DoubleLine's Jeffrey Sherman: Tight Credit, Sticky Inflation, Bad Breadth... What Else?

[00:00:00] Pierre Daillie: Welcome back. I’m Pierre Daillie, and this is Raise Your Average. Here with me today is my co-host, Mike Philbrick, a CEO at Resolve Asset Management Global. Jeffrey Sherman, Deputy CIO and Portfolio Manager at DoubleLine Capital is here. Jeffrey, welcome back.

[00:00:17] Jeffrey Sherman: Yeah. Thanks for coming. And Raising Your Average, I took your advice last time and as Mike and I were discussing at the onset, we’re trying to raise my room rating average here too.

Oh, yeah.

So since the last time, I think I’m trying to do a little bit better, but we’ll see what the feedback is. I’m not convinced,

[00:00:35] Mike Philbrick: you’re crushing it. You got a big-

Yeah.

… picture, you got orchids, it’s the Sherman-ier and there’s room, you’re gonna get at le- I’m thinking you’re gonna get, I would say at least into the high eights, low nines with that.

[00:00:47] Jeffrey Sherman: All right. That’s all we can, that’s all I can hope for. That, that’s at least a B right? That’s raising our average,

[00:00:52] Mike Philbrick: exactly. And room rate. Get on it. Tell us what it is.

Yeah.

[00:00:56] Pierre Daillie: Did you [inaudible 00:00:57] Jeffrey, did you take that, did you take that photo? Is that a photo that you’ve

[00:01:00] Jeffrey Sherman: taken?

No, I went the cheap route, or maybe it’s more expensive route, but I bought it. You know-

Yeah.

… that’s one of those things where I don’t have that photographic eye. I’m not the artistic one. I’m the other side of the brain. I can’t remember which side it is, but way analytical to get into art. Yeah.

[00:01:17] Mike Philbrick: Now with the with the Midjourney and AIs it is interesting that you can be quite technical in orientation and pump out some pretty cool art.

[00:01:28] Jeffrey Sherman: Yeah. I think I, I know what I like when I see it, but I’m never the one that could create it, so-

Yeah.

… I’m not the one that goes in the art museum and says, "Hey, I could have done that." ‘Cause I always go, "There’s no way in hell I would ever came up with that."

Yeah.

So I appreciate what I appreciate and I guess that’s what you’re always told. That’s what art is, right? Yep. Yeah.

[00:01:49] Pierre Daillie: You can use it to create unlimited, NFTs and dilute the market.

[00:01:54] Jeffrey Sherman: Yeah. I did someone sent to me the other day that they’ve created a new mapping like a tile mapping, which is non-repetitive. And so it’s been this this math problem that they’ve been trying to solve for many decades of trying to like, have a non-repetitive tile mapping with only using one object. And they were able to finally do that. And again not into the topology and know all of that, but I thought that was pretty cool. And so I think that will help AI create some new things as well.

[00:02:26] Pierre Daillie:

Jeffrey, it’s listen, it’s great to see you again and honored to have you on again and catch up with you.

Yeah.

We’re really stoked to have you back and for the chance to to have this conversation with

[00:02:40] Jeffrey Sherman: you.

Yeah. Pierre, have you been brushing up on your California speak with stoked?

I did that.

[00:02:45] Pierre Daillie: Oh, that was deliberate. [laughs].

[laughs].

That was deliberate for you for all of you in Santa Monica [laughs].

[00:02:52] Jeffrey Sherman:

We appreciate it.

[00:02:53] Pierre Daillie: Yeah.

Yeah. Jeffrey, it’s been quite a quarter and definitely quite the year. What’s new in DoubleLine land?

[00:03:02] Jeffrey Sherman: [laughs]. It’s the markets always throw you curve-balls, so we’re always trying to do that. But, again we’ve continued to innovate. We have increased our footprint since the last time we talked in the ETF space. And we had sub-advised three E- ETFs through the Spider brand with State Street, and last year we launched our first our own two new ETFs. And one on the equity side, one on the bond side, and actually last Friday we launched two new ETFs as well. They’ll list on the exchange tomorrow. So by the time this hits out in the system we’ll actually have four ETFs up and running.

We continue to innovate. Yeah, we continue to listen to the demand from our clientele and be able to deliver in the vehicle of choice that people are looking for. And we’ve heard a lot over the years to the ETF wrapper. And we’re happy to be able to provide our clients some exposures to some different strategies. Now these are two newer strategies that we’re launching in ETF

[00:04:02] Pierre Daillie: wrapper.

Con- congratulations. I’m just curious, why would you want to do that?

[00:04:09] Jeffrey Sherman: [laughs]. They always say innovation is the lifeblood of the business. But it’s things that we thought there was a hole in the marketplace for. And one of them will be a residential mortgage backed fund, purely on that side focused on both agency and non-agency. And we think from, our expertise in that space, just focusing only on the agency side, limits the scope of that. And so bringing our expertise there, we thought it’s something that, that’s really missing in the marketplace right now. Having that flexibility to use both of those sectors of the residential market and further expand it outside of just what’s in the index.

And then secondly the one that many people would scratch their head and say is a little more controversial, but we’re very we really much love the concept is something focused on commercial real estate. And with all the headline risk and everything out there this created some really good opportunities there. But our team has ran very high quality, low interest rate sensitive or low duration parts of the market in our low duration strategy. And just looking at that, that there’s, that isn’t in the marketplace today. And so we think with our risk controlled approach the underwriting that our team does in the commercial real estate place, that this is something that’s right for an opportunity set.

And today’s market, it’s one of the few asset classes I would say that is truly priced for a recession, priced for bad things to happen. And so if you know what you’re doing in the space and I have a lot of confidence in our real estate team there we think there’s a great opportunity there. And so to bring that to an ETF wrapper we’re very excited about. And as I said, I think some folks would scratch their head, "What are you doing? You’re jumping right into the fire." But this is a part of the market that we think is extremely attractive. And we have an evergreen solution for that. And so we’re bringing that out as well.

We’re excited, so the team is fired up, putting money to work today. It’s it’s very interesting. So it’s good times.

[00:06:02] Pierre Daillie: Awesome. Before we get started, I do want to introduce you just in case there are still some folks who don’t know you, Jeffrey Sherman DoubleLine’s Deputy Chief Investment Officer, masterfully leads the investment management subcommittee and shines as the lead portfolio manager for multi-sector and derivatives based strategies. A key member of DoubleLine’s executive management and fixed income asset allocation committee. His influence is far-reaching. You can catch him on the Sherman Show podcast, where he interviews top tier guests and shares DoubleLine’s latest insights. Named one of 10 fund managers to watch by a Money Management Executive in 2018. Jeffrey Sherman’s expertise is undeniable.

Previously, a senior vice President at Trust Company of the West, he honed his skills in fixed income and real asset portfolios. A devoted educator, Jeffrey taught statistics, mathematics, and quantitative methods for CFA level one candidates, armed with a Bachelor of Science in Applied Mathematics, and a master of science in financial engineering and a CFA charter, Jeffrey Sherman is a financial powerhouse. So please stand by, and while you are, please like us, follow us. And above all, subscribe.

[00:07:23] Jeffrey Sherman: The views and opinions expressed in this broadcast are those of the individual guests, and do not necessarily reflect the official policy or position of advisoranalyst.com or of our guests. This broadcast is meant to be for informational purposes only. Nothing discussed in this broadcast is intended to be considered as advice.

[00:07:42] Pierre Daillie: Jeffrey what the heck is going on in the bond market? We had SVB, Credit Suisse, the banking crisis. What’s your take on all of that?

[00:07:52] Jeffrey Sherman: Don’t blame the bond market for that. We, we get blamed for a lot of things out there that the bond market was crushing financial markets last year. But I’m gonna, I’m not gonna take any blame on the bond market for SVB, Credit Suisse or the likes. And it’s been a wild ride once again in the rates market as well as in credit in the first quarter. If you think about it, we started the year with a big rallying rates, right? And January was one of the best January’s on record for the bond market out there. And a lot of it came from, we saw a materialization of economic slowdown at the very beginning of the month.

And looking back, I think what the market was responding to, at least rates were responding to in early January were two key reports. And one of them was the ISM services data. There was a big collapse in that data set. And this is something that, when you get the contraction in ISM services, it typically puts you on alert. If you get it consistently a contraction, it should put you mired in some form of recession. And we saw this, that was one of the few data prints that was the holdout late last year, where people were talking about a recession. If you think back in the first two quarters in 2022, there was all of this there was a contraction in GDP, the debate was out, whether we’re in recession or not.

I never really thought we were, because the employment was strong, the retail consumer was there, and again, services was there. And so what you’ve seen was that you saw that collapse. But if you really look back on the data, the other data point that came in, which is a big shocker, was we had a contraction in retail sales in December. And you historically don’t really see that. Really, December tends to be a positive month. There’s a holiday spin the likes. And as you start to dig through it a little bit, and you look back, collaborations were, there was accelerated spinning in October and November. And, again, one narrative that we developed about that is, potentially what happened is that people, the experience from 2021 during the holiday season where the supply chain issues, weren’t able to source things, so many people consumed a little bit earlier. But again I tried to get caught up in narratives, but really, again, trying to really tease out what’s going on the data.

But then by the time we got to February, all of a sudden there’s the rebounding services, the sp- the spending comes back, retail sales are there again. Yes, credit cards went up a little bit. We still continue to see some income growth. So all of a sudden the market’s "Wait a second, potentially, that December data was the aberration. It was not the harbinger of negativity." And so all of a sudden, if you were chasing that market in January, then you got whipsaw the next month, and you got the reversal, you got the FED talking about hiking more, up upping there kind of dot plots and the like.

And okay, now you’re saying, "Okay, we’re back on track. The FED’s kind of back in play." And then Pierre, we got, we ended up getting the SVB situation, right? You got signature bank as well, which a lot of people don’t talk about. But that was in the middle of that as well. And so all of a sudden you had this fear of a banking crisis. And, the banking crisis, I’m gonna still call it a crisis because it is a crisis. And, what we’ve seen thus far is a heavy response from the FED. They provided liquidity, they provide facilities to help stabilize that market, but it’s a banking crisis and not, it’s not reminisce of the financial crisis we saw in ’08.

And the difference here is the banks, now, we haven’t really distilled what’s in their loan portfolios, right? What they’ve actually lent out into the market, but their asset portfolios are easily analyzable. And unlike in ’08 where we didn’t know what the value of the subprime mortgages were, we didn’t know what the CDOs were, we didn’t know all the exposures there, they were at the larger banks, which are harder to distill. This is pretty obvious.

My boss said it recently is that, all you gotta do is hire an intern at the FED. They can push the refresh on the Bloomberg spreadsheet to get the prices every day. They know what the value of that is." And this was a crisis of confidence. Look, it was a bad situation because, SVB was connected to the VC industry and there were so many, it was a well-connected area, everybody knew everybody. And so it was one of those quintessential bank runs. And, look, the value of these assets, it is depressed because of the FED’s interest rate policy, rates are simply higher, but these assets are practically government guaranteed. And so it’s a mark to market issue, not an impairment of capital issue. And as investors, there, there’s a huge distinction there.

And what we saw is, really a reset of pricing once again. Rates are mo- modeling along at these levels. Again, we had, some overseeing a little bit to the downside. But what’s amazing about all this is that we stayed in this trading range, still throughout March even with all of that, because we shot to the upper end of the range. And so I think r- right now, you know what we’re reading from the bond market is what are the implications of this? And we’ve seen equities rally, and we can talk about that a bit. We’ve seen a lot of this risk come back into the market thinking, implying, let’s say that things are all back on track and everything’s rosy.

And I’m a bit more cautious on that because, the old saying is that there’s not ever only one cockroach, out there, right? There’s tends to be more. And I think that this is endemic problem in some of this banking area. And so I, I think the ramifications are very profound here. And I think what this is going to do is lead to a credit contraction. And I can expand upon that more. But you gave me a very basic question. I jumped very deep in the weeds very quickly. Let me pause there and see if there’s anything else you wanna talk about within that.

Yeah

[00:13:53] Pierre Daillie: I I guess it’s a little premature. I think I, I would agree with you that it’s premature to think that the banking crisis has resolved. There’s obviously a lot to look forward to in terms of the outlook at the banks. And, one of those things is the higher cost of deposits, right?

Yeah.

And margin compression earnings comp- mar- margins compression on bank earnings as they try to meet with the demand from, you, from their

[00:14:30] Jeffrey Sherman: depositors.

Yeah.

And people Well,.

And that, and that has significant ramifications because it’s not just the NIM, right? The Net Interest Margin compression we’re talking about, they’ve gotta change their business model here, right?

Yeah.

Their business model was predicated on essentially not giving you interest, right? And okay, may, maybe they were, sexy relative to the big banks and, they were giving you 50 basis points on your savings. But if you look at the big banks, a lot of ’em still today give you one basis point on a savings account. And what a lot of people have woke up and realized is, "Wait a second, I can open an account at treasury direct, right?" You can buy T-Bills directly from the government, set up an account with them, they will put them in your account for you. It does not take a level of sophistication, and you can get 5% today, right?

Wait a second, I can get 500 times the earnings rate? At the bank, the bank always sell as an X multiple of one another. And so what you’re seeing here is that I believe what it is done is it’s woke up the population and all of a sudden people are realizing that, "Wait a second, the bank isn’t paying me what interest rates are out there?" And so it’s that cost of funding goes up. And so if you wanna protect your depo- if you want to protect your deposit base today, what you need to do is move that rate up meaningfully.

It, means you have to sell ’em CDs, you, CDs at least lock them up, right? Some of them are FDIC insured and the like, so consult your tax advisor and all that stuff. At the end of the day, what that means is that if they’re gonna extend a loan out to somebody, it’s gotta cover their funding rate, right? So it’s not just margin compression, it’s saying that the cost of credit needs to go up meaningfully. And why that’s important… First of all you could say, okay, that’s great, Jeff, but I look at."

Investigative corporate bond spreads. I look at high yield spreads and they haven’t moved meaningfully during this. Yes, they’ve moved up, but they haven’t moved commensurate with that type of, differential I’m talking about on deposit rates. But, these are different corporations, right? They borrow in the bond market, they don’t borrow from a local base. And the thing about the regional banks is that they service something like almost half of all the small business loans in America. We always talk about small business being the backbone of America. And it is, if you wanna look at where job creation is this is where, this is really where it’s settled.

And what this means is that, likely, the funding the cost of loans is gonna go meaningfully. So what does this mean to your local restaurant, your local, art stores, if you’re talking about art, right? They may wants to expand a little bit, it’s gonna be extremely expensive now, and they’re gonna feel the effects of all these rake heights that have been pint up into the system. And my concern is that this creates a credit contraction. One is that the cost is gonna go out meaningfully, but secondly what is the propensity for these banks to want to go out today and originate a long term loan? Maybe you ought do a six-month financing, may that, but they’re gonna be nervous about their depositor base. And so that’s the thing that really is unnerving about this, is that I think there are knock on effects of all this. And those are things that haven’t materialized yet and we haven’t seen.

[00:17:49] Mike Philbrick: I think they may be actually materializing. ‘Cause if you look at, so this is pretty classic, right? First FED hikes rates. Next, domestic banks tend to tighten their lending standards. We’ve seen a flight of cash out of those systems. Now, keep in mind you go back to 2000, you got 3% at a bank and you got five or 6% on a T-Bill or a, on a government bond. This gap has existed traditionally, the challenge is today everyone is incredibly FinTech savvy. And as you’ve pointed out Jeff, you can go and easily get access to all of these places where you have a superior guarantee on large sums of money-

In one day [inaudible 00:18:34].

In one day. And those regional, like those regional banks have seen these funds flood out of their system that leaves less money to lend.

Yeah.

Period.

[00:18:44] Pierre Daillie: So Now, and that’s on a backdrop of the liquidity.

Yeah. Heightening-

… liquidity, the current-

Correct.

… liquidity mismatch as well that-

[00:18:51] Mike Philbrick: Further tightening liquidity conditions then are leading to. We’re already seeing this, that you see the loans and leases that are being created and provided have started to contract. And Powell did comment on that in his comments that I’ve gotta have an eye on this because there is an impact that comes to the economy from this. So all of this kind of waterfalls, this is pretty much due course here. The funny thing is, with SVB, I’m wondering why they didn’t just close their online bank. Like it’s a funny thing that they left it open.

Yeah.

You can just turn it off. Which yeah [inaudible 00:19:31].

You can do that, but

[00:19:33] Jeffrey Sherman: y- you’re probably not gonna be in business very long, right?

Maybe not.

[00:19:36] Jeffrey Sherman: It would’ve paused for a moment.

Yeah.

[00:19:38] Mike Philbrick: It’s interesting that the three banks that were allowed to fail have something in common. Silver Gate, Signature and SVB all ….

[00:19:45] Jeffrey Sherman: Start with an S.

[00:19:46] Mike Philbrick: Yeah, they all start with an S, right? And they also have lots of lending into high-tech and FinTech type businesses, Signature and Silver Gate, particularly crypto related. So it’s interesting that these three were allowed to go through the failure process. Having said that [inaudible 00:20:06].

On that, and

[00:20:06] Pierre Daillie: the backdrop, the other backdrop I just wanted to add to what you’ve both said was that, is that, the health and maturity paper losses, unrealized losses on health and maturity assets is also putting a lot of pressure as well, right? I think, people don’t, people maybe don’t realize that when they look at banks, the deposits are actually the liabilities and the loans and the investments are the assets, right? And when your investments

[00:20:33] Mike Philbrick: are on the-

And they don’t market the loans to market, they only market the asset portfolio to market, which is not that interesting to me.

The maturity [inaudible 00:20:41].

[00:20:40] Jeffrey Sherman: Only on the AFS. [inaudible 00:20:43].

If I’m

[00:20:43] Mike Philbrick: talking about the loans that they make, they don’t have to on the HTM unless they actually do one, they do all, which is all weird and perverse-

Let’s-

… Unintended consequences.

[00:20:52] Pierre Daillie: … it’s backwards right? It’s the opposite of what people think. They, people think that oh, SVB had $200 billion in assets or more and, that was ample liquidity, but it’s not, it’s a, that’s ample liability. It’s not ample liquidity.

‘Cause you have to meet the depositors request

[00:21:07] Jeffrey Sherman: if you do but coming back to Mike’s point too, on, on these these three being very related, I think that’s part of the reason you saw the run. You’re talking about a tight-knit community, one that uses, I, I don’t know what technology, Reddit, whatever they use to chat these days where, they get together and they know each other, right?

Yeah.

[00:21:28] Jeffrey Sherman: And this is what kind of extended out to First Republic in my viewpoint as well. First Republic, we in California think of as a high quality bank, high touch service, the old school white shoe. T- they do a lot of lending private customized stuff to wealthy people. And guess what? Wealthy people talk to each other, right? That’s what, their circles together. And so some of that money went over there, then it left very quickly as well.

And so I think what you’re seeing here is it’s like this psychological behavior and it’s someone saying if I think there’s gonna be a run on the bank, Mike and Pierre, am I gonna call you? I may, but after I move my money out. And I’m gonna tell you why I did it, right? I’m gonna get my money saved and I’m gonna call you guys and tell you. Man, you guys gotta get your money outta there. Here’s the problem at this bank."

And so I think that, that’s the elements you saw, and I think, some of it is why the FDIC stepped in, they, they did create moral hazard here. If we’re gonna talk free markets and everything, you gotta put on your big boy pants, if you’re gonna do this stuff, if you’re gonna keep more than $250,000 at the bank, you gotta make sure you have a sweep account, right?

Yeah.

[00:22:35] Jeffrey Sherman: It doesn’t cost anything. Like you can get a sweep account that sweeps into government money market, right? To protect yourself. And so I think people are gonna learn more about the banking system in this and how this applies. But, look, they did create moral hazard because, Yellen one day, during the press conference, she’s said, "We’re not gonna guarantee it." Powell’s saying they’re gonna guarantee it, they’re causing mixed signals because they don’t want to guarantee it-

[laughs].

… but they also need to instill confidence, right? And when Yellen was testifying, I think it was the congressman from like Arkansas was asking, or may as Oklahoma, I can’t recall. But you said if my banks fail in my region, are you gonna do that? No. They’re not protected. If they failed, they’re protected.’" And it’s so you create the moral hazard by doing that. And look, did we need to do it? I think it was probably the right thing to do to guarantee those deposits in the short term. Because you would’ve had a classic run. I think every bank would’ve experienced this with assets above 250 from any client.

And again, like that’s the thing. The market needs to work. You gotta play by the rules. But this is one of those where, I think the FED and the FDIC and treasury, they’re flying by the seat of their pants here. And they didn’t want to have a banking failure in the middle of this. But Mike, lastly, to your point, the FED hiking, contracting, tightening conditions, that’s the whole plan.

Yeah.

They hike while something breaks, and I think it’s pretty fair to say they broke something last month. They’re trying to fix it with the tools they have, but they’re also hiking rates. Still, they’re removing liquidity via QT ’cause they have to shrink their balance sheet and their viewpoint, but they’re pumping liquidity that offsets more than that in the market. So once they stop pumping that liquidity, we go back to tighter conditions again, now with a tighter system as well.

And so to us, this has pulled out the recession watch, it’s moved it up meaningfully. This looks like we probably have a meaningful contraction at some point, by summer to fall this year. And again, it’s gonna, it’s gonna rely on the response mechanism and what that catalyst is to get us out of that. And, right now, I think, this is the plan of the FED. They wanted to crush some of the housing market we had. It was on fire, it was creating this speculative influx because of the wealth effect. And so all the stuff they did in the last cycle, people realize that it got on steroids this time because of the amount of stimulus, and now they’re trying to fight inflation.

And look, at some point, this stuff becomes deflationary, right? You just don’t have the impulse, you don’t have the credit impulse out there, and therefore that means we’re gonna have a slowdown. And I think the implications for investors right now is that don’t get caught up in the panacea. This is not the time to exceed your risk taking. It’s not the time to increase it, it’s the time to reassess, look where you’re at, and make sure that you’re comfortable with the amount of risk you have.

Yeah.

And our point for the last, even before this crisis in January, was let’s sell on strength. Things that are rallying, let’s try to monetize some of this and let’s try to build up a better defensive portfolio. And, we’ve been doing that for the last six to eight months. And so when SVB came, a lot of people want to interview us, asked, "What are you doing?" It’s like, "We haven’t really made any meaningful moves here. Portfolio’s fine." we had bought duration coming into this year we continue to extend out a little bit in January. And so we were comfortable with it.

And, look, you never want to make a knee-jerk reaction here. And we’ve been reassessing now that things look a little calmer. And the consensus around, around the table as we had these discussions that, look, we have a lot of banking analysts that really understand this stuff very well, way beyond the scope of what I do. And, it’s saying "Look, this is a problem. And look, SVB had been written about for months, right?"

Yeah.

So this-

[00:26:27] Mike Philbrick: All available for months before. COVID almost-

But then you know, you-

… it was widely known for of time before-

Yeah.

… it mattered, and then all of a sudden it mattered.

Yeah,

[00:26:34] Jeffrey Sherman: but this is a failure of the FED.

Okay.

This is a failure of the FEDs.

I Think we

[00:26:38] Mike Philbrick: agree. I think that’s an agreement and a har- hard agreement there. So what are the implications as we move on? So now we have tighter financial conditions. All of a sudden now you have the Saudis come out and say, "Hey, we’re gonna cut production."

Yeah.

[00:26:51] Mike Philbrick: So now we’ve got another inflation push there.

Yep.

If China’s reopening domestically. So domestically, China’s economy has reopened, whether you look at China’s stats or look at airline stats in China to see how they’re refiring up the internal domestic economy, at the same time, we still got pretty tight labor. We’ve got this urge to, have domestic energy independence. We want a nearshore or duplicate or, shore up supply chains so that we have a higher likelihood of them actually lasting rather than the cheap and cheerful just in time. It’s no, we want resilient, redundant supply chain.

All of this does not paint a very good backdrop for with, which the FED will be able to make decisions. The previous 40 years prior to 2021 was easy. You cut, you were, you had this deflationary backdrop, inflation wasn’t a concern. So I too am concerned about the equity side of the equation. The equity seemed to be pricing in the immaculate reception recession, if you will.

[laughs].

[00:28:06] Mike Philbrick: So what are your thoughts there? So we keep being conservative. We, how are people supposed to navigate this? What do you think are some of the shoes that could drop

[00:28:15] Jeffrey Sherman: along the way?

Yeah, well-

Yeah.

[00:28:17] Jeffrey Sherman: … [inaudible 00:28:19] say, but I thought about all this year was, if you wanna risk to this kind of inflation side and it was predicated on the China reopening, not really an OPEC thesis, was that you put some allocation to commodities, right? If we’re gonna have the reopening, if we get to the stage where you’re gonna get consumption back, and remember, this is a highly dependent economy on oil over there in China as well, right? If you’re gonna get the, production restocking, it’s good for industrial metals as well.

And so to me, when people are saying, "What about the inflation tips and the like?" I’m like, don’t look at the bond market for this, right? You look, use the bond market for your deflation, for your defense here, but use a commodity allocation and do that. And I think, that’s what we’re seeing right now. And when I listen to you ramble off all of those metrics, Mike and don’t take offense by rambling [laughs], you’re just saying them back to back. And so ultimately what I hear in there is that it sounds like there’s a demand for commodities, right?

And, I think that’s also could be one of the potentially saving graces. If you think about it, if the Chinese economy and the Chinese themselves respond like the rest of the world did post COVID, they’re gonna travel, right? They’re gonna consume the oil, they’re gonna jet fuel, but they’re gonna come to our country too. They’re gonna spend money here. So potentially that’s a little bit of a saving grace here. But if I look at you think about that small business side, they provide a lot of service jobs, and that’s where you’ve seen the strength in the labor market.

And so I know a lot of punditry will come out and say those are lower paying jobs, it’s not as good. Look at all the tech layoffs and look at the finance layoffs that we’ve seen out there." And I guess now we have McDonald’s announcing layoffs today, right? At the corporate headquarters. I always wonder how many people work at that corporate headquarters at McDonald’s, but it’s supposedly a really cool facility outside Chicago. But anyway, not to digress.

But what you found what I look at in that service date is that this is the area that the jobs didn’t come back yet, right? Because there was the uncertainty, there was the star- starting and restarting of the economy. There was opening, is there a mass mandate? What do we do? And, the different parts of the country attacked it differently. And the, I think there was some hesitancy for those jobs to come back. And look, I went to someone’s wedding this weekend and stayed at a hotel and it’s if you want service, you have to request it, [laughs].

Okay, that’s fine. But it’s just you can see here that the staffing is different. And so I think what we see in this resiliency is that it was a handoff to this other part of the market that was slower to hire. And some of the tech jobs they over hired and the like, because it was like, "This is post COVID world forever, we’re never going back to offices. We’re never doing that." I think that you had this push and pull in the labor market that I’m concerned now because of what we talked about in the banking side and small businesses not having access to that capital to re-expand.

And, anecdotally, go to a restaurant, you, it’s hard to get a reservation. It’s hard to get in there. You get in there, the room’s not filled, but they’re at capacity, right?

Yeah.

And so I, I think that, maybe this is a hiccup there and that, that’s why I’m a bit concerned because that’s where we’ve seen the job growth as of late. I think the commodities are the way to play this for the time beat. Look, after seeing a 6% rise in oil may- maybe just look to see if-

Not today.

Yeah. Yeah. Maybe not today but still.

But you know

[00:31:48] Mike Philbrick: what else is interesting, Jeff you raised a really good point on the fact that, so when money leaves the regional banking sector, a lot of it went to, systemically important banks. So now they’ve got a whole bunch of cash on their balance sheets. The challenge is they have no infrastructure to flow that back to loans in middle America, to, to all those SM- SMEs, small medium-

Yeah.

… size enterprises, SMEs. So in order to provide those loans, and this is what we’re like, it’s not like the cash disappeared. It wasn’t like the ’30s when 10,000 banks went under and everybody lost the money and the money was just gone. The money has been able to go to other instruments, whether they be those banks or to government guaranteed bonds. The challenge is there’s no infrastructure for these banks to provide loans to these SMEs. And so we just keep, every time we go look for ways to channel finance back to the economy to get the growth to occur, we hit a wall, it seems.

[00:32:49] Jeffrey Sherman: Think about it during the pandemic, the transmission mechanism when the free money programs came out, right? How did it go? It went to the banking system.

Yeah.

[00:32:59] Jeffrey Sherman: And so that is a channel to get there. Look, it had to go through the G-SIBs as you said because they’re the ones plugged in, they had access to that. And to me, what you do here is that you just say, "Look, we’re gonna help these banks out for the time being, but also we’re gonna tighten the screws." Regulation’s coming, right?

And some people say they got lax in the last administration when they lax the, the G-SIB status or the route of regulation went from 50 billion deposits and they moved up to 250 billion. So it creates some consolidation, right? Banking’s a scale business, right? You’re not gonna do well a banks if you’re on the corner just trying to lend money in the neighborhood, right? You’ve gotta get scale. And ultimately I think what comes in this is regulation. And, but what that also means, that comes back to my basic tenant, it’s cost of capital.

Because if you have a higher restriction of what you can lend out, which you do is you want to make sure you get the return on that capital. It’s not as much of a scale as it is bringing that, making sure you get what again, to cover what they call the risk weighted capital charges, the risk weighted asset charges. And so I, I think you need to do is apply that down and look right now, it’s like JP Morgan gets hit with the highest capital charge ’cause the highest base, right?

So there’s gotta be a way of having a sliding scale here to, and I’m not saying to make it more competitive with the National Bank. So the G-SIBs are called I think it’s government systemically important bank?

Important banks. Yeah.

[00:34:30] Jeffrey Sherman: Yeah. We love acronyms, so we gotta use those.

We do, that’s right.

Yeah. But ultimately I think what you’ll see here is that it’s just going to be a regulation. And there’s a reason you haven’t heard anything outta Mary Daly’s mouth since this whole happened. Like that bank is under her control. She is the San Francisco president of San Francisco FED, that is her job is regulating that system. And she’s trying to stay outta the limelight right now and they can figure it out and yeah, there’s an investigation under it and look, it’s gonna be lacks of oversight. And so I think what happens there is that you bring that, you allow that transmission still to work.

And Yeah, if you think about it, it’s like the perverse thing, right? First Republic has to run its bank, it loses 30, 40 billion in deposits. It shows the big banks. JP Morgan lends a syndicate to lend it back to ’em, right? It’s "We don’t want your money, right? But we’ll help you out." And then, and what really made me nervous a week or so ago was that when, JP Morgan said, "No, we have 30 billion, we’re gonna invest it in there," and First Republic stock went down, right? To me, when I see something like that, it’s like the market’s "Wait a second, why aren’t you trying to do this? You’re going to absorb them."

And I don’t think there’s any desire to consolidate from the large banks to taking any of these banks together. And I was talking to a few folks in New York we were out there talking to some bankers doing what we do. And, one of the guys that’s having dinner with was like, "Look if I’m in this middle scale bank, I merged with another kind of large middle scale, I get to G-SIB status and I know I’m in better shape, right?" And I’m like, "Yeah, but unless regulations coming, that’s not necessarily good for your business." And and look, then we create the problem of we don’t have enough competition. And that’s where the regionals really do good.

Yeah.

[00:36:18] Jeffrey Sherman: They do a great job of that.

[00:36:20] Mike Philbrick: Also as we’ve talked about. They’ve got the pipes to the SMEs, right? The small medium-

… enterprises, they have the structure. You can’t, you need a loan for your farm equipment business in Iowa.

[00:36:33] Jeffrey Sherman: You think JP Morgan is doing that?

And I have [inaudible 00:36:34] you don’t have you don’t have the traditional credit line, so-

Correct.

[00:36:39] Jeffrey Sherman: … You don’t have t- traditional income.

Yeah.

[00:36:41] Jeffrey Sherman: That’s what we saw in the mortgage market, right? Where they’re the Alt-A loans because someone is self-employed, right? And they’re not in that same system that works for the big banks, right? Because it’s automated, it’s a law of large numbers. And so it’s the personal relationship, right? And no it’s integral to this country. We have this large land mass, right? Where one, that, that were spread out and we have an economy that fires on different cylinders. And so it is extremely important there. And I think that’s why, it’s also very important to say these banks, and I know it’s been politicized, it’s it’s Silicon Valley Bank. Of course it was wokeness that did all this and everything."

[laughs].

Gimme a break. We’re talking about the financial aspects of it, and it’s it’s gonna be politicized. It’s you’re saying, a democratic state bank, because you’re in charge." It’s like, there, there’s bigger issues here. And so I think when people realize that it does make some sense, but it’s also there’s still bad actors in here. Look they scaled up at the wrong time. They invested in what everybody else was buying at the time, and it’s down in value.

[00:37:44] Mike Philbrick: And they didn’t have a chief risk officer.

[00:37:47] Jeffrey Sherman: If they did I, you know-

They didn’t-

… first of all,

[00:37:51] Mike Philbrick: I don’t think that person-

… For nine months, there was no chief risk officer for the previous nine months. Now Jeff, I just wanna pull on a string, Jeff-

I just wanted to, I, I-

One, one thought hold on Pierre.

Yeah.

On the idea of allowing these banks to scale up and become more oligopolistic, I view that slightly differently. I think you want to have regulation that sort of makes the banking system a little bit more regional to attempt to have, some guardrails around having a fire. Like the one nice thing about Silicon Valley Bank was that it was tech oriented and that area suffers the loss. But the, the farm equipment guy in Iowa, maybe he’s not suffering that loss if you’ve got a more regional type approach to banking. So I get, I wonder if actually making these things bigger and bigger actually helps

[00:38:42] Jeffrey Sherman: us. It, it-

I don’t think it does. I don’t think it does.

[inaudible 00:38:45].

I, that’s what I was saying. I was kind arguing with the guy that night and he works for a G-SIB, he works for a G-SIB and he said that week they got $37 billion in deposits that week. And so-

Yeah.

… you can guess, which of the organizations he worked at. But I would argue that, a- at the end of this, it’s no, that’s why I was saying I think what you need is the regulation needs to come down. Now I was gonna say, "Oh, regulation not a free market capitalist and everything." But we need the regulation because notice what happened. None of the G-SIBs had this problem, right? They also have their available for sale portfolio. They did what they needed to do in some of this and it’s because they have a higher cost of capital through the risk weighted asset charges and risk weighted capital charges.

And so that’s where I’m saying you, you don’t have to level the playing field, but you have to monitor it. And that’s why I say, that, JP Morgan doesn’t want this business. They don’t want to scale up, on that side because they already have too much money today. They don’t want it. That’s why the deposit rate’s at basis point, they do not want your money. They do not want it today. But I agree, we need access to this. That’s why I say we have such a land mass, we have such a distinct economies across this country that, people don’t understand that business.

Ask the Midwestern banker what’s going on in Silicon Valley and that client, they’ll say they deserved it. They’re crazy. They’re guns slingers." And you’re saying, "You wanna lend to a farm, you wanna give ’em a million dollars in equipment loans and you make $75,000 a year. Is that a good deal?" so they don’t understand the business. And so there is some stuff that is very integral to that. So I’m actually agreeing with you, Mike.

Gotcha.

I was disagreeing with this person.

I gotcha. I got confused. [laughs].

I’m gonna be invited dinner again now [

[00:40:28] Mike Philbrick: inaudible 00:40:28].

And sorry Pierre, I didn’t mean to cut you off ’cause I wanted to circle that drain.

Yeah

[00:40:32] Pierre Daillie: I just wanted to ask about the the federal home loan bank advances. To, to what extent? It’s less than obvious. It’s not like the other two facilities. The window and the, BTFP, which are very stigmatizing very public means for the banks to shore up their books. But behind the scenes is this federal home loan bank advances that’s happening. There’s been some very large issuance the last couple of weeks. I think Alfonso Peccatiello pointed out that there was something like $300 billion-

… in advances. Is that is that a more sort of quiet way of shoring things up that’s going on or is that off the

[00:41:15] Jeffrey Sherman: mark?

But that’s what the FHLB is for.

Yeah.

[00:41:17] Jeffrey Sherman: It’s to help bring stability to that and ensure deposits. And so essentially, that’s how the FDIC operates is through that mechanism to-

Yeah.

… my understanding. And using that, look, you can buy FHLB bonds today, right? That’s what, you know-

… know they issue bonds to help that funding as well. And those spreads haven’t blown out. We looked at ’em because they’re government guaranteed, right? So there’s something to look at when there’s a crisis like this. But, ultimately the home loan bank is there to provide that liquidity. And it’s not the same kind of stringency that you see at parking money at the FED, right? Certain assets [inaudible 00:41:53] and the likes.

This BTFP program, I think, no one wants to use it today because if you’re known, it’s like during the financial crisis that, when they rescued the bank, is they gave you every bank money, right? ‘Cause they didn’t want you to know who needed it the most.

Yeah.

[00:42:09] Jeffrey Sherman: And some people are like, "Oh, we don’t want it." It’s like, "No, you’re taking it." and

so-

[00:42:12] Pierre Daillie: It’s a firing squad.

Yeah.

It’s like the the old-fashioned firing squad where, only one rifleman had the the bullet [laughs].

[00:42:21] Jeffrey Sherman: And everybody shoots the, you know-

Yeah.

… To make sure that no one knows who did it. And then you don’t have the guilt either, right? That’s right.

… but I would say that, I don’t read too much into it. I view it all as one thing. At the end of the day, the one that subs us up is liquidity. The bank didn’t have liquidity. They needed it. The system was deficient and that instead of creating this fear… because once you hear about a bank going down, the next thing that happens is everyone starts to question, "Is my bank next? And should I go do this?" They’re like, I still think it’s, I won’t say funny, but I find it very interesting in 2023 of people staying outside of a bank to try to get their money.

Look, you could do it electronically. Everything I heard from First Bank, First Republic clients was that they were able to wire money out instantly, right? There was no issue wiring that day and the like. It’s have you ever went to a bank and tried to get five grand, 10 grand? They don’t want to give it to you, right? Because you’re always doing something unscrupulous if you’re doing that.

And it’s just, it’s finally, it’s pretty interesting to me that anyone who’s in line, the amount of cash they’re gonna get is under the FDIC limit, right? Do you think you’re gonna go in and walk out with a million dollars in cash? It’s just not gonna happen. So I just that’s where I found it Yeah.

… I’m like that, that’s a fear mongering kind of concept though too, so I just don’t read too much in the FHLB. I think it’s all just liquidity. And the thing is shored up to shore confidence up. But now the next thing comes is like, how do those banks protect their deposits? And, we’ve still seen the outflow of the banks from what we get in the reporting, there was a new outflow bank of the re- of the small regional banks and the large banks got more money in, right?

And so you’re seeing that transference happen and a lot of you are waking up, look did you guys see this announcement that there’s a new VC or tech company that it’s gonna help people invest in treasury bills, right? They’re gonna help manage your liquidity. There was like a $20 million-

Yeah.

[00:44:27] Jeffrey Sherman: … valuation or raise on the, and they’re like, I’m like again, treasury, direct man. Look, I’m not trying to compete with the treasury here. We’re actively managing bond strategies, right? I don’t care if you wanna buy T-Bills. I’ve heard it from clients for last year. I wanna own this." And it’s "Look, I don’t have a problem with you doing that. But when you own T-Bills, you have reinvestment risk. When it matures, you have to do something. So you gotta think about what that means for you." But ultimately if your cash was earning basis points. Look, it’s shame on you for not knowing-

Yeah.

[00:45:00] Jeffrey Sherman: … that. But also that’s part of our job, that’s why we’re doing this podcast, right? Is to try to make people aware of things out there and understand that the system only works for you if you know how to play in the system. And a lot of it is just understanding, the tools you have available. And most people don’t realize it, that you could go buy, a government money market fund or you can go buy T-Bills direct and they massively outstrip what you’re getting paid to park cash somewhere. And you get seduced by a CD.

I remember walking down Manhattan and seeing First Republic advertising at 2% CD and I’m like, "Why would I lock money up for 12 months when I can buy the 12-month bill?" I think yields like 480 at the time, right? So anyway I think it’s I think a lot of it is just… Understand this and I, I just don’t think we’re done yet with seeing some of this movement of cash because people have woken up to it.

[00:45:50] Pierre Daillie: Yeah. I think the other strange thing is that there’s nothing wrong with the assets that we’re talking about, right? That’s the other thing. There’s absolutely nothing wrong. They’re doing exactly what was expected. If rates were going up, they were going down. And, and-

Yeah. You wanna fire

[00:46:09] Jeffrey Sherman: sell those assets, you want to sell ’em at a distress level. We’ve got a bid.

Yeah.

We’ve got a massive bid for that because they are money good. They have mark to market risk. They have duration risk, but they will mature at par. And that’s the thing you could not say during the financial crisis. And that’s a distinction here, is during the financial crisis, no one knew what those assets were worth, right? We all had guesses. We all had, you have to run a model to figure out what it’s, ’cause you own the credit risk. These are money good assets. They are insured by they’re backed by the US government, right? And so that, that’s the biggest thing about, it’s so if the [inaudible 00:46:44] want to step in and buy it because you can buy these assets. It’s no, do I want the liability of earning a bank? No I’ll take your assets if you wanna sell them below market, right?

Yeah.

But I can go buy those assets in the market today from someone else at market price. So why am I incentivized to do that? By the way, I don’t know your loan book. I don’t understand that. And so unless they do there, it’s gonna be very difficult for a sale. And I think, I’m glad to see there’s been some stability there, but I just I think we’re gonna get another dose of this at some point. And I’m not saying we’re gonna have more failures. I think it’s just gonna be someone’s gonna lose a lot of deposits and something’s gonna have to happen.

[00:47:28] Pierre Daillie: Yeah, absolutely.

No, I-

I, sorry, I got a question.

Yeah.

[00:47:32] Pierre Daillie: I want to change gears just for a moment as well, because I want to ask you about this rotation that’s taken place in equities, because it seems to me like the, the high duration stocks, technology crypto have rallied massively in the last quarter.

Yeah.

[00:47:49] Pierre Daillie: And and I love it when I hear the the crypto song, happening, which is the, the digital gold song.

Yep.

And crypto see we told you, this is the problem. The, there’s no interference here from a central bank, and that’s why people are flocking back to crypto and risk, risky high duration assets. What’s, what are your thoughts on that rotation? Is that a mistake? Is it something that’s fleeting or, is there something real, some real fundamental action going on there?

[00:48:27] Jeffrey Sherman: Yeah. I think if you go back to academic research it actually shows that, a lot of, like the technology isn’t interest rate sensitive area. We’ve craft, crafted this narrative in the last cycle. And I think what it is that growth was at a premium, right? When there’s low growth, if you get growth, you’ll pay a higher multiple for growth. And, so does interest rates really influence that? Look, reference Cliff Asness, look at his take on it, he’s way smarter than I am. He’s written on value and growth forever. And it is a misconception.

And I think this last rally to me feels like it’s "Oh, rates are down. Of course, tech is up, right?" You turn on the TV, you look at media upon everyone says that, right? And so I think it’s in the cycle yeah, of course if rates go down, tech should go up. If we have a VC problem, should tech go up, right? I mean-

Yeah.

[00:49:17] Jeffrey Sherman: … I, it doesn’t make a lot of sense to me, so-

It was the

[00:49:21] Mike Philbrick: very big tech that’s gone

[00:49:23] Jeffrey Sherman: up.

It’s the five names-

Yeah.

And they were-

Yeah.

[00:49:25] Jeffrey Sherman: … they were beaten up a bit. And, and I don’t know, I’m [inaudible 00:49:30].

I’ve

[00:49:30] Mike Philbrick: got, I got a bit of a thesis on that, but I want you guys to [

[00:49:32] Jeffrey Sherman: inaudible 00:49:33].

Okay I’ll let you, I’d love to hear it. I’d love to hear it too, because-

[00:49:37] Jeffrey Sherman: Is this short-lived?

Is this a short lived-

I feel it is. Look, the multiples expensive on those five names they drove like-

Yeah.

… the stock market, again, they drove the NASDAQ 100. If you look at the equally weighted tech index, [inaudible 00:49:49]… I’ve wa- I was watching TV this morning, I don’t know why I was watching CBC, but watching it, and, someone said on there tech and all this, but if you look at the [inaudible 00:49:58] S&P, and I’m like, "Why don’t use the equaled tech basket?" you’re talking about these five names. There is something out there, you can look at it and it’s use that. It’s the same argument. But my point is that it’s not this robust deep rally. And so I feel like there’s this new [inaudible 00:50:12].

Yeah, the breath is awful, right?

Yeah. Yeah. The breath is awful. Just going to, the garlic restaurant over there in, in Melrose, I can’t remember… The Stinking Rose, I think it’s called, right?

[laughs].

Stinky Breath. But point being is that, the I do think that, in the psyche, it’s oh, rates are down. It’s gonna be supportive. This is what helped tech before. I, it’s baked out there right now in the psyche. And this is a whole different issue, and so I’m not convinced that there, there’s the sustainability in that. The crypto side is interesting because if you want to tell me it’s the digital gold, right? Last time gold traded at 2,000, where was Bitcoin? It was near the fi- the 50,000 handle, whatever. I don’t know, your story doesn’t hold a lot of water there with me.

But you know what? Look, this is the crisis of confidence. If you think the banking system’s failing, this is, again, crypto’s moment to shine, and it’s up, okay, great. It’s up on people putting money into it, but does it move anywhere? And that’s the thing, in order to drive the prices up, people have to buy more, right? That’s how markets work. It’s something like cash flowing asset. Again, you look at it I just I don’t know what to make of it.

I feel like looking at charts, crypto is best described by the queues. The NASDAQ 100, you watch the NASDAQ, you watch crypto they move in tandem, right? Maybe one’s a little, maybe crypto’s a little levered to that bet. It’s essentially what the bet looks like to me. Putting those two things together, Pierre I think that’s kind of part of the crypto. And look, if this was digital gold, this is, I want my money outta the system, we’re all gonna buy it. It would be, it would’ve done multiples of what it did.

Yeah.

[00:51:59] Mike Philbrick: On, on the tech side, there’s a couple of things that, that are stirring around my brain. One is, one is when you contemplate inflation, one of the best inflation hedges is to have something where the cost of production is very low. And prices can be raised very easily, which are subscription services in particular for software. So these can provide some very interesting inflation hedges and layered on top of that, the one thing that’s changed since November is ChatGPT and AI.

Today as we record this, the 3rd of April is the 50th anniversary of the first cell phone call, strangely enough, came across this. It took 16 years for the cell phone to reach a user base of a hundred million people globally. It took ChatGPT two months.

We’re talking about the square of Moore’s Law.

And it’s funny that it’s

[00:53:08] Jeffrey Sherman: the 5 major-

Who just [inaudible 00:53:10] by the way, Moore just passed [inaudible 00:53:12].

Oh,

[00:53:11] Mike Philbrick: did he?

Yeah.

Yeah.

[00:53:12] Mike Philbrick: And so we just keep layering on the mys- the mystery here. So it just, it’s the one thing that I think it’s overdone, just like you, I’m like,

[00:53:22] Jeffrey Sherman: yeah, it feels but then I’m like, God,

[00:53:27] Mike Philbrick: ChatGPT is revolutionary, AI Midjourney. These places where you are able to increase your productivity almost exponentially as an individual changing the landscape, not only for the computer current programmers, but for the creatives. If you haven’t checked out, Midjourney and whatnot.

I wonder if the market is anticipating the types of potential earnings flow that is going to come and it’s going to accrue largely to those five, like Microsoft’s building it into office. It’s in Google everywhere. It’s pervasive and it’s largely centered around that. And then you look at the chips and the semiconductors that’s what’s required you these high end chips, all of a sudden you see performance in that area too.

Like in video

[00:54:16] Jeffrey Sherman: is one of the best performance [inaudible 00:54:17] right? Yeah.

Correct.

[00:54:19] Mike Philbrick: Because the their graphics chips are what is used largely for, this the data interpellation for the AI. So I look at these two factors, one of inflation and this idea of low input, good cost flexibility, and then the explosion. We’re over a hundred million users in two months. That is mind blowing. And then how that might relate to, the crypto world and the internet of things. We get a little bit into being a bit of a futurist here, just thinking outside the box a little bit. But I gotta look at the price and I gotta look at Crypto, Silver Bank, Silver Gate out, Signature, done, SVB Gone. Those were the rails to the traditional finance system. And crypto seems unfettered.

I don’t know I literally don’t know here, I’m just speculating in my mind about, wow, we’ve had some pretty interesting things launched, this whole AI, it’s impact, it’s efficacy. And I think there might be something there. That would be something that is wasn’t in the, wasn’t in the the equilibrium in 2021 and early part of ’22, ’22. So I just leave that

[00:55:39] Pierre Daillie: as a, it’s free. It’s free, it’s not like when the iPhone came along and-

I think ChatGPT is

[00:55:44] Mike Philbrick: 20 bucks a month. I pay for, a-

Yeah. But you can get-

… greatest service but a hundred million people jumping in, and immediately?

Yeah.

[00:55:53] Jeffrey Sherman: Yeah. Look I don’t really know how to interpret the ChatGPT thing and what it looks like to me. It’s just it is the neural network we’ve been promised for 30 years, right? That it’s gonna learn on the fly-

Yeah.

… it’s gonna do it. And look it seems interesting is it a fad or not? I don’t know. And, look maybe that is part of it. And, kudos to Microsoft and stuff for the subscription based service because who the hell wants to buy another disc or download the latest version? You force it on people, right? I mean-

Yeah. Yeah.

… it was brilliant. And I think you’re right. And, especially with automatic payments, which by the way still goes to the financial system.

[inaudible 00:56:35].

Especially the be- the best subscription is the annual because you forget about it. If it’s the monthly-

Yeah.

… and you look at your statement, you may miss that one charge too. But yeah, it’s an interesting thesis and I gu- I

guess we’ll see-

[00:56:52] Mike Philbrick: It’s music, it’s movies, it’s all of that genre of, like we have a music library. I don’t know what movie’s gonna recreate some song from 20 years ago and it’s gonna get hot again. And I’m just gonna, I have songs now on 18 different formats in six different subscription services. I’m like, man, oh man, [

[00:57:12] Jeffrey Sherman: laughs].

Yeah. No it’s funny because, and then when, like a TV show or one of those, cultural phenomena hit and all of a sudden there’s this song and it goes like viral, right?

Yeah.

And there was one that recently, I can’t think-

Kate Bush.

… what yeah.

[00:57:28] Jeffrey Sherman: [inaudible 00:57:28] the Kate Bush one with, It’s like for 30 years she would just disappear-

Yeah, thanks Netflix, right?

… she’ll just hop on outside the US, right?

Yeah.

And then all of a sudden, it was on I don’t even know what show it was on, but it came out and then, she’s like a number one hit and it’s wow, the, she was playing the long game, man.

Oh yeah.

[laughs].

[00:57:45] Mike Philbrick: Yeah. She was running up that hill.

Running

[00:57:48] Jeffrey Sherman: up that hill. Yeah. [inaudible 00:57:49].

That long duration [inaudible 00:57:52].

Yeah. Yeah.

Alright. Fellas well. Hey, I need to hop soon. So let’s let’s take one more topic and let’s beat it to death and then we’ll call it a day. If that’s good for you guys.

What do

[00:58:01] Mike Philbrick: you think, what do you think of just diving into how much exposure did you guys have to Credit Suisse and the AT1’s? ‘Cause that was really unique how they zeroed to 16 billion in AT1’s, shored up the senior notes gave the equity holders. I don’t know if you want to dive into that a little bit, if you’ve got some-

Yeah.

… talking points on that. But I’m happy not to if you don’t.

Yeah,

[00:58:20] Jeffrey Sherman: Compliance doesn’t like me to say exactly how much we own, but I’ll give you a hint. It rhymes with hero. And Ah, nice. [laughs].

… think about a number that rhymes with hero. And look we just, we never liked the risk, they were bailing bonds. They weren’t bailout bonds. You were the one bailing people out. And look, this is what they were meant for, is to help shore up the system when something bad happens. We never liked the risk. We’ve been worried about Credit Suisse for a long time. There’s a couple other banks on our list that we’ve been worried about for a long time. And, look, our trading budgets have diminished with them. We, we have risk management, we have counterparty risk committees, and their job is to analyze who we’re trading with.

And a lot of people don’t appreciate that, the work that goes into that because you think, Hey, I do a trade. It’s done right. We getting a price, you’re getting it, we have settlement risk, right? Yeah, we trade bank loans, right? Those sometimes don’t settle for seven to 10 days. In that period, you own counterparty risk even though you’ve traded a physical security. And I think at the end of the day, it’s just important… And, look, Credit Suisse didn’t like us for a while as we were doing some of this ’cause our, we went down in their league tables massively.

And, we get calls and it’s I don’t know, I’m in shock [inaudible 00:59:39] the price. And at the end of the day, I think, it’s looking at the stability of this. And like the European banks have been in shambles for a while, and, we’re trying to always figure out with a Credit Suisse, can’t, even if the SMB steps in, can they, what are they gonna do, right? What are they gonna back it with? They lost all their gold, but they’re make chocolate, I guess people still like watches, and so it’s and again, I always give the Swiss crap because it’s so expensive to ever go there. I’m always like, how do you guys still survive here? Ultimately, a lot of people have reckoned this to Deutsche Bank. Now, Deutsche Bank has been a concern with us off and on over the years. And the one thing about Deutsche Bank is the [inaudible 01:00:24] is not letting them go down. They may nationalize it-

Yeah.

… they may do something, but that’s something that it’s probably gonna work. It just like the US system will bail out our American banks, so-

It’s a

[01:00:33] Mike Philbrick: substantially larger economy backing that particular

[01:00:38] Jeffrey Sherman: bank.

One that-

[01:00:39] Jeffrey Sherman: And… Yeah.

… one that has a lot of trade relations. There’s a lot going on. They’re not predicated on hiding money around the world. Again, sorry to the Swiss out there.

Privacy privacy.

[01:00:48] Jeffrey Sherman: Yeah. Privacy. And look they never recovered in the crisis. And at the I still would argue that part of it was they tried to say, "We’re not gonna deal with your US pirate privacy laws." And we said, "Come to America and you’re going to jail." and we seized on that. That really hurt the Swiss banking system, right? The US did dry, and it was a long time coming, but some of it is because of what happened in that kind of, mid 2010 era, right? And so I think that, look, these banks are super complex. We have G-SIBs they’re, no one understands every risk inside that bank.

But you watch share price, you watch the CDS to protect the bonds, right? The credit default swap market on it. You look at the markets looking at it, and when you see something plummeting time in and time out, it’s hard to get excited about wanting to do business with them if you can do business elsewhere. And look as much as I’ve, lauded First Republic for being this great bank, I don’t wanna do a transaction with them right now. Why would I?

Yeah.

[01:01:53] Jeffrey Sherman: I have many other options. And so I think that’s part of it. And, look, the market can take you out of business, right? And that, that’s part of what happened here. And I think, their problems had nothing to do with the SVB issue. Credit Suisse have been spinning off harms their business, they spun off the profitable stuff, they keep selling stuff in the market. And I think the market just finally said, "Look, if there’s gonna be a next G to drop, it’s Credit Suisse," in a big way. And they punished them, and that’s why the SMB had to step in.

That’s not I don’t think they’re related. There, there is some kind of knock on effect there just because we had this banking thing in the US. And so I think what it should do is alert your antenna, or it should raise your antenna, it should alert you a little bit to say, "What are unintended risks that I’m taking?" And, it’s not unidentifiable, what happens here? And to see that, my wife has an account like at, she grew up in Texas, this small little like Credit Union there.

They sent her a notice about they had no exposure to Silicon Valley Bank, and they, I was like, "They don’t even know who it is." like the person that wrote this letter is "Oh, we gotta just tell all our clients, we don’t have any exposure." And it’s so funny, it was like during COVID, right? The barbershop gives you their COVID policy, going and it’s you know what? I’m not concerned about the barbershops COVID policy, right? Again, I don’t think they’re completely related. Yeah, they’re probably was something in there, that, that bank was heading for trouble for a long time.

[01:03:28] Mike Philbrick: I think they’re related from a global perspective of a very quick and fast-paced series of tightenings globally.

Yeah.

Yeah, no and it’s-

And the tides rolling out and we’re gonna see some naked swimmers.

Yeah.

Yeah.

[01:03:42] Jeffrey Sherman: And I’ve always liked that metaphor. And I think that’s what’s happening here and you’re gonna realize through these cycles is that, who’s actually managing risk. And when you don’t have a CR- a chief risk officer for a while, now you’re [inaudible 01:03:55]. Our company’s completely profitable, but our CFOs resigning." look, the thing that kind of screwed First Republic is they put out a notice to their clients that, "We’re fine, we’re solving everything’s good." I’m like they’re bankrupt by Monday. Like [inaudible 01:04:13].

[laughs].

[01:04:13] Jeffrey Sherman: It’s the letter of doom. Look, I think what it is just, make sure you, you understand as much as you can about what you’re, who you’re doing business with, how you’re doing it, understand the safeguards you can take. Risk-free money should be in risk-free things, right? There’s no free lunch, lending out your crypto, it’s not risk-free. All these things out there. And I think that you’re gonna see that. But also if we continue to see deposits flow and more money go into money market, that’s money that’s not going into the capital markets either, right?

Exactly.

[01:04:47] Jeffrey Sherman: And so you can say it was cash on the sidelines. You’re gonna get some equity analyst reports gonna say, "Look at all the cash on the sidelines, all this money and government money market." it was sitting at the bank anyway. It’s rainy day funds, it’s people using for savings. And I just think that’s another sucking sound out of the capital markets, which makes things tighter, right? And so ultimately, this is why, I was pretty optimistic that we could make it through the most of this year and maybe stay off recession. Maybe we skirt along a little bit.

I never believe in the no landing scenario. Eventually things run out of fuel. That we will land at some point, and ultimately it just feels like things get pulled forward. And is it soft? Is it hard? I don’t know. But I do know that it depends on our response mechanism to it. And if things play out, it’s a typical cycle. We have some form of recession and all of a sudden we need to throw stimulus at it, then comes the next round of inflation Mike, back to your point on the inflation side. So we may get a little disinflation. I noticed J- Jay didn’t use anything about disinflation in the last one.

And you mentioned something earlier that, that he addressed the credit contraction. I give him kudos for that, because most people aren’t gonna really understand that at the surface, and him going, and I guess most people don’t listen to Jay Powell like the rest of us do. But I do think he’s trying to address these things. And so that’s why I think the FED should be done with the rate policy. Let’s just see what happens for a few months, maybe that, I don’t think they need to cut at this point, and I don’t think they do cut until something really bad happens.

And they have to see it, and they don’t think what they’re doing is working. And at that point, there’s no "We’re gonna take off 25 basis points this month, and in six weeks we’re gonna do another 25." They’re coming in 200, right? It’s gonna be, we’re gonna do something that has an impact.

[inaudible 01:06:37].

And so-

[01:06:39] Jeffrey Sherman: Slowly at first and then all of a sudden.

Yeah. Yeah [laughs]. The old, Yeah.

… is that Great Gatsby, or no? No. It’s it’s Hemingway. No, it’s not. Anyway, [inaudible 01:06:50].

Slowly and then all of a sudden.

Yeah. Yeah. Exa- it’s one of those classics out there too. But-

Yeah.

… anyway so I just say that, I think these are lessons to folks out there. Don’t expect people to bail you out. Again, is this a bailout? It is, but, look what it is, if we, it is a true bailout, the cost of FDIC insurance is going up, right? Which means regulations-

[inaudible 01:07:15].

… going up and look, I’m for it. I’m not for the cost of FDIC going up, but I’m for the regulation here. It’s look, if you, by not doing it, we caused a problem, right? So there needs to be a level of scrutiny at this size and maybe a little bit smaller. But look, the local Credit Union that’s got, 10 million deposits, I don’t know, let ’em figure out how they’re gonna lend in their little local community of 4,000 people, right? But when you get to a certain scale, it has impact, right? And so I think that’s probably gonna be the postmortem on this, and someone’s gotta take the blame on it, at the FED. And it’s their responsibility. They regulate the banking system.

[01:07:56] Mike Philbrick: Great place to leave it,

[01:07:58] Pierre Daillie: Yeah. Jeffrey, thank you so much. That was an amazing discussion. Thank you very much for your incredibly valuable time.

Yes,

[01:08:07] Jeffrey Sherman: absolutely. And I looked it up. It is Hemingway on the-

Yeah. [laughs].

… it’s The Sun Also Rises. And if no if our, your listeners have not read that great Hemingway book.

Thank you.

[01:08:22] Mike Philbrick: Love it.

Oh, you want to just where people can find you, Jeffrey, I’m sure they can find you. You, you-

Yeah.

… just give ’em the last bit there, and.

[01:08:29] Jeffrey Sherman: Yeah. Search everywhere for this painting and you’ll find it, you know-

[laughs].

… this photograph and you’ll find me. No. But, [inaudible 01:08:35] obviously doubleline.com we have our podcast out there, the Sherman Show. It gets on all the major podcast providers. We have a Twitter account @ShermanShowPod. I’m trying to use it a little bit more to put up stuff just besides the podcast. It just, my time gets sucked away and things. And with compliance, I think there’s a little bit of time.

But that said reach out to us too. You want to be on the Sherman Show, you got a great guest, you got a great recommendation. I’m always lobbying for new folks to come on there. So an email address, shermanshow@doubleline.com. Thanks thanks for listening. Thanks guys, for having me. It’s a pleasure. It’s great to see you again. And best of luck as we start the second quarter here.