John Mousseau on Risk in the Fixed Income Market (Podcast)

Bloomberg Masters in Business Podcast – April 11, 2020

Bloomberg Opinion columnist Barry Ritholtz speaks with John R. Mousseau, who is president, chief executive officer and director of fixed income at Cumberland Advisors. Mousseau is also co-author of the book “Adventures in Muniland: A Guide to Municipal Bond Investing in the Post-Crisis Era.”

Running time 40:28

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RITHOLTZ: This week on the podcast I have a special guest. His name is John Mousseau, and he is President, CEO and Head of Fixed Income Trading at Cumberland Advisors, a firm that runs about $3.5 billion in mostly fixed income products. They do equity as well. I know Moose for a long time. He is David Kotok’s right-hand man, and I have been fishing with Moose up in Maine at the Shadow Federal Reserve event that takes place every summer for, gee, better part of a decade.

There aren’t many people who understands the internal plumbing and the mechanicals of fixed income the way Moose does. He really is incredibly knowledgeable and insightful. And I think if you are anything interested in fixed income, bonds, munis and how they actually are — are traded on Wall Street, you’re going to find this to be a fascinating conversation.

So with no further ado, my Masters in Business interview with John Mousseau.

VOICE-OVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

RITHOLTZ: My special guest this week is John Mousseau. He is the CEO and Director of Fixed Income at Cumberland Advisors, a bond shop that manages over $3.5 billion in assets. He is a Chartered Financial Analyst and has his masters in Economics from Brown.

John Mousseau, welcome to a shelter in place version of Masters in Business. I know John for a long time. We fish up in Maine every year in Camp Kotok. We’ll — we’ll come back to that a little later. Let’s talk a little bit about your career. Tell us about your first job on Wall Street.

JOHN MOUSSEAU, CEO AND DIRECTOR OF FIXED INCOME, CUMBERLAND ADVISORS: Hi, Barry. Thanks. I walked in off the streets of New York in the fall of 1980 and answered an ad from the New York Times for the Value Line Investment Survey. They gave me a quiz and hired me as an Assistant Securities Analyst.

RITHOLTZ: I remember getting the Value Line papers that you would put into a giant three-ring binder on updates on different companies and different sectors. That — that was a couple of years ago.

MOUSSEAU: You know, it ran that way for a long time before they got to the Internet age. And what you did as a securities analyst there is you wrote script to fit the model for the stocks. They had a relative value model that ranks stocks. But like I said, it was a great place to learn. Still have a lot of friends from there. I met Jeff Vinik there who was my deskmate early on, And, you know, the fact that the product is still out there today says a lot.

RITHOLTZ: And Vinik ended up at a little shop called Fidelity, if memory serves.

MOUSSEAU: It’s — yes, a little shop called Fidelity. And I can remember him saying to me we were there out over a couple of beers. He goes, “Moose (ph), if I ever hit it really big, I’m going to buy a hockey team,” and sure enough he did.


RITHOLTZ: For sure. So — so where did you go from Value Line? What was your next stop?

MOUSSEAU: From there I spent the next 12 years out of combined firms of E.F. Hutton and then Shearson after they took over Hutton, and did most of my work there in the beginning-ish for the Government Bond Department and the Municipal Department Bond Department and eventually ended up doing portfolio analysis at Hutton and ended up basically running our Portfolio Analysis Group right to 1993 where we analyzed municipal bond portfolios and suggested changes.

And in 1993 I went to Lord Abbett and became the Director of the Municipal Bond Management. That was a great spot; learned a lot from Bob Dow who ran the firm and ran the fixed income area there. And I was there until year 2000, and that’s the year I joined Cumberland Advisors.

RITHOLTZ: So you end up at Cumberland Advisors in the year 2000. Why did you gravitate more towards fixed income over equities?

MOUSSEAU: I really always enjoyed fixed income because of the way it tied together math and the idea that all bond prices, more or less, moved in the same direction, but none of them moved in the same velocity depending on maturities, et cetera. So it always had a lot more appeal to me.

And it’s — it’s funny because when I started at Value Line and you’re actually analyzing earnings of companies, I was excellent at predicting earnings, I still couldn’t figure out why stocks might hit their earnings, but go down or go up, and — and bonds always tied together much more rationally for me.

RITHOLTZ: So that leads to a question, I’ve heard over the years bonds called the “smart money,” why is that? Is it — is it that rationality that leads people to thinking bonds are — are a little less random or emotional than stocks are?

MOUSSEAU: I think the idea is with — particularly with municipal bonds, you know – it’s not my line, but I thought it was a great line – they don’t make you rich, but they keep you rich. And the idea of bond investing overtime and the compounding of interest, it’s — it’s terrific. And, you know, you go back and look back to the early 1980’s when interest rates are high. If you had bought something like zero coupon strips at 14 percent interest for 30 years, it’d be very hard to replicate that anywhere else.

RITHOLTZ: When I think of bonds, I think of three factors that go into the specific value of a bond. It’s the credit quality, the — the coupon or yield and the duration. Is it that simple or are bonds just a mathematical formula?

MOUSSEAU: No, there’s a lot more that goes into it. It’s not just credit quality, it’s relative credit quality. It’s not just duration, it’s a relative duration to the market. And — and it’s a structure of bonds, too, call protection or lack of call protection, a convexity comes in. I mean, that’s — that’s really — a lot of those judgments are what you would call total return bond management. And that’s where David Kotok is still the Chairman of Cumberland. And I agreed early on it was, you know, we — we — we saw the world the same in the world of bonds.

RITHOLTZ: Explain convexity of bonds positions to me.

MOUSSEAU: Sure. Convexity is — is really the — they call it the second derivative. So if you look at a bond and you can judge its duration or basically how much the price changes for a — a given change in yield, the convexity will tell you how fast that duration is changing. It’s like the — it’s like the equivalent of acceleration to speed.

RITHOLTZ: Huh, quite interesting. And — and for most of my career I’ve heard bonds described as the adult supervision in the room. The bond vigilantes were going to keep the Congress in check and make sure they didn’t deficit, spend too much. They were going to keep their eyes on inflation and fight that. Whatever happened to the so-called bond vigilantes?

MOUSSEAU: Well, that was a while ago. And — and, you know, if you go back one of bill Clinton’s favorite lines was – and I’m taking out the swear words, but that do you mean I — I really have to bow down to all the — the bond traders. And the answer back then from Alan Greenspan is yes, you do.

And they figured out a way back then to actually lower the government deficit and actually get it to a surplus. And along the way, interest rates came down which was really not a surprise. Now you’ve gone the other way and the deficit really haven’t mattered and you’re at all-time lows in yields. So to answer your question, a lot of that has been thrown out the door.

RITHOLTZ: His — his political adviser, James Carville, I believe, is the one who said, “When he comes back, he wants to be reincarnated as the bond market because everybody is terrified of it.”

MOUSSEAU: Right, maybe not this bond market, but yes.

RITHOLTZ: So, Moose (ph), let’s talk a little bit about how the bond market has changed over the past 30 years. What are some of the big differences between 2020 and 1980?

MOUSSEAU: I think there’s some differences and there’s some similarities, Barry. I think the biggest difference, of course, is electronic trading much more prevalent on the taxable side. On the municipal side, you actually just need to talk to dealers and underwriters, and that’s because of the diffused nature of the municipal bond market.

The municipal bond market is still much more of a people business. You have to kind of know where the bonds are, where the levels are, who’s offering what bonds.

On the corporate side, it is much more electronic-oriented, block trading-oriented. And — and that’s been — that’s been the biggest change, so a lot less people, clearly a lot less firms and bigger volume electronically.

RITHOLTZ: So — so let’s talk about what I think is the most fascinating difference between stocks and bonds. You know, the Wilshire 5000, the joke is it’s now about 3,000 stocks. Adding some of the over-the-counter and really small caps, maybe you have 4,000 stocks.

When we look at the world of bonds, there’s hundreds of thousands of individual bonds. It’s almost as if putting together a bond portfolio is bespoke. How infrequently do these bonds trade and how unique are each of these issues that are out there?

MOUSSEAU: Again, it — it differs. When you’re in the world of corporates, and mortgages and treasuries, it’s a fairly defined universe of — of bonds. And putting your portfolios together is probably a little easier than on the tax-free side where you probably have a million different CUSIPs out there, and that’s because of the nature of many bond issues that come to market where they have serial bonds and term bonds, and so just the amount of issues is almost overwhelming. So in the tax-free side, only a fraction of the available bonds that are out there actually trade every day.

RITHOLTZ: And explain what CUSIPs are for the audience who may not be …


RITHOLTZ: … on a bond desk.

MOUSSEAU: It’s a — it’s a uniform identification system so each bond has its own unique identifier, which is crucial to identify in the bond itself as well as processing the trade later on.

RITHOLTZ: And — and let’s talk a little bit about processing those trades. You know, early in my career and certainly early in your career, every brokerage firm had its own bond trading desk. Every bank, every insurer, trading was done constantly all over the place. Today it seems — and — and I rely on my friend, David Nadig who’s been pushing this argument for a long time.

Nadig says, “All that has been replaced with BlackRock and Vanguard as — as the new street bond desks.” Is he exaggerating or how true is that?

MOUSSEAU: Yeah, certainly, behemoth is out there. But look, you know, you can — you can look at that and say, “Does that work to your advantage or not?” As — as a smaller investor and advisor relative to those — those guys, a BlackRock is not going to care about a $25 million water bond from Eastern Ohio some school district. We care about $25 million water bond from Eastern Ohio because it’s meaningful to us. So to the extent that they’ve gotten too big and a lot of issues aren’t relevant to them, we can take advantage of that. So I would disagree with Dave a little bit.

RITHOLTZ: And at Cumberland, are you guys putting together bespoke bond portfolios? Are you buying bond mutual funds or bond ETFs? How do you deliver a fixed income mix to clients?

MOUSSEAU: No, we — we will use individual bonds as we put portfolios together. On our own — our thoughts have always been that the final product looks much better when you have individual bonds as opposed to owning mutual funds. And — and part of that reason is the ability to input certain yield levels and duration levels in the portfolios.

You know, the other part, too, just talking about mutual funds, in general, the difference between owning a portfolio of individual bonds and owning a mutual fund of bonds is the fact that if you want a mutual fund, you’re subservient to one price and one price only, and that’s the price that I find at the end of the day or if it’s an ETF, the price of that ETF at the end of the day.

If you own individual bonds, they can be spread out if you have some longer-term bonds and some shorter-term bonds. So if there’s a need for cash and maybe it’s not a particularly good bond market, you can find assets in the portfolio that have not been hurt price-wise and — and use them to your advantage. So I think individual bonds offers a much greater degree of flexibility.

RITHOLTZ: We’ve had some clients say to us, “I don’t want to own bond mutual funds because I’m concerned if during a bond selloff I’m subject to the whims of what my fellow mutual fund investors are doing, and that could drive the price below either fair value or net asset value.” How realistic of the threat is that to people who are bond mutual fund investors as opposed to buying individual bonds themselves?

MOUSSEAU: I think it’s a very good point because you don’t have control over that. And the route we just went through is a perfect example of that. You walk in the door March 9th and treasury prices were skyrocketing because of the Saudi selling of oil. That meant that a lot of the corporate and municipal bond dealers couldn’t hedge anything anymore with prices and treasuries doing what they’re doing. So what do they do? They’d back off their prices.

So then evaluation services don’t have many prices to — to put on that night, so they take prices down. So the poor guy whose only holdings is XYZ bond fund looks at his NAV the next day’s net asset value and it’s gone down. He says, “Maybe I should sell some,” so he sells some and the next day the mutual funds have to meet these redemptions by selling bonds into a market that’s already eroding.

So prices go down further. The next day, same investor looks, “Oh, my NAV went further, I better sell some more.” So now you’ve gotten yourself into a negative feedback loop of selling of mutual funds. And we saw that on a right absolutely gargantuan level in the middle of March.

RITHOLTZ: And had they wrote it out for a couple of weeks, the worst of it would have passed and we would have seen some sort of recovery in the – in the mutual fund and bond market. Is that a fair statement?

MOUSSEAU: That is a more than fair statement. It was not only a rebound, it was a rebound of historic proportions. So the back-off was also historic. It went essentially from two percent to four percent in about seven business days — six business days. And then you rebounded three-quarters of that in about three business days. I’ve been managing money for 36 years, I’ve never seen anything like it.

RITHOLTZ: So we have a mutual friend from Fidelity, Eric Golden who runs a quantitatively-driven fixed income portfolio. He said he saw a prices do things that the model say it just can’t happen. Your — your experience sounds like it was very similar.

MOUSSEAU: Very similar. And — and I can tell you just from — I mean, having good trades on, we saw bond prices down over 25 points and certainly some discounted bonds and lower coupons, so think about a bond that came in December at 100 cents on the dollar that was trading at $0.75 on the dollar in mid-March, and less than a week later it was being priced at par.

RITHOLTZ: So if you were nimble, there was …

MOUSSEAU: That was — that is (inaudible) …

RITHOLTZ: … there was upside to be had?

MOUSSEAU: Oh, sure, absolutely. You know, in a total return manager is going to use that type of a distress in the market to go and change the mix of his portfolios. And in our view, that sell-off that you saw in March was not credit-related, it was all liquidity related because of what was going on in the stock market. People wanted cash. It didn’t matter whether it was in a bond mutual fund or a — a — a REIT or — or anything else or selling gold and by the end of the week, they are also selling treasury bonds, so anything to get cash.

RITHOLTZ: The old line is in an emergency, you sell what you can, not what you want.

MOUSSEAU: And that’s true about the meltdown in mutual funds. You know, a mutual fund manager won’t sell what he’d like to sell, which might be a — I’m making it up — a hospital bond that you lean the wrong way and buying, it doesn’t have the greatest credit in the world. It’s exactly what you said, Barry, you sell what you can sell, which is usually a high-grade bond.

RITHOLTZ: So earlier we were discussing the dislocation in corporates and treasuries, let’s talk a little bit about the muni market from everything I heard and saw during the beginning volatility early in March. It looked like the muni bond market had just gone berserk, maybe even the most severe dislocation of any of the fixed income trading we’ve seen. Tell us what happened. And so far, have the markets recovered yet?

MOUSSEAU: Sure, Barry, I mean, it was certainly a — March was certainly historic volatility and historic loss, and almost historic rebounding. You know, I — I still I harken back to March 9th when treasury prices were spiking upward and yields are dropping, and that rendered most firms out there on Wall Street impotent to actually give you a bid on bonds because they couldn’t hedge anything. So prices were backed off.

And that combined with the stock market and it started to roll over partly because of the price of oil is dropping and there was concern on the economy and the coronavirus picking up. And you suddenly had a perfect storm of dropping equity prices, people looking for cash wherever it could be, and that involved the selling of bond funds and bond ETFs into a market that was overwhelmed. So when you think about bond yields moving up from two percent to four percent, that is a historic rise in a very short period of time, 200 basis points and, essentially, a doubling of yields.

And — and, like I said, most of that was almost all liquidity-related and — and not credit-related. And — and — and yet there are concerns out there about — of course, about municipalities and how they’re going to fare through this. Our viewpoint on that is that most really kind of high-quality general obligation and — and essential service bonds are going to be fine. You know, what you end up doing is you’re looking at the essentiality of the services, the prism of the virus and things look a little different if you’re talking about something like a — a rapid transit bond or an airport bond, et cetera. But that — that was not the cause of the sell-off in the mutual funds.

RITHOLTZ: So this wasn’t a systemic issue, this was just a massive amount of volume that overwhelmed the normal liquidity that exists in the bond market?

MOUSSEAU: That’s exactly right. And you hadn’t seen that before where the meltdown in the bond market was occurring alongside a meltdown in the stock market. The last time you really saw that was in 2008, and that was after Lehman failed. And that sell-off in municipal bond funds was credit-related because nobody knew whether anything was going to pay. In other words, when — when Lehman went under, it was like a 13th strike of a clock and people wondered, “Oh, does that mean my school district is not going to pay off its bonds or that the water authority won’t pay off its bonds?” It was really overdone, but — but that was the nature of that sell-off.


RITHOLTZ: So let’s look at the current circumstances, which seem to be not comparable to anything else that’s come before, including ’08, ’09. Uncle Sam has shown an ability to keep running deficits for as long and as deeply as needs, but states and cities don’t have that luxury. And we know that these states and we know that these cities, especially areas like New York, New Jersey, Washington State, wherever the virus has — has hit pretty hard, we’re starting to see signs that’s happening in Florida, how are these states going to operate if they can’t run a deficit and have hundreds of millions or billions in shortfalls? Are these states potentially at risk for defaulting on whatever general obligation bonds they’ve issued?

MOUSSEAU: It’s a good question, Barry. And what you look at is really two-fold? One, almost all bond issuers have debt service reserve funds. Sometimes that can be a half-year, sometimes a year, it depends on the — depends on the issue.

Will we see credit downgrades? Absolutely, you’re seeing it now. Will you see invasion of debt service reserves? Sure, and you’re going to see thinner debt service coverage across the board. That’s a given.

We don’t think you’re going to see massive defaults, especially if you come out of this within the next month or two. So what it — what it is it’s a — it’s a torpedo to the side of the ship, but the ship is going to continue the sail. And then you start restoring debt service. We think that there is a lot of federal support for certainly some of the bigger agencies out there. Let’s take a very high profile one.

Look at the MTA in New York City, the subways. You can certainly think of, you know, MTA as a — as a poster child for transportation, and transportation is certainly a poster child for infrastructure. And I think that’s one thing that the administration is really keen on. So I — I see certainly a lot of support for that. I see a lot of state of New York support for that, so I — I don’t expect to see a default on that. It doesn’t stop bonds from trading cheaper, we’ve seen that for sure. And that’s — that includes airport bonds as well. You look at the hub airports out there, the federal government is not going to have those airports go into default because they are necessary for the restoration of the economy when we’re back at work in hopefully a month.

RITHOLTZ: We normally think of equity investors as the risk-takers who are more greatly compensated for assuming that risk than the traditional bond investor. But I have to ask given what you just said, what sort of compensation are risk-takers receiving in the fixed income market these days?

MOUSSEAU: Well, you can — you can argue that — look at a lot of deals that have come in the last week or so, the long end of the tax-free bond market, the high-grade and it’s restored itself to roughly about a three percent yield. That doesn’t sound particularly high and like a — and it doesn’t sound like a particularly rewarding yield if you think about the potential for downgrades down the road or a thinning of debt service coverage, et cetera. It does look relatively cheap when you compare it to a long treasury bond of 135, but I would contend the treasuries are probably a little overbought in here and municipals may be a little cheap and they’re going to eventually meet in the middle.

I think the important part is to keep the long-term really economics of municipalities in the forefront when you’re investing. If you went back to the worst period in our history, which is the Great Depression — and we don’t think we’re going back to that — you had about 1,700 municipal entities in this country stopped paying their debt. It didn’t mean they went bankrupt in a legal sense, but they just stopped paying.

And in the end, as the economy turned around, they all — except for a few dustbowl times in Oklahoma — almost all paid off their debt and arrears, and got turned on their debt and continued to pay. And that’s because of the monopolistic powers that municipalities have. If a meteor came tomorrow and hit the Saint Louis Water Authority, would they stop paying their debt? Yeah, most likely. When they rebuilt things and started to get debt service again, would they repay it? Absolutely.

RITHOLTZ: So, John, in all of this we haven’t talked about the mack daddy in the room, the Federal Reserve. What is the role today of the Fed in the fixed income market?

MOUSSEAU: Barry, the role is probably more important than ever, and you only have to look back at the last few weeks to figure it out. You look at the Fed and how did they step in on this crisis? Well, the first thing is that they fixed the short-term bond market. You think about things like revenue anticipation notes, bond anticipation notes, these are the things that money market funds invest in. Some of them are non-rated. Their — their promise is to pay.

The bid dropped out of the market in the middle of this crisis in mid-March. What the Fed did is they establish credit facilities that would buy these bonds from the money market funds, these (RAMs) and (TAMs) at their cost basis, not at the market, and give them cash, so that kept the money market funds in business. And you can’t really get an improvement in equities until you can improve the bond market. So their first stop was to fix the short-term bond market.

Then you saw the legislation come in where the treasury through the Fed as their agent was going to start to buy municipal bonds one out of five years. It have to be investment grade or better not high-yield. They haven’t done it yet. Just the fact that they established it was enough to really improve the bond market a couple of weeks ago as that packages putting together. So the Fed, through either their ability to do credit facilities or their special ability that buy bonds out through six months which they have and they have not exercised, and now the ability of the Treasury to go through the Fed and try to buy bonds out through five years, all of that has helped shore up the market and has been very important.

RITHOLTZ: So the mere announcement that, hey, we have the ability to buy munis if you want to is sufficient to stabilize the bond market.

MOUSSEAU: Absolutely, and — and it not only has stabilized the short-term market, which is also in disarray, but it helped to stabilize the long-term market because within that confine, there is the ability to take that beyond five years. I mean, State Mnuchin can call up Jay Powell and say we want this extended to 15 or 20 or 30 years, and they could do that.

RITHOLTZ: I recall during the ’08, ’09 crisis the big complaint I heard from the Fed haters and the people wringing their hands over the various rescue packages was that the Fed is adding $3 trillion to their balance sheet. This is going to cause all sorts of trouble. Well, here we are a decade later, what is their $5 trillion on the way to $6 trillion? What does that mean for — fill in the blank — the economy, fixed income, inflation for the Fed to potentially have trillions and trillions on their balance sheet?

MOUSSEAU: Well, what did we learn from the ’08, ’09 and actually it’s essentially three rounds of quantitative easing? It never created inflation even though you saw the Fed take their balance sheet up to what was then record levels and they’re buying treasuries, agencies and mortgages. The key to that was the fact, A, they’re trying to keep rates lower, but it didn’t create inflation because if they bought $100 million worth of treasuries and they bought it from the bank of Barry Ritholtz and deposited $100 million, at two o’clock in the afternoon, the bank of Barry Ritholtz put that money back on deposit at the Fed earning a quarter of a percent. What it was not doing was lending the money out, so the velocity of money and the expansion of money, that way, was not happening. The quantitative easing was effectively keeping rates in — in — in a certain range.

What could cause inflation is the $2 trillion plus clearly more money coming on the government spending side. And that’s what you didn’t have. I mean, you had $800 billion in programs back in the ’08, ’09 crisis. That is going to be tripled or quadrupled here.

I would expect you …

RITHOLTZ: And remember that …


RITHOLTZ: … remember that $800 billion was — $300 billion was a temporary tax cut, $300 billion was a temporary extension of unemployment benefits. The pure stimulative fiscal part of it was — was barely $200 billion.

MOUSSEAU: Right. And — and you — you saw some other things like the BABs programs, et cetera. You might see a resurrection of something like that. What I …

RITHOLTZ: That’s being Build American — Build America Bonds, right.

MOUSSEAU: Build America Bonds, which is really to try to get municipalities to borrow in the taxable market because the — at that point treasuries were at three and long tax rebonds were at six, so that is really ineffective borrowing. So this allowed them to get a 35 percent subsidy from the federal government, really lowered their borrowing costs to something under four percent. And they were essentially building new things.

So think about a — an airport building a new runway or a state university building a new dorm where they’re pouring concrete, hiring people, building stuff. That was the stimulative nature of it. Whether we see something like that here, we don’t know. The administration has announced that $2 trillion infrastructure policy, but we haven’t seen any particulars on it yet.

I would — I would think though that if you don’t get inflation down the road from this amount of government spending, then we might never see inflation.

RITHOLTZ: Huh, that’s quite — that’s quite fascinating. So let’s — let’s talk about the opposite of inflation. Let’s talk about deflation and negative rates. When — when you started your career, did you ever imagine a set of circumstances where rates could go negative?

MOUSSEAU: No, and I guess one of the nice things of having a long career is I’ve seen the peak in interest rates and I have seen the low in interest rates like forever. You know, you — you don’t think about negative interest rates when you think about textbooks back in the 1980’s or 70’s or even — even 90’s. But you saw negative interest rates and you saw them in Europe over the last year. So if you — if you get back from this particular crisis and go through last year, you saw negative rates.

Not here, and our interest rates dropped in the U.S. last summer really not because the economy here is floundering, but because our rates are too high relative to what was going on around the world. And all negative rate means is that you’re expecting rates to go more negative, so you want to lock in something. Losing half a percent is better than losing one percent. So you want to lock that in.

I think Europe was coming to the agreement that this was not good for banks. And you saw a lot of noise in some movement, and before all this, you’ll start to see rates rise. So Germany had gone from negative 10-year bond rates to actually positive rates.

In the last — in the last few weeks they have gone from negative, like minus 0.9 to up to -0.3, so I think we’re going to move out of the negative interest rate range over time. And I think the idea is if you can get back to a world we have a — a steeper yield curve than the banks are in shape to make money, and you need a decent banking system and a banking system that’s in financial health and can make money to get the economy moving.

RITHOLTZ: They used to call it a zero bound for a reason, I guess so we can’t use that phrase anymore. So — so it sounds like you’re not looking at rates going negative from here even if we have a — a pretty substantial rescue package.

MOUSSEAU: No, I think what you’ll see is you will actually see rates turned positive. I think you’ll see a — a more positive looking yield curve. And I think if all the kind of government stimulus that you see, that should produce a positive yield curve because you’d think you would start to build that inflationary expectations as you go further out, and that’s reflected in the shape of the yield curve as well.

RITHOLTZ: So that leads to the obvious question, are we ever going to see inflation in our lifetime?

MOUSSEAU: I think so. And, you know, if you look — if you look last year at the kind of the middle part of the year, you had a cover of Business Week and it had a picture of some kind of animal and it said — says “The Death of Inflation,” that was good enough for me to realize an inflation is probably coming back. It — it — it takes a while and it will take a while to build up. And I think you wonder about where — where will it end up, what asset class will it end up.

And we’ve seen some of the Fed’s actions in the past that it ends up and maybe small cap stocks or it ends up in the housing market. Does — this time, does it end up in commodities, which are — are, you know, it’s been severely depressed?

You would think that if you come out of this mess, those kind of traditional things like copper, and timber and things of that nature would start to do well. And so I would start to think you’d see some inflation.

RITHOLTZ: And yet throughout this whole post credit crisis recovery period, we’ve seen a huge uptick in multi-family housing construction. We’ve seen a lot of sectors of the economy over the past 12 years slowly come back online and still no inflation. So what’s going to be the — the spark that lights that fire?

MOUSSEAU: You know, it’s hard to say that because you — I think what’s going to be going on here is a lot of it based on demographics. And what you’re going to see is the millennials who, if you draw a belt curve of the millennials, the biggest part of that curve is just starting to turn 30, and they’re just starting to get into the years where they will start to spend money on family formation and all the things the baby boomers did except maybe a little more delayed. And — and a little more delayed partly because of the financial crisis of 2008, ’09.

So kids who get out of college between say 2008 and 2011 were really behind the eight ball a little bit in terms of getting jobs or getting the quality of jobs that people just a couple of years younger got later on. So even they are now approaching that point of lift-off from a spending standpoint. And if you look at the millennials as a group, they are bigger than the baby boomers, so I think that’s where it’s going to come from.

RITHOLTZ: Quite interesting. So normally if we were in the Bloomberg office I would be asking my 10 favorite questions, but we don’t have the full 90 minutes to do that, so I’m just going to give you a speed round, five …


RITHOLTZ: … questions, quick answers. Let’s plow right through this.

Where are you streaming these days? Give us your favorite Netflix, Amazon Prime, Disney+ shows.

MOUSSEAU: I am back watching all the Ken Burns specials on baseball, World War, prohibition, et cetera. So, you know, you’re never too old to learn and you’re never too old to relearn.

RITHOLTZ: Quite interesting. Who were your early mentors? Who influenced your career?

MOUSSEAU: Really when I look back a named Billy Gaw (ph) at E.F. Hutton who was a Public Finance Banker. And he — he really kind of took the liking to me and got me into the municipal bond area, and then later on Bob Dow Lord Abbett.

RITHOLTZ: Tell us about your favorite books. What are you reading? What do you like to give as gifts?

MOUSSEAU: I’m big into history. You know, one of my favorite books is “Rise and Fall of the Third Reich,” which is a (inaudible) by William Shirer. I — I go back and read “Free to Choose” by Milton Friedman every once in a while. They make sure I’m oriented the right way. And I’m — I’m trying to read the Ulysses Grant biography right now by Ron Chernow.

RITHOLTZ: Quite, quite interesting. A recent college graduate considering a career in fixed income comes to you and ask for some advice, what would you tell them?

MOUSSEAU: I would say find a spot on any firm and do everything they ask from sweeping the floors to, you know, make sure you show up the first one there every day and find a mentor. But I would give that advice to anybody that’s starting out. If you can find a mentor and — and even if it takes a few years, it is well worth it because you have somebody to bounce ideas off of.

RITHOLTZ: And our final question, what do you know about the world of fixed income today you wish you knew 40 years ago when you were first starting out?

MOUSSEAU: I wish I had known the importance of international flows in currencies. You know, as a — as a municipal bond expert, back 40 years ago you didn’t realize the importance of international flows and how they would affect things. So the fact is that the change in the Chinese currency would affect municipal bond have actually would never occur to you. It definitely affects it today. So I — I think that’s the one thing that I’ve learned.

RITHOLTZ: Quite interesting. We have been speaking with John Mousseau. He is President, CEO and Director of Fixed Income Trading at Cumberland Advisors.


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