1 00:00:17,880 --> 00:00:20,720 Speaker 1: Hello, and welcome to the Credit Edge, a weekly markets podcast. 2 00:00:21,079 --> 00:00:23,640 Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg. 3 00:00:24,280 --> 00:00:27,280 Speaker 1: This week, we're very pleased to welcome Jerry Kudzill, portfolio 4 00:00:27,280 --> 00:00:28,680 Speaker 1: manager at TCW. 5 00:00:28,720 --> 00:00:32,520 Speaker 2: How are you, Jerry, Undo your world Javes, Thanks for asking. 6 00:00:32,479 --> 00:00:34,280 Speaker 1: Thanks so much for joining us today. We're really excited 7 00:00:34,280 --> 00:00:37,280 Speaker 1: to dig into your market views and outlook. Also delighted 8 00:00:37,280 --> 00:00:40,080 Speaker 1: to welcome back David Havens with Bloomberg Intelligence. Great to 9 00:00:40,080 --> 00:00:42,440 Speaker 1: see you again, David, you too great to be with everybody. 10 00:00:43,080 --> 00:00:45,080 Speaker 1: So just to set the scene a little bit here, 11 00:00:45,240 --> 00:00:48,320 Speaker 1: credit markets are rallying again this month. Government bond yields 12 00:00:48,320 --> 00:00:51,600 Speaker 1: are dropping and debt'spreads are grinding tighter. You're not really 13 00:00:51,600 --> 00:00:54,000 Speaker 1: not getting very much compensation for the risk of default 14 00:00:54,080 --> 00:00:57,680 Speaker 1: or downgrade. The mood is pretty uniformly bullish. We just 15 00:00:57,720 --> 00:01:01,040 Speaker 1: had the Milk and Global Conference in La. Sounded very upbeat, 16 00:01:01,160 --> 00:01:04,800 Speaker 1: especially about US assets and private markets. Even real estate 17 00:01:04,840 --> 00:01:07,000 Speaker 1: seems to be getting back into favor, some of it. 18 00:01:07,080 --> 00:01:07,440 Speaker 2: Anyway. 19 00:01:08,040 --> 00:01:10,800 Speaker 1: Issuers are piling in with seeing record levels of bond 20 00:01:10,840 --> 00:01:13,400 Speaker 1: and loan issuance as companies take advantage of a window 21 00:01:13,440 --> 00:01:15,520 Speaker 1: to raise debt. They seem to be coming around to 22 00:01:15,560 --> 00:01:18,160 Speaker 1: the idea that the FED isn't cutting rates anytime soon. 23 00:01:18,840 --> 00:01:21,320 Speaker 1: All of this bullishness scenms founded on a belief that 24 00:01:21,360 --> 00:01:24,680 Speaker 1: the US economy will avoid recession. Earnings are solid, most 25 00:01:24,720 --> 00:01:28,319 Speaker 1: companies can afford to pay the much higher borrowing costs. Fundamentally, 26 00:01:28,680 --> 00:01:31,399 Speaker 1: companies are in a good place. On the other hand, 27 00:01:31,440 --> 00:01:33,360 Speaker 1: there also seems to be quite a lot to worry about, 28 00:01:33,400 --> 00:01:37,160 Speaker 1: from commercial real estate to war, geopolitics, and elections. I 29 00:01:37,240 --> 00:01:41,840 Speaker 1: sense a bit of complacency in credit markets, and your firm, Jerry, TCW, 30 00:01:42,000 --> 00:01:44,360 Speaker 1: seems to be one of the very few firms acknowledging that, 31 00:01:44,400 --> 00:01:49,640 Speaker 1: at least publicly. Brian Whalen, TCW's a fixed income CIO, 32 00:01:49,800 --> 00:01:52,960 Speaker 1: recently warned of a credit market reckoning to come, and 33 00:01:53,320 --> 00:01:58,360 Speaker 1: Katie Cock, your president and CEO in Milkin, said that 34 00:01:58,400 --> 00:02:02,960 Speaker 1: she sees rising stress and the threat of more defaults. So, Jerry, 35 00:02:03,000 --> 00:02:05,440 Speaker 1: what's your take. We had people come on this show recently. 36 00:02:05,480 --> 00:02:08,840 Speaker 1: We have them all the time talking about a golden 37 00:02:08,880 --> 00:02:11,000 Speaker 1: age for credit and the year of the bond. What 38 00:02:11,000 --> 00:02:11,840 Speaker 1: are they getting wrong? 39 00:02:12,520 --> 00:02:18,360 Speaker 2: Well, this is exactly this is exactly where we differ. 40 00:02:18,440 --> 00:02:20,320 Speaker 2: I think usually people look. People look at the same 41 00:02:20,400 --> 00:02:23,280 Speaker 2: data and come to different conclusions. We all have access 42 00:02:23,320 --> 00:02:26,920 Speaker 2: to the same information and what we're looking at and 43 00:02:26,960 --> 00:02:31,840 Speaker 2: what we're seeing, I would say, is a significant amount 44 00:02:31,880 --> 00:02:35,400 Speaker 2: of stress under the surface. At the same time, you're 45 00:02:35,440 --> 00:02:39,720 Speaker 2: looking at credit spreads in the markets at essentially global 46 00:02:39,720 --> 00:02:43,440 Speaker 2: financial crisis tights. So what we're saying is we'd love 47 00:02:43,480 --> 00:02:45,320 Speaker 2: to talk to you about all the weakness we're seeing 48 00:02:45,400 --> 00:02:48,760 Speaker 2: under the surface. And we mentioned it before, but we 49 00:02:48,800 --> 00:02:52,320 Speaker 2: have a deep team of people one hundred people outside 50 00:02:52,320 --> 00:02:55,000 Speaker 2: that we really lean on to try to get as 51 00:02:55,840 --> 00:02:59,480 Speaker 2: coincident or forward looking data as we can. All of 52 00:02:59,480 --> 00:03:03,359 Speaker 2: the economic data that's that's published obviously is backward looking, 53 00:03:04,160 --> 00:03:05,720 Speaker 2: and so we try to We try to do that 54 00:03:05,760 --> 00:03:09,080 Speaker 2: as much as we can. But what we're saying is 55 00:03:09,120 --> 00:03:13,600 Speaker 2: that the prospective returns giving these starting levels are just 56 00:03:14,720 --> 00:03:19,000 Speaker 2: really difficult uh and ANDRE are challenged in the worst 57 00:03:19,000 --> 00:03:23,840 Speaker 2: case scenario certainly could lead to significant loss in portfolios 58 00:03:24,120 --> 00:03:25,040 Speaker 2: in the near term. 59 00:03:25,840 --> 00:03:30,240 Speaker 3: So, Jerry, this is David Havens from Bloomberg Intelligence. You 60 00:03:30,240 --> 00:03:33,840 Speaker 3: you recently wrote your Nervous for Now, UH Now can 61 00:03:33,919 --> 00:03:37,080 Speaker 3: last a long time. You brought up the financial crisis 62 00:03:37,080 --> 00:03:39,960 Speaker 3: and there was a period of UH of Pacific markets 63 00:03:39,960 --> 00:03:42,000 Speaker 3: for four or five years in the in the run 64 00:03:42,080 --> 00:03:44,440 Speaker 3: up to that UH. You mentioned that you're seeing some 65 00:03:44,520 --> 00:03:46,920 Speaker 3: things below the surface. Maybe you could expand on that, 66 00:03:47,000 --> 00:03:49,080 Speaker 3: maybe the top two or three things that make you 67 00:03:49,360 --> 00:03:52,120 Speaker 3: nervous for now other than simply spreads are tight and 68 00:03:52,360 --> 00:03:55,480 Speaker 3: markets are, you know, sort of throwing caution to the wind. 69 00:03:56,720 --> 00:04:00,480 Speaker 2: Yeah, I'd say, I'd say there's maybe there's a couple 70 00:04:00,560 --> 00:04:04,080 Speaker 2: things that I think are really worth talking about or highlighting, David, 71 00:04:04,080 --> 00:04:07,840 Speaker 2: because it's a really good it's a really good point. Look, 72 00:04:07,880 --> 00:04:11,160 Speaker 2: we saw we saw two thousand and five through two thousand, 73 00:04:11,200 --> 00:04:14,200 Speaker 2: you know, leading into the global financial crisis, spreads were 74 00:04:14,240 --> 00:04:18,240 Speaker 2: tight for quite some time. So, as you mentioned, markets 75 00:04:18,279 --> 00:04:22,040 Speaker 2: can remain irrational longer than people can remain solvent. And 76 00:04:22,120 --> 00:04:25,880 Speaker 2: that's that's true in any market. I think as fundamental 77 00:04:25,960 --> 00:04:28,520 Speaker 2: managers we always lean on and just to be clear, 78 00:04:29,120 --> 00:04:32,719 Speaker 2: what we what we try to do is say, what 79 00:04:32,800 --> 00:04:35,240 Speaker 2: are the fundamentals saying to us? And we can't We 80 00:04:35,279 --> 00:04:37,440 Speaker 2: don't know what the technicals will mean, we don't know 81 00:04:37,440 --> 00:04:39,600 Speaker 2: when they'll turn. But ultimately we sit in front of 82 00:04:39,640 --> 00:04:42,400 Speaker 2: our clients, all we can lean on are the fundamentals 83 00:04:43,200 --> 00:04:45,279 Speaker 2: So what are we seeing under the surface that concerns us, 84 00:04:45,279 --> 00:04:49,760 Speaker 2: because I think that's the that's the biggest question. I'd 85 00:04:49,760 --> 00:04:55,360 Speaker 2: say first is labor market data. I'd say headline, the 86 00:04:55,400 --> 00:04:59,480 Speaker 2: headline unemployment data, and the labor market data would imply 87 00:04:59,640 --> 00:05:03,120 Speaker 2: that the the consumer is healthy. Would we would say 88 00:05:03,160 --> 00:05:07,240 Speaker 2: that we think as you scratch even a little bit 89 00:05:07,320 --> 00:05:10,960 Speaker 2: under the surface there, we think the unemployment picture does 90 00:05:11,000 --> 00:05:14,479 Speaker 2: not look nearly as robust as the headline data would imply. 91 00:05:14,760 --> 00:05:17,559 Speaker 2: And that's just just macro perspective. Why does that matter? 92 00:05:18,520 --> 00:05:23,919 Speaker 2: In our opinion, the only inflation and only price you know, 93 00:05:24,880 --> 00:05:27,679 Speaker 2: pricing power that companies have is going to be driven 94 00:05:27,680 --> 00:05:30,440 Speaker 2: by wages. Then when you look at the credit markets, 95 00:05:30,440 --> 00:05:33,600 Speaker 2: and I think this is really important, the fault rate 96 00:05:33,640 --> 00:05:36,960 Speaker 2: looks really low. I think we can kind of lull 97 00:05:36,960 --> 00:05:38,880 Speaker 2: ourselves to sleep with a two percent to fault rate 98 00:05:38,880 --> 00:05:41,800 Speaker 2: and leverage finance markets that the fault rate more than 99 00:05:41,880 --> 00:05:45,479 Speaker 2: doubles when you look at distressed exchanges and liability management exercises, 100 00:05:45,760 --> 00:05:48,240 Speaker 2: and I think we really need to spend time on 101 00:05:48,279 --> 00:05:52,400 Speaker 2: this because there's stress that's happening at the company level. 102 00:05:52,920 --> 00:05:56,400 Speaker 2: There's willing sponsors and owners that are supporting it allowing 103 00:05:56,400 --> 00:05:58,480 Speaker 2: to happen, and there are owners of the debt that 104 00:05:58,520 --> 00:06:02,039 Speaker 2: need to manufacture a higher term that are also doing it. 105 00:06:02,080 --> 00:06:05,320 Speaker 2: So when you combine these these uh, these kind of 106 00:06:05,320 --> 00:06:07,200 Speaker 2: different liights of the stool here you get a real 107 00:06:07,279 --> 00:06:11,520 Speaker 2: toxic brew. And that doesn't happen in healthy markets. You 108 00:06:11,520 --> 00:06:14,040 Speaker 2: don't see increase in in picks, you don't see increase 109 00:06:14,080 --> 00:06:17,960 Speaker 2: in amendments, and you certainly don't see aggressive liability management 110 00:06:18,040 --> 00:06:20,800 Speaker 2: exercises in in in healthy companies. 111 00:06:21,240 --> 00:06:25,040 Speaker 3: Right, So, what what might be the spark that could 112 00:06:25,160 --> 00:06:26,400 Speaker 3: create a conflagration? 113 00:06:26,680 --> 00:06:26,880 Speaker 2: You know? 114 00:06:27,320 --> 00:06:30,560 Speaker 3: Again, you know we we've had a couple of situations 115 00:06:30,560 --> 00:06:33,200 Speaker 3: where it's either been sort of a European debt issue, 116 00:06:33,240 --> 00:06:36,960 Speaker 3: it's obviously the the build up of leveraging the financial 117 00:06:36,960 --> 00:06:40,600 Speaker 3: as system prior to the financial crisis. We obviously can't 118 00:06:40,600 --> 00:06:44,680 Speaker 3: predict a pandemic. But what what what sparks are you 119 00:06:44,720 --> 00:06:45,800 Speaker 3: looking out for? 120 00:06:45,800 --> 00:06:49,080 Speaker 2: For? For us, I'd say simply it's the it's the 121 00:06:49,200 --> 00:06:55,440 Speaker 2: unemployment picture. It really gets back to the health of 122 00:06:55,520 --> 00:06:59,760 Speaker 2: the consumer. We're all hanging our hat on the resiliency 123 00:06:59,800 --> 00:07:03,839 Speaker 2: in the consumer, and I think what we've recently seen 124 00:07:04,520 --> 00:07:07,159 Speaker 2: is the excess savings from the pandemic. Well, we know 125 00:07:07,240 --> 00:07:11,320 Speaker 2: that's all been burned through, and there's been a you know, 126 00:07:11,360 --> 00:07:14,680 Speaker 2: a lot of talk around the people pulling down on 127 00:07:14,720 --> 00:07:17,600 Speaker 2: their credit cards. Sure, that's that's happened. A lot of 128 00:07:17,920 --> 00:07:20,440 Speaker 2: a lot of people talking now about buy now, pay later. 129 00:07:21,400 --> 00:07:24,440 Speaker 2: Sure that's been an increase as well. You typically don't 130 00:07:24,720 --> 00:07:26,880 Speaker 2: you don't see the increase in the credit card draw 131 00:07:26,960 --> 00:07:30,120 Speaker 2: down in in consumers that that are healthy. As a 132 00:07:30,120 --> 00:07:33,640 Speaker 2: matter of fact, now what we're seeing is maintaining of 133 00:07:33,680 --> 00:07:37,520 Speaker 2: credit card balances UH pick up in delinquencies that we're 134 00:07:37,520 --> 00:07:40,840 Speaker 2: seeing as well, and so it feels like the consumers 135 00:07:40,920 --> 00:07:44,480 Speaker 2: really stretched. It's it's we we know that there's a 136 00:07:44,760 --> 00:07:46,680 Speaker 2: we we know that prices are high. We know the 137 00:07:46,680 --> 00:07:51,640 Speaker 2: cost of living is astronomical. And what we what we're 138 00:07:51,680 --> 00:07:55,440 Speaker 2: waiting for and what we think will be pretty significant 139 00:07:55,960 --> 00:07:58,960 Speaker 2: is when you can see this this continued increase in 140 00:07:58,960 --> 00:08:03,320 Speaker 2: in UH, in unemployment, that's really going to be the 141 00:08:03,760 --> 00:08:07,400 Speaker 2: tipping point. I will note that in the in the 142 00:08:07,400 --> 00:08:11,000 Speaker 2: employment figures, I think something that that that that probably 143 00:08:11,000 --> 00:08:13,320 Speaker 2: should be kind of looked at a little bit further 144 00:08:13,360 --> 00:08:14,880 Speaker 2: and we spend a little bit time. We have a 145 00:08:14,880 --> 00:08:16,920 Speaker 2: team of people, you know, looking at this and then 146 00:08:16,960 --> 00:08:20,640 Speaker 2: the amount of workers who are taking multiple jobs because 147 00:08:20,640 --> 00:08:23,760 Speaker 2: of economic reasons, and we've seen that up. We've seen 148 00:08:23,760 --> 00:08:25,240 Speaker 2: that increase in a real material way. 149 00:08:25,440 --> 00:08:27,240 Speaker 1: So Jerry your view on the economy. If you think 150 00:08:27,320 --> 00:08:29,920 Speaker 1: unemployment is taking up, do you expect a US recession 151 00:08:29,960 --> 00:08:30,360 Speaker 1: this year? 152 00:08:31,000 --> 00:08:35,040 Speaker 2: We we do expect the US recession, uh this year. 153 00:08:35,520 --> 00:08:38,520 Speaker 2: We are always we're always trying to We're always trying 154 00:08:38,520 --> 00:08:41,120 Speaker 2: to be aware and and and be able to succeed 155 00:08:41,240 --> 00:08:44,400 Speaker 2: in all markets. So what we would say is, we 156 00:08:44,400 --> 00:08:46,920 Speaker 2: don't know how deep the recession will be. Banks are 157 00:08:46,920 --> 00:08:50,400 Speaker 2: healthier than they've been in the past, consumers are coming 158 00:08:50,400 --> 00:08:53,280 Speaker 2: into this with a significantly healthier balance sheet. This has 159 00:08:53,280 --> 00:08:57,160 Speaker 2: been there's been a real appreciation of just net worth 160 00:08:57,280 --> 00:09:00,440 Speaker 2: generally between asset prices in real estate and the equity markets. 161 00:09:01,880 --> 00:09:05,120 Speaker 2: And so we would just we would we would temper 162 00:09:05,200 --> 00:09:07,600 Speaker 2: some of that by saying we do expect a recession. 163 00:09:07,640 --> 00:09:11,640 Speaker 2: We do expect the Fed to need to lower rates 164 00:09:11,679 --> 00:09:14,079 Speaker 2: and need to lower rates faster than the market perceives. 165 00:09:15,640 --> 00:09:19,880 Speaker 2: But the reality is what what we're what we're also 166 00:09:19,920 --> 00:09:23,599 Speaker 2: saying is that even a minor or a mild recession, 167 00:09:23,960 --> 00:09:26,040 Speaker 2: well whatever kind of recession we get and typically I 168 00:09:26,040 --> 00:09:30,320 Speaker 2: don't know, you know, mild recession means significantly wider credit 169 00:09:30,400 --> 00:09:34,280 Speaker 2: spreads broadly, and to us, you're not being paid to 170 00:09:34,360 --> 00:09:37,000 Speaker 2: absorb any kind of volatility or loss in the marketplace 171 00:09:37,040 --> 00:09:38,120 Speaker 2: given where prices. 172 00:09:37,840 --> 00:09:42,800 Speaker 3: Are h So Jerry with with spreads it at historically 173 00:09:42,880 --> 00:09:46,160 Speaker 3: tight level, certainly within what I think we would both 174 00:09:46,320 --> 00:09:49,000 Speaker 3: we would all agree is tail risk or at least 175 00:09:49,040 --> 00:09:52,920 Speaker 3: a tail with the outlook that you have that a 176 00:09:53,240 --> 00:09:55,800 Speaker 3: that a recession may occur in the United States, what 177 00:09:55,920 --> 00:10:00,800 Speaker 3: does a portfolio management team do? And in the up bond. 178 00:10:00,559 --> 00:10:04,680 Speaker 2: World, Yeah, this is this is the conversation we have 179 00:10:04,800 --> 00:10:09,079 Speaker 2: every day because yields are high, right, spreads are tight, 180 00:10:09,600 --> 00:10:12,520 Speaker 2: and so everyone is talking about, well, the technicals are 181 00:10:12,559 --> 00:10:16,040 Speaker 2: really solid in the in the corporate bond market, they're 182 00:10:16,080 --> 00:10:20,640 Speaker 2: really solid in the leverage loan market. Current yields look high. 183 00:10:21,160 --> 00:10:25,000 Speaker 2: Yield yields are you can finally earn income in the 184 00:10:25,040 --> 00:10:28,559 Speaker 2: corporate world, but you can earn that income because the 185 00:10:28,640 --> 00:10:31,120 Speaker 2: risk free rate is high. So what are we doing 186 00:10:31,160 --> 00:10:35,079 Speaker 2: in our portfolios. We are moving up in credit quality 187 00:10:35,640 --> 00:10:37,760 Speaker 2: across the board. We're doing that in different ways. We're 188 00:10:37,760 --> 00:10:42,360 Speaker 2: pulling different levers depending upon the strategies that which we're managing. 189 00:10:43,679 --> 00:10:48,000 Speaker 2: So that would mean moving up in quality in corporate bonds, 190 00:10:48,400 --> 00:10:53,120 Speaker 2: It would mean shortening our duration in corporate bonds, It 191 00:10:53,160 --> 00:10:56,880 Speaker 2: would mean moving into top of the capital structure in 192 00:10:56,920 --> 00:11:02,680 Speaker 2: some in some securitized world will triple a clos even 193 00:11:02,720 --> 00:11:04,840 Speaker 2: triple a c nbs. And we talked a little bit 194 00:11:04,840 --> 00:11:07,280 Speaker 2: about some of the real estate early in the early 195 00:11:07,320 --> 00:11:10,040 Speaker 2: commentary as we started, as you started the segment, just 196 00:11:10,120 --> 00:11:14,720 Speaker 2: the even real estate's recovered. And we also really like 197 00:11:14,800 --> 00:11:18,600 Speaker 2: and find relative value in fixed income in the agency 198 00:11:18,640 --> 00:11:21,640 Speaker 2: mortgage market. We think that segment of the of the 199 00:11:21,679 --> 00:11:26,960 Speaker 2: market is is really cheap nominally and is really cheap 200 00:11:27,040 --> 00:11:28,360 Speaker 2: relative to corporate bonds. 201 00:11:28,600 --> 00:11:31,520 Speaker 3: Okay, So so up and up in quality sounds like 202 00:11:31,600 --> 00:11:34,640 Speaker 3: the the idea for now is it does Is there 203 00:11:34,679 --> 00:11:38,400 Speaker 3: any sense in your mind to up in credit quality 204 00:11:38,800 --> 00:11:41,439 Speaker 3: down in structure anywhere. 205 00:11:42,240 --> 00:11:47,400 Speaker 2: So that we do that a little bit. What we 206 00:11:47,520 --> 00:11:50,319 Speaker 2: also try to do is we try to dynamically allocate 207 00:11:51,120 --> 00:11:53,480 Speaker 2: throughout the cycle, and to the extent you go down 208 00:11:53,520 --> 00:11:59,200 Speaker 2: and structure. Typically there's no alchemy, right David. When you're 209 00:11:59,480 --> 00:12:03,720 Speaker 2: trying to enhance your yield by going down in structure, 210 00:12:03,800 --> 00:12:09,640 Speaker 2: you are oftentimes selling liquidity, and what that might preclude 211 00:12:09,679 --> 00:12:13,439 Speaker 2: you from doing is dynamically allocating your portfolio when volatility 212 00:12:13,480 --> 00:12:16,640 Speaker 2: increases to take advantage of some of the dislocations in 213 00:12:16,679 --> 00:12:19,920 Speaker 2: the marketplace. So we'll do that. We will take advantage 214 00:12:19,960 --> 00:12:23,600 Speaker 2: of some complexity in structure. We've done that in some 215 00:12:23,840 --> 00:12:28,000 Speaker 2: esoteric asset backed securities which we find attractive. We've done 216 00:12:28,040 --> 00:12:31,839 Speaker 2: that in some structured corporate securities that we find attractive. 217 00:12:32,520 --> 00:12:36,480 Speaker 2: But we are making sure that we're also aware and 218 00:12:36,480 --> 00:12:40,400 Speaker 2: cognizant of liquidity in the marketplace because you can pick 219 00:12:40,480 --> 00:12:44,120 Speaker 2: up significant yield just buying agency mortgages. They traded very 220 00:12:44,120 --> 00:12:49,280 Speaker 2: attractive levels. You can stay liquid in the top part 221 00:12:49,280 --> 00:12:53,480 Speaker 2: of the capital structure, and colos Colo markets now at 222 00:12:53,840 --> 00:12:56,160 Speaker 2: a trillion dollars in the top part of that capital 223 00:12:56,200 --> 00:12:59,240 Speaker 2: structure is six hundred billion dollars in size, very liquid, 224 00:13:00,040 --> 00:13:03,320 Speaker 2: stay liquid in agency mortgages, which are one of the 225 00:13:03,320 --> 00:13:08,000 Speaker 2: more liquid segments of the fixed income market aside from treasuries. 226 00:13:08,320 --> 00:13:11,559 Speaker 2: And so you don't really need to sell a bunch 227 00:13:11,559 --> 00:13:13,240 Speaker 2: of liquidity to do that, but we'll do it in 228 00:13:13,800 --> 00:13:15,320 Speaker 2: pockets where we think we're being compensated. 229 00:13:15,800 --> 00:13:18,479 Speaker 1: I just wanted to back up a bit. Dari Onyle macroview. 230 00:13:18,480 --> 00:13:20,800 Speaker 1: The rates thing is interesting to me because it seems 231 00:13:20,840 --> 00:13:23,160 Speaker 1: so key right now. We started the year pricing in 232 00:13:23,240 --> 00:13:25,520 Speaker 1: six rate cuts this year, now we've gone to one zero, 233 00:13:25,559 --> 00:13:27,559 Speaker 1: maybe even a hike. So what's what's the your house view? 234 00:13:28,200 --> 00:13:32,800 Speaker 2: Our house view is that the market has gotten ahead 235 00:13:32,800 --> 00:13:36,160 Speaker 2: of itself and gotten too complacent with what we think 236 00:13:36,200 --> 00:13:41,880 Speaker 2: the FED will will do, and so our opinion is 237 00:13:41,920 --> 00:13:47,640 Speaker 2: that inflation is already coming down. We think some of 238 00:13:47,679 --> 00:13:52,680 Speaker 2: the some of the metrics that are critical inputs to 239 00:13:52,920 --> 00:13:59,880 Speaker 2: inflation want one of those being rant is a lagged input, 240 00:14:00,480 --> 00:14:04,040 Speaker 2: and is is a is a calculated number and not 241 00:14:04,200 --> 00:14:06,439 Speaker 2: an observed number in the marketplace. So some of the 242 00:14:06,480 --> 00:14:10,560 Speaker 2: observed rents we're seeing are are pretty you know, rolling 243 00:14:10,600 --> 00:14:13,040 Speaker 2: over pretty hard. And then what we would say is 244 00:14:13,080 --> 00:14:18,760 Speaker 2: that between auto insurance and health insurance, which is one 245 00:14:18,800 --> 00:14:24,280 Speaker 2: of the biggest components to the increase in inflation, well, 246 00:14:24,320 --> 00:14:27,600 Speaker 2: we think given what's happened to use car prices, which 247 00:14:27,600 --> 00:14:29,880 Speaker 2: we think will feed through the new car prices, you 248 00:14:29,960 --> 00:14:32,880 Speaker 2: get a little bit of a normalization in auto insurance, 249 00:14:32,920 --> 00:14:36,480 Speaker 2: which the FED has no control over whatsoever. So really, 250 00:14:36,560 --> 00:14:39,840 Speaker 2: is you know, really that there's nothing interest rate increases 251 00:14:39,880 --> 00:14:43,880 Speaker 2: are going to mean for auto insurance. Well, ultimately, what 252 00:14:43,880 --> 00:14:47,400 Speaker 2: we're saying is the parts of insurance that the parts 253 00:14:47,440 --> 00:14:49,880 Speaker 2: of inflation that will prove to be cyclical, which are 254 00:14:49,880 --> 00:14:52,400 Speaker 2: in the Fed's control, have actually already rolled in our 255 00:14:52,480 --> 00:14:55,440 Speaker 2: rolling pretty hard. And our opinion is that the inflation 256 00:14:55,880 --> 00:14:58,280 Speaker 2: that the inflation numbers that the FED is looking at 257 00:14:58,280 --> 00:15:02,400 Speaker 2: on the headline basis don't don't really tell the story. 258 00:15:02,400 --> 00:15:05,640 Speaker 2: And so we think the Fed's job has already been achieved. Largely, 259 00:15:06,000 --> 00:15:08,520 Speaker 2: I think the Fed's already there, and so our opinion 260 00:15:08,600 --> 00:15:11,080 Speaker 2: is that the market's gotten too complacent about that. And 261 00:15:11,160 --> 00:15:13,160 Speaker 2: if we see it a little bit of a roll 262 00:15:13,600 --> 00:15:16,000 Speaker 2: over the next few months, which we actually think we will, 263 00:15:16,680 --> 00:15:19,760 Speaker 2: and you get back to a two point six percent 264 00:15:20,440 --> 00:15:23,200 Speaker 2: annualized number and inflation which we don't think we're too 265 00:15:23,240 --> 00:15:26,920 Speaker 2: far away from in May. By May, well that's where 266 00:15:26,920 --> 00:15:28,480 Speaker 2: we were to start the year, and we had, you know, 267 00:15:28,520 --> 00:15:31,280 Speaker 2: and or or in March actually when the FED put 268 00:15:31,280 --> 00:15:33,320 Speaker 2: out their summary of economic projections and you had three 269 00:15:33,360 --> 00:15:37,840 Speaker 2: rate cuts priced into the marketplace. So our opinion largely 270 00:15:38,000 --> 00:15:41,680 Speaker 2: is that you can easily see a scenario where you 271 00:15:41,760 --> 00:15:45,920 Speaker 2: get a couple of softer prints, you get confirmation of 272 00:15:46,000 --> 00:15:48,880 Speaker 2: this this this labor market as we saw in non 273 00:15:48,880 --> 00:15:52,480 Speaker 2: farm payrolls on Friday, and you get you get that 274 00:15:52,520 --> 00:15:54,240 Speaker 2: to continue to roll through the market over the next 275 00:15:54,280 --> 00:15:57,600 Speaker 2: couple of months, and then you're pricing a few more cuts, 276 00:15:57,600 --> 00:16:00,240 Speaker 2: which we think is is is probably the base in 277 00:16:00,280 --> 00:16:00,640 Speaker 2: our view. 278 00:16:00,800 --> 00:16:03,400 Speaker 1: But that's pretty bullish for corporate credit. But you're and 279 00:16:03,720 --> 00:16:05,880 Speaker 1: yet you're underweight, So I'm kind of trying to reconcile 280 00:16:05,920 --> 00:16:06,280 Speaker 1: those two. 281 00:16:06,680 --> 00:16:11,840 Speaker 2: Well, the question around the reason for the cuts, you're 282 00:16:11,920 --> 00:16:14,720 Speaker 2: right in the first order, and the market reaction in 283 00:16:14,760 --> 00:16:18,880 Speaker 2: the first order has been if we see if we 284 00:16:18,920 --> 00:16:23,320 Speaker 2: see rate cuts, that's positive for risk acids. And if 285 00:16:23,320 --> 00:16:26,600 Speaker 2: we see rate cuts, then the equity market should rally 286 00:16:26,680 --> 00:16:31,680 Speaker 2: and corporate spreads should rally. And what we what we 287 00:16:31,760 --> 00:16:34,560 Speaker 2: might see is a scenario where we're seeing rate cuts 288 00:16:34,560 --> 00:16:37,560 Speaker 2: because the economy is slowing down, so risk assets are 289 00:16:37,600 --> 00:16:41,760 Speaker 2: actually not going to behave well in the in that scenario, 290 00:16:42,040 --> 00:16:44,800 Speaker 2: and we haven't we haven't yet seen that. It's more 291 00:16:44,880 --> 00:16:49,680 Speaker 2: been about liquidity. It's more been about we have a 292 00:16:49,720 --> 00:16:52,680 Speaker 2: discount rate in the risk free rate, we lower that rate, 293 00:16:52,760 --> 00:16:55,800 Speaker 2: and then we artificially or or or not artificially, but 294 00:16:55,840 --> 00:16:59,360 Speaker 2: we just inflate asset prices higher. That may not happen 295 00:16:59,680 --> 00:17:01,680 Speaker 2: to the extent that you're seeing in economic slow down 296 00:17:01,720 --> 00:17:04,879 Speaker 2: which the FED is responding to, and that economic slowdown 297 00:17:04,960 --> 00:17:07,720 Speaker 2: is leading to a recession that's typically not positive for 298 00:17:07,840 --> 00:17:12,520 Speaker 2: corporate spreads, not positive for equity markets. Ultimately, if the 299 00:17:12,520 --> 00:17:16,000 Speaker 2: FED gets more aggressive and more accommodative at some point, 300 00:17:16,400 --> 00:17:18,560 Speaker 2: it will mean that you can see a remediation and 301 00:17:18,560 --> 00:17:21,760 Speaker 2: inflection back in spreads. But we don't think that's where 302 00:17:21,600 --> 00:17:23,880 Speaker 2: we don't we don't think that that's where it's where 303 00:17:23,920 --> 00:17:24,240 Speaker 2: it's hit. 304 00:17:24,640 --> 00:17:26,840 Speaker 1: So just back to real estate, Jerry, I mean, you 305 00:17:27,119 --> 00:17:28,879 Speaker 1: talk about it as an opportunity. We've had people on 306 00:17:28,880 --> 00:17:31,400 Speaker 1: this show talk about it as a trillion dollar opportunity, 307 00:17:32,520 --> 00:17:34,919 Speaker 1: and others are running scared and saying it's going to 308 00:17:34,920 --> 00:17:37,200 Speaker 1: bring down the banks. You know, it's going to wipe 309 00:17:37,200 --> 00:17:41,000 Speaker 1: out hundreds of regional banks, which would be very problematic 310 00:17:41,000 --> 00:17:44,000 Speaker 1: for rule markets. So what's the opportunity for you guys 311 00:17:44,040 --> 00:17:44,920 Speaker 1: in terms of real estate? 312 00:17:46,600 --> 00:17:50,359 Speaker 2: We we think we think real estate is an opportunity 313 00:17:50,359 --> 00:17:55,120 Speaker 2: in the marketplace. We are not We're not running from 314 00:17:55,440 --> 00:17:59,480 Speaker 2: real estate. We do believe it might be and will 315 00:17:59,520 --> 00:18:03,399 Speaker 2: continue to be ahead wind for regional banks broadly, we 316 00:18:03,440 --> 00:18:06,600 Speaker 2: think that systemically critical banks in the US and the 317 00:18:06,640 --> 00:18:10,880 Speaker 2: super regional banks in the US are very well capitalized 318 00:18:10,880 --> 00:18:14,840 Speaker 2: in there any kind of real estate stress will not 319 00:18:15,240 --> 00:18:19,520 Speaker 2: be a problem for for the systemically critical banks. What 320 00:18:19,560 --> 00:18:21,720 Speaker 2: we would say is where where are we seeing opportunity. 321 00:18:23,040 --> 00:18:26,200 Speaker 2: We think there's there's opportunity in prime UH in prime 322 00:18:26,520 --> 00:18:30,520 Speaker 2: uh cnbs, which is a single asset, single borrowers, where 323 00:18:30,520 --> 00:18:32,719 Speaker 2: we're seeing the majority of the opportunity. At this point. 324 00:18:33,080 --> 00:18:37,359 Speaker 2: There's been a significant remediation UH in UH in most 325 00:18:37,440 --> 00:18:41,200 Speaker 2: markets as as we've as we've talked about, and that 326 00:18:41,200 --> 00:18:45,560 Speaker 2: that has not precluded there from being opportunity in specific 327 00:18:45,960 --> 00:18:50,960 Speaker 2: areas of commercial real estate. There's been remediation in retail. 328 00:18:51,200 --> 00:18:56,679 Speaker 2: There's been remediation in hotel. There has not been remediation 329 00:18:56,840 --> 00:19:01,880 Speaker 2: in office too. You know, trade signial figuredly wide offer value. 330 00:19:02,280 --> 00:19:05,840 Speaker 2: You have to do a significant amount of homework because 331 00:19:05,920 --> 00:19:10,199 Speaker 2: all of these properties are very different. So there's you know, 332 00:19:10,240 --> 00:19:12,720 Speaker 2: a lot, a lot of credit work needs to be done, 333 00:19:12,800 --> 00:19:15,000 Speaker 2: a lot a lot of on the ground work needs 334 00:19:15,040 --> 00:19:17,040 Speaker 2: to be done, and then when you do that, you 335 00:19:17,080 --> 00:19:21,760 Speaker 2: can buy very good assets at levels that we think 336 00:19:21,800 --> 00:19:26,600 Speaker 2: will will provide very attractive total returns over the medium term, 337 00:19:26,640 --> 00:19:30,200 Speaker 2: and that that might take It might take six months, 338 00:19:30,200 --> 00:19:33,120 Speaker 2: it might take a couple of years, but we think 339 00:19:33,200 --> 00:19:37,040 Speaker 2: owning those assets over the over the medium term will 340 00:19:37,119 --> 00:19:38,640 Speaker 2: prove beneficial for our clients. 341 00:19:39,119 --> 00:19:41,200 Speaker 1: But what's changed recently, Jerry? There seems to have been 342 00:19:41,200 --> 00:19:43,439 Speaker 1: this impasse between buyers and sellers that you know, the 343 00:19:43,480 --> 00:19:46,280 Speaker 1: sellers didn't really want to accept the new valuations which 344 00:19:46,280 --> 00:19:49,040 Speaker 1: would much lower. Have they started to become more realistic 345 00:19:49,080 --> 00:19:51,400 Speaker 1: in their assessment a little bit? 346 00:19:51,480 --> 00:19:55,680 Speaker 2: Sporadically, some have been forced. We have seen a few 347 00:19:56,680 --> 00:20:01,959 Speaker 2: a few forced sells. We have seen a few liquidations. 348 00:20:02,480 --> 00:20:07,520 Speaker 2: We've also seen a lot still are seeing the one 349 00:20:07,600 --> 00:20:12,440 Speaker 2: year extensions or the modifications. Those are still making their 350 00:20:12,440 --> 00:20:17,480 Speaker 2: way through through the marketplace. What what has happened a 351 00:20:17,520 --> 00:20:23,200 Speaker 2: little bit is you know, look, you know, interest rates 352 00:20:23,240 --> 00:20:26,400 Speaker 2: came down, uh from from last year. They've they've they've 353 00:20:26,400 --> 00:20:29,239 Speaker 2: moved back higher. But the one hundred basis point move 354 00:20:29,320 --> 00:20:33,520 Speaker 2: lower and interest rates was was helpful. We did see 355 00:20:33,520 --> 00:20:37,920 Speaker 2: capital and and money raised. And the longer that rates 356 00:20:38,480 --> 00:20:41,720 Speaker 2: sit at higher levels, and the longer that you get 357 00:20:41,880 --> 00:20:44,680 Speaker 2: or the closer you get to maturity. You know, the 358 00:20:45,000 --> 00:20:46,919 Speaker 2: reality is it just comes up. It just comes up 359 00:20:46,960 --> 00:20:48,840 Speaker 2: on people, and you're forced to deal with it. You 360 00:20:48,920 --> 00:20:50,960 Speaker 2: just have you have to deal with it in some level. 361 00:20:51,000 --> 00:20:54,560 Speaker 2: And so and then transactions beget transactions. So we do 362 00:20:54,600 --> 00:20:58,879 Speaker 2: think that over time we start seeing a few a 363 00:20:58,880 --> 00:21:02,359 Speaker 2: few liquidations, that'll probably mean more more assets will trade 364 00:21:02,720 --> 00:21:04,560 Speaker 2: with the more time that passes. Because you we we 365 00:21:04,600 --> 00:21:07,919 Speaker 2: are coming up on maturity walls enough people have have 366 00:21:08,040 --> 00:21:10,320 Speaker 2: talked about on this show and many others. 367 00:21:10,640 --> 00:21:15,080 Speaker 3: Jerry, we're a couple dozen minutes into into this podcast, 368 00:21:15,160 --> 00:21:17,879 Speaker 3: and amazingly, I don't think we've uttered the phrase private 369 00:21:17,920 --> 00:21:21,440 Speaker 3: debt or private credit seems to be just about the 370 00:21:22,200 --> 00:21:25,040 Speaker 3: sort of most talked about area in uh in credit 371 00:21:25,080 --> 00:21:29,480 Speaker 3: maybe finance these days. Uh, what are you seeing there? 372 00:21:29,480 --> 00:21:31,880 Speaker 3: You guys have been engaged for a while. You guys 373 00:21:31,920 --> 00:21:36,439 Speaker 3: are affiliated with with Carlisle, which I probably has some insight, uh, 374 00:21:36,600 --> 00:21:38,960 Speaker 3: you know, into that market as well. So, so what's 375 00:21:38,960 --> 00:21:40,240 Speaker 3: going on from your perspective? 376 00:21:41,200 --> 00:21:45,080 Speaker 2: I'm really glad you asked. Uh, there's a lot going 377 00:21:45,080 --> 00:21:48,879 Speaker 2: on in private credit, as we all know. Every and 378 00:21:48,880 --> 00:21:53,320 Speaker 2: and you know, milk Milkin's finishing up and obviously the 379 00:21:53,359 --> 00:21:57,560 Speaker 2: topic of every conversation UH was was private credit. We 380 00:21:57,600 --> 00:22:01,560 Speaker 2: announced our own private credit deal on on Monday with 381 00:22:02,240 --> 00:22:06,440 Speaker 2: PNC and TCW has been doing investing in private credit. 382 00:22:06,480 --> 00:22:07,920 Speaker 2: We have a private credit team has been investing in 383 00:22:07,920 --> 00:22:12,280 Speaker 2: private credit for twenty years. Ninety five percent of private 384 00:22:12,320 --> 00:22:18,320 Speaker 2: credit funds have started post global financial crisis, approximately almost 385 00:22:18,480 --> 00:22:20,840 Speaker 2: almost all of them, and there's been a lot of 386 00:22:20,840 --> 00:22:26,240 Speaker 2: capital that's been raised. And any time you see the excesses, 387 00:22:26,600 --> 00:22:28,880 Speaker 2: and anytime you see the shape of the curve as 388 00:22:28,880 --> 00:22:31,240 Speaker 2: the way it is meaning the assets are raised, they 389 00:22:31,320 --> 00:22:34,720 Speaker 2: look like a hockey stick. There's this massive spike, this 390 00:22:34,880 --> 00:22:37,480 Speaker 2: massive j curve, almost vertical in the assets that have 391 00:22:37,520 --> 00:22:41,120 Speaker 2: been raised in private credit, and it's the golden age 392 00:22:41,119 --> 00:22:43,720 Speaker 2: for private credit, and private credit is going to take 393 00:22:43,720 --> 00:22:48,320 Speaker 2: over every liquid market. What we would say is we 394 00:22:48,359 --> 00:22:51,719 Speaker 2: believe in private credit long term. We believe that private 395 00:22:51,760 --> 00:22:56,639 Speaker 2: credit structurally makes a lot of sense. In portfolios we have, 396 00:22:57,240 --> 00:23:00,359 Speaker 2: we have we are investing actively in private credit. What 397 00:23:00,400 --> 00:23:04,760 Speaker 2: we would also acknowledge is that we also believe there 398 00:23:04,840 --> 00:23:10,520 Speaker 2: is a significant period of volatility between now and what 399 00:23:10,600 --> 00:23:12,800 Speaker 2: we believe to be kind of this structural growth in 400 00:23:12,840 --> 00:23:15,240 Speaker 2: private credit. We believe the fault rates are going to 401 00:23:15,240 --> 00:23:17,520 Speaker 2: pick up in a really material way in private credit. 402 00:23:17,560 --> 00:23:20,720 Speaker 2: We think there's going to be volatility in private credit, 403 00:23:21,640 --> 00:23:25,920 Speaker 2: and we do not think that private credit is going 404 00:23:25,960 --> 00:23:29,119 Speaker 2: to cannibalize the liquid market. We don't think private credit 405 00:23:29,119 --> 00:23:32,800 Speaker 2: is a thirty trillion dollar opportunity. We do believe private 406 00:23:32,840 --> 00:23:35,159 Speaker 2: credit is a very significant opportunity. We do not want 407 00:23:35,200 --> 00:23:37,639 Speaker 2: to undersell that. We do believe that, but we just 408 00:23:37,640 --> 00:23:40,600 Speaker 2: want to be careful. Our clients need liquidity. Now. We 409 00:23:40,840 --> 00:23:43,960 Speaker 2: talk to our we talk to pension funds. We manage 410 00:23:43,960 --> 00:23:48,760 Speaker 2: money for corporations and pensions and cities and hospital systems 411 00:23:48,800 --> 00:23:50,920 Speaker 2: across the country, and what we would say is that 412 00:23:51,880 --> 00:23:56,199 Speaker 2: there's a place where they can sell liquidity just like 413 00:23:56,280 --> 00:23:58,360 Speaker 2: we can, and then there is a place in their 414 00:23:58,400 --> 00:24:02,000 Speaker 2: portfolio for quid assets that you're going to need to 415 00:24:02,040 --> 00:24:03,719 Speaker 2: carry you out. So there's a lot to talk about, 416 00:24:04,040 --> 00:24:07,320 Speaker 2: but what we would say is we are currently seeing 417 00:24:07,880 --> 00:24:10,760 Speaker 2: some real stress in private credit, some real weakening of 418 00:24:10,800 --> 00:24:12,960 Speaker 2: docks in private credit, and that's a function of the 419 00:24:13,000 --> 00:24:15,080 Speaker 2: capital that's been raised, and we think that will most 420 00:24:15,160 --> 00:24:17,080 Speaker 2: likely lead to some accidents in private credit. 421 00:24:17,280 --> 00:24:20,000 Speaker 3: Yeah, I mean, it almost seems inevitable that that will happen, 422 00:24:20,040 --> 00:24:22,040 Speaker 3: given the amount of growth and maybe some of the 423 00:24:22,040 --> 00:24:26,600 Speaker 3: tourists that de vender the sector. They're definitely cross currents 424 00:24:26,600 --> 00:24:28,520 Speaker 3: in terms of the opportunity. There are some of the 425 00:24:28,600 --> 00:24:31,080 Speaker 3: largest managers in the world saying it is a golden 426 00:24:31,119 --> 00:24:34,200 Speaker 3: age for credit, and then there are chicken littles out 427 00:24:34,200 --> 00:24:39,560 Speaker 3: there saying the sky is falling. We had similar talk 428 00:24:39,600 --> 00:24:41,520 Speaker 3: in the run up to the financial crisis, but that 429 00:24:41,600 --> 00:24:44,879 Speaker 3: point we had, you know, financial entities that were levered 430 00:24:44,880 --> 00:24:47,879 Speaker 3: fifty to one, one hundred to one and such. Private 431 00:24:47,880 --> 00:24:50,879 Speaker 3: credit seems to be much less levered. So even if 432 00:24:50,920 --> 00:24:53,119 Speaker 3: we do have some accidents, do you what sort of 433 00:24:53,160 --> 00:24:55,080 Speaker 3: a systemic impact do you think that would have? 434 00:24:56,520 --> 00:24:59,840 Speaker 2: We don't think. We don't think that private credit will 435 00:25:00,680 --> 00:25:05,720 Speaker 2: will have anywhere near the impact of a global financial crisis. 436 00:25:06,280 --> 00:25:10,760 Speaker 2: We clearly the leverage that was in the system. There 437 00:25:10,800 --> 00:25:14,040 Speaker 2: were credit hedge funds that were leveraged five to seven 438 00:25:14,080 --> 00:25:17,280 Speaker 2: times heading into global financial crisis, and then there were 439 00:25:17,320 --> 00:25:21,080 Speaker 2: liquid macro funds that were levered twenty to forty times 440 00:25:21,119 --> 00:25:24,639 Speaker 2: going into the global financial crisis. And private credit today 441 00:25:24,720 --> 00:25:27,680 Speaker 2: is probably levered one times, right, I mean, we all 442 00:25:28,440 --> 00:25:31,320 Speaker 2: so that what we What we would say is that 443 00:25:32,840 --> 00:25:35,920 Speaker 2: there's a really nice window into private credit and that's 444 00:25:35,960 --> 00:25:41,280 Speaker 2: the BDC market. And the BDC market, by any estimation, 445 00:25:42,160 --> 00:25:45,280 Speaker 2: hold somewhere around a third of private credit. Maybe it's 446 00:25:45,320 --> 00:25:48,600 Speaker 2: as much as forty percent, but let's say it's, you know, 447 00:25:48,840 --> 00:25:51,800 Speaker 2: a little bit less. What we're you're seeing is a 448 00:25:51,800 --> 00:25:57,439 Speaker 2: real increase in amendments and a real increase in payment 449 00:25:57,480 --> 00:26:00,960 Speaker 2: and kind or pick notes. These are these are where 450 00:26:01,000 --> 00:26:03,359 Speaker 2: companies can can't pay their coupons and so what do 451 00:26:03,400 --> 00:26:06,000 Speaker 2: they do? They pay you with more more bots. They 452 00:26:06,480 --> 00:26:10,400 Speaker 2: call it payment in kind pick notes. Healthy companies don't 453 00:26:10,400 --> 00:26:13,560 Speaker 2: pick their coupons. That's not that's not what's happening, right, 454 00:26:13,640 --> 00:26:16,840 Speaker 2: So what we would say is there's some real stress 455 00:26:17,200 --> 00:26:22,160 Speaker 2: that's that's being masked with some pick notes. That's that's 456 00:26:22,200 --> 00:26:25,399 Speaker 2: happening in real time. The flexibility of private credit capital 457 00:26:25,440 --> 00:26:29,200 Speaker 2: Colonel and can can deal with that. That that is true. 458 00:26:30,000 --> 00:26:31,760 Speaker 2: And the other thing that I would that I would 459 00:26:31,800 --> 00:26:34,520 Speaker 2: mention is that look private credit, the whole story is 460 00:26:34,560 --> 00:26:37,280 Speaker 2: that there's a match between the assets that are raised, 461 00:26:37,840 --> 00:26:40,800 Speaker 2: uh and then the the loans that are made and 462 00:26:40,840 --> 00:26:43,720 Speaker 2: they So what we say is there's a real match. 463 00:26:44,119 --> 00:26:48,760 Speaker 2: There's also true that LPs get committed to multiple funds 464 00:26:49,200 --> 00:26:51,960 Speaker 2: and typically get called all those funds at the same time, 465 00:26:52,720 --> 00:26:55,320 Speaker 2: and then there is leverage, and that leverage doesn't match 466 00:26:55,440 --> 00:26:58,760 Speaker 2: the maturity on those loans. And so I don't think 467 00:26:58,800 --> 00:27:01,400 Speaker 2: it'll be We don't. We don't think it'll be anywhere 468 00:27:01,440 --> 00:27:04,240 Speaker 2: near a systemic issue. We also don't think it is 469 00:27:04,280 --> 00:27:07,520 Speaker 2: without volatility, and we also don't think it's without potentially 470 00:27:07,600 --> 00:27:13,480 Speaker 2: significant loss, and probably more volatility and loss than some 471 00:27:13,520 --> 00:27:16,600 Speaker 2: of the cheerleaders would lead you to belief, but certainly 472 00:27:16,640 --> 00:27:18,720 Speaker 2: not as much volatility and loss as some of the 473 00:27:18,760 --> 00:27:20,440 Speaker 2: people who would tell you the world and the world 474 00:27:20,480 --> 00:27:21,639 Speaker 2: is ending in the sky is falling. 475 00:27:22,119 --> 00:27:25,200 Speaker 1: And when you say more to faults, are you able 476 00:27:25,200 --> 00:27:27,720 Speaker 1: to quantify that? I mean, we've got let's say six 477 00:27:27,760 --> 00:27:31,280 Speaker 1: percent by some estimates in public high yield at the 478 00:27:31,280 --> 00:27:34,120 Speaker 1: moment if you factor in leverage, loans and distress exchanges 479 00:27:34,119 --> 00:27:37,679 Speaker 1: and all that stuff. But on the on the private side, 480 00:27:38,160 --> 00:27:39,800 Speaker 1: what do you expect and how do you even see it? 481 00:27:39,840 --> 00:27:41,720 Speaker 1: Because some of this stuff will just go unto the radar. 482 00:27:42,240 --> 00:27:45,200 Speaker 2: You can, yeah, how do you see it? You only 483 00:27:45,240 --> 00:27:50,720 Speaker 2: would see it in what is the impaired assets in 484 00:27:51,000 --> 00:27:57,080 Speaker 2: in BDC's and what you might get from some private 485 00:27:57,119 --> 00:28:00,439 Speaker 2: credit you know, kind of annual report which you know 486 00:28:00,800 --> 00:28:02,560 Speaker 2: if you have to be an investor to see to 487 00:28:02,600 --> 00:28:06,720 Speaker 2: see it. Our opinion and any estimation that you'll read, 488 00:28:06,800 --> 00:28:09,719 Speaker 2: is that the private credit default rate and the public 489 00:28:09,720 --> 00:28:14,639 Speaker 2: credit default rate don't look all that dissimilar. They tend 490 00:28:14,640 --> 00:28:19,480 Speaker 2: to they tend to move together. As a matter of fact, 491 00:28:20,200 --> 00:28:22,320 Speaker 2: there's there's been a there's a recent report out that 492 00:28:22,359 --> 00:28:24,760 Speaker 2: says that the private credit default rate is within fifty 493 00:28:24,760 --> 00:28:27,840 Speaker 2: basis points of the public credit default rate. And so 494 00:28:28,440 --> 00:28:31,040 Speaker 2: I think it's with anybody's best guess that if you're 495 00:28:31,040 --> 00:28:33,639 Speaker 2: seeing a four and a half percent default rate in 496 00:28:33,680 --> 00:28:37,119 Speaker 2: the lverage finance markets currently with disdrastic changes and defaults, 497 00:28:38,080 --> 00:28:41,120 Speaker 2: it would not it wouldn't be a stretch to think 498 00:28:41,160 --> 00:28:44,960 Speaker 2: that you're seeing a very similar default experience in private credit, 499 00:28:45,000 --> 00:28:46,800 Speaker 2: even if you're not realizing that today. 500 00:28:47,240 --> 00:28:50,080 Speaker 1: So, in terms of the all of the stuff you 501 00:28:50,120 --> 00:28:52,920 Speaker 1: look at, Jerry, and you mentioned relative value earlier, which 502 00:28:52,960 --> 00:28:56,040 Speaker 1: is my favorite topic for this show. You see you 503 00:28:56,080 --> 00:28:59,880 Speaker 1: see relative value in the mortgage back stuff, but in 504 00:29:00,040 --> 00:29:01,840 Speaker 1: sense of like one thing you had to pick right 505 00:29:01,880 --> 00:29:04,719 Speaker 1: now and I think you have a global mandate, right, 506 00:29:04,760 --> 00:29:06,520 Speaker 1: So what would you put your finger on and say 507 00:29:06,560 --> 00:29:09,520 Speaker 1: is the best in credit at the moment. 508 00:29:09,880 --> 00:29:13,400 Speaker 2: Well, I'd say in fixed income it's agency mortgages. So 509 00:29:14,040 --> 00:29:18,920 Speaker 2: we would say that as we look at credit, if 510 00:29:18,920 --> 00:29:22,720 Speaker 2: we're including securitize credit, I would say it's double A 511 00:29:22,840 --> 00:29:26,080 Speaker 2: or triple A clos. The spreads that you can realize 512 00:29:26,080 --> 00:29:29,560 Speaker 2: on double A or triple A clos at one hundred 513 00:29:29,560 --> 00:29:33,160 Speaker 2: and fifty and two hundred basis points look very attractive, 514 00:29:33,680 --> 00:29:36,120 Speaker 2: both on a nominal basis and on a relative basis. 515 00:29:38,080 --> 00:29:41,480 Speaker 2: And then as you start to move, as you start 516 00:29:41,520 --> 00:29:47,680 Speaker 2: to move out the quality spectrum and the credit spectrum, 517 00:29:48,440 --> 00:29:51,560 Speaker 2: what we would say is you're probably supposed to be 518 00:29:51,640 --> 00:29:56,000 Speaker 2: in high quality investment grade. That's probably the easiest. That's 519 00:29:56,000 --> 00:29:58,600 Speaker 2: probably the easiest investment you can make at five and 520 00:29:58,600 --> 00:30:01,760 Speaker 2: a half percent. And if you can take, if you 521 00:30:01,800 --> 00:30:05,200 Speaker 2: can take risk and default, you're starting yields on leverage 522 00:30:05,240 --> 00:30:11,440 Speaker 2: loans at nine percent, certainly give you, certainly give you 523 00:30:11,560 --> 00:30:17,640 Speaker 2: a nice ability to absorb loss and default. You have 524 00:30:17,720 --> 00:30:20,239 Speaker 2: to be very specific about what you choose. I mean, 525 00:30:20,600 --> 00:30:22,680 Speaker 2: what we would say is, you know you've heard some 526 00:30:22,720 --> 00:30:27,000 Speaker 2: of our concerns on credit and liability management exercises and 527 00:30:28,440 --> 00:30:32,000 Speaker 2: default rates in LME. So I would you know, we 528 00:30:32,080 --> 00:30:34,480 Speaker 2: would caution it's not for the faint of heart. We 529 00:30:34,520 --> 00:30:37,320 Speaker 2: would also say that the good news about that is 530 00:30:37,360 --> 00:30:40,080 Speaker 2: you're starting You're starting with the current yield that is 531 00:30:40,200 --> 00:30:42,680 Speaker 2: nine percent, and that will give you the ability to 532 00:30:42,720 --> 00:30:44,480 Speaker 2: absorb some volatility and some loss. 533 00:30:44,880 --> 00:30:47,680 Speaker 1: But all that stuff you're mentioning, I mean, including the 534 00:30:47,720 --> 00:30:51,320 Speaker 1: triple A clos must be quite exposed to a big 535 00:30:51,360 --> 00:30:53,760 Speaker 1: shake out, you know, if there is an increase in volatility. 536 00:30:54,080 --> 00:30:55,840 Speaker 1: I mean, there's lots of things on the horizon. There's 537 00:30:55,880 --> 00:30:57,880 Speaker 1: two walls, as an election in the US coming up, 538 00:30:58,080 --> 00:31:03,400 Speaker 1: there's all sorts of things that could potentially increase spread significantly. 539 00:31:04,120 --> 00:31:06,960 Speaker 1: You know, as you mentioned, complacency seems to be dominating 540 00:31:07,000 --> 00:31:11,320 Speaker 1: now that could well change. How do you hedge against 541 00:31:11,600 --> 00:31:13,520 Speaker 1: against that? Because you know your your house view, you're 542 00:31:13,520 --> 00:31:16,280 Speaker 1: talking about a reckoning, you're talking about well defaults, you're 543 00:31:16,280 --> 00:31:18,760 Speaker 1: talking about stress. But but again, at the same time, 544 00:31:18,800 --> 00:31:21,560 Speaker 1: you seem to be you know, expressing, you know, somewhat 545 00:31:21,560 --> 00:31:24,120 Speaker 1: of a benign view in terms of your portfolio. 546 00:31:24,840 --> 00:31:27,920 Speaker 2: Well, the highest level portfolio of you that I can 547 00:31:27,960 --> 00:31:30,760 Speaker 2: give you and we can we can be as transparent 548 00:31:30,800 --> 00:31:35,040 Speaker 2: as we can is we are long duration, we are 549 00:31:35,320 --> 00:31:38,440 Speaker 2: underweight corporate credit in a very significant way. So we're 550 00:31:38,560 --> 00:31:42,080 Speaker 2: higher quality, but we are underweight corporate credit. We are 551 00:31:42,160 --> 00:31:48,760 Speaker 2: overweight agency mortgages, and we have a small allocation to 552 00:31:50,800 --> 00:31:53,200 Speaker 2: CMBs in the in the grand scheme of things, because 553 00:31:53,240 --> 00:31:57,880 Speaker 2: as much as we are finding opportunity there, we are 554 00:31:57,920 --> 00:32:02,160 Speaker 2: also aware there's been significant remedia. So when you think 555 00:32:02,200 --> 00:32:09,320 Speaker 2: about that, we are we're expressing a very pronounced view 556 00:32:10,040 --> 00:32:15,400 Speaker 2: with incremental liquidity and portfolios with higher quality assets in 557 00:32:16,320 --> 00:32:22,000 Speaker 2: agency mortgages, a significant underweight to corporate credit, and we 558 00:32:22,120 --> 00:32:27,520 Speaker 2: are using a very small part of our risk budget 559 00:32:27,640 --> 00:32:30,920 Speaker 2: in areas where we think there's opportunity, but giving ourselves 560 00:32:30,960 --> 00:32:36,320 Speaker 2: ample room to add to situations because the reality is 561 00:32:36,360 --> 00:32:38,960 Speaker 2: we are supposed to stay invested, we are supposed to 562 00:32:39,040 --> 00:32:41,760 Speaker 2: run diverse portfolios, and we don't know when the time 563 00:32:41,880 --> 00:32:44,800 Speaker 2: is going to be, when the markets will turn, and 564 00:32:44,840 --> 00:32:46,080 Speaker 2: so what do we try to do. We try to 565 00:32:46,080 --> 00:32:48,800 Speaker 2: set our portfolios up that can perform in a lot 566 00:32:48,840 --> 00:32:53,280 Speaker 2: of different market environments. Right now, the portfolio carries a 567 00:32:53,280 --> 00:32:55,560 Speaker 2: little bit more than that of the index thanks to 568 00:32:55,640 --> 00:32:59,760 Speaker 2: agency mortgages to be honest, because they trade so relatively wide. 569 00:33:00,280 --> 00:33:02,280 Speaker 2: And at the same time, what we think is not 570 00:33:02,400 --> 00:33:05,560 Speaker 2: introduce a significant amount of credit risk and and that 571 00:33:05,720 --> 00:33:07,280 Speaker 2: and that is going to give us the ability to 572 00:33:07,960 --> 00:33:11,640 Speaker 2: we think, carry well while we wait for volatility and 573 00:33:11,640 --> 00:33:14,440 Speaker 2: then have the ability to take advantage of that volatility. 574 00:33:14,480 --> 00:33:15,160 Speaker 2: Given how we're. 575 00:33:15,000 --> 00:33:17,160 Speaker 1: Set up, and what are you most worried about in 576 00:33:17,280 --> 00:33:20,840 Speaker 1: terms of the next six to twelve months, there's. 577 00:33:20,680 --> 00:33:25,840 Speaker 2: A few things that that that really that really concern us. 578 00:33:26,800 --> 00:33:30,440 Speaker 2: I'd say the first the first thing is is the 579 00:33:30,880 --> 00:33:33,400 Speaker 2: is the consumer and jobs. I mean, we're really focused. 580 00:33:33,440 --> 00:33:37,320 Speaker 2: We spend a lot of time on the health of 581 00:33:37,400 --> 00:33:41,640 Speaker 2: the consumer because the and and it feels like there's 582 00:33:41,680 --> 00:33:45,280 Speaker 2: a lot of folks on one side and and it 583 00:33:45,800 --> 00:33:48,800 Speaker 2: and and the world's expensive, and we don't believe the 584 00:33:48,800 --> 00:33:53,880 Speaker 2: consumer is is healthy. So I'd say the thing that 585 00:33:54,120 --> 00:33:56,440 Speaker 2: concerns us the most, uh, you know, is is the 586 00:33:56,480 --> 00:34:00,000 Speaker 2: consumer that will drive that will drive the economy. Obvious, 587 00:34:00,240 --> 00:34:03,800 Speaker 2: the long list of geopolitics, we think they're really difficult 588 00:34:03,840 --> 00:34:07,160 Speaker 2: to navigate and invest around, and we try to look 589 00:34:07,440 --> 00:34:13,800 Speaker 2: through a lot of that. Having said that, the the 590 00:34:14,480 --> 00:34:23,359 Speaker 2: the deterioration in geopolitics broadly is worrisome, is concerning, and 591 00:34:23,400 --> 00:34:29,200 Speaker 2: that has led to you know, a a a near shoring, 592 00:34:29,520 --> 00:34:35,000 Speaker 2: a friend shoring, you know, has led to supply chains, 593 00:34:35,040 --> 00:34:39,120 Speaker 2: you know, redundancy that that we're spending some time on 594 00:34:39,160 --> 00:34:41,319 Speaker 2: and trying to think through. And it's longer term and 595 00:34:41,360 --> 00:34:44,799 Speaker 2: it's longer term impact. And the last thing we spent, 596 00:34:45,440 --> 00:34:47,200 Speaker 2: like I said, we spent forty minutes on this call. 597 00:34:47,320 --> 00:34:52,360 Speaker 2: Haven't mentioned the letters AI either. I'd say, you know, 598 00:34:52,400 --> 00:34:56,319 Speaker 2: a lot of investment, a lot of hype. There was 599 00:34:56,360 --> 00:34:58,880 Speaker 2: a lot of hype on the internet in two thousand 600 00:34:58,920 --> 00:35:01,399 Speaker 2: and a lot of companies went b So we would 601 00:35:01,400 --> 00:35:05,640 Speaker 2: say we believe in AI long term. We believe that 602 00:35:05,760 --> 00:35:08,719 Speaker 2: half the companies in the US today have don't even 603 00:35:08,800 --> 00:35:12,319 Speaker 2: have the ability to implement anything with AI. And so 604 00:35:12,360 --> 00:35:16,799 Speaker 2: there's the real next leg in AI as we see it, 605 00:35:16,840 --> 00:35:21,239 Speaker 2: and we believe in AI is the adoption from the 606 00:35:21,280 --> 00:35:25,839 Speaker 2: company level. And as much as we think that's gonna happen, 607 00:35:25,880 --> 00:35:28,799 Speaker 2: there's definitely a long tailed of some of that. So 608 00:35:29,440 --> 00:35:33,800 Speaker 2: we are constructive on AI. We're implementing it here, but 609 00:35:33,960 --> 00:35:36,359 Speaker 2: what we would say, it's not not a straight line either. 610 00:35:36,920 --> 00:35:39,960 Speaker 1: Great stuff. Jerry Kudzill, portfolio manager at TCW. Thank you 611 00:35:40,040 --> 00:35:41,520 Speaker 1: very much for coming on the Credit Edge. 612 00:35:42,000 --> 00:35:44,359 Speaker 2: Thank you guys, Thanks James, Thanks David, I appreciate it. 613 00:35:44,400 --> 00:35:46,919 Speaker 1: And to David Havens the Bloomberg Intelligence, thanks for being. 614 00:35:46,880 --> 00:35:47,279 Speaker 2: On the show. 615 00:35:47,920 --> 00:35:48,719 Speaker 3: Great being with you. 616 00:35:49,200 --> 00:35:52,400 Speaker 1: Check out all of David's excellent analysis on the Bloomberg Terminal, 617 00:35:53,120 --> 00:35:55,520 Speaker 1: and please do subscribe wherever you get your podcasts. We're 618 00:35:55,560 --> 00:35:58,760 Speaker 1: on Apple, Spotify and all other good podcast providers, including 619 00:35:58,760 --> 00:36:01,359 Speaker 1: The Bloomberg Terminal. Give us a review, tell your friends, 620 00:36:01,480 --> 00:36:05,000 Speaker 1: or email me directly at jcrombieight at Bloomberg dot net. 621 00:36:05,560 --> 00:36:07,440 Speaker 1: I'm James Crombie. It's been a pleasure having you join 622 00:36:07,520 --> 00:36:09,399 Speaker 1: us again next week on the Credit Edge.