Transcription
Allen Schwartz joins us now, the executive chairman of Guggenheim Partners. Great to see you, Allen.
Nice to see you too. I mean, you guys are no stranger to energy. You've basically pioneered the one forty four a securitization. You have the renewal deal. You know, I I you've got to explain that to me with regards to the land lease financing here. But when you walk around this conference, it doesn't matter what business you're in. Everybody's talking about energy infrastructure in some way or another.
Yes. Well, it's look. We've had a few decades of relatively flat, you know, demand for electricity, and all of a sudden, we're electrifying the entire economy plus AI. And so the demand curve is moving like this, and we are far behind in the war to make sure that we have the electric power to allow us to compete, especially in AI. Because if we don't have the power to compete in AI, as somebody said, it would be terrible to win the technology race and lose the power race for AI.
Wow. Is the capital there to do this? The capital is there. Fortunately, if you go in the past when you had a new technology, for example, wind and solar, the government would create a credit. The credit would allow it to be deployed at a high price, but allow that price to come down through the development and the learning curve of pricing. The government can't do that now for some of the new power sources, but the large, you know, data center users and, you know, the hyperscalers have the capacity to they can today pay the very high price that electricity will be, you know, created at, and that will allow it to come down. So there's a very important point that we're getting pushback that the public's afraid that data centers are gonna come and take away their power or drive up the cost of power. And the reality is we need them to be the ones leaning in to bring down the power curve for everybody else and the cost.
Well, that's exactly what I was wondering about. You know, you think about the narrative that has emerged, in the population about data centers, and there's a lot of not in my backyard ism. And, certainly, if you take a look at the map of where data centers are distributed, they're really concentrated in a few places in the country. And I wonder, you know, obviously, you see this as an opportunity, an opportunity for Guggenheim, but do you worry that, you know, there could be some regulatory risk here, some political risk here at some point.
There is. The NIMBY movement is a concern, and it's actually backwards is the point I'm trying to make. I mean, you look at Georgia, for example, which is the largest user, they're using the deployment of power to the data centers to bring down the cost to the average consumer. As I said, the government used to support it. Now they can pay the high price to get it created and come down the learning curve and make it available to the population. So it's the exact opposite of what people are concerned about. I mean, it has to be regulated properly for that to happen, but it's the exact opposite of what people are afraid about, and I think the message has to get out there.
Yeah. It's interesting. In some ways, it feels like it's parallel to the conversation that we have around institutional ownership in housing. You know, whether or not the facts back it up, there is that perception out there that that's driving up costs, and maybe that applies to energy as well. I do wanna throw you a little bit of a curveball because we heard from BlackRock's Larry Fink earlier today on a panel saying that you think about The US right now, we're short power to your point. We're short compute, and we're short chips. And as a result, he believes that we're going to see an entirely new asset class in the form of basically buying futures of compute. And I wonder, you know, when you think about Futures of what?
I'm sorry. Of compute.
Okay. And, you know, maybe you don't agree with that specifically, but do you think that, you know, the forces that we're talking about are profound enough to be creating new asset classes here?
Yes. I think, you know, whether or not we're gonna have a specific futures market for compute or whatever it is, there is gonna be a significant opportunity for a flow of capital into the things we need the most. You know, we've gone through this period of, you know, believing that we can get whatever we need from wherever in the country it's cheapest, and it will always show up on time and everything else. And now as we move into a multipolar world, there's an awakening that we have to be careful not to be dependent on one country to get everything we need to build our future. And so that reassuring opportunity is one where there's gonna be a lot of opportunity for investment.
Hoop, speaking of opportunity for investment, obviously, over the last few months, there was a lot of hand wringing about the state of private credit. You guys just had a a huge, new debt fund, $88,400,000,000 or so. At a time where everybody's looking at this space and thinking, why would you be pouring money into it? The fact that you're able to raise that, the fact that that actually hits your hard cap, if I if I'm correct, seem to show there's still a lot a lot of demand out there for that. Why?
I think there's two things. First of all, there's been a lot of demand that is beginning to fade. Secondly, in our side on Guggenheim investments, we did not raise a ton of private credit in the last, say, seven, eight years because we thought that the market was a little too a bullion. Mhmm. And so we've been going to other sectors where we can find opportunities. Now is the time to raise private credit capital to take advantage of what there might be opportunities if the private credit market cracks. And we are concerned that it will.
You are concerned?
Yes. But to a point where it could be systemic? I mean, we should point out. I mean, you were, you know, before Guggenheim, you were the last, CEO at Bear Stearns. So, I mean, you had a front row seat to what was going on during that crisis.
Yes. I mean, when people start talking about parallels between o six, o seven, o eight, o nine, and today, is that fair?
It's fair. I don't think it's gonna turn out to be anywhere near as significant. Mhmm. So it's fair in this sense. One, that whenever you have a sector that grows very rapidly that in the past has not grown so much, you have to worry about that. Is it gonna have excesses? We've seen that in private credit. We had a tremendous increase in private credit after the financial crisis, which I read about, and a and, and a lower quality rating in that private credit market. So we've been paying a lot of attention to that, which is, as said, why we didn't raise as much, but also on the security side paying a lot of attention. The recent, you know, demands for getting their capital back has put some focus on it, and there are some tremors in that market. Now systemically, I think it's different in this sense. One, I do think that the lot of the big players in private credit, the Apollo's, KKR's, are very sophisticated investors. So I'm a little less concerned that there's gonna be a rapid, you know, a big huge amount of problem. Second, the last time in the financial crisis, it was the banking system that got paralyzed with all of these assets. The banking system is the, let's say, the arteries for the monetary authorities to put liquidity back in the system. So if the arteries are clogged, it becomes much more systemic. Now the banks who cut back on a lot of this are in very good shape. And so this private credit, I think, can be handled in a better way than the financial crisis was able to be handled.
Well, it's interesting. I mean, you mentioned the Apollos and the Ares of the world, and you're not really concerned about them as managers. But it was interesting. We heard recently from the head of spread products over at Citi warning basically about tourists in the private credit space that you've had a lot of managers who spotted an opportunity there and came in in a big way, and then maybe that's who you see come out. And I wonder if, you know, you would list that as a concern of yours as well.
Yeah. I I think so. And I and and I'm not saying there won't be fractures in even the very good managers. They're gonna have some issues. I just don't think they'll be, you know, tremendous. The issue is we're seeing anytime you have an asset class that is illiquid and nontransparent. And now when you're getting redemption calls and you may get margin calls, the lack of any knowledge of what the market is or what that particular credit is because it's not transparent, makes it a very difficult asset category to get, you know, fixed because there's no marketplace to go to. So it can it can spasm and create some, you know, significant problems. Mhmm. I just come back to, you know, we're seeing an increase in shadow defaults and things like that. So it it's something we have to keep an eye on. I'm not saying it's gonna be really small, but I don't think it'll be systemic.
Well, Allen, I do wanna switch gears a little bit because we brought up 2008, and someone you saw in action in 2008 was Kevin Walsh. And Sure said. Kevin Walsh, if all things go smoothly, should be the next Fed chair come this month. And, you know, you think about the the central bank makeup that he's inheriting here, four dissents at the most recent Fed meeting. You think about what a Fed chair has to do. It's not just policy. It's also politics as well. So, you know, in your experience knowing him, how do you feel in terms of how he's gonna be able to orchestrate all these differing opinions on the Fed right now?
Look. I have said this before. I don't think there's a better person to step into that role today than Kevin Walsh. He was the superstar, in my opinion, interacting with the government in the financial crisis. He's very analytical. He's a very analytical person. So people who think, oh, I'm gonna come in with my desire and my demand are wrong. He's going to create analysis. Now separating the near term, if he came in tomorrow, let's say, given what's going on in the energy markets, Iran, etcetera, he's very, very good at using the team to analyze what's happening in the markets. The near term policies are gonna be based on the data that they see out of that. But then longer term, I think that what he sees is something that I totally agree with is that I think we've had a bigger productivity revolution than a lot of us realized was happening, and Kevin was seeing that. And that has impact on the way markets react to interest rates and the size of the Fed's balance sheet, etcetera. So I think he's got a vision of where we should be going long term, but he's not gonna dictate it. He's going to bring the credibility of research to the team and the and the board to look at.
But when you say vision, I mean, this is I mean, if you take him at his word, this is potentially gonna be a real philosophical change in the way that the Fed is led. Are markets prepared for that? Do they understand it?
I think that Yeah. His point will be the markets will turn out to react differently than the models would say. Look what we've seen so far. What did we think was gonna happen with the increase in tariffs, with the shortage of different things as we've talked about? But somehow corporate profits just keep going. Mhmm. Inflation hasn't taken off. The economy is gonna against all of these things that we think would flow through. So you have to rethink the models, and then you have to articulate it to the public. We are getting a bit of a rethink in the philosophy behind monetary policy.
Do you have any hope that we'll get a meaningful and more importantly, a constructive constructive rethink rethink of of fiscal fiscal policy? Policy?
I think that's very, very important. Mhmm. I think the challenge there is, as you say, the politics of getting a group of people in a room who are all there for the same reasons to come together on a change in policy is a little bit different than trying to get the senate and the administration and congress together, and we have a real issue with that. You know, one thing about it, it could become more important because I don't think people realize that post financial crisis was the first recovery in US financial history that we had an actual decline in consumer credit as a percentage of GDP. Every other recovery, there was more credit, more credit. Yeah. So the government stepping in and borrowing more was actually in some ways a necessary thing. But it also created an environment where people would say, oh, as much as the government borrows doesn't matter. Yeah. And on top of that, we had interest rate compression where they were able to refinance their high coupon debt with lower coupon debt. And so we went, I don't know, let's say, fifteen, sixteen years where interest expense was flat while debt doubled or tripled. So there's a complacency in the market that now consumers aren't gonna keep delevering and interest rates are no longer able to refinance at lower rates so that the pressure that could come from the market that would for force some reconciliation could come. But I think without it, it's gonna be very hard politically to find something that you can get a consensus around what to do.