Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast.
Speaker 1: I'm Tracy Allaway and I'm Joe Wisenthal. Joe, I'm struggling
Speaker 1: to think about how to start this episode because there's
Speaker 1: just so much going on in this particular space, which
Speaker 1: is the corporate credit market. Yeah, I mean, big picture,
Speaker 1: there's a lot going out in corporate credit because there
Speaker 1: is a lot going on in the market, because there
Speaker 1: is a lot going on in the world right now.
Speaker 1: I feel like if people were to just listen to
Speaker 1: our last several episodes, it would be a great trajectory
Speaker 1: of the world just getting crazier and crazier and crazier
Speaker 1: with EACHYPT with each episode. Yeah. Absolutely, And the sell
Speaker 1: off in the stock market has been bad enough, but
Speaker 1: it does feel like what a lot of people are
Speaker 1: starting to worry about now are these strains that we've
Speaker 1: seen in credit. So we've seen risk premiums on bonds
Speaker 1: really blowout, Derivative indicase tied to those bonds also going
Speaker 1: up as people try to get more protection. We've seen
Speaker 1: some big name companies rushing to tap credit lines and
Speaker 1: try to raise cash before that liquidity dries up. There's
Speaker 1: just so much concern in the market, and a lot
Speaker 1: of it goes back to warnings and issues that people
Speaker 1: have been talking about for years, right the news that
Speaker 1: we got yesterday, and of course, because things are moving
Speaker 1: so fast, it's always worth pointing out when we're recording
Speaker 1: these episodes were recording this Thursday, March twelve. The news
Speaker 1: we got yesterday about various private equity companies telling their
Speaker 1: portfolio companies that they should draw on credit lines was
Speaker 1: kind of one of the real indicators that what started
Speaker 1: off as a health crisis and then sort of became
Speaker 1: an economic and market panic is becoming something that I
Speaker 1: think is really becoming a major concern about the liquidity
Speaker 1: and credit in the system available available to anyone. Yeah,
Speaker 1: and there's one thing that makes the credit market very
Speaker 1: different to the stock market, and that is the level
Speaker 1: of transparency and pricing. So when markets are selling off,
Speaker 1: you can look up a stock index, you can see
Speaker 1: exactly where it's trading, and you know pretty much what
Speaker 1: it's doing. But with credit it can be much more
Speaker 1: difficult just because of the way those assets trade. So today,
Speaker 1: in order to wrap our heads around all these themes
Speaker 1: and sort of pick up some of the latest color
Speaker 1: really try to answer whether or not we're facing a
Speaker 1: new credit crunch or stress in the corporate ball market.
Speaker 1: We're going to talk to someone who I think at
Speaker 1: this point us be one of our repeat guests and
Speaker 1: probably holds the crown of the most of Blots episodes ever. Yeah,
Speaker 1: I think so, I mean this might be this might
Speaker 1: be a fourth or fifth and so we've had a
Speaker 1: few repeat guests, but I think this current guest is
Speaker 1: the winner, and you know, for good reason. All right,
Speaker 1: so we're talking to Chris White. He's the CEO of
Speaker 1: Viable Markets, formerly of Goldman Sachs and really a long
Speaker 1: time corporate bond market specialists, the perfect person to talk
Speaker 1: about all this. Chris, thanks so much for coming on again. Yeah,
Speaker 1: it's it's always a pleasure. You guys know that this
Speaker 1: is one of my favorite shows. I listened to your podcast.
Speaker 1: I'm a fan as well as a contributor. So it's
Speaker 1: a it's an honor to hopefully untangle some of the
Speaker 1: Christmas tree lights that are the US credit mark. We
Speaker 1: gotta get you a tote bag or something. We definitely
Speaker 1: need odd lots wag. I can't believe we haven't made that,
Speaker 1: but we definitely need to uh, for anyone who's been
Speaker 1: on five times, we need to give them. Yeah, I
Speaker 1: think it's four, but but you know what, I have
Speaker 1: a feeling that the fifth one might come up before
Speaker 1: the end of the year, given what's happening exactly. Happy
Speaker 1: to talk about what's happening in credit, you know, Tracy,
Speaker 1: I think that you bring up something that's really interesting,
Speaker 1: where when we're looking at the health of the markets
Speaker 1: as they're reacting to COVID nineteen, we have up to
Speaker 1: the minute information on every single global equity index, but
Speaker 1: we really do not know what's happening in the in
Speaker 1: the bond markets, particularly the credit bond markets. And what's
Speaker 1: scary about that is there's so much bigger than they
Speaker 1: were the last time we had a crisis. So walk
Speaker 1: us through exactly how pricing happens for corporate bonds, because
Speaker 1: I think that's going to inform a lot of our conversation.
Speaker 1: How do corporate bonds trade nowadays? Since we began talking
Speaker 1: with you, which I think was a few years ago, now,
Speaker 1: there has been some evolution of the way that market functions,
Speaker 1: but also not that much right. Actually, you know a
Speaker 1: company that I started Bondlick is working on this problem
Speaker 1: of fixing the the or at least establishing structure around pricing,
Speaker 1: and I'd say that's the major difference. I would imagine
Speaker 1: much of your audience is used to looking up prices
Speaker 1: um for equities through their smartphones, But when you really
Speaker 1: want to know prices and bonds, it's difficult. And this
Speaker 1: doesn't change for the professional arena when you're talking about
Speaker 1: trading bonds, working for an investment bank or working for
Speaker 1: an asset manager. While there is a lot of information
Speaker 1: that's out there, um, it's it's very difficult to discern
Speaker 1: at times what's real and what's actionable. And so during
Speaker 1: the past twelve years, we've had pretty sleepy markets where
Speaker 1: any sort of sort of bump in the road was
Speaker 1: met with central bank intervention that sort of stabilized markets.
Speaker 1: Now we're in a period, thanks to COVID nineteen where
Speaker 1: there is no stabilization on the horizon that people can
Speaker 1: see really starting to see markets whip around and and
Speaker 1: so not having coherent and reliable data is impacting the
Speaker 1: way these markets are trading. So for people who haven't
Speaker 1: listened to your previous episodes and people who wonder, Well,
Speaker 1: it's why can't people just look up a bond price
Speaker 1: on their phone like you can do with stock. Give
Speaker 1: us this sort of thirty second explanation of why bonds
Speaker 1: are different, just for people catching up, and then tell us,
Speaker 1: you know what you're seeing already about how trading is
Speaker 1: really being affected by the first crisis in a long time.
Speaker 1: That's not a monetary crisis, and so therefore there's not
Speaker 1: an obvious central bank fix. Sure, it's it's really simple.
Speaker 1: About fifty years ago, the equity markets faced a crisis
Speaker 1: around institutional trading. They answered that where liquidity had really
Speaker 1: dried up. They answered that crisis by just saying, hey,
Speaker 1: let's make a platform where everybody puts their pricing in
Speaker 1: the same place, and that was NASTAC. NASTAC stands for
Speaker 1: National Associate Ation Securities Dealers Automated Quotation System and that
Speaker 1: concept of of I would say, crowdsourcing pricing and centralizing
Speaker 1: it is something that we've seen in every other modernized market.
Speaker 1: That architecture has really never shown up for the US
Speaker 1: corporate bond market. We're trying to bring it to market
Speaker 1: in terms of my company, but because we don't have
Speaker 1: this piece of architecture. Prices are just everywhere and so
Speaker 1: UM without knowing definitively where is the best bid or
Speaker 1: best offer, it's a bit it's a bit chaotic, and
Speaker 1: I would say in some in some cases people would
Speaker 1: say it's chaos by design because obviously if you have
Speaker 1: UM dislocated pricing information, there there are big opportunities out
Speaker 1: there for certain traders in the market. So for a
Speaker 1: lot of people, they've liked the reduction and information. However,
Speaker 1: you know when I've said this in previous podcasts, and
Speaker 1: I think it's really important now the market is too
Speaker 1: big for that sort of gap in infrastructure. Just to
Speaker 1: put in perspective, it's a ten trillion dollar market in
Speaker 1: terms of outstanding size. I think, Tracy, when you and
Speaker 1: I first we were talking about how big the market was,
Speaker 1: when it was maybe six or se Yeah, I remember that.
Speaker 1: So playing these reindeer games around pricing is just it's
Speaker 1: not good for the UM. The overall function of a
Speaker 1: market that I think at this point in time is
Speaker 1: really really important for the overall health of the global economy.
Speaker 1: There's so many bonds out there and so many companies
Speaker 1: that depend on this market. I think we do need
Speaker 1: to rethink around the importance of data and actually getting
Speaker 1: it right around pricing information. So when it comes to
Speaker 1: a sell off or a market route like what we're
Speaker 1: seeing at the moment, how does that corporate bond market
Speaker 1: structure actually impact what's happening in the credit space. I
Speaker 1: guess another way of saying that is how much of
Speaker 1: the action that we've seen is due to technical factors
Speaker 1: versus concerns about economic fundamentals actually affecting the credit worthiness
Speaker 1: of companies. That that's a great question. I'm actually looking
Speaker 1: at the data right now, going back to would you
Speaker 1: guys agree that maybe, like February is the start of
Speaker 1: the craziness? Can we accept that as a date. Well,
Speaker 1: if I go back for Tracy, it's been like since
Speaker 1: mid the rest of the world. The rest of the
Speaker 1: world woke up to it right around in late February,
Speaker 1: said okay, great, so my my, you know, Western American
Speaker 1: view of of COVID has been like, hey, things got
Speaker 1: crazy on February. So if I go back to February
Speaker 1: and just looking at our system, I can see that
Speaker 1: the corporate bomb market as a whole has net purchase activity,
Speaker 1: meaning that there's been more buying activity by almost twenty
Speaker 1: billion in notional volume, than there's been selling activity. So
Speaker 1: while the value of bonds has definitely changed, they're definitely lower.
Speaker 1: It's not due to a technical change. It's not because
Speaker 1: there's an oversupply and people are just selling into the market.
Speaker 1: It's actually something that I think is better described as
Speaker 1: as a repricing, and a repricing is hey, you know,
Speaker 1: yesterday and we thought this bond was worth you know
Speaker 1: what's called it? A hundred dollars um? Well I wake
Speaker 1: up today, I wake up today, and you know what,
Speaker 1: I think that bond is worth eight? What do you
Speaker 1: think there hasn't been, you know, trades at seven. That's
Speaker 1: not how the bond market works. You're not seeing that.
Speaker 1: What you're just seeing is literally changes in value based
Speaker 1: on an opinion. And so this is where data is now.
Speaker 1: It's really out of premium because if you've got a
Speaker 1: lot of data and you know how to organize it,
Speaker 1: there's some tremendous values in this market right now. So
Speaker 1: explain that a little further. This idea of just a
Speaker 1: repricing verse mass selling, is that something What is it
Speaker 1: about bond market structure that allows that to happen that
Speaker 1: one day you have a bond trading at par, trading
Speaker 1: at a hundred, the next day it's trading at eight.
Speaker 1: What is it about the current structure where you see
Speaker 1: wholesale repricings like that in a way that feels a
Speaker 1: little bit different than you see and stocked. Sure, so
Speaker 1: when we're talking about trading bonds, we're talking about trading credit.
Speaker 1: The Latin origin of the word credit is credo. The
Speaker 1: word means I believe, And so what are we talking about?
Speaker 1: What do you believe in credit? Do you believe whether
Speaker 1: or not a company is going to be able to
Speaker 1: pay their debts? So what we're really trading here is
Speaker 1: opinion on the long term prospects of certain companies to
Speaker 1: pay off their debts. Now, depending on what industry the
Speaker 1: company is in, those prospects may take a hit, but overall,
Speaker 1: you still feel like at the end of the day
Speaker 1: five years from now, uh CVS is still going to
Speaker 1: exist as a company. So buying their buying their debt
Speaker 1: and saying like I'll hold this paper for a few
Speaker 1: years is a less risky prospect. However, when when things
Speaker 1: get dangerous in the bond mark market, when default rates
Speaker 1: do start to rise. And I think that this, this
Speaker 1: particular type of crisis could lead to defaults because this
Speaker 1: is a crisis of time. We don't know when things
Speaker 1: are going to clear in the marketplace, We don't know
Speaker 1: when things are going to normalize. And for for for
Speaker 1: a lot of these corporate issuers, time is is urgent
Speaker 1: because they may need to tap the corporate bond market
Speaker 1: again in order to meet payroll or to pay off
Speaker 1: the bond that they had previously issued. And so if
Speaker 1: the corporate if the credit markets are closed for a
Speaker 1: few weeks, I think we have a real problem on
Speaker 1: our hands. Yeah. I think the time frame is really
Speaker 1: important because just from my personal experience being here in
Speaker 1: Hong Kong, even as we sort of get back to normal,
Speaker 1: the rest of the world is now, you know, experiencing
Speaker 1: what we experienced a month or two ago, and so
Speaker 1: I think we're going to have these sort of rolling
Speaker 1: impacts as the coronavirus circles around the globe and potentially
Speaker 1: second waves as well. So yeah, it could be a
Speaker 1: long time. Chris, real quickly. Uh, I want to just
Speaker 1: sort of ask you to expand on a point when
Speaker 1: you talk about okay, you believe either this company is
Speaker 1: going to pay its debts or not. You know, when
Speaker 1: we think about a stock, we think about, okay, this
Speaker 1: stock is valued at some current discounted future cash flow,
Speaker 1: and if that cash flow expectations drop five percent, then
Speaker 1: theoretically the stock should drop five percent. I guess with
Speaker 1: bonds there's just much more of a binary nous. Either
Speaker 1: the company will eventually pay it off at the end
Speaker 1: of its period or it won't. But there's not that
Speaker 1: sort of there's not as much gradations in there about
Speaker 1: the ultimate outcomes. So I think one of the things
Speaker 1: that is um important in terms of the difference between
Speaker 1: the stocks and the bond market is the stock market
Speaker 1: is much more immediate in the reaction, and I'd say
Speaker 1: a lot of the movements on stocks are technical movements
Speaker 1: where you're getting a bunch of supply and so the
Speaker 1: value of the stock is going down. And then you
Speaker 1: have the term value investors in stock in the stock market,
Speaker 1: where these are people that say, hey, this stock has
Speaker 1: been oversold according to what we're looking at in this company,
Speaker 1: and according to the pe ratios, this is a value
Speaker 1: right now when we're going to buy it, and so
Speaker 1: that those are a lot of the things that are
Speaker 1: driving trading activity, the back and forth in the stock market,
Speaker 1: right in the bond market. Not only are you dealing
Speaker 1: with them complexity of whether or not you believe a
Speaker 1: company is going to pay off its debts, you also
Speaker 1: have this time factor because it's not just is the
Speaker 1: company going to pay off its debts, is when is
Speaker 1: it going to be able to pay off its debts.
Speaker 1: I'll give you a classic example, Tesla. Let's call it.
Speaker 1: I think it was a year ago. Elon Musk was
Speaker 1: on the Joe Rogan podcast, a podcast that I think
Speaker 1: is far exterior to the Odd Lots podcast, but thank you.
Speaker 1: On that podcast, he thought it's a little more popular.
Speaker 1: He thought it was a good idea to um smoke pod.
Speaker 1: On the podcast, what we saw on the bond market
Speaker 1: for Tesla bonds were the bonds that we're going to
Speaker 1: be maturing in eighteen months. Prices hardly moved, but the
Speaker 1: bonds that we're going to be maturing in almost I
Speaker 1: think four years, those bonds lost significant value. And that's
Speaker 1: because it's the I believe factor. I believe the Tesla
Speaker 1: is gonna be able to pay off their debts. In
Speaker 1: the next eighteen months, but perhaps their prospects of paying
Speaker 1: off their debt four years from now are not as good,
Speaker 1: and so that that this is where you get I've
Speaker 1: said to people during this crisis, you can't just simply
Speaker 1: say the credit markets are upper, the credit markets are
Speaker 1: down right. That's impossible, because in different areas of the
Speaker 1: credit markets, you're going to see stability and are going
Speaker 1: to see panic. Um. But to make things sound less
Speaker 1: gloom and doom, I do think that what COVID nineteen
Speaker 1: is doing for credit markets, it is bringing yield back
Speaker 1: and it's creating value for the investor. The only problem
Speaker 1: is many people were already fully invested, so they've given
Speaker 1: a lot of those returns back in the last few weeks.
Speaker 1: Just on that note, one of the criticisms of corporate
Speaker 1: credit over you know, the last five years or so,
Speaker 1: has been this idea that investors are buying stuff and
Speaker 1: they're not necessarily getting compensated for some of it, or
Speaker 1: the notion that credit is priced to perfection and something
Speaker 1: like the coronavirus outbreak just doesn't feature in the price
Speaker 1: at all. How much of the chaos that we're currently
Speaker 1: seeing is just due to valuations having gotten out of
Speaker 1: hand previously. Tracy, that's an excellent, excellent point. And I'm
Speaker 1: gonna I'm gonna tell you the story of a bond
Speaker 1: that actually illus rates exactly what you're talking about. And
Speaker 1: the story is the bond, a bond that was recently
Speaker 1: issued by American Airlines UM it's their new issue maturing
Speaker 1: in two thousand. It's there there there three and a
Speaker 1: quarter coupon bond that came to market. At that time.
Speaker 1: When that bond came to market, it was coming to
Speaker 1: market at a dollar price of of effectively par a hundred.
Speaker 1: Today that same bond is trading at seventy cs in
Speaker 1: the dollar. So just the change in sentiment, like the
Speaker 1: fact that that American Airlines deal came through the market
Speaker 1: and people bought it at that level, I think, tells
Speaker 1: you what the environment was around yield, which is, Hey,
Speaker 1: I know that there's an airline bond, and I know
Speaker 1: that it's coming only two and forty basis points over
Speaker 1: the five year treasury, which is really really tight. But
Speaker 1: you know what I need yield, and so I'm gonna
Speaker 1: buy it. And and now what we're seeing is, I mean,
Speaker 1: now the spread on that bond is almost over a
Speaker 1: thousand um when compared to treasures. And in fact, when
Speaker 1: we get to this point, we don't even talk about spreads.
Speaker 1: We talked about bonds and dollar prices, because literally what
Speaker 1: we're trading, it's purely the credit. This is not an
Speaker 1: interest rate play at all. The way that this bond
Speaker 1: is going to be traded is going to be based
Speaker 1: on whether or not you believe that American Airlines it's
Speaker 1: gonna be able to pay off their debts, and it's
Speaker 1: gonna have nothing to do with the current interest rate environment,
Speaker 1: which is really where high yield and distress debt trades.
Speaker 1: It trades in that sort of environment where prevailing interest
Speaker 1: rates really don't matter. Something I'm curious about is, uh,
Speaker 1: you know, in the post crisis era, there has been
Speaker 1: this big effort to de risk the banks themselves, and
Speaker 1: so that you know, even already we're talking a lot
Speaker 1: about stress from companies and companies drawing down credit lines
Speaker 1: on the bond market and so forth, but we don't
Speaker 1: hear a lot yet about much stress to the sort
Speaker 1: of core institutions of the financial system. And we we
Speaker 1: know that through the Vulcal rule and so forth, the banks,
Speaker 1: they hold less credit inventory on their books at any
Speaker 1: given time. How does that change the trading experience, the
Speaker 1: price experience, the price discovery experience right now during this
Speaker 1: crisis versus past crises passed bouts of volatility in which
Speaker 1: there was more centralized, centralized risk. Well, first of all, Joe,
Speaker 1: I think you're I haven't heard anybody else really pull
Speaker 1: that out in this discussion and of where markets are going.
Speaker 1: And I actually think we need to tip our caps
Speaker 1: to the regulators here because there was a lot of
Speaker 1: screaming and gnashing of teeth around, uh, you know, the
Speaker 1: risking the banks, but we we aren't actually at this
Speaker 1: point in time worried about banks going under, which is
Speaker 1: totally different than the tenor of two thousand and eight.
Speaker 1: I think a lot of that has to do with
Speaker 1: the measures that were taken. And you know, it's almost
Speaker 1: like your parents. I'm sure your parents gave you some
Speaker 1: advice Joe that at the time you said, whatever Mom
Speaker 1: and Dad, and now you really actually appreciate their insight.
Speaker 1: So tip of the cap. But I think that, um,
Speaker 1: when we're speaking particularly about credit, Uh, there's been just
Speaker 1: so much cash built up in the system that really
Speaker 1: where the bid is coming from right now, Um, it's
Speaker 1: really coming from the buy side. So these markets are functioning,
Speaker 1: I believe because insurance companies, pension funds, they're so thirsty
Speaker 1: for yield that even though even those American Airlines bonds
Speaker 1: are trading down. And again I'm gonna look right now
Speaker 1: on our system and just try to see on a
Speaker 1: net purchasing basis whether or not from when this bond
Speaker 1: was issued too. Now it's only slightly negative in terms
Speaker 1: of selling activity, which just tells you that there have
Speaker 1: been a lot of people buying this bond. Where's that
Speaker 1: money coming from. It's coming from from an insurance company
Speaker 1: that may have issued annuities at six percent, but it's
Speaker 1: only been yield. But their portfolio itself has only been
Speaker 1: yielding four and a half percent for the past five years,
Speaker 1: so they know they have a shortfall. We we exp
Speaker 1: act that that bid is supposed to come from the dealers,
Speaker 1: it's not coming from the dealers anymore. It's coming from
Speaker 1: from the by side, because they're the ones with the
Speaker 1: money in the cash to put to work. Right. So
Speaker 1: this has been a major theme in corporate credit over
Speaker 1: the past few years. The power the growing power of
Speaker 1: the BY side in that market. Just on that note,
Speaker 1: does that mean that we need to look at the
Speaker 1: BYE side to sort of find the bag holders of
Speaker 1: the recent stress in credit markets? Is that where we
Speaker 1: should look for portfolio losses? And also where in the
Speaker 1: credit market do you see the most potential for um
Speaker 1: for pain? Well, the the I think that the by
Speaker 1: side right now is able to they have enough cash
Speaker 1: where they are stepping into this market. I don't know
Speaker 1: how long they can do that for. And I don't
Speaker 1: know whether the opinion on where yields should reset is
Speaker 1: going to change, because again, you know this this is
Speaker 1: like you know, when we're looking at yields of the
Speaker 1: past twelve years, really post two thousand and eight, it's
Speaker 1: been a desert. So any sort of bump in the
Speaker 1: market has been met with buying. But now this is
Speaker 1: a prolonged bump, and so we we actually we might
Speaker 1: see a resetting where what investors are demanding for the
Speaker 1: market um is even greater in terms of yield pick up,
Speaker 1: and that would move prices down even further. In terms
Speaker 1: of the dangers, There's been something on the horizon that
Speaker 1: I know Muhammad al Arian has been talking about it.
Speaker 1: I've written about it um but the real danger has
Speaker 1: to do with the triple B area of the market.
Speaker 1: And what the triple B area of the market just
Speaker 1: for your listeners, the bond market has credit ratings the
Speaker 1: same way that you have a credit score, and based
Speaker 1: on your credit rating, you either fall into something called
Speaker 1: investment grade, which means hey, probability that you're gonna pay
Speaker 1: off your debt, or below investing grade, which is we're
Speaker 1: not so sure. And depending on how low below invest
Speaker 1: and grade or the high yield or junk market you're in,
Speaker 1: that that that basically dictates the probability that you'll pay
Speaker 1: off your debt. So the triple B tranche of credit
Speaker 1: is really the it's the lowest rung of investment grade.
Speaker 1: It's the it's the B minus on your report card. Right.
Speaker 1: Anything lower than that, you've got a little bit of
Speaker 1: a problem. So, uh, that area of the market is
Speaker 1: has been growing exponentially as the market itself has grown.
Speaker 1: You've got record issuance in non non financial companies, and
Speaker 1: many of those companies have this trip will be rating
Speaker 1: in their debt. Here's where the problem comes in. If
Speaker 1: you look at something like black rocks um. You know,
Speaker 1: investment grade e T fifty of the e t F
Speaker 1: is comprised of triple B rated debt. If those bonds
Speaker 1: get downgraded or some of those some of those names
Speaker 1: get downgraded, black Rock is forced to sell those out
Speaker 1: of their portfolio, as well as every other investment grade
Speaker 1: bond fund that has triple bees that get downgraded. Now,
Speaker 1: this is the problem that people have been concerned about
Speaker 1: when we're talking about the credit market bubble. It's been
Speaker 1: this scenario in which oversupply would hit an area of
Speaker 1: the market and we don't know where bonds go from there.
Speaker 1: So I'll stop for a second. I know that was
Speaker 1: a mouthful, but if you guys have any questions on
Speaker 1: that scenario, no, I want to continue on this scenario.
Speaker 1: So one of the things you mentioned is with the
Speaker 1: stock market. Uh, you know, stocks get hammered, but then
Speaker 1: maybe a different group of investors becomes interested in it,
Speaker 1: and so okay, now there's a value stock. Talk to
Speaker 1: us about the discontinuity in the bond market such that
Speaker 1: if there is this sort of massive liquidation from investment
Speaker 1: grade funds where they have to sell due to downgrades,
Speaker 1: there is not some clean handoff to a new group
Speaker 1: of investors that can just pick them up because their
Speaker 1: mandate maybe for risk are credit. Sure. So so let's
Speaker 1: start here. The biggest asset managers in credit and for
Speaker 1: corporate bond space our our investment grade asset managers. And
Speaker 1: what they've basically said is we're gonna have our portfolio
Speaker 1: is only going to have debt in it that is
Speaker 1: investment grade. And so they have to stand by that mandate.
Speaker 1: So all of the capital that they take in um,
Speaker 1: they're not allowed by law, by compliance to invest that
Speaker 1: capital in anything but investment grade debt. Right now, as
Speaker 1: the bond market has gotten bigger since two thousand and eight,
Speaker 1: the overwhelming majority of new debt has been triple B
Speaker 1: rated investment grade debt on that lowest rung. And to
Speaker 1: put it in perspective for you, fort of a ten
Speaker 1: trillion dollar market is now made up of triple B
Speaker 1: rated debt. The triple B tranch alone is bigger than
Speaker 1: the entire investment grade market was in two thousand and eight.
Speaker 1: There's been nowhere for you to go as an investment
Speaker 1: grade bond fund because not only are there so many
Speaker 1: triple BE bonds out there, the yields have been so
Speaker 1: low for so long that if you want really to
Speaker 1: show any positive return in your portfolio, you had to
Speaker 1: buy those bonds and you had to hold them. So
Speaker 1: now the scenario is this as as if any of
Speaker 1: those triple B bonds like big names start getting downgraded,
Speaker 1: they must be purged from the investment grade asset management community.
Speaker 1: That purge it's something called it's a well, the bonds
Speaker 1: changing direction from being investment grade to high yield something
Speaker 1: called fallen angels. I think it's a really nice way
Speaker 1: to explain, like, you know, hey, you were in heaven
Speaker 1: and now you're back down to Earth. But those those
Speaker 1: fallen angels that supply this massive supply of fallen angels,
Speaker 1: it has a knock on effect. The first knock on
Speaker 1: effect is there simply is not enough capital in the
Speaker 1: high yield market. High yield investors do not have that
Speaker 1: much cash to start buying up all these fallen fallen angels,
Speaker 1: so they're the fear is there won't be a bid.
Speaker 1: The other knock on effect that really isn't being talked about,
Speaker 1: which is quite dangerous, is if you are pure high yield,
Speaker 1: if you are a B rated company or triple C
Speaker 1: rated company. The the the debt markets, the capital debt
Speaker 1: markets to you are going to become incredibly expensive because
Speaker 1: the oversupply of now high yield paper is going to
Speaker 1: make it so that if you want people to buy
Speaker 1: your bonds, and you're going to be issuing new new bonds,
Speaker 1: then the yields that you must um offer to them
Speaker 1: are going to have to be incredibly attractive, and so
Speaker 1: everything gets more expensive for companies that quite frankly are
Speaker 1: are sort of on the sort of damocles around whether
Speaker 1: or not they're going to make it. Where you're most
Speaker 1: likely to see in this scenario is a domino effect
Speaker 1: that creates that really spikes the default rates. And and
Speaker 1: that's what you know, the the larger conversation of will
Speaker 1: the corporate bond market due to the global economy? What
Speaker 1: the more good markets did to the global economy in
Speaker 1: two thousand and eight. Yeah, we've already seen a cluster
Speaker 1: of fallen angels, including I think Kraft Heins was the
Speaker 1: biggest one. Just on your last point, if you think
Speaker 1: about two thou one of the problems was that home
Speaker 1: loans or mortgages were massively levered in different ways through
Speaker 1: different financial products like synthetic c d O s, through
Speaker 1: the repo market, through things like that. Is there any
Speaker 1: sign of that kind of leverage when it comes to
Speaker 1: the corporate credit market or is the concern that the
Speaker 1: real economy itself is now over levered visit the corporate
Speaker 1: credit market. Yeah, that's a great question. Um. I think
Speaker 1: that there are signs of over leverage, but they don't
Speaker 1: look exactly like what we saw in two thousand eight.
Speaker 1: Here's a sign if you if you look at a
Speaker 1: lot of actually pretty healthy companies that have been issuing debt.
Speaker 1: What they've been doing is that the yields have been
Speaker 1: so low in the debt market. For example, a company
Speaker 1: like Apple didn't have an outstanding bond before two thousand
Speaker 1: eight and now has over a hundred billion and outstanding debt.
Speaker 1: Apple doesn't need cash, but what they've been doing with
Speaker 1: that capital, the debt capital that they've that they've borrowed,
Speaker 1: is they've been buying back their own stock. So the
Speaker 1: lever the leverage that you're seeing in the market is
Speaker 1: one in which uh companies are issuing bonds using the
Speaker 1: cash that they've gotten from those bond bond proceeds to
Speaker 1: go and buy their own stock, which is then changing
Speaker 1: the dynamics of financial markets. Mostly, what we've seen historically
Speaker 1: is the stock market and the bond market moving opposite
Speaker 1: directions of each other, and that's why having a diversified
Speaker 1: portfolio portfolio you're hedged. What we've been seeing though, over
Speaker 1: the past ten years is the stock market and the
Speaker 1: bond market moving in tandem. They both have been going
Speaker 1: up at the same time. That to me is the
Speaker 1: sign that there's there's something wrong with the leverage in
Speaker 1: the system, because now you actually have new heads here.
Speaker 1: We're all high fiving each other when both the bond
Speaker 1: market and the stock market stock market are going up
Speaker 1: because our four one case looked great, but now what
Speaker 1: are we seeing? Both the bond market and the stock
Speaker 1: market are repricing. The only market that's actually gained in
Speaker 1: value is the treasury market, which this week was the
Speaker 1: first time ever that the entire treasury curve um had
Speaker 1: yields lower than one percent. So we're we're an uncharted
Speaker 1: territory here, but there's a there's a lot of evidence
Speaker 1: of leverage over leverage. I mean, I think that the
Speaker 1: stats I gave you on the trip will be market alone.
Speaker 1: I think if we're if the analog between what's happening
Speaker 1: now and the mortgage crisis is this. People point to
Speaker 1: easy money being given to individuals who really didn't have
Speaker 1: the credit profile to qualify for loans like the Ninja
Speaker 1: loans and you know other mortgages that had really loose
Speaker 1: covenants as being the start the catalyst. Well, we replace
Speaker 1: that individual mortgage or homeowner with large corporations who have
Speaker 1: also gotten access to easy credit, who were getting access
Speaker 1: to credit at levels that were inappropriate for their fundamentals.
Speaker 1: So they really can't afford to be borrowing this much money.
Speaker 1: But as long as the credit cycle has been eased
Speaker 1: for the past twelve years, nobody really cared. I think
Speaker 1: now is the time to definitely care. You're going to
Speaker 1: see some sort of material the materialization of these lax
Speaker 1: credit standards, and it looks like it's much much bigger
Speaker 1: than what we saw in two thousand and eight. I
Speaker 1: was I've just gotten more depressed and stressed out throughout
Speaker 1: this entire conversation, and then with that last line, it, uh,
Speaker 1: it's even gotten worse. I want to ask a questions
Speaker 1: because we we talked a lot about the fed easy
Speaker 1: monetary policy and low rate But of course there's a
Speaker 1: difference between rate policy and credit, and of course with
Speaker 1: the bond, both of those are components. Did the two
Speaker 1: necessarily go hand in hand, by which I mean okay?
Speaker 1: Is there a way to keep credit standards stringent amid
Speaker 1: lower rates? Or did the weakening of credit standards that
Speaker 1: we saw, or the willingness of credit investors to take
Speaker 1: on perhaps undue risk. Was it an inherent byproduct of
Speaker 1: a macroeconomic policy to keep rates low and to keep
Speaker 1: the economy growing well, Joe, not only was an inherent byproduct,
Speaker 1: it was literally the intention of the central banks to
Speaker 1: make investors focus on less credit worthy companies. See what
Speaker 1: what central banking policy has basically done is they've been
Speaker 1: the net purchasers, like big purchasers of government debt and
Speaker 1: high quality corporate bond debt. By lowering those yields. The
Speaker 1: knock on effect has been to lower the overall yield
Speaker 1: environment for all bonds, whether or not their government or
Speaker 1: highly rated corporate debt. Because if I'm a company with
Speaker 1: you know, a lower credit rating, can take advantage of
Speaker 1: the fact that you can't find yield anywhere else and
Speaker 1: therefore my debt can be more expensive from an investor standpoint.
Speaker 1: That's been going on for a long time, and if
Speaker 1: you read what the central bank has been talking about,
Speaker 1: they've done that to particularly stimulate the economy. The problem
Speaker 1: though with this is there are a couple of facets
Speaker 1: of this problem. Problem Number one, um, you do this
Speaker 1: for a long enough time, you start to bankrupt the
Speaker 1: people who are looking to save money and effectively live
Speaker 1: off of their investments, because what they're what's happening is
Speaker 1: they're not getting enough yield in exchange for the risk
Speaker 1: that they're taking on. And eventually we get to a
Speaker 1: moment like we are right now, where spread start blowing
Speaker 1: out and companies where you had invested at a very
Speaker 1: low yield are now looking like companies that could default
Speaker 1: and you you have not been getting compensated for that.
Speaker 1: So again it's it's sort of like this double body
Speaker 1: blow to a lot of the the end investors that
Speaker 1: are in the marketplace. I think that you know, there's
Speaker 1: a lot of theory around central banking. I think a
Speaker 1: lot of testing them things that they've done, but we
Speaker 1: are going to see some some negative We're going to
Speaker 1: see a negative environment that I think has been fomented
Speaker 1: by a lot of central banking policy up to this point.
Speaker 1: Joe and I just recorded an episode talking about US
Speaker 1: energy and shale energy really and how it connects to
Speaker 1: capital markets, and a lot of that reminds me of
Speaker 1: what's happened in shale. On the one hand, the Federal
Speaker 1: Reserve really encouraged a lot of capital to go into
Speaker 1: the energy space because they were looking for returns, and
Speaker 1: that was beneficial for the US economy and for employment,
Speaker 1: as all these shale producers, you know, hired a bunch
Speaker 1: of people. But of course now we're sort of facing
Speaker 1: the reckoning with COVID as well as the big oil
Speaker 1: price sell off. Chris, one more question for you. Let's
Speaker 1: try to cheer up Joe. Uh yeah, please please? What
Speaker 1: could stop the current strains and credit? What can stop
Speaker 1: it from getting worse? If we're looking for a silver
Speaker 1: silver lining with COVID nineteen, the silver lining might be
Speaker 1: that we needed this cleansing around the debt markets in
Speaker 1: order to get yields to normalize, and normalizing yield normalized
Speaker 1: fields are actually very good for all end investors because
Speaker 1: we end up having a portfolio that performs better over
Speaker 1: the long term. In the short term, there's going to
Speaker 1: be some pain because the mark to market value of
Speaker 1: the bonds has gotten has gone down. But over a
Speaker 1: longer period of time, you actually might be compensated for
Speaker 1: taking risk, which is good for all of us who
Speaker 1: have a long time horizon before we retire. I think
Speaker 1: another another positive thing, and we have to, you know,
Speaker 1: remember this because remember we're we're all old enough to
Speaker 1: be around in two thousand and eight and think the
Speaker 1: sky was falling. Then, you know, market dislocations like this,
Speaker 1: real crisises, do create an environment in which innovation becomes
Speaker 1: starts to take hold. So I actually, what I think
Speaker 1: might be happening here might be the same thing that
Speaker 1: was happening to the equity markets after the crash, the
Speaker 1: flash crash of nineteen nineteen sixty two. The equity markets
Speaker 1: had a three day flash crash in which people were
Speaker 1: freaking out and they didn't know where prices were, and
Speaker 1: that eventually led to the creation of central pricing systems.
Speaker 1: So I think this, this market, especially for credit, is
Speaker 1: finally going to change the cultural idea that not having
Speaker 1: information is the best thing for trading. And what we
Speaker 1: may see at the end of this is people actually
Speaker 1: stepping into the idea that maybe it's a good idea
Speaker 1: that we actually know where all the bids and offers
Speaker 1: are before we start making multimillion dollar trading decisions. And
Speaker 1: the net result of that, Joe and Tracy is the
Speaker 1: end investor getting better treatment in the bond market than
Speaker 1: they've ever gotten before. And that always a positive when
Speaker 1: we're looking at the the just the overall global economic
Speaker 1: outlook for individuals. I guess that's something I tried, Joe.
Speaker 1: I tried to thank Yeah, you're trying. Thank thank you,
Speaker 1: thank you for trying. Okay, Um, Chris, we're going to
Speaker 1: leave it there. That's Chris White, CEO of Viable Markets.
Speaker 1: Thank you so much for coming on yet again. Really
Speaker 1: appreciate it. Thanks so much, guys. It's it's always wonderful
Speaker 1: talking to you. I wish it was something to be
Speaker 1: cheerier about. But I do think that a better day
Speaker 1: is coming when the bond market actually embraces transparency. Um
Speaker 1: and and hopefully I'll be on your podcast again to
Speaker 1: talk about that. Looking important to that. Thanks Chris, so Joe.
Speaker 1: I love how Chris tried at the end to bring
Speaker 1: that silver lining. But the other reason I really enjoy
Speaker 1: speaking with him is because he's so good at describing
Speaker 1: the differences between the stock market and the credit market,
Speaker 1: but also talking a lot about how they interact. And
Speaker 1: I do think an underappreciated aspect of the bull run
Speaker 1: in equities over the past few years has been just
Speaker 1: how much it has been supported by corporate credit. Yes,
Speaker 1: thinking about where the leverage has migrated to, I mean,
Speaker 1: it does seem like, you know, banks are in a
Speaker 1: healthier situation to some extent that they were prior to
Speaker 1: the crisis. Households, uh, not leveraged to the same degree
Speaker 1: that they were pre crisis, especially their own leverage to
Speaker 1: their literal home. But obviously, this sort of emergence of
Speaker 1: a giant boom in corporate credit has always been vulnerable
Speaker 1: to a serious downturn in the economy. And because serious
Speaker 1: sustained downturns in which people don't know when they're going
Speaker 1: to and such as this inherently puts at risk the
Speaker 1: question of is Chris put it, do we believe that
Speaker 1: these companies will be able to pay back their debts?
Speaker 1: And uh, that is coming under quite some strain right now.
Speaker 1: That yeah, and on that point, The coronavirus outbreak is
Speaker 1: so dangerous for a lot of these companies because it
Speaker 1: basically means that some of them are going to get
Speaker 1: their cash flows cut off for as Chris was saying,
Speaker 1: an unknown period of time. Many of them might still
Speaker 1: have to pay out salaries and other expenses in that time,
Speaker 1: and so you really have this big hit to earnings.
Speaker 1: Combined with all the technical factors of what's going on
Speaker 1: in the market, sell off very very painful when it
Speaker 1: comes to corporate credit. Um, I'm worried. I'm going to
Speaker 1: depress you again. When Chris tried to end it on
Speaker 1: an optimistic note, Oh what's the optimistic note? Oh, well,
Speaker 1: that we could get a repricing in credit and investors
Speaker 1: could maybe be better compensated for the risks that they're
Speaker 1: actually taking on, and that could be better over the
Speaker 1: long term. That was his argument. Oh yeah, I mean,
Speaker 1: I yeah, I know it's important. I'm just you're like, no,
Speaker 1: I'd rather not have coronavirus. Yeah, yeah, that's yeah, that
Speaker 1: makes sense. Okay. This has been another episode of the
Speaker 1: All Thoughts podcast. I'm Tracy Alloway. You can follow me
Speaker 1: on Twitter at Tracy Alloway and I'm Joe. Why Isn't Thal?
Speaker 1: You can follow me on Twitter at the Stalwart, and
Speaker 1: you should follow our guest on Twitter, Chris White, under
Speaker 1: his company's handle Viable Markets. It's actually at Viable m
Speaker 1: k t s. And you should follow our producer on Twitter,
Speaker 1: Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg
Speaker 1: head of podcast on Twitter, Francesca Levi at Francesca Today,
Speaker 1: and check out all of our podcasts under the handle
Speaker 1: at podcasts. Thanks for listening to