00:00Elizabeth, it has been quite the morning globally, 10-year yields at one point trading at the highest since 2023.
00:05It backs off of that slightly.
00:07You've been writing about this, and you had expected rates to move higher.
00:11Does it get worse from here?
00:13Is this just the beginning of a sell-off?
00:15Look, I think structurally rates will move higher.
00:18This might be the beginning.
00:19I've said, as you pointed out, for over a year now that I think the 10-year is probably more
00:23appropriately priced around 5 or 6, just mathematically speaking.
00:27And nothing that really Bess and Erwarsch is doing right now fixes the underlying problem for why that term premium
00:35is increasing.
00:36And that really has to be a fiscal response.
00:38If the Fed cuts and the 10-year keeps rising, is that basically the market's telling the Fed that you're
00:45doing something wrong?
00:45Maybe.
00:46And I know there's a long list, again, of reasons why we're seeing yields behave the way they're behaving.
00:50But I think you are on to something, right?
00:52And we've seen that play out.
00:53We saw the rate cuts in 2024, and yet the 10-year continued to increase.
00:57The beginning of this year, you know, the 10-year was around 4-1.
01:01Look where it is now.
01:02We're not, we weren't in, you know, a different cycle.
01:05So I think that you are seeing that pushback, and you are seeing that when are we actually going to
01:09believe that something's going to change on this front in order to get the yields to come back down.
01:14So it'll be really interesting to see what happens in the next couple weeks with the Fed.
01:18I think Waller on Thursday will be interesting to watch.
01:20He's definitely a swing voter and should have some influence there.
01:24So I think, yes, we'll continue to see yields rise until something changes.
01:27Well, again, you said that it's going to be a bond market, not necessarily just pressuring the Fed, but pressuring
01:32the fiscal situation and the deficit we're in.
01:35I mean, there's no really appetite to change the fiscal picture, is there, Elizabeth?
01:38I mean, this piece of the pie surely is going to remain as strange as ever.
01:42There is no appetite to change it, politically speaking, at least, at least until the mid-2030s when we start
01:47to see problems with Medicare and Medicaid.
01:49But I'm sure you all saw the CBO's own study that if interest expenses increase by just 0.1 more
01:56than expected, we're going to run into $2 trillion in interest payments instead of the $1 trillion we have about
02:01now, which is up from $350 billion not just five years ago.
02:05So we're certainly in a situation where we're not in a cost-cutting mode and, you know, it's sort of
02:10like, you know, when you started out when you were 21 and your parents told you, you know, live within
02:15your means and as you make more income, don't adjust your lifestyle.
02:18And certainly the U.S. government could take a page from that.
02:20We've adjusted our lifestyle and we need to get back to basics.
02:24The lifestyle creep, the infamous lifestyle creep, what then would make you more bullish on long-duration treasuries?
02:30I think you'd have to see, you know, entitlement form and massive fiscal constraints.
02:35I think you'd have to see something like that.
02:36The other thing that could get yields down would be something massively disruptive and recessionary, and that's certainly not my
02:42base case.
02:43As long as we continue to see this bullishness in the AI trade and, you know, it used to be
02:48don't fight the Fed.
02:48Now I think it's don't fight the bulls.
02:50I think we'll continue to see, you know, progress in the equity markets.
02:54So it's kind of tough to see how yields really come in from here unless there's a massive reckoning.
02:59It has been really remarkable that for August, equities remained unshooken by anything happening in the bond market, higher by
03:062.6%.
03:08Are you saying that that doesn't change, that equities and specifically the AI trade can do fine regardless of what
03:14rates are doing?
03:15No.
03:15I think there is a level at which, you know, and your colleague just mentioned it, which rates can become
03:20problematic.
03:21But look, in terms of, like, what's happening in equities and what's driving them,
03:24it's actually, like, you know, the lower multiple stocks that are really kind of doing well here, at least in
03:29the NASDAQ.
03:30And I get asked by clients all the time, you know, if you could design your perfect portfolio, what would
03:34it look like?
03:34I hate that question because you have to start from zero.
03:37But maybe it's a third, a third, a third.
03:39Maybe it's NASDAQ.
03:40Maybe it's real assets.
03:41And then maybe it's something income-oriented that's keeping you liquid while you deploy into these other assets and you
03:46kind of brace for the volatility there.
03:48But I'm not anti-equities here.
03:51What about credit?
03:52Where do you see the next credit blow up?
03:54Do you think that this is just isolated when it comes to the industry or are you waiting for something
03:59more systemic?
04:01I think there are pockets of isolation here.
04:03If you look at the second quarter BDC results, you're seeing the same couple of software names that are kind
04:09of in a bunch of those larger cap and mid-cap names.
04:12And if something happens to deteriorate in any one of those four names, you could see that broadening out across
04:17the BDC sector because they're all in those names.
04:20That said, I think also health care looks somewhat problematic.
04:23But, you know, the other part of that report was that we're seeing some bright signs there.
04:29And there's certainly bifurcation.
04:30You're seeing, you know, a handful of names trading above NAV because of their credit quality.
04:34But then you're seeing others that are, you know, 0.6x that, you know, are trading based on credit concerns.
04:40So you're definitely seeing dispersion from that level.
04:43I would say you're also just seeing it across other broad measures, right?
04:48So I think the good thing about that for us at Fortress is that dispersion creates opportunity.
04:54And it's not the number of defaults that, you know, are interesting.
04:59It's that the number of distressed names is a broader universe than it used to be, and that creates additional
05:03opportunity.
05:04So it's not something systemic, but it's saying things are interesting.
05:07And that's where things, especially finance and opportunistic credit, can come into play.
05:11And it is notable, again, it's within the DNA of Fortress that it makes sense that those opportunities are in
05:16credit.
05:16Why are you bearish on the equity side, the private equity side of things?
05:22I think I'm bearish on the private equity side of things for reasons a lot of people are.
05:26There was a report out a couple weeks ago from PitchBook, I believe.
05:30It said 50% of private equity companies, and that's the whole universe, haven't done a transaction in four years.
05:34That is quite meaningful, and that the backlog in funds that need to liquidate is like an 11-year backlog.
05:42That is quite substantial.
05:45So while I think there probably are opportunities in private equity, and I think that good quality sponsors can probably
05:51still get things done,
05:52if people are concerned about the credit markets, you know, you should really be concerned about the equity markets here.
05:58And, you know, the 2020, 2021 Vintage Digi that bought in it, you know, six times and now, you know,
06:04and full leverage, sorry, for selling,
06:08you know, it's a different market and it's a different pricing structure.
06:10So it's not that the IPO market is closed, and it's not that we can't get these realizations to happen.
06:15It's the price at which people are willing to execute that, and that still hasn't come back.
06:19What is the general vibe of clients at Fortress?
06:22What are they most asking you of late?
06:24Like, is there one common thread that they're all worried about?
06:27So it's different between retail and institutional.
06:29I think on the retail side, they're saying, what else can I do in private markets?
06:33So, you know, one of the good things about when you see a disruption early in some of these markets,
06:37like we saw early on in the BDCs, which are now kind of coming back and are more muted,
06:42is that it opens the opportunity for them to say, okay, what else is out there?
06:45So things like real estate credit and net lease opportunities and, you know, and also private equity.
06:53And then on the institutional side, I think their main concern is, are we still going to get diversification out
06:58of our bond portfolio?
06:59What else can we do?
07:01And on the institutional side, one of those diversification triggers used to be commodities that was largely taken out of
07:06portfolios 15, 20 years ago.
07:08And I think there needs to be a look back at that.
07:11Now, that's a tough call to make because commodities, your expected returns would essentially be flat over your life horizon.
07:18But I think you need to include more diversification in your portfolio.
07:22And then, you know, as I mentioned earlier, marry it with some of those income-producing assets that are floating
07:26rate,
07:27can adjust with the rate level, and you don't have to get that right.
07:30So I think they're looking for protection and diversification.
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