Marathon Asset Management founder and CEO Bruce Richards discusses the outlook for financial markets, Federal Reserve monetary policy and how he is investing in the current environment. He is joined by Bloomberg's Matt Miller, Sonali Basak, and Katie Greifeld.
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:06):
Joining us now Bruce Richards, founder and CEO of Marathon
Asset Management. His firm specializes in public and private credit markets,
with over twenty three billion dollars in assets. It's interesting,
Matt reminds me. In the morning, I will look at
the ten year It's the first thing I do every morning.
We're only at around four point four percent. The market
has been digesting this. We don't need to be in
(00:29):
any state of alarm or anything like that, but a
lot of people are really bell ringing about the deficit.
How do you feel about the long term.
Speaker 1 (00:35):
I'm not a state of alarm either. The long bond
is of concern. But start with there's three things guaranteed
in this country, death, taxes, and deficits. And the deficits
are becoming front of mind for everybody. And when you
have a big, beautiful bill which will probably add to
deficit pro growth and so you know best. And the
(00:57):
theory is that will grow out of this. Dimon even
said it just a minute ago. That will grow out
of this. The truth of the matter is we're running
seven percent of GDP in terms of deficits and seven
percent equals about two trillion that we're adding to debt
each year. And when you have a tariff policy that
leads to a week er dollar and maybe some some
(01:21):
indigestion by foreigners and owning our treasuries, and they own
thirty percent of the treasuries, it becomes that much more
alarming because there's ten trillion of treasuries at the current
pace of what we need to roll off and refinance,
as well as the new debt that we add. Given
the deficits trillion of treasuries in the next year to sell.
And so while there's a big bid for the front
(01:42):
end treasuries, when you get out longer along the curve,
the thirty year treasuries, it becomes a little more difficult
to digest because it has some pretty big price risk.
The duration for the thirty year treasury is eighteen which
means eighteen years, which means that if you raise rates
base points, the price falls eighteen percent, So it's a
(02:03):
pretty big price decline. So you have these macro funds,
hedge funds that are starting to short the long end,
knowing that the Fed's not buying treasuries and knowing that
foreigners will be more reluctant to buy long end treasuries,
and yet you have so many treasuries for sale, and
so I can't tell you. I think rates are a
really tough thing to call, and we try not to
make a rate call. But you know, earlier this century,
(02:25):
pre you know GFC, you know, long bonds were up
around six percent. Could we go to six percent? Yes?
And when we do, it becomes much more difficult to
fund our government because of the higher interest charges. Right.
Speaker 3 (02:38):
We had a great story I think yesterday that Double
Line and TCW and PIMCO, they're all they're in a
buyer strike. So even American companies are not buying our
long dated treasuries. Some of them are even shorting long
dated treasuries. Obviously, the foreigners right now feel a little
bit offended by what's going on in trade, so they
(02:59):
could stay out as well well. And as a result,
maybe Treasury moves issuance to the front end of the curve.
Does that solve things?
Speaker 1 (03:07):
I mean, you know it does, but we'll just put
pressure on the front end. And the bottom line is
inflation's really well behaved at two point one percent. You
think treasures should be doing better on that basis, But
the FED knows that later this year, when terris really
start to kick in, that we might see a higher inflation.
I think the five or seven percent doomsdayers are kind of,
you know, off the reservation and making those calls. We
(03:30):
think more like two point one percent PC number becomes
a two point eight to three point two range, and
that's reasonable. A one percent increase from here kind of tops.
And with that the FED will want to see how
inflation you know, factors through and before making a move.
So the Fed's got hold for an extended period of time.
Despite what the ECB is doing and the Bank of
(03:53):
England's doing, and the Bank of Cannon is doing, which
is the ease rates, the FED will keep rates where
they are now. The real issue, I think is the
knock on effect when you have higher rates, whether it's
the front end or the longer and when you have
higher rates, there's a crowding out. And so whether it's
municipalities that have to pay a higher rate, whether it's
companies that have to pay a high rate, whether it's
(04:14):
homeowners that have to pay a higher rate and get
crowded out because they can't afford to buy that home,
or the real estate markets, commercial real estate that is
dealing with higher cap rates, this crowding out effect that
impacts markets and impacts the consumer.
Speaker 2 (04:28):
I want to double down on those risks because I
want to be very clear about this when we talk
to big credit funds, private credit funds, the higher for
longer environment has also meant higher yields. Hence that goals
and opportunity. We get it, but I want to talk
about the cracks because to your point, if we do
see long end rates remain higher, what cracks where exactly
(04:50):
will that pain be? Because we're also equally hearing about
people starting to want to dive into rescue financings. Are
they worth it?
Speaker 1 (04:58):
So it is a great time to invest, and as
a lender, we're making returns that equity markets would wish
they were making, and we're making these really high re
rates return with really low level volatility. So we're equity markets,
the public equity markets that have sixteen vol in the
private credit markets that can speak for us at Marathon,
(05:20):
our volatility and our private credit lending books are like
four to six percent. It's really low relative to the
rate of return that we're making. So the risky ward
is phenomenal to your point that you're making. There are
some cracks. The number one crack is the consumer. And
so the consumer. If you look at the high your market,
you look at every sector across the high you walk
(05:40):
and hio walk is doing well. It's yielding seven and
a half percent, you know, a nice bread of three
hundred and fifty off. It's it's doing great. But there's
one sector that's underperforming and negative on the year, and
that's you know, consumer discretionary type, you know, retailers and
that sort and and so we've been avoiding that because
we've understood that the consumer would be weak in this
type of marketplace and consuming less because of the higher
(06:04):
inflation that we've traditionally seen and now higher rates. So
there's one sector that's really causing me to take a
lot of pause. And software that's interesting.
Speaker 3 (06:14):
We talked to garget Shaw Jory from Blackrock earlier and
she loves software right especially because of the AI.
Speaker 1 (06:19):
You have to love software because of AI, and when
you have AI first software companies, and that's what Google's becoming,
that's what Microsoft is today, that's where salesforce is moving towards.
In Snowflake and Adobe and these big incombing companies that
will see enterprise value even sore further from here, given AI,
(06:40):
it's hugely positive. Do you know, Matt, that there are
five thousand companies owned by private equity, five thousand that
are software companies.
Speaker 3 (06:49):
Thousand software software.
Speaker 1 (06:50):
Companies owned by private equity, and not all those companies
will make the AI adjustment, and there will be creative
at destruction that comes their way, which will make them
much more valuable because they'll make that adjustment. And so
when you look in their data room of how they've performed,
the pe sponsors, how their software firms have performed, you'll
(07:11):
see companies which have much higher multiples because of AI.
The exact point that she was making that you were making, right,
But then you'll have a bigger cohort of companies that'll
have that blockbuster moment video. Think about Mark and Treason,
Mark Intreason making this common fifteen years ago that AI
will eat the world. And AI has done a lot
(07:32):
for the economy, done a lot for the equity markets
and wealth creation. Now his new saying is AI will
eat software, and so what software companies will make it through? Now?
Think about being a lender, Sonario.
Speaker 2 (07:44):
Right, this will credit blockbuster moment.
Speaker 1 (07:47):
So because because our loans are capped at par, we
don't have the upside of equity, but we have the
downside if there's a default. Marathon manages to never have
need to fall, let alone a loss, and so we're
avoiding software companies. I think private credit has somewhere between
(08:08):
twenty to thirty percent of their book in software related companies.
And I think that when you make a private investment
that you have no real exit and it's a five
to seven year loan. You can't sit here today and
tell me that this company it's a software company. A
traditional software company can make that we switch to be
(08:30):
a AI software first company. And so I think they
have all the downside with none of the upside other
than getting your coup on your cash flow and par.
So I think those spreads need to be a couple
hundred bases points wider. I think that the decade email
ratios that they're lending at, which has been very very high,
because the arr because the reoccurring revenue needs to be
(08:51):
considerably lower. In fact, we're taking a much greater degree
of position as it relates to these software companies in
the private credit markets by saying time out, We're going
to wait and see for a period of time how
it settles in and which companies can make the transition
and which companies can But I think the default rate
will go from one third of the marketplace that you
(09:13):
see in software relative to the market to three times
the default rates of the traditional marketplace. So I think
it's a great place to invest as private equity and
as equity, but it's not such an intelligent place to
invest if you're private credit cap a par on these
software companies
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:06):
Joining us now Bruce Richards, founder and CEO of Marathon
Asset Management. His firm specializes in public and private credit markets,
with over twenty three billion dollars in assets. It's interesting,
Matt reminds me. In the morning, I will look at
the ten year It's the first thing I do every morning.
We're only at around four point four percent. The market
has been digesting this. We don't need to be in
(00:29):
any state of alarm or anything like that, but a
lot of people are really bell ringing about the deficit.
How do you feel about the long term.
Speaker 1 (00:35):
I'm not a state of alarm either. The long bond
is of concern. But start with there's three things guaranteed
in this country, death, taxes, and deficits. And the deficits
are becoming front of mind for everybody. And when you
have a big, beautiful bill which will probably add to
deficit pro growth and so you know best. And the
(00:57):
theory is that will grow out of this. Dimon even
said it just a minute ago. That will grow out
of this. The truth of the matter is we're running
seven percent of GDP in terms of deficits and seven
percent equals about two trillion that we're adding to debt
each year. And when you have a tariff policy that
leads to a week er dollar and maybe some some
(01:21):
indigestion by foreigners and owning our treasuries, and they own
thirty percent of the treasuries, it becomes that much more
alarming because there's ten trillion of treasuries at the current
pace of what we need to roll off and refinance,
as well as the new debt that we add. Given
the deficits trillion of treasuries in the next year to sell.
And so while there's a big bid for the front
(01:42):
end treasuries, when you get out longer along the curve,
the thirty year treasuries, it becomes a little more difficult
to digest because it has some pretty big price risk.
The duration for the thirty year treasury is eighteen which
means eighteen years, which means that if you raise rates
base points, the price falls eighteen percent, So it's a
(02:03):
pretty big price decline. So you have these macro funds,
hedge funds that are starting to short the long end,
knowing that the Fed's not buying treasuries and knowing that
foreigners will be more reluctant to buy long end treasuries,
and yet you have so many treasuries for sale, and
so I can't tell you. I think rates are a
really tough thing to call, and we try not to
make a rate call. But you know, earlier this century,
(02:25):
pre you know GFC, you know, long bonds were up
around six percent. Could we go to six percent? Yes?
And when we do, it becomes much more difficult to
fund our government because of the higher interest charges. Right.
Speaker 3 (02:38):
We had a great story I think yesterday that Double
Line and TCW and PIMCO, they're all they're in a
buyer strike. So even American companies are not buying our
long dated treasuries. Some of them are even shorting long
dated treasuries. Obviously, the foreigners right now feel a little
bit offended by what's going on in trade, so they
(02:59):
could stay out as well well. And as a result,
maybe Treasury moves issuance to the front end of the curve.
Does that solve things?
Speaker 1 (03:07):
I mean, you know it does, but we'll just put
pressure on the front end. And the bottom line is
inflation's really well behaved at two point one percent. You
think treasures should be doing better on that basis, But
the FED knows that later this year, when terris really
start to kick in, that we might see a higher inflation.
I think the five or seven percent doomsdayers are kind of,
you know, off the reservation and making those calls. We
(03:30):
think more like two point one percent PC number becomes
a two point eight to three point two range, and
that's reasonable. A one percent increase from here kind of tops.
And with that the FED will want to see how
inflation you know, factors through and before making a move.
So the Fed's got hold for an extended period of time.
Despite what the ECB is doing and the Bank of
(03:53):
England's doing, and the Bank of Cannon is doing, which
is the ease rates, the FED will keep rates where
they are now. The real issue, I think is the
knock on effect when you have higher rates, whether it's
the front end or the longer and when you have
higher rates, there's a crowding out. And so whether it's
municipalities that have to pay a higher rate, whether it's
companies that have to pay a high rate, whether it's
(04:14):
homeowners that have to pay a higher rate and get
crowded out because they can't afford to buy that home,
or the real estate markets, commercial real estate that is
dealing with higher cap rates, this crowding out effect that
impacts markets and impacts the consumer.
Speaker 2 (04:28):
I want to double down on those risks because I
want to be very clear about this when we talk
to big credit funds, private credit funds, the higher for
longer environment has also meant higher yields. Hence that goals
and opportunity. We get it, but I want to talk
about the cracks because to your point, if we do
see long end rates remain higher, what cracks where exactly
(04:50):
will that pain be? Because we're also equally hearing about
people starting to want to dive into rescue financings. Are
they worth it?
Speaker 1 (04:58):
So it is a great time to invest, and as
a lender, we're making returns that equity markets would wish
they were making, and we're making these really high re
rates return with really low level volatility. So we're equity markets,
the public equity markets that have sixteen vol in the
private credit markets that can speak for us at Marathon,
(05:20):
our volatility and our private credit lending books are like
four to six percent. It's really low relative to the
rate of return that we're making. So the risky ward
is phenomenal to your point that you're making. There are
some cracks. The number one crack is the consumer. And
so the consumer. If you look at the high your market,
you look at every sector across the high you walk
(05:40):
and hio walk is doing well. It's yielding seven and
a half percent, you know, a nice bread of three
hundred and fifty off. It's it's doing great. But there's
one sector that's underperforming and negative on the year, and
that's you know, consumer discretionary type, you know, retailers and
that sort and and so we've been avoiding that because
we've understood that the consumer would be weak in this
type of marketplace and consuming less because of the higher
(06:04):
inflation that we've traditionally seen and now higher rates. So
there's one sector that's really causing me to take a
lot of pause. And software that's interesting.
Speaker 3 (06:14):
We talked to garget Shaw Jory from Blackrock earlier and
she loves software right especially because of the AI.
Speaker 1 (06:19):
You have to love software because of AI, and when
you have AI first software companies, and that's what Google's becoming,
that's what Microsoft is today, that's where salesforce is moving towards.
In Snowflake and Adobe and these big incombing companies that
will see enterprise value even sore further from here, given AI,
(06:40):
it's hugely positive. Do you know, Matt, that there are
five thousand companies owned by private equity, five thousand that
are software companies.
Speaker 3 (06:49):
Thousand software software.
Speaker 1 (06:50):
Companies owned by private equity, and not all those companies
will make the AI adjustment, and there will be creative
at destruction that comes their way, which will make them
much more valuable because they'll make that adjustment. And so
when you look in their data room of how they've performed,
the pe sponsors, how their software firms have performed, you'll
(07:11):
see companies which have much higher multiples because of AI.
The exact point that she was making that you were making, right,
But then you'll have a bigger cohort of companies that'll
have that blockbuster moment video. Think about Mark and Treason,
Mark Intreason making this common fifteen years ago that AI
will eat the world. And AI has done a lot
(07:32):
for the economy, done a lot for the equity markets
and wealth creation. Now his new saying is AI will
eat software, and so what software companies will make it through? Now?
Think about being a lender, Sonario.
Speaker 2 (07:44):
Right, this will credit blockbuster moment.
Speaker 1 (07:47):
So because because our loans are capped at par, we
don't have the upside of equity, but we have the
downside if there's a default. Marathon manages to never have
need to fall, let alone a loss, and so we're
avoiding software companies. I think private credit has somewhere between
(08:08):
twenty to thirty percent of their book in software related companies.
And I think that when you make a private investment
that you have no real exit and it's a five
to seven year loan. You can't sit here today and
tell me that this company it's a software company. A
traditional software company can make that we switch to be
(08:30):
a AI software first company. And so I think they
have all the downside with none of the upside other
than getting your coup on your cash flow and par.
So I think those spreads need to be a couple
hundred bases points wider. I think that the decade email
ratios that they're lending at, which has been very very high,
because the arr because the reoccurring revenue needs to be
(08:51):
considerably lower. In fact, we're taking a much greater degree
of position as it relates to these software companies in
the private credit markets by saying time out, We're going
to wait and see for a period of time how
it settles in and which companies can make the transition
and which companies can But I think the default rate
will go from one third of the marketplace that you
(09:13):
see in software relative to the market to three times
the default rates of the traditional marketplace. So I think
it's a great place to invest as private equity and
as equity, but it's not such an intelligent place to
invest if you're private credit cap a par on these
software companies
Popular Podcasts
24/7 News: The Latest
The latest news in 4 minutes updated every hour, every day.
Crime Junkie
Does hearing about a true crime case always leave you scouring the internet for the truth behind the story? Dive into your next mystery with Crime Junkie. Every Monday, join your host Ashley Flowers as she unravels all the details of infamous and underreported true crime cases with her best friend Brit Prawat. From cold cases to missing persons and heroes in our community who seek justice, Crime Junkie is your destination for theories and stories you won’t hear anywhere else. Whether you're a seasoned true crime enthusiast or new to the genre, you'll find yourself on the edge of your seat awaiting a new episode every Monday. If you can never get enough true crime... Congratulations, you’ve found your people. Follow to join a community of Crime Junkies! Crime Junkie is presented by audiochuck Media Company.
The Clay Travis and Buck Sexton Show
The Clay Travis and Buck Sexton Show. Clay Travis and Buck Sexton tackle the biggest stories in news, politics and current events with intelligence and humor. From the border crisis, to the madness of cancel culture and far-left missteps, Clay and Buck guide listeners through the latest headlines and hot topics with fun and entertaining conversations and opinions.