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In today’s episode, Willy welcomes Lotfi Karoui. Lotfi joined Goldman Sachs in 2007 and was promoted to managing director in 2015. Currently, he is the Chief Credit Strategist and head of the Credit Research Group at Goldman Sachs, one of the world’s leading investment banking, securities, and management firms. His research covers a wide span of topics, including income markets, interest rate models, and macro-finance. His work is published in various academic journals, including the Journal of Financial Economics, Management Science, the Journal of Derivatives, and the Journal of Economic Dynamics and Control. To start, Willy asks Lotfi about Paul Tudor Jones’ opinion in a recent CNBC interview, in which he stated, “You don’t want to be in bonds or stocks right now. I can’t think of a worse macro-environment….” Lotfi points out the paradigm shift of the newfound ability for investors to park their cash, decreasing the urgency of putting money in bonds and stocks. The built-up risk premium also becomes a factor, citing widened corporate bond spreads as an example. Lotfi continues to explain that “anything that has a little bit of duration risk has probably its worst start ever,” encompassing investment-grade and treasury bonds. The terminal value of the fed funds rate is set to peak at 3%, which coincides with Goldman Sachs view of the ideal target to dip one’s toes into bonds. Lotfi noticed a significant trend in the past five economic declines: The slope of the yield curve has done a fantastic job at predicting future recessions. However, he enumerates two caveats – correlation is not entirely causation, and the current cycle has proven to be more nuanced since the onset of the Great Moderation in the early eighties. He also emphasizes the imbalance in the labor market, with the federal government slowing down the economy without pressuring businesses to lay off employees. He presents his definition of a soft landing in terms of the ongoing inflation and status of the employment market and rates – the slowing down of the economy below potential while avoiding recession that causes companies to overreact. He states that the odds of a recession happening over the next two years are 35%. Tune in to this episode of the Walker Webcast — State of the Credit Market with Lotfi Karoui, Chief Credit Strategist at Goldman Sachs. Key Points In The Webcast: 00:00 Introduction 00:14 Willy welcomes Lotfi Karoui, Chief Credit Strategist at Goldman Sachs to the show 02:35 The paradigm shift in bonds, stocks, and more risk premium 04:47 Lotfi’s perspective on Jeffrey Gundlach’s opinion on treasury and investment-grade bonds 07:14 How the slope of the yield curve predicts recessions and the imbalance in the labor market 19:30 The stability of the energy industry in handling shocks in the US vs. Europe 21:35 The disconnect between the credit cycle and the business cycle 37:47 Lotfi’s predictions on the current dramatic shift in investments 42:32 The slowdown in globalization and the change to regionalization 48:25 The development of ESG fixed income 51:15 Lotfi’s credit market forecast GET NOTIFIED about upcoming shows: » Subscribe to our YouTube channel here: / @walkerdunlop » See upcoming guests on the #WalkerWebcast here: https://www.walkerdunlop.com/webcasts/ RELATED WEBCASTS: Tune in on Wednesdays for fresh perspectives about leadership, business, the economy, commercial real estate, and more!