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May 23rd through the 25th, the Qatar Economic Forum powered by Bloomberg returns to Doha,
convening voices that are spotlighting solutions to some of our most pressing global challenges.
Speakers include CEOs from the Boeing Company, Miramax, VINFAST, Blockchain.com, Sundance Institute and more.
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Hello and welcome to What Goes Up, a weekly markets podcast.
My name is Mike Regan.
I'm a senior editor at Bloomberg.
And I'm Voldana Heirk, a cross-asset reporter with Bloomberg.
At this week on the show, well, the recent failure of some regional banks has turned investors' attention
to the health of the credit markets and the possibility of a so-called credit crunch
in which the availability of debt financing becomes drastically reduced.
So what kind of shape are credit markets in right now and what can we expect for the rest of the year?
We'll get into it with a veteran portfolio manager in the fixed income markets.
But first, Voldana, I have to ask, have you done all your Mother's Day shopping?
I haven't bought anything for anybody.
Nothing for not anybody, Mom.
Not for my Mom, not for my husband's Mom, not for his grandma.
Nothing.
Nothing.
You're a terrible daughter.
I'll just buy flowers on the day off, I guess.
OK, but we are flying to Florida to see my husband's grandma.
She's 99.
Oh my goodness.
She's turning 100 in August.
Oh my god.
So that's the gift, really.
OK, OK.
Have you done your shopping?
I've got a reservation for my wife.
That sounds nice.
That's as much as you can be.
You're making me feel bad.
You're making me feel a little bad.
Of course I waited till last week and there's no reservations left.
So I have a 330.
No, you don't.
The worst time.
It's like not brunch, but also not dinner.
What is it?
I don't know what it is.
You're lucky the restaurant is even open.
I'm trying to convince her it's the new hip thing.
Everyone's brunching at three times.
It's early, early bird.
Yeah, the earliest bird.
It's a late night brunch.
Nice.
Nice.
That's perfect.
Anyway, our guest is waiting for us.
I do want to bring her in.
I'm so excited to have her on.
I've heard her speak so many times and so happy she could join us for the podcast.
It's Elaine Stokes, executive vice president and portfolio manager and co-head of the
full discretion team at Loomis Sales.
Elaine, thank you so much for coming on the podcast.
Thanks for having me.
Like I mentioned, I've been to a bunch of you guys' events.
I've heard you over the last couple of years talk about your many different outlooks, but
maybe we can just start with you just giving us a quick overview of who you are and what
your role entails.
Okay.
Well, I am obviously, you mentioned my name, Elaine Stokes.
I've been working at Loomis for 35 years this week.
I am part of what we call the full discretion team.
What we manage is multi-sector portfolios.
We take a long-term opportunistic approach, so active management, which has been a little
out of hope as of late.
I think something that people are eyes open to again now that we're starting to see some
value in the market.
Elaine, I know you keep close eye on credit markets in your role.
There's been so much talk lately after the failure of these regional banks about a potential
quote unquote credit crunch.
So far, I'm not seeing a lot of hard data evidence of it.
If you look at, say, high yield spreads, they seem pretty well contained.
I know that Fed Senior Loan Officer survey showed a little bit of an increase in tightening
of standards, but nothing sort of through the roof.
They're obviously our pockets of weakness, commercial, real estate, mortgage-backed securities,
those spreads are getting pretty wide.
But I'm curious how you're thinking about sort of the macro conditions for credit right
now.
What's the real risk of a credit crunch where supply of credit gets greatly curtailed because
of all these issues that we've seen in the banks?
It seems to us that what has happened and what we're really seeing out of this banking
turmoil, I'll call it, is that we have seen a proof point that all these moves by the
Fed are finally working.
But they're working in people's risk appetite going down for things like new technology,
crypto, even some private equity.
But we're not seeing it in our day-to-day life, right?
We're not seeing it to the extent that you would expect to be seeing it in normal day-to-day
borrowing.
But my fear is that if we continue to have equity markets telling us that regional banks
aren't safe, then regional banks and banks in general will then continue to tighten and
continue to tighten their standards.
And that's going to start to hit those small and medium-sized businesses.
If that happens, I think we all have a different view of what the recession will look like.
Being the week prior to Mother's Day, I and regulators liking to come out and give us
something on Sundays.
I was thinking that maybe that would be the regulator's gift to us, is that they gave
us something that would quiet down this constant, let's take a run at the regional banks and
then settle down, take a run at the regional banks and settle down, and would get something
that would put that potential crisis of confidence.
That we're all looking at and put it to bed once and for all, we have strong banks and
it's a confidence game and we need to do something to swelch that confidence or it is
going to start to affect the economy.
So you said in, obviously a lot rides on a resolution to the banking issues.
How plausible is it to actually see something like the universal deposit insurance or how
do you actually see things playing out going forward?
You know, I really think a lot of it rides on watching what happens to the equities of
these regional banks because that's the only place we're still keeping our eye on and watching
where that fear is coming.
If we can get to a steady state, maybe we're going to have an orderly merger or two beyond
what we've already had, then I think we're past it.
But if we, I think the next two weeks are critical and having the negotiations in Washington
kind of hanging over our head at the same time definitely has the ability to make markets
overreact.
You know, and obviously it all comes back to interest rates and the path for the Fed this
year, Elaine.
We did get CPI data this week, headline number 4.9%, they had about 1 10th from the previous
month, core at 5.5% also down about a 10th.
But really not aggressively normalizing the way it did say last summer.
What's your big picture view on where the Fed and rates markets are headed in general,
given this inflation scenario that the worst it seems to be over, but we really kind of
seem to be plateauing almost at some pretty elevated levels.
What do you expect for the rest of the year as far as rates and the Fed?
Yeah, so because of the short term reasons we already mentioned, right, what's happening
with the regional banks and the debt selling talks, I think the Fed will absolutely pause
at its next meeting.
But longer term, our view is that there are some big picture secular trends that are going
to keep inflation elevated.
Not necessarily elevated at 5%, but I think it's going to be really, really hard to get
to target.
We believe that the Fed is going to be a little slower to react in cutting rates.
We think the market's a little bit ahead of itself here.
The market I think is pricing in one of those first two short term items going horribly
wrong and the Fed having to come in and really cut.
We think that what we refer to is the 4Ds, right?
We have demographics working against us.
We have de-globalization working against us.
We have decarbonization working against us in growing deficits, right?
We have those four things that we all are familiar with that are all potentially inflationary.
It's going to be hard for the Fed to take the foot off the pedal completely.
It just doesn't feel like a strong cutting cycle is in our future.
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Can we talk about what the market is expecting because the market is pricing in cuts as early
as July, which is in a couple of weeks basically.
What is behind that thinking there?
Then almost everybody I talked to is that is not going to happen.
The Fed is not going to be cutting in July.
The only way that really makes sense to me is that the market is saying in putting pressure
on the government to get its act together and come to an agreement or to figure out how
to make this bank situation go away.
I think I got some market saying, hey, we're here telling you to get your act together
because it doesn't make sense given the economic numbers that we're seeing.
We're still seeing some up, some down, a very mixed bag of economic numbers and still have
too many good potential strong drivers of this economy.
That does not make sense.
I just think it's the market using whatever lever it has to get the attention of the regulators.
To force the Fed's hand, I guess.
Elaine, it's kind of a fascinating time to be surveying the fixed income landscape because
there's some tremendous opportunities in the front end.
Even in a money market fund, you can get 5% basically yield right now.
I'm curious.
Where are you seeing value?
Is the front end the place to be right now with these high yields?
What are you looking at as terms as attractive corners of fixed income right now?
What I love about fixed income is you kind of have to triangulate.
It's great.
We have over 5% in the short end, up from under 2%.
For the last several years, any of us would look at 5% as, wow, that's a nice healthy return.
Let's not forget that inflation is still around 5%.
If you take more risk, get involved in high yield, we're talking about 8.5% to 9% type
yields.
That's really attractive.
The yield level has gotten really interesting.
Spreads have also gotten much larger than they were a year ago.
We've pretty much almost doubled in spread levels that we're getting from our tights.
That means that we're getting paid a bigger premium to take on some risk.
Is it enough that it looks like we're getting paid as if we're in a downturn or a recession?
Not quite.
But the difference right now is that the dollar price is lower.
We have been living in a market where dollar prices for bonds have been well over par
for a very, very long time.
And now we're looking at dollar prices that index averages are close to 90 cents on the
dollar.
Not only can you buy that bond at the 5% or the 8.5%, but you also have the potential
to go up those 10 price points if there's any type of positive economic news or specific
news.
So when I look at all three together and really think about the technicals in the market,
and when I talk about the technicals in the market, what I'm really referring to is the
lack of issuance.
We've had very, very low issuance levels over the last few years.
Those have gone private and that has made a big difference in the markets and the number
of buyers out there looking for product.
So when I consider all that together, I think that this value in this market and it's in
the short end, yes, but we also can go down the risk spectrum a little bit and pick up
some nice low dollar price bonds that have the potential to go up in a lot of excess yield.
Elaine, we had this very interesting interview with Bill Gross earlier this week where he
said that he really likes one month T-Bills because he thinks the debt ceiling issue,
although it's a risk, that it will get resolved.
And so I'm curious, like if somebody came to you, if a client came to you and asked
you about T-Bills, what would you advise them?
And this is my sort of runabout way of asking you how you're managing and thinking about
the debt ceiling issue.
I look at it as a bump in the road.
We've seen this movie before.
Yes, it feels a little bit worth.
I was just noting that credit default swaps and US credit default swaps are now wider than
Greece, Brazil, Mexico, like I could go on and on, right?
But when all is said and done, everybody in that room knows they have to come up with
some type of agreement.
The alternative is too bad politically for both sides.
Do I think it makes sense to be super short?
Yes, there is value there.
But what I would say is let's take advantage of the volatility.
The volatility that I think we're going to have over the next couple of weeks is going
to be the opportunity.
So take advantage of that opportunity to buy a little further out the curve.
To buy low dollar price bonds.
To build in real return for a long time.
Why stay maybe I'm too much of a risk taker.
I was brought up in the high yield market.
But these are the periods going into the downturn that you build your long term portfolios.
So that's what I would use this opportunity for.
So you do think high yield is worth the risk if we do get some volatility even with all
the recession concerns floating around?
Yes, I don't believe that this time around it's going to be the traditional high yield
market that's going to see the big wave and defaults.
That is going to happen in either the bank loan market or the private market.
We might not even see them as defaults because a lot gets worked out behind the scenes there.
But that's where the weaker issuance has come and the lower quality issuance.
So the traditional high yield market is actually setting up to look pretty attractive.
Elaine, I wanted to rewind a little bit because you mentioned something that I had intended
to ask you about.
And that is the shift into private credit that we've seen.
I mean, I don't know how many stories I've seen about borrowers tapping into the private
credit markets more and more.
I don't think we quite have the visibility into it and the transparency to put dollar
figures on how big of a shift it's been.
But clearly there's been a big shift into private credit.
I'm curious what you think is driving that.
I mean, is it simply a matter of less paperwork, less need for disclosure, that sort of thing
or is there more so within that?
I think there's a lot of things that have been driving that.
Part of it was, and I do want to tell you that that kind of, that straight line up has
started to roll over.
Okay.
So a little bit less year to date has been going into the private markets versus the
public markets.
We're starting to shift rates were so low, so much money was looking for something better
to do a place where they could get higher returns.
So they were going to the private market that cash was going to the private markets.
So now the private markets were flush with all this cash and what are we going to do
with it?
And they started putting together and what we call them club deals, they started to join
forces, friends getting together and they would pluck deals right out of the public
market, print them a little bit about the same level or even a little bit tighter than
they would have happened in the public market.
But for the issuer, they took away that market risk, you know, that process of having to bring
it out into the market as an issue where, oh, it's, you know, it's five buyers.
This is going to be much easier to negotiate if we do get ourselves into trouble.
And a lot of this debt that came there was single B and below, you know, so it was definitely
riskier type of debt.
It kind of set itself up on both sides to be advantageous.
Now with money being pulled back from taking on that excess risk and short rates at 5%,
do we really need to go into that type of risk?
So money is pulling away from it and those same deals come into the market and whether
they're private credit or bank loans, we're seeing them come to the market and looking
to come back to the high yield market.
So we're starting to go full circle on this whole swing.
The bottom line is, I think this is one of the most fascinating parts of the debt markets
right now.
These markets are converging.
It's getting harder and harder to tell the difference between the high yield market, the
bank loan market and the private debt market.
And the players are a lot of the same players.
The syndicate desks are, you know, for new issues are all talking to each other and,
you know, almost any given deal you could find a way to put it into the market that you want
it to be in if you're a large enough buyer.
So it's really become an interesting part of the market.
And we're watching it really, really closely as potential supply coming back into the debt
markets.
Elaine, I wanted to ask you, because we're talking about all of these different risks
that potentially are on the horizon.
One of them, which you touched on is that potentially inflation proves, you know, stick
here than people think.
The other one is that we are misreading the labor market.
And I'm wondering what your thought is on that, like how potentially we might be misreading
it.
Yeah.
Labor has been sticky.
In other words, unemployment has stayed surprisingly low.
We had a significant number of cross currents during COVID that took a lot of labor out
of the market.
But aside from that, we've also had some really big structural changes.
We have the baby boomers getting older and getting to that age of retirement.
It's a different cohort.
We're looking at retirement as let's go, you know, get a condo in Florida and play pickleball
and golf.
That sounds really nice, actually.
I would love to be doing that right now.
And they have more means to retire early.
I think a lot of people were looking at that as a fluke, the early retirements and people
coming out of the labor force through COVID.
You know, don't forget how big that baby boomer cohort is.
Then it continued to be coming out of the labor force at a faster pace.
And I think at the same time anecdotally, locally, what I've noticed is when we decide
we're going to go out to dinner, just an example, we decide we're going to go out to
dinner, we have to really think about which restaurant is open which day because all of
the restaurants in our area are short staffed.
So what they've started to do is close down for a couple of days a week.
And it's not just happening there.
It's not just happening in the restaurant industry.
It's happening.
That type of thing is happening where, you know, there is a need or companies would like
to give better service, have more employees, but they're just not the employees to hire.
I think there's some pent up demand there for labor that will come back in if the labor
market loosens up.
So I do think if there's anywhere where we might be misreading is that the pressure on
the labor market and potentially wages might stick around a little bit longer.
The income is back and Van Eck has you covered with V ETFs to bring income to your portfolio.
Find the yield duration and credit exposure you're looking for from Van Eck's range of
income focused ETFs, which includes municipal bonds, corporate bonds, international bonds,
equity income, floating rate instruments and multi asset income.
With Van Eck's income investing yield monitor at ThinkYield.com, you can easily track Van
Eck's ETF yields as well as the monthly flows and performance of each income ETF category.
Take advantage of the back to income play, explore Van Eck's income ETFs at ThinkYield.com
and find the right ETF for you.
Investing risk includes principal loss.
Past performance is no guarantee of future results.
Visit Van Eck.com to view a perspective that includes investment objectives, risks, fees,
expenses and other information that you should read and consider carefully.
Van Eck ETFs are distributed by Van Eck Securities Corporation.
The wholly owned subsidiary of Van Eck Associates Corporation.
We don't just break news.
We build perspective.
Bloomberg publishes over 5,000 data driven stories a day across multiple platforms,
so you can gain insight and act with confidence.
Ready to dive deeper?
Start at Bloomberg.com slash Think Bigger.
Well, Elaine Stokes, the new kid on the block, only 35 years at Loomis.
Great to catch up with you.
We're almost out of time.
We can't let you go yet though because Vodana's going to tell us the craziest thing
she saw in markets this week.
Okay, remember last week I had a kind of lame one about Wendy's.
Yeah, yeah.
The chili in the can or whatever.
Yeah, yeah.
Okay, this week's is also about Wendy's.
Sensing a trend, okay.
I haven't been to Wendy's in years, but...
Frosty's in the can?
No, this is so interesting.
Ooh, that's a really good idea.
They should sell that at grocery stores.
I would definitely buy Frosty's ice cream.
Anyway, Wendy's is going to start testing an AI powered chat bot.
For drive-through orders.
So you can go to Wendy's, go through the drive-through, and potentially be talking to an AI chat bot.
To take your to place your order.
That actually makes a lot of sense.
Especially given Elaine's restaurant worker shortage.
Yeah, and isn't that so cool?
Like up until now, mostly when any of us have interfaced with AI stuff,
it's like you going to chat GPT and asking you to write you a song or whatever.
Yeah, yeah.
And this is like you're out in the real world, you're not looking for AI stuff.
And potentially you run into this chat bot.
An AI bot saying you want fries with that?
Yeah, exactly.
Hopefully then I'll mess it up.
That's pretty interesting.
I thought so.
Yeah.
Alright.
That's a good one.
How about you, Elaine?
See anything crazy this week?
I'm really struggling between my silly one and my serious one.
But I think my silly one a little bit goes with yours, and it is how new technology is being used in a strange way.
And you know what little sea urchins are?
Not well known fact.
They like to put rocks and shells on their heads to keep predators in the sun away.
So at an aquarium, some of the workers at the aquarium decided to make them to 3D print them hats.
You know, there are going to be uses we're not expecting from AI, from 3D printing,
from all this technology that's happened over probably this last 10 years.
I'll say I was not expecting that one.
That's awesome.
Honestly, that's so good.
That's a really good one.
And then my serious one is, I don't know if you saw the story about temperatures in Vietnam reaching 44.1 degrees Celsius.
That's 111 degrees.
Thailand tapped out at 44.6 Celsius.
That's 112 degrees.
There is a major heat wave going on.
These are record temperatures.
These are temperatures where it doesn't matter if it's dry heat or not.
I mean, these are crazy temperatures and it just got my mind going.
You know, we have been so focused and so worried about heating Europe in the winter.
Now we need to worry about cooling the planet.
Yeah, that's a great point, especially when those heat waves hit Europe and the air conditioning is in the electricity demand.
But it affects also food, supply chains, tourism, etc.
Yeah, that's true.
That is some hot temperatures though.
Alright, I'll give you mine.
So Steve Jobs.
Uh oh, no peaking.
I didn't look.
I didn't look.
No peaking, Valdana.
I have my eyes closed.
Steve Jobs famously did not like to give autographs.
So, which means that in the collector's market, his old checks are very much a hot item.
Who was he banking with?
Apple was well, so check from the 70s up for sale on our auctions.
Still six hours left to go for the bidding.
Sign check by Steve Jobs.
Elaine, it's time to play the prices precise.
Not the prices right.
The prices precise.
I'll warn you, there are six hours left in the auction as of the time we're recording.
But the bidding is pretty close to what his last sign check sold for.
So I think we're pretty close in the price discovery.
What do you think the going bid is for a signed, cashed Steve Jobs check?
I'm going first.
You go for it.
$150,000.
$150,000.
That's a very confident and quick answer.
Thanks.
Elaine, you know the rules.
What do you think the bid is for a signed check?
Apple Computer Company Check.
Signed by Steve Jobs.
I was going to say exactly what you said.
So I am going to take a leap.
$333,000.
Wow.
Wow.
You guys are big spenders.
Don't tell me it's like $10,000.
It's currently at $53,000.
Oh, that's so much slower than I thought.
I think it will come in.
My experience with these things is someone comes in with a high bid at the end.
Last year's was $55,000.
For a piece of paper.
Hop.
That doesn't mean anything.
Hop on there and bid away, Voldata.
You got six hours.
Oh my gosh.
These bidders would love to happen.
I just over bid on everything.
Jumped here $150,000.
Yeah.
Wow.
Now that you mentioned maybe it is a little low.
Now you got me thinking maybe I should bid on it.
It seems under price.
Voldata, a car bar of $53,000.
Yeah.
Let me just spend more with you.
All right.
Thank you.
You're welcome.
With that said, Elaine Snokes of Luma Sales.
Great to catch up with you.
Really appreciate you allowing us to pick your brain on markets.
Have a good time.
Great.
Thank you.
Elaine.
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