Bruce Richards, co founder and CEO of Marathon Asset Management, and Bruce All the talk last week, of course was about the FED, what they didn't do, but more importantly what they're telegraphing and a market. When you look at what's happening in treasuries and you look what's happening inequities right now, it doesn't seem to think the Fed is going to hold rates as high as they seem to say they are.
Well, you could say that, or then you can just listen to what the man had to say at the pressure last week when FED Chairman Palell showed us the dots and share with us that there will be only one easing this year, it's a very far cry from you know, six that was expected by the market coming into the year. So, yes, the inflation number is getting softer and trending down towards that you know two percent goal that everyone wants to see, and it's really good news.
But here's the thing that I'm thinking about. If you're FED chairman Pale, are you going to ease so quickly when EPI markets are all time highs, job markets are incredibly strong and rob lost and economy is strong because if you were to ease, might it just inflate a little bit more the economy, equity markets and cause these animal spirits to come back and inflation to come back. And so they're going to go I think, very very
slowly and very very cautiously. So you might expect one ease or two eases and then a long pause to see did it do anything to reinflate inflation?
Yeah, but it is all this ends up being academic to a certain extent because we keep talking about what the Fed may or may not do. And the question I really I guess I really have is does it matter, right at least in the hearing now for the economy and the markets. I mean, twenty five basis points, even fifty basis points are easing.
Does that have a material us? Economy is so strong, And the reason why it doesn't have a material impact is because the Fed really doesn't matter. That's really hard to say. No, they don't want to matter, given the amount of fiscal stimulus has happened, and the fiscal stimuluss has been so exorbit so huge, never before seen in a growth market like we've had, and yet it came
through in trillions and trillions and trillions. We're talking about Infrastructure Act, the Chips Acted, and many other acts that at trillions of stimulus at the time the FED was tightening. So I would say that you're right about that. It is a bit academic because here we are at higher rates and economy is just fine. You have to stay bullish because the economy is strong, jobs are strong, stock market.
We're going to see what's going to happen with second half earnings, and we're going to have record earnings in the third and fourth quarter. So i'd say stay bullish for equities and stay bullsh for credit as well, because a higher rate environment that we're seeing is really really bullsh for the bomb market. So let's get to that.
Okay, So the higher equity market, economy is really good.
What's the bankruptcy situation?
Like, I mean, are we going to see the kind of bankruptcies that everyone was quort of anticipating or the weakness that we've been anticipating. What do you think?
Well, first of all, I'd start with the faultrates. The faultrates are trending around four percent, and today about three quarters of these defaults don't come from bankruptcies. Don't come from Chapter eleven's They come from these LMA, these liability management exercises or what the rating agencies referred to as distrusted exchanges, where the creditors are crammed down they have to receive a lower interest, payment less principle or termed
out debt, something that's adverse to them. Private equity is very smart. They're very smart to start with in buying companies and very smart when it comes to financial engineering. And what they figured out is it's really costly to put a company in bankruptcy, the business interruption cost, all the legal costs that you go through when the company's in bankruptcy for a year to two years, it's much better to extract a pound of flesh from the creditors.
And with ninety percent of the brotherly syndicating loan market being covenant light, they can do that quite efficiently by taking assets, moving over to an unrestricted SOB, coming up with new money solutions from folks like Marathon, who will give the company, the private equity company, additional dollars right to make it through and at the expense of existing creditors.
So what I would say is this is a very favorable environment for the credit markets because while ninety to ninety five percent of the markets can sustain these higher rates and you're getting paid the best yields in the generation, those other five to ten percent there's also a lot to do for us opportunities and credit managers that are providing capital solutions and these solutions for these distress exchanges.
It's part of that going to be in commercial real estate because we haven't had that disaster that we've been waiting for.
Commercial real estate is again like the pig for the python. It's a slow process that's being worked through. So the commercial real estate debt markets around six trillion dollars. About half of that is held within the banks, and about half of that is in the private credit sector between the reads and the CMBs markets and so forth. So the good news for commercial real estate is, and there's very good news, is valuations are stabilized. It's a big market,
and there's lots of really attractive deals to do. That's the good news. The bad news is that there's about a trillion of this debt that's upside down where there's no value left and the creditors have to work through this process of workout, and so there's a big, huge maturity wall.
I see the advantage of sort of doing these kind of non bankruptcies whatever we want to call them, refinancings or recapitalizations, if you will. Are we just kicking the can down the road? Are we actually making these companies healthier and in theory more sustainable.
They're more sustainable because in that process there's going to be less debt, and the cram down itself usually relates to less debt in certain cases. In other cases, you're right, you're just kicking the can down the road and waiting for a day out in the future. But if the companies can then grow into those capital structures, that's a
very positive thing. And so quite often with these exercises they actually can and sometimes you're right, they probably can't, and then the bankruptcy waits down the line a year or two years, you know, out in the future. But in most cases, these new money solutions have the colatteral that protects them, and so they're senior, they're secured, and they have the colatter with the covenants in place, and so it's really a good attractive way to put out money.
And I look across Marathon's book of all these capital solutions are done and across industries, because private equity is invested across industries, and you're seeing this high debt burden not impact just one or two sectors, but really all industries.
Bruce, how do you think about the election? How do you think about election risk right now?
Well, look at the election risks we just saw in France, right, We're Macron called for an earlier election and he's still going to remain president, but you know, the parliament is up for grabs and it looks like his party's going to lose a bunch of votes, and votes you are going to go to the far right and far left.
And what did the stock market vote for? Well, the CAC forty, which is the French stock market, was down six point two percent on that news, and French bonds, which are the odes, widen out twenty eight bases points relative to buns. That's the biggest gap in debt versus you know, our versus debt markets and equen markets versus our eque marketers is up that we've seen in like
fifteen twenty years. So elections do matter, and we saw that right there, right, And so six of the seven G seven countries are up for election this year, and so it's a big year. You're right, it's a year of the election. Here in the United States, we have a big election and although we try to stay away from politics, this is going to affect markets in a very big way. So think about several things. Number one, the border itself. That's probably one of the top issues.
And people don't want to talk about border because it doesn't relate to the comm me. Well, yes it does. The number one driver of employment over the last three years has been immigration. You take immigration out, jobs are flat, and meanwhile they've been growing by leaps and bounds, hundreds of thousands a month, you know, month after month for three years now. We've had this great employment growth and
it's because of immigration. That's one factor. The second factor is regulatory and regulatory capture and everything related to you know, big government versus kind of pro business right. And so when you think about the former president who wanted to take a hands off approach to business versus the current administration, President Biden and FTC, which has been kind of anti these big M and A transactions, you'll see a very
different outcome. The investment bankers and corporate CEOs are probably in lining up if the former president were elected to announce deals sometime going into next year, versus kind of hands off right now with certain these companies. And finally, what I'd say is taxes. It's a very different tax stand that President Bible would have versus versus the former president with respective corporate taxes as we all know, and what implications are there for companies as well as the
impact to higher taxes for the wealthy. So very different policies and a lot on the line.
A lot of people would say very different policies, But when you look at history, at some point it kind of balance itself out, at least from an investment perspective. Is there a point in time in this election cycle where it is appropriate to actually act on the potential for what could happen? Do you wait till after the election, do you front run it, what do you do well?
One of the greatest trades of this last fifteen twenty years is when President Obama was elected and knowing his stance on healthcare and buying into healthcare companies in advance of him taking office, and that had legs that took us from years and years and years on and it's still working to today based upon Obamacare and all the
policies and measures that we're put in place. So so yes, I think these implications of what one administration, our current administration might take versus the former administration might take is very different, and we'll have implications for for sectors and for companies specifically.
One thing that seems to stay the same in all the research that I read is that the budget deficit, the physcal deficit's going to grow, like no matter who's in the White House, there's me more money in different ways coming in.
Do you think that's that effect?
Is that true?
Do you look at it like that?
Is there a long term behind your place?
It didn't used to be the case, but now I think it more is the case and what's baked in, and so I wouldn't disagree with that at all. Now, is you know, rather disappointed, you know to see how much the deficit grew during the Republican administration because I'm all for you know, fiscal austerity or or you know, fiscal strength and how it's you know, been relatively indifferent.
But what I would say is I think we'd have slightly bigger depths with the current administration that we would with the form administration, because I think the former administrations learned from that and wants to downsize government and wants to downsize a lot of the benefits that so many folks have enjoyed in these last four years. And I think there actually might be a little greater than what the commentators are stating and versus what you've seen in these last few years.
We'll only have about thirty seconds left. But on that point, though, are we focusing too much on the president himself? I mean, I think about the elections that we just had overseas that was less about the man at the top and more about the legislatures or the parliaments, And I wonder if we're going to find ourselves in the same situation here in the US, where who's in the White House is going to matter less than what the complexion.
Of conquers point. Executive order will be the order of the day, more executive or more executive order than that we've ever seen going forward, because that rubicon has already been crossing.
Okay, all right, there's a great conversation. Always great to have you, Richards. He's the CEO of Marathon Asset Management,