WEBVTT - The Great Debate of 2021 0:00:00.400 --> 0:00:03.840 Strap on your parachute. It's time for What Goes Up 0:00:04.120 --> 0:00:13.840 with Sarah Ponzick and Mike Reagan. Hello and welcome to 0:00:13.920 --> 0:00:17.759 What goes Up, a Bloomberg Weekly Markets podcast. I'm Sarah Ponzek, 0:00:18.040 --> 0:00:20.880 reporter on the Cross Asset team, and I'm Mike Reagan, 0:00:21.000 --> 0:00:23.840 a senior editor at Bloomberg. This week on the show, 0:00:24.040 --> 0:00:27.240 for a second time this year, yield on junk bonds 0:00:27.240 --> 0:00:29.920 in the US hit a record low this month. Investment 0:00:30.000 --> 0:00:32.880 grade credit spreads are extremely narrow to this ahead of 0:00:32.920 --> 0:00:36.080 a FED meeting next week, which is possibly, dare I 0:00:36.159 --> 0:00:39.600 say it, the last big risk event of So what's 0:00:39.640 --> 0:00:41.960 the outlook for corporate debt as the year comes to 0:00:42.000 --> 0:00:45.320 a close. We'll discuss. Sorry you're really chinxing us there 0:00:45.360 --> 0:00:52.200 with the last capitalized, last capitalized risk event of the year. Wow. Wow, 0:00:52.400 --> 0:00:55.040 I really hope not. I'm sitting at a completely wooden 0:00:55.080 --> 0:00:57.840 desk right now, and you can just imagine me knocking 0:00:57.880 --> 0:01:00.400 on the bottom of it, because I do it was 0:01:00.440 --> 0:01:04.240 a risk. We'll all know who to blame. We'll all 0:01:04.240 --> 0:01:06.360 know who to blame. But it's good to have you back. 0:01:06.360 --> 0:01:09.039 Sarah was off last week. I was I was trolling 0:01:09.080 --> 0:01:11.360 you a little bit while you were out. It's good 0:01:11.400 --> 0:01:13.120 to have you back. I'll make you You'll have to 0:01:13.160 --> 0:01:15.360 go back and uh and listen to that. To be 0:01:15.400 --> 0:01:18.760 completely honest, I I didn't have a chance. Uh, But 0:01:18.800 --> 0:01:20.440 now I'm going to have to go back later this 0:01:20.480 --> 0:01:22.600 evening and listen in so that I can get right 0:01:22.600 --> 0:01:25.480 back at you. Mike. Not surprisingly, it was about your 0:01:25.520 --> 0:01:28.520 proficiency with the craziest things. I was telling Katie Gray 0:01:28.560 --> 0:01:32.360 felt don't sweat it. Sarah sets a low bar for 0:01:32.440 --> 0:01:35.839 this stuff. I would imagine that Katie brought it. She 0:01:35.840 --> 0:01:39.000 she did pretty good. We'll see how our guests this 0:01:39.040 --> 0:01:41.440 week's do well. Of course, finish the episode with our 0:01:41.520 --> 0:01:44.919 tradition the craziest things we saw in markets. But first 0:01:45.000 --> 0:01:46.920 before that, we're shifting gears a little bit and we 0:01:46.959 --> 0:01:49.960 want to talk about the credit markets, which, like all 0:01:50.040 --> 0:01:53.320 markets this year, what a wild sort of round trip 0:01:53.360 --> 0:01:56.720 for the credit markets, uh, with the pandemic and then 0:01:56.840 --> 0:01:59.640 some support from the Fed. So to help us wrap 0:01:59.680 --> 0:02:02.120 our head is around it all. We are very happy 0:02:02.200 --> 0:02:05.800 to have the head of North American investment grade credit 0:02:05.880 --> 0:02:10.000 at Aviva Investors. His name is Josh Lomire. Josh, welcome 0:02:10.040 --> 0:02:12.840 to the show. Yeah, really really grateful to be on 0:02:13.000 --> 0:02:15.919 thank you. Yeah. Yeah. So we're Sarah and I are 0:02:15.960 --> 0:02:19.079 more of the the dummies in the stock market, uh 0:02:19.280 --> 0:02:21.280 end of things. So bear with us if some of 0:02:21.280 --> 0:02:24.239 our questions are are credit markets one on one, but 0:02:24.280 --> 0:02:26.520 I think some of our listeners could could benefit from 0:02:26.520 --> 0:02:29.400 that as well, Josh. As Sara put it out, the 0:02:29.480 --> 0:02:33.040 spreads have have really obviously come back in a lot 0:02:33.320 --> 0:02:35.560 since the FED stepped up to the plate. You know, 0:02:35.639 --> 0:02:37.680 I was looking at just the triple A spreads, which 0:02:37.720 --> 0:02:40.480 I know is not the hugest basket of credit out there, 0:02:40.480 --> 0:02:44.280 but wow, talk about a dramatic year that the spreads 0:02:44.280 --> 0:02:46.320 went up to correct me if I'm wrong, something like 0:02:46.360 --> 0:02:50.240 three thirty or so basis points in March back down 0:02:50.360 --> 0:02:54.600 about one thirty and change. Now. So I'm gonna ask 0:02:54.600 --> 0:02:57.040 you a question that's probably unanswerable, but give us your 0:02:57.080 --> 0:02:59.560 best guests. Where would these spreads be? Do you think 0:02:59.639 --> 0:03:02.280 if the SAID hadn't done what it's doing. I think 0:03:02.320 --> 0:03:05.600 that's the great epiphany we've all had this year or 0:03:05.639 --> 0:03:07.840 through the experience was you know, a lot people like 0:03:07.960 --> 0:03:11.120 to talk about economic cycles in terms of years, and 0:03:11.320 --> 0:03:16.080 we've we've experienced an entire economic cycles worth of volatility 0:03:16.160 --> 0:03:20.160 within within less than twelve months. From a spread per perspective, 0:03:20.240 --> 0:03:22.720 you know, to your point, we peaked in March and 0:03:22.760 --> 0:03:25.399 then you know, three hundreds well into the three hundreds, 0:03:25.520 --> 0:03:29.040 and we're officially now through where we started the year. 0:03:29.120 --> 0:03:31.720 So you wouldn't have thought that we're still in the 0:03:31.720 --> 0:03:34.520 middle of a pandemic. You wouldn't have thought we're still 0:03:34.560 --> 0:03:38.640 recovering from a pandemic if you just look at valuations today. 0:03:38.840 --> 0:03:43.240 And so from our perspective, what the Fed did, because 0:03:43.800 --> 0:03:47.120 you know, clearly they haven't really actually bought too many 0:03:47.120 --> 0:03:50.200 corporate bonds. They've they've only spent about nine billion dollars 0:03:50.320 --> 0:03:53.800 actually in in corporate bond purchases in a market that's 0:03:53.840 --> 0:03:57.760 actually issued one point seven five trillion dollars this year. 0:03:58.240 --> 0:04:01.960 And so we we've broke and every record known to 0:04:02.120 --> 0:04:06.240 man or woman in supply this year. It's mind boggling. 0:04:06.320 --> 0:04:09.680 Talk about getting your nine billions worth. Huh, But yeah, exactly, 0:04:10.480 --> 0:04:12.520 I guess it's just the notion that they're there and 0:04:12.560 --> 0:04:15.040 they've got the checkbook at hand if they need to 0:04:15.040 --> 0:04:18.520 do more, that's exactly right. It's it's a psychological healing 0:04:18.640 --> 0:04:21.719 that that can't be underestimated the impact and value that 0:04:21.760 --> 0:04:25.320 it's provided markets. It's knowing that they're willing and able, 0:04:25.400 --> 0:04:27.120 and they do have a big check book. They were 0:04:27.120 --> 0:04:29.000 willing to write a lot more than nine billion. That 0:04:29.080 --> 0:04:31.159 just happened to be all they needed to do, which 0:04:31.200 --> 0:04:33.799 which I think is brilliant policy talk, a big game. 0:04:34.279 --> 0:04:36.640 Spend as little as you have to to calm down 0:04:36.680 --> 0:04:39.160 markets and make sure they're functioning. And that's what we got, 0:04:39.200 --> 0:04:42.400 and that's been you know, they've been extremely responsive and 0:04:42.440 --> 0:04:45.400 helpful in that regard. So let's stay pretty broad. I mean, 0:04:45.440 --> 0:04:49.159 you talk about how unbelievably quick this cycle has been, 0:04:49.200 --> 0:04:52.000 and I find it amazing just to think about the 0:04:52.040 --> 0:04:55.000 fact that we have record low junk on yield, we 0:04:55.040 --> 0:04:58.479 have stocks at record highs, and yet we're talking, or 0:04:58.560 --> 0:05:01.719 we hear strategists investors talking about the fact that we 0:05:01.760 --> 0:05:04.479 are at the beginning of a new economic cycle. Yet 0:05:04.640 --> 0:05:09.159 from these historic levels, from your perspective looking out into 0:05:09.200 --> 0:05:13.000 the future, and when you think about constructing your own portfolios, 0:05:13.800 --> 0:05:18.200 how much has the outlook for even been pulled forward 0:05:18.240 --> 0:05:22.000 into and how much more is there to look forward to? 0:05:22.600 --> 0:05:25.120 I mean, especially if you do believe in the fact 0:05:25.200 --> 0:05:27.120 that we are at the beginning of a new economic cycle, 0:05:27.560 --> 0:05:30.440 even seeing financial markets where they are today. Yeah, I 0:05:30.440 --> 0:05:33.680 think that the great challenge, I think for investors today 0:05:33.920 --> 0:05:38.920 is to sadly not get too bogged down into the fundamentals. 0:05:38.960 --> 0:05:44.440 What great advice could have painted some pretty draconian pictures 0:05:44.440 --> 0:05:47.000 earlier in the year, even in March, after the FED 0:05:47.080 --> 0:05:50.039 came out and said we were gonna support markets, you 0:05:50.080 --> 0:05:52.640 aren't really going to know the extent of the true 0:05:52.720 --> 0:05:56.280 damage in the corporate sector till after third quarter earnings, 0:05:56.720 --> 0:05:59.960 really in September. Certain, you know, because even in in June, 0:06:00.200 --> 0:06:02.839 you know, even the June thirty kind of earning season, 0:06:03.400 --> 0:06:05.159 you were kind of right in the middle of where 0:06:05.160 --> 0:06:08.960 the crisis was really ramping up. So the willingness and 0:06:09.000 --> 0:06:12.960 ability of the market to to price out this virus 0:06:13.040 --> 0:06:17.120 and price in a recovery has been spectacular. But but 0:06:17.200 --> 0:06:20.120 I guess in perfect time site which we're all blessed with, 0:06:20.640 --> 0:06:23.720 what we've realized is the magnitude and the amount of 0:06:23.760 --> 0:06:26.400 stimulus that was just thrown at this problem, to the 0:06:26.480 --> 0:06:31.040 extent that inaggregate wages were actually higher through the crisis. 0:06:31.160 --> 0:06:33.200 And when you include the stimulus checks and all other 0:06:33.279 --> 0:06:36.920 things and unemployment, that the economy actually got a boost 0:06:36.960 --> 0:06:40.200 from a wages perspective, and people were stuck at home 0:06:40.200 --> 0:06:42.720 and still able to spend some money. And so I 0:06:42.760 --> 0:06:45.880 think when you look forward at what's going to happen, 0:06:45.880 --> 0:06:48.480 and you have more confidence in a in a vaccine, 0:06:48.520 --> 0:06:51.720 and you have some level measure of confidence that there 0:06:51.760 --> 0:06:56.039 will be some agreement on stimulus continuing looking forward with 0:06:56.600 --> 0:06:59.960 potentially you know, Yelling coming into Treasury, working with Powell 0:07:00.000 --> 0:07:02.360 at the FETE, there's a lot of stars that are 0:07:02.400 --> 0:07:05.880 aligning to say, we're still gonna do, in any scenario 0:07:06.400 --> 0:07:09.680 everything we can to try to make sure we're we're 0:07:10.840 --> 0:07:15.200 stimulating slash supporting our way into this recovery in twenty one. 0:07:15.240 --> 0:07:19.640 And so valuations, to your point, have absolutely really started, 0:07:20.160 --> 0:07:22.480 you know, all year, have really priced in that that 0:07:22.600 --> 0:07:25.800 upside outcome for markets. And I think we're in a 0:07:25.840 --> 0:07:28.600 position now with you know, the things just mentioned that 0:07:28.680 --> 0:07:30.720 we're probably in a position where the market is going 0:07:30.760 --> 0:07:34.160 to keep right on pricing into that, uh, that positive 0:07:34.200 --> 0:07:37.120 outlook around the vaccine and and and things starting to 0:07:37.160 --> 0:07:39.320 open up, you know, in the let's call it second 0:07:39.360 --> 0:07:41.760 half of next year. So I feel like, that's what 0:07:41.920 --> 0:07:45.640 everybody's you know, that's what the momentum and the valuations 0:07:45.640 --> 0:07:48.440 are telling us today. You know, Josh, my eyes were 0:07:48.440 --> 0:07:50.920 popping when I was reading about some of the fund 0:07:50.920 --> 0:07:53.720 flows into one of the Viva's. One of the funds 0:07:53.760 --> 0:07:57.640 you manage, the Global Investment Grade Corporate Bond Fund. Ay, 0:07:57.680 --> 0:08:00.440 you am doubled over the course of twenty I team 0:08:00.480 --> 0:08:02.760 doubled again in the first half of this year to 0:08:03.480 --> 0:08:07.600 seven and change billion. I mean, wow, what is going 0:08:07.640 --> 0:08:11.240 on here? Is it just the proverbial hunt for yield 0:08:11.280 --> 0:08:14.040 around the world? And is it? I mean, the sovereign 0:08:14.040 --> 0:08:19.200 bond market has basically gone away in many respects for 0:08:19.360 --> 0:08:21.720 some investors with negative yields or you know, in the 0:08:21.840 --> 0:08:25.160 US tenure yields you know blow one percent? Is it 0:08:25.200 --> 0:08:27.600 all just that hunt for yield? And is it? Is 0:08:27.600 --> 0:08:30.080 the i G market kind of playing the role that 0:08:30.160 --> 0:08:32.080 the sovereign bond market used to play for a lot 0:08:32.120 --> 0:08:33.959 of investors. Do you think you know, we talk a 0:08:34.000 --> 0:08:36.920 lot about the sixty Are you guys taking a bigger 0:08:36.920 --> 0:08:40.080 share of that forty? Do you think? Yeah? I like 0:08:40.200 --> 0:08:43.480 that question. It's really important, and it's when we think 0:08:43.520 --> 0:08:45.440 about a lot and I hope you're right. I hope 0:08:45.480 --> 0:08:48.280 we are taking a bigger chunk of that forty and 0:08:48.360 --> 0:08:51.480 kind of would be great. And so yeah, from an 0:08:51.520 --> 0:08:54.120 a u M growth perspective, I think there's some video 0:08:54.200 --> 0:08:56.719 syncresies we're doing as a manager in the market that 0:08:56.760 --> 0:09:00.679 are that are resonating with clients. But from a broader 0:09:00.720 --> 0:09:05.240 market demand perspective, you know, when you think about the crisis, 0:09:05.920 --> 0:09:08.160 what we saw a lot of if clients had a 0:09:08.200 --> 0:09:11.520 tactical asset allocation where they can where they can quickly 0:09:11.559 --> 0:09:15.080 move from treasuries to investment grade bonds, they did that 0:09:15.360 --> 0:09:18.120 or many people did do that, particularly because you know, 0:09:18.240 --> 0:09:20.800 rates rock bottomed at the same time spreads blue out. 0:09:20.880 --> 0:09:23.440 If you believed in the fedback stop, in the potential 0:09:23.480 --> 0:09:25.920 for for spreads to recover, that was a really nice 0:09:26.000 --> 0:09:29.800 trade for you at the time. And now that spreads 0:09:29.800 --> 0:09:32.880 are kind of getting back to the levels we're at today, 0:09:32.920 --> 0:09:35.240 the debate is now, you know, it's still it's still 0:09:35.320 --> 0:09:39.120 the same debate. We're not getting anything from our risk 0:09:39.200 --> 0:09:43.880 free rate, We're not getting any yield from government bonds, 0:09:43.920 --> 0:09:46.120 and so right now, you know, if you think about 0:09:46.120 --> 0:09:48.240 the Royal government bonds place, and this has been the 0:09:48.240 --> 0:09:50.440 great benefit of sixty forty over the years, it's the 0:09:50.480 --> 0:09:54.000 ability for government bonds to rally when other risk assets 0:09:54.040 --> 0:09:57.360 are selling off. And there's still you know, a component 0:09:57.400 --> 0:09:59.240 of that even at the levels were at for the 0:09:59.320 --> 0:10:03.720 thirty year asury. Today you can still rally basis points 0:10:03.720 --> 0:10:06.600 in an extreme scenario, which is a real positive outcome 0:10:07.120 --> 0:10:09.480 for those bonds. You're still getting a little bit of that, 0:10:09.520 --> 0:10:11.959 but you're not getting any carry and so really all 0:10:12.000 --> 0:10:14.160 you're getting for the most part is a little bit 0:10:14.200 --> 0:10:17.520 of downside protection and liquidity for a big part of 0:10:17.559 --> 0:10:20.240 the market. If if you're a foundation or an endowment 0:10:20.640 --> 0:10:23.640 and you have calls on your liquidity, you still have 0:10:23.720 --> 0:10:26.319 to have a big slug of your you know, your 0:10:26.320 --> 0:10:29.600 asset allocation in the most liquid assets on the market. 0:10:29.640 --> 0:10:31.160 And so I think what a lot of people are 0:10:31.200 --> 0:10:35.160 struggling with now, is am I content owning almost zero 0:10:35.320 --> 0:10:37.480 just to preserve that liquidity? And how much can I 0:10:37.520 --> 0:10:40.240 push into these other asset classes to generate something of 0:10:40.280 --> 0:10:58.760 a return. I want to go ahead and read one 0:10:58.760 --> 0:11:00.520 of the quotes from the notes that or sent over 0:11:00.559 --> 0:11:05.000 to us um from you before we actually started discussing 0:11:05.640 --> 0:11:09.240 on the episode. So you said subdued global growth, continued 0:11:09.280 --> 0:11:11.640 government and central bank support, and the relative safety of 0:11:11.640 --> 0:11:14.560 investment grade credit as an asset class may put it 0:11:14.559 --> 0:11:16.920 in a sweet spot in and I also imagine some 0:11:16.960 --> 0:11:19.760 of these factors that we've been discussing contribute to that 0:11:19.840 --> 0:11:24.360 quote unquote sweet spot as well. But really illustrate that 0:11:24.480 --> 0:11:27.120 for us, what does a sweet spot and investment grade 0:11:27.120 --> 0:11:30.079 credit these days actually even look like this? Yeah, the 0:11:30.120 --> 0:11:35.600 sweet spot to me is really an environment where companies 0:11:36.160 --> 0:11:40.400 are incredibly motivated still to repair their balance sheet. So, 0:11:41.360 --> 0:11:44.320 you know a lot of companies weren't infected nearly as 0:11:44.440 --> 0:11:47.120 much as you know, the sectors in the in the 0:11:47.200 --> 0:11:50.040 in the companies at the epicenter of the coronavirus, things 0:11:50.080 --> 0:11:53.400 like you know, airlines and hotels and in various aspects 0:11:53.400 --> 0:11:56.320 of retail. You know, they're they're still fighting, you know, 0:11:57.000 --> 0:12:00.280 fighting to survive in this type of environment. Others actor's 0:12:00.360 --> 0:12:02.160 might have taken a little bit of a hit, you know, 0:12:02.200 --> 0:12:04.440 in their ebit down, they're gonna you know, bounce right 0:12:04.480 --> 0:12:07.400 back up with with the recovery and so. But everybody 0:12:07.720 --> 0:12:10.560 took down lots of debt to build a cash hoard 0:12:10.640 --> 0:12:13.160 in that in that environment, and so the great debate 0:12:13.200 --> 0:12:15.120 of twenty one is gonna be what do they do 0:12:15.200 --> 0:12:17.400 with that cash? Are they going to pay it back? 0:12:17.440 --> 0:12:18.920 Are they going to give it to shareholders? Are they 0:12:18.960 --> 0:12:21.439 going to do him and A? Are they gonna are 0:12:21.440 --> 0:12:24.120 they just gonna buy back debt? And so we're in 0:12:24.160 --> 0:12:27.080 this environment where it's certainly in everyone's best in your 0:12:27.120 --> 0:12:30.640 interest to stabilize your leverage, stabilize your ratings, and and 0:12:30.679 --> 0:12:34.080 behave yourself. So that that's a positive. You know, even 0:12:34.080 --> 0:12:37.400 though the spreads look incredibly anemic right now, right where 0:12:37.480 --> 0:12:40.559 we're anywhere between let's call it the low one hundreds 0:12:40.600 --> 0:12:44.720 on spreads for investment grade, well you're talking about a 0:12:44.760 --> 0:12:47.800 base of you know, a treasury market that's you know, 0:12:48.240 --> 0:12:51.720 tenure treasuries at closet is only at one percent. And 0:12:51.800 --> 0:12:54.080 so if you're at one thirty on spreads on the 0:12:54.120 --> 0:12:56.720 index level and you're at one percent, you're still getting 0:12:57.200 --> 0:12:59.760 you know, your yield on a corporate bond is you know, 0:13:00.040 --> 0:13:03.480 in some instance as close to of your total yield 0:13:03.600 --> 0:13:06.480 is the corporate spread. And so to be in that 0:13:06.520 --> 0:13:10.120 sweet spot when you think about investment grade still being 0:13:10.160 --> 0:13:13.640 an asset class with very low default rates and still 0:13:13.760 --> 0:13:17.040 quite a bit of liquidity in the market, particularly with 0:13:17.120 --> 0:13:19.960 FED backing to keep the functioning in the liquidity of 0:13:20.000 --> 0:13:23.480 the market. Then you can see people say, look, I'm 0:13:23.480 --> 0:13:25.520 willing to take some money out of treasury is I'm 0:13:25.559 --> 0:13:28.280 willing to put more of my allocation into corporate bonds. 0:13:28.320 --> 0:13:31.640 Because of these factors, you're more than doubling your yield, 0:13:32.040 --> 0:13:35.600 You're still have a very low probability of default, and 0:13:35.880 --> 0:13:38.720 you're you're getting a much higher you know, spread for 0:13:38.760 --> 0:13:41.960 your for your money. And you're also in an asset 0:13:41.960 --> 0:13:45.280 class that's still pretty darn liquid and also uh low 0:13:45.320 --> 0:13:48.120 probability of default. And so that's what I refer to 0:13:48.240 --> 0:13:51.640 as kind of the the Goldilocks scenario for corporate bonds, 0:13:51.679 --> 0:13:54.080 and and that and that behavior, that balance sheet behavior 0:13:54.120 --> 0:13:56.680 is a big part of that. So how low could 0:13:56.679 --> 0:13:58.920 spreads go? Do you do you think? I mean, is 0:13:58.960 --> 0:14:04.199 it possible? So think of corporate bonds yielding a negative 0:14:04.280 --> 0:14:07.199 rate of inflation, a negative real real rate or is that? 0:14:07.600 --> 0:14:09.720 Is that a crazy notion? And at this point in 0:14:09.760 --> 0:14:14.400 the economic cycle, philosophically and theoretically, it's a crazy notion 0:14:17.720 --> 0:14:24.280 that may become a reality. Uh it's times yeah, um, 0:14:24.600 --> 0:14:28.480 And so yeah, did you jump to the crazy question party? Alright, 0:14:28.560 --> 0:14:31.720 it's kind of specially, it's kind of you know, I 0:14:31.760 --> 0:14:34.280 think we can't. We can keep going from here. And 0:14:34.600 --> 0:14:37.239 and this is where I make that common on fundamentals 0:14:37.320 --> 0:14:40.520 versus technicals. If if you focus on the fundamentals, we 0:14:40.600 --> 0:14:44.240 are recovering. The world's not ending, but we probably shouldn't 0:14:44.240 --> 0:14:46.600 be at these levels based on where we're at from 0:14:46.600 --> 0:14:49.960 an economic recovery perspective. But when we go back, there's 0:14:49.960 --> 0:14:51.960 two points I want to make on on why the 0:14:52.040 --> 0:14:55.840 market has as a significant ability to continue to grind 0:14:55.880 --> 0:14:59.720 in from here is because we had one point seven 0:14:59.760 --> 0:15:03.480 five trillion of new issues last year. That number is 0:15:03.960 --> 0:15:06.640 definitely going to go down. Not only did we have 0:15:06.680 --> 0:15:08.960 one point seven five chillion of new money coming in, 0:15:09.120 --> 0:15:15.280 we actually rallied through twenty nineteen levels with one point 0:15:15.280 --> 0:15:17.960 seven five trillion a new supply. So when you have 0:15:18.000 --> 0:15:21.560 a market, yeah, exact, mind boggling. And sir, you can't 0:15:21.560 --> 0:15:23.960 blame the Robin Hood kids for this either. I don't think. 0:15:24.280 --> 0:15:28.000 I don't think they're training. I don't know. I know 0:15:28.080 --> 0:15:29.720 a few of them, and they haven't talked to me 0:15:29.720 --> 0:15:37.920 about pedal and state. Um, so yeah, go ahead. Well, 0:15:38.040 --> 0:15:41.440 so there's always a risk, right, And uh, one thing 0:15:41.720 --> 0:15:44.640 you mentioned before that I found interesting is M and A. 0:15:44.880 --> 0:15:48.280 You know, and I assume there must be a bottleneck 0:15:48.400 --> 0:15:50.480 of M and A that hasn't been done this year 0:15:50.520 --> 0:15:52.960 because of you know what a crazy year it is. 0:15:53.600 --> 0:15:55.840 Do you see the potential for a big M and 0:15:55.880 --> 0:16:00.000 A boom and you know presumably that that requires company 0:16:00.080 --> 0:16:02.080 used to lever up and sort of have a little 0:16:02.080 --> 0:16:05.000 bit of deterioration and credit quality and maybe you'll see 0:16:05.040 --> 0:16:07.440 some spread widening. Then is that is that a real risk? 0:16:07.560 --> 0:16:10.120 You think it's a risk. I wouldn't call it the 0:16:10.160 --> 0:16:12.880 biggest risk because you know, what we do know is 0:16:12.920 --> 0:16:15.600 a lot of companies are flush with more cash than 0:16:15.640 --> 0:16:19.280 they need, and so there has to be a temptation 0:16:19.560 --> 0:16:21.840 to look at all the different means with which they 0:16:21.880 --> 0:16:24.400 can deploy that. And so I think you're going to 0:16:24.520 --> 0:16:27.080 continue to see what we have seen where if you 0:16:27.120 --> 0:16:29.680 think about going into the crisis, you know, there were 0:16:29.680 --> 0:16:32.920 a lot of companies really you know, that was the 0:16:33.080 --> 0:16:35.600 that was the m oh they they needed to do 0:16:35.800 --> 0:16:39.280 M and A to grow And that probably hasn't changed, right, 0:16:39.320 --> 0:16:42.800 And so if anything, it might give companies an opportunity 0:16:43.160 --> 0:16:46.160 because of the crisis to pick off firms slower to 0:16:46.240 --> 0:16:50.400 recovery steel market share when firms are struggling. But you know, 0:16:50.440 --> 0:16:53.640 the the rally and equity valuation certainly has taken some 0:16:53.720 --> 0:16:56.440 of that off the table where they're probably not getting, 0:16:56.880 --> 0:16:59.680 you know, a sweet deal today based on the recovery 0:16:59.680 --> 0:17:01.920 and value suations at the equity side. But if you're 0:17:01.920 --> 0:17:04.000 flushed with cash and you've already got it, you've already 0:17:04.000 --> 0:17:07.480 issued the debt, you've got one variable out of the equation, 0:17:07.760 --> 0:17:10.919 you've already locked in very cheap financing. So him and 0:17:10.960 --> 0:17:13.359 A may very well well be a great place to 0:17:13.400 --> 0:17:17.200 deploy that capital. I'm curious, you know, in the equity market, 0:17:17.240 --> 0:17:21.080 the idea there's been a few narratives around the election, 0:17:21.119 --> 0:17:24.159 and I got admit, it's a shifting narrative and and uh, 0:17:24.280 --> 0:17:26.560 you know, for a while there looked like everyone was 0:17:26.560 --> 0:17:30.119 excited about a blue wave. Now everyone's excited about the 0:17:30.119 --> 0:17:32.119 idea of a split government. I think that the moral 0:17:32.119 --> 0:17:35.080 of the story is people are excited about equities regardless, 0:17:35.240 --> 0:17:39.439 uh what's going on in Washington. But but how's it 0:17:39.840 --> 0:17:42.399 looked too from a as the perspective of a credit 0:17:42.440 --> 0:17:47.000 market investor, Is this divided government, this gridlock in Washington 0:17:47.640 --> 0:17:49.840 a good scenario? You know, it's to remove some of 0:17:49.840 --> 0:17:52.920 the regulation risks for for certain industries that sort of thing. 0:17:53.000 --> 0:17:55.240 Or where how are you you know, are you worried 0:17:55.280 --> 0:17:59.120 about the election and and the composition of the Congress 0:17:59.160 --> 0:18:01.680 next year at all? Uh? Thinking about it at all 0:18:01.680 --> 0:18:03.840 when it comes to credit. Yeah, I mean, if I 0:18:03.840 --> 0:18:06.879 think about it, I would say a split government is 0:18:06.960 --> 0:18:11.240 probably the most um will create the least volatility for 0:18:11.440 --> 0:18:13.960 from certainly from a regulatory perspective. And if you think 0:18:13.960 --> 0:18:18.160 about you know, what's driven euphori and risk assets, it's 0:18:18.200 --> 0:18:21.680 tax cuts, it's you know, less regulation, it's it's all 0:18:21.760 --> 0:18:25.160 these things that are no longer at risk of being 0:18:25.200 --> 0:18:28.120 materially disrupted in the short term. And so I think 0:18:28.160 --> 0:18:31.280 on the margin, that's a very helpful thing. Uh. And 0:18:31.320 --> 0:18:34.439 also I think you're also what we're seeing now is 0:18:34.440 --> 0:18:37.040 you're also gonna gonna hopefully get to a point where 0:18:37.040 --> 0:18:40.399 cooler heads prevail and people do come together in a 0:18:40.440 --> 0:18:43.080 bipartisan way and and work on the things that really 0:18:43.119 --> 0:18:45.840 matter and get some sort of stimulus package out, get 0:18:45.920 --> 0:18:49.080 some sort of keep moving the things that are really 0:18:49.119 --> 0:18:52.080 going to help the economy. And I've always said, even 0:18:52.160 --> 0:18:54.399 leading into the elections, you know what happens to the 0:18:54.400 --> 0:18:56.480 Blue Way, what happens with the you know this or that? 0:18:56.520 --> 0:18:59.119 And I said, look, the one thing we have going 0:18:59.160 --> 0:19:01.960 for us is that in any scenario, it almost doesn't 0:19:01.960 --> 0:19:05.399 matter in the very very short term, as long as 0:19:06.080 --> 0:19:09.000 we know, no matter what the administration is, the sole 0:19:09.080 --> 0:19:11.240 focus over the next six months is going to be 0:19:11.800 --> 0:19:15.120 getting us into this recovery. And I think that's still 0:19:15.160 --> 0:19:35.160 the case today. Last question before we get two crazy things, 0:19:35.160 --> 0:19:38.359 because I know Mike is itching over there at his 0:19:38.400 --> 0:19:41.919 home in New Jersey, but I feel like we cannot 0:19:41.960 --> 0:19:46.119 have a conversation about financial markets these days without mentioning stimulus. 0:19:46.160 --> 0:19:50.199 And we've had this unbelievable monetary backstop, We've had this 0:19:50.280 --> 0:19:54.760 unbelievable fiscal backstop, and now once again we have Capitol 0:19:54.840 --> 0:19:58.560 Hill and conversation about get another package? Will will it 0:19:58.640 --> 0:20:03.520 not get past what for it? Maybe? But even with 0:20:03.720 --> 0:20:07.000 all this money flowing through the system, it doesn't completely 0:20:07.000 --> 0:20:09.000 erase bankruptcy risk. So we just want to get a 0:20:09.040 --> 0:20:11.440 sense of how you still think about bankruptcy risk and 0:20:11.680 --> 0:20:14.120 if there are certain areas that you would completely steer 0:20:14.160 --> 0:20:16.040 clear of if there are areas that you like right 0:20:16.080 --> 0:20:18.400 now and you think companies are going to be able 0:20:18.400 --> 0:20:21.880 to go ahead and really get through this recovery even 0:20:21.920 --> 0:20:24.880 stronger on the other side eventually. Yeah, that's a great 0:20:24.960 --> 0:20:27.719 question because you know this this gets into what are 0:20:27.760 --> 0:20:30.439 you actually doing with your money? Right We're talking a 0:20:30.440 --> 0:20:35.399 lot about you know, momentum and technicals and stimulus impacting demand, 0:20:35.560 --> 0:20:39.080 but we always have to stay focused on fundamentals that 0:20:39.240 --> 0:20:42.080 they may not be driving markets for periods small, short 0:20:42.119 --> 0:20:44.960 periods of time, um, but they will always you know, 0:20:45.040 --> 0:20:47.760 get the last laugh, so to speak. And so from 0:20:47.760 --> 0:20:50.960 a fundamental perspective, you know what I think we we 0:20:51.080 --> 0:20:54.280 caution people on and this this came through with with 0:20:54.680 --> 0:20:56.480 you know, the things the Fed and the Treasury did 0:20:56.520 --> 0:21:00.560 with the corporate bond buying problem program is don't mistake 0:21:01.359 --> 0:21:05.800 the government's willingness to to roll maturities, extend debt, help 0:21:05.880 --> 0:21:10.480 you refinance for bailing companies out, because companies can and 0:21:10.520 --> 0:21:14.680 will still fail if they are bad businesses with very 0:21:14.720 --> 0:21:19.399 bleak outlooks, and so defaulting and bankruptcies is still a 0:21:19.480 --> 0:21:24.720 very real risk, particularly in sectors most impacted and by 0:21:24.720 --> 0:21:28.440 the coronavirus and facing a much uh steeper hill to 0:21:28.480 --> 0:21:31.120 climb to get their revenues back up to to kind 0:21:31.119 --> 0:21:34.480 of let's call it pre pandemic level. So um, the 0:21:34.520 --> 0:21:36.960 way we think about it is you should never lose 0:21:37.000 --> 0:21:39.800 sight of following the cash flows. So you know, some 0:21:39.840 --> 0:21:41.720 people are going to be willing to to buy a 0:21:41.760 --> 0:21:44.720 company just because the market was willing to extend them debt. 0:21:45.160 --> 0:21:47.640 That's a bad idea in some instances unless you really 0:21:47.640 --> 0:21:51.000 believe cash flows can ramp quite quickly on our recovery. 0:21:51.080 --> 0:21:54.080 So when we build a portfolio, and when we think 0:21:54.080 --> 0:21:57.919 about allocating risk, we look at the entire landscape and 0:21:57.960 --> 0:22:01.679