1 00:00:00,120 --> 00:00:03,000 Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast. 2 00:00:03,279 --> 00:00:05,880 Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg. 3 00:00:06,280 --> 00:00:09,840 Speaker 1: Today's guests are Paula Seligson, a credit reporter for Bloomberg 4 00:00:09,880 --> 00:00:12,399 Speaker 1: News in New York, and Rob Schiffman, who looks at 5 00:00:12,400 --> 00:00:15,840 Speaker 1: the tech sector for Bloomberg Intelligence. It's been another very 6 00:00:15,880 --> 00:00:18,919 Speaker 1: busy week, lots of excitement in global credit markets, which 7 00:00:18,960 --> 00:00:21,759 Speaker 1: by some measures, are having the best January ever. I 8 00:00:21,760 --> 00:00:23,720 Speaker 1: don't know what you make of this, but it all 9 00:00:23,760 --> 00:00:26,000 Speaker 1: seems too much, too fast. Where does it all end. 10 00:00:26,480 --> 00:00:28,400 Speaker 1: We'll get to that in a little bit, but before 11 00:00:28,440 --> 00:00:32,120 Speaker 1: we do, I've got windmills on my mind. Of course, 12 00:00:32,400 --> 00:00:35,360 Speaker 1: we all love sustainable energy. Everyone wants to save the planet. 13 00:00:35,360 --> 00:00:38,159 Speaker 1: But did you read the wind turbines taller than the 14 00:00:38,159 --> 00:00:41,400 Speaker 1: Statue of Liberty are falling over. There was a great 15 00:00:41,440 --> 00:00:44,159 Speaker 1: Business Week story this week on that they set the 16 00:00:44,200 --> 00:00:46,879 Speaker 1: scene out there in Oklahoma, a beautiful place. I used 17 00:00:46,880 --> 00:00:49,520 Speaker 1: to live. There by the way, on a calm, sunny day, 18 00:00:49,560 --> 00:00:51,360 Speaker 1: a man was feeding his cattle when he got the 19 00:00:51,360 --> 00:00:54,800 Speaker 1: call from a local sheriff's dispatcher. A motorist reported that 20 00:00:54,840 --> 00:00:57,160 Speaker 1: one of the huge turbines at a nearby wind farm 21 00:00:57,160 --> 00:01:01,840 Speaker 1: had collapsed in dramatic fashion. The steel tower, which was 22 00:01:02,080 --> 00:01:04,280 Speaker 1: hundreds of feet tall, was buckled in half, and the 23 00:01:04,319 --> 00:01:07,200 Speaker 1: turbine blades, whose rotation took the machine higher than the 24 00:01:07,200 --> 00:01:09,919 Speaker 1: Statue of Liberty, was splayed across the wheat fields below. 25 00:01:10,040 --> 00:01:12,120 Speaker 1: What do you make of this? You know? Is it 26 00:01:12,200 --> 00:01:15,720 Speaker 1: the end of sustainable energy? What about windmills? Who likes windmills? Here? 27 00:01:15,720 --> 00:01:18,120 Speaker 1: What do you think, Paula, I'm just trying to imagine 28 00:01:18,160 --> 00:01:20,400 Speaker 1: watching this thing fall straight down. I want to know 29 00:01:20,480 --> 00:01:22,240 Speaker 1: the thud that it makes when it hits the ground. 30 00:01:23,080 --> 00:01:24,800 Speaker 1: But yeah, I mean, I don't know. I hope they 31 00:01:24,880 --> 00:01:27,440 Speaker 1: sorted out because I definitely want more wind energy. Personally, 32 00:01:27,920 --> 00:01:30,399 Speaker 1: I think my biggest concern would be that the price 33 00:01:30,440 --> 00:01:31,920 Speaker 1: of weed is going up and I have to pay 34 00:01:31,920 --> 00:01:35,280 Speaker 1: more for my bagels. Possible A good angle, good angle. 35 00:01:35,520 --> 00:01:37,679 Speaker 1: Don't get me started on ESG investment though, it's another 36 00:01:37,720 --> 00:01:42,040 Speaker 1: topic for a different episode, I'm sure, But anyway. Paula Sellison, 37 00:01:42,160 --> 00:01:44,640 Speaker 1: she's our ACE reporter in New York City covering all 38 00:01:44,680 --> 00:01:47,600 Speaker 1: things credit. She's been behind some of the biggest scoops 39 00:01:47,600 --> 00:01:49,960 Speaker 1: on your Bloomberg terminal over the last few years, and 40 00:01:50,000 --> 00:01:52,720 Speaker 1: it's great to have you here in the studio. Thanks 41 00:01:52,720 --> 00:01:55,760 Speaker 1: for having me. The latest big story from Paula. Well, 42 00:01:55,840 --> 00:01:58,720 Speaker 1: it's a bit technical, but we're going to go into 43 00:01:58,760 --> 00:02:01,680 Speaker 1: it and break it down. Feel free to interrupt anytime, 44 00:02:01,720 --> 00:02:05,240 Speaker 1: Robbie if you have any questions. Here's the headline, fed 45 00:02:05,360 --> 00:02:10,720 Speaker 1: up CLO buyers push managers to reject terms of libel switch. 46 00:02:11,600 --> 00:02:14,799 Speaker 1: So let's start with the obvious one. What is a 47 00:02:14,880 --> 00:02:18,320 Speaker 1: CLO and why do we care? That is a great question, 48 00:02:18,440 --> 00:02:20,720 Speaker 1: and I am happy to be in a podcast where 49 00:02:20,720 --> 00:02:23,160 Speaker 1: I can get pretty wonky because usually I can't get 50 00:02:23,200 --> 00:02:27,640 Speaker 1: into this much detail normally. So CLO stands for collateralized 51 00:02:27,760 --> 00:02:31,799 Speaker 1: loan obligation. That's a really fancy way of saying it's 52 00:02:31,800 --> 00:02:35,320 Speaker 1: a structured product where people basically buy a bunch of 53 00:02:35,440 --> 00:02:39,640 Speaker 1: really risky leverage loans, which is a form of corporate debt, 54 00:02:40,000 --> 00:02:42,320 Speaker 1: and then they put it together in a big pool, 55 00:02:42,760 --> 00:02:45,040 Speaker 1: and then they sell slices of it in the form 56 00:02:45,080 --> 00:02:48,600 Speaker 1: of bonds in different tronches. And this could be triple 57 00:02:48,639 --> 00:02:51,400 Speaker 1: A tronch which is very very safe, almost no chance 58 00:02:51,400 --> 00:02:54,079 Speaker 1: of losing money, all the way down to double A 59 00:02:54,280 --> 00:02:57,240 Speaker 1: and lower and then Eventually you get to the equity portion, 60 00:02:57,520 --> 00:03:00,359 Speaker 1: which essentially gets what's left over in the structure at 61 00:03:00,360 --> 00:03:03,160 Speaker 1: the end of each period. And you know, this is 62 00:03:03,280 --> 00:03:08,440 Speaker 1: essentially a way to find It's a way. It's it's 63 00:03:08,440 --> 00:03:10,919 Speaker 1: a lot of demand for leverage loans, so clos buy 64 00:03:11,000 --> 00:03:13,600 Speaker 1: roughly two thirds or more of the leverage loan market, 65 00:03:13,880 --> 00:03:17,000 Speaker 1: and so they also drive demand for buying leverage loans. 66 00:03:17,240 --> 00:03:19,680 Speaker 1: It's a way. It sounds like a total casino here. 67 00:03:19,680 --> 00:03:22,000 Speaker 1: You've lost me already. Is it like a CDO, the 68 00:03:22,040 --> 00:03:24,120 Speaker 1: thing that blew up the financial system in two thousand 69 00:03:24,200 --> 00:03:26,400 Speaker 1: and eight. I'm glad you asked that, because everyone in 70 00:03:26,440 --> 00:03:29,000 Speaker 1: the CLO market hates that comparison, and they remind me 71 00:03:29,040 --> 00:03:32,240 Speaker 1: of it all the time. Structurally, it is similar to 72 00:03:32,280 --> 00:03:34,800 Speaker 1: a CDO with the tranches and things like that. But 73 00:03:34,920 --> 00:03:37,880 Speaker 1: as participants in the space like to remind everyone, clos 74 00:03:37,960 --> 00:03:40,280 Speaker 1: did not blow up. In fact, even though they are, 75 00:03:40,680 --> 00:03:44,240 Speaker 1: you know, part they use leverage loans, which are risky, 76 00:03:44,400 --> 00:03:47,200 Speaker 1: highly indebted companies that have borrowed money. But the way 77 00:03:47,200 --> 00:03:49,880 Speaker 1: the loans are structured, they're what's called secured, which means 78 00:03:49,920 --> 00:03:52,320 Speaker 1: there's a lot of assets backing the loans. So even 79 00:03:52,360 --> 00:03:55,080 Speaker 1: if that company went bankrupt. This type of lenders should 80 00:03:55,120 --> 00:03:58,800 Speaker 1: be made fairly whole of assuming everything goes well. So 81 00:03:59,040 --> 00:04:02,160 Speaker 1: it's both risky also safe at the same time. So 82 00:04:02,400 --> 00:04:05,400 Speaker 1: they buy leverage loans. They also sound really scary. What 83 00:04:05,760 --> 00:04:08,040 Speaker 1: a leverage loans? Can you break that down for us? Yeah, So, 84 00:04:08,080 --> 00:04:10,640 Speaker 1: if you think about sort of the universe of investing, 85 00:04:10,920 --> 00:04:13,200 Speaker 1: there's equity and then there's debt, right, and so debt 86 00:04:13,280 --> 00:04:16,280 Speaker 1: is split up pretty much by its ratings. Anything above 87 00:04:16,320 --> 00:04:19,599 Speaker 1: a certain rating is considered investment grade, which is fairly safe, 88 00:04:19,880 --> 00:04:22,760 Speaker 1: and anything below a certain rating is considered high yield 89 00:04:22,839 --> 00:04:25,839 Speaker 1: or junk. And so within that space you have two 90 00:04:25,920 --> 00:04:29,560 Speaker 1: types of debt. You have junk bonds and leverage loans. 91 00:04:29,760 --> 00:04:32,680 Speaker 1: And so leverage loan just means it's a loan where 92 00:04:32,720 --> 00:04:34,920 Speaker 1: it is borrowed by a company that is rated high 93 00:04:34,960 --> 00:04:38,200 Speaker 1: yield by ratings agencies. And these distinctions are very important 94 00:04:38,240 --> 00:04:40,680 Speaker 1: because the types of investors who buy each form of 95 00:04:40,720 --> 00:04:43,599 Speaker 1: debt are very different often and it's sort of split 96 00:04:43,680 --> 00:04:46,200 Speaker 1: up within a portfolio. You know, this is our sector 97 00:04:46,360 --> 00:04:49,120 Speaker 1: that's buying just hiled bonds. This is our portfolio manager 98 00:04:49,160 --> 00:04:51,840 Speaker 1: who's just buying investment grade bonds, and so leverage loans 99 00:04:51,880 --> 00:04:54,440 Speaker 1: are just sort of part of this overall universe. One 100 00:04:54,520 --> 00:04:57,240 Speaker 1: of these big loans made to companies are the companies 101 00:04:57,240 --> 00:04:59,560 Speaker 1: that we've never heard of that are lurking in the shadows, 102 00:05:00,040 --> 00:05:04,560 Speaker 1: the household names. It's usually not household names. The household 103 00:05:04,640 --> 00:05:07,240 Speaker 1: names borrow with investment grade bonds and you've heard all 104 00:05:07,240 --> 00:05:10,440 Speaker 1: of them before. You know, high yield rated companies can 105 00:05:10,560 --> 00:05:13,800 Speaker 1: range from you know, some oil and gas companies to 106 00:05:14,080 --> 00:05:17,440 Speaker 1: people who make you know, aftermarket auto parts. It's often 107 00:05:17,560 --> 00:05:20,480 Speaker 1: a really key part of the world, but it's kind 108 00:05:20,480 --> 00:05:23,160 Speaker 1: of the part that you don't notice day today. So 109 00:05:23,360 --> 00:05:25,640 Speaker 1: thank you for that. I think it's becoming clear now. 110 00:05:25,720 --> 00:05:28,880 Speaker 1: But going back to the headline, fed up clo buyers 111 00:05:28,920 --> 00:05:32,320 Speaker 1: push managers to reject terms of libel switch. What's the 112 00:05:32,360 --> 00:05:35,400 Speaker 1: situation with the managers pushing back? Why are they doing that? 113 00:05:35,400 --> 00:05:37,680 Speaker 1: That's a great question. So I kind of have to 114 00:05:37,680 --> 00:05:39,800 Speaker 1: take a step back to explain the libor switch to 115 00:05:39,839 --> 00:05:43,679 Speaker 1: begin with. So libor, the London interbake offer rate, sorry, 116 00:05:43,760 --> 00:05:47,240 Speaker 1: London Interbank Offered rate, is this key benchmark that was 117 00:05:47,320 --> 00:05:50,359 Speaker 1: used across the world for many, many years. As the 118 00:05:50,360 --> 00:05:53,359 Speaker 1: financial crisis unfolded, it was discovered that this was basically 119 00:05:53,400 --> 00:05:55,800 Speaker 1: being fixed by a bunch of banks in London. It 120 00:05:55,880 --> 00:05:58,680 Speaker 1: was a huge scandal and regulators across the globe decided 121 00:05:58,680 --> 00:06:00,640 Speaker 1: they had to get rid of it. One of the 122 00:06:00,720 --> 00:06:03,560 Speaker 1: key differences is as they've transitioned away from LIBOR, is 123 00:06:03,600 --> 00:06:06,160 Speaker 1: that instead of it being one rate for the whole world, 124 00:06:06,400 --> 00:06:08,520 Speaker 1: now each region has its own rate, and so the 125 00:06:08,560 --> 00:06:11,880 Speaker 1: overall preferred replacement rate in the United States is for 126 00:06:12,000 --> 00:06:16,039 Speaker 1: something called the secured Overnight Financing Rate or SOFUR. So 127 00:06:16,080 --> 00:06:18,880 Speaker 1: we're in the midst of this transition. It's very complicated 128 00:06:18,920 --> 00:06:23,880 Speaker 1: and very messy. So essentially everyone who is doing new 129 00:06:23,960 --> 00:06:26,680 Speaker 1: deals had to stop using LIBOR at the beginning of 130 00:06:26,760 --> 00:06:30,159 Speaker 1: twenty twenty two, but any existing deals have until the 131 00:06:30,200 --> 00:06:33,000 Speaker 1: middle of twenty twenty three to make that switch. And 132 00:06:33,040 --> 00:06:35,520 Speaker 1: we are in the very final stretch the last six 133 00:06:35,600 --> 00:06:38,400 Speaker 1: months of this and the one point four trillion dollars 134 00:06:38,480 --> 00:06:42,160 Speaker 1: US leverage loan market. Only about twenty five percent of 135 00:06:42,200 --> 00:06:43,919 Speaker 1: these loans of switch so far, so we have about 136 00:06:43,920 --> 00:06:47,400 Speaker 1: seventy five percent left now. Enter CLOS and what's going 137 00:06:47,400 --> 00:06:50,400 Speaker 1: on there. So, as I mentioned before, Clos they are 138 00:06:50,520 --> 00:06:53,120 Speaker 1: one of the biggest buyers of leverage loans, So what 139 00:06:53,240 --> 00:06:57,760 Speaker 1: CLO managers are doing really impacts the entire leverage loan market. 140 00:06:58,160 --> 00:07:01,039 Speaker 1: So within that you have the cloquity investor that's buying 141 00:07:01,040 --> 00:07:05,839 Speaker 1: the riskiest tranche of clos And essentially there's this issue, 142 00:07:06,000 --> 00:07:08,760 Speaker 1: which is that libor and sofur are not the same. 143 00:07:09,400 --> 00:07:12,920 Speaker 1: SOFA typically prints consistently lower than libor. So if you 144 00:07:13,040 --> 00:07:17,120 Speaker 1: just switched a loan from libor to sofur, the lenders 145 00:07:17,160 --> 00:07:20,760 Speaker 1: who lend that money immediately lose money. It's only a 146 00:07:20,800 --> 00:07:23,040 Speaker 1: few basis points. It depends on the day because all 147 00:07:23,040 --> 00:07:24,760 Speaker 1: of this moves around. It could be you know, a 148 00:07:24,800 --> 00:07:28,000 Speaker 1: point oh five percent, maybe point one percent, depending on 149 00:07:28,040 --> 00:07:30,000 Speaker 1: what's going on, But that can add up a lot 150 00:07:30,040 --> 00:07:33,040 Speaker 1: if you have a multimillion dollars portfolio of these assets. Right, 151 00:07:33,680 --> 00:07:37,000 Speaker 1: So for CLO equity investors specifically, because they're getting the 152 00:07:37,080 --> 00:07:40,040 Speaker 1: left over and what's left in the CLO after everyone 153 00:07:40,080 --> 00:07:42,800 Speaker 1: else has been paid this interest, if there's a mismatch, 154 00:07:42,840 --> 00:07:44,600 Speaker 1: it really hurts them and they can be on the 155 00:07:44,640 --> 00:07:47,320 Speaker 1: line to lose millions of dollars. So it's all about 156 00:07:47,320 --> 00:07:50,920 Speaker 1: the money. It's always about the money. Yeah, So basically 157 00:07:51,320 --> 00:07:54,720 Speaker 1: CLO equity investors care because if they don't have what 158 00:07:54,760 --> 00:07:57,920 Speaker 1: they consider a fair switch from Libor to sofur. They 159 00:07:57,920 --> 00:08:00,960 Speaker 1: are the ones who lose money specifically. And so the 160 00:08:00,960 --> 00:08:04,080 Speaker 1: big news that myself and my colleague Carmen Arroyo were 161 00:08:04,080 --> 00:08:07,120 Speaker 1: able to break this week is that the Cello equity 162 00:08:07,160 --> 00:08:11,080 Speaker 1: investors are actually organizing. So typically these markets are very 163 00:08:11,120 --> 00:08:13,800 Speaker 1: you know, maybe you call your friend, maybe you instant 164 00:08:13,800 --> 00:08:17,960 Speaker 1: message someone, but they're fairly unorganized and each actor is 165 00:08:17,960 --> 00:08:21,200 Speaker 1: sort of acting on its own. But Eagle Point Credit 166 00:08:21,640 --> 00:08:25,920 Speaker 1: specifically organized a call in early January to get a 167 00:08:25,920 --> 00:08:28,800 Speaker 1: bunch of equity investors on the phone, and they all 168 00:08:28,880 --> 00:08:32,280 Speaker 1: essentially discussed how they wanted a specific type of transition 169 00:08:32,320 --> 00:08:35,360 Speaker 1: from libor to sover. They wanted this special rate that's 170 00:08:35,400 --> 00:08:38,319 Speaker 1: the maximum rate they can get between the two benchmarks, 171 00:08:38,559 --> 00:08:41,640 Speaker 1: and so they essentially said, okay, guys, we've talked about this. 172 00:08:41,960 --> 00:08:44,200 Speaker 1: Now you should go to the Cello managers, the ones 173 00:08:44,240 --> 00:08:47,640 Speaker 1: actually making these decisions, and ask them to ask for 174 00:08:47,679 --> 00:08:50,480 Speaker 1: this highest version of this rate as these companies try 175 00:08:50,520 --> 00:08:54,000 Speaker 1: to transition. Fascinating. Thank you for breaking that down. Clos 176 00:08:54,040 --> 00:08:56,200 Speaker 1: leverage loans. Let's watch for more news on that, But 177 00:08:56,280 --> 00:09:01,240 Speaker 1: before we go to Rob for a deep dive, into tech. 178 00:09:01,640 --> 00:09:04,480 Speaker 1: Let's ask you, also, Paul It about Twitter, because you've 179 00:09:04,480 --> 00:09:06,920 Speaker 1: been following that one very closely, and they have some 180 00:09:06,960 --> 00:09:09,160 Speaker 1: money that they have to pay on some debt because 181 00:09:09,400 --> 00:09:12,720 Speaker 1: Elon Musk spent billions buying the thing and then breaking 182 00:09:12,720 --> 00:09:15,120 Speaker 1: it all apart. What's going on there? Yes, so the 183 00:09:15,160 --> 00:09:18,360 Speaker 1: first deadline is coming up. Let's rewind for a second. 184 00:09:18,400 --> 00:09:21,920 Speaker 1: When Elon Musk decided to acquire Twitter, he raised thirty 185 00:09:21,960 --> 00:09:24,720 Speaker 1: three point five billion in equity commitments, but he also 186 00:09:24,960 --> 00:09:28,440 Speaker 1: raised roughly twelve billion dollars of debt from a bunch 187 00:09:28,480 --> 00:09:31,200 Speaker 1: of banks. And those banks actually had to fund all 188 00:09:31,200 --> 00:09:33,679 Speaker 1: of that debt themselves because they weren't able to sell 189 00:09:33,720 --> 00:09:37,520 Speaker 1: it to outside investors. So banks are the Twitter lenders 190 00:09:37,600 --> 00:09:40,920 Speaker 1: right now, not like institutional asset managers like we normally see. 191 00:09:41,600 --> 00:09:45,080 Speaker 1: And so you know, before Twitter's interest expense was less 192 00:09:45,080 --> 00:09:47,520 Speaker 1: than one hundred million dollars a year. Now that Elon 193 00:09:47,640 --> 00:09:50,240 Speaker 1: Musk added all this debt onto the company's balance sheet, 194 00:09:50,600 --> 00:09:53,480 Speaker 1: it's annual interest expense is exceeding one point two billion 195 00:09:53,520 --> 00:09:57,160 Speaker 1: dollars a year. So just think about how impactful that 196 00:09:57,280 --> 00:09:59,280 Speaker 1: is for a company that wasn't making a ton of 197 00:09:59,280 --> 00:10:02,240 Speaker 1: money to begin and so the way all this works 198 00:10:02,440 --> 00:10:05,719 Speaker 1: is the first coupons should be coming due roughly three 199 00:10:05,760 --> 00:10:08,920 Speaker 1: months after it closed, which should place it around this Friday. 200 00:10:09,559 --> 00:10:12,360 Speaker 1: So Twitter will have to pay interest of roughly three 201 00:10:12,440 --> 00:10:15,040 Speaker 1: hundred million dollars to a group of banks led by 202 00:10:15,040 --> 00:10:17,959 Speaker 1: Morgan Stanley. There's been some questions are they going to 203 00:10:18,040 --> 00:10:21,040 Speaker 1: pay it? Are they not going to pay it? I think? 204 00:10:21,320 --> 00:10:24,160 Speaker 1: I mean, look, it's Elon Musk, so who knows. He 205 00:10:24,400 --> 00:10:26,200 Speaker 1: is a wild card. He might do things that are 206 00:10:26,280 --> 00:10:29,200 Speaker 1: very unexpected. But there's no real reason for him not 207 00:10:29,280 --> 00:10:32,240 Speaker 1: to pay it at this point because if he did 208 00:10:32,240 --> 00:10:34,760 Speaker 1: not pay this interest, or I should say, if Elon 209 00:10:34,800 --> 00:10:37,240 Speaker 1: Musks not have Twitter pay this interest to the banks, 210 00:10:37,559 --> 00:10:40,280 Speaker 1: then after some period of time, the banks could force 211 00:10:40,320 --> 00:10:42,720 Speaker 1: a default which would force it into bankruptcy, and then 212 00:10:42,720 --> 00:10:45,800 Speaker 1: the banks would probably end up owning Twitter. So really, 213 00:10:45,920 --> 00:10:48,560 Speaker 1: unless it was some kind of strange negotiating tactic, there's 214 00:10:48,600 --> 00:10:51,160 Speaker 1: no reason for Elon Musk to not have this interest 215 00:10:51,160 --> 00:10:53,480 Speaker 1: paid unless he's willing to walk away from the company, 216 00:10:53,480 --> 00:10:55,720 Speaker 1: which I don't think he's there yet. Do we think 217 00:10:55,760 --> 00:10:58,880 Speaker 1: the banks want to own Twitter? I think they do 218 00:10:58,960 --> 00:11:00,800 Speaker 1: not want to own Twitter. I think that they wish 219 00:11:00,840 --> 00:11:04,240 Speaker 1: they could have sold this debt. Banks don't want to 220 00:11:04,280 --> 00:11:06,679 Speaker 1: hold this type of debt. They want to sell it 221 00:11:06,720 --> 00:11:08,400 Speaker 1: and move it off their books and just make a 222 00:11:08,520 --> 00:11:13,240 Speaker 1: huge fee in the tune of multimillion dollars. So they 223 00:11:13,360 --> 00:11:15,160 Speaker 1: want to move it. So I think what they probably 224 00:11:15,200 --> 00:11:18,439 Speaker 1: most sincerely hope is that Elon Musk works a miracle, 225 00:11:18,640 --> 00:11:20,800 Speaker 1: makes Twitter amazing, and then they can offload this debt 226 00:11:20,800 --> 00:11:23,000 Speaker 1: in a few quarters. And the interesting thing is, yeah, 227 00:11:23,000 --> 00:11:28,760 Speaker 1: I covered Twitter, and bondholders made out great. Bondholders had 228 00:11:28,800 --> 00:11:31,120 Speaker 1: a one on one change of control, so not just 229 00:11:31,200 --> 00:11:34,520 Speaker 1: equity holders got paid here, but original bondholders, legacy bond 230 00:11:34,520 --> 00:11:38,439 Speaker 1: holders got paid. So the only ones really who are 231 00:11:38,520 --> 00:11:42,160 Speaker 1: left holding the bag right now is Musk himself with 232 00:11:42,200 --> 00:11:45,920 Speaker 1: all his equity exposure and the banks. And I agree. 233 00:11:46,040 --> 00:11:48,120 Speaker 1: Banks never want to hold on to loans. They want 234 00:11:48,160 --> 00:11:50,199 Speaker 1: to sell them as fast as I can. And if 235 00:11:50,200 --> 00:11:52,760 Speaker 1: there was a bid for those loans right now, they'd 236 00:11:52,760 --> 00:11:56,080 Speaker 1: be gone. Eventually, they'll reach a price where I think 237 00:11:56,200 --> 00:11:58,760 Speaker 1: institutional investors will own them, but it's probably going to 238 00:11:58,800 --> 00:12:01,520 Speaker 1: take a little while. Great story, and we'll be watching 239 00:12:01,520 --> 00:12:04,920 Speaker 1: for your updates. Poor as we hit the deadline for 240 00:12:05,000 --> 00:12:07,640 Speaker 1: repayments and Also, as you said, it's Elon Musk. Anything 241 00:12:07,640 --> 00:12:10,520 Speaker 1: could happen, so it's gonna be exciting times. So let's 242 00:12:10,840 --> 00:12:16,160 Speaker 1: switch gears now, rub rub Shiftman, bloom Bug Intelligence. You 243 00:12:16,280 --> 00:12:19,439 Speaker 1: specialize in the tech sector and that's really where a 244 00:12:19,480 --> 00:12:22,280 Speaker 1: lot of the drama is right now. Um, you know, 245 00:12:22,400 --> 00:12:25,920 Speaker 1: big tech stock and bond returns with significantly negative last year. 246 00:12:26,920 --> 00:12:29,600 Speaker 1: But we're going through earnings. Now what do we expect 247 00:12:29,720 --> 00:12:33,160 Speaker 1: from that? And you know, are the fundamentals deteriorating? And 248 00:12:33,720 --> 00:12:35,360 Speaker 1: you know, what do we expect for this year? What's 249 00:12:35,360 --> 00:12:38,559 Speaker 1: the outlook? Yeah, my world is so much easier than Paulus. 250 00:12:38,640 --> 00:12:41,280 Speaker 1: You know, my companies they sell a lot of gadgets, 251 00:12:41,320 --> 00:12:43,880 Speaker 1: make a lot of money. Stocks go up, bonds go up, 252 00:12:44,120 --> 00:12:46,640 Speaker 1: they sell a lot less stuff, and you have the reverse. 253 00:12:46,960 --> 00:12:52,000 Speaker 1: The reality is there's a huge economy between technology equity 254 00:12:52,040 --> 00:12:56,640 Speaker 1: performance and bond performance. It looks like last year that 255 00:12:56,840 --> 00:12:59,880 Speaker 1: returns were similar. You know, in general big tech was down, 256 00:13:00,040 --> 00:13:03,520 Speaker 1: say twenty five percent, and tech high gratee tech bonds 257 00:13:03,559 --> 00:13:06,400 Speaker 1: were also down twenty to twenty five percent. But the 258 00:13:06,440 --> 00:13:10,760 Speaker 1: reality is mom and pop might be buying Apple or 259 00:13:10,800 --> 00:13:14,120 Speaker 1: Microsoft or Google, but they're not buying their bonds. Institutional 260 00:13:14,120 --> 00:13:17,120 Speaker 1: investors are buying their bonds, and rather than just just 261 00:13:17,320 --> 00:13:23,800 Speaker 1: outright taking rate risk and credit risk, institutional investors hedge. 262 00:13:24,120 --> 00:13:27,920 Speaker 1: So excess returns on tech last year were really like 263 00:13:28,040 --> 00:13:31,000 Speaker 1: three hundred basis points, you know, not that much of 264 00:13:31,000 --> 00:13:33,719 Speaker 1: a loss. The vast majority of loss for bonds or 265 00:13:35,840 --> 00:13:38,720 Speaker 1: we're affected by rising rates. So what do we have 266 00:13:38,760 --> 00:13:41,080 Speaker 1: as we walk into the beginning of this year. We 267 00:13:41,160 --> 00:13:43,720 Speaker 1: have rates that have stabilized to gone down, spreads that 268 00:13:43,760 --> 00:13:47,200 Speaker 1: have stabilized to gone down, and we've got positive returns 269 00:13:47,240 --> 00:13:50,080 Speaker 1: across the board. Lo and behold. We walk into early 270 00:13:50,120 --> 00:13:54,040 Speaker 1: earning season with hopes that the worst is gone, and 271 00:13:54,120 --> 00:13:58,280 Speaker 1: you have Microsoft in Texas Instruments report both huge bellweathers. Right, 272 00:13:58,679 --> 00:14:04,079 Speaker 1: Microsoft has this massive cloud business and they're saying that 273 00:14:04,400 --> 00:14:07,600 Speaker 1: it's going to continue to decelerate next quarter. Texas Centuriance 274 00:14:08,200 --> 00:14:11,120 Speaker 1: is an analog semiconductor business, which means that pretty much 275 00:14:12,000 --> 00:14:16,439 Speaker 1: they sell to every business incorporation that provides any gadget 276 00:14:16,720 --> 00:14:20,400 Speaker 1: that's not a phone or a PC, but pretty much 277 00:14:20,480 --> 00:14:23,520 Speaker 1: everything else. And their business is down as well. So 278 00:14:23,640 --> 00:14:26,920 Speaker 1: it sort of bodes poorly for Industrial America. It boats 279 00:14:27,000 --> 00:14:32,560 Speaker 1: poorly for big tech, whether it's cloud businesses like Amazon 280 00:14:33,120 --> 00:14:36,960 Speaker 1: or Alphabet, and it also continues to bode poorly for 281 00:14:37,360 --> 00:14:42,040 Speaker 1: semiconductors across the board. That being said, credit quality for 282 00:14:42,160 --> 00:14:48,080 Speaker 1: big tech is dramatically better than people perceive equity valuations. 283 00:14:48,080 --> 00:14:52,160 Speaker 1: Equity valuations might be down twenty five thirty five percent, 284 00:14:52,640 --> 00:14:55,840 Speaker 1: but credit quality across the board last year really didn't change, 285 00:14:56,800 --> 00:14:59,040 Speaker 1: and in fact, in many cases it actually got better. 286 00:14:59,640 --> 00:15:02,240 Speaker 1: And I I think that's going to be the model 287 00:15:02,520 --> 00:15:05,520 Speaker 1: for this year, is that we're going to worry when 288 00:15:05,520 --> 00:15:09,520 Speaker 1: we really hit the bottom, and whenever we do, that'll 289 00:15:09,560 --> 00:15:12,360 Speaker 1: define when we can see a long standing rally. But 290 00:15:12,440 --> 00:15:15,480 Speaker 1: in the meantime, tech credit is a place for people 291 00:15:15,560 --> 00:15:18,920 Speaker 1: to put their money, hide, tuck it under a pillow, 292 00:15:19,160 --> 00:15:21,440 Speaker 1: and worry about other things. We're not worried about the 293 00:15:21,440 --> 00:15:23,120 Speaker 1: supply chain though, because that was a really big issue 294 00:15:23,200 --> 00:15:25,560 Speaker 1: last year and there are problems with the China and 295 00:15:25,600 --> 00:15:27,400 Speaker 1: all sorts of other issues around the world. I mean, 296 00:15:27,840 --> 00:15:31,200 Speaker 1: how does that affect this sector. Well, listen, bond folks 297 00:15:31,320 --> 00:15:34,160 Speaker 1: worry about everything, you know. I worry about whether or 298 00:15:34,200 --> 00:15:35,640 Speaker 1: notf the train is going to be on time, or 299 00:15:35,680 --> 00:15:38,120 Speaker 1: how much snows there is going to be tomorrow. So yeah, 300 00:15:38,120 --> 00:15:43,160 Speaker 1: there's Listen, there's lots of macro headwinds, whether it's wars, 301 00:15:43,600 --> 00:15:48,440 Speaker 1: whether it's COVID, whether it's supply, whether it's demand. We're 302 00:15:48,480 --> 00:15:51,880 Speaker 1: always concerned that. Being said, the margin of error for 303 00:15:52,080 --> 00:15:56,840 Speaker 1: big tech is enormous. Like I tend to wonder when 304 00:15:56,960 --> 00:15:59,920 Speaker 1: when we really think about credit quality, does it matter 305 00:16:00,200 --> 00:16:03,480 Speaker 1: if Microsoft has sixty billion of free cash flow this 306 00:16:03,560 --> 00:16:07,200 Speaker 1: year or fifty billion. You know, it does matter, But 307 00:16:07,240 --> 00:16:09,920 Speaker 1: it matters more to the equity holder because they're going 308 00:16:09,960 --> 00:16:12,000 Speaker 1: to get less returned. The bond holder is still going 309 00:16:12,040 --> 00:16:13,960 Speaker 1: to get their coupon. This is not a question of 310 00:16:14,480 --> 00:16:16,800 Speaker 1: Twitter and whether Musk is going to make a coupon payment. 311 00:16:17,040 --> 00:16:20,360 Speaker 1: The vast majority of tech names and large internet names 312 00:16:20,640 --> 00:16:24,560 Speaker 1: our investment grade have tens if not over one hundred 313 00:16:24,560 --> 00:16:28,960 Speaker 1: billion dollars of cash generate tens of billion dollars of 314 00:16:29,040 --> 00:16:31,560 Speaker 1: free cash flow. I do think this is going to 315 00:16:31,560 --> 00:16:34,960 Speaker 1: be a continued down earning cycle. I think revenues are 316 00:16:35,000 --> 00:16:37,080 Speaker 1: going to continue to trend downwards. And what we've seen 317 00:16:37,120 --> 00:16:40,160 Speaker 1: to start off earning season is that we have not 318 00:16:40,240 --> 00:16:45,160 Speaker 1: reached the bottom. Nobody is forecasting yet. When we've seen 319 00:16:45,200 --> 00:16:48,720 Speaker 1: an inflection point in revenues and cash flows. So headwinds 320 00:16:48,800 --> 00:16:50,600 Speaker 1: are going to continue to be out there, but I 321 00:16:50,640 --> 00:16:55,680 Speaker 1: think incrementally relative to the concerns that people had last year, 322 00:16:56,160 --> 00:16:59,680 Speaker 1: the vast majority of the bad news is already baked 323 00:16:59,720 --> 00:17:03,000 Speaker 1: into most of these names. Again, I'm not an equity guy, 324 00:17:03,120 --> 00:17:05,400 Speaker 1: but I think it's mostly from the equity side as 325 00:17:05,400 --> 00:17:07,200 Speaker 1: well as from the credit side. But as you say, 326 00:17:07,200 --> 00:17:09,240 Speaker 1: they've got billions on their balance sheet, why do they 327 00:17:09,280 --> 00:17:11,720 Speaker 1: keep issuing new debt and they issue about one hundred 328 00:17:11,720 --> 00:17:13,399 Speaker 1: billion dollars a year. Yeah, we get to ask that 329 00:17:13,480 --> 00:17:15,840 Speaker 1: question all the time. And you know, part of it 330 00:17:15,920 --> 00:17:18,719 Speaker 1: is weighted average cost of capital issue. You know, if 331 00:17:18,760 --> 00:17:20,960 Speaker 1: your cost of equity is ten percent and your weighted 332 00:17:21,000 --> 00:17:23,399 Speaker 1: average cost of debt is only one percent, you know, 333 00:17:23,520 --> 00:17:26,200 Speaker 1: economics just say, let's issue more debt that's really done 334 00:17:26,200 --> 00:17:29,320 Speaker 1: in a little bit of a lower rate, higher valuation 335 00:17:29,359 --> 00:17:32,760 Speaker 1: and environment. You know, one of the main reasons that 336 00:17:33,720 --> 00:17:39,120 Speaker 1: big tech, whether it's Apple, Microsoft, Google, Amazon, or now 337 00:17:39,240 --> 00:17:43,040 Speaker 1: Meta has come to the market is because they want 338 00:17:43,119 --> 00:17:47,280 Speaker 1: enhanced financial flexibility to buy back stock. We are seeing 339 00:17:47,320 --> 00:17:53,280 Speaker 1: just you know, massive record breaking stock and dividend payments. 340 00:17:53,600 --> 00:17:55,160 Speaker 1: I don't think that's going to end. You know, when 341 00:17:55,200 --> 00:17:58,280 Speaker 1: you see valuations go down, you buy back more. You 342 00:17:58,280 --> 00:18:01,000 Speaker 1: don't need to be more conservative. Apples sitting one hundred 343 00:18:01,040 --> 00:18:03,920 Speaker 1: and seventy billion dollars of cash, they've got nothing to buy. 344 00:18:04,320 --> 00:18:06,919 Speaker 1: What do you do with the money? You give it 345 00:18:06,920 --> 00:18:09,080 Speaker 1: back to shareholders, and you give it back in size. 346 00:18:09,240 --> 00:18:11,760 Speaker 1: You know, we've projected for a name like Apple, over 347 00:18:11,800 --> 00:18:13,480 Speaker 1: the next couple of years, they're going to get to 348 00:18:13,560 --> 00:18:16,400 Speaker 1: a point that in the past, in the past decade, 349 00:18:16,480 --> 00:18:19,159 Speaker 1: they're gonna have given back a trillion dollars of cash 350 00:18:19,520 --> 00:18:23,160 Speaker 1: in both share buybacks and dividends. So you borrow more 351 00:18:23,440 --> 00:18:25,480 Speaker 1: and give it to shareholders, and that's, you know, all 352 00:18:25,400 --> 00:18:28,520 Speaker 1: a risk that bondholders always have to take. I think 353 00:18:28,520 --> 00:18:30,680 Speaker 1: we're going to see more of that. There's little need 354 00:18:30,760 --> 00:18:33,040 Speaker 1: for M and A financing, though there are a couple 355 00:18:33,119 --> 00:18:35,080 Speaker 1: deals out there that need to be funded. You know. 356 00:18:35,840 --> 00:18:40,440 Speaker 1: One of the tails is like is Microsoft is trying 357 00:18:40,440 --> 00:18:42,840 Speaker 1: to buy Activation for sixty nine billion dollars of cash. 358 00:18:43,080 --> 00:18:45,840 Speaker 1: They don't have a bank loan, they're not relying on 359 00:18:45,880 --> 00:18:49,680 Speaker 1: the capital markets for that. They're sitting on close to 360 00:18:49,720 --> 00:18:51,640 Speaker 1: one hundred billion dollars of cash. They just write the check, 361 00:18:51,920 --> 00:18:54,840 Speaker 1: But what do they do afterwards? To me, they write 362 00:18:54,840 --> 00:18:56,600 Speaker 1: the check, and then they go out and issue fifty 363 00:18:56,600 --> 00:18:59,120 Speaker 1: billion of bonds and reload on cash to either give 364 00:18:59,160 --> 00:19:02,560 Speaker 1: back to shaholders or do some form of other M 365 00:19:02,640 --> 00:19:05,440 Speaker 1: and A. In some of the big tech space, you know, 366 00:19:05,480 --> 00:19:08,639 Speaker 1: if you're an alphabet or a meta or even an Apple, 367 00:19:08,920 --> 00:19:12,040 Speaker 1: the government is going to try to block everything, so 368 00:19:12,119 --> 00:19:14,560 Speaker 1: it's hard to write a big enough check for a 369 00:19:14,600 --> 00:19:17,000 Speaker 1: transaction that's going to put your balance sheet at risk. 370 00:19:17,240 --> 00:19:19,320 Speaker 1: So I think we continue to see this pattern, so 371 00:19:19,440 --> 00:19:22,800 Speaker 1: it's going to be pure opportunistic financing. I think as 372 00:19:23,320 --> 00:19:28,320 Speaker 1: soon as rates start going down again, even though companies 373 00:19:28,359 --> 00:19:32,440 Speaker 1: don't need it, tech borrowing is going to click back 374 00:19:32,480 --> 00:19:35,840 Speaker 1: over that hundred billion dollars annually that we've seen over 375 00:19:35,880 --> 00:19:39,560 Speaker 1: the past decade. Are there any particular issues or parts 376 00:19:39,640 --> 00:19:41,560 Speaker 1: of the tech sector that you like and you think 377 00:19:41,600 --> 00:19:45,280 Speaker 1: we'll outperform over the next twelve months. Yeah, listen, I 378 00:19:45,280 --> 00:19:48,880 Speaker 1: think tech overall is going to outperform, particularly high quality tech, 379 00:19:49,200 --> 00:19:51,160 Speaker 1: And I think you want to take a Barbell approach. 380 00:19:51,400 --> 00:19:53,560 Speaker 1: You know that there's there's sort of two ways to 381 00:19:53,600 --> 00:19:57,160 Speaker 1: play it. Super high quality names that are really liquid, 382 00:19:57,280 --> 00:20:02,640 Speaker 1: they trade tight, but have limited volatility. That Apple Microsoft, Google, 383 00:20:03,400 --> 00:20:06,720 Speaker 1: and even Amazon Amazons is a ton of debt. They've 384 00:20:06,720 --> 00:20:09,520 Speaker 1: had so much in terms of warnings of their business, 385 00:20:09,840 --> 00:20:13,159 Speaker 1: cash flying out the door, and bonds barely move. So 386 00:20:13,200 --> 00:20:15,040 Speaker 1: I think you move up the quality for names like that, 387 00:20:15,320 --> 00:20:17,520 Speaker 1: and then you move down in quality to the triple 388 00:20:17,560 --> 00:20:20,919 Speaker 1: B space where names have either levered up for M 389 00:20:20,920 --> 00:20:23,520 Speaker 1: and A or buybacks, but know that they've reached the 390 00:20:23,600 --> 00:20:26,880 Speaker 1: point where they can't put their their investment grade ratings 391 00:20:26,920 --> 00:20:30,520 Speaker 1: at risk. And that's a broad calm or an intel. 392 00:20:31,400 --> 00:20:36,919 Speaker 1: You know, massive balance sheets, large transactions that that's levered up. 393 00:20:36,960 --> 00:20:41,880 Speaker 1: That's levered them up. They've borrowed a ton, but spreads 394 00:20:41,960 --> 00:20:45,760 Speaker 1: are now much wider than other triple B industrials. Yet 395 00:20:45,960 --> 00:20:50,320 Speaker 1: fundamentals suggest that they can deliver pretty rapidly. And you 396 00:20:50,359 --> 00:20:54,040 Speaker 1: know the benefit that you have from buying large triple 397 00:20:54,160 --> 00:20:57,479 Speaker 1: B tech that's been aggressive is that if you have 398 00:20:57,600 --> 00:21:00,920 Speaker 1: fifty billion, seventy five billion, one hundred billion dollars a debt, 399 00:21:01,400 --> 00:21:04,640 Speaker 1: you cannot be a junkraded company because you cannot stay 400 00:21:04,640 --> 00:21:07,680 Speaker 1: in business. You're seeing that with Twitter on a much 401 00:21:07,720 --> 00:21:11,120 Speaker 1: smaller scale. So you get to that point where you 402 00:21:11,160 --> 00:21:13,919 Speaker 1: push the boundaries of low trip will be and then 403 00:21:13,960 --> 00:21:20,080 Speaker 1: everybody becomes a bondholder's best friend, and you deliver. Bonditors 404 00:21:20,160 --> 00:21:22,440 Speaker 1: can take advantage of that. You add to those names, 405 00:21:22,480 --> 00:21:24,640 Speaker 1: and as soon as they go through that delivering process 406 00:21:24,840 --> 00:21:27,600 Speaker 1: and they start stabilizing and they get ready to reload 407 00:21:27,640 --> 00:21:29,920 Speaker 1: on that next deal or that next big buyback, that's 408 00:21:29,960 --> 00:21:32,440 Speaker 1: when you get out. But you can pick incremental yield 409 00:21:32,480 --> 00:21:34,840 Speaker 1: down the curve, and you can get safety up the curve. 410 00:21:35,200 --> 00:21:37,480 Speaker 1: So just one area of jug and that popped out 411 00:21:37,480 --> 00:21:39,960 Speaker 1: when you were talking barbell approach. What on earth do 412 00:21:39,960 --> 00:21:42,840 Speaker 1: you mean by that? Well, you know, listen, you can 413 00:21:42,880 --> 00:21:44,960 Speaker 1: look at my physique and you tell a workout a ton. 414 00:21:45,280 --> 00:21:48,679 Speaker 1: You know, when you load up a giant barbell, you 415 00:21:48,720 --> 00:21:51,560 Speaker 1: put heavy weights on both sides, it sort of bends 416 00:21:51,600 --> 00:21:56,280 Speaker 1: in the middle and both ends stay much lower to 417 00:21:56,320 --> 00:21:59,560 Speaker 1: the ground. That's what we're talking about. You can buy 418 00:21:59,600 --> 00:22:03,640 Speaker 1: both ends of the spectrum that offer potentially lower risk 419 00:22:04,040 --> 00:22:07,240 Speaker 1: and higher reward without all stress of being in the 420 00:22:07,240 --> 00:22:10,480 Speaker 1: middle of those names that are smaller, that have much 421 00:22:10,520 --> 00:22:13,840 Speaker 1: more violatility, that could bounce around that much more. But 422 00:22:13,880 --> 00:22:16,359 Speaker 1: the the outlet you're giving is quite rosy. One we're 423 00:22:16,400 --> 00:22:19,320 Speaker 1: potentially heading into a recession. You know, the inflation hasn't 424 00:22:19,320 --> 00:22:22,520 Speaker 1: gone away, as you mentioned, all the geopolitical noise out there, 425 00:22:23,480 --> 00:22:28,360 Speaker 1: and you know, earnings maybe maybe getting pretty tough. And 426 00:22:28,440 --> 00:22:30,720 Speaker 1: also we've had a huge rally in the first month 427 00:22:30,760 --> 00:22:33,840 Speaker 1: of the year, I mean, the best best January for 428 00:22:33,960 --> 00:22:36,960 Speaker 1: investment grade globally. Ever, it looks like based on our data, 429 00:22:37,080 --> 00:22:39,960 Speaker 1: so is there still value and you know, is there's 430 00:22:39,960 --> 00:22:42,679 Speaker 1: still room to perform better even at that level or 431 00:22:42,720 --> 00:22:44,679 Speaker 1: do we expected to sort of cool off a bit 432 00:22:44,840 --> 00:22:47,680 Speaker 1: from here? Yeah. Listen, if I had the crystal ball 433 00:22:47,760 --> 00:22:50,280 Speaker 1: that could call returns, I wouldn't be sitting in this seat. 434 00:22:50,320 --> 00:22:53,840 Speaker 1: I'd be sitting in a much more leathery, plush sort 435 00:22:53,880 --> 00:22:57,280 Speaker 1: of seat. That being said, I think, you know, in 436 00:22:58,040 --> 00:23:05,280 Speaker 1: this space, the risk is reasonably limited, excess financial flexibility, 437 00:23:06,600 --> 00:23:11,200 Speaker 1: high quality, free cash flow. I do think, like you know, 438 00:23:11,640 --> 00:23:17,879 Speaker 1: the street gets way ahead of where fundamentals are. The 439 00:23:18,119 --> 00:23:21,880 Speaker 1: you know, stock and bond prices saw this last year. 440 00:23:22,200 --> 00:23:25,000 Speaker 1: The vast majority of the pain was taken well before 441 00:23:25,400 --> 00:23:27,920 Speaker 1: it showed up in fundamentals. So now that we start 442 00:23:27,960 --> 00:23:32,280 Speaker 1: to see fundamentals finally declining, it's really no surprise. And 443 00:23:32,320 --> 00:23:34,480 Speaker 1: that's where when I say we look for hints of 444 00:23:35,040 --> 00:23:37,800 Speaker 1: this inflection point, because I think once you find that 445 00:23:37,960 --> 00:23:42,120 Speaker 1: bottom is when things get much much better and valuations 446 00:23:42,160 --> 00:23:47,080 Speaker 1: improve dramatically. So I think even though the fundamentals are 447 00:23:47,320 --> 00:23:50,200 Speaker 1: are really starting to show up as negative, it's actually 448 00:23:50,320 --> 00:23:53,760 Speaker 1: a brighter point when it comes to valuation, particularly for 449 00:23:53,840 --> 00:23:56,720 Speaker 1: those that have higher credit quality and don't have that 450 00:23:56,800 --> 00:23:59,760 Speaker 1: same sort of downsize risk. So you know, I know 451 00:24:00,000 --> 00:24:04,320 Speaker 1: it sounds overly bullish. Um, it's because these names are 452 00:24:04,560 --> 00:24:07,400 Speaker 1: super super well positioned. You know, you could even throw 453 00:24:07,480 --> 00:24:11,160 Speaker 1: out names like I cover China. Um, names like Ali 454 00:24:11,240 --> 00:24:15,280 Speaker 1: Baba and ten Cent that got absolutely annihilated over the 455 00:24:15,440 --> 00:24:18,359 Speaker 1: last two years, you know. And what's happened over the 456 00:24:18,480 --> 00:24:21,000 Speaker 1: last just a few months. You know, there's been this 457 00:24:21,359 --> 00:24:25,240 Speaker 1: huge uptick in both bond and equity prices, just on 458 00:24:25,320 --> 00:24:28,399 Speaker 1: the hope that the worst is starting to come to 459 00:24:28,520 --> 00:24:32,760 Speaker 1: the end. You're still seeing um negative fundamentals, but once 460 00:24:32,840 --> 00:24:35,880 Speaker 1: you realize that the downside is mostly out of the way, 461 00:24:35,880 --> 00:24:39,000 Speaker 1: that's when markets rally. So um, you know, I listen, 462 00:24:39,040 --> 00:24:40,440 Speaker 1: I don't I don't know what returns are going to 463 00:24:40,480 --> 00:24:43,360 Speaker 1: be over the next two minutes, two hours, two days, 464 00:24:43,400 --> 00:24:45,840 Speaker 1: through months, two years, But I do know this space 465 00:24:46,240 --> 00:24:51,960 Speaker 1: is much better position than generic industrials and that you know, 466 00:24:52,080 --> 00:24:55,320 Speaker 1: these companies that sell tens hundreds of billions of dollars 467 00:24:55,359 --> 00:24:58,080 Speaker 1: of goods do so for a reason. They've got they've 468 00:24:58,119 --> 00:25:01,040 Speaker 1: got the products that people want, got the financial muscle 469 00:25:01,080 --> 00:25:05,440 Speaker 1: to take smaller players out of business. They're running pseudo monopolies, 470 00:25:05,840 --> 00:25:08,200 Speaker 1: and as soon as demand picks up, they're going to 471 00:25:08,280 --> 00:25:10,720 Speaker 1: get at all. So it's just a matter of more 472 00:25:11,040 --> 00:25:16,880 Speaker 1: more cyclical concerns than secular ones. Okay, thank you. But also, 473 00:25:17,000 --> 00:25:19,920 Speaker 1: being a journalist, I'm extremely pessimistic just by nature, and 474 00:25:20,040 --> 00:25:22,440 Speaker 1: also i'm a credit journalist as well as that just 475 00:25:22,520 --> 00:25:26,320 Speaker 1: makes me doubly pessimistic. And that's being British also makes 476 00:25:26,359 --> 00:25:30,560 Speaker 1: me even more pessimistic. But that's what makes markets. Apple 477 00:25:30,880 --> 00:25:36,000 Speaker 1: sorry no alphabets. Google recently sued by the Department of Justice, 478 00:25:36,160 --> 00:25:39,119 Speaker 1: and you know that's not good news. Surely, what does 479 00:25:39,119 --> 00:25:41,080 Speaker 1: that all mean? Yeah, I hate to sort of pooh 480 00:25:41,080 --> 00:25:43,440 Speaker 1: pooh what seems to be pretty bad news. You know 481 00:25:43,480 --> 00:25:45,640 Speaker 1: a lot of these companies also, you know, not only 482 00:25:45,680 --> 00:25:47,480 Speaker 1: are they going through legal fights with the government, but 483 00:25:47,520 --> 00:25:49,359 Speaker 1: they they've been firing a bunch of people. You know, 484 00:25:49,440 --> 00:25:51,679 Speaker 1: oftentimes you see stocks rally when you fire peoplecause you're 485 00:25:51,680 --> 00:25:54,640 Speaker 1: gonna save costs. You know, generally those moves are sort 486 00:25:54,680 --> 00:25:57,639 Speaker 1: of small when when it comes to legal risk. Listen, 487 00:25:57,880 --> 00:26:01,200 Speaker 1: legal risk takes a long time to play out, years, 488 00:26:01,320 --> 00:26:03,320 Speaker 1: if not decades. You know. A lot of this is 489 00:26:03,440 --> 00:26:08,640 Speaker 1: political theater. Tech names, whether it's it's meta, Apple, Microsoft, 490 00:26:10,119 --> 00:26:15,120 Speaker 1: Alphabet have been under scrutiny um for a long time, 491 00:26:15,480 --> 00:26:16,919 Speaker 1: you know, but they also have a lot of political 492 00:26:17,040 --> 00:26:19,560 Speaker 1: capital on their side. And I think that you know 493 00:26:19,600 --> 00:26:22,000 Speaker 1: that when the government wants to show strength, they they 494 00:26:22,440 --> 00:26:24,919 Speaker 1: they hire lawyers and start a lawsuit. In the end. 495 00:26:25,200 --> 00:26:27,320 Speaker 1: You know, do I think Alphabet's going to get broken up? No? 496 00:26:27,840 --> 00:26:30,000 Speaker 1: Do I think they'll have to change some business practices 497 00:26:30,040 --> 00:26:32,680 Speaker 1: and maybe pay a small fine. Yes, we've seen this 498 00:26:32,840 --> 00:26:35,320 Speaker 1: game before. It takes a long time to play out, 499 00:26:36,520 --> 00:26:38,640 Speaker 1: you know. I actually think when when names trade down 500 00:26:38,720 --> 00:26:42,280 Speaker 1: on something like that, it's more opportunity than than true 501 00:26:42,320 --> 00:26:45,040 Speaker 1: downside risk. You actually saw Alphabet barely budged when these 502 00:26:45,040 --> 00:26:48,000 Speaker 1: headlines came out. Also, this has been in the works 503 00:26:48,119 --> 00:26:51,040 Speaker 1: now for you know, more than a year, so it 504 00:26:51,119 --> 00:26:54,440 Speaker 1: hasn't really surprised anybody. Um, So we're looking for like 505 00:26:54,960 --> 00:26:57,639 Speaker 1: new real news I just don't think this is it 506 00:26:57,880 --> 00:27:00,919 Speaker 1: from a credit perspective. You know, Alphabet only has um 507 00:27:01,480 --> 00:27:03,600 Speaker 1: you know, a little over ten billion of bonds outstanding. 508 00:27:03,640 --> 00:27:07,320 Speaker 1: They trade supertight with double A ratings. I just don't 509 00:27:07,359 --> 00:27:10,080 Speaker 1: see bond spreads going anywhere. And as you mentioned, layoffs 510 00:27:10,119 --> 00:27:13,080 Speaker 1: are kind of piling up. Is that good for credit? Yeah, 511 00:27:13,080 --> 00:27:15,200 Speaker 1: it's you know, it's one of those other things. You know, 512 00:27:15,240 --> 00:27:17,280 Speaker 1: it's bad for main street, good for wall streets type 513 00:27:17,320 --> 00:27:19,600 Speaker 1: of thing. It's certainly an indication that demand is on 514 00:27:19,680 --> 00:27:22,760 Speaker 1: the decline and you want to save costs. The reality is, though, 515 00:27:23,000 --> 00:27:24,280 Speaker 1: you know, when you start looking at some of these 516 00:27:24,320 --> 00:27:27,959 Speaker 1: companies with layoffs. You know, Amazon for instance, moved layoffs 517 00:27:28,040 --> 00:27:30,840 Speaker 1: up from ten thousand to eighteen thousand. You know, but 518 00:27:31,440 --> 00:27:33,760 Speaker 1: take take a look. You know, they hired five hundred 519 00:27:33,800 --> 00:27:37,040 Speaker 1: thousand people since at the beginning of COVID, so you know, 520 00:27:37,119 --> 00:27:40,680 Speaker 1: from a from a percentage of workers perspective, it's pretty 521 00:27:40,680 --> 00:27:44,120 Speaker 1: close to zero impact. When you think about where they're 522 00:27:44,160 --> 00:27:47,160 Speaker 1: positioned relative to two years ago, they still have many 523 00:27:47,240 --> 00:27:50,040 Speaker 1: more employees. So the rate of growth is likely to slow. 524 00:27:50,080 --> 00:27:51,960 Speaker 1: That doesn't mean growth is going to slow, you know, 525 00:27:52,119 --> 00:27:53,840 Speaker 1: So I listen, I hate to see layoffs. It's not 526 00:27:53,920 --> 00:27:56,720 Speaker 1: good for anyone. But once when it comes to security, 527 00:27:56,760 --> 00:28:00,320 Speaker 1: pricing and credit, you know, unfortunately it is generally received 528 00:28:00,320 --> 00:28:04,280 Speaker 1: as positive. Thank you very much, Robert Schiffman. Bloomberg Intelligence 529 00:28:04,320 --> 00:28:07,560 Speaker 1: will watch your analysis of the tech sector with great interest. 530 00:28:08,359 --> 00:28:10,280 Speaker 1: And to just wrap things up here, I mean, as 531 00:28:10,320 --> 00:28:12,680 Speaker 1: I mentioned at the beginning, credit markets have done a 532 00:28:12,760 --> 00:28:16,200 Speaker 1: huge amount this year. Every market has really rallied, and 533 00:28:16,520 --> 00:28:18,720 Speaker 1: that's from a very low base because last year was 534 00:28:18,720 --> 00:28:20,480 Speaker 1: such a terrible year and everyone wants to forget that 535 00:28:20,520 --> 00:28:23,200 Speaker 1: and move on. But it seems like everyone only wants 536 00:28:23,240 --> 00:28:24,600 Speaker 1: to look at the good news now and they only 537 00:28:24,640 --> 00:28:27,119 Speaker 1: want to think about what could be bullish for for 538 00:28:27,480 --> 00:28:30,719 Speaker 1: this sector, this asset class. I'm wondering, you know, from 539 00:28:30,760 --> 00:28:32,920 Speaker 1: your perspective, both of you. I mean, you're you're watching 540 00:28:32,960 --> 00:28:34,600 Speaker 1: this day and day out. I'm sort of buried in 541 00:28:34,680 --> 00:28:38,520 Speaker 1: it myself. What is your biggest fear right now in 542 00:28:38,680 --> 00:28:40,640 Speaker 1: terms of the next phase of this cycle? And we 543 00:28:40,720 --> 00:28:43,920 Speaker 1: are we going to suddenly be booted off our track? 544 00:28:44,080 --> 00:28:46,560 Speaker 1: Is the is the bullish thing suddenly going to go bust? 545 00:28:46,960 --> 00:28:50,600 Speaker 1: How does this move in the next you know, three 546 00:28:50,800 --> 00:28:52,960 Speaker 1: three months or so. What's what's your view, Paula Paula 547 00:28:53,000 --> 00:28:56,800 Speaker 1: Selexon from Bloomberg News. I think a lot of investors 548 00:28:56,880 --> 00:29:00,239 Speaker 1: are keen to see what private companies report. The way 549 00:29:00,320 --> 00:29:03,080 Speaker 1: debt works is a lot of private companies issue debt 550 00:29:03,120 --> 00:29:05,960 Speaker 1: there and so these investors have access to private company earnings. 551 00:29:06,520 --> 00:29:08,640 Speaker 1: They come out after public company earnings, So it'll be 552 00:29:08,680 --> 00:29:11,360 Speaker 1: about a month or so after the current rush we're 553 00:29:11,400 --> 00:29:13,640 Speaker 1: seeing in the market, and that will give us a 554 00:29:13,680 --> 00:29:16,239 Speaker 1: really good clue into just how impacted these companies are 555 00:29:16,320 --> 00:29:20,320 Speaker 1: by really two things. Recession slash potential recession how bad 556 00:29:20,480 --> 00:29:23,160 Speaker 1: you know that's affecting revenues. But then also the cost 557 00:29:23,240 --> 00:29:25,000 Speaker 1: of borrowing has increased a lot. A lot of these 558 00:29:25,040 --> 00:29:28,440 Speaker 1: companies have floating rate debts, so as the FED increases 559 00:29:28,520 --> 00:29:32,280 Speaker 1: interest rates, their actual interest to every quarter has increased 560 00:29:32,280 --> 00:29:34,200 Speaker 1: a lot, and so that really eats into cash flow. 561 00:29:34,240 --> 00:29:36,560 Speaker 1: So I think there's a very big question mark over 562 00:29:36,960 --> 00:29:38,440 Speaker 1: who are going to be the losers in that and 563 00:29:38,440 --> 00:29:40,440 Speaker 1: who are not going to be able to support their 564 00:29:40,480 --> 00:29:43,240 Speaker 1: debt loads going forward. Yeah, I think the FED is 565 00:29:43,240 --> 00:29:46,000 Speaker 1: a positive catalyst. You know, just like I said, as 566 00:29:46,000 --> 00:29:48,160 Speaker 1: you start getting near the bottom, if the FED starts 567 00:29:48,200 --> 00:29:51,080 Speaker 1: slowing down and we go to twenty five basis points 568 00:29:51,240 --> 00:29:54,800 Speaker 1: for from fifty basis points increases with hints that they're 569 00:29:54,840 --> 00:29:57,680 Speaker 1: coming to an end. You know. I think if you 570 00:29:57,760 --> 00:30:00,640 Speaker 1: see a rate rally, you know, it's obviously enorm positive 571 00:30:00,760 --> 00:30:04,600 Speaker 1: for credit. From a fundamental perspective, I don't see fundamentals 572 00:30:04,680 --> 00:30:08,400 Speaker 1: getting much better over the next few quarters. But again 573 00:30:08,440 --> 00:30:12,760 Speaker 1: we can separate fundamentals, um from from valuation. You know, 574 00:30:13,320 --> 00:30:16,880 Speaker 1: it's UM. I think the biggest concerns that we that 575 00:30:17,040 --> 00:30:20,440 Speaker 1: we have are not things like true supply and demand 576 00:30:20,640 --> 00:30:25,440 Speaker 1: there they're big exogenous changes um UM, like war and 577 00:30:25,640 --> 00:30:30,040 Speaker 1: covid um as is I think, UM, you know, as 578 00:30:30,120 --> 00:30:33,520 Speaker 1: those issues hopefully start to go into the background, UM, 579 00:30:33,880 --> 00:30:36,680 Speaker 1: there's there's meaningfully more upside. And I just think people 580 00:30:36,720 --> 00:30:40,240 Speaker 1: always need to take a step back to last big 581 00:30:40,400 --> 00:30:43,320 Speaker 1: dynamic shifts in the market, you know, and the real 582 00:30:43,440 --> 00:30:46,880 Speaker 1: last one, um it was the beginning of covid um. 583 00:30:47,160 --> 00:30:49,000 Speaker 1: Market bounced back very quickly. If we go back to 584 00:30:49,080 --> 00:30:50,880 Speaker 1: the last one and go back to OA to the 585 00:30:50,880 --> 00:30:54,480 Speaker 1: financial crisis, and go back to Paul thies um collateralized 586 00:30:54,520 --> 00:30:56,840 Speaker 1: issues from the housing market that really crushed us. You know, 587 00:30:56,960 --> 00:30:59,560 Speaker 1: banks are in much better financial position than they were 588 00:30:59,720 --> 00:31:02,440 Speaker 1: you know eight, corporate bounce sheets are in much better 589 00:31:02,520 --> 00:31:06,120 Speaker 1: financial position than they are in Oh eight. Rates historically 590 00:31:06,160 --> 00:31:09,200 Speaker 1: are still reasonably low, and the cost of borrowing is 591 00:31:09,280 --> 00:31:12,040 Speaker 1: historically low. And that's why I think when we start 592 00:31:12,080 --> 00:31:15,000 Speaker 1: talking about recession, you're talking about not a real deep recession. 593 00:31:16,360 --> 00:31:20,680 Speaker 1: So it's you know, what are those real risks to me? There? There? 594 00:31:20,920 --> 00:31:23,840 Speaker 1: It's the FED number one, and then it's always that 595 00:31:23,960 --> 00:31:27,400 Speaker 1: exogenous risk. And if you can sort of avoid the 596 00:31:27,520 --> 00:31:33,600 Speaker 1: Fed getting meaningfully more hawkish, and I think fundamentals as 597 00:31:33,640 --> 00:31:35,880 Speaker 1: we get to the back half the year start getting better, 598 00:31:36,400 --> 00:31:38,120 Speaker 1: you know, and it sets us up for I think 599 00:31:38,160 --> 00:31:40,600 Speaker 1: a strong second half of the year from a credit 600 00:31:40,680 --> 00:31:45,000 Speaker 1: performance perspective, as well as twenty twenty four. Thank you 601 00:31:45,120 --> 00:31:46,960 Speaker 1: very much. Rob Schiffman, who looks at the tech sects 602 00:31:46,960 --> 00:31:49,400 Speaker 1: of a Bloomberg intelligence ending on a high notes, also 603 00:31:49,520 --> 00:31:53,120 Speaker 1: thank you very much, indeed too, PAULA Selson, credit reporter 604 00:31:53,280 --> 00:31:56,560 Speaker 1: in New York City. I'm James Crumby at Bloomberg News, 605 00:31:57,120 --> 00:31:58,880 Speaker 1: and thank you very much for joining us for they 606 00:31:58,960 --> 00:31:59,560 Speaker 1: Credit Edge