1 00:00:05,800 --> 00:00:08,720 Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox. 2 00:00:08,760 --> 00:00:11,520 Speaker 1: Along with my co host Lisa Bramowitz. Each day we 3 00:00:11,640 --> 00:00:15,120 Speaker 1: bring you the most important, noteworthy, and useful interviews for 4 00:00:15,200 --> 00:00:17,840 Speaker 1: you and your money, whether you're at the grocery store 5 00:00:17,960 --> 00:00:20,720 Speaker 1: or the trading floor. Find the Bloomberg p m L 6 00:00:20,840 --> 00:00:32,720 Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Howard Marks, 7 00:00:33,400 --> 00:00:36,920 Speaker 1: I loved your memo. Thank you for coming in. Howard Marks, 8 00:00:36,960 --> 00:00:40,159 Speaker 1: of course, is a legendary investor in depth markets and 9 00:00:40,200 --> 00:00:43,760 Speaker 1: across all asset classes. Frankly, co founder of oak Tree 10 00:00:43,880 --> 00:00:48,520 Speaker 1: Capital Management. Uh, Howard, in your memo, you really outlined 11 00:00:48,640 --> 00:00:53,599 Speaker 1: conditions that would necessitate being more cautious. Are we setting 12 00:00:53,720 --> 00:00:57,480 Speaker 1: up conditions that are similar to what we saw in 13 00:00:57,520 --> 00:01:01,640 Speaker 1: two thousand six two thousand seven, that are particip precipitating 14 00:01:01,800 --> 00:01:06,200 Speaker 1: a pretty big downturn? Well, Lisa, it's easy to say 15 00:01:06,440 --> 00:01:12,080 Speaker 1: we are seeing risky behavior in kind, but I don't 16 00:01:12,080 --> 00:01:16,360 Speaker 1: think at all in degree. I mean, the conditions of 17 00:01:16,440 --> 00:01:24,399 Speaker 1: oh six seven were uh exceptionally excessive and gave rise to, 18 00:01:24,680 --> 00:01:31,360 Speaker 1: of course, the worst UH financial experience of a lifetime. UM, 19 00:01:31,400 --> 00:01:36,080 Speaker 1: I don't think we're nowhere near in that territory. Now, yes, 20 00:01:36,800 --> 00:01:40,559 Speaker 1: I mean the private sector and especially the financial sector 21 00:01:40,680 --> 00:01:43,480 Speaker 1: is nowhere near as levered as it was at that time. 22 00:01:43,880 --> 00:01:48,040 Speaker 1: And uh they in many cases the leverage where you 23 00:01:48,360 --> 00:01:54,480 Speaker 1: was used to invest in subprime related mortgage backed securities. Uh. 24 00:01:54,560 --> 00:01:58,600 Speaker 1: And I don't think there's an analog to those now. 25 00:01:59,000 --> 00:02:02,320 Speaker 1: So I'm not saying that we're looking at that. All 26 00:02:02,360 --> 00:02:05,360 Speaker 1: I'm saying, and maybe I didn't make it clear enough, 27 00:02:05,680 --> 00:02:09,960 Speaker 1: although I think I did, is that is that there 28 00:02:10,080 --> 00:02:14,320 Speaker 1: is a time for caution and there's a time for aggressiveness, 29 00:02:14,360 --> 00:02:19,520 Speaker 1: and they're different, and it's important for a professional investor 30 00:02:19,600 --> 00:02:23,960 Speaker 1: to make the distinction. And I believe that in relative terms, 31 00:02:24,040 --> 00:02:28,959 Speaker 1: this is a time when one should emphasize caution over aggressiveness. 32 00:02:29,000 --> 00:02:32,840 Speaker 1: And to be clear, even though you are saying caution, 33 00:02:33,080 --> 00:02:35,120 Speaker 1: you're not saying and you specifically said that, you are 34 00:02:35,160 --> 00:02:38,320 Speaker 1: not saying that this is a nonsensical bubble. Uh. It 35 00:02:38,440 --> 00:02:43,320 Speaker 1: just there is high risk and valuations are high. So 36 00:02:43,400 --> 00:02:45,560 Speaker 1: how do you proceed with caution? Can you give us 37 00:02:45,600 --> 00:02:47,919 Speaker 1: an example of a type of asset that would be 38 00:02:47,960 --> 00:02:53,440 Speaker 1: an appropriate by at this time? My point is that 39 00:02:53,480 --> 00:03:00,000 Speaker 1: within each investment strategy, there are aggressive ways to pursue 40 00:03:00,080 --> 00:03:04,440 Speaker 1: it and defensive ways to pursue it. Uh. An example, 41 00:03:05,320 --> 00:03:11,360 Speaker 1: one of our activities is distress debt. The higher you 42 00:03:11,400 --> 00:03:17,880 Speaker 1: are in the capital structure, the more dependably you make money. 43 00:03:17,919 --> 00:03:20,320 Speaker 1: But when things go well, the less money you make. 44 00:03:21,000 --> 00:03:22,480 Speaker 1: So do you want to be high in the capital 45 00:03:22,520 --> 00:03:25,720 Speaker 1: structure and have a very high probability of making money 46 00:03:25,840 --> 00:03:28,880 Speaker 1: or low in the capital structure and maximize the return 47 00:03:29,360 --> 00:03:33,520 Speaker 1: in good outcomes? And I would say that if in 48 00:03:33,560 --> 00:03:36,600 Speaker 1: a time for caution, you would move towards senior securities, 49 00:03:37,360 --> 00:03:43,200 Speaker 1: increase your probability of making money, decrease the absolute payoff 50 00:03:43,400 --> 00:03:47,480 Speaker 1: when things go great. So you're you're willing to pay 51 00:03:47,760 --> 00:03:53,440 Speaker 1: higher prices for better secured assets even though the absolute 52 00:03:53,440 --> 00:03:57,520 Speaker 1: return will be substantially less. Right, Well, what you what 53 00:03:57,720 --> 00:04:01,480 Speaker 1: you call higher prices? I would say, we're willing to 54 00:04:01,520 --> 00:04:05,760 Speaker 1: accept lower prospective returns for for greater safety. That's what 55 00:04:05,840 --> 00:04:13,560 Speaker 1: it's all about. If the conservative investor accepts lower expected 56 00:04:13,600 --> 00:04:18,120 Speaker 1: returns as the price for greater safety. There are times 57 00:04:18,120 --> 00:04:22,000 Speaker 1: when that's highly appropriate. There are times when that's highly inappropriate. 58 00:04:22,680 --> 00:04:25,359 Speaker 1: Our job is to figure out which this is. So. UM, 59 00:04:25,440 --> 00:04:28,040 Speaker 1: I've heard a lot of pension funds in particular say 60 00:04:28,080 --> 00:04:31,640 Speaker 1: that they are seeking returns and safety from this sort 61 00:04:31,680 --> 00:04:34,680 Speaker 1: of a bulliant environment in private debt markets, and there 62 00:04:34,720 --> 00:04:37,880 Speaker 1: seems to be quite a lot of cash flowing into 63 00:04:38,000 --> 00:04:40,440 Speaker 1: private debt. Has it gone too far? And is it 64 00:04:40,560 --> 00:04:46,280 Speaker 1: keeping companies alive that perhaps shouldn't be. I can't say 65 00:04:46,279 --> 00:04:49,040 Speaker 1: too far it's gone far. The point is everybody says, oh, 66 00:04:49,040 --> 00:04:50,880 Speaker 1: you should do this, We were the only ones who 67 00:04:50,920 --> 00:04:53,200 Speaker 1: have thought of that. Every If everybody is saying you 68 00:04:53,200 --> 00:04:54,920 Speaker 1: should do this because we're the only ones who thought 69 00:04:54,920 --> 00:04:57,040 Speaker 1: of it, then it's really obviously not as novel a 70 00:04:57,120 --> 00:05:00,960 Speaker 1: solution as they're suggesting. So so the eye da private 71 00:05:01,040 --> 00:05:05,000 Speaker 1: lending UH is not undiscovered. Money has flowed in. I 72 00:05:05,040 --> 00:05:08,760 Speaker 1: can't tell you whether it's an appropriate amount or too much. Clearly, 73 00:05:08,800 --> 00:05:11,479 Speaker 1: the market is more competitive to make loans than it 74 00:05:11,600 --> 00:05:14,080 Speaker 1: used to be, and when market is more competitive, that 75 00:05:14,120 --> 00:05:18,680 Speaker 1: implies lower prospective returns. UH. I still think, however, that 76 00:05:18,800 --> 00:05:24,799 Speaker 1: private lending is more appropriate today than than buying public 77 00:05:24,880 --> 00:05:28,920 Speaker 1: securities because the public money can't get to the private 78 00:05:29,080 --> 00:05:34,360 Speaker 1: lending opportunities. UH. And I think that the public quest 79 00:05:34,560 --> 00:05:38,279 Speaker 1: for high returns in a low return world has caused 80 00:05:38,320 --> 00:05:40,800 Speaker 1: a lot of money to flow into senior loans and 81 00:05:40,920 --> 00:05:44,080 Speaker 1: hi your bonds and so forth. And that is less 82 00:05:44,120 --> 00:05:49,760 Speaker 1: true about uh, the private dead market. But I'll add 83 00:05:49,800 --> 00:05:53,400 Speaker 1: one thing. When you move away from public markets, which 84 00:05:54,080 --> 00:05:58,360 Speaker 1: nowadays we kind of call beta markets because the return, uh, 85 00:05:58,400 --> 00:06:00,920 Speaker 1: your return is determined by the turn of the market 86 00:06:00,960 --> 00:06:04,359 Speaker 1: in large part. To alpha markets, where your return is 87 00:06:04,480 --> 00:06:08,120 Speaker 1: largely a factor of the skill of the manager, you 88 00:06:08,240 --> 00:06:13,520 Speaker 1: are accepting a new kind of risk which is substantial 89 00:06:13,600 --> 00:06:16,760 Speaker 1: dependence on the skill of the manager, which is different 90 00:06:16,800 --> 00:06:19,800 Speaker 1: than being in public markets, are being in an index fund. Uh. 91 00:06:19,839 --> 00:06:22,640 Speaker 1: You know, talking about index funds, you talked about the 92 00:06:22,680 --> 00:06:25,280 Speaker 1: threat of all of the money that moved in moving 93 00:06:25,360 --> 00:06:28,640 Speaker 1: out in tandem. UM. I hear a lot about cash 94 00:06:28,720 --> 00:06:31,120 Speaker 1: on the sidelines, and I'm not sure exactly what they're 95 00:06:31,120 --> 00:06:33,520 Speaker 1: talking about. I think to a large degree they're talking 96 00:06:33,520 --> 00:06:35,839 Speaker 1: about private equity funds that have all this dry powder 97 00:06:35,920 --> 00:06:38,719 Speaker 1: lying around. To what extent will that cash on the 98 00:06:38,760 --> 00:06:42,960 Speaker 1: sidelines buffer any declines, Well, it depends on where they 99 00:06:43,000 --> 00:06:47,120 Speaker 1: are and whether the cash on the sidelines is so 100 00:06:47,160 --> 00:06:50,400 Speaker 1: always say flexible. For example, we raised money for distress 101 00:06:50,440 --> 00:06:53,720 Speaker 1: debt fund in the expectation that there would be an 102 00:06:53,720 --> 00:06:58,960 Speaker 1: opportunity for distress which has not materialized yet. Admittedly, um, 103 00:06:59,000 --> 00:07:01,800 Speaker 1: and you know, if there is such an opportunity, we're 104 00:07:01,800 --> 00:07:03,719 Speaker 1: gonna swing into actually gonna put that money to work. 105 00:07:03,760 --> 00:07:05,880 Speaker 1: This is something we've done in the past. Well, we 106 00:07:05,960 --> 00:07:07,719 Speaker 1: hope to do it in the future if there's we 107 00:07:07,760 --> 00:07:09,200 Speaker 1: hope there will be an opportunity, and we hope to 108 00:07:09,200 --> 00:07:12,320 Speaker 1: do a good job with it. But given the nature 109 00:07:12,360 --> 00:07:16,360 Speaker 1: of the investment business, if uh, if let's say, uh, 110 00:07:16,960 --> 00:07:19,960 Speaker 1: to follow your argument, money flowed out of e t 111 00:07:20,160 --> 00:07:23,800 Speaker 1: F s and they had to sell the high flyers 112 00:07:23,840 --> 00:07:25,720 Speaker 1: that have done so well based on e t F 113 00:07:25,800 --> 00:07:27,960 Speaker 1: buying and they had to become sellers, and that drove 114 00:07:28,000 --> 00:07:31,200 Speaker 1: them down. We couldn't buy that because we can't take 115 00:07:31,240 --> 00:07:33,560 Speaker 1: the money we raise for distressed debt funds and buy 116 00:07:33,600 --> 00:07:39,520 Speaker 1: public equities. So uh. You know, in in the institutional 117 00:07:39,520 --> 00:07:43,360 Speaker 1: investment business, we talk about something called buckets. Which bucket 118 00:07:43,720 --> 00:07:47,120 Speaker 1: is your money for and our bucket is for private 119 00:07:47,600 --> 00:07:50,560 Speaker 1: distress debt. We can't take that money and buy put 120 00:07:50,600 --> 00:07:53,520 Speaker 1: it into a different bucket, which is public equities. So 121 00:07:53,840 --> 00:07:57,280 Speaker 1: if the if most of the dry powder is in 122 00:07:57,560 --> 00:08:02,680 Speaker 1: private equity and private debt and so forth, anybody who says, oh, 123 00:08:02,760 --> 00:08:04,640 Speaker 1: you know, if the market goes down, those private equity 124 00:08:04,640 --> 00:08:06,720 Speaker 1: guys will just go in and buy them up. It's 125 00:08:06,760 --> 00:08:09,920 Speaker 1: unlikely because people don't step out of their bucket that often. 126 00:08:10,040 --> 00:08:11,840 Speaker 1: So this is fascinating. Does that mean that there's more 127 00:08:11,840 --> 00:08:14,640 Speaker 1: of a floor under prices of private debt, say, or 128 00:08:15,320 --> 00:08:17,760 Speaker 1: distress debt than there is for equities. Well, of course 129 00:08:17,840 --> 00:08:20,400 Speaker 1: the private debt or distressed debt guys would say no, no, 130 00:08:20,440 --> 00:08:24,000 Speaker 1: we're gonna let it drop before we buy. But clearly, 131 00:08:24,280 --> 00:08:28,440 Speaker 1: the more buying power there is on the sidelines, the 132 00:08:28,480 --> 00:08:32,280 Speaker 1: more there's a floor, the less uh things will will 133 00:08:32,360 --> 00:08:35,719 Speaker 1: drop unremittingly, you were talking about how you don't think 134 00:08:35,720 --> 00:08:39,200 Speaker 1: that there is the same degree of leverage at investment 135 00:08:39,200 --> 00:08:42,120 Speaker 1: banks that there was leading up to the two crash. 136 00:08:42,400 --> 00:08:46,240 Speaker 1: I am hearing more about leverage being used by hedge funds, 137 00:08:46,280 --> 00:08:50,360 Speaker 1: in particular to buy equities and investment grade credit. How 138 00:08:50,400 --> 00:08:52,800 Speaker 1: concerned are you about this? Have you been hearing about this? 139 00:08:55,440 --> 00:08:59,839 Speaker 1: The willingness to use more leverage after the market has 140 00:09:00,040 --> 00:09:05,240 Speaker 1: risen making people feel good is indicative of, in my opinion, 141 00:09:05,760 --> 00:09:10,240 Speaker 1: the need for caution. UH. If people are using leverage 142 00:09:10,280 --> 00:09:14,959 Speaker 1: today who didn't use leverage five years ago, well, is 143 00:09:15,000 --> 00:09:17,440 Speaker 1: it is today a better buying opportunity or a worse 144 00:09:17,520 --> 00:09:20,599 Speaker 1: buying opportunity? Is it safer today or risk here? I 145 00:09:20,640 --> 00:09:22,800 Speaker 1: would say it's a worse buying opportunity. It's risk here. 146 00:09:22,840 --> 00:09:24,800 Speaker 1: So why are you using leverage today that you didn't 147 00:09:24,920 --> 00:09:28,880 Speaker 1: use five years ago? The answer is, given the low 148 00:09:28,920 --> 00:09:32,640 Speaker 1: prospective returns in all markets, it's hard to make money today, 149 00:09:32,840 --> 00:09:35,839 Speaker 1: so more and more people resort to leverage. Leverage does 150 00:09:35,880 --> 00:09:39,200 Speaker 1: not make an investment better. It only magnifies the results. 151 00:09:39,760 --> 00:09:42,360 Speaker 1: It magnifies the gains if there are gains, and losses 152 00:09:42,360 --> 00:09:45,480 Speaker 1: if there are losses. And uh So, the question is 153 00:09:45,520 --> 00:09:48,280 Speaker 1: why would you use leverage today that you didn't use 154 00:09:48,320 --> 00:09:52,720 Speaker 1: five years ago. It's by the way, you know, in 155 00:09:52,840 --> 00:09:56,320 Speaker 1: Las Vegas, Lisa, they say the more you bet, the 156 00:09:56,400 --> 00:09:59,679 Speaker 1: more you win when you win. Now, you can't argue 157 00:09:59,679 --> 00:10:02,600 Speaker 1: with that statement, but but any intelligent person should see 158 00:10:02,640 --> 00:10:09,080 Speaker 1: the fallacy. Uh you know you're talking about the private 159 00:10:09,120 --> 00:10:12,200 Speaker 1: equity and then in the cash being raised. I'm wondering, 160 00:10:12,240 --> 00:10:14,400 Speaker 1: you know, we have heard about the record amount of 161 00:10:14,440 --> 00:10:19,040 Speaker 1: money new record funds for buyouts or private debt. Do 162 00:10:19,080 --> 00:10:21,280 Speaker 1: you think that the worst case scenario for these is 163 00:10:21,320 --> 00:10:23,760 Speaker 1: that returns will be much lower, or that it could 164 00:10:23,800 --> 00:10:29,679 Speaker 1: potentially be even worse than that. The most likely negative 165 00:10:29,760 --> 00:10:35,000 Speaker 1: repercussion is that returns will be hard to come by 166 00:10:35,120 --> 00:10:40,640 Speaker 1: and maybe lower than investors have in mind. There's always 167 00:10:40,640 --> 00:10:47,079 Speaker 1: the possibility of negative returns, uh, but that would require uh, 168 00:10:47,240 --> 00:10:50,720 Speaker 1: something nearly cataclysmic, you know. I think that. I think 169 00:10:50,760 --> 00:10:54,400 Speaker 1: that in oh eight, when the global financial crisis was 170 00:10:54,720 --> 00:10:59,200 Speaker 1: raging after the Lehman bankruptcy, I believe that the private 171 00:10:59,200 --> 00:11:04,840 Speaker 1: equity font in general, the funds of oh five, six, seven, 172 00:11:04,960 --> 00:11:08,959 Speaker 1: maybe eight, we're looking at the prospect of losing money. 173 00:11:09,559 --> 00:11:12,000 Speaker 1: It happens that the government did a great job of 174 00:11:12,080 --> 00:11:16,520 Speaker 1: bailing out the financial sector, which reopened the credit window, 175 00:11:16,600 --> 00:11:20,040 Speaker 1: which enabled those companies to refinance their debts and push 176 00:11:20,120 --> 00:11:23,480 Speaker 1: them off. And also, of course, the government's bail out 177 00:11:23,520 --> 00:11:27,120 Speaker 1: brought back the economy and brought an end to the 178 00:11:27,640 --> 00:11:30,640 Speaker 1: to a significant recession. And the combination of those things 179 00:11:30,720 --> 00:11:34,720 Speaker 1: meant that those funds will now have moderate, I believe, 180 00:11:34,800 --> 00:11:37,800 Speaker 1: high single digit returns, and everybody will say, oh, not 181 00:11:37,840 --> 00:11:41,800 Speaker 1: so bad, and the returns on those funds will not 182 00:11:41,840 --> 00:11:44,400 Speaker 1: be bad. I believe they could have been worse, but 183 00:11:44,640 --> 00:11:48,400 Speaker 1: for the things that went right. So talking about returns 184 00:11:48,440 --> 00:11:50,640 Speaker 1: just last day, I want to touch base with you 185 00:11:50,880 --> 00:11:55,480 Speaker 1: on what you expect to be appropriate expectations for returns 186 00:11:55,480 --> 00:11:59,160 Speaker 1: for say, pension funds at this point. What's an appropriate 187 00:12:00,000 --> 00:12:03,800 Speaker 1: market if you if if if you walked into a 188 00:12:03,840 --> 00:12:07,400 Speaker 1: pension fund today which had no investments, and you were 189 00:12:07,440 --> 00:12:11,720 Speaker 1: given a pile of cash, and you invested today intelligently, 190 00:12:11,840 --> 00:12:18,720 Speaker 1: prudently but not shrinking from risk, I think you could 191 00:12:18,760 --> 00:12:25,160 Speaker 1: expect to make something in the vicinity of five in 192 00:12:25,200 --> 00:12:30,800 Speaker 1: the in the in the coming years from today. UM. 193 00:12:30,840 --> 00:12:33,040 Speaker 1: If you take more risk and everything goes right, you'll 194 00:12:33,040 --> 00:12:36,480 Speaker 1: make more, and vice versa. UM. The problem is, most 195 00:12:36,480 --> 00:12:38,840 Speaker 1: pension funds need seven and a half to make the 196 00:12:38,920 --> 00:12:43,400 Speaker 1: math work to make today's assets turn into enough to 197 00:12:43,440 --> 00:12:47,840 Speaker 1: pay tomorrow's benefits. Uh. And I think that making seven 198 00:12:47,880 --> 00:12:52,199 Speaker 1: a half from today will be quite a challenge and 199 00:12:52,240 --> 00:12:57,800 Speaker 1: will necessitate two things substantial risk taking and and good outcomes, 200 00:12:58,880 --> 00:13:02,439 Speaker 1: which means that there is a bigger risk of negative 201 00:13:02,480 --> 00:13:07,600 Speaker 1: outcomes and UH, much lower than even To respond to 202 00:13:07,640 --> 00:13:10,560 Speaker 1: the Las Vegas people, the more you bet, the more 203 00:13:10,600 --> 00:13:12,760 Speaker 1: you lose when you lose, So you can't have it 204 00:13:12,840 --> 00:13:18,520 Speaker 1: both ways. And I think that most investors see that 205 00:13:18,679 --> 00:13:25,119 Speaker 1: today's low return environment necessitates substantial risk taking. But substantial 206 00:13:25,200 --> 00:13:29,280 Speaker 1: risk taking, if it runs into bad outcomes, will will 207 00:13:29,760 --> 00:13:32,080 Speaker 1: lead to disappointment. That's all we can say for sure. 208 00:13:32,440 --> 00:13:34,679 Speaker 1: Poward Marks, thank you so much for joining. Thank you, 209 00:13:35,240 --> 00:14:05,920 Speaker 1: Poward Marks, co founder of oak Tree Capital Management. I 210 00:14:05,960 --> 00:14:08,920 Speaker 1: can hear Chris Salman singing this song. Chris Salman, the 211 00:14:09,000 --> 00:14:13,280 Speaker 1: chief investment officer of the California State Teachers Retirement System. 212 00:14:13,320 --> 00:14:15,080 Speaker 1: I believe he's got a little bit more than two 213 00:14:15,559 --> 00:14:20,280 Speaker 1: eight billion dollars under management. Chris, you're on your bicycle 214 00:14:20,360 --> 00:14:22,560 Speaker 1: now you have one in your office too. I know, 215 00:14:22,720 --> 00:14:25,880 Speaker 1: I wish I was. I actually tore the meniscus in 216 00:14:25,960 --> 00:14:29,000 Speaker 1: my knee dancing at my daughter's wedding. So I am 217 00:14:29,040 --> 00:14:33,120 Speaker 1: off my bike summer, but surgery. I'll be back soon, hopefully. 218 00:14:33,320 --> 00:14:36,880 Speaker 1: Well it was allah. It was all on a good cause, 219 00:14:36,920 --> 00:14:39,840 Speaker 1: as they say, exactly. I was dipping her. I I 220 00:14:39,880 --> 00:14:42,280 Speaker 1: have father daughter dance. I got to dip her and 221 00:14:42,880 --> 00:14:45,200 Speaker 1: boom out with my knee. I didn't drop though, So 222 00:14:45,240 --> 00:14:47,920 Speaker 1: it's okay. It was wonderful. Well good, Yeah, that that's 223 00:14:48,000 --> 00:14:50,440 Speaker 1: that's sort of like the investment philosophy, right, you know, 224 00:14:50,520 --> 00:14:52,920 Speaker 1: you take the risk and then you hope that nothing 225 00:14:52,960 --> 00:14:56,360 Speaker 1: bad happens and you bounce back. Good for you. Agree 226 00:14:56,480 --> 00:15:00,240 Speaker 1: with Howard Marks. But I have a couple of other 227 00:15:00,280 --> 00:15:02,440 Speaker 1: points to raise. Well, I want you to raise them. 228 00:15:02,440 --> 00:15:04,800 Speaker 1: I just want to offer people the context for that 229 00:15:04,880 --> 00:15:08,200 Speaker 1: California State Teachers Retirement System, which of course is the 230 00:15:08,240 --> 00:15:12,440 Speaker 1: second largest US pension fund, you earned thirteen point four 231 00:15:12,520 --> 00:15:17,880 Speaker 1: percent in the fiscal year ended June. Well done, there 232 00:15:17,880 --> 00:15:19,600 Speaker 1: you go. That does that make up for the for 233 00:15:19,640 --> 00:15:22,840 Speaker 1: the bad years? You know? Well, look at this tim 234 00:15:22,920 --> 00:15:26,880 Speaker 1: we made ten percent over five years. We've made just 235 00:15:27,080 --> 00:15:32,560 Speaker 1: about seven percent over the last twenty years net of fees. 236 00:15:33,160 --> 00:15:37,280 Speaker 1: That includes two very nasty recessions. So well, that's that 237 00:15:37,400 --> 00:15:39,400 Speaker 1: seven and a half bogey, right the seven and a 238 00:15:39,400 --> 00:15:43,200 Speaker 1: half percent the hurdle. No, it is below that, but 239 00:15:43,280 --> 00:15:46,360 Speaker 1: it's right out about seven. We're lowering our assumption rate 240 00:15:46,720 --> 00:15:48,760 Speaker 1: from seven and a half seven in the corner last 241 00:15:48,840 --> 00:15:52,160 Speaker 1: year seven percent this coming year. So you said that 242 00:15:52,200 --> 00:15:56,360 Speaker 1: you had some some responses to Howard Marks's comments where 243 00:15:56,360 --> 00:16:00,440 Speaker 1: he basically said that going forward, if pension funds were 244 00:16:00,520 --> 00:16:03,720 Speaker 1: to invest new money today, all of their money knew, 245 00:16:04,040 --> 00:16:08,240 Speaker 1: not including older legacy investments. That they could probably reliably 246 00:16:08,320 --> 00:16:12,880 Speaker 1: get a five percent return without taking excessive risk and 247 00:16:13,000 --> 00:16:16,440 Speaker 1: risking potential losses. Do you agree with that? Let me 248 00:16:16,520 --> 00:16:19,920 Speaker 1: frame the way, and I think for your investor listeners 249 00:16:19,920 --> 00:16:23,280 Speaker 1: that would help to frame that. Think about two thousand, 250 00:16:23,440 --> 00:16:27,120 Speaker 1: sixteen and seventeen as a vintage year. So your IRA 251 00:16:27,320 --> 00:16:30,880 Speaker 1: contribution this year, your money, if you invested it, as 252 00:16:30,920 --> 00:16:35,040 Speaker 1: you're saying, this year new money, what's a realistic expectation 253 00:16:35,200 --> 00:16:39,280 Speaker 1: for that over the near term? Five percent might be 254 00:16:39,440 --> 00:16:44,440 Speaker 1: acceptable The differences I invest every year again and again 255 00:16:44,600 --> 00:16:47,600 Speaker 1: for thirty years. So right now my portfolio, I have 256 00:16:47,720 --> 00:16:51,240 Speaker 1: investments that are over twenty five years old that were 257 00:16:51,280 --> 00:16:54,120 Speaker 1: made in the at the end of the nineties, where 258 00:16:54,160 --> 00:16:57,120 Speaker 1: they're going to have a double digit return, and I 259 00:16:57,160 --> 00:17:00,320 Speaker 1: think seven percent over the next thirty years is a 260 00:17:00,360 --> 00:17:03,400 Speaker 1: realistic number if you use today as a starting date. 261 00:17:03,440 --> 00:17:09,240 Speaker 1: And that's where Howard's coming from. Capital asset prices are expensive, 262 00:17:09,280 --> 00:17:13,640 Speaker 1: whether it's equities, public securities, and private securities are almost 263 00:17:13,680 --> 00:17:17,760 Speaker 1: priced to perfection, and so we recognize that new money 264 00:17:17,760 --> 00:17:20,120 Speaker 1: going to work this year may not have that great 265 00:17:20,119 --> 00:17:23,159 Speaker 1: of our return. This vintage year for private equity, this 266 00:17:23,359 --> 00:17:26,680 Speaker 1: vintage year for real estate, you can't expect to buy 267 00:17:26,680 --> 00:17:30,080 Speaker 1: a building at these prices and have a really high return. 268 00:17:30,720 --> 00:17:33,760 Speaker 1: But as he pointed out, when prices dropped, and that's 269 00:17:33,800 --> 00:17:37,000 Speaker 1: when Howard loves to invest. When when prices go down, 270 00:17:37,720 --> 00:17:39,800 Speaker 1: then he'll come into the market, and so will we. 271 00:17:40,440 --> 00:17:44,080 Speaker 1: I often say we're countercyclical. We have thirty year money. 272 00:17:44,240 --> 00:17:46,640 Speaker 1: We don't have to buy at the top. We can 273 00:17:46,680 --> 00:17:49,800 Speaker 1: wait and be patient and and look for lower prices. 274 00:17:49,880 --> 00:17:52,679 Speaker 1: And that's been a big discussion of my staff. I 275 00:17:52,800 --> 00:17:54,879 Speaker 1: was just with a group of c I O s 276 00:17:54,960 --> 00:17:58,320 Speaker 1: up in Canada last week. That was our key discussion 277 00:17:58,400 --> 00:18:02,920 Speaker 1: was asset prices being perfection. How much dry powder should 278 00:18:02,960 --> 00:18:07,159 Speaker 1: you hold back? How cautious should you be? Are you 279 00:18:07,160 --> 00:18:10,320 Speaker 1: holding back? Well? Right now, we're over two percent in cash, 280 00:18:10,400 --> 00:18:13,320 Speaker 1: and my staff met last week and is talking about 281 00:18:13,400 --> 00:18:16,840 Speaker 1: potentially raising that. We've been taking profits, Lisa, in this 282 00:18:17,040 --> 00:18:20,240 Speaker 1: US equity market since the start of the year. Every 283 00:18:20,240 --> 00:18:22,200 Speaker 1: time it hits the new high, we just shave off 284 00:18:22,240 --> 00:18:24,719 Speaker 1: a little bit of that profit. We've been putting that 285 00:18:24,800 --> 00:18:27,920 Speaker 1: in Europe and in Asia, but also building up our 286 00:18:28,359 --> 00:18:33,080 Speaker 1: our de risking assets, assets that that do better or 287 00:18:33,119 --> 00:18:36,600 Speaker 1: hold value when the markets go down. Um so those 288 00:18:36,640 --> 00:18:38,840 Speaker 1: assets didn't do well last year because the market was 289 00:18:38,920 --> 00:18:43,159 Speaker 1: up so so strong. But we're trying to balance that portfolio. 290 00:18:43,240 --> 00:18:45,560 Speaker 1: You've heard me say a year after year to the 291 00:18:45,640 --> 00:18:49,480 Speaker 1: to the listeners. It's all about rebalancing your asset allocation. 292 00:18:49,680 --> 00:18:54,080 Speaker 1: Don't let your equities run, rebalance into the less risky assets. 293 00:18:54,320 --> 00:18:57,240 Speaker 1: And I think that's what Howard's saying. Well, Chris Alman, 294 00:18:57,680 --> 00:18:59,719 Speaker 1: you know you you spend a lot of time listening 295 00:18:59,720 --> 00:19:02,119 Speaker 1: to hundits and experts, and you know you read all 296 00:19:02,200 --> 00:19:05,160 Speaker 1: the reports. I mean, what you're what you're proposing sounds 297 00:19:05,200 --> 00:19:08,119 Speaker 1: pretty reasonable and you don't necessarily need a PhD to 298 00:19:08,160 --> 00:19:11,359 Speaker 1: figure this out? Or do you? No, you don't. I 299 00:19:11,400 --> 00:19:14,720 Speaker 1: listen to you. You're the pundits expert. Don't do that. 300 00:19:15,200 --> 00:19:16,720 Speaker 1: You know that I listen to you. I ride my 301 00:19:16,760 --> 00:19:19,160 Speaker 1: bike to work sometimes I and I listen to you guys, 302 00:19:19,640 --> 00:19:23,280 Speaker 1: so and I hear and you're right. But my point is, 303 00:19:23,280 --> 00:19:25,560 Speaker 1: every time you ask, Chris, every time you ask someone 304 00:19:25,720 --> 00:19:29,560 Speaker 1: went to sell, no one ever has an answer. Oh exactly. 305 00:19:29,600 --> 00:19:32,679 Speaker 1: But but look at the stage advice from people like 306 00:19:32,720 --> 00:19:36,800 Speaker 1: Warren Buffett. You buy when everybody is nervous, and you 307 00:19:36,840 --> 00:19:40,040 Speaker 1: sell when everybody is greedy. So right now things are 308 00:19:40,080 --> 00:19:42,840 Speaker 1: priced to perfection. But even as Howard, he put out 309 00:19:42,840 --> 00:19:46,320 Speaker 1: a newsletter last week where he said it's it's they're 310 00:19:46,359 --> 00:19:50,160 Speaker 1: at it again again, but he admits he's often early. 311 00:19:50,240 --> 00:19:52,280 Speaker 1: We're at the we're in the late stages of this 312 00:19:52,359 --> 00:19:55,800 Speaker 1: economic expansion. But it could last for another year or 313 00:19:55,840 --> 00:19:59,000 Speaker 1: even two years. You don't know when it will crack. 314 00:19:59,240 --> 00:20:01,560 Speaker 1: So let's talk ab at that. Because we have heard 315 00:20:01,840 --> 00:20:06,720 Speaker 1: from some pensions, particularly in UH in Canada, they have 316 00:20:06,800 --> 00:20:10,720 Speaker 1: been investing directly in companies, buying them directly, basically competing 317 00:20:10,760 --> 00:20:15,359 Speaker 1: with private equity companies. You know that Cowper's is considering 318 00:20:15,440 --> 00:20:18,879 Speaker 1: doing the same. What about Calistas. We're looking at the 319 00:20:18,920 --> 00:20:20,919 Speaker 1: idea of teaming up with people. We don't think we 320 00:20:20,960 --> 00:20:23,680 Speaker 1: want to start from scratch um. We want to team 321 00:20:23,720 --> 00:20:26,080 Speaker 1: up with people that are already in the marketplace. And 322 00:20:26,119 --> 00:20:29,000 Speaker 1: this is part of recognizing as Pen was hitting me 323 00:20:29,080 --> 00:20:33,040 Speaker 1: with lower return environment. We can make or return out 324 00:20:33,040 --> 00:20:35,600 Speaker 1: of private equity, but if we can reduce our costs 325 00:20:35,880 --> 00:20:38,760 Speaker 1: a little bit of investing in private equity, that enhances 326 00:20:38,800 --> 00:20:41,960 Speaker 1: our return. So the idea of going and buying mid 327 00:20:42,080 --> 00:20:45,399 Speaker 1: sized companies directly instead of the old two and twenty 328 00:20:45,440 --> 00:20:49,520 Speaker 1: private equity model is much more attractive, and we've recognized 329 00:20:49,600 --> 00:20:52,439 Speaker 1: the spread and private equity has come down. You're not 330 00:20:52,480 --> 00:20:57,280 Speaker 1: getting three basis points are full three over public stocks, 331 00:20:57,400 --> 00:20:59,840 Speaker 1: probably only getting a hundred and fifty or one and 332 00:21:00,040 --> 00:21:02,840 Speaker 1: half percent over public stocks, but you're still getting a 333 00:21:02,880 --> 00:21:07,480 Speaker 1: premium over public markets. Chris just quickly. Is the investing 334 00:21:07,560 --> 00:21:11,159 Speaker 1: environment for let's say, environmentally friendly companies or companies that 335 00:21:11,520 --> 00:21:15,280 Speaker 1: respect the environment and so on, socially responsible? Is that 336 00:21:15,359 --> 00:21:17,399 Speaker 1: a key theme or is that something that was just 337 00:21:17,440 --> 00:21:20,400 Speaker 1: a buzzword and has gone away PIM I think we're 338 00:21:20,400 --> 00:21:23,359 Speaker 1: going to see today and into the future. I would 339 00:21:23,359 --> 00:21:27,440 Speaker 1: describe it as managements that actually think bigger and broader 340 00:21:27,440 --> 00:21:30,359 Speaker 1: than just the risks that appear in the next ninety days. 341 00:21:30,800 --> 00:21:33,920 Speaker 1: Managements that look out three to five years and think 342 00:21:33,960 --> 00:21:37,840 Speaker 1: about a broad section of material risk to their business. 343 00:21:37,960 --> 00:21:41,040 Speaker 1: Those companies are going to outperform other companies, says the 344 00:21:41,080 --> 00:21:43,840 Speaker 1: man who rides his bike to work. Chris Alman. Always 345 00:21:43,840 --> 00:21:45,680 Speaker 1: a pleasure. We love speaking with you. Chris Alman is 346 00:21:45,720 --> 00:21:49,159 Speaker 1: Chief Investment Officer of the California State Teachers Retirement System, 347 00:21:49,160 --> 00:21:52,600 Speaker 1: with more than two hundred billion dollars under management. It's 348 00:21:52,640 --> 00:22:08,520 Speaker 1: based in Sacramento, California. Now let's turn our attention to Sprint. 349 00:22:08,560 --> 00:22:10,120 Speaker 1: I want to find out what's going on there. We've 350 00:22:10,119 --> 00:22:12,160 Speaker 1: got John Butler. He is an expert when it comes 351 00:22:12,200 --> 00:22:16,680 Speaker 1: to telecom and telecom equipment, and he is joining us now. 352 00:22:16,720 --> 00:22:19,879 Speaker 1: He's of course from Bloomberg Intelligence and John Sprint up 353 00:22:19,920 --> 00:22:22,760 Speaker 1: a ten percent. That's the stock right now. What are 354 00:22:22,800 --> 00:22:27,520 Speaker 1: they doing? What what's causing this big move higher? Well? Sprinted? Okay, 355 00:22:27,600 --> 00:22:29,960 Speaker 1: in the quarter, you know, it was steady as she 356 00:22:30,080 --> 00:22:34,320 Speaker 1: goes um. Frankly, you know, they always do a very 357 00:22:34,359 --> 00:22:38,639 Speaker 1: good job about sort of managing investor expectations and giving 358 00:22:38,680 --> 00:22:42,000 Speaker 1: people the sense that they're writing the ship, and they are, 359 00:22:42,200 --> 00:22:45,120 Speaker 1: but it really is a cost cutting thing for them 360 00:22:45,119 --> 00:22:48,199 Speaker 1: more than a top line story. At this point. What 361 00:22:48,320 --> 00:22:51,359 Speaker 1: I think is driving the stock up is CEO Marcello 362 00:22:51,480 --> 00:22:59,680 Speaker 1: Clare was asked about potential combinations Charter, Yes, and he 363 00:22:59,720 --> 00:23:04,679 Speaker 1: told people to expect something coming soon. Um in the 364 00:23:04,720 --> 00:23:08,440 Speaker 1: near future, I believe was the term he used. Uh, 365 00:23:08,520 --> 00:23:09,840 Speaker 1: what are some of the what are some of the 366 00:23:09,920 --> 00:23:13,000 Speaker 1: possibilities in John Butler's Well, Before I answer that, I'll 367 00:23:13,040 --> 00:23:15,600 Speaker 1: just say I hope he's right, you know, Sprint has 368 00:23:15,640 --> 00:23:19,320 Speaker 1: been on the block for a while. Um Soft Bank 369 00:23:19,520 --> 00:23:25,160 Speaker 1: and in particular CEO uh Massa Yoshi San owns eight 370 00:23:25,280 --> 00:23:29,560 Speaker 1: percent of Sprint and he has really tried to monetize 371 00:23:29,600 --> 00:23:32,480 Speaker 1: that asset for a long time now, so tried to 372 00:23:32,520 --> 00:23:35,480 Speaker 1: sell it. Yeah, and it feels like a house that's 373 00:23:35,520 --> 00:23:37,879 Speaker 1: been on the market a little bit too long. You know, 374 00:23:38,080 --> 00:23:42,800 Speaker 1: it begins to get people wondering as to aging to Yeah, 375 00:23:42,920 --> 00:23:47,040 Speaker 1: what's really wrong there? But you know there's a convergence 376 00:23:47,080 --> 00:23:51,000 Speaker 1: now happening between cable and telecom or it's looming more 377 00:23:51,080 --> 00:23:54,240 Speaker 1: than anything. You see a T and T buying Time 378 00:23:54,240 --> 00:23:59,800 Speaker 1: Warner getting into content. Verizon has shown interest there through 379 00:24:00,000 --> 00:24:02,320 Speaker 1: a O L and Yahoo, both of which you have 380 00:24:02,359 --> 00:24:05,280 Speaker 1: a lot of content, and there's been talk that they're 381 00:24:05,359 --> 00:24:08,919 Speaker 1: kicking the tires and media land. So you know, the 382 00:24:08,960 --> 00:24:12,479 Speaker 1: potential for a cable company to buy Sprint or Sprint 383 00:24:12,520 --> 00:24:14,800 Speaker 1: to buy a cable company has been high on the 384 00:24:14,880 --> 00:24:20,639 Speaker 1: rumor mill um. You know, there's again potential, there's bundling potential. 385 00:24:20,680 --> 00:24:24,240 Speaker 1: They're right where people can buy their wireless, their cable, 386 00:24:24,280 --> 00:24:27,679 Speaker 1: their broadband all from one provider. You know, I have 387 00:24:27,760 --> 00:24:30,320 Speaker 1: to say, John and I this just shows the narrow 388 00:24:30,440 --> 00:24:33,359 Speaker 1: lens with through which I see the world. But here Sprint, 389 00:24:33,400 --> 00:24:36,040 Speaker 1: and I think, wow, They're the biggest issuer in the 390 00:24:36,119 --> 00:24:38,679 Speaker 1: high old bond market and the one point three trillion 391 00:24:38,720 --> 00:24:42,400 Speaker 1: dollar US higher bond market. They have more than twenty 392 00:24:42,440 --> 00:24:47,080 Speaker 1: four billion dollars in the main index that people track, 393 00:24:47,560 --> 00:24:49,800 Speaker 1: And this just makes me wonder. I mean, first of all, 394 00:24:49,920 --> 00:24:52,960 Speaker 1: would any buyer have to assume that date debt? And 395 00:24:52,960 --> 00:24:56,440 Speaker 1: how much of an obstacle is that to purchase? And 396 00:24:56,800 --> 00:24:59,840 Speaker 1: second of all, if it doesn't fall through, is there 397 00:25:00,080 --> 00:25:02,680 Speaker 1: chance that Sprint could go into a spiral and sort 398 00:25:02,680 --> 00:25:06,320 Speaker 1: of fail to pay the mounting UH interest payments that 399 00:25:06,400 --> 00:25:10,439 Speaker 1: it owes. We'll start by saying, thank god, I'm not 400 00:25:10,520 --> 00:25:14,200 Speaker 1: our credit analysts. We have a telecom credit analyst named 401 00:25:14,240 --> 00:25:17,400 Speaker 1: Steve Flynn who who knows the details better than I do. 402 00:25:17,560 --> 00:25:20,959 Speaker 1: But I will say if someone did acquire Sprint, they 403 00:25:21,000 --> 00:25:24,720 Speaker 1: would probably have to acquire that debt. And I think 404 00:25:24,760 --> 00:25:27,679 Speaker 1: Sprint is on a track now where they're sort of 405 00:25:27,800 --> 00:25:31,879 Speaker 1: out of danger in terms of making those payments. Things 406 00:25:31,920 --> 00:25:35,040 Speaker 1: can change overnight and telecom, as we all know, but 407 00:25:35,680 --> 00:25:38,920 Speaker 1: based on the current trajectory um, I would say they're 408 00:25:38,920 --> 00:25:43,920 Speaker 1: in pretty good shape for now Apple, what do you expect? 409 00:25:44,720 --> 00:25:48,080 Speaker 1: You know, the current quarter doesn't matter. People are really 410 00:25:48,160 --> 00:25:52,080 Speaker 1: all eyes are on September, uh, the September quarter, which 411 00:25:52,119 --> 00:25:55,960 Speaker 1: is their fiscal fourth quarter. Um, they have the launch 412 00:25:56,040 --> 00:25:59,800 Speaker 1: of the new iPhones coming, and just to sort of 413 00:26:00,040 --> 00:26:03,439 Speaker 1: at the table, we're expecting three new i phones. So 414 00:26:03,520 --> 00:26:06,199 Speaker 1: we'll get sort of a standard feature update of the 415 00:26:06,240 --> 00:26:09,920 Speaker 1: iPhone seven and seven plus that are on the market now. 416 00:26:10,520 --> 00:26:13,800 Speaker 1: So the iPhone seven s and the seven s plus 417 00:26:14,240 --> 00:26:20,359 Speaker 1: will have a similar screen, probably offer wireless charging, truly wireless, 418 00:26:20,480 --> 00:26:24,880 Speaker 1: or waterproof ports, and maybe a better camera. That's typically 419 00:26:24,920 --> 00:26:27,439 Speaker 1: what you see with you know, those kind of feature 420 00:26:27,520 --> 00:26:31,119 Speaker 1: upgrades or what you see with that sort of talk 421 00:26:31,200 --> 00:26:35,560 Speaker 1: here where you just get modest upgrades. But it is 422 00:26:35,600 --> 00:26:39,040 Speaker 1: the tenure anniversary of the iPhone, and there will be 423 00:26:39,160 --> 00:26:43,199 Speaker 1: hopefully a third iPhone called the iPhone X or the 424 00:26:43,240 --> 00:26:46,440 Speaker 1: iPhone eight as I've been calling it, which will be 425 00:26:47,040 --> 00:26:49,720 Speaker 1: a much bigger device, rumored to have a five point 426 00:26:49,760 --> 00:26:54,400 Speaker 1: eight inch screen, no bezels or those little side bars 427 00:26:54,440 --> 00:26:58,160 Speaker 1: that frame the screen on the side, So they're going 428 00:26:58,280 --> 00:27:01,000 Speaker 1: bezel lists, which will give you more real estate there. 429 00:27:01,760 --> 00:27:05,520 Speaker 1: And um, you know there's been talk of Component Delays. 430 00:27:07,400 --> 00:27:11,960 Speaker 1: John Butler, Senior Telecom Services and Equipment Analyst for Bloomberg Intelligence. 431 00:27:12,040 --> 00:27:18,280 Speaker 1: Always our pleasure to speak with you. Thanks for listening 432 00:27:18,359 --> 00:27:21,240 Speaker 1: to the Bloomberg P and L podcast. You can subscribe 433 00:27:21,240 --> 00:27:24,840 Speaker 1: and listen to interviews at Apple Podcasts, SoundCloud, or whatever 434 00:27:24,920 --> 00:27:28,399 Speaker 1: podcast platform you prefer. I'm pim Fox. I'm on Twitter 435 00:27:28,680 --> 00:27:32,440 Speaker 1: at pim Fox. I'm on Twitter at Lisa Abramo wits one. 436 00:27:32,640 --> 00:27:35,320 Speaker 1: Before the podcast, you can always catch us worldwide on 437 00:27:35,400 --> 00:27:36,240 Speaker 1: Bloomberg Radio