FM: Which commodities have you traded? What are you currently trading and why?
JB: My professional introduction to financial markets really began with crude oil futures, going back now more than 25 years. Much of my early research at MIT, and for a company called Charles River Associates that consulted for the U.S. Department of Energy (DOE), was into the nascent oil futures market. My positions offered me a front-row seat, and some involvement in terms of doing policy research, to the DOE’s efforts to manage the SPR (Strategic Petroleum Reserve). My role allowed me to explore how the DOE could use oil futures both as a temperature gauge of tightness in the oil markets, and possibly to assist in implementing SPR policy.
It was some years later that I got involved in commodity index investing. A luminary in that industry, Robert Greer, at the time was promoting how more traditional investors could best get exposure return and hedging qualities that commodities provide. Ultimately Bob joined me, and together we launched and built out one of the largest commodity franchises in the world. The major indexes were constructed to focus on the largest most liquid commodity futures. Though our “trading” was done mainly on index baskets, using derivatives and structured notes, my broader experience provided me with extensive exposure to financial futures: Bonds, equities, currencies, you name it. In particular, one of my first roles in the business involved me writing state-of-the-art, circa 1995, delivery models for valuing all the major bond and note contracts around the world.
FM: You’ve seen the evolution of the catastrophe (CAT) bond. How have these grown and changed over time? What’s your outlook for this market?
JB: CAT bonds sit at the nexus of two huge markets. One of those markets is the reinsurance market, which attempts to underwrite and diversify catastrophic natural hazard risk, or “perils.” The other, even larger market, is the global capital market.
I hold some pretty strong opinions about how CAT bonds can serve investors. Succinctly put, there’s a certain segment of the natural catastrophe market, the super-catastrophic, parametrically modeled, peak-perils, that all large institutional investors should strategically and tactically participate in, via CAT bonds.
FM: You are the co-author of “Inflation-Protection Bonds” and co-editor of “The Handbook of Inflation-Indexed Bonds” and once were responsible for trading $160 billion in TIPS [Treasury Inflation Protected Securities] for PIMCO. As an inflation expert, what’s your outlook for the near- and long-term?
JB: Obviously the global economy is, and has been for five years, in the midst of one of the toughest deleveraging cycles of the past 100 years. This, combined with unprecedented monetary policy, not just at the U.S. Fed, but at all major central banks globally, puts inflation at a knife’s edge. I suspect that inflation in the near term will remain contained, and there is even a risk of disinflation. However, my concern is the huge amounts of “dry gunpowder” in terms of excess reserves in, and lagged effects of, negative real interest rates globally, that speak to inflation risk on the upside and that would be difficult to control.