00:00In the worst case scenario, Winnie, how might this play out and what kind of contagion effect might there be,
00:06if any?
00:07I think that the number one thing to keep in mind in a worst case scenario, or at least a
00:11not great scenario, is the impact of the wealth effect on the U.S. consumer.
00:16We have seen tremendous appreciation of financial assets over the past few years, shaking off a lot of volatility, supported
00:23in part by all of the cash sitting in the front end of the curve, as Matt noted.
00:28And if we see a pullback on the equity side of things, then people are going to feel less flush
00:34with cash, especially that upper K of the consumer that has really been propelling the spending over the past few
00:41quarters.
00:42And if that were to actually start to manifest, then you start to see some of the pressure on margins,
00:48more job losses, and that gets you into a pretty nasty consumer-driven spiral,
00:53which I think is what people are really worried about when it comes to talking about a true recession.
01:00So it sounds like that might be big enough to kind of push the whole investment-grade market wider. Is
01:05that right?
01:06Yeah, definitely.
01:07That would be a bear case scenario in which IG spreads would widen out to levels that are starting to
01:13price in some downgrades, some fallen angel capital structures, higher probability of defaults,
01:19some recalibration of some of the very tight consumer names, and some of the more cyclical sectors that have benefited
01:25over the last few years.
01:27Matt, you told our James Crombie last month that you take the approach that AI could be a complete flop
01:33and you're still going to get paid.
01:35So how do you get paid back, especially on the very long-dated bonds issued by tech companies to fund
01:41all their AI ambitions, the AI credit, essentially?
01:43What specifically do you buy to ensure that you get paid?
01:47Yeah, so I was really speaking specifically to what we're doing, not just the market generically, because there will be
01:52obviously some losers.
01:53But what we're trying to do is address the structure of a lot of these one-off SPVs.
01:59So a lot of these companies are coming with the traditional vanilla unsecured, but they're also doing really unique special
02:04-purpose vehicle projects.
02:06And some are backed by power, some are backed by chips, some are backed by other areas of the AI
02:11infrastructure.
02:12And the structure of these individual credits is tremendous.
02:15And this is like a really great bond picker's market to be taking advantage of this.
02:18You're getting some high-yield names that have backing of Alphabet, and then at some point it will go away.
02:23But the reality is these are going to get upgraded and investment-graded in a lot of situations.
02:26So we really take kind of the what's-the-worst-case scenario that can happen because we don't get the
02:31upside that the equity investor gets.
02:33That's why you have to be a little more careful in the long-dated unsecured.
02:37But the secured portion of the market, particularly in the structured credit market as well, is really attractive right now.
02:42And it's just got to look through on a case-by-case basis.
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