WEBVTT - What It's Like to Suddenly Become a Bond Manager in the Credit Crisis 0:00:10.240 --> 0:00:13.640 Hello, and welcome to another edition of the Thoughts Podcast. 0:00:13.680 --> 0:00:17.479 I'm Tracy Alloway and I'm Joe Wisenthal. So, Joe, you 0:00:17.560 --> 0:00:21.880 and I talk a lot about markets, but it's kind 0:00:21.880 --> 0:00:24.279 of weird, I guess because like neither of us. Well, 0:00:24.360 --> 0:00:26.640 I suppose you have you invested a little bit when 0:00:26.640 --> 0:00:29.560 you were in college right way back in the day. 0:00:29.800 --> 0:00:32.600 I did a little bit of trading, and I worked 0:00:32.640 --> 0:00:36.760 for a brief period for portfolio management company. But no, 0:00:36.920 --> 0:00:38.800 I would say that between the two of us, we 0:00:38.840 --> 0:00:41.640 do not have a lot of collective experience actually in 0:00:41.720 --> 0:00:45.360 the market. Right, So have you ever wanted to have 0:00:45.440 --> 0:00:48.919 an in depth discussion with someone who actually makes investment 0:00:48.920 --> 0:00:52.919 decisions on daily basis? Yes, this is all I mean, 0:00:52.920 --> 0:00:55.440 to be honest, is all I want to do every day. 0:00:55.480 --> 0:00:57.920 You know, there's so many people who just talk and 0:00:58.080 --> 0:01:04.280 talk and pundits and strategists and people who tweet too much, 0:01:05.040 --> 0:01:08.080 and it's like, forget all the noise. Let's just talk 0:01:08.120 --> 0:01:11.399 to someone who you know, actually has to put money 0:01:11.400 --> 0:01:14.000 to work. I mean, that's what people really want to hear, right, right, 0:01:14.120 --> 0:01:15.840 And of course it's one thing for us to kind 0:01:15.840 --> 0:01:18.319 of sit back and say, markets look frothy and this 0:01:18.360 --> 0:01:22.480 is all there's signs of irrational exuberance. But if you're 0:01:22.520 --> 0:01:25.600 someone whose job is to actually put money to work, 0:01:25.680 --> 0:01:29.040 you have to find something to invest in, right exactly, 0:01:29.160 --> 0:01:32.000 or I mean, or theoretically you could sit out the market, 0:01:32.040 --> 0:01:34.840 but then you're going to be judged on that question too. 0:01:35.280 --> 0:01:39.560 But you definitely can't get away with just saying boring 0:01:39.600 --> 0:01:42.920 stuff like the markets are looking frothy and all of 0:01:42.959 --> 0:01:45.200 the boring stuff people say all the time. But anyway, 0:01:45.200 --> 0:01:47.280 why why are you uh, what are you getting at? 0:01:47.280 --> 0:01:48.960 Are we going to have such a conversation like that 0:01:49.000 --> 0:01:51.280 today and we're gonna have a good conversation, Yeah, we 0:01:51.320 --> 0:01:54.040 are actually so. Today for our guest, we have um 0:01:54.080 --> 0:01:57.680 one of my favorite investment managers. Actually, it's David Shawl. 0:01:57.840 --> 0:02:01.440 He's a portfolio manager over It and River Investment. You've 0:02:01.440 --> 0:02:03.880 had him on your show a couple of times. He's 0:02:03.920 --> 0:02:09.280 a prolific tweeter actually, but he is also someone who 0:02:09.639 --> 0:02:12.720 makes money do things on a day to day basis. 0:02:13.440 --> 0:02:17.480 So unlike our conversations, we're not talking to a poker player, 0:02:17.600 --> 0:02:20.400 We're not talking to a gambler. Were actually going to 0:02:20.520 --> 0:02:25.120 talk to someone who invests a real life credit portfolio manager. 0:02:25.280 --> 0:02:27.960 That's who we're talking to. Awesome, Well he's in studio 0:02:28.080 --> 0:02:41.079 right now. Hey David, Hey guys, thanks for having me on. 0:02:41.560 --> 0:02:44.120 Shall we start with well, why don't we back up 0:02:44.160 --> 0:02:46.560 a bit? Why don't you tell us what exactly you 0:02:46.680 --> 0:02:50.760 do and what kind of portfolios you manage? Sure? So 0:02:51.040 --> 0:02:53.560 I started a New River about two years ago and 0:02:53.639 --> 0:02:56.839 right now I manage an Opportunities again to Come strategy. 0:02:57.040 --> 0:02:59.480 And pretty much what that does is it focuses on 0:02:59.680 --> 0:03:04.000 fixed income or fixed income like securities in the publicly 0:03:04.000 --> 0:03:07.280 traded space. So these are instruments such as mortgage reads, 0:03:07.800 --> 0:03:11.840 reads closed, and funds that have underlying bonds in them, 0:03:12.400 --> 0:03:16.680 preferred stocks, business development companies, and it's kind of a 0:03:16.760 --> 0:03:20.160 niche area of the market where a few players play. 0:03:20.440 --> 0:03:23.880 It's very liquid um and it's a little bit of 0:03:23.880 --> 0:03:27.079 the wild West in the market, you know. Versus before, 0:03:27.600 --> 0:03:29.440 I want to ask you a question that backs up 0:03:29.560 --> 0:03:33.280 even further than that, because the idea of having a 0:03:33.560 --> 0:03:37.160 job where you can take money and buy stuff and 0:03:37.200 --> 0:03:40.200 sell stuff seems pretty appealing, but how do you even 0:03:40.240 --> 0:03:43.800 get there? So, how did you get to this role 0:03:43.960 --> 0:03:48.000 in life where you work for New River? Investments, and 0:03:48.120 --> 0:03:50.560 you have this money to invest, what's the what's the 0:03:50.600 --> 0:03:53.200 path to get there? Sure? So that's a great question. 0:03:53.880 --> 0:03:57.840 So I started at a bank, Denovo bank called Square 0:03:57.880 --> 0:04:01.120 one Financial in early too. I was an eight and 0:04:01.160 --> 0:04:04.600 I started as a credit analyst. And Square one was 0:04:04.640 --> 0:04:07.960 a commercial bank, but they catered to the venture capital community. 0:04:08.000 --> 0:04:10.440 So a company would raise ten million dollars of the 0:04:10.560 --> 0:04:13.400 Series A and they might raise a little bit of 0:04:13.440 --> 0:04:16.800 debt to bridge them to the next equity round, and 0:04:16.839 --> 0:04:19.679 we'd make the clients keep all their deposits at the bank, 0:04:20.320 --> 0:04:23.279 and pretty much I was underwriting these these clients, so 0:04:23.320 --> 0:04:26.080 it might be a formula line of credit. And so 0:04:26.080 --> 0:04:29.039 it was early two eight and the bank at the 0:04:29.040 --> 0:04:32.120 time had an outsource investment manager who had loaded them 0:04:32.200 --> 0:04:35.880 up to the gills in subprime bonds. And the CEO 0:04:35.960 --> 0:04:39.200 came to me and he said, hey, David, I heard 0:04:39.240 --> 0:04:41.640 you worked on Wall Street. And so I just moved 0:04:41.640 --> 0:04:43.440 back from New York. I was in equity research, so 0:04:43.480 --> 0:04:45.760 I wasn't in fixed them come at all, and he said, hey, 0:04:45.760 --> 0:04:48.320 I heard you work on Wall Street. We need your help. 0:04:48.920 --> 0:04:51.920 I said, sure, with what? And he said, We've got 0:04:51.920 --> 0:04:54.279 a whole portfolio of subpreme bonds that are going bad 0:04:55.080 --> 0:04:57.360 and we don't know what to do, so we need 0:04:57.360 --> 0:05:00.760 your help. I said, that sounds really interesting, but I 0:05:00.760 --> 0:05:06.599 don't know if fix in come at all. And I said, 0:05:06.600 --> 0:05:08.160 you know, I've done the c f A program and 0:05:08.160 --> 0:05:11.240 that's kind of all theory and no practice. And he's like, 0:05:11.320 --> 0:05:13.920 doesn't matter. We need you to come over here. So 0:05:14.480 --> 0:05:17.200 I went over there. It was, you know, early two 0:05:17.080 --> 0:05:21.320 thousand eight, and we had probably a portfolio five million 0:05:21.320 --> 0:05:24.080 of bonds that were going bad. And I remember looking 0:05:24.120 --> 0:05:26.720 at one of the mark to market reports and I 0:05:26.800 --> 0:05:30.359 think it was a negative million mark to market and 0:05:30.360 --> 0:05:32.680 the bank only had equity of twenties. So we were 0:05:33.320 --> 0:05:38.040 well and solving on paper, and um, they fired the 0:05:38.080 --> 0:05:41.440 investment manager. The treasurer at the time that was running 0:05:41.440 --> 0:05:44.480 the portfolio quit. So I was left at the time, 0:05:44.480 --> 0:05:47.600 in the middle of the crisis, to run cash flows, 0:05:47.720 --> 0:05:52.039 re prospectuses, model cash flows, kind of figure out, you know, 0:05:52.120 --> 0:05:55.440 the mess that we were in. And so, you know, 0:05:55.440 --> 0:05:57.360 I had to meet with regulators, and I'll never forget 0:05:57.360 --> 0:05:59.560 one of the regulators coming in from the f d 0:05:59.600 --> 0:06:01.520 a C or Federal Reserve. I don't remember which one 0:06:01.560 --> 0:06:05.200 it was. And they opened up a intro to mortgage 0:06:05.200 --> 0:06:08.520 backed securities book. So at that moment I realized that, 0:06:09.200 --> 0:06:10.800 you know, even they didn't know what was going on, 0:06:11.720 --> 0:06:14.800 and so I mean it was fascinating. I remember, you know, 0:06:14.880 --> 0:06:17.839 just looking into these bonds and seeing some bonds that 0:06:17.880 --> 0:06:20.440 were bought where you know, they decided to pick up 0:06:20.440 --> 0:06:23.039 an extra thirty basis points of spread by going from 0:06:23.040 --> 0:06:27.320 the senior A one class to the mezzanine tronch. And 0:06:27.360 --> 0:06:29.280 I looked at you know, these bonds were six months 0:06:29.279 --> 0:06:33.280 old and already of them had not even made one payment, 0:06:34.120 --> 0:06:36.880 not even one payment. So you know, that's how I 0:06:36.960 --> 0:06:38.760 learned fixed income. I was kind of self taught in 0:06:38.760 --> 0:06:41.360 a lot of ways. So the portfolio that I managed there, 0:06:42.120 --> 0:06:43.480 it was kind of a wide range of you were 0:06:43.560 --> 0:06:45.159 thrown right in the deep end, strown right in the 0:06:45.200 --> 0:06:48.000 deep end. We ended up raising capital to recap ourselves. 0:06:48.000 --> 0:06:50.839 But the portfolio ended up managing was kind of a 0:06:50.839 --> 0:06:54.960 mix of mortgage backed securities, corporate bonds, preferred stocks, municipal bonds, 0:06:55.120 --> 0:06:59.039 asset back securities, so kind of the kitchen sink of 0:06:59.440 --> 0:07:01.960 fixed and um kind of with the only two constraints 0:07:02.000 --> 0:07:05.120 being you know, we had to keep the duration around 0:07:05.160 --> 0:07:08.359 three years or lower, and we probably could only have 0:07:08.440 --> 0:07:11.360 about half the portfolio and credit from there. It was 0:07:11.440 --> 0:07:13.240 kind of my job and I had a lot of 0:07:13.240 --> 0:07:16.960 flexibility and freedom to kind of be creative and set 0:07:16.960 --> 0:07:19.120 the portfolio up however I wanted. So if I wanted, 0:07:19.840 --> 0:07:23.360 you know, of the portfolio in three year bonds, I 0:07:23.360 --> 0:07:25.760 could do that. If I wanted some in thirty year 0:07:25.800 --> 0:07:27.440 bonds and some at the front end of the curve, 0:07:27.480 --> 0:07:29.200 I could do that. And that's kind of the fun 0:07:29.280 --> 0:07:32.880 part is you know, taking different types of securities with 0:07:32.960 --> 0:07:38.120 different characteristics of credit duration embedded leverage in creating a 0:07:38.160 --> 0:07:41.400 portfolio that will perform in the types of scenarios that 0:07:41.400 --> 0:07:45.120 you're looking forward to. So, David, that kind of leads 0:07:45.120 --> 0:07:48.080 into the question I wanted to ask, which is, yes, 0:07:48.160 --> 0:07:50.680 you've got into fixed income in two thousand and eight, 0:07:50.680 --> 0:07:53.240 which was definitely a special time to be doing it, 0:07:53.320 --> 0:07:57.320 and to some extent, everyone was learning new things, to 0:07:57.360 --> 0:08:00.440 put it mildly um during the financial crisis. But you 0:08:00.480 --> 0:08:04.120 came from an equity background, So what struck you as 0:08:04.160 --> 0:08:08.440 the biggest difference between equities and fixed income when it 0:08:08.440 --> 0:08:12.560 comes to investing or analyzing portfolios? Good question. Well, I 0:08:12.600 --> 0:08:15.200 think the macro the macro components, So you know, so 0:08:15.320 --> 0:08:18.480 much is driven by interest rates obviously, So you know, 0:08:18.560 --> 0:08:22.920 obviously you know key characteristic of fixed incomes duration, So 0:08:23.120 --> 0:08:25.840 just how interesting for our listeners who don't know the 0:08:25.840 --> 0:08:29.080 definition of duration? What does that mean? So duration would 0:08:29.080 --> 0:08:31.600 be the first derivative, so it would be the change 0:08:31.640 --> 0:08:35.000 in price for a given move and interest rates. So 0:08:35.080 --> 0:08:37.840 if interest rates move x, the duration will tell you 0:08:37.880 --> 0:08:40.960 how much the underlying asset will correct. So in theory, 0:08:41.160 --> 0:08:44.840 if somebody said duration was three in rates went up 0:08:44.960 --> 0:08:47.959 a hundred basis points, you know, the price would decline 0:08:48.000 --> 0:08:51.439 three got and vice versa. All right, so I interrupted 0:08:51.440 --> 0:08:53.120 you and you were sort of talking about the difference 0:08:53.120 --> 0:08:56.640 between equity and fixed income investing. Yeah, so obviously I 0:08:56.640 --> 0:08:59.920 think that the macro implications, so you know, the implication, 0:09:00.000 --> 0:09:05.040 and the Federal Reserve policy, inflation, um, you know, other 0:09:05.040 --> 0:09:08.679 central banks throughout the world, and then just broadly, credit cycles. 0:09:08.720 --> 0:09:11.440 I mean credit cycles are a lot different than you know, 0:09:11.480 --> 0:09:14.560 equities obviously, so you know, there's different types of supply, 0:09:14.720 --> 0:09:18.720 there's market technicals. Is the goal different because when I 0:09:18.760 --> 0:09:22.400 think of my biases, when I think of an equity manager, 0:09:22.880 --> 0:09:26.240 I think of someone who's really thinking about the upside 0:09:26.880 --> 0:09:29.720 and beating the indices. And when I think about a 0:09:30.000 --> 0:09:33.200 fixed income manager, I'm thinking of someone who's more about 0:09:33.240 --> 0:09:36.440 downside avoidances and you sort of know how much you 0:09:36.440 --> 0:09:40.040 could make, but you're trying to limit the potential losses. 0:09:40.200 --> 0:09:42.480 Is that a fair characterization of the risk profile or 0:09:42.520 --> 0:09:45.000 is that not thinking about it the right way? I 0:09:45.040 --> 0:09:48.839 think it is because at the end of the day, um, 0:09:48.880 --> 0:09:50.720 you know your upside as you get your principle back 0:09:50.720 --> 0:09:53.440 and you get paid interest to so you know, so 0:09:53.480 --> 0:09:56.760 you're right. The risk reward is very different. And you 0:09:56.800 --> 0:09:59.400 know fixed income as it is and equities, so you know, 0:09:59.440 --> 0:10:01.880 if you have a year and fixed income, you know 0:10:01.920 --> 0:10:03.720 you might not have the two x like you'd have 0:10:03.720 --> 0:10:07.080 inequities to offset that. So you know your risk awards 0:10:07.080 --> 0:10:11.040 a lot different. But what about your benchmarks are I 0:10:11.040 --> 0:10:14.280 guess what I'm asking is what sort of return profile 0:10:14.360 --> 0:10:17.400 are you aiming for? And you must be pegging yourself 0:10:17.400 --> 0:10:22.559 for benchmarking yourself to a particular thing or goal, right correct? 0:10:22.679 --> 0:10:24.680 So you know when it was at the bank, it 0:10:24.720 --> 0:10:27.440 was more of an asset liability framework and more kind 0:10:27.440 --> 0:10:30.920 of in terms of the Barkley's agg um. Now the 0:10:30.920 --> 0:10:36.319 Bloomberg Barkley is now stay well done, Joe. Joe is 0:10:36.360 --> 0:10:39.320 totally on message. That's right. So I think, you know, 0:10:39.360 --> 0:10:41.040 for people that are not familiar, I would kind of 0:10:41.040 --> 0:10:43.240 call it the S and P five hundred of the 0:10:43.280 --> 0:10:47.640 bond world um. And that's pretty heavily weighted in treasuries 0:10:47.640 --> 0:10:50.679 and corporate bonds. So I would say in more agency 0:10:50.679 --> 0:10:53.480 mortgage backed security. So those are the main components of 0:10:53.480 --> 0:10:58.320 the Barkley's agg kind of intermediate intermediate benchmark um, you know, 0:10:58.520 --> 0:11:01.240 average life duration, you know, in the five is range. 0:11:02.920 --> 0:11:05.200 Now I want to we want to talk about the 0:11:05.240 --> 0:11:09.120 market right now, but before we get there, let's see 0:11:09.120 --> 0:11:13.280 the next up. So you have this portfolio, how do 0:11:13.320 --> 0:11:15.560 you find what you invest in? What where do you start? 0:11:15.920 --> 0:11:19.800 Let's say someone let's just imagine a blank slate. Let's 0:11:19.800 --> 0:11:22.080 say you had a billion dollars to invest it wasn't 0:11:22.120 --> 0:11:25.080 invested anywhere, whatever it is, or you have a portfolio 0:11:25.120 --> 0:11:27.240 it's totally messed up and you need to fix it. 0:11:27.640 --> 0:11:31.439 Where does the process begin to find investments that are 0:11:31.520 --> 0:11:34.600 a good or be uh sort of suit the needs 0:11:34.720 --> 0:11:37.160 of whoever money it is, right, so I think the 0:11:37.200 --> 0:11:40.160 first question would be, is this an open ended return 0:11:40.240 --> 0:11:43.240 where you're you're shooting for absolute return or total return, 0:11:44.000 --> 0:11:47.480 or is this an asset liability framework. Asset liability framework 0:11:47.520 --> 0:11:49.960 would be you know, for instance, a bank or insurance 0:11:50.000 --> 0:11:53.040 company that has certain types of liabilities do in the 0:11:53.080 --> 0:11:56.160 future and you're trying to match those. So from that 0:11:56.200 --> 0:11:59.040 point of view, your investment process is very different because 0:11:59.040 --> 0:12:01.960 you're trying to meet you know, certain liabilities in the future, 0:12:02.000 --> 0:12:05.040 whereas kind of an open ended total return you know, 0:12:05.120 --> 0:12:07.800 kind of more like I'm doing right now. Um, you know, 0:12:07.840 --> 0:12:10.640 you're not trying to meet any liabilities in particular. So 0:12:10.679 --> 0:12:13.120 I think, um, you know what I tell people is 0:12:13.160 --> 0:12:15.920 kind of there's four ways to make money and fixed 0:12:15.960 --> 0:12:18.920 and come. There's kind of like four drivers. Um, you know, 0:12:19.040 --> 0:12:22.200 first is duration, so you can take you know, more 0:12:22.280 --> 0:12:24.920 or less duration, you know, going longer on the curve. 0:12:25.520 --> 0:12:28.160 There's credit risk, so you know, you can go down 0:12:28.200 --> 0:12:30.560 in credit. You can buy triple C bonds instead of 0:12:30.880 --> 0:12:34.720 double B R triple A. The next is liquidity, so 0:12:34.760 --> 0:12:36.920 you can kind of go down the liquidity spectrum. You 0:12:36.960 --> 0:12:39.360 know some you know, the pimp Coos of the world 0:12:39.480 --> 0:12:41.679 or double lines might need to buy you know, much 0:12:41.760 --> 0:12:45.199 larger issues, whereas a smaller investment managers can buy these 0:12:45.200 --> 0:12:48.320 small issues or just kind of off the run things. 0:12:48.840 --> 0:12:51.640 And then the fourth is leverage. And and that's either 0:12:52.280 --> 0:12:55.080 leverage that you could use you know, through repo or 0:12:55.200 --> 0:12:58.120 embedded leverage through you know, certain kinds of securities that 0:12:58.160 --> 0:13:01.439 have that leverage within it. So any time you're shooting 0:13:01.480 --> 0:13:05.400 for more return or more yield in the market, really 0:13:05.440 --> 0:13:09.160 you're taking one or more of those four components. And 0:13:09.280 --> 0:13:12.680 I think the big thing when looking to form portfolios 0:13:13.320 --> 0:13:16.040 is you're looking to say, at the current time, which 0:13:16.040 --> 0:13:21.720 of those four aspects is most attractive. And there's certain 0:13:21.720 --> 0:13:26.080 times when it's you know duration, So after um, you know, 0:13:26.120 --> 0:13:28.800 Trump was elected and rates kind of sold off. You 0:13:28.840 --> 0:13:31.560 know a lot of things in duration, you know, really 0:13:31.600 --> 0:13:34.560 sold off hard, and things tied to the long ends 0:13:34.559 --> 0:13:39.000 such as um municipal bonds and preferred stocks. You know, 0:13:39.400 --> 0:13:41.680 you know, some some things tied to those really get 0:13:41.720 --> 0:13:45.120 hit hard. And there's opportunities, and you know, there's other 0:13:45.160 --> 0:13:49.079 times when it's really credit so say early in when 0:13:49.120 --> 0:13:51.240 we had the oil scare and how you'll blow out 0:13:51.320 --> 0:13:54.360 and um, you know, spreads on much lower rated bonds 0:13:54.400 --> 0:13:58.160 were far more attractive. So, David, I want to ask 0:13:58.200 --> 0:14:01.400 you about the current market, thecause amidst all the talk 0:14:01.559 --> 0:14:05.360 about you know, lofty valuations and froth in the market 0:14:05.640 --> 0:14:10.200 credit and you know, things like corporate bonds, UM, high 0:14:10.240 --> 0:14:13.440 ye old bonds, those sold by junk rated companies UH, 0:14:13.720 --> 0:14:17.719 subprime auto a bs, even some consumer loan a b 0:14:17.960 --> 0:14:21.720 s or securitizations. Those have all been name checked as 0:14:22.040 --> 0:14:26.920 potentially risky forms of investment in the current environment, or 0:14:26.960 --> 0:14:29.800 at least overvalued in terms of what investors are getting 0:14:29.840 --> 0:14:32.400 back for putting their money in those How do you 0:14:32.440 --> 0:14:37.040 make investment decisions when everyone is basically talking about things 0:14:37.040 --> 0:14:40.240 being overvalued in the market. Yeah, it's a great question. 0:14:40.280 --> 0:14:42.640 I think one thing is just to remind yourself that, 0:14:43.120 --> 0:14:45.520 you know, for how many years now have have people 0:14:45.640 --> 0:14:48.240 been saying that? So you know, you know, the mere 0:14:48.320 --> 0:14:52.080 fact that that's being commented on doesn't necessarily mean that's 0:14:52.800 --> 0:14:55.880 you know, it may be true, but it may also continue. 0:14:56.160 --> 0:14:58.200 And that's not to say, you know, we're going to 0:14:58.320 --> 0:15:01.560 ignore risks in the market. Uh, Like you guys kind 0:15:01.600 --> 0:15:04.720 of alluded to in the introduction, if your task with 0:15:04.800 --> 0:15:08.320 managing money, you can't really just sit it out and say, 0:15:08.320 --> 0:15:10.000 you know, maybe you can in your personal account, but 0:15:10.040 --> 0:15:12.960 if you're managing assets, you can't really say I'm gonna 0:15:12.960 --> 0:15:15.840 I'm gonna set this whole thing out. So I think 0:15:15.840 --> 0:15:19.680 it's looking at the different risks. For instance, UM, do 0:15:19.680 --> 0:15:23.040 you think that the risk return of you know, corporate 0:15:23.080 --> 0:15:27.120 issuers is more favorable than for instance, housing related debt, 0:15:27.600 --> 0:15:30.560 which I think you know, the last crisis was housing 0:15:30.600 --> 0:15:33.040 related debt, but I think that the fundamentals for housing 0:15:33.080 --> 0:15:36.320 related debt at this time are actually pretty favorable. You know, 0:15:36.360 --> 0:15:40.120 consumer balance sheets are being repaired. Um. You know, there's 0:15:40.120 --> 0:15:42.800 really not non agency being issued, you know, if there 0:15:42.920 --> 0:15:46.480 is very very little UM. So you know, in my mind, 0:15:46.560 --> 0:15:50.040 something like the underlying tail winds and fundamentals of housing 0:15:50.080 --> 0:15:52.880 related debt are a lot more attractive than you know, 0:15:52.960 --> 0:15:55.680 corporates for instance. You know, but you can't, you know, 0:15:55.760 --> 0:15:58.520 just stop there, because you know the market may already 0:15:58.520 --> 0:16:01.320 be pricing in that. So UM. I think a big 0:16:01.320 --> 0:16:03.480 thing that you look at in the bond market is 0:16:03.640 --> 0:16:06.760 loss adjusted yield. So you're not just looking at the 0:16:06.840 --> 0:16:10.280 yields and spreads you're getting, but you're having to loss 0:16:10.320 --> 0:16:14.320 adjust that. So you're you're looking at different scenarios and saying, well, 0:16:14.760 --> 0:16:17.720 if if the credit cycle is benign and defaults here 0:16:17.840 --> 0:16:20.600 run at x, you know, what what does my return 0:16:20.640 --> 0:16:23.760 look like? But you know, if it's very unfavorable, then 0:16:23.800 --> 0:16:26.680 what will look like Because I think, you know, you 0:16:26.680 --> 0:16:29.320 have to have humility in this job and say what 0:16:29.360 --> 0:16:31.680 I think is going to happen is probably not going 0:16:31.720 --> 0:16:34.600 to happen. So we're gonna look at various scenarios and 0:16:34.640 --> 0:16:39.320 we're gonna say, and um rates up X happens in 0:16:39.440 --> 0:16:43.360 base scenario you know why happens? And rates down see happens? 0:16:43.480 --> 0:16:46.640 Or in you know, benign credit cycle this, you know, 0:16:47.000 --> 0:16:50.520 great credit cycle that, or terrible credit cycle, you know 0:16:50.600 --> 0:16:54.600 something else. So you're looking at different scenario analysis, and 0:16:54.840 --> 0:16:57.200 you know, sometimes not all bonds are gonna win for 0:16:57.240 --> 0:16:59.920 you at the same time. So for instance, at the bank, 0:17:00.080 --> 0:17:02.160 you know, one of the things I did was I 0:17:02.240 --> 0:17:06.840 was very long and zero coupon California school district communities. 0:17:07.520 --> 0:17:11.600 And it sounds crazy, and in isolation, people might not 0:17:11.680 --> 0:17:15.080 have bottom because they were thirty year zero coupon bonds, 0:17:15.920 --> 0:17:20.359 but they had very very widespreads and very good risk rewards. 0:17:20.400 --> 0:17:23.040 And when you mix that with things that were very 0:17:23.040 --> 0:17:26.840 short at the time, it created a very favorable overall dynamic. 0:17:27.320 --> 0:17:28.640 So I think one of the things that you can 0:17:28.680 --> 0:17:32.439 have a bond in isolation that might look ugly or 0:17:32.440 --> 0:17:35.120 it might look unfavorable, but when you add it into 0:17:35.160 --> 0:17:39.880 a portfolio, you know you can create superior overall profiles. 0:17:40.119 --> 0:17:41.760 And I think that's that's the fun of it. You're 0:17:41.760 --> 0:17:45.360 mixing different ingredients in and trying to create a profile 0:17:45.400 --> 0:17:49.880 that will match what your overall assessment of the market is. Well, 0:17:50.040 --> 0:17:52.720 David Shaw, I think that was a I love that 0:17:52.840 --> 0:17:55.880 last answer. I love that it ended on a thirty 0:17:55.960 --> 0:18:01.480 year California school district zero coupon bobs because probably an 0:18:01.520 --> 0:18:04.840 area of the market that not many people have perhaps 0:18:04.840 --> 0:18:07.200 ever thought about in their entire life. But I think 0:18:07.240 --> 0:18:09.080 that was a great talking to you. That was like 0:18:09.160 --> 0:18:11.359 sort of a great explanation of what you do. And 0:18:11.400 --> 0:18:16.000 then also I loved real quickly name those four things again, 0:18:16.040 --> 0:18:19.600 the four vectors through which there are opportunities and fixed income. Correct, 0:18:19.720 --> 0:18:24.760 that's duration, right, sensitivity to raids, credit risk, liquidity risk, 0:18:25.480 --> 0:18:28.959 and weapons. Great stuff. David Shaw, portfolio manager at New 0:18:29.040 --> 0:18:44.360 River Investments, Thank you very much for joining us. Thanks guys. So, 0:18:44.640 --> 0:18:47.480 Joe are you are you? Are you thinking of changing jobs? 0:18:48.040 --> 0:18:51.159 I am going to switch jobs and put all of 0:18:51.200 --> 0:18:55.320 my money and I think thirty year California zero. No. 0:18:55.480 --> 0:18:57.119 I think that was like that was the old trade. 0:18:57.280 --> 0:19:00.600 I imagine that opportunity is not there anymore. Aectually. Uh 0:19:00.800 --> 0:19:03.240 by the time people hear this podcast, I have to 0:19:03.320 --> 0:19:06.680 admit it does sound really fun, he said. He said 0:19:06.680 --> 0:19:08.480 to use the word fun at the end. The idea 0:19:08.520 --> 0:19:11.840 of actually having money on the line, not just talking. 0:19:12.400 --> 0:19:15.960 There's this gigantic world of fixed income trying to find 0:19:16.000 --> 0:19:17.919 the diamond in the rough. You got to admit it 0:19:17.960 --> 0:19:19.879 sounds like it would be a pretty cool job. It 0:19:19.960 --> 0:19:23.240 sounds pretty frustrating to me, actually, just because there's so 0:19:23.280 --> 0:19:26.880 many there's so many factors to consider, and I guess 0:19:26.880 --> 0:19:29.480 I'm a risk averse um kind of person. So I 0:19:29.480 --> 0:19:31.720 would sit down and I would look at a particular 0:19:31.760 --> 0:19:34.040 bond and I would just basically list off all the 0:19:34.080 --> 0:19:36.440 things that could go wrong, and I'd probably never invest 0:19:36.520 --> 0:19:38.879 in anything, and I'd be beaten by all my peers 0:19:38.920 --> 0:19:41.320 and I would be very very bad at this. Yeah, 0:19:41.440 --> 0:19:44.160 I know exactly what you're saying I think the journalist 0:19:44.240 --> 0:19:48.480 mindset is to focus on the downside, probably a good 0:19:48.520 --> 0:19:52.600 reason why we're in our current jobs and not David's job. Yeah, 0:19:52.800 --> 0:19:55.600 you're right, all right, Well I feel better, so should 0:19:55.600 --> 0:19:58.920 we leave it there. I'm Tracy Halloway. You can follow 0:19:58.920 --> 0:20:01.800 me on Twitter at Trey see Alloway, and I'm Joe 0:20:01.920 --> 0:20:05.440 wisn't Thal. You can follow me on Twitter at the Stalwart, 0:20:05.560 --> 0:20:08.639 and you can follow David Shawl on Twitter at David 0:20:08.680 --> 0:20:13.639 shaw and our producer Sarah Patterson Sarah pat with two teas. 0:20:14.040 --> 0:20:14.840 Thanks for listening.