Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. This He's Master's in
Speaker 1: Business with Barry Ritholts on Bloomberg Radio.
Speaker 2: This week on the podcast, another extra special guest, Matt
Speaker 2: Sherwin is co founder and chief investment officer at Merrek Capital.
Speaker 2: He'd previously spent sixteen years at JP Morgan Chase and
Speaker 2: then a bunch of years at City Group beforehand, running
Speaker 2: all sorts of spread markets, head of securitized product, lots
Speaker 2: of CIO and risk management titles. I came to no
Speaker 2: Maerk through a live event we did Atloomberg last year.
Speaker 2: I found that his approached to credit and trading is
Speaker 2: absolutely fascinating, and what Marek is doing is really quite interesting.
Speaker 2: I thought the conversation was brilliant, and I think you
Speaker 2: will also with no further ado, my conversation with Merreck Capitals.
Speaker 2: Matt Sherwin, Matt Scharnwin, Welcome to Bloomberg.
Speaker 3: Thanks for having me. This is exciting. That was kind
Speaker 3: of That was a bigger wind up than I was.
Speaker 2: I like, I like a big wind up because it
Speaker 2: gives us an opportunity to roll back to the beginning
Speaker 2: and say, all right, Bachelors and economics from the University
Speaker 2: of Pennsylvania. What was the original career plan. I don't
Speaker 2: imagine people going to college and saying I want to
Speaker 2: be the head of global spread markets.
Speaker 3: No. But that's super interesting because our oldest is a
Speaker 3: sophomore in college now and he's in the business school
Speaker 3: to American and I was just talking to him yesterday
Speaker 3: and he said, I'm now in I think they call
Speaker 3: it like finance for Business. I really liked this new
Speaker 3: class and I said to him, that remind finds me
Speaker 3: so well of when I was in undergrad business school
Speaker 3: and I did the first couple of semesters at ECON
Speaker 3: and I hated it.
Speaker 2: And I had a similar experience, and it was like.
Speaker 3: You know, I shouldn't have hated it as much as
Speaker 3: I did, but at the time, uh, it was ilm curves,
Speaker 3: it was supply, it was demand, et cetera. And it
Speaker 3: just it felt it didn't feel very practical to me,
Speaker 3: and I didn't do very well and I didn't go
Speaker 3: to class very often. I didn't do very well. But
Speaker 3: then we got to kind of the next semester, which
Speaker 3: I think they called finance one oh one and was
Speaker 3: like bond math, discounted cash flows, and I was like,
Speaker 3: oh this, I like, okay, I am in the right worl.
Speaker 2: Well, it's much more realistic and you're not dealing with
Speaker 2: homo economy because that is this theoretical.
Speaker 3: Looking back on, I wish I had listened a bit
Speaker 3: more at some of those others. But you know something
Speaker 3: I say, maybe we'll get to is like it just
Speaker 3: in recommendation would give to other people. It took me
Speaker 3: a little while to realize what I was introd in,
Speaker 3: what I was interested in being interested in. And when
Speaker 3: I got into some of those classes, kind of the
Speaker 3: more financi kind of stuff, I was like this, I
Speaker 3: like this makes sense. I want to learn more, and
Speaker 3: I think that's kind of where it's right. So I
Speaker 3: always wanted to I just like, when there's you know,
Speaker 3: numbers on the page, it adds up to something you're
Speaker 3: trying to make money. It's hopefully positive at the end,
Speaker 3: it might be negative. It's pretty clear cut at least
Speaker 3: the goal is And I always like that, always gravitating.
Speaker 2: So economics way too abstract and academic, but business and
Speaker 2: finance practical, applicable, real life usage.
Speaker 3: Yeah, which is interesting too because I also I'm a
Speaker 3: little bit like this a little exaggerate, but I'm a
Speaker 3: little bit of like a history buff, so like it
Speaker 3: was interesting that that what didn't didn't appeal to me
Speaker 3: because I do like kind of the history of it.
Speaker 3: How did we get here? And I think that's always
Speaker 3: something that I'm like in this form as well, going
Speaker 3: back to learn more about financial systems, how much works,
Speaker 3: how they thought it used to work, different schools of thoughts,
Speaker 3: and I think it really helps you understand where you've been,
Speaker 3: where you are, where you're going.
Speaker 2: So when you look back when you were a group
Speaker 2: treasurer or chief investment officer at the JP Morgan division
Speaker 2: you were, you were involved in, what sort of lessons
Speaker 2: did you take away from that? You're you're in the
Speaker 2: real world managing real risk, real portfolios. How did that
Speaker 2: experience change how you perceive risk?
Speaker 3: Yeah, it's a great question, and I'll tell you so. Obviously,
Speaker 3: I had a career with a background in trading, running
Speaker 3: trading teams both on the buy side and the cell side,
Speaker 3: and it was really that experience that this next piece
Speaker 3: that was transformative for me, and you know, really brought
Speaker 3: us to the point where my partner, Derek Woman and
Speaker 3: I decided let's form Eric and you know, I'm sure
Speaker 3: we'll get into that a bit. But what happened was
Speaker 3: I spent twenty odd years trading mortgages, rates, corporate high
Speaker 3: yield products like that, working with specialty finance companies, some
Speaker 3: that I worked with, some I had a hand in
Speaker 3: running this kind of universe, and then in late twenty nineteen,
Speaker 3: the opportunity to move over, and this was different building,
Speaker 3: different Waldorf, key card, different team, and be the CIO
Speaker 3: and the treasurer. So this is now by side running
Speaker 3: the capital of the firm, the investment of the firm,
Speaker 3: hedging and managing structure was lots of things wrapped up
Speaker 3: in there. But the real thing was the point in
Speaker 3: time where this happened was late twenty nineteen. A few
Speaker 3: days later was the repo crisis. If we remember that,
Speaker 3: when all of a sudden, if you wanted to borrow
Speaker 3: overnight against treasuries, it costs you ten percent. Okay, six
Speaker 3: months after that pandemic breaks out. And why bring that up?
Speaker 3: Is so much changed in dramatic size, at rapid speed
Speaker 3: that I saw something I'd never seen before, and it
Speaker 3: was how does the financial system really work? And what
Speaker 3: does it mean? And how does it apply to everything
Speaker 3: that I've done? And it was one of these moments
Speaker 3: where I felt like I just went from being the
Speaker 3: captain of the ship, you know, my own little thing,
Speaker 3: right will be a little expansive with it. I went
Speaker 3: from being the captain of the ship to going to
Speaker 3: work in the engine room and seeing the actual gearing
Speaker 3: and how it works and how it doesn't and what
Speaker 3: could stop it from working. And you spend years, you know,
Speaker 3: you pull a lever, you think the boat goes faster,
Speaker 3: but you don't know why, and you don't know what
Speaker 3: could stop it from doing that. You don't know what
Speaker 3: could make it work more efficiently. But now you go
Speaker 3: work in the engine room and you see it and
Speaker 3: you understand it. It was just this aha moment, Like we're
Speaker 3: two guys with glasses, right, So you know, when you
Speaker 3: go to the you get a new prescription, you get
Speaker 3: your new glasses, you put them on, You're like, oh
Speaker 3: my god, I can see right. And by the way,
Speaker 3: how was I walking around the streets of Manhattan with
Speaker 3: that old prescription? But now I can see clearly, and honestly,
Speaker 3: twenty odd years into my career. That's how I felt
Speaker 3: to that.
Speaker 2: Moment in twenty nineteen.
Speaker 3: Yeah, I would say like in early twenty twenty, about
Speaker 3: six months in, it was kind of like, oh my goodness,
Speaker 3: it's coming together.
Speaker 2: Now.
Speaker 3: I wish I wish I had known this for the
Speaker 3: twenty years that preceded this, but I felt like, now
Speaker 3: I know nothing and I'm starting.
Speaker 2: To learn, so I have to ask. So my experience
Speaker 2: with twenty nineteen was that wobble seemed to go by
Speaker 2: so quickly compared to eight oh nine, where you know,
Speaker 2: to me, you saw a lot of warning signs, first
Speaker 2: in housing and then in securitized product, and then in construction,
Speaker 2: and then you know, the market didn't peak till October seven,
Speaker 2: and the next eighteen months were kind of fun if
Speaker 2: you were on the right side of it, but if
Speaker 2: you weren't, it must have been a bloodbath. It sounds
Speaker 2: like you derived more out of the twenty nineteen experience.
Speaker 2: Then you're on a desk eight O nine. What sort
Speaker 2: of scar tissue did that leave? How? Yeah, informative was that?
Speaker 3: That's really interesting the way you kind of put those together.
Speaker 3: And so to set the table a bit O seven.
Speaker 3: When I got to JP Morgan, lad O six seven,
Speaker 3: eight oh nine, I was in charge of had a team.
Speaker 3: We traded asset backed security, say, credit cards, auto student loans,
Speaker 3: subprime mortgages. Remember those clos so really kind of like
Speaker 3: the center of what ended up happening after that. And
Speaker 3: I would say it was so overwhelming at the time.
Speaker 3: I mean, we were there two in the morning, hand
Speaker 3: marking bonds, okay, walking across the street between the two buildings, like,
Speaker 3: is there more information this company might buy that company
Speaker 3: before the market opens? What else can we do? The
Speaker 3: numbers were huge. It was almost like a bit more
Speaker 3: than you could process at the time. But I think
Speaker 3: each one of these became every step there was like
Speaker 3: I understand what I'm doing better now because the first
Speaker 3: thing I ever did was I started I was a
Speaker 3: cash flow structure. And actually, at that point in time,
Speaker 3: the guy who ran the department was a friend of
Speaker 3: mine named Bruce Richards, who went on to start Marathon
Speaker 3: and has had a fantastic career, and we keep in
Speaker 3: touch and he said, I said, I want to be
Speaker 3: a trader, and he said, well, I want you to
Speaker 3: be a structure because if you learn how the cash
Speaker 3: flow works, how the structure works, then you'll be a
Speaker 3: better trader later on. I think each piece helped me
Speaker 3: understand the risk better, and then the system it sits in,
Speaker 3: and that helps you understand the risk better. And then
Speaker 3: when you understand the risk better, you understand the system
Speaker 3: it sits in better, and it builds and it builds
Speaker 3: on top of each other. So I would say in
Speaker 3: eight I learned more. In eight we saw we felt
Speaker 3: like we were the tip of the spear in like
Speaker 3: a bad way, and we could see it was getting worse,
Speaker 3: and it was accelerating, and we could see the people
Speaker 3: were maybe even underestimating. And I remember some conversations around
Speaker 3: at the time that we were basically saying, like, think bigger,
Speaker 3: think broader, think worse. That's the context we're talking about.
Speaker 3: But all of that helped me understand how does my
Speaker 3: product I'm trading fit into an investment bank? How's an
Speaker 3: investment bank impact the system. I think when I went
Speaker 3: into twenty nineteen, obviously a lot time had passed, I'd
Speaker 3: had more experiences, et cetera. I remember sitting in a meeting.
Speaker 3: We're in seven thirty am traders meeting. This is with
Speaker 3: the CIO group, and we go around the table, my
Speaker 3: rates lead, my credit lead, et cetera, and the REPO
Speaker 3: guys walk in and they say, hey, we can lend
Speaker 3: against treasuries at ten percent? Should we do more? And
Speaker 3: I said, guys, this is my third day with this team. Okay,
Speaker 3: I'm the person in the room who knows the least
Speaker 3: about what you're talking about. But if you need my authorization,
Speaker 3: you have it.
Speaker 2: Because that sounds pretty great.
Speaker 3: That's fantastic. My response to you is how much can
Speaker 3: we not? Can we do more?
Speaker 2: Like?
Speaker 3: How much can we do? Meaning more and more? And
Speaker 3: that just became the beginning of like, why did that happen?
Speaker 3: How did we get here? What's the where did it
Speaker 3: come from? Where does it go? And I found that
Speaker 3: certain people knew certain pieces but not the picture. And
Speaker 3: then you're like it was just starting to pull.
Speaker 2: Out, and that was your job to the whole picture.
Speaker 3: It became it became the only It became the focus
Speaker 3: of what I wanted to know, because unpacking that would
Speaker 3: help me understand how do we get here, why does
Speaker 3: this happen? And by the way, what are the pieces
Speaker 3: that put this all together? And how do we how
Speaker 3: do we take advantage of that? How do we protect ourselves,
Speaker 3: but also how do we take advantage of that? So
Speaker 3: is this the whole thing? Was this one of those
Speaker 3: types of things you say, I opened up a door,
Speaker 3: three doors behind it, and I want to keep going
Speaker 3: in that direction. And it felt to me like a
Speaker 3: purer and purer version of everything I'd done in my career.
Speaker 3: Getting closer and closer to the source in pricing.
Speaker 2: Really really fascinating. One of the things I think a
Speaker 2: lot of people don't realize about JP Morgan Chase during
Speaker 2: the financial crisis, and I never doing the research for
Speaker 2: Balot Nation, I never got this really source the way
Speaker 2: I would have liked to. But JP Morgan Chase had
Speaker 2: their own derivative scare a couple of years earlier, and
Speaker 2: the word was Jamie just said, clear all this junk
Speaker 2: off of our balance sheet, we don't we can't handle
Speaker 2: this risk doesn't seem to be worth the potential upside.
Speaker 2: So heading into eight oh nine, they weren't dealing with
Speaker 2: the same sort of existential danger that Merrill, Lynch and Wells,
Speaker 2: Fargo and go down the list all had to go through.
Speaker 2: They were ended up being an acquirer of distress assets,
Speaker 2: not a seller of distressed assets.
Speaker 3: Well, I think. I mean, it was a tremendous place
Speaker 3: to work. I worked with incredible people. I learned a lot,
Speaker 3: and I worked with great, great people that you're just
Speaker 3: part of a terrific team, fantastic place. I learned something
Speaker 3: that became transformative to everything I'd spent my career doing.
Speaker 3: So that's why we set out too, and I said,
Speaker 3: I want to do this, and that's why we set
Speaker 3: out to build Merrick. When we said, you know, I
Speaker 3: recalled Derek and I sat down one day and I said,
Speaker 3: let me just here's how I think about markets. I
Speaker 3: think about it in terms of money, capital, credit, liquidity,
Speaker 3: and regulation. That's my five money Capital, credit, liquidity, regulation, MCCLR.
Speaker 2: How do you separate money from capital?
Speaker 3: So I think money to me is how do you
Speaker 3: make it? How do you destroy? How does it move
Speaker 3: through the system. To me, capital is a little bit
Speaker 3: more of how much do you have? How do you
Speaker 3: measure it? How much do you have? Are you making more?
Speaker 3: You destroying it? Credit is really how is it being formed?
Speaker 3: How is it moving through the system. The financial system
Speaker 3: is changing now, It's very different than it was a
Speaker 3: few years ago. We actually when we were really trying
Speaker 3: to get our ideas on paper. We wrote a paper
Speaker 3: that we outline saying we described what we thought was
Speaker 3: the new version of the financial system. We said, the
Speaker 3: financial system is changing, your de facto recreating Glass Steegel.
Speaker 3: You have gesibs. If you come from some of this framework,
Speaker 3: you know, are the globally systematically important banks, systemically important
Speaker 3: banks think JP, Morgan Wells, Bank of America, et cetera.
Speaker 3: We said, there are the new gesips, people like Apollo, Blackstone, KKR, Blackrock.
Speaker 3: These are areas. These are the folks that are actually
Speaker 3: making credit extension decisions in this economy. Okay, you have
Speaker 3: the traders like Citadel, Securities, Jump Chain, some of these
Speaker 3: other names. Everybody's familiar with. This is disaggregating the financial
Speaker 3: system and putting it into different buckets. So basically we
Speaker 3: think about where's it coming from, where does it go,
Speaker 3: who wins, who loses? What are the flywheels here. This
Speaker 3: is a process that we apply to everything we do.
Speaker 3: Some of the guys on the team call it McLear mcclr.
Speaker 3: It's the lens that we look at because we believe
Speaker 3: money capital, credit liquiding regulation drives economies, markets and prices,
Speaker 3: and then you can really start to understand monetary policy,
Speaker 3: real estate housing, the types of specialty finance companies we've
Speaker 3: talked about consumer So this, to me, actually explains how
Speaker 3: it all works, and we apply that. It's a huge
Speaker 3: addressable universe. We trade rates, mortgages, securitized products, corporate credit
Speaker 3: related equities. It's an enormous addressable universe with investors that
Speaker 3: have very narrow mandates that transact to different points in
Speaker 3: time and sometimes non economically imbound by potentially non economic rules,
Speaker 3: which means there are a lot of overlaps that people
Speaker 3: don't take the advantage of, and there's a lot of
Speaker 3: gaps that they quite simply don't bridge. And the setup
Speaker 3: for all of this, I think, and I've seen some stuff.
Speaker 3: A lot of your listeners have seen quite a bunch
Speaker 3: of stuff. We've seen things go right, we've seen things
Speaker 3: go wrong. This is one of the best setups we've
Speaker 3: seen in a long time, and so that's why we
Speaker 3: went out to say, I saw some interesting stuff, I
Speaker 3: learned some interesting stuff. There's an opportunity set that we
Speaker 3: want to prosecute right now, and it is an incredible
Speaker 3: time to do so. So we built a team.
Speaker 2: Sorry, go ahead, I was just gonna ask No, I'm fascinated.
Speaker 2: I want to roll back to something you said earlier,
Speaker 2: which was glass Steegel is sort of being backdoor re applied.
Speaker 2: Is that a function of people being risk averse or
Speaker 2: is that a function of people just specializing in their
Speaker 2: own silo so you don't have, you know, glass Steagel
Speaker 2: for people who aren't. Economic and policy wonks separated the
Speaker 2: FDIC safe banks from the riskier investment banks, and once
Speaker 2: that was repealed in the late nineties, didn't cause the
Speaker 2: financial crisis, but allowed all these banks to merge and
Speaker 2: get bigger, and maybe it made the crisis a little worse,
Speaker 2: But I don't think of it as the underlying cause.
Speaker 2: But the idea that the market is working its way
Speaker 2: back towards that is kind of fascinating. Let me suggress that.
Speaker 3: Right as you laid out, like glass sel to say
Speaker 3: it to oversimplify, basically said like, you can hold deposits,
Speaker 3: you can underwrite securities, you can trade securities, things like that,
Speaker 3: and there were rules right now, there are some rules
Speaker 3: that say what you can and can't do, but really
Speaker 3: there's a lot more that has morphed into what people
Speaker 3: like to call private credit, or we're going to extend
Speaker 3: credit through these fashions, or some of the rules don't
Speaker 3: apply to this group, so we can trade the markets differently,
Speaker 3: or we can make markets in a way that maybe
Speaker 3: the big banks can't. And then the big banks say, well,
Speaker 3: we're viewed as super safe, because I would argue we
Speaker 3: are and that has its advantages also. So it's like
Speaker 3: we created these artificial boundaries. What is great for us
Speaker 3: and the way we look at the world is we
Speaker 3: saw that, we see that, we understand that we also
Speaker 3: see and understand and think about all day long and
Speaker 3: put it into our portfolio construction and the risk that
Speaker 3: we build. It's all up for grabs again, right. So
Speaker 3: we've got Kevin Worsh nominated to be the FED chair
Speaker 3: and Mickey Bowman is the vice chair for supervision, and
Speaker 3: they are no, no, what the right adjective for it is.
Speaker 3: But they're changing the rules and they're pulling some of
Speaker 3: them down, and in my opinion, people just don't understand
Speaker 3: which of them matter and which of them don't, and
Speaker 3: the market moves to place on some that simply don't matter,
Speaker 3: like it's lack of understanding of what SLR was and
Speaker 3: how that worked, and we don't need to dive into that,
Speaker 3: but to simplify, they said, we're going to remove this
Speaker 3: rule and it's a big deal, and we Merek said
Speaker 3: you can take it off. It doesn't matter. So everything
Speaker 3: the market's doing in reaction to that is a potential
Speaker 3: opportunity for us.
Speaker 2: In other words, people are overreacting to a regulatory change
Speaker 2: that is in significant, long time.
Speaker 3: And that example.
Speaker 2: Yeah, coming up. We continue our conversation with Matt Sherwin,
Speaker 2: co founder in chief officer at Merrick Capitol, discussing why
Speaker 2: he launched the firm in twenty twenty four. I'm Barry Ritolts.
Speaker 2: You're listening to Masters in Business on Bloomberg Radio. I'm
Speaker 2: Barry Ridolts. You're listening to Masters in Business on Bloomberg Radio.
Speaker 2: My extra special guest today is Matt Sherwin. He is
Speaker 2: co founder and chief investment officer of Merik Capital, specializing
Speaker 2: in a variety of alternative credit and related private products. Previously,
Speaker 2: he spent sixteen years at JP Morgan Chase, where he
Speaker 2: had a number of very important titles. Before that, City Group,
Speaker 2: are we in all that unique a period of time.
Speaker 2: Is the opportunity set that much greater than what we
Speaker 2: typically see in the normal You know, this is a
Speaker 2: little more geopolitically volatile administration than than even the previous
Speaker 2: Trump administration. Is that a driver or is it the
Speaker 2: deregulation and misapprehension of what these rule changes mean?
Speaker 3: I think it's a combination of what's going on. So
Speaker 3: we have we just kind of use some little catchphrases
Speaker 3: among the team that help us sort of like, you know,
Speaker 3: gravitate around concepts or communicate quickly. We say, this is
Speaker 3: an administration that's in the business of being in business,
Speaker 3: and that's just a there's no opinion or judgment one
Speaker 3: way or the other. It's just it's just a statement
Speaker 3: what this environment is. Also, we also came up with
Speaker 3: something that we thought was just made us chuckle one like,
Speaker 3: it's important to have a little bit of sense of humor.
Speaker 3: We found our investors actually do read the materials very
Speaker 3: closely and they tend to have a sense of humor,
Speaker 3: which is good. But we created this thing we called
Speaker 3: the one big Beautiful chart, uh huh, and we just said,
Speaker 3: you know what they really need, They need rates to
Speaker 3: get down, and they needed to come down a lot
Speaker 3: more them what the market and the curve has already
Speaker 3: priced in because of how much debt the country has,
Speaker 3: what it costs, what they want to come So here's
Speaker 3: what they need to accomplish, and they're going to do
Speaker 3: everything they can to it. So, you know, we construct portfoliot,
Speaker 3: we have an investment thesis, We have a narrative. Everything
Speaker 3: we put in the book has to fit that narrative,
Speaker 3: has to contribute to what we're trying to achieve, has
Speaker 3: to be the best version of that, or has to
Speaker 3: protect us from what could go wrong. So getting back
Speaker 3: to your question a little bit, we think it's a
Speaker 3: very business forward environment, business forward administration. We think that
Speaker 3: it is one that needs rates to come down. We
Speaker 3: are going to have a new FED chair in the
Speaker 3: middle of June, and he'll say all sorts of things
Speaker 3: in the confirmation hearing, but really it will be a
Speaker 3: catalyst potentially for change in the middle of the year.
Speaker 3: And then we have a bias within markets to strip
Speaker 3: back some of the layers of of regulation and away
Speaker 3: from Whether you support that or not, I can tell
Speaker 3: you because I've been on the other side of it.
Speaker 3: The layers of process and bureaucracy and spending your time
Speaker 3: back solving instead of what could we do better. When
Speaker 3: you change what your goal is and how you're pointed,
Speaker 3: you're going to get different results. We think that combination
Speaker 3: is spinning flywheels in the market now that in our opinion,
Speaker 3: people are just they're underestimating the power of some of
Speaker 3: these flywheels.
Speaker 2: Really really interesting. Last question before we talk a little
Speaker 2: bit about Marek. In the old days, and I was
Speaker 2: never a big believer in this, but everybody else was,
Speaker 2: there was some constraints on deficits and ongoing government debt
Speaker 2: because the bond vigilantes would punish you. The bond vigilantes
Speaker 2: seem to have disappeared, in part replaced by the stock vigilantes,
Speaker 2: who any policy they don't like they just sell off
Speaker 2: until they have their hissy fit, until they get their way,
Speaker 2: and then okay, thank you very much, and we're off
Speaker 2: to the races again. What do you think of the
Speaker 2: eighties nineties era bon vigilantes? Is that just ancient history.
Speaker 2: There's no discipline on deficits spending anymore, or and by
Speaker 2: the way, I think deficits are not all that relevant
Speaker 2: look at Japan, look at the US history. We've been
Speaker 2: warned about deficits and they haven't caused much of a
Speaker 2: problem most of this history.
Speaker 3: Yeah, I mean, look, I love the term, and I
Speaker 3: think we've seen some of those episodes. Last year we
Speaker 3: saw around the whatever we call Liberation Day in April,
Speaker 3: like there were a couple of days where treasuries and
Speaker 3: mortgages said like enough, Okay, that's it, and we're either
Speaker 3: going to have one of those days where they are
Speaker 3: giving stuff away or you got to pull back. And
Speaker 3: I think what we saw was the administration pull back.
Speaker 3: So I think in some level it's still there. But
Speaker 3: part of what we do ATMERIC and what influences our
Speaker 3: thought process is big. Parts of this have been really
Speaker 3: broken down. The markets are so big now that it's
Speaker 3: been broken into specific functions. Like people have odd thing
Speaker 3: to do and they do that in a narrow mandate.
Speaker 3: We have a more flexible mandate to us. The products,
Speaker 3: they're widgets, they're tools in the toolbox for us to
Speaker 3: achieve our goals and our investment thesis and the portfolio
Speaker 3: risk and construction and diversification that we'd like to have.
Speaker 3: But the markets are hyper specialized in very, very large markets,
Speaker 3: so you get some of those episodes where it's like, oh,
Speaker 3: crowded trade, we got to get out. I think the
Speaker 3: question of does the administration react to the markets? Does
Speaker 3: the markets react to the administration. It's something that we've
Speaker 3: actually focused on quite a bit. We actually, you know,
Speaker 3: we wrote another pie in June of twenty twenty five
Speaker 3: that we call the Warshfed and it was just about
Speaker 3: what could happen, and we sort of went through to
Speaker 3: your point, like the concept of risk free rate and
Speaker 3: credit spread are completely intertwined and commingled now and they
Speaker 3: don't exist separately. So I think that's some of the
Speaker 3: concepts you're getting at. Is this a problem for credit?
Speaker 3: Is it a problem for rates? Are those the same thing?
Speaker 2: Now?
Speaker 3: One of the most interesting things, and I would just
Speaker 3: say before we get back to your question, is what
Speaker 3: was really interesting observation to us was during the last
Speaker 3: government shut down, whatever mini version of that we're going
Speaker 3: through right now, it was almost in the data was
Speaker 3: not forthcoming, and then VOLE went down, So it was
Speaker 3: this sort of like a little bit like if we
Speaker 3: don't know, maybe nothing's happening. But what it also was
Speaker 3: was a little bit to what you were saying is
Speaker 3: when things were a little less hyper focused, they actually
Speaker 3: we're a little less jumpy around small moves, And that
Speaker 3: was a big takeaway, big takeaway for us. It's a
Speaker 3: big thing you're going to hear from Kevin Walsh if
Speaker 3: he ends up in the chair seat, You're gonna hear
Speaker 3: a long narrative from him for his time in that
Speaker 3: seat of we need to step back from the day
Speaker 3: to day and the minute by minute information and think
Speaker 3: about the big better picture and the trend and where
Speaker 3: we're headed and be a little more forward looking. I
Speaker 3: think that's the kind of guidance that you will get
Speaker 3: from that chair.
Speaker 2: Really interesting. So let's just start out with why you
Speaker 2: left the comfort of a big shop to have the
Speaker 2: headache of your own firm. What's the elevator pitch? What
Speaker 2: problem does Mara Capital solve that couldn't be solved at
Speaker 2: a large Wall Street bank.
Speaker 3: Look, I think quite simply, there are some things that
Speaker 3: banks can do and some things that banks can't do,
Speaker 3: some things that they can do and that they don't
Speaker 3: want to do. In my career, I've always been involved
Speaker 3: in these types of markets, being rates mortgages, securitized products,
Speaker 3: corporate credit, the equities related to that around it, these
Speaker 3: types of specialty finance, operating companies, and always felt that
Speaker 3: you have when you can apply the various lenses to
Speaker 3: these products, being the trader lens, the structurer lens, the
Speaker 3: operator lens, you understand it better and you get the
Speaker 3: gearing and the pieces. And when you learn about the
Speaker 3: financial system that it sits within, then you actually can
Speaker 3: understand but take advantage of the risk and return in
Speaker 3: a more elevated and efficient way.
Speaker 2: I want to address that. Is it that the big firms,
Speaker 2: the bigger banks were risk averse and didn't want to
Speaker 2: take advantage of it, whether they were prohibited on a
Speaker 2: regulatory basis or when they're just doing their mac grow
Speaker 2: risk assessment. Hey, we'll go this far, but no further.
Speaker 3: I think it's even simpler than that. We look at
Speaker 3: the worlds through our lens. We look at the world
Speaker 3: through the Merrick lens of money, capital, credit, liquidity, and regulation,
Speaker 3: which drives economies, markets and prices. That helps us understand
Speaker 3: the drivers of the capital markets that we sit within,
Speaker 3: helps us understand monetary policy, housing finance, commercial real estate finance,
Speaker 3: understand both the gearing of it. Then you can look
Speaker 3: at something and you can say, Okay, I'm looking at
Speaker 3: City Group, I could buy it, I could sell it.
Speaker 3: I could understand what they're doing in the markets. They
Speaker 3: have a footprint in what that means for the markets.
Speaker 3: Do I want to buy that? So like where are
Speaker 3: the flywheels? What does it spin to next? So everything
Speaker 3: we were doing was very much about what do we
Speaker 3: want to do because we see a very large addressable
Speaker 3: opportunity where we have a unique perspective, a defined lens,
Speaker 3: and a way of applying that to these big liquid
Speaker 3: markets that we think very strongly we can take advantage
Speaker 3: of in a way that people simply haven't had the
Speaker 3: opportunity to learn about and to understand and apply to
Speaker 3: these products with the type of flexible mandate that we have,
Speaker 3: which boiled down means we look at the world a
Speaker 3: little differently. These are big addressable markets which have dislocations, volatility,
Speaker 3: and opportunity all the time, and we can use that
Speaker 3: combination to achieve what's a very very simple goal, improve
Speaker 3: the return a little bit while reducing the risk a
Speaker 3: little bit.
Speaker 2: That's all anyone can ask for better returns at lower risk.
Speaker 2: I'm kind of fascinated by the overall Merrick investment philosophy.
Speaker 2: We'll get to, but let's start with a little bit
Speaker 2: with structure. I think of you guys as an alt
Speaker 2: credit shop, but you also look a little bit like
Speaker 2: a multi strat shop, like a is it so kind
Speaker 2: of a hybrid like? Tell us about the structure.
Speaker 3: We just define what we do. Okay, we are who
Speaker 3: we are. We do it the way that we do.
Speaker 3: We run where right now we're running a hedge fund
Speaker 3: which trades these products as well, I SAIDs tools in
Speaker 3: the toolbox as as wige. We do it in one
Speaker 3: collaborative portfolio. So our set up, our structure. We've got
Speaker 3: an amazing team. We have specialists in rates, in mortgages,
Speaker 3: in non agency mortages, and a BS in credit in
Speaker 3: clos I am on the phone every day with traders
Speaker 3: and salespeople myself. We trade it as one bookoo.
Speaker 2: Well, not really a multi strat within a single expression.
Speaker 3: It is what we think is the best expression of
Speaker 3: the trade.
Speaker 2: Well, I shouldn't call it multi strat. It's really multi asset.
Speaker 2: It's a variety of different credit assets all under one umbrella.
Speaker 3: Within our lane. Okay, sticking to our knitting what we believe,
Speaker 3: we know very well. What we know, we have a
Speaker 3: differentiated insight into and extracting from that. Okay. The team
Speaker 3: is phenomenal. They have a ton of byside and cell
Speaker 3: side experience. They work very well together. It's very exciting
Speaker 3: to be I mean, and additionally doing this together, like
Speaker 3: Derek and I doing this together, putting our name on
Speaker 3: the door, like Marek is Matt and Derek, because we
Speaker 3: spent way too much time trying to think of what's
Speaker 3: a clever name that means means you know, alpha extraction
Speaker 3: in Sanskrit or some something you know. And Derek's wife
Speaker 3: one day was like, enough, it's Marek, Matt and Derek.
Speaker 3: Now go do some real work. And I think she
Speaker 3: said in a little bit more of a spicy way,
Speaker 3: but we were like, yeah, that could work, all right,
Speaker 3: let's do that.
Speaker 2: I think just a little footnote, if you've ever incorporated
Speaker 2: an LLC or any other entity in New York State,
Speaker 2: every Greek and Roman god, every Babylonian god, every cerebus
Speaker 2: named the creature from mythology, it's either a fund or
Speaker 2: an LLC. They're all taken it's astonishing.
Speaker 3: But the real point I wanted to make also that
Speaker 3: I don't want to lose, is this is putting our
Speaker 3: name on the door. Okay, it's our name, it's our reputation,
Speaker 3: because and that really cemented it for us. That was
Speaker 3: something we really wanted. I took some time off and
Speaker 3: which was fantastic, and I met some of the most
Speaker 3: amazing and interesting people in the world. When you're unaffiliated,
Speaker 3: people speak to you in a different way because they
Speaker 3: had no one to talk to. Okay, I sat down
Speaker 3: with the CEO of one of the world's largest pension
Speaker 3: fund sovereign wealth funds, and we had and I never
Speaker 3: met the person before. We had our long conversation because
Speaker 3: he just needed to talk to someone. And I learned
Speaker 3: a lot in that. I met some of the most
Speaker 3: interesting people in venture cap in all it's in private equity,
Speaker 3: et cetera. And it was just more way of learning
Speaker 3: parts of the system. But it got to the point
Speaker 3: where after my you know, academic wander through the wilderness,
Speaker 3: I was like, okay, you know what this is. At
Speaker 3: the time, we had three teenagers living at home and
Speaker 3: it was an amazing time. I used to always say,
Speaker 3: you should be able to retire in your forties and
Speaker 3: go back to work in your fifties, Like that's the
Speaker 3: way business should work. Obviously, that's a luxury that very
Speaker 3: few have. But I was getting to the point where
Speaker 3: I was like, Okay, I feel great. I want to
Speaker 3: do this. I'm miss markets. I love this. I want
Speaker 3: to get back to it, and I want to do
Speaker 3: it in the way that I want to do it.
Speaker 2: How long gap that I took, like about a year off.
Speaker 3: You know, it's you know, it's a riot. So in
Speaker 3: our deck, we put a little timeline of my experience
Speaker 3: in Derek's experience, and just to help people understand who
Speaker 3: hadn't met us, who we are. And at the very end,
Speaker 3: I put you know, this is my background, simple. I
Speaker 3: was here for ten years. I was there for sixteen years.
Speaker 3: And then we put like a lot one year nugget
Speaker 3: on the end of the timeline that just said chilling
Speaker 3: no G no G just chi L I N R,
Speaker 3: I don't remember.
Speaker 2: Just very on Wall Street sort of.
Speaker 3: Well, it was like our nine hundredth version of the
Speaker 3: deck and we were just getting a little punching like
Speaker 3: it made us laugh. Okay, you gotta have a sense
Speaker 3: of humor. It made us laugh. So we're like, this
Speaker 3: is going in. Every investor brings it up. They bring
Speaker 3: it up and they love it and you know it.
Speaker 3: To us, it's like, wow, you were reading every part
Speaker 3: of the deck. And also it's nice to know you
Speaker 3: have a sense of humor. But getting back, getting back
Speaker 3: to it, it's like.
Speaker 2: People, this is always shocking. People read the foot Oh.
Speaker 3: Yes, that's been a big learning for us. They read it.
Speaker 3: So when we were doing all this, you know, my
Speaker 3: wife was like, yeah, why would you want to do
Speaker 3: something for anybody else? And I thought to myself, exactly
Speaker 3: what are we gonna work hard round? What are we
Speaker 3: going to make sure succeeds the thing that we put
Speaker 3: our name on the door, or reputation that we believe
Speaker 3: other people don't get it that we believe is the
Speaker 3: right way to approach these markets that we believe can
Speaker 3: extract from a setup which is one of the best
Speaker 3: that we've ever seen. So if you tick all those boxes,
Speaker 3: why would you do it for anybody else? Huh?
Speaker 2: Really really intriguing. So it's twenty twenty six, I'm legally
Speaker 2: obligated to ask how do you use artificial intelligence in research,
Speaker 2: portfolio construction or operations at Merrick Capital.
Speaker 3: Sure, I would sort of make two points. I'm an
Speaker 3: AI optimist. That's not one of my two points, so
Speaker 3: that doesn't count. We use it every day. We build
Speaker 3: stuff more quickly, we build our own tools, and we
Speaker 3: build the more quickly than we ever could before. You know,
Speaker 3: the guys on the team, they're building stuff at their
Speaker 3: desk in a week that would have taken a year
Speaker 3: to do somewhere else. Literally, And I know because I've
Speaker 3: been in that, and once you built it, it would have
Speaker 3: taken like six months to get approval to release it
Speaker 3: into your et cetera. This is like light speed versus
Speaker 3: what we used to do. Now changing a little bit
Speaker 3: of how you frame that question. AI is a really
Speaker 3: really interesting thing in financial markets as well. Okay, so
Speaker 3: I don't think we're there yet, but we're going to
Speaker 3: get to a place where people are using it for
Speaker 3: risk management, they're using it for compliance, they're using it
Speaker 3: for KYC. Put all that aside. The most interesting to
Speaker 3: me right now is we look at the AI cap
Speaker 3: x boom and we say, here's a product that is
Speaker 3: commercial real estate with securitization technology around it. You're talking
Speaker 3: about where is it? Is it built? If not? How
Speaker 3: long is it going to take to build it? Who
Speaker 3: are the tenants, how long are the lease is, what
Speaker 3: are they paying? What's it worth when it's all done?
Speaker 3: Is there residual risk like you have in an auto lease,
Speaker 3: Only some of it comes to the securitized market because
Speaker 3: it's just not that that market is not big enough
Speaker 3: for it, So it comes to the corporate bond market.
Speaker 3: So that to us is like, that's the type of
Speaker 3: opportunity that piques our interest, where we say, this is
Speaker 3: something that looks like ABC and its being wrapped up
Speaker 3: and put into a different market. That is asking one, two, three,
Speaker 3: And those are good questions, but it's really like, put
Speaker 3: it all together, look at all the factors. What are
Speaker 3: the additional Are you getting more structure, are you getting less?
Speaker 3: Are you charging for the risk? Are you paying a
Speaker 3: way for it? So the AI cap X Boom to
Speaker 3: us is actually like a source of very cheap risk
Speaker 3: for us to look at. And each one has a
Speaker 3: little bit of different flavor and we're very opinionative about
Speaker 3: which ones we like.
Speaker 2: Huh. It sounds it sounds really fascinating. It also sounds
Speaker 2: like anytime there's a novel area, the opportunity for mispricing
Speaker 2: seems to really there's that.
Speaker 3: There's that we look get some of those first time issuers.
Speaker 3: We have like we have some things in the book.
Speaker 3: We have something called the north Star Playbook, which is
Speaker 3: what are companies and bonds that have clear missions and
Speaker 3: objectives that they can execute on, that are aligned with
Speaker 3: us with the instrument that we have, or misaligned or
Speaker 3: that they're not able to execute. But some of it
Speaker 3: it's actually not just about the novel structures. Let's look
Speaker 3: at agency mortgage backed securities. Those have been around for
Speaker 3: a long time. Okay, A couple of weeks ago, tweet
Speaker 3: from the pre or whatever we call a post on
Speaker 3: truth Social four twenty six pm, I've instructed my representatives
Speaker 3: to buy two hundred billion of agency MBS boom bomb
Speaker 3: in the agency mortgage back market. This is a there
Speaker 3: are was it twelve billion, twelve trillion of these things outstanding?
Speaker 3: And the agency mortgage market is nine trillion, hundreds of
Speaker 3: billions of a trade every day. And that was a
Speaker 3: after market post tweet. And what are you gotta do
Speaker 3: with the vaxity event?
Speaker 2: So then are you out buying into that that rise
Speaker 2: to take advantage. Are you are you price taker or
Speaker 2: a price maker? What are you doing when that that's happening?
Speaker 3: It's both. We look instantly like what does this mean?
Speaker 3: What was our expectation?
Speaker 2: Now?
Speaker 3: In that instance, we expected the GSS who will be
Speaker 3: the ones who actually buy it? We expected the GSS
Speaker 3: to be buyer. I think our view was a little
Speaker 3: bit at the high side or out of consensus. Even
Speaker 3: we thought this is going to be a support mechanism
Speaker 3: for this market over the course of the year. Fan
Speaker 3: and Freddie are going to buy a lot of this.
Speaker 2: Stuff, assuming they haven't already started to.
Speaker 3: They had been, and that's a great point. They had been,
Speaker 3: but buying two hundred billion with like an after market tweet,
Speaker 3: and nobody knew, like, is it going to be two
Speaker 3: hundred and then another two hundred? Are you going to
Speaker 3: start buying? Are going to buy forty tomorrow? How's this
Speaker 3: all going to work? This exceeded even our expectations, and
Speaker 3: you saw right away. I think we were positioned for
Speaker 3: that type of event. We were positioned to take advantage
Speaker 3: of some of the policy risk as opposed to get
Speaker 3: hit by some of the policy risk. You could see
Speaker 3: that there was a massive short covering rally right after that,
Speaker 3: and you could see that that wasn't necessarily people's expectations
Speaker 3: and how they were how they were set up for I.
Speaker 2: Have a mortgage related question for this, but I'm going
Speaker 2: to save it to the next segment coming up. We
Speaker 2: continue our conversation with Matt Trewin, co founder and chief
Speaker 2: investment officer of Merrick Capital, discussing credit and risk in
Speaker 2: today's markets. I'm Barry Ritolts. You're listening to Masters in
Speaker 2: Business on Bloomberg Radio. I'm Barry Dults. You're listening to
Speaker 2: Masters in Business on Bloomberg Radio. My extra special guest
Speaker 2: this week is Matt Trewin, co founder and chief investment
Speaker 2: officer of Merrik Capital. Previously, he spent twenty five or
Speaker 2: so years running credit and various types of risks at JP,
Speaker 2: Morgan Chase and City Group. So we were talking earlier
Speaker 2: about the Trump tweet directing the GCS to buy two
Speaker 2: hundred billion dollars worth of agency paper. You would have
Speaker 2: thought that should have sent yields, plumbing and mortgage rates down,
Speaker 2: which would stimulate the housing market. I assume part of
Speaker 2: the motivation for that tweet and for that purchase. What
Speaker 2: what's going on in that market? And why does it
Speaker 2: seem so difficult to drive rates lower?
Speaker 3: Right, that's a great question. And as silly as it sounds,
Speaker 3: like two hundred billion, it's just.
Speaker 2: Not enough pocket cash, right, walking around money.
Speaker 3: That's one way.
Speaker 2: I mean in a twelve trillion dollars market for twelve trillion,
Speaker 2: it's not even one.
Speaker 3: Yeah, sure if you are if you've got thirty five
Speaker 3: trillion in treasuries outstanding, and yeah, yeah, it's a big
Speaker 3: number and it moves the needle, but what they really
Speaker 3: want to move it and keep it there? Like that's
Speaker 3: a little bit of a hard part because don't forget
Speaker 3: that the Fed owns two point two trillion, so they're
Speaker 3: gonna buy two hundred billion. Didn't give a lot of
Speaker 3: information and that sort of helped them in that moment.
Speaker 3: The lack of information after probably led some of it
Speaker 3: to kind of like bleed out and unwind a bit.
Speaker 3: But the Fed owns two point two trillion and those
Speaker 3: are paying off and that's approximately one hundred eighty billion
Speaker 3: a year. So then you start to think about, like, well,
Speaker 3: if the rate moves and mortgage prices go up. Are
Speaker 3: some of the money managers going to sell one hundred
Speaker 3: billion over time and to kind of neutralize it? So
Speaker 3: I think it's helpful, it's indicative. Here's the real takeaway
Speaker 3: for us. Okay, So at that moment, it's how do
Speaker 3: we trade this, what's the price, what's the next step?
Speaker 3: But then we're really thinking from there like what does
Speaker 3: this mean, what's going to happen next? And of coming
Speaker 3: full circle. What it really does is show you how
Speaker 3: hard they're going to try to drive the mortgage rate down,
Speaker 3: to drive rates down overall, to sign up for an
Speaker 3: agenda and a plan to get rates down. Okay, So
Speaker 3: some of it is what do we do in that
Speaker 3: specific market, and some of it is how is it
Speaker 3: informing our view of the bigger picture.
Speaker 2: So you guys have two I don't want to say conflicting,
Speaker 2: but somewhat different risk factors you're juggling with. Obviously, when
Speaker 2: you buy paper, you're thinking long term and we want
Speaker 2: to watch this play out to our broader thesis. But
Speaker 2: at the same time you're actively trading on the short term.
Speaker 2: How much do these compliment each other or do you
Speaker 2: ever find yourself long in one duration of the portfolio
Speaker 2: and short in another. How do you balance this out?
Speaker 3: Yeah, I mean we have longs and shorts across the book,
Speaker 3: within mortgages, within credit, we there were you know, long
Speaker 3: what we like and short what we don't. Keep it
Speaker 3: super simple or long what helps contribute to our thesis
Speaker 3: or protect and vice versa, and you know protect the
Speaker 3: Knvecci profile that we're looking to achieve. We are, we
Speaker 3: trade every day, We are active in these markets. It's
Speaker 3: part of more of a sort of a medium term
Speaker 3: thought process how they're going to play out, but every
Speaker 3: day is iterating on that. Is this still what we think?
Speaker 3: Are we positioned with the best version of it? Do
Speaker 3: we have the bonds that are going to contribute to
Speaker 3: what we are trying to achieve? Like right now, we're
Speaker 3: very focused on the flywheels that exist within financing markets.
Speaker 3: And if you think about what does that mean? Okay,
Speaker 3: so rates come lower, we talk rates go lower. We
Speaker 3: talked about that a little bit. But credit spreads are
Speaker 3: also really tightening. And when rates are lower and credit
Speaker 3: spreads are tight tighter, your cost of borrowing has gone down.
Speaker 3: You can refinance all sorts of assets. It means some
Speaker 3: assets are even at that point in time worth more
Speaker 3: valued highly. Now that it's worth more, you've got a
Speaker 3: lower LTV loan that you could take out an even
Speaker 3: tighter credit spread on And how do these spin and
Speaker 3: what is this? So this is very much what we're
Speaker 3: thinking about now. I think the market completely underestimates the
Speaker 3: power of those flywheels and what it can be achieved.
Speaker 3: So that is one of we look at our portfolio,
Speaker 3: say we want to have about twenty trades in it,
Speaker 3: and a trade is not one line. A trade could
Speaker 3: be thirty line, I guess, but the flywheel is a trade.
Speaker 3: It's a little bit of a maybe even a bigger
Speaker 3: higher order one. But we look at what is happening
Speaker 3: at that moment. Is there something to take advantage of?
Speaker 3: But also what are the ripple effects of what's happening
Speaker 3: in that moment, and what does the market need to do?
Speaker 3: What is it going to do? Does it understand this?
Speaker 3: And then we unpack it and say where the opportunity.
Speaker 3: So coming back to what we talked about, we believe
Speaker 3: when you look at the world through this lens, we
Speaker 3: look at markets through the Marrick lens, that the lack
Speaker 3: of connections made through these markets and the lack of
Speaker 3: extracting from some pretty obvious pockets are an opportunity and
Speaker 3: like we talked about, to improve your return and reduce
Speaker 3: your risk. And it's a process. So it's just as
Speaker 3: much a process and a machine through which you're extracting
Speaker 3: alpha from the market. We have our views, we hope
Speaker 3: to be right. It's also it's a process through which
Speaker 3: you work through these markets that you extract all the time.
Speaker 3: And the mandate is pretty clear, Like as I think
Speaker 3: of it, the mandate is very clear. You need to
Speaker 3: make money when markets go up, and you need to
Speaker 3: make money when markets go down every day, every month,
Speaker 3: every quarter, every year, and you probably won't. That's the
Speaker 3: mandate and that's what we're going for it, And it's quite
Speaker 3: simple when you frame it out that way.
Speaker 2: You mentioned in twenty nineteen there was a sea change
Speaker 2: in how you perceived what was happening in the market
Speaker 2: and how different that had become. How does that affect
Speaker 2: how you look at and define risk. Risk definitions have
Speaker 2: obviously changed over your career, but twenty nineteen was such
Speaker 2: a sea change. What's different about managing risk today?
Speaker 3: Yeah? I think I believe managing risk at scale is
Speaker 3: a skill. Okay, you have your numbers, and you want
Speaker 3: to know what those are, and those are indicators, and
Speaker 3: those are starting places. Var is a number and a
Speaker 3: starting place and an indicator. Stress is unnumbered DV one
Speaker 3: Cso one these are we I like to look at
Speaker 3: the world in a stress based framework and we create
Speaker 3: a bunch of different stresses. Some are quite simple. Rates
Speaker 3: go uprates go down, credit crunch, a flight to quality.
Speaker 3: We had our little like you know, we're getting little
Speaker 3: punched from. We had one we call QI forever and ever.
Speaker 3: And looking at these it's really about like it's a
Speaker 3: starting place for a conversation, okay, because you do need
Speaker 3: to know where it's coming from, and what's the attribution,
Speaker 3: what's the return attribution, where's it where you're hoping it
Speaker 3: comes from, and what's the risk attribution? And very importantly
Speaker 3: what could go wrong? Understanding that what you're trying to achieve,
Speaker 3: but knowing where the exits are. Like, I think it's
Speaker 3: really like a philosophy to risk and to managing risk
Speaker 3: to make sure you're pointed to achieve your goals while
Speaker 3: managing your risk properly and knowing what you would do
Speaker 3: if things changed, Right, you have a plan and then
Speaker 3: things change.
Speaker 2: Really really interesting when you're looking out at a variety
Speaker 2: of different opportunities, what do you think today presents the
Speaker 2: best risk opportunity? Looking at structured credit corporates relative value,
Speaker 2: what is really drawing your attention?
Speaker 3: Yeah, we really thought that one of the places to
Speaker 3: extract from the flywheel is in securitized markets. Actually, as
Speaker 3: an example, like we've been very focused on trophy quality
Speaker 3: office and gateway cities and this goes back a little ways.
Speaker 2: These are the super a resident commercial realship, right.
Speaker 3: So that all came to be from us pulling at
Speaker 3: the thread of how the financial system works. We talked
Speaker 3: a little bit about the new gips and what you
Speaker 3: had was everybody was going back to work, back to
Speaker 3: the office, but took longer than we kind of looking
Speaker 3: back on it, that took a long time. The part
Speaker 3: of the financial system that was changing were those new
Speaker 3: g sibs, Apollo, Ares, KKR, Blackstone, black Rock, and they
Speaker 3: were coming back to the office and they were growing,
Speaker 3: and they were finding that two things. One they needed
Speaker 3: nice offices to kind of you know, get everybody where
Speaker 3: they want them to be, but also they were growing
Speaker 3: and they outgrew what they had and then they went
Speaker 3: looking for more and what they found was there's actually
Speaker 3: not that much trophy real estate out there. And so,
Speaker 3: like our view on the evolving financial system, led us
Speaker 3: to have very strong conviction about a supplied demand imbalance
Speaker 3: in commercial real estate when applied correctly, and then we
Speaker 3: just looked for what's the best place, and it's tightened
Speaker 3: a lot. But actually we think it continues to and
Speaker 3: has been, because it's like the it's continued to be
Speaker 3: one to two steps behind the fundamental So what that
Speaker 3: really means the way we think to wrap it up
Speaker 3: in a nutshell, this is a triple B bond that
Speaker 3: we think is a double.
Speaker 2: A really brilliant because everybody's painting with a broad brush
Speaker 2: of hey, forget bs even a buildings are sixty percent
Speaker 2: occupied in terms.
Speaker 3: But they're not. They're one hundred percent occupied but in
Speaker 3: terms of.
Speaker 2: Staff returning to office, so it's fully leased. But the
Speaker 2: what is it castle key cars or running sixty percent
Speaker 2: of pre pandemic levels in a lot of cities. But
Speaker 2: the A plus the bigger, the JP Morgan's they want
Speaker 2: everybody back in the office, as does Goldman Sachs, as
Speaker 2: does a lot of these places. And they're roll in
Speaker 2: trophy properties.
Speaker 3: And it's not just New York, it's Miami, it's actually
Speaker 3: San France has come a long way. There's certain buildings
Speaker 3: there that we like. We actually, I would say a
Speaker 3: little bit out of consensus. We like DC certain not
Speaker 3: the government buildings, but nice offices. Like we said, this
Speaker 3: is an administration that's in the business of being in business,
Speaker 3: which means you got to go see them and make
Speaker 3: your case. You want to get some business done, which
Speaker 3: means you need lawyers with a nice conference room, that
Speaker 3: need a decent office, and et cetera, et cetera. I mean,
Speaker 3: like it sounds a little good, but you're.
Speaker 2: It's doing business.
Speaker 3: It's true. And so you can see there are certain
Speaker 3: companies that are buying buildings, knocking them down in DC
Speaker 3: and building brand new ones. And there are buildings that
Speaker 3: are being taken offline to convert to REZI. By the way,
Speaker 3: everything we wrapped up in what we said, the conversion
Speaker 3: from office REZI is actually spinning faster now in DC.
Speaker 3: Some buildings are being just outside d C. Some buildings
Speaker 3: are being converted to data centers, so actually like stocks
Speaker 3: being removed all the time. Anyways, it's just an example
Speaker 3: of how like we're pulling on threads and we're finding
Speaker 3: where we can best take advantage of it, and like
Speaker 3: what are the next couple steps and ultimately we're looking
Speaker 3: for what's something that's already gotten better except the price
Speaker 3: hasn't changed yet.
Speaker 2: Huh. That's really that's really interesting. You You've mentioned stress
Speaker 2: scenarios a couple of times. We know that correlations have
Speaker 2: a tendency to go to one and liquidly disappears.
Speaker 3: Well, I think I've seen that personally, right, LIQ disappears.
Speaker 3: I think I would just wrap that up. I make
Speaker 3: two comments that people I say, like one, you don't
Speaker 3: go out of business because your assets. You go out
Speaker 3: of business because your liabilities. And when you start looking
Speaker 3: at that side of the balance sheet first, then you
Speaker 3: understand things a little bit better. And then also you know,
Speaker 3: with with traders and all the people I work for,
Speaker 3: it's really great because some of the people I hired
Speaker 3: a long time ago, there am desent places now. It's
Speaker 3: actually take a lot of pride in the people I've
Speaker 3: worked with who have gone on and done fantastic things.
Speaker 3: I really really hate the phrase money good. Okay, I
Speaker 3: don't think anybody should be allowed to say it.
Speaker 2: Hmm.
Speaker 3: It is this like false crutch. I also, in many,
Speaker 3: many conversations, have said to people, I think you're right.
Speaker 3: In fact, you've convinced me. I believe you are right.
Speaker 3: I'm just saying, you know you're going to get fired
Speaker 3: long before we know the answer to this question. Okay,
Speaker 3: let's take everything we thought, everything we've known, and let's
Speaker 3: put it into the context of how do we apply
Speaker 3: this in markets? What's going to happen, what's everybody else doing,
Speaker 3: and how do we take advantage of that?
Speaker 2: Huh, really really fascinating. Last question before I get to
Speaker 2: my favorite questions, what do you think investors.
Speaker 3: Those were your favorite questions?
Speaker 2: Oh? No, you'll see the favorite question. All right, what
Speaker 2: do you think investors in the credit and all space
Speaker 2: are not talking about but perhaps should be. What topics
Speaker 2: as sets, geographies, data points are getting overlooked but really shouldn't.
Speaker 3: Yeah, so that's a great question. We touch on a
Speaker 3: little bit. They're underestimating the power of this flywheel. Like
Speaker 3: with the background I've had and we've talked about, and
Speaker 3: I've seen a lot of things blow up, Like we
Speaker 3: could come up with a lot of examples of things
Speaker 3: that could go wrong. I think they're underestimating the things
Speaker 3: that could go right, or what the power of financing
Speaker 3: and the mechanics around financing and the provision of liquidity
Speaker 3: and credit credit spreads when they're good and when they're tight,
Speaker 3: and when the machine is flowing, what that financial engineering
Speaker 3: can really do to both unrecover value and create value.
Speaker 3: I think they're underestimating. The other quick thing is in
Speaker 3: the middle of the year, if Kevin Warsh ends up
Speaker 3: sitting in that seat, and if we get a little
Speaker 3: bit of the setup that he's looking for, he's going
Speaker 3: to change everything. Right, So he believes we're going to
Speaker 3: have a big productivity dividend from AI and we're gonna
Speaker 3: have a big productivity dividend from deregulation, and then that
Speaker 3: would allow you to have lower rates and a smaller
Speaker 3: fed balance sheet at the same time. And if he
Speaker 3: gets a little bit of what he needs to craft
Speaker 3: that argument, we're gonna have a very different second half
Speaker 3: of twenty six than the first.
Speaker 2: Really really interesting. All right, let's jump to our favorite
Speaker 2: questions our speed round. We'll get you guys out of
Speaker 2: here at a reasonable time. Starting with who are your
Speaker 2: mentors who helped shape your career?
Speaker 3: Oh, I've worked for some pretty amazing people, and I
Speaker 3: tried to learn from every I just had the bosses
Speaker 3: that I've had. Are you know legends in this industry,
Speaker 3: whether it's Bruce Richards t and Purlow, Jimmy Dumar, mad Zimes,
Speaker 3: Daniel Pinto. I mean, these are people who defined these
Speaker 3: markets and they all had a huge impact on my career.
Speaker 2: Really interesting. Let's talk about books. What are you reading now?
Speaker 2: What are some of your favorites?
Speaker 3: Oh, you know, but like I am in front of
Speaker 3: a computer screen and reading so much, and I read
Speaker 3: so much analytics, research, et cetera. I get home, it's
Speaker 3: a little bit more like hang out with my wife
Speaker 3: and kids and a little TV.
Speaker 2: Well that's my next question. What are you listening to
Speaker 2: or streaming? Give us your favorite next, Netflix, Amazon, Prime, whatever.
Speaker 3: I will watch pretty much anything Tailor Sheridan. You know,
Speaker 3: like we just.
Speaker 2: Finished season two of Land Minute's so good.
Speaker 3: Like Landman, All the Yellowstones, everyone, nineteen eighteen twenty three,
Speaker 3: nineteen to all of those lion any of.
Speaker 2: Those Lioness was also great. This should be a new
Speaker 2: season of that coming out one of these days.
Speaker 3: Yeah, there is. I mean I think I've watched both
Speaker 3: seasons like one hundred times.
Speaker 2: Final two questions, what sort of advice would you give
Speaker 2: to a college grad interesting career in investing, credit trading,
Speaker 2: what have you?
Speaker 3: I just think it's not you know, it doesn't have
Speaker 3: to be a commitment for life. Just look at it
Speaker 3: as what's something I'm interested in being interested in. I
Speaker 3: think you can pick the kind of people you work with,
Speaker 3: and you want to be around good people who will
Speaker 3: teach you, who will support what you're doing, and just say,
Speaker 3: I'm going to give this a spin for three to
Speaker 3: five years, and if I like it, I love it,
Speaker 3: maybe I'll sign up for another five. But you know,
Speaker 3: you have an opportunity to try something out and see
Speaker 3: if it's for you.
Speaker 2: And our final question, what do you know about the
Speaker 2: world of trading, credit investing in alternative sources of liquidity
Speaker 2: and other products that would have been helpful twenty five
Speaker 2: or so years ago when you were just getting your
Speaker 2: legs onto you.
Speaker 3: I wish I knew a fraction of what we are
Speaker 3: applying at Marek any point before we did this. If
Speaker 3: I knew a drop of what we're doing when I
Speaker 3: sat in other seats, yeah, I'll put that all in
Speaker 3: the I wish I knew Bucky.
Speaker 2: Really, really, absolutely fascinating.
Speaker 3: Matt.
Speaker 2: Thank you for being so generous, Thanks for having with
Speaker 2: your time, and we have been speaking with Matt Sherwin.
Speaker 2: He's co founder and chief investment officer of Mare Capital.
Speaker 2: If you enjoy this conversation, well, be sure and check
Speaker 2: out any of the previous six hundred or so we've
Speaker 2: done over the past twelve years. You can find those
Speaker 2: at iTunes, Spotify, Bloomberg YouTube, wherever you get your favorite podcasts.
Speaker 2: I would be remiss if I didn't thank the correct
Speaker 2: team that helps us with these conversations together each week.
Speaker 2: Alexis Noriega is my video producer. Sean Russo is my researcher.
Speaker 2: Ana Luke is my podcast producer. I'm Barry Rutaults. You've
Speaker 2: been listening to Masters in Business on Bloomberg Radio.