Hello, Welcome to the Credit Edge, a wiki market's podcast.

My name is James Crumbie.

I'm a senior editor at Bloomberg.

I'm Rob Schiffman, co head of Bloomberg Intelligence's credit research team and technology analysts by night.

This week, we're very pleased to welcome Mike Knopoulis, Deputy CIO at Richard Bernstein Advisors.

How you doing today, Mike, great, rap, thanks for having me road you're here.

Michael is the deputy Chief Investment officer Richard Bernstein Advisor.

She plays a key leadership role on rbiga's investment decision making with his hands on portfolio strategy, asset allocation and investment management.

We cross paths back a few decades ago at Credit Swiss, earning our research chops together, so I'm even more excited for today's talk than I normally am.

Make them feel old, yeah, So happy a new year to all our listeners out there.

We start twenty twenty six with high drama in Venezuela.

Regime changed spot to being big bond rally and there are hopes of more gains there.

But the main event for global credit this year is supply.

In other words, issuance of new bonds and loans.

A lot of that will.

Come from AI.

But Mike, you're a skeptic.

You make the point that credit investors won't get any upside if the boom succeeds, but they'll also be left carrying the bag if it fails.

So why is everyone piling into tech debt right now?

Rob's probably the better person to answer on that front, because I'm a little bit, you know, unsure as to why they're piling into tech debt at the moment, especially you know, exceedingly long dated tech debt.

I mean the you know, technology obviously, as we all know, can change incredibly rapidly.

You know, back when I started my career, you had, you know, mainframe rooms that were massive, and just a few short years later and you know, you have an iPhone where you've got technology sitting in your pocket and those massive server rooms are no longer necessary.

So I'm a little bit confused.

So Rob, I'll maybe throw the question back to you.

Water investors really seeing in technology bonds where you're willing to fund forty year debt on something that you know could be obsolete in five or ten years.

And the way I see it is given where yields are given, where spreads are given, how fast technology moves.

You know, the only answer I can come up with, James is, you know, there's just there's just excess and there's excess liquidity and too much speculation in markets, and credit has gotten caught up in that, and the path to hell is paved with Carrie.

But right now, that's all you've got, so.

Yeah, you know, listen, I My general view is I think that this whole AI bubble is just a little bit of a marketing ploy and it's very much overblown.

The reality is, you know, why is there so much demand for tech credit, Because there's million dollars of demand for capacity that there is an AI revolution debt's going on that's going to drive future cash flows like we've never seen before.

But on top of that, you know, the real difference between where we are now and where we were either in two thousand and eight or the dot com bubble is that, you know, we're not starting with companies that don't have any revenues or cash flows that we're trying to value clicks.

We're talking about the mount rushmore of credits.

So when you think about cash flows today, they're already supportive of meaningfully higher spending.

So if you're worried about cash flows out in the future, even if these companies are making massive mistakes and spending hundreds of billions of dollars on capital that they're never going to see real returns on, credit's probably not going to be impacted anyway.

So I think you know where I think you've nailed it is that this is much more of an equity issue than it is a credit issue.

And it's because we're starting from such a strong place, and you're also just spot on there.

Everyone is reaching for you in these sort of environments, and if you can buy the best credits in the corporate bomb market at levels that are twenty thirty fifty wider than where they were six months ago or a year ago, people are going to do it.

I'm a little bit more interested in where you think things can really go wrong.

Is it the cost of capital goes up?

Is that, you know, the FED shifts from cutting rates to raising rates.

You know, other than just like, okay, there's not as much AI tech demand as that people thought, what are the other exogenous things that really should be making people worry more so about macro credit than I think these names from a bottoms up perspective.

Yeah yeah, I think before I get into what can go wrong, I think you hit a couple key points, Rob that's want to jump on real fast.

One is it's certainly not the dot com bubble.

And I actually i'd go back and even say I think we're kind of in everything bubble at the moment.

You know, it's not just AI.

It's crypto tam stocks, it's SPACs, it's ig credit, it's high yield credit.

You know, you can kind of create a laundry list.

It's it's sport bedding.

I mean, it's it's it's a liquidity.

We live in a liquidity driven bubble that doesn't just sit within AI.

And I think that's an important one because who knows of AI is a bubble?

If it's not a bubble, if it ends up, you know, having the promise that many expected to have, I couldn't tell you, But what I can tell you is that monetary and fiscal policy has created an environment of tremendous excess liquidity has driven you know, valuations across asset classes to you know, levels that I don't think the fundamentals necessarily justify that's actually created a lot of opportunity in areas that you know have been less you know, have benefited less from from liquidity, right, because the capital has been sucked away from those areas and it's created some opportunities in them.

Is it with regards to sort of the dot com period?

I would like in this more to one of your you know, specialties of course way back when it is today.

I'm sure it's more to the telecom side of the equation, not the dot com part.

Right.

So you had obviously all the five roped, the cable lines laid, and excess capacity bill and it was, you know, meaningfully a creative to the economy and to you know, sort of future technology and how we live.

But there's about ten years of excess infrastructure that just sort of laid dormant in the ground until you know, really Internet sort of boomed and traffic boomed, and why couldn't this be something different?

And it doesn't mean companies go bankrupt.

You know, we're not talking about Meta, you know, defaulting on its debt or or you know, Oracle or or Microsoft or wherever you know, defaulting on the debt.

I don't think that's really the concern.

The concern is certainly on equity valuations, as you mentioned, but also it's just something else going wrong.

I mean a lot of this debt is longer dated.

I do think we're in a period of higher inflation that's gonna dent duration.

It doesn't matter whether you're high quality credit or you know, a government bond.

You know, if rates go up, we saw on twenty twenty two what that does to bond price is what that does to returns.

And you know, it's certainly technology, which in and of itself is a long duration asset.

From the equity perspective and from the cash flow perspective, you're betting on future returns, future cash flows to fund the debt to you know, justify equity multiples.

So by nature, technology is long duration in and of itself.

Then you're laying long duration debt on top of that.

If rates go up, if inflation's higher than expected over the next decade, that can really erode eroad returns.

On the credit side.

I would think you'd be more worried though down the investment grade curve, you know, more for triple bas like how bad is it really going to get?

For a triple A or a double A technology name.

Even in that sort of scenario where where rates are higher, liquidity is lower, and demand is lower, you would think that you know, those names certainly could underperform and SPA might be too tight, but they're going to outperform on a relative basis when the rest of the economy is is uh blowing up much more so?

Are there other other spots outside of tech that you have some of the same sort of worries for?

Yeah, I mean in the in the in the credit world, you know, I think there there there are several I get asked a lot about sort of you know, what keeps you up at night and just does private credit keep you up at night?

So that that's the question I probably get asked more more than anything else within the credit space.

Not a lot keeps me up at night.

Be for what it's worth, I sleep pretty well and I'm not worried about any imminent blow up that is going to be you know, two thousand and eight.

Like in fact, I actually think, you know, earning growth is going to be reasonably healthy this year.

I think you know, markets are going to be JUSTPI.

I think you're going to get a broadening.

But private credit, I think in private markets in general, you know, could create some significant liquidity mismatch is out there that down the road, you know, could uh could cause some some sleepless nights.

And it's not necessarily a default story as much as it is liquidity story.

And uh, you know, we've seen, you know, from a few high profile endowments and other institutional investors where you know, you get capital calls and commitments and you have to sell what you can in order to fund that, and you get gated and things of that nature.

And you can envision a world where private credit, private equity, et cetera ultimately leads to weakness and credit markets and you can't get out and uh, and that would sort of be you know, for me, I think more concerning than high quality credit.

Certainly, I believe it or not.

I'm not a huge bear.

I actually think when you get the next spread widening event, meaning that we're not talking about, you know, Liberation Day, why it to you know, one hundred and forty or something whatever it was one hundred and twenty on IG, When you get to one sixty five one eighty five, the next time that happens in IG when you get to six hundred, seven hundred, eight hundred basis points high yield, which will inevitably happen, right, You're going to usher in a golden age for credit.

I think we're gonna have five to ten years of exceptional corporate bond returns where you rival, if not outperform equity markets.

So I'm actually really bullish over the long run.

I can get into why I think that is in just a moment, but I'm really bullish corporate credit long run, just not at seventy nine basis point IG spread, just not at you know, technology companies funding, you know massive, you know hard asset, real estate investment, you know, for forty years.

Like that, to me is just not really making a lot of sense.

You know, we're experienced enough that when we talk about two thousand and eight or the dot com bubble, we live through it.

There's a lot of people out there that have no idea what we're even talking about.

And I think some of the things that they see is, you know, James starts out with Venezuela.

Today, stocks are up, spreads are tighter, you know issuance, and the IG market is off to a record Like what has to happen to shake this market.

It just seems like, no matter what the news is, spreads don't want to go meaningfully.

What I was also one of the way in with my trouble trying to reconcile in my mind the on the one handle thing, we're in everything bubble and on the other hand, you sound pretty bullish.

It's the ultimate strategy.

That's why he's been around for so long.

Yeah, exactly what's what live survived?

No, I ambles just in areas that you wouldn't necessarily think, particularly in inequity markets.

You know, they're there are certain areas throughout the world that we think are attractive.

There are you know, dividend payers where nobody's really paying attention, European markets quality.

You know, these are all areas that I would say are not in that liquidity driven bubble where they make a lot of sense fixed incomes.

It's it's a little bit harder to find, you know, the value it has existed over the last year.

I mean, we really liked agency mortgage backed securities last year.

They offered a really good opportunity.

We thought they you know, they uh, there was a good amount of spread and spread compression that could happen, and you know they returned eight percent last year.

I think there's opportunity and unis at the moment, particularly the long end of the Muni curve.

So it's not like opportunities don't exist or that you have a liquidity evaluation bubble in every single asset class, but there's certainly My point is it's it's more than just AI, right, and that doesn't mean that there is an opportunity elsewhere.

There certainly is in terms of your comment Rob about you know us living through eight us living through the dot com you know bus as well.

It is fascinating to think, you know, there's a generation OF's hedge fund manager strategists, heads of desks that have never seen a true down market, that have always you know, been rewarded for buying the dip.

That scares me.

You know, I don't count COVID.

COVID was lasted a day and a half.

You know, you've never really had a true recession.

I actually think I would.

I would would have been like the most vindictive central banker had I, you know, been the chair of the central bank, like when SVB and First Republic, you know, when I just would have let it all burn, you know.

I think that was an opportunity to reset the clock, sort of let the forest fire, you know, burn out all the brush and let new growth, you know, you know, come up.

But of course we didn't do that, and it kind of sparked this latest liquidity driven rally and and here we are.

But it is interesting.

I think that lack of experience of trading around real crises could exacerbate issues within credit markets and within markets in general.

When we have our next procession whenever, whenever, that may be rates.

So you seem to think that rates might go up, which I think the market is mostly betting they'll go down.

And if you listen to the most Trumpian fed governor, he thinks they should be cut by a hundred bases points this year.

So how how do you feel about your rates?

You know, obviously there is inflation.

We don't have a lot of data to actually, you know, figure out how much.

But jorly, the next move is a cut.

We're going to keep cutting and that's going to be great for duration.

It's going to be even more equidity.

That's going to pump up the bubble.

So there's there's there's two schools of thought on this, and I think both can be right.

It just depends on your time frame.

You know, it was funny the Monday before the FED cut September of last year, twenty twenty four, before the first set of cuts, you had a lot of market pundits and pms coming on Bloomberg and other shows saying, now is the time to buy duration.

When the FED starts cutting interest rates, you know you want to actually go long duration, go out the curve.

I think that's very lazy analysis.

The question has to be why is the fair cutting interest rates?

If the Fed's cutting interest rates because you're going into a recession or you're going into a growth slowdown, then certainly by duration.

But if you're actually cutting interest rates into a strong economy, into a high inflation environment, you actually want a cell duration and get underweight.

And that's exactly what you wanted to do, and in twenty twenty four and so far, that's by and large been what you've wanted to do.

In twenty twenty five and into twenty twenty six as well.

The Fed's cutting, but inflation isn't meaningfully going down.

The Fed's cutting, but you're over four percent in GDP.

The Fed's cutting, but earnings growth is still in the mid teens.

And in that environment, should you know, the FED cut one hundred bases points in twenty twenty six and you not have unemployment rising, should you not have inflation falling, then I think you're going back to five year five percent on the tenure.

Now.

Of course, the the other side of that is that if they're cutting interest rates and growth is slowing and inflation is splung, well, then by by by all means you know rate should fall.

But I don't see anything the data to suggest a significant slowdown in growth in inflation to justify the FED cutting straight.

So I think one of the biggest risks out there to kind of go back rob to your question earlier, is that the FED remains much tighter than the market expects, and you can almost envision and this is certainly not a base case, so I do want to mention that.

But you can invention an environment where the FED has to not cut because inflation stays elevated, but earnings growth lows, and you kind of get a light version of twenty twenty two, you know, where sort of you get high correlation amongst all asset classes, and you know, maybe it's not big negative returns like you had in twenty twenty two, but you know, the sort of very lukewarm or or minimal returns in twenty twenty six.

Again not necessarily a base case, but certainly within the realm of possibility and.

What's sort of opportunities to think I would create for reddit though, if we have rising all in yields, there seems to be like a pretty deep investor bid for yields even at these levels.

So does that mean credit how performs equities if yield your one hundred basis points high?

So yeah, not necessarily because you just don't have any spread cushion at all to absorb that.

But I do think you could definitely make a case for floating rate debt.

You can see clos do phenomenally well.

So I think the high quality floating rate which you know floaters in IG right, we'll do very very well in that environment as well.

So I just think loadation ig loateration, even high yield potentially depending how bad that in this theoretical, very theoretical, non bas case world, depending how bad the earnings deceleration is, you know, you can make a case for all sort of shorter duration or floating rate fixed income out performing equities.

I think that's actually pretty reasonable, and that's what you saw in only twenty two.

In that environment, you have to love sort of the you know, floating rate securitized market, something like you know, triple A clos or something like that.

You also say in your investment philosophy that you'd like to focus on corporate profit cycles rather than economic cycles.

Do you look at profits, liquidity and investor sentiment valuation?

What are you saying there right now?

Yeah, so you know, it's it's a good It's it's really the most and one of the most important things that that define our philosophy and the idea of looking at profits versus economics.

In the credit side, I would say, you know, you know, economics matter a lot, right because the old at the end of the day, you know, you have to be able to make your interest payment and to ultimate payment of of principle, right, and so as long as you don't default and you can withstand mark to market, then you're going to be good.

And recession or not recession is going to be the big determining factor of that.

But ultimately, you know, in terms of spread widening and marked market risk.

Profits matter above all else, and you can have, like in twenty twenty two, a period where you have a profit recession negative you're on your earnings growth, but non economic recession and get really poor marked to market returns in asset classes.

Where are we today declining earnings growth but not weak earnings growth.

We think the next several quarters, so Q four when we got the data Q one and Q two, we're gonna come off of a peak that was Q three, So we think, you know, mid teens or so is where Q three ended up on a year of year basis.

I think Q four is going to go down to sort of you know, twelve twelve thirteen percent your earn your earnings growth, and we think by Q one Q two of this year you're gonna be high single digits in terms of earnings.

That's still pretty good.

We're not thinking you going to have an earnings recession, but an earning slowdown for equity markets.

That that earning slowdown does matter.

For credit markets, it matters less.

And so you know, one thing that we kind of chatted about before you know, we started recording here was you know it seems like I'm quite bearish.

And it's funny because in credit markets, you know, we don't need a spread widening scenario to outperform.

I can avoid corporate credit altogether.

And it's not like I want or need or expect spreads to blow out.

You know, I always go back to the mortgage backs scenario, mortgage backed securities, where I can buy agencies for the same yield, actually for slightly more yield than the IG broad market, and not have any of the downgrade risk, any of the you know, corporate risk.

I'm in a government, government guaranteed security.

So why would I not if I had the option to not just have to own corporate credit, why would I not do that instead?

Right?

Is that what you're doing?

That That's what we've done.

Yeah, so we're overweigh mortgages and we actually own in our portfolios, believe it or not, no corporate credit, which is which is sounds crazy even on the show.

I know, well to discuss I suppose why we don't, but that that sounds good.

But you know, this is a relatively new position for us, and we came into twenty twenty five overweight credit risk.

We came into twenty twenty five overweight credit risk through triple B colos.

We are very overweight credit risk coming out of COVID through interes, straight edge, IG, short duration, high yield.

So we have like corporate credit for the bulk of this sort of profit acceleration period, this liquidity driven environment.

But when spread's got you know, really below ninety, for us, the relative value proposition just didn't make sense anymore.

And you know that's for me.

That's that's really what this is about.

It's it's not about you know, the expectations of defaults really accelerating or massive spread blow.

If those things happen, we'll obviously do well.

So you jump back in if it came.

I don't know if you want to go down this route, but you know, we invest in in ETFs, they mentioned earlier, And I actually think that ultimately the way credit investing is going to work and fixed income investing is going to work is going to be almost solely through ETFs because of the ability to get out completely and then to scale back up to a meaningful weight within a portfolio without ever having to buy or sell an ill liquid you know, bond.

So right now you have zero exposure to i G or high yield direct interns of pure corporate and that was all done through ETF.

All trades all done through ETF, So you can get out of it in a day, get back into it in a day.

And let's say IG went above ninety spread, what is high yield have to go above?

Will you just be interested?

So for me, it's a combination of two things.

It's it's valuation, it's where we are within the within the the profit cycle.

Ninety would not wouldn't do it for me because we're in a discelerating earnings environment.

I think there's some risks out there.

I think rates are going to go higher, et cetera.

So I probably have to see, you know, either reaccelerating earnings or wider spreads to really want to earn corporate credit.

Here, for me, there's sort of some no brainer levels at which you buy.

Doesn't matter what's going on from from a macroeconomic or profit perspective.

You just are supposed to buy it because you know, over twelve eighteen twenty four month rising you do quite well.

I mean, that's much why we've been in a very long time.

They bring like one sixty five and right, I mean these are levels that like stout, I mean Rob's there's the levels that sounds ludicrous.

Yeah, high yield's a little bit more interesting because seven hundreds of is a danger zone and high that's like the rule of thumb.

But when you actually run the the analysis, you know, if you buy a high yield that's seven hundred, you have about equal odds about performing or underperforming the broad market over twelve months because either you're going seven hundred going to north of one thousand.

So the the trajectory of how you get to seven hundred, are you going up to seven hundred, are you coming back down through seven hundred?

It matters, right, But yeah, I mean if you're in that seven hundred range seven to fifty ranch becomes a lot more interesting.

If you're in that one one fifty one sixty range, I think IG becomes a lot more interesting.

Or profit growth starts to reaccelerate, then you feel more comfortable in the carry.

But what do you think in the broader picture of AI, not not from the tech company perspective, but from the efficiency perspective over time?

Don't you think that as AI gets built out and there's much more compute capacity that it's going to make companies meaningfully more profitable, and that should drive browning earnings growth, higher multiples, theoretically tighter spreads.

I think I could answer that question.

Yes, I could answer it no, And it's just conjecture.

I just don't think we know, you know, I think we were all saying that about the Internet.

And if you look at you know, if we're on TV right now, it could throw a chart on productivity.

You'd actually see productivity if you squint at the line has actually gotten worse.

Uh since since the advent of the Internet.

I don't know.

Everybody does not the internet where productivity has gotten worse.

You can only use your imagination, but certainly hasn't enhanced productivity.

AI may be one of the greatest productivity booms ever and that drives you know, profitability and ultimately the ability for for multiple expansion.

It may be a dud.

We I don't think you or I know that yet, right And so I think, right now, it's it's all story.

And until I start seeing the productivity gains, until I start seeing the benefits of AI, yeah, I'm gonna I'm gonna hold off.

You know, I'm investing in that sort of that philosophy.

You know, in fact, you're starting to see a lot of companies that have invested heavily in AI buyed workers thinking that is going to add to productivity, enhance profits, et cetera.

And then had to say, listen, roll it all back and say this was not what we thought it was going to be.

It's not ready for prime time, and we have to hire back workers and that's act be an expense, right, And uh so I just don't think the technology is there yet.

I don't know.

We'll say, why do.

You think everyone else though, is so complacent?

Like you know, we just did our credit conference in in December, and you know, most other strategists they're just calling for a reasonably narrow range of ig with you know, low but positive all in returns, not necessarily significant outperformance.

But but there doesn't seem to be just any fear And like why is that?

Like certainly from the bond world, like you started out saying, the ultimate upside is you just get paid back.

Right, there's always never a huge upside, But there's there's a level of complacency that exists right now that you know, it just seems like it's unbreakable, and we know that's not right.

So what are those couple of things that you just think people are missing.

Well, I think time has you know, time of no major issues creates complacency.

You've probably talked to the majority of those investors and they'll say, oh, well, the FED will bail you out.

You know.

It's like to the conversation earlier that with Trump or Trump or whatever, right, And the problem is that becomes much harder to do if you have higher inflation.

And I will be the first to admit if inflation goes back down to two percent and the FED is able to cut interest rates and you know you have three to four percent GDP, you know the party is going to continue on for a lot longer.

If Goldilocks walks down the hallway, things will be great.

Well, but then that's I think that's right, and I think that's I think that's sort of the base case for most investors.

There's a Bloomberg article.

I don't know if it's today yesterday, right, And I can't remember the number of investors, so you might be able to quote me James on this one, but it was like I think it was of six hundred people were interviewed, surveyed, and sixty percent thought you'd get twenty percent or more return in the equity market in twenty twenty six.

It's like twenty percent plus is now the new standard expectation.

It ten years ago, Well, I guess now it's fifteen years ago.

Got time time five?

So fast?

But after the financial crisis, when RBA was actually founded, you're saying, we were saying at that time, you know, ten percent returns in the equity market are doable, and no one believed that because think about it, you just came off of a decade of basically zero return for the S and P five hundred and ten percent sounded like this ludicrous idea.

Now, if you were to tell someone I expect ten percent returns, they say, well, that's terrible.

You know, I expect twenty percent every year.

Year after a year, I'm gonna double my money every three years.

And that's just those expectations are unhinged with reality.

And when you look at credit spreads, when you look at equity valuations, when you look at the sentiment out there, it's very classic signs of excess.

I don't like to use the word bubble because bubble just implies such like you're gonna have an imine pop.

I don't know when the pop, if there's gonna be a pop.

If it's gonna pop, the year is just gonna be deflated.

Who knows.

But it's just such obvious signs of excess when no one is bearish.

You know, it's funny, we don't expect a recession this year, but no one else does either.

Everybody was expecting a recession last year.

No recession is ever predicted.

Right if you're if the strategists and the market is predicting a recession, it's not happening.

I start to worry about times when everybody's you know, expecting good times, and that's certainly right now.

And again I think that comes from time.

It's been such a good several years.

People are taking their eye off the ball and listen.

I mean, what a fixed income markets return last year?

The Bloomberg I had was probably seven seven and a half percent return.

I mean, then in a normal year, that's like a pretty good equity year.

But at the same time, people are digging deeper strin and chase returns and risky of stuff.

You know that we're talking on the show recently about double be dlo branches and equity light returns in other parts of the market, to which I always say, do you mean twenty five percent?

And they say no, not much er than that.

But nonetheless, people, uh, do you see any signs of broth in credit markets of people, you know, undue risk taking, risk being mispriced, that kind of thing.

So, you know, I think it's again, I think it's pretty pervasive in credit markets.

I think a lot of that has gone to private credit.

I think that's sort of where you've seen it the most.

The COLO one is an interesting one.

I mean, there was a time for many years where clos across the capital structure were cheap.

That's pretty much gone at this point.

So you know, almost anything you know today with a spread is is sort of you know, trading cheap.

The one area that's not.

I would argue, you could make the arguments maybe muni's in longer term munis, but yeah, I mean, I think everybody's reaching for yield to some degree, which is kind of ironic, right, because you don't need to reach for you That's why I don't.

That's where I'm you know, out of touch.

I feel like with.

Investor IG bones five percent?

Why yeah, why do you have to stretch one hundred percent buy IG bonds at five percent?

You can buy you know, treasuries, you can buy agency mortgages, you can buy munis.

I mean, there's you don't need to reach for yield to get reasonable yield.

But we've become so as Rubb says, complacent.

We are so used to twenty percent nexty mukeets.

So we need to be stretching.

We needs to be pushing.

There is read out there not much be it.

Well.

I think that I think that's right.

I think that's right.

But that idea of higher yields will ultimately, as I mentioned earlier, ushering a golden age for corporate credit, because quite frankly, I don't think corporate credit has been really anything special in terms of returns over the last several years.

If if you look back obviously to December thirty first, twenty twenty one through today, you know, pretty lackluster, right because of what happened in twenty twenty two.

But I think you know that when you have zero interest rate policy, when you have quantitative of easing, when you have a fifty basis point ten year yield investors will do anything and give up any protection to get any sort of yield.

So all the power goes to the borrower and sorry, the lender, and the barer has like basically no power, right when you have higher yields, risk free rates, right, and maybe a little spread on top of that, because you actually get a little maybe bit of spread widening.

At some point, the power really shifts from the borrower to the lender, right, because now you can go and you can actually find alternatives you don't need to reach.

You can set your covenants to what you you know, you expect and what you want them to be, and you just you start to get a little bit more power.

And that's a good thing, right if you're if you're a lender.

And so I think I think the power is going to shift pretty meaningfully.

And I think, you know, if I think about the next five to seven years in corporate credit, there's gonna be some really really good opportunity.

It's just, you know, seventy nine bass points, I'm not sure it's there today.

Do you like ig floats?

Do you like CEE loans?

Do you like leverage loans?

So leverage loans are an interesting one, not so much.

You know, the fall rate today and leverage loans are probably a little bit you know, bad average, maybe a little bit higher than average, but you know, four and a half five percent.

We've seen some pretty poor recoveries recently in the leverage loan space.

What's interesting about loans is that you obviously typically want an unfloating rate when rates are going up, right.

I actually think you could see loans outperform if the FED cuts interest rates because the interest burden it's you know, I think difficult for some of these companies that don't have really strong earnings.

You're seeing it same same sort of dynamic within the small cap space and equities, where you know, the earnings growth the the operating leverage hasn't been able to make up for the financial leverage, right, And that's actually, you know, usually not the case.

Usually when rates are going up, your ernie's growth is outpacing your interest expense, and so small caps do really really well.

Leverage loans do well because the floating rate nature and you know, the earnings growth more than makes up for the extra expense.

You get both the higher yield and stronger fundamentals.

I actually think leverage loans could do okay in a falling rate environment where the FED is cutting interest rates.

But I think if the FED were to stay tighter for a period of time, you know, loan defaults could accelerate and you could actually have a harder time in the leverage loan market.

So for me, given our rate view, given that we believe earninge's growth is reasonably strong but declining, I'd rather own higher quality floating rate or higher quality load duration paper than floating rate leverage loans at the moment.

Have you have you looked closely at the credit the fault swaps markets recently.

You know, most people didn't know the term CDs until just a few months ago, when you know, places like Bloomberg started talking about Oracle CDs.

But do you think that that that is a market that it's foreseeing what's happening?

Is it not liquid enough, is it idiosyncratic or is it just sort of more of a blip on the on the radar, And how do you take advantage of you know, certain names that have widened significantly over the last few months.

Yeah, I mean, I think there's a lot of information value in the credit derivatives market.

You know, obviously it was a massive market pre crisis kind of died per period of time.

And you know what's interesting about the credit drivator's markets.

Of course, the common way to describe it for those sort of who aren't financial experts is its insurance, right, and so anytime you start to see you know, more insurance product out there, I think it is a little bit of a warning sign.

And the smart money, if you want to say that, and quotes you know, are are betting against parts of the credit markets at the moment through doing that through the derivative space, and so I do think there's information value there, But I you know, for I think it's probably going to be forever a you know, since the financial crisis, I think, sadly, I do think there's a good use for it.

I think it's going to be a somewhat of a niche market on specific companies or you know, indices obviously, and probably not grow into the same sort of thing that it was in the past.

So I think it's important.

I think it's good to keep an eye on.

I think it does give us some sort of information about the headiness and the toppiness of sort of the market.

But I'm not sure if we you know, there's much more to be said about it.

I think you mentioned the name Rob Oracle.

I'm going to ask you both people are talking about it potentially falling to junk the market.

You know, some of the bonds are trading very high yields.

It's tripically flat right now, so it's got a bit of a way to go in tons of downgrades.

But if it could it be cut to junk and what happened if it did ters the high heeld market a hundred billion dollars of new high yield.

Debt robs the expert on this one.

What what I would say is nothing is infallible.

And you know, real issues and credit markets typically don't come from lending to junkie companies.

They come from, you know, lending to companies that you know, investors thought were infallible and then you find out later that you know, they are in fact fallible.

That's not to say that Oracle is or is not, but you know, it would be a tremendous amount of supply for uh, the high yield market, you know, and and and that would cause some disruption for some period of time.

But I also have the belief that markets are pretty efficient and quickly sort of you know, will adjust, but you know, we'll see.

Yeah, even Superman has a script, and I I don't think Oracle is going to junk a lot of things for them to pull out of their their their hat if they if they need to to stay there.

But listen, it needs to be a worry you have a company has one hundred and eight billion dollars a debt and probably needs to borrow fifty plus billion dollars more.

It should be a concern.

I just think some of those concerns appear overblown when there's so many they have so much optionality in terms of where and how they can finance.

You know, I think there might be a poster child.

It's not the same exact example, but you know, about a year ago, this same conversation was had with Intel.

Intel spending so much money it was negative free cash flow, and the concern was that they were going to go to junk and lo and behold, we're seventy five beeps tighter now post Liberation Day and nobody's talking about them going to junk.

And they have you know, friends in high places like in video writing five billion dollar check.

So some of this world of tech, you know, is a bit ancestral, right, People sort of feed on each other.

So when everyone else is relying on each other, the ones with deep pockets ultimately I think will probably end up bailing out the ones that have need.

So I think it creates great conversation and real opportunity potentially for for people to helpperform.

But like Mike says, listen, nobody knows what tomorrow is going to hold, and all we can do is make our our best uestimate on the probability analysis.

Probability now says that man, that is a big downside risk.

But to me, that probability is very low.

You started getting talking about I think you did use the web bubble.

I think we did say everything bubble driven by liquidsy and you're looking at a ton of different types of asset.

But but sticking with credit, where is the best opportunity right now in terms of you know, relative value global credit?

Now, it's a it's a tough it's a tough question because I just don't see a lot of opportunity out there.

I think European i G has traded you know, cheap to U S i G for quite some time, and you know, could continue to to provide some opportunity.

You know, I do like your Europe, but it's in the credit side.

It's no, we're not we're not seeing a lot that we love at the moment.

I mean now spreads across the board or in the low you know, the single digit to very very low double digit sort of percentile ranges as almost like a it's an unwritten policy at URBA.

Then in the emerging market side, it's it's we basically look at hard currency.

We only invest in hard currency.

I don't want to take the FX risk and fixed income.

You know, one of my job at the end of the day is to get the spread call right, you know, And you would hate to get the spread call right, the yield to call right, and then blow up your return because you got the FX call wrong right.

So you know, a lot of return can happen because of currency and FX and in emerging markets.

But I probably wouldn't go there just for the reason that we won't.

I won't go there in this podcast because because we won't go there as as as a firm.

But yeah, I mean Europe and I G I think has offered some opportunity not corporate credit, but we think long term unis offer some opportunity and and that's almost you know, in more in mortgages again, but again not corporate credit.

Corporate credits in general across the board is pretty rich.

What's the one idea if you know you you gotta make you have one?

You got one shot this year?

What what is it?

And that's across what anything?

Anything?

And short best idea?

I really like, uh, European equities.

That's that's that's where I would that's where I would go.

Weaker dollar helps, I think you get fiscal stimulus, Monetary policy is reasonably supportive, and earnings growth is accelerating.

Any sectors specifically that's.

Not necessarily sector related, but sort of quality stocks tend to be undervalued at the moment.

If you sort of think about like a total estimate, total return estimate of being you know, expectations for you know, your earnings so EPs growth plus your dividend, and you look at that as sort of like, okay, that's should be your sort of you know, poor man's idea of a total return and you look at that versus pe nothing's better than high quality European European stocks so for me, I think that's probably our best idea for this year.

The European ig as I mentioned earlier, sort of fits within that theme as well and still gives you some value relative to to U S I G.

So I think that's that that's going to helperform.

And what's the I think I know the answer to this, But what's the on the flip side, what's the space that you're most concerned about, or at least you think is going to be the biggest underperformer.

Yeah, I mean I still think that the US tech equity complex, you could see some rotation away from that.

You know, last year was a lot of hype around AI and sort of you know, bidding up multiples and getting multiple expansion on promise.

This year could be a disappointment on that.

Earnings growth for what it's worth within the Max deven X and videos and videos sort of its own you know, world earnings growth for Max deven is not particularly particularly magnificent.

I mean, it's actually been coming down now for two years from very high levels.

But there are a lot of other a lot of other stocks within the SP five hundred that are growing earnings faster than Max seven and Uh, you know, they don't trade anywhere near the multiple.

So I think I think the mark is gonna wake up to that this year.

I think you're gonna get a little bit of air taken out of the you know, dare I say bubble and uh?

And I think tech is going to you know, it's going to kind of come back down to earth a little bit.

This year still could do well, but I think other areas well perform.

Right, you're not looking at those very high coupon venezuela in how currency as well.

Yeah, that's well, that's a little hard.

It's hard, a little hard to invest there.

In tons of the potential for the markets to flip.

And you do kind of hinted this throughout discussion, you know that spreads could blow out.

What would be the one thing you think could trigger it?

Is is it something you could pinpoint or is it really just a blacks one type event?

Well, no, I think there's a lot of very reasonable things that can cause spreads to widen this year.

I think, you know, one of the biggest risks I think is a mistake, or maybe it's not a mistake, just a repricing of expectations around rate cuts.

And what the Fed's going to do and what that means for rates, and you know, I think that can cause a lot of disruption across across markets and cause spread widening.

You know, typically in rates go up, what happens usually spreads tighten because you are coming from wide spread levels.

But when you come from very very you know, nearly forty year tight levels, if rates go up, I think you see wider spreads and could see wider spreads, you know, to a pretty meaningful degree.

And for me, I think that's a pretty reasonable chance of happening.

And the other one I would say is just a bigger growth slowdown than what's expected.

You know, I think everybody essentially thinks that earnings growth is going to accel economic growth is reasonably strong.

Certainly from the Wall Street perspective, I think that's sort of the consensus.

And if you get some disappointment around earning his growth and economic growth, you know, I think there could be periods of spread widening.

Depending how bad it is, we'll determine how much of the spread widening you get.

But if you have that at the same time as you have a tighter than expected FED, then then you could get out to those sort of one forty one fifty type levels.

Great stuff.

Mike con topless with Richard Bernstein Advisors.

It's been a pleasure having you on the Credit Edge.

Many thanks, thank you very much, appreciate it.

And to Robert Schiffman with Bloomberg Intelligence, thank you very much for joining us today.

Thanks James read more analysis, read all of Rob's great work on the Bloomberg Terminal.

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