Everything I Learned From 20 Years Running Research at JPMorgan | LFTC

[Applause] [Applause] Welcome to Live from the Compound. I

your host Downtown Josh Brown here with my co-host as always, Mr. Michael Batnik. On today's very special episode,

Batnik. On today's very special episode, we are joined by one of the most popular and the most requested and re-requested guests in compound history, Mr. Michael

Sealist. Uh, Michael's work has shaped

Sealist. Uh, Michael's work has shaped how professionals and institutions think about markets for decades. He is the chairman of market and investment strategy at JP Morgan asset and wealth

management. The author is the widely

management. The author is the widely followed Eye on the Market, a research publication known for its sharp analysis, irreverent tone, and deep dives into the market, the economy,

geopolitical issues, etc. Over 35 years of experience. Michael is one of the

of experience. Michael is one of the most respected investment strategists on the street. Welcome back to the show.

the street. Welcome back to the show.

We're so happy to have you.

Thanks very much.

How's that for a buildup?

Off the dome. Very impressive. Um,

there's more. So, um, we invited you here to celebrate the 20th anniversary of a publication Michael never misses. I

never miss. And, uh, it's called, uh, Eye on the Market. If you work in finance, it's very likely you get this sent to your inbox. Um, and and the 20th

anniversary is a really big deal. And uh

I think what we want to do today is really talk about some of the most memorable charts and some of the biggest insights that you've produced over the years um putting this out. And I I just

want to say thank you so much for joining us in studio. It was so much fun for me to go back and read some of these because I read them in the moment and one of the questions I kept asking

myself was did I pay enough attention to this at the time that it came out? What

was your what was your experience like going back through your own work?

Uh let's see. Well, we our chart formatting was pretty crappy when we started. Fair.

started. Fair.

Um the pieces the the pieces were shorter.

Yeah.

Um particularly before the financial crisis when the world was simpler, but then once the financial crisis hit the the cadence of it went up. At one point we had to publish like every week. the

week that Lehman went into uh defaulted and then the GSSE were put into conservatorship, we published three times.

Yeah.

Um so we we wrote a lot more often back then because there was a lot of things to plow through.

So I want to go I want to go back to the beginning. You've done 4,500 pages worth

beginning. You've done 4,500 pages worth of Eye on the Market, right?

But like that's the page count.

Yeah. It's called We have this file called the Eye on the Monster and that's it's every eye on the market's ever been written.

Okay.

And there's 584 of them.

Was it always Eye on the Market? Was

that the first name?

Uh before that I wrote a semi a semiannual publication called on my mind but it was you know uh for a few years before that but I in the market started in 2005.

Okay. So so Mary Callahan Erdos comes to you and says you're so you're doing a lot of research for the in-house client call right?

Which is like an 8 a.m. or 7 a.m.

Yep. Right.

And I'm the I was the chief investment officer in the private bank at the time.

Okay. and she wanted me to start sharing externally to the extent that we could disclose what we were thinking about different portfolio strategies.

So this is 2005. Did it start as an email product or were you physical?

It started as an email except a lot of our clients didn't have email, right?

So we had to print them and then snail mail them at times.

Okay. All right. So

and people were still using Palm Pilots.

So um this is how Mary puts it. She

refers to Eye on the Market as quote one of the most widely respected pieces of thought leadership in our industry. I

think most people would agree with that.

Jamie Diamond has referred to your Eye on the Market series as quote required reading. Um, I'm guessing the success of

reading. Um, I'm guessing the success of the series has surpassed your wildest expectations from when you were 35 years old and they came to you and said, "Hey, how would you like to put this out on a regular basis?"

regular basis?" 35 years old.

35.

How old How old were you started? My

math sucks.

All right. Sorry.

I was 45.

45. Okay. My bad. But I'm guessing from the day you started, right, they must have like this must have gone so much bigger than you ever thought it would have.

Yeah. I mean, it took a while, right? I

mean, you you have to you have to compete for space. There's a lot of people get a lot of stuff in their inbox and, you know, you have to get some calls right. You have to get some

calls right. You have to get some important calls right. Uh you have to make it clear when you make the wrong call what you learned and how you're going to try to avoid the same thing.

But yeah, over time it it started to pick up speed.

What do you think was your best call there? I mean, a few things kind of jump

there? I mean, a few things kind of jump out. Um,

out. Um, the subprime stuff. This

the subprime.

I mean, not that you peaked early, but like you had really fortuitous timing.

I saved an email that I sent to Jamie in the fall of 2006 saying, "I've heard rumblings that the bank is about to start up a subprime effort. I think that would be a huge mistake. Let me tell you

what we see going on underneath the hood in terms of leading indicators, delinquencies, defaults, and recoveries.

Yeah, I think so. I think I had not read that, but that's 06. You're talking

about subprime 18 months before it becomes the lynch pin of something really monstrous for the market. And uh

and I know you stuck with it. You didn't

just write about it once, but I noticed that you started um you started right there with this particular uh compilation. Yeah.

compilation. Yeah.

Why was it important to do that? Was

that like setting the table to just show like look we we said some really important stuff?

Yeah. I mean I I I didn't want to start I didn't want to start the compilation with a with a 2020 hindsight piece after the financial crisis had already happened. I wanted to make it clear that

happened. I wanted to make it clear that we did see some of the elements coming.

I had absolutely no idea that the GSC's were in such bad shape that they were going to be put into conservatorship.

Yeah.

But we did start the year underweight credit high yield specifically and equities in in 2008 because of these kind of concerns.

And you know I I I actually thought the Lehman bankruptcy was going to be the bottom and then you know we got a whole another bottom after that.

It was six months before the bottom right. It was it was one a bottom.

right. It was it was one a bottom.

A bottom. That's right.

Okay. when you when you started to get feedback for this um and coming from people outside of JP Morgan. So the

first so you start publishing it starts going out. What is the early feedback

going out. What is the early feedback like super encouraging and makes you want to keep going or there people taking issue with what you're saying or what was that like?

Well, you know the the more opinionated you are, the more people have issues with it. Um I you know people send in

with it. Um I you know people send in things and then legal people deal with them and right you know um you usually you get the strongest

reaction to things that don't have to do with markets. I mean markets go market

with markets. I mean markets go market outcomes speak for themselves and there's not a lot to debate after the fact about what a market outcome was.

people tend to get themselves, you know, all twisted up when it comes to policy issues energy vaccines you know, and things like that.

Penguins, penguins, people and and and politics in particular. And that's when people kind

particular. And that's when people kind of get very opinionated about things.

But you can't you you can't write something that's strongly opinionated and and not have a high tolerance for people to disagree with some of the things that you say.

I actually would take that further.

There are a lot of people who have decades long careers on Wall Street and their primary skill set is saying absolutely

nothing at all times. And um for a lot of investment firms, a lot of banks, a lot of asset management firms, that's actually all they want. They want

someone who's the face of the firm, who never disagrees with anyone vehemently, never offends, um, never pisses off a client, and just right down the middle,

here's the most plain vanilla version of events. And you,

events. And you, uh, very obviously have staked out opinions, and you've gone the other way and the bank has stood with you for the most part. I think you you said only

most part. I think you you said only twice has content been shelved um that that you've done for Eye on the Market.

Are we allowed to reveal It's in the past. We could say what they were, I

past. We could say what they were, I guess.

Is that where you want to go?

Let's start there.

In the beginning of the podcast, let's let's let's start there. Uh you

probably said uh jet fuel doesn't melt steel beams. Wow.

No. Okay.

Oh my gosh.

No. What did you say that was what did you say that was so crazy?

Is he's not like a a uh a truther?

No. No. No. Not at all. What did you say that was like so controversial that in March 2021?

I wrote a piece on the science the the the mounting scientific evidence that CO was an accidental lab leak.

Yeah.

And um I can see and and I talked to a wide number of hematologists and the sad thing was um that a lot of them felt this way but didn't want to go public

with it. Uh but I had the piece written

with it. Uh but I had the piece written and you know the firm decided that it would be too problematic for China and could negatively affect our business in

China and the firm has been trying to do business in China for a long time and uh so that piece got sheld.

Not a lot of upside to publishing that.

I was going to say were you relieved when they said we're thank you for doing this work but we don't think it's it's No, I thought it was pretty gi given all of the competing narratives at the time.

I thought it was important for people to understand that the the paper that was written in February 2020 in the Lancet talking about how, you know, it's

definitely a zonotic jump and there's no debate about it was really bad science uh and irresponsible. And so I I I wanted to publish the piece, but it got shelled. I understand why it got

shelled. I understand why it got shelled, but it got shelled.

The piece would have been used for political purposes in the in the news.

It would have become it would have it would have taken on a life of its own far beyond the the the perfectly legitimate research purpose of why you wrote it.

Y okay. What was the other uh instance?

okay. What was the other uh instance?

The other one happened this year. Um,

I I I there's certain details I'm going to sanitize, but a couple of our operating committee members wanted me to write a piece on the executive orders against the law firms when they first started happening

and how it was corrosive to to good government and, you know, negative for the markets and and negative in terms of a signal of how the administration was going to be dealing

with individual companies and firms and issues. So, I wrote this piece and you

issues. So, I wrote this piece and you know, I started out by saying that defending corporate lawyers was a rather unpleasant task. And I I wrote about the

unpleasant task. And I I wrote about the piece was called the plumbing snake because I wrote about how in my family I'm the one that has to unclog toilets and pick up dead animals from the yard and and which which is kind of like

defending lawyers is is is on the same level as those unpleasant things to do.

Now, quite an analogy, right? And but but now that I'm going to

right? And but but now that I'm going to do it, here here are the reasons, you know, with looking back at 200 years of of history as as to why this is this is

bad for investors and bad for the United States. And um

States. And um these are the law firms that had launched lawsuits against Trump in his first term or or or simply had people working at them.

Yeah.

Who at in some years prior were involved with some litigation against the president.

Right. And um this is different than like you may some people may not agree with the president's policy with respect to cutting NIH funding or CDC funding, but he ran on that. Some people and people elected him for it. Some people

don't like his immigration policy. Some

people don't like his policy with respect to the Supreme Court. But all of those things he ran on and and voters voted. Um the law firm thing was

voted. Um the law firm thing was different. that that that was something

different. that that that was something that was very personal to the president and I think not in a very kind of constructive way for for for the investment community. Uh but other uh

investment community. Uh but other uh other other um operating committee members felt that that it would just put a target on the firm's back and it was inappropriate to publish and you know

that that was that was the only one that was killed.

Okay. So, uh I I guess I guess I would take it a little bit further and then we can move on. But, um I'm sure there's some interest uh JP Morgan and Wall

Street firms engaged in a lot of M&A and now there are a lot of personal issues with particular companies that want to do deals and uh it seems that the market is not

really particularly concerned right now.

They think deals will get done. You just

have to do and say the right things. Is

that something that you think you might be writing about or I don't know. We'll see. There was a lot of excitement about Lena Khan leaving, you know, her post and how the DOJ and

the FTC would have a more pro- merger approach to policy. Um, interestingly,

Vance has misgivings about about business consolidation and so does some other people in the administration who are not necessarily in favor of the kind

of classic Sherman Act approach to M&A approvals. Um, but you know, so far the

approvals. Um, but you know, so far the business community is is is able to operate with a little bit more free reign than it did under Biden.

Right. Yeah.

You've you and I have talked about this before.

Yeah. But you know that you know that hold my beer thing.

Yeah.

Uh that people say u the the Obama admin the first term of the Obama administration set an all-time record for the pace of substantial government regulation and then Biden said hold my beer. Yeah. And the the Biden

beer. Yeah. And the the Biden administration's regulatory track record blew past what Obama did in his first term.

Yeah. So, you know, as we're sitting here thinking about M&A and business activity and things like that, that's that's the deregulatory stuff that CEOs in general at the business round table

are hoping eventually become the dominant narrative of this administration.

It's horse trading and it's not Trump's not the first president to engage in horse trading with no with corporations.

Read any read any biography of Lyn Johnson.

So now so now US Steel was able to be acquired and the government kind of got like warrants on the deal or something.

Yeah.

Um CBS will be able to be Via will be able to be sold to the Ellison.

Let's see what happens. The language

last night in the Japan in the Japan trade deal talked about $550 billion um of investment into the United States from Japan at the president's discretion. Now I I don't think he

discretion. Now I I don't think he really means that, but that those were the words that he used to describe it, right? So, you know, we we have to kind

right? So, you know, we we have to kind of be on the lookout for some kind of Latin American approach to to to business dealings, but you know, I I'll before overreacting, I'm going to wait

to see what happens in practice.

All right, let's dive in to some of the greatest hits from my on the market.

Okay, Michael, why don't you take over?

Um, so I know you pulled out some of your favorite charts that uh we revisited uh over let's start with this.

Um, as investors, we all know that a lot of the errors that we make are self-inflicted. Greed, fear, rash

self-inflicted. Greed, fear, rash decisions. One of the big ones that you

decisions. One of the big ones that you said uh, our clients were quite concerned by was Meredith Whitney. And a

lot of times these unforced errors are because we see it on the TV or in the newspaper. Like we people of authority

newspaper. Like we people of authority are saying things that sound intelligent and smart and scary and we panic. So,

you pulled out Meredith Whitney's 60 Minutes interview. What do you remember

Minutes interview. What do you remember about that time?

Well, first I remember people telling me you you must not want to make any friends in this industry. Uh, which was true. Um, what I remember was my my

true. Um, what I remember was my my email inbox is a a direct reflection of the things that people are hearing because the more our clients get scared

about something, no matter how successful and knowledgeable they are in their fields, for many of them, their municipal investments are their safe harbor. So when they start hearing

harbor. So when they start hearing things negative about the municipal bond market, whether it's credit risk or maybe, you know, Obama had a proposed federal tax of 5 to 7% on municipal

bonds for people AGI over 250, you know, I start, oh my god, what's going to happen? I get all these questions.

happen? I get all these questions.

And Meredith Whitney, like a lot of other people in the wake of the financial crisis, was looking to stake out here's the next Armageddon thing that's going to happen. You know, look

at me. and and and she staked out the

at me. and and and she staked out the territory that you were going to have massive uh defaults in the municipal bond market and that it was come it was going to be

become the biggest single issue in the in the entire US economy.

We got a million questions about that.

This was the the scariest thing in the world.

Yes, it was. And again, it's it's um this is the safe harbor bedrock for a lot of client portfolio.

Yes. The riskoff this is the riskoff piece, right? And you're telling and now

piece, right? And you're telling and now you're telling people the default rate could be 20% or something or some she had some massive number

50 to 50 to 100 large municipal defaults and it just it it didn't ring true to us because when you dug through the details it just wasn't there. So the next thing

that happens of course is Detroit you know files. But Detroit was so different

know files. But Detroit was so different in ways people may never be able to appreciate than the other large municipal issuers. Even places like

municipal issuers. Even places like Cleveland, Baltimore, and Pittsburgh.

Detroit was so different. So we went and we pulled reams of data across all 350 MSAs, which are the metropolitan statistical areas in the country from

the BEA. And we looked at at the size of

the BEA. And we looked at at the size of the labor force and um labor income, tax payments. Uh we violent crime violent

payments. Uh we violent crime violent crime. We looked at everything

crime. We looked at everything and Detroit consistently ranked below the fifth percentile in almost every metric.

And in a way, Detroit just was not in any way a bellweather for the rest for most of the rest of the of the municipal issuers,

right? And it took that level of

right? And it took that level of detailed research and a long report that we wrote called How Different Is Detroit that we had to send out to all the clients to get them to be comfortable

with the fact that we were going to kind of have a business as usual approach in the municipal portfolio and the subsequent 12 to 15year default rate in the municipal market is 0.1%.

Yeah. So what people need to understand about how meaningful your piece was in that moment in 2011, Meredith Whitney is three years, four years removed from

having made a huge call. She was a sellside analyst covering Croup. Where

did she work?

Merryill or Oppenheimer. I don't

remember. But she's but she basically called Croup on on their on their uh balance sheet on their solveny. And I

think she predicted the demise of Croup, which of course, like many other banks, ends up getting bailed out. So, she's a cause celebr uh she's everywhere. She's like right up

there with Rubini and all the other people that got credit for quote unquote calling the crisis.

So, her then saying here's the next crisis, has a lot of weight.

It did. It did. And but you know in the same as the music industry, a lot of a lot of your listeners probably love watching TV shows or reading blogs about one hit wonders in the music industry.

That's what she ended up doing. There's

a lot of one hit wonders as investors and there's one hit wonders as strategists and they have this amazing call, right place, right time, and then they spend the rest of their careers trying to create another one.

That's what happened after the GFC.

There was you famously made this chart.

There were 15 of those.

The consequences of listening to the Armageddonists and a lot of these people have still they're still saying the same thing but the market seems to Are you going to show the chart?

The market seems to not really care about them anymore. They don't get a lot of air time. They used to Oh. Oh, for

sure. Even if 5 years ago they were still Do you want me to explain what this is, please?

Okay. So what we did was we took we took the date the actual date of on which people said an Armageddonist type thing which is 100% chance of

recession next year I think people should have a zero weight to equities all of those kinds of things and then from that moment we went long duration bonds and short the equity market and

then this is what happened if you had if you had listened to those recommendations and then not adjusted your portfolio since right other People have done this kind of thing. Similarly,

I just felt like doing it myself in defense of some of the people on there. That wasn't the last thing they

there. That wasn't the last thing they ever said.

That's right. Right.

Some of them died.

Some of the best.

So, do you think that because you don't hear from these people too often, David Stockman, when's the last time he's been on TV? Do you think that investors have

on TV? Do you think that investors have gotten much better at staying invested at holding through the ups and downs or is their extinction more a reflection of

not better behavior but the market environment?

Well, you know, to their credit, we lived through this period of financial repression um that essentially put real rates below

zero that changed the reaction function in the markets. And so a lot of those people might have been right if the Fed had had insisted on maintaining positive

real rates like they had for the prior 50 years. But the fact is they didn't

50 years. But the fact is they didn't and they were they were kind of flooding the system with money. And um I think from from from our perspective because remember I I I'm covering both our

private clients and our institutional asset management clients whether it's endowments foundations insurance companies and sovereign wealth funds and ORISA plans. Yes, there's there's more

ORISA plans. Yes, there's there's more tolerance to hold through volatility than there used to be. And there's also less liquidity. And I think people have

less liquidity. And I think people have learned as asset allocators, it's very hard to kind of okay, I'm going to sell here. I'm going to wait till it goes

here. I'm going to wait till it goes down. I'm going to buy it back again.

down. I'm going to buy it back again.

And the market liquidity after the financial crisis is not there. after

Silicon Valley Bank failed. I don't want to go to too much detail, but we we tried to acquire a substantial meaningful position in the in the preferred of some

of the other banks and it was almost impossible to do in spite of what the Bloomberg screens were telling you they were available at. So in a world where the the de the market depth isn't there,

you you can't kind of do that as much horse trading at the port at the asset class level as you might have done in the past. So yes, people are kind of

the past. So yes, people are kind of more willing to stick with positions through good and bad.

Yeah. I also think the retail component of the market, I think the retail of this current generation, they're bolder, tend to want to take more risks and do crazier things.

And ET, by the way, ETFs also are a big part of that and right and and that's the other component to it is uh just the reflex of okay, rebalancing into stocks, they're down,

buying my ETFs. Okay. Um let's talk about geopolitical risk. One of the takeaways, geopolitical risk is a generally poor signal for investors. We

obviously agree. We do tons of content.

Anytime something is going on geopolitically, people get nervous. Of

course, they should because something is volatile in the world and, you know, maybe this means I should take less risk. And of course, it very rarely

risk. And of course, it very rarely works out that way. Um, but you specifically looked at this in 2014.

um looking at uh two major conflicts in the postw World War II era and uh tell us what you found.

Well, you know, there's the counterpart to Meredith Whitney at in in this space is a guy named Ian Bremer.

Yeah.

Uh and Ian Bremer a lot of times will say things this is the biggest this is the biggest year of geopolitical risk in the post-war era. Maybe, but that doesn't necessarily translate into market risk.

Yeah. And I think sometimes investors don't try to think about that in a systematic way. So we we looked at all

systematic way. So we we looked at all of the post-war geopolitical events and with the exception of the Arab-Israeli war of 73, none of them really had a lasting impact on the financial markets

and this was, you know, something that we did in 20 in 2014.

You think Middle East um episodes don't impact the market because energy is such a smaller component both in terms of us producing and just the sector is tiny.

Well, first of all, if I had told you two years ago what was going to happen in Israel and Gaza and Iran, I think you would have guessed in the old days of crude oil 150.

That's right. Like you remember Arjent Merty Goldman had a $200 price target for for crude.

Um, and so, you know, I I so people tend to overestimate the impact of of some of these geopolitical risk. And second, I do agree if you look at a chart of oil

consumption per unit of global GDP, right? the there's that's the world gets

right? the there's that's the world gets more energy efficient every year. Um

there's also some substitution going on slowly for whether it's gas or electric electrification for for oil consumption.

But in general there's just not a lot of evidence that geopolitics drives markets for more than a few weeks.

Yeah.

No matter what the events happen to be.

I think saying um Middle East also is like probably not helpful from an investing standpoint. Iranian oil is

investing standpoint. Iranian oil is technically not even on the market. If

there were a conflict that involved Saudi Arabia, crude oil might react very differently.

That's right.

Yeah. I mean, I there there is this issue that the vast majority of Saudi oil is located in the eastern province and the vast majority of the people that live there are Shiites.

Yeah.

And and that piece of territory happens to be in close proximity to Iran. Right.

So, those are real issues. But um I look I'm much more concerned if if I had to pick one geopolitical issue. If I wake up one day and I find out that that China has imposed a naval blockade on

Taiwan, which I expect them to do before the decade is out, I'm much more worried about the market reaction to that than anything that would take place in the Middle East.

You expect them to do that within the next 5 years?

I think so. How does

I mean that that's that's just that's a personal opinion. That's not the opinion

personal opinion. That's not the opinion of the firm or JP Morgan or its employees or it's anything. So there are some cases where geopolitical risk would have an enormous impact on the stock market. In my opinion, that would be one

market. In my opinion, that would be one of them.

That would be one of them. Yeah.

Why? I I don't know.

Well, there's there's there's first there's only four months a year where this can be done.

You like iPhones for for you know, for weather and tidal reasons. There's only four months a year

reasons. There's only four months a year when this could happen.

Taiwan used to get 50 like 50% of its electricity from nuclear um and they decided to unilaterally reduce that to 5%. So

5%. So they they have effectively abandoned a lot of their energy self-sufficiency because now they're big importers of LG.

And I think I read that they have something like 12 or 18 days of coverage for natural gas. So it wouldn't take very long for a naval blockade to kind of bring Taiwan to a screeching halt.

What happens there, I don't know. But,

you know, I I I I don't think that that the Chinese government has infinite endless patience with the status quo.

That's that there's that's that's the signals that they're sending.

This is one of those things where the hardest hit sector would probably be technology, at least initially initially.

And then you'd have to see like where does it go from there, right? uh um

what would happen to export policies and import policies for semiconductors? We don't know. I think

semiconductors? We don't know. I think

about this. There's so much discussion about Europe and its pre Ukraine war exposure to Russian energy. So about 25%

of European energy came from Russia before the invasion. the world is 70 to 80% reliant on Taiwan for advanced chips. Yeah.

chips. Yeah.

So it's it's in another league of of dependence. Yeah. And so

dependence. Yeah. And so

now you know there are scenarios where naval blockade or not Taiwan is still able to supply the world with with advanced chips. But you know that's the question.

Okay.

Um do you want to get to how markets bottom or do you want to do your indicator stuff?

Let's do the indic let's do the indicators. So I I think people want to

indicators. So I I think people want to hear about that.

So which are kind of Oh, that one.

Yeah.

This one was interesting.

Go ahead.

Um and and for all the right reasons, the markets were really focused. And you

remember this, it was just two years ago.

In the summer of 2023, yield curve is inverted. And the yield curve since 1966 has a perfect papal infallibility record, eight for eight in predicting recess.

We've had Campbell Harvey on the show a bunch. So yeah. And I think the sum rule

bunch. So yeah. And I think the sum rule was flashing then too or was that the next year?

Um event shortly thereafter started and and by the way even Claudia came out and said ah people are misreading it but um so eight for eight inverted yield curves

predict recession within you know 9 12 18 months and but we went back and we looked at what was going on at the time of those recessions and this time just looked

different and so dangerous to say this time is different but I had no choice.

this time looked different.

23 in in the fall of 20 in August 2023, we wrote this Rasputin piece because it was evocative of how how higher interest rates were not killing the US economy,

right? Because remember Rasputin, he was

right? Because remember Rasputin, he was kind of stabbed, shot, drowned, and poisoned before he died.

Couldn't get rid of them.

Couldn't get rid of him.

Like Nordberg.

Yeah.

So what we did was we said, "Well, wait a minute. In the past when the inverted

a minute. In the past when the inverted yield curve caused a recession, it was because the front end real rates went

very high whereas in 2022 they were barely above zero. So yes, they raised them but raised them from minus6 to plus.2.

plus.2.

The b the base that they came from had never been the base for a prior episode.

Ben chart at the lower left. In the

past, every time the funds rate went up, you saw evidence that corporate interest payments were rising. Why was the craziest trial of all time?

But during the during a decade of financial repression, who didn't know that they were supposed to term out the their liabilities how here's the funny part. Who did it?

The Fed, corporations, and households. Who didn't

do it?

Banks. Banks.

Banks. Yeah.

Right. So the banks in general were the worst asset liability managers during this period of financial repression.

Yeah.

But as you can see here, yes, it's bad that the policy rate was shooting up, but corporate interest payments as a percentage of profits were still falling.

Yeah.

So the transmission mechanism from rising policy rates to recession wasn't there. And maybe the most important one

there. And maybe the most important one of all is the chart at the lower right, which is in the past, why did rising

policy rates cause recessions, right?

It's because at the time the Fed raised rates, it was a shock to the system and the finan and the corporate sector was off sides. A negative number means that

off sides. A negative number means that the corporate sector has a negative financial balance which means they're spending a lot more than they're earning. In 2020, the corporate sector

earning. In 2020, the corporate sector was in surplus.

Yeah. So in the past Fed raises rates, companies are offside radically retrench capital spending and high because they have to borrow and they have to pay more for borrowing which

would raise the hurdle rate. You would

say ah maybe we don't need to do this expansion of our business.

This time around they they weren't worried about that because in aggregate the corporate sector was in surplus. So

we felt that there wasn't going to be a recession and then and then then we had the uh the eye in the market the next January was the pillow talk about the bears falling into the pillow.

Yeah. And not only and that turned out to be the right call and you you had corporations like Apple and Bergkshire Hathaway with hundreds of billions of dollars in cash where actually higher rates was more more net income.

Right.

And we have never seen anything like that before.

That was and that was very out of consensus at the time. Everybody

expected a recession. All right. So what

indicators do matter? You have another chart that shows some of your favorites.

Let's talk about these.

Yes. Now, these shift around depending upon what time period you're looking at, but we try to run these here. We did

this one over like, you know, almost 30 years. And we run these over a long

years. And we run these over a long period of time. And we're trying to figure out like if you didn't know what was going on, but you just invested

based on these indicators, would you make or lose money? So, for example, when the leading indicator index is above average, you make 1.6% a month

investing the S&P compared to when it's below average, you only make point4%. So, the spread is big. So, it's a good indicator.

big. So, it's a good indicator.

Yeah.

What I love about the geopolitical risk index is the sign is negative, right? You actually would lose money if

right? You actually would lose money if you didn't invest when the index was high. So it it sends

high. So it it sends high meaning more risk.

More risk. It's sending you in the wrong direction.

Yeah.

And it doesn't mean that it would never work. But over long periods of time,

work. But over long periods of time, there's just no benefit to the signals.

So the for the people listening to this, not watching it, some of these other quote unquote good indicators, CEO confidence, payroll growth, GDP

growth, forward 12 month profits, growth expectations, small business optimism.

Most of these are intuitive.

Yeah.

Like most of these you just assume if I invest during a period of time where this indicator is rising, things are good.

That's right.

Isn't that most of the time?

Most of the time this works.

Most of the time these this is positive, not negative, right? And that's and and this is the

right? And that's and and this is the thing that feeds into that like that semiconductor looking chart with all the symbols on it.

So we just mentioned that no indicator is infallible. Nothing works forever,

is infallible. Nothing works forever, right? To me one feature of the market

right? To me one feature of the market that I would say is permanent works today, worked 100 years ago, will work 100 years from now is that the stock

market will bottom well in advance of everything else. The stock market will

everything else. The stock market will bottom and rebound and the news will get blacker and blacker and blacker and you'll say, "What the is going on? Why

is the Dow up 300%?

They'll say they'll say disconnects in stock rallies on terrible news. Well,

yeah, that's what happened. So, talk

about this.

Well, um I think the my my favorite one of all.

Great. This is a great group of charts and and we we we have charts here that go back to the Great Depression and the um in in the compilation which people can find online if they look for it.

Yeah.

We included a whole bunch of charts from the depression. Uh same thing, but look

the depression. Uh same thing, but look at the chart at the upper right. Okay.

So if you look at the S&P bank index, right, whether it's the S&P bank index or you remember you can look at the KBW, same signal,

that index bottoms in early 2009 at a time when only 8% of the eventual bank failures had taken place.

It's it's the most bizarre anticipatory signal in the equity market that I've ever seen. Part of it was driven by the

ever seen. Part of it was driven by the ESCAP program which was you know the Gitener sponsored recapitalization of the banks and things like that. But you

see this again and again at the lower left. It works in Europe too. In Europe

left. It works in Europe too. In Europe

the the European equities bottomed during the balance of payments crisis 2012. And it took another two years

2012. And it took another two years before the unemployment rate which is a horribly lagging indicator stopped rising. So you just see this again and

rising. So you just see this again and again and again. Um and it's uh oh actually the the one on the left on the upper left that one's from the depression.

So only half of the bank failures had taken place by the times the Dow Jones had actually bottomed. So you just see this again and again.

So with stocks it's hard to know what amount of risk is pricing. It's hard to quantify that. But with credit markets

quantify that. But with credit markets Oh yeah you can. And you did. So this is from December 2008.

Um and this is just math. So talk about I'm sure you remember this very well.

Yeah.

What did you see and what were you say to investors about what sort of risk was being priced?

This was one of the only times that I can actually remember begging. So we

were begging our clients to read this line. Please read this eye in the

line. Please read this eye in the market. You don't have to do anything

market. You don't have to do anything but you have to promise me that you're going to read it because you're never going to see a piece of paper like this

ever again. Okay. Um and and I I

ever again. Okay. Um and and I I understand the level of shock. Okay. So,

let's let's not be too much 2020 in hindsight. It's December 2008. We're now

hindsight. It's December 2008. We're now

looking at the second 40% decline in equity markets within a decade.

Something that hadn't happened since the depression. And you know, I I consider

depression. And you know, I I consider our firm to be pretty smart. Our firm

bought two billion $2 billion of Fanny Preferred over the summer that eventually got wiped out, right? So even

JP Morgan didn't understand the depth of the problems at at the GSSE's.

Um now that said like you said where were things priced? Look at that investment grade first row investment grade corporate bonds implied default rate implied default rate was 14%.

And the worst ever the worst ever was three and we were assuming a 20% recovery rate. I mean,

investor grade bonds rarely default, but when they do, the recovery rates are well north of 80%. Let's look at high yield. The implied default rate was 55%.

yield. The implied default rate was 55%.

Which is like the end of the world, right? End of the world. So now there

right? End of the world. So now there were some discussions like the the worst ever for high yield junk bonds.

The worst ever uh default rate in reality was 34%.

And this was pricing at 55.

And this was pricing at 55. Okay. So now

the if you invested then you couldn't have any leverage at all because a lot of the pricing still deteriorated until March. So we made clear that when we

March. So we made clear that when we were investing and when clients did it on their own that you can't leverage this at all where you got the leverage from they could pull it.

Yeah.

Which is another risk counterparty risk.

So you have to have the discipline.

Yeah. every time something blows up to say what's the embedded pricing assumptions particularly in credit because they'll just kind of jump out at you. On equity markets, you had the

you. On equity markets, you had the thing on the right which is that um the markets were basically pricing in zero

forward earnings growth after you know 26 years uh at 10 to 15%.

Jim Sheno said in bull markets people put a premium on on promises and in bare markets they put a discount on reality and that's what that is I think so that was that was a pretty remarkable time it was

so as you were begging people to read this particular piece did they yeah they read it they all read it um uh and some you know and look we we are in

our business we have a combination of discretionary funds that we oversee that we control and then we have other funds that are self-directed and so, you know, we did what we were going to do in our self-direct in our in our discretionary

business and some of the self-directed people came along and for the ride as well. Another similar episode when Lula

well. Another similar episode when Lula was first elected in Brazil. Remember

him?

Yeah.

He's back. But when he was first elected in Brazil, yeah, um one-year default protection, which is the equivalent of going long a corporate bond, you could sell one-year default protection in Brazil for 30%.

Really?

Right. That's how much fear there was around Lula. We went out to all the

around Lula. We went out to all the clients. The only people that did it

clients. The only people that did it were Brazilian.

Okay.

They weren't as they weren't as worried.

They weren't as worried. Okay.

So, let's assume at some point in the future there will be another downturn.

Yeah.

The stock market will fall. The economy

will contract.

Right. you wrote uh bank equity injections had historically been much more successful in boosting real GDP growth and boosting equity markets than government purchases of bad loans from

banks.

Yeah. So my question to you is, do you think that the next rescue plan will look more like '08 where we have all these programs and you have QE and and

monetary stimulus or will it look more like 2020 where there will be more fiscal stimulus which obviously had a much different and larger impact?

Yeah. Um,

depends on the nature of the crisis.

Yeah. But I I I I understand the question. To me, I don't think you get a

question. To me, I don't think you get a an alphabet soup approach like 2008 again because think about all of the stuff that was taking place in the

financial sector back then with, you know, with GE Capital and with Wakovia and WAMU. I mean, WAMU was underwriting

and WAMU. I mean, WAMU was underwriting mortgages and they were making 3% on them um at a time when the rest of the banking industry was making half a percent. Those are some pretty funky

percent. Those are some pretty funky mortgages in order to be able to make that much money. So, a lot of the kinds of things um and derivatives particularly that have now been all

moved on to centralized exchanges instead of being bilateral, I don't think you have the same kind of risks in the banking system. And by the way, look what's happening with private credit. A

lot of the cuspier bank loans that used to exist within the financial system have been shunted onto, you know, private credit where people are dealing directly with investors. So, I I think the next crisis is not about the banks.

I think I don't fully agree with that part. I think we've sent a lot of the

part. I think we've sent a lot of the cuspier lending activity out to the private credit industry.

Yeah.

But now there's this recursive thing happening where the investors in those funds are coming from the wealth management operations of the systemically important financial

institutions. The banks themselves are

institutions. The banks themselves are not taking balance sheet risk. Their

clients are.

Yeah.

I mean, let's be honest. Like like

that's a that's where the money is coming from. It's

coming from. It's I agree with that. But that has different implications. If something

different implications. If something goes wrong, it's it's not a direct implication.

No, rich people have bigger problems than corporate executives.

I guess my my point is that fiscal sending people checks is a much quicker way to stop the bleeding, the economic bleeding. Unfortunately, we did that in

bleeding. Unfortunately, we did that in a time where people had nothing to spend the money on except to buy stocks. And

so, and then and then in crypto and then we turned the power back on. There was

so much money, not enough supply of of goods and inflation.

Yeah. Un unfortunately, I think that will be the prevailing lesson is that when you send checks, you get rampant inflation when in reality we don't know what would have happened if if there wasn't going to run that back. It made

Biden a one-term president. I

understand.

Yeah.

Yeah. No, I mean what was so unique about the CO situation is that there should have been a normal recession, but it was shortcircuited because of the PPP loans and other things that were done.

So that that doesn't almost it almost doesn't count as a recession because the normal transmission mechanisms from weak economic growth to rising defaults didn't happen.

Yeah.

So it it you know we haven't had a real traditional recession since the financial I mean this this says it all right like you have a chart that shows a stimulus response to CO and there's nothing like it.

No there wasn't any. We thought we thought that the uh you know the great the global financial crisis was a lot of stimulus. Look at that chart on the

stimulus. Look at that chart on the right. In terms of money supply growth,

right. In terms of money supply growth, it's it's unbelievable. It needs its own uh um I want to talk to you about the role of humor in your work. You're a

funny guy. You really are a funny guy.

Uh because I'm an idiot. This is my favorite thing you've ever done. Um do

we have this?

Is this CGI with this really next to you?

Oh, no. They're they're still on my couch in my office.

So, this is your liberation day tariff webcast.

I bought them on Amazon. And for the people listening, it's uh Michael Seymbleist with his two panelists. One

is a uh emperor penguin and the other is is that a rook? What do they call baby penguins?

Rook penguins.

It's a rook. So uh what what did you gain what kind of insight did you gain from your guest that day? What do people say when they see that?

Everyone's in on the joke, right?

Well, no. I I I can't really tell anybody in advance that I'm doing this.

No, of course not.

Just in just in case, you know, people get cold feet and say, "Oh my god, you whole career out of surprising people rather than asking for permission.

You know, I think um it it was it was you have to remember the fact you have to remember how we got here.

Yeah.

So, Howard Lutney comes out with the cardboard thing and here are the liberation day tariffs. Yeah. Okay.

Again, the president ran on I love McKinley. McKinley was the father of the

McKinley. McKinley was the father of the modern tariff. I like I don't have any

modern tariff. I like I don't have any problem with the president implementing policies that he ran on and the voters said they wanted.

Yeah.

The issue is how do they do it? So they

come out with these liberation day tariffs and they say we're doing it based on this formula.

The morning they get announced. I

actually get a an email from the guy the academic who wrote the formula that they based it on and they completely botched it.

Yeah. the formulas would have been a the the liberation day tariffs were four times higher than they would have been had they correctly interpreted his work.

But they were looking for bombast. They

weren't trying to they weren't trying to say something that was formulaically accurate. They were trying to then don't

accurate. They were trying to then don't then don't put a formula in the footnote.

Okay.

You got to base it on something.

You got to base it then copy paste.

But so but so the joke here the joke here is uh the McDonald Islands. Nobody

lives. The herd and McDonald Islands were included on the initial.

How did they get on there?

Well, because they basically they basically had some, you know, 19-year-old intern grab a list from Wikipedia of all of the

countries that exist and paste them into a thing. And they said, "What what are

a thing. And they said, "What what are you know, let's put tariffs on everybody?" And that's how it showed up.

everybody?" And that's how it showed up.

And my I I just think that if you're if you're going to do something like this that reverses a hundred years of policy, you should have somebody, you know, who

is able to rent a car um do the analysis, right, that you have to be 25.

So like do it right. Find somebody that will that will substantiate what you're trying to do and do it responsibly. And

I didn't think they were doing that. So

this was my way of of suggesting that they could have done better. The market

reaction to that was chaos. Yes.

Because the roll out was chaos.

Yeah.

What do you expect? Right.

Right. Now that said, we had a 20% correction and then, you know, I went back to the toolkit and on the webcast that we did

on that same webcast, I showed a chart saying going back a 100 years, every time there's a 20% sell-off, you know, 85% of the time a year later, the markets are

higher. Yeah. So for all the concerns

higher. Yeah. So for all the concerns that people may have, nobody has a problem with that. The

problem with that is does 20 become down 40 first.

That's the that's the issue. It's not

will we recover. It's what happens between now and the recovery. Does it

get way worse?

But but you know uh an 85% success and a 20% sell-off covers a lot of sins.

You just buy economically and earnings. And so we felt that that it was enough to justify some additional risk takingaking.

All right. There's another one I loved in real time when you did it. I think

this one spread like wildfire. I picture

the FT Alphavville people who I'm friends with. They must like wait with

friends with. They must like wait with baited breath for the next Michael Seymbleist during a European financial crisis. This is your son's Legos,

crisis. This is your son's Legos, right?

And you basically construct this hierarchy of who has to bail out who to save the European financial system. And

for people that are not watching this, they're listening to this, uh, Michael's got every relevant group, Spain and Italy, um, the German parties, Finland,

the German Social Democrats, you've got, uh, the European Central Bank, and they're all represented by various Lego Stormtroopers characters. There are

Stormtroopers characters. There are storm troopers down here.

I was I was I was Who were the storm I'm sorry, who were the storm troopers in this uh, the EU Commission. Yeah, I that this didn't go

Commission. Yeah, I that this didn't go over super well in Europe. Um, but this Okay, so first a couple of important things.

Uh, normally I wouldn't have the time to do this because this took a lot of time to stage, but it was during one of those lipo blackouts on Long Island. Oh,

and so we had plenty of time. What's

that?

Was this Sandy?

I don't remember exactly what was happening, but we had a we had like a fiveday blackout and and I had plenty of time for for this kind of diarama work. Second, this

was this was actually part of one of the most important decisions that we ever made was the there was more carnage in the US than in Europe during the

financial crisis and a lot of people were overweight Europe and stayed that way for much of the decade. In 2010, as you saw in the compilation, I did not

like the dynamics that I was seeing, um, which we can get into, but we were violently and massively underweight Europe compared to the US and have been

since then. I don't think there will

since then. I don't think there will ever be an asset allocation position that we will have in portfolios that will ever make as much as what we've made on that. And so that funny looking

diarama was one of the pillars of the reasons why we were so confident being underweight.

Your conclusion was that the US stress tests were real. Very real. They were

to his credit used a 9% default rate.

Yeah.

Uh you know which had only happened during a brief period during the recession to stress test. But what that did is it forced the banks to raise enough raise too much money to either raise capital or dedicate

pre-provision income to rebuilding their balance.

In Europe, they were smoking crack. They

they assumed a $3 billion loss for the entire for the entire financial system in Europe. They said the capital shortfall was three billion.

I'll do you one better. They were

raising interest rates. They were

worried about inflation in in 2010.

The other thing, and I I don't I don't think you put it in the deck, but the other thing that people can see in the compilation that's amazing Yeah. is

Yeah. is if you go back before the euro and you look at things like industrial production and current account deficits, the North and the South moved the same.

They put the euro in place and then they broke apart. It's actually a textbook

broke apart. It's actually a textbook definition of the opposite of what a currency union is supposed to do. A

currency union is supposed to force all those macroeconomic variables to converge the way they did the Remember there were multiple dollars in the early 1800s. Yeah.

1800s. Yeah.

And as as the regular dollar became the standard across the country, inflation and growth and income and all those metrics across the United States and the region started to converge.

Yeah.

In Europe, they blew apart.

And so that was a signal to us that something was seriously broken.

And that brokenness would in in fact affect earnings and multiples and everything else. And boy, I mean that

everything else. And boy, I mean that I'm comfortable with that diarama and our positions in Europe being put on my tombstone.

You have a that's how much money.

You have a chart showing the absurdity of uh you you showed the dispersion between European countries was further apart than if you had just created a currency based on all the countries

whose first letter is M.

That's right. the like you you said these c these countries have so little in common that if we just took the M countries around the world that would be a more cohesive or or the countries at the 40th latitude

I mean you can create or you could reconstitute the Ottoman Empire but that ended up being the right allocation call because it's a dysfunctional it's effectively a dysfunctional

it's a political vision and in a way in a way it's it's there are wonderful things about the European vision you know similar Similarly, Europe is leading the world in

decarbonization, right? And and the in

decarbonization, right? And and the in in there's a chart in the compilation.

Europe is leading the way with respect to renewables displacing other forms of fuel. Europe's also leading the way in

fuel. Europe's also leading the way in terms of industrial shutdowns and departures, right? Europe's also leading

departures, right? Europe's also leading the way in the cost of electricity. So,

Europe has certain political objectives that at times override market and economic objectives and as investors, we have to be able to respond to that. the

front page of the journal today, the big debate in Europe is air conditioning or not. So, this is a this is an example of

not. So, this is a this is an example of what you can we just spend a minute on that so that people understand what's going on.

Something like 90% of homes in the United States have air conditioning, even in really northern climates.

In Europe, that's not the case. Okay?

So, you have fossil fuel-based heating.

So, there's a huge push in Europe for people to electrify their home heating with a heat pump. Right? So for

everybody listening, what's a heat pump?

A heat pump essentially is an air conditioner that works in reverse, right? And it's very efficient. It can

right? And it's very efficient. It can

convert one unit of heat into three units of electricity. So it's it's a very kind of energyefficient device, but if you give people these heat pumps for

their winter heat, they'll just flip them and use them as air conditioning in the summer. So we ran some numbers and

the summer. So we ran some numbers and for countries like Turkey, sorry, for Italy and Greece, all the all the CO2 emissions benefits that they would get from pushing these more efficient heat pumps would be lost if people start

using air in July and August.

And is a classic unintended consequence thing that you see in Europe all the time, right?

So I want to uh I know we have a that's a good transition. Let's end on leadership.

Yeah. Let's do this.

We're already done.

Well, let's do let's You gave us the heart out. We don't have one. Michael

heart out. We don't have one. Michael

and I will sit with you all night. Um,

let's do this thing about what was Lehman doing because it's a great segue into the leadership at what was JP Morgan not doing that Lehman was doing.

Um, and you were there at the time. So,

I think that's a really great lesson for investors to take from this.

Well, you know, uh, part of this dates back to the first Bush administration, and you guys will probably remember this. Before 2004, there used to be

this. Before 2004, there used to be something called the the the broker dealer net capital rule.

12 to1.

12 to1. Exactly.

That's the max leverage broker dealer could take.

That's right. No matter, forget about risk adjusted, like 12 to1 hard stuff, which is a lot already.

Yeah. And under the first Bush administration, you know, the broker dealers were effective at lobbying the SEC and they rescended this rule and essentially put in some squishy

touchyfey limit.

Within two years, all the big five broker dealers were 30 plus in terms of Fair Leman, Merrill, Goldman, and Morgan St.

Goldman. Okay. So part of the backdrop was understanding how what looked like a footnotey thing in the journal about a change to riskbased capital rules had

this seismic impact on what was going on in the actual markets and and we we saw it and you know that was also kind of a

scary thing that was taking place and um you know we we responded by kind of gradually pulling our horns heading into the financial crisis when we saw this um

The the reason that I put together the chart on the right was all all the banks were essentially bumrushed into taking the capital whether they needed it or not with the

exception of US Bank which was the one bank that said no we won't take it and but not all the banks are the same and you know Jamie gave a couple of talks where like look we'll take our lumps and

we will continue to take our lumps but putting all the banks together in one boat and kind of blaming them for everything was what didn't make sense because there were such it was a very

heterogeneous group and look at this chart right there was that giant alphabet soup of all the facilities that were required

Maril Lynch and Morgan Stanley and AIG you know used the vast lion share of this and so you know I at the time that we published these charts we said look you know we have issues like everybody

else but there are differences in terms of how banks run themselves and how they manage risk and and these were some of the charts that we used.

So in your compilation you point out that Lehman was running at 35 to1 and in one part of their business 100 to1.

Yeah.

And JP Morgan was not doing that.

No.

I want to ask you if this is true.

There's an apocryphal story that I heard from someone who was working on a trading desk at JP Morgan right in the heart of this uh the runup to the

crisis. And uh Jamie was taking a tour

crisis. And uh Jamie was taking a tour as he frequently does and just talking to people on every floor. And he asked somebody to quote something, probably a

bond, maybe a mortgage, something. Uh

the trader gave him a quote uh of where it was trading, where it was being valued. And this is at a time where

valued. And this is at a time where people were worried. And the way he tells the story, Jamie said, "What's the price?" He quotes the price. Jamie said,

price?" He quotes the price. Jamie said,

"Oh yeah, sell some." He said, he said, "What do you mean?" He said, "Let's see.

let's see if that's the price, sell some. And of course, the trader can't

some. And of course, the trader can't get a sale off at that price. And that

was kind of like a microcosm, I guess, of a bigger story where JP Morgan realized where the market was versus where the reality was were not the same things. You believe that? You think that

things. You believe that? You think that story is true or something like that might happen?

I haven't heard that one, but it's having seen It's a good one though.

Having seen Jaime in action, it's entirely plausible. He's very involved

entirely plausible. He's very involved on a detailed level in terms of you know when he meets with management teams and and they present to him you know

it put it this way that that experience is entirely different than that same experience with these CEOs that preceded Jane like everything about the level of

preparation the consequences for being unprepared you know and and the kind of questions and due diligence that are going to be asked of you um that that changed well so so on leadership he stands and

so far apart from the other leaders of that era, one of them was the best golfer in the world, apparently. We

won't name names. Uh, one of them was a world champion bridge player. Uh, Jamie

didn't Jaime didn't have the reputation for having those hobbies. He was focused on the risk-taking within the bank and what to do about it. And they're the last they're the last one standing, literally.

Yeah. You know, I've and I've mentioned this before. Um, you know, my job

this before. Um, you know, my job requires me to know to know a lot of things about a lot of things and do so pretty deeply.

And there are a lot of times when I need to reach out to people and uh and get help uh on certain things. Sometimes

something will happen and I'm starting out, you know, with a deficit of knowledge that I have to build really fast. couple of years ago, remember when

fast. couple of years ago, remember when Credit Swiss blew up and there were the Cocoa bonds which were the European version of preferred stock, but they were kind of different than the way US preferred function and nobody ever heard of the devils are in the details. Like

there's a lot of times when I have to get up to speed on something really fast and um or something within the energy space and I need to understand really

quickly how some new technology might work. the the halo effect that um that

work. the the halo effect that um that Jamie has created for the firm over the last 20 years is amazing. Um there I can call people and say I'm the chief

investment officer at JP Morgan Asset Management. Will you talk to me? And

Management. Will you talk to me? And

almost always the answer is yes. Yeah.

And I attribute that having nothing to do with me because they most of the time never heard of us. But because of Jamie and the impact he's had on the organization, they returned your call.

One of the only times that people that that didn't work was you called Elizabeth Warren.

I'm not going into that. Um

during the summer during the summer of 2008, yeah, we were getting a lot of calls from

clients, why can't you guys make 11% annualized return with a 2% V like this made off guy? And so I said, "Well, I

don't know. Let me let me look into it."

don't know. Let me let me look into it."

So I start looking into it. I can't find any information. And you know, the whole

any information. And you know, the whole thing is very sketchy. Uh I I went on to the early version of Google Maps and I I looked at the building in which the custodian was allegedly housed and it

was the back of a Chinese restaurant. So

the whole thing seemed really kind of funky to me. So we said, "Okay, let's let's do a a due diligence trip." So, we get in the car and we go up uh to

Connecticut to see uh the feeder fund.

You remember they had that?

Yeah.

I'm not going to mention any names, but you know, there was there was that feeder fund.

This is the fund that's raising money from people and passing it over to Maid Off, right?

Okay.

And I, you know, we had like a 19 section questionnaire that we wanted to ask and and the first one is, can we meet the principal? And the answer was no. And I said, well, we're leaving. And

no. And I said, well, we're leaving. And

they said, well, no, no, no. and we just we got up and we left because if we can't meet the principal and talk to him, the rest of the questionnaire is irrelevant. So I went back and uh

irrelevant. So I went back and uh I put some notes in the files saying like I don't understand what's going on here and I I drew a picture of a unicorn

on their total return chart and I said I don't get this. This doesn't make any sense.

Yeah, it looks like private credit, right?

But and wait so wait, hold on. So

he's a $50 billion fund then too, right?

It's so so I just drew a picture. I'm not

even a good like artist, but I drew a picture of a unicorn, put it in the files, and forgot about it. And then

eventually the SEC ended up deposing me.

What did the chart look like? Up into

the right up to the right. It was it was the 11% annualized return with 3% fall.

Yeah.

And I got deposed by the SEC who wanted to know what I knew when and why didn't I tell everybody and what was going on and you know, I answered all the question. I mean, I there wasn't much to

question. I mean, I there wasn't much to say. They wouldn't

say. They wouldn't talk to you. they wouldn't talk to us.

And uh and but at one point the the deposition kept going on and on and on and uh I said, "Well, you know, why didn't you read the Harry Marcopouolis note from 2001 that said Bernie Maidoff

is a fraud and the lawyer that was representing me in the deposition almost had a heart attack?"

Yeah. Yeah.

That was the end of the deposition.

Yeah. Michael, this isn't what we're here to do. We're we're not here to score points.

You you you By the way, you if I can just say a couple other things, please. you there's a there my favorite

please. you there's a there my favorite of all the pieces in there is the one on uh the you know why the financial crisis happened the way that it did 17 we have this

we like to do it this is my favorite eye in the market and and this and the reason it's my favorite one of all time is the the

public narrative from the government and all of its agents and both parties was the private sector did it the rating agencies are responsible the banks responsible reckless bankers,

reckless lending policy.

Now, this you'll have to read the piece because this is like a spaghetti chart, but I want to show you something here.

Those red lines are taking are rising.

And now we're looking at the '9s here up until 2005. These represent the portion

until 2005. These represent the portion of Freddy and Fanny underwriting that is effectively subprime and all day risk.

This is before. Look at the black line.

That's the private sector. So, the GSC's loaded up on alt and subprime risk way before the private sector did. And why

did they do it? Because of the blue line of the GSSE low and moderate income lending targets that Congress established. And there's a quote that we

established. And there's a quote that we pulled from the year 2000 from from the HUD reports that is the most amazing smoking gun I've ever seen in the

history of smoking guns where they say, you know, let's have the GSSE do subprime type lending without calling it subprime and we will eventually lure

like the sirens. We will eventually lure the private banks to their death.

George Bush the ownership society. This

was George W. Bush extolling the virtues of home ownership and we need to create more homeowners.

This was a combination of Clinton Clinton and Bush and by the way Andrew Cuomo was the head of HUD when some of these things happened.

So you know the and and to read about how aggressively the public sector tried to after the financial crisis change the history of what actually happened. I I'm

glad that I had the historical records to kind of show no that's not what happened. Yeah,

happened. Yeah, this is what happened. And you know, there are some lessons to be learned here about about risk-taking and risk underwriting and things like that. So, I

love that one. I also there was also a piece at the end for how I ended up in the asset management business that's also worth learning that has to do with a piece of candy.

That was that was a funny story in the lunchroom.

So, Michael, we think this is just an extraordinary document and it is the culmination of decades of your work and uh it's just incredible. Uh the I don't where's the artwork come from? Uh

because that's a really big part of the presentation.

Me too.

Well, no. For for the vast majority of the history in the market, we would commission.

Yeah.

A magazine.

Yeah. To draw and and they're beautiful.

And then re more recently, we we've been using chat GPT just to do certain things. But I hire artists once in a

things. But I hire artists once in a while. There are there are things that

while. There are there are things that GPT can't do.

Can we get 20 more years?

Yeah. Tony, what do you think? Keep

going.

No, there's a lot of I've still a lot of fish I've never caught. I've never

caught a permit. Um, which is on my list.

You can do both this time. Go catch a penguin.

I'm going to uh I'm going in in early in late August. I'm going to uh British

late August. I'm going to uh British Columbia.

Okay.

To catch uh on a kayak. I'm going to fish for sturgeon, like seven to eight foot sturgeon.

Okay.

So, I've done it before and almost, you know, it was pretty dicey. So, I can't I'm looking forward to trying it again.

Well, on on behalf of everyone on Wall Street, everyone off Wall Street, anyone who's ever read uh Eye on the Market, anyone who's a regular reader, uh Michael and I and we here at the compound would just like to say thank

you for your extraordinary contribution to our knowledge. Uh I get smarter.

Every time I finish reading one of your pieces, I learn something. And uh

and I want to thank you because I kind of like like Boo Radley, I lived in silence for most of my career. And you

guys were the first uh place where I went, you know, to talk to a broad like podcasty type.

But now you have your own show. How do

people how do people find your podcast?

Let's tell people where they can get more.

I I post every eye in the market on uh LinkedIn now.

So if you go to my LinkedIn profile, uh you can find the anniversary piece, you can find um and the other pieces that I write.

This is this is amazing. Thank you so much for being here. We appreciate you guys. Make sure to follow uh Michael

guys. Make sure to follow uh Michael Semolist on LinkedIn if you want the uh latest eye on the market piece and by all means go and hunt down this 20th uh

anniversary compilation. You can get it

anniversary compilation. You can get it as a PDF. It is extraordinary. You will

absolutely become a better investor once you've digested it. Thank you so much.