WEBVTT - What the Market Crash Says About How Investing Works 0:00:05.000 --> 0:00:08.640 Hi, all Thoughts listeners. Joe and I are working our 0:00:08.680 --> 0:00:12.960 way through a pretty big backlog of episodes. So what 0:00:13.080 --> 0:00:16.160 that means is what you are about to hear is 0:00:16.200 --> 0:00:19.760 something that was reported quite a while ago. We recorded 0:00:19.800 --> 0:00:23.760 this one back on March three. We were in the 0:00:23.800 --> 0:00:27.360 midst of the big market crash back then, but we 0:00:27.440 --> 0:00:30.760 hadn't really seen the effects of that crash work their 0:00:30.800 --> 0:00:33.720 way through the financial system. So you're gonna hear Joe 0:00:33.760 --> 0:00:36.040 and I talk a lot about how weird it is 0:00:36.120 --> 0:00:40.640 that we haven't seen any big trading blow ups just yet. 0:00:41.120 --> 0:00:45.800 Of course, since March we have had a few, notably 0:00:45.840 --> 0:00:49.720 a big oil fund in Singapore and also a hedge 0:00:49.720 --> 0:00:54.400 fund called Malachite in New York. I think, if anything, 0:00:54.880 --> 0:00:59.040 it makes the episode more interesting and the themes discussed 0:00:59.040 --> 0:01:20.959 probably more estion. So I hope you enjoyed. Thanks for listening. Hello, 0:01:21.080 --> 0:01:24.160 and welcome to another episode of the All Thoughts podcast. 0:01:24.240 --> 0:01:28.559 I'm Tracy Allaway and I'm Joe. WI isn't all so, Joe? 0:01:28.680 --> 0:01:34.280 You know what I've been thinking about quite a lot recently. Um, Well, 0:01:34.680 --> 0:01:36.440 I don't know. Is it the same thing that literally 0:01:36.520 --> 0:01:40.360 everyone across the entire world can't stop thinking about and 0:01:40.440 --> 0:01:43.600 dreaming about and talking about or is there something else 0:01:43.640 --> 0:01:46.600 going on? Wait? Are you thinking of the virus or 0:01:46.640 --> 0:01:49.240 the market sell off? I think I've been exposed to 0:01:49.520 --> 0:01:53.080 financial markets for too long because they're sort of both 0:01:53.240 --> 0:01:57.880 entwined in my mind. I literally like dreamed last night 0:01:57.960 --> 0:02:02.600 about both the virus and the market crash, and I 0:02:02.640 --> 0:02:04.960 have not thought about anything else. So, but now, what 0:02:05.120 --> 0:02:07.720 is the specific thing that you yourself are thinking about 0:02:07.760 --> 0:02:10.960 these days? Okay, it's kind of an offshoot of the 0:02:11.040 --> 0:02:17.520 market crash, and it's basically, uh, investor blow ups, So okay, 0:02:17.639 --> 0:02:22.200 that's that's timely. Yeah. So one of the interesting things 0:02:22.240 --> 0:02:27.000 about this particular sell off is we still haven't seen 0:02:27.560 --> 0:02:31.880 a bunch of investors really get taken to the cleaners 0:02:31.919 --> 0:02:34.760 just yet. We've had a few, um, one of our 0:02:34.760 --> 0:02:37.680 Bloomberg colleagues wrote about the hedge fund in particular. But 0:02:37.720 --> 0:02:41.040 you can imagine with everything that's gone on in the market, 0:02:41.360 --> 0:02:46.440 you're going to get more and more of these stories emerging. Yeah. 0:02:46.480 --> 0:02:49.480 I mean, it's the things that things are moving so 0:02:49.600 --> 0:02:53.840 fast right now that even by the time this recording 0:02:53.919 --> 0:02:57.480 comes out, we might hear a lot more investor blow ups. 0:02:58.160 --> 0:03:01.799 And the one of the reasons, I think we will, 0:03:02.200 --> 0:03:05.840 and one of the is because we've been seeing, you know, 0:03:05.919 --> 0:03:09.280 like so many tried and true strategies in the last 0:03:09.360 --> 0:03:14.320 couple of weeks have just completely uh failed essentially. So 0:03:14.440 --> 0:03:20.160 various hedges that investors use to mitigate volatility in their portfolio, 0:03:20.320 --> 0:03:23.440 whether it's treasuries or whatever, haven't behaved the way, all 0:03:23.520 --> 0:03:27.000 kinds of dislocations. So ay, we're almost certainly going to 0:03:27.040 --> 0:03:30.560 get those blow us and be I think the conditions 0:03:30.560 --> 0:03:33.840 are now in place from the intensity of the moves 0:03:33.880 --> 0:03:37.120 that we've seen in recent weeks that will sort of 0:03:37.560 --> 0:03:40.000 finally cause some of those shoes to drop even beyond 0:03:40.080 --> 0:03:42.520 just the you know, the sell off so to speak, 0:03:43.160 --> 0:03:46.520 exactly right. And a lot of those strategies were things 0:03:46.560 --> 0:03:51.320 that people supposedly had piled into, like selling volatility or 0:03:51.600 --> 0:03:54.560 risk parity where you're sort of relying on the inverse 0:03:54.600 --> 0:03:58.240 correlation between bonds and stocks. All of those seem to 0:03:58.360 --> 0:04:02.240 fall apart in the recent sell off. So my question is, 0:04:02.880 --> 0:04:06.840 if you're a professional investor, like a hedge fund or 0:04:06.960 --> 0:04:10.880 a dealer or something like that, what separates you from 0:04:10.920 --> 0:04:14.520 the crowd when it comes to your investment strategies? Because, 0:04:14.560 --> 0:04:16.880 like I said, it feels like a lot of people 0:04:17.000 --> 0:04:19.840 have sort of just crowded into the same thing in 0:04:19.880 --> 0:04:23.200 recent years. Yeah, it has felt like that, and it 0:04:23.320 --> 0:04:26.520 also is it's been this puzzle and I've certainly like 0:04:26.640 --> 0:04:30.960 thought about this since well before the crisis hit, which 0:04:31.000 --> 0:04:34.200 is that on the one hand, you don't want to 0:04:34.600 --> 0:04:37.400 just pile into the same strategies as everyone else. Everyone 0:04:37.400 --> 0:04:40.760 everyone knows that, Uh, that's not a particularly desirable it's 0:04:40.760 --> 0:04:43.560 hard to stand out. On the other hand, for essentially 0:04:43.600 --> 0:04:47.800 the last decade, we've had this situation in which the 0:04:47.839 --> 0:04:51.640 winning strategy is to go all in on high beta 0:04:51.720 --> 0:04:54.960 and shortening volatility. And if you did anything other than that, 0:04:55.160 --> 0:04:58.120 essentially for a decade, you faced the situation or like 0:04:58.520 --> 0:05:00.599 and you have to write a quarterly in estment letter 0:05:00.680 --> 0:05:03.640 and your to your clients it's explain why you underperformed 0:05:03.680 --> 0:05:06.760 yet again, So there has been this real pickle where 0:05:07.240 --> 0:05:12.000 there's been one dominant strategy for so long and uh, 0:05:12.800 --> 0:05:17.400 if any deviation meant you probably were under performance. Yeah, exactly. 0:05:17.400 --> 0:05:20.719 There's been a real tension between doing your own thing 0:05:20.960 --> 0:05:25.120 and profiting from basically just following the flows. In what 0:05:25.360 --> 0:05:28.720 has been for the past ten years of really momentum 0:05:28.880 --> 0:05:33.479 driven market but on this note of sort of standing 0:05:33.480 --> 0:05:36.480 out from the crowd or um coming up with an 0:05:36.600 --> 0:05:40.880 edge in professional investment. It's kind of interesting that when 0:05:40.920 --> 0:05:44.960 people talk about business in general, h and in economics, 0:05:45.320 --> 0:05:49.239 people are always talking about competitive advantage and you're supposed 0:05:49.279 --> 0:05:52.120 to organize yourself around what you do best and organize 0:05:52.120 --> 0:05:54.120 your business around it, and that's what's supposed to make 0:05:54.160 --> 0:05:58.520 you successful. But when it comes to professional investing, you 0:05:58.680 --> 0:06:04.520 rarely hear that. Yeah, absolutely right. Okay, So today we're 0:06:04.560 --> 0:06:06.800 going to be speaking with someone who's actually been on 0:06:06.839 --> 0:06:09.960 the show before, but who has written a book exactly 0:06:10.240 --> 0:06:14.600 on this topic competitive advantage in investment and what it 0:06:14.640 --> 0:06:18.320 means to actually be a big professional investor and how 0:06:18.520 --> 0:06:23.400 different types of investors will approach investing in different ways. 0:06:24.040 --> 0:06:27.720 Uh So, our guest is Steven Abraham's. He's a former 0:06:27.760 --> 0:06:31.280 Deutsche Bank analyst. Um As I mentioned, he has been 0:06:31.279 --> 0:06:33.360 on the show before where he was talking about the 0:06:33.680 --> 0:06:36.359 changing world of the sell side analyst, which is a 0:06:36.400 --> 0:06:40.279 really good thing to listen to. But he's now over 0:06:40.600 --> 0:06:44.720 at Amherst pure Pont. He's the head of investment strategy 0:06:44.760 --> 0:06:47.880 over there, and his book is out in April. It's 0:06:47.880 --> 0:06:53.600 called Competitive Advantage in Investing, building winning professional portfolios. Steven, 0:06:53.760 --> 0:06:58.480 Welcome to the show. Hi Tracy, Hi, how are you good? 0:06:58.520 --> 0:07:06.240 Thank you for joining us. Absolutely exciting times. Um So, 0:07:06.560 --> 0:07:08.320 maybe just to begin with, what do you think about 0:07:08.360 --> 0:07:13.200 the big sell off recently? Pretty uh, pretty dramatic. Oh, 0:07:13.320 --> 0:07:17.360 it has been. It has been a drama of historic proportions. 0:07:17.400 --> 0:07:21.760 There's no doubt about that. I would say, unfortunately for 0:07:21.840 --> 0:07:27.240 some the dramas probably not over. I know that, as 0:07:27.280 --> 0:07:29.800 you were mentioning earlier, we've all been waiting around to 0:07:29.920 --> 0:07:33.120 see if all of the various players are going to 0:07:33.240 --> 0:07:38.040 make it through uh, this kind of volatility, and as 0:07:38.080 --> 0:07:40.960 you pointed out, we've been doing okay so far. But 0:07:41.040 --> 0:07:45.720 I would say just within you know, recent days, we've 0:07:45.720 --> 0:07:49.560 started hearing that there are some portfolios that are in 0:07:49.720 --> 0:07:53.280 serious trouble and and may not make it so well, 0:07:53.480 --> 0:07:56.880 we're going to be watching things very closely. Right. It 0:07:57.040 --> 0:08:01.000 seemed to take a step up in the seriousness really 0:08:01.000 --> 0:08:02.840 over the last week, and I think there's a good 0:08:02.840 --> 0:08:06.840 time to remind let listeners know that by the time 0:08:06.880 --> 0:08:09.520 they hear this, the entire world may have since changed again. 0:08:09.560 --> 0:08:13.320 But we are recording this on Monday, March twenty three, 0:08:13.800 --> 0:08:15.760 so just so that people have a frame of reference, 0:08:15.800 --> 0:08:18.920 because again, things are moving so fast. But you know, 0:08:18.960 --> 0:08:22.080 it's one thing I feel like for the value of 0:08:22.200 --> 0:08:25.360 risky assets to decline and stocks decline, and we all 0:08:25.400 --> 0:08:28.560 know that stock market crashes are possible, but I think 0:08:28.600 --> 0:08:31.880 over the last two weeks, what we've really seen on 0:08:31.960 --> 0:08:34.240 top of that, especially over the last week, is that 0:08:35.080 --> 0:08:39.000 various hedging strategies that people might have put in place 0:08:39.120 --> 0:08:42.079 to mitigate a stock market decline or some other risky 0:08:42.120 --> 0:08:46.880 asset decline, they've suddenly like stopped working as liquidity has 0:08:47.800 --> 0:08:53.720 started to vanish. Yes, yeah, this is really a as 0:08:53.720 --> 0:08:58.520 you're pointing out, Joe, the normal relationships between assets and hedges, 0:08:59.640 --> 0:09:02.240 or between in one asset and another in many markets 0:09:02.280 --> 0:09:06.360 has completely broken down. And underneath a lot of this 0:09:07.280 --> 0:09:12.600 is just a historic reach for cash. That's true at 0:09:12.600 --> 0:09:16.640 the level of individual businesses up and down Main Street, 0:09:17.080 --> 0:09:20.280 but it's also true with the level of some of 0:09:20.320 --> 0:09:25.680 the highest quality investment grade companies that apply their wears 0:09:25.800 --> 0:09:29.120 day to day around the world. Most of those companies 0:09:29.160 --> 0:09:33.240 are looking at economies that are effectively coming to a 0:09:33.320 --> 0:09:39.000 complete halt and could remain basically closed for thirty to 0:09:39.160 --> 0:09:44.120 sixty nine days. Nobody is quite sure. So they are 0:09:44.320 --> 0:09:49.400 stockpiling cash and in the process basically selling everything that 0:09:49.480 --> 0:09:54.840 they possibly can, and that includes securities. So the usual 0:09:55.200 --> 0:10:00.439 ideas of stocks being richer cheap or bonds being rich 0:10:00.520 --> 0:10:06.080 or cheap has been uh completely subsumed under the issue 0:10:06.120 --> 0:10:08.760 of what is liquid and what can be sold and 0:10:08.840 --> 0:10:13.520 whatever is liquid is definitely getting solved. So just on 0:10:13.520 --> 0:10:15.680 that note, can we talk a little bit about what 0:10:16.000 --> 0:10:20.720 traditional investment theory would have told us about that big 0:10:20.760 --> 0:10:23.640 scramble for cash, Because on the one hand, there is 0:10:23.679 --> 0:10:27.120 a saying that in a crisis, correlation goes to one 0:10:27.360 --> 0:10:30.240 and everything sort of sells off at the same time. 0:10:30.600 --> 0:10:33.440 But on the other hand, you know, the reason you 0:10:33.559 --> 0:10:37.800 pay more for investment grade or something like the U. S. 0:10:37.840 --> 0:10:41.400 Treasury is because it's supposed to be safe in times 0:10:41.440 --> 0:10:44.440 like this. So what does investment theory actually tell us 0:10:44.440 --> 0:10:47.880 about what's going on here? You know, investment theory, probably 0:10:47.920 --> 0:10:51.920 the most relevant theory here is kind of traditional monetary 0:10:51.960 --> 0:10:56.959 policy theory, which says that when people have doubts about 0:10:57.000 --> 0:11:00.959 the credit worthiness of their counterparties, than any typically does 0:11:01.000 --> 0:11:06.120 not flow, and the big issue is that with economy 0:11:06.200 --> 0:11:09.000 is coming to a sudden stop, it really is difficult 0:11:09.000 --> 0:11:13.960 to predict which companies have the wherewithal to make it 0:11:14.040 --> 0:11:17.400 through this crisis. Central banks have really been flooding the 0:11:17.400 --> 0:11:22.720 market with very plentiful and very cheap money, But the 0:11:22.840 --> 0:11:25.160 issue is the credit worthiness of the people who need 0:11:25.240 --> 0:11:31.559 it most now. Traditionally, this is an issue that monetary 0:11:31.600 --> 0:11:35.800 policy assumes is going to affect banks. You know, the 0:11:35.880 --> 0:11:39.400 depositors look at the banks, they worry that the banks 0:11:39.400 --> 0:11:42.080 are making loans that are not prudent, and they try 0:11:42.080 --> 0:11:45.320 to withdraw their deposits. Here in some ways it's just 0:11:45.440 --> 0:11:48.760 the opposite. The banks have tremendous amounts of money, but 0:11:48.760 --> 0:11:53.480 they're worried about the credit worthiness of the restaurants and 0:11:53.640 --> 0:12:00.000 bars and taxi businesses that right now, for practical purpose 0:12:00.000 --> 0:12:05.240 as are shut down. So UM many companies are simply 0:12:05.360 --> 0:12:09.160 looking at whatever can trade, whatever might be liquid. So 0:12:09.200 --> 0:12:14.840 it's really monetary policy and UM the ideas around liquidity 0:12:14.920 --> 0:12:20.760 that apply here, and those have dominated any idea of 0:12:21.120 --> 0:12:25.120 the ability to UM call relative value. I want to 0:12:25.160 --> 0:12:30.760 get more into some of the ways monetary policy can 0:12:30.800 --> 0:12:33.960 help this crisis, including again some of the things that 0:12:33.960 --> 0:12:35.920 we're just announced this morning, but before we do, I 0:12:35.960 --> 0:12:37.920 just want to sort of go back to this idea 0:12:37.960 --> 0:12:43.520 of historic grab for any cash that people have, the 0:12:43.559 --> 0:12:46.120 likes of which maybe we've never seen before or very 0:12:46.200 --> 0:12:49.920 rarely seen. One of the things that's really striking is 0:12:49.960 --> 0:12:54.000 in the last couple of weeks, how treasuries, which are 0:12:54.400 --> 0:12:57.720 almost cash, like the sentence that they're completely backed by 0:12:57.720 --> 0:13:01.640 the full faith and credit of the government, counterparty risk free, 0:13:02.320 --> 0:13:05.840 even those started get selling off, started to be sold 0:13:05.840 --> 0:13:08.079 off a little bit because if we think right like this, 0:13:08.240 --> 0:13:11.920 like hierarchy of money, Yeah, holding a treasury is really 0:13:11.960 --> 0:13:15.880 great for you know, lean times and you want to 0:13:15.880 --> 0:13:17.760 be saved, but if you need to make a bill 0:13:17.800 --> 0:13:22.920 payment tomorrow, you still just want cash instead. Correct. Yes, 0:13:23.000 --> 0:13:26.800 So in the treasury market, um there has been surprising 0:13:27.080 --> 0:13:31.559 amounts of illiquidity. Usually in the treasury market, liquidity comes 0:13:31.559 --> 0:13:33.960 in a couple of tiers, and the most liquid tier 0:13:34.320 --> 0:13:38.520 is the most newly issued notes or bonds, and those 0:13:38.760 --> 0:13:42.920 still seem to be maintaining liquidity. But then the older 0:13:42.960 --> 0:13:47.640 notes and bonds have lost um surprising amounts of liquidity, 0:13:47.679 --> 0:13:54.240 and there have been very large leveraged treasury portfolios. Traditionally, 0:13:54.240 --> 0:13:58.679 those portfolios would have reached through the broker deal or 0:13:58.760 --> 0:14:03.720 bank network for financing. They may have used repo or 0:14:03.800 --> 0:14:08.280 other forms. Many of the balance sheets that normally would 0:14:08.400 --> 0:14:12.840 lend to them have been limited in their ability to 0:14:13.080 --> 0:14:17.600 expand credit. So, among other things, this starts to get 0:14:17.640 --> 0:14:23.040 at some of the core competitive advantages or disadvantages of 0:14:23.160 --> 0:14:28.680 some of these investment platforms. The leveled players really don't 0:14:28.720 --> 0:14:34.840 have any source of funding on their own. Banks now 0:14:34.960 --> 0:14:38.640 have sources of funding. Traditionally they have sources of funding 0:14:38.720 --> 0:14:43.160 through their deposit base. Now the FED and other central 0:14:43.200 --> 0:14:46.640 banks around the world are flooding the bank system with money. 0:14:46.680 --> 0:14:52.440 But some of the post crisis rules on UH the 0:14:52.520 --> 0:14:58.640 proper ratios of debt to equity, and other issues limit 0:14:58.680 --> 0:15:03.040 the ability of banks to lend endlessly, and that has 0:15:03.120 --> 0:15:06.640 partly constrained the system, and it's led the FED, I think, 0:15:06.640 --> 0:15:10.680 at times, to struggle with what it's supposed to do next. Yeah, 0:15:10.840 --> 0:15:12.800 So you had a bunch of these levered funds that 0:15:12.840 --> 0:15:16.040 were effectively picking up pennies in front of a steam 0:15:16.120 --> 0:15:20.280 roller for years by exploiting the difference between the more 0:15:20.360 --> 0:15:23.680 liquid futures and the cash US treasuries, and then that 0:15:23.800 --> 0:15:27.920 trade blew up rather spectacularly a week or two ago, 0:15:28.040 --> 0:15:31.000 and then that ended up infecting the U S treasury 0:15:31.000 --> 0:15:34.520 market and causing all sorts of problems. Uh. Just pass 0:15:34.600 --> 0:15:39.480 forwarding to today again, Monday March, just before we started 0:15:39.520 --> 0:15:43.640 recording this, the Federal Reserve announced its latest attempt to 0:15:43.880 --> 0:15:49.440 soothe the market, and that includes potentially unlimited QUEI and 0:15:49.560 --> 0:15:53.840 also some help for companies and munies. Steve, I know 0:15:53.880 --> 0:15:56.320 you've been thinking a lot about this, but is this 0:15:56.440 --> 0:15:57.840 the right thing for the FED to do? Are they 0:15:57.840 --> 0:16:00.200 on the right track or would you be encouraging to 0:16:00.240 --> 0:16:04.960 do something else at this point? Well, probably the most 0:16:05.080 --> 0:16:08.880 important thing the FED did this morning was announced a 0:16:08.960 --> 0:16:16.560 couple of new facilities that allows the FED to buy 0:16:16.600 --> 0:16:23.640 a much wider range of assets directly from investment portfolios 0:16:23.720 --> 0:16:27.280 and businesses, so this is now no longer limited to 0:16:27.880 --> 0:16:32.720 the typical um set of primary dealers. They announced the 0:16:32.920 --> 0:16:37.160 term Asset Lending Facility, which basically will buy all kinds 0:16:37.400 --> 0:16:42.000 of asset back securities as long as they have the 0:16:42.120 --> 0:16:48.000 proper ratings, and they will buy those securities from any 0:16:48.440 --> 0:16:55.080 eligible um US portfolio. They also announced a series two 0:16:55.200 --> 0:16:59.440 programs directed at the corporate market, one that will buy 0:16:59.480 --> 0:17:05.639 corporate debt directly from US companies with headquarters in the 0:17:05.720 --> 0:17:09.680 United States and doing major business in the United States. 0:17:09.720 --> 0:17:14.399 So this effectively creates a direct connection between investment grade 0:17:14.440 --> 0:17:19.840 companies and the government balance sheet. They announced similar programs 0:17:20.040 --> 0:17:26.359 for secondary corporate debt, and they expanded the program that 0:17:26.520 --> 0:17:31.919 they announced a week ago for commercial paper. So the 0:17:32.040 --> 0:17:34.960 FED is slowly stepping in the direction of trying to 0:17:36.119 --> 0:17:41.600 address this cascading illiquidity across these markets. And my guess 0:17:41.640 --> 0:17:46.720 is these new programs for ingressment investment grade paper will 0:17:46.800 --> 0:17:51.479 have um a tremendously good effect and should start to 0:17:51.480 --> 0:17:56.600 eliminate some of the volatility. So just to help people understand, 0:17:56.680 --> 0:17:59.520 it's not that, you know, we're still going to have 0:17:59.680 --> 0:18:03.600 these sort of main street economic crisis for as long 0:18:03.640 --> 0:18:06.160 as people are locked down, as long as the virus 0:18:06.400 --> 0:18:09.960 is here and so forth, and that's going to continue 0:18:10.000 --> 0:18:14.080 to ravage the economy. But in the meantime, high quality 0:18:14.160 --> 0:18:18.600 companies can at least ease up theoretically a little bit 0:18:18.640 --> 0:18:21.679 on grabbing hold of any cash that they can in 0:18:21.720 --> 0:18:25.359 the system, because for not for the moment, the FED 0:18:25.640 --> 0:18:30.879 will backstop essentially their short term borrowing. So that should 0:18:31.040 --> 0:18:34.719 the idea is that eases some of the overall desperation 0:18:34.800 --> 0:18:40.359 that every person in every company everywhere has for liquidity. Yeah, 0:18:40.400 --> 0:18:45.000 exactly right. Investment grade companies, large investment grade companies at 0:18:45.000 --> 0:18:50.800 this point essentially have substantial direct assess to the FED, 0:18:51.320 --> 0:18:53.520 and my guests would be the Fed's going to continue 0:18:54.080 --> 0:18:57.360 providing and expanding that access as long as it sees 0:18:58.000 --> 0:19:03.280 signs of stress. The b S facility starts to walk 0:19:03.320 --> 0:19:08.959 down the path of providing better access to main street, 0:19:09.400 --> 0:19:12.600 and that would have to come through the willingness of 0:19:12.640 --> 0:19:16.320 banks to make credit card loans and auto loans. The 0:19:16.359 --> 0:19:21.639 asset back facility basically has elements that will allow auto 0:19:21.720 --> 0:19:28.399 dealers to finance cars and other vehicles more easily. But 0:19:28.600 --> 0:19:31.880 you still, at this point, I think, have a problem 0:19:31.920 --> 0:19:37.040 getting credit to a lot of smaller mainstream businesses. Maybe 0:19:37.080 --> 0:19:39.920 the FED has a couple of tricks left in the bag, 0:19:40.240 --> 0:19:43.199 but my guess is you're really going to need some 0:19:43.280 --> 0:19:58.680 kind of physical policy. So I wanted to go back 0:19:58.720 --> 0:20:02.640 to something you touched on earlier, which was this notion 0:20:03.000 --> 0:20:06.200 of the dealers or the banks being a little bit 0:20:06.200 --> 0:20:08.840 more restricted in terms of the amount of risk that 0:20:08.880 --> 0:20:12.280 they can take, and maybe some of that risk having 0:20:12.320 --> 0:20:14.840 shifted to the buy side, because a lot of people 0:20:14.920 --> 0:20:19.440 right now are talking about how the current crisis resembles 0:20:19.480 --> 0:20:22.480 not necessarily Lehman Brothers in two thousand and eight, but 0:20:22.640 --> 0:20:27.199 more lt CM or long term capital management. Back in 0:20:28.960 --> 0:20:32.320 they dabbled in a lot of derivatives UH and basically 0:20:32.760 --> 0:20:35.840 exploded UM. So I'm just wondering if if that's the 0:20:35.920 --> 0:20:38.720 right framework to look at the current state of the 0:20:38.720 --> 0:20:42.480 financial industry, and if that's the reason why the FED 0:20:42.880 --> 0:20:46.800 is quite focused on expanding UM the parties that it 0:20:46.840 --> 0:20:49.240 can actually do business with. When it comes to QUEWI, 0:20:50.040 --> 0:20:53.439 the biggest difference between this crisis in two thousand and 0:20:53.480 --> 0:20:57.639 eight is that the crisis in two thousand and eight 0:20:57.800 --> 0:21:03.000 was in the financial system. The crisis in is outside 0:21:03.040 --> 0:21:07.760 of the financial system. UM really at its core in 0:21:08.840 --> 0:21:13.760 corporate America UH, and as a result of corporate America 0:21:13.840 --> 0:21:18.720 being stressed, it's a problem then on main street and 0:21:18.920 --> 0:21:22.959 in households pretty much around the world. The FED as 0:21:22.960 --> 0:21:29.000 a central bank is really really well equipped to pour 0:21:29.160 --> 0:21:34.480 water on fires inside the financial system. Outside the financial system, 0:21:34.520 --> 0:21:38.080 it has to get a little bit more creative, because 0:21:39.160 --> 0:21:44.680 the core issue here is the fundamental credit worthiness of 0:21:45.800 --> 0:21:51.960 main street borrowers and many homeowners. The best possible solution, 0:21:52.640 --> 0:21:56.280 what which was in some material within the last few 0:21:56.359 --> 0:22:02.320 days that I published in Financial Times, is to provide 0:22:02.400 --> 0:22:10.440 government guarantees of emergency bank loans to otherwise credit worthy businesses. 0:22:11.480 --> 0:22:14.000 We have a problem that the economies of ground to 0:22:14.119 --> 0:22:18.600 a sudden stop, but I think it's widely expected that 0:22:18.720 --> 0:22:22.320 after a ninety or a hundred and eighty day period, 0:22:22.920 --> 0:22:27.159 many of these businesses will be viable again. So the 0:22:27.240 --> 0:22:34.919 trick is bridging that period by providing credit. Banks I 0:22:35.000 --> 0:22:38.879 think have plenty of money, but I think any banker 0:22:38.960 --> 0:22:42.440 hesitates to lend to a business about to see its 0:22:42.480 --> 0:22:46.440 earnings evaporate. If you had, if you had the government 0:22:46.640 --> 0:22:51.360 provide guarantees, I think banks would have a lot more 0:22:51.400 --> 0:22:55.080 courage in that situation, right, I really Uh. There was 0:22:55.119 --> 0:22:58.200 this great LARRYUS Summers quote that he said a couple 0:22:58.200 --> 0:22:59.960 of weeks ago, and I keep thinking about it. He's 0:23:00.160 --> 0:23:03.480 basically saying, like somehow I forget his working exactly, But 0:23:03.560 --> 0:23:07.240 essentially the challenges how do you freeze financial or so 0:23:07.480 --> 0:23:11.240 how do you freeze economic time, while uh, financial time 0:23:11.440 --> 0:23:13.879 continues in its current state, and this idea is like, Okay, 0:23:13.960 --> 0:23:16.280 everyone knows we have to stay inside. Everyone knows that 0:23:16.440 --> 0:23:18.359 there are a lot of viable businesses that will need 0:23:18.400 --> 0:23:21.720 to shut their doors for days or whatever. But the 0:23:21.720 --> 0:23:26.400 bills keep coming in regardless and essentially and as you say, 0:23:26.400 --> 0:23:28.760 that sort of outside of the monetary system and subside 0:23:28.760 --> 0:23:31.880 of the banking system per se. So it's somehow going 0:23:31.920 --> 0:23:34.920 to have to be an Act of Congress to come 0:23:35.000 --> 0:23:38.040 up with a solution that lets everyone pay their bills 0:23:38.640 --> 0:23:43.400 during the essential time of the FACTI lockdown. Yes, that's 0:23:43.400 --> 0:23:48.760 exactly right. So, Steven, I wanted to get to your book, uh, 0:23:48.800 --> 0:23:51.400 and we spoke a little bit about it earlier. But 0:23:51.760 --> 0:23:55.360 you know, when people talk about investment strategy, they're usually 0:23:55.960 --> 0:23:58.720 treating all the investors in a sort of similar way. 0:23:58.800 --> 0:24:02.919 But as you point out, people tend to do things 0:24:03.119 --> 0:24:08.199 differently according to their competitive advantages. Could you maybe just 0:24:08.240 --> 0:24:12.639 walk us through, uh, the premise of your book and 0:24:12.680 --> 0:24:17.000 why this was something that interested you. Yeah. Absolutely. I 0:24:17.040 --> 0:24:19.160 think that when you sit in a seat like mine, 0:24:19.280 --> 0:24:24.199 where you're really advising a wide range of investors, you 0:24:24.280 --> 0:24:29.000 start to see over time that the players matter just 0:24:29.160 --> 0:24:31.560 as much as the market does when it comes to 0:24:32.280 --> 0:24:38.639 UM investing. You can UM look from banks to insurance companies, 0:24:39.440 --> 0:24:45.520 mutual funds to hedge funds, reets, sovereign wealth funds. They 0:24:45.560 --> 0:24:52.320 all operate UM with very very distinct advantages and disadvantages, 0:24:52.640 --> 0:24:57.120 and those kinds of things not only shape what they 0:24:57.240 --> 0:25:02.639 buy how they use the as assets, but UM it 0:25:02.720 --> 0:25:05.639 also ends up turning around and affecting the value of 0:25:05.680 --> 0:25:09.159 those assets in the marketplace. And they're just plenty of 0:25:09.240 --> 0:25:12.160 examples of that, including the kind of markets that we're 0:25:12.160 --> 0:25:16.200 looking at right now. And UH I thought for years 0:25:16.800 --> 0:25:22.119 that we needed something that went through these different kinds 0:25:22.160 --> 0:25:26.520 of investors and talked about what their strengths and weaknesses 0:25:26.600 --> 0:25:29.760 might be and how it affected assets. And that's what 0:25:30.480 --> 0:25:33.240 led me to write the book to expand this further 0:25:33.600 --> 0:25:36.880 strengths and weaknesses of different types of assets. What does 0:25:36.880 --> 0:25:39.840 that mean specifically, Well, I'll give you an example. It's 0:25:40.040 --> 0:25:43.840 very relevant to where we are now. UM. Let's take 0:25:44.080 --> 0:25:49.639 UM source of funds. Some investment platforms just have tremendous, 0:25:49.720 --> 0:25:54.919 tremendous advantage in the variety and the low cost of 0:25:54.960 --> 0:25:59.920 their funding. And for example, right now, the the eight 0:26:00.040 --> 0:26:03.560 hundred pound guerrilla on that front is the banking system. 0:26:03.640 --> 0:26:07.240 So banks traditionally have a really wide range of sources 0:26:07.240 --> 0:26:12.040 of funds through their retail deposit base. Some of their 0:26:12.040 --> 0:26:16.280 retail deposits are a kind of fast deposits from big 0:26:16.320 --> 0:26:20.160 corporations that are moving money through their accounts quickly. Other 0:26:20.320 --> 0:26:25.880 other deposits are very very long, steady and stable UH 0:26:25.960 --> 0:26:29.000 sources of funds. Like, for example, if you look at 0:26:29.000 --> 0:26:33.040 my checking account, I've probably had some at least minimal 0:26:33.080 --> 0:26:40.080 balance in my checking account for decades, So banks could 0:26:40.280 --> 0:26:43.760 use my money that's there for decades, your money that's 0:26:43.800 --> 0:26:47.480 there for decades, other people's money that may be there 0:26:47.560 --> 0:26:51.560 for far shorter periods of time, corporate money which may 0:26:51.680 --> 0:26:54.000 come in and out day to day, and they can 0:26:54.119 --> 0:26:58.000 use that to buy or fund a wide range of 0:26:58.520 --> 0:27:03.439 not only loans, but securities. If you want to go 0:27:03.520 --> 0:27:07.480 to the opposite extreme, you could look at hedge funds, 0:27:07.520 --> 0:27:15.920 for example, or reads, which usually borrow based on repurchase 0:27:16.080 --> 0:27:20.720 or repo agreements UH, and those repo or repurchase agreements 0:27:20.800 --> 0:27:24.600 often last only for a day and have to be 0:27:24.680 --> 0:27:30.200 renewed every day. Right. That leads those kinds of organizations 0:27:30.280 --> 0:27:34.920 kinds of investors highly subject to markets where suddenly there's 0:27:34.960 --> 0:27:37.439 a run on liquidity, and those are the those are 0:27:37.440 --> 0:27:41.600 the folks that are struggling at this point, right, some 0:27:41.720 --> 0:27:44.600 of them would have done that levered US treasury trade 0:27:44.720 --> 0:27:47.960 that we just described. So I guess the question is 0:27:48.000 --> 0:27:51.120 knowing that you have that sort of short term day 0:27:51.160 --> 0:27:55.360 to day funding, shouldn't that change the way you invest 0:27:55.520 --> 0:28:01.080 potentially or at least the way that you hedge. Absolutely? Um. 0:28:01.119 --> 0:28:03.800 I mean when it comes to the way you invest, 0:28:04.359 --> 0:28:08.760 and you see this in the portfolios at least most 0:28:08.800 --> 0:28:13.320 of the portfolios of prudent leverage investors, that almost forces 0:28:13.359 --> 0:28:18.560