00:00I think we've seen this movie before. The expectation is that this lasts a few days, but who knows?
00:07And where I'm really focused right now, given that the fiscal impact is supposed to be minimal,
00:12it's really turning my attention to the labor market in particular.
00:16So we know that there will be a furlough of around 40 percent of federal workers, around 900,000,
00:23and a delay in pay for all federal workers.
00:26Now, the Trump administration has said that they're looking to make some of that permanent.
00:31And that could perhaps create a shock in the job market.
00:34And, of course, the Fed is very focused on the labor market right now as it considers future policy.
00:39And as you mentioned, this also comes at a time where we could have delayed information about employment
00:44that we would have received on October 3rd.
00:47And so we're just closely monitoring the situation.
00:50Now, from a financial market impact, in the past, shutdowns have had a limited effect on bonds and stocks.
00:59But with valuations so stretched in equities today, this time potentially could be different.
01:06How long will markets give it before they start to see a real impact?
01:11Because everything's been quite muted at this point.
01:13And I'm just wondering how much patience that investors will have
01:16before they want to see progress in trying to restore government operations.
01:21It's a great question and probably unknowable.
01:23But, you know, thinking about the stock market and where things are at from a valuation perspective,
01:29you have a P.E. ratio that is very much above average.
01:35You know, entering the year, it was around 22 times.
01:38And when we kind of look at that and we look at history, when you bought into the S&P 500 at that kind of forward P.E. multiple,
01:49your returns for the next 10 years were pretty muted, plus two to negative two.
01:54And so I just wonder how patient equity market buyers are going to be as the shutdown continues.
02:01And maybe they get a little fearful of what the outlook might be for stocks and continue shifting into credit.
02:07We've seen such demand for alternatives in credit, as you mentioned, Caroline, to open.
02:12And I really think with the contractual nature of credit,
02:15we could see more demand from investors in this type of a volatile market environment.
02:20OK, that's into more demand.
02:21That's really interesting because, I mean, we have already seen such exponential growth.
02:26I mean, part of the appeal of private credit is that it's niche, is that it's nimble.
02:31And yet there have been and are starting to be some worries about whether this market is overheated.
02:37Do you think it is overheated?
02:39It's attracted the awe of regulators in some countries.
02:43In Europe, there is concern about the rapid growth of private markets.
02:47Your view?
02:47Yeah, you hit on something that is very important.
02:50Given the rapid growth, there's more demand, really, from asset managers that have raised private credit funds than there is demand from private equity sponsors and borrowers.
03:02And so what that means is you need to be very careful about the deals that you're accepting.
03:08There's been a degradation in quality in terms of underwriting, but also some of the covenants.
03:15And we're also seeing spreads that are compressing pretty significantly.
03:19So now is really a time for caution.
03:21Now, that said, you're still getting a nice pickup compared to public debt.
03:26But, you know, the public markets are seeing demand, too.
03:28This month alone, high-yield bonds have done, you know, $60 billion of issuance.
03:34That's twice as much as we would see in a normal month.
03:38And that's really hitting a level we haven't seen since 2021.
03:42So demand in both public and private markets.
03:44How are you assessing, I suppose, that concern over the quality of assets out there as well?
03:52Where are you collecting the information to be sure that you're making the right decisions when investing in private markets?
03:59Well, you know, at Oaktree, we're bottom-up fundamental managers.
04:02So we're underwriting a company's creditworthiness.
04:06But we also are looking at consumer and sector data to inform those views.
04:13And right now what we're seeing is that soft data has recovered from April lows.
04:18But hard data, such as, you know, monthly spending, while it's on trend, there's definitely a bifurcation in the data.
04:24So you're seeing that the higher-income consumer is still spending, the lower-income consumer perhaps is already in a recession.
04:32A few things that we're keeping an eye on, we've seen relatively weak data for travel in August, as well as hotel occupancy,
04:42which could signal that the higher-end consumer, you know, is kind of tapping the brakes a little bit given so much uncertainty in the market.
04:50I mean, there's so much happening in the macro backdrop, more than I can remember.
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