Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast.
Speaker 1: My name is Mike Regan. I'm a senior editor at Bloomberg,
Speaker 1: and I'm Veldona Hire, across asset reporter with Bloomberg. And
Speaker 1: this week on the show, Well, anyone who has spent
Speaker 1: any time really studying the stock market is probably familiar
Speaker 1: with the old cliche sell in May and go away
Speaker 1: and come back on Saint Leger's Day. That's September fifteenth
Speaker 1: for those who aren't familiar with their sixteenth century English saints. Well,
Speaker 1: May's only a couple of weeks away, and the stock
Speaker 1: market has gotten off to a rip roaring start this year,
Speaker 1: So is this a good year to follow that old
Speaker 1: advice in the cliche? We'll talk to a market strategist
Speaker 1: who says, hey, don't wait, sell now. He'll explain why
Speaker 1: he's expecting a drop of as much as about twenty
Speaker 1: two percent from current level in the SMP five hundred.
Speaker 1: But first, Phil though, I have to ask ask away.
Speaker 1: You know it's going to be a strange one. When
Speaker 1: have you ever owned a pair of Air Jordan's? No, no,
Speaker 1: but they're very trendy now, even if you don't play hoops. No.
Speaker 1: I used to buy him when I when I was
Speaker 1: still a basketball just because the idea is, like you,
Speaker 1: they'll make you a better player. Well they're good, yeah,
Speaker 1: they're good basketball sneakers. No, but they're trending now just
Speaker 1: as a fashion item and in fact, shout out to
Speaker 1: Mario DeAngelo. Frequent listener Penn Palavars who pointed out a
Speaker 1: crazy thing for this week. It's not my crazy thing.
Speaker 1: Oh good, because I saw it. You did, Yeah, I know.
Speaker 1: That's why. It's not because I knew you knew the
Speaker 1: press because he sent it to me to a pair
Speaker 1: of they well it's this is a BBC story, So
Speaker 1: they called him trainers. I'd have never heard Air Jordan's
Speaker 1: referred to as trainers except in the BBC, but pair
Speaker 1: of trainers once worn by basketball legend Michael Jordan himself.
Speaker 1: So Aired Jordan's worn in a game by Air Jordan's
Speaker 1: himself sold for two point two million at auction, which
Speaker 1: sounds like a lot, but it's actually less than what
Speaker 1: they were expecting, which I think is a bearish signal.
Speaker 1: Oh signal. Wow? Maybe. Well we've been waiting for this,
Speaker 1: right like it's always some obnoxious number every time we
Speaker 1: are thinking about like auctions, they were expected to go
Speaker 1: as high as four million two point two. So I
Speaker 1: think that's a good segue to our guest, who's a
Speaker 1: little bit in the bearish camp, even though it is. Yeah,
Speaker 1: I think our first guest ever to join us from Honolulu,
Speaker 1: So yeah, I think he might be. I'm so jealous
Speaker 1: of him. Hard to be too pessimistic in Honolulu and
Speaker 1: he's there for a conference, Like, do you think Bloomberg
Speaker 1: would send us to Honolulu? It's maybe you probably not, Yeah, yeah, bye,
Speaker 1: but I do want to bring him in. It's Troy Gayesky,
Speaker 1: chief market strategist at FEST Investment. Troy, I've been wanting
Speaker 1: to get you on the podcast for forever, So thank
Speaker 1: you so much for joining us. Yeah, it's great to
Speaker 1: be on. Looking forward to it. Yeah, I'm so happy
Speaker 1: to have you on. So maybe just to start, you
Speaker 1: can tell us about FS Investments. Yeah. So, FS Investments
Speaker 1: was really founded by Michael Foreman with the mission to
Speaker 1: democratize alternative investments and you know, bring strategies that had
Speaker 1: only been available to the ultra altar, high net worth
Speaker 1: individuals or you know mega institutions like CalPERS, or Yale's endowment,
Speaker 1: and then take those strategies and package them in a
Speaker 1: way that was readily accessible with much lower standards in
Speaker 1: terms of size, in terms of liquidity, in terms of fees,
Speaker 1: and so over time we've evolved from being mainly focused
Speaker 1: on middle market corporate lending package through BDCs, some of
Speaker 1: which are listed, to a broad suite of solutions that
Speaker 1: range from daily liquid multi strategy funds packaged in a
Speaker 1: mutual fund wrapper. We run the largest public non traded
Speaker 1: senior security commercial real estate lending rate. We've recently combined
Speaker 1: with Portfolio Advisors to bring private equity secondaries to individuals
Speaker 1: in a user friendly way, so the mission of the
Speaker 1: firm remains the same democketizing alternatives. We're just pleased and
Speaker 1: feel very fortunate that, you know, these strategies are so
Speaker 1: timely in an environment like we're going now, and you know,
Speaker 1: when when we think of last year, they're really five
Speaker 1: alternative strategies that did well from credit reads, multi strts,
Speaker 1: equity reads, perpetual BDCs, and managed future CTAs, and two
Speaker 1: of them have a richer opportunities set in twenty three
Speaker 1: than twenty two, and those happen to be two of
Speaker 1: our flagship alternative solutions. So we're somewhat fortunate, somewhat lucky,
Speaker 1: but we think the business model has served our clients
Speaker 1: and ourselves. Well, well try, let's talk about that idea
Speaker 1: that the market is sort of due for a come up.
Speaker 1: And so you sent us some notes before the podcast
Speaker 1: in so you see a scenario where the SMP could
Speaker 1: drop as low as thirty two hundred twenty something percent
Speaker 1: dropped from here, is the selling may work this year?
Speaker 1: I guess? Is the question? Yeah, it be incredibly stunning
Speaker 1: if if selling in May, or selling prior to May,
Speaker 1: like I said, note, there's there's no reason to wait.
Speaker 1: You know, it's not like you're gonna leave ten percent
Speaker 1: off side on the table. Doesn't work out. And if
Speaker 1: you think about, first of all, the strongest rallies have
Speaker 1: always been in bear markets, right, Bear marker rallies are
Speaker 1: nothing new. They happen all the time. Usually they're driven
Speaker 1: by technical factors, and then there's a narrative that's put
Speaker 1: together to justify it. The more recent one was that, yeah,
Speaker 1: like inflation is going to slow enough that the Fed
Speaker 1: won't have to hike anymore, and then we're gonna have
Speaker 1: a recession and somehow that's going to cause the FED
Speaker 1: to cut rapidly. But recessions aren't bad for revenue or earnings,
Speaker 1: and it really makes very little sense. So ultimately, if
Speaker 1: you think of where we are, you know, multiples compressed
Speaker 1: last year significantly, we got down to fifteen point seven
Speaker 1: five times forward earnings. We've popped back up to let's
Speaker 1: call it eighteen point four to eighteen point six. Let's
Speaker 1: go at the rosiest sum that we've bottomed in terms
Speaker 1: of multiples, because multiples tend to bottom before earnings. And
Speaker 1: if you look forward and just take eighteen point six
Speaker 1: down to call it sixteen or seventeen times trough earnings
Speaker 1: at two hundred, that gets you to that thirty two
Speaker 1: to thirty four hundred. And that makes a lot of
Speaker 1: sense to us, just from a historical analysis perspective, when
Speaker 1: we've always thought that this bear market would be meaningfully
Speaker 1: worse than the twenty eighteen correction or some of those
Speaker 1: shocks we had in the post GFC period, but not
Speaker 1: as bad as we had from two thousand oh two
Speaker 1: and also the financial crisis, and so we always thought
Speaker 1: thirty to forty percent was a rational range Obviously that
Speaker 1: math on sixteen to seventy times trough earnings. The two
Speaker 1: hundred takes us down about twenty nine to thirty three
Speaker 1: from the peak in the beginning of twenty twenty two
Speaker 1: before things got really ugly. And so bottom line is,
Speaker 1: if you're an investor today and you have still elevated
Speaker 1: level abate in your portfolio, you haven't gotten the message
Speaker 1: yet that bear markets occur, they don't end magically overnight.
Speaker 1: This is a golden opportunity to use this bear market
Speaker 1: rally to de risk in advance of potentially very painful
Speaker 1: losses over the next six, nine to twelve months. And
Speaker 1: you know, this is a side topic, but it completely
Speaker 1: stuns me still at how much inertia there is an
Speaker 1: acid allocation, and how even when faced with clear evidence
Speaker 1: that the risk reward of equities is poor, there's very
Speaker 1: little capital that flows out into strategies that actually have
Speaker 1: a fighting chance to make you five to eight percent
Speaker 1: instead of potentially losing you know, fifteen to twenty five.
Speaker 1: So I think if I were to take sort of
Speaker 1: the side of the bulls out there today, they would say, well,
Speaker 1: you know, inflation is coming down. I think the CPI
Speaker 1: print this week was what five percent versus six percent
Speaker 1: last month something like that, And that FED reaction function
Speaker 1: to Silicon Valley Bank and Signature Bank was so lightning quick.
Speaker 1: They created that term lending facility, the discount windows open wide.
Speaker 1: They're sort of reintroducing liquidity, expending their balance sheet again.
Speaker 1: You know, I think they boils down to the kids
Speaker 1: on Twitter would say the money printers going bar again,
Speaker 1: you know, which is a very obviously an oversimplified reason
Speaker 1: to be bullish for stocks. But nonetheless, there's a lot
Speaker 1: of believers in that that notion that the you know,
Speaker 1: maybe we get one or two more rate hikes from
Speaker 1: the Fed, but that balance sheet is open for business again.
Speaker 1: How do you sort of respond to that bullish take
Speaker 1: these days? Yeah. Look, so we've always said throughout this
Speaker 1: period that, you know, the probability of the FED cutting
Speaker 1: significantly or reprinting money was exceptionally low until they broke
Speaker 1: things right and real things, and so obviously you had
Speaker 1: some poorly managed banks in terms of asset liability, mismatch
Speaker 1: in terms of duration, and they did respond. And that's why,
Speaker 1: quite frankly, up until last week's data came out on
Speaker 1: the FED reshrinking their balance sheet. We kind of moved
Speaker 1: from a narrative of all right, it's clear that money
Speaker 1: supplies contracting at the fastest pace in history, balance sheets
Speaker 1: being drained. Fed's got, you know, at least two hikes
Speaker 1: at that point, maybe three to four left in him.
Speaker 1: Everything's going down. And then for a brief window of
Speaker 1: time you moved to like, is the FED doing QE
Speaker 1: while they're doing qt can you hike at the front
Speaker 1: end while expanding the balance sheet? What does this mean
Speaker 1: for money supply? What does this mean for the four
Speaker 1: trajectory of multiples? But then, of course, now that we
Speaker 1: have more data, you've seen that the balance sheet just
Speaker 1: started to shrink again, which obviously has negative ramifications for
Speaker 1: money supply. The FED will more than like the only
Speaker 1: hike one to two more times. But advocating that the
Speaker 1: Fed is going to come to the rescue prior to
Speaker 1: having more downside pain in the economy and markets, we
Speaker 1: think is very naive at this stretch of the game.
Speaker 1: And you do have to give the Fed, FDIC and
Speaker 1: Treasury a lot of credit. Obviously missed the problem, but
Speaker 1: they addressed it very rapidly, and it does look like
Speaker 1: they've so far ring fenced the problem in a number
Speaker 1: of problematic banks but kept the system rather safe. So,
Speaker 1: you know, I think we've really for two or three
Speaker 1: weeks it was very confusing. You had conflicting narratives, you
Speaker 1: had conflicting data on how this would play out. But
Speaker 1: now it's back to the same path of shrinking balance
Speaker 1: sheet several more, you know, one of the two more hikes,
Speaker 1: and that just means multiples are way way too high.
Speaker 1: And by the way, just to go from a historical perspective,
Speaker 1: you know, when you go back to you know, let's
Speaker 1: look and assume we bottomed at fifteen and a half
Speaker 1: to sixteen times for earnings. Remember the multiple bottom in
Speaker 1: the GFC was nine, right, so that's nowhere near the
Speaker 1: pain that we saw then. And the multiple bottom coming
Speaker 1: out of twenty two was fifteen. Right. We went from
Speaker 1: twenty five times to fifteen. So in some ways, like
Speaker 1: our board view, we don't even consider barish, We just
Speaker 1: consider it like realistic, right, and arguing that in eighteen
Speaker 1: or nineteen multiple is rational in this type of environment
Speaker 1: makes very very little sense to us. I'm wondering what
Speaker 1: you make We had the FED minutes come out this week,
Speaker 1: and one of the headlines was the Fed. FED staff
Speaker 1: is projecting a mild recession starting later in twenty twenty three.
Speaker 1: Aren't we not supposed to hear from the FEDS saying
Speaker 1: that they're expecting any type of downturn after some of
Speaker 1: their missteps on describing inflation and as transitory. I give
Speaker 1: them a lot of credit for being fairly honest and
Speaker 1: straightforward that the end game here is a recession, right,
Speaker 1: That's how you break inflation. There's really no other way
Speaker 1: to get through this cycle and bring inflation down to
Speaker 1: two or three percent, which is you know, their target
Speaker 1: probably should be three now instead of two, but they're
Speaker 1: still stuck on two. So that's where we're headed. And
Speaker 1: you know, the way we describe that to investors is
Speaker 1: we've really been mired in this ugly environment for quite
Speaker 1: some time. And by ugly we mean, you know, inflation, simmering,
Speaker 1: spreading to services and labor. FED has to hike a lot,
Speaker 1: shrink the balance sheet, everything's going down. You know. The
Speaker 1: good news is that we were certainly always going to
Speaker 1: get out of that and not stay have a seventy
Speaker 1: style stagflationary outcome. If for an other reason that money
Speaker 1: supply was already shrinking and the FED was behind the
Speaker 1: curve but caught up fast. But the bad news is,
Speaker 1: as we leave the ugly, the next stop is almost
Speaker 1: certainly what we call the bad which is a classic
Speaker 1: old school recession. And you know, when you think of
Speaker 1: what's kept this out of it so far, it's been
Speaker 1: the remarkable resilience of the labor market and the US consumer,
Speaker 1: which is basically single handedly kept the global economy afloat here.
Speaker 1: And you know, as the labor market cracks, and we're
Speaker 1: starting to see signs of that, particularly in withholding tax
Speaker 1: data and layoffs move from you know, very high paying
Speaker 1: tech jobs and to lesser extent financial services to the
Speaker 1: broader economy, there just won't be enough support from consumption
Speaker 1: to keep us out of recessions. So you know, that
Speaker 1: is the next stop. You know, at this point, the
Speaker 1: soonest we could see that is really late Q two,
Speaker 1: early Q three of this year. The latest is Q
Speaker 1: one of twenty four and then you know, kind of
Speaker 1: circling back to the question on the bullish argument, in
Speaker 1: some ways you could justify holding onto assets in a
Speaker 1: meaningful way that have twenty percent downside if you thought
Speaker 1: coming out of that, you know, hey, the next three years,
Speaker 1: you're going to make eight. But remember, the next FED
Speaker 1: cutting cycle is going to look a lot like the
Speaker 1: mirror image of the last hiking cycle, where they hiked very,
Speaker 1: very gingerly from fifteen to eighteen, and they did that
Speaker 1: to make sure that they'd slayed the disinflation and deflation demon.
Speaker 1: And this time again barring an apocalyptic economic ALcom or
Speaker 1: market calamity, they're going to cut very very slowly. So
Speaker 1: you're not going to see the multiple expansion from say,
Speaker 1: you know, later this year early twenty four over the
Speaker 1: next five six years that we saw from O nine
Speaker 1: to twenty one. It'll be much more like the O
Speaker 1: two to seven bull market, where he came into that
Speaker 1: bull market at fifteen times borderings. You ended that bull
Speaker 1: market at fifteen times sport. What is behind the rally
Speaker 1: right now? Is it just that people are thinking about,
Speaker 1: you know, the FED potentially pausing and or cutting rates
Speaker 1: down the line, and how we square that with why
Speaker 1: they'd be cutting rates to begin with, like something would
Speaker 1: be bad happening with the economy right at the same time. Yeah,
Speaker 1: So that again that it's been really stunning that you've
Speaker 1: had folks articulated narrative that the FED will cut and
Speaker 1: cut aggressively because we're going to have a recession and
Speaker 1: that's somehow good for revenue and earnings, right, I mean,
Speaker 1: like I just don't understand that for life of me.
Speaker 1: And and I think this gets back to another point
Speaker 1: of where you know, bear market rallies are typically driven
Speaker 1: by technicals. Right, there's short covering starts, there's DAMA hedging
Speaker 1: by options trading desks. Then you have systematic trend followers
Speaker 1: or traders hop on, you know, the bear market rally
Speaker 1: drives it higher. And then the industry And by industry,
Speaker 1: I mean you know, strategists, CIOs, analysts try to figure
Speaker 1: out a way to justify it. And sometimes that justification
Speaker 1: makes no sense at all. And did you guys know
Speaker 1: that you know, typically you know, recessions cause at least
Speaker 1: the twenty percent drop and earnings all all we did
Speaker 1: with our our math before was say ten percent drop,
Speaker 1: which is a lot less than twenty So it certainly
Speaker 1: could be could be worse. But yeah, the the idea
Speaker 1: that a recession and a FED that's four to pivot
Speaker 1: because of it late, we will drive a positive outcome
Speaker 1: for equity markets is just borderline bizarre, you know. True.
Speaker 1: I think one shoe that everyone seems to be waiting
Speaker 1: to drop next is in the credit markets, and you know,
Speaker 1: the supply of credit, and it's kind of a hard
Speaker 1: thing to really gauge in real time. You know, the
Speaker 1: FED reports, the H eight report and things like that
Speaker 1: are usually a week or two old. The Senior Loan
Speaker 1: Officer Survey. I think the next one's not till the
Speaker 1: middle of May or something like that. How do you
Speaker 1: look at sort of the conditions in the credit market
Speaker 1: to determine whether they're tightening up in real time? And
Speaker 1: is there any evidence yet that it's come. I mean,
Speaker 1: obviously we've had all these rate hikes and the failure
Speaker 1: of a few banks clearly must be making loan officers nervous.
Speaker 1: You know, where are you? Is there any where you
Speaker 1: can point to now and say it started or is
Speaker 1: it still just kind of bracing for that to happen. Yeah,
Speaker 1: So look, I think it really depends on the market.
Speaker 1: I would go back to when you think about when
Speaker 1: high yield and i G spreads started widen in like
Speaker 1: Q one Q two of last year, It took until
Speaker 1: May of last year for senior commercial estate lending spreads
Speaker 1: start widening. Then it took until say August for middle
Speaker 1: market corporate private loan spreads to start widening. And then
Speaker 1: obviously in this risk on period, you've had spreads tightened
Speaker 1: back in liquid markets. That hasn't happened yet in private
Speaker 1: markets we don't expect it to, but more directly, and
Speaker 1: this gets back to that confusing kind of narrative around
Speaker 1: what was going on. For a three period. You saw
Speaker 1: obviously the stresses in the banks during a time where
Speaker 1: loan officers were already constraining credit creation, so credit standards
Speaker 1: were already tightening, and then you got this pop up
Speaker 1: in actually commercial bank lending, a really quick pop up,
Speaker 1: and it's like, well, like, what the heck's going on here? Oh,
Speaker 1: I get it. Everybody's drawn down revolvers, like grabbing cash
Speaker 1: while they can, while they can, And then you know,
Speaker 1: of course we expected that to roll over, and that's
Speaker 1: exactly what's happened. Now that the past two weeks you're
Speaker 1: directly seeing evidence of the banking situation in regional community
Speaker 1: banks impacting broader commercial lending. So the big banks are
Speaker 1: doing more but the smaller banks are doing far less.
Speaker 1: And then you know, also from a mortgage availability standpoint,
Speaker 1: you'd already seen agency rmbs spreads wide and dramatically because
Speaker 1: the QT, which was further constraining funding to the housing market.
Speaker 1: That's actually one of our we have a really unique
Speaker 1: exposure in our multi strategy fund to take advantage of
Speaker 1: that that we can maybe talk about later. But you're
Speaker 1: certainly seeing now ample evidence right that credit conditions are tightening,
Speaker 1: which further reinforces the concept of how in the world
Speaker 1: can we possibly avoid recession the next six, nine, twelve months.
Speaker 1: It's really mission impossible. You know, we always stop the probability,
Speaker 1: the FED magically threading the needle and guiding us to
Speaker 1: you know, a five or five and a half percent
Speaker 1: unemployment without a recession was at tops was a ten
Speaker 1: percent probability. Now it just looks, you know, virtually zero.
Speaker 1: If we wanted to get a read through of the
Speaker 1: what's happening in the wake of the turmoil with the
Speaker 1: banks in the stock market, do you think the small
Speaker 1: cap space would be the place to look, with the
Speaker 1: idea being that maybe smaller companies have less access to
Speaker 1: banks and potentially maybe would also be a place where
Speaker 1: we'd start to see some layoffs as a result of
Speaker 1: the credit crunch. It's interesting you say that, because you know,
Speaker 1: smid cap or small cap factor exposures, we're already really
Speaker 1: cheap coming into the year relative to large omega, and
Speaker 1: we actually had that factor trade on. But as soon
Speaker 1: as the banking crisis started, it's like, all right, like
Speaker 1: you know, cheap things can get cheaper, or relationships can
Speaker 1: get more out of whack. We blew out of that
Speaker 1: really quick, and ultimately what it does is it delays
Speaker 1: any compression of that that spread, right, And that's again
Speaker 1: when you think about just locally more, what's happened to
Speaker 1: the Nasdaq or you know, Apple and Microsoft in particular,
Speaker 1: you know, the last remaining you know, fangs that are
Speaker 1: still performing as as you'd expect as growth companies that
Speaker 1: aren't grossly overvalued. You know, a lot of that gets
Speaker 1: back to the fact that you know, those have more
Speaker 1: pristine balance sheets. And when you think about smaller cap
Speaker 1: companies that are clearly more exposed to the domestic economy,
Speaker 1: that are clearly more reliant upon you know, local small
Speaker 1: bank financing, um, it's it's unlikely that death situation improves,
Speaker 1: and you know, I would say one cross current to
Speaker 1: that which is fascinating to us, uh, just given our
Speaker 1: footprint and private credit, both in commercial real estate and
Speaker 1: middle market corporate loans, is you know, the the window
Speaker 1: now for private lenders to take market share from banks
Speaker 1: at wider spreads. It has expanded far more than again
Speaker 1: we would have imagined six weeks ago, right, and that
Speaker 1: we expected banks to retrench they had been. We expected
Speaker 1: better opportunities to service the needs of those that had
Speaker 1: to roll loans. We'd already seen many companies doing what
Speaker 1: I politely call bankruptcy prevention DIP loans to reduce the
Speaker 1: risk of going bankrupt in the event of a recession.
Speaker 1: And now that's just even escalating more. So you think
Speaker 1: about like commercial real estate lending, there's about one point
Speaker 1: eight trillion loans that are going to roll this year
Speaker 1: in the next three years, and there's just less financing
Speaker 1: options for those borrowers, and so that creates a better
Speaker 1: opportunity if you have dry powder to lend into a
Speaker 1: mini liquidity vacuum. And it's really the best time to
Speaker 1: be a lender that we've seen since the global financial crisis.
Speaker 1: And you know, fortunately that's one of the three silver
Speaker 1: line things of this environment. We expect a recession. Obviously
Speaker 1: the weakest links in the financial system were cracked, but
Speaker 1: the system is still strong. I'd like to get into
Speaker 1: that the idea of commercial real estate a little bit.
Speaker 1: You know, you mentioned, uh you guys manage a real
Speaker 1: estate investment trust, especially the property sector roets of or
Speaker 1: the office rates h have I really just been annihilated
Speaker 1: this year to the point where you know, it's gotten
Speaker 1: so ugly that it starts looking pretty I think to
Speaker 1: a lot of investors. You know, these yields are pretty
Speaker 1: eye popping? Are there riets and commercial real estate investments
Speaker 1: in general? Where there's you know, babies being thrown out
Speaker 1: with the bathwater right now? Are there are certain sectors,
Speaker 1: certain areas that that are attractive to well? So I
Speaker 1: think it really depends right for for our franchise word
Speaker 1: senior lenders. So the markets coming to us, you had
Speaker 1: this long period of time where you had the head
Speaker 1: wind of uh, you know, front and rates were extremely
Speaker 1: low and what we floating rate loans. So when the
Speaker 1: Fed never hikes and then they hike a little, and
Speaker 1: then they cut again and they cut back to zero,
Speaker 1: you obviously don't have that same degree of income you'd expected.
Speaker 1: And then in a world where you had money supply ballooning.
Speaker 1: In general, spreads in every credit strategy we're tight relative
Speaker 1: to a normalized environment. And obviously that's changed significantly. So
Speaker 1: the opportunities to lend, particularly in multifamily or industrial where
Speaker 1: the fundamentals look really good, it's just you know, spreads
Speaker 1: were too tight or LTVs were higher than we would
Speaker 1: have liked. You know, LTVs are dropping have dropped materially,
Speaker 1: and spreads and wide and you know when you when
Speaker 1: you think about you know, office specifically, So there's obviously
Speaker 1: a big difference between small footprint secondary tertiary you know
Speaker 1: cities and in u in the Sun Belt or in
Speaker 1: the Smile States and major metro you know, office in
Speaker 1: New York, San Francisco, Chicago. The way we see that
Speaker 1: playing out, and we've been articulated this for about eighteen months,
Speaker 1: is it's going to be a repeat of the slow
Speaker 1: motion train wreck that we had in Bricks and Water retail.
Speaker 1: All right, So Brisonmwatar Retail was a real credit concern,
Speaker 1: a real owner operator concern for for years and you know,
Speaker 1: ultimately that cured itself with a surprisingly low amount of losses.
Speaker 1: But major metro office, as you know, it's very difficult
Speaker 1: to repurpose major towers into multi family giving the footprints,
Speaker 1: and there's just going to be a submistantial amount of
Speaker 1: wealth destroyed by owner operators. I'd say we'd be cautious
Speaker 1: on trying to play any short term bounce in any
Speaker 1: equity read that's listed as we're going into a session,
Speaker 1: but clearly as that happens, yields will go even higher,
Speaker 1: and at some point, you know, two to three years
Speaker 1: from now, we'll start to see real estate broadly rebound
Speaker 1: at least stabilize at a lower valuation. So we're always
Speaker 1: ones to say, in an environment like this, what you
Speaker 1: really want to do is focus on strategies that have
Speaker 1: a bright opportunity that happened to have gotten at least
Speaker 1: slightly better because of what's going on in the banking
Speaker 1: system and financial markets, as opposed to trying to be
Speaker 1: a hero in time of bottom in any particular security
Speaker 1: or asset class that could have meaningfully more downside from here.
Speaker 1: That's interesting, So you think it could be another two
Speaker 1: to three years before we really see the bottom in
Speaker 1: office rates, especially, I asked, because we had a headline
Speaker 1: out today JP Morgan orders all managing directors back into
Speaker 1: the office five days a week. Is it not return
Speaker 1: to work alone is not enough to solve the issue
Speaker 1: with office rates in the short term, I guess, well, again,
Speaker 1: I don't want to speak specifically about any anyone security. Yeah, yeah,
Speaker 1: But bottom line is, the trends of outward migration from
Speaker 1: certain areas of the country had been in place for
Speaker 1: quite some time. That was obviously amplified by the pandemic
Speaker 1: in you know, return to work for certain mega institutions
Speaker 1: alone won't necessarily cause any particular rebound evaluations that you
Speaker 1: can point to with a great deal of specificity. I
Speaker 1: would say, though, again, if you think of real estate broadly,
Speaker 1: and we have this term called galactic meter version, where
Speaker 1: you know, after years of outrageous asset out performance versus
Speaker 1: the real economy and the labor market, you know, we
Speaker 1: started to go through again, not another lost decade or
Speaker 1: in nineteen sixty four to nineteen eighty two, but a
Speaker 1: period where financial assets would would perform poorly and labor
Speaker 1: market would be surprisingly resilient and that's actually played out
Speaker 1: even better than we thought. But it wasn't just about
Speaker 1: you know, financial assets. Real estate also had a hockey
Speaker 1: stick like move. You know, Residential real estate you know,
Speaker 1: up thirty five to forty two percent. Commercial you know,
Speaker 1: not quite as much upside. And so naturally, when when
Speaker 1: financing rates go up and borrowing costs go up, you're
Speaker 1: going to have some degree of giveback. You know. Whenever
Speaker 1: an asset class has a hockey stick like move, you know,
Speaker 1: obviously you give back some of those gains. And and
Speaker 1: so for broader real estate, whether it's rezzi or commercial,
Speaker 1: all we're going through is a healthy correction, right, you're
Speaker 1: taking out the access and valuations. The difference with major
Speaker 1: metro office is that that's that's a sustained secular problem, right,
Speaker 1: That's not like, hey, I probably overpaid for a multi
Speaker 1: family property at the peak, and I'm gonna my IRR
Speaker 1: is gonna be a lot lower the next seven years,
Speaker 1: and I hope risk of default does not existent. I'm
Speaker 1: just gonna make less money owning the property. Um, those
Speaker 1: are areas where they will be realized losses to owner
Speaker 1: operators that in some cases we'll bleed through into the
Speaker 1: banking system. So in your notes you said tim your
Speaker 1: equity exposure and embrace democratized alt because the time for
Speaker 1: the right alts is still now. I'm wondering then what
Speaker 1: you would put on that list of the right alts.
Speaker 1: So there's really three silver lines of this environment. One
Speaker 1: seventy style outcome was always a credibly low probability. It's
Speaker 1: not existing now to repeat of a GFC, given how
Speaker 1: strong underwriting standards have been. You know where the excess
Speaker 1: liquidity is still in the banking system, not in every bank,
Speaker 1: and in the banking system, you know stuff over three
Speaker 1: trillion of excess slash total reserves versus forty to fifty
Speaker 1: billion coming into GFC. But the third is that alternatives
Speaker 1: have been democratized. Right, You didn't have fixed income to
Speaker 1: protect the last year like you did in two thousand
Speaker 1: and two or even the GFC, but you had a
Speaker 1: series of democratized alternative strategies that actually performed really well
Speaker 1: last year relative to markets. And you know those five
Speaker 1: categories supplicitly not all inclusive, were credit reads, multi strategy funds,
Speaker 1: equity reads, fully invested perpetual BDCs, and CTA's managed future.
Speaker 1: So last year, those five groups all performed very well
Speaker 1: relative to what was going on in fixed income and
Speaker 1: equity markets, where it was a horror show, as you know.
Speaker 1: So the difference this year and why we evolved the
Speaker 1: message from the time for alts is now to the
Speaker 1: time for the right alts is still now. Is of
Speaker 1: those five strategies too, have we believe maturely better opportunities
Speaker 1: to have a darker outlook. And the fifth it's not
Speaker 1: necessarily that you're guaranteed to lose money. It's just the
Speaker 1: history of client allocations to CTAs or trend following strategies
Speaker 1: is people buy tops and sell bottoms, rinch, repeat, do
Speaker 1: it again. Very very difficult to time. So you know,
Speaker 1: multi strates at least we know have higher income now
Speaker 1: than they did coming into twenty twenty two. So all
Speaker 1: things being equal, if you can generate the same amount
Speaker 1: of alpha, again it's an if not a guarantee, you're
Speaker 1: starting with much higher cash flower carry, which should lead
Speaker 1: to a higher toll return. In the case of credit reats,
Speaker 1: you know you're lending it wider spreads earning higher yields
Speaker 1: at lower LTVs. However, so those are the two that
Speaker 1: we believe have a more positive outlook, and again we
Speaker 1: think we're very fortunate as a firm to have two
Speaker 1: of those as our flagship strategies right now, and then
Speaker 1: to the two that have a darker outlook, at least
Speaker 1: for the time being. Our equity reads where you know,
Speaker 1: that was a story of income, small amounts of income,
Speaker 1: but still reasonable income plus massive NAV appreciation that was
Speaker 1: then goosed by some of the post pandemic measures by
Speaker 1: the Fed and the fiscal stimulus. That's evolved to paltry
Speaker 1: income with now NAB depreciation or to be mathematically correct,
Speaker 1: less income plus NAB depreciation at least for the next
Speaker 1: several years as the real estate market continues to decline
Speaker 1: and then perpetual BDCs. The good news is income has
Speaker 1: gone up more than you thought. The bad news is
Speaker 1: you're going to have more marked market markdowns on owns
Speaker 1: and also more realized loss. So again, not not the
Speaker 1: end of the world, but not as rosy of an
Speaker 1: outlook in twenty three and twenty four then he had
Speaker 1: coming into twenty two. So you know, two of the
Speaker 1: five we think look materially better, Two of the five
Speaker 1: look at least modestly darker. In the fifth, it's just
Speaker 1: more about client timing and investment in seeing so many
Speaker 1: times people allocate to cincinac trend followers at the precise
Speaker 1: wrong time, lose money, don't make money for a while,
Speaker 1: redeem and then rinse, repeat And by the way, like
Speaker 1: like a lot of the that's you could actually say
Speaker 1: that just about every asset class, right, Like we're actually
Speaker 1: looking at at private equity flows trying to get a
Speaker 1: handle on how big the private equity secondary opportunity could be.
Speaker 1: And it's just amazing that like seventy seventy seventy five
Speaker 1: percent capital ever allocated to private equity was from eighteen
Speaker 1: to twenty two, you know, when you had much higher evaluations,
Speaker 1: much lower borrowing costs. Yeah. Have there been a lot
Speaker 1: of inflows into your managed features strategy? No? So so
Speaker 1: managed futures we do not. We have a very tiny
Speaker 1: strategy that focuses on that. But the flows that had
Speaker 1: come into managed futures as an industry were very robust
Speaker 1: last year because the performance was very was very strong,
Speaker 1: And I wonder are the are the trends just not
Speaker 1: as well defined to this year and easy to follow?
Speaker 1: Do you think? Yes? So the master thesis coming into
Speaker 1: twenty three was it would be very difficult for markets
Speaker 1: to replicate the degree of trending that you had in
Speaker 1: twenty two. Right. It was just like you go through
Speaker 1: O eight in early oh nine and then you get
Speaker 1: into twenty ten to twenty twelve and you have more
Speaker 1: range mound choppy, sloppy markets. So we thought from a
Speaker 1: return expectation standpoint, you have to lower your return expectations.
Speaker 1: That being said, we certainly didn't see them getting hit
Speaker 1: to degree they have so far this year. The more
Speaker 1: problematic issue is that you know it was setting up
Speaker 1: for an exact repeat of what we've seen historically, where
Speaker 1: you know you have great performance, you have the non
Speaker 1: and eagle be correlated return profile. Everyone weaks up and says, oh,
Speaker 1: we should allocate to this, and then they allocate. Yeah, yeah, yeah,
Speaker 1: Well Troy Gaki, chief market strategists at FS Investments in Honolulu,
Speaker 1: vill Donna Jealous meet Try and Honolulu to do the
Speaker 1: he should have told us before. Come on, Trey next time.
Speaker 1: Sorry about that. We can't let you go just yet. However,
Speaker 1: we do have a tradition here on what goes up
Speaker 1: where we're gonna have to hear about everyone's craziest thing
Speaker 1: of the week. Holda, why don't you get it started?
Speaker 1: I think this is the first time we're talking about this.
Speaker 1: You and I are working on a new project. Yes,
Speaker 1: and for that new project, the producers had to interview
Speaker 1: our family members. Did that happen too too? They called
Speaker 1: my sister they did. Yeah, so I want to give
Speaker 1: a shout out to my sister Marilla who your sister
Speaker 1: Marilla who? Since they interview her, she had to go
Speaker 1: back and listen to a bunch of What Goes Up
Speaker 1: episodes And now she is a crazy Craziest Things finder, Like,
Speaker 1: I mean, the stuff she sends me is amazing, but
Speaker 1: she always sends it like after the episode air, so
Speaker 1: it's always too late. So I'm just gonna list a
Speaker 1: few of the line A right, okay, Tesla made a
Speaker 1: beer with cyber hoops, gigab beer b I er. Then
Speaker 1: she sent me do you know the sore Aldi. Yeah,
Speaker 1: they have like a clothing line now really yeah, it
Speaker 1: looks kind of funky. Then she sent me Coca Cola
Speaker 1: bottles with yellow caps because it denotes that they weren't
Speaker 1: made with corn syrup, so that they're passover friendly. Okay,
Speaker 1: she's just send me so much stuff, So I just
Speaker 1: might have a new Crazy Things Chef correspondent. I think
Speaker 1: we do. I mean she even went to Aldi and
Speaker 1: took pictures of the stuff. Listeners can't see it, but anyway,
Speaker 1: mine is New York City rats Are. The rats are
Speaker 1: New York City rats Are. Is earning one hundred and
Speaker 1: fifty five thousand dollars to lead the road in fight
Speaker 1: not enough. I would double that. I mean, I'm interested
Speaker 1: to see what happens. Like, he's got to get rid
Speaker 1: of all the rats. She she she's got to get
Speaker 1: rid of them. So that's is that a new possession
Speaker 1: or is that a standing? No. Remember, they announced the
Speaker 1: position a while ago, and they just hired this woman
Speaker 1: who used to be the Department of Educations rat reduction.
Speaker 1: She spearheaded a Department of Education rat reduction efforts. She's
Speaker 1: got her work cut out for her. I don't know.
Speaker 1: She might be a good podcast guest on that. Yeah,
Speaker 1: I don't know, Trey, that's pretty good. I don't know.
Speaker 1: It's nothing to do with markets, but well, it's a salary.
Speaker 1: I was going to make a joke that it's like
Speaker 1: one of the Jolts, you know, figures that had to
Speaker 1: because they hired her. You know, the rat one hundred
Speaker 1: and fifty grand not enough, not enough to handle all
Speaker 1: the rats in New York City, couldn't pay you enough, Trey.
Speaker 1: How about you? You You say anything crazy this week? Well,
Speaker 1: I'll tell you I think the craziest thing has happened.
Speaker 1: You know that was actionable recently. It's just, you know,
Speaker 1: we already had these ridiculous levels of industry volatility, you know,
Speaker 1: with an expectation that you know, at some point we'd
Speaker 1: have a recession in you know, when you think about
Speaker 1: what's been going on in the housing market, it's obviously
Speaker 1: a downturn. And if you had asked me six weeks ago,
Speaker 1: when I thought in versaios which I won't get into
Speaker 1: all the complex description, but bottom line is they benefit
Speaker 1: from a steeper eel curve and slower refinance activity would
Speaker 1: start to perform even a shadow of what they did
Speaker 1: from really O eight through twenty twelve. I never would
Speaker 1: have guessed at But then it had the mini banking crisis, obviously,
Speaker 1: the Ford curb reprices. Suddenly these securities that had very
Speaker 1: little no cash flow have the potential to cash flow
Speaker 1: pretty significantly. And so the massive levels of industry volatility
Speaker 1: combined with a potential shift in FED direction, even a
Speaker 1: mild one, just caused the value of those two to
Speaker 1: go up dramatically. And it was just something we never
Speaker 1: saw coming, you know, even six weeks ago. So it
Speaker 1: was one of the few negatively chord expressions that really
Speaker 1: showed up in terms of performance a lot faster than
Speaker 1: we would have dreamed of. Interesting, I have to look
Speaker 1: those up. Look those up on the terminal. All right,
Speaker 1: you like alternative assets, tree, I got this is I
Speaker 1: specialize in very very alternative assets. So here to hear it,
Speaker 1: vil Dona. Are you familiar with the song Hot for
Speaker 1: Teacher by Van Helen? No? No, no, really, no I
Speaker 1: am it is, And I know we've seen the video
Speaker 1: very It's a very good video. A lot of production
Speaker 1: value in the video. I'll leave it at that, But um,
Speaker 1: the guitar Eddie Van Helen was playing in that video,
Speaker 1: it's like the red guitar with the white stripes across
Speaker 1: it going up for sale at Southby. The Hot for
Speaker 1: Teacher guitar. It's a Kramer guitar. It was made and
Speaker 1: I think eight nineteen eighty two at the Kramer green
Speaker 1: Grove Plant in Neptune, New Jersey. Wow, right near Asbury Park. Interesting,
Speaker 1: which is something I did not know. It's gone up
Speaker 1: for sale at Sotheby's. So it's time to play. The
Speaker 1: prices precise, the prices precise, right, Tree, bad news, You're
Speaker 1: now a game show contestant on our show. The prices precise,
Speaker 1: I guess I'll phrase it this way. But this hasn't
Speaker 1: gone up for sale, so we're dealing with the what
Speaker 1: Sotheby's expects it to finish. So we'll go with the
Speaker 1: high end. Okay, So the first question is do you
Speaker 1: think more or less than those air Jordan's for two
Speaker 1: point two million. I've never heard of this. I never
Speaker 1: heard of Oh my god, no, got it bad? Got
Speaker 1: it bad? No, come on, no, very famous song. My
Speaker 1: guess is going to be so bad. What do you guess?
Speaker 1: High end estimate for that Cramer guitar seventy five thousand
Speaker 1: dollars seventy five thousand dollars, Tree, I'm going I'm gonna
Speaker 1: go Tree, think of all those those heavy metal head
Speaker 1: fans of ours. He's telling you to go higher. Yeah,
Speaker 1: but hey, heavy metal guys, they have a lot of money.
Speaker 1: I don't know, I don't know. Yeah, it's it's a
Speaker 1: narrow market, right, yeah, it is. It is. You'll go higher,
Speaker 1: You'll go seventy five thousand and one dollar. Yes, go high.
Speaker 1: They're saying a three million million, Oh my god, two
Speaker 1: to three million. Put it this way. The opening bid
Speaker 1: is one point eight million dollars. So wow, just saying, Valdonna,
Speaker 1: you know, if you're looking, I don't understand why present
Speaker 1: for me for my next birthday? Your birthday just passed.
Speaker 1: Your next birthday isn't for another year. All right, Well,
Speaker 1: if it's still for sale, you don't want to get me.
Speaker 1: Oh my gosh, I'll look this up. Sparash. He's only
Speaker 1: going seventy five, but he won. So how for teacher
Speaker 1: gets her? It's a lot of liquidity out there. Talk
Speaker 1: about asset inflation. Yeah, anyway, try great to hear your thoughts.
Speaker 1: He told us to sell may Maybe we'll bring you
Speaker 1: back on Saint Ledger's Day to see how it went.
Speaker 1: Let me think it goes. Yeah. Well, hey you guys,
Speaker 1: great to be on. Thanks so much. Enjoy the rest
Speaker 1: of your day, and I'm looking forward to get a
Speaker 1: little surfing in while out here. Yeah, where that sound screening?
Speaker 1: I will thank you Troy What Goes Up. We'll be
Speaker 1: back next week. Until then, you can find us on
Speaker 1: the Bloomberg Terminal website and app, or wherever you get
Speaker 1: your podcast. We'd love it if you took the time
Speaker 1: to rate and interview the show so more listeners can
Speaker 1: find us. You can find us on Twitter, follow me
Speaker 1: at Bildonna Hire. Mike Reagan is at Reaganonymous. You can
Speaker 1: also follow Bloomer Podcasts at podcasts. What Goes Up is
Speaker 1: produced by Stacy Wong, and our head of podcasts is
Speaker 1: Sage Falman. Thanks so much for listening, and we'll see
Speaker 1: you next week.