Lead-Lag Live
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Lead-Lag Live
Robin Wigglesworth on Bond Market Volatility, European Financial Optimism, and Central Bank Roles in Market Stability
Discover the intricate world of global financial markets with Robin Wigglesworth, editor of FT Alphaville, as we navigate the fascinating dynamics of the bond market. Robin shares his passion and insights, drawing from his current work on a book chronicling the history of bonds. Through our discussion, you will gain a deeper understanding of the volatility in the U.S. Treasury yields, the implications of these unusual fluctuations, and why U.S. markets often rally while Europe remains undervalued.
Reflecting on past financial crises, we dissect the nuanced relationship between bond and equity markets, revealing how bonds can be a more perceptive indicator of systemic risks. Recent economic turbulence, from the Silicon Valley Bank collapse to inflationary pressures, has brought increased volatility in fixed income markets, raising concerns about their fragility. Yet, U.S. Treasuries remain a safe haven in times of crisis. We examine how central banks play a pivotal role in maintaining market stability and explore the potential impacts of a hypothetical second Trump administration on global markets.
Our conversation extends to the evolving financial landscapes in Europe and Japan, where signs of optimism are emerging despite historical challenges. We explore the implications of Europe’s potential shift towards American-style securitization and Japan's low-interest rates. Meanwhile, the U.S. sees a rise in private credit, invoking comparisons to past financial trends like subprime lending. Get a glimpse into the speculative nature of distressed asset investing, the role of leveraged ETFs, and how trading dynamics have shifted in today’s markets. Engage with us in this exploration of the forces shaping the global economic outlook.
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God knows how many articles I've written over the years about US investors as well, thinking the UK and Europe looks dirt cheap and therefore it must go up and lo and behold, America's just rallied. So I tend to think that the driver might be less Europe just being so cheap. It starts catching a bid and people get excited and starts getting momentum. I don't think that will do it.
Speaker 2:For those that are watching this, whether it's on X, youtube, linkedin, facebook whatever platform you're watching and streaming this on let's make this interactive. I can see whatever comments you want to put in those various platforms. So if you want to make this interactive, ask questions live during this roughly 45-minute conversation just post on whatever platform you're watching on and I'll bring it up. I'm excited for this conversation.
Speaker 2:I did a podcast with Robin I don't know a year and a half ago maybe or so, and there's been a lot of interesting things he's been talking about recently, especially when it comes to private credit, which we're going to touch on in a bit here. This is going to be an edited podcast under Lead Lag Live and all of your favorite platforms Apple, youtube, spotify top 5% most downloaded podcasts. Please help me keep that momentum going. And, with all that said, my name is Michael Guyad, publisher of the Lead Lag Report. Join me for roughly 40, 45 minutes as Robin Wigglesworth. Robin, I know about you, but for those who aren't familiar with your background, introduce yourself. Who are you, what's your background? What have you done throughout your career? What do you do now?
Speaker 1:Yeah, no, thanks for having me back on, michael. I've been looking forward to this. So yeah, despite the weird last name, I'm actually Norwegian. So I'm actually sitting in Oslo, norway, right now, where it's cold and dark, but I'm the editor of FT Alphaville, so that's the Financial Times' finance blog. I've been doing that for a few years.
Speaker 1:Before that I was the global finance correspondent. Before that I led the markets team in the US. So basically being a financial journalist through most of my career it's kind of a joke. It's the first cut. It was the first job I did out of university and, like Cat Stevens said, the first cut is the deepest. So that's been some of my abiding love ever since. When we spoke, I'd written a book on the history of index funds and how they were born, how disruptive they were, how they grew up and kind of took over swaths of markets and the impact that we're having now. Now I'm working on the second book, the difficult second album, as it were, on the history of the bond market, which really is my first love, because I was a fixed income journalist first of all and still love anything bond related. It's my passion, even though it doesn't really get me lots of cool kudos from friends and family always.
Speaker 2:Hopefully there's no sophomore slump there. To your point, interesting timing to talk about the history of bonds. So I was at a dinner last night and Mark Zandi was the keynote speaker and I've known Mark for a bit, I've had him on my podcast as well and his concern was that the volatility in treasuries isn't over and that there could be an outsized risk that people are still underestimating Relative to the history of US government bonds, which usually is supposed to be pretty safe. He made this point that it used to be the case that if the bond market moved by like two or three basis points in a day, it was a big deal. Market moved by like two or three basis points in a day, it was a big deal. Now their yields are swinging on the 10 year 10, 20 bps daily, almost. What's your take on volatility in treasuries and bonds and how does that compare to history, because I got to imagine that's going to be a part of the book.
Speaker 1:Yeah. So I mean it's just a great topic because, look, equities, get, they get all the love and attention. And equities, they get all the love and attention and that's where huge fortunes are made and lost. But fixed income, that's kind of the bedrock.
Speaker 1:I remember speaking to Jeremy Grantham once the founder of GMO. He's been around for a long time, longer than you and me put together and he once joked that the bond market was a bit like it was the smartest part of the financial system, that the equity market was kind of dumb. It was like a brontosaurus and it wouldn't really realize if something's eating its tail until a few seconds too late, because it was so large and had such a small brain. The signals didn't travel properly. And he was talking in the context of 2007, when you could see, frankly, a bit of a shit show happening in credit markets and the equity markets were kind of still politely marching on towards records.
Speaker 1:Right now, I think the bond market is probably the one that's a little bit more sanguine, or too sanguine maybe. I agree with Mark's point that the bond market has not been the most volatile. Certainly the rates market, the treasury market, the bond market, the gilt market, they're the ones that really kind of set the foundation stone for everything else. They haven't really been super volatile, with a few exceptions like 1994, for, frankly, 30, 40 years. I mean, interest rates have trended down for 40 years almost not in a straight line but close to it, and in 22, that started to change because of inflation taking off and central banks scrambling to catch up with that, and I think right now the sense is that that's under control. I don't think inflation can go back up to where it was, but I think people are pricing in maybe a lot of optimistic outcomes when it comes to inflationary rates. That seem optimistic to me, if not sort of Pollyanna-ish.
Speaker 1:And then there's just the fact that the fabric or the markets are changing.
Speaker 1:We saw around, for example, when Silicon Valley Bank went bust. That caused an immense amount of rates volatility and that tends to kind of echo in every other market, echoes in funding markets and equity markets. We saw, for example, some of the unwanted of the carry trade in Japan in August and I just think we're probably entering an era of more fixed income shocks. And as the fixed income markets are growing radically over the past 40, 50 years, they are now bigger than the entire loan market. For the first time in 1,000 years, since banks and bonds were both invented in Italy a thousand years ago, the bond market is bigger than the banking system. So stuff that happens in the fixed income world don't stay there, and I think that's something that we've seen flashes of in 1998 with the blow up of LTCM. The financial crisis was one of the first big bond market crises as well, but I worry that there's some fragility there that we're probably not fully braced for and we might see in the coming years.
Speaker 2:Okay. So my issue with a lot of the narratives around this is the idea that and you said it correctly it's the bedrock right If you're going to have some kind of further tail event or disruption in government debt and treasuries. It seems like people seem to think that means equities are going to be fine because it's going to be isolated to treasuries. And I'm always reminded, I always think back to 2011. You had the debt downgrade, which you would have thought would increase yields, thought would increase yields, but the implication was that US government debt, if it's getting worse than because they could tax all these corporate issuers, their corporate credit, must be worse than by definition as base relative to everything else, and yields actually dropped on government debt while everything else kind of blew out. I mean, it seems to me that that actually could, oddly enough, be bullish for treasuries, like what happened in 2011, and bearish for everything else.
Speaker 1:I mean there's always this uneasy balance between those two. I mean, one of my most nihilistic views has always been I've always kind of wanted the US to hit the debt ceiling and default and see treasuries rally, because I think in that kind of situation you'd actually see US treasuries rally because it's the ultimate safe haven trade. In a weird way, you'd see the US government default when trades were out. I think people still want that and I think that relationship most of the time still holds true, and when it doesn't, it's because of obvious things like inflation. So when inflation goes up a lot, obviously fixed income becomes less valuable and so yields go up and then you can actually, to a certain point that can be fine for the equity market or for growth, but at a certain point it just starts basically kneecapping everybody, and that's what we saw in 22, when we saw Quinn Bear marks both fixed income and equity, which is pretty rare.
Speaker 1:The stuff that worries me most is just, frankly, the size of the markets, not in isolation, but how that interacts with chips in the ecosystem, about how bonds are traded. So back in the day, obviously the banks were dominant in this world. They were absolutely huge and frankly they still are some of the central engines of the bond markets, but they're just far smaller. They have more or less capital set aside for making markets and we have seen, at times, stuff break, and I think the really really scary one was in March 2020. I tend to not be. Try not to be too panicked. Lots of journalists always start hyperventilating when the shit hits the fan. But March 2020, when you saw the treasury market suddenly turn very liquid and start gapping in all sorts of funny ways, that scared the crap out of me because, frankly, spoons can fall like 10 points, it doesn't matter. It's more of a symptom of an issue. Really, most of the time, and even if we have a flash crash of the size of Black Monday, it'll probably be fine. It'll scare people for a while, but it'll be fine.
Speaker 1:But the Treasury market gumming up that way was profoundly scary and if it had persisted, or if the Fed hadn't gone in and this wasn't even a bazooka, this was like a thermonuclear weapon they use then I think that the damage would have been immense. And we're talking like mass gating of the entire fixed income complex, ripples through equities. All sorts of unpredictable stuff could have happened. So that's where my worry is most of all If occasionally bond yields go up even as equities fall down, even if it's for short periods or longer periods like in 22,. People don't like it. It kind of ruins all those investing strategies built around them, acting against each other. But people kind of adapt, markets adapt really well to new environments. We don't always like it, but it usually doesn't end up being a systemic issue.
Speaker 2:One of the things also last night that was talked about is how strong the US economy is and how terrible everything else outside the US looks, especially in Europe, obviously Germany in particular. I am curious to hear your thoughts on how, first of all, the global economic outlook pre-Trump if any of that fundamentally changes now that Trump is going to be president.
Speaker 1:I tend to think that presidents get too much praise or criticism for whatever happens on their watch. I think actually, we kid ourselves with this kind of illusion of control. These are, you know. Quite often you end up paying the price or benefiting from something somebody did 20 years ago that starts coming to fruition on your watch. I think one of the reasons why the US exceptionalism and it really has been exceptional the economic performance versus, frankly, the rest of the world has been because in 2008, they spent a lot of money. They didn't spend as much money as they did after COVID did. They probably didn't spend as much money as they did after COVID did. They probably didn't spend as much money as ideally they should have. But whilst Europe was tightening the belt quite radically from 2009 onwards, the US still had a fairly expansionary fiscal policy alongside expansionary monetary policy, and that helps. I think it's just a more dynamic economy as well. Some of that stuff is structural and cultural and you know it's going to be hard to replicate in Europe and how the outlook changes.
Speaker 1:I mean, I was in the US and led the market scene for the FT when Trump was elected in 2016. And it was clearly like a mammoth deal at the time, but I remember at the time I was less convinced it was going to be a huge thing for markets or the economy. I mean, it boils down to maybe what you think of as a big deal, but essentially he was going to cut taxes and he occasionally complained about the Fed but didn't really do anything about it. Generally speaking, that's fine. We saw continuation of, frankly, some of the trends that we saw under Obama, but juiced with a bit of tax cuts. So you just price in and it's fine and you move on.
Speaker 1:I think this administration, the Trump 2.0 war, might be radically different. So I'm far more worried per se today than I was in 2016, because this is a different Trump. It's a different Republican party, it's a different administration, it's a stronger mandate that he has. So you could easily see things like Trump going from not just like tweeting or truth socialing about the Fed and saying Jake Powell should cut rates, but like quite aggressively kneecapping the institution and quite a lot of other institutions. And then you start looking at stuff that I maybe would have given a 2% chance of last time, maybe not becoming probable, but certainly becoming sort of 30% probability this time.
Speaker 1:So the kind of low confidence, but high impact events like essentially eviscerating the Fed's independence, massive tax cuts or massive tax, not increases but spending cuts. I mean he wants to get the budget under control as well. So right now I think the fan of possibilities we're looking at over the next four years is vastly greater, and some of those possibilities do unnerve me, and I think because the US is still the world's essential economy. China has a very large economy as well, but it's kind of different seeing it as a component Like China. Gdp is a huge component of the world now, but it's not a big driver in the same way that the US does Like. When the US kind of contracts or drives faster, everybody else is along for the ride in the way that no other economy does. So I think that's why Europeans are freaking out on it, because, frankly, they were already doing pretty badly and now there are a lot of risks lurking on the horizon.
Speaker 2:Is there any bullish case then for Europe in the next four years? I mean other than just valuation, I mean this sort of US dominance from the equity. I'm sure you've seen the same charts. I've seen right the uh, the msci world that's the us versus everything else is like at an all-time high. Um, is there anything you can unseat that?
Speaker 1:well, I tend to think that pure valuations I mean people get obsessed with them and obviously they matter. But just because something's cheap doesn't become it doesn't mean it can't become cheaper still or stay cheap for a hell of a long time. Japan was a classic example of a Thai country becoming a value trap. God knows how many articles I've written over the years about US investors as well, thinking the UK and Europe looks dirt cheap and therefore it must go up and, lo and behold, america's just rallied. So I tend to think that the driver might be less Europe. Just being so cheap, it starts catching a bid and people get excited and starts getting momentum. I don't think that will do it.
Speaker 1:I do think there's so many different multiple and overlocking dimensions of this US US supremacy, financial supremacy, and obviously it's just the US stock market has done broadly incredibly well for a long period of time. And then there's the US tech companies have done extremely well inside that subset. And then you have this generally large companies, so big tech has done extraordinarily well. So it's big American tech and that is so high now that you could see something like just like suddenly Nvidia not putting up insane numbers quarter after quarter. And then there's a bit of a correction that cascades and then just starts dragging everything else down, and that's how you see it's a relative valuation narrowing between the US and Europe that the US could and probably still and always will trade at a premium to Europe, but not quite to the extreme levels that we're seeing now. But I would want to maybe come with a slightly more optimistic scenario on Europe, and not because I am super optimistic, but just because Europe and quite a lot of countries they do their worst work when they're oblivious or blind or in denial about their problems.
Speaker 1:I think what is different with Europe today versus maybe after the financial crisis or in the middle of the Eurozone crisis, is that nobody in Europe is kidding themselves that they don't have a problem. The political will is there as well. People don't always agree on the solutions, but there is a broad agreement that things have to change. It as a fairly comprehensive idea planned for European competitiveness. And it's super long, it's super dry, it's kind of boring, so I don't recommend people reading it unless they're a massive geek like me. But there's a lot of really interesting stuff there and look, there's no chance in hell we'll even get half of it. I mean even half is super optimistic, but there is broad agreement on a lot of stuff there and it'll be slow because Europe is slow and there's lots of different parliaments and different parties and different vested interests. But it feels like people are kind of pointing in the right direction again and kind of admitting there is a problem and really agreeing on the contours of some of the potential solutions.
Speaker 1:So for me, one of the real symptomatic evidence of this is securitization. Europe has hated American securitization for a long time, packaging up of car loans, mortgages, into mortgage-backed securities, commercial-backed mortgage-backed securities and it stuck to what they use they call them covered bonds, which is basically just kind of bonds collateralized by mortgages. But in the US, obviously, mbs wasn't exactly like a hot three-letter acronym after 2008 either, but that market kind of collapsed. It picked itself up and moved on and has grown, has grown. It's part of one of the reasons why the US can raise more capital than any country on the planet and Europe now is talking about look shit. We need to learn from this. We should be copying some of this stuff.
Speaker 1:Securitization, arguably, was invented in Europe several hundred years ago. We need to rebuild this, to free up our banks more, and a few years ago I would never have said you'd hear European politicians talk favorably about importing American style and securitization, and I don't know if it's going to happen, but I think just the fact that they are talking about this shows that there has been a bit of a vibe shift in Europe that might lead to slightly more optimistic outcomes further down the line.
Speaker 2:You mentioned one of my favorite countries, japan, which I have been talking about ad nauseum. I have a way of being very repetitive in my communication because, in the event that I'm right, it's an asymmetric bet, right In terms of the attention. When the reverse carrier trade played out for two trading days, august 3rd, august 5th on August 5th I had almost 15 million impressions organically on X because I kept on hitting that repeatedly since, really, october of last year, everyone forgot about it. Market ripped higher right After the VIX hit 65, that was when the break would profit, like I said back then, and and everyone now seems to think that, uh, it's not a risk anymore, because it wasn't a risk the first time. Um, I vastly disagree with that, but I am curious to hear your thoughts, your perspective on japan. Um, it seems like they probably have to keep on raising rates. They may do so, I think, december 18th. Um, any risk of a repeat there, you think?
Speaker 1:Oh for sure I think some of the more seamlessly leathered stuff got margin called out of existence in August and I think now it's kind of a no-no. People know this is a risk. So there's going to be less of that to very obviously sharp unwind. But there's so many things that have built up over a decade of negative interest rates in Japan versus the rest of the world they don't just unwind in a week I think you've talked about this that these things don't blow up over just a couple of days. So that was the small bit. I don't think it's going to become a giant global financial earthquake, but there's a lot of stuff that has been built up that's kind of built around the idea that Japan has basically zero interest rates and the rest of the world kind of moves in around that. So there's lots of funding being done in Japan.
Speaker 1:One thing that I think people get talked less about outside of Japan maybe, frankly, even Japan as well is that Japan is. There was a hedge fund manager I know that called it the Saudi Arabian savings. So Japan, they save an ungodly amount of money and they shovel it abroad. It's both the Japanese pension system, it's the Japanese banks, it's Japanese insurance companies, it's ordinary Japanese households, the proverbial Mrs Watanabe, and in an era where, essentially, interest rates have been close to zero for a generation there, or over a generation of banks, that has led to just a mass export of capital over a long period of time. And of course, as long as the yen weakens and weakens or stays flat, that's all fine.
Speaker 1:But if that starts reversing and it could reverse pretty sharply and pretty powerfully then a lot of these overseas usually dollar and a few euro-denominated investments just look less good. So I think that's the structural problem. I mean how much money a GPF and the other Japanese financial institutions have shoveled abroad over a long period of time and how a period of sustained yen strengthening might affect things, um. So I think that would be more of a slow moving thing, but it might be pocketed with a few sort of um, outright explosions like we saw in august. I'm hoping for because I I thought that was fun. I was on holiday that week and I cursed it.
Speaker 2:That was so sad I mean it was, um. It was just fascinating to me how quickly everybody became an expert suddenly on that very concept. And I was on a podcast a few days ago and the host said you know, you've been bearish on markets. And I said, let me correct you, I'm not saying that I'm bearish on stocks, it's that I'm bullish on a tail event. And then I think Japan is sort of the source of Speaking about leverage. That's actually a good transition to private credit. I have been perplexed maybe unjustifiably so, given the strength of the US economy over how tight credit spreads I've kept on getting. And one of the arguments I've heard is the makeup of junk debt is much higher quality than it used to be because the real junk debt has ultimately gone into private credit, so it's just taken out of the public markets. I want to get your take on where are we in the cycle for private credit? I had put out a post at some point saying private credit is this cycle subprime, which got quite a bit of attention.
Speaker 1:But let's talk about that because I know you've been covering it I do think it is possibly the the cycle subprime, with a few big caveats that I I think it's not nearly of a size and high enough leverage to cause that kind of carnage. I think you think it's. It's this cycle's hot asset class and I think there's a reason for that. You. Private credit, let's just say, is not entirely new, but it definitely got a massive growth hit in the zero interest rate error or low interest rate error, and it's the hot thing BlackRock's buying HPS. Every asset manager worth their salt is now scrambling to buy a private credit manager. That's where investors are putting money because they think they can basically get like fixed income, like returns, but with an extra spread of 200 to 300 basis points because of kind of the illiquidity premium. Which that specific point drives me crazy is if there's like some magical theory that like literally gives people free returns for taking some risks and sometimes it's just risk you're taking, you're not getting rewarded for it at all you just don't see what the risks are. Um, I think private credit has a hot future. I think it's actually quite exciting. I think it's going to keep growing. So it's not like subprime that something is essentially going to go away either. I think you know if we're talking about this, in 10 years' time private credits can be vastly bigger than it is today. But we do know people do stupid stuff when something's really hot and growing quickly and there's been so much money raised very quickly there.
Speaker 1:This is an asset class that's gone from a few hundred billion dollars to two, three trillion dollars now. That's before you include the leverage as well. That undoubtedly dumb shit has happened. Companies, private credit firms they get paid on deployed capital, not commitments, so they want to deploy it quickly. It's hard to get enough deals over decent quality, so there's been worse and worse deals that happened. And then the thing I'm watching right now is that the difference between private credit and public credit is that public credit is overwhelmingly fixed income. So the high yield market. You borrowed a fixed rate, so your rates go up and down. Obviously you invest in the value of that bond goes up and down, but the borrower doesn't give a crap. He's locked in that money that cost anyway and also swapped it out. Private credit is floating rate, so they borrow at a spread over SOFA typically and what was maybe like five percentage points above 1%, so for a few years ago is now north of 11%, and unless you're growing really quickly that starts hurting a lot.
Speaker 1:And we can see evidence of this more sort of anecdotal but more quantitative in the business development company sphere that there's more, you know, very sort of classic signs of extending and pretending going on there, where companies that used to pay their private credit loans in cash have now toggled to paying kind, where you basically roll the interest into the principal owed. That's kind of a sign that they don't have the money to pay and their private credit firm doesn't want to deal with the headache of like a bankruptcy. And that can work out. If the company starts growing into its capital structure, the economy strengthens whatever.
Speaker 1:But right now we're in this kind of weird part of the cycle where either interest rates have to come down quite quickly for there not being quite a lot of problems in that space, or the economy if that weakens, that will hurt a lot of firms. So they're kind of trapped in this kind of Goldilocks. They need rates to come down, but not that there's a recession that brings rates down too far either, and that's why I think it's kind of a peculiar setup and Larry Fink is a vastly smarter dude than I am and he's bought incredibly well throughout his career. Like almost every acquisition he's done has been a blinder. But the HBS acquisition that we've seen this week, that feels a little bit toppy to me, at least for this cycle, this new cycle for the private credit space.
Speaker 2:It's hard to find the data on it, but it seems like a lot of crises tend to be purely liquidity-driven. How is liquidity when it comes to private credit? I mean, it's a big market but it's not really mark-to-market right. No, and that's a great question because? But it's not really market to market right.
Speaker 1:No, and that's a great question, because this is one of the areas where you can see how problems will develop, but also why. At least I don't think it'll be a systemic issue. Private credit firms are not dumb. These are way smarter than I am. They know that they're buying very liquid stuff. It's in their marketing perspective. So they kind of brag about how little this trades and that means you can have a bit of flexibility in the market and you can see I wouldn't say well, I can say creative marketing or slightly fantastical marketing as a company ambles towards the default.
Speaker 1:Private credit loans do not get marked down as rigorously as, let's say, syndicated loans do, that trade more frequently or high yield. So by the time a company actually defaults on a high yield bond, that's already in the price In a private credit loan. It quite often isn't priced in the day before the defaults and even though the lenders really can see what's coming and if they can't see what is coming then they're not doing their job. But they have pretty rigorous structures around this. Most private credit funds raise money in locked up money and they use leverage, but again it tends to be term financing. That means they're not subject to margin loans on daily movements in their net asset values.
Speaker 1:I think what we'll see is more of a slow-burning evisceration of investor capital rather than anything systemic. Because fundamentally these private credit firms and funds and as people at Blackstone and KKR and Apollo pointed out, they're safer than banks. Banks are levered still 10, 20 times their capital. Private credit firms don't take many turns of leverage, if any, and it tends to be fairly conservative. So if they start marking down, if a lot of the loans they make are bad, the investment money is locked in there. They'll just be stuck in this vehicle.
Speaker 1:That will essentially just lose them a bit of money over a long period of time probably, and they're locked in for five to ten years typically, and you know they have little leeway to kind of yank the money out again, if any at all. It'll just be, you know, sort of a black mark against the reputation of the sponsor, the private capital firm that backs that fund, for example. And I kind of want to see a systemic problem here. I've gone looking for it and maybe I'm just not dumb enough I haven't seen it yet, but as far as I'm concerned, private credit is something that is going to lose people money and, in some cases a lot of money over the next few years probably. But I just can't see any sort of systemic risk, given the locked up nature of the capital and the relatively modest leverage compared to what we see, let's say, a hedge fund or even a private equity firm or certainly a bank.
Speaker 2:I don't know if you ever know this stuff, but I think it'd be interesting to look at that data. When you look across private credit, is it overwhelmingly in a certain sector or industry group? So, like when you look at junk debt on the public side, it's primarily more discretionary or energy sector-wise right From a debt perspective. Is there a similar?
Speaker 1:makeup. It flips around. So I looked at some numbers on this a few years ago and most in the context that it was very heavily skewed towards technology and software. So I was looking in the context of recoveries Because obviously when you invest in something like I would say it's not an original idea, but there's no bad assets, only bad prices you can invest in something that's like an absolute pile of crap. If you've invested a low enough price, you can make that back in the recovery. A company can go bankrupt and if you're accredited you can still make money on that trade. And for junk bonds recovery, I mean it will vary because you can be in different parts of the capital structure and different companies have different types of assets. But 50 to 80 cents on the dollar typically, I think Depends a bit on where it is in the cycle.
Speaker 1:Private credit often gets marketed that it's super good, like they have bespoke loan documents because it's bilateral lending. It's me lending money to you, michael, and I can control what you do and make sure you don't do anything stupid. And if something does go wrong then I have all sorts of credit protections to kind of protect my recoveries. In practice I think that runs up in the fact that, against that, I think there's been a slippage in standards that people have been so keen like, being so deal hungry, that they seem to be not being as diligent about some of those covenants. And also, fundamentally, covenants aren't magic. They can't protect you if the company's assets are basically worthless.
Speaker 1:So if you invest in a technology or in a software company and that was a decent chunk of it kind of was for a period, but I looked at it recently the equivalent of what energy is for the junk bond space you know some of those companies are valuable, but if they've gone bust it's usually because the fundamental business isn't worth anything. And then your recoveries might be, you know, optimistically, 10 cents on the dollar. And then you know the returns just look commensurately worse as well. But, and the returns just look commensurately worse as well. But it's the one thing that I think is watching, like these sectoral concentrations.
Speaker 1:But I was a long answer saying that it used to be a few years ago, software and tech in general, because it was kind of hot. It was more lending into almost like the growth equity space. It was lending a lot to other private equity firms. So there were firms that private equity were taking over. But nowadays I haven't actually looked at it recently, I think it's at least that concentration wasn't egregious. Even when I looked at it, it was just notable in the context of what the recoveries the average recoveries might look like.
Speaker 2:Yeah, I'm going to put that on my list of things to do to sort of see if there's a way to identify that. To be said that it's visible, because I think that's where it gets to be intriguing. Even if it's sure, if it's on the software side, that's a different type of vulnerability than if it's on the consumer side, exactly when credit card rates are and all that. Anything else that's on your radar that's been interesting to you that you think is not getting as much play in the media as it should.
Speaker 1:That's a good question. I mean there's always tons of stuff. I mean micro strategy. There's a lot of stuff. I'd like to say that I think might be legally iffy to say I just think that that looks like an accident waiting to happen. I think there are issues there. I think that's fascinating. One thing that blew my mind because I mean I've been keeping an eye half an eye on the micro strategy for a while, given the strategy of leveraging up on Bitcoin. But it's this ecosystem of ETFs, leverage ETFs built on top of that. So it's kind of leverage on leverage on leverage of a very dicey asset class like Bitcoin.
Speaker 1:I wrote when there were some firms launching some levered ETFs on those. I wrote that this like I've written a book on ETFs. I love them, I think they're really fascinating structures. But this was seamlessly done. I mean it's just absolutely awful stuff. But I didn't think they would take off. It was kind of like, frankly, more of an old man gripe almost about like all this people are innovating stupid stuff. Now it's kind of the ETF equivalent of like peanuts, shit coins and stuff like that. But those ETFs and I'm embarrassed to admit I read in the journal it's via Arch Enemy they have $5 billion of AUM now. They're like $5 billion in two-time leverage, micro-strategies, single-name ETFs or something that is already a extremely levered vehicle to invest in Bitcoin. I can think of quite a few scenarios where that ends in tears and yeah. So that's the kind of stuff that I feel people are paying attention to it, but maybe I think that's something we should all be paying a bit more attention to.
Speaker 2:By the way, I will say I'm glad you said, because I've been seeing that more recently as advisors this looks like this is a media that's different than other medias in the sense that and you can see the leverage, trading volume, cumulative flows and all this stuff to your point on the single stock side. I mean this is pure retail, this is pure speculative speculation and it's these are signs of what you typically see towards a blow-off top?
Speaker 1:No, it is. I mean. I would say I mean especially micro-strategy. That's just extreme.
Speaker 1:I would say I always used to think that about many others of many manias or crazy stuff that happened over the past 10, 20 years, but I think, as often GameStop I changed my mind belatedly, but I actually think that what we're looking at now is kind of a new normal, like I'm not saying that micro-stretch is going to go to the moon or anything like that, but the fact that there are two secular changes in the kind of fabric of markets that have never been there before, even in the dot-com crisis or the South Sea bubble. One thing is trading is super easy and it's free Basically free in almost every country in the world and actually free in others. Even in dot-com, you had to dial up on a modem and pay what? Eight bucks for a trade. There was friction involved. Nowadays, I can literally sit on the toilet after a big night out and trade double-leathered, micro-stretchy, single-name ETFs. As much as something will blow up and we saw lots of stuff blow up in 2022, right After the whole post-COVID retail trading boom, gamestop fell back down again.
Speaker 1:All that jazz. That's a secular change, and then that collides with social media and it's easy to form tribes and clubs and cabals and groups that have some sort of joint identity online, whether it's literally that they support a football club or they happen to think GameStop is the megastar. And I think, as much as we'll see waxing and waning of what is the bubble, where is the excitement? Whether it's crypto or something else, those are secular changes. We're not going to like recork those genies. They're out there now. But free, friction-free trading and social media and some of this stuff can go global as well.
Speaker 1:Before it was very Just because of social media. Social media was like newspapers and fanzines in the US or Europe or the UK. It was very vulcanized. Now, literally, you can have people in Australia or Vietnam or Angola or the US or the Antarctic trading micro that makes me think that we're going to see more of these mini boom. Before booms and bubbles that proper bubbles were something that took a big, long time to inflate and they were really big and then they collapsed and then people kind of sobered up and stayed sober for 10 to 20 years. Now I think that the pace of these cycles is probably quick and quite radically uh, and I think we're still kind of grappling with the implications, both those regulations for how you trade, how you invest and so on robin, for those who want to uh track more your thoughts, more your work, uh, where would you point them to?
Speaker 1:oh, I don't know if anybody wants more of my thoughts, but I'm the editor of FT Alphaville and that's actually the only free part of the FT and I fight very hard to keep it that way. So you have to register with an email address, but that's all you have to do and you can read FT Alphaville for free, and that's probably the best bit of the FT. Just don't tell anybody at my actual employer, the FT, that I told them that they still pay my salary, so I keep that on the down fees down low?
Speaker 2:basically, do you have a timetable on the book, the second book?
Speaker 1:Yeah, I'm going to hopefully finish it Q1 next year. I was going to finish it this year but because of everything going on in markets, it's kind of the fun stuff Like. What we do is always exciting and fun, right so. But I'm hoping I'll get the book done on bonds all by the time for Christmas stockings next year. Basically it'll be out then hopefully.
Speaker 2:And I will have you on, hopefully before that. Appreciate those that watch this live. Again, this has been Edited Podcast under Leadlag Live and I'll see you all on the next episode. By the way, folks, I am hosting a webinar with Granite Chairs at 12 pm Eastern. I did post about it on X Watch that it's going to be really interesting. Thank you, robin. Appreciate it.
Speaker 1:Thanks, michael. Thanks for having me on. Cheers everyone. Thank you.
