Talk Your Book: Do We Need the Federal Reserve?

Summary

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Animal Spirits Podcast: “Talk Your Book: Do We Need the Federal Reserve?”

Date: July 13, 2026
Hosts: Michael Batnick & Ben Carlson
Guest: Alex Morris, FM Investments

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Episode Overview

This episode of Animal Spirits centers on the role and necessity of the Federal Reserve in today’s financial system, delving into central banking history, current bond market conditions, government debt management, and the dynamics of ETF and bond investing. Featuring frequent guest Alex Morris from FM Investments, the discussion also highlights the launch of an AI-powered tool to analyze central banker commentary, and provides a candid look inside both bond market mechanics and FM's organizational philosophy.

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Key Discussion Points & Insights

1. Do We Need the Federal Reserve?

• History of US Central Banks:
  • The US is actually on its fourth central bank, not just the Federal Reserve (see Bank of North America, First and Second Banks of the United States).
  • Alex Morris [02:24]:

    “The fear is if you let politicians make central banking level decisions, they'll just make money free because free money gets votes. Right. So you need someone to be the adult in the room to say it's time to take your medicine.”

• Pros & Cons of Central Banking:
  • Central banks provide vital independence from political cycles, but that independence is sometimes at odds with democratic accountability.
  • The Supreme Court had debated whether Congress should control everything, which, per Morris, would “throw a lot of central bank observers for a loop.” [03:10]

2. Interest Rates & Market-Driven Alternatives

• Can markets set rates?
  • The two-year Treasury rate tracks the Fed, but replacing the Fed with a market-set rate would cause greater volatility and lack crisis intervention.
  • Alex Morris [04:15]:

    “The private actors don't come together when times get tough and offer to foot the bill... The Fed has that weird anti profit motive to come in and actually stabilize things.”

3. What Really Drives Financial Markets?

• Rule of Law More Important Than Rates:
  • Morris rates “faith and good faith in the system” as the true backbone, with interest rates “free riding” on that foundational trust.
  • Alex Morris [05:18]:

    “Interest rates free ride on that. All these other things… money, none of that really much matters if you don't have all the other constituent parts of a really well functioning economy.”

4. Bond Market’s Sensitivity to Narratives

• Fed’s Actual Impact:
  • Media often overstates the direct power of any single Fed chair.
  • Examples like gold, bitcoin, and the “debasement trade” fluctuations are overinterpreted.
  • Alex Morris [06:49]:

    “I don't think the appearance of one person... is a fit. The government debt is an issue, there's a hard limit… but that's a Treasury, not a Fed, metric.”

5. Government Debt: Short vs. Long Term

• Shift to Short-Term Borrowing:
  • Most US debt is now concentrated on the short end (three-month T-bills), making rollovers more frequent but manageable—for now.
  • Policy concern: it’s difficult to make long-term public investments without locking in long-term rates.
  • Alex Morris [10:08]:

    “If there were to be ruin we would now see it come faster. ... How do you make long term policy decisions... if every two years you got to refinance everything?”

6. Should Governments Invest Like Norway’s Sovereign Fund?

• U.S. vs. Norway:
  • Brief discussion on whether the U.S. should buy equities with its own issuance proceeds.
  • Norway’s oil fund is cited as a “patriotic” example. [12:04–12:35]

7. Yield Curve & Inflation Perceptions

• Current Market Sentiment:
  • Despite above-target inflation, bond markets appear relatively unfazed, pricing in “bad but not worse” compared to previous expectations.
  • Alex Morris [13:45]:

    “The bond market will react and overreact to bad things getting worse. Not just bad things staying kind of bad, they've already kind of priced in the bad base case.”

8. Inflation Protection, TIPS, and ETF Flows

• TIPS Value:
  • TIPS (inflation-protected securities) often outperform traditional bonds and real assets for inflation hedging.
  • Alex Morris [15:23]:

    “They win versus their own break even at the day you bought them... tend to do better, certainly better than holding cash and certainly better than gold or real estate.”

• ETF Flow Insights:
  • Most incoming assets at FM are flowing into inflation and duration products, especially at both the short and long ends of the curve.
  • Recent activity suggests growing multi-year conviction trades, not just short-term positioners. [16:35–18:10]

9. Inside FM Investments: Growth & Customer Focus

• Success Recipe:
  • FM focuses on “doing simple things well” and returning every possible dollar to fund holders, eschewing thematic ETF fads.
  • Alex Morris [19:05]:

    “If we had billions of dollars in our pa, what would we do? Just do that.”

• Direct Client Communication:
  • FM actively engages with clients, demystifying complicated bond structures and correcting misunderstandings.[21:00–21:16]

10. Credit Spreads, High-Yield & Corporate Debt

• Tight Spreads and Investor Behavior:
  • Despite concerns, tight corporate and high-yield spreads signal a fundamentally healthy economy but may tempt investors into riskier CLOs and private debt.
  • Alex Morris [22:19]:

    “Every time, I think they can't get much tighter, they try to do it for us... there's a hunt for yield... maybe it's not time to be greedy.”

• Cautions Against Yield Chasing:
  • Investors should be wary of stacking illiquid or highly correlated bond risks just to seek yield.

11. How New Corporate Bonds Hit the Market

• Corporate Bond Issuance Process:
  • Unlike Treasury auctions, corporations issue bonds through bank underwriters with nuanced allocations to funds.
  • The bond market is now much larger than equities, and its turnover is constant. [25:42–27:20]

12. FM's High-Yield ETF Philosophy (ZTOP)

• Simple, Market-Driven Selection:
  • The ZTOP ETF strictly holds the largest, most liquid high-yield bonds, letting the market filter for default risk rather than analytics or ratings.
  • Alex Morris [30:53]:

    “We’ve turned the entire market of buyers into the selectors. ... When the market runs away from you, they also hold their value the best because it's the greatest chance of being paid back.”

13. Augmented Intelligence for Central Banker Analysis

• AI ‘Kevin Warsh’ Project:
  • FM Labs scraped all public writings and speeches of Kevin Warsh to create an AI chatbot that can answer policy questions exclusively from Warsh’s actual record.
  • Alex Morris [32:13]:

    “We built a large language model... We made an exhaustive search of all of Kevin's writings... and you can just ask it questions where you’re talking to Kevin. The model is anti-hallucination based.”

  • The tool will be published for public use, with further developments for other central bankers coming soon.

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Notable Quotes & Memorable Moments

• On Central Bank Necessity:

  "You need someone to be the adult in the room to say it's time to take your medicine."
  — Alex Morris [02:24]

• On Rule of Law vs. Interest Rates:

  “Interest rates free ride on [trust in the system].”
  — Alex Morris [05:18]

• On ETF Simplicity:

  "Just do the things that we're doing for others, and we were doing in our own portfolios, we're doing for ourselves."
  — Alex Morris [19:05]

• On Yield Chasing:

  “If you're going to be greedy, that's what your equity book should be for.”
  — Alex Morris [24:19]

• On the AI Kevin Warsh Tool:

  “It's almost as if maybe we've done that in the background... some cool stuff coming out around that.”
  — Alex Morris [34:34]

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Timestamps for Key Segments

• [02:05] Do we need the Federal Reserve?
• [04:15] Should we let markets set rates?
• [05:18] Most important market foundations
• [06:49] Does the Fed chair’s persona matter that much?
• [09:53] Shift in government borrowing to short end
• [12:04] Should governments own equities?
• [13:45] Bond market’s view on inflation
• [15:23] TIPS vs. other inflation hedges
• [16:35] ETF flows and market indicators
• [19:05] FM’s growth strategy
• [22:19] Tight credit spreads and risk appetite
• [25:42] How corporate bonds are issued to market
• [30:53] ZTOP: Market-Driven High-Yield ETF
• [32:13] Unveiling the AI Kevin Warsh tool

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Conclusion

This episode provides a thorough, accessible journey through the complexities and realities of modern central banking, government debt management, and institutional bond investing. With engaging analogies, a bit of humor, and an eye toward demystification, Alex Morris brings depth to the debates surrounding the Federal Reserve and investment strategies in a turbulent world—while FM’s innovation signals a future where both human and machine analysis can empower investors.

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Transcript

[Ben Carlson]

Today's Animal Spirits Talk. Your book is brought to you by FMinvestments. Go to FMinvest.com to learn more about their whole suite of Treasury ETFs and Bond ETFs. That's FMinvest.com to learn More.

[Podcast Intro]

Welcome to Animal Spirits, a show about markets, life and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

[Ben Carlson]

Welcome to Animal Spirits with Michael and Ben. On today's Talker book, we have potentially our guest with he's like the five Timer jacket on snl, right? He's probably got the most appearances. Alex Morris from FM Investments came to talk about the Fed. The bond market school us on a bunch of different things. Also show us how he created AI Kevin Warsh. What else do we got? I feel like the it is funny how cyclical the bond market really is and the takes on it. What did I share this on Slack the other day with you? I said when rates rise, you worry about inflation. When rates fall, you worry about recession. Right? But I feel like the narratives have driven the bond market more than the bond market is lashing out of these narratives. Is that fair? The bond market is in a pretty stable place as far as I'm concerned. Spreads are low. The volatility of yields has not been that much considering where inflation sits.

[Michael Batnik]

Yeah. Yeah. No, you're right. It could be. Could certainly be worse.

[Ben Carlson]

Yeah, that's what I'm thinking. The bond market hasn't been it was a source of volatility in 2022 for sure. Since then, not so much. As far as I'm concerned, it's been relatively stable. Anyway, we talked about a ton of different things concerning the bond market, how FM investments went from zero to $10 billion in a little over five years. A bunch of other stuff. Here's our conversation with Alex Morris from FM Investment.

[Michael Batnik]

Alex, great to see you.

[Alex Morris]

It's great being back.

[Michael Batnik]

All right, let me ask you this. Do we need a Fed chairman? Do we need a Federal Reserve? Well, let me just say that for not Federal Reserve. That's crazy. Do we need the policymakers to be setting interest rates?

[Alex Morris]

Well, it's a question a lot of folks have asked. I Mean the experiment of central banking the last 50 years seems to say yes, right. Maybe a little more than that. By the way, to your point, Michael, we're on our fourth central bank in the United States, right? We had one called the First Central bank of the United States that didn't work out so well. We paid off all of our debts, actually, with Andrew Jackson, we had the Second bank of the United States that didn't work out. So then we thought, you know, let's stop numbering this. We'll just call it the Federal Reserve. That way if we have a few others, we don't. But we forget there's actually like a first one, the Zero bank, bank of North America under Articles of Confederation. So we've been trying this a lot. The fear is if you let politicians make central banking level decisions, they'll just make money free because free money gets votes. Right. So you need someone to be the adult in the room to say it's time to take your medicine. And inflation has killed empires before and we're hoping for better. So it's a tough question, I'd argue. Yes, it seems to be working. But the very tenuous relationship between a central and independent central bank versus the legislature is hard to square sometimes. And today I know folks will read this after you've already had a chance to read it, but Supreme Court said if you read Justice Thomas's dissent, he went into a lengthy discussion of this whole thing is unconstitutional. Politicians should control everything at all times. Which, you know, was gonna throw a lot of central bank observers for a loop.

[Michael Batnik]

Leave my Knicks alone. They can't touch the. They will not control my basketball team.

[Alex Morris]

That's right. Well, that they're okay with.

[Ben Carlson]

A lot of people have said, well, why don't you just let the two year set the. Set the race? Because if you look at it, the two year the essentially. And the federal funds rate essentially track each other. Now, I'm sure the retort there would be like, of course, the two years following what the Fed is saying, but I mean, it wouldn't ever be as simple as just following a market rate like that. Wouldn't that just make rates more volatile?

[Alex Morris]

I think so. I mean, markets are pretty good at solving a lot of problems. And I think availability of money is also a markets issue. Right. The Fed gives money to banks and goes through a lending process, but banks and independent lenders decide if you can get that money. Right. So just because money in the system is available doesn't mean it's available to any of us. Right. To you, as it were the two year. I think the cause to your point is. Exactly. Fed does something two year follows because market knows that's what they can get. I think you would see more volatility first off, which folks might not be used to. But you also need someone to stand by and inject liquidity when it's needed. And the two year can't really do that independently. The private actors don't come together when times get tough and offer to foot the bill, right. They get together and they say great news, we're taking our chips that are remaining and going home. So the Fed has that weird anti profit motive to come in and actually kind of stabilize things that a market based rate just wouldn't ever naturally have.

[Michael Batnik]

Do you think the path of interest rates is the most important thing governing financial markets?

[Alex Morris]

Probably not. I mean that's probably blasphemy to say a little bit, particularly as someone who follows this. It's a super critical factor, right? But I think probably the most important is the rule of law and you have belief of fair faith and good faith in the system, right. That interest rates free ride on that.

[Ben Carlson]

Right.

[Alex Morris]

All these other things, the availability, money, none of that really much matters if you don't have all the other constituent parts of a really well functioning economy. You can look at, you know, despotic regimes across time and space. You can look what happens in China now, right? There's, without that there's just these other things just become window dressing.

[Ben Carlson]

Thank you, Alex. I've always said that the Fed is less important than most people assume. But I still think people draft their expectations on the Fed. So Bloomberg had this article last week saying that the debasement trade is unraveling. And Kevin Warsh is one big reason. Okay? So they look at all these things and they say, hey listen, since war became the new Fed chair, gold has fallen, bitcoin has fallen. Although everyone, it seems like every Fed chair makes bitcoin fall. Now the treasury curve, right, Yields have fallen and then the dollar has stabilized and increased and they say, well this is a worse thing. I'm just curious, do you think that people read way too closely into how much the bond market cares about things like government debt and these types of things? Because you've said, yeah, listen, inflation has brought down regimes in the past, but guess how many times that happens? Once, right? It doesn't happen all the time. So do you think that people put too much stock in that whole, the whole faith in the system and the debasement and all this like Is it too much to give that on the. Put that on the bond market's shoulders?

[Alex Morris]

I mean the bond market certainly would say no, we deserve that. I think it might be too much to put on any one Fed chair shoulders. I don't think the appearance of one person who by the way, is one vote of 19 people who are there 18 dots because he opted out, but not all of them vote at any one point anyway. But he's one vote. He has a lot of ability to set policy. I'd argue the Fed chair probably has more to do with regulation and some of the other more administrative tools the Fed uses to regulate banking systems and how money moves around the world and its interaction with FinCEN and some of these other things and how it interacts with other central banks than it does the value of Bitcoin, right. Bitcoin's going down because people just don't want to own Bitcoin. Supply and demand says bitcoin will go down. Gold, same sort of thing, right? They're not trying to do that. The dollar debasement trade has had 10, 15 years of, you know, being top of mind and every six months it's got a new reason why it's happening and then it doesn't, and then it does for a little while and then it comes back. Right? So I don't think that's a fit. But I do think they're, you know, the government debt is an issue, right? I think that there is a natural and hard limit. We're good at monitoring that, not through the Fed, but through the Treasury. How much action do we see at each of the auctions? Are they strong or are they not? Which is the public's way of saying we believe in the direction that the government's taking and we're willing to lend you money at this rate to do it. And, and here's how many of us are actually willing to make that happen, right? It's not just one person who believes it's. Is that belief held broadly?

[Michael Batnik]

Just curious, what does a weak auction look like? You see the headlines. Does that mean that like, oh, they were trying to borrow at whatever, 392-when- ended up being 39204. Like what does that, what does that mean practically?

[Alex Morris]

We always see some difference, right? We issue these securities called when issued securities, which is again, like this is what we think the, the new on the run is going to trade at. And the, then we talk about whether the auction was strong or weak. You hear about it tailing in, which means you get A little more yield than you might have expected, so it was a little weaker. But there's some structural reasons that that tail tends to happen, particularly on the short end of the curve on a regular basis. It's when the government says we need to. The true failure, right is government says we need $50 billion from this auction and only $48 billion actually show up to bid.

[Michael Batnik]

It's like Treasury IPOs.

[Alex Morris]

Yeah, it's a Treasury IPO. The treasury does this multiple times a week in all sorts of securities. Now they do have primary dealers who are required to take down those, those auctions if they don't have a bid. So they have some mechanism there. But there is a hard limit where eventually folks will just say no government, we're just not going to lend you money anywhere near the rate you're looking to do. And the government then has to decide are we going to issue a 10 year bond at 10% or are we going to just say oops, you know, go back and try again. Both are fairly catastrophic by the way.

[Ben Carlson]

You might, you might know the numbers better than me, but there was a story a couple of weeks ago about how the majority of the borrowing by the government now is just on the short end. They have just decided, listen, we can control the short term yields and most of that money is going to be in probably like 3 month T bills. Right. And I don't know, the number was 60% maybe something. Is that in the ballpark?

[Alex Morris]

It's, it's approaching 2/3 on the short end of the curve. Yeah.

[Ben Carlson]

Does that worry you at all? Because people say man, that that debt has to be rolled over way quicker. And you think that's actually a good thing in that, hey, yes, long term rates are rising, but who cares? To the government debt because we're not borrowing that much money using long term rates anymore anyway.

[Alex Morris]

Mixed emotions on it to some extent. The government has proven its ability to refinance those amounts in the short end. So I don't have like that much worry that they won't be able to. Obviously if there were to be ruin we would now see it come faster. Right. Which is probably bad. It's really more the policy, ah, just

[Ben Carlson]

rip the bandit off. If, if the, the empire is going to end, let's just do it, get

[Alex Morris]

rid of everything, try it all again. Invest in squirrel pelts and gold and lead and property in the mountains. That said, I think it's the policy implications. How do you make long term policy decisions and spending decisions for the population, for all the Citizens, if every two years you got to refinance everything, who's

[Michael Batnik]

making long term decisions?

[Alex Morris]

That's the problem. Nobody. The 535 elected people a mile from me here in D.C. are the ones who were supposed to be doing it. And it's darn near impossible to get them to do anything. And, and you're seeing the treasury markets kind of respond to that. But if, if we were able to meaningfully borrow for five or 10 years and then stick to the plan, I think you'd see a lot of things work better. Right? Like some of those, the entitlement programs that are now in the crosshairs, meaningfully. So because they're super expensive and they're getting more expensive, we got to find a way to solve that. Right? And that's how all of these items of like, we have too much debt, we, we spend too much money, we have to refinance money. It's cheaper to refinance it today for two or three years than today for 10 years. But we think rates are going to go down. So we want to preserve that option. That feels good, but eventually you become paralyzed because you're just on this treadmill where you can't make any long term plans if you try to borrow for them. They're too expensive. I don't want to borrow this much debt. It's going to cost too much to refurbish my house. So I'm just going to keep doing incremental step improvements until eventually you realize I spent 10 times as much money doing each project individually than if I just moved out for six months, had them renovate the place and come back. Right.

[Michael Batnik]

So why didn't they just take the proceeds of the most recent issuance and just buy Micron and extinguish all the debt? Do I have to think of everything?

[Alex Morris]

A lot of folks have said that there have been conversations that the government should be a bigger holder of equities, that it's, you know, sort of a patriotic thing to do. And certainly Norway, you know, sort of the shining example of this. You know, they had a lot of extra wealth in the sovereign wealth fund from oil proceeds. They invested in equities and other things, invested it well. And they're a massive investor today. They own basically every single equity on the face of the planet because they have so much money.

[Michael Batnik]

I saw years and years ago, and I think the Credit Suisse yearbook that they own like 2% of every publicly traded company and that was a decade ago. It's probably 5% now. Whatever.

[Alex Morris]

Yeah, I haven't seen the latest number. It's a big number and it's not like it's not a rounding error number. It's like a meaningful percentage given how big they are. I mean they probably were inventing and I don't know the exact. I don't. I think the krona trades at about 8 to 1 so I extra order of magnitude for simplicity. So imagine how many zeros there are in every single report that comes out of that bank. Right. Like the first time as a student you read a, you know, income statement you have to think oh it says thousands. Oh it says millions. Like for them it must say in trillions just to make they own 8,

[Michael Batnik]

quadrillion krona worth of whatever McDonald's. What does the shape of the yield curve tell you about where the market is today? The market, the economy, whatever.

[Ben Carlson]

I've got a add on to this one Michael. Kind of the same, similar, similar vein. So the 10 year in the bond yields rose a little bit but the 10 years at 4.4%. Okay. Inflation came in at 4.2%. There's a lot of pundits who are worried about inflation being sticky but doesn't seem like the bond market cares. So maybe latching on to Michael's question like what is the bond market telling you about its current worries or trade offs or however you want to take that.

[Alex Morris]

Sure. So I mean I'm one of those folks thinks inflation is worse than you think. Right. And I think folks are. You see the headline numbers by the way, 4.2 is not 2. And even if you take the new Fed chairs theory of I worry about the left side of the decimal place. There's no creative rounding of two that gets you to four. Right. Last I checked. So I think there's. And most of the crops that have gone into the ground in the northern hemisphere have priced in high cost oil. Right. Oil creates fertilizer. Fertilizer need for the crops. Those are in there. We're going to see those prices, you know, stay high through autumn harvest and there'll be more of that. And I do think wage inflation is coming around. Certainly you know the biggest problem now for consumers is Boise, Idaho. We can't get out enough memory. So your Apple phone is going to cost more money. Right. So there are all of these like late night items there. I think the market has just said the bond market in particular. Yep. We thought things would be really bad. They're just bad. Right. The bond market tends to be cynical. They didn't come out worse And I think in general you see the bond market will react and overreact to bad things getting worse. Not just bad things staying kind of bad, they've already kind of priced in the bad base case and they're like, well it didn't get any worse so we're kind of fine. We're also looking at there's a, you know, a lot of two year, you know, paper that's probably going to come to market for all of the reasons that we, we just discussed. So there'll be some supply and demand imbalances that, you know, will be interesting to see how they work out. But I don't think the bond market is looking at every CPI print, you know, holding its breath anymore. Like the fix is it. Inflation is not 2 and it's probably not going there this year. The Fed agrees. So let's stop worrying so much about it. It's still here.

[Ben Carlson]

Do you think that tips are like kind of a wonderful deal right now then?

[Alex Morris]

Tips are a great deal now. I mean and statistically if you look at it, tips versus nominals plus, you know, trying to beat the rate of inflation, you know, unless you're buying equities and taking other risk, they tend to win, you know, most of the time. And there's some cool tools we can show you where we, we go through and do that analysis for you and you can see what they do and do. They win versus their own break even at the day that you bought them. And the answer is most of the time, yes, like they're a great mechanism to do it. Now that said, tips are a little strange, right? When folks, we talk about them, folks look at the 5 year or the 10 year tip and they say but it's Coupon is like 1.875. Where's my money? The answer is, well you're getting 1.875 plus all of your inflation along the way. So that coupon's going to grow over time to get to where you need to be. And net, net, that tends to do better, certainly better than holding cash and certainly better than gold or real estate, which always seems to let you down when you least want it to.

[Michael Batnik]

So Alex, when you see flows into and out of all the products that you all manage at FM and I'm curious to get into some of them, anything that you like, scratch your head at or do you think that like markets are efficient even at that level, at the ETF flow level?

[Alex Morris]

You know, we're biased. We kind of look at them as the indicator species of what the market's thinking because we see very viscerally every transaction. Right. And we do a lot of tracking of it. I mean no surprise, a lot of assets have come in recently and it's in the inflation and duration products. Right. The Asian products, I guess, where folks who are hedging inflation by our bill and those on the curve buy you too for ones who just want fed funds sort of metric. Ben, as you well pointed out. But then on the much further end of the space, seen a lot of action on the 30 year folks who just want duration and are playing the fact there's a bid on bonds and they think rates will come down in the back end of the year for which they're going to profit handsomely if that happens.

[Michael Batnik]

So on the, on the long end particular, I'm curious, do you see people popping in and out or do you think that like. Because nobody's trying to, nobody's trying to lock in rates for 30 years. I mean I know that there are like corporations and maybe pension funds that are. But for an etf, I would assume that most of most of this is saying interest rates are bumping up against 5%. Again, this always happens and they always come down. It feels like a good risk reward to just pop in here and grab some money.

[Alex Morris]

I think a lot of that that has been the traditional use case up until say six weeks ago when volumes really started to pick up and we started getting some field cases brought up to us and folks picking up the phone or sending an email who look to be longer term holders. Right. They're not going to be here for 10 years. Right. But they're not going to be three week, five week, six week traders trying to play meeting to meeting or interest rate move to interest rate move. This is more of a particularly since the rolling feature of always staying in the 30 year or the 20 year or the 10 year that they're looking for a more secular downturn and rates coming down for which this is a multi a year to multi year trade as they diversify generally away from equities but still looking for some meaningful portfolio return.

[Ben Carlson]

Alex, as podcast hosts, I'm generally the good cop and Michael's the bad cop. Is that fair, Michael?

[Michael Batnik]

Sure.

[Ben Carlson]

Okay, so I'm going to give you a good cop softball question. So per your website fminvest, you're closing in $10 billion in assets.

[Alex Morris]

Yep.

[Ben Carlson]

As of close the end of June. And the firm is still relatively new. Five years old essentially.

[Alex Morris]

Yeah, about six.

[Ben Carlson]

Yeah. So what worked that got you to this level in that amount of time. Like what actually worked for you as an ETF provider?

[Alex Morris]

You know, we show up to a lot of places, but, you know, we have this very deep commitment to just trying to do simple things. Well, bonds in particular are not particularly sexy to most people.

[Ben Carlson]

Yeah, no. No crazy thematic funds from you guys. Right?

[Alex Morris]

Exactly. Just like, just do the things that we're doing for others. And we were doing in our own portfolios, we're doing for ourselves. You know, put back the security, lending revenue into the fund. Do these, like, basic things that. If we had billions of dollars in our pa, what would we do? Just do that. And then the hardest part is just being able to continue to focus on making that really boring thing better without ever changing it. Right. There are a lot of more academically pleasing ways we could do a lot of these products. We don't, because that's going to change the character of what they are. And we don't want folks to be taking that risk. We want to just give them. The government does a lot of heaviest lifting for us. Let's just lean into that and make sure you get the best possible experience. Last year, if you own T bill, the return of T bill was greater than its expense ratio by three basis points. So you got the 90 day, according to what Bloomberg thinks it is, plus three basis points back after all of our fees were paid. Which is kind of the way it should be. Right. Like, if we did and took other risks, which we don't do, we might be able to tell you, well, great news, we got you five for which we risk losing you 15, which feels like a really terrible trade. And I think that just commitment to simplicity and being able to say, this is what it does. It's not these. If you want something else, you should go and find that thing. This is what it does. It's not changing its stripes. We've got a dozen people every day who. All they do is come in and try to live up to that commitment.

[Michael Batnik]

Well, I'll do you one equal.

[Alex Morris]

Oh, Lord.

[Michael Batnik]

Perhaps even better. We got an email from a listener maybe about a year ago, maybe two. I can't remember how long ago it was where they were misunderstanding something of the mechanics of one or one of the structural issues of one of your funds. And you were happy to connect with them. I don't remember what the topic was. I certainly don't. And you knocked it out of the park. The person that emailed us were so happy that your team got on the phone and there was no. There was no, no negative outcome, no negative surprise. Like he, he misunderstood something and you guys cleared it up and it was wonderful.

[Alex Morris]

I recall doing that. It was about inflation and like it was actually one of the best questions we've ever had about how the tips market functions from the auction structure to structural cheapness. And it was an immensely detailed and thoughtful question.

[Michael Batnik]

I remember the question that I was like, dude, I have no idea what you're talking about. Maybe Alex will talk to you.

[Alex Morris]

Thrilled to have it. We love walking out on this sort of stuff because it's what we do. And you know, it's, let's face it, a lot of this stuff is really complicated. It doesn't mean it's hard to understand. It's just complicated. And I think too many folks, particularly in bond market speak, love to hide behind the jargon and some of this other stuff because it's great job preservation, but that doesn't help the average investor build a better portfolio. And that's our mission. Let's just build better portfolios and answer the questions and as best we can. And sometimes the answer is this is actually really complicated or complex, in which case our response is usually, that's true, maybe it's not for you. And we'll be the first to tell

[Ben Carlson]

you, my general way of explaining the bond market to clients that we work with is listen, we're not trying to guess which way inflation's going to go. We're not trying to guess which way rates are going to go. We've yet to find many people who can do that consistently. We're trying to figure out where the best risk reward lies. And so I'm curious, when it comes to like a risk reward side of bonds, where what is, what is something like this, the corporate or high yield spreads telling you because they've been, they've been pretty tight for a very long time now.

[Alex Morris]

It seems like they've been really tight. And every time, I think they can't get much tighter, they try to do it for us. And then of course, you know, recently on the opposite end of that spectrum, right, is super high yield. The CLO market folks are like just piling into that into private debt and some of these other things that lack some of the transparency and character that even, you know, triple B's tend to offer today, plus space. I think the short answer is the economy, like the actual real economy of big companies borrowing is pretty good. Like the, all the reforms we've done over all this time, all of the other theory of central banking and lending Everything else it's kind of worked out. We have some companies that are pretty stable. Right. If we were to go back 25 years ago, maybe 35 years ago, the average company in the NASDAQ 100 would need to refinance before the end of the month to make sure that it could hit payroll. That's not true today. Right. We have these hyper, these like not even large cap or hyper cap, like super hyper cap, mega cap, IPOs coming to market. We're going to see two or three more of those. Right. A trillion dollars was a lot in the equity market. That's five years ago. Now we're going to see three new trillion dollar companies just burned out of paper in the next. Well, one now and probably two, three more for the end of the year. All of this comes down to it's fueled on the whole system working together. And it seems to be working. The question is, can we just make it work so well that we can break it? Right. Like is this the we can't, this is why we can't have nice things moment?

[Ben Carlson]

Is the so the reason that SO spreads are very tight? Is that why we're seeing so much money pile into things like Clos and these types of things? This isn't an area of the bond market people could have invested in very easily in the. Until the recent past. Correct.

[Podcast Intro]

Good.

[Alex Morris]

It's very hard to do even now with ETFs. You got to be a little careful as to which ones you get involved in. But it's a complicated part of the market. There is a hunt for yield. You know, we try to remind folks you're still getting pretty nice yields right from the treasury market. And even with tight spreads from corporate. And then in the high yield space,

[Ben Carlson]

think about where they were just five years ago. You had you getting nothing.

[Alex Morris]

Yeah. You had to do these other things five years ago because you got nothing. But response is, well, maybe just because you're getting something and it's pretty decent, maybe it's not time to be greedy. If you're going to be greedy, that's what your equity book should be for. There are other ways to go seek that sort of return for your portfolio, taking it particularly the more risky the asset type that you're buying in the bond world, the more correlated they tend to be when something goes wrong. And if you're buying your bond portfolio specifically for diversification, then buying things that are highly correlated to each other, even though they're different from what you're buying, more flavors of that isn't Actually doing you more favors. You're getting a pretty healthy return from the government itself. We could discuss its risk rating and whether that's warranted or not in a separate discussion. From high quality investment grade companies and even some pretty high quality, high yield companies. There's a lot of money to be made there on a regular basis. You don't need to get greedy, so you probably shouldn't bother with it.

[Michael Batnik]

I have a dumb question. I'm so ignorant to how this works. So Nvidia issued bonds for the first time in a while I think since 2021. Google is doing the same. How does this work? Like, I guess my primary question is, is it an auction similar to the way the government does it? How much of this paper ends up inside of ETFs? Like I have no idea how this works.

[Alex Morris]

So bonds go through an underwriting process, right? And don't forget bond market. Three times the size of the equity market. All of it, which with the exception of some of the perps, very small percentage of them, all of it will get retired probably in the next, on average seven to 10 years. So it turns over a lot. So investment banks underwrite it and they come to folks like us and say, hey, here's what we're offering. It's this bond which usually have multiple tranches with different interest rates and different conditions and terms and, and different expected ratings to be attached to it. And they, we put in for it just like an ipo. And then we are as an issuer allocated some or none of of each issue. So that underwriting tends to be, you know, some amount of subscribe between not subscribed very well and over subscribe depending upon what type of fund you are, what you're looking for. You want one tranche versus the other and then it starts to turn the secondary. But it's a very well coordinated underwritten process by the investment banks. And there's not so much an auction where we all show up, we just say, okay, we're interested or we're not. And they'll give feedback. Most of the more prolific folks like in particular the folks who offer car loans like Ford Motor Company, those folks, they're used to doing this all the time. So there's a revolving set of investors who show up to buy those. When you get some of these headline issues like Google issues the most stock it's ever issued in its life, right? Biggest secondary issue ever. And then a bunch of other bonds, bond buyers were also paying attention, like equity is good. That's money that could be used to pay back bondholders. We like to see that. But now we're going to bid on whether or not we think Google is able to pay its bills back over the next five or 10 years. And the spoiler alert for everyone is most bond investors thought, yeah, Google was going to be able to do that.

[Ben Carlson]

So people in the equity market are worried about like, oh my gosh, how is there going to be enough money to soak up all these IPOs, right? We have these huge companies coming to market. If all these hyperscalers decide that they're going to start instead of issuing equity, they're going to issue debt. Is there enough, people have to ask, is there enough money to keep this train going in the bond market? There probably has to be, right?

[Alex Morris]

There's certainly enough money in the bond market, but there's also a lot of cynicism. Will they be able because it's nice to go and buy debt, sell debt to individuals for short term projects that need to be built, right? And you can do the NPV and say, we're going to borrow at 6%. Our expected return is 10%, therefore the spread is 4. This is a good trade for us. The problem is bond issuers want to make sure that that money in the back end of that model is actually going to show up. Right? So you building a whole bunch of new facilities and hiring a bunch of people and developing a whole bunch of products have to actually return it. Otherwise we're not going to get interest payments, we're not going to get paid back. So there's a gentle balance now that needs to be done. As a corporate treasurer, between how do we capitalize the business things? The bondholders expect to see their interest payments every three or six months like clockwork. And at the end of the bond they expect to get all of their money back. Right. Subject to some of the other clever features that bonds can have. Sometimes you can pay it off early, sometimes it has auto extension. There's all sorts of other things that can be be done. But it's a pretty rigorous payment. It's like your mortgage. The bank doesn't come to you and say, well, you had a really great year, so we want a little extra. But same token, they just say, well, you had a bad year, we're gonna, we're willing to cut our payments a little bit. So it's a much more strict and rigorous way for lending to be done. The good news is you know your exact costs from the outset. When you sell equity, you could shoot the lights out and you just gave away some of your upside. So it's how do you do those two? I think the bond market is gonna be more concerned about these high cost, high lifed assets that take a lot of energy to go in and require a few other macro things to be right. Like I don't think they would question the ability can someone build a data center? It's you're building a data center because you see this demand. If everyone else builds those data centers and demand doesn't actually meet up to everyone's expectations, we're all now holding debt that may not be worth what we paid for it. So you have to sell more equity to pay us back. Are you willing to do that? And that's where this balance becomes difficult to strike. But also why I think you see hyperscalers and others and why a lot of venture capital. There's more venture capital firms providing equity than venture debt firms providing debt because it's just as a project creation mechanism or funding mechanism. You have to feel pretty good about the returns to get the debt to do it. The famous story here is obviously Chobani, who did this through bank loans and debt as opposed to equity. And it worked. But you know, the Small Business association is littered with folks who've tried this and had it not work. So that skepticism, I don't know that

[Michael Batnik]

story, but I do like yogurt. Let me ask you this, Alex, last question. I'm guessing that you saw. No, I'm guessing you obviously saw an opportunity to come to market with a high yield bond offering bond portfolio that you thought was better than. There's two gigantic ETFs out there. What is it about? So I'm talking about the Z Top, which I do like. It's good ticker, the FM High Yield 100 ETF. The ticker is Z Top. What are you trying to do here that is different than the more popular ones?

[Alex Morris]

So the popular ones are so big now they have to buy everything, which means when there's a lot of flow, they end up buying the exact opposite of what you want them to buy and selling things you want them to sell the least. Z Top said well, as opposed to doing underwriting. Right? Because high yield issuers, some might default. So you got to spend a lot of time working out who's who. Let's let the market do that for us. Rather like bend your theory of the two year setting rates. Let's let the market decide. So we're just going to buy the largest, most liquid issuers and it turns out the market's really good in that liquidity measure at determining who's going to pay back their debt in a timely basis and who's not. So we've turned the entire market of buyers into the selectors. So we just buy the largest, most liquid issuers who have the most liquid bonds. When things are going well, they tend to keep up with the market. Sometimes they're a tick behind because they're a little safer, as it were. But when the market runs away from you, they also hold their value the best because it's the greatest chance of being paid back. And the market's the adjudicator of that, not the rating agencies, not someone else, not some analysts sitting in an investment bank. We let the market do that work for us.

[Michael Batnik]

I love that. That's so simple and makes a lot of sense.

[Alex Morris]

Before we wrap, and you guys are free to edit this out, can I show you guys something? I know that listeners are going to be like, oh my God, they're just trying to show his screen.

[Michael Batnik]

But I'll describe, we could describe what's on the screen. Go ahead.

[Alex Morris]

So we're talking about Kevin Warshew came in. You know, the laboratories here are always doing something. You're going to see this later this week shortly before this drops as FM labs, but a conversation with me and a guy who runs our communication long term friend of mine, Jim Prosser. We say, well, Kevin's going to tell us less. And he said, well, why don't we fix that? So we built a large language model. It runs on Claude in the background. We made an exhaustive search of all of Kevin's writings from the FOMC, from his congressional testimony. Everything fine. You can see 1,784 documents and you can just ask it questions where you're talking to Kevin. The model is, starts at a. So it's anti hallucination based, right. So it starts with no response and then builds a response only from the transcripts and the data that we've given. We gave it lots of economic data, but you can ask it questions like, you know what, let me see, what is your preferred inflation metric? Which it'll go run away. It'll do. I'll tell you like, okay, it's consulting the record. It's a little slow because it's sitting on a development box and it does a bunch of testing.

[Ben Carlson]

How many writings did he have that you guys put together?

[Alex Morris]

1,784.

[Ben Carlson]

Wow.

[Alex Morris]

Every day it updates. It goes and scrapes for everything he says and say Here, quick analysis. I report Kevin Ward Fuse. I'm not Kevin Morsh. That's compliance made us say that. I really wanted to do that, but you can go. It says here's what he talks about. And it was. We'd always will give you some measure of where rates were when we quote something.

[Michael Batnik]

Trimmed averages. He's a trimmed averages guy.

[Alex Morris]

Me too.

[Michael Batnik]

I thought I was the only one.

[Alex Morris]

He's your. No, he's your guy. Now a lot of folks assume that he said, well, I'm really into like the Dallas Feds. Trimmed mean equa. Trim mean PCE measure, which they put out. The answer is. Well, it kind of is, but so down here we tell you that. By the way, we know that context is here, but we're not going to allow what we know. Popular opinion is to actually get in the way of what he said.

[Michael Batnik]

All right, when are you launching this? This. By the way, you are a confirmed super nerd. I love this. When is this coming up?

[Alex Morris]

Uh, this. This will be out before this. This podcast drops. That should come out the July 1st. Around here is FM Labs. You'll see more of us from there. By the way, if I could do this for. For Kevin, you can imagine we could do it for others. And we did. And there's gonna be some pretty interesting stuff in the pipeline as we start to really get all of that. That together.

[Ben Carlson]

The ghost of Alan Greenspan could be commenting on current policy.

[Alex Morris]

It's a. It's almost as if maybe we've done that in the background. So some cool stuff coming out around that. Some other tools around inflation.

[Ben Carlson]

But send us this and we'll link to this in the show notes. For sure.

[Alex Morris]

We'll do. It's good stuff coming, but thought you guys would enjoy that.

[Ben Carlson]

I like it. All right, Alex, people want to learn more about FM Investments and all your ETFs. Where do we send them?

[Alex Morris]

Fminvest.com it's all there.

[Ben Carlson]

All right, thanks, Alex.

[Alex Morris]

Thanks, boys.

[Ben Carlson]

All right, thanks to alex as always. Fminvest.com to more about their whole suite of funds tools. Email us animalspearscompoundnews.com Personal emails, personal responses. See you next time.