WEBVTT - Equity and Credit Trends 0:00:02.520 --> 0:00:13.760 Bloomberg Audio Studios, podcasts, radio news. This is the Bloomberg 0:00:13.840 --> 0:00:17.920 Surveillance Podcast. Catch us live weekdays at seven am Eastern 0:00:18.200 --> 0:00:22.000 on Apple CarPlay or Android Auto with the Bloomberg Business App. 0:00:22.360 --> 0:00:25.680 Listen on demand wherever you get your podcasts, or watch 0:00:25.760 --> 0:00:26.960 us live on YouTube. 0:00:27.240 --> 0:00:31.440 Let's identify consensus, and then let's always think about what 0:00:31.640 --> 0:00:35.400 always will go wrong, because consensus never gets it quite right. 0:00:35.479 --> 0:00:39.720 Francois Trahan is excellent at this chief investment strategist being 0:00:39.760 --> 0:00:43.760 on capital Marcus. Let's start with what is consensus right 0:00:43.800 --> 0:00:45.280 now in the Trehan world. 0:00:46.479 --> 0:00:50.760 Consensus is pretty constructive. It's pretty bullish, as it should be. 0:00:50.840 --> 0:00:53.800 After my most stock indices in the US are sitting 0:00:53.840 --> 0:00:56.120 your all time highs, and so I think people are 0:00:56.320 --> 0:01:00.320 very constructive. Unfortunately, when you get into that mode, you 0:01:00.440 --> 0:01:03.520 stop thinking about what could possibly go wrong, and I 0:01:03.560 --> 0:01:06.320 think that's the most important question to ask when you're bullish. 0:01:06.720 --> 0:01:09.560 And the answer this year, I think is inflation and. 0:01:09.600 --> 0:01:12.520 LinkedIn to interest rates. Urine tim or out On LinkedIn 0:01:12.600 --> 0:01:17.160 with a brilliant, brilliant chart migrating the five percent thirty 0:01:17.200 --> 0:01:21.520 year bond a higher yield. Link out of consensus in 0:01:21.560 --> 0:01:25.399 the equity market with a five point two, five point four, 0:01:25.840 --> 0:01:28.119 five point whatever percent thirty year. 0:01:28.400 --> 0:01:30.479 I haven't seen it, well, I know you. 0:01:30.400 --> 0:01:33.880 Haven't seen it chart, but the basic idea is higher inflation, 0:01:34.319 --> 0:01:38.160 higher yields. Market it the thirty year bond. How will 0:01:38.160 --> 0:01:39.160 that affect the so. 0:01:39.120 --> 0:01:41.760 Push out, push out the curve. Well, you know that's 0:01:41.800 --> 0:01:45.399 the that's the issue is. I think people are really 0:01:45.400 --> 0:01:47.360 focused on one thing when it comes to inflation, and 0:01:47.400 --> 0:01:51.920 it's oil, which is now off the boil. It's really 0:01:51.960 --> 0:01:55.480 when a rise in commodity prices, energy prices turns into 0:01:55.600 --> 0:01:59.280 core inflation or what the FED calls underlying inflation, that 0:01:59.360 --> 0:02:02.520 it becomes in issue from market multiples. And I'm fearful 0:02:02.520 --> 0:02:04.240 that that might be, you know, that might be what 0:02:04.280 --> 0:02:05.600 we're wrestling with come the fall. 0:02:06.600 --> 0:02:10.480 We have a new FED chairman, mister Walsh. Presumably he 0:02:10.560 --> 0:02:14.000 comes in with some kind of expectation to lower rates, 0:02:14.040 --> 0:02:16.000 if you will, But boy, the data doesn't seem to 0:02:16.040 --> 0:02:19.320 support it. And what do you expect to hear from 0:02:19.320 --> 0:02:19.919 our fatt. 0:02:21.560 --> 0:02:22.400 It's in a tough spot. 0:02:22.520 --> 0:02:26.680 Yeah, let's be honest, because the data is very constructive, 0:02:26.919 --> 0:02:28.880 you know, particularly if you look at the pmis the 0:02:28.919 --> 0:02:32.600 ism yesterday, the regional pmis are seeing these smile patterns 0:02:32.600 --> 0:02:34.840 and virtually every data series. I think that was a 0:02:34.880 --> 0:02:39.239 surprise to consensus, you know, after what occurred in March. 0:02:40.240 --> 0:02:42.120 At the end of the day, we have an insane 0:02:42.160 --> 0:02:44.799 amount of stimulus hitting the economy in twenty twenty six. 0:02:44.840 --> 0:02:47.440 So it is your classic recovery, the tie that lifts 0:02:47.440 --> 0:02:49.520 all boats and earnings. We're clearly seeing that, and it's 0:02:49.560 --> 0:02:53.560 being augmented by what is happening to AI. Forward earnings 0:02:53.560 --> 0:02:55.960 growth for the S and P is up twenty nine percent. 0:02:56.639 --> 0:02:58.480 I've been at this a little over thirty years now. 0:02:58.480 --> 0:03:01.840 I've only seen numbers like that twice, coming out of 0:03:01.840 --> 0:03:04.720 the GFC and coming out of the pandemic, and so 0:03:04.800 --> 0:03:07.840 this is really unique times that we're in. But that 0:03:08.000 --> 0:03:11.480 is often a sign of an economy that is overheating. 0:03:12.440 --> 0:03:14.880 How about you see, like Tom mentioned earlier, Google coming 0:03:14.880 --> 0:03:17.200 to market really really the first time since it went 0:03:17.280 --> 0:03:20.960 public twenty some odd years ago, with this massive equity 0:03:21.000 --> 0:03:23.560 deal on the backs of the tech industry for the 0:03:23.600 --> 0:03:26.639 first time really in its history, tapping the bond market 0:03:26.800 --> 0:03:30.079 in size. What do you make of all this investment 0:03:30.120 --> 0:03:31.720 in AI? And it's something like we haven't seen. 0:03:31.880 --> 0:03:34.679 Yeah really, you know, at a you were asking me 0:03:34.680 --> 0:03:38.440 about consensus. So one place where I think it might 0:03:38.480 --> 0:03:41.720 be off is just how strong the US economy is 0:03:41.840 --> 0:03:44.400 in twenty twenty six. A lot of people are still 0:03:44.760 --> 0:03:47.480 hung up on structural issues, and they're very legitimate, but 0:03:47.600 --> 0:03:50.200 cyclically speaking, you know, if you do back of the 0:03:50.280 --> 0:03:53.360 envelope math, you're getting about a percent to GDP growth 0:03:53.360 --> 0:03:56.360 this year from the big beautiful bill. You're getting over 0:03:56.400 --> 0:03:58.920 a percent from the capex cycle, just from the top 0:03:58.960 --> 0:04:01.800 five hyperscalers, which is a little mind blowing if you 0:04:01.800 --> 0:04:04.080 think about it. And then we haven't even talked about 0:04:04.080 --> 0:04:07.080 the lagged effects of the Fed's rate cuts, you know, 0:04:07.080 --> 0:04:09.960 which take almost two years to impact the economy. So 0:04:10.160 --> 0:04:13.200 it's not that difficult to get to three four percent. 0:04:13.520 --> 0:04:15.080 You know, in twenty twenty six. 0:04:15.520 --> 0:04:19.320 The the nominal GDP is five ish or dare I say, 0:04:19.360 --> 0:04:23.640 with inflation sixes percent? I guess it's not a Banana republic. 0:04:24.120 --> 0:04:27.120 But it's not the American economy we knew two years ago, 0:04:27.680 --> 0:04:30.680 twelve years ago, twenty two years ago. It's original, isn't it. 0:04:31.520 --> 0:04:35.080 Well, what's changed is fiscal stimulus and monetary stimulus I 0:04:35.080 --> 0:04:37.760 would say we had the Kapex cycle. It wasn't as 0:04:37.760 --> 0:04:40.280 pronounced as it is today. But we've added to that 0:04:40.440 --> 0:04:42.440 rate cuts and we've added fiscal stimulus. 0:04:42.480 --> 0:04:44.680 Okay, so inside baseball, folks, I don't want to nerd 0:04:44.720 --> 0:04:46.960 out here. It's too early in the morning, and you know, 0:04:47.240 --> 0:04:49.640 Alexis and ire up all night talking about the Knicks. 0:04:49.640 --> 0:04:54.159 The bottom line is is the Kalucky Levy theory, which 0:04:54.240 --> 0:04:57.560 Richi Sharman talks about in the Ft, is that if 0:04:57.560 --> 0:05:00.799 you have a big government deficit, some of that rolls 0:05:00.839 --> 0:05:04.359 over is a spirit into the private economy. It's a 0:05:04.400 --> 0:05:08.159 you know, theory fifty sixty seventy years old. Are we 0:05:08.200 --> 0:05:11.000 getting a goost to our economy because of all this 0:05:11.200 --> 0:05:13.000 debt and deficit? Partially? 0:05:13.120 --> 0:05:16.839 Yeah, absolutely, And I think you know, the real challenge 0:05:16.880 --> 0:05:21.279 for Walsh is that the FED is dealing with labor 0:05:21.320 --> 0:05:23.839 markets that are unlike anything we've seen before. We have 0:05:23.880 --> 0:05:27.600 literally zero growth in the labor force this year, partially 0:05:27.640 --> 0:05:31.440 because of demographics, partially because of immigration policy. But we 0:05:31.480 --> 0:05:33.520 haven't seen anything like that one. 0:05:33.560 --> 0:05:36.040 The last thing, I mean, you know, it's amazing when 0:05:36.080 --> 0:05:38.559 you're with the Bank of Montreal, I'm looking at Brian 0:05:38.600 --> 0:05:43.000 Bouchet on ESPN at the hockey game or whatever, and 0:05:43.040 --> 0:05:46.360 there's friends out Trajan and Raleigh and that, Like in 0:05:46.400 --> 0:05:49.599 Montreal the next day. I mean, the Canadians want to 0:05:49.680 --> 0:05:51.960 run to get back into the game. Can they sustain 0:05:52.680 --> 0:05:55.680 this Montreal Canadians excellence in the next year. 0:05:55.880 --> 0:05:57.279 Oh yeah, there's always next year. 0:05:58.400 --> 0:06:01.720 I mean, that's what you're saying. Montreal. It's only Paul. 0:06:01.720 --> 0:06:03.799 They haven't won the Stanley Cup. I mean the reason 0:06:03.800 --> 0:06:06.240 the maple leafs are so bad and so there gonna 0:06:06.240 --> 0:06:08.760 be somebody's lil dies a Canadians, I know, like the 0:06:08.800 --> 0:06:09.560 last time they won. 0:06:09.720 --> 0:06:10.800 Yeh yeh yeh. 0:06:10.960 --> 0:06:13.280 Franz, thank you for coming in greatly, greatly appreciate it. 0:06:13.440 --> 0:06:16.720 Be more. Capital Market's really smart. Note with the tron charts, 0:06:17.440 --> 0:06:20.560 we love to see. Stay with us more from Bloomberg 0:06:20.680 --> 0:06:22.600 Surveillance coming up after this. 0:06:30.000 --> 0:06:33.520 You're listening to the Bloomberg Surveillance podcast. Catch us live 0:06:33.640 --> 0:06:36.760 weekday afternoons from seven to ten am Eastern Listen on 0:06:36.880 --> 0:06:40.480 Applecarplay and Android Auto with the Bloomberg Business app, or 0:06:40.680 --> 0:06:42.120 watch us live on YouTube. 0:06:42.279 --> 0:06:45.160 This is the adult I want to get Smarter book 0:06:45.240 --> 0:06:48.839 for the summer for equity in bond people on the street. 0:06:49.160 --> 0:06:52.599 This is heavy lifting. There's no differential equations. But there's 0:06:52.600 --> 0:06:54.880 a lot of work here. And here's Paul. As you 0:06:55.000 --> 0:06:57.880 bring in Michael, here's what you need to know. Joyce Chain, 0:06:58.360 --> 0:07:03.760 JP Morgan, a guy named Gibelli heard of them, great supporter, 0:07:03.960 --> 0:07:09.640 Seth Klarman of Value, Howard Marx and at Carlisle Group 0:07:09.720 --> 0:07:12.720 ex School. When Harvey Schwartz lines up for this book 0:07:12.840 --> 0:07:16.120 is the the Wall Street book of the summer. It 0:07:16.280 --> 0:07:19.960 is the credit Investor's Handbricmichael Gatto Paul Sweeney. 0:07:19.720 --> 0:07:22.640 With Michael Professor Michael Gatto, partner, professor and author at 0:07:22.680 --> 0:07:24.679 silver Point Capital. Thanks for coming into our studio. 0:07:24.760 --> 0:07:26.160 Thank you so much for having me. 0:07:26.360 --> 0:07:29.280 How has the credit market changed? I went through the 0:07:29.360 --> 0:07:32.320 Chase Manhattan Bank and Credit training program. I feel like 0:07:32.360 --> 0:07:34.720 I'm pretty good on credit. But now I'm seeing some 0:07:34.880 --> 0:07:37.520 of the technology companies coming to the markets with these 0:07:37.720 --> 0:07:40.280 monster sized deals. How do you look at the credit market. 0:07:40.200 --> 0:07:44.040 Well, it's changed massively over the thirty years I've been 0:07:44.120 --> 0:07:47.320 in it. Right, it used to be boring when you 0:07:47.400 --> 0:07:49.800 went to a commercial bank, you made a loan, you 0:07:49.920 --> 0:07:53.120 held it. That was said then in the nineteen nineties, 0:07:53.240 --> 0:07:57.120 loan started to trade, so banks, investment banks could arrange it, 0:07:57.680 --> 0:08:01.360 sell it off to non banks. They traded. Then two 0:08:01.400 --> 0:08:04.960 thousand and eight you got huge amount of influx of 0:08:05.120 --> 0:08:09.360 capital doing private credits, saying, hey, you could come directly 0:08:09.480 --> 0:08:12.480 to us, A fund will lend you the money. You 0:08:12.600 --> 0:08:15.280 don't need a bank. And then you had in twenty 0:08:15.560 --> 0:08:20.040 fifteen liability management or what the press loves, creditor on 0:08:20.200 --> 0:08:25.680 creditor violence. That changed the whole dynamic of lending senior security. 0:08:26.120 --> 0:08:30.120 It used to be with the Three Musketeers. If Tom 0:08:30.200 --> 0:08:33.400 owns a debt, you own it. I own it, same debt, 0:08:33.559 --> 0:08:37.240 same company, We're all for one, one for all, were 0:08:37.320 --> 0:08:41.079 the same. All of a sudden it changed, and certain 0:08:42.000 --> 0:08:45.520 investors in the same exact death instrument end up doing 0:08:45.679 --> 0:08:49.240 better than other debt instruments. So what I would say is, 0:08:49.720 --> 0:08:53.480 when I started in the business, senior secure lending was boring. 0:08:54.080 --> 0:08:57.000 I was boring. It was a perfect fund, And over 0:08:57.160 --> 0:08:59.400 time it became interesting and exciting. 0:09:00.360 --> 0:09:02.240 You know, folks, I got to cut to the chase here, 0:09:02.400 --> 0:09:04.959 I mean, you know, margin call with Jeremy Iron sitting 0:09:05.000 --> 0:09:08.760 at the end of the table, Peter Sullivan was the 0:09:08.920 --> 0:09:11.959 character Zach Quinto doing it the junior risk analysis and 0:09:12.080 --> 0:09:16.959 margin call from years ago. How many people in your 0:09:17.200 --> 0:09:22.599 racket really aren't all that smart because your book is 0:09:22.679 --> 0:09:26.079 a tough read and it makes them smarter. There's a 0:09:26.160 --> 0:09:28.160 lot of pretenders in credit, aren't there? 0:09:28.600 --> 0:09:32.840 No one, I get myself in trouble if I said 0:09:32.880 --> 0:09:35.440 there's a lot of pretenders in credit. No, I think 0:09:35.480 --> 0:09:40.400 people evolved. I think historically being in credit you were 0:09:40.640 --> 0:09:44.559 a second class citizen because it wasn't as sexy and 0:09:44.640 --> 0:09:47.000 it was like, hey, all you have to do is 0:09:47.480 --> 0:09:50.800 can I get paid back? Yes or no? And it 0:09:51.000 --> 0:09:54.960 was viewed as a lesser business. Then let's say equity 0:09:55.320 --> 0:09:59.480 as equity's got more and more efficient as dead started 0:09:59.559 --> 0:10:05.160 to troy as distress debt buying someone else's problem add 0:10:05.559 --> 0:10:10.760 significantly below palm where you could have downside protection, but 0:10:11.520 --> 0:10:15.319 all the upside of converting some of that debt potentially 0:10:15.440 --> 0:10:18.520 into equity. All of a sudden, people got a lot 0:10:18.760 --> 0:10:23.559 lot more sophisticated. And the reason I wrote the book 0:10:23.960 --> 0:10:27.719 is for the younger professionals. There was no book you 0:10:27.800 --> 0:10:31.480 could go on Amazon type how do I invest in equities? 0:10:31.720 --> 0:10:35.800 Thousands of books? How do I invest in senior secured, 0:10:36.000 --> 0:10:41.559 non investment grade, distress debt zero books. So I wrote it, 0:10:41.640 --> 0:10:45.559 I got a monopoly. I want to monetize the monopoly 0:10:45.720 --> 0:10:46.840 while it's still there. 0:10:47.440 --> 0:10:48.480 And I take a. 0:10:48.480 --> 0:10:51.680 Little offense Tom, and I love you. It's an easy read. 0:10:51.920 --> 0:10:56.520 I wrote this book so you My goal was you 0:10:56.760 --> 0:10:59.760 read it and say, holy crap. I learned a lot, 0:11:00.240 --> 0:11:03.959 but that wasn't pain fault. So every technical concept, like 0:11:04.040 --> 0:11:08.760 a fraudulent conveyance, I ended with an interesting story like 0:11:09.600 --> 0:11:16.119 Caesar's big fight over moving assets accusations of a fraudulent conveyance. 0:11:16.480 --> 0:11:20.920 So I try to teach all of the technicals that 0:11:21.160 --> 0:11:25.160 you need to be a CREDITI vest whether it's performing 0:11:25.360 --> 0:11:30.199 or distressed, but then use real companies to illustrate it, 0:11:30.480 --> 0:11:33.080 and then tell a war story. So you say, oh, 0:11:33.160 --> 0:11:35.040 the girl, that wasn't that paint fault. 0:11:35.960 --> 0:11:38.240 What's your view on private credit? If it weren't for 0:11:38.280 --> 0:11:40.000 the warner in, I think this market would be talking 0:11:40.000 --> 0:11:42.079 about private credit a lot more. How you view it? 0:11:42.679 --> 0:11:49.160 Yeah, Look, private credit historically has been a phenomenal asset class. 0:11:49.720 --> 0:11:53.280 You're lending senior secured. You put a one to one 0:11:53.440 --> 0:11:57.280 debt to equity ratio. And you're gotting double digit yields 0:11:57.600 --> 0:12:02.120 with downside protection. So it's a phenomenal asset class. Now, 0:12:02.200 --> 0:12:07.319 basic economics tell you if you're earning excess returns to 0:12:07.480 --> 0:12:11.079 the perceived risk, a lot of capital flows in. And 0:12:11.200 --> 0:12:14.480 that's what happened, a ton of capital float in. I 0:12:14.720 --> 0:12:17.640 just wrote an article on how the anaalog. You said, 0:12:17.800 --> 0:12:21.040 because what's gonna happen? Is this just going to be 0:12:21.080 --> 0:12:25.120 a dispersion of returns. The players that have been in 0:12:25.200 --> 0:12:28.880 it live through cycles, got punched in the face and 0:12:29.080 --> 0:12:32.479 al wait, learn from it. Are going to stay disciplined. 0:12:32.960 --> 0:12:35.079 They're not going to get involved in race to the 0:12:35.160 --> 0:12:38.880 bottom deals. And but I think the asset class is 0:12:39.080 --> 0:12:43.319 great if done well. I think some some fields that 0:12:43.440 --> 0:12:45.760 I've done were bad deals, and if you did too 0:12:45.840 --> 0:12:48.560 many of them, you're you're gonna have a problem. 0:12:48.760 --> 0:12:51.480 But I love the asset Wall Street worldwide. The credit 0:12:51.559 --> 0:12:54.680 investor's handback, Michael, getto whether we're going to continue where 0:12:54.720 --> 0:12:57.760 then the professor is definitive here with a guy named 0:12:57.800 --> 0:13:01.040 Solomon of Gold and Sex writing it forward is well, 0:13:01.200 --> 0:13:03.800 I want you to talk about the Gagillia. So the 0:13:04.000 --> 0:13:08.439 equity deal yesterday from Google original large in that. But 0:13:08.640 --> 0:13:12.599 talk about the wall, the demand, the demand for the 0:13:12.720 --> 0:13:15.640 hyperscaler bond offerings. What does it signal to. 0:13:15.640 --> 0:13:22.360 You, Well, look, a ton of capital is getting raised 0:13:22.880 --> 0:13:23.920 for data centers. 0:13:24.840 --> 0:13:25.440 There's going to be. 0:13:25.440 --> 0:13:31.000 Equity and debt as in every fundraising. It's an interesting 0:13:31.120 --> 0:13:35.079 thing debt play. The goal of a debt investor is 0:13:35.160 --> 0:13:40.439 to get equity like returns with debt like a downside. 0:13:41.040 --> 0:13:44.400 Now there's a question whether some of these debt deals 0:13:44.800 --> 0:13:49.839 you're getting debt returns with equity downside, which is the 0:13:50.120 --> 0:13:53.280 polar opposite of your wants of what you want. But 0:13:53.480 --> 0:13:57.920 I break these into three types. There's the data centers 0:13:58.040 --> 0:14:02.199 with a long term investment grade lease, lowest risk, but 0:14:02.400 --> 0:14:07.160 you got to do your work. One, are there cancelation 0:14:07.360 --> 0:14:11.480 causes in those leases because you might think, oh, I'm 0:14:11.559 --> 0:14:14.520 taking meta risk, and then all of a sudden you 0:14:14.600 --> 0:14:17.800 find out the contract could get canceled after two years 0:14:18.160 --> 0:14:20.960 if certain events happen. So you got to go in. 0:14:21.160 --> 0:14:24.600 You got to make sure or you have the right 0:14:25.400 --> 0:14:30.360 legal entity. Big companies have massive legal entities. You might 0:14:30.480 --> 0:14:34.960 have a name that's guarantee your loan that doesn't have 0:14:35.240 --> 0:14:38.040 the corporate guarantee. So you got to do a lot 0:14:38.120 --> 0:14:41.480 of work. And that's one end of the spectrum, lower risk. 0:14:42.000 --> 0:14:44.520 It's got a contract. And then there's the ones that 0:14:44.720 --> 0:14:48.240 you're builded and they would come and that's a higher risk. 0:14:48.560 --> 0:14:53.480 But everything is going to get financed with debt and equity. 0:14:54.280 --> 0:14:56.800 First Brands tell us about First Brands and how that 0:14:56.960 --> 0:14:59.880 might have been a teaching tool for credit investors. 0:15:00.920 --> 0:15:03.200 Look, I'm gonna professor, you see this, said, I teach 0:15:03.280 --> 0:15:06.960 how Columbia it's the school the MBAs and then ford 0:15:07.040 --> 0:15:12.040 him the undergrants, and I tell every student learn from mistakes. 0:15:12.160 --> 0:15:12.920 That's how you learn. 0:15:13.360 --> 0:15:18.720 Best way, learn from someone else's mistakes. First Brands had 0:15:19.120 --> 0:15:22.160 five I wrote an article on this. It had five 0:15:22.320 --> 0:15:25.680 red fires. Now, a red flag doesn't mean I'm not 0:15:25.760 --> 0:15:28.400 going to do the deal. A red flag means I 0:15:28.480 --> 0:15:31.720 got to dig deep B. And when you went into 0:15:31.800 --> 0:15:35.320 the first book, you said the Kate alone, you couldn't 0:15:35.360 --> 0:15:37.720 did deep BA and you had to make the decision 0:15:37.960 --> 0:15:40.960 just because everyone else is doing it? Should I? And 0:15:41.240 --> 0:15:43.080 I write about that, Michael, I got to get this in. 0:15:43.200 --> 0:15:46.840 I just think it's too too important. There's always leverage 0:15:46.920 --> 0:15:51.440 within the system. Where's the leverage now or the implied leverage. 0:15:52.200 --> 0:15:55.160 Well, I think and I've heard this some people have said, 0:15:55.320 --> 0:15:59.720 is private credit going to be the next catalyst for 0:16:00.320 --> 0:16:04.760 a downturn? I think it's very misunderstood when you look 0:16:04.840 --> 0:16:08.240 at it. Is a private equity. Let's use a private 0:16:08.320 --> 0:16:11.720 equity as an example. They're gonna buy a company. The 0:16:12.360 --> 0:16:17.720 private credit investors are usually lending about fifty percent loan 0:16:17.840 --> 0:16:23.560 to value. Then you have they go to the banks. 0:16:24.160 --> 0:16:27.320 The banks lend them fifty percent loan to value on 0:16:27.800 --> 0:16:31.400 what their debt was. So you got a ton of question. 0:16:31.840 --> 0:16:36.360 The company's got to decrease in value by half. Private 0:16:36.400 --> 0:16:42.000 equity loses money the debtholder dozen then it's got to 0:16:42.120 --> 0:16:45.720 reduce by another half for the banks. And the banks 0:16:45.760 --> 0:16:50.000 are cross collateralize. So I look at it and say, look, 0:16:50.560 --> 0:16:55.040 from the stability of the financial markets, this is very 0:16:55.200 --> 0:16:58.280 low risk for banks that are funding very. 0:16:58.240 --> 0:17:01.600 Eiching Green writes in his book Chapter to Chapter and 0:17:01.640 --> 0:17:06.560 the History of Currency about financialization, what does the Michael 0:17:06.600 --> 0:17:09.280 Ghetto financialization look like? 0:17:09.520 --> 0:17:09.919 Right now? 0:17:10.280 --> 0:17:13.639 Are we all being too cute with our technology? Our 0:17:13.720 --> 0:17:16.080 academics are smarts in credit. 0:17:16.600 --> 0:17:18.480 I'm got to be honest, I'm not sure I understand 0:17:18.560 --> 0:17:20.000 the question what do you mean by that? 0:17:20.280 --> 0:17:24.679 Very Chagreen says, at some point within a capitalistic system, 0:17:24.880 --> 0:17:29.560 financialization takes over where it's trading as trading. There's trading 0:17:29.640 --> 0:17:32.800 that within banking. Do you see that within the American system. 0:17:34.280 --> 0:17:37.119 I'm not sure. I have a strong view on that. 0:17:37.720 --> 0:17:41.240 My area of expertise is credit and private credit, and 0:17:41.400 --> 0:17:46.080 I see that as only positive in that one. If 0:17:46.119 --> 0:17:50.760 you're only relying on banks, when the banks get nervous 0:17:50.920 --> 0:17:53.440 and seeing your manage the owner of the bank saying 0:17:53.920 --> 0:17:59.119 reduce sk that could take a normal downturn and create 0:17:59.320 --> 0:18:00.560 a big session. 0:18:00.760 --> 0:18:00.920 You know. 0:18:01.080 --> 0:18:04.440 It's It's what Howard Marx talks about in his book 0:18:04.960 --> 0:18:08.000 is if all of a sudden the banks pull, a 0:18:08.080 --> 0:18:11.200 moderate recession becomes a big recession. And I think you 0:18:11.320 --> 0:18:14.879 see that in twenty twenty three, right, that's where the 0:18:15.000 --> 0:18:18.600 banks were hung with Twitter, Right, they were hung with 0:18:18.720 --> 0:18:23.080 another deal. The regional banks, Silicon Valley Bank which was 0:18:23.200 --> 0:18:28.240 obscure went under, and the banking are the more traditional 0:18:28.840 --> 0:18:34.040 finance providers just slow down because private credit was there 0:18:34.920 --> 0:18:37.280 in the world survive and if a private for any 0:18:37.359 --> 0:18:40.800 credit fun gets into problems, no harm, no foult. 0:18:40.880 --> 0:18:43.119 Michael Thank you so much. Michael Janner with this, Professor 0:18:43.200 --> 0:18:45.880 Gator with us the Credit Investor's Handbook. I can't say 0:18:46.359 --> 0:18:49.879 enough about this. This is the adult read for Global 0:18:49.960 --> 0:18:53.480 Wall Street this year. Even equity animals like Joyce Chang 0:18:54.040 --> 0:18:56.400 or JP Morgan's to shut up and read it. You're 0:18:56.480 --> 0:19:00.440 just really really good with some really foundational at work 0:19:00.520 --> 0:19:03.800 there for a Global Wall Street. Stay with us. More 0:19:03.920 --> 0:19:06.680 from Bloomberg Surveillance coming up after this. 0:19:14.080 --> 0:19:17.600 You're listening to the Bloomberg Surveillance podcast. Catch us live 0:19:17.720 --> 0:19:20.840 weekday afternoons from seven to ten am Eastern. Listen on 0:19:20.960 --> 0:19:24.560 Applecarplay and Android Auto with the Bloomberg Business app, or 0:19:24.760 --> 0:19:26.240 watch us live on YouTube. 0:19:26.400 --> 0:19:29.320 Our interview of the Day. Ted Mortensen is an institution 0:19:29.520 --> 0:19:33.520 at Baird looking at software. It's in right now. I 0:19:33.760 --> 0:19:36.480 like the treatment. I think zero headshet it yesterday that 0:19:36.600 --> 0:19:40.040 the Great Silence of May of twenty twenty six is 0:19:40.080 --> 0:19:43.680 the thirty five percent recovery in Microsoft straight down like 0:19:43.760 --> 0:19:47.639 a rock. Four standard deviations plus two minus two and 0:19:47.960 --> 0:19:50.240 boy his software come back. Let's start with the why 0:19:50.600 --> 0:19:52.159 why has software rebounded? 0:19:52.400 --> 0:19:55.119 I think you've seen some reports on data Dog and 0:19:55.280 --> 0:19:58.720 Snowflake on the consumption side, as well as Mango dB 0:19:58.920 --> 0:20:02.840 that I've actually blown out numbers, and I think we're 0:20:02.880 --> 0:20:07.200 now starting to see instead of a gentic software being 0:20:07.280 --> 0:20:10.440 in a test phase, it's actually been deployed. 0:20:10.960 --> 0:20:14.000 Bill Ackman bought Microsoft and made us splash as mister 0:20:14.119 --> 0:20:17.760 Ackman is wont to do. Did he jump start this? No? 0:20:17.920 --> 0:20:23.040 I think Jensen Jensen from a Navidia jump started at 0:20:23.119 --> 0:20:24.160 copy Taxi based. 0:20:24.200 --> 0:20:28.480 He said coat, Yeah, maybe you shouldn't, but both did. 0:20:30.000 --> 0:20:33.159 Software is a free cashlow machine and in this cycle, 0:20:33.560 --> 0:20:37.480 infrastructure leads the AI build software is going to go 0:20:37.520 --> 0:20:39.840 along for the ride, but the news software is going 0:20:39.880 --> 0:20:42.879 to go along for the ride. So a lot of 0:20:42.920 --> 0:20:44.600 free cash flow coming to these names. 0:20:45.119 --> 0:20:47.240 Ted, what do you make of our good friends at 0:20:47.280 --> 0:20:50.520 Alphabet coming to the market for really the first time? 0:20:51.000 --> 0:20:54.080 I would say, since the IPO with eighty billion dollars 0:20:54.760 --> 0:20:57.520 straight equity converts the whole nine yards of private investment 0:20:57.600 --> 0:20:59.240 from Berkshire, what does that tell you? 0:21:00.040 --> 0:21:01.320 It's a big deal. 0:21:01.760 --> 0:21:03.600 And the reason why it's a big deal is this 0:21:03.680 --> 0:21:06.639 is going to extend the cycle and if Google is 0:21:06.680 --> 0:21:08.760 doing it, I guarantee all the other clubs. 0:21:10.000 --> 0:21:10.639 Yes, that's right. 0:21:10.840 --> 0:21:14.720 The meetings you that are listening in your cars on 0:21:14.840 --> 0:21:17.760 your way to her. What God say to Google do meeting? 0:21:17.760 --> 0:21:18.159 That's right. 0:21:18.600 --> 0:21:20.720 So what this will do is that will extend the 0:21:21.160 --> 0:21:26.720 CAPEX cycle infrastructure first into twenty seven. This is a 0:21:26.840 --> 0:21:30.840 race to AGI or what we call human intelligence. And 0:21:31.000 --> 0:21:33.160 this is a cycle like no other. It's real, It's 0:21:33.200 --> 0:21:33.919 not two thousand. 0:21:35.320 --> 0:21:38.919 Got the Philadelphia stockishing semiconductor inext up eighty percent? 0:21:39.320 --> 0:21:40.240 What is that about? 0:21:40.359 --> 0:21:41.800 I mean we're talking semis here. 0:21:42.280 --> 0:21:42.879 Well, we're now. 0:21:43.160 --> 0:21:46.960 You know, I'm old, so I've I've, I've I've lived 0:21:47.000 --> 0:21:49.800 through pretty much every single cycle. And you have to 0:21:49.920 --> 0:21:54.320 understand that we're now in animal spirits land and animal 0:21:54.400 --> 0:21:57.320 spirits then two thousand. This can go on for a 0:21:57.600 --> 0:22:02.200 long time and value doesn't matter. And if you look 0:22:02.240 --> 0:22:06.480 at the HP print last night, you know you're a 0:22:06.960 --> 0:22:11.840 different hemisphere on where these models are coming out post earning. 0:22:11.960 --> 0:22:15.200 So the Google deal was very interesting in that it 0:22:15.280 --> 0:22:18.119 was very conventional, like a six percent haircut on one 0:22:18.200 --> 0:22:21.560 trune to Berkshire, right, and almost eight percent haircut on 0:22:21.640 --> 0:22:24.359 another trune to Berkshire, et cetera, et cetera, And then 0:22:24.359 --> 0:22:27.280 there's this new fangled thing where they're going to pay 0:22:27.320 --> 0:22:31.840 the tax obligations to the employees by an on the 0:22:31.960 --> 0:22:34.879 run offering, which I think zero Edge is right on 0:22:35.000 --> 0:22:39.760 this that retail shareholders are going to pay the taxes 0:22:40.400 --> 0:22:43.320 do at Google? How did this happen? Where did this 0:22:43.480 --> 0:22:43.920 come from? 0:22:44.600 --> 0:22:47.399 I think it's this is a war for talent, and 0:22:48.200 --> 0:22:50.600 if you really look at all these companies, it's all 0:22:50.640 --> 0:22:53.040 about engineers. I mean, at the end of the day, 0:22:53.200 --> 0:22:57.200 it's product innovation through brilliant engineers. And I think they're 0:22:57.320 --> 0:23:02.680 just stop gapping, you know, with the intensity of free 0:23:02.800 --> 0:23:06.040 cash flow on the Capex builds, they're just finding another 0:23:06.119 --> 0:23:07.960 avenue to lock up employees. 0:23:10.040 --> 0:23:14.080 Are we rerating the valuation for global tech here these days? 0:23:15.400 --> 0:23:17.159 It just again you mentioned we're in the world of 0:23:17.240 --> 0:23:23.240 animal spirits, are rerating the valuation of technology absolutely so. 0:23:23.520 --> 0:23:27.400