This is Bloomberg Business Week Inside from the reporters and editors who bring you America's most trusted business magazine, plus global business, finance and tech news. The Bloomberg Business Week Podcast with Carol Messer and Tim Stenebec from Bloomberg Radio. You know the story SPB Silicon Valley Bank collapsing into FDIC receivership earlier today, We were just talking about it with our TV colleagues. We also had an earlier in the week a crypto connected bank also coming undone, So
let's get to it. We're talking about Silvergate earlier in the bank earlier in the week with US. Right now is Anton Schutz, who's president and chief investment officer at mendon Kapital Advisors. He joins us via zoom in Florida, who I should remind everybody is investing largely in that regional bank sector also with US as Herman Chan, he's senior ALICE for US regional banks with our Bloomberg Intelligence team.
He is here in our Bloomberg Interactive Broker's studios. Listening to him this morning, I'm like, we gotta have them on. We gotta have them on. So glad to have both of you here, So Herman, let's start with you, though, what is of note right now in terms of where we are and what we know about Silicon Valley and potentially impact on the rest of the banking sector or
not impact on the rest of the banking sector. Sure, So when I think about what happened with SBB, it really is a classic bank run wrapped inside a technology bubble that we have seen start to pop with rates
where they are today. So it's a very unique bank that catered specifically to a client demographic startup in Silicon Valley and across the US and internationally, and their venture capital partners, and with what's going on with the startups today with burning cash and not raising additional funds via vcs or i pos, you've seen that those deposits really outflow, and that's really was the chief concern with SBB, followed by the fact that SBB invested a lot of securities
during the prior zero rate environment and with rates worthy are today, those securities were underwater, so they were sitting on on a lot of paper losses, which was a big red flag for the investment community. So it's just a matter of time before they started to happen as long as we stayed in this rate environment. As long
as we stayed in this rate environment. And frankly, the management surprised the street with the equity offering and also the sale of their investment, the available for sale investment securities portfolio. That surprised the streets and it brought on board a lot of questions of the viability of the big Can you walk us through actually the last couple of days and really how this is transpired and just spiraled out of control. Yeah, it's really kind of crazy
how it all happened. It really is the fact that they came out with this news about selling their securities and issuing equity. The market was surprised. You have the fact that silver Gate closed down the same day, and the market was very taken aback by the issue. You saw the stock trading down sixty percent yesterday, and it brought on board questions of the viability of the bank, with VC folks telling their their startup companies to pull money out of the bank. So it was a classic
bank run that just happened in the blink of an eye. Yeah, everybody started getting nervous and just wanted to run for the Hills. All right, let's bring in the investor and the investors side of this story. Anton's so good to have you back with us. How do you see what's happening and how we got here? Well, first of all, I'm really angry because there's a law in the books
in this country about creating a bank run. So you know, all the social media out there, all the big institutions that publicly went out and told everybody pull your money out of there, because at the end of the day, it was a liquidity situation. It was a bank run, right, It was poorly run bond portfolio, was a botched offering, and they should have wall crossed everybody. But creating a bank run really getting on you know, social media and telling everybody get out of the bank, I mean, that
is actually illegal. So unless they want to change the law, they should think about potentially going after people to create a run. You know, this is a liquidity situation. There was a badly run portfolio of bonds, right, they took a lot of risk. That's you know, that's where the risk is, right, It's not credit silver gate, same thing, right, they had a run on the bank. They had a securities portfolios too long in duration, they couldn't liquidated. And by the way, at the end of the day, the
FED was going to break something raising rates. And they've broken a couple of banks here. And the banks are culpable too because they didn't run their balance sheet well. But creating runs on banks is still legal in this country and is wrong. And by the way, from a contagion perspective, this bank was really unique. I mean the risks they took where their portfolio was unique. The deposits
they had. We're really relying on venture capital, right, really big, big, chunky deposits, so a very small part of the deposits are under that two hundred and fifty thousand amounts. So when when people started to take money out, it became
so serious that the regulars had to step in. And it's really sad because if they had, you know, wall crossed a bunch of big institutions raised the money, come out and said, hey, we're really strong, we have lots of lots of capital, rather than you know, publicly go out and oh, yeah we're gonna a capitalizing. We have bad news for you. Right, they could have wall crossed
a bunch of big institutions Anton. But because of this news, what are you doing in your own fun and looking at some of the fun the names that you do, right, you're into the regional banks. What are you doing to kind of check out the exposure that might be similar, maybe on a different scale to SVB. Yeah, there is There is nothing like SVB. There's a couple of other banks out there that that that do a fair bit
of venture lending. We don't have exposure to them. I'm actually not going to name them because I don't want to be part of creating a run on these companies. But nobody has that type of exposure right to that
extent um. You know. I do expect that some of those other companies may seek partners, They may get smart about it, or raise capital over the weekend and do exactly what I said, which is to a wall cross and go okay, let's shore up the balance sheet in case the money does want to run out or is nervous. But but this is a This is not regional banks, right, These are These are institutions that are very focused on this niche and there's not many of them. You know.
My my core investment are are companies that are based in smaller geographies that have great core deposits that lend money. You know that that really have very sticky deposits, and that's important. It's not chunky either, right. You know, First Republic came out today and made a statement, I don't own First Republic, so it would be very clear. But you know, they talked about the granularity of their depositors
and it's very granular. Yes, they have some venture but again very very small percentage relative you know to what Silicon Valley did. So again, I think this is localized. There are very small banks in this country that have huge deposits that you know, went out in bought bond portfolios. Those will eventually become owned by by slightly bigger banks. Herman, come on in and feel free to ask Anton a question.
Do you agree that it's localized? Yeah, s MEB is a very unique animal where their entire business model was focused on the startup and venture capital community. There's no other bank that that's public today that really does that of SBB size. SBB was the top twenty bank in the US, even though most folks listening today probably never heard of a BIT a week ago, but it was a it's a very big deal, and it's a unique bank that all of the venture capital and start community trusted.
Until yesterday, I have to say that I didn't know who this bank was and then did a milk in event a year ago that was all about kind of innovation and disruption. I believe it was in wellness and they because of their investments that they make and you know, talked with the head of the company. So it was certainly and I've been doing this a long time too,
it was not on my radar. Yeah, I mean, what exactly lies ahead now in the midst of all of this, because this is a big, kind of dramatic week just in general in the market's heading into next week with that critical CPI reading. So how does this really lead for the banking sector moving forward when you're looking more toward these regional banks. Yeah, So the focus is on deposits and how stable deposits will be for the banking industry.
And second, it's going to be focused on how much losses that the banks have in their securities port follow Those were the two crux critical issues for SBB that didn't pass muster, and I agree with Anton saying that some of these banks that are feelings a bit of this contagion risk maybe need to bite the bullet and raise some capital over the weekend with some big name investors to really assuage some of the fears that's in
the marketplace today. So Anton are you. I'm looking at your first bank shares that's a top holding by you. It's down four percent. Do you buy on some of these dives that we're seeing in some of the names. Well, I, you know, as a mutual fund manager, I can't tell you exactly what I'm gonna do, but I will tell you that that I'm very confident in these companies. I'm confident in their business models, their deposits, their lending structure, and their capital. Right. I think that you also had
a really big anomaly. Right, you had a very violent move up in rates over the last week, and by the way, violent moved down in rates today. So could Silicon Valley have been saved where they even tried to raise capital had they been at today's rates versus yesterday's Right, it's a really big mark on the portfolio, given given how many securities they had, so a really really big change.
You know, I think the Fed, you know, is getting a signal here, right, they've broken something, and you know, perhaps they should stop shrinking their balance sheet and allow liquidity be out there, and perhaps they ought to wait and see. We all have to remember we're coming off a lot of money slashing around for a long time, and even more so post pandem A Kermanja fifteen seconds. What would make you a little bit more nervous? What
has to happen quickly? Yeah, What really makes me nervous is if we see more deposited outflow as system in general or general. So that's something that we're going to have to keep an eye on. Bank runs. Who would have thought? Thank you both, Anton Schutz, President and Chief Investment Officer, Men and Kapital Advisors via zoom from Florida. Herman Chan. He's our senior Alice for US regional banks at Bloomberg Intelligence. Joining us here at her Bloomberg Interactive
Broker's studio. You're listening to the Bloomberg Business Week podcast. Catch us live weekdays from two to five pm Easter on Bloomberg Radio, The Bloomberg Business a Band You two. You can also listen live to our flagship New York station, Just say Alexa play Bloomberg elve and Dirty. All right, folks,
you know you have a big headline today. US pay rolls up in February by more than expected, while a broad measure of monthly wheat growth slowed, offering a mixed picture as the Fed consider whether to step up the pace of interest rate hike. So many questions. All right, with what she is seeing, Let's bring in Amy Hunter Glazer, senior vice president at the Global Staffing, an HR services company at Deco. She's with us via zoom in Florida. And then here for our jobs round table, Bloomberg News
Economics editor Molly Smith. She's here in our Bloomberg Interactive Broker studio. All right, So Molly lay it out for us. It was a mixed batch of data right from the government totally, which is why I hesitate to take a side here. So I'm going to lay out the good and the bad. So on the good side, we have this headline number of payrolls growing by more than three
hundred thousand last month. That's succeeding almost every estimate in the Bloomberg survey and continuing this streak that economists have now gotten it wrong for eleven straight months. To the downside, so we are still growing far more than what most forecasters would expect. You may have seen the unemployment rate
rosebook actually for a quote good reason. It's because more people actually came into the workforce, so the participation rate rows, and also the share of those people who are employed also ros so it's not just that they are looking for work, they actually have jobs. So those are all good things. Another thing where there maybe needs to be a little caveat is that we're hearing that a measure of wage growth slowed, which it did for average hourly
earnings for all employees. But if we look at a smaller subset that is just looking at what's called non supervisory workers, as in the majority of us who are not in management positions, right, those wages actually rose a lot. So that let's just lay it leave it there for this is the start of the mixed picture. Amy, I wanted to bring you in the conversation and chat about what you're seeing when it comes to US staffing demand and those data points right now. Yeah, so, frankly, it
wasn't a surprise. On the ground. We're still seeing almost two openings for every single employee out there seeking employment. So the market's still hot. Jobs are still out there, Employers are still fighting for top talent. Well, it's interesting you heard, you know, Molly lay it all out, so
you it sounds like tight labor market still. But I am also curious about as we dig a little bit deeper, what about the wages that are being offered our companies able to dial that back a little bit and not have to compete so much when it comes to wages. I still think we're seeing the most success and employers who are paying up in that seventy fifth percentile range, especially as it relates to the kind of that non
desk workforce. What we are seeing a little bit of a slow What does that mean is that like the hospitality, leisure, yea, our warehouse transportation those folks, what we are seeing is a slowdown on workers that are transitioning from one job to another getting those great wage gains that they have seen for the past twelve months. So signing bonuses starting to stall, just a little bit, retention bonuses we're kind
of going by the wayside. So we're seeing some of those other financial incentives really shift, But that base wage hourly rate, we're still seeing the candidates are taking advantage up Molly. I was curious about what kind of impact this report will have on FED policy because we didn't see a big revision downward for those January numbers. And still even though we saw a bit of cooling, I mean, this wasn't seem like I'm still pretty strong, solid report, right, Yeah.
And I'm laughing here because I wish I could give you the answer, and I think that's what we all want to know, and you know, I don't want to see a Carol's thunder here. But she had alluded to a survey that she did on Twitter and what this means we're in the FED? Oh yeah, it is? It being twenty five fifty year depends on CPI, I said, Fed's next move twenty fifty Most people said fifty bases points really over sixty twenty three percent to twenty five
bases points and then I set up to CPI fifteen percent. Okay, well, I'm gonna go with the last one to give myself the most weagle room here. I think that's the most prety thing to do. And just given like what I was saying before all of these caveats that it's really just tough to take this at the face value because on the one hand, the Fed's going to see these two as you mentioned, Jess, back to back months of
really strong job gains excuse me. But then on the other hand, they see moderating wage growth, which is great, but there's the subset of the population where they're still experiencing really strong wage gains, and it's in the service sector where the FEED is most concerned about wage pressures. All right, that's but Mike made the point too, and this speaks to something you know, I feel like Amy
that you were talking about. Mike McKee earlier said that where the growth was was hospitality, right, I think food services, things like that, and that tends to be lower wages versus manufacturing, which saw some declines, which tend to be higher wages that actually, you know provides That's actually a good point, Kyle, because we did break out and some of like where this was a mixed bag the good and the bad. That what we look at, and what's
called the diffusion index. It tracks like the breadth of jobs gains and how wides read the employment growth is across industries. It's actually pretty narrow right now. It fell the last month to the lowest level since the onset of the pandemic. So that shows you that the job grains were really just concentrated in a few industries like leisure as well as retail and healthcare. Amy, I was curious about what are you seeing when it comes to the type of benefits that talent is trying to seek
in these new type of roles. When we are debating a lot about what the picture looks like when it comes to the FED and what that means for them, it's all about flexibility. So they're looking for employers that really allow them that opportunity to focus not only on their financial wellbeing, but their mental wellbeing and health wellbeing as well. So we're seeing flexible schedules, paid time off, any additional perks having to do with physical activity, yoga classes,
things of that nature. So wage continues to be number one, but a solid number two behind that is how that financial peace gets balanced truly with your helped them well being. I mean that sounds like that's so it's challenging, right, That's still be challenging for them. It's dynamic. I want to bring up one more question for you as well.
If that's Okay, there was one thing that we saw that the average work week was shorter in February and not a ton But normally this is what we can see is a potentially worrisome sign because employers tend to cut hours before they cut staff when demand wayne. So I just want to know in your work if that's seeing you're seeing any of the impacts of that come up. We're really not seeing that much of an impact as
it relates to hours worked. Maybe a slight reduction in overtime, but I actually attribute that to we've seen some relief in a couple of different areas on supply chain issues, so I think it's more of a rebalance where we've just had for the past this heightened sense of we've got to get product out the door, and we've had a lot of overtime that we're just balancing back to a new normal. Hey, I do wonder Amy, I didn't
tell me if this is right. Guys, FED swaps were price in a FED cut now again later this year, all right, so they are still Amy, so are the companies that you're working with or hearing from anybody though talking about the potential for a recession that could be problematic or slowdown next year. Yeah, what I'm hearing from most employers is they're cautiously optimistic that, you know, this may be a tiny slowdown, but that it will rebound
very quickly. So I really am seeing a lot of companies hold on to their labor and an effort to avoid even if there's, you know, a little bit of disruption. They don't want to be faced with a talent shortage in the future. So I think lessons learn from the pandemic or at play again today is they're kind of stockpiling their workforce on the back end, all right, so we need to look forward. CPI, that's our next stop. Molly, let me get your thoughts first. Yeah, CPI the next
big one. Next week. We also have PPI, which is Producer price Index of wholesale inflation as well as retail sales. So yeah, these are really the next big data points, the last ones that the FED will have before they're meeting the following week. I think, taken together, all of this probably and of course, in the context of SBB, really can't ignore that at this point is probably still tilting in favor of the twenty five basis point hike.
As opposed to fifty. So it almost in a way seems like what Pal was talking about earlier this week, opening the door to fifty is somewhat okay, it's very much old news at this point. I mean, I don't know. To me, that just seems like that would just really cause more problems than do good. Amy saved to fifteen twenty seconds. Any thoughts in terms of wage inflation and what we might get. I think we'll wait and see.
I think we'll continue to see just some modest growth over the next couple of months, but I don't anticipate any huge surprises. All right, Gonna leave it on that note. Our thanks to both of you. Amy Glazer, Senior VP of a Deca via Zoom out there in Florida, and Molly Smith right here in our Bloomberg Interactive broke her studio. She's economics editor at Bloomberg News. I also asked the Twitter world, what would you lead with today? I said, cooling,
wage inflation, bank contagion or other. Overwhelmingly, they said bank contaction at seventy seven almost seventy eight percent. This is Bloomberg Business Week inside from the reporters and editors who bring you America's most trusted business magazine, plus global business finance and tech news. The Bloomberg Business Week Podcast with
Carol Messer and Tim Stenebec from Bloomberg Radio. Want talk a little about the crypto space if we made because bitcoin, I believe it's had its worst week since November due to the equity sell off, fear of a higher rates, and really an escalating US regulatory crackdown on crypto combining to hurt investors sentiment again. So we kind of continue to see this planet out. I'm just playing up Bitcoin
for the week. It looks like it was down I think about four and a half percent here, right, Carol, really getting under pressure, and especially when you're looking at just more broadly with this overall selloff in the equity market and really as far as I mean cryptocurrencies, especially in recent months, I mean, it's been really hard, and so when you're seeing those segments of the market, especially those banks that have that exposure towards crypto, especially getting
hit this week. Carol, all right, so let's talk a little bit in our weekly crypto segment. Back with us is Mike Belshi. He's co founder and CEO Bicco, which, as the company notes on its website, is a digital asset security, custody and liquidity company provides the operational backbone for more than fifteen hundred institutional clients in over fifty countries on institutions storing digital assets securely. He joins us
via zoom from Washington, DC. Especially appropriate since we want to talk a bit about regulatory Mike, good to have you back. Welcome again. Simply put, remind our world, our audience about your role, your company's role in the crypto world. Sure, Sobiko has been focused on custody most recently, which is a regulated custody. So we're regulated both in New York under the New York DFS as well as in South Dakota. Abroad, we're regulated under BOFEN in Germany, in Switzerland and also
coming soon in a couple of other countries. So we've taken a highly regulated approach. We're trying to build market structure so we can build safe access to digital assets. Something I was curious about is, from your advantage point, how is the recent volatility impacting the digital asset world right now? Well, look, we're in a macro recession. You know.
Sometimes we hear a lot of focus, like just a few moments ago, about how the crypto industry is hit so hard, you know, in the last month, and it's true it has been, but you know, it's a high vall asset inside of a broader market which has also been hit incredibly hard in the last six to twelve months.
You know, we're all experiencing it doesn't matter whether you're crypto or otherwise, pretty tough time as we try to recover from the ups of downs of first having had massive money prints a couple of years ago, and then now having massive inflation I'm sorry fed rates increase, and
then also facing inflation fears. So in terms of what you got, what you've been seeing specifically, whether through operations, conversations with clients, or what they're telling you, I mean, are you seeing investors more hesitant when it comes to crypto? Give us a little bit more color if you will. You know, actually we don't see a lot of that. People are always wondering what's happening with the market, that's true, But there's a couple of different types of people that
are invested into bitcoin digital assets. There's those that are investing because they're speculative about potentially making a quick buck and those those that are here and Bicco and myself personally are in this group. We're here because we actually do believe that we are building a better financial system. Look, technology has not had the opportunity to really change the financial structure that we have, the market structure that we have.
There's a lot of middlemen, there's a lot of participants, there's a lot of folks on Wall Street getting very wealthy on the existing system. We have an opportunity to change that make it more transparent and less risk. Now. I know it doesn't seem like that given the volatility that you see on a daily basis in crypto, but there are some shining lights that are coming through and that's what we're here fighting for. It's not a two month effort, it's a multi year effort. It's a multi
decade effort, and that's where you're fighting for. In general, we see a lot of investors they're excited about that promise. When you're talking about that transparency, what specifically is that, how do you make it more transparent? Well, look, everything's on a blockchain, and that means every transaction through the dawn of time is recorded in a public way where
you can always go back and see it. So we've already had the largest financial crimes ever found and investigated have been off of the blockchain, where what happens is some malfeasance happened in the past, and it may take a month, it may take a year, but you can watch what's happening, and as soon as a bad guy perpetrates tries to exploit his past ill gotten gains, you can see it and you can catch them. And that's transparency. On the balance sheet side, you can see exactly what
assets people have. We have a product called grap Bitcoin and you can go to a website and you can see in real time, twenty four hours a day, seven days a week, exactly what the finances of that that that particular product are. So you don't have to wait until the quarter and get ninety day out of date audits. We can give it to you every day in real time. That's transparency. So how do we make the crypto world work?
Which I feel like and I hate I just said to Jess, I hate that we kind of say crypto world because there's a lot in there and I feel like it's not apples to apples. You know, we throw blockchain in there, and that's related obviously, but it just doesn't all kind of mesh always in terms of comparison. But I do wonder, you know, Mike, the whole idea of digital currencies was to be kind of away from the traditional infrastructure, with kind of less fingers in the pot.
How does the regulatory environment come in there and kind of keep it pure the way it was meant to be. Well, look, we do need some amount of market structure, checks and balances, elimination of single points of failure. A lot of the basic principles of security overlap with like how do you have sound money? So the idea that you give your assets or your cash to a single party and he manages it entirely without any oversight is a bad idea.
Bernie made Off made it very claric. He said publicly, if his clients had required him to use a third party, independent custodian, he could not have perpetrated his crime. So we know some of the basics of how to solve this. I recognize that in recent months there's been a number of failures, and in general it's not because bitcoin is off and inherently rogue. Right, it's because bitcoin has not
been included in the financial system. And you know, we could talk about silver Get Bank, where the entire burden of a trillion dollar asset classes banking was basically laid to rest on the shoulders of silver Gate Bank. Now, what we should have had instead of a single bank with eighty five percent exposure to crypto and a major concentration risk, we should have had a hundred banks with two percent exposure to crypto, and this bank run never
could have happened. So what we need quickly is for the US regulators to get comfortable with crypto, to start welcoming it instead of shunning it and pushing it away and making a robust market. That's what we need. And I'm glad you brought this up because we had this week with SVB, the biggest bank failure since two thousand and eight. When you're looking at what's happening in Silicon Value.
But to back up and think about what we've been chatting in recent months FTX and that collapse leading into this. So what do you think was the big takeaway of what we should have learned from ftx's collapse as far as how this moves forward. Were you ever asked to be a custodian for them? So we were not a custodian for FTX prior to their bankruptcy. We actually are the custodian under the new management. So John Ray has
taken over as CEO at FTX. The first thing that he did was he installed a custodian to take care of the assets. Prior to that, the assets were held by the internal people working at you know, FTX, and of course it allowed them to perpetrate crimes that we only learn about about later. Look, the thing to learn about FTX is simple, and again we should point out, as we've been doing on Bloombergers, they're still figuring it all out in terms of what actually happened and what
criminal charges are accurate. So we just want to put that out. Go ahead, Mike. Look, the basic thing we need is we need checks and balance and marketstructure. You know, FTX had two roles. It owned a company called Alameda Research, which was a prop trading firm. Some people call it a hedge fund. At the end of the day, that's proprietary money, it's investor money, it's high networth people like they can do what they want. They can take crazy risks.
They want to lose all their money, no problem. The second part of FTX, of course, was the exchange. The exchange is part of market infrastructure. So when it comes to market infrastru were you're talking about the CFTC and derivatives, or whether you're talking about the equities world, you will see a series of companies exchanges, broker dealers, clearing houses, transfer agents, custodians and banks, and these come together to provide checks and balances and robustness which prevent the types
of failures that we had at FTX right. Unfortunately, without those in place, Sam bankman Fried took the money out of the exchange, which was supposed to be known quantified risks, you know, infrastructure, and he took it and he put in his prop trading firm. Again, they're just figuring out all the details. But I hear you. I hear you, Mic We've run out of time, but I know we'll continue this conversation again in the future. Good to check
in with you again. Mike Balci, He's chief executive officer Bitco. He's also co founder. I should point out a Bitco joining SVA zoom from Washington, DC. You're listening to the Bloomberg Business Week podcast. Catch us live weekdays from two to five pm Eastern on Bloomberg Radio. The Bloomberg Business a band you Doo. You can also listen Love. I'm to our flagship New York station. Just say Alexa, play Bloomberg e Love and Dirty Journal. Now about you. Let
me drive? No, no, no, no, who's going home? Honey? Please? I'll do the riding gravels. I want to try. It's good question. Drive. This is the drive to the clothes. TIMU thank well, Brier up down on Bloomberg Radio to do a double two. All right, everybody, About seventeen minutes
left in today's trading session. I think Jess was just saying double take, because there's some numbers that are being thrown at us when it comes to the markets that kind of get you like, wait what Carol Master alonger Jess met and you know Tim is on leave and as we said, we're counting down to the closing bell here. We got a lot going on, so let's get to
it with Christopher Zook. He's founder, chairman and chief investment officer at KAZ Investments, joining us on the phone from Houston, Christopher, good to have you here with us. We've had quite a market reset, I think it's safe to say, over the last couple of weeks. So we've had a bank failure. We've actually had two this week in terms of regional banks. We've got fed swaps fully pricing in a quarter point
rate cut by year end that happened today. We've got lots of volume amid the volatility and downward swings that we're seeing on equity. So how do you describe the market environment right now and how confident do you feel about predicting where we are three months from now, six months from now? Well, thank you for having man. What I'll tell you is that anybody who was bored, they're
now wide away. It has become a quite interesting market environment, and just in the last twenty four or forty eight hours, it is shifted quite a bit. More So, to answer your question specifically, you know, it is very difficult to focus out three to six months, just because there's so much noise. We have a saying as a firm, which is the careful not to look too much at the trees, but try to look at the forest above. Here's what the forest is right now, the Fed is in a box.
They're going to have to raise rates more, They're going to have to do it probably longer, and so as a result, it's going to make it much more difficult for investors to just ignore that. And what I will say is that there's two types of recessions. There's episodic recessions caused by events like COVID, and there are manufactured recessions where the Federal Reserve simply says we got to put the country in a recession to tamp down inflation.
We haven't seen that since nineteen eighty two, and most of the people picking stocks in nineteen eighty two or picking bonds in nineteen eighty two aren't in the business anymore. And so as a result, nobody knows the playbook really to use in this environment. And that's what's really going to set the tone is how most does the market begin to anticipate twenty four or do they really just truly not understand what twenty three is going to look
like for the rest of the year. I know your firm provides private credit investors, and that's something that's really important. What are you seeing there? What is that telling us right now. You know, it's interesting because in the private credit world versus the public credit world, there's actually a fairly significant amount of stability compared to what might be
expected at this time in the economic cycle. So we invest in a lot of different areas of private credit, and so you really do need to dig into the details of a specific segment or specific sector. But overall, we're not seeing distressed because more or less companies have had better balanced chiefs as they've gone into this procession,
they've had better liquidity position. But and this is the big butt, is that we have a wall of maturities that is going to happen between twenty four and twenty six, and now interest rates are much higher, margins are getting compressed, and so we do think there's going to be some fantastic opportunities in the distressed debt landscape coming in over the next eighteen to twenty four months as that reset does occur. So we're building a war chest to take
advantage of that. What are those opportunities specifically, Well, I mean, as you see spreads blow out. The interesting thing about this cycle, going back back to my point about different playbooks, you know, when you think about COVID spreads blew out immediately high old spreads went from whatever it was five hundred basis points to you know, fifteen hundred basis points
just round numbers. And so what you saw is this immediate reaction of years of contagion and how this was going to drive you know, businesses out of business effectively, which of course it did in many cases. And in a manufactured recession it's much more gradual, and so you have a little bit more of depth by a thousand paper cuts as opposed to just a meat clearer being taken, you know, to use a not agreeing analogy there, but but a lot of paper cuts can add up to
some serious pain. So I am wondering, you know, just to push a little bit further. I mean, in terms of where the distress credit opportunities might be. You know, what kind of are there certain industries that you think are particularly Absolutely we do, and we think that anything in the industrial or anything that doesn't have material pricing power.
When you look at a stagflation environment, which is what we believe we're in and going to be in for a little while, it's those companies that have the ability to pass on price increases to their customers that are going to be able to be more resilient. So if you see spreads blowout in I'm going to just use
industrials because they've already said it. If you see that blowouts where you're getting a thousand or twelve hundred basis points on top of a fat funds rate of five or five and a half or six, now you start talking about really, really good return. And that's before you apply any leverage whatsoever to your own investment strategy. So we see those kinds of opportunities playing out as well as in the venture capital lending space. You know, obviously
forget the whole SFB SBB story today. Just before today, you had this enormous gap between what companies are willing to raise money for and what their needs for capital are going to be over the next eighteen to twenty four months. Well, if they don't want to do a big down round, then they're going to have to go out and get the money somewhere. And that provides an opportunity for lenders to fill that gap and get very high rates of return as well as usually warrants or
some form of equity. We see that as a great opportunity over the next twenty four months. And you also were speaking about the margins, and obviously that's an important point there. Where are you seeing the companies that are still able to sustain that in those work Because obviously there's the ones you would think with fits more consumer
focused and things like that. But to your margins point, where are you seeing sort of that pressure and then other corners that can withstand that at this point, so the pressure is everywhere. When we talk to companies all over the world, the one thing that they all say in common is that margins are under pressure because their cost of inputs and their labor costs are all rising, in many cases at a faster rate than that can
pass those along to their consumer. So in pretty much every sector, with the exception of maybe chocolate or coffee or areas like that where they just don't really care if you raise the price by another nickel or another dime, in those particular areas you have left margin compression. But in every other area you have margin compression, which means that as you see that happen, the market is just completely been wishing. And there's the old saying, hope is
not investment strategy. The market has been hoping that learnings are not wanted to decline as much as they typically do under recession. This is actually potentially worse because you have this big increase in cost inputs. Then you also overlay a slowdown in demand, which is inevitable when you have credit card rates at nineteen percent and you have subprime auto loans that are obviously at very high rate now because they're floating rate right right right, and people
are handing back the keys. But you do wonder I think about the auto sector, corporate are you know, company and real estate, like there's just things percolating out there. Christopher Zuck, Yeah, it feels that way. Christophers Duck, thank you so much, Founder, chairman, and chief investment officer at KAS Investment. On the phone from Houston. This is the Bloomberg Business Week podcast, available on Apple, Spotify, and anywhere
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