1 00:00:18,079 --> 00:00:20,880 Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast. 2 00:00:21,040 --> 00:00:23,440 Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg. 3 00:00:23,840 --> 00:00:26,200 Speaker 1: This week, we're very pleased to welcome Matt Mish, head 4 00:00:26,200 --> 00:00:29,520 Speaker 1: of credit strategy at UBS. How are you, Matt, I'm great, James, 5 00:00:29,520 --> 00:00:31,360 Speaker 1: thanks for having me. Thank you so much for joining 6 00:00:31,400 --> 00:00:33,080 Speaker 1: us today. We're very excited to have you on the show. 7 00:00:33,400 --> 00:00:36,279 Speaker 1: Also delighted to see Julie Hung with Bloomberg Intelligence. 8 00:00:36,320 --> 00:00:38,920 Speaker 2: Hello, Julie, good morning, Thanks for having me back. 9 00:00:39,560 --> 00:00:41,760 Speaker 1: So just to set the scene a bit here, credit 10 00:00:41,800 --> 00:00:44,600 Speaker 1: markets have rallied in anticipation of rate cuts. Most people 11 00:00:44,600 --> 00:00:47,800 Speaker 1: are pretty bullish on corporate debt. A resilient US economy 12 00:00:47,840 --> 00:00:51,240 Speaker 1: and likely soft blanding or a real boost lower rates 13 00:00:51,280 --> 00:00:53,720 Speaker 1: will take some pressure off week Companies that were struggling 14 00:00:53,760 --> 00:00:56,560 Speaker 1: with high borrowing costs over the last few years. Triple 15 00:00:56,600 --> 00:00:59,080 Speaker 1: C rated bards in particular, are doing very well at 16 00:00:59,080 --> 00:01:02,200 Speaker 1: the moment. There's more demand than net supply of corporate debt, 17 00:01:02,240 --> 00:01:04,760 Speaker 1: which is a big technical boost to credit markets. Companies 18 00:01:04,800 --> 00:01:07,200 Speaker 1: are taking advantage. We've seen a ton of bond and 19 00:01:07,400 --> 00:01:09,880 Speaker 1: loan issuance, but there also seems to be a real 20 00:01:10,000 --> 00:01:13,360 Speaker 1: urgency to the pace of debt sales across bonds, loans, 21 00:01:13,480 --> 00:01:17,080 Speaker 1: structured finance, and muni bonds. Big borrowers seem worried about 22 00:01:17,120 --> 00:01:20,200 Speaker 1: what the next few months may bring. All markets are 23 00:01:20,200 --> 00:01:22,119 Speaker 1: bracing for volatility in the run up for the US 24 00:01:22,160 --> 00:01:25,080 Speaker 1: election in November. While in credit specifically there's a fair 25 00:01:25,120 --> 00:01:29,560 Speaker 1: amount of distress defaults and bankruptcy. That's against the backdrop 26 00:01:29,600 --> 00:01:33,720 Speaker 1: of commercial real estate stress war, global geopolitics, and recession 27 00:01:33,800 --> 00:01:37,000 Speaker 1: risk hasn't really gone away. So Matt, we'll get into 28 00:01:37,040 --> 00:01:40,000 Speaker 1: the specifics of the election positioning a bit later run 29 00:01:40,040 --> 00:01:42,080 Speaker 1: in the show. But where do we go from here? 30 00:01:42,120 --> 00:01:44,160 Speaker 1: Is this a bullish credit market? Some people are saying 31 00:01:44,319 --> 00:01:46,319 Speaker 1: a golden age? Is it still a great place to be? 32 00:01:47,200 --> 00:01:51,400 Speaker 3: Yeah? We still like credit a lot here, right, And 33 00:01:51,440 --> 00:01:54,120 Speaker 3: I think three main points. The first is, you know, 34 00:01:54,160 --> 00:01:57,080 Speaker 3: no landing fears, which were a big concern and certainly 35 00:01:57,120 --> 00:01:59,800 Speaker 3: one of the key tail risks earlier in the year, 36 00:02:00,200 --> 00:02:04,360 Speaker 3: have largely receded. The inflation data has been right where 37 00:02:04,360 --> 00:02:06,040 Speaker 3: it needs to be, I think, right where the Fed 38 00:02:06,440 --> 00:02:09,400 Speaker 3: wants it to be. And so the risk of rate hikes, 39 00:02:09,440 --> 00:02:11,480 Speaker 3: which is one of the three key risks to spread 40 00:02:11,480 --> 00:02:15,160 Speaker 3: product is really off the table, particularly unexpected FED hikes. 41 00:02:15,520 --> 00:02:19,079 Speaker 3: Second thing I would say is that rate cuts are 42 00:02:19,200 --> 00:02:23,160 Speaker 3: driving flows into the product and pushing people also off 43 00:02:23,200 --> 00:02:26,560 Speaker 3: the sidelines. So a lot of discussion about the six 44 00:02:26,600 --> 00:02:29,240 Speaker 3: plus trillion in money market assets, but there's also a 45 00:02:29,240 --> 00:02:32,959 Speaker 3: lot of clients that currently own credit, particularly US credit 46 00:02:33,040 --> 00:02:35,040 Speaker 3: in the short end of the curve, so that's zero 47 00:02:35,080 --> 00:02:38,440 Speaker 3: to two years, and we're seeing those clients decide to 48 00:02:38,520 --> 00:02:42,200 Speaker 3: push out the curve so extend duration in anticipation of 49 00:02:42,280 --> 00:02:44,480 Speaker 3: rate cuts. So I think there's a lot of positive 50 00:02:44,560 --> 00:02:48,880 Speaker 3: momentum in the market in terms of not just inflows 51 00:02:49,480 --> 00:02:53,040 Speaker 3: but clients looking to exten duration. And then the third is, 52 00:02:53,240 --> 00:02:55,600 Speaker 3: you know, I think we have built a name for 53 00:02:55,639 --> 00:02:59,280 Speaker 3: ourselves at UBS in terms of looking for the cracks, 54 00:02:59,320 --> 00:03:02,600 Speaker 3: looking for some lines of material weakness and credit quality 55 00:03:03,320 --> 00:03:06,440 Speaker 3: and signs of a more sinister slow down in economic activity. 56 00:03:06,760 --> 00:03:10,880 Speaker 3: And I would just characterize those signs as fairly narrow 57 00:03:12,280 --> 00:03:15,080 Speaker 3: and limited. And so we think most of the data 58 00:03:15,120 --> 00:03:18,519 Speaker 3: is coming in consistent with a softish landing, and as 59 00:03:18,520 --> 00:03:21,680 Speaker 3: a result, we think credit returns, you know, aren't going 60 00:03:21,720 --> 00:03:23,399 Speaker 3: to be certainly as good as they were a few 61 00:03:23,440 --> 00:03:26,720 Speaker 3: months ago. The market has had very good performance across 62 00:03:26,720 --> 00:03:29,840 Speaker 3: in particular IG and high yield in the third quarter, 63 00:03:30,520 --> 00:03:33,720 Speaker 3: But we think coupon like returns with still yields in 64 00:03:33,760 --> 00:03:37,960 Speaker 3: the five to six seven percent context for kind of 65 00:03:38,000 --> 00:03:42,040 Speaker 3: core liquid credit is a very good return profile, particularly 66 00:03:42,080 --> 00:03:45,120 Speaker 3: going into an environment where we're expecting slower growth and 67 00:03:45,160 --> 00:03:47,960 Speaker 3: where you know, again we acknowledge there are risks out 68 00:03:48,040 --> 00:03:53,120 Speaker 3: on the horizon, a recession, potentially credit issues as we 69 00:03:53,120 --> 00:03:56,160 Speaker 3: look into twenty twenty five, but overall, we still like 70 00:03:56,200 --> 00:03:56,720 Speaker 3: credit here. 71 00:03:57,640 --> 00:04:00,240 Speaker 2: And in terms of the rate cuts, there's just a 72 00:04:00,240 --> 00:04:04,240 Speaker 2: lot of talk how much, what are your what's your 73 00:04:04,280 --> 00:04:08,520 Speaker 2: perspective on that, What's what's a good amount? Like what 74 00:04:08,560 --> 00:04:11,040 Speaker 2: do you think is going to help generate activity? 75 00:04:12,320 --> 00:04:15,400 Speaker 3: I mean, we're looking for the FED to cut three 76 00:04:15,480 --> 00:04:18,599 Speaker 3: times this UH this year, starting with twenty five basis 77 00:04:18,600 --> 00:04:21,599 Speaker 3: points this week, and then next year we have them 78 00:04:21,680 --> 00:04:26,600 Speaker 3: cutting essentially twenty five basis points at every meeting, and 79 00:04:26,680 --> 00:04:29,560 Speaker 3: so that really will drive the funds rate closer to 80 00:04:29,640 --> 00:04:33,359 Speaker 3: what we think is let's say, roughly neutral, and we 81 00:04:33,440 --> 00:04:36,560 Speaker 3: think that that's going to incentivize again clients to come 82 00:04:37,120 --> 00:04:41,000 Speaker 3: off the sidelines because when you know, short end corporate 83 00:04:41,080 --> 00:04:44,279 Speaker 3: yields are you know, falling from let's say the mid 84 00:04:44,320 --> 00:04:47,960 Speaker 3: to high five percent range or low six percent range 85 00:04:48,000 --> 00:04:51,720 Speaker 3: down two percentage points, and cash rates right are falling 86 00:04:51,760 --> 00:04:54,320 Speaker 3: from let's say five and a quarter down to something 87 00:04:54,400 --> 00:04:56,560 Speaker 3: like three or three in a quarter. We think that's 88 00:04:56,720 --> 00:05:00,080 Speaker 3: enough of a move, Julie, to really push people in 89 00:05:00,080 --> 00:05:02,880 Speaker 3: to fixed income and out the curve, and so I 90 00:05:02,880 --> 00:05:05,679 Speaker 3: think that's going to be quite strong. What we would 91 00:05:05,760 --> 00:05:07,920 Speaker 3: like to hear from the Fed this week is that 92 00:05:08,360 --> 00:05:12,360 Speaker 3: growth is actually fine and that these cuts are driven 93 00:05:13,200 --> 00:05:17,240 Speaker 3: but more by inflation getting closer to target. They've said 94 00:05:17,240 --> 00:05:19,960 Speaker 3: that inflation risks to the upside have lessened. We agree 95 00:05:19,960 --> 00:05:22,200 Speaker 3: with that, and really that they just want to get 96 00:05:22,200 --> 00:05:25,479 Speaker 3: policy back to a more normal level from what we 97 00:05:25,520 --> 00:05:28,479 Speaker 3: would argue as a fairly restrictive level currently. I think 98 00:05:28,480 --> 00:05:30,920 Speaker 3: that's what the market wants to hear. Growth is fine, 99 00:05:31,480 --> 00:05:35,200 Speaker 3: this is a recalibration of policy in line with inflation data, 100 00:05:35,800 --> 00:05:39,080 Speaker 3: and basically getting out of restrictive territory because some of 101 00:05:39,120 --> 00:05:42,080 Speaker 3: the upside risks are largely behind us. 102 00:05:42,720 --> 00:05:46,040 Speaker 1: On the money market flow, Matt, We've had a lot 103 00:05:46,040 --> 00:05:47,760 Speaker 1: of people talk about that, I mean, going back to 104 00:05:48,279 --> 00:05:51,359 Speaker 1: almost a year ago, about the potential for that to 105 00:05:51,400 --> 00:05:54,239 Speaker 1: come into credit. But then when you look at the history, 106 00:05:54,240 --> 00:05:55,920 Speaker 1: it does tend to operate with quite a bit of 107 00:05:55,960 --> 00:05:59,800 Speaker 1: a lag. Also, you know, we've had some people recently 108 00:06:00,320 --> 00:06:02,599 Speaker 1: talk about how these rates needs to go down a 109 00:06:02,600 --> 00:06:06,720 Speaker 1: lot more before there's really an incentive to rotate. Plus, 110 00:06:06,960 --> 00:06:09,520 Speaker 1: you know, money market is really a place for you know, 111 00:06:09,560 --> 00:06:13,080 Speaker 1: safe haven, and we're heading into a period potentially of 112 00:06:13,279 --> 00:06:16,360 Speaker 1: very volatile times, you know, around the election, around the 113 00:06:16,480 --> 00:06:19,919 Speaker 1: FED easing and so on, and the economy. What gives 114 00:06:19,920 --> 00:06:23,240 Speaker 1: you kind of real conviction in this, you know that 115 00:06:23,360 --> 00:06:25,840 Speaker 1: the money market cash will flow into credit. 116 00:06:27,800 --> 00:06:29,560 Speaker 3: Yeah, for us, it's really a two part story. And 117 00:06:29,640 --> 00:06:32,400 Speaker 3: let me emphasize on the top that we think that 118 00:06:32,480 --> 00:06:34,920 Speaker 3: a lot of clients that are already in credit at 119 00:06:34,960 --> 00:06:38,000 Speaker 3: the short end of the curve. And for example, James, 120 00:06:38,040 --> 00:06:41,040 Speaker 3: you and Julie have discussed the importance of foreign investors 121 00:06:41,120 --> 00:06:44,080 Speaker 3: right the resk of world demand, particularly coming from the 122 00:06:44,120 --> 00:06:48,240 Speaker 3: APAC region, and those clients in a lot of cases 123 00:06:48,360 --> 00:06:52,279 Speaker 3: are wealth management or high net worth clients have rotated 124 00:06:52,400 --> 00:06:54,760 Speaker 3: into credit, but they're in the short end of the curve. 125 00:06:54,800 --> 00:06:57,600 Speaker 3: Over the last twelve to eighteen months, and that really 126 00:06:57,760 --> 00:07:01,160 Speaker 3: was out of in part local assets that we're underperforming, 127 00:07:01,520 --> 00:07:03,200 Speaker 3: and so I want to stress that part of this 128 00:07:03,279 --> 00:07:06,479 Speaker 3: is really just a rotation out the credit curve. But 129 00:07:06,520 --> 00:07:10,000 Speaker 3: at the margin, right, that is increasing duration in the portfolios, 130 00:07:10,400 --> 00:07:12,360 Speaker 3: and that is a way to take on more risk, 131 00:07:12,400 --> 00:07:15,360 Speaker 3: and it is very supportive for credit if those flows 132 00:07:15,400 --> 00:07:17,840 Speaker 3: move from the short end already in credit and just 133 00:07:17,920 --> 00:07:20,640 Speaker 3: push out the curve into a new five year or 134 00:07:20,760 --> 00:07:23,240 Speaker 3: seven year or ten year deal. The second thing I 135 00:07:23,240 --> 00:07:25,160 Speaker 3: would say on the money market side is I agree 136 00:07:25,920 --> 00:07:29,080 Speaker 3: with the narrative, this is not a silver bullet. These 137 00:07:29,280 --> 00:07:33,920 Speaker 3: lead lag relationships are several quarters. Normally, what you need 138 00:07:34,000 --> 00:07:36,280 Speaker 3: to see is the FED needs to cut in a 139 00:07:36,360 --> 00:07:39,560 Speaker 3: consistent fashion. And I think a lot of clients need 140 00:07:39,600 --> 00:07:42,480 Speaker 3: to see those cuts and then see essentially the short 141 00:07:42,560 --> 00:07:46,040 Speaker 3: rate right their money market fund rate fall and fall 142 00:07:46,080 --> 00:07:48,880 Speaker 3: pretty dramatically. So I would say, if the FED only 143 00:07:48,920 --> 00:07:51,000 Speaker 3: cuts a few times, we've had the position that that 144 00:07:51,040 --> 00:07:54,000 Speaker 3: doesn't really move the needle. But through next year, if 145 00:07:54,000 --> 00:07:58,080 Speaker 3: the FED is cutting let's say cumulatively two hundred or 146 00:07:58,200 --> 00:08:00,360 Speaker 3: two hundred or two hundred and fifty basis point points, 147 00:08:00,680 --> 00:08:02,800 Speaker 3: we think over time through next year, this is going 148 00:08:02,840 --> 00:08:05,960 Speaker 3: to be kind of a constant source of support. And 149 00:08:06,000 --> 00:08:09,240 Speaker 3: it's true that money market flows don't necessarily go negative, 150 00:08:09,240 --> 00:08:12,440 Speaker 3: but the rate of growth through periods of FED cuts 151 00:08:12,520 --> 00:08:15,600 Speaker 3: does tend to fall pretty dramatically to the low to 152 00:08:15,600 --> 00:08:17,800 Speaker 3: mid single digits. And so some of that money that 153 00:08:17,840 --> 00:08:21,280 Speaker 3: would continue to go into money markets is essentially, we think, 154 00:08:21,320 --> 00:08:23,560 Speaker 3: moving into fixed income. But it really is kind of 155 00:08:23,560 --> 00:08:26,800 Speaker 3: a one two punch, so to speak, where that first 156 00:08:26,800 --> 00:08:30,040 Speaker 3: part really just rotation out the curve of clients already 157 00:08:30,080 --> 00:08:34,440 Speaker 3: in credit, I think is probably the underappreciated factor that 158 00:08:34,480 --> 00:08:35,840 Speaker 3: we're dialing in on. 159 00:08:37,280 --> 00:08:41,040 Speaker 2: And going back to your comment before that, everybody wants 160 00:08:41,080 --> 00:08:44,200 Speaker 2: to hear from the FED that growth is fine. In 161 00:08:44,240 --> 00:08:47,880 Speaker 2: covering the consumer stable sector, we're hearing from the food 162 00:08:47,920 --> 00:08:51,600 Speaker 2: and beverage management teams that the consumer is still stressed. 163 00:08:52,080 --> 00:08:55,080 Speaker 2: So what they're doing is they're going to the supermarket less, 164 00:08:55,120 --> 00:08:58,160 Speaker 2: but they're trying to stretch out their dollar more. And 165 00:08:58,200 --> 00:09:02,720 Speaker 2: then you see that recently the jobs report was altered 166 00:09:02,720 --> 00:09:06,240 Speaker 2: down by about eight hundred and eighty thousand, So you're 167 00:09:06,320 --> 00:09:10,920 Speaker 2: kind of wondering, is growth really fine? What like do 168 00:09:10,920 --> 00:09:13,400 Speaker 2: you have an opinion on that? Because you were saying, 169 00:09:13,440 --> 00:09:16,480 Speaker 2: like you guys like to look for the cracks to me, 170 00:09:16,840 --> 00:09:20,200 Speaker 2: there's a kind of a dislocation in what's what the 171 00:09:20,200 --> 00:09:22,440 Speaker 2: FED is saying or what's coming out of you know, 172 00:09:22,480 --> 00:09:26,520 Speaker 2: economic data versus what we're hearing from company specific comments. 173 00:09:28,160 --> 00:09:31,600 Speaker 3: Yeah, I think, look, the US consumer and the strength 174 00:09:31,640 --> 00:09:35,319 Speaker 3: of the consumer is critical, and so you know, when 175 00:09:35,360 --> 00:09:38,080 Speaker 3: I say growth is fine, certainly the commentary you get 176 00:09:38,080 --> 00:09:41,439 Speaker 3: from companies, I think is very consistent with a deceleration, 177 00:09:42,440 --> 00:09:43,640 Speaker 3: which is what we're looking for. 178 00:09:43,720 --> 00:09:43,800 Speaker 2: Me. 179 00:09:43,880 --> 00:09:47,200 Speaker 3: We're looking for real GDP growth to fall in the 180 00:09:47,240 --> 00:09:49,520 Speaker 3: next two quarters for Q three and Q four down 181 00:09:49,559 --> 00:09:52,800 Speaker 3: to kind of a low one percent range in real terms, 182 00:09:52,840 --> 00:09:56,000 Speaker 3: and so relative to where we've been over the last 183 00:09:56,000 --> 00:09:59,200 Speaker 3: several years, that's a notable downtick, and I think is 184 00:09:59,280 --> 00:10:03,960 Speaker 3: consistent with recency bias, right, and with management teams talking 185 00:10:03,960 --> 00:10:08,360 Speaker 3: about how consumers are essentially being more selective or they're 186 00:10:08,400 --> 00:10:12,080 Speaker 3: trading down potentially to more staple goods. Having said that, 187 00:10:12,880 --> 00:10:15,400 Speaker 3: the second point really that I would convey is that 188 00:10:15,440 --> 00:10:19,760 Speaker 3: the consumer is very heterogeneous and a lot of the 189 00:10:19,760 --> 00:10:22,199 Speaker 3: comments I think from some of the consumer good or 190 00:10:22,240 --> 00:10:25,880 Speaker 3: staple companies that reflects all consumers that they see. Right, 191 00:10:25,960 --> 00:10:31,200 Speaker 3: everyone buys essentials, everyone buys basic necessities, but we would 192 00:10:31,280 --> 00:10:34,160 Speaker 3: argue that the high end of the consumer profile by 193 00:10:34,160 --> 00:10:37,960 Speaker 3: income is really the strongest, and that does matter at 194 00:10:38,040 --> 00:10:42,440 Speaker 3: least from a macroeconomic perspective, because over sixty percent of 195 00:10:42,720 --> 00:10:45,560 Speaker 3: PCE or spending in the US is driven by the 196 00:10:45,600 --> 00:10:48,960 Speaker 3: top forty percent by income, and so I think you 197 00:10:49,000 --> 00:10:53,120 Speaker 3: can reconcile these two narratives. I don't think they're necessarily 198 00:10:53,400 --> 00:10:56,560 Speaker 3: mutually exclusive. It really is just that you are sitting 199 00:10:56,559 --> 00:10:59,400 Speaker 3: more pressure at the lower particularly the lower but lower 200 00:10:59,400 --> 00:11:02,360 Speaker 3: to middle income consumer. But the high end we still 201 00:11:02,360 --> 00:11:05,600 Speaker 3: think is fairly robust. And so I think again that 202 00:11:05,760 --> 00:11:09,880 Speaker 3: slowdown is consistent with weakness that starts at the bottom. 203 00:11:10,360 --> 00:11:13,480 Speaker 3: I don't really think it's moving aggressively into the middle. 204 00:11:14,320 --> 00:11:16,840 Speaker 3: That's really where the risk is. But at the higher end, 205 00:11:16,880 --> 00:11:20,080 Speaker 3: those top two what we call quintiles, or the top 206 00:11:20,120 --> 00:11:23,160 Speaker 3: forty percent by income, they are still, so to speak, 207 00:11:23,240 --> 00:11:25,760 Speaker 3: driving the bus. They're still sixty one or sixty two 208 00:11:25,840 --> 00:11:28,880 Speaker 3: percent of spending, and we think they're in quite good shape. 209 00:11:28,880 --> 00:11:31,920 Speaker 3: And a lot of this is based on foundational, long 210 00:11:32,000 --> 00:11:34,720 Speaker 3: term structural work that we've done using the FED Survey 211 00:11:34,720 --> 00:11:38,679 Speaker 3: of Consumer Finances. We basically show using three credit ratios 212 00:11:38,720 --> 00:11:43,120 Speaker 3: that in many cases, consumer health or consumer balance sheet 213 00:11:43,200 --> 00:11:47,160 Speaker 3: strength has rebounded aggressively essentially back to where it was 214 00:11:47,200 --> 00:11:50,559 Speaker 3: in the mid to late nineteen nineties. And so you 215 00:11:50,600 --> 00:11:52,800 Speaker 3: know that I think really is a point to emphasize 216 00:11:52,840 --> 00:11:55,120 Speaker 3: for people that are in the markets or investors that 217 00:11:55,160 --> 00:11:57,440 Speaker 3: have been in the market for ten or fifteen years, 218 00:11:58,080 --> 00:12:00,520 Speaker 3: you haven't really been in a situation like the nineteen 219 00:12:00,600 --> 00:12:03,960 Speaker 3: nineties where the consumer was just starting from a much 220 00:12:04,000 --> 00:12:06,920 Speaker 3: more solid footing. So we think you can reconcile a 221 00:12:06,960 --> 00:12:09,920 Speaker 3: lot of these We are looking for quote unquote, as 222 00:12:09,960 --> 00:12:12,120 Speaker 3: I said, cracks. We wrote a piece last week about 223 00:12:12,120 --> 00:12:15,200 Speaker 3: auto delinquencies, but on net I would just say the 224 00:12:15,280 --> 00:12:17,800 Speaker 3: high end we still think is quite strong and resilient. 225 00:12:18,480 --> 00:12:20,760 Speaker 3: And what that means is some of these traditional quote 226 00:12:20,800 --> 00:12:25,040 Speaker 3: unquote cracks or signs of weakening at the lower end consumer, 227 00:12:25,679 --> 00:12:30,200 Speaker 3: they really need to, as we say, accelerate in terms 228 00:12:30,240 --> 00:12:32,680 Speaker 3: of the deterioration that you're seeing. So I should be 229 00:12:32,679 --> 00:12:35,439 Speaker 3: able to send you and James, you know, four or 230 00:12:35,520 --> 00:12:42,720 Speaker 3: five charts showing very scary deterioration or weakness in some 231 00:12:42,760 --> 00:12:44,480 Speaker 3: of these metrics that really key in on the lower 232 00:12:44,559 --> 00:12:47,439 Speaker 3: income consumer. And we're just not there yet. 233 00:12:48,200 --> 00:12:50,680 Speaker 2: And you know, We've been hearing a lot about the 234 00:12:50,720 --> 00:12:56,199 Speaker 2: bifurcation of consumer spending. Higher income consumers are spending, they 235 00:12:56,200 --> 00:13:00,440 Speaker 2: haven't really slowed down. And what we're also hearing and 236 00:13:00,440 --> 00:13:02,760 Speaker 2: seeing is that a lot of the spending at the 237 00:13:02,760 --> 00:13:06,640 Speaker 2: walmarts and the targets are from higher end consumers. When 238 00:13:06,640 --> 00:13:10,280 Speaker 2: do you think the lower end consumers will quote unquote 239 00:13:10,280 --> 00:13:13,120 Speaker 2: come back or be able to come back, like what 240 00:13:13,160 --> 00:13:16,199 Speaker 2: would be triggers that kind of will push them into 241 00:13:17,000 --> 00:13:22,920 Speaker 2: spending on furniture, vacations, things that are outside of the essentials. 242 00:13:24,320 --> 00:13:26,480 Speaker 3: As you look in let's say into a medium to 243 00:13:26,559 --> 00:13:30,160 Speaker 3: longer term horizon, I think into twenty twenty five, and 244 00:13:30,240 --> 00:13:34,000 Speaker 3: our real GDP forecast, which again is anchored on consumer spending, 245 00:13:34,520 --> 00:13:38,040 Speaker 3: does pick up. It picks up, you know, modest leads 246 00:13:38,040 --> 00:13:40,400 Speaker 3: and moderately. So we're talking about moving from the low 247 00:13:40,480 --> 00:13:44,440 Speaker 3: one percent level in terms of quarterly real GDP to 248 00:13:44,559 --> 00:13:47,280 Speaker 3: something that is in the mid or slightly mid to 249 00:13:47,960 --> 00:13:51,320 Speaker 3: higher end in terms of real GDP, but still you know, 250 00:13:51,480 --> 00:13:54,080 Speaker 3: below two percent. And what we think drives that in 251 00:13:54,120 --> 00:13:56,400 Speaker 3: a lot of cases is the lagged effect of rate 252 00:13:56,440 --> 00:14:00,920 Speaker 3: cuts in terms of stimulating financial conditions and incrementally reducing 253 00:14:01,600 --> 00:14:06,240 Speaker 3: interest burden. The other key part is essentially that the 254 00:14:06,320 --> 00:14:10,840 Speaker 3: labor market holds up and the weakness is contained, and 255 00:14:10,920 --> 00:14:13,600 Speaker 3: as you go into next year, inflation, at least in 256 00:14:13,720 --> 00:14:16,760 Speaker 3: terms of year on year comps continues to fall. So 257 00:14:17,000 --> 00:14:19,640 Speaker 3: I think the you know, the goldilocks scenario for the 258 00:14:19,640 --> 00:14:24,920 Speaker 3: consumer is easing financial conditions, easing pressure in terms of 259 00:14:24,960 --> 00:14:29,440 Speaker 3: interest burden, the labor market holding up or softening, let's say, 260 00:14:29,880 --> 00:14:34,800 Speaker 3: incrementally from here, but really inflation continuing on a path 261 00:14:34,840 --> 00:14:37,840 Speaker 3: that is down in line with the FED target. And 262 00:14:37,880 --> 00:14:41,240 Speaker 3: that means that real wage growth can still be reasonable 263 00:14:41,800 --> 00:14:44,800 Speaker 3: again in an environment where we think a lot of 264 00:14:45,000 --> 00:14:47,760 Speaker 3: you know what we've what we're seeing as a normalization too, 265 00:14:48,680 --> 00:14:52,280 Speaker 3: you know, clute too or much closer to trend, you know, 266 00:14:52,320 --> 00:14:55,520 Speaker 3: but that's okay, right for credit, that's essentially goldilocks. 267 00:14:55,920 --> 00:14:57,480 Speaker 1: Let's talk about the cracks, so, Mat, I mean, you 268 00:14:57,520 --> 00:15:00,480 Speaker 1: have been great in the past acording these things out, 269 00:15:00,520 --> 00:15:03,000 Speaker 1: and you know, we've been looking at your research for years. 270 00:15:03,280 --> 00:15:06,000 Speaker 1: Canaries and the coal mine, all that stuff. It worries 271 00:15:06,040 --> 00:15:08,240 Speaker 1: me slightly that you just sound so positive at this moment. 272 00:15:08,280 --> 00:15:11,000 Speaker 1: I mean, are you really you know, I mean you 273 00:15:11,000 --> 00:15:13,160 Speaker 1: mentioned auto delinquencies what else you worried about. 274 00:15:14,080 --> 00:15:16,400 Speaker 3: I mean, the biggest thing I think that we have 275 00:15:16,400 --> 00:15:21,320 Speaker 3: have focused on is private credit, and you know, the 276 00:15:21,360 --> 00:15:25,520 Speaker 3: signals in private credit are mixed, so you are seeing 277 00:15:25,600 --> 00:15:27,800 Speaker 3: certainly a fairly you could point to a number of 278 00:15:27,840 --> 00:15:31,920 Speaker 3: indicators that would be you know, on the more concerning end, right, 279 00:15:32,000 --> 00:15:35,240 Speaker 3: the number of pay in kind or the number of 280 00:15:35,280 --> 00:15:40,720 Speaker 3: what I would call essentially actions that by time amendments 281 00:15:41,600 --> 00:15:44,080 Speaker 3: has certainly been elevated. That's coming off a little bit, 282 00:15:44,080 --> 00:15:46,680 Speaker 3: but there's certainly underlying concern that there's a number of 283 00:15:46,720 --> 00:15:50,800 Speaker 3: companies that have fairly low interest coverage ratios, a lot 284 00:15:50,840 --> 00:15:54,160 Speaker 3: of essentially the incremental cash flow is going to higher 285 00:15:54,240 --> 00:15:57,360 Speaker 3: interest burdens. Now that should improve as the FED cuts rates, 286 00:15:57,840 --> 00:16:01,520 Speaker 3: but there's always you know, again and acknowledgment that the 287 00:16:01,560 --> 00:16:04,280 Speaker 3: signals from that market, we would say are mixed. We 288 00:16:04,360 --> 00:16:07,560 Speaker 3: think there will be portfolio deterioration in the next twelve months, 289 00:16:08,280 --> 00:16:11,480 Speaker 3: there will be higher defaults, but I think it will 290 00:16:11,480 --> 00:16:16,360 Speaker 3: be measured and not necessarily a significant concern. You know. 291 00:16:16,480 --> 00:16:19,080 Speaker 3: Away from that, I would just say commercial real estate 292 00:16:19,120 --> 00:16:21,960 Speaker 3: has been an area of focus. You know, you've seen 293 00:16:22,000 --> 00:16:24,840 Speaker 3: a lot of pressure on office that seems in terms 294 00:16:24,840 --> 00:16:29,240 Speaker 3: of office delinquency rates, that seems to have migrated into multifamily. 295 00:16:29,880 --> 00:16:33,520 Speaker 3: But I still think if the unemployment rate remains fairly 296 00:16:33,720 --> 00:16:38,000 Speaker 3: low and we essentially don't have a significant uptick to 297 00:16:38,080 --> 00:16:40,960 Speaker 3: hear certainly we're below five percent through next year in 298 00:16:41,040 --> 00:16:45,040 Speaker 3: terms of the forecast, then ultimately we think that you know, 299 00:16:45,160 --> 00:16:48,920 Speaker 3: office is probably largely worked through some of the structural issues. 300 00:16:49,440 --> 00:16:52,320 Speaker 3: The decline and interest rates certainly will help cap rates 301 00:16:52,680 --> 00:16:57,479 Speaker 3: and valuations, and multifamily likely holds up in the context 302 00:16:57,520 --> 00:17:02,760 Speaker 3: where most households still have a job and still have 303 00:17:02,960 --> 00:17:06,320 Speaker 3: income growth. So I would say right now, you know, 304 00:17:06,359 --> 00:17:10,520 Speaker 3: private credit is the area of concern for us. That's 305 00:17:10,600 --> 00:17:12,920 Speaker 3: the kind of area that's front and center. The other 306 00:17:12,960 --> 00:17:16,080 Speaker 3: ones I think are not really you know, they're they're 307 00:17:16,119 --> 00:17:19,040 Speaker 3: on our radar, on our scorecards, so to speak, but 308 00:17:19,040 --> 00:17:22,679 Speaker 3: are not really flashing uh, you know, signs of of 309 00:17:22,760 --> 00:17:24,760 Speaker 3: red or even signs I would say of orange at 310 00:17:24,800 --> 00:17:27,000 Speaker 3: this point to use a stop stoplight analogy. 311 00:17:27,400 --> 00:17:30,359 Speaker 1: Does private credit cause such stress that it rips across 312 00:17:30,400 --> 00:17:31,280 Speaker 1: other parts of credit? 313 00:17:33,840 --> 00:17:36,359 Speaker 3: We don't believe so unless you kind of have a 314 00:17:36,560 --> 00:17:42,240 Speaker 3: confluence of instances or occurrences that that that that that 315 00:17:42,359 --> 00:17:45,320 Speaker 3: feed on one another, and I think for that to happen, 316 00:17:45,359 --> 00:17:49,080 Speaker 3: to be clear, you would likely need a more material 317 00:17:49,119 --> 00:17:52,960 Speaker 3: economic slowdown or a recession relative to what we're forecasting, 318 00:17:53,040 --> 00:17:56,680 Speaker 3: which in the baseline is no recession. Again, it's slow 319 00:17:56,720 --> 00:18:00,280 Speaker 3: growth that starts to incrementally pick up into twenty twenty five. 320 00:18:00,640 --> 00:18:03,560 Speaker 3: So I think you need a macroeconomic recession in the US, 321 00:18:03,600 --> 00:18:09,160 Speaker 3: but you'd also need weakness in profits, right, and we 322 00:18:09,320 --> 00:18:12,240 Speaker 3: use different profit measures. One that we continue to like 323 00:18:13,320 --> 00:18:16,200 Speaker 3: is just the simple GDP account based profits, and those 324 00:18:16,200 --> 00:18:19,800 Speaker 3: were up almost five percent through the second quarter year 325 00:18:19,840 --> 00:18:24,440 Speaker 3: on year. Now that trend will decelerate, but historically it's 326 00:18:24,440 --> 00:18:27,320 Speaker 3: been a better indicator for what the state of profits 327 00:18:27,400 --> 00:18:30,480 Speaker 3: are at the economy wide level. In a lot of 328 00:18:30,520 --> 00:18:33,600 Speaker 3: cases that captures medium and smaller companies, and so right 329 00:18:33,640 --> 00:18:38,840 Speaker 3: now that's in positive territory. Normally that series goes negative 330 00:18:38,920 --> 00:18:42,399 Speaker 3: several quarters before the recession. But I would emphasize that 331 00:18:42,440 --> 00:18:45,400 Speaker 3: we would really need to see earnings in profit weakness. 332 00:18:45,920 --> 00:18:50,439 Speaker 3: And despite the material increase in interest costs, heuristically, what 333 00:18:50,480 --> 00:18:52,919 Speaker 3: we learned over the last one to two years is 334 00:18:52,960 --> 00:18:56,199 Speaker 3: that interest expense alone is not going to cause a 335 00:18:56,200 --> 00:19:00,639 Speaker 3: problem if underlying nominal earnings and EBIT dog growth, and 336 00:19:00,680 --> 00:19:03,639 Speaker 3: that's what we've seen. So I think the second thing 337 00:19:03,640 --> 00:19:07,240 Speaker 3: we would look for is a profit contraction, particularly in 338 00:19:07,280 --> 00:19:11,119 Speaker 3: those sectors where the concentration in private credit portfolios is 339 00:19:11,160 --> 00:19:14,600 Speaker 3: quite high, and in particular I would highlight tech and 340 00:19:14,680 --> 00:19:17,760 Speaker 3: also business services, and so you'd have to have I 341 00:19:17,760 --> 00:19:21,639 Speaker 3: think a confluence of those two events that might drive 342 00:19:21,720 --> 00:19:27,720 Speaker 3: default rates higher and potentially materially higher than what clients 343 00:19:27,760 --> 00:19:32,080 Speaker 3: are forecasting at this point. And that cycle, potentially, given 344 00:19:32,520 --> 00:19:34,640 Speaker 3: a number of the measures that you've seen to kind 345 00:19:34,640 --> 00:19:37,680 Speaker 3: of amend and extend or amendments to kind of extend 346 00:19:37,680 --> 00:19:40,479 Speaker 3: the runway for these firms, that could lead us to 347 00:19:40,560 --> 00:19:42,600 Speaker 3: a cycle that looks a little bit more like the 348 00:19:42,680 --> 00:19:46,080 Speaker 3: late nineties for corporate debt, right, which is a more 349 00:19:46,160 --> 00:19:49,680 Speaker 3: longer and drawn out default cycle. If in fact, some 350 00:19:49,840 --> 00:19:54,159 Speaker 3: of these vulnerabilities had been let's say, tapered over or 351 00:19:54,760 --> 00:19:57,639 Speaker 3: dampened down. If we get into a real kind of 352 00:19:57,720 --> 00:20:00,840 Speaker 3: series of shocks as I describe, then the cycle may 353 00:20:00,840 --> 00:20:03,680 Speaker 3: be larger. Default rates may be notably higher on a 354 00:20:03,760 --> 00:20:08,040 Speaker 3: cumutive basis, and that could cause problem for credit investors. 355 00:20:08,040 --> 00:20:11,800 Speaker 3: I don't necessarily believe James that it's quote unquote systemic, 356 00:20:12,800 --> 00:20:16,720 Speaker 3: but we're certainly watching and trying to calibrate that as 357 00:20:16,760 --> 00:20:17,640 Speaker 3: the cycle evolves. 358 00:20:18,000 --> 00:20:20,679 Speaker 1: To what extent though, does it affect spreads in public 359 00:20:20,840 --> 00:20:23,600 Speaker 1: bond markets in that you're effects we be taking away 360 00:20:23,640 --> 00:20:24,360 Speaker 1: some of the supply. 361 00:20:26,000 --> 00:20:31,680 Speaker 3: I definitely think that the natural quote unquote contagent point 362 00:20:31,680 --> 00:20:35,120 Speaker 3: would be leverage loans in the US. The portfolios are 363 00:20:35,119 --> 00:20:39,960 Speaker 3: both floating rate, generally lower quality. They have similar sector concentrations, 364 00:20:39,960 --> 00:20:41,840 Speaker 3: so I think you would see it there. I do 365 00:20:41,920 --> 00:20:44,800 Speaker 3: think that high yield in the US and particularly high 366 00:20:44,800 --> 00:20:49,080 Speaker 3: grade are on firmer footing. But if you had an 367 00:20:49,119 --> 00:20:53,359 Speaker 3: issue where default rates were rising and rising above average 368 00:20:53,359 --> 00:20:56,959 Speaker 3: and private credit, I think that would likely spill into 369 00:20:57,080 --> 00:21:02,440 Speaker 3: leverage loans. Again, given the similarity of the companies, the sector, 370 00:21:02,440 --> 00:21:06,240 Speaker 3: the rating profile. And then you're talking, you know, realistically 371 00:21:06,280 --> 00:21:10,320 Speaker 3: about call it three trillion of debt where you have 372 00:21:10,359 --> 00:21:15,199 Speaker 3: pretty material losses. Potentially that will affect risk appetite, it 373 00:21:15,280 --> 00:21:18,600 Speaker 3: will affect the capacity to raise capital, and I think 374 00:21:18,640 --> 00:21:22,600 Speaker 3: you will see spill over to US high yield and 375 00:21:22,680 --> 00:21:24,440 Speaker 3: ultimately US investment grade. 376 00:21:25,200 --> 00:21:27,399 Speaker 1: Can you put numbers on the default rate you're expecting 377 00:21:27,440 --> 00:21:29,760 Speaker 1: private credit? It's just so hard to see. You mentioned 378 00:21:29,800 --> 00:21:32,400 Speaker 1: the amend and extent. Sometimes these things just don't get 379 00:21:32,720 --> 00:21:35,480 Speaker 1: actually reported as defaults because they just keep getting amended 380 00:21:35,520 --> 00:21:36,160 Speaker 1: and extended. 381 00:21:36,480 --> 00:21:38,600 Speaker 3: Yeah, I want to clarify. I mean first, right, so 382 00:21:38,680 --> 00:21:42,040 Speaker 3: the starting point to your question a little bit earlier 383 00:21:42,040 --> 00:21:44,440 Speaker 3: in the discussion. You know, we have high yield default 384 00:21:44,520 --> 00:21:46,840 Speaker 3: rates in the US, which is a key benchmark for 385 00:21:46,920 --> 00:21:51,080 Speaker 3: credit for macro investors, that essentially is running below one percent. 386 00:21:51,119 --> 00:21:54,600 Speaker 3: It's six tenths of a percent on a debt weighted basis. 387 00:21:55,280 --> 00:21:57,320 Speaker 3: A lot of the numbers that you'll see in the 388 00:21:57,359 --> 00:22:00,639 Speaker 3: marketplace that are higher are countweighted, and we think that 389 00:22:00,640 --> 00:22:02,600 Speaker 3: that's not the right metric to look at in terms 390 00:22:02,600 --> 00:22:07,600 Speaker 3: of the overall impact on our client portfolios, our client's portfolios. 391 00:22:07,600 --> 00:22:10,440 Speaker 3: So six tenths of a percent is the high yield 392 00:22:10,480 --> 00:22:13,840 Speaker 3: default rate currently. We have that rising to one percent 393 00:22:14,520 --> 00:22:16,440 Speaker 3: at the end of the year, but it's still quite low. 394 00:22:17,080 --> 00:22:20,960 Speaker 3: Leverage loans are at about two to two and a 395 00:22:21,000 --> 00:22:25,440 Speaker 3: half percent. We have it peaking there. So the message 396 00:22:25,480 --> 00:22:27,920 Speaker 3: overall from high graded or excuse me, from high yield 397 00:22:27,920 --> 00:22:30,320 Speaker 3: and leverage loans is fairly benign. 398 00:22:31,240 --> 00:22:33,640 Speaker 1: Sott. Let's talk about the election. You've written a great 399 00:22:33,680 --> 00:22:35,800 Speaker 1: report on that. That's all we seem to be hearing 400 00:22:35,800 --> 00:22:39,360 Speaker 1: about these days, from Taylor Swift to Stolen Peece. It's 401 00:22:39,400 --> 00:22:42,320 Speaker 1: really dominating the news cycle. How does it affect markets? 402 00:22:42,440 --> 00:22:44,080 Speaker 1: I mean, I've been asking this question a lot over 403 00:22:44,080 --> 00:22:47,560 Speaker 1: the last thirty so years, covering markets particpally in the 404 00:22:47,560 --> 00:22:49,800 Speaker 1: emerging world, but when it comes to the US so 405 00:22:49,880 --> 00:22:51,880 Speaker 1: often it seems to be just noise that doesn't really 406 00:22:51,960 --> 00:22:54,600 Speaker 1: make a huge amount of difference to portfolios. Why does 407 00:22:54,640 --> 00:22:55,280 Speaker 1: it matter now? 408 00:22:56,320 --> 00:22:58,840 Speaker 3: So we kind of agree and disagree with that narrative. 409 00:22:58,920 --> 00:23:02,439 Speaker 3: So at the macro level, we've done some work to 410 00:23:02,560 --> 00:23:05,440 Speaker 3: show the large swing and polls. I'm kind of using 411 00:23:05,520 --> 00:23:12,000 Speaker 3: some UBS Evidence lab data which essentially uses offshore probabilities 412 00:23:12,640 --> 00:23:17,600 Speaker 3: for the outcome of the presidential election, essentially so betting 413 00:23:17,600 --> 00:23:21,400 Speaker 3: sites offshore that help us calibrate precisely kind of how 414 00:23:21,640 --> 00:23:25,400 Speaker 3: the polls are moving in terms of favoring now former 415 00:23:25,480 --> 00:23:30,440 Speaker 3: president Trump versus the vice president president Electris. We've used 416 00:23:30,440 --> 00:23:32,280 Speaker 3: that to kind of look at how the markets move, 417 00:23:32,320 --> 00:23:35,879 Speaker 3: and I would say overall, at the macro level, we 418 00:23:36,000 --> 00:23:38,800 Speaker 3: don't think that there's a large story there. And I 419 00:23:38,800 --> 00:23:41,439 Speaker 3: think when you get under the issues a lot of 420 00:23:41,440 --> 00:23:43,480 Speaker 3: the reason for that is a lot of the key 421 00:23:43,600 --> 00:23:46,360 Speaker 3: issues that are in focus on the client side. Whether 422 00:23:46,400 --> 00:23:49,280 Speaker 3: you look at immigration, you look at tariffs, you look 423 00:23:49,320 --> 00:23:57,280 Speaker 3: at fiscal policy and economic policy, they're either back loaded, 424 00:23:57,560 --> 00:24:01,240 Speaker 3: so none of these are going to probably impact markets 425 00:24:01,800 --> 00:24:06,640 Speaker 3: or where you'll actually see actions or legislation or policy. 426 00:24:07,240 --> 00:24:08,880 Speaker 3: It's not going to happen, we think in a lot 427 00:24:08,880 --> 00:24:11,560 Speaker 3: of cases until the middle or second half of twenty 428 00:24:11,600 --> 00:24:14,520 Speaker 3: twenty five or twenty twenty six. And I think that's 429 00:24:14,560 --> 00:24:17,760 Speaker 3: one reason why the macros, not macro credit indices are 430 00:24:17,800 --> 00:24:22,520 Speaker 3: not really trading, let's say, on those probabilities. The second 431 00:24:22,560 --> 00:24:24,280 Speaker 3: thing I would say, though, is on the micro level, 432 00:24:24,840 --> 00:24:29,040 Speaker 3: we are seeing and I think continue to see alpha 433 00:24:29,200 --> 00:24:33,000 Speaker 3: or dispersion at the sector level. And you know, some 434 00:24:33,160 --> 00:24:36,200 Speaker 3: of this I think is useful because it also allows 435 00:24:36,280 --> 00:24:39,359 Speaker 3: us again the large run up in the polling in 436 00:24:39,440 --> 00:24:42,440 Speaker 3: favor of President Trump in the summer and then the 437 00:24:42,560 --> 00:24:48,159 Speaker 3: commensurate fall in those probabilities as Vice President Harris started 438 00:24:48,160 --> 00:24:50,800 Speaker 3: to really build momentum in the polls, gives us a 439 00:24:50,920 --> 00:24:53,560 Speaker 3: natural case study to kind of look at how sectors 440 00:24:53,600 --> 00:24:57,600 Speaker 3: are trading through those changes in probabilities. And so with 441 00:24:57,680 --> 00:25:00,439 Speaker 3: a Harris Victory, we think very clearly there's three sectors 442 00:25:00,440 --> 00:25:04,800 Speaker 3: that will benefit. One is utilities, the second is capital goods, 443 00:25:04,840 --> 00:25:07,640 Speaker 3: and the third is basic industry. And I would put 444 00:25:07,640 --> 00:25:09,639 Speaker 3: it in that order, and a lot of that we 445 00:25:09,680 --> 00:25:12,880 Speaker 3: think is tied to the preservation of the Inflation Reduction 446 00:25:13,000 --> 00:25:18,080 Speaker 3: Act and support of many of the Biden era stimulus policies. 447 00:25:18,960 --> 00:25:23,320 Speaker 3: On the flip side, we think at a Harris Victory, tech, 448 00:25:23,440 --> 00:25:27,359 Speaker 3: telecoms and banks underperform, and that really is on an 449 00:25:27,400 --> 00:25:31,879 Speaker 3: expectation of higher regulatory scrutiny and basically lower M and 450 00:25:31,960 --> 00:25:35,920 Speaker 3: A and financial activity. And then we also think autos underperform. 451 00:25:36,400 --> 00:25:40,359 Speaker 3: We believe that's mainly on potentially faster adoption of electric 452 00:25:40,480 --> 00:25:44,679 Speaker 3: vehicles which are less profitable, and just softer defense of 453 00:25:44,920 --> 00:25:49,280 Speaker 3: US manufacturers from imports or from offshore competition. So bottom 454 00:25:49,280 --> 00:25:52,600 Speaker 3: line macro less of a story, but micro we think 455 00:25:52,640 --> 00:25:56,080 Speaker 3: there's a lot of interesting sector stories depending on the 456 00:25:56,119 --> 00:25:57,120 Speaker 3: outcome in November. 457 00:25:57,760 --> 00:25:59,480 Speaker 2: Do you feel like a lot of her policies are 458 00:25:59,560 --> 00:26:02,200 Speaker 2: just exts mentions of the current Biden administration. 459 00:26:03,440 --> 00:26:07,240 Speaker 3: I think that she has tried to differentiate herself on 460 00:26:07,320 --> 00:26:10,600 Speaker 3: a number of issues, and I think she's continuing to 461 00:26:10,760 --> 00:26:13,880 Speaker 3: try uh and do that if you look at the policy, 462 00:26:14,480 --> 00:26:17,080 Speaker 3: uh in terms of fiscal if you look at some 463 00:26:17,119 --> 00:26:20,440 Speaker 3: of the policies that she's announced really in the last 464 00:26:20,440 --> 00:26:23,640 Speaker 3: few weeks in terms of in support of middle income families, 465 00:26:24,640 --> 00:26:27,679 Speaker 3: and certainly I think she has a different nuance on 466 00:26:27,800 --> 00:26:32,200 Speaker 3: foreign policy. So I think that that's the natural response 467 00:26:32,320 --> 00:26:36,320 Speaker 3: is to believe that, you know, she's essentially largely embracing 468 00:26:36,359 --> 00:26:40,159 Speaker 3: the Biden agenda. But I think what you're seeing is 469 00:26:40,160 --> 00:26:45,160 Speaker 3: is a fairly fairly savvy and selective approach to kind 470 00:26:45,160 --> 00:26:49,760 Speaker 3: of making certain issues her own in terms of what 471 00:26:49,840 --> 00:26:52,800 Speaker 3: she and what she's proposing, and and I would suspect 472 00:26:52,800 --> 00:26:56,960 Speaker 3: that we'll see that continue again in terms of her 473 00:26:57,000 --> 00:27:00,560 Speaker 3: candidacy and uh uh and and and and the issues 474 00:27:00,560 --> 00:27:03,359 Speaker 3: and the policy that she wants to put in place 475 00:27:03,400 --> 00:27:05,360 Speaker 3: as we move closer to November. 476 00:27:06,520 --> 00:27:09,359 Speaker 2: Because going back to your comments about we're probably not 477 00:27:09,440 --> 00:27:12,919 Speaker 2: going to see legislation or you know, an impact to 478 00:27:13,000 --> 00:27:16,000 Speaker 2: the macro level heading into twenty twenty five, twenty twenty six, 479 00:27:16,080 --> 00:27:19,080 Speaker 2: or until twenty twenty five, twenty twenty six, I would 480 00:27:19,080 --> 00:27:21,600 Speaker 2: think that if she was kind of embracing more of 481 00:27:21,640 --> 00:27:27,000 Speaker 2: the current Biden policies, that the MACRO would react positively 482 00:27:27,240 --> 00:27:32,320 Speaker 2: towards that because they generally, you know, they like what 483 00:27:32,359 --> 00:27:38,040 Speaker 2: Biden has been doing, like what specifically that Harris is 484 00:27:38,640 --> 00:27:41,560 Speaker 2: doing or not doing. Do you think we'll delay that 485 00:27:41,640 --> 00:27:43,600 Speaker 2: kind of legislation or we're not going to see the 486 00:27:43,640 --> 00:27:45,200 Speaker 2: results for another year or two? 487 00:27:46,680 --> 00:27:49,200 Speaker 3: I mean, I think again a macro, I'm not really 488 00:27:49,320 --> 00:27:51,679 Speaker 3: arguing that there's going to be a material impact, but 489 00:27:51,840 --> 00:27:55,639 Speaker 3: let me be specific. So our economics team has looked 490 00:27:55,680 --> 00:28:01,399 Speaker 3: at the proposals for you know, Harris and a Trump 491 00:28:01,400 --> 00:28:05,920 Speaker 3: win and basically argue that fiscally, the delta is quite small, right, 492 00:28:06,040 --> 00:28:08,359 Speaker 3: both of them are likely to spend a lot of 493 00:28:08,359 --> 00:28:11,840 Speaker 3: that is essentially I don't want to say institutionalized, but 494 00:28:11,920 --> 00:28:15,719 Speaker 3: it is likely to occur because in a lot of cases, 495 00:28:15,760 --> 00:28:20,159 Speaker 3: the tax changes or the potential tax changes aren't going 496 00:28:20,240 --> 00:28:23,600 Speaker 3: to go into effect until twenty twenty six. If you 497 00:28:23,680 --> 00:28:29,240 Speaker 3: look at tariffs, we believe the Trump administration has de 498 00:28:29,359 --> 00:28:33,480 Speaker 3: emphasized tariffs in terms of their overall list of kind 499 00:28:33,520 --> 00:28:38,040 Speaker 3: of key agenda items and the topics that they want 500 00:28:38,080 --> 00:28:41,920 Speaker 3: to try and address, and things like energy independence certainly 501 00:28:42,000 --> 00:28:46,640 Speaker 3: for former President Trump, and as well things like immigration 502 00:28:46,800 --> 00:28:50,400 Speaker 3: are certainly higher on the agenda, and so we don't 503 00:28:50,400 --> 00:28:54,120 Speaker 3: believe that the tariffs will be announced or go into 504 00:28:54,120 --> 00:28:57,240 Speaker 3: effect again until at the earliest probably the second half 505 00:28:57,320 --> 00:29:00,760 Speaker 3: of twenty twenty five. And then immigration is certainly a 506 00:29:00,800 --> 00:29:04,720 Speaker 3: critical issue. But in terms of credit, I think again 507 00:29:04,800 --> 00:29:08,040 Speaker 3: it is a a it is, so to speak, in 508 00:29:08,680 --> 00:29:10,800 Speaker 3: not at the forefront, but kind of in the uh 509 00:29:11,560 --> 00:29:13,680 Speaker 3: in the back, so to speak. And we think that 510 00:29:13,760 --> 00:29:17,120 Speaker 3: really is just because if people want to trade tighter 511 00:29:17,200 --> 00:29:21,480 Speaker 3: slack potentially you know, lower immigration leading to labor market 512 00:29:21,560 --> 00:29:24,360 Speaker 3: impacts and tighter slack, they're likely to do it in 513 00:29:24,480 --> 00:29:28,320 Speaker 3: rates markets in particular through tips first, and I think 514 00:29:28,440 --> 00:29:32,080 Speaker 3: credit investors are not going to use that instrument to 515 00:29:32,120 --> 00:29:35,479 Speaker 3: communicate that view. But it's also going to take some time, 516 00:29:35,760 --> 00:29:38,160 Speaker 3: I think, to really know exactly what policy is going 517 00:29:38,240 --> 00:29:41,080 Speaker 3: to be put in place in terms of the severity 518 00:29:41,400 --> 00:29:44,080 Speaker 3: of the change in in immigration that we've seen. Obviously, 519 00:29:44,160 --> 00:29:47,280 Speaker 3: the direction of travel is quite clear, probably clear under 520 00:29:47,280 --> 00:29:50,240 Speaker 3: both administrations, but even in a Trump administration, the delta 521 00:29:51,080 --> 00:29:56,400 Speaker 3: and the actual actions that that try and address immigration, 522 00:29:56,520 --> 00:29:59,080 Speaker 3: I think are still a more medium to longer term issue. 523 00:30:00,120 --> 00:30:03,080 Speaker 2: And you know, you're talking about the three sectors that 524 00:30:03,120 --> 00:30:07,720 Speaker 2: would benefit under Harris administration. I'm a consumer stables analyst, 525 00:30:07,760 --> 00:30:09,920 Speaker 2: so I have to ask, where do you see consumer 526 00:30:09,960 --> 00:30:16,440 Speaker 2: staples in a Harris wind? What would happen to the sector? Positive? Negative, neutral? 527 00:30:17,560 --> 00:30:21,400 Speaker 3: Yeah, we have not seen at the aggregate level a 528 00:30:21,520 --> 00:30:24,920 Speaker 3: significant amount of deviation relative to the index, Julie. And 529 00:30:25,000 --> 00:30:27,720 Speaker 3: so you know our approach, and I think one of 530 00:30:27,720 --> 00:30:30,320 Speaker 3: the things that's valuable to our approach is it essentially 531 00:30:30,360 --> 00:30:33,840 Speaker 3: takes the market tell and again I'm looking to be 532 00:30:33,960 --> 00:30:37,840 Speaker 3: clear at a sector level. We've also done subsector, but 533 00:30:37,880 --> 00:30:41,160 Speaker 3: we're not necessarily looking at individual names at least for 534 00:30:41,200 --> 00:30:45,040 Speaker 3: this exercise. And you haven't really had much deviation from 535 00:30:45,040 --> 00:30:48,880 Speaker 3: the overall index level, and so you know, I'd like 536 00:30:48,960 --> 00:30:51,840 Speaker 3: to have a more commercially interesting response. But on the 537 00:30:51,840 --> 00:30:56,560 Speaker 3: staple side, we really aren't seeing the changes in the 538 00:30:56,600 --> 00:31:01,400 Speaker 3: probabilities again around polling for the presidential election really swinging 539 00:31:01,880 --> 00:31:04,960 Speaker 3: and influencing the sector more so than what we're seeing 540 00:31:05,000 --> 00:31:07,440 Speaker 3: just in the general index. So I think the overall 541 00:31:07,480 --> 00:31:11,480 Speaker 3: implications are limited. Acknowledging that there are tariff and other 542 00:31:11,600 --> 00:31:15,480 Speaker 3: underlying issues that could have you know, pretty substantial effects 543 00:31:16,240 --> 00:31:19,440 Speaker 3: on individual companies, but at the aggregate level just not 544 00:31:19,520 --> 00:31:22,720 Speaker 3: really seeing evidence that the market's actually trading that or 545 00:31:22,720 --> 00:31:26,000 Speaker 3: at least that sector as prominently as some others like 546 00:31:26,040 --> 00:31:26,600 Speaker 3: I mentioned. 547 00:31:27,480 --> 00:31:30,640 Speaker 2: So maybe not the consumer stable sector, but what about 548 00:31:30,680 --> 00:31:35,160 Speaker 2: the consumer Like in a Harris win, how would the 549 00:31:35,200 --> 00:31:38,040 Speaker 2: consume the underlying consumer benefit or not benefit? 550 00:31:39,320 --> 00:31:42,280 Speaker 3: Yeah, I think I mean so in a Harris win, again, 551 00:31:42,360 --> 00:31:47,120 Speaker 3: we think autos underperforms and that signal that behavior has 552 00:31:47,160 --> 00:31:50,080 Speaker 3: been consistent over the last few months. Again, we think 553 00:31:50,080 --> 00:31:54,840 Speaker 3: that that's largely because the transition to EVS, which is 554 00:31:54,880 --> 00:31:59,920 Speaker 3: probably accelerated, and also in the Trump administration, the stronger 555 00:32:00,080 --> 00:32:05,280 Speaker 3: defense from the Trump administration of imports of competition we 556 00:32:05,360 --> 00:32:08,600 Speaker 3: think essentially are part of the reason why the market 557 00:32:08,640 --> 00:32:12,000 Speaker 3: is trading autos with a with a skew that's more 558 00:32:12,040 --> 00:32:16,160 Speaker 3: negative when Harris increases in the polling. Away from that, 559 00:32:16,240 --> 00:32:20,080 Speaker 3: I think on consumer cyclicals, a lot, you know, really 560 00:32:20,200 --> 00:32:22,800 Speaker 3: remains to be seen in terms of how much policy 561 00:32:23,560 --> 00:32:27,720 Speaker 3: actually gets initiated optically. You know, certainly some of the 562 00:32:27,800 --> 00:32:33,240 Speaker 3: proposals for tax credits for the down payments for first 563 00:32:33,240 --> 00:32:36,719 Speaker 3: time home buyers, you know, those things conceptually should improve 564 00:32:36,840 --> 00:32:40,280 Speaker 3: consumer finances, consumer buying power, and so you think you 565 00:32:40,280 --> 00:32:43,160 Speaker 3: would think that that naturally would be positive for cyclicals. 566 00:32:44,040 --> 00:32:46,120 Speaker 3: But again, you know, we're going to have to see 567 00:32:46,120 --> 00:32:49,640 Speaker 3: how many of those policies stick if she is elected, 568 00:32:49,680 --> 00:32:53,680 Speaker 3: and then how many actually can get through what may 569 00:32:53,680 --> 00:32:56,160 Speaker 3: be a divided Congress. And so that's the other important 570 00:32:56,160 --> 00:32:59,480 Speaker 3: part of this is some of the policies, for example, 571 00:32:59,520 --> 00:33:03,640 Speaker 3: preservation of a lot of the IRA policies, that is 572 00:33:03,680 --> 00:33:07,640 Speaker 3: probably going to be easier even if the congressional makeup 573 00:33:08,400 --> 00:33:13,560 Speaker 3: is split between Democrats and Republicans. New legislation, for example, 574 00:33:13,640 --> 00:33:18,000 Speaker 3: the twenty five thousand that's going to be potentially offered 575 00:33:18,000 --> 00:33:21,320 Speaker 3: to first time home buyers, that is new legislation. It's 576 00:33:21,360 --> 00:33:24,880 Speaker 3: going to be harder to get through or very difficult, 577 00:33:24,880 --> 00:33:28,800 Speaker 3: we think if the Congress is split between parties. 578 00:33:29,400 --> 00:33:31,000 Speaker 1: Let's talk about the Trump trade, though, I mean a 579 00:33:31,080 --> 00:33:34,400 Speaker 1: few months ago before Biden stepped out, you know, everyone 580 00:33:34,440 --> 00:33:37,080 Speaker 1: was just talking about high yield, as the Trump Trade 581 00:33:37,120 --> 00:33:41,400 Speaker 1: is by high yield, your report points to you, in 582 00:33:41,440 --> 00:33:44,040 Speaker 1: the event of a Republicans suite, we would see a 583 00:33:44,120 --> 00:33:48,760 Speaker 1: triple c's rally because of the potential benefits to small caps. 584 00:33:49,680 --> 00:33:51,200 Speaker 1: We are seeing that right now. Is that what the 585 00:33:51,200 --> 00:33:52,000 Speaker 1: market's betting on. 586 00:33:53,040 --> 00:33:54,920 Speaker 3: Yeah, it's a great question James, and one that we 587 00:33:54,920 --> 00:33:58,240 Speaker 3: were discussing literally an hour ago. I think. So part 588 00:33:58,240 --> 00:34:00,240 Speaker 3: of it is what you've seen in the trip Sea 589 00:34:00,280 --> 00:34:04,040 Speaker 3: bucket over the last week is really outperformance in telecommunications 590 00:34:04,760 --> 00:34:07,920 Speaker 3: and distressed capital structures in that sector, and that is 591 00:34:08,000 --> 00:34:11,960 Speaker 3: on the Verizon bid for Frontier. So we think a 592 00:34:12,000 --> 00:34:15,360 Speaker 3: majority of that move at Triple C's right now is 593 00:34:15,480 --> 00:34:18,799 Speaker 3: probably more tied to idiosyncratic risk or what I would 594 00:34:18,800 --> 00:34:23,200 Speaker 3: call sector specific risk basically M and A. Away from that, though, 595 00:34:23,239 --> 00:34:27,000 Speaker 3: there is part of that outperformance in Triple C's, which 596 00:34:27,080 --> 00:34:30,840 Speaker 3: you know, months to date are over fifty basis points tighters. 597 00:34:30,880 --> 00:34:34,840 Speaker 3: They are outperforming Double b's and single bees. There is 598 00:34:34,960 --> 00:34:38,400 Speaker 3: part of this that is I think in expectation of 599 00:34:38,560 --> 00:34:43,040 Speaker 3: lower interest rates providing relief to interest expense and also 600 00:34:43,120 --> 00:34:46,080 Speaker 3: lower interest rates I would say just galvanizing or easing 601 00:34:46,120 --> 00:34:51,160 Speaker 3: financial conditions right it gives an incentive for potentially for 602 00:34:51,480 --> 00:34:54,880 Speaker 3: investors to extend the runway, to look at amend and 603 00:34:54,920 --> 00:34:58,400 Speaker 3: extend type structures, and or as we see for M 604 00:34:58,440 --> 00:35:01,080 Speaker 3: and A potentially to pick up and for buyers to 605 00:35:01,120 --> 00:35:03,799 Speaker 3: be a little bit more aggressive. So the other part 606 00:35:03,800 --> 00:35:06,239 Speaker 3: of this, though is growth, and we always think that 607 00:35:06,320 --> 00:35:09,560 Speaker 3: growth matters most for Triple c's, and I think what 608 00:35:09,560 --> 00:35:12,840 Speaker 3: we're seeing even in the retail spending data this morning, 609 00:35:13,400 --> 00:35:16,120 Speaker 3: is that the overall softish landing the resilience of the 610 00:35:16,200 --> 00:35:21,359 Speaker 3: US economic data is probably also helping. So bottom line, 611 00:35:21,400 --> 00:35:24,080 Speaker 3: it's hard to disentangle these three effects. But I think 612 00:35:24,120 --> 00:35:27,240 Speaker 3: what you're seeing in the last few weeks with Triple c's, 613 00:35:27,320 --> 00:35:30,440 Speaker 3: it was particularly the last week, is mainly related to 614 00:35:31,120 --> 00:35:34,360 Speaker 3: telecommunications rallying, and that really is on the back of 615 00:35:34,560 --> 00:35:36,200 Speaker 3: M and A, which we think of as a little 616 00:35:36,200 --> 00:35:37,320 Speaker 3: bit more idiosyncratic. 617 00:35:38,920 --> 00:35:42,960 Speaker 2: So in the event or in the scenario of a 618 00:35:43,040 --> 00:35:48,239 Speaker 2: Trump win, have you guys explored what sectors would perform well, 619 00:35:48,280 --> 00:35:50,200 Speaker 2: will benefit in which ones would not. 620 00:35:51,560 --> 00:35:55,040 Speaker 3: Yeah, we think in investment grade, to kind of flip 621 00:35:55,080 --> 00:35:58,160 Speaker 3: the coin, we think a Trump win would be positive 622 00:35:59,040 --> 00:36:04,920 Speaker 3: for energy, both for in high yield for energy. We 623 00:36:04,960 --> 00:36:08,000 Speaker 3: think it would be positive for autos. And the other 624 00:36:08,040 --> 00:36:12,279 Speaker 3: one that shows up is really aerospace defense. And we 625 00:36:12,360 --> 00:36:18,000 Speaker 3: think essentially that's because overall, you know, the administration, the 626 00:36:18,040 --> 00:36:22,080 Speaker 3: Trump administration seems to be certainly pro energy independence. I 627 00:36:22,080 --> 00:36:27,240 Speaker 3: think at the margin production and increased production. A rollback 628 00:36:27,280 --> 00:36:29,759 Speaker 3: in some of the regulations is on net positive for 629 00:36:29,800 --> 00:36:34,440 Speaker 3: the energy sector, particularly the pipeline sector. On the auto sector, 630 00:36:34,480 --> 00:36:38,200 Speaker 3: as I say, it's more I think his stance essentially 631 00:36:38,239 --> 00:36:44,200 Speaker 3: that's more supportive of essentially internal combustion engine vehicles and 632 00:36:44,280 --> 00:36:48,399 Speaker 3: basically more profitable vehicles, particularly trucks, and then also his 633 00:36:48,480 --> 00:36:53,480 Speaker 3: defense against competition and imports, particularly from China. And then 634 00:36:53,560 --> 00:36:57,120 Speaker 3: lastly on aerospace defense. I think there's a perception, although marginal, 635 00:36:58,120 --> 00:37:01,360 Speaker 3: that he would be more supportive of defense spending. And 636 00:37:01,440 --> 00:37:04,640 Speaker 3: during his last term you saw the rate of spend 637 00:37:04,719 --> 00:37:09,960 Speaker 3: on defense that was certainly exceeding inflation and just a 638 00:37:10,400 --> 00:37:13,640 Speaker 3: broader spending. Harris is not necessarily I think negative, but 639 00:37:13,680 --> 00:37:17,040 Speaker 3: the Trump administration is seen as more supportive, and that 640 00:37:17,080 --> 00:37:19,719 Speaker 3: would be consistent also with traditionally what you see from 641 00:37:20,160 --> 00:37:24,160 Speaker 3: Republican candidates, which is there perceived to be incrementally more 642 00:37:24,160 --> 00:37:25,480 Speaker 3: constructive on defense. 643 00:37:26,520 --> 00:37:28,799 Speaker 1: With six weeks out that it's very uncertain, no one 644 00:37:28,840 --> 00:37:31,479 Speaker 1: really knows what's going to happen. But is credit credit 645 00:37:31,560 --> 00:37:35,280 Speaker 1: market is telling us anything. Is there a signal either way. 646 00:37:36,680 --> 00:37:39,040 Speaker 3: In terms of the economic outlook or in terms of 647 00:37:39,120 --> 00:37:43,399 Speaker 3: the election the election, No, I don't. I don't think 648 00:37:43,440 --> 00:37:48,400 Speaker 3: credit is telling us anything In particular other than I 649 00:37:48,440 --> 00:37:52,440 Speaker 3: do believe, you know, again that the sectors are trading 650 00:37:52,560 --> 00:37:55,040 Speaker 3: very much as we described, and so particularly over the 651 00:37:55,120 --> 00:37:59,000 Speaker 3: last week host the debate, you saw a number of 652 00:37:59,040 --> 00:38:02,920 Speaker 3: those sectors that I would say are winners in a 653 00:38:03,000 --> 00:38:08,160 Speaker 3: Trump administration victory. In November underperform right, we saw energy. 654 00:38:08,360 --> 00:38:11,080 Speaker 3: Part of that was on oil prices and weaker demand, 655 00:38:11,080 --> 00:38:13,600 Speaker 3: but I think part of that selection saw the same 656 00:38:13,640 --> 00:38:16,560 Speaker 3: thing with autos again not just an election narrative. So 657 00:38:17,200 --> 00:38:19,640 Speaker 3: I think the market, you know, we believe is trading 658 00:38:20,120 --> 00:38:23,680 Speaker 3: and is kind of separated winners and losers, you know, 659 00:38:23,760 --> 00:38:26,400 Speaker 3: and incrementally, we think the polls are pretty consistent with 660 00:38:26,440 --> 00:38:28,560 Speaker 3: the way credit is trading, which is, it seems like 661 00:38:29,160 --> 00:38:33,759 Speaker 3: there is a you know, a margin of and in 662 00:38:33,800 --> 00:38:38,480 Speaker 3: the polling as well. The support is certainly in the 663 00:38:38,560 --> 00:38:42,600 Speaker 3: Harris camp, but that is not necessarily by an overwhelming majority. 664 00:38:42,600 --> 00:38:46,120 Speaker 3: In our latest Evidence Lab poll essentially looks similar to 665 00:38:46,239 --> 00:38:49,280 Speaker 3: exactly what we wrote a few weeks ago in this report, 666 00:38:49,320 --> 00:38:51,440 Speaker 3: which is it's kind of a fifty four to fifty 667 00:38:51,520 --> 00:38:55,840 Speaker 3: five percent in favor of Harris and about fifty percent 668 00:38:55,880 --> 00:38:58,120 Speaker 3: in favor of Trump. 669 00:38:58,160 --> 00:39:01,000 Speaker 1: In terms of the polling, when you talk to global 670 00:39:01,040 --> 00:39:04,600 Speaker 1: portfolio managers, certainly those that aren't based in the US. 671 00:39:04,920 --> 00:39:06,400 Speaker 1: What do they make of all this? Are they selling 672 00:39:06,520 --> 00:39:08,960 Speaker 1: US assets because of the volatility and uncertainty or is 673 00:39:09,000 --> 00:39:11,880 Speaker 1: it just the cleanest dirty shirt out there. They have 674 00:39:11,960 --> 00:39:14,200 Speaker 1: no alternative but to be highly exposed to US credit 675 00:39:14,239 --> 00:39:14,960 Speaker 1: markets right now. 676 00:39:16,000 --> 00:39:19,520 Speaker 3: I think it depends on the client and the region 677 00:39:19,600 --> 00:39:21,680 Speaker 3: and the country, But I would just say in general, 678 00:39:22,320 --> 00:39:25,479 Speaker 3: you know, the narrative that win is winning I think 679 00:39:25,560 --> 00:39:29,719 Speaker 3: currently is you know, if that is your friend, the 680 00:39:29,800 --> 00:39:32,040 Speaker 3: trend is going to be your friend. Interest rates are 681 00:39:32,080 --> 00:39:35,960 Speaker 3: coming lower, and clients in a lot of different markets 682 00:39:36,000 --> 00:39:41,160 Speaker 3: either need diversification or they simply don't have enough net 683 00:39:41,239 --> 00:39:44,560 Speaker 3: supply of credit in corporate supply, which is a point 684 00:39:44,560 --> 00:39:47,480 Speaker 3: that you made at the top and the introduction for 685 00:39:47,520 --> 00:39:51,279 Speaker 3: the discussion. As a result, they are incentivized to look 686 00:39:51,320 --> 00:39:54,600 Speaker 3: at US credit and the nominal yields. While spreads are tight, 687 00:39:55,239 --> 00:39:58,120 Speaker 3: the nominal yields are still very attractive with IG just 688 00:39:58,160 --> 00:40:02,040 Speaker 3: below five percent and high yield with roughly a seven handle. 689 00:40:02,160 --> 00:40:05,440 Speaker 3: You know, that's a very good cupon that A lot 690 00:40:05,480 --> 00:40:09,760 Speaker 3: of clients are incentivized to look at, particularly with interest 691 00:40:09,880 --> 00:40:14,360 Speaker 3: rates going in a favorable direction. And particularly with credits 692 00:40:14,400 --> 00:40:16,960 Speaker 3: still suggesting, you know, to your point on Triple C's 693 00:40:17,000 --> 00:40:21,520 Speaker 3: outperforming over the last week or two, that the risk, 694 00:40:22,400 --> 00:40:27,400 Speaker 3: the overall risk in terms of markets and the downside 695 00:40:27,480 --> 00:40:28,600 Speaker 3: risk is fairly contained. 696 00:40:29,360 --> 00:40:31,200 Speaker 1: What though, if there's no clear result, we have to 697 00:40:31,239 --> 00:40:35,440 Speaker 1: weigh through months of legal battles. One side refuses to concede. Right, No, 698 00:40:35,520 --> 00:40:38,520 Speaker 1: we have another January sixth event to credit investors have 699 00:40:38,600 --> 00:40:40,279 Speaker 1: anywhere to go? And I mean, you know, we've we've 700 00:40:40,280 --> 00:40:42,319 Speaker 1: just been through a volatility event early in August, which 701 00:40:42,360 --> 00:40:44,759 Speaker 1: surprise a lot of people, the vics really the jump 702 00:40:44,920 --> 00:40:48,320 Speaker 1: credit got a bit of a beating. You know, surely 703 00:40:48,360 --> 00:40:49,400 Speaker 1: there must be some concern. 704 00:40:50,719 --> 00:40:53,480 Speaker 3: I mean, I might answer it differently. The three things 705 00:40:53,520 --> 00:40:57,239 Speaker 3: when we think about credit and what could disrupt what 706 00:40:57,440 --> 00:41:01,560 Speaker 3: feels like a goldilocks environment that's extended for much of 707 00:41:01,560 --> 00:41:04,120 Speaker 3: the year to your point, with exceptions of bouts of 708 00:41:04,200 --> 00:41:07,520 Speaker 3: volatility but very short lived. The August bout, as we 709 00:41:07,560 --> 00:41:11,680 Speaker 3: wrote for credit, the big spike to sixty five, credit 710 00:41:11,719 --> 00:41:16,240 Speaker 3: spreads were much more well behaved. I would say involved 711 00:41:16,280 --> 00:41:18,800 Speaker 3: was much lower in credit than it was in areas 712 00:41:18,920 --> 00:41:25,080 Speaker 3: like certainly equity volatility, but also currencies and also rates, 713 00:41:25,160 --> 00:41:27,640 Speaker 3: and so what disrupts that is three things. One is 714 00:41:27,760 --> 00:41:31,040 Speaker 3: unexpected tightening and monetary policy, but as I say, the 715 00:41:31,080 --> 00:41:34,080 Speaker 3: no landing risk in the market I think has fallen dramatically. 716 00:41:35,080 --> 00:41:39,239 Speaker 3: The second is a profit really a profit contraction or 717 00:41:39,280 --> 00:41:43,080 Speaker 3: a material profit or economic slowdown. And we talked a 718 00:41:43,080 --> 00:41:45,880 Speaker 3: lot about that over the last call it thirty odd minutes, 719 00:41:46,480 --> 00:41:48,520 Speaker 3: just not seeing a lot of signs that that is 720 00:41:48,600 --> 00:41:52,600 Speaker 3: starting to fester or matriculate into something larger than just 721 00:41:53,080 --> 00:41:58,200 Speaker 3: a slowing. And then the third is really systemic risk. 722 00:41:58,600 --> 00:42:00,800 Speaker 3: And in a lot of cases that that is credit 723 00:42:01,000 --> 00:42:07,160 Speaker 3: quality deterioration, and it generally is something that's obviously impacting 724 00:42:07,200 --> 00:42:11,440 Speaker 3: the banks in particular. And so if the first of 725 00:42:11,480 --> 00:42:14,040 Speaker 3: those three concerns is let's say, largely off the table, 726 00:42:14,640 --> 00:42:17,239 Speaker 3: then it really should be all eyes on growth and profits, 727 00:42:17,920 --> 00:42:20,040 Speaker 3: or it should be all eyes on systemic risk. But 728 00:42:20,200 --> 00:42:22,080 Speaker 3: you know, to circle back to some of the discussion 729 00:42:22,120 --> 00:42:25,319 Speaker 3: we had earlier away from private credit, and I don't 730 00:42:25,320 --> 00:42:27,600 Speaker 3: even think private credit is systemic, but just in terms 731 00:42:27,600 --> 00:42:32,359 Speaker 3: of signs of cracks, you know, we're we're we're diligently 732 00:42:32,560 --> 00:42:35,760 Speaker 3: looking for those signs, but I just don't think there's 733 00:42:36,120 --> 00:42:41,040 Speaker 3: a lot of evidence of systemic risk rising and rising, 734 00:42:41,640 --> 00:42:44,560 Speaker 3: you know, in a sinister way at this point. 735 00:42:45,360 --> 00:42:47,880 Speaker 1: Great stuff. Matt Mish, head of Credit Strategy at UBS. 736 00:42:47,920 --> 00:42:49,520 Speaker 1: It's been a pleasure having you on the Credit Edge. 737 00:42:49,560 --> 00:42:53,160 Speaker 1: Many thanks. Thank you, James and Julie Hung with Bloomberg Intelligence. 738 00:42:53,160 --> 00:42:55,239 Speaker 1: Thank you very much for joining us today. Thanks James, 739 00:42:55,600 --> 00:42:58,000 Speaker 1: we're even more analysis. Read all of Julie's great work 740 00:42:58,040 --> 00:43:00,560 Speaker 1: on the Bloomberg Terminal Bloomberg Intelli. This is part of 741 00:43:00,600 --> 00:43:03,479 Speaker 1: our research department with five hundred analysts and strategists working 742 00:43:03,480 --> 00:43:06,800 Speaker 1: across all markets. Coverage includes over two thousand equities and 743 00:43:06,840 --> 00:43:09,640 Speaker 1: credits and outlooks on more than ninety industries and one 744 00:43:09,719 --> 00:43:13,880 Speaker 1: hundred market indices, currencies and commodities. Please do subscribe to 745 00:43:13,880 --> 00:43:16,760 Speaker 1: the Credit Edge wherever you get your podcasts. We're on Apple, 746 00:43:17,000 --> 00:43:20,200 Speaker 1: Spotify and all other good podcast providers, including the Bloomberg 747 00:43:20,280 --> 00:43:23,640 Speaker 1: Terminal on b pod Goo. Give us a review, tell 748 00:43:23,640 --> 00:43:27,040 Speaker 1: your friends, or email me directly at jcrombieight at Bloomberg 749 00:43:27,120 --> 00:43:29,960 Speaker 1: dot net. I'm James Crombie. It's been a pleasure having 750 00:43:30,040 --> 00:43:49,920 Speaker 1: you join us again next week on the Credit Edge.