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Speaker 1: Welcome to Fear and Greed Q and A, where we

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Speaker 1: ask and answer questions about business, investing, economics, politics and more.

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Speaker 1: I'm Sean Alma. It seems almost every day we're talking

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Speaker 1: about a new record for the price of gold, traditionally

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Speaker 1: a safe haven asset when markets fall or investors are

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Speaker 1: a little bit worried. But at the same time seems

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Speaker 1: to be plenty of asset classes, including share markets hitting

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Speaker 1: or near record highs. We've spoken previously to Paul Miran,

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Speaker 1: co founder and fund manager at M squared Capital the

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Speaker 1: great support of this podcast. He's written and note exploring

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Speaker 1: what he calls the bizarre flood of liquidity into gold

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Speaker 1: and growth assets simultaneously. Remember this is general information only,

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Speaker 1: and you should always seek advice talent to your circumstances

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Speaker 1: before making investment decisions. Paul, Welcome back to Fear and

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Speaker 1: Greed Q and a thank you Sean. Now that note

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Speaker 1: I mentioned, I must say at the beginning you talked

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Speaker 1: about the fact that you're pleased that your office had moved,

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Speaker 1: because otherwise you'd be battling the hordes trying to buy gold.

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Speaker 2: Absolutely, you see bullion, the great photos that you see

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Speaker 2: in the paper and you have people queuing up all

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Speaker 2: and up and down mardin Place that are now building right,

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Speaker 2: And so the reason why I wrote the note and

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Speaker 2: the article was all of a sudden in the last

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Speaker 2: two weeks, you had one or two people in the queue,

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Speaker 2: and now the queue stretches all the way up and

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Speaker 2: down Mardin Place. So something has changed in the last

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Speaker 2: two weeks in relation to people wishing to buy physical gold.

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Speaker 2: And I'm very thankful that they moved out. Otherwise I

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Speaker 2: would be going up and down twelves stories of stairs

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Speaker 2: to get to the office every day.

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Speaker 1: So if we look at gold, we look at share markets.

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Speaker 1: Potentially we look at private credit slash private markets. There

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Speaker 1: they are really highly valued at the moment. Is there

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Speaker 1: a fundamental reason why that's the case? Before we get

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Speaker 1: into this specific.

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Speaker 2: Well, in my thirty years, I've never seen a market

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Speaker 2: situations such as this. It seems that every single asset

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Speaker 2: class is at record high and there's so much liquidity

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Speaker 2: in the marketplace, which creates its own danger in itself,

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Speaker 2: and I think should be quite wary about it. I'm

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Speaker 2: no expert in gold, but it does create an emotion mentally,

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Speaker 2: whether it's fear, of greed in relation to being in

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Speaker 2: gold or not, or are people buying it because they

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Speaker 2: want to make money, or people buying because they're afraid

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Speaker 2: of other acid classes being at the peak or potential collapse.

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Speaker 2: So there's all of these emotions happening as well. It's

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Speaker 2: in your face as well, so it's a good time

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Speaker 2: to take a breath and have a think about it.

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Speaker 1: Yeah, I mean I noticed Jamie Diamond, the US Wall

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Speaker 1: Street banker. Yeah, I think he said it's semi rational

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Speaker 1: to own goal. Now, you know Wall Street bankers want

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Speaker 1: to make money. You don't get much return on gold.

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Speaker 1: It just gets running, and he's saying it's semi rational.

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Speaker 1: You said, you're not an expert on goal, but how

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Speaker 1: does that play out at Ultimately?

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Speaker 2: Normally everything is countercyclical, so you know, for example, people

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Speaker 2: will buy gold because they've believed that the market is

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Speaker 2: too hot. It's defensive in its nature. It's a reserve currency,

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Speaker 2: so you'd normally expect people taking my last thirty years.

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Speaker 2: People normally take money from one asset class which is

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Speaker 2: really hot, they take their profits, they move it around.

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Speaker 2: But right now it seems like everything is hot at

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Speaker 2: the moment, so it creates its own conversation piece.

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Speaker 1: Okay, so let's bring that too. Equities and the ASEX

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Speaker 1: two hundred. I noticed in that note that you talked

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Speaker 1: about an income yell of about three point two percent.

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Speaker 1: Now you compare that to a pretty safe bond rate,

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Speaker 1: but that isn't much of a dividendial that you're getting.

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Speaker 1: How does and invaluations in some areas, particularly very high standard,

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Speaker 1: how does that all play out well?

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Speaker 2: Because it's so much capital, it's a significant margin squeeze.

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Speaker 2: So if you just look at equities, and once again

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Speaker 2: i'm a private credit expert, but just from a helicopter view,

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Speaker 2: I'm not trying to say I'm an expert, but one

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Speaker 2: out of five companies actually met their part of a

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Speaker 2: forecast in the reporting season recently, and with three point

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Speaker 2: two percent. If they'd start disappointing, that's going to be

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Speaker 2: squeezed even further. And if the capital continues going into

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Speaker 2: the markets, the yield they're going to get in something

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Speaker 2: which is already quite concentrated is going to be lower

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Speaker 2: and lower. So I think investors are going to have

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Speaker 2: to start accepting that income or returns on their capital

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Speaker 2: is going to be squeezed even further unless there's an

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Speaker 2: event happens the next twelve months or so.

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Speaker 1: Okay, I'll get to private credit or private markets in

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Speaker 1: the moment. But what I'm wondering is, with all this

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Speaker 1: liquidity and with US paying twelve percent super still, is

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Speaker 1: there any end to that liquidity or does it just

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Speaker 1: keep flying because of the strainings subernuation system.

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Speaker 2: Well, look, it's a great question. We haven't seen this

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Speaker 2: much liquidity in the market for a very long time.

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Speaker 2: But if you look at market cycles, but this is

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Speaker 2: what happens. You know, once in a while, you know,

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Speaker 2: market a black swan event comes along, the fear kicks

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Speaker 2: in and as the value start tumbling. So I think,

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Speaker 2: you know, people need to be mindful that we have

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Speaker 2: had a very long bull run and it's across all

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Speaker 2: asset classes, whether it's property, shares, equities, gold, wherever it is.

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Speaker 2: You know, market cycles are driven not by economics. They're

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Speaker 2: normally driven by animal spirits and that's the collective mood

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Speaker 2: of the market, which we don't know when it's going

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Speaker 2: to change. And I think what looking at people at

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Speaker 2: Martin Place, that is what comes to my mind when

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Speaker 2: I see that I go, well, you know what the

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Speaker 2: world can change for very quickly.

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Speaker 1: Prior credit then certainly has boomed in the past few years.

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Speaker 1: There's been some high profile missteps recently, no doubt about

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Speaker 1: that in the US. End Here in Australia as a sector,

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Speaker 1: where's it at at a maturity level.

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Speaker 2: We look, it's a very good, good question. Like the

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Speaker 2: perception is always that the US market is a lot

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Speaker 2: more further down the line than we are, and they

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Speaker 2: might be a lot more further online in relation to

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Speaker 2: pricing for risk than Australia. So were these are my observation.

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Speaker 2: The normal margin that you get on a sixth cured

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Speaker 2: private credit deal in the US is about one half

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Speaker 2: percent above normal cash rates. In Australia you can get

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Speaker 2: yields on fully secured, nothing creative, no specialized security type

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Speaker 2: opportunity or a fund between three and five, so the

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Speaker 2: margins are a lot better. And the market is very

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Speaker 2: different between US and Australia. A lot of US there's

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Speaker 2: a lot more risk taking relation to debt, so when

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Speaker 2: you have a change in the economic cycle, there's a

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Speaker 2: lot more failure, so your chance of losing capital is

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Speaker 2: a lot higher because the security is normally corporate debt,

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Speaker 2: and the value of the corporate debt is in the

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Speaker 2: value of the good will, So when they can't pay

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Speaker 2: the mortgage, it's arguably to say that the value of

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Speaker 2: the good will is diminished substantially. In Australia, predominantly most

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Speaker 2: private credit is secured by property. As it came out

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Speaker 2: just recently, their concern is a lot of private credit

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Speaker 2: concentration is secured by property, but against construction loans, and

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Speaker 2: the issue there is a well, for the regulators, there

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Speaker 2: might be a lot more concentration of retail investors. We

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Speaker 2: may not understand that risk who are invested in that

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Speaker 2: type of as a class within private credit.

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Speaker 1: The whole idea of understanding what's in private credit, I

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Speaker 1: think is at the nub of all this, And it's

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Speaker 1: not just you as a private credit operator, it's actually

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Speaker 1: the regulator, yes, the investor and kind of all being

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Speaker 1: on the same page when it comes to private credit.

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Speaker 2: Yeah, sure, I couldn't agree with you more. The interesting

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Speaker 2: part here is that equities, for example, we've got over

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Speaker 2: hundreds of years worth of experience in understanding risk and information,

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Speaker 2: so you've got a symmetry information that goes in and

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Speaker 2: then then the market determines what the price of that

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Speaker 2: risk is on a daily basis. Private credits is opaque

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Speaker 2: in nature that it's very hard to find information, and

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Speaker 2: because you don't have that secondary market that is pricing

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Speaker 2: risk on a daily basis, the shift is different. The

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Speaker 2: responsibility of understanding the risk is on an investor. However,

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Speaker 2: the opportunity is very good because you might compare three

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Speaker 2: four different private credit providers. Each one might be offering

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Speaker 2: the same rate, but the risk could be very different

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Speaker 2: from one to another, and his responsibility is that it's

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Speaker 2: for the investor to find those golden opportunities for themselves.

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Speaker 1: So I think reading between the lines there, what you're

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Speaker 1: saying is make sure you like your private credit manager.

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Speaker 1: That's because you really need to believe that they can

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Speaker 1: manage the portfolio.

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Speaker 2: And it's not only that, it's actually understanding. It's a

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Speaker 2: different way of looking at risk. So private credit you

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Speaker 2: really need to understand what is being invested in. So,

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Speaker 2: for example, if a private credit loan goes bad, it's

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Speaker 2: a because the risk of that particular loan wasn't great

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Speaker 2: and it probably wasn't managed very very well. It's up

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Speaker 2: to the investor to understand the difference between a private

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Speaker 2: credit fund that it only does secured private loans against

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Speaker 2: completer property versus construction versus corporate debt. If you look

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Speaker 2: at the logic there from a from a security perspective,

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Speaker 2: you would say that the first one that I mentioned

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Speaker 2: would have the lower return and the last one would

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Speaker 2: have the higher return. Yeah, theoretically, but that's in theory,

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Speaker 2: and that's that's that's an efficient market where you have

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Speaker 2: information and people that have that price discovery. In Australia

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Speaker 2: that does not exist. So it's it's a risk in

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Speaker 2: one perspective, but it's also an opportunity to get a

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Speaker 2: higher return.

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Speaker 1: Okay, so let's wrap this aill up. You talked about

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Speaker 1: flying investors flying too close to the sun, and I

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Speaker 1: suppose that you reflects the whole liquidity issue that's going

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Speaker 1: on at the moment. What gives eventually? I mean, you

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Speaker 1: sort of answered that in terms of cycles. But if

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Speaker 1: I'm an investor, what are the risks I should be

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Speaker 1: thinking about right now?

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Speaker 2: Well, the way that I look at debt is that

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Speaker 2: I have to think about worst case scenario because with

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Speaker 2: private credit, once, once you crystallize a loss, you can't

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Speaker 2: get it back, whereas, for example, if by equities, you

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Speaker 2: just you know, the logic there is that you wait

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Speaker 2: in the market until it recovers. So from a downside risk,

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Speaker 2: you really need to be looking from a different perspective.

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Speaker 2: So that that that is how I look at my business,

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Speaker 2: and that's how I look at private credit.

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Speaker 1: Okay, so bring all assets together. Ye, gold can't run forever,

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Speaker 1: equities can't run forever. Property and we didn't mention property,

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Speaker 1: but you know, broadly property is pretty good. Even commercial

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Speaker 1: property is better than what it was. The land, residential.

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Speaker 1: You've got private credit, plenty of fans there. But at

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Speaker 1: some point does something.

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Speaker 2: Give Yeah, look I'm a believer that it does. You know,

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Speaker 2: you can't you can't grow trees to the sky. You

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Speaker 2: can't fly forever, so things come back to earth quickly

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Speaker 2: and you normally don't catch it. So diversification is important,

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Speaker 2: non correlated assets. It is really important understanding how to

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Speaker 2: put a portfolio together, getting the right advice and not

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Speaker 2: being overexposed over exposed in one sector. Thinking that is

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Speaker 2: that that's going to be the goldmind for your portfolio.

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Speaker 1: Yeah, Paul, thank you for talking to fear and Greed Q.

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Speaker 2: And a thank you so much.

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Speaker 1: That was Paul Mirren, co founder and fund manager at

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Speaker 1: M squared Capitol, which is a great supporter of this podcast.

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Speaker 1: Remember this is general information only, and if you're going

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Speaker 1: to invest, get professional advice tailored to your circumstances before

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Speaker 1: making decisions. If you've got something you'd like to know,

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Speaker 1: then send through your questions on LinkedIn, Instagram, Facebook for

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Speaker 1: at Fearangreed dot com. Today you I'm sure, I am Martin.

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Speaker 1: This is Fear and Greed Q and D