Lending, Markets, Metals, And A Growth Recession (Podcast)

squash team is insane, insane and legendary squash team. Yeah, in Hertford, Connecticut. And then you go get a master's in English from the Universe Chicago, which I didn't even know the University of Chicago offered a master's in English. I just think numbers when I think of Univerity of Chicago. So you get all that going, what do you do? You go into the private credit business? How does that work?

I mean, well that's what I If you're gonna go to Wall Street, I think you're gonna do English major in the classics or history. I just don't see it. But Randy Schwimmer did it. He's co head of senior lending and Senior managing Director Churchill as management. Randy, You've had a odd career path, but we'll take you as an expert on this private credit business. I love the private private credit business. I think I can get yield there.

Just give us an overview of kind of what the private credit market is like today, because boy, it's been ugly everywhere else in the capital markets it has been. But you know, listening to you guys talk, I had to do some push ups in my office just exactly that's he's shaming us. All. Yeah, but I did on my oak mail this more and so I'm good to go. But you know, feeling energized actually about where we are.

Although you know, it's interesting. There's no much more fun for capital markets and investor guy to be looking at an inflection in the market right because the things are going along smoothly. It's like being a weather person meteorologist in San Diego. Okay, it's Sunday today, Sunday to Marrow, it's gonna be Sunday next week all week, you know. Whereas you know New England, it's a little more changeable. Sometimes he's raining sometimes and this is what's going on

kind of right now. Is there a lot of moving parts where at the end of a war to your cycle where interest rates fell fell fell, you know that's over and we're in a new cycle, you know where rates are lifting off. We're calling it the Great Unwind. So the FEDS on winding its balance sheet, and the concern now is inflation, right, and so the Fed has to be frustrated because they're wondering, Okay, everybody, what about this we're raising rates until inflation is dead message? Have

you not been getting? Turns out it was the we're raising rates until inflation is dead message they weren't getting. Well, it feels like they're getting it now, and the market is very cautious. Private credit, i would say, is somewhere between cautious, um and constructive depending on what's going on.

Our portfolio, interestingly, which is comprised of almost three hundred private equity backed companies and all sorts of sectors, mostly defensive, healthcare, business services, technology, that portfolio is actually doing pretty well. Revenues are generally up, cash closer are also up. Now there are obviously, see situations where companies are struggling with supply chain issues. You mentioned labor costs before we started, you know, labor costs and labor availability is certainly an issue.

But in the right sectors, and particularly with private equity sponsors who have raised long term capital with decades of experience around those sectors, and they have conviction with these businesses based not only in their decades, you know, going through cycles, but also in the recent experience going through COVID, And so they're coming out of COVID and looking at this new opportunity in the market and saying, you know, we think we have found companies that will continue to

do well, less consumer facing, lower cap acts, and higher cash free cash flow uh generation, and those businesses we think we're going to do really well. We're partnering with them up and down the capital structure, senior debt, junior capital, equity co investing, and and have found that all of a sudden over the last you know, year or two, that opportunity is actually expanding for us, in part because the AZTEC class, as you mentioned, is attractive for people.

It's an alternative asset class to the sort of headline bending stuff that's going on and very very popular lately. I mean, we hear so many people actually all year we've been hearing people talk about it, But how bad has it been. It's so opaque that I can't get a good picture by typing I N go on my Bloomberg terminal. I can see that treasuries UM are off, you know, the Treasury's index is down ten percent year to date. I can see that corporate debt is down

UH ten eleven percent year to date. The global agg is off almost from its high. So it's been an historically bad period for you know, fixed income of all kinds. How has it been for uh, for private debt until this until this inflection has actually been through this year. And I would include include actually leverage loans in general, because we have a large cap practice with the now vene UM that does the broadly syndicated market liquid loans

and so forth. Both that asset class and private credit have done very well this year relative to other assets, in part because of interest rates going up, in part because of the collateral and the security and the covenants that we have in the direct lending market that gives us protection, and in part because we don't trade. You mentioned you can't go on Blueberg and find flind these deals. That's the beauty of the alternative market, and that's what's

happening with private credit since you can't trade it. The goodness is if you're comfortable with the investments you've made. These businesses are throwing off cash flow after cash flow, strong valuations because again, we're buying this, we're financing the data as a partner to the private equity firm who's throwing in tons of private equity cash that they've raised below us, So they've got to burn through a lot

to get to even to us. That's why our default rate and laws rate has been so low, and that's generally the case in in private credit. The other thing that's going on right now is that investors, you know, who were investing in platforms like Churchill are looking for you know, relatively low risk, conservative but you know, yield that is going to be enhanced when rates go up. We're a floating right off the class. We've been waiting

for this news cycle for forty years. Okay. I started my career coming out of Universe Chicago forty plus years ago and at the time was in charge. Interest rates were you know, double digital. I had a mortgage that was like twelve percent. I thought I was lucky here we are so far went from zero percent so for like the I don't use so for I'm a lieboard guy. Okay, so it went from zero to three percent? Right, all right, Randy,

we gotta kint it short there. I could talk private credit all day, not at the time, so you can get you do you get? Ran Randy back back for like a half hour because I love this private credit business co had of senior lending and senior managing director Churchill Asset Management Private Credit. Check it out, all right, Breton Ewing Joints us he's a chief market strategist for

First Franklin Financial Services. They're based in Tallahassee, and Brett has his undergraduate degree from Florida State and he's on the board of trustees at Tallahassee Quarterback Club Foundation. So Bred, we gotta start up. We'll get to the market stuff later. Give us the preview Florida State football. Well, we just had our first home game, got a pulled out a

victory in a rainy night. But the big game really that's starting our season in our minds is this weekend against l s U. This So what's the feeling in Tallahassee about Florida State football. I mean they were you guys had such a great run for such a long time under coach Balden. It's been a little bit follow since then. What's the feeling of Tahassee these days? Well,

we are optimistic. Um, we do feel that we have a good coaching and his leadership and what he's done with recruiting given the tools he does have, access two is pretty strong, and we are optimistic that we'll have a pretty decent season this year, which should give us momentum going into next fall. All right, good stuff. All right, So you've got a Federal Reserve that turn I'm not sure if they turned hawker Is on Friday last of last week, but boy, they certainly communicated that and that's

had an impact on these markets. What did you guys take away from our Federal Reserve on Friday? Well, I think the timing of that meeting was, you know, reflect important because I mean we were coming off of a

pretty big run up from the June Lows. In fact, the week prior to that you had the NASDAC up from the Lows, SMP up at almost and I think I think he didn't turn a little bit more dubblished in the market, was kind of hoping for looking forward, and his rhetoric just was perfect timing for what we feel is a pullback that has been badly needed in this market. We think a new bull market has started and the June lows will hold. Really I'd like that. See,

that's the question I've had a lot of people. Yes, it is a call like will we retest those June lows, and you're suggesting maybe not. I think the only way that we retest those June lows over this fall would be inflation actually starts picking up at a higher pace, and we don't see that happening with our data that we're looking at across the board. The FED has really done one of the most hawkish beatdowns of this economy that we've seen in forty years, and the real effects

of that are just now starting to flow through. And we believe the economic data will still continue to cool, and we believe that inflation numbers have peaked and that we're going to start seeing some cooling in there as well. You know, I want to ask you about the labor market because we had um the app firing kind of adding to the pile of silicon valley, Um, you know, shopping that's going on as well as or At the same time, we had a super high job openings and jolts.

And then I thought, why am I always asking these macro questions? Why are we so darn macro? It just drives me crazy. It's so annoying bread Does it annoy you too? I mean, you have to do you have to be this this macro in these markets? I really think you do. I mean, what what's going on today? I mean, look, a lot depends on what happens in the job market as we move forward, right, I mean that's one of the primary things that the Fed's looking at.

And the eight hundred pound gorilla in the room is definitely the FED, and we have to pay attention to what they're going to be doing. But look, the job market is cooling Since April lows, the job four week moving average on jobless claim is up fort and I would say, you know, statistically, anytime it's moved up fifty from those lows, it's it's indicated recession coming down the road.

And so I do think the job market is cooling off, even though we have a big job's report coming up this Friday, we're expecting somewhere around three three fifty UM on jobs game, which is significantly reduced from the last number. But yeah, moving forward, I think you're going to continue to see some economic numbers to terryate. So what have you guys been doing in the market here, Brett in in the last you know, several weeks here again, we had a brutal first half of the year, bounce off

the bottom. Now a little bit of uncertainty here. What are you guys doing over the last several weeks. Well, strategically, we have shifted to we are by dips and specifically we like the small and mid cap arena. I think the valuations on their four p's are probably the best going back to the early two thousands, and we're paying attention to that. We're taking advantage of individual stock picking,

I think is the way to play this. There's just some companies that have been thrown out with the bathwater and I think there's incredible opportunities and we're taking advantage on any of these dips as we move forward. It's awesome to get a straight talker, you know. Yeah, Well you get good to Tallahassee. You get straight talkers. I like it. Yeah, I like it. Don't mess around that. And it's also rare to get a street talker that's so bullish these days, right, even the big bulls seem

to have turned bearish. And the bear sounds so much smarter with their doom and gloom if you step back and look at the charts longer term. Absolutely yeah. Alright, Florida State at l s U this Sunday, September four pm. That is game, all right, Brett, you in chief market strategist First Franklin Financial Services. We appreciate getting your thoughts. Our next guest, this is interesting. A bus hater, CEO and president of a peto based in Fredericksburg, Virginia. I

think all of us. What do you guys do at a specto? This is really interesting? Tell us about your company absolutely so. Basically, um, A Speedo provides innovative solutions to the government, military, and the intel community protecting their interest, human assets and infrastructure. And I have a feeling you're going to get into one of our more interesting products here in a little bit, but I'll wait for that. No, it's bullet bulletproof close. I'm so down with this and

by the way, it's not just like vests. Right, do you make actually bulletproof suits? Can I wear this on TV? Oh? Absolutely? It's uh, no such thing as bulletproof, but yes, we are America's first bullet resistant clothing company. Many many years ago we created suits that look like regular suits that you wear to work, but they'll stop a nine millimeter fifty and all that. How how does that just tell us? How? Um we work with the special arameds and integrated into clothing.

I've talked to you before, I've talked you. I've talked to you about this before. My first thought goes to motorcycle clothing because it's so difficult to find good, uh, motorcycle clothing that's not big and bulky, and clearly suits are not that. So why don't you branch out into that business? We've actually done stuff like that on individual basis. But I mean our focus is government, uh, in the intel community, the military, So we're right now sticking to that.

But who knows, Yeah, that's my tip, you know, like military, well, police, police ride a lot of times. But so so what what else? What are the most interesting aspects of espetto for you? Beyond the one that you have to talk about every time someone finds happy. But well, we're also the first ones to introduce female focused body armor to the military. Women in the military have been wearing uh men body armor for the longest time, and it affects their mobility. Uh you know, it's not as safe. It

causes a lot of injuries. So we were the first ones to work with the US Air Force and create the female focused body armors. So we did that. We also right now are working on something really cool. We're calling it Scaliflex, which is going to be the you know, the next level of female focused body armors. So doing those things, but we have an entire division called a Speado Labs were we're just developing cool technology and we have in house engineers, tree d printers, all of that.

And then the other side of a Speadow Labs is where we actually invest were incumbator accelrator model on that where we invest in cool technologies and bring them to the government. Because the biggest issue with startup communities that they can't really present their products to the federal government. There's I mean, you have to have contracts, you have to have contact, past performances and everything well has all of that, and so we would just invest in that.

See I see, so you're there in basically you're absolutely there so to speak. Or nobody wants to have to use these kind of products, right. Um, I'm sure you also would prefer if there were no war, but there is one right now. Vladimir Putin invaded Ukraine. Are you shipping armor? Um? Two soldiers there? Are you helping out in that? Uh, you know, on the good side of that fight? Yeah? Absolutely, the good side of the fight. Um, yeah, we are. We have a cargo plane full of products

that goes out. In the beginning, it was going out pretty much every week, every other week, and now it's more or less like a couple of times a month. Uh, that we have. So we've done um, body armor carriers, UM m r E, medical equipment, flashlights, and you know, a whole bunch of stuff. Is this I've actually been to Ukraine. I was right at the beginning of this war. I was I was at the border of Poland in Ukraine. But in eighteen I also supplied a whole lot of

armor to Ukraine and I was actually there delivering that. Interesting, So I mean, is it for the Ukraine army as for civilians, who knows for the military, it's the military and border control. So what what how do you finance all this stuff? I mean, um, are you looking at raising money in public markets? Are you? Um? You know taking out debt right now is a very interesting time

to I guess already have done that. You don't maybe don't want to do it, um, as as as rates go up and up, But what's the capital structure look like? So espeto? UM. We we are cash positive. We were not in lost. Uh, We're doing well. So a lot of it is just you know, utilizing our own cash. We worked great deals with some of her suppliers. We've got great partners in the industry with great terms with that. But we are looking at talking to some pees and vcs.

But the biggest thing that we're gearing up for is at the end of three for early hopefully we will be going public UM. Right now, we're just in the prep mode forward. We're we have a firm we're working with in New York, have taken hundreds of companies public um. We've got a great board of advisors. UM. Heck, one of the one of the guys on our board of advisor is the guy who wrote the book, The I P O Playbook. Uh, Steve cake Bread, he took sales

Force Pandora, yes public, he was their CFOs. So just putting all the pieces in place right now and scale to scale you want to really out? Yeah, absolutely. I mean most of the companies that go public are are in a loss right, but they have exponential growth. We're a company that has been positive for years and we're still have that exponential growth. Where did you guys come from? I mean, where do you find people like you? I mean doing a bullet resistant clothing I mean, I don't

even think I can even think of that. So you're and you're a bit of a serial entrepreneur, aren't you? After ships in ports? Hope, you're sending your ships in ports That was a great business senior year of high school. Um, that's all so, so basically you've been starting businesses since you were a kid. Yeah. Especially I started freshman year of college and senior year of colleges when we introduced

the America's first bullet resistant clothing line. Unbelievable. Why, I mean party, Why wasn't just just drinking beer with the rest of the college kids. I was, but I was working at men'sware house full time, learning my business full time, going to school full time. Um and uh it was. It was tough. But University of Mary Washington, that's a hustle. Where's the University Mary Washing? I know it's in Virginia.

We're in Virginia. You guys stayed right there. You're close to d C. You're close to d C all those government businesses. That's cool stuff. Alright, great figure build up contacts on the Colorado to so Colorado's big. Colorados are another tech side. So we have our offices in Colorado and Charleston. Colorado is mostly you know, Space Force Missile Defense System and APETO is in all of those nassas

for Missile Defense System. A boss Hayter when you make your first billion remember remember us, Yes exactly, A boss Hater CEO and president of ASPECTA. One of our more interesting guest all right, want to bring in Anna Want she's the chief US economist with Bloomberg Economics. I'm glad we got her on today because I have some questions. Will you go hit well? So all right, Anna, thanks so much for joining us. We had this um piece of news from snap You know, the owners of Snapchat,

they're firing twenty percent of their staff. And we've been seeing stuff like this at a Silicon valley for a month two months now, where they're either freezing, hiring or reducing headcount by ten percent or twenty You know, from social media to UH to UM, UH, crypto to software, everybody seems to be slowing, stopping, or firing at the same time. The JOLTS yesterday showed the biggest amount of job openings, one of the highest on record, eleven point

eight million. What gives Yeah, I think definitely there has been a tech recession UM, but techno technology technology sector accounts for but just a small proportion of the labor force UM. In JOLTS data yesterday, we saw that the job openings UH increase has been concentrated in government and UH low sort of the low income services sector. And I think that seems to be consistent with what I'm

seeing outside in the real world too. That is, if you just get out of the cities and go out to you know, Brew America, there's still a lot of a lot of UM for higher signs. People are still small businesses, are still complaining about not being able to to find workers. So I think two things could happen at once in the in the economy, which is you have these pockets of weaknesses, which is good to save from the fetch perspective, but also that there's a strength

in the rest of the service economy. Matt, I don't know how you and I made it to Bloomberg. I mean, we are surrounded by really smart people. And it's got her undergraduate degree economics and statistics, which is just the worst. I was just luck lucky, but I thinks is the best. I couldn't get away in it. It's just the worst. And then she gets her PhD from the universe of Chicago. I don't have no idea how we made it here. But and I talked to us about a growth recession.

What is a growth recession? Or is that something you just made up? Didn't we just see that? I don't know. Well, I'm I'm on the same boat as you guys. Actually, I have not seen this terminology at Berkeley or Chicago, but apparently once I looked it up. What this means is that it is positive growth that but it's not positive enough to bring down unemployment rate. So unemployment rate will still go up. UM. So I think it's just

a euphemism for soft landing UM. And you know, in in the June's Summary of Economic projections, the median f o MC members sees unemployment rate rising from you know, three point six at that time to four point one pc by the end of still very low, very low, very low, but with positive GDP growth. So that is the growth recession. I think that that would be consistent with growth recession. That's just weird. Okay, what do we call what just happened? We had contraction, no growth in

the first two quarters. And do you think we're going to continue to see um, you know, back to back quarters of contraction without calling it a recession. I mean, it doesn't feel like a recession, does it unless you are one in five people at snapchat. UM. I think there's a big debate in the economic profession right now, which is what is the real data and GDP. There

there are two measures of GDP. One is the from the expenditure side, where you know C plus G plus I plus net exports and that is showing two consecutive quarters of negative growth. But the other measure, which is based on summing the income and corporate profits. That's called the gross domestic income that is showing positive growth in

the last two quarters. So usually the economists think that the average of those two is the best gauge of what's going on in the economy, and that will tell you that, well, growth has stalled definitely in the first half of this year, but it did not go negative. And what's this what's this half look like? Are we what's this quarter look like? What are we in right now? I think the troth of consumer spending was around June or early July, when gasoline prices was uh was very high.

And from high frequency data, I'm seeing that spending has has been going back up again truck yesterday. And even the housing market, Yeah, we are seeing these dramatic plunges in home sales, but you know, if you look at actual real time data, like I have the app red fin on my phone, there has been just a lot of pending and continguous Like the moment that houses comes on,

it's pending contingency. Good stuff an a long Next time you're in New York, you are coming into our studio, no questions ask all right, I think we're all gonna learn a lot here. I know I am in this next segment. Dr Luisa Marino joins us. She's president of Defense Metals Corporation. That makes it sound so so serious, I know, but that's why I want to go there. So uh, Dr Marina, thank you so much for joining us here. Tell us what Defense Metals Corporation is. What

do you guys do well? Defense Metals is a junior mining company and we are in the process of developing um mine, a rare earth mine, and rare earth is is a critical material um for technologies and for the defense sector. I thought rare earth was like a whole group of minerals. It is. It is so rares. Uh. They are the London Nights. They'll find at the bottom of the the periodic table, and they're about seventeen elements.

And so the reason why they all grouped together is that when you mind one effectively mining all of them, because they tend to occur together. So where does one mind for these? Are they in certain parts of the world? And what are there like neodymium or prodium? Are you you just pulled up the periodic table. I'm just looking at the last seventeen I thought he had that memories from hyd chemistry. Now, they are not very common. Most people don't know about them. Like I said, they are seventeen.

Some of the most known would be, for instance, new demium presidymium. They make the strongest known magnets um and and they go into everything from speakers to too electric mortars for electric vehicles and things like that, as well as m right machines for for in medicine. So those are very popular ones. But there's this prosium, there's lenten um, there's therium. There's so many for so many different applications.

But they are so so so what's your focused that I mean, it's this is something that is of uh sort of national security importance because um otherwise, in order to build the batteries we need or um, you know, the medical equipment that we need, we have to rely on China or other countries that we don't necessarily so um so so so what are you what are the one what are the use cases that you're focused on with the stuff that you you're gonna mind, right, So,

like I said, when you mind one, you mind all of them. So we tend to have the most important ones for us. Definitely the new Demium, presidimium UM, some other minds, mostly in China. They will have you know, what we call the heavy arths, which are the least uh common ones, the more the more difficult ones to find. And those have even more scientific and and and and

you know, very specialized applications. UM. For instance, this podium that's go into magnets as well, but those are for magnets that need to be exposed to very high temperatures for instance, UM. And so they are you right, um. China is responsible for refining of all the earth in the world, although the US does mine about fifteen um of in our accounts for fifteen of the world mind production.

But he exports everything to China as well, but is processed, so China controls effectively the supply chain for for for earth. The world is dependent on China for that that if they were that's not good. How do we diversify? Is it possible toy away from that? Right? That's what Defense Mental is trying to do. We're trying to to to build this mind in in British Columbia and Canada and and build a supply chain in North America. There are a couple other projects some in Africa, UM, some in

South America, UM one or two in Europe. And you know it's it takes time to develop that. So mining is one part of it, and then there's different stages of processing. You have to float to produce a munal concentrate, which you do UNUS, but and then they haven't been able to economically refine it and they are sending it at a moment to to China. And so the rest of the world has to find ways of economically refined these these materials and the defense metals that that's what

we focus on doing. So where is the US government in this and trying to diversify away from trying I would think you would have a tremendous amount of government support and incentives to try to diversify away from China. How do you deal with the US government and maybe some other governments. Why isn't the military just doing this itself find the stuff, you know, kick people out of their houses where it is, and then rip up the

ground and get it. It would be extremely expensive and if every if everything else fails, UM, probably that's that's that's the way to Oh. I mean, some of these materials already very very expensive five hundred dollars per kilo,

thousand dollars per kilo UM. And so you know, if you, if you, if we have an incident with China, for instance, and these cars, the prices of these of these elements will go through the roof, like they did back into thousand and ten when there was a conflict between China and Japan and they were, you know, effectively rumors that China was going to halt exports too of rats to Japan, which at that time was the second consumer, and prices

went up a thousand percent, two thousand percent. Linden in Syria, which was two dollars went to two hundred and fifty dollars per kilo. And that is used for instance for oil refinery. By the way, where is this stuff? Where is this stuff traded? Louis says it it's not a lot of metals exchange right, Well, no, it's not really

traded um not yet. So you could see prices launch Shanghai metals, UM and uh and and some other Asian metals and in in you know, some some other websites, but it's it's usually uh, you know, confidential contracts, different amounts, some you know, it's it's not that large. It's not

like iron ore or copper. You know, there's only about two eighty thousand tons produced around the world, and these are really unique, very strong materials which with a small amount of it you can get fantastic magnetic, electric, optical properties. So you mentioned you're starting a mine in Canada. Give us kind of the update there. Where are you What are some of the challenges you're facing. How do you find the stuff? Yea, how do you find How do

you know it was there? Yes, you know, it's started a long time ago. I mean they had associated with sometimes niobium and other elements, and the geological survey of of of of Briach, Columbia was was looking at the time, I believe for food for niobium, and they find out that there was rares as well, and it was not important for a long time until somebody find out, Okay, now is the time for rats, and you start developing it.

So that happens a little bit. So you do find um rats with sometimes associated with with uranium or or autorium or other elements, and so historically we know more or less where where they occur. The problem is not so much to find them, but it's but it's to develop them, is to ultimately find an economic way of processing them. And so we have been very successful at

Defense Metals. So we have a unique deposit. We are able to do one important thing, which is to produce mintal concentrate first, which then makes the whole profits more. All right, good stuff, A good stuff. Dr Louisa Marino, President Defense Metals Corporation. You get a PhD and Material science and mechanics from Imperial College, London. What do you do when you become the president of Defense Medals Corporation.

Thanks for listening to the Bloomberg Mark Gets podcasts. You can subscribe and listen to interviews of Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three and on Fall Sweeney I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.