Christopher Joye: How investors can prepare ahead of a second "humiliating" RBA rate hiking cycle

Note: This interview was taped on Monday 29 July 2024. The interview occurred before both the Q2 inflation print in Australia as well as the August RBA meeting.

Few people are more opinionated about the opportunity set in global fixed income and the state of the macro environment than Coolabah Capital Investments Co-Founder and Chief Investment Officer Christopher Joye. Over the last few years, Joye has repeatedly argued that a recession is the only thing that will bring inflation down, that the Reserve Bank of Australia has not been gutsy enough to raise rates to a level that will bring down inflation, and that the economy is operating in two speeds.

But perhaps his biggest bugbear of late is one valued at $200 billion - the Australian private credit industry. The industry itself didn't properly exist until 10 years ago - which was also when interest rates were on the decline to near-zero levels. The promises of high yields and locked-in capital gains have enticed even the safest super funds and institutional investors. 

Now, with rates higher than at any time since the early 2010s and possibly about to march even higher, Joye foresees an almighty crash occurring.

"The problem with private debt is that most teams are tiny, and have zero experience running money in a default cycle because we haven't had one in Australia since 1991. You just have this massive wave of Ponzi-style money chasing yield," he argues. 

He's so confident that he's even challenged the biggest player in the Australian private debt market to take him on in a great debate. 

"I challenge Andrew Lockhart (co-founder of Metrics Credit Partners), who is the 500-pound gorilla of the private debt space, to an open debate on liquid versus illiquid credit, if he has the kahunas to go toe-to-toe with the liquid guys like yours truly," Joye challenges. 

More broadly, Joye sees a "70%+" chance of a hard landing/recessionary scenario globally, adding that it'd be a "miracle" if Australia escaped this cycle without a major downturn. As for asset prices, he says a telling moment is coming for the illiquid asset classes:

"You really want to avoid illiquidity like the plague. The asset classes that, for me, spring to mind are venture capital, private equity, commercial real estate, private debt, and high-yield bonds," Joye says.

"My view is that it's going to be a multi-year adjustment process," he adds.

In this edition of Views from the Top, Joye sits down with me to discuss his views on the markets, how he is positioning portfolios ahead of key macro regime changes, and where he thinks the biggest opportunities and risks will be in the next few years. Tune in to also hear a very personal story about how private credit has shaped his family's own finances - and his larger view about the industry. 

Finally, he shares his View from the Top, in a nod to the most prolific distressed debt investor in the world, Oaktree Capital Management's Howard Marks.

Timecodes

• 0:00 - Intro
• 0:44 - What makes Coolabah Capital's strategy to fixed income investing unique?
• 2:55 - Where Christopher Joye gets his signals from (tools, data, research)
• 5:00 - Why the global economy has not landed yet
• 7:56 - Joye: "70%+" chance the global economy has a hard landing
• 8:28 - How investors can prepare for a second RBA rate hiking cycle
• 10:37 - Private credit "is a disaster" and is full of "Ponzi-style money chasing yield"
• 13:28 - Should private credit investors be heading for the exits?
• 15:44 - What are the key opportunities and risks 2-3 years from now?
• 17:31 - Christopher Joye's View from the Top

Extra Reading

• Joye mentioned a PIMCO report on the state of private credit returns. You can read that report here or a great summary of the report in this Business Insider article.
• To read Howard Marks' note that I mentioned at the end of the interview, click here.