WEBVTT - The Case for a 22% Drop in S&P 500 0:00:13.800 --> 0:00:17.000 Hello, and welcome to What Goes Up, a weekly markets podcast. 0:00:17.120 --> 0:00:19.840 My name is Mike Regan. I'm a senior editor at Bloomberg, 0:00:19.920 --> 0:00:23.239 and I'm Veldona Hire, across asset reporter with Bloomberg. And 0:00:23.440 --> 0:00:25.799 this week on the show, Well, anyone who has spent 0:00:25.960 --> 0:00:29.680 any time really studying the stock market is probably familiar 0:00:29.720 --> 0:00:33.360 with the old cliche sell in May and go away 0:00:33.800 --> 0:00:37.880 and come back on Saint Leger's Day. That's September fifteenth 0:00:37.920 --> 0:00:42.800 for those who aren't familiar with their sixteenth century English saints. Well, 0:00:42.920 --> 0:00:44.920 May's only a couple of weeks away, and the stock 0:00:44.960 --> 0:00:47.279 market has gotten off to a rip roaring start this year, 0:00:47.400 --> 0:00:49.520 So is this a good year to follow that old 0:00:49.560 --> 0:00:52.920 advice in the cliche? We'll talk to a market strategist 0:00:52.960 --> 0:00:55.760 who says, hey, don't wait, sell now. He'll explain why 0:00:55.800 --> 0:00:58.600 he's expecting a drop of as much as about twenty 0:00:58.600 --> 0:01:02.240 two percent from current level in the SMP five hundred. 0:01:02.800 --> 0:01:06.280 But first, Phil though, I have to ask ask away. 0:01:06.400 --> 0:01:07.840 You know it's going to be a strange one. When 0:01:08.920 --> 0:01:12.040 have you ever owned a pair of Air Jordan's? No, no, 0:01:12.800 --> 0:01:15.640 but they're very trendy now, even if you don't play hoops. No. 0:01:15.800 --> 0:01:17.440 I used to buy him when I when I was 0:01:17.480 --> 0:01:21.360 still a basketball just because the idea is, like you, 0:01:21.880 --> 0:01:24.200 they'll make you a better player. Well they're good, yeah, 0:01:24.240 --> 0:01:26.480 they're good basketball sneakers. No, but they're trending now just 0:01:26.560 --> 0:01:29.080 as a fashion item and in fact, shout out to 0:01:29.480 --> 0:01:35.160 Mario DeAngelo. Frequent listener Penn Palavars who pointed out a 0:01:35.200 --> 0:01:37.319 crazy thing for this week. It's not my crazy thing. 0:01:37.520 --> 0:01:40.080 Oh good, because I saw it. You did, Yeah, I know. 0:01:40.160 --> 0:01:41.880 That's why. It's not because I knew you knew the 0:01:41.880 --> 0:01:44.400 press because he sent it to me to a pair 0:01:44.480 --> 0:01:46.560 of they well it's this is a BBC story, So 0:01:46.640 --> 0:01:49.120 they called him trainers. I'd have never heard Air Jordan's 0:01:49.200 --> 0:01:53.000 referred to as trainers except in the BBC, but pair 0:01:53.040 --> 0:01:56.800 of trainers once worn by basketball legend Michael Jordan himself. 0:01:56.800 --> 0:02:00.000 So Aired Jordan's worn in a game by Air Jordan's 0:02:00.040 --> 0:02:04.000 himself sold for two point two million at auction, which 0:02:04.040 --> 0:02:05.920 sounds like a lot, but it's actually less than what 0:02:06.200 --> 0:02:09.880 they were expecting, which I think is a bearish signal. 0:02:10.000 --> 0:02:14.760 Oh signal. Wow? Maybe. Well we've been waiting for this, 0:02:14.880 --> 0:02:18.400 right like it's always some obnoxious number every time we 0:02:19.320 --> 0:02:22.000 are thinking about like auctions, they were expected to go 0:02:22.000 --> 0:02:25.960 as high as four million two point two. So I 0:02:26.000 --> 0:02:28.320 think that's a good segue to our guest, who's a 0:02:28.360 --> 0:02:30.880 little bit in the bearish camp, even though it is. Yeah, 0:02:30.919 --> 0:02:33.720 I think our first guest ever to join us from Honolulu, 0:02:33.840 --> 0:02:35.880 So yeah, I think he might be. I'm so jealous 0:02:35.919 --> 0:02:38.120 of him. Hard to be too pessimistic in Honolulu and 0:02:38.160 --> 0:02:41.079 he's there for a conference, Like, do you think Bloomberg 0:02:41.080 --> 0:02:45.560 would send us to Honolulu? It's maybe you probably not, Yeah, yeah, bye, 0:02:47.560 --> 0:02:49.640 but I do want to bring him in. It's Troy Gayesky, 0:02:49.720 --> 0:02:53.080 chief market strategist at FEST Investment. Troy, I've been wanting 0:02:53.080 --> 0:02:54.760 to get you on the podcast for forever, So thank 0:02:54.800 --> 0:02:56.960 you so much for joining us. Yeah, it's great to 0:02:56.960 --> 0:02:59.120 be on. Looking forward to it. Yeah, I'm so happy 0:02:59.120 --> 0:03:00.880 to have you on. So maybe just to start, you 0:03:00.880 --> 0:03:04.840 can tell us about FS Investments. Yeah. So, FS Investments 0:03:05.080 --> 0:03:08.240 was really founded by Michael Foreman with the mission to 0:03:08.280 --> 0:03:12.280 democratize alternative investments and you know, bring strategies that had 0:03:12.320 --> 0:03:15.360 only been available to the ultra altar, high net worth 0:03:15.480 --> 0:03:20.240 individuals or you know mega institutions like CalPERS, or Yale's endowment, 0:03:20.720 --> 0:03:23.280 and then take those strategies and package them in a 0:03:23.320 --> 0:03:27.400 way that was readily accessible with much lower standards in 0:03:27.480 --> 0:03:30.680 terms of size, in terms of liquidity, in terms of fees, 0:03:31.000 --> 0:03:34.960 and so over time we've evolved from being mainly focused 0:03:35.000 --> 0:03:38.280 on middle market corporate lending package through BDCs, some of 0:03:38.320 --> 0:03:41.760 which are listed, to a broad suite of solutions that 0:03:41.880 --> 0:03:46.120 range from daily liquid multi strategy funds packaged in a 0:03:46.200 --> 0:03:49.960 mutual fund wrapper. We run the largest public non traded 0:03:50.440 --> 0:03:55.119 senior security commercial real estate lending rate. We've recently combined 0:03:55.120 --> 0:03:58.880 with Portfolio Advisors to bring private equity secondaries to individuals 0:03:59.560 --> 0:04:02.760 in a user friendly way, so the mission of the 0:04:02.800 --> 0:04:06.200 firm remains the same democketizing alternatives. We're just pleased and 0:04:07.200 --> 0:04:10.400 feel very fortunate that, you know, these strategies are so 0:04:10.480 --> 0:04:13.840 timely in an environment like we're going now, and you know, 0:04:14.040 --> 0:04:16.160 when when we think of last year, they're really five 0:04:16.160 --> 0:04:20.480 alternative strategies that did well from credit reads, multi strts, 0:04:20.680 --> 0:04:25.200 equity reads, perpetual BDCs, and managed future CTAs, and two 0:04:25.240 --> 0:04:28.200 of them have a richer opportunities set in twenty three 0:04:28.200 --> 0:04:30.479 than twenty two, and those happen to be two of 0:04:30.480 --> 0:04:35.559 our flagship alternative solutions. So we're somewhat fortunate, somewhat lucky, 0:04:35.640 --> 0:04:38.400 but we think the business model has served our clients 0:04:38.400 --> 0:04:42.920 and ourselves. Well, well try, let's talk about that idea 0:04:43.279 --> 0:04:46.000 that the market is sort of due for a come up. 0:04:46.040 --> 0:04:48.480 And so you sent us some notes before the podcast 0:04:48.520 --> 0:04:51.320 in so you see a scenario where the SMP could 0:04:51.360 --> 0:04:54.760 drop as low as thirty two hundred twenty something percent 0:04:54.920 --> 0:04:57.480 dropped from here, is the selling may work this year? 0:04:57.520 --> 0:05:01.239 I guess? Is the question? Yeah, it be incredibly stunning 0:05:01.279 --> 0:05:03.880 if if selling in May, or selling prior to May, 0:05:03.960 --> 0:05:07.120 like I said, note, there's there's no reason to wait. 0:05:07.200 --> 0:05:08.960 You know, it's not like you're gonna leave ten percent 0:05:08.960 --> 0:05:12.040 off side on the table. Doesn't work out. And if 0:05:12.080 --> 0:05:15.240 you think about, first of all, the strongest rallies have 0:05:15.320 --> 0:05:17.760 always been in bear markets, right, Bear marker rallies are 0:05:17.800 --> 0:05:21.320 nothing new. They happen all the time. Usually they're driven 0:05:21.360 --> 0:05:25.200 by technical factors, and then there's a narrative that's put 0:05:25.240 --> 0:05:29.039 together to justify it. The more recent one was that, yeah, 0:05:29.120 --> 0:05:32.359 like inflation is going to slow enough that the Fed 0:05:32.640 --> 0:05:35.479 won't have to hike anymore, and then we're gonna have 0:05:35.520 --> 0:05:38.120 a recession and somehow that's going to cause the FED 0:05:38.200 --> 0:05:42.720 to cut rapidly. But recessions aren't bad for revenue or earnings, 0:05:42.839 --> 0:05:45.640 and it really makes very little sense. So ultimately, if 0:05:45.640 --> 0:05:49.520 you think of where we are, you know, multiples compressed 0:05:49.560 --> 0:05:52.240 last year significantly, we got down to fifteen point seven 0:05:52.320 --> 0:05:55.600 five times forward earnings. We've popped back up to let's 0:05:55.600 --> 0:05:58.479 call it eighteen point four to eighteen point six. Let's 0:05:58.760 --> 0:06:01.480 go at the rosiest sum that we've bottomed in terms 0:06:01.480 --> 0:06:05.320 of multiples, because multiples tend to bottom before earnings. And 0:06:05.400 --> 0:06:07.880 if you look forward and just take eighteen point six 0:06:08.000 --> 0:06:11.839 down to call it sixteen or seventeen times trough earnings 0:06:11.880 --> 0:06:14.240 at two hundred, that gets you to that thirty two 0:06:14.240 --> 0:06:16.960 to thirty four hundred. And that makes a lot of 0:06:17.000 --> 0:06:21.640 sense to us, just from a historical analysis perspective, when 0:06:21.880 --> 0:06:25.560 we've always thought that this bear market would be meaningfully 0:06:25.560 --> 0:06:28.320 worse than the twenty eighteen correction or some of those 0:06:28.360 --> 0:06:32.320 shocks we had in the post GFC period, but not 0:06:32.480 --> 0:06:35.480 as bad as we had from two thousand oh two 0:06:35.640 --> 0:06:38.560 and also the financial crisis, and so we always thought 0:06:38.560 --> 0:06:43.200 thirty to forty percent was a rational range Obviously that 0:06:43.720 --> 0:06:46.360 math on sixteen to seventy times trough earnings. The two 0:06:46.440 --> 0:06:48.800 hundred takes us down about twenty nine to thirty three 0:06:49.240 --> 0:06:52.440 from the peak in the beginning of twenty twenty two 0:06:52.800 --> 0:06:55.880 before things got really ugly. And so bottom line is, 0:06:56.480 --> 0:06:59.720 if you're an investor today and you have still elevated 0:06:59.800 --> 0:07:03.599 level abate in your portfolio, you haven't gotten the message 0:07:03.680 --> 0:07:08.600 yet that bear markets occur, they don't end magically overnight. 0:07:08.839 --> 0:07:12.120 This is a golden opportunity to use this bear market 0:07:12.200 --> 0:07:16.320 rally to de risk in advance of potentially very painful 0:07:16.320 --> 0:07:19.000 losses over the next six, nine to twelve months. And 0:07:19.520 --> 0:07:22.920 you know, this is a side topic, but it completely 0:07:23.040 --> 0:07:27.520 stuns me still at how much inertia there is an 0:07:27.520 --> 0:07:32.400 acid allocation, and how even when faced with clear evidence 0:07:32.480 --> 0:07:35.760 that the risk reward of equities is poor, there's very 0:07:35.760 --> 0:07:39.560 little capital that flows out into strategies that actually have 0:07:39.600 --> 0:07:41.640 a fighting chance to make you five to eight percent 0:07:41.720 --> 0:07:44.200 instead of potentially losing you know, fifteen to twenty five. 0:07:44.600 --> 0:07:46.320 So I think if I were to take sort of 0:07:46.320 --> 0:07:51.240 the side of the bulls out there today, they would say, well, 0:07:51.320 --> 0:07:55.000 you know, inflation is coming down. I think the CPI 0:07:55.080 --> 0:07:58.320 print this week was what five percent versus six percent 0:07:58.760 --> 0:08:02.960 last month something like that, And that FED reaction function 0:08:03.680 --> 0:08:08.960 to Silicon Valley Bank and Signature Bank was so lightning quick. 0:08:09.000 --> 0:08:14.080 They created that term lending facility, the discount windows open wide. 0:08:14.240 --> 0:08:18.120 They're sort of reintroducing liquidity, expending their balance sheet again. 0:08:18.640 --> 0:08:20.440 You know, I think they boils down to the kids 0:08:20.480 --> 0:08:23.040 on Twitter would say the money printers going bar again, 0:08:23.120 --> 0:08:27.640 you know, which is a very obviously an oversimplified reason 0:08:27.720 --> 0:08:31.200 to be bullish for stocks. But nonetheless, there's a lot 0:08:31.240 --> 0:08:35.160 of believers in that that notion that the you know, 0:08:35.920 --> 0:08:37.720 maybe we get one or two more rate hikes from 0:08:37.720 --> 0:08:40.720 the Fed, but that balance sheet is open for business again. 0:08:40.920 --> 0:08:43.440 How do you sort of respond to that bullish take 0:08:43.920 --> 0:08:46.959 these days? Yeah. Look, so we've always said throughout this 0:08:46.960 --> 0:08:51.120 period that, you know, the probability of the FED cutting 0:08:51.200 --> 0:08:55.920 significantly or reprinting money was exceptionally low until they broke 0:08:56.000 --> 0:09:00.839 things right and real things, and so obviously you had 0:09:00.840 --> 0:09:04.160 some poorly managed banks in terms of asset liability, mismatch 0:09:04.520 --> 0:09:07.960 in terms of duration, and they did respond. And that's why, 0:09:08.280 --> 0:09:11.280 quite frankly, up until last week's data came out on 0:09:11.320 --> 0:09:14.400 the FED reshrinking their balance sheet. We kind of moved 0:09:14.400 --> 0:09:17.640 from a narrative of all right, it's clear that money 0:09:17.640 --> 0:09:21.280 supplies contracting at the fastest pace in history, balance sheets 0:09:21.320 --> 0:09:24.520 being drained. Fed's got, you know, at least two hikes 0:09:24.559 --> 0:09:26.439 at that point, maybe three to four left in him. 0:09:27.080 --> 0:09:29.920 Everything's going down. And then for a brief window of 0:09:30.040 --> 0:09:34.440 time you moved to like, is the FED doing QE 0:09:34.480 --> 0:09:37.760 while they're doing qt can you hike at the front 0:09:37.880 --> 0:09:40.400 end while expanding the balance sheet? What does this mean 0:09:40.440 --> 0:09:42.920 for money supply? What does this mean for the four 0:09:43.040 --> 0:09:47.320 trajectory of multiples? But then, of course, now that we 0:09:47.400 --> 0:09:49.360 have more data, you've seen that the balance sheet just 0:09:49.400 --> 0:09:52.559 started to shrink again, which obviously has negative ramifications for 0:09:52.679 --> 0:09:55.120 money supply. The FED will more than like the only 0:09:55.160 --> 0:10:00.080 hike one to two more times. But advocating that the 0:10:00.160 --> 0:10:03.160 Fed is going to come to the rescue prior to 0:10:03.240 --> 0:10:07.040 having more downside pain in the economy and markets, we 0:10:07.120 --> 0:10:09.760 think is very naive at this stretch of the game. 0:10:10.280 --> 0:10:13.360 And you do have to give the Fed, FDIC and 0:10:13.400 --> 0:10:17.280 Treasury a lot of credit. Obviously missed the problem, but 0:10:17.320 --> 0:10:20.439 they addressed it very rapidly, and it does look like 0:10:20.679 --> 0:10:24.240 they've so far ring fenced the problem in a number 0:10:24.280 --> 0:10:27.480 of problematic banks but kept the system rather safe. So, 0:10:27.920 --> 0:10:30.400 you know, I think we've really for two or three 0:10:30.400 --> 0:10:34.000 weeks it was very confusing. You had conflicting narratives, you 0:10:34.000 --> 0:10:37.360 had conflicting data on how this would play out. But 0:10:37.400 --> 0:10:40.120 now it's back to the same path of shrinking balance 0:10:40.160 --> 0:10:42.320 sheet several more, you know, one of the two more hikes, 0:10:42.760 --> 0:10:45.319 and that just means multiples are way way too high. 0:10:45.800 --> 0:10:48.040 And by the way, just to go from a historical perspective, 0:10:48.480 --> 0:10:50.439 you know, when you go back to you know, let's 0:10:50.480 --> 0:10:52.680 look and assume we bottomed at fifteen and a half 0:10:52.679 --> 0:10:56.240 to sixteen times for earnings. Remember the multiple bottom in 0:10:56.280 --> 0:11:00.280 the GFC was nine, right, so that's nowhere near the 0:11:00.320 --> 0:11:03.280 pain that we saw then. And the multiple bottom coming 0:11:03.320 --> 0:11:06.040 out of twenty two was fifteen. Right. We went from 0:11:06.080 --> 0:11:10.480 twenty five times to fifteen. So in some ways, like 0:11:10.679 --> 0:11:14.240 our board view, we don't even consider barish, We just 0:11:14.280 --> 0:11:18.400 consider it like realistic, right, and arguing that in eighteen 0:11:18.480 --> 0:11:23.960 or nineteen multiple is rational in this type of environment 0:11:24.080 --> 0:11:27.000 makes very very little sense to us. I'm wondering what 0:11:27.040 --> 0:11:29.360 you make We had the FED minutes come out this week, 0:11:29.400 --> 0:11:31.960 and one of the headlines was the Fed. FED staff 0:11:32.000 --> 0:11:35.640 is projecting a mild recession starting later in twenty twenty three. 0:11:35.679 --> 0:11:38.120 Aren't we not supposed to hear from the FEDS saying 0:11:38.240 --> 0:11:43.840 that they're expecting any type of downturn after some of 0:11:43.880 --> 0:11:48.959 their missteps on describing inflation and as transitory. I give 0:11:48.960 --> 0:11:51.760 them a lot of credit for being fairly honest and 0:11:51.800 --> 0:11:56.240 straightforward that the end game here is a recession, right, 0:11:56.360 --> 0:11:59.240 That's how you break inflation. There's really no other way 0:11:59.400 --> 0:12:01.920 to get through this cycle and bring inflation down to 0:12:01.960 --> 0:12:04.600 two or three percent, which is you know, their target 0:12:04.640 --> 0:12:06.920 probably should be three now instead of two, but they're 0:12:06.920 --> 0:12:09.000 still stuck on two. So that's where we're headed. And 0:12:09.400 --> 0:12:11.560 you know, the way we describe that to investors is 0:12:11.880 --> 0:12:14.920 we've really been mired in this ugly environment for quite 0:12:14.920 --> 0:12:17.840 some time. And by ugly we mean, you know, inflation, simmering, 0:12:18.040 --> 0:12:21.720 spreading to services and labor. FED has to hike a lot, 0:12:21.840 --> 0:12:25.240 shrink the balance sheet, everything's going down. You know. The 0:12:25.280 --> 0:12:28.120 good news is that we were certainly always going to 0:12:28.160 --> 0:12:30.800 get out of that and not stay have a seventy 0:12:30.840 --> 0:12:34.319 style stagflationary outcome. If for an other reason that money 0:12:34.360 --> 0:12:36.400 supply was already shrinking and the FED was behind the 0:12:36.400 --> 0:12:39.240 curve but caught up fast. But the bad news is, 0:12:39.960 --> 0:12:42.439 as we leave the ugly, the next stop is almost 0:12:42.440 --> 0:12:44.840 certainly what we call the bad which is a classic 0:12:44.880 --> 0:12:47.800 old school recession. And you know, when you think of 0:12:47.960 --> 0:12:50.800 what's kept this out of it so far, it's been 0:12:50.880 --> 0:12:55.120 the remarkable resilience of the labor market and the US consumer, 0:12:55.120 --> 0:12:58.959 which is basically single handedly kept the global economy afloat here. 0:12:59.480 --> 0:13:02.280 And you know, as the labor market cracks, and we're 0:13:02.280 --> 0:13:05.280 starting to see signs of that, particularly in withholding tax 0:13:05.400 --> 0:13:09.200 data and layoffs move from you know, very high paying 0:13:09.240 --> 0:13:11.480 tech jobs and to lesser extent financial services to the 0:13:11.480 --> 0:13:14.720 broader economy, there just won't be enough support from consumption 0:13:14.760 --> 0:13:16.959 to keep us out of recessions. So you know, that 0:13:17.080 --> 0:13:19.199 is the next stop. You know, at this point, the 0:13:19.320 --> 0:13:22.480 soonest we could see that is really late Q two, 0:13:22.520 --> 0:13:25.600 early Q three of this year. The latest is Q 0:13:25.679 --> 0:13:28.520 one of twenty four and then you know, kind of 0:13:28.559 --> 0:13:32.600 circling back to the question on the bullish argument, in 0:13:32.640 --> 0:13:36.720 some ways you could justify holding onto assets in a 0:13:36.760 --> 0:13:40.800 meaningful way that have twenty percent downside if you thought 0:13:40.920 --> 0:13:43.360 coming out of that, you know, hey, the next three years, 0:13:43.360 --> 0:13:47.439 you're going to make eight. But remember, the next FED 0:13:47.520 --> 0:13:50.560 cutting cycle is going to look a lot like the 0:13:50.559 --> 0:13:54.640 mirror image of the last hiking cycle, where they hiked very, 0:13:54.720 --> 0:13:57.960 very gingerly from fifteen to eighteen, and they did that 0:13:58.040 --> 0:14:01.040 to make sure that they'd slayed the disinflation and deflation demon. 0:14:01.600 --> 0:14:05.640 And this time again barring an apocalyptic economic ALcom or 0:14:05.679 --> 0:14:08.640 market calamity, they're going to cut very very slowly. So 0:14:09.040 --> 0:14:12.640 you're not going to see the multiple expansion from say, 0:14:12.679 --> 0:14:15.920 you know, later this year early twenty four over the 0:14:15.920 --> 0:14:18.960 next five six years that we saw from O nine 0:14:18.960 --> 0:14:20.640 to twenty one. It'll be much more like the O 0:14:20.720 --> 0:14:23.920 two to seven bull market, where he came into that 0:14:23.960 --> 0:14:26.440 bull market at fifteen times borderings. You ended that bull 0:14:26.480 --> 0:14:35.280 market at fifteen times sport. What is behind the rally 0:14:35.360 --> 0:14:37.440 right now? Is it just that people are thinking about, 0:14:38.120 --> 0:14:41.280 you know, the FED potentially pausing and or cutting rates 0:14:41.320 --> 0:14:44.360 down the line, and how we square that with why 0:14:44.400 --> 0:14:47.320 they'd be cutting rates to begin with, like something would 0:14:47.400 --> 0:14:53.240 be bad happening with the economy right at the same time. Yeah, 0:14:53.720 --> 0:14:57.240 So that again that it's been really stunning that you've 0:14:57.240 --> 0:15:01.480 had folks articulated narrative that the FED will cut and 0:15:01.520 --> 0:15:05.360 cut aggressively because we're going to have a recession and 0:15:05.400 --> 0:15:08.040 that's somehow good for revenue and earnings, right, I mean, 0:15:08.080 --> 0:15:10.520 like I just don't understand that for life of me. 0:15:10.600 --> 0:15:13.520 And and I think this gets back to another point 0:15:13.640 --> 0:15:17.000 of where you know, bear market rallies are typically driven 0:15:17.040 --> 0:15:22.120 by technicals. Right, there's short covering starts, there's DAMA hedging 0:15:22.360 --> 0:15:26.560 by options trading desks. Then you have systematic trend followers 0:15:26.640 --> 0:15:28.760 or traders hop on, you know, the bear market rally 0:15:28.840 --> 0:15:31.760 drives it higher. And then the industry And by industry, 0:15:31.800 --> 0:15:35.800 I mean you know, strategists, CIOs, analysts try to figure 0:15:35.840 --> 0:15:38.640 out a way to justify it. And sometimes that justification 0:15:38.680 --> 0:15:41.200 makes no sense at all. And did you guys know 0:15:41.240 --> 0:15:44.560 that you know, typically you know, recessions cause at least 0:15:44.600 --> 0:15:47.440 the twenty percent drop and earnings all all we did 0:15:47.480 --> 0:15:50.400 with our our math before was say ten percent drop, 0:15:50.800 --> 0:15:53.200 which is a lot less than twenty So it certainly 0:15:53.240 --> 0:15:56.840 could be could be worse. But yeah, the the idea 0:15:57.000 --> 0:16:00.520 that a recession and a FED that's four to pivot 0:16:00.600 --> 0:16:05.280 because of it late, we will drive a positive outcome 0:16:05.480 --> 0:16:09.200 for equity markets is just borderline bizarre, you know. True. 0:16:09.240 --> 0:16:11.800 I think one shoe that everyone seems to be waiting 0:16:12.480 --> 0:16:16.200 to drop next is in the credit markets, and you know, 0:16:16.240 --> 0:16:18.880 the supply of credit, and it's kind of a hard 0:16:18.960 --> 0:16:21.360 thing to really gauge in real time. You know, the 0:16:21.480 --> 0:16:24.680 FED reports, the H eight report and things like that 0:16:24.720 --> 0:16:27.520 are usually a week or two old. The Senior Loan 0:16:27.560 --> 0:16:30.560 Officer Survey. I think the next one's not till the 0:16:30.560 --> 0:16:33.800 middle of May or something like that. How do you 0:16:33.880 --> 0:16:37.440 look at sort of the conditions in the credit market 0:16:37.560 --> 0:16:40.440 to determine whether they're tightening up in real time? And 0:16:40.560 --> 0:16:43.080 is there any evidence yet that it's come. I mean, 0:16:43.120 --> 0:16:46.680 obviously we've had all these rate hikes and the failure 0:16:46.760 --> 0:16:50.800 of a few banks clearly must be making loan officers nervous. 0:16:50.840 --> 0:16:52.880 You know, where are you? Is there any where you 0:16:52.920 --> 0:16:56.440 can point to now and say it started or is 0:16:56.480 --> 0:16:59.720 it still just kind of bracing for that to happen. Yeah, 0:16:59.760 --> 0:17:03.040 So look, I think it really depends on the market. 0:17:03.560 --> 0:17:06.320 I would go back to when you think about when 0:17:06.600 --> 0:17:09.560 high yield and i G spreads started widen in like 0:17:09.680 --> 0:17:12.480 Q one Q two of last year, It took until 0:17:12.560 --> 0:17:16.040 May of last year for senior commercial estate lending spreads 0:17:16.119 --> 0:17:20.639 start widening. Then it took until say August for middle 0:17:20.680 --> 0:17:24.439 market corporate private loan spreads to start widening. And then 0:17:24.440 --> 0:17:27.000 obviously in this risk on period, you've had spreads tightened 0:17:27.000 --> 0:17:29.879 back in liquid markets. That hasn't happened yet in private 0:17:29.880 --> 0:17:33.040 markets we don't expect it to, but more directly, and 0:17:33.119 --> 0:17:35.840 this gets back to that confusing kind of narrative around 0:17:35.920 --> 0:17:38.480 what was going on. For a three period. You saw 0:17:38.720 --> 0:17:41.520 obviously the stresses in the banks during a time where 0:17:41.560 --> 0:17:45.320 loan officers were already constraining credit creation, so credit standards 0:17:45.320 --> 0:17:48.359 were already tightening, and then you got this pop up 0:17:48.440 --> 0:17:51.360 in actually commercial bank lending, a really quick pop up, 0:17:51.840 --> 0:17:54.479 and it's like, well, like, what the heck's going on here? Oh, 0:17:54.520 --> 0:17:57.639 I get it. Everybody's drawn down revolvers, like grabbing cash 0:17:57.640 --> 0:18:01.000 while they can, while they can, And then you know, 0:18:01.040 --> 0:18:03.320 of course we expected that to roll over, and that's 0:18:03.320 --> 0:18:06.400 exactly what's happened. Now that the past two weeks you're 0:18:06.560 --> 0:18:11.880 directly seeing evidence of the banking situation in regional community 0:18:11.880 --> 0:18:15.560 banks impacting broader commercial lending. So the big banks are 0:18:15.600 --> 0:18:17.920 doing more but the smaller banks are doing far less. 0:18:18.400 --> 0:18:22.919 And then you know, also from a mortgage availability standpoint, 0:18:23.560 --> 0:18:28.280 you'd already seen agency rmbs spreads wide and dramatically because 0:18:28.280 --> 0:18:31.719 the QT, which was further constraining funding to the housing market. 0:18:32.119 --> 0:18:34.879 That's actually one of our we have a really unique 0:18:35.119 --> 0:18:38.199 exposure in our multi strategy fund to take advantage of 0:18:38.240 --> 0:18:41.040 that that we can maybe talk about later. But you're 0:18:41.080 --> 0:18:44.640 certainly seeing now ample evidence right that credit conditions are tightening, 0:18:45.320 --> 0:18:50.960 which further reinforces the concept of how in the world 0:18:51.320 --> 0:18:55.120 can we possibly avoid recession the next six, nine, twelve months. 0:18:55.760 --> 0:18:59.440 It's really mission impossible. You know, we always stop the probability, 0:18:59.480 --> 0:19:02.720 the FED magically threading the needle and guiding us to 0:19:03.560 --> 0:19:05.160 you know, a five or five and a half percent 0:19:05.240 --> 0:19:09.080 unemployment without a recession was at tops was a ten 0:19:09.119 --> 0:19:13.480 percent probability. Now it just looks, you know, virtually zero. 0:19:14.200 --> 0:19:16.800 If we wanted to get a read through of the 0:19:17.280 --> 0:19:20.040 what's happening in the wake of the turmoil with the 0:19:20.080 --> 0:19:22.720 banks in the stock market, do you think the small 0:19:22.760 --> 0:19:25.159 cap space would be the place to look, with the 0:19:25.200 --> 0:19:29.600 idea being that maybe smaller companies have less access to 0:19:30.280 --> 0:19:34.879 banks and potentially maybe would also be a place where 0:19:35.160 --> 0:19:38.280 we'd start to see some layoffs as a result of 0:19:38.280 --> 0:19:41.520 the credit crunch. It's interesting you say that, because you know, 0:19:41.680 --> 0:19:46.840 smid cap or small cap factor exposures, we're already really 0:19:46.920 --> 0:19:50.200 cheap coming into the year relative to large omega, and 0:19:50.480 --> 0:19:53.120 we actually had that factor trade on. But as soon 0:19:53.240 --> 0:19:55.840 as the banking crisis started, it's like, all right, like 0:19:56.359 --> 0:19:59.000 you know, cheap things can get cheaper, or relationships can 0:19:59.040 --> 0:20:00.840 get more out of whack. We blew out of that 0:20:01.240 --> 0:20:06.360 really quick, and ultimately what it does is it delays 0:20:06.920 --> 0:20:10.560 any compression of that that spread, right, And that's again 0:20:10.640 --> 0:20:13.480 when you think about just locally more, what's happened to 0:20:14.040 --> 0:20:17.720 the Nasdaq or you know, Apple and Microsoft in particular, 0:20:17.840 --> 0:20:20.680 you know, the last remaining you know, fangs that are 0:20:20.720 --> 0:20:24.879 still performing as as you'd expect as growth companies that 0:20:24.880 --> 0:20:27.560 aren't grossly overvalued. You know, a lot of that gets 0:20:27.560 --> 0:20:29.320 back to the fact that you know, those have more 0:20:29.359 --> 0:20:32.280 pristine balance sheets. And when you think about smaller cap 0:20:32.320 --> 0:20:36.960 companies that are clearly more exposed to the domestic economy, 0:20:37.040 --> 0:20:40.200 that are clearly more reliant upon you know, local small 0:20:40.240 --> 0:20:45.040 bank financing, um, it's it's unlikely that death situation improves, 0:20:45.040 --> 0:20:47.639 and you know, I would say one cross current to 0:20:47.720 --> 0:20:51.239 that which is fascinating to us, uh, just given our 0:20:51.240 --> 0:20:54.280 footprint and private credit, both in commercial real estate and 0:20:54.760 --> 0:20:58.760 middle market corporate loans, is you know, the the window 0:20:59.119 --> 0:21:02.600 now for private lenders to take market share from banks 0:21:02.960 --> 0:21:07.119 at wider spreads. It has expanded far more than again 0:21:07.160 --> 0:21:09.600 we would have imagined six weeks ago, right, and that 0:21:10.640 --> 0:21:13.800 we expected banks to retrench they had been. We expected 0:21:13.960 --> 0:21:16.840 better opportunities to service the needs of those that had 0:21:16.840 --> 0:21:21.560 to roll loans. We'd already seen many companies doing what 0:21:21.640 --> 0:21:26.119 I politely call bankruptcy prevention DIP loans to reduce the 0:21:26.200 --> 0:21:29.639 risk of going bankrupt in the event of a recession. 0:21:30.680 --> 0:21:33.440 And now that's just even escalating more. So you think 0:21:33.480 --> 0:21:36.520 about like commercial real estate lending, there's about one point 0:21:36.520 --> 0:21:38.600 eight trillion loans that are going to roll this year 0:21:38.640 --> 0:21:42.360 in the next three years, and there's just less financing 0:21:42.400 --> 0:21:45.800 options for those borrowers, and so that creates a better 0:21:45.840 --> 0:21:49.320 opportunity if you have dry powder to lend into a 0:21:49.359 --> 0:21:52.760 mini liquidity vacuum. And it's really the best time to 0:21:52.880 --> 0:21:56.120 be a lender that we've seen since the global financial crisis. 0:21:56.520 --> 0:21:59.720 And you know, fortunately that's one of the three silver 0:21:59.800 --> 0:22:03.200 line things of this environment. We expect a recession. Obviously 0:22:03.240 --> 0:22:06.000 the weakest links in the financial system were cracked, but 0:22:06.040 --> 0:22:08.840 the system is still strong. I'd like to get into 0:22:08.880 --> 0:22:11.159 that the idea of commercial real estate a little bit. 0:22:11.200 --> 0:22:13.800 You know, you mentioned, uh you guys manage a real 0:22:13.880 --> 0:22:18.879 estate investment trust, especially the property sector roets of or 0:22:18.960 --> 0:22:23.280 the office rates h have I really just been annihilated 0:22:23.359 --> 0:22:26.080 this year to the point where you know, it's gotten 0:22:26.119 --> 0:22:28.320 so ugly that it starts looking pretty I think to 0:22:28.640 --> 0:22:31.359 a lot of investors. You know, these yields are pretty 0:22:31.400 --> 0:22:37.000 eye popping? Are there riets and commercial real estate investments 0:22:37.000 --> 0:22:39.239 in general? Where there's you know, babies being thrown out 0:22:39.280 --> 0:22:41.960 with the bathwater right now? Are there are certain sectors, 0:22:42.000 --> 0:22:45.560 certain areas that that are attractive to well? So I 0:22:45.600 --> 0:22:50.040 think it really depends right for for our franchise word 0:22:50.080 --> 0:22:53.359 senior lenders. So the markets coming to us, you had 0:22:53.400 --> 0:22:55.920