It’s Only a Bubble If You Panic

6:18Michael Batnick:So, Chanel, you're the perfect person to have here this week. We're going to be talking a lot about the cockroaches. And I want to say this before we get into the show. So I, relatively early on, probably two years ago, was like, why the f*** am I getting so many emails from private credit companies? What is happening? Like, I've been on this corner for a long time now. Right? It's been a minute? Mm-hmm. And I also think that a lot of the conversation that is happening and I'm like, how did I turn into like the voice, the spokesperson for the private credit industry? It was never, that's not like what I'm here to do.

6:57Michael Batnick:But I think a lot of the hyperbolic fears are just a way overblown. You know, it's like any other asset class. Why would you paint it with a broad brush? It doesn't make sense to me. If you're picking fund managers in public markets, You would look at those fund managers. You would look at their track record. You'd see how they've been doing over time. You would see, importantly, which to me, this drives me crazy, nobody asks what they're actually invested in. What are they underwriting? So those questions, you've got to ask them. And if you look under the hood, you know, today was a great example.

7:30One of the biggest alternative managers had published their report, Blackstone. Did you see the results?

7:35Michael Batnick:I did. Phenomenal. I'm a shareholder. So Blackstone's private credit business alone was up almost 13%. Private equity also 13 % over the last 12 months. So doing well despite all the cockroach fears. So I had sent you that chart over there too. Paxcom went down 4 % today. Gives a shit. You know, actually all year long, these managers have been reporting record assets. Very, very, very, very, very. Oh boy, that laugh.

7:59Downtown Josh Brown:All right, that was Ben. All right, guys, they're doing the show before we start the show.

8:04Michael Batnick:Well, let's get started. I just wanted to, because I want you to have the mic.

8:08Downtown Josh Brown:It's enough of me. Three claps coming in. Wait, do you feel like you've spent the last week defending private credit? Not a little bit. You have.

8:16Michael Batnick:I feel like I have been, and I don't— How did this happen? How did you become— How did you become— I was the first person to say it's bullshit, and now I'm defending it? All right. Whoa, whoa, whoa. Stop the clock. Here's a word from our sponsor. Today's show is sponsored by Public. Public is the investing platform for those who take it seriously. You can build a multi-asset portfolio of stocks, bonds, options, crypto, and more.

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10:05Ben Carlson:Welcome to The Compound and Friends. All opinions expressed by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

10:26Downtown Josh Brown:Ladies and gentlemen, Welcome to the Joe Rogan Experience. My name is Downtown Josh Brown. Today is going to be one of the most epic episodes we have ever done. I could not be more excited. We have in the house John, Duncan, Nicole, Rob, the Compound crew. In addition, joining us today, you know him, you love him, from several other shows on this network, and anytime he joins us in person, it's a barrel of monkeys. Ladies and gentlemen, Ben Carlson. I don't have a bio written for you. Star, Broken Arrow, and several other 90s action classics. Ben is a collegiate football star. Well, you are. I flamed out in high school.

11:15Downtown Josh Brown:You flamed out. Oh, that was high school. That was high school?

11:18Ben Carlson:I played in college for a couple years, but it didn't happen. I was too busy partying.

11:21Downtown Josh Brown:All right. More importantly, Ben is the head of institutional asset management here at Rittholtz Wealth. He is the author of A Wealth of Common Sense. He is the co-host of Animal Spirits with Michael Batnick and just an all-around gem of a human being. Welcome back, Ben. So happy you're here. And first-time guest. she is in my opinion she was in my opinion one of the best reporters covering high finance that's what i call it like the upper echelons of of finance what happened to finance no no yeah high finance i mean that's your beat finance uh you changed him i love finance you have interviewed before i even say your name you have interviewed like every impressive person on Wall Street.

12:09Downtown Josh Brown:You would agree with that? And even some non-impressive ones. Sure. Sure. Sure. That's true, too. Shanali Bassak is the chief investment strategist for iCapital, responsible for developing market views and research. Prior to joining iCapital, Shanali anchored Bloomberg television show Open Interest while serving as the network's chief global finance correspondent. Welcome to the show. You happy to be here? I am so excited to be here. Long time listener, long time fan. First time guest, though. Thank you. All right. My first question, how dare you defend private credit? All right. So this is going to be this is going to be a show that's fairly focused on private equity, private credit, clearing up some of the misconceptions that I have been spreading in the media.

12:57Downtown Josh Brown:And no, what we want to do is get to the bottom of what somebody who is very connected within this world has to say. I know you've probably spent the last two or three weeks speaking to people at a very high level about this, both investors and fund managers and corporate executives. Yeah, we've been speaking to people about it, but we've also been doing a lot of research because we wanted to be so clear about what is and what isn't. And it's funny because private credit in particular, we were joking around, Batnick and I, just a second ago about how you were getting pitches for private credit funds for years now.

13:30And most of my career at Bloomberg was very much around the private markets because that's where so much of the activity was moving. So similarly, you couldn't avoid it. So where are we now? It's grown so many. So let's start there.

13:43Downtown Josh Brown:Like, how much are we all about to lose? well we did this analysis you shared it i have one bone to pick but i'll pick it later and so because i know you like a little spiciness uh and so if you look at the exposure across the business development corp universe this is the private credit verse universe you'd really look at did you see how small the actual exposure was to two bankruptcies yeah try close zero Well. Not only small, but so dispersed. Yes. No one player is really affected at all. Right. Other than Jeffries. We looked at more than 165 BDCs. Yeah. And just over a dozen had any exposure at all.

14:23And most of the exposure within those funds was 0.05%.

14:28Downtown Josh Brown:Can we back up and tell the audience what we're talking about? When you say exposure to first brands, for people that aren't paying very close attention, what what's like the synopsis of why all of a sudden everybody's worried about this so there's two companies in a row first band and tricolor that face bankruptcy by the way i would actually argue for different reasons there was a third company that no one talks about the prima lend company right but because it wasn't tied to private credit no one talked about it right or because it didn't have a private credit not salacious enough exactly the private credit world draws a lot of questions and attention so when they went bankrupt we did see losses tied to banks.

15:06And then a lot of questions around how exposed banks were to private credit firms, because you saw those types of losses within these two, what, you know, what Jamie Dimon is calling cockroaches, what people have heard for the last couple of weeks, what, you know, people are calling the idiosyncratic risks tied to certain private credit. But really, this was a banking problem, ultimately, at the end of the day, these are bank lines that at the end

15:29Downtown Josh Brown:of the day, I want to be clear, also, in one of these cases, someone is alleging fraud, Yes. Which is not the same thing as, quote unquote, reckless lending. It's its own. Fraud is just a part of, unfortunately, it's a risk that every financial institution faces. But even beyond that, there were a lot of questions about loans that were not disclosed to investors among those firms, right? Fraud. But, you know, was there diligence enough? Was there not enough diligence? This is a big question among the firms that were exposed to each of those companies.

16:03Ben Carlson:Don't you think that this is actually a positive for the industry, though, because there's people wouldn't talk about this stuff a few years ago. Now, I think it's just me more transparency. I think in the end, that's a good thing. Yeah, I couldn't agree more because we were saying a little earlier, if you are invested in a public market manager, you are looking at their holdings, you're looking at what they're invested in, you're asking about track records, why wouldn't you do the same thing for private credit? If you call up your manager, I did it throughout the last two weeks, I called a bunch of managers and I said, what are you holding?

16:30What are you holding? And how sensitive is it to the broader economy.

16:33Downtown Josh Brown:You have the ability to do that. Everyone else doesn't. You know, the thing that's really interesting about private credit now, because it's opening up to a broader market of individual investors, you are seeing more managers be more and more clear with as many advisors that they could be really open the doors to the ability. I agree. I agree with that. But but I but I also want to point out these things don't have cusips. This is the fundamental difference. So when you own a public when you own a public bond fund. Yeah. The manager is buying all sorts of bonds, all sorts of loans in some cases.

17:11Downtown Josh Brown:And for the most part, they tend to have a QCIP, which means an end investor can look these things up, which is way more transparency than by definition you would get from private credit, from direct lending. There's no there's no way to know what anything's worth until the manager files and says, here is the mark. This is what we think it's worth. But don't you think it's interesting? You know, there was a story on Bloomberg today that's consistent with what we're seeing. As these products become much more available, these investments become more available. You're all of a sudden seeing, you know, what was impossible a few years ago, possible now.

17:45Now we have monthly reporting for many funds, for example. And so that transparency, it has to increase as availability increases. But with that said, like, let's talk about just private credit for a second. Shouldn't we just take a big step back here and say, why are we even talking about this? If you think about it, why is it that I have spent so much time on private credit? It's because so much of my career was after the financial crisis. After the financial crisis, regulations really hamstrung the banks in certain areas. But then there's two other moments, arguably, that really accelerated this.

18:17COVID. When the banking system froze up in a lot of ways during COVID, it was actually private credit that moved a lot faster into many parts of the economy.

18:25Downtown Josh Brown:Because people still needed loans. Totally. Yeah. And so that was one thing. And then when Silicon Valley Bank happened, right, you had seen that kind of regional banking crisis of 2023. And that was another big moment for private credit to really expand its wings in a massive way. Because again, you saw the banking system freeze up in certain ways, especially among smaller and middle, medium-sized lenders. So private credit firms started to backstop many of those lenders and become what is now a more critical lifeblood to the American economy than it was a decade ago.

18:58Ben Carlson:So you're still relatively new to the space. I'm curious like what you've learned being on the inside now that we don't see from the outside. I actually, the chart that I sent you of returns, right? I think a lot of people are asking -

19:10Downtown Josh Brown:Let's put that up. Yeah. Do we have it? John has it. Yeah, it's really, really interesting chart here. And what you're seeing is that you have double digit returns in many parts of the private markets. I thought this was the most clarity that I could -

19:22Michael Batnick:Selection has been an important driver of return outcomes and alternatives. We're looking at dispersion. And I think, Shana, I want to speak for you. What's your point? Because I think I know what it is. But you go. So a lot of people talk about volatility. I don't think volatility is a problem. I think dispersion is a problem. And if you're not in the better funds, if you're not doing the diligence that many people, as you were saying, Ben, are not doing, by the way, then you're not getting what is possible from this industry. And a lot is possible. Remember, this is also an asset class that institutions were more privy to than individual investors.

19:51We had a great, I pulled this up for you, Josh Brown. You were asking how big of an opportunity the RIA channel is for alternatives. If you are an RIA with assets above$500 million, they have had much, much, much more exposure to alts. Makes sense. You might have bigger clients in that book and more money than to put aside to alts. You used to have bigger minimum ticket sizes. But now you could invest$25 ,000 in an alternative fund with a fair degree of, I hate, this is a whole other topic, which again, do liquidity, right? And so -

20:29Ben Carlson:I think that's the biggest tip. That's why we're never going to have a plane crash in private markets because it'll be, like, let's say this really was, it would be a death by a thousand cuts because the investors can't panic. You can't get out of it quickly.

20:41Downtown Josh Brown:How would you panic as a private credit investor? you would have to buy CDS against the basket of the loans that you're on the hook.

20:49Ben Carlson:So because of the illiquid nature of the funds, like that, that would make it worse if there was a credit problem and everyone said, all right, get me out now. You can't do that. You literally can't because of the way the funds are structured.

20:58Downtown Josh Brown:So John, actually, but so just like a little bit of nuance there, we saw a small version. Some would say if the people that said this is a canary in the coal mine ended up being wrong. But we saw an episode where BlackRock has a semi-liquid. Blackstone. Excuse me. Blackstone B-Wheat. Semi-liquid. And Blackstone had to gate redemptions because the alternative is allow people to have their money back and sell things at a depressed valuation.

21:30Michael Batnick:Wait, hang on.

21:31Downtown Josh Brown:And that's not good for anyone if the portfolio is forced to liquidate things at prices that they don't want to. So they gated redemptions. Eventually the redemption requests cooled off and B-REIT is still trading and it's okay. But if you go back to that time, it's such an interesting moment, right? Because it actually worked the way it was supposed to work. A gate is only a gate if you're not legal. Like they had limits. All of these funds to Ben's point have limits. Right. It's not full liquidity. And it's also not a gate. And so to talk about these funds as though they're liquid is a big mistake too.

22:05Starwood gated, right?

22:06Michael Batnick:Wasn't it Starwood that said there's no more money coming back? We could, people could fact check. I don't want to like, but I don't want to speak to Starwood. All right. So, John, chart 10. So we're fast forwarding for a little bit here. This was going to be my ultimate take. I have been of the mind that the episode that we just experienced with Tricolor and First Brand, And it's not nothing. There is something happening. Is it systemic? I don't think so. I think that it ultimately blows over in a very similar way that B-REAT blew over. And guess what? The stress in the real estate market, particularly the office space, which they don't have a ton of exposure to it, at least not anymore.

22:46Michael Batnick:This was so much more significant and potentially systemic. Think about the stress in the real estate sector, the actual stress. And here we are a couple of years later, and it's fine. You know, I'm just going to call you on Tuesday nights now and just be like, let's talk about this.

23:01Downtown Josh Brown:I mean, I think the assets in this, the assets in this fund have been between 50 and 60 billion for the last two years straight. And that that disruption that everyone said, this is going to be the death knell for these semi liquid real estate vehicles turned out not to be true. And to Michael's point, like the the the hysteria cooled off.

23:27Ben Carlson:But if there are real losses, though, the clients are going to have to eat them. Sure. That's the thing. That's the difference. But that goes back to the dispersion chart, too. It's not that people don't lose money in this asset class, but they lose—they also make a lot of money in it, too. Those are going to be the stories someday. It's like, look at how terrible this fund did. The people were overpromised or there was too much leverage or whatever it was. Those are going to be the stories.

23:46Downtown Josh Brown:Okay, so— But my comment at the time was, what? You think you can't lose money in a publicly traded REIT?

23:51Michael Batnick:Like, what are we talking about here? So, B-REIT, the returns have not been great over the past couple of years. Yeah, real estate's been challenged. we know, but is it a catastrophe for investors? No, is it great? No, it's not great. It's basically flat for the last few years. But let's get back to Shanali's chart that she showed in terms of dispersion. Okay. I think this is really important. When you are investing in things with highly idiosyncratic manager access risk, like venture, like growth equity, the dispersion of returns are a mile wide. And if you're not in the top, whatever, decile, quartile, you might as well.

24:23Downtown Josh Brown:The better managers versus the run-of-the-mill managers or the bad managers.

24:28Michael Batnick:Direct lending is the opposite. We aren't we. The industry is making loans. And guess what? Most of the loans get paid back. So this is an interesting, like I said, in the last week, I've talked to a lot of managers about this. And it's not like, you know, if you're Stan Druckenmiller, right? Stan Druckenmiller is known for big, concentrated bets, right? That is the secret to his success. But those are like 40 % returns, right? Venture capital is like that too, but different type of asset. Direct lending, super diversified. There are hundreds and hundreds of loans that are being underwritten such that if one loan were to go bad, it's a typical -

25:08Ben Carlson:What is the typical position size for one of these funds? I know there's a lot of different funds, but I mean, what is it? 1 %? 2 %? How big are the position sizes in these funds? Well, let's put it this way. When it was first brands, the losses that we saw, like I said, it was 0.05 % that was lost for most of these funds.

25:23Downtown Josh Brown:So who has taken the losses? So it's a half of 1 % position. Those are just the BDCs. Okay. Yeah. So in a bankruptcy, you're taking basically a total loss. Less than half, 0.05%.

25:34Michael Batnick:And the problem with that is that the collateral, the liens were no good because there was fraud. Yes. Double counting assets. Even then, how small that was relative to the overall portfolio, that's kind of the point. But with that said, I actually was pulling up an email because I asked our diligence team how they go about picking funds as well. And they said there are two rules. There are two rules when it comes to underwriting. Protect capital and don't forget. No, definitely not that. Have you ever heard? Protect your capital and don't forget rule number one. How do you ever finish a thought?

26:09Downtown Josh Brown:That's a Buffett quote. Yeah. Rule number one, don't lose money. Let me give you another one. Rule number two, don't forget rule number one. Who is the one that said, don't ever hire an optimistic credit manager?

26:19Michael Batnick:Right.

26:19Downtown Josh Brown:I like that one too.

26:20Michael Batnick:So my take is there is, if you look at just rolling returns, not rolling returns, rolling like inflows, the institution has pulled back dramatically because they're good. They're full, right? And distributions on the private equity side have just not materialized. So they're not really allocating as much there on private credit or equity. And the flows have been replaced by wealth managers. We know the story. It's very transparent. But it's not as if the inflows have triple X'd. So even though I guess my skepticism would say there's so much money coming in that there can't possibly be this many good loans to make.

26:51Michael Batnick:And therefore, the underwriting standards have probably come down. There's probably some sloppy behavior, which we're seeing. And it's not going to be, in my estimation, a systemic, holy shit, I can't believe we were so blind to the risk. It'll probably be lower returns. Now, the counterpoint is, well, but it's SOFR plus six, and that's just kind of what it is. And so if rates come down, returns will come down. but let's say that there's a take up in defaults. Returns will come down too. So fine. So it's not nine to 11%. It's seven to 9%. And again, it depends on the manager because the one we were talking about this morning is still double digits, right?

27:19But with that said, yes, you're right. There is an element here. I call them tourists. There are a lot of people who have entered this space that don't know what they're doing. That's for sure, right? And why do I believe that?

27:31Downtown Josh Brown:Stop subtweeting, Michael. Is that? Oh my God, you used to be my favorite. I have a fund. I have a private credit fund.

27:38Michael Batnick:Taking investors now. Well, you know, the thing about the tourists here is that we haven't seen a real market cycle here since 2008, not to a severe degree. And so a lot of people who are entering the industry have not experienced that pain. And, you know, a lot of people, when they look at their managers say, OK, well, what kind of pain have you experienced and have you navigated it? To the point you're making, Ben, it's not just the ability to withstand pain in the market. The bigger managers, because of scale, there is a benefit, right? If you have management teams and big teams that can work with the portfolio companies, you're also at greater protection of even making it to a workout.

28:17And if you make it to a workout, by the way, a lot of these people have been through distress cycles before. They know how to work those.

28:23Downtown Josh Brown:For the listener, the workout is, all right, we can't actually make these payments as currently structured. What else can we do so that the underlying company survives? and then the lender has all the incentive in the world. And a lot of times these are bilateral things. It's not a syndicated loan where, you know, it just gets adjudicated in court and there's nothing you can do about it. These are like phone calls between people who trust each other. When were we in Charlotte with Cam Harvey?

28:53Michael Batnick:Years ago. Okay. So in 23, I was talking to Cam and this is back when I was like, why am I getting several emails, a dozen a week from private credit managers? And I spoke to Cam. And I said, does this worry you at all? And he's, I don't think he's not known as a pessimist, but he's a risk guy, right? And he was like, no. And I said, really? Tell me more. And he said, well, because these loans were otherwise syndicated by banks. And there was a million different investors and knife fights galore and lawsuits. Like I'd much rather this go, I didn't say Blackstone per se, but I'd much rather the risk be in the hand of a single operator that can negotiate with these companies and work it out.

29:28Michael Batnick:And so there's like been a lot of talk about this payment in kind stuff. Oh, it's all just payment in kind. They're just adding to the end of the loan. They're extended it because they can't pay. And if you look at the data, that's actually just not happening. And if it were, I would be sharing it and people would be talking about it, but it's not. John, can you throw up chart two? So this is from Houlihan Loki. And we, next chart, please. I'm sorry. Chart three. Like we're talking, we're just talking stories without like fundamentals and data. And look at the top chart, payment in kind.

30:01Downtown Josh Brown:Let's just slow down. define for, for the, what does that mean? What does that mean for somebody that's investing? You weren't listening.

30:10Michael Batnick:So payment in kind is when the payment is missed and it is added to the end of the loan. It extends and it makes the principal payment. In lieu of making a payment today,

30:18Downtown Josh Brown:we'll just give you more money. We'll lend you even more money and you'll owe us later. So that is like the buzzword that people keep talking about. That's what the financial times looks at and says, this is going to, this will end badly.

30:31Michael Batnick:Okay. But look at the data, please. So payment in kind as a percent of total interest income, it's steady. And if you look at non-accrual investments, which are borrers that missed a payment, there's nothing there. You know, and I've got to say, I've tried to look at this in so many ways and stress test all these ideas because, you know, not only has this remained steady, when you look at the markets, are you more worried at this juncture, honestly, about public credit or private credit?

30:59Downtown Josh Brown:Private credit. Why? Credit spreads are enormously, enormously tight right now.

31:04Ben Carlson:But don't the yields have to come down, though? If there's that many lenders out, Josh said, well, it's the SOFR plus whatever. Don't they have to come down if there's that much competition for the loans? That's what I'm worried about. Okay, let me address this, too. There's two things going on. The traditional way private credit used to be defined was direct lending. This was, you know, levered loans, by and large. That's estimated to be a$1.7 trillion industry. Broadly syndicated loans are actually less than that right now. What's the difference between those two?

31:29Michael Batnick:I thought they were, like, kind of the same thing.

31:30Downtown Josh Brown:bilateral versus a syndicate where there's a million lenders and everyone has a tiny slice.

31:35Michael Batnick:Levered loans and bank loans aren't the same thing? So broadly syndicated loans, levered loans are in the same bucket, but direct lending versus BSL. That's what I'm talking about. Direct lending is now a bigger, by many estimates, industry than broadly syndicated loans. So it's kind of how much bigger can it really get when they're kind of the same type of borrower? We'll see. The high yield market is, you know, different estimates, but just a little bigger, 2.6 trillion. So where now has private credit been going next? Why is it growing so much? It's not all direct lending. Data centers. There's a lot of data centers, which are absolutely fascinating.

32:11Oh, great. More exposure to AI. I know.

32:13Downtown Josh Brown:That's what everyone's missing in their portfolio. It's more AI exposure. There's so many funky things, right? Asset backed lending, music royalties. There's consumer finance, which is more weighted to the credit cycle. And so I think the industry is evolving in different ways. You're just seeing, it's just lending. It's just lending. Direct lending is Aries raises a fund. They raise$10 billion. Midsized companies that are not going to issue bonds in the public market go to Aries and say, we have a contract to supply X number of gigawatts of electricity to this AI data center. Here's the contract.

32:55Downtown Josh Brown:Meta is paying. We know it's money good. Basically, it's almost like factoring. But let's go to the data center thing. So wait, wait. So Aries makes that loan in their fund. Yes. I'm comfortable with that because it's Aries on the hook for it. I thought you hated private markets. He's talking himself into it. I know. I want to point this out. I think it's important. A lot of people are making the comparison, myself included, to the mortgage bond era. Interesting. The difference between this and that, this actually seems safer to me because in the mortgage bond era, nobody knew who owned what. It was syndicated to death and tranched.

33:38Downtown Josh Brown:And it was backed by the strawberry farmer who had eight houses. Right. This is backed by Metta. So that's – It's not the same. So I'm saying something very constructive here, which is that I feel pretty confident the guys running Blue Owl and Aries and Apollo, they're not complete insane maniacs that are just randomly spitting money at lending opportunities and hoping for the best. And they all have seen a credit cycle, right? Of course. These guys all came out of – Like Drexel. Yeah, they've seen it all. So I'm comfortable with that aspect of it. This is what I've been saying. They're not the only players in the market.

34:18Downtown Josh Brown:That's one. Now you have a second tier.

34:21Ben Carlson:Yeah, because those big firms,

34:21Downtown Josh Brown:they can short up so much money. They're not the ones pitching, Michael.

34:25Michael Batnick:But wait, okay. So this is a very important point. So all of this bullshit in my inbox, these funds are nonsense, right? Even if it's like a third tier asset manager that we know, no chance, buddy. Sorry, not going to happen. But the Blackstone, Aries, KKR, Carlisle of the world, there is only like six of them that can make this$5 billion loan. So they're not fighting for scraps with all of these fourth tier entrants. They're going to get smoked, the lower ones. I'm pretty sure to Josh's point that the contracts with Oracle, at least for now, they're going to, they're going to be okay. The contracts that you have at the hyperscalers are some of the most interesting ones and why.

34:59One is because those are between 15 and 30 year loans. They are so long. And yes, you know, if you're worried about public market valuations of those kinds of companies, that's one thing. They have to pay their lease, right? That needs to happen. Why are those loans so long? Because they're leases. They're data center leases. That's where I think that the confusion around what's actually happening here, you're talking about what has traditionally been known as direct lending and private credit. Yes, fine. But the way the industry is going is also these massive data center leases too that are very long leases.

35:32And so they're not just that. Some of these are also because of rent, right? It's adjusted to inflation. So they actually, the cash flows grow every year. That's the other pretty interesting.

35:45Downtown Josh Brown:All right, so now let me tell you though, the second half of what I'm saying. This is what I'm worried about. Sure. And I have firsthand knowledge of this. Okay. Because - He's very old. No, no. Do you lose money in a private credit fund? No.

35:56Michael Batnick:Yeah, show me on the dollar where the private credit talks about.

35:58Downtown Josh Brown:But I have an analog that I think is very apropos of, I think could, I actually think this, my firsthand experience could be emblematic of what's happening all over the country, maybe all over the world. In my industry, the wealth management industry, every single day, there's another article in the trades about a private equity deal. That's the bubble. Hold on, hold on. For a firm that I already know is a piece of shit. Okay. Every day, not every week, every day. They are taking other people's money. They are buying firms that have no real enterprise value at absurd multiples, 20 times cashflow.

36:43Downtown Josh Brown:They are retiring the boomer who started the firm 20 years ago. And they're basically smashing this acquisition together with a whole pile of firms just like that. And they're calling it a business. In reality, they're buying salespeople and those salespeople's relationships with their clients. And they're counting on the fact that they're only going to have to sue a few of these people who try to leave. These are horrendous, horrendous. Now I know this for a fan. Not everything, again, dispersion, but to your point. Of course, not everything. But I have to overgeneralize because the question is, why is this happening?

37:20Downtown Josh Brown:I will tell you why. All of these funds have raised so much money from investors. they have to do something. And all of the best assets are already spoken for or not for sale because they're good assets. So what's left - Like us. What's left is making mediocre investments in mediocre companies at bad valuations, competing with 50 other funds. There's just no way on the equity side that that's good business. How could it not be similar on the credit side? It's the same firms. Whoa, whoa, whoa, whoa, whoa. No, not, first of all, it's actually not the same firms often because, you know, what's grabbing headlines, sometimes it is.

38:00When it's the same firms, you're looking at a big buyout and maybe the direct lender is exposed, but they're downside protected, right? That's another aspect of this. Why?

38:08Downtown Josh Brown:Because they're at the top of the capital. It's loans versus equity. Yeah, that's a big difference.

38:12Michael Batnick:It's not even close to the same thing.

38:13Downtown Josh Brown:But it's the same industry competitive dynamics if there are thousands of players. But they would have to go bankrupt. Loans versus equity. Loans versus equity. But don't you see? Yeah, I do see. It's the same competitive dynamics. I understand. If we don't put this money to work, we're going to lose the AUM. I understand.

38:28Michael Batnick:But to Shonali's point earlier, the equity dispersions of managers, yeah, obviously I agree with you with what we're seeing in our industry. I don't want to invest in those shitty companies. But don't you think every industry is the same thing? No. But loans and equity, they're so different. That is like, we'll get back to that because that is the most important part of this. But on private equity, to the point that you're making, it's even beyond the bad companies being bought. It's the fact that you have, they call it the DPI issue, right? Have you heard of this a lot? It's basically that private equity firms have been sitting on assets.

38:55Michael Batnick:They're not giving investors money back. They're not giving investors money back. And so when people say that, they just mean that they're stuck. It's a complete clog right now. Not complete. It's starting to open up. You saw that in the results. Well, because valuations got so silly. There's no more buyers. And you know what's happened? This is the problem. As it pertains to private credit, there is a controversial thing going on right now in the way that people are keeping companies going via debt just because they can't exit in the private equity universe. So yes, I don't disagree with you.

39:27But if you are a credit firm, remember, the risk profile is this. Josh Brown, I'm going to lend you money. I'm going to lend you money. You're not that good of a borrower. It comes to me at 15 % to 20 % because you're not a good borrower. But what I'm betting is you're not going to default. What I'm betting is you're not going to go bankrupt on me. You're not going to miss your payments. So it has to be a much worse of a borrower than wait, the competitive dynamics are bad because if the competitive dynamics are bad, then your equity valuation just sucks.

39:55Michael Batnick:So the equity dumb schmucks that are investing in these companies, that stupid valuations, they're not going to get money because there's no growth.

40:01Downtown Josh Brown:I may not intend to default, but in an economic downturn, I know we haven't had one in a very long time. We're not going to know any of this until there's a recession. Some companies, just the cash flow isn't there to support the loans they've taken out. And the smart thing to do is to default and clean the slate or liquidate. And we just to Ben, what Ben's saying is what I think, which is that, okay, we don't have a dry run. Yeah. We have, we don't have recessions

40:29Ben Carlson:anymore though.

40:30Downtown Josh Brown:So you had a seven minute recession five years ago. It's been 50. That's the thing.

40:34Ben Carlson:All these systemic risks we're always talking about. We're never going to know until we get another recession. How could you?

40:40Downtown Josh Brown:We can't do a rehearsal. Right. So that's my only point is, and now the industry has made more loans than they've ever made. The dollar amounts have gone up and the amount of people in this ecosystem borrowing from direct lenders has gone up. And look, there will be losses in public credit too.

40:57Michael Batnick:Yeah, I was about to say,

40:58Downtown Josh Brown:everything you're saying is obviously true. Yeah. And when the tide comes out, people eat shit. Well, me and him were talking about this. But here's the difference. Wait, wait, no, this is really important. it. Here's the difference as a financial advisor. I call my clients and I say, the economy looks really bad. You've got auto companies spitting the bit. You got banks reporting losses. You got credit card companies. Let's let's sell and go to cash. I can do that in HYG whenever the I want. I can't do that. You're saying that this is good. That's not all good. That people can panic? Not panic.

41:36Downtown Josh Brown:Decide that they don't want to take as much risk in the credit market. After deep losses. I can't do that. Not after. Maybe in the early innings. You don't know how long that goes on for. To me, that's like the least offensive part of it. But also, remember, this is going back to the point. I've been around a long time. Do you understand? I drank out of glass Snapple bottles. Do you understand this? That's how long I've been around. I'm just saying, as an advisor, if you say to a client we're down in this bond fund because some of the credits are blowing up and we're just gonna take a little bit less risk we're gonna trim you can't do that in the private vehicle what are you gonna sell first if things are really going poorly stocks you sell your equities first no but you're right

42:16Ben Carlson:that people are gonna change their allocation preferences a lot of them they're gonna want more of this

42:20Michael Batnick:don't you see that yes they are there's gonna be a lot of people who say that just happened in 2022 when people got their asses kicked that's true Because their bonds duration killed them. That's why they flooded into the floating rate nature of private credit. And also floating rate good,

42:37Downtown Josh Brown:illiquid floating rate, not as good. Wait, but that's, that's, that's what it is. Double digit returns. But also even beyond that, 2020 and 2023, when we were talking about when credit, ultimately people didn't feel so good about it then, right? You still saw private credit being able to step in, in this massive way. And by that's when the things are cheapest. Those are the best investments that they could possibly make. Can we all agree that investors prize liquidity in a crisis? Yes. We can all agree there. Well, what you're saying is the 180 degree opposite of that.

43:09Michael Batnick:I'm saying that if you have a normal, responsible portfolio and 10 % of your portfolio is illiquid, you're going to be fine. But also, how much of your portfolios are in cash right now? 100%. I'm super bearish. Well, but like the average RIA has what? I've heard anywhere.

43:25Downtown Josh Brown:The average RIA holds 2 % aside, mostly so they can bill their clients. That's 2 %?

43:31Michael Batnick:But Shalai, one other thing that we mentioned that we glossed over, on the where would you rather be private credit, public credit, again, not to be the defender here, but on the private side, what you are getting in exchange for the illiquidity is a relatively constant spread over SOFR. Five, six hundred, whatever it is. Which is meaningful. That's the source of returns. In public markets right now, granted, you could say that the quality in HYG is higher than it used to be because all the bullshit is going to the private direct lending. Fine, I'll grant you that. But right now, credit spreads are so tight in public credit.

44:00Michael Batnick:Like, I don't know. Is that better? Why is that better?

44:03Downtown Josh Brown:Right. But in general, in general, in an economic downturn, people very highly value. And I'm going to tell you something about the financial advice business because there was a time where we were all told, hedge funds, got to be in hedge funds. Hedge funds avoided the dot-com blow up. Hedge funds made money in the last decade for stocks. Hedge funds could play with markets. There's a lesson here. There's a huge lesson in that. And then the illiquidity of a lot of those hedge funds had private market assets. Yeah. They had to side pocket them. You couldn't get, and that pissed people off. Even if the returns five years later were good, it was beside the point when things are not going well, people really value the ability to reach in and pull cash out for whatever reason.

44:48I don't disagree by any stretch of the imagine.

44:51Downtown Josh Brown:Well, advisors who have very illiquid portfolios for their clients, unfortunately, are going to have a lot of difficult conversations if we ever have a recession again. Those clients will be our clients eventually. It shouldn't be. You should have a reasonable amount of alts in your portfolio that are not. It's not. You have to still have a liquid part of your. You know, it's interesting. And Goldman came out with a survey the other day and a fifth, a fifth of the respondents in the survey were holding, um, actually no, out of the survey, one fifth of all the total assets that were surveyed for were in cash.

45:28A fifth, a fifth still today.

45:30Michael Batnick:When you say in cash, like all in cash, what do you mean? So a fifth of the total portfolios that, right. So Morgan Stanley said that on one of their calls recently, 20 % of their, yeah. So if you look at the wealth community writ large, there's a lot of money in cash. So the liquidity question has clearly been on everybody's mind, especially at these levels. You know, where are we in the market? So on and so forth. Josh is right. Josh is right. If you overdid it on the private side with your clients and they're 45%, you are fired, you dumb asshole. I don't hate a barbell. You're allowed to curse on here?

46:02Downtown Josh Brown:We can do whatever we want. I don't hate a barbell of I'm 10 % cash and I'm 10 % illiquid, high-yielding assets. and I can make sense of that because it's a total portfolio approach. It's not what I personally recommend.

46:18Ben Carlson:That's an advisor problem, not a client problem.

46:19Downtown Josh Brown:It's an advisor problem. Yeah, no, but it's a real one. It is a real problem. But that's the thing. Thinking about it from a total portfolio is the only way to think about it, right? You can't just like dump all of your assets into illiquid - But people do. But here's the problem though. People, it's called mental accounting. People do this all the time. A client looks at their portfolio have a conversation with the advisor, 80 % of the portfolio is going up, 20 % is going down. What do you think the client has questions on? Should we still own this? What are we doing with this? Do you still like this as much as you liked it when you told me to buy it?

46:55Downtown Josh Brown:They'll fixate on the part that's down. Now, they shouldn't because that's probably the part that's about to outperform. I'm just telling you the difference between data and how things actually go when you're helping people with their money. If things are going wrong, Think about it this way. Let's just draw that scenario. Because 2008 and the market structure today for private assets are different. Yes, if I'm holding a hedge fund where you think they're in a bunch of liquid stuff and turns out they're not, that sucks. That totally sucks. It's also not what they really sold you, right? But now what you're looking at is a market that's meant to be liquid, right?

47:29And so it's like, wait, OK, to your point, I know I can't pull this money out. And when things do go bad, it's more likely that those public assets have been facing that decline than your private credit, which is, you know, supposed to be less volatile than what's happening in the public markets and not because of liquidity.

47:46Downtown Josh Brown:But you know what I'm bullish on for that reason? I think the most popular category in this in this space is going to be secondaries. Yeah, that's huge. Because that's how you take advantage of all the problems I'm pointing out is you're invested in a fund that's waiting for people to choke. And then when those other funds are choking on assets and have to sell things, the secondary fund is there to get that discount. Are you a distressed investor? I might be. Holy shit. I'm definitely distressed. The thing is, there's going to be so many - I'm definitely distressed.

48:18Ben Carlson:There's going to be so many overreactions in the next recession. Oh, hell yeah. That's no matter what. It's been so, so long since we've had a real one that wasn't shored up immediately. I think the knock-on effects of whatever the next recession happened is going to be enormous. Well, let me ask you a question. You know, we were talking so much about privates to your point on total portfolio, how vulnerable is the stock market to that?

48:40Downtown Josh Brown:It'll be fine. Very. Oh, yeah. Very. What does a recession, like, you know, people are saying bubble this, bubble that, but realistically speaking, if something actually goes wrong with the macro.

48:50Michael Batnick:If the loans go bad, could you imagine what the equity is going to look like? Like, could you even imagine? It'll be way worse. So I want to just, I know we've gone long, but I want to, we can't not talk about the banks, especially because Moody's just put out a big report yesterday that is really important and they talk about the big picture, and I would agree with everything that they said here in terms of this. Risk is rising, especially for smaller banks. They talk about growth and competition. They said concentration risk is a concern with banks specifically. The true risk can be hard to assess.

49:17Michael Batnick:Of course, we all know that. And then lastly, transparency and bank loans exposure isn't proven, but new light exposes gaps. So they have these great charts that I want to talk about. They showed that banks help. Ironically, Jamie Dimon. I mean, there's a love-hate relationship. This is so wrong, though. The data's wrong. Oh, go ahead, please. Sorry, this kills me because they said there's 300 billion.

49:37Downtown Josh Brown:Moody's is never wrong about anything. No comment. Say more. This data is not, oh, here, maybe not wrong, but at least a little misleading for this topic. So 96 billion is really what's in private debt funds. They're saying it's 300 billion. What they're accounting for - No, that's percent growth. Well, no, but in total, what they're counting, it's percent growth, but what they're counting is up to$300 billion in loans outstanding. Oh, that happened to be the same for no reason. But it's actually when you look at the total, that's the growth off of a almost non-existent base that you're looking at.

50:08And then on top of that, it's actually 96 billion, not 300 billion. And out of the entire universe of a non-bank financial credit, which is getting bigger, the private credit is only 4 % of that.

50:20Michael Batnick:So this will bother you this. So is this a better, this is better representation? The NDFI on the bottom? Kind of. But the NDFI is a real broad category. Non-deposit financial institution or shadow bank. That is like online lenders. That is like all sorts of specialty lenders. You name it. All right, fine. Forget that bullshit. Here's the important part. Here's the important part. John, chart nine. I'm going to try one more time. All right. The rise of private credit. So Bloomberg took the data from Moody. So tell me if this is wrong too. It might be. So this is the amount of loans in private credit from the banks.

50:51Michael Batnick:And JP Morgan.

50:53Downtown Josh Brown:Uh-oh. They wait. They found a way around Dodd-Frank.

50:58Michael Batnick:Yes. So Matt Levine wrote about this yesterday.

51:00Ben Carlson:Jamie Dimon's eating chocolate cockroaches.

51:03Michael Batnick:But look, Wells Fargo,$60 billion in exposure to private debt firms. JP Morgan, they're not making the loans, but they're making the loans to the people that are making the loans. They're lending the money to the lenders. It's genius. But they've always done that, right? I know. JP Morgan's biggest customer is what? Like mostly regional banks, right? How many do they bank? 4 ,000 of them? Yes.

51:22Downtown Josh Brown:That's their business. And so when you look at this number with what I just said, that it's the private credit definition that they gave. is a little misleading because it's those online lenders, it's the specialty lenders, it's all sorts of lenders. So it doesn't actually show what their private credit exposure is here. It's a lot less than that. And, you know, you think about it, people are talking about JP Morgan's private credit exposure, but like they also just increase their provisions for loan losses to the entire economy, right? They have underwriting that suggests that loans, just regular way consumer loans could start to sell a little bit.

51:58Downtown Josh Brown:What do you think of this, though? nothing's happened yet. And people are this vigilant. Is that a good thing or a bad thing? You know, I'm with Ben. I like it. We don't have delinquencies in real life. And people are like, people are like, suspect everyone. Let's be honest. If this is really a worst systemic risk, everyone's getting bailed out. Come on.

52:18Ben Carlson:Well, that's true too.

52:19Downtown Josh Brown:That's the funny part is that no one will actually have any consequences. Yeah, it'll be fine. But do you feel like that's a good sign that we're all like, Jamie Dimon, we're scouring all of our books. That's kind of good. It's very good. That we're doing that now before there are actual losses. Never hire an optimistic credit. I like that. Like you. Next topic. Yeah. BDCs. Yeah. How do you sleep? No, I'm just kidding. I wrote it. So I know you wanted to take interest, take issue with one of the things I wrote. I wrote about BDCs. You called me biased. Not to. Well, I'm biased too. Wait, wait, wait.

52:56Downtown Josh Brown:Okay, Shanali, I'm biased. I'm biased toward the stock market. So we all have our - Fair enough. Okay. I wrote about BDCs because I think they are the exposed part of the wound. That if there is a wound in the way that they behave, people are worried about two things with BDCs. The first is very banal. As interest rates come down, obviously the yields that these companies are able to pay have to come down with them. Nobody should be alarmed by that. That's the way interest rates work. So we know that dividend distributions will come down and these stocks are selling off in that expectation. We had the first rate cut of the cycle in September.

53:38Downtown Josh Brown:Maybe we get another one in a month or two. Okay, no problem. But then the second part of that is, oh, wait a minute, there's fraud with some of these loans. How much more fraud might there? Okay, what if there's three? What if there's four? Zion's Bank came out and said they're suing somebody. Oh, there's definitely more than four. We know there's going to be more than two. I'm not saying it has to be 2 ,000. But a lot of the things people are saying in defense of the BDCs were the same things that they were saying in defense of the mortgage funds 15 years ago. And I know because I was there.

54:16Downtown Josh Brown:And it's not terribly different in terms of rhetoric. The reality might be different. What do you make of the panic? minor panic that we saw in the publicly traded BDCs? And would you agree that this is a better gauge of credit risk right now than what we would traditionally look at, which would be junk spreads relative to treasuries? There's such a massive difference, I think. I know. I know. No, no, no, no. Between credit risk and between spread compression and credit risk, credit risk, we're talking about whether you're lending to a worthy borrower. Spread compression, you're saying returns are going to come down over time.

54:58Okay, fine, maybe. But if returns come down in private credit to the point Michael Batnick was just making, it would come down in public credit too. And the spread for private would still be higher than that. So the wound, which wound are we talking about? I think is what my question is.

55:13Downtown Josh Brown:I'm not worried about spread compression. I don't think that's an emergency. And so are you worried about widespread fraud? I'm worried about the rush to put money to work that we all have to acknowledge has been a big part of this era. What are the ramifications that will stem from that if and when we have a credit cycle?

55:32Michael Batnick:So Josh, the only question that I have for private credit managers as we talk to them is, what if you get$10 billion in funds tomorrow? How quickly do you deploy it and how? What are your controls? Is it just cash in, got to make loans, cash in? Because it can't possibly work that way. And if it does, and people are doing business that way, and I know a lot of people are, you're going to be in trouble. Yeah. And not just for credit, for private equity too. The biggest mistake many managers made the last few years is they made all of these acquisitions in 2021. That doesn't look so pretty today.

56:07You know, things felt really good. So people put a lot of money to work and look at where we are now. But, you know, if I don't think if we saw a scenario in which Ben was talking about, which is a widespread recession, who's safe in that scenario? Like what is safe? You're right.

56:23Michael Batnick:And nobody in 2021, when the music was playing and all of these giant mega growth funds were investing in these companies and insane valuations. I remember that there was very few people calling it out and saying, this is crazy. And one of them was our friend Howard Lindzen, who was like, I have cash and I'm not investing because the prices that I keep seeing are stupid. They spent it too fast. And when they stop being stupid, I will start investing again. And that's who you want to give your money to in periods of complacency. And there's no doubt that there is too much lending and it's too much, it's too fast.

56:54Hey, you know, I mean, if there's anything to take away from all this, right, is do the damn homework, right? Don't put your money just because there's a promise of something interesting in an industry that's a hot asset class. Do the work and say, okay, what is this actually investing?

57:08Michael Batnick:And put it in your 401k for God's sakes. I was waiting for that to come up today.

57:12Downtown Josh Brown:Do you think investors should be biased toward the larger players in the space as a just in case? Yes. Because I do. I think brand and size and scale really matters. They matter for a lot of reasons, but not in every asset class, right? Because things like private equity, actually middle market and lower middle market have much more attractive return profiles than you would have in those large scale buyouts right now.

57:35Michael Batnick:This is the opposite. I feel like in venture and with hedge funds, smaller managers tend to do better because scale is the enemy in that space. I think with lending, it's the opposite. It's the opposite. You need scale. I would agree. I would agree with that.

57:47Downtown Josh Brown:Okay. So that's, so you're like, you're asking people to do their homework, due diligence. Most people listening to this who are being recommended. No, I mean like you, like the advisor. Oh, I'm doing really good. So this is going to be, this is going to come off as like overly cynical and sardonic, which is right on brand for me. but somebody asked me, what's your private equity, private credit strategy? And I said, I'm just going to wait for the disappointment and then take everyone's clients. Do you own a house? Yeah. Is that my private credit strategy? You own a hard asset. You own a private asset, right?

58:20And so, you know, what you're asking someone to do in a private fund is to buy assets that, you know, you're going to buy hard assets, you could buy infrastructure, you can get into credit.

58:30Downtown Josh Brown:I don't have enough money to be able to buy the things that are private assets that I actually think I would want$25 ,000. Yes. That that's how will that move the needle for me? But that's what the thing is, I don't have a billion dollars and I can't buy an NFL team. And that's what I that's the private asset that I am interested in. You need a financial planner. I can't really help you there. But I know some athletes. But that's my that's my intro. I don't think every market. Yeah. I don't think every market makes sense for every person. That's true. Okay. So in the private market, the best managers who have access to buy the best assets are not going to be accessible by every investor.

59:11Downtown Josh Brown:That's my point. That is true. But I would also argue that because there have been, there's a lot going on. The operational efficiency is getting better. The documents are getting more fluent to access and the technology is getting better. The fund structures are changing very meaningfully. The minimums are coming down. that's why we're even talking about this honestly speaking it used to be impossible to access many of these types of assets

59:36Michael Batnick:even 10 years ago wealth managers couldn't do it even two years ago I agree with that and those are all good things

59:42Downtown Josh Brown:anything that you do that makes these things more accessible and makes it so you can actually research them and more transparent and lowers the fees and adds transparency is unequivocally good but that means unequivocally good lower returns lower returns it has to it depends I actually don't agree necessarily on that because these are, you know, when you just because you open up something to a wider array of investors doesn't mean like your 401k plans, that's scale, that's pricing power. And that's net of fees, a better return. Now, I will say this, the liquidity tradeoff, that's where the return compression comes in.

1:00:16You're seeing a lot of products come to market that are like, oh, yeah, you know, we're private, but we're liquid. You go one level deeper. Disaster. Well, but it's also not private. It's it's it's blended.

1:00:25Downtown Josh Brown:The more liquid something is, right, by definition, it's not. It's not liquid. It's not illiquid. It's not private. It's not private. And so a lot of these funds are like, okay, well, we're part this and part that. And like really the private allocation is like this big. And yes, you're going to have a trade-off there where you're not getting paid for that illiquidity premium. Human nature, okay? Just answer me this. If something is an amazing investment, whether it's an asset class or a particular property or a particular whatever, If something's amazing, are billionaires going to let dentists get in?

1:01:01Downtown Josh Brown:No way, right? Well, the billionaires, you know, it's funny. Tony James wrote a book about this. The billionaires need the dentist though now. Yeah, the billionaires need the dentist. Yeah, as exit liquidity.

1:01:09Michael Batnick:Dude, stop. What are you talking about? Who's saying this is an amazing investment? Private loans do 8 % to 10 % a year.

1:01:15Downtown Josh Brown:No, no, no. We're talking about private equity now. I'm saying if something is like an incredible opportunity and Mark Cuban buys, Mark Cuban buys 20 % of it and someone else buys 20 % and someone else and all these wealthy, well-connected, famous, brilliant people. Josh, what team do you want to buy? Wait, wait. Just let us know. And then there's 10 % of it left. Why would there be 10 % of it left for the public? Let's put it this way. Why? Why wouldn't they just buy the rest? No, you're right. You're right, of course. The best investments are for the ultra wealthy. That will never change. Never, ever.

1:01:51Downtown Josh Brown:So anytime you're democratizing something, you're telling me this is third tier. First of all, our sports seems always good investment. Yes. Name one that isn't. I don't know. It's funny. I once asked Mark Lasry why he got out of the bucks, right? Best trade ever. Well, he said - He bought it for$400 million and sold it for billions. That's a good enough reason. But he then went to other kind of more esoteric sports like pickleball, right? Because the return profile was better there. And yes, these are not available to everybody, but I would say - You know the Jets are probably worth$5 billion?

1:02:23Downtown Josh Brown:Oh, I'm so glad you mentioned that. Sorry. Is that who you are? There is no sports franchise that goes down in value.

1:02:28Michael Batnick:So last night I went to the Knick Game. But the return rate can slow. That's what I'm saying. True. Last night I went to the Knick Game and I was genuinely thinking about this. What are the Knicks worth? I don't know,$6 billion,$8 billion,$10 billion, whatever it is.

1:02:38Downtown Josh Brown:$15 in real life.

1:02:39Michael Batnick:Okay, whatever. Fine. Let's just say it's$10. Oclo is worth like$25 billion. Like all of these nonsense pre-revenue companies. Like when you put it into that context, I know it's Apple's and computers, like it's not the, but it is kind of hilarious. But by the way, I don't think we're that far off from having individual investors being able to be in sports teams, too. I agree. They're there. Private equity is there. That's what I'm saying. So actually, the universe of investments is just getting a lot bigger. So I don't disagree that there's exclusive investments that are maintained for the ultra wealthy.

1:03:08But I'm saying the universe of investments that only used to be for the ultra wealthy is now expanding.

1:03:12Downtown Josh Brown:So I think that's good. I do think people should leave room in a portfolio. People who are wealthy. Did we win you over? No. The boxing judges called us on the tides. I was already there, but I also know. So I'm a firm believer. I'm a firm believer that 90 % of everything is shit. It's what I think. Okay. You know, I will, I will actually agree with you there. So most of these, so most of these investments, most investments, they don't have to go bad. I wouldn't say that. I would just say like, do you want to own the fifth best fund in a sector? And you just showed us dispersion is really a big deal in this space.

1:03:51Downtown Josh Brown:You do not want to own the fifth best manager. You want to own number one or two, or your returns will be radically different. That, from my perspective, I think that's why iCapital has been so successful. People need someone to tell them, this is the good one, that's the bad one. You know, and it's the beauty of my job. And it's so funny because I asked my husband, I'm like, how do I fight with Josh Brown about the bias comment? We're not, so we agree on almost everything. We do. And I would say it's not about, there's no interest in being biased. The interest is in, same for both of us, in being right, right?

1:04:27And being able to do as much diligence as humanly possible on behalf of everyone else, right? That's what I got to do as a journalist and it's what I get to do now.

1:04:33Downtown Josh Brown:So my last question then, is it realistic for somebody who has$200 ,000 in a 401k to be able to take$25 ,000 of that and put it into a top tier private equity manager? Wouldn't you think? Or private credit manager? Do you think that's actually what's going to happen? I do. You do? I think it'll take a minute to get this ironed out properly, but private assets writ large. Do you think the better managers will make themselves available to inflows from a 401k?

1:05:06Ben Carlson:That is 1 ,000. Don't they have to? Because if they go into 401ks and it's a disaster, then that's going to be really bad. They're going to have to put some decent funds forward, don't you think?

1:05:17Downtown Josh Brown:Yeah, they'll get kicked out of the plans if they blow up right out of the gates. Yeah, they have to do that. It has to be top tier quality. And also, I mean, that idea of putting assets in a forum, you're holding that for a long time. Yeah. That's one of the best possible structures for private assets. Yeah, so I don't think Schwab and Vanguard will work with terrible firms or dodgy. I agree with that. I do think there will be marquee names in private assets working with the marquee names that manage most of the country's 401ks. So I don't think it's a case where bad product is going to be shoved down people's throats.

1:05:55I guess I just question it's probably not bad, but is it even good?

1:06:00Downtown Josh Brown:Is it even will it be materially better than what they could do with low cost index bonds and stocks? I don't know the answer. I don't know the answer. But that's the question. You know, a couple of months ago, remember, made a lot of news when Goldman came out with their assumptions for where the S &P in 500 is heading in the next 10 years. And just because of valuations where we are today. I mean, that is one of the big problems, right? It's just capital markets assumptions where we are in valuations and the expected returns over 10, 20, 30, 40 years.

1:06:28Michael Batnick:Right. Why overpay in public markets? You could overpay in private markets. But hopefully nobody's overpaying with us, right?

1:06:35Downtown Josh Brown:Shanala, you're so good at this. It's scary. I just I want to thank you so much for coming here and pointing out all of these things that are getting lost in the conversation. Do you have fun on the show? I love this show. I'm your neighbor. I'll come. Can we do a Rocky versus Apollo for the thumbnail of you two? But we like agree on like 90 percent of this. I think we both want what's best for the investing public. That's pretty obvious. Yes. One thousand percent. All right. Optionality. and education. And I think I'm in on secondaries because I like buying other people's pain. I like that. I'm just going to call him Vulture for a while.

1:07:12I almost forgot to mention this.

1:07:13Michael Batnick:We have to disclose this. We are a shareholder of iCapital. You are? Technically, Michael's your boss. I don't know if you know that. That's scary. Don't get me a glass of water. iCapital bought one of our companies. So we have shares in your company. Look at that. So don't f*** it up. I'm hoping you're enjoying that whole thing. So don't screw up our investment. My kids 529 is counting on you. That's why he's a spokesman. for no kidding i love that you threw that at me at the end there would have been nicer to you guys

1:07:39Downtown Josh Brown:all right so we always end that we always end the show um asking people what they're looking forward to and uh i'd love to uh i'd love to hear from you guys what's what's hot in your world what's going on on the horizon what are you excited about shanala you can start all i can think about is the cpi print tomorrow is that horrible are we even gonna get are we even gonna get one you and cali both. Yeah. Callie's excited too. It's only like it's a data starvation for the last three weeks. I guess I'm sort of excited about it too. I think just in general, I think we'll just get one more rate cut at the end of the year, no matter what the CPI print is.

1:08:18Downtown Josh Brown:Just one? You think definitely just one or two? Maybe more, but I think we're definitely getting one. Yeah, I would agree. So what are you excited about? What economic data point can you not sleep until we get?

1:08:29Ben Carlson:so i'm excited this weekend my son plays third and fourth grade football okay in his last game following in his old man's footsteps he's on the line he's not like me uh they're playing their

1:08:39Downtown Josh Brown:last game of the year at the big house in ann arbor oh wow it kind of came out the end is rasnick gonna be there yeah it's jason rasnick gonna have a front row seat for that uh so i

1:08:47Ben Carlson:something about football was my sport so watching one of my children play football has been like so gratifying for me it's it's unbelievable how do you what do you think of the lion season this year

1:08:57Downtown Josh Brown:I thought they'd be better.

1:08:58Ben Carlson:They're not bad. They're good.

1:09:00Downtown Josh Brown:I just thought they'd be better. Yeah, but everybody thought we'd lose their coaches. Ben's from Detroit. I'm a Packers fan, so I think we're not friends. Okay. No, wait.

1:09:08Michael Batnick:They lost their offensive and defensive coordinator, and they're still kicking ass. Yeah. We had the best running back in the league.

1:09:13Downtown Josh Brown:Yeah. They look okay. Oh, that guy's freakishly fast, too. Gibbs, yeah. Yeah. All right. So, but overall, it's not a terrible season. It's just, I guess I thought they'd be more dominant.

1:09:23Michael Batnick:Aren't they 4-2? What's their record? 5-2? 5-2 or something. No, they're going to the Super Bowl.

1:09:26Downtown Josh Brown:You think so? Yeah. Okay, I don't know.

1:09:28Michael Batnick:Who's better than them in the NFC? Nobody.

1:09:31Ben Carlson:I have very low expectations to the Lions every year. Grand Rapids hedge. When were they last in the Super Bowl? Never. Never. I was going to say.

1:09:39Downtown Josh Brown:Yeah, they should have been last year. Sorry. Yeah, they got so many injuries. Yeah, they should have been. So he's going to play in front of 100 ,000 seats.

1:09:46Ben Carlson:100 ,000 seats. 100 ,000 seats. They give him an hour to play this game. So they got no halftime. We got it because there's all these games. But he gets to finish the season. How old is he? he's eight.

1:09:56Downtown Josh Brown:Eight. That's it. He'll remember that. He'll remember that for the rest of his life. Yes.

1:09:59Michael Batnick:Can I say what I'm excited for? I'm excited for tomorrow. If somebody told me 15 years ago that I'd be interviewing Jim Cramer with Josh, I would have spoken dust. Oh, is he on the pod? Yeah.

1:10:08Downtown Josh Brown:He's on the pod tomorrow night. We're going to do it live. It won't air until next week. I don't know how long we have him for, but we're going to do like the Jim Cramer on the Compound Experience. Where are you guys doing it at? We have a venue. holds about 120 people. It's fairly exclusive. And custom cocktails in the financial district. I don't know about that. That's a Nicole question. We're going to do it. We're going to I don't know, Rob. We're going to do it right.

1:10:36Michael Batnick:Thank you, KKR, for sponsoring the show tomorrow.

1:10:41Downtown Josh Brown:All right. Anyway, something to look forward to. Guys, we want to thank our guest where can people learn more and get more of your insights? Because I feel like you just absolutely lit it up on the show tonight. Yeah, we keep we keep it real on LinkedIn. We are on Twitter. We try to share as much as we can. Okay. And on iCapital.com. Your Twitter as your real name. iCapital.com. People could subscribe to the research that you guys put out. Yep. Yeah. We have a newsletter where we share a lot of that research. And we have a tab under Thought Leadership where we publish every week. All right. You're the best.

1:11:11Downtown Josh Brown:Thank you so much for being here. Appreciate it. Thanks to all the listeners. Like and subscribe. See you soon. Bye.

1:11:22Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye.

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