00:00Kind of break this down from an economic perspective. We know fuel prices are high.
00:04We know oil prices are high. But do those come crashing back down if we do somehow find a
00:10resolution to this situation? I think it's not so simple. And I think what the markets had this
00:14level of complacency for a while because it's been profitable to kind of fade the Trump trades,
00:20right? Whenever things got heated up, markets got disrupted, he would back off. War's a little
00:25different, though, unfortunately. And it's not easy to dial that down. You see what we just saw,
00:29the quote from this morning of dialing up the rhetoric. So the challenge, I believe,
00:33comes from essentially the infrastructure damage that's taken place. So first of all,
00:38we know the straits closed. We know that no ships are leaving right now. So that will take three to
00:42four weeks once you open it to really get supply going. But in order to do that, you have to
00:46have
00:46the supply of oil coming through as well. And we know there's been a lot of pipeline disruption as
00:51well. So I think that the market, what you've seen, you've seen kind of the back end of that
00:55futures curve, I'll call it back end later this year, start to gravitate upwards more. Now,
01:00it's not at the $115 that we see on the front end, but it is north of 80 right now,
01:04or it's roughly
01:04at the $80 point, which is significantly higher than when we entered into this conflict as well.
01:09So I think the market is saying that there is going to be paying for longer. So the deconstruction
01:13of all of this comes down to what happens to the growth story. Obviously, oil is the most important
01:18commodity in the world. It goes into every single input. It's shipping, it's heating,
01:22it's cooling, it's everything that we use in the world. And it has massive ramifications
01:26economically. And so the longer this goes on, the longer that we have this disruption,
01:31the longer the pain is. And that's going to bleed into economic growth at some point in the near
01:35future. Does that sort of mean that we're looking at a situation? I know it seemed like a couple
01:39weeks ago, everybody was focused on this idea of the Fed or really central banks globally raising
01:43rates to combat the inflationary scenario. Now, there's been a lot of talk as to maybe whether we
01:48see some of these banks actually lower rates to sort of address the growth scenario.
01:51If you're going to make a move, it would be to lower rates, not raise them. And so people see
01:56this knee-jerk reaction, oh, here's inflation. But remember, the Fed and most central banks in
02:00the world strip commodity prices out of their inflation targets, right? Because we don't need
02:04them, right? Of course, we just talked about how important it was. But we know that there's
02:07volatility around it. But the thing is, hiking into this, it would be, to me, I would say the oil
02:11market is doing the hiking for the Fed, right? It's actually tightening the policy because it is a penalty
02:17on consumption, right? If you want to consume oil a day, it's going to cost you a lot more
02:21than it did. Thus, that is something of a regressive tax there. And it's going to hit
02:26disproportionately the lower end as well. So it definitely hurts the growth story. And as I just
02:30said, with being the input cost into everything in our economy, it makes everything more expensive.
02:35So that inherently tightens policy in and of itself because you get this natural slowdown. So
02:41it's not that traditional inflation risk. Usually when you get supply shocks and commodities,
02:45that inflation impulse leads to a deflationary impulse on the other side. And that's the
02:50market self-correction function when it comes to higher commodity prices.
02:54Right. Sort of the economy self-correcting, the market self-correcting. I want to talk about
02:57the portfolio implications of this all, because that quote I read at the top here that, you know,
03:02you need more clarity before you want to extend duration. But you think about, for example,
03:07just where the tenure is right now. I mean, I think we're at 434 there. What sort of levels would
03:13be
03:13basically too enticing to ignore where you would say, OK, we're comfortable stepping in now?
03:18Yeah. I mean, look, everybody wants a 5 percent tenure. Right. That was the
03:21Well, I mean, and not the president, of course. Right. And not probably the treasury secretary
03:26either. Investors would like that number. And, you know, that was the cycle high
03:30and a couple of, you know, hundreds of a basis point out there from there. But I think what you
03:35would see something in the 475 range seems reasonable out there, because if you look back over
03:40the trading range for the last, let's say, since the administration came in, we're kind of mired in
03:45that middle of the range. Yeah, it's slightly higher than the middle of that range. But we're
03:50not that far off of it. Remember, when we entered this conflict with the very low end of the range,
03:54because the market was priced in significant cuts as well. So I think what you see right now is
03:58that it's been this reaction from the inflationary impulse. But also, what about the amount of money we
04:03have to finance this war as well? And that's something that hasn't really been discussed much.
04:07So rewind the clock to before this conflict, or when we've started this, you know, the CBO said
04:12it was a $1.05 trillion deficit for the first five months of fiscal, you know, 2026. So that's not
04:20a good pace to be on. And we're obviously burning more money right now as well. So I think some
04:24of
04:24that is leading into the Treasury price and behavior. And that's we talk about a little bit
04:27of clarity as well. And remember, we were at the low end of the range, we kind of gotten more
04:33to that
04:33middle to upper part of the range. I think you want to be more at the higher end of that
04:36range
04:37to deal with some of this uncertainty today. I do want to take a little bit of a pivot here
04:41and talk about the world of private credit, because you and I last spoke in Las Vegas in
04:46about mid-March. And in the weeks that have passed since, we've seen a ton of withdrawal requests,
04:51and we've seen a lot of asset managers basically choose to cap withdrawals at that 5% level.
04:56I don't actually want to talk about sort of the fundamentals necessarily of what we're seeing
05:01in some of these private credit portfolios, but just the human psychology aspect of it all. You
05:06think about this push to put retail in some of these private credit semi-liquid vehicles. Do you
05:12think that this will negatively impact fundraising efforts in years to come?
05:17I think it has to. I think that, you know, the thing about liquidity, it's like correlation.
05:21When we talk about portfolio construction, the correlations, it's low until you need it,
05:27right? And then everything gets correlated. It's the thing with liquidity. You don't think you want
05:30the liquidity, but then you realize, hey, Romaine's getting some liquidity. Maybe I should get a little
05:34bit as well. I want that. Right. And, you know, and so I think what you find there is the
05:38psychology
05:39does take hold. And then what happens is that what you find is a lot of investors too, they love
05:44a trade.
05:45They love private credit. What does private credit look like? It looks like bank loans.
05:48What's also in bank loans? There's CLOs. So they end up layering these risks and they own multiple
05:53exposures to it thinking they've achieved diversification because they have different
05:57line items in the portfolio. So the fear comes from the contagion that when you need liquidity,
06:02you come back to the public markets and sell some of that. And you haven't seen that to date.
06:06And I think that again, the nice thing about the private credit side is that ultimately it takes a long
06:11time to get your money back. So you have time to hopefully work that out. But you need a positive
06:16economic environment. You don't need the degradation and the overhang there. So I think
06:21what you have to watch is the reference point. And so if you're going to look at the public markets,
06:25what I've told clients is look at the triple C bank loan market. You can pull up those indices.
06:30You can pull them up on your Bloomberg and you can find that. And you'll see if those yield spreads.
06:33And I'm talking spreads, but we can just talk yields. But it's 2000. You're over 2000 basis points.
06:39That tells me there's stress in that market, right? That's what private credit somewhat looks
06:43like. Yeah, there's better quality in certain portfolios, but that's a barometer to think
06:47about. So if you continue to watch that and you see stress in that market, to me, that says there's
06:52more stress come in the other parts. So remember, they all reference one another, even though they're
06:55private. They're still kind of a cross point against them. Well, that's what I'm curious about. I mean,
06:59I think we can all look and see. And we know the stress is there. I guess the question
07:02is how widespread and more importantly, is there a risk of sort of broader market contagion,
07:07or is this going to be more idiosyncratic? Well, I mean, it feels idiosyncratic,
07:10but it always does until you get the contagion moment, unfortunately. I think the really the
07:14challenge with all of this is that when you look at the market, let's talk about high yield,
07:18right? That's a riskier part of credit in the corporate credit markets. But if you look at the
07:22double B index, the spreads are like 200 basis points that there's no stress there, right? You go in
07:27the single B, there's some, but if you want eight, nine, 10% yields, you're in junkier credit or
07:32hairier credit. There's a story behind every single one of those bonds. And so what you find
07:36is that the market has been very discerning on this. And that's why you take that triple C cohort
07:41and loans obviously has the most risk in it today. But ultimately, I think what you're seeing is that
07:45investors are shunning that riskier part of the world right now, because again, it's such a tail
07:51risk event that's very hard to really nail down what's going to be the bastion growth. And if we're
07:56talking about a slower growth environment and you're not getting rate cuts, right, then how do
08:01you get that economic certainty back that's going to help these companies? And so that's the headache
08:05that that market's facing today.
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