#86 - Jason Thomas: Inflation, AI Economics, Tariffs, Private Markets

31:16That's really remarkable. I don't know of any boom, any concentrated CapEx boom we've had in history where people are somehow not interested in it, or at least only interested in what it means in a year, two years, five years time. And so I think, again, it's an asymmetric response to what is driving so much of the economic growth right now. I do think that, again, there's lots of reasons to be very optimistic, but there's an interim step on the road. And that is, as we've discovered, to reach that end point that many of the futurists talk to us about, the agentic economy, the dramatic reconfiguration of workflows, and all the disinflation that may come, This interim step requires trillions of dollars of fixed investment.

32:16And some people suggest trillions of dollars in annual fixed investment in the not too near future. And to me, that doesn't sound so crazy because we're already at a point today where we're spending hundreds of billions of dollars on a quarter. and the metrics that we see suggest it's still growing at a 40 to 60 percent annual rate. You know, typically when you have something that's growing so rapidly, the comps, the year ago comps get so high that the growth rate has, you know, it almost arithmetically has to slow and that's not happening. And so it's really, really interesting. And again, we have not seen a concentrated CapEx boom like this since 25 years.

33:03I think you could certainly compare it to telecom, mobile telephony, of course, the broadband, but especially fiber optics. Before that, I think it was electrification that really took off in the 1920s. Prior to that, probably the railroads. But yes, I'm very excited about the future. Certainly have a lot of estimates and different ideas about some of the impacts on productivity, the downstream impacts, the investment implications. But I think first and foremost, we just have to appreciate that this is one of those concentrated CapEx boom that is really quite historic and only comparable to a few that we've seen over the past 150 years.

33:49Where do you think the revenue to justify all that spending will come from? I think it's a risk that I'm concerned about, certainly, But I think that the bigger issue for me right now is when I look at the stock market and I look at, you know, people focus on the concentration in the stock market. So you have the top 10 companies in terms of market cap that account for, you know, about 40 percent of the S &P 500. That is higher than it was in 2000. But I think that there's actually a bigger problem. And that's that it's not that's not just the concentration of a small number of companies. It's that these companies are basically doing the same thing or, you know, you could say are essentially exposed to the same risk factors.

34:36So, you know, it's one thing if you have a concentrated market, but it's companies like GE and Pfizer and ExxonMobil. And, you know, these are companies in different markets doing different things, pursuing different corporate strategies. Right, diversified concentration. Exactly, diversified, right. Almost a paradox, but that's exactly what it was. And that's not the feeling today. It is concentration on, again, pursuing what looks to be similar strategies or at least, again, exposed to very similar risk factors. And so I think that that's what gives me pause. It's not that this all won't work out or that the revenues won't materialize and the use cases and apps and business applications, consumer applications won't materialize.

35:26It's just that if it does not, that they're just thinking probabilistically or assessing both sides up and down, it just feels like, wow, we really, from a stock market perspective, have a lot of eggs in a single basket. Well, we've talked about inflation. We just covered AI. The other big topic today is tariffs. Let me ask you, what is the purpose, impact, and risk of tariffs? We opened the year with that question, the very same, what is the purpose of tariffs? And it was really interesting to talk to people from the campaign and the people that were going into the administration. Because when you asked, everyone knew the president was enthusiastic about tariffs.

36:17Everyone knew tariffs were coming, but it wasn't so obvious what they were supposed to accomplish. Why were they being imposed? And when you talk to people, they had four different people had four different answers. And so it was just, you know, before you could really assess what tariffs would mean for the economy, you first had to know what would success look like? Why is this being done? And I do think that we've learned that tariffs are functioning effectively as a backdoor value-added tax. And this is, I think, whether you like tariffs or don't like tariffs, I mean, obviously, as an orthodox economist, you have to say that this is not a good idea, right?

36:58That this sort of impedes some of the basics. When you think about specialization or trade, this is as fundamental as it gets to economics, right? The household that doesn't have to make its own clothes or build its own home or grow its own food that can specialize in one occupational pursuit is going to be wealthier than an economy where people have to provide all their own necessities. And the same thing is true when you generalize to an economy, that the more you can specialize, the richer you're going to be, the more you can trade and, again, have some of those activities that are better matched to productivity levels, living standards, wage levels, et cetera.

37:42So, again, with that, but this idea of a backdoor value of tax, we do have to appreciate that this is welcome news from a fiscal perspective. So a value-added tax is something that the United States is really alone among its trading partners without a border-adjusted value-added tax. There was really virtually no likelihood that one would come into law because the VAT is something that's generally opposed by Democrats because it's regressive, hits lower income households harder, generally opposed by Republicans because they associate it with socialism, or at least they see it as a revenue source in economies that have much larger public sectors.

38:27So really just no appetite for a VAT, but that's effectively what's been imposed here. And instead of a VAT that is 41 % or 40 % of GDP, that's generally the tax base for VATs in other advanced economies. This tax base is relatively small. It's only about 11 % or 11.5%. And that's the goods imports to the United States. But I think that what we've seen over the course of the year is that these tariff rates are designed almost perfectly calibrated to maximize revenue. So they're high enough where they're generating a lot of revenue. I mean, tariffs in the second quarter, imports were down because there was so much front-loading of components, parts, inputs, raw materials in Q1 in advance of tariffs.

39:17So imports were depressed in Q2, yet tariffs still generated eight-tenths of a percent of GDP in revenue. So to think that tariffs on a going-forward basis at roughly these levels could generate$3,$3.5 trillion over a 10-year budget window is perfectly reasonable. I mean, I think that that's actually likely. And again, it's because of instead of having cripplingly high tariffs to change relative prices to essentially force certain economic activities back to the United States, it's at levels of that 10 % to 20 % range where it's painful. But again, it's not sufficiently high to really change anything in terms of industrial organization or the location of production.

40:05So I think it's going to have a minimal impact on the geography of production processes, but it would actually raise quite a lot of revenue. So that's interesting because I think, again, that's something that we've learned over the course of the year. And I think if you were to go back a few months, you might've thought that some of the tariff rates would be considerably higher, again, because the objective would be different, where the objective is actually, no, no, no, we want this type of manufacturing back in the United States. And therefore, we're going to take tariffs up to whatever levels are necessary to make it economic to produce in the United States rather than elsewhere in the world.

40:43I guess one of the big questions that's an open question is, who pays the tax? Who pays that added cost? Is it consumers? Is it businesses through lower margins? Is it exporters? And that is yet to be seen? Well, I think that what we've learned, again, over the last few months, is that there is no mechanism that automatically causes increases in tariff rates to translate into increased consumer prices. And I think that, you know, in some ways, the discourse, the media overcorrected, where people were so furious that President Trump were suggesting that other countries pay tariffs, that they started to insist that 100 % of the cost is borne by the consumer.

41:30And that's not true. If you look at the economic literature, it's very, very complicated. You know, the cost, some of the cost is borne by foreign exporters. They have to accept somewhat lower import prices, lower prices that they receive from importers in the United States. Some of it, of course, is narrower margins. And then some of it is an increase in consumer prices. But, you know, when you think about it, if you look at the corporate income tax and you think about the incidence of taxation, who pays the corporate income tax? This, again, another fertile area of empirical research, the suggestion that shareholders pay about 30 to 35 percent and the rest is paid by workers in the form of lower wages and also consumers in the form of higher prices.

42:20And I think this is interesting because I couldn't imagine anyone suggesting that they oppose an increase in the corporate tax rate because of its inflationary impact. So the incidence of taxation is extremely complicated. In this case, I think, first of all, we have seen less inflation than I would have expected or less impacting consumer prices I would have expected because that front loading of deliveries in Q1 was so much larger than I would have expected. We started to see this in our portfolio data in December and January. And so the demand indicators for, again, components, parts, raw materials, other inputs, would have suggested that U.S.

43:04industrial production was growing at something like a 7 % annualized rate. It just looked like things were booming. Of course, that wasn't happening. It was just that there was this building of stocks, building of inventories. And our data suggested as of March 31st, inventories were almost 40 % larger than they were relative to year-ago levels. So some retail, but mostly that is, again, intermediate goods, components, parts, etc. Well, that finished July, according to our data, at about 4 % above year-ago levels. So effectively, these inventories that acted as a buffer, and again, the fact that if you have an inventory, you can continue to operate, continue to sell down without changing prices, it doesn't have any effect on your economics.

43:52So that very important buffer from the effects of tariffs has more or less run out. And I would suspect when we look at our data at the end of this month, at the end of August, that they're gone entirely. So the rubber is hitting the road now. And I think that this is where you're going to see now it comes down to demand elasticities. What is the price elasticity of demand in your market? What is the price elasticity of demand across the various products that you sell? And I think it's going to be very specific. There's going to be places where businesses are going to find they can push on price.

44:33And they can, in some cases, actually increase prices more than the increase in their cost of goods sold. There'll be other categories where it would be self-defeating to try to increase prices because there's going to be demand destruction instead. And that's where you'll see some of the slowdown in consumption. So, again, it's going to be very interesting. I think that we've sort of been spared some of these effects because of that inventory accumulation, some of the competitive pressure, some of the just ambiguity about how long the tariffs will be in effect. But it will be something that becomes more evident in the coming months.

45:11And I would just say that when you think about it, there is a budget constraint. If you hold income constant and you increase the prices for some things like durable goods, if more of that income is consumed by those imported durable goods, well, that could mean actually that you spend less on travel, tourism, dining out. And so I would caution investors to not simply look at it from an accounting perspective, who has seen their cost of goods sold increase and therefore where the margin is going to be compressed or where the sales volume is going to come down or where is the inflation going to manifest itself, because you could see a change in spending patterns.

45:55And that's some of the discretionary categories that have nothing to do, no exposure to tariffs could actually bear a larger share of the adjustment than many people suppose. So given the economic and market backdrop that you just described, let's turn to what investors can do about it. In the past, and I'll start with bonds, in the past, investors could rely on bonds to hedge equity risk, but that seems less reliable today given sticky inflation. How do you see the role of fixed income evolving and what alternatives are emerging as effective diversifiers? There's two issues that are related to one another.

46:34The first, when you think about the diversification that is available through the stock market, it's gone down quite considerably over the last 20 years. Part of that is just the decline in the number of public companies in the U.S. from something like 8 ,000 to about 3 ,500 today. But of course, when you look at the demography of those companies, it's basically yesterday's growth stocks that have essentially migrated to private markets or essentially have just stayed private. That then instead of pursuing an IPO, have chosen to avail themselves of private capital to grow for liquidity for the founders, whatever the purpose is.

47:16And it's actually those stocks that provided the greatest diversification benefit in the past because generally they're pursuing idiosyncratic strategies, right, that some succeed, some don't. But it's those offsetting deviations, the efforts to grow that provided most of the diversification benefit. So that's gone away in the stock market. That didn't really have much of an impact on investors' portfolios over the last 10, 15, 20 years, you could say. because they got the diversification benefit from bonds. So now the stocks move more or less together. But when the stock market goes down, you could rely on bond prices rising.

48:00And a lot of that, again, had to do with low inflation, not having to worry about inflation. But more importantly, the way low inflation or non-existent inflation, you could say, opened the door for the Fed to ease policy massively at any sign of economic troubles. You know, the economy hit a pothole, the Fed would reliably launch another round of QE. The stock market falls by 10%, the Fed would launch another round of QE. Well, think about what that means. That means the Fed is actively making purchases of long-term bonds with the intention of driving down their yields, essentially pushing up their market values.

48:41And that's how you got into, of course, the risk parity trades, the idea that you could hedge your stock market risk on really a one-for-one basis with leverage positions in bonds, because it was just so reliable that the value of your bond portfolio would rise whenever the stock market sold off. So I think that these are the twin problems today, that this lack of diversification, or at least not the same degree of diversification available in the stock market, and now the potential that this changed inflation regime and the way that central banks are perhaps constrained has changed the hedge value of bonds.

49:25And I would just say that one of the things that's interesting when talking to people, they very often think that the negative stock and bond return correlation is some physical law of nature, that this is just how things work. But actually, when you look historically, the 70s, 80s, and 90s, actually stocks and bonds tended to have positive correlation in their returns. And when you think about things like stagflation risk, harming bonds and stocks at the same time, you think about changes in real discount rates. Again, real discount rates reducing stock values, higher real discount rates reducing stock present values, present value of future cash flows at the same time that they reduce the market value of bonds.

50:14These are things that actually were more regular than not prior to 2000. So it's really just the way that inflation came out of the system, the way that central banks could be really one sided, focusing on their employment or their macroeconomic stability mandate, not having to worry about inflation, that that generated this enormous and very valuable hedge benefit from bonds. But I think that if you look over the last three years, that's gone. If you look at monthly returns in treasuries and U.S. stock market, it's been about a 60 % positive correlation on a three-year moving average basis, but again, on monthly returns.

50:55And if you look at April, especially, where you had this time where you would expect bonds to be especially valuable if they were a hedge asset, S &P 500 draws down by about 12 % following Liberation Day, well, bonds actually sold off in tandem. So you're losing on both sides of your portfolio. I think that was that kind of acute event that really drove home this changed correlative relationship. And I think one way to look at it is you have big changes in growth over time and you could potentially have big changes in inflation over time. And when one of those factors, and inflation in this case, didn't really move for decades, then you can just diversify by owning things that do well in different growth environments like stocks and bonds.

51:43But when inflation is uncertain once again, and we don't know where it's going to head, and there's potentially pressures for it to stay higher than target for an extended period of time, then you have to reconsider what it means to be diversified. And I suppose part of that is owning inflation hedge assets as well. Absolutely. And I think, again, there is the diversification first in the equity portion of the portfolio. I don't think that that's possible outside of private markets. I think that having shorter duration, so being in floating rate loans is something that people right now, the prospect of rate cuts, well, the coupon interest on the loans is going to go down.

52:27Well, you might be looking at very significant capital losses on your fixed income, depending again on inflation expectations or the way that monetary policy is greeted by policymakers. You also, again, have the situation where sometimes when in the past in bull markets, in the stock market, the Fed would raise rates in response and bond mark bonds went up in value because they actually cheered that the Fed was ensuring that the inflation wasn't going to get out of control. So it's just, you know, there's so many different environments so that in those cases, bonds and stocks rising together because of tighter monetary policy, monetary policy being tight in response to the stock market boom, But then bond market investors worried about inflation, saying, oh, thank goodness, the central bank has my back raising rates to ensure inflation doesn't break out.

53:20These are the sorts of scenarios that people haven't really had to consider for 20 years. But now all of a sudden, this kind of scenario analysis becomes essential to make sure that you don't experience those kinds of portfolio drawdowns where both sides of your portfolio are falling simultaneously. like. A lot of what we've discussed is the potential that the world ahead looks very different from the macro conditions of the last decade. And I'd say with greater uncertainty on multiple fronts. Yet when we look at many portfolios, and I look at these all the time, to me, they seem less diversified than they were.

53:59And meaning more heavily allocated to equities, more concentrated in US markets, and even more narrowly concentrated within a handful of US stocks. What general advice do you have for investors who are trying to navigate this environment? Over the last 20 years, the big change that we've observed has been this change in attitudes among founders, entrepreneurs, and management teams in favor of private rather than public capital. It's very dramatic. We did a survey before the pandemic, talking to our CEOs about becoming public company CEOs, if a company goes public. And at about 40 % said that they wanted no part of being a public company CEO.

54:48And when following up, asking why that was, it was just a sense that maybe 30 % of your time is spent dealing with is constantly turning shareholder base, having to be a stock salesperson. I just want to operate the business. I want to manage my talent, hit our objectives. I don't want to spend all of my time doing that. And so this change in attitudes is, again, reflected in the reduction in the number of public companies. It's also when you look at listing propensity, which is what is the likelihood that a company that arises above certain size thresholds, whether in terms of its enterprise value or number of employees, what are the likelihood that it goes public?

55:30And depending on the threshold used, we could say 500 employees. That's gone down from about 40%, so about two in five companies pursuing an IPO in the next 18 months, to now about one in seven. And so the important thing is that as the investment opportunity set moves, as it moves in the direction of privates, for no reason other than that, the companies themselves, entrepreneurs, founders, management teams are preferring private capital. I don't see how it's possible to diversify or keep your portfolio static as though nothing has changed. And I think that as you suggested with the way portfolios have become less diversified, it's really hard when you see American stocks outperform for 14 years, I think it was about 700 basis points annualized, boy, that's quite remarkable.

56:25Similarly, when you look at the mega cap companies and you look at the net income growth and you look at, again, these are great companies, the rents they collect from their platforms, it's tough to ignore. But I think, again, the nature of diversification is the idea of an inherently uncertain set of future outcomes. I remember in the mid of 2000s, when I was in the NEC, there was just this enormous enthusiasm for emerging markets. Markets like Brazil, certainly as China opened its stock market. And there was just this sense after the global financial crisis that the advanced economies are dead.

57:09There's no growth there. The demographics don't look so good. You really need to have all of your money invested in emerging markets. And that seems so crazy today, to think back to that age. But again, it underscores that we live in an uncertain world and the inability to forecast the future with any clarity. The only way to manage that uncertainty is through diversification and through, again, appreciation for the way the investment opportunity set changes over time. That example that you just shared is so interesting because at the same time when that was the prevailing view, that was the beginning of the great divergence of US stocks significantly outperforming all other markets.

57:54And now here you are at the other end of that range where the outlook is so favorable for the US versus those other economies. And it just makes you wonder if that tide is about to turn. So that's the thing that when people look back, it's like, oh, well, we could have just invested in the S &P 500 and with the returns. And yes, of course, that's true with the benefit of hindsight. Unfortunately, you know, when you're in 2035, you're not going to have been able to seen the 10 years unfold to make your 2025 asset allocation decisions. Right. And the whole point of diversification is just the appreciation and realization that we don't know what the next decade holds.

58:39And the potential range of outcomes is probably pretty wide given the macroeconomic conditions that you described. so be diversified. And if you look forward, it's probably more uncertain than it's been for a long time, yet most portfolios are more concentrated than they have been for a long time, and there seems to be a disconnect there. That is certainly, I think, the challenge of the moment. And again, it's appreciation for the past, appreciation for the present, but always the risk of driving with a rearview mirror. That's the big risk I think you see very often. And again, just in some cases, is not appreciating the scale of the changes.

59:16I think when people talk about private markets, it's so often this time is spent on the supply side, the players in the market, the funds that are being raised, those sorts of things. Not enough on the demand for capital. And that's where the changes have been more dramatic. I mean, when Amazon went public, it was three years after its founding. And why did it go public so soon? Because it grew to a level where they had no choice. There was no developed private market at that time. At that time, private markets were simply early-stage venture and then late-stage buyout, which was largely delistings.

59:51LBO, take private with an expectation of refloating the company after it's been fixed or changed strategic direction. Since then, now you have companies that, and Amazon probably wouldn't go public until 12 or 15 years after its founding. That's the change. So it's the diversifying growth of companies that you don't even know of today that you're not going to be able to get in the stock market. That's, I think, probably what the, in terms of what is the material, what is the meaning of the change in the investment opportunities that I talked about. That's more of what I mean. So you've talked about diversifying within private markets because you get greater exposure to great companies that may happen to be private instead of public.

1:00:37But how do you think about diversification in the sense of economic sensitivity of those companies? Again, right now, I think that there is still insufficient compensation for duration risk. And what I mean is, if you go back to really pre-GFC, on average, if you held a 10-year Treasury note, your yield would be about 150 basis points to 200 basis points higher than the expected yield on money market funds or bills, Treasury bills, over that safe 10-year window. So not just that moment in time, but the expected path for short rates over the same holding period. After the GFC, that premium went away.

1:01:32And it went away because obviously there was the expectation of the Fed action, the QE. And that's where you had, again, because bonds were a negative beta asset, because they reliably hedged equity market risk, they didn't need to have a risk premium. In fact, the risk premium could be negative, again, by nature of the negative beta aspect. And now, again, if we are living in a different world, if we are living in a world that looks closer to what prevailed in the 70s, 80s and 90s, investing in longer term treasuries should generate some premium. You know, you shouldn't be satisfied with 15 or 20 basis points.

1:02:14You should demand greater compensation for the potential volatility ahead. So I think that that risk exposure is one that is underappreciated. And that's places like infrastructure, where you can get duration, but then it's actually not fixed in terms of the income, but actually adjust through inflation or other contractual provisions. So you're getting longer duration assets in terms of the cash flow profile, but the cash flows themselves adjust up and down with the economics. You're not taking sizable losses in the event that there is some backup in yields because, again, it's generally tied to those same factors.

1:02:56Then I would say, I think that with AI, it's very much thinking about downstream exposure, that where is the value ultimately going to accrue here? Because if there's one thing we know about markets, when there is a CapEx boom or a technology shock of this sort, markets look for the choke points initially. In the 1920s, when you look at that dramatic run-up in the stock market, it was mostly explained by electric companies and electric equipment manufacturers. It was just a sense that, okay, something fundamental has changed here. This electricity is really going to be a big deal. I need to invest in the companies that, again, are laying the wires, building the boilers, making the other equipment.

1:03:48But in fact, it was actually the durable goods manufacturers who captured most of the benefit. We didn't have things like ovens and toasters and vacuum cleaners. Then the radio, to plug in radio, all of a sudden that led to the development of an entirely different type of content industry. So it was just that the focus on where the choke point was, what was most obvious, actually didn't turn out very well. It was thinking about, again, what is downstream, what's next? And I think the same thing is true when you looked at the internet. Of course, the Cisco, and you see a choke point, we need more routers, we need more packet switching, we need more fiber.

1:04:30But ultimately, the benefits accrued to what was downstream. I mean, famously, Walmart, because of the way that the distributed computing allowed for much more efficient inventory management, accounted for something like one sixth of the related productivity gains. Also, of course, allowed GE, other manufacturers through the network computing to really just dramatically streamline value chains and production processes. So I think that with AI, again, it's not whether you're bullish or perhaps skeptical. It's just being more attuned to where that value is ultimately going to accrue and being attuned to the tendency of markets to overemphasize those initial choke points related to hardware or the finiteness of the new technology.

1:05:20And potentially the answer is be diversified. Don't try to guess exactly how it's going to play out. diversify across markets, public, private, different asset classes across all this. And I think the diversification also allows for a lot of learning by doing insofar as you start to see some of the benefits of AI downstream accrue to certain businesses. And then that allows you to invest more and again, have that exposure. But I just don't think it's possible today with any precision, at least, to know where that value is going to accrue. So you want to have your bets pretty widely distributed, I would think.

1:05:58One of the areas within private markets that has had a lot of interest is private credit. And if you just look at the yield of private credit, it's relatively attractive, often offering equity-like returns and higher up in the capital structure. Obviously, you give up some liquidity for that. With so many new strategies and significant capital inflows, what are your thoughts on the opportunity set today? It's exactly as you describe in terms of why is there investor interest. It's very obvious. If you can get returns, expected returns, that are in excess of what you're expecting from the stock market, but you're sitting at the top of the capital structure rather than having the residual claim and dealing with that risk and market risk, it's, of course, again, a very attractive proposition for a lot of investors.

1:06:52I think that in the near term, one of the issues in a direct lending space, we'll say, is that – and direct lending is essentially private credit where you're lending to sponsored M &A activity. So if a private equity fund is buying a company, the portion – the credit portion of the capital structure very often will be provided by a direct lender. So that sponsored-based M &A flow has been somewhat subdued. And interestingly, the higher interest rates that have actually made the expected returns on private credit so attractive are also in some cases what has slowed the M &A activity. Because you have an inventory of assets that were acquired in a very different interest rate regime.

1:07:42So, you know, basically anything acquired before that second half of 2022 was, of course, acquired when base rates were close to zero. And more importantly, especially in 2021, the expectations that base rates are going to be zero through 2024, you know, for a long, long time in the future. So that, again, the adjustment has led to, you know, a bid-ask spread. It's similar to what we've seen in housing markets, where you have existing owner with a relatively low financing. Prospective buyer has to pay more for their mortgage. There's not as many transactions as there were previously. So I think that the only risk I would say in the direct lending space is just can the inflows and the interest in these instruments and the prospective returns, is it matched by the number of deals?

1:08:40And right now, you could say that maybe it looks like there's a market where there's a bit more lenders than there are borrowers. I think that that's probably going to correct itself starting in 2026 would be my guess. And you'll see a pickup in M &A activity. But in the short run, that's the only risk I would say. I think that the much more attractive areas in private credit is the non-sponsored lending. So those are where you're originating loans. Maybe it's family businesses. Maybe it's another business in some sort of special situation where it expects a liquidity event like a listing or something in the next 18 months but needs cash today.

1:09:17And then also asset-backed finance or you could say investment-grade private credit. This is an area where sometimes you have a regular collateral, like a loan collateral. It doesn't really lend itself to the public securitization markets. Maybe there's some drawdown feature where the borrower has the ability to take the loan down, increase the loan balance over time. Just some feature that makes it so it's not so easily securitized in public markets. Those areas are both very, very attractive where the spreads in private markets are still very robust relative to anything you see with equivalent default risk in public markets.

1:10:02One of the concerns often raised about private investments is the liquidity. And as we all know, investors often prize liquidity. But do you think there's an opportunity cost to being too liquid? I think that that's something that large institutions have discovered very clearly over the last, again, 15, 20 years. And I think there's two issues here. One is just realizing that they're giving up returns for liquidity they don't need. So there's been a lot of efforts to really focus on how much liquidity do we really need? And then, OK, we'll have some buffer. We don't have to go exactly to that threshold.

1:10:42But let's try to optimize and try to get a better sense of the liquidity we need so we're not leaving any returns on the table. Because even if you're talking about 300 basis points, when that compounds over 10 years, you're talking about very, very different end balances. So I think that that's something that institutions have been very focused on, just not paying for liquidity that they don't need. And then secondly, what you've seen is just a realization that liquidity can be ephemeral. And so you think something's liquid, then a shock or a crisis hits, and you find out it's not liquid at all.

1:11:17And those are the periods where I think a lot of institutions have become very frustrated because they end up having to sell what can be sold rather than what they would like to sell. And just an example of that, after Liberation Day, if you look at the Russell 2000 and you divide the stocks into four quartiles based on their liquidity, either based on prior turnover or bid-ask spread, you find that the highest quartile of stocks in terms of liquidity sold off by 400 basis points more than the least liquid quartile. And that's interesting because, again, it's just a sign that it wasn't people selling what they wanted to sell.

1:12:01It had nothing to do with companies' exposure to tariffs or companies' exposure to international markets. They were just being sold because these other stocks were too illiquid to sell. And trying to sell, it just meant that you would have to take a much larger price hit so they weren't sold. You find that also in some of the public loan markets as well, that people sell what's large, what's liquid, and then the smaller or less liquid names actually have no trading volume because everyone realizes that if they tried to sell it, it would be a bloodbath. There's no one on the other side ready to provide liquidity.

1:12:40So again, I think it's paying for liquidity you don't need in terms of foregone returns. And then secondly, the realization that actually many of these assets aren't as liquid as I thought, at least in periods of stress or when there's a shock to the system. Well, Jason, this has been fantastic. I appreciate you sharing all your insights. You have a great talent for explaining complex concepts in simple terms. So I appreciate that. And I hope our listeners did as well. Well, thank you so much for having me. I really enjoyed it. Thanks for listening. We hope you enjoyed this episode. Please visit our website at insightfulinvestor.org to access past shows and learn more about our podcast.

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