Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, along
Speaker 1: with my co host of Bonnie Quinn. Every business day
Speaker 1: we bring you interviews from CEOs, market pros, and Bloomberg experts,
Speaker 1: along with essential market moving news. Kind a Bloomberg Markets
Speaker 1: Podcast on Apple podcast or wherever you listen to podcasts,
Speaker 1: and on Bloomberg dot Com. Very excited to bring in
Speaker 1: our next guest. Bruce Greenwald is Professor emeritus at Columbia
Speaker 1: Business School. He is, of course famous for his seminal
Speaker 1: book on value investing. He's been teaching so many thousands
Speaker 1: of students about value investing during his days at Columbia
Speaker 1: over the past several decades, me being one of them.
Speaker 1: I remember very difficult days poring over the book of
Speaker 1: case studies that Bruce Greenwald used to hand out. But
Speaker 1: excited that he's back on for a fully updated edition
Speaker 1: of the seminal book Value Investing from Graham to Boot
Speaker 1: and beyond. So Bruce, welcome, Very great to have you
Speaker 1: on the program. It's been a rough decade for value investing,
Speaker 1: of course, but there was a little bit of talk
Speaker 1: recently that we might be heading into the value cycle again.
Speaker 1: What did you make of all of that. Look, I think,
Speaker 1: let me first say, Vanni, it's a real pleasure to
Speaker 1: talk to YouTube after so many years. The fact of
Speaker 1: the matter is that I think, in contrast to what
Speaker 1: happened in the tech boom at the end of the nineties,
Speaker 1: there are fundamental changes in the economy that have taken place.
Speaker 1: So even though the basic value principles are still going
Speaker 1: to be there, which is, you want to look intelligently
Speaker 1: for opportunities where you're more likely to be better positioned
Speaker 1: than the other side of the trade. You want to
Speaker 1: know the value of what you're buying, and you want
Speaker 1: to be disciplined. The changes in the world means you're
Speaker 1: going to have to apply them differently, and I think
Speaker 1: if value investors don't adapt, there may be short periods
Speaker 1: when they do well, but I don't think for the
Speaker 1: long term they're they're going to have the kinds of
Speaker 1: records that they historically had. So, Professor, what types of
Speaker 1: adaptations do you think investors should take to the extent
Speaker 1: that they really want to pursue value investing. Well, okay,
Speaker 1: so let's actually start with just what it is that's changed.
Speaker 1: So you have an idea of what you're adapting to.
Speaker 1: And there are two dominant trends in the global economy
Speaker 1: that affect investors. The first is manufacturing is dying and
Speaker 1: we're becoming a service economy, which means we're going from
Speaker 1: big centralized manufacturing facilities to very dispersed service facilities. And
Speaker 1: the second thing is, and this really amounts to the
Speaker 1: same thing tchech has basically disaggregated organizations. So you see
Speaker 1: it in the way that people work separately, which is
Speaker 1: the gig economy, but you also see it in the
Speaker 1: way in which organizations are separated out. So in the
Speaker 1: old days, if you are doing I t IBM did everything.
Speaker 1: If you look at it today, you know Microsoft does
Speaker 1: the operating system and basic functions, or Echo does the databases,
Speaker 1: Google does search, Intel does only the CPU chips, and
Speaker 1: Facebook does the interactions. So you're really going from large
Speaker 1: centralized organizations to really very decentralized one and that has
Speaker 1: three absolutely critical consequences. The first is that productivity growth
Speaker 1: is currently much harder on a decentralized basis, So going forward,
Speaker 1: you're not going to see the rate of improvement in
Speaker 1: productivity that you saw in the path. Although we're big
Speaker 1: organizations like McDonald's in the US learn to do it.
Speaker 1: We're going to do probably in the US better than
Speaker 1: other people. Second thing is when people work individually they
Speaker 1: get paid for what they do. They don't get paid
Speaker 1: the average wage, and that means that the distribution of
Speaker 1: income becomes much much more unequal, and that's going to continue.
Speaker 1: And I think the third thing, which is really what's
Speaker 1: crucial for value investors, is that you are moving from
Speaker 1: broad global markets, the gms, the gas of the world,
Speaker 1: to niche local markets. And big global markets are competitive
Speaker 1: small niche market I mean, for example, if you're gonna
Speaker 1: be viable at one percent market share, you're never going
Speaker 1: to keep anybody out of those big global markets, whereas
Speaker 1: small local markets are markets in which dominant competitors can
Speaker 1: enjoy barriers to entry based on economies of scale. And
Speaker 1: once that happens, once you've got these what Buffett refers
Speaker 1: to a franchise businesses, the whole investment world changes. So
Speaker 1: you have high returns on investment capital. So capital allocation
Speaker 1: can be hugely value creating as well as value destructive.
Speaker 1: You benefit from organic growth and revenue. I mean, if
Speaker 1: you're in a competitive market and revenue grows organically. Temporarily
Speaker 1: profits may go up, but then everybody enters and they
Speaker 1: just divide the business more finally, and the profits go away.
Speaker 1: And the same thing happens with the benefit of tech
Speaker 1: based margin growth, you know, is productivity goes up. In
Speaker 1: a competitive market, everybody rushes in. But if you benefit
Speaker 1: from barriers to entry, you get to enjoy that. And
Speaker 1: you see that, by the way, and what's happened to profits.
Speaker 1: In the early in the late eighties early nineties, profits
Speaker 1: were eight of national income. Today they're twelve to cent
Speaker 1: or higher, and they're probably going up. But here is
Speaker 1: the critical thing. Old fashioned asset based value investing is
Speaker 1: not going to do it for you. It's too small
Speaker 1: a part of the overall picture that assets aren't that
Speaker 1: important in a world where has got barriers to entry
Speaker 1: and franchise businesses, and there by the way, where you've
Speaker 1: got services and intangible assets, they're much harder to measure.
Speaker 1: So I think the first thing investors have to do
Speaker 1: is understand franchise businesses. Interesting case where we almost have
Speaker 1: a time, but I do want to get in one
Speaker 1: more question. If you talk to the likes of Joel
Speaker 1: greenbatt or Richard Bosina or Bill Miller, you'll come away
Speaker 1: with a very different style of value investing. A piece. Well,
Speaker 1: what distinguishes all of these different styles of value investing? Well,
Speaker 1: I don't think that they are as I say, there
Speaker 1: are three fundamental things that they all do. I think that,
Speaker 1: you know, the crucial difference between traditional value investors and
Speaker 1: them is that they've actually adapted much better, that they
Speaker 1: understand that growth creates value in this world, and you
Speaker 1: can't invest and look for value without understanding how to
Speaker 1: put value on growth. And I think that is the
Speaker 1: single overwhelming style difference. And I think, frankly the future
Speaker 1: lies with the Bill Millers and the Joel Green plots
Speaker 1: for the world. And in fact, what the book is
Speaker 1: really about is about adapting to this new environment where
Speaker 1: all of a sudden, the historical distinction between growth investing
Speaker 1: what you would call varieties of value investing and traditional
Speaker 1: sort of cigar but asset has gone away. A Bruce,
Speaker 1: thank you so much for joining us there. Bruce Bruce Greenwald,
Speaker 1: Professor Emeritus at Columbia Business School, Chairman of the Paradigm
Speaker 1: Capital Management, and senior advisor at First Eagle investment manager
Speaker 1: and of course author of the book Value Investing From
Speaker 1: Graham to Buffett and beyond. We always appreciate listening to
Speaker 1: the thoughts of Professor Greenwald. I think about value investing.
Speaker 1: It's really been challenging in this market where growth has
Speaker 1: really been the dominant theme really for a couple of decades.
Speaker 1: Right now and at this time now to take a
Speaker 1: look at the credit markets and maybe the markets more broadly,
Speaker 1: let's bring in MinC you count on Depine, chief investment
Speaker 1: officer of Western Asset Management. I say the credit markets
Speaker 1: because they're top of mind today, Mike, what with a
Speaker 1: MC being in a little bit of trouble. We know
Speaker 1: that the movie theaters have already tapped all the credit
Speaker 1: that possibly is available to them, except for private individuals
Speaker 1: that are looking to do that. And just curious as
Speaker 1: to where you see the credit markets right now, Well,
Speaker 1: there's no question and by the way, Vanni and Paul,
Speaker 1: thank you for having me on UM. There's no no
Speaker 1: question that UM, there is still stress in the credit market.
Speaker 1: You mentioned amc Um. There's a lot of companies, there's
Speaker 1: a lot of industries that have done pretty much everything
Speaker 1: they possibly could to survive to this point, UM, some
Speaker 1: aren't going to make it, and you actually see that
Speaker 1: in the default numbers. UM. I think many because the
Speaker 1: capital will markets up so quickly back in late March
Speaker 1: and early April UH, some were able to access that
Speaker 1: rescue financing and even though they paid dearly for doing that. UM.
Speaker 1: I think it's going to be a wise move on
Speaker 1: their part, and UM will at least minimize how many
Speaker 1: of these companies actually had to ultimately restructure or or
Speaker 1: file so UM. I think the credit markets right now,
Speaker 1: there's no question that some of the rally that we
Speaker 1: were expecting to occur in two thousand one, some of
Speaker 1: that has been pulled forward into two thousand twenty, just
Speaker 1: with clarity on the vaccine. UM. I think everyone's expecting
Speaker 1: as we are bouncing growth, a bouncing earnings UM. But
Speaker 1: that being said, I still think the credit markets have
Speaker 1: room for performance as we move forward over the next
Speaker 1: few quarters, probably going to be more of a focus
Speaker 1: on income, focus on carry trade versus what we've seen
Speaker 1: over the last two or three quarters, which has really
Speaker 1: been you know about capital appreciation and spread tightening. I
Speaker 1: think the magnitude of that spread tightening is probably behind
Speaker 1: us but but still opportunity UM in fixed income resectors
Speaker 1: broadly and UM in particular in credit. So, Mike, you
Speaker 1: talked about some performance maybe being brought forward a little
Speaker 1: bit here in let's talk about high yield. Is there
Speaker 1: any value left in high yield? It's amazing to me,
Speaker 1: you know, how well that market has performed, given some
Speaker 1: of the potential credit risks out there that are are
Speaker 1: quite likely, you know, even going well into Yeah, it
Speaker 1: is surprising. And if you just think about where we
Speaker 1: were uh in the depths of March and into early April,
Speaker 1: and you know, now high yields up over six percent
Speaker 1: year to date. UM. But I would say this, there's
Speaker 1: a lot of disparity in high yield UM. If you
Speaker 1: look at you know, just even by rating category UH,
Speaker 1: double B high quality is doing very well, you know,
Speaker 1: up nine and a half percent, triple CS uh. You know,
Speaker 1: just think of the lowest quality within high yield UH
Speaker 1: just up over a little over four percent year to date,
Speaker 1: and then take that even further UM by industry energy
Speaker 1: is negative still two percent year to date. UM. So
Speaker 1: there is a lot of disparity within the high yield market.
Speaker 1: And yes, we do still think there are opportunity. I
Speaker 1: think it's um. You know, again, if you go back
Speaker 1: to late March and early April, it was really just
Speaker 1: get risk in high yield. Clearly the downside had overshot
Speaker 1: and you just want to capitalize on that trade. I
Speaker 1: think going forward you're gonna see, um, just just a
Speaker 1: lot more disparity or um, you know, just different markets
Speaker 1: out performing in different markets under performing. So I think
Speaker 1: it's really gonna end up being you know, you got
Speaker 1: to pick the right credits, you gotta pick the right industries,
Speaker 1: really focus on bottom up discipline, fundamental research. Um. So.
Speaker 1: I I do think that's there's opportunity there. Um. But again,
Speaker 1: I don't think it's going to be as obvious, and
Speaker 1: I think it's gonna take a little more work to
Speaker 1: identify those trades. That said, we're not getting any new
Speaker 1: stimulus that we know of. Yes, I mean maybe it
Speaker 1: will happen, but we don't know how that will impact businesses.
Speaker 1: Surely there's going to be another round of bankruptcy, is Mike, Um,
Speaker 1: I do think. I mean, I don't think there's going
Speaker 1: to be an elevated spike of bankruptcies. UM. I think
Speaker 1: we know or at least have a reasonable idea of
Speaker 1: which companies are on the verge of having to file UM.
Speaker 1: If you look at trading levels, I think the market
Speaker 1: does a pretty good job of identifying those credits, and
Speaker 1: they tend to trade it very stressed or distressed prices. UM.
Speaker 1: I only I think the only way that we would
Speaker 1: get UM sort of a new flare up, if you will,
Speaker 1: or another round of defaults or bankruptcies, is if we
Speaker 1: had disappointment on the vaccine. I think between now and
Speaker 1: when we expect the vaccine to make its way into
Speaker 1: the broad population, let's call that maybe over the next
Speaker 1: two quarters. UM. I think the market is is expecting that.
Speaker 1: I think the liquidity and on most of the balance
Speaker 1: sheets of companies that are in the high old market
Speaker 1: is sufficient to get to that point. However, again, if
Speaker 1: we had disappointment and UM, you know that vaccine wasn't
Speaker 1: as successful or the vaccines aren't as successful, and this
Speaker 1: extends into the latter part of two thousand twenty one,
Speaker 1: I do think then you know you're you're you're going
Speaker 1: to see some more vulnerabilities. You're going to see some
Speaker 1: of these at risk sectors and at risk companies either
Speaker 1: have to get another round of secured financing, or perhaps,
Speaker 1: as you alluded to, UM, have to to restructure. But
Speaker 1: I don't think that's in our base case. Hey Mike,
Speaker 1: what's uh, what's your thoughts on Janet Yelling as by
Speaker 1: the Treasury Secretary nominee. Yeah, I think that was a
Speaker 1: wise choice. UM, definitely calming to the markets. UM. You know,
Speaker 1: even saw uh Larry Cudlow comment on that, and you
Speaker 1: know he's one of the few from the Trump administration
Speaker 1: to say anything, but clearly, I mean Janet Yell, you know,
Speaker 1: sensible views on the economy as a former FED chair. Um.
Speaker 1: You know, I think there's a certain level of comfort
Speaker 1: in the market knowing that she understands the cohesion that's
Speaker 1: necessary between between Fed and White House policy. UM. So
Speaker 1: I think that was a wise choice and I think
Speaker 1: definitely UM was was calming to the markets. So Michael,
Speaker 1: will you be looking out now through year end? Are
Speaker 1: we going to see this Santa calus while I continue? Yeah,
Speaker 1: I think you know the new issue volume that m
Speaker 1: in both the investment grade market and the high old market.
Speaker 1: You know, those are two records. There's just an extra
Speaker 1: ainary amount of new issuance UM. Now, a lot of
Speaker 1: that was for refinancing, which I think is a good thing.
Speaker 1: If you're a lender UM and you want to uh
Speaker 1: classify new issuance into something that's either bondholder friendly or
Speaker 1: bondholder not friendly, we'd obviously rather see more friendly purposes,
Speaker 1: which we would call refinancing. Is definitely a friend friendly
Speaker 1: use of proceeds UM. But clearly you're going to see
Speaker 1: a slowdown in new issue volume over the next couple
Speaker 1: of weeks. Um money continues to come into these markets,
Speaker 1: both investment grade and high yield have seen uh you know,
Speaker 1: an extraordinary amount of flows into both institutional as well
Speaker 1: as retail funds, So, you know, good technical backdrop from
Speaker 1: that perspective. More money continuing to come in, uh, you know,
Speaker 1: less new issue should result in at least stable spreads
Speaker 1: and stable markets. In my opinion, Hey, Mike, thanks so
Speaker 1: much for joining us. We really appreciate your thoughts. Might
Speaker 1: be Cannon, Deputy Chief investment officer for Western Asset Management
Speaker 1: based out in Pasadena, California, really giving us their thoughts
Speaker 1: on the fixed income markets. Again, new issuance all time high. Well,
Speaker 1: we have seen several shots now of nurses critical care
Speaker 1: and nurses getting their first adviser beyond take shots. So
Speaker 1: the first vaccines are out there. Let's get straight to
Speaker 1: Bob Landgrath, who is a Bloomberg healthcare reporter here for
Speaker 1: us on this rollout. So deaths are approaching three hundred
Speaker 1: thousand and continuing to rise. Bob, how fast can the
Speaker 1: distribution network get this vaccine out to where it needs
Speaker 1: to be? Oh? Yeah, no, this is going to take
Speaker 1: a while. This is a long slow process. And you
Speaker 1: mentioned the gas approaching three hundred thousand. Unfortunately, those deaths
Speaker 1: are going to continue to increase because many of them
Speaker 1: are essentially you know, they're based on people who have
Speaker 1: already been infected weeks ago. So the numbers want to
Speaker 1: continue to to go to to go up, to go
Speaker 1: up in the terms of the guests for a few
Speaker 1: weeks because the number of vaccines that are available, you know,
Speaker 1: that's just not going to make you a big impact
Speaker 1: on death for a while to come. But it's very
Speaker 1: important to get this rollout going absolutely, and the people
Speaker 1: that are being vaccinated now are you know, healthcare workers
Speaker 1: and then the nursing home residents as small fraction of
Speaker 1: the population those are kind of the priority people that
Speaker 1: haven't decided that will get it first, because you know,
Speaker 1: they're on the front lines. And in terms of the
Speaker 1: healthcare workers, and then the nursing home residents obviously have
Speaker 1: some of the highest death rates and account for a
Speaker 1: large percentage of the death toll in the United States.
Speaker 1: So right now there's in this initial way there's only
Speaker 1: two point nine million doses available, so that's a very
Speaker 1: small faction of even healthcare workers uh and uh uh
Speaker 1: nursing home residents, and and then the next week there's
Speaker 1: only more. In the week after that's gonna be more,
Speaker 1: and hopefully by the end of this week will get
Speaker 1: the moderna vaccine as well, not you approximately double the
Speaker 1: number of doses you know, available per week. Uh, So
Speaker 1: you know, it is starting to roll out. As people
Speaker 1: have said, this is kind of the who we hope
Speaker 1: this is the beginning of the end, but still only
Speaker 1: the beginning, and it's going to take a while, and
Speaker 1: that's very important. People still should take precautions until we
Speaker 1: get to this difficult period right now and much larger
Speaker 1: percentage of population is able to be vaccinated. Dr Faucci
Speaker 1: just now on MSNBC says Americans with no underlying conditions
Speaker 1: should get the vaccines at the end of March or
Speaker 1: the beginning of April can according to Dr Fauci, just
Speaker 1: now an MSNBC. UM, So interesting, Bob, what do we
Speaker 1: know about the MODERNA drug again? It we It looks
Speaker 1: like they're going to be just a week behind Fiser.
Speaker 1: Get the approval Thursday, I guess, and then maybe start
Speaker 1: rolling it out over the weekend like we just saw
Speaker 1: with Fiser. Is there any reason to believe that Moddarian
Speaker 1: will run into any roadbox. No, there are actually no
Speaker 1: reason to believe I'm the Durnal run into any load box.
Speaker 1: It's actually a very similar vaccine to the Fiser vaccine
Speaker 1: that they're both based on this messenger RNA technology. It's
Speaker 1: a new technology. It turns out to work be working
Speaker 1: very well against the coronavirus U. Both of these vaccines
Speaker 1: about efficacy rate, uh, and so this is very similar.
Speaker 1: So you know, unless there's some surprises, Yeah, this should
Speaker 1: should roll out around, start rolling out around and say Friday,
Speaker 1: unless there's some showstopp or surprise. We don't don't know
Speaker 1: about that. That's that's the very good news. You know
Speaker 1: that the bad news is that both of these because
Speaker 1: they're a new technology, isn't the manufacturing experience, and they
Speaker 1: have to make this enormous quantities and these factories are
Speaker 1: still current just gearing up now and that's why you're
Speaker 1: at first for the first few months, there's definitely, you know,
Speaker 1: going to be a shortage of vaccine to go around.
Speaker 1: Can you give us some idea of the supply chain
Speaker 1: and how it works and how you know a vaccine
Speaker 1: gets from a factory to a hospital. Yeah, there are
Speaker 1: several steps involved, and there's distribution hubs and UH. I
Speaker 1: know that UPS and set X are involved and helping
Speaker 1: ship uh the the Friser vaccine UH to to the
Speaker 1: right places where it's needed. Uh. It's a very complicated
Speaker 1: supply chain. Those governments monitoring it very closely. Once it
Speaker 1: gets into individual states and locations, then it's more the
Speaker 1: responsibility of the local states and hospital change to distribute
Speaker 1: it once they get their allocations. But the U. S.
Speaker 1: Government is kind of setting the allocations for the individual
Speaker 1: states and territories and that's kind of the first step.
Speaker 1: And then and then the manufacturing that's complicated as well.
Speaker 1: Because these are injections. There's a manufacturing of the raw ingredients,
Speaker 1: the m or and A itself at one factory, but
Speaker 1: then there's a separate factory that does you know, puts
Speaker 1: it into vials and insures it as sterile. So there's
Speaker 1: several steps there as well. So it's all kind of
Speaker 1: a very complicated system, made more complicated by the fact that,
Speaker 1: as everyone's probably heard by now, Fighter's vaccine, these extreme
Speaker 1: cold storage requirements, uh. And that means either extra ultracold freezers,
Speaker 1: special ultracote fezers, or special dry ice containers that fisers
Speaker 1: developed for places that don't have those freezers. Hey Bob,
Speaker 1: how do we or how does the how is it
Speaker 1: determined how much each state will receive? As it simply
Speaker 1: pop elation is an infection rates the we Is there
Speaker 1: a formula? Yeah? I believe that the government, I'm not
Speaker 1: totally sure sure the government's kind of U S government
Speaker 1: has set that that those figures, and I believe it's
Speaker 1: you know, due to you know, it's more in the
Speaker 1: total population in the group's uh, in the groups at
Speaker 1: risk for the vaccident, But I don't know the fine
Speaker 1: details of that. Where are we looking at more? Lockdown's
Speaker 1: build a Blasio here? In New York, the mayor of
Speaker 1: the city talking about the potential for New York City
Speaker 1: to go into lockdown. Is that happening around the country still? Yeah, so, uh,
Speaker 1: I mean, I think what people need to think about
Speaker 1: is uh that, yes, these vaccines are starting to law,
Speaker 1: and that's very very good news, you know. But the
Speaker 1: fact is we're still you know, in the thick of
Speaker 1: like the worst ways of the pandemic, and these vaccines
Speaker 1: are not gonna impact what's happening right now in terms
Speaker 1: of infections and deaths. You know, they're not kind of
Speaker 1: significant impact on that, you know, on a kind of
Speaker 1: broad basis, uh, for for quite you know, quite a while.
Speaker 1: Quite a number of people you know are vaccinated. Obviously
Speaker 1: they'll help the people who get the vaccines. That's just
Speaker 1: a very small percentage right now. So in terms of
Speaker 1: the big picture, you know, what we need to do
Speaker 1: to to to control this right now, it's the same
Speaker 1: things that we need to be doing more of. It's
Speaker 1: you know, avoiding credit places, wearing masks and all those things,
Speaker 1: and those are gonna need to replace day in place
Speaker 1: or quite some time. Hey, Bob, thanks so much for
Speaker 1: joining us. As always, you always appreciate your reporting about
Speaker 1: Langreth Bloomberg Healthcare reporter giving us the latest on the
Speaker 1: vaccine rollout. Again, we've all probably seen images from this
Speaker 1: morning vaccines being given around the country, Day one of
Speaker 1: vaccines and what is sure to be a long process.
Speaker 1: Did it's time now to take a look at the
Speaker 1: credit markets and then maybe the markets more broadly, let's
Speaker 1: bring in Mike Puccount and Deputy Chef Investment Officer of
Speaker 1: Western Asset Management. I say the credit markets because they're
Speaker 1: top of mind today, Mike, what with a MC being
Speaker 1: in a little bit of trouble. We know that the
Speaker 1: movie theaters have already topped all the credit the possibly
Speaker 1: is available as them except for private individuals that are
Speaker 1: looking to do that. And just curious as to where
Speaker 1: you see the credit markets right now. Well, there's no
Speaker 1: question and by the way, Vanni and Paul, thank you
Speaker 1: for having me on UM. There's no no question that, Um,
Speaker 1: there is still stress in the credit markets. You mentioned
Speaker 1: amc Um. There's a lot of companies, there's a lot
Speaker 1: of industries that have done pretty much everything they possibly
Speaker 1: could to survive to this point. Um, some aren't going
Speaker 1: to make it. And you actually see that in the
Speaker 1: default numbers. UM I think many because the capital markets
Speaker 1: up so quickly back in late March and early April UH,
Speaker 1: some were able to access that rescue financing and even
Speaker 1: though they paid dearly for doing that. UM I think
Speaker 1: it's going to be a wise move on their part,
Speaker 1: and UM will at least minimize how many of these
Speaker 1: companies actually had to ultimately restructure or or file. So
Speaker 1: UM I think the credit markets right now, there's no
Speaker 1: question that some of the rally that we were expecting
Speaker 1: to occur in two thousand one, some of that has
Speaker 1: been pulled forward into two thousand twenty, just with clarity
Speaker 1: on the vaccine. UM I think everyone's expecting as we
Speaker 1: are bouncing growth a bouncing and earnings UM. But that
Speaker 1: being said, I still think the credit markets have room
Speaker 1: for performance as we move forward over the next few quarters,
Speaker 1: probably going to be more of a focus on income,
Speaker 1: focus on carry trade versus what we've seen over the
Speaker 1: last two or three quarters, which has really been you
Speaker 1: know about capital appreciation and spread tightening. I think the
Speaker 1: magnitude of that spread tightening is probably behind us, but
Speaker 1: but still opportunity UM in fixed income resectors broadly and
Speaker 1: UM in particular in credit. So, Mike, you talked about
Speaker 1: some performance maybe being brought forward a little bit here
Speaker 1: in let's talk about high yield. Is there any value
Speaker 1: left in high yield? It's amazing to me, you know,
Speaker 1: how well that market has performed, given some of the
Speaker 1: potential credit risks out there that are are quite likely,
Speaker 1: you know, even going well into Yeah, it is surprising.
Speaker 1: And if you just think about where we were, uh
Speaker 1: in the depths of March and into early April, and
Speaker 1: you know, now high yields up over six percent year
Speaker 1: to date. UM. But I would say this, there's a
Speaker 1: lot of disparity in high yield UM. If you look
Speaker 1: at you know, just even by rating category UH, double
Speaker 1: B high quality is doing very well, you know, up
Speaker 1: nine and a half percent, triple CS UH. You know,
Speaker 1: just think of the lowest quality within high yield UH
Speaker 1: just up over a little over four percent year to date,
Speaker 1: and then take that even further UM by industry energy
Speaker 1: is negative still two percent year to date. UM. So
Speaker 1: there is a lot of disparity within the high yield market.
Speaker 1: And yes, we do still think there are opportunity. I
Speaker 1: think it's um you know again, if you go back
Speaker 1: to late March and early April, it was really just
Speaker 1: get risk in high yield. Clearly the downside had overshot
Speaker 1: and you just want to capitalize on that trade. I
Speaker 1: think going forward you're going to see, um, just just
Speaker 1: a lot more disparity or um, you know, just different
Speaker 1: markets out performing in different markets underperforming. So I think
Speaker 1: it's really gonna end up being you know, you got
Speaker 1: to pick the right credits, you gotta pick the right
Speaker 1: industry is really focus on bottom up discipline, fundamental research um.
Speaker 1: So I do think that's there's opportunity there um. But again,
Speaker 1: I don't think it's going to be as obvious, and
Speaker 1: I think it's gonna take a little more work to
Speaker 1: identify those trades. That said, we're not getting any new
Speaker 1: stimulus that we know of. Yes, I mean maybe it
Speaker 1: will happen, but we don't know how that will impact businesses.
Speaker 1: Surely there's going to be another rout of bankruptcies, Mike, Um,
Speaker 1: I do think. I mean, I don't think there's going
Speaker 1: to be an elevated spike of bankruptcyes. Um. I think
Speaker 1: we know, or at least have a reasonable idea of
Speaker 1: which companies are on the verge of having to file UM.
Speaker 1: If you look at trading levels, I think the market
Speaker 1: does a pretty good job of identifying those credits and
Speaker 1: they tend to trade it very stressed or distressed prices.
Speaker 1: Um all. I think the only way that we would
Speaker 1: get UM sort of a new flare up, if you will,
Speaker 1: or another round of defaults or bankruptcies, is if we
Speaker 1: had disappointment on the vaccine. I think between now and
Speaker 1: when we expect the vaccine to make its way into
Speaker 1: the broad population, let's call that maybe over the next
Speaker 1: two quarters. UM. I think the market is is expecting that.
Speaker 1: I think the liquidity and on most of the balance
Speaker 1: sheets of companies that are in the high you old
Speaker 1: market is sufficient to get to that point. However, again,
Speaker 1: if we had disappointment and UM, you know that vaccine
Speaker 1: wasn't as successful or the vaccines aren't as successful, and
Speaker 1: this extends into the latter part of two thousand twenty one,
Speaker 1: I do think then you know you're you're you're going
Speaker 1: to see some more vulnerabilities. You're going to see some
Speaker 1: of these at risk sectors and at risk companies either
Speaker 1: have to get another round of secured financing or perhaps
Speaker 1: as you alluded to, UM have to to restructure, but
Speaker 1: I don't think that's in our base case. Hey Mike,
Speaker 1: what's uh, what's your thoughts on Janet Yelling as Biden's
Speaker 1: Treasury Secretary nominee. Yeah, I think that was a wise choice. UM.
Speaker 1: Definitely calming to the markets. UM. You know even saw
Speaker 1: uh Larry Cudlow comment on that, and you know he's
Speaker 1: one of the few from the Trump administration to say anything,
Speaker 1: but clearly I mean Janet Yelling, you know, sensible views
Speaker 1: on the economy as a former FED share UM. You know,
Speaker 1: I think there's a certain level of comfort in the
Speaker 1: market knowing that she understands the cohesion that's necessary between
Speaker 1: between Fed and White House policy. UM. So I think
Speaker 1: that was a wise choice and I think definitely UM
Speaker 1: was was calming to the markets. So Michael, will you
Speaker 1: be looking out now through year end? Are we going
Speaker 1: to see this Santa calls while I continue? Yeah? I
Speaker 1: think you know the new issue volume that UM in
Speaker 1: both the investment grade market and the high old market.
Speaker 1: You know, those are two records. There's just an extraordinary
Speaker 1: amount of new issuance. UM. Now, a lot of that
Speaker 1: was for REEF financing, which I think is is a
Speaker 1: good thing. If you're a lender UM and you want
Speaker 1: to classify new issuance into something that's either bondholder friendly
Speaker 1: or bondholder not friendly, we'd obviously rather see more friendly purposes,
Speaker 1: which we would call reefing dancing is definitely a friendly
Speaker 1: use of proceeds UM. But clearly you're going to see
Speaker 1: a slowdown in new issue volume over the next couple
Speaker 1: of weeks. Um money continues to come into these markets,
Speaker 1: both investment grade and high yield have seen, uh, you know,
Speaker 1: an extraordinary amount of flows into both institutional as well
Speaker 1: as retail funds, so you know, good technical backdrop from
Speaker 1: that perspective. More money continuing to come in, uh, you know,
Speaker 1: less new issue should result in at least stable spreads
Speaker 1: and stable markets in my opinion, Hey Mike, thanks so
Speaker 1: much for joining us. We really appreciate your thoughts. Mike P. Canon,
Speaker 1: Deputy Chief Investment Officer for Western Asset Management based out
Speaker 1: in Pasadena, California, really giving us up their thoughts on
Speaker 1: the fixed income markets again, new issuance all time high.
Speaker 1: Thanks for listening to Boomberg Markets podcast. You can subscribe
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