Financing In The AI Boom: Masters in Business with Bob Michele

0:02 Bloomberg Audio Studios, podcasts, radio, news. This week on the podcast, another fantastic conversation. Bob Michael has had an amazing career, could be one of the most informed, influential managers in the whole world of fixed income. In his perch as chief investment officer and head of global fixed income currency and commodities at J.P. Morgan Asset Management, He oversees a lot of assets and a lot of people, not just for corporate America and for central banks, but for regular investors, for pretty much everybody in the world. Few people know as much about what drives the fixed income markets as Bob does. I thought the conversation was fantastic. And I think you will also, with no further ado, my conversation

0:56 with J.P. Morgan Asset Management's Bob Michael. Bob Michael, welcome to Bloomberg.

1:12 I'm thrilled to be here.

1:13 I'm thrilled to have you. The timing couldn't be better. Before we talk about what you've built at J.P. Morgan and the state of the fixed income markets, I want to dive into your background, which is so interesting. University of Pennsylvania classical languages degree. That is not the traditional route to managing fixed income. What was the original career plan?

1:41 Well, it's a good point. I'm here by accident. So that's how the career plan worked out. Actually, I was a dual major. I also majored in natural sciences. Both my parents were doctors. My father was a surgeon. My mother was an orthodontist. Every job I had over the summer was pretty much working in a hospital or lab somewhere.

2:03 I was doing pre-med studies at Penn, ready to go to medical school. Unfortunately, my father died my junior year, and I decided maybe I should take a break before I do all of that. You're at Penn. Wharton's right there. Everyone's talking about business, going to work for a bank. And I said, why not me? I'll do that for a year. Everyone laughed at me. You have absolutely no business courses. Give me one to take. I said. And they said, take accounting. So I took accounting second term my senior year, didn't understand anything about it, interviewed with a load of banks, and someone was foolish enough to hire me, Bankers Trust. I'll tell you, Barry, after one week in banking in New York City, I knew I

2:47 was never going to medical school.

2:49 Really? That's fascinating. So it was just dumb luck you ended up at Bankers Trust right out of college?

2:56 Pretty much. I wrote to a lot of firms. I And maybe this is a complaint for the University of Pennsylvania. I went to College Hall and pulled Lehman out of the folder and sent them a letter. But Lehman was spelled L-E-G-H-M-A-N for some reason. So there was a typo. I didn't know. I wasn't a business major. I was doing sciences. I was doing classics, Latin and Greek. So I sent it off. They must have had a good laugh.

3:26 I never heard back from them.

3:28 Well, they assumed you were too risky, right? So you start on the investment management side at Bankers Trust as an analyst, eventually a portfolio manager. Then you shift to managing taxable and total return portfolios at Brown Brothers Harriman. You were never an economist. You were never a market strategist.

3:49 You went straight from the classics to an analyst to a PM. Tell us about that progression.

3:58 Well, there are a couple things along the way that I learned. The first is I took the CFA. I figured if I didn't have the background and the CFA was becoming popular, I could learn it then. I also had a lot of confidence in myself. I sat there and I figured if going to a class a couple times a week for one term, you can learn organic chemistry.

4:25 What if you're doing something eight to 12 hours a day, five days a week for 30 days. Can you learn it as quickly as you could organic chemistry? And the reality is, yeah, you could pick up a lot. You could teach yourself a lot. What did appeal to me was the mathematical aspect behind investments. Doing the sciences, there's a lot of math involved, and there it is, right in investments.

4:53 So people always bring up that, It's not a science. It's not quite an art. It's a little bit of a mix of both. Is the same true for fixed income?

5:04 I think it's a little bit more of a science than an art. Perhaps equities is a bit more art than science. I did a lot of equity work until the early 90s, and I switched purely to fixed income. And the attraction for me is the valuation metric that goes along with fixed income. You could model it. There was a maturity. All the dynamics behind the cash flows could be calculated. There was a finality to somebody with a mass background, with a sciences background, that was appealing.

5:40 When I looked at the equity market and one of my early roommates in New York City, he and I would debate late in the evening about, how do you value a stock? And he was working in corporate finance at Baish at the time. And it would become very theoretical. And this would go on for a year. And we could never figure out what was the proper way to value a stock. There were dozens of ways. And every one of them seemed to be a different valuation. So I'm very happy with the choice I made.

6:09 So you lead me to a really interesting recognition. It's pretty well settled, at least amongst the academics, active stock selection is ultimately a very difficult game over the long haul. Passive, it's very difficult to be passive on the equity side. But more math than more science than art on the fixed income side, it seems that active managers and fixed income very much bring value. And there's an advantage to active on the bond side over just a broad passive index.

6:47 Do you credit the fact that it's more science than art? Or does it have something to do with the fact that, hey, equity folks are stuck picking 3,500 stocks. You have tens of millions of products to pick from.

7:05 I think there's a strong element of sciences. I think when you step back and look at the bond market, you can calculate yield. Most of the time, you're going to find investors gravitate to higher yielding instruments, that gives you a bit of a cushion. You know that over time, if your portfolio yields more than a benchmark, you're likely to outperform the benchmark. So my expectation of my team is that almost all the time they will outperform the benchmark. Now, competitor universe, that's a very different dynamic because a lot of competitors outperform benchmarks. So we have to think of ourselves not only as outperforming a benchmark, but also outperforming a competitor universe.

7:52 So you run U.S. fixed income at First Boston, better known as Credit Suisse today. You're a managing director at BlackRock before ultimately leading fixed income in London for Schroeder Investment Management. I'm curious, what was your experience like in the U.K. and in the Eurozone? Did that have any impact on how you look at fixed income markets?

8:15 It was a fantastic experience. It absolutely has a dynamic on how I look at the fixed income markets, I do think, globally. But if you look at the period that I went to London, it was 2001 until 2010. It was really the creation and the buildup of the Europe. So I wasn't in London on my own. In fact, in 2000, when the thought about going to London to run the fixed income platform first came up, the thought was, well, maybe you're going to wind up in Frankfurt because that's the home of the Euro. The European Central Bank is in Frankfurt. But a funny thing happened on the way to Frankfurt. Thousands and thousands and thousands of Americans went to London in banking, and we rather like London. So

9:09 we all stayed there. And it was an incredible 10-year run.

9:14 So was all 10 years at Schroeder's or did you move over to J.P. Morgan in the middle of that run?

9:20 Towards the end in 2008, I moved over to J.P. Morgan and actually it came through one of your earlier guests, Seth Bernstein, was actually head of fixed income at J.P. Morgan. They were having some problems at the end of 2007, early 2008. He pinged me. He was in London. And said, here's an opportunity to come, be chief investment officer. Are you interested or not? And I sat back and thought for a second, well, J.P. Morgan is the big deal.

9:55 And they've got a huge platform. And I remember early on in my career. understanding that they managed a lot of the central bank assets in fixed income, which was the flagship accounts back in the early 90s. So at some point, I realized we're headed back to the New York area. I'm going with JP Morgan.

10:18 A second? A second sounds like it was a long time. That seems like really one of the ultimate positions in your space.

10:28 In all fairness, Schroders was a fantastic place. And I loved everything about Schroders. I was there for ten years. They were fantastic to me and my family. And we helped build a real quality franchise there. We were winning business. everywhere, not just in fixed income in a lot of areas. But time moves on and opportunities come and go and I didn't feel that that opportunity would come around again if I didn't take it.

10:59 Yeah, absolutely. So you joined JP Morgan in 08, just as the great financial crisis is starting to ramp up. What was that like trying to get your footing in a new firm when the credit world is falling apart?

11:16 When we were at Schroeder's, when I was at Schroeder's, we had pretty clean, pristine portfolios. So we were performing exceptionally well. When I got to J.P. Morgan, it's interesting. I was on a U.S. contract. Back then, it was only two weeks. So in the two-week period from when I resigned from Schroeder's and then started at J.P. Morgan, Lehman came and went. It was gone. That's leaning with a G, right? A G and H, all of them, were gone. So it was gone, and I walk into J.P. Morgan, and I'm sitting down with Seth, and he's giving me the lay of the land, and there were some problems there.

12:05 But they were things that were insurmountable. They were just over-allocations in some areas. But you saw there was an opportunity to go in and make a change, put in place a process that you had confidence in, something that was disciplined, and control the way the business looked going forward. So it was an exciting time to be in the markets.

12:31 Yeah, to say the very least. And to give credit where credit is due, there was a subprime derivative issue that had flared up at JPM years earlier. And Jamie Dimon said, get all that crap off our balance sheets. We're not in the speculative business. We're a major money-centered bank, not a gambling house. I'm paraphrasing, but famously kind of read people the Riot Act. So when a lot of other big banks ran into trouble, J.P. Morgan was in a beautiful position to pick up a lot of assets cheap.

13:06 Bear Stearns, Washington Mutual, go down the list. They really came out.

13:10 Of that era.

13:12 Really well. I'm curious, what did that era teach you as a bond investor? What should we all have learned about risk, about fixed income, and about leverage?

13:25 It forced you to be a fiduciary. It forced you to put yourself in your client's shoes and think about, are these the things that they want to own in their bond portfolio? Or are they looking for you to put investments in place that will give them some yield, but they'll get their capital back. The whole thing won't be at risk. They may not get the yield or return they were expecting. So that's the first thing that we all understood. I'd say the second is you learn that every bond is different. There are a lot of different dynamics. You have to roll up your sleeves. You have to do your own research. You can't outsource your research.

14:05 You have to understand everything about the bond. You have to understand the underlying collateral of the bond. You have to understand who's obligated to pay you back. You have to understand the cash flow dynamics, any prioritization, covenants, all of that. So it really changed the way I believe the market looked at fixed income.

14:28 And hopefully for the better. Coming up, we continue our conversation with Bob Michael, Chief Investment Officer at and head of global fixed income currency and commodity, discussing building out those departments at J.P. Morgan Asset Management. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

14:55 My extra special guest this week is Bob Michael. He is chief investment officer and head of global fixed income. at J.P. Morgan Asset Management. He joined the firm in 08. So let's talk about what you cover there, the businesses you cover there. It's fixed income, it's currencies and commodities. I'm curious, what's the intermarket relationships between those three, what we think of as separate asset classes?

15:24 Well, there's a big macroeconomic driver to them. They're all predicated on how the global business environment is doing. If it's a healthy business, then probably there are going to be some growth and inflationary pressures. Bond yields will be a little higher. Commodities will price that in. There's probably some demand for commodities. They'll be a little bit higher in price. And when you look at currencies, you'll have to figure out which sovereigns are doing better than others, and those currencies will tend to do better. So I'd say the first thing is to step back and think about the global macro environment, and then you start to figure out where the value is in each of those markets.

16:06 So I've always looked at currencies, especially the U.S. dollar, as inverse to commodities. When the dollar does well, commodities sell off a little bit and vice versa. Although lately, the U.S. dollar seems to be holding up pretty well, and commodities have enjoyed quite a bit. How do you look at the current relationship today? Is that being driven by other factors, or is it just part of the cycle?

16:31 Yeah, and I had a similar view over my career that gold was the anti-dollar. And if you didn't like dollar, you held gold and vice versa. And that generally held true for quite some period of time. I would say today, one of the advantages I have is that I meet with a lot of official institutions globally. And a lot of the conversation always is, we're over-allocated to U.S. dollar assets, U.S.

17:02 fixed income. Is there an alternate reserve currency we should be looking at? And it's a real head-scratcher because for the first time in my career, I can't really think of one. And if you go back over history and think about alternate reserve currencies to the dollar, I think back to the late 80s when yen was considered the alternate reserve currency to the dollar. Remember, the Japanese were buying Pebble Beach. They were buying Rockefeller Center.

17:33 They were bringing it back to Tokyo with them. Right?

17:35 Pretty much.

17:36 That's what people were concerned about.

17:38 And then that came and went. We talked about my moving to London. That was the advent of the euro. And for the first time, people said, finally, a United States of Europe. We have a euro that's going to be a reserve currency. It's going to match the size and scope of the U.S. There you go. And for a while, it looked like it. And then ultimately, we learned monetary union without fiscal union isn't so good. And then coming out of the great financial crisis, remember, it was China. It was the renminbi. China did what the world needed it to do in 2009. It borrowed and it spent and it created aggregate final demand in a world which didn't have a lot of aggregate final demand.

18:29 And yeah, I know there's a talk about the highways to nowhere and the ghost cities. Those have eventually been populated, but people talked about the Rim NIMBY. And then that came and went. And then it became gold. And you talk to central banks, they've acquired some gold. It's really hard for them to use gold to manage and deliver on their primary objective, which is price stability, inflation. Gold's more a reflection of the outcome of their policies than allowing them to alter their policies. So today we sit here and really the dollar is the only reserve currency out there. Nobody wants to fight it for now.

19:10 I always wondered, why should Economic growth be dependent on how much yellow metal we scrape out of the ground each year, but hold that aside You didn't mention Bitcoin or any of the crypto currencies is that is that a fantasy that some people hold that we can replace the US dollar with either central bank issued currencies or Crypto currencies or perhaps Bitcoin.

19:38 I know bitcoins been controversial. I know a lot of the controversy about has to do with what does it actually represent. I'm going to talk to that. And I know a lot of it is concerned that if it's untracked, unregulated, it gets used for criminal enterprise. And yes, of course, that's a concern. Let me go back to store of value.

20:01 From the time it was created, I stepped back and thought, I can see this as a store of value. I can see the millennial generation and surrounding cohorts coming along, and this is something they would like to have as a store of value. What does it represent? A mathematical formula? Okay, I have a math background. I kind of get that.

20:24 I'm okay with that. When I get into debates with clients about, but you own nothing, and it just goes on and on, I bring up fine art. And I bring up the thought that, look at some of the fine art. A few months ago, a Jackson Pollock painting sold at Christie's for close to $ 200 million. And I went to see it because I wanted to see it.

20:50 It was beautiful. It was like squiggly lines. Probably you can do it. You can take a Monet. And with AI today and with 3D printers, you can replicate a Monet perfectly. Every color, every brush stroke. And yet the original, I don't know, is probably worth $ 100 million. Who are we to tell our collectors that that's not what they want as their store of value? That it can be replicated today almost exactly. Why would you pay that much when you can have a copy where most people can't tell the difference? So I've always appreciated what Bitcoin represented and crypto represented. I think it's an alternate asset class.

21:37 And I think it is a store of value. And I'm not here to lecture people on what they want to put their money into.

21:44 An alternative to fiat currency. Could that ever be an alternative to the dollar?

21:52 I'm not sure. I think you would need central banks to come in. You would need treasuries to come in. I think there's a big difference between and the confusion between crypto and a stable coin and what can be tracked and regulated and what has the full faith and credit of the u.s behind it and is it a digital currency all of those things i agree with i don't know if crypto can become mainstream i don't know if it's bitcoin but i do see a digital dollar in the stable coin world with the backing of the treasury the support of the federal reserve To me, that's almost inevitable.

22:35 So I'm glad you brought up stable coins. And I don't want to spend too much time talking about currencies, but I've always thought of the dollar more as a medium of exchange than a store of value, if only because we tend to have inflation at 2%, 3% or higher over longer periods of time. And I could swap my dollars for true stores of value, whether it's businesses, real estate, stocks, bonds. etc. Is that a fair description?

23:03 I think it is, which is why we have our careers, because if you just sit there with a load of dollars, as you say, they're depreciating by at least the rate of inflation. If you get the dollars invested, then you hopefully are generating at least a return equal to inflation and something that's a premium to that. And that helps you save and that helps you buy a home down the road. And it protects your assets, your cash from eroding in value.

23:35 So you've been doing this for quite a while. You were fairly verbal heading into 08, warning people about the crisis. And then again in 2023 about regional bank stress. You're a reader of fixed income markets. How different are they today than, you know, 20 plus years ago heading into the GFC?

23:57 I think And don't mistake this for there's another GFC brewing. I think we are back to an environment that reminds me of the aughts. And I think it's a healthy environment where there's a demand for capital because there's a productive use of that capital. And because of that, there's going to be a competition for capital and a cost of that capital. And it ain't going to be zero anymore.

24:26 It's going to have a real value to it. And I go back to 2012 a lot when the Fed started with its summary of economic projections and the nefarious dot plot. If you go back to the very first one and look at their estimate of the long-term neutral rate for the Fed funds rate, it was 4.25%. How did they get there? They looked at over that time period, the 99-year history of the Fed, The real Fed funds rate with 2.25%, you're targeting 2%. Inflation, there's your 4.25% Fed funds rate. I think that's a world we're headed back to and we're in. I like it. It reflects a dynamic economy. It reflects that we're leaving the post-great financial crisis behind where, frankly, us baby boomers kind of broke things. We took the one asset that never went

25:21 down in value... which was housing, and figured a way to oversupply it so that it went down and created a crisis.

25:28 So let's talk about that. You and I have both discussed normalization. In anticipation of talking to you, I pulled some data, and it's really eye-opening. Over the last 25 years, from 2001 to 2026, the 10-year averaged about three and a quarter, a touch less. 30-year fixed rate mortgage, a little over 5%. If you look at the 25 years prior to that, it's double. You're over 8% on the 10-year, and mortgages from 76 to 2,000 averaged about 10%. So how much of what we've been experiencing over the past five years is just, hey, the past quarter century has been aberrational, and now we're getting back to normal.

26:16 I think a lot of it. And by the way, when my wife and I bought our first house, our first mortgage was 10.58%. And being the smart bond guy that I am, at 10.25%, we refinanced. So there's an entirely different thinking out there when I look at mortgage rates today. I think the two periods you highlighted, the truth is somewhere in between. Certainly the early part of that, we were coming off of the Volcker shock. when he raised rates to 20%.

26:47 81, 82? Yeah, I was in the market.

26:51 I've seen both 20% Fed funds and 0% Fed funds. I don't think 10%, you just take the median, that's it. I do think somewhere in the 3% to 6% range strikes me as where the Fed should be. So is it 4.5%? Is it a neutral point? I think that's a good bogey to put out there. right now as we kind of feel around for what is normal again.

27:19 And again, I consider that healthy. I like the ability to give our client base businesses and households bond portfolios that have yields above 6% in the investment grade space. And if you take a little below investment grade, you get close to 7%. That's very different than delivering a portfolio with the yield of 2% on it.

27:43 So we're going to talk a lot more about bonds and and fixed income investing i want to stay with these various regimes uh... the federal reserve has made a number of changes under the new chairman uh... what do you think their uh... perspective is uh... about higher for longer everybody uses that phrase to me it feels more like normalization as opposed to hire for longer uh.

28:09 uh.

28:11 is this a brand new federal reserve regime, and we have to stop thinking about it the way we thought about either the Bernanke regime or the Yellen regime?

28:20 Well, you started off by asking me what I did when I got to J.P. Morgan, so I appreciate you're put into a role. You have to be given the flexibility and the ability to organize things the way that you want. And when I look at Chair Warsh and he stepped into the Fed, he's doing that. There are things that he doesn't like. There are things he'd like to get more information on. He probably has a plan.

28:44 It's fine.

28:45 He's not going to break anything. And we'll just have to learn to adapt. We adapted from Volcker to Greenspan. We're now adapting from Powell to Warsh. It will all be okay. What do I think about some of the things he's doing? I actually think we had gotten to a pretty good place where when you looked at the transparency, all the central banks had gotten to They look at a lot of models. They have models that tell them about the economy, inflation, interest rates, yada, yada, yada, credit spreads.

29:21 And they're pretty transparent about them. So we got to see those models. They put out a lot of minutes. So there was a lot of commentary in the minutes about what they were doing. And then there were a lot of publications that they put out there. What they were doing is pretty much activating millions of people in the industry to focus on the issues they were concerned about and get all that feedback. And in an AI world, you could probably process it. I would have thought that was valuable. I don't know why central banks would want to get away from that. So I'm hoping that there's some in between there. what do I expect from this Fed?

30:02 I expect this Fed to be more vigilant on inflation than growth. I think the central banks and the Fed that were more vigilant on growth had to be after the great financial crisis. Now you've got the next demographic coming along. The 1991 births are now the largest population cohort. They've replaced the 1959 births. So they're going to want things.

30:28 They're going to be the dominant earner, spender, and saver. All of those things have a growth and inflation element to it. And again, it's not around zero. It's a much higher rate. And I think we're going to have central banks that will have to be more focused on inflation vigilance, and they're catching on to that.

30:50 That makes a whole lot of sense to me. I always thought the transparency, here are the models, here are what we're thinking about, here are the important issues, was a way the Fed communicated to the market, hey, here's what we're going to do. Why don't you guys go do our heavy lifting for us? When we've heard about less guidance, less communication, it sounds like less transparency. Are they losing that mechanism of the Fed informing the markets hey, here's what you guys need to go do?

31:24 A little bit. And look, it hasn't been perfect, right? They were forecasting rate cuts this year. When you go back to the start of the year, that's never materialized. But they pointed the industry at, here are the things we're looking at. So they started to get an early feedback loop. I think those of us in the business, particularly working for large firms with a lot of resources, We're always going to do our own research. We're always going to talk to businesses. We're always going to look at what households are doing. We're always going to build our own models. We'll put them out there. We'll say this is what we're thinking. This is where the risks are.

32:04 This is where the value is. And it's not going to change that. And then we'll wait to see how the Fed reacts to those things.

32:12 Did the Fed send the markets a, hey, don't worry about this earlier this year when we saw inflation and tariffs and then the war in Iran. Did they kind of underestimate the impact of all those elements?

32:28 I don't think so. I think they learned from 2022 that you can't say that it's transitory. You can't always look through. You can to some extent. So perhaps their initial inclination is this could be wound up pretty quickly. Let's wait and see what happens. But the reality is within six months' time, they shifted gears. They've started the hiking cycle. Like all of us, they're just going to watch events in the Middle East and look at where oil is, see if there are second, third round effects to it in the broader inflation metrics. And if they have to respond with much higher rates, they will. I think that's a good place for them to be.

33:11 Makes a lot of sense. Coming up, we continue our conversation with Bob Michael. CIO and Head of Global Fixed Income at J.P. Morgan Asset Management, discussing the current rate and credit environment around the world. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. I'm Barry Ritholtz.

33:31 You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Bob Michael. He's Chief Investment Officer and Head of Global Fixed Income Currency and Commodities at at JPMorgan Asset Management. So let's talk about some of the things that are driving the markets, driving the economy. It's been pretty clear. Artificial intelligence and the hyperscalers are just a house of fire. Big part of GDP, AI data center built out, are using everything from euros to yen to hybrid structures for the credit on this.

34:10 I'm curious, what are your thoughts about this? Is the market pricing it correctly? Have we over-allocated to the space? What's going on over there in credit?

34:20 Well, I'm fortunate to have worked in a franchise that saw and believed in AI early. And I go back three or so years ago before really the buildup. And I think of Jamie Dimon and Mary Erdos pretty much pushing us, dragging us, kicking and screaming into AI. You don't understand. It's greater than anything that happened in the dot-com era. You have to go back to the Industrial Revolution.

34:50 It may even be greater than that. And initially, we looked at it. We weren't sure. We had people come in, talk to us about it. Is it like an amped-up Google on steroids or something like that? And you begin to then use it very quickly. Like any technology, once you're introduced to it, you can't put it away. You start to use it. So we've been on this journey within JPMorgan Chase for over three years now. It's everywhere.

35:20 It's all-consuming. And the differentiation in how we do things today versus what we did two or three years ago is extraordinary, even from the start of the year. It's everywhere in fixed income. We actually just did a shark tank. We had the analysts and associates submit proposals to us. There were 11 of them. Three were finalists. And we've decided we're going to fund two of them. And this was just in the last week or so. So within the bank, I see it. I understand it. It's real.

35:55 When I talk to our client base, I am a little bit surprised. Perhaps I shouldn't be. How many businesses are just starting that journey? So then I step back. Clearly, we invest in all the hyperscalers. We do so across the capital structure, both in asset management and then on the banking side. So we're seeing all facets of it.

36:18 We're all seeing the same thing. Demand is super high. The ability to deliver capacity to meet that demand is super low. So you have a couple choices. You can either borrow today on your very pristine balance sheet and start delivering the capacity quickly so you can monetize the demand, or you can build it out of excess cash flow, which a lot of these hyperscalers have. Not all of them, but most of them. If you do that, don't you become, don't you risk becoming the next Blackberry or Nokia? Somebody else is going to get there faster than you are.

36:59 You're going to be content harvesting the revenue and profits you have, and you're going to miss the next dynamic. So We get it from all aspects. We get it from the use case. We get it from the demand for capital case. We see an end game. We don't actually know what AI will do five, ten years from now.

37:22 But I feel we live that in the internet. I only say, pull out your iPhone today or whatever your smartphone is. And imagine if you had that in 2000. It didn't come along until seven years later. How big would the dot-com bubble have been? We didn't know what could exist. We're open to that journey with AI, but today it's making radical changes in how we operate the business.

37:48 I'm excited about what it could do five years from now, and I'm happy to finance a lot of these borrowers in this space.

37:55 You know, as a consumer of JPMorgan Chase, I have noticed when I get fraud alerts are very different currently than years ago. If it's a hotel I've booked before or travel, even overseas, it used to be a red flag. Now it's not. And yet somebody bought $ 25 worth of something at a Walmart in Nebraska on my credit card, and obviously that got flagged right away. So I suspect this is being integrated throughout not only your shop but everywhere.

38:30 It's going to be really fascinating to see what happens. I'm really intrigued about the thought of allocating across all sorts of ways and across every various hyperscaler. Is that just the nature of being one of four giant money center banks? You're going to have a finger in every pie? Is that just how that goes?

38:53 Okay. I wouldn't phrase it like that. I would phrase it that you have these very large companies out there that have financing needs. And this is a seismic financing need. And they know they can come to JPMorgan Chase and we can offer them a lot of ways to finance it. Just on the debt side, do you want to tap a bank line of credit? Do you want us to arrange some sort of direct loan and club it out?

39:22 Maybe asset management is a part of that. Or do you want us to raise capital in the public markets for you, in the debt markets for example? If you want to do that, do you want it all in dollars or do you want some in euro, some in yen, some in Canada dollar? That opportunity is also available. Or if you're concerned that everyone may be crowding out the debt markets all at once, had you thought about equity?

39:48 Look at where your equity is trading. Look at the multiple. Look at the stock level. At JPMorgan Chase, you can offer all of those. So when I meet with some of the hyperscalers who are looking to borrow, I'm just a tiny sliver of the solution. I know they're having other conversations across JPMorgan Chase.

40:08 So you mentioned the public bond market. We've seen tremendous growth in the private credit market alongside public markets. What are your thoughts on that? This has become a giant addition to public equities and public fixed income.

40:25 I love it. I love the fact that a legitimate non-bank lending channel has been opened up. And yes, because I work within a bank that might otherwise like to have all that loans on its balance sheet and have originated them, there is an acceptance that markets evolved. If I go back early in my career and I think about the mortgage market, I've seen this before. If you took out a mortgage in the 80s, it was from a bank. And then, of course, the bank sold it on to Fannie Mae or Freddie Mac, Ginnie Mae, who then gave them capital to continue extending loans into the mortgage market. Today, it's not banks that are the largest mortgage lender. It's Rocket Mortgage is the largest mortgage lender. Yet,

41:14 Banks and non-bank lenders have learned to coexist in that space. I think the same thing is happening in private credit and direct lending. There's also a convergence now. We were meeting with a lot of the borrowers in our space and they wanted to understand, was it better for them to access the public debt markets or should they access a direct loan? And a lot of the larger, bigger borrowers were going through that dynamic So we've created a partnership between my group in asset management and the commercial bank, where the commercial bank, which is the largest lender to corporate America, the largest banker to corporate America, will source and originate loans. We'll have a look at them and

42:02 do a fiduciary look. If they make sense for some of our client base, then we'll put it into our portfolios. The convergence between public and private is happening everywhere. I think it's healthy for the bond markets.

42:17 So let's talk about a few other things besides inflation that are driving yields higher. How do you look at the current set of deficits? How significant has that been to what's going on in bond markets? And is that a key factor with yield or is that just one of many factors?

42:38 I think it's one of many factors. I think you have to go back to our bonds giving you some sort of premium to inflation. If I think about debt and deficits, for sure, there's a level of righteous indignation we should all have. We're all going to go home and balance our checkbooks. We all say we'd like to have that, can't afford it. Don't want to borrow. Let's do with something else. Would like to go there. Too expensive.

43:12 Let's go here and sell. Do we need to go out for dinner? No, probably not. We can eat at home. Everyone is doing that, yet we look at governments and they don't seem to have that discipline anymore. And it's not just the U.S. We're learning it's happening in France. We're learning that it's about to happen in Germany. Has it gone on in Japan and China for a while?

43:36 It has. I'm over it. I'm over it. You look at debt to GDP in Japan, it's closing in on 300%. You look at China, it's closing in on 200%. We're just over 100%. I don't know what the structural speed limit is, but it's not here. Perhaps a more interesting measure is to look at debt service to GDP. Where does that become a problem? Where does it look stretched?

44:04 Maybe the total amount of debt service payments to GDP at close to 5% is a historic high level for the US. But we're in the mid threes right now. To me, that's still pretty reasonable. So there was a lot of low coupon financing that's gone on at the government level.

44:25 And if memory serves, I'm doing this off the top of my head, 10% is where countries really run into trouble. If their debt service is 10%, of their gdp that's really problematic.

44:36 Yeah and and then you're hunting the math on how much debt the u s would have to issue to get there i don't even know if we could spend it all you're not given five thousand dollar checks terry what i don't maybe you're given five million dollar checks to everyone.

44:51 That would be inflationary we would have to worry about that so so there has been some hesitancy uh... when we look at these treasury auctions from foreign buyers I know you've pushed back on the sell America narrative. What are your thoughts on how attractive U.S. treasuries are today around the world?

45:13 The U.S. doesn't own the best bonds in the global bond market. It has some of them, but not all of them. There are other good borrowers out there. And when we step back and look at the repricing that's gone on, particularly over the last year, yields have gone up to extreme levels in several places. And recently, we talked about Australia and Japan. And for us, it's the discipline of the central bank and the willingness to lean into that, maybe create a little bit of pain for the longer-term good to try and rein in some of the inflation rather than leave monetary policy so accommodative that you effectively finance the higher price level of energy in the pass-through, and that becomes an inflation problem. So markets

46:04 like that, we tend to like. Emerging market debt, we love. We look at the local emerging market debt that's been issued over the last decade, and it looks terrific to us. Historically, and early in my career, I looked at Brady Bonds. I was taught that emerging markets Borrowed your money, then confiscated, and then you have to go after them to get them back. That's the wrong way to think about it.

46:35 And happily, early in my career, back in the early 90s, whether it was at Brown Brothers or First Boston Asset Management, we would bring in junior central bankers from around the world, and they would do an internship with you. And you got to meet people from other central banks. Well, guess what? Those guys are back running the central banks. So the local emerging markets are now financing themselves in local currency debt.

47:05 They have full yield curves. The yield curves, the domestic bonds, aren't dependent on cross-border flows. They don't need us. They have pension funds and insurance companies that support the long end. They have wealth management platforms that support the front end and the intermediate part of the curve. When we look at the ownership of local emerging market debt, close to 90% of it is owned by locals. The other 10% are crossover buyers like us coming in with portfolios that aren't dedicated there. The central banks are doing a fantastic job.

47:42 They're every bit as good as the developed market central banks. You could argue if you go back to 2021, when they started hiking rates a year before the developed market central banks, they're actually a little bit sharper. So that's the hidden gem in our portfolios today is local emerging market debt. The authorities are doing a great job in those countries.

48:03 What regions of EM debt do you like? What specific countries?

48:07 It's a combination. There are a lot that we like in Latin America. We own Mexico. We own Colombia. We own Brazil. Then you mix in a little Eastern European, so Czech and Poland. There was a new issue that just came for South Africa, close to a 10% yield. We bought some of that. 10%?

48:30 That's real yield.

48:34 It's a lot of real yield. And when I look at that basket that we put together, you're looking at a real yield that's close to 5% and a nominal yield that's close to 9%. So that's pretty attractive for Sovereign that I think, have pretty diligent central banks. I also heard the president of Paraguay at a conference last week.

49:01 And then you just start thinking and wondering, well, maybe the hard currency debt makes sense for that. So every time I listen to an emerging market, I don't think, is it good debt or bad debt? I think, what debt is there? What's the price of that debt? Does it make sense? Where would I be interested a lot of good stuff going on there as well?

49:23 So let's talk tips Here in the US what what are your thought on on? inflation indexed bonds.

49:32 Well tips are a great way to tell you what's priced into the market and if I look at tips today and It's telling us that despite the concern over oil in the second and third round of facts, actually, TIPS are embedding in inflation expectations of 2.35%. That's really well anchored. What's become a little bit unanchored is the real yield embedded within TIPS. That's at 2.9%. You have to go back to the dot-com era to find real yields that high. What's actually become priced into bond markets is less about inflation concern and the ability of central banks to handle that and more concern about the mix of policies out there. You've got monetary policy we talked about.

50:23 We don't know the reaction functions anymore. You've got fiscal policy. There's a lot of borrowing going on. We don't really understand that. Of course, we have the geopolitics of what's going on in the Middle East, Russia, Ukraine. And then just politics in general. You're going to have an election in France, and you have midterms coming up in the U.S.

50:43 I think all of that uncertainty is pushing bond investors to demand compensation for that, and that's being reflected in higher real yields.

50:53 Really interesting observation. We haven't talked about muni bonds. If you're a New York resident and you're in a national New York combination muni portfolio, Today, we're recording this right before October starts. You're getting 4.5% yield. That's the taxable, I'm sorry, close to 5% yield. That's taxable equivalent of over 8%. If I would have told somebody you could get 8% five years ago, they would, you know, throw me a parade. What are your thoughts on munis, especially if you're in a high-tax state like New York, California, Connecticut, New Jersey, Massachusetts? Love them. Love them.

51:36 Absolutely love them. Exactly for what you say. The yield is there. It's high. The markets come under a little bit of pressure. Of course, the backup in yields makes everyone a little bit apprehensive about putting money into the bond market, particularly munis. You don't want to try and catch a falling knife. We think it's gone too far.

51:59 There's been a lot of supply. Munis typically like to fund themselves before we get into year end. And of course, if you have had a backup in yields over the course of the year, bond prices are going to be down. As you know, we're entering the taxed harvesting season, tax loss harvesting. So we're seeing a lot of that. We're seeing a lot of meanies being sold to harvest losses, to offset gains somewhere else in somebody's portfolio. That's created a pretty good buying opportunity for us. One of the things we look at, too, try to measure the overall health and the municipal bond market are the rainy day funds that they have. And if you go back 10 years or so, they didn't really have any rainy day funds.

52:43 They had blown through a lot of their budgets and fiscal discipline was a problem for them. Enter COVID, enter the payouts that they received, and suddenly those rainy day funds are flush again.

52:59 So you really like munis. I'm thrilled to hear that. I'm a fan as well. So let's talk a little bit about the state of the economy. Your fourth quarter 2026 outlook puts the probability of economic expansion at 85%. That's as close to certainty that we're not getting a recession as I think any one of us that are in the public eye would be wanting to do. What are the drivers of this? We've seen a whole lot of concerns about inflation and food and energy and we've certainly you've mentioned geopolitics is all this uh... concerns about various elections and yet the economy is so resilient what what are the big drivers there.

53:45 I think there are a couple of things uh... one is the capex cycle when we talk to businesses they are investing uh... and and to us you can look across industries and say okay it It may all be around AI currently, but the interesting thing is when we talk to sovereign borrowers and ask them about their spending plans, technology is one of them, of course, but they also talk about investing in their military, defense of their borders.

54:17 You're going to see more of that CapEx come through. Of course, they're talking about energy independence and security. You're going to see more investment there. And of course, in the aftermath of tariffs, everyone's concerned about manufacturing and their supply lines, and they're interested in investing in that. So we see CapEx as being more broadly based than simply AI.

54:41 When you look at corporate earnings and corporate profitability, they look pretty good, and they actually look pretty good globally.

54:49 So you've watched both professionals and individuals invest in the fixed income space for decades. What do you think the biggest mistake people make in this area? And what sort of errors are you concerned about the potential of people making in this environment?

55:08 That's a really interesting question. I'm going to give you a kind of different answer. I tell people, particularly new to the industry, those that we're hiring out of colleges and universities, to understand managing money is a two-edged sword. It's a privilege to manage somebody else's money. You need to understand that. But it comes with an enormous responsibility.

55:40 It's not a game. It's serious. You have individual clients who have dreams, who have aspirations. They're saving for a home. They're going to send their kids to college. They're saving for retirement. They want to go on a holiday, something like that. It's important. We deal with big businesses. We deal with pension funds. They have retirees who are dependent on the retirement plan paying out and giving them a healthy stream of income to live off of. We deal with insurance companies. We deal with monetary authorities, central banks, official institutions. There isn't an individual at the end of all of that that it's important to understand is dependent on the returns you generate. It's not a game. It's real.

56:29 Accept that with the privilege, the responsibility. I think when you step back and look at the markets today, you have to approach it that way. Am I making rational investments? Am I stretching too much? Am I taking too much risk? What am I actually here to do? For us in fixed income, It's to ensure that you get your capital back, plus you get a reasonable income stream, coupon payments, and the total package is some premium to inflation. So I don't want to reach too far for the marginal borrower that has a problematic business model and roll the dice.

57:10 Maybe I'll get my money back. Maybe I'll make another percent on income than I might have by lending to another borrower. I want to do the smart, prudent thing Because I know it's not a game. I know there's a real expectation at the end of this.

57:27 Serious answer. Last question before I jump to my favorites that I ask all of my guests. What do you think fixed income investors or just investors generally are not really thinking about but perhaps should? It could be a topic. It could be a region. It could be a data point. What's getting overlooked in this environment that shouldn't?

57:49 There's the near term. which is what happens in the last 18 months of the Trump presidency? It looks unlikely that he's going to retain Congress. Will he lose the House, the House and the Senate, one or the other? What happens if you have a split Congress and an administration? What do they do and what does he do? Everything's cruising along pretty well right now. Does that dynamic change?

58:19 So I think we need to start looking at that more closely and wondering what happens when there's no more fiscal stimulus. The One Big Beautiful Bill Act has sort of come and gone. If we're left with higher energy prices and with tariffs and there's nothing that will provide the stimulus and Congress is unable to deliver it, do we have a soft landing or is it something that's a little bit harder? So that's one thing that we're focused on. From the longer term, we talked a little bit about the demographics. The 1991 births are around. I think we have to understand what that looks like. I talked about they replaced the 1959 births. I am one.

59:06 I saw that in my career, how we dominated earning, spending, and saving. The 1991 births and surrounding cohorts, they're 35 this year. So they are on that journey for the next 20 years. The interesting thing is, as a baby boomer, as near as I can tell looking at me and you, we're living longer. So we're not going to de-asset We're probably going to retain our assets. We're going to hold them longer than historical metrics would tell them. What does that world look like? Where will the demand be? What will inflation and growth look like? How will policymakers have to respond? So that's something we constantly wrestle with.

59:45 So if I'm hearing you correctly, and my historically divided government has always been good for the equity market, if we don't get more stimulus it sounds like that's potentially disinflationary maybe we see yields come down not back to zero but uh... maybe under down to four percent on the ten-year uh... is is this a goldilocks scenario you're you're laying out plus the gen z and gen alpha spending uh... run over the next twenty years this sounds like this is a really good for everybody.

1:00:24 It's sort of like 1980 or 81 to 2000. When you look at it on a line, it looks pretty good from the equity market. There was that stock market crash in 87. And then there was 89, which.

1:00:40 Was the mini crash.

1:00:41 Then you had long-term capital and the whole dot com.

1:00:43 So Plus the Asian contagion right in the middle of that.

1:00:53 Yeah. And then you go back to, remember that random county in California, Orange County defaulted.

1:01:01 In- Orange County, yes. 90, 91, something like that.

1:01:03 I think it was 94, 95, the tequila crisis. So I think you're right. I think the next decade plus looks pretty good, but it's not going to be a perfect straight line. And I wonder if in the second half of the Trump term the last 18 months without the fiscal impulse. Yeah, you'll have a gridlock Congress, but we're used to the adrenaline rush from capital flowing in.

1:01:31 If you don't get that, do we get a soft landing or a hard landing? We really haven't had a recession in seven years.

1:01:37 Seven years. I mean, other than the brief COVID, it's been closer to 17 since TFC. I mean, COVID, I kind of think of as not the normal business cycle contraction. It was a pandemic. So somewhere out there, we probably do. And it always looks better in retrospect. You don't remember. I was on a trading desk in the 90s. I remember how painful 96, 97, 98. And those were big double-digit gains those years. They were.

1:02:09 They were.

1:02:09 So let me... I only have you for a few more minutes. Let me jump to my favorite questions I ask all my guests. Starting with, who are your mentors? Who helped shape your career? You mentioned... Seth Bernstein, tell us about the folks that really put you on the career path you've been on.

1:02:27 Do you know, it's another thing I tell people joining the industry, look at senior leaders. You learn a lot from what made them successful. You also learn what's holding some of them back. And along the way, I've tried to do that. I go back to when I was at Brown Brothers Harriman, the partner in charge of fixed income, Gene Raines, love the guy. He did all his own research.

1:02:51 The Fed Tan book at the time, I think it's now the Beige book, would come out. He would get a copy and he would comb through it and read everything. So from him, I learned, do your own research. And I do that. I go online. I get all the publications from the IMF, from central banks, and read them. When I was at BlackRock from Larry and Rob, I learned win. Winning is fun. You outperform benchmarks. You win new mandates. It's a lot more fun than losing. And I've tried to build that into J.P. Morgan, where we position ourselves as being a winner that will outperform benchmarks, will win client mandates. Everyone participates in the upside. When I got to J.P. Morgan and I watch Jamie Dimon and Mary Erdos win, What you learn is there is

1:03:50 an obligation and an expectation that if you work at JPMorgan Chase, you do first class business in a first class way. The clients expect it and they expect it. So deliver on that. So there is a very high standard, which I like. And I think people have to wear that badge at JPMorgan Chase. They do expect. to deliver higher than they have previously, but they see that they're winning and that's all good.

1:04:22 Really interesting answer. Let's talk about books. What are you reading? What are some of your favorites?

1:04:27 I do read a lot. It's funny, once you leave college and university and you don't have to do the required reading, you wander off into things that are interesting you. I've read a trio of good books over the summer. I read 1929. which was terrific, Andrew Ross Sorkin. I also read Empire of Pain. Very good read. It's about the Sackler Empire.

1:04:55 Oh, that's right.

1:04:56 So that's pretty interesting.

1:04:58 That also won a few awards, if I recall.

1:05:00 I think so. And then also because I'm a Philadelphian, I've always wanted to read Walter Isaacson's Ben Franklin, and I just finished that up, and that was a great read. Next on my list is a fabulous debt.

1:05:14 I'm halfway through it.

1:05:16 Is it good?

1:05:18 First of all, when you tell someone you're reading a history of bonds, the first reaction is, oh, that must be boring as hell. I'm like, no, it's absolutely fascinating. You go back to Venice and then you go to the Dutch and then London. And, you know, we think of all the big crashes as equity, but through history...

1:05:37 it's mostly been bonds. And you, you of all people, you're going to love this book. Deeply researched, really well written.

1:05:44 Do you know, last week I had lunch with Robin. He told me he has a signed copy of the book for me. It's in Oslo. What am I supposed to do with that? You're right. I don't think bonds are boring. If you step back and think about it, what I love is we can finance anything. Businesses, households, governments.

1:06:05 Who else can do that?

1:06:06 And, and, Not only did they finance making the Netherlands, which is below sea level, habitable, but it's why the British were able to beat Napoleon, the greatest general in Europe, because his financing costs were so much higher than theirs. I don't want to spoil anything. You're going to enjoy this book. I knew a lot of stuff in it, but it was just presented in such a fascinating way.

1:06:35 Who would have guessed? What else are you doing for entertainment these days? What are you listening to or streaming or watching?

1:06:43 What am I streaming? I like sort of the spy espionage stuff.

1:06:48 Same.

1:06:49 Lioness is really good this year. Falda is shockingly good. Um, you know, it, it's, it's a tough watch, but it's really good.

1:06:59 So stressful. You can't go to sleep after Fowda.

1:07:02 Yeah.

1:07:03 Lioness, that was some cliffhanger at the end. Have you finished the season?

1:07:06 Yeah, I have. Yeah. Keep you coming back. Yep. You know, Reacher is kind of in that covert ops. That's interesting. And then of course, because I spent time in England, I like some of the British stuff, slow horses to me. How does Gary Oldman do it?

1:07:23 He's great.

1:07:24 How is he that character? That's great. And then Ted Lasso, of course.

1:07:30 So my wife doesn't watch Slow Horses, but I like it. And she just sucked me into the new Reacher spinoff.

1:07:40 Neely? Yeah. Very good. Of course we're watching that.

1:07:43 We watched the first one. We just watched the first Ted Lasso. Because we always wait for the whole season to drop.

1:07:49 Oh, you got to binge it, huh?

1:07:51 Well, one a night. I don't want to wait 10 weeks. That was the problem with Reacher. Last two questions. Normally here, I would ask what sort of advice you would give to a college grad interested in your space. Instead, I'm going to give your own quote back to you. This is something you say to interns, and I want you to comment on it. The way to differentiate yourself now...

1:08:14 is mastering AI tools the way a previous generation mastered spreadsheets. Explain that.

1:08:22 You have a technology advantage coming out of university because it's a way of life. And those of us who have been in business for a while are generally still on legacy systems, eyeing what will be coming along. When I started at Bankers Trust in 1981, we did everything on yellow ledger paper and HP 12Cs. And then the first sort of electronic spreadsheet came along, VisiCalc. And I had done some basic programming back in high school and at Penn. So I had some sort of background and immediately started crunching numbers with VisiCalc and looking at dozens of companies at once instead of spending the whole day trying to look at one company. And it created a step change in my career. It differentiated what I was

1:09:19 doing relative to what everyone else is doing. Those that we're interviewing for our platform now who are in college or university, we're seeing how AI-enabled they are. We can teach them the finance. I taught myself that, going to CFA class and being in the business. We're all there. But we want them to come in and give us the aha moment, like, why aren't you doing it this way using this GPT or this tool? Why are you doing it that way? So to me, that's the most critical thing.

1:09:52 And our final question, what do you know about the world of fixed income investing today? Might have been useful back in the 90s when you were really first getting started.

1:10:01 I think it's OK to take risks. I think the bond market presents loads of different risks to you. There are new instruments that come along. There are new vehicles. There are new tools to use. Take some risk.

1:10:19 Really, really good advice. We have been speaking with Bob Michaels. He is the head of global fixed income and currency and commodities, as well as chief investment officer at J.P. Morgan Asset Management. If you enjoy this conversation, well, be sure and check out any of the previous 664 we've done over the past 12 years. You can find those at iTunes, Spotify, Bloomberg, YouTube, wherever you get your favorite podcasts from. I would be remiss if I didn't thank the crack team that helps put these conversations together each week.

1:10:57 Elizabeth Sedrin is my video producer. Anna Luke is my podcast producer. Sean Russo is my researcher. I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.