Oaktree's Wayne Dahl on Credit Markets Right Now

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:15)

And I'm Tracy Alloway.

Joe Weisenthal (0:16)

Tracy, we just got back from California. We were at the Future Proof Conference. I love going to Southern California.

Tracy Alloway (0:23)

I mean, you can't beat Huntington Beach. It was pretty sweet.

Joe Weisenthal (0:27)

It was so beautiful. It was really cool. We were out on the beach.

Tracy Alloway (0:30)

We walked up to the pier, watched the surfers.

Joe Weisenthal (0:33)

Perfect weather, watched the surfers, ate some really good food, and had some pretty good conversations about the state of financial markets.

Tracy Alloway (0:41)

Yep, and we finally got to record an episode that we've been meaning to do for a while. We dived into not the ocean, but the credit market.

Joe Weisenthal (0:51)

I guess the credit market comes up here or there in various aspects of our conversations. I guess typically when we talk about real estate, maybe a little bit about the Fed, but the credit market is obviously so diverse and it's such its own world that we really, it had been too long since we like talked about, okay, what is happening in credit?

Tracy Alloway (1:10)

Well, also, I think there was this expectation that as interest rates went up, you were going to see lots of drama in the credit market. And even though we've seen bankruptcies rise a little bit, we haven't really seen the big fallout that a lot of people had been expecting.

Joe Weisenthal (1:25)

Right, and you know, look, the way people think about the Fed is that it works by tightening credit conditions, right? Like in theory, like that's how it's all supposed to work. As you said, when interest rates go up, and yet we have got this rise in interest rates for sure. We definitely see it on the mortgage side, like less housing activity, but the sort of like broader tightening of like business credit, we certainly haven't seen much of a widening and spreads at all. So it's a confusing time.

Tracy Alloway (1:51)

Absolutely. So we really do have the perfect guests to talk about this.

Joe Weisenthal (1:55)

That's right, our guest, we spoke with Wayne Dahl. He's a managing director, portfolio manager, and investment risk officer at Oaktree. We talk about all things credit. What do you see? Why did rates move so hard? Why are they still pressed up against the ceiling?

Wayne Dahl (2:10)

We went through a period so long where interest rates were very low and money was very easy.

And unfortunately, during the period of COVID with some of the supply chain issues, with a lot of the stimulus that was put into the economy, both through the monetary channel and the fiscal channel, that really set up kind of a perfect storm for demand to go through the roof and supply to be diminished. And ultimately, we ended up with this big inflation push, which if you go back to the formula from the 70s and 80s, how do you cure inflation? You raise interest rates quickly. And I think that's the playbook that the central banks, not only in the US, but really globally, had no choice but to follow.

Tracy Alloway (2:53)

What does risk actually mean to you and Oaktree? And does it differ from maybe other financial firms definition of risk?

Wayne Dahl (3:03)

Yeah, that is a great question. And anyone who's read our Chairman Howard Marks' memos knows that he's very clear that risk is more than just a measure of volatility. I mean, when typically at Oaktree, when we talk about risk, it is our number one investment philosophy and investment tenant to keep risk under control.

Really, it's to avoid loss. And the tagline there for Oaktree is if you avoid the losers, the winners take care of themselves. So as credit investors, especially in a market like this where yields are high, you want to earn that yield and keep that yield and not give it back in the form of default. So to us, minimizing risk is largely related to kind of minimizing loss for investors.

Joe Weisenthal (3:44)

All right, let's dive deeper into credit. I mean, let's start like, spreads are still pretty narrow.

Wayne Dahl (3:50)

Yeah.

Joe Weisenthal (3:51)

And a credit is such a huge world. So I know we have to like go from like slice to slice to slice, but like big picture, people don't seem particularly concerned about like defaults.

Wayne Dahl (4:00)

Yeah, I mean, look, I think one of the things with credit that has changed is largely related to the backdrop of interest rates. And to quote Howard again, our chairman, he wrote a memo in December called a sea change. And in that memo, he talked about this change in what was a low return world to a high return world. And that has really, I think shifted the dynamic and the expectations around credit. And you're right, have credit spreads moved maybe as wide as people thought?