Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Joining us now Bruce Richards, founder and CEO of Marathon
Speaker 2: Asset Management. His firm specializes in public and private credit markets,
Speaker 2: with over twenty three billion dollars in assets. It's interesting,
Speaker 2: Matt reminds me. In the morning, I will look at
Speaker 2: the ten year It's the first thing I do every morning.
Speaker 2: We're only at around four point four percent. The market
Speaker 2: has been digesting this. We don't need to be in
Speaker 2: any state of alarm or anything like that, but a
Speaker 2: lot of people are really bell ringing about the deficit.
Speaker 2: How do you feel about the long term.
Speaker 1: I'm not a state of alarm either. The long bond
Speaker 1: is of concern. But start with there's three things guaranteed
Speaker 1: in this country, death, taxes, and deficits. And the deficits
Speaker 1: are becoming front of mind for everybody. And when you
Speaker 1: have a big, beautiful bill which will probably add to
Speaker 1: deficit pro growth and so you know best. And the
Speaker 1: theory is that will grow out of this. Dimon even
Speaker 1: said it just a minute ago. That will grow out
Speaker 1: of this. The truth of the matter is we're running
Speaker 1: seven percent of GDP in terms of deficits and seven
Speaker 1: percent equals about two trillion that we're adding to debt
Speaker 1: each year. And when you have a tariff policy that
Speaker 1: leads to a week er dollar and maybe some some
Speaker 1: indigestion by foreigners and owning our treasuries, and they own
Speaker 1: thirty percent of the treasuries, it becomes that much more
Speaker 1: alarming because there's ten trillion of treasuries at the current
Speaker 1: pace of what we need to roll off and refinance,
Speaker 1: as well as the new debt that we add. Given
Speaker 1: the deficits trillion of treasuries in the next year to sell.
Speaker 1: And so while there's a big bid for the front
Speaker 1: end treasuries, when you get out longer along the curve,
Speaker 1: the thirty year treasuries, it becomes a little more difficult
Speaker 1: to digest because it has some pretty big price risk.
Speaker 1: The duration for the thirty year treasury is eighteen which
Speaker 1: means eighteen years, which means that if you raise rates
Speaker 1: base points, the price falls eighteen percent, So it's a
Speaker 1: pretty big price decline. So you have these macro funds,
Speaker 1: hedge funds that are starting to short the long end,
Speaker 1: knowing that the Fed's not buying treasuries and knowing that
Speaker 1: foreigners will be more reluctant to buy long end treasuries,
Speaker 1: and yet you have so many treasuries for sale, and
Speaker 1: so I can't tell you. I think rates are a
Speaker 1: really tough thing to call, and we try not to
Speaker 1: make a rate call. But you know, earlier this century,
Speaker 1: pre you know GFC, you know, long bonds were up
Speaker 1: around six percent. Could we go to six percent? Yes?
Speaker 1: And when we do, it becomes much more difficult to
Speaker 1: fund our government because of the higher interest charges. Right.
Speaker 3: We had a great story I think yesterday that Double
Speaker 3: Line and TCW and PIMCO, they're all they're in a
Speaker 3: buyer strike. So even American companies are not buying our
Speaker 3: long dated treasuries. Some of them are even shorting long
Speaker 3: dated treasuries. Obviously, the foreigners right now feel a little
Speaker 3: bit offended by what's going on in trade, so they
Speaker 3: could stay out as well well. And as a result,
Speaker 3: maybe Treasury moves issuance to the front end of the curve.
Speaker 3: Does that solve things?
Speaker 1: I mean, you know it does, but we'll just put
Speaker 1: pressure on the front end. And the bottom line is
Speaker 1: inflation's really well behaved at two point one percent. You
Speaker 1: think treasures should be doing better on that basis, But
Speaker 1: the FED knows that later this year, when terris really
Speaker 1: start to kick in, that we might see a higher inflation.
Speaker 1: I think the five or seven percent doomsdayers are kind of,
Speaker 1: you know, off the reservation and making those calls. We
Speaker 1: think more like two point one percent PC number becomes
Speaker 1: a two point eight to three point two range, and
Speaker 1: that's reasonable. A one percent increase from here kind of tops.
Speaker 1: And with that the FED will want to see how
Speaker 1: inflation you know, factors through and before making a move.
Speaker 1: So the Fed's got hold for an extended period of time.
Speaker 1: Despite what the ECB is doing and the Bank of
Speaker 1: England's doing, and the Bank of Cannon is doing, which
Speaker 1: is the ease rates, the FED will keep rates where
Speaker 1: they are now. The real issue, I think is the
Speaker 1: knock on effect when you have higher rates, whether it's
Speaker 1: the front end or the longer and when you have
Speaker 1: higher rates, there's a crowding out. And so whether it's
Speaker 1: municipalities that have to pay a higher rate, whether it's
Speaker 1: companies that have to pay a high rate, whether it's
Speaker 1: homeowners that have to pay a higher rate and get
Speaker 1: crowded out because they can't afford to buy that home,
Speaker 1: or the real estate markets, commercial real estate that is
Speaker 1: dealing with higher cap rates, this crowding out effect that
Speaker 1: impacts markets and impacts the consumer.
Speaker 2: I want to double down on those risks because I
Speaker 2: want to be very clear about this when we talk
Speaker 2: to big credit funds, private credit funds, the higher for
Speaker 2: longer environment has also meant higher yields. Hence that goals
Speaker 2: and opportunity. We get it, but I want to talk
Speaker 2: about the cracks because to your point, if we do
Speaker 2: see long end rates remain higher, what cracks where exactly
Speaker 2: will that pain be? Because we're also equally hearing about
Speaker 2: people starting to want to dive into rescue financings. Are
Speaker 2: they worth it?
Speaker 1: So it is a great time to invest, and as
Speaker 1: a lender, we're making returns that equity markets would wish
Speaker 1: they were making, and we're making these really high re
Speaker 1: rates return with really low level volatility. So we're equity markets,
Speaker 1: the public equity markets that have sixteen vol in the
Speaker 1: private credit markets that can speak for us at Marathon,
Speaker 1: our volatility and our private credit lending books are like
Speaker 1: four to six percent. It's really low relative to the
Speaker 1: rate of return that we're making. So the risky ward
Speaker 1: is phenomenal to your point that you're making. There are
Speaker 1: some cracks. The number one crack is the consumer. And
Speaker 1: so the consumer. If you look at the high your market,
Speaker 1: you look at every sector across the high you walk
Speaker 1: and hio walk is doing well. It's yielding seven and
Speaker 1: a half percent, you know, a nice bread of three
Speaker 1: hundred and fifty off. It's it's doing great. But there's
Speaker 1: one sector that's underperforming and negative on the year, and
Speaker 1: that's you know, consumer discretionary type, you know, retailers and
Speaker 1: that sort and and so we've been avoiding that because
Speaker 1: we've understood that the consumer would be weak in this
Speaker 1: type of marketplace and consuming less because of the higher
Speaker 1: inflation that we've traditionally seen and now higher rates. So
Speaker 1: there's one sector that's really causing me to take a
Speaker 1: lot of pause. And software that's interesting.
Speaker 3: We talked to garget Shaw Jory from Blackrock earlier and
Speaker 3: she loves software right especially because of the AI.
Speaker 1: You have to love software because of AI, and when
Speaker 1: you have AI first software companies, and that's what Google's becoming,
Speaker 1: that's what Microsoft is today, that's where salesforce is moving towards.
Speaker 1: In Snowflake and Adobe and these big incombing companies that
Speaker 1: will see enterprise value even sore further from here, given AI,
Speaker 1: it's hugely positive. Do you know, Matt, that there are
Speaker 1: five thousand companies owned by private equity, five thousand that
Speaker 1: are software companies.
Speaker 3: Thousand software software.
Speaker 1: Companies owned by private equity, and not all those companies
Speaker 1: will make the AI adjustment, and there will be creative
Speaker 1: at destruction that comes their way, which will make them
Speaker 1: much more valuable because they'll make that adjustment. And so
Speaker 1: when you look in their data room of how they've performed,
Speaker 1: the pe sponsors, how their software firms have performed, you'll
Speaker 1: see companies which have much higher multiples because of AI.
Speaker 1: The exact point that she was making that you were making, right,
Speaker 1: But then you'll have a bigger cohort of companies that'll
Speaker 1: have that blockbuster moment video. Think about Mark and Treason,
Speaker 1: Mark Intreason making this common fifteen years ago that AI
Speaker 1: will eat the world. And AI has done a lot
Speaker 1: for the economy, done a lot for the equity markets
Speaker 1: and wealth creation. Now his new saying is AI will
Speaker 1: eat software, and so what software companies will make it through? Now?
Speaker 1: Think about being a lender, Sonario.
Speaker 2: Right, this will credit blockbuster moment.
Speaker 1: So because because our loans are capped at par, we
Speaker 1: don't have the upside of equity, but we have the
Speaker 1: downside if there's a default. Marathon manages to never have
Speaker 1: need to fall, let alone a loss, and so we're
Speaker 1: avoiding software companies. I think private credit has somewhere between
Speaker 1: twenty to thirty percent of their book in software related companies.
Speaker 1: And I think that when you make a private investment
Speaker 1: that you have no real exit and it's a five
Speaker 1: to seven year loan. You can't sit here today and
Speaker 1: tell me that this company it's a software company. A
Speaker 1: traditional software company can make that we switch to be
Speaker 1: a AI software first company. And so I think they
Speaker 1: have all the downside with none of the upside other
Speaker 1: than getting your coup on your cash flow and par.
Speaker 1: So I think those spreads need to be a couple
Speaker 1: hundred bases points wider. I think that the decade email
Speaker 1: ratios that they're lending at, which has been very very high,
Speaker 1: because the arr because the reoccurring revenue needs to be
Speaker 1: considerably lower. In fact, we're taking a much greater degree
Speaker 1: of position as it relates to these software companies in
Speaker 1: the private credit markets by saying time out, We're going
Speaker 1: to wait and see for a period of time how
Speaker 1: it settles in and which companies can make the transition
Speaker 1: and which companies can But I think the default rate
Speaker 1: will go from one third of the marketplace that you
Speaker 1: see in software relative to the market to three times
Speaker 1: the default rates of the traditional marketplace. So I think
Speaker 1: it's a great place to invest as private equity and
Speaker 1: as equity, but it's not such an intelligent place to
Speaker 1: invest if you're private credit cap a par on these
Speaker 1: software companies