In this interview, Josh Wolfe and host Emilio dissect a growing systemic illiquidity problem that spans government bonds, corporate debt, fixed‑income ETFs, and venture‑capital markets. Wolfe highlights the unprecedented $13 trillion of negative‑yielding sovereign debt and the surge of retail investors (about 60 % of U.S. government‑bond buyers) being pushed onto the steep yield curve, forcing retirees into higher‑yield, potentially illiquid instruments. He explains how daily‑priced ETFs can mask underlying illiquidity, creating a false sense of safety and risking permanent principal impairment. Wolfe then shifts to corporate finance, noting that buybacks have again eclipsed CapEx—a pattern last seen before the 2008 crisis—and that a handful of BBB‑rated giants (AT&T, Dell, GM, Ford, GE) hold roughly $800 billion of debt, making downgrade cascades a liquidity nightmare. The conversation moves to venture capital, where Wolfe points to SoftBank’s Vision Fund pricing, the drying up of Chinese capital in U.S. biotech, and the scarcity of marginal buyers for later‑stage pre‑IPO rounds. He draws parallels to the 2000 dot‑com bubble and 2008 financial crisis, warning that high valuations, low profitability, and mismatched liquidity can trigger a broader market shock. Throughout, Wolfe argues that active managers who can perform security selection will be valuable as passive inflows reverse to outflows.
Chapters
Oi!
I think about this as illiquidity, which is a word that I use often, which is the opposite of liquidity. You've got the yield curve. You've got $13 trillion of negative yielding interest rates, which I think is unprecedented in 4 millennia. You've got an enormous amount of people that in the US, I think 60% of buyers of government debt are retail, which is about double what it was a few years ago. $13 trillion of negative yielding debt was zero 5 years ago. People are pushed out on the yield curve. You have a lot of people that are saying— aging population, and what do people historically do? The narrative is let me buy debt. Typically, the percentage of my portfolio that should be allocated to fixed income should be roughly proportionate to my age. You're a 60-year-old, you got 60-plus percent in debt, fixed income, 40% maybe in equities, in mutual funds. The portion that's in debt is at record low historic yields. So, you had $1 million or $2 million in savings as a retiree, and you were making $50,000 or $60,000 a year, now you're making $10,000. So, what do you do? You go out on the yield curve. So, maybe you're in fixed income instruments, or mutual funds, or ETFs that have some slightly higher yield, and you think you are principal protected. So, you were looking for your return on principal. The probability has grown that the return of principal is actually not there. Why? You might have stuff mixed in just like you did with subprime going back 10 years ago that is not actually investment grade. Things might have been rated as investment grade, but they're not. All of a sudden, you see a 10% decline. You see this in Europe, this is happening now, H2O, ironically named, completely illiquid. I think the private portion of this was 9% of assets that they had marked at nav, and then it dropped down to 2%, which means probably it's really 50 basis points. And so, significant value impairment. And then you have the human behavioral reaction, which is to start pulling funds out of these funds. So, if you have that in the fixed income world—
Because there's an illiquidity mismatch, because you can get money out for a while before it stops.
You have the illusion of liquidity because you have daily trading and ETFs and they're marked on a daily basis, but the underlyings suddenly might be illiquid. And so, I think that there's a real risk of permanent impairment, which is the true measure of risk. Of principal. So if that happens, and retirees start saying, wait a second, you know what, let me go to cash. Let me get out of these bond funds that I thought was safe. That creates a problem. Well, they also might need to sell out of equity funds. Now, in both asset classes, you've had a shift from passive— from active to passive. So I actually think it's a great time probably for active managers who can actually do security selection and determine. Because the simple algorithm for all of these things was dollar in, buy. And now, it's going to be dollar out, sell. Which means some of the good stuff is going to be sold indiscriminately. So, people are pushed out on the yield curve. They're taking more and more illiquidity risk, and they don't realize it. Now, you think about who the marginal buyer is. On the equity side, you've also had record amount of corporations that are buying back stock. The last time that corporate buybacks eclipsed corporate CapEx was 2008, 10 years ago. And that's happening again now. And that was right before. Crisis, and then hitting the March 2009 lows. Now, are we in a setup for history repeating, if it doesn't rhyme, I don't know. But it's certainly peak valuations that you've seen over the past 10 years. And you'd argue, well, relative to interest rates, you've got S&P yield at 4.6%, 10-year at 2%, maybe the value's there, maybe it's not. But then you look at the illiquid side. And not just on the bonds, and not just on equities and people selling, but my world. Which is venture capital. Here, you have a marginal buyer on the public equities who maybe was the corporation buying back its own stock. In my world, the marginal buyer is two kinds. One, you've got SoftBank, which is setting an irrational price. They have an enormous amount of money to put to work and have put to work pricing up their own stock. We've talked on Real Vision before about this in the past with Mike. I think that they have created irrational comps that other people have reference to that have set artificially high prices that are almost equivalent to leverage, because a 10% or 20% down round wipes out everybody in that capital structure stack. The second thing that I think you have is looking at some of the marginal buyers, which were foreigners. Now, if you take life sciences and biotech, a year ago, you had about $1.6 billion, $1.7 billion of Chinese money that went into US biotech companies out of a total of about $20 billion of life science money that went in. First 6 months of this year, you have about $700 million. So, about half, a billion dollars of capital that compared to last year is not there. So, suddenly, VCs are looking around and saying, okay, who's going to be pricing up my Series B, C, D pre-IPO rounds? You have a handful of people who potentially are bag holders. Maybe these are the Baillie Giffords or the Fidelities that are doing these pre-IPO rounds. Why are they doing that? Because the returns were in the pre-IPO financings. Then you look at the pre-IPO companies that are now going IPO, so Uber and Lyft, and potentially WeWork. These are the darling unicorns and many of these have not held up well. Some have, Zoom has done very well, others have been disastrous. You look again at SoftBank and you say, okay, they've got these illiquid stakes through the Vision Fund. They tried to do what? After these things went public, rather than just selling the stock, they tried to issue debt, have issued debt, $4 billion secured by the Garden stake or the Uber stake. To retail investors. And then the underlying, WeWork, originally, we're going to put $16 billion in, they put a few billion dollars in, they priced up their own paper valuation. I've got my own tinfoil hat theory about why they're doing that to serve as collateral against mothership indebtedness. WeWork now, going IPO, going to issue $4 billion of debt before they go public, because there's nothing more that people love than a more indebted company before they go public. Now, the biggest counter is people will say, well, compare this moment to the 2000 bubble. When you had all these phony valuations. At least companies now have revenue, which is true, because a lot of back then, you just had eyeballs, you had no dollars, no revenue. But the problem is, in spite of all this revenue, you still have no profits. So, if you have all of this revenue growth, but it's unprofitable, and it's really driven by the kindness of strangers who are the providers of the capital, I think a lot of people are overestimating the potential profitability of these companies. So one of the other very interesting things, of course, is you have this mismatch between CapEx and buybacks. But CapEx is a good measure of corporate investment activity. And so buybacks now eclipsing corporate CapEx, CapEx potentially declining at a time when interest rates are as low as they've been in many, many years. It doesn't bode well for the economy. And it comports with your view of recession. It also comports with your view, which I think is an excellent one, of real volatility and risk amongst the European banks.
I'm just looking at the situation we talked about on the corporate side, the amount of BBB debt. It's so enormous now. And it's basically 5 companies that— about $800 billion is 5 companies. That's AT&T, Dell, GM, Ford, and GE.
And by the way, every one of those companies is not a company that a cutting-edge, early-stage entrepreneur engineer would ever want to go and work for.
No.
Now, the amount of indebtedness has served asset growth and you could argue is fueling operations, but look at GE now in my world. GE, I predicted, was going to divest of their corporate venture portfolio. Because whenever you see corporate venture activity, it's almost always countercyclical indicator. When peak corporate VC starts happening, they feel like they're late to the game, they look at their brethren, they see that money is being made, at least in paper marks. CEO says, I think we should be doing corporate VC activity, the board says, yay, then all of a sudden, they see one of their brethren and say, wait a second, these guys haven't had any liquidity, they're divesting their portfolio, the secondary funds come in, they buy things at 70, 80 cents on the dollar. The day that GE announced that they were going to divest their VC portfolio, we got contacted by a very large prominent buyout fund that said, hey, do you want to team and take a look at this? I think that there's going to be portfolio after portfolio. Of corporate venture that starts getting divested so that they can free up cash for liquidity. But to your point, all that BBB indebtedness, these are companies that are dinosaurs. There's real structural risk that they're going to be disrupted by the next guard, and it'll be debt that kills them.
My fear with this as well is anybody gets downgraded, which they will, in the next recession, they'll get downgraded, and the junk bond tier, there's two different owners. So, it's the pension system that owns the BBB because it's still investment grade. As soon as it goes out, it's not owned by them at all. It's owned by the junk bond guys. So, there is no liquidity. There's sellers and there's basically no ability to buy that much downgrade stuff. And I fear it knocks on into your world, because illiquid knocks on into illiquid. And we saw this in 2008, is hedge funds became the cash machine where they could be. So, they all had to gate. Then all the private equity guys were trading— I remember I was helping out a family office. And they were selling out of stuff at $0.30 on the dollar, which was good stuff, but they just desperate for liquidity.
Well, this was, again, going back, just like 2008 was the time relative today when corporate buybacks exceeded CapEx, 2008 was when BNP gated those 3 hedge funds.
Exactly.
And that was the start of the catalyst.
And that's what I saw with this H2O.
And GAM.
Yeah. And Neil Woodford, he's like, OK, this is interesting. You're starting to see liquidity issues. And that's what it was. And that's why I thought of you, Emilio. I've got to get Josh Wolfe about this because there's a liquidity event going on. And people are saying they're isolated. And they were isolated with BNP. And then it was the money market funds. And it just started moving around. Tells you there's not enough dollars in the system. And from a— over time.
From a simple macro standpoint, even to the layman, if you're pushed out on the yield curve, and money is being printed, and money is available, and you go into this higher illiquid stuff, Now, you've taken cash that was meant to help bail out the system, promote growth, you've put it into illiquid stuff, and now it's trapped. The question is, who is the incremental buyer in all of these things? In my world, who is the incremental buyer? Is it the crossover hedge fund? Is it the growth equity investor? Are the Tigers and Kotus and the Tiger Cubs that are doing private companies? Is it SoftBank? When that capital starts to dry up, we have a liquidity crisis, so massive illiquidity. In the case of the bond funds, you know that the illiquidity comes when you have these things that you think are investment grade that turn out not to be. In the case of the mutual funds, you have illiquidity when suddenly everybody starts selling and people think that the underlying that they're able to get out of. So, I agree with you, I think that this is a substantially underreported, underrecognized risk.
