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well if you look at the period from the end of the global financial crisis uh roughly 09 through the appearance of the pandemic and and then in the 20 and 21 uh we were you know the the FED took Extreme Measures to save the economy they worked very low interest rates the lowest in history zero for much of that time and uh quantitative easing the buying of bonds which puts liquidity into the economy these things produced what I would call was an easy environment in the economy and the markets it was we had the longest economic recovery in history it was easy to make money right we had low-cost Capital it was easy to make a profit we had very few defaults in bankruptcy it was easy to stay in business it was easy to access Capital everything was easy at that time and in the last year of course with the appearance of the of the inflation and the increasing of rates to try to Stamp Out the inflation things have gotten harder I imagine people today saying well when are we going back to normal like it was five six seven years ago and and the important thing to know is that that wasn't normal right that was the easiest the best of times right and and I my own belief is we're not going back there we're now in an environment of more normal and uh circumstances and we're going to roughly stay this way well it's what a sea change is it's a complete transformation uh not just a minor uh cyclical fluctuation so you know look I think that the business world the economic world is not supposed to be easy it's not supposed to be easy to make money right it's not supposed to be easy for companies with bad business models to stay in business as it has been for the last 14 years right um so I think we go back to a period in which we have moderate interest rates we have moderate availability of capital we have the moderate default rate and so forth all of which will feel much less accommodative I think than the last 14 years it depends on your definition of stable time wise but of course I think that the FED became activist with the arrival of Alan Greenspan in the mid 90s and I think that it it's you know we we had you know people started to talk about the arrival of the Greenspan put that if there was a problem in the economy the FED would just squirt in some liquidity and solve it and definitely did including Y2K and and other a real and imaginary uh crises the arrival of the the bursting of the TMT bubble for example so I would say that that's 25 years that we haven't had what I call a free market in money uh I'm applying Common Sense uh you can't always count on common sense but uh you know the events of recent years tell me that it's not great to have interest rates at zero uh zero interest rates are really in a an emergency measure uh somebody gets a heart attack you give them a shot of adrenaline works right that doesn't mean you start your day with a shot of adrenaline every day for seven years right we had rates at seven at zero for seven years and I think that uh you know and by the by the way by the time uh 16 17 18 rolled around people started to say well shouldn't rates be a little higher so that if we have a recession the FED can cut rates and and become accommodative well if rates are a zero or a quarter or a half you can't do that yeah so I think that's an important reason why rates should be positive and if you want to fight inflation and and kill off inflationary psychology which is very important you need a positive real fed funds rate that is the funds fed funds rate has to exceed the rate of inflation because Mark Twain said history does not repeat but it Rhymes we haven't had many uh much experience with inflation you know I lived through the last one which was in the 70s most uh unpleasant uh decade right but then I think the situation was different uh the the court the sources of the inflation were different and of course it reached uh the mid-teens right I think we're not going there this time I think that the the uh the original reasons for the current bout of inflation too much money chasing too few goods money from pandemic relief money people put in the bank in 20 because they couldn't spend it and then a a supply mechanism that was sputtering right too much money chasing too few goods that will correct over time okay the extra money will get spent right Supply will catch up I think the the the forces behind inflation will Abate anybody who joined after 09 right pretty much only saw Good Times except for a couple of bad months in 2020 with in connection with the pandemic right shutdown uh but you know for my first 30 years in high yield bonds 78 to 08 the average default rate was about four percent a year in the last four decade it was only two percent a year I think four is more normal and you know it defaults in bankruptcy should not be that scarce and we I think we'll be going back to a somewhat harsher environment the prices the current prices are roughly sustainable the when you say is the rally sustainable they're not going to keep going up that is to say yields are not going to keep coming down in my opinion uh you know I think that uh that rates are roughly where they can stay except that I I think it's important to record recognize that the the uh the debate today is being dominated by people who are optimistic by people who think that the recession won't be too bad yeah won't be too long that the inflation will give way and that um the FED will be able to turn accommodative right you know I think that the FED is going to want to be somewhat strict and hold that position and we'll say throughout the year okay I don't think the FED wants to be seen as being optimistic you know hawkish dobbish hawkish dubs they want to have some uh constancy I think that in in in many areas in the stock market for example uh that that a significant degree of optimism is ruling the day today okay and if you want to look at pessimism look at June look at uh September you know that's then people were not so optimistic about this pivot towards uh dovishness so and we've been going back and forth and the the s p for example has been trading in a channel between 3 700 and 4 000 yep depending on whether the optimists or the pessimists were in the ascendancy right now I think the optimists are in the ascendancy uh who knows uh how the events will bear them out we're what's called bottom-up investors we're not strategic we don't say we want to have so much in America and so much in Europe and so much in steel and so much in paper and let's find some companies we just look for pieces of paper that look reasonable from companies that we think will stay in business well I would say value you know if if we as creditors can buy the debt of a company that we think can stay in business because it has a good business model and some margin for error in tough times and if we can buy the debt at a at a place in the capital structure where we create ownership in that company potentially at a reasonable valuation that's that's what we look for we saw really was this sea change in Romaine you know prior to 77 which I think or 78 which was the Advent of higher bonds a a bond rated below investment grade could not be issued yeah Moody's defined a B rated Bond as follows fails to possess the characteristics of a desirable investment in other words bad idea after Milken and others arrived in 77-78 the the new way of thinking was well it's not a great company but the promise rate of interest is enough to compensate for the risk and for the last 45 years and I think for the for the rest of time we don't think of good idea bad idea we think risk return risk return is it how risky is it is the risk is the promised return adequate to compensate for the risk and and you know that's very important so the point is that the people who started to do this early right you know I was lucky to be asked the asked of the former Ohio bond fund by Citibank in 78.
the people who started doing it earlier could find places that people were saying oh no we wouldn't touch that that's low grade yeah and and where you could get a high return without taking much risk that you know that was kind of a free lunch yeah efficient markets tend to cause free lunches to go away but it was great to get there early
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