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Risk and Reward with Marek Capital Co-Founder Matt Cherwin · Masters in Business

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Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. This He's Master's in
0:15
Speaker 1: Business with Barry Ritholts on Bloomberg Radio.
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Speaker 2: This week on the podcast, another extra special guest, Matt
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Speaker 2: Sherwin is co founder and chief investment officer at Merrek Capital.
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Speaker 2: He'd previously spent sixteen years at JP Morgan Chase and
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Speaker 2: then a bunch of years at City Group beforehand, running
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Speaker 2: all sorts of spread markets, head of securitized product, lots
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Speaker 2: of CIO and risk management titles. I came to no
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Speaker 2: Maerk through a live event we did Atloomberg last year.
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Speaker 2: I found that his approached to credit and trading is
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Speaker 2: absolutely fascinating, and what Marek is doing is really quite interesting.
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Speaker 2: I thought the conversation was brilliant, and I think you
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Speaker 2: will also with no further ado, my conversation with Merreck Capitals.
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Speaker 2: Matt Sherwin, Matt Scharnwin, Welcome to Bloomberg.
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Speaker 3: Thanks for having me. This is exciting. That was kind
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Speaker 3: of That was a bigger wind up than I was.
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Speaker 2: I like, I like a big wind up because it
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Speaker 2: gives us an opportunity to roll back to the beginning
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Speaker 2: and say, all right, Bachelors and economics from the University
1:34
Speaker 2: of Pennsylvania. What was the original career plan. I don't
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Speaker 2: imagine people going to college and saying I want to
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Speaker 2: be the head of global spread markets.
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Speaker 3: No. But that's super interesting because our oldest is a
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Speaker 3: sophomore in college now and he's in the business school
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Speaker 3: to American and I was just talking to him yesterday
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Speaker 3: and he said, I'm now in I think they call
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Speaker 3: it like finance for Business. I really liked this new
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Speaker 3: class and I said to him, that remind finds me
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Speaker 3: so well of when I was in undergrad business school
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Speaker 3: and I did the first couple of semesters at ECON
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Speaker 3: and I hated it.
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Speaker 2: And I had a similar experience, and it was like.
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Speaker 3: You know, I shouldn't have hated it as much as
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Speaker 3: I did, but at the time, uh, it was ilm curves,
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Speaker 3: it was supply, it was demand, et cetera. And it
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Speaker 3: just it felt it didn't feel very practical to me,
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Speaker 3: and I didn't do very well and I didn't go
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Speaker 3: to class very often. I didn't do very well. But
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Speaker 3: then we got to kind of the next semester, which
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Speaker 3: I think they called finance one oh one and was
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Speaker 3: like bond math, discounted cash flows, and I was like,
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Speaker 3: oh this, I like, okay, I am in the right worl.
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Speaker 2: Well, it's much more realistic and you're not dealing with
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Speaker 2: homo economy because that is this theoretical.
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Speaker 3: Looking back on, I wish I had listened a bit
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Speaker 3: more at some of those others. But you know something
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Speaker 3: I say, maybe we'll get to is like it just
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Speaker 3: in recommendation would give to other people. It took me
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Speaker 3: a little while to realize what I was introd in,
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Speaker 3: what I was interested in being interested in. And when
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Speaker 3: I got into some of those classes, kind of the
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Speaker 3: more financi kind of stuff, I was like this, I
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Speaker 3: like this makes sense. I want to learn more, and
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Speaker 3: I think that's kind of where it's right. So I
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Speaker 3: always wanted to I just like, when there's you know,
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Speaker 3: numbers on the page, it adds up to something you're
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Speaker 3: trying to make money. It's hopefully positive at the end,
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Speaker 3: it might be negative. It's pretty clear cut at least
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Speaker 3: the goal is And I always like that, always gravitating.
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Speaker 2: So economics way too abstract and academic, but business and
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Speaker 2: finance practical, applicable, real life usage.
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Speaker 3: Yeah, which is interesting too because I also I'm a
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Speaker 3: little bit like this a little exaggerate, but I'm a
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Speaker 3: little bit of like a history buff, so like it
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Speaker 3: was interesting that that what didn't didn't appeal to me
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Speaker 3: because I do like kind of the history of it.
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Speaker 3: How did we get here? And I think that's always
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Speaker 3: something that I'm like in this form as well, going
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Speaker 3: back to learn more about financial systems, how much works,
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Speaker 3: how they thought it used to work, different schools of thoughts,
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Speaker 3: and I think it really helps you understand where you've been,
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Speaker 3: where you are, where you're going.
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Speaker 2: So when you look back when you were a group
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Speaker 2: treasurer or chief investment officer at the JP Morgan division
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Speaker 2: you were, you were involved in, what sort of lessons
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Speaker 2: did you take away from that? You're you're in the
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Speaker 2: real world managing real risk, real portfolios. How did that
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Speaker 2: experience change how you perceive risk?
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Speaker 3: Yeah, it's a great question, and I'll tell you so. Obviously,
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Speaker 3: I had a career with a background in trading, running
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Speaker 3: trading teams both on the buy side and the cell side,
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Speaker 3: and it was really that experience that this next piece
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Speaker 3: that was transformative for me, and you know, really brought
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Speaker 3: us to the point where my partner, Derek Woman and
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Speaker 3: I decided let's form Eric and you know, I'm sure
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Speaker 3: we'll get into that a bit. But what happened was
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Speaker 3: I spent twenty odd years trading mortgages, rates, corporate high
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Speaker 3: yield products like that, working with specialty finance companies, some
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Speaker 3: that I worked with, some I had a hand in
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Speaker 3: running this kind of universe, and then in late twenty nineteen,
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Speaker 3: the opportunity to move over, and this was different building,
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Speaker 3: different Waldorf, key card, different team, and be the CIO
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Speaker 3: and the treasurer. So this is now by side running
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Speaker 3: the capital of the firm, the investment of the firm,
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Speaker 3: hedging and managing structure was lots of things wrapped up
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Speaker 3: in there. But the real thing was the point in
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Speaker 3: time where this happened was late twenty nineteen. A few
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Speaker 3: days later was the repo crisis. If we remember that,
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Speaker 3: when all of a sudden, if you wanted to borrow
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Speaker 3: overnight against treasuries, it costs you ten percent. Okay, six
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Speaker 3: months after that pandemic breaks out. And why bring that up?
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Speaker 3: Is so much changed in dramatic size, at rapid speed
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Speaker 3: that I saw something I'd never seen before, and it
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Speaker 3: was how does the financial system really work? And what
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Speaker 3: does it mean? And how does it apply to everything
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Speaker 3: that I've done? And it was one of these moments
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Speaker 3: where I felt like I just went from being the
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Speaker 3: captain of the ship, you know, my own little thing,
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Speaker 3: right will be a little expansive with it. I went
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Speaker 3: from being the captain of the ship to going to
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Speaker 3: work in the engine room and seeing the actual gearing
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Speaker 3: and how it works and how it doesn't and what
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Speaker 3: could stop it from working. And you spend years, you know,
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Speaker 3: you pull a lever, you think the boat goes faster,
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Speaker 3: but you don't know why, and you don't know what
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Speaker 3: could stop it from doing that. You don't know what
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Speaker 3: could make it work more efficiently. But now you go
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Speaker 3: work in the engine room and you see it and
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Speaker 3: you understand it. It was just this aha moment, Like we're
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Speaker 3: two guys with glasses, right, So you know, when you
6:44
Speaker 3: go to the you get a new prescription, you get
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Speaker 3: your new glasses, you put them on, You're like, oh
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Speaker 3: my god, I can see right. And by the way,
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Speaker 3: how was I walking around the streets of Manhattan with
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Speaker 3: that old prescription? But now I can see clearly, and honestly,
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Speaker 3: twenty odd years into my career. That's how I felt
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Speaker 3: to that.
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Speaker 2: Moment in twenty nineteen.
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Speaker 3: Yeah, I would say like in early twenty twenty, about
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Speaker 3: six months in, it was kind of like, oh my goodness,
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Speaker 3: it's coming together.
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Speaker 2: Now.
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Speaker 3: I wish I wish I had known this for the
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Speaker 3: twenty years that preceded this, but I felt like, now
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Speaker 3: I know nothing and I'm starting.
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Speaker 2: To learn, so I have to ask. So my experience
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Speaker 2: with twenty nineteen was that wobble seemed to go by
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Speaker 2: so quickly compared to eight oh nine, where you know,
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Speaker 2: to me, you saw a lot of warning signs, first
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Speaker 2: in housing and then in securitized product, and then in construction,
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Speaker 2: and then you know, the market didn't peak till October seven,
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Speaker 2: and the next eighteen months were kind of fun if
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Speaker 2: you were on the right side of it, but if
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Speaker 2: you weren't, it must have been a bloodbath. It sounds
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Speaker 2: like you derived more out of the twenty nineteen experience.
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Speaker 2: Then you're on a desk eight O nine. What sort
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Speaker 2: of scar tissue did that leave? How? Yeah, informative was that?
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Speaker 3: That's really interesting the way you kind of put those together.
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Speaker 3: And so to set the table a bit O seven.
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Speaker 3: When I got to JP Morgan, lad O six seven,
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Speaker 3: eight oh nine, I was in charge of had a team.
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Speaker 3: We traded asset backed security, say, credit cards, auto student loans,
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Speaker 3: subprime mortgages. Remember those clos so really kind of like
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Speaker 3: the center of what ended up happening after that. And
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Speaker 3: I would say it was so overwhelming at the time.
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Speaker 3: I mean, we were there two in the morning, hand
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Speaker 3: marking bonds, okay, walking across the street between the two buildings, like,
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Speaker 3: is there more information this company might buy that company
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Speaker 3: before the market opens? What else can we do? The
8:55
Speaker 3: numbers were huge. It was almost like a bit more
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Speaker 3: than you could process at the time. But I think
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Speaker 3: each one of these became every step there was like
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Speaker 3: I understand what I'm doing better now because the first
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Speaker 3: thing I ever did was I started I was a
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Speaker 3: cash flow structure. And actually, at that point in time,
9:15
Speaker 3: the guy who ran the department was a friend of
9:17
Speaker 3: mine named Bruce Richards, who went on to start Marathon
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Speaker 3: and has had a fantastic career, and we keep in
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Speaker 3: touch and he said, I said, I want to be
9:26
Speaker 3: a trader, and he said, well, I want you to
9:27
Speaker 3: be a structure because if you learn how the cash
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Speaker 3: flow works, how the structure works, then you'll be a
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Speaker 3: better trader later on. I think each piece helped me
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Speaker 3: understand the risk better, and then the system it sits in,
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Speaker 3: and that helps you understand the risk better. And then
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Speaker 3: when you understand the risk better, you understand the system
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Speaker 3: it sits in better, and it builds and it builds
9:45
Speaker 3: on top of each other. So I would say in
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Speaker 3: eight I learned more. In eight we saw we felt
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Speaker 3: like we were the tip of the spear in like
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Speaker 3: a bad way, and we could see it was getting worse,
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Speaker 3: and it was accelerating, and we could see the people
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Speaker 3: were maybe even underestimating. And I remember some conversations around
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Speaker 3: at the time that we were basically saying, like, think bigger,
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Speaker 3: think broader, think worse. That's the context we're talking about.
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Speaker 3: But all of that helped me understand how does my
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Speaker 3: product I'm trading fit into an investment bank? How's an
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Speaker 3: investment bank impact the system. I think when I went
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Speaker 3: into twenty nineteen, obviously a lot time had passed, I'd
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Speaker 3: had more experiences, et cetera. I remember sitting in a meeting.
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Speaker 3: We're in seven thirty am traders meeting. This is with
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Speaker 3: the CIO group, and we go around the table, my
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Speaker 3: rates lead, my credit lead, et cetera, and the REPO
10:43
Speaker 3: guys walk in and they say, hey, we can lend
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Speaker 3: against treasuries at ten percent? Should we do more? And
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Speaker 3: I said, guys, this is my third day with this team. Okay,
10:55
Speaker 3: I'm the person in the room who knows the least
10:58
Speaker 3: about what you're talking about. But if you need my authorization,
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Speaker 3: you have it.
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Speaker 2: Because that sounds pretty great.
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Speaker 3: That's fantastic. My response to you is how much can
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Speaker 3: we not? Can we do more?
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Speaker 2: Like?
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Speaker 3: How much can we do? Meaning more and more? And
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Speaker 3: that just became the beginning of like, why did that happen?
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Speaker 3: How did we get here? What's the where did it
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Speaker 3: come from? Where does it go? And I found that
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Speaker 3: certain people knew certain pieces but not the picture. And
11:27
Speaker 3: then you're like it was just starting to pull.
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Speaker 2: Out, and that was your job to the whole picture.
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Speaker 3: It became it became the only It became the focus
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Speaker 3: of what I wanted to know, because unpacking that would
11:39
Speaker 3: help me understand how do we get here, why does
11:41
Speaker 3: this happen? And by the way, what are the pieces
11:44
Speaker 3: that put this all together? And how do we how
11:48
Speaker 3: do we take advantage of that? How do we protect ourselves,
11:51
Speaker 3: but also how do we take advantage of that? So
11:53
Speaker 3: is this the whole thing? Was this one of those
11:56
Speaker 3: types of things you say, I opened up a door,
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Speaker 3: three doors behind it, and I want to keep going
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Speaker 3: in that direction. And it felt to me like a
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Speaker 3: purer and purer version of everything I'd done in my career.
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Speaker 3: Getting closer and closer to the source in pricing.
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Speaker 2: Really really fascinating. One of the things I think a
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Speaker 2: lot of people don't realize about JP Morgan Chase during
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Speaker 2: the financial crisis, and I never doing the research for
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Speaker 2: Balot Nation, I never got this really source the way
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Speaker 2: I would have liked to. But JP Morgan Chase had
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Speaker 2: their own derivative scare a couple of years earlier, and
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Speaker 2: the word was Jamie just said, clear all this junk
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Speaker 2: off of our balance sheet, we don't we can't handle
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Speaker 2: this risk doesn't seem to be worth the potential upside.
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Speaker 2: So heading into eight oh nine, they weren't dealing with
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Speaker 2: the same sort of existential danger that Merrill, Lynch and Wells,
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Speaker 2: Fargo and go down the list all had to go through.
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Speaker 2: They were ended up being an acquirer of distress assets,
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Speaker 2: not a seller of distressed assets.
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Speaker 3: Well, I think. I mean, it was a tremendous place
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Speaker 3: to work. I worked with incredible people. I learned a lot,
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Speaker 3: and I worked with great, great people that you're just
13:18
Speaker 3: part of a terrific team, fantastic place. I learned something
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Speaker 3: that became transformative to everything I'd spent my career doing.
13:28
Speaker 3: So that's why we set out too, and I said,
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Speaker 3: I want to do this, and that's why we set
13:33
Speaker 3: out to build Merrick. When we said, you know, I
13:36
Speaker 3: recalled Derek and I sat down one day and I said,
13:39
Speaker 3: let me just here's how I think about markets. I
13:43
Speaker 3: think about it in terms of money, capital, credit, liquidity,
13:47
Speaker 3: and regulation. That's my five money Capital, credit, liquidity, regulation, MCCLR.
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Speaker 2: How do you separate money from capital?
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Speaker 3: So I think money to me is how do you
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Speaker 3: make it? How do you destroy? How does it move
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Speaker 3: through the system. To me, capital is a little bit
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Speaker 3: more of how much do you have? How do you
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Speaker 3: measure it? How much do you have? Are you making more?
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Speaker 3: You destroying it? Credit is really how is it being formed?
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Speaker 3: How is it moving through the system. The financial system
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Speaker 3: is changing now, It's very different than it was a
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Speaker 3: few years ago. We actually when we were really trying
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Speaker 3: to get our ideas on paper. We wrote a paper
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Speaker 3: that we outline saying we described what we thought was
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Speaker 3: the new version of the financial system. We said, the
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Speaker 3: financial system is changing, your de facto recreating Glass Steegel.
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Speaker 3: You have gesibs. If you come from some of this framework,
14:40
Speaker 3: you know, are the globally systematically important banks, systemically important
14:46
Speaker 3: banks think JP, Morgan Wells, Bank of America, et cetera.
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Speaker 3: We said, there are the new gesips, people like Apollo, Blackstone, KKR, Blackrock.
14:57
Speaker 3: These are areas. These are the folks that are actually
15:00
Speaker 3: making credit extension decisions in this economy. Okay, you have
15:03
Speaker 3: the traders like Citadel, Securities, Jump Chain, some of these
15:08
Speaker 3: other names. Everybody's familiar with. This is disaggregating the financial
15:13
Speaker 3: system and putting it into different buckets. So basically we
15:16
Speaker 3: think about where's it coming from, where does it go,
15:19
Speaker 3: who wins, who loses? What are the flywheels here. This
15:23
Speaker 3: is a process that we apply to everything we do.
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Speaker 3: Some of the guys on the team call it McLear mcclr.
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Speaker 3: It's the lens that we look at because we believe
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Speaker 3: money capital, credit liquiding regulation drives economies, markets and prices,
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Speaker 3: and then you can really start to understand monetary policy,
15:45
Speaker 3: real estate housing, the types of specialty finance companies we've
15:51
Speaker 3: talked about consumer So this, to me, actually explains how
15:56
Speaker 3: it all works, and we apply that. It's a huge
15:59
Speaker 3: addressable universe. We trade rates, mortgages, securitized products, corporate credit
16:05
Speaker 3: related equities. It's an enormous addressable universe with investors that
16:10
Speaker 3: have very narrow mandates that transact to different points in
16:13
Speaker 3: time and sometimes non economically imbound by potentially non economic rules,
16:19
Speaker 3: which means there are a lot of overlaps that people
16:22
Speaker 3: don't take the advantage of, and there's a lot of
16:24
Speaker 3: gaps that they quite simply don't bridge. And the setup
16:29
Speaker 3: for all of this, I think, and I've seen some stuff.
16:34
Speaker 3: A lot of your listeners have seen quite a bunch
16:39
Speaker 3: of stuff. We've seen things go right, we've seen things
16:41
Speaker 3: go wrong. This is one of the best setups we've
16:44
Speaker 3: seen in a long time, and so that's why we
16:47
Speaker 3: went out to say, I saw some interesting stuff, I
16:50
Speaker 3: learned some interesting stuff. There's an opportunity set that we
16:54
Speaker 3: want to prosecute right now, and it is an incredible
16:57
Speaker 3: time to do so. So we built a team.
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Speaker 2: Sorry, go ahead, I was just gonna ask No, I'm fascinated.
17:03
Speaker 2: I want to roll back to something you said earlier,
17:06
Speaker 2: which was glass Steegel is sort of being backdoor re applied.
17:13
Speaker 2: Is that a function of people being risk averse or
17:17
Speaker 2: is that a function of people just specializing in their
17:20
Speaker 2: own silo so you don't have, you know, glass Steagel
17:24
Speaker 2: for people who aren't. Economic and policy wonks separated the
17:30
Speaker 2: FDIC safe banks from the riskier investment banks, and once
17:36
Speaker 2: that was repealed in the late nineties, didn't cause the
17:39
Speaker 2: financial crisis, but allowed all these banks to merge and
17:43
Speaker 2: get bigger, and maybe it made the crisis a little worse,
17:46
Speaker 2: But I don't think of it as the underlying cause.
17:49
Speaker 2: But the idea that the market is working its way
17:55
Speaker 2: back towards that is kind of fascinating. Let me suggress that.
17:59
Speaker 3: Right as you laid out, like glass sel to say
18:03
Speaker 3: it to oversimplify, basically said like, you can hold deposits,
18:06
Speaker 3: you can underwrite securities, you can trade securities, things like that,
18:10
Speaker 3: and there were rules right now, there are some rules
18:16
Speaker 3: that say what you can and can't do, but really
18:18
Speaker 3: there's a lot more that has morphed into what people
18:22
Speaker 3: like to call private credit, or we're going to extend
18:24
Speaker 3: credit through these fashions, or some of the rules don't
18:27
Speaker 3: apply to this group, so we can trade the markets differently,
18:30
Speaker 3: or we can make markets in a way that maybe
18:33
Speaker 3: the big banks can't. And then the big banks say, well,
18:36
Speaker 3: we're viewed as super safe, because I would argue we
18:39
Speaker 3: are and that has its advantages also. So it's like
18:42
Speaker 3: we created these artificial boundaries. What is great for us
18:46
Speaker 3: and the way we look at the world is we
18:49
Speaker 3: saw that, we see that, we understand that we also
18:52
Speaker 3: see and understand and think about all day long and
18:56
Speaker 3: put it into our portfolio construction and the risk that
18:59
Speaker 3: we build. It's all up for grabs again, right. So
19:05
Speaker 3: we've got Kevin Worsh nominated to be the FED chair
19:09
Speaker 3: and Mickey Bowman is the vice chair for supervision, and
19:13
Speaker 3: they are no, no, what the right adjective for it is.
19:17
Speaker 3: But they're changing the rules and they're pulling some of
19:21
Speaker 3: them down, and in my opinion, people just don't understand
19:25
Speaker 3: which of them matter and which of them don't, and
19:28
Speaker 3: the market moves to place on some that simply don't matter,
19:31
Speaker 3: like it's lack of understanding of what SLR was and
19:34
Speaker 3: how that worked, and we don't need to dive into that,
19:36
Speaker 3: but to simplify, they said, we're going to remove this
19:39
Speaker 3: rule and it's a big deal, and we Merek said
19:41
Speaker 3: you can take it off. It doesn't matter. So everything
19:45
Speaker 3: the market's doing in reaction to that is a potential
19:47
Speaker 3: opportunity for us.
19:48
Speaker 2: In other words, people are overreacting to a regulatory change
19:52
Speaker 2: that is in significant, long time.
19:54
Speaker 3: And that example.
19:55
Speaker 2: Yeah, coming up. We continue our conversation with Matt Sherwin,
19:58
Speaker 2: co founder in chief officer at Merrick Capitol, discussing why
20:04
Speaker 2: he launched the firm in twenty twenty four. I'm Barry Ritolts.
20:08
Speaker 2: You're listening to Masters in Business on Bloomberg Radio. I'm
20:22
Speaker 2: Barry Ridolts. You're listening to Masters in Business on Bloomberg Radio.
20:26
Speaker 2: My extra special guest today is Matt Sherwin. He is
20:29
Speaker 2: co founder and chief investment officer of Merik Capital, specializing
20:34
Speaker 2: in a variety of alternative credit and related private products. Previously,
20:40
Speaker 2: he spent sixteen years at JP Morgan Chase, where he
20:43
Speaker 2: had a number of very important titles. Before that, City Group,
20:48
Speaker 2: are we in all that unique a period of time.
20:52
Speaker 2: Is the opportunity set that much greater than what we
20:55
Speaker 2: typically see in the normal You know, this is a
20:58
Speaker 2: little more geopolitically volatile administration than than even the previous
21:03
Speaker 2: Trump administration. Is that a driver or is it the
21:07
Speaker 2: deregulation and misapprehension of what these rule changes mean?
21:12
Speaker 3: I think it's a combination of what's going on. So
21:14
Speaker 3: we have we just kind of use some little catchphrases
21:17
Speaker 3: among the team that help us sort of like, you know,
21:19
Speaker 3: gravitate around concepts or communicate quickly. We say, this is
21:24
Speaker 3: an administration that's in the business of being in business,
21:27
Speaker 3: and that's just a there's no opinion or judgment one
21:31
Speaker 3: way or the other. It's just it's just a statement
21:35
Speaker 3: what this environment is. Also, we also came up with
21:39
Speaker 3: something that we thought was just made us chuckle one like,
21:41
Speaker 3: it's important to have a little bit of sense of humor.
21:43
Speaker 3: We found our investors actually do read the materials very
21:46
Speaker 3: closely and they tend to have a sense of humor,
21:48
Speaker 3: which is good. But we created this thing we called
21:50
Speaker 3: the one big Beautiful chart, uh huh, and we just said,
21:53
Speaker 3: you know what they really need, They need rates to
21:57
Speaker 3: get down, and they needed to come down a lot
21:59
Speaker 3: more them what the market and the curve has already
22:02
Speaker 3: priced in because of how much debt the country has,
22:06
Speaker 3: what it costs, what they want to come So here's
22:08
Speaker 3: what they need to accomplish, and they're going to do
22:11
Speaker 3: everything they can to it. So, you know, we construct portfoliot,
22:14
Speaker 3: we have an investment thesis, We have a narrative. Everything
22:17
Speaker 3: we put in the book has to fit that narrative,
22:20
Speaker 3: has to contribute to what we're trying to achieve, has
22:22
Speaker 3: to be the best version of that, or has to
22:24
Speaker 3: protect us from what could go wrong. So getting back
22:27
Speaker 3: to your question a little bit, we think it's a
22:29
Speaker 3: very business forward environment, business forward administration. We think that
22:35
Speaker 3: it is one that needs rates to come down. We
22:39
Speaker 3: are going to have a new FED chair in the
22:41
Speaker 3: middle of June, and he'll say all sorts of things
22:46
Speaker 3: in the confirmation hearing, but really it will be a
22:49
Speaker 3: catalyst potentially for change in the middle of the year.
22:54
Speaker 3: And then we have a bias within markets to strip
22:57
Speaker 3: back some of the layers of of regulation and away
23:02
Speaker 3: from Whether you support that or not, I can tell
23:04
Speaker 3: you because I've been on the other side of it.
23:07
Speaker 3: The layers of process and bureaucracy and spending your time
23:12
Speaker 3: back solving instead of what could we do better. When
23:15
Speaker 3: you change what your goal is and how you're pointed,
23:19
Speaker 3: you're going to get different results. We think that combination
23:22
Speaker 3: is spinning flywheels in the market now that in our opinion,
23:27
Speaker 3: people are just they're underestimating the power of some of
23:30
Speaker 3: these flywheels.
23:32
Speaker 2: Really really interesting. Last question before we talk a little
23:36
Speaker 2: bit about Marek. In the old days, and I was
23:40
Speaker 2: never a big believer in this, but everybody else was,
23:44
Speaker 2: there was some constraints on deficits and ongoing government debt
23:49
Speaker 2: because the bond vigilantes would punish you. The bond vigilantes
23:54
Speaker 2: seem to have disappeared, in part replaced by the stock vigilantes,
23:59
Speaker 2: who any policy they don't like they just sell off
24:02
Speaker 2: until they have their hissy fit, until they get their way,
24:05
Speaker 2: and then okay, thank you very much, and we're off
24:08
Speaker 2: to the races again. What do you think of the
24:12
Speaker 2: eighties nineties era bon vigilantes? Is that just ancient history.
24:17
Speaker 2: There's no discipline on deficits spending anymore, or and by
24:20
Speaker 2: the way, I think deficits are not all that relevant
24:23
Speaker 2: look at Japan, look at the US history. We've been
24:26
Speaker 2: warned about deficits and they haven't caused much of a
24:29
Speaker 2: problem most of this history.
24:31
Speaker 3: Yeah, I mean, look, I love the term, and I
24:33
Speaker 3: think we've seen some of those episodes. Last year we
24:37
Speaker 3: saw around the whatever we call Liberation Day in April,
24:42
Speaker 3: like there were a couple of days where treasuries and
24:45
Speaker 3: mortgages said like enough, Okay, that's it, and we're either
24:51
Speaker 3: going to have one of those days where they are
24:54
Speaker 3: giving stuff away or you got to pull back. And
24:58
Speaker 3: I think what we saw was the administration pull back.
25:00
Speaker 3: So I think in some level it's still there. But
25:03
Speaker 3: part of what we do ATMERIC and what influences our
25:06
Speaker 3: thought process is big. Parts of this have been really
25:09
Speaker 3: broken down. The markets are so big now that it's
25:12
Speaker 3: been broken into specific functions. Like people have odd thing
25:15
Speaker 3: to do and they do that in a narrow mandate.
25:18
Speaker 3: We have a more flexible mandate to us. The products,
25:22
Speaker 3: they're widgets, they're tools in the toolbox for us to
25:25
Speaker 3: achieve our goals and our investment thesis and the portfolio
25:29
Speaker 3: risk and construction and diversification that we'd like to have.
25:33
Speaker 3: But the markets are hyper specialized in very, very large markets,
25:36
Speaker 3: so you get some of those episodes where it's like, oh,
25:39
Speaker 3: crowded trade, we got to get out. I think the
25:42
Speaker 3: question of does the administration react to the markets? Does
25:47
Speaker 3: the markets react to the administration. It's something that we've
25:50
Speaker 3: actually focused on quite a bit. We actually, you know,
25:57
Speaker 3: we wrote another pie in June of twenty twenty five
26:02
Speaker 3: that we call the Warshfed and it was just about
26:04
Speaker 3: what could happen, and we sort of went through to
26:07
Speaker 3: your point, like the concept of risk free rate and
26:11
Speaker 3: credit spread are completely intertwined and commingled now and they
26:14
Speaker 3: don't exist separately. So I think that's some of the
26:16
Speaker 3: concepts you're getting at. Is this a problem for credit?
26:22
Speaker 3: Is it a problem for rates? Are those the same thing?
26:24
Speaker 2: Now?
26:26
Speaker 3: One of the most interesting things, and I would just
26:30
Speaker 3: say before we get back to your question, is what
26:33
Speaker 3: was really interesting observation to us was during the last
26:36
Speaker 3: government shut down, whatever mini version of that we're going
26:39
Speaker 3: through right now, it was almost in the data was
26:42
Speaker 3: not forthcoming, and then VOLE went down, So it was
26:46
Speaker 3: this sort of like a little bit like if we
26:49
Speaker 3: don't know, maybe nothing's happening. But what it also was
26:52
Speaker 3: was a little bit to what you were saying is
26:56
Speaker 3: when things were a little less hyper focused, they actually
27:00
Speaker 3: we're a little less jumpy around small moves, And that
27:04
Speaker 3: was a big takeaway, big takeaway for us. It's a
27:08
Speaker 3: big thing you're going to hear from Kevin Walsh if
27:11
Speaker 3: he ends up in the chair seat, You're gonna hear
27:16
Speaker 3: a long narrative from him for his time in that
27:19
Speaker 3: seat of we need to step back from the day
27:22
Speaker 3: to day and the minute by minute information and think
27:25
Speaker 3: about the big better picture and the trend and where
27:27
Speaker 3: we're headed and be a little more forward looking. I
27:31
Speaker 3: think that's the kind of guidance that you will get
27:34
Speaker 3: from that chair.
27:35
Speaker 2: Really interesting. So let's just start out with why you
27:39
Speaker 2: left the comfort of a big shop to have the
27:43
Speaker 2: headache of your own firm. What's the elevator pitch? What
27:47
Speaker 2: problem does Mara Capital solve that couldn't be solved at
27:51
Speaker 2: a large Wall Street bank.
27:54
Speaker 3: Look, I think quite simply, there are some things that
27:57
Speaker 3: banks can do and some things that banks can't do,
28:00
Speaker 3: some things that they can do and that they don't
28:02
Speaker 3: want to do. In my career, I've always been involved
28:06
Speaker 3: in these types of markets, being rates mortgages, securitized products,
28:11
Speaker 3: corporate credit, the equities related to that around it, these
28:14
Speaker 3: types of specialty finance, operating companies, and always felt that
28:19
Speaker 3: you have when you can apply the various lenses to
28:24
Speaker 3: these products, being the trader lens, the structurer lens, the
28:28
Speaker 3: operator lens, you understand it better and you get the
28:31
Speaker 3: gearing and the pieces. And when you learn about the
28:35
Speaker 3: financial system that it sits within, then you actually can
28:39
Speaker 3: understand but take advantage of the risk and return in
28:44
Speaker 3: a more elevated and efficient way.
28:47
Speaker 2: I want to address that. Is it that the big firms,
28:50
Speaker 2: the bigger banks were risk averse and didn't want to
28:54
Speaker 2: take advantage of it, whether they were prohibited on a
28:57
Speaker 2: regulatory basis or when they're just doing their mac grow
29:00
Speaker 2: risk assessment. Hey, we'll go this far, but no further.
29:04
Speaker 3: I think it's even simpler than that. We look at
29:08
Speaker 3: the worlds through our lens. We look at the world
29:12
Speaker 3: through the Merrick lens of money, capital, credit, liquidity, and regulation,
29:17
Speaker 3: which drives economies, markets and prices. That helps us understand
29:22
Speaker 3: the drivers of the capital markets that we sit within,
29:26
Speaker 3: helps us understand monetary policy, housing finance, commercial real estate finance,
29:32
Speaker 3: understand both the gearing of it. Then you can look
29:34
Speaker 3: at something and you can say, Okay, I'm looking at
29:37
Speaker 3: City Group, I could buy it, I could sell it.
29:40
Speaker 3: I could understand what they're doing in the markets. They
29:42
Speaker 3: have a footprint in what that means for the markets.
29:44
Speaker 3: Do I want to buy that? So like where are
29:46
Speaker 3: the flywheels? What does it spin to next? So everything
29:49
Speaker 3: we were doing was very much about what do we
29:53
Speaker 3: want to do because we see a very large addressable
29:56
Speaker 3: opportunity where we have a unique perspective, a defined lens,
30:02
Speaker 3: and a way of applying that to these big liquid
30:05
Speaker 3: markets that we think very strongly we can take advantage
30:08
Speaker 3: of in a way that people simply haven't had the
30:11
Speaker 3: opportunity to learn about and to understand and apply to
30:15
Speaker 3: these products with the type of flexible mandate that we have,
30:18
Speaker 3: which boiled down means we look at the world a
30:21
Speaker 3: little differently. These are big addressable markets which have dislocations, volatility,
30:28
Speaker 3: and opportunity all the time, and we can use that
30:31
Speaker 3: combination to achieve what's a very very simple goal, improve
30:35
Speaker 3: the return a little bit while reducing the risk a
30:37
Speaker 3: little bit.
30:38
Speaker 2: That's all anyone can ask for better returns at lower risk.
30:42
Speaker 2: I'm kind of fascinated by the overall Merrick investment philosophy.
30:47
Speaker 2: We'll get to, but let's start with a little bit
30:50
Speaker 2: with structure. I think of you guys as an alt
30:54
Speaker 2: credit shop, but you also look a little bit like
30:57
Speaker 2: a multi strat shop, like a is it so kind
31:01
Speaker 2: of a hybrid like? Tell us about the structure.
31:05
Speaker 3: We just define what we do. Okay, we are who
31:07
Speaker 3: we are. We do it the way that we do.
31:13
Speaker 3: We run where right now we're running a hedge fund
31:17
Speaker 3: which trades these products as well, I SAIDs tools in
31:21
Speaker 3: the toolbox as as wige. We do it in one
31:23
Speaker 3: collaborative portfolio. So our set up, our structure. We've got
31:27
Speaker 3: an amazing team. We have specialists in rates, in mortgages,
31:32
Speaker 3: in non agency mortages, and a BS in credit in
31:35
Speaker 3: clos I am on the phone every day with traders
31:39
Speaker 3: and salespeople myself. We trade it as one bookoo.
31:43
Speaker 2: Well, not really a multi strat within a single expression.
31:50
Speaker 3: It is what we think is the best expression of
31:53
Speaker 3: the trade.
31:54
Speaker 2: Well, I shouldn't call it multi strat. It's really multi asset.
31:57
Speaker 2: It's a variety of different credit assets all under one umbrella.
32:01
Speaker 3: Within our lane. Okay, sticking to our knitting what we believe,
32:06
Speaker 3: we know very well. What we know, we have a
32:09
Speaker 3: differentiated insight into and extracting from that. Okay. The team
32:16
Speaker 3: is phenomenal. They have a ton of byside and cell
32:20
Speaker 3: side experience. They work very well together. It's very exciting
32:24
Speaker 3: to be I mean, and additionally doing this together, like
32:29
Speaker 3: Derek and I doing this together, putting our name on
32:32
Speaker 3: the door, like Marek is Matt and Derek, because we
32:36
Speaker 3: spent way too much time trying to think of what's
32:39
Speaker 3: a clever name that means means you know, alpha extraction
32:45
Speaker 3: in Sanskrit or some something you know. And Derek's wife
32:49
Speaker 3: one day was like, enough, it's Marek, Matt and Derek.
32:53
Speaker 3: Now go do some real work. And I think she
32:55
Speaker 3: said in a little bit more of a spicy way,
32:58
Speaker 3: but we were like, yeah, that could work, all right,
33:00
Speaker 3: let's do that.
33:01
Speaker 2: I think just a little footnote, if you've ever incorporated
33:05
Speaker 2: an LLC or any other entity in New York State,
33:09
Speaker 2: every Greek and Roman god, every Babylonian god, every cerebus
33:14
Speaker 2: named the creature from mythology, it's either a fund or
33:18
Speaker 2: an LLC. They're all taken it's astonishing.
33:21
Speaker 3: But the real point I wanted to make also that
33:24
Speaker 3: I don't want to lose, is this is putting our
33:27
Speaker 3: name on the door. Okay, it's our name, it's our reputation,
33:30
Speaker 3: because and that really cemented it for us. That was
33:33
Speaker 3: something we really wanted. I took some time off and
33:36
Speaker 3: which was fantastic, and I met some of the most
33:38
Speaker 3: amazing and interesting people in the world. When you're unaffiliated,
33:42
Speaker 3: people speak to you in a different way because they
33:44
Speaker 3: had no one to talk to. Okay, I sat down
33:47
Speaker 3: with the CEO of one of the world's largest pension
33:49
Speaker 3: fund sovereign wealth funds, and we had and I never
33:53
Speaker 3: met the person before. We had our long conversation because
33:58
Speaker 3: he just needed to talk to someone. And I learned
34:00
Speaker 3: a lot in that. I met some of the most
34:02
Speaker 3: interesting people in venture cap in all it's in private equity,
34:06
Speaker 3: et cetera. And it was just more way of learning
34:08
Speaker 3: parts of the system. But it got to the point
34:11
Speaker 3: where after my you know, academic wander through the wilderness,
34:15
Speaker 3: I was like, okay, you know what this is. At
34:17
Speaker 3: the time, we had three teenagers living at home and
34:19
Speaker 3: it was an amazing time. I used to always say,
34:20
Speaker 3: you should be able to retire in your forties and
34:22
Speaker 3: go back to work in your fifties, Like that's the
34:24
Speaker 3: way business should work. Obviously, that's a luxury that very
34:27
Speaker 3: few have. But I was getting to the point where
34:32
Speaker 3: I was like, Okay, I feel great. I want to
34:34
Speaker 3: do this. I'm miss markets. I love this. I want
34:36
Speaker 3: to get back to it, and I want to do
34:38
Speaker 3: it in the way that I want to do it.
34:40
Speaker 2: How long gap that I took, like about a year off.
34:43
Speaker 3: You know, it's you know, it's a riot. So in
34:46
Speaker 3: our deck, we put a little timeline of my experience
34:50
Speaker 3: in Derek's experience, and just to help people understand who
34:52
Speaker 3: hadn't met us, who we are. And at the very end,
34:55
Speaker 3: I put you know, this is my background, simple. I
34:58
Speaker 3: was here for ten years. I was there for sixteen years.
35:00
Speaker 3: And then we put like a lot one year nugget
35:03
Speaker 3: on the end of the timeline that just said chilling
35:06
Speaker 3: no G no G just chi L I N R,
35:10
Speaker 3: I don't remember.
35:11
Speaker 2: Just very on Wall Street sort of.
35:14
Speaker 3: Well, it was like our nine hundredth version of the
35:17
Speaker 3: deck and we were just getting a little punching like
35:19
Speaker 3: it made us laugh. Okay, you gotta have a sense
35:22
Speaker 3: of humor. It made us laugh. So we're like, this
35:24
Speaker 3: is going in. Every investor brings it up. They bring
35:28
Speaker 3: it up and they love it and you know it.
35:30
Speaker 3: To us, it's like, wow, you were reading every part
35:33
Speaker 3: of the deck. And also it's nice to know you
35:36
Speaker 3: have a sense of humor. But getting back, getting back
35:38
Speaker 3: to it, it's like.
35:39
Speaker 2: People, this is always shocking. People read the foot Oh.
35:43
Speaker 3: Yes, that's been a big learning for us. They read it.
35:46
Speaker 3: So when we were doing all this, you know, my
35:49
Speaker 3: wife was like, yeah, why would you want to do
35:52
Speaker 3: something for anybody else? And I thought to myself, exactly
35:57
Speaker 3: what are we gonna work hard round? What are we
35:59
Speaker 3: going to make sure succeeds the thing that we put
36:02
Speaker 3: our name on the door, or reputation that we believe
36:06
Speaker 3: other people don't get it that we believe is the
36:10
Speaker 3: right way to approach these markets that we believe can
36:13
Speaker 3: extract from a setup which is one of the best
36:17
Speaker 3: that we've ever seen. So if you tick all those boxes,
36:22
Speaker 3: why would you do it for anybody else? Huh?
36:25
Speaker 2: Really really intriguing. So it's twenty twenty six, I'm legally
36:29
Speaker 2: obligated to ask how do you use artificial intelligence in research,
36:33
Speaker 2: portfolio construction or operations at Merrick Capital.
36:37
Speaker 3: Sure, I would sort of make two points. I'm an
36:40
Speaker 3: AI optimist. That's not one of my two points, so
36:42
Speaker 3: that doesn't count. We use it every day. We build
36:46
Speaker 3: stuff more quickly, we build our own tools, and we
36:48
Speaker 3: build the more quickly than we ever could before. You know,
36:51
Speaker 3: the guys on the team, they're building stuff at their
36:53
Speaker 3: desk in a week that would have taken a year
36:55
Speaker 3: to do somewhere else. Literally, And I know because I've
36:58
Speaker 3: been in that, and once you built it, it would have
37:01
Speaker 3: taken like six months to get approval to release it
37:03
Speaker 3: into your et cetera. This is like light speed versus
37:07
Speaker 3: what we used to do. Now changing a little bit
37:12
Speaker 3: of how you frame that question. AI is a really
37:15
Speaker 3: really interesting thing in financial markets as well. Okay, so
37:21
Speaker 3: I don't think we're there yet, but we're going to
37:23
Speaker 3: get to a place where people are using it for
37:24
Speaker 3: risk management, they're using it for compliance, they're using it
37:27
Speaker 3: for KYC. Put all that aside. The most interesting to
37:30
Speaker 3: me right now is we look at the AI cap
37:33
Speaker 3: x boom and we say, here's a product that is
37:37
Speaker 3: commercial real estate with securitization technology around it. You're talking
37:41
Speaker 3: about where is it? Is it built? If not? How
37:44
Speaker 3: long is it going to take to build it? Who
37:46
Speaker 3: are the tenants, how long are the lease is, what
37:49
Speaker 3: are they paying? What's it worth when it's all done?
37:52
Speaker 3: Is there residual risk like you have in an auto lease,
37:56
Speaker 3: Only some of it comes to the securitized market because
38:00
Speaker 3: it's just not that that market is not big enough
38:02
Speaker 3: for it, So it comes to the corporate bond market.
38:04
Speaker 3: So that to us is like, that's the type of
38:07
Speaker 3: opportunity that piques our interest, where we say, this is
38:13
Speaker 3: something that looks like ABC and its being wrapped up
38:18
Speaker 3: and put into a different market. That is asking one, two, three,
38:22
Speaker 3: And those are good questions, but it's really like, put
38:26
Speaker 3: it all together, look at all the factors. What are
38:29
Speaker 3: the additional Are you getting more structure, are you getting less?
38:32
Speaker 3: Are you charging for the risk? Are you paying a
38:34
Speaker 3: way for it? So the AI cap X Boom to
38:37
Speaker 3: us is actually like a source of very cheap risk
38:41
Speaker 3: for us to look at. And each one has a
38:42
Speaker 3: little bit of different flavor and we're very opinionative about
38:44
Speaker 3: which ones we like.
38:46
Speaker 2: Huh. It sounds it sounds really fascinating. It also sounds
38:49
Speaker 2: like anytime there's a novel area, the opportunity for mispricing
38:55
Speaker 2: seems to really there's that.
38:57
Speaker 3: There's that we look get some of those first time issuers.
39:01
Speaker 3: We have like we have some things in the book.
39:04
Speaker 3: We have something called the north Star Playbook, which is
39:08
Speaker 3: what are companies and bonds that have clear missions and
39:10
Speaker 3: objectives that they can execute on, that are aligned with
39:13
Speaker 3: us with the instrument that we have, or misaligned or
39:17
Speaker 3: that they're not able to execute. But some of it
39:21
Speaker 3: it's actually not just about the novel structures. Let's look
39:24
Speaker 3: at agency mortgage backed securities. Those have been around for
39:27
Speaker 3: a long time. Okay, A couple of weeks ago, tweet
39:31
Speaker 3: from the pre or whatever we call a post on
39:33
Speaker 3: truth Social four twenty six pm, I've instructed my representatives
39:37
Speaker 3: to buy two hundred billion of agency MBS boom bomb
39:43
Speaker 3: in the agency mortgage back market. This is a there
39:45
Speaker 3: are was it twelve billion, twelve trillion of these things outstanding?
39:50
Speaker 3: And the agency mortgage market is nine trillion, hundreds of
39:53
Speaker 3: billions of a trade every day. And that was a
39:56
Speaker 3: after market post tweet. And what are you gotta do
40:01
Speaker 3: with the vaxity event?
40:02
Speaker 2: So then are you out buying into that that rise
40:06
Speaker 2: to take advantage. Are you are you price taker or
40:09
Speaker 2: a price maker? What are you doing when that that's happening?
40:11
Speaker 3: It's both. We look instantly like what does this mean?
40:14
Speaker 3: What was our expectation?
40:15
Speaker 2: Now?
40:15
Speaker 3: In that instance, we expected the GSS who will be
40:19
Speaker 3: the ones who actually buy it? We expected the GSS
40:21
Speaker 3: to be buyer. I think our view was a little
40:24
Speaker 3: bit at the high side or out of consensus. Even
40:26
Speaker 3: we thought this is going to be a support mechanism
40:29
Speaker 3: for this market over the course of the year. Fan
40:30
Speaker 3: and Freddie are going to buy a lot of this.
40:32
Speaker 2: Stuff, assuming they haven't already started to.
40:34
Speaker 3: They had been, and that's a great point. They had been,
40:37
Speaker 3: but buying two hundred billion with like an after market tweet,
40:40
Speaker 3: and nobody knew, like, is it going to be two
40:42
Speaker 3: hundred and then another two hundred? Are you going to
40:43
Speaker 3: start buying? Are going to buy forty tomorrow? How's this
40:46
Speaker 3: all going to work? This exceeded even our expectations, and
40:50
Speaker 3: you saw right away. I think we were positioned for
40:54
Speaker 3: that type of event. We were positioned to take advantage
40:58
Speaker 3: of some of the policy risk as opposed to get
41:00
Speaker 3: hit by some of the policy risk. You could see
41:03
Speaker 3: that there was a massive short covering rally right after that,
41:08
Speaker 3: and you could see that that wasn't necessarily people's expectations
41:11
Speaker 3: and how they were how they were set up for I.
41:15
Speaker 2: Have a mortgage related question for this, but I'm going
41:17
Speaker 2: to save it to the next segment coming up. We
41:19
Speaker 2: continue our conversation with Matt Trewin, co founder and chief
41:23
Speaker 2: investment officer of Merrick Capital, discussing credit and risk in
41:29
Speaker 2: today's markets. I'm Barry Ritolts. You're listening to Masters in
41:32
Speaker 2: Business on Bloomberg Radio. I'm Barry Dults. You're listening to
41:49
Speaker 2: Masters in Business on Bloomberg Radio. My extra special guest
41:53
Speaker 2: this week is Matt Trewin, co founder and chief investment
41:56
Speaker 2: officer of Merrik Capital. Previously, he spent twenty five or
42:00
Speaker 2: so years running credit and various types of risks at JP,
42:05
Speaker 2: Morgan Chase and City Group. So we were talking earlier
42:08
Speaker 2: about the Trump tweet directing the GCS to buy two
42:13
Speaker 2: hundred billion dollars worth of agency paper. You would have
42:16
Speaker 2: thought that should have sent yields, plumbing and mortgage rates down,
42:21
Speaker 2: which would stimulate the housing market. I assume part of
42:25
Speaker 2: the motivation for that tweet and for that purchase. What
42:29
Speaker 2: what's going on in that market? And why does it
42:31
Speaker 2: seem so difficult to drive rates lower?
42:36
Speaker 3: Right, that's a great question. And as silly as it sounds,
42:39
Speaker 3: like two hundred billion, it's just.
42:41
Speaker 2: Not enough pocket cash, right, walking around money.
42:45
Speaker 3: That's one way.
42:46
Speaker 2: I mean in a twelve trillion dollars market for twelve trillion,
42:49
Speaker 2: it's not even one.
42:50
Speaker 3: Yeah, sure if you are if you've got thirty five
42:52
Speaker 3: trillion in treasuries outstanding, and yeah, yeah, it's a big
42:57
Speaker 3: number and it moves the needle, but what they really
43:01
Speaker 3: want to move it and keep it there? Like that's
43:04
Speaker 3: a little bit of a hard part because don't forget
43:07
Speaker 3: that the Fed owns two point two trillion, so they're
43:10
Speaker 3: gonna buy two hundred billion. Didn't give a lot of
43:14
Speaker 3: information and that sort of helped them in that moment.
43:18
Speaker 3: The lack of information after probably led some of it
43:21
Speaker 3: to kind of like bleed out and unwind a bit.
43:23
Speaker 3: But the Fed owns two point two trillion and those
43:26
Speaker 3: are paying off and that's approximately one hundred eighty billion
43:30
Speaker 3: a year. So then you start to think about, like, well,
43:33
Speaker 3: if the rate moves and mortgage prices go up. Are
43:37
Speaker 3: some of the money managers going to sell one hundred
43:40
Speaker 3: billion over time and to kind of neutralize it? So
43:43
Speaker 3: I think it's helpful, it's indicative. Here's the real takeaway
43:48
Speaker 3: for us. Okay, So at that moment, it's how do
43:51
Speaker 3: we trade this, what's the price, what's the next step?
43:53
Speaker 3: But then we're really thinking from there like what does
43:55
Speaker 3: this mean, what's going to happen next? And of coming
44:01
Speaker 3: full circle. What it really does is show you how
44:03
Speaker 3: hard they're going to try to drive the mortgage rate down,
44:08
Speaker 3: to drive rates down overall, to sign up for an
44:12
Speaker 3: agenda and a plan to get rates down. Okay, So
44:17
Speaker 3: some of it is what do we do in that
44:18
Speaker 3: specific market, and some of it is how is it
44:20
Speaker 3: informing our view of the bigger picture.
44:23
Speaker 2: So you guys have two I don't want to say conflicting,
44:28
Speaker 2: but somewhat different risk factors you're juggling with. Obviously, when
44:34
Speaker 2: you buy paper, you're thinking long term and we want
44:37
Speaker 2: to watch this play out to our broader thesis. But
44:41
Speaker 2: at the same time you're actively trading on the short term.
44:45
Speaker 2: How much do these compliment each other or do you
44:48
Speaker 2: ever find yourself long in one duration of the portfolio
44:52
Speaker 2: and short in another. How do you balance this out?
44:55
Speaker 3: Yeah, I mean we have longs and shorts across the book,
44:57
Speaker 3: within mortgages, within credit, we there were you know, long
45:01
Speaker 3: what we like and short what we don't. Keep it
45:03
Speaker 3: super simple or long what helps contribute to our thesis
45:09
Speaker 3: or protect and vice versa, and you know protect the
45:12
Speaker 3: Knvecci profile that we're looking to achieve. We are, we
45:16
Speaker 3: trade every day, We are active in these markets. It's
45:20
Speaker 3: part of more of a sort of a medium term
45:24
Speaker 3: thought process how they're going to play out, but every
45:26
Speaker 3: day is iterating on that. Is this still what we think?
45:30
Speaker 3: Are we positioned with the best version of it? Do
45:33
Speaker 3: we have the bonds that are going to contribute to
45:36
Speaker 3: what we are trying to achieve? Like right now, we're
45:39
Speaker 3: very focused on the flywheels that exist within financing markets.
45:43
Speaker 3: And if you think about what does that mean? Okay,
45:46
Speaker 3: so rates come lower, we talk rates go lower. We
45:49
Speaker 3: talked about that a little bit. But credit spreads are
45:51
Speaker 3: also really tightening. And when rates are lower and credit
45:55
Speaker 3: spreads are tight tighter, your cost of borrowing has gone down.
46:00
Speaker 3: You can refinance all sorts of assets. It means some
46:02
Speaker 3: assets are even at that point in time worth more
46:06
Speaker 3: valued highly. Now that it's worth more, you've got a
46:09
Speaker 3: lower LTV loan that you could take out an even
46:12
Speaker 3: tighter credit spread on And how do these spin and
46:15
Speaker 3: what is this? So this is very much what we're
46:17
Speaker 3: thinking about now. I think the market completely underestimates the
46:22
Speaker 3: power of those flywheels and what it can be achieved.
46:25
Speaker 3: So that is one of we look at our portfolio,
46:29
Speaker 3: say we want to have about twenty trades in it,
46:31
Speaker 3: and a trade is not one line. A trade could
46:33
Speaker 3: be thirty line, I guess, but the flywheel is a trade.
46:37
Speaker 3: It's a little bit of a maybe even a bigger
46:39
Speaker 3: higher order one. But we look at what is happening
46:44
Speaker 3: at that moment. Is there something to take advantage of?
46:48
Speaker 3: But also what are the ripple effects of what's happening
46:52
Speaker 3: in that moment, and what does the market need to do?
46:55
Speaker 3: What is it going to do? Does it understand this?
46:58
Speaker 3: And then we unpack it and say where the opportunity.
47:01
Speaker 3: So coming back to what we talked about, we believe
47:04
Speaker 3: when you look at the world through this lens, we
47:08
Speaker 3: look at markets through the Marrick lens, that the lack
47:13
Speaker 3: of connections made through these markets and the lack of
47:16
Speaker 3: extracting from some pretty obvious pockets are an opportunity and
47:22
Speaker 3: like we talked about, to improve your return and reduce
47:26
Speaker 3: your risk. And it's a process. So it's just as
47:29
Speaker 3: much a process and a machine through which you're extracting
47:34
Speaker 3: alpha from the market. We have our views, we hope
47:37
Speaker 3: to be right. It's also it's a process through which
47:42
Speaker 3: you work through these markets that you extract all the time.
47:45
Speaker 3: And the mandate is pretty clear, Like as I think
47:48
Speaker 3: of it, the mandate is very clear. You need to
47:50
Speaker 3: make money when markets go up, and you need to
47:52
Speaker 3: make money when markets go down every day, every month,
47:57
Speaker 3: every quarter, every year, and you probably won't. That's the
48:00
Speaker 3: mandate and that's what we're going for it, And it's quite
48:02
Speaker 3: simple when you frame it out that way.
48:04
Speaker 2: You mentioned in twenty nineteen there was a sea change
48:06
Speaker 2: in how you perceived what was happening in the market
48:10
Speaker 2: and how different that had become. How does that affect
48:13
Speaker 2: how you look at and define risk. Risk definitions have
48:18
Speaker 2: obviously changed over your career, but twenty nineteen was such
48:22
Speaker 2: a sea change. What's different about managing risk today?
48:27
Speaker 3: Yeah? I think I believe managing risk at scale is
48:30
Speaker 3: a skill. Okay, you have your numbers, and you want
48:36
Speaker 3: to know what those are, and those are indicators, and
48:38
Speaker 3: those are starting places. Var is a number and a
48:41
Speaker 3: starting place and an indicator. Stress is unnumbered DV one
48:46
Speaker 3: Cso one these are we I like to look at
48:49
Speaker 3: the world in a stress based framework and we create
48:52
Speaker 3: a bunch of different stresses. Some are quite simple. Rates
48:56
Speaker 3: go uprates go down, credit crunch, a flight to quality.
49:00
Speaker 3: We had our little like you know, we're getting little
49:02
Speaker 3: punched from. We had one we call QI forever and ever.
49:06
Speaker 3: And looking at these it's really about like it's a
49:10
Speaker 3: starting place for a conversation, okay, because you do need
49:13
Speaker 3: to know where it's coming from, and what's the attribution,
49:17
Speaker 3: what's the return attribution, where's it where you're hoping it
49:20
Speaker 3: comes from, and what's the risk attribution? And very importantly
49:23
Speaker 3: what could go wrong? Understanding that what you're trying to achieve,
49:28
Speaker 3: but knowing where the exits are. Like, I think it's
49:30
Speaker 3: really like a philosophy to risk and to managing risk
49:35
Speaker 3: to make sure you're pointed to achieve your goals while
49:40
Speaker 3: managing your risk properly and knowing what you would do
49:44
Speaker 3: if things changed, Right, you have a plan and then
49:47
Speaker 3: things change.
49:49
Speaker 2: Really really interesting when you're looking out at a variety
49:53
Speaker 2: of different opportunities, what do you think today presents the
49:58
Speaker 2: best risk opportunity? Looking at structured credit corporates relative value,
50:03
Speaker 2: what is really drawing your attention?
50:05
Speaker 3: Yeah, we really thought that one of the places to
50:08
Speaker 3: extract from the flywheel is in securitized markets. Actually, as
50:13
Speaker 3: an example, like we've been very focused on trophy quality
50:17
Speaker 3: office and gateway cities and this goes back a little ways.
50:20
Speaker 2: These are the super a resident commercial realship, right.
50:25
Speaker 3: So that all came to be from us pulling at
50:28
Speaker 3: the thread of how the financial system works. We talked
50:30
Speaker 3: a little bit about the new gips and what you
50:32
Speaker 3: had was everybody was going back to work, back to
50:34
Speaker 3: the office, but took longer than we kind of looking
50:36
Speaker 3: back on it, that took a long time. The part
50:39
Speaker 3: of the financial system that was changing were those new
50:42
Speaker 3: g sibs, Apollo, Ares, KKR, Blackstone, black Rock, and they
50:45
Speaker 3: were coming back to the office and they were growing,
50:47
Speaker 3: and they were finding that two things. One they needed
50:50
Speaker 3: nice offices to kind of you know, get everybody where
50:52
Speaker 3: they want them to be, but also they were growing
50:55
Speaker 3: and they outgrew what they had and then they went
50:57
Speaker 3: looking for more and what they found was there's actually
51:01
Speaker 3: not that much trophy real estate out there. And so,
51:05
Speaker 3: like our view on the evolving financial system, led us
51:08
Speaker 3: to have very strong conviction about a supplied demand imbalance
51:12
Speaker 3: in commercial real estate when applied correctly, and then we
51:15
Speaker 3: just looked for what's the best place, and it's tightened
51:18
Speaker 3: a lot. But actually we think it continues to and
51:22
Speaker 3: has been, because it's like the it's continued to be
51:26
Speaker 3: one to two steps behind the fundamental So what that
51:29
Speaker 3: really means the way we think to wrap it up
51:31
Speaker 3: in a nutshell, this is a triple B bond that
51:33
Speaker 3: we think is a double.
51:34
Speaker 2: A really brilliant because everybody's painting with a broad brush
51:39
Speaker 2: of hey, forget bs even a buildings are sixty percent
51:44
Speaker 2: occupied in terms.
51:45
Speaker 3: But they're not. They're one hundred percent occupied but in
51:47
Speaker 3: terms of.
51:48
Speaker 2: Staff returning to office, so it's fully leased. But the
51:52
Speaker 2: what is it castle key cars or running sixty percent
51:55
Speaker 2: of pre pandemic levels in a lot of cities. But
51:58
Speaker 2: the A plus the bigger, the JP Morgan's they want
52:02
Speaker 2: everybody back in the office, as does Goldman Sachs, as
52:05
Speaker 2: does a lot of these places. And they're roll in
52:07
Speaker 2: trophy properties.
52:09
Speaker 3: And it's not just New York, it's Miami, it's actually
52:12
Speaker 3: San France has come a long way. There's certain buildings
52:15
Speaker 3: there that we like. We actually, I would say a
52:17
Speaker 3: little bit out of consensus. We like DC certain not
52:20
Speaker 3: the government buildings, but nice offices. Like we said, this
52:24
Speaker 3: is an administration that's in the business of being in business,
52:27
Speaker 3: which means you got to go see them and make
52:29
Speaker 3: your case. You want to get some business done, which
52:31
Speaker 3: means you need lawyers with a nice conference room, that
52:34
Speaker 3: need a decent office, and et cetera, et cetera. I mean,
52:36
Speaker 3: like it sounds a little good, but you're.
52:37
Speaker 2: It's doing business.
52:39
Speaker 3: It's true. And so you can see there are certain
52:41
Speaker 3: companies that are buying buildings, knocking them down in DC
52:45
Speaker 3: and building brand new ones. And there are buildings that
52:48
Speaker 3: are being taken offline to convert to REZI. By the way,
52:51
Speaker 3: everything we wrapped up in what we said, the conversion
52:53
Speaker 3: from office REZI is actually spinning faster now in DC.
52:58
Speaker 3: Some buildings are being just outside d C. Some buildings
53:01
Speaker 3: are being converted to data centers, so actually like stocks
53:05
Speaker 3: being removed all the time. Anyways, it's just an example
53:08
Speaker 3: of how like we're pulling on threads and we're finding
53:12
Speaker 3: where we can best take advantage of it, and like
53:14
Speaker 3: what are the next couple steps and ultimately we're looking
53:17
Speaker 3: for what's something that's already gotten better except the price
53:21
Speaker 3: hasn't changed yet.
53:22
Speaker 2: Huh. That's really that's really interesting. You You've mentioned stress
53:27
Speaker 2: scenarios a couple of times. We know that correlations have
53:31
Speaker 2: a tendency to go to one and liquidly disappears.
53:35
Speaker 3: Well, I think I've seen that personally, right, LIQ disappears.
53:40
Speaker 3: I think I would just wrap that up. I make
53:42
Speaker 3: two comments that people I say, like one, you don't
53:45
Speaker 3: go out of business because your assets. You go out
53:47
Speaker 3: of business because your liabilities. And when you start looking
53:50
Speaker 3: at that side of the balance sheet first, then you
53:52
Speaker 3: understand things a little bit better. And then also you know,
53:55
Speaker 3: with with traders and all the people I work for,
53:58
Speaker 3: it's really great because some of the people I hired
53:59
Speaker 3: a long time ago, there am desent places now. It's
54:02
Speaker 3: actually take a lot of pride in the people I've
54:04
Speaker 3: worked with who have gone on and done fantastic things.
54:08
Speaker 3: I really really hate the phrase money good. Okay, I
54:11
Speaker 3: don't think anybody should be allowed to say it.
54:13
Speaker 2: Hmm.
54:14
Speaker 3: It is this like false crutch. I also, in many,
54:19
Speaker 3: many conversations, have said to people, I think you're right.
54:22
Speaker 3: In fact, you've convinced me. I believe you are right.
54:24
Speaker 3: I'm just saying, you know you're going to get fired
54:27
Speaker 3: long before we know the answer to this question. Okay,
54:29
Speaker 3: let's take everything we thought, everything we've known, and let's
54:31
Speaker 3: put it into the context of how do we apply
54:34
Speaker 3: this in markets? What's going to happen, what's everybody else doing,
54:37
Speaker 3: and how do we take advantage of that?
54:40
Speaker 2: Huh, really really fascinating. Last question before I get to
54:43
Speaker 2: my favorite questions, what do you think investors.
54:47
Speaker 3: Those were your favorite questions?
54:48
Speaker 2: Oh? No, you'll see the favorite question. All right, what
54:52
Speaker 2: do you think investors in the credit and all space
54:56
Speaker 2: are not talking about but perhaps should be. What topics
54:59
Speaker 2: as sets, geographies, data points are getting overlooked but really shouldn't.
55:05
Speaker 3: Yeah, so that's a great question. We touch on a
55:09
Speaker 3: little bit. They're underestimating the power of this flywheel. Like
55:12
Speaker 3: with the background I've had and we've talked about, and
55:15
Speaker 3: I've seen a lot of things blow up, Like we
55:17
Speaker 3: could come up with a lot of examples of things
55:19
Speaker 3: that could go wrong. I think they're underestimating the things
55:23
Speaker 3: that could go right, or what the power of financing
55:27
Speaker 3: and the mechanics around financing and the provision of liquidity
55:32
Speaker 3: and credit credit spreads when they're good and when they're tight,
55:34
Speaker 3: and when the machine is flowing, what that financial engineering
55:38
Speaker 3: can really do to both unrecover value and create value.
55:42
Speaker 3: I think they're underestimating. The other quick thing is in
55:46
Speaker 3: the middle of the year, if Kevin Warsh ends up
55:50
Speaker 3: sitting in that seat, and if we get a little
55:52
Speaker 3: bit of the setup that he's looking for, he's going
55:56
Speaker 3: to change everything. Right, So he believes we're going to
55:59
Speaker 3: have a big productivity dividend from AI and we're gonna
56:02
Speaker 3: have a big productivity dividend from deregulation, and then that
56:05
Speaker 3: would allow you to have lower rates and a smaller
56:09
Speaker 3: fed balance sheet at the same time. And if he
56:13
Speaker 3: gets a little bit of what he needs to craft
56:15
Speaker 3: that argument, we're gonna have a very different second half
56:20
Speaker 3: of twenty six than the first.
56:21
Speaker 2: Really really interesting. All right, let's jump to our favorite
56:24
Speaker 2: questions our speed round. We'll get you guys out of
56:27
Speaker 2: here at a reasonable time. Starting with who are your
56:30
Speaker 2: mentors who helped shape your career?
56:33
Speaker 3: Oh, I've worked for some pretty amazing people, and I
56:37
Speaker 3: tried to learn from every I just had the bosses
56:39
Speaker 3: that I've had. Are you know legends in this industry,
56:42
Speaker 3: whether it's Bruce Richards t and Purlow, Jimmy Dumar, mad Zimes,
56:49
Speaker 3: Daniel Pinto. I mean, these are people who defined these
56:53
Speaker 3: markets and they all had a huge impact on my career.
56:56
Speaker 2: Really interesting. Let's talk about books. What are you reading now?
57:00
Speaker 2: What are some of your favorites?
57:02
Speaker 3: Oh, you know, but like I am in front of
57:04
Speaker 3: a computer screen and reading so much, and I read
57:07
Speaker 3: so much analytics, research, et cetera. I get home, it's
57:09
Speaker 3: a little bit more like hang out with my wife
57:11
Speaker 3: and kids and a little TV.
57:14
Speaker 2: Well that's my next question. What are you listening to
57:17
Speaker 2: or streaming? Give us your favorite next, Netflix, Amazon, Prime, whatever.
57:22
Speaker 3: I will watch pretty much anything Tailor Sheridan. You know,
57:25
Speaker 3: like we just.
57:26
Speaker 2: Finished season two of Land Minute's so good.
57:28
Speaker 3: Like Landman, All the Yellowstones, everyone, nineteen eighteen twenty three,
57:33
Speaker 3: nineteen to all of those lion any of.
57:35
Speaker 2: Those Lioness was also great. This should be a new
57:38
Speaker 2: season of that coming out one of these days.
57:41
Speaker 3: Yeah, there is. I mean I think I've watched both
57:43
Speaker 3: seasons like one hundred times.
57:45
Speaker 2: Final two questions, what sort of advice would you give
57:48
Speaker 2: to a college grad interesting career in investing, credit trading,
57:53
Speaker 2: what have you?
57:54
Speaker 3: I just think it's not you know, it doesn't have
57:56
Speaker 3: to be a commitment for life. Just look at it
57:59
Speaker 3: as what's something I'm interested in being interested in. I
58:03
Speaker 3: think you can pick the kind of people you work with,
58:05
Speaker 3: and you want to be around good people who will
58:08
Speaker 3: teach you, who will support what you're doing, and just say,
58:10
Speaker 3: I'm going to give this a spin for three to
58:12
Speaker 3: five years, and if I like it, I love it,
58:15
Speaker 3: maybe I'll sign up for another five. But you know,
58:18
Speaker 3: you have an opportunity to try something out and see
58:21
Speaker 3: if it's for you.
58:22
Speaker 2: And our final question, what do you know about the
58:24
Speaker 2: world of trading, credit investing in alternative sources of liquidity
58:31
Speaker 2: and other products that would have been helpful twenty five
58:34
Speaker 2: or so years ago when you were just getting your
58:37
Speaker 2: legs onto you.
58:38
Speaker 3: I wish I knew a fraction of what we are
58:42
Speaker 3: applying at Marek any point before we did this. If
58:46
Speaker 3: I knew a drop of what we're doing when I
58:49
Speaker 3: sat in other seats, yeah, I'll put that all in
58:53
Speaker 3: the I wish I knew Bucky.
58:55
Speaker 2: Really, really, absolutely fascinating.
58:57
Speaker 3: Matt.
58:57
Speaker 2: Thank you for being so generous, Thanks for having with
58:59
Speaker 2: your time, and we have been speaking with Matt Sherwin.
59:02
Speaker 2: He's co founder and chief investment officer of Mare Capital.
59:06
Speaker 2: If you enjoy this conversation, well, be sure and check
59:09
Speaker 2: out any of the previous six hundred or so we've
59:13
Speaker 2: done over the past twelve years. You can find those
59:16
Speaker 2: at iTunes, Spotify, Bloomberg YouTube, wherever you get your favorite podcasts.
59:23
Speaker 2: I would be remiss if I didn't thank the correct
59:25
Speaker 2: team that helps us with these conversations together each week.
59:29
Speaker 2: Alexis Noriega is my video producer. Sean Russo is my researcher.
59:35
Speaker 2: Ana Luke is my podcast producer. I'm Barry Rutaults. You've
59:39
Speaker 2: been listening to Masters in Business on Bloomberg Radio.