The transcript from this week’s, MiB: Kristen Bitterly Michell, Citi Global Wealth, is below.
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ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have an extra special guest. Her name is Kristen Bitterly Michell. She is Head of North America Investments for Citi Global Wealth, which is a giant wealth management arm of the giant Citibank. They run over $800 billion in client assets, and Kristen’s group, the North American Group, is responsible for about half of the revenue that that massive organization generates. She really has an incredible background in everything from capital markets to derivatives, to wealth management.
And I found this to be an absolutely fascinating conversation, covering everything from risk to inflation to how to manage markets and how to manage investments when markets show a lot of volatility, and everybody starts to get a little nervous. I thought this was quite fascinating, and I think you will also.
With no further ado, my conversation with Citi Global Wealth’s Kristen Bitterly Michell.
So you have really very interesting background. You’ve been involved with capital markets for your entire career. What led you to this area?
KRISTEN BITTERLY MICHELL, HEAD OF NORTH AMERICAN INVESTMENTS, CITI GLOBAL WEALTH: It’s really interesting because I’m not someone that you would think would be the typical profile to end up in capital markets or — or sales and trading. I’m from a — a very small town in the middle of Pennsylvania. It’s a town of about 4,000 people, so exposure to markets or investment banking or any of the careers in finance was not something that you really envisioned.
And so, coming out of school, I studied Economics and Spanish Literature, and I applied to a — a program that actually targeted Liberal Arts majors. It was at Bank One, at the time. It was called the First Scholars Program, and they targeted Liberal Arts majors. And the whole concept of it was why don’t we take Liberal Arts majors, give them on-the-job training, give them exposure to a variety of different areas of banking and finance.
And so, with this gave me exposure to everything from investment banking to retail, looking at like checking account campaigns, like how do you get more assets in the door to credit risk. And ultimately, to make a very long story short, I fell in love with derivatives.
So derivatives were a part where I was very intimidated. I wasn’t that typical person that did a number of, you know, internships during the summer, had that …
RITHOLTZ: Applied Mathematics, Quants, those guys, yeah.
BITTERLY MICHELL: … was — no, no. I was econ and kind of geeky. I love statistics. I — I loved math, but really, I was going to go down that literature route more than anything else and — and study Spanish literature.
And so, when I arrived and — and got this exposure and on-the-job training, I really challenged myself to do the thing that I thought was going to be the scariest. And so, derivatives, at the time, seems like the scariest — the scariest area. And so, I said, “All right. At six months, let’s see — let’s see how this goes.”
And so, it was within the Corporate Equity Derivatives team. I was very lucky to have amazing mentors, amazing people around me who really taught me about the business, taught me about markets. And once I started making that translation in my mind that it’s just a different language. It’s different vernacular.
BITTERLY MICHELL: Like when you think of derivatives, it’s like statistics, right? If you have a base foundation in statistics, it’s just translating those different concepts to a new language.
I very quickly fell in love with it. I — I fell in love with equity derivatives. I thought they were amazing building blocks and a really creative part. And it was this combination of being, like I said, kind of geeky, kind of quanti, but then being client-facing. And so, that was really kind of the early formation around like this is the area where I want to be. I want to be client-facing. I want to help clients solve problems. But having this very creative, almost modular part in terms of designing solutions and structuring solutions, I loved.
RITHOLTZ: So let’s talk exactly about that. At Citi, in 2007, fantastic timing, you take over as Head of Structured Solutions. Tell us a little bit about what that job entailed under normal circumstances and then we’ll talk about the couple of years that followed.
BITTERLY MICHELL: Sure. So I’ll tell you a little bit about how I came to Citi. So I spent a — a long time in markets, like I said, big focus on derivatives, both on the sales, as well as structuring side. I covered corporate clients, institutional clients, as well as ultra-high net worth and high net worth clients.
At the time when I started really focusing in that part of the — the industry, a lot of those corporate equity derivative teams, they covered both. They covered individuals, as well as — as well as the corporations. And so, throughout that journey and covering different regions, different types of clients, I found that with the high net worth, ultra-high net worth clients, you developed a much stronger relationship. So this was a — a part of the market that it really challenged your own understanding of these strategies because these were clients that some of them were very sophisticated when it came to financial products.
Some of them, it was their first experience. They had a big liquidity event. They sold their company to another company.
BITTERLY MICHELL: Their company just went public. And it’s the first time that they’re talking about options, right, and — and strategies to …
RITHOLTZ: You’re talking collars and hedges and …
BITTERLY MICHELL: Exactly, to be able to hedge, maintain wealth, monetize wealth. And so, this ability to either go super technical was someone who was an expert in that field and also be able to roll it back and just explain at a very high level, you know, what is the purpose of this strategy, what is it helping you do, what could go wrong.
And so, ultimately, given the different types of clients segments that I’d covered, I made the decision that I really wanted to be in wealth management. And so, 2007, I came over to Citi. My husband always teases me on this point that he says, “You know, aren’t you, in some aspects, kind of a traitor?” And when you think about market timing was 2007 the best time to — to make a move, but it ended up being a perfect time actually long-term for — for my career. And so, coming into — to Citi, a lot of changes, right on the brink of the great financial crisis.
And, you know, the one challenge there, Barry, was the fact that we were selling these — these products and solutions that actually were extremely relevant given market conditions. But obviously, you know, protecting your wealth, hedging downside risk, providing liquidity, helping people navigate margin calls, but obviously, it was a really challenging environment, a lot of market volatility, and anything that had to counterparty of a large bank was not something that was going to go over well. So …
RITHOLTZ: There’s always risk involved with counterparties …
BITTERLY MICHELL: Always risk.
RITHOLTZ: … which people tend to ignore when things are pretty — let’s say, in 2007, a lot of people aren’t thinking about counterparty risk. Tell us what it was like when everything hits the fan in ’08-’09 derivatives blowup not that you were playing in the — in the worst …
BITTERLY MICHELL: Not in leveraged, no, not at all, give more …
RITHOLTZ: You were really in — you’re really hedging …
BITTERLY MICHELL: … risk management.
BITTERLY MICHELL: Exactly.
RITHOLTZ: That’s a different sort of derivative than CDO, CMO, CDO squared, et cetera. You were basically doing a more rational …
BITTERLY MICHELL: We’re helping people customize the risk return profile …
BITTERLY MICHELL: … across asset classes is the way that I think about it. And so, there’s definitely a pre and post. I mean, when you look at that pre, it was, you know, the thought counterparty risk of a bank was solid, right, like that was something. It wasn’t even question. I’m sure you remember this as well in terms of the bond market, whether you were looking at structured products, bonds, this idea that, hey, it’s issued by this bank, that bank, well-known diversified financial services institution.
And then the interesting thing is before we really saw that the unwinding of risk, I mean, you saw credit spreads widen, right? You started to see credit spreads widen.
RITHOLTZ: Markets sniff things out kind of — I — I hate to anthropomorphize markets, but there is a sense that some participants in the market are sniffing this out and it gets reflected in prices.
BITTERLY MICHELL: You could see credit spreads widen, and it’s something you people are like, wow, that’s great, right? They’re willing to pay me more, now I’m getting a higher yield on this. And so, I think …
RITHOLTZ: For a reason.
BITTERLY MICHELL: … looking back, you learn from every experience, but I think that’s one of those — one of those moments in time where you’re like if something is too good to be true, it probably is too good to be true and questioning why something is yielding the amount that it’s yielding. And so, living through that experience, I mean, from a personal standpoint, it was tragic, right? Like lives are completely changed across …
BITTERLY MICHELL: … obviously, the United States, the global economy. And then you saw a lot of people that you really respected really cared about. There is a massive amounts of layoffs, and so I think it was a very, very seismic shift in terms of just what we thought finance was, what we thought sales and trading was, the stability of that type of career.
And so, I think from that perspective, you really realize that nothing is guaranteed. You have a lot of gratitude for being able to work in this industry.
RITHOLTZ: Right, write it out.
BITTERLY MICHELL: And then you also have to really make sure that people realize. And again, we carry this through to wealth management more broadly. If you don’t understand what you’re doing, you should not invest in it, right?
Rick Dickinson: To — to say the very least. So from there, you rise to the position Head of Investments for North America for Citi Global Wealth. It sounds similar to a CIO role, a Chief Investment Officer. Tell us a little bit about your current role and what it involves.
BITTERLY MICHELL: Sure. I love my current role. I love leading investments for — for North America, for Citi global wealth. This is an area where if you hear Jane Fraser speak, it’s — it’s an area where we’re heavily investing as an institution.
One of our key objectives is to be a global leader in wealth management. And so, my mandate in leading North America is really to lead the investments organization, and so that’s a combination, Barry, to your point about the CIO role in terms of what strategy, how are we advising our clients, how are we breaking down markets. So there’s a strategy component to that. There’s a client coverage component to that, depending upon your wealth, depending upon your objectives, who are you interacting with, whether it’s an investment adviser, investment counselor or whether it’s product specialists who have deep expertise in a particular asset class or product. It’s our product organization, making sure that we’re offering the right products and solutions, how we’re analyzing what we offer to our clients, how we’re differentiating that versus the competition.
And the last piece of it, which I’ve become really passionate about over the past really kind of five to 10 years of my career is the technology and platform. So if you think about some of the trends within wealth management, it’s not just about the personalization bespoke solutions, although that is something that has certainly gained a lot of popularity and grounded and is almost becoming table stakes. But there’s a big piece of it that’s digitization, right, and the platform, and how easy is it to access your advice and put capital to work.
And you can see some of the trends just from the digital world, right, and that comparison. If someone’s going to do an online transaction, an online trade, that is almost like — I use the example it’s like seamless Grubhub, right, where you call up and like this idea of ordering a pizza, right, and calling a pizza plays, if you go on like on an app, and if that pizza place doesn’t open, you’re going to the next one.
No one’s s calling anymore, and so those trends within our industry as to some of those experiences that our clients want was contactless, right? It should be frictionless. It should be pretty easy for me to do versus where we’re really adding value in terms of advice. So the platform digital experience and technology is really, really critical as well.
RITHOLTZ: Really quite, quite interesting. So you’ve been that Citi for over 16 years. That’s a long time at any one place. Tell us about what’s kept you there for this long.
BITTERLY MICHELL: It will be 17 come December.
BITTERLY MICHELL: Yeah, so it’s been a — a great experience. Look, I’ve been very fortunate at Citi. I’ve had a lot of support, a lot of great people around me, a lot of great mentors, right? And I think that one of the things that Citi does remarkably well is really allows you to transition throughout your career in terms of exploring different areas of the business.
And so, while you can see that concentration in markets, and sales, and trading, once I started really working with our private bank in a meaningful way, I was then able to lead teams of investment counselors and investors. I ran investments for the East Region. I then came back into capital markets and — and got to really kind of see, okay, how are we running this business and really setting to up this business for this client segment of family offices, ultra-high net worth/high net worth investors.
And so, while you could see this common vein, it really has given me the ability to flex different muscles. And that’s not just me, I mean, that’s something that’s really, really common throughout our organization. And you’ll see that with a lot of people, and it doesn’t have to be all within wealth management, it can be across lines of business. So I think Citi and our culture is one of let’s keep our good people, let’s give them opportunities whether it’s in their immediate world or outside.
And then the other thing that I will say is that I think culturally, it’s a very flat organization. There’s access to everyone’s accessible. And what I’ve seen that’s really special about our culture is even when we’ve had those situations or we lose people, they tend to come back. We call them boomerangs.
RITHOLTZ: Right, right. I’ve heard that expression.
BITTERLY MICHELL: And so, they try something else for one to two years, and then they say, “You know what? This — this place just, in terms of the access, the culture that drive to kind of grow together, do stuff as a team, it feels entrepreneurial even though we’re such an old bank, right?”
BITTERLY MICHELL: So that’s really what’s kept me here. And I think now that we’re embarking upon with Jane taking over as CEO, this massive focus in wealth, which is my passion as well, I am so excited for the — the next several years.
RITHOLTZ: So let me make sure I understand the path that led you to Citi. You were at Bank One …
BITTERLY MICHELL: Yeah.
RITHOLTZ: … right? And if I recall correctly, they were acquired by …
BITTERLY MICHELL: J.P. Morgan.
RITHOLTZ: … J.P. Morgan, so that’s how you ended up at J.P. Morgan.
BITTERLY MICHELL: Yeah.
RITHOLTZ: Then Credit Suisse?
BITTERLY MICHELL: That’s right.
RITHOLTZ: What led you to go from Credit Suisse to Citi?
BITTERLY MICHELL: So each part of my career, I would say, is — is something I learned a lot, I experienced a lot, so it’s like different building blocks. But the — but the Bank One/J.P. Morgan days, that was out in Chicago, so I worked out in Chicago.
RITHOLTZ: Fun town.
BITTERLY MICHELL: That was when — it’s a very fun town. I have a soft spot for Chicago.
BITTERLY MICHELL: The food, we could talk about the food for a long period of time.
RITHOLTZ: Oh, oh. I’m in Chicago every year for Thanksgiving, so it’s — Turkey is just where we start, then it’s …
BITTERLY MICHELL: Yeah, we got it …
RITHOLTZ: … pizza and hotdogs and …
BITTERLY MICHELL: Yeah, we definitely need to get into — to pizza.
BITTERLY MICHELL: I’m a Lou Malnati’s girl. I don’t know how …
RITHOLTZ: I could go Lou Malnati’s or Edwardo’s. I’m very …
BITTERLY MICHELL: All right, equal — equal opportunity.
RITHOLTZ: … I’m very New York open-minded in Chicago, yeah.
BITTERLY MICHELL: There we go. But — so in Chicago, it’s a really interesting time because if you remember that’s when Jamie Dimon was running Bank One.
RITHOLTZ: Right, right.
BITTERLY MICHELL: Right? So talk about a flat organization, someone who, at that moment in time, was truly a — a rising star. And he was very accessible, spends a lot of time. I always remember him being like very client-centric — very, very client-centric. So if it was a client of the firm, making himself accessible, making himself available to close those transactions, and so obviously, the rest is history in terms of J.P. Morgan acquiring …
RITHOLTZ: Yeah, whatever happened to that guy? He kind of faded away.
BITTERLY MICHELL: I — I don’t know. I’m a fan though. I’m a big fan. I know it’s a competing …
RITHOLTZ: Hard not to be. Can I tell you something?
BITTERLY MICHELL: … it’s a competing bank, but he’s a phenomenal leader.
RITHOLTZ: How do you not appreciate a person who steps into that role through the takeover and just basically revitalizes the whole organization? It was very impressive.
BITTERLY MICHELL: Yeah, a very impressive career. And I — I admire him a lot and — and everything that — that he’s done. And so, I think then, like the transition in my own career, right, so when we were going through all of those transitions with J.P. Morgan acquiring Bank One, you know, one of the — the downsides to that talking about, you know, our — our fondness of the Citi of Chicago, there’s a lot of jobs into New York.
BITTERLY MICHELL: Right? So a lot of — what was kind of that big bank, that was like one of the last banks in — in Chicago, and trading floors, and things like that. I’m talking about diversified financial services. Obviously, we weren’t going to have two of everything, and we — we had to — to move that to New York.
And so, with that experience moving to New York, I did move to — to Credit Suisse, and really that was to flex a slightly different muscle. And the job there was building out the Latin American business, selling derivatives, structured products to Latin American banks and — and broker-dealers.
RITHOLTZ: So let me stop you right there. You have a background, undergraduate, your economics degree from Notre Dame, but you were dual-major Spanish language and Literature degree, how useful was that in Latin America?
BITTERLY MICHELL: Or like how did you end up in finance.
BITTERLY MICHELL: Spanish language and literature, it was incredibly useful and it’s still useful to this day. So I am a fluent Spanish speaker. I lived in Spain, I lived in Mexico. My husband is from Mexico, so I speak Spanish in my personal life. I’ve — I’ve used it in my professional life.
And so, when I was covering Latin America, I will say it was a competitive advantage (inaudible).
RITHOLTZ: Because everybody speaks English, but you show up speaking the local language. I have to think that’s well-received.
BITTERLY MICHELL: It is well-received. And I think Americans have — have a — a reputation for not being multilingual …
BITTERLY MICHELL: … for not speaking another language. And, you know, working at a global bank like Citi where we’re constantly interacting with people from around the globe and you see how many other languages our — our colleagues speak, but at that moment in time, really kind of focusing on Latin America and then going in region, going down to Miami, being able to have meetings in Spanish. And one thing that I did have to learn though is I — so while I was fluent in Spanish, I wasn’t fluent in, let’s call it financial language Spanish.
RITHOLTZ: Oh, really?
BITTERLY MICHELL: And so, you start to learn things like, well, so how do you say call option, how do you say puts — so as I was like chatting with different people or communicating with different people on — on Bloomberg, let’s say, I would then, you know, put — what are they saying? What does that mean in terms of financial slang. So it was really fun because it — it developed in that part of my language skills.
But most importantly, it was great because like the client base was different, their risk appetite was different. And one of the things that I learned is, you know, the difference when you look at a U.S. average, let’s say, wealth client versus someone who grew up in Latin America, someone who grew up in Latin America has — and I’m just saying on average, right …
BITTERLY MICHELL: … this isn’t a generalization, but they have a higher risk tolerance.
BITTERLY MICHELL: They’ve seen hyperinflationary environments. They understand currencies. And so, when you think of the area that I was very passionate about in derivatives, there’s a natural understanding just by growing up in an economy like that, that interest rate risk matters. F.X. risk matters. Commodity risk matters.
And so, inflation really can impact, right, can severely impact your net worth. And so, it was almost like this client base grew up with a natural understanding of derivatives markets, even though maybe they didn’t recognize that it was derivatives, but there’s such an easy and it was very facile because of what they lived through, so it was definitely an advantage.
But then when I ran capital markets in North America and Latin America, you can ask many of my colleagues if the dominant language is Spanish, we have meetings in Spanish. If it’s a one-on-one meeting and you find, you know, people’s personalities can be different in different languages. Their sense of humor for sure can be different, and so it’s been a great experience.
RITHOLTZ: Complacent ROE because the dollar is the reserve currency of the world, we don’t think about currencies, we don’t usually think about inflation except since the pandemic and thought about it in 40 years. It was a little spike pre-financial crisis. But for the most part, it’s been a deflationary environment. How does working in North America with a — a client base that doesn’t have those same sort of sensitivities, how different is that in Latin America?
BITTERLY MICHELL: So I would say there’s a couple of things that are really important from a — and I’ll say U.S. perspective, right? So from a U.S. perspective, how you hold your assets is just as important as what you hold, right? So the — the business of …
RITHOLTZ: Meaning custodianship or …
BITTERLY MICHELL: Meaning custodians, of course, like in terms of — of counterparty, but also thinking of like your wealth planning and the structure of your assets, the trusts that are available to you, how you want to think about trust and estate planning. And so, within the U.S., there’s a big focus on how do we optimize for tax efficiency, too.
BITTERLY MICHELL: And so, what you’ll notice is, you know, I think there’s almost this thought process that everyone wants to be an active trader. And what you realize is, yes, there are people who are sincerely interested in markets and they follow them and they’re passionate about them, but they’re also really concerned about the after tax impact of what …
BITTERLY MICHELL: … they’re doing and how they’re investing. So I think that’s a piece of it.
I think your average U.S. investor, aware of interest rates, right? They’re aware of interest rates in terms of what am I earning on my deposits, kind of what the average yields and investment grade debt, and understanding mortgage rates, and — and the impact in terms of liabilities. F.X. is almost absent to a large degree, right, for the — the average investor.
That being said, like I mentioned earlier, we’re a global bank, and so like one of the major advantages we have is bringing those international opportunities to our clients, to investors, and making sure that we’re not — we don’t suffer from that home bias in terms of how we’re allocating capital. And so, that’s an area where you can then combine all of these things that I’ve — that I’ve talked about, you know, what regional exposures do you want, where do you see opportunity, and do you want to take on that currency risk or do you not?
And so, it’s a little bit of an educational process, but …
BITTERLY MICHELL: … but it’s — it’s different, right? It’s different wealth regimes, it’s different tax regimes. And so, a lot of that will drive the decision-making process as well.
RITHOLTZ: So let’s stay in the U.S. and — and stay with structures and how you hold assets. What sort of an appetite do you seem — I’m sure clients — for traditional alternatives like hedge funds venture capital and private equity?
BITTERLY MICHELL: It’s interesting because that’s something that has changed substantially over the past, let’s say even 12 months, right?
RITHOLTZ: It — it feels like it, yeah.
BITTERLY MICHELL: I — I think there’s a little bit of a shift going on. And I think you have to separate out. If we think of alternatives maybe in three different buckets, private equity — and I’ll put private credit in there as well, private equity credit, real estate, and then hedge funds. We have seen strong, strong demand pretty consistently for building out alternatives, portfolios, particularly when it comes to opportunities with great financial sponsors on the private equity side, looking at these long-term secular trends, right?
And I think one of the interesting trends that we’ve seen year-to-date is really, well, people have been conservatively positioned, really kind of shocked by the start to the year that we’ve had …
BITTERLY MICHELL: … one of the worst ones on record when we look at both equities and fixed income being in tandem down over, you know, 10 percent …
RITHOLTZ: Got to go back to ’81 to see the same sort of thing.
BITTERLY MICHELL: … there — exactly, exactly. So pretty intense start to the year, but where clients were consistently allocating capital was in private markets.
And I think, you know, part of that is this ability to take a long-term view, right? So short-term, we know some of these changes that we’re going through, we’re nervous about what the Fed’s trajectory is going to be. I think Friday may have cleared that up a little bit in Jackson Hole, however, you know, what happens next year, right? So what happens next year, but being able to take a view out five, seven, 10 years much easier. So I think that those flows into private equity, in particular, have remained really strong.
RITHOLTZ: So let’s talk about that because a year ago the Fed was at zero, you couldn’t get yield anywhere except for places like private equity and structured credit and structured notes, et cetera, et cetera. Now, what is the 10 year? We’re recording this, it’s 3.20, 3.25 …
BITTERLY MICHELL: Yeah.
RITHOLTZ: … something like that. And you can get yield, and if we want to look at munis on a — on a tax-adjusted basis …
BITTERLY MICHELL: You’re looking at high single-digits depending upon your state.
RITHOLTZ: … it’s almost respectable, right?
BITTERLY MICHELL: Yeah.
RITHOLTZ: So — so what do you think that’s going to do? And I — I — I don’t like to ask people for predictions and forecasts, but you’re looking at the flows and you get client questions all the time. Do you think that we’ve had this amazing run in structured products in private equity because yields were so low? Now that yields are higher, what might that do to — to demand for those products?
BITTERLY MICHELL: So what we’ve seen is that, absolutely, bonds are back so thinking through what was a not in Vogue last year or the year before, and this was our advice, too, in — in terms of advising our clients as, you know, having an overweight exposure to fixed income just didn’t make sense over the past couple of years. You’re — you’re talking …
RITHOLTZ: What (inaudible) at the end of a 40-year bull market in bonds you don’t want to be overweight fixed income?
BITTERLY MICHELL: You don’t want to be overweight and when, you know, 40 percent of the world’s government debt is negative yielding, you know …
BITTERLY MICHELL: … maybe not exactly the best, which actually created some really difficult …
BITTERLY MICHELL: … difficult situations for those who were retiring, right, and those …
BITTERLY MICHELL: … that market was really tough because you’re like, wait, I need to be overweight equities to get the returns that I’m looking for. But, you know, traditional investment advice is telling me I should pull back on some of that risk, so that created some interesting dynamics. But I think this year, what we’re seeing is, on the private equity alternative site, it’s really playing that long game. So that ability to kind of see longer-term and what I think is going to really have some legs and separate the noise short-term as are we going to have a recession, are we not going to have a recession?
When it comes to fixed income though, we’re seeing now all of a sudden you went from a situation where your cash was yielding nothing, right? And …
BITTERLY MICHELL: … and now you’re even looking at whether it’s short duration, intermediate duration, you’re now looking at yields that are mid-single-digits, right, on investment grade. And so, what we’ve seen is it doesn’t completely combat, right? It doesn’t entirely combat that impact of inflation if we’re staying around 8.5 percent. But for someone who’s been sitting overweight cash and getting to marginally better outcomes, you brought up munis, which is an excellent example as well, you’re getting marginally better outcomes on a, you know, pre-tax equivalent basis looking at high single-digits depending upon what state you reside in. And so, all of a sudden that became an easier path versus looking at some of the — the more traditional true risk assets.
The one thing that I will mention since you brought up structured products as well, that’s an interesting part of the market that if we think about the past 10 years, right, so the past 10 years — and this is someone who’s worked in derivatives and — and structured products for quite some time, yes, they’ve gained in popularity, but there was also a little bit of a concept wherein, you know, long-term secular bull market, everything’s going up, right?
BITTERLY MICHELL: So this idea of customizing my risk return profile, well, when you think of the components of a traditional structured note, you have, you know, a bond and then some underlying options. Now that rates are higher, that bond is giving you more value. And when we see these spikes in volatility, a lot of those strategies tend to be short volatility. And so, now you’ve created this environment where the market environment is giving you the ability to use strategies were you can earn high single-digit yields with some downside protection. And you’re saying, look, if the market pulls back another 10, 20 percent, I’ll buy in at that level. And in the meantime, I’m getting paid to wait.
So I think even people who question those strategies historically looking at I can go into an ETF, everything’s going up, I can kind of play some of the momentum now saying, you know, where — where do I really want to allocate capital. And I understand that there’s a lot of risks, there’s a lot of datapoints that we’re waiting on. There’s a — a lot that we need to wait on for earnings and the impact that this — this tightening, right, this tightening that both in terms of rate hikes and quantitative tightening is going to have on companies and consumers alike, I think it’s actually opened up a really nice market and place in the portfolio for those strategies.
RITHOLTZ: Let’s talk a little bit about inflation. You mentioned 8.5 percent inflation rate. It seems like when we look around the world, a lot of that inflation is peak and past us. We look at the Baltic Dry Index, and gas prices, and oil prices, and go down the list of commodities that seem to be coming down in price. Home sales are declining, although rents remain high. Let’s start talking about where we are in this rate tightening cycle. What was your take away from the Jackson Hole festival of speeches and — and Jerome Powell’s — it’s kind of surprising that anybody thinks he didn’t communicate what was happening, but it seems like the market was taking a little by surprise.
BITTERLY MICHELL: Don’t you think there’s a debate though? Do I think there’s this question around what we want the Fed to do, what we think the Fed should do versus what they’re telling us they’re going …
BITTERLY MICHELL: … to do, right?
BITTERLY MICHELL: So I think that Chair Powell has been very clear in terms of what they’re going to do. Over the summer months, we got that rally off the June lows and, you know, some of it was kind of peak bearish positioning. Some of the abatement like you mentioned in terms of commodity prices and particularly with gasoline, and then Q2 earnings were pretty resilient, right?
BITTERLY MICHELL: We thought inflation was going to impact a lot more than it did. There are a lot of surprises in terms of top line revenue growth. And so, then I — I think what happened was we started sneaking in these narratives — the market did — about, you know, maybe there’s a Fed pivot. Maybe the Fed …
BITTERLY MICHELL: … will be dovish. We didn’t see that at — at Citi Global Wealth. We did not see any signs that the Fed was going to change course. And so, I think in Jackson Hole, that very short, very deliberate speech was one where it was make no mistake about the fact that we are going to continue to tighten that inflation expectations will not out of control yet, but at a level of, you know, 2.25, 2.5 looking far out, we need to bring him down to two, and our job is not yet done. We need to make sure that we’re — we’re taking that action.
I think the other interesting thing, too, that may have been one of the catalysts for the — the volatility that we saw on — on Friday and Monday was really this lack of mentioning a soft landing. Chair Powell and his past couple of speeches and public comments always said that a soft landing was possible. Hear that was absent, so it was much more about invoking Voelker and also just looking at this is going to create some pain, and he admitted that. So I think they’re trajectory is very clear through the rest of this year in terms of the tightening path that they’re o.
RITHOLTZ: Right. I — I — I think 50 plus 75 plus 75 plus whatever happened September 2022, that’s the end of the soft landing. He’s telling you we’re going to really throttle back in order to make sure we can get the toothpaste back in the tube, but that leads to an interesting question. We’re talking about narratives and what we hope there’s a little bit of wishful thinking going on …
BITTERLY MICHELL: Yeah.
RITHOLTZ: … but, you know, my perspective has been the Fed was late to start raising rates. At the very least, they should have gotten off their emergency footing sooner. It looks like now they’re late to recognize the peak in inflation and they probably don’t have to do a whole lot more. Are they going to be causing unnecessary pain? Have — have they already one, can they declare a victory and go home or are they going to just keep pounding away and either cause a mild recession or perhaps something worse?
BITTERLY MICHELL: Yeah. And I think that’s one of the challenges in terms of, you know, this is where economics degrees really come in handy in terms of breaking down all of these — these data points, but they were very specific that their goal was, you know, headline inflation. We all talked about the demand side of the equation, the supply-side …
RITHOLTZ: Right, right.
BITTERLY MICHELL: … what’s in their control, what’s out of their control. And Chair Powell again was very, very direct in terms of no, the whole thing is our mandate, right? So whether it’s supply-side, demand-side, we need to make sure that we got this under control. So obviously, we’re seeing some relief in the commodity sector, but more broadly it’s, you know, whether or not how quickly are we going to see that number come down. And even if it’s at, let’s say 6.5, six percent by yearend, that’s nowhere close, right, to their ultimate target.
And so, continuing on this path, I think the challenge that the Fed’s in is when you think of tightening financial conditions, we don’t see the full impact of that until out probably 12, 18 months.
BITTERLY MICHELL: Right? So there is this concept of what they’re doing now is not really going to flow through to everyone both the consumer, as well as corporations until several months out. And so, what does that mean for consumer spending? What does that mean for all of the decisions that the consumer is making, which drives 65 percent of the — the U.S. economy? And what does it mean for corporations as they are making decisions?
And so, in Q2, we heard a lot that recession wasn’t the base case, but they’re — they’re planning. I think it’s going to be really fascinating. I think we’re going to pivot from — I shouldn’t use that term, pivot.
RITHOLTZ: It’s become a dirty word, right.
BITTERLY MICHELL: Become a dirty word.
RITHOLTZ: It’s a five-letter word.
BITTERLY MICHELL: But I — I think we’re going to change the dialogue from what was obsessive about the Fed and debate about what they’re going to do, and what is the terminal Fed funds rate to now obsession about earnings. And I think we’re really going to focus on where are we seeing that squeeze, where are we seeing that change in consumer spending patterns, how are companies preparing for this, and what companies are well-prepared for what is going to be — we say don’t fight the Fed when it’s easy monetary conditions …
BITTERLY MICHELL: … maybe we shouldn’t fight the Fed when it’s very clearly tighter financial conditions.
RITHOLTZ: So you raise a whole bunch of really interesting points I want to pin you down on. First, do investors pay too much attention to the Fed? Do they obsess when really they should be looking past it a year out?
BITTERLY MICHELL: It’s hard to say that definitively, right, because interest rates are important, liquidity …
BITTERLY MICHELL: … is important. The concept of a Fed put was really important in terms of the overall direction, so it absolutely impacts the economy and markets. I think paying too much attention to the day over day moves is something.
And this is interesting, Barry, I think this is something that we actually saw starting with COVID. Once we shifted to that work from home, stay at home, and just massive spike in volatility, massive movements in the market, I think we’ve gotten into a little bit paying a lot of attention to day over day movements.
BITTERLY MICHELL: What does this day mean? And even if we take, you know, for the summer months, liquidity is light.
BITTERLY MICHELL: People are on vacation. You know, paying too much credence …
RITHOLTZ: Easy to move the headlines around, yes.
BITTERLY MICHELL: … to one day and really trying to take that view, it doesn’t need to be out five years, but trying to take that view out several months. And so, I think we’re seeing a lot of investors really hanging on the word of every speech every day — daily report. And I think, on average, yup, we’re going to have jobs reports that are important, we’re going to have CPI and prints that are important, but really it’s the amalgamation of all of these things that’s going to determine how severe the recession is and the ultimate trajectory of markets from here.
RITHOLTZ: Right. Going from zero percent interest rate to four percent interest rate, obviously important.
BITTERLY MICHELL: Seismic.
RITHOLTZ: But it feels like every CPI report, it hits the tape, and then people are already talking about the following month. You know, in — in July, it’s like is this going to be the peak. It was barely crossing the tape, and then suddenly August and September. And we’re going to see the same thing happened in September. As soon as we get that print, people are going to start talking about October.
The next question that you alluded to, which is really interesting about revenue and profits, how solid in inflation hedge are equities? Revenues seem to be unaffected, profits have been pretty strong, and companies have shown a pretty solid ability to pass along input cost to the — to ultimately to the consumer. Do we — should we be looking at stocks as an inflation hedge?
BITTERLY MICHELL: Yeah, so I think this is to your earlier question about U.S. investors thinking through some of these risks, inflation really hasn’t been a risk that we’ve had to think about for quite some time, right?
RITHOLTZ: Right, right.
BITTERLY MICHELL: So obviously, absent the — the 70’s and — and 80’s, thinking of this level of inflation is not someone — someone’s had to think about, and the idea of what is the real — real rate of return, what is the real interest rate on this. And so, if you were someone who was sitting in cash, let’s say from like 2000 to 2010, you were earning on a real basis about three percent per annum.
BITTERLY MICHELL: Not knocking it out of the park, but not terrible either …
RITHOLTZ: Whereas the — and the market when — essentially didn’t get above 2000 to like 2013 or so.
BITTERLY MICHELL: Exactly. And so, I think that now looking at this past decade where you’ve seen that impact and now you’re just seeing it front and center in terms of 8.5 percent is — is extreme in — in terms of what that means from a spending standpoint, as well as what it means from an investment standpoint. And so, this becomes the question around how do I create — depending upon how I’m currently positioned, how do I create better outcomes?
So if you’re someone who has been hiding a little bit in cash, maybe overweight cash for not just the past two years, but the past 10 years, that’s that conversation, but how do we get to marginally better outcomes? How do we add things like muni bonds? How do we add things? Even like preferreds in terms of some of the yields that we’re seeing in preferreds for investors because I recognize that, Barry, if we’re thinking of like what are the best hedges against inflation? Well, if we go through the highest beta, it’s almost like you can break it down as commodities, direct commodity exposure, a lot of individual investors are not going to take that on.
BITTERLY MICHELL: So then you’re looking at the commodity stocks. Are there opportunities within energy, commodity stocks? We actually had positions within commodity stocks for a period of time as a hedge, as a portion of the portfolio not as a directional that at all, but we — we pulled back on those positions just given some of the turnover that we’ve seen particularly within the …
RITHOLTZ: And the giant spike from last year plus once the invasion in Ukraine started in February, the oil sector went …
BITTERLY MICHELL: You needed some hedging, right?
BITTERLY MICHELL: Like you needed that hedging because it wasn’t just impacting energy, it was impacting food. It was impacting natural resources. We saw that concentrated exposure, right, with the — the — the staff that came out, that 85 percent of the world’s wheat production. And — and you saw these …
BITTERLY MICHELL: … we’re coming out of Russia and the Ukraine, things we never — never knew before.
And so, getting to your question about equities where we’re positioned right now, equities absolutely can conserve an important part in the portfolio. But given the concerns that I have as to where the U.S. is right now, U.S. equities, we’re not pricing in a recession right now, we’re not pricing in a meaningful earnings contraction or tightening financial conditions impacting companies. And so, where we’re invested is in quality.
And if you look at like the S&P 500 Dividend Aristocrats Index, you’re talking about companies not high dividend payers, but companies that have been able to consistently grow their — their dividends, consistently grow their earnings. And so, looking at the yields on that, around three, 3.5 percent and diversification across sectors like healthcare, even infotech is in there because — and you have some infotech companies that are now durable demand, that’s the part of the market where from an equity standpoint we’re — we’re very comfortable maintaining that exposure.
RITHOLTZ: It’s our pricing in a recession or are markets just pricing in a slowdown of the growth, a little bit of the Fed having some bite, but not necessarily causing a full-blown contraction?
BITTERLY MICHELL: I don’t think they’re pricing in a recession or earnings contraction right now. I’m not saying that we’re going to see substantial downsize from here. There’s a lot of debates, right, about …
RITHOLTZ: So before …
BITTERLY MICHELL: … are we going to retest those lows?
RITHOLTZ: So — so let’s put — put a little framework on — on what we’re talking about if people are listening to this in the future. It’s late in the summer in 2022, markets sold off 22, 24 percent, recovered about half of those losses …
BITTERLY MICHELL: Yeah.
RITHOLTZ: … and gave a little bit of that back after Jackson Hole. So down 10 percent or so in the S&P, not really pricing in a whole lot of (inaudible).
BITTERLY MICHELL: That’s not, and when you look at those analyses of recessionary bear markets versus non-recessionary bear markets …
RITHOLTZ: That’s a huge difference, isn’t it?
BITTERLY MICHELL: It’s a huge difference both in terms of the duration, right? So you tend to see recessionary. And it depends on what data points you use, but again, on average …
RITHOLTZ: But depth and duration, it’s a big difference.
BITTERLY MICHELL: … depth and duration, it’s a big difference where you see, you know, the — the duration in non-recessionary bear markets, on average, are about 180 days, maybe max. Some of those max observations around 220, right? So well under — well under a year where recessionary bear markets are 400.
BITTERLY MICHELL: So that — that’s a — that’s a big difference. And also the drawdowns, if we’re using U.S. equities, non-recessionary bear markets down around 20 percent, so yes, we may have done that work.
BITTERLY MICHELL: But recessionary bear markets can be an excess of 30 percent and even closer to 40 percent depending upon what dataset you’re using. So it is very different when companies are making tough decisions about where they’re investing, right, and how they’re investing, and how that impacts obviously wages, employment, et cetera.
So what we’ve seen with the — you know, the two negative quarters of GDP growth, a lot of people say, well, that’s a technical recession. And then again, all of our economic students are like, no, there’s the National …
BITTERLY MICHELL: … Bureau of Economic Research, and this is how it’s calculated. But we’re looking at that in terms of you have to see some significant increase in the unemployment rate, and you’re going to have to see that earnings contraction. And so, do we anticipate — here’s — here’s — I’m going to — I’m going to share some positive news, right? So that was — that was very cautionary.
But I think one of the positive things is we haven’t had a recession that has been this anticipated either. So whether the market’s pricing it in or not, consumers are planning for it, corporations are planning for it. This is not something that’s coming out of left field. The Fed is clear about their trajectory. So in terms of taking some of those decisions and mitigating the depth and duration of that, recessions are painful, right, but the depth and duration of that economic pain, hopefully that can be mitigated.
RITHOLTZ: So let’s stick with that because that’s really interesting. I’m going to preface what I’m going to ask you with — with the caveats. So heading into 2022, there surely were pockets of froth. Crypto had gone ballistic, technology had exploded. Anytime the S&P 500 is up 28 percent. Hey, there’s probably a little bit of a speculation going on.
But given all that, the first half of this year, the data and just the general field wasn’t like consumers and companies were leaning too far out over their skis. Everybody’s balance sheets were pretty clean. They had refinanced, they had very low rates. It looked like both the household and the business sector, hey, if things slowed down, they’re pretty well-prepared for this or am I oversimplifying it?
BITTERLY MICHELL: I think you’re right. I — I think you’re absolutely right that, on average, the average company, average consumer came into this year in pretty good shape, right? Their balance sheets were very strong. I’m saying they are both across companies and consumers. They were able to take advantage of the low interest rate environment to really kind of clean up liabilities. And so, I think that we came into this year prepared from a balance sheet perspective, not prepared for what was then going to transpire …
RITHOLTZ: Mentally, right.
BITTERLY MICHELL: … in — yeah, in terms of not only that quick movement in interest rates. Remember in January, that was the story, the kind of …
BITTERLY MICHELL: … very quick movement in interest rates, and then obviously, geopolitics and Russia’s war in the Ukraine really exacerbating some of those supply shocks. And so, I just think that those types of risks and the overall prospect of what that means from a recession standpoint, it’s better to be in that position, right? It is better to be in that position.
BITTERLY MICHELL: We’re coming into it from a place of strength.
And you are starting to see some cracks, right? So let’s talk about the cracks inventory is building, right? That’s — that’s probably front and center.
RITHOLTZ: Well, with the fact from, hey, we can’t get anything, let’s just get everything.
BITTERLY MICHELL: Now we’re seeing a massive inventory build. We’re seeing housing starts come down. We’re seeing just the time, right, that homes are on the market and …
BITTERLY MICHELL: … extending, and so …
RITHOLTZ: Bidding wars are dropping.
BITTERLY MICHELL: … you’re starting to see that, but that’s also good in terms of showing some of that froth being taken out of the — the economy and — and some of that — that slowdown.
I think some of the things that we need to keep an eye on just from a — the impact of the Fed’s tightening is a couple of things. One, we also saw a record number of credit card openings in Q1 and Q2. And so, some of the stats that we’ve seen, Q1 of this year was a record number, $532 million.
RITHOLTZ: New credit card issuances, wow.
BITTERLY MICHELL: And so, on one hand, people like consumers are continuing to spend. Yup, they’re continuing to spend. We are reaching pre-pandemic levels in terms of balances on credit cards. We’re not going above that, we’re just pre-pandemic levels …
RITHOLTZ: And relative to income it’s — you know, that always — people always show you the — the debt, but they sometimes fail to show you what does the debt look like relative to discretionary income. That’s at really good levels, isn’t it?
BITTERLY MICHELL: It’s at very good levels. But when you see — so it’s interesting because then you see these trends, OK, we’re opening more and more credit cards, okay? Interesting. How are people then spending? Previously, it was stimulus, right? There was stimulus fueling the economy, and now it’s — OK, now I’m buying on credit. That’s not the end of the world, right?
BITTERLY MICHELL: That is access to — to capital. But when we see those balances increase, another increasing at higher interest rates …
BITTERLY MICHELL: … that’s something that we want to watch and keep an eye on. And obviously in Q2, a lot of financials reported and they talked about loan loss reserves very well in check, very healthy, and so I think that’s a trend that we need to keep an eye on.
Same thing when it comes to corporations, right? So when we think about credit spreads in the market and we look at high-yield spreads, we look at — we haven’t really seen that widen out. And if that does widen out, right, it’s widened a little bit, Barry, to be fair, but it hasn’t really to this level of, OK, we’re really going to see companies stretched. Those are some areas that could — could create some continued pain in the market.
RITHOLTZ: So you sit in a really unique perch. You referenced to all of the new credit card openings, you at Citi also get — which is a giant credit card entity, you get to see delinquencies, delays, defaults, all — all those sorts of things. How do you manage to tap into that huge amount of data that you have? Can you crunch those numbers and use it for your own benefit because who better than someone at one of the nation’s biggest credit card issuers to look at those numbers and say, hey, what are we seeing internally before it hits BLS or Commerce Department?
BITTERLY MICHELL: Yeah, so any data that we have obviously has a large financial …
RITHOLTZ: Anonymized in blah blah blah.
BITTERLY MICHELL: … yeah, large financial institution. There’s obviously walls. There’s data that can be shared, data that cannot be shared. And — and there’s a lot of protection around that.
However, when we look at things like — like flows, right, and we can see average cash balances that our clients have, are they building cash balances, are they taking more risk in the market? So all of those trends and insights that we get from our clients are critically important in terms of the pulse of the economy, as well as the markets. And so, yes, we — we pay a lot of attention not only to what we think, right, but what we think is going to happen in the economy and markets.
But those signs that we’re getting from our investors …
RITHOLTZ: What’s actually occurring.
BITTERLY MICHELL: … and our clients at large, exactly, and it’s a really important thing. We always think about that on the institutional side in terms of flows. A lot of people are measuring every single day, right? But that’s something that you can see within private wealth as well, and — and it’s significant. It can move the market.
RITHOLTZ: Really interesting. So let’s talk a little bit about the current environment in the past couple of years starting with the 2020 pandemic. How did that affect clients? Did they react to the volatility? What — what sort of questions did you get?
BITTERLY MICHELL: And so, I — I think we could break it down into two different parts: how did it impact us and how did it impact clients because, at that moment in time, Barry, I was running our Capital Markets Division in — in the Americas, North America and Latin America. And I remember March 2020, there was no thought in our mind that we were going to work from home.
BITTERLY MICHELL: Working on a trading floor, trading desk, this idea that you are going to somehow mobilize and be able to take an organization of dozens of people and somehow figure out how to work from home. So I was one of those people that definitely left kicking and screaming (inaudible), like I can stay here, I can still work from here.
RITHOLTZ: I remember someone saying, don’t worry it’ll be a week or two you’ll be back in the office.
BITTERLY MICHELL: We all thought that, right? We — we all thought that it was maybe a month, maybe three months max. And so, — but we did it, right? We had to — we were doing at that moment in time at Citi, we had the contingency plans. We had people working on different days and — and continuity of business sites. And then we got the phone call that, no, we need to find a way to move everyone 100 percent to work from home.
RITHOLTZ: And that — that continuity, that was all set-up post 9/11. I — I think a lot of people don’t realize one of the few good things that had come out of our — you know, closing of the stock markets for a week and …
BITTERLY MICHELL: Yeah.
RITHOLTZ: … everybody realized, oh, we have to have a plan be in case something like this ever happens again.
BITTERLY MICHELL: We have different sites exactly. So we have one in New Jersey where we can recreate, and it’s part of your job, right? You do the continuity …
BITTERLY MICHELL: … of business testing. And so, that was helpful, but then it was you know what, we need to have everyone work from home. And so, it was a mad rush to be able to make that happen.
And I think we all learned a lot about our technology. We learned a lot about phone lines …
BITTERLY MICHELL: … phone lines and — and how to — to make sure that every call was going to be answered because you couple not only that with one of the most volatile markets in history. And so, you’re like the one thing that we can’t fail to do is help our clients. If they need to get out of risk, if they need to sell, we want to make sure that we’re — we’re able to answer those calls and help them out.
And so, we were very fortunate looking back on it. I think everyone has those surreal experiences, right, that you don’t even know …
RITHOLTZ: Well …
BITTERLY MICHELL: … how many hours you worked or what was happening or …
RITHOLTZ: Right, it’s a blur.
BITTERLY MICHELL: … your kids doing virtual school next to you while you’re trying to manage this. And so, I think we — we really helped our clients through that that period of time because this wasn’t like any other market correction, right? This was a once in a 100-year pandemic.
RITHOLTZ: Down 34 percent less than six weeks, you’ve never seen anything like that. For me …
BITTERLY MICHELL: Never seen anything like that.
RITHOLTZ: … 87 is the closest thing, and that was really more plumbing than anything.
BITTERLY MICHELL: And so, one of the things that we did was we started communicating more frequently with our clients. And so, our Chief Investment Officer and our Chief Investment Strategist, we all got together and decided that this was something we need to communicate to our clients every week as to what’s going on. And so, we continue to do this to this day.
We — we publish once a week breaking down what’s happened in the markets, what’s happened in the economy, how people should be thinking about their portfolios. And then we do a weekly webcast every Thursday. Same thing, some people really like to read it, some people like the — the live interaction, but people were craving that information, how should I think about this, how should I think about what’s next.
And so, that frequency of communication and having that access to information and how to think about, how you should be positioned, and staying the course, right, because that’s the most difficult challenge. And — and when you see those severe drawdowns, human psychology and all of our heuristic biases, right, that come into play as you’re seeing the market tank, it is very hard to stay invested.
RITHOLTZ: What about the flipside of that? Starting in April, the market begins to recover and takes off. Were you getting phone calls from clients saying, “Hey, what’s going on? This doesn’t make any sense. Everything around me is closed. How can the market be rallying?”
BITTERLY MICHELL: Absolutely. And then, you know, some of the — the calls that we had about adding to home builders, thinking about human behavior and how it was going to change. And I remember when we added some of those exposures to the portfolio, the kneejerk reaction was really?
RITHOLTZ: What are you, crazy?
BITTERLY MICHELL: Really?
BITTERLY MICHELL: Like who’s — who’s buying a house right now, like we’re in a pandemic, and it’s like actually everyone.
RITHOLTZ: People want to get the hell out of apartment buildings, right?
BITTERLY MICHELL: Everyone want to get out of apartments. Everyone wants to — which is so intuitive now, but we became a lot more tactical with some of our allocations. Of course, we have strategic asset allocations, strategic portfolios. But to really take advantage of some of these movements because it was — it was intense, right, and it continues to be intense in terms of navigating these markets. And so, we became a lot more nimble and a lot more opportunistic in — in some of our investments, and so it really increased.
I will say I think one of the surprises to us was it only made our client relationship stronger. You would think that this very personal business of you’re constantly visiting clients, you’re meeting in their homes, you get to know their families. The pandemic created a need to understand markets better, the economy better, the — the global economy better, all of these different dynamics. And having like a go-to advisor and someone who was accessible pretty much 24/7 because …
RITHOLTZ: Right, right.
BITTERLY MICHELL: … we’re all — we’re all working from home and …
BITTERLY MICHELL: … living …
RITHOLTZ: The phone is right there, the computer is right there.
BITTERLY MICHELL: Yeah, trying to stay healthy and taking care of our families. And — and — and so I actually think it strengthens a lot of the relationships. It was a way for us to actually when we see — look at our new client acquisition statistics, when we look at our AUM growth. we actually brought in a lot of assets. And so, you know, hopefully that’s a — you know, a testament to how we were advising our clients through that time, the frequency, the accessibility, and — and their trust in us to continue to do that going forward.
RITHOLTZ: What were you hearing from clients the following year?
BITTERLY MICHELL: Yeah, so 2020 was dominated by this concept of COVID defensives, COVID cyclicals, right? Who are the winners and losers when it comes to being work from home, stay at home.
RITHOLTZ: Netflix, Peloton …
BITTERLY MICHELL: Yeah.
Rick Dickinson: … that whole group of stuff.
BITTERLY MICHELL: You saw that whole thing of like stay at home versus leave your home, right? So that was what really dominated and it continued to dominate in — in 2021. And one of the questions that we were asking ourselves is you did see, particularly within the hyper growth part of the market, right, hyper growth. And, you know, I think it’s unfair.
We tend to talk about technology very broadly, and so it’s, you know, all one thing and all the same. It’s very different and the subsectors are very different. But I think one way to slice and dice it is looking at, OK, you have some technology companies that have durable demands, right? You can put them in that bucket of dividend growers, durable demand, quality companies/
And then you have hyper growth companies that, you know, the way that their stocks trade is almost like a call option on an unknown future, right? So just like a call option premium is going to have a lot more volatility than you would see in a stock price, you see similar behavior. And I think the momentum that we saw in the pandemic and coming out of the pandemic, a lot of hyper growth benefited from that.
And so, one of the changes that we made to our portfolio is probably in Q3/Q4 of last year was this idea, OK, there’s going to be the shift. We’re no longer going to have this dominance of COVID cyclicals, COVID defensives and where we should be invested, but this is going to be a question of what’s going to do well in a rising rate environment. How are we — how do we want to be positioned in a rising rate environment? What companies can withstand inflationary pressures, which was really our shift in our portfolios away from some of those hyper growth technology companies and then into more quality?
RITHOLTZ: So let’s say with that because that’s really an interesting distinction. Heading into 2022, sure, the broad market sold off and we were down 20 or so percent. But when you look at the hyper growth, when you look at the high flyers, some of these got shellac 40, 50, 60 …
BITTERLY MICHELL: Yeah.
RITHOLTZ: … percent or worse, what do you do when clients call up who are sitting in those sorts of things? How do you manage that?
BITTERLY MICHELL: I think finding — so for — for clients who are sitting in individual stocks and looking at, okay, I am, you know, part of that experience where these positions are down 50, 60, 70 percent to your point …
RITHOLTZ: And to be fair they had a giant run the past 10 years.
BITTERLY MICHELL: They had a massive run, exactly. And so, you look at it net-net. Obviously, that — that’s an important part of that equation. But I think breaking it down into are we talking about a profitable company, are we talking about that call option on an unknown future, or are we talking about there’s a clear path to profitability.
I think there is a misunderstanding sometimes in the market that, you know, just because something is sold off substantially it has to go up.
BITTERLY MICHELL: You know, there — there’s a number of analyses out there where it talks about stocks that are trading, you know, 80 percent off their all-time highs, and you really look back at it. And people think that happened last year or the year before. It could’ve happened 20 years ago.
BITTERLY MICHELL: There are still stocks that are trading significantly off, so not everything that goes down must go up. So I think it — it is a function of understanding that we are in a tightening financial conditions environment. Don’t fight the Fed, right? Don’t fight that Fed. And — and try to determine is this something I’m willing to hold long-term because I see that path to profitability or is this something where I don’t see it and we could see continued volatility or continued downside (inaudible).
RITHOLTZ: So — so that’s the question about the other side of the recession, are you buying things in 2021 and 2022 especially that you’re comfortable riding up and down until we come out of whatever takes place in ‘23 and ’24?
BITTERLY MICHELL: Precisely. So at the — like I — like I mentioned, Q3, Q4 of last year we started to make some of these portfolio changes on the equity side. This year we came into the year underweight fixed income like most people, right, anticipating rising rates. We added fixed income exposure. Again, quality fixed income exposure looking at munis, investment grade, preferreds really wants that 10-year — the 10-year crossover three percent for the first time. That was an area where we said, all right, are we going to see peak inflation? Are we going to see peak rates in this year? Probably, and so we became very comfortable adding that exposure.
And now when you think of what we were talking about earlier, this debate of are we going to see some resiliency here or are we going to tip over into a recession? And preparing your portfolio for both of those things, I think patience is a virtue in this market, not chasing some of these rallies that we see, but being very comfortable with those exposures both across equities, fixed income, and as we were talking about earlier, private markets as well.
RITHOLTZ: So what you’re really describing are portfolios that are robust, resilient, and can ride out a downtown.
BITTERLY MICHELL: A 100 percent. And when you even go back to really difficult times like the 1970’s and you say, OK, well, what — what happened to large cap quality shares during that period of time? They were able to double their share prices, right?
So even when you start analyzing companies about durable demand or acknowledging that we’re going to be, it doesn’t mean — I — I view tightening financial conditions is very similar to climbing a mountain, right? If you have a heavier load, it’s going to take you longer, right? It doesn’t mean you can’t climb the mountain. That’s what corporations are faced with. That’s what consumers are faced with, and so putting your capital in those areas.
And then if we do tip over into that recessionary environment, that fixed income portion of the portfolio is going to do well, right? So the anticipation in terms of rates coming down flight to quality is a balance and a diversifier in the portfolio that, as we were talking about previously, didn’t make sense when we were dealing with negative yielding debt, but now — now makes sense.
RITHOLTZ: Right. You get some ballast at 3.2, 3.5 that you don’t really see it. Forget even negative when — when yields are, you know, below one percent, how much room is there to that offset? Any sort of downtime?
BITTERLY MICHELL: Absolutely.
RITHOLTZ: And — and we saw that in the first half of this year. So you mentioned high net worth and ultra-high net worth. I want to ask a question about family offices, which seemed …
BITTERLY MICHELL: Sure.
RITHOLTZ: … to be sort of their own specific category of investors. Do they approach markets like this similarly to high net worth investors? How was their approach different? Tell us a little bit about what your experiences are with that group.
BITTERLY MICHELL: Sure. So with family offices, I — I think the interesting thing is we try to view them as one client segment. It’s not the case at all. So …
RITHOLTZ: Well, there’s a big difference between a $50 million office and a $500 million …
BITTERLY MICHELL: Absolutely.
RITHOLTZ: … family office.
BITTERLY MICHELL: And — and not — every family office is a little bit different in terms of what they’re dealing with, how the wealth was created, the existing assets. And so, we’re very fortunate. We work with over a quarter of the world’s billionaires. We have experience working with family offices.
We actually have a dedicated global family office team. And we do a lot of research in this area, and we provide a lot of information both in terms of networking opportunities for family offices, as well as family offices recognizing kind of their own benchmarking, right? So data around what are other family offices doing? How are they set-up? What is their staffing? What are the rules of the different people on — on staff?
And so, we spend a lot of time with this client segment with the acknowledgement that family offices are markedly different. I think it all goes back to the sizes you mentioned, right? So the size and amount of capital can greatly change the way that the family office is structured. And then it’s also how the wealth was generated. Sometimes it’s within our industry, sometimes …
RITHOLTZ: That’s interesting.
BITTERLY MICHELL: … it was within hedge funds, for example. Whether there’s an asset that’s a non-negotiable, we’re not selling this asset.
So someone who started an amazing company, right, still is on the board, owns a — a big chunk of their wealth in a concentrated stock position. And then it’s like what are we doing around that, right, because we’re not touching this. I — I still remain active in the company.
And so, I would say each family office is different. We work with institutional family offices that tend to, you know, trade more actively. They’re looking for opportunities that are very similar to our institutional client base. We — we partner with other family offices exactly what we’re talking about, right? So how should we think about liquidity, how should we think about the markets. No asset class is off limits.
And then, you know, there’s — there’s certain family offices that we’re seeing nowadays especially that have very precise mandates, right, where you see …
RITHOLTZ: Oh, really?
BITTERLY MICHELL: … where you see mandates that are heavily weighted towards private markets, mandates that are heavily weighted toward sustainable investing or impact investing. So that’s something that’s really come out over the past several years where the mandate is not just about investments in asset classes, but actually thinking through the full journey of the principal, and what they want to do both from an investment standpoint, as well as a philanthropic standpoint.
RITHOLTZ: Right, reflecting their values. So let’s — I’m glad you brought that up because we haven’t talked about that.
There’s been a lot of political pushback to ESG and that sort of investing, but it sounds like the investors themselves — at least a portion of them are asking for that. How — how do you balance the two or do you just ignore the political noise?
BITTERLY MICHELL: When you look at the growth rates overall of sustainable investing versus just broad — broad-based wealth, right, and — and wealth growth, and — and assets coming into traditional, let’s say traditional investing, the anticipated growth rate is anywhere from three to five times higher in sustainable investing over the next five years.
BITTERLY MICHELL: Huge. It’s really significant. We’re talking about, you know, trillions of dollars coming into the space. And so, I think the important thing is really from an education standpoint, right? So this is partially about what’s happened within the industry, and it’s partially about what is the desire of the investor.
What’s happened in the industry is a massive proliferation of products, right? But there is a scale, right, how we’ve evolved over time. You could say sustainable investing originally came, right? It came from exclusionary. I don’t want to invest in …
BITTERLY MICHELL: … certain things. And then it’s become, OK, maybe more broad-based in terms of some of the criteria and then looking at really making an impact, right? So both a return financially and being able to measure the impact.
The trends that we’re seeing in this space were much more personalized. So where you see that higher kind of five times growth rate is really more on the line of I want thematic, I want things that are personalized to what I want to do. And it’s no longer — and this is where a lot of people get confused. It’s not about philanthropy, right? So philanthropy is something entirely different.
BITTERLY MICHELL: This is about where am I investing capital that is then aligned to my values. And it’s not concessionary, it’s not about taking inferior returns, it’s about creating that mandate and being very specific about it. So the ability to be able to customize that and personalize that is something that’s going to be significant for wealth managers going forward.
RITHOLTZ: So last question on this topic and then we’ll get to our favorite questions. Some of the studies I’ve seen have mentioned that when it comes to sustainable investing or impact investing, the younger generation embraces it much more wholeheartedly than do the boomers or — or younger than them. And the boomers are really on the verge of a multitrillion dollar generational wealth transfer. Is part of that underlining that big change in growth for sustainable investing?
BITTERLY MICHELL: Absolutely. I — I think there is demographics. There’s trends. You even see that in Gen Z, right? It’s — it’s about passion and purpose, right? It’s — it’s not just about where you’re investing, but what is my career? Where am I working day-to-day, right, and really finding that from a — from a value perspective.
But I think we’re also a little bit too flippant in terms of — of saying the — the — the boomers are not interested in this. I think everyone’s interested in it. I — I really, really do. I think — you know, when you think about who am I giving my money to, right? Who am I giving my money to? Investing is giving your money to someone, right?
BITTERLY MICHELL: It is betting on someone else’s ingenuity. And so, having that type of thing, if I were going to lend money to someone, you know, personally or invest equity in — in someone, I would want them to be, you know, aligned in terms of values, make sure that they’re, you know, a good person, treating their employees while making, you know, investments in the right — in — in the right areas, embracing things like diversity, not just from a diversity and inclusion standpoint, but also from diversity of thought and background and …
BITTERLY MICHELL: … and ideas. And so, you know, when you think of that on a micro level and then you expanded to a macro level in terms of how you’re investing, it becomes intuitive that everyone wants to do that. But do they have the time, right? Like do they have the time, and so that’s where I do think there is a huge responsibility for wealth managers to filter through and make sure we’re not labeling certain things. And then there’s a huge opportunity for wealth managers because then if you’re presented with that, you understand the — the risk mitigation factors, you can view this as a risk mitigant, right, governance.
Governance is a big piece of that, right? So …
RITHOLTZ: Right, better governance is less of the sort of terrible outcomes we’ve seen.
BITTERLY MICHELL: … going to lead to better returns.
BITTERLY MICHELL: Absolutely. And so, I think it’s applicable to everyone. I think there is a lot more education that has to happen within the space. There’s a lot more personalization, a lot more demand for thematic investing, but this is something where it’s a great opportunity to bridge what the investors really want and also the current offerings.
RITHOLTZ: Really quite interesting. All right. I know I only have you for a limited amount of time, so I’m going to jump to my favorite questions. I know you have young ones at home that you had to deal with …
BITTERLY MICHELL: Yeah.
RITHOLTZ: … during — during the pandemic. What did you do to entertain them? What sort of things was the family watching on Netflix or whatever?
BITTERLY MICHELL: What we were doing during the pandemic, I mean, we did a — we — we set-up makeshift — like ziplines in our house.
RITHOLTZ: Oh, really?
BITTERLY MICHELL: It’s an engineering feat. I have two boys, so …
RITHOLTZ: How old are they?
BITTERLY MICHELL: … two boys. They’re now six and eight.
BITTERLY MICHELL: So at the pandemic …
RITHOLTZ: Still — still young, right? Yeah.
BITTERLY MICHELL: … they were little. Yeah, they were — they — they were little. They’re still young. So we were trying to find ways to burn energy, right? It was — for them, I think it was — hopefully, they’ll remember this way.
I think it was delightful for them because I travel a lot, so they’ve got used to, you know, me being at home cooking pancakes in the morning. But what have we been watching?
So two boys, obviously, are dominating my Netflix and any type of streaming. There’s a lot of Wild Kratts going on, not even sure if you know this program but …
RITHOLTZ: I have nieces and nephews, yes, I’m familiar.
BITTERLY MICHELL: Yes, so yes. And then I would say I had no idea how many Avenger movies there were.
BITTERLY MICHELL: Endless.
BITTERLY MICHELL: There’s millions, there’s millions of …
RITHOLTZ: Right, they just don’t stop.
BITTERLY MICHELL: … they don’t stop.
Godzilla is a whole franchise I didn’t know existed. I missed this over the past two decades.
RITHOLTZ: I know it’s a franchise, I haven’t seen any of the recent ones.
BITTERLY MICHELL: You can ask me anything about that. And then …
RITHOLTZ: Any of the Star Wars, Mandalorian, Boba Fett …
BITTERLY MICHELL: I tried …
RITHOLTZ: … or are they too young for that?
BITTERLY MICHELL: I love Star Wars. I tried. We’re not there yet. We are into the Jurassic Worlds. We got to see that in the theater. So I — you know what, I — I — I let them lead the way. Someday they’ll — they’ll get into to Star Wars, I hope.
But personally, so here’s my current recommendation, which I just discovered and I don’t know how I didn’t know about this earlier is Yellowstone. Have you watched Yellowstone?
RITHOLTZ: I know people who love it. We haven’t — we haven’t started it yet.
BITTERLY MICHELL: It is remarkable. So Kevin Costner — I mean, who doesn’t love Kevin Costner.
BITTERLY MICHELL: Right? The Field of Dreams, The Bodyguards. Do you remember The Bodyguard?
RITHOLTZ: Sure. The famous Whitney Houston song came out of that.
BITTERLY MICHELL: He was Robin Hood …
RITHOLTZ: Absolutely, right.
BITTERLY MICHELL: … I mean, Dances with Wolves, but this is an incredible show.
There’s four seasons out there. It is like succession meets — I — I don’t — there’s like a succession meets the west, meets — it’s worth it. Check it out.
RITHOLTZ: It’s on my list.
BITTERLY MICHELL: Check it out.
RITHOLTZ: (Inaudible) helped to shape your career?
BITTERLY MICHELL: I have been so lucky that I’ve had so many amazing mentors and people around me. I may flip this question a little bit just in the sense of like some early pieces of advice that have stuck with me. I’ll mention two.
One, I played tennis growing up and — and I had a great tennis coach in high school. And one of the things that she said — and I still remember this. This is like so vivid, and I tell it to myself some — sometimes because we — we all need to — to check ourselves. And she would tell the story that basically went something like this that, you know, when you’re in your 20s and 30s you’re always worrying about what everyone is saying about you. And then when you get into your 40s, you realize you don’t really care what they’re saying about you.
And then when you’re in your 50s and 60s, you realize they weren’t talking about you in the first place. And it is …
RITHOLTZ: That’s very funny.
BITTERLY MICHELL: … so true, Barry, it is so true. And so, sometimes when you’re feeling, you know, a little anxious or you’re wondering how something went or whether it was bad/good, I — I use that also — I don’t know if you play golf. Do you play golf?
RITHOLTZ: I play tennis, I don’t play golf.
BITTERLY MICHELL: All right. So golf — I’m a terrible golfer, but I love to do it. And so, golf, I used to get really nervous playing with clients and — and playing with — with other people. And then I realize that advice applies to golf as well because everyone’s so obsessed with their own game, they’re not paying attention to your game.
BITTERLY MICHELL: So there’s — there’s numerous ways you can apply this. The other story that I’ll tell really quickly, which has carried with me, is I went to Notre Dame undergrad. One of the Notre Dame’s very longstanding, very well-known presidents is — is a gentleman who passed away, Barry, years ago named Father Hesburgh. So he was President of the university for 35 years, very present — very, very present.
He had an office on the 13th floor of the library. So for anyone kind of geeky, you could — you could hang out with him, go into his office. He would give you — give you advice. And he had this homily during Lent, which is when, you know, Catholics generally — you give up something for — for Lent. You make some type of sacrifice.
And so, normally, you — people like to give up food. They like to …
BITTERLY MICHELL: … they like become a vegetarian for that — that period of time. And so, he would tell the story that, you know, when he thinks about Lent, you know, there were periods of time where, you know, at first he thought he would give up drinking. So let’s give up drinking for Lent, that’s what I’m going to do. And a couple days into it, it becomes too hard, it’s too hard.
So then, you know what, I’m going to give up smoking. I like to smoke cigars, so I’m going to give up smoking. But then I have a drink in my hand and that cigar kind of seems to make sense, so that was too hard.
And so, then I’m thinking instead of giving something up, why don’t I do something challenging yet healthy. I’m going to start running. But then with all the smoking and drinking …
BITTERLY MICHELL: … there’s no way I could be a runner. And so, what he said is, you know, we spend all of this time thinking about like how we’re making sacrifices, what we’re going to do, and he’s like just be kind, like be aware of how you’re treating other people. That’s probably the most important thing to do not just during Lent, but during like any time of the year. And I think that’s really applicable to your personal life, your professional life. It’s like just, you know, take a moment to check yourself and just be kind.
RITHOLTZ: I like it. Let’s talk about books. What are some of your favorites and what are you reading right now?
BITTERLY MICHELL: So I’ll give you one from Spanish literature. So one of my favorite books of all time was written by a Spanish philosopher named Unamuno, so a very famous Spanish philosopher. He wrote this book called “San Manuel Bueno, Mártir,” which is San Manuel, Saint Manuel, the Good, Martyr.
And it is effectively — it’s a really short story, but it is about a priest who doesn’t believe in God and kind of the impact that he has. It’s — it’s a beautiful book. It’s like really challenges a lot of things. So that’s one of my all-time favorite.
RITHOLTZ: A parable or is it — how — how is it told? Yeah.
BITTERLY MICHELL: It’s like a parable, yeah, it’s like a parable. And so, you know, at face value you think it’s an entertaining story, but there’s a lot of, you know, undercurrents in it. So anyone who has studied Spanish literature from Spain probably knows the author certainly and — and — and this book pretty well.
In terms of some of the things that I’m reading right now, so another podcast that I’m a big fan of — have you listened to Dax Shepard’s podcasts, Armchair Expert? Have you ever …
RITHOLTZ: No, but it sounds familiar.
BITTERLY MICHELL: So Dax Shepard, actor, comedic actor, he also happened to study, I believe, Anthropology at UCLA. He does an amazing podcast, right, interviews people from all different walks of life, politicians, authors, scientists, you name it.
And so, he had a recent guest on Anna Lembke who was a psychiatrist, and she wrote this book “Dopamine Nation,” which is — I’m — I’m in the middle of that. It’s really fascinating. It’s kind of like the science of addiction. And it’s not addiction in your traditional sense, it’s like addiction to digital devices and — and some of the things that are kind of plaguing modern times right now. So I haven’t finished it. I’m like square in the middle of it, and it’s been a really, really good read.
And then the next one that I’m reading, which is great because it’s short stories is Dave Sedaris has a new collection. It’s called “The Best of Me.” That is kind of vignettes from his life and some of his best stories that he’s written in the past. So I like anything written kind of get like a little snippet …
BITTERLY MICHELL: … and you finish it start to finish.
RITHOLTZ: He and, I believe, his sister are both hilarious.
BITTERLY MICHELL: They are hilarious.
RITHOLTZ: Hilarious, right.
BITTERLY MICHELL: I think David Sedaris — you know those books, the books where you laugh out loud …
BITTERLY MICHELL: … I think you’re reading like it’s easy to laugh out loud, you’re in person, but when you’re reading a book, someone whose humor comes through on a page, insanely talented writer in my book.
RITHOLTZ: Right, absolutely. Our final two questions, what sort of advice would you give to a recent college grad who is interested in a career in either capital markets, derivatives or wealth management?
BITTERLY MICHELL: I would say it’s an amazing career, so I would highly recommend it, I would say, you know, one piece of advice, if you go into it, don’t — don’t exclude wealth management. I think a lot of times, you know, the — the sexier analyst programs and entry-level programs, everyone historically is always focus so much on investment banking, and sales, and trading. Don’t ignore wealth management. It’s a high growth rate, and it’s a — it’s a really interesting and rewarding part of the market.
The other thing that I would say is I think there’s this habit that when you graduate from school and you get your first job, you basically have this moment like I did it, right? I’ve been planning for so long. I — you know, I was building up my résumé in high school so I would get into the right college, and I did well in college. And I, you know, applied to various jobs, and now I have this job and like I’ve done it.
And so, we spend, you know, the big chunk of our life planning for the next phase, so approaching everything as though you’re always a student, never stop planning. Always think about that, right? Like you have to do a good job of what you’re doing that’s table stakes, but having this constant — it can change this constant plan like what do I want to do, right, in five years. So it’s a great career, it’s a great industry, it’s a growing area of our industry. But I think if you bring that same innovation planning drive to it, you’ll be just amazed at where it takes you.
RITHOLTZ: And our final question, what do you know about the world of markets and investing today you wish you knew 20, 25 years ago when you were first getting started?
BITTERLY MICHELL: So I mean, so many things probably, so many things. I would say a — a couple of things as I’ve progressed in the — the industry and — and some of the things that I thought about is when you get very comfortable is when you get a little lazy and complacent, right? So this idea that once something you’re — you’re doing it and it almost becomes — at first it’s really challenging, but you find yourself in that environment where it’s on auto pilot, pivot, right? So — so find a way to either expand your responsibilities, learn something new, reach out to colleagues. And so, there’s just — it’s such a vast industry.
And I think it’s going back to my comment about always a student, we’re always learning things, right? So I think that’s one component to it.
And then another thing that I’ll share is this is something Jamie Forese who was the — the former — he led our institutional clients group. He was a former President of Citi. You know, one of the things that he shared with me as I was playing a terrible golf round with him, by the way, one of — one of my embarrassing golf — golf rounds is I asked him a question about, you know, just thinking about his success and how he really rose through the ranks at Citi.
And he said, “You know what? One of the challenges that I have is that, you know, you reach a certain seniority level and people don’t challenge you anymore.” Every idea that you have everyone says is brilliant, and it’s — it’s not the case, it’s certainly not the case, it can’t be the case. And so, what he said is he’s like, you know, you have to really create those opportunities and environments where people can challenge you, right?
And the second part of that is that pivoting or changing your mind is not a sign of weakness, it’s actually a sign of strength, right? So to be able to admit that you did something wrong or that you made the wrong decision, but you’re going to change that and you have an action plan, I think we tend to value things like confidence and conviction, but humility is — is a virtue. And I think knowing and admitting when you’re wrong is actually a superpower that’s way underrated.
RITHOLTZ: I couldn’t agree more. Thank you, Kristen, for being so generous with your time. We have been speaking with Kristen Bitterly Michell, Head of North American Investments for Citi Global Wealth.
If you enjoyed this conversation, well, be sure and check out any of the previous 400 plus we’ve done over the past eight years. You can find those at iTunes, Spotify, wherever you get your favorite podcasts from.
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I am Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.