We have seen busier news weeks, but we’re not sure when we last saw a more interesting news week. Let’s start at the intersection of AI and credit, an area that has been a particular focus for us of late. Regular readers will not have been surprised that TFTD was interested in the recent fuss surrounding whether Blue Owl was contributing equity to an Oracle deal. Oracle’s share price is literally a big deal because Oracle is quite a large lump of market cap: at its recent peak, it was $933bn, although today it is $517bn. The reason we have taken an interest in Blue Owl is that Blue Owl’s funds have recently suffered more redemption requests than it could meet through the cash generated by its investments and new investors.
That’s why Blue Owl management proposed converting their open-ended credit fund (OWLCX) into a closed-end fund. SEC rules require “interval funds” to offer investors quarterly liquidity, subject to a limit of 5% of the outstanding shares. Sadly, (for Blue Owl’s management), investors focused on the discount the closed-end fund traded at and baulked at the deal.
It’s intriguing that Blue Owl chose to walk away from the $10bn data center in Michigan on the terms Oracle offered. Reports suggest Blackstone is likely to be the lucky winner, but that might be spin. To be clear, Blue Owl does have existing exposure to data centers and to two other Oracle data centers, but decided not to pursue this latest deal. Was it Oracle, or data centers, or the terms offered that have become materially less attractive? Or was it Blue Owl’s tolerance for risk that changed?
We have our theories, but we doubt we will get proof anytime soon. What we do know is that it does seem to be getting harder to roll over certain credit structures. Owners of the Bluerock Total Income + Real Estate fund have just completed the conversion to the Bluerock Private Real Estate Fund. Investors approved the conversion of their open-ended fund to a closed-end fund, which immediately traded at a 38% discount to NAV. Some people call this “price discovery”. Investors approved the conversion because it avoided them selling the underlying assets into a weak CRE market and immediately crystallizing losses that they hope will be mitigated with more time. Some people call this “extend and pretend”. Could there be more examples of this coming? We leave readers to reach their own conclusion, but there is nothing quite like watching doors closing to make investors start looking for exits.
We highlight these stories because if you had characterized the economy as “K-shaped”, and the part of the economy that was growing slows, your thoughts might turn to recession risks. Which brings us to Powell’s Q&A last week. Powell offered us an unusual clarity on where the Fed sees the risks to their current outlook, and it wasn’t the inflation side of their mandate.
It’s always comforting when the Fed confirms that it sees roughly the same things you think you are seeing. But if we combine signs that the labor market is weakening, with the evidence that inflation is (at least temporarily) in abeyance, perhaps we should keep an open mind on the chance of a January rate cut? You can do this while still acknowledging that the Fed thinks it has probably done enough. Ultimately, the decision will be about the data, and perhaps predictably, we already have concerns about the integrity of the data. We had assumed the shelter components would bias CPI releases lower for the next few months, because market rents have been falling (supply, migration trends, loss of housing transfers, fewer students and tourists), but we hadn’t factored in the probability of a lower OER.
There were two other stories that struck us as “interesting”. First, we were struck that Susie Wiles has now been outed as an influential figure in the WH. For those who have been paying attention, this is not news. WH CoS is always an important job, and she is likely to be the last person to speak to Trump on any given issue. In this administration, that’s real power! But why did the WH cooperate with the Vanity Fair “hit piece” at all? Our guess is that they want Wiles to have a higher media profile, probably because they think she will improve their approval ratings. And we suspect they are right.
In contrast, over in Europe, we had a demonstration of what real impotence looks like. Von de Leyen and Merz came out of this looking terrible. Of course, the core of the problem is that Belgium had a pretty good idea that they would be left with the $300bn tab and demanded indemnities from their EU colleagues. But even those indemnities wouldn’t have compensated Euroclear for the reputational damage to their EUR42 Trillion depository business. Maybe it’s just me, but I was also struck by this comment from Macron and Bart De Wever’s, “Russia’s most valuable asset” remarks to a Politico journalist, before he left for his dacha in St. Petersburg. We do live in interesting times!
