MI Rewind: Masterclass on SPACs w/ David Sherman

25:16It doesn't meet my value metrics. Now, as far as alignment of interest, it's a problem, right? Why is it a problem? Well, let's start with the biggest problem. When SPACs are taken public in an IPO where the cash goes into the collateral account and they're looking for a deal, that capital to get it public needs to come from somewhere. So if you're doing a$200 million IPO of a SPAC, it's going to take somewhere between$8 and$15 million of risk capital to actually just get the SPAC up and running and build a team and go look for the stuff. So I mean, the$200 million is going to go into a trust account, and it might even be more than$200 million because they might take $204 million, right?

25:55So that means of the$12 million that the sponsor's putting up, four is going to the trust account for redeemers or liquidation. That means there are other$8 millions, what's eating up their costs that are cash payments as well as future. If they don't find a transaction or they find a transaction and they don't close it, they lose all the risk capital. So a SPAC sponsor's primary focus is finding a deal to close, period, end of story, because if it liquidates, the sponsor loses everything. So they're incentivized, good, bad, who knows, just get the deal done. Now, the other part is most sponsors syndicate that risk capital.

26:32So you can actually have sponsors who have practically no skin in the game from a capital standpoint, but share a significant part of the proceeds of being the sponsor, right? That's even worse of an alignment of interest. Now, we haven't talked about what the sponsor gets. This is the egregious part. A sponsor who puts up this risk capital, so my example before was$12 million on a$200 million deal, which is pretty high, but it's assuming a SPAC is collateralizing a$10 IPO with, call it 1020 or 1030 in trust. So the IPO bonds are locking in a 2 % to 3 % gross yield just on the cash collateral before the value of the warrants, which we haven't talked about, but let's focus on this.

27:11So they put up the risk capital. Well, they need something for this. And if they're going to syndicate it, the guys who are buying the syndicate need something. So in SPACs, the sponsors typically get 20 % of the value of the IPO if they do a deal. That means if it's a$200 million deal and it trades at$10 a share, they just made$40 million of value. They didn't make it minus their cost. Okay. So they made $28 million in my example. It's pretty good gearing. And they still get warrants so they could make more. And if it trades at$5, they still make money. They're breakevens usually around, depending on how they syndicated or didn't syndicate it, but it's usually between $2 and$3 a share.

27:46So if the SPAC trades above$3, they're probably making money. That's another problem with the alignment of interest. Now the sponsor does, will argue, I have to find the deal. I don't get paid to find the deal. There's costs. I eat it. I'm taking all the risk. Oh, and by the way, everyone knows these economics I'm dealing with because they're publicly disclosed. So here's what happens. When I find a deal, the target says, oh, I'll take a little of your sponsor shares. And then when they go raise the pipe money or the additional capital to support redemptions and additional capital, they'll take a little of the founder shares.

28:17Doesn't matter. If you think about the fee, it's almost more egregious than hedge funds. So that's problem one. What's problem two? The companies that are selling want the best price. They're not interested in creating value generally in a cheap price. That's true in an IPO as well, by the way. But I think the difference is in an IPO, I think there's a little bit more of a commitment to try to price it more fair, right? Because you're not giving so much up to some group that isn't part of it. You're giving it to investors directly. In addition, you have to think about the consequences of the mergers' private equity, meaning the shareholders.

28:54So take BuzzFeed, which we participated in anchoring the pipe, which is a convertible bond. You've got shareholders that are now suing BuzzFeed. These are employee shareholders, shareholders who worked at BuzzFeed, who got shares working there, arguing they got locked up and they didn't have enough time to get out at a good price. So there is an alignment of interest problem. Okay, let's go one more. Investment bankers, lawyers and accountants. Now, the accountants actually don't charge a lot, but those investment bankers charge a lot. Where do they charge? They charge for the IPO, and many of them defer their fee until the IPO finds a deal.

29:25So they're already now tainted. Then you've got the investment bankers who want to help you find the target. Then you've got the investment banker raising that represents the target. By the way, you have lawyers for all these things too, okay? Then you have the investment bankers focusing on the pipe, and you have lawyers there. So there's a lot of hands grabbing. And this is the old joke. You go to the docks and they show you many yachts and they say, this is JP Morgan's yacht. And somebody says, yeah, but where are the clients' yachts? So that's a problem. And to give you an idea, it's not unusual to see$20 and$30 million fees in the merger to cover all this.

30:03Well, it's a billion-dollar enterprise. You just took 3 % out. And going back to Warren Buffett, something brilliant happened just the other day. He announced he's going to merge with Allegheny. He's going to buy Allegheny. And he said, but investment bankers don't add enough value. But he said, Allegheny, you want to pay your investment bankers. That's fine with me, but it's not coming out of my pocket. So I'm paying you X per share, and you're going to reduce that share price by what you're paying the investment bankers to your shoulders, but not to me, right? And it was actually a pretty reasonable number.

30:31You've got a lot of people with looking to make money. That's true in IPOs too, by the way. I don't think it's any different in IPOs. there may be less parties involved, less transactions. It's a problem in the Wall Street environment in that when a lot of money's there, you figure out how to charge lots of fees and you say, well, it's not a big number. Yeah, I completely agree that the incentives don't really seem to be aligned. And the 20 % fee that you mentioned just seems egregious. With that, what you typically hear or read in the news is that SPACs are risky, speculative investments where you can lose a lot of money.

31:08You see these deals where some of these companies are doing zero revenue. And back to Buffett, Buffett has been someone that has completely avoided IPOs. Now with that, let's transition to CrossingBridge. You guys approach the space much differently by focusing on pre-merger SPACs specifically. Could you tell us a little bit more about pre-merger SPACs and what makes them different from what we usually see in the headlines? So nothing would make me happier than spend some time talking about pre-merger arbitrage and SPACs and how it's a fixed income-like strategy. Before we do that, though, I do want to address two things.

31:46I don't know if Warren Buffett's ever bought an IPO or not. I'll take your word for it. But I will tell you that Warren Buffett also never bought tech stocks, and now he does. So I think it's not that there's necessarily hard rules in the sand. I think people have hard rules, but an inquisitive person who's mindful and disciplined also recognizes that sometimes things change. So that's one. Two, there are actually very few SPACs that have zero revenue. And if they are, they're typically SPACs that are more like drug development, which you also see in IPOs. That said, there are a ton of overpriced, mispriced SPACs, which is going to work to your listenership in that a lot of them are value investors.

32:26go to the SPAC market, look at all those SPACs that were done, and now look at their prices today. I mean, Casper, which we've all heard, it was a SPAC that was done. Stock collapsed, rightfully so. Company did 100 % the right strategy of realizing that you can't be direct to consumer without having bricks and mortar in the long run to meet the most addressable value. They raised convertible bonds. The business model has real issues. The stock dropped below three. They're taking it private. I assure you, they'll rationalize their marketing and they'll make money as a private company, right? Because as a public company, they were using other people's money and the cash they raised.

33:05But as a private company, they're going to conserve that cash and rationalize it. And instead of focusing on growth, focus on cashflow. And I think you're going to see all kinds of opportunities in post-merger SPACs. I don't want to pick names that we're looking at. We can have a separate conversation or podcast, but there will be those opportunities. It'll also be a great vulture investor market with all the convertible bonds and fixed income pipes that are being done. But I do think it's a mistake not to look at the aftermarket as a potential value opportunity. Unfortunately, there'll be a lot of stones you have to turn over before you may find one.

33:40And the accounting is not generally as good and the disclosure is more marketing-based. Now, that's not what we do in most of our funds. We're fixed income. We're extremely disciplined. I actually joke with people say, we're like a paint by numbers person. Everybody's trying to find in my profession, like the greater good of managing money. I'm not sure it's like being a doctor where you save lives. I'm not sure the greater good of managing money to make money on money, but it's a living. I really like it. So I think my art is a paint by numbers picture or artwork. Why? Because in paint by numbers, there are rules.

34:16And if you follow the rules, you'll get a pretty good looking picture and you got to stay within the lines. So that's about being disciplined. Specifically in that regard, and I think it's important when we talk about it, there is a strategy we did not create. It's been around for a long time. We're a follower, not a creator, but it's called pre-merger SPAC arbitrage. And it's very simple. It's because SPACs have a liquidation date. And if they announce a deal, you can choose not to participate and get your money back. In both cases, you get what's in the trust value. And the trust value is generally T-bills.

34:47And you get to vote on whether they do the deal or not. And they've separated the put feature from the vote. So of course, you're going to vote for the deal because you want to get your money back, right? Why would you vote against the deal and let the life of the SPAC continue, right? So if you know that your credit risk is T-bills and you know what's in the collateral account, because they give it to you every 10Q, it's publicly available information. And basic math can tell you how to divide the trust account by the number of shares. And if you can't do that, you probably should outsource your investing.

35:17Okay. So now you know how much you have per share in trust. You know what the market price is of the stock. I'm not talking about the warrants. There's a discount generally, right? And you know what the liquidation date is. And by the way, now that rates are finally going up, you'll earn interest on those T-bills. They typically invest in six months or less T-bills. So if it's a one-year SPAC, they invest in a ladder to six months. When they reinvest, if they haven't found a deal, you're going to get a higher rate today. So if a SPAC, and when they do the IPO, they're all over collateralized today.

35:46So today, a SPAC, let's take a new issue. Today, this last week, there was a new issue. They issued $10.25 in trust, and you paid$10 and you got a unit. So you got a 2.5 % gross yield, plus you got the warrant. Now, when you sell the warrant, if you choose to do that, your stock price is going to go down by pretty much what you sold the warrant for. right? But since you're going to be able to get it back when you put it or liquidate, you're selling something that gives you money today, but you'll have a mark to mark a hit. But when you liquidate or redeem, you're getting it at par. So warrants today are like half a warrant.

36:20And the life of this thing is typically 15 months. Okay. So I've gotten 15 months or a year and a quarter maturity, 2.5 % gross yield, plus a warrant that's worth 1 to 1.5 % when I sell That's 4 % or 3.5 % for 15 months. I'm making more than 3 % in G-bills. I have mark-to-market risk. But if I do the math right, I'm disciplined. And by the way, they announced the deal in six months and closed it in six months. I put it double my return, 7.5 months to be exact. So the fixing of nature is that discount with the intent that you're always going to redeem, or if it's Donald Trump's deal, you're going to sell.

36:56But once it's trading above trust value, it's a different analysis. So, you know, Donald Trump announced this deal. We were out by 11 o 'clock that day. I didn't get the$60,$80 a share. I'm stupid. You know what? That's not what we do. What we do is, oh, it's at$19? That's$9 above trust? Sorry, we're out. That's what we do. So if you do SPAC arbitrage, you have to always redeem and make sure you do it properly and check your record dates. You have to be prepared to liquidate. If you're going to use leverage or you need cash or you're asked to the liability match, You have to be able to hold to maturity because there is mark-to-market risk, especially since hedge funds leverage these products four times, five times, six times.

37:36And one day you might get a tap on the shoulder and see those spreads really blow out. And you can decide to sell the warrants or not. We always sell the warrants. There are other SPAC ETFs that may say they're doing what they're doing, but have the ability to participate in the deal. There are even SPAC ETFs that only do the deal things. But ours is 100 % focused on below trust account, liquidate or sell or redeem, don't roll and capture that discount. Now, what does that mean? Are we going to outperform? I'd like to tell you as an active thing, we're going to outperform them if you do it yourself.

38:06But who knows? But if you do it yourself today,$140 billion of the SPAC market, according to SPAC Informer, are trading at yield to liquidations of greater than 3%. And by the way, the average maturity on this is probably about 11 months. So I don't know, 3 % for 11-month money backed by treasuries? Oh, most of it's capital gain, not ordinary income? Sounds pretty good if you want to, what are we in? We're in March. Let's say you have a kid going to college in September. Well, you got tuition in September. You got tuition in January the following year. Let's take the January tuition. You could go buy a portfolio of SPACs, make 3 % most of it capital gain, right?

38:46As opposed to ordinary income. That's a lot better than a CD, a lot better than a T-bill, a lot better than a money market fund. And if you're an ultra short duration fund, you got wiped out when you didn't expect to right at the moment because of rising rates. So it's a really good sort of long-term cash alternative. Now, who are the investors that buy the pre-merger SPAC ETFs? What you would expect, merger ARB guys, high yield investors, distressed investors, right? These are the hedge funds with some of the sharpest trading elbows. And they're levered. They're levered four to one, five to one, six to one.

39:21Millenniums in it, Citadel's in it. So you do run the risk that liquidity premium, which I still isn't thinking even today is not being valued enough. And I am concerned today with what's going on geopolitically with Ukraine and China and all that, that there's counterparty risk that isn't properly being considered. I mean, I just read today something about the European banks are looking at the $100 billion of exposure just to Russia. Okay. The market hasn't seized up. Hopefully it won't seize up. I'm not predicting it will seize up. But if you just have a bad market, no big deal. And SPACs have held up really well in a rising rate environment and a tough take.

40:00But if you get liquidity events that are counterparty related like 08, you're going to see SPAC pricing drop because people won't get paid more of a premium. And believe me, there's a price that's going to stop dropping because at some point, Warren Buffett for the insurance company will buy SPACs if you can buy treasuries at 6 % and 7 % for one year. So if you're going to do this, be prepared that you could have a drop. And in this environment, maybe not get fully invested in them, right? Thinking you can have some dry powder. But that being said, it's a good alternative. I mean, again, a lot of these hedge funds have four, five, six to one leverage in them.

40:33So if they get a tap on the shoulder, it's going to have the least price decline to de-risk, Right? So we haven't seen that. I will tell you in 08 in COVID, the drawdowns existed. They were not terrible relative to a high yield book or even an investment grade book during COVID before the Fed came to the rescue. But you also remember during COVID, I could buy defies, municipal bonds, bonds that were municipal bonds called that were backed by Treasurer's at 7%. Let's take a quick break and hear from today's sponsors. Hey, it's Sean O'Malley, just popping in with a quick message. If you like this podcast, well, I've got great news for you.

41:08We've got a handful of other shows for you to explore, from learning about Bitcoin to embracing a richer, wiser, happier lifestyle. Just go into your podcast app and type in We Study Billionaires to find our collection of shows. We Study Billionaires is our flagship podcast, and we've made a name for ourselves over the years by interviewing the best investors in the world, including Ray Dalio, Howard Marks, Joel Greenblatt, and many, many more. My colleagues, Stig Brodersen, Clay Fink, Kyle Greve, Preston Pysh, and William Green each hosts their own We Study Billionaires episodes and bring their own unique perspectives.

41:43A whole new world of insights awaits you. Just go ahead and type in We Study Billionaires into your podcast app and see what you've been missing out on. Seriously, go ahead. I promise you'll like what you find. Bonus points if you show your support for our work by clicking follow. If something piques your interest, just start listening. No hard feelings. I'll be waiting for you back here. Just like everybody else, there was a time when I was a beginner investor, and I have to say, investing is particularly filled with jargon that can just make it so difficult for new investors to understand what is going on.

42:13But it's never too late to get smarter about stock investing from the ground up. At The Investors Podcast Network, we've made a habit of studying the world's best investors, and now I'm distilling those learnings into a simple course for you, or for anyone in your life who you might want to share the gift of knowledge with. With my How to Get Started with Stocks course, you can master the principles of excellent lifelong investing with valuable insights for both beginners and pros. The course covers 10 different sections, beginning with the basics of what a stock actually is and how the stock markets work, to strategies to optimize your retirement savings, how to pick great companies for the long term, what to look for in ETFs, and how to monitor your investments, plus so much more.

42:51To begin getting smarter about investing, just visit theinvestorspodcast.com slash get started with stocks. That's theinvestorspodcast.com slash get started with stocks. And for a limited time, you can use code STOCKS15 for a 15 % discount at checkout. Not to be cliche, but building a market-beating portfolio really doesn't have to be a mystery, at least with the right tools. If you've listened to our podcast for a while, then you know we spend a lot of time learning from savvy investors. So why not use the same tools we do? With TIP Finance, you can. Screening for great companies, calculating intrinsic value, keeping up with legendary investors' portfolios, and more are all not just possible, but easy to do.

43:38TIP Finance was created by investors for investors. It's quite literally the tools we wanted to use ourselves when researching investments in a simple to use interface. You can get started by creating an account for free. Who knows, maybe TIP Finance will help you find your next 100 to 1 investment. Between the screener and Legend Investment Portfolios to reference, I've gotten a ton of ideas from TIP Finance. What are you waiting for? Take the next step in your investment journey today with the right tools at your fingertips. Grab your device and type into your browser, theinvestorspodcast.com slash tip-finance to get started.

44:16That's theinvestorspodcast.com slash tip-finance. All right, back to the show. So if I'm understanding this correctly, there could be a drawdown in the price of the SPAC or your initial principle, but if you hold it out, you're eventually going to be able to redeem it for the share price. Am I understanding that correctly? Exactly. You know the saying in value investing, value won't run out? Well, here you have an exit date. You have a termination date. You have a guaranteed date. You can crystallize getting your money back. And you know you're going to get your money back unless treasuries default, in which case maybe they won't get your money back as long as you properly redeem or make sure you liquidate.

44:58Are there any risks people should consider with this sort of pre-merger strategy? I like how you're able to protect your principal, but kind of give you this venture capital type approach where you're giving yourself some exposure to that upside, such as what happened with Donald Trump's back. So I'm curious, are there any risks at all that people should be considering in this strategy? There are risks. There's no free lunch. I haven't found anything that's risk. I even think there's risks in T-bills. We can talk about that. And I mentioned in a Wall Street Journal of risks, look, one of the risks is you could have sovereign government, US Treasury default risk.

45:33You could have the risk that you have a bad actor as a sponsor for some reason, which would make no absolute no sense, maybe put into bankruptcy. It wouldn't make sense. It might not even legitimately be able to be put in bankruptcy. There's no rhyme or reason how this would work out. I think there's an extreme, extreme potential of this. It's not an event I'm concerned about, right? And then the Bankruptcy Corps has to argue, are you adequately secured or is it a contractual obligation? You're talking about a lot of technical nuances, but it's an example of a risk that people take that one should understand and just either accept it or not accept it, right?

46:11But I'm not concerned about this risk. When I was at Lucadia, we wouldn't lend out our securities to make income because lending securities took on counterparty risk. And everybody thought we were really, really stupid. And the only time you ran into counterparty risk in lending securities in the history of my career of significance was 2008. then you had a problem. So you should never say never. You should be aware of risks, but you should be able to judge them. You also mentioned earlier that there are high redemption rates, meaning people are wanting their money back rather than holding the actual shares.

46:44So I'm curious why that is and who ends up holding the shares? Is it shares that just aren't issued since they aren't being redeemed? Or how does that work? So after a SPAC announces a transaction, there's a record date. You want to make sure you own your securities by that record date, not by them post record date, because then you're going to get stuck rolling into the deal. That's one of the risks, by the way. And if you have the right to choose to redeem, which means you're saying, I'll take the cash, my proportional amount of cash, and in return, I'll give you my stock. So it's almost like the company's buying back their stock for the trust of that.

47:22It's no longer outstanding. It's as if it was purchased or redeemed. So it goes out of float and it goes out of issuance. High redemptions are a function of bad deals. If it's a good deal, nobody redeems because the value of the transaction exceeds the trust account. And those who are planning to practice pre-merger SPAC arbitrage will have sold to someone who wants to own that stock. Gore's brothers have traditionally done good deals. Uts Potato Chips is an example of a private company that has been hugely successful as a SPAC, that's just a cashflow consumer company, right? But you have DraftKings, you have various others.

47:59So there are plenty of reasonable companies where they trade above the trust value and people want to own them, right? The problem is you've got a lot of SPACs out there with mediocre sponsors with misalignments of interest, the need to get a deal done, and valuations are high. And And at some point, there has to be sanity. So high redemptions are really a function of the quality of the deal at the time it's announced from a perception standpoint. Let's transition to talk a little bit about the general market. You seem to be very familiar and in tune with what the Fed's doing, interest rates and such.

48:39So curious to get your general take on the market for the rest of 2022? We're a bottom-up manager. So most of our views on the world are from being in the trenches, looking at what's happening, and then formulating an opinion of what the world is telling us from being a bottom-up venture. I am not a Gunlock or a Rosenberg or a Malden or even a Jim Brandt or Jeremy Siegel or any of these financial pundits who really understand top-down. And I think it's important that people recognize their strength and weakness and figure that out. We believe when the Fed said they were going to raise rates that they were.

49:15I don't know. I think it's probably a pretty safe thing to do. If I'm wrong, I just underperform, but I kind of believe the Fed, particularly this Fed. So we felt the Fed was going to raise rates. And more importantly, we felt the Fed was committed to trying to deleverage its balance sheet. We were less comfortable to how much success they would have, but we felt they were committed to that. And we do think that balance sheet has hedge fund like qualities. And I recommend people read Jim Grant's work on the balance sheet of the Fed. But that said, I was much more concerned about the deleveraging of the balance sheet than I am the Fed raising Fed fund rates or ultra short-term rates.

49:51Because our rates are already low. We had a yield curve that we felt was going to steepen, and it did last year. And we felt now it's going to flatten a little bit. And the effect on corporate America, which is in pretty good shape and the consumer, which quite frankly, currently is in good shape because they can get jobs, they got stimulus checks, et cetera. And yes, I know that half of America is really struggling paycheck to paycheck or worse, but they're actually better today than they were five, 10 years ago. And this is not a political comment. It's just a balance sheet comment. So we came into the year with a defensive mindset.

50:22And the reason I was concerned about the Fed deleveraging was if the Fed stops buying a trillion dollars of securities, fine. So by definition, mortgage-backed securities, commercial-backed securities, asset-backed securities, which is most of their book, right? Those spreads are going to widen because to induce other buyers which are out there, they got to pay them more spread because the Fed's the most aggressive buyer. And when your spreads widen out, it doesn't stop it. Government agencies and investment rates, it flows all the way through, right? Because if I can make more on a AAA, then I need to make more in a double A all the way down the way.

50:56And if they raise rates, in theory, you know, you got to get paid more in their cap rate. The reason I was less concerned about short rates being raised also is it's a perception thing. Unless it can affect the middle of the curve or the five to 10 year or longer, you're not really affecting valuations, just affecting working capital funding, which changes margins, but not huge. A 1 % change in interest rates for somebody who's using it as a working capital margin is not going to affect your aggregate profitability that much, even in high leverage. So it's the balance sheet. We made that decision to be defensive based on the facts of what we were seeing by the Fed, the facts that in order to have long-term inflation, you need wage pressure.

51:35We're not quite sure where that's going. But we also saw, regardless of what's happening with Russia, the continued and increasing tension between the United States and China, Taiwan is a target of China no matter what. Our view is, if you think the Ukraine situation is something that's difficult to deal with, we have to start thinking about how that's all going to unfold. Because I think China has said that they're taking over Taiwan, that it's theirs. I don't want to argue the merits of that or not. China's been pretty good about following the words. Unless there's regime change at China from the people themselves, I think we have to assume that at some point, either coercively or voluntarily, Taiwan is going to end up more and more part of China.

52:21And that's not such an issue, except that we have a lot of semiconductor manufacturing and various other things that's going to bring prices to go up in sourcing here. Final question before I give you a handoff. I just pulled up the treasury rates here on March 23rd. I see the two-year rate today is 2.15 % and the 10-year rate is 2.37%. With the two-year, the rate is accelerating rapidly, meaning the bondholders are selling off those treasuries. Is an inverted yield curve where these rates cross something that you're keeping your eye on? Or is there anything else you're watching to see, okay, the Fed is not going to be able to continue to unwind?

53:02So there are a couple of things. First of all, I think the market is ahead and has been ahead of the Fed's movements. And I think the market's very, very worried about the large increases in prices. And there's no question, even the the bearish oriented people were taken by surprise at the large amount of reaction from the two-year and one-year part of the curve. And I think there's a Bloomberg article that came out last night and said, this is the biggest bond route, fixed income route there's been in the history of fixed income. And I think they're really talking about the short end of the curve, by the way.

53:32And I think unfortunately, a lot of people parked money as a haven of safety, right? Because the stock market had run so much. And there's another people that permanently parked it there because they're still recovering from either 08 or COVID, right? That people are really feeling pain. And ultimately, the loss aversion sets in and people decide they're going to sell. What's concerning is not an inverted yield curve. What's concerning is I haven't seen a capitulation trade. So I think SPACs are a great way of measuring capitulation. The SPAC market's sort of sideways, call it flat. Maybe it's down a little, but it's called flat since the end of October, actually.

54:08Yet the yield as an asset class has gone up. So the yield's gone up. They're relatively flat. Now, they're short dated duration. That's a pretty good defensive outcome and you're earning more yield. What you would see in the capitulation trade is where there's a tap on the shoulder, you would see that yield really blow out. You'd see prices, et cetera. You haven't seen that. You haven't seen a capitulation. There's been huge outflows in high yield, primarily driven through the ETF, HYG, and JNK, some in the mutual fund world, but there's been more out of the ETFs than out of the mutual funds. Again, you haven't seen the capitulation trade.

54:39It's been relatively order. Yes, bid-ask spreads have widened a little, spreads to treasury are down, high yields certainly down, but it's been very orderly. And you haven't seen that. In fact, I think HYG has probably got a greater yield to worst and yield to maturity than the cash market, meaning the underlying securities of that. You have a disparity, which shows more pressure on outflows than the actual securities themselves, but you haven't seen it. So I'm more concerned about where are we in that capitulation trade? Because I want to be a liquidity provider. I want when people need money, we're waiting on the sidelines to provide.

55:15In the meantime, we are picking away. You know, the inverted yield curve, we'll see. I am not a believer that the Fed's going to successfully deleverage its balance sheet and simultaneously do five raises. And the other question is how big the raises. I think they're committed to try to do a shock and awe, but not so much the stock market goes cratering and the fixed income market goes cratering. So it's more talk, shock, and awe, and then follow it based on the market's reaction, then the market is up, the two-year is up 100 basis points since the end of the year or more, right? That means the Fed can raise 100 basis points just to get even where it is.

55:47And remember, until the Fed does it, you're rolling down the curve, right? Your two-year maturity becomes an 18-month maturity, becomes a one-year maturity. So I do think we'll get a flattening yield curve. I'm not so concerned about an inverted yield curve. Most inverted yield curves are associated with recessions. That actually isn't always the case. Bank of America came out with something that they said, until high yield spreads are 600 basis points or more, There's no indicativeness of a recession. I would argue by the time it gets to 600 basis points, you've missed the foreshadowing. But I think we're going to get a lot of volatility.

56:16I think that what I would advise investors, whether it's equities, it's pre-merger SPACs, it's high yield, it's Bitcoin, which I don't know how to think about. I'm just too old. But whatever you do, I have the following recommendations that I think are tried and true. It's first, know thyself, know what you know, and know what you don't know. Two, be disciplined and stick to your discipline. Forget FOMO, right? And also, that'll prevent you from avoiding loss aversion because you'll feel good. I mean, I've often said to people, I don't know how much money I'm going to make and how long it's going to take, but I know I'm going to make money because it's a good investment.

56:46A good investment is a good investment. What you can't measure is time and return. But if it's good, it's good. And when it's bad, you got to recognize it. Two, invest in what you know. Those are the three most important things. And view market volatility as an opportunity to exit and to buy. But I don't know how long you can count on a Fed put. And I want to be clear about that. So don't focus on the technicals. Focus on the fundamentals. I think that's really, really important and have a longer term view. I think it's important. Look, the best example I can give is I don't invest in venture capital myself because I don't know what to do.

57:21I have allocated some family money to venture capital firms. I don't pick up myself because I don't know what's going on. I've done it because I have a fundamental long-term belief that we're in the beginning of a huge technological revolution, both in healthcare and quality of life products, productivity, nothing like what we saw on the internet. I mean, I think it's going to be bounds above that. I'm not recommending the ARK investment portfolio per se, but I have allocated to some venture capitalists. I stopped allocating to those funds several years ago because I felt valuations got stupid, right?

57:51So why would I allocate somebody who's now getting fresh money to invest in bad valuations? But I did several years ago. And one of the managers says to me, did you read my letter? I'm like, no. He goes, well, do you read my letters? I'm like, I never read your letters. He said, but you're an investor in the fund. Don't you want to know what we own? I said, no. He said, what do you mean? You can learn from it. I said, I can't. I said, you're a professional. You're a venture capitalist. I gave you money. When can I get my money back? He said, when I send it back to you. I said, exactly. So in the next five to 10 years, I'll know how we did based on how much you send back to me.

58:24And otherwise I can't do anything. I can't get my money back sooner. I can't make a decision. It's not like, oh, I can sell you. I'm stuck with you. I made that decision already. So reading your letters is just going to take time and clutter my brain. And I already have enough clutter. I need to focus on what I know. So I leave that story to try to help your listeners. David, thank you so much for coming on to the Millennial Investing Podcast. This was such an informative conversation. So I really appreciate you being so generous with your time for our audience. Before we close out the episode, where can the audience go to connect with you and CrossingBridge?

59:02So you can go to our website. You can just type in the word CrossingBridge funds and Google will take you to the number one thing. You can go to CrossingBridgeFunds.com. You can go to Kohanzik.com, which is the parent company of CrossingBridge, which also manages money, but not necessarily. So they're owned. But CrossingBridge funds, you can do a Google search, David Sherman, Kohanzik, David Sherman, CrossingBridge. You can call us 914-741-9600, 914-741-960. Hey, email me. If I don't know the answer, I'm going to say, I don't know. You'll get a response within a couple of days. Email me, David, D-A-V-I-D, it's not that hard, at crossingbridge.com or davidatcohanzik.com, which is my primary email, C-O-H-A-N-Z-I-C-K.com.

59:45You'll find us. It won't be a problem. Awesome. Thanks again, David. We'll be sure to link all those in the show notes.

1:00:17There you will find all of our episodes, some educational resources, as well as our TIP finance tool that Robert and I use to manage our own stock portfolios. And with that, we'll see you again next time. Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by the Investors Podcast Network. Every Wednesday, we teach you about Bitcoin. And every Saturday, we study billionaires and the financial markets. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional.

1:00:56This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.