0:04

Hello and welcome to a crossover

0:06

episode of Behind the Memo and

0:08

the Insight by Oaktree Capital. I

0:11

am pleased to be joined

0:11

by Howard Marks, Oaktree's co-chairman,

0:14

and Armin Pinocian, Oaktree's

0:17

head of performing credit and incoming co-CEO.

0:21

Today we'll be discussing topics related to

0:23

Howard's latest memo, Further Thoughts

0:25

on C-Change, and Oaktree's recently

0:27

published performing credit quarterly, which

0:30

was co-authored

0:30

by Armin. I'm excited to dive right

0:33

in. Thank you both for joining me today. Thank

0:35

you, Anna. Great to be with you. Thanks,

0:38

Anna. So, let's start with Further

0:40

Thoughts on C-Change. Howard, why

0:43

were you interested in writing a follow-up

0:46

to your memo C-Change? Anna,

0:48

a lot of my messages are A,

0:51

inspired and then B, shaped by

0:54

discussions with clients. It's not a one-way

0:56

street.

0:57

And of course, the original C-Change

1:00

thesis came out of client visits

1:02

that I made in October and November, and

1:04

then the memo was released in December.

1:07

But then of course, I continued to meet with people,

1:09

talk to them about the thesis, get their response, get

1:12

their questions, and just more thoughts

1:14

arose and I wanted to share them.

1:17

Before we move on, Howard, can you

1:19

just explain exactly what

1:21

the thesis of Further Thoughts on C-Change

1:24

is? Well, the whole idea

1:26

of the C-Change is, number one,

1:28

that it's a significant, fundamental,

1:31

possibly lasting development.

1:34

I think this is a major change that

1:37

interest rates have been low

1:39

or declining since 1980, with

1:42

the exception of 2022 when they

1:44

were jacked up to

1:45

fight inflation. And if you came into this

1:47

business since 1980, and that covers a lot

1:50

of people, here we are 43 years

1:52

later, that's pretty much all you saw. And

1:55

people tend, especially investors

1:57

tend when they see something for a few years, to

1:59

think Well, that's normal and that

2:01

means that's the way it's always going to be. And

2:04

I think especially with regard to interest

2:07

rates here in moderate single

2:09

digits, I don't think you can say

2:11

that declining and ultra-low interest rates

2:13

will be the rule for the coming decade or

2:15

so. This is not a normal cyclical

2:18

fluctuation like we're used to dealing

2:20

with every year or two or three.

2:23

This is for me and my commentary,

2:26

a really once in a lifetime. I've never written a

2:28

memo before, talked about something

2:30

of the magnitude of the sea change that I

2:32

think we're going through. This changes

2:35

so much. It changes the outlook for

2:38

GDP growth. It changes the outlook for

2:40

the ease of financing for companies.

2:43

It changes the outlook for defaults and bankruptcies.

2:45

And it changes prospective returns. A

2:48

year and a half ago, high yield bonds yielded

2:50

in the fours. Not very interesting. As

2:52

a matter of fact, we joked around here that they were actually

2:54

medium yield bonds, not high yield bonds. And

2:57

today they yield in the nines, which is more

2:59

than enough for most clients' needs.

3:02

That's a big change. And I don't

3:04

think it's going to reverse in the immediate

3:07

future.

3:08

Armin, what would you say are some of your

3:10

key takeaways from Howard's memo?

3:13

I think

3:15

a lot of investors look at 2023

3:17

and say, man, it's not so bad. The

3:19

consumer is doing okay and inflation

3:22

is heading generally in the right direction. Unemployment

3:25

is quite low. And there are reasons

3:27

to believe that maybe we are going

3:29

to get through this period of time without

3:32

a meaningful economic impact

3:34

from these higher rates. But

3:36

I think that there's a tremendous

3:38

risk in being backward looking on this point because

3:42

the impact of higher rates has

3:45

only just begun to take hold. It's

3:47

only been a few quarters, three quarters

3:50

maybe, where the high base

3:52

rates have had an opportunity to reset, have

3:54

impacted company cash flows, and

3:57

the unlevered free cash flow drying

3:59

up. for a very large portion of

4:02

businesses, as well as

4:04

the consideration for additional capital

4:07

needs for interest rate sensitive assets

4:09

like real estate. In corporate

4:11

credit, give it another year or two and

4:13

you will see the need for refinancing capital.

4:16

And so it's really a time to tread carefully

4:19

and not to look in the rear view mirror and say

4:21

everything looks great. And we really ought to be careful

4:24

because I think in the next 12 to 24 months, there

4:26

will be a day of reckoning for some of the capital

4:29

structures that were put in place that are now gonna look

4:31

inappropriate.

4:32

And I'd like to interject here in

4:35

preparing for this recording session

4:37

today with Armin and you. I

4:39

thought about two things that I wanna make

4:41

explicit to our listeners about interest

4:43

rates.

4:44

Number one,

4:45

the interest rate on debt is practically

4:48

always less than

4:50

the return people hope for on equity.

4:54

Number two,

4:55

short rates are almost always shorter

4:58

than long rates. These are facts. Now,

5:00

the interesting thing is those two truths

5:03

have a profound impact on people's behavior

5:06

and tend to lead to

5:09

the two biggest mistakes

5:11

that people make. The first, the

5:14

low cost of debt means that it's

5:16

usually attractive to leverage. And

5:19

if you're making an equity investment at a certain

5:21

rate of return, invariably, you

5:23

can increase the expected rate of return by

5:25

borrowing some of the capital. The more

5:28

you borrow, the more you amplify the return.

5:30

As they say in Las Vegas, the

5:32

more you bet, the more you win when you win. But

5:35

you don't always win. And the

5:37

more leverage you have, the

5:40

lower the chance you have of

5:42

surviving a difficult period. So

5:45

interest rates on debt being lower than equities

5:47

invariably encourages leverage, sometimes

5:49

to excess. The second is

5:51

that short borrowings cost less

5:54

than long borrowings. And that

5:56

tends to cause people to borrow

5:58

short sometimes. to invest

6:00

long to make long-term commitments. That's

6:03

fine except in those brief

6:05

periods when finance becomes harder

6:08

to obtain and you have what's

6:10

called the mismatch. You've borrowed

6:12

short, you've invested or loaned

6:14

long, your providers

6:17

have capital asset their money back. Your

6:19

assets aren't saleable. You meltdown.

6:23

So leverage and mismatch are

6:25

two of the greatest ways to have a financial problem

6:27

and they are all encouraged

6:30

by the nature of borrowing

6:33

costs and the way

6:35

people respond to them.

6:37

Maybe if I could add one more thing to when

6:39

you own a business there are two ways to grow

6:41

its enterprise value. There are taking

6:44

on debt to invest in

6:47

the company and building a manufacturing

6:49

plant or doing some R&D

6:51

for new products that again requires

6:53

access to capital markets. The second way

6:55

is just having really good execution irrespective

6:58

of how you're capitalized. If you're just really

7:01

good in a particular sector and you have a secret

7:03

sauce or a playbook to really expand

7:05

enterprise value that will

7:08

show even if you have no debt.

7:10

Now

7:10

the leverage buyout industry has

7:13

participants that do both and

7:16

I think what we will find as the next

7:18

year or two unfold is which

7:20

of those private equity firms have the subject

7:22

matter expertise to have grown enterprise value

7:25

even on an unlevered basis and

7:28

then which of those private equity firms really

7:30

needed access to cheap and consistently

7:32

cheap capital to realize upon

7:34

their equity returns. To quote Warren

7:37

Buffett, when the tide goes out is

7:39

when you find out who's been swimming without a bathing

7:41

suit on and I think we will find that

7:44

in spades in the next year or two especially

7:46

on the equity side and on the highly levered

7:49

equity side.

7:50

Also Armin, this weakness you're talking about,

7:53

do you think you're also going to see it emerge in

7:55

private credit?

7:56

Yeah, in private credit it's been a huge

7:58

growth industry for the last 10, 15 years,

8:01

a lot of private credit managers that are large

8:04

today didn't exist before the global financial

8:06

crisis. They have

8:08

grown with the growth of the private equity

8:11

universe and an expansion

8:13

of their lending practices and capabilities

8:15

and assets under management have helped fuel private

8:18

equity returns as well. Now, I think private

8:20

equity will experience more

8:22

of a challenge in the next few

8:25

years than private credit will. But

8:27

I think private credit transactions that

8:29

were highly levered may have some problems

8:32

in old vintages because when

8:34

base rates were at 25 basis points and

8:36

the spreads were at 550, that

8:39

cost of that leverage was 6% to 7%. Today

8:42

that same loan, even without a

8:44

refinancing, is now costing the borrower 11%. So

8:49

what is going to happen with that company? Can it

8:51

make its principal and interest payments when it comes due?

8:54

If it cannot, where will the incremental capital

8:56

come in to deliver the business? There is

8:58

risk in the rear view mirror in private credit,

9:01

but without risk creates opportunity out

9:03

the front window, which for fresh

9:05

capital, for experienced investors

9:08

having invested through cycles, there

9:10

will be some great buys. There are some great

9:12

buys even now, but I think it's going to accelerate

9:14

in terms of private capital being deployed into

9:17

a dislocated environment where there are banks

9:20

and other private credit funds that

9:22

were probably a little too long in

9:25

their procyclical lending and

9:27

investment behavior and now that's going

9:29

to need to be retracted a bit.

9:31

I think the point is the tide has never

9:33

gone out on private lending. It's

9:35

never been tested. Credit analysis

9:38

may seem like a pedestrian activity,

9:40

but the truth is there is such a thing as superior

9:43

credit analysis, average credit analysis,

9:45

inferior credit analysis, and the people

9:47

who did inferior credit analysis

9:50

in the last 15 years and maybe

9:52

who scooped up too many assets to

9:54

invest in, in the interest of asset

9:57

growth, will find out who they were I

9:59

think. and maybe the list will be winnowed.

10:02

So the last specific question

10:04

I'll ask about this memo, Howard,

10:07

is for you. And it's about capital allocation,

10:09

because it's obviously a big part of the memo

10:12

for the response on C-Change. And you write

10:14

in the memo that you're not calling

10:16

for investors to become more defensive, but

10:19

instead talking about a reallocation of

10:21

capital away from ownership and toward lending.

10:24

I'd like you to speak about that distinction

10:27

you're making.

10:28

Yes, I don't think that

10:31

the markets, even the stock market,

10:34

are so high that

10:37

I would urge increased defensiveness. They're

10:39

also not so low that one should become

10:41

more aggressive. But I don't think too many

10:44

people are tempted by that.

10:45

Stocks are a little high based on historic

10:48

parameters, but not so much so, I

10:51

think, that it's worth significantly

10:53

reducing exposure for defensive

10:55

purposes. But the point is today

10:58

that we can potentially get equity returns

11:01

from debt.

11:03

The S&P has returned about 10.2%

11:05

a year for the last century. And

11:08

that was enough to turn a dollar into something

11:10

like $14,000.

11:13

We can get prospective returns like that from

11:15

credit today. On the liquid

11:17

side, from high yield bonds

11:19

and senior loans close to 10, on

11:22

the private side, even the senior

11:24

most of loans to the best and biggest buyouts

11:27

are offering 11 or 12 or a bit more.

11:30

Credit instruments, debt instruments, are

11:33

by definition less volatile,

11:35

less uncertain than equity. Returns

11:38

are contractual.

11:39

We have a note from the borrower who

11:41

says,

11:42

you give me some money. I'll give you interest every

11:44

six months. At the end of the term, I'll give you money

11:46

back. And by the way, if I don't give you money

11:49

back, you can have my company.

11:51

Now that's implicit in the bankruptcy process,

11:54

and I'm overgeneralizing and oversimplifying.

11:56

But the point is, these are contractual

11:58

returns. from

12:00

equities to debt in 1978, I

12:02

was wowed by the fact that there's

12:05

this promise to pay around

12:07

Oak Street called the power of the coupon. And

12:09

you're clipping coupons every six months

12:12

and the pendency of the next coupon

12:14

payment tends to keep

12:16

the price of the asset up.

12:19

If something's going to pay you, let's say, 11% interest

12:21

a year, its price can only go

12:24

so low as long as its fundamental

12:26

credit worthiness is not impugned. And

12:29

you have to recognize the turning points

12:32

in the investment business. In 1980, my

12:35

stepmother proudly announced at

12:37

dinner one night that she had taken out a CD

12:39

at 16%. And I said, oh,

12:41

that's great. I said, how long? She

12:44

said a year. I said, you should have done 10 years.

12:46

She said, well, 10 years, you only get 11. And

12:49

I couldn't convince her that 11 for 10 years

12:51

was better than 16 for one year. The

12:54

point is, the higher rates go,

12:56

the more you should want to tie them up as

12:59

a lender or investor. One

13:02

of the ways I try to think about correct

13:04

actions is by saying, well, what's the

13:06

mistake one could make today? And

13:09

I believe that the mistake would be failing to

13:11

take advantage of these rates today.

13:14

Now let's shift gears a little bit.

13:17

Already in our discussion, we've been

13:19

talking about some of the risks

13:21

that has been building in markets

13:23

in the economy because, Armin, of some of

13:25

these capital structures, as you said, that

13:27

were put in place at a time when interest rates were extremely

13:29

low, now they're becoming unsustainable.

13:32

So you and your co-author

13:34

recently put out a performing credit quarterly

13:37

piece in which you talked about kale

13:39

risks that we're building in markets today.

13:42

So to begin, can you just explain

13:44

your main argument in that piece? Well,

13:46

if you look at averages, if you

13:49

look at the average fixed charge

13:51

coverage of a company, what is its income versus

13:53

its interest expense? The averages

13:56

look fairly healthy. The averages

13:58

look like they are...

13:59

unchanged, at least from a materiality concept,

14:02

over the last several years.

14:04

But if you were to look at the tail, the

14:06

weak tail of issuers,

14:09

borrowers in the market, what you would find

14:11

is a growth of that tail

14:14

of weak positions, and that

14:16

tail really is not

14:18

able to pay its principal and its interest as

14:21

it comes to. Now why would that be? It

14:23

would be because two or three years ago,

14:25

only the weakest companies, the most impacted

14:28

by COVID, or the most impacted by

14:30

inflation, had trouble in

14:32

terms of maintaining their cash flows

14:35

relative to their interest expense. But

14:37

now with the rise in rates and

14:40

the commensurate reduction

14:42

in the forward growth of these companies

14:45

and just of the economy overall in such a high-rate

14:47

environment, you are seeing a flatlining

14:50

or even a decline in cash flows before

14:52

consideration of debt, and you're seeing a

14:55

rapid escalation in the cost of maintaining

14:57

that debt. And therefore, a growing

15:00

number of companies are

15:03

now entering that tail, that tail that

15:05

is EBITDA over fixed charges

15:08

of one times coverage or less. And

15:10

that tail is fattening. The averages

15:12

may look okay because on the other side, there may be

15:14

a company that actually did really well during COVID

15:16

or really well under inflation. And

15:19

so the average will be misleading. The average

15:21

is misleading currently. I think you have to

15:23

look at how big the tail is getting

15:25

and how severe the problems are in that tail. And

15:28

I think directionally and orders of magnitude-wise,

15:31

that it's becoming very concerning.

15:34

And I think you really need to think about the tail and

15:37

the size of that tail today versus

15:39

the size of that tail during the global financial crisis.

15:41

The markets today are four times

15:44

the size as they were during the global financial

15:46

crisis. You could have a quarter

15:48

as many defaults or a quarter as much

15:50

stress and still have the same dollars

15:53

of pressure weighing on

15:55

the markets. And therefore, from an opportunistic

15:58

investor standpoint, I think that's a good question. very attractive

16:01

investment opportunity even without

16:03

a massive recession or

16:06

a double-digit spike of default rates. You don't

16:08

need all that to create pretty

16:10

big dollars of dislocation in the market

16:13

and investment opportunities because

16:15

of this growing tail.

16:18

One more comment, Dana. There's an old saying

16:20

that the worst of loans are made in the best

16:22

of times. We had an economic

16:25

recovery in a bull market that exceeded 10 years. As

16:28

the good times roll on longer and longer,

16:31

people, as I said before about normalcy,

16:33

tend to think that the longer it's gone on,

16:36

well, the longer it's going to go on.

16:39

Normally, I would say it's exactly the

16:41

opposite. The longer the good times have gone

16:43

on, probably the closer we are

16:45

to a downturn. But people don't

16:48

act that way. Since they think

16:50

times are good, they tend to

16:52

compete to make loans by

16:55

accepting lower returns and

16:57

reduce safety. I discussed this

17:00

in a memo called Race to the Bottom in

17:02

February 2007, which unfortunately turned

17:04

out to be right in the global financial crisis. And

17:07

certainly, aggressive lending has taken

17:09

place in the last 15 years. And

17:12

when tested by more difficult conditions,

17:14

it's not all going to make it.

17:16

Howard, you're 100 percent right. And actually, if

17:18

you look at the loan market today, the broadly

17:21

syndicated loan market, which

17:23

about 70 to 75 percent of the issuance

17:25

has been in support of leveraged buyouts, as

17:27

opposed to the high yield bond market, which really was

17:30

not the financing mode

17:32

of choice for private equity firms because high

17:34

yield bonds have call protection. So they

17:36

liked floating rate liabilities. They

17:38

liked the callability of broadly

17:41

syndicated loans. And so that market rapidly

17:43

grew over the last 10, 12 years

17:46

because of the leveraged buyout boom. If

17:49

you look at that market today versus

17:51

what it was 12 or 13 years ago, it's meaningfully lower

17:55

in quality. 12, 13 years ago,

17:57

about 30 percent of that market was double

17:59

B rated. Today, it's closer to 20%.

18:02

In addition, today, close to 50%

18:05

of that market is a weak

18:08

single B. That is the highest

18:10

it has been in at least 10 years.

18:12

Now that tells you about the tail. The

18:15

tail is no longer an immaterial

18:18

amount of debt. It is 40

18:21

plus percent of the market. It

18:23

is rated weak and

18:26

on the verge of becoming even weaker

18:29

in terms of rating. That's an important

18:31

risk to monitor

18:34

because the ownership of broadly

18:36

syndicated loans in large part are in the

18:38

form of collateralized loan obligations or

18:40

CLOs, which are rating sensitive

18:43

buyers of those securities.

18:46

If a loan becomes CCC,

18:49

effectively there is almost no bid

18:51

in the market for that loan. Other

18:53

than from a distressed player, not from

18:55

a CLO. If you become a

18:58

forced seller for whatever reason

19:00

of paper that has become downgraded or

19:02

is at risk of downgrade, it will

19:05

not take much in terms of selling

19:07

pressure, in terms of dollars of selling pressure,

19:09

to drive down a loan's

19:11

price 5, 10, 20 points because of the

19:15

technical that is tied

19:17

to the ratings which

19:20

are then impacted by this tail

19:22

risk that we're talking about now.

19:24

The environment that you're describing

19:26

here, I think it can make sense why this could

19:29

potentially be a good environment if you're

19:31

an opportunistic investor. I'm

19:33

also curious if you're on the performing side.

19:36

What does that mean in this environment?

19:39

It's a credit picker's market. We're talking

19:41

about the tails, but the average is

19:44

not so bad, which means that there's an other

19:46

tail, there's an extreme other tail of high quality

19:49

that could be trading at attractive

19:51

yields just because the overall market

19:54

is a little choppy. You can

19:56

look at the percent of the loan market

19:58

that is double B. You could look

20:01

at a very large portion of the high

20:03

yield bond market and find pretty good buys.

20:06

Now, why high yield? High yield is the

20:08

highest quality it's been in 15 years. It

20:11

is the highest rated it has been.

20:13

In addition, the borrowers are

20:15

generally larger in the high yield

20:17

bond market than they are in the loan market. Both

20:20

markets are about 1.5 trillion, but

20:22

there are close to double the number of

20:24

borrowers in the loan market versus

20:26

the high yield market.

20:27

In addition, the debt to EBITDA

20:30

of the average high yield issuer is actually lower

20:33

than the first lien debt to EBITDA

20:35

is on the average loan issuer. So,

20:38

less levered, bigger business. And

20:40

then the most important thing, I think,

20:42

is that these companies did a great

20:44

job of extending their maturities in 2020

20:47

and 2021 when the markets were wide open

20:50

with QE, supporting those markets, the

20:52

quantitative easing. And because of that,

20:54

if you're a big business and you have

20:56

the benefit of time and a fixed

20:59

dollar liability for the next

21:01

several years in terms of the interest that you owe,

21:04

you might actually benefit from inflation

21:07

to the point where when you do have your maturity

21:09

in four or five years from now, you

21:11

might have actually grown. And you might

21:13

have actually delivered until then. I

21:16

think bigger businesses are benefited

21:18

therein with inflation. Smaller

21:21

businesses are in trouble usually, especially

21:23

when the cost of their liabilities is

21:25

rising real time. So,

21:28

there are opportunities. You have to pick

21:30

and choose. You have to do your underwriting. You have to

21:32

look in the right places. You could buy

21:34

a basket of high yield bonds now in the 80s

21:36

in terms of a dollar price, 86 to 88, that have been

21:39

performing well and have the benefit of

21:41

time. They're trading

21:43

at that price mainly because of rates

21:46

and technicals rather than fundamentals. And

21:49

we really like buying securities that

21:51

are trading down because of technicals and

21:53

that have strong fundamentals. There

21:55

are also great buying opportunities in newly

21:58

issued private credit because... Again,

22:00

the banks have stepped away, direct

22:03

lenders are finding a growing

22:05

watch list of securities in their portfolios.

22:08

So if you do have dry powder and a clean portfolio

22:11

and the capability to handle a volatile

22:13

economic period, then there are great

22:15

buying opportunities, but you have to do the work.

22:18

Howard, one of the things that you often

22:21

say, it's obviously a mantra here at Oktra,

22:23

is this idea of trying to avoid

22:25

the losers. And this environment

22:28

we're talking about, there are obviously probably going

22:30

to be more losers than there have been in

22:32

previous years. And I'm curious what

22:35

you think this means for

22:37

the types of strategies that

22:39

may be well-positioned to outperform

22:42

moving forward and how they may be different than those that

22:44

have outperformed, say, in the last 10 years.

22:47

The short answer is very simple.

22:49

In the 10 years you're talking about Anna, 2010 through 2019,

22:52

it was an easy period, safe

22:55

period, there wasn't much pain

22:58

felt. When there are no defaults,

23:01

when it's 99.1 instead of 90 to 10, you don't have to worry

23:05

too much about avoiding the

23:07

losers. And you can be soft on

23:09

your credit analysis and in

23:11

a good environment, the potential defaulters

23:13

don't default and everybody looks

23:15

the same. The person who played golf instead of

23:18

reading prospectuses does as well as

23:20

the person who was glued to his green eye

23:22

shade. The bottom line is that

23:25

risk taking was rewarded. And

23:28

for the most part, if you dip

23:30

down in quality, you made

23:32

more money because there were so few defaults and

23:34

bankruptcies in particular. But

23:36

that doesn't mean it's always the case. Sometimes

23:39

the lower you dip down in quality the more money

23:41

you make, sometimes the more you

23:43

dip down in quality the more you lose. And

23:46

now, as Armin says, you're going to have to do the

23:48

work. Now the period that

23:50

we're looking at ahead is going to

23:53

be more of a normal period, I believe. One

23:55

of these days we'll have a recession. And in those,

23:58

the weak credits are exposed. the tide

24:00

goes out. And in that period,

24:02

the person who did better credit

24:05

analysis and maybe took

24:07

less risk is rewarded.

24:09

And I think that the period ahead

24:11

is more like that. The period

24:14

just behind us was an unusually

24:16

easy period in which risk taking

24:19

was rewarded, as I say. And if

24:21

you learn the lesson that the more risk

24:23

you take, the more money you make from time

24:25

to time, that turns out to be a very dangerous lesson.

24:29

So to finish up today's conversation,

24:32

I wanted to look back a little bit. This

24:34

podcast is going to be coming out in early

24:37

November of 2023. And this has

24:39

obviously been quite an eventful

24:41

year after a few other eventful

24:43

years. So question

24:46

for both of you, what would you say were some of your biggest

24:48

surprises from this year thus far?

24:51

I have been surprised about

24:54

how resilient the economy has

24:56

been this year. I would have

24:58

expected for bigger cracks

25:01

to form sooner. Now the cracks are forming

25:03

now. Maybe I'm cheating a little bit, but I

25:05

am seeing the cracks now. I am seeing certain consumer

25:08

facing businesses roll over

25:10

a little bit, seeing credit card and other

25:12

consumer finance charge off starting to tick up.

25:14

So I just would have expected it sooner. And

25:16

I think the reason it did not

25:19

surface sooner was because there has been a

25:21

tremendous amount of stimulus over

25:23

the last several years that frankly had a

25:26

longer halo effect than I thought would be possible.

25:28

Obviously you had the helicopter cash of the COVID

25:31

era, but since then you've also had the

25:33

CHIPS Act, the Inflation Reduction Act, the

25:36

Infrastructure Act, even though one is called

25:38

the Inflation Reduction Act. They are kind of inflationary

25:40

because they do support economic

25:44

growth and are therefore inflationary

25:47

over a short period of time. So that

25:49

is I think the explanation for the surprise,

25:51

but I am frankly just surprised about how resilient

25:54

it has been. I am also surprised that several

25:56

investors look at that strong

25:58

performance and say,

25:59

everything's just fine. I do think to

26:02

use basketball terminology, it feels like a

26:04

head fake over the next few quarters. Those

26:07

folks that have thought that everything's going to be just

26:09

fine or think are going to be proven quite wrong

26:12

because it's only a matter of time that these cracks

26:15

that are already forming really widen and

26:17

swallow up some companies.

26:20

And I think following on from Armin's

26:22

favorable surprise on the performance of the

26:25

economy, I'm surprised to see so

26:27

much optimism emerge in stock market investors.

26:30

The market is a tug of war between the optimists

26:32

and the pessimists and 2023

26:34

is a year in which the optimists won. People

26:37

who believed that there won't be a recession

26:39

or there won't be much of a recession or

26:41

that the Fed will pivot towards

26:44

dovishness. So far, these people have

26:46

won in the stock market in the sense that

26:49

they have caused prices to go up as

26:51

opposed to when the pessimists win and

26:53

the prices go down. So it's been a strong year

26:55

in the stock market. Yes, maybe concentrated

26:58

in a few stocks or stock groups, but

27:01

a very positive year. The good news

27:03

about this Anna is, as you know, our

27:05

investment philosophy says that our investment

27:08

decisions are not based on our macro

27:10

expectations or our market timing.

27:13

One of the things we have around here is it's okay

27:15

to have an opinion. It's just not okay to

27:17

act as if it's correct.

27:19

So before we end today, do you have any final

27:21

thoughts?

27:22

Merely to say that at Oaktree

27:25

and for cautious investors, the

27:28

period under discussion in the sea change, 09

27:31

through 21 was a difficult

27:33

period. Risk taking

27:35

was rewarded.

27:37

Borrowing

27:39

was subsidized.

27:41

Lending, which is what we are, was

27:43

penalized. Bargain hunting

27:45

was difficult because you get the big bargains

27:47

when other people are depressed, panicking, and

27:50

they want out. So from 2012 through 2020,

27:54

credit investors were investing in a low

27:56

return world. The yields were

27:58

unattractive and And the process was

28:01

dreary. We're very excited

28:03

about this new world. Now we're in a,

28:05

I describe it as a full return world. People

28:07

talk about whether we're going to have higher for longer. We

28:10

don't have high rates today. We have

28:12

normal rates today. They may

28:14

go higher, they may not, who knows? But

28:16

the point is, we're not in a low return world

28:18

anymore, and we're very excited about

28:20

the potential returns that can be earned from credit.

28:24

Well, I think that's an excellent point to end on, and

28:26

thank you both so much for joining me. Thanks

28:29

as always, Ann.

28:30

Thank you.

28:35

Notes and disclaimers,

28:37

this recording and the information contained

28:39

here are for educational and informational

28:41

purposes only and

28:43

do not constitute and should

28:44

not be construed as an offer to sell

28:47

or a solicitation of an offer to buy any

28:49

securities or related financial instruments,

28:51

responses to any inquiry

28:53

that may involve the rendering of personalized

28:56

investment advice or affecting or attempting

28:58

to affect transactions and securities will not

29:00

be made absent compliance with applicable

29:02

laws or regulations, including broker-dealer,

29:06

investment advisor, or applicable agent or

29:08

representative registration requirements, or

29:10

applicable exemptions or exclusions

29:12

therefrom. This recording,

29:15

including the information contained herein, may

29:17

not be copied, reproduced, republished,

29:19

posted, transmitted, distributed, disseminated,

29:22

or disclosed, in whole or in part

29:25

to any other person in any way without

29:27

the prior written consent of Oaktree Capital

29:30

Management LP.

29:31

Together with its affiliates, Oaktree,

29:34

by accepting this document, you agree that you

29:36

will comply with these restrictions and

29:38

acknowledge that your compliance is a material

29:40

inducement to Oaktree providing this document

29:42

to you.

29:44

This recording contains information and views

29:46

as of the date indicated, and such information

29:48

and views are subject to change without notice.

29:51

Oaktree has no duty or

29:53

obligation to update the information contained

29:55

herein. Further, Oaktree makes

29:57

no representation, and it should not be assumed that the document

30:00

assumed that past investment performance

30:02

is an indication of future results.

30:04

Moreover, wherever there is the potential for

30:06

profit, there is also the possibility of

30:08

loss.

30:10

Certain information contained

30:11

herein concerning economic trends

30:13

and performance is based on or derived

30:15

from information provided by independent

30:17

third-party sources. Oaktree

30:19

believes that such information is accurate

30:22

and that the sources from which it has been obtained are

30:24

reliable. However, it cannot

30:26

guarantee the accuracy of such information and

30:28

has not independently verified the accuracy

30:31

or completeness

30:32

of such information or the assumptions

30:34

on which such information is based.

30:36

Moreover, independent third-party sources

30:38

cited in these materials are not making

30:41

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30:43

regarding any information attributed to them

30:45

and shall have no liability in connection with

30:47

the use

30:48

of such information in these materials.