Packer16

IMO there are 2 factors most forget when talking about debt. First, the debt is the first claim (via taxes) on the economy of the country. As long as the country is viable, the debt never has to be repaid but just serviced. Also, in the case of large domestic debt countries (incl US), the debt of a country is the lowest risk asset available to investors. These are the reasons why Japan will not explode until either there savings disappear and/or there economy (GDP) declines sharply & permanently. I am not saying changes in financial conditions will not effect the currency on the edges but in the currency game you are compared to the next best alternative & at this point all large alternative are worse. Packer

I think it reflects the reality today. To expect the system to blow up is the pessimistic IMO. The government debt is different than credit card debt because someday the CC holder will die but not the US. If the US dies, then there will be bigger problems than all of our portfolios. The fear of the pessimistic case clearly is driving bitcoin & gold but there is a large opportunity cost to holding gold/bitcoin versus CF generating asset like stocks & real estate. Packer

The exit is to pay down the debt over time. This will reduce growth over time. We have seen the government debt go up but personal debt go down. Worse come to worse there will be high taxes on either high income individuals or large companies as the first lien is called. However, since most US debt is owned by US citizens most if not all the debt can be rolled indefinitely. This is what is happening to Japan. Watch Japan for clues to how a large internally owned debt is dealt with. Given the advances in technology & supply, we can monetize the debt with low/modest inflation. We have not reached the point where debt has crowded out investment as real rates are very low. As outlined in the Fisher paper, as long as the debt is being serviced, any new money printed will decrease velocity thus no inflation & more deflation as aggregate demand is reduced to service/payback the debt. Packer

When you look at the US debt, the collateral for the US debt is the US economy not just the US government as the Federal gov't can tax to get revenue (so it has a first lien against all cash flows the US economy generates) We have less debt than either Japan or Europe. So they will be the test for high debt servicing. IMO we will not have any problems unless govt's decide to not pay debts which would imply that their first lien is impaired in some way. Debt reduces growth due to the cost of servicing the debt/repayment versus consumption. Given the low cost of debt (& the continued expectations of this as long as people repay the debt), the servicing cost is low. We will continue to have deflation as long a debt repayment occurs. Lacy Hunt/Irving Fisher have a good framework to examine debt crises historically. The podcast below outlines this framework along with Fisher's paper: https://ttmygh.podbean.com/e/teg_0006/ https://fraser.stlouisfed.org/files/docs/meltzer/fisdeb33.pdf As to innovation, innovation is the result of R&D & investment in intangible vs. tangible assets. This investment is a cost according to accounting versus an investment. The US investment in tangible & intangibles asset has increased from the low 20% of GDP in the late 70s to the mid 20% now. The mix has changed from 14% tangible/8% intangible to 10% tangible/16% intangible. So US investment is still robust. A big use of tangible assets going forward will be the rollout of a renewable energy infrastructure so tangible asset investment should go up going forward. Packer

I am not sure the next FAANG will be from technology. If you look 10 years from 2000 many of the invincible tech names in the top 10 firms were gone. Why? Due to intense competition reducing share/profits. IMO there are rare profit pools that can last more than 10 years & to continue to grow into valuations requires entering new markets where incumbents know your game. IMO the international opportunities will disappoint also as online media & commerce will tilt towards local champions more easily taxed & can provide jobs for local governments. Packer

Lt Lu has a pretty good historical view of China/US per Bill's comments above, here: https://uploads-ssl.webflow.com/5ef3c7300432b40ed865991a/5ef3c7300432b4f82e659975_Discussions%20About%20Modernization%20-%20A%20Look%20at%20the%20Future%20of%20Sino-US%20Relations.pdf His basic conclusion is China needs to determine if they want to be a part of the American Order (democratic order established & grown after WWII) or tread their own path with a smaller group of countries that will always be at a disadvantage to the much larger US/Europe/Japan democratic world. Packer

Thanks for your contributions. Was the composition of your portfolio based upon interest/insight from your job or in a completely different field? Congrats on identifying some nice growth companies that the market underestimated. Packer

I think it depends. There are some truly great tech based networking businesses but there are also many wannabe companies with much weaker models out there hoping to be great. IMO if the business does not have customer lock-in and high switching costs it is in a poor position. I went through Value Line the other day & was observing the large contrast in profitability between the networked giants & everyone else. Amazon has created the myth that a barely profitable business can turn into one of these networked giants but IMO Amazon is the exception not the rule. As with any great model there are limited places that it works well. Also there is the trend of the cloud based companies reaching the end of their take share from weaker players strategy as they dominate the market & for growth they need to take share from each other as described in Investing in the Cloud: From Gold Rush to Hunger Games. Packer

Thanks for ideas. I looked at Oaktree also but had the same conclusion as you - how do I know they will get the best of fair deals? They also have a relatively high expenses (48% of NII) vs 35% for TSLX & TSLX has first dibs on any deal originated by 6th Streets US Debt origination group. TCP was also interesting due to its lower costs & decent historic track record. There range of products appears to be narrower than TSLX (which has made retail ABR loans, DIP loans & tech loans) Packer

Does anyone have any ideas of distressed/spec sit investors with alot of dry powder & public vehicles to invest in? The two I can think of are Equity Commonwealth (Zell) w $3.3 billion cash & TSLX w $1.0 billion dry powder. Packer

Great interview. I heard an interesting framework on the TSLX conf call this morning, namely crises have 2 phase liquidity phases & "work out' phases. For now the liquidity phase is done and peaked in March. The much longer & far reaching "work out" phase now begins. This will be where the restructuring folks will do their magic. Two differences between now & the past lower interest rates & an abundance of rescue capital. I think folks will get a decent return here but what folks were used to in the past. Packer

IMO doing all these calculations of debt levels/interest without looking at alternatives does not make sense. Savers have to invest somewhere so as long as the US on a relative basis is better than any other place on earth it does not matter. If there was a large country with a better place for savings/investing I would be concerned but there is not. Since we are all pretty much in the same boat with Coronavirus spending & capital will continue to grow, how has the relative position of the US versus changed? Not much IMO. Also those countries that have an aged population & large capital base accumulated over the years have a large internal demand for bonds in the local currency. That is why places like Japan have not seen much depreciation/inflation. Packer

Thanks. That explains the movements last week probably a good time to buy given you had forced sellers. Does anyone know how many of these funds that auto liquidate are out there for BDCs, REITs & mREITs? Packer

What are folks thoughts on contagion or fear of contagion is specifically real estate & other fixed income. There has been some wild gyrations in real estate fixed income the past few weeks (LADR & NLY) being to examples. Treasuries being used as collateral (increasing demand) is another effect. It has spread to real estate finance companies like STOR & high quality first lien lenders like TSLX. Does anyone have any insights to what has caused this. I have heard rumors of margin calls & I know they can cause some contagion effects. Packer

The problem with this line of thinking is it all time dependent & we do not as investors have big globs of money to invest this way. Most of us have money to invest over time. If you look at the DCA results, I think you will get a more realistic expectation of how people invest not theoretically what we could have made if we timed the markets correctly. Packer