1 00:00:00,040 --> 00:00:02,160 Speaker 1: Please to say. Joining us right now is Jeffrey Sherman. 2 00:00:02,400 --> 00:00:06,760 Speaker 1: He's Double Line Capital's deputy chief investment officer. Jeff's great 3 00:00:06,800 --> 00:00:08,840 Speaker 1: to I see you again here. As you know, there's 4 00:00:08,880 --> 00:00:11,440 Speaker 1: been so much talk right now about what twenty twenty 5 00:00:11,480 --> 00:00:13,280 Speaker 1: four is going to hold, is going to be materially 6 00:00:13,280 --> 00:00:15,960 Speaker 1: different than twenty twenty three. So far, it seems like 7 00:00:16,000 --> 00:00:18,040 Speaker 1: we're just kind of singing from the same hymnal that 8 00:00:18,079 --> 00:00:19,960 Speaker 1: we had for a good portion of last year. Yere, 9 00:00:20,280 --> 00:00:22,040 Speaker 1: I mean, what are you sort of banking on as 10 00:00:22,079 --> 00:00:25,000 Speaker 1: far as anything being materially different than what we saw 11 00:00:25,079 --> 00:00:25,560 Speaker 1: last year. 12 00:00:27,040 --> 00:00:29,280 Speaker 2: Well, if you think about where we're starting the year, 13 00:00:29,480 --> 00:00:31,800 Speaker 2: at least from the bomb market's perspective, it's not much 14 00:00:31,840 --> 00:00:34,440 Speaker 2: different than where we entered last year. There was a 15 00:00:34,440 --> 00:00:36,519 Speaker 2: lot of volatility throughout the year. I think that the 16 00:00:36,560 --> 00:00:41,160 Speaker 2: tenure Treasury effectively almost closed exactly where it started twenty 17 00:00:41,200 --> 00:00:43,360 Speaker 2: twenty or where it closed in twenty twenty two. So 18 00:00:43,760 --> 00:00:45,559 Speaker 2: as you start to look across the board, I think 19 00:00:45,840 --> 00:00:47,400 Speaker 2: the things that have changed a little bit or some 20 00:00:47,440 --> 00:00:48,640 Speaker 2: of the risk in the market. 21 00:00:48,880 --> 00:00:51,080 Speaker 3: I know last year was something like I don't know, 22 00:00:51,120 --> 00:00:52,120 Speaker 3: like eighty percent. 23 00:00:51,840 --> 00:00:55,120 Speaker 2: Of economists were forecasting for a recession last year and 24 00:00:55,160 --> 00:00:58,840 Speaker 2: that FED policy was going to be a very problematic 25 00:00:59,200 --> 00:01:02,720 Speaker 2: and really materialize. But I think that those risks are 26 00:01:02,720 --> 00:01:05,600 Speaker 2: still building out there. But the big question is is 27 00:01:05,640 --> 00:01:08,120 Speaker 2: that is the FED going to actually do the opposite 28 00:01:08,160 --> 00:01:10,320 Speaker 2: and come to the rescue. And you know, you're starting 29 00:01:10,319 --> 00:01:12,360 Speaker 2: to see there's talks of if you look at the 30 00:01:12,360 --> 00:01:15,280 Speaker 2: FED minutes yesterday, there are talks of rate hikes in it, 31 00:01:15,360 --> 00:01:17,319 Speaker 2: there's talks of a pause in it, and there's talks 32 00:01:17,319 --> 00:01:19,440 Speaker 2: of rate cuts in it. So I think there's something 33 00:01:19,480 --> 00:01:22,200 Speaker 2: for everyone right now. And really I think what we're 34 00:01:22,200 --> 00:01:24,240 Speaker 2: going to have to be focusing on is the labor market. 35 00:01:24,319 --> 00:01:27,360 Speaker 2: And I was listening to your banter about the buy now, 36 00:01:27,400 --> 00:01:30,760 Speaker 2: pay later concept too, and that doesn't give me a 37 00:01:30,760 --> 00:01:33,240 Speaker 2: lot of great feelings about the consumer for just using 38 00:01:33,280 --> 00:01:35,760 Speaker 2: credit to get there. And again, maybe it's a substitute 39 00:01:35,800 --> 00:01:38,880 Speaker 2: for a credit card, maybe it's something else. But I 40 00:01:38,880 --> 00:01:41,039 Speaker 2: think as you look as you look into this year 41 00:01:41,400 --> 00:01:45,920 Speaker 2: to the risk are still there for that recession, and ultimately, 42 00:01:45,959 --> 00:01:48,280 Speaker 2: I think it's going to really come down to essentially 43 00:01:48,360 --> 00:01:50,000 Speaker 2: how the labor market unfolds. 44 00:01:50,120 --> 00:01:53,000 Speaker 1: Yeah, absolutely, and that's what everybody's focusing on probably less 45 00:01:53,040 --> 00:01:55,720 Speaker 1: so than maybe the direct inflation reports. I am curious 46 00:01:55,720 --> 00:01:57,600 Speaker 1: that when you go back to early last year, when 47 00:01:57,600 --> 00:02:00,280 Speaker 1: everybody really was predicting the potential for awards, should and 48 00:02:00,320 --> 00:02:02,080 Speaker 1: we should, just in fairness, that our folks here at 49 00:02:02,080 --> 00:02:04,680 Speaker 1: Bloomberg Intelligence were predicting one hundred percent chance of a 50 00:02:04,760 --> 00:02:07,320 Speaker 1: recession in twenty twenty three. That proved to be wrong. 51 00:02:07,560 --> 00:02:09,440 Speaker 1: But there was a reason why those calls were made. Jeff, 52 00:02:09,440 --> 00:02:11,680 Speaker 1: you saw the data. It was all there suggesting, at 53 00:02:11,720 --> 00:02:13,760 Speaker 1: least on a historical basis, we were headed towards one. 54 00:02:13,919 --> 00:02:16,360 Speaker 1: He had a yield curve inversion that was the worst 55 00:02:16,360 --> 00:02:17,920 Speaker 1: that we've seen since the financial crisis. 56 00:02:17,960 --> 00:02:22,280 Speaker 2: What happened, Well, one hundred percent is tough in market, 57 00:02:22,440 --> 00:02:26,200 Speaker 2: so I would I would caution your your your economists 58 00:02:26,240 --> 00:02:28,840 Speaker 2: from always doing one hundred percent probability. At least put 59 00:02:28,840 --> 00:02:31,160 Speaker 2: a ninety nine point nine on us. So that's why 60 00:02:31,840 --> 00:02:34,600 Speaker 2: h yeah, And I would never say zero either. Let's 61 00:02:34,600 --> 00:02:37,000 Speaker 2: call it infinitesimal on the other side. So that's just 62 00:02:37,040 --> 00:02:39,840 Speaker 2: my little mathematical brain. But at the end of the day, 63 00:02:40,160 --> 00:02:42,839 Speaker 2: I think what's happened there is that those risks still 64 00:02:43,000 --> 00:02:45,639 Speaker 2: are present, and so the thing is the old curve 65 00:02:45,680 --> 00:02:49,000 Speaker 2: is still inverted. This is one of the longest tenures 66 00:02:49,160 --> 00:02:52,359 Speaker 2: of yield curve inversion when you look at like twos 67 00:02:52,440 --> 00:02:55,760 Speaker 2: tens since really back in the early forties. And so 68 00:02:56,320 --> 00:02:59,400 Speaker 2: it's really problematic that you see that the market is 69 00:02:59,440 --> 00:03:02,160 Speaker 2: really fighting the Fed here too. And so the market, 70 00:03:02,520 --> 00:03:06,280 Speaker 2: the rallies we've seen what we've been calling the everything 71 00:03:06,400 --> 00:03:10,320 Speaker 2: rallies since November first, really just started to really be 72 00:03:10,360 --> 00:03:13,200 Speaker 2: predicated on rate cuts again. So if the FED was 73 00:03:13,200 --> 00:03:15,560 Speaker 2: really tried and true, what they're higher for longer Mantra, 74 00:03:16,160 --> 00:03:18,440 Speaker 2: I think that we would get closer to the recession. 75 00:03:18,520 --> 00:03:21,200 Speaker 2: And you know when people call for soft landings, usually 76 00:03:21,280 --> 00:03:23,959 Speaker 2: what that means is that there's some problematic area of 77 00:03:24,040 --> 00:03:24,720 Speaker 2: the economy. 78 00:03:24,960 --> 00:03:27,760 Speaker 3: It just doesn't have the breadth across. That's what makes 79 00:03:27,800 --> 00:03:28,680 Speaker 3: it a hard landing. 80 00:03:28,720 --> 00:03:31,320 Speaker 2: And so I still think that there are still some 81 00:03:31,440 --> 00:03:34,200 Speaker 2: challenged areas. But if we start to see some of 82 00:03:34,200 --> 00:03:37,160 Speaker 2: these rate cuts, maybe some of those problematic areas do 83 00:03:37,280 --> 00:03:41,480 Speaker 2: get skirted and the FED achieves the miracle of being 84 00:03:41,520 --> 00:03:44,320 Speaker 2: able to really navigate this hiking cycle and be able 85 00:03:44,360 --> 00:03:48,200 Speaker 2: to normalize policy back without causing pain. The problem is 86 00:03:48,200 --> 00:03:51,320 Speaker 2: is that historically the FED has one hundred percent track 87 00:03:51,360 --> 00:03:55,000 Speaker 2: record in most of these instances of causing recession, at 88 00:03:55,080 --> 00:03:57,640 Speaker 2: least when they stay dedicated to the hiking cycle. 89 00:03:57,800 --> 00:04:00,760 Speaker 4: Right right, Well, interest rates are very black tool when 90 00:04:00,800 --> 00:04:03,160 Speaker 4: it comes down to it. You mentioned risks. What is 91 00:04:03,200 --> 00:04:07,400 Speaker 4: the bigger risk right now? Reignition in inflation or a 92 00:04:07,400 --> 00:04:09,560 Speaker 4: stronger than expected labor market, which is kind of what 93 00:04:09,560 --> 00:04:10,920 Speaker 4: we're seeing signs of right now. 94 00:04:12,280 --> 00:04:14,800 Speaker 3: Yeah, I think the labor market has been relatively strong. 95 00:04:14,840 --> 00:04:16,920 Speaker 2: I know a lot of people question it, saying, you know, 96 00:04:17,200 --> 00:04:19,840 Speaker 2: is it the birth death model, and you know, we've 97 00:04:19,839 --> 00:04:23,120 Speaker 2: seen some net revisions negative, but on on whole, the 98 00:04:23,200 --> 00:04:24,840 Speaker 2: labor market has has held. 99 00:04:24,640 --> 00:04:25,720 Speaker 3: Up pretty resiliently. 100 00:04:26,160 --> 00:04:28,640 Speaker 2: And when you look at unemployment claims today, the new 101 00:04:28,720 --> 00:04:32,359 Speaker 2: data coming out, whether it's continuing initial claims, they're not 102 00:04:32,360 --> 00:04:35,279 Speaker 2: putting up red flags at this point. And so I 103 00:04:35,320 --> 00:04:37,840 Speaker 2: don't think that the labor market is going to reignite 104 00:04:38,080 --> 00:04:39,640 Speaker 2: and you're going to start to see three and four 105 00:04:39,680 --> 00:04:43,000 Speaker 2: hundred thousand jobs per month being created. But I do 106 00:04:43,040 --> 00:04:45,400 Speaker 2: think that the bigger risk is the inflation, and I 107 00:04:45,400 --> 00:04:47,680 Speaker 2: think the FED will have concerns about some of this, 108 00:04:47,760 --> 00:04:49,719 Speaker 2: which is why we kind of scratch our heads with 109 00:04:49,800 --> 00:04:52,960 Speaker 2: j Powell at the last press conference, you know in November, 110 00:04:52,960 --> 00:04:55,760 Speaker 2: he talked about financial conditions being tied at the bond market, 111 00:04:55,839 --> 00:04:58,200 Speaker 2: signaling it then rates rally. 112 00:04:57,960 --> 00:04:59,159 Speaker 3: Financial conditions ease. 113 00:04:59,520 --> 00:05:01,440 Speaker 2: It made we don't mention really of it at the 114 00:05:01,480 --> 00:05:04,640 Speaker 2: last press conference, but if the Fed does believe in 115 00:05:04,680 --> 00:05:09,360 Speaker 2: these wealth effects that we heard from Bertank in two administrations, 116 00:05:09,360 --> 00:05:12,279 Speaker 2: to go at the FED that ultimately, you know, when 117 00:05:12,320 --> 00:05:15,839 Speaker 2: people feel wealthier, risk assets rally, their portfolios go up, 118 00:05:15,880 --> 00:05:16,680 Speaker 2: they spend more. 119 00:05:17,120 --> 00:05:18,800 Speaker 3: Maybe then all of a sudden. 120 00:05:18,680 --> 00:05:21,039 Speaker 2: This starts to cause consum concern at the FED that 121 00:05:21,120 --> 00:05:24,280 Speaker 2: we start to see this kind of reacceleration of inflation. 122 00:05:24,480 --> 00:05:27,960 Speaker 2: But at this stage we see core inflation has been dampening. 123 00:05:28,240 --> 00:05:32,200 Speaker 2: The trajectory's right, but the market is definitely extrapolating this 124 00:05:32,360 --> 00:05:35,479 Speaker 2: into that the FED is going to normalize policy back 125 00:05:35,640 --> 00:05:38,120 Speaker 2: to a much lower rate, and it just seems that 126 00:05:38,160 --> 00:05:41,120 Speaker 2: it's a little optimistic today to think that's going to 127 00:05:41,200 --> 00:05:43,040 Speaker 2: happen so soon, as early as March. 128 00:05:44,120 --> 00:05:46,880 Speaker 4: So when it comes down to it, a lot of 129 00:05:47,200 --> 00:05:49,560 Speaker 4: corporate bond analysts will look at the credit market right now, 130 00:05:49,560 --> 00:05:51,160 Speaker 4: look at where spreads all right now, and say that 131 00:05:51,320 --> 00:05:53,400 Speaker 4: at least at the end of December, it was priced 132 00:05:53,480 --> 00:05:57,160 Speaker 4: for perfection. Given where we stand right now after two 133 00:05:57,200 --> 00:05:59,000 Speaker 4: days of declines, I know we're seeing a bit of recovery. 134 00:05:59,000 --> 00:06:01,400 Speaker 4: Today's price right now, what's priced in? 135 00:06:02,520 --> 00:06:04,800 Speaker 2: Yeah, I don't know if it's perfection out there, but 136 00:06:04,839 --> 00:06:06,880 Speaker 2: I think what it is is that we're gonna have 137 00:06:06,960 --> 00:06:10,120 Speaker 2: a smooth process or the softest kind of landing or 138 00:06:10,839 --> 00:06:13,520 Speaker 2: I don't typically believe in a no landing scenario because 139 00:06:13,520 --> 00:06:16,320 Speaker 2: there's always a bankruptcy or two there. But I think 140 00:06:16,360 --> 00:06:18,720 Speaker 2: what you see in corporate spreads is that the idea 141 00:06:18,800 --> 00:06:20,520 Speaker 2: that at least they can is kicked. 142 00:06:20,279 --> 00:06:20,800 Speaker 3: Down the road. 143 00:06:20,960 --> 00:06:23,679 Speaker 2: And think about the problems we solved with high yield 144 00:06:23,680 --> 00:06:26,080 Speaker 2: and spreads widening out once we got the rally. You 145 00:06:26,080 --> 00:06:29,320 Speaker 2: saw a lot of refinancing activity over the summer. Some 146 00:06:29,400 --> 00:06:31,599 Speaker 2: of the debt that was due let's say in twenty 147 00:06:31,640 --> 00:06:34,400 Speaker 2: twenty four got extended out. And you're seeing that both 148 00:06:34,440 --> 00:06:37,600 Speaker 2: in investigrate and high yield, where the tenors or the 149 00:06:37,600 --> 00:06:41,760 Speaker 2: maturities have been taken out farther along the curve. And 150 00:06:41,800 --> 00:06:45,160 Speaker 2: so typically when you have a big default cycle, it's 151 00:06:45,200 --> 00:06:48,160 Speaker 2: either concentrated in one industry or you have what's called 152 00:06:48,200 --> 00:06:51,000 Speaker 2: the maturity wall that really hits where you get all 153 00:06:51,040 --> 00:06:53,599 Speaker 2: this debt that has to be refinanced at the same time, 154 00:06:53,920 --> 00:06:56,440 Speaker 2: and the market kind of has indigestion over that. And 155 00:06:56,520 --> 00:07:00,200 Speaker 2: so this smoothness of this refinancing has probably caused some 156 00:07:00,240 --> 00:07:02,240 Speaker 2: of these spreads to come in a little bit as 157 00:07:02,279 --> 00:07:05,880 Speaker 2: well when you look at the overall market, because in general, 158 00:07:05,960 --> 00:07:08,480 Speaker 2: what you've seen is just this kind of idea that, well, 159 00:07:08,640 --> 00:07:10,800 Speaker 2: the debt doesn't do it, it's by now, pay later, 160 00:07:10,960 --> 00:07:13,160 Speaker 2: right exactly where talking about all you have to do 161 00:07:13,240 --> 00:07:15,680 Speaker 2: is carry the coupon, and so you're willing to finance 162 00:07:15,680 --> 00:07:18,200 Speaker 2: at a higher coupon simply because you want to be 163 00:07:18,240 --> 00:07:21,720 Speaker 2: able to survive through the cycle. And so this is 164 00:07:21,760 --> 00:07:24,360 Speaker 2: part of I think where you see spreads being tighter 165 00:07:24,720 --> 00:07:25,600 Speaker 2: is for that reason. 166 00:07:25,680 --> 00:07:27,200 Speaker 3: So I don't know if it's perfection. 167 00:07:27,320 --> 00:07:30,280 Speaker 2: I mean, remember pre pandemic, we've seen spreads inside of 168 00:07:30,280 --> 00:07:32,680 Speaker 2: one hundred on corporate bonds. I mean, there was a 169 00:07:32,680 --> 00:07:35,160 Speaker 2: period there in the mid teams where we traded in 170 00:07:35,160 --> 00:07:38,320 Speaker 2: the sixties and seventies. So you have this idea where 171 00:07:38,680 --> 00:07:41,880 Speaker 2: ultimately this isn't perfection, but it doesn't give you a 172 00:07:41,960 --> 00:07:43,800 Speaker 2: lot of wiggle room at this stage. 173 00:07:43,560 --> 00:07:47,880 Speaker 1: Is it easier now, I guess to execute the trades 174 00:07:47,920 --> 00:07:50,680 Speaker 1: and whatever sort of investment vision that's coming out of 175 00:07:50,720 --> 00:07:52,680 Speaker 1: the investment committee, there is it easier to do that 176 00:07:52,720 --> 00:07:55,000 Speaker 1: now in this environment versus maybe where we were at 177 00:07:55,040 --> 00:07:56,400 Speaker 1: the start of the great hiking cycle. 178 00:07:57,800 --> 00:08:00,080 Speaker 2: Well, I think right now, what you see is that 179 00:08:00,080 --> 00:08:03,520 Speaker 2: the issuance activities picked up because yields are lower, so 180 00:08:03,960 --> 00:08:07,560 Speaker 2: not just spreads being tighter, but effectively the treasury rates 181 00:08:07,600 --> 00:08:10,120 Speaker 2: being lower. So when you look at the rally we've 182 00:08:10,120 --> 00:08:12,520 Speaker 2: seen over the last couple of months, I mean in 183 00:08:12,520 --> 00:08:14,480 Speaker 2: some instances, some parts of the curve in one hundred 184 00:08:14,520 --> 00:08:17,000 Speaker 2: basis points. And so this all of a sudden makes 185 00:08:17,000 --> 00:08:20,440 Speaker 2: it meaningfully more attractive for these companies to come out. 186 00:08:20,720 --> 00:08:23,040 Speaker 2: So I know our corporate team has been talking about 187 00:08:23,080 --> 00:08:25,800 Speaker 2: it in our meetings this week about just the amount 188 00:08:25,840 --> 00:08:29,480 Speaker 2: of issuance coming in the marketplace. Again, because corporate CFOs 189 00:08:29,560 --> 00:08:32,079 Speaker 2: are smart, they say, hey, it's a good time to 190 00:08:32,320 --> 00:08:33,240 Speaker 2: access the market. 191 00:08:33,240 --> 00:08:34,679 Speaker 3: We don't know how long it lasts. 192 00:08:34,800 --> 00:08:36,800 Speaker 2: Let's go ahead and let's get out into the market 193 00:08:36,840 --> 00:08:39,600 Speaker 2: and do some of our traditional issuance. And so there's 194 00:08:39,640 --> 00:08:42,400 Speaker 2: the ideal ability to affect those trades. But at the 195 00:08:42,400 --> 00:08:44,600 Speaker 2: beginning of the hiking cycle. It was still pretty easy 196 00:08:44,640 --> 00:08:48,559 Speaker 2: as well, because there was this dearth of supply coming 197 00:08:48,800 --> 00:08:51,959 Speaker 2: because effectively, people are saying, oh, here comes the hiking cycle. 198 00:08:52,080 --> 00:08:54,440 Speaker 3: I need to go issue the debt today, right. 199 00:08:54,520 --> 00:08:57,920 Speaker 2: So it's the idea here is is not that you know, 200 00:08:58,000 --> 00:08:59,760 Speaker 2: it's it's ever easier more challenging. 201 00:08:59,800 --> 00:09:00,959 Speaker 3: It's all about liquidity. 202 00:09:01,240 --> 00:09:03,480 Speaker 2: And when you get rate rally or i'm sorry, you 203 00:09:03,480 --> 00:09:07,280 Speaker 2: get asset price rallies, things become easier to execute. 204 00:09:07,400 --> 00:09:08,479 Speaker 3: And what we're seeing. 205 00:09:08,240 --> 00:09:12,040 Speaker 2: Right now is what our credit folks call a grabby market, 206 00:09:12,080 --> 00:09:14,800 Speaker 2: and that's a technical term we use here. Just people 207 00:09:14,800 --> 00:09:17,120 Speaker 2: are looking for bonds. They're grabbing onto anything anything that 208 00:09:17,200 --> 00:09:20,120 Speaker 2: has yield right now. And so you're seeing this especially 209 00:09:20,120 --> 00:09:23,200 Speaker 2: in markets that haven't had supply, something like our commercial 210 00:09:23,200 --> 00:09:27,199 Speaker 2: real estate markets right CMBs, which was very problematic for 211 00:09:27,280 --> 00:09:30,160 Speaker 2: a lot of investors. We're hearing about people trying to 212 00:09:30,200 --> 00:09:33,120 Speaker 2: bid on bonds three four points higher today. And what 213 00:09:33,160 --> 00:09:35,000 Speaker 2: it is is that they're thinking about the end. 214 00:09:34,960 --> 00:09:35,760 Speaker 3: Of the hiking cycle. 215 00:09:35,800 --> 00:09:38,360 Speaker 2: They're thinking that these things are potentially going to start 216 00:09:38,360 --> 00:09:40,560 Speaker 2: to clear better, and so you're starting to see some 217 00:09:40,600 --> 00:09:44,760 Speaker 2: of the activity. But that's where we teach patients and persistence. 218 00:09:44,760 --> 00:09:47,000 Speaker 2: So I have a seasoned team. You don't go chase 219 00:09:47,040 --> 00:09:49,480 Speaker 2: those gravy type of areas, and you make sure you 220 00:09:49,520 --> 00:09:51,240 Speaker 2: have the positioning coming into it. 221 00:09:51,320 --> 00:09:52,920 Speaker 4: A grabby market. I like the way you put that, 222 00:09:53,040 --> 00:09:55,840 Speaker 4: Jeffrey Sherman of Double Line Capital, appreciate your joining us 223 00:09:55,880 --> 00:09:57,000 Speaker 4: and giving us some of your time.