Investing in Credit and DOGE Outlook

Sal Naro: 

Thank you for having me back. It's great to see you again. 

Elana Margulies-Snyderman: 

So, Sal, to kick off our conversation today, tell us a little about the firm and how you got to where you are today. 

Sal Naro: 

Well, I run a strategy called Coherence Credit Strategy, which is a liquid alternative strategy. We're housed inside of Tiptree Advisors, which is an asset management company with about $1.8 billion and that's inside a public company called Tiptree Inc. So, Tiptree Inc. is a public holding company and we're leading a strategy inside that company. 

EisnerAmper: 

At EisnerAmper, we are creative problem solvers that take a 360-degree approach focusing on you. We're an award-winning firm with decades of experience. EisnerAmper, let's get you ready. 

Elana Margulies-Snyderman: 

Great. And, Sal, to segue, given you focus on credit investing, I would love to hear your high-level overall outlook for the space. 

Sal Naro: 

There's so much going on now and I have been in this space for a long time, 43 years actually to be exact. So, I've seen basically every type of market since 1982. And we're in an extremely interesting environment now. And obviously central banks drive the majority of policies these days, and really for the last many years since sort of the 2007 crash. And so, it's no different now. Where are the central bank's going? What are their policies going to be? And how is that going to drive the rest of the fixed-income markets as it relates to the value of the dollar versus other currencies and also absolute level of interest rates? 

What's really interesting here is we have a new administration, which is really changing basically everything. And so, what will be determined here is ... And what will actually be the outcome of all these potential changes that have been suggested and that we're seeing living right now. And I had talked in January about these changes taking place through March, which is now, probably through April and even into May, until the markets really have a view of what's truly going to happen with these, I think, drastic changes in policy. 

Elana Margulies-Snyderman: 

And, Sal, more specifically, given everything going on, where do you see some of the greatest opportunities in your space and why? 

Sal Naro: 

Well, I think right now the credit markets are still very, very attractive. The absolute level of rates is still reasonably high. And I do believe that rates are going to come down. I expect ... We've seen a couple of rate cuts in Europe already this year. I expect to see a rate cut in Europe this week. I expect to see a Fed cut actually in June now. And so, as interest rates drop, typically fixed income will perform well. There's just a lot of things around all this that is causing a tremendous amount of volatility. And so, volatility will create dispersion. And dispersion is some companies and some credits doing better and some doing worse. And this environment, highly politicized and highly volatile, should really increase dispersion. So overall I see active management and active managers outperforming in the environment in this fiscal year. 

Elana Margulies-Snyderman: 

Sal, on the other hand, what are some of the greatest challenges you face in your space and why? 

Sal Naro: 

The biggest challenge right now in my space is actually interest rates and hedging your portfolio or having an interest rate outlook. I talk a lot about ... I recently put a piece out on AARP, and it's not the American Association of Retired People, it's actually all about rates positioning. And so, what does that mean? The credit curve and the interest rate curve has been very, very volatile. Since the last six weeks, the 10-year interest rates, for instance, have dropped about 70 basis points. And where we were looking at inflation maybe going higher and the markets thinking rates were going to go even higher potentially, we've had a completely huge swing with interest rates coming down materially. And so that creates lots of different issues in the overall marketplace, especially for investors like us who are looking at spreads and credit spreads and things like that. So, it's a very volatile time here. 

Elana Margulies-Snyderman: 

Sal, to shift gears a bit, Trump's Department of Government Efficiency (DOGE) has been a big topic as of late. I would love to hear your outlook on this. 

Sal Naro: 

There's a gigantic push-pull in the marketplace right now. The government would like to and needs to have interest rates lower to finance this massive deficit that we have. Along the same lines, there is a strong push to continue the tax cuts that Trump put through all those years ago and perhaps even enhance those tax cuts. So, on top of that, there's the potential of tariffs, which are all the rage all over the economy now. Tariffs should theoretically slow the economy down. Interest rates ... Tax cuts should perk the economy up. And interest rates overall make it very, very challenging for the market to get a view of where things are going to be. So, the bottom line here is you have the government who wants rates lower, but you have some potential inflationary policies, tax cuts and tariffs. The other side of all that is DOGE. 

And what is DOGE actually going to produce? We don't know. We don't actually know. The estimates are between $1-$2 trillion. The early indications are that they're finding tremendous amount of efficiencies. I'm not going to call them waste. Efficiencies that can take place in the market. So, you could actually get, and this is what's happening so far, lower interest rates, lower inflation, and actually much more efficiencies from the economy if DOGE is successful. But around DOGE is tremendous amount of political noise and volatility. So, you've got vol a couple of points higher right now than it's been for quite some time and there's just a lot of indecision in the market. 

It will take us, the markets, at least three or four more months to get a real view around all these issues. How much will DOGE actually save us? What tariffs are going to go through? What's actually real and what's bluster? What is a negotiating tactic versus what can become reality? Once I think that is all settled out, if you look at what Trump did the last time he was in office, we didn't have any wars and inflation went down. So, if you look at that actual track record and maybe not all the noise, I'm optimistic and the second half of this year is going to be very positive for equities and very, very positive for fixed income. But there'll be winners and there'll be losers. 

Elana Margulies-Snyderman: 

Sal, we've covered a lot of ground today and wanted to see if you want to share your future plans or final thoughts with us. 

Sal Naro: 

My final thoughts are, here, don't have lazy longs in your portfolio. Make sure you know what you actually own. Be in industries that you think are going to improve. And expect the unexpected here for the next few months as we work our way through all the noise that's surely going to be taking place from the government, and from a geopolitical perspective. 

Elana Margulies-Snyderman: 

Sal, I wanted to thank you so much for sharing your perspective with our listeners. 

Sal Naro: 

Thank you for having me. It's wonderful to see you. And I appreciate the time. 

Elana Margulies-Snyderman: 

And thank you for listening to the EisnerAmper podcast series. Visit EisnerAmper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business. 

Transcribed by Rev.com