WEBVTT - Corn May Be Big Opportunity at These Levels, Gilbertie and McGlone Say 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg p m L Podcast. I'm pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Bramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg p m L 0:00:20.840 --> 0:00:31.400 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Well, 0:00:31.560 --> 0:00:36.440 corn is king. Corn markets are the biggest agricultural market 0:00:36.680 --> 0:00:40.080 both in turns of tonnage as well as dollar amount 0:00:40.400 --> 0:00:42.800 in the world. And here to tell us what to 0:00:42.960 --> 0:00:47.440 expect from this market is Sala Gilberti, President, chief chief 0:00:47.479 --> 0:00:50.640 investment officer and co founder of two Cream Trading ll C, 0:00:51.200 --> 0:00:55.360 as well as Mike mclogan, commodity strategist for Bloomberg Intelligence. 0:00:55.560 --> 0:00:58.080 So I want to start with you. You noted something 0:00:58.520 --> 0:01:02.800 pretty amazing to me that even as demand increases from 0:01:02.800 --> 0:01:08.000 ethanol and just globally, corn prices are around three dollars 0:01:08.000 --> 0:01:10.160 and fifty cents of bushel, which means corn prices are 0:01:10.200 --> 0:01:14.720 again at or below perceived cost of production. Does that 0:01:14.760 --> 0:01:17.480 mean that farmers have to raise prices cell, Well, it 0:01:17.480 --> 0:01:20.040 means the market has to raise prices. Farmers really don't 0:01:20.040 --> 0:01:22.800 control the price unless they stop planting, and in a 0:01:22.800 --> 0:01:25.559 way so indirectly they can control the price. What we've 0:01:25.560 --> 0:01:28.800 seen is in the past ten years, two times corn 0:01:28.840 --> 0:01:31.200 has been at this level three fifty or below spot 0:01:31.200 --> 0:01:34.240 corn and the prices doubled to over seven dollars. That 0:01:34.280 --> 0:01:36.720 happened in the two thousand seven two eight crop here 0:01:36.760 --> 0:01:42.119 and again in usage continues to rise. Demand is always 0:01:42.240 --> 0:01:44.840 rising for corn. Corn touches every part of your life. 0:01:44.840 --> 0:01:47.199 It's like oil, and when oil, you know, goes below 0:01:47.240 --> 0:01:50.240 the cost of production, money tends to be attracted. Their 0:01:50.560 --> 0:01:53.880 corn is once again at that three fifty level in spot. 0:01:54.280 --> 0:01:56.680 We we can't say when for sure there will be 0:01:56.680 --> 0:01:59.520 a supply disruption. We know that it is very unlikely 0:01:59.560 --> 0:02:02.720 that there will demand disruption. So corns corn maybe a 0:02:02.760 --> 0:02:05.920 big opportunity here. Uh, Mike mcgloan wants you to come 0:02:05.960 --> 0:02:08.639 in on this because you know, there's only so much 0:02:08.680 --> 0:02:11.359 acreage out there, and farmers have to decide what the plant. 0:02:11.360 --> 0:02:13.760 And sometimes they say, I'm not gonna plant corn, I'm 0:02:13.760 --> 0:02:17.600 gonna plant soybeans. Uh. Why do they make those decisions? 0:02:17.639 --> 0:02:21.600 And what are they deciding right now? One reason? Money revenue, 0:02:21.919 --> 0:02:24.080 and that's A key factor that's happening right now is 0:02:24.840 --> 0:02:28.120 there's I'm looking at my screen. The US D estimates 0:02:28.120 --> 0:02:30.919 for corn revenue for this year are average acre is 0:02:30.919 --> 0:02:33.400 gonna lose ninety dollars per acre, yet they're still breaking 0:02:33.440 --> 0:02:35.720 even in soybean, so they're gonna plant more soybeans. So 0:02:35.720 --> 0:02:38.240 that's probably the first time in history we're gonna see 0:02:38.320 --> 0:02:40.640 much more soybeans planted than the corn. A key factor 0:02:40.680 --> 0:02:43.880 there is it's an indication that US grain production is peaked, 0:02:43.919 --> 0:02:46.640 which is a very profound statement because we heard about it. 0:02:46.639 --> 0:02:48.520 You know, a great year again this year, but from 0:02:48.520 --> 0:02:51.600 a typical acre of land you get maybe four metric 0:02:51.600 --> 0:02:54.320 tons of corn, but for soybeans it's about one. So 0:02:54.400 --> 0:02:57.600 the total production will continue decline, is very likely to 0:02:57.639 --> 0:03:01.120 continue decline. It's farmers chase profits and plant more beans 0:03:01.120 --> 0:03:04.639 and less corn, and that's probably it's an unsustainable trend 0:03:04.720 --> 0:03:07.960 until price is generally adjust to make a difference. Sal 0:03:08.040 --> 0:03:11.840 I'd like to to get your sense of why farmers 0:03:11.880 --> 0:03:15.280 are planting more soybeans at this point. When I don't, 0:03:15.480 --> 0:03:18.240 I mean I love tofu. We were talking earlier that 0:03:18.360 --> 0:03:21.320 you like tofu too, but that's not much driving this 0:03:21.480 --> 0:03:23.440 is it. No, it's not. In fact, that demand for 0:03:23.480 --> 0:03:28.080 soybeans is so enormous from China, and China we saw 0:03:28.080 --> 0:03:31.800 them by I think Smithfield. They they are consuming more pork, 0:03:32.200 --> 0:03:35.400 more animal based proteins. They are importing all of the 0:03:35.400 --> 0:03:37.880 soybeans they can find from any source in the world 0:03:37.920 --> 0:03:40.280 in order to feed their animals. Remember, the number one 0:03:40.360 --> 0:03:42.240 use of grains is to feed the animals that we 0:03:42.320 --> 0:03:44.320 as humans eat, and so we might like the eat 0:03:44.320 --> 0:03:48.520 a lot of tofu, but the real consumption is for animals. Okay, 0:03:48.560 --> 0:03:50.200 so let's build on that. I mean, what at what 0:03:50.320 --> 0:03:55.080 price point would farmers be incentivized to plant more corn? Well, 0:03:55.120 --> 0:03:57.880 they look at a ratio, and so they look at 0:03:57.920 --> 0:04:00.680 their inputs and their costs, and they look at what 0:04:00.800 --> 0:04:03.040 will make them more Either you know, d seventy five 0:04:03.040 --> 0:04:05.520 bushels of corn or fifty or so bustels of soybeans. 0:04:05.640 --> 0:04:06.840 One or the other is going to come off of 0:04:06.880 --> 0:04:11.960 that same maker. Importantly, though, for sustainability issues, it's really important. 0:04:12.120 --> 0:04:15.080 Corn draws nitrogen out of the soil, and farmers think 0:04:15.080 --> 0:04:17.600 about this all the time. Soybeans put it back in, 0:04:17.839 --> 0:04:20.640 and so there's something called crop rotation where it's really 0:04:20.680 --> 0:04:24.800 advisable for a farmer who can supplement with with artificial fertilizers. 0:04:24.800 --> 0:04:26.520 But the best thing that farmer can do for his 0:04:26.560 --> 0:04:28.679 soil is once in a while, when he's got a choice, 0:04:28.880 --> 0:04:32.120 switch back to soybeans because it improves the general health 0:04:32.160 --> 0:04:35.320 of his farm. Uh Mica. One of the things I 0:04:35.320 --> 0:04:37.400 want you to speak about, though, is what they're facing 0:04:37.440 --> 0:04:40.080 in terms of fuel costs right now with with farmers, 0:04:40.160 --> 0:04:43.040 because I don't get this. Uh. The United States is 0:04:43.080 --> 0:04:46.719 producing more oil and more natural gas than anybody can remember, 0:04:47.240 --> 0:04:50.400 and yet supplies for farmers are kind of getting squeezed. 0:04:50.440 --> 0:04:52.840 What's up? What's up with that one word? Exports a 0:04:52.960 --> 0:04:56.400 key factor in in the US. I think the US 0:04:56.440 --> 0:04:59.839 commodity market right now, most notably energies we can export. 0:05:00.120 --> 0:05:02.159 We have a declining dollar that we had restrictions a 0:05:02.160 --> 0:05:04.359 few years ago. Those are gone. So if there's a 0:05:04.360 --> 0:05:06.560 better market overseas and there's more money to be made, 0:05:06.560 --> 0:05:09.400 there's plenty of exports. So that is a key factors. 0:05:09.560 --> 0:05:13.040 Cost of costs for farmers are increasing because patrol imune costs, 0:05:13.320 --> 0:05:16.600 drying costs for corn are increasing, but exports and that's 0:05:16.640 --> 0:05:18.719 also a key factor in the grains, and it just 0:05:18.760 --> 0:05:21.520 hasn't happened yet. So we've seen a bottom in crude 0:05:21.520 --> 0:05:24.599 oil bottomed and what it's really like from the lows 0:05:24.600 --> 0:05:26.720 free years ago, we haven't seen that in the grain yet. 0:05:26.760 --> 0:05:29.120 And that's what it's probably gonna happen in a key 0:05:29.200 --> 0:05:31.599 driver's exports. So if we have a continued week dollar, 0:05:32.080 --> 0:05:35.440 unless there's some kind of straight train restrictions, it's almost inevitable. 0:05:35.480 --> 0:05:39.680 This substantial paradigm shift in big increase in US exports 0:05:39.720 --> 0:05:42.560 should boost the price of US traded corn, soybeans, and 0:05:42.560 --> 0:05:46.600 potentially weak So you were talking earlier about that ratio 0:05:47.320 --> 0:05:51.800 of corn to soybeans. Where are we now? What's it saying? Um, 0:05:51.839 --> 0:05:55.120 it's telling farmers to plant soybeans. Um, it was telling 0:05:55.200 --> 0:05:56.640 them a couple of weeks ago to plant a lot 0:05:56.640 --> 0:05:58.960 more soybeans. Right now it's coming back into line because 0:05:59.000 --> 0:06:01.920 people are starting to speck like Mike is predicting that 0:06:02.000 --> 0:06:05.520 they will plant more soybeans versus corn. And again, you're 0:06:05.520 --> 0:06:07.680 gonna get fifty bushels of soybeans off an acre or 0:06:07.680 --> 0:06:09.880 you're gonna get a hundred and seventy five corn. That's 0:06:09.880 --> 0:06:12.080 a big difference. If you switch to soybeans. So how 0:06:12.160 --> 0:06:16.039 much could you see corn prices rise? They're at about 0:06:16.080 --> 0:06:18.279 three dollars and fifty cents of bushel right now. Where 0:06:18.279 --> 0:06:19.800 are they going to go by this time next year? 0:06:19.880 --> 0:06:22.240 There's no towing. I can tell you that this is 0:06:22.279 --> 0:06:24.679 the midst of the corn harvest seasonal, so more corn 0:06:24.800 --> 0:06:26.719 is in a big pile than then there will be 0:06:26.720 --> 0:06:28.920 for the rest of the year, and so that generally 0:06:28.960 --> 0:06:32.279 creates a seasonal low um, so you can see a 0:06:32.320 --> 0:06:34.680 slow trickle upward of price for the next six months 0:06:34.760 --> 0:06:38.359 until the next planning season becomes clear. But again, twice 0:06:38.560 --> 0:06:41.040 in the last ten years, corn prices have doubled from 0:06:41.040 --> 0:06:43.560 the price that they're at right now. I'm just looking 0:06:43.600 --> 0:06:46.320 at your E T F right corn, the two cum 0:06:46.400 --> 0:06:48.920 corn E T F trading it about sixteen and a 0:06:48.960 --> 0:06:52.480 half bucks a share. It was as high as almost 0:06:52.520 --> 0:06:55.359 twenty in July it was. And you've you've seen this 0:06:55.400 --> 0:06:58.159 relentless bear market with these these supplies of corn. But 0:06:58.200 --> 0:07:01.480 now the harvest is over. And again our fund wasn't 0:07:01.480 --> 0:07:03.960 around for both of those doubling prices, but it was 0:07:04.040 --> 0:07:07.200 for the one, and you know, the fund did perform 0:07:07.320 --> 0:07:08.920 quite well, and I think it's went from the mid 0:07:08.920 --> 0:07:11.360 twenties to the very low fifties. Mike, what's the best 0:07:11.400 --> 0:07:15.160 way for investors to uh to trade corn? Well, I 0:07:15.560 --> 0:07:17.120 have to admit when I look at a lot of 0:07:17.160 --> 0:07:19.040 the products and it sell levels. When I do this, 0:07:19.120 --> 0:07:22.239 I go to soybeans partly because historically you can invest 0:07:22.320 --> 0:07:25.040 in soybean and soybean product and you don't have that 0:07:25.120 --> 0:07:27.480 massive cost of carry. Now you might not get the 0:07:27.480 --> 0:07:29.320 performance right away, but that's one of the issues in 0:07:29.400 --> 0:07:31.520 commodities is you have a cost of carry. Soybeans are 0:07:31.600 --> 0:07:34.000 very easy to store and very inexpensive to store, so 0:07:34.040 --> 0:07:36.840 that generally you don't have that rolling futures cost I e. 0:07:36.960 --> 0:07:39.760 A contango and corn you have. It's a little more expensive, 0:07:39.840 --> 0:07:42.000 but you know that's just you have a different type 0:07:42.000 --> 0:07:44.120 of market. So I look at soybeans is a longer 0:07:44.240 --> 0:07:47.880 term hold. It depends on where you are, but overall 0:07:48.240 --> 0:07:52.000 it's certain key levels like cell mentioned here. The risk 0:07:52.360 --> 0:07:54.760 is that we trickled down or re double in price 0:07:54.800 --> 0:07:56.280 over the next few years is the kind of way 0:07:56.320 --> 0:07:58.240 I look at it. And a little bit of a 0:07:58.240 --> 0:08:00.120 weather event will do that, and I'm not predicting that, 0:08:00.240 --> 0:08:02.840 but just these demand versus supply trends imply prices and 0:08:02.920 --> 0:08:07.840 top probably need to increase or exports will make them increase. Gentlemen, 0:08:07.880 --> 0:08:09.760 want to thank you very much for joining us and 0:08:09.840 --> 0:08:12.840 lightening us about the world of commodities. Sal Gioberti is 0:08:12.880 --> 0:08:15.640 the president and the chief investment officer and co founder 0:08:15.680 --> 0:08:18.080 of a two creum at Trading not just looking at 0:08:18.120 --> 0:08:21.800 his soybean e t F again of about four point 0:08:21.840 --> 0:08:25.760 three percent since August. Thanks very much. Mike mcgloanar commodity 0:08:25.800 --> 0:08:43.040 strategist for Bloomberg Intelligence. This is Bloomberg. Here to help 0:08:43.120 --> 0:08:45.439 us understand what's going on in the bond market is 0:08:45.480 --> 0:08:48.840 Tad Revel. He is the chief investment officer of TCW, 0:08:48.880 --> 0:08:52.240 helping to manage more than two hundred billion dollars based 0:08:52.280 --> 0:08:54.640 in Los Angeles. Tad, thank you very much for being 0:08:55.040 --> 0:08:57.400 with us. When if you could just begin by telling 0:08:57.440 --> 0:09:02.040 people who was Sir Thomas Gresham, why does it matter? 0:09:02.280 --> 0:09:05.800 And maybe tell us how that connects with the United 0:09:05.840 --> 0:09:08.520 States and the fact that we don't use silver in 0:09:08.600 --> 0:09:12.280 any of our money. That is, it is a bit 0:09:12.280 --> 0:09:14.880 of an obscure reference, but I think actually many people 0:09:14.880 --> 0:09:19.960 are familiar with the term. Gresham's loss. So Gresham was 0:09:20.040 --> 0:09:23.520 actually an advisor to the court of King Henry the 0:09:23.559 --> 0:09:27.319 eighth of financial advisor, and he put forth the observation 0:09:28.000 --> 0:09:31.280 that bad money drives out good money, and what he 0:09:31.320 --> 0:09:33.680 meant by that is that if there were or the 0:09:33.720 --> 0:09:39.040 observation was that if you have two identical face value 0:09:39.160 --> 0:09:44.200 type currencies, let's say gold coins, silver coins, copper coins, UM, 0:09:44.400 --> 0:09:47.719 people will essentially take the gold coins and put them 0:09:47.720 --> 0:09:51.160 in their drawer and utilize the copper coins to facilitate 0:09:51.200 --> 0:09:54.479 the circulation UM. In the case of the American experience, 0:09:54.600 --> 0:10:00.240 coinage was silver until n four Congress changed the law, 0:10:00.480 --> 0:10:04.200 and beginning in nineteen sixty five, when other medals base 0:10:04.320 --> 0:10:07.719 metals were used, all the silver coins basically disappeared. So 0:10:08.280 --> 0:10:11.440 Gresham's law is kind of an interesting insight into the 0:10:11.520 --> 0:10:15.640 human nature that actually most people are probably pretty familiar with, 0:10:15.679 --> 0:10:19.520 even if no one really knows UM the origins of 0:10:19.520 --> 0:10:22.520 the term well so so connecting it to to now 0:10:22.720 --> 0:10:25.680 and to market, it's the idea being that we've seen 0:10:25.679 --> 0:10:29.720 this incredible run up in equities and in riskier assets 0:10:29.920 --> 0:10:32.400 in the debt market as well as frankly safe assets. 0:10:32.440 --> 0:10:34.760 We've seen a run up and absolutely everything, and people 0:10:34.800 --> 0:10:37.520 are chasing the rally by pouring more money in. Is 0:10:37.520 --> 0:10:41.360 the implication here that we are on the precipice of 0:10:41.400 --> 0:10:44.120 a turning point, that this is bad money going into 0:10:44.120 --> 0:10:47.280 the market right now. I think that that's a that's 0:10:47.280 --> 0:10:50.280 a good metaphor for for the point which is that 0:10:50.960 --> 0:10:55.520 UH investors, I think are always counseled UM to be 0:10:55.640 --> 0:10:59.760 disciplined in their approach to UH, not overpaying for assets 0:11:00.000 --> 0:11:02.520 who taking a long term approach. But what does happen 0:11:02.960 --> 0:11:05.440 laid in the cycle is the phenomenon that you alluded to, 0:11:05.559 --> 0:11:09.400 which is that there is money that is hungry for 0:11:09.400 --> 0:11:12.440 for yielden income and at some point is willing to 0:11:12.600 --> 0:11:15.400 pretty much underwrite any risk in exchange for the income. 0:11:15.880 --> 0:11:18.880 The result is that you get assets of all sorts, 0:11:19.400 --> 0:11:22.160 those worthy and those less so that get bit up 0:11:22.160 --> 0:11:24.800 in price, and in effect it becomes an example of 0:11:24.880 --> 0:11:29.720 Gresham's law of investing, in which basically the bad underwriting UM, 0:11:29.800 --> 0:11:33.440 the money that is just far too willing to UH 0:11:33.440 --> 0:11:36.120 sponsor risk, starts to drive out the good money and 0:11:36.160 --> 0:11:39.040 the good underwriting that which is more discipline, and it 0:11:39.040 --> 0:11:42.920 creates a a point of cognitive dissonance for people because 0:11:42.960 --> 0:11:45.680 you said on the sidelines, if your discipline and you say, 0:11:45.840 --> 0:11:48.839 I just don't understand. Everybody else seems to be making 0:11:48.880 --> 0:11:51.240 money and I'm sitting this out. Is this really the 0:11:51.760 --> 0:11:56.240 right strategy for for me that I should take? And historically, 0:11:56.320 --> 0:11:58.920 actually it is, even though it doesn't feel that way 0:11:58.920 --> 0:12:02.360 in real time. Given given that sort of backdrop, is 0:12:02.360 --> 0:12:07.559 TCW moving more money in its fixed income portfolios to cash? 0:12:07.960 --> 0:12:10.959 Is it taking money out of certain markets? And if so, 0:12:11.120 --> 0:12:14.199 which ones? Well? The way we think about it, or 0:12:14.240 --> 0:12:16.400 the way we express it is that you should think 0:12:16.400 --> 0:12:19.559 in terms of in terms of fixed income, you should 0:12:19.559 --> 0:12:23.080 think about bendable assets and breakable assets. And by that 0:12:23.160 --> 0:12:26.199 what we mean is that a breakable asset is essentially 0:12:26.520 --> 0:12:29.000 an asset in the case of a bond, where you're 0:12:29.040 --> 0:12:33.760 going to ultimately suffer loss of principle um it will 0:12:33.840 --> 0:12:39.440 not recover or represent an economically viable asset. A bendable 0:12:39.480 --> 0:12:44.319 asset is an asset that will, we believe, ultimately provide 0:12:44.320 --> 0:12:47.120 full recovery of principle. But the use of the term 0:12:47.160 --> 0:12:50.200 bendable is meant to remind us all that that doesn't 0:12:50.200 --> 0:12:52.520 mean that there isn't going to be ups and downs 0:12:52.520 --> 0:12:57.079 and market related type volatility. So what what Yeah? What 0:12:57.080 --> 0:13:01.720 what's what's bendable and what's breakable? Yeah, exact exactly. Um. So, 0:13:02.200 --> 0:13:06.320 just as a large generalization, UH, the kinds of assets 0:13:06.320 --> 0:13:08.120 that you should think of as being bendable that are 0:13:08.200 --> 0:13:11.120 appropriate late in the cycle where we think we are 0:13:11.120 --> 0:13:14.880 are things like investment grade corporate bonds UM top of 0:13:14.920 --> 0:13:17.840 the capital structure type of investments in some of the 0:13:17.880 --> 0:13:22.960 securitized credit areas. So those would include typically triple A 0:13:23.080 --> 0:13:27.360 rated commercial back mortgage backed securities. They would include programs 0:13:27.400 --> 0:13:31.120 such as the UH the FELP student loan program, which 0:13:31.200 --> 0:13:35.920 basically is government guaranteed full faith and credit obligations UH 0:13:35.960 --> 0:13:39.800 student loans. They would include agency mortgages. And then that 0:13:39.840 --> 0:13:42.840 begs the question, so what would be breakable? Well, um, 0:13:42.880 --> 0:13:44.960 that of course is the rub of it, which is 0:13:45.000 --> 0:13:48.000 that you need to pre identify that which will be 0:13:48.040 --> 0:13:51.320 breakable before you essentially get into the end of the 0:13:51.360 --> 0:13:56.360 cycle when markets tend to be absolutely unforgiving. Traditionally, you 0:13:56.360 --> 0:14:00.520 will see breakable assets in such asset classes as UH 0:14:00.679 --> 0:14:04.679 high yield securities below investment grade. You'll oftentimes see them 0:14:04.679 --> 0:14:07.520 in emerging markets, and you'll typically see them down the 0:14:07.559 --> 0:14:10.840 capital structure in some of the securitized credits. If you're 0:14:10.840 --> 0:14:14.120 buying a triple B a double B commercial mortgage, you 0:14:14.240 --> 0:14:17.000 better be careful about the level of due diligence that 0:14:17.040 --> 0:14:19.640 you're doing because an asset like that, we would suggest 0:14:19.800 --> 0:14:22.320 is potentially in the breakable category. So does that mean 0:14:22.360 --> 0:14:26.520 that TCW is actively selling HILD bonds, emerging market bonds, 0:14:26.640 --> 0:14:30.440 and some lower rated investment grade bonds. Right. So it's 0:14:30.440 --> 0:14:33.480 important to convey this is that the statements I made 0:14:33.800 --> 0:14:37.760 were generalizations, and there are sometimes particular differences. But as 0:14:37.760 --> 0:14:41.520 a general statement, we have de emphasized the high yield 0:14:42.480 --> 0:14:45.640 element in our portfolios for a significant period of time. 0:14:45.880 --> 0:14:49.560 We have emphasized the triple A in securitized credit and 0:14:49.640 --> 0:14:52.240 the investment grade. So I don't want to, you know, 0:14:52.520 --> 0:14:54.760 go too far and say that, you know, we wouldn't 0:14:54.760 --> 0:14:57.280 buy a high yield security in this type of environment. 0:14:57.520 --> 0:14:59.840 We would subject it to a level of due diligence 0:14:59.840 --> 0:15:02.680 and level of skepticism that I think you're that is 0:15:02.720 --> 0:15:06.800 supposed to be appropriate laid in a credit or asset 0:15:06.840 --> 0:15:11.080 price cycle ted just quickly, the people that you speak with, 0:15:11.240 --> 0:15:15.240 do you feel that they are acting out of emotion 0:15:15.600 --> 0:15:20.040 or out of some kind of rational thought process. UM. 0:15:20.080 --> 0:15:24.400 I think it's actually mostly habit People become habituated uh 0:15:24.440 --> 0:15:27.880 to to taking risk laid in the cycle. And I 0:15:27.880 --> 0:15:31.400 think an interesting way to think about it is that, 0:15:32.000 --> 0:15:35.800 uh if you look at market related measures of risks, 0:15:35.920 --> 0:15:39.800 so things like the VIX index, which measures stock market 0:15:40.200 --> 0:15:43.360 implied volatility or stock market implied risk. There are other 0:15:43.400 --> 0:15:46.400 indicries like the MOVE index that measures that in treasuries. 0:15:46.680 --> 0:15:49.720 Until a few days ago, these indicries were hovering at 0:15:49.720 --> 0:15:53.720 twenty five years twenty five year loads. If market participants 0:15:53.720 --> 0:15:56.880 were being utterly rational. The only conclusion you could draw 0:15:56.920 --> 0:15:59.920 from that is that market participants must literally be saying 0:16:00.160 --> 0:16:03.560 this is the safest investment environment in twenty five years. 0:16:04.000 --> 0:16:07.640 If you think market participants are not literally and rationally 0:16:07.680 --> 0:16:10.520 saying that, than what you're really observing is a very 0:16:10.560 --> 0:16:14.640 crowded trade UM in the sense that many, for too 0:16:14.680 --> 0:16:18.160 many people probably are over their skis as it related 0:16:18.240 --> 0:16:21.360 to credit risk taking. Tad Revell, thank you so much 0:16:21.360 --> 0:16:24.440 for joining us. Tad Revel, chief investment officer for TCW, 0:16:24.520 --> 0:16:27.600 which overseas two hundred and one billion dollars and is 0:16:27.640 --> 0:16:43.560 based in Los Angeles. When a company defaults, typically it's 0:16:43.600 --> 0:16:46.040 because it has run out of money to pay its bills, 0:16:46.080 --> 0:16:48.640 but every so often it means something very different. If 0:16:48.680 --> 0:16:51.560 you take a look at the credit default swaps of Huffnanian, 0:16:51.600 --> 0:16:54.640 which is New Jersey's biggest home builder, it looks like 0:16:54.680 --> 0:16:57.000 the company is about default. If you look at the bonds, 0:16:57.000 --> 0:17:00.440 it looks like they are nowhere near defaulting and are lying. 0:17:00.480 --> 0:17:03.600 This is a hedge fund battle that we want to 0:17:03.720 --> 0:17:06.159 illuminate with our own. Shodar Naturaj and he is a 0:17:06.240 --> 0:17:09.600 high yield the debt and syndicated a loan reporter for Bloomberg. 0:17:09.880 --> 0:17:12.640 He breaks a lot of news. He writes great articles. 0:17:12.680 --> 0:17:14.320 You can find them on at the Bloomberg as well 0:17:14.320 --> 0:17:17.320 as Bloomberg dot com. Um, sure, can you just give 0:17:17.400 --> 0:17:19.840 us a sense what's going on here under the surface 0:17:19.920 --> 0:17:22.600 having to do with have Nanian credit default swaps and bonds. 0:17:23.040 --> 0:17:25.480 I mean, it's one of those situations that just leaves 0:17:25.520 --> 0:17:28.240 a lot of people scratching their heads on how this 0:17:28.320 --> 0:17:31.919 is even allowed. Essentially, you have a company who's sails 0:17:31.960 --> 0:17:34.919 it down, credit metrics are worsening, and they have a 0:17:35.000 --> 0:17:37.000 good chunk of debt that is about a mature so 0:17:37.040 --> 0:17:38.840 they need to figure out a way how they can 0:17:38.880 --> 0:17:41.320 refinance their debt, and in WOX and G s O, 0:17:41.400 --> 0:17:44.640 which is black Son's credit unit, ostensibly as the White 0:17:44.720 --> 0:17:46.960 Knight offering what might seem like a good deal to 0:17:47.000 --> 0:17:50.080 the company, but there is this unusual provision. They want 0:17:50.119 --> 0:17:52.240 the company to be able to default on the credit 0:17:52.280 --> 0:17:55.600 default swaps contract so that they get a payout on that, 0:17:56.080 --> 0:17:57.919 and that obviously has a lot of people on the 0:17:57.920 --> 0:18:00.679 other side of the trade very upset. So basically you 0:18:00.720 --> 0:18:03.639 have hundreds of millions of dollars at stake in the 0:18:03.680 --> 0:18:07.119 credit default swaps market that are totally independent of the 0:18:07.160 --> 0:18:10.240 company and the company's dealtload. Like the company doesn't actually 0:18:10.240 --> 0:18:12.359 have to pay out in any of this, right, so 0:18:12.520 --> 0:18:17.040 why wouldn't the company say we will take better financing terms, 0:18:17.320 --> 0:18:20.600 We're going to lower our interest rates, except black Stones 0:18:20.720 --> 0:18:24.760 offer and not make our payments quite on time, so 0:18:24.800 --> 0:18:26.960 that a bunch of hedge funds are forced to pay 0:18:26.960 --> 0:18:30.640 out black Stone make them whole on the whole transaction, 0:18:30.960 --> 0:18:34.040 and everyone goes on there, mary or not some merry way. 0:18:34.119 --> 0:18:36.080 Because the guys on the other side are arguing that 0:18:36.119 --> 0:18:39.200 the company in this case would be intentionally interfering with 0:18:39.480 --> 0:18:42.720 another contract that they have with third parties, because what 0:18:42.880 --> 0:18:45.359 g s O is doing is they're effectively buying up 0:18:45.359 --> 0:18:49.760 the default swaps, betting on a default while simultaneously knowing 0:18:49.800 --> 0:18:51.760 that they will be able to force the default. And 0:18:51.760 --> 0:18:53.440 that doesn't smell right to a lot of people on 0:18:53.480 --> 0:18:55.040 the other side of the trade, who are obviously trying 0:18:55.040 --> 0:18:57.560 to protect their own relative value trades. Who's on the 0:18:57.560 --> 0:19:00.920 other side you have? You have hedge funds like Solas, 0:19:01.280 --> 0:19:04.119 c Qus, there are a few other big names involved. 0:19:05.200 --> 0:19:10.080 We know that the credit trades has involved people like Goldman, Citadel, 0:19:10.440 --> 0:19:14.040 black Rock, and you have someone like an Apologlobal Management 0:19:14.080 --> 0:19:16.439 their credit unit which is on the same side as you, 0:19:16.520 --> 0:19:18.520 so as they have been buying a lot of the swaps, 0:19:18.520 --> 0:19:21.320 so they will profit if there is a payout in 0:19:21.320 --> 0:19:24.560 those contracts. But doesn't this just raise the very sort 0:19:24.560 --> 0:19:28.160 of philosophical issue of how a credit the fault swap 0:19:28.320 --> 0:19:32.240 works because the credit the fault swap, while it may 0:19:32.280 --> 0:19:36.040 not be directly tied to something that underlies it, like 0:19:36.119 --> 0:19:39.840 the value in this case of Hobnanian, it is a 0:19:40.000 --> 0:19:43.359 separate entity. So it's almost as if you're selling insurance 0:19:43.359 --> 0:19:48.760 for someone's automobile, and then the premium gets traded back 0:19:48.800 --> 0:19:52.199 and forth, and people say, I want that premium to 0:19:52.280 --> 0:19:54.800 go up, which means that you would get into an accident. 0:19:54.840 --> 0:19:57.280 So you have someone who's throwing tax on the road 0:19:57.760 --> 0:20:00.080 hoping that the car will get into an axe it 0:20:00.160 --> 0:20:02.520 in because that will raise the premium, and then the 0:20:02.520 --> 0:20:05.760 insurance company is left holding the bag. Is that It's 0:20:05.840 --> 0:20:08.159 kind of the way this thing works. It feels like 0:20:08.160 --> 0:20:10.760 and and and and the byproduct of this this is 0:20:10.800 --> 0:20:13.520 a byproduct really of the growth we've seen in the 0:20:13.520 --> 0:20:17.000 credit to false source market. These are essentially insurance contracts. 0:20:17.160 --> 0:20:19.439 You're buying the contracts just so that you're able to 0:20:19.480 --> 0:20:21.719 head your position. At least that was the original goal, right, 0:20:21.720 --> 0:20:23.879 but that's been teased out. In other words, the person 0:20:23.920 --> 0:20:27.240 who's buying that contract is now no longer really interested 0:20:27.280 --> 0:20:30.760 in the health of the underlying asset, or they're interested 0:20:30.800 --> 0:20:33.639 in is the value of the contract goes up or down, 0:20:34.000 --> 0:20:37.439 and that's something that is traded just as if it 0:20:37.560 --> 0:20:40.520 was a separate entity. And that's an interesting point to 0:20:40.560 --> 0:20:43.240 make because the last time something like this happened, and 0:20:43.400 --> 0:20:45.159 you know, black Stone got a lot of flak for it, 0:20:45.240 --> 0:20:48.359 and this happened with the Spanish gaming company. Blackstone made 0:20:48.400 --> 0:20:51.040 a very specific point, and I'd like to read out 0:20:51.080 --> 0:20:54.280 about their statement from back then. They said the losers 0:20:54.359 --> 0:20:57.160 on the other side of the trade was sophisticated hedge 0:20:57.200 --> 0:20:59.880 funds using credit to false swaps to bet on the 0:21:00.040 --> 0:21:03.159 timing of a default. They were like gamblers betting on 0:21:03.200 --> 0:21:06.000 the overrun the spread, but having an interest, having no 0:21:06.160 --> 0:21:08.919 interest in the outcome of the game. Of course, the 0:21:08.920 --> 0:21:11.320 guys on the other side would argue that that's absolutely 0:21:11.359 --> 0:21:13.760 not true, and that's why we have this bitched battle 0:21:13.880 --> 0:21:17.520 right now. Interesting story, it's a great story and one 0:21:17.600 --> 0:21:21.520 that I think will probably continue and the lawyers will 0:21:21.560 --> 0:21:24.040 certainly make out with this. I will just note that 0:21:24.040 --> 0:21:28.040 that company that Shodar was talking about was Coderi, and 0:21:28.080 --> 0:21:30.800 it was featured the whole affair and Blackstone's role, and 0:21:30.800 --> 0:21:32.760 it was featured on the John Stewart Show back in 0:21:33.680 --> 0:21:37.480 It was that we perceived publicly as being rather ridiculous, 0:21:37.560 --> 0:21:41.040 given how divorced it was from you know, the underlying Well, 0:21:41.119 --> 0:21:44.359 there's no ridiculous in trying to make money, right, I mean, 0:21:44.359 --> 0:21:47.280 it's all about whatever the opportunity presents itself. Thanks very 0:21:47.359 --> 0:21:50.040