1 00:00:02,440 --> 00:00:07,720 Speaker 1: Bloomberg Audio Studios, podcasts, radio news, because we've been talking 2 00:00:07,720 --> 00:00:11,640 Speaker 1: about that mounting concern about how big government spending has 3 00:00:11,840 --> 00:00:16,600 Speaker 1: going to create this issue here to markets, potentially upending them, 4 00:00:16,640 --> 00:00:19,720 Speaker 1: making the job more challenging for central banks. Of course, 5 00:00:19,760 --> 00:00:22,799 Speaker 1: as Jerome Powell, the FED Chair, has two days of 6 00:00:22,880 --> 00:00:26,360 Speaker 1: testimony ahead in Congress, all in the middle of a 7 00:00:26,360 --> 00:00:28,680 Speaker 1: weakening labor market here in the United States. 8 00:00:28,720 --> 00:00:29,640 Speaker 2: It's the perfect storm. 9 00:00:29,840 --> 00:00:33,040 Speaker 1: We are now joined by oak Tree Capital Management co 10 00:00:33,120 --> 00:00:35,839 Speaker 1: founder and co chairman Howard Marks to talk all about it. 11 00:00:36,000 --> 00:00:38,479 Speaker 1: We've been talking about the fiscal issues, right, We've been 12 00:00:38,520 --> 00:00:42,280 Speaker 1: talking about the monetary conundrum that's been happening for now 13 00:00:42,600 --> 00:00:45,400 Speaker 1: well over a year for the FED Chair. If you 14 00:00:45,440 --> 00:00:49,000 Speaker 1: think about the potential for fiscal to really upend how 15 00:00:49,040 --> 00:00:51,960 Speaker 1: investors think these days, how much is the government dot 16 00:00:51,960 --> 00:00:55,640 Speaker 1: loads in the US and abroad really changing the calculus? 17 00:00:56,800 --> 00:01:01,440 Speaker 3: Well, look, Sonali, I think it's unfortunate that the US 18 00:01:01,680 --> 00:01:05,200 Speaker 3: behaves like a country that has a credit card with 19 00:01:05,200 --> 00:01:09,640 Speaker 3: no credit limit, where the bill never comes. I mean, 20 00:01:09,680 --> 00:01:14,160 Speaker 3: nobody can think that's a good idea. You would think 21 00:01:14,480 --> 00:01:17,600 Speaker 3: that there has to be a point at which our 22 00:01:17,720 --> 00:01:21,399 Speaker 3: dead or our deficits become too much reckoned as a 23 00:01:21,440 --> 00:01:26,440 Speaker 3: percentage of GDP. Usually nobody will tell you that point 24 00:01:26,520 --> 00:01:32,880 Speaker 3: doesn't exist. Nobody will tell you where it is. So 25 00:01:35,560 --> 00:01:38,920 Speaker 3: nobody's exercising fiscal discipline in Washington these days. 26 00:01:40,560 --> 00:01:41,680 Speaker 2: Last year we had. 27 00:01:41,520 --> 00:01:47,000 Speaker 3: A deficit in the trillions in a period of prosperity, 28 00:01:47,319 --> 00:01:48,240 Speaker 3: not supposed to happen. 29 00:01:49,000 --> 00:01:53,320 Speaker 2: All very unfortunate. But A nobody can tell. 30 00:01:53,120 --> 00:01:58,640 Speaker 3: You when it becomes a problem, and b nobody can 31 00:01:58,680 --> 00:02:02,600 Speaker 3: tell you what to do with it. You can't eliminate 32 00:02:02,640 --> 00:02:07,040 Speaker 3: the US from your portfolios. People who've said to do 33 00:02:07,160 --> 00:02:10,200 Speaker 3: that in past years are now looking pretty bad. 34 00:02:10,360 --> 00:02:10,560 Speaker 2: Yeah. 35 00:02:10,560 --> 00:02:12,920 Speaker 4: I was going to say, if you had followed that advice, 36 00:02:13,200 --> 00:02:15,200 Speaker 4: you'd be in a world hurt right now in terms 37 00:02:15,200 --> 00:02:17,680 Speaker 4: of relative performance. And you said, the new one can 38 00:02:17,720 --> 00:02:20,120 Speaker 4: tell you where that point is. But that's exactly what 39 00:02:20,120 --> 00:02:22,600 Speaker 4: I'm going to ask you. Where do you think that 40 00:02:22,639 --> 00:02:24,959 Speaker 4: point is? Is it something that we're approaching If you 41 00:02:24,960 --> 00:02:26,880 Speaker 4: don't want to exactly pinpoint. 42 00:02:26,400 --> 00:02:28,680 Speaker 3: It, I don't want to exactly pinpoint it. I want 43 00:02:28,680 --> 00:02:30,680 Speaker 3: to say that I'm among the people who can't tell 44 00:02:30,720 --> 00:02:34,359 Speaker 3: you where it is, you know, one of the many. Yeah, 45 00:02:34,720 --> 00:02:38,120 Speaker 3: you know, I think every time I come on this 46 00:02:38,720 --> 00:02:42,280 Speaker 3: on Bloomberg, I quote Mark Twain who said, it ain't 47 00:02:42,320 --> 00:02:44,399 Speaker 3: what you don't know that gets you into trouble. It's 48 00:02:44,400 --> 00:02:46,680 Speaker 3: what you know for certain that just ain't true. I 49 00:02:46,840 --> 00:02:47,680 Speaker 3: certainly don't know. 50 00:02:48,400 --> 00:02:51,560 Speaker 5: Well, I wonder what kind of opportunities you're finding. I'm 51 00:02:51,560 --> 00:02:56,040 Speaker 5: always interested on the distress side about how sort of 52 00:02:56,080 --> 00:02:58,240 Speaker 5: target rich the environment is. I think that says a 53 00:02:58,240 --> 00:03:00,880 Speaker 5: lot about our economy. All the econo surprises that we 54 00:03:00,960 --> 00:03:06,120 Speaker 5: see are to the downside lately and rates remain high. 55 00:03:06,560 --> 00:03:09,000 Speaker 2: Does that make this interesting for you? Well, I think 56 00:03:09,000 --> 00:03:09,840 Speaker 2: it is interested. 57 00:03:10,080 --> 00:03:13,519 Speaker 3: I mean, we went through a really slow period from 58 00:03:13,919 --> 00:03:16,639 Speaker 3: nine when the FED took the Fed funds rate to 59 00:03:16,720 --> 00:03:19,880 Speaker 3: zero to stimulate the economy, to twenty one when they 60 00:03:19,880 --> 00:03:23,000 Speaker 3: started to decided to lift it to fight inflation. And 61 00:03:23,040 --> 00:03:25,760 Speaker 3: in that thirteen year period there was very little distress 62 00:03:25,880 --> 00:03:31,040 Speaker 3: because it was a very benign environment for companies. Now, 63 00:03:31,120 --> 00:03:34,320 Speaker 3: as you know, the interest rates are higher. That gives 64 00:03:34,400 --> 00:03:37,840 Speaker 3: us more of an opportunity. And importantly, there were a 65 00:03:37,880 --> 00:03:44,040 Speaker 3: lot of leverage transactions done in the period I described, 66 00:03:45,160 --> 00:03:51,720 Speaker 3: where companies were burdened with capital structures debt structures that 67 00:03:51,840 --> 00:03:54,400 Speaker 3: did not anticipate a five hundred basis point or four 68 00:03:54,520 --> 00:03:56,080 Speaker 3: hundred base point increase in rates. 69 00:03:56,600 --> 00:03:58,920 Speaker 2: So, you know, to put it. 70 00:04:01,240 --> 00:04:04,240 Speaker 3: In short, it was it was a great time to 71 00:04:04,280 --> 00:04:06,440 Speaker 3: be a borrower because rates came down and. 72 00:04:06,400 --> 00:04:07,560 Speaker 2: Business was prosperous. 73 00:04:08,400 --> 00:04:12,520 Speaker 3: But right now, and I think going into the future, 74 00:04:14,280 --> 00:04:18,320 Speaker 3: leveraged companies will not be able to renew their leverage 75 00:04:18,520 --> 00:04:21,360 Speaker 3: as easily and the cost of doing so will be higher. 76 00:04:21,680 --> 00:04:25,160 Speaker 3: So that gives us better opportunities than we've been seeing. 77 00:04:25,600 --> 00:04:30,200 Speaker 3: And you know, just to put it in brief for 78 00:04:30,279 --> 00:04:33,440 Speaker 3: your listeners, six years ago, you had an idea, You 79 00:04:33,480 --> 00:04:35,400 Speaker 3: went at the bank, you described that, they said, fine, 80 00:04:35,440 --> 00:04:37,760 Speaker 3: we'll give you nine hundred million dollars at five percent. 81 00:04:38,120 --> 00:04:40,279 Speaker 3: Now it's time to renew your debt. You go in, 82 00:04:40,360 --> 00:04:42,760 Speaker 3: you describe it again, and they say, good, we'll give 83 00:04:42,800 --> 00:04:44,440 Speaker 3: you five hundred million dollars at nine percent. 84 00:04:45,360 --> 00:04:47,240 Speaker 1: Where do you think most of that pain is going 85 00:04:47,279 --> 00:04:50,039 Speaker 1: to come? Because there's a private equity universe that's clearly 86 00:04:50,279 --> 00:04:53,760 Speaker 1: grappling with that refinancing pain. There's a commercial real estate market, 87 00:04:54,000 --> 00:04:57,520 Speaker 1: and equity investors seem to be ignoring any leverage that 88 00:04:57,600 --> 00:04:58,679 Speaker 1: might be under the system. 89 00:04:58,760 --> 00:05:00,600 Speaker 2: Still, what should they be one reaching out for? 90 00:05:01,279 --> 00:05:05,920 Speaker 3: Well, clearly now it'll be in highly levered situations, and 91 00:05:05,960 --> 00:05:10,080 Speaker 3: you name two of them, private equity and real estate leverage. 92 00:05:10,279 --> 00:05:14,000 Speaker 3: The use of debt to amplify your returns. It has 93 00:05:14,080 --> 00:05:20,360 Speaker 3: been the lifeblood of these two asset classes and they've 94 00:05:20,400 --> 00:05:25,479 Speaker 3: done extremely well as a result. It was very, very 95 00:05:25,600 --> 00:05:28,840 Speaker 3: salutary for them. But that's where the pain will come 96 00:05:28,880 --> 00:05:35,000 Speaker 3: in the future. And you know, you can't increase a 97 00:05:35,120 --> 00:05:39,760 Speaker 3: company's debt service costs markedly without affecting his returns. And 98 00:05:39,880 --> 00:05:46,720 Speaker 3: in certain sectors of the real estate world, mainly retail 99 00:05:45,040 --> 00:05:51,640 Speaker 3: and office, there are fundamental questions. So you put that together, 100 00:05:52,080 --> 00:05:57,240 Speaker 3: we think you'll see some disruption which will give us 101 00:05:57,800 --> 00:06:00,400 Speaker 3: and people like us opportunity. You know, this has been 102 00:06:00,400 --> 00:06:04,000 Speaker 3: a really tough period for lenders, which is what we are, 103 00:06:04,360 --> 00:06:06,640 Speaker 3: and a really tough period for bargain hunters. 104 00:06:06,800 --> 00:06:09,000 Speaker 4: Right well, I want to talk a bit more about 105 00:06:09,000 --> 00:06:10,800 Speaker 4: the business of lending and what's going on in the 106 00:06:10,800 --> 00:06:13,480 Speaker 4: private credit industry. Of course, a month or two ago 107 00:06:13,560 --> 00:06:16,720 Speaker 4: we saw Plural Site back by Vista basically transfer its 108 00:06:16,720 --> 00:06:20,440 Speaker 4: assets into a different subsidiary to obtain more financing from 109 00:06:20,440 --> 00:06:23,159 Speaker 4: its sponsor. Let's become a little bit of a battle cry, 110 00:06:23,240 --> 00:06:26,960 Speaker 4: you see lenders basically asking for plural site protection. Right now, 111 00:06:27,000 --> 00:06:30,200 Speaker 4: I won't ask you specifically about what happened with that episode, 112 00:06:30,200 --> 00:06:32,880 Speaker 4: but how do you see this evolving in the industry. 113 00:06:32,920 --> 00:06:34,960 Speaker 4: Do you think that we're going to see more creditor 114 00:06:35,000 --> 00:06:37,080 Speaker 4: on creditor violence as some have been calling it. 115 00:06:38,320 --> 00:06:42,440 Speaker 3: Well, you know, people tend to do what they can 116 00:06:42,520 --> 00:06:46,680 Speaker 3: to enhance their position financially. Most people will stick to 117 00:06:46,800 --> 00:06:49,720 Speaker 3: what they can do legally. Some people will stick to 118 00:06:49,800 --> 00:06:53,359 Speaker 3: what they can do ethically. I don't know, there's some 119 00:06:53,600 --> 00:06:57,400 Speaker 3: question about what that means, but you know, people, if 120 00:06:57,400 --> 00:06:59,720 Speaker 3: there's an opening, people will take it. For the most part, 121 00:07:00,080 --> 00:07:02,760 Speaker 3: there is an opening for what you call credit or 122 00:07:02,800 --> 00:07:07,560 Speaker 3: credit of violence. That is proactive, proactive efforts to enhance 123 00:07:07,640 --> 00:07:10,240 Speaker 3: your situation financially at the expense of somebody else. 124 00:07:11,000 --> 00:07:12,400 Speaker 2: And so. 125 00:07:13,720 --> 00:07:19,240 Speaker 3: The important point is that it's up to lenders to 126 00:07:19,320 --> 00:07:22,320 Speaker 3: study the documentation well enough to prevent it. 127 00:07:22,680 --> 00:07:23,120 Speaker 2: That's it. 128 00:07:23,280 --> 00:07:27,920 Speaker 5: Are you getting Are you active in office space right now? 129 00:07:27,920 --> 00:07:30,840 Speaker 5: Because it seems like the perfect storm for anybody who 130 00:07:30,920 --> 00:07:35,080 Speaker 5: has the financing. We talked to Ego Namdar, a real 131 00:07:35,120 --> 00:07:37,840 Speaker 5: state investor a couple of days ago, who is getting 132 00:07:37,920 --> 00:07:43,480 Speaker 5: like seventy percent off really big important office buildings in 133 00:07:43,720 --> 00:07:46,360 Speaker 5: New York, the capital of the world, Like, how can 134 00:07:46,440 --> 00:07:47,600 Speaker 5: that not come back? 135 00:07:47,800 --> 00:07:50,840 Speaker 3: Well, the question, Matt is very simple. You're getting let's 136 00:07:50,840 --> 00:07:52,000 Speaker 3: say you're getting seventy off. 137 00:07:52,480 --> 00:07:53,080 Speaker 2: Is that enough? 138 00:07:54,240 --> 00:07:57,000 Speaker 3: And you know, the mere fact that the price of 139 00:07:57,040 --> 00:07:59,600 Speaker 3: something is down doesn't make it a bye. It has 140 00:07:59,680 --> 00:08:03,600 Speaker 3: to be that the price is down more than it 141 00:08:03,640 --> 00:08:05,560 Speaker 3: should be given the fundamentals. 142 00:08:06,160 --> 00:08:10,880 Speaker 2: And you know, I think it's going to be up to. 143 00:08:12,400 --> 00:08:15,960 Speaker 3: The experts, people who've made their life in that world 144 00:08:16,600 --> 00:08:19,480 Speaker 3: and with success, to make that assessment. 145 00:08:21,720 --> 00:08:22,680 Speaker 2: You know, I think that. 146 00:08:25,000 --> 00:08:27,400 Speaker 3: If there is a bunch of real estate funds formed 147 00:08:27,400 --> 00:08:29,760 Speaker 3: this year, somebody who puts all their money into office 148 00:08:30,520 --> 00:08:32,400 Speaker 3: and somebody who puts none of their money into office, 149 00:08:32,520 --> 00:08:34,000 Speaker 3: one of them will be the best performer. 150 00:08:34,760 --> 00:08:35,760 Speaker 2: I just don't know which one. 151 00:08:35,920 --> 00:08:37,520 Speaker 1: You know, if you have these struggles that are still 152 00:08:37,559 --> 00:08:39,920 Speaker 1: under the surface, we are just about, you know, five 153 00:08:40,000 --> 00:08:43,439 Speaker 1: days away really from bank earnings, and the question is 154 00:08:43,440 --> 00:08:45,920 Speaker 1: is we enter this era where they're about to meet 155 00:08:45,960 --> 00:08:49,679 Speaker 1: new capital rules as well? Are there still just tremendous 156 00:08:49,720 --> 00:08:52,200 Speaker 1: stresses under the system that people are not noticing. 157 00:08:52,880 --> 00:08:57,120 Speaker 3: Well, it's the it's the small to mid size banks, 158 00:08:57,120 --> 00:09:00,920 Speaker 3: the community and regional banks that are that are heavily 159 00:09:01,679 --> 00:09:07,079 Speaker 3: weighted toward real estate loans. The biggest banks over two 160 00:09:07,120 --> 00:09:09,600 Speaker 3: hundred and fifty billion in assets don't have much of 161 00:09:09,640 --> 00:09:10,320 Speaker 3: a concentration. 162 00:09:10,480 --> 00:09:11,280 Speaker 2: They're not at risk. 163 00:09:11,840 --> 00:09:15,679 Speaker 3: But some of the smaller banks, you know, I think 164 00:09:15,720 --> 00:09:17,880 Speaker 3: on average, the banks under two hundred and fifty billion 165 00:09:17,920 --> 00:09:22,000 Speaker 3: in assets, loans on real estate make up one hundred 166 00:09:22,000 --> 00:09:24,960 Speaker 3: and sixty percent of their regulatory capital. So some of 167 00:09:25,000 --> 00:09:28,480 Speaker 3: them will find pain, especially the ones who lent above 168 00:09:28,520 --> 00:09:32,079 Speaker 3: average and concentrated in regions that are troubled and so forth. 169 00:09:32,120 --> 00:09:35,520 Speaker 3: So you know, I don't think it's a systemic risk 170 00:09:35,640 --> 00:09:38,560 Speaker 3: that's going to put us in the sink, but I 171 00:09:38,600 --> 00:09:41,920 Speaker 3: do think that you'll see some companies in trouble, and 172 00:09:42,440 --> 00:09:46,920 Speaker 3: you know, one by one the authorities may have to 173 00:09:46,960 --> 00:09:49,720 Speaker 3: bail them out, and may well. 174 00:09:49,480 --> 00:09:51,920 Speaker 4: Do so, all right, Howard, Unfortunately we have to leave 175 00:09:51,960 --> 00:09:53,920 Speaker 4: it there. Great to have you, of course on our 176 00:09:54,000 --> 00:09:56,880 Speaker 4: launch day are big banks, of course, to Howard. Marxie 177 00:09:57,000 --> 00:09:59,880 Speaker 4: is the co founder and co chairman of oak Tree Capital.