Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: We're joined by the firms CEO and CIO Jeffrey Gunlock. Jeffrey,
Speaker 2: thank you so much for having us here.
Speaker 3: Yeah, it's good to be here. Glad you made a
Speaker 3: house call. Excuse me to do absolutely.
Speaker 2: I mean, we've got this nice rug, these nice chairs,
Speaker 2: so we couldn't be happier. But let's get right to
Speaker 2: the good stuff here. I want to talk about this
Speaker 2: moment in private credit. There's been a ton of different
Speaker 2: analogies and metaphors used. One of the ones that you've used,
Speaker 2: you said only in early April on X that basically
Speaker 2: we're in two thousand and seven for private credit. I
Speaker 2: want to talk about the potential domino effects here, because
Speaker 2: you think about any potential crisis in private credit, what
Speaker 2: is the actual read through into markets more broadly, the
Speaker 2: economy more broadly, and what does that mechanism actually look like.
Speaker 4: I think the mechanism is already underway, and the mechanism
Speaker 4: is a decline or eliminate of trust because there's been
Speaker 4: so much reporting that is questionable in terms of the
Speaker 4: underlying activity. When I point out the one that really
Speaker 4: grabbed my attention to last fall was there was a
Speaker 4: fund that was marked at one hundred, and overnight it
Speaker 4: was marked at eighty one.
Speaker 3: Now that is hard to understand.
Speaker 4: Markdown by a not insignificant sponsor, one with a good
Speaker 4: reputation and a very large staff supposedly doing underwriting and
Speaker 4: due diligence and tracking and all that sort of stuff,
Speaker 4: and yet it goes down nineteen percent overnight. Now many
Speaker 4: people don't quite fully understand the ramifications of that. They
Speaker 4: think about a stock, you know that reports and it
Speaker 4: goes from one hundred to eighty one, and that's a
Speaker 4: big move, But there was a big earningsmiths or something.
Speaker 4: These re portfolios of hundreds of loans, maybe thousands of
Speaker 4: loans in some cases, and one hundred to eighty one
Speaker 4: means either all the loans were marked out nineteen points
Speaker 4: all of them, or say, since I keep being told
Speaker 4: that everything's largely fine, let's say fifty percent of the
Speaker 4: loans are absolutely rock solid. That means that the other
Speaker 4: fifty percent were marked down thirty eight points.
Speaker 3: What if seventy five.
Speaker 4: Percent of the portfolio is absolutely rock solid, which is
Speaker 4: kind of what the.
Speaker 3: Messaging has been. That's mostly all good. I remember I think.
Speaker 4: One said no red flags, no orange, no yellow flags,
Speaker 4: and mostly green flags. Wait a minute, where's the other
Speaker 4: slice of the pie, No red, no yellow, and mostly green.
Speaker 4: What about the not mostly you know what type of thing.
Speaker 4: But if seventy five percent of the loans are absolutely
Speaker 4: rock solid, it means the other twenty five percent were
Speaker 4: marked down to twenty four right.
Speaker 3: So but what if it's.
Speaker 4: Ten percent of the loans upset have to be marked
Speaker 4: down to below zero?
Speaker 3: Right?
Speaker 4: So it's clear and when we get these markedowns, it
Speaker 4: would be awfully helpful if they would say, this is
Speaker 4: how many loans we have, This is the dollar amount
Speaker 4: of loans we have, and this is how many were
Speaker 4: marked down. Because we know the dollar amount of the markdown,
Speaker 4: it's the percentage.
Speaker 3: So how many are there?
Speaker 4: That would really really big issue. But I've been saying
Speaker 4: this is not just about private credit. This is something
Speaker 4: that is endemic to market cycles. This happened in the
Speaker 4: IPO of dot coms back in the late nineties. They
Speaker 4: had they had no revenue, no business plan, and they
Speaker 4: were selling for large, large prices. And then, of course
Speaker 4: in the lead up to the global financial crisis, you
Speaker 4: had the mortgage market. The non guaranteed mortgage market exploded
Speaker 4: in size to about where the private credit market is today,
Speaker 4: a little less actually for those securitized mortgage about two trillion,
Speaker 4: you know, and it boomed, and of course that ended
Speaker 4: up blowing up. It's all because the growth is so fast.
Speaker 4: That's what really drives it. And it can happen when
Speaker 4: there's a huge liquidity events that money is pumped in
Speaker 4: from the government some such thing as it wasn't during COVID,
Speaker 4: and sudden that money has to get deployed and it
Speaker 4: can be indiscriminate. So I use the analogy of the
Speaker 4: Wild West. This one, I think really explains it in
Speaker 4: simple terms. You've got a nice town. It's eighteen forty
Speaker 4: and out on the frontier. You've got a little town
Speaker 4: mostly farmers living off the land, and they're all God
Speaker 4: fearing people. And they got a sheriff there. He's got
Speaker 4: a heart of gold. He's like Gary Cooper and high noon.
Speaker 3: And there's very little crime.
Speaker 4: You know, every now and then there'll be a murder
Speaker 4: of passion or something. But no one had even locked
Speaker 4: their doors. I don't have to worry about it. And
Speaker 4: then something happens, so maybe it's there's a discovery of
Speaker 4: gold three miles away, and all of a sudden, all
Speaker 4: the fast buck artists and con men and rapscallions they
Speaker 4: come flooding. And not everybody's a rap scallion, but a
Speaker 4: sufficient fraction of them are rap scallions, and they're coming
Speaker 4: in there to hit it big and then get out.
Speaker 4: And suddenly there's murders. You have to lock your door,
Speaker 4: you have to barricade your door.
Speaker 3: The sheriff is completely overwhelmedble who's going to clean.
Speaker 1: That up this time?
Speaker 5: I mean, who's going to be the Gary Cooper? And
Speaker 5: if I remember, at the end, the Mark Opera badge and.
Speaker 3: Market will be the Grey Cooper.
Speaker 4: Market inflicts the pain and so you'll end up having
Speaker 4: sales at lower prices and so forth. But the trust
Speaker 4: problem is pretty significant. I mean, it appears that many
Speaker 4: of the investors in the interval funds didn't quite understand
Speaker 4: what was going on with the gating possibilities. I'm sure
Speaker 4: it's in the documents. I'm absolutely positive it's in the documents.
Speaker 4: But the investors are being sold Tube through intermediaries. In
Speaker 4: many many cases, those intermediaries get paid a very large commission.
Speaker 3: I read reporting.
Speaker 4: If there were billions of dollars paid to intermediaries.
Speaker 3: Selling private credit by the private credit.
Speaker 4: Firms, billions of dollars, so they have a lot of
Speaker 4: incentive to not focus exclusively on the negatives.
Speaker 3: Let me put it that way.
Speaker 4: And so I have a feeling that some people who
Speaker 4: are in interval funds think and maybe this didn't read
Speaker 4: the documents. Did you read your mortgage documents when you
Speaker 4: in delivery page?
Speaker 2: I'm actually going through that.
Speaker 3: Who knows what's end? Didn't read the fine print? Yeah,
Speaker 3: we do.
Speaker 2: We live in a disclosure based society. But you make
Speaker 2: a good point. I mean, you think about the fine print,
Speaker 2: did people read it? And how do you make sure that.
Speaker 3: They read it?
Speaker 2: But I want to talk about how this develops because
Speaker 2: we got through the first quarter of redemptions and certainly
Speaker 2: we saw some big headlines and some big numbers there.
Speaker 2: You warned about the IDEs of June on CNBC last week.
Speaker 2: I want to talk on Bloomberg about what that means.
Speaker 2: Are you expecting even bigger redemptions when you get those
Speaker 2: second quarter numbers?
Speaker 4: I think if I went in front of a crowd
Speaker 4: of two thousand people who are somewhat familiar with private credit,
Speaker 4: and said, show of hands, who in this room thinks
Speaker 4: the redemption requests are going to be higher than in
Speaker 4: June than redemption.
Speaker 3: Requests in March.
Speaker 4: I believe virtually every hand would go up, because it's
Speaker 4: just human nature. When you can't get out, it makes
Speaker 4: you want to get out even more. On the panel
Speaker 4: that I did at the Milkin Conference yesterday, there's this
Speaker 4: statement made by one of the private credit people that
Speaker 4: it's really public credit that's at risk, not private credit,
Speaker 4: because since they can't get out of the private credit,
Speaker 4: we don't have to sell.
Speaker 3: See that's one of the beauties of private credit.
Speaker 4: So obfuscation is now a synonym for beauty. But you know,
Speaker 4: they say that because they can't get out of their
Speaker 4: private credit, they're going to sell their public credit.
Speaker 3: They're going to sell stocks. It's going to be bad
Speaker 3: for the stock market.
Speaker 4: They're going to sell high yield, they're going to sell
Speaker 4: bank loans, corporate bonds. And I said, you know, there's
Speaker 4: a certain intellectual attractiveness of that concept. The only problem
Speaker 4: I have with it is it's not happening at all.
Speaker 4: The stock market is not in trouble. It's at new highs,
Speaker 4: not today, but it's near the highs. The loan market's
Speaker 4: not in trouble, yeah, they're they're up near power. The
Speaker 4: high yield market isn't in trouble. The spreads are tightened
Speaker 4: right back down where they where they started from at
Speaker 4: their lows of the year. So it could happen that
Speaker 4: that that logic may apply to the future, but it's
Speaker 4: not happening now.
Speaker 3: And with all of the noise and all of.
Speaker 4: The redemptions that weren't met, you'd think if there was
Speaker 4: something to that concept, we'd see more evidence of it.
Speaker 1: And that's how does this play out?
Speaker 5: Though, because I mean, hearing you talk, I'm having flashbacks
Speaker 5: to kind of like twenty years ago.
Speaker 1: I mean, the same thing. People weren't reading and what
Speaker 1: was packaging.
Speaker 5: Into these mortgage bond deals, and then once they found
Speaker 5: out what was in them, it was kind of this rush,
Speaker 5: but it was a flow moving rush, I mean first.
Speaker 4: But this will be slower, I think because the stresses
Speaker 4: in the subprime market were being tracked by the ABX indices.
Speaker 4: We could buy an ABX trunch of double B, double A,
Speaker 4: single A, triple A, and the triple b's started to
Speaker 4: fall pretty noticeably in early two thousand and seven, and
Speaker 4: they got down to about eighty and a lot of
Speaker 4: people thought it was over, that was the end, and
Speaker 4: that was actually a buying opportunity. But obviously it wasn't
Speaker 4: a buying opportunity. But you could see it on the
Speaker 4: screen every day. You could also see on a monthly basis,
Speaker 4: the delinquency is starting to pile up.
Speaker 3: This is more of a quarterly.
Speaker 4: Cycle with these with these interval funds, and so they
Speaker 4: get a respite, you know, they once they go through
Speaker 4: the painful process of gaining them, they now have I
Speaker 4: don't know, ten weeks where they have to revisit that
Speaker 4: topic again.
Speaker 3: So we know beware.
Speaker 4: The eydes of March is from Shakespeare's Julius Caesar and
Speaker 4: it was about it's talking about you shouldn't go to
Speaker 4: the capitol, you know. The eyes of March was March fifteenth.
Speaker 4: It turns out that the eyes of March is not
Speaker 4: always the fifteenth. It has to do with them how
Speaker 4: many days. It has to do with when the full
Speaker 4: moon is. So the eyes of June this year, I
Speaker 4: believe is June thirteenth. I looked it up one time.
Speaker 4: I thought I saw June twenty third, but I think
Speaker 4: it's June thirteenth. Doesn't matter which one it is. Beware
Speaker 4: the eydes of March, because that's when around when the
Speaker 4: redemption requests are going to come in.
Speaker 1: Are we going to see true default?
Speaker 5: I don't mean like these kind of shadow of defaults
Speaker 5: or whatever the heck we're calling in those days. Are
Speaker 5: we going to see true default in any sort of
Speaker 5: meaningful way in private credit?
Speaker 4: Yeah, you already are a are We've seen markdowns from
Speaker 4: one hundred to eighty one on a very large private
Speaker 4: credit fund. They will believe them at par if they
Speaker 4: believe they're not on the way to default. I've seen statements,
Speaker 4: not by every private credit company, by a lot of
Speaker 4: them that they say that's how they justify the one
Speaker 4: hundred to zero. Remember thee hundred to zeros that we
Speaker 4: saw last summer, You know they didn't They one day
Speaker 4: had to make a binary decision that yesterday we thought
Speaker 4: there was a chance of this paying off. Today we
Speaker 4: don't think there's a chance with paying off one hundred
Speaker 4: to zero. It's not going back up. It's written off.
Speaker 4: And so there's plenty of write offs happening I saw
Speaker 4: today there was another fund that marked it's NAV down
Speaker 4: five percent.
Speaker 1: Yes, Now, that I.
Speaker 4: Think is something to start seeing more of, because it's
Speaker 4: a lot more defensible to mark a fundowns five percent
Speaker 4: three times than a mark of fun down fifteen percent overnight.
Speaker 4: You can spread it out over three weeks, you know,
Speaker 4: it's a little easier to wave your hands about it
Speaker 4: one hundred to zero overnight. And so it's pretty clear
Speaker 4: to me that the trust is starting to dissipate because
Speaker 4: everything's always one off, and it's always at somebody else.
Speaker 4: It's Lake wobe Gone on steroids. Every firm is top Dessa.
Speaker 2: Well, Jeffrey, I'd love to get your thoughts on some
Speaker 2: of the recent efforts we've seen to make private credit
Speaker 2: basically more transparent. Here's two different headlines from Bloomberg yesterday.
Speaker 2: One of them is Apollo to start reporting daily prices
Speaker 2: for private markets, and then you had JP Morgan creating
Speaker 2: a new index tracking sixty four hundred private companies. So
Speaker 2: there is that effort out there. I mean, do you
Speaker 2: think that initiatives like this are helpful?
Speaker 4: It's very confusing because they started out in the early
Speaker 4: days saying this was a positive feature that we're not
Speaker 4: marketing to market, which is a strange thing because it's
Speaker 4: certainly my my institutional clients don't feel that way.
Speaker 3: Yesterday I came up with this idea.
Speaker 4: Maybe what I should do is go to my institutional
Speaker 4: regular investment crede bond clients and say, why don't we
Speaker 4: not prevail your portfolio every month and with the last
Speaker 4: close of the day for your performance report, why don't
Speaker 4: we use a one year moving average?
Speaker 3: You should try it? Why not?
Speaker 4: Because it appears that people find it attractive. Isn't that
Speaker 4: that's one of essentially the major selling points for private credit.
Speaker 4: It has what Sherman has termed laundered volatility. Everybody knows
Speaker 4: that the prices are moving. They say that private credit
Speaker 4: really earned its stripes during the lockdown, the COVID lockdown,
Speaker 4: because it held up well. Corporate credit bonds would have
Speaker 4: held up to if you didn't mark them down. Does
Speaker 4: anybody really believe they could have sold private credit loans
Speaker 4: the first week of April twenty twenty five, say, during
Speaker 4: the tape ptenpement, they could have sold those loans.
Speaker 3: At cost that's served of course they couldn't.
Speaker 4: Nobody thinks that but instead of saying, yes, we could
Speaker 4: have sold them, they say, you're missing the point. We
Speaker 4: don't have to sell them, and that's what's so great
Speaker 4: about it. Well, okay, but if I use moving average
Speaker 4: marks on my portfolio of publicly traded bonds, I'll probably
Speaker 4: have three times the sharp ratio. It will be the
Speaker 4: same return ultimately over the fullness of time, but it'll
Speaker 4: look different because it won't be as bumpy. And that's
Speaker 4: kind of the number one characteristic. It was always sold
Speaker 4: as being lower volatility. Everything's lower relative. You don't market.
Speaker 4: Nobody thinks that private equity is really lower volatilty than
Speaker 4: public equity. It's just the vehicle that it's in. And
Speaker 4: then it was sold. The second sales point was the
Speaker 4: higher historical returns. That's almost all born of twenty twenty,
Speaker 4: particularly through twenty twenty two, when the public market and
Speaker 4: corporate bonds went down fifteen to eighteen points in price
Speaker 4: thanks to rising interest rates. You don't mark them, you've
Speaker 4: got eighteen points better performance.
Speaker 1: Well, I am curious about one day.
Speaker 5: There's been a lot of talk about sort of this
Speaker 5: new sort of wave of vintages that might be coming
Speaker 5: down the pike, and sort of what the what the
Speaker 5: potential yield might be on that that's off there, But
Speaker 5: more importantly, the demand. Will the demand be there in
Speaker 5: the same way that we saw, you know, seventy eight
Speaker 5: years ago when the last mantages.
Speaker 4: I doubt you'll you'll see a repeat of the glory
Speaker 4: days when the public markets had zero yield and the
Speaker 4: private markets had both the yield and the hidden volatility.
Speaker 4: You know, if I just use moving averages, I'm actually surprised.
Speaker 4: I wonder if I can get the regulators to allow
Speaker 4: me to do a mutual fund.
Speaker 3: This is when you're moving average price.
Speaker 4: I kind of doubt it, but if I could, I mean,
Speaker 4: I think it would be a massive success.
Speaker 1: Right.
Speaker 2: Well, I do want to talk a little bit about
Speaker 2: vehicles here, because you know, you mentioned interval funds. You
Speaker 2: think about these non traded BDCs, and you think about
Speaker 2: the last year. I mean, there has been a real
Speaker 2: push to put retail and open up access.
Speaker 4: Yeah, because the machine has kind of reached its limits.
Speaker 4: Institutional investors and I've seen it written, which is a
Speaker 4: little bit concerning to me. I don't know know exactly
Speaker 4: what they mean underneath this, but they see we need
Speaker 4: to go to retail to keep making loans. It's almost
Speaker 4: like you have to always add your investor base.
Speaker 3: What does that sound like? Well, what does that sound like?
Speaker 4: You you can't go forward unless you get attract more
Speaker 4: and more and more investors.
Speaker 3: What does that sound like?
Speaker 1: I don't know.
Speaker 4: I think they build its not like a social security system.
Speaker 2: Well, I'm curious whether or not you think that you know,
Speaker 2: we're going to see some of that push die down here,
Speaker 2: whether we are going to see demand from retail heading
Speaker 2: forward here.
Speaker 3: I'm not sure it'll cool.
Speaker 4: I think that there will be, for sure heightened redemption requests.
Speaker 4: There may be some people that think that.
Speaker 3: It's a buye.
Speaker 4: I would recommend against that because my experience is long,
Speaker 4: and I have a very strong memory, and I know
Speaker 4: the way these things work. You have the push first,
Speaker 4: push down, and it looks cheap by historical prices, and
Speaker 4: then some intrepid people decide they're going to take a
Speaker 4: punt on it and they buy it, and it pushes
Speaker 4: it up somewhat.
Speaker 3: That's what happened in subprime.
Speaker 4: Like I said, the triple BABX went down from one
Speaker 4: hundred to eighty, and then it rallied up to like
Speaker 4: ninety two or something before it went to zero. But
Speaker 4: so I think there'll be some people that think that
Speaker 4: it's a buy although there's an inconsistentency between everything's fine
Speaker 4: and our nav was marked down one percent. But this
Speaker 4: is the greatest opportunity you got to buy now because
Speaker 4: it's down a whole whopping percent. So I think there
Speaker 4: will be people that buy it and then sell it lower.
Speaker 1: Yeah.
Speaker 5: I am curious though, if we do end up in
Speaker 5: a crisis. There's been a lot of talk as to
Speaker 5: what capacity the government would have to even bail things
Speaker 5: out the way they did, you know, twenty years ago.
Speaker 4: I have a really hard time thinking about a government
Speaker 4: bailout on this one. The last one they were able
Speaker 4: to wrap it up in the little guy on Main
Speaker 4: Street losing his house, right, this is the richest guys
Speaker 4: in the world making money in the wild West, and so.
Speaker 3: They might do it. I mean it might be possible.
Speaker 4: I modified the mortgages that was against the law and
Speaker 4: violation of prospectuses, so a lot of weird things can happen.
Speaker 3: But I think I think to get a.
Speaker 4: Government bail out, the problem would have to grow so
Speaker 4: large that it wouldn't be possible.
Speaker 3: It's weird.
Speaker 4: They could do a bailout if if it was not
Speaker 4: that large a problem, But then the public could go,
Speaker 4: what do you do? And you're just wiring wirring money
Speaker 4: to these billionaires. You've already given your tax breaks too,
Speaker 4: even though that's largely a myth, but that's the way.
Speaker 3: That's the way the public has been.
Speaker 5: But when you look at when you look at the
Speaker 5: fiscal situation, particularly with the interest expense continuing to rise
Speaker 5: higher than defense, I am curious what you think the
Speaker 5: Treasury Department is actually doing right now with regard to
Speaker 5: its issuance, primarily on the shorter end of the curve,
Speaker 5: and what, at least from what they've communicated, is probably
Speaker 5: going to be their strategy going forward.
Speaker 1: Do you trust in what they're doing? Uh?
Speaker 3: Well, trust is an interesting word.
Speaker 4: But they're already issuing the vast majority of the treasury
Speaker 4: debt short term.
Speaker 3: Most people aren't aware of this.
Speaker 4: Over the last year and spent the case for the
Speaker 4: last few years, about eighty five percent of all treasury
Speaker 4: issuance is inside a one year And you know what
Speaker 4: percentage is longer than twenty years? Under two percent, actually
Speaker 4: under one and a half percent, so it's already It's
Speaker 4: funny the long end gets so much attraction attention, but
Speaker 4: it's really not the area. They're already doing it all
Speaker 4: on the short end. The big mistake was that we
Speaker 4: didn't go much more heavily on the long end. But
Speaker 4: the yield was one you know, because now the yield's
Speaker 4: up at five, so it's up four hundred basis points.
Speaker 4: Those bonds, those one percent or thirty years, they're still
Speaker 4: down at fifty cents on the dollar still. I mean,
Speaker 4: they're still on their lows because the yield is within
Speaker 4: ten ten basis points of it's high.
Speaker 1: But the market keeps absorbing this.
Speaker 4: Well, maybe it's being manipulated. I mean they talked about
Speaker 4: you curve control, but rates, it has the market really
Speaker 4: been dealing with it. Because since the Fed start cutting
Speaker 4: interest rates back in September of twenty twenty four, the
Speaker 4: long rates are up one hundred basis points, right, they
Speaker 4: are up, and I think they're going to continue to
Speaker 4: go up even if there's a recession. In fact, I
Speaker 4: think if there's a recession, they'll go up even faster
Speaker 4: because people will be worried about the management of the
Speaker 4: interest expense. And it will get to the point where
Speaker 4: something has to be done about it. And it could
Speaker 4: be that the government does yield curve control. Scott bestn't
Speaker 4: talked about yel curve control as a tool, and we
Speaker 4: used you ill curve control after World War Two for
Speaker 4: about a decade. They did in Japan for decades, so
Speaker 4: it can be done. They've done quantitative easing, so they
Speaker 4: can buy whatever bonds they want, and they could just
Speaker 4: buy long bonds and bring the yield down to whatever
Speaker 4: they want it to be, as they did in Japan. Now,
Speaker 4: that didn't work that well from nineteen forty five to
Speaker 4: nineteen fifty five because once they stopped doing it, you
Speaker 4: went into a huge bear market and treasure yields went
Speaker 4: up to fifteen percent even on long term treasuries, and
Speaker 4: T bill rates were taken above twenty percent. So will
Speaker 4: they do that possibly, that's potential tool. I have an
Speaker 4: idea which I've already acted on in some of my
Speaker 4: portfolios where it's appropriate go on.
Speaker 3: Which is.
Speaker 4: One of the greatest things ever because in investment business,
Speaker 4: if you can eliminate a risk without paying anything, you
Speaker 4: should do it.
Speaker 3: We can agree on that.
Speaker 4: And if you take a risk, you should get paid
Speaker 4: something for it, right, Okay, So if you can ever
Speaker 4: eliminate a risk at zero or no cost, you should
Speaker 4: do it. So I was thinking, what if they go
Speaker 4: crazy and amplify and implement Scott Besson's suggestion of late
Speaker 4: twenty twenty four, which is we should lower the coupon
Speaker 4: on our foreign treasury holders and extend their maturity. Now,
Speaker 4: how do you know who the foreigners are? Foreign investors
Speaker 4: can hide behind any entities. So that's not really an implemental,
Speaker 4: implementable idea, but it shows a glimpse into the thought process.
Speaker 5: Do you think they'll try that like an ultralong ultra
Speaker 5: ultralong bond.
Speaker 4: I don't think they'd get many buyers for it. I
Speaker 4: think what they'll do instead is a restructuring of the existing.
Speaker 3: Debttholders as possible.
Speaker 4: I'm not saying this is a thirty percent chance even,
Speaker 4: but what if they say, you know what our interest
Speaker 4: expense is now three trillion dollars. We had a recession,
Speaker 4: rates have gone up. We're now we're showing thirty year
Speaker 4: bonds at six percent. We can't afford it. You know,
Speaker 4: we're drowning here. So let's just say, every maturity bond
Speaker 4: is outstanding, same maturity, won't buy their extending. They could
Speaker 4: extend them, but you don't want to get people super mad,
Speaker 4: So you say, we're not going to extend your maturity,
Speaker 4: but we're going to drop the coupon to the following
Speaker 4: the lower of the existing coupon and one. So you
Speaker 4: would take the entire trot stock of treasury debt, which
Speaker 4: has an average coupon about.
Speaker 3: Four, and you take it down to be one.
Speaker 4: So it would bring the interest expense down seventy five
Speaker 4: percent overnight. And so you would go from three trillion
Speaker 4: dollars to one quarter of that, so down to seven
Speaker 4: hundred and fifty, and so you'd be half of where
Speaker 4: you are now. So that would be the ultimate way
Speaker 4: of kicking the can down the road. We always see
Speaker 4: saying we're running out of road. Well, that would be
Speaker 4: a new road that's being paved. We can kick it down.
Speaker 3: Now.
Speaker 4: What would happen, Well, of course bonds, the bond holders
Speaker 4: would be super mad.
Speaker 3: The ones that owned the sixes.
Speaker 4: That were issued ten years ago was thirty years, They
Speaker 4: would go down like seventy points and all those bonds
Speaker 4: would be worth thirty and the government would not be
Speaker 4: allowed to borrow for generations, which is the solution to
Speaker 4: our to our debt addiction. We could do that. So
Speaker 4: what did I do when I thought of this idea
Speaker 4: some time ago? Actually two years ago now, I said,
Speaker 4: I called up I was on the road talking about
Speaker 4: the potential for this, and I said, you know, you're
Speaker 4: talking too much and you're not acting enough. So I
Speaker 4: called up my treasury desk and I said, in certain funds,
Speaker 4: including our flagship fund, I said, you know, I want
Speaker 4: you to go through our treasury book and analyze all
Speaker 4: the maturities, and I want to keep every maturity the same.
Speaker 3: Because we like our yield positioning.
Speaker 4: But I want you to take what we own and
Speaker 4: swap it for the lowest coupon existing in that cohort. Now,
Speaker 4: not only do you don't have to pay penalty for that,
Speaker 4: you pay a little liquidity penalty, but our fund is
Speaker 4: so liquid.
Speaker 3: It's not an issue for us.
Speaker 4: You pay a little bit, but you actually pick up yield.
Speaker 4: You actually pick up yield because the ones e'es and
Speaker 4: the one and a half ski's out there, they're off
Speaker 4: the run. The on the runs trade at the lowest
Speaker 4: yield so you actually pick up yield, so you're being
Speaker 4: paid to eliminate a risk. And I took the coupon
Speaker 4: in our long bucket of treasury from four and three quarters.
Speaker 3: To one and a half. So if that blows up,
Speaker 3: I'll be a hero too.
Speaker 4: I'll be a hero, just like I was in the
Speaker 4: global financial crisis, because when you sidestep something and people
Speaker 4: go I could have done that, because you're actually not
Speaker 4: paying a penalty for doing so. We'll see if the
Speaker 4: ones seas and twosies start rolling tomorrow.
Speaker 2: Well you're going to be the first person we call
Speaker 2: if we do see that sort of restructuring. But we
Speaker 2: only have a few minutes left with you, and I
Speaker 2: do want to talk a little bit more about positioning
Speaker 2: because you told our colleagues Joe Wisenthal and Tracy Alay.
Speaker 2: I believe it was back in November that you would
Speaker 2: recommend a twenty percent cash position basically to hedge against
Speaker 2: some sort of market inclusion. Is that still your recommendation?
Speaker 2: What is the ideal allocation right now?
Speaker 4: I kind of like twenty percent in cash. I've had
Speaker 4: allocations higher than that at times. I just think markets
Speaker 4: are very very high. I mean yields I think are
Speaker 4: going to rise. I've said that earlier this year. People
Speaker 4: were betting on two three rate hut cuts this year,
Speaker 4: and I said on national media, I said, you know,
Speaker 4: if you're buying risk assets on the back of only
Speaker 4: two rate cuts, is your high conviction idea, You're.
Speaker 3: Backing the wrong horse. We're not going to get rate
Speaker 3: cuts this year.
Speaker 4: And now I think that narrative has become not uncommon,
Speaker 4: that we're not getting rate cuts and maybe we'll get
Speaker 4: a rate hike. But cash, I think you can deploy
Speaker 4: it at lower evaluations on risk assets and higher yields
Speaker 4: on fixed income. I've liked commodities for a long time.
Speaker 4: I like about a twenty percent position. I personally have
Speaker 4: a higher one, but for most people, twenty percent position
Speaker 4: and something that's real assets. And the Bloomberg Commodity Index
Speaker 4: is perfectly fine for that.
Speaker 3: It's doing great, it's been super.
Speaker 4: Strong, it's new high, it's above all moving averages. It's
Speaker 4: due for a pullback, but it's so broadly diversified, and
Speaker 4: so many commodities are under upward pressure based on the
Speaker 4: oil prices, particularly food commodities, which I relieve and filtered
Speaker 4: for three, so.
Speaker 3: I like that. I go on and off on gold.
Speaker 3: I was a very big gold Bowl.
Speaker 4: Entering twenty twenty five, and I was asked when it
Speaker 4: was at twenty nine seventy, I was asked on National TV,
Speaker 4: do you think it's going to go above three thousand?
Speaker 3: And I said, what kind of a forecast is that?
Speaker 3: Is it going to go up a percent?
Speaker 4: I mean, come on, I said, it's going to go
Speaker 4: above four thousand by the end of this year twenty
Speaker 4: twenty five, and I went to fifty five hundred.
Speaker 1: Jeffrey, this has been a wonderful conversation.