WEBVTT - Junk Defaults May Rise on Small Cap Pain, Says Regions

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<v Speaker 1>Hello, and welcome to Credit Edge of Weekly Markets Podcast.

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<v Speaker 1>My name is James Crombie. I'm a senior editor at Bloomberg.

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<v Speaker 1>This week, we're very pleased to welcome Alan McKnight, chief

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<v Speaker 1>investment officer at Regent's Bank. How are you Ellen?

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<v Speaker 2>Doing great this morning, James, thanks for having me.

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<v Speaker 1>Thank you so much for joining us today. We're very

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<v Speaker 1>excited to hear your credit market views, and we're also

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<v Speaker 1>delighted to have back on the show. Matt Goointner with

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<v Speaker 1>Bloomberg Intelligence.

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<v Speaker 3>Hello, Matt, Hi, everyone, thanks for having me back.

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<v Speaker 1>So just set the scene a little bit here. Credit

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<v Speaker 1>markets are projecting an air of calm. Spreads US super tight.

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<v Speaker 1>There's not very much difference between investment grade and junk

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<v Speaker 1>bonds when it comes to risk premia. On debt rated

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<v Speaker 1>double B you're getting paid as much for default risk

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<v Speaker 1>as you were in twenty nineteen. The gap between doubleby

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<v Speaker 1>and triple B rated bonds hasn't been this tite since

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<v Speaker 1>before the pandemic. The good old returns are okay, but

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<v Speaker 1>it's not really the year of the bond a lot

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<v Speaker 1>of people had expected. That's mostly because of rates which

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<v Speaker 1>remain elevated, undermining total returns and also keeping pressure on

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<v Speaker 1>weak companies that have a lot of debt. Shorter duration

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<v Speaker 1>assets like high yield and floating rate loans are doing

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<v Speaker 1>all right, though not as good as equities, and we've

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<v Speaker 1>seen a ton of issuance, most of it for refinancing,

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<v Speaker 1>so net supply is still thin and portfolio managers have

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<v Speaker 1>a lot of cash to reinvest. That's a very bullish

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<v Speaker 1>technical factor that we should discuss today. Credit markets are

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<v Speaker 1>supported also by strength in the US economy, which is

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<v Speaker 1>good for US companies, but corporate bonds in Europe and

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<v Speaker 1>Asia are actually doing better than in America, boosting the

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<v Speaker 1>case for geographic diversification. And while technically credit markets have legs,

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<v Speaker 1>fundamentally there's more and more to worry about inflation, recession risk,

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<v Speaker 1>debt defaults, bankruptcies, commercial real estate, stress, war, geopolitics. Plus

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<v Speaker 1>everyone's loaded up on US assets going into a very

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<v Speaker 1>noisy presidential election. I've used the word complacency a few

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<v Speaker 1>times on this show, given market valuations, but then again,

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<v Speaker 1>there's just this wall of cash. If you bet against it,

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<v Speaker 1>you're potentially not You're potentially going to miss out on

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<v Speaker 1>another big rally. So I want to start there, alan

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<v Speaker 1>what's your take, What do you expect to see in

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<v Speaker 1>credit markets in the second half. Where do we go

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<v Speaker 1>from here?

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<v Speaker 2>Well, I think as you laid out both the opportunities

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<v Speaker 2>and the risk there right now, certainly the market has

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<v Speaker 2>been incredibly tight this year, particularly in light of a

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<v Speaker 2>slowing global economy, and so as we think about the

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<v Speaker 2>back end of twenty four and start looking out into

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<v Speaker 2>twenty five, we think that you could actually continue to

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<v Speaker 2>do well on the investment grade side and on the

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<v Speaker 2>high yield side, albeit we're going to see spreads widening

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<v Speaker 2>a little bit as we get through the election and

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<v Speaker 2>we start to really focus in on what policy is

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<v Speaker 2>going to be. To your point, on the wall of

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<v Speaker 2>cash that is sitting out there, it's really remarkable to

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<v Speaker 2>us just how much capital is on the sidelines and

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<v Speaker 2>is waiting to be deployed. And I think part of

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<v Speaker 2>that is visible via the supply that we've seen in

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<v Speaker 2>the credit markets, where we've seen up over twenty five

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<v Speaker 2>percent on a year of year basis in terms of

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<v Speaker 2>supply coming in, and the demand has been insatiable, and

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<v Speaker 2>the coverage audit has been has not skipped a beat.

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<v Speaker 2>And so I think to that end as we go

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<v Speaker 2>to the end of the year next year, it does

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<v Speaker 2>make us wonder will that wall of capital continue to

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<v Speaker 2>fund these deals. We haven't seen a hiccup in it yet,

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<v Speaker 2>but that's something that we're we're watching closely.

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<v Speaker 3>This is a Matt with the Bloomberg Intelligence So I'm

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<v Speaker 3>one of the five hundred analysts and strategies here with

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<v Speaker 3>the Bloomberg's research department. When I look at WORP, which

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<v Speaker 3>is our world indust rate probability function on the term,

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<v Speaker 3>it looks like the consensus view for the FED to

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<v Speaker 3>cut at the end of summer in September. That would

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<v Speaker 3>mean that we'd have a historically long pause by the FED,

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<v Speaker 3>which contrasts with BEA's chief rates strategist viewing late fall

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<v Speaker 3>more likely, while we've I guess on the past who've

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<v Speaker 3>highlighted cuts may not come till year end. So are

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<v Speaker 3>you in the consensus camp Allen for a September move

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<v Speaker 3>or what's regions of view?

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<v Speaker 2>We are. We're in the consensus camp, which always makes

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<v Speaker 2>us a little bit uncomfortable. It's a little prickly feeling

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<v Speaker 2>to be in the consensus camp. And to your point,

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<v Speaker 2>this is the second longest pause we've ever had and

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<v Speaker 2>rivals number one, which is back in six oh seven,

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<v Speaker 2>and so again as history as a precedent it it

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<v Speaker 2>does give us a bit of pause around than a

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<v Speaker 2>little bit of heartburn around. Okay, what does that mean

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<v Speaker 2>when they do come with these cuts. But we do

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<v Speaker 2>think September and December the most likely, and any sort

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<v Speaker 2>of tailwind will come from the FMC having more data

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<v Speaker 2>to support that in terms of with PCE later this week,

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<v Speaker 2>with jobless claims continuing to rise and a broadly slowing

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<v Speaker 2>economy may give them a little bit more ammunition to

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<v Speaker 2>be able to do both of those.

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<v Speaker 1>So when you say you think that credit markets can perform,

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<v Speaker 1>you know through the rest of the year, Ellen, what

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<v Speaker 1>do you mean by that? You're talking about much more

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<v Speaker 1>total return or you think tighter spreads on what are

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<v Speaker 1>we talking about here?

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<v Speaker 2>More on the total return basis, because it would be

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<v Speaker 2>hard for Press for them to get tighter spreads. I

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<v Speaker 2>mean when you look at it on a twenty five

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<v Speaker 2>years basis, average investment grades spread around one hundred and

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<v Speaker 2>fifty bases points and we're at ninety more or less.

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<v Speaker 2>So it's hard for us to envisionous getting back much lower,

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<v Speaker 2>and same with high yield when you have a long

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<v Speaker 2>term average of over five twenty on twenty five years

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<v Speaker 2>and we're closer to three three ten right again, So

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<v Speaker 2>we think it really is about total return, and I

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<v Speaker 2>mean the benefit you have there too is just across

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<v Speaker 2>the board. Is assuming we do get rate cuts this

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<v Speaker 2>year and we do see rates coming down a little bit,

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<v Speaker 2>on a total return base, we should see some in

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<v Speaker 2>terms of just pricing where it is today and yields

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<v Speaker 2>where they are, we should see benefit in portfolios.

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<v Speaker 1>Does does that mean that we continue on this kind

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<v Speaker 1>of low single digits track for the full year for

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<v Speaker 1>IGN high y I.

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<v Speaker 2>Think it does. It's not going to be a major rally.

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<v Speaker 2>We're not going to see a big pickup, but compared

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<v Speaker 2>to where it's been to your point at the outset,

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<v Speaker 2>it has been a pretty mediocre. Here are certainly in

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<v Speaker 2>comparison to equities.

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<v Speaker 3>You noted the spread levels. So we actually had the

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<v Speaker 3>head of a US highield strategy from b of A

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<v Speaker 3>on a couple months ago, and he was sort of

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<v Speaker 3>highlighting half of the high old market trading inside of

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<v Speaker 3>two outer basis points, which is typically levels reserved for

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<v Speaker 3>investment grade which you know, it could reflect maybe anticipated upgrades,

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<v Speaker 3>but it could also be sort of investors or bond

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<v Speaker 3>holders looking to position themselves from face or in safer

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<v Speaker 3>names given the current interest rate environment or potential for

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<v Speaker 3>economic volatility. So you know, with that dynamic in mind,

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<v Speaker 3>how do you view spreads being this tight? And with that,

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<v Speaker 3>what are some of the maybe core over or underweights

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<v Speaker 3>that you guys have at this point for maybe the

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<v Speaker 3>back half of twenty four and into next.

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<v Speaker 2>Year certainly, So I think as you note there's those

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<v Speaker 2>spreads are incredibly tight for the highest quality names, and

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<v Speaker 2>I'd say we're bunched up with those folks as well,

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<v Speaker 2>just in terms of we don't think you're really being

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<v Speaker 2>paid to take on an order amount of risk out

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<v Speaker 2>because there's not enough juice in it and the squeeze

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<v Speaker 2>for you for you to do that. And so we've

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<v Speaker 2>really tried to stay stay one higher quality and shorter

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<v Speaker 2>duration and relate to those names. And I think as

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<v Speaker 2>you think about the end of this year, so five

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<v Speaker 2>plus months that we have left and into twenty five,

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<v Speaker 2>I think we would look for an opportunity with any

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<v Speaker 2>volatility to try to pick up maybe some of those

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<v Speaker 2>some of the higher quality names. If we do see

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<v Speaker 2>just a general weakness and the credit markets, we're not

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<v Speaker 2>expecting that, but that would be a nice and pleasant

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<v Speaker 2>surprise we could get a little bit of that in

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<v Speaker 2>terms of being able to pick up something. And then

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<v Speaker 2>to that end, I think what we've seen is we've

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<v Speaker 2>been in our core strategies. We've been overweight credit, higher

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<v Speaker 2>quality credit, which has been allowed us to pick up

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<v Speaker 2>a little bit of yield there without taking on undue risk.

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<v Speaker 2>We haven't really wanted to chase on duration on either

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<v Speaker 2>side either. We just were trying to stay pretty pretty

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<v Speaker 2>conservative as the way I would describe it thus far, okay,

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<v Speaker 2>and through the end of next year, through the end

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<v Speaker 2>of this year and beginning of next year, I think

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<v Speaker 2>that's gonna be the right spot.

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<v Speaker 1>That quality trade though, and I mean everyone wants quality,

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<v Speaker 1>and particularly on the high yield side. You know, double

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<v Speaker 1>b's is a very very crowded trade. Is it not

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<v Speaker 1>just getting you know, expensive in terms of you know

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<v Speaker 1>what conversation you're actually getting for the risk of downgrade

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<v Speaker 1>or you know, worse things happening.

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<v Speaker 2>Now, that's a good point. I think we we challenge

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<v Speaker 2>one another is around that of is it. Are we

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<v Speaker 2>taking on more risk or undue risk by chasing quality?

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<v Speaker 2>But when you think about what the alternative is and

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<v Speaker 2>what pickup we may be able to receive for extending

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<v Speaker 2>out a little bit more, it just hasn't hasn't seemed

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<v Speaker 2>worth it to us. And I think the one big

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<v Speaker 2>question mark for us would be do we see do

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<v Speaker 2>we see default rates pick up even more so than

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<v Speaker 2>they have so now let's say four to seven versus

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<v Speaker 2>you know, long term average culture to four to one.

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<v Speaker 2>Do we see those picking up? And if so, and

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<v Speaker 2>what areas that might be presenting some opportunities. We're not

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<v Speaker 2>there yet, though, And I think that's the thing is

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<v Speaker 2>we've we're sitting on the sidelines waiting. We feel like

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<v Speaker 2>this is the best place to wait until we can

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<v Speaker 2>pick some of that up. But it hasn't come.

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<v Speaker 1>And we've been waiting a long time for those defaults

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<v Speaker 1>to come. And you know, really it seems potentially that

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<v Speaker 1>there's an offramp for some of these companies. You know,

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<v Speaker 1>if rates do come down relatively quickly, and you know,

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<v Speaker 1>the liquidity returns to the market, and you know, the economy,

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<v Speaker 1>soft lending, you know, all that stuff seems to be potential,

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<v Speaker 1>you know, exit for those companies that were struggling. Why

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<v Speaker 1>should we expect defaults to increase at this point.

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<v Speaker 2>Well, I think there's just the reality of the lower

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<v Speaker 2>quality names that while they have not reached that point yet,

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<v Speaker 2>they're in close proximity in terms of a slowdown and

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<v Speaker 2>from an economic perspective, and I think those names so

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<v Speaker 2>if you think about using the equity comparable, you look

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<v Speaker 2>at the small cap indices, and you look at the

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<v Speaker 2>say the Russell two thousand, which over fifty percent of

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<v Speaker 2>those names are non earners right now. They're actually unp offitable.

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<v Speaker 2>There's a lot of names in that sort of realm

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<v Speaker 2>that could be on the tipping point, particularly in light

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<v Speaker 2>of when they have to refinance their debt and they

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<v Speaker 2>just they're having to kick the can and make a shift. Again,

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<v Speaker 2>that doesn't impact the higher quality names. In fact, some cases,

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<v Speaker 2>that's going to push probably even more money into quality

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<v Speaker 2>because people want to get as far away as they

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<v Speaker 2>can't unless they're going to start picking it up, and

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<v Speaker 2>they see more opportunity there. So again I think that's

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<v Speaker 2>the nexus of it for us is around we don't

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<v Speaker 2>think we're at a tipping point yet, but I think

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<v Speaker 2>that's what we're watching more than anything else.

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<v Speaker 1>Are there any sectors in those small caps you're particularly

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<v Speaker 1>worried about when we talked a bit about consumer names

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<v Speaker 1>and real estate in previous shows, Are they areas of

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<v Speaker 1>stress that you see we do?

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<v Speaker 2>And I think on the consumer side, those that are

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<v Speaker 2>most exposed to the lower income consumer in the United

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<v Speaker 2>States are going to be particularly hurt by that because

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<v Speaker 2>as you've seen the spending levels, the discretionary spending with

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<v Speaker 2>low income consumers the United States is really pulled back

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<v Speaker 2>because they have been most impacted by higher it's higher

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<v Speaker 2>fuel prices and higher food prices, and so those are

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<v Speaker 2>the names we would skew away from as we look

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<v Speaker 2>into the consumer we would be more on the staple side,

0:11:10.320 --> 0:11:12.320
<v Speaker 2>which we think you have a little more opportunity there

0:11:12.440 --> 0:11:15.880
<v Speaker 2>or again this concept of higher quality. But even in

0:11:15.960 --> 0:11:18.680
<v Speaker 2>the retailers, where we haven't seen as much of a

0:11:18.720 --> 0:11:21.640
<v Speaker 2>pullback in that spending and they're more targeted to the

0:11:21.720 --> 0:11:24.240
<v Speaker 2>higher to middle income consumer in the United States, that

0:11:24.920 --> 0:11:29.280
<v Speaker 2>seems to be a more conservative bet on that versus

0:11:29.400 --> 0:11:33.200
<v Speaker 2>the low income consumer side that is being materially impacted

0:11:33.240 --> 0:11:33.600
<v Speaker 2>right now.

0:11:33.720 --> 0:11:35.920
<v Speaker 1>Right were just to play devil's advocate a little bit.

0:11:35.960 --> 0:11:38.600
<v Speaker 1>I mean, some people do say that we've seen all

0:11:38.640 --> 0:11:40.839
<v Speaker 1>the defaults in those sectors already because we've been through

0:11:40.840 --> 0:11:44.720
<v Speaker 1>that very tough you know, COVID and post COVID period

0:11:44.760 --> 0:11:46.920
<v Speaker 1>and rates have gone up and they've pushed all of

0:11:46.960 --> 0:11:51.000
<v Speaker 1>that stuff into bankruptcy or into default. So is there

0:11:51.040 --> 0:11:52.360
<v Speaker 1>really any left to do?

0:11:53.040 --> 0:11:54.920
<v Speaker 2>I think there's still some out there. Unfortunately. I think

0:11:54.960 --> 0:11:57.000
<v Speaker 2>there's still a little bit of a little bit of

0:11:57.000 --> 0:12:01.960
<v Speaker 2>space there, primarily because what we've seen is down to

0:12:02.080 --> 0:12:06.440
<v Speaker 2>the consumer level, they have been able to push things out,

0:12:06.440 --> 0:12:10.960
<v Speaker 2>whether that be buy now, pay later, whether they have

0:12:11.040 --> 0:12:14.480
<v Speaker 2>been able to put more on their cards. They've been

0:12:14.520 --> 0:12:16.320
<v Speaker 2>able to extend it out a bit, and so it

0:12:16.360 --> 0:12:19.240
<v Speaker 2>hasn't really flown through in terms of the impact on

0:12:19.240 --> 0:12:20.920
<v Speaker 2>the balance sheets of these companies. But I think it

0:12:21.000 --> 0:12:24.600
<v Speaker 2>will eventually get there. But what you see is this

0:12:24.720 --> 0:12:26.880
<v Speaker 2>stark contrast, you know, the best of times the worst

0:12:26.880 --> 0:12:30.520
<v Speaker 2>of times of those who've been able to manage through

0:12:30.520 --> 0:12:32.920
<v Speaker 2>that at the corporate level. When you look at the walmarts,

0:12:33.000 --> 0:12:35.040
<v Speaker 2>the costcos on the retailer side, even on a home

0:12:35.080 --> 0:12:37.040
<v Speaker 2>deepont of loads that have been able to manage through

0:12:37.080 --> 0:12:40.600
<v Speaker 2>that and continue to prosper through it versus those on

0:12:40.679 --> 0:12:42.720
<v Speaker 2>the low income retailer side that if not that are

0:12:42.720 --> 0:12:43.680
<v Speaker 2>already struggling there.

0:12:44.040 --> 0:12:47.080
<v Speaker 3>So it's sort of in that same vein. If if

0:12:47.080 --> 0:12:49.079
<v Speaker 3>there's a view that there's gonna be economic weakness and

0:12:49.120 --> 0:12:51.840
<v Speaker 3>that the FED cutting rates in response to that, it seems,

0:12:52.320 --> 0:12:54.600
<v Speaker 3>you know, logical that you'd sort of be positioning to

0:12:54.679 --> 0:12:57.560
<v Speaker 3>invest in sectors or names with high barriers to entry

0:12:57.679 --> 0:13:02.400
<v Speaker 3>wide economic modes. So credits with you know, very defensive characteristics,

0:13:02.440 --> 0:13:06.160
<v Speaker 3>which I would think means posturing or having a bias

0:13:06.200 --> 0:13:09.520
<v Speaker 3>more up rather than down in credit quality. So how

0:13:09.520 --> 0:13:12.640
<v Speaker 3>far down the spectrum or you know, what rating wrongs

0:13:12.640 --> 0:13:15.920
<v Speaker 3>are you guys comfortable being invested at if we have

0:13:15.960 --> 0:13:17.880
<v Speaker 3>potential cuts from the FED and it's just not they're not

0:13:17.920 --> 0:13:21.480
<v Speaker 3>able to sort of get that soft landing that many

0:13:21.480 --> 0:13:22.800
<v Speaker 3>are sort of pricing in.

0:13:23.040 --> 0:13:26.360
<v Speaker 2>Yeah, we've definitely skewed to the higher quality credits there. Again,

0:13:26.400 --> 0:13:28.600
<v Speaker 2>in terms of how far are we going down, we're

0:13:28.600 --> 0:13:30.880
<v Speaker 2>sticking on the investment grade side of things, and like

0:13:30.960 --> 0:13:32.880
<v Speaker 2>so if you think about our total portfolio and our

0:13:32.920 --> 0:13:36.480
<v Speaker 2>plus strategies that we manage, we have up to twenty

0:13:36.480 --> 0:13:40.440
<v Speaker 2>percent that can be allocated on non investigrade, and we're

0:13:40.480 --> 0:13:43.040
<v Speaker 2>down at the low end of that range, down closer

0:13:43.040 --> 0:13:46.520
<v Speaker 2>to these seven eight percent range on that. So we've

0:13:46.559 --> 0:13:48.839
<v Speaker 2>really we've really pulled back, you know, in terms of

0:13:48.880 --> 0:13:52.360
<v Speaker 2>where we are. Our view has been that we're not

0:13:52.480 --> 0:13:55.760
<v Speaker 2>picking up the commensurate amount of return outside of that

0:13:56.840 --> 0:13:58.120
<v Speaker 2>to make it work. And so when you think of

0:13:58.200 --> 0:14:01.680
<v Speaker 2>even those names, if you your point on those names

0:14:01.679 --> 0:14:04.360
<v Speaker 2>that have the ability to weather through that, whether that

0:14:04.440 --> 0:14:08.079
<v Speaker 2>be on the industrial side, when you think about the

0:14:08.160 --> 0:14:10.080
<v Speaker 2>names like the Honeywells of this world, when you think

0:14:10.120 --> 0:14:12.920
<v Speaker 2>about even on the consumer staple side, on the beverage

0:14:13.000 --> 0:14:14.880
<v Speaker 2>side of the coach, the Pepsi's that kind of name. Again,

0:14:15.760 --> 0:14:18.199
<v Speaker 2>you're not picking up much in terms of spread there,

0:14:18.559 --> 0:14:21.760
<v Speaker 2>but we think that they're well positioned through that slowdown.

0:14:21.760 --> 0:14:23.800
<v Speaker 2>And so that's what uns this idea that in the

0:14:23.840 --> 0:14:25.440
<v Speaker 2>event that we do start to see a bit of

0:14:25.480 --> 0:14:29.480
<v Speaker 2>a dislocation and or we just see what we would

0:14:29.480 --> 0:14:32.520
<v Speaker 2>describe as instead of a grind down in the economic

0:14:32.560 --> 0:14:34.680
<v Speaker 2>output so far, if it were to have more that

0:14:34.720 --> 0:14:39.600
<v Speaker 2>wily coyote type of moment, you could then we'd be

0:14:39.640 --> 0:14:42.280
<v Speaker 2>well positioned to be able to pivot a bit on

0:14:42.320 --> 0:14:45.320
<v Speaker 2>some of those names, and we just hasn't been worth

0:14:45.360 --> 0:14:46.160
<v Speaker 2>it to chase it this far.

0:14:46.280 --> 0:14:49.680
<v Speaker 3>Yeah, I mean, we had Larry Colpon, who's the CEO

0:14:49.720 --> 0:14:53.200
<v Speaker 3>of g Aerospace, on Bloomberg TV this morning highlighting, you know,

0:14:53.280 --> 0:14:56.160
<v Speaker 3>some of his expectations for a rising defense betting here

0:14:56.160 --> 0:14:59.640
<v Speaker 3>in abroad given the elevated threat environments? Is that part

0:14:59.680 --> 0:15:04.240
<v Speaker 3>of your irrationale behind positive views for maybe certain sectors.

0:15:04.280 --> 0:15:08.840
<v Speaker 3>Does that include industrials, does it include actual defense guys

0:15:08.880 --> 0:15:11.560
<v Speaker 3>and you know, do you sort of share that view

0:15:11.600 --> 0:15:14.960
<v Speaker 3>and does you know that change it all depending on

0:15:15.000 --> 0:15:17.920
<v Speaker 3>who may or may not be in the White House

0:15:18.400 --> 0:15:19.040
<v Speaker 3>a year end.

0:15:19.480 --> 0:15:21.600
<v Speaker 2>Well, we do. I mean, we think that the industrial

0:15:21.640 --> 0:15:23.240
<v Speaker 2>side is going to do well, and we think that

0:15:23.240 --> 0:15:28.040
<v Speaker 2>that can do well, whether it regardless of which administration

0:15:28.600 --> 0:15:31.840
<v Speaker 2>comes in and next January. But the reality is that

0:15:32.240 --> 0:15:35.520
<v Speaker 2>within those and this within those, the industries associated with

0:15:35.840 --> 0:15:39.240
<v Speaker 2>right now owning more defense right now we think is

0:15:39.280 --> 0:15:43.120
<v Speaker 2>a positive because we think that broadly speaking, regardless of

0:15:43.120 --> 0:15:45.320
<v Speaker 2>which side of the aisle you're on, that based on

0:15:45.360 --> 0:15:47.920
<v Speaker 2>what is going on with Ukraine, what's going on in Gaza,

0:15:48.360 --> 0:15:52.680
<v Speaker 2>and the continued tensions with China, that overall we will

0:15:52.720 --> 0:15:55.520
<v Speaker 2>be spending more in that domain as well as other

0:15:55.600 --> 0:15:58.120
<v Speaker 2>countries will be spending more in that domain. So that works.

0:15:58.280 --> 0:16:00.280
<v Speaker 2>But then picking up some more on the industrial side

0:16:00.320 --> 0:16:03.760
<v Speaker 2>as it relates to the infrastructure spin that is likely

0:16:03.800 --> 0:16:06.080
<v Speaker 2>to occur as we go into twenty five. I think

0:16:06.080 --> 0:16:09.280
<v Speaker 2>it's going to be more about where that infrastructure spind

0:16:09.360 --> 0:16:11.960
<v Speaker 2>goes than if it happens at all. I don't think

0:16:12.000 --> 0:16:15.160
<v Speaker 2>either party shown a real desire or proclivity to cut spending. Yeah,

0:16:15.600 --> 0:16:19.080
<v Speaker 2>so I think it's just a more matter of which

0:16:19.640 --> 0:16:21.680
<v Speaker 2>within each of those on the industry side, which you

0:16:21.720 --> 0:16:23.680
<v Speaker 2>can pick up on, but I think that continues to

0:16:23.680 --> 0:16:24.360
<v Speaker 2>do well so.

0:16:24.360 --> 0:16:30.120
<v Speaker 3>Within the industrial space, or you know, maybe even like utilities,

0:16:30.160 --> 0:16:32.520
<v Speaker 3>are there any sort of single name credits that you

0:16:32.600 --> 0:16:34.400
<v Speaker 3>have sort of a high conviction in that could be

0:16:34.440 --> 0:16:38.280
<v Speaker 3>positioned outperform and conversely maybe some names where you think

0:16:38.320 --> 0:16:42.160
<v Speaker 3>that the upside downside is maybe skewed not as favorable.

0:16:42.640 --> 0:16:45.359
<v Speaker 2>Yeah, so I would say one, you know, names like Honeywell,

0:16:45.760 --> 0:16:48.560
<v Speaker 2>Lockheed Martin or names that we have owned, do own

0:16:48.600 --> 0:16:51.000
<v Speaker 2>and feel good about because think they can both in

0:16:51.040 --> 0:16:53.360
<v Speaker 2>terms of from the industrial side and then from the

0:16:53.920 --> 0:16:57.360
<v Speaker 2>defense side. On the Lockheed side, less so on the

0:16:57.680 --> 0:16:59.680
<v Speaker 2>names we've really been shining away from in terms of

0:16:59.680 --> 0:17:01.840
<v Speaker 2>how we're running the portfolio. You know, we don't have

0:17:02.560 --> 0:17:04.440
<v Speaker 2>long We are long only, and so we don't have

0:17:04.480 --> 0:17:07.600
<v Speaker 2>anything that really other than quote unquote shortening against the index.

0:17:07.600 --> 0:17:10.000
<v Speaker 2>But we're not actually taking on a negative view other

0:17:10.040 --> 0:17:13.560
<v Speaker 2>than that. And so I think it's the way we've

0:17:13.600 --> 0:17:15.960
<v Speaker 2>positioned it thus far is to try to be over

0:17:16.040 --> 0:17:20.639
<v Speaker 2>allocated within industrials and then those credits within defense with

0:17:20.720 --> 0:17:25.000
<v Speaker 2>the broadly industrial like the Honeywell has more of a

0:17:25.040 --> 0:17:30.880
<v Speaker 2>broad multi business industrial for sure, industrial and multinational type

0:17:30.880 --> 0:17:32.919
<v Speaker 2>of opportunities. And I think that's the thing too. We

0:17:32.920 --> 0:17:35.520
<v Speaker 2>don't want to be as laser focused on any a

0:17:35.600 --> 0:17:38.880
<v Speaker 2>really narrow interest in those because we think it's broad.

0:17:38.920 --> 0:17:41.000
<v Speaker 2>The spending is going to be broad and it can

0:17:41.080 --> 0:17:42.199
<v Speaker 2>lift all boats.

0:17:43.119 --> 0:17:45.560
<v Speaker 1>And on the utility side, I mean, those bards tend

0:17:45.560 --> 0:17:48.399
<v Speaker 1>to be much longer duration. They obviously got whacked by

0:17:48.480 --> 0:17:51.159
<v Speaker 1>rates rising. Is there a sort of technical reason to

0:17:51.160 --> 0:17:53.400
<v Speaker 1>buy those just because they got cheap on a surprise basis?

0:17:54.240 --> 0:17:56.080
<v Speaker 2>I think there is. I mean I think that we

0:17:56.200 --> 0:17:58.919
<v Speaker 2>like the overall view on the utilities as it relates

0:17:58.960 --> 0:18:01.280
<v Speaker 2>to not just this end we've seen on the AI side,

0:18:01.280 --> 0:18:05.560
<v Speaker 2>which has impacted many of them, but really the long

0:18:05.640 --> 0:18:09.000
<v Speaker 2>term infrastructure type of play with these utilities, specifically those

0:18:09.040 --> 0:18:10.960
<v Speaker 2>names as you see across the Sun Belt in the

0:18:11.080 --> 0:18:14.639
<v Speaker 2>United States, of the continued growth in population and demographic

0:18:14.680 --> 0:18:17.800
<v Speaker 2>shift into those areas, and the ability to generate or

0:18:17.800 --> 0:18:19.880
<v Speaker 2>turn off of those not just on the consumer side

0:18:19.880 --> 0:18:23.480
<v Speaker 2>as you've seen that population growth, but also from a

0:18:23.640 --> 0:18:26.760
<v Speaker 2>from broader commercial side, as you've seen more companies moving

0:18:26.800 --> 0:18:30.320
<v Speaker 2>to those areas, they're able to pick up new user

0:18:30.440 --> 0:18:33.880
<v Speaker 2>you know, commercial and consumer type of clients. So that's

0:18:33.880 --> 0:18:37.000
<v Speaker 2>been a net positive for them and for their ability

0:18:37.080 --> 0:18:40.600
<v Speaker 2>to generate returns off of them.

0:18:40.680 --> 0:18:42.760
<v Speaker 3>So I just to jump back in you kind of

0:18:42.760 --> 0:18:46.520
<v Speaker 3>mentioned earlier, you know, if we get some event happening

0:18:46.560 --> 0:18:49.320
<v Speaker 3>that's leading to some some spread widening and maybe some

0:18:49.359 --> 0:18:52.199
<v Speaker 3>opportunities to jump in, can you maybe highlight you know,

0:18:52.320 --> 0:18:55.200
<v Speaker 3>what are some of those levels that you're looking at

0:18:55.240 --> 0:18:57.720
<v Speaker 3>where it's like, Okay, maybe the negativity has sort of

0:18:57.760 --> 0:19:00.240
<v Speaker 3>gone too far and we like this as an entry point.

0:19:01.640 --> 0:19:04.240
<v Speaker 3>We've signaled some levels of complacency going on right now.

0:19:04.280 --> 0:19:06.760
<v Speaker 3>So where where does the complacency go away?

0:19:06.800 --> 0:19:07.040
<v Speaker 1>For you?

0:19:07.560 --> 0:19:10.560
<v Speaker 2>Well, if you had told me ten years ago that

0:19:10.640 --> 0:19:13.600
<v Speaker 2>I would be saying that, you know, anywhere over one

0:19:13.720 --> 0:19:16.439
<v Speaker 2>twenty one thirty investment grade would be intriguing to me

0:19:16.520 --> 0:19:18.600
<v Speaker 2>because wow, that we've seen a nice wine that's tight,

0:19:18.640 --> 0:19:22.040
<v Speaker 2>and yet that's the one thing that you almost you're

0:19:22.080 --> 0:19:25.200
<v Speaker 2>suspending belief on something. And I think that's one of

0:19:25.200 --> 0:19:27.040
<v Speaker 2>the challenges we faced. We've been doing this for a

0:19:27.080 --> 0:19:29.880
<v Speaker 2>long time. As we think about the old adage from

0:19:29.880 --> 0:19:33.080
<v Speaker 2>Mark Twain, if history doesn't repeat itself, but it rhymes, Yeah,

0:19:33.640 --> 0:19:35.679
<v Speaker 2>we keep coming back to it, and that's what we

0:19:35.680 --> 0:19:39.359
<v Speaker 2>would like to see it, you know, well above you know,

0:19:39.359 --> 0:19:41.520
<v Speaker 2>the one twenty one thirty on investment grade getting closer

0:19:41.560 --> 0:19:43.199
<v Speaker 2>just to the long term average for that to be

0:19:43.240 --> 0:19:46.639
<v Speaker 2>intriguing in a perfect world and maybe be careful what

0:19:46.760 --> 0:19:49.880
<v Speaker 2>you wish for we get above that. But the sort

0:19:49.920 --> 0:19:55.199
<v Speaker 2>of decisive exogenoush factor they would have to create that,

0:19:55.560 --> 0:19:58.320
<v Speaker 2>because it's not just the FED coming to table and

0:19:58.320 --> 0:20:00.080
<v Speaker 2>saying we're not going to do cuts in September or

0:20:00.080 --> 0:20:01.680
<v Speaker 2>we're not going to cut into Simber. We don't think

0:20:01.720 --> 0:20:06.520
<v Speaker 2>that drives the level of widening. It would have to

0:20:06.560 --> 0:20:09.959
<v Speaker 2>be something much more material in our view, and so

0:20:10.000 --> 0:20:11.840
<v Speaker 2>that's what we keep watching around Okay, what else could

0:20:11.840 --> 0:20:15.440
<v Speaker 2>that really be? You know, I mean, so it's like

0:20:15.440 --> 0:20:17.359
<v Speaker 2>the whole scenario analysis around what those may be and do.

0:20:17.520 --> 0:20:19.880
<v Speaker 2>There's not any one thing right now that we would

0:20:19.920 --> 0:20:21.600
<v Speaker 2>point to to say, Okay, this is what is really

0:20:21.600 --> 0:20:23.399
<v Speaker 2>going to drive that higher. It have to be a

0:20:23.440 --> 0:20:25.120
<v Speaker 2>multitude of factors as it relates to those.

0:20:25.400 --> 0:20:26.840
<v Speaker 1>It seems like though, from what you were saying earlier

0:20:26.920 --> 0:20:30.159
<v Speaker 1>on that there is a big demand element here, just

0:20:30.280 --> 0:20:34.760
<v Speaker 1>this endless wall of cash pushing against a limited supply.

0:20:35.240 --> 0:20:38.240
<v Speaker 1>We're seeing it from you know, not just dedicated credit buyers,

0:20:38.240 --> 0:20:41.480
<v Speaker 1>but also crossover buyers and also non US buyers. Everyone's

0:20:41.520 --> 0:20:43.880
<v Speaker 1>piling and then you've got this sort of redemptions and

0:20:44.080 --> 0:20:45.879
<v Speaker 1>maturities and so you've got this all those cash that

0:20:45.920 --> 0:20:48.159
<v Speaker 1>needs to be recycled. Is there anything that you can

0:20:48.160 --> 0:20:50.840
<v Speaker 1>see that might weaken the demand side of the argument?

0:20:51.440 --> 0:20:53.679
<v Speaker 2>Well, I think one point you brought up there is

0:20:54.000 --> 0:20:55.960
<v Speaker 2>a particular interest to us, and that's on the international

0:20:55.960 --> 0:20:58.639
<v Speaker 2>buyers because there has been such a thirst for US

0:20:58.720 --> 0:21:01.320
<v Speaker 2>yield and we've can you to see that it's been

0:21:02.520 --> 0:21:05.119
<v Speaker 2>pretty consistent. So the question we have is as it

0:21:05.119 --> 0:21:08.960
<v Speaker 2>relates to through the election and into twenty five of

0:21:09.760 --> 0:21:12.520
<v Speaker 2>broader policy and what that may or may not do

0:21:12.600 --> 0:21:14.680
<v Speaker 2>in terms of some of those buyers. Those buyers don't

0:21:14.680 --> 0:21:17.680
<v Speaker 2>want to be punished for it. So they already own

0:21:17.960 --> 0:21:19.960
<v Speaker 2>a significant amount of credit. So that's not as though

0:21:20.000 --> 0:21:24.200
<v Speaker 2>they are going to in our view at least widely

0:21:25.200 --> 0:21:27.880
<v Speaker 2>leave and flood and flood the space with a lot

0:21:27.920 --> 0:21:31.159
<v Speaker 2>of with a lot of product. But are they going

0:21:31.200 --> 0:21:33.000
<v Speaker 2>to be the net new buyer? And I think that's

0:21:33.200 --> 0:21:35.800
<v Speaker 2>to your good question. I think it's around will they

0:21:35.800 --> 0:21:38.040
<v Speaker 2>continue to be the net new buyer in an environment

0:21:38.080 --> 0:21:40.000
<v Speaker 2>where policy is more strict of him. When you have

0:21:40.000 --> 0:21:44.600
<v Speaker 2>a policy that relates to geopolitic geopolitical policy, tarifs and

0:21:44.640 --> 0:21:48.399
<v Speaker 2>other things that may create consternation, you could see them

0:21:48.440 --> 0:21:51.879
<v Speaker 2>being net less interested. So that's one category of capital

0:21:51.920 --> 0:21:55.679
<v Speaker 2>that may be coming out. And then as it relates

0:21:55.720 --> 0:21:58.560
<v Speaker 2>to within within the US of just okay, how much

0:21:59.480 --> 0:22:01.520
<v Speaker 2>how much thirst is there? How much you know? And

0:22:01.560 --> 0:22:03.400
<v Speaker 2>the funds that are out there right now. The only

0:22:03.440 --> 0:22:06.000
<v Speaker 2>thing that gives us a bit of a silver lining

0:22:06.040 --> 0:22:09.480
<v Speaker 2>there is the amount that's in cash right now that

0:22:09.640 --> 0:22:11.040
<v Speaker 2>is looking for a home. I mean, you look at

0:22:11.040 --> 0:22:14.119
<v Speaker 2>the data supporting that at the amount of cash money

0:22:14.119 --> 0:22:18.440
<v Speaker 2>market funds and institutional cash, it is significant that could

0:22:18.440 --> 0:22:20.440
<v Speaker 2>be deployed, and so I think that is the one

0:22:20.560 --> 0:22:23.640
<v Speaker 2>counterbalance to some of the international component of those, but.

0:22:23.560 --> 0:22:26.560
<v Speaker 1>That also leads I mean, when there's such excess demand

0:22:26.640 --> 0:22:28.520
<v Speaker 1>for limited spy, you also get a lot of froth.

0:22:28.680 --> 0:22:31.520
<v Speaker 1>So is there any kind of concern there that you're seeing,

0:22:31.600 --> 0:22:33.880
<v Speaker 1>you know that you're seeing. I mean, we're always looking

0:22:33.880 --> 0:22:36.400
<v Speaker 1>for things like more pick deals, more dividend deals, more

0:22:36.720 --> 0:22:40.639
<v Speaker 1>of those sorts of very very speculative fundraisings. Is there

0:22:40.640 --> 0:22:42.560
<v Speaker 1>anything that you're seeing right now that would worry you?

0:22:43.480 --> 0:22:45.199
<v Speaker 2>I think the thing that gives us a bit of

0:22:45.280 --> 0:22:49.639
<v Speaker 2>pause is less so on the cross markets than the

0:22:49.720 --> 0:22:52.000
<v Speaker 2>idea on the private credit side and just what's been

0:22:52.000 --> 0:22:53.399
<v Speaker 2>going on there and the amount of money that is

0:22:53.440 --> 0:22:56.520
<v Speaker 2>there and our inability to get a really good look

0:22:56.560 --> 0:22:59.360
<v Speaker 2>into that to determine how what the net impact would

0:22:59.359 --> 0:23:03.760
<v Speaker 2>be if that money away, and how much how much

0:23:03.760 --> 0:23:06.040
<v Speaker 2>that would impact the broader market, because I do think

0:23:06.080 --> 0:23:10.480
<v Speaker 2>we've seen such a a wall of capital that has

0:23:10.520 --> 0:23:13.560
<v Speaker 2>been moved into private capital in terms of the deals

0:23:13.560 --> 0:23:16.080
<v Speaker 2>that they're doing, and just what is that, what's the

0:23:16.119 --> 0:23:16.960
<v Speaker 2>net takeaway from that.

0:23:17.440 --> 0:23:19.800
<v Speaker 1>Yeah, yeah, I mean it's certainly taken some supply out

0:23:19.880 --> 0:23:23.800
<v Speaker 1>so that as technically it's had some impacts on pricing

0:23:23.840 --> 0:23:26.840
<v Speaker 1>of public markets, but definitely an interesting one to watch.

0:23:28.119 --> 0:23:30.560
<v Speaker 1>I just wanted to also ask you about some other

0:23:30.880 --> 0:23:33.120
<v Speaker 1>credit I mean, there's there's so many, it's a it's

0:23:33.160 --> 0:23:38.760
<v Speaker 1>a big broad universe. But beyond bonds, what about loans?

0:23:38.800 --> 0:23:43.320
<v Speaker 1>You know, they've they've done very well. There's potentially some

0:23:43.440 --> 0:23:46.280
<v Speaker 1>kind of cracks appearing in the thesis around you know,

0:23:46.400 --> 0:23:48.879
<v Speaker 1>floating rate because rates are coming down, maybe that's not

0:23:48.920 --> 0:23:50.720
<v Speaker 1>as compelling as it was. And then you've got a

0:23:50.760 --> 0:23:54.080
<v Speaker 1>lot of people buying clos securitized credit. What what else

0:23:54.080 --> 0:23:55.800
<v Speaker 1>are you looking at in terms of other parts of

0:23:55.840 --> 0:23:56.840
<v Speaker 1>credit markets.

0:23:57.240 --> 0:24:00.440
<v Speaker 2>Yeah, so we've been we really have not jumped into

0:24:00.440 --> 0:24:02.959
<v Speaker 2>the foray on the COLO side ever since just has

0:24:03.000 --> 0:24:06.200
<v Speaker 2>not been intrigued to us, but more because we haven't

0:24:06.200 --> 0:24:08.080
<v Speaker 2>felt like, as long term buyers as much that there's

0:24:08.080 --> 0:24:10.080
<v Speaker 2>been an opportunity set there, and so we've just said,

0:24:10.119 --> 0:24:13.120
<v Speaker 2>you know, we'd rather just wait. That is one area

0:24:13.160 --> 0:24:15.120
<v Speaker 2>where because of the sheer demand that we have seen

0:24:15.520 --> 0:24:19.199
<v Speaker 2>in recent years, we just didn't feel compelled to have

0:24:19.240 --> 0:24:20.840
<v Speaker 2>to chase after it. We just didn't think that that

0:24:21.040 --> 0:24:24.240
<v Speaker 2>was worthy of of allocated additional capital on it. So

0:24:24.320 --> 0:24:28.439
<v Speaker 2>I think that's one area where we've where we've remained restrained,

0:24:29.240 --> 0:24:32.000
<v Speaker 2>if you will. But I think as we as we

0:24:32.040 --> 0:24:35.359
<v Speaker 2>look out over the coming six to twelve months, it

0:24:35.400 --> 0:24:38.040
<v Speaker 2>would be intriguing to see if we do see again,

0:24:38.320 --> 0:24:40.560
<v Speaker 2>not a base case, but it broad a broad slow

0:24:40.600 --> 0:24:42.960
<v Speaker 2>down if things just pick up steam. We have some

0:24:43.080 --> 0:24:45.400
<v Speaker 2>challenges where there could be an opportunity set for us.

0:24:45.400 --> 0:24:47.640
<v Speaker 2>We haven't. We haven't waded into it, but it would

0:24:47.640 --> 0:24:50.119
<v Speaker 2>be of interest later on. And those would be almost

0:24:50.160 --> 0:24:52.000
<v Speaker 2>when you think about you're sitting upon the terminal and

0:24:52.000 --> 0:24:54.199
<v Speaker 2>you're watching the thing, the things that could become the

0:24:54.280 --> 0:24:57.280
<v Speaker 2>opportunities that they haven't reached that level yet, but would

0:24:57.320 --> 0:24:59.119
<v Speaker 2>be intriguing at that at that point.

0:24:59.320 --> 0:25:01.680
<v Speaker 1>Okay, other parts of a B S. Are you looking

0:25:01.760 --> 0:25:04.399
<v Speaker 1>at consumer abs or any of the other I mean,

0:25:04.440 --> 0:25:06.439
<v Speaker 1>we've seen a lot of whole business All that stuff

0:25:06.480 --> 0:25:08.159
<v Speaker 1>is that of interest at the moment people think that

0:25:08.160 --> 0:25:10.800
<v Speaker 1>there's value there, So I'm wondering if you're seeing the same.

0:25:11.119 --> 0:25:12.879
<v Speaker 2>Yeah, you know, it's interesting you talk about the on

0:25:12.880 --> 0:25:14.840
<v Speaker 2>the consumer ARABS side and we have not been as

0:25:14.880 --> 0:25:16.960
<v Speaker 2>interested there only because we felt like there's there's a

0:25:17.040 --> 0:25:22.560
<v Speaker 2>reason that it's been undervalued, and you know what was

0:25:22.600 --> 0:25:23.840
<v Speaker 2>the all that is that you could it could remain

0:25:23.920 --> 0:25:26.920
<v Speaker 2>undervalue longer than you can remain solvent, right and uh.

0:25:27.000 --> 0:25:28.679
<v Speaker 2>And so I think that's been one where we just

0:25:28.800 --> 0:25:31.280
<v Speaker 2>in this and it's reflected in the comments earlier just

0:25:31.280 --> 0:25:33.399
<v Speaker 2>about the consumer in the United States as well and

0:25:33.440 --> 0:25:38.040
<v Speaker 2>specifically those who are having to wait into that we'd

0:25:38.119 --> 0:25:41.359
<v Speaker 2>rather step away from that. So so we have so

0:25:41.400 --> 0:25:44.520
<v Speaker 2>our exposure that has been you know, below the index

0:25:44.560 --> 0:25:46.760
<v Speaker 2>and below our you know, our normal allocations there because

0:25:46.760 --> 0:25:49.200
<v Speaker 2>we haven't felt like is we're getting paid for the

0:25:50.080 --> 0:25:51.480
<v Speaker 2>inherent risk, right right?

0:25:51.560 --> 0:25:53.840
<v Speaker 1>And I'm guessing you'd probably say the same about commercial

0:25:53.880 --> 0:25:56.359
<v Speaker 1>real estate and all that stuff. But I would like

0:25:56.400 --> 0:25:59.240
<v Speaker 1>to ask, you know, what, what risks do you think

0:25:59.560 --> 0:26:03.040
<v Speaker 1>there are of like commercial real estate becoming a bigger problem,

0:26:03.040 --> 0:26:05.280
<v Speaker 1>because you know, it's it's often spoken about, it's often

0:26:05.280 --> 0:26:08.119
<v Speaker 1>talked about as something that could take down hundreds of

0:26:08.160 --> 0:26:11.680
<v Speaker 1>banks in the US and be very very problematic, and

0:26:11.760 --> 0:26:14.560
<v Speaker 1>yet we you know, it just seems to be you know,

0:26:14.840 --> 0:26:17.159
<v Speaker 1>bubbling under the surface, and it hasn't really blown up,

0:26:17.160 --> 0:26:19.560
<v Speaker 1>and people I think, you know, there are deals going on,

0:26:19.680 --> 0:26:23.800
<v Speaker 1>their assets being brought their investors, they're picking up, but

0:26:23.920 --> 0:26:26.159
<v Speaker 1>it's not blowing up. Are you worried about commercial real

0:26:26.280 --> 0:26:26.800
<v Speaker 1>estate at all?

0:26:27.200 --> 0:26:29.320
<v Speaker 2>We are, and we're worried about it from a slightly

0:26:29.359 --> 0:26:32.280
<v Speaker 2>different point of view, which is one of it's it's

0:26:32.480 --> 0:26:34.600
<v Speaker 2>less so for the banks. Would you think there's some

0:26:34.600 --> 0:26:37.560
<v Speaker 2>mediosyncratic risk there for certain banks who are overexposed, and

0:26:37.560 --> 0:26:40.359
<v Speaker 2>we've seen some of that over the last six months

0:26:40.480 --> 0:26:43.920
<v Speaker 2>nine months, But broadly speaking, the ones who are going

0:26:43.960 --> 0:26:45.800
<v Speaker 2>to be the most penalized by it in this in

0:26:45.840 --> 0:26:49.920
<v Speaker 2>this marked to market and the quick dash to mark

0:26:50.000 --> 0:26:54.960
<v Speaker 2>down values will be the private funds who have who

0:26:54.960 --> 0:26:56.600
<v Speaker 2>have put a lot of money into these and have

0:26:56.640 --> 0:26:59.840
<v Speaker 2>been unwilling to really mark these to market or unwilling

0:26:59.840 --> 0:27:02.560
<v Speaker 2>to depends on what your point of view, so dadd

0:27:02.560 --> 0:27:04.200
<v Speaker 2>you say, it all depends on whose bulls being gored,

0:27:05.359 --> 0:27:08.680
<v Speaker 2>But it really is about when they have to start

0:27:08.720 --> 0:27:11.280
<v Speaker 2>marketing those down and the investors associated with that, which

0:27:11.320 --> 0:27:13.680
<v Speaker 2>are the large institutional investors and some of these funds

0:27:13.680 --> 0:27:15.800
<v Speaker 2>that are going to start to get hit by that.

0:27:15.800 --> 0:27:19.400
<v Speaker 2>That becomes a real challenge for them, but we don't

0:27:19.440 --> 0:27:22.520
<v Speaker 2>think it's a systemic risk. Across the financial services industry

0:27:22.520 --> 0:27:25.520
<v Speaker 2>and specifically in banking, it will hit a couple of

0:27:25.560 --> 0:27:32.240
<v Speaker 2>smaller entities who have really over allocated to that sector

0:27:32.280 --> 0:27:34.959
<v Speaker 2>and industry. I think it also will very much it

0:27:35.040 --> 0:27:38.600
<v Speaker 2>is aligned with the region of the country and the

0:27:38.600 --> 0:27:40.639
<v Speaker 2>world that you're in as associated with that, because I

0:27:40.640 --> 0:27:43.000
<v Speaker 2>think the marks you're going to get in certain parts

0:27:43.040 --> 0:27:45.399
<v Speaker 2>of the US that have continued to struggle from a

0:27:45.480 --> 0:27:47.960
<v Speaker 2>growth perspective will look very different than some of the

0:27:48.040 --> 0:27:51.480
<v Speaker 2>growth areas where they haven't built up as much. And

0:27:51.480 --> 0:27:54.560
<v Speaker 2>there's probably a trade that can happen closer to the

0:27:54.560 --> 0:27:56.880
<v Speaker 2>mark than in other areas.

0:27:56.840 --> 0:27:59.520
<v Speaker 1>But it's not one that you're actively looking into at

0:27:59.520 --> 0:27:59.919
<v Speaker 1>the moment.

0:28:00.440 --> 0:28:03.600
<v Speaker 2>No, we're not. I think we would just have to

0:28:03.600 --> 0:28:10.560
<v Speaker 2>see a much larger shift there. Again, we would have

0:28:10.600 --> 0:28:15.320
<v Speaker 2>to see more owners mark down their properties that we

0:28:15.440 --> 0:28:17.440
<v Speaker 2>just have not seen yet. It's just I think those

0:28:17.480 --> 0:28:19.560
<v Speaker 2>could prevent some real opportunities for some of the own

0:28:19.640 --> 0:28:22.000
<v Speaker 2>you know, some of the larger commercial real estate credits

0:28:22.040 --> 0:28:25.480
<v Speaker 2>out there, but that's just not there yet. So opportunity

0:28:25.920 --> 0:28:30.159
<v Speaker 2>but not the big not the complete systemic risk that

0:28:30.200 --> 0:28:32.479
<v Speaker 2>I think some would consider okay.

0:28:32.960 --> 0:28:35.119
<v Speaker 1>I mean, obviously we're right in the middle of the

0:28:35.240 --> 0:28:38.200
<v Speaker 1>US election here, and things are changing by the minutes

0:28:38.280 --> 0:28:40.440
<v Speaker 1>and will probably be different by the time we put

0:28:40.480 --> 0:28:42.640
<v Speaker 1>this thing out. But I did want to ask you

0:28:42.680 --> 0:28:44.560
<v Speaker 1>about the Trump trade. You know there are there is

0:28:44.600 --> 0:28:47.080
<v Speaker 1>a lot of talk that you know, well, obviously trade

0:28:47.160 --> 0:28:50.040
<v Speaker 1>is like volatility, and they like trading different narratives. Things

0:28:50.040 --> 0:28:52.760
<v Speaker 1>are changing, so that's that's an opportunity to do something.

0:28:52.760 --> 0:28:55.080
<v Speaker 1>But is there a big Trump trade in your view

0:28:55.160 --> 0:28:56.400
<v Speaker 1>in terms of credit markets.

0:28:58.280 --> 0:29:01.120
<v Speaker 2>I think it's really the influence of events when you

0:29:01.120 --> 0:29:04.960
<v Speaker 2>think of the Trump trade, if you will, last two weeks,

0:29:05.000 --> 0:29:07.800
<v Speaker 2>which has been as he's received the nomination at the

0:29:07.840 --> 0:29:11.080
<v Speaker 2>Republican National Convention, a lot of the noises associated with

0:29:11.160 --> 0:29:13.600
<v Speaker 2>President Biden and as that was coming on. But then

0:29:13.640 --> 0:29:17.960
<v Speaker 2>you in the same lockstep, you had the FOMC, the

0:29:18.040 --> 0:29:21.160
<v Speaker 2>fact that inflation looked to continue to come down, you

0:29:21.160 --> 0:29:23.880
<v Speaker 2>saw jobless claims picking up, you saw the unemployment picking up.

0:29:23.880 --> 0:29:26.800
<v Speaker 2>So I think it was not just that it wouldn't

0:29:26.840 --> 0:29:28.680
<v Speaker 2>all be allocated to the Trump trade. There are those

0:29:28.720 --> 0:29:31.600
<v Speaker 2>other items that were really given that tailwind credit markets

0:29:31.600 --> 0:29:35.120
<v Speaker 2>and people saying okay, convergence of those would say, you know,

0:29:35.160 --> 0:29:39.120
<v Speaker 2>the likelihood has certainly risen from the Trump perspective in

0:29:39.200 --> 0:29:43.480
<v Speaker 2>terms of presidency, the likelihood of the FOMC doing something

0:29:43.520 --> 0:29:47.040
<v Speaker 2>in the next five months high or at least as

0:29:47.120 --> 0:29:49.080
<v Speaker 2>high as it had been. So again, those things have

0:29:49.080 --> 0:29:49.800
<v Speaker 2>have factored in.

0:29:50.800 --> 0:29:53.880
<v Speaker 1>The economists is saying that, you know, at least what

0:29:54.280 --> 0:29:57.760
<v Speaker 1>has been verbalized from the Trump camp would be very

0:29:58.000 --> 0:30:01.880
<v Speaker 1>inflationary if it was to he be enacted as policy,

0:30:02.480 --> 0:30:04.440
<v Speaker 1>in which case you presume you want to buy low

0:30:04.560 --> 0:30:06.800
<v Speaker 1>duration and leverage loans and all that stuff. But do

0:30:07.400 --> 0:30:12.080
<v Speaker 1>you fear a renewal of, you know, a resumption in

0:30:12.320 --> 0:30:16.280
<v Speaker 1>inflation if there is a big GOP suite in the

0:30:16.400 --> 0:30:17.080
<v Speaker 1>November election.

0:30:18.520 --> 0:30:20.600
<v Speaker 2>Yeah. Our base case isn't that we see a real

0:30:20.800 --> 0:30:22.920
<v Speaker 2>pick up in inflation, more so that it's just going

0:30:23.000 --> 0:30:26.760
<v Speaker 2>to continue to remain higher than the Fed would like.

0:30:27.160 --> 0:30:30.240
<v Speaker 2>We just you know, we look at it as inflation

0:30:30.280 --> 0:30:32.760
<v Speaker 2>took the elevator up. Now it's taking the escalator down,

0:30:33.080 --> 0:30:36.360
<v Speaker 2>and it's almost like the slow escalator grinding lower because

0:30:36.360 --> 0:30:38.120
<v Speaker 2>it's just not getting back to that two percent target

0:30:38.120 --> 0:30:41.280
<v Speaker 2>anytime in the in your future. And nothing about the policies,

0:30:41.320 --> 0:30:44.520
<v Speaker 2>at least as presented from either side right now would

0:30:44.600 --> 0:30:47.280
<v Speaker 2>lead me to believe that that is going to change,

0:30:47.680 --> 0:30:49.600
<v Speaker 2>that there's going to be a pickup. And even as

0:30:49.640 --> 0:30:52.160
<v Speaker 2>we talk about this, you think of people talk about

0:30:52.200 --> 0:30:55.840
<v Speaker 2>inflation coming down, the expectation still that it is rising

0:30:56.080 --> 0:30:58.400
<v Speaker 2>at above average. It's still going you know, it hasn't

0:30:58.400 --> 0:31:00.080
<v Speaker 2>gone back to where it was. You said that, you

0:31:00.120 --> 0:31:03.240
<v Speaker 2>know the fantasyad is of pre pre COVID. We're still

0:31:03.280 --> 0:31:06.560
<v Speaker 2>not going back to those levels. It's just not rising

0:31:06.600 --> 0:31:08.840
<v Speaker 2>as fast as it did before. And I think that's

0:31:08.880 --> 0:31:13.040
<v Speaker 2>where we struggle with seeing an environment that it will.

0:31:14.960 --> 0:31:17.600
<v Speaker 1>So in terms of opportunity, when you look around all

0:31:17.640 --> 0:31:19.480
<v Speaker 1>of the stuff you get to look at every day,

0:31:19.600 --> 0:31:22.040
<v Speaker 1>not just in the US, is there something you particularly

0:31:22.080 --> 0:31:24.040
<v Speaker 1>put your finger on now as an opportunities Is there

0:31:24.080 --> 0:31:26.959
<v Speaker 1>something that you know of trade that you have very

0:31:27.040 --> 0:31:29.000
<v Speaker 1>high conviction in that maybe others are missing.

0:31:30.320 --> 0:31:33.040
<v Speaker 2>Well. I think as we think about it, there's this

0:31:33.800 --> 0:31:36.680
<v Speaker 2>what did Voltaire say? Doubt is an unpleasant condition, but

0:31:36.800 --> 0:31:41.480
<v Speaker 2>certainty is absurd. I think we don't feel real certain

0:31:41.480 --> 0:31:43.240
<v Speaker 2>about any of the trades right now, other than what

0:31:43.240 --> 0:31:47.400
<v Speaker 2>we've discussed before around a higher quality trade and waiting

0:31:47.440 --> 0:31:49.280
<v Speaker 2>a bit until we get to see a bit more

0:31:50.440 --> 0:31:52.560
<v Speaker 2>unearthed over the next six months. I think that's going

0:31:52.600 --> 0:31:54.239
<v Speaker 2>to be the opportunity set and being able to have

0:31:54.280 --> 0:31:56.880
<v Speaker 2>ready capital to deploy going into that because aren't that

0:31:56.880 --> 0:31:58.520
<v Speaker 2>many fat pitches out there. There aren't many things where

0:31:58.520 --> 0:32:01.480
<v Speaker 2>you'd say, wow, spreads are in dodibly wide. We have

0:32:01.680 --> 0:32:03.880
<v Speaker 2>a real dislocation and we're willing to put money at

0:32:03.960 --> 0:32:05.600
<v Speaker 2>really cheap levels. I mean, there are a few here

0:32:05.600 --> 0:32:08.520
<v Speaker 2>and there, but even to the discussion earlier about the consumer,

0:32:08.640 --> 0:32:11.880
<v Speaker 2>even on the ABS side, we would argue they're cheap

0:32:11.920 --> 0:32:15.720
<v Speaker 2>for a reason, and so it doesn't it doesn't make

0:32:15.800 --> 0:32:19.080
<v Speaker 2>us compelled to go out and chase that trade. We'd

0:32:19.160 --> 0:32:22.240
<v Speaker 2>rather wait, be a bit more conservative on it, and

0:32:22.280 --> 0:32:24.760
<v Speaker 2>then hopefully let some things come to us over the

0:32:24.760 --> 0:32:26.600
<v Speaker 2>next six months and have enough capital be able gott

0:32:26.600 --> 0:32:28.640
<v Speaker 2>and deploy that and not get hit as much as

0:32:28.640 --> 0:32:31.440
<v Speaker 2>some others before we put that to work. And I

0:32:31.440 --> 0:32:33.360
<v Speaker 2>think that's part of this too, where we haven't chased

0:32:33.360 --> 0:32:34.719
<v Speaker 2>some of these deals even I mean, you look at

0:32:34.720 --> 0:32:37.640
<v Speaker 2>the coverage on some of the deals that have come

0:32:37.680 --> 0:32:41.080
<v Speaker 2>to market over the last month, let's say, and it's

0:32:41.120 --> 0:32:44.320
<v Speaker 2>just the sheer amount of capital that's out there, but

0:32:44.360 --> 0:32:45.000
<v Speaker 2>you know, just.

0:32:45.520 --> 0:32:46.960
<v Speaker 3>I mean, the Bowing deal was like eight to ten

0:32:47.000 --> 0:32:49.440
<v Speaker 3>times over subscribed. It's incredible, and.

0:32:50.000 --> 0:32:51.640
<v Speaker 2>It just has to scratch in our head when you

0:32:51.640 --> 0:32:53.120
<v Speaker 2>get the numbers back, you say, if we say that

0:32:53.120 --> 0:32:55.360
<v Speaker 2>one more time, what did you do? The coverages on

0:32:55.440 --> 0:32:58.120
<v Speaker 2>that one was the over subscription? And so I think

0:32:58.160 --> 0:33:00.520
<v Speaker 2>that's where we'd rather be patient.

0:33:01.280 --> 0:33:02.800
<v Speaker 1>Is that some way you think you particularly have an

0:33:02.880 --> 0:33:03.840
<v Speaker 1>edge right now?

0:33:05.320 --> 0:33:08.320
<v Speaker 2>It's interesting. I think it actually lies in that willingness

0:33:08.320 --> 0:33:11.640
<v Speaker 2>to be patient and be more long term, because I

0:33:11.640 --> 0:33:13.920
<v Speaker 2>think there's so many folks around us that get caught

0:33:13.960 --> 0:33:15.360
<v Speaker 2>up in the whims and vagaries of the market. They

0:33:15.440 --> 0:33:18.360
<v Speaker 2>just feel they have to get they have to put

0:33:18.400 --> 0:33:20.560
<v Speaker 2>some money to work, and they have to try to

0:33:20.560 --> 0:33:22.800
<v Speaker 2>pick up at the margin a little bit more yield

0:33:23.160 --> 0:33:26.880
<v Speaker 2>to get that return. We're willing to wait, you know,

0:33:26.880 --> 0:33:28.400
<v Speaker 2>and so in the short run that can be a

0:33:28.440 --> 0:33:31.040
<v Speaker 2>little more punitive to returns because obviously you're you're not

0:33:31.120 --> 0:33:32.680
<v Speaker 2>chasing it, so you're not going to see that in

0:33:32.720 --> 0:33:35.640
<v Speaker 2>the short run. But over the long run, we think

0:33:35.680 --> 0:33:40.880
<v Speaker 2>it's it's the most prudent course, and and with that

0:33:40.920 --> 0:33:43.040
<v Speaker 2>you sort of get that, you know, the ben gram

0:33:43.080 --> 0:33:45.360
<v Speaker 2>adage of the weighing machine rather than the voting machine.

0:33:45.360 --> 0:33:46.720
<v Speaker 2>You know, we think people are chasing a lot of

0:33:46.760 --> 0:33:48.800
<v Speaker 2>stuff right now. We think you better served to wait

0:33:48.800 --> 0:33:50.520
<v Speaker 2>it out a little bit. Doesn't mean being out of

0:33:50.560 --> 0:33:53.240
<v Speaker 2>the market. It just means skewing to be more conservative

0:33:53.240 --> 0:33:53.640
<v Speaker 2>within it.

0:33:54.160 --> 0:33:56.800
<v Speaker 1>And is that the best hedge against any potential volatility

0:33:56.840 --> 0:33:57.840
<v Speaker 1>that could come down.

0:33:58.000 --> 0:34:00.520
<v Speaker 2>We think so. And I think that's the one thing

0:34:02.160 --> 0:34:06.000
<v Speaker 2>we believe is that volatility will pick up. It's just

0:34:06.040 --> 0:34:11.920
<v Speaker 2>a matter of when, not if. And I think, as

0:34:11.960 --> 0:34:15.399
<v Speaker 2>we've talked about in the past, this idea of how

0:34:15.400 --> 0:34:18.160
<v Speaker 2>did you go broke gradually and then suddenly and it

0:34:18.200 --> 0:34:20.000
<v Speaker 2>comes so quickly it's almost what we saw of late

0:34:20.040 --> 0:34:22.520
<v Speaker 2>with the I'm talking about the equity side of the

0:34:22.560 --> 0:34:27.279
<v Speaker 2>house with small caps. Small caps underperformed and unperformed until

0:34:27.320 --> 0:34:29.160
<v Speaker 2>they didn't and then within a seven to day trading

0:34:29.280 --> 0:34:33.600
<v Speaker 2>range those spiked and made up over a thousand basis

0:34:33.600 --> 0:34:35.160
<v Speaker 2>points of return. I think that sort of thing that

0:34:35.160 --> 0:34:38.560
<v Speaker 2>we'll see this volatility pick up, and being well positioned

0:34:38.560 --> 0:34:40.640
<v Speaker 2>and more conservative will allow us to then put money

0:34:40.640 --> 0:34:42.600
<v Speaker 2>to work rather than having to retrench or be on

0:34:42.640 --> 0:34:44.840
<v Speaker 2>the side of a while. Now I've got is jettison

0:34:44.920 --> 0:34:47.640
<v Speaker 2>some names to try to make room. I think we're

0:34:47.680 --> 0:34:48.840
<v Speaker 2>actually in really good shape.

0:34:49.440 --> 0:34:51.359
<v Speaker 1>What's the one thing you worry about most in terms

0:34:51.400 --> 0:34:53.279
<v Speaker 1>of what might spark that volatility?

0:34:55.280 --> 0:34:59.800
<v Speaker 2>I think it's the confluence of geopolitical issues that seemed

0:34:59.800 --> 0:35:04.600
<v Speaker 2>to be even more not dire, but certainly more present

0:35:05.320 --> 0:35:09.400
<v Speaker 2>than almost at any other time, and the interrelated nature

0:35:09.440 --> 0:35:12.120
<v Speaker 2>of them, and the fact that I think markets are

0:35:12.120 --> 0:35:15.160
<v Speaker 2>more global than they have ever been. And regardless of

0:35:15.160 --> 0:35:20.400
<v Speaker 2>how folks may feel about that path going forward, you

0:35:20.800 --> 0:35:22.600
<v Speaker 2>wake up in the morning in any given day and

0:35:22.640 --> 0:35:24.000
<v Speaker 2>they're a host of things to be going and I

0:35:24.000 --> 0:35:26.080
<v Speaker 2>think those are the things that can bring shocks, and

0:35:26.120 --> 0:35:28.680
<v Speaker 2>those shocks can then force people's hands again and this

0:35:28.800 --> 0:35:32.279
<v Speaker 2>idea that they suddenly don't have the hedge that they

0:35:32.280 --> 0:35:35.880
<v Speaker 2>thought they meaning to jettison things, and it creates that spiral.

0:35:36.400 --> 0:35:39.040
<v Speaker 2>And that spiral is twenty four to seven globally in

0:35:39.120 --> 0:35:40.520
<v Speaker 2>terms of what that can do. And I think we

0:35:40.560 --> 0:35:42.840
<v Speaker 2>saw that to a certain extent back in the in

0:35:42.880 --> 0:35:45.440
<v Speaker 2>the spring, in the financial crisis, in a few areas,

0:35:45.480 --> 0:35:48.200
<v Speaker 2>in certain banks. You know, again, it just it happened

0:35:48.239 --> 0:35:50.399
<v Speaker 2>so rapidly that if you had told me that twenty

0:35:50.480 --> 0:35:53.880
<v Speaker 2>years ago, that you could see that shift that I

0:35:53.920 --> 0:35:56.960
<v Speaker 2>would have said, oh there's it's not possible, not physically possible,

0:35:57.400 --> 0:35:58.479
<v Speaker 2>and yet that's where we were.

0:35:59.480 --> 0:36:02.440
<v Speaker 1>Great stuff, and I'm mcnight, Chief Investment Officer at Regions Bank.

0:36:02.480 --> 0:36:04.279
<v Speaker 1>It's been a pleasure having you on the Credit Edge. Minny.

0:36:04.320 --> 0:36:06.239
<v Speaker 2>Thanks, thanks so much for having me today, and.

0:36:06.239 --> 0:36:08.800
<v Speaker 1>Of course we're very grateful to Matt Goiitner from Bloomberg Intelligence.

0:36:08.840 --> 0:36:09.759
<v Speaker 1>Thank you for joining us again.

0:36:09.880 --> 0:36:11.279
<v Speaker 3>Matt, thanks everyone appreciate it.

0:36:11.560 --> 0:36:13.879
<v Speaker 1>For more Credit analysis, read all of Matt Goyner's great

0:36:13.920 --> 0:36:16.480
<v Speaker 1>work on the Bloomberg Terminal. Bloomberg Intelligence is part of

0:36:16.520 --> 0:36:19.239
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0:36:19.280 --> 0:36:22.560
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0:36:22.560 --> 0:36:24.719
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0:36:24.760 --> 0:36:28.520
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0:36:28.560 --> 0:36:30.600
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0:36:43.040 --> 0:37:05.520
<v Speaker 1>having you join us again next week on the Credit edge.