Transcription
So, uh, as we were talking at the beginning of the first segment, we were talking about some of the macroeconomic data. We were discussing the Fed. Uh, we went over our segment. So, I, I promised our panelists that they would be able to chime in too on their view on the Fed. And so we'll let Jeffrey and Charles do that. And then we're going to segue into some topics about various parts of the financial markets as well. So, before we, uh, pivot into that, Jeffrey, why don't you start us off here?
>> All right, I'll keep it fairly short. Um, I've been saying for years, and I will continue to say it, that the Federal Reserve simply follows the two-year Treasury. And when the Fed started to cut rates in September of 2024, the two-year Treasury was basically where it is today. And the Fed has come all the way back down in line with the two-year. They were 175 basis points out of sync, which is one of the most extreme out-of-sync positions. So, as I said, I, back in 2024, I thought they should have cut 100 basis points in September of 2024, but they got there pretty quickly with 50 and, you know, 25, 25. Um, the two-year Treasury is now at basically 3.5%. The Fed funds rate is at 3 and 5/8%. So, if Rosie's going to be right and the Fed's going to cut down to 2% or something like that this year, the two-year Treasury has got to start moving. And it's not moving.
Another thing is most investors aren't aware of how much of the debt is financed at the short end. Inside, in the last 12 months, and this has been the case for quite a while, over 84% of bond issuance over the last 12 months has been one year and in. Now, that's a little bit overstated, of course, because if you do a 90-day, you do it four times, you're you're counting it, you're counting it more than once, but it's still a very, very high percentage. And I think one of the reasons that that's likely to continue, if not increase, is it's a rate the Fed can actually control. They can control short-term interest rates. So, if you're borrowing a huge amount in T-bills, then the bond market vigilantes don't matter that much.
Another thing on the flip side of that, investors don't realize that only 1.7% of bond issuance over the past 12 months, and this has been constant for a while, too, 1.7% is 20 years and longer. That's it. So, one thing that we have this big problem with is interest expense, which has gone up from 300 billion to now it's about a trillion dollars more than that. And it's of course going to go higher because we have a budget deficit still that creates more interest expense. And the the the bonds that are rolling off have marginally lower yields for the next few years than today's today's issuance. So that that pressure is going to be there and that they can control it. So, I, I just, I, I think it's shocking to me that people don't understand that the Fed follows the two-year. Just look at a chart going back to 1980. The Fed follows the two-year. The two-year leads every single time. And since the Fed started cutting, 175, two-year has been unchanged. So, they've gotten in sync. So, my base case is that the Fed is not going to cut interest rates until May. And maybe that, maybe they will then because of Sikopant being the Fed chairman. But, uh, I'm, I still remain though quite bullish on the short end. I think ultimately short rates are going to come down. I agree with that. It just doesn't seem to me it's in prospect in the near term.
>> Yeah.
>> The problem with the two-year though is it doesn't have the word Kevin in it. You know, we can't get there. So, Charles, let me, let me do a two-for with you here. Um, tell me your view on the Fed. Doesn't even matter with what you're thinking about. Give us your view and then let's talk about what the Fed's impact has to the equity markets.
>> Well, uh, I, if I had a tambourine, I would have been playing it. I would have gotten tired, but I would have been playing it while Rosie was speaking. uh because uh I think he's, um, right on this and, um, just the, just, just the way they use the data, interpret data, and, and by the way, they're so wetted to the to the way they use it bothers me a lot. You can't get them off of this. The notion that everything else has moved up. Everyone else is incorporating modern technology, high-frequency data, but we still rely on the most important monetary policy on old data. We're slow, we're lower responses with massive revisions. Uh, and that's how we are driving our economy and our society. It's ridiculous. Uh, now, as far as the the the new Fed, I, I just, Trump is grappling and, and Jim Biano is right. He wants someone who can persuade the members of the Federal Reserve and the folks that are in the betting market. Half of them he doesn't think can, the other half he doesn't trust. They're saying the right things now. And, uh, you know, you know, he, but Pal said the right thing in his opinion.
>> Right.
>> And so he's grappling with that. His ultimate answer would be a Scott Bessant who would have the cache that a Pal has, that that that, you know, Pal has this this way or, you know, and listen, he's done a good job in articulating the minority, you know, in these press conferences, giving them a voice, being their voice, if you will. If no Pal has, if you, you know, if you consider him to be the biggest dove, he has come out like the time he says, don't take for granted there'll be rate cuts like he's articulating for them. And I think that's part of the job, you know, to make them feel heard. Uh, by the same token, even if he's still wetted to his do position. So, the ultimate answer would be maybe a Bessant at at the Federal Reserve, but the ultimate ultimate would be if the GOP could hold the house and then maybe Congress taking a look at the Federal Reserve. Now, we've heard Trump talk about it, but you've heard Bessant talk about this a lot, using the term Main Street. A Federal Reserve for Main Street, not Wall Street, because as much as the two-year may move to Federal Reserve, it feels like they always come to the rescue of the stock market. And it really became a big deal when when Greenspan, a month into the job, saved the market. Helicopter Ben, you go down the line, and that's one of the reasons the stock market looks so much at Fed policy. And, and the Fed was used to be able to jawbone the market around, but not as much anymore. So, ironically, if Bessant took the job, that would be a big, big deal for Trump to get those 100 basis points through. He can muscle it through. Uh, also, if
>> Under that scenario, Charles, I want to ask you, Bessant taking a job. Does he keep his existing job, too?
>> Uh, he'll put.
>> I know Danielle's going to cringe on that.
>> I know. I know.
>> But I mean, look, we're, we're, listen, only Marco Rubio can have the handle that many different jobs. Okay.
>> We've had this discussion though. If Jamie Dimon became Treasury Secretary, I think we'd all be fine. So, you know, but I, I, I think Bessant's going to have to. I think ultimately, I think Trump is going to try his best to get Bessant to take the job because he does all of these things that he wants him to do. He has the the sway. The other guys don't necessarily have the sway, or he doesn't trust them.
>> And he's trusted. Like that's the key what you're saying.
>> Right. And markets like him. Markets love Bessant. Bessant has been the key to our markets, right? It really, he really has been. So, you know,
>> If I could ask you one, one quick question, though, because Bessant wrote a beautiful, very long article in an international publication a few months ago. Every single person except for Hasset, even Bessant, has said QE was a failed policy. Zero interest rate policy was a failed policy. I mean, in the end, don't you think that Trump wants QE resumption and going back to the zero bound, and Bessant would not give that to him?
>> Yeah, I think he would, though. I mean, maybe he, maybe it wouldn't. I don't know about QE, and maybe hopefully we won't necessarily need QE. Honestly, it'd be great to see a market that didn't need any real Fed help if it was just able to move on its own organically like it used to, like on, like it says it should be able to on paper. Um, but I still think that's the best necessary scenario, and maybe ultimately for Congress, which gave away their job of full employment in '77, take that back. Maybe we need a Fed that's less complicated, and certainly we don't need a Fed that's doing everything that the that the Elizabeth Warren wanted them to do, right? I just, this Federal Reserve has too many hats, too many jobs. They conflict with one another, and, and, and, and to be honest with you, Jim, Bianca, politics are now in the role. I mean, it is a politically driven Federal Reserve. That's how you get an Austin Goolsby. I had, I must have had 20 fights with Austin Goolsby on TV before he got this gig. All right. He, when he spoke after this last meeting, and he's still harping Rosie about inflation, that was 100% political. Pissed me off because as much as we're all political animals to a certain degree, with that sort of job and responsibility, you have to at some point acquiesce to the people and not. And that's why I don't think there will be a revolt either. If the Fed did have a revolt, uh, then the, the idea that they're, they're, they're always use the term stable, it would be the most unstabling, destabilizing thing they could possibly do. So, I don't think that would happen.
>> Yeah.
>> Um, what does it mean to have meaningful rate cuts for the equity market if they're done under different guises, right? Maybe they are warranted. Um, but, you know, we see the myin kind of world since we're talking about politization, right? We've seen him be, you know, away off the rest of the folks. Not saying he's wrong, but he's definitely in a different camp. Um, you know, there's been the concern about, you know, the politization of the Fed. You're already saying it exists, right? So, how do markets respond to that if we step in and we have a meaningful cut? It's not just 25, you know, eight times to get it go get down to 200, but it's 200 in May when the new person comes to town.
>> Yeah. Well, be 200 in May, but let's face it, on a high rate hiking for markets is different than rate cutting psychology. And that's why Pal being so late with the transitory thing, uh, is, is a problem, and maybe wanted to be why, why the long end hasn't really moved yet. I mean, we started with 25, which was tap it and late, then 50, then all of a sudden 75, 75, 75, 75. We haven't un, we haven't come close to unwinding all of that yet, you know, and so, I, I think the market, particularly the stock market, is okay with an accommodative Fed that's cutting. They don't have to cut every meeting, but they know that their next move will be a cut. And that's why, you know, listen, rates move, started moving before this last round of cuts because they knew cuts were coming. And as long as the equity markets know that the cuts are coming, that the Fed is accommodative, that's all they need. The stock market, in my opinion,
>> Almost inherently, I'm sorry to keep going after you on this one, but isn't that inherently the Fed put we're talking about?
>> Yeah. Yeah. Right. Yeah. I mean, you know, that's why you got the, you know, give the maestro the credit. Y.
>> You know, but, um, this is what the, this is the role of the stock, the stock market looks at the Federal Reserve, and that's how they looked at the Federal Reserve, and through that lens only.
>> And, okay, so maybe I'll let anyone take this one too. I mean, we're talking about the stock market. When we say the stock market, it means a lot of different things. A lot of people, most of us probably on stage are thinking S&P 500, right? We know that's kind of a very narrow trade today. um, you know, are there ramifications of all of this, you know, with these policies? Does it matter for the stock market, or are we just wetted to this tech AI thing, and that's going to really be the direction of the stock market?
>> Almost everybody in the street has been talking about rotation. I mean, this year, it's only four days in, but materials are looking better, industrials are looking better, whatever, you know. I, I think the, the notion of just the S&P 500 gets to a part of this, right? You've got so much amazing things, so many amazing things happening in the stock market outside of the S&P 500 that are reflective of this industrial revolution. Uh, and, and this is where all the big, big, big, big money is going to be made. This is where it was made last year as well. And you, you'll have smaller, you'll, you know, of course, the irony is, you can have smaller gains on the S&P, but more participation, right? Because obviously, if oil does well, and materials do well, and the so far, consumer, communication services are lagging. They were just flat, you know. So, you have the S&P is only, only up 8% this year, but ironically, you'd probably have a better, a more balanced rally. Uh, you know, where all these names who did that, did awful last year. So, but it depends. You know, it's, some people always come on to my channel, say, you know, it's a stock picker market. For me, it's always a stock picker market. Uh, you know, unless you have a 401k and, and, and, and by the way, the passive investing thing, which we've talked about so many times, is still also that, uh, you know, say what's outside of the Fed, the passive investing thing is where the fix is also in. Every week, every two weeks, people get a paycheck, a big chunk of that goes in a 401k, big chunk of that goes into the biggest names in the stock market. The biggest names in the stock market go up, and it's been a fortuitous cycle. And, and one day, I, I guess it will be broken, and I don't know how it looks when it unwinds, but right now, you're getting an accommodative Fed and the juggernaut of passive investing, and it's hard to ignore the stock market.
>> One thing that I was working on with the team when we were talking about some of this is, you know, we're looking at names in the S&P versus, you know, kind of kind of medium-sized names that don't make it in there because of the committee effects. And what we, we were noticing too, is that it's the prevalence not just of the S&P. It's not just the SPY or, you know, your equivalent Vanguard fund that has this. I mean, the prevalence of leveraged funds now, right? The 2x, the 3x on the S&P. Everyone has jealousy of the one of those big income overriding funds out there. Everybody wants to do one. We've seen the introduction of buffer funds, right? And the amount of things that reference just not directly as the the stream we call delta 1, but we have this kind of, you know, this leveraged effect. We have this call overwrites, we have put buying on it, too. We're doing all these things. Um, it just seems that everything is so focused on the S&P, not just that kind of, let's call it passive beta money, right? But all these other ideas.
>> More ETFs than individual stocks, but the ETFs are buying the individual stocks. It's just amazing.
>> Well, you can have a stock, and it can have an ETF on the stock, and you have a 2x on it, a 3x, a 4x. The fives we discussed last night got denied so far. So far, right?
>> Um, you know, there's a couple other, keep it as the short ones, too. No one wants that. But, um, Jim, you've written about this a lot. What is your take on some of this?
>> Yeah, that, you know, I think that we've, uh, really developed into an, an equity I mindset that you want to just own the stock market. You want to own it because it goes up over the long period of time. And then there was, um, uh, Professor Jay Ritter, uh, he's done some research where he says that the majority of the gains in the stock market come from like 3% of the names. The other 97% of the names either go out of business or don't do anything. Well, we, I don't know what the 3% of the names are going to be. So, buy a broad-based index and hopefully you'll have those 3% names in your portfolio. And that's also kind of the mindset that you have, um, on Silicon Valley. There's a guy that runs Elevation Partners, Roger McNamee. And, uh, one time, you know, he had a gaffe on financial television. It wasn't on Fox Business. This probably 15, 20 years ago. Um, and that's when you accidentally tell the truth where they asked him the the question, what three stocks should investors buy now? And he said, don't ask me because two of them will go to zero. And then he, and they said, what are you talking about? He goes, "Well, that's the way it works on Silicon Valley is that we invest in 10 names, and seven of them go to zero. Two of them break even, and one goes up a thousand X, and we're all rich." You know, and that's kind of how the mentality has come into the market that there's going to be this next spectacular gain. I don't know what it is. So, own a broad-based index and hopefully it's gotten caught in there. Last year, or in the last couple years, that name has been Nvidia. And as long as you've had an index that has had that and the similar types of companies to it, you've been participating.
>> Yeah. Um, let's talk about the elephant in the room of all financial markets, and that's valuation. You know, um, it, it's hard to sit here and argue there's a lot of things out there except maybe single names when I look at broad asset classes and sectors and things like that, that things are on the cheaper side. Um, how do you think about that? You got your Rosie fund, right? I've seen, I've seen that in your research too, and things. H, how do you think about the valuation at this part of the cycle, and you know, where we're paying for earnings? I mean, we're doing it, uh, when you look at, you know, credit spreads, they're very tight as well. Um, you know, it seems like everything is similarly, um, on the richer side. Now, there's degrees of that richness, but starting with you, Rosie, like, how are you thinking about valuation, and what, what should investors be thinking about? Are we just going to play the momentum game? Are we just going to do the naive passive investing? Or is there something to the story of, uh, of what's worked over the long periods of time?
>> Right. Well, I've never made any bones about the fact that, uh, my, my hero and mentor of all time was Bob Farrell, who was the, uh, chief technical strategist at Merrill for like 5,000 years. He was splitting the Red Sea with Moses back in the, uh, Old Testament. Back in the 1950s, uh, Bob Farrell was, uh, the the pioneer in introducing sentiment into his work on the equity market. Uh, which makes sense because, uh, we're talking about a lot of psychology when we talk about the stock market. And when John Maynard Keynes, in the 1930s, invoked the phrase animal spirits, he wasn't talking about the economy. The animal spirits don't drive GDP or GDI. Um, but animal spirits, sentiment, confidence, uh, you know, what Alan Greenspan called rational exuberance prematurely in 1996. Um, this dictates a lot of the movement that we see in the stock market. It cannot be denied that sentiment, um, drives a lot of other things. Sentiment drives market positioning. It drives the flows, and it drives valuations. There's different m, different multiples we can look at. We can look at price to earnings, price to EBITDA, price to sales, price to book. Everything is at the very high end of the historical range. Uh, the one metric I like to look at because it goes back to like 1900 is the Shiller PE, uh, what's called the CAPE, uh, the cyclically adjusted price earnings multiple, uh, and it now is pressing against 40, and it is now officially a three-sigma event. Now, on my own webcast last year, I had Jeremy Grantham on the call, uh, who's been saying for a while that we are in a, a bubble. And I asked him, how do you define that? Like, how do you arithmetically define that? And he said, uh, that whenever any asset class or security becomes more than a two-standard deviation event, um, that is the bubble. You, you're in a mania at one sigma, a bubble in two sigma. And, uh, we became a two-sigma event, stock market, S&P 500, uh, in the summer of 2024. But you can be in the bubble phase, like we're past the ninth inning, and we're in the 13th inning, but you could be in the bubble phase for between 12 and 24 months. That's not unusual. And the people that say that you can actually make money in the bubble, they're right. Historically, in the bubble phase, from the ninth inning to the 14th inning, um, the stock market's usually up 25%. You just have to be careful because you're in a different part of the investment landscape where the elevator could come down at any time. You know, a bull market's an escalator going up over time, but the thing about bear markets is that they're quick, but they're very severe, and you get your head sliced off. So, that's where we're right now. We're, we're in extra innings. The, that that PE ratio, the CAPE is at 40. Uh, it's only been higher than this historically back in the late 1990s. We've already taken out 1929. We've taken out the Nifty 50 in the '60s and early '70s. Uh, we've taken out '07, although that was more of a housing bubble than an equity bubble. And, you know, they say that valuations aren't a timing tool, and they're not. And I don't know anybody that is a great perfect market timer. Uh, to me, success in building wealth for your clients is not buying at the lows or selling at the highs. It's playing the middle 60%. Play the middle 60%. Um, well, we're beyond that right now. We are beyond that 60% of the distribution curve. And the only time when you look at the CAPE multiple and you split it into five or 10, uh, point bands, when you're above 35, it's the only time when you're above 35. And of course, you're talking about a lot of data points. You have 100 years worth of data. It's the only time when you're north of 35, and we're at 40 right now on the CAPE. When you're north of 35 on a one-year, three-year, five-year, 10-year basis, the total return of the S&P is consistently negative. So, frankly, I don't intend on chasing shekels in front of the steamroller, but that's where we are right now. So, that's where I come across the valuations. Uh, they're not a timing tool, but you have to decide yourself how do you want to invest? Do you want the wind at your back or the wind in your face? And right now, I think the wind, uh, is in the face.
There's something that's very interesting that I mentioned before about psychology. And, you know, I've got, I've got 2,300 clients in 40 countries, and I get a lot, that's also a big data point. And the prevailing view is that we will never have a recession again. The business cycle's been repealed. AI and Trump and the Fed have repealed the business cycle. We will not have a recession again. I get that over and over again. And especially because the recession that was supposed to come in 2022, 2023 didn't come, has emboldened that view. A recession, and that basically comes down to why credit spreads are so tight, because the credit market, the credit spread market is priced for a zero default cycle. And there's this view because there's this put. If it's not a Fed put, it's a Trump put, that the stock market will not go down. Or if it goes down like it did in February to April, all of a sudden it went down with the reciprocal tariffs, then the next thing you know, there's the reprieves. So the the government or the Fed will find a way to prevent the market. They'll put a floor under the market. There's this ingrained belief that the stock market will just not go down. And the stock market doesn't seem to go down for very long when it does go down. So it, it gives this, um, sense of complacency and I would say almost hubris, because I don't think that mother nature, um, has just got a bullet in the head and that we've repealed the cycle. But that's the prevailing view.
What I'm struggling with is that when you look at the CAPE and you think of a 40 multiple, it's a 2.5% earnings yield. And I look at the real yield at the long end of the curve, because you have to compare a long-duration asset to a long-duration asset. The Fed funds rate for the stock market, back to the earlier question, the Fed funds rate for the stock market means absolutely nothing if it doesn't have an impact out the curve. So I would say actually the Fed has not had a big impact at all lately, because let's face it, the stock market bottomed October 2022, and the Fed was still tightening policy at that point. So that was basically Chad GPT. But what does it mean for the people in the room and the people watching this when the real 30-year yield is 2.6 and the yield in the equity market is 2.5? We have a slightly negative equity risk premium. So investors are telling everybody here and telling me that the stock market today has become a riskless asset class. That's the mentality today. And then it's up to everybody in the room, including me and including you guys, to decide whether or not that if that, that's part, if that is part, that is part, if that is part of the new paradigm, uh, that, um, that Charles, that Charles was was talking about, that this is the new paradigm where we're putting the S&P 500 into a riskless, comparing it to the risk-free rate, the riskless asset bucket. That's really what the markets are telling you right now.
>> But I was going to ask you, could the converse be true? It's not that the market thinks that the S&P 500 is riskless. Potentially, maybe the market believes that the 30-year bond is riskier.
>> Absolutely not. Absolutely. It can, it cannot be. It is in, it is, it is actually impossible what you just said, because we can talk about the risk in the Treasury market. We could talk about the risk in the 30-year bond. We could talk about the fiscal premium. There's always cyclical risk. Uh, there's, um, uh, duration risk if inflation comes back. There are risks in the Treasury market. But what makes the Treasury market different than any other market? Commodities, precious metals, corporate credit, equities is the certainty of payment. It's the only asset class, the Treasury market is the only asset class where you know in three, five, 10 years, you know what you're going to get paid and when you are going to get paid.
>> Unless they restructure it.
>> Okay, but basically that's just an assumption that something may happen that they may restructure, they may default, whatever. But let's just say that I don't even know how to handicap that, okay? Because that would be, if, if that happened, then you only really want to own probably gold and maybe barbed wire, sawed-off shotguns, and canned tuna fish. Okay. If, uh, the reserve currency defaults, it's been talked.
>> Yeah. So, basically, I'm not even going to entertain that. It's basically.
>> It's, it's a, it's a, it is, it is the certainty of payment characteristics of the Treasury market as we know it today, without making any assumptions, is what makes it different than the stock market. So, no, I don't, I don't agree with that. I think that basically this comes down to the psychology of the market today, that there will not be a recession again. We will not have a default cycle again. Uh, and that, and that because that we will not have a bare market. You can understand that if you believe, if you believe there will not be a bare market again in the stock market, why wouldn't you just be all in on stocks? Because what makes it different than bonds is your bonds have a finite total return potential, whereas the stock market could theoretically be a jack and the beanstalk. So, if you actually believe, which is what the equity risk is telling you, that equities are a riskless asset class, you'd want to own the equity market 100% at all times. And that's why we have a record share when you look, go to the the national balance sheet, and you look that in aggregate, households have 72% of their financial asset exposure in equities, which has never been that high before, not even during the dot-coms. That's the mentality we have today. That is the pervasive belief.
>> Can I just jump in and say one thing? I, I disagree and I work with tens of thousands of retail investors for a long time. It's not that they don't believe there will be a bare market. There'll never be another bare market again. They just believe they'll be short-lived. And they've watched, they've watched themselves selling to bare markets thinking it was the end and then months or a couple of years later saying, "Damn, I shouldn't have sold. I should have bought." That's a different psychology. Uh, and that's a different driving force. We're talking about the driving force of the Fed, fiscal and monetary policy, the structure of more ETFs and stocks, you know, so supply and demand. That's another driving force that has to be taken into account. A different sort of mentality amongst these new investors. Not that they don't believe, they're smart. They're not dumb. They know there will be bare markets. They know there'll be crashes. You know, the early, early 2025 was a great test. But guess what? When the institutions were selling, guess who were the number one buyers? Retail investors. So, it's not that they don't anticipate bare markets, but they understand that if they're going to be in this long term, not to be shaken out like they have been in the past, particularly taking big haircuts when people talk about valuation on on spreads that Rosie brought up, that valuations are very tight relative to treasuries for corporate bonds, junk bonds, emerging market bonds, um, you know, bank loans, etc. One of one of the things that you should take keep in mind is the credit quality of the public corporate bond market is better than it was in the past. The the fractions of in the of the junk bond market that are double B or higher, the fractions that are triple C or lower than they were in the past. And I'm of the opinion that tight spreads have maintained so strongly for so long because I think under the surface, maybe maybe only subconsciously, investors are aware of the fact that a lot of the risk that historically has plagued the public corporate, uh, bond market has now been sold to private credit.
>> Bingo.
>> Which, which has had a massive increase in participation from about five years ago. It's up like 400%. And the private credit, uh, story has been one that was very strong because people were attracted to the returns early on about five years ago. But now, you, you know, the credit quality is very suspect. There have been many, many news reports of things that are going on within reputable private credit firms, and there are a lot of them since there's been a boom in that issuance that are not reputable. I use the analogy of the of the Wild West. You had a small settlement, and there was one honest, uh, well-meaning and hardworking sheriff, and he took care of everything. And then they discovered gold nearby, and all these people started swarming in. And once people see that there's a bonanza going on, a lot of non-reputable people start showing up. I'm not saying they're all non-reputable, but I'm saying some of them might be.
>> But some of these very reputable firms had some weird experiences in 2025. One was there was a, a mark put on a position at a hundred cents on the dollar, and four weeks later it was written off at zero. Now, I know that there's some opacity here, but are you not monitoring your positions? It turned out there was, there was one, one Renovo was what was one of these deals where they had $150 million in liabilities and under $50,000 in assets.
>> Yeah.
>> And the bond was marked at 100. I mean, you know, give, give me something here. 80.
>> 70.
>> But then they, they actually come out and say, "Our policy is if we think that we're going to get a 100 back or think that's the a good probability of getting 100 back, we market it 100." And then there was another one where there, there were about eight private credit firms that owned exactly the same position. And in June, they were all marked at 100. Then in the ensuing months, one, one firm marked it at 98, the 95, and when you got to around November, one firm had it marked at 91, and one at 74. Now, that's not 100 to zero in four weeks. But there's a big difference between 91 and 7. Car wash.
>> And I had a, a very big insurance company client that came in. This was early in 2025.
>> And he was pointing out that he was in a lot of private credit investments. And in fact, he had eight managers that had the exact same position because that's how private credit works. It's very clubby. There's, it used to be one big happy family five years ago. So now there's a lot of tension in the market because the big firms are bullying the small firms. But this, this, this insurance company had eight managers with exactly the same position. One had the, the difference in the mark was between, I can't remember exact numbers now, but it was a very big spread. One had it at 95, and one had it at 8. So what's going on here? Well, the argument was three-fold for private credit. The first was an illusion that it has lower volatility than public markets. Well, so does CDs. I guess if you bought a 10-year CD at 1% interest rate back in, uh, 2021, you could not redeem that at 100 if you wanted to get out of it. It's just held at cost. Well, if you held things, if you do a weighted average type smoothing of prices, you get lower volatility. This was, this is a theme that's borrowed from private equity, where private equity became very popular because of a Sharpe ratio argument. You know, you might have the same or maybe a little better return than the public market. But when the S&P 500 goes from 100 to 50, the private equity would mark from 100 to 80. And then when the S&P 500 recovers back to 100, they mark their private equity back to 100, and voila, you've got exactly the same return of zero, but it's less than half of the volatility. So it's more than double the Sharpe ratio. That's just an illusion.
>> Second argument for private credit helping its boom was the the historical return argument, which was valid back five years ago. You know, in, although we all know that past performance is not indicative of future results, but it was a valid, a valid draw. That's not valid anymore. It's not performing. It's not outperforming. And then the third argument is the worst of them all, and it's really just a cynical repackaging of the first Sharpe ratio argument, and that is you should own private credit significantly in your allocation to credit because it'll allow you to sleep at night when the public market exhibits volatility. That's a repackaging of the Sharpe ratio argument. You're just not marketing it to market.
>> Which is why they're now selling to retail.
>> Yes. Retail. And you, you see the huge percentages that many of these large endowments have in locked-up investments. There was the the famous example that Harvard with its 50-plus billion dollar endowment, when the donors stopped writing checks because they didn't like the demonstrations on campus, they had to go to the bond market and they tried to borrow $4.5 billion to pay ongoing expenses, electricity bills, and salaries. The great Harvard with 50-odd billion dollars doesn't have a couple billion of liquidity. So this reminds me a lot of what happened during the global financial crisis when there were all these funds that once things got really cheap, they called the money, but by then nobody had any money. I had a meeting with Stanford University endowment, the most memorable meeting, one of them, of my career. I, he came in, it was '08, the the mortgage securities market had completely imploded. You were able to buy securities where you would could prove to people with a high degree of buy-in that the minimum possible return on investments made at that moment, two very conservative assumptions, probably overly conservative assumptions, was 24% IRR. And I went through it with with the Stanford people. I used to do it in in auditoriums full of people who believed that mortgages, these these garbage private label mortgages are going to default more than 25% of them. All the hands go up. And so keep your hand up if you think it's going to be more than 35%. Still a lot of hands. 45% hands are fallen. 50% no hands left. I said, we're going to use 65%. So everybody in this room agrees that that's too high. And what do you think the loss is going to be when they sell these out of foreclosure? How many think they're going to get 90 cents on the dollar? Nobody. Nobody believes that. You know, same exercise. It might end up going down. Everybody thought that the loss would be no more than about 60 cents on the dollar on the dollar. So I said, we're going to use 70. And so to these assumption, that's the 24 IRR. It ended up being more like 48%. It's almost double that in the end because his assumptions were so onerous. And the Stanford fellow says, I can't disagree with your logic. It's a pretty, that's a pretty convincing, you know, slight of hand you did right there. And he said, but I, I, I can't invest with you. And I said, why not? He says, "I don't have any money." Well,
>> I said, "Come on, I'd love to have Stanford University endowment on my client list. You know, 10 million. Come on, 10 million." He says, "I don't have 10 million. I have no money. In fact, I'm liquidating my private, my draw down my, you know, call the capital funds because I don't have any money to fund them, and I'm selling them at like 75 cents on the dollar if I'm lucky." That's what's going to happen to these.
>> That the secondary market right now is on fire with people trying to to get get out of some of these investors.
>> Get out. First loss is your best loss. The old bond traders.
>> And now they've got, and this is something that we're writing about this week. They've got these continuation funds, and so things have frozen so solid.
>> Paying in kind.
>> No, it, it is paying in.
>> Paying, but but private equity is creating a new generation of funds to buy the old generation of of portfolio companies from themselves. Right. Well, it's that the Blue Owl semi scandal, there. I mean, they've got one fund that's marked to mark and one that isn't. They want to take the one that into the other one.
>> So, this time they're not calling them gates lateral losses to the people that are in the other fund. Yep.
>> And they, they had to back away from that. But that's that's a tell. This type of stuff, you know, it starts, it starts to build up, and it's not, it's not really affect going to affect,
>> The public market so much. Probably have some spillover types of effects because something that's cheap enough, it draws everything related to it. Like,
>> We are having a bankruptcy cycle.
>> Yeah.
>> I mean, we're having a large bank. I mean, S&P reported this morning, 749 corporate bankruptcies this year. That's a 15-year high.
>> And when it comes to emerging market spreads, you know, if you just look at at at some of the financial ratios of, uh, you know, debt to GDP and stuff like this, they're far less than the developed, far less. So maybe some tight spreads have something to do with the fact that people are rethinking what's risky and what isn't. I will point out that during 2025, Bitcoin went down 6%. Well, gold went up like 65, 70%. I didn't see the closing tick, but it seems to me that people are sobering up to the idea that maybe hype isn't really the best idea at these valuation levels at this point. Maybe something real like gold. And gold, as Jim Grant so often turns interesting phrases, he said the price of gold is the reciprocal of people's confidence in central banking.
>> Amen.
>> Yeah.
>> So that's, I have to say about that.
>> I, I actually am going to leave it there because I think that is so poignant, and always, you know, I love a great Jim Grant reference. So, we're going to do that, and we're going to make a pause here for the end of our second segment, and we're going to come back, and when we come back, we're going to talk a little bit more about markets, but we're going to weave it into favorite trades and ways to build portfolios for 2026. So, it's not just best trade. You can pair them up together. We're trying to think about how to help our clients out here navigate through this in a multi-polar world, a multi-asset world. And we're going to come back with our panel and their best ideas at that point.