Speaker 1: Pushkin from Pushkin Industries. This is Deep Background, the show
Speaker 1: where we explore the stories behind the stories in the news.
Speaker 1: I'm Noah Feldman. Today. We're returning to covid are once
Speaker 1: and it seems almost eternal topic. But we're not going
Speaker 1: to be talking about viruses and vaccines, at least not directly. Instead,
Speaker 1: our topic today is the very bizarre behavior of financial
Speaker 1: markets that we're observing right now, both stock market and
Speaker 1: the bond market under circumstances of global pandemic. To help
Speaker 1: make sense of the somewhat bizarre and anomalous behaviors of
Speaker 1: the markets right now, I'm joined by an expert on
Speaker 1: those things. He's Boas Weinstein, the founder of Saba Capital,
Speaker 1: a hedge fund in Manhattan. Boas has been deep in
Speaker 1: the markets for almost twenty years now, and he has
Speaker 1: a repute as among the most intellectually brilliant students of
Speaker 1: the subject. We spoke on Monday. Wells, thank you very
Speaker 1: much for joining me. I want to start with something
Speaker 1: that maybe probably is incredibly obvious to people in your
Speaker 1: line of work, but the rest of us are a
Speaker 1: little bit puzzled by, and that is the economy is
Speaker 1: in a shambles. Companies are shutting down, thirty million people
Speaker 1: are just about are going to be unemployed, and yet
Speaker 1: the stock market, after an initial marked decline, has been
Speaker 1: climbing mostly back up. At the most basic level, why
Speaker 1: is this happening? So I myself, I'm scratching my head
Speaker 1: wondering how can that be? And so you know, there
Speaker 1: are a number of explanations, but let's just talk about
Speaker 1: the best one, the easiest to understand. And so, you know,
Speaker 1: I think nobody would disagree that the economic picture looks terrible.
Speaker 1: It's worse in the quarter that we're now in than
Speaker 1: in the first quarter was pretty terrible. But stocks represent
Speaker 1: the future cash blows of a company for all of time.
Speaker 1: So a dollar earned in twenty twenty two may be
Speaker 1: less certain and less valuable than a dollar in today,
Speaker 1: But since the interest rates are hovering near zero, the
Speaker 1: difference between those two dollars, one earned today and one
Speaker 1: earned a year or two from now, is not that
Speaker 1: significant in a financial model, and so that's what's meant
Speaker 1: by the time value of money. So even if you
Speaker 1: write off this year as a year where corporate profits
Speaker 1: in the aggregate are going to be quite weak, if
Speaker 1: you believe that the economy is headed for a V
Speaker 1: shaped recovery, you can justify stock prices where they are today.
Speaker 1: And of course there's this question, is a V shaped
Speaker 1: recovery the best guess of what the future holds? So
Speaker 1: V shape recovery we can all picture it. We shot
Speaker 1: down on one egg of the V, and then we're
Speaker 1: going to shoot back up on the other leg of
Speaker 1: the V. There are other options, though, and they all
Speaker 1: have little letters attached to them. So what are some
Speaker 1: of the other options, and maybe help us while you're
Speaker 1: describing the different options, help us think about whether one
Speaker 1: is more credible to believe in than the other. Right,
Speaker 1: So the cousin of the of the V is the U.
Speaker 1: In fact, they're right next to each other in the alphabet,
Speaker 1: which you didn't need me to come on and talk about.
Speaker 1: And so in that telling, it's unclear where we are
Speaker 1: in the U. Did we hit the bottom and we're
Speaker 1: about to start curving upward or things going to get worse?
Speaker 1: But we know they're going to get better. And so
Speaker 1: I think people can also not fret about stock prices
Speaker 1: if they think we're in a U. And I should
Speaker 1: also say part of why we even think we might
Speaker 1: be here. Has a ton to do with what the
Speaker 1: Federal Reserve and the government has been doing, which we'll
Speaker 1: get to, i'm sure in just a minute. But aside
Speaker 1: from V and you you know, there's then all of
Speaker 1: a sudden, you start getting too much scarier letters. The
Speaker 1: L is dreaded, the L is really bad. But I
Speaker 1: think the W is really where my head is at,
Speaker 1: that we're going to be in a world where we
Speaker 1: just don't know, and the emotional side of investing, you know,
Speaker 1: is the Fed's interventions going to be enough, Is the
Speaker 1: economy can recovery? Is there going to be a vaccine
Speaker 1: soon enough? You know, we're going to get these fits
Speaker 1: and arts and rallies and der markets are very very typical,
Speaker 1: so that in a sense that's not unusual. And so
Speaker 1: for me, the W best reflects the seesaw that we're
Speaker 1: going to be in. So let's talk about the W,
Speaker 1: because in the W, we first come down like the
Speaker 1: beginning of the V, and then we start to come
Speaker 1: back up again, and we're probably in that second bit
Speaker 1: of the W where we're coming back up, and then
Speaker 1: it's going to go back down again before it comes
Speaker 1: up and in that theory. Presumably one of the reasons
Speaker 1: that we're coming back up is the government's intervention, the
Speaker 1: Federal reserves intervention of essentially pouring cash into the economy
Speaker 1: and giving it to investors at incredibly low, unimaginably previously
Speaker 1: low interest rates, just draining cheap cash. How is that
Speaker 1: affecting the market. I mean, I've heard people say, and
Speaker 1: this seems intuitively plausible, that because there's just so much
Speaker 1: money coming in that reassures investors to keep the values
Speaker 1: of stocks high. But I've heard other people saying, well,
Speaker 1: it's not even that sophisticated. There's no reassurance. It's just
Speaker 1: free money. And what are you gonna do with the
Speaker 1: free money. You're gonna have to put it into the
Speaker 1: markets because you've got to put it somewhere, right, Well,
Speaker 1: you know there's that you have to put it somewhere.
Speaker 1: Wall Street's really built on alphabet, soup, and acronyms, and
Speaker 1: that is best encapsulated with two, which is fear of
Speaker 1: missing out. So fomo if you don't put it somewhere,
Speaker 1: and then things do go up. The emotional side of
Speaker 1: did you miss it? You know, why were you not
Speaker 1: following the herd. And then of course, Tina, there is
Speaker 1: no alternative. Tina's really really special in this market. And
Speaker 1: so to your question, you know, it's not just low
Speaker 1: interest rates. We've been in a low interest rate world forever,
Speaker 1: well at least for many years, even if it's lower now.
Speaker 1: But it's also the enormous amount of purchasing of US
Speaker 1: traguries mortgage backed securities, which I think people have to understand,
Speaker 1: take them out of the hands of investors, and then
Speaker 1: they have cash. They sold them because they got, you know,
Speaker 1: an amazing price, and now the question is where do
Speaker 1: they put it? And they could leave it in cash,
Speaker 1: but the theory, of course is that many of those
Speaker 1: investors will put it somewhere else. But the fed's backing
Speaker 1: of the market has extended to the commercial paper funding facility,
Speaker 1: the primary dealer credit facility, the money market mutual fund
Speaker 1: liquidity facility, and I could name ten more if you
Speaker 1: only let me. And so they've really gone whole hog
Speaker 1: and are not done yet. And so if you just
Speaker 1: look in the aggregate of what the stimulus has been
Speaker 1: from the three bills thus far, I find this quite shocking.
Speaker 1: The stimulus in the aggregate is greater than the stimulus
Speaker 1: that happened over a four year period after the Great Depression.
Speaker 1: So we've already just in a few short months, spent
Speaker 1: a bigger percentage of our GDP than was spent to
Speaker 1: stimulate the economy back in nineteen twenty nine. And of
Speaker 1: course back then it didn't quite work right. It wasn't
Speaker 1: really until I know, there's a big debate about this,
Speaker 1: but it really wasn't until a World War two that
Speaker 1: we got the kind of rise in production that helped
Speaker 1: get the economy out of the doldrums. Sure, so that
Speaker 1: could be the reason why they have to go bigger
Speaker 1: this time. So the question is was it just a
Speaker 1: question of size, or can the government, in the face
Speaker 1: of a credibly steep correction, recession, maybe even depression, can
Speaker 1: they actually stop up all of that supply of people
Speaker 1: who want to exit risk and restore the markets. And
Speaker 1: I think that question is going to go and fits
Speaker 1: and starts, which is where the w comes in. Even
Speaker 1: where we are with respect to the economy turning back
Speaker 1: on Visa VI, the pandemic ebbing, and you know, all
Speaker 1: these things are open questions, and so I think one
Speaker 1: interesting kind of meta question about The original topic here
Speaker 1: is why do investors have such confidence? You know, we're
Speaker 1: supposed to have confidence in markets that look like markets
Speaker 1: we've been in. The people you know that have been
Speaker 1: trained in finance, whether it's at Wharton or Harvard or
Speaker 1: anywhere else, or you know, from the mean streets of
Speaker 1: Wall Street have used models and heuristics that apply to
Speaker 1: a certain range of examples. And are we not now
Speaker 1: in uncharted territory for anyone who was, you know, barely
Speaker 1: alive even during the Great Depression? How can you have
Speaker 1: confidence that the market ought to be higher than it
Speaker 1: was a year ago? And that's I think where, you know,
Speaker 1: I start to feel like this has a lot more
Speaker 1: to do with temporary factors in psychology. And I see
Speaker 1: examples from a different market than the stock market, from
Speaker 1: the credit market, which is the aggregate bigger than the
Speaker 1: stock markets, that's the bond market, the loan market, and
Speaker 1: I see signs that are much more worrying than the
Speaker 1: confidence inspired by the recent rallying stocks. Let's turn to
Speaker 1: that other market. So until now, we've been mostly talking
Speaker 1: about the stock market, which is equity, which means that
Speaker 1: what's being traded our shares, which means you still have
Speaker 1: an ownership stake in that company going forward, and even
Speaker 1: if the company were to fail, if you hold shares
Speaker 1: in it, you still have a claim on the assets
Speaker 1: of the company, and if it reorganizes itself, you still
Speaker 1: hold onto your shares. Bond markets are different. There, we're
Speaker 1: trading the money that the companies owe, the cash that
Speaker 1: they owe. Tell us what are the bad signs, the
Speaker 1: ominous signs that you're seeing there, because my impression is
Speaker 1: that the bond markets do not share the apparent enthusiasm
Speaker 1: of the stock market. Well, so, firstly, there are arguments
Speaker 1: that they ought to share in it because if you
Speaker 1: look at what the FED has done, some of it
Speaker 1: is to in fact restore confidence in that market. The
Speaker 1: FED hasn't resorted to buying stocks yet, but they have
Speaker 1: agreed to buy basically pools of risky credit, not low
Speaker 1: risk mortgage backed securities or US treasuries, but high risk
Speaker 1: in fact, things that are called junk. The FED has
Speaker 1: gone to buying junk through exchange traded funds and also
Speaker 1: lending to companies that used to be investment grade and
Speaker 1: are now raded junk. And that occurred late in March
Speaker 1: because of COVID, and so we saw it most notably
Speaker 1: happened to Ford and to Macy's and to energy companies
Speaker 1: like Occidental Petroleum. And so the things that are most
Speaker 1: worrying to me in the bond market that you don't
Speaker 1: see in the stock market is that despite that action,
Speaker 1: despite the FED being there to lend, we see a
Speaker 1: lot of hiled companies that were already a pretty risky spot. So,
Speaker 1: you know, recently J. C. Penny has announced that it's
Speaker 1: skipping its interest payments. It's days away from actually filing
Speaker 1: for bankruptcy. Jay Crewe has filed for bankruptcy. Neiman Marcus
Speaker 1: filed for bankruacy. So some of those, one might say, well,
Speaker 1: they were already teetering for a while, so you know,
Speaker 1: how unusual is that. On the other hand, we've seen
Speaker 1: companies that were trading very well before COVID that have
Speaker 1: been dramatically affected, notably Hurts, which was a company whose
Speaker 1: bonds were trading at one hundred at the full claim.
Speaker 1: You know, you make a loan and you're owed back
Speaker 1: one hundred percent. The bonds of Hurts or the gaming
Speaker 1: reservation Mohegan's Son were even above par and now they're
Speaker 1: down into the teens or twenties cents in the dollar
Speaker 1: in the case of Hurts and Mohican Son has fallen
Speaker 1: in half. And so there are a number of companies
Speaker 1: despite all of this, that are defaulting, that will default.
Speaker 1: Expectations for a default rate is extremely high in credit
Speaker 1: and also for small businesses. And so despite all of
Speaker 1: this money being offered to airlines to cruise lines, I
Speaker 1: see continued fear in the credit market, as evidenced by
Speaker 1: the price of the bonds, and also a market called
Speaker 1: the credit rative market. And I see banks that are
Speaker 1: using this derivatives market to hedge themselves to American Airlines,
Speaker 1: United Airlines, Royal Caribbean forward hedging in a way that
Speaker 1: to me, the prices suggest these companies have a real
Speaker 1: chance of defaulting, even though that is inconsistent with the
Speaker 1: idea that the government is going to save those companies.
Speaker 1: So from an intuitive perspective of all that makes sense. Right. So,
Speaker 1: I mean, to the ordinary civilian you think of Hurts,
Speaker 1: They're doing just fine. They're a well run company. Lots
Speaker 1: of people are renting cars, fewer people maybe owned cars.
Speaker 1: So then in the long run you expect a lot
Speaker 1: of people to rent cars. You expect Hurts to be
Speaker 1: able to pay back its debts, then suddenly no one's
Speaker 1: going anywhere, and you expect it to be a lot
Speaker 1: more likely the Hurts won't be able to pay off
Speaker 1: its debts. So that sort of makes common sense. And
Speaker 1: then the thing that you would imagine would not make
Speaker 1: it go down would just be that the government was
Speaker 1: going to effectively bail out Hurts, right, that the government
Speaker 1: was going to buy their debt or make of they're
Speaker 1: debt in some way. And if people think maybe the
Speaker 1: government won't do that for Hurts, then what you're describing
Speaker 1: makes a lot of sense. And it seems as though
Speaker 1: the credit markets are behaving closer to what an outsider
Speaker 1: to the financial markets would expect, and that it's the
Speaker 1: stock market that's the surprising bit. Am I getting that right? Yeah,
Speaker 1: it would be incongruous to have a default rate which
Speaker 1: is in the double digits, which is what's really being
Speaker 1: expected now. So it's not that i'mbarished and mine is
Speaker 1: in the double digits, but others are in the single digits.
Speaker 1: We're expecting a default rate equal or greater to what
Speaker 1: happened in two thousand and eight when we had Lehman
Speaker 1: Brothers default in all of the General Motors and Chrysler
Speaker 1: and everything that came after it. We're expecting actually a
Speaker 1: higher default rate and for a much longer period of time.
Speaker 1: And the third part, which is pernicious is that the
Speaker 1: recoveries what the bond holders are getting back for suffering
Speaker 1: these defaults, are very very low. There was just last
Speaker 1: week a auction of recently defaulted bonds for a company
Speaker 1: called Whiting Petroleum, and those bonds only fetched seven cents
Speaker 1: in the dollar. So normally, as a bond holder, since
Speaker 1: you have a claim on the assets of the company,
Speaker 1: you might expect a recovery more like thirty cents forty cents,
Speaker 1: even if you didn't have a security, you know, like
Speaker 1: in a mortgage. But recoveries have been very low, defaults
Speaker 1: have been high, and so it's really historically inconsistent to
Speaker 1: have a world where the default rate is high, companies
Speaker 1: are defaulting, and the stock market is high at the
Speaker 1: same time. Of course, it didn't have to be this way.
Speaker 1: Companies could have been less levered, which would have given
Speaker 1: them more liquidity, more time to weather the storm. But
Speaker 1: you know, there are a lot of signs pre COVID
Speaker 1: that leverage was running extremely high at the corporate level
Speaker 1: and the default rate was even picking up. Despite the
Speaker 1: bull market we were in, there were wearying signs from
Speaker 1: the credit market, which is what I followed day in
Speaker 1: and day out, which was already giving you pause. And
Speaker 1: here we are, the defaults are not just coming through.
Speaker 1: I would say the stigma of defaulting has changed, because
Speaker 1: now it's not well, we mismanaged the business or a
Speaker 1: Y and z, it's blame it on COVID, which is
Speaker 1: not necessarily unfair. But the stigma of missing a bond
Speaker 1: payment feels, you know, and I can't exactly say why,
Speaker 1: feel like in the marketplace defaulting is becoming more tolerable
Speaker 1: and it's it's contagious. Well, I mean you sort of
Speaker 1: have said why, right, I mean, here you have companies
Speaker 1: that are already highly levered, meeting they already owe as
Speaker 1: much money as they could conceivably owe, and maybe more
Speaker 1: than they should, and so they were a little teetery.
Speaker 1: And then as you say, you know, this is human nature,
Speaker 1: there's an excuse to do it. You say, well, you
Speaker 1: know it's true that they were contributing factors, but really,
Speaker 1: we would have gotten through this were it not for
Speaker 1: this unforeseeable event, And it just seems like that's the
Speaker 1: way excuse has hurt done all the time. You know,
Speaker 1: it's a sort of dog gate my homework way of
Speaker 1: thinking about it, But there's some truth to it if
Speaker 1: the dog really ate your homework, or at least you
Speaker 1: know it slobbered all over it. So I think you've
Speaker 1: given a sufficient psychological account of why not only would
Speaker 1: companies say this, but other people would be prepared to
Speaker 1: listen to it. And the contagion point also makes sense.
Speaker 1: If lots of companies are doing it, there's just a
Speaker 1: limit to how much stigma you can attach to each
Speaker 1: company that does it, and so pretty soon there's not
Speaker 1: that much stigma. So that part, I think you've already
Speaker 1: explained it. Well, it's probably fun to note that there
Speaker 1: is one person that took bankruptcy to a new level
Speaker 1: and it didn't stop him from making the most out
Speaker 1: of it, and that's that's our president, whose company suffered
Speaker 1: bankruptcy dozens of times. So anyhow, I don't know if
Speaker 1: that really has a role, but you know, that's actually
Speaker 1: fundamentally what's happening that companies are defaulting. We'll be back
Speaker 1: in just a moment. Let's turn Baus to what's going
Speaker 1: to happen next? You say the bond markets are a
Speaker 1: little bit are more than a little bit nervous. They're concerned,
Speaker 1: and if you're right, you're also suggesting the possibility that
Speaker 1: the stock market itself could go down. What's going to happen?
Speaker 1: You know, how prepared is the government for another crisis?
Speaker 1: You know, for the third leg in the w where
Speaker 1: having boosted us all up, we go back down again.
Speaker 1: What will that day look like? Well, so now you're
Speaker 1: asking me to opine about this murkiness that I said
Speaker 1: was highly uncertain and hard to predict. We'll give us
Speaker 1: a range of options. How about that? In my telling
Speaker 1: of it, having seen what happened, where at the first
Speaker 1: sign of trouble the government stepped in and arranged a
Speaker 1: marriage in two thousand and eight between JP Morgan and
Speaker 1: bear Stearns. Bear Sterns needed a rescue and so they
Speaker 1: were saved and the default didn't occur. But then with
Speaker 1: Lehman Brothers the default did occur, And with General Motors
Speaker 1: and Christ's Third the default did occur. And so there
Speaker 1: is this question of if we really do have finite money,
Speaker 1: if there is something to be believed in what Mitch
Speaker 1: McConnell said, you know, worrying about the total level of
Speaker 1: debt and said quite instantly early things about perhaps municipalities
Speaker 1: need to default. So if the D word is going
Speaker 1: to you know, be present and causing pain for investors,
Speaker 1: I think rationing the stimulus to where it's most needed
Speaker 1: is maybe how things are going to evolve. And so
Speaker 1: maybe the answer isn't to save every company that's going
Speaker 1: to get hurt because of the COVID crisis, but instead
Speaker 1: protect the jobs of those companies without necessarily protecting the
Speaker 1: bond holders. And so that's one way it could evolve.
Speaker 1: And in that way, asset prices can go down, bond
Speaker 1: prices certainly can go down, and even stock prices should
Speaker 1: go down. And in that world, you know, perhaps the
Speaker 1: dollars are better spent on the individual investor. And it
Speaker 1: really raises I think something that's going on right now,
Speaker 1: we can see it. We don't have to wait for
Speaker 1: the future. This is something I listened with interest to
Speaker 1: a week ago said by Larry Summers on Bloomberg TV,
Speaker 1: which is if you look at how companies are scrambling
Speaker 1: right now to raise money. Almost all of that money
Speaker 1: is being raised in the debt market. So just ten
Speaker 1: days ago Boeing raised twenty five billion dollars through more debt.
Speaker 1: Forward raised seven billion GM four billion. Retailers like Polls
Speaker 1: or Gap Stores came into the debt market to bar
Speaker 1: own more money. But Summers raised the question of is
Speaker 1: that actually the best thing for the company when it
Speaker 1: comes to solvency. Ought they not raise equity at the
Speaker 1: same time, or aught they not raise significant amounts of
Speaker 1: equity instead of debt as a way to bolster their balancie.
Speaker 1: It is a way for them to have cash without
Speaker 1: having the obligation to pay it back. And so in
Speaker 1: the way that I think a lot of Americans are
Speaker 1: upset when they see companies take money and go buy
Speaker 1: back shares. In a sense, this is like the inverse
Speaker 1: of it. Well, now they're in trouble, why don't they
Speaker 1: issue shares? Why don't they raise money? The way I
Speaker 1: saw over my career companies do in times of fear,
Speaker 1: like in two thousand and two when we had and
Speaker 1: Ron default in worldcome a lot of companies at that
Speaker 1: point in time chose to raise equity. And so while
Speaker 1: it is happening today, the International steel company Mittal raised
Speaker 1: some equity, United did Carnival did. I think the best
Speaker 1: answer of why it's not happening is that the management
Speaker 1: is too afraid to dilute their shareholders, and so the
Speaker 1: amounts of money they would need to raise to deal
Speaker 1: with the COVID crisis is so great that they would
Speaker 1: really be hurting their stock price, but they would be
Speaker 1: shoring up their liquidity and their solvency, and so that's
Speaker 1: to me. The next phase is that whether the government's
Speaker 1: loans come with equity stakes, which basically creates that situation
Speaker 1: where they are diluted, or companies do it themselves where
Speaker 1: they access the markets, whether they're forced to or want
Speaker 1: to through equity, which would be a much in my view,
Speaker 1: much better outcome for all of Americans. And when you
Speaker 1: say that the corporate management doesn't want to dilute their shareholders,
Speaker 1: do you mean that they're basically just worried that then
Speaker 1: the shareholders will vote them out. Well, part of it
Speaker 1: is maybe just the amount of money they need to
Speaker 1: raise is so great that they just couldn't get there
Speaker 1: purely with equity, but we're seeing a lot of the
Speaker 1: capital raising done purely on the debt side, So it
Speaker 1: doesn't answer why are they not doing both or why
Speaker 1: are they not doing heavy amounts of equity. And I
Speaker 1: think some of it comes back to the greed of
Speaker 1: not wanting their share price to go down. But by
Speaker 1: taking out more debt, you're creating a more levered situation,
Speaker 1: a company that is more exposed to a prolonged downturn
Speaker 1: leading to default. And so it might be in the
Speaker 1: shareholder's interest, and I think the FED in somebody's has
Speaker 1: encouraged it by saying they're going to backstop lending to
Speaker 1: fallen angels and they're going to buy high oldtfs, when
Speaker 1: really there should be a lot more equity raised. When
Speaker 1: the government signals that it's willing to basically ensure companies,
Speaker 1: why shouldn't they go borrow that money in cash. They're
Speaker 1: gambling that someone's going to back them up if they fail.
Speaker 1: That's fairer baus. Let me just close by asking you
Speaker 1: what should I be asking you about what's going to
Speaker 1: happen or what is happening that I haven't I mean,
Speaker 1: there's obviously a huge amount of complexity here, and you've
Speaker 1: gone very far towards clarifying and simplifying it for the
Speaker 1: listeners and for me, which I'm really grateful for. But
Speaker 1: what am I not asking you that I should be
Speaker 1: asking you? So the thing that I most want to
Speaker 1: get off my chest is that I see a market
Speaker 1: that normal, non professional investors believe is driven by fundamental forces,
Speaker 1: and I see it more than ever driven by technical forces.
Speaker 1: And define that what are technical forces? So instead of
Speaker 1: what's the intrinsic value of a company worth using a
Speaker 1: financial model, it's who's doing what to whom and in
Speaker 1: what quantity? How many sellers are there compared to buyers?
Speaker 1: What's the relationship between related instruments such as the debt
Speaker 1: of a company and the equity of a company, And
Speaker 1: I see large divergences. As an investor, I've always been
Speaker 1: much more focused on relative value on looking at a company.
Speaker 1: Let's take United Airlines, which is having tremendous issues. They
Speaker 1: had to shelve a debt deal. They were bringing debt,
Speaker 1: They did bring a little bit of equity beforehand, and
Speaker 1: they had to shelve it over lack of demand. And
Speaker 1: I look at the difference in price between the debt
Speaker 1: of the US airlines and the equity which still has
Speaker 1: considerable value, and I see a dislocation there compared to history.
Speaker 1: I see that the debt is actually giving a much
Speaker 1: more negative picture. And so when I look at the
Speaker 1: market today versus five years ago and even much further back,
Speaker 1: I see a market really driven by technical forces, and
Speaker 1: so the things that are of interest to my relative
Speaker 1: value strategies are off the charts. Interesting right now, there's
Speaker 1: a type of trade that we've been doing for about
Speaker 1: a dozen companies that in my twenty two years of
Speaker 1: doing this type of trade has never been this good,
Speaker 1: and normally you don't expect that to be, you know,
Speaker 1: in a market where we're only ten fifteen percent off
Speaker 1: of the high. My takeaway from that is is that
Speaker 1: markets are highly unstable because relationships that tend to correlate
Speaker 1: are right now breaking down. There's a lot of havoc.
Speaker 1: There's a lot of market segmentation where some investors are
Speaker 1: only doing one kind of thing and other investors are
Speaker 1: doing another, and it's led to an opportunity set which
Speaker 1: is really quite exceptional for my kind of strategy. But
Speaker 1: it also even though I don't have any more crystal
Speaker 1: ball than anyone else. It does give me great caution
Speaker 1: when it comes to the direction of markets. I'm quite
Speaker 1: worried that the markets are going to be headed lower
Speaker 1: and that the if the V comes, you know, the
Speaker 1: V was already mostly priced in, and the risk of
Speaker 1: it not being a V is far greater based on
Speaker 1: current levels. Well, it's not a cheerful moment on which
Speaker 1: to end, but it is definitely honest and I really
Speaker 1: appreciate it. Boaz, thank you so much for your time.
Speaker 1: Thank you, Noah. Boaz's account gives us substantial food for
Speaker 1: thought when we think about the behavior of the financial
Speaker 1: markets right now. He's validating our general concern that there's
Speaker 1: something strange about the way that the stock market the
Speaker 1: equity markets continue to be behaving as though a V
Speaker 1: shape recovery were to be soon expected. Going forward, the
Speaker 1: deep question is whether the different signals being sent by
Speaker 1: bond markets and the stock market will eventually come into coordination.
Speaker 1: Logically speaking, if they do, there's only two ways that
Speaker 1: can happen. Either things can get better in the bond
Speaker 1: markets than they are now, or it seems much more
Speaker 1: likely things in the stock market can get a lot worse.
Speaker 1: Above all, I'm really struck that just as we're highly
Speaker 1: dependent upon scientists in a moment of pandemic to try
Speaker 1: to explain in ordinary language what's going on, we're also
Speaker 1: dependent on financial market experts to try to explain to
Speaker 1: the rest of us what they see happening in their
Speaker 1: own very distinctive and very consequential world. Until the next
Speaker 1: time I speak to you, be careful, be safe, and
Speaker 1: be well. Deep background is brought to you by Pushkin Industries.
Speaker 1: Our producer is Lydia Jane Cott, with research help from
Speaker 1: Zooie Wynn and mastering by Jason Gambrel and Martin Gonzalez.
Speaker 1: Our showrunner is Sophie mckibbon. Our theme music is composed
Speaker 1: by Luis gera special thanks to the Pushkin Brass, Malcolm Gladwell,
Speaker 1: Jacob Weisberg, and Mia Loebell. I'm Noah Feldman. I also
Speaker 1: write a regular column for Bloomberg Opinion, which you can
Speaker 1: find at Bloomberg dot com slash Feldman. To discover Bloomberg's
Speaker 1: original slate of podcasts, go to Bloomberg dot com slash podcasts.
Speaker 1: And one last thing. I just wrote a book called
Speaker 1: The Arab Winter a trag. I would be delighted if
Speaker 1: you checked it out. You can always let me know
Speaker 1: what you think on Twitter about this episode, or the book,
Speaker 1: or anything else. My handle is Noah R. Feldman. This
Speaker 1: is deep background