Q&A with Ron Joelson

IAUM: Look, at the end of the day, I wrote these questions, and I just wanted to hear your view on it.

JOELSON: Absolutely, absolutely.

IAUM: Really, just to be perfectly transparent with you, you and I have a pretty good relationship, and you see a lot more than I do. You just see a lot more information and you’re in those markets, and it really helps me to figure out what’s true versus what you see on whatever it is. And so, with all the flows into private classes, the people that are asset management clients … the guys that wrote public fixed income where it’s all dead on arrival and everybody wants privates and everybody wants funky credit. When you see this kind of dislocation, did you see those asset classes get out of joint more than the public stuff? What did you see?

JOELSON: What I would say is, the difference between the public and private sector right now is that in the public sector, really we’re seeing everything is hot. Who would have expected Marriott to come into the marketplace and do reasonably well? Which happened yesterday. Everything right now is in demand in the public space. The private space is also, there’s a lot going on but it’s much more specific. If you’re in a COVID impacted industry, I’ve seen those names seriously in the marketplace. The private investors seem to have a more longterm view and they are not willing to buy those names that are in effected industries. But there is issuance going on and it is relatively attractive. You have seen re-establishment of a public/private premium, which is good to see. Yeah, the market is still attractive. I think investors, while they’re concerned about liquidity, still have room in their portfolios for private. I don’t know if that helps you but-

IAUM: It does a lot.

JOELSON: That’s kind of what I’m seeing.

IAUM: It does a lot. Everybody talks about liquidity being an issue. Let me say it differently. Would it be pre-market vol … People were like, “Boy, I don’t know what’s going to happen with all these bond ETFs and all of this stuff, if the market ever gets weird.” Now the market’s gotten weird. What’s happened?

JOELSON: Well, so far, first of all, it started off in March where obviously liquidity was God awful, nearly everywhere. That’s when everybody was raising those kinds of objections. Whether it was mortgage backs or treasuries or agency, all of it really was in turmoil. And then of course, the fed stepped in with a big bazooka. When that happened, all of a sudden you saw liquidity flowing in those markets, and that’s when they started opening up. That’s when you started seeing issuers move in and say, “Hey, this actually might be reasonably attractive.” I think the fed, this time around, doing in a week and a half really what it took a year and a half in 2008 to do, alleviated some of the liquidity fears that were out there, and the market responded appropriately. I do think that if you think about the classic downturn scenario where you start with a liquidity problem and you move to a credit problem, I think our liquidity problem was fast.

We got past that pretty quick. Now the credit problem, right now, you’re not quite seeing it in the marketplace. You’re seeing the rating agencies fairly confident about investment grade names. Yeah. You’ve seen downgrades, obviously that’s happened, but you’re not necessarily seeing it as much concern in the market as you would expect given everything that we’re hearing. I think there’s likely still a credit event to come our away. It just hasn’t been there yet. How is that going to unfold? It’s going to unfold when we get past a lot of the virus stuff, and we see how the economy turns back on. I think what we’ll start to see is that it will turn on slowly. When that happens, I think you’re going to see more credit events and restructurings and things like that.
And then we’re going to go back to liquidity again because really what starts to happen when you have major restructuring is the companies can deal, insurance space can deal with that, but they better make sure they don’t have a liquidity issue. Because you can restructure a bond, you can decide to roll over a mortgage, you can push everything out maturity wise. All of that is fine provided you have enough liquidity in your company. I kind of see that happening. We went from liquidity. I think we’ll move to some kind of a credit event, and then there’ll a little bit back to liquidity as we go through restructuring. That’s my take on where I see it sort of rolling through.

IAUM: Not for any sort of … completely off the record or whatever, how big a deal do you think their credit event would be? Do you think it’s industry specific?

JOELSON: Yeah. Well, it certainly starts out in the industries that you would expect. We’re already seeing airlines, I think Frontier filed for bankruptcy in the last couple of days. Yeah, it’s going to start in the industries affected. And then there will be some secondary effects, but I don’t know how bad that’s going to be. That’s the whole issue. It depends how quickly we get past this. I can tell you that we are changing the indicators that we look at. The classic economic indicators are too long. You’re looking at old data that doesn’t really tell you what’s going on. We started looking at different kinds of indicators. Now, we look at the daily new COVID cases. We still look at consumer confidence, but now the New York fed economic index appears to be more realtime. Initial jobless claims, credit spreads, oil prices, those become the things that move quickly and that we’re going to be using to track, I’ll call it the recovery dashboard.

You want to monitor high frequency data for signs of a bottom. I think that’s going to tell us whether … the answer to your question, I don’t know the answer yet, but that will begin to tell me whether it’s going to be widespread or in affected industries.

IAUM: I’ve read your article that you put out, it goes really just very straight forward, right?

JOELSON: Yeah.

IAUM: I really applaud you for the way that you just, you come right at it. The very long liabilities that you’ve got, hard to fund, long rates are ungodly low. I looked this morning in the St. Louise fed database. It was basically November of ‘18, there’s a period in time there where the 10 year note was at 3% right there. Prior to that, it was 2014, rates are in godly low. You talked about longterm guardrails. Does any of this … and stressing the market, you guys are very pragmatic about that. You’ve been at this a long time. Does any of this most recent … every time it comes out as some other place, it’s like the housing crisis, you never know where it’s going to come. This comes to us. Does this latest change anything of how you look at risk and what you’re doing?

JOELSON: Yeah. I guess the short answer would be no, with enough capital that we would be able to reinvest on the way down because we felt that back in ‘08, we really pulled too much out of the market and those would’ve been some of the best periods of time to invest. We believe that will be the case again this time. I think the difference is … and I don’t think we’re alone, I think insurance companies in general have been holding more capital in anticipation of another event. The other thing that happened in ‘08 was the correlations moved to one, and so people realized that diversification is still important, but it didn’t quite give you the benefit that you thought it would. And that was in turn, what led to people holding more capital. We did the same, we held more capital, and now we’re kind of executing on that plan, which is sure, we’re not going to necessarily bind industries that we think are going to be devastated, but we do think where pricing is attractive, we are going back into the markets and have been pretty steadily been a buyer in those markets.

I do feel good about that. The guardrails continue to be making sure that we still have the capital, making sure we can withstand an additional shoe to drop here. I do think that’s likely. There’s no question that the market … well, I can’t say no question, but I do think it’s likely that the credit situation will get worse before it gets better. I doubt that the market has fully baked that in. There’s a good chance that we’ll see another correction in the market. I don’t think it will be severe, but I do think that will happen. But we expect that to happen. And so, we’re buying now, but we’ll buy then. I’m not going to try to call the boss on this,, I guess what I’m trying to say.

IAUM: Yeah.

JOELSON: But we got to have the guardrails. We’ve got to make sure that we can withstand it, is my point.

IAUM: Does this dislocation, does it allow you to pursue … when you and I talked in your office, you said, “I’ve got a billion and a half dollars a month rolling off the portfolio,” and then you have a lot of InsureTech and technology initiatives. Does that market dislocation allow you to redirect some flow into that sort of thing that you might not have had the budget for prior? Does that make any sense?

JOELSON: Well, it does. I wouldn’t say that we didn’t have the budget. I would say that a lot of the pricing in that market was so overbought that we didn’t find it to be attractive. But now what you’re finding is in InsureTech and Proprietary Tech that the money from the private equity investors is drying up a bit. You have to show a profit in order to make sense. I think in that sense, we are looking at some of those opportunities and we will selectively buy them, but we’re going to be careful there as well. We’re not going to buy in the same way that we would’ve bought a year ago because we’re going to want to see earnings as well. Yeah, there’s some opportunities there that weren’t there before. I don’t know how much more we’re going to direct funds there, but we’re certainly looking at that at the moment.

IAUM: How does a life insurance company keep writing … This is a tough environment for a life company. It’s tough.

JOELSON: Not totally. Let me throw a few things at you. Number one, first of all, we’re seeing very strong activity in sales right now actually. It may be because our clients work with financial advisors and maybe everybody has a little more time on their hands to make sure their financial houses are in order. That may be one thing. It may be as well that people think about their own mortality a little bit and say, “Hey, wait a minute, maybe I better make sure I have my insurance in place.” It may be because we have been doing I think a pretty good job of telling our clients, “We’re investing at this time.” Maybe they’re thinking, if Northwestern Mutual is doing it, maybe I should be doing it. So we’ve actually been seeing a fair amount of inflows in our wealth management business. We’re actually seeing pretty good business right now.

Now, the other question though that you ask is, well, what about rates and how can you make it profitable and all of that. Well, the good news is we don’t price our products with any interest rate forecast in mind. We price them under the current rates that we’re under. We have a dividend rate that is very attractive. But if the 10 year treasury stays at 60 basis points … it keeps moving around. I think that’s close to where it is today. But if it stays down there, then no question at some point, our dividend rate has to follow. But it will still look attractive relative to the prevailing rate environment. I think that’s the main thing. By the way, credit spreads, as you know, have gapped out nicely. Just because treasury rates have fallen, we’re still getting decent returns on our high grade investment. It’s actually at this point, it’s not a terrible environment really unless and until that credit event happens, and then there’ll be more strain and stress. But like I said before, we have the capital for that. Depending on the insurance products that you write, our main product, I would say we’re actually seeing decent business.

IAUM: That’s good stuff. I appreciate that. I really don’t have anything else. I’m just, I’m amazed at, the level of debt with these stimulus packages globally is pretty remarkable. Not part of this necessarily, but it is a stunning amount of issuance that’s going to be coming.

JOELSON: Yes. And so, what that suggests, obviously longterm, nobody really knows what this amount of debt is going to do. But one thing I feel pretty confident in is short rates are going to stay low for quite a while, right? The fed is going to keep the rates low. You almost have to in order to repay the debt that’s been incurred. I don’t think it can forever participate in the longer end of the curve. It will, it can moderate rates a little bit. I do see a sort of steepening yield curve emerging out of all of this. I should say a steepening credit curve. In other words, you’re going to start to see investment opportunities going out the curve, probably relatively attractive. Just because I don’t see how the fed can continue to intervene in all of those markets. That’s where I think we’ll land on this. We’ll have a steeper curve, we’ll have a steeper credit curve and the short end will stay very low. And of course, that’s not a terrible environment either for an insurance company. If you add inflation onto that, inflation is also not the worst thing in the world for an insurance company, because then the liabilities are always in current dollars. If you have a little bit of inflation, that wouldn’t be terrible for the insurance space.

IAUM: I always feel better when I get done talking to you. I always feel better-

JOELSON: There you go. That’s even without the magic.

IAUM: Yes. It’s good. I always feel like, hey, I feel good, better about the markets. That’s good.

JOELSON: Good.

IAUM: The magic’s fabulous.

Ron is a magician in more ways than one. He can do mind-boggling card tricks, at just two feet in front of my eyes,…I still can’t figure out how he did it.
It’s that magic that is required to run Northwestern Mutual’s $237 billion General Account investment portfolio.

JOELSON: Absolutely, absolutely.

IAUM: Really, just to be perfectly transparent with you, you and I have a pretty good relationship, and you see a lot more than I do. You just see a lot more information and you’re in those markets, and it really helps me to figure out what’s true versus what you see on whatever it is. And so, with all the flows into private classes, the people that are asset management clients … the guys that wrote public fixed income where it’s all dead on arrival and everybody wants privates and everybody wants funky credit. When you see this kind of dislocation, did you see those asset classes get out of joint more than the public stuff? What did you see?

JOELSON: What I would say is, the difference between the public and private sector right now is that in the public sector, really we’re seeing everything is hot. Who would have expected Marriott to come into the marketplace and do reasonably well? Which happened yesterday. Everything right now is in demand in the public space. The private space is also, there’s a lot going on but it’s much more specific. If you’re in a COVID impacted industry, I’ve seen those names seriously in the marketplace. The private investors seem to have a more longterm view and they are not willing to buy those names that are in effected industries. But there is issuance going on and it is relatively attractive. You have seen re-establishment of a public/private premium, which is good to see. Yeah, the market is still attractive. I think investors, while they’re concerned about liquidity, still have room in their portfolios for private. I don’t know if that helps you but-

IAUM: It does a lot.

JOELSON: That’s kind of what I’m seeing.

IAUM: It does a lot. Everybody talks about liquidity being an issue. Let me say it differently. Would it be pre-market vol … People were like, “Boy, I don’t know what’s going to happen with all these bond ETFs and all of this stuff, if the market ever gets weird.” Now the market’s gotten weird. What’s happened?

JOELSON: Well, so far, first of all, it started off in March where obviously liquidity was God awful, nearly everywhere. That’s when everybody was raising those kinds of objections. Whether it was mortgage backs or treasuries or agency, all of it really was in turmoil. And then of course, the fed stepped in with a big bazooka. When that happened, all of a sudden you saw liquidity flowing in those markets, and that’s when they started opening up. That’s when you started seeing issuers move in and say, “Hey, this actually might be reasonably attractive.” I think the fed, this time around, doing in a week and a half really what it took a year and a half in 2008 to do, alleviated some of the liquidity fears that were out there, and the market responded appropriately. I do think that if you think about the classic downturn scenario where you start with a liquidity problem and you move to a credit problem, I think our liquidity problem was fast.

We got past that pretty quick. Now the credit problem, right now, you’re not quite seeing it in the marketplace. You’re seeing the rating agencies fairly confident about investment grade names. Yeah. You’ve seen downgrades, obviously that’s happened, but you’re not necessarily seeing it as much concern in the market as you would expect given everything that we’re hearing. I think there’s likely still a credit event to come our away. It just hasn’t been there yet. How is that going to unfold? It’s going to unfold when we get past a lot of the virus stuff, and we see how the economy turns back on. I think what we’ll start to see is that it will turn on slowly. When that happens, I think you’re going to see more credit events and restructurings and things like that.
And then we’re going to go back to liquidity again because really what starts to happen when you have major restructuring is the companies can deal, insurance space can deal with that, but they better make sure they don’t have a liquidity issue. Because you can restructure a bond, you can decide to roll over a mortgage, you can push everything out maturity wise. All of that is fine provided you have enough liquidity in your company. I kind of see that happening. We went from liquidity. I think we’ll move to some kind of a credit event, and then there’ll a little bit back to liquidity as we go through restructuring. That’s my take on where I see it sort of rolling through.

IAUM: Not for any sort of … completely off the record or whatever, how big a deal do you think their credit event would be? Do you think it’s industry specific?

JOELSON: Yeah. Well, it certainly starts out in the industries that you would expect. We’re already seeing airlines, I think Frontier filed for bankruptcy in the last couple of days. Yeah, it’s going to start in the industries affected. And then there will be some secondary effects, but I don’t know how bad that’s going to be. That’s the whole issue. It depends how quickly we get past this. I can tell you that we are changing the indicators that we look at. The classic economic indicators are too long. You’re looking at old data that doesn’t really tell you what’s going on. We started looking at different kinds of indicators. Now, we look at the daily new COVID cases. We still look at consumer confidence, but now the New York fed economic index appears to be more realtime. Initial jobless claims, credit spreads, oil prices, those become the things that move quickly and that we’re going to be using to track, I’ll call it the recovery dashboard.

You want to monitor high frequency data for signs of a bottom. I think that’s going to tell us whether … the answer to your question, I don’t know the answer yet, but that will begin to tell me whether it’s going to be widespread or in affected industries.

IAUM: I’ve read your article that you put out, it goes really just very straight forward, right?

JOELSON: Yeah.

IAUM: I really applaud you for the way that you just, you come right at it. The very long liabilities that you’ve got, hard to fund, long rates are ungodly low. I looked this morning in the St. Louise fed database. It was basically November of ‘18, there’s a period in time there where the 10 year note was at 3% right there. Prior to that, it was 2014, rates are in godly low. You talked about longterm guardrails. Does any of this … and stressing the market, you guys are very pragmatic about that. You’ve been at this a long time. Does any of this most recent … every time it comes out as some other place, it’s like the housing crisis, you never know where it’s going to come. This comes to us. Does this latest change anything of how you look at risk and what you’re doing?

JOELSON: Yeah. I guess the short answer would be no, with enough capital that we would be able to reinvest on the way down because we felt that back in ‘08, we really pulled too much out of the market and those would’ve been some of the best periods of time to invest. We believe that will be the case again this time. I think the difference is … and I don’t think we’re alone, I think insurance companies in general have been holding more capital in anticipation of another event. The other thing that happened in ‘08 was the correlations moved to one, and so people realized that diversification is still important, but it didn’t quite give you the benefit that you thought it would. And that was in turn, what led to people holding more capital. We did the same, we held more capital, and now we’re kind of executing on that plan, which is sure, we’re not going to necessarily bind industries that we think are going to be devastated, but we do think where pricing is attractive, we are going back into the markets and have been pretty steadily been a buyer in those markets.

I do feel good about that. The guardrails continue to be making sure that we still have the capital, making sure we can withstand an additional shoe to drop here. I do think that’s likely. There’s no question that the market … well, I can’t say no question, but I do think it’s likely that the credit situation will get worse before it gets better. I doubt that the market has fully baked that in. There’s a good chance that we’ll see another correction in the market. I don’t think it will be severe, but I do think that will happen. But we expect that to happen. And so, we’re buying now, but we’ll buy then. I’m not going to try to call the boss on this,, I guess what I’m trying to say.

IAUM: Yeah.

JOELSON: But we got to have the guardrails. We’ve got to make sure that we can withstand it, is my point.

IAUM: Does this dislocation, does it allow you to pursue … when you and I talked in your office, you said, “I’ve got a billion and a half dollars a month rolling off the portfolio,” and then you have a lot of InsureTech and technology initiatives. Does that market dislocation allow you to redirect some flow into that sort of thing that you might not have had the budget for prior? Does that make any sense?

JOELSON: Well, it does. I wouldn’t say that we didn’t have the budget. I would say that a lot of the pricing in that market was so overbought that we didn’t find it to be attractive. But now what you’re finding is in InsureTech and Proprietary Tech that the money from the private equity investors is drying up a bit. You have to show a profit in order to make sense. I think in that sense, we are looking at some of those opportunities and we will selectively buy them, but we’re going to be careful there as well. We’re not going to buy in the same way that we would’ve bought a year ago because we’re going to want to see earnings as well. Yeah, there’s some opportunities there that weren’t there before. I don’t know how much more we’re going to direct funds there, but we’re certainly looking at that at the moment.

IAUM: How does a life insurance company keep writing … This is a tough environment for a life company. It’s tough.

JOELSON: Not totally. Let me throw a few things at you. Number one, first of all, we’re seeing very strong activity in sales right now actually. It may be because our clients work with financial advisors and maybe everybody has a little more time on their hands to make sure their financial houses are in order. That may be one thing. It may be as well that people think about their own mortality a little bit and say, “Hey, wait a minute, maybe I better make sure I have my insurance in place.” It may be because we have been doing I think a pretty good job of telling our clients, “We’re investing at this time.” Maybe they’re thinking, if Northwestern Mutual is doing it, maybe I should be doing it. So we’ve actually been seeing a fair amount of inflows in our wealth management business. We’re actually seeing pretty good business right now.

Now, the other question though that you ask is, well, what about rates and how can you make it profitable and all of that. Well, the good news is we don’t price our products with any interest rate forecast in mind. We price them under the current rates that we’re under. We have a dividend rate that is very attractive. But if the 10 year treasury stays at 60 basis points … it keeps moving around. I think that’s close to where it is today. But if it stays down there, then no question at some point, our dividend rate has to follow. But it will still look attractive relative to the prevailing rate environment. I think that’s the main thing. By the way, credit spreads, as you know, have gapped out nicely. Just because treasury rates have fallen, we’re still getting decent returns on our high grade investment. It’s actually at this point, it’s not a terrible environment really unless and until that credit event happens, and then there’ll be more strain and stress. But like I said before, we have the capital for that. Depending on the insurance products that you write, our main product, I would say we’re actually seeing decent business.

IAUM: That’s good stuff. I appreciate that. I really don’t have anything else. I’m just, I’m amazed at, the level of debt with these stimulus packages globally is pretty remarkable. Not part of this necessarily, but it is a stunning amount of issuance that’s going to be coming.

JOELSON: Yes. And so, what that suggests, obviously longterm, nobody really knows what this amount of debt is going to do. But one thing I feel pretty confident in is short rates are going to stay low for quite a while, right? The fed is going to keep the rates low. You almost have to in order to repay the debt that’s been incurred. I don’t think it can forever participate in the longer end of the curve. It will, it can moderate rates a little bit. I do see a sort of steepening yield curve emerging out of all of this. I should say a steepening credit curve. In other words, you’re going to start to see investment opportunities going out the curve, probably relatively attractive. Just because I don’t see how the fed can continue to intervene in all of those markets. That’s where I think we’ll land on this. We’ll have a steeper curve, we’ll have a steeper credit curve and the short end will stay very low. And of course, that’s not a terrible environment either for an insurance company. If you add inflation onto that, inflation is also not the worst thing in the world for an insurance company, because then the liabilities are always in current dollars. If you have a little bit of inflation, that wouldn’t be terrible for the insurance space.

IAUM: I always feel better when I get done talking to you. I always feel better-

JOELSON: There you go. That’s even without the magic.

IAUM: Yes. It’s good. I always feel like, hey, I feel good, better about the markets. That’s good.

JOELSON: Good.

IAUM: The magic’s fabulous.