The Sell-Everything Strategy

so sure. The equity market has been wild and the vix jumped to a record high this week, a record, But at the heart of the stock markets worries has been corporate credit fears, right, and we'll get into that with our guest Uh And of course we'll close out the episode with the craziest things we saw in markets this week. Sarah, I trust there were plenty of crazy things you saw in markets this week. So many crazy things we saw in markets, but also just in the world.

We should be very clear if our audio sounds a little bit strange, or you hear an ambulance or maybe the man who lives on top of me his band playing jazz um. We're all coming at it from our very own homes for the first time. So bear with us and it'll be a lot of fun. You might you might hear my dog. And it's a clarify, Sarah. The man lives in an apartment above you. He doesn't literally live on he literally Yeah, he doesn't literally live

right on top of my head. He does live in the apartment above me the luxury of New York City. So I've got a man living in my head. But that's a whole that's that's a that's a different issue that will deal with Mike. Yeah. But Sarah, as you said, I think in uh markets these days, uh, the main topic front and center on everyone's mind is the severe damage being done to credit mark It's um. So we're very happy to welcome to the show for the first time,

the head of credit strategy at Wells Fargo's Securities. When do you, Caesar, what do you welcome to the show? Thank you very much for having me. Happy to be here. Oh great, um, And I guess the one thing I wanted to ask you first. I know, uh, this is sort of out of your normal realm of strategy, but I feel like the whole world is waiting for some kind of government uh plan to shore up the credit markets. I mean, we we've got a little bit of a

start on that from the FED with their commercial paper facility. UM. But I'm just curious, have you given much thoughts so sort of what kind of government package uh could be put together to to really sort of uh stop the bleeding and credit markets, especially since obviously the FED is not allowed to buy corporate bonds, but maybe that will change. UM. How's your thinking around all of that about what we can expect from the government when it comes to credit. Yeah,

you're You're absolutely right. Credit markets have dislocated very severely in recent weeks, and for us, on the strategy side of things, we have been basically following the FEDS playbook. Um. They have a pretty well recognized strategy from the financial crisis. They have the benefit of being able to look back and seeing, you know, what worked then, what didn't work, um, and trying to project out what will work in this situation. Now.

I think that the biggest thing that people are are really worried about in the short term across the credit markets is there's just been this massive rush for liquidity. It's been the sell everything strategy in the markets to raise cash while issuers on the corporate side of things are drawing down revolvers taking out their delayed drawing term

loans at you know, basically a record case. And so the biggest question for corporate credit is there enough liquidity in the system to actually back up all these revolver drawdowns all of the cash raising by investors. We've spoken for I don't know years now since the financial crisis just about how much liquidity was pumped into the system

by the FED and other central banks. And so now this is the real critical point where we figure out, did all of the regulations put in place on the banking system, uh post crisis, are they actually going to do what they were designed to do and give borrowers the type of liquidity that we really need right now when we have no idea about the duration of this

crisis and the real magnitude of it all. So we are following the FED and other central banks very closely while also trying to figure out what the fiscal plan is from the government. And you know, we've seen a number of central banks come in and say that they are putting I G. Corporate debt as uh, you know, an eligible asset for quantitative easing programs. And I think that there is a lot of speculation that the FED, in conjunction with Congress and the U. S. Treasury may

have to ultimately go down that path. What do you make of that possibility. I mean, we saw the op ed from Janet Yellen and Bernanki and the Financial Times raising that that maybe the FED could step in and buy corporate bonds. I mean, if that were to actually happen one, what might that look like and to how might that actually help the system at this point in time. So, you know, I think that the mechanics of it are

are definitely to be seen. We have the playbooks from other central banks where you know, it's just open market purchase is and they you know, go in and they have their list of eligible securities and you oftentimes see the basis between those eligible securities and ineligible widen when you have market volatility. So you know, it's yet to be seen what the FEDS playbook would would actually be

in conjunction with Congress in the treasury um. But you know, historically, if we look back at the FED putting MBS on its list of securities, that they're going to buy that stabilized the market pretty considerably in the financial crisis, and you know, this go around NBS is already in the newest que program um, and you know, it's not proving to be quite as much of a quick fix as

I think some people might have thought it would be. UM. So I think that the biggest issue right now is that the front end of the curve is under tremendous pressure because everybody just wants cash, and you know, we we don't have the solutions in place quite yet to normalize that front end of the curve. I think that

we are definitely creeping toward that point. And you know, one of the things that I think you have to keep in mind is we are still in Q one for corporate borrowers, which means that you know, they want to have as much cash on hand for their Q one filings so that when they report earnings they can say, you know, look at this liquidity that we have on hand.

So the big question is are we now taking too much liquidity out of the system in one fell swoop and we're going to go back in six weeks from now and say, okay, well, maybe maybe we didn't need to all be drawing down our revolvers At the same time, it's you know, it's a very interesting kind of game theory issue that we have backed ourselves too, you know when you I, I know the focus has been on when you talk about sectors that obviously the energy sector

is once again the big concern, and credit uh, travel and leisure and hospitality UH clearly is a big source of concern. But I feel like there's potential for this to just bleed into other sectors. UM. You know, are there any sectors you think that have either um uh not priced in the risk enough yet or maybe went too far? Um. I'm just trying to think where this goes next after you know, energy and clearly the travel and leisure sectors have been hit pretty hard. Yeah, that

it's it's a great question. And and when we're grappling with on a very regular basis, I personally have been very surprised by how well technology has held in in both investment grade and high yield. Tech is one of the tightest trading sectors despite you know, in my opinion, having pretty tremendous exposure to supply chain and then sticklicality issues. UM. So that's one of the segments where we've been a bit more cautious UM, and it hasn't worked so far.

So we're we're definitely you know, looking at pressure points and maybe if there are positive catalysts that we were just overlooking. UM. The media side of things is also interesting. You have some some different gifts and take where with more people at home, you'll see more streaming. There will be some media winners from that, UM. But you also don't have people in movie theaters and how long is it going to take for you know, people to really be comfortable going to a movie and being in a

in a crowded space. I don't know, generally public perception of these types of issues take a little bit longer for people to get comfortable again. UM. Then I think some people estimate. And then also you know, the home building building products side of things that's been very resilient UM in this market UM, and that there's clearly going to be a slowdown in home buying if we have unemployment just spiking all of a sudden. Now the big question is, you know, what are the jobs that we're

actually losing in the economy. Are those jobs you know, going to coincide with people who would be trying to buy homes. Um. You know, there there's probably a little bit of a glimmour for home construction if we have the ability to do a lot of the um you know, more uh finance law, the kind of tech higher higher paid, higher wage jobs, rather than the hospitality industry where you know,

it's still not the most well paid industry. UM. So I'm definitely looking, you know, pretty closely at what's going on in the housing market as well. Timing here is is such a big question. Really, no one has any way of knowing how long this is going on for. And I mean you talk about stimulus, what fiscal can do, what they can do on the monetary side, and you hope that to an extent that does help. But I'm

kind of just curious. I mean, how long can the U S economy as it's built now actually sustained being shut Like, even if you do have liquidity being pumped into the system and you have a way of getting cash to companies to help build themselves back up, I mean, at what point does it potentially just become too much. I wish, I wish I really knew the answer to that. Because I feel like I could probably make some very

good bets if I did. You know, when I when I talked to my my econ experts about you know, how severe this can be for g d P. You know, most of them like to refer me back to the early nineteen eighties and we had a pretty severe downdraft in economic growth, but it was very short lived. And you know, I think that long term, as a corporate credit investor, I continue to believe in the viability of capitalism.

I don't think that this is going to be, you know, the the end of times for American capitalism as we know it and globalism. You know, I think that we're going to eventually right ourselves. I think the economy as shut down as it is, I think means that the recovery is less likely to be v shaped because it takes time to turn things back on and get people back in seats, get people back flying for business purposes. Um. So it will be interesting to see how this plays

out from you know, a liquidity standpoint. The longer this last, clearly the worst it is for the very highly leveraged issuers. And that's the big concern is what happens in the leverage loan market. What happens in the fringes of high ye old and single bees and triple c s. You know, these issuers generally don't have twelve or twenty four months of liquidity. Similarly, you know, small businesses across the US generally don't have all that much extra liquidity just sitting

on hand to kind of manage through these issues. Um. And I think that that's where the federal government has to come in with fiscal stimulus and they basically have to you know, tell us how much time they think this is going to take to remedy and then also provide that stop gap liquidity to get things moving back in the right direction again. You know when you obviously the big elephant in the room during the global financial

crisis a decade ago was the credit the fault swap market. Um. You know, it's simply just grown way too big, bigger than the amount of debt that it was actually ensuring. Um. Once again we're hearing the words CDs and credit the fault swaps again. It's kind of kind of a a sense of shiver up your spine to some degree. But my sense is that, um, it's not quite the elephant

in the room. It was at one point that all the reforms uh that have been done uh in the inner interim have have made them less of a sort of a uh systematic risk. I'm curious, you know, is that is that the right take on that? And if so, are there other sort of pockets of the credit markets that we should be worrying about, Like you mentioned leverage loans, uh, uh, that sort of thing. Obviously that is a very weekly

performing sector at the momentum. But I'm just curious, what do you think of, you know, the sort of CDs market as it stands now in compared to back then, and you know, tan generally, are there other sectors in the credit markets that could kind of sneak up on us and and be that elephant in the room the way credit the fault swaps were a decade ago. Sure, I mean there there are a few. So when it comes to CDs specifically, that market has been very much transformed.

You know, we don't have the risk of these pervasive bilateral CDs contracts where you're also exposed to know, massive counter party risk. There's been a pretty robust um clearing facility put in place and I know from a number of the investors that I speak with in the US, you know, they prefer to use the cleared CDs. So that market is a much more regulated, functioning market than it used to be, and it also is a lot smaller um than it used to be. So you know,

I don't I don't worry at night about the CDs market. Now. Where I do worry is leverage loans and then the growth of what people refer to as the private credit market, where because of regulation on banks and because of just an absolute lack of yield in the system for much of the post crisis period, we've seen a lot of growth in these you know, smaller kind of clubby or direct lending deals UM that traditionally would have been the purview of the big banks and now have that risk

has been moved somewhere else UM. And you know a lot of it is pension funds that are now involved in private credits. Oh, you know, it's it's the end investor who is exposed to potential severe default rates and pretty dramatic losses on you know, capital that is locked up in this private credit markets. On the leverage loan side of things, there has been tremendous growth in the in the broadly syndicated loan markets um it now stands at about the same size as the US high yield markets.

And there's also been a lot of degradation and fundamentals, So you saw a lot of loan only capital structures, which means that there is no unsecured debt. So if if you have a first lean loan in a loan only capital structure, it really makes you wonder about recovery assumptions because there's there's no cushion for the blow there

when when things go really bad. So, you know, loan in private credit are two of the things that I am thinking about within this context because I think that ultimately what happens is government intervention is going to be um kind of barbelled where the biggest corporations, the airlines, the um, the real you know name brands that are getting very hit in this economic slowdown. I think that they're ultimately going to come through at the other end

because the government is going to provide support. And then also I think that there's a tremendous focus on main street now and these smaller businesses and trying to figure out how do we you know, have have them, have

provided them enough liquidity to to manage through this. But then there's this kind of middle ground of the economy where you're not necessarily big enough to um get the government's attention, but you're you're probably too big to benefit from kind of the smaller you know, micro loan um type packages that may ultimately come to fruition. Yeah, it almost seems like wall streets easier to bail out than

main street. You know, in the in the financial crisis, you knew where to point the fire hose at the big banks. Uh, in this situation, it just seems like the fire could be all around you, which just it seems like a very tricky thing, uh, for the government

to wrap its head around. And I think that that is something that we have tried to point out to regulators and in our you know, just discussions and we've had discussions with investors, is you can never fully eliminate risk from the system, no matter how much relators would like to try. You can shift risk around, and what's ultimately happened is risk is now held on you know, the balance sheet of most Americans in terms of you know, what's in there for one k a what's in their

pension plan? Um? Because it's been much more of this kind of shadow banking direct lending system that's emerged to work around some of the regulatory issues that were put in place and constrained the big banks. Absolutely, we are really facing surreal times and crazy times, and it's true, it's just hard to know where where do you direct that fire hose? Where do you direct your efforts if so many people across the spectrum are going to be affected? Yeah, Sarah,

was that a tease? They're the crazy times? Trying to set you up a little bit when he did they tell you about our gimmick. Here the craziest thing I saw in markets? I was giving a little bit of advanced warning and I also was doing my diligence and listening to a few of the podcasts are there, So that did actually radar. So we'll start with you, what's the craziest thing you saw in markets this week? I know it was a pretty tame week, not much going on,

but something have many that I can talk about. Um, you know, the first one, which is I'm still trying to wrap my head around, is in the investment grade corporate bond market, Tuesday of this week was the biggest new issue volume day this year, so spreads, you know, more than more than double what they were earlier this year.

We were still able to price twenty seven billion of i G bonds at an average coupon of three and a half percent, which over the long term perspective, is still a very attractive cost of capital for most investment grade companies. What did I tell you about the help of the market, So you know, I keep facilitating between believing it's a tremendously engaging sign and a very terrifying sign.

Because on the one hand, if these deals are clean clearing the market still able to borrow at you know, very attractive eights, then that is a long term positive thing for investors. Now, then I kind of look back at at where yields went during the Great Financial Crisis, because you know, in in many other markets we've we've seen much more of a repricing of you know, cost of capital um. And then I begin to wonder, you know, are these investors using up their liquidity flower power too quickly?

I certainly hope they're not um, But you know, I'm gonna be the optimist and say the glasses half full. And if the credit markets are continuing to function and the new issue market is open, then that is that is an encouraging, you know, glimmer of hope across financial markets.

The hunt for yield survives another day, yes, indeed. And then you know, at the other end of the spectrum, still in the investment grade market, there are some issuers where the front end of the curve is so severely inverted that you can buy an I G bond that has a maturity this year for call it. And then if we look at the cash on hand from revolver drawdowns and cash balances, they are covered in that bond

with cash on hand, you know, multiples over. So there's there's a tremendous dislocation between you know what some parts of the market are telling you and then other parts of the market, and it's trying to figure out, you know, which signals should we believe in, which signals are falced on? Yeah, and and so much of that must just be this this dollar funding squeeze and the liquidity issues, I would imagine, Yeah,

a lot of it. It just has to do with money markets, dollar funding and the front end of the curve. Crazy times Sarah, how about you, what did you see this week? I have too, but I'll keep it pretty short and simple. One just Monday was absolutely insane. You have another circuit pricket trigger and then I mentioned it, But the vix ving to the highest level on records, so above any single point of the global financial crisis back in O eight oh nine. Um, pretty unbelievable. But

then just another interesting story. I thought, we have the US government now talking about the idea of helicopter money, but Facebook is moving ahead of the curve. They've already said that they're giving each of its employees a one thousand dollar bonus to help support them during the outbreak. So just an insight to what some companies are already trying to do to help alleviate any pain from their employees. Alright,

very good, very good. Well in the spirit of de regulation, Sarah, I'm gonna I'm gonna bend the rules a little bit on this. You've been the rulest like five weeks. But because are trying times, go ahead, they're trying times. Obviously, the virus is the most important thing UH markets are dealing with right now. So I'm I'm found some very crazy virus related stories, not necessarily market related stories. But if you have a terminal, I highly recommend you run

the function and I odd. It just finds all the odd stories from the Internet and compiles it into one place. It's it's really worth the subscription price alone. So let me give you some of the craziest coronavirus stories I've seen out there. Uh, New York Post is way ahead of the game on this, I will say. And they had one story a man in Spain. You know, obviously there's a shortage of face masks, so this guy in

Spain decided to get in his t Rex costume. It's one of those inflatable t Rex costumes, and he was wandering around Spain. But they arrested him, I guess because he's he's not supposed to be outside, but he was breaking the quarantine. Yes, yes, Also in the post here, I'll just read the headline cheating husband catches coronavirus on trip to Italy with mistress. Oh no, oh no, Karma is alive and well in the time of the coronavirus. And finally, this this one is vaguely markets related. And

this is my favorite from CBS. Bernie made Off is among the famous inmates out there who want an early release because of coronavirus. He's a in his eighties. He's worried that if the virus hits the the prison that he will be susceptible at that age, one of the people at risk. So I don't know when you think they should? Should they spring? Bernie made off because of the virus? What do you think? I feel like you're almost safer in prison from the coronavirus than you are

outside of prison. That's just my my take on it. I think that's a little bit out of my wheelhouse. I'm gonna I'm gonna smart answer smart. I'm not sure Bernie's gonna get away with this one. It seems it seems like a uh. Well. With that said, trying to keep a lighter tone in the midst of all of this when he's he's are we know you're coming to us from so we really appreciate you taking the time today. Happy to be here. This was a welcome deviation from

steering at the screens. What goes up? We'll be back next week. Until then, you can find us on the Blueberg Terminal website and app or wherever you get your podcasts. We love it if you took the time to rate interview the show on Apple Podcasts so more listeners can find us. And you can find us on Twitter, follow me at at Sarah Pontzack, Mike is that Reaganonymous, and you can also follow us on Bluemberg Podcasts at podcasts. What Goes Up is produced by Topur Forehead. The head

of Bloomberg podcast is Francesco Leavi. Thanks for listening, See you next time. Oh