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I was going to ask you whether or not do you think we are Peak rates but is is is the better question is I don't know how low do we get in the next cycle well you know uh the one thing I'm confident about is that I don't know but uh I think that rates may go a little higher but not terribly much higher or not there's substantial progress being made against inflation and that's what matters the the economy is producing mixed signals but at least inflation is well down from the peak and uh things are performing well so you would say I would say that maybe a little higher or maybe not you've been known not to give your macro forecast although very recently you've you've made something similar which is the thesis that's that se change has come yes and that the next 10 years will be very different very different from the last yeah and underscore premise there and what do I do with that information well uh if you came into this business since 1980 which covers almost everybody you've only seen either declining interest rates or ultra low interest rates you have to go back into the 70s to have seen a different climate which I fortunately did do um and uh I believe that the this monotonic decline of Interest rates is over number one there's not much room for a further Decline and number two I think uh the FED probably understands that that it kept rates too low too long and that there was a negative consequence certainly in terms of inflation so uh you know I think the important thing is that uh and I said in my memo C change which was published in December that uh I I don't believe in forecast especially my own but I'm willing to say that for the next decade the FED funds rate is more likely to be between two and four than between 0 and two that's as far as I can go but and and I only say that uh directionally to indicate my belief that the period of ultra low rates is over and let's say let's assume that's correct do I have any business than being in the equity Market what does it mean for not not so much investment strategies but you know where you want to park the bulk of your money because equities have been rewarded substantially yes over the last 15 yes um look you you as as Warren Buffett always says you don't want to Desert the us or the US economy or I think the corporate sector and and uh uh you know the S&P has given a 10.2% return every year on average for the last century you don't want to give up that right now it looks like you can get Equity type returns from credit a little below 10 for what we call Liquid credit stuff that's tradeable every day and well above 10 perhaps for uh private credit which is not tradable um the point is that um you know 21 months ago today high Yi bonds yield in the nines uh 21 months ago they were in the fours uh when they're in the nines you can invest in them uh with high expectations competitive with equities and more than sufficient to meet most organizations needs private credit uh returning in the low double digits uh or more well that's obviously very very competitive but uh you know equities or what equities have that that credit doesn't have is the ability to surprise on the upside right and you find uh some great great great growing companies in your portfolio uh you'll be sorry if you weeded them out although the other side to that is credit is also so higher up the capital structure that's an obligation too so my question there would be you know for longer term investors that say have they have to match your liabilities for 30 years insurance companies come to mind as well yes is the proposition fixed income and not Equity markets because equities tended to give you longer term returns more consistently right uh with variation but uh in credit you can't tie up anything for 30 years you know a long maturity nowadays is 7 years or something like that so you can invest today and get a rate for 7 years but then you have no way of knowing today what rate you'll reinvest in s years from now so this is why we don't go 100 Z or Z 100 uh that's why there will always be a place for equities but I think now there's a much better place for credit than there has been um at at at most times in the last uh 14 years would you go above 50% would you say majority is at so the question is the the the biggest potential catch in becoming a credit investor is that you uh reduce the likelihood of downside but you give up the upside of equities so the question is how do you and your organization feel about that tradeoff if I say to you I think I can get you uh nine to 10% through a balanced portfolio of credit uh over the long term quite dependably if you say that's great I love that maybe you do 75% of your portfolio Okay if you say I want to still make sure that I have exposure to the upside of equities uh then you you then you say maybe 50 or 40 here's my question though this is a relatively new asset CL yes or operation private credit what happens when we get a recession I can't think of a recession since this this whole began so what happens then well that's right I mean private credit as an asset class really has existed since 2011 and it hasn't been tested by a real recession we had one bad quarter in 2020 because of an external reason the pandemic not internal economic reasons so uh you know um it all dep it's going to vary because some people do good credit analysis some people do bad credit analysis the ones who do good credit analysis uh perceive the risks accurately and demand a a Comm at margin of safety should do quite well um and they may have a default rate of uh a couple percent a year in their portfolio and uh lose half their money in those situations well two if you have 2% default rate and you lose half your money you lost 1% obviously not a significant number bad credit analysts bad managers will have higher uh default risks uh default R rates and lower recovery so they could lose several percent which would make it an unsuccessful strategy
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