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This is Masters in Business with Barry Ritholts on Bloomberg Radio.

This week on the podcast, I have another extra special guest, So now, Decie.

What can I say?

She runs the Fixed Income Group as chief investment Officer for Franklin Templeton.

She directly manages two hundred and fifteen billion dollars in assets.

Soanal has been named to just about every most influential Woman in finance list Baron's five years in a row Forbes Pension Investments.

If you are at all interested in fixed income, what the thought process is like, I'm trying to figure out how to structure a portfolio fixed income?

What you think about, what affects the returns you're going to see?

This is gonna be a great podcast for you.

I thought this was interesting, really fascinating, and I think you will also with no further ado Franklin Templeton's Sanal Decide, Welcome to Blomberg.

Thank you Barry that it's so kind of you to have me here.

Well, it's a pleasure.

I'm excited to talk to you.

Let's start out with the background that you come from bachelors and economics from del High University.

PhD from Northwestern, also in economics.

What was the original career player?

This is a really interesting one because I grew up in Indo.

You know, there are two careers.

At that time, there were two careers any good parent wanted from for his son or in my case daughter.

You could be an engineer, or you could be a doctor.

And if you really didn't want to do either of those, you could work for the government.

I didn't want to do any of the three, and economics seemed at that time to be the one which left the most options open for me.

So I did economics.

At the end of my undergraduate degree, though I didn't feel like I'd really learned enough about economics, and so I decided, you know, not having understood the concept of sunk cost, I decided to do even more and I did a PhD.

And was that two years?

Three years?

The PhD?

Yeah, no, that was a full five four five years.

So that's more than sun costs.

That's double, more than double exactly.

So you come out of Northwestern with a PhD in economics, What was your first job in finance or what was your first job out of school?

I was assistant professor of economics at the University of Pittsburgh.

And here's the deal.

When I got that job, I had also interviewed with the IMF, and I had really liked the IMF.

But you have to understand, I don't know if it's that way today, but at that time, there was no way I was going to my thesis advisor and telling him, yeah, I do have a tenure track offer from a decent university, but you know, I'm going to go to the dark side and work for the IMF.

So I couldn't bring myself to do it.

I went and I did the academia thing for a couple of years.

And I was young enough that the IMF told me at that time that, look, if you change your mind within the next two years, let us.

Know, huh.

I mean, academia is in for everybody, and it might take a year or two to figure that out.

I mean, if that lifestyle works for you, it certainly, you know, could be rewarding intellectually very much.

So, Look, academia, I admire it.

I think it is the pinnacle of what this country does brilliantly having academia, having those research universities, all of that is absolutely superb for me.

The problem was I'd spent five years of my life essentially doing research, and now I wanted to get out there and do something with it.

To me, getting into the IMF, it was mind bogglingly, ioway, it was fantastic.

Remember this is in the mid nineties, so let's let me date myself.

Yeah, so this is in the mid nineties.

Eastern Europe is just coming in from the cold, right, and that was where I focused most of my time.

So how long did you stay at Pittsburgh before you joined the IMF?

Two years?

It was two years.

So what was the experience like in Europe in the nineties working for the International Monetary.

No, no, no.

So I worked out of Washington, DC.

I worked on Eastern Europe.

So I'm talking about countries like Bulgaria, Macedonia, Romania, Croatia.

Prior it liter the wall had fallen in the late eighties, eighty nine, was it, you know?

And so these countries, some of these countries didn't even have the concept of GDP as we know it.

They had gross social product, they didn't have CPI in disease.

So it was in some ways the initial piece was like an extension of being a university because we were bringing these concepts to them.

It was.

It was an amazing experience.

So any lessons that you learn at IMF that ultimately influenced your investment philosophy.

My enormous respect and belief in macroeconomics actually comes from my time at the IMF.

Were you know that IMF got a lot of things for program countries, you know, for programs which are put into place around the world.

Some were better than others.

I get all of that, but here's the thing.

We would go to these countries and the idea was really frankly orthodox fiscal and monetary policy.

And sometimes when you're starting from a certain point, be it high perinflation, be it out of control physical balance, be it lack of any kind of international reserves, you need to go back to orthodoxy.

It kind of works, and that carrying that forward, I think it's influenced a lot of how as thought about emerging markets through the through the years.

How long did you stay at the IMF four.

It was it was six years.

It was six years in DC and then half a year.

Basically my husband and I at that time we chose to move to the private sector right.

He was moving to the private sector in London and I was following him, and I had accumulated six months of vacation.

They let you do that.

They wouldn't cash me out for six months, but they said take the holiday.

You know what I did.

I had the IMF pay for me to do a professional patisserie course in London because I had to take the holiday.

I couldn't go out and work, but I was being paid and I couldn't not be paid.

So I took a one year course question to.

Six months full on pastry and.

Court UNPLO, Basic, intermediate and superior.

Do you still do a lot of cooking?

So I do a lot of cooking, but I don't do much much baking anymore.

My husband always complains.

He says, I baked more before the partisiri course because after that, but I would come into our rental apartment and say, I can't work in these conditions.

So you became a chef prima donna?

Is that what I have to looking back at myself, I have to believe I became a prima donna.

So you relocate with your husband to London, I'm going to assume that's how you end up at Thames River Capital, Is that right?

First?

Actually I was on the cell side, so I've done it all.

I've done academia.

Then I did the public sector at the IMF.

Then I did the cell side Dresna Klein watwas Stein Investment Banking and I was in the research team there and that was in London.

And then after six years with them, I moved to Thames River Capitol, which was a macro hedge fund in London.

What was that experience like that you were there right through the Great Financial Crisis?

Yeah?

Actually, so I started with them in two thousand and six and in two thousand and nine I moved back to the long only by side.

I think it was absolutely eye opening, all right, And I think one of great things about working with them small team, boutique firm hedge fund, but a macro hedge fund, so at every stage it felt like and I'd been on the cell side and now it's on the buy side.

It gets you a little bit closer to the end point.

I think it was a fascinating point of time because essentially, over the course of the two thousands, the private sector really came into its own, so in a sense, when we were at the IMF, A lot of these emerging markets, they came to the IMF because there wasn't a true alternative.

Private markets, especially for em had not deepened enough.

And now as as we got into eight nine, you started seeing the strength and power of the private sector.

And then we had the global financial crisis.

Holy cow, that was you know.

That was when I would walk around and I used to walk home from my work and I was just thinking.

Everyone keeps talking about, oh, you know, living an unprecedent times, living through history.

I draw to read about it.

You know, living through it was amazing.

I remember waking up at three or four in the morning to find out what had happened overnight, what were markets doing.

It was a whole different level.

It was just amazing.

And now I look back and it's like, great, we did that.

We did that.

But I will tell you one of the best things about that time was remembering to look out of the window we worked out of Berkeley Square, lovely officers, looking out of the window and watching people having normal lives and realizing, you know, the world doesn't begin or end with finance.

For sure, it certainly has an impact, but yeah, it's kind of funny.

Some of the younger folks who are late thirties, early forties, this is it's hard to imagine this is before their time.

It is like they were in college.

So I was in grad school during the eighty seven crash, and it was you really didn't pay attention to it.

I imagine anybody who's an undergraduate or graduate or even just starting to work into eight o nine, you really don't understand how unusual and the force of that debacle across the entire economy.

Barry, take it one step further and recognize that somebody, some kid who got into JP Morgan as a trader and was fortunate enough not to lose their job in eight or nine.

This is somebody who probably through COVID, ended up being a senior trader and has never lived through truly non ero interest rates.

I mean yet the FED started raising them, but through what I would consider normal, normal business cycles.

It is remarkable.

That's when you really realize, Wow, you've lived through interesting times.

To say the very least.

So you mentioned you joined Franklin in nine the long Only.

Yes, pretty good timing to join a long only shop mid o nine.

Tell us what that transition was like going from a long short hedge fund to a long only asset manager.

So actually, you know, the reality is the team i joined at that time was the global macro team within Franklin Templeton, and in many respects that team works with deep value investing in a sense, looking for emerging markets which are totally out of favor, thinking in terms of long business cycles and really investing approach.

So it was a bit of a natural transition.

The part which was more complicated to get my head around was being part of an enormous organization after having basically been a part of a very small team, a small boutique team where if you want to do something you could be very entrepreneurial and go out and do it.

At Franklin you have to to get your arms around a much bigger organization.

But it was very good.

Twenty eighteen you become chief investment officer for the fixed income group at Franklin Templeton.

Is that the timing right, Yeah?

Roughly, Yeah, that's the timing.

That's got to be a pretty big change in enroll from had a research to yeah, running fixed income.

So it was a big change.

And now we get to the point where my predecessor was retiring, and Jenny asked if I thought.

I could do this, and Jenny Johnson.

Jenny Johnson, and she asked me if I if I thought I could take this role on.

And I have to say my first reaction was that there's too many pieces that I can't do.

And I tell you something.

This is a difference between men and women.

My husband when he looks at, you know, a job description, there are something like twenty things on that job and so I can apply for this.

I said, but but, but but you know, you haven't done you haven't digged up one of these boxes.

He says, I take that one.

He will apply for it and he will likely get the job.

When I had Jenny here for an interview, we talked about that exact thing, and did she mentioned, She goes, women will look at this and say, oh, I can't do that, like I don't have one seven and twelve, and guys are like, yeah, we'll figure it out as we go.

It's a very genetic di It's.

A real genetic difference because my instinct is, well, I haven't done that before, so I can't do it.

And between between my husband and Jenny They basically kicked me in the pants and said, no, you can do it.

Learn learn on the job.

I guess I did.

It was fantastic.

It's been really fantastic.

Really interesting.

So let's talk a little bit about Franklin.

So you've been chief investment officer for seven almost eight years now.

What's been the most surprising thing about this role?

Number One, When you challenge yourself, you really can step up.

Number Two, there are parts of fixed income that I thought would be I'll just say it boring.

They're not as exciting as going out and finding that emerging market.

And what you find is actually everything is fascinating if you spend enough time looking at it.

So that's been great.

And I'd say the other part of it, which has been somewhat surprising to me, I'd say, is it goes actually into the broad into broader markets, not just my role within this within this group, it is the extent to which markets look at what is happening currently, and it's a very short step for analysts to look at what's happening extended into the future and give you a reason for why it happened.

How difficult it is to break out of the mold and try to act genuinely look forward.

Does this make sense?

Yes, we you know, flick on the TV radio and people are constantly explaining what just happened when they had no idea what was going to happen.

So a lot of hindsight bias.

Yes, And there's also what just happened and therefore why it should continue happening.

And I think that's something which I never realized how deeply ingrained it is and how difficult it is to break people out of that way of.

Just extrapolating to infinity infinity.

Yeah, that happens all the time.

You recently were on with my colleague Shanali and you said to her, investors need to price risk more seriously.

Explain what you mean by that.

What I mean by that is, I said more than I'm looking now since the global financial crisis, and Barry we just talked about the fact that their entire entire generations of people who have never lived in a world where liquidity were anything other than hyperabundant.

And by the way, we're still in that world.

You look at the Fed's balance sheet, it's still enormous.

I think it's very hard for people to even realize that the FED sat on a minuscule bald sheet prior to this, they were We were not in a situation where essentially there was always a get out of jail for free card out there.

The classic FED put fed.

The FED put.

Eventually it was a FED put.

Then people thought there was a Trump put.

And quite frankly, over the over the last four or five years, we've had a fiscal policy put.

We have put all over the place, and I think that what happens in that environment.

You know, when I said that we need to price risk, start remembering again how to price risk appropriately.

It is the fact that when financial markets started moving out along the yield curve, out along the risk spectrum.

I've even seen the IMF talk about, oh, well, markets need to price risk correctly.

Well, hello, they were forcing us into those positions explicitly.

When the first set of Q one two threes happened, it was explicitly there to get financial markets to take risk again.

Q one definitely Q one and two.

Maybe you know markets had frozen up.

We needed to liquefy frozen markets.

And to me, if I look at that, that made sense.

Problem is we hung on to it for too long.

If I look at high yield credit, let's talk about fixed ink markets high heeld credit.

Typically in a recession, spreads of high yield credit over treasuries equivalent treasuries should be at around six hundred, six fifty even higher.

We've never gotten there were tight yet No, today we are close to record tights.

Right by only looking at a few hundred basis points, we're sub three hundred.

This to me means that while people like to talk the talk of recipession, what they're really saying is cut rates.

We want more liquidity because we're not getting rid of four of all of our assets over here, the risky assets, which should sell off if people truly expected a recession.

So I'm going to assume you're not in the recession camp here.

I haven't been.

I haven't been.

I'd say that I can proudly say that it's been.

You know, I'm on redquord.

So I think it was in probably early twenty twenty one, when inflation started picking up here that I was saying, yeah, this isn't looking so good.

This transitory stuff isn't looking so good.

And most importantly, it wasn't at all clear to me why we were expanding fiscal while we also had this massively easy monetary policy and how that could possibly result in a recession.

And we've been having recessions which are two quarters out now, I think rolling two quarters out for the better part of something like three and a half years.

And I will say, we've not bought into that.

I think it's a very strong economy.

So it certainly has been.

We continue to see consumer spending despite weak sentiment.

Consumers continue to spend.

The labor market is tight.

Yeah, there are some warts on the housing markets, and you know, there's always some sector you could poke at, but by and large, this seems to be a fairly robust, fairly resilient economy.

Fair statement.

I think that is a fair statement because here's the thing.

You know, in the first few months of this year, we saw sentiment tank and everyone said, well, hard data will follow.

I wasn't so sure because sentiment was moving on something which was unusual.

It wasn't moving on the back of weakness and labor markets or people feeling uncertain about their jobs.

It was weakening on the back of pronouncements, you know, on top of policy pronouncements.

I'd see the execution of that stuff was really bad and continues to not be particularly good in terms of tariffs that impacted sentiment.

However, people continue to spend.

They didn't stop spending, as you said.

And I'm not suggesting that this economy's recession proof.

I'm just saying, so far, we haven't got whatever we need to push us right.

Interansas, any thoughts on the idea that perhaps sentiment measures are broken, that when you see Michigan sentiment worse than the pandemic, worse than the financial crisis, worse than the eighty seven crash, and yet you know you look at the data, you're just not seeing anything remotely.

I have to say that I'm looking a little bit less at some of these indicators.

I think they need to be leeve and we need to now do more digging.

Our country has become very polarized, and that feeds into people's sentiment.

It doesn't feed into their shopping habits.

That's the reality, right.

So I'm wondering how much of this is driven not just by media, but by social media and algorithms.

It seems to send people to more extreme.

Absolutely huge, and I think that the speed of the news cycle, the need for clickbait style, tweets, headlines, whatever it is.

I think that exacerbates every sentiment.

However, people still seem to be relatively sensible in terms of how they actually behave, because we're not hearing about people massively canceling their European vacations, which, according to Delta, we're taking in record numbers.

Right, It's so funny you say that because last quarter they drop their guidance.

Hey, everybody's frozen.

JetBlue did something similar.

We don't know what's happening.

They just came out in the most recent few days talking about not only reinstating guidance but being pretty aggressive as to what they see going forward.

That's fairly constructive kind of fights against the Oh, this tariff war is going to cause a vib session and crash everybody.

Yeah.

No, I really never bought the vibe session idea on tariffs.

I mean, let's can we talk about tariffs?

Sure?

I mean it's been talked to death, but why not let's talk about tariffs briefly.

Here's the thing.

I look at our country and I'm gonna use big round numbers here.

Right, We're about a thirty trillion economy.

Okay, twenty nine call it thirty trillion economy.

Seventy percent of our economy is consumption.

Okay, so you get to around twenty one twenty twenty one trillion, Seventy percent of consumption is services.

Guess what services aren't really impacted by tariffs?

Now I go to Okay, I've got around six six six and a quarter trillion of consumption of goods.

How much of this is actually imported?

Around three point four trillion of goods are imported.

So I'm looking at three point four trillion against all of this huge economy size, and I say, okay, they're talking about putting tariffs.

You know, let's assume tariff revenue ends up being three hundred billion.

Yeah it's not.

Yeah, that's it could be much lower three hundred billion.

If I were to spread this out over all goods and services like the Europeans do, using a vat that's a two percent tax, right, would we all be jumping up and down saying vibe session If magic happened and the federal government did something very intelligent and put just a small consumption tax on the economy to lower the budget deficit, we wouldn't.

So I guess what I'm trying to say is I don't love tariffs, please.

Tariff's are a highly inefficient form of raising revenue that they there distortionary because they randomly hit some products relative to other products.

I don't love tariffs.

I just don't think that they are as catastrophic for the US as they are for the rest of the world.

The rest of the world.

Yeah, it is a big problem.

The US doesn't depend It's a huge economy, which is essentially a large closed economy.

Closed economy, it is.

That's very interesting.

How do I come back?

It seems like, look, our phones are made in China.

I'm wearing a watch.

We're in Switzerland.

Cars are from Japan and Germany and Korea and elsewhere.

It feels like we see so many imported goods, clothing, just all this stuff.

But what you're really pointing out is the things we import are relatively small percent way exactly.

I think you're totally right, you know, And here's the thing.

Should we be manufacturing more in the US?

This is actually a political decision, and people vote for this, don't And you know, anybody who says that's a crazy idea, well, Germany does it, Japan does it.

You know, it's a choice.

It's a choice, it's a political choice, and I think that it is up to the people of our country to decide which direction do they wish to go, And there's no right answer.

It's a democracy.

People need to choose.

However, it is an incredibly wealthy country.

And therefore when we talk about imports and exports, I look at exports, which is how our gd HE gets impacted via tariffs or trade or anything.

Imports are ten twelve percent of our overall GDP because we import around four and a half trillion of goods and services three and a half of just goods four and a half trillion out of you know, a thirty trillion economy called it twelve thirteen percent.

That is where we are looking in terms of our imports.

And you compare this to a Germany.

Germany, including its exports to the rest of the euro Area, it's around forty four percent of GDP.

Isn't that true throughout Europe?

There they're much like I look at Germany, France, Italy, Spain, sort of like New York, California, Texas, Florida, because there are substantial economies and they're right there.

There's no ocean in between them.

And they know and they also export outside, right, so they're very, very dependent on what the wins of the rest of the world are because they need Here's the reality of it.

You know, Well, every time the administration talks about VAT as a trade barrier, any economists will tell you that's just plain wrong.

It's not it because it's a trade it's a trade adjustment.

No, no, and it basically it's not a barrier because it's a board what we call a border adjusted tax.

So you know, we export a car to Germany, absolutely you have to pay VAT there, but you'll have to pay the VAT on the BMW may.

That's whatever you're going to say, that's just wrong.

However, if you want to take again that twenty thousand foot up in the air view to this, there is an economic model which I think the Europeans have chosen to follow, which is to penalize consumption in Europe with the VAT twenty two percent tax on average on consuming, which means the Europeans aren't consuming not European stuff and not American stuff.

And we have some of the lowest taxes in the world and everyone we consume everybody's production, so you're supporting global GDP, buyo our desire for consumption.

We also have privatized things that the VAT tax subsidizers in Europe.

Yeah, yeah, so we.

Pay our own healthcare and retirement in college.

For many European countries, they're paying much higher taxes.

But that's part of the sort of the social safety net, not part of the private sector.

Totally agree, And again I'd come back to the idea that these are choices made by democracies, and there are no right and wrong answers.

So it's wrong for us to say get rid of your VAT.

They made the choice to have that.

Eight.

I will tell you that I have a vivid recollection of being in London and Brussels during the dot com crash, like two thousands for business.

And you leave New York where everybody's kind of freaked out and stressed, and you go to London and people are a little more relaxed.

Then you go to Brussels and they're even more relaxed.

And I guess there's no fear of losing your healthcare or owing college loans or saving for retirement.

Kind of makes people a little more sanguine when it comes to the economic.

Cycle, it is you know, there are trade offs on everything, right, So we could have an entire philosophical discussion in terms of the choices people make, and everyone doesn't make the same choices.

The other side, I would argue, of the coin that you're pointing out correctly, which is the lack of stress associated with all these fundamental needs of life.

The other side can and is a lack of innovation, which you see across the boards.

There is a desire of a risk taking right, and that's what permeates the entire American dream, so to speak.

You know, you work really hard, you can be entrepreneurial, You go out there, you do things, and you can make it.

And I'm an immigrant, I'm a naturalized American, and I have to tell you that's what I bought into and I really believe in it.

I love that about this country.

Huh.

Really really interesting.

You mentioned earlier all the liquidity that the FED has flooded the system with.

What's the implication of that for fixed income today?

So I'd say the implication is when you're looking for let's call them risky assets within the fixed income space to invest in it's quite difficult.

Like I said, typically risk assets, you look at the premium you get for taking the risk over the risk Free Act, which is of course the Treasury.

And the reality is there's clearly enough to the point of complacency.

I would say comfort around what is going on within the economy and what the expectations are from the FED that those spreads.

If I again I point to something like high yield, they're nowhere close to what I think would be reasonable.

Nonetheless, you are getting close to seven percent seven and a half percent depending on the day you're looking at it, without not in spread terms, but all in terms for a high yield or a risky bond in the for a high yeld corporate.

Now, this I think remains reasonable if you are active.

I wouldn't buy passively into this because when you have way too much liquidity, clearly some excesses are bound to creep up, and I think that probably they have.

We are active managers, so we're literally doing bottom up picking a company by company, and I think you need to do that.

So what do you do.

I look at ten your treasuries, and I look at FED funds, and I try to decide at four forty four p.

Fifty.

We're range trading right now.

Is this a sing by?

Should you be jumping in because you think that treasuries are going to rally massively?

And the answer is, actually, though I would call myself aggressively neutral, I'm stealing that term from a colleague of mine.

Aggressively neutral.

At this range, I think fair value for US treasuries actually is probably today at between four seventy five and five.

So, in fact, I think there's more for US treasuries to sell off, and thus this is this is the backdrop.

Now why do I think this?

I think all these complaints about where the FED is, you know, the FED should cut rates, cut rates, cut rates, Well, I think the neutral Fed funds rate is actually between four and four twenty five or so.

So I don't think the Fed is that much room to cut rates.

Why do I think it's four percent?

Is there a magic number?

Well, if I again abstract from these POSTGFC fifteen seventeen years that we're looking at where we've had this very abnormal, unorthodox monetree policy for a large part of this period, and I look at the decades prior to that, neutral FED funds was around four p fifty five percent.

That was what this economy took.

What does that neutral FED funds rate consist of inflation and what you think productivity growth is going to be.

I think inflation is around two two and a quarter and productivity growth we're kind of cruising back towards that two percent is level that we were gives you your FED funds.

So inflation is softening, productivity is gaining.

That sounds like a very productive environment for both the economy and the fixed income market.

Well, I think it's a good time for fixed income.

From the following perspective, You're getting yield from fixed income, and I think you'd probably sell off a bit more.

You're getting income from fixed income.

Let's put it that way, and again talking about generations of people who were used to getting one or two two and a half percent from their you know, there was a point where, given where inflation was and given where tenure treasuries were, we were paying the government in real terms for the privilege of lending the government money, which is what you're doing every time you buy a treasury.

Right, But at least we're not there anymore.

We're getting positive real returns.

I think it is a constructive environment for fixed income, but you can't expect equity like returns from fixed income.

And again, because of liquidity flows and so on, people have become a little bit married to the idea of fixed income delivering massive outperformance.

And what it should really be doing is giving you boring returns.

You know, boring returns.

It should be the ballast in your portfolio when your equity market delivers equity like returns.

And that is the future state that I anticipate for fixed income.

So let's stay with the issue of liquidity, which keeps coming up.

How does that affect how you look at fixed income, whether you want to go out for further duration or maybe even higher credit risk.

What is all of this, both from the FED and elsewhere.

What does all this liquidly do to how you construct a portfolio fixed thing comet?

I think it actually makes it a little bit more difficult.

We talked earlier about the issue of pricing risk.

When you have this much of liquidity, those spreads, people will get forced into risky your products.

You can't stay out of the market because you need to clip that coupon.

So you are present.

But like I said, you're not getting massively over your skis in terms of adding on extra risk, because things are priced to perfection in a market like this one.

So what I mean by this is my baseline is that we don't get a recession.

As we spoke about it, nobody has perfect foresight into what this looks like.

You could get anything coming out of left field.

COVID came from somewhere.

None of us anticipated very short recession, but it had very meaningful consequences.

Clearly, there are many areas of uncertainty, and these are the reasons why.

From my perspective, my baseline on the fundamental economic fundamentals is no recession.

But given how assets are priced right now, I would not go overboard loading up on risk at current levels.

There are many reasons to anticipate, for example, additional corrections, including on the equity markets.

Frankly, just from a macro perspective, which we don't have right now.

We're gonna We're gonna keep it modest on the credit side.

What about duration, we had we had an inverted yield curve for a couple of years.

The yield curve more or less uninverted, so you're getting paid a little bit for longer duration, But you're not getting paid a whole lot.

How do you look at at the long term choices for where's the sweet spot?

Is it forty No, I'd say it's it's shorter right now.

It's shorter than fourty seven, So I'd say I'd stay a little bit shorter right now because I, like I said, we're at four forty.

I don't think it would take us very much to grind higher over here.

And then if you've taken on a lot of duration, it will hurt you.

Now if you're taking some of that credit risks, should you be hedging it out?

That is something which you can consider, But outright simply going long I wouldn't do too much in terms of we actually still think that there is an enormous amount of cash still sitting on the sidelines and everything from money markets onwards.

And perhaps one of the best things to do is to at least dip your feet in and get at least to ultra short, get yourself comfortable with ultra short, so you could start moving out the yield curve as opportunities present themselves.

So one of the questions anytime we discuss hedging, either credit or duration risk, what are the prices of that look like these days curse.

I recall pre financial crisis it was wildly miss priced then turned out to be really cheap to hedge credit risk.

What about today in duration risk?

Is it cheap or expensive to hedge that.

It's still expensive still?

I would say, it's still expensive, but you can't do it.

You can do it in option space, for example.

But that's that's really interesting.

We hinted at but really didn't spend a lot of time talking about geopolitical risk.

How do you factor that into your investment decisions?

How does this drive fixed income choices?

I think the interesting thing about geopolitics is increasingly it's become a backdrop, and I think that markets are not capable of remaining in a heightened state of panic and anticipation indefinitely.

What I mean is, when Russia went into Ukraine, we all thought this was going to be a short period, and you know, geopolitics became very central to everyone's thinking.

It's gone on for three years and it's not unclear when, if ever, it's going to go away.

And I think what's happening is that geopolitical uncertainty has become so much a part of the backdrop that you can't actually manage your portfolio to that geopolitical risk.

You can when risks get sharply higher, you can try doing something, but you cannot position your portfolio for these geopolitical risks.

So what are the geopolitical stress points?

The Middle East is frankly, it was a forever geopolitical stress point, which has to give this administration it's due come markedly lower.

Based on what we have seen so far, I think actually things are looking a lot better in the Middle East than they have over a very long period of time, So that's a positive.

I think the issue of China, you have different geopolitical stress points.

You have the trade tensions, but then separately there's the eternal question of what happens with Taiwan, and that is always going to be a part of the backdrop.

And I think a lot of people take a great deal of comfort from the fact that the Chinese authorities are extremely, extremely careful, and so we don't anticipate shooting from the hips, so to speak, you know.

So this is something which we will continue to see stress points go up and down, and so I do think that in the early days of this administration, you know, certainly early days post Liberation Day, there was a thought that somehow you have a complete realigning of the geopolitical environment with the US not being credible or dependable.

I don't I think that was overstated.

The US is more important than any one administration or any one single set of policies.

We talked a little bit about Europe and the euro Area, at least in the equity side.

Europe is finally outperforming the US after a long period of underperformance.

What are your thoughts on the Euro Area and emerging markets in today's environment?

So you know the euro so if I look at the equity markets, I think you can't really talk about the equity markets without talking a little bit about the dollar, and that actually impacts em as well.

And I see a lot of discussion again, and it's somewhat related to our previous comments on geopolitics, that somehow the dollar is no longer fit to be the world's reserve currency.

It is the end of US exceptionalism, et cetera, et cetera.

I think it's mixing up a whole bunch of things.

Number One, when we entered this year trade in trade weighted terms, the dollar was at its strongest level since the Plaza code, right, do you know that since the Plaza Corde I didn't realize we're talking about the absolute strongest levels in trade weighted terms since in something like close to forty five fifty years, really strong.

Then what happened.

We came into this year and the first thing that happened, frankly was deep Seek you know, Deep Seek burst, and somehow, oh my god, the US is not exceptional and people were put us exceptionalism hand in glove with the mag seven.

I think, however, if you were a European investor right last two years, you got fifty four percent just on the S and P, and then you got what was it, ten to fifteen percent in dollar appreciation?

You made not like a bandit.

If you were smart, you took some profits.

Right as soon as you got deep Sea happening.

In short order afterwards, you got the Germans suddenly talking about one trillion euros over the ten year period in terms of spending.

So the last fiscal man standing, like I like to say, goes toppling down and we will go yeah, yay, that happened.

But more seriously, it meant that potentially European growth would not look as lackluster, frankly as it has been for a while.

So that happened, and then you had Liberation Day.

You had three sets of reasons.

And the European equity market had been lagging so much more than even the Nike in Japan.

It was obviously a good time for people to go put money back there.

And I think there's a little bit of catch up going on.

So I don't think it's anything deep and amazing, and quite frankly, if I look at European growth, European growth is not yet showing German growth is not yet showing any impact from the one trillion ten year dollars spend.

It's not yet showing up.

I personally think that perhaps it's gone a bit too far, because if I look at funds which had been approved during COVID time five years ago, five years ago, they still have not been able to deploy them.

The Europeans tied up in red tape at a level which makes me have a certain degree of I'm not going to go as far as saying skepticism, but caution in terms of how quickly this money will actually show up.

What about the defense spending that we're hearing about.

That's probably weaponized Knesenism.

That's probably going to be a little quicker to find its way into the economy.

I think it could be.

But the only thing is the multiplier for defense spending is one of the lowest multipliers you have.

Your highest multiplier is going to be what we did, which was to helicopter drop checks during co COVID to everyone.

That has a very high multiplier eventually, But if you look at defenses, the multiplier ero point four, it's a low, low, low multiplier.

Separately, you have other issues which I think are not discussed enough, and that is I think there are that somebody who's telling me it's close to seventeen different arms manufacturers and europe haamny arms manufacturers.

You need if you have multitudes of people making tanks.

The problem is the demand for tanks is not infinite, right right, And so you have a lot of relatively inefficient defense expenditure which is likely to take place as well.

I think it will make its way.

I don't want to come across as being overly negative.

I think it's very positive that the Europeans are taking their own defense in hand, and I think we and markets need to be cautious in terms of the speed at which we think this will show up.

Sure, so the European Central Bank has cut rates.

We've seen other central banks around the world cut rates.

We talked a little bit about the FED.

What do you think they're paying attention to?

Are they legitimately tight, especially now with q E ending and QT beginning.

How do you look at the role of the FED.

Here, Barry, Look, we talked a little bit about what I thought a reasonable FED funds rate was.

When I call it neutral, I mean the economy is neither falling into recession or overheating ie inflation accelerating.

I think that number is four to four twenty five given where rates are right now.

Last year, before all of these ups downs and ins and outs, I thought the FED had within its gift around one hundred and twenty five to one hundred and fifty basis points of rate cuts in all, and they did a hundred basis points already.

So I think there isn't an unlimited amount that the FED really can or should do.

Will they do more?

Probably, you know, I don't know whether it's this Fed or next year.

At some stage they can it won't be catastrophic.

I don't think it's particularly wise to cut rates dramatically.

Are they messing up right now?

No?

Actually, I don't think they're messing up.

This is a very dubbish FED by the way, everyone says that, oh, markets will panic if we get a dubbish FED chair.

Hello, the last non dubbish FED chair we had was Paul Volca.

We haven't had a hawkish FED chair in an enormous amount of time, and I don't see it happening now.

It's not in the Fed's DNA.

Huh, really really interesting.

Let me throw a curveball question at you.

What do you think investors are not talking about but perhaps should be.

So that's a really excellent question.

In this day and age, I think you can't talk about what's being overlooked without talking about time horizon.

I think that we are all talking about fiscal but in very vague terms, and the mistake we are making is acting as if we suddenly got a fiscal deficit.

We have been running ridiculous deficits for the last close to five years now, and it's very much like the excesses we saw with QE in the sense of monetary policy which lasted long after it should have been withdrawn, and we're seeing that now.

And I don't see any desire on either party's side to do something serious about that deficit, which implies we won't fall into a recession.

But I do think at some stage there needs to be some change in policy which reduces that deficit meaningfully.

And I'm not sure you can do that without actually reducing growth.

This is an additional reason why I don't think the FED should go too far today.

So I I think there is a long way of saying there's almost nothing that we don't talk about.

It is a question of the timing.

I think today we're probably looking at most of the important things that need to be looked at.

Huh, really interesting.

So I only have you for a certain amount of time, But let me jump to my favorite questions.

Tell us about your early mentors who helped shape your career.

So you know, my earliest mentor, I'd have to say, is my father.

I grew up in India.

In India, the path that I followed is not very traditional, and I have two brothers, and my father always treated me exactly the same as my brothers, and so in a sense, when people ask me, even today, how do you get more women into the workplace?

And I get asked this question around the world when I go to our different offices, I tell everyone, you know, encourage your daughters, your sisters, your wives to be in finance, and they will be in finance.

My father didn't encouraged me to be in finance.

He did encourage me to think exactly the way frankly my brothers were thinking in terms of what the future held.

So he was my earliest mentor second mentor, I would have to say, is one of my first mission chiefs at the IMF, Paul Thompson, who subsequently actually led missions to Greece and became the director of the European Department.

He was my first mission chief and he is an amazing negotiator.

And I still find myself using hand gestures that I see I've learnt from him, and I still find myself doing this.

How amazing is that, because now you're talking about a very long time ago, and he definitely shaped how I work in the workplace.

Really interesting.

Let's talk about books.

What if some are your favorites?

What are you reading right now?

Okay, so some of my favorites.

I've got an enormously very The only thing I don't read is horror of any kind.

It scares me too much.

My imagination is too real.

But if I think about things I always go back to I will throw out.

There's the Master in Margarita, which is Mikhail Bulkrakov, which was the first first book which actually seen It was transcendental.

I think love pride and prejudice.

I love The Lord of the Rings.

And currently I'm reading urban fantasy.

It's called The author's names are Ilona Andrews, Kate Daniels.

It's very escapist.

It's about as as escapist as anything I think you would watch on Netflix.

It is absolutely fantastic.

What's the title.

So it's a series of books.

The protagonist is called Kate Daniels, and I think the first one was Magic Bites or something like that, set in a dystopian Atlanta where you have a mixture of various types of supernatural elements and things like that.

It's really cool, huh, really interesting.

Our final two questions, what sort of advice would you give to a recent college grad interested in the career in either fixed income or investing.

Number one, be extremely curious, right, extremely curious.

I would note that learn to do research.

I'm not talking about research.

What I'm saying is, especially today with gen Ai, I think one of the worst things is immediately having answers, because if you don't learn to spend the time to dig really, really deep into different areas, I don't think you're going to find answers.

You're not going to be able to find the answers all written in the first three lines of Google search.

Actually, I do think that people coming fresh into the markets that we have, they need to read a little bit more about what has gone before them.

I think there are some brilliant books out there.

I would call out Ken Rogoff and Carmen Reinhart have a couple of them.

It's just a good this time is different, Yeah, this time, this time it's different.

It's fantastic.

And and your book, I'm gonna give you that shout out because I think it's good to actually read practitioners books because we live in bizarre times and many people will not have seen the various cycles history.

You know, those of us who don't learn from history are condemned to repeat it.

There's that part of it, and I think.

The other piece I would say is it's very hard, I know, but try not to be too impatient.

If you can't go through a few market cycles, it's very difficult to really understand my markets, right.

So I don't believe in time and grade.

I'm all for people umping ahead, but sometimes nothing substitutes for actually living through different market cycles in our business.

Huh, really really interesting.

What do you know about the world of investing today?

You wish you knew thirty years or so ago when you were first getting started.

You know, the biggest thing I'd say is that nothing.

While in the moment it feels like the catastrophe is going to end the world number one, it won't number two cycles end.

I would have had a lot fewer sleepless nights if I could have just calmed myself down and said, Okay, this too will pass.

So I think I think there is an element of just knowing that you know, this is a part of what we do.

Really so interesting.

Thank you Sanal for being so generous with your time.

We have been speaking with Sonal Dasai.

She's chief investment serve for Franklin Templeton's fixed income group.

If you enjoy this conversation.

Well, check out any of the five hundred we've done over the past eleven years.

You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you find your favorite podcast, And be sure and check out my new book How Not to Invest The ideas, numbers, and behavior that destroys wealth and how to avoid them How Not to Invest at your favorite bookseller.

I would be remiss if I did not thank the Crack team that helps us put these conversations together each week.

Meredith Frank is my audio engineer.

Anna Luke is my producer.

Sean Russo is my researcher.

Sage Bauman is the head of podcasts at Bloomberg.

I'm Barry Riholts.

You're listening to Masters in Business on Bloomberg Radio.

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