I think about this as
Illiquidity which is a word that I use often. Yeah, which is the opposite of liquidity. You've got the yield curve
You've got 13 trillion dollars of negative yielding interest rates, which I think is unprecedented in four millennia
You've got an enormous amount of people that in the US
I think 60 percent of buyers of government debt are retail which is about double what it was
You know a few years ago. And by the way that 13 trillion dollars of negative yielding debt was zero five years ago
Yeah, so people are pushed out on the yield curve
You have a lot of people are saying the aging population aging population and what do people historically do the narrative is let me buy
Debt, you know typically the percentage of my portfolio that should be allocated to
To fixed income should be roughly proportionate to my age. So your 60-year old you've got 60 plus percent in
debt fixed income
40% maybe in inequities in mutual funds the portion that's in debt is at record low historic yields
So you had a million dollars or two million dollars in savings as a retiree?
And you were making fifty or sixty thousand dollars a year now you're making ten
So what do you do you go out on the yield curve?
So maybe you're in fixed income instruments or mutual funds or ETFs that have some slightly higher yield than you think your principal protected
So you were looking for your return on principal the probability has grown that the return of principal is actually not there. Yeah
Why you might have stuff mixed in just like you did with the subprime?
You know going back 10 years ago that is not actually investment. Great
Things might have been rated as investment grade
But they're not and all of a sudden you see a 10% decline and you see this in Europe
That's this is happening now, hto h2o
ironically named
completely illiquid
I think the private portion of this
Was 9% of assets that they had marked at nav and then it dropped down to 2% Which means
Probably it's really 50 basis points
Yeah
And so significant value impairment and then you have the human behavioral reaction which is to start pulling funds
Funds out of these funds
So if you have that in the fixed income world where the liquid is a mismatch because you'd get money out for a while
before it stops, you have the illusion of liquidity because you have daily trading and and and ETFs and you know,
They're marked on a daily basis, but the underlyings suddenly might be a liquid
And so I think that there's a real risk of permanent impaired which is the true measure of risk of principle
So if that happens and retirees start saying wait a second, you know what let me go to cash
Let me get out of these bond funds that I thought was safe. You know that creates a problem
Well, they also might need to sell out of equity funds now in both asset classes
You've had a shift from passive from active to passive
So I actually think it's a great time probably for active managers who can actually do security selection and determine because the simple algorithm
For all of these things was dollar in buy
And now it's gonna be dollar out sell which means some of the good stuff is gonna be sold indiscriminately
So people are pushed out on the yield curve
They're taking more and more illiquidity risk, and they don't realize it now
You think about who the marginal buyer is on the equity side? You've also had record amount of
Corporations that are buying back stock the last time that corporate buybacks
Eclipsed corporate capex was two thousand eight ten years ago and that's happening again now and that was right before
Crisis and then hitting the March 2009 lows now
Yeah, our we didn't set up for you know history were repeating if it doesn't rhyme
I don't know but it certainly, you know peak valuations that you've seen over the past ten years and you to argue
Well relative to interest rates, you've got, you know S&P yield that
4.6 percent ten-year at two, you know, maybe the values there
Maybe it's not
but then you look at the illiquid side and I and not just on the bonds and not just on equities and people selling but
My world is venture capital and here you have
You know a marginal buyer on the public equities who maybe was the corporation buying back its own stock
Yeah in my world. The marginal buyer is two kinds one
You've got soft Bank, which is setting a you know, irrational price
They have an enormous amount of money to put to work and have put to work
Pricing up their own stock and we've talked on real vision before about this in the past with Mike
And so so I think that they have created
irrational
Comps that other people have referenced to that have said artificially high prices that are almost equivalent
To leverage because a 10% or 20% down around wipes out everybody in that capital structure stack the second thing that I think you have
Is looking at some of the marginal buyers which were foreigners. Now if you take life sciences and biotech a
year ago you had about a billion six a billion seven of
Chinese money that went into US biotech companies out of a total about twenty billion dollars of life
Money that went in first six months of this year you have about 700 million dollars
So about half a billion dollars of capital that compared to last year is not there
So suddenly VCS are looking around and saying okay who's gonna be pricing out my series?
BCD pre-ipo rounds you have a handful of people who potentially are bag holders
Maybe these are the Bailey Giffords or the Fidelity's that are doing these pre IPO. Rounds. Why are they doing that?
Because the returns were in the pre IPO financings
but then you look at the pre IPO companies that are now going IPO so uber and lyft and
Potentially we work, you know, these are the darling unicorns and many of these have not held up
Well, some have zoom has done very well, others have been disasters, but you look again at Softbank and you say okay
They've got these illiquid stakes through the vision func
And they try to do what after these things went public rather than just selling the stock
They tried to issue debt have issue debt
Four billion dollars secured by the garden stake or the uber stake to retail investors
And then the underlying we work originally we're gonna put 16 billion dollars in they put a few billion dollars in and they priced up
Their own paper, you know valuation
I've got my own tinfoil hat theory about why they're doing that to serve as collateral against mothership indebtedness
we work now going IPO gonna issue four billion dollars of debt before they go public because there's nothing more that people love than a
More indebted company before they go public now
The biggest counter is people will say well compare this moment to the 2000 bubble when you had all these you know
phony
Valuations at least companies now have revenue which is true because I bought it back then you just had eyeballs you had no dollars
No revenue, but the problem is in spite of all of this revenue. You still have no profits
so if you have all of this revenue growth
But it's unprofitable and it's really driven by the kindness of strangers who are the providers of the capital
I think a lot of people are overestimating the potential profitability these companies
So so one of the other very interesting things, of course is you have this mismatch between capex and buybacks
But capex is a good measure of corporate investment activity and so buybacks now eclipsing corporate capex capex
Potentially declining at a time when interest rates are as low as they've been in many many years
It doesn't bode well for the economy and it comports with your view of recession
it also comports with your view which I think is an excellent one of
Real volatility and risk amongst the European banks. I'm just looking at the situation we talked about on the on the corporate side
the amount of trip will be debt, you know, it's it's it's so enormous now and it's basically five companies that
eight hundred
Billion dollars is five companies. That's AT&T Dell
GM Ford and
GE and by the way, every one of those companies is not a company that a cutting-edge
Early-stage entrepreneur engineer would ever want to go and work for no now the amount of indebtedness, right?
Has served asset growth and you could argue as fuelling operations
But look at GE now in my world GE I predicted was going to divest of their corporate venture portfolio
Because whenever you see corporate venture activity, it's almost always counter cyclical indicator right when peak corporate VC starts happening
They feel like they're late to the game. They look at their brethren
They see that money is being made at least in paper marks
CEO says, you know, I think we should be doing corporate VC activity. The board says yay
Then all of a sudden they see one of their brethren say wait a second
These guys haven't had any liquidity their divest in their portfolio
The secondary funds come in they buy things that's 70 80 cents on the dollar the day that GE
Announced that they were gonna divest their VC portfolio. We got contacted by a very large prominent buyout fund that said,
Hey, do you want a team and take a look at this?
and I think that there's going to be portfolio after portfolio of
Corporate venture that starts getting divested so that they can free up cash for liquidity
But to your point all that trip will be indebtedness. I mean, these are companies that are dinosaurs. Yeah, there's real
Structural risk that they're going to be disrupted by the next guard and it'll be dead my fear with this as well
Is it is anybody gets downgraded which they will in the next recession, they'll get downgraded and the junk bonds here
There's two different owners. So it's the pension system that owns the triple because it's still investment great as soon as it goes out
It's not owned by them at all, right, but jump on guys, so there's no liquidity
There is a the sellers and there's basically no ability to bind that much
Downgrade stuff and I fear it knocks on into your world
Because illiquid lip knocks on into a liquid and we saw this in 2008 is hedge funds became the cash machine where they could be
So they all had to gate
Then all the private equity guys were trading. I remember I was helping out a family office and they were
Selling out of stuff at 30 cents on the dollar which was good stuff, but they just desperate for liquidity
Well, this was again going back, you know, just like 2008 was the time relative today when corporate buybacks at CD capex
2008 was when BMP
gated those three hedge funds exactly and now was the start of the catalyst and that's what I saw with this h2o and
Yemen yeah and Neal Woodford is like okay. This is interesting because
You're sarsens to see liquidity issues and that's what it was and that's why I thought if you mean like that
I've got to get Josh about this because there's a liquidity event going on and people are saying that
Isolated and they were isolated with BMP and then it was the money market funds
And it just started moving around tells you there's not enough dollars in the system and instead of over time from a simple macro standpoint
Even to the layman if you're pushed out on the yield curve and money is being printed and money's available and you go into this
Higher illiquid stuff now you've taken cash that was meant to help bail system promote growth
You've put it into a liquid stuff and now it's trapped
And the question is who is the incremental buyer and all of these things?
So in my world, who is the incremental buyer, is it the crossover hedge fund? Is it the growth equity investor?
Are that the Tigers and co twos and you know, the tiger cubs that are doing private companies
Is it Softbank when that capital starts to dry up? We have a liquidity crisis
Yeah, so massively liquidity in the case of the bond funds
You know that the Allah quiddity comes when you have these things that you think are investment grade that turn out not to be in
the case of the mutual funds you
Have a liquidity when suddenly everybody starts selling and people think that the underlying that they're able to get out of
So I agree with you. I think that this is a
substantially underreported under-recognized risk