Speaker 1: Bruce Richards, co founder and CEO of Marathon Asset Management,
Speaker 1: and Bruce All the talk last week, of course was
Speaker 1: about the FED, what they didn't do, but more importantly
Speaker 1: what they're telegraphing and a market. When you look at
Speaker 1: what's happening in treasuries and you look what's happening inequities
Speaker 1: right now, it doesn't seem to think the Fed is
Speaker 1: going to hold rates as high as they seem to
Speaker 1: say they are.
Speaker 2: Well, you could say that, or then you can just
Speaker 2: listen to what the man had to say at the
Speaker 2: pressure last week when FED Chairman Palell showed us the
Speaker 2: dots and share with us that there will be only
Speaker 2: one easing this year, it's a very far cry from
Speaker 2: you know, six that was expected by the market coming
Speaker 2: into the year. So, yes, the inflation number is getting
Speaker 2: softer and trending down towards that you know two percent
Speaker 2: goal that everyone wants to see, and it's really good news.
Speaker 2: But here's the thing that I'm thinking about. If you're
Speaker 2: FED chairman Pale, are you going to ease so quickly
Speaker 2: when EPI markets are all time highs, job markets are
Speaker 2: incredibly strong and rob lost and economy is strong because
Speaker 2: if you were to ease, might it just inflate a
Speaker 2: little bit more the economy, equity markets and cause these
Speaker 2: animal spirits to come back and inflation to come back.
Speaker 2: And so they're going to go I think, very very
Speaker 2: slowly and very very cautiously. So you might expect one
Speaker 2: ease or two eases and then a long pause to
Speaker 2: see did it do anything to reinflate inflation?
Speaker 1: Yeah, but it is all this ends up being academic
Speaker 1: to a certain extent because we keep talking about what
Speaker 1: the Fed may or may not do. And the question
Speaker 1: I really I guess I really have is does it matter,
Speaker 1: right at least in the hearing now for the economy
Speaker 1: and the markets. I mean, twenty five basis points, even
Speaker 1: fifty basis points are easing.
Speaker 2: Does that have a material us? Economy is so strong,
Speaker 2: And the reason why it doesn't have a material impact
Speaker 2: is because the Fed really doesn't matter. That's really hard
Speaker 2: to say. No, they don't want to matter, given the
Speaker 2: amount of fiscal stimulus has happened, and the fiscal stimuluss
Speaker 2: has been so exorbit so huge, never before seen in
Speaker 2: a growth market like we've had, and yet it came
Speaker 2: through in trillions and trillions and trillions. We're talking about
Speaker 2: Infrastructure Act, the Chips Acted, and many other acts that
Speaker 2: at trillions of stimulus at the time the FED was tightening.
Speaker 2: So I would say that you're right about that. It
Speaker 2: is a bit academic because here we are at higher
Speaker 2: rates and economy is just fine. You have to stay
Speaker 2: bullish because the economy is strong, jobs are strong, stock market.
Speaker 2: We're going to see what's going to happen with second
Speaker 2: half earnings, and we're going to have record earnings in
Speaker 2: the third and fourth quarter. So i'd say stay bullish
Speaker 2: for equities and stay bullsh for credit as well, because
Speaker 2: a higher rate environment that we're seeing is really really
Speaker 2: bullsh for the bomb market. So let's get to that.
Speaker 3: Okay, So the higher equity market, economy is really good.
Speaker 2: What's the bankruptcy situation?
Speaker 3: Like, I mean, are we going to see the kind
Speaker 3: of bankruptcies that everyone was quort of anticipating or the
Speaker 3: weakness that we've been anticipating. What do you think?
Speaker 2: Well, first of all, I'd start with the faultrates. The
Speaker 2: faultrates are trending around four percent, and today about three
Speaker 2: quarters of these defaults don't come from bankruptcies. Don't come
Speaker 2: from Chapter eleven's They come from these LMA, these liability
Speaker 2: management exercises or what the rating agencies referred to as
Speaker 2: distrusted exchanges, where the creditors are crammed down they have
Speaker 2: to receive a lower interest, payment less principle or termed
Speaker 2: out debt, something that's adverse to them. Private equity is
Speaker 2: very smart. They're very smart to start with in buying
Speaker 2: companies and very smart when it comes to financial engineering.
Speaker 2: And what they figured out is it's really costly to
Speaker 2: put a company in bankruptcy, the business interruption cost, all
Speaker 2: the legal costs that you go through when the company's
Speaker 2: in bankruptcy for a year to two years, it's much
Speaker 2: better to extract a pound of flesh from the creditors.
Speaker 2: And with ninety percent of the brotherly syndicating loan market
Speaker 2: being covenant light, they can do that quite efficiently by
Speaker 2: taking assets, moving over to an unrestricted SOB, coming up
Speaker 2: with new money solutions from folks like Marathon, who will
Speaker 2: give the company, the private equity company, additional dollars right
Speaker 2: to make it through and at the expense of existing creditors.
Speaker 2: So what I would say is this is a very
Speaker 2: favorable environment for the credit markets because while ninety to
Speaker 2: ninety five percent of the markets can sustain these higher
Speaker 2: rates and you're getting paid the best yields in the generation,
Speaker 2: those other five to ten percent there's also a lot
Speaker 2: to do for us opportunities and credit managers that are
Speaker 2: providing capital solutions and these solutions for these distress exchanges.
Speaker 3: It's part of that going to be in commercial real
Speaker 3: estate because we haven't had that disaster that we've been
Speaker 3: waiting for.
Speaker 2: Commercial real estate is again like the pig for the python.
Speaker 2: It's a slow process that's being worked through. So the
Speaker 2: commercial real estate debt markets around six trillion dollars. About
Speaker 2: half of that is held within the banks, and about
Speaker 2: half of that is in the private credit sector between
Speaker 2: the reads and the CMBs markets and so forth. So
Speaker 2: the good news for commercial real estate is, and there's
Speaker 2: very good news, is valuations are stabilized. It's a big market,
Speaker 2: and there's lots of really attractive deals to do. That's
Speaker 2: the good news. The bad news is that there's about
Speaker 2: a trillion of this debt that's upside down where there's
Speaker 2: no value left and the creditors have to work through
Speaker 2: this process of workout, and so there's a big, huge
Speaker 2: maturity wall.
Speaker 1: I see the advantage of sort of doing these kind
Speaker 1: of non bankruptcies whatever we want to call them, refinancings
Speaker 1: or recapitalizations, if you will. Are we just kicking the
Speaker 1: can down the road? Are we actually making these companies
Speaker 1: healthier and in theory more sustainable.
Speaker 2: They're more sustainable because in that process there's going to
Speaker 2: be less debt, and the cram down itself usually relates
Speaker 2: to less debt in certain cases. In other cases, you're right,
Speaker 2: you're just kicking the can down the road and waiting
Speaker 2: for a day out in the future. But if the
Speaker 2: companies can then grow into those capital structures, that's a
Speaker 2: very positive thing. And so quite often with these exercises
Speaker 2: they actually can and sometimes you're right, they probably can't,
Speaker 2: and then the bankruptcy waits down the line a year
Speaker 2: or two years, you know, out in the future. But
Speaker 2: in most cases, these new money solutions have the colatteral
Speaker 2: that protects them, and so they're senior, they're secured, and
Speaker 2: they have the colatter with the covenants in place, and
Speaker 2: so it's really a good attractive way to put out money.
Speaker 2: And I look across Marathon's book of all these capital
Speaker 2: solutions are done and across industries, because private equity is
Speaker 2: invested across industries, and you're seeing this high debt burden
Speaker 2: not impact just one or two sectors, but really all industries.
Speaker 3: Bruce, how do you think about the election? How do
Speaker 3: you think about election risk right now?
Speaker 2: Well, look at the election risks we just saw in France, right,
Speaker 2: We're Macron called for an earlier election and he's still
Speaker 2: going to remain president, but you know, the parliament is
Speaker 2: up for grabs and it looks like his party's going
Speaker 2: to lose a bunch of votes, and votes you are
Speaker 2: going to go to the far right and far left.
Speaker 2: And what did the stock market vote for? Well, the
Speaker 2: CAC forty, which is the French stock market, was down
Speaker 2: six point two percent on that news, and French bonds,
Speaker 2: which are the odes, widen out twenty eight bases points
Speaker 2: relative to buns. That's the biggest gap in debt versus
Speaker 2: you know, our versus debt markets and equen markets versus
Speaker 2: our eque marketers is up that we've seen in like
Speaker 2: fifteen twenty years. So elections do matter, and we saw
Speaker 2: that right there, right, And so six of the seven
Speaker 2: G seven countries are up for election this year, and
Speaker 2: so it's a big year. You're right, it's a year
Speaker 2: of the election. Here in the United States, we have
Speaker 2: a big election and although we try to stay away
Speaker 2: from politics, this is going to affect markets in a
Speaker 2: very big way. So think about several things. Number one,
Speaker 2: the border itself. That's probably one of the top issues.
Speaker 2: And people don't want to talk about border because it
Speaker 2: doesn't relate to the comm me. Well, yes it does.
Speaker 2: The number one driver of employment over the last three
Speaker 2: years has been immigration. You take immigration out, jobs are flat,
Speaker 2: and meanwhile they've been growing by leaps and bounds, hundreds
Speaker 2: of thousands a month, you know, month after month for
Speaker 2: three years now. We've had this great employment growth and
Speaker 2: it's because of immigration. That's one factor. The second factor
Speaker 2: is regulatory and regulatory capture and everything related to you know,
Speaker 2: big government versus kind of pro business right. And so
Speaker 2: when you think about the former president who wanted to
Speaker 2: take a hands off approach to business versus the current administration,
Speaker 2: President Biden and FTC, which has been kind of anti
Speaker 2: these big M and A transactions, you'll see a very
Speaker 2: different outcome. The investment bankers and corporate CEOs are probably
Speaker 2: in lining up if the former president were elected to
Speaker 2: announce deals sometime going into next year, versus kind of
Speaker 2: hands off right now with certain these companies. And finally,
Speaker 2: what I'd say is taxes. It's a very different tax
Speaker 2: stand that President Bible would have versus versus the former
Speaker 2: president with respective corporate taxes as we all know, and
Speaker 2: what implications are there for companies as well as the
Speaker 2: impact to higher taxes for the wealthy. So very different
Speaker 2: policies and a lot on the line.
Speaker 1: A lot of people would say very different policies, But
Speaker 1: when you look at history, at some point it kind
Speaker 1: of balance itself out, at least from an investment perspective.
Speaker 1: Is there a point in time in this election cycle
Speaker 1: where it is appropriate to actually act on the potential
Speaker 1: for what could happen? Do you wait till after the election,
Speaker 1: do you front run it, what do you do well?
Speaker 2: One of the greatest trades of this last fifteen twenty
Speaker 2: years is when President Obama was elected and knowing his
Speaker 2: stance on healthcare and buying into healthcare companies in advance
Speaker 2: of him taking office, and that had legs that took
Speaker 2: us from years and years and years on and it's
Speaker 2: still working to today based upon Obamacare and all the
Speaker 2: policies and measures that we're put in place. So so yes,
Speaker 2: I think these implications of what one administration, our current
Speaker 2: administration might take versus the former administration might take is
Speaker 2: very different, and we'll have implications for for sectors and
Speaker 2: for companies specifically.
Speaker 3: One thing that seems to stay the same in all
Speaker 3: the research that I read is that the budget deficit,
Speaker 3: the physcal deficit's going to grow, like no matter who's
Speaker 3: in the White House, there's me more money in different
Speaker 3: ways coming in.
Speaker 2: Do you think that's that effect?
Speaker 1: Is that true?
Speaker 2: Do you look at it like that?
Speaker 3: Is there a long term behind your place?
Speaker 2: It didn't used to be the case, but now I
Speaker 2: think it more is the case and what's baked in,
Speaker 2: and so I wouldn't disagree with that at all. Now,
Speaker 2: is you know, rather disappointed, you know to see how
Speaker 2: much the deficit grew during the Republican administration because I'm
Speaker 2: all for you know, fiscal austerity or or you know,
Speaker 2: fiscal strength and how it's you know, been relatively indifferent.
Speaker 2: But what I would say is I think we'd have
Speaker 2: slightly bigger depths with the current administration that we would
Speaker 2: with the form administration, because I think the former administrations
Speaker 2: learned from that and wants to downsize government and wants
Speaker 2: to downsize a lot of the benefits that so many
Speaker 2: folks have enjoyed in these last four years. And I
Speaker 2: think there actually might be a little greater than what
Speaker 2: the commentators are stating and versus what you've seen in
Speaker 2: these last few years.
Speaker 1: We'll only have about thirty seconds left. But on that point, though,
Speaker 1: are we focusing too much on the president himself? I mean,
Speaker 1: I think about the elections that we just had overseas
Speaker 1: that was less about the man at the top and
Speaker 1: more about the legislatures or the parliaments, And I wonder
Speaker 1: if we're going to find ourselves in the same situation
Speaker 1: here in the US, where who's in the White House
Speaker 1: is going to matter less than what the complexion.
Speaker 2: Of conquers point. Executive order will be the order of
Speaker 2: the day, more executive or more executive order than that
Speaker 2: we've ever seen going forward, because that rubicon has already
Speaker 2: been crossing.
Speaker 1: Okay, all right, there's a great conversation. Always great to
Speaker 1: have you, Richards. He's the CEO of Marathon Asset Management,