Why Historic Relationships in Markets Have Been Totally Upended

Tracy Alloway (0:08)

Hello, and welcome to another edition of the Odd Lots Podcast. I'm Tracy Alloway.

My co-host, Joe Weisenthal, is not with me today. Mr. Weisenthal has gone off to Washington to do some very important Bloomberg related things, which means he's going to miss out on an episode that I am personally very excited about. Today, we are going to talk to one of my all time favorite analysts. And the reason he became one of my all time favorite analysts is because he wrote some very, very interesting research in the run up to the financial crisis. I think it was a few days or a week or two before Lehman Brothers collapsed. He basically wrote a note called, Are the Brokers Broken, pointing out some weaknesses in the funding of US financial institutions. And since then, he's gone on to write more broadly about the markets, specifically, he's written about how markets have been functioning in the era of central bank liquidity. And as you all know, this is a hot topic because the Federal Reserve is in the process of tightening monetary policy, reducing its balance sheet, which puts a giant question mark over the fate of markets. Are they going to be able to stand on their own two feet without the support of the Fed and potentially some other central banks?

So I won't keep you in suspense for any longer. Let's bring in Matt King. He is the Global Head of Credit Strategy at Citigroup.

Matt, thanks for joining us.

Matt King (1:55)

My pleasure. What a flattering introduction.

Tracy Alloway (1:58)

Yes, I tried. I'm trying to make up for the fact that Joe isn't here, so this is my compensation. Let's start at the very beginning of how we actually got to know each other and how you became one of my favorite analysts. 2008, you're at Citi. I think you were covering the banks then, I assume.

Oh, you weren't.

Matt King (2:22)

So I was doing credit strategy then, kind of similar to what I'm doing now, but I guess the approach that we have always taken is to try and focus on whatever it is that really seems to be driving the market.

What we don't do is say, well, here's what the economists say about the outlook and therefore here's what it means for our market. We always try and say, what is it that's really driving the world? And so in 2007, I sort of had to, we used to look at credit fundamentals of companies, but then in 2007, we had to drop everything and suddenly start looking at sieves and conduits and structured credit. And then in 2008, it seemed to me that repo financing and broker dealers were a critical issue. And so I spent a long time looking at them.

And then in more recent years, it's been things like the, you know, with the European sovereigns, or it's been about China and credit creation more broadly. And then the dominant theme more than anything else for us at the moment is just about central banks and central bank liquidity.

Tracy Alloway (3:14)

So I love that in 2008, you managed to sort of out analyze the actual banking analysts then. And that was one of the things I liked about the crisis as a financial journalist is the fact that everyone was kind of learning at the same time. You know, no one had a really good grasp of the intricacies. Just before we move on to more contemporary topics, I want to press you on that note. So you're at Citi in September 2008

What were you feeling when you pushed the button on a research piece that basically said, hey, there's a massive funding issue at the US. Pinks and specifically Lehman?

Matt King (3:52)

I could feel at the time it was probably the most significant piece that I'd written.

And while we couldn't say we predict that Lehman will go under, there was a chart in there that made it pretty obvious. And indeed, we basically predicted that all of the brokers would have to change their models. And then Lehman happened two weeks later. I guess what was slightly surprising, and it had taken me a long time to do, was that there was no particular immediate market reaction, in part because Freddie had just been rescued literally that weekend. And so while I did get quite a lot of attention, most of the attention actually came after Lehman when people like you kind of went back and said, hey, actually, this was really significant. Look, this guy spotted it at the time. So I knew it was important, and I made a big song and dance about it internally.