For the full interview please listen to The CM Group- Free Lunch Podcast, Episode 147 “Are we headed for GFC 2? An interview with Shay Kshatriya”
Colin and Greg: For the benefit of the listeners, Shay, why don't you just tell us a little bit about how you started and how you ended up where you are today with Russell Investments?
Shay: Yeah, sure. It's been quite a while. Gosh, I'm going to timestamp myself. I've been with Russell with over 17 years, but it's been a great run. I've been in several different locations. I started my career at Russell in our New York office working as an analyst within the institutional team, so work with a lot of institutional clients back then, and I was there for about a few years and then an opportunity had opened up in our Toronto office to work within the broader capital markets team there and didn't realize it at the time, but I ended up spending 11 years in Toronto, which was amazing, had a great time. It was a lot of fun. And I think back, what I wish I would have done was the skyline of Toronto When I first joined Russell in Toronto back in 2008, I believe it was, and the Skyline when I left, which was 2019, so right before the pandemic, what a difference. So there's been so much growth, and I think it's a reflection of what's happened in Canada, right, as far as real estate goes. And I'm sure we might be touching on that topic, but remarkable growth in the city and it was a great time and it's still a great city, but a great time to be there. While we had that growth around 11 years there work within the broader investment team, of course, not in isolation, but with the broader investment team worked on and discussed the capital markets insights, our view on the Canadian economy, the outlook and all that good stuff. And then as I said, 2019, we left and the family, we moved down to North Carolina. So North Carolina right now moving and see has been nice. For one, the weather is a bit milder here. In addition to that, just being in the US now, working also a little bit more with our clients, but of course still very much dialed in with the Canadian client. So yeah, it's been a nice journey so far.
Colin and Greg: Hey, I want to ask you about because you're in Charlotte, right?
Shay: I'm in Raleigh.
Colin and Greg: Raleigh, okay. Because Greg and I were in Charlotte, North Carolina a few years ago. Pre-covid, of course, a couple things stood out for me there. It was the NASCAR capital or the home of NASCAR, and I didn't realize that. And also the number of financial institutions that had head offices in Charlotte, North Carolina, of all places. That's got to be kind of a newer thing, isn't it?
Shay: It's not that new, actually. So it's it kind of goes under the radar. But Charlotte has been in terms of banking assets, if you will, second behind New York City. So it has a pretty big presence within the broader U.S banking system. The Bank of America is an example. Bank of America is headquartered in Charlotte, so that's obviously a big hub there. And now, well, it was Wachovia, but then Wells Fargo. Now Wachovia was headquartered in Charlotte. And then of course, after the GFC, Wachovia was absorbed by Wells Fargo. So now Wells also has a pretty big presence in Charlotte. So yeah, it's pretty under the radar, but it does have a pretty big presence in in finance in the US.
Colin and Greg: Are there tax reasons why financial companies might headquarter there or just history?
Shay: I think it's just history. If you compare overall from a taxation perspective, I should say, that could play a bit of a role because overall tax environment is a little bit more favorable, I would say here in NC versus let's say New York City, right, which is a higher cost state. So some of that could be playing in. But I think it's also history, right? When you have a big bank like Bank of America, it tends to also work as an anchor for other institutions to take a look at the city.
Colin and Greg: Well, listen, before we dive into some questions maybe just expand a little bit on what a Director of North American Strategies does on a day like what does your day look like?
Shay: It's a good question. I don't often get asked that, but thanks for asking. A lot of my day is just staying on top of the markets, right? Just seeing what's happening, what's going on, what's moving the markets at the moment and how could that influence our outlook? As I said, I still work very closely with the Canadian team. I'm still responsible for drafting, let's say, our Canadian outlook and what have you, in conjunction with obviously the views of the broader Canadian investment team. So it's just staying on top of the markets as well as communicating our views similar to what we're doing today, just communicating our views at the moment and what could be influencing it. Just things to keep an eye on and be watchful for, right? So a lot of client communications as we're doing right now, as well as staying on top of the markets and having a sense on how we could influence our outlook. And of course, bigger picture, what implications that could have on overall asset allocation decisions.
Colin and Greg: You mentioned GFC a few minutes ago, otherwise known as the Global Financial crisis for those that aren't familiar with that acronym. So there's been a ton of volatility the last 2 to 3 years, as evidenced from COVID and now the recent bank failures in the US and the Credit Suisse issue with takeover by UBS. Lots of people are asking us, are we headed towards another global financial banking crisis?
Shay: That question has been coming up a lot more in conversation these days considering what's happened, as you kind of mentioned, Colin. We do think it's a very different situation today than what transpired back in 2008. And that's, I think, probably a good place to start the broader outlook and make that distinction. So back in 2008, financial crisis, a lot of that was because of poor credit quality on the books of the US banking system, which is not the case today. So what do we mean by poor credit quality? Well, a lot of the debt that was causing the problems for the banking system back then was related to subprime debt. So you might recall some of the acronyms that were used to be thrown out back then, the ninja loans, if you will. Right? No income, no jobs, no problem. You'll get a loan. Anyone could qualify for a loan with minimal requirements. Quite frankly, that resulted in a high proportion of the overall mortgages that were getting booked, being qualified as subprime. So poor credit quality of mortgage originations. And then you had a situation where a lot of these mortgage debt was getting repackaged in investable instruments and then spread more broadly throughout the entire banking system. So the bank balance sheets were not nearly as clean as they might have been assumed to be at that point in time because of the subprime debt. That was kind of like a cancer within the entire system and which ultimately brought down a lot of the banks as we kind of touched on in the beginning.
And then the other thing, I think that's an important distinction to make, poor credit quality, but also what made the US economy more vulnerable back then was the fact that household debt was not nearly as clean as it is today. So household debt to disposable income back then reached, I believe, around 140% or so. Currently it's around 100%. So very different situation today on the household balance sheet side versus what it was back then. So poor credit quality one because of subprime and two, an extremely leveraged household sector is what contributed to the unraveling that we saw back then, which is not the situation today where, yes, we've seen these bank runs. Obviously Silicon Valley Bank is the one that comes to mind first and foremost. And the situation there isn't because they had poor credit quality. Quite frankly, the issue that they had is not of credit, but it's more of duration market losses that they've been forced to realize because they needed to meet accelerating deposit withdrawals. And it was that disconnect between their asset side and their liability side and having to recognize these losses because of the fastest increases that we've seen by the US Federal Reserve in about 40 years. Right. Is going to cause some volatility. And this is where we're starting to see that come through. So it wasn't wasn't a credit quality issue. The banks overall more broadly are in much better shape today than they had been back then. But it was really the vulnerabilities have been caused by the rapid rise in rates.
For more questions and answers with Shay please refer to our Podcast.
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