The Exchanges

Q Can I ask, on the element of inflation, when we think about kind of the government stimulus packages and the quantitative easing that we've seen, how do you think that plays into the theory of, you know, rising inflation rates?

A You know, the, the canon of economics says that if the government runs deficits and otherwise stimulates the economy, prints money, as we say, that will add to the economic vigor and eventually bring on inflation. But our government's been running deficits since the global financial crisis, And this was the slowest recovery in post-war history, and it didn't kindle any inflation. And I'll add one other thing. For roughly 60 years, the inflation, the creation of inflation, was believed to be tied to something called the Phillips Curve, which was taken to mean that the lower the rate of unemployment, the higher the rate of inflation. That is to say, when more and more people got employed, that would take the slack out of the economy, allowing workers to negotiate higher wages And bringing on inflation. And, you know, as of January, the unemployment rate in this country was three and a half percent, the lowest in 50 years, and still no inflation. So now I think the Phillips curve is being disregarded. As I say, it's mysterious, and I wouldn't want to put a bet on what the inflation will be in, in, uh, 24.

AI assessment note: “our government's been running deficits... and it didn't kindle any inflation.”

Q wait on this one, and so they're fundamentally quite scary times. We've had the dot-com, we've had the tech bubble with the lack of business fundamentals, and then in 2008 obviously with the liquidity and housing crisis. The thing I've been thinking about constantly over the last few days, and excited to hear your thoughts on is, What in your mind is the fundamental economic crisis that's occurring here today?

A Well, we have a couple of things. Number one, depending on the ultimate severity of the disease, the present time we have a total stoppage of the economy. You know, stores are closed, restaurants, movie theaters, nobody's going to entertainment events, nobody's on airplanes traveling, hotel occupancy is very low, no business trips, no pleasure trips. So the economy is in a deep freeze. And then, in addition to that, given the fact that we had 11 years of prosperity and declining interest rates in the world, people used more and more debt to buy assets of lower and lower quality to lever them into palatable returns. But the combination today of the high leverage and the low asset quality has come home to roost, and a lot of companies are over levered, and a lot of investment entities are as well, and they may not survive. And in the meantime, They are having their liquidity withdrawn by lenders who need the money back, so there's on top of an economic freeze, we have a withdrawal of liquidity, and the combination is very serious.

AI assessment note: “combination today of the high leverage and the low asset quality has come home to roost”

Q Can I ask you, as you mentioned that, the incredible 60 years that you spent in the industry, is there an analogy that you can point to where you draw lessons from this time, or do you see this as fundamentally a completely new paradigm?

A Well, it's similar in some ways to oh eight, And it's different in some ways. The main difference is that this is life and death. This is a health crisis. That was a financial crisis. And the other difference is that that crisis came off a bubble in which the banks were levered 32 times their equity, and many highly levered entities had invested in subprime mortgages, which had no real substance. This time around, we are not coming off a bubble. The banks are much less leveraged. And there's no analog as deficient in substance as the subprime mortgage. So those are the differences. The similarities are that it's a financial problem for highly levered entities which own assets that are declining in price.

AI assessment note: “Well, it's similar in some ways to oh eight, And it's different in some ways.”

Q I would love to quickly dive in, though, and for those that maybe missed our first episode, how did you make your way into the world of finance and come to found Oaktree in a very succinct one to three minutes?

A In other words, 60 years in three minutes. I went to college expecting to be an accountant. I switched my major to finance. I took a graduate degree at University of Chicago, and while in school, I had a summer job at Citibank's Investment Research Department, and I enjoyed it. And when I got out of school, I had several choices, but having had a favorable experience, that's what I chose. I was an equity analyst at Citibank for several years, unit head, and then the director of research from six, 75 to 78. In 78, I was asked to start a high-yield bond fund, and high-yield bonds have been the, shall we say, epicenter, although it's an advised word today, for almost everything that's happened, interestingly, in finance in the last 40 years. So I went from Citi to TCW, and there, with Bruce Karsh, I started the distressed debt investing activity, which is very important to us today. And in 95, Bruce and I and three other colleagues left to start Oaktree. So we are within a couple of weeks of Oak Tree's 25th anniversary, and that's the short version.

AI assessment note: “In 95, Bruce and I and three other colleagues left to start Oaktree.”

Q Can I ask, on the element of inflation, when we think about kind of the government stimulus packages and the quantitative easing that we've seen, how do you think that plays into the theory of, you know, rising inflation rates?

A You know, the, the canon of economics says that if the government runs deficits and otherwise stimulates the economy, prints money, as we say, that will add to the economic vigor and eventually bring on inflation. But our government's been running deficits since the global financial crisis, And this was the slowest recovery in post-war history, and it didn't kindle any inflation. And I'll add one other thing. For roughly 60 years, the inflation, the creation of inflation, was believed to be tied to something called the Phillips Curve, which was taken to mean that the lower the rate of unemployment, the higher the rate of inflation. That is to say, when more and more people got employed, that would take the slack out of the economy, allowing workers to negotiate higher wages And bringing on inflation. And, you know, as of January, the unemployment rate in this country was three and a half percent, the lowest in 50 years, and still no inflation. So now I think the Phillips curve is being disregarded. As I say, it's mysterious, and I wouldn't want to put a bet on what the inflation will be in, in, uh, 24.

AI assessment note: “the canon of economics says that if the government runs deficits”

Q see DoorDash soaring at the rates that it has done. I just have to ask you, it often doesn't seem to correlate. How do you evaluate the state of kind of the public markets today, companies IPO-ing, given what we've discussed in some ways in terms of the fragility of the macroeconomy and the situation that we're in? How do you think about and evaluate your public market performance today?

A Well, number one, everybody wants to know if we have all these problems with the disease, how can a Stock prices be at an all-time high. That's the main thing. And what I would say is, number one, for complex reasons, the prices of stocks and other assets are highly influenced by the level of interest rates. The lower the interest rates, the higher the asset price is justified. We have the lowest interest rates in history. That justifies, for example, the highest P.E. ratios in history. So when you look and you see that the average P.E. ratio in the post-war period has been 16, and today we're in the 26 or seven region. You say, well, that's, that's tremendously overpriced, but it's, it's makes perfect sense relative to the level of interest rates. Now we spent a lot of time before talking about inflation and interest rates. If interest rates go up, prices should be expected to go down. But today's asset stock prices for technology companies, for example, I think are not inconsistent with today's level of interest rates. And then the other thing is great tech companies like Amazon and Microsoft and so forth were icebreakers. They led the way by performing extremely well coming out of the pandemic. They're up substantially for the year, while non-tech is not. Their great relative performance kind of cleared the way for phenomena like you're seeing in the IPO market. The fact tha…

AI assessment note: “for complex reasons, the prices of stocks and other assets are highly influenced by”

Q we look at the Toolkit that we have at our disposal to reengage the economy when the health crisis does subside, you know, one hopes as soon as possible, but we've used all the tools at our disposal. Do you think that's a fair concern given the fiscal and monetary policies that we've used over the last seven to 10 years, meaning we have little to enact such growth again?

A Well, it is a concern. The main areas in which we have exhausted our resources are, uh, interest rates, which historically interest rate cuts have been the central bank's main Tool for stimulating economies. The problem this time is that the normal regime of interest rate cuts in the past covered approximately 500 basis points, which is what investment people use to say mean five percentage points. So interest rates in the past might have gone from nine to four or from seven to two or something like that. Or in the global financial crisis, they went from five to zero. Well, the problem is that in this instance, the interest rates At the beginning of the problem were one and a half percent. So clearly if it's one and a half, you can't cut by five. So that's a problem. And then the other problem is that governments, as opposed to central banks, government's main tool for stimulating economies has been deficit spending. And thanks to the Trump tax bill that was signed in December of 17, we were already running a trillion dollar deficit in times of prosperity. So further deficit spending then is Similarly, unpalatable. So the ability to do deficit spending should be limited in some way, and obviously the ability to cut rates is limited. There are other things that the Fed and the government can do, and they'll do them all to try to bring the economy back.

AI assessment note: “Well, it is a concern. The main areas in which we have exhausted our resources”

Q wait on this one, and so they're fundamentally quite scary times. We've had the dot-com, we've had the tech bubble with the lack of business fundamentals, and then in 2008 obviously with the liquidity and housing crisis. The thing I've been thinking about constantly over the last few days, and excited to hear your thoughts on is, What in your mind is the fundamental economic crisis that's occurring here today?

A Well, we have a couple of things. Number one, depending on the ultimate severity of the disease, the present time we have a total stoppage of the economy. You know, stores are closed, restaurants, movie theaters, nobody's going to entertainment events, nobody's on airplanes traveling, hotel occupancy is very low, no business trips, no pleasure trips. So the economy is in a deep freeze. And then, in addition to that, given the fact that we had 11 years of prosperity and declining interest rates in the world, people used more and more debt to buy assets of lower and lower quality to lever them into palatable returns. But the combination today of the high leverage and the low asset quality has come home to roost, and a lot of companies are over levered, and a lot of investment entities are as well, and they may not survive. And in the meantime, They are having their liquidity withdrawn by lenders who need the money back, so there's on top of an economic freeze, we have a withdrawal of liquidity, and the combination is very serious.

AI assessment note: “on top of an economic freeze, we have a withdrawal of liquidity”

Q the incredible firm that you've built with Oaktree, but, you know, it had to start somewhere, and a little birdie told me before Before our conversation about an investment banking job that you maybe didn't get coming out of college, so I'd love to start with that. Why did you not make the job, and how did you make your way into the world of finance as a result, Howard?

A Well, a little over 50 years ago, when I was graduating from University of Chicago Graduate School of Business, I didn't really know what I wanted to do. I applied for six different jobs in six different fields. One of them attracted me more than the others. It seemed more glamorous and more exciting, and it was what everybody wanted, all my peers. So I was hoping for that one, but I didn't get that one, and instead, I started work at Citibank in the Investment Research Department, and about 30 years later, the guy from that firm, who was the campus recruiter, did something very good for the school, so I wrote him a letter, and this was in the days of letters in the late nineties, and I congratulated on what he was doing, and I said, I don't know if you remember me, but you were the recruiter, and I was a job applicant, and you know, in those days, it took a while, so a couple of weeks later, his Letter appeared, and it said, yes, I remember you, and I followed your career, and if you ever want to know why you didn't get that job, give me a call. So, of course, I gave him a call about 10 seconds later, and after some pleasantries, he said, well, we hired the wrong guy. It's weird of you to say that, and he said, no, I mean, the recruiters had decided to hire you, and instead, the partner in charge came and hung over that morning and called the wrong guy, and they actually gave …

AI assessment note: “the partner in charge came and hung over that morning and called the wrong guy”

Q Howard, I want to finish on, on a final one, and it's not a forecast at all by any means. It's more a forward look And that might be a forecast in some respects, but what does the next five years look like for you and for Oak Tree? What does that roadmap ahead look like for you, do you think?

A Well, my goal is to continue to operate as we have in the past. I don't think this is a time to increase our risk, as I suggested in my answer to the last question. When I say we could have had more risk in between, this is not a time for more risk. We're going to continue to keep the risk off and prepare for the next downturn, and we're hoping there will be one. We need one. We make our biggest money In connection with downturns and their resulting recovery, we're assuming that there will be a cycle as in the past. The bull market is 11 years old. If there's not one in the next five years, that means we'll have gone 16, which would be a record by a wide margin. So my guess is that in the next five years, we'll have a period of distress, and my hope is that Oak Tree will distinguish itself as it has so many times in the past in distress.

AI assessment note: “in the next five years, we'll have a period of distress”

Q cycle. I guess the big question for me is It's really a case of insertion point. I know at points in 2008, OCHE were deploying close to maybe six hundred million per week for 15 weeks running. I guess then, how do you think about when's the right time to be really aggressive versus when to pull back, given the kind of probability distribution returns being maybe more modest now?

A Well, again, you said, what the insertion point? What is the time to buy? I would try to get away from that phrase. There is no the time. This is a time. There may be several. And we never know when it's the top or the bottom, but we can have a sense whether it's a better time to increase risk or decrease risk. I think it's a better time to decrease risk for the reasons that I've been discussing, the extended nature of the expansion, the bull market, the above average valuations, the investor behavior. Frankly, investors in a low interest rate environment with the market roaring ahead as it did in, in Best return since 1997, that's 22 years. People are afraid of missing out, so they're engaging in what I call pro-risk behavior in order to get their share. All of these things taken together tell me that this is A time precaution, not B time, A time, that I believe that an investor should have less risk currently than they usually do. Now, people always wanted me to say, buy or sell, in or out, and those judgments are too black and white. It should be more nuanced. Where on the speedometer between zero and a hundred should you be today? And my answer is that whatever your normal risk position is, today I believe you should have less, not zero. I don't think we're in a massive bubble. I don't think this thing is gonna collapse anytime soon, but I do think that there is more risk t…

AI assessment note: “we can have a sense whether it's a better time to increase risk or decrease risk.”

Q the incredible firm that you've built with Oaktree, but, you know, it had to start somewhere, and a little birdie told me before Before our conversation about an investment banking job that you maybe didn't get coming out of college, so I'd love to start with that. Why did you not make the job, and how did you make your way into the world of finance as a result, Howard?

A Well, a little over 50 years ago, when I was graduating from University of Chicago Graduate School of Business, I didn't really know what I wanted to do. I applied for six different jobs in six different fields. One of them attracted me more than the others. It seemed more glamorous and more exciting, and it was what everybody wanted, all my peers. So I was hoping for that one, but I didn't get that one, and instead, I started work at Citibank in the Investment Research Department, and about 30 years later, the guy from that firm, who was the campus recruiter, did something very good for the school, so I wrote him a letter, and this was in the days of letters in the late nineties, and I congratulated on what he was doing, and I said, I don't know if you remember me, but you were the recruiter, and I was a job applicant, and you know, in those days, it took a while, so a couple of weeks later, his Letter appeared, and it said, yes, I remember you, and I followed your career, and if you ever want to know why you didn't get that job, give me a call. So, of course, I gave him a call about 10 seconds later, and after some pleasantries, he said, well, we hired the wrong guy. It's weird of you to say that, and he said, no, I mean, the recruiters had decided to hire you, and instead, the partner in charge came and hung over that morning and called the wrong guy, and they actually gave …

AI assessment note: “the partner in charge came and hung over that morning and called the wrong guy”

Q that you've written about, it was actually in your memo from 1993, but you said, being right does not lead to superior performance if the consensus forecast is also right, lending to the contrarianism that we just mentioned there. So, if we kind of double-click on that, can you expand on your matrix of right and wrong, and then consensus versus non-consensus, and how do you think about that matrix?

A Well, the most important thing about the matrix And, uh, that, you know, even though it's, uh, 26 years ago, it still attracts pretty good attention as you're witnessing. One of the most important things to take away from that matrix is that if you engage in conventional behavior, that is, you follow the crowd, if good things happen, you'll have good conventional performance, and if bad things happen, you'll have bad conventional performance, but either way, your performance will be conventional. If you want to distinguish yourself from the crowd, If you want to be an above average performer, by definition, you can't engage in conventional behavior. So if you instead deviate from the crowd, and contrarianism is one way to deviate from the crowd, if you do, and you get good breaks, you'll have unconventional above average returns, and if you get unlucky breaks, you'll have unconventional below average returns. But the attempt to produce above average returns Has to start with unconventional behavior. You can't expect to behave conventionally and have returns which are unconventional. That's really what that matrix is all about.

AI assessment note: “One of the most important things to take away from that matrix”

Q There we go. Howard, in one of your memos you wrote, and I love this, you can't predict, you can prepare. How do you think about that in today's context?

A We never know what the future holds. Mark Twain 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. Given the uncertainty that surrounds the future by definition, the big mistake is to assume you know what the future holds and bet heavily on it and be wrong. So no sentence that starts with, I don't know, but, or I could be wrong, but ever got anybody into big trouble. We don't know where we're going, but we should know where we are. And if where we are is elevated in the cycle and precarious, and if the economic recovery is elderly, then we should, that's what enables us to Prepare. And I think that the market conditions in 19, twenty-nineteen and the prior years made us vulnerable to an economic shock like the pandemic produced. And when it came along, it took a toll. Fortunately, the Fed and Treasury responded as well as they did.

AI assessment note: “We don't know where we're going, but we should know where we are.”

Q see DoorDash soaring at the rates that it has done. I just have to ask you, it often doesn't seem to correlate. How do you evaluate the state of kind of the public markets today, companies IPO-ing, given what we've discussed in some ways in terms of the fragility of the macroeconomy and the situation that we're in? How do you think about and evaluate your public market performance today?

A Well, number one, everybody wants to know if we have all these problems with the disease, how can a Stock prices be at an all-time high. That's the main thing. And what I would say is, number one, for complex reasons, the prices of stocks and other assets are highly influenced by the level of interest rates. The lower the interest rates, the higher the asset price is justified. We have the lowest interest rates in history. That justifies, for example, the highest P.E. ratios in history. So when you look and you see that the average P.E. ratio in the post-war period has been 16, and today we're in the 26 or seven region. You say, well, that's, that's tremendously overpriced, but it's, it's makes perfect sense relative to the level of interest rates. Now we spent a lot of time before talking about inflation and interest rates. If interest rates go up, prices should be expected to go down. But today's asset stock prices for technology companies, for example, I think are not inconsistent with today's level of interest rates. And then the other thing is great tech companies like Amazon and Microsoft and so forth were icebreakers. They led the way by performing extremely well coming out of the pandemic. They're up substantially for the year, while non-tech is not. Their great relative performance kind of cleared the way for phenomena like you're seeing in the IPO market. The fact tha…

AI assessment note: “Their great relative performance kind of cleared the way for phenomena like you're seeing in the IPO market.”

Q start by taking stock a little bit. So, I spoke to Ray Dalio this year in March, and he said we'd be entering not a recession, but a global depression. I'm not sure that's the most cheery way to start a podcast episode, but how do you feel about this statement when doing an analysis on the year that's been for the economy? Howard, why don't we start with you?

A Well, before I I know you're going to ask a lot of macro questions, and before I start answering, I'm going to say for myself, but I think probably also for Bill, that macro predictions are very hard to make, and I don't think either of us bases our investment decisions on macro forecasts. That's not a way to have a good batting average. With that disclaimer out of the way, first of all, nine months ago, a global depression was absolutely a possibility. With the, most of the developed countries Certainly outside of Asia, shutting down their whole economies in order to limit contacts and bend the curve. You know, demand would have gone to zero. Incomes would have gone to zero for many people and many businesses. And, you know, global trade would have, could have gone very, very badly. You know, I remember around, uh, let's say March, 18th, absolutely considering the possibility of a global depression. But, uh, thank God the, uh, The Fed and the Treasury did what they did in this country, central banks elsewhere, and, uh, clearly we've had a very painful and precipitous but brief recession.

AI assessment note: “clearly we've had a very painful and precipitous but brief recession.”

Q There we go. Howard, in one of your memos you wrote, and I love this, you can't predict, you can prepare. How do you think about that in today's context?

A We never know what the future holds. Mark Twain 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. Given the uncertainty that surrounds the future by definition, the big mistake is to assume you know what the future holds and bet heavily on it and be wrong. So no sentence that starts with, I don't know, but, or I could be wrong, but ever got anybody into big trouble. We don't know where we're going, but we should know where we are. And if where we are is elevated in the cycle and precarious, and if the economic recovery is elderly, then we should, that's what enables us to Prepare. And I think that the market conditions in 19, twenty-nineteen and the prior years made us vulnerable to an economic shock like the pandemic produced. And when it came along, it took a toll. Fortunately, the Fed and Treasury responded as well as they did.

AI assessment note: “market conditions in 19, twenty-nineteen and the prior years made us vulnerable”

Q You mentioned that kind of, that very swift actions. I am interested. What policy changes would you like to see, especially in the US, but your home market, and how would you see that in terms of minimizing the economic damage? What would you most like to see that you think would be beneficial to the economy moving forward?

A You know, the analogy I use, Harry, is that sometimes when people are very sick, they put them into a coma so that the body can heal itself, and I think we need a freeze on certain things so that the economy can heal, and I think that the new government actions will have a freeze on evictions, for example, and maybe there has to be a freeze on debt collections, and maybe there could be a freeze on rents. Now, the problem is everybody says, oh, that sounds like a great idea. Why don't we tell everybody That for the next six months, they don't have to pay their rent. That would be a real help to the guy who's lost his job. Sounds like a great idea. But where do the rent payments go? And they go to landlords. So that means that the landlord loses his income. And can he live? And can he maintain the building and pay the central costs and so forth? So the solutions aren't easy, but I think the answer is that there have to be temporary actions to mitigate the short-term damage. You know, in our country, we have unemployment insurance for 26 weeks. Maybe it has to be made longer or something like that.

AI assessment note: “freeze on evictions, for example, and maybe there has to be a freeze on debt collections”

Q Can I ask, does it change anything about how you act and operate within Oatree, and maybe Oatree more broadly, given the longstanding bull run that we've had, given the very, very swift changes today, does it change the operations and the mentality at Oatree?

A Well, I mean, it, for us, it just makes us more aggressive. We've been defensive for the last several years. We have thought that practices in the financial world were too undisciplined. So we've been trying to operate in a reduced risk fashion and buy higher quality assets. And I would say now that prices are down so much and the marketplace is more disciplined, I think we can turn more aggressive. When there's a lot of money in everybody's hands and they're all eager to put it to work, then everybody bids for assets and they bid for opportunities to provide financing. And as a result, the prices rise, the prospective returns decline, And the risk rises, and that's the process I call the race to the bottom, and it's very, very dangerous for people who participate in the race. On the other hand, if we have a market where people aren't bidding to put their money to work, then maybe the few people who will invest or will lend can get a good deal with low prices and high returns and safety. So Warren Buffett, great quote, he said that the less prudence with which others conduct their affairs, The greater the prudence with which we must conduct our own affairs. And I interpret that to mean that when other people are carefree and risk oblivious, we should be terrified. But on the other hand, when other people are terrified, we should turn aggressive. So in times when other people ar…

AI assessment note: “for us, it just makes us more aggressive. We've been defensive for the last several years.”

Q do you manage the psychology of not knowing where the bottom is? And as you said, it will always fall lower than when you catch it, and there's always that ensuing time frame where it does drop. How do you manage that psychology where everyone else panics and worries and is concerned and sells at a loss? How did you manage that psychology, especially in the early days, I guess?

A Well, in the early days, I wasn't managing money. I was 44 when I lived through my first debt crisis in 1990. By that time, maybe I had grown up and learned a few things. Bruce Karsh and I, I think, are both unemotional people, and in terms of living with these ups and downs, it helps to be unemotional. Number two, we support each other. And I think that each of us can do a better job of resisting the emotional ups and downs because we have the support of the other, which is very important. But the point is this. Think about the average investor. The average investor gets excited when things go well and prices rise and wants to buy more. And the average investor gets depressed when things go poorly and prices fall and wants to sell. In other words, the model should be buy low, sell high. And the average person's psychology tends to get him to buy high and sell low. So the average person's psychology is a big enemy. It's our job to resist that. What that means, Harry, is that if you operate emotionally or psychologically, like the average person, you will have average results, which for the most part means buying high and selling low. In order to be an above average investor among all the various requirements, One is that you not follow average psychology. You have to resist it. You have to try to buy when things are low and people are depressed and panicking, and you have to tr…

AI assessment note: “Bruce Karsh and I, I think, are both unemotional people”

Q Absolutely. I do agree. I guess my question to you is, with such uncertainty ahead, How do you think about how to manage and move forward with such uncertainty, and are there frameworks one can use to analyze crisis events and moments like this?

A There are frameworks through what you tried to do at the beginning of the show, that is analogies, but when you're living through something that is unique, as we are, both in terms of the health crisis, and there's never been, I don't think there's ever been, two million new unemployment claims, which is what some of the brokers think there's going to be next week. There's never, I don't think there's ever been a A quarter with a 20% decline in GDP. So you can't say you know how this is going to end, given the fact that it's a unique experience. I think for Oaktree, Harry, all we try to do is figure out what companies will stay in business, some idea of what they're worth, and then invest in them on a senior level. And if investing in what we think are viable companies in senior debt, if that doesn't work, I think maybe nothing will. So we have to operate on the premise that will be successful as it always has been in the past.

AI assessment note: “There are frameworks through what you tried to do at the beginning of the show”

Q Can I ask, does it change anything about how you act and operate within Oatree, and maybe Oatree more broadly, given the longstanding bull run that we've had, given the very, very swift changes today, does it change the operations and the mentality at Oatree?

A Well, I mean, it, for us, it just makes us more aggressive. We've been defensive for the last several years. We have thought that practices in the financial world were too undisciplined. So we've been trying to operate in a reduced risk fashion and buy higher quality assets. And I would say now that prices are down so much and the marketplace is more disciplined, I think we can turn more aggressive. When there's a lot of money in everybody's hands and they're all eager to put it to work, then everybody bids for assets and they bid for opportunities to provide financing. And as a result, the prices rise, the prospective returns decline, And the risk rises, and that's the process I call the race to the bottom, and it's very, very dangerous for people who participate in the race. On the other hand, if we have a market where people aren't bidding to put their money to work, then maybe the few people who will invest or will lend can get a good deal with low prices and high returns and safety. So Warren Buffett, great quote, he said that the less prudence with which others conduct their affairs, The greater the prudence with which we must conduct our own affairs. And I interpret that to mean that when other people are carefree and risk oblivious, we should be terrified. But on the other hand, when other people are terrified, we should turn aggressive. So in times when other people ar…

AI assessment note: “for us, it just makes us more aggressive. We've been defensive”

Q You mentioned that kind of, that very swift actions. I am interested. What policy changes would you like to see, especially in the US, but your home market, and how would you see that in terms of minimizing the economic damage? What would you most like to see that you think would be beneficial to the economy moving forward?

A You know, the analogy I use, Harry, is that sometimes when people are very sick, they put them into a coma so that the body can heal itself, and I think we need a freeze on certain things so that the economy can heal, and I think that the new government actions will have a freeze on evictions, for example, and maybe there has to be a freeze on debt collections, and maybe there could be a freeze on rents. Now, the problem is everybody says, oh, that sounds like a great idea. Why don't we tell everybody That for the next six months, they don't have to pay their rent. That would be a real help to the guy who's lost his job. Sounds like a great idea. But where do the rent payments go? And they go to landlords. So that means that the landlord loses his income. And can he live? And can he maintain the building and pay the central costs and so forth? So the solutions aren't easy, but I think the answer is that there have to be temporary actions to mitigate the short-term damage. You know, in our country, we have unemployment insurance for 26 weeks. Maybe it has to be made longer or something like that.

AI assessment note: “I think we need a freeze on certain things so that the economy can heal”

Q On appearance, and I hope this is okay to ask a personal one, but on appearance, you've achieved all that one would want to achieve or could achieve. What motivates you today, Howard?

A Well, I think the reason that I've been successful is that I so enjoy what I do. And because I enjoy it, I don't want to stop. And what would I do? You know, I'm not a golfer or a bridge player, and I don't want to sit on a park bench. And if I hung around the house, my wife would kill me. So there used to be a rock club in the seventies or even the late sixties called the Fillmore. And it was run by a guy named Bill Graham. And, and, and he said, it's only work if you'd rather be doing something else. And, you know, there's really nothing I'd rather be doing. I have friends. I see my family. I see my friends. I like some leisure. I love to read, but I love my work. And the great thing about investing is it's different every day. And yesterday's solution may not be appropriate for tomorrow. So it's a thrill. And of course, the people I work with.

AI assessment note: “I so enjoy what I do. And because I enjoy it, I don't want to stop.”

Q cycle. I guess the big question for me is It's really a case of insertion point. I know at points in 2008, OCHE were deploying close to maybe six hundred million per week for 15 weeks running. I guess then, how do you think about when's the right time to be really aggressive versus when to pull back, given the kind of probability distribution returns being maybe more modest now?

A Well, again, you said, what the insertion point? What is the time to buy? I would try to get away from that phrase. There is no the time. This is a time. There may be several. And we never know when it's the top or the bottom, but we can have a sense whether it's a better time to increase risk or decrease risk. I think it's a better time to decrease risk for the reasons that I've been discussing, the extended nature of the expansion, the bull market, the above average valuations, the investor behavior. Frankly, investors in a low interest rate environment with the market roaring ahead as it did in, in Best return since 1997, that's 22 years. People are afraid of missing out, so they're engaging in what I call pro-risk behavior in order to get their share. All of these things taken together tell me that this is A time precaution, not B time, A time, that I believe that an investor should have less risk currently than they usually do. Now, people always wanted me to say, buy or sell, in or out, and those judgments are too black and white. It should be more nuanced. Where on the speedometer between zero and a hundred should you be today? And my answer is that whatever your normal risk position is, today I believe you should have less, not zero. I don't think we're in a massive bubble. I don't think this thing is gonna collapse anytime soon, but I do think that there is more risk t…

AI assessment note: “whatever your normal risk position is, today I believe you should have less, not zero.”

Q that you've written about, it was actually in your memo from 1993, but you said, being right does not lead to superior performance if the consensus forecast is also right, lending to the contrarianism that we just mentioned there. So, if we kind of double-click on that, can you expand on your matrix of right and wrong, and then consensus versus non-consensus, and how do you think about that matrix?

A Well, the most important thing about the matrix And, uh, that, you know, even though it's, uh, 26 years ago, it still attracts pretty good attention as you're witnessing. One of the most important things to take away from that matrix is that if you engage in conventional behavior, that is, you follow the crowd, if good things happen, you'll have good conventional performance, and if bad things happen, you'll have bad conventional performance, but either way, your performance will be conventional. If you want to distinguish yourself from the crowd, If you want to be an above average performer, by definition, you can't engage in conventional behavior. So if you instead deviate from the crowd, and contrarianism is one way to deviate from the crowd, if you do, and you get good breaks, you'll have unconventional above average returns, and if you get unlucky breaks, you'll have unconventional below average returns. But the attempt to produce above average returns Has to start with unconventional behavior. You can't expect to behave conventionally and have returns which are unconventional. That's really what that matrix is all about.

AI assessment note: “the attempt to produce above average returns Has to start with unconventional behavior”

Q Absolutely. I do agree. I guess my question to you is, with such uncertainty ahead, How do you think about how to manage and move forward with such uncertainty, and are there frameworks one can use to analyze crisis events and moments like this?

A There are frameworks through what you tried to do at the beginning of the show, that is analogies, but when you're living through something that is unique, as we are, both in terms of the health crisis, and there's never been, I don't think there's ever been, two million new unemployment claims, which is what some of the brokers think there's going to be next week. There's never, I don't think there's ever been a A quarter with a 20% decline in GDP. So you can't say you know how this is going to end, given the fact that it's a unique experience. I think for Oaktree, Harry, all we try to do is figure out what companies will stay in business, some idea of what they're worth, and then invest in them on a senior level. And if investing in what we think are viable companies in senior debt, if that doesn't work, I think maybe nothing will. So we have to operate on the premise that will be successful as it always has been in the past.

AI assessment note: “all we try to do is figure out what companies will stay in business”

Q guess, you know, for me, if we double click on that partnership, some of the discussions you've had in the tough times And how you maybe play devil's advocate to each other. First, my question would be, what do you think that you have so well in terms of really fostering that environment of safety and radical transparency in the partnership and also with your relationship and dialogue with Bruce?

A Yeah, well, as you say, Harry, I was very fortunate to meet Bruce Karsh in 1987. And, you know, we just clicked and he joined me at Trust Company of the West and worked for me. And together in 88, we started what I believe was the first Distress debt fund from a mainstream financial institution, and as a result, I believe we're the oldest mainstream practitioner in distress debt. Here we are, 32 years later, and I think that this was never rehearsed or formalized, but I think that our relationship is characterized by affection for each other, but importantly, by mutual respect, and we're respectful toward the other's views. You know, I think that one of the most important characteristics for any of us in our lives is Intellectual humility. And it's very simple what that means. It means the other guy could be right. And if you don't think the other guy could be right, if you're sure you're right and he's wrong all the time, then you're probably a jerk. And I wouldn't want to be that person, and I wouldn't want to work with that person. And Bruce and I, you know, we, we have strong opinions, but we don't insist we're right. We want to hear the other person's point of view and see if they agree, and if not, why? The beauty is we don't, neither of us fights to get our way. Or fights to defend our opinion just because it's ours. We want to find the right solution, and this is just t…

AI assessment note: “relationship is characterized by affection for each other, but importantly, by mutual respect”

Q real strength of relationship. I guess the really interesting element is when one thinks about really embracing that within the wider team, how do you think about some things maybe you say to your team to encourage productive disagreements across a broader set of people? Is there anything that you found works In terms of inserting that I could be wrong, but, and that productive disagreement element into the discussion.

A Well, you know, Harry, I don't just write the memos for external consumption. It's also desirable that they're internally consumed, and so everybody who works here understands the working environment. If you read our business principles, which are on the website, and most people read the investment philosophy, but not the business principles, it talks about having a harmonious Working environment, and everybody who works here knows that they're safe. Again, safety is important. Everybody's safe to say what they think. If somebody disagrees with me, a junior person that disagrees with me, I don't come down on them. I don't criticize them. If it turns out they're wrong, it's not like they've signed their career death warrant. It's just one opinion, and this firm has a limited view on correctness of opinions, and everybody's entitled to have them, and the fact that you have some which turn out to be Incorrect is not a, a mark of shame, and, you know, our firm is non-hierarchical. Everybody speaks to everybody else like equals, and, and as I say, I don't think people are afraid to express opinions, even those that turn out to be wrong, or even to disagree with somebody who on the org chart is senior, and, you know, we have a relaxed environment, and I think that all these things are very helpful.

AI assessment note: “Everybody's safe to say what they think. If somebody disagrees with me”