00:00When you look at the economy, and more importantly, you look at what the Fed is trying to do,
00:04the labor market, does that take precedent?
00:06So, you know, look, we think that the inflation situation today,
00:10when you look at overall, the Fed's statutory mandate is price stability.
00:14That's been achieved.
00:15The volatility of inflation is all the way back down to where it was pre-pandemic.
00:20So sort of front and center in terms of the Fed's reaction function is the labor market.
00:24And there's a lot going on there.
00:26You know, it's supply constrained owing to the change in immigration, the demographics,
00:32the aging of the population means the employment to population ratio is sort of trended down.
00:38And you've got a productivity story happening.
00:39And so it's kind of, you know, a low velocity environment overall.
00:44We think the Fed's right to be focused on that part of their mandate.
00:48With regards to productivity, we played a clip from Robert Kaplan, who was on a little bit earlier today.
00:52And in the broader part of that interview, he talked a lot about the potential improvements to productivity from AI
00:58and how this actually means that the AI build out to a certain extent is going to become a Fed discussion at meetings going forward.
01:05I was super heartened to hear how to what degree they went, Chair Powell, yesterday in the press conference,
01:10to really identifying this as an influence.
01:13And quite frankly, there's been a stealth productivity inflection higher after, you know, a decade of dormancy ever since the pandemic.
01:20You know, necessity being the mother of invention, companies needing to sort of on their feet sort of find efficiencies across their supply chains and the like.
01:29So this has been a phenomenon.
01:31So when you think about 2 percent productivity growth, you can grow the economy at 2 percent without adding one minute to the hours worked.
01:38That's what's happening.
01:39And now productivity set to inflect even higher with generative AI.
01:43I want to talk a little bit more about AI as it relates to the bond market.
01:46And when it comes to this basically debt deluge that we're seeing in terms of, you know, a lot of these big borrowers tapping the bond market to fund their AI hopes and dreams with that build out.
01:57What has that meant for you as an investor?
01:59Because, you know, you've seen a lot of big tech issuance in particular.
02:03Yeah, it's very welcome.
02:04And so you think about we've lived in a world in credit markets that are kind of starved of new issuance.
02:09So a couple of unbelievable statistics.
02:12The high yield market is the same size it was five years ago, has not changed at all.
02:16The investment grade market had a record amount of gross issuance this year.
02:21But the net issuance was less than 1 percent of that, which is outstanding.
02:25The Treasury market issued 10 percent.
02:27And so there's been this scarcity.
02:30So that surge of issuance, which, by the way, we're expecting to continue next year with CapEx super cycle.
02:36We welcome that, particularly if it comes at a concession to the secondary market.
02:40So get out of the way of it.
02:41Wait for it to come and participate when it comes at the right price.
02:45So an opportunity there.
02:46I want to seize on what you were saying about the high yield market, that it's not growing, that it's stayed flat.
02:52And you think about, you know, the size of everything.
02:54It feels like it's inflated over the past couple of years.
02:56Why does high yield stand out?
02:58Why isn't it growing?
02:59So, you know, you've seen as in a rising rate environment, the traditional structure of a high yield bond today and the way that call features priced in.
03:09It's more there's more incentive for some of the lower rated borrowers to get more to go into the floating rate market, into the into the loan market.
03:16So some of the lower quality borrowers have sort of transitioned into that market.
03:20And so that market has grown.
03:21But the overall high yield market in general, which is as high quality as it's ever been, is also has this amazing technical to it, which supports stubbornness of tight spreads.
03:32Well, with regards to those tight spreads, are you anticipating that we are going to see a meaningful widening of them anytime soon?
03:37So, listen, we're so excited about the environment we're coming into.
03:40So spreads are tight, justifying those technicals, justifying overall systemically good credit quality.
03:46But you have this CapEx super cycle, meaning these waves of issuance can create tactical trading opportunities.
03:52We're expecting an M&A wave in the new year, which can cause a leveraging of companies.
03:56And there's opportunities on both sides of that trade.
03:59And, you know, there is a dispersion in the economy.
04:03So we do think defaults can marginally tick up into the new year.
04:06And so, again, being a stock picker or a credit picker is like nirvana for us.
04:11And I do want to bring in private markets to this conversation, especially, I mean, you think about high yield staying flat in terms of size.
04:19I wonder how much, you know, this uptick that we're seeing in private credit can explain some of that.
04:24But you think about the recent concerns that we've seen over the past few weeks, concerns about due diligence, whether it's being done properly.
04:31I wonder where you fall on that question.
04:33So we live in a world where there's too much money, not enough yielding assets.
04:37And so you do have instances of marginal lenders making marginal loans to marginal borrowers.
04:42The answer is don't do that.
04:44The answer is have a very, very sophisticated lens.
04:48Make sure you know what your collateral is.
04:50Make sure you know how to negotiate covenants and where they're strong enough.
04:53There are plenty of very good opportunities.
04:56And so, again, it really plays to the strengths of those that have, you know, the right lens to pick the right credits and avoid the ones that are the potential pitfalls.
05:03Any sort of but I mean, part of the reason, though, when we look at some of the issues that we had this year was that there are a lot of folks that aren't doing that due diligence.
05:10Now, some of that's just, you know, different firms, different standards.
05:13But also there's this idea of competition for assets.
05:15And I am curious as to whether how you sort of make sure that you avoid competing for something without having done the right due diligence.
05:22Deep expertise, a lot of gray hair, having lived through many, many credit cycles and knowing what's possible.
05:29And, of course, by definition, you know, credit assets have that negatively convex sort of price in terms of, you know, you might earn your coupon and you might get paid back par.
05:40Yeah.
05:40But if you get in trouble, your downside could be significant.
05:42So just being very, very careful and never letting your guard down about where you allocate credit capital.
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