Comments
Transcript
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JTNice interview--some new information, but there was a junk bond market in 1984 and Drexel was doing the "predator's ball" (for junk bond investors) for a number of years. Also, D. Dimartino has been talking about this for years.
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AMWhere is the FED QE 4.5T ? many blame the FED for the buybacks as well. so the FED is int he junk bonds game as well?
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SCThis is still one of best interviews.
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DROne of the better RV interviews of all time. I remember how it was so encouraging that the Federal Court struck down that state pension, as Brian explained, but it became a one-of-a-kind. Government unions are too powerful and must be curtailed. But meanwhile, to help prevent certain financial disaster and the biggest market crash in living memory, legislation must immediately be passed in most western countries to: 1) Immediately convert all public sector pensions from DB to DC plans with zero taxpayer-funded top up; 2) Remove all taxpayer liability from the exorbitant and underfunded public sector pensions, paid by taxpayers who typically haven't any such rich pension themselves; 3) BAN all corporate share buybacks, immediately. Get real again!
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GDBest Interview, this guy was amazing. Thank you for sharing
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IHone of the best interviews on real vision.
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JLWhen can we have Brian Reynolds on again?
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RRI have watched this so many times. RV get Brian back on, he is brilliant.
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JD..finding Brian is like discovering a long buried oracle that is able to provide another, cogent and incisive understanding of market actions, today and for the past couple of decades.
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RUThis interview is worth the yearly renewal of my subscription!
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RKGet this guy back on. One of the best interviews I've seen in awhile.
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RAI’ve watched this video several times and think it is one of the most important RV pieces to date. I had never heard of this explanation for fund flows before and it makes all the sense in the World to explain why the Equity markets keep melting up in the face of deteriorating fundamentals and ridiculous valuations (except that as Buffet points out the valuations are NOT ridiculous if these low rates are here to stay). I would love to have Macro Insiders weigh in on this thesis.
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MNBrilliant! Amazed by the clarity and fluency in Brian's thesis.
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AFturns the stomach a bit, very insightful though
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TWNow that's first rate professional insight. Talk about connecting the dots.
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RM-JP Morgan's Guide to the Markets says that from 2000-2017 the share count accounted for 3% of annual EPS growth with the rest of EPS driven by revenue and margins. Yet we see many incl Brian here, saying buybacks are driving the mkt. How can that be? -And they say buybacks are the only buyer in the market. But the 24Tn mkt cap of SPX has a much larger back & forth flow of buyers and sellers than 500bn of buybacks. A credit boom touches much else besides buybacks. It is those effects which are more important - lower corp borrowing rates and higher leverage. Yet it is supposedly only about buybacks. -Brian mentioned that we are in a historic credit boom. But corp credit/ GDP is at 47% and hasn't run up more than in previous cycles? -Brian mentioned non regulated cash funds as a sector to watch. But I couldn't find anything that might fit this description. What is this?
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LSI will need to listen to this again to fully digest the ideas. Such great content that adds another piece of advice even puzzle.
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RDExcellent!
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MSThat was excellent will def watch again
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YBFascinating! Also, that RV dude looks like Ryan Gosling!
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BACan someone please explain the link between a surge of LBO's and an inverted 10-2yr yield curve? Thanks
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ENFantastic interview. I have a few questions though. Where does the money for the stock market come from when pensions only find high risk yield (~7.5% and higher) in credit, it can't be all buybacks, right?
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DCThis interview and the interviews with @alderlaneeggs are the best of the best of RealVision. Great job by the RealVision team.
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KCBrian, thank you for filling in the backstory for a primary driver in this market. i really hope to see you as a regular contributor here at Real Vision. And Tyler, great job interviewing.
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AWAmazing! And also wow, what a voice! That man is born for radio, can he please narrate my audiobooks??
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WBBrian is awesome! Can’t wait for the next crisis so, hopefully, we get back to living within our means.
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EFFantastic interview, but would love to hear more around timings. The thought this can continue another 3 years seems beyond belief. It does feel to me like we are in the final innings, but then again, how many hedge funds have died saying that across the last 8 years?
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HJI think he’s right! What a mess this will be! Good job RV
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SWI love RV. I love the trade ideas, the 5 minute segments on technical setups, the stuff about vol of vol with the math whizzes - it's a great platform with well-varied content. Having said that, every once in a while there's a segment where a luminary almost literally explains the world and makes the viewer think if only for a fleeting moment "okay, now I get it". And this might be the best of that ilk. Please have him back.
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RKWhen I meet wisdom I just raise my hat. I wish Brian would sit down with Jerome, Janet & Ben and gave these IYIs a lesson in how the real (vs the academic) economy works.
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SLAnyone know if there's a way to follow Brian's recent work?
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nsWhy does he talk of irrational moves in the Vix futures when it goes into backward action, it has always behaved that way .
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SMAre these buybacks then giving the companies a lower float therefore allowing less volume to change the price more? I'm referring to the talk around 11:15?
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NIQuestion for Brian Reynolds if he is reading the comments. Do you think State & Local government is approaching a breaking point where the game can't continue (i.e. hike taxes and raise voter ire or reallocate and impact critical infrastructure/functions)? Or is there some room to run there? Thanks for such a great interview!
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IHTerrific, the best yet and explains a lot!
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RPThis, to me, shows how big a deal the BBB market is and what happens if large parts get downgraded to junk. The herd mentality will kick in and not a buyer will be seen. It is a matter of when and not if. The entire credit market over time is becoming lower and lower quality as the size gets bigger and bigger. When that credit cycle stops, so does the buyback market. This seems to be the cycle we face at some point in the next recession. And as ever, most of this will end up on the Feds balance sheet...and we move another step towards the Great Debt Jubilee... and whatever that entails. This is when the gold lovers will have their very long awaited day in the sun. This seems as clear to me as day... its the timing of the next recession and how the Fed stops this mechanism that is key.
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PJExcellent interview, one of the best and most original perspectives
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GGSorry RV, wrong interviewer, you need to put Michael Green or Raoul or Grant with this guy. Looks like Mr. Reynolds has way more look out and knowledge of the credit markets than anybody you have presented. Please put him back on ASAP with somebody asking the questions. Urgent!
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TJWhat an absolutely brilliant interview. I loved it and learnt so much as I so often do with RV videos. If only Presidents and Fed Chairs spent some serious time with credit experts like Brian to really understand what drives leverage, and how it almost always ends in bust and disaster. I do hope Brian is right about us having another two or three years before the fan is full of excrement and the music stops, but the recent yield curve inversion of the 10 year and 3 month UST's has already happened as Tyler mentioned, and most empirical studies suggest this has historically been a more accurate predictor of subsequent recessions, but either way, the clock is ticking down to that next crisis and bear market! Thanks RV for these priceless insights.
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CAMoodys and the credit agencies will once again get a lot of the blame for being let to the game.
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JMThis may be too obvious but why don't pensions just keep increasing member contribution rates? Shifting from defined benefit to defined contribution just transfers financial risks to financially unsophisticated beneficiaries.
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JVThey dont call him Iron Horse for nothing!
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CTBrian Reynolds opened my mind to another realm of forces influencing equity prices. It is an area I have never studied in any detail. Guess I need to! Stock buybacks, gahh!
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SvShockingly clear and useful! Great presentation. Thanks
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RAExcellent job Tyler! Always interesting to see such a different viewpoint from an excellent source. Not sure I understand all the transmission mechanisms and I did see a few generalizations about what the Pension funds are doing that I’m not sure I agree with...that said I really enjoyed hearing, at least to my ear, quite a different well reasoned perspective. Unique piece and very enjoyable—good job RV.
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DPA rare dud on RealVision...Implication or actual statement that Q4 2018 drawdown in equities has happened 35 times in the last 10 years!
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KEGood job Tyler, it was great to have the credit knowledge grom Brian mixed with a trader's experience during the conversation
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NIWow. Great work RV. Brian Reynolds offered an excellent explanation of why the equity market is so disconnected from fundamentals. This credit cascade made perfect sense. The pension blow-up from chasing 7.5% in a 2% world will be epic. Even Warren Buffett has said 6% is about the limit for a pension and that was long before repression. 7.5 just isn't going to happen.
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PKfantastic interview, thank you! would love to get Raouls perspective on it (or get them very soon together in another interview). i would also love to get some more "so what can a retail investor do..." insights. thanks!
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VSExtremely good interview . Great insight that explains a lot of mystery. Thank you !
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MHA inspired seer on RV. Clearest view of coming attractions.
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ATThoroughly enjoyed, great insight
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CSSo many "experts" want to fight the tape and be seen as right, so few want to find a proper explanation for what is happening, preferring to simply say the "madness has to end". This guy is a breath of fresh air.
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TMBrian provided some keen historical and current insight into the credit markets. What continues to amaze me is the depth of the market for these covenant lite loans with underlying companies that have a poor business model. In most cases, these companies can't go to JPM or BAC and obtain a traditional bank loan, but the bank's Capital Markets teams are happy to sell these crap loans in the open market. With $10 trillion of negative yielding debt world wide, Brian's opinion of two to three years left before a crisis makes sense to me.
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NHone of the best videos yet. I would love to have him back and talk about how the leveraged loan market eventually blows up, much like Drexel years ago.
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MMSmart guy......thanks.
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PBI really enjoyed this conversation! Massive thanks!
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VPVery well done. Electricians, Plumbers and BTFHYD another 10-15 times until it's a crisis!! Interesting LBO wave theory. Thought equities under performed after 2/10 inversion but what do I know. Bring 'em back! Really good!
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CHEducational. Thanks
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AKThankfully that's not happening here in Illinois, Cook County and Chicago.......
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DRGood one. It's unfunded corporate pensions, Soc Security (a giant ponzi scheme) and most of all, the massive lush public sector pensions at all levels of government. More than a "potential" disaster. It's an inevitable disaster, on top of the other like student loans and junk corporate bonds. The US is headed for a perfect storm that will make 2007-09 look like good times. Some savvy economic commentators have explained for years how the massive public pension crisis looming in the US will lead to a massive US economic implosion and depression that'll be worse than the 1930's. Alternatively, pensions will be backstopped and "paid" by money printing (because taxpayers are mathematically incapable of backstopping pensions), resulting in a Weimer-like hyperinflation scenario. Pick your poison. Either way, protect yourself or else go down with the ship.
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TBGreat interview. Sad and scary, but very informative.
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RSNo where else have I heard stated the fact that state income tax increases have exceeded the amount of the federal income tax cuts. Hard to believe this went so unnoticed.
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YBwow. brilliant. one of the best interviews real vision has ever had. on par with druckenmiller.
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ENThank you RV. I know I sound like a broken record, but what else is there to say to an interview such as this one.
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JSAwesome interview & analysis on credit. Please do more on credit. We (retail investors) don't really get to hear that side of the story much - its always about equities!
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NGAn excellent explanation of the internal workings of the credit markets. The surprise is how this is a surprise to people. Just goes to show that you need to focus more on the engine of everything, which is, always was and always will be: the bond market. Probably the least understood part of the financial system. PS: I loved the "it's like a light switch, it's either on or off." Anyone who has run a bond book knows how true that is...
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ddamazing interview, we want more interviews like this one
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BBAwesome interview! Reynolds is one of the best at truly "seeing the forest through the trees". Great job by the interviewer as well! Bravo RV
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PTSame old story; taxpayers will end up bailing out bad behavior, & knowing this, the pension funds have little incentive to change their risky behavior; in fact, the greater the number of irresponsible pension funds, the greater their influence for bailouts by Congress.
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JMThis one goes into the vault. One of RV's very best.
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SLWow, what an interview. Made me rethink my entire view of markets. Really interesting and well done!
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NvWow, one of the best interviews yet. Excellent, thanks RV and Brian
BRIAN REYNOLDS: Before we invented the margin credit market, the stock market ran on fundamentals, things like earnings, things like valuations. And then the credit market came along, and starting in the 1990s, disrupted that whole process. 40 years ago in the '70s, the average company was highly rated, AA or AAA rated from a credit standpoint.
Now we've added so much leverage in the last 40 years that the average credit quality has gone down to just above junk.
TYLER NEVILLE: Brian Reynolds, here to talk about unfunded pension liabilities, the credit boom and corporate buybacks. And we're here at this lovely New Hampshire Institute of Politics, which is the perfect setting for our conversation. First, why don't you just get everyone familiar with your background and maybe go through that a little bit.
BRIAN REYNOLDS: Sure. So in a month it'll be my 35th anniversary in this business. I started in 1984. And I've been in the business so long, the junk market didn't exist when I started. That's how long I've been in the business.
The first 16 years I spent on the buy side of David L. Babson and Company. It was a great place to work because it started in 1940. I have mentors that go back to the 1920s, '30s, and '40s, they taught me to follow the money. They taught me this business the old fashioned way.
And I've brought that through every job I've ever had since. And it was a great place to be because that was the emergence of credit as an asset class. Not only was the junk market not invented yet but the actual investment grade credit market was still in its infancy. So it's a very different world now than it was then, because credit is now so big it dominates financial markets, but back then it was a backwater.
So I ran our money market funds, which is where shadow banking started. I was in charge of bank and finance bonds, which is some of the original shadow bankers. And then in the late 1980s, as structured finance began to become more significant, I was in charge of that product from the late '80s until 2000.
So I kind of grew up with the Martin credit market. I saw it develop from almost nothing into this large asset class, which is now the tail that wags the dog.
TYLER NEVILLE: Some of the things you talk about, the Daisy chain of capital, now that's like a primary theme throughout your work, can you explain that for the viewers?
BRIAN REYNOLDS: Before we invented the Martin credit market, the stock market ran on fundamentals, things like earnings, things like valuations. And then the credit market came along, and starting in the 1990s, disrupted that whole process. So now we're in the third modern credit boom. The first one lasted from 1991 through 2000, then we had a financial disaster.
The second one went from 2004 to 2007, then we had another financial disaster. And then we launched another one in 2009. And all this Daisy chain is, is our public pensions needing to make outsized returns. They have become the dominant global investor.
Our pensions were only about 60% of GDP in '84. Now they are 120% of GDP. That's massive spectacular growth. There's nothing on earth that's grown that fast from such a high base. So they're the dominant global investor, but they're so underfunded they need to make 7.5%.
TYLER NEVILLE: So talk about how the big, big pension funds work. Why 7.5%? And where's that money going?
BRIAN REYNOLDS: The 7.5% they need to make, that's the difference between what their governors and their legislatures have under the mat versus the promises they've made to our public sector workers, police officers, firefighters, teachers. Most state governments tend to work the same, so they all tend to have that same gap. And that gap works out to be 7.5%, which is crazy because most interest rates are much, much lower than that.
So they really have to push the envelope in terms of what they invest in to try and get that. And you would think they would be in stocks because pensions should be long term oriented, but most pension boards are police officers, teachers, firefighters, and politicians. They have a short term focus, and so they invest in the credit market.
They started doing it in the 1990s. The most famous credit fund they hired was John Meriwether's long-term capital management. But it wasn't just him, it was thousands and thousands of other credit funds that mimicked him. These pensions will hire these credit funds, they'll put money to work on an aggressive leveraged basis to try and get that 7.5% yield they need.
And when they buy these record amounts of corporate bonds from companies, that puts cash into corporate balance sheets. Modern CEOs are incented to get their stock price up, so they take this unlimited money that comes from our pensions via these credit funds and use it to buy back their stock. That's a Daisy chain of financial engineering.
That's what happened in the '90s, it's what happened from '03 to '07, that's what's been going on since 2009.
TYLER NEVILLE: Now, can you put that in a relative context? How much of the buybacks have pushed the market up? First, like say, ETF or mutual funds. How come people don't quantify the buybacks in relative terms to that? They concentrate so much energy on Wall Street talking about ETF flows and mutual fund flows.
And how does it get overlooked? What's the number?
BRIAN REYNOLDS: Because the world has changed in the last 3 and 1/2 decades. As I said, the junk market didn't exist when I started in the business, but from the late 1980s on, the junk market began to become a bigger force for this, and that's when we started putting on leverage. So 40 years ago, in the '70s, the average company was highly rated, AA or AAA rated from a credit standpoint.
Now we've added so much leverage in the last 40 years that the average credit quality has gone down to just above junk. That's how much we've levered up corporate America. And if you look at a chart of who's been buying stocks over the last few decades, there's been money going to ETFs, but that's come at the expense of mutual funds, pensions, both state and private pensions have been large sellers.
So investors as a whole have really done nothing these last three decades. The buybacks have taken an increasing share to the point where they're almost 100% of the buyers of the last decade. In other words, investors have done nothing on a net basis for 10 years. Yeah, they put money into ETFs at the expense of active product.
And the result is this Daisy chain of money coming in from taxes to pensions, going into credit, which is then used to artificially push up stock prices.
TYLER NEVILLE: And a lot of times that money ends up in not profitable zombie companies. And you talked about in 2015, 2016, I believe, that money flowing into energy companies that oversupplied the market. Can you talk about how that kind of related to back in the WorldCom days?
BRIAN REYNOLDS: This credit money typically zeros in on a particular industry. In addition to boosting the overall level of credit, we overdo it in an industry. So in the 1990s, we focused on companies like WorldCom and Enron. We inflated their balance sheets to the point where their valuations didn't jibe with reality.
And then it came down like a souffle. Then we did the same thing with subprime housing in the next cycle, and that collapsed. And then we did it with energy companies from, say, energy and commodity companies from say 2009 to 2013, then those companies collapsed. And now we're starting to do it with commercial real estate, so it's just like we go from one asset class to another within the context of boosting overall leverage.
TYLER NEVILLE: So in terms of shocks and supply, I know the big concentration these days is on the stock market when it's falling and the VIX is going crazy. What happens to the credit markets? Because I think very rarely you turn on the news and you see, stocks are in turmoil, stocks are in turmoil, but no one's talking about how credit markets are functioning.
BRIAN REYNOLDS: I have three themes. My first theme is that we're in this credit boom, this Daisy chain of financial engineering. But my second theme was that it gets periodically interrupted by these panics, because equity investors just don't believe in this. The stock markets outpace the economic fundamentals over the last decade.
So if you are a fundamentally oriented equity investor, you don't want to buy stocks, you don't want to own them, you want to sell them in a drop of a hat every time there's a worry. We've had 35 pullbacks in the stock market that have been marked by irrational inversions of the VIX curve, where people get so panicked about the downside that they pay up for short term protection when longer term protection is cheaper. The most recent of those was in the fourth quarter of 2018.
And when these stock market panics happen and the VIX gets inverted, the credit market shuts down. Because these credit funds that are hired by our pensions to put money to work, they're allowed to take a break during a panic to see if the turbulence creates a better buying opportunity. So yields and spreads typically go up during these panics. That happened again in the fourth quarter of last year, as demand for credit temporarily stopped.
But once the equity panic runs its course, as it did at the start of January, then the credit market opens right back up. People make up for