Podcast Transcript: Marc Rubinstein on Understanding Banks, the Crypto Challenge and Private Equity

This is an edited transcript of our podcast episode with Marc Rubinstein, author of Net Interest – a leading weekly newsletter on the world of finance. In this podcast we discuss how to predict financial crises, how financials are different from other companies, how to do well in angel investing, and much more. While we have tried to make the transcript as accurate as possible, if you do notice any errors, let me know by email.

Introduction to Marc Rubinstein 

Bilal Hafeez (00:00): 

Welcome to Macro Hive Conversations with Bilal Hafeez, we aim to bring you the best macro to help you successfully invest in markets. For our latest analysis, visit macrohive.com. 

Markets continue to get hit by shocks, whether on the energy front or US debt scene issues. I was on CNBC talking about the energy situation, so check out the video on the Macro Hive social media channels. Meanwhile, we published another slew of great reports this week. We have a piece on what odds equity options markets are pricing for a 20% correction at the index level and at the company level. It’s an eye-opening read. We also look at what the best ETF plays are for the semiconductor sector, and we have a review on new academic work on how much of your portfolio you should allocate to equities over bonds. Then we continue to extend our work in crypto markets, this time introducing the framework for looking at Ethereum. And like we did for Bitcoin earlier, we look at metrics like institutional flows, the behaviour of HODLers, and mining activity. And also look out for a big picture piece we have coming out soon which talks about whether the US is going through stagflation or not. You can get access to all of this and more, including our member Slack room where the Macro Hive team and members discuss markets all hours of the day. It’s refreshingly different from Twitter. When you sign up, the first month is free, and then it’s only the cost of a few weekly cappuccinos, it’s well worth it, and many call Macro Hive a hidden gem for investors. Once again, sign up at macrohive.com. 

Now, onto this episode’s guest, Marc Rubinstein. Marc is author of Net Interest, a weekly newsletter on the world of finance. Before this, Marc spent 10 years at the leading hedge fund, Lansdowne Partners, where he was a partner and portfolio manager. And this was after he spent time on the sell-side working for Barclays Investment Bank, Visa W, Schroeders, and then Credit Suisse where he was Head of European Bank’s Research. Onto our conversation. 

So welcome Marc. It’s great to have you on the podcast show. I’ve been looking forward to our conversation. 

Marc Rubinstein (02:02): 

Great to be here. 

Understanding Marc Rubinstein 

Bilal Hafeez (02:03): 

Great. What I like to ask all my guests is something about their origin story. So, what did you study at university? And was it inevitable you’d end up in the financial sector? And tell us something about your journey up until the point you’re at now. 

Marc Rubinstein (02:18): 

It’s not that exciting to be honest, Bilal. I’d wanted to be a doctor up until the age of about 16. 

Bilal Hafeez (02:23): 

Was that parental pressure? Or- 

Marc Rubinstein (02:25): 

Little bit. Little bit. Yeah, my choices were doctor, accountant, or lawyer, and I wanted to be a doctor. Visited a hospital at the age of 16 and ended up fainting and ruled that out therefore very quickly. So, accountant was next on the list, because I was never going to be a lawyer. Flirted with that and then ended up in investment banking, basically all the big investment banks came to campus to recruit and I interviewed with a number of them. Very few of them are now in existence anymore, the likes of Bearings Brothers, the likes of Morgan Grenville, many of those old UK merchant banks have since been subsumed by the global banks, but I got a job with one of them, which was the arm of Barclays. 

Marc Rubinstein (03:03): 

And although my education was in mathematics, quant was beginning to emerge then in the mid 1990s, but it wasn’t an area that I was drawn to particularly, I was more drawn to fundamental research and so joined equity research and did that for 12 years at Barclays and then Credit Suisse, and then eventually I went to work with one of my clients and ended up there for 10 years. 

Bilal Hafeez (03:25): 

Okay. And then when you were in equity research, were you focusing on a specific sector or did you rotate a few times before you settled down? 

Marc Rubinstein (03:32): 

I was focused on the bank sector. So my background, 25 years as looking at financial services companies. I was focused on the bank sector. In those days, the UK wasn’t part of Europe, we’ve kind of gone full circle. Barclays had a UK equity research business and a European equity research business. And I was embedded into the European equity research business. I spoke no European languages, but I started to look at some banks and I was very fortunate actually, because having joined in mid 1990s, the Scandinavian banks had recently all gone bankrupt, massive financial crisis in the Nordic countries. 

And just as my career was emerging in the mid to late 90s, the governments of the Scandinavian countries that had nationalised those banks were looking to privatise them. And so there was a lot of capital market business involved in privatising those banks. And so I got involved in that, both in Norway and in Sweden, which was great. It was a great opportunity and it was also a very useful insight into the anatomy of financial crises, how they happen, how banking systems are recapitalised by governments, and then what happens subsequently. And there were a number of waves to the rerating and re-emergence of those Scandinavian banks back then, it was a good time to be involved. 

Bilal Hafeez (04:51): 

Yeah. And then you joined a client, a fund, and what was that transition like? 

Marc Rubinstein (04:55): 

So it was 2006, just before the financial crisis. I had thought that I would end up on the buy-side for several years, but wanted to choose the right firm. And that firm had to be one that was fundamental, research oriented, but also absolute. I was keen not only to look at long opportunities, but also short opportunities. And so an absolute driven firm hedge fund ultimately appealed to me. And my client, Lansdowne Partners, had launched a financials-only fund a couple of years prior and I joined that fund. It was an ex-banks analyst from Morgan Stanley, it was me, an ex-banks analyst from Credit Suisse, and an ex-banks analyst from JP Morgan. And we stuck together for 10 years investing, pre-financial crisis, during the financial crisis, and then post-financial crisis. It was kind of a ringside seat onto the financial crisis. 

Bilal Hafeez (05:55): 

And then when did you leave Lansdowne and what did you do after that? 

Marc Rubinstein (05:58): 

So I left in 2016. We actually wound the fund up in 2016 and I then spent a few months having done financials for 20 years thinking, I will do anything but financials. 

Bilal Hafeez (06:10): 

Of course. 

Marc Rubinstein (06:12): 

Went off to university actually for a year. I spent a year at the London Business School doing the MBI I never did, which was a lot of fun. And then got pulled back into financials subsequently because I built up an expertise there. And so did a bit of consulting for banks and for funds. And then more recently when the pandemic began, launched a newsletter, which I now write once a week called Net Interest. 

How are financials different from other companies? 

Bilal Hafeez (06:35): 

Okay, great. And so obviously finance financial sector is your domain, it’s your home turf so to speak. And one of the things I’ve always found looking at markets is that when I look at companies or when I analyse companies, there’s companies, and then there’s the financial sector, which is almost like a separate beast almost. Is that the way you think about it? And what is so different about banks when you analyse and study them? Why is it that they often have this, you need to almost use a different or an additional framework to understand them. 

Marc Rubinstein (07:05): 

Yeah. There’s a kind of veneer of complexity to financials. I’ve met many portfolio managers in the past that have not wanted to look at financials. Actually, they’ve been paid not to look at financials for large periods of time, but they haven’t wanted to look at financials. It’s a veneer of complexity, which in some ways is manufactured by the industry itself. In some ways, margin has been extracted via complexity. And when we look at, and there’s many examples across many different areas of financial services, but some kind of exotic options embedded in retail financial products might be one example, very high margin products where manufactured around complexity. Lots of examples. So, that’s possibly one reason. And the second reason is that the valuation framework is inherently different because leverage, which is one of the dimensions with which one would typically address a non-financial corporate, it is the bread and butter of a financial institution. And so, differentiating between debt from a leverage perspective and from the operating product that they offer is very difficult and that makes valuation a little bit different. So those are the reasons it is a different framework. 

Interestingly, I often think deploying that framework that I’ve established, looking at financials back into the corporate sector can be very, very useful because there are many companies that I’ve discovered over the years that have got hidden financial companies inside. So take the auto sector, for example, historically many auto companies have made more money on financing their vehicles than making and selling their vehicles. They’ve had financing arms attached to them, timeshare business in the US, they make money basically through credit businesses in order to enhance the sales of their timeshares. The list goes on and on. And so, it’s been very useful to me. That framework’s very useful to me. Behind it, there’s a credit overlay. I think you will find a lot of, I personally don’t have a credit background, but I think you’ll find a lot of successful investors in financial services do because it’s where credit meets equity, but that’s why the frameworks are different. 

How to predict financial crises 

Bilal Hafeez (09:11): 

And the global financial crisis, obviously was a huge event for the financial sector, I mean did that lead to you changing your framework or the way you look at the financial sector? Or did it just validate what you already thought, the way you should look at banks and so on? 

Marc Rubinstein (09:26): 

So I would divide that up. So as I said earlier, I think I had a ringside seat of the financial crisis. The financial crisis uniquely for a global macro political event began on banks’ balance sheets. And my job was to come into the office every day and look at banks balance sheets. So I identified early warning indicators and clearly the magnitude of it, I never anticipated, but the signs looking at banks balance sheets from 2005, 2006, and financial services broadly, balance sheets, what were there and that was very instructive to me. 

Bilal Hafeez (10:04): 

I mean, what types of indicators would they have been? Would it been the rate of change with the balance sheet, things like that? 

Marc Rubinstein (10:10): 

So again, depending on yes, yes, the running down of capital and the leveraging upper balance sheets, the use of alternative financing mechanisms, for example, amongst the broker dealers in the US like Bear Stearns in order to enhance leverage the… It’s a very simple model when looking at the banks, it’s kind of margin, it’s kind of a portfolio of fixed income securities really. Banks are undertaking a carry trade and they’re able to make money if they make more on what they are earning on their portfolio of securities than what they’re paying for their funding. And that’s their margin, that’s their spread. Spreads were declining up until 2006, 2007 because of competition. And in order to offset that, banks levered up. 

So, leverage was, I’ve mentioned the broker dealers, subprime was another area where demand was being manufactured. Again, one of the interesting things I think and the reasons why banks were able to lever up is because the demand was ultimately there. And the reason why the demand was ultimately there is because if you’re giving away under-priced credit, who’s not going to take it? So it was their gift to create the demand which they did, and we saw that in the subprime industry very vividly, loans that were never going to get repaid. And again, there were signs in 2006, so-called early payment defaults where borrowers were defaulting within 90 days of taking on a mortgage. So all of those signs, I think were there. So that’s one piece of it. Having said that, I’ll admit it now, I used the wrong playbook subsequently. I mentioned earlier the Scandinavian banking crisis and any analysis of any banking crisis historically was quite a simple playbook actually. Banks will get recapitalised, and we saw that in the financial crisis, took longer in Europe than it did in the US, but banks got recapitalised and competition would reduce, such is the nature of the capital cycle. Competition would reduce, margins would go up. Because they’d be better capitalised, valuations would go up as well. And they would recover as they had done in Scandinavia in the late 1990s. 

And actually, this time around, that didn’t happen. And it didn’t happen for two reasons. It didn’t happen because interest rates were kept lower for longer and it didn’t happen because of regulation. And so I remember somebody saying to me in 2008, 2009, he was a tech strategist who would live through the dotcom boom and bust. And he said to me, you’re kidding yourself. That was going to be a quick recovery. These things take a generation. It takes a generation for investors to forget what happened and to feel comfortable in the sector once again. And actually from where we sit today, he’s been right. 

What do price-to-book ratios tell us? 

Bilal Hafeez (12:43): 

I mean, I used to work at Deutsche Bank, which obviously was one of the biggest and probably still is one of the biggest European players, and one of the things when I was there and even now after I’ve left, I look at the valuations, the price of the book for example, the classic sort of metric. And it always trades at discount to the book value. Why do you think the Europeans, it’s not just Deutsche, it’s all the Europeans are trading like that. I mean, why do you think that, is it because the market is saying that they don’t believe what the book value is of the balance sheet? Or is it to do with just the low growth prospects of the European financial sector? Or is it something else? 

Marc Rubinstein (13:21): 

It’s probably, of those two points, it’s more the second than the first now, but there’s a third point as well, which is, if you pull off the bookshelf any corporate finance textbook, then the classic response is that a business shouldn’t trade below its replacement cost. It shouldn’t trade below its liquidation value because why wouldn’t it just be liquidated and private equity can be the catalyst for that to happen. Can’t happen for a bank like Deutsche Bank, not withstanding that a private equity company wouldn’t be able to buy it. But it’s literally too big to liquidate. We’re talking trillions of exposures. We’re talking a central plank of the financial system globally. We’re talking hundreds of thousands of employees, it’s too big to liquidate. So it goes on and will trade because of that second point, because its returns will be lower than its cost of equity without the option to liquidate it, it will trade at a discount to its book value. And Germany’s a very special case as well because it shares some similarities here in Japan and some other markets that there’s a big non-listed sector, there’s a big not-for-profit sector within German banking, and therefore margins and returns are suppressed. 

Bilal Hafeez (14:29): 

And so one of the themes investors play often is the value trade and what always comes up in any valuation metrics you look at is the financials. They’re trading cheap, so for the value player, you want to buy financials. When you think about financials through the valuation filter, I mean do you agree that they’re generally cheap or do you add additional factors which make them actually not look so cheap? 

Marc Rubinstein (14:54): 

Yeah. I mean look, they’ve been underperforming for a long, long time now and they do look cheap. I mean, I look at a lot of fintech now and banks are of the view that within their businesses, they have fintech, fintech’s embedded within incumbent banks that they’ve got the wherewithal to compete with any fintech. And yet even on sum of the parts basis, they’re not being valued alongside on a multiple of sales like some of those FinTech businesses are. Now clearly, their growth prospects are weaker in aggregate. There are various regulatory constraints. They operate under that, some fintechs don’t actually, again that’s something banks complain about. But yeah, I mean I think it’s difficult to argue that they’re not, you can argue about performance from here, but difficult to argue that they’re not cheap. 

Can banks rebrand themselves as fintech? 

Bilal Hafeez (15:39): 

Yeah. And when you say fintech, that term is bandied around a lot. Everybody claims to be fintech. I mean, do you have a more strict definition of fintech or how do you think about fintech? 

Marc Rubinstein (15:51): 

Yeah, so I think fintech… It is a good question actually. One could ask the question broadly about how one defines it, everyone wants to be a tech company right now. Why wouldn’t they? In fact, just recently a bank in Thailand announced that it is going to delist its bank and relist its fintech business and shift the bank to become a subsidiary of its fintech business. So, Siam Commercial Bank henceforth will be relisted as SCBX, much more tech native name. And it’s going to be a collection of fintech businesses with a subsidiary bank. And the market loved it and the stock was up 20% on the news. 

Marc Rubinstein (16:29): 

Tons of examples, banks, a lot of fintech IPOs coming either IPOs or SPAC demergers, SPAC mergers have been coming to the market. And in many, many, many examples, the underlying bank or insurance company wants to be followed by the sales side tech analyst, not by the bank or insurance analyst. So, lots of examples. I can see why they would want to ultimately… Another one I’ve written about is Greensill in the UK. So Greensill in the UK paraded as a fintech business and it won a lot of funding on the back of it being a fintech business. Turned out that when it went into administration, there were no technology assets there whatsoever, there were no buyers for its fintech R&D. And actually, some other banks plugged into its fintech provider, a company called Trulia, rather than buying anything directly from Greensill. It wasn’t a fintech, but it paraded as a fintech, and to the detriment of many of its investors. 

What are the key fintech trends? 

Bilal Hafeez (17:26): 

And what areas of FinTech are most exciting for you right now? What sectors or what companies you think these are the companies that are actually doing something really interesting and you want to watch them? 

Marc Rubinstein (17:36): 

So I think payment is interesting. Historically it’s been almost an adjunct of what banks did. Banks started from the perspective of being a harbor for savings, a store of wealth and payments was an adjunct to that. Increasingly what we’re seeing is that shift and we’re seeing payments becoming the central focal point. I remember growing up, it was the current account, the checking account was the anchor product of a bank. Actually historically, maybe the mortgage was as well, but increasingly it’s becoming payments. The vehicle, the wallet, the vehicle through which a consumer interfaces with commerce, which is much more transaction orientated. And so there’s a lot of innovation that’s going on in payments right now. 

Bilal Hafeez (18:20): 

And some of the high profile ones are obviously like Stripe, PayPal obviously, and assuming there’s a whole bunch of challenges in this? 

Marc Rubinstein (18:26): 

Yeah. Square IPOed in 2014, 2015, and there’s a lot of challenges in that space and there’s crypto as well obviously. I often think Visa actually, Visa is the first fintech. It’s a new word, but Visa was the first fintech. And actually if you read the founder, Dee Hock, has written some books, including an autobiography and very, very foresighted. He was talking when he wrote his book, he was running Visa through the 1970s, but he wrote his book in ’99 I think. And he talks about the concept of moving money. This was obviously we had email in 99, but internet was fairly fledgling. He was talking about the concept of moving money as easily as sending an email and money is a form of information and that it can be seamlessly sent, information can be seamlessly sent and yet money can’t, a lot more friction associated with that. So he was thinking about those ideas many, many years ago and they’re the ideas that are still being addressed today. 

Bilal Hafeez (19:20): 

And in terms of payments, the innovation or the frontier, is it speed? What’s the thing that differentiates one from the other? 

Marc Rubinstein (19:29): 

Yeah, it’s speed is one. Cost is another, it’s kind of linked to that because cost is kind of linked to that. Cost might be also linked to the number of intermediaries in the chain, and particularly it’s been observed that in the remittance industry, the international remittance industry, costs are very high and there have been some innovations, classical one being M-PESA in Kenya which was founded in 2006, the ability to send money over a mobile phone. And this was pre-smartphone, this was over a pre-smartphone technology. So cost is one, send money through Western Union is very, very expensive. Speed is another and linked to that is a kind of globalisation, which brings in currencies as well. 

How will credit evolve? 

Bilal Hafeez (20:04): 

And so payments is one area. What other areas of fintech do you think are the things to focus on? 

Marc Rubinstein (20:11): 

I think credit is interesting. I think there are new forms of lending, which banks historically haven’t done, banks historically have been very focused on collateral. So there are new forms of, there’s two elements of this, one is smaller ticket loans, which it was not economic for a bank to do and now there’s operating expense benefit by technology, which enables companies to do smaller ticket loans. 

Bilal Hafeez (20:33): 

And that’s to do with just processing the smaller loans are cheaper now rather than the credit rating or credit scoring. 

Marc Rubinstein (20:40): 

Exactly. So it could be… Yeah, exactly, it could be there’s a fee to pay to the credit bureau and then there’s a fee to pay to do the paperwork and there’s a fee to disperse the money and then a fee to collect. All the costs the bank incurs in just dispersing that loan made no sense for a $50 loan or $100 loan, whatever it might be. Same for insurance, so there are microinsurance policies now. For example in China, you can immediately, via an app get an insurance policy that will ensure the flight you’re about to take. So travel insurance on demand, which is a very smaller ticket item which can now be processed much more rapidly using technology. So that’s one bucket, but the second bucket is just using new data sources and new approaches to technology. So partly there’s a number of fintech companies which are lending against revenue on the basis that revenue for many SaaS companies can be predictable. And the fintech company has got access to the sales ledger, the transaction data of that online commerce company and can use that to underwrite. Whereas a bank typically would’ve required three years of historic financial reports and just a whole different set of data, which they’re not equipped to be able to underwrite against. 

Is the crypto challenge to finance real? 

Bilal Hafeez (21:55): 

Okay. Yep. Yep. That makes sense. And then you mentioned in passing crypto, I mean how important is that for fintech? Or would you say it’s a new emerging market that is interesting, but it’s not central right now? 

Marc Rubinstein (22:10): 

Yeah. So, I think it’s very important. I think Defi is a huge new area of exciting innovation, and actually is the challenge to fintech ultimately, but at the same time, it is small. There’s a great quote about what to be careful about the toy, today’s toy. And it is a bit of a toy and crypto in the Defi sense, it’s almost like a parallel financial system. And so far, there hasn’t been that much crossover. I’ve seen a few innovations where they’ve financed real assets in the real economy, but it’s negligible, it’s tiny, it’s irrelevant right now, but it’s happening and therefore it’s something to watch. 

Bilal Hafeez (22:51): 

And when you say it’s a challenge to fintech, I mean what do you mean by that? 

Marc Rubinstein (22:54): 

Well, in the way that fintech was a challenge to the incumbent banks, it’s a challenge to the whole incumbent financial system. 

How to do well in angel investing 

Bilal Hafeez (23:00): 

Yeah. And you also do angel investing as well, so when you look at a company, I mean what types of things do you look at who make you feel confident that you want to invest in them? 

Marc Rubinstein (23:12): 

Well, it’s an interesting question and angel’s very different. So my background is in public markets investing, which is very, very different from angel investing. So the downside is, there’s no background, financial analysis is second fiddle to the strategic analysis, which needs to go on. In my case, and it’s a bit of a cliche really about the founder, but in my case, it’s about getting to understand the view and the perspective of the founders and just being able to trust them frankly. 

Bilal Hafeez (23:45): 

Okay. Yeah. Yeah. So it’s just quite basic in some levels about that relationship, do you trust them or not? 

Marc Rubinstein (23:51): 

Obviously I’ve got to align on the idea, align on their values, and then have an understanding that I can trust that they will execute on their mission. But at the same time, I’ve been involved in things before where they’ve changed, the strategic emphasis has changed. So they have to be more adaptable than might be the case, but then it’s easier to adapt than is the case for a big public market institution. But it’s been fascinating, and actually it’s, I think, made me… Again, there’s a trend now. I don’t manage other people’s money, but there’s a trend now amongst those that do to be going into… So download, for example, in fact my old firm, Lansdowne to launch venture funds and to be doing less short selling. And I think there is a kind of synergy and I’ve seen it in my own small way between dealing with startups and working with startups and then thinking about public market investing, and vice versa as well up front. 

Bilal Hafeez (24:46): 

Yeah. Yeah. I guess it gives you a lot of insights when you work, which straddle both sides, the public and the angel side. And we didn’t talk about asset management. I mean asset management’s being challenged on so many different fronts and you have some of these huge players in that sector. Do you have a view on trends in that sector? 

Marc Rubinstein (25:08): 

Nothing variant. I think clearly I think we lived over the past few years, the point at which passive tipped over 50%, no one rung any bells, but it happened. And that’s fascinating development. I look at the hedge fund industry and I look at the private equity industry very carefully actually, because the private equity firms are most of the big ones, KKR, Blackstone, Carlyle, Apollo, are publicly traded? And I ask questions all the time, why have they been able to institutionalise, whereas hedge funds have not? We don’t see as many publicly traded hedge funds, generational shift among hedge funds is more infrequent and more difficult. Typically there’s been more personnel tension in hedge funds than we’ve seen for these private equity companies. So I look at those, I ask those questions a lot. 

Why have private equity firms institutionalized better than hedge funds? 

Bilal Hafeez (26:01): 

And do you have an answer? Why is it harder for hedge funds to institutionalise? 

Marc Rubinstein (26:04): 

I suppose capital allocation. I suppose, in private equity, there’s an operating element as well as a financial element. And that could be easier to institutionalise. The private equity firms have also been more successful, there’s no reason why hedge funds couldn’t have done this. Private equity firms have been more successful in diversifying across different asset classes. So, Blackstone is now having started out as a leveraged buyout firm in the 80s, it now does everything in alternative asset management. It runs hedge funds and it runs venture capital and it runs private equity and real estate and so on and so forth. But there’s no reason why a hedge fund couldn’t have done that. So I don’t know the answer actually, it’s interesting. I think hedge fund, successful hedge fund portfolio managers can make a lot of money individually, and therefore there is a greater propensity there, which we don’t see in private equity, to return outside capital and turn their businesses into family offices. Largely because, and again maybe this is something about public markets where there’s a capacity constraint, there’s a limit to how much money a hedge fund can run and generate substantial returns. And maybe that’s not the case in private equity. So lots of questions, I don’t necessarily have the answers, but it is an area I’m fascinated by. 

Bilal Hafeez (27:17): 

Yeah. And at the moment, do you have any sectors or companies that stand out for you, that you think are interesting either on the bullish or bearish side? 

Marc Rubinstein (27:25): 

I tend not to go down that route of recommending or promoting individual companies, either on the long side or the short side. Areas of interest would be the one I’ve just talked about actually, the private equity space I think is very interesting because actually, as we see that shift to passive, then the classical barbell response would be greater demand for more alternative, absolute strategies. And many of those firms offer those. And what they’ve also done recently is accumulated more permanent capital, the challenge those companies have faced historically over, say, a mutual fund is that they raise a fund, deploy it, hopefully make some money along the way, but then return the capital back to those investors, then have to raise another fund. So from a business perspective, they were melting ice cubes and you’d pay a bit more than that because you’d hope that there was a sufficient franchise available for them to raise another fund. But increasingly what they’ve done is they’ve raised permanent capital and that’s given them a recurring revenue stream of management fees, which you can see in the markets they’ve been rerated because of that. So there’s a permanence now to those companies that didn’t really exist before and that makes them quite interesting. 

Bilal Hafeez (28:39): 

Yeah. I mean from a skeptical perspective, I wonder whether private equity is benefiting a lot from leverage. In an extremely low interest rate environment, and so is that a cause for concern for you? 

Marc Rubinstein (28:51): 

So much. Yes, it is. Low interest rates is one of those macro themes like demographics, or it could be the answer to everything. It could be every development. I was talking before about fintech and new types of lending, these new types of lending haven’t been tested in a credit cycle or a cycle of higher interest rates. There’s a lot that’s happened in this era of low interest rates and a lot of it can be explained by low interest rates. And until we get, we kind of had a hint of it in March of 2020, but until we get some kind of alternative macro backdrop, it’s difficult to know. But there’ll definitely be winners and losers in that environment for sure. 

What is the state of sell-side research? 

Bilal Hafeez (29:30): 

Yeah. And I’m a researcher, my background, sell side throughout when I worked for companies and now have Macro Hive, you also have had a sell side research background, then you went to buy side, and now you have your newsletter. So you’re in some ways a researcher, like an independent researcher I suppose I could call you. So do you have a perspective? You’ve been on all sides of the defense and all corners of the market now in terms of consuming, producing research, do you have a view on the state of research in the financial sector? 

Marc Rubinstein (30:03): 

Yeah, I think so. Research is odd in the sense that it’s difficult to identify a revenue stream. And so historically, research came about as a bundled add on to trading as a way to incentivise trading. And then it, in the late 1990s, I’m not talking about macro trading here, I’m not talking about macro research here, I’m talking about equity research. In the late 1990s, it was always a cost centre looking for a revenue stream, like an orphan wandering around looking for some kind of foster parent. And so historically it was the trading businesses and then it went on to be the capital markets businesses in the run up to the boom of 2000, and then Elliot Spitzer kicked it back out again, and it became an orphan once again. There was a period where it associated itself with proprietary trading at the investment banks, and then when the financial crisis hit and through the Volcker Rule. So MiFID II in some ways is a useful development because it allows some transparency to open up. But at the same time, that creates an opportunity for, as you said earlier, for independent researchers and one of the phenomenal things that was happening pre COVID and has accelerated during COVID and working from home, partly because… So when I started a Credit Suisse, and you’ll be the same, I needed the Credit Suisse megaphone to get my ideas heard. 

Okay. I had a bit of a name because I was a kind of ranked sell side analyst, but I needed that platform in order to get my name heard. Increasingly, the cost of production of research is a lot lower. I actually, I’m sure you use your Bloomberg avidly, I regret not resubscribing to Bloomberg but I don’t have a Bloomberg, but that would, if I did, would be my biggest cost, but without that, I can get access to information. Again so, one more anecdote, going back when I was covering those Swedish banks in the late 1990s, I learned that there was some information coming out of the Riksbank, the Swedish Central Bank, that would be useful to analyse Swedish banks, but it was only available, it was faxed to me and it was in Swedish. I had to run out to my local bookstore to buy a Swedish/English dictionary to translate this to discern the information which turned out to be pretty valuable. 

Now obviously, A, I don’t need a dictionary, B, that content is available online instantaneously anyway to everybody. So as an independent researcher, I don’t need that infrastructure and that expense account that I had at Credit Suisse. So the cost of production is a lot lower, the cost of information is a lot lower, and the cost of distribution is now a lot lower as well, because as you say, I’ve got a newsletter and it goes out, self-started, bootstrapped now to 25,000 people. I don’t know if my client list was ever that big at one of the big sell side firms. 

Bilal Hafeez (33:02): 

And so where does that leave sell-side research then? Banks still have fairly large research departments, what’s their future? 

Marc Rubinstein (33:09): 

Yeah. I think they’ll have a future. They will have a future. One of the trends over the past few years, we’ve seen, is a juniorisation of sell side research effort, which is a shame actually. Just this week, because I’m involved in the banking sector, the partner at Goldman Sachs who ran European banking research has just retired. There’s just a general juniorisation, which is fine because a lot of the content, that’s adequate for, but for a longer term contextual perspective, it maybe isn’t something that they can offer. And so a lot of those people, like you, like me have gone independent. 

Bilal Hafeez (33:46): 

Yeah, no, that’s great. I’m sure we can talk about lots more topics, but to round off our conversation with some personal questions. One is, I always like to ask my guests, what’s the best investment advice you’ve ever received? 

Marc Rubinstein (33:58): 

I don’t know really. So, personal investment advice, the best personal investment advice it’s not even that relevant broadly is not to be driven by tax. I’ve seen many personal investors, retail investors make mistakes, including myself historically, by making a decision that was driven by tax rather than by the underlying investment rationale. That’s one piece of advice. 

Bilal Hafeez (34:20): 

Yeah, no, that’s good. That’s a good one actually. I haven’t heard that one before, but that makes a lot of sense. I’ve experienced that myself and in the financial sector, there’s a lot of people who obsess about that type of thing. The other question was more about personal productivity, because we’re all inundated with information, yourself included, you mentioned earlier about a bank in Thailand. So I mean, how do you filter your information? How do you keep on top of things? Do you have a system? 

Marc Rubinstein (34:45): 

It’s not easy. I used to obsess about it. I trialed various note-taking apps, Evernote, Rome Research. Now I rely on Serendipity often actually. So I accumulate a lot of stuff on Kindle books, although I do take notes off the Kindle books and I underline print books. So I surround myself with them. I’ve got an inbox, which is just absolutely enormous, but good search functionality. I’ve got a library of PDFs, which is also enormous, but good search functionality. So I would say Serendipity and the search function, the search function. If I’m thinking about anything, it’s the first thing I will do is hit the search bar on my laptop. And actually it’s incredible what it drags up. 

Books that influenced Marc: Fooled by Randomness (Taleb), Origin of Wealth (Beinhocker) and The (Mis)Behaviour of Markets (Mandelbrot) 

Bilal Hafeez (35:32): 

No, that’s great. And you mentioned Kindle, sounds like you’re a big reader. Are there any books that really influenced you over your career? Career or even in your personal life? 

Marc Rubinstein (35:39): 

Yeah, I’m a little bit guilty sometimes of being overly influenced by the last thing I read, but thinking about that, and what I’m reading right now isn’t that interesting. I was quite influenced by the Nassim Taleb books, particularly Fooled By Randomness. And then subsequently, I’ve read a lot of books, there’s one called, by Eric Beinhocker, called the Origin Of Wealth around complexity, because that was kind of a mindset shift for me, just the idea that the world and the investing market isn’t linear and that it’s ultimately, actually I’ll throw Mandelbrot in there as well, his book, it’s kind of a complex system and thinking about it in those terms, using some of those techniques can be, I’m not sure it gets you the answers, but it stops you from making mistakes. 

Bilal Hafeez (36:22): 

No, that’s great. Yeah. And if people wanted to follow you, subscribe to your letter, how do they do that? 

Marc Rubinstein (36:29): 

Well, the letter is called Net Interest. It goes out every Friday and the sign up is via netinterest.co. And I’m on Twitter as well, which is marcruby, M-A-R-C-R-U-B-Y. 

Bilal Hafeez (36:41): 

Okay, great. I’ll include links on the show notes so everyone can access that easily. Well on that note, thank you very much. It was really enlightening speaking to you. That was excellent. 

Marc Rubinstein (36:49): 

Great. No, thanks. Great to be here. 

Bilal Hafeez (36:50): 

Thanks for listening to the episode. Please subscribe to the podcast show on Apple, Spotify, or wherever you listen to podcasts. Leave a five star rating and a nice comment. Let other people know about the show. We’d be really grateful. Also, sign up to become a member of Macro Hive at macrohive.com. We’ll be back soon, so tune in then.