WEBVTT - The Financial Markets and COVID-19 0:00:15.396 --> 0:00:22.156 Pushkin from Pushkin Industries. This is Deep Background, the show 0:00:22.196 --> 0:00:25.556 where we explore the stories behind the stories in the news. 0:00:26.076 --> 0:00:30.396 I'm Noah Feldman. Today. We're returning to covid are once 0:00:30.436 --> 0:00:33.676 and it seems almost eternal topic. But we're not going 0:00:33.716 --> 0:00:38.196 to be talking about viruses and vaccines, at least not directly. Instead, 0:00:38.196 --> 0:00:41.916 our topic today is the very bizarre behavior of financial 0:00:41.996 --> 0:00:46.156 markets that we're observing right now, both stock market and 0:00:46.356 --> 0:00:51.116 the bond market under circumstances of global pandemic. To help 0:00:51.156 --> 0:00:54.916 make sense of the somewhat bizarre and anomalous behaviors of 0:00:54.916 --> 0:00:57.996 the markets right now, I'm joined by an expert on 0:00:58.036 --> 0:01:02.476 those things. He's Boas Weinstein, the founder of Saba Capital, 0:01:02.836 --> 0:01:06.036 a hedge fund in Manhattan. Boas has been deep in 0:01:06.076 --> 0:01:08.596 the markets for almost twenty years now, and he has 0:01:08.636 --> 0:01:12.996 a repute as among the most intellectually brilliant students of 0:01:13.036 --> 0:01:17.076 the subject. We spoke on Monday. Wells, thank you very 0:01:17.116 --> 0:01:21.036 much for joining me. I want to start with something 0:01:21.076 --> 0:01:24.076 that maybe probably is incredibly obvious to people in your 0:01:24.116 --> 0:01:25.956 line of work, but the rest of us are a 0:01:25.956 --> 0:01:29.836 little bit puzzled by, and that is the economy is 0:01:29.836 --> 0:01:34.476 in a shambles. Companies are shutting down, thirty million people 0:01:34.476 --> 0:01:37.676 are just about are going to be unemployed, and yet 0:01:37.756 --> 0:01:43.036 the stock market, after an initial marked decline, has been 0:01:43.076 --> 0:01:48.276 climbing mostly back up. At the most basic level, why 0:01:48.396 --> 0:01:52.796 is this happening? So I myself, I'm scratching my head 0:01:52.876 --> 0:01:55.396 wondering how can that be? And so you know, there 0:01:55.436 --> 0:01:58.636 are a number of explanations, but let's just talk about 0:01:58.716 --> 0:02:01.916 the best one, the easiest to understand. And so, you know, 0:02:01.956 --> 0:02:05.436 I think nobody would disagree that the economic picture looks terrible. 0:02:05.756 --> 0:02:08.236 It's worse in the quarter that we're now in than 0:02:08.276 --> 0:02:11.636 in the first quarter was pretty terrible. But stocks represent 0:02:11.796 --> 0:02:15.076 the future cash blows of a company for all of time. 0:02:15.436 --> 0:02:18.196 So a dollar earned in twenty twenty two may be 0:02:18.356 --> 0:02:21.156 less certain and less valuable than a dollar in today, 0:02:21.596 --> 0:02:24.476 But since the interest rates are hovering near zero, the 0:02:24.556 --> 0:02:27.876 difference between those two dollars, one earned today and one 0:02:27.996 --> 0:02:29.476 earned a year or two from now, is not that 0:02:29.636 --> 0:02:32.716 significant in a financial model, and so that's what's meant 0:02:32.716 --> 0:02:34.636 by the time value of money. So even if you 0:02:34.716 --> 0:02:37.556 write off this year as a year where corporate profits 0:02:37.556 --> 0:02:40.396 in the aggregate are going to be quite weak, if 0:02:40.436 --> 0:02:42.596 you believe that the economy is headed for a V 0:02:42.676 --> 0:02:46.716 shaped recovery, you can justify stock prices where they are today. 0:02:46.716 --> 0:02:49.036 And of course there's this question, is a V shaped 0:02:49.036 --> 0:02:52.356 recovery the best guess of what the future holds? So 0:02:52.596 --> 0:02:55.276 V shape recovery we can all picture it. We shot 0:02:55.316 --> 0:02:57.116 down on one egg of the V, and then we're 0:02:57.116 --> 0:02:58.676 going to shoot back up on the other leg of 0:02:58.716 --> 0:03:01.556 the V. There are other options, though, and they all 0:03:01.636 --> 0:03:03.836 have little letters attached to them. So what are some 0:03:03.876 --> 0:03:06.676 of the other options, and maybe help us while you're 0:03:06.716 --> 0:03:09.956 describing the different options, help us think about whether one 0:03:10.036 --> 0:03:12.476 is more credible to believe in than the other. Right, 0:03:12.596 --> 0:03:15.356 So the cousin of the of the V is the U. 0:03:15.556 --> 0:03:17.316 In fact, they're right next to each other in the alphabet, 0:03:17.356 --> 0:03:19.076 which you didn't need me to come on and talk about. 0:03:19.236 --> 0:03:22.556 And so in that telling, it's unclear where we are 0:03:22.596 --> 0:03:24.276 in the U. Did we hit the bottom and we're 0:03:24.316 --> 0:03:27.156 about to start curving upward or things going to get worse? 0:03:27.196 --> 0:03:28.676 But we know they're going to get better. And so 0:03:28.716 --> 0:03:31.956 I think people can also not fret about stock prices 0:03:31.956 --> 0:03:33.956 if they think we're in a U. And I should 0:03:33.996 --> 0:03:36.196 also say part of why we even think we might 0:03:36.236 --> 0:03:38.596 be here. Has a ton to do with what the 0:03:38.596 --> 0:03:41.356 Federal Reserve and the government has been doing, which we'll 0:03:41.356 --> 0:03:43.356 get to, i'm sure in just a minute. But aside 0:03:43.356 --> 0:03:45.436 from V and you you know, there's then all of 0:03:45.436 --> 0:03:47.996 a sudden, you start getting too much scarier letters. The 0:03:48.236 --> 0:03:52.596 L is dreaded, the L is really bad. But I 0:03:52.636 --> 0:03:55.196 think the W is really where my head is at, 0:03:55.236 --> 0:03:57.916 that we're going to be in a world where we 0:03:57.996 --> 0:04:01.116 just don't know, and the emotional side of investing, you know, 0:04:01.516 --> 0:04:04.116 is the Fed's interventions going to be enough, Is the 0:04:04.116 --> 0:04:06.396 economy can recovery? Is there going to be a vaccine 0:04:06.436 --> 0:04:08.876 soon enough? You know, we're going to get these fits 0:04:08.836 --> 0:04:12.596 and arts and rallies and der markets are very very typical, 0:04:12.956 --> 0:04:15.396 so that in a sense that's not unusual. And so 0:04:15.476 --> 0:04:18.516 for me, the W best reflects the seesaw that we're 0:04:18.556 --> 0:04:20.636 going to be in. So let's talk about the W, 0:04:20.996 --> 0:04:23.476 because in the W, we first come down like the 0:04:23.516 --> 0:04:26.276 beginning of the V, and then we start to come 0:04:26.316 --> 0:04:29.236 back up again, and we're probably in that second bit 0:04:29.276 --> 0:04:32.396 of the W where we're coming back up, and then 0:04:32.596 --> 0:04:34.516 it's going to go back down again before it comes 0:04:34.556 --> 0:04:37.676 up and in that theory. Presumably one of the reasons 0:04:37.676 --> 0:04:40.636 that we're coming back up is the government's intervention, the 0:04:40.676 --> 0:04:45.756 Federal reserves intervention of essentially pouring cash into the economy 0:04:46.196 --> 0:04:51.316 and giving it to investors at incredibly low, unimaginably previously 0:04:51.356 --> 0:04:56.276 low interest rates, just draining cheap cash. How is that 0:04:56.516 --> 0:04:58.796 affecting the market. I mean, I've heard people say, and 0:04:58.836 --> 0:05:02.236 this seems intuitively plausible, that because there's just so much 0:05:02.276 --> 0:05:06.236 money coming in that reassures investors to keep the values 0:05:06.276 --> 0:05:08.516 of stocks high. But I've heard other people saying, well, 0:05:08.516 --> 0:05:11.356 it's not even that sophisticated. There's no reassurance. It's just 0:05:11.396 --> 0:05:12.596 free money. And what are you gonna do with the 0:05:12.596 --> 0:05:14.196 free money. You're gonna have to put it into the 0:05:14.196 --> 0:05:16.716 markets because you've got to put it somewhere, right, Well, 0:05:16.756 --> 0:05:19.036 you know there's that you have to put it somewhere. 0:05:19.396 --> 0:05:22.716 Wall Street's really built on alphabet, soup, and acronyms, and 0:05:22.756 --> 0:05:25.836 that is best encapsulated with two, which is fear of 0:05:25.876 --> 0:05:28.476 missing out. So fomo if you don't put it somewhere, 0:05:28.636 --> 0:05:30.956 and then things do go up. The emotional side of 0:05:31.036 --> 0:05:32.756 did you miss it? You know, why were you not 0:05:33.036 --> 0:05:36.436 following the herd. And then of course, Tina, there is 0:05:36.516 --> 0:05:39.476 no alternative. Tina's really really special in this market. And 0:05:39.516 --> 0:05:41.596 so to your question, you know, it's not just low 0:05:41.636 --> 0:05:43.636 interest rates. We've been in a low interest rate world forever, 0:05:45.116 --> 0:05:47.996 well at least for many years, even if it's lower now. 0:05:48.276 --> 0:05:51.436 But it's also the enormous amount of purchasing of US 0:05:51.516 --> 0:05:54.756 traguries mortgage backed securities, which I think people have to understand, 0:05:54.796 --> 0:05:57.716 take them out of the hands of investors, and then 0:05:57.756 --> 0:06:00.236 they have cash. They sold them because they got, you know, 0:06:00.236 --> 0:06:02.156 an amazing price, and now the question is where do 0:06:02.196 --> 0:06:04.236 they put it? And they could leave it in cash, 0:06:04.316 --> 0:06:07.076 but the theory, of course is that many of those 0:06:07.116 --> 0:06:09.956 investors will put it somewhere else. But the fed's backing 0:06:09.956 --> 0:06:13.916 of the market has extended to the commercial paper funding facility, 0:06:13.996 --> 0:06:17.476 the primary dealer credit facility, the money market mutual fund 0:06:17.516 --> 0:06:19.596 liquidity facility, and I could name ten more if you 0:06:19.636 --> 0:06:23.996 only let me. And so they've really gone whole hog 0:06:24.036 --> 0:06:25.556 and are not done yet. And so if you just 0:06:25.596 --> 0:06:28.476 look in the aggregate of what the stimulus has been 0:06:28.836 --> 0:06:32.116 from the three bills thus far, I find this quite shocking. 0:06:32.156 --> 0:06:35.276 The stimulus in the aggregate is greater than the stimulus 0:06:35.516 --> 0:06:38.436 that happened over a four year period after the Great Depression. 0:06:38.556 --> 0:06:41.196 So we've already just in a few short months, spent 0:06:41.236 --> 0:06:44.116 a bigger percentage of our GDP than was spent to 0:06:44.156 --> 0:06:47.636 stimulate the economy back in nineteen twenty nine. And of 0:06:47.676 --> 0:06:49.996 course back then it didn't quite work right. It wasn't 0:06:50.036 --> 0:06:51.996 really until I know, there's a big debate about this, 0:06:51.996 --> 0:06:54.636 but it really wasn't until a World War two that 0:06:54.756 --> 0:06:57.596 we got the kind of rise in production that helped 0:06:57.756 --> 0:07:00.836 get the economy out of the doldrums. Sure, so that 0:07:00.876 --> 0:07:02.596 could be the reason why they have to go bigger 0:07:02.636 --> 0:07:04.756 this time. So the question is was it just a 0:07:04.836 --> 0:07:08.276 question of size, or can the government, in the face 0:07:08.436 --> 0:07:13.116 of a credibly steep correction, recession, maybe even depression, can 0:07:13.156 --> 0:07:16.716 they actually stop up all of that supply of people 0:07:16.716 --> 0:07:19.596 who want to exit risk and restore the markets. And 0:07:19.636 --> 0:07:22.636 I think that question is going to go and fits 0:07:22.636 --> 0:07:24.636 and starts, which is where the w comes in. Even 0:07:24.796 --> 0:07:27.436 where we are with respect to the economy turning back 0:07:27.476 --> 0:07:30.956 on Visa VI, the pandemic ebbing, and you know, all 0:07:30.996 --> 0:07:32.836 these things are open questions, and so I think one 0:07:32.916 --> 0:07:36.716 interesting kind of meta question about The original topic here 0:07:37.196 --> 0:07:40.076 is why do investors have such confidence? You know, we're 0:07:40.116 --> 0:07:43.116 supposed to have confidence in markets that look like markets 0:07:43.116 --> 0:07:45.196 we've been in. The people you know that have been 0:07:45.236 --> 0:07:48.156 trained in finance, whether it's at Wharton or Harvard or 0:07:48.156 --> 0:07:50.636 anywhere else, or you know, from the mean streets of 0:07:51.316 --> 0:07:55.156 Wall Street have used models and heuristics that apply to 0:07:55.476 --> 0:07:58.716 a certain range of examples. And are we not now 0:07:58.876 --> 0:08:02.396 in uncharted territory for anyone who was, you know, barely 0:08:02.436 --> 0:08:05.476 alive even during the Great Depression? How can you have 0:08:05.516 --> 0:08:08.076 confidence that the market ought to be higher than it 0:08:08.196 --> 0:08:10.596 was a year ago? And that's I think where, you know, 0:08:10.636 --> 0:08:12.716 I start to feel like this has a lot more 0:08:12.756 --> 0:08:15.956 to do with temporary factors in psychology. And I see 0:08:15.996 --> 0:08:18.276 examples from a different market than the stock market, from 0:08:18.276 --> 0:08:20.796 the credit market, which is the aggregate bigger than the 0:08:20.836 --> 0:08:23.556 stock markets, that's the bond market, the loan market, and 0:08:23.636 --> 0:08:26.556 I see signs that are much more worrying than the 0:08:26.556 --> 0:08:30.556 confidence inspired by the recent rallying stocks. Let's turn to 0:08:30.636 --> 0:08:33.716 that other market. So until now, we've been mostly talking 0:08:33.716 --> 0:08:36.796 about the stock market, which is equity, which means that 0:08:36.876 --> 0:08:39.436 what's being traded our shares, which means you still have 0:08:39.476 --> 0:08:42.956 an ownership stake in that company going forward, and even 0:08:42.996 --> 0:08:45.796 if the company were to fail, if you hold shares 0:08:45.836 --> 0:08:48.796 in it, you still have a claim on the assets 0:08:48.796 --> 0:08:50.836 of the company, and if it reorganizes itself, you still 0:08:50.836 --> 0:08:54.356 hold onto your shares. Bond markets are different. There, we're 0:08:54.396 --> 0:08:58.396 trading the money that the companies owe, the cash that 0:08:58.516 --> 0:09:02.596 they owe. Tell us what are the bad signs, the 0:09:02.636 --> 0:09:05.916 ominous signs that you're seeing there, because my impression is 0:09:05.956 --> 0:09:09.436 that the bond markets do not share the apparent enthusiasm 0:09:09.436 --> 0:09:13.156 of the stock market. Well, so, firstly, there are arguments 0:09:13.156 --> 0:09:15.036 that they ought to share in it because if you 0:09:15.076 --> 0:09:17.076 look at what the FED has done, some of it 0:09:17.116 --> 0:09:19.716 is to in fact restore confidence in that market. The 0:09:19.756 --> 0:09:22.796 FED hasn't resorted to buying stocks yet, but they have 0:09:23.116 --> 0:09:27.916 agreed to buy basically pools of risky credit, not low 0:09:28.036 --> 0:09:31.716 risk mortgage backed securities or US treasuries, but high risk 0:09:31.956 --> 0:09:34.516 in fact, things that are called junk. The FED has 0:09:34.516 --> 0:09:38.516 gone to buying junk through exchange traded funds and also 0:09:39.196 --> 0:09:42.276 lending to companies that used to be investment grade and 0:09:42.316 --> 0:09:45.236 are now raded junk. And that occurred late in March 0:09:45.276 --> 0:09:47.516 because of COVID, and so we saw it most notably 0:09:47.836 --> 0:09:52.116 happened to Ford and to Macy's and to energy companies 0:09:52.156 --> 0:09:55.796 like Occidental Petroleum. And so the things that are most 0:09:55.836 --> 0:09:58.636 worrying to me in the bond market that you don't 0:09:58.636 --> 0:10:01.316 see in the stock market is that despite that action, 0:10:01.796 --> 0:10:05.876 despite the FED being there to lend, we see a 0:10:05.876 --> 0:10:10.596 lot of hiled companies that were already a pretty risky spot. So, 0:10:10.876 --> 0:10:13.556 you know, recently J. C. Penny has announced that it's 0:10:14.036 --> 0:10:16.956 skipping its interest payments. It's days away from actually filing 0:10:16.996 --> 0:10:21.036 for bankruptcy. Jay Crewe has filed for bankruptcy. Neiman Marcus 0:10:20.796 --> 0:10:23.516 filed for bankruacy. So some of those, one might say, well, 0:10:23.516 --> 0:10:25.716 they were already teetering for a while, so you know, 0:10:25.756 --> 0:10:28.036 how unusual is that. On the other hand, we've seen 0:10:28.036 --> 0:10:31.196 companies that were trading very well before COVID that have 0:10:31.236 --> 0:10:35.156 been dramatically affected, notably Hurts, which was a company whose 0:10:35.156 --> 0:10:37.636 bonds were trading at one hundred at the full claim. 0:10:37.676 --> 0:10:39.396 You know, you make a loan and you're owed back 0:10:39.396 --> 0:10:42.116 one hundred percent. The bonds of Hurts or the gaming 0:10:42.156 --> 0:10:45.596 reservation Mohegan's Son were even above par and now they're 0:10:45.596 --> 0:10:48.756 down into the teens or twenties cents in the dollar 0:10:48.836 --> 0:10:51.356 in the case of Hurts and Mohican Son has fallen 0:10:51.356 --> 0:10:53.436 in half. And so there are a number of companies 0:10:53.476 --> 0:10:56.516 despite all of this, that are defaulting, that will default. 0:10:56.756 --> 0:11:00.476 Expectations for a default rate is extremely high in credit 0:11:00.556 --> 0:11:04.436 and also for small businesses. And so despite all of 0:11:04.476 --> 0:11:07.956 this money being offered to airlines to cruise lines, I 0:11:08.156 --> 0:11:12.076 see continued fear in the credit market, as evidenced by 0:11:12.116 --> 0:11:14.476 the price of the bonds, and also a market called 0:11:14.516 --> 0:11:17.436 the credit rative market. And I see banks that are 0:11:17.556 --> 0:11:21.156 using this derivatives market to hedge themselves to American Airlines, 0:11:21.236 --> 0:11:25.356 United Airlines, Royal Caribbean forward hedging in a way that 0:11:25.556 --> 0:11:28.996 to me, the prices suggest these companies have a real 0:11:29.076 --> 0:11:32.556 chance of defaulting, even though that is inconsistent with the 0:11:32.596 --> 0:11:35.116 idea that the government is going to save those companies. 0:11:35.996 --> 0:11:38.876 So from an intuitive perspective of all that makes sense. Right. So, 0:11:39.036 --> 0:11:41.676 I mean, to the ordinary civilian you think of Hurts, 0:11:42.116 --> 0:11:44.596 They're doing just fine. They're a well run company. Lots 0:11:44.636 --> 0:11:47.516 of people are renting cars, fewer people maybe owned cars. 0:11:47.516 --> 0:11:48.916 So then in the long run you expect a lot 0:11:48.956 --> 0:11:50.556 of people to rent cars. You expect Hurts to be 0:11:50.596 --> 0:11:53.076 able to pay back its debts, then suddenly no one's 0:11:53.116 --> 0:11:55.836 going anywhere, and you expect it to be a lot 0:11:55.916 --> 0:11:57.756 more likely the Hurts won't be able to pay off 0:11:57.756 --> 0:12:00.396 its debts. So that sort of makes common sense. And 0:12:00.436 --> 0:12:03.356 then the thing that you would imagine would not make 0:12:03.396 --> 0:12:04.956 it go down would just be that the government was 0:12:04.956 --> 0:12:08.156 going to effectively bail out Hurts, right, that the government 0:12:08.196 --> 0:12:10.076 was going to buy their debt or make of they're 0:12:10.116 --> 0:12:11.636 debt in some way. And if people think maybe the 0:12:11.636 --> 0:12:14.436 government won't do that for Hurts, then what you're describing 0:12:14.556 --> 0:12:17.796 makes a lot of sense. And it seems as though 0:12:18.516 --> 0:12:21.916 the credit markets are behaving closer to what an outsider 0:12:21.956 --> 0:12:25.276 to the financial markets would expect, and that it's the 0:12:25.476 --> 0:12:28.596 stock market that's the surprising bit. Am I getting that right? Yeah, 0:12:28.836 --> 0:12:31.876 it would be incongruous to have a default rate which 0:12:31.916 --> 0:12:33.956 is in the double digits, which is what's really being 0:12:33.956 --> 0:12:37.396 expected now. So it's not that i'mbarished and mine is 0:12:37.396 --> 0:12:39.476 in the double digits, but others are in the single digits. 0:12:39.596 --> 0:12:42.956 We're expecting a default rate equal or greater to what 0:12:43.076 --> 0:12:45.916 happened in two thousand and eight when we had Lehman 0:12:45.956 --> 0:12:49.436 Brothers default in all of the General Motors and Chrysler 0:12:49.476 --> 0:12:52.156 and everything that came after it. We're expecting actually a 0:12:52.236 --> 0:12:55.076 higher default rate and for a much longer period of time. 0:12:55.396 --> 0:12:57.836 And the third part, which is pernicious is that the 0:12:57.916 --> 0:13:00.756 recoveries what the bond holders are getting back for suffering 0:13:00.756 --> 0:13:03.676 these defaults, are very very low. There was just last 0:13:03.716 --> 0:13:07.916 week a auction of recently defaulted bonds for a company 0:13:07.956 --> 0:13:11.556 called Whiting Petroleum, and those bonds only fetched seven cents 0:13:11.556 --> 0:13:14.156 in the dollar. So normally, as a bond holder, since 0:13:14.156 --> 0:13:15.836 you have a claim on the assets of the company, 0:13:15.876 --> 0:13:19.076 you might expect a recovery more like thirty cents forty cents, 0:13:19.116 --> 0:13:22.316 even if you didn't have a security, you know, like 0:13:22.436 --> 0:13:25.596 in a mortgage. But recoveries have been very low, defaults 0:13:25.596 --> 0:13:29.996 have been high, and so it's really historically inconsistent to 0:13:30.076 --> 0:13:32.556 have a world where the default rate is high, companies 0:13:32.596 --> 0:13:35.076 are defaulting, and the stock market is high at the 0:13:35.076 --> 0:13:37.836 same time. Of course, it didn't have to be this way. 0:13:37.916 --> 0:13:40.836 Companies could have been less levered, which would have given 0:13:40.876 --> 0:13:43.836 them more liquidity, more time to weather the storm. But 0:13:44.036 --> 0:13:46.116 you know, there are a lot of signs pre COVID 0:13:46.436 --> 0:13:49.556 that leverage was running extremely high at the corporate level 0:13:49.716 --> 0:13:52.876 and the default rate was even picking up. Despite the 0:13:52.916 --> 0:13:55.156 bull market we were in, there were wearying signs from 0:13:55.156 --> 0:13:57.996 the credit market, which is what I followed day in 0:13:57.996 --> 0:14:00.516 and day out, which was already giving you pause. And 0:14:00.596 --> 0:14:02.636 here we are, the defaults are not just coming through. 0:14:02.876 --> 0:14:06.036 I would say the stigma of defaulting has changed, because 0:14:06.076 --> 0:14:08.916 now it's not well, we mismanaged the business or a 0:14:09.316 --> 0:14:11.596 Y and z, it's blame it on COVID, which is 0:14:11.636 --> 0:14:14.516 not necessarily unfair. But the stigma of missing a bond 0:14:14.516 --> 0:14:18.636 payment feels, you know, and I can't exactly say why, 0:14:18.836 --> 0:14:23.316 feel like in the marketplace defaulting is becoming more tolerable 0:14:23.396 --> 0:14:26.276 and it's it's contagious. Well, I mean you sort of 0:14:26.316 --> 0:14:28.756 have said why, right, I mean, here you have companies 0:14:28.756 --> 0:14:31.516 that are already highly levered, meeting they already owe as 0:14:31.596 --> 0:14:34.116 much money as they could conceivably owe, and maybe more 0:14:34.156 --> 0:14:36.356 than they should, and so they were a little teetery. 0:14:36.956 --> 0:14:38.916 And then as you say, you know, this is human nature, 0:14:38.916 --> 0:14:41.716 there's an excuse to do it. You say, well, you 0:14:41.756 --> 0:14:43.796 know it's true that they were contributing factors, but really, 0:14:43.836 --> 0:14:45.916 we would have gotten through this were it not for 0:14:45.956 --> 0:14:49.596 this unforeseeable event, And it just seems like that's the 0:14:49.596 --> 0:14:51.996 way excuse has hurt done all the time. You know, 0:14:52.036 --> 0:14:53.676 it's a sort of dog gate my homework way of 0:14:53.716 --> 0:14:55.316 thinking about it, But there's some truth to it if 0:14:55.316 --> 0:14:57.316 the dog really ate your homework, or at least you 0:14:57.316 --> 0:14:59.596 know it slobbered all over it. So I think you've 0:14:59.636 --> 0:15:03.236 given a sufficient psychological account of why not only would 0:15:03.276 --> 0:15:05.676 companies say this, but other people would be prepared to 0:15:05.676 --> 0:15:07.476 listen to it. And the contagion point also makes sense. 0:15:07.516 --> 0:15:10.556 If lots of companies are doing it, there's just a 0:15:10.556 --> 0:15:12.676 limit to how much stigma you can attach to each 0:15:12.716 --> 0:15:15.036 company that does it, and so pretty soon there's not 0:15:15.036 --> 0:15:16.956 that much stigma. So that part, I think you've already 0:15:16.996 --> 0:15:21.276 explained it. Well, it's probably fun to note that there 0:15:21.396 --> 0:15:24.036 is one person that took bankruptcy to a new level 0:15:24.076 --> 0:15:26.876 and it didn't stop him from making the most out 0:15:26.876 --> 0:15:29.636 of it, and that's that's our president, whose company suffered 0:15:29.676 --> 0:15:32.396 bankruptcy dozens of times. So anyhow, I don't know if 0:15:32.396 --> 0:15:34.196 that really has a role, but you know, that's actually 0:15:34.196 --> 0:15:37.516 fundamentally what's happening that companies are defaulting. We'll be back 0:15:37.556 --> 0:15:50.196 in just a moment. Let's turn Baus to what's going 0:15:50.236 --> 0:15:53.876 to happen next? You say the bond markets are a 0:15:53.876 --> 0:15:56.796 little bit are more than a little bit nervous. They're concerned, 0:15:56.916 --> 0:16:00.356 and if you're right, you're also suggesting the possibility that 0:16:00.436 --> 0:16:04.556 the stock market itself could go down. What's going to happen? 0:16:04.876 --> 0:16:09.116 You know, how prepared is the government for another crisis? 0:16:09.316 --> 0:16:11.276 You know, for the third leg in the w where 0:16:11.716 --> 0:16:15.116 having boosted us all up, we go back down again. 0:16:15.556 --> 0:16:19.196 What will that day look like? Well, so now you're 0:16:19.196 --> 0:16:22.076 asking me to opine about this murkiness that I said 0:16:22.156 --> 0:16:24.636 was highly uncertain and hard to predict. We'll give us 0:16:24.676 --> 0:16:27.076 a range of options. How about that? In my telling 0:16:27.116 --> 0:16:30.196 of it, having seen what happened, where at the first 0:16:30.196 --> 0:16:33.076 sign of trouble the government stepped in and arranged a 0:16:33.156 --> 0:16:36.036 marriage in two thousand and eight between JP Morgan and 0:16:36.076 --> 0:16:39.876 bear Stearns. Bear Sterns needed a rescue and so they 0:16:39.876 --> 0:16:42.436 were saved and the default didn't occur. But then with 0:16:42.556 --> 0:16:46.836 Lehman Brothers the default did occur, And with General Motors 0:16:46.876 --> 0:16:48.676 and Christ's Third the default did occur. And so there 0:16:48.756 --> 0:16:51.596 is this question of if we really do have finite money, 0:16:51.636 --> 0:16:53.956 if there is something to be believed in what Mitch 0:16:53.996 --> 0:16:56.436 McConnell said, you know, worrying about the total level of 0:16:56.476 --> 0:17:00.196 debt and said quite instantly early things about perhaps municipalities 0:17:00.236 --> 0:17:02.956 need to default. So if the D word is going 0:17:02.996 --> 0:17:06.156 to you know, be present and causing pain for investors, 0:17:06.396 --> 0:17:09.716 I think rationing the stimulus to where it's most needed 0:17:10.156 --> 0:17:12.556 is maybe how things are going to evolve. And so 0:17:12.596 --> 0:17:15.476 maybe the answer isn't to save every company that's going 0:17:15.516 --> 0:17:18.996 to get hurt because of the COVID crisis, but instead 0:17:19.316 --> 0:17:23.276 protect the jobs of those companies without necessarily protecting the 0:17:23.316 --> 0:17:26.036 bond holders. And so that's one way it could evolve. 0:17:26.116 --> 0:17:29.036 And in that way, asset prices can go down, bond 0:17:29.036 --> 0:17:31.436 prices certainly can go down, and even stock prices should 0:17:31.436 --> 0:17:34.636 go down. And in that world, you know, perhaps the 0:17:34.676 --> 0:17:38.716 dollars are better spent on the individual investor. And it 0:17:38.756 --> 0:17:41.636 really raises I think something that's going on right now, 0:17:41.676 --> 0:17:42.956 we can see it. We don't have to wait for 0:17:42.996 --> 0:17:45.476 the future. This is something I listened with interest to 0:17:45.876 --> 0:17:48.596 a week ago said by Larry Summers on Bloomberg TV, 0:17:48.916 --> 0:17:51.556 which is if you look at how companies are scrambling 0:17:51.636 --> 0:17:54.196 right now to raise money. Almost all of that money 0:17:54.276 --> 0:17:57.716 is being raised in the debt market. So just ten 0:17:57.796 --> 0:18:02.396 days ago Boeing raised twenty five billion dollars through more debt. 0:18:02.516 --> 0:18:06.596 Forward raised seven billion GM four billion. Retailers like Polls 0:18:06.716 --> 0:18:08.996 or Gap Stores came into the debt market to bar 0:18:09.156 --> 0:18:12.476 own more money. But Summers raised the question of is 0:18:12.476 --> 0:18:15.036 that actually the best thing for the company when it 0:18:15.036 --> 0:18:18.116 comes to solvency. Ought they not raise equity at the 0:18:18.156 --> 0:18:20.556 same time, or aught they not raise significant amounts of 0:18:20.556 --> 0:18:23.996 equity instead of debt as a way to bolster their balancie. 0:18:24.036 --> 0:18:25.716 It is a way for them to have cash without 0:18:25.716 --> 0:18:27.636 having the obligation to pay it back. And so in 0:18:27.676 --> 0:18:30.476 the way that I think a lot of Americans are 0:18:30.556 --> 0:18:33.116 upset when they see companies take money and go buy 0:18:33.116 --> 0:18:35.676 back shares. In a sense, this is like the inverse 0:18:35.716 --> 0:18:38.196 of it. Well, now they're in trouble, why don't they 0:18:38.236 --> 0:18:40.356 issue shares? Why don't they raise money? The way I 0:18:40.396 --> 0:18:43.316 saw over my career companies do in times of fear, 0:18:43.596 --> 0:18:45.556 like in two thousand and two when we had and 0:18:45.756 --> 0:18:49.036 Ron default in worldcome a lot of companies at that 0:18:49.076 --> 0:18:51.756 point in time chose to raise equity. And so while 0:18:51.796 --> 0:18:56.356 it is happening today, the International steel company Mittal raised 0:18:56.396 --> 0:18:59.836 some equity, United did Carnival did. I think the best 0:18:59.876 --> 0:19:02.836 answer of why it's not happening is that the management 0:19:02.916 --> 0:19:05.556 is too afraid to dilute their shareholders, and so the 0:19:05.556 --> 0:19:07.876 amounts of money they would need to raise to deal 0:19:07.876 --> 0:19:10.036 with the COVID crisis is so great that they would 0:19:10.036 --> 0:19:13.156 really be hurting their stock price, but they would be 0:19:13.356 --> 0:19:17.396 shoring up their liquidity and their solvency, and so that's 0:19:17.436 --> 0:19:20.476 to me. The next phase is that whether the government's 0:19:20.516 --> 0:19:24.036 loans come with equity stakes, which basically creates that situation 0:19:24.036 --> 0:19:26.756 where they are diluted, or companies do it themselves where 0:19:26.956 --> 0:19:30.076 they access the markets, whether they're forced to or want 0:19:30.116 --> 0:19:33.276 to through equity, which would be a much in my view, 0:19:33.396 --> 0:19:36.636 much better outcome for all of Americans. And when you 0:19:36.676 --> 0:19:39.236 say that the corporate management doesn't want to dilute their shareholders, 0:19:39.356 --> 0:19:41.396 do you mean that they're basically just worried that then 0:19:41.436 --> 0:19:44.876 the shareholders will vote them out. Well, part of it 0:19:44.916 --> 0:19:46.756 is maybe just the amount of money they need to 0:19:46.796 --> 0:19:49.036 raise is so great that they just couldn't get there 0:19:49.236 --> 0:19:51.476 purely with equity, but we're seeing a lot of the 0:19:51.556 --> 0:19:53.916 capital raising done purely on the debt side, So it 0:19:53.956 --> 0:19:56.196 doesn't answer why are they not doing both or why 0:19:56.236 --> 0:19:58.356 are they not doing heavy amounts of equity. And I 0:19:58.396 --> 0:20:00.596 think some of it comes back to the greed of 0:20:00.876 --> 0:20:03.156 not wanting their share price to go down. But by 0:20:03.316 --> 0:20:06.396 taking out more debt, you're creating a more levered situation, 0:20:06.436 --> 0:20:10.156 a company that is more exposed to a prolonged downturn 0:20:10.276 --> 0:20:13.196 leading to default. And so it might be in the 0:20:13.196 --> 0:20:15.996 shareholder's interest, and I think the FED in somebody's has 0:20:16.036 --> 0:20:19.556 encouraged it by saying they're going to backstop lending to 0:20:19.676 --> 0:20:22.796 fallen angels and they're going to buy high oldtfs, when 0:20:22.836 --> 0:20:25.356 really there should be a lot more equity raised. When 0:20:25.356 --> 0:20:29.236 the government signals that it's willing to basically ensure companies, 0:20:29.796 --> 0:20:33.116