1 00:00:17,840 --> 00:00:20,360 Speaker 1: Hello, and welcome to the Credit Edge, a weekly markets podcast. 2 00:00:20,440 --> 00:00:22,960 Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg. 3 00:00:23,239 --> 00:00:25,599 Speaker 2: Hi, this is Spencer Cutter. I'm a senior credit analyst 4 00:00:25,600 --> 00:00:28,159 Speaker 2: with Bloomberg Intelligence. And today we are thrilled to have 5 00:00:28,240 --> 00:00:31,320 Speaker 2: with us a legitimate fixed income legend, mister Marty Fritzen. 6 00:00:31,440 --> 00:00:33,400 Speaker 2: He's the youngest person ever to be inducted in the 7 00:00:33,440 --> 00:00:37,440 Speaker 2: Fixed Income Society Hall of Fame. Marty's Wall Street fixed 8 00:00:37,479 --> 00:00:40,800 Speaker 2: income background Drake dates back to the nineteen seventies and 9 00:00:40,800 --> 00:00:44,000 Speaker 2: includes stints at such firms as Solomon Brothers, Morgan Stanley, 10 00:00:44,040 --> 00:00:47,159 Speaker 2: and Merrill Lynch, where he was instrumental in the development 11 00:00:47,159 --> 00:00:50,159 Speaker 2: of Merrill's highield bond Index. He's since gone out on 12 00:00:50,159 --> 00:00:52,600 Speaker 2: his own and now runs fritz en Vision, which provides 13 00:00:52,640 --> 00:00:55,600 Speaker 2: empirically based, value focused investment recommendations. 14 00:00:55,760 --> 00:00:58,880 Speaker 1: Yes, Spencer, As you mentioned, global markets are being royal 15 00:00:58,960 --> 00:01:02,600 Speaker 1: by trade wars and concerns about Federal Reserve independence. US 16 00:01:02,640 --> 00:01:05,559 Speaker 1: equity markets and the dollar have both dropped. Bond yields 17 00:01:05,560 --> 00:01:07,480 Speaker 1: are also higher this month. There's no safe haven bid 18 00:01:07,480 --> 00:01:10,119 Speaker 1: for treasuries as there has been another periods of prior 19 00:01:10,280 --> 00:01:13,120 Speaker 1: volatility and global investors are trying to find alternatives to 20 00:01:13,240 --> 00:01:17,280 Speaker 1: US assets As the storm rages on, Analysts meanwhile slashing 21 00:01:17,319 --> 00:01:20,600 Speaker 1: earnings estimates, fearing that a severe economic slowdown is coming 22 00:01:20,640 --> 00:01:23,400 Speaker 1: as a result of tariffs, and the risk of stagflation, 23 00:01:23,520 --> 00:01:26,360 Speaker 1: which would be very bad for corporate borrowers, is rising. 24 00:01:26,880 --> 00:01:29,280 Speaker 1: Despite all of this, the credit market reaction has been 25 00:01:29,319 --> 00:01:33,840 Speaker 1: relatively muted. So given a very troubling macro and geopolitical outlook, 26 00:01:33,880 --> 00:01:37,559 Speaker 1: we do expect to see a repricing wider in credit, 27 00:01:37,680 --> 00:01:39,840 Speaker 1: especially in high yeld bonds and loans. I do want 28 00:01:39,840 --> 00:01:42,160 Speaker 1: to start there, Marty, because one of the data sets 29 00:01:42,200 --> 00:01:44,040 Speaker 1: you are known for is a model of high yield 30 00:01:44,080 --> 00:01:47,080 Speaker 1: bond fair value. What do all the data tell us 31 00:01:47,120 --> 00:01:50,240 Speaker 1: about high yield bond fair value right now? 32 00:01:50,760 --> 00:01:56,640 Speaker 3: Well, there's a lot wrapped up in that question. When 33 00:01:56,640 --> 00:01:59,960 Speaker 3: you talk about fair value, you're not really that's sure 34 00:02:00,280 --> 00:02:05,560 Speaker 3: making a market forecast. If the economy goes into recession, 35 00:02:05,640 --> 00:02:11,840 Speaker 3: particularly in a way that's not anticipated for an advance, 36 00:02:13,120 --> 00:02:19,240 Speaker 3: high old will perform poorly. It's and I think there 37 00:02:19,320 --> 00:02:23,000 Speaker 3: is a kind of a false confidence about how far 38 00:02:23,240 --> 00:02:28,119 Speaker 3: it can fall. Notion is that well, the credit mix, 39 00:02:28,200 --> 00:02:31,680 Speaker 3: the ratings mix, of the High Old Index is close 40 00:02:31,720 --> 00:02:37,000 Speaker 3: to the best it's ever been. That comparison really is 41 00:02:37,760 --> 00:02:42,120 Speaker 3: fairly strong. If you look at the history of the 42 00:02:42,440 --> 00:02:46,080 Speaker 3: High Old Index going back to nineteen eighty six, or 43 00:02:48,080 --> 00:02:51,600 Speaker 3: where you get a more specific rating breakdown from nineteen 44 00:02:51,680 --> 00:02:55,240 Speaker 3: ninety six onward, it hasn't changed all that much in 45 00:02:55,280 --> 00:03:00,120 Speaker 3: the last decade. And we had a recession in twenty twenty. 46 00:03:00,600 --> 00:03:05,200 Speaker 3: The spread on the High Old Index, and I use 47 00:03:05,280 --> 00:03:08,240 Speaker 3: here the option adjusted spread on the ice B of 48 00:03:08,240 --> 00:03:13,480 Speaker 3: a US High Old Index that did get to over 49 00:03:13,520 --> 00:03:17,080 Speaker 3: one thousand, close to eleven hundred in that very brief 50 00:03:17,080 --> 00:03:23,440 Speaker 3: recession of twenty twenty. The percentage of double b's is 51 00:03:23,480 --> 00:03:29,120 Speaker 3: a little bit higher than it was there the inconveniently 52 00:03:29,200 --> 00:03:32,560 Speaker 3: for those making such arguments, the triple C and lower 53 00:03:32,560 --> 00:03:35,840 Speaker 3: component is also slightly higher than it was when you 54 00:03:35,960 --> 00:03:42,120 Speaker 3: net it all out. If the spreads on the rating categories, 55 00:03:42,640 --> 00:03:47,840 Speaker 3: which weighted by those their representation in the High Held Index, 56 00:03:48,800 --> 00:03:52,760 Speaker 3: produce the spread on the index as a whole, you'll 57 00:03:52,760 --> 00:03:56,560 Speaker 3: get to about the same actually a few basis points 58 00:03:56,640 --> 00:04:00,520 Speaker 3: higher by my calculation than in the two So this 59 00:04:00,640 --> 00:04:03,560 Speaker 3: idea that well, we've had this radical improvement in the 60 00:04:03,640 --> 00:04:06,120 Speaker 3: quality of the index, and you can throw out all 61 00:04:06,240 --> 00:04:10,880 Speaker 3: history as far as how far spreads can go. Now 62 00:04:10,920 --> 00:04:14,360 Speaker 3: that is, does assume that a double bee of today 63 00:04:15,000 --> 00:04:17,640 Speaker 3: is similar to a double bee of just five years ago. 64 00:04:17,680 --> 00:04:20,559 Speaker 3: I mean, if you were to say, oh, well, let's 65 00:04:20,600 --> 00:04:23,560 Speaker 3: compare it to double b's of twenty five years ago, 66 00:04:24,760 --> 00:04:26,520 Speaker 3: I'm not sure there would be a big difference, but 67 00:04:26,800 --> 00:04:30,520 Speaker 3: at least that might be a plausible argument. But certainly 68 00:04:30,560 --> 00:04:32,919 Speaker 3: over the last five years there hasn't been some radical 69 00:04:33,040 --> 00:04:37,479 Speaker 3: change in rating standards, so I think there is some 70 00:04:37,600 --> 00:04:42,120 Speaker 3: false confidence out there. You mentioned the point about the 71 00:04:42,480 --> 00:04:48,960 Speaker 3: private credit, which is very important. The supply of highial 72 00:04:49,080 --> 00:04:53,800 Speaker 3: debt is no higher than it was ten years ago. 73 00:04:53,880 --> 00:04:57,480 Speaker 3: If you look at the face amount of bonds in 74 00:04:57,520 --> 00:05:00,760 Speaker 3: the that ic B of a us hilde so I mentioned, 75 00:05:01,000 --> 00:05:04,640 Speaker 3: it's essentially flat from a decade ago. And you can 76 00:05:04,680 --> 00:05:11,719 Speaker 3: assume that wealth has increased, investible funds allocations to the 77 00:05:11,760 --> 00:05:14,320 Speaker 3: demand for high old debt has increased. So we went 78 00:05:14,360 --> 00:05:19,240 Speaker 3: through quite a long period up until this recent sell 79 00:05:19,279 --> 00:05:25,680 Speaker 3: off started on Liberation Day on April second, where the 80 00:05:25,720 --> 00:05:33,120 Speaker 3: spreads were persistently too tight relative to fair value, which 81 00:05:33,200 --> 00:05:35,880 Speaker 3: talked about how I get to that fair value estimate. 82 00:05:36,680 --> 00:05:41,800 Speaker 3: That problem has been corrected by a substantial widening of 83 00:05:41,839 --> 00:05:47,279 Speaker 3: the spread since then, so we're close to fair value now. 84 00:05:48,600 --> 00:05:51,800 Speaker 3: But again, if you take the view within your shop 85 00:05:52,200 --> 00:05:55,240 Speaker 3: that we're on the verge of recession, yeah, you can 86 00:05:55,320 --> 00:05:58,240 Speaker 3: expect spreads to widen quite a bit from the four 87 00:05:58,240 --> 00:06:01,640 Speaker 3: to five hundred to where they'll reach in at the 88 00:06:01,680 --> 00:06:03,200 Speaker 3: maximum during the recession. 89 00:06:03,640 --> 00:06:07,640 Speaker 2: Following up on your points of fair value and the 90 00:06:07,760 --> 00:06:10,839 Speaker 2: credit rating metric, our standards haven't really changed, and a 91 00:06:10,880 --> 00:06:12,720 Speaker 2: lot of the analysis is looking you know, as a 92 00:06:12,800 --> 00:06:16,080 Speaker 2: very empirically based, so you know, looking at just the 93 00:06:16,160 --> 00:06:18,800 Speaker 2: numbers where we are today versus where we've been. It 94 00:06:18,839 --> 00:06:21,599 Speaker 2: feels like for many of us, you know, part of 95 00:06:21,600 --> 00:06:24,039 Speaker 2: that is saying, well, this time it's not different, and 96 00:06:24,080 --> 00:06:26,200 Speaker 2: maybe it's not. Maybe it is, but we're now in 97 00:06:26,240 --> 00:06:32,000 Speaker 2: a position where global alliances are being reshuffled. The US 98 00:06:32,040 --> 00:06:34,920 Speaker 2: dollars position is a safe haven is you know, still there. 99 00:06:34,920 --> 00:06:37,200 Speaker 2: But it's being questioned. We saw the outflows of the 100 00:06:37,279 --> 00:06:42,560 Speaker 2: United States altogether. How much does that impact the empirical 101 00:06:42,600 --> 00:06:46,080 Speaker 2: analysis that that you're doing. Can you adjust for that 102 00:06:46,320 --> 00:06:48,320 Speaker 2: or do you feel like this time is really not 103 00:06:48,400 --> 00:06:51,840 Speaker 2: that different? It's different factors driving the volatility and sell 104 00:06:51,880 --> 00:06:55,360 Speaker 2: off today versus twenty twenty when oil prices briefly went, 105 00:06:55,480 --> 00:06:59,000 Speaker 2: you know, down to zero or negative. That was a 106 00:06:59,040 --> 00:07:02,680 Speaker 2: different driver. But the market's still the market, and fair 107 00:07:02,760 --> 00:07:05,880 Speaker 2: value is still fair value today versus five years ago. 108 00:07:06,279 --> 00:07:08,960 Speaker 3: Yeah. Well, especially you can bring in all sorts of 109 00:07:09,680 --> 00:07:13,640 Speaker 3: predictions of the future. Keep in mind that there's a 110 00:07:13,800 --> 00:07:17,920 Speaker 3: ring of hell in Dante's Inferno reserved for fortune tellers. 111 00:07:18,440 --> 00:07:22,200 Speaker 3: Predicting the future for pay is illegal in New York City. 112 00:07:22,640 --> 00:07:25,280 Speaker 3: When the mayor finally starts to enforce that law, a 113 00:07:25,320 --> 00:07:27,120 Speaker 3: lot of people are going to be in serious trouble. 114 00:07:28,160 --> 00:07:32,560 Speaker 3: So I don't do that. I have views about all 115 00:07:32,600 --> 00:07:37,040 Speaker 3: those things you've mentioned, and investors should certainly take that 116 00:07:37,160 --> 00:07:43,280 Speaker 3: into account. But the as far as to say what 117 00:07:43,440 --> 00:07:49,840 Speaker 3: has driven spreads over time, they are really four factors 118 00:07:49,880 --> 00:07:56,360 Speaker 3: in my model that are not related or the views 119 00:07:56,400 --> 00:08:00,440 Speaker 3: on those things are subsumed in them. So one is 120 00:08:01,040 --> 00:08:05,440 Speaker 3: the most powerful factor is credit availability, and I use 121 00:08:05,520 --> 00:08:10,800 Speaker 3: for that a survey that's done quarterly by the Federal 122 00:08:10,840 --> 00:08:14,480 Speaker 3: Reserve of Senior Loan officers at banks and ask are 123 00:08:14,480 --> 00:08:18,680 Speaker 3: you currently tightening or easing your standards for companies to 124 00:08:18,800 --> 00:08:21,720 Speaker 3: qualify for loans, So it's not the rate that they're setting, 125 00:08:21,800 --> 00:08:25,760 Speaker 3: but the standard to qualify. Now, one limitation of that 126 00:08:25,960 --> 00:08:29,360 Speaker 3: is that it's done only once a quarter, and unfortunately 127 00:08:29,400 --> 00:08:34,640 Speaker 3: we're currently close to getting a new update. It was 128 00:08:35,320 --> 00:08:39,920 Speaker 3: mildly in the direction of net tightening a quarter ago 129 00:08:40,040 --> 00:08:43,200 Speaker 3: when the last survey was done. You would think that 130 00:08:43,440 --> 00:08:45,880 Speaker 3: if it's going to go in any direction from there, 131 00:08:45,920 --> 00:08:48,960 Speaker 3: it's going to be more in the direction of tightening 132 00:08:49,040 --> 00:08:51,920 Speaker 3: rather than easing in light of some of the factors 133 00:08:52,600 --> 00:08:57,160 Speaker 3: you've stated, So that could result in the fair value 134 00:08:57,160 --> 00:09:01,000 Speaker 3: spread going somewhat higher than it is and putting the 135 00:09:01,080 --> 00:09:05,440 Speaker 3: current spread back not necessarily an extreme relative to the 136 00:09:05,480 --> 00:09:08,640 Speaker 3: fair value that would cause you to make a significant 137 00:09:08,640 --> 00:09:14,240 Speaker 3: asset reallocation, but toward the tight side relative to fair value. 138 00:09:14,440 --> 00:09:18,000 Speaker 3: The other factors in the model, industrial production turns out 139 00:09:18,040 --> 00:09:21,880 Speaker 3: to be the most useful economic indicator. People sometimes say 140 00:09:21,920 --> 00:09:25,400 Speaker 3: to me, well, why not unemployment or GDP, and I say, 141 00:09:25,480 --> 00:09:28,120 Speaker 3: this is not Marty Fritzen's subjective view of how the 142 00:09:28,120 --> 00:09:30,720 Speaker 3: world ought to work. You know, basically, we take a 143 00:09:30,720 --> 00:09:32,520 Speaker 3: lot of things and throw them against the wall and 144 00:09:32,559 --> 00:09:37,200 Speaker 3: see what sticks. And capacity utilization and industrial production have 145 00:09:37,280 --> 00:09:41,520 Speaker 3: consistently over the years been the best economic indicators for 146 00:09:41,640 --> 00:09:48,520 Speaker 3: the high yield spreads. Specifically, the spread is also inversely 147 00:09:48,559 --> 00:09:53,040 Speaker 3: correlated with the underlying yield. The five year yield is 148 00:09:53,080 --> 00:09:57,040 Speaker 3: the closest to the average maturity for the high Yield index, 149 00:09:57,280 --> 00:10:01,400 Speaker 3: So the lower the treasure yield, the fair value spread. 150 00:10:01,679 --> 00:10:04,480 Speaker 3: And then I do bring in ratings mixed because over 151 00:10:04,480 --> 00:10:07,360 Speaker 3: a very long term there have been significant changes in 152 00:10:07,400 --> 00:10:10,680 Speaker 3: the breakdowns between double B single b's and triple C 153 00:10:10,800 --> 00:10:15,480 Speaker 3: and lower. So the triple C percentage specifically is the 154 00:10:15,520 --> 00:10:19,840 Speaker 3: best proxy for rating change. So that is taken into 155 00:10:19,840 --> 00:10:21,440 Speaker 3: account in my fair value estimate. 156 00:10:21,600 --> 00:10:23,760 Speaker 1: But last time I looked at the model, Marty. And 157 00:10:23,920 --> 00:10:26,960 Speaker 1: also we should mention that the Bank of America indices 158 00:10:27,000 --> 00:10:30,240 Speaker 1: that you mentioned on high Yield, you were instrumental in 159 00:10:30,280 --> 00:10:32,720 Speaker 1: setting those up. You essentially created those. 160 00:10:33,400 --> 00:10:36,840 Speaker 3: Well, no, I don't want to take unfair credit. I 161 00:10:36,880 --> 00:10:41,319 Speaker 3: did have some role in setting up the industry breakdowns, 162 00:10:41,360 --> 00:10:46,600 Speaker 3: and when payment and kind bonds and zero coupon bonds 163 00:10:46,640 --> 00:10:51,160 Speaker 3: came along, I encouraged them to bring that in. Those 164 00:10:51,160 --> 00:10:53,880 Speaker 3: bonds had not been included in the previous version of 165 00:10:53,920 --> 00:10:59,600 Speaker 3: the index. But Phil Galdy, who ran that operation Preston 166 00:10:59,640 --> 00:11:05,040 Speaker 3: Peacock along with him other ones. It's a tremendous, tremendous tool, 167 00:11:05,960 --> 00:11:08,040 Speaker 3: and I don't want to take on Dreker, but thank 168 00:11:08,080 --> 00:11:10,400 Speaker 3: you for mention. I did have some role. 169 00:11:10,320 --> 00:11:12,840 Speaker 1: In it, a huge innovator. But going back to your model, 170 00:11:12,840 --> 00:11:14,720 Speaker 1: the last time I looked at it, the CIR called 171 00:11:14,760 --> 00:11:18,040 Speaker 1: fair value was let's say, I'm guessing about four twenty 172 00:11:18,040 --> 00:11:22,440 Speaker 1: five basis points over treasuries. We kind of went above 173 00:11:22,440 --> 00:11:27,120 Speaker 1: that in the volatility posts Tariff's announcements, but now we're back. 174 00:11:27,160 --> 00:11:29,440 Speaker 1: I'm looking at our own Bloomberg indext but we're now 175 00:11:29,480 --> 00:11:31,960 Speaker 1: back at three sixty, so, you know, closer to what 176 00:11:32,120 --> 00:11:36,360 Speaker 1: I think you were previously calling overvalue, maybe not extremely overvalued. 177 00:11:36,400 --> 00:11:38,880 Speaker 1: But it also seems to me things have only gotten 178 00:11:38,880 --> 00:11:40,679 Speaker 1: a lot worse since I last looked at the model. 179 00:11:40,760 --> 00:11:42,880 Speaker 1: So you know, to me, it would it would it 180 00:11:42,920 --> 00:11:45,080 Speaker 1: would imply in my head that fair value must be 181 00:11:45,240 --> 00:11:46,920 Speaker 1: a lot higher in terms of the high yield spread. 182 00:11:47,160 --> 00:11:50,960 Speaker 3: Yeah, no, I think it's a valid point. The likelihood 183 00:11:51,040 --> 00:11:56,640 Speaker 3: is divergence in both directions. The spread because of the 184 00:11:56,800 --> 00:12:00,800 Speaker 3: credit availability measure, likely to go somewhat while and as 185 00:12:00,800 --> 00:12:05,720 Speaker 3: you say, the spreads have come in after that initial reaction, 186 00:12:05,920 --> 00:12:09,800 Speaker 3: and I think that that is related to the as 187 00:12:09,840 --> 00:12:16,720 Speaker 3: I mentioned, the supply has not grown because the issuance 188 00:12:16,800 --> 00:12:20,680 Speaker 3: has been diverted in large measure initially to the leverage 189 00:12:20,720 --> 00:12:25,079 Speaker 3: loan market, and more recently the private credit market has 190 00:12:25,120 --> 00:12:30,520 Speaker 3: been so successful that the lenders there who were previously 191 00:12:31,040 --> 00:12:35,560 Speaker 3: focused on small and medium enterprises have graduated to being 192 00:12:35,600 --> 00:12:39,600 Speaker 3: able to compete in the market for even the large 193 00:12:39,960 --> 00:12:43,880 Speaker 3: issuers that have access to the public hig bond market. 194 00:12:44,200 --> 00:12:47,040 Speaker 3: So we have a kind of a crowned shortage of supply. 195 00:12:47,280 --> 00:12:50,439 Speaker 3: And you can look at that in two ways to say, well, 196 00:12:50,440 --> 00:12:54,760 Speaker 3: that's a technical factor that supports and justifies spreads wherever 197 00:12:54,800 --> 00:12:57,400 Speaker 3: they are, or you can say, well that's a vulnerability 198 00:12:57,440 --> 00:13:02,040 Speaker 3: because it won't matter when a fault risk starts to 199 00:13:02,160 --> 00:13:08,120 Speaker 3: escalate significantly and investors will really be concerned and looking 200 00:13:08,160 --> 00:13:10,040 Speaker 3: to safety and not as an alternative to go into 201 00:13:10,080 --> 00:13:13,160 Speaker 3: private credit, but to go into treasury bonds or even 202 00:13:13,200 --> 00:13:17,400 Speaker 3: treasury bills if they're concerned enough about the outlook. 203 00:13:17,600 --> 00:13:19,240 Speaker 1: But if you run the model today, what would it 204 00:13:19,280 --> 00:13:21,400 Speaker 1: give you as a fair value spread behind yield? Where 205 00:13:21,440 --> 00:13:23,600 Speaker 1: should we be based on all of the inputs you have. 206 00:13:24,000 --> 00:13:29,040 Speaker 3: Well, it's a little hard to say. We're a little 207 00:13:29,040 --> 00:13:33,560 Speaker 3: ways away from getting an update on the credit availability measure, 208 00:13:33,920 --> 00:13:37,480 Speaker 3: so probably we're looking at moving somewhere upwards from four 209 00:13:37,559 --> 00:13:38,480 Speaker 3: hundred and fifty or so. 210 00:13:38,800 --> 00:13:41,160 Speaker 2: Quick follow up question on the supply point that you 211 00:13:41,200 --> 00:13:44,800 Speaker 2: brought up, as mentioned earlier, I follow the energy sector, 212 00:13:45,040 --> 00:13:50,280 Speaker 2: and I've clearly noticed that same trend within energy if 213 00:13:50,280 --> 00:13:53,560 Speaker 2: you go back to twenty fifteen when we probably peaked 214 00:13:53,600 --> 00:13:56,080 Speaker 2: in terms of high old energy supply, and then where 215 00:13:56,080 --> 00:13:59,599 Speaker 2: we are today. I haven't done the analysis recently, but 216 00:13:59,640 --> 00:14:03,280 Speaker 2: I looked at like high yield independent energy debt outstanding 217 00:14:03,320 --> 00:14:05,480 Speaker 2: in the Bloomberg Index, and it's we're back down to 218 00:14:05,559 --> 00:14:07,839 Speaker 2: kind of where we were, as you mentioned ten, if 219 00:14:07,840 --> 00:14:10,600 Speaker 2: not fifteen years ago, from an energy standpoint. A lot 220 00:14:10,600 --> 00:14:13,959 Speaker 2: of that was bankruptcies that you know, companies went bankrupt 221 00:14:13,960 --> 00:14:17,000 Speaker 2: in twenty sixteen again twenty twenty, so those bonds disappeared 222 00:14:17,040 --> 00:14:19,120 Speaker 2: and they wrote off, you know, billions and billions of 223 00:14:19,120 --> 00:14:20,480 Speaker 2: dollars worth of debt, and then some of it was 224 00:14:20,520 --> 00:14:23,760 Speaker 2: also credit rating upgrades. Since twenty twenty, a lot of 225 00:14:23,800 --> 00:14:26,440 Speaker 2: the oil and gas companies, not just the producers, but 226 00:14:26,480 --> 00:14:29,480 Speaker 2: even the midstream companies which were relatively safe havens within 227 00:14:29,600 --> 00:14:33,480 Speaker 2: energy have been very focused on paying down debt, generating, 228 00:14:33,960 --> 00:14:36,680 Speaker 2: focusing on free cash flow, and you've seen leverage metrics 229 00:14:36,760 --> 00:14:39,800 Speaker 2: come down, and so a lot of companies like Apatche, 230 00:14:40,240 --> 00:14:44,160 Speaker 2: Occidental and others have gone from high yield into investment grade. 231 00:14:44,200 --> 00:14:46,920 Speaker 2: A lot of people, myself included, seem to think that 232 00:14:46,960 --> 00:14:49,200 Speaker 2: if we're going to have another downturn and energy, that 233 00:14:49,200 --> 00:14:52,360 Speaker 2: that least in the high yield side, provides some cushion. 234 00:14:52,960 --> 00:14:55,440 Speaker 2: I'm curious from the supply side overall, how much from 235 00:14:55,520 --> 00:14:57,800 Speaker 2: what you've seen, I've just following energy, but from the 236 00:14:57,840 --> 00:15:00,600 Speaker 2: broader market, how much of the smaller or stagnant high 237 00:15:00,640 --> 00:15:03,720 Speaker 2: yield supply is deals going to the private market or 238 00:15:03,760 --> 00:15:07,320 Speaker 2: going to the leverage little market versus maybe upgrades other 239 00:15:07,360 --> 00:15:09,120 Speaker 2: sector has been following the same trend, And does that 240 00:15:09,240 --> 00:15:12,080 Speaker 2: help provide some cushion if there's a downturn, or as 241 00:15:12,080 --> 00:15:13,920 Speaker 2: you said, is it just kind of doesn't really matter. 242 00:15:14,080 --> 00:15:18,200 Speaker 3: Well, it's a good question. I never really got onto 243 00:15:18,640 --> 00:15:23,520 Speaker 3: the analysis. Sam Deroza Farag, who was at Credit Swiss 244 00:15:23,840 --> 00:15:25,960 Speaker 3: in the old days, used to do a very detailed 245 00:15:26,680 --> 00:15:31,720 Speaker 3: analysis of exactly what you're describing. Where the supply came from, 246 00:15:31,760 --> 00:15:34,840 Speaker 3: where it went, and so on. What I can tell 247 00:15:34,840 --> 00:15:38,360 Speaker 3: you is that what I have looked at is you 248 00:15:38,440 --> 00:15:40,560 Speaker 3: have a runoff of something on the order of twenty 249 00:15:40,680 --> 00:15:45,280 Speaker 3: or twenty five percent per year in high yield outstandings, 250 00:15:45,720 --> 00:15:52,840 Speaker 3: a combination of defaults, upgrades to investment grade retirements, including calls, 251 00:15:52,960 --> 00:15:56,320 Speaker 3: and those bonds may or may not get replaced with 252 00:15:56,680 --> 00:15:59,360 Speaker 3: high yield bonds, or may not get replaced at all. 253 00:15:59,760 --> 00:16:03,200 Speaker 3: The company is reducing that, as you say, in the 254 00:16:03,320 --> 00:16:06,320 Speaker 3: energy sector and batically, I think there's been some movement 255 00:16:06,400 --> 00:16:11,040 Speaker 3: you know better than I companies saying well, maybe raising 256 00:16:11,040 --> 00:16:14,680 Speaker 3: more money and investing at the when cruit is at 257 00:16:14,680 --> 00:16:17,400 Speaker 3: one hundred dollars a barrel isn't really the best way 258 00:16:17,400 --> 00:16:21,840 Speaker 3: to serve shareholders. Maybe we should return that capital to 259 00:16:22,680 --> 00:16:28,040 Speaker 3: the shareholders and you know, invest when prices are at 260 00:16:28,160 --> 00:16:32,360 Speaker 3: and more modest levels rather than peak levels, and not 261 00:16:32,640 --> 00:16:35,440 Speaker 3: get into situations where we're going to be sort of 262 00:16:35,480 --> 00:16:40,640 Speaker 3: exploiting very high cost reserves that won't ultimately be profitable. 263 00:16:40,920 --> 00:16:42,440 Speaker 3: But as they say, there's about a you know, twenty 264 00:16:42,520 --> 00:16:46,200 Speaker 3: or twenty five percent runoff in the outstanding amount, So 265 00:16:46,280 --> 00:16:50,520 Speaker 3: you have to have new issuance each year just to 266 00:16:50,760 --> 00:16:54,720 Speaker 3: stay even. And I think that's that's the real issue 267 00:16:55,000 --> 00:16:59,480 Speaker 3: to me, you know, the specific breakdown of where it goes. Again, 268 00:16:59,520 --> 00:17:02,280 Speaker 3: it's a combination of factors, but the key thing is 269 00:17:02,320 --> 00:17:05,080 Speaker 3: you have to have the new issuance coming. And we 270 00:17:05,160 --> 00:17:08,160 Speaker 3: haven't seen the growth in the new issue market that 271 00:17:08,200 --> 00:17:12,440 Speaker 3: we had historically seen going way back to the really 272 00:17:12,480 --> 00:17:15,120 Speaker 3: beginning in the late nineteen seventies, you had had a 273 00:17:15,240 --> 00:17:18,800 Speaker 3: very steady growth, but it's kind of leveled off in 274 00:17:18,880 --> 00:17:19,880 Speaker 3: more recent years. 275 00:17:20,320 --> 00:17:23,920 Speaker 2: So sticking with energy, so my understanding is your view 276 00:17:23,960 --> 00:17:26,679 Speaker 2: recently at least has been that energy is one of 277 00:17:26,720 --> 00:17:29,080 Speaker 2: the sectors that might be cheap on a rating for 278 00:17:29,200 --> 00:17:32,439 Speaker 2: rating basis. I'm just kind of curious given the volatility 279 00:17:32,480 --> 00:17:35,360 Speaker 2: we've seen. I mean, I've seen some bonds widened by 280 00:17:35,720 --> 00:17:37,920 Speaker 2: well over one hundred basis points in the last couple 281 00:17:37,920 --> 00:17:40,280 Speaker 2: of weeks, and they've tightened by thirty or forty since then. 282 00:17:40,880 --> 00:17:42,960 Speaker 2: What's your view on energy or any of the other 283 00:17:43,000 --> 00:17:46,320 Speaker 2: industries right now that might be standouts as either relatively 284 00:17:46,680 --> 00:17:50,360 Speaker 2: cheap to their peers or conversely overpriced. 285 00:17:50,840 --> 00:17:55,280 Speaker 3: Yeah, well, energy stands out, as you mentioned, it widened 286 00:17:56,400 --> 00:18:02,040 Speaker 3: recently and this was even before my gibvious update on 287 00:18:02,280 --> 00:18:07,080 Speaker 3: the industry relative value. So in a period from the 288 00:18:07,160 --> 00:18:10,880 Speaker 3: end of March through April twenty fourth, whereing the high 289 00:18:10,920 --> 00:18:16,119 Speaker 3: Yield Index as a whole widened by just eighteen basis points, 290 00:18:16,240 --> 00:18:19,640 Speaker 3: energy widened by seventy seven basis points. We also talk 291 00:18:19,680 --> 00:18:22,040 Speaker 3: about paper if we have time, which was the other 292 00:18:22,680 --> 00:18:27,480 Speaker 3: standout in that, But that was attributable, I believe to 293 00:18:28,119 --> 00:18:33,639 Speaker 3: the expectation that with a contraction of global trade, commodity 294 00:18:33,640 --> 00:18:37,320 Speaker 3: prices in general would come under pressure. Crude oil prices 295 00:18:38,000 --> 00:18:42,040 Speaker 3: did decline in that period, and there was also a 296 00:18:42,080 --> 00:18:45,240 Speaker 3: statement by Saudi Arabia that they were going to punish 297 00:18:45,240 --> 00:18:50,040 Speaker 3: some of these cheaters in OPEC plus who had been 298 00:18:50,040 --> 00:18:54,639 Speaker 3: exceeding their quotas by stepping up the Saudi production. So 299 00:18:54,680 --> 00:18:59,760 Speaker 3: that puts some further downward pressure. So energy is one 300 00:19:00,040 --> 00:19:03,359 Speaker 3: that's attractive, And let me describe what that means. You know, 301 00:19:03,440 --> 00:19:06,840 Speaker 3: if you say industry X, which has a lot of 302 00:19:06,880 --> 00:19:10,440 Speaker 3: triple c's, is that a wider spread than industry WHY, 303 00:19:10,600 --> 00:19:13,680 Speaker 3: which is mostly double bees. It's kind of a meaningless 304 00:19:13,720 --> 00:19:16,919 Speaker 3: statement because of course you're talking about the difference in 305 00:19:17,000 --> 00:19:21,040 Speaker 3: ratings mix rather than how that industry is perceived. So 306 00:19:21,640 --> 00:19:25,240 Speaker 3: with help of a research assistant, I do this very 307 00:19:25,320 --> 00:19:29,159 Speaker 3: laborious process, going through bond by bond in each of 308 00:19:29,200 --> 00:19:33,240 Speaker 3: the twenty largest industries represented in the High Old Index 309 00:19:33,760 --> 00:19:38,439 Speaker 3: and normalize for that difference in ratings mix, so that 310 00:19:38,480 --> 00:19:40,159 Speaker 3: we can say if they were if they all had 311 00:19:40,200 --> 00:19:44,880 Speaker 3: the same ratings mix, given how double bees within Energy 312 00:19:45,240 --> 00:19:48,920 Speaker 3: are trading compared to double b's in the peer group, 313 00:19:48,960 --> 00:19:52,320 Speaker 3: how single bees are trading, and so forth, then you 314 00:19:52,320 --> 00:19:55,480 Speaker 3: can see on a rating for rating basis, this industry 315 00:19:55,600 --> 00:19:58,680 Speaker 3: is rich or cheap, and by construction, half of them 316 00:19:58,760 --> 00:20:01,520 Speaker 3: are wider than the peer group and half of them 317 00:20:01,560 --> 00:20:06,040 Speaker 3: are narrower. But I also look at a separate dimension, 318 00:20:06,160 --> 00:20:09,439 Speaker 3: which is what do the rating agencies say about that 319 00:20:09,640 --> 00:20:16,240 Speaker 3: industry's ratings prospects? Because they put out rating outlooks for 320 00:20:16,359 --> 00:20:19,400 Speaker 3: every company in the speculative grade range that they rate, 321 00:20:19,480 --> 00:20:22,560 Speaker 3: saying that the rating is likely to remain stable, or 322 00:20:22,560 --> 00:20:26,359 Speaker 3: it's likely to decline or likely to improve, and they 323 00:20:26,359 --> 00:20:30,080 Speaker 3: don't put a specific timeframe on that, but people generally 324 00:20:30,119 --> 00:20:33,159 Speaker 3: feel about eighteen months or so is the horizon that 325 00:20:33,200 --> 00:20:37,080 Speaker 3: they're looking at. Well, Energy is in this kind of 326 00:20:37,119 --> 00:20:43,120 Speaker 3: anomalous position of being cheap relative to its ratings even 327 00:20:43,119 --> 00:20:45,639 Speaker 3: though the rating agencies are telling you that those ratings 328 00:20:45,640 --> 00:20:49,080 Speaker 3: are likely to improve. You'd expect the ones that are 329 00:20:49,520 --> 00:20:51,720 Speaker 3: trading cheap to their ratings to be the ones where 330 00:20:51,760 --> 00:20:54,959 Speaker 3: they say the ratings are likely to decline. That would 331 00:20:55,400 --> 00:20:57,480 Speaker 3: make sense that they would then be cheap relative to 332 00:20:57,520 --> 00:21:03,840 Speaker 3: the ratings. So energy is in that category and attractive again. 333 00:21:03,880 --> 00:21:05,520 Speaker 3: You know, if you say to me, I have a 334 00:21:05,560 --> 00:21:08,240 Speaker 3: crystal ball that says the crude oil price is going 335 00:21:08,320 --> 00:21:10,480 Speaker 3: to drop another ten percent next week, I'd say, well, 336 00:21:10,520 --> 00:21:13,480 Speaker 3: wait until another week before you buy them. But on 337 00:21:13,520 --> 00:21:17,480 Speaker 3: a fundamental kind of value basis, it is one of 338 00:21:17,840 --> 00:21:23,960 Speaker 3: five industries in that category currently. The others are diversified 339 00:21:24,000 --> 00:21:28,919 Speaker 3: financial services that excludes banks, thrifts, insurance companies, but leasing 340 00:21:29,000 --> 00:21:35,320 Speaker 3: companies and other other kinds of finance companies. Energy is one. Healthcare. 341 00:21:37,240 --> 00:21:40,840 Speaker 3: The retailers that's not the food or drug retailers, but 342 00:21:41,240 --> 00:21:47,680 Speaker 3: department stores, discounters, especialties stores, and utilities within high yield, 343 00:21:47,680 --> 00:21:52,520 Speaker 3: those are not typically the usual regulated electric power companies, 344 00:21:52,560 --> 00:21:57,520 Speaker 3: but more of the merchant power producers. But those five, 345 00:21:57,560 --> 00:22:00,000 Speaker 3: and it's unusual they have as many as five. Sometimes 346 00:22:00,119 --> 00:22:03,240 Speaker 3: you have only one out of the twenty that's in that. 347 00:22:03,800 --> 00:22:06,600 Speaker 3: If you picture that as a diagram, it's in the 348 00:22:06,640 --> 00:22:13,080 Speaker 3: northeast quadrant of the diagram, improving ratings and cheap relative 349 00:22:13,119 --> 00:22:13,600 Speaker 3: to the rating. 350 00:22:14,000 --> 00:22:16,040 Speaker 2: Yeah, I just a quick comment. I'll hand it back 351 00:22:16,080 --> 00:22:18,479 Speaker 2: to James. I know he has a question, but for 352 00:22:18,520 --> 00:22:20,640 Speaker 2: me following energy can't help but think some of the 353 00:22:20,680 --> 00:22:22,959 Speaker 2: investors in the market are having sort of post traumatic 354 00:22:23,040 --> 00:22:27,200 Speaker 2: flashbacks to twenty twenty in twenty fifteen sixteen, and assuming 355 00:22:27,280 --> 00:22:29,959 Speaker 2: that that may play out again. As you mentioned, ratings 356 00:22:29,960 --> 00:22:33,280 Speaker 2: trend has been positive within energy, there's a lot less 357 00:22:33,320 --> 00:22:36,359 Speaker 2: debt within high heeled energy. Feels to me like you know, 358 00:22:36,480 --> 00:22:39,080 Speaker 2: downturn would certainly be painful, but perhaps less painful than 359 00:22:39,119 --> 00:22:41,760 Speaker 2: it was in twenty twenty. But wondering if that's knee 360 00:22:41,840 --> 00:22:43,040 Speaker 2: jerk reaction from the market. 361 00:22:43,240 --> 00:22:46,000 Speaker 3: No, not at all. I mean, take a step back. 362 00:22:46,119 --> 00:22:48,000 Speaker 3: I'm very proud of the fact that in all the 363 00:22:48,080 --> 00:22:50,879 Speaker 3: years that I worked on Wall Street, the phrase our 364 00:22:50,960 --> 00:22:54,920 Speaker 3: chief economist says never once appeared in my research. And 365 00:22:55,000 --> 00:22:57,320 Speaker 3: it wasn't that I didn't have respect for them, but 366 00:22:57,440 --> 00:23:00,800 Speaker 3: my feeling was that for the people received our research, 367 00:23:01,280 --> 00:23:05,159 Speaker 3: half agreed with our chief economists and half disagreed, and 368 00:23:05,320 --> 00:23:08,320 Speaker 3: hence the market was where it was at. I mean, 369 00:23:08,320 --> 00:23:11,960 Speaker 3: that's the equilibrium that separation of opinion occurs. I didn't 370 00:23:11,960 --> 00:23:14,399 Speaker 3: want my research to be useful only to half of 371 00:23:14,440 --> 00:23:18,359 Speaker 3: the audience, so that's why I emphasize things like the 372 00:23:18,400 --> 00:23:22,080 Speaker 3: fair value analysis. And it's quite appropriate to have an 373 00:23:22,080 --> 00:23:26,879 Speaker 3: overlay of a house view about the direction of oil 374 00:23:26,960 --> 00:23:31,040 Speaker 3: prices or the direction of interest rates, whatever it might be. 375 00:23:32,080 --> 00:23:35,040 Speaker 3: And I think the combination of those two is the 376 00:23:35,080 --> 00:23:40,360 Speaker 3: way you get to, you hope, superior risk adjusted returns 377 00:23:40,359 --> 00:23:43,639 Speaker 3: over time. So I'm not at all discounting any of 378 00:23:43,680 --> 00:23:47,800 Speaker 3: those factors you say. But by the same time, by definition, 379 00:23:48,200 --> 00:23:52,360 Speaker 3: half of the market is more optimistic than the view 380 00:23:52,400 --> 00:23:56,320 Speaker 3: you've described. Hence we're at the oil price and the 381 00:23:56,400 --> 00:23:59,440 Speaker 3: spread on energy index that we're currently at. 382 00:24:00,080 --> 00:24:04,120 Speaker 1: Looking of PTSD, which Spencer just built up. My PTSD 383 00:24:04,200 --> 00:24:06,200 Speaker 1: is more about to two thousand and eight, in which 384 00:24:06,440 --> 00:24:09,800 Speaker 1: the rating agency has just got coot wrong too slow. 385 00:24:10,200 --> 00:24:12,199 Speaker 1: Is there any chance in any of this analysis that 386 00:24:12,200 --> 00:24:15,160 Speaker 1: the rating agencies just aren't fast enough to act and 387 00:24:15,240 --> 00:24:17,800 Speaker 1: you know, on a broad scale, or is that just 388 00:24:17,880 --> 00:24:19,439 Speaker 1: not going to happen? 389 00:24:19,720 --> 00:24:23,520 Speaker 3: Well, it's a big question. I've written quite a bit 390 00:24:23,560 --> 00:24:26,760 Speaker 3: about the rating agencies, not because I have a brief 391 00:24:27,080 --> 00:24:31,880 Speaker 3: to defend them or anything, but people sometimes lose sides 392 00:24:31,920 --> 00:24:37,080 Speaker 3: the fact that the rating agency say explicitly that ratings 393 00:24:37,160 --> 00:24:43,119 Speaker 3: are not investment recommendations, they're not price recommendations. Within a 394 00:24:43,240 --> 00:24:46,680 Speaker 3: rating category, you have quite a wide range and overlap 395 00:24:46,720 --> 00:24:51,200 Speaker 3: among the rating agencies, and that sometimes interprets me, oh, well, 396 00:24:51,240 --> 00:24:57,639 Speaker 3: they're wrong. Well, you know, what the ratings address is 397 00:24:58,160 --> 00:25:03,160 Speaker 3: probability of default and expected recovery in the event of default, 398 00:25:03,440 --> 00:25:06,320 Speaker 3: and to some extent, covenants are reflected in the ratings 399 00:25:06,359 --> 00:25:12,800 Speaker 3: as well. They don't address the liquidity of the issue, 400 00:25:12,840 --> 00:25:16,560 Speaker 3: which can be quite important at times, and they certainly 401 00:25:16,560 --> 00:25:20,760 Speaker 3: don't attempt to move ratings up and down on a 402 00:25:20,760 --> 00:25:24,480 Speaker 3: week to week or even a six months to six 403 00:25:24,520 --> 00:25:28,240 Speaker 3: month kind of basis. In high yield, they are they 404 00:25:28,400 --> 00:25:33,240 Speaker 3: strive to be more sensitive to changes in the environment 405 00:25:33,320 --> 00:25:36,640 Speaker 3: than would be the case in investment grade, where they 406 00:25:37,040 --> 00:25:39,960 Speaker 3: really will take a longer view. Stepping back from all that, 407 00:25:40,359 --> 00:25:43,840 Speaker 3: the portfolio managers, I don't think you can find anyone 408 00:25:43,840 --> 00:25:46,119 Speaker 3: in high yield who will say, oh, yeah, we just 409 00:25:46,160 --> 00:25:49,080 Speaker 3: rely on the ratings. That's how we make our decisions. 410 00:25:49,160 --> 00:25:52,960 Speaker 3: Not that they ignore that, it's not that they don't 411 00:25:53,040 --> 00:25:56,800 Speaker 3: see useful input. But really the great achievement of the 412 00:25:56,880 --> 00:26:00,720 Speaker 3: rating agencies is that the default rate over one year, 413 00:26:00,920 --> 00:26:05,040 Speaker 3: five years, ten years, whatever horizon is higher on double 414 00:26:05,040 --> 00:26:07,760 Speaker 3: a's than it is on triple as, higher on single a's, 415 00:26:07,760 --> 00:26:10,320 Speaker 3: and it is on double a's and higher all the 416 00:26:10,359 --> 00:26:14,640 Speaker 3: way down to the alphanumeric you know, triple C minus, 417 00:26:14,800 --> 00:26:18,720 Speaker 3: you know, higher than on triple C plus, And that 418 00:26:18,720 --> 00:26:21,560 Speaker 3: that is useful that they're giving you that kind of 419 00:26:21,800 --> 00:26:27,520 Speaker 3: assessment of default risk, which doesn't really change as dramatically 420 00:26:27,680 --> 00:26:33,240 Speaker 3: as the spreads do in response to short term development. 421 00:26:33,280 --> 00:26:36,040 Speaker 3: So I think if you look at ratings in their 422 00:26:36,040 --> 00:26:39,679 Speaker 3: proper role and as they're used by investors, I'm not 423 00:26:40,040 --> 00:26:43,800 Speaker 3: losing sleep about Oh well, well, you know, the spread 424 00:26:43,840 --> 00:26:47,760 Speaker 3: on some particular bond go from five hundred to seven 425 00:26:47,840 --> 00:26:51,359 Speaker 3: hundred without a signal from the rating agencies that it 426 00:26:51,400 --> 00:26:53,399 Speaker 3: has changed. It may go back to five hundred, and 427 00:26:53,440 --> 00:26:56,280 Speaker 3: then they'll say, oh, well, you forced me, by your 428 00:26:56,359 --> 00:26:58,480 Speaker 3: rating change to sell that bond, and now I have 429 00:26:58,520 --> 00:26:59,879 Speaker 3: to buy it back at a higher price they have. 430 00:27:00,000 --> 00:27:02,280 Speaker 3: I've gotten exactly that kind of criticism in the past. 431 00:27:02,280 --> 00:27:05,320 Speaker 3: So it's a no win proposition if the rainy agencies 432 00:27:05,359 --> 00:27:08,480 Speaker 3: were to say, oh, well, we accept all of the 433 00:27:08,520 --> 00:27:11,919 Speaker 3: responsibility that people putting on us, as opposed to here's 434 00:27:11,960 --> 00:27:15,280 Speaker 3: what we actually do. Here's how you should use the ratings. 435 00:27:15,400 --> 00:27:18,080 Speaker 3: If you choose not to do that, that's on you. 436 00:27:18,440 --> 00:27:20,560 Speaker 2: Quick quick question. Since we've been sort of talking a 437 00:27:20,560 --> 00:27:24,000 Speaker 2: little bit here about distressed and post traumatic stress disorder, 438 00:27:24,000 --> 00:27:27,399 Speaker 2: et cetera, I'm curious what your view is on the 439 00:27:27,400 --> 00:27:30,119 Speaker 2: distressed market these days. My understanding, as you see, the 440 00:27:30,160 --> 00:27:34,000 Speaker 2: distressed ratio is a bit low relative to historical standards. 441 00:27:34,160 --> 00:27:36,720 Speaker 2: Obviously there's a lot of you know, with the volatility 442 00:27:36,720 --> 00:27:38,879 Speaker 2: in the market and concerns, there's probably a lot of 443 00:27:38,880 --> 00:27:41,760 Speaker 2: people out there trying to position themselves or thinking that, 444 00:27:42,119 --> 00:27:46,080 Speaker 2: you know, distressed investment opportunities may climb in the future years. 445 00:27:46,080 --> 00:27:49,639 Speaker 2: So just general overview, what's your expectations or outlooks for 446 00:27:49,640 --> 00:27:52,240 Speaker 2: the distressed market, and then also how is that influenced, 447 00:27:52,240 --> 00:27:54,840 Speaker 2: if at all, based on the amount of money that's 448 00:27:54,880 --> 00:27:58,439 Speaker 2: out there specifically earmarked for distressed investments. I just recall 449 00:27:58,680 --> 00:28:01,879 Speaker 2: some of the power downturns. You see the economy heading south, 450 00:28:02,000 --> 00:28:03,719 Speaker 2: people start to think there's going to be a lot 451 00:28:03,760 --> 00:28:07,040 Speaker 2: of stressed investment opportunities, so a lot of money gets raised, 452 00:28:07,080 --> 00:28:09,359 Speaker 2: and that money gets put to work, and then bonds 453 00:28:09,400 --> 00:28:11,960 Speaker 2: that normally might be trading at forty fifty cents on 454 00:28:12,000 --> 00:28:14,479 Speaker 2: the dollar trading at eighty cents on the dollar because 455 00:28:14,680 --> 00:28:18,480 Speaker 2: there's just so much money trading chasing so few distressed opportunities. 456 00:28:18,480 --> 00:28:20,080 Speaker 2: So I just kind of curious what your thoughts are 457 00:28:20,160 --> 00:28:22,320 Speaker 2: that dynamic and what your expectations might be. 458 00:28:23,119 --> 00:28:26,520 Speaker 3: Yeah, the most recent calculation in the last few days, 459 00:28:27,320 --> 00:28:31,800 Speaker 3: the distress ratio came to six point seventy three. Now, 460 00:28:31,840 --> 00:28:34,159 Speaker 3: for those who may not be familiar, the distress ratio 461 00:28:34,720 --> 00:28:37,320 Speaker 3: is the percentage of issues in the high Old index 462 00:28:37,720 --> 00:28:40,720 Speaker 3: that are quoted at a thousand basis points are more 463 00:28:41,120 --> 00:28:45,440 Speaker 3: above treasuries. And that was a cutoff that I came 464 00:28:45,560 --> 00:28:49,360 Speaker 3: up with, you know, many years ago, and has been 465 00:28:49,400 --> 00:28:51,480 Speaker 3: widely adopted. There are some who say, well, we really 466 00:28:51,480 --> 00:28:55,320 Speaker 3: look at distressed at two thousand over, so we consider 467 00:28:55,360 --> 00:29:00,240 Speaker 3: a thousand stressed, But the terminology has been adopted by Otherstually, 468 00:29:00,280 --> 00:29:02,640 Speaker 3: it's not the kind of thing you can patent. So 469 00:29:02,680 --> 00:29:07,200 Speaker 3: I'm just proud that you know that without having exclusive 470 00:29:07,280 --> 00:29:11,280 Speaker 3: rights to the intellectual property. I've made some contribution to 471 00:29:11,400 --> 00:29:13,920 Speaker 3: the field in that way. But yeah, that's six point 472 00:29:13,960 --> 00:29:17,200 Speaker 3: seven percent compares with a median over time of eight 473 00:29:17,200 --> 00:29:20,960 Speaker 3: point three so it is a little bit low by 474 00:29:21,320 --> 00:29:27,280 Speaker 3: that standard. During recessions, it typically goes to thirty percent. 475 00:29:27,600 --> 00:29:29,640 Speaker 3: During that two thousand and eight two thousand nine that 476 00:29:30,040 --> 00:29:34,600 Speaker 3: was causing so much stress from memories for James, it 477 00:29:34,680 --> 00:29:38,800 Speaker 3: went to believe or not eighty seven percent. And that 478 00:29:39,000 --> 00:29:41,160 Speaker 3: was certainly a time when you didn't have to worry 479 00:29:41,200 --> 00:29:44,120 Speaker 3: about too much capital being thrown at distress that I mean, 480 00:29:44,360 --> 00:29:48,800 Speaker 3: there really were giveaways. I mean, if you talk to 481 00:29:48,840 --> 00:29:51,320 Speaker 3: people in mister stress market at that time, they said 482 00:29:51,360 --> 00:29:55,160 Speaker 3: they couldn't believe the opportunities that were there. Bonds that 483 00:29:55,720 --> 00:30:00,000 Speaker 3: certainly certainly didn't deserve to be training at distress level, 484 00:30:00,120 --> 00:30:02,280 Speaker 3: that had just been thrown out. You know, the baby 485 00:30:02,320 --> 00:30:04,920 Speaker 3: with the bath water. You know, people kind of get 486 00:30:04,920 --> 00:30:07,040 Speaker 3: carried away with that kind of metaphor sometimes, but that 487 00:30:07,080 --> 00:30:10,320 Speaker 3: was certainly an error where it was possible. Now there 488 00:30:10,840 --> 00:30:14,080 Speaker 3: there is a very definite asset class of distress debt. 489 00:30:14,160 --> 00:30:18,800 Speaker 3: There's money that's allocated to that that may not always 490 00:30:18,880 --> 00:30:21,560 Speaker 3: be in line with the supply, you know. Right now, 491 00:30:21,600 --> 00:30:24,560 Speaker 3: I think you have to be pretty selective, you know. 492 00:30:24,600 --> 00:30:30,440 Speaker 3: I think the opportunities are in very idiosyncratic companies where 493 00:30:31,360 --> 00:30:35,160 Speaker 3: investors have gotten dis enchanted, the stock market has said 494 00:30:35,400 --> 00:30:38,640 Speaker 3: given up on them, and so on. But when you 495 00:30:38,640 --> 00:30:44,000 Speaker 3: look more closely, they're pretty likely to continue paying their interests. 496 00:30:44,000 --> 00:30:46,760 Speaker 3: They may have the interest actually fairly well covered. They 497 00:30:46,800 --> 00:30:50,400 Speaker 3: have sufficient asset value where you can be comfortable on 498 00:30:50,760 --> 00:30:53,440 Speaker 3: the debt, particularly on you know, some bonds that are 499 00:30:53,600 --> 00:30:57,360 Speaker 3: maturing only two or three years out. Very unlikely now, 500 00:30:57,760 --> 00:30:59,640 Speaker 3: it would be rare to find something like that trading 501 00:30:59,640 --> 00:31:03,360 Speaker 3: it fifty cents on the dollar, but you can get 502 00:31:04,280 --> 00:31:08,000 Speaker 3: some pretty good returns on selected situations like that. So 503 00:31:08,040 --> 00:31:12,120 Speaker 3: I think that right now a distressed manager has to 504 00:31:12,160 --> 00:31:17,520 Speaker 3: be careful not go chasing something that is really kind 505 00:31:17,520 --> 00:31:19,320 Speaker 3: of a coin flip, whether it's going to make it 506 00:31:19,760 --> 00:31:24,400 Speaker 3: or not. But if some of the negative factors in 507 00:31:24,760 --> 00:31:27,280 Speaker 3: the economy and the financial markets that have been talked 508 00:31:27,280 --> 00:31:32,080 Speaker 3: about during this conversation, if those come to pass, you'll 509 00:31:32,120 --> 00:31:36,080 Speaker 3: certainly see the distress ratio rise get back to at 510 00:31:36,200 --> 00:31:40,240 Speaker 3: least a sort of a median historical level, and likely 511 00:31:40,280 --> 00:31:44,600 Speaker 3: beyond that. And then there'll be more opportunities to look at. 512 00:31:45,000 --> 00:31:48,080 Speaker 1: On a related note, March the default rate. I'm interested 513 00:31:48,080 --> 00:31:50,800 Speaker 1: in your view that not only a sort of projection. 514 00:31:50,880 --> 00:31:54,960 Speaker 1: I know you have mentioned how dangerous it is to forecast, 515 00:31:55,040 --> 00:31:57,040 Speaker 1: and how it's probably illegal in this city, but I'm 516 00:31:57,040 --> 00:31:59,440 Speaker 1: going to ask you for a forecast. But besides that, 517 00:31:59,480 --> 00:32:02,400 Speaker 1: how do you even see it? Because on the one hand, 518 00:32:02,440 --> 00:32:06,840 Speaker 1: you've got liability management lemes which are kind of concealing 519 00:32:06,840 --> 00:32:08,520 Speaker 1: a lot of this, and on the other you've got 520 00:32:08,520 --> 00:32:10,360 Speaker 1: private credit where a lot of this stuff's going, so 521 00:32:10,360 --> 00:32:12,880 Speaker 1: you won't see it either. So how much of that 522 00:32:13,000 --> 00:32:14,440 Speaker 1: is playing into the default rate? And what do you 523 00:32:14,480 --> 00:32:15,720 Speaker 1: expect the default rate to be? 524 00:32:16,200 --> 00:32:20,920 Speaker 3: Well, you know, great questions. I attended not very long 525 00:32:20,960 --> 00:32:27,560 Speaker 3: ago the Wharton Restructuring Conference dealing with distressed debt, and 526 00:32:27,600 --> 00:32:31,800 Speaker 3: it was interesting that LME was the byword this year. 527 00:32:32,440 --> 00:32:35,680 Speaker 3: Really the majority, by far of the sessions were one 528 00:32:35,720 --> 00:32:39,800 Speaker 3: way or another about liability management exercises, to a point 529 00:32:39,800 --> 00:32:43,520 Speaker 3: where frankly, I found that there wasn't really enough to 530 00:32:43,520 --> 00:32:47,960 Speaker 3: sustain that many different variations of the topic. But be 531 00:32:48,040 --> 00:32:52,440 Speaker 3: that as it may, what came up consistently in those 532 00:32:52,440 --> 00:32:57,800 Speaker 3: sessions was that the default rate on deals that have 533 00:32:57,920 --> 00:33:01,000 Speaker 3: been patched up with ls is fairly high. You know, 534 00:33:01,240 --> 00:33:04,400 Speaker 3: you get some that really do buy some time the 535 00:33:04,440 --> 00:33:06,880 Speaker 3: company is able to turn it around, but in others, 536 00:33:07,400 --> 00:33:11,480 Speaker 3: in other cases, many other cases, you're just postponing the inevitable. 537 00:33:11,720 --> 00:33:15,800 Speaker 3: So as far, it's not as if the lmes eliminate 538 00:33:16,360 --> 00:33:22,120 Speaker 3: default risk, certainly entirely may have some modifying effect. As 539 00:33:22,120 --> 00:33:24,440 Speaker 3: far as the private credit, you know, like some other 540 00:33:24,480 --> 00:33:26,840 Speaker 3: markets that have come before it, it has not yet 541 00:33:26,880 --> 00:33:32,320 Speaker 3: been tested by a really serious downturn, at least in 542 00:33:32,360 --> 00:33:38,080 Speaker 3: its modern current manifestation of having graduated to these larger 543 00:33:38,360 --> 00:33:41,240 Speaker 3: companies and a lot of capital has been thrown at 544 00:33:41,560 --> 00:33:45,200 Speaker 3: that sector. So that raises concerns. Are deals getting two 545 00:33:45,280 --> 00:33:49,680 Speaker 3: lacks the standards? You know, we'll find out, you know, 546 00:33:49,720 --> 00:33:53,239 Speaker 3: hard to assess for sure in advance. So with all that, 547 00:33:53,280 --> 00:33:57,440 Speaker 3: I'd say, I wouldn't expect to see radical, radically different 548 00:33:57,520 --> 00:34:01,600 Speaker 3: default results. That's always a great story for people whose 549 00:34:01,680 --> 00:34:05,440 Speaker 3: job is to raise money for high old managers. Oh, 550 00:34:05,480 --> 00:34:07,920 Speaker 3: we don't have to worry about default rates. I've heard 551 00:34:07,920 --> 00:34:12,240 Speaker 3: that in every cycle since the beginning, and it has 552 00:34:12,280 --> 00:34:16,799 Speaker 3: never really panned out. I mean, default continue to occur Now, 553 00:34:17,040 --> 00:34:23,960 Speaker 3: Moody's doesn't put out a specific US speculative grade bonds 554 00:34:24,000 --> 00:34:27,840 Speaker 3: only forecast. They do report a figure, but I have 555 00:34:27,960 --> 00:34:32,240 Speaker 3: to kind of back into what that figure would be 556 00:34:32,760 --> 00:34:36,840 Speaker 3: based on their US bonds and loans figure versus the 557 00:34:36,880 --> 00:34:39,839 Speaker 3: bond's only figure that they do produce, and my best 558 00:34:39,960 --> 00:34:42,920 Speaker 3: estimate of that is two point one six percent as 559 00:34:42,920 --> 00:34:46,200 Speaker 3: a base case, and I would say that their base 560 00:34:46,320 --> 00:34:52,040 Speaker 3: case is a pretty good analysis. I sort of stopped doing, 561 00:34:52,120 --> 00:34:55,200 Speaker 3: you know, trying to come up with an improved default 562 00:34:55,280 --> 00:34:58,400 Speaker 3: rate forecasting model, which I think would be legitimate. It 563 00:34:58,400 --> 00:35:00,799 Speaker 3: wouldn't be predicting the future. It would be saying, you know, 564 00:35:00,840 --> 00:35:04,200 Speaker 3: based on experience is you know, and the factors that 565 00:35:04,239 --> 00:35:06,600 Speaker 3: influence the default rate. But I think it's a pretty 566 00:35:06,640 --> 00:35:11,800 Speaker 3: good model. Now I also look at what is the 567 00:35:11,840 --> 00:35:16,560 Speaker 3: market saying. And let me just say that this is 568 00:35:16,600 --> 00:35:20,880 Speaker 3: not a break even analysis. I've written essentially to show 569 00:35:21,160 --> 00:35:24,400 Speaker 3: how if you take this spread versus treasuries, adjust for 570 00:35:25,200 --> 00:35:29,239 Speaker 3: recoveries in default, and then subtract that, you know that, no, 571 00:35:29,360 --> 00:35:33,640 Speaker 3: that is not a good measure of the expected default 572 00:35:33,719 --> 00:35:36,759 Speaker 3: rate in the market. The real way to do it 573 00:35:36,800 --> 00:35:39,640 Speaker 3: is to look at the distress ratio, because Essentially, all 574 00:35:39,719 --> 00:35:43,880 Speaker 3: defaults occur in bonds that have been at a thousand 575 00:35:44,000 --> 00:35:48,520 Speaker 3: or more over treasuries well before they default, back when 576 00:35:48,560 --> 00:35:52,440 Speaker 3: you had more financial reporting fraud, before sarabainez Oxley, there 577 00:35:52,520 --> 00:35:55,839 Speaker 3: was a greater likelihood of a bond trading at a 578 00:35:55,840 --> 00:35:59,040 Speaker 3: decent level and then all of a sudden being in default. 579 00:35:59,320 --> 00:36:04,080 Speaker 3: That's highly unlikely today. So the number, then there's a 580 00:36:04,280 --> 00:36:07,239 Speaker 3: quantitative of a formula that I won't go into detail here, 581 00:36:07,280 --> 00:36:10,160 Speaker 3: but the bottom line on it is that that currently 582 00:36:11,040 --> 00:36:15,000 Speaker 3: indicates that the market is expecting a default rate on 583 00:36:15,239 --> 00:36:19,759 Speaker 3: US speculative grade bonds of three point eight percent, So 584 00:36:20,960 --> 00:36:25,360 Speaker 3: you're well over a percentage point greater. And for what 585 00:36:25,440 --> 00:36:29,160 Speaker 3: it's worth, the distress market has tended to perform quite 586 00:36:29,200 --> 00:36:32,279 Speaker 3: well when there's a gap of one percentage point or more, 587 00:36:32,520 --> 00:36:37,759 Speaker 3: much less one point six percentage points. So we'll see 588 00:36:37,760 --> 00:36:40,600 Speaker 3: if the market is better. You know, again, Moody's has 589 00:36:40,640 --> 00:36:44,960 Speaker 3: an optimistic and a pessimistic scenario, so they're not ignoring 590 00:36:46,200 --> 00:36:49,960 Speaker 3: the possibilities, but they're basically saying, our base case is 591 00:36:50,000 --> 00:36:53,880 Speaker 3: sort of a consensus forecast of the economy right now. 592 00:36:54,239 --> 00:36:57,200 Speaker 3: If it turns out that that consensus is too optimistic, 593 00:36:57,600 --> 00:37:00,279 Speaker 3: then you know, maybe the default rate really really will 594 00:37:00,320 --> 00:37:02,160 Speaker 3: be more in line with that three point eight and 595 00:37:02,200 --> 00:37:03,680 Speaker 3: that's over the next twelve months. 596 00:37:03,840 --> 00:37:06,320 Speaker 1: Are you surprised though, that the credit markets have functioned 597 00:37:06,360 --> 00:37:09,080 Speaker 1: so well and you know, the spreads haven't moved very 598 00:37:09,160 --> 00:37:12,440 Speaker 1: much until you know, it strikes me that credit markets 599 00:37:12,920 --> 00:37:16,120 Speaker 1: don't seem to believe that the tariffs will stick, or 600 00:37:16,160 --> 00:37:18,880 Speaker 1: the trade will end in a bad outcome, or you know, 601 00:37:18,920 --> 00:37:21,320 Speaker 1: all of these extreme policies will actually go through. 602 00:37:21,680 --> 00:37:24,640 Speaker 3: Well. Yeah, I think there's been some mirroring of the 603 00:37:24,680 --> 00:37:29,760 Speaker 3: equity market, which since April second have had five hundred 604 00:37:29,880 --> 00:37:33,040 Speaker 3: and one thousand down days and five hundred thousand up 605 00:37:33,120 --> 00:37:37,840 Speaker 3: days as well. And I think that the initial response 606 00:37:38,040 --> 00:37:40,560 Speaker 3: was quite appropriate to say, if we're really going to 607 00:37:40,600 --> 00:37:42,680 Speaker 3: go to one hundred and forty five percent tariff on 608 00:37:42,800 --> 00:37:45,760 Speaker 3: China and we're going to throw up the tariff barriers 609 00:37:45,800 --> 00:37:49,960 Speaker 3: to Canada and Mexico that had been talked about and 610 00:37:50,480 --> 00:37:56,640 Speaker 3: really throw out our historical alliances with the NATO countries, 611 00:37:57,400 --> 00:38:01,480 Speaker 3: that's that's pretty dire and was appropriate that the spreads 612 00:38:01,480 --> 00:38:04,800 Speaker 3: did widen by one hundred bases points are more initially, 613 00:38:05,080 --> 00:38:08,480 Speaker 3: and it's appropriate that they have come back. As Trump 614 00:38:08,520 --> 00:38:13,120 Speaker 3: has talked back. Scott Bessened in particular has been saying, well, 615 00:38:13,160 --> 00:38:15,000 Speaker 3: I haven't talked to Trump. I don't know if he's 616 00:38:15,120 --> 00:38:19,200 Speaker 3: talked to the Chinese about this. He ought to know, 617 00:38:19,360 --> 00:38:22,680 Speaker 3: one would think, but this isn't sustainable that we continue 618 00:38:22,719 --> 00:38:25,000 Speaker 3: at this kind of a level. And that has provided 619 00:38:25,000 --> 00:38:28,000 Speaker 3: some reassurance to the market, and Trump himself has kind 620 00:38:28,040 --> 00:38:32,840 Speaker 3: of walked back this, Well, can't get rid of Jerome 621 00:38:32,920 --> 00:38:35,960 Speaker 3: Powell soon enough to saying well, I'm not playing to 622 00:38:36,000 --> 00:38:38,719 Speaker 3: fire him. Now. You have to wonder how much of 623 00:38:38,719 --> 00:38:40,480 Speaker 3: that is a real change of heart, how much of 624 00:38:40,520 --> 00:38:44,319 Speaker 3: that is Oh, the stock market reacted very poorly. A 625 00:38:44,320 --> 00:38:46,719 Speaker 3: lot of people have four oh one k's and we 626 00:38:46,800 --> 00:38:48,920 Speaker 3: have midterm elections coming up. I don't want to be 627 00:38:48,960 --> 00:38:53,520 Speaker 3: too cynical about this, but whatever the motivations for these 628 00:38:53,600 --> 00:38:57,360 Speaker 3: changes were, I think the market is I think correctly 629 00:38:57,960 --> 00:39:03,960 Speaker 3: sensing some change of aggressiveness, swiftness of change and so on. So, 630 00:39:04,440 --> 00:39:08,839 Speaker 3: you know, doesn't rule out that if trade talks come 631 00:39:08,880 --> 00:39:12,000 Speaker 3: to a standstill, of China just digs in its heels 632 00:39:12,040 --> 00:39:16,000 Speaker 3: in the US digs in its heels feeling and maybe 633 00:39:16,040 --> 00:39:18,560 Speaker 3: appropriate to use the phrase and dealing with China that 634 00:39:18,640 --> 00:39:21,319 Speaker 3: the US wants to save face not be seen as 635 00:39:21,360 --> 00:39:25,640 Speaker 3: backing down. Yeah, you could see the situation worsening again, 636 00:39:25,719 --> 00:39:29,320 Speaker 3: and I would expect the hyld market to reverse course 637 00:39:29,360 --> 00:39:32,760 Speaker 3: again and widen out very substantially. If we see. 638 00:39:32,600 --> 00:39:35,759 Speaker 1: That, worries you most about the outlook for the next 639 00:39:35,800 --> 00:39:36,480 Speaker 1: six months. 640 00:39:37,120 --> 00:39:40,799 Speaker 3: I think the trade situation has to be at the 641 00:39:40,840 --> 00:39:43,520 Speaker 3: top of the list, because you know, we're used to 642 00:39:43,800 --> 00:39:48,239 Speaker 3: dealing with recessions. Recessions come along, and we might have 643 00:39:48,280 --> 00:39:51,680 Speaker 3: been due for a recession without any of that. If 644 00:39:51,800 --> 00:39:54,799 Speaker 3: someone else other than Donald Trump had been elected, or 645 00:39:54,840 --> 00:39:58,880 Speaker 3: if Trump had been elected and decided to focus on 646 00:39:58,880 --> 00:40:02,240 Speaker 3: one of his other many issues rather than putting tariffs 647 00:40:02,280 --> 00:40:04,960 Speaker 3: at the forefront, we might have been in a recession 648 00:40:05,239 --> 00:40:08,319 Speaker 3: before the end of twenty twenty five. Anyway, Recessions do 649 00:40:08,400 --> 00:40:12,000 Speaker 3: come along periodically, and if you consider that the twenty 650 00:40:12,160 --> 00:40:15,799 Speaker 3: twenty recession really was triggered by the pandemic, which was 651 00:40:15,840 --> 00:40:19,360 Speaker 3: a sort of out of nowhere kind of development, then 652 00:40:19,480 --> 00:40:22,919 Speaker 3: we've gone since two thousand and nine without a real, 653 00:40:23,160 --> 00:40:25,440 Speaker 3: real recession, if you want to put it that way. 654 00:40:25,520 --> 00:40:28,480 Speaker 3: So perhaps we were due anyway, But I think that 655 00:40:28,680 --> 00:40:30,600 Speaker 3: people know how to deal with that in dealing with 656 00:40:30,640 --> 00:40:34,520 Speaker 3: a portfolio, they say, well, okay, we can look at 657 00:40:34,640 --> 00:40:37,760 Speaker 3: nineteen ninety ninety one, we can look at two thousand 658 00:40:37,800 --> 00:40:39,799 Speaker 3: and one. Maybe we throw out two thousand and eight, 659 00:40:39,840 --> 00:40:43,000 Speaker 3: two thousand and nine, but we do have the most 660 00:40:43,040 --> 00:40:46,839 Speaker 3: recent experience of twenty twenty, you know, just two months worth. 661 00:40:46,920 --> 00:40:51,040 Speaker 3: But we know what to expect. We can differentiate between 662 00:40:51,440 --> 00:40:54,879 Speaker 3: cyclical and well, there may not be any completely non 663 00:40:54,880 --> 00:41:00,520 Speaker 3: cyclical companies and certainly no countercyclical companies out there, but 664 00:41:01,440 --> 00:41:05,719 Speaker 3: we can adjust, and despite the bad mouthing of the 665 00:41:05,840 --> 00:41:09,440 Speaker 3: rating agencies, sometimes here maybe we will pay some attention 666 00:41:09,600 --> 00:41:14,359 Speaker 3: to how many triple c's we have in the portfolio, 667 00:41:14,680 --> 00:41:16,719 Speaker 3: even though you know, we like some of them, and 668 00:41:16,760 --> 00:41:19,160 Speaker 3: maybe we'll hold on to some of them, but we're 669 00:41:19,160 --> 00:41:23,239 Speaker 3: probably going to upgrade the portfolio in light of that expectation. 670 00:41:23,400 --> 00:41:27,200 Speaker 3: So I think that does really have to be until 671 00:41:28,000 --> 00:41:29,840 Speaker 3: we can get to a point where we say, okay, 672 00:41:31,360 --> 00:41:33,359 Speaker 3: at least we know where we stand. Maybe we are 673 00:41:33,440 --> 00:41:37,400 Speaker 3: going to have ten percent tariff that is going to 674 00:41:37,440 --> 00:41:41,879 Speaker 3: have some adverse effect on global trade, but at least 675 00:41:41,920 --> 00:41:44,600 Speaker 3: we know where we stand. I think, you know, it's 676 00:41:44,640 --> 00:41:49,319 Speaker 3: not only the impact of tariffs, but the huge uncertainty 677 00:41:49,920 --> 00:41:52,200 Speaker 3: that continuing to surround them. 678 00:41:52,400 --> 00:41:54,640 Speaker 1: But also if there is a recession, then the HILD 679 00:41:54,640 --> 00:41:57,359 Speaker 1: spread needs to be double or more where it is now. 680 00:41:57,440 --> 00:42:00,560 Speaker 3: Oh yeah, again, I just don't buy this story that 681 00:42:00,880 --> 00:42:03,320 Speaker 3: you only have to go to seven or eight hundred 682 00:42:03,360 --> 00:42:06,359 Speaker 3: bases points. That's the maximum we'll go to. Now, there 683 00:42:06,440 --> 00:42:08,640 Speaker 3: is a story, I think a legitimate one. One of 684 00:42:08,680 --> 00:42:12,400 Speaker 3: the seal side shops put out a piece recent They said, well, 685 00:42:12,480 --> 00:42:14,840 Speaker 3: you know there's a FED put and no, that's a 686 00:42:14,880 --> 00:42:17,600 Speaker 3: debatable point. But you know, I think it's plausible to say, well, 687 00:42:17,600 --> 00:42:20,880 Speaker 3: we can count on the FED despite all its other mandates, 688 00:42:20,920 --> 00:42:24,080 Speaker 3: you know, the two actual legal mandates of stable prices 689 00:42:24,160 --> 00:42:27,640 Speaker 3: consistent with full employment. The law doesn't say that the 690 00:42:27,680 --> 00:42:30,640 Speaker 3: FED is supposed to be concerned about the trade exchange 691 00:42:30,680 --> 00:42:34,919 Speaker 3: value of the dollar or the value of the stock market. Realistically, 692 00:42:35,320 --> 00:42:38,239 Speaker 3: they start to feel some pressure from Congress, you know, 693 00:42:38,880 --> 00:42:42,880 Speaker 3: when those things fall out of bed. But even with 694 00:42:42,960 --> 00:42:46,040 Speaker 3: all that, maybe the FED does pay attention to where 695 00:42:46,040 --> 00:42:50,600 Speaker 3: the high yield spread is. It is concerned about availability 696 00:42:50,600 --> 00:42:53,399 Speaker 3: of credit for companies that don't qualify for the very 697 00:42:53,400 --> 00:42:55,840 Speaker 3: top credit ratings, and so maybe you can say oh, 698 00:42:55,840 --> 00:42:59,760 Speaker 3: at some point, and the figure I saw in research 699 00:42:59,880 --> 00:43:03,840 Speaker 3: was seven hundred and twenty basis points. Don't interpret that 700 00:43:04,000 --> 00:43:09,000 Speaker 3: is meaning that's where the spread stops. Again mentioning Milton Friedman, 701 00:43:10,120 --> 00:43:14,880 Speaker 3: he famously said that FED policy operates monetary policy operates 702 00:43:15,080 --> 00:43:19,480 Speaker 3: with a lawn lag. So if the Fed starts to 703 00:43:20,080 --> 00:43:22,919 Speaker 3: ease credit in response to a widening of the high 704 00:43:22,960 --> 00:43:25,799 Speaker 3: old bond spread, which ninety percent of the population has 705 00:43:25,800 --> 00:43:28,640 Speaker 3: no idea what you're talking about, but let's grant the 706 00:43:28,640 --> 00:43:31,839 Speaker 3: premise that it will jump in at that point. It's 707 00:43:31,840 --> 00:43:33,880 Speaker 3: not going to stop on a dime. You'll see the 708 00:43:33,880 --> 00:43:37,399 Speaker 3: spread continue to widen from there, and I have high 709 00:43:37,400 --> 00:43:40,400 Speaker 3: confidence that we will get back to a thousand basis 710 00:43:40,400 --> 00:43:43,000 Speaker 3: points on the high Old index as a whole at 711 00:43:43,280 --> 00:43:46,720 Speaker 3: the worst point of the next recession, whenever that occurs. 712 00:43:47,160 --> 00:43:49,680 Speaker 1: Great stuff, Marti Fritz and chief executive officer of Fritz 713 00:43:49,760 --> 00:43:52,239 Speaker 1: and Vision High Yield Strategy. It's been a pleasure having 714 00:43:52,239 --> 00:43:53,200 Speaker 1: you on the Credit Edge Money. 715 00:43:53,200 --> 00:43:55,480 Speaker 3: Thanks really been a pleasure to speak with you and. 716 00:43:55,520 --> 00:43:57,759 Speaker 1: To Spencer Cuts up with Bloomberg Intelligence. Thank you very 717 00:43:57,800 --> 00:43:58,640 Speaker 1: much for joining us today. 718 00:43:58,719 --> 00:44:00,080 Speaker 2: Thank you my pleasure. 719 00:44:00,120 --> 00:44:03,160 Speaker 1: Even more great credit market analysis Read all of Spencer's 720 00:44:03,200 --> 00:44:06,759 Speaker 1: great work on the Bloomberg Terminal. Bloomberg Intelligence is part 721 00:44:06,800 --> 00:44:09,960 Speaker 1: of our research department, with five hundred analysts and strategists 722 00:44:10,000 --> 00:44:13,120 Speaker 1: working across all markets. Coverage includes over two thousand equities 723 00:44:13,120 --> 00:44:15,319 Speaker 1: and credits and outlooks on more than ninety industries and 724 00:44:15,440 --> 00:44:19,800 Speaker 1: one hundred market industries, currencies and commodities. Please do subscribe 725 00:44:19,800 --> 00:44:22,200 Speaker 1: to The Credit Edge wherever you get your podcasts. We're 726 00:44:22,239 --> 00:44:25,160 Speaker 1: on Apple, Spotify, and all other good podcast providers, including 727 00:44:25,200 --> 00:44:28,520 Speaker 1: the Bloomberg Terminal at b pod Go. Give us a review, 728 00:44:28,600 --> 00:44:31,799 Speaker 1: tell your friends, or email me directly at Jcromby eight 729 00:44:31,920 --> 00:44:35,160 Speaker 1: at Bloomberg dot net. I'm James Cromby. It's been a 730 00:44:35,160 --> 00:44:37,880 Speaker 1: pleasure having you join us again next week on the 731 00:44:37,880 --> 00:44:55,560 Speaker 1: Credit Edge