WEBVTT - Surveillance: Transition Period with Zelter 0:00:05.120 --> 0:00:07.119 This is the Bloomberg Surveillance Podcast. 0:00:07.160 --> 0:00:11.080 I'm Tom Keene, along with Jonathan Farrell and Lisa Abramowitz. 0:00:11.280 --> 0:00:15.760 Join us each day for insight from the best and economics, geopolitics, 0:00:15.760 --> 0:00:20.720 finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, 0:00:20.960 --> 0:00:25.400 Spotify and anywhere you get your podcasts, and always on 0:00:25.520 --> 0:00:29.840 Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App. 0:00:30.080 --> 0:00:32.319 Jim Zelter with us is just starting to walk out 0:00:32.320 --> 0:00:35.040 of the room. Called president of Paul Credit Card Management. 0:00:35.720 --> 0:00:38.640 He joins us now with decades of experience and fixed 0:00:38.680 --> 0:00:40.440 on John, why don't you bring in a gentleman with 0:00:40.479 --> 0:00:44.120 an overview of this crisis or non crisis that we're 0:00:44.159 --> 0:00:44.639 in right now? 0:00:44.680 --> 0:00:47.319 The co president at Apollo Asset Management joins us right now. Jim, 0:00:47.360 --> 0:00:49.360 good morning, Good morning, all great to catch up. I 0:00:49.360 --> 0:00:51.120 want to start here. Can we just start with the 0:00:51.200 --> 0:00:55.400 days after RECVB collapses. You've raised all this capital. This 0:00:55.520 --> 0:00:59.240 is like your moment to make things happen. How difficult 0:00:59.280 --> 0:01:00.000 was it to deploy it? 0:01:01.520 --> 0:01:01.720 Well? 0:01:01.800 --> 0:01:05.160 I think you had to differentiate between a deposit crisis 0:01:05.200 --> 0:01:07.280 over the first few days at Thursday and over the 0:01:07.280 --> 0:01:10.040 weekend when the government took its action, and then you 0:01:10.120 --> 0:01:12.360 really were talking to a lot of borrowers and a 0:01:12.640 --> 0:01:16.480 lot of institutions that needed help. So that week we 0:01:16.560 --> 0:01:19.360 did a very large transaction and helped out pack West. 0:01:20.440 --> 0:01:22.759 But I think what you're really talking about this morning 0:01:22.800 --> 0:01:28.679 here is a deposit crisis evolving into a business model question, 0:01:29.120 --> 0:01:33.040 and that's really where the overall evolution of the markets are. 0:01:33.080 --> 0:01:35.440 But certainly, you know, we've been very busy. We've been 0:01:35.520 --> 0:01:37.679 very busy on all sides of our business, and there's 0:01:37.720 --> 0:01:40.840 no doubt that this withdrawal of capital, it's not a 0:01:40.840 --> 0:01:44.200 credit crunch, it's not an embulent market, but there's a 0:01:44.240 --> 0:01:47.840 transition with a higher cost of capital in debt financing 0:01:47.840 --> 0:01:48.760 across all the markets. 0:01:48.880 --> 0:01:51.160 Let's stick deeper into that. Can you describe the spaces 0:01:51.240 --> 0:01:54.640 right now where you expect traditional banks to retrench from, 0:01:55.120 --> 0:01:57.320 to move away, to move back from, and where you 0:01:57.320 --> 0:01:59.840 think there's opportunities for you to step in even more. 0:01:59.680 --> 0:02:02.760 Sure, you know, as we've had this conversation about private 0:02:02.760 --> 0:02:06.000 credit over the last several years, last decade, it's really 0:02:06.040 --> 0:02:09.680 been for the headlines focused on sponsor finance, which is 0:02:09.760 --> 0:02:14.200 non investment grade. The real opportunity is the regional bank 0:02:14.280 --> 0:02:17.600 model really evolves and their cost of financing is up 0:02:17.639 --> 0:02:21.600 quite a bit higher. There's a variety of asset based strategies, 0:02:22.040 --> 0:02:24.720 whether it's in the commercial mortgage space, whether it's in 0:02:24.720 --> 0:02:28.160 the resume mortgage space, whether it's in solar finance, whether 0:02:28.200 --> 0:02:32.239 it's in aircraft finance, where the regional banks or traditional 0:02:32.280 --> 0:02:36.120 banking models, those were interesting businesses. The business that we 0:02:36.160 --> 0:02:38.960 bought out of Credit Swiss, the Atlas finance business, which 0:02:39.000 --> 0:02:43.520 is really an abs warehouse businesses. Those businesses typically the 0:02:43.639 --> 0:02:48.120 underlying risk is investment grade, and for the most part, 0:02:48.480 --> 0:02:51.800 because of either sovereignty two in Europe or other rules, 0:02:52.120 --> 0:02:55.639 those are just become much more capital intensive and capital 0:02:55.680 --> 0:02:58.440 consuming for the banks. And so there's a variety of 0:02:58.440 --> 0:03:03.120 those asset classes that I mentioned that's like forty trillion 0:03:03.560 --> 0:03:07.080 versus a ten trillion private credit opportunity in the US. 0:03:07.360 --> 0:03:10.000 But Jim, what I didn't hear you mentioned was just 0:03:10.120 --> 0:03:13.800 a pure unsecured, revolving loan of credit, which is basically 0:03:13.919 --> 0:03:16.880 what a lot of these smaller regional banks delivered to 0:03:17.040 --> 0:03:20.360 smaller companies. Is that a no go area at this point. 0:03:20.520 --> 0:03:25.480 No, I think listen those are smaller, idiosyncratic corporate loans 0:03:25.600 --> 0:03:28.560 and someone needs to fill the gap in that. And 0:03:28.600 --> 0:03:31.000 the reality is the cost of financing has gone up 0:03:31.000 --> 0:03:33.280 to to four hundred basis points in the last month, 0:03:33.600 --> 0:03:36.839 So those companies are getting that financing. You've not seen 0:03:36.880 --> 0:03:40.080 it yet in the earnings, but certainly that's where we 0:03:40.160 --> 0:03:44.120 believe this whole idea of tighter financial conditions. It's that 0:03:44.280 --> 0:03:47.520 exact company that you're talking about that's probably having a 0:03:47.560 --> 0:03:50.560 more challenging period of time right now securing that financing. 0:03:50.720 --> 0:03:53.160 How does that change the equation for you when you 0:03:53.240 --> 0:03:56.520 decide what size company you want to invest in. The bigger, 0:03:56.640 --> 0:04:00.360 more stable, better access to financing going to have and 0:04:00.400 --> 0:04:03.800 even better profile versus an even worse one for some 0:04:03.800 --> 0:04:04.600 of the smaller ones. 0:04:04.640 --> 0:04:09.040 Sure, typically at Apollo, if the capital is coming from 0:04:09.080 --> 0:04:13.320 our balance sheet, we're usually talking to companies with companies 0:04:13.600 --> 0:04:17.760 and having ebada less more than fifty million dollars. That 0:04:17.880 --> 0:04:21.960 being said, we have a portfolio of sixteen portfolio finance companies, 0:04:22.400 --> 0:04:25.040 of which the CS business now called Atlas is one 0:04:25.080 --> 0:04:28.120 of them, and they'll range in the companies that they 0:04:28.160 --> 0:04:32.120 financed that that's three thousand employees, about eighty billion of assets. 0:04:32.520 --> 0:04:36.200 Those companies will lend to companies anywhere from ten to 0:04:36.240 --> 0:04:39.599 fifteen million in revenue, so much smaller, much deeper and broader. 0:04:39.680 --> 0:04:40.720 Are they as attractive? 0:04:41.120 --> 0:04:44.520 Well, what you've seen really across the board, let's just 0:04:44.560 --> 0:04:47.280 talk about commercial real estate. A lot of conversations about that. 0:04:47.760 --> 0:04:50.120 Commercial real estate finance for the most part, like a 0:04:50.160 --> 0:04:53.760 single a CMBs piece of paper that was three point 0:04:53.760 --> 0:04:56.559 fifty when I came out here six months ago, that's 0:04:56.600 --> 0:05:00.520 six seventy five today. It's just math spread of widen 0:05:00.600 --> 0:05:02.800 from one seventy five to three fifty over. 0:05:03.000 --> 0:05:05.360 Yeah, I noticed in Washington to day Brookfield giving back 0:05:05.400 --> 0:05:07.560 two properties they can't make a go of. Well, I 0:05:07.600 --> 0:05:10.400 mean the commercial real estate thing is tangible. I want 0:05:10.440 --> 0:05:12.279 to look at the level of the word the D 0:05:12.360 --> 0:05:14.960 word distress that's out there right now, and I look 0:05:15.000 --> 0:05:17.960 at it just in a basic accounting standard. How blind 0:05:17.960 --> 0:05:20.559 are people like you right now off fasby one fifty 0:05:20.640 --> 0:05:23.920 seven and you can't mark the market depth that's out there? Now, 0:05:23.960 --> 0:05:26.640 what's the opacity that's out there in the system? 0:05:26.800 --> 0:05:28.480 Well, I think I think time If you look at 0:05:28.480 --> 0:05:31.679 the overall leverage finance market, it's a couple trillion dollar market. 0:05:31.680 --> 0:05:34.440 You've got to assume defaults next year, probably going up 0:05:34.440 --> 0:05:36.960 to the mid high forest of five percent, right, So 0:05:37.080 --> 0:05:40.480 that's about one hundred million of a challenge credit if 0:05:40.480 --> 0:05:42.840 you would. In the forward calendar, if you look at 0:05:42.839 --> 0:05:45.000 commercial real estate, you got a trillion and a quarter 0:05:45.040 --> 0:05:46.720 that needs to get financed in the next twelve to 0:05:46.720 --> 0:05:50.040 eighteen months. So there's no doubt that there's a portion 0:05:50.120 --> 0:05:52.320 of that will But you're not you're not seeing broad 0:05:52.400 --> 0:05:55.799 distressed yet. You're in this you're in the transition period. 0:05:56.160 --> 0:05:59.240 We had fourteen years of low interest rates and the 0:05:59.320 --> 0:06:02.920 real impact act on valuations. It takes a while to 0:06:02.960 --> 0:06:06.400 filter through. You're seeing some evidence in the secondary markets. 0:06:06.440 --> 0:06:10.680 In the pe secondary market, those names are trading between 0:06:10.720 --> 0:06:13.840 the high seventies and low eighties. Credit secondaries are in 0:06:13.880 --> 0:06:17.920 the high eighties, low nineties, VC secondaries in the fifties, 0:06:18.240 --> 0:06:20.960 So you're seeing it in some markets. But this idea 0:06:21.080 --> 0:06:25.680 of tighter financial conditions, this takes three, six, twelve months 0:06:25.720 --> 0:06:28.400 to really evolve. And as you talk later on today, 0:06:28.440 --> 0:06:31.000 you know you have your big banks reporting today. It 0:06:31.040 --> 0:06:33.760 will be very interesting to see, you know, on the 0:06:33.839 --> 0:06:37.200 regional banks, they went from a deposit crisis to a 0:06:37.360 --> 0:06:40.360 question of their economic business model, how do they make 0:06:40.440 --> 0:06:43.520 money long term? And you know the other side of 0:06:43.560 --> 0:06:46.760 that is, we feel that our business model has only 0:06:46.760 --> 0:06:50.400 gotten enhanced. We have long term liabilities and now those 0:06:50.480 --> 0:06:53.640 ten year liabilities in our business. It allows us to 0:06:53.680 --> 0:06:56.200 be a robust, stable lender in a period right now 0:06:56.240 --> 0:06:57.800 of flux and conversation. 0:06:58.040 --> 0:07:01.040 The heart of the math to me and the Brickfield 0:07:01.120 --> 0:07:03.480 article from Bloomberg today is just definitive. At the very 0:07:03.480 --> 0:07:06.320 bottom of it. In the last paragraph, year over year, 0:07:06.440 --> 0:07:09.400 the monthly payments on a blended piece of sub properties 0:07:09.440 --> 0:07:12.000 went from three hundred and thirty gazillion out to eight 0:07:12.160 --> 0:07:14.720 hundred and eighty. And the translation of this to me 0:07:14.960 --> 0:07:17.480 for all of our listeners and viewers is in the 0:07:17.520 --> 0:07:21.760 new math, somebody's got to put up cash to do 0:07:21.800 --> 0:07:24.720 the restructure. This is a whole new world for a 0:07:24.760 --> 0:07:25.320 lot of people. 0:07:25.400 --> 0:07:29.240 Jim, it's called cost of For a decade plus and 0:07:29.280 --> 0:07:32.040 I mentioned to you all before, equity was the great 0:07:32.080 --> 0:07:37.280 beneficiary of low cost that really subsidized the equery return exactly. 0:07:37.400 --> 0:07:41.480 Now we've had a complete paradigm shift and it's just math. 0:07:41.520 --> 0:07:44.080 You said it earlier. The funding cost. When you hear 0:07:44.160 --> 0:07:46.320 that there's a credit card out there you're making four 0:07:46.360 --> 0:07:48.760 percent on right now, or assuming not a credit card 0:07:48.760 --> 0:07:51.920 but a bank deposit program, that's just a cost of 0:07:51.920 --> 0:07:55.360 good sold and it's a higher cost for somebody, the 0:07:55.440 --> 0:07:59.800 consumers the great beneficiary. But back to our model, we 0:07:59.840 --> 0:08:02.560 are are looked at, you know, the the American economy. 0:08:02.560 --> 0:08:05.160 We've gone through a really tough quarter, but you know, 0:08:05.280 --> 0:08:07.760 four percent of the population, fifty percent of the financial 0:08:07.760 --> 0:08:11.600 assets in the world, we have the envy financial markets 0:08:11.600 --> 0:08:14.000 of the world. And this isn't This is we were 0:08:14.040 --> 0:08:16.960 evolving right now in a period of you know, three 0:08:16.960 --> 0:08:19.160 to nine months, but up with a higher cost of 0:08:19.200 --> 0:08:21.400 capital that's just flooting through the system. 0:08:21.520 --> 0:08:23.480 You in a great spot. That's what we're describe in 0:08:23.960 --> 0:08:25.720 Is that because of the way the cycle is evolving, 0:08:25.960 --> 0:08:28.000 or is it more structural in nature, because it sounds 0:08:28.000 --> 0:08:28.600 a little bit more like. 0:08:28.600 --> 0:08:30.600 The last secular it's secular. 0:08:30.840 --> 0:08:32.600 You know, if you take the last as we've talked before, 0:08:32.600 --> 0:08:35.120 if you take the last twenty five thirty years and 0:08:35.160 --> 0:08:38.640 the evolving role of financial services around the globe, really 0:08:38.760 --> 0:08:40.640 led in the US, but following on in Europe and 0:08:40.640 --> 0:08:42.640 a little bit in Asia as well. You know, there's 0:08:42.679 --> 0:08:46.000 no doubt that that folks that are able to be 0:08:46.040 --> 0:08:48.840 able to operate with the ability that we are to 0:08:48.880 --> 0:08:52.560 really bring the proper liabilities to the equation. You know, 0:08:52.600 --> 0:08:57.160 our investors are sovereigns, institutions, pension funds from around the globe. 0:08:57.200 --> 0:08:59.199 They're the ones that can make the five and ten 0:08:59.280 --> 0:09:03.240 year commitments along with retirement savers. Those are the folks 0:09:03.320 --> 0:09:05.679 that should be making these loans. I mean, the digital 0:09:05.679 --> 0:09:08.160 world has really changed the banking market and there's a 0:09:08.160 --> 0:09:10.600 lot of folks that are a lot more knowledgeable about 0:09:10.600 --> 0:09:14.160 the traditional banking system. But again, we just have a 0:09:14.200 --> 0:09:17.040 lot more tools in our toolbox were able to provide 0:09:17.080 --> 0:09:19.080 a lot more capital. As I mentioned the pac West 0:09:19.080 --> 0:09:22.760 solution that happened basically in three days, a billion four 0:09:22.840 --> 0:09:25.480 facility for them that really got them through a pretty 0:09:25.480 --> 0:09:29.200 tough liquidity situation, but was a high quality assets that 0:09:29.240 --> 0:09:31.959 were looked through investment grade. And if you do that, 0:09:32.200 --> 0:09:35.400 you know, having those solutions, your your doorbell is going 0:09:35.440 --> 0:09:36.560 to ring quite a bit these days. 0:09:36.640 --> 0:09:39.040 How much cash do you have in anticipation of the 0:09:39.080 --> 0:09:39.800 doorbell ringing? 0:09:40.280 --> 0:09:42.960 You know, I think our latest numbers as a last 0:09:43.000 --> 0:09:46.319 quarter probably an excess of fifty billion a dry powder. 0:09:46.640 --> 0:09:50.880 Oh well, you know, I'll leave it to you. I'll 0:09:50.960 --> 0:09:52.319 leave it to you guys to talk about that. But 0:09:52.800 --> 0:09:54.800 there's no doubt that investors from Ron on the globe. 0:09:54.920 --> 0:09:57.240 I was an agent last week, and the idea of 0:09:57.280 --> 0:10:01.199 really exporting yield around the globe. You know, they've had 0:10:01.280 --> 0:10:04.319 very low rates for a decade plus. Obviously a lot 0:10:04.360 --> 0:10:07.079 of conversations about what's going on in Japan right now 0:10:07.120 --> 0:10:10.240 with y CCO curve control and how do they transition 0:10:10.320 --> 0:10:12.240 off that. I mean, I think that's a really interesting 0:10:12.240 --> 0:10:14.760 story for the latter half of the year. But the 0:10:14.840 --> 0:10:17.760 reality is we're in an evolving market in the States. 0:10:18.120 --> 0:10:21.920 What was a deposit liquidity crisis is now a evolution 0:10:22.000 --> 0:10:24.680 of their business model, and really it's going to be 0:10:24.720 --> 0:10:26.520 a period of tougher financial conditions. 0:10:26.679 --> 0:10:29.920 Let's finish on this. You describe a process you're expecting 0:10:29.920 --> 0:10:31.800 tougher financial conditions. I just want to build on the 0:10:31.880 --> 0:10:34.680 question Lisa asked. I hate to ask the one question, 0:10:35.160 --> 0:10:38.120 when do you expect that doorball just to be NonStop ringing, 0:10:38.200 --> 0:10:40.600 because that's what it sounds like you're looking for. 0:10:41.200 --> 0:10:43.560 I don't I think by the time that actually happens 0:10:43.760 --> 0:10:46.920 all the activities occur. I think it's almost too late, Jonathan. 0:10:47.120 --> 0:10:49.720 I think you really need to be in the markets 0:10:49.760 --> 0:10:52.520 every single day. The reality is, you know, there was 0:10:52.559 --> 0:10:54.959 some headlines last week the private credit took a step 0:10:55.000 --> 0:10:58.360 back because of one financing. The reality is the m 0:10:58.360 --> 0:11:00.679 and A market's a little bit quieter right now, and 0:11:00.920 --> 0:11:02.319 you know LP firms want to do so. 0:11:02.400 --> 0:11:03.920 Am I going to make some news this morning? I'm 0:11:03.960 --> 0:11:06.400 looking for a Western Alliance transaction. Would you like to 0:11:06.400 --> 0:11:07.720 break that news here this morning? 0:11:07.920 --> 0:11:10.360 I'll let others talk about that one. I got my 0:11:10.400 --> 0:11:11.079 hands full. 0:11:11.840 --> 0:11:14.560 Jim, this was fun, sir, Thank you, Thank you very much. 0:11:14.600 --> 0:11:27.600 Jim's out to the of Apollo Asset Management with us 0:11:27.600 --> 0:11:30.280 around the table, and please to say Dan Greenhouse, chief 0:11:30.280 --> 0:11:34.000 strategist at Solace Alternative Asset Management. Dan, welcome to the show. 0:11:34.080 --> 0:11:35.160 Good morning, Thank you, sir. 0:11:35.480 --> 0:11:37.800 Are we learning that the bank stress of the last 0:11:37.800 --> 0:11:41.040 month or so is more idiosyncratic than systemic or is 0:11:41.080 --> 0:11:41.839 it still too early? 0:11:42.559 --> 0:11:45.439 I don't think there was really In my opinion, I 0:11:45.480 --> 0:11:47.120 don't think there was a debate from the beginning that 0:11:47.200 --> 0:11:52.920 this was not idiosyncratic. Clearly, there were specific factors to 0:11:53.000 --> 0:11:57.560 Silicon Valley specifically, but Signature as well that I never 0:11:57.640 --> 0:12:01.200 really found were sister wide, so to speak. That's not 0:12:01.240 --> 0:12:04.920 to say that the unrealized losses throughout the banking system 0:12:04.960 --> 0:12:05.719 isn't a real thing. 0:12:05.800 --> 0:12:06.199 It is. 0:12:06.240 --> 0:12:07.080 We know that it is. 0:12:07.480 --> 0:12:09.680 But the I mean to give you the best, the 0:12:09.679 --> 0:12:12.520 best that I could give you. Silicon Valley Bank has 0:12:12.559 --> 0:12:15.240 seventeen branches and somewhere around one hundred and fifty thousand 0:12:15.280 --> 0:12:18.400 checking accounts. Fifth Third, which is a comparably sized bank 0:12:18.679 --> 0:12:23.000 deposit wise, has eleven hundred branches and like a million accounts. 0:12:23.040 --> 0:12:25.800 It's a different base, it's a different thing entirely so, 0:12:25.800 --> 0:12:27.880 so we were never particularly concerned about there being a 0:12:27.920 --> 0:12:30.320 banking crisis, if you will. Certainly there's an issue that 0:12:30.360 --> 0:12:32.800 has to be dealt with, but I don't know that 0:12:32.800 --> 0:12:35.160 that hearing that said, I don't know that hearing from 0:12:35.240 --> 0:12:39.240 JP Morgan and Wells Fargo tells me what Western's going 0:12:39.280 --> 0:12:41.160 to tell me after the close. That's much more consequential. 0:12:41.280 --> 0:12:43.160 We're still trying to gauge to what extent we're going 0:12:43.160 --> 0:12:45.480 to see a turn and get lending standards and how 0:12:45.520 --> 0:12:49.560 contained macroeconomic spillovers will be. Have you drawn any conclusions 0:12:49.559 --> 0:12:50.280 on that just yet. 0:12:50.520 --> 0:12:50.760 Yeah. 0:12:51.120 --> 0:12:53.080 Listen, the short answer to any question like that is 0:12:53.200 --> 0:12:56.920 a few basis points off GDP, I mean everywhere. I 0:12:56.920 --> 0:12:58.839 don't have any particularly new news on this. We know 0:12:58.960 --> 0:13:01.280 lending standards have been tight and going into this, we 0:13:01.320 --> 0:13:03.920 assume lending standards will tighten further coming out of it. 0:13:04.080 --> 0:13:06.160 And we also know that, on balance, the level of 0:13:06.200 --> 0:13:09.720 tightening that we've seen is traditionally associated with worse economic 0:13:09.760 --> 0:13:13.040 outcomes than better economic outcomes. I don't think that narrative 0:13:13.120 --> 0:13:15.600 is likely to be changed at all from the large 0:13:15.640 --> 0:13:17.960 banks telling me on balance that loans are continuing to 0:13:18.000 --> 0:13:20.280 expand there's a lag, and ultimately I think it ends 0:13:20.320 --> 0:13:22.079 up weighing on GDP. By someone, we call it three 0:13:22.200 --> 0:13:24.079 tents or four tenths of GDP, something like that. 0:13:24.200 --> 0:13:26.400 Dan, you're strategist to a hedge fund, you're living the 0:13:26.440 --> 0:13:31.080 billion's dream. Do we overweight what we think are the 0:13:31.120 --> 0:13:33.840 bets of hedge funds If we're trying to establish a 0:13:33.840 --> 0:13:36.440 strategy that's longer than three hours, if we're trying to 0:13:36.559 --> 0:13:39.680 establish a nine months or a three year strategy, is 0:13:39.679 --> 0:13:44.120 there value in measuring the long short bets of your world? 0:13:44.679 --> 0:13:49.000 So We are not active traders. If you will, we've 0:13:49.040 --> 0:13:50.600 owned positions for ten. 0:13:50.559 --> 0:13:52.320 Years, say ten minutes. 0:13:52.440 --> 0:13:54.600 No, No, that's not the world in which we live. 0:13:54.760 --> 0:13:58.600 I think certainly actively trading hedge, actively trading hedge funds 0:13:59.040 --> 0:14:01.640 that flip position on a daily or is there value to. 0:14:01.600 --> 0:14:03.760 That information is transfixed by it? 0:14:03.840 --> 0:14:06.680 Well, yes, in the sense that momentum strategies are going 0:14:06.720 --> 0:14:09.280 to be derived from that trading activity and are going 0:14:09.320 --> 0:14:11.960 to be related to that activity. But we're, as I mentioned, 0:14:12.080 --> 0:14:14.360 a much more long term focused investor. When we take 0:14:14.360 --> 0:14:17.640 a position, oftentimes it's to control of the company. We 0:14:17.679 --> 0:14:20.440 are the second or third largest holder of several companies. 0:14:21.280 --> 0:14:23.360 Other times we'll get in and out if the thesis 0:14:23.440 --> 0:14:25.720 changes in let's say a month, but we are not 0:14:25.920 --> 0:14:28.560 actively participating in the market. Is there value in those 0:14:28.600 --> 0:14:31.520 types of strategies, Sure, but I think it's value for 0:14:31.560 --> 0:14:35.280 a certain specific type of investor, not our client or 0:14:35.320 --> 0:14:36.640 our investivation, so to speak. 0:14:36.760 --> 0:14:39.640 So just pushing against some of the bearishness out there 0:14:39.840 --> 0:14:42.760 has been the credit markets that you really focus on 0:14:42.880 --> 0:14:45.080 has been some of these longer term bets where people 0:14:45.120 --> 0:14:47.600 are looking more for opportunity than they're worried about losses. 0:14:47.640 --> 0:14:50.600 And you're seeing that under the hood pretty much across 0:14:50.600 --> 0:14:53.360 the board. Do you make of that that people still 0:14:53.400 --> 0:14:55.480 do have confidence that this is going to be some 0:14:55.520 --> 0:14:57.400 sort of shallow recession, that we're going to merge on 0:14:57.440 --> 0:14:59.960 the other side with higher rates that you want to capitalize. 0:15:00.160 --> 0:15:01.280 Now, you know, I know. 0:15:01.280 --> 0:15:03.400 Everyone says this is going to be a shallow recession, 0:15:03.840 --> 0:15:06.600 and I find that statement to be more a function 0:15:06.680 --> 0:15:10.080 of comfort than analysis. And what I mean by that 0:15:10.200 --> 0:15:12.760 is it's very easy to say this is going to 0:15:12.760 --> 0:15:15.920 be a shallow recession because they're forget career risk. The 0:15:16.080 --> 0:15:18.200 likelihood that you're wrong in saying, well, it's going to 0:15:18.240 --> 0:15:21.600 be something more than that is quite high. Now that said, 0:15:21.640 --> 0:15:23.560 we also, and I don't want to speak for you guys, 0:15:23.600 --> 0:15:25.720 I apologize if I'm saying this wrong, But how many 0:15:25.720 --> 0:15:27.480 times do we follow up and say, well, what do 0:15:27.520 --> 0:15:29.280 you mean by a software session? Well, I think we 0:15:29.280 --> 0:15:31.800 can define this in terms of basis points moves in 0:15:31.840 --> 0:15:34.320 the unemployment rate. If you think the unemployment rate's going 0:15:34.400 --> 0:15:37.160 up by one percent, yeah, that's probably something resembling a 0:15:37.160 --> 0:15:40.680 shallow recession. But as we all know, there's really no 0:15:40.800 --> 0:15:42.800 instance in which the unemployment rate goes up by one 0:15:42.800 --> 0:15:45.440 percent and then stops. It's quite often a much more 0:15:45.480 --> 0:15:46.680 accelerated move from there. 0:15:46.880 --> 0:15:48.840 It feels like we've been in this purgatory for a while. 0:15:48.960 --> 0:15:50.440 We're they're sort of on the one hand. 0:15:50.520 --> 0:15:53.440 On the other hand, and this lack of any clarity whatsoever. 0:15:53.680 --> 0:15:56.280 When do you get clarity of what we're heading into? 0:15:57.040 --> 0:16:01.000 Yeah, you and everyone else, I think that's obviously the 0:16:01.040 --> 0:16:03.320 top question of the day. I would have told you 0:16:03.320 --> 0:16:05.520 at the start of twenty twenty two that by the 0:16:05.560 --> 0:16:08.320 middle of twenty twenty three we will be in something 0:16:08.600 --> 0:16:11.080 or close to something resembling a recession. Now Here we 0:16:11.120 --> 0:16:13.720 are in the middle lish of twenty twenty three, and 0:16:13.760 --> 0:16:16.480 I don't think we're anywhere close to a recession. I 0:16:16.560 --> 0:16:20.360 have been in public bearish on risk assets over the 0:16:20.360 --> 0:16:23.040 course of that time. I more or less remain so now, 0:16:23.080 --> 0:16:26.720 although there's some cavegats to that. But it's remarkable the 0:16:26.760 --> 0:16:29.080 way that the economy has performed in the face of 0:16:29.160 --> 0:16:31.800 such rapid increases, Which brings up something that you guys 0:16:31.840 --> 0:16:34.680 were talking about yesterday. I think Tom mentioned the IMF 0:16:34.720 --> 0:16:37.360 report and the world economic outlook, and the discussion of 0:16:37.360 --> 0:16:41.000 the natural rate of interest. Excuse me and I think 0:16:41.040 --> 0:16:42.720 there is a lot that we don't know about the 0:16:42.720 --> 0:16:46.080 current environment. But with respect to the natural rate of interest, 0:16:46.080 --> 0:16:48.640 I think it's fair to say that whatever we thought 0:16:48.640 --> 0:16:51.360 the natural rate of interest was, or that the level 0:16:51.360 --> 0:16:53.600 of interest rates that balances supply and demand throughout the 0:16:53.640 --> 0:16:56.720 economy is higher than we previously thought, which means what 0:16:56.800 --> 0:16:59.800 we thought the economic damage, so to speak, would be 0:16:59.840 --> 0:17:02.280 from five hundred basis points of rate hikes is not 0:17:02.400 --> 0:17:03.920 quite what we thought it would have been. It might 0:17:03.960 --> 0:17:05.399 take six hundred or seven hundred. 0:17:05.400 --> 0:17:06.000 I'm rapp there. 0:17:06.000 --> 0:17:08.320 You go to do the same amount of damage that 0:17:08.359 --> 0:17:10.000 perhaps a year ago we thought five hundred. 0:17:10.000 --> 0:17:10.480 Big ye on. 0:17:10.400 --> 0:17:13.920 Bloomberg Financial Conditions Index, from a minus five standard deviation, 0:17:14.040 --> 0:17:17.680 we are out to a positive point one nine. That's 0:17:17.720 --> 0:17:19.960 called not doing what Jay Powell wants. 0:17:20.000 --> 0:17:22.280 I'm just tying everything together that you've said in the 0:17:22.320 --> 0:17:25.879 last ten minutes or so March eighth, pre SVB to 0:17:26.040 --> 0:17:29.200 your yield north of five percent? Is that where we're 0:17:29.240 --> 0:17:31.200 going back to given what you've just told us. 0:17:31.320 --> 0:17:32.880 Well, I will say, if you look at the three 0:17:32.920 --> 0:17:35.040 month and the six month bill yields, they're both now 0:17:35.119 --> 0:17:38.560 north of five percent. I was surprised at the level 0:17:38.600 --> 0:17:40.399 of decline in the two year. Let's say that to 0:17:40.440 --> 0:17:41.720 the extent that the two year is going to be 0:17:41.760 --> 0:17:45.000 anchored to the federal funds rate, ish a drop of 0:17:45.040 --> 0:17:47.439 that's move. And you see this E code in the 0:17:47.440 --> 0:17:49.520 Fed fund futures, in the ear dollars future market card 0:17:49.520 --> 0:17:54.000 wrest it's all, it's it's it's the level of pricing adjustment. 0:17:54.080 --> 0:17:56.640 Seemed accessive to me based on my original comment, which 0:17:56.720 --> 0:17:59.800 was I didn't think that SVB was anything other than idiosymprodity. 0:18:00.000 --> 0:18:00.760 I got bad news. 0:18:00.800 --> 0:18:03.240 Doug Cass is listening and he's got a Yankees question, 0:18:03.320 --> 0:18:05.920 but we're not going there. Doug Cass looks out and says, look, 0:18:05.960 --> 0:18:10.800 dividen SPX one point seven percent. Lisa's talking about five 0:18:10.800 --> 0:18:13.879 percent money. How does the stock market elevate off of 0:18:13.880 --> 0:18:15.000 that five percent yield? 0:18:15.320 --> 0:18:17.639 Yeah, listen, it's a tremendous head wind right now, and 0:18:17.680 --> 0:18:18.640 I don't think it's sufficient. 0:18:18.680 --> 0:18:19.560 First of all, high Doug. 0:18:19.800 --> 0:18:22.600 But it's not sufficient to look back historically and say, well, 0:18:22.640 --> 0:18:24.720 the market rally in nineteen eighty three and interest rates 0:18:24.760 --> 0:18:27.520 were much higher, which everyone meaningfully older than me likes 0:18:27.560 --> 0:18:30.919 to remind me of. I think there are challenges to 0:18:32.000 --> 0:18:35.439 the equity market right now from the fixed income space. 0:18:35.840 --> 0:18:37.520 That said, in the credit market, where we spend a 0:18:37.520 --> 0:18:39.640 good amount of time, the high yield market is still 0:18:39.680 --> 0:18:42.200 yielding somewhere around eight and a half percent, which isn't 0:18:42.200 --> 0:18:45.439 particularly high yield. Even triple c's, which is the lowest 0:18:45.440 --> 0:18:47.840 part of the market, which isn't really a market so 0:18:47.920 --> 0:18:50.160 much as a bunch of videosyncratic names to get lumped together, 0:18:50.560 --> 0:18:53.280 is yielding yet less than a thousand basis points. If 0:18:53.320 --> 0:18:57.480 you had anything resembling poor economic expectations priced into markets, 0:18:57.800 --> 0:18:58.800 they just simply wouldn't be. 0:18:58.760 --> 0:18:59.480 Treating their credit. 0:18:59.520 --> 0:19:02.280 SPIZ would be at four forty on high yield, we 0:19:02.280 --> 0:19:04.720 were three five hundred basis points for what five minutes PREMI. 0:19:04.840 --> 0:19:06.639 I mean, if credit is a leading indicator, it's not 0:19:06.680 --> 0:19:07.520