C (2:14)

He's a Renaissance man.

A (2:15)

Ah. That was it. Renaissance man. That's the one.

D (2:17)

Wow.

A (2:18)

That.

C (2:18)

That is. That is the one. Time.

A (2:20)

So anyway, we got into a bunch of different stuff. I think the most interesting topic for advisors and one of the things that you and I have been harping on for a while now is just this idea of tax alpha and tax alpha coming to fixed income. And we got into that and much more on the show. So here's our talk, our live Animal spirits from Washington, D.C. with Alex Morris from FM Investments.

E (2:44)

Thanks for showing up. I know today is a day of general grumpiness, being tax day and all. So thanks for at least getting it done in a day or being willing to take the penalties for filing tomorrow.

C (2:53)

You're all patriots.

E (2:54)

Second time we've done this live. Today. We'll talk a little bit about inflation, a little bit about taxes, obviously, and some stuff we're doing around there and some general market stuff. But that's right, you guys are here to see them, not us. So let these guys introduce themselves.

C (3:07)

All right. Well, I'm not going to introduce myself, but it's great to see everybody you know. My name's Michael. How's everybody doing?

A (3:12)

Good.

C (3:13)

Good. Okay. Cheers to you, sir. So, Alex, it's been said by many that the bond market is a smart money.

A (3:23)

Right.

E (3:23)

I'll take that as a compliment.

C (3:24)

That's the thing people say, well, why come the bond market was pricing in rate hikes just a couple of weeks ago when really I think everybody knows that there was no rate hikes coming.

E (3:38)

It can't be right all the time. Answer for everybody, it can't be right all the time. But I mean, look, the bond market was, why was it doing that? It was pricing in rate hikes because it was afraid of inflation and inflation delivered. In that case, the bond market was right. We did get a big inflation print. We're going to see more of that in the future.

C (3:55)

Right.

E (3:55)

If you've gone and filled up your car recently, it ain't cheaper today and it's getting more expensive.

C (4:00)

I feel like you're moving the goalposts

E (4:01)

on there a little bit because that's why the bond markets, smart money, you got to just reframe the story to make it work. But I think they got a little ahead of itself. It was unlikely we were going to see massive rate hikes. Right. And they were like little baby ones built in there. But it's pretty clear we weren't going to see massive cuts which we were talking about three, four weeks beforehand, particularly with where are we going to get a new Fed chair? And. Well, that seems like that palace intrigue is far from Over.

C (4:26)

All right. Let better I be better hosts and and start from the top. We're here thanks to you guys who is FM Investments. For people in the audience in front of us and for people listening that might not be familiar with. With. With who you are.

E (4:39)

Sure. Investment Boutique managed about $20 billion today. It's weird that in today's day and age, $20 billion is boutique. When I started here, that was a lot of money. We look after everything from your traditional SMAs and the fixed income world to a handful of pretty cool ETFs. T bill being the large them one we've talked about a bunch of times. But also things in the credit, you know, IG space, high yield tax advantage space and inflation protection as well.

A (5:04)

When you started this, sometimes ETF is kind of like a movie or a song. You don't know what's going to hit. Does that surprise you that A T Bill ETF is your biggest fund?

E (5:11)

Yeah, it's more than a little surprising. You can never plan for success. You hope for it a great deal. If you had taken a bet on the desk, which of our first three funds, T bill, which is the 90 day, U2 which is the two year and U10 which is the 10 year, which was going to be the biggest. We all chose the 10 year because it's the 10 year. Of course TYS going to win in that sense and uten would do it. But T Bill took off because people really love yield and they love a simple story where it just reinforces itself. We could tell you what the dividend was going to be. You got exactly what you were promised. You came back for more.

C (5:42)

Well, it's better to be lucky than good. And you're both. But the timing of the launch was chef's kiss. So T Bill has almost 6 billion in assets.

E (5:50)

Almost 7. Almost 7. Who's counting?

C (5:52)

And you launched it when was it? 22.

E (5:55)

22. August 11th.

C (5:56)

Okay. And. And the money came in and stayed in and it keeps coming in.

E (6:01)

Keeps coming in. We had our best month, best inflows month, last month. Of. Of all times.

C (6:06)

Are you surprised? Because I am. Maybe I don't follow your company as closely as you do that. There has not been any copycats.

E (6:12)

The T Bill market was pretty saturated anyway. And so T Bill comes along and it was new and there was no real motive for BlackRock to create a copycat of it had a lot of other things that kind of got close to what it was but weren't exactly an audience. I think there was an audience for Something different that, you know, was done with some passion and done with some energy and, you know, was more precise than some of those tools.

C (6:32)

Did you see any drain over the last couple of weeks? Because I feel like, I mean, T bill literally is cash and people have to pay their taxes. Did you see that as like a piggy bank for some people?

E (6:40)

We do see a lot of money that comes in and out on a regular basis, which is design.

A (6:44)

Right.

E (6:44)

We want your money to come in at a good price and come out at a good price. That's our sort of commitment on. On both sides of the trade. Certainly March was a lot of inflow. I think there was a lot of concern about Iran that brought it in. Last couple of weeks we've seen folks paying their taxes, but it's a pretty small number relative to what we've seen historically.

A (7:00)

So we get a bunch of questions in our inbox from people about the markets and investing. And one of the ones the last two years, especially since the bond bear market in 2022, I think a lot of people woke up to I thought bonds were supposed to be easy. This is supposed to be the easy part of the portfolio. And stocks go down and bonds go down almost the same amount because bonds cause the stock market to go down. So I think a lot of people have woken up to the fact that like under different economic environments that we hadn't seen in 40 years, you might need different types of fixed income. And so I'm just curious how you think about the need for investors to diversify within this bond segment when in the past they didn't really think about it that much.

E (7:34)

Well, they certainly, a lot of us grew up with near zero interest rates.

A (7:38)

Right.

E (7:38)

In the investing world. So you didn't really think about it. Why would I buy bonds? I choosing my flavor of zero. They all seem kind of complicated and none of them seem to do what I want. And then, yeah, stock bond correlation increase. So sort of making it worse.

D (7:49)

Right.

E (7:49)

Why not getting the diversification effect. But I think most bond funds suffer from being often very expensive and actively managed, which is an interesting outcome, except when you want some very clear, pure exposure to one of those factors. You want that factor. But the bond world was never designed to do that for you. And indeed, most of the bond indices are really good at telling you something about the bond market. Here are some very narrow rating band sector other items, which is a cool data point. It's just not an investment thesis. And you know, having been a PM for a long time, it stinks to throw the dart and hit the bullseye and then have it fall out because something you didn't control for went wrong in benchmark series. And the other funds we've created, they're all really that same thing. How do we give you a really clean. This really clean experience so when you know what you want, you can get that and reliably see it in your portfolio. Most folks are disappointed with bonds not because the bonds didn't work, but because the person that was managing the bonds was doing something different than what they thought they were doing. And there's a lot of jargon that gets in the way between investor and bond manager that makes that really easy to happen.

A (8:55)

We've talked to a lot of bond managers over time and I think they look at their equity people and kind of thumb their nose because it's hard to beat the s and P500. But the bond managers think, well, the benchmarks we have are these tiny little hurdles. It's pretty easy. But most of the time it's just they're taking more risk. Right. They're taking some sort of credit risk or interest rate risk or. So I'm curious your thought. You mentioned active management. Like, I'm curious what you think about that. That idea of the benchmarking in bonds and maybe it's, it's, yes, you're beating them, but you're doing other stuff that you didn't know you were doing to get there.

E (9:26)

Yeah. I mean, certainly bond benchmarks could do with a good rethink, right. The sort of granddaddy of them all. LBAG to most of us, right. Have done this a long time. But the ag, right, you would otherwise see as AGG the easiest way to get it. It's so big, it's uninvestable.

C (9:40)

You just called it lbag.

E (9:41)

LBAG from layman. Yeah, it goes back that far. But the problem is in constructing that index, it does a lot. It's so big, it's uninvestable. We know this because Bloomberg has a version of it called the Investable ag, sort of implying we know the other one with its 40 some odd thousand holdings is not the kind of thing you'd actually achieve. By the way, the investable version has like 20,000 things, also largely uninvestable. So go figure. But most of the bonds, because there's a lot more bonds, right? So if you think about it just on a pure cusip basis, so 500 stocks in the S&P 500, Ford Motor Company has 1 participation there f it has 3500 other fixed income instruments associated with it. You go to the muni market, there's 6 million issuances out there, half of which will probably never trade. So the bond market size is big in issued size. It's also three times larger in actual value than the equity market. So it's hard to pick one item like the s and P500 and say that's the bond market target. We've done that on the ag, but it holds mortgages, it holds Treasuries, all sorts of stuff. So yes, you're taking different risks than the ag. You probably want those risks because you have other outcomes you're trying to achieve.

C (10:50)

The bond index is cap weighted, right? So the more bonds you issue, the bigger you're waiting. Now the other side is you can't just issue unlimited bonds. Like at some point the market will say, okay, well, higher rates because you're being irresponsible. One area of the market that's getting a lot of attention on the equity side is now bleeding into the bond side, which are the hyperscalers because they are issuing a lot of debt and they are a large portion of the investment grade index. And spreads are still extremely tight. I know Oracle had some issues with their credit default swaps coming out a little bit, but investors are still giving these, these hyperscalers the benefit of the doubt. And it's having a big impact on the construction of the index, whether you know it or not.

E (11:31)

Yeah, absolutely. And it'll continue to. The bond market is strange in that the more debt you take out, the more debt you can. It's like sort of like seeing your credit rating for the first time. Like, wait a second, if I take out more debt, my credit rating will go up, so I should take out more debt and off you go. It's like having more mortgages means that you'll, you'll get another mortgage in the future. There is a limit to it, but I think as long as the narrative is in favor for the hyperscalers, they're going to continue to be able to issue debt pretty cheaply. And the Fed is probably going to come to the rescue even more by driving down nominal rates, which will make it easier for them to get more money cheaper. And even if they have to borrow at 50 basis points more versus their long term earnings perspective, it's just a drop in the bucket.

C (12:11)

Speaking of that, so Ben and I are tourists here in D.C. and also in the bond market. We've said over and over that you would think that they're going to get involved with mortgages. Like isn't the easiest way to drive down mortgage rates because it wasn't just the 10 year that went up which is where, where mortgages are priced off of, but it was the spread as well. It was like the double whammy. So I'm sure there's a good reason why they can't just buy the bonds. Why didn't they, why aren't they?

E (12:43)

Well they could to some extent. Right. They've done it before. Fannie and Freddie have had various relationships of tightness with the government and the President has made very clear his belief that he can direct them to do whatever he wants. Which not quite true but there's some truth that if you put the right leadership in place, intervening though in the housing market like that has these is a very short term effect. People refinance, right. Like that one mortgage isn't going to be there forever. So if the government gets in the game of now just sponsoring debt to individuals directly, might as well just hand you money and you'll see some really interesting second order effects, many of which are not going to be great for the market. So I think most folks have decided to stay away from that. There are also plenty of private mortgage companies out there who will give you better rates than you might see in the conforming world. So it's a lot of action there. The other problem is when rates come down, everyone refinances. So no one wants to be the first guy in that space to then have to go and figure out something else to do with that money. Two years from now when someone who came in at seven and a half is now says a six and a half rate and that's worth it for them to refinance and reset the clock and they're going to keep doing that. So it's, it seems easy until the government tries. If the government wants to bring housing rates down, there are other ways they could try to affect that and I think you'll see that happen as we hit the midterm.

C (13:55)

Well what are some of those other ways?

E (13:57)

Well they can push rates down generally speaking. Right. Which will have some knock on effect. They can issue all sorts of tax credits that give you back end benefits for having, you know, your mortgage, right. The salt deduction came out and limited that they could undo that and say look for all of your mortgage interest we'll let you deduct it one to one, even give you a tax credit. So there's other ways they could incentivize that behavior without exposing their balance sheet.

C (14:20)

The last time that they cut rates it was weird because the tenure was rising and obviously there was a lot of other dynamics impacting the longer end of the curve, but it was not what you would expect.

E (14:28)

Yeah, I think it was more of a capitulation like we needed to do this. They waited a long time. There was a really weird inversion in the curve for a very long time.

A (14:36)

Right.

E (14:36)

Most folks who started in post Covid never really saw a long period of a normalized yield curve that we were used to for a long period of time. So we had to get this sort of weird shape back in, which meant the long end kind of needed to go up a little bit because it was also pretty low. Why was it low? People loved the 10 year so they just kept buying it sort of artificially keeping its yield low because it was so popular.

A (14:57)

Michael's hoping for a mudroom deduction.

E (15:00)

You could try.

A (15:01)

So one of the big trends following the great financial crisis and obviously building before was just a lot of people just decided to give up on active management. Not completely, but the index fund revolution, the numbers are pretty clear, right. I think Vanguard is $12 trillion. BlackRock is like 14. It's big numbers. Obviously the financial advisors play a big role there too in wealth management. Again, not completely giving up on active management, but there was a lot of it. Index funds or like the core position now. And it seems like the next evolution for asset management and wealth management. We're seeing this from clients all the time and prospects. They're coming to us and the new thinking for them is all right, fine, you can't give us alpha in the markets. We want tax alpha. Right. That and they're coming to us with questions. How? How do you make my after tax returns better? That's like I, I can and I feel like, you know, we can control that a lot more than we can control beating the market. I think that's the, that's the theory. So why don't you talk about that idea in the fixed income space?

E (15:55)

It's sort of strange that it's taken us a long time to think about post tax returns. Right. We've always invested in that world just and for a long while. Parametric appirio aia. A handful of these shops, primarily on the west coast, sprang up in the tech world where they had the ability to look at individual tax lots and now produce an after tax return. Just getting that math was actually kind of hard for a long time. Great sort of rise of those assets. And then last Decade or so, just quiet. Used to be tax Alpha was a thing about 10 years ago here in D.C. we ran a business called Fortigent that did this for family offices. We published a tax Alpha number for them and then folks just stopped talking about it. Well, it's back taxes are back. A lot of folks have capital wealth that they're going to try to defer income tax on or capital gains tax on. And now it's a time to really think about that. Also we have cost basis legislation happen quietly about eight years ago, which makes it way easier to do. Like if you were to go back to your Schwab account a decade ago, you didn't always have all the basis in there. And sometimes at the end of the year you were sending your account in the numbers and making it up. It was a lot harder to do. And you'd had like two months to call your accountant and your custodian up and have them change the basis of what it was. So it took a long time for all that to play in now. But now I think folks have realized, wow, there's a, there's a problem. I don't want to pay as much in tax as I'm going to. How can I defer income as long as possible? How can I convert income from capital, you know, income tax to capital gains? How can I defer short to long term capital gains? We came out with the compounder series and we'll continue to add to them through the accumulator series. How do you own something and not collect the dividend? It turns out dividends are kind of messy. Like they generated 1099, which is what folks don't want. So can we avoid that? Followed by. If you've ever looked at your reinvestment program from your broker dealer directly, they stink. I mean we were shocked issuing an etf, just how bad the execution has been bad, how it's lazy. Execution is off the marks that you would get. If you just put in a market order, it's because your broker dealer looks at it over their entire book and just launches an order. At the end of the day, the beginning of the day, whenever the system gets around to doing it. It's not someone sitting there like taking a lot of care and in feeding of that trade. Their goal is just get the trade done as soon as possible so you're back in the market. If you lose two pennies on the trade, you're back in the market. That was the goal, right? Turns out it's kind of sloppy. You look at that over the course of a year you could be out of the market two or three weeks. Right. And in the fixed income world, every day I'm earning my coupons is an important day. And if you look at an execution basis, you could be losing 50, 60 basis points on some of these higher yield funds, which it's kind of scary when you think about it.

C (18:35)

So BlackRock reported the day before yesterday and they said that they've had nine consecutive quarters of inflows into Appirio $13 billion.

E (18:43)

I'm surprised it's not 30, frankly.

C (18:45)

It will be. Well, they said they're going to double and triple it in the near term. And one of the reasons, at least on the equity side that the dam burst was the elimination of asset based pricing. And so when you were doing these, these direct index type products and there's 307, whatever it is, paying a $7 commission on each becomes unpalatable, at least for accounts under X million dollars. And then of course Robin came in, commissions went to zero. Asset based pricing gone. Free trades game on.

E (19:22)

Exactly. And the payment for order flow model helps there because it encourages you to make the trades you want to make, not the ones that you feel you should make after paying an 8. And let's not forget 10, 15 years ago we were talking 20, 30 years ago, $40 ticket charges when 40 bucks was a lot of money and you were paying a quarter to before decimalization, 8th to a quarter was not an unusual spread. So put all that together. Payment forward flow's been a great thing there. But that's also the index revolution working active management plus after tax returns with a third party manager become hard. But when you're trying to achieve an index return, say the Russell 2000, you got a lot of stocks to buy. I can buy half of them today, I can sell some tomorrow and I've got a lot of things to turn in and out of. If you have a manager who's going to buy 30 stocks, you got to own all 30 stocks. It's hard to turn in and out of it.

C (20:08)

I think you would agree with the statement that investors have never had better options than they do today. We say all the time, particularly on the tax minimization side. What is available to people with means and with advisors steering them is unbelievable.

E (20:28)

It's amazing. You've never been a better time to be an investor of any asset category than today. And it's only going to get better. If anything starting to become too much. Some things are a little too similar, some things are a Little too cute by half that you might get into a little bit of trouble with. And deregulation has helped. But also I think the rise of, of individuals who can trade from their phone trade in a way that makes sense for them with a lot of certainty that they're getting a pretty decent price. Used to be kind of hard logging on, doing this other stuff, a lot of paperwork. Moving money around was hard. Wires were like a three day exercise. Waiting at the bank. That's all gone. Like we've moved a lot of those barriers and for good reason. My bigger worry isn't is it a good time to be investor? Is it, it's now, do you have too many choices that you actually become paralyzed and you need to make a choice. You get kind of wooed into one that seems a little funky and you assume it's fine. Like we look at some of the ETFs coming out for, you know, are the Eagles going to win this? You know, are they going to make the postseason? And those are things that are great to put on polymarket and Kalshi, but once you make them brokerage account level easy, you start to get into some trouble. And so I, I, I worry a little bit that and, and someone who's done a lot of innovative things from a firm that's happy to embrace that. Look, we came up with a, we own a single treasury in an etf. I mean we were laughed out a lot of rooms when we say, you know, it might be a little too far. Kind of look at that as there's some things that might be a little too far.

A (21:49)

So getting back to the tax stuff, remind us how what you do in the compounder series because a lot of these, a lot of places are now there's a ton of ETFs using options. Like how are you trying to defer this tax situation and not pay out as much income?

E (22:02)

Sure. So options, we try to do the same thing. Right. We're always trading in kind. So we'll buy security, say Aggie, and before it declares its dividend, we'll sell it and we'll buy something that's pretty similar to it or two or three things that on average look a lot like AGG. We'll hold onto that through AGG's dividend period. And then before any of those other funds declare a dividend, we sell back out and rotate back into agg, which just basically has the benefit of capturing the dividend every day. So if you watch the NAV of agg, you'll watch it go up because all the coupons get collected and ingested into the navigation. We just get out of the way before that nav is decreased and the dividend provided. By doing that, we never collect the dividend and therefore you're just getting a total return experience.

A (22:47)

I mean, I imagine there's not a ton of activity.

E (22:49)

No, it's 20 trades a year in that sense. I mean it seems like a lot of turnover because we're constantly in and out. We can't own half of it. We'd still get half the dividend, but you're getting a pretty clean exposure and our goal is to give you agg, whatever it is and then we do a high yield version. You'll see us branch out into cash. For folks who don't like the options based world to get cash, we actually want to own a Treasury, we'll do it in that space. We'll go to BDCs, we'll go to REITs, we'll go to things where you have a lot of cash income that you'd like to defer or not collect the dividend on.

C (23:16)

All right, BDCs. Lot of smoke.

E (23:19)

So to be fair, BC has been around for a long time and many of them done a really good job. Some of them recently have gained a, garnered a lot of negative interest, perhaps deservedly so.

C (23:30)

So I've been, I think, pretty fair on what's happened in the space and I think the, the most legitimate criticism is that I think everybody understands how we got here. 2022 sucked for everybody. And the bonds were supposed to be your ballast, they were supposed to protect you and they, they pushed you overboard, right? So your bonds fell and then the stocks fell with it. And because there was a relatively benign economic environment, the credit held up and the floating rate was amazing for these, for these private loans and everybody was really happy that all the money came in and etc. Etc. The money came in so fast they couldn't spend it and so there just

E (24:13)

can't be a problem. By the way, I'd like to have,

C (24:15)

there can't be that many good borrowers. And so how do you think about that? How should investors think about the rise of this asset class? Which by the way, I don't think that in three years we're going to look back and say like holy shit, can you believe how crazy that was? I think it's gonna be way bigger.

E (24:30)

I think it'll be much bigger. And are there that many good borrowers? Maybe the banks have stopped doing a lot of that activity. So someone had to step in. Some of it's private credit, some of it's in the BDC market. Flavors in between the two or private credit using raising bdc.

C (24:45)

Well, why don't you explain the difference?

E (24:46)

So private credit firms, generally speaking, things like a hedge fund, a lot of different ways they can lend money to you and it's a one to one relationship and they have a lot of covenants just like your mortgage. And you can customize some of those features. BDC is a very technical 40 act wrapper, which is a way for someone like a private credit issuer, do underwriting to raise capital from all of us and then find a way for it to get into our brokerage account and just about anyone can buy it. Whereas most private credit funds, you have to be fairly wealthy to get involved. BDCs because of their 40 act nature, much more ecumenical, but they have some limitations in what they can do and how much money they can pay out and what they, how they're formed. The upside is you get liquidity. You can sell it to anyone on the street anytime.

C (25:25)

And the downside is you get liquidity, you get liquidity.

E (25:27)

And if you get a mark to market every day, intraday, you get it every, you know, couple times a second. So if you're in a fund where your manager says, hey, we really think this should be marked at, at par at 100, but the market says, I don't know, I think it's 80. You're getting 80 whether you like it or not. Blue Owl got in trouble when they tried to merge a private fund into a public one. And everyone in the private fund said, we don't want to take that haircut for liquidity.

C (25:50)

And there was another blue rock where the investor said, you're getting 65.

E (25:53)

Yeah. And the marks on those are hard. Look, we work prove this. In the equity market, when you have 14 people who decide the value of something, there's a whole market out there who doesn't have to agree with them. Those 14 folks can get group think pretty fast. You open it up to analysts on the street, individual retail investors who have their own ideas, they'll come up with their own number.

C (26:12)

So actually I'm glad you said that. So there are a lot of publicly, publicly traded BDCs. Aries is the biggest, I believe ARC say has like $14 billion or something like that. And they, they trade like stock. And I would imagine that most individual investors have no idea what they're trading, right? Like how to, how to mark the loans. Who is Actually in there on an intraday basis are these, are these hedge funds, like who is setting the price that we see on the screen?

E (26:40)

So market makers who are generally trading ETFs, trading stocks, trading other bonds, they're the ones who are ultimately offering that liquidity. Right. There's gotta be some shock absorber. Although I could put a market order in and you could be exactly on the other side. And we're just gonna meet in the middle and off we go. But it's mostly professional. Market makers have a pretty good idea. At the end of the day there's a combination of third party providers. So your trust companies, your accountants, your third party valuation agents who are gonna come up with that mark that they'll determine the nav on that'll sort of start us off the next day. But that isn't to say the managers don't get some say in it. If a manager looks at a number and says that's just wrong. Here's why. The boards and independent boards that control this may side with the manager. So you will get some noise. Oh, may they? They may. It used to be the manager's job and the board would just say yes. Now because of all this news, there's a lot more contention in that space. And the boards aren't, you know, particularly interested in saying we know more about this credit than you. They don't. But at the same token, they appreciate big moves or big deviations from a third party valuation source. Expose them to some liability.

A (27:46)

I'm curious for your thoughts on the illiquidity side of things. Because bonds themselves are not as liquid as stocks, obviously they don't trade as much. Maybe you'll disagree me there, but Some of these ETFs have had problems in the past. Remember during COVID some of the corporate bond ETFs, remember there was a huge divergence and even some really high quality ETFs. I not having the background or the ability to see through private credit and do credit analysis on these individual loans, the mismatch of assets and liabilities is the thing that I think obviously got a lot of them in trouble. And even the Blue Owl CEO admitted like maybe us and the advisors didn't explain this whole illiquidity thing. And it is tough to me to think of having these illiquid loans in a more liquid structure. That's obviously a big part of the problem. It doesn't matter what, what the loans are worth if people are trying to sell all at once. So I'm curious just your Thoughts on the whole nature of putting in illiquid security in a little more of a liquid wrapper.

E (28:37)

That mismatch has always been problematic, right? And we found ways to work through it. Market making helps, you know, having a longer term view helps. But ultimately some bonds are way more liquid than stocks. The on the Run 90 Day, the most liquid security on the planet, right? So certain bonds are more liquid than your average large cap stock. Some are less liquid. There are some uni bonds that may never trade. They're issued and they just sit in portfolios until they mature 20 years from now, 30 years from now. So it depends where you are. Some of the BDC loans are, are somewhat illiquid, but there's a market of folks who want to move them. And a really interesting example is bank loans. Bkl, right. Bank loans are super liquid. They're just really, really hard to settle. Settlement is T plus 7 or T plus 70 or T plus 700. And you don't really know what it's going to be today. So BKLN comes out as this really great etf, like a derivative. Now that's just making that liquidity move around because it's just going to sit around and wait for those settlement change to happen. BDC is working a sort of similar way. There is a supply and demand imbalance. You can't go and turn the BDC in and say give me the loans, right? Like you are buying like a closed end fund version of this. So you're going to see the price move. And the good news is the price can move. So if you really want out today and you're willing to take a lower price, there's probably someone who's willing to take it. Now we go back to March 8th, sort of 2020 Covid hits. We see this massive dislocation in ETFs. Something weird I think actually happened. It was the opposite of what most think. The bonds had no real price, right? There wasn't a lot of liquidity. The ETFs were actually pricing the bonds. But because bonds don't trade every day we get what we call an evaluated price. Someone is sitting there and says, okay, based on all the math and all the history, we think the value of this bond at 4pm today should be this. They're often not looking what the bond actually traded at. They're just looking at the math, saying this is what it should be based on its cash flow, its credit rating and all these other factors. So you saw this dislocation because the evaluated prices just weren't Right. And over time, you kind of need those. You look inside of mub, half those bonds don't trade every day. They still need a price. So we can price the security. Mub's super liquid, even though you can't transact all of it every day. So we've developed a market structure that is relatively accommodating and pretty good at solving those problems. But there are individual issuances where you do, you know, bust, and there are problems when too many people get on one side of the trade where some really silly things can happen. That's where you got to do your homework.

C (31:01)

So getting back to the after tax stuff that, that clients and. And advisors love, I don't want to get you in trouble. I know we're not tax attorneys here, but what. How should investors think about the potential risk of. Is this getting too cute? Are we running afoul of the intended rules and regulations?

E (31:22)

Yeah. So, I mean, it's probably for folks who are listening to this, it's tax day. So most American of holidays, we're here in Washington, D.C. so thank you guys for coming. You can drop your tax bills at Indiana Avenue at the IRSH hq. They're happy to have you. But I think when you. There's a good rule. If they have to explain to you how it works and it takes more than a few sentences, you really need to leave it to someone else to do. Right. Don't try to do that on your own. Make sure an accountant or an attorney has blessed it. And if you have to, they have to hand you a piece of paper that says, hey, hey, we had someone read this thing and we've got a new view of how the law should be read. Probably a good sign to turn around, like what we do in the Compounder series. It's just a normal ETF trade. There's nothing special about it. It's no different than the trades we do every day in all of our funds that every ETF manager is doing in all of their funds. It's when you start saying things that are really new and you look at it and say, that seems too good to be true. If you can't back it up in a sentence or two, probably.

C (32:14)

Is there an example of things that you're seeing come to market or ideas that you're hearing that investors need to be careful of? Because to your point, there is so much choice. There's so many things that it really becomes paralyzing at a certain point.

E (32:27)

Yes. I mean, a lot of the derivative income strategies that ADVERTISE themselves is income that is natively tax free and never ever will be subject to tax. Does have some concern to me. There are some ways that that may work. There's a lot of ways it won't. I do have some risk and some worry about some of the 351s that we see advertised. I think that's a great way. If you have a strategy and you want to convert, if you have a bunch of wayward assets with high appreciation and you just stick them into this mysterious rediversification engine that's going to promise you gains and riches and no taxes, eventually the irs, I think, is going to have to look at that pretty hard and say, is this really the intent of what. When we wrote this thing 40, 50 years ago, is that what we really meant? Probably not. A lot of the platforms out there have taken that view.

C (33:12)

I suspect there will be some headlines in that, in that space.

E (33:15)

I think, I think you'll see some action there and I think you'll. It's less going to be what actually happened and more the marketing of it. Most of the tax rules that have teeth to them have less to do with what you're doing. Some things that are clearly illegal are clearly illegal. It's the things that are probably legal but can be marketed in an inappropriate way that become problematic. Look, if you've ever filed a complex 1040, your accountant kind of takes out a bottle of whiskey and looks at it and you could give three or four accountants the same thing. You get different answers. It's a bit wild, but it's amazing. And this is the one thing that I, I never quite understood. I always feel like paying your taxes a bit like a bidding process with the government. Like they have a number in mind. They just. It's like buying a car. They don't want to be the first to offer a number. So then they make you follow these forms. They offer a number and then, sorry, we graded your test, we think you're wrong. Pay us penalties and interest. It's like, well, just tell me the number, I'll click the box and say yes and move on with my life.

A (34:08)

So he started out asking you about the bond market being the smart money. A lot of people. Who was it? The Glanville guy said if he dies, he wants to come back. It's the bond market. Something because it's so powerful. I think a lot of people have been scratching their heads in recent years about, well, if the government debt is so high and we added all these trillions in debt where are the bond vigilantes? Why is it not happening? Why, why aren't bonds screaming higher? Because every time they go up people go, all right, here we go, this is it. We hit 5% and people go, this is it. We're finally punishing the government for spending so much money.

E (34:35)

Well, we've, we've warned people the bond market has made some warning signs of like hey, we've got issues. The problem is there's what, $28 trillion of cash sitting on the sideline. So there's a lot of cash that comes sloshing in to help. And a seemingly insatiable demand for US government securities. Like eventually an auction will have a terrible failure.

A (34:55)

So I was gonna ask you, like what would actually make you worry? Like what would be the. Because people keep saying, like just wait, it's going to happen. And people have been saying that for 50 years, government debt's too high. Like what would cause you to say okay, this is a moment in time when like it's worth worrying about something here.

E (35:09)

We could have a legitimate failed auction. So the government auctions off securities a ten year once a quarter and they reopen it occasionally, you know, up to every week for the 90 day. And we bid, any of us can bid. You can go and get a treasurydirect.com and turns out as an individual taxpayer you're allowed preference over all the major institutions. You get your bids filled first. Eventually the government will say we want $30 billion for this auction and there just will not be $30 billion of demand and they will not be able to fill it no matter what price they say. Now practically speaking there'll probably be a price there. Like we're not going to have debt more expensive than Argentina, but at some point what we expect to happen. So if we think a number will come out at 4% and it comes out at 4.2%, we say that thing trailed by tailed by 20 basis points. When that number gets big, right, like tens of basis points, weird things will

A (35:59)

start to happen at that point. Don't we just do what Japan did and we buy our own debt? Essentially we could.

E (36:05)

Obviously the balance sheet of the Fed has grown and done that before. Yield curve control though has some real drawbacks to it. I mean Japan started doing that and lost a whole decade and change in its equity market over that sort of behavior. And JGBs start repricing, they delink from the 10 year and they start to go bit bananas and the yen goes nuts on the back end of it. So when you have that level of control, you gotta really commit to it and you gotta accept some pretty negative outcomes are likely.

C (36:31)

All right, so take us inside the ETF factory. How does it work in terms of you think you have a good idea, you want to bring it to market, and then what ideas are you most excited about? Not to give anything away that you're, that you're cooking up, but like maybe something that, that, that currently exists. How does the whole thing work?

E (36:47)

Sure. So first, first thing is you gotta talk to your colleagues about it. And if anyone looks at us and just says that's really interesting, we get rid of it right away. There's a scrap heap of ETF history of just interesting ideas. It has to solve a problem. Don't tell me it's interesting, tell me what problem it's solving. And we hold each other very much accountable to that. Then we call you guys, we talk to users and say, hey, we have this idea, we want to solve this problem, we think we can do it this way. And if folks actually understand the problem we're solving, agree that is a real problem that needs to be solved and they want it solved, then we can carry on down the road. That gets rid of 90 to 95% of the really interesting ideas because there's some really complex things we could do. It'd be a lot of fun, but they're not actually going to help someone make better investment choice decisions. So we go down that road. Once you start getting into this though, I still got to convince a professional market maker to take us on. So if I can't explain it to them, that's a good tell. And if they come back and tell us, hey, interesting idea, it's going to trade a dollar wide, probably not investable by the average person. Another way to another exit spot for us. But at the end of the day it's really simple. If we can't articulate the problem we're solving and you can't articulate how it solves your problem, we're not going to do it. And it's the marriage of those two that makes products work. We think we're working on a lot more in the rotational fund sort of tax aware space. We'll do some more in inflation. Inflation is a generational problem and it's not, not solved yet. So we'll see more action there. And the bond world is really big. There's a lot of other products that we think folks want to see and reimaginations of things we're doing or recombinations of them to make it easier to invest that we'll start working on in the future. But if we, if we talk about one thing that's sort of off, off target for us, maybe just a small reason of why you should pay your taxes. Your taxes do go to some pretty cool stuff. Last week we sent people around the moon. I mean when you think about like I'm trying to save the marginal few dollars on this, just remember like we need tax dollars to, to sponsor that sort of stuff. And every now and again you feel kind of proud when you watch those guys, you know, men and women come down, you know, from 35,000 miles an hour to zero in the Pacific Ocean. And by the way NASA to its credit stuck the landing within like 200 meters of where they thought in 20 seconds of it. So like there's some good that comes from maybe not trying to squeeze every dollar out of that tax stuff because we do want those stories.

A (39:06)

All right.

C (39:07)

It's not all bad. I agree. I agree. All right. Anything else? What else?

E (39:12)

I mean that's it. Markets have been, have been strange recently. So all time highs today. All time highs.

C (39:17)

Ben, what was the stat you told me before we started recording?

A (39:21)

5% of stocks hit all time highs the day the market did, which is third lowest ever or something. Wow. Individual stocks haven't come along yet.

E (39:29)

Just over concentration of a few stocks driving a lot of action. Still for all of the political unrest in the world, I wouldn't have thought we'd be seeing all time highs in what, nine, ten days of up markets in the nasdaq.

C (39:43)

You know what?

E (39:43)

I think this time the stock market

C (39:44)

was the smart money. It got it right.

E (39:46)

It did. I mean I do worry that it's trading the rumor we haven't actually resolved these issues.

C (39:53)

Yeah, it's over.

E (39:54)

Yeah, I hope you're right.

A (39:55)

More right than wrong this decade. But. So 2022 was a bear market with you know that was an inflationary thing. But we haven't had a credit cycle in. I mean there's been some flare ups and scares but really since the great financial crisis has there been one credit cycle that you can point to? Maybe energy, a couple of years, 2015 energy. There's been pockets of it. There hasn't been a market wide credit cycle. So what's going to cause that?

E (40:17)

I don't know. Maybe you should ask why has there not been one right first which is we added a lot of regulation, some of it that actually kind of worked.

A (40:24)

So the GFC regulation you think may is Part of the reason for that.

E (40:27)

Some of it, yeah. And then I think lenders got smarter, right. And the combination of good regulation, smarter lending, smarter borrowing to some extent and then a really healthy stock market that was able to just sort of peanut butter over all the cracks and all the other.

C (40:41)

The stock market created so much wealth, so much wealth. Housing market and the housing. There's so much wealth and money and liquidity out there that you see these distress funds popping up before there's even distress. And yeah, I mean at some point you would think, you know, at some point they will stop, but who knows?

E (40:57)

I think the thing that does it is probably not the credit in. It's actually just the underlying demographics of what we have. We've got, you know, we don't have enough people for jobs we need. We're hoping that AI will come and increase productivity. That will kind of keep this train rolling along. But we do have a. Just like China has faced, just like Japan has faced. We do face a sort of crisis of labor coming in the future and that's probably the thing that sets it off.

A (41:21)

We need AI.

E (41:22)

We do.

A (41:23)

We might need.

E (41:23)

It certainly going to be the new Fed view of we need AI to increase productivity, to allow all of the other metrics to keep humming along. And in that sense, if it works, it's going to have a lot of great promise.

C (41:33)

Well, Alex, thank you very much for inviting us down here. It's been incredible to see the rise of fm. I think that you are. Next time we speak, you will graduate out of the boutique world. I don't know where the line is, but you don't feel boutique anymore?

E (41:43)

No, no, we don't feel that way anymore either. I think it's 25 billion, so we hope so. But I appreciate you guys for being supporters of this and letting folks know about what we've been doing for really since the get go.

C (41:52)

Well, thank you.

A (41:55)

Okay, thank you to Alex and the whole team at FM Investments for hosting us. It really was a fun show. They brought us out to a wonderful dinner afterwards too. You and I were blown away. I always love a good dinner like that. Fminvest.com to learn more and and then email us. Animals.

D (42:11)

Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the fund, please call 1-800-617-0004. Read the prospectus or summary prospectus carefully before investing. TBIL Fund risks. The US Treasury Three Month Bill Fund may be susceptible to an increased risk of loss, including losses due to adverse events that affect the UST 3 month bill funds investments more than the market as a whole. To the extent that the UST three month Bill Funds investments are concentrated in a particular issue issuer or issuers country, market segment or asset class, while U.S. treasury obligations are backed by the full faith and credit of the US government, such securities are nonetheless subject to credit risk, I.e. the risk that the US government may be or be perceived to be unable or unwilling to honor its financial obligations such as making payments. 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