Quant ESG With PanAgora Asset Management’s George Mussalli

inspire our students. let’s solve this. . our own david faber is in larue, texas. investors are convening to discuss all kinds of issues. david, i see the jacket is on. take it away. reporter: jack ket is on because it’s so bright out and i had a white shirt on. it’s a magnificent day here. one of our hosts is kyle bass. thank you for having us, as always. sure. and you and i are going to start off where we start many of our interviews, mainly talking about debt balances throughout the world. deleveraging has been taking place around the world. in fact, you hear about it, the deleveraging the economy. that’s not the case, right? we try to look at the world in its totality and when you look at on balance sheet corporate debt, they’ve grown from $80 trillion, 11% growth rate when you have a population growth of 1.2, realty gdp growth of 3.8 and debt growth of about 11. central bank balance sheet of 16. you can’t just do this for very long. what you’re seeing is leveraging on the government side. you’re seeing central banks that are starting to do open-ended money printing. so it makes it difficult. you’re looking now at the sort of further end of this chart. we didn’t have it all in on global oh population, real gdp, 10% global credit increase in that and then central bank is printing money. everybody printing money. you and i have been having this conversation for years and it doesn’t appear that things have gone off the rails yet. even europe is somehow staying together. i guess it’s perceived to be saying together. 90% of your money and now you have owning the greek debt. that’s going to have to get wiped out as well. you will still see what they need to do because certainly german economy benefits from the europe. extended family? maybe not. so imagine 17 nations that have basically been fighting for the last 200 years agreeing to seed their sovereignty to a higher power. it boils down to something more simple that it can’t happen. when you look at global debt balances, the world and interesting adjective and historically what has happened, when you get to 250%, credit market debt, historically two sides of deficit spending going to a war and winner goes the spoils and losers go to defeat and default. the reason it’s so difficult for us to understand what the playbook looks like going forward, we never did hear before. we’re starting to see debt inflation. think about it, we had a hyper-levered economy and world going into the financial crisis. we lost trillions and trillions of dollars because of that leverage. the first trillion were replacing what was lost. and the subsequent printing and when you think about what we’re seeing in southern europe, much higher than expected and gdp prints much lower than expected so you’re seeing this cost push type of inflation push-up. debasing their own buying power at the end of the day? it takes time. it certainly does take time. you and i are going to be sitting here next year and the year after that having the same conversation? i hope so. i hope things are not going to fall off the rails as much as they could. do you think they could? yeah. i’ve spent enough time in d.c. they all shake their heads when you talk about debt sustainability and you leave and nothing happens. nothing changes. this fiscal cliff is not going to happen. they are going to vote it down the road another year. sequestration never works. it’s fairly easy to see what is going to happen. how do you invest around that? what do you do? they don’t want any parts of equity. they know that you’ve made coaching arguments and have been largely right directionally with what is going on but they wonder, where do i put my money? what do you tell them? we have more than half of our portfolio in bonds, believe it or not. the things that created and made your name, let’s face it, in terms of being short that market. so now you’re long a lot of residential mortgage-backed securities? right. we own about 1% of the market. we have a large investment in that marketplace. basically i think the u.s. housing markets played out. it’s about 6.25 years and we’re 6.50 years in our cycle. i think housing is going to flatten out. that makes housing affordable as it can possibly be. we don’t think housing is going to go up at any point in time in the near future. you don’t? it’s not going to go down anymore. why won’t it go up? there seems to be signs that prices are starting to creep up, affordability is definitely there. it is. but anyone who has already thought about buying is house has already bought a house. you have household formation rate in the u.s. about 1.2 million people, population growth of about1.5%. so it’s going to take a few years to absorb the shadow inventory. everything just tells me that when yo income and home prices, they should be parallel. you and i have had many conversations about this macro world you’re describing, way too much debt. what are you doing to play that or are you not even playing that? in our portfolio, we actually own what we call event-driven situations in either credit or equity and the way that we hedge our kind of the corpus of our portfolio is th dramatically misprices option ality. so there is enormous convexity in various areas of the world. and we can spend just a small amount of capital and have enormous convex positions. and i believe it’s all in japan. but at the end of the day, i think many people would say this has not been — even if you were right on this crisis as it’s moved along, in europe for example, you have not been in position to profit from it the way you were from having seen subprime coming. it’s just not the same. right. the opportunity is –s as a fiduciary, if i sit on a public