Canyon Partners’ Friedman says the markets can handle a recession and

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Even if the economy faces two quarters of contraction — the traditional definition of a recession — Josh Friedman thinks it’s strong enough to withstand a more serious slowdown. Friedman is co-founder, co-chairman, and co-CEO of the $26 billion credit giant, Canyon Partners. He sat down with Leslie Picker to explain why he believes the markets “can tolerate a little bit of stress.” 

While a stronger economy means fewer opportunities for distressed investors like Friedman, he said his firm is prepared with “comprehensive shopping lists of securities” in other areas like secondaries, loan originations, and securitized packages.

 (The below has been edited for length and clarity. See above for full video.)

Leslie Picker: I was looking back at our interview from January and at the time, you said we were at a fork in the road. From an economic and market standpoint, that prediction appears to be very prudent, given everything we’ve seen in the equity market sell-off, the fixed income sell-off, shift in monetary policy, geopolitical strife, and more over the last six months. It’s definitely the epitome of a fork in the road. So, I’m just curious how you’re sizing up the current environment, given what we’ve seen since we last spoke,

Josh Friedman: I think we have to start by looking at where we came from. When I last talked to you, I think it was the day that the market dropped something over 1,000 points and bounced back. And my basic comment was, well, things were just too expensive. Markets fluctuate. And a confluence of recovery from COVID supply constraint and excessive stimulus both from the Treasury and from the Fed caused quite an amount of over speculation and froth in almost every asset class that you could imagine – whether it was real estate cap rates, whether it was SPACs, whether it was equities, whether it was credit markets, where you had no interest, no spread, and still had credit risk. So, it was not surprising to see a pullback from that just on its own, because those things are always self-correcting. There’s always some kind of a mean reversion. But now, we’re in a little different place because the Fed underestimated so significantly the more embedded inflationary aspects that are in the economy. And that’s kind of the fork in the road that we’re at right now.  Will there be an ability of the Fed to rein this in quickly? Will people’s activities in response to the Fed’s comments, cause that to happen by itself? Will there be enough demand destruction to contain inflation? Or maybe that’ll happen all by itself, even without the Fed doing what it asserts that it will do. 

Picker: So, the fork in the road is essentially the debate that I think pretty much everybody is having right now is, will there be a soft landing or a hard landing? And will the Fed be able to accomplish the potential for a soft landing? And I’m just curious how you are looking at this from…