WEBVTT - Central Banks Going Too Far With Tightening, Bianco Says 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 --> 0:00:32.120 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. So 0:00:32.200 --> 0:00:34.839 while I was away at treasury, yields climbed. They had 0:00:34.840 --> 0:00:38.280 their biggest five days sell off since the November since 0:00:38.360 --> 0:00:41.360 right after the US election. And to bring in someone 0:00:41.400 --> 0:00:43.519 who can can tell us, you know, whether this is 0:00:43.560 --> 0:00:46.800 the beginning of a more protracted bond market route or 0:00:46.800 --> 0:00:49.320 whether this is just a hiccup in an otherwise low 0:00:49.440 --> 0:00:51.879 yield environment. We have Jim Bianco, who I am so 0:00:51.960 --> 0:00:55.280 pleased to speak with. Jim Bianco is president of Bianco Research, 0:00:55.280 --> 0:00:58.680 which is based in Chicago. Jim, what is going on here? 0:00:58.720 --> 0:01:01.240 You know? Is this just uh, you know, rates kind 0:01:01.240 --> 0:01:03.440 of normalizing in a a little bit more of a 0:01:03.520 --> 0:01:05.480 choppy fashion that they have been, or is this the 0:01:05.520 --> 0:01:09.480 beginning of something bigger? It could be the beginning of 0:01:09.520 --> 0:01:12.720 something bigger, but I don't think. So let's talk about 0:01:12.800 --> 0:01:17.720 what happened June, which was not that long ago, uh, 0:01:17.880 --> 0:01:20.640 just two weeks ago the tenure yield was it two eleven? 0:01:21.200 --> 0:01:23.600 And the next day there was a bunch of central 0:01:23.600 --> 0:01:26.920 bankers that spoke uh Mark Kearney of the Bank of 0:01:26.959 --> 0:01:30.160 England and Mario Dragging of the European Central Bank, and 0:01:30.200 --> 0:01:33.440 they hinted that even they might be looking at a 0:01:33.480 --> 0:01:37.679 period of when they're central bank stimulus of bond buying 0:01:37.959 --> 0:01:42.240 might end. Remember now that all bonds in the world, 0:01:42.280 --> 0:01:45.199 and developed market government bonds in the world, one third 0:01:45.200 --> 0:01:48.240 of them are now owned by central banks. So if 0:01:48.320 --> 0:01:50.840 all the Fed has already stopped buying, if the ECB 0:01:50.960 --> 0:01:52.520 is gonna stop buying, in the Bank of England is 0:01:52.520 --> 0:01:56.560 going to stop buying. The bond market responded accordingly by 0:01:56.600 --> 0:01:59.120 seeing a rise in yields a lot. Now we've seen 0:01:59.120 --> 0:02:02.520 the tenure, you'll go up, but your europeanials have gone 0:02:02.600 --> 0:02:05.440 up a lot more. That ten year German Bund is 0:02:05.440 --> 0:02:08.920 at an eighteen month high on that news, So I 0:02:08.960 --> 0:02:12.320 think that's been the catalyst for it. The problem is 0:02:12.440 --> 0:02:16.280 that they're assuming, they being central banks, are assuming that 0:02:16.440 --> 0:02:19.800 inflation is going to kick back up. If it does, 0:02:20.520 --> 0:02:23.280 then all their hawk ish talk about raising rates is 0:02:23.320 --> 0:02:27.960 probably justified if it doesn't and these uh and inflation 0:02:28.040 --> 0:02:29.880 stays low, and for the last several years, that has 0:02:29.880 --> 0:02:32.519 always been the thing. Inflation confounds by being too much 0:02:32.919 --> 0:02:36.000 lower than everybody thinks. If it stays there, then they 0:02:36.080 --> 0:02:39.120 might be overtightening and they could be seriously impacting the 0:02:39.160 --> 0:02:41.960 economy in a negative way. Which way do you fall 0:02:42.000 --> 0:02:45.040 on this? I think that they're going too far. I 0:02:45.120 --> 0:02:47.880 think that inflation is not going to pick up to 0:02:47.919 --> 0:02:50.400 the degree that central banks say it's going to pick up. 0:02:50.720 --> 0:02:53.120 We did a study a couple of weeks ago where 0:02:53.160 --> 0:02:56.920 we looked at uh FED speech and usually when inflation 0:02:57.000 --> 0:02:59.720 surprises them, they start using the words models and for 0:03:00.040 --> 0:03:02.560 tasks a lot, meaning that O'll pay no attention to 0:03:02.639 --> 0:03:05.680 us being wrong. Now the future, according to our model 0:03:05.680 --> 0:03:08.280 and forecast says will be right. They've used the words 0:03:08.360 --> 0:03:10.440 model and forecast more than they have at any point 0:03:10.480 --> 0:03:14.079 in the last eight years. So they're really betting that 0:03:14.120 --> 0:03:16.440 they're going to see a rise of inflation, and I 0:03:16.560 --> 0:03:18.600 just don't see it right now. And if they intend 0:03:19.080 --> 0:03:21.239 on reducing the balance, she at least the Federal Reserve 0:03:21.680 --> 0:03:24.400 raising rates more, and we were to get this kind 0:03:24.400 --> 0:03:25.680 of pull back from the e c BE in the 0:03:25.680 --> 0:03:28.840 Bank of England, it could be very problematic for the 0:03:28.880 --> 0:03:32.000 economies because you could wind up tightening to the point 0:03:32.000 --> 0:03:34.840 where it actually hurts the economy, something we haven't seen 0:03:34.920 --> 0:03:37.880 yet so far. I'm wondering, Jim, what's your take on 0:03:37.960 --> 0:03:41.920 whether this bond market sell off happened on thin volume 0:03:42.000 --> 0:03:44.720 and it was simply a result from a summer market 0:03:44.720 --> 0:03:46.600 where a lot of people were out of the office 0:03:46.840 --> 0:03:50.160 versus uh, people were positioned for this and we're waiting 0:03:50.200 --> 0:03:52.440 for this, and and and and have been. So the 0:03:52.440 --> 0:03:55.320 market has gotten so one sided that it can readjust 0:03:55.400 --> 0:03:59.680 quickly and more violently. Let me make it just an 0:03:59.720 --> 0:04:02.760 an don't for you about the thin volume. Um JP 0:04:02.920 --> 0:04:07.720 Morgan has reported now that among their high institutional clients 0:04:08.280 --> 0:04:10.840 that they have mobile apps for them to trade and 0:04:10.880 --> 0:04:14.240 they have now done at trades in excessive a billion 0:04:14.240 --> 0:04:17.560 dollars with somebody on their phone. So all those traders 0:04:17.560 --> 0:04:19.920 that are summering in the Hampton's over the Fourth of 0:04:20.000 --> 0:04:22.359 July weekend, they're not in the office, They've got a phone, 0:04:22.640 --> 0:04:24.719 They've got their two buttons away from doing a trade. 0:04:24.800 --> 0:04:28.200 And that's exactly what they have been doing, and so 0:04:28.279 --> 0:04:30.640 I don't buy the argument that there's there's this thing 0:04:30.720 --> 0:04:34.640 called thin summer volume. As far as where the where 0:04:34.680 --> 0:04:37.200 the markets go, as far as the positioning goes in 0:04:37.279 --> 0:04:40.200 the marketplace, I think it's rather neutral. We look at 0:04:40.240 --> 0:04:42.280 things like the Commitment of Traders report, which is a 0:04:42.320 --> 0:04:45.240 breakdown of open interest, and we see that the ten 0:04:45.320 --> 0:04:49.000 year UH, the speculators in the ten year contract are 0:04:49.160 --> 0:04:51.719 very very long, and that's supposed to be bearished. But 0:04:51.760 --> 0:04:53.760 then we've got the opposite in the ear dollar, and 0:04:53.800 --> 0:04:56.200 when you add them all up, they're kind of in 0:04:56.240 --> 0:04:58.840 a middling kind of range. So I don't see UH 0:04:58.960 --> 0:05:02.400 positioning as being they were extreme right now, which suggest 0:05:02.440 --> 0:05:05.040 that this this rise and rates might have a little 0:05:05.080 --> 0:05:07.680 bit more to run, but not much more, because if 0:05:07.720 --> 0:05:11.200 the if it's going to continue to raise rates without inflation, 0:05:11.520 --> 0:05:13.040 I think the market is going to start worrying that 0:05:13.080 --> 0:05:15.160 they're gonna hurt the economy, and that could be very 0:05:15.200 --> 0:05:17.599 supportive for interest rates. At what point do you think, 0:05:17.720 --> 0:05:19.839 for let's say, on the tenure, what yields do you 0:05:19.839 --> 0:05:22.279 think are going to be attractive enough to bring people 0:05:22.320 --> 0:05:25.320 in buying in bulk. I think to forty would do it. 0:05:25.680 --> 0:05:27.760 We're only a couple of asis points away from that 0:05:27.880 --> 0:05:30.720 right now. I think that if you see a two 0:05:30.800 --> 0:05:34.120 point four facts fill in the blank after that, I 0:05:34.160 --> 0:05:37.800 think that people will start getting interested in the bond market. Jim, 0:05:37.800 --> 0:05:39.880 you know when I when I always speak with you 0:05:40.040 --> 0:05:42.920 or here hear your voice or read things that you're right, 0:05:43.000 --> 0:05:45.720 I always think, Okay, Jim is in Chicago, so he's 0:05:45.800 --> 0:05:47.599 kind of the steady eddie and all this. You know, 0:05:47.760 --> 0:05:51.080 he kind of sees it from a perspective that many 0:05:51.160 --> 0:05:53.159 people on the coast and so on may not be 0:05:53.279 --> 0:05:55.920 able to see. And then I of course thought, but 0:05:56.120 --> 0:06:00.520 Chicago was in Illinois, and you know, you've got a problem, 0:06:00.520 --> 0:06:02.680 and I'm wondering if you could talk about just the 0:06:02.720 --> 0:06:10.240 pensions and these problems with the budgets in particularly in Illinois, 0:06:10.279 --> 0:06:12.960 and what you think the effects of that are going 0:06:13.000 --> 0:06:16.480 to be in the economy Illinois on the road to ruin? 0:06:16.600 --> 0:06:20.320 How about that? Um? And unfortunately I'll say that we're 0:06:20.400 --> 0:06:23.480 just further along on that road than everybody else. They 0:06:23.480 --> 0:06:26.720 all seem to be on it. Um. Real brief, here's 0:06:26.760 --> 0:06:30.960 Illinois problem. They passed the new constitution in nineteen seventy 0:06:31.120 --> 0:06:34.960 Section five of the new Constitution said you cannot change 0:06:34.960 --> 0:06:38.040 a pension plan or any retirement plan that is done 0:06:38.040 --> 0:06:41.920 by the state, city, or any municipal workers. They've tried 0:06:41.960 --> 0:06:45.040 to amend or I'm sorry, they've tried to change the plans, 0:06:45.080 --> 0:06:48.760 the courts have struck it down because the constitutions says 0:06:48.800 --> 0:06:52.279 you can't change them. So we've got this giant pension 0:06:52.360 --> 0:06:55.760 problem that cannot be changed short of a constitutional amendment. 0:06:56.200 --> 0:06:59.359 I won't go to the the mechanics to that, but 0:06:59.440 --> 0:07:02.040 let's just say that a constitutional amendment in Illinois all 0:07:02.040 --> 0:07:06.040 but impossible. So that's the first problem that Illinois has. 0:07:06.080 --> 0:07:08.960 The second problem that Illinois has been at that point 0:07:09.120 --> 0:07:11.960 is that they have been raising taxes to try and 0:07:12.000 --> 0:07:14.920 meet this pension problem. They've been driving people out of 0:07:14.960 --> 0:07:18.360 the state. The state of Illinois has the largest exodus 0:07:18.360 --> 0:07:20.600 of people in the country. The city of Chicago has 0:07:20.640 --> 0:07:23.360 the largest exodus of any major city of people in 0:07:23.400 --> 0:07:27.040 the country. We've just raised the taxes again. The Illinois 0:07:27.080 --> 0:07:30.960 Policy Institute says that, congratulations, Illinois, you've got the highest 0:07:30.960 --> 0:07:33.080 tax rate in the country. Now, all in tax rate 0:07:33.080 --> 0:07:35.160 in the country. That's gonna drive more people out of 0:07:35.200 --> 0:07:37.520 the state that's going to lower the number of people 0:07:37.560 --> 0:07:40.160 that pay taxes. That's why I mean by Illinois on 0:07:40.160 --> 0:07:43.480 the road to ruin. Now, what fixes this? Well, when 0:07:43.520 --> 0:07:46.920 the Illinois voters decide what they want to be. Do 0:07:46.960 --> 0:07:49.440 they do they want to be a quasi socialist state 0:07:49.520 --> 0:07:52.559 and continue to just raise taxes and raise taxes and 0:07:52.760 --> 0:07:54.720 they don't care if they drive everybody out, or do 0:07:54.760 --> 0:07:58.120 they want to correct this by electing politicians that will 0:07:58.480 --> 0:08:02.720 pass the constitutional amendment to start start fixing this problem. 0:08:02.880 --> 0:08:05.560 The Illinois voters haven't decided yet, and that's why we 0:08:05.560 --> 0:08:07.760 will remain on the road of ruin until they do 0:08:07.840 --> 0:08:12.760 decide what they want to do. Thank No, but Jim Bianco, 0:08:12.920 --> 0:08:14.480 I mean, you know, as they say, tell us how 0:08:14.520 --> 0:08:17.080 you really feel. No, but Jim Bianco, You're you're highlighting 0:08:17.160 --> 0:08:20.280 so many very pertinent issues, and we want to thank 0:08:20.280 --> 0:08:22.840 you for doing so. Jim Bianco is the president and 0:08:22.920 --> 0:08:25.480 the founder of Bianco Research, and yes, he is based 0:08:25.520 --> 0:08:41.040 in Chicago. There's a holiday coming up, Lisa of Romwitz. 0:08:41.160 --> 0:08:45.000 It's only happening online though it's ending in the Amazon world, 0:08:45.400 --> 0:08:49.680 and it's called Amazon Prime Day. And this apparently is 0:08:49.880 --> 0:08:53.400 a moment in Internet experience that people have waited for 0:08:53.440 --> 0:08:56.760 all year. But we've got someone who has to do 0:08:56.880 --> 0:08:59.440 this for a living, just Hendra Warrel. He is our 0:08:59.480 --> 0:09:04.400 Global Internet and Consumer Electronics Analyst for Bloomberg Intelligence and 0:09:04.480 --> 0:09:08.400 he joins us from our nine sixty studio in San Francisco. 0:09:08.520 --> 0:09:11.199 Je Tendra, thank you very much for making time for us. 0:09:11.240 --> 0:09:15.400 And have you got the countdown clock or something to 0:09:15.480 --> 0:09:19.640 this retail experience? Tell tell people who are not familiar 0:09:19.640 --> 0:09:22.240 with it or whose eyes are rolling into the rhead 0:09:22.520 --> 0:09:25.960 what this is all about. So basically this is a 0:09:26.000 --> 0:09:29.320 third year that Amazon is doing this. Essentially, what they 0:09:29.320 --> 0:09:31.960 want to do is for all their Prime members, make 0:09:32.400 --> 0:09:35.440 you know, products available, deep discounts so that you know, 0:09:35.559 --> 0:09:38.840 more people are aware of this prime membership service and 0:09:38.880 --> 0:09:41.959 they attract more Prime members you know long term. Now, 0:09:41.960 --> 0:09:45.680 what we have seen last year two years basically every 0:09:45.679 --> 0:09:47.920 time they have a Prime Day one day, they always 0:09:47.960 --> 0:09:52.359 have like a you know, sales exceeding sort of expectations 0:09:52.360 --> 0:09:54.880 on the Prime Day, which reflects on the prey guidance 0:09:54.960 --> 0:09:59.280 being higher than expectations, but also a surgeon prime memberships. 0:09:59.400 --> 0:10:02.920 So what you can expect here is deals, more Prime 0:10:02.920 --> 0:10:06.880 members and um, you know, them selling more Equit devices 0:10:06.920 --> 0:10:09.400 to you this year to Tendra. How big are the 0:10:09.480 --> 0:10:13.920 discounts and who takes the cut in profits? Does Amazon 0:10:14.320 --> 0:10:17.960 pass on the cut and profits to the suppliers, the 0:10:18.160 --> 0:10:21.400 stores that supply uh the goods? Or is it just 0:10:21.800 --> 0:10:24.520 them taking the hit and taking the loss. See, the 0:10:24.559 --> 0:10:27.720 goal here is not just chasing sales and profitability on 0:10:27.760 --> 0:10:31.400 this day. The goal here is to broadcast the brand globally, right, 0:10:31.760 --> 0:10:35.160 so attracting more prime members. So it's it's less to 0:10:35.160 --> 0:10:37.800 do with profits and more to do it just the acquisition. 0:10:37.920 --> 0:10:39.920 I know, I understand that, I understand that, but I'm 0:10:39.960 --> 0:10:42.920 wondering if they discount things heavily, right, how does that? 0:10:43.200 --> 0:10:45.640 You know, are they basically taking a loss with the 0:10:45.679 --> 0:10:47.680 amount that they're discounting it, or are they just they're 0:10:47.679 --> 0:10:50.080 discounting it a little bit and they're still on certain 0:10:50.120 --> 0:10:52.800 categories on certain categories. That would be true. But if 0:10:52.840 --> 0:10:55.319 you actually look at you know, the stuff that they 0:10:55.360 --> 0:10:58.240 sell the most or or hope to sell the most, 0:10:58.360 --> 0:11:01.800 is Amazon's own products, which obviously you know they're taking 0:11:01.840 --> 0:11:04.400 a loss on it as it is, so you know, 0:11:04.400 --> 0:11:06.120 it's safe to assume that they would be taking a 0:11:06.120 --> 0:11:09.640 loss on that. But the goal here is more penetration 0:11:09.720 --> 0:11:12.439 of you know, these devices like Amazon Echo and henceforth, 0:11:12.720 --> 0:11:16.079 the more tuned customers are to the whole Amazon ecosystem. 0:11:16.640 --> 0:11:20.760 So if I said to the Alexa or the Echo 0:11:21.200 --> 0:11:25.760 machine in the living room, tell me the dollar amount 0:11:25.880 --> 0:11:31.160 of sales that Amazon does on these days, what would 0:11:31.160 --> 0:11:36.120 the response be? They don't disclose this number. What do 0:11:36.160 --> 0:11:38.160 you think it is? What kind of sales numbers are 0:11:38.160 --> 0:11:42.160 we talking about? So right now we will be probably 0:11:42.200 --> 0:11:45.560 approaching a billion dollars in gm re because you know, 0:11:46.240 --> 0:11:49.559 they have thirty hours this year versus twenty four, be 0:11:49.720 --> 0:11:52.400 they have more Prime members. How did they get how 0:11:52.400 --> 0:11:55.160 did they squeeze those hours? Who did they call to 0:11:55.280 --> 0:11:59.000 get those extra hours? Well, they also expanded the number 0:11:59.000 --> 0:12:00.920 of countries over here, and they want to make sure 0:12:01.000 --> 0:12:03.800 that you know, all these deals attract as many Prime 0:12:03.840 --> 0:12:08.080 and Echo customers as possible. So, but what's interesting is 0:12:08.280 --> 0:12:12.520 with the Echo devices, like you have exclusive deals on 0:12:12.600 --> 0:12:14.840 them as well, and deep discounts on the Echo product 0:12:14.880 --> 0:12:17.680 as well. So Amazon clearly wants, you know, more and 0:12:17.720 --> 0:12:20.280 more people to buy these Echo devices and rely more 0:12:20.320 --> 0:12:22.360 on it so that you know, they stay away from 0:12:22.360 --> 0:12:27.320 shopping elsewhere. Why don't all retailers do this, have their 0:12:27.360 --> 0:12:30.440 own holiday, not Black Friday, but have their own holiday 0:12:30.480 --> 0:12:33.160 that they managed to create manufacturing. I mean, Hallmark basically 0:12:33.160 --> 0:12:35.719 did that for like Mother's Day and Valentine's Day, right, 0:12:35.720 --> 0:12:37.640 So I mean, why why don't we see more of this? 0:12:38.800 --> 0:12:41.320 It's interesting because you know what we have seen all 0:12:41.360 --> 0:12:45.240 the last three years, it's been reactionary uh stances from 0:12:45.240 --> 0:12:49.120 other players. So Walmart had something similar last year in 0:12:49.200 --> 0:12:52.280 response to Prime, but like this year, they are not 0:12:52.360 --> 0:12:55.280 doing it. But why aren't they doing it? Um? Well, 0:12:55.679 --> 0:12:58.040 maybe maybe one of the reasons it is probably their 0:12:58.080 --> 0:13:01.600 discounts are more flexible throughout the year versus Amazon. It's 0:13:01.640 --> 0:13:04.120 it's a little bit more rigid on that stance. And 0:13:04.160 --> 0:13:06.720 also they don't have members you know for Prime members 0:13:06.760 --> 0:13:10.080 as for Prime Member, Prime Member, Prime Days, Prime Members only, 0:13:10.520 --> 0:13:14.239 so they don't have this sort of membership loyalty program 0:13:14.240 --> 0:13:16.480 going on across the board. And I think that's something 0:13:16.480 --> 0:13:21.400 that they couldn't do. They're buying an annual annuity stream 0:13:21.440 --> 0:13:23.200 and whatever they were, right, I mean, and they just 0:13:23.200 --> 0:13:25.440 had to figure out a way to finance what they have. 0:13:25.960 --> 0:13:28.920 The stock is up one in a quarter percent. Right now, 0:13:29.840 --> 0:13:34.200 Amazon shares trading just under a thousand dollars a share 0:13:34.320 --> 0:13:39.360 nine dollars a share for for Amazon. So who who 0:13:39.360 --> 0:13:44.479 takes the hit from all this? Walmart? Oh well, Walmart 0:13:44.600 --> 0:13:47.280 interestingly didn't do it this year, like you know, have 0:13:47.400 --> 0:13:51.240 a reactionary sort of response, but not Walmart as much. 0:13:51.280 --> 0:13:54.520 But like you could see the other source, uh, you 0:13:54.559 --> 0:13:57.280 know sort of do take a hit from traffic being 0:13:57.280 --> 0:13:59.599 the worded away from them. But it's not about a 0:13:59.679 --> 0:14:02.160 hit one day. It's about it hit on like what 0:14:02.240 --> 0:14:04.960 it means for the next year, you know. So, like 0:14:05.000 --> 0:14:08.040 I said, they have twenty two million more Prime members 0:14:08.080 --> 0:14:11.160 now coming into Prime Day versus it was last year, 0:14:11.280 --> 0:14:15.800 So more people are attuned to this ecosystem, more likely 0:14:15.840 --> 0:14:18.760 they want to stick to it. It's like a cable company, right, 0:14:18.760 --> 0:14:26.120 They've got more people paying a year. Absolutely believe it's 0:14:26.160 --> 0:14:29.680 absolutely But but what's interesting is that, I mean, it 0:14:29.720 --> 0:14:32.280 doesn't really cover your free shipping and all the goods 0:14:32.280 --> 0:14:34.560 you get out of it. So what Amazon wants to 0:14:34.560 --> 0:14:38.000 do is essentially rely more on third party sellers through 0:14:38.040 --> 0:14:41.440 their Fulfillment by Amazon program uh, to sell it to 0:14:41.560 --> 0:14:44.760 Prime members. So that's how they try to recuperate. Uh 0:14:44.800 --> 0:14:47.640 you know all the costs that or some of the 0:14:47.680 --> 0:14:50.720 costs at least for now to um to give you 0:14:50.800 --> 0:14:54.080 the free shipping and all these services to tender world. 0:14:54.160 --> 0:14:55.720 Thank you so much for joining us and gonna let 0:14:55.720 --> 0:14:58.000 you go and get started to get up your wish 0:14:58.000 --> 0:15:00.960 list for Amazon Prime to turn as our global Internet 0:15:00.960 --> 0:15:04.440 and consumer Electronics analyst for Bloomberg Intelligence joining us from 0:15:04.600 --> 0:15:20.080 San Francisco. Well, there is a market that isn't covered 0:15:20.400 --> 0:15:23.680 very much, but is vast and is of great importance 0:15:23.720 --> 0:15:25.600 to really the heart of the U S economy, and 0:15:25.640 --> 0:15:28.040 that is middle market lending. I want to bring in 0:15:28.160 --> 0:15:30.440 Andy Stoyerman. He is head of middle market lending and 0:15:30.520 --> 0:15:34.120 head of late stage lending for Gallop Capital, its dollars 0:15:34.320 --> 0:15:38.280 under management based in Chicago. Andy, I want to talk 0:15:38.280 --> 0:15:40.400 about just the state of the market right now, because 0:15:40.400 --> 0:15:45.080 in the first half of broadly syndicated loans saw an 0:15:45.160 --> 0:15:48.600 unprecedented amount of issuance, and a lot of this was repricing. 0:15:48.640 --> 0:15:51.760 People try Our company is trying to get lower rates 0:15:51.960 --> 0:15:54.680 on their loans. Right now, we're starting to see some 0:15:54.760 --> 0:15:59.240 softness in the broader, bigger loan market. What about the 0:15:59.280 --> 0:16:02.520 middle market, The middle market always is immune to what's 0:16:02.560 --> 0:16:05.080 going on the syndicated market. We do say if they 0:16:05.080 --> 0:16:07.240 have a flu, we get a cold. But middle markets 0:16:07.240 --> 0:16:11.080 more relationship blending, and our clients really don't have a choice. 0:16:11.200 --> 0:16:13.320 They don't really have a syndicated option, they don't have 0:16:13.360 --> 0:16:16.720 a non syndicated option. So middle market has some spread 0:16:16.720 --> 0:16:19.120 compression when the large market has spread compression, which is 0:16:19.120 --> 0:16:22.080 happening now. But we're more immune and we tend to 0:16:22.080 --> 0:16:25.280 be more relationship lending, so clients tend to pick us 0:16:25.280 --> 0:16:28.560 and work with us even when markettions change. What kind 0:16:28.560 --> 0:16:32.320 of how much higher are the rates on these loans? 0:16:32.360 --> 0:16:36.120 Say on average then on broadly syndicated loans, they could 0:16:36.160 --> 0:16:37.800 be anywhere from about a hundred to a hundred and 0:16:37.800 --> 0:16:39.680 twenty five basis points. And if you're one of the 0:16:39.720 --> 0:16:42.640 leader arrangers, you get to keep most of the upfront fees. 0:16:42.960 --> 0:16:45.440 Were in a syndicated market, the investment bank keeps the 0:16:45.440 --> 0:16:48.480 outfront fees and the retail market takes a very low 0:16:48.480 --> 0:16:50.400 o I D. So we actually get a premium in 0:16:50.400 --> 0:16:54.720 our spread because we're the underwriter and holder. I want 0:16:54.800 --> 0:16:58.240 you to just use if you can, the here's the image. 0:16:58.280 --> 0:17:01.320 The image is you have a pet and you have 0:17:01.440 --> 0:17:03.560 to go and you need to let's say, have it 0:17:03.640 --> 0:17:06.280 cared for, and you get the bill and you just 0:17:06.359 --> 0:17:09.800 are in shock, but you pay it. Can you tell 0:17:09.880 --> 0:17:13.280 us about that and a loan that you put together 0:17:13.400 --> 0:17:16.840 and how that kind of exemplifies not only your role, 0:17:17.400 --> 0:17:21.399 but specifically the kinds of businesses and the people involved 0:17:21.480 --> 0:17:27.120 in the businesses, the owners, the operators. Sure Golf Capital 0:17:27.400 --> 0:17:29.920 works with middle market companies in the United States. Middle 0:17:29.920 --> 0:17:32.600 market companies really are the growth engine. That's where both 0:17:32.760 --> 0:17:36.000 changes happen because larger companies are kind of too bureaucratic. 0:17:36.480 --> 0:17:39.080 We do like the pet space. We found over time 0:17:39.119 --> 0:17:41.320 that people actually like their pets, sometimes more than their children, 0:17:41.560 --> 0:17:43.240 and we'll feed their pets better food than they feed 0:17:43.280 --> 0:17:46.720 their children. So it's actually a pretty recession resistant elements. 0:17:46.720 --> 0:17:49.679 So we we've worked well. In the vetman, I'm sorry, 0:17:51.240 --> 0:17:53.679 it's proven to be true. We we could see it. 0:17:53.760 --> 0:17:57.280 I just want you to get the vet care so 0:17:57.640 --> 0:18:02.000 people bring. Veterinary care is has been recession resistant. We 0:18:02.040 --> 0:18:04.000 have data going back fifteen years when we've done our 0:18:04.080 --> 0:18:08.119 first Veterinarians have two issues, right, they have issues of 0:18:08.160 --> 0:18:10.840 scale because they need to kind of grow their business 0:18:10.840 --> 0:18:12.960 and they have generational change issues, which is how do 0:18:13.040 --> 0:18:16.720 I monetize what I've created? So the private equity market 0:18:16.760 --> 0:18:20.359 has been great at creating these super companies where they 0:18:20.400 --> 0:18:24.159 consolidate all the operations get more efficient, so sometimes pricing 0:18:24.200 --> 0:18:27.840 goes down better care referral sources. But also the owners 0:18:27.880 --> 0:18:30.280 of these businesses actually get to cash out and change 0:18:30.280 --> 0:18:34.000 their generational wealth. So our company we did was called 0:18:34.040 --> 0:18:37.000 pet Fet. Pet FETs one of the larger consolidators. And 0:18:37.040 --> 0:18:39.520 this is an example how we did a middle market 0:18:39.520 --> 0:18:43.040 deal and didn't go syndicated. Seven hundred million dollar facility 0:18:43.600 --> 0:18:45.880 in prior years would have been done the larger syndicated 0:18:45.920 --> 0:18:48.199 loan market. And just to be just this was this 0:18:48.280 --> 0:18:53.200 headquartered in in um Uh, Connecticut. Headquartered in Connecticut. But 0:18:53.200 --> 0:18:56.640 but their operations are national and they're building clusters nationally 0:18:56.800 --> 0:18:59.919 and their owned by a pension plan, by a pen 0:19:00.040 --> 0:19:03.000 and plan and other lenders like like ourselves. Well, I 0:19:03.000 --> 0:19:05.240 want to pick up on the idea that a pension 0:19:05.720 --> 0:19:10.480 plan owns this company Ontario Teachers Pension Plan. This I 0:19:10.520 --> 0:19:12.840 thought was interesting and this is a new development where 0:19:12.880 --> 0:19:16.800 you're seeing an increasing number of pensions invest directly in 0:19:17.040 --> 0:19:19.840 smaller companies in order to capture those higher yields that 0:19:19.880 --> 0:19:24.160 you were saying, we're uh north of one percentage point 0:19:24.240 --> 0:19:28.960 higher than more broadly syndicated loans. Um, how much are 0:19:28.960 --> 0:19:31.000 you seeing this as a trend and is it good 0:19:31.080 --> 0:19:33.520 or is it bad? So we've seen pension plans in 0:19:33.560 --> 0:19:36.879 two places. One we've seen them as buyers of businesses 0:19:36.920 --> 0:19:39.560 where they've decided not to invest in private equity funds 0:19:40.119 --> 0:19:42.320 and pay the carrying the promote to private equity funds 0:19:42.320 --> 0:19:44.720 and they build their own teams. And then we've seen 0:19:44.720 --> 0:19:48.159 as direct direct lenders where they have huge obligations and 0:19:48.200 --> 0:19:50.920 they see the direct loans that we're making and giving 0:19:50.920 --> 0:19:53.040 to our investors and I'd like to participate, and someone 0:19:53.160 --> 0:19:55.760 have the scale to get their teams together. So there 0:19:55.800 --> 0:20:00.000 are it's a delicate balance into when you say scale 0:20:00.080 --> 0:20:02.480 to get their teams together. Does that mean that they 0:20:02.480 --> 0:20:07.040 are hiring people who are specialists in direct lending to 0:20:07.280 --> 0:20:10.840 go out on behalf of them and source opportunities or 0:20:10.880 --> 0:20:14.080 does this mean that uh, they're getting sort of investment 0:20:14.760 --> 0:20:17.360 thecs together in order to invest. No, they're doing both. 0:20:17.359 --> 0:20:19.639 They actually have full teams, their marketing to the private 0:20:19.640 --> 0:20:22.560 equity universe as if they were Gollop Capital. So they're 0:20:22.560 --> 0:20:26.480 out there using their balance sheet, using their pension plan 0:20:27.040 --> 0:20:29.040 and going out and sourcing loans on their own. Does 0:20:29.040 --> 0:20:32.000 this make it difficult for you? You know there, it 0:20:32.080 --> 0:20:34.200 does make it more difficult, But there is a scale, 0:20:34.560 --> 0:20:37.720 there is tenures. So Gallop capitalsman in business for twenty years. 0:20:38.119 --> 0:20:39.920 It takes a long time to queue. In this business. 0:20:40.440 --> 0:20:41.800 One of the things that people don't talk about. You 0:20:41.840 --> 0:20:44.159 have to provide companies that revolvers the lines of credit. 0:20:44.600 --> 0:20:47.440 Having that operation is very time consuming, expensive and it's 0:20:47.440 --> 0:20:51.359 a big organization. They tend to do more the junior capital. 0:20:51.400 --> 0:20:54.879 Pension plans second lean high yield bonds and tend to 0:20:54.880 --> 0:20:58.560 buy into our loans, probably more than than to arrange 0:20:58.560 --> 0:21:01.480 and lead themselves because that difficult, real, real quick. Which 0:21:01.520 --> 0:21:05.159 pension plans have the biggest teams devoted to direct lending 0:21:05.720 --> 0:21:10.280 um Ontario Teachers was there's a group called PSP. There 0:21:10.320 --> 0:21:12.680 are there are pension plans all of the United States. 0:21:12.680 --> 0:21:14.800 They're all doing it. They're family offices that are doing 0:21:14.800 --> 0:21:17.560 it too, high net worth individuals and family offices. So 0:21:17.600 --> 0:21:20.239 the Canadian market has been one of the largest. If 0:21:20.280 --> 0:21:22.280 you look at all the Canadian pension plans, they've been 0:21:22.600 --> 0:21:27.000 the most aggressive, you know, really in our market. That 0:21:27.160 --> 0:21:31.720 is amazing. They really so they're investing in the United 0:21:31.760 --> 0:21:37.880 States to fund their future liabilities for their retirees. Yes, 0:21:38.800 --> 0:21:42.719 not our own pension plans. Some invest through us. Well 0:21:43.200 --> 0:21:45.320 what a trend. All right, well done, Thanks very much 0:21:45.359 --> 0:21:48.919 for being here illuminating an interesting topic. Andy's Storyaman He 0:21:49.080 --> 0:21:51.200 is the head of middle market lending and the head 0:21:51.240 --> 0:21:53.840