Odd Lots - A Longstanding Fear About The Corporate Debt Market May Finally Be Coming True

Episode Date: March 23, 2020

For a long time, people have been warning that corporate debt could be the major source of vulnerability in today's economy. And the market meltdown that we've been seeing since the beginning of March could make those fears a reality. On this week's podcast, we speak with frequent Odd Lots guest Chris White of Viable Markets, on how the extreme search for yield in recent years, combined with massive issuance of debt, combined with the idiosyncrasies of the corporate debt market, could be a setup primed for disaster.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But on Vanguard, at Vanguard, institutional quality isn't a tagline. It's a big line. It's a lot of firms. It's a few. commitment to your clients. We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com

slash audio. That's vanguard.com slash audio. All investing is subject to risk vanguard marketing Corporation Distributor. And welcome to another episode of the All Thoughts podcast. I'm Tracy Alloway. And I'm Joe Wisenthal. Joe, I'm struggling to think about how to start this episode because there's just so much going on in this particular space, which is the corporate credit market. Yeah, I mean, big picture, there's a lot going out in corporate credit because there is a lot

going on in the market, because there is a lot going on in the world right now. I feel like if people were to just listen to our last several episodes, it would be a great trajectory of the world just getting crazier and crazier and crazier with each episode. Yeah, absolutely. And the sell-off in the stock market has been bad enough, but it does feel like what a lot of people are starting to worry about now are these strains that we've seen in credit. So we've seen risk premiums on bonds really blow out, derivative indices tied to those bonds also going up as people try to get more protection. We've seen some big name companies rushing to tap credit lines and try to raise cash before that liquidity dries up.

There's just so much concern in the market. And a lot of it goes back to warnings and issues that people have been talking about for years. Right. The news that we got yesterday, and of course, because things are moving so fast, it's always worth pointing out when we're recording these episodes. We're recording this Thursday, March 12th. The news we got yesterday about various private equity companies telling their portfolio companies that they should draw on credit lines was kind of one of the real indicators that what started off as a health crisis and then sort of, sort of. of became an economic and market panic is becoming something that I think is really becoming a major concern about the liquidity and credit in the system available to anyone. Yeah. And there's one thing that makes the credit market very different to the stock market, and that is the level of transparency and pricing. So when markets are selling off, you can look up a stock index. You could see exactly where it's trading. And you know pretty much,

what it's doing. But with credit, it can be much more difficult just because of the way those assets trade. So today, in order to wrap our heads around all these themes and sort of pick up some of the latest color, really try to answer whether or not we're facing a new credit crunch or stress in the corporate ball market, we're going to talk to someone who I think at this point must be one of our repeat guests and probably holds the crown of the most odd lots episodes ever. Yeah, I think so. I mean, this might be fourth or fifth. And so we've had a few repeat guests, but I think this current guest is the winner. And, you know, for good reason. All right. So we're talking to Chris White. He's the CEO of Viable Markets,

formerly of Goldman Sachs, and really a longtime corporate bond market specialist, the perfect person to talk about all this. Chris, thanks so much for coming on again. Yeah, it's always a pleasure. You guys know that this is one of my favorite shows. I listen to your podcast. I'm a fan as well as a contributor. So it's an honor to hopefully untangle some of the Christmas tree lights that are the U.S. credit market. We got to get you a tote bag or something. We definitely need a odd lot swag. I can't believe we haven't made that, but we definitely need to, for anyone who's been on five times, we need to give I think it's four, but you know what? I have a feeling that the fifth one might come up before the end of the year, given what's happening. Next week, maybe. Yeah, exactly. Yeah. Happy to talk about

what's happening in credit. You know, Tracy, I think that you bring up something that's really interesting where when we're looking at the health of the markets as they're reacting to COVID-19, we have up-to-the-minute information on every single global equity index, but we really do not know what's happening in the bond markets, particularly the credit bond markets. And what's scary about that is there's so much bigger than they were the last time we had a crisis. Right. So walk us through exactly how pricing happens for corporate bonds, because I think that's going to inform a lot of our conversation. How do corporate bonds trade nowadays? Since we began talking with you, which I think was a few years ago now, there has been some evolution.

of the way that market functions, but also not that much. Right. Actually, you know, a company that I started, BondClick is working on this problem of fixing the, or at least establishing structure around pricing. And I'd say that's the major difference. I would imagine much of your audience is used to looking up prices for equities through their smartphones.

But when you really want to know prices and bonds, it's difficult. And this doesn't change for the professional arena. when you're talking about trading bonds, working for an investment bank or working for an asset manager, while there is a lot of information that's out there, it's very difficult to discern at times what's real and what's actionable. And so during the past 12 years, we've had pretty sleepy markets where any sort of bump in the road was met with central bank intervention that sort of stabilized markets. Now we're in a period thanks to COVID-19 where there is no stabilization on the horizon that people can see, really starting to see markets whip around. And so not having coherent and reliable data is impacting the way these markets are trading. So for people who haven't listened to your previous episodes and people who wonder, well, it's 2020.

Why can't people just look up a bond price on their phone like you couldn't do with stock? Give us this sort of 30-second explanation of why bonds are different just for people catching up. And then tell us, you know, what you're seeing already about how trading is really being affected by the first crisis in a long time. That's not a monetary crisis. And so, therefore, there's not an obvious central bank fix. Sure. It's really simple. About 50 years ago, the equity markets faced a crisis around institutional trading.

They answered that where liquidity had really dried up. They answered that crisis by just saying, hey, let's make a platform where everybody puts their pricing in the same place. And that was NASDAQ. NASDAQ stands for National Association Securities Dealers, automated quotation system. And that concept of, I would say, crowdsourcing pricing and centralizing it is something that we've seen in every other modernized market. That architecture has really never shown up for the U.S. corporate bond market. We're trying to bring it to market in terms of my company, but because we don't have this piece of architecture, prices are just everywhere. And so without knowing definitively, where is the best bid or best offer, it's a bit, it's a bit chaotic. And I would say in some,

in some cases, people would say it's chaos by design, because obviously if you have dislocated pricing information, there are big opportunities out there for certain traders in the market. So for a lot of people, they've liked the reduction in information. However, you know, when I've said this in previous podcasts, and I think it's really important now, the market is too big for that sort of gap in infrastructure. Just to put in perspective, it's a $10 trillion market in terms of outstanding size. I think, Tracy, when you and I first met, we were talking about how big the market was, when it was maybe six or six or something.

Yeah, I remember that. Yeah. So playing these reindeer games around pricing is just, it's not good for the overall funk. of a market that I think at this point in time is really, really important for the overall health of the global economy. There's so many bonds out there and so many companies that depend on this market. I think we do need a rethink around the importance of data and actually getting it right around pricing information. So when it comes to a sell-off or a market route, like what we're seeing at the moment, how does that corporate bond market structure actually

impact what's happening in the credit space. I guess another way of saying that is how much of the action that we've seen is due to technical factors versus concerns about economic fundamentals actually affecting the creditworthiness of companies. That's a great question. I'm actually looking at the data right now going back to, would you guys agree that maybe like February 24th is the start of the craziness? Can we accept that as a date? Yeah. Well, if I go back. For Tracy, it's been like since mid-January, but then the rest of the world,

the rest of the world woke up to it right around late February. So that I would agree. Okay, great. So my Western American view of COVID has been like, hey, things got crazy on February 24th. So if I go back to February 24th and just looking at our system, I can see that the corporate bond market as a whole has net purchase activity, meaning that there's been more buying activity by almost 20 billion in notional volume than there's been selling activity. So while the value of bonds has definitely changed, they're definitely lower.

It's not due to a technical change. It's not because there's an oversupply and people are just selling into the market. It's actually something that I think is better described as a repricing. And a repricing is, hey, you know, yesterday and we thought this bond was worth, you know, let's call it $100. Yeah. Well, I wake up today, I wake up today and you know what? I think that bond is worth $81.

What do you think? There hasn't been, you know, trades at 99, 98, 97. That's not how the bond market works. You're not seeing that. What you're just seeing is literally changes in value based on an opinion. And so this is where data is now. It's really at a premium because if you've got a lot of data and you know how to organize it, there's some tremendous values in this market right now.

So explain that a little further, this idea of just a repricing versus mass selling. Is that something, what is it about bond market structure that allows that to happen? That one day you have a bond trading at par, trading at 100, the next day it's trading at 80. What is it about the current structure where you see wholesale repricings like that in a way that feels a little bit different than you see in stocks? Sure. So when we're talking about trading bonds, we're talking about trading credit. Right. The Latin origin of the word credit is credo.

The word means, I believe. Right. And so what are we talking about? What do you believe in credit? Do you believe whether or not a company is going to be able to pay their debts? So what we're really trading here is opinion on the long-term prospects of certain companies to pay off their debts. Now, depending on what industry the company is in, those prospects may take a hit, but overall, you still feel like at the end of the day, five years from now, CVS is still going to exist as a company. So buying their debt and saying, like, I'll hold this paper for a few years is a less risky prospect.

However, when things get dangerous in the bond market, when default rates do start to rise. And I think that this particular type of crisis could lead to defaults because this is a crisis of time. We don't know when things are going to clear in the marketplace. We don't know when things are going to normalize. And for a lot of these corporate issuers, time is urgent because they may need to tap the corporate bond market again in order to meet payroll or to pay off the bond that they had previously issued. And so if the credit markets are closed for a few weeks, I think we have a real problem on our hands. Yeah, I think the time frame is really important because just from my personal experience being here in Hong Kong, even as we sort of get, get back to normal, the rest of the world is now, you know, experiencing what we experienced

a month or two ago. And so I think we're going to have these sort of rolling impacts as the coronavirus circles around the globe and potentially second waves as well. So, yeah, it could be a long time. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income.

So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio. That's vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation distributor. Chris, real quickly, I want to just sort of ask you to expand on a point when you talk about, okay, you believe either this company is going to pay its debts or not. You know, when we think about a stock, we think about, okay, this stock is valued at some current discounted future cash flow.

and if that cash flow expectations drop 5%, then theoretically, the stock should drop 5%. I guess with bonds, there's just much more of a binariness. Either the company will eventually pay it off at the end of its period or it won't, but there's not that sort of, there's not as much gradations in there about the ultimate outcome. So I think one of the things that is important in terms of the difference between the stocks and the bond market is, the stock market is much more immediate in the reaction. And I'd say a lot of the movements on stocks are technical movements where you're getting a bunch of supply. And so the value of a stock is going down. And then you have the term value investors in the stock in the stock market where these are people that say, hey, this stock has been oversold according to what we're looking at in this company. And according to the PE ratios, this is a value right now and we're going to buy it. And so those are a lot of the things that are driving trading activity, the back and forth in the stock market. In the the bond market, not only are you dealing with the complexity of whether or not you believe a company is going to pay off its debts, you also have this time factor because it's not just,

is the company going to pay off its debts, is when is it going to be able to pay off its debts? I'll give you a classic example. Tesla, let's call it, I think it was a year ago, Elon Musk was on the Joe Rogan podcast, a podcast that I think is far inferior to the Odd Lots podcast. Thank you. Thank you. On that podcast, he thought it's a little more popular. Just a bit. He thought it was a good idea to smoke pod on the podcast. What we saw in the bond market for Tesla bonds were the bonds that were going to be maturing in 18 months, price has hardly moved.

But the bonds that were going to be maturing in almost, I think, four years, those bonds lost significant value. And that's because it's the I believe factor. I believe that Tesla is going to be able to pay off their debts in the next 18 months. but perhaps their prospects of paying off their debt four years from now are not as good. And so this is where you get. I've said to people during this crisis, you can't just simply say the credit markets are up or the credit markets are down. Right.

That's impossible because in different areas of the credit markets, you are going to see stability and you're going to see panic. But to make things sound less gloom and doom, I do think that what COVID-19 is doing, for credit markets, it is bringing yield back and it's creating value for the investor. The only problem is many people were already fully invested. So they've given a lot of those returns back in the last few weeks. Just on that note, one of the criticisms of corporate credit over, you know, the last five years or so has been this idea that investors are buying stuff and they're not necessarily getting compensated for some of it or the notion that credit is priced to perfection and something like the coronavirus outbreak just doesn't feature in the price at all. How much of the

chaos that we're currently seeing is just due to valuations having gotten out of hand previously? Tracy, that's an excellent, excellent point. And I'm going to tell you the story of a bond that actually illustrates exactly what you're talking about. And the story is a bond that was recently issued by American Airlines. It's their new. issue maturing in 2025. It's their three and a quarter coupon bond that came to market at that time. When that bond came to market, it was coming to market at a dollar price of effectively par, 100. Today, that same bond is trading at 75 cents in the dollar. So just the change in sentiment, like the fact that that American Airlines deal came through the market and people bought it at that

level, I think tells you what the environment was around yield, which is, hey, I know that this is an airline bond, and I know that it's coming only 240 basis points over the five-year treasury, which is really, really tight. But you know what? I need yield. And so I'm going to buy it. And now what we're seeing is, I mean, now the spread on that bond is almost over a thousand when compared to treasuries. In fact, when we get to this point, we don't even talk about spreads. We talk about bonds and dollar prices because literally what we're trading is purely the credit. This is not an interest rate play at all. The way that this bond is going to be traded is going to be based on whether or not you believe that American Airlines is going to be able to pay off their debts

and it's going to have nothing to do with the current interest trade environment, which is really where high yield and distressed debt trades. It trades in that sort of environment where prevailing interest rates really don't matter. Something I'm curious about is, you know, in the post-crisis era, there has been this big effort to de-risk the banks themselves. And so that, you know, even already we're talking a lot about stress from companies and companies drawing down credit lines and the bond market and so forth. But we don't hear a lot yet about much stress to the sort of core institutions of the

financial system. and we know that through the Volker rule and so forth, the banks, they hold less credit inventory on their books at any given time. How does that change the trading experience, the price experience, the price discovery experience right now during this crisis versus past crises, past bouts of volatility in which there was more centralized risk? Well, first of all, Joe, I haven't heard anybody else really pull that out in this discussion of where markets are going. And I actually think we need to tip our caps to the regulators here because there is a lot of screaming and gnashing of teeth around, you know, derisking the banks. But we aren't actually at this point in time worried about banks going under, which is totally

different than the tenor of 2008. I think a lot of that has to do with the measures that were taken. And, you know, it's almost like your parents. I'm sure your parents gave you some advice, Joe, that at the time you said, whatever, mom and dad. And now you really actually appreciate their insight. So tip of the cap. But I think that when we're speaking particularly about credit, there's been just so much cash built up in the system that really where the bid is coming from right now, it's really coming from the buy side. So these markets are functioning, I believe, because insurance companies,

funds, they're so thirsty for yield that even though these American Airlines bonds are trading down. And again, I'm going to look right now on our system and just try to see on a net purchasing basis, whether or not from when this bond was issued to now, it's only slightly negative in terms of selling activity, which just tells you that there have been a lot of people buying this bond. Where's that money coming from? It's coming from an insurance company that may have issued annuities at 6%, but it's only been yield, but their portfolio itself has only been yielding 4.5% for the past five years, so they know they have a shortfall. We expect that that bid is supposed to come from the dealers. It's not coming from the dealers anymore. It's coming from

the buy side because they're the ones with the money and the cash to put to work. Right. So, this has been a major theme in corporate credit over the past few years, the power, the growing power of the buy side in that market. Just on that note, does, Does that mean that we need to look at the buy side to sort of find the bagholders of the recent stress in credit markets? Is that where we should look for portfolio losses? And also, where in the credit market do you see the most potential for pain? Well, I think that the the buy side right now is able to, they have enough cash where they

are stepping into this market. I don't know how long they can do that for. And I don't know whether the opinion on where yields should reset is going to change. Because again, you know, this is like, you know, when we're looking at yields over the past 12 years, really post-2008, it's been a desert. So any sort of bump in the market has been met with buying. But now this is a prolonged bump. And so we actually, we might see a resetting where what investors are demanding for the market, is even greater in terms of yield pickup, and that would move prices down even further.

In terms of the dangers, there's been something on the horizon that I know Muhammad Alarion's been talking about it. I've written about it, but the real danger has to do with the triple B area of the market. And what the triple B area of the market, just for your listeners, the bond market has credit ratings the same way that you have a credit score. And based on your your credit rating, you either fall into something called investment grade, which means, hey, 95% probability that you're going to pay off your debt or below investment grade, which is we're not so sure. And depending on how low below investment grade or the high yield or junk market you're in, that basically dictates the probability that you'll pay off your debt.

So the triple B tranche of credit is really the, it's the lowest rung of investment grade. It's the it's the B minus on your report card, right? Anything lower than that, you've got. a little bit of a problem. So that area of the market has been growing exponentially as the market itself has grown. You've got record issuance in non-financial companies, and many of those companies have this triple B rating in their debt. Here's where the problem comes in. If you look at something like Black Rock's investment-grade ETF, 50% of the ETF is comprised of triple B-rated debt. If those bonds get downgraded or some of those, some of those names get downgraded, BlackRock is forced to sell those out of their portfolio, as well as every other investment-grade

bond fund that has triple Bs that get downgraded. Now, this is the problem that people have been concerned about when we're talking about the credit market bubble. It's been this scenario in which oversupply would hit an area of the market and we don't know where bonds go from there. So I'll stop for a second. I know that was a mouthful, but if you guys have any questions on that scenario. No, I want to continue on this scenario. So one of the things you mentioned is with the stock market, you know, stocks get hammered, but then maybe a different group of investors becomes interested in it. And so, okay, now it's a value stock. Talk to us about the discontinuity in the bond market such that if there is this sort of massive liquidation from investment grade funds where

they have to sell due to downgrades, there is not some clean handoff to a new group of investors that can just pick them up because their mandate may be for riskier credit. Sure. So let's start here. The biggest asset managers in credit for the corporate bond space are investment grade asset managers. And what they've basically said is we're going to have our portfolio is only going to have debt. in it that is investment grade. And so they have to stand by that mandate. So all of the capital that they take in,

they're not allowed by law, by compliance, to invest that capital in anything but investment grade debt. Right. Now, as the bond market has gotten bigger since 2008, the overwhelming majority of new debt has been triple B rated investment grade debt on that lowest rung. And to put it in perspective for you,

44% of a $10 trillion market is now made up of triple B rated debt. The triple B tranche alone is bigger than the entire investment grade market was in 2008. There's been nowhere for you to go as an investment grade bond fund because not only are there so many triple B bonds out there, the yields have been so low for so long that if you want really to show any positive return in your portfolio, you had to buy those bonds and you had to hold them. So now the scenario is this, if any of those triple B bonds, like big names, start getting downgraded, they must be purged from the investment grade asset management community. That purge is something called, well, the bonds changing direction from being investment grade to high

yield, something called fallen angels. I think it's a really nice way to explain, like, you know, hey, you were in heaven and now you're back down to earth. But those fallen angels, that supply, this massive. supply of fallen angels, it has a knock on effect. The first knock on effect is there simply is not enough capital in the high yield market. High yield investors do not have that much cash to start buying up all these fallen angels. So the fear is there won't be a bid. Yeah. The other knock on effect that really isn't being talked about, which is quite dangerous,

is if you are pure high yield, if you are a B-rated company or a triple C-rated company, the debt markets, the capital debt markets to you are going to become incredibly expensive because the oversupply of now high-yield paper is going to make it so that if you want people to buy your bonds and you're going to be issuing new bonds, then the yields that you must offer to them are going to have to be incredibly attractive. And so everything gets more expensive for companies that, quite frankly, are sort of on the sort of Damocles around whether or not they're going to make it. What you're most likely to see in this scenario is a domino effect that creates that really spikes the default rates. And that's what, you know, the larger conversation of will the corporate bond market do to the global economy what the mortgage market did to the global economy in 2008?

Yeah, we've already seen a cluster of fallen angels, including, I think Kraft Hines was the biggest one. Just on your last point, if you think about 2008, one of the problems was that home loans or mortgages were massively levered in different ways through different financial products like synthetic CDOs, through the repo market, through things like that. Is there any sign of that kind of leverage when it comes to the corporate credit market? Or is the concern that the real economy itself is now over levered, is the corporate credit market? That's a great question. I think that there are signs of over leverage, but they don't look exactly like what we saw in 2008. Here's a sign. If you look at a lot of actually pretty healthy companies that have been issuing debt,

debt, what they've been doing is that the yields have been so low in the debt market, for example, a company like Apple didn't have an outstanding bond before 2008 and now has over a hundred billion an outstanding debt. Apple doesn't need cash, but what they've been doing with that capital, the debt capital that they've borrowed, is they've been buying back their own stock. So the leverage that you're seeing in the market is one in which companies are issuing bonds, using the cash that they've gotten from those bond proceeds to go and buy their own stock, which is then changing the dynamics of financial markets. Mostly, what we've seen historically

is the stock market and the bond market move in opposite directions of each other. And that's why having a diversified portfolio, you're hedged. What we've been seeing, though, over the past 10 years, is the stock market and the bond market moving in tandem. They both have been going up at the same time, that to me is the sign that there's something wrong with the leverage in the system, because now you actually have no hedge here. We're all high-fiving each other when both the bond market and the stock market are going up because our 401ks look great. But now what are we seeing? Both the bond market and the stock market are repricing. The only market that's actually gained in value is the Treasury market, which this week was the first time ever that the entire Treasury

curve had yields lower than 1%. So we're in uncharted territory here, but there's a lot of evidence of leverage over leverage. I mean, I think that the stats I gave you on the triple B market alone, I think if the analog between what's happening now and the mortgage crisis is this, people point to easy money being given to individuals who really didn't have the credit profile to qualify for loans, like the ninja loans and other mortgages that had really loose covenants as being the start, the catalyst, list. Well, we replace that individual mortgage or homeowner with large corporations who've also gotten access to easy credit, who were getting access to credit at levels that were inappropriate

for their fundamentals. So they really can't afford to be borrowing this much money. But as long as a credit cycle has been eased for the past 12 years, nobody really cared. I think now is the time to definitely care. You're going to see some sort of material. the materialization of these lax credit standards. And it looks like it's much, much bigger than what we saw in 2008. I've just gotten more depressed and stressed out throughout this entire conversation.

And then with that last line, it's even gotten worse. I want to ask a question because we talk a lot about the Fed's easy monetary policy and low rates. But of course, there's a difference between rate policy and credit. and, of course, with the bond, both of those are components. Did the two necessarily go hand in hand, by which I mean, okay, is there a way to keep credit standards stringent amid lower rates, or did the weakening of credit standards that we saw

or the willingness of credit investors to take on perhaps undue risk? Was it an inherent byproduct of a macroeconomic policy to keep rates low and to keep the economy growing? Well, Joe, not only was an inherent byproduct, it was literally the intention of the central banks to make investors focus on less credit-worthy companies. See, what central banking policy is basically done is they've been the net purchasers, like big purchasers of government debt and high-quality corporate bond debt. By lowering those yields, the knock-on effect has been to lower the overall yield environment for all bonds, whether or not their government or highly rated corporate debt.

Because if I'm a company with a lower credit rating, I can take advantage of the fact that you can't find yield anywhere else. And therefore, my debt can be more expensive from an investor standpoint. That's been going on for a long time. And if you read what the central bank has been talking about, they've done that to particularly stimulate the economy. The problem, though, with this is there are a couple facets to this problem. Problem number one, you do this for a long enough time.

You start to bankrupt the people who are looking to save money and effectively live off of their investments. Because what's happening is they're not getting enough yield in exchange for the risk that they're taking on. And eventually we get to a moment like we are right now, where spreads start blowing out. and companies where you had invested at a very low yield are now looking like companies that could default. And you have not been getting compensated for that. So again, it's sort of like this double body blow to a lot of the end investors that are in the marketplace. I think that, you know, there's a lot of theory around central banking. I think a lot of testing on things that they've done. But we are going to see some negative, we're going to see a negative environment that I think

has been fomented by a lot of central banking policy up to this point. Joe and I just recorded an episode talking about U.S. energy and Shale energy, really, and how it connects to capital markets. And a lot of that reminds me of what's happened in Shale. On the one hand, the Federal Reserve really encouraged a lot of capital to go into the energy space because they were looking for returns. And that was beneficial for the U.S. economy and for employment as all these shale producers, you know, hired a bunch of people. But of course, now we're sort of facing the reckoning with COVID as well as the big oil price sell-off. Chris, one more question for you. Let's try to cheer up, Joe.

Yeah, please, please. What could stop the current strains and credit? What can stop it from getting worse? If we're looking for a silver lining with COVID-19, the silver lining might be that we needed this cleansing around the debt markets in order to get yields to normalize. And normalizing yield, normalized yields are actually very good for all end investors because we end up having a portfolio that performs better over the long term. In the short term, there's going to be some pain because the mark to market value of the bonds has gotten, has gone down. but over a longer period of time, you actually might be compensated for taking risk, which is good for all of us who have a long time horizon before we retire. I think another positive thing, and we have to, you know, remember this,

because remember, we're all old enough to be around in 2008 and think the sky was falling then. You know, market dislocations like this, real crises do create an environment in which innovation becomes, starts to take hold. So I actually, what I think might be happening here might be the same thing that was happening to the equity markets after the flash crash of 1962. In 1962, the equity markets had a three-day flash crash in which people were freaking out and they didn't know where prices were. And that eventually led to the creation of central pricing systems.

So I think this market, especially for credit, is finally going to change the cultural idea that not having information is the best thing for trading. And what we may see at the end of this is people actually stepping into the idea that maybe it's a good idea that we actually know where all the bids and offers are before we start making multi-million dollar trading decisions. And the net result of that, Joe and Tracy, is the end investor getting better treatment in the bond market than they've ever gotten before. and that's always a positive when we're looking at the just the overall global economic outlook for

individuals. I guess that's something. I tried, Joe. I tried. Yeah, you're trying. Thank you. Thank you for trying. Thank you. Thank you for trying to leave it there. That's Chris White, CEO of Viable Markets. Thank you so much for coming on yet again. Really appreciate it. Thanks so much, guys. It's always wonderful talking to you. I wish it was something to be cheerier about, but I do think that a better day is coming when the bond market actually embraces transparency. And hopefully I'll be on your podcast again to talk about that. Looking forward to that. Thanks, Chris. So, Joe, I love how Chris tried at the end to bring that silver lining. But the other reason I really enjoy speaking with him is because he's so good at describing the differences between the stock market and the credit market,

also talking a lot about how they interact. And I do think an underappreciated aspect of the bull run in equities over the past few years has been just how much it has been supported by corporate credit. Yes, thinking about where the leverage has migrated to. I mean, it does seem like, you know, banks are in a healthier situation to some extent that they were prior to the crisis. households not leveraged to the same degree that they were pre-crisis, especially their own leverage to their literal home. But obviously, this sort of emergence of a giant boom in corporate credit has always been vulnerable to a serious downturn in the economy. And because Syria sustained downturns in which people don't know when they're going to end, such as this, inherently. puts at risk the question of, as Chris put it, do we believe that these companies will be able to

pay back their debts? And that is coming under quite some strain right now. Yeah. And on that point, the coronavirus outbreak is so dangerous for a lot of these companies because it basically means that some of them are going to get their cash flows cut off for, as Chris was saying, an unknown period of time. Many of them might still have to pay out salaries and other expenses. And in that time. And so you really have this big hit to earnings combined with all the technical factors of what's going on in the market sell-off very, very painful when it comes to corporate credit. I'm worried I'm going to depress you again when Chris tried to end it on an optimistic note. Oh, what's the optimistic note? Oh, well, that we could get a repricing in credit and

investors could maybe be better compensated for the risks that they're actually taking on, and that could be better over the long term. That was his argument. Oh, yeah. Yeah. It's not too. I mean, yeah, I know it's important. I'm just. You're like, no, I'd rather not have coronavirus. Yeah. Yeah. That makes sense. Okay. This has been another episode of the A Thoughts podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Joel. Weizenthal, you can follow me on Twitter at the stalwart. And you should follow our guest on Twitter, Chris White, under his company's handle Viable Markets.

It's actually at Viable MKTS. And you should follow our producer on Twitter, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcasts on Twitter. Francesca Levy at Francesca Today. And check out all of our podcasts under the handle at podcasts. Thanks for listening. doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all.

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