Animal Spirits Podcast: "Talk Your Book: Animal Spirits Live" – Detailed Summary

Release Date: November 25, 2024

Hosts:

• Michael Batnick
• Ben Carlson
• Guest Introducer: Alex

1. Introduction

The episode begins with Michael Batnick and Ben Carlson welcoming listeners to the "Animal Spirits" podcast, emphasizing that all opinions expressed are solely their own and do not reflect those of Ritholtz Wealth Management. Alex introduces the hosts with a humorous anecdote about their initial interactions, setting a relaxed and engaging tone for the discussion.

2. Company Background and Strategies

Ben Carlson provides an overview of FM Investments, detailing its inception five and a half years ago. The firm focuses on bridging the gap between alpha-generating strategies and investors' portfolios by eliminating business roadblocks that prevent great ideas from reaching the market.

• Notable Quote:
  Ben Carlson [01:50]: "There are really great alpha generators out there who often can't find their way into your portfolios."

Currently, FM Investments manages approximately 60 different strategies with a team of about 85 professionals. These strategies cover a broad spectrum of asset allocations, primarily focusing on asset style, institutional, fixed income, and equity sectors.

• Notable Quote:
  Ben Carlson [02:34]: "And it spans the full gamut of asset allocation, asset style primarily, though in between institutional, fixed income and equity."

3. Bond Market and Money Market Funds

The conversation shifts to the bond market, highlighting its recent attractiveness. Ben Carlson mentions that bonds have been a focal point due to their intriguing movements and the locking of doors during their discussion, signaling an in-depth exploration of fixed income topics.

• Notable Quote:
  Ben Carlson [02:36]: "You're going to hear a lot about bonds today. So we did lock the doors. You can't actually leave until we're done."

Alex brings up the substantial inflows into money market funds, questioning why funds like the T Bill Ticker continue to attract significant investments despite the Federal Reserve's rate cuts.

• Notable Quote:
  Alex [04:49]: "There is 7 trillion, give or take dollars in money market funds and the money is not slowing down."

Ben explains that even with attractive yields (e.g., 4% nominal rate, 6.5% TIPS), investors remain hesitant to move into riskier assets, preferring the security and simplicity of cash-like instruments.

4. Market Sentiment and Investor Behavior

Michael Batnick reflects on the recent bull market, noting the substantial gains in U.S. stock indices over the past year. He juxtaposes this optimism with continued investments in money markets, questioning the dynamic between bullish equities and conservative fixed income allocations.

• Notable Quote:
  Michael Batnik [05:57]: "What's going on here?... Is there just money everywhere that it can just be spread out and sprayed or what's going on here?"

Ben Carlson attributes the steady flow of money to diverse sources, including funds from private markets unlocking liquidity and being redirected into public markets. He anticipates ongoing market enthusiasm driven by strong fundamentals and investor confidence.

• Notable Quote:
  Ben Carlson [06:44]: "We see money coming in from all sorts of sources... we're seeing a lot of those funds... putting it into the public markets."

5. Treasury Inflation-Protected Securities (TIPS) and Breakeven Inflation

The discussion delves into TIPS, highlighting their recent performance and investor perceptions. Michael mentions that during the pandemic, breakeven inflation rates were negative, leading to skepticism about TIPS' effectiveness.

• Notable Quote:
  Michael Batnik [17:08]: "What are these break evens.... investors are emailing in and said what's going on here?"

Ben clarifies that the underperformance during the pandemic was due to duration risks rather than TIPS' inherent flaws. He emphasizes that in the current environment with higher yields, TIPS offer attractive real returns and serve as a robust inflation protection tool.

• Notable Quote:
  Ben Carlson [17:40]: "We think so... what you're getting is your inflation protection worked. It's just your duration hurts you."

6. Private Credit and Private Markets

Alex introduces the topic of private credit, a growing area in wealth management involving loans to companies unable to access public markets. He inquires about the implications of integrating private credit into ETF structures.

• Notable Quote:
  Alex [18:25]: "One of the biggest themes in wealth management has been the rise of private markets, specifically private credit."

Ben discusses the complexities and potential innovations in bringing private credit to public investment vehicles. He cautions about the challenges related to liquidity and pricing in such structures, noting that the experiment is still in its nascent stages.

• Notable Quote:
  Ben Carlson [19:20]: "There's a lot of guessing... we haven't yet tested what that looks like."

The conversation touches on the sustainability of high returns in private credit, suggesting that without continuous inflows, the market may face significant adjustments.

• Notable Quote:
  Ben Carlson [21:14]: "Once you're afraid you're not going to get any of your money back... something has to give."

7. Government Debt and Deficit Concerns

Alex raises concerns about the increasing U.S. deficit and its potential impact on the bond market, questioning whether investors should fear a government debt crisis.

• Notable Quote:
  Alex [22:23]: "Is the deficit keeps going up... should investors be worried that the US Government is going to run out of money or there's going to be a crisis in the bond market?"

Ben reassures listeners by explaining the government's ability to manage debt through mechanisms like the printing press and maintaining the dollar's strength. He acknowledges potential long-term challenges but emphasizes the current resilience of the bond market.

• Notable Quote:
  Ben Carlson [23:25]: "We have a printing press and they know how to use it... we have longer term goals on that."

Michael adds that while interest expenses are a significant portion of the budget, the Fed's rate cuts help manage these costs, provided confidence in Treasury auctions remains strong.

8. Future Products and Innovations

Ben Carlson teases upcoming products focused on inflation protection, including new TIPS funds and potentially thematic equity ETFs in sectors like life sciences. These innovations aim to cater to evolving investor needs in a changing economic landscape.

• Notable Quote:
  Ben Carlson [29:11]: "We're going to do some stuff inflation... some other parts on the curve because we get a lot of requests."

Michael inquires about the specific maturities in the new TIPS yield curve products, to which Ben responds by detailing plans for short-term, real cash T-Bill funds that strip out duration to focus purely on inflation protection.

9. Advisor vs. Retail Investor Focus

The hosts discuss their product accessibility, emphasizing that while their offerings are designed to solve professional investment problems, they remain accessible to retail investors. Ben highlights the importance of building products that integrate seamlessly into various client's portfolios.

• Notable Quote:
  Ben Carlson [30:45]: "Most of the clients we work with... manage money for some other asset owner... Nothing we built should be unusable by the retail market."

He acknowledges that not all products will have the same appeal to individual investors but strives to create solutions that address both professional and personal investment needs.

10. Conclusion

The episode concludes with light-hearted banter and invitations for audience questions, reinforcing the hosts' approachable and community-focused demeanor. Michael and Ben express gratitude for the audience's participation and encourage listeners to contribute their queries for future discussions.

Key Takeaways:

• FM Investments manages a diverse range of strategies aimed at integrating high-alpha ideas into investor portfolios.
• Bond markets remain attractive, with significant inflows into money market funds and T-Bills due to favorable yields and economic uncertainty.
• TIPS have rebounded as effective inflation protection tools, especially with higher real yields currently available.
• Private credit presents both opportunities and challenges, particularly regarding liquidity and sustainable returns.
• Government debt concerns are mitigated by the U.S.'s financial management capabilities, though long-term vigilance is necessary.
• Future product launches by FM Investments will focus on inflation protection and thematic equities, catering to evolving investor demands.
• Accessibility of investment products remains a priority, ensuring solutions benefit both professional advisors and retail investors.

Notable Quotes:

• Ben Carlson [01:50]: "There are really great alpha generators out there who often can't find their way into your portfolios."
• Michael Batnik [05:57]: "Is there just money everywhere that it can just be spread out and sprayed or what's going on here?"
• Ben Carlson [06:44]: "We're seeing a lot of those funds... putting it into the public markets."
• Michael Batnik [17:08]: "Investors are emailing in and said what's going on here?"
• Ben Carlson [17:40]: "We think so... what you're getting is your inflation protection worked."

This episode of Animal Spirits provided an insightful exploration of current financial markets, investment strategies, and the evolving landscape of fixed income and private credit. Hosts Michael Batnick and Ben Carlson, along with their guest Alex, delivered a comprehensive discussion that balanced technical analysis with practical investment advice, making it valuable for both seasoned investors and those new to the market.