Podcast Summary
WS Skinny supports Ron Clark Academy's teachers initiative: WS Skinny's team is fundraising for Ron Clark Academy to support educators' professional development
The Wall Street Skinny team, with a passion for teaching, has joined the advisory board for iConnections funds for teachers initiative. This initiative aims to support the Ron Clark Academy and its innovative teaching methods by providing access to their professional development opportunities for educators nationwide. The team is organizing fundraising events in major cities to directly donate proceeds to the Ron Clark Academy to aid teachers in participating in these groundbreaking training programs. Despite the challenges of formatting and aligning content in tools like Canva, the team finds joy in creating clear and understandable messages. This initiative aligns with their mission to make the financial services industry accessible to everyone, extending to the education sector and empowering teachers.
Navigating the operational aspects of starting a business or new roles in finance: Expect to learn new skills beyond market knowledge when starting a business or pursuing roles in finance. The journey may not have clear-cut solutions, so be prepared to embrace the learning process.
Starting your own business or pursuing roles in industries like venture capital, private equity, or investment management involves learning a wide range of skills beyond market knowledge. These operational aspects can be daunting and may not have clear-cut solutions, making the journey less structured compared to more traditional roles. Brian Weinstein, a former client and current head of fixed income at Morgan Stanley Investment Management, shared this experience. Despite his impressive background at BlackRock managing billions of dollars, he started his own company, Blue Elephant, and faced the challenge of learning new skills. This lack of a playbook and the need to figure things out on your own is a common theme across various roles in finance and beyond. It's essential to be prepared for this aspect of the journey and embrace the learning process.
Unexpected opportunities at unknown companies: An unconventional path led the speaker to an internship at BlackRock, where he learned programming and contributed to the company's growth. Unexpected opportunities can lead to valuable skills and insights.
Sometimes, not having a traditional educational background or following a popular career path can lead to unexpected opportunities. The speaker shares his story of wanting to become a lawyer but ending up with an internship at an unknown company called BlackRock instead. He was initially discouraged by the lack of recognition and resources compared to other companies, but this experience turned out to be pivotal in his career. He started as an intern and learned programming, eventually contributing to the company's growth. He also emphasizes the importance of understanding fixed income markets, as they play a significant role in financing and private equity. Despite the initial challenges, the speaker's experience at BlackRock provided him with valuable skills and insights that set him apart from others in the industry. It's a reminder that unexpected opportunities can lead to great rewards and that sometimes, the most fundamental things can be the most impactful.
Learning and adapting in investment management: Investment management in fixed income offers constant learning opportunities and requires adaptability to changing markets and new skills.
A career in investment management, particularly in fixed income, offers constant learning opportunities and dynamic challenges. The speaker, who started in fixed income at BlackRock and later founded a private credit company, emphasized the importance of adapting to changing markets and learning new skills. He transitioned from managing billions of assets to running a small company, learning various aspects of business operations, and eventually leading Morgan Stanley Investment Management. Fixed income investing involves not only financial analysis but also operational risk management and investor experience. The speaker's diverse experiences demonstrate the multifaceted nature of investment management and the importance of being adaptable and resilient in this field.
Active management in fixed income markets: Active investment management in fixed income markets can offer better returns and risk management compared to passive strategies.
While passive investment strategies like index funds and ETFs have gained popularity due to their tax efficiency and low fees, active investment management, particularly in fixed income markets, can offer better returns and risk management. Morgan Stanley Investment Management, a division of Morgan Stanley, is an active asset manager that specializes in allocating capital for institutional and retail investors into various asset classes beyond fixed income, including public equities, infrastructure, real estate, private credit, and private equity. Active managers like Morgan Stanley Investment Management conduct extensive research to identify the securities that offer the best potential returns while minimizing risk. In fixed income markets, passive strategies may not be as effective as in equities, as the largest issuers often have the most debt, and active managers can help investors avoid defaulting securities. While passive strategies have their merits, active management can provide value, especially in markets where research and careful selection are crucial.
Identifying risks and opportunities through research: MSIM's $1.4 trillion investment firm relies on dedicated research teams to understand market risks and opportunities, informing investment decisions made by portfolio managers.
Research plays a crucial role in the functioning of a large institutional investment firm like MSIM. With over $1.4 trillion in assets under management, including $200 billion in fixed income, research teams are dedicated to identifying and understanding the risks and opportunities in various markets and industries. These teams consist of analysts who conduct on-the-ground research in countries, speak with company executives, and study trends and macroeconomic factors. Their findings inform investment decisions made by portfolio managers, who construct baskets of bonds tailored to the risk appetites and investment goals of various institutional and retail investors. The research process is collaborative, with teams working together and communicating about macroeconomic factors and industry trends. The result is a well-informed investment strategy that aims to provide yield, safety, and duration to investors.
Roles in Portfolio Management Team: A portfolio management team consists of traders, research analysts, and portfolio managers, each contributing unique skills to create a diversified and balanced portfolio that aligns with the client's goals and investment style.
A portfolio management team consists of various interconnected roles, including traders, research analysts, and portfolio managers. Traders act as the bridge between sales and trading teams and ETF market makers, while research analysts keep them informed and provide investment ideas. Portfolio managers, who often come from a research background, are responsible for creating a portfolio that aligns with the client's goals and investment style. They synthesize ideas from various sources, ensuring a well-diversified and balanced portfolio. Investment management firms may have different structures, and portfolio managers can come from various backgrounds, such as operations or client service. The role requires a unique skill set that combines art and science, and portfolio managers make investment decisions based on the firm's mantra and the client's specific needs. The team's goal is to create a portfolio that effectively expresses various investment views, including long-only, short duration, curve trades, and volatility exposure. In fixed income markets, buying the market has a different meaning, as bonds are bounded by par and can only go up to their face value at maturity.
Understanding the role of US Treasuries as a hedge during uncertain times: Buying a government bond fund provides safety and protection during risk-off moves, as yield changes have a significant multiplier effect on bond prices. Fixed income investments, like bonds, can provide substantial returns during market volatility.
When considering fixed income investments, it's essential to understand the role of the US Treasury as a natural hedge during times of uncertainty or risk. The yield on US Treasuries reflects the market's best guess of the average Fed funds rate over the next 10 years, adjusted for some risk premium. The yield change has a significant multiplier effect on the price of bonds, meaning a small change in yield can result in substantial gains or losses. Therefore, if you're looking for safety or protection during a risk-off move, buying a government bond fund is the most effective way to achieve this goal. Additionally, it's crucial to recognize that fixed income investments, like bonds, can provide significant returns when markets experience large moves, even if they may not seem as dramatic as in the equity market. Lastly, the fixed income market's vast size, with trillions in notional value, means that even small moves can have a significant impact on overall returns.
Understanding Risks in Fixed Income Investing: Active management, diversification, and careful analysis are crucial for mitigating risks in fixed income investing. Even with a deep understanding of the market, it's impossible to research every bond, making trusted advisors and research teams essential.
In the world of fixed income investing, it's crucial to understand the risks involved, particularly when it comes to high yield bonds and municipal bonds. During periods of low interest rates, the allure of high returns can lead investors to take on more risk than they realize. However, as the speaker notes, when yields rise, even slightly, the impact on portfolios can be significant. This is why an active manager with a deep understanding of the market and individual bonds is essential. Diversification and careful analysis are key to avoiding defaults and maximizing returns. It's also important to remember that even the most informed investors can't possibly research every bond on the market, making it essential to rely on trusted financial advisors and research teams. While it's possible to short bonds, this strategy comes with its own set of risks and requires a deep understanding of the market and individual securities. Ultimately, fixed income investing requires a long-term perspective and a willingness to navigate complexities.
Simplifying Fixed Income Investing with Empson: Empson Fixed Income focuses on duration and credit risks, providing valuable expertise and research to clients in the complex world of fixed income investing.
Empson Fixed Income is a long-term investment firm that focuses on buying and holding bonds they believe in, rather than constantly trading for short-term gains. They provide expertise and valuable information to their clients, particularly in the area of credit risk, which is crucial in fixed income investing due to the high likelihood of debt defaults. The firm aims to simplify the complexities of fixed income investing by focusing on two primary risks: duration and credit. While duration refers to the sensitivity of a bond's price to changes in interest rates, credit risk is the likelihood that the issuer of the bond will default on their debt obligations. Although these risks are related, they can be isolated to some extent by understanding the shape of the Treasury yield curve and identifying the risk-free rate across various maturities. By providing research and analysis in this area, Empson Fixed Income adds value to their clients, who are often unable or unwilling to conduct this research themselves.
Protecting against interest rate risks with high yield funds: Consider high yield emerging market and bank loan funds for shorter durations or floating rates, but be aware of the unusual yield curve shape and potential for unexpected inflation
For individual investors looking to protect themselves from interest rate risks, considering high yield emerging market and bank loan funds is a good strategy. These funds typically have shorter durations or floating rates, reducing the impact of changes in interest rates. However, it's important to note that the current yield curve shape is unusual, and taking on duration risk is currently not rewarded. Instead, investors may want to consider holding a mix of safer assets like money market funds and riskier funds depending on their outlook for the economy. The speaker also shared his personal belief that the bond market, which has historically predicted economic downturns, may be signaling an uncertain future, but he emphasized that this doesn't make him smarter than the market, but rather a recognition of the historical context of inflation and its unpredictability. Ultimately, investors should stay informed and adapt their strategies accordingly.
Low inflation expectations could change: Experts warn that low inflation may not last, with concerns over the Fed's response, gov't spending, disrupted supply chains, and central bank bond buying potentially impacting the yield curve and inflation rates.
The recent period of low inflation may have fundamentally changed people's expectations, leading to a potential rise in inflation that could be more persistent than some expect. The Fed's aggressive response to inflation, coupled with massive government spending and disrupted supply chains, have created concerns about the sustainability of low inflation rates. Central banks have also bought up a significant amount of government bonds, potentially impacting the yield curve and the fixed income market. Despite the market's current expectations of low inflation, some experts believe that inflation could average higher than the current 2.3% implied by 10-year breakevens. The Fed may be done raising rates for now, but the long-term implications of these trends are still uncertain.
Historical Asymmetry of Fed's Response to Economic Crises: The Fed's response to economic crises has been asymmetric, with monetary and fiscal policies implemented differently. During the pandemic, an unprecedented level of stimulus led to high inflation, and the Fed's tools, including QT, may face challenges in a political environment.
The Fed's response to economic crises has historically been asymmetric, with monetary and fiscal policies implemented at different times. During the COVID-19 pandemic, the Fed and the government employed an unprecedented level of stimulus, leading to high inflation. The Fed's toolkit, including quantitative tightening (QT), is available but may face challenges in a political environment where inflation remains above target. The psychological acceptance of higher inflation and the Fed's reluctance to aggressively use their tools could eventually lead to a change in their target. The Fed's handling of inflation and economic downturns is a complex issue, requiring careful consideration and understanding of historical context.
The Future of the US Dollar as the World's Reserve Currency: Despite large debts and differing inflation targeting, the US dollar's dominance remains due to stability and US consumption. Potential alternatives like crypto and China's currency are subjects of debate, but the dollar's role may diminish slightly in the next 20 years.
The US dollar's status as the world's reserve currency is not under imminent threat, but it could face challenges in the future. The Federal Reserve and European Central Bank have different approaches to inflation targeting, and the amount of debt in the US and Japan is large, but yields in Japan are the lowest despite their high debt-to-GDP ratio. The dollar's dominance is due to its stability, ease of use, and the US being a large consumer of goods. However, the question of what could replace the dollar is worth considering, and potential alternatives like crypto and China's currency are subjects of ongoing debate. Emerging market investments often involve managing currency risk, and US investors have benefited greatly from the US market's strong performance in the last decade. The next 20 years may see the dollar's role diminish somewhat, but it's not a concern for day-to-day investments. The US should take better care of its currency as a country, acknowledging that it doesn't have a divine right to the reserve currency status.
Navigating Currency Risks in Investment Portfolios: MSIM, a large investment firm, emphasizes diversification and managing currency risk in investment portfolios. Long-term trends and team expertise help guide decisions, but unexpected events require adaptability and clear investment theses. Liquidity and investor sentiment are crucial during crises.
Diversification is key in investment portfolios, even for large institutions like MSIM. European and Asian investors often look beyond their regions for higher yields and less currency risk. The US, with its strong economy and dollar, remains a significant part of many portfolios, but managing currency risk is important. Currencies can be complex and volatile, and even professional investors find it challenging to navigate. Long-term trends in currency correlations can provide some guidance, but unexpected events and idiosyncratic factors can cause deviations. Asset managers at MSIM divide their teams based on investment styles and market expertise, and they emphasize clear investment theses and risk management. They avoid trying to hedge for extreme outcomes and instead focus on long-term research and adaptability. Liquity and investor sentiment are also crucial considerations in managing portfolios during crises.
Navigating setbacks and risks in finance: In finance, being wrong is common. Adaptability, risk-taking, and the ability to pivot when a thesis fails are essential skills.
Working in finance, particularly in a role like fixed income asset management, requires a unique skill set and mindset. It's important for professionals to remain calm and level-headed, even when faced with setbacks or challenges. This is because being wrong is a common occurrence in this field. Therefore, the ability to recognize when a thesis is not working and being willing to take risks off is crucial. Additionally, the path to breaking into a place like MSIM is not always clear-cut. While having a finance or economics background can be helpful, it's not a requirement. Employers value diverse backgrounds and the ability to add value right away, particularly in skills like programming. Overall, a career in fixed income asset management offers the opportunity to learn complex markets and adapt to constant change.
Exploring Investing's Concentric Rings: Fixed Income and the Apprenticeship Model: The apprenticeship model in sales and trading offers opportunities for career growth, especially in fixed income, where knowledge can be gained on the job. MSIM encourages exploration and accepts resumes from non-university applicants.
Investing offers various concentric rings of expertise, allowing individuals to specialize or be generalists. The sell side, specifically sales and trading, has an apprenticeship-based model, which is attractive for those starting their careers. Fixed income is an area where one may not have extensive knowledge coming out of school, but opportunities exist to learn and grow. Brian Weinstein, a guest on the podcast, shared his experience of benefiting from such a model and now runs an internship program at MSIM to teach and recruit analysts. He encourages those interested in investing to explore different areas and consider fixed income for its potential income opportunities. The process to join MSIM is similar to the standard recruiting cycle for universities, but they also accept resumes from those not in universities.
Learn financial concepts through podcast, TikTok, Instagram, and YouTube: The Wall Street Skinny offers various formats to learn financial concepts: podcast for audio learners, TikTok and Instagram for visual learners, and YouTube for in-depth tutorials
The Wall Street Skinny is not just a podcast, but also offers visual content on TikTok and Instagram to help learners grasp complex financial concepts. These platforms provide content that complements the podcast, ranging from valuation to Excel skills to bond fundamentals 101. For those who prefer in-depth tutorials, the Wall Street Skinny's YouTube channel is the place to be, where they regularly publish comprehensive videos on these topics and more. So, whether you're an audio learner, a visual learner, or a combination of both, the Wall Street Skinny has got you covered. Stay connected with us on our social media platforms and subscribe to our YouTube channel for a well-rounded financial learning experience.
