Leverage 'Party' Is At Root of Fund Blowups: Ben Hunt

is overheated. You can look no further, maybe than some of the blowups we've seen just recently, whether it's the Archegos from last week, Melvin Capital on all the Reddit stocks, and some others. Here to help us put it all on perspective, we welcome Ben Hunt. He's co founder and chief investment officer of Second Foundation Partners. He's also the creator and author for Epsilon Theory newsletter and website based

in Reading, Connecticut. So Ben is, as you take a look at you know, whether it's Greensial or Archegos or Melvin Capital, what do you see when you see some of those kind of blow ups in the market Yeah, well, thanks for having me on to talk about this, Paul, I. I appreciate that. You know, you know, I obviously all three of these, right, So Melvine Capital, as you mentioned, that's that's Gabe Plotkin's hedge fund that was at the

epicenter of the Game Stop robin Hood debacle. Right. You've got Green Silk Capital with supposedly you know, supply chain financing uh, and then most recently you've got Archagos UH and and whatever that was. Right, And certainly these are all a little different. I mean, I guess it was, I forget who it was, the Tolstoy. Every unhappy family is unhappy in its own way, right, so so you know, they're they're clearly differences in the situation of all three

of these, but there's also really important similarity. And that similarity, I think is that all three of these institutions were levered to the hilt funded by other financial institutions. And I and I think that sort of leverage is at the heart of the demise, or, at least in the case of Melvin, the misfortune that that that all three of them have had ben Correct me if I'm wrong, and if I'm stepping out a line. But it is very easy in times like these to blame the Fed.

They've pumped up this market with unlimited quei, unlimited stimulus. Everyone is fomo. We all have confetti emojis when we make trades. How much of this is a problem because money is too easy? Well, look, I mean this is always this issue, right, I mean, this is the punch bowl. And what happens when you've got uh an unlimited punch bowl with spite with with with pure grade alcohol. Well, you know, people get drunk and and I think that's

what we have being represented market today. But but look, it's it's yes, you're you're so right easy to blame the fat And frankly, I do think that zero interest rate policy for so long has to have these sort of consequences that we're seeing today. But but I think

it also goes beyond the fat Taylor. Honestly, I think that one of the big reasons that that we are in this situation is that the lenders, the people who are extending the leverage that's being gobbled up by the bill loongs of the world or the gay Plotkins of the world. You know, it means something when we talk about too big to fail. It means something when we talk about these systemically import financial institutions. They can extend

this leverage. They can take these losses without frankly, taking the consequences of bad risk management and bad decision making. All right, so the bullmarket been for this market is pretty clear for most investors. And then you know in whether it's the FED with low low interest rates, fiscal stimulus, the reopening trade, and we all know the bull case. Here, where is the risk in that bulk case? From your perspective, it seems it's pretty clear to a lot of investors.

But where do you see the risk in that bull call? Well, look, the risk is is where the risk always is right, which is the uh can the party go on forever? The risk is always what happens as as we're seeing some examples today of the enormous losses that are made

possible by the use of leverage. Uh. You know what we're experiencing today, I think is a reversal and a number of the I'll call them correlations, but but but really what they are these gigantic economic barges that have been sailing in the same direct action for like thirty or forty years. I'm talking about inflation expectations, moving from expectations of deflation to inflation. You're seeing that being reflected

in interest rates. I'm talking about the reversal and globalization, this massive force for deflation, but also for these the supply chains, supply finance, trade finance. It's been a one way market in both inflation expectations and globalization for thirty or forty years, and I think we're clearly seeing signs that those one way bets are shifting. So that's why I think that that well, that's what I think could

cause went to pay the piper. With the enormous amount of leverage that's being extended to so many of these investment firms, how much of this two comes down to the need for transparency. I just watched that great I think it was a PBS documentary about Brooksley Born and long term capital management. And I met Taylor Riggs Capital Management, and I know what I've lent you, and Paul Sweeney at his Capital Management knows what he's lent you. But he and I have no idea what we have combined

collectively lent you. And therein lies the problem. Well, I'll say that that's a problem in two respects. One, it's a problem that our regulators are are are not seemingly able to provide or capture that that sort of of transparencies. You're saying, that sort of visibilities that we can know what risks exist in the market. But but I'll also say it gets back to this this notion of being

too big to sail. You know, you know you're never gonna stop investment banks or prime brokers from taking risk. We wouldn't want to. We wouldn't want to stop that, right. But I think it's very different. We live in a world of today where I don't know that we can have a Bear Stearns moment, right. I don't know that it's paul sable for a prime broker today too, you know, to extend so much leverage that that they get taken out in the street and shot. Huh and and and

it's a yeah, right right, absolutely, we hope not. But what I would say is that if if that ultimate um penalty doesn't exist, then I think that takes away kind of the motivation of the banks to say, hey, let me let me do a little more digging here, and let me let me have a conversation with other banks about how much leverage they're extending to this guy or that guy. I think it comes back to that

too big to sail notion. All right, Ben, thanks so much for joining so we appreciate your thoughts here on these markets. Ben Hunt, co founder and chief investment officer of Second Foundation Partners. Let's all recent news that Goldman Sachs called quit on a dollar short the currency team closed it's recommended short green back position against a basket of G ten come any currencies, including the Aussie and Kiwi, in a note titled Tactical Retreat. Let's get some color

on those currency markets. We do that with Dr Win Thin, global head Currency Strategy at Brown Brothers Harriman. Uh when thanks so much for joining us here. What do you make of that Goldman call there on the dollar? Oh, first of all, thanks for having me. It's always it's always a pleasure to be on here. Um. You know, I think they pretty much had to acknoledge the inevitable. Now I can't fault like the original call because think about you know, this is anty history, but think about

where we started the year. January one, the US virus numbers were exploding vaccines were nowhere being rolled out. Um, most of the con was closed. Um, we're looking at it at a split government and all of a sudden June six have even changed. And you know that if a lot of things happened that day, but the main thing that happened was that was the day after the Georgia send It runoffs and we got um, the Democrats swept,

and we're seeing the fruits to that right now. We saw an aggressive fiscal package already, we're talking about another two trillion infrastructure spending, another one coming after that. So one onom line is that the US economic outlook is much much better than it was when we started the year. UM. The two twenty was clearly dollar negative. We did a terrible job with the pandemic. But really we've seen one eight over there over Q one, and I think the dollar,

equity market, spawn markets are all reflecting this. This really a new outlook. UM. Effects is certainly part of that trade. Now, how are you thinking about the impacts on e M. Where we thought we were going to have big dollar weakness, we ended up not. We had some dollar strength. You have some rising yields here in the US. As you think about capital flows and relative attractiveness. How then, does

this change the outlook for emerging markets. Yeah, that's a great question because you know it's it's I think that the drivers to e M are in stense constlickting right now. So the global growth story again it's not just the US, but you know, China is doing well, Japan is starting pick up um. The global growth outlook is is very positive for e M UM. You know, we're seeing strong exports, have Taiwan, Korea, high commodity prices, and that's all great,

you know well and good for em UM. But in terms of currency, the strong dollar definitely, you know, throws a monkey you mentioned into it. You know, it's it's there are times when the dollar can diverge against the majors, against em but right now it seems to be sort

of you know, full on dollar strength UM. And that's not to say that's bad for for em you know, some your currency UM exchange ways is actually not bad for e M. I think many of the policymakers in the emerging markets were concerned about the week dollars strong local currencies, and I think they're sort of getting almost getting in a sweet spot. So I would say negative on EM currencies, but positive on EM equities and e M growth. All right, when how about you know, we

talked about dollar strength. Where do you see opportunities in some G ten currencies here where some where are you guys doing some work? Sure so, UM, I think the all will will will really do best against sort of the big the big three. That would be a sterling, euro, yen, and we've seen that in the sort of the UH you know REU to date performance. But where I see some performance within the majors is the UM dollar block

and scandies. And it goes back to what I just said about EM and that's the similar things would hold for the sort of these growth sensitive major currency. You know, obviously can the Cadian dollar, um naki are oil related very positive there? Um you know, uh, Swedish krona um AUSSI key we you know, kind of keyed into Chinese and global growth. So those currencies can outperform. But again it's would be very hard sort of um you know, I think really gain against when the dollars is just

on such a tear. Um you know, I think you know, the Q two outlook UH is really strong for growth right now we're talking about seven percent. I think it's key senses carrying over to seven percent in two three, and that's when the rest of the you know, when most of Europe is struggling. That you know, that's sort of the other part of the equation. You know, France just went back into lockdown, Germany Itaier extended there, you know,

the limited lockdown. So you know, the European outlook. Um, you know x x UK is really quite poor right now, and so you know, I think that we can really see this performance against the euro and to lesser extent agen sterling. But but you know, the growth sensitive majors kind of holding up. Okay quickly here the yen hedge funds boosting their short yen bets to the highest in two years. Is this a traditional and still safe haven

or is there something else going on? Well no, I think um really, uh, we're kind of unwinding that safe haven right So the short sirred record high, So I think people are so you know, I think we're seeing similar price action in the swissy as well. We're moving out of the safe havens and more into the sort of you know growth um, you know, cyclical type currencies. UM, so I think it's yen uh dollar yen rise again. Weakness can continue. We've got to march high the eleven

one eleven seventy. I wanna go even further. We're looking at a two eighteen higher on one five. But you know, let's take things one steparate time. UM, let's go a quarter by quarter. But right now to me this I think this, you know, today's weakness. Not notwithstanding, I think it's more of a technical move. I think the fundamental drivers remain dollar positive. I should just add one quick thing, um. One thing that I've noticed is that the set funds

futures are starting to move up. The fet tightning expectations. Uh hike in two three is about almost half priced in and almost fully priced in by end twenty two UM, which is very much of the Hodes with the dot plots saying steady rates three. So that's at the margin also very thirty dollar positive. So all these things are you know, sort of falling in the place of the dollar really sort of reversal what we saw in so here we are, you know, taking back your dollars short.

Dr Winton, thank you so much for joinings. We always appreciate your thoughts on the global currency market's global head currency strategy of Brown Brothers Herriman. Let's talk about this reopening trade. We've got lots and lots of evidence that this economy here is reopened, but we're also seeing some bottlenecks in supply chains, in logistics. Let's get a sense of kind of what's going on out there in corporate America. We could do that with Chris Dansbury, CFO Arrow Electronics.

They are based in where are they Centennial, Colorado? So there dangerously close to some of the best skiing in the world. Chris, thanks so much for joining us here. Briefly, just describe Arrow Electronics for our listeners who may not be aware of it, and then give us a sense of kind of what you're seeing in your business. Yeah. Great to be with you this morning. Thanks for having me. Arrow is a distributor of semiconductor and electronic component products

around the world. You've got a really broad line card, so we represent a broad swath of suppliers and we help customers choose the right parts for their products. Uh. And that can include engineering designs for you know, semiconductor board assemblies and whatnot. That go into finished products, so that can be everything from your toaster to your car. Um and uh as as more and more electronic content goes into into products, we we do see abroad view

of the overall economy. So what's interesting about where we sit today is that as we went into two thousand nineteen, if we wanted to clock back a couple of years, the market went into just a cyclical decline and so people leaned out inventories, our customers leaned out inventories. Uh that looked like it was about to recover at the beginning of last year, and then the pandemic hit and

inventories came down again. So where we find ourselves right now is in a situation where people are sitting on lean inventories and there's really high demand for those products. You know, it's interesting. It's going back and reviewing the transcript from your earnings call that was really just two months ago, and lot of questions of course about the chip shortage and how big the difference is between supply and demand. What has changed in the last two months.

Has it gotten any better? Uh? Now, I would say it's continuing to progress along those lines. Again, It's we're in unstarted territory here where the business does go through cycles. But we're we're starting this ramp up following a cyclical slowdown and a pandemic. So I think that the biggest example that we see and we all hear about is

on the automotive side, right. Car dealers would love to have more cars on lots um, and the automotive sector leaned out inventories as they went into the pandemic, you know, expecting things to really soften and and really what we saw happen was, uh, you know, people spend less on the things that they just physically couldn't spend money on travel leisure restaurants, and they started to spend end it on other areas, uh, you know, home improvement, electronics, uh,

you know, for for not just consumer products, but for the home and car sales actually remained fairly strong. So we we ended up in the latter part of uh last year and into this year with just broad demand across all industrial categories and that continues. So it's interesting, Chris, I'm just looking at your stock all time high today up about two d four dollars um. What's the market discounting your stock price? Are you viewed as a reopening trade. Yeah.

I think really we UM were looked at as First of all, we were very strong from a counter cyclical standpoint. The stock held up well through the pandemic because we generate a lot of cash in a downturn, right, We we have a lot of inventory and working capital that we re reduce in those windows, and it allows us to paint on debt and buy stock a good prices.

And so we've done that. But now I think investors are really seeing the earnings potential the growth from the business as the economies around the world recover and uh and more and more consumption of semiconductor product takes place. UM. You know where we fit as interesting because the underlying product that we sell has a deflationary value to it, which which is a headwind UM. The tail wind is

is that UM more than offsets. That is, is that there's more and more electronic consumption in everything that we consume and use, and and certainly with environmental pressures and whatnot, uh, you know, that will continue. So that's a that's a much bigger tail wind for us. And I think the market recognizes that we only have about a minute left. Wanted to get your thoughts on some of the comments we heard from the President last week in the infrastructure plan.

There's a lot of production of chips and that nationalism, right, bringing that back to the US. How does that impact you? You know, it's we we um distribute product all over the world. We're buying it from from multiple geographic locations and shipping it to other geographic locations. So I don't think it really changes what we do. Uh. You know. The reality is is that for the last you know, five to ten years, there's there's obviously been an increase

in nationalistic tendencies around the world. Um, you know, I think that has its challenges with trade, but certainly from a a you know what we do standpoint, if there's more made here, then we'll just be shipping more from here and less from other places. So we're quite happy to shift as the market ships. We had to do that with teriffs, we've had to do it with other things, and uh, you know, being nimble is part of the value we bring our suppliers and customers. Hey, Chris, thanks

so much for joining us. We really appreciate chatting with you, getting some update on your company and on some of these global supply chain issues, which you guys are right smack in the middle of Christiansbury Cevo of Arrow Electronics.

They are based in any suburb of Denver, Colorado. One of the key pillars underneath the equity bull call has been the reopening trade, and we certainly be getting some data points that support that, whether it's the airlines, whether it's the gaming companies or the UH some of the other leisure businesses. And also we got last Friday that very very strong jobs reports, So again, the reopening trade seems to be in play. UH. Is that enough to

push this market higher? Let's check in with Phil Orlando, chief equity market strategist and head of client portfolio Management at Federated Herme's. Phil, thanks so much for joining us once again. You've been a consistently bullish call on this equity market. Are you still there? I am absolutely still there? Um this UH? I don't know if you read in my market commentary on Friday. I was working Friday because the Bureau of Labor Statistics thought they'd released the jobs

report on Friday. Numbers were astounding, you know, aside from the nine hundred and sixteen thousand jobs added and the hundred and fifty six thousand revisions positive for January and February. Getting under the hood exactly puts an exclamation mark on the point you just made. So you look at the household survey adding six hundred nine thousand jobs, triple the prior month. Leisure and hospitality added two hundred and eighty thousand jobs. State and local education schools are opening up

now added another hundred and one thousand jobs. All of this is because the pace of vaccination is improving. We're now up to like what two point seven million vacs is a day. Uh. And as a result, now schools are reopening bars, restaurants, stores, and end. These these lower skilled, lower wage workers who were forced to the sidelines because of these you know, lockdowns, are now flooding back into the labor market. And um, this one statistic is will

blow your mind. If you have less than a high school diploma, UM, your rate of unemployment in February was ten point one percent. It improved in March from ten point one percent to eight point two percent, roughly a two percentage point decrease in the rate of unemployment. That's telling us these people are coming back into the labor market. And that's good for the overall economy and for the financial market. Phil I'm typically on in the afternoons and remain.

Bostick and I are having a huge debate every day. We fight it out. He does not believe in inflation. I firmly believe in inflation. We see the I S M services in March now the highest on record, prices paid, the highest since two thousand and eight. When are inflationary problems going to be an issue? Though? For the equity market, well, it's a question of nominal versus core Romaine is uh.

You know, for those who are looking at inflation, if you're focused upon the nominal numbers, Copper prices have quadrupled over you know, doubled over the last year. Lumber prices have quadrupled, Oil has doubled h corn wheat uh soybeans are up seventy eight percent. So all of those nominal prices are up sharply as the economy has recovered. But remember the core inflation, the consumer price Index and the

Personal consumption expenditure index. They strip out the increases and the food and energy prices, so those numbers look relatively more muted. But something's going to happen over the next three months what the Federal Reserve refers to as a procedural base effect. To go back and look at the inflation in in this time last year. Uh, you know, February, March,

April May, those numbers were negative. Well, we're gonna roll those numbers off now progressively over the next three or four months, so it's gonna look like core inflation is spiking. But basically all we're doing is lopping off a negative number and adding on a positive number. So core PC, for example, we could see that number of two and a half percent um over the summer, which is exactly where the Fed wants to see it. The question is is it going to keep going up to three, four

or five. We think the answer is no. We think it's gonna stay in sort of that two two and a half percent neighborhood on a core level, even though the nominal numbers have moved up pretty strongly here. Alright, So given that inflation backdrop in your overall bullish call, what are the sectors that are you guys are doing the most work on right now? Well, we were sticking to our guns here that that the cyclical trade is

the one that's working. We we we took the r overweight in technology back to neutral last August, and we felt that the catalyst was in place that categories like financials and industrials and consumer discretionary and energy, that those categories were ready to catch a bid here because the economy was was out of recession and was gonna was gonna rebound very strongly. That's that's played out, but the valuation gap hasn't hasn't been fully closed. So so domestic

large cap value is going to continue to do well. International, particularly emerging markets and international SMID and the small caps, those are the areas that I think you're going to continue to do well. Okay, Hey Phil, thanks so much for joining us. We always appreciate chatting with you. For the Little WINDA chief equity market strategist for Federated Hermes, Thanks for listening to the Bloomberg Markets podcast. 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 in three and on ball Sweeney I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Lumberg Radio m