1 00:00:04,019 --> 00:00:06,600 Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean 2 00:00:06,600 --> 00:00:09,389 Sean Aylmer: Aylmer. We've talked a lot about the volatility in global 3 00:00:09,390 --> 00:00:13,770 Sean Aylmer: share markets and cryptocurrencies and normal currencies, but with inflation 4 00:00:13,770 --> 00:00:16,560 Sean Aylmer: soaring and interest rates rising around the world, I wanted 5 00:00:16,560 --> 00:00:19,320 Sean Aylmer: to have a look at fixed income investments. We spoke 6 00:00:19,320 --> 00:00:22,320 Sean Aylmer: last year to Dr. Christian Baylis, the founder and chief 7 00:00:22,320 --> 00:00:26,099 Sean Aylmer: investment officer of Fortlake Asset Management. At the time, Fortlake 8 00:00:26,100 --> 00:00:28,560 Sean Aylmer: was aiming to reach $ 1 billion in funds under management 9 00:00:28,560 --> 00:00:31,410 Sean Aylmer: in five years. They hit that after just one year 10 00:00:31,410 --> 00:00:33,990 Sean Aylmer: in December. Christian, congratulations on that and welcome back to 11 00:00:33,990 --> 00:00:34,650 Sean Aylmer: Fear and Greed. 12 00:00:35,070 --> 00:00:37,350 Dr. Christian Baylis: Thanks, Sean. Really appreciate it. Thanks for having me again. 13 00:00:37,920 --> 00:00:39,960 Sean Aylmer: So bonds are back. It looks like bonds are back. 14 00:00:40,350 --> 00:00:44,220 Dr. Christian Baylis: Yes. Well, they're certainly re- priced and they're definitely a 15 00:00:44,220 --> 00:00:47,520 Dr. Christian Baylis: lot cheaper than what they were when I last talked to you. 16 00:00:47,520 --> 00:00:50,100 Dr. Christian Baylis: So it's certainly been a dramatic shift over a pretty 17 00:00:50,100 --> 00:00:50,760 Dr. Christian Baylis: short space of time. 18 00:00:50,760 --> 00:00:55,020 Sean Aylmer: Okay. I mean, bonds are sometimes difficult for people to 19 00:00:55,200 --> 00:00:57,750 Sean Aylmer: fully appreciate. I mean, you in the market sort of 20 00:00:57,780 --> 00:01:00,150 Sean Aylmer: second nature. But to the rest of us, because they're 21 00:01:00,150 --> 00:01:03,720 Sean Aylmer: fixed income, you know you're getting a coupon every six 22 00:01:03,720 --> 00:01:06,479 Sean Aylmer: months or every 12 months and whatever percent that is, 23 00:01:06,870 --> 00:01:09,600 Sean Aylmer: that's the case. But they also have what they call 24 00:01:09,600 --> 00:01:11,280 Sean Aylmer: a face value and you might buy it at that 25 00:01:11,280 --> 00:01:15,300 Sean Aylmer: face value or for cheaper or for more. So that's 26 00:01:15,300 --> 00:01:19,470 Sean Aylmer: why we get this sort of somewhat confusing state where 27 00:01:19,470 --> 00:01:22,800 Sean Aylmer: when prices fall and yields rise, which is just sort of 28 00:01:22,800 --> 00:01:27,929 Sean Aylmer: an explanation there. Why is it that people are now 29 00:01:27,930 --> 00:01:30,630 Sean Aylmer: investing the yield on bonds is more attractive? 30 00:01:32,490 --> 00:01:35,670 Dr. Christian Baylis: Well, definitely the inflation dynamic is a huge factor there 31 00:01:35,700 --> 00:01:38,970 Dr. Christian Baylis: when you've got inflation at 9.1% in the US, you've got 32 00:01:39,660 --> 00:01:43,560 Dr. Christian Baylis: inflation at 5.1% here in Australia, what you actually require as 33 00:01:43,560 --> 00:01:46,890 Dr. Christian Baylis: a bond investor is a greater level of compensation for 34 00:01:46,890 --> 00:01:50,070 Dr. Christian Baylis: that inflation. So the thing I often point out to 35 00:01:50,070 --> 00:01:54,360 Dr. Christian Baylis: people, which usually gives a pretty stark realization of what 36 00:01:54,360 --> 00:01:56,670 Dr. Christian Baylis: it means to a fixed income investor when inflation is 37 00:01:56,670 --> 00:01:59,400 Dr. Christian Baylis: high, is that when we look in Australia as a 38 00:01:59,400 --> 00:02:03,840 Dr. Christian Baylis: simple example, and you go, well, the cash rate being at 1. 35 less the 39 00:02:04,770 --> 00:02:09,450 Dr. Christian Baylis: 5.1% inflation is a deeply negative real rate. That shows 40 00:02:09,450 --> 00:02:12,210 Dr. Christian Baylis: you as a fixed income investor, you are not getting 41 00:02:12,210 --> 00:02:15,000 Dr. Christian Baylis: a great level of return with the current level of 42 00:02:15,000 --> 00:02:19,139 Dr. Christian Baylis: high inflation. What that actually means is that you really 43 00:02:19,139 --> 00:02:22,470 Dr. Christian Baylis: need to have the cash rate going higher, and you 44 00:02:22,470 --> 00:02:25,320 Dr. Christian Baylis: really need to have every basis point in the normal 45 00:02:25,350 --> 00:02:28,950 Dr. Christian Baylis: rate going higher to start to compensate you for that inflation 46 00:02:28,950 --> 00:02:31,860 Dr. Christian Baylis: loss. So this is where the RBA has a big problem at 47 00:02:31,860 --> 00:02:35,010 Dr. Christian Baylis: the moment is that every time that they move the 48 00:02:35,010 --> 00:02:39,600 Dr. Christian Baylis: nominal cash rate and move it higher to the 1. 35, inflation keeps ticking 49 00:02:39,600 --> 00:02:42,270 Dr. Christian Baylis: high, they need to keep raising and trying to keep 50 00:02:42,270 --> 00:02:45,330 Dr. Christian Baylis: ahead of that inflation rate. That's really the challenge and that 51 00:02:45,330 --> 00:02:47,940 Dr. Christian Baylis: really means that as a fixed income invest, you've got 52 00:02:47,940 --> 00:02:51,239 Dr. Christian Baylis: to keep re- pricing that yield higher, particularly as inflation 53 00:02:51,240 --> 00:02:54,299 Dr. Christian Baylis: keeps going higher, because ultimately you're getting nowhere in real terms. 54 00:02:56,790 --> 00:02:59,610 Sean Aylmer: A lot of this, though, is about inflation expectations too, 55 00:02:59,610 --> 00:03:02,610 Sean Aylmer: isn't it? So that a lot of the pricing, the mechanism you 56 00:03:02,610 --> 00:03:04,650 Sean Aylmer: just described is how it works, but a lot of 57 00:03:04,740 --> 00:03:08,040 Sean Aylmer: investors are thinking what's going to happen in the future, 58 00:03:08,040 --> 00:03:09,990 Sean Aylmer: which is kind of why yields are where they are. 59 00:03:10,830 --> 00:03:15,959 Dr. Christian Baylis: Absolutely. Typically, what you'll find is that the inflation expectations 60 00:03:16,050 --> 00:03:20,220 Dr. Christian Baylis: along the yield curve should ultimately be priced into those 61 00:03:20,220 --> 00:03:23,760 Dr. Christian Baylis: fixed rate bonds commensurately. So if you've got five- year 62 00:03:23,760 --> 00:03:28,530 Dr. Christian Baylis: inflation expectations at 5%, ultimately that five year part of 63 00:03:28,530 --> 00:03:32,100 Dr. Christian Baylis: the fixed rate curve should also be incorporating that exact 64 00:03:32,100 --> 00:03:35,790 Dr. Christian Baylis: level of inflation expectation and should start to compensate you before 65 00:03:36,030 --> 00:03:38,340 Dr. Christian Baylis: that. Plus you should actually have a risk premium there 66 00:03:38,400 --> 00:03:39,480 Dr. Christian Baylis: on top of that as well. 67 00:03:39,990 --> 00:03:43,380 Sean Aylmer: Okay. The other thing, I mean, we're talking generally here 68 00:03:43,380 --> 00:03:46,590 Sean Aylmer: about government bonds, which are relatively risk- free, or as 69 00:03:46,590 --> 00:03:48,060 Sean Aylmer: close to risk- free as you're going to get. We'll 70 00:03:48,060 --> 00:03:51,090 Sean Aylmer: talk about corporates and that in a moment. But the 71 00:03:51,090 --> 00:03:54,210 Sean Aylmer: other I just want to mention, most other, well, many 72 00:03:54,210 --> 00:03:58,770 Sean Aylmer: other asset classes are priced off bonds. So the point 73 00:03:58,770 --> 00:04:05,220 Sean Aylmer: being that as bonds yields rise, the actual risk- reward 74 00:04:05,220 --> 00:04:08,220 Sean Aylmer: spectrum changes for other asset classes, Christian. 75 00:04:08,730 --> 00:04:14,040 Dr. Christian Baylis: Absolutely. That's a critical point because, especially with the volatility and 76 00:04:14,130 --> 00:04:17,430 Dr. Christian Baylis: the discount rates that you are seeing, that has to 77 00:04:17,430 --> 00:04:21,839 Dr. Christian Baylis: mean that as that volatility gets ever and ever larger, 78 00:04:21,839 --> 00:04:24,719 Dr. Christian Baylis: which is certainly what's been happening, it becomes very hard 79 00:04:24,720 --> 00:04:28,200 Dr. Christian Baylis: for risk markets to use a discount rate to value 80 00:04:28,200 --> 00:04:30,900 Dr. Christian Baylis: those cash flows. Because the movements that you're getting now 81 00:04:31,230 --> 00:04:34,230 Dr. Christian Baylis: are moving around huge amounts on a day- to- day, week- to- 82 00:04:34,230 --> 00:04:37,560 Dr. Christian Baylis: week and year- to- year basis and, therefore, it makes 83 00:04:37,560 --> 00:04:39,630 Dr. Christian Baylis: it very hard to pin down the core part of 84 00:04:39,630 --> 00:04:42,660 Dr. Christian Baylis: your evaluation model. That just has to mean that risk 85 00:04:42,660 --> 00:04:46,980 Dr. Christian Baylis: assets start to become definitely jittery and start to factor 86 00:04:46,980 --> 00:04:49,950 Dr. Christian Baylis: in a greater degree of risk so it's certainly something 87 00:04:50,040 --> 00:04:53,760 Dr. Christian Baylis: that you should start to focus on. What we originally 88 00:04:53,760 --> 00:04:56,460 Dr. Christian Baylis: found is that as we started to move into this 89 00:04:56,520 --> 00:05:00,659 Dr. Christian Baylis: higher inflation cycle and interest rates started to move up, 90 00:05:00,660 --> 00:05:02,520 Dr. Christian Baylis: the volatility was more in the front part of the 91 00:05:02,520 --> 00:05:04,650 Dr. Christian Baylis: curve and that's transmitted out to the 10- year part 92 00:05:04,650 --> 00:05:06,420 Dr. Christian Baylis: of the curve. The 10- year part of the curve 93 00:05:06,660 --> 00:05:09,810 Dr. Christian Baylis: is obviously the most significant part of the curve for 94 00:05:09,810 --> 00:05:12,630 Dr. Christian Baylis: equities and other risk assets because that is typically or 95 00:05:12,630 --> 00:05:14,910 Dr. Christian Baylis: that part of the curve is the discount rate that most 96 00:05:14,910 --> 00:05:17,100 Dr. Christian Baylis: risk assets use. That's the worrying thing, I think, for 97 00:05:17,100 --> 00:05:20,190 Dr. Christian Baylis: risk assets going forward is this is no longer a short- end 98 00:05:20,520 --> 00:05:22,860 Dr. Christian Baylis: phenomenon. This has moved right along, and it's going to 99 00:05:22,860 --> 00:05:25,529 Dr. Christian Baylis: be like this for some time. And particularly as inflation 100 00:05:25,529 --> 00:05:28,140 Dr. Christian Baylis: numbers keeps uprising, it doesn't look like that volatility's going 101 00:05:28,140 --> 00:05:29,340 Dr. Christian Baylis: to come down any time soon. 102 00:05:30,089 --> 00:05:32,099 Sean Aylmer: Stay with me, Christian. We'll be back in a minute. 103 00:05:38,550 --> 00:05:41,909 Sean Aylmer: I'm speaking to Christian Baylis, founder and chief investment officer 104 00:05:42,180 --> 00:05:47,280 Sean Aylmer: of Fortlake Asset Management. Okay. As we think about investing 105 00:05:47,490 --> 00:05:51,960 Sean Aylmer: in fixed income markets, we're talking about government bonds. But 106 00:05:51,960 --> 00:05:56,520 Sean Aylmer: what about the risk- reward trade- off at corporate level, 107 00:05:56,520 --> 00:05:59,820 Sean Aylmer: at semi level, which is state governments effectively, and then 108 00:05:59,820 --> 00:06:04,050 Sean Aylmer: there's the investment- grade corporate bonds, and then high- yield 109 00:06:04,500 --> 00:06:06,479 Sean Aylmer: investments, which once were known as junk bonds, but we 110 00:06:06,480 --> 00:06:08,460 Sean Aylmer: all seem to call them high yield now? What's the 111 00:06:08,460 --> 00:06:10,830 Sean Aylmer: outlook for those sorts of areas of the curve, as 112 00:06:10,830 --> 00:06:11,219 Sean Aylmer: we put it? 113 00:06:11,760 --> 00:06:14,370 Dr. Christian Baylis: Yeah. Well, I think if we start at the government 114 00:06:14,370 --> 00:06:17,850 Dr. Christian Baylis: level, the thing is some fundamental things have taken shape, 115 00:06:17,850 --> 00:06:20,310 Dr. Christian Baylis: I think, in the global economy, which are really interesting. 116 00:06:20,910 --> 00:06:23,550 Dr. Christian Baylis: One of the biggest mistakes, I think, that the West 117 00:06:23,550 --> 00:06:26,279 Dr. Christian Baylis: has made in relation to Russia was canceling Russia's foreign 118 00:06:26,279 --> 00:06:29,820 Dr. Christian Baylis: currency reserves. What that ultimately meant was that that put 119 00:06:29,820 --> 00:06:33,210 Dr. Christian Baylis: a risk premium into risk- free bonds. That is a 120 00:06:33,210 --> 00:06:38,070 Dr. Christian Baylis: sacrilegious type of event when you have ultimately a situation 121 00:06:38,160 --> 00:06:41,880 Dr. Christian Baylis: where you've got China, which holds $ 1. 5 trillion worth 122 00:06:41,880 --> 00:06:44,279 Dr. Christian Baylis: of US Treasuries, you've got the Saudis, you've got Brazil, 123 00:06:44,279 --> 00:06:48,719 Dr. Christian Baylis: you've got many Asian economies who are recycling their FX 124 00:06:48,720 --> 00:06:52,500 Dr. Christian Baylis: reserves into US Treasuries. All of these countries have always 125 00:06:52,500 --> 00:06:55,710 Dr. Christian Baylis: worked on the basis that at no point in time 126 00:06:55,740 --> 00:06:58,230 Dr. Christian Baylis: would the US Treasury ever do something like what they've 127 00:06:58,230 --> 00:07:01,409 Dr. Christian Baylis: done and that ultimately has to put an element of 128 00:07:01,410 --> 00:07:05,190 Dr. Christian Baylis: risk into the risk- free curve. And it sets a 129 00:07:05,190 --> 00:07:09,120 Dr. Christian Baylis: precedent which, I think, is particularly unhelpful and no one 130 00:07:09,120 --> 00:07:13,170 Dr. Christian Baylis: disputes the rationale for why they've done what they've done, 131 00:07:13,440 --> 00:07:16,140 Dr. Christian Baylis: but the second order consequences of that could be quite 132 00:07:16,140 --> 00:07:19,500 Dr. Christian Baylis: large. So you've got to be very careful when making 133 00:07:19,500 --> 00:07:22,050 Dr. Christian Baylis: those types of decisions because, at the end of the 134 00:07:22,050 --> 00:07:25,710 Dr. Christian Baylis: day, if you're holding US Treasuries, you've been funding their 135 00:07:25,710 --> 00:07:29,070 Dr. Christian Baylis: current account deficit, you've been funding their fiscal deficit. They're 136 00:07:29,070 --> 00:07:31,980 Dr. Christian Baylis: running a huge trade deficit of $ 1 trillion a year, 137 00:07:31,980 --> 00:07:34,920 Dr. Christian Baylis: which is 50% funded by China. Now, all of a 138 00:07:34,920 --> 00:07:38,880 Dr. Christian Baylis: sudden, the Chinese, many of these Asian economies have been saying, " 139 00:07:38,880 --> 00:07:41,400 Dr. Christian Baylis: Well, we've been giving you all of this cheap funding. 140 00:07:41,430 --> 00:07:45,150 Dr. Christian Baylis: We've been getting inflated away now at 9. 1% per 141 00:07:45,150 --> 00:07:48,300 Dr. Christian Baylis: annum on those Treasury holdings and we've basically been giving 142 00:07:48,300 --> 00:07:50,940 Dr. Christian Baylis: you money hand over fist to fund all of these 143 00:07:50,940 --> 00:07:54,000 Dr. Christian Baylis: deficits and the only thing we ever wanted back was 144 00:07:54,000 --> 00:07:56,310 Dr. Christian Baylis: to get our money back. We were happy to lose 145 00:07:56,310 --> 00:07:59,160 Dr. Christian Baylis: money on that basis. But now what you're telling us 146 00:07:59,220 --> 00:08:02,070 Dr. Christian Baylis: is that if we don't act in the right way 147 00:08:02,070 --> 00:08:04,500 Dr. Christian Baylis: or in accordance with the rest Western rule of law, 148 00:08:04,770 --> 00:08:08,040 Dr. Christian Baylis: there is the possibility that you cancel those assets at 149 00:08:08,040 --> 00:08:10,260 Dr. Christian Baylis: some point in the future." I think that's a really 150 00:08:10,440 --> 00:08:13,140 Dr. Christian Baylis: bad card to play at this time in the cycle 151 00:08:13,140 --> 00:08:15,960 Dr. Christian Baylis: because this is the point in time where the US 152 00:08:16,260 --> 00:08:20,550 Dr. Christian Baylis: really needs support. It's so important for the US to 153 00:08:20,700 --> 00:08:24,750 Dr. Christian Baylis: retain its reserve currency status and the only thing that 154 00:08:24,750 --> 00:08:28,350 Dr. Christian Baylis: keeps your reserve currency status is trust since 1971, when 155 00:08:28,350 --> 00:08:33,390 Dr. Christian Baylis: the Bretton Woods Agreement effectively dissipated currencies are fiat and 156 00:08:33,390 --> 00:08:36,179 Dr. Christian Baylis: that just basically means that they're built on trust. There 157 00:08:36,179 --> 00:08:38,790 Dr. Christian Baylis: is no commodity that sits behind them like they used 158 00:08:38,790 --> 00:08:42,150 Dr. Christian Baylis: to be. So once you start to chip away at 159 00:08:42,150 --> 00:08:44,970 Dr. Christian Baylis: that trust, you have a real issue. You know, I 160 00:08:44,970 --> 00:08:48,000 Dr. Christian Baylis: always say the Swiss National Bank is the best example 161 00:08:48,000 --> 00:08:51,510 Dr. Christian Baylis: of what trust and confidence in a currency can do. 162 00:08:51,960 --> 00:08:55,980 Dr. Christian Baylis: The Swiss have basically, for years and years, always been 163 00:08:55,980 --> 00:08:59,970 Dr. Christian Baylis: able to get amazingly cheap funding. They've always had amazingly 164 00:08:59,970 --> 00:09:02,729 Dr. Christian Baylis: strong support for their currency, all on the basis of 165 00:09:02,730 --> 00:09:07,230 Dr. Christian Baylis: trust. Even they now are starting to make some questionable 166 00:09:07,230 --> 00:09:10,080 Dr. Christian Baylis: decisions, which are probably chipping away at the trust of 167 00:09:10,080 --> 00:09:14,370 Dr. Christian Baylis: their currency as well. It's a very interesting world that we 168 00:09:14,640 --> 00:09:15,690 Dr. Christian Baylis: sit within at the moment. 169 00:09:16,620 --> 00:09:18,540 Sean Aylmer: You know, I'm not going to be able to say risk- 170 00:09:18,540 --> 00:09:21,359 Sean Aylmer: free government bonds anymore. You've just ruined it for me. 171 00:09:21,750 --> 00:09:23,490 Sean Aylmer: You've just turned all my thinking on my head. 172 00:09:23,820 --> 00:09:27,300 Dr. Christian Baylis: Yeah. It's a fundamental thing. What that means is like 173 00:09:27,300 --> 00:09:31,559 Dr. Christian Baylis: it's the base level yield that we always assumed was risk- 174 00:09:31,559 --> 00:09:33,900 Dr. Christian Baylis: free and now it may not be. So that has to mean 175 00:09:34,020 --> 00:09:36,959 Dr. Christian Baylis: different things for risk assets is that if we ultimately 176 00:09:37,470 --> 00:09:40,080 Dr. Christian Baylis: can safely say now that there is no risk- free 177 00:09:40,080 --> 00:09:42,870 Dr. Christian Baylis: asset in the world, that ultimately that risk free status 178 00:09:42,870 --> 00:09:46,410 Dr. Christian Baylis: can be tampered with based on particular events, that we 179 00:09:46,410 --> 00:09:50,010 Dr. Christian Baylis: need to reprice those assets. Look on the 11th of 180 00:09:50,010 --> 00:09:52,080 Dr. Christian Baylis: April, that was a historical day. That was the first 181 00:09:52,080 --> 00:09:57,150 Dr. Christian Baylis: day that Chinese government bonds traded under US Treasuries and 182 00:09:57,809 --> 00:10:00,239 Dr. Christian Baylis: this is sort of happening before our eyes. This could 183 00:10:00,240 --> 00:10:04,079 Dr. Christian Baylis: be the global community saying, " Look, these US Treasuries no 184 00:10:04,080 --> 00:10:06,600 Dr. Christian Baylis: longer are the risk- free assets that we thought they 185 00:10:06,600 --> 00:10:10,739 Dr. Christian Baylis: were and we are starting to get movement in these 186 00:10:10,740 --> 00:10:12,479 Dr. Christian Baylis: types of prices now on the back of some of 187 00:10:12,540 --> 00:10:13,260 Dr. Christian Baylis: these decisions." 188 00:10:13,770 --> 00:10:16,200 Sean Aylmer: Okay. So, bring it back to me as an investor, 189 00:10:16,559 --> 00:10:20,370 Sean Aylmer: wanting to buy a Woolworth's corporate bond. They're raising money, 190 00:10:20,640 --> 00:10:22,020 Sean Aylmer: I want to buy a Woolworth's bond. What about if 191 00:10:22,020 --> 00:10:25,080 Sean Aylmer: I want to buy something further at the risk spectrum, 192 00:10:25,080 --> 00:10:28,079 Sean Aylmer: which it might be an investment, sorry, a high- yielding 193 00:10:28,470 --> 00:10:31,079 Sean Aylmer: bond? What does all this mean for me as an 194 00:10:31,080 --> 00:10:34,920 Sean Aylmer: investor wanting to get a return that's above the 4%, 10- 195 00:10:34,920 --> 00:10:37,080 Sean Aylmer: year government bond? So I'm thinking of, I'm not sure 196 00:10:37,080 --> 00:10:38,370 Sean Aylmer: what it is, but let's say it's 5%, it's a 197 00:10:38,370 --> 00:10:42,480 Sean Aylmer: bit arbitrary or beyond that, how should I think about 198 00:10:42,480 --> 00:10:42,929 Sean Aylmer: that now? 199 00:10:43,710 --> 00:10:46,559 Dr. Christian Baylis: Well, I think you've got to factor in all of 200 00:10:46,559 --> 00:10:48,870 Dr. Christian Baylis: these elements. So you've got to factor in inflation, you've 201 00:10:48,870 --> 00:10:53,370 Dr. Christian Baylis: got to factor in a higher risk world, which basically 202 00:10:53,370 --> 00:10:55,980 Dr. Christian Baylis: means that there's greater risk premiums that need to be 203 00:10:55,980 --> 00:10:59,219 Dr. Christian Baylis: factored into your thinking. It also means that you've got 204 00:10:59,220 --> 00:11:02,790 Dr. Christian Baylis: to factor in a greater probability of default now. Because 205 00:11:02,820 --> 00:11:05,880 Dr. Christian Baylis: what's actually happened at the corporate level, is that the 206 00:11:05,880 --> 00:11:09,720 Dr. Christian Baylis: equity market has now fallen, let's call it 25%, and 207 00:11:09,720 --> 00:11:11,280 Dr. Christian Baylis: then you've got to add inflation on top of that 208 00:11:11,280 --> 00:11:13,710 Dr. Christian Baylis: as well. So let's say the S& P 500 after 209 00:11:13,710 --> 00:11:17,100 Dr. Christian Baylis: inflation is definitely down over 30% here in Australia. We're 210 00:11:17,100 --> 00:11:21,300 Dr. Christian Baylis: definitely down over 20% in real terms. What that ultimately 211 00:11:21,300 --> 00:11:23,910 Dr. Christian Baylis: means is that the equity window has gone for a 212 00:11:23,910 --> 00:11:26,790 Dr. Christian Baylis: lot of these corporates, particularly at the higher yielding end. 213 00:11:27,420 --> 00:11:29,939 Dr. Christian Baylis: What that means is that they've got to actually, or 214 00:11:29,940 --> 00:11:31,679 Dr. Christian Baylis: the preference would have to be that they go and 215 00:11:32,400 --> 00:11:35,190 Dr. Christian Baylis: raise funds from the debt markets, if they can, but 216 00:11:35,220 --> 00:11:38,189 Dr. Christian Baylis: equally the debt markets have now re- priced and it's 217 00:11:38,190 --> 00:11:41,220 Dr. Christian Baylis: more expensive in debt markets. The spread on high- yield 218 00:11:41,250 --> 00:11:43,290 Dr. Christian Baylis: bonds at the moment in the US is around about, 219 00:11:43,380 --> 00:11:46,530 Dr. Christian Baylis: let's call it, 550 basis points. In Europe, it's about 220 00:11:46,530 --> 00:11:50,969 Dr. Christian Baylis: 630 as we sit here today. It's very expensive via 221 00:11:51,030 --> 00:11:55,199 Dr. Christian Baylis: equity, and now very expensive via the debt markets on 222 00:11:55,200 --> 00:11:57,750 Dr. Christian Baylis: spread. Then also your interest rates have gone up on 223 00:11:57,750 --> 00:12:00,329 Dr. Christian Baylis: top of that spread element. So what it basically is 224 00:12:00,330 --> 00:12:04,500 Dr. Christian Baylis: saying that the probability of default has gone up substantially. 225 00:12:04,679 --> 00:12:06,510 Dr. Christian Baylis: Just to give you an example of that in the high- 226 00:12:06,510 --> 00:12:09,689 Dr. Christian Baylis: yield market in the US, the probability of default going 227 00:12:09,690 --> 00:12:12,809 Dr. Christian Baylis: back four or five months ago was around about 24%. 228 00:12:12,809 --> 00:12:17,309 Dr. Christian Baylis: It now sits at around 33% and that's basically telling 229 00:12:17,309 --> 00:12:21,780 Dr. Christian Baylis: you that the probability of mass defaults is increasing. The 230 00:12:21,780 --> 00:12:24,780 Dr. Christian Baylis: more concerning thing I would say for the general investor 231 00:12:24,780 --> 00:12:28,620 Dr. Christian Baylis: is that we've only had one default of that 33%. So 232 00:12:28,890 --> 00:12:32,340 Dr. Christian Baylis: the market is saying we've got 33 to go, and you've only had 233 00:12:32,340 --> 00:12:36,240 Dr. Christian Baylis: one on that journey so far. So the concerning thing 234 00:12:36,540 --> 00:12:40,710 Dr. Christian Baylis: there is that the market is acknowledging this tougher environment to 235 00:12:40,710 --> 00:12:43,439 Dr. Christian Baylis: get the funding done and the rollover risk that exists. 236 00:12:43,470 --> 00:12:45,360 Dr. Christian Baylis: So as an investor, you really want to make sure 237 00:12:45,360 --> 00:12:49,230 Dr. Christian Baylis: that you're getting compensated adequately for the current environment. 238 00:12:50,340 --> 00:12:52,410 Sean Aylmer: Christian, it's been a great chat. I don't think it's 239 00:12:52,410 --> 00:12:54,960 Sean Aylmer: been uplifting, to be perfectly honest, but I've learned a 240 00:12:54,960 --> 00:12:57,900 Sean Aylmer: hell of a lot about fixed income investing so thank 241 00:12:57,900 --> 00:12:59,280 Sean Aylmer: you. Thank you for talking to Fear and Greed. 242 00:13:00,000 --> 00:13:01,320 Dr. Christian Baylis: No worries. Thanks, Sean. Thanks for having me. 243 00:13:02,100 --> 00:13:05,010 Sean Aylmer: That was Dr. Christian Baylis, founder and chief investment officer 244 00:13:05,070 --> 00:13:08,130 Sean Aylmer: of Fortlake Asset Management. This is a Fear and Greed Daily 245 00:13:08,130 --> 00:13:11,250 Sean Aylmer: Interview. Remember you should get professional advice before making any 246 00:13:11,250 --> 00:13:14,370 Sean Aylmer: investment decisions. Join us every morning for the full episode 247 00:13:14,370 --> 00:13:17,339 Sean Aylmer: of Fear and Greed, Australia's most popular business podcast. I'm 248 00:13:17,340 --> 00:13:18,810 Sean Aylmer: Sean Aylmer. Enjoy your day.