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Speaker 1: I was gonna ask you whether or not do you

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Speaker 1: think we are at peak rates? But is the better

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Speaker 1: question is I don't know how low do we get

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Speaker 1: in the next cycle.

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Speaker 2: Well, you know, the one thing I'm confident about is

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Speaker 2: that I don't know, but I think that rates may

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Speaker 2: go a little higher, but not terribly much higher or not.

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Speaker 2: There's substantial progress being made against inflation, and that's what matters.

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Speaker 2: The economy is producing mixed signals, but at least inflation

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Speaker 2: is well.

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Speaker 3: Down from the peak and.

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Speaker 2: Things are performing well, So you would say, I would

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Speaker 2: say that maybe a little higher or maybe not.

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Speaker 1: You've been known not to give your macro forecast, although

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Speaker 1: very recently you've made something similar, which is the thesis

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Speaker 1: is that the sea change has come, Yes, and that

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Speaker 1: the next ten years will.

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Speaker 3: Be very different, very different from the last.

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Speaker 4: Yeah and underscored premister, And yeah, what do I do

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Speaker 4: with that information?

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Speaker 2: Well, if you came into this business since nineteen eighty,

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Speaker 2: which covers almost everybody, you've only seen either declining interest

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Speaker 2: rates or ultra low interest rates. You have to go

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Speaker 2: back into the seventies to have seen a different climate,

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Speaker 2: which I fortunately did do, and I believe that this

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Speaker 2: monotonic decline of interest rates is over. Number one, there's

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Speaker 2: not much room for a further decline. And number two,

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Speaker 2: I think the FED probably understands that it kept rates

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Speaker 2: too low too long and that there was a negative consequence,

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Speaker 2: certainly in terms of inflation.

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Speaker 3: So you know, I think the important thing is that.

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Speaker 2: And I said in my memoc change, which was published

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Speaker 2: in December, that I don't believe in forecasts, especially my own,

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Speaker 2: but I'm willing to say that for the next decade,

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Speaker 2: the FED funds are is more likely to be between

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Speaker 2: two and four than between.

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Speaker 3: Zero and two. That's as far as I can go.

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Speaker 2: But and I only say that directionally to indicate my

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Speaker 2: belief that the period of ultra low rates is over.

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Speaker 1: And let's say, let's assume that's correct. Do I have

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Speaker 1: any business than being in the equity market? What does

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Speaker 1: it mean for not so much investment strategies, But you

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Speaker 1: know where you want to part the bulk of your money,

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Speaker 1: because equities have been rewarded substantially, Yes, over the last

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Speaker 1: fifteen Yes.

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Speaker 2: Look, as Warren Buffett alway says, you don't want to

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Speaker 2: desert the US or the US economy, or I think

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Speaker 2: the corporate sector, and and you know the S and

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Speaker 2: P has given a ten return every year on average

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Speaker 2: for the last century.

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Speaker 3: You don't want to give up that. Right now, it

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Speaker 3: looks like.

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Speaker 2: You can get equity type returns from credit a little

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Speaker 2: below ten for what we call liquid credit, tradable every day,

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Speaker 2: and well above ten perhaps for private credit, which is

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Speaker 2: not tradable. The point is that you know, twenty one

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Speaker 2: months ago today HYO bonds yielded in the nines. Twenty

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Speaker 2: one months ago they were in the fours.

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Speaker 3: When they're in the.

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Speaker 2: Nines, you can invest in them with high expectations, competitive

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Speaker 2: with equities and more than sufficient to meet most organizations needs.

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Speaker 2: Private credit returning in the low double digits or more. Well,

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Speaker 2: that's obviously very very competitive, But you know, equities, or

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Speaker 2: what equities have that credit doesn't have is the ability

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Speaker 2: to surprise on the upside. And you find some great, great,

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Speaker 2: great growing companies in your portfolio, you'll be sorry if

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Speaker 2: you weeded them out.

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Speaker 1: Although the other side to that is credit is always

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Speaker 1: so high year up the capital structure.

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Speaker 4: That's an obligation too.

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Speaker 1: So my question there would be, you know, for longer

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Speaker 1: term investors, let's say have they have to match your

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Speaker 1: liabilities for thirty years.

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Speaker 4: Insurance companies come inline as well.

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Speaker 1: Yes, is the proposition fixed income and not equity markets

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Speaker 1: because equities tended to give you longer term returns more consistently.

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Speaker 3: Right with variation.

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Speaker 2: But in credit you can't tie up anything for thirty years.

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Speaker 2: You know, a long maturity nowadays is seven years or

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Speaker 2: something like that. So you can invest today and get

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Speaker 2: a rate for seven years, but then you have no

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Speaker 2: way of knowing today what rate you'll reinvest in seven

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Speaker 2: years from now. So this is why we don't go

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Speaker 2: one hundred zero or zero one hundred. That's why there

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Speaker 2: will always be a place for equities. But I think

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Speaker 2: now there's a much better place for credit than there

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Speaker 2: has been at most times in the last fourteen years.

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Speaker 4: Would you go above fifty percent? Would you say majority

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Speaker 4: is at So the question is the.

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Speaker 2: Biggest potential catch in becoming a credit investor is that

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Speaker 2: you reduce the likelihood of downside, but you give up

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Speaker 2: the upside of equities. So the question is how do

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Speaker 2: you and your organization feel about that trade off? If

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Speaker 2: I say to you, I think I can get you

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Speaker 2: nine to ten through a balanced portfolio of credit.

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Speaker 3: Over the long term quite dependently.

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Speaker 2: If you say that's great, I love that, maybe you

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Speaker 2: do seventy five percent of your portfolio. If you say

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Speaker 2: I want to still make sure that I have exposure

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Speaker 2: to the upside of equities.

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Speaker 3: Then you say maybe fifty or forty.

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Speaker 1: Here's my question, though this is a relatively new asked

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Speaker 1: clay yes or operation credit.

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Speaker 4: What happens when you get a recession.

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Speaker 1: I can't think of a recession since this, this whole begins,

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Speaker 1: So what happens now?

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Speaker 3: That's right?

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Speaker 2: I mean private credit as an assa class really has

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Speaker 2: existed since twenty eleven, and it hasn't been tested by

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Speaker 2: a real recession. We had one bad quarter in twenty

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Speaker 2: twenty because of an external reason, the pandemic, not internal

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Speaker 2: economic reasons.

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Speaker 3: So you know it all.

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Speaker 2: It's gonna vary because some people do good credit analysis,

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Speaker 2: some people.

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Speaker 3: Do bad credit analysis.

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Speaker 2: The ones who do good credit analysis perceive the risks

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Speaker 2: accurately and demand a commensurate margin of safety, should do

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Speaker 2: quite well, and they may have a default rate of

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Speaker 2: a couple percent the year in their portfolio and lose

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Speaker 2: half their money. In those situations. Well, two, if you

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Speaker 2: have two percent of fault and you lose half your money.

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Speaker 2: You lost one percent, obviously not a significant number, bad

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Speaker 2: credit analysts. Bad managers will have higher default risks, race rates,

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Speaker 2: and lower recovery, so they could lose several per cent,

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Speaker 2: which would make it an unsuccessful strategy,