Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast.
Speaker 1: I'm Mike Reagan, a senior editor at Bloomberg, and this
Speaker 1: week on the show, it was sort of a week
Speaker 1: of deja vu. Meme. Stocks are back in the headline,
Speaker 1: as shares of the movie theater chain a MC got
Speaker 1: pumped to the moon, and the markets oriented geopolitical tensions
Speaker 1: are making news again as the Biden administration looks to
Speaker 1: potentially expand the number of Chinese companies that are blacklisted
Speaker 1: for US investors. What should we make of all these flashbacks.
Speaker 1: We'll get into it with the chief investment officer for
Speaker 1: a hedge fund firm that manages nine billion dollars. But first,
Speaker 1: Charlie Pellett Tallusue. This week's mystery co host is. This
Speaker 1: week's mystery co host is Claire Ballantine. Claire as a
Speaker 1: reporter for Bloomberg in New York, but gused on e
Speaker 1: t f s. She hails from the same town in
Speaker 1: Tennessee as Dolly Parton. She's licensed to marry couples in
Speaker 1: New York, and she has a collection of alpaca paraphernalia. Claire,
Speaker 1: there's lots unpacked in that introduction that Charlie Pellet introduction
Speaker 1: of you. Mainly I wanted to get Charlie Pellett to
Speaker 1: say the words I'll pack up paraphernalia. I don't think
Speaker 1: I could say that five times best. But you gotta
Speaker 1: explain how does one collect Well, first of all, what
Speaker 1: the heck is alpaca paraphernalia? And how does one become
Speaker 1: a collector? And what's the market like? Is it? Is
Speaker 1: it a hot market right now? What are prices going
Speaker 1: for in the I'll pack a paraphernalia market? You know,
Speaker 1: I've been doing it for so long that I can't
Speaker 1: even remember the origin of it. Um. It just sort
Speaker 1: of became a thing. And then what happens is when
Speaker 1: you have a thing, people always get you stuff like
Speaker 1: that for your birthday or for Christmas. So even long
Speaker 1: past when this would have died down, eventually it just
Speaker 1: kept going because people kept giving me towels and mugs
Speaker 1: and rugs. And suddenly my apartment is overtaken by alpacas.
Speaker 1: That's hilarious. That's hilarious. Is that? Have you ever owned
Speaker 1: an actual alpaca? Or no? No, I want to. I
Speaker 1: want to get a standard poodle, the dog because I
Speaker 1: think it looks a bit like an alpaca, but you
Speaker 1: can walk it on the street without getting weird looks.
Speaker 1: All right. I don't know if you'd got a weird
Speaker 1: luck with an alpaca. I don't know. There's only one
Speaker 1: way to find out. We'll have to test that thesis
Speaker 1: sometimes we should. I did one time see a guy
Speaker 1: in the East village walking a pig. So anything in
Speaker 1: New York goes, that's true, that's true. All right, Well
Speaker 1: do you think goes? On this show? And we're very
Speaker 1: lucky this week to have a really interesting guest someone
Speaker 1: I've read a lot about over the years. Uh. He
Speaker 1: is the chief investment officer at UBS O'Connor, which is
Speaker 1: the hedge fund division at UBS Asset Management. His name
Speaker 1: is Kevin, So Kevin, welcome to the show. Thank you,
Speaker 1: great to be here. Kevin. Let's start with this whole
Speaker 1: revenge of the meme stocks that we're seeing in the
Speaker 1: market again, AMC, particularly just going doubling on one session
Speaker 1: during the week. I mean, for for a hedge fun
Speaker 1: guy like yourself with a lot of assets to sort
Speaker 1: of puts work this see, these type of things seem
Speaker 1: like kryptonite to me, especially obviously on the short side.
Speaker 1: I mean, we've we've heard a lot of widow maker
Speaker 1: trades on the short side. But I'm wondering for you,
Speaker 1: you know, are there opportunities here for the I mean, obviously,
Speaker 1: with the volatility and these eye popping moves we've seen,
Speaker 1: it's hard to ignore it for a guy like you.
Speaker 1: I'm just wondering if, if there are opportunities in the space,
Speaker 1: is there anyway we're for you to put money to
Speaker 1: work in this type of environment? Yeah? Uh yeah, So,
Speaker 1: I mean I tried, We tried to be about as
Speaker 1: far from these types of situations in the market as
Speaker 1: we possibly can. I I talked to one of our
Speaker 1: pms this morning and I said, I'd like to be
Speaker 1: roughly a million and miles away from this, and he's like, well,
Speaker 1: you realize we're probably like thousand miles away because there's
Speaker 1: correlations with these stocks and other stocks that were evolved
Speaker 1: in so so I kind of I kind of acknowledge that.
Speaker 1: But you know, to me, anytime you have a stock
Speaker 1: price moves that are divorced from economic reality or corporate
Speaker 1: finance changes, that's like a flashing warning side warning signed
Speaker 1: to us to really be cautious around it. And you know,
Speaker 1: I don't know if you followed some of the stats
Speaker 1: on AMC, I'm drawn to it not dissimilar to rubber
Speaker 1: necking an accident on the freeway. Um, but the numbers
Speaker 1: I saw, we're just amazing. You know, we had more
Speaker 1: AMC volume on Wednesday than we had in Tesla, in Nvidia,
Speaker 1: Apple and Amazon combined. On one day, we had more
Speaker 1: AMC op trading. Then we had this little index called
Speaker 1: the SP five hundred Index options trading. So you know,
Speaker 1: the volume is is alarming. And listen, I think there's
Speaker 1: this temptation to just completely dismiss this type of activity
Speaker 1: as irrational and illogical and a casino or mm stock,
Speaker 1: and I think that's true at all, you know, I uh,
Speaker 1: you know, to me, you really have to pay close
Speaker 1: attention to some of these phenomenons. And for for a
Speaker 1: long time, you know, we analyze companies, we analyze fundamental
Speaker 1: changes at companies, we analyze what's going on the economy.
Speaker 1: But we're we're we're honest, and we're saying, you know,
Speaker 1: sometimes price performance securious performances a function of investors psychology
Speaker 1: and position and positioning, and you know when you have
Speaker 1: a situation like this, you know, you really cannot take
Speaker 1: an aggressive stand one way or another. You can't dismiss uh,
Speaker 1: you know, the stock moves one way or another. You
Speaker 1: just have to be cautious and realize this has become
Speaker 1: a purely technical event. There's a whole bunch of investors
Speaker 1: here with different perspectives and psychologies. There's investors who are
Speaker 1: getting free popcorn at AMC theaters. By the way, Um,
Speaker 1: that's a motivation. So I wondered if that's subject to
Speaker 1: the dividend tax. I don't know. You gotta gotta give
Speaker 1: a p for some of your popcorn back to the government.
Speaker 1: Probably is probably a slight mark up at the at
Speaker 1: the counter. I agree with you. Well, and then while
Speaker 1: this is all happening, I mean, are there any opportunities
Speaker 1: that you see for you all? Or are there opportunities
Speaker 1: that maybe are getting overlooked because everyone is so focused on,
Speaker 1: you know, watching the meme stocks go up and down. Yeah,
Speaker 1: so that's one of the that's my nine thousand mile analogy,
Speaker 1: because you know, when stocks, whether it's an AMC or
Speaker 1: bed bass in beyond, go up. Um, we see things
Speaker 1: that go up in sympathy with that UM philosopher. For example,
Speaker 1: if people think that A m C and Bed Bath
Speaker 1: and Beyond are doing well, they get excited about mall
Speaker 1: owners or strip mall operators. And the reality is the
Speaker 1: dynamics of people going to malls and going to you know,
Speaker 1: strip centers is not changing. It's not changing based on
Speaker 1: overnight price action in bed Bathroom Beyond or a MC.
Speaker 1: So we do see some of the stocks that are
Speaker 1: related UM react and that's where we tend to look
Speaker 1: for opportunities to take advantage of the dislocation. So, you know,
Speaker 1: one of our core disciplines and and and this has
Speaker 1: been you know, for as long as I've been in
Speaker 1: the business. You have to be very mindful of how
Speaker 1: big the short base is in any stock. I always
Speaker 1: tell people stocks are a log normally distributed, which is,
Speaker 1: you invest a hundred dollars UH and you can lose
Speaker 1: a hundred dollars, but you can make ten x or
Speaker 1: twenty extra your money. And and subsequently, you have to
Speaker 1: be very mind full of the size and nature of
Speaker 1: your short positions. UM and and so we're we're always
Speaker 1: on top of that, but we're looking for things that
Speaker 1: are one or two steps removed from these stories take
Speaker 1: advantage of those dislocations. It always amazes me to you know,
Speaker 1: if some stocks short interest, who's the one going in
Speaker 1: and turn it in a fifty one or fifty that
Speaker 1: just seems like playing with fire. You know what I
Speaker 1: gotta tell you, I I totally agree with that. And listen,
Speaker 1: I think I I learned this literally about two weeks
Speaker 1: into my job when I started twenty years ago, which is,
Speaker 1: don't short too much of anything because it can be
Speaker 1: very technical. And so I think it's just a matter
Speaker 1: of um of of hubrists. In a lot of cases,
Speaker 1: people like well, listen, um, you know, the evaluation these
Speaker 1: companies doesn't make sense. So I can be comfortable at
Speaker 1: carrying a heat short and you know, when you have
Speaker 1: something that can be so technical, evaluation just doesn't matter. Um.
Speaker 1: And so we're always cautious with that. We we we
Speaker 1: watch short interest ratios call used old fashioned. We look
Speaker 1: at the short based relative to daily volume. We look
Speaker 1: at the short based relative to the free flowed, and
Speaker 1: if he gets above these you know, sort of certain metrics,
Speaker 1: we just try to avoid them. Kevin, to move on
Speaker 1: to something, I know you guys were involved with at
Speaker 1: least earlier in the year, you were very bullish on China.
Speaker 1: I think one of the funds had was something like
Speaker 1: exposure to China. I'm wondering, you know, do the sort
Speaker 1: of the sort of geopolitical sword rattling, the Biden blacklist
Speaker 1: um possibly being expanded to to not just military linked firms. Um,
Speaker 1: what do you make of all that? Is it kind
Speaker 1: of is it kind of just that? Is it a
Speaker 1: bit of saber rattling? Do do you see any real
Speaker 1: risk there of of sort of a worsening relationship with
Speaker 1: China and an outright band of more stocks for US
Speaker 1: investors in China. Yeah, so listen, I think big picture, Uh,
Speaker 1: there's a more constructive dialogue between the US and China happening,
Speaker 1: happening now than under the prior administration. And even though
Speaker 1: there's potentially a broader list of stocks that are going
Speaker 1: to be banned, there's potentially a tightening of existing bands
Speaker 1: and limiting bands to some of the specific subsidiaries. So,
Speaker 1: you know, big picture, I think relations between the two
Speaker 1: countries from a trade and cooperation perspective are going to
Speaker 1: be improving. Um. But you know, to the extent that
Speaker 1: that there are these bands. You know, I think this,
Speaker 1: I think they create opportunity more than risk. You know,
Speaker 1: I think if you're sitting here, you're sitting in the US,
Speaker 1: you're sitting in Western Europe. You unfortunately tend to think
Speaker 1: about this from a European or US perspective, like, you know,
Speaker 1: the US government is going to discipline you know, the Chinese.
Speaker 1: But the reality is, uh, there's always a corollary a
Speaker 1: Chinese perspective on these stories that creates, you know, an
Speaker 1: equally investable seamen. And I'll just give you an example.
Speaker 1: So you know, under the Trump administration, there was this
Speaker 1: real aggressive pressure on reducing higher end semiconductor equipment materials
Speaker 1: and and telecom equipment in stocks to to to the Chinese.
Speaker 1: UM So with the Chinese government did is react uber
Speaker 1: rationally and said, Okay, I get this. If there's some
Speaker 1: risk that I'm not going to be able to buy
Speaker 1: high quality intellectual property from the US, I'm going to
Speaker 1: build my own technology supply chain. And so while most
Speaker 1: people sat there in and said, wow, this is this
Speaker 1: uncertainty about US China trade and tech supply chain makes
Speaker 1: me nervous, some of the best performing stocks in the
Speaker 1: world were some of the domestically focused Chinese small and
Speaker 1: MidCap technology and semiconductor stocks. So we always tell our
Speaker 1: investors like, you know, don't use your don't look at
Speaker 1: everything from your U S lens, uh, you know, put
Speaker 1: on your you know, your China hat and interpret what
Speaker 1: this local corollarya is going to be because it's going
Speaker 1: to create an investable theme on the other side. And
Speaker 1: how do you go about gauging that or trying to
Speaker 1: make predictions on what international relations are going to be
Speaker 1: like I mean, you know, talking about how this administration
Speaker 1: seems like it will be UM have a more amenable
Speaker 1: relationship with China, how how do you go about sort
Speaker 1: of engauging that and then also the time horizon for
Speaker 1: that well, and so there's a bunch of UM consultants,
Speaker 1: there's UH political research firms, there's UH analysts, there's policy analysts.
Speaker 1: You know, we talked to government officials as well. We
Speaker 1: can get you know, I think a really good sense
Speaker 1: for for the direction of travel and and and in
Speaker 1: particular on on China where every our local presence. I mean,
Speaker 1: you know, this is why I would I would never
Speaker 1: think about investing, you know in Asia from sitting here
Speaker 1: in the US. We have a team that's local that's
Speaker 1: very plugged into what's going on in the regulatory landscape
Speaker 1: and economic policy landscape in China, and the teams in
Speaker 1: Hong Kong and Singapore. There's resources in Shanghai as well.
Speaker 1: UM and you you you can get a really good
Speaker 1: sense for what, um, what the policy agenda there is,
Speaker 1: and and and likely that the changes that are coming.
Speaker 1: So it's something you can you can get a pretty
Speaker 1: good handle one, you know, Kevin. For years now, I
Speaker 1: guess the one of the main bullish teams for China
Speaker 1: has been sort of this transition from a manufacturing dominated
Speaker 1: economy to potentially a more consumer dominated economy. UM. And
Speaker 1: some of the interesting interesting developments in China this year
Speaker 1: in late last year has been UM sort of an
Speaker 1: attempt to tame the credit markets in China, you know,
Speaker 1: corporate credits especially, and and prevent them from getting out
Speaker 1: of hand, getting a little too frothy. So I'm just going,
Speaker 1: you know, with those two things in mind and whatever
Speaker 1: else you're looking at in China, just what are sort
Speaker 1: of the main themes, the main kind of sectors and
Speaker 1: is it is it equities and credit or a little both.
Speaker 1: What kind of things are really drawing you into China.
Speaker 1: And so one of the things that we're the makes
Speaker 1: us the most excited about China, that that I'm you know,
Speaker 1: puzzled because it feels like not enough people are talking
Speaker 1: about is the aggressive market reform agenda passed by China
Speaker 1: late last year. That's, you know, the q FE and
Speaker 1: r q F reform. And you know, as you as
Speaker 1: you well know, historically when we want to access the
Speaker 1: onshore market in China, we have to trade via the
Speaker 1: connect system in Hong Kong. But what the QF and
Speaker 1: r q F reforms are going to allow us allow
Speaker 1: us to do is to is to trade directly in
Speaker 1: the onshore market with Chinese banks and broker dealers. Additionally,
Speaker 1: is going to be a borrow market that develops in
Speaker 1: the onshore market that's going to allow us to short
Speaker 1: stocks in the onshore market. So, you know, against all
Speaker 1: this anxiety about China about essentially planned economy, about trade friction,
Speaker 1: people are missing what we see as a watershed event
Speaker 1: of the market opening up and becoming more efficient and
Speaker 1: more accessible to international investors and all of the same
Speaker 1: principles that we use to invest on a long short
Speaker 1: basis fundamentally uh in the US or in Europe, well,
Speaker 1: they hold also in China, it's just a lot less competitive,
Speaker 1: you know, Chinese. In the Chinese market, less than about
Speaker 1: just about ten percent of the of the market cap
Speaker 1: is is owned by hedge funds. The onshore market approximately
Speaker 1: eighty percent of the volume, and the onshore market is
Speaker 1: retail investors. Uh. And so we just have a market
Speaker 1: it that's you know, we think going to become a
Speaker 1: lot more efficient, a lot more conducive to relative value
Speaker 1: investing in the market wheld. We don't think enough institutional
Speaker 1: investors are paying close enough attention. So for us, we
Speaker 1: we like to think of it as China transitioning from
Speaker 1: a beta story to an alpha story, where it's gonna
Speaker 1: matter the subsector as you pick, it's gonna matter the
Speaker 1: management teams, the products, the sectors that you pick. It's
Speaker 1: not just going to be China as a beta trade anymore.
Speaker 1: And that just you know, for us, is superrational and
Speaker 1: it's a really healthy growth in that market from you know,
Speaker 1: from a subsector perspective, you know, where we um you know,
Speaker 1: there's very clearly a tightening of the regulatory environment happening
Speaker 1: in China. There's some tightening of regulation on fin techs.
Speaker 1: There's a tightening of regulation on some of the internet
Speaker 1: and larger media companies. Now that's having a pretty meaningful impact.
Speaker 1: That's creating I think, big opportunities in the financial services sector. Uh.
Speaker 1: You know, we see big opportunities and more of the
Speaker 1: cyclical industrial and machinery and material spaces uh in China.
Speaker 1: So it's it's kind of a rotation, not dissimilar to
Speaker 1: the rotation we're seeing everywhere else in the world where
Speaker 1: you're going from, you know, from tech and growth to
Speaker 1: more value and cyclical sectors. But that's happening against a
Speaker 1: backdrop of a market getting more efficient. You know, for us,
Speaker 1: we see China as the biggest alpha opportunity in the
Speaker 1: world over the next really five to seven years, and
Speaker 1: it's mostly to do with the fact that the markets
Speaker 1: are becoming more efficient. Is there anything that's um that's
Speaker 1: surprised you in terms of your stance on China and
Speaker 1: um sort of these these positions that either um this
Speaker 1: year or even more recently that you maybe didn't expect. Yeah, well,
Speaker 1: I mean it just uh, you know, so the feedback
Speaker 1: that we that we get out talked to investors, UM
Speaker 1: a lot, We talked to UM you know, obviously our
Speaker 1: counterparties a lot. Yeah, I think people's eyes are just
Speaker 1: off the ball here. I mean again, I think they
Speaker 1: just have it in there head that you know, China
Speaker 1: is highly you know, highly regulated, closed economy. There's a
Speaker 1: very standoff dynamic between between the US and China from
Speaker 1: a political or trade perspective. But again, it's it's not
Speaker 1: what's happening in reality. The market is undergoing this massive
Speaker 1: opening up, and it's to meet people are just kind
Speaker 1: of ignoring it, and they're they're getting caught in these
Speaker 1: headlines and they're not they're not paying close enough attention
Speaker 1: to the reality of what's happening. And I'll, i'll, I'll
Speaker 1: give you a stat that I think it's pretty interesting.
Speaker 1: Right now, we estimate that you can short approximately fifty
Speaker 1: billion dollars in aggregate of Chinese equities right now through
Speaker 1: current inventory and the connect mechanism. If this onshore borrow
Speaker 1: market develops as we expect, that number is going to
Speaker 1: go up by a factor of you know, at least
Speaker 1: five x, maybe ten x. And what that means is,
Speaker 1: you know, China's already outstanding from a liquidity perspective. If
Speaker 1: you get if you get that borrow market developing and
Speaker 1: it gets more efficient, it is just going to be
Speaker 1: a terrific place for dynamic relative value investers to deploy capital.
Speaker 1: And and and we think we're there sooner than most,
Speaker 1: but I think we're gonna see a lot of people
Speaker 1: go in that direction. Yeah, it's interesting. You often read
Speaker 1: about these sort of valuation discrepancies caused by the ontore connect.
Speaker 1: You know, there's there's a lot of money flowing in
Speaker 1: South and north, and you know, it causes you know,
Speaker 1: stocks to be trading it wildly different valuations depending on
Speaker 1: you know, where they're listed. I imagine that's a pretty
Speaker 1: fleeting opportunity, but a big one when it happens for
Speaker 1: for like you said, the people that are there, they're
Speaker 1: in place ready to take advantage of it. Yeah, listen,
Speaker 1: it's a it's a huge opportunity. Uh. You know, and
Speaker 1: I think you have to again resist the temptation of
Speaker 1: a lot of professional investors, you know, dismiss retail flows
Speaker 1: at your own peril, you know. Um, we say, and
Speaker 1: it's not just similar to the to the MEM's talks.
Speaker 1: You know, the Chinese retail investors have a heavy momentum
Speaker 1: quality um and you will see things overreact both directions.
Speaker 1: You need to follow it, you need to respect it.
Speaker 1: But it also creates a lot of dislocation and relative
Speaker 1: value investment opportunities for for funds like US to to
Speaker 1: capitalize on. Yeah, I have a colleague you she at Bloomberg,
Speaker 1: who you know, follows the Chinese social media very carefully.
Speaker 1: He said. One of the jokes going around when all
Speaker 1: Game stop and now AMC, when all that was going on,
Speaker 1: is that, well, here, America, you've turned into the Chinese
Speaker 1: market now with this heavy dominance of retail participation. So
Speaker 1: it's gonna be interesting. I think when all of a
Speaker 1: sudden there is an opportunity to borrow a lot more
Speaker 1: of these names. Um well, I don't know, I don't
Speaker 1: know if Reddit is uh published in Mandarin yet or not,
Speaker 1: but an interesting dynamic. There's undoubtedly a you know exactly,
Speaker 1: there's undoubtedly that that sort of same chat room mentality.
Speaker 1: I guess, just just sort of relating to that, I mean,
Speaker 1: do you think that there are any any lessons from
Speaker 1: that that you know can be applicable to the US
Speaker 1: market just in terms of the of the retail presence,
Speaker 1: what you're seeing either in the two markets or um
Speaker 1: a need similarities or differences. You know. I mean, maybe
Speaker 1: you can call me a little bit old fashioned, but
Speaker 1: you know, we believe in being in being a little
Speaker 1: bit paranoid, paranoid about you know, making sure we know
Speaker 1: what we know, paranoid about what we don't know. UM.
Speaker 1: And anytime you see stock prices or moves that look irrational, um,
Speaker 1: you know, that's just something to draw your interest in.
Speaker 1: You know, you've got to do a lot more work
Speaker 1: again on the on the technicals, on the positioning, on
Speaker 1: the expectation before you can become you be prepared to
Speaker 1: come in and fade some of these moves and listen.
Speaker 1: If I had one recommendation, you know for people, it's
Speaker 1: to not dismiss these flows, uh, to understand what that's
Speaker 1: telling you about MARKETR participants. What's that telling you about psychology?
Speaker 1: And then just be humble about it and say like, Okay,
Speaker 1: when I'm on the other side of these trades, where
Speaker 1: I want to take the other side of these trades
Speaker 1: because I don't think you know, a m C h
Speaker 1: is worth its current market cap, Well, I guess what,
Speaker 1: the people buying AMC have no opinion on its market cap.
Speaker 1: So my assessment of coming in and looking at the
Speaker 1: value of AMC on a market cap relative to earnings power,
Speaker 1: which maybe is how we think it should be valued,
Speaker 1: it's just not relevant. So you just have to have
Speaker 1: this inherent paranoia or skepticism that there could be something
Speaker 1: else driving stock rights performance, and then you should be
Speaker 1: cautious about it. Kevin I was reading about I guess
Speaker 1: it was the first half of last year. You guys
Speaker 1: had a really strong run than during the pandemic. And
Speaker 1: one of the things I thought was really interesting was
Speaker 1: it sounds like he did some pear trades where you
Speaker 1: would short the stocks of some of the companies getting
Speaker 1: really hit hard by the pandemic, but then go along
Speaker 1: the credit of the same companies UM. And it to me,
Speaker 1: I mean, it makes total So I don't think I granted,
Speaker 1: I don't think I ever would have thought of that
Speaker 1: at the time, but it makes total sense given the
Speaker 1: dynamics at play at the time, with the FED basically
Speaker 1: saying it was going to backstop the credit markets. UM.
Speaker 1: Another big story this week obviously, is is the FED
Speaker 1: saying it's gonna sort of unwind? Uh, it's credit holdings. Um.
Speaker 1: And it was really I think more of a psych
Speaker 1: logical effect on the credit markets that a sort of
Speaker 1: dollar for dollar impact from from what the FED did.
Speaker 1: So I'm just curious, you know how you're thinking is
Speaker 1: was that was that sort of a a a fleeting
Speaker 1: once in a lifetime opportunity to do that type of
Speaker 1: thing amid the pandemic we're you know, are credit markets
Speaker 1: such that you would you would still think of doing
Speaker 1: that type of trade? Uh in this environment a year later? Yeah,
Speaker 1: So the opportunity in March and April of in the
Speaker 1: U s CR credit markets was historic. Uh you know
Speaker 1: really the only good analogy I think is the global
Speaker 1: financial crisis. UM. And in particular, when the FED came
Speaker 1: out and went the extra mile to say they were
Speaker 1: going to support the high yield market, we were staring
Speaker 1: at each other like, can you believe they just said that?
Speaker 1: They really just say that the other world it does
Speaker 1: exactly and and there was a time where the market
Speaker 1: didn't react right away, and we were staring at each
Speaker 1: other like this is a really unbelievable historic and special opportunity,
Speaker 1: and the and the most unique thing about it is
Speaker 1: that you know, normally you see that sort of news
Speaker 1: and then the market squeezes squeezes up and you have
Speaker 1: a hard time buying anything, and you're like, okay, well
Speaker 1: I just missed it. But what happened for really the
Speaker 1: entirety of the summer because of this economic conditions associated
Speaker 1: with COVID were so severe. We actually had a bunch
Speaker 1: of companies who had to come out an issue high
Speaker 1: yield investment grade or convertible debts. So not only did
Speaker 1: you have this dynamic where the FED was supporting the
Speaker 1: credit markets, and listen, I was always hell people like
Speaker 1: if you had a a wish list of things you
Speaker 1: wanted for the holidays and you asked for their FED
Speaker 1: they gave you all those things, and it's like, oh,
Speaker 1: by the way, we got a new car for you
Speaker 1: out in the driveways. So so you had everything you
Speaker 1: could possibly have wanted. But then there was a ton
Speaker 1: of issuance, so we could go out and buy a
Speaker 1: lot of high yield investment grade in convertible bonds. So
Speaker 1: not only were we able to benefit from the from
Speaker 1: the FED, policy action, but we were able to benefit
Speaker 1: from corporates issuing in what retrospect was incredibly cheap paper
Speaker 1: to shore up their liquidity to operate over the COVID crisis.
Speaker 1: So I mean, I'm trying to imagine how that particular
Speaker 1: fact pattern repeats, and I really can't, let's hope. Yeah,
Speaker 1: And I feel a little I feel a little bad
Speaker 1: because it was it was, without a doubt, probably the
Speaker 1: most compelling investing environment that I've seen in uh you know,
Speaker 1: really it's it really only compares to the global financial
Speaker 1: crisis in terms of the opportunity. So it's it's hard
Speaker 1: to imagine, you know, it's it's ever like that again.
Speaker 1: But but listen, there are and this is part of
Speaker 1: the reason why investors like ourselves, who we invest in
Speaker 1: equity market and credit credit markets globally all day, every day.
Speaker 1: Uh not everybody does that, and so you can have
Speaker 1: situations where people are looking laser focused on the equity
Speaker 1: market or the credit market and they're missing the dynamic
Speaker 1: um and you know, probably one of the you know,
Speaker 1: we had some some credit positions that that really benefited
Speaker 1: from from some of this retail participation because as these
Speaker 1: company stocks rallied. They were able to issue equity there
Speaker 1: to shore up their balance sheets improve their credit. So
Speaker 1: it's just a really a perfect dynamic to be long
Speaker 1: credit and short equity. Yeah, and I wonder you gotta
Speaker 1: sort of be in the right position to take advantage
Speaker 1: of it. You know, if you're if you're getting margin
Speaker 1: calls and you're getting outflows and all that, it's some
Speaker 1: opportunities for a lot of people. Just had to have
Speaker 1: to skip on my imagine. Yeah, you just I mean,
Speaker 1: our philosophy is we just, uh, we're never that confident.
Speaker 1: So we're just ever going to go into a situation
Speaker 1: over levered um. We're always going to keep dry powder um,
Speaker 1: and we're always gonna we always manage our our betas
Speaker 1: very tightly. Again, we're a relative value funds, so you know,
Speaker 1: when there's a market draw down, we're going to be
Speaker 1: massively outperforming you know, beta indices, and generally our investors
Speaker 1: are going to focus on their their beta investments, so
Speaker 1: they're they're confident that we're going to be able to
Speaker 1: ride through those sort of events and capitalize on some
Speaker 1: of those dislocations. So you know, when you have a
Speaker 1: long term, stable capital base and you're prudent from maintaining
Speaker 1: some excess margin, you can come in and take advantage
Speaker 1: of these opportunities. So we were fortunate to do that well.
Speaker 1: And then just seeing what happened last year, I mean,
Speaker 1: you know, like we said, knock on wood, we're not
Speaker 1: going to have a repeat of that. But were there
Speaker 1: any sort of lessons from that trade or from kind
Speaker 1: of being able to identify that early that you're going
Speaker 1: to take into the future or even the next time
Speaker 1: there is any market memorial or anything like that. Yeah,
Speaker 1: So I think that one of the enduring lessons for
Speaker 1: for us is that, um, you know, let's get our
Speaker 1: capital to the spots that are the most attractive. You know,
Speaker 1: I think there's one of the you know, i'll call
Speaker 1: it a mistake, but may maybe that's an overstatement. You know,
Speaker 1: people say, hey, I need to have some invested in
Speaker 1: this area of the market, in that area of the market,
Speaker 1: and and the reality is they were like, you know, yeah,
Speaker 1: the the credit markets in the US were an enormous opportunity,
Speaker 1: but that was just you know, frankly, one of three
Speaker 1: enormous opportunities in um, you know, most people don't really
Speaker 1: don't remember or or forgetting the fact that well, China
Speaker 1: was approximately three to four months ahead of every other
Speaker 1: economy in the world in terms of getting the covid
Speaker 1: um you know, virus, but emerging from it. And so
Speaker 1: in our view, one of the biggest opera tunities that
Speaker 1: we were able to capitalize on was moving into equities
Speaker 1: in China. In the summer of we were in remember
Speaker 1: the summer here, we were in the throes of anxiety
Speaker 1: in Western Europe and the US, but we were seeing
Speaker 1: very clear indications based on travel and commerce that the
Speaker 1: Chinese economy is starting to accelerate out of that. So
Speaker 1: we were able to rotate and really gross up our
Speaker 1: exposures in China and take care of that. And then
Speaker 1: and then finally, you know, we had that election back
Speaker 1: in November. Uh, and you know, maybe it seems obvious now,
Speaker 1: but you know, the democratic agenda by administration democratic Congress
Speaker 1: was going to lead to two things, uh, stimulus and
Speaker 1: um environmentally oriented policy, right, and so that accelerated, in
Speaker 1: our opinion, a massive opportunity to rotate and move our
Speaker 1: capital into some of the cyclical sectors that had been
Speaker 1: ignored a really you know a long time. I mean,
Speaker 1: we we'd spent almost twenty years when we thought about, Hey,
Speaker 1: interest rates are low, growth is low, We're supposed to
Speaker 1: go buy you know, high quality growth stocks and quality stocks.
Speaker 1: And now it's the opposite in a lot of ways.
Speaker 1: We're starting a new economic cycle. We're supposed to own
Speaker 1: cyclical stocks, you're supposed to own value stocks. And it
Speaker 1: was a very clear and obvious rotation that people should
Speaker 1: have been doing pretty much right into and after the election,
Speaker 1: but people people lagged in that rotation. Frankly, Uh continues
Speaker 1: to go on even even in the markets. Um, you
Speaker 1: know here today on Thursday, Uh, Kevin. Before we get
Speaker 1: into the crazy things, I think someone passed a law
Speaker 1: somewhere where every interview like this has to include a
Speaker 1: question about inflation. It's it's mandatory. I think I get
Speaker 1: I get locked up if I don't, if I don't
Speaker 1: touch about it. But one thing I noticed, Um, you know,
Speaker 1: everyone and not everyone, but a lot of people keep
Speaker 1: an eye on that city Economic Surprise Index or there's
Speaker 1: there's other you know, firms that have ECO surprise index.
Speaker 1: C He also has an inflation surprise index that unfortunately
Speaker 1: it only prices once a month at the end of
Speaker 1: the month, and I looked at it on the first
Speaker 1: stay of June and noticed May. I mean, we all
Speaker 1: knew inflation was hot in May, and we all knew
Speaker 1: it was hotter than everyone expected, but that inflation Surprise
Speaker 1: Index jumped it like doubled in May and it hit
Speaker 1: the highest level ever, which to me I find interesting
Speaker 1: because the ripple effects of all the CPI and pc
Speaker 1: whatever reports we saw in May. Yeah, the market didn't
Speaker 1: freak out too much about it, um, which to me
Speaker 1: leads me to believe that kind of the consensus out
Speaker 1: there is to agree with the fit that this is
Speaker 1: all transitory, whether it be base effects or or the
Speaker 1: supply bottlenecks we're seeing, and that we don't really have
Speaker 1: to worry about inflation. Um. I'm just curious what your
Speaker 1: take on it is. I mean, is there I don't
Speaker 1: know what a single digit chance that they're wrong that
Speaker 1: we are looking at sort of a structurally high higher
Speaker 1: inflation rate going forward because of all the all the stimulus.
Speaker 1: How are you thinking about it? Yeah? So, so I
Speaker 1: think when one of the things that a lot of people, uh,
Speaker 1: you know, forget is you know, we're getting this rush
Speaker 1: of economic activity after several years of really lower capex
Speaker 1: and investment on expectations that you know, growth was going
Speaker 1: to be low forever. And so you know, whether it's
Speaker 1: it's UM, it's industrial metals, or oil and gas, there
Speaker 1: has been a massive you know, under investment in capex
Speaker 1: really the past several years. And so now is the
Speaker 1: global economy starting to restore, starting to restart. The commodity
Speaker 1: markets are just really tight, and you know, the the
Speaker 1: amount of of of price inflation happening just on the
Speaker 1: raw material side is massive. UM and now there's a
Speaker 1: ton of there's no shortage of resources in the world. Uh,
Speaker 1: there's just a shortage of resources I can get put
Speaker 1: into production right away. And so you know, we're definitely
Speaker 1: in the camp that we're going to see a supply reaction.
Speaker 1: You're gonna get a reaction out of out of OPEC,
Speaker 1: you're gonna get a reaction on some of the metal
Speaker 1: and mining companies, and you're going to offset some of
Speaker 1: those short term price squeezes. But it's unclear to me
Speaker 1: whether that's happening in the in the end second quarter,
Speaker 1: third quarter, or fourth quarter. And so I think there's
Speaker 1: a pretty significant probability that there's an inflation surprise, and
Speaker 1: that it's difficult for the market on a on a
Speaker 1: short term basis that's over the sort of the three
Speaker 1: month horizon. But I think longer term, I think there's
Speaker 1: generally consensus that that there's going to be a supply
Speaker 1: response and offset some of these transitory pressures. So you know,
Speaker 1: what we're seeing though, is uh And I agree with you,
Speaker 1: there's you know, you have to talk about inflation every
Speaker 1: every discussion, otherwise it's a problem. You know, there's a
Speaker 1: there's a really I think a rational transition, transition happening
Speaker 1: in the market right now as investors are starting to
Speaker 1: distinguish between who is more tightly managing their cost a
Speaker 1: good sold their inventory requirements, and so we're seeing who
Speaker 1: has pricing power, We're seeing, you know, who's managing their
Speaker 1: cost infrastructure better, and the market is actually distinguishing companies
Speaker 1: and subsectors based on how they're managing the cost side
Speaker 1: of their equations. So I actually, to us, it looks
Speaker 1: like we've transitioned from you know, if you were ten
Speaker 1: out of ten frenetic anxiety about inflation in March, you're
Speaker 1: probably down to like a seven out of ten now
Speaker 1: because people you know, I could once once people are
Speaker 1: talking about it for a good rule of them. If
Speaker 1: you've been hearing people talk about it for two weeks,
Speaker 1: it's discounted um. And so for all of the handwringing
Speaker 1: that's happened. If you guys are watching the tenure right
Speaker 1: ten years, been at one sixty for I don't know,
Speaker 1: three weeks now four weeks. So I think increasingly the
Speaker 1: markets are are are discounting these short term inflationary pressures
Speaker 1: in and are more relaxed about it. There's still going
Speaker 1: to be some rotations and volatility, but you know, clearly
Speaker 1: it's it's the it's the negative event in the market.
Speaker 1: It's it's the black spawn event. There's a there's an
Speaker 1: inflation surprise, it's the FED is behind the curve, the
Speaker 1: e c B is behind the curve, and you know
Speaker 1: it ends up being counterproductive to economic activity in the
Speaker 1: back half of the year. That's that's a probability. We
Speaker 1: think it's pretty low, but that's clearly the thing to
Speaker 1: worry about, you know. And I keep thinking, as you
Speaker 1: mentioned that supply side response, I just can't help but
Speaker 1: wonder if that's going to overreact and we're talking about
Speaker 1: transitory deflation next year, and who's prepared for that? You know,
Speaker 1: you know what I mean, hope hopefully I'll be able
Speaker 1: to come back and uh and uh and uh and
Speaker 1: talk about that. I mean, listen, I think that there's again,
Speaker 1: there's no shortager resources out there. It's just a function
Speaker 1: of you know, really structurally lower capex for the past
Speaker 1: couple of years. Their corporate boardrooms around the world, they're
Speaker 1: seeing this, they're seeing the opportunity. They're looking for new
Speaker 1: supply projects, they're bringing supply online, and it's going to offset.
Speaker 1: It's just a question of whether it gets here soon
Speaker 1: enough for for some people in the market. Stand clear
Speaker 1: of the craziest things we saw in markets this week.
Speaker 1: You know, Claire, as Kevin said, there's no shortage of
Speaker 1: supply of resources in the world. You know, there's also
Speaker 1: not a shortage of crazy things. I believe. I totally agree,
Speaker 1: well supplied in that arena. So I want you to
Speaker 1: kick us off with the craziest thing you saw this week.
Speaker 1: So the craziest thing that I saw. We actually had
Speaker 1: a story out this morning. It was my colleague Katie
Speaker 1: Greifeld wrote it um and she's fantastic, But it of
Speaker 1: course is about AMC and UM. We saw that UM
Speaker 1: with AMC UM. It recently had a regulatory filing UM
Speaker 1: that landed this morning, and it talked about its intention
Speaker 1: to UM sell more than eleven million shares UM. But
Speaker 1: it had this acknowledgement in the language UM and it
Speaker 1: said that the stock is at the mercy of the
Speaker 1: retail mania UM with fundamentals playing little role in determining
Speaker 1: its valuation. UM. So just the fact that that made
Speaker 1: its way into an official regulatory filing I thought was
Speaker 1: was pretty crazy. Proceeds from the sale will be deposited
Speaker 1: with Libroll Reddenbacker to pay for all that presentably it is.
Speaker 1: I I don't think we've had any of us have seen.
Speaker 1: I mean, I don't know. The bar for crazy things
Speaker 1: keeps getting raised higher and higher. This this one though,
Speaker 1: was it's pretty good. I don't know. I don't want
Speaker 1: to knock on wood people listening with headphones at home.
Speaker 1: That might get a pop in here, but knock on wood.
Speaker 1: We don't get any crazier than that. But Kevin, how
Speaker 1: about you? You see anything crazy this week? Well? I mean,
Speaker 1: am I going to get in trouble if I kind
Speaker 1: of copy Claire on this one, not at all, not
Speaker 1: at all, So so I, um, I saw something and
Speaker 1: it was a MC, but it was an AMC nuance
Speaker 1: that I think is interesting here. I I came in
Speaker 1: after the long weekend stupor that we all were in
Speaker 1: on Tuesday morning and saw that AMC had issued stock
Speaker 1: to a single investor. Um. And call me old fashioned,
Speaker 1: I'm used to company's issuing stock at a discount until
Speaker 1: last sale, and I saw that they issued stock at
Speaker 1: a premium to last sale to a single investor about
Speaker 1: h I think it was about a four or five
Speaker 1: percent premium um, which and then I saw the stock
Speaker 1: promptly rally um massively past that. And then that same
Speaker 1: investor came out in the afternoon and said he thought
Speaker 1: the stock was wildly overvalued. So we had this weird
Speaker 1: dynamic where a company issue stock at a premium to
Speaker 1: a single investor, that investor obviously sells it in the
Speaker 1: market that day, presumably, and then and then tells people
Speaker 1: who thinks it's overvalued before it promptly doubles again the
Speaker 1: next day. And you know, I think I've seen company's
Speaker 1: issue stock at a premium. Uh, maybe once in my
Speaker 1: in my career, and it's just again one of those
Speaker 1: things where you know something's different is happening. If someone
Speaker 1: can find the page and Graham and Dodd where this
Speaker 1: this is all explained, I'd love to see it. But well,
Speaker 1: and also I believe that investor was a distress debt investor,
Speaker 1: so in a way of brilliant trade, kind of the
Speaker 1: opposite of of your trade last year. You know, it's
Speaker 1: go along the stock so that they can you know,
Speaker 1: bolster the credit. I we I don't know, but I's
Speaker 1: such a risky thing because you really didn't know. I mean,
Speaker 1: who knows how the market would react to a secondary
Speaker 1: like that, I guess. But they all worked out in
Speaker 1: their favor. Yeah, well I think, I mean, he obviously
Speaker 1: figured out. We worked out well for it. We worked
Speaker 1: out well for him. Uh, pretty good, pretty good. The
Speaker 1: tip of the hat to to that. Um, I'm copying
Speaker 1: to him. I and I guess we're all in the
Speaker 1: A m C. We're all in the theater together on this.
Speaker 1: I gotta say I did. I did go back to
Speaker 1: an AMC theater last weekend, Uh, and saw a movie.
Speaker 1: We've got it. They have the big cushy leather recliners
Speaker 1: and they bring you the food. It's it's I don't know.
Speaker 1: Maybe there's there's a good bookcase to be made. But
Speaker 1: to me, the the promotions that Claire, you and I
Speaker 1: worked on this story a little bit together, the promotions
Speaker 1: going on of AMC are our borderlining on the absurd.
Speaker 1: You know, you're seeing people on the street corner holding
Speaker 1: poster boards saying, you know by AMC stock. You're you're
Speaker 1: seeing someone tweeted a video of some pool party looked
Speaker 1: at some hotel that these these models and bikinis danced
Speaker 1: around waiving signs that say a MC to the moon.
Speaker 1: I can't wrap my head around this, Kevin, I don't know.
Speaker 1: I I uh, it's all fun while last I guess
Speaker 1: it seems like, uh, sort of a game of musical
Speaker 1: chairs to some degree, to see who's gonna be left
Speaker 1: holding that back. You know, by the end of this,
Speaker 1: they'll they'll be, they'll be it'll end very badly for
Speaker 1: people on the long and short side of there, like,
Speaker 1: so the people are going to have issues with it,
Speaker 1: for sure. I presumably those models got paid for their
Speaker 1: day's work, though, so they're they're happy it's so some
Speaker 1: some stimulats in to the economy from all this anyway,
Speaker 1: But Claire Balantine, Kevin Russell really great to catch up
Speaker 1: with both of you. I hope we can have you back,
Speaker 1: both of you back on this show someday. But I
Speaker 1: think that's all the time we have. Thanks for having me, guys,
Speaker 1: I really enjoyed it. Thank you What Goes Up. We'll
Speaker 1: be back next week. That's something. You can find us
Speaker 1: on the Bloomberg Terminal website and app, or wherever you
Speaker 1: get your podcasts. We'd love it if you took the
Speaker 1: time to rate and review the show on Apple Podcasts
Speaker 1: so more listeners can find us. And you can find
Speaker 1: us on Twitter, follow me at Reaganonymous. Claire Valentine is
Speaker 1: at CFP Underscore eighteen. You can also follow Bloomberg Podcasts
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Speaker 1: What Goes Up is produced by tofur Forez. The head
Speaker 1: of Bloomberg Podcast is Francesco Leviy. Thanks for listening. See
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