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This week on the podcast, another extra special guest, Matt Sherwin is co founder and chief investment officer at Merrek Capital. He'd previously spent sixteen years at JP Morgan Chase and then a bunch of years at City Group beforehand, running all sorts of spread markets, head of securitized product, lots of CIO and risk management titles. I came to no Maerk through a live event we did Atloomberg last year.
I found that his approached to credit and trading is absolutely fascinating, and what Marek is doing is really quite interesting. I thought the conversation was brilliant, and I think you will also with no further ado, my conversation with Merreck Capitals. Matt Sherwin, Matt Scharnwin, Welcome to Bloomberg.
Thanks for having me. This is exciting. That was kind of That was a bigger wind up than I was.
I like, I like a big wind up because it gives us an opportunity to roll back to the beginning and say, all right, Bachelors and economics from the University of Pennsylvania. What was the original career plan. I don't imagine people going to college and saying I want to be the head of global spread markets.
No. But that's super interesting because our oldest is a sophomore in college now and he's in the business school to American and I was just talking to him yesterday and he said, I'm now in I think they call it like finance for Business. I really liked this new class and I said to him, that remind finds me so well of when I was in undergrad business school and I did the first couple of semesters at ECON and I hated it.
And I had a similar experience, and it was like.
You know, I shouldn't have hated it as much as I did, but at the time, uh, it was ilm curves, it was supply, it was demand, et cetera. And it just it felt it didn't feel very practical to me, and I didn't do very well and I didn't go to class very often. I didn't do very well. But then we got to kind of the next semester, which I think they called finance one oh one and was like bond math, discounted cash flows, and I was like, oh this, I like, okay, I am in the right worl.
Well, it's much more realistic and you're not dealing with homo economy because that is this theoretical.
Looking back on, I wish I had listened a bit more at some of those others. But you know something I say, maybe we'll get to is like it just in recommendation would give to other people. It took me a little while to realize what I was introd in, what I was interested in being interested in. And when I got into some of those classes, kind of the more financi kind of stuff, I was like this, I like this makes sense. I want to learn more, and
I think that's kind of where it's right. So I always wanted to I just like, when there's you know, numbers on the page, it adds up to something you're trying to make money. It's hopefully positive at the end, it might be negative. It's pretty clear cut at least the goal is And I always like that, always gravitating.
So economics way too abstract and academic, but business and finance practical, applicable, real life usage.
Yeah, which is interesting too because I also I'm a little bit like this a little exaggerate, but I'm a little bit of like a history buff, so like it was interesting that that what didn't didn't appeal to me because I do like kind of the history of it.
How did we get here? And I think that's always something that I'm like in this form as well, going back to learn more about financial systems, how much works, how they thought it used to work, different schools of thoughts, and I think it really helps you understand where you've been, where you are, where you're going.
So when you look back when you were a group treasurer or chief investment officer at the JP Morgan division you were, you were involved in, what sort of lessons did you take away from that? You're you're in the real world managing real risk, real portfolios. How did that experience change how you perceive risk?
Yeah, it's a great question, and I'll tell you so. Obviously, I had a career with a background in trading, running trading teams both on the buy side and the cell side, and it was really that experience that this next piece that was transformative for me, and you know, really brought us to the point where my partner, Derek Woman and I decided let's form Eric and you know, I'm sure
we'll get into that a bit. But what happened was I spent twenty odd years trading mortgages, rates, corporate high yield products like that, working with specialty finance companies, some that I worked with, some I had a hand in running this kind of universe, and then in late twenty nineteen, the opportunity to move over, and this was different building, different Waldorf, key card, different team, and be the CIO
and the treasurer. So this is now by side running the capital of the firm, the investment of the firm, hedging and managing structure was lots of things wrapped up in there. But the real thing was the point in time where this happened was late twenty nineteen. A few days later was the repo crisis. If we remember that, when all of a sudden, if you wanted to borrow overnight against treasuries, it costs you ten percent. Okay, six months after that pandemic breaks out. And why bring that up?
Is so much changed in dramatic size, at rapid speed that I saw something I'd never seen before, and it was how does the financial system really work? And what does it mean? And how does it apply to everything that I've done? And it was one of these moments where I felt like I just went from being the captain of the ship, you know, my own little thing,
right will be a little expansive with it. I went from being the captain of the ship to going to work in the engine room and seeing the actual gearing and how it works and how it doesn't and what could stop it from working. And you spend years, you know, you pull a lever, you think the boat goes faster, but you don't know why, and you don't know what could stop it from doing that. You don't know what could make it work more efficiently. But now you go work in the engine room and you see it and
you understand it. It was just this aha moment, Like we're two guys with glasses, right, So you know, when you go to the you get a new prescription, you get your new glasses, you put them on, You're like, oh my god, I can see right. And by the way, how was I walking around the streets of Manhattan with that old prescription? But now I can see clearly, and honestly, twenty odd years into my career. That's how I felt to that.
Moment in twenty nineteen.
Yeah, I would say like in early twenty twenty, about six months in, it was kind of like, oh my goodness, it's coming together.
Now.
I wish I wish I had known this for the twenty years that preceded this, but I felt like, now I know nothing and I'm starting.
To learn, so I have to ask. So my experience with twenty nineteen was that wobble seemed to go by so quickly compared to eight oh nine, where you know, to me, you saw a lot of warning signs, first in housing and then in securitized product, and then in construction, and then you know, the market didn't peak till October seven, and the next eighteen months were kind of fun if you were on the right side of it, but if
you weren't, it must have been a bloodbath. It sounds like you derived more out of the twenty nineteen experience. Then you're on a desk eight O nine. What sort of scar tissue did that leave? How? Yeah, informative was that?
That's really interesting the way you kind of put those together. And so to set the table a bit O seven. When I got to JP Morgan, lad O six seven, eight oh nine, I was in charge of had a team. We traded asset backed security, say, credit cards, auto student loans, subprime mortgages. Remember those clos so really kind of like the center of what ended up happening after that. And I would say it was so overwhelming at the time.
I mean, we were there two in the morning, hand marking bonds, okay, walking across the street between the two buildings, like, is there more information this company might buy that company before the market opens? What else can we do? The numbers were huge. It was almost like a bit more than you could process at the time. But I think each one of these became every step there was like I understand what I'm doing better now because the first thing I ever did was I started I was a
cash flow structure. And actually, at that point in time, the guy who ran the department was a friend of mine named Bruce Richards, who went on to start Marathon and has had a fantastic career, and we keep in touch and he said, I said, I want to be a trader, and he said, well, I want you to be a structure because if you learn how the cash flow works, how the structure works, then you'll be a
better trader later on. I think each piece helped me understand the risk better, and then the system it sits in, and that helps you understand the risk better. And then when you understand the risk better, you understand the system it sits in better, and it builds and it builds on top of each other. So I would say in
eight I learned more. In eight we saw we felt like we were the tip of the spear in like a bad way, and we could see it was getting worse, and it was accelerating, and we could see the people were maybe even underestimating. And I remember some conversations around at the time that we were basically saying, like, think bigger, think broader, think worse. That's the context we're talking about. But all of that helped me understand how does my
product I'm trading fit into an investment bank? How's an investment bank impact the system. I think when I went into twenty nineteen, obviously a lot time had passed, I'd had more experiences, et cetera. I remember sitting in a meeting. We're in seven thirty am traders meeting. This is with the CIO group, and we go around the table, my rates lead, my credit lead, et cetera, and the REPO guys walk in and they say, hey, we can lend against treasuries at ten percent? Should we do more? And
I said, guys, this is my third day with this team. Okay, I'm the person in the room who knows the least about what you're talking about. But if you need my authorization, you have it.
Because that sounds pretty great.
That's fantastic. My response to you is how much can we not? Can we do more?
Like?
How much can we do? Meaning more and more? And that just became the beginning of like, why did that happen? How did we get here? What's the where did it come from? Where does it go? And I found that certain people knew certain pieces but not the picture. And then you're like it was just starting to pull.
Out, and that was your job to the whole picture.
It became it became the only It became the focus of what I wanted to know, because unpacking that would help me understand how do we get here, why does this happen? And by the way, what are the pieces that put this all together? And how do we how do we take advantage of that? How do we protect ourselves, but also how do we take advantage of that? So is this the whole thing? Was this one of those types of things you say, I opened up a door, three doors behind it, and I want to keep going
in that direction. And it felt to me like a purer and purer version of everything I'd done in my career. Getting closer and closer to the source in pricing.
Really really fascinating. One of the things I think a lot of people don't realize about JP Morgan Chase during the financial crisis, and I never doing the research for Balot Nation, I never got this really source the way I would have liked to. But JP Morgan Chase had their own derivative scare a couple of years earlier, and the word was Jamie just said, clear all this junk off of our balance sheet, we don't we can't handle this risk doesn't seem to be worth the potential upside.
So heading into eight oh nine, they weren't dealing with the same sort of existential danger that Merrill, Lynch and Wells, Fargo and go down the list all had to go through. They were ended up being an acquirer of distress assets, not a seller of distressed assets.
Well, I think. I mean, it was a tremendous place to work. I worked with incredible people. I learned a lot, and I worked with great, great people that you're just part of a terrific team, fantastic place. I learned something that became transformative to everything I'd spent my career doing. So that's why we set out too, and I said, I want to do this, and that's why we set out to build Merrick. When we said, you know, I recalled Derek and I sat down one day and I said,
let me just here's how I think about markets. I think about it in terms of money, capital, credit, liquidity, and regulation. That's my five money Capital, credit, liquidity, regulation, MCCLR.
How do you separate money from capital?
So I think money to me is how do you make it? How do you destroy? How does it move through the system. To me, capital is a little bit more of how much do you have? How do you measure it? How much do you have? Are you making more? You destroying it? Credit is really how is it being formed? How is it moving through the system. The financial system is changing now, It's very different than it was a few years ago. We actually when we were really trying
to get our ideas on paper. We wrote a paper that we outline saying we described what we thought was the new version of the financial system. We said, the financial system is changing, your de facto recreating Glass Steegel. You have gesibs. If you come from some of this framework, you know, are the globally systematically important banks, systemically important banks think JP, Morgan Wells, Bank of America, et cetera.
We said, there are the new gesips, people like Apollo, Blackstone, KKR, Blackrock. These are areas. These are the folks that are actually making credit extension decisions in this economy. Okay, you have the traders like Citadel, Securities, Jump Chain, some of these other names. Everybody's familiar with. This is disaggregating the financial system and putting it into different buckets. So basically we think about where's it coming from, where does it go,
who wins, who loses? What are the flywheels here. This is a process that we apply to everything we do. Some of the guys on the team call it McLear mcclr. It's the lens that we look at because we believe money capital, credit liquiding regulation drives economies, markets and prices, and then you can really start to understand monetary policy, real estate housing, the types of specialty finance companies we've talked about consumer So this, to me, actually explains how
it all works, and we apply that. It's a huge addressable universe. We trade rates, mortgages, securitized products, corporate credit related equities. It's an enormous addressable universe with investors that have very narrow mandates that transact to different points in time and sometimes non economically imbound by potentially non economic rules, which means there are a lot of overlaps that people don't take the advantage of, and there's a lot of
gaps that they quite simply don't bridge. And the setup for all of this, I think, and I've seen some stuff. A lot of your listeners have seen quite a bunch of stuff. We've seen things go right, we've seen things go wrong. This is one of the best setups we've seen in a long time, and so that's why we went out to say, I saw some interesting stuff, I learned some interesting stuff. There's an opportunity set that we want to prosecute right now, and it is an incredible
time to do so. So we built a team.
Sorry, go ahead, I was just gonna ask No, I'm fascinated. I want to roll back to something you said earlier, which was glass Steegel is sort of being backdoor re applied. Is that a function of people being risk averse or is that a function of people just specializing in their own silo so you don't have, you know, glass Steagel
for people who aren't. Economic and policy wonks separated the FDIC safe banks from the riskier investment banks, and once that was repealed in the late nineties, didn't cause the financial crisis, but allowed all these banks to merge and get bigger, and maybe it made the crisis a little worse, But I don't think of it as the underlying cause. But the idea that the market is working its way back towards that is kind of fascinating. Let me suggress that.
Right as you laid out, like glass sel to say it to oversimplify, basically said like, you can hold deposits, you can underwrite securities, you can trade securities, things like that, and there were rules right now, there are some rules that say what you can and can't do, but really there's a lot more that has morphed into what people like to call private credit, or we're going to extend credit through these fashions, or some of the rules don't
apply to this group, so we can trade the markets differently, or we can make markets in a way that maybe the big banks can't. And then the big banks say, well, we're viewed as super safe, because I would argue we are and that has its advantages also. So it's like
we created these artificial boundaries. What is great for us and the way we look at the world is we saw that, we see that, we understand that we also see and understand and think about all day long and put it into our portfolio construction and the risk that we build. It's all up for grabs again, right. So we've got Kevin Worsh nominated to be the FED chair and Mickey Bowman is the vice chair for supervision, and they are no, no, what the right adjective for it is.
But they're changing the rules and they're pulling some of them down, and in my opinion, people just don't understand which of them matter and which of them don't, and the market moves to place on some that simply don't matter, like it's lack of understanding of what SLR was and how that worked, and we don't need to dive into that, but to simplify, they said, we're going to remove this rule and it's a big deal, and we Merek said
you can take it off. It doesn't matter. So everything the market's doing in reaction to that is a potential opportunity for us.
In other words, people are overreacting to a regulatory change that is in significant, long time.
And that example.
Yeah, coming up. We continue our conversation with Matt Sherwin, co founder in chief officer at Merrick Capitol, discussing why he launched the firm in twenty twenty four. I'm Barry Ritolts. You're listening to Masters in Business on Bloomberg Radio. I'm Barry Ridolts. You're listening to Masters in Business on Bloomberg Radio. My extra special guest today is Matt Sherwin. He is co founder and chief investment officer of Merik Capital, specializing
in a variety of alternative credit and related private products. Previously, he spent sixteen years at JP Morgan Chase, where he had a number of very important titles. Before that, City Group, are we in all that unique a period of time. Is the opportunity set that much greater than what we typically see in the normal You know, this is a little more geopolitically volatile administration than than even the previous
Trump administration. Is that a driver or is it the deregulation and misapprehension of what these rule changes mean?
I think it's a combination of what's going on. So we have we just kind of use some little catchphrases among the team that help us sort of like, you know, gravitate around concepts or communicate quickly. We say, this is an administration that's in the business of being in business, and that's just a there's no opinion or judgment one way or the other. It's just it's just a statement
what this environment is. Also, we also came up with something that we thought was just made us chuckle one like, it's important to have a little bit of sense of humor. We found our investors actually do read the materials very closely and they tend to have a sense of humor,
which is good. But we created this thing we called the one big Beautiful chart, uh huh, and we just said, you know what they really need, They need rates to get down, and they needed to come down a lot more them what the market and the curve has already priced in because of how much debt the country has, what it costs, what they want to come So here's what they need to accomplish, and they're going to do everything they can to it. So, you know, we construct portfoliot,
we have an investment thesis, We have a narrative. Everything we put in the book has to fit that narrative, has to contribute to what we're trying to achieve, has to be the best version of that, or has to protect us from what could go wrong. So getting back to your question a little bit, we think it's a very business forward environment, business forward administration. We think that
it is one that needs rates to come down. We are going to have a new FED chair in the middle of June, and he'll say all sorts of things in the confirmation hearing, but really it will be a catalyst potentially for change in the middle of the year. And then we have a bias within markets to strip back some of the layers of of regulation and away from Whether you support that or not, I can tell you because I've been on the other side of it.
The layers of process and bureaucracy and spending your time back solving instead of what could we do better. When you change what your goal is and how you're pointed, you're going to get different results. We think that combination is spinning flywheels in the market now that in our opinion, people are just they're underestimating the power of some of these flywheels.
Really really interesting. Last question before we talk a little bit about Marek. In the old days, and I was never a big believer in this, but everybody else was, there was some constraints on deficits and ongoing government debt
because the bond vigilantes would punish you. The bond vigilantes seem to have disappeared, in part replaced by the stock vigilantes, who any policy they don't like they just sell off until they have their hissy fit, until they get their way, and then okay, thank you very much, and we're off to the races again. What do you think of the eighties nineties era bon vigilantes? Is that just ancient history.
There's no discipline on deficits spending anymore, or and by the way, I think deficits are not all that relevant look at Japan, look at the US history. We've been warned about deficits and they haven't caused much of a problem most of this history.
Yeah, I mean, look, I love the term, and I think we've seen some of those episodes. Last year we saw around the whatever we call Liberation Day in April, like there were a couple of days where treasuries and mortgages said like enough, Okay, that's it, and we're either going to have one of those days where they are giving stuff away or you got to pull back. And I think what we saw was the administration pull back.
So I think in some level it's still there. But part of what we do ATMERIC and what influences our thought process is big. Parts of this have been really broken down. The markets are so big now that it's been broken into specific functions. Like people have odd thing to do and they do that in a narrow mandate.
We have a more flexible mandate to us. The products, they're widgets, they're tools in the toolbox for us to achieve our goals and our investment thesis and the portfolio risk and construction and diversification that we'd like to have. But the markets are hyper specialized in very, very large markets, so you get some of those episodes where it's like, oh, crowded trade, we got to get out. I think the question of does the administration react to the markets? Does
the markets react to the administration. It's something that we've actually focused on quite a bit. We actually, you know, we wrote another pie in June of twenty twenty five that we call the Warshfed and it was just about what could happen, and we sort of went through to your point, like the concept of risk free rate and credit spread are completely intertwined and commingled now and they don't exist separately. So I think that's some of the
concepts you're getting at. Is this a problem for credit? Is it a problem for rates? Are those the same thing?
Now?
One of the most interesting things, and I would just say before we get back to your question, is what was really interesting observation to us was during the last government shut down, whatever mini version of that we're going through right now, it was almost in the data was not forthcoming, and then VOLE went down, So it was this sort of like a little bit like if we
don't know, maybe nothing's happening. But what it also was was a little bit to what you were saying is when things were a little less hyper focused, they actually we're a little less jumpy around small moves, And that
was a big takeaway, big takeaway for us. It's a big thing you're going to hear from Kevin Walsh if he ends up in the chair seat, You're gonna hear a long narrative from him for his time in that seat of we need to step back from the day to day and the minute by minute information and think about the big better picture and the trend and where we're headed and be a little more forward looking. I think that's the kind of guidance that you will get from that chair.
Really interesting. So let's just start out with why you left the comfort of a big shop to have the headache of your own firm. What's the elevator pitch? What problem does Mara Capital solve that couldn't be solved at a large Wall Street bank.
Look, I think quite simply, there are some things that banks can do and some things that banks can't do, some things that they can do and that they don't
want to do. In my career, I've always been involved in these types of markets, being rates mortgages, securitized products, corporate credit, the equities related to that around it, these types of specialty finance, operating companies, and always felt that you have when you can apply the various lenses to these products, being the trader lens, the structurer lens, the operator lens, you understand it better and you get the
gearing and the pieces. And when you learn about the financial system that it sits within, then you actually can understand but take advantage of the risk and return in a more elevated and efficient way.
I want to address that. Is it that the big firms, the bigger banks were risk averse and didn't want to take advantage of it, whether they were prohibited on a regulatory basis or when they're just doing their mac grow risk assessment. Hey, we'll go this far, but no further.
I think it's even simpler than that. We look at the worlds through our lens. We look at the world through the Merrick lens of money, capital, credit, liquidity, and regulation, which drives economies, markets and prices. That helps us understand the drivers of the capital markets that we sit within, helps us understand monetary policy, housing finance, commercial real estate finance,
understand both the gearing of it. Then you can look at something and you can say, Okay, I'm looking at City Group, I could buy it, I could sell it. I could understand what they're doing in the markets. They have a footprint in what that means for the markets. Do I want to buy that? So like where are
the flywheels? What does it spin to next? So everything we were doing was very much about what do we want to do because we see a very large addressable opportunity where we have a unique perspective, a defined lens, and a way of applying that to these big liquid markets that we think very strongly we can take advantage of in a way that people simply haven't had the opportunity to learn about and to understand and apply to these products with the type of flexible mandate that we have,
which boiled down means we look at the world a little differently. These are big addressable markets which have dislocations, volatility, and opportunity all the time, and we can use that combination to achieve what's a very very simple goal, improve the return a little bit while reducing the risk a little bit.
That's all anyone can ask for better returns at lower risk. I'm kind of fascinated by the overall Merrick investment philosophy. We'll get to, but let's start with a little bit with structure. I think of you guys as an alt credit shop, but you also look a little bit like a multi strat shop, like a is it so kind of a hybrid like? Tell us about the structure.
We just define what we do. Okay, we are who we are. We do it the way that we do. We run where right now we're running a hedge fund which trades these products as well, I SAIDs tools in the toolbox as as wige. We do it in one collaborative portfolio. So our set up, our structure. We've got an amazing team. We have specialists in rates, in mortgages, in non agency mortages, and a BS in credit in clos I am on the phone every day with traders and salespeople myself. We trade it as one bookoo.
Well, not really a multi strat within a single expression.
It is what we think is the best expression of the trade.
Well, I shouldn't call it multi strat. It's really multi asset. It's a variety of different credit assets all under one umbrella.
Within our lane. Okay, sticking to our knitting what we believe, we know very well. What we know, we have a differentiated insight into and extracting from that. Okay. The team is phenomenal. They have a ton of byside and cell
side experience. They work very well together. It's very exciting to be I mean, and additionally doing this together, like Derek and I doing this together, putting our name on the door, like Marek is Matt and Derek, because we spent way too much time trying to think of what's a clever name that means means you know, alpha extraction in Sanskrit or some something you know. And Derek's wife one day was like, enough, it's Marek, Matt and Derek.
Now go do some real work. And I think she said in a little bit more of a spicy way, but we were like, yeah, that could work, all right, let's do that.
I think just a little footnote, if you've ever incorporated an LLC or any other entity in New York State, every Greek and Roman god, every Babylonian god, every cerebus named the creature from mythology, it's either a fund or an LLC. They're all taken it's astonishing.
But the real point I wanted to make also that I don't want to lose, is this is putting our name on the door. Okay, it's our name, it's our reputation, because and that really cemented it for us. That was something we really wanted. I took some time off and which was fantastic, and I met some of the most amazing and interesting people in the world. When you're unaffiliated, people speak to you in a different way because they
had no one to talk to. Okay, I sat down with the CEO of one of the world's largest pension fund sovereign wealth funds, and we had and I never met the person before. We had our long conversation because he just needed to talk to someone. And I learned a lot in that. I met some of the most interesting people in venture cap in all it's in private equity, et cetera. And it was just more way of learning
parts of the system. But it got to the point where after my you know, academic wander through the wilderness, I was like, okay, you know what this is. At the time, we had three teenagers living at home and it was an amazing time. I used to always say, you should be able to retire in your forties and go back to work in your fifties, Like that's the way business should work. Obviously, that's a luxury that very few have. But I was getting to the point where
I was like, Okay, I feel great. I want to do this. I'm miss markets. I love this. I want to get back to it, and I want to do it in the way that I want to do it.
How long gap that I took, like about a year off.
You know, it's you know, it's a riot. So in our deck, we put a little timeline of my experience in Derek's experience, and just to help people understand who hadn't met us, who we are. And at the very end, I put you know, this is my background, simple. I was here for ten years. I was there for sixteen years. And then we put like a lot one year nugget on the end of the timeline that just said chilling no G no G just chi L I N R, I don't remember.
Just very on Wall Street sort of.
Well, it was like our nine hundredth version of the deck and we were just getting a little punching like it made us laugh. Okay, you gotta have a sense of humor. It made us laugh. So we're like, this is going in. Every investor brings it up. They bring it up and they love it and you know it. To us, it's like, wow, you were reading every part of the deck. And also it's nice to know you have a sense of humor. But getting back, getting back to it, it's like.
People, this is always shocking. People read the foot Oh.
Yes, that's been a big learning for us. They read it. So when we were doing all this, you know, my wife was like, yeah, why would you want to do something for anybody else? And I thought to myself, exactly
what are we gonna work hard round? What are we going to make sure succeeds the thing that we put our name on the door, or reputation that we believe other people don't get it that we believe is the right way to approach these markets that we believe can extract from a setup which is one of the best that we've ever seen. So if you tick all those boxes, why would you do it for anybody else? Huh?
Really really intriguing. So it's twenty twenty six, I'm legally obligated to ask how do you use artificial intelligence in research, portfolio construction or operations at Merrick Capital.
Sure, I would sort of make two points. I'm an AI optimist. That's not one of my two points, so that doesn't count. We use it every day. We build stuff more quickly, we build our own tools, and we build the more quickly than we ever could before. You know, the guys on the team, they're building stuff at their desk in a week that would have taken a year
to do somewhere else. Literally, And I know because I've been in that, and once you built it, it would have taken like six months to get approval to release it into your et cetera. This is like light speed versus what we used to do. Now changing a little bit of how you frame that question. AI is a really
really interesting thing in financial markets as well. Okay, so I don't think we're there yet, but we're going to get to a place where people are using it for risk management, they're using it for compliance, they're using it for KYC. Put all that aside. The most interesting to me right now is we look at the AI cap x boom and we say, here's a product that is commercial real estate with securitization technology around it. You're talking about where is it? Is it built? If not? How
long is it going to take to build it? Who are the tenants, how long are the lease is, what are they paying? What's it worth when it's all done? Is there residual risk like you have in an auto lease, Only some of it comes to the securitized market because it's just not that that market is not big enough for it, So it comes to the corporate bond market.
So that to us is like, that's the type of opportunity that piques our interest, where we say, this is something that looks like ABC and its being wrapped up and put into a different market. That is asking one, two, three, And those are good questions, but it's really like, put it all together, look at all the factors. What are the additional Are you getting more structure, are you getting less? Are you charging for the risk? Are you paying a
way for it? So the AI cap X Boom to us is actually like a source of very cheap risk for us to look at. And each one has a little bit of different flavor and we're very opinionative about which ones we like.
Huh. It sounds it sounds really fascinating. It also sounds like anytime there's a novel area, the opportunity for mispricing seems to really there's that.
There's that we look get some of those first time issuers. We have like we have some things in the book. We have something called the north Star Playbook, which is what are companies and bonds that have clear missions and objectives that they can execute on, that are aligned with us with the instrument that we have, or misaligned or that they're not able to execute. But some of it it's actually not just about the novel structures. Let's look
at agency mortgage backed securities. Those have been around for a long time. Okay, A couple of weeks ago, tweet from the pre or whatever we call a post on truth Social four twenty six pm, I've instructed my representatives to buy two hundred billion of agency MBS boom bomb in the agency mortgage back market. This is a there are was it twelve billion, twelve trillion of these things outstanding? And the agency mortgage market is nine trillion, hundreds of
billions of a trade every day. And that was a after market post tweet. And what are you gotta do with the vaxity event?
So then are you out buying into that that rise to take advantage. Are you are you price taker or a price maker? What are you doing when that that's happening?
It's both. We look instantly like what does this mean? What was our expectation?
Now?
In that instance, we expected the GSS who will be the ones who actually buy it? We expected the GSS to be buyer. I think our view was a little bit at the high side or out of consensus. Even we thought this is going to be a support mechanism for this market over the course of the year. Fan and Freddie are going to buy a lot of this.
Stuff, assuming they haven't already started to.
They had been, and that's a great point. They had been, but buying two hundred billion with like an after market tweet, and nobody knew, like, is it going to be two hundred and then another two hundred? Are you going to start buying? Are going to buy forty tomorrow? How's this all going to work? This exceeded even our expectations, and you saw right away. I think we were positioned for that type of event. We were positioned to take advantage of some of the policy risk as opposed to get
hit by some of the policy risk. You could see that there was a massive short covering rally right after that, and you could see that that wasn't necessarily people's expectations and how they were how they were set up for I.
Have a mortgage related question for this, but I'm going to save it to the next segment coming up. We continue our conversation with Matt Trewin, co founder and chief investment officer of Merrick Capital, discussing credit and risk in today's markets. I'm Barry Ritolts. You're listening to Masters in Business on Bloomberg Radio. I'm Barry Dults. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Matt Trewin, co founder and chief investment
officer of Merrik Capital. Previously, he spent twenty five or so years running credit and various types of risks at JP, Morgan Chase and City Group. So we were talking earlier about the Trump tweet directing the GCS to buy two hundred billion dollars worth of agency paper. You would have thought that should have sent yields, plumbing and mortgage rates down, which would stimulate the housing market. I assume part of the motivation for that tweet and for that purchase. What
what's going on in that market? And why does it seem so difficult to drive rates lower?
Right, that's a great question. And as silly as it sounds, like two hundred billion, it's just.
Not enough pocket cash, right, walking around money.
That's one way.
I mean in a twelve trillion dollars market for twelve trillion, it's not even one.
Yeah, sure if you are if you've got thirty five trillion in treasuries outstanding, and yeah, yeah, it's a big number and it moves the needle, but what they really want to move it and keep it there? Like that's a little bit of a hard part because don't forget that the Fed owns two point two trillion, so they're gonna buy two hundred billion. Didn't give a lot of information and that sort of helped them in that moment.
The lack of information after probably led some of it to kind of like bleed out and unwind a bit. But the Fed owns two point two trillion and those are paying off and that's approximately one hundred eighty billion a year. So then you start to think about, like, well, if the rate moves and mortgage prices go up. Are some of the money managers going to sell one hundred billion over time and to kind of neutralize it? So I think it's helpful, it's indicative. Here's the real takeaway
for us. Okay, So at that moment, it's how do we trade this, what's the price, what's the next step? But then we're really thinking from there like what does this mean, what's going to happen next? And of coming full circle. What it really does is show you how hard they're going to try to drive the mortgage rate down, to drive rates down overall, to sign up for an
agenda and a plan to get rates down. Okay, So some of it is what do we do in that specific market, and some of it is how is it informing our view of the bigger picture.
So you guys have two I don't want to say conflicting, but somewhat different risk factors you're juggling with. Obviously, when you buy paper, you're thinking long term and we want to watch this play out to our broader thesis. But at the same time you're actively trading on the short term. How much do these compliment each other or do you ever find yourself long in one duration of the portfolio and short in another. How do you balance this out?
Yeah, I mean we have longs and shorts across the book, within mortgages, within credit, we there were you know, long what we like and short what we don't. Keep it super simple or long what helps contribute to our thesis or protect and vice versa, and you know protect the Knvecci profile that we're looking to achieve. We are, we trade every day, We are active in these markets. It's part of more of a sort of a medium term thought process how they're going to play out, but every
day is iterating on that. Is this still what we think? Are we positioned with the best version of it? Do we have the bonds that are going to contribute to what we are trying to achieve? Like right now, we're very focused on the flywheels that exist within financing markets. And if you think about what does that mean? Okay, so rates come lower, we talk rates go lower. We talked about that a little bit. But credit spreads are
also really tightening. And when rates are lower and credit spreads are tight tighter, your cost of borrowing has gone down. You can refinance all sorts of assets. It means some assets are even at that point in time worth more valued highly. Now that it's worth more, you've got a lower LTV loan that you could take out an even tighter credit spread on And how do these spin and what is this? So this is very much what we're
thinking about now. I think the market completely underestimates the power of those flywheels and what it can be achieved. So that is one of we look at our portfolio, say we want to have about twenty trades in it, and a trade is not one line. A trade could be thirty line, I guess, but the flywheel is a trade. It's a little bit of a maybe even a bigger higher order one. But we look at what is happening at that moment. Is there something to take advantage of?
But also what are the ripple effects of what's happening in that moment, and what does the market need to do? What is it going to do? Does it understand this? And then we unpack it and say where the opportunity.
So coming back to what we talked about, we believe when you look at the world through this lens, we look at markets through the Marrick lens, that the lack of connections made through these markets and the lack of extracting from some pretty obvious pockets are an opportunity and like we talked about, to improve your return and reduce your risk. And it's a process. So it's just as much a process and a machine through which you're extracting alpha from the market. We have our views, we hope
to be right. It's also it's a process through which you work through these markets that you extract all the time. And the mandate is pretty clear, Like as I think of it, the mandate is very clear. You need to make money when markets go up, and you need to make money when markets go down every day, every month, every quarter, every year, and you probably won't. That's the mandate and that's what we're going for it, And it's quite simple when you frame it out that way.
You mentioned in twenty nineteen there was a sea change in how you perceived what was happening in the market and how different that had become. How does that affect how you look at and define risk. Risk definitions have obviously changed over your career, but twenty nineteen was such a sea change. What's different about managing risk today?
Yeah? I think I believe managing risk at scale is a skill. Okay, you have your numbers, and you want to know what those are, and those are indicators, and those are starting places. Var is a number and a starting place and an indicator. Stress is unnumbered DV one Cso one these are we I like to look at the world in a stress based framework and we create a bunch of different stresses. Some are quite simple. Rates go uprates go down, credit crunch, a flight to quality.
We had our little like you know, we're getting little punched from. We had one we call QI forever and ever. And looking at these it's really about like it's a starting place for a conversation, okay, because you do need to know where it's coming from, and what's the attribution, what's the return attribution, where's it where you're hoping it comes from, and what's the risk attribution? And very importantly what could go wrong? Understanding that what you're trying to achieve,
but knowing where the exits are. Like, I think it's really like a philosophy to risk and to managing risk to make sure you're pointed to achieve your goals while managing your risk properly and knowing what you would do if things changed, Right, you have a plan and then things change.
Really really interesting when you're looking out at a variety of different opportunities, what do you think today presents the best risk opportunity? Looking at structured credit corporates relative value, what is really drawing your attention?
Yeah, we really thought that one of the places to extract from the flywheel is in securitized markets. Actually, as an example, like we've been very focused on trophy quality office and gateway cities and this goes back a little ways.
These are the super a resident commercial realship, right.
So that all came to be from us pulling at the thread of how the financial system works. We talked a little bit about the new gips and what you had was everybody was going back to work, back to the office, but took longer than we kind of looking back on it, that took a long time. The part of the financial system that was changing were those new g sibs, Apollo, Ares, KKR, Blackstone, black Rock, and they were coming back to the office and they were growing,
and they were finding that two things. One they needed nice offices to kind of you know, get everybody where they want them to be, but also they were growing and they outgrew what they had and then they went looking for more and what they found was there's actually
not that much trophy real estate out there. And so, like our view on the evolving financial system, led us to have very strong conviction about a supplied demand imbalance in commercial real estate when applied correctly, and then we just looked for what's the best place, and it's tightened
a lot. But actually we think it continues to and has been, because it's like the it's continued to be one to two steps behind the fundamental So what that really means the way we think to wrap it up in a nutshell, this is a triple B bond that we think is a double.
A really brilliant because everybody's painting with a broad brush of hey, forget bs even a buildings are sixty percent occupied in terms.
But they're not. They're one hundred percent occupied but in terms of.
Staff returning to office, so it's fully leased. But the what is it castle key cars or running sixty percent of pre pandemic levels in a lot of cities. But the A plus the bigger, the JP Morgan's they want everybody back in the office, as does Goldman Sachs, as does a lot of these places. And they're roll in trophy properties.
And it's not just New York, it's Miami, it's actually San France has come a long way. There's certain buildings there that we like. We actually, I would say a little bit out of consensus. We like DC certain not the government buildings, but nice offices. Like we said, this is an administration that's in the business of being in business, which means you got to go see them and make your case. You want to get some business done, which means you need lawyers with a nice conference room, that
need a decent office, and et cetera, et cetera. I mean, like it sounds a little good, but you're.
It's doing business.
It's true. And so you can see there are certain companies that are buying buildings, knocking them down in DC and building brand new ones. And there are buildings that are being taken offline to convert to REZI. By the way, everything we wrapped up in what we said, the conversion from office REZI is actually spinning faster now in DC. Some buildings are being just outside d C. Some buildings are being converted to data centers, so actually like stocks
being removed all the time. Anyways, it's just an example of how like we're pulling on threads and we're finding where we can best take advantage of it, and like what are the next couple steps and ultimately we're looking for what's something that's already gotten better except the price hasn't changed yet.
Huh. That's really that's really interesting. You You've mentioned stress scenarios a couple of times. We know that correlations have a tendency to go to one and liquidly disappears.
Well, I think I've seen that personally, right, LIQ disappears. I think I would just wrap that up. I make two comments that people I say, like one, you don't go out of business because your assets. You go out of business because your liabilities. And when you start looking at that side of the balance sheet first, then you understand things a little bit better. And then also you know, with with traders and all the people I work for, it's really great because some of the people I hired
a long time ago, there am desent places now. It's actually take a lot of pride in the people I've worked with who have gone on and done fantastic things. I really really hate the phrase money good. Okay, I don't think anybody should be allowed to say it.
Hmm.
It is this like false crutch. I also, in many, many conversations, have said to people, I think you're right. In fact, you've convinced me. I believe you are right. I'm just saying, you know you're going to get fired long before we know the answer to this question. Okay, let's take everything we thought, everything we've known, and let's put it into the context of how do we apply this in markets? What's going to happen, what's everybody else doing, and how do we take advantage of that?
Huh, really really fascinating. Last question before I get to my favorite questions, what do you think investors.
Those were your favorite questions?
Oh? No, you'll see the favorite question. All right, what do you think investors in the credit and all space are not talking about but perhaps should be. What topics as sets, geographies, data points are getting overlooked but really shouldn't.
Yeah, so that's a great question. We touch on a little bit. They're underestimating the power of this flywheel. Like with the background I've had and we've talked about, and I've seen a lot of things blow up, Like we could come up with a lot of examples of things
that could go wrong. I think they're underestimating the things that could go right, or what the power of financing and the mechanics around financing and the provision of liquidity and credit credit spreads when they're good and when they're tight, and when the machine is flowing, what that financial engineering can really do to both unrecover value and create value.
I think they're underestimating. The other quick thing is in the middle of the year, if Kevin Warsh ends up sitting in that seat, and if we get a little bit of the setup that he's looking for, he's going to change everything. Right, So he believes we're going to have a big productivity dividend from AI and we're gonna have a big productivity dividend from deregulation, and then that would allow you to have lower rates and a smaller
fed balance sheet at the same time. And if he gets a little bit of what he needs to craft that argument, we're gonna have a very different second half of twenty six than the first.
Really really interesting. All right, let's jump to our favorite questions our speed round. We'll get you guys out of here at a reasonable time. Starting with who are your mentors who helped shape your career?
Oh, I've worked for some pretty amazing people, and I tried to learn from every I just had the bosses that I've had. Are you know legends in this industry, whether it's Bruce Richards t and Purlow, Jimmy Dumar, mad Zimes, Daniel Pinto. I mean, these are people who defined these markets and they all had a huge impact on my career.
Really interesting. Let's talk about books. What are you reading now? What are some of your favorites?
Oh, you know, but like I am in front of a computer screen and reading so much, and I read so much analytics, research, et cetera. I get home, it's a little bit more like hang out with my wife and kids and a little TV.
Well that's my next question. What are you listening to or streaming? Give us your favorite next, Netflix, Amazon, Prime, whatever.
I will watch pretty much anything Tailor Sheridan. You know, like we just.
Finished season two of Land Minute's so good.
Like Landman, All the Yellowstones, everyone, nineteen eighteen twenty three, nineteen to all of those lion any of.
Those Lioness was also great. This should be a new season of that coming out one of these days.
Yeah, there is. I mean I think I've watched both seasons like one hundred times.
Final two questions, what sort of advice would you give to a college grad interesting career in investing, credit trading, what have you?
I just think it's not you know, it doesn't have to be a commitment for life. Just look at it as what's something I'm interested in being interested in. I think you can pick the kind of people you work with, and you want to be around good people who will teach you, who will support what you're doing, and just say, I'm going to give this a spin for three to five years, and if I like it, I love it,
maybe I'll sign up for another five. But you know, you have an opportunity to try something out and see if it's for you.
And our final question, what do you know about the world of trading, credit investing in alternative sources of liquidity and other products that would have been helpful twenty five or so years ago when you were just getting your legs onto you.
I wish I knew a fraction of what we are applying at Marek any point before we did this. If I knew a drop of what we're doing when I sat in other seats, yeah, I'll put that all in the I wish I knew Bucky.
Really, really, absolutely fascinating.
Matt.
Thank you for being so generous, Thanks for having with your time, and we have been speaking with Matt Sherwin. He's co founder and chief investment officer of Mare Capital. If you enjoy this conversation, well, be sure and check out any of the previous six hundred or so we've done over the past twelve years. You can find those at iTunes, Spotify, Bloomberg YouTube, wherever you get your favorite podcasts.
I would be remiss if I didn't thank the correct team that helps us with these conversations together each week. Alexis Noriega is my video producer. Sean Russo is my researcher. Ana Luke is my podcast producer. I'm Barry Rutaults. You've been listening to Masters in Business on Bloomberg Radio.