1 00:00:17,800 --> 00:00:20,520 Speaker 1: Hello, and welcome to The Credit Edge, a weekly Marcus podcast. 2 00:00:20,680 --> 00:00:23,759 Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg. 3 00:00:23,480 --> 00:00:26,680 Speaker 2: And I'm Jody Lurry, senior credit analyst at Bloomberg Intelligence, 4 00:00:26,720 --> 00:00:30,200 Speaker 2: covering leisure, lodging, gaming, restaurants, and mental car companies. Today, 5 00:00:30,320 --> 00:00:34,479 Speaker 2: I'm delighted to introduce our fabulous guests Asana Aronov Asana 6 00:00:34,600 --> 00:00:37,880 Speaker 2: Head's Market Strategy for Alternative fixed Income for JP Morgan 7 00:00:37,920 --> 00:00:41,520 Speaker 2: Asset Management. Prior roles include Global Head of Fixed Income 8 00:00:41,600 --> 00:00:44,919 Speaker 2: Management Research at JP Morgan, Private bank risk manager at 9 00:00:44,920 --> 00:00:48,519 Speaker 2: Goldman Sachs Asset Management, and asset allocator positions at Blackrock 10 00:00:48,640 --> 00:00:51,279 Speaker 2: and JP Morgan. She has a long list of incredible 11 00:00:51,280 --> 00:00:55,120 Speaker 2: accomplishments that I could probably spend a whole podcast talking about, 12 00:00:55,120 --> 00:00:57,040 Speaker 2: but the one I want to bring attention to which 13 00:00:57,160 --> 00:00:59,640 Speaker 2: I find the most important, is that she was one 14 00:00:59,640 --> 00:01:02,880 Speaker 2: of our deemed panelists for our twenty twenty four Fixed 15 00:01:02,920 --> 00:01:05,280 Speaker 2: Income Halftime Report event that we held at our one 16 00:01:05,319 --> 00:01:08,120 Speaker 2: twenty Park office last year. That annual event that we 17 00:01:08,160 --> 00:01:11,720 Speaker 2: hold obviously holds halfway through the year, and we talk 18 00:01:11,760 --> 00:01:16,640 Speaker 2: about everything and anything related to credit economics, rates, you 19 00:01:16,760 --> 00:01:19,240 Speaker 2: name it, and Oxana can cover it all, so. 20 00:01:19,160 --> 00:01:20,920 Speaker 1: We'd obviously you'd delight to have you on the show, Oxanna. 21 00:01:20,959 --> 00:01:23,759 Speaker 1: Before we get to the questions, credit markets are looking 22 00:01:23,800 --> 00:01:26,559 Speaker 1: ever more complacent, with junk bonds trading tight as demand 23 00:01:26,600 --> 00:01:29,080 Speaker 1: for yield rises and net new supply of corporate debt 24 00:01:29,120 --> 00:01:32,200 Speaker 1: remains thin. Under the surface, there are signs of stress, though, 25 00:01:32,400 --> 00:01:35,440 Speaker 1: with investors moving to higher quality debt, structured finance and 26 00:01:35,480 --> 00:01:37,880 Speaker 1: sectors that would appear to be less exposed to the 27 00:01:37,959 --> 00:01:42,319 Speaker 1: chaos cause by trade wars and volatile US policymaking. Valuations 28 00:01:42,360 --> 00:01:45,360 Speaker 1: are getting pretty stretched, and it's unclear how safe higher 29 00:01:45,480 --> 00:01:48,680 Speaker 1: rated debt will actually do When markets take another big 30 00:01:48,760 --> 00:01:51,880 Speaker 1: hit and liquidity each rise up, the US economy risks 31 00:01:51,880 --> 00:01:56,040 Speaker 1: slipping into stagflation, which would be potentially catastrophic for borrowers 32 00:01:56,040 --> 00:01:58,520 Speaker 1: with a lot of debt. So, Oxanna, we've been talking 33 00:01:58,520 --> 00:02:00,600 Speaker 1: for years, you and I about the disc connect between 34 00:02:00,640 --> 00:02:04,520 Speaker 1: rising fundamental risk and bullish credit market pricing. You've talked 35 00:02:04,520 --> 00:02:07,400 Speaker 1: about a reckoning to come, but what would the trigger 36 00:02:07,440 --> 00:02:08,440 Speaker 1: be for such a correction? 37 00:02:08,880 --> 00:02:12,560 Speaker 3: Thanks so much for having me always fun chatting with you. 38 00:02:13,560 --> 00:02:16,840 Speaker 3: What would the trigger be for that reckoning? So we 39 00:02:17,440 --> 00:02:20,880 Speaker 3: saw a little bit of it in April, and that 40 00:02:20,960 --> 00:02:25,160 Speaker 3: really came from nothing much at all except a picture 41 00:02:25,200 --> 00:02:29,919 Speaker 3: that the President held held up on Liberation Day, and 42 00:02:29,919 --> 00:02:35,120 Speaker 3: that just tells you how incredibly thin that trigger really is, 43 00:02:35,240 --> 00:02:37,960 Speaker 3: or how incredibly fragile the market is. And I'm not 44 00:02:38,240 --> 00:02:40,959 Speaker 3: saying that from the standpoint of you know, oh, fundamentals 45 00:02:40,960 --> 00:02:45,560 Speaker 3: are terrible. Certainly in investment greade credit they're quite constructive. 46 00:02:46,360 --> 00:02:48,480 Speaker 3: There are plenty of the low investment grade names where 47 00:02:48,480 --> 00:02:51,239 Speaker 3: they're also constructive. The issue is, of course, the very 48 00:02:51,320 --> 00:02:54,320 Speaker 3: very tight spreads. And I always say in fixed income 49 00:02:54,440 --> 00:02:58,839 Speaker 3: it is very easy to identify a top. In equities, 50 00:02:59,280 --> 00:03:04,080 Speaker 3: the markets have repeatedly defied tops and record highs and 51 00:03:04,160 --> 00:03:07,240 Speaker 3: we just don't know. But in fixed income, when spreads 52 00:03:07,240 --> 00:03:11,320 Speaker 3: are at historic tights, the closer they get to zero 53 00:03:11,600 --> 00:03:14,720 Speaker 3: the spreads that the more certainty there is a this 54 00:03:14,880 --> 00:03:17,560 Speaker 3: is a top, you know, in rates, a tenure at 55 00:03:17,560 --> 00:03:20,480 Speaker 3: one percent or fifty base points, that's the top. So 56 00:03:20,520 --> 00:03:24,800 Speaker 3: I think investors would do well to be at least 57 00:03:24,840 --> 00:03:28,480 Speaker 3: aware of that fact because part of the reason why 58 00:03:28,520 --> 00:03:32,800 Speaker 3: we've seen valuations remain resilient has been exactly James, what 59 00:03:32,840 --> 00:03:37,000 Speaker 3: you mentioned, lack of issuance and investors are continuing to 60 00:03:37,080 --> 00:03:38,600 Speaker 3: kind of chase a little bit of you'll, just to 61 00:03:38,600 --> 00:03:41,480 Speaker 3: give you an idea, double B rate of debt, which 62 00:03:41,560 --> 00:03:44,760 Speaker 3: is the highest tranch of junk rate of debt, is 63 00:03:44,800 --> 00:03:47,920 Speaker 3: sitting within about a percent of three month tea builds, 64 00:03:48,560 --> 00:03:51,600 Speaker 3: maybe a little bit more. I mean, it's hit levels, 65 00:03:51,640 --> 00:03:53,760 Speaker 3: you know, over the last few months that are that 66 00:03:53,840 --> 00:03:57,000 Speaker 3: have been tighter than before the Great Financial Crisis. So 67 00:03:57,360 --> 00:04:01,880 Speaker 3: there is a tremendous and lack of compensation for the risk. 68 00:04:02,720 --> 00:04:05,480 Speaker 3: And really it's the demand that's keeping this party going. 69 00:04:06,240 --> 00:04:09,320 Speaker 3: And should that demand go the other way because investors 70 00:04:09,360 --> 00:04:13,080 Speaker 3: feel nervous or something is changing in the geopolitical space 71 00:04:13,200 --> 00:04:16,599 Speaker 3: or physical policy, whatever it is, it doesn't take much 72 00:04:16,640 --> 00:04:19,000 Speaker 3: when things are priced for perfection. And one of the 73 00:04:19,040 --> 00:04:21,800 Speaker 3: things that you know, feel free to stop me with 74 00:04:21,880 --> 00:04:23,799 Speaker 3: a question, but one of the things that we're seeing 75 00:04:24,080 --> 00:04:28,719 Speaker 3: as signs that borrowers are perhaps struggling to make payments 76 00:04:28,920 --> 00:04:32,080 Speaker 3: is the amount of pick, the amount of picks that 77 00:04:32,240 --> 00:04:36,000 Speaker 3: have been used to you know, quote unquote pay interest. 78 00:04:36,200 --> 00:04:40,480 Speaker 3: That number is reaching towards nine percent. Probably is going 79 00:04:40,560 --> 00:04:42,800 Speaker 3: to finish above that this year. We don't know yet, 80 00:04:42,839 --> 00:04:45,320 Speaker 3: of course, but it was as low as you know 81 00:04:45,360 --> 00:04:48,360 Speaker 3: in the force just five years ago. So call about 82 00:04:48,520 --> 00:04:51,080 Speaker 3: you know, talk call it kind of a doubling, I 83 00:04:51,080 --> 00:04:54,200 Speaker 3: guess you could say. So we are seeing that phenomenon 84 00:04:54,200 --> 00:04:57,640 Speaker 3: that companies are finding it hard to get the cash 85 00:04:57,839 --> 00:05:01,520 Speaker 3: and they're resorting to more inventive of paying their interest. 86 00:05:02,120 --> 00:05:05,000 Speaker 2: And I think, Oksanna, what fascinates me is I actually 87 00:05:05,080 --> 00:05:08,719 Speaker 2: rewatched our replay from last year's event, and what you 88 00:05:08,800 --> 00:05:11,839 Speaker 2: said last year still holds. What you just said about 89 00:05:11,880 --> 00:05:15,039 Speaker 2: double B still very much holds. And I think the 90 00:05:15,080 --> 00:05:17,120 Speaker 2: only difference between last year and this year is that 91 00:05:17,120 --> 00:05:19,839 Speaker 2: we're seeing an enhanced version of what we saw last year. 92 00:05:20,200 --> 00:05:22,800 Speaker 2: The conversation is the same, but I think, you know, 93 00:05:22,880 --> 00:05:26,159 Speaker 2: the maybe the volume was tuned up a bit more, 94 00:05:26,960 --> 00:05:28,919 Speaker 2: and maybe that's a reflection of the fact that the 95 00:05:28,960 --> 00:05:31,839 Speaker 2: election has gone and went. We now had a Liberation Day, 96 00:05:32,080 --> 00:05:34,479 Speaker 2: We've now had a lot of things happen over time. 97 00:05:34,760 --> 00:05:36,680 Speaker 2: But I think what struck me is not only the 98 00:05:36,720 --> 00:05:41,080 Speaker 2: conversation about double B and about risk taking or lack 99 00:05:41,120 --> 00:05:45,360 Speaker 2: of reward that you get, but the conversation around inflation. 100 00:05:45,720 --> 00:05:47,839 Speaker 2: So what are you thinking, I mean, where are you 101 00:05:47,920 --> 00:05:51,560 Speaker 2: seeing the most concern when you think about you know, 102 00:05:52,160 --> 00:05:55,760 Speaker 2: high yield taking on more pick related debt, right, so 103 00:05:56,200 --> 00:05:58,599 Speaker 2: they can't actually pay in cash, and then you have, 104 00:05:59,080 --> 00:06:01,120 Speaker 2: you know, inflation issues use on top of that, bubbling 105 00:06:01,160 --> 00:06:04,320 Speaker 2: around the surface. What are you thinking, what are you 106 00:06:04,360 --> 00:06:05,080 Speaker 2: advising people? 107 00:06:05,240 --> 00:06:08,359 Speaker 3: So inflation is a really interesting foe in that it 108 00:06:08,520 --> 00:06:11,919 Speaker 3: impacts a lot of different companies in a variety of 109 00:06:11,960 --> 00:06:15,120 Speaker 3: different ways. When we talk about inflation, the first thing 110 00:06:15,160 --> 00:06:17,240 Speaker 3: that comes to mind is higher rates, which of course 111 00:06:17,320 --> 00:06:20,360 Speaker 3: is problematic for lower rateed credit because these companies tend 112 00:06:20,440 --> 00:06:24,560 Speaker 3: to not have very significant cash streams, right or very 113 00:06:24,760 --> 00:06:28,479 Speaker 3: healthy cash streams, or they rely on financing and that's difficult, 114 00:06:28,520 --> 00:06:31,760 Speaker 3: and that's why we've seen dramatic reduction and issuance. But 115 00:06:31,800 --> 00:06:35,919 Speaker 3: inflation also impacts in a different way, dramatically large investment 116 00:06:35,960 --> 00:06:39,039 Speaker 3: grade companies because their business models are so tied to 117 00:06:39,160 --> 00:06:44,120 Speaker 3: the global economy, and inflation of course, completely reorders that 118 00:06:45,000 --> 00:06:49,320 Speaker 3: global world order, and that has very significant ramifications for 119 00:06:49,400 --> 00:06:52,120 Speaker 3: those companies because a ton of their revenue comes from 120 00:06:52,120 --> 00:06:56,000 Speaker 3: overseas and that is all being totally kind of thrown 121 00:06:56,040 --> 00:06:58,000 Speaker 3: up in the air. So I think when we talk 122 00:06:58,040 --> 00:07:02,120 Speaker 3: about credit investing today, it makes me a little bit 123 00:07:02,200 --> 00:07:06,240 Speaker 3: concerned that there is sort of a stampede in or 124 00:07:06,279 --> 00:07:09,920 Speaker 3: a stamped out mentality when we really should be very 125 00:07:09,960 --> 00:07:14,200 Speaker 3: discerning with respect to all of these different layers. You know, 126 00:07:14,240 --> 00:07:17,800 Speaker 3: the fundamentals, the business model of a company. You know, 127 00:07:17,840 --> 00:07:20,440 Speaker 3: where are the revenues coming from, how much cash do 128 00:07:20,480 --> 00:07:23,000 Speaker 3: they have, what sector are they in? Because some sectors 129 00:07:23,040 --> 00:07:25,520 Speaker 3: are going you know this Jody better than anyone, and 130 00:07:25,600 --> 00:07:27,760 Speaker 3: some types of sectors are going to be significantly more 131 00:07:27,800 --> 00:07:32,520 Speaker 3: impacted than others, like retail, like manufacturing and others, and 132 00:07:33,120 --> 00:07:35,760 Speaker 3: some are going to be perhaps less less because they're 133 00:07:35,840 --> 00:07:39,040 Speaker 3: less dependent on things coming from overseas that are impacted 134 00:07:39,080 --> 00:07:41,760 Speaker 3: by tariffs, et cetera. So there are so many different 135 00:07:41,880 --> 00:07:46,280 Speaker 3: layers to look through, and yet we have kind of 136 00:07:46,280 --> 00:07:50,680 Speaker 3: this over arching phenomenon in the investment industry and the 137 00:07:50,720 --> 00:07:53,400 Speaker 3: investment management industry right now where we're just trying to 138 00:07:53,480 --> 00:07:57,720 Speaker 3: democratize access to all forms of credit, which in itself 139 00:07:57,800 --> 00:08:00,240 Speaker 3: is a good thing. We want to give people the 140 00:08:00,280 --> 00:08:04,360 Speaker 3: opportunity to access different streams of returns and differentiated streams 141 00:08:04,360 --> 00:08:07,040 Speaker 3: of returns. But when I see things like ETFs tied 142 00:08:07,040 --> 00:08:10,520 Speaker 3: to private credit, you know, I was kind of scratching 143 00:08:10,520 --> 00:08:12,640 Speaker 3: my head at the round etf tide to leverage loans, 144 00:08:12,640 --> 00:08:15,280 Speaker 3: and leverage loans have been in the ecosystem much longer, 145 00:08:15,600 --> 00:08:18,640 Speaker 3: and we know what they act like when they're stressed. 146 00:08:18,800 --> 00:08:21,680 Speaker 3: Private credit is not a tested st class. I'm not 147 00:08:21,720 --> 00:08:25,800 Speaker 3: saying it's a bad asset class. They are absolutely constructive 148 00:08:25,840 --> 00:08:28,680 Speaker 3: things and great things to do there. I just wonder 149 00:08:28,800 --> 00:08:33,840 Speaker 3: how much investment tourism exists there, how rigorous is the 150 00:08:33,920 --> 00:08:36,079 Speaker 3: due diligence around all of this stuff, and how much 151 00:08:36,120 --> 00:08:39,040 Speaker 3: do does every investor understand in terms of, you know, 152 00:08:39,120 --> 00:08:42,000 Speaker 3: the price stability they were promised, is it really going 153 00:08:42,040 --> 00:08:45,000 Speaker 3: to hold in a volatile episode? 154 00:08:45,480 --> 00:08:47,960 Speaker 2: And that that market liquidity piece is sort of a 155 00:08:48,040 --> 00:08:51,760 Speaker 2: question that I've been pondering. And you know, even in 156 00:08:51,840 --> 00:08:54,640 Speaker 2: my prior life, you know, something that we looked at was, 157 00:08:55,120 --> 00:08:57,120 Speaker 2: you know, you think about bond ETFs. They're really not 158 00:08:57,240 --> 00:09:00,559 Speaker 2: that old, right, just corporate bond ETFs. So never mindverage loans, 159 00:09:00,559 --> 00:09:04,080 Speaker 2: never mind all these other products that are much less 160 00:09:04,200 --> 00:09:07,760 Speaker 2: liquid underlying, What are you thinking in terms of when 161 00:09:07,800 --> 00:09:12,160 Speaker 2: you're looking at opportunity, when you're looking at diversification, how 162 00:09:12,200 --> 00:09:14,720 Speaker 2: are you thinking about these Because if you just read 163 00:09:14,760 --> 00:09:17,840 Speaker 2: on the sidelines, you know, you could potentially lose out right, 164 00:09:17,880 --> 00:09:20,200 Speaker 2: you could be laiting. We be waiting years before the 165 00:09:20,200 --> 00:09:22,679 Speaker 2: shoe drops. So you know, if I just say I'm 166 00:09:22,679 --> 00:09:24,800 Speaker 2: not going to touch any retail company or if I'm 167 00:09:24,840 --> 00:09:27,640 Speaker 2: not going to touch any manufacturing company, there's definitely you 168 00:09:27,640 --> 00:09:29,520 Speaker 2: don't want to throw the baby out with bath leader. 169 00:09:29,640 --> 00:09:31,960 Speaker 2: So how are you thinking about opportunities? 170 00:09:32,320 --> 00:09:35,120 Speaker 3: So credit investors are if we zoom out, fixed income 171 00:09:35,160 --> 00:09:39,960 Speaker 3: investors really have three issues. Today. You have a market 172 00:09:40,040 --> 00:09:43,640 Speaker 3: that is much more volatile, just broadly the bond market 173 00:09:43,640 --> 00:09:48,000 Speaker 3: than it's been between the Great Financial Crisis and called 174 00:09:48,040 --> 00:09:51,160 Speaker 3: it three years ago. Volatility has gone back to where 175 00:09:51,160 --> 00:09:54,480 Speaker 3: it used to live before central banks have gotten massively involved. 176 00:09:54,480 --> 00:09:56,160 Speaker 3: And this is actually one of the first things we 177 00:09:56,200 --> 00:09:59,199 Speaker 3: show investors when we start talking about the macro backdrop, 178 00:09:59,280 --> 00:10:01,200 Speaker 3: is that volatility back to where it used to live 179 00:10:01,240 --> 00:10:05,560 Speaker 3: before central banks became the kind of institute of the 180 00:10:05,559 --> 00:10:08,800 Speaker 3: central bank. Put if you will. The second issue investors 181 00:10:08,800 --> 00:10:12,120 Speaker 3: have is that everything within fixed income is highly correlated, 182 00:10:12,120 --> 00:10:15,200 Speaker 3: precisely because spreads are so tight. So if you look 183 00:10:15,240 --> 00:10:19,520 Speaker 3: at the correlation between investment grade, high yield, emerging market debt, 184 00:10:19,600 --> 00:10:22,360 Speaker 3: mortgage is kind of everything in fixed income versus treasuries. 185 00:10:22,880 --> 00:10:26,000 Speaker 3: That correlation used to be around zero point five just 186 00:10:26,040 --> 00:10:29,160 Speaker 3: five years ago. It ended twenty twenty four at north 187 00:10:29,160 --> 00:10:32,400 Speaker 3: of point nine, and this year, you know, April was 188 00:10:32,440 --> 00:10:34,480 Speaker 3: a poster child. And this continues to be the case 189 00:10:34,520 --> 00:10:37,640 Speaker 3: that bonds just haven't been offsetting the risk of equities. 190 00:10:37,800 --> 00:10:41,040 Speaker 3: This is a phenomenon that exists when inflation is alive 191 00:10:41,080 --> 00:10:44,720 Speaker 3: and well. And the fact that we've gotten so used 192 00:10:44,720 --> 00:10:48,040 Speaker 3: to sixty forty working so well for over twenty years. 193 00:10:48,200 --> 00:10:51,760 Speaker 3: Few people realize that the sixty forty ecosystem did not 194 00:10:52,040 --> 00:10:56,079 Speaker 3: exist really in any meaningful way prior to the late nineties, 195 00:10:56,120 --> 00:11:01,199 Speaker 3: which is when that stock bond correlation was negative and 196 00:11:01,280 --> 00:11:04,600 Speaker 3: you benefited anytime stocks won down, your bonds went up. 197 00:11:04,840 --> 00:11:07,959 Speaker 3: Prior to that, for decades, stock bond correlation was positive 198 00:11:07,960 --> 00:11:10,520 Speaker 3: and sixty forty was not a thing, or at least 199 00:11:10,520 --> 00:11:13,720 Speaker 3: it was a very kind of limited thing. So that's 200 00:11:14,000 --> 00:11:16,840 Speaker 3: the second big issue that investors have is that lack 201 00:11:16,880 --> 00:11:20,760 Speaker 3: of correlation, so portfolio construction or not lack but high 202 00:11:20,760 --> 00:11:24,400 Speaker 3: correlation between aset classes, So portfolio construction needs to be resought. 203 00:11:25,320 --> 00:11:27,280 Speaker 3: And the third issue is the one you just hit 204 00:11:27,320 --> 00:11:31,520 Speaker 3: on with fixing comingtfs. But just generally, this hits at 205 00:11:31,559 --> 00:11:36,160 Speaker 3: the bigger pitch picture of liquidity liquidity in this market 206 00:11:37,000 --> 00:11:39,640 Speaker 3: from the standpoint of who is going to take this 207 00:11:39,720 --> 00:11:42,360 Speaker 3: position off your hands when you want to sell it. 208 00:11:42,400 --> 00:11:45,080 Speaker 3: This used to be the cell side, and that the 209 00:11:45,120 --> 00:11:48,880 Speaker 3: appetite for risk there has been dramatically reduced post GFC, 210 00:11:48,920 --> 00:11:53,880 Speaker 3: both regulatory means but also just the bank risk appetite. 211 00:11:54,240 --> 00:11:57,920 Speaker 3: And so as a result, the top five corporate bond ETFs, 212 00:11:57,960 --> 00:12:00,960 Speaker 3: for example, you know, you're we all know who they are. 213 00:12:01,280 --> 00:12:02,480 Speaker 3: You know, I'm not going to name names, but we 214 00:12:02,480 --> 00:12:06,160 Speaker 3: know who they are. Their total assets under management are 215 00:12:06,240 --> 00:12:10,200 Speaker 3: several times what the street is inventorying for corporates. So 216 00:12:10,240 --> 00:12:13,080 Speaker 3: what does that mean in practice is that when someone 217 00:12:13,160 --> 00:12:16,000 Speaker 3: wants to sell these ETFs, which are meant to be 218 00:12:16,040 --> 00:12:21,760 Speaker 3: instantaneously liquid, the dealer that you call to unload that 219 00:12:21,800 --> 00:12:24,079 Speaker 3: position is not going to be able to take anything 220 00:12:24,080 --> 00:12:25,959 Speaker 3: off your hands. They're just going to try to find 221 00:12:26,000 --> 00:12:28,760 Speaker 3: the other side for that trade, which creates a bottleneck, 222 00:12:28,800 --> 00:12:32,439 Speaker 3: which creates a very violent price discovery process, and prices 223 00:12:32,520 --> 00:12:35,560 Speaker 3: kind of drop precipitously. So we have a market where 224 00:12:36,400 --> 00:12:39,920 Speaker 3: the fat is papered over this lack of liquidity for 225 00:12:40,000 --> 00:12:42,839 Speaker 3: a long time, but to the extent that they're not now, 226 00:12:42,880 --> 00:12:46,080 Speaker 3: and I seriously doubt that they're going to be the 227 00:12:46,080 --> 00:12:51,000 Speaker 3: buyer less resort for these speculative names like hy udtf's 228 00:12:51,040 --> 00:12:54,120 Speaker 3: the way they were during COVID or high you issuers. Altogether. 229 00:12:54,240 --> 00:12:58,440 Speaker 3: They may support and probably will blue chip employers because 230 00:12:58,440 --> 00:13:02,079 Speaker 3: that affects the overall American economy, But I really doubt 231 00:13:02,080 --> 00:13:06,479 Speaker 3: that Congress will have any appetite for bailing out you know, speculators, 232 00:13:06,480 --> 00:13:09,200 Speaker 3: which is really an investor who is just in the 233 00:13:09,240 --> 00:13:12,160 Speaker 3: markets for the sake of growing their capital. So I 234 00:13:12,200 --> 00:13:15,040 Speaker 3: think investors have to be cognizant of this, And you're right, 235 00:13:15,520 --> 00:13:19,200 Speaker 3: it has been kind of a consistent theme for years, 236 00:13:19,240 --> 00:13:24,680 Speaker 3: similar to how interest rates and the tremendously low yields 237 00:13:25,040 --> 00:13:27,840 Speaker 3: were a consistent theme for many years, and then we 238 00:13:27,880 --> 00:13:31,000 Speaker 3: had twenty twenty two and people still haven't been able 239 00:13:31,040 --> 00:13:34,000 Speaker 3: to dig themselves out of that hole. The aggregate now, 240 00:13:34,040 --> 00:13:37,079 Speaker 3: the Bloomberg aggregate is still down almost you know, four 241 00:13:37,120 --> 00:13:39,040 Speaker 3: to five percent depending in the year over the five 242 00:13:39,120 --> 00:13:45,440 Speaker 3: year period, and so these are real losses in portfolios. 243 00:13:45,480 --> 00:13:48,840 Speaker 3: So far, at least the portfolio haven't been able to 244 00:13:48,840 --> 00:13:51,760 Speaker 3: dig themselves out of that hole. So these things may 245 00:13:51,840 --> 00:13:54,320 Speaker 3: take a while to unravel, but I do think they're 246 00:13:54,360 --> 00:13:57,760 Speaker 3: important to be cognizant enough because they have lasting, long 247 00:13:57,840 --> 00:13:58,960 Speaker 3: term consequences. 248 00:14:00,040 --> 00:14:02,800 Speaker 1: About something you said earlier, I said about the pick, 249 00:14:03,080 --> 00:14:06,080 Speaker 1: which I find interesting payment in kind. The company cannot 250 00:14:06,120 --> 00:14:08,800 Speaker 1: afford to pay back the debt, so they just give 251 00:14:08,840 --> 00:14:12,040 Speaker 1: you more debt. Obviously that's problematic. But you mentioned a 252 00:14:12,120 --> 00:14:14,800 Speaker 1: number nine percent versus four percent? Can you unpack that 253 00:14:14,840 --> 00:14:17,000 Speaker 1: a bit? I mean nine percent of what of what period? 254 00:14:17,040 --> 00:14:19,200 Speaker 1: And when was it four percent? And what's going on there? 255 00:14:19,360 --> 00:14:19,800 Speaker 2: Yeah? 256 00:14:19,880 --> 00:14:23,120 Speaker 3: So look, a pick can be a constructive thing. Sometimes 257 00:14:23,200 --> 00:14:27,520 Speaker 3: a pick is meant to finance a research effort that 258 00:14:27,600 --> 00:14:30,000 Speaker 3: a company is undertaking, right, and so they don't want 259 00:14:30,000 --> 00:14:31,680 Speaker 3: to pay cash. They want to take the cash and 260 00:14:32,640 --> 00:14:35,800 Speaker 3: use it for something that actually invests back into their 261 00:14:35,840 --> 00:14:40,240 Speaker 3: business and allows them to create a new revenue stream. Perhaps, 262 00:14:40,600 --> 00:14:43,800 Speaker 3: but more often than not we see picks too, exactly 263 00:14:43,800 --> 00:14:46,400 Speaker 3: as you said, because the company does not have a 264 00:14:46,440 --> 00:14:49,040 Speaker 3: cash stream, and so they just increase their debt load. 265 00:14:49,720 --> 00:14:52,000 Speaker 3: And when we say eight to nine percent picks, that's 266 00:14:52,400 --> 00:14:57,440 Speaker 3: a percentage out of the overall interest payable in the 267 00:14:58,240 --> 00:15:02,560 Speaker 3: below investment grade space currently so it's not insignificant. 268 00:15:02,800 --> 00:15:04,640 Speaker 1: It's nine percent. Now, when was it four percent? 269 00:15:05,080 --> 00:15:08,680 Speaker 3: And so about twenty twenty we had it somewhere between 270 00:15:08,720 --> 00:15:11,400 Speaker 3: four and five percent, And so you know, nine percent 271 00:15:11,520 --> 00:15:15,880 Speaker 3: is like every tenth eleventh company. So it's not insignificant. 272 00:15:15,920 --> 00:15:18,520 Speaker 1: Is it across the board? Is it isolated in certain sectors? 273 00:15:18,880 --> 00:15:23,680 Speaker 3: It is more prevalent in sectors that have had a 274 00:15:23,800 --> 00:15:27,160 Speaker 3: harder time, you know, like retail, like you know, but 275 00:15:27,320 --> 00:15:30,560 Speaker 3: it's it's definitely not limited. I can't say that it 276 00:15:30,600 --> 00:15:34,440 Speaker 3: is specific to only these three. It's definitely used pretty 277 00:15:34,800 --> 00:15:35,480 Speaker 3: pretty widely. 278 00:15:35,920 --> 00:15:39,200 Speaker 2: But would you say that that is a tell for 279 00:15:39,600 --> 00:15:44,920 Speaker 2: a possible uptick in restructurings and bankruptcies, because oftentimes you 280 00:15:44,960 --> 00:15:50,040 Speaker 2: see picks as a precursor or a sort of restructuring component, right, 281 00:15:50,680 --> 00:15:53,520 Speaker 2: And what we've seen in recent years is because private 282 00:15:53,520 --> 00:15:56,240 Speaker 2: credit has gotten big, as you talked about earlier, is 283 00:15:56,280 --> 00:15:59,640 Speaker 2: that companies now have these alternative streams to get cash, right, 284 00:16:00,080 --> 00:16:03,040 Speaker 2: And so if you're thinking about it from that context, 285 00:16:03,160 --> 00:16:06,280 Speaker 2: I mean, is this either sort of a back door 286 00:16:06,480 --> 00:16:10,680 Speaker 2: restructuring situation in which we're already watching happen, or do 287 00:16:10,720 --> 00:16:12,680 Speaker 2: you think it's more of a precursor. 288 00:16:12,720 --> 00:16:15,560 Speaker 3: So it's probably both because exactly as you said, we 289 00:16:15,680 --> 00:16:18,680 Speaker 3: are seeing so in terms of like just outright defaults, 290 00:16:18,760 --> 00:16:23,440 Speaker 3: right defaults have remained subdued, and you know, in loans 291 00:16:23,480 --> 00:16:27,240 Speaker 3: they're probably going to end up somewhere between four and 292 00:16:27,280 --> 00:16:29,120 Speaker 3: a half and six percent. That seems to be kind 293 00:16:29,120 --> 00:16:32,600 Speaker 3: of the consensus on the street. In bonds, they're actually 294 00:16:32,720 --> 00:16:35,680 Speaker 3: slightly lower, believe it or not, because loans have been 295 00:16:35,720 --> 00:16:37,360 Speaker 3: not to go off on a tangent, but there's been 296 00:16:37,440 --> 00:16:41,160 Speaker 3: really a deterioration in the quality of loans, and we 297 00:16:41,160 --> 00:16:44,720 Speaker 3: can talk about that separately. But what we see and 298 00:16:44,800 --> 00:16:47,440 Speaker 3: kind of in terms of what picks, in the use 299 00:16:47,480 --> 00:16:50,320 Speaker 3: of picks, what does it mean when we look at 300 00:16:50,360 --> 00:16:54,920 Speaker 3: the number of restructurings, there is a significant uptake in those. 301 00:16:55,000 --> 00:16:59,000 Speaker 3: And so if there weren't these alternative ways to refinance, 302 00:16:59,040 --> 00:17:01,480 Speaker 3: so like private credit that absolutely does come in and 303 00:17:01,560 --> 00:17:05,639 Speaker 3: take public companies out and allows them in a different 304 00:17:05,640 --> 00:17:08,200 Speaker 3: way to refine us, we would see higher default rates 305 00:17:08,200 --> 00:17:11,399 Speaker 3: for sure. So I think the use of pigs is 306 00:17:11,560 --> 00:17:18,879 Speaker 3: both a symptom of an evolving credit space and also 307 00:17:18,960 --> 00:17:21,280 Speaker 3: a precursor that, look, there are going to be companies 308 00:17:21,320 --> 00:17:24,600 Speaker 3: whose business models are just not interesting necessarily for private 309 00:17:24,640 --> 00:17:28,480 Speaker 3: credit by some estimates. You know, we had a number 310 00:17:28,480 --> 00:17:30,639 Speaker 3: of companies who shouldn't have made it through COVID who 311 00:17:30,680 --> 00:17:33,840 Speaker 3: are still around. Last year we had a reprieve and 312 00:17:34,040 --> 00:17:36,360 Speaker 3: in the interest rate environment, they were able to refinance 313 00:17:36,400 --> 00:17:38,800 Speaker 3: yet again and kind of push things down the road. 314 00:17:39,040 --> 00:17:41,240 Speaker 3: But to your earlier question, what is going to be 315 00:17:41,280 --> 00:17:44,320 Speaker 3: the catalyst, I think the catalyst is just the passing 316 00:17:44,359 --> 00:17:48,600 Speaker 3: of time. As the settles in that look rates are 317 00:17:48,720 --> 00:17:52,000 Speaker 3: higher for longer, the r star for this economy, that 318 00:17:52,080 --> 00:17:55,399 Speaker 3: sort of neutral rate is higher. It's trending, you know, 319 00:17:55,440 --> 00:17:58,000 Speaker 3: probably three percent, even the fedal and estimate of it 320 00:17:58,000 --> 00:18:02,600 Speaker 3: has been climbing up. This continues to be a reality 321 00:18:03,000 --> 00:18:05,960 Speaker 3: month after month and maybe even year after year. Quarter 322 00:18:06,000 --> 00:18:08,320 Speaker 3: after a quarter. It's the passage of time that's going 323 00:18:08,400 --> 00:18:12,320 Speaker 3: to keep driving that default rate up. And you're right 324 00:18:12,359 --> 00:18:16,560 Speaker 3: now you're still seeing more rising stars than falling angels, 325 00:18:16,600 --> 00:18:20,440 Speaker 3: meaning more upgrades than downgrades. But that changes very quickly 326 00:18:20,520 --> 00:18:23,280 Speaker 3: the moment kind of the mood in the market changes, 327 00:18:23,600 --> 00:18:26,600 Speaker 3: the ratings and agencies follow, and so I wouldn't really 328 00:18:26,640 --> 00:18:31,320 Speaker 3: use that as a barometer. But the catalyst is always 329 00:18:31,320 --> 00:18:33,800 Speaker 3: when the catalyst is something when we look back. It's 330 00:18:33,840 --> 00:18:36,600 Speaker 3: always like, well, of course you know this happened, but 331 00:18:36,880 --> 00:18:40,840 Speaker 3: it's never easy to forecast it. And I always say, 332 00:18:40,880 --> 00:18:42,680 Speaker 3: the only thing we can know is where we are 333 00:18:42,760 --> 00:18:46,320 Speaker 3: now and assess it very clearly. And where we are 334 00:18:46,359 --> 00:18:50,360 Speaker 3: now is a very very tight spread environment where you're 335 00:18:50,440 --> 00:18:53,280 Speaker 3: not compensated for the risk that is under the hood 336 00:18:53,400 --> 00:18:55,880 Speaker 3: of a lot of these companies. You have to be very, 337 00:18:56,000 --> 00:18:57,560 Speaker 3: very selective in terms of price. 338 00:18:57,800 --> 00:18:59,359 Speaker 1: A lot of these companies had been kind of holding 339 00:18:59,359 --> 00:19:02,080 Speaker 1: that breath, wasting for rates to come down significantly. I mean, 340 00:19:02,119 --> 00:19:04,240 Speaker 1: we started this year expecting, you know, over one hundred 341 00:19:04,240 --> 00:19:04,800 Speaker 1: bases points in. 342 00:19:04,840 --> 00:19:07,480 Speaker 3: Costs, then every year for a number of years. 343 00:19:06,880 --> 00:19:10,480 Speaker 1: That's maybe there'll be no cuts this year. But then 344 00:19:10,600 --> 00:19:12,399 Speaker 1: you know, we have this conversation often with this sort 345 00:19:12,440 --> 00:19:13,840 Speaker 1: of segment of the market that we kind of know 346 00:19:13,920 --> 00:19:15,800 Speaker 1: is going to blow up. It's triple c's. Everyone knows 347 00:19:15,840 --> 00:19:17,960 Speaker 1: where it is, where the danger lies. They stay away 348 00:19:17,960 --> 00:19:21,080 Speaker 1: from it, and there's assumption that there will be no contagion, 349 00:19:21,119 --> 00:19:23,560 Speaker 1: that there'll be no ripple effect across credit. Is that 350 00:19:23,920 --> 00:19:25,440 Speaker 1: is that safe to say that you know you can 351 00:19:25,480 --> 00:19:27,359 Speaker 1: just get rid of you know, I think some people 352 00:19:27,359 --> 00:19:29,600 Speaker 1: have talked about hundreds of billions of dollars worth of 353 00:19:29,960 --> 00:19:32,320 Speaker 1: debt blowing up, but everything else will be fine. What 354 00:19:32,400 --> 00:19:33,239 Speaker 1: do you what do you make of that? 355 00:19:33,760 --> 00:19:36,880 Speaker 3: You see me shaking my head right now. So high 356 00:19:36,920 --> 00:19:40,679 Speaker 3: yield is not the sort of ass of class where 357 00:19:41,000 --> 00:19:45,400 Speaker 3: you can have a part of the market experience that 358 00:19:45,480 --> 00:19:49,119 Speaker 3: kind of seismic shift or dislocation and the rest of 359 00:19:49,160 --> 00:19:51,560 Speaker 3: the market kind of yawning through. And I always bring 360 00:19:51,680 --> 00:19:55,960 Speaker 3: up twenty fifteen energy crisis as an example, because you 361 00:19:56,119 --> 00:20:00,399 Speaker 3: had legitimate fundamental issues in that space, but you didn't 362 00:20:00,440 --> 00:20:03,560 Speaker 3: have fundamental issues in leisure, in gaming and lodging, in 363 00:20:03,560 --> 00:20:06,320 Speaker 3: healthcare and technology and all these other sectors. But everything 364 00:20:06,359 --> 00:20:09,320 Speaker 3: went to nearly one thousand over nine hundred over because 365 00:20:09,359 --> 00:20:12,199 Speaker 3: you had stress in this one place. And again, you know, 366 00:20:12,280 --> 00:20:14,800 Speaker 3: talking about the fact that so much of this industry 367 00:20:14,800 --> 00:20:18,960 Speaker 3: has been etfized if that's wormed, and so much of 368 00:20:19,000 --> 00:20:23,440 Speaker 3: it has been investors just chasing yield. When something goes wrong, 369 00:20:23,520 --> 00:20:25,760 Speaker 3: there is a big kind of percentage that's like, all right, 370 00:20:25,960 --> 00:20:28,000 Speaker 3: I'm out. I don't really know what's going on here, 371 00:20:28,000 --> 00:20:29,840 Speaker 3: but I don't feel good about this, and I'm out. 372 00:20:30,160 --> 00:20:33,520 Speaker 3: And that, you know, selling begets selling to my earlier 373 00:20:33,520 --> 00:20:38,520 Speaker 3: point about lack of market makers with balance sheet capability 374 00:20:38,600 --> 00:20:43,359 Speaker 3: to be a stabilizing mechanism in the market. So liquidity 375 00:20:43,400 --> 00:20:46,240 Speaker 3: has completely shifted to the buy side, to the prior 376 00:20:46,280 --> 00:20:48,760 Speaker 3: credit to teams like my team, to the buyside. But 377 00:20:49,000 --> 00:20:52,080 Speaker 3: the buy side has investment committees, it has to sell 378 00:20:52,080 --> 00:20:55,080 Speaker 3: something to buy something. It's just not as efficient a 379 00:20:55,119 --> 00:20:59,280 Speaker 3: mechanism at you know, being a cushioning mechanism for a 380 00:20:59,320 --> 00:21:02,040 Speaker 3: market that's in stress. So I think, you know, it's 381 00:21:02,040 --> 00:21:04,359 Speaker 3: a long winded way to address the question, but I 382 00:21:04,359 --> 00:21:08,040 Speaker 3: think there's just a lot of factors at play that 383 00:21:08,160 --> 00:21:12,280 Speaker 3: are being discounted now that can make for volatility that 384 00:21:12,480 --> 00:21:16,040 Speaker 3: engulfs the entire sector, even if the issue only really 385 00:21:16,080 --> 00:21:17,879 Speaker 3: sits within one portion of it. 386 00:21:18,359 --> 00:21:22,280 Speaker 2: So then if you're saying that there's potential for some 387 00:21:22,320 --> 00:21:26,080 Speaker 2: sort of high contagion even if it's not necessarily warranted. Right, So, 388 00:21:26,200 --> 00:21:28,399 Speaker 2: say we have a massive self and retail and all 389 00:21:28,400 --> 00:21:31,440 Speaker 2: the retail companies go billy up because of tariffs and 390 00:21:31,480 --> 00:21:35,080 Speaker 2: manufacturing and supply chain breakdown, and you know, people not 391 00:21:35,119 --> 00:21:38,560 Speaker 2: wanting to buy anything because it's too expensive, but everywhere 392 00:21:38,560 --> 00:21:41,520 Speaker 2: else is fine. Is it safe to say then that 393 00:21:41,680 --> 00:21:44,400 Speaker 2: investment grade looks good because the problem with investment grade 394 00:21:44,440 --> 00:21:47,040 Speaker 2: is it's just so tight right now right where is 395 00:21:47,040 --> 00:21:49,520 Speaker 2: it safe? Where's it both safe to go but also 396 00:21:49,640 --> 00:21:51,960 Speaker 2: somewhere that's actually going to give you some kind of value. 397 00:21:52,160 --> 00:21:55,200 Speaker 3: So you're really hitting on a point that that deals 398 00:21:55,200 --> 00:21:59,920 Speaker 3: with portfolio construction, because you can't really Given my comment 399 00:22:00,160 --> 00:22:04,360 Speaker 3: around high correlation across sectors and lack of liquidity providers, 400 00:22:04,480 --> 00:22:08,160 Speaker 3: right and the fact that contagion tends to spread, it's 401 00:22:08,200 --> 00:22:10,200 Speaker 3: really hard to say that, you know, if I buy 402 00:22:10,280 --> 00:22:12,640 Speaker 3: these names, I'm going to be okay, Yes, you might 403 00:22:12,640 --> 00:22:14,399 Speaker 3: be okay in the long run. Like one of them, 404 00:22:14,440 --> 00:22:16,040 Speaker 3: I'm going to often go off on a tangent a 405 00:22:16,040 --> 00:22:18,760 Speaker 3: little bit here, like Colo. Triple A colos have been 406 00:22:18,800 --> 00:22:21,560 Speaker 3: all the rage. I'm not even sure that we have 407 00:22:22,680 --> 00:22:25,359 Speaker 3: from a market value standpoint, the amount of triple A 408 00:22:25,480 --> 00:22:29,440 Speaker 3: colos that are like supposedly in all the funds right 409 00:22:29,480 --> 00:22:32,600 Speaker 3: now out there. But and the pitch is often you know, 410 00:22:32,600 --> 00:22:34,920 Speaker 3: triple A colos were great in two thousand and eight. 411 00:22:34,960 --> 00:22:37,440 Speaker 3: They were whole. They did not you know default, this 412 00:22:37,480 --> 00:22:39,840 Speaker 3: is true, but they weren't down twenty to twenty five percent. 413 00:22:39,880 --> 00:22:42,679 Speaker 3: Do you have the appetite or the risk ability to 414 00:22:42,720 --> 00:22:48,720 Speaker 3: take that. So similar here you cannot kind of isolate 415 00:22:48,800 --> 00:22:52,520 Speaker 3: yourself from the experience of the volatility. But it really 416 00:22:52,560 --> 00:22:56,199 Speaker 3: speaks to the portfolio construction a bigger conversation about and 417 00:22:56,200 --> 00:22:58,439 Speaker 3: this is kind of how we think about risk. Is 418 00:22:58,720 --> 00:23:01,800 Speaker 3: okay if I and I don't mean to point to 419 00:23:01,840 --> 00:23:03,879 Speaker 3: paint the sort of doom and gloom picture. Right, we 420 00:23:04,040 --> 00:23:07,080 Speaker 3: are taking risk, but we're doing it in a way 421 00:23:07,119 --> 00:23:10,240 Speaker 3: where we're saying, okay, if I'm taking credit risk. Over here, 422 00:23:11,160 --> 00:23:15,760 Speaker 3: credit protection is incredibly cheap today, because, as you said, 423 00:23:15,800 --> 00:23:21,119 Speaker 3: investment grade is so tight. Credit protection is incredibly inexpensive. 424 00:23:21,200 --> 00:23:24,160 Speaker 3: And it is a fixed cost. Unlike with stocks, where 425 00:23:24,240 --> 00:23:25,960 Speaker 3: if you go short of stock you have to be right, 426 00:23:26,040 --> 00:23:28,560 Speaker 3: you have to be right quickly. With bonds, it's kind 427 00:23:28,600 --> 00:23:32,560 Speaker 3: of a fixed cost because you are receiving floating paying 428 00:23:32,640 --> 00:23:36,320 Speaker 3: fixed right, So if the credit market does dislocate, you 429 00:23:36,400 --> 00:23:38,639 Speaker 3: benefit from that. If it doesn't, you just have a 430 00:23:38,640 --> 00:23:41,640 Speaker 3: fixed cost. And so and that fixed cost is very 431 00:23:41,680 --> 00:23:45,960 Speaker 3: low today. So compliment your credit exposure. Yes, you're giving 432 00:23:46,040 --> 00:23:48,160 Speaker 3: up a little bit, you're not giving up a lot. 433 00:23:48,800 --> 00:23:51,399 Speaker 3: And what it does is, should there be volatility, it 434 00:23:51,480 --> 00:23:54,600 Speaker 3: allows you to not lose your head, but be very 435 00:23:54,640 --> 00:23:57,240 Speaker 3: methodical about what am I going to do now? Where 436 00:23:57,359 --> 00:23:59,439 Speaker 3: is the pricing more interesting, Where am I going to 437 00:23:59,440 --> 00:24:02,280 Speaker 3: start putting my money to work, et cetera. So I 438 00:24:02,320 --> 00:24:05,560 Speaker 3: think it speaks to a broader portfolio construction process. When 439 00:24:05,560 --> 00:24:08,960 Speaker 3: we talk about, you know, alternatives, I don't think it's 440 00:24:09,000 --> 00:24:13,399 Speaker 3: a conversation just about you know, exotic instruments and shortening 441 00:24:13,640 --> 00:24:15,840 Speaker 3: and all these things. Like, yes, that has a room 442 00:24:16,200 --> 00:24:18,960 Speaker 3: and a role to play, but it's also a conversation 443 00:24:19,000 --> 00:24:21,240 Speaker 3: about portfolio construction. And in fixed income, I think the 444 00:24:21,280 --> 00:24:26,640 Speaker 3: portfolio construction conversation has been entirely focused on a market 445 00:24:26,760 --> 00:24:30,600 Speaker 3: risk driven benchmark like the aggregate and replicating it and 446 00:24:30,640 --> 00:24:33,640 Speaker 3: you know, maybe sprinkling in a little bit more risk 447 00:24:33,800 --> 00:24:38,280 Speaker 3: to have some additional yield. But really, if you are 448 00:24:38,320 --> 00:24:40,639 Speaker 3: a fixed income investor, now, if you are a private 449 00:24:40,720 --> 00:24:43,359 Speaker 3: credit investor or high yield investor, that comes with specific 450 00:24:43,480 --> 00:24:46,399 Speaker 3: risk return profiles, and that's a different thing. But if 451 00:24:46,400 --> 00:24:49,880 Speaker 3: we're talking about a core type allocation, right the anchor 452 00:24:49,920 --> 00:24:54,400 Speaker 3: of your portfolio, the ballast in your portfolio, that has 453 00:24:54,480 --> 00:24:57,960 Speaker 3: to really be all about capital preservation first and foremost, 454 00:24:58,680 --> 00:25:01,359 Speaker 3: and capital preservation today the only part of the market 455 00:25:01,440 --> 00:25:05,760 Speaker 3: that offers that is liquidity, but none of the investment 456 00:25:05,840 --> 00:25:07,960 Speaker 3: process on the processes on the street. And I say 457 00:25:08,000 --> 00:25:11,000 Speaker 3: this as a former due diligence analyst, none of them 458 00:25:11,080 --> 00:25:14,920 Speaker 3: or very few of them start with liquidity and then 459 00:25:15,080 --> 00:25:17,960 Speaker 3: helicoptering out of there into pairs of the market where 460 00:25:17,960 --> 00:25:21,080 Speaker 3: there is opportunity. That's how my team thinks about risk 461 00:25:21,359 --> 00:25:23,840 Speaker 3: in fix income. It's the risk of losing a single dollar. 462 00:25:23,960 --> 00:25:26,399 Speaker 3: It's not the risk of you know, I'm going to 463 00:25:26,400 --> 00:25:28,880 Speaker 3: be down ten percent. My benchmarker's down thirteen percent. I'm 464 00:25:28,880 --> 00:25:31,720 Speaker 3: a top quartel manager. You know in twenty twenty two 465 00:25:32,280 --> 00:25:34,560 Speaker 3: that would have been a top quartal manager. That's a 466 00:25:34,680 --> 00:25:38,920 Speaker 3: hollow victory for investors. So I think the entire conversation 467 00:25:38,960 --> 00:25:42,480 Speaker 3: around portfolio construction in fix income has to really evolve 468 00:25:42,800 --> 00:25:46,160 Speaker 3: to include differentiated sources of return like what we're talking 469 00:25:46,200 --> 00:25:49,879 Speaker 3: about here, but also to think differently about what is 470 00:25:49,920 --> 00:25:52,560 Speaker 3: the neutral point for risk. And for us, the neutral 471 00:25:52,560 --> 00:25:55,280 Speaker 3: point for risk is liquidity, because that is the only 472 00:25:55,359 --> 00:25:57,439 Speaker 3: part of the market today, the only part of the 473 00:25:57,440 --> 00:26:01,320 Speaker 3: curve today where you truly have capital preservation, because even 474 00:26:01,359 --> 00:26:04,520 Speaker 3: treasuries have become so much more volatile and will continue 475 00:26:04,560 --> 00:26:07,600 Speaker 3: to be that. You can't really rely on that as 476 00:26:07,800 --> 00:26:12,000 Speaker 3: a constant sort of source of liquidity for whenever the 477 00:26:12,040 --> 00:26:14,160 Speaker 3: market moves in a direction that you want to take 478 00:26:14,160 --> 00:26:14,679 Speaker 3: advantage of. 479 00:26:14,920 --> 00:26:16,639 Speaker 2: So then how much in cash should we hold? 480 00:26:16,880 --> 00:26:21,480 Speaker 3: So that is a very personal question for every investor. 481 00:26:21,520 --> 00:26:24,000 Speaker 3: It depends on keep it all under the mattress. No, 482 00:26:24,119 --> 00:26:31,840 Speaker 3: definitely not. It depends and cash. Remember, there are different flavors. 483 00:26:31,840 --> 00:26:35,440 Speaker 3: There are ultra short strategies, right, There are different ways 484 00:26:35,440 --> 00:26:37,760 Speaker 3: to play that you know. For example, we really like 485 00:26:37,840 --> 00:26:41,520 Speaker 3: the investment grade corporate floater space. It gives you a 486 00:26:41,720 --> 00:26:45,239 Speaker 3: better yield than cash. It gives you better yield than 487 00:26:45,320 --> 00:26:51,320 Speaker 3: fixed corporate floaters sorry fix corporates, and better quality double 488 00:26:51,359 --> 00:26:53,760 Speaker 3: A plus. So you are in a fairly safe part 489 00:26:53,800 --> 00:26:56,480 Speaker 3: of the market. You're clipping a pretty attractive coupon. Yes, 490 00:26:56,520 --> 00:26:59,000 Speaker 3: you have the risk of that floating feature, but if 491 00:26:59,000 --> 00:27:01,200 Speaker 3: your view, as ours is that we are in a 492 00:27:01,359 --> 00:27:04,920 Speaker 3: higher for a longer environment, then that's a great place 493 00:27:04,960 --> 00:27:08,680 Speaker 3: to be. So it's not a cash equivalent, I would 494 00:27:08,720 --> 00:27:10,520 Speaker 3: never say that it is, but it is definitely a 495 00:27:10,520 --> 00:27:13,760 Speaker 3: pretty safe place to be. And so and it still 496 00:27:13,760 --> 00:27:17,440 Speaker 3: allows you that optionality to helicopter into other parts of 497 00:27:17,440 --> 00:27:17,879 Speaker 3: the market. 498 00:27:18,160 --> 00:27:20,760 Speaker 1: The flip side of this kind of bearish view that 499 00:27:20,800 --> 00:27:22,520 Speaker 1: you might take on the market is that every dip 500 00:27:22,520 --> 00:27:24,600 Speaker 1: has been bought very very quickly, and it never lasts. 501 00:27:24,640 --> 00:27:27,800 Speaker 1: And you know, you get rewarded extremely well for just 502 00:27:28,000 --> 00:27:31,120 Speaker 1: buying that dip and piling in and naps back and 503 00:27:31,400 --> 00:27:33,359 Speaker 1: you're a winner. So what do you do with that? 504 00:27:33,400 --> 00:27:38,439 Speaker 1: I mean, way, buy the dip. There's no kind of 505 00:27:38,680 --> 00:27:43,000 Speaker 1: short view that there would work in credit despite the fundamentals. 506 00:27:43,080 --> 00:27:45,760 Speaker 1: It just seems that the market just keeps going up. 507 00:27:46,080 --> 00:27:48,399 Speaker 1: And there's another assumption. You mentioned the FED, you know, 508 00:27:48,480 --> 00:27:50,480 Speaker 1: not coming in and buying, but there is an assumption 509 00:27:50,560 --> 00:27:53,399 Speaker 1: that the government will bail you out in the end, 510 00:27:53,520 --> 00:27:56,280 Speaker 1: you know, the Vessent or Luttnek or Trump, someone will 511 00:27:56,680 --> 00:27:58,280 Speaker 1: be there to hold your hand if it all goes 512 00:27:58,560 --> 00:28:02,359 Speaker 1: rotten in the bond market. How much stock should we 513 00:28:02,400 --> 00:28:04,359 Speaker 1: hold that in that views, you think? 514 00:28:04,720 --> 00:28:08,840 Speaker 3: So to address the first part of that, that's why 515 00:28:08,840 --> 00:28:11,080 Speaker 3: I say, you know, we are active and we are 516 00:28:11,119 --> 00:28:13,040 Speaker 3: taking risks precisely for the reason that you say, you 517 00:28:13,040 --> 00:28:15,160 Speaker 3: can't just kind of sit around a way forever. There 518 00:28:15,200 --> 00:28:17,720 Speaker 3: are things to do. There are interesting things in different 519 00:28:17,720 --> 00:28:20,320 Speaker 3: parts of the market. April was a very volatile period 520 00:28:20,400 --> 00:28:23,199 Speaker 3: and we absolutely bought the dip across a number of 521 00:28:23,200 --> 00:28:25,960 Speaker 3: different parts of the market, including around the edges of 522 00:28:26,000 --> 00:28:29,080 Speaker 3: fixed income with things like converts and closed end funds. Right, 523 00:28:29,119 --> 00:28:32,320 Speaker 3: So it's a very vibrant marketplace in terms of you know, 524 00:28:32,359 --> 00:28:36,200 Speaker 3: it's evolved into a lot of different interesting kind of pockets. 525 00:28:37,080 --> 00:28:40,240 Speaker 3: So that is definitely there is an agility. I guess 526 00:28:40,240 --> 00:28:42,000 Speaker 3: it is what I should say that you should bring 527 00:28:42,120 --> 00:28:45,160 Speaker 3: as a as a manager to operating in this market 528 00:28:45,720 --> 00:28:50,720 Speaker 3: in a way that perhaps was less relevant in prior decades. Right, 529 00:28:50,800 --> 00:28:53,680 Speaker 3: So you used to be able to take weeks and 530 00:28:53,760 --> 00:28:56,440 Speaker 3: months to kind of allocate and that, and these things 531 00:28:56,480 --> 00:28:58,560 Speaker 3: have been a lot more fast and furious. Not to 532 00:28:58,600 --> 00:29:01,400 Speaker 3: say that this is a new kind of paradigm, because 533 00:29:01,440 --> 00:29:03,760 Speaker 3: then that speaks to the second part of your question. 534 00:29:04,400 --> 00:29:09,560 Speaker 3: Does the government have the ability to rescue every investor? Yes, 535 00:29:09,600 --> 00:29:12,000 Speaker 3: absolutely they do. For now, we're still if you had 536 00:29:12,080 --> 00:29:14,200 Speaker 3: currency of the world, and we can still continue to print, 537 00:29:14,200 --> 00:29:17,920 Speaker 3: and that seems to be not working you know as well, 538 00:29:17,960 --> 00:29:21,880 Speaker 3: maybe but still working to some extent. I doubt there's 539 00:29:21,920 --> 00:29:24,880 Speaker 3: going to be a lot of appetite on the Hill 540 00:29:25,040 --> 00:29:29,600 Speaker 3: to really bail out investors in some of these more 541 00:29:29,600 --> 00:29:32,760 Speaker 3: speculative parts of the market, like private credit is associated 542 00:29:32,840 --> 00:29:37,280 Speaker 3: with you know, wealthy qualified purchasers, et cetera. And I 543 00:29:37,400 --> 00:29:40,880 Speaker 3: just don't think that anyone is coming for that part 544 00:29:40,960 --> 00:29:43,320 Speaker 3: of the market. And think about what happens, right, So 545 00:29:43,320 --> 00:29:45,840 Speaker 3: if these people can't get their money out, then they're 546 00:29:45,880 --> 00:29:48,440 Speaker 3: trying to liquidate the things they can liquidate, which are 547 00:29:48,600 --> 00:29:51,760 Speaker 3: the public markets, and then that stress always spills out 548 00:29:51,800 --> 00:29:54,120 Speaker 3: into other parts of the market. So again I'm not 549 00:29:54,120 --> 00:29:56,240 Speaker 3: trying to paint a gloom and doom picture. I'm just 550 00:29:56,360 --> 00:30:02,080 Speaker 3: sort of illuminating the way that markets function beyond just oh, 551 00:30:02,120 --> 00:30:06,080 Speaker 3: fundamentals are good, therefore everything is great. But if the 552 00:30:06,120 --> 00:30:10,360 Speaker 3: fundamentals are fully priced in, then you'll be able to 553 00:30:10,360 --> 00:30:13,840 Speaker 3: get your coupon. Maybe if anything goes wrong, then you know, 554 00:30:13,880 --> 00:30:16,479 Speaker 3: the entire investment cases come apart. So you always have 555 00:30:16,560 --> 00:30:18,840 Speaker 3: to think about what if I am wrong? And there 556 00:30:18,840 --> 00:30:21,440 Speaker 3: are many things that can go wrong today if you 557 00:30:21,920 --> 00:30:26,720 Speaker 3: kind of soberly assess the situation. This administration tends to 558 00:30:26,800 --> 00:30:30,480 Speaker 3: pick its winners and losers, and I think it's really 559 00:30:30,520 --> 00:30:33,280 Speaker 3: hard to predict who the winners and losers will be. 560 00:30:33,440 --> 00:30:35,840 Speaker 3: I think at the beginning of this year, when the 561 00:30:35,840 --> 00:30:39,240 Speaker 3: administration came in, we would have had a conversation about 562 00:30:39,280 --> 00:30:41,479 Speaker 3: who those winners and losers are going to be. Today. 563 00:30:41,480 --> 00:30:46,200 Speaker 3: It hasn't necessarily worked out that way, right, So I 564 00:30:46,240 --> 00:30:51,520 Speaker 3: think it's really foolish to rely on the government as 565 00:30:51,600 --> 00:30:55,440 Speaker 3: your investment strategy. I mean, call me an old timer, 566 00:30:55,560 --> 00:30:58,760 Speaker 3: but I think that's just that. Hope is not a strategy. 567 00:30:58,800 --> 00:31:01,080 Speaker 3: At the end of the day. You have to get 568 00:31:01,080 --> 00:31:03,880 Speaker 3: your hands around the fundamentals for sure, and marry it 569 00:31:03,920 --> 00:31:07,640 Speaker 3: with the price and know that you are compensated when 570 00:31:07,640 --> 00:31:10,080 Speaker 3: all is said and done. What is your recovery rate 571 00:31:10,120 --> 00:31:12,400 Speaker 3: going to be? Are you still comfortable with that? You know, 572 00:31:12,880 --> 00:31:17,240 Speaker 3: these things have never ceased to be the right way 573 00:31:17,240 --> 00:31:18,160 Speaker 3: to invest. 574 00:31:18,720 --> 00:31:21,800 Speaker 2: So then should we be looking outside the US at corporation? 575 00:31:22,000 --> 00:31:25,840 Speaker 2: So you know, you talk lowderation, we talk higher grade, 576 00:31:26,160 --> 00:31:29,040 Speaker 2: and so it sounds like the US is headed for 577 00:31:29,120 --> 00:31:32,480 Speaker 2: some pain. So then where where in the world should 578 00:31:32,520 --> 00:31:33,200 Speaker 2: we be looking? 579 00:31:34,080 --> 00:31:39,720 Speaker 3: Europe? If we look to Europe has some growth issues, 580 00:31:40,000 --> 00:31:45,120 Speaker 3: you know, investment grade is probably okay. Again, it is 581 00:31:45,240 --> 00:31:49,400 Speaker 3: a at best coupon game. But to the extend that you 582 00:31:49,480 --> 00:31:53,080 Speaker 3: want some diversification perhaps that's not a bad way to go. 583 00:31:53,160 --> 00:31:57,040 Speaker 3: But again, you know, spreads are tight everywhere when we 584 00:31:57,080 --> 00:32:01,160 Speaker 3: talk about below investment grade in Europe. It's interesting because 585 00:32:01,280 --> 00:32:04,560 Speaker 3: unlike the US, Europe doesn't really have a path to restructuring, 586 00:32:04,680 --> 00:32:08,600 Speaker 3: so companies that go bankrupt are kind of just done 587 00:32:08,800 --> 00:32:11,840 Speaker 3: and dead, Whereas in the US we can model for 588 00:32:12,760 --> 00:32:15,600 Speaker 3: recovery rates, we kind of know what they historically are, 589 00:32:15,840 --> 00:32:21,480 Speaker 3: so it's an easier path through stress that you can model, 590 00:32:21,680 --> 00:32:24,480 Speaker 3: whereas in Europe it's sort of a done deal. So 591 00:32:24,720 --> 00:32:28,200 Speaker 3: not generally, unless spreads are very wide and attractive, not 592 00:32:28,400 --> 00:32:32,640 Speaker 3: generally a fan of European high yield when it's comparable 593 00:32:32,720 --> 00:32:35,280 Speaker 3: in a compensation to US high yield, because US highld 594 00:32:35,360 --> 00:32:37,360 Speaker 3: is just kind of a better known foe. 595 00:32:37,400 --> 00:32:40,240 Speaker 1: If you will, I'm glad you mentioned recovery rates, because 596 00:32:40,240 --> 00:32:42,239 Speaker 1: we've discussed those a lot on this show that they 597 00:32:42,280 --> 00:32:45,360 Speaker 1: are not good in the US. You know, so you've 598 00:32:45,360 --> 00:32:47,920 Speaker 1: got a pretty low default rate relatively, but your recovery 599 00:32:47,960 --> 00:32:50,840 Speaker 1: is much much lower. So and the loans, you know, 600 00:32:50,880 --> 00:32:55,960 Speaker 1: the loan only structures are putting people in trouble. And 601 00:32:56,000 --> 00:32:59,640 Speaker 1: then there's all the lemes, the liability management exercises, the 602 00:33:00,440 --> 00:33:04,480 Speaker 1: preference for certain types of investor. You know, the lawyers 603 00:33:04,480 --> 00:33:07,520 Speaker 1: get paid, but everyone else gets in trouble. So where 604 00:33:07,640 --> 00:33:10,240 Speaker 1: where do we go with recoveries? And how can you 605 00:33:10,320 --> 00:33:14,280 Speaker 1: really project them given the you know, more aggressive nature 606 00:33:14,280 --> 00:33:15,280 Speaker 1: of these workouts. 607 00:33:15,520 --> 00:33:19,800 Speaker 3: Yes, recoveries have been coming down in the US. You know, typically, 608 00:33:19,880 --> 00:33:22,800 Speaker 3: you know this, historically, high heeled bonds have had recoveries 609 00:33:22,880 --> 00:33:25,200 Speaker 3: around forty cents on the dollar, loans seventy cents on 610 00:33:25,240 --> 00:33:27,160 Speaker 3: the dollar. Right now, we you know, more recently, we're 611 00:33:27,200 --> 00:33:29,480 Speaker 3: seeing bonds closer to twenty cents on the dollar and 612 00:33:29,520 --> 00:33:32,640 Speaker 3: loans closer to forty cents on the dollar. Loans have 613 00:33:32,680 --> 00:33:35,120 Speaker 3: been really fascinating to me because that's been a darling 614 00:33:35,120 --> 00:33:39,080 Speaker 3: of investors for many, many years in spite of the 615 00:33:39,160 --> 00:33:41,360 Speaker 3: fact and again, you know, someone who's been kind of 616 00:33:41,400 --> 00:33:44,400 Speaker 3: around for a while, I remember all the handwringing around 617 00:33:44,440 --> 00:33:48,920 Speaker 3: you know, twenty percent of loans being second lean or 618 00:33:49,000 --> 00:33:52,160 Speaker 3: cove light or whatever it was during the GFC. Well 619 00:33:52,200 --> 00:33:54,760 Speaker 3: in the you know, in the years since, you know, 620 00:33:54,880 --> 00:33:57,920 Speaker 3: over eighty percent of loans or cove light loans. That's 621 00:33:58,000 --> 00:34:01,160 Speaker 3: just the reality of the market today, and most of 622 00:34:01,200 --> 00:34:04,240 Speaker 3: them have no subordination below them. There's nothing below the loan, 623 00:34:04,320 --> 00:34:07,680 Speaker 3: even yes it is a senior structure in the in 624 00:34:07,760 --> 00:34:09,960 Speaker 3: the capital structure, but there's nothing below it. So it 625 00:34:10,000 --> 00:34:12,640 Speaker 3: takes a hit directly. And that's why we've seen the 626 00:34:12,719 --> 00:34:16,880 Speaker 3: lower recoveries in loans, and that's why the projected default 627 00:34:17,040 --> 00:34:19,680 Speaker 3: rate in loans is expected to be higher than in bonds, 628 00:34:20,120 --> 00:34:23,320 Speaker 3: because there's just been such proliferation. They've been obviously gobbled 629 00:34:23,320 --> 00:34:27,080 Speaker 3: out by clos by the way to our point and 630 00:34:27,120 --> 00:34:30,839 Speaker 3: conversation on triple c's, you know, clos can only hold 631 00:34:30,920 --> 00:34:33,319 Speaker 3: up to something like seven percent triple c's, so if 632 00:34:33,320 --> 00:34:35,879 Speaker 3: we do have a downgrade wave that you know, they 633 00:34:35,920 --> 00:34:38,000 Speaker 3: start to kind of puke these things out and the 634 00:34:38,080 --> 00:34:40,440 Speaker 3: price discovery gets worse. But I feel like again I'm 635 00:34:40,520 --> 00:34:42,640 Speaker 3: kind of just slipping back into that doom and gloom. 636 00:34:45,239 --> 00:34:47,600 Speaker 3: You know, where do we go and how do how 637 00:34:47,680 --> 00:34:50,960 Speaker 3: do we model? Yes, the recovery rates have been lower, 638 00:34:51,080 --> 00:34:53,759 Speaker 3: and I always make this point as well that even 639 00:34:53,760 --> 00:34:58,280 Speaker 3: though defaults have been subdued, your recovery rates are actually lower, 640 00:34:58,400 --> 00:35:02,759 Speaker 3: so it's not typical for a non recession market. I 641 00:35:02,800 --> 00:35:06,400 Speaker 3: think another important point is that in number of companies defaulting, 642 00:35:07,320 --> 00:35:10,520 Speaker 3: there have just been mostly smaller companies, but the number 643 00:35:10,560 --> 00:35:13,799 Speaker 3: of companies defaulting is not all that typical for a 644 00:35:13,960 --> 00:35:17,799 Speaker 3: non recession market. And so again I bring all these 645 00:35:17,800 --> 00:35:20,360 Speaker 3: things out because I feel like there's so much complacency 646 00:35:20,400 --> 00:35:24,720 Speaker 3: out there. And I remember the complacency that led into 647 00:35:24,760 --> 00:35:26,600 Speaker 3: two thousand and eight. And I'm not saying we're headed 648 00:35:26,640 --> 00:35:29,360 Speaker 3: for anything like that, but it's just, you know, investors 649 00:35:29,400 --> 00:35:31,680 Speaker 3: do get very complacent, even you know, if you think 650 00:35:31,680 --> 00:35:35,960 Speaker 3: about the ultra low rates of the you know, twenty tens, 651 00:35:36,080 --> 00:35:39,839 Speaker 3: and you know, up until COVID, and so everyone was 652 00:35:39,880 --> 00:35:42,600 Speaker 3: on board with by negative yielding debt in Europe for example, 653 00:35:42,800 --> 00:35:45,680 Speaker 3: I remember going to s a European clients and they'd say, 654 00:35:45,719 --> 00:35:48,280 Speaker 3: you know, we want five percent and their yields are negative, 655 00:35:48,280 --> 00:35:50,879 Speaker 3: and I would like get palpitations, like how how can 656 00:35:50,920 --> 00:35:54,279 Speaker 3: you get five percent? Like in a world where and 657 00:35:54,400 --> 00:35:57,319 Speaker 3: so the but the mantra was it's okay to buy 658 00:35:57,360 --> 00:36:00,520 Speaker 3: negatively yielding debt because you can sell it to you know, 659 00:36:00,560 --> 00:36:03,239 Speaker 3: the next fool or the government. It was the greater 660 00:36:03,360 --> 00:36:06,839 Speaker 3: fool theory almost. So I think these things take time 661 00:36:06,920 --> 00:36:10,960 Speaker 3: to develop, but we cannot get complacent because this is 662 00:36:11,000 --> 00:36:15,080 Speaker 3: someone's retirement money. This is someone's college money. James, you 663 00:36:15,120 --> 00:36:17,759 Speaker 3: and I have talked about this as someone who is, 664 00:36:17,880 --> 00:36:21,520 Speaker 3: you know, a frust generation immigrant. I am very closely, 665 00:36:22,520 --> 00:36:25,680 Speaker 3: intimately familiar with what it's like to kind of lose 666 00:36:25,840 --> 00:36:29,560 Speaker 3: your livelihood, and so we take this very seriously. Fixed 667 00:36:29,600 --> 00:36:32,560 Speaker 3: income is not a speculator or shouldn't be a get 668 00:36:32,680 --> 00:36:35,920 Speaker 3: rich asset class or a speculative acid class. In some 669 00:36:36,000 --> 00:36:39,000 Speaker 3: parts it is. There are places to be aggressive, but 670 00:36:39,200 --> 00:36:44,960 Speaker 3: really it's about maintaining wealth, preserving wealth, maintaining a ballast 671 00:36:44,960 --> 00:36:47,799 Speaker 3: in your portfolio. And I think looking at investments through 672 00:36:47,800 --> 00:36:52,640 Speaker 3: that prism has been somewhat diluted by this kind of 673 00:36:52,680 --> 00:36:55,719 Speaker 3: just mainlining liquidity from central banks. I think it will 674 00:36:55,760 --> 00:36:59,000 Speaker 3: be a lot more difficult against the backdrop of all 675 00:36:59,080 --> 00:37:00,560 Speaker 3: this spending in DC. 676 00:37:01,200 --> 00:37:03,400 Speaker 1: So does the default rate get worse from here? Do 677 00:37:03,440 --> 00:37:05,759 Speaker 1: the does the amount of pick rise from here? Do 678 00:37:05,800 --> 00:37:07,799 Speaker 1: you do you see any signs that it is getting worse? 679 00:37:09,120 --> 00:37:10,800 Speaker 1: Or are we you know, because because you know, the 680 00:37:10,840 --> 00:37:13,279 Speaker 1: government's basically telling us to be patient and everything's going 681 00:37:13,320 --> 00:37:14,680 Speaker 1: to be fine, and we're going to be making it 682 00:37:14,719 --> 00:37:17,719 Speaker 1: all great again and we'll be absolutely fine. Don't worry 683 00:37:17,719 --> 00:37:18,120 Speaker 1: about it. 684 00:37:18,160 --> 00:37:20,120 Speaker 3: But sure, it's paying for long term gain. 685 00:37:20,280 --> 00:37:23,440 Speaker 1: Is this something you know fundamentally under the surface, are 686 00:37:23,480 --> 00:37:24,600 Speaker 1: there more defaults coming out? 687 00:37:24,600 --> 00:37:27,080 Speaker 3: There? Is there more stress so fundamentally under the surface 688 00:37:27,120 --> 00:37:30,760 Speaker 3: in lower rated grade that we are seeing ib Ibita 689 00:37:30,960 --> 00:37:34,200 Speaker 3: coming off, you know, pretty aggressively off of its height. 690 00:37:34,400 --> 00:37:37,160 Speaker 3: And when we talk about EBITDA, there are all kinds 691 00:37:37,200 --> 00:37:42,520 Speaker 3: of creative ways of reporting it and creating it and 692 00:37:42,520 --> 00:37:46,279 Speaker 3: there's really no standard per se. Jordy, I'm sure you're 693 00:37:46,320 --> 00:37:50,799 Speaker 3: familiar with this phenomenon just a little too much. And 694 00:37:50,880 --> 00:37:52,719 Speaker 3: so when I look at those numbers, I wonder, even 695 00:37:52,760 --> 00:37:55,960 Speaker 3: you know, how much more of you know, creativity is 696 00:37:56,000 --> 00:37:57,760 Speaker 3: there under the hood that if we were to standard 697 00:37:57,960 --> 00:38:01,799 Speaker 3: dies it across the board, what would we So we 698 00:38:01,920 --> 00:38:05,200 Speaker 3: are seeing those fundamentals coming off. We are seeing interest 699 00:38:05,239 --> 00:38:10,600 Speaker 3: coverage ratios coming becoming lower. They're not kind of screamingly alarming, 700 00:38:10,680 --> 00:38:15,960 Speaker 3: but they're definitely the trajectory is not upwards. The trajectory 701 00:38:16,200 --> 00:38:19,719 Speaker 3: is slightly deteriorating. So yes, I think default rates will 702 00:38:19,760 --> 00:38:25,480 Speaker 3: continue to creep up. But the mitigating mechanism there is 703 00:38:25,560 --> 00:38:28,839 Speaker 3: the private credit space. For sure, it will continue to 704 00:38:28,960 --> 00:38:32,800 Speaker 3: take more companies out. There is even maybe a scenario 705 00:38:32,800 --> 00:38:35,680 Speaker 3: where it's like only the least interesting or where the 706 00:38:35,719 --> 00:38:37,920 Speaker 3: operators that are left, or I don't know. There's a 707 00:38:37,960 --> 00:38:41,879 Speaker 3: tremendous amount of also conversion between public and private operators 708 00:38:41,960 --> 00:38:46,960 Speaker 3: right where teams that have public capabilities are developing private capabilities, 709 00:38:46,960 --> 00:38:49,759 Speaker 3: and teams that have private capabilities are also kind of 710 00:38:49,800 --> 00:38:53,000 Speaker 3: dabbling in the public market. So I think the lines 711 00:38:53,040 --> 00:38:57,960 Speaker 3: between these will be increasingly more blurry. We are just 712 00:38:58,280 --> 00:39:03,760 Speaker 3: for being opportunities, being agile and not just sleepwalking into 713 00:39:03,880 --> 00:39:07,960 Speaker 3: investments because they seem hot and because everybody's doing it, 714 00:39:08,040 --> 00:39:11,239 Speaker 3: but really buying them when they are attractive, when the 715 00:39:11,280 --> 00:39:13,319 Speaker 3: price is when the price makes sense. 716 00:39:13,880 --> 00:39:15,799 Speaker 1: So how do you position right now? I mean we've 717 00:39:15,840 --> 00:39:19,160 Speaker 1: talked about doubleb's, for example, being overpriced, We've talked about 718 00:39:19,160 --> 00:39:21,960 Speaker 1: TRIPLEZ risk you like I G floaters. What's what's the 719 00:39:22,200 --> 00:39:25,960 Speaker 1: sort of broad positioning and are you just massively long 720 00:39:26,160 --> 00:39:27,399 Speaker 1: cash waiting for the next dip. 721 00:39:28,200 --> 00:39:30,719 Speaker 3: We always have liquidity in this portfolio, and that's just 722 00:39:30,800 --> 00:39:32,799 Speaker 3: due to the mandate that we have, so we're not 723 00:39:32,920 --> 00:39:35,279 Speaker 3: a high eield operator. We can't have a lot of 724 00:39:35,360 --> 00:39:37,279 Speaker 3: high yield at different points in time, and that's why 725 00:39:37,280 --> 00:39:39,120 Speaker 3: you know, investors often come to us for a very 726 00:39:39,160 --> 00:39:42,080 Speaker 3: unbiased point of view, because we're not structured or you know, 727 00:39:42,120 --> 00:39:44,120 Speaker 3: don't have a biased towards or away from any part 728 00:39:44,160 --> 00:39:47,560 Speaker 3: of the market. And so what you know, what do 729 00:39:47,600 --> 00:39:52,080 Speaker 3: we like? We like volatility, We like value. Where is 730 00:39:52,120 --> 00:39:55,080 Speaker 3: there volatility and where is their value? There's volatility in 731 00:39:55,120 --> 00:39:58,200 Speaker 3: the curve, and so we are trading the curve and 732 00:39:58,280 --> 00:40:01,919 Speaker 3: are being very tactical there. So you know, two year 733 00:40:01,960 --> 00:40:05,080 Speaker 3: agoes above fed funds, but that's a great entry point. 734 00:40:06,160 --> 00:40:10,120 Speaker 3: Rallies below four that's an exit point most likely, So 735 00:40:10,480 --> 00:40:13,920 Speaker 3: being tactical there. So where else is there volatility? It 736 00:40:14,320 --> 00:40:18,360 Speaker 3: periodically rears its head in credit like it did in April. 737 00:40:18,360 --> 00:40:21,200 Speaker 3: There were like three volatile days, and so we did 738 00:40:21,200 --> 00:40:24,000 Speaker 3: a lot of different things in those days, including monetizing 739 00:40:24,040 --> 00:40:25,919 Speaker 3: some of our shorts, which brings me to another point, 740 00:40:25,920 --> 00:40:28,880 Speaker 3: where is their value? There's value in shorts and credit protection. 741 00:40:29,000 --> 00:40:32,080 Speaker 3: I mean shorts kind of has a very aggressive connotation 742 00:40:32,200 --> 00:40:35,480 Speaker 3: to it, but really it's credit protection. It is very cheap. 743 00:40:35,840 --> 00:40:40,239 Speaker 3: It is very undervalued today because of the complacency in 744 00:40:40,280 --> 00:40:42,960 Speaker 3: the market, and we do like it just to buy 745 00:40:43,680 --> 00:40:47,719 Speaker 3: DX investment grade. Yeah, so because they are you know, 746 00:40:47,840 --> 00:40:51,200 Speaker 3: the correlation is there, but the cost is lower in 747 00:40:51,920 --> 00:40:55,840 Speaker 3: investment grade protection, So we definitely like that part of 748 00:40:55,840 --> 00:40:58,520 Speaker 3: the market. And yes, having liquidity in your portfolio essentially 749 00:40:58,560 --> 00:41:01,560 Speaker 3: makes you a coal option and I think today optionality 750 00:41:01,560 --> 00:41:07,120 Speaker 3: and portfolios is vastly underrated. And instead of being fully 751 00:41:07,160 --> 00:41:09,719 Speaker 3: invested across the cycle, We've always said this, and over 752 00:41:09,719 --> 00:41:11,399 Speaker 3: the years, James, you and I have talked at different 753 00:41:11,440 --> 00:41:14,320 Speaker 3: points in time, we've always said, instead of being fully 754 00:41:14,320 --> 00:41:18,840 Speaker 3: invested across the cycle, which basically ties you to the 755 00:41:18,880 --> 00:41:21,800 Speaker 3: back of a truck and just kind of like drags 756 00:41:21,840 --> 00:41:26,920 Speaker 3: you across the experience of that cycle. You know, be 757 00:41:28,920 --> 00:41:31,279 Speaker 3: the master of your fate. As I said, tops and 758 00:41:31,320 --> 00:41:34,479 Speaker 3: fixed income are very easily identifiable, don't participate in them, 759 00:41:35,200 --> 00:41:38,400 Speaker 3: take some chips off the table and use your liquidity 760 00:41:38,840 --> 00:41:42,000 Speaker 3: for that optionality. We're big believers in that, and that 761 00:41:42,120 --> 00:41:46,600 Speaker 3: has allowed us to create that twenty percent advantage over 762 00:41:46,719 --> 00:41:51,000 Speaker 3: your kind of traditional AG type product with having less vowve. 763 00:41:51,600 --> 00:41:54,600 Speaker 3: I mean that's really the key too, is what this 764 00:41:54,680 --> 00:41:58,160 Speaker 3: approach this. You know, having cash is your neutral point 765 00:41:58,200 --> 00:42:00,279 Speaker 3: for risk, which doesn't mean you sit in cash. We 766 00:42:00,280 --> 00:42:02,480 Speaker 3: don't like sitting in cash. We like taking risks. We're 767 00:42:02,520 --> 00:42:07,000 Speaker 3: investors But what this does is it essentially smooths your 768 00:42:07,040 --> 00:42:10,600 Speaker 3: paths to returns because you are not you know, moving 769 00:42:10,600 --> 00:42:12,719 Speaker 3: with that truck and just being dragged behind us. You 770 00:42:13,120 --> 00:42:18,040 Speaker 3: are choosing your entry point very widely and in an 771 00:42:18,080 --> 00:42:20,440 Speaker 3: informed manner, and that means you have less vall. And 772 00:42:20,480 --> 00:42:24,360 Speaker 3: when you have less vall, investors stick around to benefit 773 00:42:24,440 --> 00:42:26,799 Speaker 3: from the fact that these things are money good. Right. 774 00:42:27,080 --> 00:42:29,799 Speaker 3: So if we are going to talk about clos let's say, 775 00:42:29,840 --> 00:42:32,080 Speaker 3: then you know, we will buy them when the price 776 00:42:32,200 --> 00:42:35,120 Speaker 3: is right and not have to Investors won't have to 777 00:42:35,160 --> 00:42:37,279 Speaker 3: live through that twenty and twenty four twenty five percent 778 00:42:37,360 --> 00:42:37,759 Speaker 3: drow down. 779 00:42:37,920 --> 00:42:39,440 Speaker 1: But if you had to pick one thing, you know 780 00:42:39,520 --> 00:42:42,320 Speaker 1: where there is value, where there's you know, relative value 781 00:42:42,360 --> 00:42:44,799 Speaker 1: that is exciting right now that you think others may 782 00:42:44,800 --> 00:42:46,839 Speaker 1: be missing, that's giving you an edge, what would that be. 783 00:42:47,480 --> 00:42:51,560 Speaker 3: I think definitely the credit protection is vastly underrated. I 784 00:42:51,560 --> 00:42:55,160 Speaker 3: think every portfolio could could use it. It will make for 785 00:42:55,239 --> 00:42:59,640 Speaker 3: a much smoother experience for your investors. I think the 786 00:42:59,680 --> 00:43:02,240 Speaker 3: investment great floaters is probably our you know, it's definitely 787 00:43:02,280 --> 00:43:05,000 Speaker 3: the most dominant trade in our portfolio today and it's 788 00:43:05,040 --> 00:43:08,960 Speaker 3: a great way to clip some coupon while still staying 789 00:43:09,000 --> 00:43:13,600 Speaker 3: fairly agile, I would say those things are probably most 790 00:43:13,640 --> 00:43:16,080 Speaker 3: attractive from a price standpoint. 791 00:43:15,600 --> 00:43:16,719 Speaker 1: And that's going to be banks most. 792 00:43:16,840 --> 00:43:19,680 Speaker 3: Is it so about forty yes, roughly, you know, less 793 00:43:19,680 --> 00:43:21,480 Speaker 3: than half, but about forty five percent of it our 794 00:43:21,560 --> 00:43:24,280 Speaker 3: money center or at least we focus on money center banks, 795 00:43:25,000 --> 00:43:27,359 Speaker 3: not the regionals. And then there's you know, some kind 796 00:43:27,360 --> 00:43:31,239 Speaker 3: of very household names across different sectors. Yeah, very plain 797 00:43:31,280 --> 00:43:31,880 Speaker 3: vanilla stuff. 798 00:43:31,920 --> 00:43:33,640 Speaker 1: That's assuming that the FED doesn't cut. 799 00:43:33,520 --> 00:43:35,960 Speaker 3: Yes, absolutely so it assumes that we are in a 800 00:43:36,040 --> 00:43:38,719 Speaker 3: higher for longer environment. But even if we are not right, 801 00:43:38,719 --> 00:43:40,640 Speaker 3: even if the FED cuts, I think, and you know, 802 00:43:40,640 --> 00:43:42,799 Speaker 3: we didn't talk about this at length, but I think 803 00:43:42,840 --> 00:43:45,160 Speaker 3: it's clear for my comments, we are not believers that 804 00:43:45,160 --> 00:43:48,319 Speaker 3: the FED can really cut pretty aggressively here. Barring some 805 00:43:48,520 --> 00:43:53,080 Speaker 3: left tail scenario, they are going to either stay put, 806 00:43:53,400 --> 00:43:58,520 Speaker 3: maybe deliver one cut. I think they're concerned about exposing 807 00:43:59,080 --> 00:44:02,720 Speaker 3: a lack of influenced on the curve because they started cutting. 808 00:44:02,760 --> 00:44:04,960 Speaker 3: I think they were too early to cut in September, 809 00:44:05,280 --> 00:44:07,719 Speaker 3: and they did it very aggressively, and the long end 810 00:44:07,719 --> 00:44:09,960 Speaker 3: of the curve moved up. And if they were to 811 00:44:10,080 --> 00:44:12,960 Speaker 3: do that now, the long end of the curve could 812 00:44:12,960 --> 00:44:15,759 Speaker 3: do the same thing, because it's not really based on 813 00:44:15,840 --> 00:44:17,520 Speaker 3: what the FED is doing. And so I think they 814 00:44:17,560 --> 00:44:20,640 Speaker 3: have to kind of marry all of these things and 815 00:44:21,000 --> 00:44:25,440 Speaker 3: not really expose themselves as perhaps not having influenced the 816 00:44:25,480 --> 00:44:27,280 Speaker 3: kind of influence they want to have over the curve. 817 00:44:27,640 --> 00:44:29,560 Speaker 1: And not to end on a down note, Alexander, but 818 00:44:29,640 --> 00:44:32,480 Speaker 1: you have been a great voice of reason in a 819 00:44:32,520 --> 00:44:36,239 Speaker 1: sea of irrational exuberance. What worries you most about the 820 00:44:36,239 --> 00:44:40,440 Speaker 1: outlook for credit markets specifically? Which is the one that 821 00:44:40,480 --> 00:44:43,200 Speaker 1: our audience most cares about. You know what really keeps 822 00:44:43,200 --> 00:44:43,759 Speaker 1: you up at night? 823 00:44:43,920 --> 00:44:46,000 Speaker 3: Worry? Well, nothing keeps me up at night because we 824 00:44:46,080 --> 00:44:47,040 Speaker 3: have liquity to take. 825 00:44:47,600 --> 00:44:50,040 Speaker 1: It's a little go What do you just shake your 826 00:44:50,080 --> 00:44:51,239 Speaker 1: head out and think, you know. 827 00:44:51,239 --> 00:44:54,600 Speaker 3: That's just not you know, I've been around long enough 828 00:44:54,640 --> 00:44:57,120 Speaker 3: at this point, and I kind of hate saying this 829 00:44:57,160 --> 00:44:59,840 Speaker 3: because I still think of myself as a very young person, 830 00:45:00,160 --> 00:45:04,920 Speaker 3: but I've been around long enough to know that complacency 831 00:45:05,200 --> 00:45:08,520 Speaker 3: never ends well. And typically what gets investors into trouble 832 00:45:08,640 --> 00:45:12,400 Speaker 3: again and again is a combination of complacency and leverage, 833 00:45:13,480 --> 00:45:16,520 Speaker 3: and even the simplest things, when they are levered up, 834 00:45:16,760 --> 00:45:20,279 Speaker 3: they never work out well. And where is all the 835 00:45:20,400 --> 00:45:23,440 Speaker 3: leverage today? And I'm sorry you said not to end 836 00:45:23,440 --> 00:45:25,359 Speaker 3: on a set one, but I'm afraid that we will. 837 00:45:26,239 --> 00:45:28,840 Speaker 3: The leverage has shifted. Yes, there's still leverage on the 838 00:45:28,840 --> 00:45:30,520 Speaker 3: private side of the market, and I'm not just talking 839 00:45:30,560 --> 00:45:32,080 Speaker 3: about the private credit but I'm talking about you know, 840 00:45:32,120 --> 00:45:34,799 Speaker 3: corporates et cetera, hedge funds and all of that. But 841 00:45:34,840 --> 00:45:37,000 Speaker 3: where is the you know, two thousand and eight, the 842 00:45:37,040 --> 00:45:41,160 Speaker 3: GFC essentially transferred the leverage from the private side to 843 00:45:41,320 --> 00:45:44,520 Speaker 3: the government balance sheet and that's where it is today. 844 00:45:44,880 --> 00:45:48,840 Speaker 3: And that has very meaningful ramifications that the entire scope 845 00:45:48,880 --> 00:45:51,240 Speaker 3: of which we will only really be able to analyze 846 00:45:51,320 --> 00:45:55,640 Speaker 3: in retrospect, you know, looking back. And that does worry me. 847 00:45:55,800 --> 00:45:59,040 Speaker 3: What does that mean. I'm not in the camp of like, oh, 848 00:45:59,080 --> 00:46:01,080 Speaker 3: the dollar is going to go away and no one's 849 00:46:01,120 --> 00:46:03,160 Speaker 3: going to want it, because again, there's just not enough 850 00:46:03,160 --> 00:46:06,200 Speaker 3: stores of value in the world today. Yes, the Swiss 851 00:46:06,280 --> 00:46:09,440 Speaker 3: frank is very stable, there's not enough of it. Nearly gold, 852 00:46:09,560 --> 00:46:11,839 Speaker 3: you know, moving up is a symptom of the same thing. 853 00:46:12,239 --> 00:46:15,160 Speaker 3: But I do that really is something that wears me 854 00:46:15,200 --> 00:46:18,960 Speaker 3: because I don't think anyone fully understands what are really 855 00:46:19,000 --> 00:46:22,719 Speaker 3: the ramifications of that. How will it play out? What 856 00:46:22,760 --> 00:46:26,200 Speaker 3: does it mean for our economy and for for the 857 00:46:26,239 --> 00:46:28,600 Speaker 3: companies that you know, for for the corporate sector, for 858 00:46:28,680 --> 00:46:32,799 Speaker 3: the consumer sector, for for sovereigns. Frankly, what does it 859 00:46:32,840 --> 00:46:35,440 Speaker 3: mean for em if you can buy us mortgages at 860 00:46:35,520 --> 00:46:37,600 Speaker 3: you know, seven percent? Let's say, like, is anyone going 861 00:46:37,640 --> 00:46:39,840 Speaker 3: to want em at in that environment? Like? So, I 862 00:46:39,880 --> 00:46:43,040 Speaker 3: think that's if anything keeps me up at night, and 863 00:46:43,080 --> 00:46:46,640 Speaker 3: not because it will reflect negatively on the strategy that 864 00:46:46,680 --> 00:46:48,200 Speaker 3: we manage, but more so I think it's just the 865 00:46:48,320 --> 00:46:51,600 Speaker 3: ramifications of it are really really far reaching and serious. 866 00:46:52,239 --> 00:46:55,640 Speaker 1: Great stuff, Folksanna Arnough with JP Morgan Asset Management, thank 867 00:46:55,640 --> 00:46:57,240 Speaker 1: you so much for joining us on the credit edge. 868 00:46:57,320 --> 00:46:59,040 Speaker 3: Thank you so much. Always a pleasure and. 869 00:46:59,000 --> 00:47:01,600 Speaker 1: Of course very grateful too. Jody Lurie from Bloomberg Intelligence, 870 00:47:01,600 --> 00:47:02,560 Speaker 1: thank you for joining us today. 871 00:47:02,800 --> 00:47:04,480 Speaker 2: Always great to be here for. 872 00:47:04,360 --> 00:47:06,880 Speaker 1: Even more credit market analysis and insight. Read all of 873 00:47:06,960 --> 00:47:09,920 Speaker 1: JODI's great work on the Bloomberg terminal. Bloomberg Intelligence is 874 00:47:09,960 --> 00:47:12,320 Speaker 1: part of our research department, with five hundred analysts and 875 00:47:12,360 --> 00:47:15,960 Speaker 1: strategists working across all markets. Coverage includes over two thousand 876 00:47:16,000 --> 00:47:18,760 Speaker 1: equities and credits plus outlooks on more than ninety industries 877 00:47:18,760 --> 00:47:22,960 Speaker 1: and one hundred market industries, currencies and commodities. Please do 878 00:47:23,040 --> 00:47:25,480 Speaker 1: subscribe to The Credit Edge wherever you get your podcasts. 879 00:47:25,520 --> 00:47:28,800 Speaker 1: We're on Apple, Spotify, and all other good podcast providers, 880 00:47:28,800 --> 00:47:31,719 Speaker 1: including the Bloomberg Terminal at b pod Goo. Give us 881 00:47:31,760 --> 00:47:34,520 Speaker 1: a review, tell your friends, or email me directly at 882 00:47:34,600 --> 00:47:38,480 Speaker 1: jcrombieight at Bloomberg dot net. I'm James Crombie. It's been 883 00:47:38,480 --> 00:47:40,520 Speaker 1: a pleasure having you join us again next week on 884 00:47:40,600 --> 00:47:58,000 Speaker 1: the Credit Edge.