Why America’s Credit Rating Dropped — ft. Scott Goodwin

26:28So I think the biggest opportunity of marketing in a long time right now is to elegantly but forcefully say, we are an American company. And we believe in upholding of American values. And what is going on right now is disturbing to us. And that company would see so much hate, so much graffiti, and a massive uptick in high margin sales from the 10 % of America that now controls 50 % of the economy. me, and that is the wealthiest 10 % who skew way left now and look at what's going on in America and, quite frankly, are really disturbed by it. We'll be right back after the break for our conversation with Scott Goodwin.

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29:48Welcome back. Here's our conversation with Scott Goodwin, co-founder and managing partner of Diameter Capital Partners. Scott, thank you very much for joining us today. Thanks very much for having me. It's been a long-time listener, first-time podcaster with Scott Galloway. So, exciting to be here. Hell yeah. We're excited to get into it.

30:10So, Scott, I'd love to start off with your thoughts on this credit rating downgrade from Moody's. Moody's has downgraded the U.S.'s credit rating from AAA to AA. Your thoughts on whether this is important and what this means for the markets? I think that the story of kind of now is that the credit risk is on the sovereign balance sheets, not on the corporate balance sheets. So globally, the volatility and the long end of the yield curve has been much higher than the credit spread volatility in, say, high yield or bank loans or even investment grade. So the idea that G7 or sovereign balance sheets are behaving like emerging markets is a lot more of what the story is.

30:56This downgrade, I think Scott Besson said it well. It's yesterday's news. It was downgraded by S &P and Fitch a long time ago. Doesn't really create much for selling. It was an excuse for people, if you wanted to sell, it's an excuse to sell. But I do think what you're seeing now globally is the long end of the yield curve with the fiscal excess of the past 25 years is being challenged, whether it was Liz Trost a couple of years ago in the UK, the long end move in the German yield curve when they said they were going to have their fiscal expansion. I think Japanese yields yesterday in the long end moved or this month have moved something like 40 basis points.

31:36And obviously, you've had a couple moves in the U.S. in the long end over the past few months as the new administration's kind of rolled out their policy platform. So the fiscal sustainability in the long end, not just U.S., but I think globally is something that's being tested. So what does this say about our economy and our fiscal situation right now? You say it's old news because we obviously had these downgrades from Fitch and from S &P. But does this signify anything larger? Is this important from a fiscal perspective? You know, Trump came out this morning and said he's a fiscal hawk. I think in principle, he's at least trying.

32:16Both parties have had excess spending the past 20, 30 years. He's at least trying at a headline basis, whether it's Doge or some of the other things, to reduce spending. Although I think government spending is up year on year last time I checked. So the issue now is the level of rates combined with the level of deficit is a pretty dangerous policy cocktail. When we should have been issuing a lot of long-duration paper four or five years ago when rates were very low, we were instead issuing a lot of short-duration paper. So the problem of the Treasury management and the excess deficits then is coming back to haunt us now.

32:52So the long end of the career, it sounds like, Scott, you don't think that this is sort of trickled down or trickled sideways or leaked into the corporate bond market, that the volatility among sovereign debt has not yet been reflected in the borrowing costs of corporates. Is that correct? Well, it has because this corporate's traded a spread off of the sovereign. But if you think about investment-grade credit, the percentage of the yield on an IG long bond, let's say Apple or Amazon long bonds, the percentage of that yield that is U.S. government yield versus corporate spread is near historical lows.

33:30Same for high yield, frankly. So the treasury, the fiscal is crowding out a lot of the credit spread. So it is causing corporate borrowing costs to be higher, but that's the base yield, the nominal yield, not the spread. If you have a situation where the fiscal excess leads to less government spending, leads to them to causing things that cause job losses, then it will flow into credit spreads and defaults. But so far, the economy is doing OK. hey, you know, you had tech stocks have been booming the past few years. Housing is doing terribly, but everyone refinanced their mortgage in 2020 and 2021.

34:08So there's people who own a home are sitting here and are kind of refined. And it's the lower quartile or third of the economy that aren't homeowners, that are renters, that are getting screwed by higher rates. So just a thesis, because it sounds like you have what I'd call a more middle of the road view of this. And that is that there's been – we have been fiscally irresponsible for the last 20, 30 years, both administrations or both sides of the aisle. And this latest quote-unquote tax cut, big tax bill, whatever you want to call it, looks like it's going to add somewhere between$4.5 trillion at the low end and possibly – and there's other estimates that go much higher.

34:47and that we appear to be at least, I don't know, people would argue we're moving towards a breaking point or at some point you just run out of room here and your cost to borrow go up, which impacts the cost of everything. And that this kind of lack of fiscal responsibility, again, and I'll assign blame to both sides, but this at some point starts to create a downward spiral. That doesn't worry you about the state of the credit markets moving forward? I think it worries me. But you could have said the same thing at any point in the past five or 10 years. It's just been getting marginally worse.

35:27If you look at the situation Japan's been in for a long time, although they're more self-funded, their numbers are much worse than ours. So it's a question of when does the market care? It's always been that question. we're single name credit investors, sector credit investors. We're thinking about telecom or software, healthcare, much less than we're thinking about where 30-year rates should be, frankly. But we are macro aware. And I think when we're thinking about credit markets and opportunities, where's the forced seller? And around the tariffs and the long bond sell-off that you saw at the beginning of April post-Liberation Day, a lot of the forced selling was in rates.

36:07It wasn't in corporate credit at all. In fact, you had more buyers of higher quality corporate credit as yields went higher due to the rates moving higher because that spread was creating more and more opportunity. And what was interesting is we looked at it and we said, wow, I can buy Amazon, Apple long bonds. Bonds that were issued in 2020 and 2021, so 2050 and 2051 maturities, that because they were issued when rates were low, have three, three and a half percent coupons. And because of the duration and higher rates now, they're trading at 55 cents on the dollar. So the forced selling of treasuries by levered entities, and I don't think it was that much foreign entities so much as levered domestic entities, led to the opportunity to buy really interesting credits where their spreads had gone from 80 spread to 120 spread.

36:58So your spread is 50 % wider on Apple or Amazon that has a better balance sheet than the US government, that was where we saw the dislocation. So we bought that paper, which had five, six, 7 % current yield in the mid fifties, credit convexity and spread convexity. And that was a nice trade. It wasn't an investment. It was a short-term dislocation. I think the bigger question long-term is when to higher base rates flow into a negative impact on the economy. For baby boomers, they own their home. They were earning zero on their savings. Now they're earning five. That's been great for them. It's been negative for people in the velocity of housing market and negative for people at the low end that aren't savers.

37:39But in terms of when does it matter, I'm not the right person to ask. We'll hopefully be prepared and can react, but we're not macro predictors on the interest rate side of it. At a very basic level, isn't it? I would think, and I'm talking your book a little bit now, but I've always been all equities my entire life, which isn't a good idea, but I've never owned a bond until just a few years ago. That was a really good decision from 2010 to 2020, though. It was all intentional, right? Yeah, it's better to be like it than good. I just don't understand credit markets. I understand stocks or think I understand stocks, but it feels like for the first time in a while, you're getting paid for the risk to be in credit.

38:17I'll just put that forward. Does that change? Have you seen way more inflows and interest in credit funds? You run a large credit fund. And have you seen a lot more interest as people are thinking, wow, I mean, for the first time, I'm happy to leave money in cash. I never thought I would say that. I leave a decent amount of money in cash now because I'm getting paid for it. Has there been a meaningful change in asset allocation across institutions and individuals? Sure. So the rate hiking cycle of 2022 was really the change of the Rubicon to the changing of the guard, where you went from wanting to be long tech stocks, private equity, things that had money multiple and really benefited through multiple expansion from lower rates to being a yield receiver, a saver, a creditor, because you're getting paid a lot more for that.

39:07We've seen over the past three and a half years really increasing interest from all different types of investors and partners, be it a family office, a bank, a sovereign wealth fund, a pension and endowment. Everyone's sitting there saying, wow, my pension was 20 % underfunded, S &Ps are the highest, now it's funded. So that's one type of person that says, okay, I can take that, put it into Apple long bonds at 6.5 % or at 6%, and now I'm fine. I don't even have to worry about the equity market. That's one constituency. And there's another constituency of people who have made a lot of money in equities, a little more worried about valuation, and are saying, where can I go for a little bit more of a safe yield opportunity.

39:48And obviously, private credit and the returns there combined with the lack of volatility of that asset class have drawn a lot of capital as well. So it's not just the base yield. It's been different types of yield products have really proliferated. And you've had smart players in the public alts world, be it an Apollo, a Blackstone, or others, pushing a lot of that product out, not just to the institutional channel, but to the retail channel as well. Now that this credit downgrade has happened, I think everyone probably agrees that this is going to be, or at least directionally speaking, a good thing for high-grade corporate debt.

40:23And, you know, I think investors are probably getting, you know, more and more wary of treasuries. And you talked there about how being invested in high-grade corporate bonds has paid. And there's one line that you said there where you said, you know, we're invested in Apple debt, for example, and we feel better about the balance sheet of Apple than we do about the balance sheet of the United States of America. And we're getting paid more. To be clear, I feel pretty good about the U.S. balance sheet too. But in the Apple situation, you know, there's no more asset rich country in the world than the United States.

41:01But in the Apple situation, you've got a net cash position. So that's pretty incredible. And I think you're seeing over time the spread premium demanded to hold corporate risk versus treasuries compressed. Yes. Because there are investors who are looking at that and seeing a ratings compression between the corporates and the treasuries and also seeing a balance sheet situation where there's a lot of supply of loan data treasuries and less supply of corporates. That's also leading to that spread compression. And I guess the question I would ask is how new is that? and I think for a lot of people listening to that, at least for me, and I'm not an expert in the credit markets, but the sound of that, it sounds not good.

41:44I mean, it's an investment opportunity and that's something to note, but it sounds like not a great thing, this idea that actually the debt on these companies is actually more safe from a balance sheet perspective than the treasury market. And I guess I'm just wondering, how new is that phenomenon? I think it's been a creeping thing as you've had the fiscal crowding out private for the last 20 or 30 years. It's been creeping over time. Maybe it's becoming a little more acute now. And part of what I mentioned was the dollar price on those long duration bonds we were looking at is 55 cents on the dollar.

42:25So your claim is 100 and you're buying them at 55. So that's part of why it's such an interesting and compelling investment, because you have a current yield and you have convexity. I think you've been in an environment for the past couple of years where you wanted to own carry, which is just how much carry can I make because volatility was low. Now you're in an environment where there's more realized volatility, whether it's through the tariff headlines, what's going on in the economy globally, some of the changes with the German fiscal, what's happening in Japan. So you want to have more convexity in your portfolio and maybe a little bit less carry.

42:57So that's why that investment was a focus for us. It was less about a view on the U.S. government versus any of those. Scott, can you define convexity? What is the skew or payoff profile of the investment you own? So if you own a bond at par, let's just say, and it's callable at par, and callable means the company can call it away from you at par, the best you can do is get your coupon. So if it's a 5 % coupon, the best you're going to do is 5%. It can only go down. Let's just say the interest rates, base rates right now are four and mid-force. Let's say they go to 10. You're going to get that bond.

43:34You have no upside. It's going to go down. It's going to re-rate based on those base rates. On the opposite side of it, the Apple bond I was talking about or Amazon, if that bond was issued in 2021 or 2020 when rates were very low, and it's got a 3%, 3.5 % coupon, but because rates have moved up, it's traded down on a dollar price basis. I'm buying it at 55 cents on a dollar. So my current yield, which is my cash on cash yield, is 5%, 6%, 7%. I'm earning that. If base rates go up a lot, that doesn't matter to me as much because my current yield is nice, and I'm buying it at a low dollar price from a claim perspective.

44:19But if credit spreads tighten and if base rates go down, everyone's all, all we're talking about now is higher rates, but what if they go down? I have a huge amount of convexity in that I have a positive credit spread yield and I have spread convexity, I have spread tightening convexity, and I have interest rate convexity. All those things are in the right direction for me because I'm at a much lower price. I'm at essentially a bond floor or a recovery floor. Something we've been tracking is what appears to be sort of a reversal or a slowing of the flows of capital into the U.S. equity markets.

44:52And a lot of institutional investors have expressed less interest in investing in U.S. equities and more interest in looking abroad, whether it's China or the EU or Latin America. What are the trends in terms of capital flows in and out of the U.S. credit markets? The historical valuation difference that exists between maybe U.S. equities and European equities or other parts of the world isn't the same in credit. First, the U.S. has the most developed credit market by far. Let's say if Europe is second, it's still very bank-driven market. So you have a deeper, more developed capital market, better rule of law from a bankruptcy and creditor rights process.

45:33So if anything, the higher yields are bringing more capital in, not less. The situation where you can have a potential problem, and I think what you saw at the beginning of April was you had both the dollar selling off and rates moving up at the same time. Some of the foreign investors own the US credit unhedged. So if you have rates moving up, that means their bond prices are going down. And you have the dollar selling off, they're losing on both sides. that can lead to a nasty spiral. And that's part of why I think you saw a change in behavior by the U.S. government in terms of reacting to that spiral that was happening where you had weaker dollar and higher rates.

46:19What they really, I think, want is weaker dollar and lower rates. And which sectors do you find convexity or dislocation? Is it based on the sector, the individual performance of the name, or do you see certain trends? Right now, it's pretty rich with forward opportunity, if you think about it. When I started, telecom was going through a big bust. You had all the commercial fiber have been built out. And the first things we were trading in 2002 were Global Crossing, Level 3, WorldCom, and some of the same investments now. We're still trading Level 3, and there's still too much commercial fiber.

46:56But guess what? Now you have AI, and all these data centers are getting built. And when the information needs to leave the data center, when you move from training, where the chips are all talking to each other in the data center and learning from each other, to inference, where we're using our phone or our computer to use the model, it's got to go on the commercial fiber or over the airwaves. So the demand for commercial fiber is going to go up a lot. That's been a huge opportunity in the distressed or formally distressed debt of level three, which is now performing debt. I think it will lead to a big opportunity, too, in the spectrum space, where you're going to see a huge ramp in demand for spectrum.

47:35Some of the owners, you think about 10 years ago, Sprint was distressed. And then Sprint was spectrum-rich. Turned out, as we went from 1G to 2G to 3G to 4G to 5G, there was more spectrum needed. You're going to be in the same situation. you're going to have probably a 4 to 10x increase in demand for mobile data over the next five years, let's call it, as you go from AI training to inference, whether it's us using it on our phones or robots, cars, other sort of edge AI needs. That mobile data increase is going to leave people short spectrum. So the companies that own spectrum, some of which are in the public credit market, could be big beneficiaries of that.

48:17So that's one theme. I think the biggest theme we like to think about is who's a forced seller, who needs capital. Part of that has been banks at times have been forced sellers. Post-GFC, they've put themselves much less in that position. That's been in the growth of private credit. So right now, some of the forced sellers or the people that need capital from a company perspective are companies impacted by tariffs. So we did a first lien deal that we worked with Morgan Stanley on a couple weeks ago for Kohl's, which is a retailer that sources a lot of their goods in China, but they have a lot of really good distribution center networks.

48:56So we did a financing that we leaned up the distribution centers and got a really nice piece of paper. So those opportunities, I think, are coming. We're getting calls every day from companies that need capital. I would say they're less acute now than maybe they were 10 days ago pre the change in the China policy. but I think that need of capital as there's A, uncertainty and B, changes in the way companies are earning money changes in their supply chains is only going to increase so that's an exciting opportunity for all of our products whether it's the hedge fund, the drawdown fund or some of the private credit businesses Stay with us

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52:08We're back with Profit G Markets. Scott, I learned that Diameter was one of the first buyers, or I think the first buyer of the Twitter debt when Elon took over Twitter and renamed it X. Could you take us through what happened there? What was the investment thesis? How did you wind up buying that debt and how has it all played out? So I think Elon bought Twitter, I want to say mid-2022. So he's owned it now for about three years. And Morgan Stanley was the lead bank that financed it, but there were other banks involved as well. The$12 billion financing package. Usually banks would syndicate that package.

52:45But because of what happened in the credit markets in 2022, higher rates, credit markets selling off at the time they announced the deal. and then an advertiser reaction to Elon owning it that was negative, including, I think I looked today, Scott's last tweet was at some point in 2023. The revenue went down and the bank said, we're going to hold the paper. We're confident it's covered, but we don't want to sell it at a discount to par. Fast forward two and a half years, we're tracking the data just like an equity fund would track how many subscribers meta meta has or instagram had you can track that data for for x and we're seeing that in the back half of 2024 uh especially in the in the in the last quarter those subscribers are starting to return it looks like the ad dollars are starting to return so we dug into the business a bit more uh the premium users which were basically nothing when elon bought it are now close to three million um he had cut i think 75 of the employees taking capex from a billion to 70 million a year uh and ebitda which was around a billion five when he bought it is right about that if not a little higher right now um so he's turned the business around by cutting costs changing the earnings the revenue model and if you think about what the debt might be worth um we were looking at the debt the first lien debt at the time when we were looking at buy early in the year is about a 10 billion dollar tranche uh with a coupon around 11 percent And the banks were looking for a couple people for a proof of concept to buy 500 million each.

54:20It was, I think, us and one other fund that publicly bought it. And we said, OK, what's the right price for this debt? If it's 10 billion and you've got that billion five of EBITDA, let's call it. So let quote unquote leverage would be around six times. They also own a stake in XAI, we learned. because X chips were used to incubate XAI. And XAI at that time was raising capital of 50 billion. So they owned a 12 % stake in XAI. So we've got the billion five of EBITDA on X, which we think is worth a lot more than the six times terms of leverage. Snap trades at 20 times. So if you put a 20 times multiple on X, that's high 20, 30 billion, plus their 12 % stake in XAI, which at the time was worth another 6 billion.

55:09You've got$10 billion of debt. Then your loan to value or your debt versus the total value of the enterprise look like something like 25%, 20 % to 30%. And in the market, 20 % to 30 % loan to value debt at that time, a few months ago, was trading at 7 % to 8%. Because of the uncertainty, the amount the banks own, we were able to buy it around a 13.5%, 14 % yield. which we thought we were getting really a lot of compensation for the excess spread there. Now that debt trades at par, they since merged with XAI, and the numbers have continued to improve. Other people have bought the debt from the bank since trading more liquidly.

55:53But we think as a creditor, it's a really good business, and Elon's done a nice job with it. And the public comps obviously trade at high multiples, which would make us feel really good about that valuation that we bought it at. And that's been a great trade for you, no? So far, yeah. But still in it. Excited about the future. We talk a lot about how to be a great stock investor on this show. And you've been very successful as a credit investor. I'm just wondering, what do you think are the characteristics of a great credit investor? And does it differ from being a great stock investor? Are there differences between those two games?

56:33And what do they look like? Great question. The great stock investors over the past 15 years have done much better than we have in credit. We've been earning our coupon. Now maybe it's our time to shine. But equity investors are thinking about what is this business? How can I create a multiple on this business? There was a really interesting podcast that Patrick O'Shaughnessy did with my friend Neil Mehta a couple of weeks ago, where Neil talked about trying to find the next S &P 500 company. He's really thinking about which companies can he invest in at the venture or growth stage that can be hundreds of billion, trillion dollar companies.

57:07We're just thinking about, is this company going to pay us back? So the credit investor is much more focused on downside protection, legal protections, where the business is going, yes, over the next 12, 18, 24 months, not necessarily trying to earn a money multiple of return on their performing credit. Now, there are opportunities, like I mentioned, level three, that was at 30 cents on the dollar. We figured out there was going to be a big AI winner. The debt's now near par. So you've had a 2, 3, 4x money opportunity there. But that's not the everyday opportunity in credit. Credit is much more about avoiding mistakes and loss avoidance.

57:44If you think about the people who've done really well in credit, it's those who have not made mistakes. And I actually think that lends itself more to learning from macro people. The guys who are really well in equities are the ones that picked on megatrends. You know, Mag7, big tech, software, internet. A lot of things Scott's been talking about for the past 15 years. In credit, one of the first jobs I had was working for Paul Jones and John McFarlane at Tudor one summer in college. And the shark I have behind me is kind of in honor of Paul because he had a big shark on the trading floor there.

58:21And my son's a big shark fan. but a lot of what I learned from him was if you think you're wrong or something's changing in your thesis, sell. And that has trained me to be a fat seller. So if something changes in our view, something changes in the macro that changes the way a company earns or underlying earnings power of that company, we get out, especially if it's par debt. We talked about convexity. A lot of the things you might own in a par debt fund, you're owned for your coupon. Not because you think the price is going to appreciate. So if your base case is coupon and something's changing that could be negative for that business, you want to sell.

58:58We tend to think much more from a total return perspective than a yield perspective. So we're always trying to think, be much more forward-looking, hopefully, than the average person in credit markets who are more focused on that coupon. And that makes it a little more proactive seller when things are changing in the markets, either macro or micro. And I guess, so my question would be, what are the signs of forced sales? How do you know that there are people who are, I guess, as Warren Buffett would say, who are getting fearful when you could be greedy? How do you recognize that? What's the liability structure of the asset owner?

59:36And I think this is something that has changed a lot in credit markets for the better over the past 15 years. And if you look back 15 or 20 years ago, a lot of, say, the high-yield market was owned by mutual funds that had daily liabilities. I could take my money out every day. But the underlying asset, they might own$100 million or$200 million of some bond that trades$5 million a day, and they're getting an outflow. And so they have to go and pay a lot of bid offer to exit that position. Now there's more longer-dated liability structures, locked up money, a lot more drawdown capital that can take advantage of those opportunities.

1:00:14But the banks who are the intermediaries are taking less risk in that business. they're taking risk in the origination business, not the secondary trading business, which means that there is an opportunity when there are four sellers, whether it's an ETF that has to sell because there's just a natural arbitrage or somebody's withdrawing money for that ETF or a mutual fund that has to sell or has to buy. You can have four sellers or four buyers. So that's every day in the credit markets. And because it's an OTC market versus like the bonds trade by appointment versus trading every penny like Google stock or Amazon stock would.

1:00:50That creates an opportunity every day in small size. And then as you move towards the extremes, when volatility is higher, there are structures, be it a CLO. What can cause a CLO to have to sell something? Ratings downgrade. Usually you can see those things coming. We talked about ratings agencies tend to be slow moving and late. So if you're proactive and forward looking, you can foresee those downgrades and be ready so that when there's a forced seller from a CLO, you can buy it from them at an attractive price, provide them that liquidity to buy an interesting asset. What else might make somebody sell?

1:01:22A downgrade for a pension or an insurance fund that owns only investment grade debt. If it gets downgraded to high yield, they might have to sell. So the credit markets are very rules-based. Liability structure, What's the duration? What's the sector? What's the rating? And every rating you have from triple C to triple A, every notch you go up, there's more buyers by rule. Every notch you go down, there's less buyers by rule in corporate credit. So understanding who the buyers are at each notch along the way and what yield or spread they'll demand can allow you to learn about those things. What else creates for sellers?

1:02:01Volatility. So who are the levered players when there's high volatility? In early April, the most levered people were CTAs, trend followers, risk parity. They had to sell treasuries and stocks. You didn't have a situation yet where credit entities were necessarily for sellers in the same way because the economy is doing well. You haven't had a lot of defaults. But we hunt around and we like to find those opportunities. And I think that the credit market now has, there's a lot of people investing in private credit, chasing private credit. You haven't seen any real force selling there. It's been a great asset class to be in.

1:02:42But there are bubbles within it building up a little bit. And that you have like almost a third of the private credit market right now is software or tech related loans. And typically when we've had a large percentage of the Lev Finn market become one sector, you think about energy in the mid 2010s. eventually there's a problem because people do unnatural things when they're exposing themselves that much to one sector. For a regular investor, for a retail investor listening to this podcast, mostly thinks about stocks, mostly thinks about equity. Here's you. They'd like to diversify into credit.

1:03:15Where would you recommend you start? There's plenty of ETFs. There's a LQD is the investment grade ETF. HYG is the high yield ETF and BKLN is the bank loan ETF. Those are simple products that you can trade every day with low fees. If you want to go into the alternative, there's us and then many others that have products across hedge funds, private credit, CLOs. There's active management and passive management. I do think that partnering with active managers who can take advantage of some of the sectoral dislocations we're talking about, some of the volatility we're talking about on a go-forward basis is the right way to invest in credit because you do want people who can capture that convexity versus just sitting and waiting on carry.

1:04:00My final question, I learned that you are on the board of the U.S. national soccer team. I am a huge soccer fan, football fan. Scott is a budding soccer fan. My question to you before we wrap here, when is the USA men's team going to get any good? Let's hope it's soon. One year, right? We've got the World Cup coming up next year. I've got dinner with with the coach with Mauricio next week in New York. So what are the prospects looking like? Because I know the women's team has been incredible. Everyone keeps on saying the men's team is going to pop off and they keep on underperforming. What's happening?

1:04:37So U.S. soccer had a really interesting person, JT Batson, who's a former software executive and soccer player takeover as CEO a few years ago. And his view was you had to reform not just the development process, which I've lived with my kids, Scott's lived with his kids, in South Florida, which is not, you know, the youth structure in the U.S. needs work, to say the least. Just got now experience it in the U.K. It's much better in the U.K. There's tons of free clubs. There's high-end coaching. You get bullied if you don't play. Yeah. Yes. And there's only one sport or one and a half sports. Here, there's a lot of sports.

1:05:12So JT hired for the women's program, Emma Hayes, probably the top women's coach in the world. and the women's program has elite talent historically they've had you know between five and 15 of the top 50 players in the world and maybe 20 of the top 100 although spain and others are catching up the men's team typically has maybe one of the top 100 players in the world if that so women's team has a bigger talent base title nine really put the u.s ahead of everyone else when it came to women's sports uh and we now we have the top coach in the world and it was a women's team that maybe needed a culture change, they go and win the Olympics.

1:05:46So in trying to do the same thing on the men's side, where you had a need for a culture change, a need for a new voice, JT and his team brought in Mauricio Pocatino, who's a top 10 global coach. And now Mauricio has something called grinta, which is an Argentine word for grit. And I think part of what the U.S. men's team has been lacking is that grit, that intensity. And one thing he said to me, it was an interesting conversation. He said, when I played for Argentina, if I was playing in a friendly game, so let's say Argentina was playing, there was a national team camp, they were playing a friendly game against one of the club teams in Argentina.

1:06:23Or I was playing in the World Cup final, same attitude for Messi. We played the same. Same intensity. And that's not necessarily been true, I don't think, about the American team on the men's side. So instilling that mentality of belief, grit, hustle, heart is important. And hopefully that will lead to better results next summer. The Gold Cup's coming up in a month. Let's see. I wish you luck. Scott Goodwin is the co-founder and managing partner of Diameter Capital Partners, an alternative asset manager focused on the global credit markets. Prior to founding Diameter, Scott worked with Anchorage Capital Group as a portfolio manager and the global head of trading.

1:07:04He also spent eight years with Citigroup, serving as head of high-yield bond and credit default swap trading. Scott currently also serves on the Leadership Advisory Board for U.S. Soccer. Scott, this was great, and it's good to hear that you're bullish on Team USA. Ed and Scott, thanks so much for having me. It's a real privilege. When I first got on Mike and the Mad Dog, after being a longtime listener as a kid, this is a similar moment for me, so it's really nice to be on with you guys. That's the first time anyone has ever used that analogy, but thank you.

1:07:40This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Mia Silverio is our research lead. Isabella Kinsel is our research associate. Dan Shallan is our intern. Drew Burrows is our technical director. And Catherine Dillons, our executive producer. Thank you for listening to Profity Markets from the Vox Media Podcast Network. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.

1:08:42So I went on ChatGPT while you were talking. Okay. And I typed in, if Scott Galloway was a sperm donor, what would the attributes of his children be? And it came out, this is what I got back. True story. Did this while you were talking. One, came out of the womb quoting EBITDA. Six pack of abs by age six. I like that. Started a podcast from the womb. Emotionally unavailable, financially literate. There we go. Calls other toddlers unscalable. Already worried about loneliness at age three. Self cancels before kindergarten. Height 6 '3", confidence 6 '10", therapy bills$3 ,000 a month. That's amazing.

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