Just weeks after the conclusion of this year’s World Economic Forum in Davos, Switzerland, Guggenheim Partners Chairman of Investments and Global Chief Investment Officer Scott Minerd sat down with CSQ C-Suite Advisor and Private Wealth Advisor Bruce Munster for a conversation about life, success, and his first attempt at retirement. He also shares plenty of insight on what’s next for the financial markets. As one of the world’s most respected minds in investment matters and macroeconomics, when Minerd speaks about global financial issues, people listen. Following is a summary of that conversation.
Scott Minerd’s first job out of college was an education in itself. His career path, he quickly realized, could go one of two ways: He could either work harder or work smarter. He tried the former, then opted for the latter, with magnificent results.
After earning a Bachelor of Science degree in Economics at the University of Pennsylvania’s Wharton School, Minerd’s first job at PriceWaterhouse gave him the opportunity to analyze hundreds of financial statements. The experience also gave him valuable perspective starting out that influenced the rest of his career. He used the formal rigorous process of analyzing large companies as an accountant from the inside as a foundation for future business success. “I couldn’t afford to get an MBA so a CPA, I thought, was a good professional credential,” he recalls.
However, working up to 80 hours a week, for just $15,000 a year, Minerd said the life of a CPA got old and wasn’t providing the intellectual stimulation he had hoped for. He watched his friends from Wharton working smarter, not harder, on Wall Street and jokes that they worked far less and made exponentially more income; plus, they had luxurious perks that included expense accounts and car service. “You realize if you could do that for somebody else, you could do that for yourself,” he says. “I feel my perspective on work was definitely colored going forward.”
Upon completing graduate work in econometrics at the University of Chicago Graduate School of Business, Minerd followed his friends to Wall Street. Minerd settled into a position as a bond trader with Merrill Lynch. Working the markets, he said, was a practical way to take economics and apply it to the real world.
Following the Currency of World Events
When the reunification of Germany in late 1990 led to the European currency crisis a couple years later and plunged Europe into a deep recession, Minerd was busily advancing through the ranks of Morgan Stanley to run credit trading in Europe. “Watching that and being involved in it firsthand really gave me a lot of insight [into] how one country’s policy can so dramatically influence other countries,” he states. “The Germans followed their own domestic agenda and did so without regard to the rest of Europe. It essentially set off a cascade of dominoes across the continent.” Later, during the 1993 European exchange rate crisis, Minerd helped orchestrate the successful restructuring of the Eurobond debt in Italy. By employing the largest debt exchange offer ever executed by a G7 country, Italy was able to re-establish itself as a credible capital markets borrower, avoiding an appeal to the IMF for financial relief. While still in his early 30s, Minerd had ascended to become the global head of fixed income at Credit Suisse, working for Bob Diamond.
Despite his incredible success, Minerd decided to move to LA, buying a beach house and making plans to retire at age 37. “Wall Street paid pretty well, especially in those days,” he says. “I told people I didn’t need 23 houses and 37 automobiles. I saw the opportunity to take all my chestnuts and go away. I really didn’t think I would work again.” He appreciated LA’s casual lifestyle, the weather, and the economics: He could purchase a 2,200-square-foot home for the same price as a one-bedroom apartment in New York City.
At the same time, Minerd continued to help friends raise money for various projects. One of those projects was a specialty finance in Chicago called Liberty Hampshire. But after a brief stint in retirement, Minerd got bored and opened an office in his new hometown. Two years later, Minerd met members of the Guggenheim family and in 2000 became one of the founders of Guggenheim Partners. “I guess you could call it my retirement project,” he says with a chuckle. Little did he know that the company would become a $240B-asset juggernaut with 2,500 staff in 22 cities throughout the U.S., Europe, and Asia. Minerd is one of the firm’s eight managing partners and oversees global asset management.
“[Y]ou can get information all over the place. It just matters if you’re paying attention and listening to it.”
Finding Meaning in Success
Regardless of the stratospheric rewards his financial acumen yields, Minerd’s core values remain grounded. “Most people think success is achieving some status in society or accumulating some amount of wealth,” he says. “I think real success is being motivated by trying to create something that will live on beyond you. Something that really will make a difference and impact society. I don’t know that I’ve reached it. I don’t think I have. I think that’s the real definition of success.”
What distinguishes Minerd as an investor is he tends to be patient and methodical in his analysis and doesn’t make snap judgments. “We tend to marry views for long periods of time. I prefer to look at big underlying trends or themes and we take those themes and play them out.”
Minerd meets with his research team every Monday morning at 5 a.m. He actively listens to everyone on his team as well as friends in the industry and even people he meets on the street. “My view is that you can get information all over the place. It just matters if you’re paying attention and listening to it.”
Case in point: During his first visit to California in 1987, Minerd’s cab driver shared his real estate investment strategy as they drove from the airport to Minerd’s hotel. The cabbie said he bought one house, refinanced to take money out to buy another house and continued the pattern. Minerd inquired, “Does the rent of all these houses cover mortgage payments?” The cabbie said it wasn’t the rent that covered the mortgage, it was the appreciation in the house that made the money. Minerd knew the cab driver’s story was a sign that the late 1980s were going to be a hard time for real estate.
A naturally imposing presence, Minerd’s reputation as a big thinker is warranted. But he’s not the blustery type, and he is thoughtful and contemplative when deciding on a course of action. “I’m the greatest self-doubter of all,” he acknowledges. “The minute I come to a conclusion about an investment, I start to try to look at things to refute it.” And once Minerd has convinced himself, there’s practically no one who will convince him to change his mind.
Former Barclays CEO Bob Diamond, who worked with Minerd at Credit Suisse and Morgan Stanley, observes, “[Scott] would not answer anything quickly. He would take his time. No matter how unimportant or important the question was, he would always give a thoughtful, careful response.” Diamond said in 30 years of banking, “I’ve never met anyone who is a better judge of credit or a better structurer of transactions. He’s the best chief investment officer that I’ve ever seen.”
Stressing the System
In a published commentary, “Storm Clouds Over Davos,” Minerd recently quoted William White, head of the Organization for Economic Development (OECD), as saying that stresses on the financial system are “worse than it was in 2007.” Offering more specifics as to what White may have meant, Minerd explains, “Corporate bonds and Treasury debt have more than doubled since the end of the financial crisis in terms of the amount of debt outstanding. The size of dealer balance sheets to trade those bonds is less than 20 percent of the size they were in 2007.”
These factors are producing an increase in volatility, according to Minerd. “As people have had to rebalance their portfolios to make the adjustments, we have found markets are not very deep and it takes big changes in price to elicit the amount of demand it takes to get price stability,” he says. “What it’s doing is forcing capital into narrow channels [that] people perceive to be safe.” Two of those channels are commercial real estate and government bonds. Regarding commercial real estate, he says, “As cap rates continue to fall and people continue to chase returns, we’re starting to see commercial real estate values get very extended.” With government bonds, “There’s a real bubble here in sovereign credit. Someday these capital imbalances will have to be readjusted.”
Minerd is quick to clarify that markets that get overvalued and become even more overvalued are called bull markets. We are indeed in a bull market in commercial real estate, he explains.
What many accept as being “normal” monetary policy were really solutions invented to address a variety of economic problems in developed countries. “We accept the fact today that accumulating assets on the balance sheets of central banks is an orthodox monetary policy. Ten years ago we would have thought it was crazy. I remember speaking before and during the financial crisis to groups of people and I would get this glazed-over look because whoever cared about negative interest rates.”
The financial system is so fragile, Minerd says, that once inflation takes off, wages grow too rapidly, and the Federal Reserve and other central banks explore an adjustment. “We are likely to find that even modest changes in monetary policy have very adverse consequences on asset prices,” he says. “I think that will end up cuffing the hands of the Central Banks and forcing them to remain accommodative way too long and there will be eventually adverse consequences as a result of too much accommodation.”
The Fed needs to start adjusting short-term interest rates as employment continues to fall over the next two years, he continues. “I think the Fed is going to realize it can’t push short-term rates too high. It’s a pretty fine hair trigger that the Central Bank has the U.S. economy on. I think it has to move. But I think it has to move very slowly and cautiously.”
As the Fed continues to tighten and other central banks (i.e., European Central Bank, Bank of Japan) go further into Negative Interest Rate Policy (NIRP), the U.S. dollar (USD) should continue to climb. The problem is, the Chinese renminbi (RMB) is pegged to the USD and both currencies have climbed significantly, making the export-driven Chinese economy uncompetitive.
“We accept the fact today that accumulating assets on the balance sheets of central banks is an orthodox monetary policy. Ten years ago we would have thought it was crazy.
Minerd said Chinese government announcements to expand funding as part of a new fiscal stimulus plan are buying them time for currency devaluation. Minerd said the Chinese have to become more competitive because their neighbors have depreciated their currencies. “If the Chinese would just devalue, the initial impact would be pretty tough for the financial markets to withstand for the first couple of weeks. Ultimately it would allow commodity prices to rise. The first couple of weeks it could be pretty difficult. But in the course of six months to a year, the markets would do pretty well.”
A Prescient Keynote Address?
As the closing keynote speaker for CSQ’s 2014 LA Investor Conference, Minerd proposed that the European Central Bank (ECB) could one day buy gold. At this point, Munster revisits Minerd’s comments and reintroduces the question: Is this still a possibility and what is your outlook for gold?
Europeans aren’t concerned about the adverse consequences of negative interest rates, replies Minerd, and they are running out of things to buy in an environment that is helping reduce fragmentation.
“It looks a lot like what we went through in the mid-1970s after we left the Bretton Woods agreement,”1 he points out. “Gold went from $35 to approximately $250 and then came crashing down before climbing to $900. I reminded people back when gold was around $1,900 that a retracement to $1,100 was very possible but that would still not be an argument for the end of a bull market in gold. We’re in a generational bull market here which is punctuated with these very abrupt downturns.” Minerd adds that while investors shouldn’t put all their money in gold, it is a good place for investors to have a 5- or 10-percent portion of their portfolios.
Running a global firm requires extensive travel. In 2015, Minerd spent time in the United Arab Emirates, Singapore, South Korea, Japan, and other countries. His favorite travel destination is his beachfront home in Los Angeles: “If I can get the opportunity to be at home, I look forward to it. I already have a beach house, I just don’t get to spend any time there.”
When he is on the road, Minerd follows a detailed regimen that includes a full arsenal of supplements such as Zicam (a cold remedy) and Pedialyte to prevent dehydration during his intense travel schedule. The entire time, he keeps his must-have “football” close. While the President of the United States is always accompanied by a military aide carrying a “football” including launch codes for nuclear weapons, Minerd’s “football” comes in the form of his Bloomberg Terminal, allowing him to monitor, analyze, and trade from wherever he happens to be at the time.
Spending time with Minerd and hearing his thoughtful remarks, it’s no surprise that the 56-year-old Pennsylvania native is actively involved in nonprofit organizations, including The Union Rescue Mission. “What [the Mission is] really committed to is not just getting people a meal, or getting people off the street, but to work with them on the issues in their lives that lead for them to homelessness,” Minerd points out. “The goal is to eventually get them to their own private space.” One of Minerd’s recent donations kept the doors of Hope Gardens Family Center open. Minerd said the transitional housing facility in the foothills of the Angeles National Forest helps reintegrate 80 percent of the women and children who live there back into society. “I’ve come to believe I’ve benefited a lot from being in this country,” he says. “I think there’s an obligation to give back and provide public service.”
“If you try to treat people fairly and justly and be a good steward of the things that you’re given, you’ll find that the rewards will follow. Most people focus on the rewards. I think the world appreciates people trying to do the right thing.”
While Minerd is an avid collector of a variety of art, it is the iconic art of Charles M. Schulz that especially touches him. Schulz’s work is revolutionary because the cartoonist addressed subjects such as therapy and midlife crisis and gave human qualities to animals. “Schultz was very inventive about finding a way to get below the radar screen,” says Minerd. “He was able to take on a lot of serious issues, whether they were social causes or life issues or even issues of faith.”
You would think that someone who has had such an enormous impact and presence at pivotal moments in history would have an oversized ego. But Minerd exhibits an additional layer of depth when asked about his daily routine. Prayer is his bookend when he wakes up and before he goes to bed. “I’m grateful for the blessings the Lord has given to me,” he says earnestly. “I realize, like all people, I fall short. I like to recommit daily to place myself in His care and live by His guidance.” Minerd acknowledges Guggenheim Partners has been successful beyond any of his expectations. “I can’t believe it’s by our own smarts that we’ve gotten here. It’s by some divine purpose.”
One guiding principle that Minerd holds close is the idea that “Acceptance always comes before understanding.” Minerd explains, “The thing that we need to do as people is learn to accept things whether that’s circumstances that we’re in or the behavior of other people. Because until you learn to accept them, you don’t really have an opportunity to understand them. Everybody cries out for understanding. But when you turn it around and you talk to people, at their core, what they really want is to be accepted.”
Minerd’s professional and philanthropic passions are driven by purpose. He remains grounded by the fact that half of Guggenheim’s clients are insurance companies, with an average policy size of $60,000. This serves as a constant reminder of how important it is to deliver results. “I think it really is trying to recognize what to do that’s right. If you try to treat people fairly and justly and be a good steward of the things that you’re given, you’ll find that the rewards will follow. Most people focus on the rewards. I think the world appreciates people trying to do the right thing,” Minerd said.
Minerd’s beautiful mind, big heart, and compassionate soul have elevated him to a level of success that’s far beyond the reach of most. It is striking to see his evolution from a young man driven by money to one of the great financial minds of this generation, motivated by service.
1 The Bretton Woods agreement developed at the United Nations Monetary and Financial Conference in New Hampshire in 1944 pegged currencies to gold and got the United States away from the gold standard. By 1973, though, the Bretton Woods system was replaced by the Nixon Administration as part of a series of measures referred to as the Nixon Shock based on freely floating flat currencies.