Bloomberg Audio Studios, podcasts, radio news, because we've been talking about that mounting concern about how big government spending has going to create this issue here to markets, potentially upending them, making the job more challenging for central banks. Of course, as Jerome Powell, the FED Chair, has two days of testimony ahead in Congress, all in the middle of a weakening labor market here in the United States.
It's the perfect storm.
We are now joined by oak Tree Capital Management co founder and co chairman Howard Marks to talk all about it. We've been talking about the fiscal issues, right, We've been talking about the monetary conundrum that's been happening for now well over a year for the FED Chair. If you think about the potential for fiscal to really upend how investors think these days, how much is the government dot loads in the US and abroad really changing the calculus?
Well, look, Sonali, I think it's unfortunate that the US behaves like a country that has a credit card with no credit limit, where the bill never comes. I mean, nobody can think that's a good idea. You would think that there has to be a point at which our dead or our deficits become too much reckoned as a percentage of GDP. Usually nobody will tell you that point doesn't exist. Nobody will tell you where it is. So nobody's exercising fiscal discipline in Washington these days.
Last year we had.
A deficit in the trillions in a period of prosperity, not supposed to happen.
All very unfortunate. But A nobody can tell.
You when it becomes a problem, and b nobody can tell you what to do with it. You can't eliminate the US from your portfolios. People who've said to do that in past years are now looking pretty bad.
Yeah.
I was going to say, if you had followed that advice, you'd be in a world hurt right now in terms of relative performance. And you said, the new one can tell you where that point is. But that's exactly what I'm going to ask you. Where do you think that point is? Is it something that we're approaching If you don't want to exactly pinpoint.
It, I don't want to exactly pinpoint it. I want to say that I'm among the people who can't tell you where it is, you know, one of the many. Yeah, you know, I think every time I come on this on Bloomberg, I quote Mark Twain who said, it ain't what you don't know that gets you into trouble. It's what you know for certain that just ain't true. I certainly don't know.
Well, I wonder what kind of opportunities you're finding. I'm always interested on the distress side about how sort of target rich the environment is. I think that says a lot about our economy. All the econo surprises that we see are to the downside lately and rates remain high.
Does that make this interesting for you? Well, I think it is interested.
I mean, we went through a really slow period from nine when the FED took the Fed funds rate to zero to stimulate the economy, to twenty one when they started to decided to lift it to fight inflation. And in that thirteen year period there was very little distress because it was a very benign environment for companies. Now, as you know, the interest rates are higher. That gives
us more of an opportunity. And importantly, there were a lot of leverage transactions done in the period I described, where companies were burdened with capital structures debt structures that did not anticipate a five hundred basis point or four hundred base point increase in rates.
So, you know, to put it.
In short, it was it was a great time to be a borrower because rates came down and.
Business was prosperous.
But right now, and I think going into the future, leveraged companies will not be able to renew their leverage as easily and the cost of doing so will be higher. So that gives us better opportunities than we've been seeing. And you know, just to put it in brief for your listeners, six years ago, you had an idea, You went at the bank, you described that, they said, fine, we'll give you nine hundred million dollars at five percent.
Now it's time to renew your debt. You go in, you describe it again, and they say, good, we'll give you five hundred million dollars at nine percent.
Where do you think most of that pain is going to come? Because there's a private equity universe that's clearly grappling with that refinancing pain. There's a commercial real estate market, and equity investors seem to be ignoring any leverage that might be under the system.
Still, what should they be one reaching out for?
Well, clearly now it'll be in highly levered situations, and you name two of them, private equity and real estate leverage. The use of debt to amplify your returns. It has been the lifeblood of these two asset classes and they've done extremely well as a result. It was very, very salutary for them. But that's where the pain will come in the future. And you know, you can't increase a
company's debt service costs markedly without affecting his returns. And in certain sectors of the real estate world, mainly retail and office, there are fundamental questions. So you put that together, we think you'll see some disruption which will give us and people like us opportunity. You know, this has been a really tough period for lenders, which is what we are, and a really tough period for bargain hunters.
Right well, I want to talk a bit more about the business of lending and what's going on in the private credit industry. Of course, a month or two ago we saw Plural Site back by Vista basically transfer its assets into a different subsidiary to obtain more financing from its sponsor. Let's become a little bit of a battle cry,
you see lenders basically asking for plural site protection. Right now, I won't ask you specifically about what happened with that episode, but how do you see this evolving in the industry. Do you think that we're going to see more creditor on creditor violence as some have been calling it.
Well, you know, people tend to do what they can to enhance their position financially. Most people will stick to what they can do legally. Some people will stick to what they can do ethically. I don't know, there's some question about what that means, but you know, people, if there's an opening, people will take it. For the most part, there is an opening for what you call credit or
credit of violence. That is proactive, proactive efforts to enhance your situation financially at the expense of somebody else.
And so.
The important point is that it's up to lenders to study the documentation well enough to prevent it.
That's it.
Are you getting Are you active in office space right now? Because it seems like the perfect storm for anybody who has the financing. We talked to Ego Namdar, a real state investor a couple of days ago, who is getting like seventy percent off really big important office buildings in New York, the capital of the world, Like, how can that not come back?
Well, the question, Matt is very simple. You're getting let's say you're getting seventy off.
Is that enough?
And you know, the mere fact that the price of something is down doesn't make it a bye. It has to be that the price is down more than it should be given the fundamentals.
And you know, I think it's going to be up to.
The experts, people who've made their life in that world and with success, to make that assessment.
You know, I think that.
If there is a bunch of real estate funds formed this year, somebody who puts all their money into office and somebody who puts none of their money into office, one of them will be the best performer.
I just don't know which one.
You know, if you have these struggles that are still under the surface, we are just about, you know, five days away really from bank earnings, and the question is is we enter this era where they're about to meet new capital rules as well? Are there still just tremendous stresses under the system that people are not noticing.
Well, it's the it's the small to mid size banks, the community and regional banks that are that are heavily weighted toward real estate loans. The biggest banks over two hundred and fifty billion in assets don't have much of a concentration.
They're not at risk.
But some of the smaller banks, you know, I think on average, the banks under two hundred and fifty billion in assets, loans on real estate make up one hundred and sixty percent of their regulatory capital. So some of them will find pain, especially the ones who lent above average and concentrated in regions that are troubled and so forth.
So you know, I don't think it's a systemic risk that's going to put us in the sink, but I do think that you'll see some companies in trouble, and you know, one by one the authorities may have to bail them out, and may well.
Do so, all right, Howard, Unfortunately we have to leave it there. Great to have you, of course on our launch day are big banks, of course, to Howard. Marxie is the co founder and co chairman of oak Tree Capital.