Making Billions: The Private Equity Podcast for Fund Managers, Startup Founders, and Venture Capital Investors

$40B Fund Manager on Looming Economic Crisis

May 01, 2023 Ryan Miller Episode 58
$40B Fund Manager on Looming Economic Crisis
Making Billions: The Private Equity Podcast for Fund Managers, Startup Founders, and Venture Capital Investors
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Making Billions: The Private Equity Podcast for Fund Managers, Startup Founders, and Venture Capital Investors
$40B Fund Manager on Looming Economic Crisis
May 01, 2023 Episode 58
Ryan Miller

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Do you get the sense lately that there is a lot of risk in the markets?  Do you wish you had someone with a mountain of knowledge to help you see it and know how to manage it? With so much volatility and systemic risks baked into the markets, how do you navigate it to dance around the risks to elevate your investing game? In this week's episode of Making Billions, I bring on my dear friend Kristof Gleich. Kristof is the President and Chief Investment Officer of a $40B investment firm called Harbor Capital.  Join Kristof and me as we discuss the current crises in the market and what you can do to prepare for it now. Managing risks, understanding economics, and allocating your investments properly are all skills we need in our pursuit of Making Billions.

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DISCLAIMER: The information in every podcast episode “episode” is provided for general informational purposes only and may not reflect the current law in your jurisdiction. By listening or viewing our episodes, you understand that no information contained in the episodes should be construed as legal or financial advice from the individual author, hosts, or guests, nor is it intended to be a substitute for legal, financial, or tax counsel on any subject matter. No listener of the episodes should act or refrain from acting on the basis of any information included in, or accessible through, the episodes without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer, finance, tax, or other licensed person in the recipient’s state, country, or other appropriate licensing jurisdiction. No part of the show, its guests, host, content, or otherwise should be considered a solicitation for investment in any way. All views expressed in any way by guests are their own opinions and do not necessarily reflect the opinions of the show or its host(s). The host and/or its guests may own some of the assets discussed in this or other episodes, including compensation for advertisements, sponsorships, and/or endorsements. This show is for entertainment purposes only and should not be used as financial, tax, legal, or any advice whatsoever.

Show Notes Transcript Chapter Markers

Send us a Text Message.

Do you get the sense lately that there is a lot of risk in the markets?  Do you wish you had someone with a mountain of knowledge to help you see it and know how to manage it? With so much volatility and systemic risks baked into the markets, how do you navigate it to dance around the risks to elevate your investing game? In this week's episode of Making Billions, I bring on my dear friend Kristof Gleich. Kristof is the President and Chief Investment Officer of a $40B investment firm called Harbor Capital.  Join Kristof and me as we discuss the current crises in the market and what you can do to prepare for it now. Managing risks, understanding economics, and allocating your investments properly are all skills we need in our pursuit of Making Billions.

WANT TO LEARN HOW THE BEST INVESTORS MAKE MONEY? SIGNUP FOR OUR NEWSLETTER:
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Subscribe on Youtube:
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Connect with Ryan Miller:
Linkedin: https://www.linkedin.com/in/rcmiller1/
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Twitter:

Everyday AI: Your daily guide to grown with Generative AI
Can't keep up with AI? We've got you. Everyday AI helps you keep up and get ahead.

Listen on: Apple Podcasts   Spotify

FranchiseU!
FranchiseU! is for those in, or considering, careers within the world of franchising.

Listen on: Apple Podcasts   Spotify

Support the Show.

DISCLAIMER: The information in every podcast episode “episode” is provided for general informational purposes only and may not reflect the current law in your jurisdiction. By listening or viewing our episodes, you understand that no information contained in the episodes should be construed as legal or financial advice from the individual author, hosts, or guests, nor is it intended to be a substitute for legal, financial, or tax counsel on any subject matter. No listener of the episodes should act or refrain from acting on the basis of any information included in, or accessible through, the episodes without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer, finance, tax, or other licensed person in the recipient’s state, country, or other appropriate licensing jurisdiction. No part of the show, its guests, host, content, or otherwise should be considered a solicitation for investment in any way. All views expressed in any way by guests are their own opinions and do not necessarily reflect the opinions of the show or its host(s). The host and/or its guests may own some of the assets discussed in this or other episodes, including compensation for advertisements, sponsorships, and/or endorsements. This show is for entertainment purposes only and should not be used as financial, tax, legal, or any advice whatsoever.

Ryan Miller  
My name is Ryan Miller and for the past 15 years have helped hundreds of people to raise millions of dollars for their funds and for their startups. If you're serious about raising money, launching your business or taking your life to the next level, this show will give you the answers so that you too can enjoy your pursuit of making billions. Let's get into it. 

Have you gotten the sense lately that there's just a lot of risk in the market? Do you wish you had someone with a mountain of knowledge to just help you see it and know how to manage it? See, with so much volatility and systemic risks baked into the markets now? How do you even navigate this to dance around those risks and elevate your investing game? Well, I got good news for you. In this week's episode of making billions I bring on my dear friend, Kristof Gleich. Kristof is the President and Chief Investment Officer of a $40 billion investment firm called Harbor Capital. Join Kristof and me as we discuss the current crisis ease in the market and what you can do to prepare for it today. managing risks, understanding economics, and allocating investments properly are all skills we need in our pursuit of making billions. Here we go. 

Hey, welcome to another episode of making billions. I'm your host, Ryan Miller. And today I have my dear friend, Kristof Gleich. Kristof is the President Chief Investment Officer at Harbor Capital Advisors, a $40 billion investment fund out of Chicago. So what this means is that Kristof has an expert level view of markets, economics, and making billions from investing. So he's agreed to come on the show and provide an inside view of how he achieved the heights in the finance world, and how you can navigate interesting economic conditions, much like the ones we've seen today. So Kristof, welcome to the show, man.

Kristof Gleich  
Ryan, it's great to see, thanks for having me. It's a big honor to be on your show. I'm a big fan and a big fan of the community that you've built. And yeah, it's great to be here. 

Ryan Miller  
Hey, we're honored to have you, thank you, you're very kind, you know, to have someone with your background, it's truly an honor. But, and we can find that you're at Harbor capital. And we can read all about the cool stuff that you've done. And we're gonna get into that in a moment. But before we do, we've got 100 countries around the world. All these people are wondering what the heck a chief investment officer and the president of harbor capital, how the heck did you even get there? So where did it start for you,

Kristof Gleich  
so I'll go, I'll go back to I'll go back to the beginning. I'm in Chicago. Now, it's just got the evening time here. So it's got that, but my accent isn't a local Chicago and accent as your listeners or viewers may have told. So I'm from the UK. Born and raised in the UK, that's where I grew up. And I've been living in the States now for about eight years or so. And I guess, for me where it all began, it really, I guess it begins at school, right in terms of people that shape you and mentor you. And you begin to learn a little bit, but a little bit about yourself. And I learned that I was pretty good at science. And I was quite interested in it. And I was okay at maths, or math, as we call it here in the States. And that ended up taking me to university for an undergraduate degree. And I studied physics. I studied physics at Bristol University, which is in the West of England. I studied undergrad for three years. And I really, really enjoyed it. And I didn't going into it, I didn't know what I wanted to do. I wanted to just do something that I thought was interesting, and I'd love to learn from and it was no more complicated than that. And from that physics kind of foundation, I found my way into financial services. I joined Goldman Sachs in 2001. So where it all began professionally for me, is I began actually working about two weeks before the 911 tragedy. So I really obviously, you know, remember that time and, you know, going into the markets I was in London, but you know, your your shapes or degree by kind of what happens at you know, in the earlier parts of your career. So I spent a while at Goldman Sachs, I spent some time at JP Morgan as well. But for me, like my physics background is a big part of who I am today. I think it was a really important skill set that I learned in that physics, you have to be kind of observant of the world around you. You have to be intellectually curious. You have to be comfortable with opposing theories kind of living and coexisting at the same time. You have to be comfortable with approximations. You have to be comfortable with contradictions, and you have to be comfortable with lots of uncertainty. And you have to be comfortable with that all at the same time. And I think from outsiders looking into the field of physics, people sort of think of this as a very precise, well then it's very buttoned up. But actually it's no it's quite chaotic when you look at all the different characters and how and how it sort of worked. And little did I know it but that was quite a useful beginning for her life on Wall Street or the city, as we call it in London. And that that began my journey.

Ryan Miller  
Wow, that is phenomenal. So, and at JP Morgan, when you were there, was it the asset management? I mean, how did that look,

Kristof Gleich  
when I was when I began, like fast at Goldman, I was in the finance division. And then I moved after about two or three years, I didn't like my first job at all. And in fact, I thought I'd made a terrible mistake, and I almost left the industry. But before I did, you know, some things that lined up, and I ended up moving to the asset management side of Goldman, and so from about 2003, I worked within GE Sam, which stands for Goldman Sachs asset management. And I joined a group, you know, I would say, fortuitously, it was called a manager, research group. And we were supposed to find managers from all over the world to using client portfolios. And so I kind of fell into this. And I've been doing more or less that type of thing since. And so when I went to JP Morgan, I worked within JP Morgan, Wealth Management, which is where you're looking after more kind of like individuals, wealth needs. But I began life there running the research team for you, sets, funds and use it to kind of like the offshore version of 40 Act. And so I was in London, I was running a research team, and I was responsible for finding investments for clients in Latin EMEA, and Asia and private bank. So that was great. I had a global role, I cut my teeth and leadership. And I a lot of travel, and it was great. And I loved that. And then in 2015, they asked me to move to New York, and take over as global head of the team. And so I then began running a research team of about 60 people all over the world. And with about $500 billion of assets under management, which is obviously, there's a big number there. And it's still a big number now. And yes, but it was great. It was a place that I love to work. And it was it was a great, great, great time.

Ryan Miller  
Phenomenal. So running a $500 billion fund, no big deal. Just kidding, that is a very big deal. Good for you. So you cut your teeth. So you started, you went to school, you did a little bit of science, a lot of science, then you went into finance, and then you launched your career in those bulge bracket banks, started in asset management and really cut your teeth there. And now you're really kicking butt and you're doing some wonderful things in harbor. So maybe you could walk us in? When did it? How did you go from JPMorgan and harbor and maybe share with us a little bit about what, what you're up to at Harbor and kind of could paint a picture for us on current state,

Kristof Gleich  
I've been working for almost 20 years. And I guess I kind of view that as maybe the approaching halfway of your career. And I never grew up wanting to be a banker. And yet, I'd worked for almost two decades, that kind of two of the largest, best, most notorious like pick your attic, insert your additive their banks, and I kind of felt like banks had extracted their pound of flesh from me. And I wanted to get out of the banking sector. Even though I'd worked within asset management and wealth management, there's certain sort of regulatory obligations, I guess, that come for working with with banks and really large companies as well. And I'd learn you know, great skill set, you know, when you go through, and you work at institutions like that, you really learn about yourself and you home certain skills, and I wanted to take that to the next chapter of my career. So I thought about what I liked doing. And kind of what got me out of bed in the morning. And it was investing. And it was Asset Management. I'm drawn by the long term nature of it. When I grew up, I thought what after I joined Goldman, I thought I wanted to be a trader, because that was kind of the the alpha, male thing to want in the early 2000s. But then someone, yeah, but then someone explained to me really clearly, actually, the guy that ran GE Sam at the time, he said, Look, there's two types of people in life. There's hunters, and there's farmers. And he said, like, which one are you? Which one do you want to be and like trading is like hunting like you eat what you kill. Asset Management is more akin to farming. It's about nurturing, doing things for the long term, and thinking in like years or decades ahead, and it really struck a chord with me then. And you know, some people might say, that's really cheesy, but actually, that's kind of been my experience of it as well. So it's been an analogy that works. So I wanted to be in a longer term business. Asset Management is that and so I joined harbor capital. I'll tell you a quick bit about harbor and in case your listeners don't know who we are. We are an asset management firm in public markets. It's we're headquartered in Chicago, we have about 40 billion of assets under management. And what makes us a little bit different from a, like a traditional long only firm, is we find specialized boutique money managers or entrepreneurs, different thinkers, and we partner with them, and we bring them to the marketplace, and we help raise capital for them. And we offer these best in class investors in an appropriate vehicle. Historically, that was mutual funds. We have collective investment trusts, which get used in retirement, we have a big retirement channel, but most recently ETFs, and specifically active ETFs. That's where a lot of the innovations happening in the industry. Taxable clients are kind of voted with their with their wallets, that they prefer the ETF structure. And so that's sort of a new area that we've been investing in and been quite creative in in the last 18 months or so. So it's a great spot, I get to work with managers and investors across the world, in equities and fixed income and commodities. And yeah, I love doing it.

Ryan Miller  
Yeah, that's, that's phenomenal. And you know, from my research, I've noticed that you guys appear, and I'd love for you to speak on this. So within the ETF space, it appears, traditionally, we understand them, just the retail understanding is is a passive thing, kind of buy it, throw it in your portfolio, wherever that lands. It's kind of a passive thing. Now, from what I've seen and talking to you offline and getting to know your firm a little bit, you guys are starting to make a little bit of a push to active ETFs. And wonder if you can maybe talk a little bit about that. And in why why is that kind of the the new frontier for you guys, for sure.

Kristof Gleich  
So I think you're absolutely right, that historically ETFs have kind of been synonymous with passive investing. And that linkage is beginning to change. And so why is that happening? So back in December of 2019, there was actually a regulatory change by the SEC, a good a good regulatory change. And now listen, I'm not gonna diss regulators. So I think they have a very hard job. And they generally do it very, very well. But so in 2019, they leveled the playing field for issuers of funds, like Harbor, that issuing an ETF or issuing a mutual fund became very similar processes. So prior to 2019, if you wanted to launch an active ETF, you had to get something called exemptive relief. exemptive Relief is kind of a little bit like root canal surgery, you know, with the dentist, it's not something you particularly want to do, it can be painful, the outcomes can be uncertain. And so there wasn't much activity or innovation in the space. So the regulator's essentially created a playbook. And so what you've seen and what we've seen since late 2019, is new issuers coming to the market quite quickly and quite rapidly. And now, if you look in any area of asset management, the area that has the highest organic growth rate is actually active ETFs of the ETF market, they represent about 5% of the assets. So it's still a small part. But if you look at it on a flow basis, the asset class is growing, you know, by about 30% a year. And they they're taking the area's taking about 20% of total flows every year. So it's growing, there's lots of innovation. And look, I'm a, I'm a believer in active management. And I don't mean that in kind of, I don't have this religious belief that all active management is amazing. Like, it's like anything, that's some terrible active management. There's some average active management, and there's some really good active management. But I believe in the value that good active management can bring to clients appropriately positioned with other investments, whether that's lower cost index investments, or liquid alternative investments for those that can use that. But that area of the market that we play in is finding those exceptional active managers, and then bringing them in now in ETFs. Because for taxable clients, the the argument has been one that you know, ETFs are a superior mousetrap. They offer they're cheaper for the end client. And the only guaranteed free alpha in investing is doing something tomorrow what you do today, but doing it cheaper. And so if you can do that the mutual fund versus an ETF, it's structural fee alpha, if we want to get kind of jargony stick about it. And then there's also tax considerations. So generally our industry has been set up historically to look at things on a pre tax basis, but of course clients really eat after tax free tons and ETFs due to some of the mechanisms and structures and the way they work, they are able to offer and deliver clients a better after tax return. They tend to be more transparent, as well. And I'm a believer, all else being equal in life, more transparency is better than less transparency. And ETFs offer more transparency versus other vehicles. So there's a preference there. And then the last thing about ETFs is, you can trade them more frequently intraday, I'm on the fence, whether this is a bug or a feature, it's kind of six of one half a dozen, the other, I'm a big believer in being a longtime investor. And just because you can do something frequently doesn't necessarily mean that you should do something frequently. And actually, I think one of the one of the benefits of private equity over public equity is you're locking investors up, and you're kind of saving them from themselves for a 10 year period. That's

Ryan Miller  
100% my viewpoint as well, Kristof. So you know, what I've been able to observe. And a couple of my guests have also commented on this is as you because we've had real estate investors or venture capital, and some people are in hedge funds view, and as you increase liquidity of an asset, you also increase the potential volatility, that's the belief you're the scientist, so you'd probably be able to check my logic on that. So access to a very liquid market and like public equities versus a real estate or a venture capital fund, that's really hard to move in and out of those those investments, much like a hedge fund. So that kind of helps to your point, save them from themselves is because it's inherently baked in that you can't just move in and out like the public markets. And so that that could be good. It could be bad, or it could be just neutral.

Kristof Gleich  
Yeah, I think I think what it does is it it's a mechanism, I don't think it was designed for this purpose, but maybe it's you know, a, a benefit that kind of came out of that is that you you stay invested for longer, and generally staying invested for longer is better than speculating in the short run. And there's been various studies done i There's a little bit of a misnomer, I think about less volatility, in the sense that these these businesses that sit within private funds are still on planet Earth, they're still exposed to the same vagaries of the up and down business cycle. But they don't have if you like, the manic depressive or optimistic views driven by Mr. or Mrs. Stock market, so that I acknowledged that point for sure. But Morningstar have done some good studies on this really good studies, there's a ton of good work that they've done. And they actually show within public markets, the more volatile the asset class, the bigger the difference between the time weighted return and the money weighted return, which means you could have a manager or an asset class that has a 20% roll or a 30% roll in an asset class where you've got a 30% roll, the behavior of people to chase in or run away from that asset class is higher, and they generally do a bad job of it. And so actually, even if that more volatile asset class earns more over the long run, investors actually are less because they are terrible at timing it. And that's one of the biggest things that we're sort of very passionate about here is spending a lot of time on education with clients and with advisors, and trying to orient people for that, you know, longer term, you know, navigation through markets

Ryan Miller  
brilliantly said and, you know, as as, as we round third base on on this discussion, this is phenomenal. You know, wondering, just, you know, if you had two or three tips, because you see a lot of data, you you analyze and synthesize a lot of information. And you know, one of the things in asset management, especially in the public equities, you'll learn this in undergrad, or maybe everybody on YouTube is preaching kind of the same Kool Aid of this 60/40 asset split of constructing your own portfolio. I'm wondering if maybe you can share some opinion, does the 60/40 classic asset allocation split of your personal portfolio? Does that still carry water in this market? And if not, what do you think is better?

Kristof Gleich  
So it's a really interesting time to talk about this? Because I would say there's a definitely a bit of a raging debate happening at the moment with what happened last year, you know, what happens with 60/40 portfolio last year is it failed? And there's the rhetorical on one side saying, you know, the 60/40 is dead. And then there's another rhetorical on the other side, saying Long live for 60/40. And I think, you know, it's, it's a bit more nuanced than that. But I think there are measures that investors can take to improve upon a 60/40 portfolio, and I can go into some of those. But I do think invest Today do face a dilemma. If you're if you're, if you're in a rudimentary, just, you know, alone, call it a low cost index 60/40. I think you, you either need to diversify into alternative asset classes, or you need to moderate your own return expectations quite dramatically compared to history. So let me like, unpack that a little bit more if I can. So the world is, you know, a very uncertain place, especially at the moment. There are so many seemingly kind of independent things happening. That's causing a great deal of uncertainty. It's been talked about I subscribed to the the ft. Back Back home, but online, and they talk about this moment being the Polly crisis. The world isn't a Polly crisis, right. And I think what you may be, there's at least lots of problems. So we'll call it like many problems. And if we kind of run through that list, you know, I think geopolitical tensions are higher than they have been probably right in our lifetimes. real tiny what we remember probably since the Berlin Wall came down,

Ryan Miller  
yeah, Cold War, all that stuff. The Reagan times. Yeah. Other than that, it's never been this hot.

Kristof Gleich  
Exactly. So you've got you've got geopolitical tensions that have very high, you've got the war happening in Europe, in the Ukraine, you know, which is the biggest conflict in Europe since the Second World War, you've got a brewing energy crisis that's still looming, and I think Europe got a lot got a lot of luck, which is a good thing, by the way, that they had a really seasonably warm winter. But there is this energy crisis, and now there's desire for energy independence, really, you know, across the world. So you've got that back draft of global I D, globalization, I'm sorry, Deglobalization, you have structural labor shortages across the world, you know, we've definitely got them in the US, we still have them in the US a ridiculously tight labor market. And I'm sure a lot of your listeners see that whether it's in steel going to restaurants or home renovations or ordering stuff, there's, there's there's shortages everywhere. And then at the same time, you've got a desire for supply chain resilience. So you've got a theme of kind of re onshoring or nearshoring. happening. And if you think about that the world that we grew up in capitalism was driven by economic incentive trumping everything else. And generally, that's not a bad system, it creates good incentives and lots of innovation. But what we found about that, that kind of was shattered by COVID. And the pandemic, in that this just in time, sort of way of running the world, there wasn't enough, you know, margin of safety. And so I think a lot of there's a lot of self reflection going on, and lots of companies focused on, you know, how can we, you know, really ensure you have the energy transition, you know, I talked about energy security, but the world has committed, more or less, but to net zero by 2050. And so we're gonna have to wean ourselves off coal, carbon fuels, and fossil fuels as a way of, you know, fueling our way of life. And we're not going to pull back on that and sacrifice our lifestyle, like people never do that. We're going to have to figure out with new technology, how to replace that. So that's all I can some everything I just set up with, that's all inflationary, and it's structurally inflationary. And then I'd say the other kind of more recent Wall of worries or show I'm sure we'll talk about in a bit, is there's a bit of a banking crisis happening and something about that, yeah, it's a bit of a throwback to 2008. But we can talk about, there's a lot, you know, I don't want to scare listeners, and because there's an old adage, and I'm sure you've heard this, like equities climb a wall of worry or or climb a wall of uncertainty. But what I will say at the moment is that wall is really high. And so we have to think about navigating all of that. And we have to think about what that means for a 60/40 portfolio. So, after the financial crisis, a 60/40 portfolio did amazingly well. A 60/40 portfolio in the 2000 and 10s. Return 10% a year with not much volatility or drawdown and bonds and equities were not correlated, they were negatively correlated. The non mathematical way of thinking about that is one sector and the others act, which is what you want. And inflation was at 2%. So you had real returns like the keep home after the cost of inflation of 8% a year. Like think about that as a return like 8% a year for a decade, for really rudimentary and simplistic investment portfolio. That was a bit of an outlier. But I think what's happened is that has been baked in now to what people expect. But we're in a very different environment. And so if you look at the 2020, so far, a 60/40 portfolio has delivered about six and a half percent. But inflation has been running at near five. So investors have been left with a much smaller sliver of that return after after paying for the cost of inflation. And with we're almost three and a half years into this decade already, so it's not like this is a, you know, three months in or something. So we think that the environment is going to be much tougher, you're going to have to work harder to generate returns, you're going to have to be more creative to generate returns. But we do think there are opportunities to generate returns. And, you know, I think one of the Forgotten asset classes is quite hated asset classes, commodities. And that's one that we actually have a pretty strong positive view on at the moment. And, you know, we think we think there's, there's ways that you can forcefully diversify, give investors a smoother ride, without paying through the roof for fees, and, you know, just generate a better outcome. 

Ryan Miller  
Wow, phenomenal breakdown, man. So. So the 60/40 kind of works. I mean, there's barely enough meat on the bone, as I like to say right now, I mean, one and a half percent that you get to keep after accounting for inflation. It's just as barely a heartbeat there. So I can see why people are looking for alternatives to the traditional 60/40 split on allocating assets. So thank you for that breakdown. Now, you mentioned before that there's inflation, there's like heated geopolitical risk. I mean, there are some systemic risks in the not only the North American economy, but also the global economy, I would say. And so like, with all with six, systemic risks, like banking, we got banking issues, we've got inflation issues, and many others. What advice can you give to investors as far as managing these systemic risks,

Kristof Gleich  
okay. So, you know, at the moment, there's a saying, it's a bit of a graphic saying about the Fed, that the Fed keeps slamming on the brakes until something goes through the windshield, alright, and, and it always happens, and we always talk ourselves into nano is going to be a soft landing, and nothing's gonna happen, and it's all going to be fine. But something always goes through the windshield. And what we've seen at the moment is regional banks have been flying through the windshield in the US, and then a giant, you know, systematically important bank called Credit Suisse then came dramatically flying through the windshield, as well. So there's a lot going on. So I'll kind of unpack this a little bit. So from an inflation perspective, you've obviously, you know, we talked about some of the structural drivers for inflation, none of those are going to be solved by monetary policy. You know, if you go through that list, the high interest rates was not the solution to really any of them, maybe structural labor shortages, you could say, cause a recession made some people unemployed, get it doesn't really solve the underlying problem. I think, you know, one of the most challenging things at the moment is the toolkit needed to solve them seems to be kind of a mismatch between the tools needed to solve the problems at hand, but the bank, the central banks, the Fed are going to do the best that they possibly can. And so the answer to that was rapid normalization of interest rates and the cost of money coming out of COVID. You know, we had this fiscal stimulus, this really weird, you know, couple of years period that hopefully, we never have to go through again, some people have been very critical of you know, what happened, the amount of fiscal stimulus, but generally, like, the playbook is always set up for the previous problem. And I think coming up 2008, or policymakers learned was you need to go hard, and you need to go fast, and you need to go big. And that's what they did in COVID. But they went a little bit too hard, a little bit too fast and a little bit too big, which is causing some of the problems that we're in now. So the Fed played catch up late slammed on the brakes, you know, we had 475 basis point hikes in a row. And now we're kind of dealing with the consequences. So So what do you what do you do with all of that? You know, how do you kind of navigate systemic risk? I think I've seen a few now, and I'd say it's a little bit like, I don't know what the show was called. But it was I think it was maybe called storm chasers, you know when there's like a tornado coming and they jump in that car and they like drive straight to the eye of the storm. Do you know what I'm talking about? Yeah, exactly. So so you've got to be a bit of a storm chaser. And you've got to run to the eye of the storm and measure kind of what's happening in the thick of the moment. And so if I just I'll do a quick sort of summary of some of the crises that I've seen and illustrate that. So when the financial crisis in 2008, it was all really the all of the action was happening in the in the investment bank CDS market. And that's why you needed to kind of focus to kind of see what was going on in the acuteness of the problem. You know, in the Eurozone crisis in the in the 2011 1213, period, it was kind of Greek CDs, and Italian spreads versus German spreads. And then, you know, there was other things going through the COVID crisis that we looked at. So where are we today, with the current systematic crisis in banking, you have to look at things that you don't normally look at on a day to day basis. And so we created a banking crisis dashboard that has harbor and we've we made it available to all of our clients, because we wanted to share with them, you know, on a real time basis, what we're looking at, and actually, if your listeners want to get a copy of this, if you send an email to banking crisis report at Harbor, capital.com, maybe we can in the blog, we can put the Yeah, and so you need to look at, you know, funding spreads, you know, swap spreads, you need to look at what's happening in certain areas of the CDS market. And then you need to look at what's happening, the central banks, and how much has been sort of drawn down on their emergency programs. And you can aggregate all of that. And then you can what's called Zed score, and look at how it scores compared to like history. And then you look at that thing every single day, as an indicator of stress. And so that's what we do to help us navigate Well, I'd also say it's, there's a, there's a psychological element to these crises as well. And I think there's really like three phases that we go through by phase number one are called utter confusion. And that's at the beginning, when something happens, and you're literally sat around going like, Oh, my God, what's going on? This makes no sense. How did this happen? Like this is illogical. And it's kind of like this complete state of denial. So we'll call that phase like, utter confusion. And in our confusion stage, you get tons of volatility, because there's no anchor for setting risk. And you get a lot of questions from clients. And there's just lots of questions, and there's not really many answers, and you don't really have any policy response, you then transition into kind of this complete acceptance of like, Oh, my God, it's gonna be like this forever, or the world's never gonna get back to normal. And, you know, I remember this during during COVID, like, it was impossible to kind of think, how is the world going to kind of like normalize, so you have this, you quickly then flip to, we're going to, it's going to be like this forever, and it's going to be terrible forever. And sentiment gets really, really negative. And during this phase, you get a really strong policy response from policymakers, whether it's fiscal, whether it's monetary, or whether it's regulatory combination of all of them. And then you get what always surprises me, when it happens is you get this kind of rapid normalization of the new normal, where suddenly things that you were saying a few weeks ago, they're still there, but you just now live with them. And they quickly kind of fade into the background. And so I love just thinking about the psychology of this and what's happened in this banking crisis. We've gone from one to two to three in like two weeks, and the crisis hasn't gone away. The Banking Markets are still stressed. And if you look at some of these banks, they're on life support. And if you look at you know, there's something called the h four, one report and the h eight report that come out from the Fed that tell you how much the Fed discount window is being used or how much the the I've got a written on my whiteboard, the BTF B program, which was the, you know, the bank term funding program. And these things are really stress levels. You know, the first week they come out, Oh, my God, like, Did you see the discount window? It was $160 billion dollars. That is worse. That was in 2008. The world was ending. Oh, my goodness. Week three, you're like, Did you see the bank funding? Well, yeah, it was 160 billion. Yeah, okay. All right, you know, but anyway, like, what's the break? First. And so it's just, it's weird that each one's like kinda unique, but these these behaviors, so I think like In summary, you know, stay on top of the moment that the day but also be aware of kind of psychology and how quickly it can change and, you know, measure the right things. And that's what we're doing at the moment,

Ryan Miller  
man, Dad, what a phenomenal breakdown from one of the most brilliant minds in finance today. So thank you for sharing that. So we talked about asset allocation, does the 6040 still hold water? Like you just said to you know, you're in this belief that the world's ever gonna change, never gonna normalize, we got to do everything different. Maybe that's true. Then we talked about systemic risk. Now, I'm wondering. Now, given that inflation, some people say it's transitory, some people say it's here to stay, or, you know, maybe there's a lost decade, what, whatever that might be. I'm just wondering, you know, do you have like, have you guys created any products for you? Because you know, you guys are very client focused, you take care of your clients, you crank out products? Have you done anything to address some of the current markets today? And if you had, maybe you can share a little bit with us today?

Kristof Gleich  
Yeah, so maybe if I, I'll give a case study, just to try and sort of demonstrate how we work. And I think but I guess it's up to your listeners to decide like how thoughtful, you know, we can be We do try and be thoughtful. And so I'll go back a couple of years ago, that we had a view, this decade was going to be, you know, pretty different. And one of the biggest kinds of implications was going to be inflation was going to be higher, and probably more volatile. And the, you know, the, the zig and zag benefit of a 60 portfolio portfolio is going to be less than it has been historically. And we needed something for our clients and for our own sort of portfolios as well that we run for clients to help navigate and weather that environment. And so we started off with a view. And then we started on looking at research of, okay, if we've got this view, how do you capture that view? What's what's the best way of doing it? And so we looked at different asset classes, and there's lots you know, one, two good things about finances, there's tons of data, and some of it goes back. I think the biggest the longest graph I've ever seen in finance was about 450 years old, which was, which was the interest rates at the Bank of England, apparently, and I was like, wow, okay, that is getting kind of like medieval. But anyway, you can generally go back decades, if not, like, you know, to 100 years. So we looked at how different things and different asset classes perform. And, you know, if you're looking at, like hedging inflation, or putting something in your portfolio, that's going to give you more ballast, in more choppy seas, you can look at things like tips, you know, the hence in the name, treasury inflation protected securities, you can look at sort of commodity oriented equities, like energy stocks, you know, infrastructure, you could potentially look at real estate, you know, generally real estate, you know, rents rise with, with, with inflation as well. And there's some hedge funds, you know, alternative strategies as well managed futures, or trend, as it's called, has been quite a good one. Or you can look at commodities. So we did all of the work to see which one gives you the most predictable correlation or protection with inflation. And we, from our research, we found it was commodities and just go and running through the other ones, you know, tips. They do protect inflation, but they're also susceptible to rises in real interest rate. And so, you know, what happens is the bits that readjusts like the coupon and then the notional to inflation, you can lose the benefit of that if real interest rates kind of go up even faster, which is what happened last year. So tips didn't make any money last year, they lost money, but they lost less than nominal bonds. So not great. And when we looked at equities, sometimes they were good, and sometimes they weren't. And sort of what happens is, you need to know, for the underlying companies you're investing in what's their hedging policy for underlying commodities. You know, generally speaking, if you've got, say, a company that wants to build a new copper mine are an oil well, to get financed to invest in that project from a bank, or the issuance of a bond, they have to hedge out the future volatility associated with that commodity price, in case it collapses, they want to make sure they've got the cash flow to cover the interest rate. So generally, they can hedge out quite a lot of the underlying especially in those initial years, the underlying benefit that you as an investor might think you might get from investing in the equities, you have to be more selective so Less than is less predictable real estate, we found there wasn't much of a correlation. And then with, with managed futures, they they're pretty good. They're not too bad, but they're not as good as commodities. So then we were, so we come through, and we're like, okay, we want to do something in commodities. And then we start looking at ways that we can access commodities, and the types of options available to investors to everyday investors, like an A mutual fund or an ETF. They just weren't very good. And there's, there's an index that is kind of like the s&p 500 off commodities, it's called BCOM, stands for the Bloomberg commodities index, or shortened for the Bloomberg commodities index, I should say, So be calm. And it gets very volatile. And it kind of it, it suffers from kind of boom and bust. And so it gives clients not a very smooth ride. And it tends to underperform over the long term as well from against a sort of a 60/40 portfolio. But actually, when you look at commodities as an asset class, I think about what they are, we summarize it with a word. But actually, you've got, you know, food, you've got fuel, you've got precious metals, you've got industrial metals, and they all behave like very, very, and then within those, you've got different underlying commodities with different characteristics. And they actually perform very differently from one another. And so there's a lot of diversification, I'd say untapped diversification that exists within commodities. And so we set about trying to figure out how could we find SM expertise outside of Harbor that could help crack this problem. And we found a group called quantex, in Greenwich, and they're former Goldman Sachs, commodities traders. So they're founded by a guy called Don Castoro, who used to head up their commodities trading at Goldman Goldman and one of the biggest, if not the biggest commodities traders in the world. And so there's a real kind of domain expertise, they know their staff. And we're able to design with them an index, that is a dynamic index that allocates to differing weights of commodities at different points in the market cycle, depending on what the outlook for inflation is. So it results in a very different outcome from like, the kind of standard vanilla off the shelf. Commodity solutions, I'll get, I'll give an example of how that that can work at the moment we've got, we've got a position of about just under 40%, in gold as part of that allocation. And if you look at more standardized approaches, they're very left they're very little, I wouldn't recommend to anybody that you try and like time gold, yourself, like it takes expertise. But gold can be a really, really good inflation hedge or it can be a really, really bad inflation hedge. It depends on what was driving inflation. And if you look at what's happening at the moment, that wall of worry, I talked about all of that uncertainty I talked about, gold does very well against the backdrop of just general as systemic uncertainty. You've got record central banks buying gold. I think a lot of central banks were shaken up by what happened last year with the sanctions around Russia. And it was a it's been a bit of a challenge to the dollar based system. And so last year, there was a record amount of gold bought by central banks. And oddly enough, Turkey bought more gold than anybody else, like who would have thunk it, but it's happening everywhere. And then you've got things like shock and real interest rates and things like that. So you've got all these things that like, we think gold's going to do. Well, now that's incorporated into the design of it. So we find we set out the problem of, you know, what are we trying to solve for? Like, do the research like what's the best area of the market to aim for? And then that let's look at that area of the market. Is it any good? conclude that is not? And then can we improve on that with a thoughtful design? If that requires bringing outside expertise? Let's bring that outside expertise. We created this index with context and now we have an ETF. The ticker is hedger, HG er, that tracks this, this index, and there's been a market now for just over a year. And we're pretty pleased with how it's done. It's up 10% in an absolute sense, net fees. And if you look at like equities are down about 10% in that time period, bonds are down about seven or 8%. Other broad based commodities are actually down about 2%. So they've they've done a bit better than the 60/40 but they've still just last less. And it's outperformed the other commodities. ETFs and like we work in a competitive industry, it's nice like, you know, what was it Hannibal Smith from the ATM I love it when a plan comes Gotta like though I'm showing my age there, there was a, there's just a nice sort of satisfaction that you get when you spend so long building something and it kind of pans out,

Ryan Miller  
man. So everything's down roughly 10% You're up 10%. I mean, yeah. For that one, except that particular one apples to apples comparison to say, Well, if you wanted to just go general, the classic passive manager or these, this ETF that you've done, 'HGER', is that right?

Kristof Gleich  
Yeah, that's right, 'HGER', which stands here stands for hedge or exactly, and it's, you know, it's a good, you know, the obviously, this isn't an investment advice. This is a demonstration of how we I you know, try and creatively work news opposition in the world to work with these different investors, these different boutiques with different expertise, where we can hopefully solve a real world kind of problem that helps everyday investors

Ryan Miller  
right on so you know, in this section, we I call it, scale it and nail it. So you've talked about how you scaled it. Now, you know, final question or comments, in your opinion in your market? Who's nailing it? Is there any starlight that you just you're you're really impressed could be your own product? Or someone else out there? Who's Who's nailing it, in your opinion?

Kristof Gleich  
Well, I'll, I'll start by saying like, I'm incredibly grateful for all of my colleagues at Harbor and I want to give you all a shout out, you do amazing work. Everybody is working so hard. And I'm proud of everybody at Harbor. But I want to get I want to be impartial. And I'll give a shout out to some of the entrepreneurs out there because being an entrepreneur can be tough. It can be lonely at times. And there's actually there's two people not related to harbor me just you know, professional contacts. There's a guy called Andrew bear, and another guy called Bob Elliott. Now Andrew bear, runs the dynamic betta managed futures ETF. The ticker is 'DBMF'. It's sold off a bit recently. So again, not financial advice, but like generally what I like about Andrews is very mission driven. And his his mission is about providing managed futures exposure to retail investors out of out a price point that is, represents value. And without paying through the nose, like kind of two and 20 type fees. And he's gone about it in his own way. And he's very, he's very passionate. And he's a he's a, he's a great guy. And then the second one, Bob Elliott is doing something similar. And Bob was the former deputy CIO of Bridgewater, you know, one of the best hedge fund brands in the business. And he's trying to disrupt his old industry, which I think is pretty funny. And he's, he's, he's known something that tickers HFMD, which kind of stands for hedge fund for sure. And he's just up and running. He's a, he's a cool entrepreneur, and he's really good to follow on Twitter as well. And he's trying to disrupt the fees in the alternatives industry. And I just think that's sort of the irony of doing that having coming out of Bridgewater, but they're both very creative, and entrepreneurs in the space that are worth a shout out,

Ryan Miller  
man. Brilliant. So you've talked about how you've scaled it, those two gentlemen, nailed it. So we'll, we'll be sure to send him the show. And as you give them love so and yeah, into the love of harbor capital, I also share that sentiment, I mean, it's a wonderful firm. And, you know, I you and I don't have to say it. But finance, believe it or not, is a little more than spreadsheets, as we like to call it. Or at least I do. jokingly say we're the freak in the sheets, with spreadsheets, but with that horrible joke. You know, we'll just as we wrap things up, and all that wonderful, wonderful knowledge that Kristof has shared, is just be mindful of how the market is changing, and be ready to respond more than you're ready to react. In fact, I would argue reaction isn't really a function of being ready at all. In so being ready to respond through your asset allocations focus on asset allocations to not only manage the downside, but also the upside profitability. as things change. So learn to respond to changing markets. The second thing is pay attention to systemic risks, they exist, and they matter. So be aware of those systemic risks whether you're in public or private equities and investing these things matter and they do move the needle Kristof gave us a wonderful dialogue on what they are and what they've been doing to manage those in. Finally, don't be afraid to create new products, try your market and you just might find something that your market loves. You do these things, and YouTube will be well on your way in your pursuit of Making Billions. 

What a show. I hope you enjoyed this episode as much as I did. Now if you haven't done so already, be sure to leave a comment and review on new ideas and guests you want me to bring on for future episodes. Plus, why don't you head over to YouTube and see extra takes while you get to know our guests even better, and make sure to come back for our next episode where we dive even deeper into the people the process and the perspectives of both investors and founders. Until then, my friends stay hungry, focused on your goals and keep grinding towards your dream of making billions


(Cont.) $40B Fund Manager on Looming Economic Crisis
(Cont.) $40B Fund Manager on Looming Economic Crisis

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