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Speaker 1: Hello, Welcome to the Credit Edge, a wiki market's podcast.

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Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg.

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Speaker 2: I'm Rob Schiffman, co head of Bloomberg Intelligence's credit research

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Speaker 2: team and technology analysts by night. This week, we're very

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Speaker 2: pleased to welcome Mike Knopoulis, Deputy CIO at Richard Bernstein Advisors.

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Speaker 2: How you doing today, Mike, great, rap, thanks for having

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Speaker 2: me road you're here. Michael is the deputy Chief Investment

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Speaker 2: officer Richard Bernstein Advisor. She plays a key leadership role

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Speaker 2: on rbiga's investment decision making with his hands on portfolio strategy,

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Speaker 2: asset allocation and investment management. We cross paths back a

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Speaker 2: few decades ago at Credit Swiss, earning our research chops together,

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Speaker 2: so I'm even more excited for today's talk than I

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Speaker 2: normally am.

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Speaker 1: Make them feel old, yeah, So happy a new year

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Speaker 1: to all our listeners out there. We start twenty twenty

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Speaker 1: six with high drama in Venezuela. Regime changed spot to

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Speaker 1: being big bond rally and there are hopes of more

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Speaker 1: gains there. But the main event for global credit this

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Speaker 1: year is supply. In other words, issuance of new bonds

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Speaker 1: and loans. A lot of that will.

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Speaker 3: Come from AI.

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Speaker 1: But Mike, you're a skeptic. You make the point that

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Speaker 1: credit investors won't get any upside if the boom succeeds,

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Speaker 1: but they'll also be left carrying the bag if it fails.

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Speaker 1: So why is everyone piling into tech debt right now?

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Speaker 3: Rob's probably the better person to answer on that front,

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Speaker 3: because I'm a little bit, you know, unsure as to

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Speaker 3: why they're piling into tech debt at the moment, especially

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Speaker 3: you know, exceedingly long dated tech debt. I mean the

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Speaker 3: you know, technology obviously, as we all know, can change

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Speaker 3: incredibly rapidly. You know, back when I started my career,

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Speaker 3: you had, you know, mainframe rooms that were massive, and

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Speaker 3: just a few short years later and you know, you

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Speaker 3: have an iPhone where you've got technology sitting in your

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Speaker 3: pocket and those massive server rooms are no longer necessary.

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Speaker 3: So I'm a little bit confused. So Rob, I'll maybe

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Speaker 3: throw the question back to you. Water investors really seeing

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Speaker 3: in technology bonds where you're willing to fund forty year

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Speaker 3: debt on something that you know could be obsolete in

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Speaker 3: five or ten years. And the way I see it

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Speaker 3: is given where yields are given, where spreads are given,

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Speaker 3: how fast technology moves. You know, the only answer I

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Speaker 3: can come up with, James is, you know, there's just

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Speaker 3: there's just excess and there's excess liquidity and too much

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Speaker 3: speculation in markets, and credit has gotten caught up in that,

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Speaker 3: and the path to hell is paved with Carrie. But

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Speaker 3: right now, that's all you've got, so.

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Speaker 2: Yeah, you know, listen, I My general view is I

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Speaker 2: think that this whole AI bubble is just a little

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Speaker 2: bit of a marketing ploy and it's very much overblown.

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Speaker 2: The reality is, you know, why is there so much

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Speaker 2: demand for tech credit, Because there's million dollars of demand

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Speaker 2: for capacity that there is an AI revolution debt's going

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Speaker 2: on that's going to drive future cash flows like we've

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Speaker 2: never seen before. But on top of that, you know,

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Speaker 2: the real difference between where we are now and where

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Speaker 2: we were either in two thousand and eight or the

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Speaker 2: dot com bubble is that, you know, we're not starting

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Speaker 2: with companies that don't have any revenues or cash flows

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Speaker 2: that we're trying to value clicks. We're talking about the

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Speaker 2: mount rushmore of credits. So when you think about cash

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Speaker 2: flows today, they're already supportive of meaningfully higher spending. So

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Speaker 2: if you're worried about cash flows out in the future,

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Speaker 2: even if these companies are making massive mistakes and spending

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Speaker 2: hundreds of billions of dollars on capital that they're never

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Speaker 2: going to see real returns on, credit's probably not going

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Speaker 2: to be impacted anyway. So I think you know where

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Speaker 2: I think you've nailed it is that this is much

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Speaker 2: more of an equity issue than it is a credit issue.

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Speaker 2: And it's because we're starting from such a strong place,

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Speaker 2: and you're also just spot on there. Everyone is reaching

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Speaker 2: for you in these sort of environments, and if you

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Speaker 2: can buy the best credits in the corporate bomb market

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Speaker 2: at levels that are twenty thirty fifty wider than where

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Speaker 2: they were six months ago or a year ago, people

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Speaker 2: are going to do it. I'm a little bit more

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Speaker 2: interested in where you think things can really go wrong.

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Speaker 2: Is it the cost of capital goes up? Is that,

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Speaker 2: you know, the FED shifts from cutting rates to raising rates.

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Speaker 2: You know, other than just like, okay, there's not as

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Speaker 2: much AI tech demand as that people thought, what are

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Speaker 2: the other exogenous things that really should be making people

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Speaker 2: worry more so about macro credit than I think these

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Speaker 2: names from a bottoms up perspective.

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Speaker 3: Yeah yeah, I think before I get into what can

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Speaker 3: go wrong, I think you hit a couple key points,

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Speaker 3: Rob that's want to jump on real fast. One is

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Speaker 3: it's certainly not the dot com bubble. And I actually

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Speaker 3: i'd go back and even say I think we're kind

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Speaker 3: of in everything bubble at the moment. You know, it's

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Speaker 3: not just AI. It's crypto tam stocks, it's SPACs, it's

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Speaker 3: ig credit, it's high yield credit. You know, you can

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Speaker 3: kind of create a laundry list. It's it's sport bedding.

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Speaker 3: I mean, it's it's it's a liquidity. We live in

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Speaker 3: a liquidity driven bubble that doesn't just sit within AI.

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Speaker 3: And I think that's an important one because who knows

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Speaker 3: of AI is a bubble? If it's not a bubble,

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Speaker 3: if it ends up, you know, having the promise that

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Speaker 3: many expected to have, I couldn't tell you, But what

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Speaker 3: I can tell you is that monetary and fiscal policy

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Speaker 3: has created an environment of tremendous excess liquidity has driven

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Speaker 3: you know, valuations across asset classes to you know, levels

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Speaker 3: that I don't think the fundamentals necessarily justify that's actually

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Speaker 3: created a lot of opportunity in areas that you know

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Speaker 3: have been less you know, have benefited less from from liquidity, right,

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Speaker 3: because the capital has been sucked away from those areas

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Speaker 3: and it's created some opportunities in them. Is it with

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Speaker 3: regards to sort of the dot com period? I would

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Speaker 3: like in this more to one of your you know,

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Speaker 3: specialties of course way back when it is today. I'm

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Speaker 3: sure it's more to the telecom side of the equation,

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Speaker 3: not the dot com part. Right. So you had obviously

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Speaker 3: all the five roped, the cable lines laid, and excess

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Speaker 3: capacity bill and it was, you know, meaningfully a creative

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Speaker 3: to the economy and to you know, sort of future

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Speaker 3: technology and how we live. But there's about ten years

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Speaker 3: of excess infrastructure that just sort of laid dormant in

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Speaker 3: the ground until you know, really Internet sort of boomed

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Speaker 3: and traffic boomed, and why couldn't this be something different?

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Speaker 3: And it doesn't mean companies go bankrupt. You know, we're

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Speaker 3: not talking about Meta, you know, defaulting on its debt

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Speaker 3: or or you know, Oracle or or Microsoft or wherever

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Speaker 3: you know, defaulting on the debt. I don't think that's

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Speaker 3: really the concern. The concern is certainly on equity valuations,

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Speaker 3: as you mentioned, but also it's just something else going wrong.

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Speaker 3: I mean a lot of this debt is longer dated.

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Speaker 3: I do think we're in a period of higher inflation

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Speaker 3: that's gonna dent duration. It doesn't matter whether you're high

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Speaker 3: quality credit or you know, a government bond. You know,

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Speaker 3: if rates go up, we saw on twenty twenty two

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Speaker 3: what that does to bond price is what that does

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Speaker 3: to returns. And you know, it's certainly technology, which in

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Speaker 3: and of itself is a long duration asset. From the

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Speaker 3: equity perspective and from the cash flow perspective, you're betting

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Speaker 3: on future returns, future cash flows to fund the debt

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Speaker 3: to you know, justify equity multiples. So by nature, technology

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Speaker 3: is long duration in and of itself. Then you're laying

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Speaker 3: long duration debt on top of that. If rates go up,

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Speaker 3: if inflation's higher than expected over the next decade, that

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Speaker 3: can really erode eroad returns. On the credit side.

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Speaker 2: I would think you'd be more worried though down the

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Speaker 2: investment grade curve, you know, more for triple bas like

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Speaker 2: how bad is it really going to get? For a

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Speaker 2: triple A or a double A technology name. Even in

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Speaker 2: that sort of scenario where where rates are higher, liquidity

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Speaker 2: is lower, and demand is lower, you would think that

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Speaker 2: you know, those names certainly could underperform and SPA might

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Speaker 2: be too tight, but they're going to outperform on a

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Speaker 2: relative basis when the rest of the economy is is

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Speaker 2: uh blowing up much more so? Are there other other

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Speaker 2: spots outside of tech that you have some of the

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Speaker 2: same sort of worries for?

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Speaker 3: Yeah, I mean in the in the in the credit world,

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Speaker 3: you know, I think there there there are several I

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Speaker 3: get asked a lot about sort of you know, what

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Speaker 3: keeps you up at night and just does private credit

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Speaker 3: keep you up at night? So that that's the question

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Speaker 3: I probably get asked more more than anything else within

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Speaker 3: the credit space. Not a lot keeps me up at night.

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Speaker 3: Be for what it's worth, I sleep pretty well and

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Speaker 3: I'm not worried about any imminent blow up that is

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Speaker 3: going to be you know, two thousand and eight. Like

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Speaker 3: in fact, I actually think, you know, earning growth is

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Speaker 3: going to be reasonably healthy this year. I think you know,

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Speaker 3: markets are going to be JUSTPI. I think you're going

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Speaker 3: to get a broadening. But private credit, I think in

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Speaker 3: private markets in general, you know, could create some significant

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Speaker 3: liquidity mismatch is out there that down the road, you know,

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Speaker 3: could uh could cause some some sleepless nights. And it's

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Speaker 3: not necessarily a default story as much as it is

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Speaker 3: liquidity story. And uh, you know, we've seen, you know,

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Speaker 3: from a few high profile endowments and other institutional investors

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Speaker 3: where you know, you get capital calls and commitments and

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Speaker 3: you have to sell what you can in order to

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Speaker 3: fund that, and you get gated and things of that nature.

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Speaker 3: And you can envision a world where private credit, private equity,

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Speaker 3: et cetera ultimately leads to weakness and credit markets and

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Speaker 3: you can't get out and uh, and that would sort

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Speaker 3: of be you know, for me, I think more concerning

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Speaker 3: than high quality credit. Certainly, I believe it or not.

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Speaker 3: I'm not a huge bear. I actually think when you

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Speaker 3: get the next spread widening event, meaning that we're not

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Speaker 3: talking about, you know, Liberation Day, why it to you know,

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Speaker 3: one hundred and forty or something whatever it was one

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Speaker 3: hundred and twenty on IG, When you get to one

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Speaker 3: sixty five one eighty five, the next time that happens

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Speaker 3: in IG when you get to six hundred, seven hundred,

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Speaker 3: eight hundred basis points high yield, which will inevitably happen, right,

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Speaker 3: You're going to usher in a golden age for credit.

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Speaker 3: I think we're gonna have five to ten years of

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Speaker 3: exceptional corporate bond returns where you rival, if not outperform

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Speaker 3: equity markets. So I'm actually really bullish over the long run.

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Speaker 3: I can get into why I think that is in

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Speaker 3: just a moment, but I'm really bullish corporate credit long run,

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Speaker 3: just not at seventy nine basis point IG spread, just

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Speaker 3: not at you know, technology companies funding, you know massive,

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Speaker 3: you know hard asset, real estate investment, you know, for

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Speaker 3: forty years. Like that, to me is just not really

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Speaker 3: making a lot of sense.

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Speaker 2: You know, we're experienced enough that when we talk about

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Speaker 2: two thousand and eight or the dot com bubble, we

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Speaker 2: live through it. There's a lot of people out there

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Speaker 2: that have no idea what we're even talking about. And

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Speaker 2: I think some of the things that they see is,

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Speaker 2: you know, James starts out with Venezuela. Today, stocks are up,

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Speaker 2: spreads are tighter, you know issuance, and the IG market

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Speaker 2: is off to a record Like what has to happen

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Speaker 2: to shake this market. It just seems like, no matter

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Speaker 2: what the news is, spreads don't want to go meaningfully.

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Speaker 1: What I was also one of the way in with

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Speaker 1: my trouble trying to reconcile in my mind the on

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Speaker 1: the one handle thing, we're in everything bubble and on

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Speaker 1: the other hand, you sound pretty bullish.

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Speaker 2: It's the ultimate strategy.

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Speaker 3: That's why he's been around for so long. Yeah, exactly

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Speaker 3: what's what live survived? No, I ambles just in areas

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Speaker 3: that you wouldn't necessarily think, particularly in inequity markets. You know,

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Speaker 3: they're there are certain areas throughout the world that we

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Speaker 3: think are attractive. There are you know, dividend payers where

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Speaker 3: nobody's really paying attention, European markets quality. You know, these

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Speaker 3: are all areas that I would say are not in

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Speaker 3: that liquidity driven bubble where they make a lot of

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Speaker 3: sense fixed incomes. It's it's a little bit harder to find,

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Speaker 3: you know, the value it has existed over the last year.

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Speaker 3: I mean, we really liked agency mortgage backed securities last year.

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Speaker 3: They offered a really good opportunity. We thought they you know,

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Speaker 3: they uh, there was a good amount of spread and

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Speaker 3: spread compression that could happen, and you know they returned

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Speaker 3: eight percent last year. I think there's opportunity and unis

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Speaker 3: at the moment, particularly the long end of the Muni curve.

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Speaker 3: So it's not like opportunities don't exist or that you

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Speaker 3: have a liquidity evaluation bubble in every single asset class,

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Speaker 3: but there's certainly My point is it's it's more than

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Speaker 3: just AI, right, and that doesn't mean that there is

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Speaker 3: an opportunity elsewhere. There certainly is in terms of your

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Speaker 3: comment Rob about you know us living through eight us

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Speaker 3: living through the dot com you know bus as well.

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Speaker 3: It is fascinating to think, you know, there's a generation

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Speaker 3: OF's hedge fund manager strategists, heads of desks that have

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Speaker 3: never seen a true down market, that have always you know,

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Speaker 3: been rewarded for buying the dip. That scares me. You know,

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Speaker 3: I don't count COVID. COVID was lasted a day and

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Speaker 3: a half. You know, you've never really had a true recession.

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Speaker 3: I actually think I would. I would would have been

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Speaker 3: like the most vindictive central banker had I, you know,

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Speaker 3: been the chair of the central bank, like when SVB

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Speaker 3: and First Republic, you know, when I just would have

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Speaker 3: let it all burn, you know. I think that was

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Speaker 3: an opportunity to reset the clock, sort of let the

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Speaker 3: forest fire, you know, burn out all the brush and

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Speaker 3: let new growth, you know, you know, come up. But

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Speaker 3: of course we didn't do that, and it kind of

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Speaker 3: sparked this latest liquidity driven rally and and here we are.

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Speaker 3: But it is interesting. I think that lack of experience

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Speaker 3: of trading around real crises could exacerbate issues within credit

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Speaker 3: markets and within markets in general. When we have our

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Speaker 3: next procession whenever, whenever, that may be rates.

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Speaker 1: So you seem to think that rates might go up,

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Speaker 1: which I think the market is mostly betting they'll go down.

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Speaker 1: And if you listen to the most Trumpian fed governor,

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Speaker 1: he thinks they should be cut by a hundred bases

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Speaker 1: points this year. So how how do you feel about

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Speaker 1: your rates? You know, obviously there is inflation. We don't

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Speaker 1: have a lot of data to actually, you know, figure

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Speaker 1: out how much. But jorly, the next move is a cut.

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Speaker 1: We're going to keep cutting and that's going to be

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Speaker 1: great for duration. It's going to be even more equidity.

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Speaker 1: That's going to pump up the bubble.

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Speaker 3: So there's there's there's two schools of thought on this,

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Speaker 3: and I think both can be right. It just depends

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Speaker 3: on your time frame. You know, it was funny the

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Speaker 3: Monday before the FED cut September of last year, twenty

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Speaker 3: twenty four, before the first set of cuts, you had

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Speaker 3: a lot of market pundits and pms coming on Bloomberg

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Speaker 3: and other shows saying, now is the time to buy duration.

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Speaker 3: When the FED starts cutting interest rates, you know you

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Speaker 3: want to actually go long duration, go out the curve.

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Speaker 3: I think that's very lazy analysis. The question has to

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Speaker 3: be why is the fair cutting interest rates? If the

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Speaker 3: Fed's cutting interest rates because you're going into a recession

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Speaker 3: or you're going into a growth slowdown, then certainly by duration.

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Speaker 3: But if you're actually cutting interest rates into a strong economy,

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Speaker 3: into a high inflation environment, you actually want a cell

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Speaker 3: duration and get underweight. And that's exactly what you wanted

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Speaker 3: to do, and in twenty twenty four and so far,

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Speaker 3: that's by and large been what you've wanted to do.

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Speaker 3: In twenty twenty five and into twenty twenty six as well.

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Speaker 3: The Fed's cutting, but inflation isn't meaningfully going down. The

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Speaker 3: Fed's cutting, but you're over four percent in GDP. The

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Speaker 3: Fed's cutting, but earnings growth is still in the mid teens.

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Speaker 3: And in that environment, should you know, the FED cut

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Speaker 3: one hundred bases points in twenty twenty six and you

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Speaker 3: not have unemployment rising, should you not have inflation falling,

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Speaker 3: then I think you're going back to five year five

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Speaker 3: percent on the tenure. Now. Of course, the the other

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Speaker 3: side of that is that if they're cutting interest rates

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Speaker 3: and growth is slowing and inflation is splung, well, then

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Speaker 3: by by by all means you know rate should fall.

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Speaker 3: But I don't see anything the data to suggest a

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Speaker 3: significant slowdown in growth in inflation to justify the FED

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Speaker 3: cutting straight. So I think one of the biggest risks

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Speaker 3: out there to kind of go back rob to your

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Speaker 3: question earlier, is that the FED remains much tighter than

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Speaker 3: the market expects, and you can almost envision and this

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Speaker 3: is certainly not a base case, so I do want

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Speaker 3: to mention that. But you can invention an environment where

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Speaker 3: the FED has to not cut because inflation stays elevated,

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Speaker 3: but earnings growth lows, and you kind of get a

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Speaker 3: light version of twenty twenty two, you know, where sort

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Speaker 3: of you get high correlation amongst all asset classes, and

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Speaker 3: you know, maybe it's not big negative returns like you

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Speaker 3: had in twenty twenty two, but you know, the sort

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Speaker 3: of very lukewarm or or minimal returns in twenty twenty six.

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Speaker 3: Again not necessarily a base case, but certainly within the

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Speaker 3: realm of possibility and.

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Speaker 2: What's sort of opportunities to think I would create for

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Speaker 2: reddit though, if we have rising all in yields, there

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Speaker 2: seems to be like a pretty deep investor bid for

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Speaker 2: yields even at these levels. So does that mean credit

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Speaker 2: how performs equities if yield your one hundred basis points high?

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Speaker 3: So yeah, not necessarily because you just don't have any

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Speaker 3: spread cushion at all to absorb that. But I do

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Speaker 3: think you could definitely make a case for floating rate debt.

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Speaker 3: You can see clos do phenomenally well. So I think

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Speaker 3: the high quality floating rate which you know floaters in

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Speaker 3: IG right, we'll do very very well in that environment

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Speaker 3: as well. So I just think loadation ig loateration, even

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Speaker 3: high yield potentially depending how bad that in this theoretical,

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Speaker 3: very theoretical, non bas case world, depending how bad the

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Speaker 3: earnings deceleration is, you know, you can make a case

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Speaker 3: for all sort of shorter duration or floating rate fixed

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Speaker 3: income out performing equities. I think that's actually pretty reasonable,

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Speaker 3: and that's what you saw in only twenty two. In

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Speaker 3: that environment, you have to love sort of the you know,

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Speaker 3: floating rate securitized market, something like you know, triple A

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Speaker 3: clos or something like that.

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Speaker 1: You also say in your investment philosophy that you'd like

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Speaker 1: to focus on corporate profit cycles rather than economic cycles.

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Speaker 1: Do you look at profits, liquidity and investor sentiment valuation?

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Speaker 1: What are you saying there right now?

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Speaker 3: Yeah, so you know, it's it's a good It's it's

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Speaker 3: really the most and one of the most important things

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Speaker 3: that that define our philosophy and the idea of looking

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Speaker 3: at profits versus economics. In the credit side, I would say,

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Speaker 3: you know, you know, economics matter a lot, right because

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Speaker 3: the old at the end of the day, you know,

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Speaker 3: you have to be able to make your interest payment

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Speaker 3: and to ultimate payment of of principle, right, and so

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Speaker 3: as long as you don't default and you can withstand

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Speaker 3: mark to market, then you're going to be good. And

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Speaker 3: recession or not recession is going to be the big

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Speaker 3: determining factor of that. But ultimately, you know, in terms

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Speaker 3: of spread widening and marked market risk. Profits matter above

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Speaker 3: all else, and you can have, like in twenty twenty two,

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Speaker 3: a period where you have a profit recession negative you're

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Speaker 3: on your earnings growth, but non economic recession and get

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Speaker 3: really poor marked to market returns in asset classes. Where

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Speaker 3: are we today declining earnings growth but not weak earnings growth.

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Speaker 3: We think the next several quarters, so Q four when

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Speaker 3: we got the data Q one and Q two, we're

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Speaker 3: gonna come off of a peak that was Q three,

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Speaker 3: So we think, you know, mid teens or so is

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Speaker 3: where Q three ended up on a year of year basis.

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Speaker 3: I think Q four is going to go down to

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Speaker 3: sort of you know, twelve twelve thirteen percent your earn

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Speaker 3: your earnings growth, and we think by Q one Q

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Speaker 3: two of this year you're gonna be high single digits

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Speaker 3: in terms of earnings. That's still pretty good. We're not

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Speaker 3: thinking you going to have an earnings recession, but an

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Speaker 3: earning slowdown for equity markets. That that earning slowdown does matter.

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Speaker 3: For credit markets, it matters less. And so you know,

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Speaker 3: one thing that we kind of chatted about before you know,

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Speaker 3: we started recording here was you know it seems like

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Speaker 3: I'm quite bearish. And it's funny because in credit markets,

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Speaker 3: you know, we don't need a spread widening scenario to outperform.

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Speaker 3: I can avoid corporate credit altogether. And it's not like

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Speaker 3: I want or need or expect spreads to blow out.

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Speaker 3: You know, I always go back to the mortgage backs scenario,

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Speaker 3: mortgage backed securities, where I can buy agencies for the

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Speaker 3: same yield, actually for slightly more yield than the IG

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Speaker 3: broad market, and not have any of the downgrade risk,

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Speaker 3: any of the you know, corporate risk. I'm in a government,

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Speaker 3: government guaranteed security. So why would I not if I

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Speaker 3: had the option to not just have to own corporate credit,

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Speaker 3: why would I not do that instead?

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Speaker 2: Right?

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Speaker 1: Is that what you're doing?

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Speaker 3: That That's what we've done. Yeah, so we're overweigh mortgages

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Speaker 3: and we actually own in our portfolios, believe it or not,

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Speaker 3: no corporate credit, which is which is sounds crazy even

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Speaker 3: on the show. I know, well to discuss I suppose

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Speaker 3: why we don't, but that that sounds good. But you know,

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Speaker 3: this is a relatively new position for us, and we

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Speaker 3: came into twenty twenty five overweight credit risk. We came

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Speaker 3: into twenty twenty five overweight credit risk through triple B colos.

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Speaker 3: We are very overweight credit risk coming out of COVID

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Speaker 3: through interes, straight edge, IG, short duration, high yield. So

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Speaker 3: we have like corporate credit for the bulk of this

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Speaker 3: sort of profit acceleration period, this liquidity driven environment. But

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Speaker 3: when spread's got you know, really below ninety, for us,

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Speaker 3: the relative value proposition just didn't make sense anymore. And

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Speaker 3: you know that's for me. That's that's really what this

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Speaker 3: is about. It's it's not about you know, the expectations

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Speaker 3: of defaults really accelerating or massive spread blow. If those

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Speaker 3: things happen, we'll obviously do well.

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Speaker 1: So you jump back in if it came.

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Speaker 3: I don't know if you want to go down this route,

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Speaker 3: but you know, we invest in in ETFs, they mentioned earlier,

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Speaker 3: And I actually think that ultimately the way credit investing

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Speaker 3: is going to work and fixed income investing is going

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Speaker 3: to work is going to be almost solely through ETFs

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Speaker 3: because of the ability to get out completely and then

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Speaker 3: to scale back up to a meaningful weight within a

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Speaker 3: portfolio without ever having to buy or sell an ill

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Speaker 3: liquid you know, bond.

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Speaker 1: So right now you have zero exposure to i G

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Speaker 1: or high yield direct interns of pure corporate and that

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Speaker 1: was all done through ETF.

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Speaker 3: All trades all done through ETF, So you can get

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Speaker 3: out of it in a day, get back into it

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Speaker 3: in a day.

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Speaker 1: And let's say IG went above ninety spread, what is

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Speaker 1: high yield have to go above? Will you just be interested?

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Speaker 3: So for me, it's a combination of two things. It's

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Speaker 3: it's valuation, it's where we are within the within the

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Speaker 3: the profit cycle. Ninety would not wouldn't do it for

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Speaker 3: me because we're in a discelerating earnings environment. I think

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Speaker 3: there's some risks out there. I think rates are going

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Speaker 3: to go higher, et cetera. So I probably have to see,

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Speaker 3: you know, either reaccelerating earnings or wider spreads to really

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00:22:59,320 --> 00:23:03,240
Speaker 3: want to earn corporate credit. Here, for me, there's sort

432
00:23:03,280 --> 00:23:06,280
Speaker 3: of some no brainer levels at which you buy. Doesn't

433
00:23:06,320 --> 00:23:09,720
Speaker 3: matter what's going on from from a macroeconomic or profit perspective.

434
00:23:09,760 --> 00:23:11,280
Speaker 3: You just are supposed to buy it because you know,

435
00:23:11,320 --> 00:23:13,920
Speaker 3: over twelve eighteen twenty four month rising you do quite well.

436
00:23:14,240 --> 00:23:16,240
Speaker 3: I mean, that's much why we've been in a very

437
00:23:16,280 --> 00:23:19,119
Speaker 3: long time. They bring like one sixty five and right,

438
00:23:19,119 --> 00:23:20,919
Speaker 3: I mean these are levels that like stout, I mean

439
00:23:21,000 --> 00:23:25,720
Speaker 3: Rob's there's the levels that sounds ludicrous. Yeah, high yield's

440
00:23:25,720 --> 00:23:28,440
Speaker 3: a little bit more interesting because seven hundreds of is

441
00:23:28,480 --> 00:23:30,960
Speaker 3: a danger zone and high that's like the rule of thumb.

442
00:23:31,640 --> 00:23:35,720
Speaker 3: But when you actually run the the analysis, you know,

443
00:23:35,720 --> 00:23:39,520
Speaker 3: if you buy a high yield that's seven hundred, you

444
00:23:39,600 --> 00:23:42,840
Speaker 3: have about equal odds about performing or underperforming the broad

445
00:23:42,880 --> 00:23:45,240
Speaker 3: market over twelve months because either you're going seven hundred

446
00:23:45,320 --> 00:23:50,120
Speaker 3: going to north of one thousand. So the the trajectory

447
00:23:50,200 --> 00:23:52,480
Speaker 3: of how you get to seven hundred, are you going

448
00:23:52,600 --> 00:23:54,760
Speaker 3: up to seven hundred, are you coming back down through

449
00:23:54,800 --> 00:23:57,280
Speaker 3: seven hundred? It matters, right, But yeah, I mean if

450
00:23:57,320 --> 00:23:59,160
Speaker 3: you're in that seven hundred range seven to fifty ranch

451
00:23:59,200 --> 00:24:00,800
Speaker 3: becomes a lot more interesting. If you're in that one

452
00:24:00,920 --> 00:24:03,040
Speaker 3: one fifty one sixty range, I think IG becomes a

453
00:24:03,040 --> 00:24:07,000
Speaker 3: lot more interesting. Or profit growth starts to reaccelerate, then

454
00:24:07,040 --> 00:24:09,399
Speaker 3: you feel more comfortable in the carry.

455
00:24:09,440 --> 00:24:12,000
Speaker 2: But what do you think in the broader picture of AI,

456
00:24:12,720 --> 00:24:17,199
Speaker 2: not not from the tech company perspective, but from the

457
00:24:17,280 --> 00:24:23,160
Speaker 2: efficiency perspective over time? Don't you think that as AI

458
00:24:23,280 --> 00:24:26,919
Speaker 2: gets built out and there's much more compute capacity that

459
00:24:26,960 --> 00:24:31,119
Speaker 2: it's going to make companies meaningfully more profitable, and that

460
00:24:31,240 --> 00:24:37,080
Speaker 2: should drive browning earnings growth, higher multiples, theoretically tighter spreads.

461
00:24:38,680 --> 00:24:41,280
Speaker 3: I think I could answer that question. Yes, I could

462
00:24:41,320 --> 00:24:45,480
Speaker 3: answer it no, And it's just conjecture. I just don't

463
00:24:45,520 --> 00:24:49,600
Speaker 3: think we know, you know, I think we were all

464
00:24:49,640 --> 00:24:51,640
Speaker 3: saying that about the Internet. And if you look at

465
00:24:51,840 --> 00:24:53,440
Speaker 3: you know, if we're on TV right now, it could

466
00:24:53,440 --> 00:24:57,439
Speaker 3: throw a chart on productivity. You'd actually see productivity if

467
00:24:57,440 --> 00:25:00,840
Speaker 3: you squint at the line has actually gotten worse. Uh

468
00:25:00,880 --> 00:25:03,600
Speaker 3: since since the advent of the Internet. I don't know.

469
00:25:03,600 --> 00:25:05,760
Speaker 3: Everybody does not the internet where productivity has gotten worse.

470
00:25:05,760 --> 00:25:09,720
Speaker 3: You can only use your imagination, but certainly hasn't enhanced productivity.

471
00:25:10,240 --> 00:25:14,600
Speaker 3: AI may be one of the greatest productivity booms ever

472
00:25:14,720 --> 00:25:20,040
Speaker 3: and that drives you know, profitability and ultimately the ability

473
00:25:20,119 --> 00:25:25,439
Speaker 3: for for multiple expansion. It may be a dud. We

474
00:25:25,720 --> 00:25:28,040
Speaker 3: I don't think you or I know that yet, right

475
00:25:29,000 --> 00:25:31,080
Speaker 3: And so I think, right now, it's it's all story.

476
00:25:31,440 --> 00:25:33,920
Speaker 3: And until I start seeing the productivity gains, until I

477
00:25:33,960 --> 00:25:38,520
Speaker 3: start seeing the benefits of AI, yeah, I'm gonna I'm

478
00:25:38,520 --> 00:25:41,280
Speaker 3: gonna hold off. You know, I'm investing in that sort

479
00:25:41,320 --> 00:25:44,000
Speaker 3: of that philosophy. You know, in fact, you're starting to

480
00:25:44,040 --> 00:25:46,440
Speaker 3: see a lot of companies that have invested heavily in

481
00:25:46,520 --> 00:25:50,440
Speaker 3: AI buyed workers thinking that is going to add to productivity,

482
00:25:50,560 --> 00:25:53,800
Speaker 3: enhance profits, et cetera. And then had to say, listen,

483
00:25:53,880 --> 00:25:55,359
Speaker 3: roll it all back and say this was not what

484
00:25:55,440 --> 00:25:57,000
Speaker 3: we thought it was going to be. It's not ready

485
00:25:57,040 --> 00:25:59,520
Speaker 3: for prime time, and we have to hire back workers

486
00:25:59,520 --> 00:26:03,520
Speaker 3: and that's act be an expense, right, And uh so

487
00:26:03,840 --> 00:26:05,560
Speaker 3: I just don't think the technology is there yet. I

488
00:26:05,560 --> 00:26:06,720
Speaker 3: don't know. We'll say, why do.

489
00:26:06,680 --> 00:26:09,879
Speaker 2: You think everyone else though, is so complacent? Like you know,

490
00:26:09,920 --> 00:26:12,359
Speaker 2: we just did our credit conference in in December, and

491
00:26:12,680 --> 00:26:15,439
Speaker 2: you know, most other strategists they're just calling for a

492
00:26:15,640 --> 00:26:19,600
Speaker 2: reasonably narrow range of ig with you know, low but

493
00:26:19,760 --> 00:26:26,840
Speaker 2: positive all in returns, not necessarily significant outperformance. But but

494
00:26:27,080 --> 00:26:29,479
Speaker 2: there doesn't seem to be just any fear And like

495
00:26:29,560 --> 00:26:33,439
Speaker 2: why is that? Like certainly from the bond world, like

496
00:26:33,480 --> 00:26:36,159
Speaker 2: you started out saying, the ultimate upside is you just

497
00:26:36,200 --> 00:26:40,280
Speaker 2: get paid back. Right, there's always never a huge upside,

498
00:26:40,560 --> 00:26:43,600
Speaker 2: But there's there's a level of complacency that exists right

499
00:26:43,640 --> 00:26:48,000
Speaker 2: now that you know, it just seems like it's unbreakable,

500
00:26:48,640 --> 00:26:52,600
Speaker 2: and we know that's not right. So what are those

501
00:26:52,640 --> 00:26:55,320
Speaker 2: couple of things that you just think people are missing.

502
00:26:55,720 --> 00:26:59,679
Speaker 3: Well, I think time has you know, time of no

503
00:26:59,800 --> 00:27:05,159
Speaker 3: major issues creates complacency. You've probably talked to the majority

504
00:27:05,200 --> 00:27:09,440
Speaker 3: of those investors and they'll say, oh, well, the FED

505
00:27:09,440 --> 00:27:11,960
Speaker 3: will bail you out. You know. It's like to the

506
00:27:12,000 --> 00:27:16,200
Speaker 3: conversation earlier that with Trump or Trump or whatever, right,

507
00:27:16,440 --> 00:27:18,879
Speaker 3: And the problem is that becomes much harder to do

508
00:27:18,920 --> 00:27:21,520
Speaker 3: if you have higher inflation. And I will be the

509
00:27:21,520 --> 00:27:24,000
Speaker 3: first to admit if inflation goes back down to two

510
00:27:24,000 --> 00:27:26,919
Speaker 3: percent and the FED is able to cut interest rates

511
00:27:27,080 --> 00:27:30,159
Speaker 3: and you know you have three to four percent GDP,

512
00:27:31,000 --> 00:27:32,720
Speaker 3: you know the party is going to continue on for

513
00:27:32,760 --> 00:27:33,320
Speaker 3: a lot longer.

514
00:27:33,359 --> 00:27:35,840
Speaker 2: If Goldilocks walks down the hallway, things will be great.

515
00:27:35,920 --> 00:27:38,399
Speaker 3: Well, but then that's I think that's right, and I

516
00:27:38,400 --> 00:27:41,800
Speaker 3: think that's I think that's sort of the base case

517
00:27:42,080 --> 00:27:44,920
Speaker 3: for most investors. There's a Bloomberg article. I don't know

518
00:27:44,920 --> 00:27:46,600
Speaker 3: if it's today yesterday, right, And I can't remember the

519
00:27:46,680 --> 00:27:48,320
Speaker 3: number of investors, so you might be able to quote

520
00:27:48,320 --> 00:27:49,919
Speaker 3: me James on this one, but it was like I

521
00:27:49,920 --> 00:27:55,280
Speaker 3: think it was of six hundred people were interviewed, surveyed,

522
00:27:55,600 --> 00:27:58,560
Speaker 3: and sixty percent thought you'd get twenty percent or more

523
00:27:59,640 --> 00:28:02,600
Speaker 3: return in the equity market in twenty twenty six. It's

524
00:28:02,600 --> 00:28:05,680
Speaker 3: like twenty percent plus is now the new standard expectation.

525
00:28:06,280 --> 00:28:09,920
Speaker 3: It ten years ago, Well, I guess now it's fifteen

526
00:28:10,000 --> 00:28:13,040
Speaker 3: years ago. Got time time five? So fast? But after

527
00:28:13,080 --> 00:28:17,080
Speaker 3: the financial crisis, when RBA was actually founded, you're saying,

528
00:28:17,200 --> 00:28:20,280
Speaker 3: we were saying at that time, you know, ten percent

529
00:28:20,320 --> 00:28:23,560
Speaker 3: returns in the equity market are doable, and no one

530
00:28:23,600 --> 00:28:25,800
Speaker 3: believed that because think about it, you just came off

531
00:28:25,800 --> 00:28:29,399
Speaker 3: of a decade of basically zero return for the S

532
00:28:29,440 --> 00:28:32,040
Speaker 3: and P five hundred and ten percent sounded like this

533
00:28:32,280 --> 00:28:35,800
Speaker 3: ludicrous idea. Now, if you were to tell someone I

534
00:28:35,840 --> 00:28:39,560
Speaker 3: expect ten percent returns, they say, well, that's terrible. You know,

535
00:28:39,920 --> 00:28:42,200
Speaker 3: I expect twenty percent every year. Year after a year,

536
00:28:42,200 --> 00:28:44,240
Speaker 3: I'm gonna double my money every three years. And that's

537
00:28:44,240 --> 00:28:50,080
Speaker 3: just those expectations are unhinged with reality. And when you

538
00:28:50,080 --> 00:28:52,480
Speaker 3: look at credit spreads, when you look at equity valuations,

539
00:28:52,520 --> 00:28:54,480
Speaker 3: when you look at the sentiment out there, it's very

540
00:28:54,480 --> 00:28:57,040
Speaker 3: classic signs of excess. I don't like to use the

541
00:28:57,040 --> 00:28:59,200
Speaker 3: word bubble because bubble just implies such like you're gonna

542
00:28:59,200 --> 00:29:01,160
Speaker 3: have an imine pop. I don't know when the pop,

543
00:29:01,320 --> 00:29:03,000
Speaker 3: if there's gonna be a pop. If it's gonna pop,

544
00:29:03,040 --> 00:29:05,520
Speaker 3: the year is just gonna be deflated. Who knows. But

545
00:29:05,560 --> 00:29:09,400
Speaker 3: it's just such obvious signs of excess when no one

546
00:29:09,880 --> 00:29:14,600
Speaker 3: is bearish. You know, it's funny, we don't expect a

547
00:29:14,640 --> 00:29:19,120
Speaker 3: recession this year, but no one else does either. Everybody

548
00:29:19,160 --> 00:29:23,360
Speaker 3: was expecting a recession last year. No recession is ever predicted.

549
00:29:23,720 --> 00:29:27,800
Speaker 3: Right if you're if the strategists and the market is

550
00:29:27,800 --> 00:29:31,280
Speaker 3: predicting a recession, it's not happening. I start to worry

551
00:29:31,320 --> 00:29:35,560
Speaker 3: about times when everybody's you know, expecting good times, and

552
00:29:35,600 --> 00:29:39,040
Speaker 3: that's certainly right now. And again I think that comes

553
00:29:39,080 --> 00:29:44,040
Speaker 3: from time. It's been such a good several years. People

554
00:29:44,040 --> 00:29:46,480
Speaker 3: are taking their eye off the ball and listen. I mean,

555
00:29:46,520 --> 00:29:49,040
Speaker 3: what a fixed income markets return last year? The Bloomberg

556
00:29:49,080 --> 00:29:51,960
Speaker 3: I had was probably seven seven and a half percent return.

557
00:29:52,480 --> 00:29:53,800
Speaker 3: I mean, then in a normal year, that's like a

558
00:29:53,840 --> 00:29:54,800
Speaker 3: pretty good equity year.

559
00:29:55,040 --> 00:29:57,520
Speaker 1: But at the same time, people are digging deeper strin

560
00:29:57,560 --> 00:29:59,360
Speaker 1: and chase returns and risky of stuff. You know that

561
00:29:59,520 --> 00:30:03,160
Speaker 1: we're talking on the show recently about double be dlo

562
00:30:03,440 --> 00:30:07,160
Speaker 1: branches and equity light returns in other parts of the market,

563
00:30:07,320 --> 00:30:08,960
Speaker 1: to which I always say, do you mean twenty five percent?

564
00:30:08,960 --> 00:30:12,640
Speaker 1: And they say no, not much er than that. But nonetheless, people, uh,

565
00:30:12,720 --> 00:30:14,760
Speaker 1: do you see any signs of broth in credit markets

566
00:30:14,760 --> 00:30:17,880
Speaker 1: of people, you know, undue risk taking, risk being mispriced,

567
00:30:17,920 --> 00:30:18,440
Speaker 1: that kind of thing.

568
00:30:18,920 --> 00:30:23,280
Speaker 3: So, you know, I think it's again, I think it's

569
00:30:23,320 --> 00:30:26,360
Speaker 3: pretty pervasive in credit markets. I think a lot of

570
00:30:26,400 --> 00:30:29,120
Speaker 3: that has gone to private credit. I think that's sort

571
00:30:29,160 --> 00:30:31,200
Speaker 3: of where you've seen it the most. The COLO one

572
00:30:31,280 --> 00:30:33,440
Speaker 3: is an interesting one. I mean, there was a time

573
00:30:34,160 --> 00:30:37,440
Speaker 3: for many years where clos across the capital structure were cheap.

574
00:30:38,360 --> 00:30:41,360
Speaker 3: That's pretty much gone at this point. So you know,

575
00:30:41,400 --> 00:30:46,120
Speaker 3: almost anything you know today with a spread is is

576
00:30:46,160 --> 00:30:50,120
Speaker 3: sort of you know, trading cheap. The one area that's not.

577
00:30:50,320 --> 00:30:52,520
Speaker 3: I would argue, you could make the arguments maybe muni's

578
00:30:52,840 --> 00:30:56,040
Speaker 3: in longer term munis, but yeah, I mean, I think

579
00:30:56,080 --> 00:30:58,560
Speaker 3: everybody's reaching for yield to some degree, which is kind

580
00:30:58,560 --> 00:31:00,360
Speaker 3: of ironic, right, because you don't need to reach for

581
00:31:00,400 --> 00:31:02,920
Speaker 3: you That's why I don't. That's where I'm you know,

582
00:31:03,040 --> 00:31:04,600
Speaker 3: out of touch. I feel like with.

583
00:31:04,640 --> 00:31:06,320
Speaker 1: Investor IG bones five percent?

584
00:31:06,360 --> 00:31:08,120
Speaker 3: Why yeah, why do you have to stretch one hundred

585
00:31:08,120 --> 00:31:10,120
Speaker 3: percent buy IG bonds at five percent? You can buy

586
00:31:10,560 --> 00:31:13,440
Speaker 3: you know, treasuries, you can buy agency mortgages, you can

587
00:31:13,440 --> 00:31:16,640
Speaker 3: buy munis. I mean, there's you don't need to reach

588
00:31:17,320 --> 00:31:19,840
Speaker 3: for yield to get reasonable yield.

589
00:31:19,840 --> 00:31:22,480
Speaker 1: But we've become so as Rubb says, complacent. We are

590
00:31:22,520 --> 00:31:24,959
Speaker 1: so used to twenty percent nexty mukeets. So we need

591
00:31:25,040 --> 00:31:26,560
Speaker 1: to be stretching. We needs to be pushing. There is

592
00:31:27,080 --> 00:31:28,520
Speaker 1: read out there not much be it.

593
00:31:28,720 --> 00:31:30,400
Speaker 3: Well. I think that I think that's right. I think

594
00:31:30,440 --> 00:31:35,440
Speaker 3: that's right. But that idea of higher yields will ultimately,

595
00:31:35,480 --> 00:31:39,360
Speaker 3: as I mentioned earlier, ushering a golden age for corporate credit,

596
00:31:39,560 --> 00:31:42,440
Speaker 3: because quite frankly, I don't think corporate credit has been

597
00:31:42,440 --> 00:31:45,240
Speaker 3: really anything special in terms of returns over the last

598
00:31:45,440 --> 00:31:47,760
Speaker 3: several years. If if you look back obviously to December

599
00:31:47,800 --> 00:31:51,040
Speaker 3: thirty first, twenty twenty one through today, you know, pretty lackluster,

600
00:31:51,360 --> 00:31:53,840
Speaker 3: right because of what happened in twenty twenty two. But

601
00:31:53,920 --> 00:31:56,800
Speaker 3: I think you know that when you have zero interest

602
00:31:56,840 --> 00:32:02,320
Speaker 3: rate policy, when you have quantitative of easing, when you

603
00:32:02,320 --> 00:32:07,080
Speaker 3: have a fifty basis point ten year yield investors will

604
00:32:07,080 --> 00:32:10,120
Speaker 3: do anything and give up any protection to get any

605
00:32:10,160 --> 00:32:13,800
Speaker 3: sort of yield. So all the power goes to the

606
00:32:14,600 --> 00:32:19,240
Speaker 3: borrower and sorry, the lender, and the barer has like

607
00:32:19,320 --> 00:32:24,760
Speaker 3: basically no power, right when you have higher yields, risk

608
00:32:24,800 --> 00:32:28,600
Speaker 3: free rates, right, and maybe a little spread on top

609
00:32:28,680 --> 00:32:30,840
Speaker 3: of that, because you actually get a little maybe bit

610
00:32:30,880 --> 00:32:35,280
Speaker 3: of spread widening. At some point, the power really shifts

611
00:32:35,520 --> 00:32:41,360
Speaker 3: from the borrower to the lender, right, because now you

612
00:32:41,360 --> 00:32:43,760
Speaker 3: can go and you can actually find alternatives you don't

613
00:32:43,800 --> 00:32:47,120
Speaker 3: need to reach. You can set your covenants to what

614
00:32:47,160 --> 00:32:49,160
Speaker 3: you you know, you expect and what you want them

615
00:32:49,200 --> 00:32:50,800
Speaker 3: to be, and you just you start to get a

616
00:32:50,800 --> 00:32:52,880
Speaker 3: little bit more power. And that's a good thing, right

617
00:32:52,920 --> 00:32:55,800
Speaker 3: if you're if you're a lender. And so I think

618
00:32:55,840 --> 00:32:58,280
Speaker 3: I think the power is going to shift pretty meaningfully.

619
00:32:58,320 --> 00:33:00,560
Speaker 3: And I think, you know, if I think about the

620
00:33:00,600 --> 00:33:03,040
Speaker 3: next five to seven years in corporate credit, there's gonna

621
00:33:03,040 --> 00:33:05,880
Speaker 3: be some really really good opportunity. It's just, you know,

622
00:33:06,000 --> 00:33:07,960
Speaker 3: seventy nine bass points, I'm not sure it's there today.

623
00:33:08,800 --> 00:33:09,800
Speaker 1: Do you like ig floats?

624
00:33:09,880 --> 00:33:10,560
Speaker 3: Do you like CEE loans?

625
00:33:10,600 --> 00:33:13,400
Speaker 1: Do you like leverage loans?

626
00:33:13,480 --> 00:33:16,080
Speaker 3: So leverage loans are an interesting one, not so much.

627
00:33:16,440 --> 00:33:18,320
Speaker 3: You know, the fall rate today and leverage loans are

628
00:33:18,440 --> 00:33:20,480
Speaker 3: probably a little bit you know, bad average, maybe a

629
00:33:20,520 --> 00:33:22,320
Speaker 3: little bit higher than average, but you know, four and

630
00:33:22,320 --> 00:33:25,160
Speaker 3: a half five percent. We've seen some pretty poor recoveries

631
00:33:26,040 --> 00:33:31,320
Speaker 3: recently in the leverage loan space. What's interesting about loans

632
00:33:31,640 --> 00:33:34,000
Speaker 3: is that you obviously typically want an unfloating rate when

633
00:33:34,080 --> 00:33:37,240
Speaker 3: rates are going up, right. I actually think you could

634
00:33:37,240 --> 00:33:40,400
Speaker 3: see loans outperform if the FED cuts interest rates because

635
00:33:40,400 --> 00:33:42,480
Speaker 3: the interest burden it's you know, I think difficult for

636
00:33:42,520 --> 00:33:44,760
Speaker 3: some of these companies that don't have really strong earnings.

637
00:33:44,880 --> 00:33:47,200
Speaker 3: You're seeing it same same sort of dynamic within the

638
00:33:47,240 --> 00:33:50,600
Speaker 3: small cap space and equities, where you know, the earnings

639
00:33:50,640 --> 00:33:55,440
Speaker 3: growth the the operating leverage hasn't been able to make

640
00:33:55,520 --> 00:33:58,640
Speaker 3: up for the financial leverage, right, And that's actually, you know,

641
00:33:58,800 --> 00:34:01,400
Speaker 3: usually not the case. Usually when rates are going up,

642
00:34:02,040 --> 00:34:06,000
Speaker 3: your ernie's growth is outpacing your interest expense, and so

643
00:34:06,120 --> 00:34:09,000
Speaker 3: small caps do really really well. Leverage loans do well

644
00:34:09,040 --> 00:34:11,760
Speaker 3: because the floating rate nature and you know, the earnings

645
00:34:11,800 --> 00:34:14,480
Speaker 3: growth more than makes up for the extra expense. You

646
00:34:14,520 --> 00:34:17,920
Speaker 3: get both the higher yield and stronger fundamentals. I actually

647
00:34:17,920 --> 00:34:21,080
Speaker 3: think leverage loans could do okay in a falling rate

648
00:34:21,160 --> 00:34:23,520
Speaker 3: environment where the FED is cutting interest rates. But I

649
00:34:23,520 --> 00:34:25,400
Speaker 3: think if the FED were to stay tighter for a

650
00:34:25,400 --> 00:34:28,560
Speaker 3: period of time, you know, loan defaults could accelerate and

651
00:34:28,560 --> 00:34:30,320
Speaker 3: you could actually have a harder time in the leverage

652
00:34:30,360 --> 00:34:35,160
Speaker 3: loan market. So for me, given our rate view, given

653
00:34:35,200 --> 00:34:38,160
Speaker 3: that we believe earninge's growth is reasonably strong but declining,

654
00:34:38,520 --> 00:34:42,759
Speaker 3: I'd rather own higher quality floating rate or higher quality

655
00:34:42,840 --> 00:34:46,880
Speaker 3: load duration paper than floating rate leverage loans at the moment.

656
00:34:47,680 --> 00:34:51,600
Speaker 2: Have you have you looked closely at the credit the

657
00:34:51,640 --> 00:34:54,520
Speaker 2: fault swaps markets recently. You know, most people didn't know

658
00:34:54,640 --> 00:34:57,839
Speaker 2: the term CDs until just a few months ago, when

659
00:34:59,480 --> 00:35:02,600
Speaker 2: you know, places like Bloomberg started talking about Oracle CDs.

660
00:35:02,640 --> 00:35:06,040
Speaker 2: But do you think that that that is a market

661
00:35:06,160 --> 00:35:10,839
Speaker 2: that it's foreseeing what's happening? Is it not liquid enough,

662
00:35:11,000 --> 00:35:13,920
Speaker 2: is it idiosyncratic or is it just sort of more

663
00:35:13,920 --> 00:35:18,160
Speaker 2: of a blip on the on the radar, And how

664
00:35:18,160 --> 00:35:20,320
Speaker 2: do you take advantage of you know, certain names that

665
00:35:20,360 --> 00:35:22,800
Speaker 2: have widened significantly over the last few months.

666
00:35:23,040 --> 00:35:25,640
Speaker 3: Yeah, I mean, I think there's a lot of information

667
00:35:25,920 --> 00:35:30,560
Speaker 3: value in the credit derivatives market. You know, obviously it

668
00:35:30,640 --> 00:35:34,279
Speaker 3: was a massive market pre crisis kind of died per

669
00:35:34,360 --> 00:35:39,160
Speaker 3: period of time. And you know what's interesting about the

670
00:35:39,160 --> 00:35:42,240
Speaker 3: credit drivator's markets. Of course, the common way to describe

671
00:35:42,280 --> 00:35:46,320
Speaker 3: it for those sort of who aren't financial experts is

672
00:35:46,360 --> 00:35:50,000
Speaker 3: its insurance, right, and so anytime you start to see

673
00:35:50,680 --> 00:35:53,239
Speaker 3: you know, more insurance product out there, I think it

674
00:35:53,280 --> 00:35:57,000
Speaker 3: is a little bit of a warning sign. And the

675
00:35:57,120 --> 00:35:59,160
Speaker 3: smart money, if you want to say that, and quotes

676
00:35:59,600 --> 00:36:04,080
Speaker 3: you know, are are betting against parts of the credit

677
00:36:04,120 --> 00:36:06,640
Speaker 3: markets at the moment through doing that through the derivative space,

678
00:36:06,680 --> 00:36:09,400
Speaker 3: and so I do think there's information value there, But

679
00:36:09,440 --> 00:36:12,360
Speaker 3: I you know, for I think it's probably going to

680
00:36:12,440 --> 00:36:17,080
Speaker 3: be forever a you know, since the financial crisis, I think, sadly,

681
00:36:17,480 --> 00:36:19,080
Speaker 3: I do think there's a good use for it. I

682
00:36:19,080 --> 00:36:20,880
Speaker 3: think it's going to be a somewhat of a niche

683
00:36:20,880 --> 00:36:26,239
Speaker 3: market on specific companies or you know, indices obviously, and

684
00:36:26,560 --> 00:36:28,680
Speaker 3: probably not grow into the same sort of thing that

685
00:36:28,760 --> 00:36:31,800
Speaker 3: it was in the past. So I think it's important.

686
00:36:31,840 --> 00:36:33,200
Speaker 3: I think it's good to keep an eye on. I

687
00:36:33,200 --> 00:36:36,720
Speaker 3: think it does give us some sort of information about

688
00:36:36,800 --> 00:36:38,880
Speaker 3: the headiness and the toppiness of sort of the market.

689
00:36:39,440 --> 00:36:41,440
Speaker 3: But I'm not sure if we you know, there's much

690
00:36:41,480 --> 00:36:42,440
Speaker 3: more to be said about it.

691
00:36:42,560 --> 00:36:44,799
Speaker 1: I think you mentioned the name Rob Oracle. I'm going

692
00:36:44,840 --> 00:36:47,640
Speaker 1: to ask you both people are talking about it potentially

693
00:36:47,680 --> 00:36:51,000
Speaker 1: falling to junk the market. You know, some of the

694
00:36:51,000 --> 00:36:55,040
Speaker 1: bonds are trading very high yields. It's tripically flat right now,

695
00:36:55,040 --> 00:36:55,960
Speaker 1: so it's got a bit of a way to go

696
00:36:56,000 --> 00:36:59,040
Speaker 1: in tons of downgrades. But if it could it be

697
00:36:59,160 --> 00:37:01,759
Speaker 1: cut to junk and what happened if it did ters

698
00:37:01,800 --> 00:37:04,200
Speaker 1: the high heeld market a hundred billion dollars of new

699
00:37:04,320 --> 00:37:04,920
Speaker 1: high yield.

700
00:37:04,760 --> 00:37:07,520
Speaker 3: Debt robs the expert on this one. What what I

701
00:37:07,520 --> 00:37:13,160
Speaker 3: would say is nothing is infallible. And you know, real

702
00:37:13,239 --> 00:37:16,560
Speaker 3: issues and credit markets typically don't come from lending to

703
00:37:16,680 --> 00:37:20,680
Speaker 3: junkie companies. They come from, you know, lending to companies

704
00:37:20,680 --> 00:37:23,400
Speaker 3: that you know, investors thought were infallible and then you

705
00:37:23,520 --> 00:37:26,720
Speaker 3: find out later that you know, they are in fact fallible.

706
00:37:27,160 --> 00:37:29,080
Speaker 3: That's not to say that Oracle is or is not,

707
00:37:30,280 --> 00:37:32,759
Speaker 3: but you know, it would be a tremendous amount of

708
00:37:32,760 --> 00:37:37,960
Speaker 3: supply for uh, the high yield market, you know, and

709
00:37:37,960 --> 00:37:40,520
Speaker 3: and and that would cause some disruption for some period

710
00:37:40,560 --> 00:37:42,680
Speaker 3: of time. But I also have the belief that markets

711
00:37:42,719 --> 00:37:45,280
Speaker 3: are pretty efficient and quickly sort of you know, will adjust,

712
00:37:45,360 --> 00:37:47,880
Speaker 3: but you know, we'll see.

713
00:37:48,160 --> 00:37:51,239
Speaker 2: Yeah, even Superman has a script, and I I don't

714
00:37:51,239 --> 00:37:54,360
Speaker 2: think Oracle is going to junk a lot of things

715
00:37:54,360 --> 00:37:57,120
Speaker 2: for them to pull out of their their their hat

716
00:37:57,160 --> 00:38:00,880
Speaker 2: if they if they need to to stay there. But listen,

717
00:38:00,920 --> 00:38:02,640
Speaker 2: it needs to be a worry you have a company

718
00:38:02,680 --> 00:38:04,799
Speaker 2: has one hundred and eight billion dollars a debt and

719
00:38:04,960 --> 00:38:10,279
Speaker 2: probably needs to borrow fifty plus billion dollars more. It

720
00:38:10,360 --> 00:38:13,319
Speaker 2: should be a concern. I just think some of those

721
00:38:13,320 --> 00:38:18,360
Speaker 2: concerns appear overblown when there's so many they have so

722
00:38:18,440 --> 00:38:21,720
Speaker 2: much optionality in terms of where and how they can finance.

723
00:38:22,000 --> 00:38:24,000
Speaker 2: You know, I think there might be a poster child.

724
00:38:24,160 --> 00:38:26,399
Speaker 2: It's not the same exact example, but you know, about

725
00:38:26,400 --> 00:38:28,720
Speaker 2: a year ago, this same conversation was had with Intel.

726
00:38:29,600 --> 00:38:32,520
Speaker 2: Intel spending so much money it was negative free cash flow,

727
00:38:33,040 --> 00:38:34,640
Speaker 2: and the concern was that they were going to go

728
00:38:34,680 --> 00:38:37,600
Speaker 2: to junk and lo and behold, we're seventy five beeps

729
00:38:37,600 --> 00:38:41,399
Speaker 2: tighter now post Liberation Day and nobody's talking about them

730
00:38:41,400 --> 00:38:43,800
Speaker 2: going to junk. And they have you know, friends in

731
00:38:43,880 --> 00:38:46,600
Speaker 2: high places like in video writing five billion dollar check.

732
00:38:46,680 --> 00:38:48,880
Speaker 2: So some of this world of tech, you know, is

733
00:38:48,920 --> 00:38:51,560
Speaker 2: a bit ancestral, right, People sort of feed on each other.

734
00:38:51,719 --> 00:38:54,440
Speaker 2: So when everyone else is relying on each other, the

735
00:38:54,480 --> 00:38:57,200
Speaker 2: ones with deep pockets ultimately I think will probably end

736
00:38:57,280 --> 00:39:01,000
Speaker 2: up bailing out the ones that have need. So I

737
00:39:01,040 --> 00:39:05,480
Speaker 2: think it creates great conversation and real opportunity potentially for

738
00:39:05,480 --> 00:39:09,960
Speaker 2: for people to helpperform. But like Mike says, listen, nobody

739
00:39:10,000 --> 00:39:12,080
Speaker 2: knows what tomorrow is going to hold, and all we

740
00:39:12,120 --> 00:39:15,560
Speaker 2: can do is make our our best uestimate on the

741
00:39:15,640 --> 00:39:19,200
Speaker 2: probability analysis. Probability now says that man, that is a

742
00:39:19,200 --> 00:39:23,719
Speaker 2: big downside risk. But to me, that probability is very low.

743
00:39:24,719 --> 00:39:27,279
Speaker 1: You started getting talking about I think you did use

744
00:39:27,280 --> 00:39:29,840
Speaker 1: the web bubble. I think we did say everything bubble

745
00:39:30,080 --> 00:39:32,799
Speaker 1: driven by liquidsy and you're looking at a ton of

746
00:39:32,800 --> 00:39:37,840
Speaker 1: different types of asset. But but sticking with credit, where

747
00:39:38,200 --> 00:39:40,640
Speaker 1: is the best opportunity right now in terms of you know,

748
00:39:40,719 --> 00:39:42,480
Speaker 1: relative value global credit?

749
00:39:44,840 --> 00:39:47,600
Speaker 3: Now, it's a it's a tough it's a tough question

750
00:39:47,719 --> 00:39:51,600
Speaker 3: because I just don't see a lot of opportunity out there.

751
00:39:51,640 --> 00:39:55,960
Speaker 3: I think European i G has traded you know, cheap

752
00:39:56,000 --> 00:39:59,200
Speaker 3: to U S i G for quite some time, and

753
00:39:59,239 --> 00:40:03,239
Speaker 3: you know, could continue to to provide some opportunity. You know,

754
00:40:03,280 --> 00:40:07,880
Speaker 3: I do like your Europe, but it's in the credit side.

755
00:40:07,920 --> 00:40:10,880
Speaker 3: It's no, we're not we're not seeing a lot that

756
00:40:10,960 --> 00:40:13,480
Speaker 3: we love at the moment. I mean now spreads across

757
00:40:13,520 --> 00:40:16,160
Speaker 3: the board or in the low you know, the single

758
00:40:16,200 --> 00:40:20,120
Speaker 3: digit to very very low double digit sort of percentile

759
00:40:20,200 --> 00:40:26,360
Speaker 3: ranges as almost like a it's an unwritten policy at URBA.

760
00:40:26,520 --> 00:40:29,440
Speaker 3: Then in the emerging market side, it's it's we basically

761
00:40:29,440 --> 00:40:32,360
Speaker 3: look at hard currency. We only invest in hard currency.

762
00:40:32,400 --> 00:40:34,560
Speaker 3: I don't want to take the FX risk and fixed income.

763
00:40:35,080 --> 00:40:36,680
Speaker 3: You know, one of my job at the end of

764
00:40:36,719 --> 00:40:40,880
Speaker 3: the day is to get the spread call right, you know,

765
00:40:41,200 --> 00:40:42,920
Speaker 3: And you would hate to get the spread call right,

766
00:40:42,960 --> 00:40:44,759
Speaker 3: the yield to call right, and then blow up your

767
00:40:44,760 --> 00:40:47,319
Speaker 3: return because you got the FX call wrong right. So

768
00:40:48,840 --> 00:40:50,640
Speaker 3: you know, a lot of return can happen because of

769
00:40:50,680 --> 00:40:53,560
Speaker 3: currency and FX and in emerging markets. But I probably

770
00:40:53,600 --> 00:40:56,360
Speaker 3: wouldn't go there just for the reason that we won't.

771
00:40:56,640 --> 00:40:58,480
Speaker 3: I won't go there in this podcast because because we

772
00:40:58,480 --> 00:41:01,480
Speaker 3: won't go there as as as a firm. But yeah,

773
00:41:01,480 --> 00:41:03,240
Speaker 3: I mean Europe and I G I think has offered

774
00:41:03,239 --> 00:41:07,719
Speaker 3: some opportunity not corporate credit, but we think long term

775
00:41:07,800 --> 00:41:10,960
Speaker 3: unis offer some opportunity and and that's almost you know,

776
00:41:10,960 --> 00:41:13,560
Speaker 3: in more in mortgages again, but again not corporate credit.

777
00:41:13,600 --> 00:41:15,719
Speaker 3: Corporate credits in general across the board is pretty rich.

778
00:41:16,000 --> 00:41:19,959
Speaker 2: What's the one idea if you know you you gotta

779
00:41:20,080 --> 00:41:22,040
Speaker 2: make you have one? You got one shot this year?

780
00:41:22,160 --> 00:41:26,360
Speaker 3: What what is it? And that's across what anything? Anything?

781
00:41:26,520 --> 00:41:28,080
Speaker 2: And short best idea?

782
00:41:28,400 --> 00:41:34,120
Speaker 3: I really like, uh, European equities. That's that's that's where

783
00:41:34,120 --> 00:41:36,640
Speaker 3: I would that's where I would go. Weaker dollar helps,

784
00:41:36,760 --> 00:41:41,680
Speaker 3: I think you get fiscal stimulus, Monetary policy is reasonably supportive,

785
00:41:41,680 --> 00:41:43,840
Speaker 3: and earnings growth is accelerating.

786
00:41:44,120 --> 00:41:45,880
Speaker 2: Any sectors specifically that's.

787
00:41:46,040 --> 00:41:50,640
Speaker 3: Not necessarily sector related, but sort of quality stocks tend

788
00:41:50,640 --> 00:41:52,680
Speaker 3: to be undervalued at the moment. If you sort of

789
00:41:52,680 --> 00:41:55,719
Speaker 3: think about like a total estimate, total return estimate of

790
00:41:55,800 --> 00:42:00,239
Speaker 3: being you know, expectations for you know, your earnings so

791
00:42:00,320 --> 00:42:04,759
Speaker 3: EPs growth plus your dividend, and you look at that

792
00:42:04,800 --> 00:42:06,640
Speaker 3: as sort of like, okay, that's should be your sort

793
00:42:06,640 --> 00:42:09,920
Speaker 3: of you know, poor man's idea of a total return

794
00:42:11,200 --> 00:42:15,200
Speaker 3: and you look at that versus pe nothing's better than

795
00:42:15,560 --> 00:42:18,359
Speaker 3: high quality European European stocks so for me, I think

796
00:42:18,400 --> 00:42:21,520
Speaker 3: that's probably our best idea for this year. The European

797
00:42:21,560 --> 00:42:23,680
Speaker 3: ig as I mentioned earlier, sort of fits within that

798
00:42:23,760 --> 00:42:26,640
Speaker 3: theme as well and still gives you some value relative

799
00:42:26,680 --> 00:42:30,480
Speaker 3: to to U S I G. So I think that's

800
00:42:30,560 --> 00:42:31,760
Speaker 3: that that's going to helperform.

801
00:42:31,840 --> 00:42:34,000
Speaker 2: And what's the I think I know the answer to this,

802
00:42:34,040 --> 00:42:36,200
Speaker 2: But what's the on the flip side, what's the space

803
00:42:36,239 --> 00:42:38,440
Speaker 2: that you're most concerned about, or at least you think

804
00:42:38,520 --> 00:42:39,839
Speaker 2: is going to be the biggest underperformer.

805
00:42:40,040 --> 00:42:42,919
Speaker 3: Yeah, I mean I still think that the US tech

806
00:42:42,920 --> 00:42:45,960
Speaker 3: equity complex, you could see some rotation away from that.

807
00:42:46,920 --> 00:42:50,800
Speaker 3: You know, last year was a lot of hype around

808
00:42:50,960 --> 00:42:55,600
Speaker 3: AI and sort of you know, bidding up multiples and

809
00:42:55,880 --> 00:42:59,080
Speaker 3: getting multiple expansion on promise. This year could be a

810
00:42:59,120 --> 00:43:03,319
Speaker 3: disappointment on that. Earnings growth for what it's worth within

811
00:43:03,360 --> 00:43:05,560
Speaker 3: the Max deven X and videos and videos sort of

812
00:43:05,560 --> 00:43:08,759
Speaker 3: its own you know, world earnings growth for Max deven

813
00:43:08,880 --> 00:43:11,600
Speaker 3: is not particularly particularly magnificent. I mean, it's actually been

814
00:43:11,640 --> 00:43:14,560
Speaker 3: coming down now for two years from very high levels.

815
00:43:15,640 --> 00:43:17,520
Speaker 3: But there are a lot of other a lot of

816
00:43:17,560 --> 00:43:19,520
Speaker 3: other stocks within the SP five hundred that are growing

817
00:43:19,560 --> 00:43:22,759
Speaker 3: earnings faster than Max seven and Uh, you know, they

818
00:43:22,760 --> 00:43:24,799
Speaker 3: don't trade anywhere near the multiple. So I think I

819
00:43:24,800 --> 00:43:26,600
Speaker 3: think the mark is gonna wake up to that this year.

820
00:43:26,800 --> 00:43:28,520
Speaker 3: I think you're gonna get a little bit of air

821
00:43:29,120 --> 00:43:31,640
Speaker 3: taken out of the you know, dare I say bubble

822
00:43:32,680 --> 00:43:35,880
Speaker 3: and uh? And I think tech is going to you know,

823
00:43:35,880 --> 00:43:37,200
Speaker 3: it's going to kind of come back down to earth

824
00:43:37,200 --> 00:43:40,160
Speaker 3: a little bit. This year still could do well, but

825
00:43:40,280 --> 00:43:41,920
Speaker 3: I think other areas well perform.

826
00:43:42,160 --> 00:43:45,640
Speaker 1: Right, you're not looking at those very high coupon venezuela in

827
00:43:45,960 --> 00:43:46,960
Speaker 1: how currency as well.

828
00:43:47,160 --> 00:43:49,160
Speaker 3: Yeah, that's well, that's a little hard. It's hard, a

829
00:43:49,200 --> 00:43:50,920
Speaker 3: little hard to invest there.

830
00:43:50,520 --> 00:43:53,240
Speaker 1: In tons of the potential for the markets to flip.

831
00:43:53,360 --> 00:43:56,000
Speaker 1: And you do kind of hinted this throughout discussion, you

832
00:43:56,000 --> 00:43:58,960
Speaker 1: know that spreads could blow out. What would be the

833
00:43:58,960 --> 00:44:01,319
Speaker 1: one thing you think could trigger it? Is is it

834
00:44:01,320 --> 00:44:03,759
Speaker 1: something you could pinpoint or is it really just a

835
00:44:03,800 --> 00:44:05,040
Speaker 1: blacks one type event?

836
00:44:05,280 --> 00:44:07,240
Speaker 3: Well, no, I think there's a lot of very reasonable

837
00:44:07,239 --> 00:44:10,439
Speaker 3: things that can cause spreads to widen this year. I think,

838
00:44:11,480 --> 00:44:13,560
Speaker 3: you know, one of the biggest risks I think is

839
00:44:13,680 --> 00:44:15,880
Speaker 3: a mistake, or maybe it's not a mistake, just a

840
00:44:16,080 --> 00:44:19,000
Speaker 3: repricing of expectations around rate cuts. And what the Fed's

841
00:44:19,040 --> 00:44:20,719
Speaker 3: going to do and what that means for rates, and

842
00:44:21,440 --> 00:44:23,400
Speaker 3: you know, I think that can cause a lot of

843
00:44:23,440 --> 00:44:27,600
Speaker 3: disruption across across markets and cause spread widening. You know,

844
00:44:27,640 --> 00:44:30,040
Speaker 3: typically in rates go up, what happens usually spreads tighten

845
00:44:30,160 --> 00:44:32,960
Speaker 3: because you are coming from wide spread levels. But when

846
00:44:32,960 --> 00:44:35,640
Speaker 3: you come from very very you know, nearly forty year

847
00:44:36,120 --> 00:44:39,959
Speaker 3: tight levels, if rates go up, I think you see

848
00:44:39,960 --> 00:44:42,880
Speaker 3: wider spreads and could see wider spreads, you know, to

849
00:44:42,960 --> 00:44:45,680
Speaker 3: a pretty meaningful degree. And for me, I think that's

850
00:44:45,719 --> 00:44:50,520
Speaker 3: a pretty reasonable chance of happening. And the other one

851
00:44:50,560 --> 00:44:54,440
Speaker 3: I would say is just a bigger growth slowdown than

852
00:44:54,440 --> 00:44:58,319
Speaker 3: what's expected. You know, I think everybody essentially thinks that

853
00:44:58,440 --> 00:45:02,000
Speaker 3: earnings growth is going to accel economic growth is reasonably strong.

854
00:45:02,360 --> 00:45:04,799
Speaker 3: Certainly from the Wall Street perspective, I think that's sort

855
00:45:04,800 --> 00:45:08,600
Speaker 3: of the consensus. And if you get some disappointment around

856
00:45:08,640 --> 00:45:11,399
Speaker 3: earning his growth and economic growth, you know, I think

857
00:45:11,440 --> 00:45:13,960
Speaker 3: there could be periods of spread widening. Depending how bad

858
00:45:14,000 --> 00:45:16,240
Speaker 3: it is, we'll determine how much of the spread widening

859
00:45:16,320 --> 00:45:18,239
Speaker 3: you get. But if you have that at the same

860
00:45:18,280 --> 00:45:20,359
Speaker 3: time as you have a tighter than expected FED, then

861
00:45:20,680 --> 00:45:22,000
Speaker 3: then you could get out to those sort of one

862
00:45:22,080 --> 00:45:23,600
Speaker 3: forty one fifty type levels.

863
00:45:23,800 --> 00:45:27,799
Speaker 1: Great stuff. Mike con topless with Richard Bernstein Advisors. It's

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Speaker 1: been a pleasure having you on the Credit Edge.

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Speaker 3: Many thanks, thank you very much, appreciate it.

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00:45:31,000 --> 00:45:33,319
Speaker 1: And to Robert Schiffman with Bloomberg Intelligence, thank you very

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00:45:33,360 --> 00:45:36,280
Speaker 1: much for joining us today. Thanks James read more analysis,

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00:45:36,280 --> 00:45:38,480
Speaker 1: read all of Rob's great work on the Bloomberg Terminal.

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Speaker 1: at Bloomberg dot net. I'm James Crombie. It's been a

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