Chris Joye: Chief Investment Officer at Coolabah Capital Investments

Speaker A: Welcome back to the WNM why Invest podcast with me, Luke Hyde Smith and today listeners. It's a first. We welcome back a returning guest, none other than Chris Joy from Coolabah. Not wanting too stereotypical Chris, but be rude not to welcome you back with a G' day mate. How are you?

Speaker B: Yeah, I'm good buddy. Thanks for having me on the uh, the pod. I appreciate the opportunity to engage with your amazing audience, but what's the first? You've not had a second?

Speaker A: You are the first returning guest.

Speaker B: Wow. Yeah, interesting. I'll have to uh, live up to the hype and expectation.

Speaker A: Yeah, well, we enjoyed our first conversation a lot, even though it was a slightly briefer one. So we're in for the long form today which is very exciting for us and our listeners. By way of background, Chris founded Coulobar UH Capital in 2011 and leads the portfolio management effort that has produced one of the leading top performing fixed income capabilities in Australia and indeed increasingly globally that is available to European investors via the Pacific Cooler Bar uh, Credit Alpha Fund. Not only is Chris founder and cio, but he is widely known in Australia as an economist, policy advisor and fund manager and serves as a contributing editor to the Australian Financial Review. Previously Chris worked at Goldman Sachs, the Reserve bank of Australia and founded Rismarck International and has advised both the Australian and the US governments on um, policy. That is a seriously impressive cv. Chris, kudos for what you've achieved today and I have even left out all your academic accolades which go on an extensive list. But it is so good to have you on the show and many thanks for taking the time.

Speaker B: Thank you. Appreciate the opportunity.

Speaker A: Good stuff. Well, let's get into it because one of the things I thought would be interesting to compare is where we were back in September 2025 when we last met and where we are today from say a uh, inflation growth rates spread so that corporate bond spread over government bond yields and equity markets. Obviously there's a lot there. But let's I think start off with the inflationary backdrop because when we last spoke you actually pretty non consensus was saying inflation is going to be a bit more entrenched and we have certainly seen that in the US come through in the data. It's definitely more sticky. Markets moved on to pricing rate cuts to rate hikes. Where are you currently in your thinking on the inflationary backdrop, both US and globally?

Speaker B: Yeah, so for a year now we've been arguing that investors should be worried about hikes, not cuts. That it was crazy bond markets were Pricing in no hikes at all for The Fed over 26, 27, 28, uh, we had as much as 100 basis points of cuts priced for the Fed. Uh, now we see at various times recently one to two hikes priced in for the Fed markets eviscerated the cuts. And we actually seen the advent of what could be a global secular synchronized hiking cycle. The Reserve bank of Australia has hiked three times. They were the first central bank in the world to cut, hike, cut and then be forced to capitulate in failing to meet their price stability target and hike again. The Reserve bank of New Zealand is now signaling they're going to hike circa three times this year. The ECB's hikes at the Norges bankers, hikes at the bank of Japan's hiking. And we've had a hawkish pivot uh, obviously from the Fed. And our hypothesis was that the US economy would be much stronger than people expected. So in the last episode we expressed a lot of bullishness on uh, the U.S. economy as a function of fiscal stimulus. The fact that the Fed had cut the policy, uh, rate from five and a quarter to five and a half down to circa 3.6. The fact that Trump was the most pro business president perhaps we've ever seen and actively uh, reshoring strategic supply chains and that the AI Capex boom was going to be much, much bigger than people thought. I think I might have said on the episode that our thesis was that the hyperscalers were lying about Capex deliberately understating it and we'd get consistent upside surprises, which is obviously what has played out and that AI would create jobs rather than destroy jobs. If you look at new business openings in the US they are booming and much like the Internet, uh, we're seeing a lot of new contiguous industries emerge. So everyone's trying to capitalize on this AI phenomenon. And you're actually getting a lot of job creation, also some job destruction. But in the short to medium term a lot of inflationary rather than disinflationary pressure. We're seeing that core inflation in the US was accelerating prior to the inflation shock in March. So on inflation we've obviously had this uh, significant inflation shock. But core PCE inflation in the US six month annualized I think was running at 3.4 in the six months to February, I think 3.2 in the 12 months to February and stronger again in the six and 12 months to March. And at the same time we're seeing the unemployment rate fall in the us We're Observing consistent upside surprises in payroll and employment prints. And now with the cessation of the Iranian US conflict, we had a very contrarian view on that. Uh, Luke. We argued in mid March that the conflict would end very quickly. We started buying billions of dollars of credit in the last two weeks of March and we argued that actually the kinetic conflict would be cauterized by the end of March. I wrote that publicly. Now, we had the ceasefire in the first week of April and the formal consummation of the ceasefire obviously in the last week. But basically we said you might see some tit for tat conference kinetic exchanges after March. But basically we argued, uh, you should fade the conflict. Oil prices have plunged since. So I think on the one hand, uh, we're going to get elevated inflation pressures as the oil price shock passes like a peek through a python for the next couple of quarters. But on the other hand we've got the disinflationary pressure of oil prices normalizing. We're still very bullish on the us I think Trump's going to try and prime the economy as much as possible ahead of the midterm elections in November. And um, you know, globally, services inflation is belligerent, very sticky. We see it here in the UK services inflation is still very elevated about 3.7% on our numbers. UK core inflation is still running well above, uh, BoE targeted. You know, on our numbers again, 2.6% versus 2. The Fed's running inflation way above target, so it's gonna put pressure on Wash. WASH is obviously not gonna wanna hike, um, before the midterm elections. And I think that's kind of at least has been the consensus view because obviously the market was pricing in cuts. So I see global inflation pressures. I think global growth will be better than people expect. I think AI and the capex related to AI is a game changer. I think the swing in the political pendulum globally to the right. We're seeing a huge shift to the right in Australia, New Zealand, the US and here in the uk, to name a few examples.

Speaker A: South America. I'll add to that.

Speaker B: South America. Exactly. And I think this is profound for markets, specifically bond markets, because you've got lots of fascinating cross currents. The politicization of central banks, potentially the erosion of their inflation fronting credentials. I'll tell you one thing very interesting here in the UK is we're seeing a very serious upward drift in inflation expectations. And that's also a global phenomenon. And then the question of whether we'll get fiscal consolidation or fiscal expansion are they going to cut taxes or slash the bureaucracy? Trump's done an amazing job at reducing the number of government employees. So the bureaucracy has experienced on some measures the largest shrinkage in decades. So what these centre right parties do when they come to power I think is really important.

Speaker A: Okay, that's a fantastic backdrop and lots to pick out on that. So let's just think about the inflationary side. Uh, you've spoken about the fact that many central banks are hiking. You've spoken about the fact that Walsh, who's coming in hosting his first, first Fed press conference actually later today as we speak on 17 June, unlikely to hike. But your sort of view is inflation's going to be sticky but we're probably not going back to the kind of inflation that we saw coming out of COVID then the Ukraine war, et cetera, not double digits. But inflation is going to be stickier and remain slightly higher. Is your view, is it? I mean, let's just deal with the energy thing. Right, the energy. Interestingly, as you correctly forecast, the conflict uh, in the Middle east has come so far to a conclusion. Oil prices are back below 80amazingly, obviously a little bit up from when we started. But that dynamic feels, as you say, there might be a short term um, rise in inflation but it's not likely to be long lasting and I mean debate, you know, where we are from, a sort of underlying inflationary dynamic.

Speaker B: Yeah. So uh, I mean what I would say is we've never seen inflation normalize since the pandemic and that's true of almost every country in the world. Services inflation has been persistently problematic. Goods prices fell once supply chains reopened and that pulled down headline and core inflation a little bit. But goods prices, if anything, started to increase again around the world. And uh, services inflation has been a big problem here in the uk we have uh, and I say we, and I went to Marlborough College, I studied at Cambridge University, worked for Goldman Sachs in London. So I consider the UK a spiritual homo sorts. But here in the UK we have this interesting dynamic where we've got very weak productivity growth. We've had no productivity growth here in the UK since 2022. We have uh, super strong unit labor price growth or unit labor cost growth. So that's basically productivity adjusted wage growth in the UK is running at about 5% on our numbers, way above pre pandemic levels. And that basically is the key forecast variable for inflation. And that explains the elevator.

Speaker A: Wage pressure is subsiding, is it not?

Speaker B: Yeah, it is. And uh, well on the one hand, our trend measures of uh, productivity adjusted wage growth continue to remain very high. On the other hand, full employment is estimated to be four and a half to five and unemployment is obviously above that here in the uk. So there's more labor markets slack in the uk, which is a positive for inflation. But on the other hand the UK is amongst the weakest productivity growth in the world, so that's a negative for inflation. And then in the UK here we have a huge budget deficit. Pre pandemic it was running 2%. Right now it's running 5% of GDP. So rampant public spending. But to answer your question, basically my short stroke summary is prepare for a higher, for longer rates environment. I might have said this in September last year, but we've been arguing the US 10 year could push towards five. We've seen it head in that direction because it was at 3.6 at one point last year and it's headed into the high fours. So prepare for a higher for longer environment. I think you'll see hikes globally and we've argued that for a year inflation's not going away. Inflation expectations globally all around the world are drifting higher. And I think if you get a shift to the right, you could see tax cuts globally, fiscal deterioration, more, um, expansionary policies. We've seen globally central banks undermined in Australia, politicized in the uk pretty on um, the one hand, dovish boe, you could argue. And in the us clearly WASH is changing the interest rate calculus. So I'm definitely telling you that we remain concerned about elevated inflation pressures and I don't see any or many sources of disinflation. AI is not going to be the disinflationary miracle for some time.

Speaker A: Yeah, very clear. Uh, let's go on to the sort of growth dynamic now because I think that does play into obviously the inflation story. You mentioned a sort of a movement to the right. It looks like we probably may go a little bit more left in the UK first. And that's going to be a challenge maybe for the government bond market in terms of higher spending, potentially more taxes, potentially. Let's see how that unfolds. Um, obviously a very uncertain political backdrop, growth profile. Again, trying to compare where we were September 25th to where we are now you were talking about. Actually we were in a sort of mid cycle slowdown expectation for the U.S. that was the market consensus, lots of concern about the impact of tariffs, which have been sort of muted I think, both from a growth and a deep inflation backdrop in the us. But you correctly highlighted that the capex spend was going to be much higher than market expectations. And real GDP at the moment in the US is running circa three, three and a half percent. So strong. You see we've got a capex, we've got a private sector which is re leveraging. So the growth in the US looks pretty strong. Would you A agree with that? B, how does that look elsewhere?

Speaker B: Yeah, we've been super bullish on the US for the last year and remain very, very bullish. The US I think Trump is galvanizing a lot of momentum for his policy program geopolitically and domestically. It's clearly paying massive dividends. If you look at how the tech intelligentsia have really coalesced around Trump. I mean this was a bunch of oligarchs in the US that were historically quite supportive of the Democrats. And whether it's Zuckerberg or Musk or Tim Cook or uh, Jensen, they've all sort of um, galvanized behind Trump and his deregulation program. And I think that the zeitgeist in the U.S. i mean I've been to a lot of U.S. cities recently. In the last week I was in Chicago, Menlo Park, San Fran and so on. And the entrepreneurial zeitgeist is incredibly positive. If you're an entrepreneur, you really feel like you have an administration in Washington that has your back and that you can remove sand from the wheels of innovation and progress and you can get shit done basically. So that's obviously very different to countries like Australia and the UK and large parts of Europe. Yeah, large parts of Europe we have center left governments in power who actually see the private sector as a zero sum, um, opportunity to rape and pillage and appropriate wealth through taxes. So to take from the private sector to feed the public sector, to feed these ever enlargening bureaucracies. But the problem is you can't tax your way to productivity and prosperity. And we're seeing in the U.S. i think, a fascinating schism between left and right. It's absolutely, I think, uh, incredible what's happening. If you juxtapose California and New York against Florida and Texas, mass exodus of people, businesses and wealth out of those blue states that just see the private sector as a target for taxation and the theft of income and capital and wealth to feed their pet political projects. And so they're all running huge budget deficits, massive economic problems, basically. I think their policies are economically suicidal. On the other hand, we're seeing budget surpluses in Texas and Florida, tremendous growth, strong population growth and um, they're looking to eviscerate taxes. In fact, I think Florida's in the process of removing all land taxes and they're already one of the lowest tax states in the United States. So I think if you look at the success of the US compared to other countries, I think that lays a platform for future center right political programs. I would say globally, I'm pretty positive on growth. I think, uh, the China and the US will sort of reach a detente and an impasse that will allow the global economy to progress. I'm hoping that some of these seemingly existential geopolitical conflicts, whether it's Russia, Ukraine or what's happened in the Middle east, will dissipate. Uh, having said that, Trump's hell bent on asserting control within his Western sphere of influence. So clearly Cuba is now in the crosshairs. But I don't think that's a bad thing. I think what happened in Venezuela was a good thing. I think if they take out the Cuban regime, I think that will be net positive for growth and stability in the medium term. So I'm generally very bullish growth. I think also I would say this, that no one's saying your comment about the potential shift further to the left here in the UK in the short term. I would say here in the uk, the Zeitgeist is also similarly clear. People are very, very unhappy with the prevailing policies. Uh, the centre right is in the ascendancy and I think that's gonna put a lot of pressure on the left and it's forcing change. It will at the end because ultimately these politicians, all they care about is power and they wanna sustain their power and perpetuate that. So we're seeing similar things in Australia. The centre left government in Australia's come out with this horrendous tax program in the budget in May where they've lifted capital gains tax rates in Australia, the highest levels in the world. So capital gains tax is going towards 50% from 23.5% in Australia.

Speaker A: Oh, I hope Andy Burnham, um, and co aren't looking at that for the uk.

Speaker B: Yeah, but there's been a tremendous, extraordinary, frankly and very visceral backlash. So the hard right party, which was sort of a, uh, curiosity in the past, has suddenly emerged as the most popular political party in Australia.

Speaker A: So has that tax change come into effect in Australia or been muted as a policy change?

Speaker B: Exactly the latter. So it was mooted what was proposed as part of the May budget. It's now slated to be legislated. But this is a tax they promised a year ago, the federal election not to introduce, they promised 50 times not to introduce all these taxes. It wasn't one, it was many. For example in Australia, trusts, so family trusts have never been taxed in the history of the country and they've slapped a 30% tax on family trust. They've ah, introduced for the first time ever an estate tax, I mean the full panoply of anti productivity policies. And there's just been this tremendous backlash. And it's interesting, these tax programs have elicited uh, a sort of latent toxicity towards politicians behaving in ways that uh, are not straightforward. I mean basically they've lied and uh, that's uh, been received very poorly. But to answer your question, positive growth and I think that means higher rates, longer rates uh, or higher for longer climate, elevated inflation pressures and I think that introduces a lot of cyclical risk in vulnerable parts of the economy. So what I'm saying is a little bit bipolar. On the one hand lots of positivity for growth. I think that challenges though uh, asset prices in some respects because that means high discount rates, higher risk premium and it particularly challenges more marginal sectors of the economy that are being funded by non bank lenders or these new subprime lenders in the form of private credit.

Speaker A: Yeah, well I was thinking as you were framing that what that means for asset markets. Uh, let's deal with your specific area of expertise which is global fixed income. How do you see the opportunity set you mentioned you bought a lot of credit in mid March when we had a sort of brief widening of credit spreads. Although that certainly relative to history spreads are quite tight. They've even tightened further. So number one, how do you see the credit markets? Public credit? Number two, where do you see if any opportunities on the government bond type?

Speaker B: So when you think about credit markets you've really got to break down the component parts of what credit's paying you. So on the one hand there's your overnight or short term cash rate. So what is cash doing? So that's the bank of England policy rate. On the other hand, if we're looking at long term bonds, you're going to get compensation for holding bonds for a period of time through something called the term premium, which is basically extra interest you get paid for uh, the compensation associated with interest rate volatility, inflation volatility and fiscal policy uncertainty. So the cash rate here in the UK is 3.75% but a 10 year gilt pays roughly 5 ish.

Speaker A: Roughly 5. Yeah.

Speaker B: So that differential is one proxy for the term premium. And then clearly market expectations for future rates are going to impact future rates, whether we're in a hiking or easing cycle. And I'm not sure if we talked about this last time, but one of our hypotheses, Luke, has been that there has been a shift in risk premia from the private sector to the public sector. So whilst credit spreads have tightened, term premier have widened.

Speaker A: Right.

Speaker B: And so markets are basically saying we trust, for example JP Morgan and we might trust, as another example, Amazon or Google, but we do not trust the UK government or the Australian government. And so public risk premium have expanded. And what this means is that whilst people often talk about credit spreads being tight, one point I'd make is the credit market is super heterogeneous. There's many parts of it, as you know just as well as me. You get the private credit market where spreads are tight and that's a huge problem because default rates are increasing and that market is in crisis. You've then got, uh, the high yield market where spreads are t. And if we're right and inflation is sticky and stubborn and rates remain high for long and possibly rise, that's going to create increasing pressures for high yield.

Speaker A: Although on the flip side, strong economy, operating performance, the underlying business is good. So you're not talking like credit blow up, but you know, you just got to be very selective maybe on your credits and who's exposed to higher rates for longer.

Speaker B: Correct. And we saw in March, like, you know, we had massive outperformance. We have had consistently massive outperformance over peers, but in March, massively, we saw very significant decompression. Decompression within bond markets. And what I mean by that is there was a lot of, um, discrimination in bond markets between bond issuers that would perform well in a high for longer or rising rate and inflationary climate and those that might struggle with that cyclical risk with higher rates under the weight of that interest burden. So we saw cyclical corporates really punished in March, but, you know, too big to fail financials, for example, outperform relative to those corporates. So coming back to your question on bond markets, where are the opportunities and how do we see those? So on the one hand, cash rates are high and what that means is cash is king. Right now, cash looks fantastic here in the UK, the BoE policy rate is much higher than. It's basically more than double its average since 2007. So cash is fantastic and that sits within your yield. Now when I said to you that risk Premium shifted from the private to the public sector. What that means is whilst credit spreads have tightened, term premium widened, government bond yields have increased. And so your all in yield has actually kind of moved sideways. It hasn't actually plunged and a lot of, as you know Luke, a lot of investors in our market are focused in on the yield as opposed to the spread, the yield buyers rather than spread traders. So first point is cash rates are high, likely to increase in many markets. And I love cash. Cash is one of the most attractive asset classes in the world right now because it's liquid, it has no credit risk and it's part of our yield. I also like term premier term premium improved a lot. I do like long term government bond yields now. The risk is they drift a bit higher.

Speaker A: All of them or are you going to be a bit more specific on country?

Speaker B: I'm not, I'm not a huge fan of the UK because of the uh, you know, the 5% budget deficit and the fact that you know we have a crazy super hard left government here. I mean the UK seems out of kilter with I think the direction of travel in the UK in terms of the rise.

Speaker A: It feels like we're going to get there but it might be a difficult journey and might get worse first.

Speaker B: Yeah, exactly. So, so I think gilt yields look amazing but on the other hand they could rise and if you held a fixed rate bond and the price falls that might be on a mark to market basis a little uncomfortable. But I would say generally as an asset class government bonds look really attractive in terms of long term interest rates. And I particularly like Treasuries when they're sitting between 4.5% and 5%. And I think gilts at this level uh, are definitely uh, worthy of consideration. So cash is attractive. Long term government bond yields are attractive. Now let's come to credit spreads. Investment grade credit spreads uh, are far less attractive, corporate spreads in particular but financial and senior ranking financials and what we call sub sovereigns. So European Union bonds and some of the supranational or sub sovereign issuers. So imf, World bank, the sub sovereigns actually in spread terms relative to cash are uh, not nearly as expensive as corporates. Sovereigns generally are very attractive like Aussie 10 year government bond yields. Aussie government bond yields are AAA rated, one of only a handful of triple A rated countries in the world. The Aussie 10 yield's been at 5% and that is relative to US 10 yields has been at about its 98th percentile spread over US 10 years on a historical basis. So sovereign's attractive, subsovereign's definitely attractive in spread terms relative to other parts of the market. Corporate's less attractive. I'll uh, come back to that in a moment. Financials, I like senior financials in particular I would say that we've been trading a lot of the hyperscalers bonds and the hyperscalers are issuing a ton of debt. So Nvidia came the other day uh, with a uh, $25 billion issue. We took 550 million US of it and they were paying big new issue concessions. So the hyperscalers because they've got to fund so much capex having to pay over the odds to issue their bonds and the new issue concessions are very attractive. The one rider is they tend to be attractive for a very, very short period of time because what they're actually doing is they're re racking their own interest rates or their own spreads wider with the tsunami of issuance. So you've got to trade them incredibly actively, which we do. So I would say spreads not particularly attractive but within the market there's actually lots of opportunity. My key prescription or recommendation for folks listening is you want to be super liquid, you want to be super high grade. I like being a double A rated. You don't want any cyclical risk, uh, you don't want any private credit in my view, you don't want any default risk and you want to be really active in new issue markets because the juice. So on the one hand spreads are tight but what that means is we're getting a ton of issuance and the issuance it's hard to price for a lot of managers because they're not particularly Precise. We have 80 bond pricing models, I have 61 in my team people and uh, 14PMs and 22 analysts and they're pretty much all quants. And so our wheelhouse is 1, 2, 3, 4, 5 basis point spread mispricing. So very fine micro mispricings. So for Cool Bar, this is super target rich. Um, we're loving, we're trading 10 to 20 new issues a day, you know, in higher activity markets. So I would say like cash, like yields, uh, spreads are a bit iffy. There are opportunities within ig, but the real opportunity is new issues. So the IPO market for bonds and the final comment I make on this is the IPO market for investment grade bonds is 20 to 30 times bigger than the IPO market for equities. So while Luke and Chris, Joy, that's my Name we might seem like ostensibly very doer, uh, boring, parsimonious people. We are actually pretty exciting dudes in the sense that we have this tidal wave of new issues every day to pick amongst.

Speaker A: Okay, fascinating. Yeah, really deep dive on the various opportunities. One of the things I'd be interested in your view of, and you sort of mentioned it. Do you think we get into an environment where the spreads or even the all in yields of some of the high quality corporates, hyperscalers, for example, trade under. Yes, the governments. Yeah, I know we're seeing that a little bit.

Speaker B: You think that, oh, 100, 100, like these, these uh, too big to fail national champions that are um, explicitly and or implicitly government guaranteed should command lower all in yields than say the UK government. Yeah, makes total sense.

Speaker A: Yeah, it does. It says from a credit fundamentals perspective it makes sense. But from a economic theory, you know, basically you're spreading your corporate fund as your cash rate, you're spreading your corporate spread, et cetera. Hard to fathom, isn't it?

Speaker B: It's hard to fathom because the economic theory assumes that these political actors are rational. And what we've seen is tremendous hedonism and myopia as these profligate and highly imprudent politicians basically borrow from future taxpayers to inundate taxpayers in the present with these political gifts. They're basically trying to corrupt or financially conflict voters today they're trying to buy votes. And it's been a very successful strateg, and we've argued this for years, it will only work in a low inflationary environment as soon as inflation increases. And this has been a key hypothesis of ours, has been the community will eventually join the dots between um, this extraordinary political and public sector largesse. And the consequence or corollary, that is a much, much higher cost of living manifest in much higher inflation, which then has to be combated with much higher interest rates that forces Main street to pay the price of these handouts. And that's what we're really seeing. Slowly galvanize. The other thing that's galvanizing I think here in the UK is people understand that the growth has been driven by basically government spending and immigration and population growth. And there's now a significant backlash against the fact that all these handouts and all these immigrants have driven up the cost of living, which is then forcing up or keeping here in the UK interest rates higher than they would be otherwise. And again, you're effectively robbing Peter to pay poor. The problem I think with the politicians is a Lot of these folks are professional politicians. They've never worked in business, they have never started a business, they have never hired a single soul in their careers. And they don't understand that it's actually the private sector that powers prosperity, not the public sector. And this is the essential and existential problem. They don't get it, mate. They don't understand that it's Main street that needs to be supported and empowered to power, profits and prosperity and jobs,

Speaker A: which is understood in the US for all its like, potential policy. And you might not like the way it's done, but that is definitely understood. Oh, so here's the acid million dollar question for you. If you were Rachel, uh, Reeves for a day or a little bit longer. Let's give you longer, uh, than a day. Now, what policies would you enact as Chancellor of the Exchequer here in the UK to try and dig us out of, which is quite a deep hole?

Speaker B: Well, first I'd cut the public service by about 25%.

Speaker A: Okay, so cut the spending.

Speaker B: Yeah, I'd massively reduce government spending. So I'd slash the bureaucracy by about 25%. I would radically reduce income taxes and corporate taxes. And I would just try and make the UK a uh, center of excellence for world class human and financial capital, which it used to be the city used to be a key global clearinghouse for the best and brightest minds in the world. And unfortunately that's no longer the case because it's being supplanted by Singapore, Dubai, parts of Europe, uh, the US and all these ascendant countries that are willing to do deals in order to attract the best, uh, and brightest minds in business. So I think government needs to get out of the way. We need much, much lower taxes and we need much, much lower political spending. And it's clear in the UK we don't need any more immig. You know, that's been a huge assimilation issue in the uk. The other thing in the UK is, I mean there's clearly a highly insidious form of stealth socialism and censorship. I mean the censorship is just out of control. And um, you know, the social media prosecutions, this idea that kids under the age of 16 can't use social media. Ridiculous. They can't use X, but they can use Blue sky, which they can, they can use the center left social media platforms, but they can't use the center right social media platforms. It's absolutely absurd

Speaker A: on that policy. Right. We all want kids to have less screen time.

Speaker B: Uh, yeah.

Speaker A: And less, I guess, addiction to social

Speaker B: media, etcetera but it can't be a centrally planned prescription. That's ultimately the responsibility of the parents in question. And you know, screen time can be a very good thing in many contexts, but it's ultimately the parents who need to make those judgments and decisions. We can't have these centrally planned dictates prescribed to us. I mean, it's a massive infringement of civil liberties, banning holos, bolus all forms of social media, but excising your preferred political platform in the form of blue sky. So Australia did lead the way. And I don't think it's a policy that will sustain. I don't think you'll see it sustained here in the UK either. When people actually think through A, it's almost impossible to enforce, but B, it's uh, an evisceration of parental rights.

Speaker A: Understood and very clear. And also chimes with one of our former podcast guests who's Arthur Laffer.

Speaker B: Right.

Speaker A: Who'd written about what you need to engender a strong economy. And it's broadly. And that's not no tax, but it's a flat and low rate of tax. It's a government that gets out the way. It's sound money, it's deregulation and it's free trade.

Speaker B: You know, you saw with the non dom rules change here in the uk, you've got a huge exodus of people and capital out of the country. And the problem today is that capital and people are incredibly mobile. So they will move like businesses will relocate. There's no necessary need to base yourself in the uk And I think, uh, the UK is, uh, increasingly threatened with irrelevance. So we need to be a preferred destination for the best and brightest in the world. And therefore we need to have very, very globally competitive incentives for businesses to establish themselves here. I mean, if you've got a great idea, why on earth would you set up that new business here in the UK? You would, you know, pick 25 to 30 different destinations before the UK. So I think that's the problem and that's why we've had no productivity growth. I mean, the UK has, as I mentioned, amongst the worst productivity growth in the world. So it's uh, just not tenable in the long run.

Speaker A: Okay, that's very clear. Other side of the Atlantic, we've mentioned Kevin Walsh, new Fed governor, first press conference and uh, conversation, et cetera. Today, later today. So, you know, difficult to gauge what he's going to say. But how do you see his. A policy, macroeconomic environment that he's, I mean, he's been very explicit and clear, wants to get US Government debt down, wants to get the cost on the interest on that government debt down. Quite difficult. In the backdrop that you've described, that is pretty strong growth and inflation, which may not come back to target. How do you see his sort of commitment, communication with the market and what do you expect? And do you know him?

Speaker B: No, I don't know him. I think he'll probably end up being a very good Fed chair. I think, um, the atmospherics around his appointment are kind of more or less irrelevant in the medium term. In the short term, I think they'll assert. I think presidents and prime ministers get to appoint their central bank governors and chairs. They're always politicized. They get to appoint all the voting members on all the committees around the world. Trump's just been much more explicit in making it clear that he wants to influence outcomes. But again, every prime minister and president does exactly what Trump's done. Uh, Walsh himself, I think is well qualified. He's historically been a bit of an inflation hawk and definitely a balance sheet hawk. He's going to be dovish because he clearly has an implicit contract with Trump to be dovish ahead of the midterm elections. In particular, he's advocated a new measure of inflation called the Dallas Fed's trim mean measure, which is only running 30 basis points above the Fed's target. So that's running at 2.3. And the, uh, Fed's targets obviously 2, whereas core pieces.

Speaker A: And he has said he thinks AI is more disinflationary than inflationary, which is

Speaker B: a convenient crux for him to rely on. And it's incredible. I mean, there are obviously persuasive arguments in favor of the idea that AI could be very disinflationary in the medium term. But I got a couple of comments on that in a second. But the issue is the Fed's explicitly or the Fed's preferred measure of inflation is core PCE, and that's running about 50% above target, so around 3% versus the target of. And I don't think that problem's going to disappear. I think, uh, he's argued that, uh, there should be less communication from the Fed. He's argued that they should potentially do away with the dot plots. He probably wants to control more of the external communications, but I think it's going to be very hard. I mean, the Fed's this massive institution with thousands of analysts and politicians can influence the flight path, but the data will determine where the Fed lands. So in Australia, for example, the government of the day sacked the chairman of the central bank, put in a new chair, brought in a dovish deputy chair from actually, interestingly, the bank of England appointed seven of the nine voting members on the interest rate setting committee. And they got a very dovish central bank that cut rates three times last year, only to find that they had a huge inflation problem and they've now hiked three times. So they've, uh, ended up landing where the data has, uh, determined. I think the Fed will be the same. So I think they could be slow, but they're going to be hawkish. He's going to have to manage those crosscurrents and his implicit contract with Trump. I don't think they're going to be cutting rates. I think rates are going to have to move higher. Our tailor rule modeling of the Fed's policy rate implies they should lift rates by 50 to 75 basis points immediately. So rates need to be higher. You've got unemployment around 4%, uh, low 4%. The full employment estimate from the Fed and Treasury is more like 4.5% to 5%. You know, wage pressures are likely to accelerate. Inflation expectations have been drifting higher. And if we're right about AI being inflationary in the short term, creating bottlenecks in all sorts of things like energy prices, chip prices, memory cards, you know, processes, and the uh, bricks and mortars required to build these data centers, you could see a lot of pressure placed on the US economy, particularly at a time when population growth in the US is at the lowest level in the history of the Republic, because Trump has been amazingly successful at cauterizing illegal immigration. So there's no long, longer any, you know, legal crossings are down 95%. There's no longer cheap labor available from Mexico and other destinations in the US and so I think all roads lead to higher Fed rates and a hawkish wash eventually reasserting himself. But I think in the short term, you know, messaging is going to be mixed and it's going to be, uh,

Speaker A: see if they can manage it through to the midterms.

Speaker B: Um, yeah, exactly.

Speaker A: Yeah, understood. Yeah, that's very clear. Look, it would be remiss to have you on without talking a little bit about Kudobar, the firm that you founded. Co founded. What are you most excited about in terms of your business? It's grown phenomenally. Performance is great.

Speaker B: Yeah. So we're um, 114 billion US here in the UK we offer a global Ad Corp, or long durational fixed rate bond strategy, which is benchmarked against that Bloomberg Global Ad Corp Index. And we also offer a absolute return strategy which has historically done about 3 to 400 over uh the UK cash rate performance has been good. Um, both those strategies have done 6 to 7% over the last 12 months and uh, have been peers since inception. Um, what I'm really excited about for Coolabar is we have a process, it's very different to other uh, fixed income participants. So historically in fixed income people have very legitimately, incredibly been focused on having uh, buy to maintain portfolios focused on yield and have really concentrated most of their efforts in how do we drive yield, do we have more duration, do we have more credit ah risk, do we have more liquidity risk at ah cooler bar we don't have liquidity risk, we're super liquid. We don't have really any default risk, we're a double A rated and we don't have any duration at all. We hedge out a hundred percent of duration or if we're running a long duration strategy we have exactly the index duration. So we don't try and bias duration in terms of macro views and being over underweight duration. What we do is price bonds and trade bonds and we trade about 1 to 2 billion a day. As uh, I mentioned We've got about 60 people on the team. Uh, most of those guys are quants and girls and I think we are the best in the world at finding these small micro mispricings where a bond's paying 5 to 10 basis points of extra spread that isn't warranted and we can capture that extra spread and when the bond normalizes the price appreciates, we uh, monetize that appreciation and we rinse and repeat. We've beaten for example Global Ad Corp by about 250 basis points per annum with the same volatility as the index, the same risk as the index and basically uh, a 2x Sharpe ratio or information ratio which is the technical term for a risk adjusted return. So for cooler bar, notwithstanding all of my rhetoric and hyperbole around the need for politicians to be prudent and balance their books, the fact of the matter is that my investment process benefits immensely from more indebtedness and more issuance. The m, more bond issuance there is in the world, the more opportunities that we uh, uh, face and we can harvest and farm and monetize and that's what we do all day, every day. US credit, Euro credit, sterling credit, Asian credit. In sovereign markets we're trading new issues and secondary markets. The bond market is also probably the Final frontier for inefficiency. And this is really interesting because it's not listed on an exchange. If you put all bonds onto a stock market, a lot of these pricing discrepancies would disappear. It would go algorithmic. But as you know Luke, buying bonds is like buying and selling houses. It's uh, mostly a voice market. Uh, there's very poor price disclosure and volume disclosure. So it's a very opaque market. And most of the flow in bonds is very passive. There's four main actors, ETFs, they're all passive. Central banks hold trillions of dollars of bonds for FX reserves, they're passive banks hold liquidity books. It's slightly technical, but banks typically have hundreds of billions of dollars of bonds on their balance sheets that are held for Basel III liquidity purposes and they have to be hold to maturity and then the bulge bracket bond market players usually have bonds as a carry book, as a source of yield and they're not looking to turn it over super actively. So for someone like Cool Bar that is hyperactive, very, very scientific and rig and uses uh, a vast array of sort of quantitative signals to find these mispricings. It's an extremely target rich environment, particularly in a world where we're getting more and more indebted, accented by the advent of the hyperscalers which are nuking bond markets with these $25 billion issues.

Speaker A: Well, I was going to mention them. They're helping you, aren't they? Expanding the opportunity set big time.

Speaker B: Big time, yeah. So I'm super excited. And then overlay this point. So not only is it alpha rich, target rich, a uh, big market, very opaque, super inefficient, but then you've got very high cash rates that are probably ris, and very high long term government bond yields and wide term premier. So really right now it's a perfect storm for bonds. And I'm sure you're seeing this in your growth and your amazing performance and uh, you know, this is fantastic. What is not good news, to be clear, is if you've got credit risk, if you've got private debt, if you've got anything that is exposed to default risk, this is a bit of a nightmarish scenario.

Speaker A: Yeah, it's the big question, isn't it? You know, if and when, you know this cycle turns right and when you've spoken about the strong growth and it does look like, you know, it supported both government spending and corporate spending, et cetera. But you know, there's clearly a risk at some stage we're going to go through a credit cycle and then obviously, you know, it's going to be a

Speaker B: slightly more challenging question. Um, what do you think about this situation in the US where the feds cut the cash rate from five and a quarter to five and a half to 3.6. So massive reduction in interest rates. One, we've had four trillion of tax cuts two very strong US economy three declining unemployment. Four. But at the same time we've had the mother of all redemption runs on private credit funds and we are seeing uh, significant stress in private debt. So how do you reconcile lower interest rates and more fiscal stimulus and a strong economy with this huge redemption run on private debt funds globally, but also in, in the U.S. i mean actually one little anecdote. My financial advisor put my mother into a UK private credit fund, okay, that was frozen for three years and they've just written down the value of that fund. 30% disaster. Absolutely. She's got one and a half million dollars in that one fund. But how do you reconcile that?

Speaker A: What's that underlying? Was that real estate? Was that broad corporate lending?

Speaker B: No, that was actually a uh, UK litigation finance firm. But on the US private credit dramas. Well how do you see that?

Speaker A: Look, I think these sectors on the public and private credit are ah, not independent to each other in terms of overall fundamentals, credit risk, the line to the economy, et cetera. I think it is interesting and it is alarming that you have had a deterioration and certainly a desire for investors to redeem from private credit in an environment where actually credit markets and the economy has been extremely robust. It does make you think, I mean if and when we do have a turn in the credit cycle, you know, blimey, how bad is it going to be there? Like, you know, there's a definite concern. I would also say there are some slightly on the positive side of private credit defending it somewhat. You know, there are a number of alarming headlines out there and actually, actually we are yet to see what the genuine fundamentals are in terms of underlying loan quality. There is undoubted risk in the software sector. I think that is a concern and is one of the reasons why a number of these funds have gated redemptions because people can see that AI disruption risk. But if you look at the lending of other private credit vehicles to mid market smaller businesses in the US where actually the US is strong, the credit fundamentals are okay. Valuation isn't great. There's been a huge supply of capital that space. So the lending standards have dropped the spreads on offer for the level of risk you're taking are that attractive. So I don't see a huge accident there which is systemic to the overall economy. It for us just doesn't look particularly appealing as a place to invest when you've got, as you say, lots of opportunities in public credit and indeed many parts of the infrastructure, space, for example, or parts of the equity market or resources, et cetera.

Speaker B: It is interesting just the uh, linkages in the global financial system with this new form of subprime in the form of private credit. Because, for example, in the case of Coolabah, we've pulled back in providing funding to certain banks, UK banks in particular, that have very large private credit exposures because we just don't trust the risk that sits on their balance sheet. And if there was some sort of, uh, as you say, turn in the credit cycle, if rates were, heaven forbid to have to climb higher and default rates were to accelerate, you could see very significant write downs, as we did in 2007, eight, that could ultimately impair bank balance sheets. So we've been quite cautious.

Speaker A: That is not going to be like private credit only. Um, right. That type of environment is going to result in a lot of credit impairment losses, spreads widening in high yield to a certain extent. Ig it might be worse in private credit, I accept. Yeah.

Speaker B: But I guess the concern is that private credit really didn't exist before 2008 and the sectors exploded and bank balance sheet exposures have exploded. Another sector that has big exposures is insurers. So, you know, I saw an insurer issue a bond the other day and they wanted us to participate. And I said to them, what's your exposure to private credit? They said, 32 billion U.S. i said, okay, what's the equity buffer on your balance sheet? What's your regulatory capital buffer? They said, um, about 15 billion U.S. so heaven forbid that that was to take that private debt portfolio was like a 50% markdown that would wipe out all the uh, regulatory capital on their balance sheet. And that's how concerned with the banks. And I'm not saying like I'm a massive investor, like I've literally got tens of billions of dollars of bank bonds around the world. So I'm not worried on a secular or systematic basis in respect to banks, but there are specific institutions where their private credit exposures are much, much larger than the equity on their own balance sheet. So if you had it big, so write down in that one specific area, it could cause problems. Another little anecdote in terms of global linkages. So My mother who's invested in UK private credit frozen 30% write down.

Speaker A: How did you. Let's invest in that.

Speaker B: I know I'm like Darth Vader for the private credit guys. Anyway another, another example is that there have been Aussie credit funds that have had exposure to that UK lender mfs that have had to take like two and a half percent write downs on these ostensibly investment grade credit funds that are daily liquid or meant to be liquid and that's caused big problems because they've been reaching for yield around the world. Thought okay, there's a subprime or non conforming or uh, non bank UK lender here we can provide some mezzanine finance to in a warehouse facility and the next thing you know it's worthless.

Speaker A: That is definitely a concern. These marks right? It does seem to be that in the private credit land you know there's no price discovery and it's either marked at 100 NAV, no impairment or it's a zero. There is risk. There we are, we are with you. And it doesn't look like a particularly attractive opportunity set right at this juncture. Look, that's been phenomenal. We're going to have a little sort of quick fire if that's okay. Just to round off our discussion any advice for a younger Chris?

Speaker B: A younger Chris? Uh, I wish I'd started Coolabar uh when I was younger uh I started Coolabar in my early 30s and um, so I started in M, M and A and principal investments at Goldman Sachs in London. I wish I'd started trading younger. Uh so I kind of was on the other side of the investment banking balance sheet in corporate finance and uh, learned really good skills there but probably my passion is for public markets and trading and yeah uh, uh so that would be one piece of advice and the other I guess piece of advice is to have more courage and conviction around my own ability to engineer unconventional ideas and unconventional solutions to problems. One of the things I learned over a long time but it took a while to learn these lessons was just by applying unrelenting thinking and a lot of firepower or intellectual horsepower to a problem you can always come up with ideas and solutions that are novel and interesting actually on AI for example, one sort of point along those lines would be that everyone says AI could be disinflationary but what they forget is you could have a huge positive productivity shock so we could all become much more productive. Let's assume that happens. We're all strapping on Claude um, Chatgpt Uh, Grok Gemini, we're much more productive, but if it's a level effect in productivity, so if you have a one off increase in productivity, that has a one off reduction in the rate of inflation, but it doesn't permanently reduce the rate of inflation. So it's also a level effect impact on inflation. So this idea that AI is going to propagate this inflation miracle is inherently problematic because it requires the impact of AI on productivity to be a continuous growth effect. As in we have to become continuously more productive. Which I think is probably a bit of a stretch. Like I can imagine us as a species becoming a one off step change in productivity. And I'm sure you and I as we user, uh, I've seen it, you've seen it. But are we going to continuously increase that rate of change or maintain that rate of change? I uh, think that's unlikely. So anyway, long story short, I think being unconventional and out thinking everyone, I said to my team, he who thinks hardest wins. It's not he or she who's smartest. And you know, uh, Elon Musk said the other day, if you're working 100 hours a week and your competition's working 50 hours a week, balance of probabilities, you're likely to win. I think that application intensity is super important.

Speaker A: Yeah, very well put. What's on your go to daily or weekly reading list?

Speaker B: Um, I actually uh, consume a huge amount of internal products, not much external product. Um, but probably my go to is actually X. So all X uh, curated content, rightly or wrongly. I don't know if that's going to endear me to listeners, but uh, yeah, my sort of external content delivery devices X substacks also.

Speaker A: No. Well I follow you on X where listeners dial in. Chris Joy. Well worth following. You've posted and reposted some excellent content, so I think that's a, I find that valuable as well. And then to finish off, if you were to hold one investment, Chris, for 10 years, what would that be?

Speaker B: I got to tell you, I am a massive fan of vast, uh, basics. So I actually am not an investor amazingly. But I've been onto the SpaceX idea for about three years. So I just think they're going to take over everything. Uh, you know I've argued for three years that SpaceX will own all telephony, all Internet.

Speaker A: Have you met or listened? Met in person. Elon?

Speaker B: No, no, but huge uh, fan of Elon's.

Speaker A: Huge fan.

Speaker B: But SpaceX is going to kind of control uh, everything and then once you Start moving data centers and computer.

Speaker A: Uh, someone said it to me the other day, you can make the case that SpaceX is just getting started as a business, which is quite a powerful concept.

Speaker B: Well, it is just getting started, yeah. I mean it's not a case. It is really just a young company and a lot of these, if you look at the rocketry, the satellites, if you look at Starlink, when are you going to buy?

Speaker A: You don't own it yet.

Speaker B: I should buy. Starlink is not even in handsets yet. Think about that. So SpaceX and Starlink are working to put Starlink Internet in every handset globally, in which case you won't need any telephony, as in SpaceX will control the telephony. Um, I don't own any investments outside of basically Cool Bar and in my home and um, a couple of other little assets. But I'm 100% focused on what I do.

Speaker A: Okay, well that's a great way to finish. First person to come on the second, uh, appearance on the Winevest podcast. I'm the first person who recommends SpaceX as their 10 year, uh, investment. So Chris, look, it's been an absolute pleasure. Thank you very much for taking the time. We look forward to keeping in touch.

Speaker B: Appreciate it, mate. Thank you.

Speaker A: Thank you for listening to the why Invest podcast with me, Luke Hyde Smith and our guest this week, Chris Joy of Coolabah Capital. It was great to welcome Chris back for a long form conversation following our short series from the Kepler Alternatives Conference back in in September last year. If you've enjoyed this episode, why not like us? Subscribe and let your friends and colleagues know. The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell as, uh, security.