Podcast Summary
Giving Back to Education through Wall Street: John Normand's unexpected career path from no Wall Street exposure to head of strategy at an Australian super, and the podcast's support for Ron Clark Academy's innovative teaching methods and professional development opportunities for educators.
The Wall Street Skinny podcast is not only about investment strategies but also about giving back to education through their involvement with the iConnections funds for teachers initiative. They are using their platform to support the Ron Clark Academy and its innovative teaching methods by providing access to professional development opportunities for educators nationwide. John Normand, a guest on the podcast, shares his background in finance and his unexpected career path that led him to spend three decades on Wall Street. Despite growing up with no exposure to Wall Street or investment banking, he found himself drawn to economics and eventually landed a role at JPMorgan. Now, as the head of strategy at an Australian super, he continues to make a difference in the financial industry. This podcast episode not only provides valuable insights into investment strategies but also highlights the importance of education and giving back to the community.
From accidental economics major to Wall Street success: A diverse educational background and certifications aren't always necessary for finance success, but they can provide unique perspectives and added value.
Having a robust educational background and obtaining various degrees and certifications can open doors and provide opportunities in finance, but it is not a requirement for success. The speaker's journey from economics and public policy to Wall Street was largely accidental, yet led to a successful career due to the intersection of various interests and being in the right place at the right time. While some qualifications can be beneficial for more technical roles, they are not essential for advancement in finance. The speaker's diverse educational background, including a philosophy degree, allowed them to approach their career with a unique perspective and added value to their roles in sales and trading and investment banking. Ultimately, the value of education and certifications depends on the individual's goals and the specific role they aim to pursue in finance.
Getting a CFA certification can boost confidence and understanding in finance: A CFA certification can provide a confidence boost and deeper industry knowledge, but performance is valued over credentials in finance.
While having professional certifications like CFA may not necessarily be the key factor in getting a job in finance or proving one's skills, it can significantly boost one's confidence and understanding of the industry. The speaker shared his personal experience of feeling underprepared in his early finance career and how getting a CFA certification helped him keep up with conversations and analyses. However, he emphasized that Wall Street values performance above credentials and that different paths lead to success. In the context of the speaker's current role in a pension fund called Australian Super, he works on the buy side, meaning he is responsible for making investment decisions for the fund. A super, in this context, is a term for superannuation, which is a retirement savings plan common in Australia.
Australian Pension System: Superannuation - A Unique Model: The Australian pension system, Superannuation, is a compulsory savings program where employers contribute to employee retirement funds. This large asset base allows for global investment strategies and direct impact on investment decisions.
Australia has a unique pension system called superannuation, which is a compulsory savings program where employers are required to contribute 11% (rising to 12%) of an employee's wages into a pension fund starting from their first job until retirement. This results in a large asset base, with over 3 trillion Australian dollars, allowing pension funds to manage non-Australian dollar assets through offices in London and New York. The speaker, who works for an Australian pension fund, explained that their role involves advising on investment strategies for public and private markets, and the impact of their work is directly felt as they are in the room with investment decision-makers. This is different from the sell-side model where analysts formulate views on markets and convey them to clients, with uncertain impact on investment decisions. The advantage of the sell-side model is the exposure to a variety of clients, potentially refining views and gaining a higher quality perspective. However, buy-side analysts need to find ways to test and validate their views and be challenged on them given the limited client base. The term "superannuation" comes from the Australian and UK pension systems, meaning a fund to provide for old age.
Pensions and Superannuation: Managing Long-term Risks for Retirees: Pensions offer guaranteed income but come with investment risk, while defined contribution systems allow individual ownership but introduce longevity risk. Both systems require careful management and long-term planning to mitigate uncertainties, especially in countries without individual pension programs.
Pension funds and superannuation (supers) are essential long-term savings mechanisms for individuals' retirement. Pensions offer a guaranteed income, providing security for retirees, but they place significant investment risk on the managing company. Defined contribution systems, like Australian super, allow individuals to own their savings but introduce longevity risk. Both systems involve uncertainty, with pension funds facing investment risk, and defined contribution systems presenting longevity risk. The complexity and long-term planning required to navigate these risks make it a critical public policy issue, especially in countries without individual pension programs, where the consequences are often older adults living in poverty.
Balancing internal and external asset management: Pension funds must decide between managing assets in-house for expertise and lower fees, or outsourcing to external managers for specialized knowledge. Demographics and pension system structure also impact the liquidity preference.
The management of pension funds involves making crucial decisions about allocating assets between internal and external management, and between liquid and illiquid markets. The internal versus external decision hinges on the trade-off between fees and expertise, with the goal of building up intellectual capital within the organization while keeping costs low. The liquid versus illiquid decision is influenced by the demographics of the pension system, with countries having younger populations able to afford more illiquid assets due to the accumulation phase of their pension systems. The Australian pension fund discussed in the conversation is moving towards managing more assets in-house, using the fee savings to build up expertise, and investing in a mix of liquid and illiquid markets. However, it's important to note that this approach may not be feasible for all pension funds, as larger universities and those with significant endowments can afford to have more assets tied up in illiquid markets. Additionally, the pension fund in question invests in various markets beyond just Australian dollar denominated investments, introducing risks such as rate risk, currency risk, and credit risk.
Expert's approach to analyzing risks in fixed income: Expert sees moderate growth, low inflation, and slow policy easing, potentially favoring equities over fixed income. Uncertainties about future economic conditions, such as AI's impact on productivity and business cycle duration, remain.
The expert's approach to analyzing risks in fixed income products involves starting with a macroeconomic view, quantitatively modeling that view, and determining whether the fixed income market is priced appropriately based on that view. Current views include moderate growth, gradually decreasing inflation, and slow policy easing, which could lead to equities outperforming fixed income. However, there are uncertainties about the economic outlook beyond 2024, particularly in relation to the impact of artificial intelligence on productivity and the potential duration of the business cycle.
Impact of AI on the workforce and US outperformance: AI may widen the gap between high-skilled and low-skilled labor, with knowledge-based jobs becoming more productive while some manual labor jobs remain untouched. Despite potential job elimination, most jobs will become more productive.
The US, as a hub of innovation since the industrial revolution, is expected to continue outperforming non-US assets in the next few years due to its role in germinating new technologies. However, the more interesting question lies in the long-term structural implications, especially regarding the impact of AI on the workforce. AI is seen as an enabler rather than a replacement, facilitating knowledge creation and making jobs more efficient. However, it may widen the gap between high-skilled and low-skilled labor, with knowledge-based jobs becoming more productive while some manual labor jobs remain untouched. AI may not be able to replace jobs that require empathy or discretion. Despite the potential for AI to eliminate some knowledge-based roles, most jobs will become more productive, with a small minority being completely eliminated. The future of service industries may depend on whether non-human agents can learn empathetic qualities. The ongoing news event about the Dollar-Yen is not directly related to the discussion.
US-Japan interest rate gap fuels carry trade and US dollar strength: The large difference in interest rates between the US and Japan is driving a record-high US dollar value against the yen through the carry trade strategy, where investors borrow in low-interest currencies to invest in high-interest ones.
The extreme rate divergence between the US and Japan, with the US having higher nominal and real interest rates than Japan, which is experiencing negative real rates, is driving the current 30-year high in the US dollar's value against the Japanese yen. This phenomenon, known as the carry trade, occurs when investors borrow in a currency with low interest rates (like the yen) and use the funds to invest in a currency with higher interest rates (like the US dollar), earning the interest rate differential as profit. The history of the yen carry trade dates back to when investors began seeking to profit from this strategy by shorting the yen against other currencies, not just the US dollar. Despite expectations of Fed rate cuts and Bank of Japan hikes, the persisting rate differential is expected to keep the dollar strong, with only a limited potential for yen appreciation.
Carry Trade: Historical Gains and Sudden Losses: The carry trade strategy involves borrowing in a low-yield currency and investing in a high-yield one, but it comes with risks of sudden losses due to macroeconomic shocks. Timing the buy-in is crucial for investors to minimize losses, and maintaining a balanced portfolio is essential for managing risk.
The carry trade, a currency strategy involving borrowing in a low-yield currency like the Japanese yen and investing in a high-yield currency, has historically resulted in significant gains but also sudden and substantial losses. This strategy is popular among investors seeking to generate alpha, but it comes with risks. The high-yield currency can experience macroeconomic shocks, leading to a collapse in its value and wiping out prior gains. For instance, during the global financial crisis, commodity prices collapsed, making high-yield commodity currencies like the Brazilian real, Australian dollar, and New Zealand dollar unattractive. The history of the carry trade is marked by extended periods of low volatility followed by sudden collapses. As a result, timing the buy-in is crucial to minimize losses. For investors, understanding the risks associated with the carry trade is essential, as currency movements can significantly impact equity investments. Pension funds, in particular, aim to generate returns by allocating assets to various asset classes based on historical performance and expected growth. They seek to hold these assets for extended periods, as they typically outperform over time. However, deflation, which leads to no profits growth, is the only scenario where risky markets underperform. Therefore, a pension fund or any investor should maintain a balanced portfolio, considering both risk and reward.
Making Informed Decisions to Outperform the Benchmark: A pension fund aims to generate alpha by making informed decisions between various asset classes, but predicting market trends is challenging and fee minimization is a priority.
A pension fund aims to outperform the benchmark by making informed relative value decisions between various asset classes, such as private equity versus public equity or infrastructure versus real estate. This strategy, known as alpha, is additive to the returns earned on the benchmark. However, predicting market trends and getting the calls right is challenging, as unforeseen events like the COVID-19 pandemic can significantly impact asset classes. The pension fund's fee structure is designed to minimize fees for members, and managing assets in-house is a common practice to save on fees. The incentives for a pension fund are different from those of other asset managers, as the focus is on reducing fees for the members rather than maximizing profits for shareholders. While some view the financial industry's role in the 2008 financial crisis as negative, it's essential to remember that both borrowers and lenders play a role in credit extension. The industry's actions should be evaluated in the context of the complex interplay of various factors.
Understanding the Role of Government Policies and Societal Expectations in the 2008 Financial Crisis: To effectively address complex issues like the 2008 financial crisis, it's essential to consider the role of government policies and societal expectations in shaping the lending environment, and find defensible principles for grounded and productive discussions.
The 2008 financial crisis was a complex event with various contributing factors, and it's essential to consider the role of government policies and societal expectations in shaping the lending environment. The finance industry's role is to allocate capital efficiently, and people involved are allowed to prioritize their financial interests. However, this doesn't absolve them of other societal responsibilities. In public policy debates, it's crucial to understand the underlying principles guiding actions to address complex issues effectively. Shaming or oversimplifying won't lead to meaningful solutions. Instead, finding defensible principles that can be applied across various domains is essential for grounded and productive discussions.
Criticizing Effective Altruism: A Deeper Understanding Needed: Effective altruism, while encouraging the wealthy to donate to the greatest good, requires a deeper understanding to ensure maximum impact. Philosopher Peter Singer's approach to identifying core premises and showing their invalidity can lead to reevaluating policies and beliefs.
The principle of effective altruism, while well-intentioned, can be criticized for its broad application and the need for a more profound understanding of the underlying reasons. The philosopher Peter Singer, who retired from Princeton, is renowned for his ability to simplify complex ethical issues and challenge the validity of core premises. Effective altruism, which encourages the wealthy to donate to the greatest good, is a valuable concept, but it's important to ensure that the donations are indeed making the greatest impact. Singer's approach to identifying the core premises of arguments and showing their invalidity can lead to reevaluating various policies and beliefs. Despite controversies, such as the case of Sam Bankman-Fried, the idea of effective altruism remains a significant contribution to the discourse on philanthropy and redistribution.
Philosophy of using finance earnings for altruism: Stay current, continue learning, and adapt to succeed in the finance industry. Socially-minded professionals can combine career commitments with altruistic causes.
The philosophy of using finance earnings to fund altruistic causes, as exemplified by SBF's actions, may be debatable and lack grounding in common sense and philosophy. However, the compelling logic behind it encourages socially-minded finance professionals to marry their commitment to their careers with their commitment to helping others. Additionally, the finance industry's dynamic and innovative nature requires continuous learning and adaptation. As John emphasized, staying current and continuing to learn is essential for success and relevance in the industry. Whether you're new or experienced, being curious and engaged with the ever-changing economic landscape is crucial. Overall, the finance industry offers challenges and dynamism, and the ability to adapt and learn is a necessary skill to keep up with the times.