Meet the Masters – John Mousseau, President and Chief Executive Officer, and the Director of Fixed Income at Cumberland Advisors

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Meet the Masters Full Transcription with John Mousseau, President and Chief Executive Officer, and the Director of Fixed Income at Cumberland Advisors

 

Trevor Chambers:

Today is March 22nd 2020, crazy time of our history here, world history, history of the United States, and I’m doing a series right now of talking to some people who’s opinions I respect, we’re definitely taking a long view and under that framework conversation, I want to introduce John … Tell me your, I’m going to butcher your last name, but I just call you Moose. You know you and I just met and I know I’m getting personal here but I call you the moose, but John tell me the pronunciation of your last name.

John Mousseau:

So the last pronunciation Trevor is Mousseau.

Trevor Chambers:

Mousseau, got it.

John Mousseau:

And I’ve been called Moose my whole life as my sister and two brothers have and my three daughters have and my father was big moose, so there you go.

Trevor Chambers:

So you guys are the herd?

John Mousseau:

We’ve never called ourselves the herd but not a bad idea.

Trevor Chambers:

I think you should.

John Mousseau:

Yeah absolutely.

Trevor Chambers:

So tell me, where did you grow up?

John Mousseau:

I grew up in north eastern Connecticut, literally in the north east corner, Thompson Connecticut, so the next town north is Massachusetts and the next town east is Rhode island. It’s called the quiet corner of Connecticut, not as quiet anymore because we’ve had a lot of people move there from western Connecticut to buy some older homes and casino executives moving north to buy homes and people moving down out of the bus route, 128 [inaudible 00:05:20] kind of needs for more affordable homes. So in the area that used to be a broken down pathways move to north Carolina area 50 years ago is now more shishi in the sense that it has a lot of antique shops and galleries and stuff like that. But it was a nice area to grow up in.

Trevor Chambers:

Yeah so you came up in the 60s and late 70s?

John Mousseau:

Yeah I grew up in the 60s and 70s. You know, got out of high school in 74′ and went to Georgetown did college, and then I worked for the government for a year and went to Brown university and got a masters’ degree in economics.

Trevor Chambers:

Oh cool, so how was Georgetown and then Brown, that must have been awesome.

John Mousseau:

Georgetown was a lot of fun. My best friends in the world are still guys that I went to Georgetown with that I met my freshman year.

Trevor Chambers:

I got brothers in your age, you’re a little older than them but not by much, and there’s five of us in our family, and I just think you guys just hit the sweet spot. It must have been just so much fun in that stretch. You guys were beyond Vietnam, and you know …

John Mousseau:

Yeah I mean that’s funny you bring that up Trevor but it was beyond Vietnam in the sense that our class and I think my year was the last year to actually get a draft number, but they weren’t conducting a draft, so you’re right, we were beyond Vietnam, we did hit the sweet spot of the recession unfortunately because getting out of college in 1978, jobs were not plentiful at all. But you know within five years the economy had started the hump, so it kind of all worked out. There’s some similarities too. When we got out of college and were at the front edge and some of the millennials had getting out in 2007, 2008, 2009, and even 10 when the job market really stunk.

Trevor:

Right, now let me just ask you one other question because … Narragansett beer, was that your beer? what did you drink? What was your high school beer back then?

John Mousseau:

High school beer was probably Miller

Trevor Chambers:

Nice.

John Mousseau:

-and you had Narragansett growing there and you’ve got to remember Narragansett beer got bought by Schlipps and didn’t exist for a number of years.

Trevor Chambers:

Yeah I know.

John Mousseau:

-and two kids who were very enterprising, Brown University graduates and had some dads that helped fund them, they brought the brand back and they went to all the bar tenders in New England and asked them what did they remember best about Narragansett beer and liked it, and they didn’t use the old formula. They took the old formula and tweaked it a little bit and Narragansett beer is humming along now with different styles of it and they’ve done a great job.

Trevor Chambers:

I have a brother in law and a sister in law in the restaurant business here in Raleigh and they have it on tap, or at least they had it on top. See that’s the true commonality actually between now and millennials is that they’re back drinking Narragansett the way I look at it. So you had your pretty diverse career, but you were at Value Line as an assistant security analyst.

John Mousseau:

They listened to Shearson because they were the only person to listen to, because remember Hutton got hurt very badly in the stock market crash in 1987, and because of, they had a cheque paying scandal and some other things, they were a little depleted of capital. So they were very weak after the crash and Shearson basically rode to the rescue and did what most times you see in a brokerage merger, they took all the registered representatives and basically cut most of the rest of the staff.

Trevor Chambers:

Yeah, so in other words capitalism.

John Mousseau:

Yeah, capitalism. But I was unlucky because believe it or not I actually joined Shearson about two months before they bought Hutton in 1987, so I actually formally went from Hutton to Shearson in September of 87′ and two months later they bought Hutton. So I had good timing.

Trevor Chambers:

Yeah, see twice now we’ve mentioned your timing, that’s very good. From there you went to Lord Abbett and you directed a believe a muni bonds portfolios, and correct me if I’m wrong on any of this, but where are you now? Because it sounds like … First of all where are you physically, where do you live?

John Mousseau:

Cumberland advisors’ headquarters is in Sarasota Florida. We have been here since 2011 from a headquarters standpoint. We opened up a branch office here in 2010. Our roots were in Vineland New Jersey.

Trevor Chambers:

Vineland, wow.

John Mousseau:

Yeah south Jersey, the firm was started in 1973 by David Kotok, who is still a chairman and chief investment office of the firm, and a partner of his Shep Goldberg who passed away about a dozen years ago, and what we did is after we opened the branch office in Sarasota in 2010 we said to heck with it, let’s move the whole firm here. So we spent four years moving people down and we still have the Vineland office, which has a couple of people in it. A few people work remotely for us but everybody else in the firm is in Sarasota.

Trevor Chambers:

In a prior life I worked with a gentleman, Mike [Conti 00:11:17] in Vineland. He was in food business when I was in the food business, but I also know there’s some incredible sub shops, like delis around there.

John Mousseau:

Just incredible.

Trevor Chambers:

But anyway.

John Mousseau:

Vineland had some really nice areas to it and if you went back to … Call it right around world war 2, the 50s, the 40s et cetera, it had some thriving business. It had trucking, it had glass, it had agriculture, because you’re in the agriculture belt down there. So it really thrived and I think what happened was after world war two, and probably more as you get into the 50s and 60s is that younger people left and didn’t come back and restart families in the area. So the area just really didn’t regenerate itself like a lot of other areas do, and that’s kind of hurt the texture of the town. But it’s actually beautiful down there. So shout out to Vineland New Jersey for sure. It is a beautiful area for sure.

Trevor Chambers:

It is, yeah there’s people… Jersey sometimes. I lived in Jersey city for a while.

John Mousseau:

No New Jersey is nice, a lot of people think New Jersey, I mean they call it the garden state for a reason and that’s a south part of the state that provides so much in terms of produce, et cetera, and Vineland was a big part of that.

Trevor Chambers:

Yeah I think broccoli, they do a lot of broccoli.

John Mousseau:

Yeah tons.

Trevor Chambers:

So real quick, speed round, one last speed round which is out of the blue. Hardest job you had and what did you learn. Just real quick, one minute. Hardest job you’ve had so far and what did you learn?

John Mousseau:

Hardest job I’ve had so far is the one that I have. President and CEO of the firm, so yeah you sit there and you … It’s a multifaceted job, so I’m still the director of fixed income. So I have that as the fun part of the day job and the rest is management, where I have a terrific executive team and a great chief operating officer who’s making it a lot easier, but you know it’s a different perspective when you’re just managing a 45 person firm as opposed to a 10 person bond department.

Trevor Chambers:

Yeah, and what did you learn to this point…

John Mousseau:

I’ve learned that most people are more talented than they think they are and in times of stress like we’ve gone through with the markets in the last couple of months, it’s incredible how well people shine.

Trevor Chambers:

Yeah, yeah. Well said. So I got off track. Tell me about Cumberland, and what makes you guys a little different and what more specifically … Then we can get in and talking about bonds and why you love them and all that stuff.

John Mousseau:

Sure, I mean Cumberland is a great firm, I mean to give you the perspective of it, I mean we gave three and a half billion under management, majority of that, almost three billion of that is in bonds, the rest we use equities using only ETFs. It’s primarily had a fixed income orientation to it, so our equity products have gotten some real traction to them. To give you some perspective I joined the firm in 2000 and we had about 480 million, something like that under management, and now we’ve got three and a half billion, so we’ve had some really good growth. Interestingly enough a lot of that growth, and remember we’re all separately manage account, so we don’t run any mutual funds et cetera, and we don’t co-mingle accounts, but a lot of the growth of the firm Trevor happened after the crash of 2008 with Lehman going under and the great recession. A lot of that is just the focus of people to fixed income as part of their portfolios, and I think anybody who lived through that crash, equity crash, came away from it realizing that bonds needed to be part of whatever their financial plan or program was.

That was reflective in the growth of the firm, we had about $1 billion under management by the end of 2008, and remember that took essentially 35 years to get to, and the next billion came in five years, and the next billion came in the next five years so you know, it’s been a nice place to be a great place to practice my craft and [inaudible 00:16:11] you know. I pinch myself, I’m lucky I’m here. It’s great to be able to be in your 60s and still have a job you love to go to everyday.

Trevor Chambers:

I think any age, I love what I do too, I really do. So I’m with you brother.

John Mousseau:

When you have a job and you love it it’s not work.

Trevor Chambers:

Yeah exactly. All right let’s get into the nitty gritty here. Why do you like bonds and explain that rationality to you.

John Mousseau:

I’ve always liked bonds. You know it’s funny because if you went back to the year that I was at Value Line and I was really analyzing equities and really their earnings, stocks earnings and how they fit into the Value Line model of valuing securities. The one thing that I was very good at was being able to tell you what a company would earn. So they great learning experience there was how to learn a balance sheet and an income statement and read it well, and I was pretty good with coming up with earning. I couldn’t tell you for the life of me why a stock would go up or down because you could sit there and nail the earnings, and maybe an increase in earnings and the stock announces and price goes down. So I mean I wasn’t very good at equity market sentiment, but I loved bonds and that was more at Hutton and Shearson getting into bonds because you realize that all bonds are tied together mathematically. So most bonds go up in price or down in price in the same direction with interest rates. Not all the time as we saw last month in March-

Trevor Chambers:

I don’t know what you’re talking about, what markets?

John Mousseau:

Yeah, the bond markets, you know most of the time they’re directional. March was a different story where you had treasury yields going up and skyrocketing in price and bonds on every other market going up in yield and down in price. That is a rarity. But the real key to bond management is to be able to figure out where the value is and what bonds will go up in price more or go down in price less, based on their credit, based on where they were in yield curve and their price sensitivity and things like that. So that is the fact that the whole bond market has been tied together mathematically has always had a great appeal to me.

Trevor Chambers:

You clearly have a talent for it yeah. So you have a brain for it, so I’m going to tap that brain. We’re going to get a little nutty in terms of wonkyness here but I’ve got to ask this question because I do think it’s interesting. Can you quickly explain convexity of bonds and why it’s important to understand that when choosing bonds and what role it plays when choosing bonds for you.

John Mousseau:

Let’s start with one [inaudible 00:19:16], duration measures the price sensitivity of a bond. So if you go in and look at a bond, say a 10 year bond. The duration is really just the present value of all the cash flows, including the return of your principle. So for a 10 year bond, duration is usually somewhere between eight or nine, could be a little lower, depending if it had a higher coupon. But the idea is that the rough math is that for a hundred basis point change up or down, that bond will change by the duration. So if you bought a bond at the price of X, it would probably get down 8% if it had a duration of eight, or up 8%. This is not assuming any cost.

Convexity is important because the convexity measures the rate of change of that duration. So it’s like, if you think back to your high school physics and you had the calculations for speed, which was basically … Speed was velocity and time. Acceleration was the second derivative of speed. It is how fast that you reach that speed. That is the same calculation as when you’re doing duration. The second derivative of duration is convexity. So how fast does your bond price change?

So let’s use an extreme example. So the zero coupon bond usually has the duration of it’s maturity, so if you have a bond that’s not due for 10 years, it’s duration is 10. If it’s not due till 30 years it has a duration of 30, and why is that so? That’s so because there are no cash flows until you get paid that. The convexity measure is how fast that price will change. So a zero coupon bond doing 30 years has the ultimate convexity in the fact that it’s duration will … The price will change faster as yields drop down or yields drop up. That’s an important part in bond management, when you’re at a bottom of the range and you get interest rates, convexity becomes less important. When you’re extending maturities and durations convexity becomes more important because you want greater price sensitivity in your bonds.

You have a brief time in the March of this year, a month ago, to actually increase convexity in portfolios, because many bonds are selling at a discount and you did not have the problem of call features just getting in the way.

Not to get too technical but it means it’s really a math issue. So the question is, is it in the middle of the froth of March, did you want to buy a 4% bond at par that had a call feature on it? Or did you want to buy a 3% bond yielding you a 435 at like 75 or 77 cents on the dollar, and you wanted to buy the second one, because if your outlook was at, “boy this market’s oversold and prices are going to rebound, then the price of that discount bond is going to increase much faster than the price of the par bond which has a call feature that’s going to run through almost immediately.

Trevor Chambers:

Yeah, so you’re buying value, I like it.

John Mousseau:

Right.

Trevor Chambers:

Nothing like equities, we’re mostly an equity shop here, so I get it. Now this all leads, the reason why I bring up this [inaudible 00:23:16] thing is because it’s one of the secret sauces clearly in understanding hot to run bonds, and I guess that leads into why you run individual bond portfolios versus using mutual funds, bond mutual funds, and then that leads into passive versus active. So I was having a discussion with an equities guy yesterday. Active gets real important in these times of panic and … It’s important anyway but tell me about that, what’s the difference and then we’ll lead from there.

John Mousseau:

Here’s the reasoning, and the reasoning is based right into what you just went through in March, mutual fund generally speaking has longer bonds, and that’s intermediate to longer bonds, because most mutual funds have a dividend. They sell their mutual funds based on the dividend or yield on their fund, they tend to be oriented towards the long end of the market, particularly in the municipal bond area which almost always has a fairly steep yield curve. So from that aspect you basically have a long duration bond in the form of a bond fund, with diversification of credit, et cetera, which are all the good things about a bond fund and the professional management.

The problem is, is that as an investor you have one price and one price only, and that’s that price at the end of the day on the bond fund. To an extent that’s also true of an ETF although you can buy an sell an ETF during the day, but it’s still only one price. With a separately managed account you have a diversification of bonds, we tend to manage portfolio as more of a barbell method with some shorter term and some longer term and the weightings of those barbells changing as the market changing. But the point of it is, is that, I mentioned before how all bond prices go up or down but not necessarily at the same rate, because of the lower duration of some of the shorter term bonds, those bonds were not nearly hurt as much when yields went up as longer term bonds were.

So in the middle of the mess, you may not like the price but the price sensitivity is less on the shorter terms bonds. So if someone said … And better example if you just had a general rise in rates. But if someone actually said, “hey I’ve got a million dollar bond portfolio and I need a hundred thousand to throw a wedding”, and the market is in a particular bad point in time you don’t have to sell bonds that have gotten hurt as much as you can sell some bonds that haven’t been hurt, or haven’t been hurt as much. It’s the flexibility of being able to manage those investments, which is one of the reasons why a separately managed account is a slam dunk over a mutual fund.

Trevor Chambers:

So that leads perfectly into this, on a macro term. What’s the impacts of the Blackrocks and the Vanguards and what’s the good and that’s the bad.

John Mousseau:

Hey listen, those guys they do a great job and they-

Trevor Chambers:

What’s the difference in you and them also?

John Mousseau:

Sure, well we’re a separate account manager and they are basically … Well Blackrocks does separately manage accounts now too. They are so big that I don’t think that they can get the diversification in their portfolio. I’m not sure they can find the value all the time because of their size, unless they’re buying. So if you think about a large $100 million plus deal, they’re probably going to care about that in the municipal bond space, or 200 whatever, we’ll probably care about some bonds there too, especially the better known names. But when you have a very good local sewer authority, essential service bond, but there might be down to $25 million range so you’re getting a water bond from Weber county Utah, is 20 million. Are they going to care about that? No, because it is a fly on the elephant’s rear end in terms of their total amount of investments. They’re not going to get involved in an investment that’s smaller, rarely, we’re covered by a number of dealers, smaller regional dealers. We care about those bonds, especially of the high quality range.

John Mousseau:

So what you end up doing is being able to get some value, and at the same time the ability to interact with some of those smaller regional dealer helps you if you ever want to sell bonds as well. So I think it allows a firm like us to be a little more nimble, and we’re still that way even though we’ve grown. Is that the same story when we’re six billion? I don’t know, we’ll find out. Hopefully we’ll find out.

Trevor Chambers:

Yeah, I think you’re well on your way. Biggest difference between munis and corporates.

John Mousseau:

Number of bonds easily. I mean if you think about munis and corporates, there’s a fixed number of corporate CUSIPs, because most corporate CUSIPs are a bullet.

Trevor Chambers:

What’s a CUSIP?

John Mousseau:

Oh CUSIP, it actually stands for the committee on uniform securities information … I can’t remember what the P was.

Trevor Chambers:

I got you.

John Mousseau:

But anyway, it’s a unique number Trevor that identifies the bond. My point here is that there’s a few thousand corporate names out there. So it’s a kind of fixed universe. The number of municipal CUSIPs is about 10 times that, hundreds of thousands. The reason is that the way that most municipal finances always work is they come with what they call, they bring that $25 million [inaudible 00:29:33] bond comes to market, they probably have maturity is running out through 10 years, and then what they call a couple of term bonds with longer term maturities. So for one corporate issuer of $25 million they would have one CUSIP and the municipal issuer probably would have 12 CUSIPs. Multiply that by the number of issuers there are and that is why you have the vast number of different munis that are out there.

The other difference is that in the day to day management of them, a lot of the corporate bond market, still done with the dealers, a lot of it is done electronically, and it’s up there you buy yourself … You get periods where it gets very disgorged like it was last month. Those are rare. But with munis, which also got disgorged. With munis though so much of it still depending upon dealers owning bonds, the bright side is we have a much bigger player in the muni market than it used to be, simply because there’s less dealers around than there were 30 years ago, 25 years ago. 25 years ago you could take three 11 and a half, eight and a half by 11 pages single space both sides, and that wouldn’t even cover all the dealers that wanted to cover you if you were a mutual fund company or company account manager, and they wanted to buy and sell those funds.

Now that list is probably down to a page and a half double space or less. That’s because a lot of firms have been bought up, but the biggest driver of less dealers has been the fact that spreads have come down as yields have come down over the years, and as spreads have come down, it is harder for corporations to basically commit capital to the market, so they’ve drawn back a little bit. So what that means is someone…., which would include Vanguard and Blackrocks, but would include us as well. We will make offerings out there.

If you go to a regional dealer and say hey I’ve got a million little rocks… bonds, I’d like to you to offer and I’ll pay you extra salmon, you know they’re happy to do that. They would rather offer your bonds and get paid, assuming it’s a reasonable price, than try to buy your bonds and have to commit their capital to owning your bonds to resell them.

Trevor Chambers:

Right.

John Mousseau:

So that’s the transition that’s happened over the last few years. But you know a lot of times munis, you’ve got to know either who owns the bonds, or who has the offering of somebody else who owns the bonds.

Trevor Chambers:

Yeah, just like anything it’s in the nuances, I love it. So you talked about the bond market being disgorged, let’s talk about the history of when that happens, in particular munis. What happened in the past few days here with … Excuse me what happened in the last 30 days, 45 days to that market? And can you kind of put it within the framework? The history of the bond market in the last 30 and 40 years?

John Mousseau:

In the sense of what?

Trevor Chambers:

So what happened to the bond market in the last three days, and then has this happened before and what’s been the ramifications of it?

John Mousseau:

You’ve had blowups in the bond markets, particularly the muni markets, and they happen every three or four years. Sometimes a little more, sometimes less. Like you had a bunch of them in just the 12 years going back to the great recession, and it happened after Lehman brothers went under, and what happened? Everybody to own treasuries, nobody wanted to own anything else including equities, commodities, real estate, corporate bonds, high yield mortgages. That’s very similar to what you went through in March. So treasuries spiking down in yield, everything else spiking up in yield. That was driven of course by the fact that the credit war [inaudible 00:34:11] was just … People were unsure. But the effect was the same. You had a sharp rise in yields, and you had yields climbing at an increasing rate. There was a moonshot in March as well, you went from 2% to 4% in seven days.

Trevor Chambers:

Yeah.

John Mousseau:

You had other periods of time similar, so a few years later, at the end of 2010, two years later you had a sell off in municipals, not in any other asset class because a bank analyst named Meredith Whitney was on 60 minutes say how there’s going to be hundreds of billion of dollars of municipals to fall to then next year, and the bond market sold off, lasted for about three months then it repaired itself. The bond markets tend to repair themselves at a slower rate than which they sell off. That’s the function of liquidity. The other selloffs you saw were in 2013 with the taper tantrum, that affected treasuries, and munis and corporates, because Ben Bernanke said they may stop their quantitative easing sooner than later, and market misinterpreted that, it was the dumbest sell off in bonds of all time, because there was no inflation, so it was a great opportunity to extend … These are all great opportunities to extend durations and maturities. The next one was three years later after president Trump gets elected and everyone is saying, “Oh my God we’re going to have a tax cut, we’re going to get all this spending, we’re going to all this inflation, we’re going to get-

Trevor Chambers:

Right

John Mousseau:

You got a tax [inaudible 00:35:42] year. There was another selloff, sharp selloff, again the right opportunity to buy bonds. You had a little bit a selloff in 18′ because the market was…. the fed tightening rates and cruise control. That ended in December of 18′ when [inaudible 00:36:01] said, they were not on cruise control and were going to be data dependent. That turned the bond market around and you had a pretty good bond market for the rest of 2019, and even the first two months of 2020 were even better. I mean you had long municipal yields down to the one handles. That changed on March 9th when treasuries started to spike down in price and down in yield because of the Saudi selling oil, and of course led over to a lot of dealer illiquidity. They withdrew their bids, prices went down, bond fund selling started, stock market started to come off, and the mess we saw in March was all liquidity related. So that was really the last month and a half in the bond market was all liquidity driven.

Trevor Chambers:

Not quality.

John Mousseau:

Not quality no.

Trevor Chambers:

Yeah yeah, not too much…. for sure. Yeah, so deficits as a state level, what’s that then … if that happens, and what’s the impact, and do municipalities stop paying? Have they ever stopped paying in our history?

John Mousseau:

Sure, if you go back to the great recessions in the 1930s, you probably had about 1700 municipal entities in the country stop paying debts. Doesn’t mean they declared bankruptcy in a formal method because to actually get a municipal bankruptcy through a chapter nine filing is actually pretty high bar, it’s hard to do. I mean think about a general obligation bond. You … Because you’re full face in credit, I mean in theory you’re supposed to be able to sell the buildings, do whatever you can to pay off the debt. In graphical terms what happens is people stop paying their debt and figure out a way to start paying them again. So if you looked in the 30s, almost all but a handful of municipal entities repaid their debt in, things got better. A lot of that is the monopolistic power that municipalities have on services and taxation powers. So if you had a meteor hit the Saint Lewis water authority today, would they stop generating debt service sure, because you don’t have any physical plant.

What would happen? They would rebuild the physical plant and they would start generating debt service again and eventually they’d pay off their bonds. If you look at the difference in default rates on municipal versus corporate securities, the default rate on municipal securities in infinitesimally small even within the same rating categories, if you age it out over 10 years. So our point is that municipal securities are always a much better credit play. That’s one reason we like tactical municipal bonds in our pension funds and foundation accounts and non profits, because of the superior credit quality and really the same amount of spread that corporates give you, sometimes more. So you know the history of municipal credit quality is very good. Listen, it’s not to say there’s not some black marks on it. Look at Puerto Rico, look at Detroit. Now Detroit ended up settling for higher cents on the dollar than were bonds were creating when they stopped paying. Puerto Rico the same way and they’re solving things over time. They point of it is, it is not like a corporate entity which shuts it’s door and doesn’t make any more payments, and that’s the difference. You know the corporate entity doesn’t have the taxing power that a municipality has.

I mean you look at the state of New Jersey. The state of New Jersey is in tough shape, you’ve got bad pensions, they’re taking some good steps. They’ve done things like, now some of the lottery revenue goes right to the pension funds, so incrementally they’ve done the right thing. Are they hurt by this corona virus? Absolutely. Are you going to see different increases in taxes? Absolutely.

Do we think New Jersey defaults? No. Do they have to rearrange a few things? Yes. I mean you’re going to see changes in all municipal services I think as you go forward and the kind of change you’re going to see, is you’re going to see increase in rates because lots of municipal services are somewhat subsidized and I think that we might go to more of a market rate based system. I think and some of these pension funds what you will see is movement of some municipal assets directly into pension funds so think about city water authority being moved to a pension fund. Think about a [inaudible 00:40:49] authority being moved to a state pension fund where they own the asset. That’s a different approach than privatizing something, because a privatization is a one time band aid, and it doesn’t necessarily fix anything. I mean we saw that in Chicago , they sold the parking authority for billions and then what happened? Well they took that, patched it into the pension funds, and other stuff in the city. The new owner of the parking authority doubled the parking, so everybody is complaining. But the real question is that why didn’t Chicago parking authority double the parking fees, and up the revenue stream, which they could have done and still held on to the asset.

So privatization is not a panacea for things and I think people have seen that and the political reality is that it’s hard to sell the idea that you’re selling off public assets that your kids would enjoy down the road.

Trevor Chambers:

Yeah for sure, but interesting, that’s interesting insight. All right, let’s talk interest rates. I mean we’ve got negative interest rates in America maybe I don’t know, certainly is that trending back, and when are we going to come off the floor on these rates?

John Mousseau:

You know if you look at interest rates Trevor and you go back to 1981, the peak in the 10 year treasury bond was a 16%, Paul Volcker. Well that was Paul Volcker coming in 79′ and raising short term interest rates, and long term interest rates followed. Back then the spread over inflation was 3, 4%. So I remember inflation was about 12 when he came in, he started getting not only inflation down, but inflationary expectations down. So it was the best bond buying opportunity anyone’s ever had ever in history. You’ve had 39 years now of cycles of interest rates where each peak in the cycle has been lower than the last peak and each trough in interest rates has been lower than the last trough, and we get asked this question all the time. When are you going to start another secular rise in interest rates. The answer is you don’t know. You don’t know till you go through a full interest rate cycle. So the last low in interest rates prior to this mess was back in 2016 in June, you had Brexit, and you hit a 130 on the 10 year bonds, 135. People said, “oh my God”.

Then what happened? Rates ros eat the end of the year because Trump got elected, blah blah blah. Then it kind of went down, they hit a 145 this summer when people were concerned about growth in Europe, et cetera, and our rates were dropping. But then it kind of went back up to 2%. Then in this mess that we’ve just been through, you blew threw everything, so I think the low in the 10 year bond was about a … Hell what was it? Close to 0.35, I have to go back and look at the low.

Trevor Chambers:

Yeah it was not.

John Mousseau:

It was around … It didn’t go negative, it did not go negative.

Trevor Chambers:

Not in the US.

John Mousseau:

You know, and it’s only about six tenths of our percent now. The point of it is that do we know whether that’s the all time low? No, you don’t know, and you won’t know until you go through a full interest rate cycle. Now you’re in a position where interest rates are significant below the rate inflation. Do we think inflation will roll over and play dead for a while? Most certainly.

Will there be some inflation down the road? You have to think so because you’re having unprecedented amount of spending. We know the monetary stimulus doesn’t necessarily mean inflation.

Trevor Chambers:

What’s your history on that?

John Mousseau:

Well the history is you go back to the … Three different rounds of fed quantitative easing since 2008.

Trevor Chambers:

All right.

John Mousseau:

All right what did they do? They upped their balance sheet, they bought treasuries, agencies, and mortgages, and they did it in different styles. The last one, which was during the taper tantrum, they were actually buying treasuries, agencies and mortgages. The other two had a time period on it where they were ending. The third one didn’t have a time period, they said they’d end it when they felt the country was growing significantly they could end it, which is why when Ben Bernanke was asked he gave an off the cuff answer which caused rates to skyrocket because people were afraid. When they actually stopped quantitative easing rates actually came down not up. The point of it all was it didn’t create inflation because it didn’t create any more velocity in money, and it’s simple. If I’m buying $100 million of treasuries on the fed and I buy it from the bank of Trevor, I write a cheque to the bank of Trevor for 100 million, I buy the 100 million in treasuries, treasury prices go up a smidge, yields come down a smidge, at the end of the day, that 100 million in the bank of Trevor goes back on the fed, it’s earning a quarter of a percent or whatever the target set funds rate is.

Trevor Chambers:

Right.

John Mousseau:

Or something akin to that. Was is it not doing? It is not going out and being lent out. So if it’s not being lent out, then you are not picking up anything on the velocity of money. That’s why we never had any real inflation. I mean you know, it cruised around between two and one and change in that neighborhood. Now you still have a lot of quantitative easing, but now you have other things thrown into the mix. You have these programs that are the PPP programs, which are essentially forgivable loans. You have government checks going out, you have fiscal spending that you have never seen before in this country, and you don’t know what the effects of it are. Most times government spends lots of money, it shows up in some asset class somewhere or something, and you start to see inflation. Where that will be I don’t know. It won’t happen right away because of the fact that so many people right now are so unemployed, so it’s going to take a while to kickstart things back, but if you don’t get any inflation out of this we’ll never have any inflation in our lifetime. That I feel safe to say. If you don’t get any inflation out of this you never will.

Trevor Chambers:

Never say never but I will say that in our lifetime yeah that’s probably right. All right so adding into that macro trend thought of interest rates and inflation and impacts of the millennials, because I think this is being lost in the mix. What’s going on with millennials, where are they at in their track in life and how do you think this is going to impact things?

John Mousseau:

I think millennials are going to be the one source that people aren’t counting on to provide some lifting here. And what you do is you go back and look right at things like, let’s go back to the 1970s. What was happening in the 70s? Rates were rising, inflation was rising. What were the demographics of that? The demographics of that were the baby boomers going through the market. I mean the person who really taught me this well is Bob Dow who ran Lorde avenue. He was very dig into this, and he was right. If you think about the economy as a garden hose. You have the baby boomers going through it and it’s like the squirrel trying to crawl through a garden hose, and the bulge is going through at different time periods because the baby boomers are spread out from 46′ to basically 1960, or 61′. But as they came through it, and particularly as you got into the seventies, and the biggest bulge was going through, what were they all doing at lunch? Well they were going to college. Then they were getting out of college and they were buying a car. Then they were getting married, going on a honeymoon. Then they were buying a house.

They were maybe going on a vacation, they were maybe going to grad school. Everything I just described is a substitute to the word borrowing money, and that bulge especially when you throw in some of the inflation because of the oil wars or the middle east and those issues, that just inflamed inflation, but it was pushing prices up. You’ve spent the last 40 years with the baby boomers turning the corner, finishing grad school, finishing the houses, maybe buying second homes, but eventually saving money, educating their kids, saving for retiring, now retiring and spending down stuff. None of that I just described is particularly borrowing money. It’s more like saving money and I mean look at the savings rate right now. The savings rate in this country as we sit here is skyrocketing yeah. Now that won’t as true when you go back to work, and here’s where I’m going with this. It won’t be as true when you go back to work but what will happen will be, most people will want to hold more cash or more funds than they did going into this just because of the nature of how severe the shock has been. So your normal reaction is to hold more funds.

So the savings rate will increase, the consumption rate will go back but it won’t be back at where it was. That’s pretty good for a firm like ours that manages money, that’s a pretty good outlook. But where I’m going with this is that, the millennials, which are bigger than the baby boomers, the millennials have just started to turn, the bulge of millennials. If you drew a bell curve the bulge of the millennials in the middle has just started to turn 30, which are the peak spending years, and if you think about it, it’s even a bigger bulge because the further front of the bulge got out of college in 07′, 08′, 09′ when things stunk. So people that took jobs, everything from washing windows to working in restaurants to doing whatever, and not in jobs that they properly trained for in college, because the jobs weren’t there. The problem was is that a couple of years later when the jobs came back, the jobs were going to newly minted college graduates, not the kids who got out two or three years earlier. It was a terrible bias. I saw kids who couldn’t get jobs and the reason was is that they came out of college at the wrong time. This sounds silly.

The only thing that cures that of course is an economy that needs workers and that’s what we got. So they were all going back to work and stuff. So all of those guys who couldn’t get jobs in 08′ and 09′ now had jobs but their peak years were delayed a little bit in terms of starting to spend. I mean I have daughters that all live in New York city. I mean they can’t wait to get the hell out of this thing with the virus. At some point will they get married? Probably. Will they want to have kids? I hope so. If they do will they want to stay in the city and pay private school education? Probably not. What will they do? They will move to the suburbs, buy a home, they will probably have kids, they will become their parents. That’s the one thing that happens Trevor, is that people become their parents.

Trevor Chambers:

Yeah.

John Mousseau:

It’s funny you talk about that…., don’t become your parents. Bullshit, everybody becomes their parents.

Trevor Chambers:

Yes, and so that works out. And by the way thank God.

John Mousseau:

Exactly, and that’s what the next generation is all about. It’s different but listen, different music, different this. Some of the traits are the same. So I think you’re going to see spending, now this all gets delayed because of the corona virus, but I do think that millennials will start to change that. So I would think that if you’re not at the bottom of what’s going to start to be a longer secular rise in interest rates, I’d be surprised because I kind of think you probably have seen it now and look, if you told me the 10 year bond in a another couple of years would be 2%, who would bat an eyelash? Christ it was almost 2% at the end of the year, of the end of 19′. So going back to 2% wouldn’t be surprising. What you really want to see is when do you get interest rates back at the level or above inflation to earn a real return on a government security. That might be a while. But I have no doubt that it will eventually get it back.

Trevor Chambers:

Yeah, what’s comes around goes around.

John Mousseau:

Correctomundo.

Trevor Chambers:

All right I’m going to end it on this because I’ve taken up almost an hour of your time.

John Mousseau:

It’s okay, it’s been wonderful.

Trevor Chambers:

Ready? Okay maybe two questions but, what are you most optimistic about. There’s so much negativity. I know we just talked about the millennials, I think that’s optimistic but what …

John Mousseau:

I’m optimistic Trevor because things revert to the mean. You always see some reversion to the mean. If you think about it in markets, stock markets have had 100 years of different calamities that have happened, and with the exception of the 1929 market crash, I mean pick everything. Kennedy assassination, stock market crash of 87′, Pearl harbor. I mean you name it. In any of those cases, a year and a half later, the market was higher than it was when the calamity happened, and the point of it is I think this will be true as well, these markets will rebound, people will come back, it will be a new normal. You might be going to a panther’s game and having your temperature checked when you go in. There will be different things out there we’re not thinking about.

The world going back to work is going to be different than the going back to play, but I have no doubt that we will rebound, because remember the economy was in very good shape when this thing hit, and that is the biggest difference, that you were at a 3 and a half percent employment rate and you had had a pickup in labor participation, which meant that people that were out of work had gone back to try to find work. Because remember, the normal unemployment rate is are you working yes or no, and if you’re not working are you looking for work. If you’re not looking for work you don’t count in the numerator denominator right. Those people were going back to work.

It took a long time. It took a hell of a long time after the recession of 08′. I don’t think the rebound of getting back to work, as severe as it is, I think the snapback is going to be better than people think because you were in a good shape beforehand. Does everything come back at once? No. Are you going to lose some mom and pap stores, absolutely. One of the key things about people getting back to work is that fact that every time you do another two weeks where you’re not back to work you’ve passed the tipping point on some businesses. But I’m optimistic by nature, and this country has survived a lot, and this is right up there with a lot of the calamities. But if we’re back to work in another month or less, you’re going to look back on this and say, “this was a two month absolutely nightmare but you know what? We hit the brick wall at 85 miles an hour and we’re walking away from it”.

Trevor Chambers:

And you know what? The US is going to lead everybody out and that’s the way it always is.

John Mousseau:

Yeah, well with some changes. Do you have a different model for inputs? Do you keep orders … Do you produce more here in America now? Maybe yes. Maybe you’re going to change some practices here. Are things going to look different? Sure. I mean how about going to college? I mean my kids are out of college but if you have kids in college their experience when they go back, there may be more stuff taught online. You may not need as many professors as you have. There’s going to be a new normal, and they’ll be some fallout from the new normal, but there’ll also be some jobs … How about testing jobs? Those jobs didn’t exist before. You need 25 thousand people to go test other people.

Trevor Chambers:

It’s the impacts, you know what will be great? We’ll do this again some time down the road, six months, a year, and we’ll… from there and we’ll see how this shapes out-

John Mousseau:

Happy to do it.

Trevor Chambers:

-yeah, I’m with you. Well listen I want to thank you-

John Mousseau:

If you get down this way make sure you give a holler and I’ll do the same when I get up to your neck of the woods.

Trevor Chambers:

Yeah there you go absolutely. Well Moose it’s wonderful and I appreciate your time-

John Mousseau:

Thank you Trevor. Okay.

Trevor Chambers:

-very insightful, and I look forward to sharing this with everybody.

John Mousseau:

Okay.

Trevor Chambers:

Stay safe and we’ll talk to you soon.

John Mousseau:

Okay thanks a lot.

Trevor Chambers:

Thanks.

John Mousseau:

Bye bye.