Surveillance: Lasry Optimistic About 2021

This is a story of West Hartford, Connecticut, wandering over to Clark University, the land of rocketry and Mr Goddard where he rocketed through distressed investment to the success of his Avenue Capitol group. Mr Last rejoins us this morning to look at this pandemic, the partition of America, the distress that is out there in the view forward for his industry, Mark, are you optimistic about opportunity in two thousand any one? Um? Well, first of all, thank you

for that introduction. I love that very few times to people talking about Clark, But um, yeah, I am actually, um pretty optimistic. I think for us, Um, what you are seeing is it's a little bit of what you just talked about your You're seeing that there are problems and a number of places, but there's also growth. So for us, really, what we're finding is opportunities where we

can invest in situations where people need capital. Uh, and we're providing that capital, but we're doing a pretty steep price. When you clear a balance sheet out, you are now clearing within the reality of a FED at the zero bound. Is the FED distorted? You're part of the hedge fund world. It actually has UM. What's ended up happening is it's made UM it easier for companies to borrow money. UM. So anybody who can borrow is doing so. But then

what it's done is the reverse. If you can't borrow UM, then you've got to you've got to deal with folks like me. And if you're doing that, UM, we're able to charge twelve. So it's kind of odd a zero rate environment, yet we're still charging twelve to fifteen. I love that you say, otherwise you've got to deal with me, and you don't want to deal with me. Mark. I do wonder when you look at distress invest in going forward, how much of this is simply who knows bankruptcy law best?

And I ask this of you knowing that you did clerk for a bankruptcy judge in the Southern District of New York. So is that really what this game has become? Um, I think you've got to understand bankruptcy law because what ends up happening now is, um, you're gonna have a number of restructurings. But I would tell you the most important part today is really understanding the balance sheet of a company. Um that if we're gonna lend, are we, you know, super secured? Are we senior? Where are we

in the capital structure? Because things can change on a dime and you want to make sure that your cover. So I would tell you that capital structure is gonna be a little bit more important, but you better have that legal background well Embedded in this is the assumption that perhaps, or my presumption that recoveries are not going to be as robust this time around, given how much debt has been incurred and given some of the erosion with some of the Covenant light loans that we have seen.

How much lower will recoveries be and how much fiarcer will the battle be over who gets what? I think recoveries will definitely be lower, and I think the fights are going to be absolutely insane because everybody is going to be fighting over a smaller pie. So that that's why the focus is really where are you in the capital structure? But you're going to have lower recoveries. It's it's it's hard for you not to mainly because of what you said, which is that people have taken on

more debt um and there's less equity value there. Mark, I want to talk about market draw down, sharp ratios and the ability to make two twenty, but that's gonna have to pass. I've got a horde of people that want to know if you can bring the glory of Elsinder and Oscar Robertson and the Milwaukee Bucks back, what does the plan forward after signing this gentleman for a jillion million dollars? What is the Bucks plan into two thousand twenty one in the NBA bubble? Um? I the

plan is simple, to try to win a championship. The execution of that plan is going to be kind of hard. Um. Look, we're gonna do everything we can, and I think we've got probably you know, our Big three, which is I think second to none at least in the East. Um, So I think we'll have a pretty good shot. Um. I think everybody's pretty excited. I think the hard part was really resigning Janice, and the fact that we were able to do that is actually great for Milwaukee. It's

great for small market teams, um. But more important, it's great for our team. Mark, your leadership was there in a time for this nation where Milwaukee was a center and the soul of protest in this nation. What do you want to see from Milwaukee this year? What is the goal to get to a more peaceful America? Look, I think at the end of the day, I think

it's listening, it's trying to bring about change. But I think what we've tried to do is be at the forefront of that um with our players, um, I think, with everyone. So we're trying to bring about that change, but we're doing it by seeing how and what people need. So I think we're you know, it's Look, it's gonna be difficult, it's gonna take time, but hopefully if people have patience, we'll be able to do it. Mark Lass, we thank you so much. With the basketball team in

Milwaukee and also Avenue Capital as well. Europe has received the attention of Nathan she It's an esteemed career is under Secretary of Treasury, he provided provided leadership on international affairs with the International Monetary Fund. He did terrific work and then leading the charge on international economics for Villain Powder at City Group. He is now at PEJAM and has that a terrific year melding economics into their global call on fixed income. Nathan, let me go back here

just a bit. How is two thousand twenty for you and melding economics into the animals? Like Greg Peters, Well, uh, that's a great question, and uh that is uh that is my challenge. But uh, I think that the task at hand is very much articulating and economic narrative. And the narrative for has been quite clear. It's been about viruses and lockdowns and then bounce backs. Adds that uh as that lockdown is ease and come back in again.

And I think our investors pay a lot of attention to what's going on in the backro so also then bring with it the micro market narrative. Someone that can do that is Janet Yellen. It will be the great transition from Fed to Treasury. You of course no chair yelling quite well, what will yelling be like a secretary of the Treasury, What will be her challenge and that political shift. So I think the appointment of Janney Yelling UH to uh be Secretary of the Treasury is is

a splendid appointment. She comes with platinum plated credibility. When she speaks, others will listen to her across the political spectrum. The Treasury is a different building than the Federal Reserve, but I think that Janet Yelling's insights into the labor market are going to be radical and helping to get

the economy back on normal footing. I think it will be very helpful their issues like financial regulation, managing the dollar, China relationship, these are all things that she's thought about and and dealt with at the fedough Reserve and as an academic for for many years. I think that she will have a very successful and constructive tenure. What do you think will be her view or her push when

it comes to the dollar. There's been some concern about whether she'll continue the sort of strong dollar being a good thing narrative or whether she'll piggyback with what President Trump was saying and frankly with what a lot of economists say, which is that a weaker dollar will give

a tail into the U S economy. Well, I think this is one of the key issues on the international side of the Treasury that on the one hand, I think there might be a case that the strong dollar policy has been around for a long time, can we still say that a strong dollar is in the US interests and particularly in the interests of US workers. I think for some time that organized labor has challenged that.

On the other hand, the strong dollar did a lot of positive and constructive things that policy in the international road, where it gave the United States moral standing and moral legitimacy. Essentially said We'll played by the rules, and we expect

others to play by the rules as well. And what would if if they want to deviate from it, what would another structure look like, and would it carry those those positive benefits of allowing the United States to uh influence the policies of other countries in the same way. I think this is something they're gonna be struggling with.

We're speaking with Nathan Sheets of p JIM and just the backdrop today is of vaccines that are gaining steam of a nine billion dollar stimulus bill that was passed in Congress and just now crossing the Bloomberg right now that Alex Asar, the head of a J j S, is saying that expect late February early March general vaccine programs.

Given what we got overnight from Congress and given the expectations for the time frame vaccinations, is the fiscal support already on the table enough to carry the economy through. So my feeling is the goal was to build a bridge, and this nillion dollars stimulus package certainly does that. Over the next few months, will be putting UH four percent of GDP into the economy seventeen percent at an annual rate.

I think it protects the economy from downside risks and importantly protects the most vulnerable parts of the household distribution as well as small firms and maybe UH at risk. So I I think it does very effectively build that bridge UH in to the vaccine, and then I think once the vaccine arrives, you put on your seatbelt. I think this economy could really rep Nathan Sheets. I want to go to your wheelhouse, which is international economic dynamics.

The idea of the movable parts out there. Does a dollar move in two thousand twenty one with it a traditional framework or things so distorted that we need a different prism to look at dollars six months or a year from now. Well, I think this is this is a fantastic question. Typically a weaker dollar is associated with a stronger euro, and then as the Euro moves, that then escalates and moves into the emerging market space. But I think we're at a place where, on the one hand,

the dollar is likely to weaken. On the other hand, I'm not sure the euro area is well placed given the economic challenges that they're facing with that with the virus to be able to absorb also can happen in the young space. I don't mean to interrupt, Nathan, but your true world class on this. There's a doom and gloom fear out there of Plaza Louver re ducts, of Reuben dollar reducts. Aren't we in a largely floating exchange rate economy where we've done away with so many of

the rigidities of those older systems. So when we go back and look at some of those past accords where there were more odd agreements with respect to currency, the misvaluations and misalignments were much larger. And I think in addition, as you're pointing out Tom the official sector relative the private sector was much larger. So on the one hand, I don't see those same misalignments, so I wouldn't expect

some broad based UH agreement. And on the other hand, it is a lot harder for the public sector to enforce its will on on the f X market. UH. So I think it really is at the end of the day, about these macro fundamentals, and I think they point to somewhat weaker dollar UH, and UH may not point to a much stronger euro from here, Nathan, how much is higher inflation part of that weaker dollar call?

So my feeling is that inflation over the medium term is going to stay relatively muted as it was before the pandemic. Now as we're coming out of out of the situation and as the vaccines a lot, could we have a temporary boost in inflation where there were some bottlenecks and shortages. Yes, So I think that in general will continue to be a low inflation environment. And so my view of a weaker dollar is not so much

predicated on an inflation call. So the reason why I asked that is because earlier you were saying that mid next year you can start to see the economy, to use your high level economic speak, really rip, And so I'm wondering what the consequences will be if that isn't necessarily on inflation, Whether we continue with this goldilocks scenario where we can see growth and we can see job jobless rates go down and yet inflation stay muted. Can

you walk us through that whole narrative. So my feeling is that during the second half of next year, as the economy is booming, that we are likely to see some shortages and bottlenecks manifest themselves and a temporary period of somewhat elevated inflation to some extent. We saw that in the third quarder of this past year as we

came out of the spring lockdowns. But that as we move into two and beyond that these deep structural factors like demographics to leveraging, automation and uh and and inflation expectations being well anchored on the downside will reassert themselves and it will continue to be a low inflation world, with perhaps even further disinflation as we continue to age. Nathan Sheets, thank you for wisdom across this two thousand and twenty look forward. To speaking you to you into

the new year with Pijam. Nathan Sheets joins us, we've tried all across Bloomberg surveillance really from February to give you the pros on this. Someone that's helped us so much out of Hope College, Kalamazoo and of course the combine at uh Wisconsin Madison and now Holding Court in Washington and they were claimed microbiology program. Deborah Fuller joins us. Right now, Debra, you and I were talking to break about the need to get back in the lab and

solve the mysteries. What's the great mystery we need to solve with this fear of mutation, this fear of variant. Well, there are two mysteries we need to solve. The first is whether it truly is more transmissible and the second

is is this going to impact the efficacy of our vaccine? So, uh, you know, if you if you break that down just a little bit, that this is a new variant that has about twenty nu muications and it does appear to be taking over as a dominant strain in the UK based on you know, there's a substantial increase in the frequency in detecting the strain in in the population. Uh. But what we don't know yet is whether that is

truly an increase in transmission. We're going to need additional tests to really validate that, such as does it outcompete other viral strains in in a cell culture study in the lab? Does that result in higher amounts of viral shedding? Uh? And animals infected with it? This usually does translate to higher transmission, So those those particularly experiments need to be done too to confirm that. What doesn't mean for vaccines,

we don't really know yet. Uh. There is no evidence yet that these new mutations are going to impact they of vaccines. Uh. There's some confidence among the manufacturers that it won't. Uh, they still need to test that. You know, in microbiology, it's about the nucleus, societoplasm and all the drama at the cellular wall. The drama here are the fearsome spikes that we see on this virus. Do we have an understanding of the physiology of those spikes and what we can do about it? The spike protein on

the virus means yes, yeah. The spike protein the virus is absolutely cential for the virus to be able to enter the cell and that's why we've designed vaccines to target that particular spike protein. It is going to be the area the virus is likely going to mutate the most, because mutations are often driven by the virus wanting to improve its own fitness, its own replication, and the spike

protein would be an obvious target for that. What we've done with the vaccines though, is that we've targeted a particular area on the spike protein that is absolutely essential for the virus to be able to enter into the cell. So if it mutates that particular area, there's a good chance that it actually is going to aboard itself. So that's probably why we haven't seen of many mutations have risen in this in this virus, many of them in the spike proteins have an impact yet on the vaccine.

With that said, uh I have I had a mentor once told me that if if if a virus can, it will and viruses can eventually potentially figure out a way to a vaccine immunity, and that's why it's so important every time one new one emerges it like this one, we have to look at our vaccines and see whether or not these new mutations, UH could result in resistance.

I'll leave the cellular biology to Tom Keane. But Deborah, I've got a much simpler question, which is one, will kids be able to be vaccinated given the lack of

information in studies so far to the state. So what they're doing right now is they are initiating UH clinical trials will include younger children, and unlike what was required for for adults, where we had to go all the way to an efficacy study comparing with CIBO versus versus those who are taking the vaccine, what we can do is study those who have already see the vaccine and

we know that they're protected. We can look at the levels of immunity they have and then use that information say, are hey, are these kids who are getting UH in our clinical trials developing antibodies or immune responses comparable to what we see and protected adults. And if they are, then I think they could probably get more extend the authorization to to include children. Of course, that that really

depends on assuring that these vaccines are also safe in children. So, based on the rollout so far, deb what's your best estimate for a time frame of when we'll reach some sort of I hate to say this because I know Tom has a lot of issues of herd immunity. Yes, herd immunity being defined as when we get sufficient amounts of vaccine induced immunity and the population so that the virus is not able to transmit as well anymore. So it really depends on how many many people we can

get to come forward to to get vaccinated. If we can get over sixt of people vaccinated number one and number two, if the distribution of the role happens in in the schedule that they're predicting, let's say April the most everybody will have an opportunity to get a vaccine, and we can get six people to to take a vaccine and the manufacturer number to produce that much vaccine, then we could probably see her community sometime in late

spring early summer. That is the money question. Deborah Fuller, thank you so much for the money answer. Where the university was Washington, I should say School of madisone president elect. There's an inauguration it'll be I don't know, the third week of January or something like that. The second most famous person to ever graduate from the University of Delaware. We now welcome the most famous person to ever graduate from the University of Delaware. Liziane Saunders joins us from

Charles Schwab was just a lot of good years of perspective. Listen, I've got to go to the money question, which you're always so good at, which is not the bladder the pundit try, but what are we actually doing with our money? What does Schwabs see that people are actually doing well?

From a fund flows perspective which goes beyond to Schwab, but broader fund flows inclusive of both mutual funds and e t F you really started to see a significant move back into US equities starting at the beginning of November. Much at the same time you've got the initial Fiser vaccine news. That led to another stage of the rotation, which was not so much into cyclical areas but into all right, what hasn't worked yet, hence the big move

into energy and financials um. Interestingly, though, the larger speculators are basically moving to the other side of the trade, so they been upping their speculative short positions on the s and it's a bit of a divergence, which I'm a bit worried about the sentiment environment because fund flows was sort of the last thing to fall since sentiment

got a bit fraughty in early September. It was mostly by the new limited day traders in the options market, and then it became more pervasive in attitudinal measures of sentiment into fund flows since early November. And the success of the market I think has bread a risk, which is that we're looking at fairly froughty sentiment. We don't go through the math this close to the holidays, but the bottom line is, if somebody is short and they cover,

it develops a convexity or acceleration of buying. Are we setting ourselves up for a big short cover if we get good news on the vaccine. I think there could be a set up for shortcovering on a number of factors. Yesked news on the vaccine, maybe less weak economic data driven by the current state of the virus um. We've already gotten some of the good news on the vaccine specific to the amount of shots that can be administered from each vial, but of course there's also the possibility

of negative news. You know. Dr Gottlieb said, I think yesterday that the stream that was seen in the UK, this new stream is probably already in the United States, and we don't know the details of whether it's it can be combated by the same vaccine. So I think there are there are risks on on both sides. If we take a generalization Lizzian Saunders that we go seven eight nine years of quiet and value and then we get a value lift which pretty much makes up for it.

Have we moved away from growthiness towards that value pop people have been waiting for or do you not see the determinants that make that happen yet? Well, I think we have to distinguished between the fundamentals of value and the index components of value. This this so called move to value, has been more driven by the surge in financials and energy, which are much more heavily weighted in the value indexes and even within the value indexes. Financials

is a huge play. Russell one thousand Value has seventeen or eighteen percent financials, Russell two thousand Value has twenty eight percent financial and financial movement financials. You have to look at where it accrues from a style index perspective. So we just have to do more than just watch the headlines of say money going from growth to value are large too small and understand that there are spector

drivers that need to be considered. And another example, healthcare is half the weight in Russell two thousand value as it is in Russell one thousand values. So if you get a big healthcare move over the course of a day or a series of days, it's going to accrue to the greater benefit of large value. Even well, you just heard. There's two things here, folks. And this is why it's such a joy to have miss Sanders on

with us. Literally this morning, as I was beginning my day, I looked on the Bloomberg terminal Russell one thousand, two thousand, three thousand, and asked myself exactly the question we observe from Lizanne Sanders about bank or financial allocation across these indices, all of the indices are different. What's the biggest mistake we have, Lizanne that were slaves to the Tao, were slaves to vix dynamics. I mean, that's so simplistic, isn't it?

It is simplistic. And another another example I often gave of the whole what are you talking about when you talk about growth versus value? Is it the fundamentals is it the factors or is it the index labels? If you if you go back to October of O two, I know that's a while ago now, but think about when the tech bust has finally ended, you had the NASA one hundred down I think at that point from peaking off plus for the overall NAZZAC and the SMP.

If you are a value factor oriented investor, if you wanted to buy deep value, you wanted to buy the tech stocks, then Russell hadn't moved them all from the growth indexes to the value indexes. So if you just stop the analysis that okay, I need to buy value and you bought the value indexes, you would have still been buying utility stocks, not the tech stocks. So I think this is an environment where you want to have

a hybrid approach. From a factor perspective, you want to look for companies that have those growth characteristics, but you want to have a value mindset in terms of what you pay for that growth, and that that spans across growth indexes, value indexes, small cap index is, large cap indexes, sector indexes, etcetera. Do the tech winners, the juggernauts, do they still have growthiness yet? Priced at value when you look at their revenue prospects, it's I wouldn't. I wouldn't

certainly wouldn't call them value stocks. But if you have as so many cops to circuit two thousand with regard to those names, especially because as of early September, the big five we're index and they were the big five back then, we're only eighty index. But the multiple comparison

is shows the stronger fundamental. So back in two thousand, the largest five stocks had a multiple of it sixte and now they have a multiple of that half That not that thirty two is cheap by any means, but it reflects them much stronger underlying fundamental of those types of companies. Not I'm not an analyst covering those company so that that shouldn't be seen as some improvate by recommendation. It's just a fact about valuations. What is the place to go if you want dividend growth to be a

yield equivalent? I mean, I know this is hazardous, folks. I go back to the Bill gross told being Procter and Gamble was a yield equivalent, and that may worldwide headlines. I mean, is there a kind of dividend it's more yieldy than others. Right now, Well you can't and again

I don't. I'm not going to give you individual names, of course, but you know there are screening tools, including our own Chi Equity ratings, but but there are others that do it where you can screen for dived and yield, but you're also screening for strong underlying fundamentals, the ability to maintain in or grow that dividend. And too many investors in a yield starved world will screen by dividend yield rank from high to low and then don't do

any additional analysis. And we all know that an extremely high dividend yield can be an underlying sign of weak fundamentals and a much greater likelihood that that dividend gets cut or eliminated altogether given those weak or fundamental So you have to you have to take a multi factor approach to screening when looking for yield to make sure you are getting that strong underlying fundamental quality balance sheet.

It's better. LIZI and Saunders, thank you so much, just very very informative of She's of course with Charles Schwab, thanks for listening to the Bloomberg surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio