Michael Vranos: One of the Best Bond Traders on Wall Street? | SALT Talks #45

“I believe investors should take a slightly more charitable view to the hedge fund structure.“

Michael Vranos is the Founder & Chief Executive Officer of Ellington Management Group, a firm founded in December of 1994 to capitalize on distressed conditions in the MBS derivatives market. Michael’s Wall Street career began in 1983 at a time when the Federal Reserve was opaque in its actions and long-term plans.

“Keep more cash on hand to anticipate the panic of others.” Michael has taken this learning from the Crisis of 1998, coupled with best practices from the economic downturn in 2008, to prevent losses during the COVID-19 pandemic. As a result, the firm was able to put $3 billion to work when others experienced sell-offs.

Where are today’s opportunities? Simply put: fundamental value investments and relative value trades. Mortgages were not the source of the 2020 economic crisis, and selling them isn’t going to solve anything. With the Federal Reserve now owning $2 trillion worth of mortgages, they will have tremendous impact on that market going forward.

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Michael Vranos

Founder & Chief Executive Officer

Ellington Management Group

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:08)
Hello, everyone, welcome back to SALT Talks. My name is John Darsie, I'm the managing director of SALT, which is a global thought leadership forum at the intersection of finance, technology, and public policy. SALT Talks are a digital interview series we started during this work from home period. Where we're interviewing leading investors, creators and thinkers. And what we're really trying to do during the SALT Talk series, is to provide our audience a window into the minds of subject matter experts as well as provide a platform for what we think are ideas that are shaping the future, as well as interesting investment opportunities. And today, we're very excited to welcome Michael Vranos to SALT Talks. Mike founded Ellington Management in December of 1994, to capitalize on distressed conditions in the mortgage backed securities derivatives market, and he was involved in that market even before it was considered sort of a hedge fund asset class.

John Darsie: (01:00)
Until December of 1994, Mike was the Senior Managing Director of Kidder Peabody, in charge of the RMBS trading division. When Mike was the head trader and the senior manager at Kidder Peabody, the mortgage backed securities' department became a leader on Wall Street in CML underwriting for each of the three years between 1991 and 1993. Mike began his wall street career in 1983. After graduating magna cum laude, Phi Beta Kappa with a Bachelor of Arts in Mathematics from Harvard University. He currently serves on the board of directors of the Boys and Girls Club, Hedge Fund Cares or now called Help For Children, as well as the Waterside School and he's an emeritus member of the board of the Stanford Shelter For The Homeless. So he's very involved in the charitable side of the hedge fund industry as well.

John Darsie: (01:50)
A reminder to our audience today. If you have any questions for Mike during today's talk, you can enter them in the Q&A box at the bottom of your video screen and conducting today's interview is Troy Gayeski who is the co-Chief Investment Officer and Senior Portfolio Manager at SkyBridge Capital, which is a global alternative investment firm. And Troy is also a contributor to salt. So Troy, thank you for joining us today. And I'll turn it over to you for the interview.

Troy Gayeski: (02:14)
Yes, thanks John. And Mike, it's really great to have you on here. And obviously, before we dive into market opportunities, which I know you're chomping at the bit to discuss. Just wanted to get a little more color on your background. I mean it's a fascinating story, how you came from relatively humble roots. Like many of us that have been on the screen, to running one of the longest, or successfully running a hedge fund that's been in business just about as long as any. And so we can take us through where you're born, how your schooling progressed, and then how you made your way to Wall Street, it'd be fantastic.

Micheal Vranos: (02:49)
Oh, thanks. Okay, thank you Troy. Sure, so I was born in Worcester Mass, and when I was young, our family moved to a town called Ellington, Connecticut. Hence, the eponymously named firm. And Ellington was and still to some extent still is a farm town. They grow shade tobacco there, which is tobacco that wraps cigars, corn, and there was a lot of dairy back then too dairy farming. My father was an engineer, and my mother was a nurse. And when I was young, I just spent a lot of time outside. And I played a lot of sports, I was a decent athlete, and I got involved in bodybuilding in my late teen years.

Micheal Vranos: (03:32)
When I got into Harvard, I was okay in math, and I spent a lot of time even at Harvard, in the gym at school. And this is important because it had some bearing on my decision to go into business because I kind of like being around people. And studying and being isolated was not exactly that. So I had written an undergraduate thesis and was given a grant by the NSF to go to graduate school in math, in Stanford. And at the very last minute, which is last minute meaning, let's say April of my senior year before graduation. I decided that it would be better to quote unquote, go into business. But I didn't know what go into business meant. I used to train with a fellow from the gym, from Harvard Business School. And he told me if I applied to jobs at Kidder Peabody, it would be great because the lunches were free, and they were very good. And if I was in sales and trading, I could be out by five o'clock and I could get to the gym. That sounded-

Troy Gayeski: (04:33)
Mike did they have protein shakes back then? And all the things they have today?

Micheal Vranos: (04:38)
Yeah, it was down at 10 Hanover square. And you could order out at the various places and things like that. It was good 80s food back then. So I decided to do it. And I was offered two jobs at Kidder Peabody, the two openings. And one was in sales and trading, and the other one was in project and lease finance. But the latter was one where I'd have to work more hours, but it was 24,000 instead of 22,000 a year. So I went for the lower salary job because I could get out at five. This was my brilliant logic back then. Anyway, so I started at the Chicago Board of Trade, and I ended up in New York by the fall of 1983.

Micheal Vranos: (05:17)
And I was supposed to be doing research in mortgages, but the traders stopped showing up to work. And they just kind of threw me in the seat. There I am 22 years old, having to figure out everything myself. There was no research group, it was pre-OAS. So the ideas of coupon compression and negative convexity, one had to sort of infer from the markets. Now, it's also important to realize back then, that rates were very, very high extraordinarily high. The current coupon mortgage rates had just dropped from 15% to 13 and a half percent, and rates have been more or less dropping for the last 40 years. And Kidder Peabody wasn't exactly Salomon Brothers, they ran the market back then. But we built our group up slowly over time. And as John mentioned, by the early 90s we became the largest CMO issuer on Wall Street and our group became the firm's profit leaders.

Micheal Vranos: (06:20)
We also produced back that a tremendous amount of mortgage backed derivatives. And in the early 90s, we developed agent based prepayment models that we still use today at Ellington to help us value these securities and these models. They consider each borrower as an individual agent who makes an economic decision to prepay or default based on certain factors, economic factors, and these agents comprise a distribution that we track over time, and that's the basis for the model. Anyway, so leaving Wall Street at the end of 94. And I'll get to the crisis of 94 later.

Micheal Vranos: (07:00)
It was a very good time, because the Fed had been raising rates precipitously, and mortgage backed securities, especially derivatives were highly undervalued. So as John mentioned, we formed Ellington in the last days of 1994. Although, it's important to say that the seeds of the partnership were planted almost 50 years ago. Larry Penn, who's our vice chairman and chief operating officer was a fellow that as a freshman I met at Harvard. And John Geanakoplos our head of research. The well known mathematical economist, and James Tobin, professor of economics at Yale is my cousin. The five of the six regional partners of Ellington... I'm sorry, of the six original partners of Ellington five are still with us today 25 years later.

Micheal Vranos: (07:51)
So we're now a firm of 155 people. We manage about 11 billion dollars across hedge funds, private debt, some long only, and permanent capital vehicles in the forms of REITs that traded in the New York Stock Exchange EFC and earn are the tickers. We write and use our own interest rate prepayment in default models for RMBS, CMBS. And corporates and as I mentioned, develop these models over decades. So that's, a little bit of my background. I can talk a little bit about some of the crises I saw back then, and how it applies to what we're seeing now if you're interested.

Troy Gayeski: (08:38)
Yeah, of course Mike. But before we get into that the question everyone's dying to ask is, how much can you bench press back in the day?

Micheal Vranos: (08:45)
Oh, that's an interesting question. You know-

Troy Gayeski: (08:47)
Don't take too long answer, though [inaudible 00:08:50] my man.

Micheal Vranos: (08:51)
Okay, I'm going to be very honest with you. 395.

Troy Gayeski: (08:55)
Not bad-

Micheal Vranos: (08:56)
It was okay.

Troy Gayeski: (08:56)
It's not bad for a man of your stature. I'll give you credit.

Micheal Vranos: (08:59)
I never got the 400 it was one of my worst lifts by the way the bench press it wasn't-

Troy Gayeski: (09:05)
Yeah, what was your best one the squat and the deadlift.

Micheal Vranos: (09:09)
Probably the squat, yeah.

Troy Gayeski: (09:10)
Squat, yeah. Same here man. That was always my most powerful movement. So, good for you.

Micheal Vranos: (09:16)
I don't know that it's done me a lot of good now at this point. But thanks for asking anyway. So-

Troy Gayeski: (09:24)
But segwaying back to business, because I know you've obviously been a huge lifter your whole life. In terms of the crises you went through, you've touched upon the 94 crisis with asking which is rate driven. You've obviously managed to long term capital, manage to the financial crisis. Just touch upon a few highlights and lessons learned or some of the keys that allowed you to survive. And then once we get through that I want to touch upon the longevity of your firm, because that's something that we feel people don't appreciate enough how difficult it is just to stay in business over time.

Micheal Vranos: (09:59)
Yeah.

Troy Gayeski: (10:00)
So shoot on the crises lessons and some of the experiences there. And then we'll get into some of your keys to longevity.

Micheal Vranos: (10:07)
Okay yeah, sure. So with all these crises, we've tried every possible way to get out of business, and it hasn't happened yet. But there's plenty of mistakes made, and there's a lot to learn. And I think the first real stark sort of learning experience and example, was the crisis of 94. To which you alluded, which is the precipitous rise in rates starting in the early spring of 94, and it's really important to realize back then. The Fed was secretive about their plans. They prided themselves in being sort of opaque with their plans, and they tightened and raised rates seven times, pushing libor from three to 6% over the course of the year in less than a year.

Micheal Vranos: (10:48)
And this was a total disaster for MBS derivatives, which were these highly leveraged securities that carry durations of at least 20 years, sometimes 30 years with negative convexity as well. So a lot of real money accounts lost money back then like mutual funds and things like that. But there was one hedge fund in particular, and there weren't many back then by the name of Asking Capital that had these securities levered as well. And that was my first experience in seeing the deadly effects of the combination of leverage and miscalculation of risk. And the two sort of work together they conspired to create a disaster. And also sort of the rapaciousness of lenders at the time, where there was not a big idea of forbearance back then. And I think, in the COVID crisis now, I can see anecdotally, I thought lenders acted more nobly than they had back then in the 90s. That's been my observation.

Micheal Vranos: (11:50)
Anyway, and then there was as you alluded to the crisis of 1998 the LTCM crisis. And that was also very interesting. And that was a crisis of leverage. And that was rather specific to hedge funds unlike the great financial crisis. And if I recall correctly, and someone in the audience might know better than I, and can check my memory. But they sent out long term capital sent out a letter on July 31 of 1998 stating that they were down 51%, and I think that was the number. So I found that to be incredibly odd, because it being down 50% given that kind of leverage, was akin to saying, "Okay, I've got the edge of his dime, and I'm going to put it on the edge of this razor blade, and it's going to balance."

Micheal Vranos: (12:45)
And that's just not an equilibrium point for a leveraged fund. And so something was going to have to... Either you're going to recover or blow up. And we know what happened, but the aftermath of that was an unnamed prime broker was making very aggressive margin calls to Ellington, and other hedge funds at the time trying to break term financing even before maturity. And we had a lot of term financing out. And I think they just made the calculation they'd rather take legal risk than market risk. And they were just looking for margin just to blow out all their borrowers.

Micheal Vranos: (13:25)
So from that, I learned three important lessons. One is not to trust anybody, two is to keep more cash on hand than you otherwise would think to anticipate the panic of others. And three is don't let your prime broker hold your money. A prime broker can hold up your trades and cause fails to others. So you can use prime brokers and we use prime brokers, but they shouldn't control your money. You should be your own prime broker. And that's not easy. That's why at Ellington we have so much infrastructure, because you need to develop great systems in risk management to hold your cash. But I think it's crucial.

Troy Gayeski: (14:10)
Yeah. And it would also be fair to say having low leverage, right? That was a lesson from both 94, and 98 correct?

Micheal Vranos: (14:15)
Absolutely, but that becomes sort of a follow on from your work backwards from there. You have to figure out how much cash you need in these scenarios, and that governs your leverage. So it's a sort of that's the flow of logic.

Troy Gayeski: (14:33)
And obviously, many of those lessons help you survive the financial crisis, and then also help mitigate losses in March as well, so-

Micheal Vranos: (14:41)
Yeah.

Troy Gayeski: (14:41)
... there's been much discussion on the financial crisis. I thought you touching upon LTCM in 94, which seems like eons ago was very informative. Why don't we segue to March and how you're able to mitigate losses compared to many of your peers.

Micheal Vranos: (15:00)
Okay, so March was interesting. So that, was a time where there was obviously a crisis of leveraging cash as well. And it has to do with managing, again left tail risk. So what we've done internally as we had, and have a lot of what if scenarios? For example, what if high yield goes down 10%? What if high yield goes down 15%? What happens to RMBS, CMBS in corporates. Particularly mezzanine tranches that carry a little extra interest rate, but whose delta will expand tremendously. So negative credit convexity, if you will, in scenarios that I've described to you. And then on top of that, what happens when that happens to haircuts?

Micheal Vranos: (15:55)
And those are the sort of what if's and scenarios that we had run. Starting actually since 2008. And even before that helped us sort of survive and actually put money to work after the March crisis of this year. I also think it's you can't underestimate the importance of having the right kind of investors so that when you call them, they come alongside. Because, the amount of money that you might husband for this sort of situation isn't nearly as impactful, as if you have investors that are willing to come along with you. And so if you could indulge me for a second, I need to get on my soapbox about this one issue with investors because although we had Ellington managed both hedge fund ENP style capital. I believe investors should perhaps take a slightly more charitable view toward the hedge fund structure. We should all keep in mind that hedge fund investors own a put. They can take the cash and put the securities back to the manager at any time oftentimes in inopportune times.

Micheal Vranos: (17:11)
And they can do this because they may have their own liquidity needs, or see better opportunities elsewhere. So as a hedge fund manager, you need to manage that put as well. And that's a drag on returns, quite frankly. Alternatively private equity, they have a call on cash, that's a drag on investor returns, and that accrues positively to them. So we are actually here at Ellington in active discussions with some pension allocators. You know that we sort of like, "Who owns that put, and what's the value of that worth PE versus, versus hedge fund." And I think it's an interesting, separate topic of discussion. But anyway, I'm digressing a bit but the point is that if you have clients that you can call even if you're a hedge fund in a crisis you can ameliorate this problem. And that's one of the ways that we put about three billion to work in April in May once the crisis hit.

Micheal Vranos: (18:13)
But again you're forced to be really fastidious about managing this left tail risk, and the liquidity so that you can buy and not sell in a crisis. And that includes not just putting aside capital, but effectively credit hedging, effectively having robust models that will tell you more or less where you think your assets will be in a big move. I mean keep in mind, the high of the index move 20% in a very short amount of time. So even in our risk scenarios, we needed to extrapolate a bit where we had down 10 and down 15 to some degree. So-

Troy Gayeski: (18:50)
Mike before we get into the key opportunities today. I think you touched upon two key points that have led to your longevity one is obviously a culture of risk management. Two is having a client base that knows when there's a buying opportunity, and isn't selling bottoms repeatedly, which is a recipe for disaster in any strategy. So those are two keys that I think that have led to your success. Are there several others that you'd like to mention that it led to just the longevity?

Micheal Vranos: (19:21)
Well, I do think modeling risk is very important. I can't emphasize that enough, because you really have to fly the plan. You're going to at times, it's like you're a pilot on instrument reading at times, because we've seen times where certain mezzanine CLO tranches for example, that we thought had the risk of let's say, of a high yield index, when it was at 108. Going to have maybe four times the risk of the high yield index, when the high yield index was 15 points lower. I don't even know that the PM believed it, but it was true. And so you need to, because modeling is really, really important to get the risks right at various times, not just now. Because, it's one thing to model risks, local risks, it's another thing to model risks for big moves. And it's not so easy, especially with moves that you haven't seen before. There's no way to know that you're going to be exactly right.

Micheal Vranos: (20:26)
Another thing I think, is it's obviously no small feat to get investors to come along with you. Investors have their own stresses at these times A. And B I think, even when an investor is looking to invest with you. And we've been around for 25 years and we're easy to check out and all that. Sometimes it takes months or even years and then the opportunity's gone. I think it's almost a little crazy sometimes. I understand how we got to that point in this industry, but I think it can hamstring investors at times too. That's a separate issue. Anyway, so-

Troy Gayeski: (21:04)
So definitely a culture of strong risk management, having clients that will stick with you in draw downs and actually add capital are very key. And it's very interesting you bring up the point of doing your in house modeling, right, which I think is a key to all success for investors is that they're not relying upon third parties to provide them with information sources, they're taking the raw data, and actually compiling outputs that make rational sense for informed decision making. You'd agree with that right, Mike?

Micheal Vranos: (21:30)
I do agree with that. I also think there's some great independent research that goes on out there. And you don't want to have the hubris to think you have all the answers and things. But in the end, you need to control your own data set, you need to know what's going into the cooking, if you will. So I think it's very important. It's expensive to do that by the way, of our 155 people roughly a third, or so or more. Are so how investment professionals have a high order, right? So the way we do things Ellington, it's a very collaborative environment. So we have the PM, and the assistant PM, and the desk analyst, and the researcher all sitting together. They're all part of a team. But any breaking that chain can be tough, if you're looking at some point, if you're just relying on an outside vendor, maybe that particular chain might not be necessary. But that's just not the way that we've chosen to do things.

Troy Gayeski: (22:35)
So Mike, let's segue into today's opportunities. Obviously, there's still areas of dislocation and structured credit. There's a lot of discussion on where pre-payments means are going to be on a go forward basis. So touch upon some of the favorite areas that you see for opportunities the next 6, 12, 18 months.

Micheal Vranos: (22:54)
Okay, sure yeah. So basically, there's two general sets of opportunities. And this is a very, almost a dumb statement. But there are the fundamental value investments. And then there's relative value trades, let's say. And the Fed has really engineered a broad tightening of almost all assets, right? So I think going blindly long is probably not the best prescription right now. And it is harder to find fundamental value investments, but they do exist. And I think one is in non agency mortgages still. And I can go into a little bit of detail about that if you'd like. But if you look and see, so what was the provenance and the opportunity. Was again, this massive selling of these assets on Sunday, basically on March 22nd by REITS.

Micheal Vranos: (23:54)
Leading up to that you would seen a lot of same day selling from really well known, long only managers leading up to that week, looking to raise cash. So this was a cash grab. And the selling by the time that week ended was rather indiscriminate. It was a selling of all structured products, but mostly legacy non agency mortgages, and later on NPL and RPL mortgages, but unlike 2008, like I said, mortgages were not the cause of this problem, and then selling them was not going to be the solution. I believe that was a big technical move, and that there's a lot of value. So what's happened since then? And why do I think that?

Micheal Vranos: (24:38)
Well, there's technical and fundamental reasons why I think that, first of all, is in response to what happened. And maybe everyone knows this, but it's really important to say nonetheless, that the Fed has had tremendous impact on the mortgage market and structured products. They've increased their holdings, net of pay downs, and you mentioned prepayments Troy, so net of pay downs, that's not a small step fee of 600 billion. And so they'll they own two trillion of mortgages, which is like 30% of the $6.7 trillion pasture market. Okay, and to think that-

Troy Gayeski: (25:12)
Yeah, all agency pastures right, Mike?

Micheal Vranos: (25:14)
Yeah.

Troy Gayeski: (25:14)
I [inaudible 00:25:15] to specify for people.

Micheal Vranos: (25:16)
Yeah, agency pastures exactly. And their balance sheet has increased 2.7 trillion since March. So it's the rising tide, is that lifting almost all boats at this point. And this is a substantially faster increase in balance sheet than other of the QE programs. So there's a lot of technical support, let's say for this market. And so what's going on right now, in non agency RMBS. So first of all, from a fundamental standpoint the housing market right now is incredibly strong, which is a positive for the securities. There's very little downside, I believe in legacy nine agency securities right now because of the low LTV. So the legacy RMBS house price appreciation, adjusted LTV is right now, are 50% or less. Meaning that for a typical borrower the outstanding loan value is only about half the value of the house itself.

Micheal Vranos: (26:22)
And these loans on average have been in existence for 15 years, and they were being paid through during the great financial crisis or have been rehabilitated and such. And we can still source that product outside of 250 basis points. Sometimes it's wide as 300, also sort of as a cousin to those securities, we saw some interesting bonds recently that have been subordinate trenches off of re-performing deals at 500 basis points to libor. In each of these types of securities are really insensitive to delinquency. And I think you'll see that the delinquencies in that market are quite high, they're probably like 18% or something like that. But even if you were to double those delinquencies and take into account what the existing defaults would be. CDR is almost at 20, and such like that, you'd still get your capital back. And you'd probably get a decent spread to libor, what we calculate in many cases 200 to libor.

Micheal Vranos: (27:24)
So it's a great risk reward. And that's with the backdrop of the Fed, and the backdrop of the strong housing. And I mean housing's just really been incredibly strong Troy. You've got house prices went up a lot in July, I think it's 25% month over month in July, and they're up eight and a half percent on-

Troy Gayeski: (27:46)
Annualized, annualized.

Micheal Vranos: (27:50)
Annualized.

Troy Gayeski: (27:50)
Yeah, that's quite a move.

Micheal Vranos: (27:51)
Right. But eight and a half percent since January, I believe.

Troy Gayeski: (27:56)
Oh, it's incredible yeah.

Micheal Vranos: (27:58)
Yeah, big jump in July. And supply is very tight also, right now we have the lowest July supply if you measure by month of inventory in housing, since it's been measured in 1982, going back to 1982. So these are really great fundamental and technical support for non agency mortgages.

Troy Gayeski: (28:29)
And so Mike, that's a great summary of opportunity and legacy RMBS, you want to talk briefly about the non QM market, because that's another area of opportunity you're saying?

Micheal Vranos: (28:36)
Sure. So the non QM market and this ties into REITs because I think the non QM it is an investible market. It's not as nearly as big as these other markets. But I do believe there's an indirect way to get exposure to these markets also through REITs. But nonetheless, let me talk about non QM and then tell you about different ways to access that market. Because, a lot of the value in non QM goes through the securitization from origination through the securitization chain. But the non QM market consists of borrowers who have over 700, FICO that are making healthy down payment. So these are 75 LTV borrowers who are paying coupons close to 6% right now, which is double that of an agency mortgage, and more than 500 basis points over the 10 year treasury. So, you can imagine that there's an incredible value in that chain.

Troy Gayeski: (29:41)
In amortizing securities too, right Mike.

Micheal Vranos: (29:43)
Yeah, amortizing 30 year secure... So it's almost a little crazy. So anyway, and what's interesting to me is that if you look at REITs in particular REITs, that house originators. They seem to be the ones to me that seems to be the most undervalued. So they're owning that supply chain and those securitization profits, and they're being valued in many cases at 60% price to book. And I think if you look at the REIT market in general, and that's why I think it's an indirect exposure, if you will. But I still think it's something to talk about because the backdrop is what just happened with Rocket and you'll ever know where did Rocket come in, 20 times earnings or something like that. And most REITs are owning their own originators about one time margin. And I understand these originators aren't Rocket, but there's a big chasm there, if you will.

Micheal Vranos: (30:40)
So if you look at the $1 billion REIT ETF REM right now that's down 40%, almost year to date, but almost like 62% of the constituents of that REIT are RMBS type hybrid RMBS REITS. So you've got these REITS that have mostly exposure to residential mortgages that are comprising this index that's down a lot on the year. Okay, so you can say should it be or shouldn't be. But the average price to book that we find of the 10 hybrid REITs that we follow is around 70%. So I believe you can buy today's assets at last month's prices or two months ago's prices, by getting into some of these REITs. And again, with the REITs with the originator arms, the price to book is even lower. And you want to look for these REITs that are functioning now like Ellington financial, for example that are taking advantage of this origination and refinancing boom that's going on right now.

Troy Gayeski: (31:49)
And then Mike, really quick before we turn over to John, for questions from the audience. Sort of get your thoughts really quick on CMBS, as well as CLOs because that's another area-

Micheal Vranos: (31:56)
Yeah.

Troy Gayeski: (31:57)
Both of those sectors, you're very active in.

Micheal Vranos: (31:59)
Sure. So that's actually dovetails with what I think is the second set of opportunities, which is more relative value. Because there are some headwinds in the corporate and CMBS market, that's obvious. But there's also some very good news, like in CMBS for example. Troy it's important to realize that that markets blessed with great hedging indices. There's substantial relative value opportunities with CMBS hedges that exist right now. And there's some pretty wide bases just between cash and the index itself. Sometimes as wide as 250 basis points, also a lot of the marginal dollars left that market, a lot of hedge funds can't participate anymore.

Micheal Vranos: (32:43)
And so we recently committed to buying a first class B strip at a very attractive levels were 300 basis points wider than pre-COVID. And we were also able to shape the collateral pool which is really important, and that brought it that strip to us it meaningfully wide spreads outside of 17% no loss, those are generally zero to eight or zero to seven and a half scripts. So it was we see opportunity there in the basis, in-

Troy Gayeski: (33:14)
Mike what do you think that is loss adjusted with the cleaner collateral 12, 15?

Micheal Vranos: (33:19)
So that's, a complicated question because generally, it's not a question of... I don't know, ultimately what the losses will be. It's the timing of the losses that matter most, we generally look to sell off the mezzanine tranches and own equity in those particular cases. And so knowing that we don't value the principal part of the equity very high, but that we value the interest payments rather high because we feel that there'll be an attenuation of losses, but ultimately it's very possible to have these high single digit losses. I do think it's possible without a doubt. But that's why again, I espouse more of a relative value approach to these markets. The same thing in CLOs for example. Do you have any other questions about CMBS?

Troy Gayeski: (34:14)
No, I think it's great if we jump to CLOs.

Micheal Vranos: (34:17)
Yeah, so for CLOs again, it's the same idea. The Legacy CLO market right now is all over the place. Tier one managers with on the run bonds are really enjoying some pretty good execution on their collateral but for other managers, especially where you've got shorter to maturity de-leveraged structures out of the reinvestment period. Sometimes the price discovery is horrible and there's a lot of negative price pressure there, I think. Some for selling and we're able to buy de-levering post reinvestment CLOs like 20, attach 40 detached at 750 to libor unlevered and these things have 115% NVOC. So they're covered for now, it would take an extreme stress for the high yield index for that tranche to take loss, tranche like that.

Micheal Vranos: (35:08)
So hedging with the high index on a sort of a collection of those types of securities. We think that's a great relative value trade.

Troy Gayeski: (35:17)
Yeah. So that's a great way to end our segment and turn over to John. I got a new nickname for you, though Mike. It's 395 Mike, you like the sound of that? I like that.

Micheal Vranos: (35:27)
400 sounds better, but-

Troy Gayeski: (35:29)
It's sort of come on, man. I like how you kept it real and kept it honest-

Micheal Vranos: (35:36)
Yeah, I'm going to be honest-

Troy Gayeski: (35:36)
Didn't squeeze in that extra five pounds.

Micheal Vranos: (35:36)
Not going to round up, no.

Troy Gayeski: (35:37)
Good man. John, why don't you take it away with questions from the audience? Okay.

John Darsie: (35:41)
All right. We have a few in the queue here. If you have additional questions, please submit them in the Q&A box at the bottom of your screen and we'll try to get them in before we let Mike go. The first question is just about technicals in the mortgage backed securities market, and whether you think there will continue to be a recovery through the end of the year, or what risk factors you're looking at are for a potential pause in the recovery in those markets?

Micheal Vranos: (36:03)
So the latter part of the question is the best part, and there are things that one needs to be concerned about, as you see this slow recovery in residential non agency. I assumed the questions about non agency. With agency, you've had a massive recovery because the Feds bought everything right.

John Darsie: (36:24)
Yeah.

Micheal Vranos: (36:25)
So, you know that the Cares Act, which is providing for this enhanced income. Sorry, I'm moving around has really basically expired on July 31st. And only a few states I think have adopted taking up these payments. So you will see, I think rising delinquencies, which will cause people to stop. Investors to pause and we're sort of counterintuitive but lower balance loans have a better pay stream track record over since the COVID crisis than higher balance precisely because of the enhanced income benefits from the government. And when that goes away, you're going to see that reversal and our extrapolation is that you will see much higher delinquencies. Nonetheless, it shouldn't affect the ultimate prepayment of principal to the securities.

Micheal Vranos: (37:25)
But that will cause applause, no doubt. The other thing is that there hasn't been a real back filling of collateral to the marginal dollar like say, in hedge funds that normally buy these. And I'm thinking that real and long only managers real money and long only managers will pick up the slack a bit, but that that could take time and it might not happen, might not happen at all or right away.

John Darsie: (37:53)
Thank you for that. The next question is given your experience firsthand with the CLO, CTO and CMO dislocation in 94 and 98, as you explained earlier. What lessons are you taking from the first quarter and second quarter of this year in 2020, of how certain large credit shops, ran their models ran their leverage or ran their business platforms.

Micheal Vranos: (38:18)
History just tends to repeat itself when it comes to leverage, it's just amazing. And I do believe that what led up to it was... I mean I wouldn't say excusable, but somewhat understandable. What happened is that there was just such a fight for yield for so many years. And credit had almost monotonically gotten better, since 08 and there have been some hiccups without a doubt 2018 and late 2015. But every time that that happened, those hiccups happened. You were rewarded, to take more risk and it's just added to it. And then you saw volatility go down, as people started to look for yield that way by selling covered calls and all that. And when you sell volatility to somebody who has nothing to do with it, you actually make volatility go down more.

Micheal Vranos: (39:13)
And so the market kept grinding into this pick up pennies in front of the steamroller thing. And it was just bound to happen at some point who knew would be this something else. So you just really do need to keep that cash aside. I guess that's it. It's a sort of a repeat of what I said.

John Darsie: (39:30)
Yeah. What are your thoughts on inflation on the RMBS market? And are you modeling any inflation risk into your models?

Micheal Vranos: (39:38)
We don't right now model anything other than what would be I would say is rather benign inflation. I do understand that things have changed recently. I haven't reviewed any models recently. In terms of what the Fed has mentioned, I haven't really reviewed any models would take into account any significant difference from what we've had recently. I mean inflation in general does tend to help a lot of these assets that we're talking about.

John Darsie: (40:11)
Do you see an opportunity in a hotel CMBS and similar types of asset classes?

Micheal Vranos: (40:17)
I don't know. I'd have to talk to my PM. I don't have a strong opinion about that. I will say one thing, that a lot of people... The market is tends to be somewhat backward looking and even someone in your audience asked a question about what could cause a pause or a problem. I think all of us here need to acknowledge that the more subtle in one drawn out disaster scenario is that real returns go negative. And you're sort of alluding to that in your question, and that when the Fed has bought so much paper, and with inflation on the other end, outpacing the yield of the securities that it could be a slow death. And it's tough, especially for pensions and others. And that's a big concern.

John Darsie: (41:05)
I want to finish with a question about your philanthropic work, which I know is near and dear to your heart. You're one of the most active philanthropists on Wall Street you help lead the Help For Children Organization used to be called Hedge Fund Cares. Could you talk about a few other causes that are most important to you and the most satisfying part of all that philanthropy that you do?

Micheal Vranos: (41:24)
Sure, so there's a there's an intersection of philanthropy and science that for me, that's very interesting. I believe that we're going through a sort of a renaissance in the life sciences right now akin to what we went through in tech many years ago. And that you're seeing this happening now with different forms of stem cell research for example, I'm a big supporter of different kinds of stem cell research initiatives. Also, certain neurological diseases that may or may not have to do with stem cell research, the effect of the gut microbiome on diseases too. What we eat, things like that I think are really important. And it's more important to me personally than whether my phone works better or 5G or something like that. It's how are we going to live healthy for the rest of our lives? And I think it's very important. And I think we're going to see great strides, probably after I die, of course, but like I see great strides in that area. I'm very excited about that.

John Darsie: (42:34)
Well, you look great. You said your girlfriend gave you your haircut, but she did a fantastic job. So thanks so much for joining us, Mike. It was great to have sort of this long form format to be able to talk to you about all your experience, which I think is fascinating. Troy, do you have a final word for Mike?

Troy Gayeski: (42:50)
No, Mike it was great to have you on and again, I think compliments to just the breadth and depth of experience. And again, I keep saying the word longevity, but having invested in hedge funds for close to 20 years now, it's hard to stay in business over a long period of time and some of the most well known managers as recently as five years ago are no longer in business so compliments to you and your team for doing that for so long.

Micheal Vranos: (43:14)
Thank you, Troy. And thanks for the opportunity to speak today.

Peter Mallouk: How to Accelerate Your Journey to Financial Freedom | SALT Talks #38

“High net worth individuals deserve the expertise without paying the price of conflict.“

Peter Mallouk is the President of Creative Planning, which provides comprehensive wealth management services to its clients. Peter is a pioneer of the Independent RIA model, with clients in all 50 U.S. states and abroad.

"Why is it that a company is selling a client its own product and charging a fee to do so?” With Peter’s background in tax and law, he’s able to offer clients a comprehensive overview of their wealth management picture while adhering to a conflict-free philosophy. However, he warns, “Yield without risk does not exist.”

Turning to active vs. passive management, he notes that the latter has indeed outperformed the former since 1980. “Large tech companies make up almost a fourth of the S&P 500,” he explains. Should their performance change, it will have a profound effect on passive management’s appeal, and there may be a move away from yield-oriented assets to alternative assets.

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Peter Mallouk

President

Creative Planning

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:08)
Hello, everyone, welcome back to salt talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum at the intersection of finance, technology, and public policy. We've been doing these SALT talks, which are a series of digital interviews during the work from home period in lieu of our global conference series. What we really try to do is replicate the type of thought leadership that we provide at those conferences, which is providing our audience a window into the minds of subject matter experts as well as providing a platform for what we think are big, world changing ideas, and today, we're very pleased to welcome Peter Mallouk to SALT talks.

John Darsie: (00:45)
Peter is the president of Creative Planning Incorporated, and its affiliated companies. Creative planning provides comprehensive wealth management services to clients, including investment management, financial planning, charitable planning, retirement plan consulting, tax service and estate planning services. Investment management is at the core of the services of Creative Planning, and they have almost 50 billion in assets under management as of July 30.

John Darsie: (01:13)
Creative Planning is customized tailored portfolio solutions for clients in all 50 states and I know some international clients as well. Peter's leadership in the industry has not gone unnoticed. He was one of the pioneers of the independent RIA model. He's the only person to have ranked number one on Barron's Top 100 independent financial advisors in America list for three straight years in 2013 through 2015. He's also appeared on the cover of Worth magazine's 2017 and 2018 issues of the Power 100, which is a list of the most powerful men and women in global finance.

John Darsie: (01:47)
In 2017, New York Times wrote that, "Creative Planning is at the vanguard of a profound shift in finance." I know we had Stephanie Link from Hightower on last week if you caught that episode of SALT talks. Peter is one of the pioneers of that independent RIA model that Hightower is another player in that space. Peter and his wife, Veronica are passionate about giving back to their local community in the Kansas City area. They're involved in many local and national efforts mainly focus on providing help for the less fortunate.

John Darsie: (02:16)
They've been honored for their tireless work with many causes. Peter graduated from the University of Kansas, so he's a homegrown star there in the Kansas City area, in 1993 with four majors, including degrees in Business Administration and economics. He went on to earn a law degree and an MBA in 1996, also from the University of Kansas. He's also earned his Certified Financial Planner practitioner designation. So in addition to being a business executive, he's also a CFP.

John Darsie: (02:46)
Peter and his wife Veronica reside in Leawood, Kansas with their three children, Michael, JP and Gabby. A reminder if you have any questions for Peter during today's talk, please post them in the Q&A box at the bottom of your video screen and hosting today's interview is Anthony Scaramucci, the Founder and Managing Partner of SkyBridge Capital, a global alternative investment firm, as well as the chairman of SALT. With that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (03:11)
John, thank you, Peter. It's great to have you on even though I'm still sore at you for the 2015 World Series situation. You guys just ripped through and destroyed my Mets. So I just want you to know that that feeling is still with me, Peter. It's still with me. The pain is still with me. I want you to take it back. My colleagues often say to me, don't ask people about their backgrounds, because you can find it on Wikipedia but I find that to be the most interesting part of people's stories. You tell us something we're not going to find on Wikipedia about you, your family, how you grew up, how you got to where you are. By the way, congratulations on your great success, but tell us something that we wouldn't learn from Wikipedia about you.

Peter Mallouk: (04:01)
I think probably what you wouldn't learn and I think this is not really my story, but the people I'm most impressed with are immigrants, like people that come to the United States and have a lot of success. If you really look at that group of people, they're off the charts in terms of what they accomplish. Because if you can leave India or Southeast Asia or Africa and find your way through all of that and come to the United States, it's kind of a cakewalk when you get here because someone else has done a lot of the hard work and then you've taken that leap.

Peter Mallouk: (04:35)
So I'm fortunate that two people did all of that for me, my parents. So you've got the kind of the best case scenario I think, as an American is to not have had to be the person that had to have the guts to do all of that and I really question, I think I would have never done that. I grew up 10 miles from where my church, my school, my office, 40 minutes from I went to college. Wherever I was born I was going to be, but that wasn't my parents attitude.

Peter Mallouk: (05:05)
That's the story of millions of Americans. So when they came to the States, it really became the kind of the best case scenario because you got to see people that really appreciated all the things that the United States has to offer that really understood how tough it could be in other parts of the world and has sacrificed everything. Like all our friends, all their family. They were the only ones to come here.

Peter Mallouk: (05:30)
So it really gave me a different mindset growing up. That mindset to me, if there was one thing if you took it out of me I wouldn't be where I was, it would just be that, was just that good fortune and that to me is the difference and I'm forever grateful for that and every year that goes by, I appreciate it more. It's also given me incredible insight into our clients.

Peter Mallouk: (05:54)
So many of our clients that have reached the top of their professional United States in business or medicine or whatever, they're immigrants. It's interesting to watch what they invest in, versus just third or fourth generation Americans. They will pay every penny of education all the time, from whatever they need to do all the way through if the kid needs help, or it's advanced tutors, tutors, when they're in college will pay for all of it. Four years, eight years, six, whatever. It's just the things that they value and invest in, I can understand it better as well. So it's helped professionally too.

Anthony Scaramucci: (06:30)
Well, I mean, you are also the pioneer in many ways of this independent RIA model. Your firm is one of the fastest growing in the space, but the RIA model in general is a very fast growing concept. You were an early pioneer. So tell us about your early vision, what came to maturation for you, and where are things going now for RIAs and for your firm.

Peter Mallouk: (07:01)
So there were some very delayed aha moments for me. So I was an advisor to other advisors for the first six to eight years of my career. I would do legal work for them, give tax advice if someone was selling a business, and I really was doing that for other advisors. So I'd go to an insurance company, a brokerage house or an independent firm, and I would do that for them. After six years of that, eight years of that, depending on how much you count of my first years, I realized that hey, sometimes products are being sold that don't make sense.

Peter Mallouk: (07:34)
Why is it that this one company is selling their clients their own products? Just really got a first hand seat at the conflict, like in a really big way. I saw it, I had probably worked with over 50 to 100 firms and I really thought, this is an interesting space. There's just embedded conflict. Somebody comes in, pays an advisor a fee, and then gets sold their product or then also buys a product on commission or winds up with an annuity.

Peter Mallouk: (08:01)
It just seemed strange and I didn't have a vision of I'm going to fix the space, I just said, I don't want to be a participant in that space anymore. So I'd like to have a firm that's independent and doesn't have their own products and doesn't work on commission and so on. I also knew that it would be nice to be able to look at a client's entire wealth picture. So if you've got somebody who's worth a few million dollars, or 10 or 100 million dollars, it's nice if you can earn 1% more for them or 2% more for them, but if you can save them, hundreds of thousands or tens of millions and estate taxes or capital gains taxes, that's where you're really moving the needle and that was really my background was that tax and law component of things.

Peter Mallouk: (08:42)
So the idea was to have a firm that really did everything it could to grow and protect and transfer the wealth of our clients and also manage the money in as conflict free away as possible. That's how we got going here and really didn't have our sights set on being the leader in the industry. As time went on, it became clear that we had an opportunity to do that.

Anthony Scaramucci: (09:10)
Let's talk about that independence and that lack of conflict and how it balances up against others that you're competing against. So, go ahead, pitch me. I'm your client, I'm coming in with 100 million dollars and go ahead, Peter, why am I using you guys?

Peter Mallouk: (09:26)
All right. 100 million dollars. You're probably looking at, you've got two choices-

Anthony Scaramucci: (09:30)
If I was John Darsie, I'd be coming with 300 million but since I'm only me-

Peter Mallouk: (09:34)
I'll take you and your 100 million. That'll work great.

Anthony Scaramucci: (09:37)
Go ahead. Go ahead, Peter.

Peter Mallouk: (09:38)
All right. You just saw the Mets, right? We could have some big cash coming in, and we're going to have a conversation later.

Anthony Scaramucci: (09:44)
Amen.

Peter Mallouk: (09:46)
All right, what we do is you basically got two choices. You got the brokers world and the independent world. The brokerage world is the JP Morgan's And the Goldman Sachs and great companies and they've got some great products. You're going to go pay them a fee to manage your money, and you're probably going to wind up with their products. That's just what's going to happen, or in the products of people that pay revenue sharing. Or you might go to the independent world and say, hey, I want a fiduciary. I'm going to go hire an independent wealth manager, and 95, 99% of those firms don't even manage as much money as you have.

Peter Mallouk: (10:19)
So there's not scale or breadth and depth. So here, you've got Creative Planning, that had 50 billion in assets under management, clients in all 50 states, 100 people that come to work every day that work just in our legal and tax teams. We are going to be able to give you that breadth and depth that somebody like you requires but we're not going to be selling your own products. We have access to all what we consider the top investments in alternative investment space and other spaces, if they're applicable to you.

Peter Mallouk: (10:47)
So the key here is to a high net worth investor, really any investor deserves to get the expertise without paying the price of conflict and that's where I think we sit today.

Anthony Scaramucci: (11:00)
You're doing a lot more private equity as well.

Peter Mallouk: (11:03)
I just pitched you. Are you closed or are you going to sign on now?

Anthony Scaramucci: (11:07)
I'm going to call you afterwards. By the way, I think your pitch is very compelling. I'm just teasing you. My problem is because I deal with every single person in the universe, and all my money is stuck in my fund.

Peter Mallouk: (11:24)
I was just joking.

Anthony Scaramucci: (11:27)
I appreciate what you're saying, a lot. I want to go to another question. Darsie's itching to get in here. So before he steals all of my thunder, Peter, I got to ask a few more questions. You're doing a lot more in private equity, and private equity is flowing through RIAs and through Creative Planning. What's your thought there? Why are we doing more there?

Peter Mallouk: (11:53)
Well, I think that first when we started, we couldn't go get our clients top shelf private equity. We couldn't call a private equity firm and say we managed 5 billion dollars, we want access to your fund. That's a conversation where we had to be at 25, 35, 40 billion to be able to say, hey, we have enough very high net worth clients to have access. We really couldn't offer a best in class until recently and that's a part of it. We don't want to offer anything unless we think we can really offer best in class.

Peter Mallouk: (12:17)
Now, I think in terms of the space, what's happening is people are scared of the stock market, but they feel better in alternatives and private equity is considered an alternative. Now, I don't buy into that on its face. They're all equities. Some are public equities, and some are private equities and this idea that you're safer if you go from public equities to private equities is on its face ridiculous, but for whatever reason, pensions and universities and so on, don't think so.

Peter Mallouk: (12:44)
I do think private equity adds value. I do think that their managers matter a lot, and if you get a good history, a good management team, you've got a pretty good chance of doing better than the public alternatives. So I like having private equity if you have access to very, very tough funds and top managers. You see more demand from that from especially more affluent, at least we do for more affluent clients.

Peter Mallouk: (13:10)
Now there's 8,300 private equity funds. That was a statistic from a few months ago. So today, there's probably 9,300 because they're just sprouting up everywhere because of the demand. I think we're going to see a bloodbath across the space, at some point, with all of the leverage that's taking place and all the money that's chasing deals is driving up valuations. I think people need to be really selective about who they're partnering with in that space if they don't want to be part of that.

Anthony Scaramucci: (13:36)
Well, we agree. In your firm, do you sometimes do special purpose vehicles for your clients as well if opportunities come up?

Peter Mallouk: (13:50)
We don't package deals ourselves, for our clients. So we're always looking for a third party and that way we are never married to a manager. If we don't like one place, we just remove them and go somewhere else.

Anthony Scaramucci: (14:04)
That goes to your conflict free philosophy. Okay, so that totally makes sense. When you're looking at the fixed income space now, the yields are obviously very, very depressed and you have older clients that need income off of their corpus. What do you say to these people?

Peter Mallouk: (14:23)
I just tweeted this morning that yield without risk does not exist. I just keep getting this question from clients now. Hey, how do I get more yield without taking additional risk? How do I get more yield without taking additional risk? It simply does not exist. Everywhere people think it exists, they are someday going to pay a price. So I think the premise for this is you have to start by accepting, you're not going to get more yield without taking more risk. So now all of a sudden, I'm moving closer to equity like risk than I am bond risk and regardless of what the packaging of the product is.

Peter Mallouk: (15:00)
If you except that, you start to wonder why you're just not in equities or alternatives to begin with, because you're going to take the risk, you may as well pay capital gains instead of income, you may as well participate in all of the upside instead of part of it. I think that's the real story is that we're going to see a move away from yield oriented investments that are perceived as low risk towards riskier asset classes.

Anthony Scaramucci: (15:21)
Well, how do you feel about a package of higher yielding stocks, dividend yielding stocks?

Peter Mallouk: (15:26)
I owned those before I owned high yield bonds, because I'm going to get the upside and I'm going to get the upside in a much more significant way and either way, I'm going to get the downside. I think you have interest rate sensitivity. So if you believe we're eventually going to have higher inflation, you can suffer there, and you tend to be more value oriented. As we know, there can be very long periods of time where value can underperform.

Peter Mallouk: (15:52)
So there can be some unintended consequences in terms of correlation with the market and everything else but for someone who wants income, they're very, very focused on income, if that's your overriding factor, then I like them.

Anthony Scaramucci: (16:06)
Makes sense to me. Active management, underperforming passive management, I ask everybody this question because I'm trying to figure it out myself. I don't honestly have the answer, but man, over the last 10, 12 years passive management has by far beaten active management. Is that a permanent thing now or is that going to be re litigated post COVID-19? What's your view?

Peter Mallouk: (16:31)
I think since, 1980, passive has beaten active most of the time for longer periods of time, but usually by a narrow margin. What I think is an anomaly that's happened in the last five to 10 years is these five or 10 very large, big tech companies that are in the S&P 500, the Microsoft, Google, Facebook, Amazon, we know what they are. They make up almost a fourth of the S&P 500. So that's 500 a day is about 505 companies, five of them are a fourth of it, the other 500 are three fourths of it.

Peter Mallouk: (17:07)
Those five have outperformed dramatically all the other stocks, lifting up the index. So passive management looks like it's not beating active. It looks like it's destroying active, but it's really not. If you take those few stocks out, it's just beating it by a little bit like it always does. So to me where you're going to see the story change and I think active will be oversold is whenever these five stocks underperform for whatever reason.

Peter Mallouk: (17:34)
They just simply can't become, instead of one and a half trillion dollar companies, let's say they can't become $10 trillion companies, they can't continue to grow at 35% a year. Eventually something will happen whether it's regulatory or market forces or whatever. When those stall or slow down or God forbid, go down, everyone's going to celebrate active and not only will they celebrate active, the passive people that own small caps will go back to celebrating small caps.

Peter Mallouk: (17:59)
Foreign investors will go back to celebrating foreign. This discrepancy between the international and US, large and small, active and passive, it's not really what it is. It's really a discrepancy between these five stocks and everything else and until those turn, then we'll see the narrative change.

Anthony Scaramucci: (18:15)
So let's talk about that perspective client again, because I think you have a fascinating read on all this. This prospective client walks in and says, okay, Peter, I get that there's a low yields. I get that there are five stocks driving the market, but I'm super worried about deficit spending. I'm super worried about the Federal Reserve's inducing markets the way it is. Should I be worried about all that? Should I be worried about $25 trillion of deficit spending at the US level? Likely a $3 trillion deficit next year as well. Is this stuff I need to be worried about or do deficits not matter and life just goes on for me and my family. What do you say?

Peter Mallouk: (19:00)
So what's interesting, I read a quote when I was a teenager and I was fascinated by it. I had written it down in a notepad I had at school. I can't even Google my way to who said this, but it was someone in Russia and it was in the 1900s. They said, we're not going to have to fire a bullet to take over the world because Great Britain is going to expand itself out of existence. Germany is going to militarize itself out of existence, and the United States is going to spend itself out of existence.

Peter Mallouk: (19:27)
What an amazing, two of those three things have happened now. It's not Russia that's there ready to take everything over. It's a much, I think, more worrisome, communist regime in China, but I think deficit spending is a real problem. Now, I think the Fed has gotten away with it and whoever the president has been has gotten away with it. They've gotten away with it first, because we had explosive growth because of the tech revolution that allowed us to carry this huge debt because just incredible innovation and growth.

Peter Mallouk: (19:57)
Now, we have these incredibly low rates. So yeah, the mortgage on the million dollar house has gone from 500,000 to a million but the mortgage on the house has gone from 6% to 0.6%. So that's a little easier to carry, but we're running out of bullets here, there's no way you can dance around it. The problem with our system is a democracy doesn't lend itself to fixing a problem like this. Because it's going to have to be fixed, really not by the Fed, but by president and Congress, all of whom don't want to control certain expenditures, because they would be voted out if they did it.

Peter Mallouk: (20:33)
So the way we solve things in democracy is we wait till there's a absolute crisis, then we do something because then all of the senators and congressmen and president can go back to their constituents and say, well, it's better than what the alternative was. Here it's too complex, it's too big to do something like that. I think this is a solvable problem. It's going to take some modicum of political courage that combines some common sense tax rates with social security reform and spending across the board that really makes both parties mad.

Peter Mallouk: (21:04)
All the way from Social Security to defense spending. It's actually remarkably doable. If you look at how easy it is to fix your Social Security, for example, it's almost crazy how easy it is to fix. You push up the retirement date a few years. When Social Security started, the expected date of death was the age Social Security started. Now when you get Social Security, you're expected to live 10, 20, 30 years longer. So just moving that data up a little bit, having it be taxed a little more on people like you and me, having the contribution rate go up just 2%. That's all you need to solve all social security.

Peter Mallouk: (21:40)
So we can solve all these problems. It's just going to take some combination of political courage. Neither party has that, or has shown that they can do that and even when you have one party want to raise taxes, they immediately allocate those dollars to new spending. You can look at Biden, he's saying if he wins, he wants to raise taxes a little bit, but he wants to allocate it to new spending. So no statement on the politics of that, but the money part of that, we're not solving any of that deficit problem.

Anthony Scaramucci: (22:08)
I'm very apolitical. I don't have a political opinion. I don't share my views with anybody. I appreciate you sending a statement of politics on that. Go ahead, John Darsie, go ahead.

John Darsie: (22:20)
I've been itching to get in here. I want to go back to Creative Planning for a little bit and operationally, what do you think has really driven your success and I want to use the pandemic as an example. I know that you've been somewhat outspoken about not taking PPP loans from the government and making pledges to your employees and sticking with your staff in a time of volatility. How do you think the way you operate your business translates to level of fiduciary care for your clients and how have you guys approached the pandemic, both internally from an operational perspective, and in terms of how you've communicated to clients? We talked a little bit before we went live about how your role as an advisor is sort of half psychologist, half money manager.

Peter Mallouk: (23:03)
I think in terms of like, if you look at a professional team or I went to KU, so let's say the Kansas Jayhawks basketball team. The way a team wins the game is most of it is recruiting. With sports, we acknowledge that. When the KU basketball team gets on the field to play Pitt State, the game is over before the tip. No one expects a different, it's not always over but it pretty much is. By having the most talented people.

Peter Mallouk: (23:30)
There's something about financial services in our space, where people just don't believe that. They feel like people are commodities, and you can swap people in and out. I don't believe that at all. To my core, I don't believe that. I think that's the big differentiator. So I feel like when our team is sitting with a client versus other firms' team, if we lose, we screwed something up, because we've got the better people in my mind. We've done everything we can to get those people.

Peter Mallouk: (23:55)
If you believe you have the better people, you want to do everything you can to keep them happy. So it was interesting in our space, when the coronavirus started, I didn't really think much of it. I just said, look, everyone's got their job. I don't care if this goes on for three years, we're not cutting pay for anybody, all the salaries are guaranteed. It was almost like, of course, this is what we're going to do.

Peter Mallouk: (24:19)
They're coming in, doing the right thing for the clients of the firm every day and I'm going to do the right thing for them. What it also does is it allows them to focus on the clients. They're not having to worry about other stuff. It allows them to focus on their clients. Now what wound up being nice is, to my knowledge, no other independent firm in the country, certainly of scale, made any kind of commitment to their clients like that.

Peter Mallouk: (24:41)
So I think it also gave me a chance to prove to our team, look, it's one thing for me to say to you, that I believe in you and I think you're great and I want to keep you here. It's a whole other thing for me to have an opportunity to prove it. I do the same thing with the clients going through the pandemic. When you go through things like this, and '08, '09 was another one of them. It's really an opportunity to show your clients, hey, I told you this is what we're going to do with your portfolio when the market's down and we're doing it.

Peter Mallouk: (25:09)
We told you that if there were financial opportunities available to you, we have a lot of restaurant owners as clients, a lot of people in the medical field, we help them figure out the CARES Act, we help them figure out the PPP loans, we did everything we could to be there for our clients. So I really viewed it as an opportunity to do those things. So for us from the very beginning to today, it's been offense, offense, offense, instead of just trying to hold the place together.

John Darsie: (25:35)
You started Creative Planning, obviously, as a businessman, you wanted to grow a business, but you started it really because it was the right thing to do and you were a pioneer in the space, as we mentioned in the open, but as of late, there's been a lot of investment capital that's flowed into the independent RIA world. There are some secular forces that are driving the flow of that capital. What about the independent RIA model do you think is so attractive? What are those forces driving the really rapid growth in the space?

Peter Mallouk: (26:03)
I think you have a couple different things, and again, in the private equity space, to your point, there's other forces happening that just make private equity a very strong space. More people are trying to access it, more institutions are moving money to it. They buy companies, they borrow money. So they benefit from lower interest rates. So you have a bunch of money going into private equity, it is easy for them to borrow very large amounts of money at low rates, which amplifies returns.

Peter Mallouk: (26:27)
So you have that in the background. So then they're going to buy businesses that are private, they want them to be of a decent size and they like to be where money is moving, where business is moving and money is moving from the brokerage world to the independent world. People are getting more sophisticated and they're going you know what, why am I going to pay this advisor to sell me a mutual fund or sell me an annuity or put me in their funds.

Peter Mallouk: (26:49)
So we're seeing market share move over to the independent world every year. We're also seeing it in the ultra fluid space happened now more than ever, where you have people worth 10 million, 25 million, 100 million, 500 million going to RIAs. Why were they not doing that five, 10 years ago? Because there weren't any big RIAs. Now there are a couple like Creative Planning that manage 50 billion and they feel comfortable coming over and going, look, I get that independence and I can get it with breadth and depth of services.

Peter Mallouk: (27:17)
So private equity is looking at this space and saying, well, we've got the market moving in that direction. So the market force is moving in that direction and there's no signs it's going otherwise. It seems like there's five choices. It's the broker's world or the independent world, and the money's moving to the independent world. So they love to be in a growth oriented space, they intuitively understand wealth management.

Peter Mallouk: (27:39)
So I think that that combination of things has attracted people. The other thing I'd say that's happening that's going to change is there really hasn't been a spectacular failure in this space. So most private equity in this space is buyout equity, meaning they come buy the whole company or almost all of the company, and they really started doing this after the '08, '09 crisis. Well, the market's nothing but go up for the last 12 years.

Peter Mallouk: (28:01)
So everybody at every private equity firm that bought an RIA, an independent firm, they're just high fiving each other within the five years, like that's something amazing. The reality is I think if this coronavirus crisis had stayed at March levels for nine months, we would have seen several spectacular blow ups in the RIA space from over leveraged larger RIAs, 10 billion and up, and I think the math of the space might have changed and the attractiveness of it might have changed but of course with the Fed coming in and the coronavirus, the mortality rate not being 3% instead being 0.5 or lower, really changed the math on all of that and then the private equity is stronger than ever here.

John Darsie: (28:43)
So we talked about how equity markets are pretty fully value. They've rebounded very quickly from that March sell off. So as you look at portfolio construction for clients, has the pandemic changed the way you think about the long term portfolio construction and also what do you view as the role of alternative investments? We talked about the rotation that happens cyclically between passive and active management. As you're building client portfolios, how do you look at alternatives like hedge funds, and other active products to diversify a portfolio?

Peter Mallouk: (29:14)
So in the public markets, we definitely favor passive investments. In the bond markets, a lot of our clients are individual bonds. Summer funds, summer ETFs. We are very big advocates of alternative investments. We lean very heavily towards private equity, private lending, private real estate. I think 60-40, we had sent an email out to our firm and had a call around that being dead over five years ago, when rates had dropped and now we're talking about 70-30 is dead. You just can't get the return a lot of people are trying to get when bond yields are between 0.6 and two and a half percent and where you're taking some serious risk to go beyond that.

Peter Mallouk: (29:51)
So I think what we're seeing at Creative Planning is we're seeing a strong commitment to the passive space, even though I think it's dramatically skewed by the Big Five, big tech companies. We continue to stay global, there will be a rotation back to international. We continue to stay invested in large and small, there's 100% of the time been a rotation back to small. I think that will eventually happen. I certainly don't know when and wish I did.

Peter Mallouk: (30:14)
Those things we're still committed to. We still believe in bonds. If you have to have money in the next five years, the reality is, if you have to have the money the next five years, we don't want to be reaching for yield, but we're more committed to alternatives than ever as we try to fill that gap in the portfolio to not have everything be so correlated, try to get returns from different places.

John Darsie: (30:32)
We have an audience follow up question regarding your earlier comments about private equity, how you have an expectation there will be some level of a washout in primary private equity. Do you think that, are you opportunistic in a way that you would try to find value in a secondary PE type of strategy?

Peter Mallouk: (30:49)
No. So I think for us, we've got a six to 10 key relationships with kind of the names everybody's heard of. We're committed to just working with them, reviewing there's, and I think we try not to get too spread out in terms of what we're looking for, although I do think that that viewer is onto something, that we're going to see more of a secondary market emerge and a lot more activity happening there. It's going to be interesting when this illiquid investment becomes more and more illiquid as that market emerges. I think that's an inevitability.

John Darsie: (31:22)
At SkyBridge, we've looked at a few opportunities. There's some funds out there that are sort of funds of closed end funds. You have a lot of closed end funds that are trading at significant discounts, given the turmoil in markets, and there's an opportunity to invest in that mismatch of underlying assets to market value. So why don't we talk about the fiduciary rule for a little while.

John Darsie: (31:44)
Again, you started Creative Planning and removed those conflicts of interest because you thought it was the right thing to do and you thought the business model was the best way to align the interests of the client and with the firm. There was a fiduciary rule under the Obama administration that ended up petering out and there's been no move to resurrected in the Trump administration.

John Darsie: (32:04)
In a Biden administration, if he wins the election in November, do you expect to see a revival of that conversation around standards of care and how do you think that would affect the industry and the acceleration of trends toward independence that we're already seeing?

Peter Mallouk: (32:19)
I do think it will come back if there's a Biden administration, but I also think, unless we just get a very clear global standard, it really won't do anything to change the industry. All these little changes do is confuse people. Everyone's got to be a fiduciary on an IRA, but not on another investment or on the certain products, but not other products. Sometimes you can be a fiduciary and sometimes you can't. The rules in this country are so unbelievably stupid that how is the consumer supposed to navigate it?

Peter Mallouk: (32:50)
I mean, our highest net worth clients don't understand it, because nobody can understand how stupid the rules are. So unless they change the rule and say every financial advisor is a fiduciary with investments all the time, it's not going to do anything to clear up the space.

John Darsie: (33:06)
Do you have an expectation of that might happen in the next five to 10 years or you're not holding your breath and you're just worried about what you're doing over there in-

Peter Mallouk: (33:16)
I'm not holding my breath. I think the financial services industry is an extremely powerful industry and you just imagine if these big private banks, these big brokerage houses, if everyone that went to work at their office had to act in the best interest of their client every day, 80% of the funds would be gone. They just wouldn't be able to sell them anymore. So no, I don't think it's going away anytime soon.

John Darsie: (33:39)
In terms of the makeup of the wealth management industry, you talked about the benefit of scale and the depth of expertise that exists at a large RIA like a Creative Planning. The industry was a little bit separated and there's been some consolidation among independent RIAs to create entities like Creative Planning where you have that at scale and expertise. Do you expect to see as you see a continued exodus from the wirehouse world, do you expect to see sort of new wirehouse type models emerge that just have fewer conflicts or how do you expect that evolution to take place in the wealth management world over the next five to 10 years?

Peter Mallouk: (34:18)
I think we're in the very early stages here. So you hear me talk about Creative Planning being large. At 50 billion, we're large in the independent space but compare it to custodians. Fidelity is 8 trillion and Schwab is 5 trillion, or compare it to the private banks. JP Morgan is five plus to 10 trillion in assets or the brokerage houses like Morgan and Merrill, trillions and trillions of dollars. When we say Creative is a rounding error, it actually is a rounding error.

Peter Mallouk: (34:45)
It's totally negligible in the wealth management space. The market share is probably one 1,000th of 1%. In the independent world we're big. To your point, the independent world. What you're seeing is you're seeing these firms, larger constructed by PE investors, where you have a firm that had 5 billion or maybe 2 billion, and then they bought 10 billion of other firms. So I call these firms Franken firms, where they might share a brand but it's not one culture.

Peter Mallouk: (35:15)
It's not one offering and it's just Morgan Stanley all over again. You go to the Chicago office and the guy's trading options, you go to the Dallas office, and maybe he's a passive guy and in New Jersey, they're the active guys. It's not one voice. It's not one philosophy. It's really just financial engineering, putting a bunch of firms together, buying them at a multiple of earnings, putting debt on it, putting it together and saying I've got a $30 billion firm and selling it to the next person.

Peter Mallouk: (35:42)
Private equity will play that game and keep selling it to the next one and the next, the next one till somebody gets caught with the whole thing falling apart. That's what's going to happen, I believe, in the independent wealth management space. There are very, very few independent firms that are actually a firm, where they've got a philosophy an approach of doing things. I think they're going to survive that washout, but I think that's where this side of the space is heading.

John Darsie: (36:09)
The last question I want to ask you before I turn it back over to Anthony, and I'm hogging the spotlight as usual. So Anthony, I'm sure will give me a mean phone call after the SALT talk but about your philanthropic work. I know you do a ton of philanthropic work. Like I mentioned, you went to University of Kansas or Kansas University, not just for undergrad. You got your MBA and other graduate degrees there. You and your wife, Veronica are very active in the community. Talk about some of your philanthropic work and why that's so important to you.

Peter Mallouk: (36:37)
I think that basically, obviously, you can't take it with you and I've gotten to see my client, kind of the book ends of seeing my parents come from a very poor country and then also seeing our clients. What happens is they save, save, save pile up, pile up, pile up, and then they die. So the clients that I've learned a lot from are the ones that they enjoy giving while they're alive. If they want their kids to have something, they give it to them so they can see them enjoy it. If they are passionate about a charitable cause, they do the giving themselves so that they can enjoy it.

Peter Mallouk: (37:11)
It's interesting, because you see people pile up their money, and then they might put it in a foundation for their kids to give away and their kids either don't want to deal with it, or they have causes that are the opposite of what the parents had. So essentially, the parents spent their whole life saving up all this money to see the money spent on things that aren't tied to them.

Peter Mallouk: (37:28)
So for me, Veronica and I look at it like 99% of whatever we wind up with is just going right out to causes that we believe in and from the beginning, I think at Creative Planning and both Veronica and I personally have been focused on those less fortunate. So I believe in the capitalist system, I'm a very proud American. Democracy is better than all the alternatives. I think Churchill said, it's a terrible option until you compare it to all other options. I'm sure I butchered that quote.

Peter Mallouk: (38:01)
Look, everything's not fair. We were born on third when we were born into the households we were born in and we're not oblivious to that. At Creative Planning, we work with a lot of people that are very successful, some of whom got there completely on their own, some with a little help, some with a lot of help. So at creative planning, we've spent our time giving to the part of the people that are never probably going to be our clients.

Peter Mallouk: (38:25)
So I'm proud of the fact that a very large percentage of our workforce is involved in mentoring kids that we provide full ride four year scholarships to, mentoring them sometimes from grade school all the way through college, covering them for all four years. All of the annual events we've had at Creative going all the way back to the inception have been focused on the inner city from 2004 to today, whether it's delivering 1,000 Thanksgiving meals every year or building a place to distribute basic goods and services to kids and people that need them that aren't covered by food stamps.

Peter Mallouk: (39:01)
Things like soap and shampoo that is unbelievably not covered by food stamps. We've just been involved in causes like that at Creative Planning from the beginning, and that's never going to change. Obviously, the events of this year, I think, have highlighted to a lot of people a lot of these things, but we're just going to keep doing what we're doing and trying to make a difference when we can.

John Darsie: (39:24)
Well, congratulations on all your great philanthropic work and your success, building Creative Planning, and that really cohesive culture that you've created. I'm going to let Anthony hop back in if he has any final words before we let you go.

Anthony Scaramucci: (39:36)
We're going to wrap up in a sec but Peter, I have one last question for you and it's really about the psychology of money. Because we have brilliant people that lose all their money and then we have janitors that are able to save and they die with $8 million in the bank that they give out to charities and their family. So if you were going to give somebody some advice about the psychology of money, what would you say?

Peter Mallouk: (40:02)
I think very, very few people have a healthy relationship with money and there's a lot of research that shows that how we all deal with money has to do with how we grew up in our households. So some people feel like they're not worth something and they spend the money on things that make them feel like they've got a sense of worth. Some people grew up in households where there was a sense of scarcity. So when they get money, they want to leave it in cash and they want to hoard it and they want to protect it and they live in fear of losing it.

Peter Mallouk: (40:35)
Some people, it becomes this narcissistic scorekeeping type of measure. So I really think that most of us have a problem with money. So having somebody who's capable of earning it and investing it without screwing it up, making a mistake like going to cash in March, which a lot of people that were invested, according to Fidelity study did in March, having people who can invest it well, who can then leave something to charities or their kids or are comfortable giving money away, and also able to enjoy it themselves.

Peter Mallouk: (41:09)
A lot of people just can't spend money on themselves. That person's very rare, and that person is a very happy person. So to the extent, we can help at all impact our clients, save better not make an investing mistake, enjoy their money for themselves and others, that's the most rewarding part of the job is helping people take the money to match the goal. That's what Creative Planning is all about.

Peter Mallouk: (41:32)
Most money managers, they're trying to get alpha all the time and obviously, we want to perform for our clients but for us, the primary goal of performance is, you want X to happen, and we're going to do these things to make it happen. So anytime you can help somebody realize that, is a beautiful thing but to me money it's like alcohol. Whatever you were before you took the five drinks, it just became amplified. So, to the extent that you can know thyself, and make better decisions, you'd be a happier investor and a happier human being.

Anthony Scaramucci: (42:06)
Amen. All right. Well, Peter, fantastic to have you on SALT talks. We got to get you to one of our live events and congratulations on what you build and what you're about to build. I think that for Creative Planning, frankly, the best days for you guys are ahead because you're right at the intersection of everything that clients want. So we wish you great success and I hope to see you at a live event.

Peter Mallouk: (42:31)
I look forward to that.

Anthony Scaramucci: (42:32)
I'm enjoying the picture of your kids way more than the fake George Washington poster behind John Darsie.

John Darsie: (42:39)
You had to get the dig in before-

Anthony Scaramucci: (42:41)
I had to get that in there before we left. Well, God bless you, Peter.

Peter Mallouk: (42:43)
All right. Thank you, Anthony.

Anthony Scaramucci: (42:44)
Give it back to John.

John Darsie: (42:45)
Don't let him convince you it's fake. Come on. Peter, thanks so much for joining us and thank you everybody who tuned in to today's SALT talk with Peter Mallouk of Creative Planning.

Jason Mudrick: Event-Driven Investing | SALT Talks #23

“While all cycles differ, the sheer size of this cycle is what stands out.”

Jason Mudrick is the Founder & Chief Investment Officer of Mudrick Capital Management, an investment firm that specializes in long and short investments in distressed credit. Jason began his Wall Street career in 2000 as an associate at Merrill Lynch’s Mergers & Acquisitions Investment Banking group.

Jason’s focus on the middle market and taking advantage of smaller opportunities has differentiated Mudrick Capital Management from other shops. One notable position is with e-Cigarette company, N-Joy. With 70% of smokers wanting to quit, “you have a preventable problem if these people make the switch from traditional cigarettes.” The COVID-19 pandemic has only served as a catalyst for those looking to make the switch.

Gold is another commodity in which Jason has confidence, making a recent investment in Hycroft.

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Jason Mudrick

Founder

Mudrick Capital Management

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:08)
Hello, everyone. Welcome back to SALT Talks. My name is John Darsie. I'm the Managing Director of SALT, which is a global, thought leadership forum, and networking platform at the intersection of finance, technology, and geopolitics. And we've been doing these SALT Talks, which are a series of digital interviews in lieu of our physical conferences, during this work from home period. And what we've really tried to do is expose our audience, and let them into the minds of leading subject matter experts that are investors, creators, and thinkers.

John Darsie: (00:35)
And then what we also try to do is provide a platform for a big world changing ideas. And we're very excited today to welcome Jason Mudrick to SALT Talks. Jason is the founder and Chief Investment Officer at Mudrick Capital Management, which is an investment firm that specializes in long and short investments in distressed credit. So, this is obviously a very rich environment for his investment style. So, we're looking forward to that conversation. Mudrick Capital was founded in 2009 with just $5 million under management, but, as of this month, the firm has grown to manage approximately 2.4 billion, primarily, for institutional clients.

John Darsie: (01:11)
Jason began his career on Wall Street in 2000, advising on mergers and acquisitions as an associate in Merrill Lynch's M&A department, in their investment banking group. And in 2001, he joined Contrarian Capital Management where he began his focus on distressed investing. In October of 2002, Jason launched the Contrarian equity fund, which was an investment vehicle focused on purchasing distressed debt. And that would be restructured into equity, post-bankruptcy equities, and other event-driven, deep value, special situations.

John Darsie: (01:41)
Jason has served on multiple creditors committees, and served on the board of directors of numerous public and private companies. Jason also spent two years in graduate school, teaching economics classes to Harvard University undergrads. Jason has a BA in political science from the University of Chicago, and a JD from Harvard Law School. And he was also admitted to the New York State bar. And hosting today's interview is going to be Troy Gayeski, who is a co-Chief Investment Officer, and senior portfolio manager and partner at SkyBridge Capital, a global, alternative investment firm.

John Darsie: (02:12)
And just a reminder to everyone watching. If you have any questions for Jason during today's talk, you can enter them in the Q&A box at the bottom of your video screen. And with that, I'll turn it over to Troy for the interview.

Troy Gayeski: (02:23)
Yeah, thanks John. Thanks everybody for joining us. We have a real pleasure to have Jason on today. Jason and I go way back to 2002 in his Contrarian days. So, before we get in the meat and potatoes of the strategy, and the opportunity now, Jason, let's talk a little bit about your backgrounds, and what it was like to get involved at Contrarian back in '02, and '03, and run that successful, post-reorg equity opportunity fund. And how it makes you feel to be sandwiched not only between Josh Freeman, the legendary distressed investor at Canyon, but coming up tomorrow we have Dan Loeb as well. That must make you feel pretty good, right?

Jason Mudrick: (03:03)
Yeah. Troy, good to see you, and thanks for having me. And yeah, you guys get an incredible lineup of speakers. This is great. I've been watching some of the series, and it's been very informative. So, in terms of background, as John mentioned, I'm a lawyer. I never practiced law but went to law school, as a lot of people in this business did. Got my degree, joined Merrill Lynch in their M&A group as was mentioned. And then we went into recession. It was the dotcom bubble. It burst in the summer of 2000. We went into that recession. And then I met the team up at Contrarian, as you mentioned. Joined them in 2001, and it was off to the races.

Jason Mudrick: (03:47)
I started at Contrarian the day Enron filed for bankruptcy, which at the time was the largest bankruptcy ever. And I left two weeks after Lehman filed, which, currently, holds the title as the largest bankruptcy ever. So, great time to be in the business. The hedge fund industry was about 200 billion in '01, it got up to 2 trillion. So, I got to see the institutionalization of the industry. Got to see two great recessions leading up to this one, this one being the third. And then when the great financial crisis happened, left Contrarian to set Mudrick up. Brought a couple of guys with me. I hired a bunch of folks. And that was 11 and a half years ago.

Jason Mudrick: (04:32)
And as John mentioned, today, we manage about two and a half billion. We have 30 people here in New York, a couple of people that sit in London. And this will be the third cycle, and it's the biggest one that we've ever seen. And I'm sure we'll talk a lot about that today.

Troy Gayeski: (04:48)
Jason, that's great to hear more about your backgrounds. Look, given your rich history both in the 2001 to 2004 total distressed cycle, and really '07 through, even as a distant or as 2010, 2011, how that informs your view on the current cycle. And could you touch upon some of the similarities and differences between this cycle and the last two?

Jason Mudrick: (05:14)
Sure. Well, look, all of these cycles are different in their own ways. I think what stands out about this one is the sheer size of it. If you think about what led up to the cycle, we had the longest period of time between recessions, literally, since like the 1850s, right? You had 11 years between cycles. And that long period of time was characterized by reasonable growth, but probably most, importantly, it was characterized by very low interest rates. And when you have a long period of time of good economic growth, and low interest rates, companies borrow a lot.

Jason Mudrick: (05:54)
And what we saw was the levered credit market, which are the companies that are most likely to get distressed. These are high yield issuers, levered loan issuers. That market was about 1.2 trillion in a weight during that last cycle, which was a huge market, right? It was up six-fold from the 2000, 2001, 2002 recession, but today it's 2.8 trillion. So, it grew, 120% over the last 11 years. And then, we had this very steep downturn. So, while there's a ton of differences, what stands out to me as the most unique thing about this cycle is there's almost $3 trillion of high yield bonds and levered loans outstanding. And we now have a recessionary type economy with a whole bunch of industries that are going through rapid, secular change brought upon and accelerated by COVID. So, huge supply of distress.

Troy Gayeski: (06:50)
Yeah. And coming into this cycle, leverage levels were meaningfully higher than they were going into the financial crisis for corporate America. Correct, Jason?

Jason Mudrick: (06:58)
Yeah. So, over the last six years, average debt to EBITDA multiples of new issue were over five times. The last time we had an average debt to EBITDA, multiple, it started with a five, was 1998. And we had over five turns of debt to EBITDA, add new issue for six years leading into this. And by the way, as everyone knows, EBITDA is an adjusted EBITDA, right? Most of these are our LBOs, and there's various generous add backs to EBITDA. So, if you're thinking about EBITDA as a proxy to operating cashflow, and you take away the questionable add backs, those five, five and a half times debt to EBITDA was really like six, six and a half. And that was average.

Jason Mudrick: (07:44)
Those were multiples for companies that expected to continue to grow, and nobody expected this recession. So, not only do you have a lot of debt outstanding, but you have very high leverage multiples, which has exacerbated the supply of distressed credit.

Troy Gayeski: (08:00)
Great. So, stepping back from the current opportunity for a second, one of the things that you've stood out from the crowd in the last three to five years is despite the fact that there is fairly low supply of distressed debt to invest in, you still made very attractive returns. Whereas, unfortunately, most of your competitors struggled to make, mid, single digit returns. Can you talk about the style that led to that? Was it being smaller? Was it being more active? Was it being more opportunistic? What do you think drove those outstanding returns vis-a-vis your competitors the last three to five years?

Jason Mudrick: (08:35)
All three of those. One thing that we've seen since the great financial crisis is most of the investment firms that specialize in distressed credit are very large. Okay? So, a lot of the folks that you've had on your talks, you can think about Canyon, Aries. And I saw Mark, spoke a couple of weeks ago, so, Avenue, Anchorage, Davidson Kempner, Centerbridge. Go down your list, pick your top 20 firms known for distressed investing. And they manage, 10 billion, 20 billion. Oaktree is 80 or 100 billion, or however big they are. And so, by our estimates about 85% of the capital dedicated to distressed investing sits in $5 billion in larger firms. But if you look at the corporate credit market, that's not what it looks like.

Jason Mudrick: (09:28)
85% of the corporate credit market is not large cap. It's actually 60% of it is small cap, and mid cap. And we define mid cap as one to 5 billion of enterprise value. So, most of the market is less than 5 billion of enterprise value. Yet most of the players in the market sit in firms that manage more than 5 billion. So, that has a whole bunch of implications. A lot of those folks really need the Lehman Brothers, and Enrons, big situations, the Pacific Gas and Electrics, where they can go put hundreds of millions to work. And that's not where most of the opportunity set has been, one.

Jason Mudrick: (10:05)
Two, you get very overdiversified portfolios. I think it's very hard to concentrate when you're running multibillion dollar portfolios. It's hard to take five or 10% positions. And in a world where there's few great opportunities, I'm talking about pre-COVID, we're in a cycle now. But when we were in the late stages of the last cycle, there was very few differentiated positions. If you can't take big positions in them, it's just really hard to put up good numbers in this asset class. So, our focus on middle market, being able to do the smaller stuff has differentiated.

Jason Mudrick: (10:44)
You mentioned active involvement. We sit on 12 boards of directors today. And we're on five active creditors committee. It's been defining part of our strategy to be very involved in these situations. And particularly, in some of the small, and middle cap situations, you really can drive the boat. You really can change the trajectory. There's not a lot of other distress players in these situations. So, we found that that's helped differentiate as well.

Troy Gayeski: (11:06)
Yeah, that's really interesting. We had Jerry Pascucci on from UBS yesterday, and he talked at length about there is a trend towards larger managers, but there are still those like yourself that are demonstrating that smaller size works to your benefit. It can help you put a better risk adjusted return. So, assuming you would agree with Jerry's conclusion.

Jason Mudrick: (11:25)
Yeah, no, 100%. I mean, look, it's a double-edged sword. I mean, it is a very resource intense investment strategy. So, you can't do this with three people on a Bloomberg. So, there is an optimal size. Particularly, today, there's a lot of new money opportunities. It's very advantageous to get to 51% in a lot of these documents, which are very covenant lite. You've heard about, I assume, the situation at J.Crew, or at Travelport, which were very involved in. PetSmart where assets are being stripped out. It's hard to be small. It's hard to be very large. And I know I'm self-serving when I say that, but there is an optimal size where you have the resources, you can own enough of this stuff to drive the boat. You can have a seat at the table, yet, you're not so big that you're lethargic, and can only be involved in large cap situations.

Troy Gayeski: (12:21)
Great. So, before we get into some of the distressed opportunities you look at today that were created by the pandemic, you have a very large investment in e-cigarette company. And we know you think it's going to lead to tremendous upside, but before we get into the upside, can you talk about the societal impact, and the positives that these companies can bring in terms of lowering morbidity and mortality rates to smokers?

Jason Mudrick: (12:46)
Yeah. I'm glad you asked about that. I mean, the e-cigarette industry has gotten a bad rap, over the last couple of years, because of a couple of bad actors. The most notorious of which is Juul. There's been a rise in youth use, underage use of the products, but it is not across the entire category, and it's not across all products. It really is a Juul phenomenon. And that has made this category talked about in a very negative light, but if you put that aside, smoking-related illness is the number one preventable healthcare problem we have in society. I know that's difficult to talk about given that we're dealing with this COVID situation, but 500,000 people in the U.S. die every year from smoking-related illness, and 6 million people die every year, globally, from smoking. And 70% of smokers want to quit, right?

Jason Mudrick: (13:42)
So, you really have a preventable problem. If you could give smokers an alternative. Obviously, quitting would be the best alternative, but if they can't quit, and they've tried over and over and over again, which a lot of them have, to give them a reduced risk product to continue to consume nicotine could be more impactful to society than almost anything else that you can imagine. So, it has gotten a bad rap, and I get it with youth use, and that has to be arrested. But if you could figure out a way to switch smokers from combustible to vapor or heat not burn over the next 10 years, it's an incredibly socially responsible investment.

Troy Gayeski: (14:18)
Yeah. This is a global problem as well, obviously, right Jason? It's like 14% of U.S. smoke. Mainly a working class problem, but in terms of China, and Germany, and other countries is far more prevalent, no?

Jason Mudrick: (14:30)
Yeah, I mean, in emerging markets, smoking rates are as high as 50%. We have one of the lowest smoking rates in the world, at around 14%, but there's still almost 50 million Americans that smoke cigarettes. I mean, I think in the investment world, we don't see it as regularly because as you mentioned, it is primarily a blue collar ... It's very prevalent in our minority communities, and our military communities. It's not necessarily something that is as salient to us on Wall Street anymore. I mean, we all have grandparents that died of lung cancer. Certainly, I did. But it's out of sight, out of mind, but that's not right. I mean, if you look at the actual numbers, $300 billion was spent last year on healthcare-related costs associated with smoking illness. So, it is a massive problem still.

Troy Gayeski: (15:24)
Yeah. So, now, that you've touched upon how it can help society, how about some of the return potential? And if you could talk through realistic return versus risk profile.

Jason Mudrick: (15:34)
Yeah, sure. So, I mean, it's very unusual to have a market as large as this that's highly regulated, that's being disrupted, right? Usually, you need very high barriers to entry. The barrier to entry in this industry is regulatory-driven, right? These products, there's good products, and there's bad products, but the science behind them, the technology, is pretty commoditized. There's nothing that unique about these products. What's unique about it is it's very hard to get a license. And the way the U.S. regulatory machine is attempting to regulate this business is going to create very few players. It's going to create effectively an oligopoly.

Jason Mudrick: (16:16)
And that process is ongoing as we speak. And the total addressable market is just huge. I mean, there's $100 billion, just in the U.S., $100 billion spent every year on nicotine-related products. And 70% of smokers want to quit, or 80% of that 100 billion is still combustible cigarettes. So, 80 billion is spent every year. So, if you believe as I do that half the market will go the way of reduced risk products over the next 10 years, you're talking about $40 billion of revenue on top of the 10 billion or so that's already spent on vapor products. You're going to have a $50 billion market over the next 10 years.

Jason Mudrick: (16:56)
That's probably going to be accessible for four, five, six, seven type of players. I mean, literally, the regulatory environment is creating ... Like we just applied for our license. It's called a PMTA, a Premarket Tobacco Product Application, in March. And to complete our application, we had to spend over $20 million. And a lot of the data that we had to show the FDA, they're the regulatory body in charge of this, a lot of the data that we had to show the FDA was historical population-level data, survey work. And if you're not an incumbent, if you're not an existing player, you can't show that.

Jason Mudrick: (17:36)
So, even if we could round up the money from venture capital firms, or collectively, to come up with a new product and go try and get a license, we wouldn't be able to show any of that historical data. And the risk would be very skewed to the downside for a new launch. So, I think, unintentionally, but it's the reality, they're creating a market where only incumbent players are going to get licenses. And a lot of the smaller players aren't going to be able to afford to put together a comprehensive application.

Jason Mudrick: (18:07)
If you fast forward 12 months from now or 18 months now, and this regulatory approval process is through, I think you're going to have five to seven players in a market that, like I said, I think could be on the scale of 100 billion in size over the next 10 to 20 years.

Troy Gayeski: (18:24)
Has the pandemic slowed down the rate of crossover from those addicted to cigarettes to vaping?

Jason Mudrick: (18:32)
Interestingly, there's a lot of noise in the numbers, so it's difficult to make too many concrete differences, but we believe we've seen an acceleration of the switch. I think there's a lot of folks just given how COVID attacks the lungs in the most severe cases, I think we've seen an acceleration of people trying to get off of combustible, either quitting entirely, which is obviously the best option for them, or switching to a vapor product, which is a reduced risk product.

Troy Gayeski: (19:03)
We were talking about this before, but somewhat, surprisingly, the FDA hasn't slowed down its application processing during this pandemic, which I think you found to be a positive surprise. No?

Jason Mudrick: (19:14)
Yeah. So, all of the applications were due May 12th. We were fortunate ... I say we, the company is called NJOY. NJOY was fortunate, and then they got their applications in March, and then COVID happened. And Juul, in particular, went to the FDA and said, "Look, we need more time because we can't complete our application with all the labs closed, with all the population survey firms closed." And that deadline was extended until September 9th. So, the current deadline is September 9th, and we'll see if that gets extended again or not. But there was a concern amongst those that had gotten their applications in like NJOY that the FDA would go pencils down given that they have a lot of other areas they're focused on, and the realities of just a work from home environment.

Jason Mudrick: (20:01)
But what we've seen is that that's not the case, that they're plowing through applications. And my belief is that they want to get the applications that did get in before COVID shut everything down off their plate, because they realize that they're going to get a whole nother batch of applications September 9th. So, last week or the week before, but very recently, Philip Morris got what's called an MRTP for their IQOS product, which is a modified risk label. So, they can actually make statements like this product is not as harmful as cigarettes. And the fact that that was approved during this COVID time shows that the FDA is still plowing through these applications. And that's a good thing.

Troy Gayeski: (20:43)
Yeah. Thanks for that summary on your largest investment. And Jason, just to shift gears, when you look at the gold market today, there's obviously a lot of buzz based on QE infinity rates at zero for pretty much as far as the eye can see. And gold's finally starting to catch a bid. But one of the interesting positions you have is in the gold miner Highcroft, which was a classic post-reorg equity. So, you want to walk people through where we are in that life cycle, and how you think it's a better way to play a continued bull run in gold than just being long, buoyant, or the futures.

Jason Mudrick: (21:16)
Yeah. Look, Highcroft's an interesting one. We bought Highcroft about five years ago out of bankruptcy, us and a couple of other firms. We basically made the company a debtor and possession loan. So, it's a priming loan you can make in bankruptcy to help them get through their restructuring. And we added a convertibility future. So, we were secured by all the assets that the company had, which we thought covered the loan. But if gold were to move materially higher, and gold miners are about as levered away as possible to play gold price appreciation. We would participate in that upside through the convertibility feature.

Jason Mudrick: (21:55)
So, when I bought it I really looked at it as almost a contrast. I mean, contrast, that is the wrong description, but I really looked at it as a hedge, even though it was a long. It wasn't a short, but it was a long. But I thought, if things ever went south on the economy or something very bad happened, there's always a flight to safe havens. And gold is usually one of those. And because of the convertibility feature, and the DIP loan, we would benefit materially from that. So, this has sat on our books. And I know I've talked about it with you, and your team in the past, but it's basically been dead money for a long time, and then COVID happened.

Jason Mudrick: (22:33)
And now, what we were able to do earlier this year is get the company public. So, it's now listed on Nasdaq. So, we merged it into a SPAC to get it publicly-traded. The ticker is HYMC. So, it's now listed as of last month, and it is a very large gold deposit sitting in Nevada. So, we have almost 20 million proved and probable ounces of gold. The NAV five using $1,300 gold is over $2 billion. And if you plug in current spot prices, so we produce silver as a byproduct too, but with silver at $19, and gold at 1,800, I think the NAV is close to $5 billion.

Jason Mudrick: (23:17)
And what's, particularly, interesting about it today is we took it public through a SPAC. Investors in SPACs tend to not care about companies that are merging, not necessarily. They tend to be more doing the arbitrage around the SPAC, and also, mining assets are very unique assets. A lot of the people that invest in gold assets, don't know about Highcroft. So, as I think about the next six to 12 months, no comment on what gold is going to do. Gold's obviously been very well-bid. As we sit here today, it's out of pie of this cycle at 1,808. But no comment on gold.

Jason Mudrick: (23:58)
This stock is very illiquid. It's not covered by any sell-side research. It's not on any exchange. And what I expect to happen over the next 12 months is we'll see five to 10 sell-side research shops pick up coverage. More liquidity will come back to the name. And if it trades in line with where its competitors trade, there's meaningful upside, potentially, two to three times where it's trading today. So, we're pretty bullish on Highcroft.

Troy Gayeski: (24:24)
Yeah, that sounds like a great way to play marketing gold. But we're running out of time. So, I just want to segue back into the classic distress cycle that we're in. You mentioned before there's still two to 300 billion of distressed companies. Because what we hear from people quite often is, "Hey, liquid IG's rallied, liquid high yield's rallied. The opportunity is not going to be as big as people thought maybe at the end of March." But there's still ample supply to go after, and defaults are only going one way, which is higher. So, can you talk to us about the broader opportunity then we can get into some specific sectors you're focused on?

Jason Mudrick: (25:00)
Yeah, no, I mean, you're absolutely right. I mean, you just call any restructuring lawyer, or any restructuring financial advisor that you know, and ask if he or she is slowing down. I mean, we're in the first inning of the actual restructurings. What happened to the markets in March, and then, subsequently, in April and May as they rallied back is different than what we do. I mean, we focus on the de-leveraging events. So, the fact that some IG bonds traded from 105 to 95, and right back to 105, or some higher grade, high yield traded down 15 points and is right back to par. That's not really what we do. I mean, I think that was a great opportunity for those that do it. And I think guys made a lot of money, but that was the trade.

Jason Mudrick: (25:46)
It was the trade of the cycle. And we'll see how that plays out. What's going to drive to faults is economic activity. And we are in a slower economy, right? The world was priced for perfection, as we talked about earlier, in terms of debt to EBITDA, multiples being very high. And we are in a slower economy now. Now, some industries are doing fine, and some industries are going to come back a lot faster as everything reopens again, and we recover, but some industries are never going to come back. Think about department stores, they were probably going away over the long period of time, Lord & Taylor's is a store that I shopped at growing up, and that was going away over the next 10 years, but it went away in 10 days when COVID started. Right?

Jason Mudrick: (26:38)
So, COVID, has really been an accelerant of change. And think of business travel. We were talking about this before we went live just now. I mean, business travel, I don't know when it gets back to 2019 levels. I think people have just realized that video conference technology is pretty good. It's not the same as being in the same room as someone, but it's 90 or 95% there. So, I expect that there's going to be a long period of time. Even once there's a vaccine and COVID is a thing of the past, I don't think people are going to travel for business the way they used to.

Jason Mudrick: (27:17)
And that's a good segue into what industries we're looking at, but we are in a slower economy. There's massive disruption in industries, all at a point in time where there was maximum amount of corporate credit, and those two ingredients are a good recipe for having a lot to do. So, what I've told folks is I think this is a three to five year cycle. We're in the first inning of it, in terms of the actual defaults, not what's going on with the SP or the Nasdaq, or higher grade, high yield, the triple C stuff, the stuff that really needs to equitize. We're very early in this game.

Troy Gayeski: (27:53)
And which sectors in particular, Jason, are you looking for good company, bad balance sheet? Because it seems like there's more prevalence of that than just dying retail, for instance.

Jason Mudrick: (28:01)
Yeah. We're doing a lot in travel, not surprisingly. We own a company called cxLoyalty, which administers loyalty points for financial institutions. So, that's been impacted a lot by the shutdown in travel. We're involved in travel port. I can't really talk about that one because we're restricted in it, but that's an Elliot portfolio company. One of the three GDs globally. We're involved in some inflight connectivity companies, Gogo Global Eagle. So, there's a lot to do around travel. And we don't own airlines or cruise ships per se. But a lot of the companies that provide services to the industry are very distressed right now. But away from travel, very diversified across industries. I mean, the theme, if anything is LBOs.

Jason Mudrick: (28:49)
I mean, to your point about good business, bad balance sheet, most LBOs are reasonably good businesses that have predictable cashflows that can be levered, but they have a bad balance sheet because they financed the purchase price with a lot of debt. And there's a lot of first lien debt trading at 80 cents right now, some of which is going to go to 60 because the company is not going to make it. And some of which is going to go to par because the company is going to make it. As long as we have a ton of situations like that to look at with debt trading at 80, there's ways to make money.

Troy Gayeski: (29:26)
Well, Jason, it's a fantastic summary of the opportunity set as well as some of your key investments going forward. And we just want to thank you for being on today. I'm going to turn it over to my partner, John Darsie, who's going to ask you some questions from the audience. There are things people are eager to hear about how much money you're going to make the next two to three years, which is what it's all about after all, right, my friend?

Jason Mudrick: (29:45)
Thanks Troy. Good to see you.

Troy Gayeski: (29:46)
Good to see you too.

John Darsie: (29:48)
Jason, you mentioned Gogo, and we had an audience question about that. So, you talked about how you don't think business travel is maybe ever going to get back to 2019 levels, and is very challenging. So, what's your investment thesis on something like Gogo that likely relies a lot on revenue from business travelers?

Jason Mudrick: (30:05)
Well, look, I was specifically talking about business travel. The recovery in the business travel world, I think there's a secular change there. And that will take much longer. Vacation travel, so, personal travel, we're actually seeing some early green shoots that that's going to come back strong. There's a lot of pent up demand for travel. And I think as soon as people feel safe getting on airplanes, again, you're going to see a lot of pent up demand there. So, I think you have to think about the two categories differently. What's interesting about Gogo, in particular, is they effectively have a monopoly on private jets. So, the business aviation, that business alone, they're in 95% of inflight connectivity is Gogo.

Jason Mudrick: (30:58)
So, it's effectively a monopoly. And private jet travel, we've actually seen for July 4th week, and 5% year over year increases. So, you're already seeing that business come back. It is a safer way to travel, or at least perceived to be for a lot of folks that have the ability to access that luxury. And what's more interesting for us as financial analysts is most of those contracts are subscription-based, they're not usage-based. So, even when people weren't traveling, a lot of people were continuing to pay their monthly costs to have Gogo active. So, we actually think that the cashflows from the aviation side of the business, they'll be down year over year, but not down that much.

Jason Mudrick: (31:39)
If that business did 140 of EBITDA last year, we think it's going to do like 120 this year or something in that neighborhood. And that business alone is probably an eight to 10 times business, and covers the lion share of the senior debt. It actually covers all of the senior debt, and even some of the junior debt. So, our thesis is really about personal travel and business travel being different, but also business aviation being a much sturdier business model than commercial aviation.

John Darsie: (32:05)
All right. Thank you for that. The next question is around investment structures. So, you recently raised a longer lockup private equity style vehicle. Are these types of structures going to be necessary for distressed investing in a cycle?

Jason Mudrick: (32:19)
I think they are, for a couple of reasons. First of all, as I mentioned earlier, distressed credit focused investment firms have gotten so large relative to the last couple of cycles. It's very common to have a very concentrated ownership of companies when they emerge from bankruptcy. And what that means is that the post-reorg equity can be very illiquid. It's very common for five or six funds to own 80% of a company. And it's hard to just re-list that company, which is what we used to do in the '01, '08. You would take the company through bankruptcy, and just re-list it on the New York Stock Exchange. And liquidity would come back to the name, and you would exit. Today, the holding period is much longer. Usually, come out of bankruptcy as a private company, you continue to fix things, and then you go do an IPO.

Jason Mudrick: (33:06)
We merged Highcroft with a SPAC to get it public. You could merge with another public company that's not a blank check company, a strategic company. You could sell the company in an auction. But if the holding period used to be 18 months, it's now two to three years, sometimes longer. So, when you're dealing with longer hold periods, it's just more prudent to have longer lockup capital. So, we've been focused on private equity-like funds, so not tenure funds, but not quarterly liquidity, something in between, call them hybrid funds, where you have three or four year investment periods, and then you can harvest the investments.

Jason Mudrick: (33:40)
And the second thing is, as I mentioned earlier, we focus a lot on middle market situations. So, those are just going to be inherently less liquid. You get better value. They're less efficient. So, the value that we're looking for is there. The mispriced securities are there, but it's hard to do that with monthly or quarterly liquidity. You really need to know that you're going to be able to be around and see these things out. And that can take years.

John Darsie: (34:08)
So, we have a followup question about your NJOY investment, which is the e-cigarette company. Just talk through, again, your investment thesis, and then how you think the Smores IPO changes or doesn't change the return trajectory for your NJOY investment. And how do you size something like that?

Jason Mudrick: (34:25)
Yeah. Good question. So, for those of you that don't know who Smores is, Smores is the largest manufacturer of these products. So, Juul does their own manufacturing, but British American Tobacco's products, Altria's old product, they've taken it off the market when they made the investment in Juul. Our product, Japan Tobacco's product all produced by Smores, in Asia. They just IPO'd, and I haven't really followed it, but my understanding is it's done very well, and doubled. So, look, it's not the same business. They're producing the products that we're distributing them, and we own the product, and the brand, but, it's obviously a good thing. I mean, if you said, would you rather have Smores trade down 50% or trade up 100%? I would say I'd rather have it trade up 100% because it shows there's demand for this industry.

Jason Mudrick: (35:21)
What's really exciting about NJOY is because of the way the regulatory environment has been set up, there's very few players. And almost all of the players are owned by a big tobacco, right? So, Vuse is the number two product. Vuse and Alto, it's the same family of products, is owned by Reynolds/British American tobacco. They're the same today. Juul is effectively owned by Altria. They have a minority investment in them, and it's effectively owned by Altria. And the current CEO is a former Altria executive. Logic is owned by Japan Tobacco. Blue is owned by Imperial Tobacco, and then there's NJOY, which we control, and is owned by private investors.

Jason Mudrick: (36:09)
So, there's a real scarcity value if you think about the big five players. If you want to invest in the disruption of the combustible cigarette, there's no way to do it, right? If you want to invest in Vuse, you have to buy British American Tobacco stock, and you're getting 80% combustible, or 90% combustible, whatever it is. So, there's really no way to invest in the disruption of the combustible cigarette absent something like NJOY. So, I'm very bullish on, potentially, a public offering. I think it wouldn't be surprising to see one of the strategics acquire NJOY before it goes public. But if in theory, NJOY was a publicly-traded company, it would be the only publicly-traded way in the U.S. to play the disruption of the combustible cigarette.

Jason Mudrick: (36:56)
And I think the scarcity value of that alone, not to mention it's just the sheer size of the market. The [TAM 00:37:03] is $100 billion market. I think the fundamentals would support a very high valuation, but the scarcity value alone is really interesting. And the market's obviously valuing growth right now, and disruptions. I mean, look at Tesla. Look at the fact that the Nasdaq's up 16% year to date, and the Dow is down 8%. There's a real premium placed on growth and disruptions, and NJOY has both of those going for it. So, I'm bullish. I think [Smores 00:37:29] helps, for sure.

John Darsie: (37:33)
Would you use a SPAC to take NJOY public? We had Chamath Palihapitiya on an early SALT Talk, and he took Virgin Galactic public via SPAC. Is that something that you would look at in the case of NJOY?

Jason Mudrick: (37:46)
Yeah. I mean, look, SPACs are interesting because you can do them quickly. They've already gone through the IPO process. So, it's really a merger negotiation, and you can get the company public quicker. There's a little bit more appetite for situations that have hair around them. That being said, there are some negatives. And we were the sponsor of the SPACs. So, I'm intimately familiar with this, but there's a lot of dilution to the upside from the warrants that you need to issue to get a SPAC public. So, we'll consider anything when the time is right.

Jason Mudrick: (38:17)
I think that the size of the market is such that this is probably more likely a regular way IPO, if you had to ask me today, but the landscape is changing very quickly. A lot's changed just in the last 12 months, and I expect things will change over the next 12 months. So, I can't make predictions but NJOY is of the sizable e-cigarette producers that are sold at convenient stores, and gas stations throughout the country, so, nationwide distribution. NJOY is the only one that's independently-owned that has sizeable market share. And that I think is particularly interesting.

John Darsie: (38:55)
Before I get into a couple of the last questions, I want to give you an open forum to talk about any other individual investments that you think are interesting, and demonstrate your investment style. We've talked a little bit about NJOY, Gogo. Are there any others that we haven't covered that you think are interesting?

Jason Mudrick: (39:12)
No, look, we're not here really to talk about our books so much. And I'm glad you asked about, NJOY, and Highcroft, because I think they're unique situations. Look, both of them are actively controlled situations. So, we control the board of NJOY. We don't control the board, it's independent of Highcroft, but we are the chairman of the board, not me, but one of the guys that works here, David Kirsch. And they were both smaller, more off the run deals, and they were also pretty contrarian. Buying a gold mine on a bankruptcy, buying an e-cigarette manufacturer out of bankruptcy.

Jason Mudrick: (39:51)
I think they're interesting trades to talk about how we have differentiated ourselves. It's not Pacific Gas and Electric bonds, which we looked at but hard to really have an edge in a situation like that where every distressed guy on the planet is taking a hard look. Very few people looked at those two situations. And, Highcroft is actionable for those that are watching, that are looking for an interesting way to play gold. And you can't really invest in NJOY outside of our firm, because it's private. But now that we've listed Highcroft, if you're looking for a highly levered way to play gold with a lot of catalysts, mainly liquidity coming back to the name. People just understanding that it exists, it trades at around 0.2 times NAV, and comps trade between 0.6 and one time NAV. If we traded close to comps, it would be a 20 to $30 stock. So, I think that's a particularly interesting one since it was already brought up.

John Darsie: (40:52)
So, we have a question, if you're familiar, what are your thoughts on the recent ruling on Serta Simmons and Apollo?

Jason Mudrick: (41:00)
Yeah. Well, interesting that it happened to Apollo because they're usually the one, pardon my French, but doing the screwing. And tables-

John Darsie: (41:14)
We had Josh Harris on, I'll tell him you said that.

Jason Mudrick: (41:17)
... Tables were turned a bit. Look, since we're talking about Apollo, we were involved in a Canadian oil and gas situation, five or six years ago, where Apollo and GSO did an up tiering. They basically exchange their debt into senior debt, and primed us, and didn't let us participate. And we sued, and we lost, and we appealed, and we lost, and I think we appealed the appealing, and we lost again. And I think we're still suing for D&O insurance coverage. So, I've been on the other end with them, just to see it happen to them was somewhat ironic. But look, we're involved in these situations all the time now.

Jason Mudrick: (42:01)
The fact is, one of the things that we've seen through the cycle is a very loose covenants. And when you have loose covenants, you're going to get companies that are going to be creative, financial sponsors that are going to be creative. And at the end of the day, what's happening in these situations is companies have figured out a way to extend the optionality in their equity. And oftentimes, that involves treating one class of creditors differently than the others, in exchange for liquidity. Right now, liquidity is paramount. So, if you're willing to put money into a company, and the company can move you ahead of similarly situated creditors in exchange for getting that money, the company should do it. I think as an investor, you just need to understand that risk. You need to handicap that risk. And if not, you're going to wake up on the wrong side of a trade like that.

John Darsie: (42:57)
Well, Jason, thanks so much for joining us. I want to give Troy one last word, if he has any more comments or questions for you before we let you go.

Troy Gayeski: (43:05)
Yeah. Thanks, John. Thanks Jason for being on again. Once again, when you compare it to 2001 to 2004 cycle, '07 through let's call it 2010, 2011, do you think the return potential is equal or greater now? Or do you think it's more compressed because of fed policy intervention? How do you see it playing out?

Jason Mudrick: (43:28)
I think this is the mother of all cycles in terms of the size, right? I think, we're in effectively a zero interest rate environment. So, I think the tailwind for equity markets over the next five to 10 years is not going to be what it was coming out of the '01 cycle. But the market is 15 times larger, right? If you asked me, would you rather have a bull market or a lot to do? I would say I'd rather have a lot to do. So, I'm bullish on this cycle because there's $3 trillion of levered credit that not all of it's distressed, but a lot of it's distressed.

Troy Gayeski: (44:12)
Well, thank you so much, Jason. You're a real entrepreneur. Congratulations on all your success. And we look forward to many more years of success in the future.

Jason Mudrick: (44:20)
Thanks, Troy. Thanks, John. Appreciate it.

Investment Advisors Explain Active vs. Passive Investing | SALT Talks #5

“Companies are now being restructured for the safety of our employees and the safety of our customers… we’re not going to get to 100% demand anytime soon.”

Karen Firestone of Aureus Asset Management, Keith Cardoza of Brownson, Rehmus & Foxworth, and Shannon Saccocia of Boston Private joined SALT founder Anthony Scaramucci to discuss their strategies as three of the top independent registered investment advisors (RIAs) in the country.

The guests discuss their reaction to the pandemic-driven stock volatility and how they advise their clients in times like these. “It's very hard, sometimes, to convince a client to buy into a falling market and to sell into a rising market, but it is very important to continue to rebalance.”

The Federal Reserve and monetary policy will play a major role in driving investment strategy through this pandemic and the periods that follow, with particular interest in the extension of low interest rates. The current economic climate poses the question around the effectiveness of active vs. passive investing. “I believe in active management. I think that the passive investing approach has a problem right now.”

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKERS

KARI FIRESTONE

CEO

Aureus Asset Management

FULL BIO

SHANNON SACCOCIA

Chief Investment Officer

Boston Private Wealth

FULL BIO

KEITH CARDOZA, CFA

Chief Investment Officer

Brownson

FULL BIO

EPISODE TRANSCRIPT

John Darsie (00:08):

Welcome everyone, back to SALT Talks. It's great to have you here. I don't know if you tuned in last Friday, but we had a great SALT Talk with General Kelley that made a little bit of news and we've been enjoying all the conversations we've been having, so thanks again for joining us today.

John Darsie (00:21):

My name is John Darsie. I'm the managing director of SALT, which as many of you know, is a global thought leadership forum and networking platform at the intersection of finance, technology, and geopolitics. With these SALT Talks, we try to replicate the environment that we create at our conferences, which is both providing a platform for big ideas and providing a window into the minds of subject matter experts, which today we have three of the leading independent RIAs in the country. Kari Firestone, Shannon Saccocia, and Keith Cardoza. I'll read out bios for each one of the panelists that are joining us today.

John Darsie (00:57):

Kari Firestone is the co-founder and chairman and CEO of Aureus Asset Management. Previously, she spent 22 years at Fidelity Investments, where she was most recently the Diversified Fund manager in the growth group with oversight of the Large Cap fund, advisor Large Cap fund, Destiny 1 fund and several institutional nonprofit and pension funds. Kari's Fidelity career began in 1983, as she was an assistant fund manager under the legendary Peter Lynch on the Magellan Fund, and we're going to ask her some questions about that experience today. Kari received a Bachelor and Master's in Business Administration from Harvard, and she's a regular contributor to CNBC as well as other financial media.

John Darsie (01:44):

Keith Cardoza is the Chief Investment Officer of Brownson, Rehmus & Foxworth. He co-chairs the firm's investment strategy and impact investment committers and serves on BRF's Private Equity, Credit, Public Markets, Real Estate, and Knowledge Management committees. He also leads the firm's asset allocation and manger selection efforts. Prior to joining BFR, Keith served as a managing director of Merit Ventures, an investment firm focused on technology investment, and previous to that, Keith chaired Boeing's investment strategy and asset allocation committee, where he was responsible for the investment strategy for their $41 billion in retirement assets. Prior to Boeing, Keith managed the $6 billion equity portfolio for the Illinois State Board of Investment's pension fund. Keith received a B.A. in economics from The University of Chicago and is CFA charter holder.

John Darsie (02:36):

Our third panelist today is Shannon Saccocia, who's the chief investment officer at Boston Private, which is a leading provider of fully integrated wealth management, trusts, and private and commercial banking services. She's responsibility for setting the overall investment strategy for the firm, overseeing asset allocation research, portfolio management, external manager search and selection, as well as creating an investment risk management. She also worked closely with both the business development team and the wealth advisor team to help construct and deliver customized wealth management solutions to meet client-specific needs. Previous to Boston Private, Miss Saccocia, Shannon, was the director of manager search and selection for Silver Bridge, which was acquired by Banyan Partners which was then acquired by Boston Private, which is where she is today. She got a B.A. in economics and history from Brandeis University and is also a CFA charter holder, and like Kari, Shannon is a frequent contributor to CNBC and other financial media.

John Darsie (03:37):

We're really excited to have these three panelists on today. Like I said, three of the leading independent RIAs in the country that provide whole suite of services to their clients. Anthony Scaramucci is the founder and managing partner of SkyBridge Capital, is going to be conducting the interview today. I'll kick it over to Anthony to conduct the interview.

Anthony Scaramucci (04:00):

Well, first off, John, thank you very much. It's great to be with you guys. What I thought I would do is go round robin the beginning here and then I'll give some individuals questions, but let start with Kari and then take commentary from each of you.

Anthony Scaramucci (04:13):

S&P 500 down 30% in March, a little more than that actually, and then has now rallied back to flat. Are we ahead of ourselves? Was this a near term blip? Fed induction? Tell us what you think, Kari.

Karen Firestone (04:32):

Well, I think it's very interesting, Anthony, and thank you very much for having me. The market is back to even, and you wonder what the market would have done if there was no coronavirus this year. So at the time, on March 23 when the market hit the bottom, the S&P was 2236 or so, and we thought that the market was very cheap at the time and that it was over-sold. We expected it to rally. It has rallied 44% now. That's not trivial. That, I believe, is the most that any market at any time has gone up in a short period.

Karen Firestone (05:16):

So do we think that the market is over-priced? I think that's what you asked, or do we think that there might be more to go? What we're seeing in the market today and for the last five trading days is that it has brought it and what drove the market higher for the first 35% of this rally was technology and the kinds of digital platform companies that have driven the market higher for the last two or three years. What has moved in the last week of trading has been financials, energy, industrial. Just a broader range of sectors, and if that can continue and we see the reopening as a success, then I think that the market can at least hold this ground and could go higher at the end of the year.

Karen Firestone (06:05):

It's not a cheap market, by any means. It just isn't cheap anymore. It was cheap. It's gotten pretty full, and it would be great if we can stabilize and show that we've got some revenue generation over the next few months to support this kind of valuation.

Anthony Scaramucci (06:21):

What do you think, Shannon? Cheap? Overvalued? Undervalued?

Shannon Saccocia (06:25):

I think it's impossible to tell whether it's cheap or not. I mean, the earnings, which is the denominator of PE, is completely unknown. There's zero transparency right now as it relates to earnings over the next couple of quarters. I think there's also a contingency that's being built into this market that you feel like you're in a situation where there are things that need to occur over the course of the next eight weeks or so to support this. So we talked a lot about an additional coronavirus package and that would include the extension of unemployment benefits through the end of the year. That is required right now for what we're expecting and I think the market is a little bit ahead of where we are from a support perspective. If you look at things like personal income, the savings rate, all of that cash that flowed into the market over the course ... or the economy over the course of the last eight weeks or so has all been artificial stimulus so if that rolls off in the middle of summer and we don't yet have the expansion of consumer spending back to reasonable levels, then I think that we're going to see a second wave, potentially, of unemployment.

Anthony Scaramucci (07:37):

Mr. Cardoza, Keith, what do you think?

Keith Cardoza (07:40):

I can't tell you what's going to happen in the short term. We are very strategic at Brownson, Rehmus. We do tell our clients to rebalance back to their strategic targets, as we did at the bottom on March 23 and as we would now. It's very hard, sometimes, to convince a client to buy into a falling market and to sell into a rising market, but it is very important to continue to rebalance.

Keith Cardoza (08:04):

On one hand, things are looking really good. U.S. financial markets are very liquid, they're functioning well. Of course, a lot of that has had to do with the Fed intervention. Spreads continue to tighten. They think the high yield is now yielding 550, which is the lowest since the beginning of March. The yield curve is steeper now. I think as of close as of at least Friday, I didn't see what it did today, but the yield curve between the ten year and the two year was 70 basis points. Just as an inverted yield curve can predict a recession, a steeper yield curve can predict growth.

Keith Cardoza (08:37):

Equity volatility has subsided. The VIX is back down to 25 or so. We've been under 30 since May 19. That's the longest we've had that stretch since February. Companies have not had problems issuing bonds and continuing to borrow more money. We've had probably a trillion dollars of issuance so far this year. March and April were record months for issuance. May fell just short of a new record. So there's a lot of positive things, but of course the challenges going forward is just as companies are taking on a lot of debt, that's being coupled with probably lower productivity going forward into the future. Companies are maximized for just-in-time delivery for just-in-sales and now all of our companies are being restructured for the safety of our employees, the safety of our customers. We are reshoring a lot of our supply chain, particularly from China, but as deglobalization continues to occur, that's going to hurt productivity.

Keith Cardoza (09:45):

As much as demand comes back, we're not going to get to 100% demand any time soon, so companies are now taking on debt with lower productivity and lower demand going forward.

Karen Firestone (09:56):

Keith, I have a question. How many of the people who you suggested on March 23 that they should re-allocate upward on equities said, "Hey, great idea. I'm dying to have you do that for us."

Keith Cardoza (10:09):

It's a challenge. Our clients are very strategic, and they have been through time periods like this before. Many of our clients were through the '07, '08, '09 liquidity crisis and our firm has been in business for 50 years, so even going through things like the dot com bubble bust. So they have been in time periods where frankly the markets were down more than 50%, let alone 35%.

Anthony Scaramucci (10:35):

What asset class is, given where we are right now, Shannon, what asset classes do you see the most opportunity?

Shannon Saccocia (10:43):

I think there's still some opportunity in credit. If you look at whether ... I mean, I think there's a little less opportunity in loans than there is high yield bonds right now, but there's still some opportunity there. I think that from our perspective, if you look at emerging markets in particular, they haven't participated in this rally that we've experienced, certainly in the month of May, that we've seen in the United States.

Shannon Saccocia (11:05):

I think that for us, we're looking at in terms of, to Kari's point, there are sectors within the U.S. equity market that are more or less attractive based on valuation, and then are a large swaths of assets outside of the United States that are pretty attractive regardless of where you're looking. So I think that there has been this sensitivity over the last decade about the underperformance of international and emerging market equities, and debt for that matter. I think that that shift, potentially, to a weaker dollar scenario, or even a stable dollar scenario, could create opportunities for investments outside of the United States.

Shannon Saccocia (11:40):

If you truly believe that the global economy is going to re-accelerate, which was our expectation coming in to 2020 and perhaps that's been kicked to 2021, you should be looking outside of the United States for potential opportunities in the equity and credit markets.

Anthony Scaramucci (11:54):

All right. So more diversity, basically. Kari, do you think that there's ... you worked at Fidelity, you've got this experience. Tech and momentum, up until today, seemed to be driving the markets, Kari. You think that's a smart trade? Do you think that's the nifty fifty of 2020, or do you think there's still room to go there?

Karen Firestone (12:17):

Well, yes. So that's the simple answer. Yes, I think that tech ... momentum, if we mean by that the people who brought us here, meaning the type of companies that have led on the upside through this whole rally, those are the companies that both have been able to maintain their leadership and been able to persevere and succeed throughout this pandemic. They're highly valued because they ought to be. We did a study, actually, I wrote a piece on this a while ago and I did a chart for CNBC that showed that the contribution of earnings within the S&P 500 from technology stocks and communication services was less than ... I'm sorry. Their share of net income as about 40% for this quarter and their share of valuation was 35%.

Karen Firestone (13:22):

Now, that number can be different today, but certainly they are not overly valued, if we look at their contribution to total earnings, and that can expand, in fact, not contract and it's because if you look at companies that are almost made for an environment that is difficult, that require remote working, requires connectivity of a different type, service providers that have to deal with a new world, it's Microsoft, Amazon, Facebook, PayPal, the different types of companies that we know they're not all in the same sector, but they're ones that have been able to prosper in this environment.

Karen Firestone (14:06):

So of course, that's where money has gone. Do I think that they need to take a break and rest? Well, perhaps, and that's been going on right now, but I think that for the market to go higher, they have to be the leaders again because they are the drivers of this economy. It's what makes the United States a preferential place to invest, rather than other global economies. Even though they might be cheaper, they deserve a lower multiple than the U.S.

Karen Firestone (14:35):

I agree, by the way, with Shannon, that I think emerging markets are cheap but to the question about what leads in the U.S., this could be another week or two of this kind of rotation, but I don't think it'll last unless the market falls and then everything will fall. But if it's going higher, I think that we have to go back to who's leading on earnings and revenues over the next six months.

Anthony Scaramucci (15:01):

So Keith, my old boss, Lee Cooperman, tepid on the markets three or four weeks ago. Dave Tepper, Appaloosa, tepid on the markets. Stan Druckenmiller, a little more bullish this morning but very tepid on the markets for four to six weeks ago. What did they get wrong?

Keith Cardoza (15:22):

Well, I think there's a few things. One, people have been conditioned to buy the dip and it has worked over and over and over again. I think second, the massive intervention by both the Federal Reserve and frankly Congress to keep the economy going in any way they could and to keep asset prices high. And I think three, there was just a look-through. It's this reminder that only 10% of a stock's value is based upon earnings of the next 12 months. 90% of a stock's value is based upon earnings that they'll gain after that and I think there was quite a bit of look-through this event.

Keith Cardoza (16:06):

So I think by being conditioned to buy the dip, with the Fed support and congressional support with both fiscal and monetary stimulus, as well as just looking through this current COVID crisis, I think that's probably what a lot of us missed.

Anthony Scaramucci (16:22):

Let me play devil's advocate and go to Shannon for a second because you mentioned the uncertainty of earnings. My old boss Lee Cooperman would say, "Well, I can't value this market. Is it 24 times earnings? 22 times earnings? What are the earnings for 2021?" So Shannon, what would you say to somebody like Steve Cooperman?

Shannon Saccocia (16:44):

I think you see-

Anthony Scaramucci (16:44):

Lee Cooperman.

Shannon Saccocia (16:45):

I wasn't going to correct you.

Anthony Scaramucci (16:46):

I mixed a couple of geniuses together. I'm sorry. But I meant to say Lee Cooperman.

Shannon Saccocia (16:52):

You know, I think the challenge here is that I don't know that right now that anybody's focused on that. I think that this look-through has two [inaudible 00:16:59], and I agree with Keith. I think the other thing that's happening is that we came into 2020, and this is not a typical recession. Generally we have some sort of economic excess that brings us to the brink and we have an overheating something, asset bubble, area of the economy. We didn't have that here, and so I think the look-through is really once it was determined that this wasn't going to be catastrophic from an economic perspective and that we would be coming out the other side, I think that expectations just sort of reset to where we were at the end of 2019, which we're not ... stocks weren't that cheap then, either, let's be honest, coming in to this year.

Shannon Saccocia (17:37):

So I think inasmuch as you'd like to trade on the fundamentals, the Fed has essentially told you that this bursting of the credit bubble that we've all been waiting for, this retribution for all of these companies over-leveraging their balance sheet, it's not coming. It's not coming today and it's not coming tomorrow. So now this pushes all of that out a few more years. We're in a zero interest rate policy. I hate to use the term, because it's overused, but there is no alternative. So whatever that E is at the bottom of that PE on the S&P 500, where else are you going to, maybe not in the next two months to three months because I think there will be additional volatility and uncertainty especially with China and the election on the horizon, but out into 2021. If you look at the back half of next year, where are you earning return for your clients? Are you earning it someplace else in the equity market? I'm not so sure.

Anthony Scaramucci (18:29):

Well, no, and look, you make a good point. Let's go to the zero interest rates for a second. Professor Stephanie Kelton just wrote a book called The Deficit Myth. It's coming out tomorrow. I had the opportunity to read it over the weekend. So let me flip this over to ... I'll take it back to Kari for a second. I'm talking about the modern money. I'm talking about what Shannon is basically saying. Interest rates are at zero, there's no other place to go. Put it into revenue-generating tech stocks. Otherwise there's no other market, if you will, and so there's a thinness to that. But let's talk about modern monetary theory for a second. Totally okay?

Karen Firestone (19:09):

Yeah.

Anthony Scaramucci (19:09):

There's a new book coming out called The Deficit Myth. We can rack up another $30 trillion in deficit, it's good for mankind. Professor Stephanie Kelton is saying that in her book. What do you say?

Karen Firestone (19:21):

Well, I think she's got a very good point. Monetary policy has changed over the last 30 years. It used to be where there would be inflation if the Fed printed a lot of money, and that has now changed. We observed that in 2008.

Anthony Scaramucci (19:36):

Why? Why has that changed? Why don't we have inflation?

Karen Firestone (19:39):

Well, first of all, we didn't have inflation over the last twelve years because there was excess of supply so even though demand grew over the last decade, there was so much supply going into 2007 and 2008 that we never achieved a point of equilibrium or demand exceeding supply. Now we're at a level where that hasn't been inflation for years, interest rates are low, you can print money and it does not cause excess demand into the marketplace and the global nature of the way people buy and sell has also continued to push prices down for-

Anthony Scaramucci (20:19):

I accept that. Keith, is that a temporary phenomenon for our time or is that something where the paradigm has shifted as a result of technology and that's now something permanent, that we can have an unlimited amount of credit printing without having any inflation?

Keith Cardoza (20:37):

I don't think that's necessarily true, but I would add to the comments of where can we go now. I actually think there's actually a few different places we can go now, and especially you're raising issues that are very complex. What is say is that one of the things that investors need to look at now are those complex assets. So assets that are typically avoided by a traditional bond manager or a traditional stock manager. As we were going through the end of March, one of our hedge fund managers said, "Hey, the way this market is priced is stocks are being priced for a three month shutdown, bonds are being priced for a three quarter shutdown, and structured credit is being priced for a three year shutdown."

Keith Cardoza (21:19):

Now that was a little bit of an exaggeration if not a bit of an exaggeration, but to his point, stocks have come back pretty quickly. Many areas on the credit side have come back, but things like structured credit is still very dislocated. Now that's not something you can get through an index fund or through an ETF or even a traditional mutual fund, but it is something that you can get through an alternative manager. Even assets like, for instance, that you can gain through a mutual fund manager, something like municipal high yield which is something that most traditional bond managers and us stock managers will avoid, even if it's a good value.

Anthony Scaramucci (21:58):

So why hasn't it come back, Keith?

Keith Cardoza (22:00):

I think because of illiquidity. There has been a big challenge in this marketplace of being able to make assessments about liquidity in the marketplace and when you think of things like municipal bonds, even particular high yield municipal bonds, pension funds aren't there, endowments aren't there, foundations aren't there, non-U.S. investors aren't there. And even for U.S. investors, it's a very particular segment of the market. It's people who are making high income.

Keith Cardoza (22:27):

On an intermediate duration high yield municipal bond portfolio, you can earn about 5.5% tax free. Even on a shorter duration high yield municipal portfolio, you can earn about 4%. It's nothing something you can do on your own. It's something that you need to hire a manager who has expertise in that area.

Anthony Scaramucci (22:46):

So Shannon, has the structure of credit come back or is it in a three year freeze? As I'm saying this to you, my heart rate is going up because I'm long on a tremendous amount of structured credit, but go ahead.

Shannon Saccocia (22:58):

I know. I have to remember who asked-

Anthony Scaramucci (23:00):

Lie to me, Shannon.

Shannon Saccocia (23:00):

I have to remember who asked me here.

Anthony Scaramucci (23:00):

Lie to me, Shannon. Lie to me. Tell me it's coming back, like, tomorrow. No, I'm kidding. Give us your critical analysis of it.

Shannon Saccocia (23:09):

There absolutely are ... there's opportunities in structured credit, but I think what March drove home for people is that you really need to understand how you feel about illiquidity, even if it's short term in nature. There were huge opportunities in the high quality municipal bond market in the middle of March as long as you didn't need to be liquid today. I think that structured credit, I think as long as you have the expectation that there could be pockets of opportunity there that some of that is going to dislocate ... there could be continued dislocation in that as we morph into this new phase of economic recovery and you have the wherewithal and the liquidity timeframe to be able to sit there and wait for those trades to pay off.

Shannon Saccocia (23:56):

I think that that's the challenge right now, is that the structures that are created for you to be in structured credit vary widely from interval funds to seven to ten year lock up funds. I think you really want to think about the underlying assets, make sure that you're giving the manager, to Keith's point, the opportunity to maximize the return on those assets without another run on liquidity and then I do think that you'll have opportunities. There's a premium for liquidity in this market that I'm not sure is going to go away, ever, and so I think that it's going to create the haves and have nots as it relates to relative opportunity.

Anthony Scaramucci (24:33):

So are you a buyer selectively in structured credit, or are you a seller of the whole thing?

Shannon Saccocia (24:38):

No, I think ... I absolutely think that it belongs in portfolios, particularly for clients, again, that can commit to a portion of their portfolio being illiquid and seeing it that way and positioning their overall portfolio for a portion of that to remain in structured credit.

Shannon Saccocia (24:55):

I think that the Fed has basically taken off the table the opportunities in traditional bonds to a large extent, and so I do think you need to get more complex in the credit space in order to make those returns.

Karen Firestone (25:08):

And just one other point I wanted to make with regard to a question you asked earlier about why is that Lee Cooperman or Howard Marks, et cetera, or Stanley Druckenmiller have been so negative and what was perhaps different about this time versus other markets such as in 2008 when the market collapsed and they might have been much more positive? We sometimes call this, or I call this, a blasphemous bull run in that it has felt like blasphemy to say that it's fine to buy the market because this market was not about evil doing of certain banks and the rest of us felt, "Gosh, there's so much undervalued stock out there. We have to support these companies, all of these people, institutions," you're just buying stock because it's out there and there's nothing about it that felt evil.

Karen Firestone (26:05):

Buying the market at the time where things looked very grim about a pandemic felt to many people almost sacrilegious and it was very hard to separate your feelings about what was happening around the world as an enormous healthcare crisis and then feeling like we've got to make money on this? It just felt ... I mean, I really think that it was a struggle that many people had-

Anthony Scaramucci (26:30):

I think it makes sense.

Karen Firestone (26:31):

... great investors.

Anthony Scaramucci (26:32):

I just think that when I-

Karen Firestone (26:35):

They were wrong, of course.

Anthony Scaramucci (26:35):

When Scott Wopner invited me on six weeks ago to talk about this, you got $4 trillion coming in from the Fed. As I said, it's a waterwall of money. It's not a bazooka. It's a green tsunami washing over the United States-

Karen Firestone (26:49):

Correct.

Anthony Scaramucci (26:49):

It's impossible for it not to show up in asset prices. We can do gymnastics, mentally, about the fundamentals, but it's just crazy.

Karen Firestone (26:57):

Correct. That's correct.

Anthony Scaramucci (26:58):

All right. We're going to do a quick round robin if you guys don't mind and then I'm going to turn it over to John Darsie, where we have audience participation and some questions. So quick round robin, so making this a short yes or no, don't like, a sentence or so. The hedge fund space is underperformed. Let's start with you, Kari. You're on my screen. The hedge fund space is underperformed. Is that a good place to be for your clients going forward, yes or no?

Karen Firestone (27:26):

Not necessarily. They haven't played it well for the last few years. Why should they start playing it better now?

Anthony Scaramucci (27:31):

Okay, so you would be underweighted in hedge funds?

Karen Firestone (27:33):

Yes.

Anthony Scaramucci (27:35):

Okay. We're not inviting you back. Can we go to Shannon, now?

Karen Firestone (27:38):

Except yours. Except yours, Anthony.

Anthony Scaramucci (27:39):

No, I'm kidding.

Karen Firestone (27:39):

Except yours.

Anthony Scaramucci (27:40):

I'm kidding. I love the objectivity. That's why we do this. Shannon, go ahead.

Karen Firestone (27:46):

We manage our own money.

Anthony Scaramucci (27:47):

Shannon, go ahead. We're recording this for posterity, Shannon, I might add that, okay? No, I'm kidding.

Shannon Saccocia (27:54):

I think there are the opportunities in place as there haven't been historically. There's probably some more opportunities in long short equity as we move forward. I think there's opportunities in structured credit. I'm shying away from relative credit. The Fed's essentially taken those trades out. I'd say uncorrelated asset classes that are available in the hedge fund structure remain pretty attractive here.

Anthony Scaramucci (28:14):

And what about you, Keith?

Keith Cardoza (28:15):

Yes. High complexity structured credit, distressed credit, multi strategy funds, macro funds. With macro, you're liquid.

Anthony Scaramucci (28:24):

Okay. Let's go to active versus passive management, so that could be in hedge fund format, it could be non-ETFs versus ETFs. Let's flip it around. Let's take it around the horn. Let's go, Kari. What do you think?

Karen Firestone (28:38):

Yeah, so if we're talking about active versus ... we are active managers here for our ... I believe in active management. I think that passive investing approach has a problem right now because passive includes an awful lot of equities that have not participated over the last five plus years in the economy and I'm not sure how they participate. So they're pulling down, I'd say-

Anthony Scaramucci (29:04):

Right. So you have to buy the bathwater with the baby, is basically what you're saying.

Karen Firestone (29:08):

Correct.

Anthony Scaramucci (29:08):

What about you, Shannon.

Shannon Saccocia (29:10):

We use both, depending on the asset class. I mean, if you're trying to capture beta you go cheap, and if you're trying to get active management, I think active management's probably a bit more in vogue now for the next 12 to 18 months given that the dislocation, but there's always opportunities to use both in your portfolio.

Anthony Scaramucci (29:25):

Okay. And what about you, Keith?

Keith Cardoza (29:27):

On the U.S. equity side, we're passive, and we have been passive for decades. On the international, it's a mix, and we are certainly are active on fixed income. I think particularly in this environment, the fixed income, you need active management.

Anthony Scaramucci (29:41):

If you were looking back at the world, it's 2025, so it's five years from now, equity markets are higher, the economy's booming. Where do you see the world ... let's go in reverse. I'll start with you, Keith. You're on my screen. It's five years from now. This was a great ... you're talking to your client today, but you have the foresight of five years from now, so you're encouraging them to do what?

Keith Cardoza (30:12):

Five years is not that far away. In the long run, we really do feel confident that stocks will outperform bonds and bonds will outperform cash, but as you tighten that timeframe, even within five years now for 2025, it becomes more difficult to predict.

Keith Cardoza (30:27):

That said, with the equity markets, we are priced for a U-shaped recovery assuming that COVID goes into a ... we have a summer respite from COVID, that things somewhat get back to normal by the end of August, that kids return to school, that we have a vaccine by ... call it the third quarter of 2021, and the economy has returned fully by fourth quarter of 2022, so 30 months from. Equities can be a good place to be over the next five years.

Anthony Scaramucci (30:57):

Okay. So bullish on equities. How about you, Kari?

Karen Firestone (31:00):

Well, I think it's hard to bet against equities because if you look over the past 50 years, they've consistently returned in excess of inflation and excess nicely of the risk rate and so yeah, I would say that you have to have, particularly if you're of a certain age and risk tolerance, a high portion of your assets in equity. I also think that we might get, over the next year or so, some real dislocation in assets like real estate. It's just totally unclear right now whether urban real estate is going to be attractive or not, what's going to happen with the suburbs. They were giving away everything. I don't live in Connecticut, I live in Boston, but it seemed to me people were giving away big estates in Greenwich for very little and now suddenly the prices are gone up 300%. I'd like to see what happens with real estate as a possible investment over the next few ... commercial real estate also can have some kind of dislocation and that can be true overseas.

Karen Firestone (32:01):

I think that we'll have these opportunities in the next twelve months. It's not clear right now how they'll shake out, but equities has to be an important factor, and I think interest rates will be higher, too, so I think that we'll have more opportunity in the fixed income side and so we can ... yes, we'll be buying your-

Anthony Scaramucci (32:20):

All right. Well, I got that on tape, okay? We're going to end. Thank you, guys, for participating. We're going to end it right there on that one statement. No, I'm just kidding. Let's keep going. Let's keep going, Shannon. What do you think? It's five years out. What are you projecting for clients?

Shannon Saccocia (32:37):

I think we continue to be in a low growth environment, Anthony, so I think that the one thing that we are projecting for clients is more subdued returns across both the equity and fixed income space and so I think things like fees, taxes, income opportunities outside of your traditional fixed income basket, those become increasingly important because client's expectations can only be changed so much. I mean, they need cash flow from their portfolio in order to support their needs, and so I think that that's where we're focused, is on this lower growth, lower return environment that we're going to continue to see over the course of the next five years, but even in that case, you want to see your allocations and equities because they at least provide some capital appreciation opportunity.

Anthony Scaramucci (33:23):

Okay. I'm going to turn it over to John Darsie. He's got some questions from our audience. I appreciate you guys participating on our game show. Go ahead, John.

John Darsie (33:33):

Yeah, we have a lot of great questions to get to. Investment advisory, asset allocation manager selection is only one of the piece of the puzzle when you're an investment advisor. What was it like communicating, psychologically, with your clients during the coronavirus-induced selloff that happened in markets and long term, how is this pandemic and the volatility that we've seen changed the way you'll look at risk management within asset allocation for your clients?

Karen Firestone (34:02):

Can I take that?

John Darsie (34:04):

Yeah, Kari. You go first.

Karen Firestone (34:05):

So we wrote to clients four times from February, started I guess February 25 was the first time we wrote and then we wrote twice in March and once the beginning of April. In 2008, beginning of 2009, we wrote to them twice. So this was a scarier period of time and we felt that the whole healthcare and very strange elements of this crisis required more reaching out by Aureus to our clients.

Karen Firestone (34:41):

So we tried to be thoughtful and calming. In March, we gave them a chart of what has happened the last six times the market fell 28% or more since 1961 and the subsequent 3, 6, 12, and 18 month periods and it turns out that in every one of those periods the market is higher following that drop 3, 6, 12, and 18 months afterwards. That spreads, that gap spreads as you go further out from the trough. So it was our way of helping to convince our clients, as well as ourselves, that it was a good time to buy stocks, but we could do it in a kind of graphical depiction and I thought that was a valuable piece of illustration for them.

Karen Firestone (35:35):

On the risk front, there are two things that I think are important. One is that the U.S. government, the Treasury and the Fed, showed us that they would reduce the risk of this environment by the amount that they were able to push out towards businesses, to citizen on the Fed side of borrowing and that definitely alleviated a big question mark and reduced the risk to investors and I thought that was very important. We saw that happen, to some extent, in 2008, but this was much bigger.

Karen Firestone (36:12):

Number two, when you start to experience this kind of meltdown in the market, you definitely, as an advisor, see the tolerance that your clients have to risk. They may have tell you how they feel about it going in to a relationship, but not until this sort of thing happens do you either hear them say, "I'm really scared. Maybe we should sell 25%," or they say, "Hey, this looks like a great opportunity. We should be buying." So it gives us more information that it could take 15 years to accumulate otherwise.

Keith Cardoza (36:48):

I want to add to-

John Darsie (36:49):

Shannon, how about ... Keith, go ahead.

Keith Cardoza (36:50):

... the second part of that question around risk and in fact, Shannon brought this up as well in terms of liquidity. I think part of the challenge that we have in our industry as a whole is when we look at risk systems, they deal with complicated problems but not complex problems. What do I mean by that? Complicated is like a jet engine. Once you figure out a jet engine works, it works the same way over and over and over again. Well, complex are things like the weather and market movements. It's always ever-changing. There's a lot of variables and once they're figured out, they continue to change.

Keith Cardoza (37:24):

So a lot of risk systems are based upon things like expected return, standard deviation and correlation, and then you can output some sort of number. The challenge is, is as Shannon mentioned before, would be things like liquidity. A lot of risk systems, it's complex. We can't measure illiquidity. It becomes very difficult. So for instance, even in terms of communicating things like with clients on something like investment-grade municipal bonds, which a lot of clients consider to be the safe part of their portfolio, during a good chunk of March and going into April and even now, it's difficult to sell, even investment-grade municipal bond.

Keith Cardoza (38:07):

So how do you communicate to a client that, "Hey, this is the safety part of your portfolio, but yet there are time periods where it's not advantageous to get out, and in fact if you do, you're really going to be hurting yourself," and I think we just need to do a much better job as an industry of being able to asses that liquidity across the entire portfolio.

John Darsie (38:27):

Shannon, do you have anything to add to that?

Shannon Saccocia (38:31):

Not really. I feel like everybody's really covered it. I would say the one big difference between, for instance 2008, 2009 to Kari's point and this time around is that our firm was more of an investment management firm back in 2008, 2009 and we're much more of a holistic wealth management firm with a significant planning component and I would say that that really helped us because reminding clients about their plan, what we had already set up for them, even when they started to get perhaps a little squirelly when we could just revisit the plan and remind them that we had really factored in through things like Monte Carlo simulations all of these potential events and that they were still coming out the other side where they needed to be from an outcome perspective, I think that really helped. So I think this particular crisis has probably driven home the importance of holistic wealth management and financial advisory as opposed to asset management, which I think 20 years ago is what we probably all were trafficking in.

Keith Cardoza (39:23):

Yeah, I will admit, Brownson Rehmus, we've been there for 50 years, so we are first and foremost a financial planning firm, and in addition to that we do investment strategy and asset allocation and manager selection. So this is something we've been doing now for five decades.

John Darsie (39:38):

Thank you all for that. We have several questions related to potential inflation, so obviously it's debatable about whether we're entering a potentially inflationary environment. Anthony touched on modern monetary theory and rising deficits and things like that, but we have a couple questions that I'll combine into one. One, if we do get some level of inflation, what impact do you expect that to have on earnings and do you expect companies to be able to pass that through to consumers, and second, given the possibility of inflation, do you think that things like gold, Bitcoin, or other inflation hedges, where do they belong in a portfolio right now, maybe increasingly so relative to a few months ago?

Shannon Saccocia (40:21):

I just want to start with that the misconception that there hasn't been inflation. There hasn't been inflation the way that we measure inflation according to the CPI. Services are certainly more expensive. Housing is more expensive depending on where you are and particularly rent. So I think when we start to think about inflation is what is the next level of inflation that could potentially feed into corporate profitability, because that's really what we're trying to discount here, is how much of this will impact corporate profitability going forward.

Shannon Saccocia (40:56):

So if you think about the costs, and I think Anthony may have mentioned this before, labor productivity and the cost of inputs, that continues to get cheaper and cheaper as technology gets cheaper as we shift away from very heavy, fixed asset businesses, to Kari's point about where growth is and that's really an intellectual capital going forward. So I think that that is where we really have to shift our framework to what do we mean by inflation, because services inflation is certainly there. Look at healthcare. Look at college costs. I mean, there is inflation in the economy, just not at the CPI level and so I think we need to think about when you're looking at it at a company level, what are the inputs that that company is going to increasingly be paying for and do we expect there to be macro economic rationale for those inputs to get more costly and that's really how you should be looking at inflation. I think the CPI measure is dated, and I wouldn't be surprised to see changes to that over the next five to ten years.

Karen Firestone (41:54):

You know, also we have to think about the near term and the long term. Over the near term, there are many inflationary pressures because of how companies that are reopening have to deal with the cost of a COVID open business. So whether that's ... if you're a restaurant and you can only serve a third of your capacity but you have the same amount of space, you have to charge more for your food. If you're in the retail business and you can only have so many customers in at a time, but again, you're paying the rent, keeping the lights on, have your inventory but have to have filters and have to have all kinds of measurements for your employees, that's inflationary. There are many ways in which people are going to deal with the coronavirus over the next six months that are going to be inflationary. Now whether that changes after there's a vaccine, we don't know, but in the short term, it's inflationary and if municipalities, state governments and eventually perhaps the federal government needs to raise taxes because everything is taking so much of the budget to manage the healthcare expenses of this pandemic, that's going to be inflationary. If companies want to keep their profit margins but their tax rates go up, I think they're certainly going to have to try to pass some of that on to consumers.

John Darsie (43:21):

Keith, do you have anything to add to the inflation question, and specifically about whether things like gold, cryptocurrencies belong as a small sliver in portfolios given the potential specter of inflation?

Keith Cardoza (43:32):

We do not have gold or cryptocurrencies as part of portfolios. Things like gold I think are just much too volatile for any type of expected return and so that is not something that we contemplate.

John Darsie (43:50):

Okay. On to the next question. We have a few that relate to China about whether, I know Shannon touched briefly on emerging markets earlier, but you guys look at China, obviously a fast growing economy that's been able to reopen a little bit more quickly than other global economies. Do you think that China has some attractiveness as an investment destination right now?

Karen Firestone (44:12):

Yeah, we do. I mean, we have of our equity assets a certain percent are in international funds. We manage the equities, U.S. equities, directly because many of us have done this as analysts and fund managers for decades and we like to do that. When it comes to international investing, we don't use index funds or ETFs or we use managers who we have a lot of faith in. We have a manager that's a China direct manager. I think that you can't be a global investor without having some representation from China. It's the second largest economy, it's become a larger factor in every index you want to look at that's non-U.S., and it's interesting. They're trading at about the same level of a year to date basis as the U.S., meaning about flat. It's about flat.

Karen Firestone (45:11):

So we own Ali Baba, that's the one name that's in our portfolio. We own 32 names, Baba's one of them. It's up, year to date, a few percent and we continue to think that's a great stock to hold. There are many good companies. It's not easy to understand that as thoroughly as people who are on the ground there and so we have allocated that mostly to external managers.

Karen Firestone (45:38):

But yeah, I think that China's very important in a global framework.

Keith Cardoza (45:43):

Yeah, I absolutely agree with that. We allocate to China through both our emerging market managers as well as our international equity managers. Anthony talked about before looking out to 2025. It's undeniable that China's economy is going to continue grow, being the second largest economy and whether we are economic allies, economic rivals, economic opponents or economic enemies, the U.S. economy and the Chinese economy are going to continue to be at the forefront around the globe. I'd like us to think about us being rivals, where we could continue to make each other better, but frankly even if we become economic enemies where we almost start having bifurcated internet system, where there are two internet systems and two global supply chains and it becomes a sphere of U.S. versus China, I think it is important to be allocated to a country and economy that's going to continue to grow.

Anthony Scaramucci (46:52):

But before Shannon talks, I want to go ... are you worried about political risk in China? And then secondarily, are you worried about political risk in the U.S.? If you were Chinese, looking at our televisions, you'd probably think that too. What do you think?

Keith Cardoza (47:07):

Yeah, political risk is certainly ... is always a factor. I mean, it's one of the reasons why when we allocate money to areas like China, well and even in the United States, we want to work with money managers who are experts, who are know the politics, they know the economics, they know the liquidity and know the systems and know the accounting and the balance sheets much better than most. So it's identifying the portfolio managers that have the uncommon knowledge of the politics and the economics and the demographics and the technology and being willing to trust them.

John Darsie (47:44):

How would the market react, in your opinion, and we'll start with Shannon on this one, if we did get a large second wave of the virus, we have more rolling shutdowns and quarantines? Is this a situation where you can't lose because if we do get another shutdown we'll get another wave of Fed liquidity and fiscal stimulus, or how do you think markets would react in that scenario?

Shannon Saccocia (48:07):

I think the markets will react negatively to a resurgence, however I think that there is little political appetite for a return to a lockdown scenario that we experienced in April. I don't mean to be crass, but I just think that from a political perspective, you're going to have pockets of progression that are going to see the benefit of going back into these lockdown scenarios and then you're going to see most places really react, I think, very differently than what we saw in April and May. I hate to say that, and I think it's going to be a challenge as we go through and see this re-acceleration of cases and so while I'm hopeful that we will not have a resurgence of the virus, I also am not expecting ... you're seeing a lot of anecdotal evidence and also several very notable economists coming out and saying that the way that we handled this was a mistake from an economic standpoint, that we should have taken a different tact. I think that's very easy to say in hindsight, since we managed to flatten the curve clearly, but I don't think that there is appetite for that in the August/September time frame.

Shannon Saccocia (49:19):

I am more concerned about how that will affect the elections in November, because I think that there will be a very ... I think that there's going to be an emphatic vote on how this crisis was handled in the elections in November, and if we get a resurgence in April and Septe ... or in August and September, excuse me, I think that's going to be even more impactful to those elections. So that's sort of how I view that potential.

Anthony Scaramucci (49:45):

So a resurgence is bad for the Trump administration, Shannon?

Shannon Saccocia (49:52):

I think it depends on how it's handled. I do. I think it depends on how it's handled in that August and September time frame. I think it depends on what's happening economically up until that point, and I do think that ... again, I think that if we end now, Anthony, to your question, and everybody can take the last couple of months and say, "Okay, how did we handle this politically? Who are the political winners and losers?" If you have a resurgence in August and September, you just get so much more fodder for that potentially contentious election that I don't know what the outcome will be of that, but I know that it will be more than about the progressive platform versus the incumbent platform than we could expect right now.

Anthony Scaramucci (50:35):

All right. If Trump wins, the next time I have you on, Shannon, I'll be wearing an orange wig, okay?

Keith Cardoza (50:42):

I'll add to the resurgence-

Anthony Scaramucci (50:44):

What's that, Keith?

Keith Cardoza (50:44):

You know, I'll add to the second wave. A lot of scientists and experts do believe we are going to have a second wave in the fall, but we're not going to have a national shutdown again. The national shutdown was probably a very prudent step to take because we didn't know where the hot spots were going to be, we didn't know what was going to be the exponential rate of the virus, we didn't know how it was primarily transmitted. There were so many unknowns about this very deadly and dangerous virus, and a national shutdown probably was prudent.

Karen Firestone (51:16):

We didn't have a national shutdown. We had a state by state shutdown. It was never a national ... I mean, it wasn't, to be clear.

Keith Cardoza (51:26):

Understood. So going to that further, I think in the fall, to your point, it'll become even more hyper localized. You will see, perhaps, specific cities, specific areas. It will be more hyper local in terms of being able to identify where hot spots are, where we will have to perhaps mitigate the virus. And also hopefully over the summer, we will have more therapeutics on the marketplace. There's not going to be an vaccine by the fall, but there's a good chance there'll be some therapeutics on the marketplace that will help alleviate the symptoms.

Anthony Scaramucci (52:01):

All right. Well, we're going to wrap up here in a second, so of course I have to talk about politics, if you guys don't mind. So let's start with you, Kari. What are you telling your clients about the election?

Karen Firestone (52:13):

I'd say that we're telling our clients right now that the market would be happy with either candidate. I'm assuming the candidates are Donald Trump and Joe Biden. I don't think that the Biden agenda is one that's going to make most investors wildly concerned about their holdings. It's probably true that there would be an interest in raising taxes, but the tax rate is so low relative to any time in history in the United States that even if taxes were to go up some, they would be far lower than they were under the Reagan administration, as an example.

Karen Firestone (52:51):

So I think that it's not as much of an issue about who wins. I think the bigger issue is what's subsequent to the election? You wonder whether there's going to be some national outcry, and I mean protests, demonstrations, or worse in either case if President Trump wins or President Trump doesn't win, and I think unrest is very concerning to the market. It hasn't been. I mean, just notice what's happened over the last week or so when we've had demonstrations, rioting, looting, et cetera. The market, I think, has gone up almost every one of those days so the market is living a slightly different state of mind but at the time of the election, and post election, it could have an affect. What happens subsequently could affect the market and how the country reacts, so that worries me somewhat. But not which candidate.

Anthony Scaramucci (53:55):

I hear you. Shannon, what do you think?

Shannon Saccocia (53:59):

I think that typically markets like to see the incumbent win. It creates greater certainty, normally. We certainly have lived in an uncertain environment and I think the China situation is the area where people are concerned about what a re-election of President Trump would mean for continued China tensions and that relationship.

Shannon Saccocia (54:20):

I also think it's important to see who Biden chooses for his running mate because we could see a more progressive platform after what's been happening from the social unrest perspective come aboard with a potential vice presidential nominee. So I'm interested to see how he positions his running mate and potentially modifies his initial platform to be more progressive in response to what's happened over the last few days.

Anthony Scaramucci (54:47):

Well, he's definitely tacking to the middle right now, because he was against the whole defunding of the police today. All right, we'll end it with you, Keith. Where do you see things election wise? See, notice I didn't pin any of you and ask you who you were voting for or who you thought would win. I want to invite you guys back, and I wanted you to accept my invitation, so I didn't push too hard there. But go ahead, Keith. What do you think's going to happen, or what do you think ... market wise?

Keith Cardoza (55:15):

You talked about 2025 and from a market perspective, I think the election is still way far out. For the market right now, no one's talking about the election. We're still interested in the reopening of the economy and what's going on with COVID, what's the advancement of therapeutics, what's the advancement of vaccines, what's the advancement of testing? Are more people going to be sitting in restaurants? Are more people going to be flying on airplanes? Are local businesses going to be open? That is what the market cares about at this moment and will be for the next few months.

Anthony Scaramucci (55:49):

All right. John, you got any other final thoughts or final question before we kick it off, kick it out?

John Darsie (55:55):

No, I just want to thank Shannon, Keith, and Kari for joining us. As we talked about in the open, these are three of the top independent RIAs in the country, beyond just asset management, as they touched on financial planning, advisory work. Really great fiduciaries for their clients that we've built relationships with and we really appreciate you offering your insights.

John Darsie (56:17):

Anthony, do you have any final words?

Anthony Scaramucci (56:18):

I don't. I just want to say thank you guys. I appreciate you coming on and the rigorous debate. I'm a little sore about the opinion on the hedge fund thing but that's okay. I can get over that. I can see through that. But listen, we obviously think there's a huge opportunity in structured credit and the stuff is fundamentally cheap and so ... but that'll be for us to convince you of that further.

Anthony Scaramucci (56:40):

So with that, guys, thank you very much. I look forward to our next SALT Talk, and you guys were great and hope you all come back.

Karen Firestone (56:47):

Thank you.

Keith Cardoza (56:47):

Thank you.

Anthony Scaramucci (56:48):

Thank you again.

Shannon Saccocia (56:48):

Thank you.

Anthony Scaramucci (56:48):

Bye bye.