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Let's identify consensus, and then let's always think about what always will go wrong, because consensus never gets it quite right. Francois Trahan is excellent at this chief investment strategist being on capital Marcus. Let's start with what is consensus right now in the Trehan world.
Consensus is pretty constructive. It's pretty bullish, as it should be. After my most stock indices in the US are sitting your all time highs, and so I think people are very constructive. Unfortunately, when you get into that mode, you stop thinking about what could possibly go wrong, and I think that's the most important question to ask when you're bullish. And the answer this year, I think is inflation and.
LinkedIn to interest rates. Urine tim or out On LinkedIn with a brilliant, brilliant chart migrating the five percent thirty year bond a higher yield. Link out of consensus in the equity market with a five point two, five point four, five point whatever percent thirty year.
I haven't seen it, well, I know you.
Haven't seen it chart, but the basic idea is higher inflation, higher yields. Market it the thirty year bond. How will that affect the so.
Push out, push out the curve. Well, you know that's the that's the issue is. I think people are really focused on one thing when it comes to inflation, and it's oil, which is now off the boil. It's really when a rise in commodity prices, energy prices turns into core inflation or what the FED calls underlying inflation, that it becomes in issue from market multiples. And I'm fearful that that might be, you know, that might be what we're wrestling with come the fall.
We have a new FED chairman, mister Walsh. Presumably he comes in with some kind of expectation to lower rates, if you will, But boy, the data doesn't seem to support it. And what do you expect to hear from our fatt.
It's in a tough spot.
Yeah, let's be honest, because the data is very constructive, you know, particularly if you look at the pmis the ism yesterday, the regional pmis are seeing these smile patterns and virtually every data series. I think that was a surprise to consensus, you know, after what occurred in March. At the end of the day, we have an insane amount of stimulus hitting the economy in twenty twenty six. So it is your classic recovery, the tie that lifts
all boats and earnings. We're clearly seeing that, and it's being augmented by what is happening to AI. Forward earnings growth for the S and P is up twenty nine percent. I've been at this a little over thirty years now. I've only seen numbers like that twice, coming out of the GFC and coming out of the pandemic, and so this is really unique times that we're in. But that is often a sign of an economy that is overheating.
How about you see, like Tom mentioned earlier, Google coming to market really really the first time since it went public twenty some odd years ago, with this massive equity deal on the backs of the tech industry for the first time really in its history, tapping the bond market in size. What do you make of all this investment in AI? And it's something like we haven't seen.
Yeah really, you know, at a you were asking me about consensus. So one place where I think it might be off is just how strong the US economy is in twenty twenty six. A lot of people are still hung up on structural issues, and they're very legitimate, but cyclically speaking, you know, if you do back of the envelope math, you're getting about a percent to GDP growth
this year from the big beautiful bill. You're getting over a percent from the capex cycle, just from the top five hyperscalers, which is a little mind blowing if you think about it. And then we haven't even talked about the lagged effects of the Fed's rate cuts, you know, which take almost two years to impact the economy. So it's not that difficult to get to three four percent. You know, in twenty twenty six.
The the nominal GDP is five ish or dare I say, with inflation sixes percent? I guess it's not a Banana republic. But it's not the American economy we knew two years ago, twelve years ago, twenty two years ago. It's original, isn't it.
Well, what's changed is fiscal stimulus and monetary stimulus I would say we had the Kapex cycle. It wasn't as pronounced as it is today. But we've added to that rate cuts and we've added fiscal stimulus.
Okay, so inside baseball, folks, I don't want to nerd out here. It's too early in the morning, and you know, Alexis and ire up all night talking about the Knicks. The bottom line is is the Kalucky Levy theory, which Richi Sharman talks about in the Ft, is that if you have a big government deficit, some of that rolls over is a spirit into the private economy. It's a you know, theory fifty sixty seventy years old. Are we getting a goost to our economy because of all this
debt and deficit? Partially?
Yeah, absolutely, And I think you know, the real challenge for Walsh is that the FED is dealing with labor markets that are unlike anything we've seen before. We have literally zero growth in the labor force this year, partially because of demographics, partially because of immigration policy. But we haven't seen anything like that one.
The last thing, I mean, you know, it's amazing when you're with the Bank of Montreal, I'm looking at Brian Bouchet on ESPN at the hockey game or whatever, and there's friends out Trajan and Raleigh and that, Like in Montreal the next day. I mean, the Canadians want to run to get back into the game. Can they sustain this Montreal Canadians excellence in the next year.
Oh yeah, there's always next year.
I mean, that's what you're saying. Montreal. It's only Paul. They haven't won the Stanley Cup. I mean the reason the maple leafs are so bad and so there gonna be somebody's lil dies a Canadians, I know, like the last time they won.
Yeh yeh yeh.
Franz, thank you for coming in greatly, greatly appreciate it. Be more. Capital Market's really smart. Note with the tron charts, we love to see. Stay with us more from Bloomberg Surveillance coming up after this.
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This is the adult I want to get Smarter book for the summer for equity in bond people on the street. This is heavy lifting. There's no differential equations. But there's a lot of work here. And here's Paul. As you bring in Michael, here's what you need to know. Joyce Chain, JP Morgan, a guy named Gibelli heard of them, great supporter, Seth Klarman of Value, Howard Marx and at Carlisle Group ex School. When Harvey Schwartz lines up for this book
is the the Wall Street book of the summer. It is the credit Investor's Handbricmichael Gatto Paul Sweeney.
With Michael Professor Michael Gatto, partner, professor and author at silver Point Capital. Thanks for coming into our studio.
Thank you so much for having me.
How has the credit market changed? I went through the Chase Manhattan Bank and Credit training program. I feel like I'm pretty good on credit. But now I'm seeing some of the technology companies coming to the markets with these monster sized deals. How do you look at the credit market.
Well, it's changed massively over the thirty years I've been in it. Right, it used to be boring when you went to a commercial bank, you made a loan, you held it. That was said then in the nineteen nineties, loan started to trade, so banks, investment banks could arrange it, sell it off to non banks. They traded. Then two thousand and eight you got huge amount of influx of capital doing private credits, saying, hey, you could come directly to us, A fund will lend you the money. You
don't need a bank. And then you had in twenty fifteen liability management or what the press loves, creditor on creditor violence. That changed the whole dynamic of lending senior security. It used to be with the Three Musketeers. If Tom owns a debt, you own it. I own it, same debt, same company, We're all for one, one for all, were the same. All of a sudden it changed, and certain investors in the same exact death instrument end up doing
better than other debt instruments. So what I would say is, when I started in the business, senior secure lending was boring. I was boring. It was a perfect fund, And over time it became interesting and exciting.
You know, folks, I got to cut to the chase here, I mean, you know, margin call with Jeremy Iron sitting at the end of the table, Peter Sullivan was the character Zach Quinto doing it the junior risk analysis and margin call from years ago. How many people in your racket really aren't all that smart because your book is a tough read and it makes them smarter. There's a lot of pretenders in credit, aren't there?
No one, I get myself in trouble if I said there's a lot of pretenders in credit. No, I think people evolved. I think historically being in credit you were a second class citizen because it wasn't as sexy and it was like, hey, all you have to do is can I get paid back? Yes or no? And it
was viewed as a lesser business. Then let's say equity as equity's got more and more efficient as dead started to troy as distress debt buying someone else's problem add significantly below palm where you could have downside protection, but all the upside of converting some of that debt potentially into equity. All of a sudden, people got a lot lot more sophisticated. And the reason I wrote the book
is for the younger professionals. There was no book you could go on Amazon type how do I invest in equities? Thousands of books? How do I invest in senior secured, non investment grade, distress debt zero books. So I wrote it, I got a monopoly. I want to monetize the monopoly while it's still there.
And I take a.
Little offense Tom, and I love you. It's an easy read. I wrote this book so you My goal was you read it and say, holy crap. I learned a lot, but that wasn't pain fault. So every technical concept, like a fraudulent conveyance, I ended with an interesting story like Caesar's big fight over moving assets accusations of a fraudulent conveyance.
So I try to teach all of the technicals that you need to be a CREDITI vest whether it's performing or distressed, but then use real companies to illustrate it, and then tell a war story. So you say, oh, the girl, that wasn't that paint fault.
What's your view on private credit? If it weren't for the warner in, I think this market would be talking about private credit a lot more. How you view it?
Yeah, Look, private credit historically has been a phenomenal asset class. You're lending senior secured. You put a one to one debt to equity ratio. And you're gotting double digit yields with downside protection. So it's a phenomenal asset class. Now, basic economics tell you if you're earning excess returns to the perceived risk, a lot of capital flows in. And that's what happened, a ton of capital float in. I just wrote an article on how the anaalog. You said,
because what's gonna happen? Is this just going to be a dispersion of returns. The players that have been in it live through cycles, got punched in the face and al wait, learn from it. Are going to stay disciplined. They're not going to get involved in race to the bottom deals. And but I think the asset class is great if done well. I think some some fields that I've done were bad deals, and if you did too many of them, you're you're gonna have a problem.
But I love the asset Wall Street worldwide. The credit investor's handback, Michael, getto whether we're going to continue where then the professor is definitive here with a guy named Solomon of Gold and Sex writing it forward is well, I want you to talk about the Gagillia. So the equity deal yesterday from Google original large in that. But talk about the wall, the demand, the demand for the hyperscaler bond offerings. What does it signal to.
You, Well, look, a ton of capital is getting raised for data centers.
There's going to be.
Equity and debt as in every fundraising. It's an interesting thing debt play. The goal of a debt investor is to get equity like returns with debt like a downside. Now there's a question whether some of these debt deals you're getting debt returns with equity downside, which is the polar opposite of your wants of what you want. But I break these into three types. There's the data centers with a long term investment grade lease, lowest risk, but
you got to do your work. One, are there cancelation causes in those leases because you might think, oh, I'm taking meta risk, and then all of a sudden you find out the contract could get canceled after two years if certain events happen. So you got to go in. You got to make sure or you have the right legal entity. Big companies have massive legal entities. You might have a name that's guarantee your loan that doesn't have the corporate guarantee. So you got to do a lot
of work. And that's one end of the spectrum, lower risk. It's got a contract. And then there's the ones that you're builded and they would come and that's a higher risk. But everything is going to get financed with debt and equity.
First Brands tell us about First Brands and how that might have been a teaching tool for credit investors.
Look, I'm gonna professor, you see this, said, I teach how Columbia it's the school the MBAs and then ford him the undergrants, and I tell every student learn from mistakes.
That's how you learn.
Best way, learn from someone else's mistakes. First Brands had five I wrote an article on this. It had five red fires. Now, a red flag doesn't mean I'm not going to do the deal. A red flag means I got to dig deep B. And when you went into the first book, you said the Kate alone, you couldn't did deep BA and you had to make the decision just because everyone else is doing it? Should I? And I write about that, Michael, I got to get this in.
I just think it's too too important. There's always leverage within the system. Where's the leverage now or the implied leverage.
Well, I think and I've heard this some people have said, is private credit going to be the next catalyst for a downturn? I think it's very misunderstood when you look at it. Is a private equity. Let's use a private equity as an example. They're gonna buy a company. The private credit investors are usually lending about fifty percent loan to value. Then you have they go to the banks. The banks lend them fifty percent loan to value on what their debt was. So you got a ton of question.
The company's got to decrease in value by half. Private equity loses money the debtholder dozen then it's got to reduce by another half for the banks. And the banks are cross collateralize. So I look at it and say, look, from the stability of the financial markets, this is very low risk for banks that are funding very.
Eiching Green writes in his book Chapter to Chapter and the History of Currency about financialization, what does the Michael Ghetto financialization look like?
Right now?
Are we all being too cute with our technology? Our academics are smarts in credit.
I'm got to be honest, I'm not sure I understand the question what do you mean by that?
Very Chagreen says, at some point within a capitalistic system, financialization takes over where it's trading as trading. There's trading that within banking. Do you see that within the American system.
I'm not sure. I have a strong view on that. My area of expertise is credit and private credit, and I see that as only positive in that one. If you're only relying on banks, when the banks get nervous and seeing your manage the owner of the bank saying reduce sk that could take a normal downturn and create a big session.
You know.
It's It's what Howard Marx talks about in his book is if all of a sudden the banks pull, a moderate recession becomes a big recession. And I think you see that in twenty twenty three, right, that's where the banks were hung with Twitter, Right, they were hung with
another deal. The regional banks, Silicon Valley Bank which was obscure went under, and the banking are the more traditional finance providers just slow down because private credit was there in the world survive and if a private for any credit fun gets into problems, no harm, no foult.
Michael Thank you so much. Michael Janner with this, Professor Gator with us the Credit Investor's Handbook. I can't say enough about this. This is the adult read for Global Wall Street this year. Even equity animals like Joyce Chang or JP Morgan's to shut up and read it. You're just really really good with some really foundational at work there for a Global Wall Street. Stay with us. More from Bloomberg Surveillance coming up after this.
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Our interview of the Day. Ted Mortensen is an institution at Baird looking at software. It's in right now. I like the treatment. I think zero headshet it yesterday that the Great Silence of May of twenty twenty six is the thirty five percent recovery in Microsoft straight down like a rock. Four standard deviations plus two minus two and boy his software come back. Let's start with the why why has software rebounded?
I think you've seen some reports on data Dog and Snowflake on the consumption side, as well as Mango dB that I've actually blown out numbers, and I think we're now starting to see instead of a gentic software being in a test phase, it's actually been deployed.
Bill Ackman bought Microsoft and made us splash as mister Ackman is wont to do. Did he jump start this? No?
I think Jensen Jensen from a Navidia jump started at copy Taxi based.
He said coat, Yeah, maybe you shouldn't, but both did.
Software is a free cashlow machine and in this cycle, infrastructure leads the AI build software is going to go along for the ride, but the news software is going to go along for the ride. So a lot of free cash flow coming to these names.
Ted, what do you make of our good friends at Alphabet coming to the market for really the first time? I would say, since the IPO with eighty billion dollars straight equity converts the whole nine yards of private investment from Berkshire, what does that tell you?
It's a big deal.
And the reason why it's a big deal is this is going to extend the cycle and if Google is doing it, I guarantee all the other clubs.
Yes, that's right.
The meetings you that are listening in your cars on your way to her. What God say to Google do meeting?
That's right.
So what this will do is that will extend the CAPEX cycle infrastructure first into twenty seven. This is a race to AGI or what we call human intelligence. And this is a cycle like no other. It's real, It's not two thousand.
Got the Philadelphia stockishing semiconductor inext up eighty percent?
What is that about?
I mean we're talking semis here.
Well, we're now.
You know, I'm old, so I've I've, I've I've lived through pretty much every single cycle. And you have to understand that we're now in animal spirits land and animal spirits then two thousand. This can go on for a long time and value doesn't matter. And if you look at the HP print last night, you know you're a different hemisphere on where these models are coming out post earning.
So the Google deal was very interesting in that it was very conventional, like a six percent haircut on one trune to Berkshire, right, and almost eight percent haircut on another trune to Berkshire, et cetera, et cetera, And then there's this new fangled thing where they're going to pay the tax obligations to the employees by an on the run offering, which I think zero Edge is right on this that retail shareholders are going to pay the taxes
do at Google? How did this happen? Where did this come from?
I think it's this is a war for talent, and if you really look at all these companies, it's all about engineers. I mean, at the end of the day, it's product innovation through brilliant engineers. And I think they're just stop gapping, you know, with the intensity of free cash flow on the Capex builds, they're just finding another avenue to lock up employees.
Are we rerating the valuation for global tech here these days? It just again you mentioned we're in the world of animal spirits, are rerating the valuation of technology absolutely so.
If you look at Memory and that's you know, sk Heinec, Samsung and Micron. Take Micron for example. Traditionally it's been trading.
On book value a multiple book value. Now it's trading on a pe.
And if you look at Micron for example, I've never seen Micron or Memory have eighty.
One percent gross margin guides.
So we're in a different world, and that's due to inference in friends drives a tremendous amount of memory consumption. So yes, we're rerating, and I think you have to put the AI cycle own perspective.
This is US and China right now.
If we didn't have the Iranian War, you would see the Middle East go basically straight up on AI.
And they will go up on AI.
Europe has to go along for the ride, and unfortunately the EU is very bureaucratic, and I think they'd rather find US companies first innovate and they really risk not.
Getting on this AI cycle economically. In defense related I endure William Power.
You have William Power, but can we make some news swarning and are lifting his target on Microsoft? Would you like to make an announcement for no.
I think will is a fantastic analyst. And I think when you see the leverage of their free cash flow and how they're re architecting the company real time, real time, it's a real time architecture. This is a company that dominates enterprise, just dominates enterprise.
They're a line item on budgets. The point that's a good way and they are a line item.
I think what they have to do to the enterprise is innovate where they're actually benefiting enterprise productivity going forward, and they have that opportunity.
The whole management team is a rated so they'll get there.
Ted, you're not a hype kind of guy. You've been around the long term.
You're navy guy.
I mean, what's going on that day? How how do you think about AI? Because it's just it's burst onto our lives in the last couple three years like nothing else.
I think the infrastructure build is historic. Okay, So for my clients, they have to make money. And right now there, as you indicated, the semiconductor indexes up eighty percent, sixty percent in the last two months. You know that's a good decade return, right So I think from that standpoint, it is the most powerful cycle I've seen in my career. Now, with that said, there's a lot of exponential risk that is not factor into this market, whether it be geopolitical,
whether it be US political, whether it be inflation. There's a tremendous amount of inflation going on in the tech market.
I mean, and on long and Bloomberg News just said this, We're going to see later this year tech inflation fold into our general inflation statistics by that concept. Absolutely does it gets us about four percent inflation as a run rate. Yes, where's a yell go? Then the thirty the ten year yield? Does it get to five percent? Do we have a thirty year bond a gust of five and a six percent? That's why I'm getting you in so much trouble.
Yes, it's my personal in the answers. Yes, what I see on just the HP call last night, right, they are raising prices. So is Dell so much on enterprise customers that they can print an number or they want on price increases. And you know memory is a big, big problem out there. When you have memory up sixty eight percent sequentially on price to say, that's not going to impact the longer bonds.
That the FED can't control. I think we do go through five.
This has been wonderful Ted More and said, what perfect time you director of technology? Definitive it bear stay with us. More from Bloomberg Surveillance coming up after this.
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YouTube right now, truly one of the great strategies of the modern nage. From England, Matt King joined us Satori Insights. Matt, wonderful to have you on. You write on momentum. I suggest a lot of people don't understand the physics of momentum nor the investments selection of momentum. What are your thoughts on twenty twenty six tech momentum.
So basically, thanks very much for having me so basically, the puzzling markets are sort of the same as it always is. Why does everything keep going up? But as you say, this year and especially recently, it's become more extreme. It's not just that the market always wants to rally, it's that the best performing strategies are all the ones that basically consist of just buying whatever's been rallying the
most already. It's the exact opposite of what every professional has been trained to do to look for mean reversion, to look for things that are cheap, You buy the expensive things, You buy what's already rallied, and then you end up outperforming. And I think a lot of the reason that people are sort of so conflicted about in the market at the moment. It's because of this momentum is outperforming retails outperforming versus institutional investors in terms of
the names that they're long. And then some of the things that are doing best are unprofitable tech or names with weak balance sheets. And it's not just the earnings that are driving it. That's the kind of consensus story. Oh, it's about the strength of tech earnings. That's some of the truth. I mean, you can tell from all these things it's not just about that there's something deeper going on.
It's something deeper. It just it seems like investors, at least over the last twenty plus years, have been kind of trained it to buy the dip. Talk to us about that. That seems to be a pretty good strategy.
I think it's exactly that, And the drivers have changed a little bit. I feel like I spent my whole professional career studying bubbles and dip buying, but the drivers have changed. For a long time, it was central bank liquidity that was driving it. Then it was US fiscal
that's driving it. But increasingly at the moment, exactly as you say, it's as though investors have been trained to keep on buying the dips So if we look back, say all the way to nineteen twenty eight, if you had been buying the dips, if every time the SMB went down ten percent you bought it, you would have made money just over half the time. If you had bought those dips in the two thousands, you would only
have made money a third of the time. If you've been doing that since two thousand and nine, you've made money every single time. And it's like there was a wonderful statistic in the Bantle survey recently where they said, oh, cash levels are really low, everyone's really long. This triggers our cell signal. But the magnitude of the cell off you get is only two or three percent. That's not
a sell signal, that's a by signal. And so now it's not only retail that's doing hedge funds are forced into the same strategies.
And what's interesting here, Matt and in Christ the crash of seven and eight was Matt King's fault.
I don't know if you knew that.
But Matt, is your study of history leverage always plays here. Do we have an overt leverage now within our crazy system or is there a very subtle leverage from things like huge deficits, et cetera.
Two great questions there bought leverage in financial markets. It's not the amount, although we are back to post two thousand and eight highs on hedge fund leverage. It's whether it's diversified or not. And the snag at the moment is not only that the leverage levels are high, but even though the beaters with the S and P look low, the correlations are high. So what that means is it's not that people are overtly long in the market. It's not that the hedges are chasing momentum for the sake
of it. But they're doing a whole load of things they hope are diversified, but they're actually all ending up in the same sorts of trades, the same names. Anyway, it's not as diversified as they think. And the real thing that's been low and could spike higher is correlation. And Cameron Creess had a wonderful article on Bloomberg about
that just the other day. As for the fiscal side, you're right in the background, even though financial sector leverage has been lower, you've had this creeping up of public debt levels, and I think across the board. What we've had is this sort of suppressing the day to day problem but adding to the tail risks. And that's true in politics, that's true for immediate markets and central banks.
And it's this tension beneath the surface, which is there the whole time and which investors find so hard to deal with.
What could put an end matt to this sense that the market just keeps going up? I mean, is an external event? Is it a FED misstep, is it a what do you think could kind of derail this?
The obviest thing that everyone would point to is interest rates and interest rate hikes, and yes, that increases the cost of leverage, and it's one of the moving parts here, and so people do worry about inflation and around the triggers. Having said that, not only can you see the market shrugging it off from one day to the next, we rally more on Trump saying oh, we're close to a deal than we do want around saying no, no, we
don't even want to negotiate anymore. But I think more than that, when the levels themselves become so extended, the trigger can be almost irrelevant. It's not the match that starts the forest fire. It's the vulnerability of the forest in the first place. Having said all that, on the metrics I look at, I don't think we're particularly close
to that at the moment. If you try and build trading rules on the back of it, which is much easy to do these days with AI than it's ever been in the past, all those trading will say you shouldn't be selling here. If anything, you're forced to participate, and the best you can do is have on things like correlation hedges or out of the money put hedges.
Matt King, thank you so much. It's been way too long. Thrilled Devan. I'd love to see you on sooner more often. Met King. Founder Satori Insights, in charge of the bedding pool on English World Cup soccer. Thrilling could join us.
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