Dan Greenhaus, Chief Strategist, Solus Alternative Asset Management LP

[00:00:01] Hello, this is Dean Curnutt and welcome to the Alpha Exchange, where we explore topics in financial markets associated with managing risk, generating return, and the deployment of capital in the alternative investment industry.

[00:00:19] With deep roots on the sell side, serving in strategist roles at both Miller-Tabak and BTIG, Dan Greenhaus is now Chief Strategist at Solus Asset Management, a multi-billion dollar AUM firm with expertise in distressed and high-yield investing.

[00:00:33] Our conversation considers economics in theory and practice, differentiating classical academic training from the role someone like Dan plays on a trading desk, supporting clients, portfolio managers, and the investment process.

[00:00:46] Here, Dan shares the importance of understanding what's in the price and details his efforts to evaluate consensus by talking to other strategists around the street to understand baseline expectation.

[00:00:57] This is some part of what he describes as his role as blindside tackle at Solus, working to identify areas of macro uncertainty that may be underappreciated.

[00:01:06] We talk about the current state of the economy and the stance of Fed policy.

[00:01:10] On the latter, Dan argues that while the impact of tighter policy on slowing has been much less rapid than anticipated, it has worked.

[00:01:17] And while he's successfully faded the repeated calls that the consumer was going to crack over the past two years, he now sees signs worth paying close attention to.

[00:01:26] He points to simple measures like weekly jobless claims and also puts stock in Visa's recent earnings calls, in which weakness was cited across multiple spending categories.

[00:01:36] Dan's study of prior Fed easing cycles suggests that rate cuts have typically come too late to offset broad-based economic weakness.

[00:01:43] Will this time be different?

[00:02:14] Among other areas of the asset classes, Dan, it's great to have you on the Alpha Exchange today.

[00:02:21] Great to be here. Thank you for having me.

[00:02:23] Interesting times we come about this conversation.

[00:02:25] We are amidst a pretty sizable shift in markets from very low vol to high vol, from lofty asset prices to something less lofty.

[00:02:36] So we'll circle back and talk a lot about the here and now throughout this podcast.

[00:02:40] And so tell us about your own path.

[00:02:42] Tell us how you started on the sell side and ultimately made your way to the buy side in Solus.

[00:02:48] So I started at a company called Miller Tabak, which has since been acquired slash gone away, working with two people that television watchers will know.

[00:02:58] Peter Buchbar, who is now at Leakley Advisors, a multi-billion dollar financial advisory firm, and Tony Crescenzi, who is now at PIMCO running some of their treasury funds.

[00:03:09] And I effectively got sat in between these guys and just absorbed everything I could on the macro and the micro from these two guys who were established and respected.

[00:03:20] And it was a tremendous learning experience because sitting out on the desk, you get both the fundamentals of the micro, so to speak, what's going on in a traditional sell side trading desk,

[00:03:31] but also listening to these two guys talk to their clients and the press about things from a macro perspective.

[00:03:38] And it gave me a really good view for many years into some of the drivers behind asset prices from a top-down perspective.

[00:03:46] And it was really a terrific experience.

[00:03:47] I mean, we all still talk to each other.

[00:03:49] And I was just really, really lucky, very fortuitous to just get sat in between these two guys.

[00:03:54] It was just an incredible learning experience.

[00:03:56] And talk to us about that interaction between someone who's got maybe more of a theoretical training and underpinning in disciplines like economics,

[00:04:07] and then the idea of being on the desk, the sort of Wall Street sell side economics role and where the theory meets the practice.

[00:04:16] Tell us a little bit more about what you learned from that standpoint.

[00:04:19] I went and got my master's and I took all three levels of the CFA, although I didn't finish the third level.

[00:04:25] Don't talk to me about it.

[00:04:26] It's a sore spot in my life.

[00:04:29] So I have a pretty firm foundational underpinning for thinking about markets from a traditional DCF type standpoint, if you will.

[00:04:36] But what getting sat in between Peter and Tony taught me is that there are other driving factors to how markets perform.

[00:04:44] And it's sort of a corollary to behavioral finance in the sense that the drivers behind Microsoft or whatever are not just EPS and a DCF analysis.

[00:04:53] There are other money flow and positioning arguments to which you need to be aware, a lot of which is intuitive and obvious to people who are probably listening to this.

[00:05:02] But to a younger individual was eye opening in the sense that when you take the CFA, when you get your master's, positioning is not exactly a prerequisite.

[00:05:10] It's something you just pick up being out on the desk.

[00:05:13] Like a lot of people who have been on trading desks, I just found it a tremendous learning experience to see how asset prices, particularly equities at that time, reacted to the release of weekly job claims or the ISM report or a comment from a global leader or the US president or the head of the SEC, whatever it might be.

[00:05:33] Just understanding how those developments intertwine is really terrific.

[00:05:38] I still think about markets in that sense today.

[00:05:41] It was a learning experience and wouldn't trade it for the world.

[00:05:44] Take us a little bit further along in your career.

[00:05:46] So I'm guessing some of your early days were in and around the tech bubble, certainly well before the financial crisis.

[00:05:53] And if I sort of think about the vol in markets, you mentioned Microsoft as an example, stocks like Microsoft, Cisco Systems, Yahoo, and so forth.

[00:06:04] These stocks were moving at tremendous rates of speed in and around 99, 2000, 2001, and so forth.

[00:06:11] You had a very quiet period before the GFC.

[00:06:13] And then, of course, this explosion of volatility and credit spread widening that was really about mispricing of risk in the system at wide.

[00:06:23] Take us through Miller-Tabak and then into BTIG and just some of your formative experiences through some of those signposts of big vol widening events.

[00:06:33] With respect to the tech bubble and the analogy today, which is what I have a lot of conversations with people about, I'm one of those people and I've made this case on TV quite repeatedly.

[00:06:43] I just don't think there are enough similarities to say today is 99, although it's a version of that saying history doesn't repeat, but it does rhyme.

[00:06:51] But just discrepancies between the two are so substantial.

[00:06:54] I think it's really important to reiterate.

[00:06:57] And you heard this from Sundar Pachai and Mark Zuckerberg in the last week or two.

[00:07:00] There's going to be overinvestment.

[00:07:02] There's going to be overbuilding akin to what happened late in the bubble in 99 and 2000.

[00:07:07] But people always think about the bubble as if it was only 99 and 2000 and not something that began, for lack of a better word, in 95 or really with the Netscape IPO in the middle of the year.

[00:07:20] There was years of asset price gain and enthusiasm and CapEx expenditures that were not dissimilar today in the sense that they were deemed warranted at the time.

[00:07:30] And admittedly, with the benefit of hindsight, were warranted as well.

[00:07:33] Just the valuations got so excessive in the back half of 99.

[00:07:37] You mentioned about the velocity of asset prices.

[00:07:40] I think it was Qualcomm.

[00:07:42] But I think Qualcomm split three times in one year.

[00:07:46] There was that type of excessiveness going on that you don't see today.

[00:07:49] You mentioned Cisco, which of course was the poster child, which I own at $51 a share and didn't sell until 10 years later at about $25 a share.

[00:07:59] I was one of the victims late in that cycle.

[00:08:01] But Cisco at its peak, with the benefit of hindsight, because we now know obviously what forward earnings were, but Cisco was trading at like 150 times forward earnings.

[00:08:10] Now, I don't mean to suggest that NVIDIA or any of the poster children of today's move are not overvalued or undervalued.

[00:08:19] Solus is not a particularly large tech investor.

[00:08:21] We don't buy large cap tech, so I'm certainly not an expert.

[00:08:24] But I do have eyes.

[00:08:26] And it does not appear to me that these names are trading at 150 times forward earnings.

[00:08:30] So while the bubble, as you mentioned, was a terrific formative experience in the sense that it was a great learning moment for the excessiveness of risk appetite, I just don't see that same level of appetite today.

[00:08:42] That's not to say 30 times forward earnings is not expensive.

[00:08:45] It's just clearly to say that it's not 150.

[00:08:48] As you well know, we got a glimpse into it in pretty short order again with the housing bubble.

[00:08:53] And I don't need to run through the fundamentals of why the housing bubble emerged, but all of a sudden you had another behavioral finance moment where people went just bananas and valuations in the housing market were just obscene and unlikely to bear out over time and didn't.

[00:09:09] But I think for today, those two instances can be instructive in the sense that they both, in effect, although not directly, were influenced by interest rates.

[00:09:20] What I mean by that is we know that eventually the housing bubble popped.

[00:09:24] Interest rates played a role in that for sure.

[00:09:27] I think you can make a case that the late 99 tech bubble was at least in part affected by interest rates.

[00:09:32] And I think it's an important lesson that I've taken with me my entire career that interest rates are a pretty important thing to pay attention to.

[00:09:41] And I say that in the context of seeing any number of buy side and sell side people saying, I don't really care about the macro.

[00:09:48] All that matters is my DCF, my EPS forecast, et cetera, et cetera.

[00:09:52] I disagree with that a lot.

[00:09:54] I think what the Fed does and doesn't do and what interest rates do and don't do is just a really big input into the investment process.

[00:10:02] And I think clearly post-2010, it's become increasingly clear to managers of all stripes, equity, credit, structured products, et cetera, et cetera, that paying attention to the macro is crucially important for helping at a minimum insulate your portfolio against those tail risks and at a maximum helping generate alpha.

[00:10:19] It's really interesting to sort of think about the tech bubble and all the volatility that came along with it.

[00:10:25] And just compare and contrast that to the housing crash and, of course, the market crash as well.

[00:10:31] The valuation bubble in tech was certainly absurd by all counts.

[00:10:37] I guess anytime you come across a new technology, it's hard to get away from it.

[00:10:41] But even adjusted for that, you look back on some of this and you'll never find something that compares to it.

[00:10:47] And yet the unwind of that did very, very little damage to the real economy.

[00:10:52] The shallowest recession we've seen in quite some time.

[00:10:55] Exactly.

[00:10:56] And of course, the GFC was the financial system sort of sicking itself on the real economy and causing a crash in the real economy.

[00:11:04] Take us through Miller-Tayback and then on to BTIG.

[00:11:08] BTIG is the same type of firm, albeit larger.

[00:11:10] And I had a couple of clients that were clients of both firms.

[00:11:14] And when BTIG had an opening, called up some higher ups at BTIG and said, you should look at this kid.

[00:11:20] I was still young at that point.

[00:11:21] I think when I got the strategist job at Miller-Tayback, I was probably about 30, maybe 29.

[00:11:26] But by the time I got to BTIG, I was probably in my mid-30s.

[00:11:29] And BTIG was a terrific place and still is a terrific place.

[00:11:33] Larger, faster.

[00:11:34] Larger, the last bastion of that late 90s and 80s Wall Street culture where people are standing up, two phones and two ears and screaming.

[00:11:43] It was a terrific experience.

[00:11:44] I still talk to any number of people that work there.

[00:11:47] I have nothing but the best things to say about it, both my clients and coworkers.

[00:11:51] It was phenomenal.

[00:11:52] But then the opportunity to leave and go work at Solus came along and I really couldn't pass it up.

[00:11:57] Given that at that point in my career, I wanted to try something like this.

[00:12:00] And when that came along, it was just a terrific opportunity and has been terrific ever since.

[00:12:05] Tell us a little bit about Solus in terms of its framework and its investing orientation.

[00:12:11] And then I just would be curious for you to reflect on your sell side years at Miller-Tayback and BTIG.

[00:12:19] And then the skill set that you picked up along the way and the perspective you picked up along the way and how that's been something you've been able to utilize at Solus.

[00:12:29] I love the sell side.

[00:12:30] I have nothing negative to say about it.

[00:12:31] I think there's a lot of people who move to the buy side and they view that as I've made it or I've gotten out of the sell side.

[00:12:38] And there's reasons for why that is.

[00:12:40] And I certainly wouldn't tell anybody they're wrong.

[00:12:42] I just thought being on the sell side was terrific.

[00:12:45] I formed really great relationships with any number of clients, small managers in Alabama and huge hedge funds like Solus here in New York.

[00:12:55] I just thought it was a terrific experience.

[00:12:57] I would absolutely do it again.

[00:12:59] It was just great.

[00:13:00] I love the sell side.

[00:13:01] So much of who I am fits very well with the sell side.

[00:13:04] I think it's terrific and have nothing but the best things to say about my experience over there.

[00:13:09] I also think one of the things I have been told I do well, that translated somewhat well over to the buy side.

[00:13:16] And this is a skill everybody should master.

[00:13:18] I think it's a skill.

[00:13:23] I think it's a skill.

[00:13:26] It's a skill.

[00:13:44] But in general, a portfolio manager doesn't have and probably won't spend three hours understanding the nuances, the details of the number of cars in the parking lot at Walmart.

[00:13:55] So you have to be able to figure out for either a market or a specific stock.

[00:14:00] What are the most important factors that are going to buy?

[00:14:05] What are the driving factors that are going to make this idea work?

[00:16:08] You have to be able to buy the work that you have done.

[00:16:38] Those first three and maybe there's some version of positioning and whether trades or exposures are over or under sponsored.

[00:16:46] That part, I'm just interested in having you talk through your approach.

[00:16:51] So you certainly have a deep understanding of the economy.

[00:16:55] I've seen you write a lot about Fed hiking or easing cycles, how the market interacts with those.

[00:17:02] See if you can just kind of start at 30,000 feet in terms of how you think about framing out the macro, how you did it on the sell side, and then how you're continuing to do it now in your role at Solus.

[00:17:15] Now, in terms of how I think I find value in markets, I guess let's put it that way.

[00:17:21] I think I have something of a differentiated view on this.

[00:17:23] I hear a lot of people talk about their personal process and how they like to just put their head down, do their work, come up with some model output for when a given asset or market is under or overvalued and why.

[00:17:38] Maybe it's a lack of margin expansion or valuation adjustment or interest rate sensitivity or something.

[00:17:43] And maybe some of it is just a qualitative guesstimate based on the totality of the research that this person is doing.

[00:17:49] There's a lot there.

[00:17:50] And of course, every adolescent strategist is going to incorporate varying aspects of what I just mentioned to varying degrees.

[00:17:56] I like to have a really keen sense of where I think consensus lives.

[00:18:01] Maybe it's the sell side guy in me, but I like to talk to a lot of people around the street, on desks, macro people from different styles, and just get a feel for what the baseline expectation is.

[00:18:11] I think there's a lot of value in ascertaining how much my own views and analysis differ from that of the consensus perception.

[00:18:18] And I think about some of my best ideas over these last few years, or trades, I guess, for lack of a better word.

[00:18:25] They've been with that concept in mind.

[00:18:27] I guess I can't talk specifically about anything we've done or are doing related to that.

[00:18:31] But as an example, I guess I can say a couple of years ago when interest rates were really, really low and not really expected to rise in any meaningful way.

[00:18:39] We were talking about the 10-year going negative or something like that.

[00:18:42] Around that time, we developed what I believe to be a pretty contrary view based at least in part, if not a large part, on the consensus idea that rates wouldn't be moving all that much.

[00:18:54] And I don't think I can talk about what we did or didn't do, but I think that understanding what's in the price, so to speak, at any given time is really helpful to me.

[00:19:02] And while I couldn't have done that on the sell side because I didn't have access to just pick up the phone and call the strategist or the economist or the analyst at Insert Bank here,

[00:19:13] on the buy side, I think that's something I find really, really helpful, trying to determine where is consensus?

[00:19:20] Do I or we differ from consensus?

[00:19:22] And if so, how can we try to exploit that difference on the assumption that we'll eventually be proved correct?

[00:19:28] So for me, that's an important part of the framework.

[00:19:31] I want to run with that a little bit.

[00:19:32] But first, maybe I'd love for you to just talk about how the macro and micro interact at Solus.

[00:19:40] In other words, among the areas of focus is distressed investing.

[00:19:45] That's a lot of micro.

[00:19:46] That's very micro.

[00:19:47] That's very micro.

[00:19:48] That's understanding management teams.

[00:19:50] It's understanding capital structure.

[00:19:52] It's understanding industry dynamics, balance sheets, and so forth.

[00:19:55] But the macro always does matter.

[00:19:57] The macro can overwhelm the micro.

[00:19:59] And so I'd love to get an understanding of sort of, of course, there's macro trades like rates that you were referring to,

[00:20:06] but there's also thinking about the micro investing in the context of the macro landscape.

[00:20:13] Tell us a little bit more about that.

[00:20:14] I'll start by saying when Chris Pachillo, the CEO and CIO brought me on, it was not with the expectation that I had to contribute to the distress process.

[00:20:23] For listeners who don't know, Solus has been around for 20 years or whatever.

[00:20:28] Chris is incredibly knowledgeable about the restructuring and the distress process.

[00:20:32] We, for quite a long time, had two on-staff restructuring attorneys.

[00:20:37] We didn't need Dan Greenhouse to contribute in that sense.

[00:20:40] The short story was it was basically to be what I described as the blindside tackle,

[00:20:45] which was effectively making sure that the team, the portfolio, et cetera, wasn't hit by anything that we didn't see coming or wouldn't have seen coming if I wasn't watching it.

[00:20:54] It was a bit of a struggle at first.

[00:20:55] For my first year or so, I was basically doing what I did on the sell side, which is care about markets and economics and their interplay from a top-down perspective and try to form investment arguments from that vantage point.

[00:21:09] It certainly wasn't as helpful as I think I would have liked.

[00:21:12] And at one point, Chris and I sat down and discussed how we could make this, my analysis, my views, et cetera, a little more actionable for the portfolio, if you will.

[00:21:22] And while it didn't happen overnight, I think that conversation that we had, again, call it a year in, has led to much better outcomes in a more specific and observable way in terms of my contributions.

[00:21:34] And from that point, let me just say from an economic standpoint, the problem everyone has now is everyone is a Fed watcher.

[00:21:40] You've got people on TV who are RIAs, who aren't macro people.

[00:21:45] And I don't mean that derogatorily.

[00:21:46] I just mean people who aren't macro people in any traditional sense, and they're commenting on the latest speech from, let's say, the Richmond Fed president and what that means for their firm in the markets.

[00:21:56] And when you have that type of a dynamic, I think one can say that the case, the value add from that type of analysis, at least for institutional investors, is effectively arbitraged away.

[00:22:06] The Fed, they put out lengthy statements now.

[00:22:09] They have press conferences.

[00:22:10] They put out the summary of economic projections and the Beige book, et cetera, et cetera, et cetera.

[00:22:15] There's so much information.

[00:22:17] The issue is anyone can form an opinion at a surface level.

[00:22:21] So I think where this job is going is probably going to be more AI infused or something like that.

[00:22:28] And it's kind of what I try to do, but not successfully enough as of yet.

[00:22:32] But you're trying to develop statistically significant market signals from all this data rather than simply reading the Bloomberg headlines and saying so-and-so sounded bullish, so-and-so sounded bearish for rates or what that means for equities or something like that.

[00:22:46] That all said, at the end of the day, we have to have investment ideas.

[00:22:50] And this gets back to that conversation I had with Chris.

[00:22:52] All the pontificating and analysis has to lead to something.

[00:22:56] And for me, that really comes in one of two ways, I guess.

[00:22:59] And I think this will answer the question.

[00:23:01] There are ideas that I come up with myself, either stock or credit-specific investments or some macro hedge for the book that comes specifically as a result of my ideas.

[00:23:11] Or second, and this is increasingly something that I'm seeing manifest itself, it's working with the analysts in an attempt to point them in the direction that I or Chris and I think is correct.

[00:23:24] And that manifests itself in stock or credit-specific investment ideas.

[00:23:28] And fortunately, during my time here at Solus, which is coming up on a decade now, the analysts that we've had and still have have been terrific at indulging these ideas that I've had get.

[00:23:40] Often together, I guess that leads to positive investment outcomes because I think we're successfully marrying these two ways of looking at the landscape, the fundamental bottom-up perspective that they have to a greater degree than I, but I share.

[00:23:53] And the top-down perspective that I come at, which they find beneficial because it's not something that they pay all that much attention to.

[00:23:59] So I think at the end of the day, what you're trying to do on the buy side, obviously, is generate alpha in the book.

[00:24:04] And as a strategist at a firm, what are the best ways that can be created?

[00:24:09] Those are the two ways, I think, over time that I've been accretive to the fund and the portfolio through those efforts.

[00:24:15] We mentioned the economy and monetary policy.

[00:24:19] And then we've talked a little bit about markets, the exposures, the prices, valuations, and so forth.

[00:24:25] Let's focus on the economy and monetary policy.

[00:24:30] And I'd love to get your take on guiding us through the 500 basis points of tightening as it's occurred.

[00:24:37] And it's obviously in the books and going to start to be unwound at some point.

[00:24:41] The way in which that pretty dramatic increase in interest rates over the last couple of years has or has not impacted the economy.

[00:24:50] And then the current state, we're talking on a day where the S&P is getting smoked.

[00:24:54] The non-farm payrolls report is another indication that just things seem to be slowing more than folks expected.

[00:25:01] I was listening to Claudia Somm tell us about her indicator this morning on Bloomberg.

[00:25:06] So the Somm rule has been tripped.

[00:25:08] But what's your take, Dan, on just the current state of the economy?

[00:25:12] Let's call that growth and inflation and then the stance of monetary policy.

[00:25:16] Clearly, monetary policy has had an effect.

[00:25:18] The question is on what and to what degree.

[00:25:20] And I'll just go back to something we all know quite well, which is the NFT market no longer exists.

[00:25:26] Unprofitable tech just imploded.

[00:25:28] Even large cap names like Adobe, real companies just absolutely imploded in and around the time that the Fed began and continued to raise interest rates.

[00:25:38] And the housing market ran into trouble.

[00:25:41] Obviously, you've got broader dynamics that are supporting the housing market, but activity was curtailed.

[00:25:45] And so I think monetary policy certainly had an effect.

[00:25:47] I do not think it had the effect that I and others thought it would have, which was a more rapid pace of slowing.

[00:25:55] And I think we're going to be debating for quite a long time why that is.

[00:25:59] Although at a baseline level, giving people tens of trillions of dollars, six trillion or whatever it was, is in retrospect going to be proven the most consequential followed somewhat by fiscal spending.

[00:26:10] But yeah, the economy has obviously held up much better and for longer than I and other people thought.

[00:26:15] If I just think about commentators along the lines of myself, I think being wrong is not a big deal.

[00:26:21] But sticking with a wrong view when you've been proven wrong is the error that you make.

[00:26:25] And I know it's hard to say I was wrong about something, especially for those of us who do some of this publicly.

[00:26:32] But the sooner you realize you're wrong, the better.

[00:26:35] And for me, I think it was early in 23, just using the S&P 500 chart as a gauge for what was working and wasn't working.

[00:26:43] It was early in 23 when I said, OK, this doesn't feel like what I thought was going to happen is happening.

[00:26:49] Fortunately, I turned somewhat quickly.

[00:26:51] Now, again, Solace isn't a particularly active trader the way some other funds are.

[00:26:56] It was certainly helpful to recognize early on that 500 basis points was not going to do the damage to the speed that I had previously thought.

[00:27:03] Now, flash forward to today, the question, of course, not to date the podcast is, are we finally seeing the effects?

[00:27:10] It's hard to tell in real time always.

[00:27:13] But clearly, the economy is slowing from the torrent pace at the end of last year.

[00:27:18] That was a given, but it appears to be slowing a bit more than perhaps some anticipated.

[00:27:23] You see this most acutely in the labor market.

[00:27:25] Today is jobs day.

[00:27:26] The jobs number was weaker than expected, along with downward revisions to previous months.

[00:27:31] But I always used to tell clients of BTIG, and I tell people today, you do not need a PhD.

[00:27:37] You just need to look at weekly jobless claims.

[00:27:40] And weekly jobless claims are going up.

[00:27:42] And that is as good a signal.

[00:27:44] It's timely.

[00:27:45] It comes out every week.

[00:27:46] It's revised, but not enormously so.

[00:27:49] Weekly jobless claims are telling you something is happening here.

[00:27:51] And that bears as close a watching as anything we've seen in the last couple of years.

[00:27:56] And so just to answer the question five minutes later, is slowing finally here?

[00:28:01] You certainly do have early indications that's the case.

[00:28:04] So as we consider the impact of monetary policy, or perhaps the less than expected impact,

[00:28:09] certainly in some areas, housing is one example.

[00:28:13] You mentioned the destruction of NFTs.

[00:28:15] Fair enough.

[00:28:16] But certainly the economy churned along in 2023 quite well relative to what people's expectations

[00:28:22] were.

[00:28:23] And so two areas I would like to hear you explore.

[00:28:26] One is just the fiscal side.

[00:28:28] I think we ran a 7% deficit last year, 4% unemployment rate.

[00:28:33] Really not supposed to be that way.

[00:28:35] Begs the question, what's going to happen when we do hit a proper economic slowdown?

[00:28:40] What is that deficit going to look like?

[00:28:42] Certainly some point to that as being an offset to monetary policy.

[00:28:47] And then the second one is just around corporate and household balance sheets coming into the

[00:28:51] tightening cycle as being reasonably insulated to the shock of higher rates relative to prior

[00:28:57] cycles.

[00:28:58] So first, how does the fiscal side make its way into your thought process on things like inflation and

[00:29:03] on things like economic growth?

[00:29:05] We're running a 5.5% budget deficit or something like that.

[00:29:09] It was, I believe, as much as 8%.

[00:29:11] That, as has been said a zillion times, is the type of deficit that you run in a severe recession,

[00:29:18] if not a depression, let alone an expansion.

[00:29:20] It would be implausible to believe that a deficit so large, and listen, there are accounting issues.

[00:29:26] It's not all the government just raining money down on the economy, but it would be difficult

[00:29:30] to believe that running a deficit that large did not have a stimulative short-term effect

[00:29:35] on markets, even with the backup in rates.

[00:29:38] I don't want to get into a larger debate about whether we're crowding out, et cetera, et

[00:29:42] cetera, but it's a very large deficit.

[00:29:44] And in terms of the investment process, the short answer is I don't care.

[00:29:48] I think the correct answer is I don't care.

[00:29:51] Meaning, I don't think that many analysts, strategists, et cetera, do or should go to their

[00:29:56] PM or APM and say, hey, the US government is running a 5.5% budget deficit.

[00:30:04] Spending over the next 10 years is expected to be $22 trillion.

[00:30:08] We should short Hewlett-Packard.

[00:30:10] I don't think that's obviously the correct way to go about doing things.

[00:30:13] I just don't think it matters that much.

[00:30:15] I think what you would care about is what does this mean for the general risk landscape?

[00:30:22] And that's something as an internal strategist or economist or whatever, I try to think about

[00:30:26] and it helps steer the portfolio in the correct direction.

[00:30:29] If you're running a large deficit, well, that probably means the risk of a recession, all

[00:30:33] else equal in the short term is reduced.

[00:30:35] If the government is raining money down, they're not exactly because again, there are some accounting

[00:30:38] things that work here.

[00:30:40] But if the government is spending a boatload of money, then companies are going to benefit

[00:30:44] from that.

[00:30:44] And that probably means all else equal, however small the percentage might be that the odds

[00:30:48] of a recession are somewhat reduced.

[00:30:50] And so that might mean that the risk environment should be tilted more in favor of lower rated

[00:30:56] credits or in favor of the idea that valuations can further expand.

[00:31:00] That's how I, if anything, I would think about it.

[00:31:02] But in terms of the more traditional discussion that happens in print or on television, i.e.,

[00:31:09] how are we ever going to sell this debt?

[00:31:11] Who's going to buy it?

[00:31:12] How are we going to grow our way?

[00:31:13] That is a completely irrelevant discussion from an investment standpoint.

[00:31:16] At some point, it will matter.

[00:31:18] And I would be foolish to assume that I could possibly come close to determining when that

[00:31:22] moment would ever arise.

[00:31:23] If we're at a point of at least potential inflection in terms of growth, the sort of

[00:31:31] durability of the economic expansion, take us through how that potentially becomes part

[00:31:36] of the calculus in evaluating whether it's ideas and sectors.

[00:31:41] I know we spoke about consumer-oriented sectors.

[00:31:45] Obviously, the consumer is a big part of the U.S. economy.

[00:31:48] Maybe start there.

[00:31:50] Walk us through how the at least potential evolution of the trajectory of economic growth

[00:31:56] makes its way into how you'll think about playing offense in sectors like the consumer sector.

[00:32:01] That's a good example.

[00:32:02] I can't get into what we own specifically or not.

[00:32:05] But as I've said publicly numerous times, we've been exposed to the consumer for the better

[00:32:10] part of a year or two now.

[00:32:11] I have, for lack of a better word, faded that argument.

[00:32:14] And we, as a fund, have faded that argument that the consumer was always on the verge of

[00:32:19] running out of money or these mysterious ethereal excess savings.

[00:32:23] It has always seemed to us that the consumer was stronger, more confident, and more flush with

[00:32:28] cash than the consensus, for lack of a better word, was giving them credit for.

[00:32:32] And so some of our better ideas these last few years have been in spaces exposed to the

[00:32:37] consumer.

[00:32:37] Now, again, what does that mean?

[00:32:39] I can't say specifically.

[00:32:40] But when we say the consumer, it doesn't just mean Kohl's or Macy's or something like that.

[00:32:45] The consumer spends money on lots of things.

[00:32:46] But the consumer has traditionally, the last two years or so, been quite strong.

[00:32:50] And we've been happy with that positioning and that investment decision.

[00:32:54] The one thing that always got left out of those excess savings discussions was household

[00:32:59] net worth, which is now pushing $152 trillion.

[00:33:02] And the increase we've seen since COVID, while not totally unheard of, is largely unheard of.

[00:33:10] The consumer balance sheet has just been really terrific.

[00:33:14] Defaults and delinquencies have, for most of that time, been constrained.

[00:33:18] Consumer sentiment is depressed for sure.

[00:33:21] But I think that's the work we've done and publicly available data bears out, is largely

[00:33:26] a function of the consumer fretting, not about the inflation rate per se, but about the inflation

[00:33:30] level, people are really upset about the basket of goods that they purchase at Kohl's or Macy's

[00:33:36] or at the supermarket, whatever it might be.

[00:33:39] But they are doing so with real wage gains these last few months or quarters, with a strong

[00:33:44] balance sheet in the form of higher stock prices.

[00:33:46] And home prices are up 40%, 45%, 50%, depending on your region.

[00:33:51] And so we've been pretty bulled up on the consumer these last few years.

[00:33:54] I think clearly now, that lower income consumer story, which has been building for some time,

[00:34:00] is, I don't want to say going into overdrive.

[00:34:03] But the analogy I would use is the Visa conference call the other day.

[00:34:06] Visa has, for several quarters, consistently said that they've seen no behavioral change

[00:34:13] across income cohorts.

[00:34:14] Their earnings report, maybe a week, a week and a half, two weeks ago, was the first time

[00:34:19] they had specifically said, okay, we're starting to see the lower income consumer slow.

[00:34:24] And that's one way that I think about things.

[00:34:26] It's very easy to point to, I'm making up random retailers, Lululemon or Chipotle or McDonald's,

[00:34:31] and have them tell me, yeah, the lower income consumer is slowing.

[00:34:35] But Visa sees behavior across all categories, hotels, travel, restaurants, leisure, retail,

[00:34:42] et cetera, et cetera.

[00:34:43] And so when they tell me something's going on, I pay a bit more attention.

[00:34:46] I think whatever level of bullishness I have had on the consumer certainly should be tempered.

[00:34:51] What we do with that as an investment is another story.

[00:34:54] But I think clearly that's starting to happen.

[00:34:57] And it comes obviously in conjunction with what you're seeing in the labor market, where

[00:35:01] you're seeing slowing.

[00:35:02] And to state the obvious, all of this falls apart if job gains grind to zero and job losses

[00:35:08] accelerate.

[00:35:09] That obviously becomes a whole different story.

[00:35:11] As you try to discern what's driving the headwinds for the lower end consumer and try to piece

[00:35:17] together those reports from Visa, do you get the sense that it's more slowing of jobs?

[00:35:23] Is it working off?

[00:35:25] I know you don't seem to have put a lot of weight in the excess savings concept, but there

[00:35:30] is that.

[00:35:30] There's job growth and then there's inflation.

[00:35:33] There was one chart, I think it was a Goldman chart.

[00:35:35] It went around on Twitter.

[00:35:36] They did some comparisons of Chipotle, I want to say Popeyes and McDonald's just from 2019

[00:35:43] to now in four or five different menu items.

[00:35:46] Oh yeah, the price change.

[00:35:47] Just unbelievable, really.

[00:35:49] I have to say, I mean, some of the joy of eating out is definitely being taken by just

[00:35:55] the prices that you're being charged.

[00:35:57] So it's everywhere.

[00:35:58] But when you kind of look at that low end consumer, any particular drivers that you think

[00:36:03] are more responsible than not to the slowing?

[00:36:05] I mean, it's the price level.

[00:36:07] Obviously, the low income consumers are less able to bear higher gasoline prices as a share

[00:36:12] of disposable income or restaurant.

[00:36:14] The problem for a lot of low income consumers is you've got 20% increases in food away from

[00:36:18] home and 20% increases in food at home.

[00:36:21] So it's not as if you have a meaningful arbitrage.

[00:36:24] There's a little bit, but it's not as if you have meaningful arbitrage by saying, okay,

[00:36:27] well, I won't go get the $20 burrito at Chipotle.

[00:36:30] I'll make it myself.

[00:36:31] It's going to cost you even more.

[00:36:32] I referenced earlier survey data.

[00:36:34] There have been any number of publicly available surveys, Semaphore, YouGov, et cetera, et cetera,

[00:36:40] where people's number one concern is not just less inflation, but lower prices.

[00:36:45] And we can leave aside the conversation around the pain that comes with lower prices in general.

[00:36:50] But people are not happy.

[00:36:52] Not to get into a political conversation here, because we'll be here another three hours.

[00:36:56] But I talk about this on LinkedIn repeatedly.

[00:36:59] The sooner politicians realize that people are pissed off about the price level, the better

[00:37:03] off they'll be.

[00:37:04] And whoever figures that out first is going to have an advantage.

[00:37:07] Because I've seen any number of data and interviews and reports that completely and totally bear

[00:37:13] out the idea that people are just pissed, for lack of a better word, that prices went up so

[00:37:19] quickly and are staying there.

[00:37:21] And so when you see economists tout, well, we've got inflation back under control.

[00:37:25] It's only going up 2.5% now or wherever it might be in any given month.

[00:37:29] That doesn't resonate with people who go to the supermarket and are paying $123 for the

[00:37:34] same basket of goods that cost them $100.

[00:37:37] And again, the sooner someone figures out how to talk to people about that, the better

[00:37:40] off everyone will be as a result.

[00:37:42] Until now, when job losses are starting to accelerate or appear to be starting to accelerate,

[00:37:48] there might be some seasonality involved.

[00:37:49] I don't think there's much else you can hang your hat on besides that.

[00:37:53] There were charts going around on the misery index.

[00:37:57] And folks are really surprised.

[00:37:58] The misery index is low.

[00:38:00] Unemployment's low.

[00:38:01] Inflation's low.

[00:38:02] And then if you adjust your misery index and just take a three-year inflation and you see

[00:38:06] the price levels up 20%, it's a whole entirely different story.

[00:38:10] I wanted to ask you just about a little bit of a framework for thinking about finding value

[00:38:17] in credit.

[00:38:18] And so when I think about distressed investing, certainly, as we alluded to, there's the really

[00:38:24] understanding capital structures, understanding where fulcrum assets lie within capital structures,

[00:38:30] a lot of legal teams and negotiations and creditor committees.

[00:38:34] There's another element, which is an asset may look very scary.

[00:38:38] It may look unappealing.

[00:38:40] But you're being really well compensated to bear the risk.

[00:38:44] I think that's what we're all here to do is find a way to step in and provide capital

[00:38:48] to a circumstance and get paid better than we should on a risk-adjusted basis.

[00:38:53] I would be interested to hear how you think about that from an equity lens, thinking about

[00:39:00] industry valuations and maybe it's some of your former work on the sell side, but then

[00:39:04] also a credit lens where something may really look unappetizing from a corporate fundamental

[00:39:11] standpoint.

[00:39:12] But the risk premium that you're getting compensated to bear to step in is exceptional.

[00:39:19] And so the risk-reward turns out to be good.

[00:39:21] In that sense, distress investing is a distant cousin to deep value investing because ultimately

[00:39:29] what you're trying to do is find an investment that's trading at a discount to intrinsic value

[00:39:33] that affords you some semblance of margin of safety if it doesn't immediately work out with

[00:39:39] an attractive return profile.

[00:39:41] And again, in that sense, distress is just deep value investing.

[00:39:45] I'm not a restructuring attorney or a distress analyst, so it's not exactly what I'm doing.

[00:39:49] But as a fund, we talk about this all the time.

[00:39:52] Certainly I do.

[00:39:53] I've thought about it a lot more lately in light of some of the arguments that David Einhorn

[00:39:57] has been putting forth about the decline in value investing and the value factor in public

[00:40:03] equity markets.

[00:40:04] I don't want to mischaracterize his argument, and I apologize if I do.

[00:40:07] But effectively what he's saying, his idea is that as a value investor, you could reliably

[00:40:12] rely on the market to come around to your view over time.

[00:40:16] And so when you find assets trading at a deep discount to intrinsic value, you can invest

[00:40:20] and you can try for whatever reason to make the public and the market aware, or the market

[00:40:25] will eventually come around to your view and the investment will trade up and you can realize

[00:40:29] your returns as that becomes clear.

[00:40:31] But either through some combination of the ascension of growth investing or passive investing,

[00:40:37] I think David's argument is that that's been challenged of lately and plays into the idea

[00:40:43] that value investing is, I don't think he said forever impaired, but might be impaired.

[00:40:47] And then distress investing, which is not exactly the same thing because it's not liquid in the

[00:40:51] way that public equity markets are valued and liquid.

[00:40:54] And there's a very specialized niche group of funds and people that do real traditional

[00:41:01] distress investing, whereas value investing is done at an exceptionally wide and large scale.

[00:41:06] But I find a lot of similarities between the two.

[00:41:09] In the case of distress investing, for listeners that might not be aware, there's a similar argument

[00:41:13] that distress investing is dead because there's no defaults or something along those lines.

[00:41:18] And that is, we would argue, fundamentally untrue.

[00:41:20] Certainly, the high yield distress environment today is not the same as it was 10 years ago.

[00:41:27] The default rate is quite low.

[00:41:29] The economy has been robust.

[00:41:30] So a lot of companies haven't needed to restructure to the same degree as perhaps in the past.

[00:41:36] But there's still a lot going on here in our market, in the distress market and the bottom

[00:41:42] of the high yield market that requires an intense amount of work and can be incredibly attractive

[00:41:47] from a return standpoint.

[00:41:50] It just has to be found to a greater degree than what we saw historically.

[00:41:54] And when you look at the lowest rung of the high yield market, the triple Cs, and to be clear

[00:42:00] for investors who are listening who may not traffic in this market, triple Cs are not a market the same

[00:42:05] way you might refer to small caps or the tech sector.

[00:42:08] It's just a conglomeration of disparate names that are just not in great shape.

[00:42:12] There's no sort of uniform factor tying these companies together.

[00:42:16] And who are we talking about?

[00:42:18] At the bottom rung, it's Lumen Technologies.

[00:42:20] It's iHeart.

[00:42:22] It's telecom names like that.

[00:42:23] It's Dish.

[00:42:24] It's Altice.

[00:42:26] Rig.

[00:42:26] These are not Apple.

[00:42:28] These are not the best of the best.

[00:42:29] And there's nothing really that ties those names to Arda or Unity or Zayo.

[00:42:34] Nothing really ties them together other than you demand a higher yield to invest in those

[00:42:38] names.

[00:42:39] Now, at this point, I've been rambling a bit, and so I've forgotten your exact question.

[00:42:42] But I think there are similarities between the two.

[00:42:45] And I think there's a tremendous value to be created still doing both of these types of

[00:42:49] investments.

[00:42:50] But it's on a bit of a hiatus right now, given the rise and the prominence of some of that

[00:42:54] growth investing.

[00:42:55] I think one of the challenges we all have as people in the markets is we kind of stare at

[00:43:01] these prices all day long, and they anchor us to some extent.

[00:43:04] So I've always argued that our inundation with prices real time and flickering at us 24-7,

[00:43:11] they kind of compromise our capacity to imagine things that are different.

[00:43:17] One thing about Chris Pacillo is his tremendous imagination for thinking about change and for

[00:43:24] really being able to spot things extremely early.

[00:43:28] And so first question, just on the more macro side of things, economy macro could be within or outside

[00:43:35] the United States.

[00:43:36] Are there emerging areas of either concern or promise that you think are more possible or

[00:43:44] assign a little bit more probability to than you think are, let's say, reflected in the market

[00:43:50] prices we look at?

[00:43:51] It's less true at this moment.

[00:43:53] It's not what we do at all.

[00:43:55] And I was never too specific about it on TV or in print.

[00:43:58] As it relates to the AI trade, let's say, I always found the infatuation with the semiconductor

[00:44:03] stocks misguided because my view was, I mean, obviously, you need a tremendous amount of investment,

[00:44:10] which is clearly materializing, to purchase some of these leading-edge chips.

[00:44:14] But you also need to build the data center and cool the data center.

[00:44:18] All these ancillary businesses that were getting overlooked for a long time powering the data

[00:44:24] center, all these ancillary businesses were getting overlooked for the longest time in

[00:44:28] favor of just simply owning NVIDIA or something.

[00:44:31] And I forever was just confused why investors who wanted to latch onto this idea just solely

[00:44:37] chose one or two avenues to express that view when some of these other stocks, big real

[00:44:43] companies that were exposed to this idea.

[00:44:46] On the power side, Vistra has become one of the poster children for this idea.

[00:44:50] All these names felt like a long period of time were being ignored.

[00:44:53] Obviously, that's less so the case today as investors eventually started branching out to

[00:44:58] some of these ancillary businesses.

[00:45:00] But I don't know that I can think of anything off the top of my head that's being ignored

[00:45:05] by markets.

[00:45:06] I think in general, markets do a pretty good job of incorporating lots of information.

[00:45:12] And increasingly, this is done algorithmically and through machine learning, et cetera.

[00:45:16] But do a pretty good job of incorporating a lot of this publicly known theories and et

[00:45:21] cetera, et cetera.

[00:45:22] None jumped to mind.

[00:45:23] Although I will say we have the pleasure of speaking when it does appear that the economy

[00:45:26] is turning somewhat.

[00:45:28] And while that doesn't mean automatically it can't be quote unquote saved, we are at a

[00:45:32] moment where people are starting to appreciate to a larger degree that things are indeed slowing.

[00:45:37] Well, this is where I want to finish.

[00:45:38] I want you to reflect on Fed cycles.

[00:45:41] Let's maybe focus on easing cycles because that's what's upon us.

[00:45:45] And just to set the table with something you just said about markets incorporating information,

[00:45:51] boy, it was as recently as late June where we had all of one ease priced into December of

[00:45:59] this year.

[00:45:59] We're now closer to four than three.

[00:46:02] Right.

[00:46:02] That's moved quite quickly, obviously, as the market's incorporating job growth weakness,

[00:46:08] softer inflation, and obviously softer markets as well.

[00:46:12] You know a lot about these past Fed tightening cycles.

[00:46:16] I would say kind of an encyclopedia of them.

[00:46:19] And the way I'll frame the question is Fed easing is good in the sense that rates are coming

[00:46:23] down and the cost of credit comes down.

[00:46:25] So that's got a lot of positive effects.

[00:46:28] But of course, they're easing because they have to.

[00:46:31] They're easing potentially in a little bit more of a hurry than they were expected to.

[00:46:36] And so that brings about more of a sense of risk off than anything else.

[00:46:41] How do you balance those two?

[00:46:43] And then what are past easing cycles tell us about, if anything, definitive about the behavior

[00:46:49] of risk assets?

[00:46:50] It's really difficult to say because so much about this current cycle is unique, for lack

[00:46:55] of a better word.

[00:46:57] Look no further than the yield curve, which has been inverted for as long as anyone's been

[00:47:01] inverted.

[00:47:02] Or I guess now it's probably been, although it's about to un-invert, as long as any yield

[00:47:06] curve has been inverted, if not longer.

[00:47:08] While the un-inversion is always your sort of signal that a recession was coming, I don't

[00:47:12] think most people thought, myself included at the time, when it inverted, it would go

[00:47:16] this long and the economy would largely hold up and we'd still be creating 200,000 jobs

[00:47:21] in a three-month average.

[00:47:22] So I think past cycles are helpful to know about.

[00:47:26] And I've spent, as you mentioned, quite a bit of time studying them.

[00:47:29] I would draw attention to the Peter Bernstein quote that I have pinned on my Twitter page, which

[00:47:36] as it's been said that good forecasters have a good sense of history.

[00:47:40] I suppose that's true, but the best lesson from the past is to forget it before it shoves

[00:47:43] you into trouble.

[00:47:44] For people who don't know, Peter Bernstein is a terrific author on risk and volatility

[00:47:48] and has written one of the best books you could read against the gods.

[00:47:52] I think that's important to keep in mind that history does rhyme.

[00:47:55] There's a lot to learn about the past, but you have to be real careful not to rely on

[00:47:59] it solely.

[00:48:01] And so what am I getting from past cycles?

[00:48:03] Well, traditionally, you're supposed to buy Fed rate hikes.

[00:48:08] This is not exactly true, but buy Fed rate hikes and sell when they start cutting.

[00:48:13] And the opposite happened.

[00:48:14] When the Fed started raising rates, the market sold off.

[00:48:16] And that's really unusual.

[00:48:17] It's when the Fed starts cutting, as you noted, it's in conjunction with economic weakness

[00:48:21] and eventually a recession, at least three of the last three times, let's say.

[00:48:26] I don't know exactly what's going to happen this time around because of the, for lack of a

[00:48:31] better word, the uniqueness of the cycle.

[00:48:33] I think when you build out a model or a framework for what's going to happen or what you think

[00:48:39] is going to happen, I think I have to be, the royal eye, have to be attuned to the idea

[00:48:46] that the economy is operating differently.

[00:48:48] We've had, for lack of a better word, relatively high interest rates for a lengthy period of

[00:48:52] time here.

[00:48:53] And you haven't had a huge effect on the economy.

[00:48:56] As we mentioned earlier, it's been deleterious in certain corners and pockets, but economy

[00:49:01] at large has held up.

[00:49:03] So if the Fed starts to reduce rates, as we're speaking, 50 basis points are getting priced

[00:49:08] into September.

[00:49:09] I just saw a headline right here that JP Morgan changed their view.

[00:49:14] I assume that's Mike Ferroli changed their view to 50 basis point cuts in both September

[00:49:19] and November.

[00:49:20] People are starting to jump on this train that the Fed's going to start to aggressively lower

[00:49:24] interest rates.

[00:49:24] If they can do it rapidly enough, and this is another obvious statement, if you can do

[00:49:29] it rapidly enough to contain the weakness to the pockets where it's currently emerged,

[00:49:34] then great.

[00:49:35] What's happened in the past is that weakness has been so broad-based.

[00:49:40] And this was the case, obviously, in 08 and previously in 99, because I don't think we

[00:49:44] should really count COVID.

[00:49:45] But what's happened in the past is the weakness has been so broad-based that rate cuts have come

[00:49:50] too late, even though those cuts have been quite rapid.

[00:49:53] Right now, the Fed has a window where if they start reducing interest rates in the back half

[00:49:59] of the year, I don't know to what degree and how rapid, but if they start reducing interest

[00:50:02] rates, I don't see as of yet the type of warning signals that you might see earlier in previous

[00:50:10] cycles that can't be arrested, I guess is what I'm saying.

[00:50:13] I'm stumbling a bit to say it that way.

[00:50:14] That if you start cutting rates in September and you continue a little bit here with the

[00:50:20] inflation rate lower, with the economy slower, with job creation slower, I don't know that

[00:50:25] you need real rates as high as they are.

[00:50:27] And if you can start that process, you can probably arrest some of this weakness.

[00:50:31] But I say that with an enormous amount of humility, because in a free market capitalist

[00:50:37] economy such as the United States, you've got the best and the brightest PhD economists staring

[00:50:43] at the same data day in and day out.

[00:50:45] And we are just not good at predicting these outcomes.

[00:50:49] Fortunately, if we were good at predicting it, we would in effect be a command and control

[00:50:54] economy.

[00:50:54] So the fact that we don't know when a recession is occurring, and in the case of 08, didn't

[00:50:59] know when we were three or four months into one is a positive.

[00:51:03] But it also is a reminder from an asset allocation standpoint that we have to have a tremendous

[00:51:07] amount of humility here.

[00:51:09] But again, to answer your question, my gut says that if they start cutting in the fall,

[00:51:14] that you can arrest some of this weakness and maybe avoid a recession or probably avoid

[00:51:20] a recession.

[00:51:21] But again, I can't say that with any level of significance or competence.

[00:51:24] It's just a very difficult thing to do.

[00:51:27] I think a lot of this turns out to really be a question that's incredibly difficult to

[00:51:32] answer, which is, is policy restrictive or not?

[00:51:36] And let's assume that it more likely than not is somewhat restrictive.

[00:51:40] You have a pretty inverted yield curve and pretty high short rate, the extent to which

[00:51:44] it's restrictive.

[00:51:45] How much does it take to get back to this imaginary but important neutral level?

[00:51:50] I think Powell said policy is in a good place.

[00:51:54] And I think folks were very frustrated by that.

[00:51:56] He says that a lot.

[00:51:56] But they were frustrated because, well, if it's in a good place, then you're probably not

[00:52:00] doing anything and I'm looking at, as an example, I like this index, the Fed near-term forward

[00:52:06] spread.

[00:52:07] It's policy rates 18 months forward.

[00:52:09] It's a three-month bill rate 18 months forward.

[00:52:11] It's cratered to minus 175 basis points.

[00:52:15] So there's a lot of expectation now, obviously, that the Fed's going to be on the move and move

[00:52:20] lower.

[00:52:21] What I'm just trying to think through is, OK, how does that propagate out to the real economy?

[00:52:26] The easing of policy, of course, a lot of it's already baked in.

[00:52:30] The market's already eased.

[00:52:31] No one's really exposed to the Fed funds rate.

[00:52:34] But 10-year yields are down.

[00:52:35] Five-year yields are down.

[00:52:36] Let me just cut you off and say, this is why we care about financial conditions, credit

[00:52:40] spread, stock prices, volatility, et cetera, et cetera, the currency.

[00:52:44] The whole idea is that the transmission mechanism happens much more rapidly now.

[00:52:49] And the long and variable legs aren't quite as long or variable.

[00:52:52] The way monetary policy affects the real economy happens more quickly.

[00:52:57] And so following stock prices, et cetera, is more crucial today than, say, 1975 because

[00:53:03] of that.

[00:53:03] So your point is entirely taken.

[00:53:05] I would just add about the uncertainty and how difficult this is.

[00:53:08] My favorite anecdote about how difficult this is, is after Lehman failed, I don't remember

[00:53:16] exactly so I could be screwing this up, but there was a meeting immediately after Lehman

[00:53:19] failed and a Fed official in the transcript said something to the effect of, we have to

[00:53:26] wait and see what effect this will have, if any, on the economy.

[00:53:30] I emphasize the if any.

[00:53:32] In this moment where I was a kid at the time, but a lot of us in markets were looking at Lehman

[00:53:37] failing, going, oh my God, if you weren't there, you don't understand.

[00:53:40] But Dean and I were there.

[00:53:41] So we know.

[00:53:42] But at that moment, a Fed official, a Fed president or governor, I don't remember which

[00:53:46] one, at the time said, we don't know what effect this will have, if any.

[00:53:50] And that was, again, after it had failed.

[00:53:52] And it's just, it underscores and has always underscored for me how difficult this is, the

[00:53:57] macro, if you will, in terms of translating it into an investment thesis and ideas.

[00:54:02] You never really know.

[00:54:04] I think that's really well said.

[00:54:06] Armed with every last bit of data and 500 PhDs at the Fed, they really completely misunderstood

[00:54:13] the root causes of the financial crisis.

[00:54:17] They were late time and time again.

[00:54:20] And it's not as if they weren't trying to do the work.

[00:54:22] And I'm also thinking about the ECB in 2011.

[00:54:26] I think they tightened in the middle of 2011.

[00:54:28] Yeah, they raised rates.

[00:54:29] It is tough stuff.

[00:54:31] It's humbling stuff.

[00:54:32] Dan, I want to say thank you for spending the hour with us.

[00:54:36] I know guests are going to enjoy this lively conversation on a day where the market's lively.

[00:54:41] Not in a good way, but it's certainly come to life.

[00:54:44] Thanks so much for joining us.

[00:54:45] My pleasure, Sean.

[00:54:46] Thank you for having me.

[00:54:47] You've been listening to The Alpha Exchange.

[00:54:50] If you've enjoyed the show, please do tell a friend.

[00:54:53] And before we leave, I wanted to invite you to drop us some feedback.

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[00:55:11] Thanks again and catch you next time.

[00:55:13] Thank you.

[00:55:13] Bye.

[00:55:13] Bye.

[00:55:13] Bye.

[00:55:13] Bye.