Colin Lancaster, Global Co-Head of Discretionary Macro and Fixed Income at Schonfeld Strategic Advisors

[00:00:01] Hello, this is Dean Curnutt and welcome to the Alpha Exchange, where we explore topics in financial markets associated with managing risk, generating return, and the deployment of capital in the alternative investment industry. It was a pleasure to welcome Colin Lancaster, Global Co-Head of Discretionary Macro and Fixed Income at Schoenfeld Strategic Advisors, back to the Alpha Exchange.

[00:00:28] Our discussion focuses on the evolution of the multi-manager model, portfolio construction, and the challenges of navigating today's macro environment. Colin discusses the importance of systems, data, and risk infrastructure, and why scale has increasingly become a competitive advantage.

[00:00:46] We explore how firms differentiate themselves through strategy mix, geographic focus, and organizational culture, even as the industry has converged around a similar set of core investment disciplines. A further theme throughout the discussion is talent. Colin outlines his approach to identifying and underwriting portfolio managers, emphasizing self-awareness, intellectual honesty, resilience, and the ability to articulate a sustainable edge.

[00:01:14] He also discusses the growing importance of managing correlations across strategies, particularly during periods of market stress. Lastly, we turn to the macro backdrop, including inflation persistence, sovereign bond markets, central bank policy, and the changing role of liquidity in financial markets. Colin shares views on crowding, leverage, and the risks associated with concentrated positioning across increasingly interconnected markets.

[00:01:42] I hope you enjoy this episode of the Alpha Exchange, my conversation with Colin Lancaster. Colin, it's great to have you back on the podcast. Dean, I've been looking forward to this quite a bit. You and I have known each other a long time. In some ways, I feel like we've grown up in the business together.

[00:02:02] I not only respect your views on markets, but in connection with this podcast, look, you've surpassed 250 episodes now. You've been putting out great content. I think that Kevin Warsh has been on this program. Howard Marks has been on this program. It's a real privilege to be here. Oh, it's great. I really appreciate that. And the last time you were on was 2021.

[00:02:31] It's actually almost five years to the day. I just looked it up. You had just written your book, Fed Up, which I found to be just a fantastic read about the insanity of COVID, the policy response. So I just wanted to start with 2021, five years ago, and just give you a quick summary of market prices and some of the backdrop of some of the stats we care about.

[00:02:56] So first of all, the 10-year yielded 1.45% when you were on the podcast. The federal debt was $28 trillion. So we found a way to add $11 trillion in five years. The average rate on marketable debt was 1.5%. Then it's 3.4% now. So that presents an awful challenge for interest on the debt. And the S&P has added $30 trillion in market cap along the way.

[00:03:26] So stocks have certainly found a way to power past increase in interest rates and the fragility at the fiscal side. It's a fascinating time we live in. Your role at Schoenfeld in running discretionary macro is going to give us so much to talk about. Just give us a very quick career history you and I met during your days at Stark 20-odd years ago. Give us just a run through as to what got you to this role at Schoenfeld.

[00:03:53] Yeah, look, I've been really fortunate. I joined my first multi-strategy firm 28 years ago. I feel like I've had a front row seat on the evolution of the multi-manager firms in particular. For the past 20 years, I've been leading macro fixed income units within those types of firms now at Schoenfeld.

[00:04:18] For me, what has been so interesting is I was always obsessed by this concept of the returns that these organizations are able to produce. It is the absolute return nature. It is the consistency, the high sharp nature of them, and the fact that they're uncorrelated.

[00:04:43] I think it's really hard to reproduce those returns in another format, and I think I've been hooked by that. I've been really fortunate to have been able to work for a number of the investing icons of the business and to be able to learn from those people. It is really something to be able to, on a consistent basis, produce durable, high-quality returns that are very uncorrelated.

[00:05:13] I think it's, in a lot of ways, the holy grail. I think what you're pointing to is, as you say, your own fascination with it, I think, is about the durability of it. And so that's going to give us a ton to talk about in the context of the multi-manager model in general, the quote-unquote pod shop. And then, of course, very specifically what Schoenfeld's approach is to it, which, of course, is going to be different than Citadel's or Baleazni's.

[00:05:40] It's going to lean into its own institutional advantages. I think it'll be the bedrock of our conversation. Dean, before we get there, though, I get the benefit of wearing a Bloomberg chat together. I get the benefit of some of your daily thoughts.

[00:05:58] And look, between you and me, we've managed through long-term capital management, the dot-com crisis, September 11, the quant quake, the global financial crisis, on and on and on. Up until COVID, the 2022 inflation scare, Silicon Valley Bank, Liberation Day. But I want to ask you a couple questions, which is, what do we learn from crisis events?

[00:06:27] To you, how has this one looked? Maybe not a crisis, but certainly a stress period in markets, a risk episode. But how has your thinking about these episodes changed? Yeah, that's a great question. And I think, for me, crisis events provide the richest learning opportunities. Of course, they're also incredibly difficult to manage through. I don't manage money directly, but I'm certainly advising folks who do.

[00:06:57] And those drawdowns present existential risk. I think, for me, if I go all the way back to LTCM, the time span between LTCM and the GFC is almost exactly 10 years, which is a blink of an eye in the grand scheme of things. To me, it's an illustration of just maybe how little we learn in some ways.

[00:07:19] I think if I were to tie a lot of these things together, I would say that market prices sometimes really are the tail wagging the dog. I'm certainly a big user of the Soros philosophy of reflexivity. I think that's a great framework. We're in the markets. We're studying market prices. But we are the market price. And I think that's where we often misread the signals coming from market prices.

[00:07:49] In that period leading into the GFC, the central banks were slapping each other on the back and high-fiving at Jackson Hole in 2006, claiming they'd conquered the business cycle. Looking at a 10 VIX and a CDX on Morgan Stanley and Merrill Lynch at 20 basis points saying, boy, this system is so riskless. It's allowing us to recycle risk or it's riskless because we're recycling risk.

[00:08:17] Boy, nothing could have been further from the truth. So, you know, man, we always have to really think about what we might be missing. I think that's what I try to do. And Colin, if I were to also just try to bring all these things together, a good risk event is just an unwind of crowding. It's a crowded condition. It's a crowded belief. And it's capital that needs to move quickly because the belief got shattered.

[00:08:45] And then about this current one, it seems to me that we've got two real counterbalancing forces. First of all, the earnings in the S&P are just enormous. It's hard to know if those are sustainable. So it's not like we're in a valuation bubble like 2000. We could be in some earnings bubble. But we also have this energy thing on the other side.

[00:09:09] And I just think the market is just deciding to look at the earnings instead of the potential fallout from the energy shock, which to me shows maybe no sign of abating. And it could be that we're going to feel the impact of it months down the road. And that's what maybe the market might be missing at this point in time. How do you think about the changing role that the Fed plays?

[00:09:33] So the combination of both Fed and markets and thus the implications for risk assets. Well, I know Kevin Warsh very well. He's been on the podcast. He's spoken at my MacroMinds event twice. And boy, I wish him the best because that's going to be a very tough job. And not just because of Trump, because we talked about this a little bit right at the outset.

[00:09:59] Milton Friedman's old saying inflation is always and everywhere a monetary phenomenon. That monetarist view, I think that's right. But I think implicit in that is the fiscal side. And it's just very hard to get away from the airdrop of dollars in the world that started in 2021 and now is just so structurally baked in.

[00:10:21] So I just don't know how you solve our price level issue or our inflation issue just on monetary policy alone. And I think the agency costs of solving it in our political system, the U.S. two-party system, are almost impossible to recover from. You can't win an election with a belt tightening platform. That's just not going to work. I do think the Fed is woefully asymmetric.

[00:10:49] Eric, we were buying bonds in 2015 with inflation at 1.5%. And now we're talking about easing in 2025 with inflation at 3.5%. It just doesn't make sense. It's just really hard to get at the credibility of a 2% target in this environment. So I just don't know what the solution is. It's a tough one.

[00:11:13] Speaking of that and speaking about my first appearance on the podcast five years ago, that was very close to when inflation first appeared above target.

[00:11:28] So we have been running above target for five years now, which, again, goes to your point in terms of Fed credibility, the difficulty of that job going forward, but also just the pricing of a variety of different assets. One last question for you. But what is unique about today's vol environment?

[00:11:54] This whole concept of low correlations, spot-up, vol-up. Did you have thoughts on that? Those are the two things I think are most unique, at least in equity vol land. Of course, these other asset classes have dynamics all their own. When I step back and I just look at the overall risk of the market, and to me, and I'm sure to you as well, the S&P is the base risk asset in most ways. That's where all the wealth is.

[00:12:22] And so when we think about hedging or we think about underperformance risk, in some ways you're always referencing the S&P. So I always start with S&P vol and the VIX and so forth. The amount of diversification that's happening in the S&P, it's just got no historical precedent at all. The correlation of the stocks in the S&P over the last month is 3%. It's just beyond unusual. What does that do? It just dampens the index volatility.

[00:12:50] And I think what we wind up doing in markets is we over-extrapolate. Something happens for a while, and it's just impossible to get away for it not to be viewed as continuing. So we price things based on that, and that's where I think some of the mistakes wind up. And then on the spot of vol-up, that's a fascinating one. We've got this memory shortage, this DRAM shortage and chip shortage.

[00:13:16] When there's a shortage of something, and I go back to when you wrote your book, it was really right after the GameStop episode. A short squeeze is the ultimate vol event. There's nothing more protracted than a short squeeze. And that's kind of what you have in memory and chips. And so that's going to lead to spot-up vol-up, where the stocks go up, but also the implied vol goes up. But it's just a really fascinating and very unique time, where these stocks are just...

[00:13:44] Micron just became a trillion-dollar company. SK Hynix is a trillion-dollar company. It's fascinating. It really is. Well, I bet you're just chomping at the bit waiting for that 4X leveraged DTF to be introduced on SpaceX when we get a crack at that, right? I just saw a note from Goldman that the largest leveraged ETF on a single-stock basis is a 3Xer on SK Hynix.

[00:14:12] It's got over 10 billion of assets, and the chart is just straight vertical. It's a straight vertical chart. It just speaks to the way in which financial products change, innovation cycles change. And I think that'll be a good starting point for our conversation, because the manufacture of uncorrelated alpha is certainly always changing as well. And I think this is going to be a great conversation to bring in your thought process.

[00:14:40] Your recruiting process has, of course, got to be mobile based on what you see out there opportunity set-wise. Let's start with Schoenfeld. So give us a sense as to the platform at Schoenfeld with some eye towards what differentiates it, your version of the multi-manager platform.

[00:15:02] Yeah, Schoenfeld is a nearly 40-year-old organization now, which to me is in this business, standing the test of time is the biggest compliment. And I do think that there's one interesting historical data point where you look at the largest of the multi-managers. They've all been in existence for 35-plus years.

[00:15:26] It really is a testament to those early founders that were experimenting with this concept at roughly the same period of time, but who've continued to innovate and have experimented with what is the right mix of strategies, what are the system and data requirements, how to risk manage a growing platform.

[00:15:51] And finally, look, I think that 40 years ago, if you talked to these early founders, all would have been quite surprised at the scale at which they're now operating. If you think about how dominant this group of firms has become. And in Schoenfeld's case, look, the original founder, Stephen Schoenfeld, mathematician, very early into the quant-based strategies.

[00:16:17] Our performance engine is a bit differentiated in that we have a higher allocation to some of these wide competitive moat systematic strategies. We have more capital deployed internationally than some of our peers with a very strong business across the APAC region. I'm speaking to you from London when the second hat that I wear is looking after our EMEA franchise, which has been quite strong since its founding.

[00:16:48] Those are the types of companies that serve as the basis for what we're doing. I'd like to think that our leadership team and my boss, a gentleman named Ryan Tolkien in particular, represents this next generation of multi-manager leadership. In that, I find the firm to be quite ambitious, quite entrepreneurial, but still relationship-driven. So not operating at the scale where you have to become very transactional.

[00:17:17] And personally, I think great talent wants to partner with people that have that mix of characteristics. And finding good partners to be able to build their own business. In that way, I think the firm has already managed a very difficult thing, which some of our peers will still need to thread the needle through, which is managing the succession planning exercise. So I do think that the firm is quite unique in its own right.

[00:17:47] I think the results speak for themselves. The listener base of the Alpha Exchange is uber senior and very experienced on markets and quanti things that we'll probably wind up talking a little bit about. But I thought it would just be useful to step back a tiny bit and just on the multi-manager platform, just in Podshop, give us a big picture of what that looks like.

[00:18:11] We started off talking about the uniqueness of the return stream that organizations like this can create when well-managed, when well-run. I do think that that's a really important component piece that maybe sometimes people don't always see as much from the outside looking in.

[00:18:33] Because I think these firms need to be able to do a lot of things really well in order to get that result. You need to have the right strategies represented in the portfolio. You need to have a great vision for systems and technology. You need the quant analytics that become part of the Alpha Stream.

[00:18:56] You need to have a great risk management sensitivity and the ability to be, you need to be paranoid on risk management and manage the tails. You need to be able to recruit and underwrite talent exceptionally well. And you also need to be able to manage those relationships and retain great talent over a life cycle.

[00:19:20] Clearly, over the 27, 28 years I've been able to witness these business from the inside out. I think seeing the experimentation with the right mix of strategies and what liquidity profile can be warehoused within these organizations. Obviously, the technology side of these organizations, it's changed by leaps and bounds over that same period.

[00:19:48] The data requirements of running these businesses. I think for some of the larger of the multi-managers, it is that scale that they're operating in now that becomes part of the competitive mode. They've now established their own fortress balance sheets in terms of almost having permanent capital to be able to invest. I think it is that combination.

[00:20:14] It is the investment that they have made in systems technology data over 35, 40 years that has continued to compound and give them those advantages. And it's hard for me to contemplate that the big allocators, the big investors will fund additional startups.

[00:20:36] I think that this side of the business is going through and will continue to go through a period of consolidation where the big will continue to get bigger. I think those competitive moats will continue to get a bit wider.

[00:20:50] And it is the larger of the firms that will be able to house the most, the more complex strategies, will have the tools to effectively risk manage those strategies, to be able to look across a wider variety of risk parameters in attempting to harvest the alpha that does exist. Because I think that there is a finite amount of alpha in the world.

[00:21:41] It's more difficult to imagine that a firm like that, a single manager organization will be able to transform itself into a true multi-manager. To answer your question in terms of some of the nuanced differences, in Schoenfeld's case, it's because of that strong DNA with some of the quant-based ad arb and the systematic strategies.

[00:22:09] We do have a larger allocation to that subset of strategy than some of our peers. Now, some of that reflects our size because some of those strategies are not infinitely scalable and there are more capacity constraints. But part of it also reflects our comfort in that. I do think that lineage in DNA is an important part.

[00:22:37] I think that where a founder came from, where a firm came from, often time reflects the strategies that are most deeply embedded within those firms and the bread and butter of those organizations. Some firms will always be much more comfortable with fundamental long-short equity because stock picking resonates with them. And maybe the things that I've represented, the macro fixed income doesn't resonate.

[00:23:07] And likewise, the systematic strategies will be bigger in some or others. And obviously, there are some very famous cases of this. But some firms have become much more comfortable in commodities and generating return and getting some volatility in their portfolios through those areas. So I do think each of these firms, while their correlations, when you look at their own performance attributes, have increased the one another over time.

[00:23:37] I do think the performance engines do have these nuances. In your own remit, discretionary macro, and then you also mentioned that part of the DNA of Schoenfeld is systematic quant approach to investing. So those are different, discretionary versus systematic. Tie those together for us. How do those kind of sit side by side within Schoenfeld?

[00:24:02] And how do you think about the portfolio of those as they interact with each other? When looking at our mix of businesses, the way we think about our firm is along four major business verticals. So there is the systematic business. There is fundamental long-short equity. There is macro fixed income.

[00:24:27] And then what we describe as tactical, which is also a collection of strategies such as Delta 1 and EM, our vol-based businesses, index rebalance, and event-orientated strategies. I do think that overall mix of strategies is one that is widely recognized. That subset of strategies is where the multi-managers have gotten to over time.

[00:24:55] I think some have larger commodities efforts, as I mentioned, which Schoenfeld currently does not have. But I think that the multi-managers and experimenting with the right mix of businesses over the last 35, 40 years has coalesced around this subset of strategies. Now, based on the talent that's available, based on the size of these businesses, some will have a bigger converts effort than another by way of example.

[00:25:25] But I do think that what these multi-managers is looking for and the reason for macro fixed income within Schoenfeld is, number one, that we've had zero correlation to the firm's other strategies. So that is a bit of a holy grail, as you know.

[00:25:44] And look, the hope is, particularly for someone with more of a macro DNA, that you are going to add some level of convexity into periods of risk-off, where maybe the firm's other strategies are having a tougher run of things. And getting back to that ultimate goal of generating absolute returns. In sport, I think that they say that hitting a baseball is the hardest, most difficult thing in sports.

[00:26:13] And look, in investing, I think it's generating absolute returns. To do it in all market conditions, I think that is the real challenge. So I want to talk a lot about just the risk management side, but there was something you said just around the talent pool available. And so I wanted to take a quick detour and just get some of your thoughts on recruiting and finding talent. It seems like you do a ton of that.

[00:26:39] It's a big part of your role is alpha in talent identification. And I would love for you to just share with us some of your thoughts on the evolution of your own process. What does it take now versus maybe, again, when we were on the podcast five years ago, there wasn't really a chat GPT. Some of these tools were coming online, but not as prominent as they are now.

[00:27:05] Just big picture as you're building out your team and a huge part of that is, again, identifying talent. What's that process look like for you? Yeah, look, I think it's as a strategy head, I think it is a big part of the job. I think my job is being able to set forth a vision for people to be able to rally around.

[00:27:27] It is the strategies that we feel that we need represented within the portfolio that will give us the return characteristics. It is having a vision for technology. It is spending a huge amount of time and energy recruiting the top talent because, again, there are not an infinite supply of A players in all of these verticals.

[00:27:51] And clearly, one of the biggest shifts in the 27, 28 years is just this concept of a war for talent. With the growth of the multi-managers, there has been a shifting. The talent demands more of the margins of the business than they did 10 or 15 or 20 years ago, which means that your underwriting of that talent has to have improved.

[00:28:16] Look, if you're a believer in Malcolm Gladwell, I definitely have my 10,000 hours in terms of studying talent, underwriting talent, making determinations in terms of what talent we think we are willing to engage with and want to partner with. But the biggest mistake I feel I can make now is going through an underwriting exercise and then being surprised.

[00:28:43] We expect each of the portfolio managers within a business to perform a certain way under different market conditions. And if that's surprising us, then it becomes a problem. We need to solve for that. But I think all of these things have become much more exacting. Not only do you have to have the systems to be able to house a variety of strategies, you need the risk sophistication.

[00:29:11] And then you need to underwrite that talent incredibly well and give them the resources and tools that they need in order to be successful. A big part of the role is at the highest level is kind of portfolio construction. You referenced it. It's putting these assets or these trading strategies together alongside each other. In some ways, you're trying to avoid the intersection of drawdowns. That's a correlation outcome that you're trying to avoid.

[00:29:40] And as you were talking about the talent, this is another question that just came to my mind. You meet so many people and everyone has got a little bit of a different framework. People come at things differently. And I just was wondering if there's some element there where you find someone who even the thought process is just a little orthogonal in ways that you're like, okay, this is different. And there's value in difference in a world prone to correlation spikes.

[00:30:10] I'm just curious if finding that different thinker is something that's valuable to you. There are two threads that you mentioned that I want to kind of pull on a little bit. Number one is this concept of managing correlations because I think, again, that's the ultimate part of a strategy head now is managing the correlations within your own portfolio, particularly into a stress environment.

[00:30:35] Because, look, if you can maintain an average pairwise correlation of 3% or 4%, that's a great business because into a tail event, you can feel comfortable that, yes, you'll see a pickup in correlations, but that's probably going to top out at 11%, 12%, which you can manage through.

[00:30:56] It's where correlations move further and further towards one where you're creating those more significant tail events for a portfolio that become more life-threatening and certainly career-threatening for someone like myself. Because if you're not doing that well, you won't be in the seat that long. I think managing correlations becomes a critically important part of these roles within the multi-managers. Back to your point on talent identification.

[00:31:26] I would say that over my years, I think I've become more skeptical over time. I think I'm less impressed by that flashy two-year track record and much more impressed by someone who shows strong characteristics. It's that humble self-confidence. It's coupled with resiliency. People that can talk you through how they mentally change things up when they're in a period of drawdown.

[00:31:55] They learn to get through that. They caught risk quick. They move their feet. They get back to basics. But they show an inability and comfort of working through the tougher periods. I think you would agree with this. I think that there are that category of a talent.

[00:32:14] When you sit down with someone and really get them talking about their area of expertise, and they're able to go into such detail and depth with such ease. Maybe it'll be about the Fed plumbing. Or you name the topic. But you walk away from those conversations saying, there is a reason for you to exist and for your strategy to exist.

[00:32:42] I understand the edge that you have. And I think that with all of these candidates, I think that is the question. Can they both really articulate the edge that they have in the markets? What it is, what is it that they do that allows them to deliver a sharp of a 1.2 or 1.5? And are they also intellectually honest about the tails? Because tails come with everything. And you know this.

[00:33:13] How do they talk about the tails? How do they talk about the periods where they will knowingly underperform their own expectations in the market? Because it's not the opportune time for their strategies. But I look for people that have a lot of self-awareness about what it is that they're doing, but also a lot of intellectual honesty.

[00:33:37] Don't tell me this is a too sharp business in every market and you're always, nothing is too good. And look, it's all math. There's an upside to that math. There's a downside to that math. I like people who are really honest about that. When we started this conversation, we talked a little bit about LTCM, then we talked about the GFC. A year before the GFC was the Quantquake, August of 07. And I think the VIX was 22 to 24.

[00:34:06] It was so underneath the surface, you really didn't see it unless you were Cliff Asnes or someone that was experiencing it real time. And what I wanted you to reflect on in the context of your own business is that sometimes the drawdown from someone outside your firm can become a headache for you.

[00:34:27] If you were in Nat Gas in 2006 and Brian Hunter was unwinding at Amaranth, you were unlucky to have something on that he had on. And so you've really got to understand whose capital is alongside you, both on the long and the short side. How do you think about crowding, measuring it, where it becomes a risk to you? I'd love to learn a lot. How do you think about that?

[00:34:51] Well, if you were in that Oknov calendar spread that Brian Hunter was in and you were on the other side, you had some pretty tough days. And you felt that you were right, but price action and just his ability to continue to push the market told you you were wrong.

[00:35:09] And look, I do think that crowding risk is a really important risk characteristic for all of markets, particularly with what we do with the growth of the multi-managers and with what you suggested. And that we've been living in a period of probably overly accommodative, both monetary and fiscal policy for a long time.

[00:35:36] And what those characteristics, what they encourage is the use of leverage. And there is a lot of leverage. And when you have crowded, leveraged on wines, that is particularly where you get these gappy price action. And you will undoubtedly get an overshoot in what is there.

[00:35:57] But even this March, if you look at front-end rates in the UK, across the Eurozone, to a lesser extent in the US, you saw that. You had this moment of, quote, regime shift because what had happened was an unpriced event in the markets. You saw a considerable unwinding of levered trades, some of the put selling that occurred. Particularly in front-end rates markets.

[00:36:24] Those are the environments that hopefully you can avoid. You can sidestep. It's by understanding what is crowded. It's pushing people on this. But I do think it's an area where one of the bigger changes over the last 20 years is the banks are not there to provide liquidity. Obviously, across the equity complex, you've had enormous retail participation.

[00:36:50] You have also had the coming of age of firms like Chainstreet and Citadel Securities, which are liquidity providers. But in some of the fixed income markets, you haven't seen new liquidity providers. And now I think those are the markets. You know, we saw this in a couple of times in Gilts. But even in Treasuries, you see the Treasury market break down in a real period of stress.

[00:37:17] As you and I know, and we've talked about this, we talked about this on the last podcast. One of the central banks and the Fed's unspoken mandates now is to be the liquidity provider of when the markets need it. And as Christine Lagarde found out early in her term, her job is to close spreads, if you remember that famous statement.

[00:37:41] And I think that that's important in our market with the growth of the pods, with all of these changes. That is certainly a risk factor that business head like you, you need to be all over. So we're going to talk about market prices, the here and now. You kind of led us into that a little bit. I'll set it up by just asking you more from a business strategy standpoint.

[00:38:05] A big part of your role is recruiting, but you're recruiting for an outlook that you think might be opportunistic. These businesses can be cyclical. There are opportunity. There are times when the rates market is dead. There are times when risk arb is really prosperous and other times when it's just really quiet. As you look at your own remit and the areas around the world where you think opportunity is going to be flush,

[00:38:33] what does that look like in terms of where you're wanting your team to deploy more capital? Yeah, look, across Schoenfeld, we have recently made a big commitment. A gentleman named Andre Laporte is building out an office for us in Sao Paulo, Brazil. So definitely increasing some of our EM exposures. Interestingly, across the fixed income world, the traditional bond basis, fixed income RV spreads there very skinny.

[00:39:03] You're seeing individual PMs, individual businesses that have been very reliant on that as a building block, need to think about new ways to earn that traditional source of carry, etc. From a bigger picture perspective, I think we've spent a lot of time recruiting and are close to some exciting new signings in Asia, which I think the Asia markets, whether it's China onshore rates, whether it's JGBs,

[00:39:31] those markets in general will continue to be growing and provide additional opportunities. I think the inflation markets, although many PMs, many inflation specialists have probably felt that their markets haven't been that alive probably since 2022. I do think the persistence of inflation is an issue that is going to continue to pin central banks, and inflation will continue to be a very dominant theme in markets.

[00:39:59] So I would think that the opportunities that should be somewhat improving there. And again, one of the beauties of the multi-manager model is just the benefits of diversification. You know, having 130 great pod leaders that cover just about everything, and having someone in the right seat at the right time when markets are most interesting.

[00:40:26] I think over the course of my 20 years of leading these types of businesses, I think what's always interesting is the changing nature of the leaderboard, where the P&L is coming from in any given period. But I think it goes to that diversification and the importance of that, but also being able to work with PMs to manage expectations, because you don't want PMs fully deployed when their area of expertise is not in vogue.

[00:40:54] So it's encouraging some of that self-regulating behavior, so you're not deploying risk into a marginal opportunity set. And I think that that becomes an important goal within our structure. You mentioned JGBs. You mentioned the UK yield curve. The back end of the bond markets, the developed market sovereigns, are certainly repricing, some would argue, certainly for the UK, under stress. Give us the big picture of that.

[00:41:23] The headlines, it's a publisher parish business, financial market media, deer sells, but it's hard to get away from what looks like vulnerability staring us in the face. Maybe start with the UK. What does that look like from your perspective in terms of the clearing price of the back end, the capacity to right-size the fiscal trajectory, and are we vulnerable to a tipping point,

[00:41:53] or is it just a muddle along, which happens oftentimes as well? I want to expand on that a little bit, because you've touched upon this in subtle ways a couple of times in this conversation, and I think it is important. Like backdating a narrative to the price action and finding a way to explain price action. And look, Wall Street is just so great at finding and coming up with new stories to sell you,

[00:42:22] to get you excited about some new trade, some new idea. And I think such an important part of, for any investor, is really battling the narrative of the day, because I find that most of the time that's fake news. Like those are not, you want to do some good fact-checking there. To your second point, I think it's the doom and gloom. Like doom and gloom sells, like fear sells.

[00:42:49] And look, remember, equities go up a lot more than they go down. And particularly with the persistence of inflation, that's going to continue. And in this environment, like risk assets, just because of the easiness of both the monetary policy and kind of reckless fiscal side, like this continues to be a really good environment for risk. Now, to your specific question on the long ends, look, with the back to the persistence of inflation,

[00:43:17] I think there's a pretty strong argument that our start is terminally, it should be higher. I think for a long time, for the last decade, the marginal duration buyer was a somewhat price insensitive central bank or liability driven pension insurance company, the big Japanese institutions, whatever it may have been. They're underwater on a lot of those, their purchases,

[00:43:46] I think are becoming more price sensitive. At the same time, that risk premium is being injected into these curves because of some of the uncertainty. On the UK, yes, it will be a limp along situation because, look, Japan is the base case for this. And you can extend this out for a long, long time. I really think of Japan as the ultimate experiment.

[00:44:15] But I think it's a hobby of mine to watch those markets. And as mentioned, we have some great risk takers who run risk in JGBs in those markets for us. So I feel very up to speed. But I think the whole world is going to go through a bit of a Japanification at some point. And they are the leader in this. But on the UK and a lot of these curves, look, I'm very sympathetic to the thought that curves will be steeper over time.

[00:44:43] But again, there are a lot of tricks of the trade that central banks have, that treasury departments have, with yield curve control, where they issue bonds, restricting supply in certain areas to try to control prices. So it's not as easy as saying, hey, let market prices do their thing, because central banks are going to want to control that.

[00:45:08] And look, remember Scott Besson, when he was stepping into that treasury seat and the focus on 10-year yields, and he was going to define success for himself around his three arrows. And look, governments do have a lot of influence over bond prices in particular. And when they want to step in, you have to respect their involvement.

[00:45:32] Well, Warsh is about to chair his first press conference, his first FOMC meeting, June 17th. Should be very interesting. A lot of divergent views on the committee. And of course, his own years leading into this, his criticism of the Fed, artfully done, has always been in my mind about its interaction with the markets. The massive non-emergency bond buying, the just incredible forward guidance.

[00:46:01] You're doing things to the market there that are contaminating market prices. And so he's definitely talked a lot about the balance sheet. Sometimes this stuff's much easier to say than do. What are your thoughts, your team's thoughts on handicapping his impact? Is that in prices yet, or is it just going to be very difficult for him to have an impact early on?

[00:46:25] When reading his prior speeches, his academic work, what he stands for, if you read the 10, is a smaller balance sheet, less forward guidance, a much higher threshold for using QE in buying assets as a way to support things. And as you said, allowing market forces to run a fuller course.

[00:46:53] Look, I think that from a macro fixed income perspective, I'd love to see that. That means more of all in the rates markets. That means more elf opportunities. But I do think that that's a harder thing to do than it is to say you're going to do. And just like any good opposition party, it's always easy to criticize current leadership. And finally get the seat. And in particular, on a couple of things with a smaller balance sheet.

[00:47:22] Look, Lori Logan, she owns that for the Fed at the moment. She's going to be a tough character to debate with. And she has strong views on that. And she is a trusted member there. And I think it's going to be hard to push her off her views. I think he has the most ability to impact the forward guidance component. Because remember, really, it was Powell that decided and was an advocate of having press conferences at every Fed meeting.

[00:47:53] Yellen only did them sporadically. Former Fed chairs did not engage in that. So you would get a decision and need to read into a lot of that. The forward guidance framework that we have now is something that I think he can influence. I don't think that he can influence the Fed speaking circuit, meaning he can't tell people not to go do the talks that they've become very accustomed to delivering. But I do think he can influence that.

[00:48:23] On the QE side in particular, this is really where the rubber meets the road. Because just like your point that it would be virtually impossible to win a political election these days with austerity as the platform, like, hey, let's have a great recession, but we'll be much better off seven years from now. In the same thing, I think when a Fed share, when markets are melting down, the treasury market

[00:48:51] is broken, the bond basis books are blowing up, and people are going to him and saying, we're going to have a recession and a million people are going to lose their jobs. I think it's easy to say, yeah, let's go back to that QE playbook. But we'll see. What he has articulated, what he stands for from a brand perspective now is to let markets run their course.

[00:49:19] But I would tell you what, those triple levered ETFs wouldn't like that a whole lot. So much of the U.S. economy is still based on the consumer and increasingly on the high-end consumer because of the wealth effect. In a lot of ways, we need to continue to prop up stocks. And if you let that part of this domino chain break down, who knows what happens.

[00:49:47] And when constituents and congressmen are calling him up and telling him that, I think it's going to be hard to say, well, a truck taught me that we're supposed to kind of let things run their course now. Well, let's finish with two areas. The first is around AI. So Kevin has said that he has a view that AI is going to be disinflationary, that it's going to permit easier policy because of its disinflationary impacts.

[00:50:18] Some would argue that at least in the near term, maybe even the medium term, it's inflationary because it's so resource intensive. I'd love to get your take on that. And then we'll end with just trying to figure out what's happening in crude and what that means for inflation. How do you think about AI and how that interacts with monetary policy? First of all, the advancements that have been made in the improvements just over the last four

[00:50:45] to six months, pretty remarkable in terms of use cases. That wasn't your question, but just to say really astounding to me. What are you saying specifically? Give us a specific example. Yeah, look, in terms of use cases, you can't turn the corner without seeing someone kind of vibe coding in terms of using Claude, etc.

[00:51:06] So anyone that has not trained up an agent or two to be doing this more manual work is already being left behind, in my opinion. On your question, yeah, ultimately, I do think it is disinflationary, depending on how the pricing of tokens plays out. But certainly in the short term, I think it is inflationary because I think it is both an inflation story and a growth story.

[00:51:34] Because unlike many prior technology cycles, this is competing for labor, for power, for commodities, for financing capability, for room within the credit markets, you name it. But I think certainly raising again this possibility that equilibrium rates themselves should be structurally higher. I do think that's the case.

[00:52:28] Above it for 60 months now. It's going to be well more than that before it goes below 2%. How does crude fit into that? We were talking before we jumped on about the inability to process any of these headlines. In your macro context, how does crude and its inflation impact? What's that calculus look like? As we've been on this, we had a Bloomberg headline that, you know, yeah, US and Iran reach deal, but need Trump's final approval.

[00:52:56] Obviously, to talk about the headline ping pong that we're all living through right now. I do think that crude is the key transmission mechanism into broader macro at the moment. It's really important for this concept of inflation persistence. This headline that we've had.

[00:53:17] Arguably, if we had a longer lasting deal and bona fide deal, that allows the Fed to remain on hold. It limits what ECB and BOJ would do in terms of hikes. It would continue to be a vault dampener. That's not my base case. I think what ends up happening is what I would describe as a skinny non-deal where, yes, there is a prolonged ceasefire.

[00:53:47] There are some certain component pieces that are agreed to. But a bit of a status quo of this longer duration ceasefire where crude remains at more elevated prices for a while. And look, because of the level of inventories, it hasn't really been in a lot of places. I think it does later this year. That becomes a really important juncture for markets. We get through the midterms.

[00:54:16] Inflation is again running a percent above Fed's target. The pressure is on them to do something. We have more of the Trump lame duck type of feeling in markets. It'll be really interesting to see there because, again, for all the reasons we talked about, the encouragement of more speculative leverage-based positions,

[00:54:41] the rise of the 3 and 4x levered ETFs, the amount of that that is piled into the AI thematic and the memory names, because it wouldn't take that much of a pullback to set markets back. And again, I'm not a doom and gloom guy. I would say that overall market conditions are very supportive for risk.

[00:55:04] But as you said, it is the unwind of these crowded positions that can quickly spiral out of control and create a lot of pain. And that is the type of risk that keeps me up at night. Yeah, there's an old quote from Hyman Minsky, which I always love. He says, success breeds the disregard for the potential of failure, which is when something works for too long, we lose sight in some ways of the risks.

[00:55:34] I don't know. I just feel like that's a good framing, maybe just a basic thing to keep thinking about. Always just trying to look around corners from a risk management standpoint. Well, Colin, you've given us a ton to think about here. It was awesome to catch up officially on this podcast, learn about your business building efforts, but also talk markets and risk with you as well. So thank you for being a guest. Great to see you, Dean. Thank you. You've been listening to The Alpha Exchange.

[00:56:02] If you've enjoyed the show, please do tell a friend. And before we leave, I wanted to invite you to drop us some feedback. As we aim to utilize these conversations to contribute to the investment community's understanding of risk, your input is valuable and provides direction on where we should focus. Please email us at feedback at alphaexchangepodcast.com. Thanks again and catch you next time.