00:00What a crazy week, a crazy year. How are you looking at things in 2026?
00:04So a week ago, I think IMF, or a few days ago, raised world growth. We've been constructive,
00:12and then there is this anxiousness here. So we've been constructed and see nominal growth
00:17of 5% to 6%. And to us, the issue is the mix between real and inflation. And that comes back
00:26to affordability. Do people feel like they have more to spend or less to spend in their pocket?
00:31And this is going to be a bipartisan issue. And that's where I think the conversation is going
00:37to be refocused on. It was last year, or rather last week, with credit cards on caps, there's been
00:44more focus on that. There's been more two-way discussion of what that can look like. You
00:52look at energy, a thought to keep prices down, and housing. How do we increase the velocity of
00:58housing? Now, I mention these in terms of the prospects for 2026, because it comes down to
01:05who's impacted. Who's going to have good margins? Who's a beneficiary of this? And who is not going
01:11to be a beneficiary of this? Intuitively, if you're going to be capping your profits, you would think
01:16that credit card issuers would be more challenged today than they were before this was announced.
01:23On the other hand, if you're a supplier to housing, you would think you would be a beneficiary,
01:31and that's also off a relatively low base. So that seems like there are good prospects there.
01:36I'm so pleased you've gone in this direction. I think it's so important, because the situation
01:40you describe has been a societal issue for a while, a political problem for a while. But markets have
01:46been somehow insulated from this, and now the president is putting more focus on it in a
01:50midterm election year. It's about to become a market problem, and also an opportunity in the
01:55way you describe it. Are you allocating money to some themes against others with all of this in mind?
02:00Absolutely. Housing, we're focusing on housing. We're watching financials, particularly the credit
02:08cards play out. Who are going to be the winners and losers? What's it going to look like? And are there
02:11other ramifications to get more money into people's pockets? And so that's what we're focusing, how
02:20that's going to work. So in other words, you're going to buy now, pay later types of companies,
02:27invest in alternative types of lending. Is that kind of the idea? It's a great question. If you think
02:32of a 10% cap, those pretty much are like double, triple that. So they're because they're going with
02:39people who would be subprime bearers. If you aren't subprime, you're not going to have the
02:43buy now, pay now later. That's not their target group or prime. So I would, that wouldn't be my
02:49first choice because I would think that they would have negative, more negative selection. But who
02:54knows? Because it's hard to react because we don't know what it's going to look like. What I found
02:59interesting is before there was denial, it won't happen. And now there's more of a two-way flow.
03:04Okay. What can we do to address this issue? I just wonder how you invest in fixed income.
03:11You're traditionally in distressed debt, distressed assets at a time where there's very little
03:14distress. Absolutely. And you have potentially higher inflation in addition to higher growth,
03:20and you have a flight into income products. How do you decide to invest with such high valuations?
03:26So first thing is, it's not clear that inflation's higher. You know, it looks, if you look at the last
03:31couple of data points, they seem to be somewhat subdued. Whether they become higher, who knows?
03:36But I think that's the, one of the themes of this year is to watch that. We're constructive that
03:41inflation's more under control. You're going to see the composition of growth be much greater than
03:46inflation. In terms of when valuations are tight and growth is, let's just say, 2% or more,
03:52it's a bad neighborhood for fixed income, particularly high yield, below investment grade.
03:58And you usually do not earn your coupon. So you buy stocks?
04:03There are some stocks that are more interesting. If you look, you know, you could look at something
04:07like an MGM, where the debt markets would finance the entire market cap of MGM. You look at Kinova,
04:14a pharmaceutical company, the old Mallinckrod Endo, same thing. I don't think either of those
04:19management teams want to go that way. You look at Comcast, which is too large to finance,
04:24but at five times EBITDA and a 13, 14% free cash flow and pretty much an equal debt to equity
04:31split now. So it's a pretty reasonable credit. The debt markets would finance 100% of that. So
04:37there's certainly a relative value opportunities. And certainly equity does better with this profile
04:44than debt.
04:44Steve, when you talk about potentially finding places to invest because of policies in America,
04:49you're talking about as if these policies are already done. The president's just floating some
04:54of this stuff on truth. Do you really think a lot of this can actually get done in America?
04:58Policies first floated by the very left wings in the United States, Bernie Sanders, Elizabeth Warren.
05:03You know, it's a great question. So are we reacting? It's more like what we have confidence in,
05:09what we have no confidence in and how that's priced. And so if it's priced as if it's a done deal,
05:15which it's not, and it's not priced that way either, we tend to be shy. When it's priced as if
05:21it's not a done deal, but if it's priced like it's a done deal, but it's not done. And we think that
05:28even if it occurs, it could be interesting, then we're going to look at it. In distress, probably the
05:33most interesting area of distress is actually in a different part of the credit cycle, which in
05:39distress debt, which is in the debtor in possession market, where you had first brands, which was a
05:46industrial roll up, was a fraud, it went bankrupt, and then they needed financing to operate in
05:53bankruptcy. And that's known as a debtor in possession financing. That financing usually is
05:59very safe. And they raised about a couple billion dollars. And it turned out that it was not safe.
06:05In fact, it lost 80% of its value. Very unusual. And with fraud, you don't know. And in this case,
06:13the whole market has come off significantly. So that's been an interesting part of the market.
06:17It reminds me of what happened with Credit Suisse when it was bought by UBS. And they gave equity a
06:25return, but blanked the junior debt. And the junior debt of the European banks sold off 20, 30 points.
06:34So I'm seeing a similar type of opportunity in terms of that market selling off.
06:39Steve, super smart. Just one final question. You just touched on something important, how
06:42one company can basically sour the whole environment and very quickly. What happens if
06:49OpenAI gets into a bit of trouble later this year? What would it do to private markets?
06:54So you're asking if OpenAI becomes Ask Jeeves. I mean, that's kind of the question, right? And it
07:03wouldn't be surprising looking back. There certainly seems to, I think that if it's a, you pick the wrong
07:11horse issue, then I think it's going to be fine. There'll be winners and losers. If it turns out that
07:18the enthusiasm or the hope doesn't match the reality, and you've seen that, for instance,
07:23it's further along with EVs, where the reality hasn't matched the hope, you're going to have a lot
07:30right dance.
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