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Ladies and gentlemen, welcome to
the Business Brew. 

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I am your host, Bill Brewster. 
Thank you, as always for giving 

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me your time. 
This episode features Blake 

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Haxton of Brandywine Global 
Asset Management. 

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Brandywine Global is a Franklin 
Templeton company. 

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This particular conversation 
focuses mostly on high yield. 

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Blake is an analyst that works 
with friend of the show John 

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Mcclane and friend in real life.
John and I do some man Hangouts 

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and catch up on the phone. 
So holler at me John, if you 

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want to. 
Anyway, I digress. 

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I quite enjoy talking to Blake. 
Blake covers a bunch of, I would

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say cyclical and basic materials
industries. 

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I think it's a perspective that 
is good to hear and one of the 

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questions that I've been asking 
myself is spreads are 

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compressed. 
The front end of the curve is 

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quite a bit higher than the back
end. 

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Why take duration? 
Why take risk at a time when 

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spreads appear compressed? 
Why high yield as opposed to 

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private credit? 
Why equity when private credit 

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is sort of promising or I 
shouldn't say promising. 

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But if you read KKRS report, the
forward projected returns are 

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quite nice. 
And talking to the guys at 

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Brandywine help me contextualize
the entire, at least in my mind,

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where the risks are and what may
be safer and where the risks 

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are. 
So anyway, I like these guys a 

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lot. 
I hope that this conversation 

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adds something to your life as 
well. 

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And as always, none of this is 
investment advice. 

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All of this is for entertainment
purposes only. 

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Consult a financial advisor 
before making investment 

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decisions. 
Consider your own unique 

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circumstances and do your own 
due diligence. 

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All right, on to the episode. 
All right, So ladies and 

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gentlemen, Blake Haxton from the
Brandywine Global Headquarters. 

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Blake, how you doing today? 
I'm. 

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Doing pretty well, Bill. 
Thanks for having me. 

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Yeah, you're welcome, man. 
Nice to chat with you the other 

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week and shout out to my man 
John McLean for making this 

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happen. 
So thanks again for dropping by.

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Do you want to? 
I don't know if people remember 

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the John McLean episode, but why
don't you give a little bit of a

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background on what you do? 
This or so, I'm a credit 

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research analyst here at 
Brandywine Global and 

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specifically I sit on the high 
yield team and work for John 

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McLean and Bill's Ox Jack 
Parker. 

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And we manage about 5 billion 
across from different 

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strategies, all high yield 
credit and they trade the 

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portfolio and manage the 
portfolio and I get to just sit 

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and do research all day. 
So just support them across the 

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structure. 
And it's just been, it's great 

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team, great place to be. 
That you were recently featured 

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in Barron's. 
That's got to be kind of cool. 

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Yeah, that was the 1st. 
That was pretty neat. 

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I didn't see that one coming. 
That was a lot of fun. 

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I mean, I'm sure like I saw, 
I've been subscribed to the The 

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Journal of Barron's for, you 
know, years and years and then 

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you could see yourself being 
that's for fun. 

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Yeah, that would be you Send 
your mom a copy. 

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Oh yeah. 
Yeah, there you go. 

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That's that's necessary. 
And what exactly do you cover 

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for those that don't know what 
Brandywine does and and what you

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do within it? 
Yeah, absolutely. 

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So I cover energy transports, 
some basic industries to home 

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building, aggregates, things 
like that. 

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And then I do some metals and 
mining as well. 

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We're a small team, so we kind 
of cover the waterfront between 

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all of us. 
My background actually started 

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out at a prior firm, same team 
but different firm as mostly an 

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equity analysts covering the 
same spaces. 

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And then a couple years ago came
over here at Brandywine with 

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John, Bill and Jack to do a full
time, but picked up a little bit

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more coverage. 
And that's really, those are 

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really my areas of focus though.
I would think that those 

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businesses on average are better
to lend to than to own the 

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equity side of, but there there 
are always exceptions to the 

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rule. 
There are, there are by and 

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large I would agree with you. 
There are certainly more 

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opportunities we think put, put 
capital to work. 

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There are only in the equity 
side you can pretty quickly 

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choose your favorite handful 
maybe. 

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And for the most part, I mean 
they're all cyclical businesses,

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they're all commodity type 
businesses for the most part. 

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So very few by and businesses in
those spaces, if you get a hold 

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of a few, they can work out 
really well. 

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But to your point, generally 
being as capital intensive as 

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they are and as difficult as 
they are, high yields a little 

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bit better of a place to be an 
analyst because they're just 

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more to do. 
I guess when we talked you had 

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mentioned that, that you thought
that like the general theme and 

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some of your coverage is, is 
sort of supply discipline and 

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and tightness. 
I don't mean to be putting words

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in your mouth, but is that an 
accurate representation of what 

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you said or did I make that up? 
No, I think that's a pretty good

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summary. 
I mean, whenever I say that, and

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to your point, I think I said 
that regarding housing or home 

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building, I should say in 
particular energy, certainly 

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mining to a certain extent, 
transports to a much lesser 

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extent. 
We're probably going through a 

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little bit of an overbuilding in
some of those industries. 

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But no, I think you're right. 
We like to say, you know, 

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strongly held opinions revised 
weekly around here because as 

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soon as you get comfortable with
management discipline and CapEx 

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discipline, somebody's always 
the first guy to to eat the 

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cookie, right? 
I don't know if you've heard 

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that at the Build Psychology 
experiment. 

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I'll give you one cookie now, 
but if you wait half an hour, 

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I'll give you 2. 
And the kids that wait the half 

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an hour always seem to do 
supposedly get better outcomes 

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in life. 
So somebody always goes after 

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it. 
So at the moment, looks like 

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things are holding in there 
pretty well, which of course 

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allows me to hold pricing. 
And in these industries, you 

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really make your money on price,
you don't make it on volume. 

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So you want to be involved when 
you're on a big price upswing 

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and supply is constrained 
because that's when you know 

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from a valuation perspective 
your revenue and your margin 

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generally go the same way. 
They're generally pretty 

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correlated. 
And if those if your revenue and

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your margin go the same way at 
the same time, you usually get 

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evaluation re rating in both 
directions. 

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So if you can participate on the
way up, I mean you've got 

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multiples on your return and 
then of course you'll get you 

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know multiples on the way down. 
So very much we want to be 

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paying. 
Attention to it. 

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But we're cautiously 
constructive on some of these 

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industries where as long as we 
can see that that discipline is 

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holding, we're happy to be 
involved and we like some of the

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opportunities we've got. 
Certainly it's not like it was 

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in 2020 where we had, but we 
felt like we had opportunities 

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all over the place. 
A lot of those have gone away. 

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But to that extent, we still 
feel like we're able to put 

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money to work for the attractive
incremental returns. 

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You mentioned that industrials 
are sort of like not as tight. 

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What would what would you say 
just broadly, what are you 

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covering in industrials? 
Sure. 

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So we've covered rails trucking 
and this is more transports, 

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it's a start. 
But rails, trucking, airlines 

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and then capital goods is a 
little bit more. 

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I would want to be a little more
specific there because aerospace

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manufacturing or aggregates or 
even even long life producer 

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goods are all going to be their 
own sort of have their own 

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flavor to them. 
I and again, I think we could be

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specific Rails for example, 
they're consolidated down. 

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Do I think the cats out of the 
bag? 

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Those are pretty good businesses
at this point, at least class 

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ones. 
Valuations I think would hint at

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that. 
We would agree gross margins are

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incredibly strong. 
Have them for a while. 

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So you really the debate there 
is sort of, you know, do you 

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want to own it at 17 times or 25
times and which one's worth it? 

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And it's credit to the 
management teams. 

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A lot of the capital allocation 
has been pretty strong. 

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Obviously Berkshire owns one of 
the question ones. 

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So that helps where any contrast
that with maybe I might say the 

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airlines where we obviously 
COVID just saying it was a 

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demand corrections and 
understanding. 

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But then they came back and they
think, you know, the securities 

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all did well on this revenge 
travel reopening trade, which 

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was true to some extent, was 
probably never as true as the 

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market thought there for a 
while. 

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And then now I think the 
industry, not only has it grown 

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at the same time they've gotten 
cost pressure on the labour and 

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and fuel side, but now they're 
having to figure out that 

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airline ticket pricing get a 
little bit of my head of head of

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myself. 
But ticket pricing is really 

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driven by patterns in 
seasonality and being able to 

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see, you know, down to the day 
and the hour. 

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What is this? 
What's the demand pattern going 

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to be? 
And after COVID, those patterns 

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clearly changed. 
I'm sure everyone listening, 

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both of us have probably, you 
know, work. 

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Our travel for work or in 
pleasure is not the same, 

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doesn't have the same cadence to
it as it did before COVID. 

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Whether it's not work called 
work, work remotely, you just 

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figured out that that last trip 
you have to take to see that 

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client can be done on Zoom. 
Whatever the case may be, our 

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patterns have changed, our 
habits have changed. 

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So I think airlines are working 
through that and there's more 

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than enough capacity out there 
right now to do that in terms of

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seating capacity and what those 
are just not good things for the

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airlines, a famously capital 
destructive industry. 

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And at the moment returns are 
for the legacies for the the big

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carriers. 
Big three are OK, they're not 

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great, but they're OK. 
And for the low cost carriers 

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they're pretty poor. 
So they are, we probably seen 

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not as much discipline on the 
capital side in spite of Airbus 

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and Boeing's best efforts to 
keep planes out of the market, 

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which yeah, has been pretty, 
pretty remarkable. 

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Yeah, the the low cost carriers,
what they got hit more from the 

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cost increases on the labor 
side, right? 

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Yeah. 
I think, I think the answer 

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there is they've always had a 
lower ability or the, I think 

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consensus has been they have a 
less ability to pass through 

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price to their consumers, which 
we would agree with. 

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That's certainly true. 
So on a percentage basis, yeah, 

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they're not going to be able to 
take pricing the way that the 

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legacies can if if prices rise. 
And we're seeing that. 

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Obviously, we've also gone 
through some labor shortages 

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where if you look at the last 
few races that pilots have 

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gotten, they're really pretty 
substantial. 

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I mean, that's yeah, I remember 
growing up being a pilot, 

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especially after 911 was kind of
a tough career to be in because 

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my mileage, mileage loan was 
down, overall compensation was 

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down, and now it's gotten tight 
again. 

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So pilots are going to get spot 
again the the absolute 

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elasticity on some of those 
tickets, it is pretty. 

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Low. 
So really the low cost carriers 

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and this is call it the 
allegiance, the spirits to some 

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extent SW, although they're sort
of in between their ability 

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really depends on how you can 
get the price low enough to 

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cause someone to take a trip 
they may not otherwise have in 

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the budget. 
And so they and that's just a 

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different buying decision. 
Then, you know, you or I have a 

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meeting and New York next week, 
and we got to be there no matter

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what. 
So it's just that that demand 

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profile has changed. 
And I think, excuse me, that 

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demand profile has remained the 
same, but the cost structure has

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changed. 
So they're in a bit of a tough 

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spot right now. 
Federal government, the policy 

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being what it is, JetBlue tries 
to buy Spirit, that gets 

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blocked. 
I think that leaves a real 

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question mark for the future of 
that business model, but we'll 

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see. 
Yeah. 

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It seems to me that like they 
could do a deal with Alaska and 

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then Spirit could do a deal with
Frontier, but I don't. 

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But maybe that's wrong. 
You know, it's an interesting 

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question. 
I think it's a hotly debated 

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one. 
I mean with Alaska barring 

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00:11:41,840 --> 00:11:46,520
Hawaiian that that one may well 
go through. 

230
00:11:46,640 --> 00:11:50,280
Meanwhile, I was in tough, tough
spot financially, although so 

231
00:11:50,280 --> 00:11:52,840
was spirit. 
So it didn't, you know, 

232
00:11:52,840 --> 00:11:54,680
apparently that didn't control 
in that case. 

233
00:11:55,160 --> 00:11:59,320
I think to your point, Frontier 
and Spirit make a lot of sense. 

234
00:11:59,800 --> 00:12:03,080
But to the extent that you still
end up with one fewer low cost 

235
00:12:03,760 --> 00:12:08,280
carrier, which seems to be what 
the judge focused on, then you 

236
00:12:08,280 --> 00:12:11,120
might still be in trouble. 
I think the industry that writ 

237
00:12:11,120 --> 00:12:13,640
large says you find the same 
aircraft type. 

238
00:12:13,640 --> 00:12:16,040
They're both, they're both 
Airbus airlines. 

239
00:12:16,360 --> 00:12:19,160
There's a lot of synergy there 
that would make a lot of sense. 

240
00:12:19,160 --> 00:12:21,360
You sort of end up with a 
counterbalance to Southwest, 

241
00:12:21,360 --> 00:12:25,320
basically an Airbus version of 
the Southwest just to the 

242
00:12:25,600 --> 00:12:27,360
market. 
Market can probably handle that 

243
00:12:27,360 --> 00:12:30,600
and everybody's got enough 
returns to go around, but we'll 

244
00:12:30,600 --> 00:12:32,680
see. 
I mean, at this point, you know,

245
00:12:32,760 --> 00:12:34,960
why buy a carrier that's 
threatening bankruptcy? 

246
00:12:35,920 --> 00:12:38,520
It's things have gotten so tough
that we're not asking those 

247
00:12:38,520 --> 00:12:41,000
questions. 
So we'll see. 

248
00:12:41,400 --> 00:12:43,320
Really what we're going to have 
to see is it is either a 

249
00:12:43,320 --> 00:12:46,920
dramatic increase in demand, 
which if you go back pre COVID 

250
00:12:46,920 --> 00:12:49,600
demand was pretty steady, sort 
of up and to the right. 

251
00:12:49,800 --> 00:12:51,760
I've talked to folks in the 
industry that they say the rule 

252
00:12:51,760 --> 00:12:56,080
of thumb is GDP plus one or two 
percent, so call it 3 or 4% a 

253
00:12:56,080 --> 00:12:58,120
year. 
And in any given market, you 

254
00:12:58,120 --> 00:13:00,840
grow, you'll grow 3 or 4% a 
year. 

255
00:13:01,080 --> 00:13:03,640
And if you keep ticket prices 
flat, it's about what you'll do.

256
00:13:04,160 --> 00:13:07,320
And that's, that's not heroic 
demand growth, but it's not bad 

257
00:13:07,320 --> 00:13:09,080
either. 
And as long as that's 

258
00:13:09,080 --> 00:13:11,800
consistent, then I think it's 
probably enough to go around. 

259
00:13:12,160 --> 00:13:15,360
But you know, we've got to get 
back to some sort of equilibrium

260
00:13:15,360 --> 00:13:19,200
here where you can justify your 
cost capital on an increasingly 

261
00:13:19,200 --> 00:13:23,120
expensive aircraft. 
So we'll see, again, cautiously 

262
00:13:23,120 --> 00:13:25,520
constructive on that, but we'll 
see a little less discipline. 

263
00:13:25,920 --> 00:13:29,720
Contrast that with, let's say, 
energy, where there's been a ton

264
00:13:29,720 --> 00:13:32,720
of capital flight out of the 
industry, either because we've 

265
00:13:32,720 --> 00:13:35,480
had three downturns in the last 
10 years and everyone's been 

266
00:13:35,480 --> 00:13:37,600
burned so badly that they just 
don't want to go there anymore, 

267
00:13:37,960 --> 00:13:42,000
or because ESG considerations 
have just taken oil and gas off 

268
00:13:42,000 --> 00:13:45,400
the table entirely. 
Then it, you know, it's very 

269
00:13:45,400 --> 00:13:48,640
hard to win these businesses in 
that sense, and there's not as 

270
00:13:48,640 --> 00:13:51,760
many dollars to me around. 
So nice place to be. 

271
00:13:51,960 --> 00:13:55,360
Like we say, I mean the last few
years, we got a big year in 2022

272
00:13:55,360 --> 00:13:59,920
on oil prices, great for energy,
bad for airlines, bad for oil 

273
00:13:59,920 --> 00:14:01,720
consumers. 
But it ended up plugging some 

274
00:14:01,720 --> 00:14:04,240
holes in a few of the balance 
sheets that were leftover that 

275
00:14:04,240 --> 00:14:07,880
still had some question marks. 
So that industry has been a 

276
00:14:07,880 --> 00:14:10,400
fantastic place to put capital 
to work since COVID. 

277
00:14:10,720 --> 00:14:13,640
So we want to be choosy and 
that's sort of how we like to 

278
00:14:13,640 --> 00:14:17,120
think about it is on a capital 
returns basis, where is the Cap 

279
00:14:17,120 --> 00:14:21,320
X going and price for the good 
of the service tends to 

280
00:14:21,320 --> 00:14:23,800
oscillate opposite the capital 
expenditure. 

281
00:14:24,280 --> 00:14:26,960
And we want to be on the right 
side of that. 

282
00:14:27,520 --> 00:14:29,400
Usually you have to be a little 
bit of a contrarian. 

283
00:14:29,680 --> 00:14:32,440
If we can be the high yield 
space does offer you those 

284
00:14:32,440 --> 00:14:34,760
opportunities. 
We like to be in the new issue 

285
00:14:34,760 --> 00:14:38,280
market if if businesses are are 
raising capital refinancing. 

286
00:14:38,280 --> 00:14:40,720
But we're also thrilled to be in
the secondary market. 

287
00:14:40,960 --> 00:14:43,360
A lot of our really good 
opportunities that come in the 

288
00:14:43,360 --> 00:14:45,400
secondary market where we 
haven't been involved until 

289
00:14:45,400 --> 00:14:48,360
something goes wrong and then we
can swoop in and scoop up some 

290
00:14:48,360 --> 00:14:52,000
bonds for a pretty significant 
discount. 

291
00:14:52,000 --> 00:14:54,920
And we want to be small enough 
that we can participate in small

292
00:14:54,920 --> 00:14:58,200
issues that get forgotten about.
So we don't, we don't see a lot 

293
00:14:58,200 --> 00:15:00,000
of those right now. 
Of course, I'm sure all your 

294
00:15:00,000 --> 00:15:02,360
listeners will know spreads are 
tight relative to where they 

295
00:15:02,360 --> 00:15:04,560
have been. 
Total returns are still pretty 

296
00:15:04,560 --> 00:15:08,560
good because the, you know, Fed 
treasuries are still offering 

297
00:15:08,560 --> 00:15:10,280
some actual yield for the first 
time. 

298
00:15:10,280 --> 00:15:13,440
In in many years. 
So that the high yield index is 

299
00:15:13,440 --> 00:15:16,360
somewhere around 8% yield, the 
worst you're all in right now. 

300
00:15:16,360 --> 00:15:18,080
Just it's probably not a bad 
return. 

301
00:15:18,480 --> 00:15:21,840
But again, some of that because 
a lot of these credits have the 

302
00:15:21,840 --> 00:15:24,520
really lousy credits have 
migrated into the private space 

303
00:15:25,000 --> 00:15:27,440
and some of the larger high 
yield credits have been 

304
00:15:27,440 --> 00:15:30,240
upgraded. 
So overall our space is probably

305
00:15:30,240 --> 00:15:33,240
a little higher quality than 
it's been for several years and 

306
00:15:33,240 --> 00:15:35,920
and that probably explains to 
some extent some of that that 

307
00:15:35,920 --> 00:15:39,360
spread tightening. 
I didn't realize that the high 

308
00:15:39,360 --> 00:15:44,160
yield index was the total return
projection was eight that that 

309
00:15:44,160 --> 00:15:47,440
seems pretty solid. 
Yeah. 

310
00:15:47,440 --> 00:15:48,880
I mean it's, it's not. 
I mean it. 

311
00:15:49,720 --> 00:15:53,720
What's the duration on that? 
I want to say about three 3 1/2.

312
00:15:54,120 --> 00:15:55,680
OK. 
I know most of the credits are 

313
00:15:55,680 --> 00:15:58,040
in that three to 4-5 year range 
right now. 

314
00:15:58,040 --> 00:16:01,040
I mean it's an inherently short 
duration asset class because of 

315
00:16:01,040 --> 00:16:03,880
course businesses just generally
don't want to learn for that 

316
00:16:03,880 --> 00:16:06,160
long to below investment grade 
businesses. 

317
00:16:06,640 --> 00:16:09,160
We like being in the front end 
with the shape of the curve 

318
00:16:09,160 --> 00:16:12,560
being what it is. 
We're very content to sit in 1-2

319
00:16:12,560 --> 00:16:14,760
and three-year credits where 
businesses we understand. 

320
00:16:15,240 --> 00:16:19,000
And to your point, when you're 
all in yields at 8 and OK, so 

321
00:16:19,000 --> 00:16:23,400
let's just let's say that, you 
know, you're, you're all in 

322
00:16:23,400 --> 00:16:26,280
yield for it being higher up 
capital structures, you know, 

323
00:16:26,400 --> 00:16:29,480
7-8, nine in a lot of these 
credit cases, if you look at the

324
00:16:29,480 --> 00:16:31,400
shape of the curve right now, 
you're sort of getting paid to 

325
00:16:31,400 --> 00:16:35,040
be in the front end on yields. 
And our space is inherently 

326
00:16:35,040 --> 00:16:37,600
short duration asset class for 
the most part to begin with. 

327
00:16:38,280 --> 00:16:41,840
And if you look at like a yield 
the worst on let's say the 

328
00:16:41,840 --> 00:16:45,200
benchmark and high yield, it's 
right around 8 at the moment. 

329
00:16:45,600 --> 00:16:48,720
Well, you're the earnings yield 
on the S&P is around 4. 

330
00:16:49,040 --> 00:16:53,080
Now granted, again, I was in 
equity and less than it's a 

331
00:16:53,080 --> 00:16:54,760
begin with. 
I guess those are not apples to 

332
00:16:54,760 --> 00:16:57,960
apples and funny people can 
illicit why that is. 

333
00:16:58,440 --> 00:17:00,280
But it's a decent place to 
start. 

334
00:17:00,760 --> 00:17:04,760
And a 4% earnings yield on on 
equities compared with somewhere

335
00:17:04,760 --> 00:17:09,040
around 8 on high yield, I think 
you'll feel pretty decent about.

336
00:17:09,440 --> 00:17:12,680
I think the counter argument for
that is a spreads are not wide 

337
00:17:12,680 --> 00:17:15,079
and a lot of allocators like to 
see spreads blow out before they

338
00:17:15,079 --> 00:17:18,599
put capital to work. 
And by spread blowout we were at

339
00:17:18,599 --> 00:17:23,440
around 3:50 right now that might
be 5 or 600 is where you is 

340
00:17:23,960 --> 00:17:27,000
where a capital allocator 
sometimes want to say hey, I 

341
00:17:27,040 --> 00:17:30,680
want to shift into the asset 
class, but again that. 

342
00:17:30,880 --> 00:17:33,760
Then to your point, you got to 
tell me what goes on with rates.

343
00:17:34,440 --> 00:17:37,040
Well, that's exactly right. 
Where do you think that front 

344
00:17:37,040 --> 00:17:40,560
end ends up and where do you 
think that spreads can be? 

345
00:17:41,680 --> 00:17:43,760
We're still able to find a lot 
of credits that are played 

346
00:17:43,840 --> 00:17:47,720
trading below par, which is 
somewhere that we like. 

347
00:17:47,720 --> 00:17:50,560
This gives us a little bit of an
extra margin safety against our 

348
00:17:50,680 --> 00:17:53,920
against our lending, which is a 
nice place to be of course. 

349
00:17:54,120 --> 00:17:58,120
And like you say, you got to 
take the rates view out beyond 

350
00:17:58,120 --> 00:18:00,880
that. 
So from our perspective, we 

351
00:18:00,920 --> 00:18:04,560
don't, we don't think we have to
bet the farm on rates really one

352
00:18:04,560 --> 00:18:07,160
way or the other get a pretty 
decent all in return. 

353
00:18:07,200 --> 00:18:11,760
From here. 
And really as we say we're rates

354
00:18:11,760 --> 00:18:15,040
will impact us for sure, but 
we're more of a credit strategy,

355
00:18:15,040 --> 00:18:17,280
the name of the game process, 
get paid back well into 

356
00:18:17,280 --> 00:18:19,160
businesses that return to 
capital. 

357
00:18:19,920 --> 00:18:22,800
And if we do that well and 
consistently over time, we think

358
00:18:22,800 --> 00:18:24,440
we're going to be able to 
deliver a nice return. 

359
00:18:24,720 --> 00:18:27,000
There are some things in high 
yield that we have going for us.

360
00:18:27,000 --> 00:18:30,080
Anyway, I would say we as a. 
As an asset class. 

361
00:18:30,840 --> 00:18:32,640
It's hard. 
With you that's really not 

362
00:18:32,920 --> 00:18:34,800
terribly efficient even to this 
point. 

363
00:18:35,120 --> 00:18:38,400
I want and I want to say it's 
something in the ballpark of 75%

364
00:18:38,400 --> 00:18:40,800
of actually managed high yield 
strategies beat the benchmark. 

365
00:18:41,680 --> 00:18:43,720
Oh, interesting. 
Yeah, which I'm sure a lot of 

366
00:18:43,720 --> 00:18:47,280
you listeners can come. 
Is it as an equity guy at some 

367
00:18:47,280 --> 00:18:50,640
point in life that's got to be 
shocking where active 

368
00:18:50,640 --> 00:18:53,240
management's a dirty word. 
But the fact of the matter is, 

369
00:18:53,600 --> 00:18:56,680
as I say, not that efficient. 
It's not very liquid. 

370
00:18:57,280 --> 00:18:59,800
And there's this, there's this 
odd function of some of these 

371
00:18:59,800 --> 00:19:02,440
indexes where you know, if 
you're a market weighted index 

372
00:19:02,440 --> 00:19:05,880
in equities, especially 
recently, you've ended up just 

373
00:19:05,880 --> 00:19:07,720
owning more and more of the best
businesses. 

374
00:19:08,560 --> 00:19:12,640
Whereas in high yield, if, if 
you are again you're sort of 

375
00:19:12,720 --> 00:19:15,200
market weighted in terms of how 
much debt you have outstanding, 

376
00:19:15,560 --> 00:19:17,560
there's a chance you might end 
up owning more and more of the 

377
00:19:17,560 --> 00:19:20,400
worst businesses of the most 
lever companies. 

378
00:19:20,760 --> 00:19:23,360
And if you can avoid a few of 
those, you end up really looking

379
00:19:23,360 --> 00:19:25,720
a lot different from the 
benchmark just by virtue of the 

380
00:19:25,720 --> 00:19:29,560
fact that of how the the. 
Constituents. 

381
00:19:29,560 --> 00:19:31,000
Yeah, the. 
Benchmarks constructed. 

382
00:19:31,280 --> 00:19:34,800
Yeah, exactly. 
So active share usually ends up 

383
00:19:34,800 --> 00:19:38,560
being pretty high across the 
board because, you know, for 

384
00:19:38,560 --> 00:19:40,320
that exact reason. 
And then we've also been 

385
00:19:40,320 --> 00:19:42,320
fortunate enough to find some 
very small issues. 

386
00:19:42,320 --> 00:19:46,600
And then by small, I mean three 
$400 million based value bonds 

387
00:19:47,000 --> 00:19:50,520
that we're big enough to take a 
pretty substantial chunk of, but

388
00:19:50,520 --> 00:19:53,360
we're not so big they can't 
won't have an impact on the 

389
00:19:53,360 --> 00:19:57,040
portfolio returns. 
And that's right beside who want

390
00:19:57,040 --> 00:19:58,960
to be. 
We will, we will not grow to the

391
00:19:58,960 --> 00:20:01,000
sky here. 
We want to make sure that we're 

392
00:20:01,000 --> 00:20:03,760
managing assets first and 
foremost for clients and for 

393
00:20:03,760 --> 00:20:05,360
ourselves. 
We don't have a lot of running 

394
00:20:05,360 --> 00:20:07,400
money in these strategies. 
So we want the numbers to be 

395
00:20:07,400 --> 00:20:09,960
good and we want to be able to 
take advantage of those 

396
00:20:09,960 --> 00:20:12,840
opportunities and we still able 
to find those even in these 

397
00:20:12,840 --> 00:20:14,960
tight tighter. 
Spread environments. 

398
00:20:15,520 --> 00:20:17,400
So we like being, we like being 
in that space. 

399
00:20:17,480 --> 00:20:21,840
I remember when I talked to John
and since then it seems to me 

400
00:20:22,280 --> 00:20:27,400
that at least the pitch in high 
yield is that there is the 

401
00:20:27,400 --> 00:20:34,600
opportunity to invest in 
companies like Post, maybe like 

402
00:20:34,600 --> 00:20:37,720
Charter where you have these 
companies that maybe like 

403
00:20:37,720 --> 00:20:40,960
shorted debt at the right time, 
but are actually pretty solid 

404
00:20:40,960 --> 00:20:44,400
companies. 
So they, they might screen over 

405
00:20:44,400 --> 00:20:47,800
levered, but there's a few 
different, you know, levers that

406
00:20:47,800 --> 00:20:50,280
they can pull. 
Now, I, I would assume that 

407
00:20:50,280 --> 00:20:54,040
mining and and oil is not 
exactly the same thing, but I'm 

408
00:20:54,040 --> 00:20:57,680
curious what your views are on 
the quality of the of the 

409
00:20:57,680 --> 00:21:03,800
underlying high yield market as 
opposed to maybe the connotation

410
00:21:03,800 --> 00:21:07,200
that high yield might bring. 
Yeah, sure. 

411
00:21:07,640 --> 00:21:11,640
That's a great question. 
And to answer your question, I 

412
00:21:11,640 --> 00:21:15,960
do think that for anyone that's 
been been a capital allocator 

413
00:21:15,960 --> 00:21:19,160
choosing between asset classes 
and between security types for a

414
00:21:19,160 --> 00:21:22,160
while now, I do think high yield
per Southeast has gotten a 

415
00:21:22,160 --> 00:21:24,480
little bit better. 
One of the big functions of that

416
00:21:24,480 --> 00:21:28,120
is really since the GFC, we've 
seen private credit come on and 

417
00:21:28,120 --> 00:21:32,680
become go from maybe not a niche
asset class, but to be a huge 

418
00:21:32,680 --> 00:21:35,560
player in the market and that's 
had a few impacts. 

419
00:21:35,560 --> 00:21:40,560
One is that a lot of the 
probably harder credits to lend 

420
00:21:40,560 --> 00:21:43,760
to really we've seen going to 
that space and there are a lot 

421
00:21:43,760 --> 00:21:46,120
of reasons for that. 
But with the growth of private 

422
00:21:46,120 --> 00:21:51,280
credit, a lot of the sketchier 
over lever, you know, more 

423
00:21:51,280 --> 00:21:53,880
difficult situations have 
actually ended up out of the 

424
00:21:53,880 --> 00:21:56,280
public markets. 
So we just don't see them 

425
00:21:56,280 --> 00:21:58,240
anymore. 
And I think that's probably been

426
00:21:58,240 --> 00:22:00,600
the, if I put my finger on it, 
that'd be the biggest driver. 

427
00:22:01,040 --> 00:22:03,520
And I say that with some 
hesitation only because granted,

428
00:22:03,600 --> 00:22:06,080
they're they're now in private 
credit and you don't always have

429
00:22:06,080 --> 00:22:07,680
the information to make those 
claims. 

430
00:22:08,280 --> 00:22:11,360
It's been pointed out recently 
that the faults have not exactly

431
00:22:11,360 --> 00:22:14,040
ripped and they're not, you 
know, if you just went by the 

432
00:22:14,040 --> 00:22:16,600
default numbers, things aren't 
so bad. 

433
00:22:17,200 --> 00:22:19,160
Things look OK. 
That's probably about right. 

434
00:22:19,360 --> 00:22:21,760
But on the other hand, you know,
in a lot of private credit 

435
00:22:21,760 --> 00:22:24,760
scenarios, you don't really ever
have to default depending on who

436
00:22:24,760 --> 00:22:26,360
the sponsor is or who the lender
is. 

437
00:22:26,640 --> 00:22:28,960
You can renegotiate, you can 
amend it stand. 

438
00:22:28,960 --> 00:22:32,560
You can amend and pretend as, 
as, as may be the case. 

439
00:22:32,960 --> 00:22:36,640
So the capital structures 
themselves and the way they are 

440
00:22:36,640 --> 00:22:39,320
constituted from from capital 
markets have changed a little 

441
00:22:39,320 --> 00:22:42,440
bit. 
So yeah, we do think that the 

442
00:22:42,520 --> 00:22:45,040
underlying quality, a lot of 
these businesses in high yield 

443
00:22:45,040 --> 00:22:48,720
space per SE for public bonds 
has probably migrated up and 

444
00:22:48,720 --> 00:22:50,880
improved. 
And we're able to lend to 

445
00:22:50,880 --> 00:22:54,680
businesses that are, you know, 
like you said, maybe not maybe 

446
00:22:55,160 --> 00:22:57,480
these maybe aren't great 
companies, but they're really 

447
00:22:57,480 --> 00:22:59,960
pretty solid and they're 
companies where you've got real 

448
00:22:59,960 --> 00:23:03,400
asset values behind them as you 
say, you got assets in the 

449
00:23:03,400 --> 00:23:05,920
ground that. 
Are. 

450
00:23:06,000 --> 00:23:08,360
Are so essential in the 
industries they serve. 

451
00:23:08,680 --> 00:23:10,280
I. 
Give you an example, and this is

452
00:23:10,400 --> 00:23:14,360
an area I'm more familiar with, 
but sort of parallels your the 

453
00:23:14,360 --> 00:23:17,360
media examples in the cable 
providers a little bit is an 

454
00:23:17,360 --> 00:23:20,760
area where we historically 
didn't make as many loans was in

455
00:23:20,760 --> 00:23:22,840
the midstream space oil and gas 
pipelines. 

456
00:23:23,360 --> 00:23:26,440
And reason for that was we could
get better risk returns. 

457
00:23:27,000 --> 00:23:30,280
The risk return offers, I should
say, in the oil fields of the 

458
00:23:30,280 --> 00:23:31,760
gas fields they were attached 
to. 

459
00:23:32,320 --> 00:23:34,840
Basically you had these 
pipelines that were serving 

460
00:23:34,840 --> 00:23:37,880
these these oil fields. 
And if you looked at the yield 

461
00:23:37,880 --> 00:23:40,920
and the leverage and pipeline, 
it wasn't quite as attractive 

462
00:23:40,920 --> 00:23:43,520
from the return perspective as 
the actual oil producer they 

463
00:23:43,520 --> 00:23:45,920
were attached to. 
And we thought, well, if the oil

464
00:23:45,920 --> 00:23:48,640
producer goes poorly, then 
owning a bridge to nowhere 

465
00:23:48,640 --> 00:23:51,520
doesn't really do any good. 
And for a while pipelines 

466
00:23:51,520 --> 00:23:53,400
reviewed as oh, this is a 
fiction shovels way to play oil 

467
00:23:53,400 --> 00:23:55,680
and gas, we didn't think they 
weren't necessarily priced that 

468
00:23:55,680 --> 00:23:57,160
way. 
So we for the most part just 

469
00:23:57,160 --> 00:23:59,040
went went to the actual 
producer. 

470
00:23:59,960 --> 00:24:02,280
That has sort of shifted 
recently where we've seen so 

471
00:24:02,280 --> 00:24:05,480
much consolidation on the 
production side that pipelines 

472
00:24:05,480 --> 00:24:09,080
now although they look a little 
bit more levered and certainly 

473
00:24:09,080 --> 00:24:11,120
the balance sheets are more 
lever to just measure let's say 

474
00:24:12,040 --> 00:24:14,840
EV to EBITDA to keep it simple. 
There are several terms more 

475
00:24:14,840 --> 00:24:17,480
leverage, but they've also got 
fixed contracts with the 

476
00:24:17,480 --> 00:24:20,320
producers and the producers are 
healthy enough that we're not 

477
00:24:20,320 --> 00:24:22,400
terribly concerned they're going
to meet those commitments. 

478
00:24:22,800 --> 00:24:26,120
So, yeah, right. 
So to your point, so you were. 

479
00:24:26,120 --> 00:24:28,640
Initially a little bit worried 
about what counterparty risk or 

480
00:24:28,640 --> 00:24:31,560
something like that, like if 
they don't deliver then who you 

481
00:24:31,560 --> 00:24:32,520
going to collect? 
From. 

482
00:24:32,560 --> 00:24:35,000
Exactly. 
And, and for us it was more of 

483
00:24:35,000 --> 00:24:37,600
a, it was a little bit of a 
counterparty risk question. 

484
00:24:37,600 --> 00:24:40,760
It was also just the outright 
return question because for a 

485
00:24:40,760 --> 00:24:43,600
long time, you know, in a zero 
interest rate environment, you 

486
00:24:43,600 --> 00:24:46,760
know, some of these pipelines, 
you know, the MLPS famously you 

487
00:24:46,760 --> 00:24:50,320
could offer a, you could offer a
mid single to high single digit 

488
00:24:50,320 --> 00:24:53,160
type return. 
Then that was a very popular 

489
00:24:53,160 --> 00:24:56,600
investment for a long time. 
And, and which is 

490
00:24:56,600 --> 00:24:59,800
understandable, I'm not saying 
it's wrong, but it also created 

491
00:24:59,800 --> 00:25:01,960
conditions where it was just a 
little too tight, where we could

492
00:25:01,960 --> 00:25:04,600
get low teens in the oil 
producer and we had a view on 

493
00:25:04,600 --> 00:25:07,680
that producer and that price. 
So our relative basis, we 

494
00:25:07,680 --> 00:25:10,240
thought they were a little bit, 
a little bit too expensive for 

495
00:25:10,240 --> 00:25:12,160
us. 
And again, now let's say the 

496
00:25:12,160 --> 00:25:15,480
producers have done so well that
those returns have come back and

497
00:25:15,480 --> 00:25:17,320
we've seen that dynamic shift a 
little bit. 

498
00:25:17,640 --> 00:25:20,200
And if you look. 
Under the hood, we still think 

499
00:25:20,200 --> 00:25:21,560
those are pretty high quality 
businesses. 

500
00:25:21,560 --> 00:25:25,400
We always would have said they 
were decent businesses but for 

501
00:25:25,400 --> 00:25:26,400
the returns. 
That are which ones? 

502
00:25:26,400 --> 00:25:28,800
The producers or the? 
I'm sorry the pipe, I'm sorry 

503
00:25:28,800 --> 00:25:30,320
the pipelines. 
Yeah, yeah, that. 

504
00:25:30,320 --> 00:25:32,840
What you might call 
infrastructure producers, and I 

505
00:25:32,840 --> 00:25:35,600
have AI, have an. 
Aversion typically take or pay 

506
00:25:35,600 --> 00:25:39,240
right and you've got some fixed 
price or some escalators 

507
00:25:39,240 --> 00:25:41,880
adjusted for inflation. 
That that's exactly right. 

508
00:25:41,880 --> 00:25:44,920
Least among the larger ones. 
That's it. 

509
00:25:45,120 --> 00:25:48,320
And especially in this 
environment you really are the 

510
00:25:48,320 --> 00:25:49,880
low cost provider of your 
service. 

511
00:25:49,880 --> 00:25:51,960
If you want to transport 
liquids, then. 

512
00:25:52,360 --> 00:25:54,200
Having a pipeline. 
In the ground is going to be the

513
00:25:54,200 --> 00:25:56,160
best way to do it. 
You know, you're competing with 

514
00:25:56,160 --> 00:26:00,200
truck and Navy rail at this 
point and you're going to win on

515
00:26:00,200 --> 00:26:02,520
a on a unit basis, you're going 
to win every time. 

516
00:26:03,040 --> 00:26:05,480
One way you then you had to 
watch out for was how much 

517
00:26:05,480 --> 00:26:07,120
development CapEx you're going 
to put in the ground. 

518
00:26:07,120 --> 00:26:09,440
How many more pipes did you have
to put in to sustain your 

519
00:26:09,640 --> 00:26:12,920
production and meet your 
commitments With the investment 

520
00:26:12,920 --> 00:26:15,760
case in the US being what it is,
The system is so built out at 

521
00:26:15,760 --> 00:26:19,120
this point that I don't want to 
say everyone's in cash flow 

522
00:26:19,120 --> 00:26:22,840
harvest mode, but it's sort of 
shifted that way from hey, let's

523
00:26:22,840 --> 00:26:27,320
explore and put new, new lines 
in to hey, let's sit tight and 

524
00:26:27,320 --> 00:26:31,000
be conservative and just try and
manage what we've gotten around.

525
00:26:31,920 --> 00:26:33,680
That's the situation. 
Warm up more comfortable with. 

526
00:26:33,680 --> 00:26:37,000
Of course we don't think there's
a as much risk you get out over 

527
00:26:37,000 --> 00:26:40,240
your skis doing a lot and a lot 
of these fields from especially 

528
00:26:40,240 --> 00:26:44,000
in the basins we probably all 
heard of the Permian, the 

529
00:26:44,000 --> 00:26:47,520
Bakken, the Eagle fur Yeah, 
they're not growing the way they

530
00:26:47,520 --> 00:26:49,640
used to, but they're going to be
around for a long time. 

531
00:26:49,960 --> 00:26:52,040
And like you say, our low 
duration asset class, we're 

532
00:26:52,040 --> 00:26:56,760
making 3-4 or five year loans. 
We don't have a problem with 

533
00:26:56,760 --> 00:27:00,120
these fields declining a lot 
faster than that to to actually 

534
00:27:00,120 --> 00:27:03,080
make a commitment. 
So yeah, pretty, pretty 

535
00:27:03,080 --> 00:27:05,640
attractive space to be in, all 
things considered, right now. 

536
00:27:07,840 --> 00:27:10,240
Yeah, Yeah. 
So when you have a three-year 

537
00:27:10,240 --> 00:27:14,440
duration, I mean, your primary 
source of repayment is, is refi,

538
00:27:14,440 --> 00:27:17,280
right, Typically, and I mean, I 
guess it's cash flow from 

539
00:27:17,280 --> 00:27:19,480
operations, but you're for all 
intents. 

540
00:27:19,480 --> 00:27:21,040
And purposes you're. 
Getting refined out. 

541
00:27:21,480 --> 00:27:23,160
Yeah, that. 
That that's the case we're 

542
00:27:23,160 --> 00:27:27,200
seeing, we are seeing some, some
indications that you know, hey, 

543
00:27:27,200 --> 00:27:30,120
we're going to get you'll get 
taken out out of cash flow. 

544
00:27:30,480 --> 00:27:34,160
A number of Enps we've went to 
are below one turn. 

545
00:27:34,440 --> 00:27:39,560
So your debt profile your is is 
below next 12 months EBITDA and 

546
00:27:39,560 --> 00:27:41,240
there's still a high yield 
business. 

547
00:27:41,440 --> 00:27:43,760
So which is which is pretty 
shocking when you really think 

548
00:27:43,760 --> 00:27:45,680
about it or I should say net 
debt. 

549
00:27:45,680 --> 00:27:47,160
I mean a lot of these companies 
have a lot of cash in the 

550
00:27:47,160 --> 00:27:49,600
balance sheet and they're 
generating cash from OPS. 

551
00:27:50,160 --> 00:27:52,280
Maybe they'll roll it, maybe 
they won't. 

552
00:27:52,280 --> 00:27:54,880
A lot of that at this point has 
to do with the duration of the 

553
00:27:54,880 --> 00:27:57,200
asset itself. 
So when we talk about duration 

554
00:27:57,200 --> 00:28:00,000
of credit, obviously that has to
do with the time the cash flows 

555
00:28:00,000 --> 00:28:05,080
on the on the loans, but with 
oil and gas particularly has to 

556
00:28:05,080 --> 00:28:07,440
do with the payback period in 
the fuel itself. 

557
00:28:07,840 --> 00:28:12,040
Like give you 2 extreme examples
to maybe frame this up. 

558
00:28:12,320 --> 00:28:16,240
When you frack an oil well, the 
rate which oil comes back out of

559
00:28:16,240 --> 00:28:20,320
the well will decline in some 
cases as much as 50% from year 

560
00:28:20,320 --> 00:28:23,200
one to year two. 
And then it it trails off. 

561
00:28:23,360 --> 00:28:27,120
Is there, it's a diminishing 
return where the that rate of 

562
00:28:27,120 --> 00:28:32,560
deceleration slows down over 
time and then after 2025, thirty

563
00:28:32,560 --> 00:28:34,880
years, there's no more oil 
coming out and you plug the well

564
00:28:34,880 --> 00:28:37,600
and that's it. 
But if you look at the math 

565
00:28:38,120 --> 00:28:41,360
roughly and again it depends on 
the field, that depends on the 

566
00:28:41,360 --> 00:28:44,920
exact technique used, but you 
might get half of all the oil 

567
00:28:44,920 --> 00:28:47,680
you ever get out of that well in
the first 12 months after you 

568
00:28:47,680 --> 00:28:50,040
frack. 
So timing is incredibly 

569
00:28:50,040 --> 00:28:52,320
important. 
Whereas let's say we go up to 

570
00:28:52,320 --> 00:28:54,680
Canada, which is also a place we
haven't been terribly active 

571
00:28:54,680 --> 00:28:56,800
historically, but it put a lot 
more money to work recently 

572
00:28:57,160 --> 00:29:02,080
where you have like an oil sands
type field where no kidding, 

573
00:29:02,080 --> 00:29:03,800
they have 100 years worth of 
inventory. 

574
00:29:04,160 --> 00:29:06,960
They could produce oil at the 
rate they're producing it right 

575
00:29:06,960 --> 00:29:10,440
now for a century and nothing 
will change. 

576
00:29:11,240 --> 00:29:13,040
And. 
You know what I missed about 

577
00:29:13,040 --> 00:29:16,120
that? 
I, I asked a buddy who was in 

578
00:29:16,120 --> 00:29:18,800
the Permian and I asked him, I 
was like, what, what's the deal 

579
00:29:18,800 --> 00:29:22,880
with the Canadian assets? 
And he, he was like, they suck. 

580
00:29:23,280 --> 00:29:27,120
And I, I didn't ask him the 
right follow up, but I think 

581
00:29:27,120 --> 00:29:29,280
that the reason that he said 
that they're not very good 

582
00:29:29,280 --> 00:29:32,920
assets is if you look at like 
the returns on capital, they're 

583
00:29:32,920 --> 00:29:35,960
not great, but a lot of capitals
already sunk. 

584
00:29:37,840 --> 00:29:40,280
And, and maybe I'm wrong, right?
But like, I asked somebody about

585
00:29:40,280 --> 00:29:43,680
CNQI was like, can you explain 
to me why so many people love 

586
00:29:43,680 --> 00:29:47,080
CNQ and they don't, you know, 
treat it like they do 

587
00:29:47,080 --> 00:29:49,000
Occidental? 
Because when I look at the 

588
00:29:49,000 --> 00:29:51,440
returns on assets on this 
business, they're like, not 

589
00:29:51,440 --> 00:29:54,600
particularly they don't, they 
don't pop off the page. 

590
00:29:54,600 --> 00:29:56,640
And he's like, you're not, 
you're not thinking about the 

591
00:29:56,640 --> 00:30:00,040
incrementals, the capitals 
already sunk and the reserves 

592
00:30:00,040 --> 00:30:02,840
are super long. 
And it's just not going to take 

593
00:30:02,840 --> 00:30:05,240
a whole lot of incremental 
capital to get the cash out of 

594
00:30:05,240 --> 00:30:08,560
the, you know, to get cash flow 
out of your reserves. 

595
00:30:09,160 --> 00:30:10,840
Well, that's right. 
And there's a lot. 

596
00:30:10,840 --> 00:30:13,320
So there's a lot that goes into 
that right now in terms of that 

597
00:30:13,320 --> 00:30:15,360
debate. 
So a couple things real quick 

598
00:30:15,360 --> 00:30:18,200
about Canada 1. 
Historically and even in recent 

599
00:30:18,200 --> 00:30:20,320
history, the differential has 
been a killer. 

600
00:30:20,320 --> 00:30:22,680
The referential just being the 
price you get from making it in 

601
00:30:22,680 --> 00:30:24,360
Canada and you got to deliver it
to the market. 

602
00:30:24,960 --> 00:30:26,560
Yeah, because you can't ship it 
right? 

603
00:30:26,560 --> 00:30:28,160
Exactly. 
It's been very hard to get it 

604
00:30:28,160 --> 00:30:29,400
out of the middle of the 
country. 

605
00:30:29,600 --> 00:30:32,160
A lot of this is in Alberta, a 
lot of it's very far north 

606
00:30:32,360 --> 00:30:34,240
consultant Calgary. 
But you got to get it to the 

607
00:30:34,240 --> 00:30:37,440
Hoover or you got to get it into
the US down to Oklahoma, which 

608
00:30:37,440 --> 00:30:40,400
is where the Wti's price or 
really the Gulf Coast, which is 

609
00:30:40,400 --> 00:30:44,600
where we actually look. 
So that differential has been 

610
00:30:44,600 --> 00:30:49,040
anywhere between 10 up to 25 
bucks when it gets really ugly. 

611
00:30:49,360 --> 00:30:52,800
So you can imagine, I mean you 
know, if oil is 70, which today 

612
00:30:52,800 --> 00:30:55,680
it's around 80, but I mean over 
the last few. 

613
00:30:55,680 --> 00:30:57,960
Years in Canada, you got to be 
at 45. 

614
00:30:57,960 --> 00:31:00,880
Exactly. 
So if you, if you're standing at

615
00:31:00,880 --> 00:31:03,520
the wellhead, so to speak, and 
you asked how much money you can

616
00:31:03,520 --> 00:31:06,240
get oil out of ground for, it's 
a really low number, but then 

617
00:31:06,240 --> 00:31:07,520
you've got all these costs on 
top. 

618
00:31:08,320 --> 00:31:10,000
That's been a problem 
historically. 

619
00:31:10,280 --> 00:31:14,320
They just opened a new pipeline 
into Vancouver more or less that

620
00:31:14,320 --> 00:31:17,160
helps alleviate some of that. 
It does two things. 

621
00:31:17,160 --> 00:31:19,960
One, it opens up 600,000 barrels
a day at export capacity. 

622
00:31:19,960 --> 00:31:21,920
So that makes a big difference. 
It's called the Trans Mountain 

623
00:31:21,920 --> 00:31:24,840
expansion. 
The other thing it does is it 

624
00:31:24,840 --> 00:31:27,600
just makes production more 
predictable in the sense that 

625
00:31:27,600 --> 00:31:31,040
now you've got producers that 
aren't going to be hoping this 

626
00:31:31,040 --> 00:31:34,840
pipeline opens in time and maybe
risking a glut in the middle of 

627
00:31:34,840 --> 00:31:37,040
country. 
And so we think that probably 

628
00:31:37,080 --> 00:31:38,840
tamps down some of the 
volatility of those 

629
00:31:38,840 --> 00:31:42,280
differentials as well. 
So that's, that's one step in 

630
00:31:42,280 --> 00:31:47,280
the right direction. 2 is that I
think this, and this gets to a 

631
00:31:47,280 --> 00:31:50,880
much larger debate, is how long 
is the world going to need oil 

632
00:31:50,880 --> 00:31:53,640
for? 
And once your thought says, as 

633
00:31:53,720 --> 00:31:56,680
you, as I'm sure you've seen, 
there are some major forecasting

634
00:31:56,680 --> 00:31:59,240
bodies that say, well, we're at 
peak oil right now. 

635
00:32:00,280 --> 00:32:03,760
They all have yet to be right, 
but that's what they said. 

636
00:32:03,840 --> 00:32:07,520
My view and we chatted about 
this last week, if you look at 

637
00:32:07,520 --> 00:32:10,680
the energy use and you can 
define that as calories, you can

638
00:32:10,680 --> 00:32:14,680
define it as joules, you can 
find it as barrels of oil use in

639
00:32:14,680 --> 00:32:17,040
the developed Western world 
versus everywhere else in the 

640
00:32:17,040 --> 00:32:21,120
world. 
I mean, the energy distribution 

641
00:32:21,120 --> 00:32:25,760
is so uneven, it's unbelievable.
And what what's going to have to

642
00:32:25,760 --> 00:32:28,760
happen is you're going to need 
an energy source that 

643
00:32:28,760 --> 00:32:31,520
essentially helps close that gap
between the developing markets 

644
00:32:31,520 --> 00:32:34,280
in the developed world or the 
developed world has to tell the 

645
00:32:34,280 --> 00:32:36,000
developing world. 
To that. 

646
00:32:36,440 --> 00:32:39,880
I might want to say off top of 
my head, you know, there's what,

647
00:32:39,880 --> 00:32:44,120
7 billion people on Earth and 6 
billion of them use less energy 

648
00:32:44,120 --> 00:32:46,160
on a daily basis than your 
average refrigerator. 

649
00:32:46,200 --> 00:32:49,280
You know, I mean, good luck 
telling someone they can't have 

650
00:32:49,280 --> 00:32:52,840
air conditioning in a car and A 
and a scooter and a 

651
00:32:52,840 --> 00:32:54,400
refrigerator. 
To some extent, that's what this

652
00:32:54,400 --> 00:32:57,440
is going to come down to. 
So, and this is a big, I realize

653
00:32:57,440 --> 00:33:00,440
this is a huge, huge subject to 
get into and there are a lot of 

654
00:33:00,440 --> 00:33:02,760
different ways to. 
I think it's kind of interesting

655
00:33:02,960 --> 00:33:05,920
that at the same time we'd have 
to tell them not to have a 

656
00:33:05,920 --> 00:33:09,400
refrigerator. 
We don't mind just plowing money

657
00:33:09,400 --> 00:33:12,640
into AI, which apparently I I 
mean I'm going to mess up the 

658
00:33:12,640 --> 00:33:17,800
stat, but like one GPU uses I I 
somebody else look it up, but 

659
00:33:17,800 --> 00:33:22,800
it's like many houses worth of 
energy in a year is what APO you

660
00:33:23,080 --> 00:33:25,880
uses or whatever. 
Oh yeah, I mean we. 

661
00:33:26,160 --> 00:33:30,920
I think it's it's crazy the the 
juxtaposition of we are on the 

662
00:33:30,920 --> 00:33:34,760
edge of a climate crisis that 
must be stopped, but also we 

663
00:33:34,760 --> 00:33:38,240
need to go after AI full, full 
blast is like something that 

664
00:33:38,240 --> 00:33:40,640
makes my head spin a little. 
It it, it does. 

665
00:33:40,680 --> 00:33:43,280
And I think if you look 
historically, we never really 

666
00:33:43,280 --> 00:33:45,880
transition off of energy. 
We just add new sources of 

667
00:33:45,880 --> 00:33:47,640
energy as a species. 
Yeah. 

668
00:33:47,800 --> 00:33:50,800
You know, like we never really 
got away from coal, so to speak.

669
00:33:50,800 --> 00:33:53,360
We did in certain local markets 
that the US uses less coal 

670
00:33:53,360 --> 00:33:55,840
because we found shale gas and 
it's a lot cheaper. 

671
00:33:56,000 --> 00:33:59,280
Makes a lot of sense, but the 
world still burns a lot of coal.

672
00:33:59,960 --> 00:34:02,400
We just keep using more and more
energy from different sources 

673
00:34:05,000 --> 00:34:08,080
unless and until something 
dramatically changes. 

674
00:34:08,239 --> 00:34:10,480
I I think that's probably a 
decent bet. 

675
00:34:11,880 --> 00:34:14,360
And to give you an idea, I mean,
some of these businesses trade 

676
00:34:14,400 --> 00:34:17,320
at in the single digit multiples
anyway of earnings. 

677
00:34:17,400 --> 00:34:20,159
And this is real earnings now. 
This isn't the, you know, 

678
00:34:20,159 --> 00:34:23,520
adjusted, you know, EBITDA when 
you're trying to, you know, 

679
00:34:23,600 --> 00:34:25,280
cheat. 
I mean, this is, this is actual 

680
00:34:25,280 --> 00:34:28,840
cash flow. 
So you flip that upside down and

681
00:34:28,840 --> 00:34:32,440
say, OK, I've got in less than 
10 years, I'm getting all my 

682
00:34:32,440 --> 00:34:36,600
money back at these prices. 
And you know, do you think we're

683
00:34:36,600 --> 00:34:40,440
going to need oil in 10 years? 
I mean, I think, I think the 

684
00:34:40,440 --> 00:34:43,120
answer is yes, we'll be paying 
attention to that, but I think 

685
00:34:43,120 --> 00:34:47,480
the answer is yes. 
And we not to say that other 

686
00:34:47,480 --> 00:34:49,840
sources won't grow as well. 
We think there's a place for 

687
00:34:49,840 --> 00:34:51,760
renewables. 
We think there's a place for 

688
00:34:53,719 --> 00:34:55,639
really every kind of energy we 
can create. 

689
00:34:55,639 --> 00:34:58,120
There's going to be a place for,
we'll find a way to use it. 

690
00:34:58,440 --> 00:35:00,240
That's one thing humans are 
very, very good at. 

691
00:35:00,640 --> 00:35:04,720
But Needless to say, we don't 
think that the duration of these

692
00:35:04,720 --> 00:35:07,920
assets is matching up with the 
duration that some investors are

693
00:35:07,920 --> 00:35:10,480
taking on them. 
And we think that provides a bit

694
00:35:10,480 --> 00:35:15,280
of an opportunity. 
I mean the the easy answer is 

695
00:35:15,360 --> 00:35:18,760
ESG, but I'm conflicted as to 
whether or not I think that's 

696
00:35:18,760 --> 00:35:21,600
the actual answer. 
I mean, part, part of me thinks 

697
00:35:21,600 --> 00:35:25,200
that there's so much money 
flowing to chasing assets that 

698
00:35:25,200 --> 00:35:29,320
are going a lot higher in price 
consistently. 

699
00:35:29,640 --> 00:35:34,200
That why mess around with sort 
of these, these cheaper assets 

700
00:35:34,200 --> 00:35:37,960
that, you know, historically 
somebody ends up cheating in the

701
00:35:37,960 --> 00:35:41,520
market and gets all messed up. 
And maybe maybe you think your 

702
00:35:41,520 --> 00:35:44,760
PE is 15, but your actual 
duration or seven, but your 

703
00:35:44,760 --> 00:35:47,080
actual duration is closer to 15 
or something. 

704
00:35:48,000 --> 00:35:51,960
I, I, I think, I think that's 
probably close to reality. 

705
00:35:51,960 --> 00:35:55,000
I don't know. 
You know, somebody that spends 

706
00:35:55,000 --> 00:35:58,720
most of his time in, you know, 
energy or energy intensive 

707
00:35:59,360 --> 00:36:01,880
investments. 
There are plenty of people that 

708
00:36:02,000 --> 00:36:04,880
want to use ESG to explain the 
underperformance at different 

709
00:36:04,880 --> 00:36:07,200
times. 
I think that is too simple to 

710
00:36:07,200 --> 00:36:10,400
your .11. 
Simple fact is this industry has

711
00:36:10,400 --> 00:36:12,720
been a terrible place to put 
money to work until very 

712
00:36:12,720 --> 00:36:15,440
recently. 
And yeah, you know, yeah, we had

713
00:36:15,440 --> 00:36:20,080
a, it was the place to be in 
some respects from, you know, O 

714
00:36:20,080 --> 00:36:22,760
5 to O eight. 
People made a lot of money. 

715
00:36:23,160 --> 00:36:25,480
Obviously, the fracking 
revolution totally changed the 

716
00:36:25,480 --> 00:36:28,800
dynamic of the market. 
We've had several downturns, 

717
00:36:28,800 --> 00:36:31,640
both supply and demand driven in
the last 10 years. 

718
00:36:32,360 --> 00:36:36,680
COVID sort of put a floor in 
which -40 is a heck of a floor. 

719
00:36:37,240 --> 00:36:41,720
And and then yeah. 
Sure, the return since then had 

720
00:36:41,720 --> 00:36:44,040
been really, really good off an 
incredibly low base. 

721
00:36:44,480 --> 00:36:47,640
But it's also hard for me to 
look around and say, hey, you 

722
00:36:47,640 --> 00:36:50,680
know, how many times have you 
bitten before you shot? 

723
00:36:51,360 --> 00:36:53,760
And there are plenty of 
portfolio managers that would 

724
00:36:53,760 --> 00:36:57,160
tell you, OK, after the third 
downturn in five years, you 

725
00:36:57,160 --> 00:37:01,160
know, we we'd had enough. 
And yeah, and that's, and that, 

726
00:37:01,280 --> 00:37:03,520
that explains a lot. 
I mean, I, I think I want to say

727
00:37:03,520 --> 00:37:08,240
in 2020 oil or these numbers 
won't be exactly right, but oil 

728
00:37:08,240 --> 00:37:11,000
made-up a tremendous portion of 
our energy writ large. 

729
00:37:11,200 --> 00:37:14,360
Was it something like 20 or 30% 
of the S&P in 2008? 

730
00:37:14,960 --> 00:37:16,680
And I want to say in 20/20 it 
was 2. 

731
00:37:16,800 --> 00:37:20,760
It got down to 2% at the low. 
I mean, it just didn't play the 

732
00:37:20,760 --> 00:37:23,440
same role in the economy, at 
least on pricing basis. 

733
00:37:23,440 --> 00:37:26,640
So part of it was you didn't 
have to have an opinion on 

734
00:37:26,640 --> 00:37:28,400
energy. 
Then it used to be absolutely 

735
00:37:28,400 --> 00:37:31,240
crucial that, you know, every 
fund and every allocator had to 

736
00:37:31,240 --> 00:37:33,000
have an opinion on what was 
going to happen to oil prices. 

737
00:37:33,520 --> 00:37:35,600
And then that went away for a 
while. 

738
00:37:36,040 --> 00:37:38,640
That may be coming back. 
I think the Russia, Ukraine war 

739
00:37:38,640 --> 00:37:41,280
has brought a lot more of that 
back into focus when people 

740
00:37:41,280 --> 00:37:44,280
started to ask, OK, one question
we need to ask is what's the 

741
00:37:44,280 --> 00:37:45,920
break even price that clears the
market? 

742
00:37:46,840 --> 00:37:47,960
And that's one level of 
analysis. 

743
00:37:47,960 --> 00:37:50,080
That's a hard question to 
answer, but that's one question.

744
00:37:50,400 --> 00:37:54,800
The other question is, OK, given
some geopolitical event, how 

745
00:37:54,800 --> 00:37:57,560
high could it go? 
And if we don't have a position 

746
00:37:57,560 --> 00:38:00,480
in some of those securities, at 
least from a, for lack of a 

747
00:38:00,480 --> 00:38:03,560
better word, insurance 
perspective, how do we need to 

748
00:38:03,560 --> 00:38:06,560
allocate to make sure we're not 
on the outside looking at? 

749
00:38:07,160 --> 00:38:10,000
I think 2022 is a prime example 
of that. 

750
00:38:10,120 --> 00:38:13,520
This is the conversation that 
I've I've had with myself a 

751
00:38:13,520 --> 00:38:16,280
little bit and it's two years 
late and my man Jake would have,

752
00:38:16,360 --> 00:38:19,520
you know, probably tell me a 
year and a half ago. 

753
00:38:19,920 --> 00:38:21,800
That I should have. 
Well, he did tell me multiple 

754
00:38:21,800 --> 00:38:26,400
times and I didn't listen, but 
yeah, that's I I know that we're

755
00:38:26,400 --> 00:38:30,880
sort of like past the this is 
the 70s redux narrative, but 

756
00:38:31,120 --> 00:38:36,400
what if we're not like I I 
don't, I don't know that I want 

757
00:38:36,400 --> 00:38:42,760
to like have an all on bet that 
that we're not past the 70s or, 

758
00:38:43,120 --> 00:38:47,240
or even if we're not past the 
70s, if eighty really is the new

759
00:38:47,240 --> 00:38:50,720
60, you know, some of these 
things are going to work pretty 

760
00:38:50,720 --> 00:38:52,280
nicely and I don't know what the
rest of the. 

761
00:38:52,280 --> 00:38:56,440
World will look like. 
Well, well, that's you're right.

762
00:38:56,440 --> 00:39:00,200
That is the debate that is the 
question or is to repeat myself,

763
00:39:00,200 --> 00:39:01,600
I would say cautiously 
constructive. 

764
00:39:01,600 --> 00:39:04,320
Part of that constructive is 
when we look at who we think the

765
00:39:04,320 --> 00:39:08,920
swing producers are and let's 
just broadly define that as 

766
00:39:09,440 --> 00:39:13,120
American shale, CE, OS and OPEC 
energy secretaries. 

767
00:39:13,640 --> 00:39:16,040
Those are the decision makers 
that really control the market 

768
00:39:16,040 --> 00:39:19,920
at this point and let's try and 
ignore what they say and just 

769
00:39:19,920 --> 00:39:23,000
watch what they do. 
Within recent history, we've 

770
00:39:23,000 --> 00:39:27,680
seen oil go back down to the low
70s, sixties neighborhood and by

771
00:39:27,680 --> 00:39:29,640
and large those two groups. 
Both. 

772
00:39:30,160 --> 00:39:32,800
Pulled back and we saw that 
happen, right. 

773
00:39:32,840 --> 00:39:36,560
So all rig counts come down. 
We've seen consolidation, we've 

774
00:39:36,560 --> 00:39:40,520
seen capital not flow back into 
the industry and we've seen OPEC

775
00:39:40,520 --> 00:39:43,760
ministers. 
And this is this has been 

776
00:39:43,760 --> 00:39:46,240
expounded on any number of 
podcasts. 

777
00:39:46,240 --> 00:39:49,520
So I, I won't get into it, but 
it looks like they want oil 

778
00:39:49,520 --> 00:39:52,240
somewhere in the 80s or 90s in 
order to be able to clear their 

779
00:39:52,240 --> 00:39:55,080
budgets to make their commit. 
Saudi famously is now investing 

780
00:39:55,080 --> 00:39:58,360
a lot in Vision 20-30, Russia's 
fighting war. 

781
00:39:58,800 --> 00:40:01,280
So there's good reason to think 
that they want to put a floor 

782
00:40:01,280 --> 00:40:05,960
under crisis, whether or not 
they have the wherewithal and. 

783
00:40:06,520 --> 00:40:09,560
The ability to do that is a 
different differently, different

784
00:40:09,560 --> 00:40:13,040
hotly debated question. 
But Henning said that we get a 

785
00:40:13,040 --> 00:40:16,080
huge portion of the cost curve 
that seems pretty sensitive to 

786
00:40:16,080 --> 00:40:22,480
that $6070 a barrel range. 
So, OK, we can underwrite a lot 

787
00:40:22,480 --> 00:40:25,080
of these businesses that are in 
the market today at that price. 

788
00:40:25,800 --> 00:40:28,240
And I'm not thinking we're not 
going to be the kind of returns 

789
00:40:28,240 --> 00:40:31,000
that were available in 2020. 
But these are still. 

790
00:40:31,240 --> 00:40:34,840
Pretty competitive investments. 
So to your point on, OK, do I 

791
00:40:34,840 --> 00:40:38,920
want to go all in on this? 
My words, not yours, I'm 

792
00:40:39,160 --> 00:40:41,600
stealing them from some 
commentators, but in sort of a 

793
00:40:41,600 --> 00:40:45,560
new super cycle, thesis and 
energy, you want to go all in on

794
00:40:45,560 --> 00:40:47,800
that? 
Or do you want to say, no, this 

795
00:40:47,800 --> 00:40:49,680
time's different, We're all done
using oil. 

796
00:40:51,000 --> 00:40:52,720
I mean, I think the answer is 
certainly somewhere in the 

797
00:40:52,720 --> 00:40:55,480
middle. 
But having said that, you can 

798
00:40:55,480 --> 00:40:58,480
take some of that risk. 
You can take risk in a pretty 

799
00:40:58,840 --> 00:41:01,520
cost efficient way right now 
would be the way I would say it.

800
00:41:01,960 --> 00:41:04,400
And if we're sitting here in 
five or ten years and either of 

801
00:41:04,400 --> 00:41:06,680
those things come to fruition, I
don't think you're going to 

802
00:41:06,680 --> 00:41:08,600
regret having put some capital 
to work there. 

803
00:41:08,800 --> 00:41:13,360
Whether or not we do see a 
tremendous rip in prices or we 

804
00:41:13,360 --> 00:41:16,440
just see things sort of Peter 
out and basically everybody 

805
00:41:16,720 --> 00:41:20,240
earns their cost capital over a 
long term, which is what, you 

806
00:41:20,240 --> 00:41:21,640
know, what sex work would say 
will happen. 

807
00:41:22,280 --> 00:41:24,480
You'll earn a decent return 
either way and you will have 

808
00:41:24,480 --> 00:41:27,240
taken some serious risk off the 
table. 

809
00:41:27,400 --> 00:41:31,960
We're all consumers of energy in
any number of ways, so I do like

810
00:41:31,960 --> 00:41:34,600
having some of my own exposure 
in that just because it provides

811
00:41:34,600 --> 00:41:37,240
the hedge to my own lifestyle. 
I told my parents the same 

812
00:41:37,240 --> 00:41:40,040
thing. 
It's just seems like pretty good

813
00:41:40,040 --> 00:41:42,240
advice to stick to. 
So at this point where 

814
00:41:42,240 --> 00:41:45,160
valuations are, it's not a real 
stretch to try and get some of 

815
00:41:45,160 --> 00:41:47,280
that exposure. 
You don't have to have a strong 

816
00:41:47,280 --> 00:41:48,720
opinion, that's what I'm trying 
to say. 

817
00:41:48,960 --> 00:41:51,840
There are a lot of ways this can
work out where you still earn a 

818
00:41:51,840 --> 00:41:54,600
pretty decent return and you've 
protected yourself from a real 

819
00:41:54,600 --> 00:41:57,120
tail risk in that. 
Yeah. 

820
00:41:57,840 --> 00:42:01,760
I guess, you know circling back 
to the to earlier in the 

821
00:42:01,760 --> 00:42:07,520
conversation you had said like 
the equity yield is call it 4% 

822
00:42:07,520 --> 00:42:10,640
and high yield total return 
expectations around eight. 

823
00:42:11,920 --> 00:42:16,320
I think what's interesting is 
like there's this issue, right 

824
00:42:16,320 --> 00:42:21,800
where some of the some of the 
more quality names in equities I

825
00:42:21,800 --> 00:42:28,440
think are I understand why like 
when I, when I hear 30 PEI think

826
00:42:28,440 --> 00:42:30,960
of like a longer duration asset,
right? 

827
00:42:30,960 --> 00:42:36,280
Like I don't think of it as, and
maybe maybe that's wrong to 

828
00:42:36,280 --> 00:42:38,400
think that way, but I think of 
it as like long duration. 

829
00:42:38,720 --> 00:42:41,880
And I guess that I the people 
that are paying that are 

830
00:42:41,880 --> 00:42:43,920
comfortable with the growth 
that's on the come. 

831
00:42:44,360 --> 00:42:49,840
But should somebody decide that 
that is actually probably not 

832
00:42:49,840 --> 00:42:54,760
worth taking that much duration,
you really need to, you're going

833
00:42:54,760 --> 00:42:56,880
to need to live through a lot of
growth and that growth has to 

834
00:42:56,880 --> 00:43:00,440
happen. 
Whereas maybe the upside is not 

835
00:43:00,440 --> 00:43:03,080
there, right? 
Like maybe 8% is not sufficient.

836
00:43:03,080 --> 00:43:05,960
But and, and I guess on the 8th,
if you're only taking three 

837
00:43:05,960 --> 00:43:09,160
years, you have more in 
reinvestment risk. 

838
00:43:09,720 --> 00:43:13,600
But it just something seems 
wacky to me right now about the 

839
00:43:13,600 --> 00:43:17,440
way that things are, are priced.
And I guess I would have always 

840
00:43:17,440 --> 00:43:22,120
said that I don't understand how
certain things are, are priced 

841
00:43:22,120 --> 00:43:24,240
right now and, and I probably 
never will. 

842
00:43:24,280 --> 00:43:27,280
And that's probably why I should
outsource some decisions to the 

843
00:43:27,280 --> 00:43:29,920
market. 
But it's just something 

844
00:43:30,080 --> 00:43:33,320
something's odd about the 
difference in in a way that 

845
00:43:33,320 --> 00:43:35,960
certain things are, are trading.
I mean, even private credit, 

846
00:43:35,960 --> 00:43:41,000
like I, I think that that that's
where the junk of yesteryear 

847
00:43:41,000 --> 00:43:43,400
used to live. 
I think everyone can agree that 

848
00:43:43,400 --> 00:43:49,760
sort of like the junkier, more 
levered credits, but, and it's 

849
00:43:49,760 --> 00:43:52,600
incestuous and I've, I've got, 
I've got plenty of issues with 

850
00:43:52,600 --> 00:43:55,960
it, but like what I can't get 
over is if you don't like 

851
00:43:55,960 --> 00:43:57,880
private credit, how do you like 
private equity? 

852
00:43:59,880 --> 00:44:02,800
Because like to me that like 
private equity is like way 

853
00:44:02,800 --> 00:44:05,600
riskier than private credit. 
And at least at least in the 

854
00:44:05,600 --> 00:44:09,520
private credit landscape, you 
hope it multiples get cut by 30%

855
00:44:09,520 --> 00:44:12,040
or so. 
There's still some asset value 

856
00:44:12,040 --> 00:44:16,240
there for you where where the 
equity you really only have one 

857
00:44:16,240 --> 00:44:18,640
way out. 
Well. 

858
00:44:19,400 --> 00:44:22,080
Unless I don't see the ball 
clearly, which is possible. 

859
00:44:23,120 --> 00:44:25,120
No, I mean, I this is easy to 
say. 

860
00:44:25,120 --> 00:44:26,560
I've always been in the public 
market. 

861
00:44:26,560 --> 00:44:31,520
So again, easy for a guy that's,
you know, to to beat up somebody

862
00:44:31,520 --> 00:44:33,160
else's book, right? 
Yeah. 

863
00:44:33,160 --> 00:44:37,480
I mean, to your point, I think 
listening to some of the people 

864
00:44:37,480 --> 00:44:39,880
that seem to know what they're 
doing there and even seeing the 

865
00:44:39,880 --> 00:44:43,520
deals that come our way in the 
public markets and how they how 

866
00:44:43,520 --> 00:44:47,400
they are valued relatively. 
And I hate to say this, but it 

867
00:44:47,400 --> 00:44:51,560
does seem like there really is a
economy of scale isn't quite the

868
00:44:51,560 --> 00:44:54,880
right description maybe, But you
really want to pick your manager

869
00:44:54,880 --> 00:44:57,120
very, very carefully, right? 
Yeah. 

870
00:44:57,120 --> 00:44:59,080
The private managers that do a 
great job are going to do a 

871
00:44:59,080 --> 00:45:00,680
great job. 
They get access to the right 

872
00:45:00,680 --> 00:45:02,040
deals. 
They've got enough powder to 

873
00:45:02,040 --> 00:45:03,920
make the make the transaction 
happen. 

874
00:45:04,240 --> 00:45:06,800
They can be creative on the 
balance sheet, which is 

875
00:45:06,800 --> 00:45:08,320
something that I'm loathe to 
say. 

876
00:45:08,320 --> 00:45:09,840
But the fact of the matter is 
they can. 

877
00:45:10,200 --> 00:45:12,800
They've understood that after 
all the regulation that came in 

878
00:45:12,800 --> 00:45:15,120
a lot of this debt that used to 
be on bank balance sheets. 

879
00:45:15,200 --> 00:45:19,360
And it's, you know, I will say 
this, but it's probably better 

880
00:45:19,360 --> 00:45:22,160
off being in the private markets
than being on bank balance 

881
00:45:22,160 --> 00:45:26,960
sheets for reasons of liquidity,
because speed of transaction, 

882
00:45:26,960 --> 00:45:30,520
because of who can underwrite 
the risk, reason, clarity, all 

883
00:45:30,520 --> 00:45:32,640
those things. 
They really probably are better 

884
00:45:32,640 --> 00:45:34,440
off being in the private space 
in general. 

885
00:45:34,760 --> 00:45:38,440
But you know, if you don't have 
a manager that knows what 

886
00:45:38,440 --> 00:45:42,120
they're doing, to your point, 
maybe that downsides a lot lower

887
00:45:42,240 --> 00:45:46,120
than investors think it to be. 
I've heard a number of private 

888
00:45:46,520 --> 00:45:49,720
equity or private equity and 
private debt managers recently 

889
00:45:50,080 --> 00:45:53,080
in the media say things like, 
well, we're getting superior 

890
00:45:53,080 --> 00:45:55,840
yields for less risk. 
I mean, I'm not looking at their

891
00:45:55,840 --> 00:45:57,880
that's. 
That's a beautiful thing. 

892
00:45:57,880 --> 00:45:59,800
Could you imagine? 
I've never. 

893
00:45:59,800 --> 00:46:03,280
Seen it in finance, right? 
And I'm a die in the wool value 

894
00:46:03,280 --> 00:46:05,240
investor. 
And I do believe that 

895
00:46:05,240 --> 00:46:08,000
opportunity and risk are not 
always opposites. 

896
00:46:08,600 --> 00:46:13,680
But I think that to the extent 
it's true, it probably won't be 

897
00:46:13,680 --> 00:46:18,240
true for very long. 
And when it ceases to be true, 

898
00:46:18,640 --> 00:46:20,760
it will probably see suddenly 
and painfully. 

899
00:46:22,240 --> 00:46:23,120
And I. 
Like how you. 

900
00:46:23,240 --> 00:46:25,240
Said that. 
Thank you. 

901
00:46:25,400 --> 00:46:27,880
That's our maybe that's our 
sales picture why you ought to 

902
00:46:27,880 --> 00:46:32,040
be in public bond so to speak. 
But we do. 

903
00:46:32,040 --> 00:46:35,240
One of the reasons that we we do
like the public bond space is 

904
00:46:35,240 --> 00:46:37,800
there's there is a lot of 
disclosure and it's a well under

905
00:46:37,920 --> 00:46:40,080
well trafficked asset class at 
this point. 

906
00:46:40,360 --> 00:46:43,600
It's a couple generations older 
than some of the private credit 

907
00:46:43,600 --> 00:46:48,280
vintages in that way. 
So we think there's some, you 

908
00:46:48,280 --> 00:46:51,000
know, there's a lot of history 
here to lean on, which is nice. 

909
00:46:51,920 --> 00:46:54,360
Maybe a false sense of security,
but it's a sense of security 

910
00:46:54,360 --> 00:46:58,280
nonetheless. 
And like, like you say, you 

911
00:46:58,280 --> 00:47:00,520
know, superior returns for less 
risk. 

912
00:47:01,360 --> 00:47:03,600
It's just the type of thing 
that's true until it isn't. 

913
00:47:03,760 --> 00:47:05,800
And man, when it isn't, it shows
up all of a sudden. 

914
00:47:06,400 --> 00:47:12,520
So yeah, I think we share your, 
we share your concerns. 

915
00:47:12,520 --> 00:47:14,440
I'm not going to sit over here 
and say that the whole asset 

916
00:47:14,440 --> 00:47:17,320
class is a waste of time. 
I don't think that's true at 

917
00:47:17,320 --> 00:47:18,280
all. 
I think they're going to be some

918
00:47:18,280 --> 00:47:20,120
managers that put up some. 
Extra terms? 

919
00:47:20,120 --> 00:47:22,800
Yeah, I don't, I don't even 
think that either. 

920
00:47:22,800 --> 00:47:26,800
I I guess I guess what I really 
scratched my head at is how 

921
00:47:26,800 --> 00:47:29,680
equities are trading. 
However, every single bull 

922
00:47:29,680 --> 00:47:34,760
market climbs a wall of worry 
and naysayers, so my having this

923
00:47:34,760 --> 00:47:37,560
feeling probably means the bull 
has a lot further to run. 

924
00:47:38,120 --> 00:47:40,400
As well said, I'm sure you've 
seen the same thing. 

925
00:47:40,400 --> 00:47:43,560
If you look at the distribution 
of returns and inequities so 

926
00:47:43,560 --> 00:47:47,960
far, even this year, it's like 
you owned some of the AI 

927
00:47:48,320 --> 00:47:51,280
oriented names or you haven't 
done terribly well. 

928
00:47:53,000 --> 00:47:54,800
And maybe that's right, maybe it
isn't. 

929
00:47:55,200 --> 00:47:59,520
But by the same token, and here 
I am talking about a 4% earnings

930
00:47:59,520 --> 00:48:02,240
yield in the S&P. 
If you go down the capital 

931
00:48:02,240 --> 00:48:04,480
structure a little bit and say, 
let's say, let's look at some 

932
00:48:04,480 --> 00:48:07,360
mid caps, let's look at some 
small caps, let's go Russell to 

933
00:48:07,360 --> 00:48:12,400
value those valuations seem a 
lot more reasonable to me. 

934
00:48:12,480 --> 00:48:15,000
Part of the reason I say that 
it's those are those type of 

935
00:48:15,000 --> 00:48:17,440
businesses are usually the ones 
you see that issue high yield 

936
00:48:17,440 --> 00:48:19,680
debt, right? 
They're they're nobody's 

937
00:48:19,680 --> 00:48:22,120
favorite. 
They're capital intensive, 

938
00:48:22,120 --> 00:48:26,560
they're cyclical, but they're 
usually around been around for a

939
00:48:26,560 --> 00:48:28,200
long time. 
They provide a good or a service

940
00:48:28,200 --> 00:48:32,240
that's essential to the economy,
right, air travel, energy, so on

941
00:48:32,240 --> 00:48:35,920
and so forth. 
So we multiple on those 

942
00:48:35,920 --> 00:48:38,440
companies. 
Those look a lot more reasonable

943
00:48:38,560 --> 00:48:41,120
to me. 
Those are in some cases high 

944
00:48:41,120 --> 00:48:44,560
singles, low teens type 
multiples much closer to 

945
00:48:44,560 --> 00:48:47,280
historic norms. 
And the debate there is all 

946
00:48:47,280 --> 00:48:48,440
right. 
Well, if you're heading into a 

947
00:48:48,440 --> 00:48:51,560
recession, these are not 
typically companies you want to 

948
00:48:51,560 --> 00:48:52,760
own. 
Most people will tell you that 

949
00:48:53,080 --> 00:48:56,480
are we or aren't we is really 
the battleground there. 

950
00:48:56,720 --> 00:49:00,240
But the multiples seem to 
suggest that it's battleground 

951
00:49:00,480 --> 00:49:03,160
and the multiples about where it
should be given that we don't 

952
00:49:03,160 --> 00:49:05,680
have agreement on where the next
cycle is going to start or where

953
00:49:05,680 --> 00:49:08,520
it's going to go. 
And of course your opinion on 

954
00:49:08,520 --> 00:49:11,440
rates is going to influence what
you think that right multiple is

955
00:49:11,440 --> 00:49:12,880
going to be over a long period 
of time. 

956
00:49:12,880 --> 00:49:16,920
So that's another layer to it. 
But regardless, in some 

957
00:49:16,920 --> 00:49:20,520
industries, like I say, I think 
that that the capital allocation

958
00:49:20,520 --> 00:49:23,760
has gotten a lot better and you 
can actually put capital to work

959
00:49:23,960 --> 00:49:25,600
given you've got a long time 
horizon. 

960
00:49:25,600 --> 00:49:28,320
I mean, in the short run, I've 
never been terribly good at the 

961
00:49:28,320 --> 00:49:30,800
short run. 
So it's easier to just say, I 

962
00:49:30,800 --> 00:49:34,080
don't want to play that game. 
But we think in the short run, 

963
00:49:35,120 --> 00:49:37,200
again, like it, it could go any 
direction. 

964
00:49:37,440 --> 00:49:40,520
Long run, we think there's some 
pretty reasonable opportunities 

965
00:49:40,520 --> 00:49:43,160
out there. 
So, and then we're seeing that 

966
00:49:43,160 --> 00:49:45,640
we're seeing in my high yield 
space even, you know, sometimes 

967
00:49:45,640 --> 00:49:48,400
we see things go wrong a little 
bit before the equity markets. 

968
00:49:48,400 --> 00:49:50,160
Do. 
You know, I, I think the market 

969
00:49:50,160 --> 00:49:52,360
to your point is climbing a wall
of worry almost in spite of 

970
00:49:52,360 --> 00:49:53,720
itself. 
I mean, I've been reading 

971
00:49:54,560 --> 00:49:58,120
reports about housing inventory 
is going up and new home sales 

972
00:49:58,120 --> 00:50:01,600
are declining and now there's a 
lot of home sales going on sold.

973
00:50:01,600 --> 00:50:05,040
But what they don't, which is, 
which is true, but what they 

974
00:50:05,040 --> 00:50:09,280
don't tell you is that 
inventories and and depend. 

975
00:50:09,280 --> 00:50:12,040
Low yeah, is growing off of like
the lowest base. 

976
00:50:12,040 --> 00:50:14,200
Yeah, exactly. 
They're not back to 2019 levels.

977
00:50:14,240 --> 00:50:16,960
Yeah, that's crazy, right we've.
Seen, we've seen rates go up, 

978
00:50:16,960 --> 00:50:19,160
you know several 100 basis 
points and mortgages go up 

979
00:50:19,160 --> 00:50:22,880
several 100 basis points and yet
we really haven't normalized 

980
00:50:22,880 --> 00:50:24,520
yet. 
It doesn't look like it to me in

981
00:50:24,520 --> 00:50:25,720
terms of those inventory 
numbers. 

982
00:50:25,800 --> 00:50:29,360
The extent we have, it's not 
extreme so and nonetheless 

983
00:50:29,440 --> 00:50:32,560
housing prices have yet to 
correct massively. 

984
00:50:32,960 --> 00:50:36,720
So. 
OK, maybe you know, it's there's

985
00:50:36,800 --> 00:50:38,960
a lot to be said for this. 
The crash is coming and I know 

986
00:50:38,960 --> 00:50:42,440
that gets clicks, but we haven't
quite seen it yet. 

987
00:50:42,960 --> 00:50:45,520
And I always take a lot of 
comfort in how worried the 

988
00:50:45,520 --> 00:50:48,560
market seems to be, right? 
I mean, greedy, one of those are

989
00:50:48,560 --> 00:50:49,960
fearful, Fearful one of those 
are greedy. 

990
00:50:49,960 --> 00:50:52,360
I'm not saying now it's by no 
mean now it's the time to be 

991
00:50:52,360 --> 00:50:54,040
greedy. 
I don't think that's our view, 

992
00:50:54,520 --> 00:50:57,480
but at the end of the day of 
what we said to begin with on 

993
00:50:57,480 --> 00:51:00,600
the credit side, you do have to 
understand the business and you 

994
00:51:00,600 --> 00:51:03,280
got to know the name and you got
to understand how management 

995
00:51:03,280 --> 00:51:05,760
thinks and you want to 
understand the cash flows on a 

996
00:51:05,760 --> 00:51:08,600
three statement basis. 
And that sounds oversimplified, 

997
00:51:08,600 --> 00:51:11,240
but it's important. 
And and especially in fixed 

998
00:51:11,240 --> 00:51:15,400
income, it's very easy to focus 
on the big levers and forget 

999
00:51:15,400 --> 00:51:17,000
that you're lending to 
individual companies that 

1000
00:51:17,000 --> 00:51:19,240
actually have to go out and 
operate in the economy. 

1001
00:51:19,600 --> 00:51:23,160
And I think when we look at the 
portfolio on that basis, we feel

1002
00:51:23,160 --> 00:51:25,560
a lot more comfortable making 
decisions and assessing risk. 

1003
00:51:26,040 --> 00:51:30,000
Then to your point, all these 
very important high level 

1004
00:51:30,000 --> 00:51:34,360
questions that are worth 
discussing, but we're trying to 

1005
00:51:34,360 --> 00:51:37,040
put together a portfolio to earn
a return. 

1006
00:51:37,040 --> 00:51:39,320
We all have to go home at night,
be accountable to our families 

1007
00:51:39,320 --> 00:51:43,400
on what we put them in. 
Then then I think our view 

1008
00:51:43,640 --> 00:51:46,480
shifts and we think the the risk
reward is still they're pretty 

1009
00:51:46,480 --> 00:51:50,680
attractive on an all in basis. 
Well, I don't know what else you

1010
00:51:50,680 --> 00:51:52,040
do. 
It's not like you're not going 

1011
00:51:52,040 --> 00:51:53,880
to get out of the market. 
That makes no sense. 

1012
00:51:54,240 --> 00:51:59,960
I guess it, it seems to me that 
the pitch on, on private and not

1013
00:51:59,960 --> 00:52:02,280
to go back to private credit, 
but I think the pitch on private

1014
00:52:02,280 --> 00:52:08,240
credit is if, if they can 
deliver, you know, 11:50 or 

1015
00:52:08,240 --> 00:52:11,160
whatever percent, why would you 
own equity? 

1016
00:52:11,520 --> 00:52:15,080
And I almost wonder if it's not 
the same similar pitch as it 

1017
00:52:15,080 --> 00:52:20,320
pertains to debt generally. 
I mean if you if you really I 

1018
00:52:20,320 --> 00:52:22,400
guess on an after tax basis 
eight turns. 

1019
00:52:22,400 --> 00:52:26,280
Into what, five and a? 
Half or six or so, but still 

1020
00:52:26,280 --> 00:52:29,480
that's that's not like a 
terrible return historically as 

1021
00:52:29,480 --> 00:52:31,240
long as you can reinvest at 
that. 

1022
00:52:31,440 --> 00:52:34,000
Well, well, that's, I mean you 
hit the nail on the head and 

1023
00:52:34,000 --> 00:52:38,200
yeah, it certainly a lot of this
been fixed income world's 

1024
00:52:38,200 --> 00:52:41,720
contingent on your own tax 
implications because you 

1025
00:52:41,720 --> 00:52:44,400
obviously want to try and avoid 
the the income hit for a lot of 

1026
00:52:44,400 --> 00:52:48,440
people. 
But I see exactly the same way. 

1027
00:52:48,440 --> 00:52:52,320
I mean if you can get, I mean 
some of these, these target IR 

1028
00:52:52,320 --> 00:52:55,600
Rs are 12 to 15% through the 
cycle. 

1029
00:52:56,200 --> 00:53:01,960
And I mean, if you can get 12 to
15% in a debt instrument, then 

1030
00:53:02,680 --> 00:53:04,160
you don't really need to owe 
much else. 

1031
00:53:04,520 --> 00:53:06,280
I mean, that's yeah. 
I mean, that's going to meet 

1032
00:53:06,360 --> 00:53:08,040
just about everyone else's 
investing goals. 

1033
00:53:08,040 --> 00:53:09,640
And if it doesn't, then your 
goals are probably not 

1034
00:53:09,640 --> 00:53:13,720
realistic, which to your point, 
makes me suspicious that those 

1035
00:53:13,720 --> 00:53:18,720
numbers are not right over a 
full cycle, you know, throughout

1036
00:53:18,720 --> 00:53:20,280
the duration of an investment 
lifetime. 

1037
00:53:20,640 --> 00:53:23,640
Like say, I mean to the extent 
it's right, it won't be right 

1038
00:53:23,640 --> 00:53:25,600
for long. 
So yeah. 

1039
00:53:25,960 --> 00:53:28,320
Maybe you can participate early 
and get a big rip. 

1040
00:53:28,840 --> 00:53:32,360
You have to hear the, to hear 
the private equity allocators 

1041
00:53:32,360 --> 00:53:34,400
tell it, they think the market 
can continue to grow. 

1042
00:53:34,400 --> 00:53:37,000
And it's got a lot of green 
pastures still. 

1043
00:53:37,880 --> 00:53:41,960
Hey, Nate, Maybe, yeah. 
I I hope it's true. 

1044
00:53:42,960 --> 00:53:45,000
If it's true, we're all going to
be in great shape. 

1045
00:53:45,440 --> 00:53:47,080
Oh, right. 
Right. 

1046
00:53:47,080 --> 00:53:51,000
I mean, if it's truly a better 
way to, if it helps the capital 

1047
00:53:51,000 --> 00:53:54,440
markets function and delivers 
great returns to people that 

1048
00:53:54,720 --> 00:53:57,520
understand and can underwrite 
the risk, I mean, that's, and 

1049
00:53:57,520 --> 00:53:59,200
that's all any of us are really 
trying to do, right? 

1050
00:54:00,120 --> 00:54:01,640
And hey, at the end of the day, 
it might also take some 

1051
00:54:01,640 --> 00:54:04,360
volatility out of the banking 
system and financial system writ

1052
00:54:04,360 --> 00:54:07,840
large by marrying the risk to 
people that are, you know, 

1053
00:54:07,840 --> 00:54:10,560
understand it and can allocate 
accordingly. 

1054
00:54:11,280 --> 00:54:13,960
That's that's, that's also 
that's AI think one of the 

1055
00:54:13,960 --> 00:54:16,680
arguments that's been made for 
the last, call it 15 years is 

1056
00:54:16,680 --> 00:54:19,400
that that's it's a better way 
for capital to flow through the 

1057
00:54:19,400 --> 00:54:21,080
system. 
And I think there's a lot to 

1058
00:54:21,080 --> 00:54:22,600
that argument. 
So. 

1059
00:54:23,320 --> 00:54:26,200
Like I say, I'm not rooting 
against anybody, but when you 

1060
00:54:26,240 --> 00:54:29,160
see some of those returns be 
that good for that long, you 

1061
00:54:29,160 --> 00:54:31,120
know, that makes me worry a 
little bit. 

1062
00:54:32,320 --> 00:54:35,400
Yeah, Wait, let's get back to 
housing real quick because I 

1063
00:54:35,400 --> 00:54:36,840
don't know that we closed that 
loop. 

1064
00:54:37,200 --> 00:54:41,720
So, so I mean, like, what's your
version of reality when it comes

1065
00:54:41,720 --> 00:54:44,440
to where we are from a housing 
perspective? 

1066
00:54:45,360 --> 00:54:47,800
Because there's, there's, I 
mean, all you know, it's, it's 

1067
00:54:47,800 --> 00:54:49,840
been interesting these past 
couple months, a lot of these 

1068
00:54:49,840 --> 00:54:53,000
stocks have rolled over. 
And I think the debate is our 

1069
00:54:53,000 --> 00:54:56,640
margins going to collapse and 
how sustainable is the current 

1070
00:54:56,640 --> 00:54:58,880
building pace and are we going 
to have to slow down? 

1071
00:54:58,880 --> 00:55:00,600
And I'm kind of curious to hear 
you riff. 

1072
00:55:00,600 --> 00:55:03,320
On it, yeah, sure. 
And that's a great place to 

1073
00:55:03,320 --> 00:55:04,920
start. 
I think some of the some of the 

1074
00:55:04,920 --> 00:55:08,400
equities have rolled over. 
We've seen in Florida, to me 

1075
00:55:08,400 --> 00:55:11,440
stands out where the builder 
surveys, builders are saying 

1076
00:55:11,440 --> 00:55:13,160
that there's some weakness in 
the market and they're starting 

1077
00:55:13,160 --> 00:55:16,040
to get a little concerned, which
makes sense given how strong the

1078
00:55:16,040 --> 00:55:17,760
market's been since 2020 down 
there. 

1079
00:55:18,720 --> 00:55:20,760
Yeah, man, they, they built so 
much. 

1080
00:55:21,600 --> 00:55:24,440
They just built a ton and I know
now they're fighting with, you 

1081
00:55:24,440 --> 00:55:27,160
know, I'm sitting here in 
Columbus, OH, So very, very 

1082
00:55:27,160 --> 00:55:29,160
different view of the world 
locally. 

1083
00:55:29,520 --> 00:55:32,560
Obviously insurance down there, 
insurance cost has spiked. 

1084
00:55:32,560 --> 00:55:33,800
So that's creating another. 
Yeah. 

1085
00:55:34,560 --> 00:55:36,840
And OK, great. 
Now we've got higher mortgage, 

1086
00:55:37,160 --> 00:55:38,720
mortgages that are starting to 
work their way through the 

1087
00:55:38,720 --> 00:55:42,800
system and we've got higher 
insurance rates, excuse me. 

1088
00:55:42,960 --> 00:55:45,520
So the carrying cost of a home 
in some of these markets is 

1089
00:55:45,520 --> 00:55:48,040
going up and that's somebody to 
pay attention to. 

1090
00:55:49,080 --> 00:55:52,840
That being said. 
I think it's something like 40% 

1091
00:55:52,840 --> 00:55:55,160
of homes or single family homes 
don't have a mortgage. 

1092
00:55:55,360 --> 00:55:57,800
Today. 
Really. 

1093
00:55:57,840 --> 00:56:00,200
It's a very high number. 
And. 

1094
00:56:00,200 --> 00:56:03,200
Wow, that is high. 
And when you think about it, I 

1095
00:56:03,240 --> 00:56:04,840
mean, I think there are several 
reasons for that. 

1096
00:56:04,840 --> 00:56:09,000
One is you've had baby boomers 
and really up to Gen. 

1097
00:56:09,000 --> 00:56:12,720
X have lived through the 
greatest wealth period of wealth

1098
00:56:12,720 --> 00:56:14,120
creation in the history of the 
world. 

1099
00:56:14,480 --> 00:56:17,640
And it's been broad based in the
US and home prices have gone up 

1100
00:56:18,200 --> 00:56:21,000
basically 3X since 1990, give or
take. 

1101
00:56:21,640 --> 00:56:24,160
So that's a pretty great way to 
get out from under a 30 year 

1102
00:56:24,160 --> 00:56:26,960
mortgage. 
And yeah, you know, I think a 

1103
00:56:26,960 --> 00:56:29,200
lot of people are now having 
this conversation with their 

1104
00:56:29,200 --> 00:56:33,360
parents or grandparents even 
saying, hey, I appreciate you 

1105
00:56:33,360 --> 00:56:37,000
want to downsize, but you don't 
have any debt on this house. 

1106
00:56:37,680 --> 00:56:39,760
What do you, what are you doing 
that for? 

1107
00:56:40,080 --> 00:56:42,160
And I think a lot of people are 
retiring in place. 

1108
00:56:42,520 --> 00:56:44,120
A lot of people are like where 
they're at. 

1109
00:56:44,600 --> 00:56:49,080
And that's a factor, I think. 
And the I'm now I'm talking 

1110
00:56:49,080 --> 00:56:51,080
about, of course, what's going 
to be strong in the housing 

1111
00:56:51,080 --> 00:56:54,840
market. 
I think an under discussed issue

1112
00:56:54,840 --> 00:56:58,840
at the moment is we're starting 
to see what will be the greatest

1113
00:56:58,840 --> 00:57:02,160
transfer of wealth between 
generations in history, right 

1114
00:57:02,160 --> 00:57:08,640
from retirees into, you know, my
generation and and, and I Gen. 

1115
00:57:08,640 --> 00:57:10,600
or whatever we're calling what's
coming next. 

1116
00:57:10,680 --> 00:57:13,760
And a lot of that is coming in 
the way of down payments on 

1117
00:57:13,760 --> 00:57:17,760
houses. 
And you asked, you know, and I'm

1118
00:57:17,760 --> 00:57:20,640
skeptical that the numbers on 
this are really, really clear, 

1119
00:57:21,200 --> 00:57:23,280
but there's a lot of help on 
first time for first time 

1120
00:57:23,280 --> 00:57:24,760
homeowners from older 
generations. 

1121
00:57:25,760 --> 00:57:27,640
That's another way in which 
you're keeping debt at a 

1122
00:57:27,640 --> 00:57:31,520
manageable level. 
So all that rolls up to and 

1123
00:57:31,520 --> 00:57:34,920
then, I'm sorry, the last piece 
I would say is we've still had a

1124
00:57:34,920 --> 00:57:37,800
lot of immigration in the United
States over the last 30 years. 

1125
00:57:38,320 --> 00:57:41,720
So you have more people and more
wealth to go around. 

1126
00:57:41,960 --> 00:57:44,800
And the housing stock does not 
look like it's kept up. 

1127
00:57:44,800 --> 00:57:47,400
Obviously that that number 
really hasn't kept up since O 

1128
00:57:47,400 --> 00:57:49,800
eight O 9. 
It's the, it's recent history 

1129
00:57:49,800 --> 00:57:53,000
there where numbers haven't gone
through the system. 

1130
00:57:53,320 --> 00:57:56,440
And now that we're seeing some 
really, some really strong 

1131
00:57:56,440 --> 00:57:58,880
demand, especially for new 
homes, I want to say the average

1132
00:57:58,880 --> 00:58:01,240
home in the United States and 
I'm I might get this little 

1133
00:58:01,240 --> 00:58:04,000
wrong. 
It's it's around 30 or 40 years.

1134
00:58:04,000 --> 00:58:05,840
I want to say it's almost 40 
years that's. 

1135
00:58:05,840 --> 00:58:07,800
What I thought it. 
Was and how the stock is, is 

1136
00:58:07,800 --> 00:58:12,240
aging and demand for new homes 
is should be pretty strong. 

1137
00:58:12,600 --> 00:58:15,080
We now have a generation. 
My, you know, my generation. 

1138
00:58:15,080 --> 00:58:18,480
I'm sitting here 33 years old. 
I mean, you know, I graduated 

1139
00:58:18,480 --> 00:58:22,520
high school in 2009 and nobody 
wanted to go into the trades. 

1140
00:58:22,600 --> 00:58:23,960
I mean, all the trades were out 
of work. 

1141
00:58:24,920 --> 00:58:28,080
You just couldn't get, you 
couldn't get employment there. 

1142
00:58:28,440 --> 00:58:30,880
And so you have generation like 
I say that their labor market, 

1143
00:58:30,880 --> 00:58:33,920
there's this pocket in labor 
market where it was very hard to

1144
00:58:34,000 --> 00:58:36,920
get still work. 
And now obviously the demand for

1145
00:58:36,920 --> 00:58:39,560
that's been very strong. 
I think it's gratifying now to 

1146
00:58:39,560 --> 00:58:42,200
see young kids considering maybe
that instead of college or 

1147
00:58:42,200 --> 00:58:45,160
higher education where maybe 
that bill's not exactly worth 

1148
00:58:45,160 --> 00:58:46,040
it. 
But that's a whole different 

1149
00:58:46,240 --> 00:58:48,800
discussion. 
Anyway, there you go. 

1150
00:58:48,800 --> 00:58:52,120
There's your supply constraint. 
So looking at it from the 

1151
00:58:52,120 --> 00:58:55,880
builder's perspective, it's a 
volatile time, but I think it 

1152
00:58:55,880 --> 00:58:59,800
shakes out where builders can 
still earn a pretty nice return 

1153
00:58:59,840 --> 00:59:03,520
on their assets. 
And accounting for home building

1154
00:59:03,520 --> 00:59:06,280
inventory because of the way you
have to account for land and 

1155
00:59:06,560 --> 00:59:08,400
work in progress inventory is a 
little weird. 

1156
00:59:08,400 --> 00:59:10,920
But if you look at balance 
sheets for home builders, 

1157
00:59:12,040 --> 00:59:15,080
they're really, they're really 
pretty strong, even the ones 

1158
00:59:15,080 --> 00:59:18,920
that have debt on and back to 
industries that have learned 

1159
00:59:18,920 --> 00:59:20,720
their lesson. 
I mean, home building, I think 

1160
00:59:20,720 --> 00:59:24,960
is right near the front of the 
pack in terms of what were what 

1161
00:59:24,960 --> 00:59:27,960
were management teams doing that
blew up in O eight O 9. 

1162
00:59:28,240 --> 00:59:31,600
And this is the classic, you 
know, Charlie Munger, just tell 

1163
00:59:31,600 --> 00:59:33,520
me where I die so I don't ever 
grow them again. 

1164
00:59:33,920 --> 00:59:36,880
You know, you get management 
teams that say we are not going 

1165
00:59:36,880 --> 00:59:39,000
to own, we're not going to we're
not going to take a lot of debt,

1166
00:59:39,000 --> 00:59:42,000
buy a bunch of land where we're 
not actively building homes for 

1167
00:59:42,000 --> 00:59:44,000
sale because that's how you blow
up. 

1168
00:59:44,400 --> 00:59:47,760
Yep, famously NVR is a home 
builder that you know that stock

1169
00:59:47,760 --> 00:59:49,720
chart is, is incredible. 
If you want to look at over the 

1170
00:59:49,720 --> 00:59:52,960
last 30 years, they had a model 
where they optioned all their 

1171
00:59:52,960 --> 00:59:55,000
land and could let those options
expire. 

1172
00:59:55,000 --> 00:59:56,920
Yeah, higher upfront costs, 
sure, but they could let the 

1173
00:59:56,920 --> 00:59:59,880
options expire in a downturn and
didn't get stuck with a lot of 

1174
00:59:59,880 --> 01:00:01,520
expensive inventory on the 
balance sheet. 

1175
01:00:01,920 --> 01:00:05,800
And we've seen a number of home 
builders copy that style in, in 

1176
01:00:05,800 --> 01:00:07,280
one way or another. 
Maybe they each have a little 

1177
01:00:07,280 --> 01:00:09,000
bit of a different flavor to it,
but that's become much more 

1178
01:00:09,000 --> 01:00:12,960
common. 
And so to the extent we are in a

1179
01:00:12,960 --> 01:00:17,640
slow down which certainly going 
from 22 to 23 when rates really 

1180
01:00:17,640 --> 01:00:20,920
climbed, we saw. 
Home sales decelerate and home 

1181
01:00:20,920 --> 01:00:23,840
buildings decelerate to the 
extent that continues. 

1182
01:00:24,280 --> 01:00:28,720
The businesses themselves still 
seem reasonably priced and 

1183
01:00:29,120 --> 01:00:31,520
probably are in a reasonable 
return over a long period of 

1184
01:00:31,520 --> 01:00:33,400
time. 
We've participated in a number 

1185
01:00:33,400 --> 01:00:36,720
of homeowners credits over the 
last year that have been nice 

1186
01:00:36,720 --> 01:00:38,800
returners for us. 
These are home builders that do 

1187
01:00:38,800 --> 01:00:42,520
not want to get over leveraged. 
Every conversation is I would 

1188
01:00:42,520 --> 01:00:45,920
say a fearful conversation. 
Back to our discussion earlier, 

1189
01:00:47,080 --> 01:00:50,360
all the questions from investors
are how manageable is your 

1190
01:00:50,360 --> 01:00:51,800
leverage? 
What's your cash flow like? 

1191
01:00:51,800 --> 01:00:53,320
What's your interest coverage 
like? 

1192
01:00:53,320 --> 01:00:56,880
I mean, that's a question that a
lot of teams haven't had to ask 

1193
01:00:56,880 --> 01:00:59,760
for a while for a while. 
I mean, OK, what in a zero 

1194
01:00:59,760 --> 01:01:02,840
interest rate environment, you 
know, the discussion was, hey, 

1195
01:01:02,960 --> 01:01:05,080
net debt to EBITDA, what's your,
what's your coverage? 

1196
01:01:05,080 --> 01:01:08,800
Can we get paid back on the face
value, not on a cash flow basis?

1197
01:01:08,800 --> 01:01:11,640
Can we cover the interest going 
out the door because you had, 

1198
01:01:12,120 --> 01:01:14,760
you know, mid to low single 
digit interest rates. 

1199
01:01:15,080 --> 01:01:18,560
Well, to be part of private 
credit now you've got companies 

1200
01:01:18,560 --> 01:01:21,320
printing low teens interest 
rates and that kind of coverage 

1201
01:01:21,320 --> 01:01:22,840
is now a much more active 
discussion. 

1202
01:01:23,840 --> 01:01:28,600
But as relates to home building,
be remiss not to say you know, 

1203
01:01:28,600 --> 01:01:31,560
the old cliche about location, 
location, location. 

1204
01:01:32,400 --> 01:01:35,280
That's certainly the case. 
You know, the markets that have 

1205
01:01:35,280 --> 01:01:38,800
done well, the Midwest, I'm 
sitting here in Ohio, we've 

1206
01:01:38,800 --> 01:01:43,320
grown nicely. 
Not gangbusters necessarily, but

1207
01:01:43,320 --> 01:01:45,800
there's been demand to soak up 
the supply. 

1208
01:01:46,160 --> 01:01:49,080
And if anything, I'd say demands
out, you know, outpace supply a 

1209
01:01:49,080 --> 01:01:50,960
little bit. 
Certain markets where people 

1210
01:01:50,960 --> 01:01:53,480
still want to be. 
I mean, it's easier, as much as 

1211
01:01:53,480 --> 01:01:57,640
the Buckeye and me would love to
just take a swing at, you know, 

1212
01:01:57,920 --> 01:02:01,720
California in the PAC 10 people 
still, when you poll young 

1213
01:02:01,720 --> 01:02:03,880
people and they say if money was
no object, where would you want 

1214
01:02:03,880 --> 01:02:05,640
to live? 
People still say Southern 

1215
01:02:05,640 --> 01:02:08,800
California and New York. 
And I don't think that's going 

1216
01:02:08,800 --> 01:02:12,800
to change in a tremendous way. 
We've seen some shifts here for 

1217
01:02:12,800 --> 01:02:15,240
across living and other things, 
but at the end of the day the 

1218
01:02:15,240 --> 01:02:18,240
ability to put new inventory in 
those markets is still going to 

1219
01:02:18,240 --> 01:02:19,960
be a pretty good investment. 
It's that you can make it 

1220
01:02:19,960 --> 01:02:22,880
happen. 
So all of that is to say, I know

1221
01:02:22,880 --> 01:02:26,560
I've I've given you the just 
rampant both sided in here. 

1222
01:02:26,960 --> 01:02:30,880
But yeah, we're looking at gross
margins for home builders in the

1223
01:02:30,880 --> 01:02:35,320
mid to high teens and return on 
assets in the teens for 

1224
01:02:35,320 --> 01:02:38,920
relatively low inventory and 
very manageable leverage from 

1225
01:02:38,920 --> 01:02:41,160
our perspective. 
And these are equities that 

1226
01:02:41,160 --> 01:02:45,400
trade high, single, low, double 
digit type multiples, OK. 

1227
01:02:45,760 --> 01:02:49,000
And I like, like I say, you tend
to make more money in these 

1228
01:02:49,000 --> 01:02:50,880
industries on price than you do 
on volume. 

1229
01:02:51,160 --> 01:02:54,240
So I like to see where are some 
uncontrollable supply 

1230
01:02:54,240 --> 01:02:56,360
constraints, and I mean 
uncontrollable from the 

1231
01:02:56,360 --> 01:02:59,400
perspective of management. 
And if you don't have enough 

1232
01:02:59,400 --> 01:03:03,280
labor and you don't have enough 
supply chain to get out from 

1233
01:03:03,280 --> 01:03:07,320
under the demand, then I like 
that because you're not as prone

1234
01:03:07,320 --> 01:03:10,120
to bad actors, you know, coming 
in and oversupplying the market.

1235
01:03:11,200 --> 01:03:12,480
Yeah, they almost can't. 
Right. 

1236
01:03:12,520 --> 01:03:13,800
Oh, that's, that's exactly 
right. 

1237
01:03:13,840 --> 01:03:17,040
I mean, you talk to home 
builders for as an example, this

1238
01:03:17,040 --> 01:03:19,960
is another where where another 
one where having some scale 

1239
01:03:19,960 --> 01:03:21,040
really doesn't make a 
difference. 

1240
01:03:21,320 --> 01:03:23,440
If you ask home builders, hey, 
how many homes do you want to 

1241
01:03:23,440 --> 01:03:26,520
build in the market? 
And they'll say, well, you know,

1242
01:03:26,520 --> 01:03:30,160
I mean as many as we can sell, 
but we want to make sure we 

1243
01:03:30,160 --> 01:03:33,640
build just enough to keep our 
trades employed because the 

1244
01:03:33,640 --> 01:03:36,480
tradesman will say, well, hey, 
as long as you can keep me 

1245
01:03:36,480 --> 01:03:39,240
employed and get me to work, 
then I'm not going to look 

1246
01:03:39,240 --> 01:03:40,480
elsewhere. 
That's exactly right. 

1247
01:03:40,800 --> 01:03:44,160
So OK, what does that look like?
Well, in a given city, maybe 

1248
01:03:44,160 --> 01:03:47,640
that looks like two or three 
communities at an absorption 

1249
01:03:47,640 --> 01:03:51,120
rate of a couple houses a month.
How many houses that are that 

1250
01:03:51,120 --> 01:03:53,120
community get sold every month 
or every year? 

1251
01:03:53,480 --> 01:03:57,120
Well, great, at that pace, the 
market can probably absorb it. 

1252
01:03:57,280 --> 01:03:59,640
We can keep our trades employed.
And. 

1253
01:04:00,400 --> 01:04:02,480
You know how much of a problem 
some of the really small 

1254
01:04:02,480 --> 01:04:06,160
builders that want to do a house
or two at a time and they might 

1255
01:04:06,160 --> 01:04:10,760
have their favorite electrician,
plumber, you know, you name it, 

1256
01:04:11,000 --> 01:04:13,760
come in well, the earth's back 
of the line. 

1257
01:04:14,120 --> 01:04:18,400
So yeah, to your point, there's 
there's a for the time being at 

1258
01:04:18,400 --> 01:04:24,040
least there seems to be a a 
meaningful but not deadly supply

1259
01:04:24,040 --> 01:04:28,000
constraint that is keeping the 
market from going gangbusters. 

1260
01:04:28,440 --> 01:04:31,200
And so long is there. 
And that will just like anything

1261
01:04:31,200 --> 01:04:34,080
else that will mean revert over 
time that'll work its way 

1262
01:04:34,080 --> 01:04:37,480
through the system. 
But for the time being it seems 

1263
01:04:37,480 --> 01:04:39,080
like it's it's sort of a sticky 
issue. 

1264
01:04:39,640 --> 01:04:42,920
And. 
As long as that's true, we think

1265
01:04:42,920 --> 01:04:45,000
that, you know, capital is going
to be able to earn a nice 

1266
01:04:45,000 --> 01:04:48,360
return. 
So yeah, now there's a there's 

1267
01:04:48,360 --> 01:04:50,720
also discussion there about what
are these kind of interesting 

1268
01:04:50,720 --> 01:04:53,840
around, You know, how much does 
home price and building costs 

1269
01:04:53,840 --> 01:04:56,760
impact the inflation discussion,
which then impacts your rate 

1270
01:04:56,760 --> 01:04:59,240
discussion, which impacts your 
mortgage discussion. 

1271
01:04:59,560 --> 01:05:02,120
And now you've got the same 
issue on both sides of the 

1272
01:05:02,120 --> 01:05:05,120
housing debate. 
That's clear as mud right now 

1273
01:05:05,600 --> 01:05:08,480
because because anybody looking 
at building supply, we were 

1274
01:05:08,480 --> 01:05:10,880
chatting the other weekend, 
lumber prices have come come 

1275
01:05:10,880 --> 01:05:14,360
back down tremendously from the 
squeeze we saw in 2020. 

1276
01:05:15,400 --> 01:05:18,680
But at these prices, you know, 
mills aren't making a lot of 

1277
01:05:18,680 --> 01:05:20,720
money. 
So we would think that price 

1278
01:05:20,960 --> 01:05:25,000
probably reverts a little bit. 
All right, Well, how sticky is 

1279
01:05:25,000 --> 01:05:27,040
that? 
To me it looks like there will 

1280
01:05:27,040 --> 01:05:30,680
be some some cost push through 
out into the future. 

1281
01:05:30,960 --> 01:05:33,640
I mean, hopefully they can bring
some efficiencies out of it. 

1282
01:05:33,640 --> 01:05:35,960
I know people, depending on who 
you talk to, we'll say we 

1283
01:05:35,960 --> 01:05:38,920
basically built a house the way 
we did 30 years ago, some of the

1284
01:05:38,920 --> 01:05:40,880
materials a little more 
advanced, a little more energy 

1285
01:05:40,880 --> 01:05:42,520
efficient, just that or the 
other. 

1286
01:05:42,640 --> 01:05:45,480
But until we see a big 
breakthrough there, then those 

1287
01:05:45,480 --> 01:05:47,760
numbers probably don't change 
very much. 

1288
01:05:48,720 --> 01:05:52,280
So anyways, trying to put a 
point on it, it's an incredibly 

1289
01:05:52,280 --> 01:05:55,800
dynamic situation from both the 
supply and the demand side 

1290
01:05:56,080 --> 01:05:58,320
nationally. 
I think you can get a much 

1291
01:05:58,320 --> 01:06:02,080
better feel in certain local 
markets and when it comes to the

1292
01:06:02,080 --> 01:06:04,560
home builders that are big 
enough to have public securities

1293
01:06:04,560 --> 01:06:07,320
out there, either debt or 
equity, then seems like you're 

1294
01:06:07,320 --> 01:06:10,080
paying a fair price for the 
landscape that you're 

1295
01:06:10,080 --> 01:06:12,920
approaching right now. 
So again, probably a decent 

1296
01:06:12,920 --> 01:06:14,680
place to have some capital to 
put to work. 

1297
01:06:16,000 --> 01:06:18,200
Yeah. 
Then maybe this is an impossible

1298
01:06:18,200 --> 01:06:21,720
question to answer without 
actual specific examples, but 

1299
01:06:21,720 --> 01:06:26,600
how do you think about going 
down on the credit quality to 

1300
01:06:26,600 --> 01:06:28,840
get a little bit more yield? 
All else equal? 

1301
01:06:28,840 --> 01:06:31,640
Would you be more biased on a 
little less yield for a little 

1302
01:06:31,640 --> 01:06:34,280
higher credit quality? 
Or this is an impossible 

1303
01:06:34,280 --> 01:06:37,280
question to frame the way I'm? 
Asked No, no, it's it's a very 

1304
01:06:37,280 --> 01:06:37,920
important. 
Question. 

1305
01:06:38,480 --> 01:06:40,320
I mean, look. 
I'll just let me tell you my 

1306
01:06:40,320 --> 01:06:43,960
bias and like you said, we got, 
you know, I'm going to say this.

1307
01:06:43,960 --> 01:06:46,800
I'm just, I can just feel John 
Mcclane and Bill's ox cringe. 

1308
01:06:46,800 --> 01:06:51,000
As I said this, I there's 
nothing more attractive to me 

1309
01:06:51,000 --> 01:06:53,240
has died. 
The wool value guy did a nice 

1310
01:06:53,240 --> 01:06:55,760
high coupon and a really high 
yield. 

1311
01:06:56,040 --> 01:06:59,000
And I'm thinking, hey, I'm going
to earn teens and get paid back.

1312
01:06:59,000 --> 01:07:01,600
This is going to be great. 
You know, I think when we get 

1313
01:07:01,600 --> 01:07:04,480
investments like that, you know,
we all start fantasizing in our 

1314
01:07:04,480 --> 01:07:07,200
head, OK, how many of how many 
of these do I need for? 

1315
01:07:07,200 --> 01:07:09,560
I don't even need to, you know, 
I have to replace my income. 

1316
01:07:10,000 --> 01:07:14,080
Yeah, I'm a sucker for that. 
I've learned my lesson. 

1317
01:07:14,360 --> 01:07:16,680
I've gotten my hand caught in 
the procedure a couple times. 

1318
01:07:16,720 --> 01:07:19,680
And that is just a painful 
lesson that you don't want to 

1319
01:07:19,680 --> 01:07:24,680
learn twice a couple. 
I think the lesson there is 

1320
01:07:24,680 --> 01:07:27,960
really and in high yield, I 
think this is even more true in 

1321
01:07:27,960 --> 01:07:30,240
high yield than it is in 
equities, to be honest with you.

1322
01:07:30,240 --> 01:07:33,760
Because equities there's so 
there can be so much emotion in 

1323
01:07:33,760 --> 01:07:37,360
it that sometimes you get an 
equity price that in my opinion,

1324
01:07:37,360 --> 01:07:40,520
doesn't have the information 
quality that you think it does. 

1325
01:07:41,400 --> 01:07:44,320
Maybe the market's short term, 
maybe there's something 

1326
01:07:44,320 --> 01:07:48,640
technically going on, who knows.
My view is that doesn't happen 

1327
01:07:48,640 --> 01:07:52,720
as much in high yield credit. 
If something is priced wide to a

1328
01:07:52,920 --> 01:07:55,840
similar bond and you look at 
comparables and something's 

1329
01:07:55,840 --> 01:07:59,040
weird, chances are very, very 
good there's a reason for it. 

1330
01:07:59,880 --> 01:08:02,800
So here's a great, I can give 
you an example. 

1331
01:08:03,720 --> 01:08:07,240
A lot of our Canadian credits 
for oil and gas we priced there 

1332
01:08:07,240 --> 01:08:10,040
was a credit and I I don't want 
to get into specifics, but there

1333
01:08:10,040 --> 01:08:13,920
was a company we went to last 
fall that printed a 12% coupon 

1334
01:08:14,480 --> 01:08:16,520
and came to market for the first
time. 

1335
01:08:16,920 --> 01:08:20,920
And at the time you know 
interest rate per the yields 

1336
01:08:20,920 --> 01:08:24,960
were really high singles for for
energy with but your antenna 

1337
01:08:24,960 --> 01:08:29,720
goes up like OK, this is several
100 basis points more yield than

1338
01:08:30,479 --> 01:08:32,680
than is being offered in the 
market for similar sized 

1339
01:08:32,680 --> 01:08:34,840
businesses. 
Like. 

1340
01:08:35,359 --> 01:08:38,600
My gut reaction is to say we're 
going to pass because that's 

1341
01:08:38,600 --> 01:08:39,920
what it takes to get this deal 
done. 

1342
01:08:40,240 --> 01:08:42,680
There's probably a good reason. 
Yeah, why exactly? 

1343
01:08:43,240 --> 01:08:45,399
We want to be able to know 
exactly why that's happening. 

1344
01:08:45,960 --> 01:08:49,520
And in that case, back to our 
earlier discussion, there were 

1345
01:08:49,560 --> 01:08:53,000
several things we could look at 
that we felt like we had a good 

1346
01:08:53,000 --> 01:08:56,640
handle on why the market was 
looking at it the way it was and

1347
01:08:56,640 --> 01:09:00,840
why that was incorrect. 
And so to try and answer your 

1348
01:09:00,840 --> 01:09:02,720
question on do you want a little
higher quality, a little less 

1349
01:09:02,720 --> 01:09:06,840
yield, a little less yield, a 
little more quality, The short 

1350
01:09:06,840 --> 01:09:09,359
answer is that's portfolio 
management question that really 

1351
01:09:09,399 --> 01:09:12,160
has to come out with you as you 
construct the overall portfolio 

1352
01:09:12,399 --> 01:09:16,120
and is above my pay grade. 
So how to answer like that? 

1353
01:09:16,200 --> 01:09:20,439
Having said that, to the extent 
you find something that has more

1354
01:09:20,439 --> 01:09:23,000
yield for a lower credit 
quality, it's very, very 

1355
01:09:23,000 --> 01:09:26,160
important to have a much sharper
view of why you are divergent 

1356
01:09:26,160 --> 01:09:29,560
from the market. 
And to the extent you can do 

1357
01:09:29,560 --> 01:09:33,479
that, we're thrilled. 
I mean, as an analyst, that's 

1358
01:09:33,479 --> 01:09:36,960
my, I mean that's my Super Bowl.
Can I find a credit that is, can

1359
01:09:36,960 --> 01:09:40,520
we find a mispriced credit that 
performs the way we want it to 

1360
01:09:40,960 --> 01:09:45,080
and and is really added to the 
overall portfolio in a 

1361
01:09:45,080 --> 01:09:47,560
meaningful way? 
That's what we're looking for 

1362
01:09:47,560 --> 01:09:51,359
every day. 
I wouldn't put a percentage on 

1363
01:09:51,359 --> 01:09:54,840
it in terms of opportunities. 
We look at and pass on the vast 

1364
01:09:54,840 --> 01:09:58,080
majority of things that have 
these really high yields we're 

1365
01:09:58,080 --> 01:09:59,800
going to pass on because 
they're, they're, you know, 

1366
01:09:59,840 --> 01:10:01,720
they're cheap for a reason, 
right? 

1367
01:10:02,200 --> 01:10:06,200
So I would say that the very 
inversely with our confidence, 

1368
01:10:06,840 --> 01:10:10,960
you know, give you an example on
the other side, 2 fallen angels 

1369
01:10:10,960 --> 01:10:13,280
that have since been upgraded, 
oxygen, petroleum and Ford 

1370
01:10:13,280 --> 01:10:16,200
Motor. 
Well, you know, I've covered 

1371
01:10:16,200 --> 01:10:19,600
those businesses for a while. 
Not a lot of secrets. 

1372
01:10:19,840 --> 01:10:23,360
Yeah, we can debate the quality 
of the overall oil market or the

1373
01:10:23,360 --> 01:10:26,280
overall automobile market in the
US Hey, fine. 

1374
01:10:26,840 --> 01:10:29,040
But at the end of the day, he's 
really understood credits and we

1375
01:10:29,040 --> 01:10:30,280
know why they're doing what 
they're doing. 

1376
01:10:30,800 --> 01:10:34,200
We don't need to go hunt for 
specifics around the deal. 

1377
01:10:35,320 --> 01:10:37,920
Those again really since been. 
Upgraded to very. 

1378
01:10:37,920 --> 01:10:42,080
Low IG, but been upgraded. 
OK, that's fine. 

1379
01:10:42,200 --> 01:10:45,120
Those are well understood. 
Those are very liquid, no big 

1380
01:10:45,120 --> 01:10:47,280
deal. 
The other thing I would say on 

1381
01:10:47,280 --> 01:10:50,360
this point is it's not just the 
yield we want to pay attention 

1382
01:10:50,360 --> 01:10:52,520
to or the coupon, it's the 
liquidity. 

1383
01:10:53,080 --> 01:10:55,200
And this is something that I've 
had to come a long way on on 

1384
01:10:55,200 --> 01:10:57,720
learning because, you know, 
these guys grew up in the credit

1385
01:10:57,720 --> 01:10:59,880
markets and the teams grew up in
the credit markets and I grew up

1386
01:10:59,880 --> 01:11:02,600
in the equity markets. 
And you know, and equities, even

1387
01:11:02,600 --> 01:11:06,200
small cap equities, you're used 
to being pretty liquid if you're

1388
01:11:06,200 --> 01:11:09,040
a long term holder, just being 
able to get a position unless 

1389
01:11:09,040 --> 01:11:12,320
you're in a really massive fund 
is generally not that hard. 

1390
01:11:12,320 --> 01:11:14,360
And certainly if you're an 
individual investor, it's almost

1391
01:11:14,360 --> 01:11:17,960
never a consideration, right? 
Higher credit just does not work

1392
01:11:17,960 --> 01:11:19,720
that way. 
And this ties back in how we 

1393
01:11:19,720 --> 01:11:21,400
were saying it's a less 
efficient asset class. 

1394
01:11:21,880 --> 01:11:26,240
There are issues, you know, 200,
three, $100 million face value 

1395
01:11:26,760 --> 01:11:30,360
that might trade a couple times 
a week if you're lucky. 

1396
01:11:31,160 --> 01:11:35,760
And the spread on the bid ask 
for it might be whole percentage

1397
01:11:35,760 --> 01:11:38,000
points. 
You know, I mean, on stocks are 

1398
01:11:38,000 --> 01:11:41,680
used to the spread being a 
couple pennies maybe, right? 

1399
01:11:43,080 --> 01:11:45,760
And understanding where those 
credits are priced and being 

1400
01:11:45,760 --> 01:11:49,840
able to be in the seat and see, 
OK, you know, these bid and ask 

1401
01:11:49,840 --> 01:11:51,760
prices are skewed from where 
they can be. 

1402
01:11:52,200 --> 01:11:54,560
I mean, you can essentially 
demand a liquidity bringing from

1403
01:11:54,560 --> 01:11:57,240
the market on both the bid and 
the ask side if you know what 

1404
01:11:57,240 --> 01:12:00,080
you're looking at. 
And so that's so every credit we

1405
01:12:00,080 --> 01:12:03,720
get involved in that's a piece 
of the discussion is how much of

1406
01:12:03,720 --> 01:12:06,360
this do we want, how liquid will
it be? 

1407
01:12:06,520 --> 01:12:09,520
Can we take advantage of the 
liquidity dynamics in the market

1408
01:12:09,760 --> 01:12:13,120
Because if we can't, there's 
going to be a return premium we 

1409
01:12:13,120 --> 01:12:16,800
can get somewhere else. 
And I'm trying to answer the 

1410
01:12:16,800 --> 01:12:18,720
question you originally. 
Asked which was. 

1411
01:12:19,080 --> 01:12:22,320
You know, higher credit, lower 
yield or lower quality, higher 

1412
01:12:22,320 --> 01:12:26,240
yield, excuse me, something 
that's important to understand. 

1413
01:12:26,720 --> 01:12:28,800
Is. 
The way the ETFs and the way 

1414
01:12:28,800 --> 01:12:32,000
passive has impacted this 
market, forgive me for jumping 

1415
01:12:32,000 --> 01:12:36,560
around, but it speaks exactly to
this liquidity issue because in 

1416
01:12:36,560 --> 01:12:40,000
the equity market, passive has 
famously taken over. 

1417
01:12:40,680 --> 01:12:42,240
It's very hard to beat the 
passive benchmark. 

1418
01:12:42,240 --> 01:12:44,840
And there's a very good passive 
benchmark when you go out and 

1419
01:12:44,840 --> 01:12:48,320
get, you know, the S&P 500 ETF 
and and that's great. 

1420
01:12:48,320 --> 01:12:50,160
You're paying a couple basis 
points if that. 

1421
01:12:50,280 --> 01:12:52,120
I think a couple of them are at 
0 now, right? 

1422
01:12:52,120 --> 01:12:56,760
To say make revenue either way. 
What happens in a high yield 

1423
01:12:56,760 --> 01:12:58,320
space? 
Is the high yield. 

1424
01:12:58,320 --> 01:13:02,200
ETS people want to use them 
tactically to get exposure to 

1425
01:13:02,200 --> 01:13:04,960
the asset crash as a whole, 
which is really a spread and 

1426
01:13:04,960 --> 01:13:07,280
rate bet and there's something 
to be said for that. 

1427
01:13:07,960 --> 01:13:10,560
But practically what happens is 
that a whole lot of capital 

1428
01:13:10,560 --> 01:13:13,560
moves into one of those ETS. 
The ETF has to go out and buy a 

1429
01:13:13,560 --> 01:13:16,200
little bit of every issue in the
market that's in that benchmark,

1430
01:13:16,400 --> 01:13:20,360
or at least it tries to. 
Well, if you get down the. 

1431
01:13:20,600 --> 01:13:23,240
The face value. 
Structure and down the market 

1432
01:13:23,240 --> 01:13:25,640
value structure into the really 
small bonds that are really 

1433
01:13:25,640 --> 01:13:28,480
illiquid. 
That is AI mean I won't say if 

1434
01:13:28,480 --> 01:13:32,440
they price agnostic bitter, but 
it's it's close If they price 

1435
01:13:32,440 --> 01:13:36,080
insensitive bitter on that 
particular credit that maybe 

1436
01:13:36,080 --> 01:13:38,360
they just want to put money to 
work and you can go ZAP the 

1437
01:13:38,360 --> 01:13:40,320
premium because they want to get
involved. 

1438
01:13:41,000 --> 01:13:42,640
And then it works the same way 
on the sell. 

1439
01:13:42,640 --> 01:13:46,200
They pull much money out all of 
a sudden you have a buyer that's

1440
01:13:46,200 --> 01:13:49,200
not or a seller that's not 
really selling based on price, 

1441
01:13:49,680 --> 01:13:51,600
which is a great place to be on 
the other side of the 

1442
01:13:51,600 --> 01:13:55,400
transaction. 
So those are all factors we 

1443
01:13:55,400 --> 01:13:56,720
want. 
To keep in mind as. 

1444
01:13:56,720 --> 01:13:58,760
We look at this, I mean, first 
and foremost, we're always going

1445
01:13:58,760 --> 01:14:00,480
to be business analysts and 
we're always going to look at it

1446
01:14:00,480 --> 01:14:02,840
from the bottom up and can we 
get paid back? 

1447
01:14:02,840 --> 01:14:05,320
I mean that's the that's the 
most important thing. 

1448
01:14:05,880 --> 01:14:08,360
But there are these secondary 
considerations in our market 

1449
01:14:08,400 --> 01:14:11,480
where we want to be aware of how
those things work because that 

1450
01:14:11,480 --> 01:14:13,720
that is going to impact our 
total return in the way we put 

1451
01:14:13,720 --> 01:14:17,520
the portfolio together. 
So I know I've really bounced 

1452
01:14:17,520 --> 01:14:18,680
around. 
On you here but. 

1453
01:14:19,040 --> 01:14:21,400
No, that makes sense. 
Your questions, I mean, I was, I

1454
01:14:21,400 --> 01:14:22,560
was. 
Trying to ask you a question 

1455
01:14:22,560 --> 01:14:23,360
that. 
Would have you talk. 

1456
01:14:23,360 --> 01:14:25,160
Like this. 
So I'm glad that you're talking 

1457
01:14:25,200 --> 01:14:26,520
like this. 
It's a great question. 

1458
01:14:26,520 --> 01:14:28,080
It's a very perceptive question 
because. 

1459
01:14:28,520 --> 01:14:30,560
Even though we've all been doing
this for, you know, our teams 

1460
01:14:30,800 --> 01:14:35,320
work together for before I was 
almost 10 years exactly, just 

1461
01:14:35,320 --> 01:14:37,760
about 10 years, we've known each
other, work together in all 

1462
01:14:37,760 --> 01:14:41,080
kinds of different capacities. 
This exact discussion is still 

1463
01:14:41,080 --> 01:14:43,600
the one we have sitting around 
the office and we all sit 

1464
01:14:43,600 --> 01:14:45,760
within, you know, we're all in 
the office every day and we sit 

1465
01:14:45,760 --> 01:14:46,880
within hours reach of each 
other. 

1466
01:14:47,280 --> 01:14:50,000
And when the credit comes up, 
we're going to take all of these

1467
01:14:50,000 --> 01:14:54,200
boxes because any one of these 
could just subtly shift the 

1468
01:14:54,200 --> 01:14:57,280
dynamic of what's going on. 
And that's why this this job is 

1469
01:14:57,280 --> 01:14:59,040
kind of fun. 
It's kind of fun. 

1470
01:14:59,040 --> 01:15:01,160
It's a lot fun. 
And it's also where you feel 

1471
01:15:01,160 --> 01:15:03,760
like you can really add a lot of
value as an active manager by 

1472
01:15:03,760 --> 01:15:06,040
having an opinion and 
understanding how to interact 

1473
01:15:06,040 --> 01:15:09,280
with the market as opposed to, 
hey, I've got this view of oil 

1474
01:15:09,280 --> 01:15:11,520
prices and I've got this view of
gas and I've got, you know, 

1475
01:15:11,800 --> 01:15:13,280
here's what I think home 
builders are going to do. 

1476
01:15:13,640 --> 01:15:15,600
Those are fun puzzles to try and
solve. 

1477
01:15:15,960 --> 01:15:18,560
But then when it comes to the 
tactics of how do you express 

1478
01:15:18,560 --> 01:15:22,400
that opinion? 
I mean, that is also a very 

1479
01:15:22,400 --> 01:15:24,120
important part of how you put 
the strategy together. 

1480
01:15:24,480 --> 01:15:27,240
So it's a very technical asset 
class. 

1481
01:15:27,280 --> 01:15:30,040
In that. 
Sense and it's very important to

1482
01:15:30,160 --> 01:15:33,080
put all those facets together or
else you might be leaving some 

1483
01:15:33,080 --> 01:15:35,480
real money on the table. 
And these returns like I say 

1484
01:15:35,520 --> 01:15:38,320
these these, these can be 
several 100 basis points at a 

1485
01:15:38,320 --> 01:15:40,640
time. 
So this is meaningful, you know,

1486
01:15:41,000 --> 01:15:44,040
this is meaningful return 
prospects that we just want to 

1487
01:15:44,040 --> 01:15:46,080
make sure we have an eye on and 
have a view on. 

1488
01:15:46,080 --> 01:15:49,240
So I think you can also tell in 
this discussion in the beginning

1489
01:15:49,240 --> 01:15:51,400
when I said, hey, I'm a research
analyst. 

1490
01:15:51,400 --> 01:15:53,880
I don't trade the portfolio when
I don't, I don't manage 

1491
01:15:53,880 --> 01:15:58,080
portfolio as PM and I love my 
role because I. 

1492
01:15:58,080 --> 01:16:00,240
Try. 
And present the business from 

1493
01:16:00,240 --> 01:16:03,200
the bottom up and answer all the
questions that, hey, we 

1494
01:16:03,200 --> 01:16:05,840
discussed about this home 
builder, that home builder, this

1495
01:16:05,840 --> 01:16:09,880
oil producer in a way that it's 
easily digestible by these guys 

1496
01:16:09,880 --> 01:16:12,960
that have to sit there and say, 
OK, when do we pull the trigger 

1497
01:16:12,960 --> 01:16:15,040
to buy or sell? 
And I have to have all that in 

1498
01:16:15,040 --> 01:16:17,040
mind. 
And then I have to interface 

1499
01:16:17,040 --> 01:16:19,360
with the market and understand 
how this particular security is 

1500
01:16:19,360 --> 01:16:21,720
created. 
You have to marry those views. 

1501
01:16:22,160 --> 01:16:25,120
And every iteration, we think 
every forecast is just an 

1502
01:16:25,120 --> 01:16:27,040
iteration about the future where
you're trying to be a little 

1503
01:16:27,040 --> 01:16:30,480
less wrong, right? 
I mean, no one's going to be 

1504
01:16:30,480 --> 01:16:32,120
right. 
Specifically over time, as we've

1505
01:16:32,120 --> 01:16:33,920
iterated through that, I think 
we've got better at it. 

1506
01:16:34,320 --> 01:16:36,720
And you do, right? 
I mean, after you've had a, you 

1507
01:16:36,720 --> 01:16:39,280
know, a conversation about, you 
know, a company for the 10th 

1508
01:16:39,280 --> 01:16:42,200
time, you sort of know how the 
other guy is is going to react, 

1509
01:16:42,200 --> 01:16:44,440
which is great. 
It feels like a sport sometimes 

1510
01:16:44,440 --> 01:16:46,720
where the team, you know, the 
hole is greater than some of the

1511
01:16:46,720 --> 01:16:49,040
parts because you can really 
work through things very 

1512
01:16:49,040 --> 01:16:50,520
quickly. 
You know, we're going to have an

1513
01:16:50,520 --> 01:16:54,320
opinion on a credit pretty fast 
And and if we don't, we're 

1514
01:16:54,320 --> 01:16:56,080
willing to say that, I mean, 
there are plenty of things we're

1515
01:16:56,080 --> 01:16:59,040
just going to put in a too hard 
bucket that, you know, don't. 

1516
01:16:59,760 --> 01:17:01,120
I'm just going. 
To say, yeah, I'm, I'm. 

1517
01:17:01,120 --> 01:17:02,400
Not really fit to have an 
opinion. 

1518
01:17:02,440 --> 01:17:05,000
I don't care how good of a 
return prospect it looks like, I

1519
01:17:05,720 --> 01:17:08,880
will pass because that's not in 
our circle of competence. 

1520
01:17:09,320 --> 01:17:12,480
There are also places where we 
can get up speed really quickly 

1521
01:17:12,960 --> 01:17:15,160
and that's a lot of fun too. 
It's it's very additive 

1522
01:17:15,400 --> 01:17:16,720
distraction. 
You feel like you can improve 

1523
01:17:16,720 --> 01:17:20,520
over time. 
Yeah, yeah, I'd imagine. 

1524
01:17:20,920 --> 01:17:24,520
I mean, everything is a get your
money back issue, but I think 

1525
01:17:24,520 --> 01:17:27,680
debt particularly is because you
don't have the right side to 

1526
01:17:27,680 --> 01:17:30,000
bail you out, right? 
There's no, there's never like 

1527
01:17:30,000 --> 01:17:33,000
some huge winner in debt, right?
You just get your money back and

1528
01:17:33,000 --> 01:17:34,240
move on. 
That's exactly right. 

1529
01:17:34,240 --> 01:17:38,680
Well, it's like Howard Marks. 
You know, I think it's the I 

1530
01:17:38,680 --> 01:17:42,600
would imagine the Marks memos is
a gateway to a lot of young 

1531
01:17:42,600 --> 01:17:46,000
people and and college and 
afterwards into credit and it's 

1532
01:17:46,000 --> 01:17:48,120
a great place to start. 
But he calls the famous losers 

1533
01:17:48,120 --> 01:17:49,600
game, right? 
It's a negative art. 

1534
01:17:50,080 --> 01:17:52,320
You know, in credit it's about 
what you don't own and as long 

1535
01:17:52,320 --> 01:17:54,280
as you don't own the things that
default, you're going to put 

1536
01:17:54,280 --> 01:17:55,520
together a pretty good track 
record. 

1537
01:17:55,920 --> 01:17:59,880
I mean that is the game. 
You know, inequity to your .1 

1538
01:17:59,880 --> 01:18:03,440
home run in the portfolio can 
cover all kinds of mistakes and 

1539
01:18:03,440 --> 01:18:06,160
a lot of great track records of 
history have been made that way.

1540
01:18:07,120 --> 01:18:09,720
Credit is the exact opposite. 
You know, the best you can do 

1541
01:18:09,720 --> 01:18:15,840
when you make the investment. 
Now I will say in the spirit of 

1542
01:18:15,840 --> 01:18:19,560
being in covering all the all 
bases every once in a while and 

1543
01:18:19,560 --> 01:18:22,000
especially in the high yield 
market, you will get a chance to

1544
01:18:22,000 --> 01:18:27,040
swing for a really nice return. 
20/20 was that for us where we 

1545
01:18:27,040 --> 01:18:31,400
were buying bonds at 30 or $0.40
in the dollar that ended up 

1546
01:18:31,400 --> 01:18:35,320
earning, you know, high double 
digit. 

1547
01:18:35,320 --> 01:18:37,360
Returns because they were just 
mispriced. 

1548
01:18:37,840 --> 01:18:39,920
You have priced insensitive 
buyers, particularly in the high

1549
01:18:39,920 --> 01:18:46,800
yield market when things get 
ugly, holders can be very, if 

1550
01:18:46,800 --> 01:18:50,040
they they don't, there are 
certain players even in high 

1551
01:18:50,040 --> 01:18:52,480
yield that just don't want to 
hold bonds and things get 

1552
01:18:52,480 --> 01:18:55,040
really, really ugly. 
And certainly March and April of

1553
01:18:55,040 --> 01:18:59,080
2020 was one of those times, and
certainly in my industries. 

1554
01:18:59,240 --> 01:19:02,000
Of airlines. 
Oil and gas, you name it. 

1555
01:19:02,760 --> 01:19:04,160
Yeah, right. 
I mean, that was sort of 

1556
01:19:04,640 --> 01:19:06,000
there's. 
Plenty was going wrong all. 

1557
01:19:06,000 --> 01:19:09,000
At once, but there was a lot to 
do there and all of a sudden 

1558
01:19:09,000 --> 01:19:11,800
you're look you go from seeing 
high single digit type yields 

1559
01:19:11,800 --> 01:19:16,360
too 2030% type yields to 
maturity and say, OK, this is 

1560
01:19:16,800 --> 01:19:19,760
the game has changed now we're 
not really in a pricing game, 

1561
01:19:19,760 --> 01:19:24,160
we're in a survival game and how
do we want to do that and we had

1562
01:19:24,280 --> 01:19:26,320
we had a view on some. 
Things we had a view on. 

1563
01:19:26,360 --> 01:19:29,320
Some things ahead of time that 
allowed us to have an opinion 

1564
01:19:29,320 --> 01:19:31,920
really quickly and that was 
really, really fun. 

1565
01:19:32,480 --> 01:19:34,640
I am not a distressed analyst 
per. 

1566
01:19:34,640 --> 01:19:37,000
Southeast. 
That's a very narrow skill set. 

1567
01:19:38,320 --> 01:19:41,480
John started out in distressed 
and, and has done that and has a

1568
01:19:41,480 --> 01:19:43,400
lot of I understand how that 
system works. 

1569
01:19:43,400 --> 01:19:45,720
I'm I am not the guy to ask 
there. 

1570
01:19:46,000 --> 01:19:49,480
We also like to say, you know, 
distressed happens all at once 

1571
01:19:49,480 --> 01:19:52,320
and then you go for long periods
where there's not a lot to do 

1572
01:19:52,680 --> 01:19:56,520
because the way cycles work. 
So do you want to is that is the

1573
01:19:56,560 --> 01:19:58,800
type of thing you want to do as 
a career or you can build a 

1574
01:19:58,800 --> 01:20:00,600
strategy around? 
Yeah, it's tough. 

1575
01:20:00,800 --> 01:20:04,080
It's tough. 
So that's probably a different. 

1576
01:20:05,480 --> 01:20:08,160
Nice tool to have, but maybe not
the strategy to run. 

1577
01:20:08,160 --> 01:20:09,720
Exactly. 
Hey, it's great. 

1578
01:20:09,720 --> 01:20:12,240
It's a nice to have. 
And there's nothing better than 

1579
01:20:12,240 --> 01:20:16,080
owning quality when something 
you like falls out of bed and 

1580
01:20:16,080 --> 01:20:17,880
then you can go straight into 
it. 

1581
01:20:17,920 --> 01:20:20,320
I mean, that's sort of like the 
died in the world, Graham died 

1582
01:20:20,320 --> 01:20:24,160
value investing where hey, I'm, 
I'm buying, maybe I'm not buying

1583
01:20:24,160 --> 01:20:28,640
dollars, but I'm buying, you 
know, 3/4 for a dime type thing.

1584
01:20:28,640 --> 01:20:30,440
I mean, that's, that's pretty 
fun. 

1585
01:20:30,680 --> 01:20:33,160
So it's an element of it. 
It's an element of the high 

1586
01:20:33,160 --> 01:20:35,600
yield market. 
It's less, it's probably going 

1587
01:20:35,600 --> 01:20:38,960
to be less than it was going. 
It's probably going to be less 

1588
01:20:38,960 --> 01:20:40,520
going forward than it has. 
Been in the past. 

1589
01:20:40,920 --> 01:20:43,480
Back there just around private 
credit, a lot of those credits 

1590
01:20:43,560 --> 01:20:47,200
are probably going to go through
workouts and amendments and 

1591
01:20:47,280 --> 01:20:50,400
capital infusions and it's 
subtly different way than they 

1592
01:20:50,400 --> 01:20:54,040
have in the past. 
So I would anticipate that even 

1593
01:20:54,040 --> 01:20:57,240
though definitely a believer 
that history doesn't. 

1594
01:20:57,240 --> 01:21:00,080
Repeat, but rhymes. 
And default rates will 

1595
01:21:00,880 --> 01:21:03,440
eventually rise, and we'll see 
trouble in the market. 

1596
01:21:03,840 --> 01:21:06,920
Maybe that ends up working out a
little differently going 

1597
01:21:06,920 --> 01:21:09,120
forward. 
That might not manifest itself 

1598
01:21:09,120 --> 01:21:10,800
in the public credit markets the
way it has. 

1599
01:21:11,240 --> 01:21:13,640
But nonetheless, we're always 
on. 

1600
01:21:13,680 --> 01:21:15,920
We're always watchful for it. 
I mean, all of us have been 

1601
01:21:15,920 --> 01:21:18,720
through situations where, you 
know, credits just get beaten 

1602
01:21:18,720 --> 01:21:22,040
down and things go wrong and 
people get scared. 

1603
01:21:22,400 --> 01:21:25,800
And you just know there's some 
panic selling and all of a 

1604
01:21:25,800 --> 01:21:28,080
sudden you figure out how much. 
Conviction you have. 

1605
01:21:28,080 --> 01:21:31,400
In that investment or not and 
and it's a painful. 

1606
01:21:31,400 --> 01:21:32,840
Lesson to learn. 
But. 

1607
01:21:33,200 --> 01:21:35,920
You know, once you learned a 
couple times, you hopefully get 

1608
01:21:35,920 --> 01:21:39,440
a little quicker at making those
decisions and understanding, you

1609
01:21:39,480 --> 01:21:41,880
know, when you want to put some 
capital to work when everyone 

1610
01:21:41,880 --> 01:21:45,240
else is truly being fearful. 
Yeah. 

1611
01:21:46,680 --> 01:21:49,640
How did you how? 
Did you work mean as an energy? 

1612
01:21:49,640 --> 01:21:50,880
Covering energy? 
How did? 

1613
01:21:50,880 --> 01:21:57,000
You work through COVID looking 
at I mean, you know, the the 

1614
01:21:57,000 --> 01:21:59,440
picture changed so much from 
April to October. 

1615
01:21:59,440 --> 01:22:03,960
I mean, how did you to the 
extent you can remember, oh, how

1616
01:22:03,960 --> 01:22:05,400
do you, how do you go through a 
time like? 

1617
01:22:05,400 --> 01:22:06,280
That. 
And. 

1618
01:22:06,280 --> 01:22:08,320
And get back to normal. 
Well, I can remember pretty 

1619
01:22:08,360 --> 01:22:11,560
well. 
Oh, that was that. 

1620
01:22:12,600 --> 01:22:14,480
Was that? 
Was really something else. 

1621
01:22:14,600 --> 01:22:16,440
I'll try and. 
Tell you the story crime 

1622
01:22:16,440 --> 01:22:18,160
logically, because in my 
nightmares, this is how it 

1623
01:22:18,160 --> 01:22:21,600
works. 
That was. 

1624
01:22:21,600 --> 01:22:25,160
Work I I should say real. 
This is obviously told from my 

1625
01:22:25,160 --> 01:22:29,200
perspective, but at the time as 
an analyst and I don't think 

1626
01:22:29,200 --> 01:22:30,520
they can hear me from where I'm 
sitting in the. 

1627
01:22:30,520 --> 01:22:31,560
Office. 
So I'll, I'll go. 

1628
01:22:31,600 --> 01:22:33,880
Ahead and say it, I mean, I, I 
really couldn't have been 

1629
01:22:33,880 --> 01:22:36,360
working for better guys than the
particularly the two guys I was 

1630
01:22:36,360 --> 01:22:39,440
working for. 
Sukum Patel, who's who's not a 

1631
01:22:39,480 --> 01:22:42,360
firm any longer. 
He he retired a few years ago. 

1632
01:22:42,360 --> 01:22:45,920
I was really my mentor and first
boss and energy and John 

1633
01:22:45,920 --> 01:22:51,320
Mcclane, who is even though he's
PM is that I as as an energy 

1634
01:22:51,320 --> 01:22:55,080
analyst qua energy analyst, I 
put him up against anybody 

1635
01:22:55,680 --> 01:22:59,440
working for those two guys in 
that environment was again, 

1636
01:22:59,480 --> 01:23:02,440
about as lucky as you can be to 
see how to work through that. 

1637
01:23:02,440 --> 01:23:05,240
So let's go back to January and 
February. 

1638
01:23:05,240 --> 01:23:07,400
I remember being at a oil 
conference. 

1639
01:23:07,400 --> 01:23:09,280
It was the last trip I took 
before COVID. 

1640
01:23:09,560 --> 01:23:12,560
And I think for what whoever 
everyone that took one last trip

1641
01:23:12,560 --> 01:23:14,960
before COVID, you know where you
were the last time you left your

1642
01:23:14,960 --> 01:23:16,600
house. 
I was in an oil and gas 

1643
01:23:16,600 --> 01:23:20,120
conference. 
And this was right when Qasem 

1644
01:23:20,120 --> 01:23:24,520
Soleimani had just been killed 
and there are Marines deploying 

1645
01:23:24,520 --> 01:23:27,040
to Saudi Arabia to counteract 
Iran. 

1646
01:23:27,560 --> 01:23:30,080
So we got a little bit of pop in
the oil price and that was the 

1647
01:23:30,080 --> 01:23:33,080
discussion point. 
Some of the headlines around 

1648
01:23:33,080 --> 01:23:35,880
COVID and China had come out. 
But whatever were in this sort 

1649
01:23:35,880 --> 01:23:41,240
of like the geopolitical risk 
premiums coming back in oil and 

1650
01:23:41,240 --> 01:23:43,680
then COVID starts to come out. 
OK, this is a. 

1651
01:23:43,680 --> 01:23:46,160
Problem. 
OK, we know this is a little 

1652
01:23:46,160 --> 01:23:48,360
more widespread. 
What's going to happen? 

1653
01:23:48,920 --> 01:23:52,040
I think it's probably been 
forgotten because of how how bad

1654
01:23:52,040 --> 01:23:54,480
COVID was for everyone, how 
traumatic that experience was. 

1655
01:23:54,840 --> 01:23:57,520
Oil really fell off a Cliff for 
the first time when the OPEC 

1656
01:23:57,520 --> 01:24:01,560
deal fell apart, which was a 
little bit before most people 

1657
01:24:01,560 --> 01:24:05,280
went into lockdown. 
And I can tell you on that. 

1658
01:24:05,280 --> 01:24:07,040
Saturday. 
When pictures. 

1659
01:24:07,040 --> 01:24:09,400
Come out that the Russians and 
Saudis have walked out of the 

1660
01:24:09,400 --> 01:24:12,080
OPEC room and they've knocked 
each other's flags over on the 

1661
01:24:12,080 --> 01:24:15,960
desk and and the Saudis walked 
in and said we're going to 

1662
01:24:15,960 --> 01:24:18,960
produce all out. 
I remember, you know six O clock

1663
01:24:18,960 --> 01:24:21,600
Sunday night I was in the office
looking at where oil is going to

1664
01:24:21,640 --> 01:24:25,120
go because I'm like this is it 
this is going to be this is 

1665
01:24:25,120 --> 01:24:28,960
going to be bad and it was I 
think we're off $20 that morning

1666
01:24:29,320 --> 01:24:33,280
I mean just a just an incredible
move and that was appropriate. 

1667
01:24:33,440 --> 01:24:34,960
I mean the market was getting. 
That right? 

1668
01:24:35,240 --> 01:24:37,320
I think I was the first one in 
the office that morning out of 

1669
01:24:37,600 --> 01:24:41,240
mostly just panic. 
And one of our old PMS, the old 

1670
01:24:41,360 --> 01:24:44,320
old shopper was just a fantastic
mentor and a guy that understood

1671
01:24:44,320 --> 01:24:46,080
energy very well. 
And they saw me come into the 

1672
01:24:46,080 --> 01:24:49,080
kitchen and just laughed at me 
like, OK, welcome to the NFL, 

1673
01:24:49,080 --> 01:24:51,600
kid. 
This is this is what this looks 

1674
01:24:51,600 --> 01:24:54,360
like. 
And we huddle pretty quickly. 

1675
01:24:54,400 --> 01:24:57,040
I mean, we put every security 
that we could trade up on the 

1676
01:24:57,040 --> 01:25:00,000
wall and said, OK, here are 
coverage lists. 

1677
01:25:00,160 --> 01:25:01,720
What do we want to do in this 
situation? 

1678
01:25:01,720 --> 01:25:05,440
Now fortunately for us at the 
time, we had had a, I want to 

1679
01:25:05,440 --> 01:25:07,160
say bearish. 
We had a really conservative 

1680
01:25:07,160 --> 01:25:08,960
view of oil prices. 
We thought there was enough 

1681
01:25:08,960 --> 01:25:12,080
production to go around early 
2020, the discussion around 

1682
01:25:12,120 --> 01:25:14,800
discipline in the US, it had 
started. 

1683
01:25:14,800 --> 01:25:16,600
I mean there were plenty of 
management teams saying, hey, we

1684
01:25:16,600 --> 01:25:18,080
want to keep the capital out of 
the ground. 

1685
01:25:18,240 --> 01:25:20,440
Shareholders were starting to be
very impatient with management 

1686
01:25:20,440 --> 01:25:23,440
about getting actual cash 
returns back, but it wasn't, I 

1687
01:25:23,440 --> 01:25:24,760
mean it wasn't the money it is 
now. 

1688
01:25:25,640 --> 01:25:29,000
And so we held some of the 
higher quality credits, much 

1689
01:25:29,000 --> 01:25:34,120
more fractured industry, not 
nearly as consolidated as it is 

1690
01:25:34,120 --> 01:25:36,160
today. 
I mean, it just in some ways it 

1691
01:25:36,160 --> 01:25:38,800
looked totally different. 
So fortunately, we were sort of 

1692
01:25:38,800 --> 01:25:42,040
on the sidelines from the really
severe drawdowns of both the 

1693
01:25:42,040 --> 01:25:44,760
debt and the equity side. 
So that from our perspective 

1694
01:25:45,120 --> 01:25:48,000
things were ugly, but we were in
a position to maneuver. 

1695
01:25:49,040 --> 01:25:53,000
And first thing we did was say, 
OK, how do we feel about OPEC 

1696
01:25:53,240 --> 01:25:56,040
and what they're going to do 
that's bad, but then how do we 

1697
01:25:56,040 --> 01:25:58,840
feel about COVID? 
And so over the course of the 

1698
01:25:58,840 --> 01:26:02,600
next two weeks, the discussion 
shifted from there's a price war

1699
01:26:02,600 --> 01:26:06,960
going on between Saudi and 
Russia to, OK, how bad is demand

1700
01:26:06,960 --> 01:26:09,000
really going to get? 
So we went from a supply 

1701
01:26:09,000 --> 01:26:10,720
discussion to a demand 
discussion really quickly. 

1702
01:26:11,520 --> 01:26:14,480
We were cautious there in the 
beginning about putting too much

1703
01:26:14,720 --> 01:26:16,560
money to work exactly for that 
reason. 

1704
01:26:17,240 --> 01:26:19,520
We thought this, the supply 
shock was serious, but the 

1705
01:26:19,520 --> 01:26:21,360
demand shock was even more 
serious. 

1706
01:26:21,360 --> 01:26:25,720
I mean, you could watch the 
tanker tracker from Saudi to the

1707
01:26:25,720 --> 01:26:29,520
Gulf Coast of Texas and how much
oil was going to be coming to 

1708
01:26:29,520 --> 01:26:32,040
the United States. 
I mean, it was, it was that 

1709
01:26:32,080 --> 01:26:36,040
obvious at that point in time. 
So we were a little bit patient.

1710
01:26:36,560 --> 01:26:41,600
And then of course, we hit April
and May, oil goes negative and 

1711
01:26:41,600 --> 01:26:43,240
it looks like now producers are 
capitulating. 

1712
01:26:43,520 --> 01:26:45,640
OK, we're. 
Throwing in the towel, Lay down 

1713
01:26:45,640 --> 01:26:47,680
the rates. 
We can't keep doing this. 

1714
01:26:48,760 --> 01:26:50,760
OPEC understands. 
OK, this is the real. 

1715
01:26:50,760 --> 01:26:51,360
Deal. 
There's we're. 

1716
01:26:51,360 --> 01:26:54,320
Going to crash our budgets if we
don't, oh, kind of cooperate and

1717
01:26:54,320 --> 01:26:57,360
get along here All right, 
there's the bid under oil 

1718
01:26:58,440 --> 01:27:00,280
demand's still terrible and we 
don't have. 

1719
01:27:00,280 --> 01:27:02,880
The vaccines yet? 
So you have to look out two or 

1720
01:27:02,880 --> 01:27:05,480
three years to get back to a 
point that's tolerable. 

1721
01:27:05,800 --> 01:27:09,400
And the strip, the future strip 
is still reading 30-40 dollars. 

1722
01:27:09,640 --> 01:27:13,280
So these are not exciting times.
But on the other hand, you've 

1723
01:27:13,280 --> 01:27:16,760
got oil bonds that are trading 
30 and 40 cents in the dollar. 

1724
01:27:17,520 --> 01:27:20,080
And OK, we think we're getting 
paid for the price. 

1725
01:27:20,640 --> 01:27:22,920
That's when we started to put a 
lot of capital to work and say, 

1726
01:27:22,960 --> 01:27:25,840
OK, we think we understand these
producers really well. 

1727
01:27:26,000 --> 01:27:27,800
They're still small, they're out
of the way. 

1728
01:27:28,280 --> 01:27:30,080
If you're risk reverse at all, 
you don't want to be in these 

1729
01:27:30,080 --> 01:27:31,880
credits. 
So that's when we started buying

1730
01:27:31,880 --> 01:27:33,960
up some of the small shale 
producers that we thought would 

1731
01:27:33,960 --> 01:27:36,400
really be good tie up 
candidates, really good 

1732
01:27:36,400 --> 01:27:39,400
consolidation candidates and the
time and shale, you could really

1733
01:27:39,400 --> 01:27:41,800
just look at a map because the 
best, the best synergies in 

1734
01:27:41,800 --> 01:27:43,280
shale really come from 
adjacency. 

1735
01:27:43,560 --> 01:27:45,760
If your property is right next 
to the other one, you can drill 

1736
01:27:45,760 --> 01:27:49,400
longer wells, you can get more 
out of your labor, you can get 

1737
01:27:49,400 --> 01:27:51,480
more out of your infrastructure.
I mean, it really was that 

1738
01:27:51,480 --> 01:27:52,960
simple. 
Put the, put the puzzle pieces 

1739
01:27:52,960 --> 01:27:56,640
together and, and take them all 
and go home. 

1740
01:27:57,200 --> 01:28:01,040
And we probably had, I mean, I 
don't know, 10 or 15 names in 

1741
01:28:01,040 --> 01:28:03,400
the portfolio would get taken 
out that way. 

1742
01:28:03,760 --> 01:28:06,680
I mean, the consolidation wave 
came in and hit very strongly 

1743
01:28:06,680 --> 01:28:08,120
and then in the back half of the
year. 

1744
01:28:08,320 --> 01:28:11,760
And not that in no way do I want
to take credit for calling the 

1745
01:28:11,760 --> 01:28:14,320
vaccines would work. 
I, I would hope they would 

1746
01:28:14,320 --> 01:28:16,960
didn't really have a strong 
view, but then the vaccines came

1747
01:28:16,960 --> 01:28:20,120
in and of course that really 
kicked off what ended up being a

1748
01:28:20,120 --> 01:28:24,320
tremendous rally in everything 
energy because you know, now 

1749
01:28:24,320 --> 01:28:27,960
that you've got production down 
and the price rally kicked off, 

1750
01:28:27,960 --> 01:28:29,840
it just ran for the next couple 
of years. 

1751
01:28:30,440 --> 01:28:33,360
And I'll make this is a bit of a
technical point, but I think one

1752
01:28:33,360 --> 01:28:36,200
thing that's important to 
understand about that particular

1753
01:28:36,200 --> 01:28:41,400
rally and the oil industry as it
stands now back to the client 

1754
01:28:41,400 --> 01:28:45,040
rates. 
Shale is a large shale wells or 

1755
01:28:45,120 --> 01:28:48,440
a specifically US shale wells, 
which is between the United 

1756
01:28:48,440 --> 01:28:50,360
States and Canada. 
That's really we're really the 

1757
01:28:50,360 --> 01:28:53,920
shale producers in the world. 
They declined at such a rate 

1758
01:28:54,240 --> 01:28:57,440
that the market clearing price 
between supply and demand, 

1759
01:28:57,440 --> 01:28:59,920
probably the reaction function 
to that so to speak is probably 

1760
01:28:59,920 --> 01:29:01,560
much faster than it has been 
historically. 

1761
01:29:01,800 --> 01:29:05,360
So if you look at a conventional
oil well like you know they 

1762
01:29:05,360 --> 01:29:09,480
drill offshore, they drill the 
least, the oil declines at mid 

1763
01:29:09,480 --> 01:29:10,960
to high single digits every 
year. 

1764
01:29:10,960 --> 01:29:13,440
You get that much less oil out 
of the well year over year. 

1765
01:29:14,040 --> 01:29:17,120
Back to the point around shale, 
shale is more like 30 or 40%. 

1766
01:29:18,000 --> 01:29:19,520
So when you stop drilling in 
shale. 

1767
01:29:19,520 --> 01:29:20,720
People talk about the shale 
treadmill. 

1768
01:29:20,720 --> 01:29:22,680
Where these producers just have 
to keep drilling wells, keep 

1769
01:29:22,680 --> 01:29:25,160
their production up. 
If you stop drilling in shale, 

1770
01:29:25,160 --> 01:29:27,600
supply drops much faster than it
has historically. 

1771
01:29:28,240 --> 01:29:32,920
So part of what happened in 2020
was you had shale contributing a

1772
01:29:32,920 --> 01:29:36,840
much larger portion of overall 
global supply, so it could react

1773
01:29:36,840 --> 01:29:40,800
a lot faster and supply could 
correct much quicker than the 

1774
01:29:40,800 --> 01:29:43,000
industry was maybe used to in 
past downturns. 

1775
01:29:44,080 --> 01:29:45,720
And that's one of the reasons 
that was such a short. 

1776
01:29:45,720 --> 01:29:49,640
Downturn in that sense. 
We had nine months of prices 

1777
01:29:49,640 --> 01:29:52,200
being in the basement, and then 
starting that fall, they start 

1778
01:29:52,200 --> 01:29:54,680
to creep back up. 
A lot of that had to do with how

1779
01:29:54,680 --> 01:29:56,360
reactive the shale producers 
could be. 

1780
01:29:56,760 --> 01:29:59,320
That's still to some extent 
forms our view now. 

1781
01:29:59,320 --> 01:30:01,240
All right. 
In a real price shock 

1782
01:30:01,240 --> 01:30:04,440
environment, how quickly can the
March market reach equilibrium? 

1783
01:30:05,080 --> 01:30:07,800
There's a natural shock absorber
in the speed of the capital 

1784
01:30:07,800 --> 01:30:10,920
expenditure and the speed of the
drilling where we don't have to 

1785
01:30:10,920 --> 01:30:12,760
worry about plugging wells or 
abandoning wells. 

1786
01:30:12,760 --> 01:30:15,320
You're just turning them off. 
Naturally, the decline rate is 

1787
01:30:15,320 --> 01:30:17,200
going to bring it back into into
equilibrium. 

1788
01:30:18,600 --> 01:30:20,120
Oh, because every. 
Every. 

1789
01:30:20,120 --> 01:30:21,240
Year you're losing. 
So much. 

1790
01:30:21,240 --> 01:30:24,280
Production so. 
That's a little. 

1791
01:30:24,280 --> 01:30:25,760
Bit what's behind? 
Ark and we were. 

1792
01:30:25,840 --> 01:30:29,240
Relying on that a little. 
Bit going down market and we 

1793
01:30:29,240 --> 01:30:34,600
think since it's probably been 
true so anyway yes great 

1794
01:30:34,880 --> 01:30:39,880
learning experience really glad 
we could express some opinions 

1795
01:30:39,880 --> 01:30:45,000
there very exciting returns I 
mean I don't think I say this 

1796
01:30:45,000 --> 01:30:47,000
and then I'll be. 
Proven wrong tomorrow. 

1797
01:30:47,120 --> 01:30:50,840
But I would be surprised if in 
my career, opportunities like 

1798
01:30:50,840 --> 01:30:55,760
that show up again, barring a 
true geopolitical event. 

1799
01:30:56,200 --> 01:30:57,880
Just based on supply and demand,
I mean. 

1800
01:30:57,880 --> 01:30:59,040
Those are, you know, if we got a
once. 

1801
01:30:59,040 --> 01:31:03,120
Every hundred year pandemic then
that's probably about what 

1802
01:31:03,120 --> 01:31:05,120
you'll see on the demand side 
would be my guess. 

1803
01:31:06,200 --> 01:31:09,400
But but you know, you got to 
dust off. 

1804
01:31:09,520 --> 01:31:12,000
The Gram. 
And dot, at that point, because 

1805
01:31:12,400 --> 01:31:16,040
now you're now you're really 
doing Mr. Market is are we a 

1806
01:31:16,040 --> 01:31:17,640
voting machine or are we a 
weighing machine? 

1807
01:31:18,120 --> 01:31:20,720
And and yeah, you know, do you 
run outside with if it's? 

1808
01:31:20,760 --> 01:31:22,320
You know it's raining. 
Gold do you run outside with a 

1809
01:31:22,320 --> 01:31:25,000
bucket That's that's kind of the
question you have to answer 

1810
01:31:25,000 --> 01:31:30,280
there so yes, I I know that's a 
very long way of answering your 

1811
01:31:30,280 --> 01:31:32,120
question. 
How do you feel about Nah, I 

1812
01:31:32,120 --> 01:31:37,400
like it well, in 2020, but you 
know well we all got the got the

1813
01:31:37,400 --> 01:31:40,400
stars from it and I think it's 
it definitely helped us as a 

1814
01:31:40,400 --> 01:31:42,440
team. 
I think understand and see how 

1815
01:31:42,440 --> 01:31:45,480
people react and what kind of 
questions you want to answer and

1816
01:31:45,560 --> 01:31:48,800
yeah, how much trust each other 
and, you know, can you rely on 

1817
01:31:48,800 --> 01:31:50,080
people to make make. 
Decisions. 

1818
01:31:50,080 --> 01:31:52,000
How do you? 
Behave when things really, 

1819
01:31:52,240 --> 01:31:55,120
really get ugly. 
Yeah. 

1820
01:31:55,200 --> 01:31:58,320
So that was I won't say. 
When it hits the that's it, I. 

1821
01:31:58,440 --> 01:32:00,440
Wouldn't want to I'm. 
Not going to sit here. 

1822
01:32:00,440 --> 01:32:02,680
And say, oh, that was a blast, 
I'd like to do it again. 

1823
01:32:02,960 --> 01:32:08,160
I wouldn't, right. 
But I was still fairly early and

1824
01:32:08,160 --> 01:32:11,680
I started my first year as 
Nailis was 2016. 

1825
01:32:12,080 --> 01:32:16,480
So this is, you know, four years
in and you still a little bit 

1826
01:32:16,480 --> 01:32:17,680
used. 
To it I've been doing energy 

1827
01:32:17,680 --> 01:32:18,680
for. 
Two years at that. 

1828
01:32:18,680 --> 01:32:22,520
Point and I do, and I still feel
this. 

1829
01:32:22,840 --> 01:32:27,080
Up until that point, I had a 
deep, deep sense of insecurity 

1830
01:32:27,080 --> 01:32:28,600
about just not knowing what I'm 
doing. 

1831
01:32:28,880 --> 01:32:31,400
Which was right? 
I'm convinced I was right about 

1832
01:32:31,400 --> 01:32:32,480
that. 
I didn't know what I was doing 

1833
01:32:33,040 --> 01:32:35,720
and afterwards me doesn't mean I
I still have that sense of 

1834
01:32:35,720 --> 01:32:38,360
paranoia. 
Probably just my personality but

1835
01:32:38,720 --> 01:32:40,240
I'll never be comfortable doing 
it. 

1836
01:32:40,640 --> 01:32:44,720
But I, I have a distinct mental 
shift before and after of 

1837
01:32:44,960 --> 01:32:48,680
saying, OK, well, at least you 
can't tell me that I I haven't 

1838
01:32:48,680 --> 01:32:51,840
been through a cycle before. 
Yeah, that's right. 

1839
01:32:52,520 --> 01:32:55,240
Yeah, I've been through. 
One of the one of the craziest 

1840
01:32:55,240 --> 01:32:56,440
cycles. 
Yeah, right. 

1841
01:32:56,440 --> 01:32:58,680
A once in 100 years. 
I haven't seen as much as most 

1842
01:32:58,680 --> 01:33:00,280
people, but I haven't. 
You know I'm not. 

1843
01:33:00,680 --> 01:33:02,280
You know, I wasn't born 
yesterday either. 

1844
01:33:03,640 --> 01:33:06,480
Yeah, no doubt. 
Is there anything that? 

1845
01:33:06,480 --> 01:33:10,280
That like is really interesting 
out there that's caught your 

1846
01:33:10,280 --> 01:33:12,080
eye. 
Are things pretty calm on the 

1847
01:33:12,080 --> 01:33:15,320
horizon? 
I would characterize things as 

1848
01:33:15,320 --> 01:33:16,560
pretty. 
Calm on the. 

1849
01:33:16,560 --> 01:33:20,000
Horizon, I mean, to answer your 
question, it's been a while 

1850
01:33:20,160 --> 01:33:22,320
since there's anything where I 
was, I would like banging the 

1851
01:33:22,320 --> 01:33:24,160
table and say, hey, we got to 
look at this. 

1852
01:33:24,160 --> 01:33:25,480
This is a really good 
opportunity. 

1853
01:33:25,920 --> 01:33:29,200
Things look fairly efficiently 
priced to me at this point. 

1854
01:33:29,480 --> 01:33:33,400
Yeah, if, if that cuts rates, 
then that'll be a tailwind to 

1855
01:33:33,440 --> 01:33:35,760
every fixed income instrument 
and that'll help. 

1856
01:33:35,960 --> 01:33:40,480
But, you know, we'll see how. 
Much does the front end. 

1857
01:33:41,640 --> 01:33:45,120
Impact. 
That like I had told you, I was 

1858
01:33:45,120 --> 01:33:48,280
having a conversation with 
somebody and their theory was 

1859
01:33:48,280 --> 01:33:51,560
that the front end is where all 
the issuance is. 

1860
01:33:51,560 --> 01:33:56,400
So that's what's actually priced
and the back end is not doesn't 

1861
01:33:56,400 --> 01:33:59,120
have as much price discovery in 
it right now. 

1862
01:33:59,120 --> 01:34:02,000
And I don't know if that's crazy
talk or if that's reality. 

1863
01:34:02,240 --> 01:34:04,080
I mean that's, that's a really 
good question. 

1864
01:34:04,320 --> 01:34:07,160
I. 
I don't deal at all. 

1865
01:34:07,200 --> 01:34:09,720
In the long end, really so. 
I wouldn't want to give you an 

1866
01:34:09,720 --> 01:34:12,600
opinion on whether the price 
discovery there is good or not. 

1867
01:34:12,600 --> 01:34:15,200
I feel like I understand where 
the debate is, but I don't have 

1868
01:34:15,200 --> 01:34:19,960
a particularly strong view other
than all the worries we all have

1869
01:34:19,960 --> 01:34:23,400
as American citizens of OK, 
well, if if inflation doesn't 

1870
01:34:23,400 --> 01:34:26,480
come down and they don't, then 
they can't lower rates or won't 

1871
01:34:26,480 --> 01:34:28,920
lower rates on the back of it, 
then what happens to the federal

1872
01:34:28,920 --> 01:34:31,640
budget? 
Maybe that's a question I think 

1873
01:34:31,640 --> 01:34:34,440
we're all afraid of. 
But you know, at the front, it's

1874
01:34:34,440 --> 01:34:36,280
really a question on the front 
end, particularly in high yield 

1875
01:34:36,280 --> 01:34:38,800
because to your point, a lot of 
these credits will be refinanced

1876
01:34:38,800 --> 01:34:42,720
or paid off in cash and when you
go to refinance. 

1877
01:34:43,000 --> 01:34:44,880
Very few of these. 
Credits ever go? 

1878
01:34:44,880 --> 01:34:48,280
Current they usually want to 
refinance more than a year in 

1879
01:34:48,280 --> 01:34:52,320
advance so they're and that 
could be as much as a year or 

1880
01:34:52,320 --> 01:34:54,080
two. 
If you have let's say you have 

1881
01:34:54,080 --> 01:34:57,040
two two bonds outstanding, you 
get a three-year A2 year bond 

1882
01:34:57,040 --> 01:35:00,040
and a three-year bond maybe call
them both at the same time. 

1883
01:35:00,600 --> 01:35:03,080
Granted, a lot of these bonds do
have call protection, so you 

1884
01:35:03,080 --> 01:35:06,720
kind of know you call yield the 
worst or yield the outcome when 

1885
01:35:06,720 --> 01:35:09,080
is the earliest this bond can 
get rewired or taken away from 

1886
01:35:09,080 --> 01:35:11,360
you. 
So there's a little bit of a 

1887
01:35:11,360 --> 01:35:14,320
buffer there where it's not 
like, you know, we're not 

1888
01:35:14,320 --> 01:35:18,800
exactly running the tomorrow's 
interest rate or fed funds in 

1889
01:35:19,000 --> 01:35:22,440
into the yield. 
Having said that, the loans have

1890
01:35:22,440 --> 01:35:26,640
gone from being priced in Libor 
to sulfur and that's that's a 

1891
01:35:26,640 --> 01:35:30,320
front end rate. 
So I would taking too long to 

1892
01:35:30,320 --> 01:35:31,760
answer your question of it's 
meaningful. 

1893
01:35:32,240 --> 01:35:34,600
I mean, it can have it can have 
a really big impact and it does 

1894
01:35:34,680 --> 01:35:37,560
it does directly flow into how 
we price all these instruments. 

1895
01:35:38,040 --> 01:35:40,720
Now it has a fairly uniform 
flow. 

1896
01:35:41,080 --> 01:35:45,440
So from our perspective, it's, 
it's a little easier to say, 

1897
01:35:45,440 --> 01:35:48,920
well, given where rates are, 
where should these other credits

1898
01:35:48,920 --> 01:35:51,320
be relative? 
That's one question. 

1899
01:35:51,520 --> 01:35:53,120
And that doesn't even move at 
the front end. 

1900
01:35:53,120 --> 01:35:56,120
But by the time by the time 
you're, you have a very short 

1901
01:35:56,120 --> 01:36:01,640
duration credit the you know the
whether or not it's right a lot 

1902
01:36:01,640 --> 01:36:03,120
of. 
The risk has been taken. 

1903
01:36:03,120 --> 01:36:06,360
At less and less risk has been 
baked into that, so the spread 

1904
01:36:06,440 --> 01:36:08,080
tends to be a little. 
Narrower. 

1905
01:36:08,320 --> 01:36:13,040
In there that mitigates it a 
little bit. 

1906
01:36:13,520 --> 01:36:16,600
You don't have to worry. 
About, you know, quite the same 

1907
01:36:16,920 --> 01:36:20,040
distribution of outcomes. 
So things do do tighten up a 

1908
01:36:20,040 --> 01:36:21,760
little bit and that that that 
spread. 

1909
01:36:21,760 --> 01:36:24,280
I'll move it, but like you say, 
it'll move the whole market. 

1910
01:36:24,400 --> 01:36:27,440
I mean, no question about it. 
Does it's it is very meaningful.

1911
01:36:28,480 --> 01:36:30,960
Yeah, I know mortgages and 
things like like long duration 

1912
01:36:30,960 --> 01:36:33,520
instruments being priced off of,
you know, long duration 

1913
01:36:33,920 --> 01:36:38,120
government securities is is 
obviously a well trodden an 

1914
01:36:38,120 --> 01:36:39,160
understood. 
Relationship. 

1915
01:36:39,280 --> 01:36:43,560
But even at even at the front 
end, it it impacts us too to be 

1916
01:36:43,560 --> 01:36:45,560
part of our valuation. 
I mean, I know that's, that's a 

1917
01:36:45,560 --> 01:36:47,160
debate, right. 
If you got an earnings yield of 

1918
01:36:47,160 --> 01:36:53,800
4% on the S&P and Treasuries are
paying 4%, you know the. 

1919
01:36:54,080 --> 01:36:56,440
Nice thing is the S and. 
P can grow the earnings right 

1920
01:36:56,440 --> 01:36:58,640
where the. 
Treasuries can, but well, it's 

1921
01:36:58,640 --> 01:37:00,240
exactly right that that's the 
other point. 

1922
01:37:00,240 --> 01:37:02,440
There, it's not. 
Apples and oranges, that is, 

1923
01:37:02,560 --> 01:37:06,800
repeated the boy, oh boy, 
doesn't seem like a time that 

1924
01:37:06,800 --> 01:37:09,480
there's the rain falling. 
From the sky, but then it but 

1925
01:37:09,600 --> 01:37:11,600
who knows? 
I don't know, it'll probably do.

1926
01:37:11,600 --> 01:37:14,520
What it's done? 
Historically in perpetuity and 

1927
01:37:14,520 --> 01:37:17,560
with bumps and and, you know, 
peaks and valleys. 

1928
01:37:17,640 --> 01:37:19,920
Yeah, right. 
I would say impersonally. 

1929
01:37:20,320 --> 01:37:24,600
My view is has been and maybe 
this is this is naive. 

1930
01:37:24,680 --> 01:37:28,440
I actually, I told this at a 
meeting and we were talking to 

1931
01:37:28,440 --> 01:37:32,520
some some clients in Paris 
actually a couple months ago and

1932
01:37:32,520 --> 01:37:36,320
I was giving them this whole 
spiel and I said, and they asked

1933
01:37:36,320 --> 01:37:38,480
a very similar question. 
I said, look, at the end of the 

1934
01:37:38,480 --> 01:37:41,880
day, you know, putting capital 
work in the American capital 

1935
01:37:41,880 --> 01:37:45,400
markets has been the right thing
to do at almost any point in 

1936
01:37:45,400 --> 01:37:48,920
time in the last 100 years if 
you had a long enough time 

1937
01:37:48,920 --> 01:37:52,640
horizon. 
And yeah, you know, I because of

1938
01:37:52,640 --> 01:37:55,960
that, I'm still, you know, if 
you get I'm always an optimist 

1939
01:37:55,960 --> 01:37:59,600
given enough time and yeah, and 
the. 

1940
01:37:59,600 --> 01:38:01,440
Guy looked at me and laughed. 
And said, yeah, that's because 

1941
01:38:01,440 --> 01:38:04,560
you're an. 
American, you know, it was 

1942
01:38:04,560 --> 01:38:07,320
coming coming from a French and 
he he wasn't, he wasn't trying 

1943
01:38:07,320 --> 01:38:08,520
to insolve it coming from a 
Frenchman. 

1944
01:38:08,520 --> 01:38:10,840
It was it was pretty fun. 
I know because in a lot of 

1945
01:38:10,840 --> 01:38:12,360
places, a lot of places. 
That just isn't true. 

1946
01:38:12,360 --> 01:38:15,160
But in the US. 
Market it's been true and I 

1947
01:38:15,720 --> 01:38:17,840
think it appears to be paranoid 
or pays to be. 

1948
01:38:17,840 --> 01:38:19,600
Paranoid. 
I think it is worth worrying 

1949
01:38:19,600 --> 01:38:20,960
about. 
I mean, I think part of our job 

1950
01:38:20,960 --> 01:38:23,440
is to worry about whether that's
not true going forward. 

1951
01:38:23,440 --> 01:38:26,840
But be that as it may, I I think
it probably will be. 

1952
01:38:26,960 --> 01:38:31,600
So over the long run, we're 
still thrilled to be able to 

1953
01:38:31,600 --> 01:38:34,440
invest into this market. 
And you know, it's like Buffett 

1954
01:38:34,440 --> 01:38:38,440
says, being an American investor
has been just the greatest 

1955
01:38:38,440 --> 01:38:40,720
wealth creating tale and anybody
could ask for. 

1956
01:38:41,160 --> 01:38:42,880
And I don't think that's 
changed. 

1957
01:38:43,240 --> 01:38:46,520
I know that's sort of the debate
of the day, but I'm still 

1958
01:38:46,600 --> 01:38:48,360
thrilled to get the 
opportunities we get. 

1959
01:38:49,000 --> 01:38:50,720
Are they wildly obvious at the 
moment? 

1960
01:38:51,160 --> 01:38:53,880
I would say probably not. 
Was there anything that I think 

1961
01:38:53,880 --> 01:38:56,920
is a imminent national return? 
I don't know. 

1962
01:38:56,960 --> 01:39:01,160
I haven't found anything that 
that I'm that excited about, but

1963
01:39:01,680 --> 01:39:05,520
I found I I feel as though I 
found plenty of things that if 

1964
01:39:05,560 --> 01:39:07,440
you give me the chance to look 
out several. 

1965
01:39:07,440 --> 01:39:10,960
Years I can. 
There be quite satisfactory and 

1966
01:39:10,960 --> 01:39:13,360
that's my time horizon now. 
It's easy for a young guy to 

1967
01:39:13,360 --> 01:39:17,160
say, you know, so I've got time 
on my. 

1968
01:39:17,160 --> 01:39:19,680
Side. 
But Charlotte, you know, Monger 

1969
01:39:19,680 --> 01:39:23,000
likes to say most of the money 
is made in the waiting and and 

1970
01:39:23,000 --> 01:39:24,560
that probably is still going to 
be the case. 

1971
01:39:25,920 --> 01:39:27,560
Well, if you're buying long 
duration. 

1972
01:39:27,560 --> 01:39:30,080
Assets and you're thinking? 
Short, you got a mismatch. 

1973
01:39:30,360 --> 01:39:33,240
If I've learned anything that's 
I've learned, that is well said.

1974
01:39:33,720 --> 01:39:37,840
Very well. 
Said yeah, no, the old cool man.

1975
01:39:38,080 --> 01:39:39,960
Well, listen, I appreciate you 
coming on. 

1976
01:39:39,960 --> 01:39:43,200
The program and I I hope that 
you've enjoyed it and I I hope 

1977
01:39:43,200 --> 01:39:46,080
that we stay in touch. 
I've enjoyed the pre work on 

1978
01:39:46,080 --> 01:39:47,200
this. 
It will go likewise. 

1979
01:39:47,280 --> 01:39:50,040
I thanks for letting me. 
Bounce around here and talk. 

1980
01:39:50,680 --> 01:39:52,400
You know, it's funny. 
I get to talk to John, Bill and 

1981
01:39:52,400 --> 01:39:55,480
Jack all the time, but it's it 
is really a you know, you said, 

1982
01:39:55,480 --> 01:39:57,920
hey, don't you know these are 
obvious questions? 

1983
01:39:57,920 --> 01:40:00,360
No, it's great. 
I hardly ever get to vocalize my

1984
01:40:00,360 --> 01:40:04,040
opinions to outside third party 
and it makes you you're talking 

1985
01:40:04,040 --> 01:40:07,600
makes you think better. 
So yeah, I think that's right. 

1986
01:40:07,600 --> 01:40:09,280
Writing to Absolutely. 
Absolutely. 

1987
01:40:09,280 --> 01:40:10,840
So no. 
I appreciate you. 

1988
01:40:10,840 --> 01:40:12,800
Taking the time and reaching 
out, it's been great getting to 

1989
01:40:13,240 --> 01:40:15,000
getting to know you a little 
bit. 

1990
01:40:15,640 --> 01:40:18,000
Obviously don't hesitate at any 
point going forward. 

1991
01:40:18,000 --> 01:40:21,080
Love to do it again. 
Or even if you know some 

1992
01:40:21,080 --> 01:40:24,000
security comes up and it's 
offline, you just want to ping 

1993
01:40:24,000 --> 01:40:25,800
me about something I'm 
associated with. 

1994
01:40:26,000 --> 01:40:27,800
Hey, let me don't. 
Don't be a stranger. 

1995
01:40:27,960 --> 01:40:29,800
Be careful what you ask for on 
that. 

1996
01:40:30,640 --> 01:40:34,200
There may be some inbounds. 
Hey, no, I'm I'm here for it. 

1997
01:40:34,640 --> 01:40:36,520
I'm here for. 
It sounds good. 

1998
01:40:36,600 --> 01:40:38,000
Hey, thanks, Bill. 
I appreciate it all. 

1999
01:40:38,040 --> 01:40:39,800
Right, have a good one. 
Thank you. 

2000
01:40:40,000 --> 01:40:40,400
You too.