Oil Earnings And The New Fed

May 11, 2026 | Season 8 | Episode 15

Oil is back near the center of everything, and it’s forcing investors to hold two ideas at once: geopolitical risk is rising while U.S. stocks keep notching record highs. We walk through the morning’s market setup, from strong earnings and nonstop AI demand to the way higher crude can sneak into inflation expectations, bond yields, and Fed decision-making.

Then we go backward to go forward. John D. Rockefeller is often remembered as a monopolist, but the more useful investing lesson is how he built a system: rigorous bookkeeping, manufacturing-like refinery discipline, relentless waste reduction, and a supply chain he controlled end to end. That mindset helps us ask a better question about any company we own or want to own: what’s the durable process advantage that competitors can’t easily copy?

From there we hit the week’s biggest narratives: Barron’s bullish case for the S&P 500 moving toward 8,000, the post-Spirit Airlines reality that “ultra-cheap” airfare is fading, and why Delta and United increasingly look like loyalty and credit card businesses that happen to operate airplanes. We also cover Moderna’s pop on hantavirus headlines, what to look for in private credit through Ares Capital’s portfolio choices and payment-in-kind income, and what a Kevin Warsh-led Federal Reserve could signal on rates, the balance sheet, and a steeper yield curve.

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Transcript

Market Setup And Today’s Map

Alan Eppers 0:00

And now introducing Mr. Keith Lanton.

Keith Lanton 0:03

All right, good morning. Today is Monday, May 11th, almost halfway through the second quarter of 2026. We have certainly seen a tremendous amount of earnings reports. We'll talk about those. They have been very strong, and that has been one of the main factors driving markets higher, despite the geopolitical tensions that continue, as we certainly see the news flow in the headlines this morning, considering the U.S. and Iran, President Trump going to be heading to China to meet with President Xi, and concerns continuing between Russia and Ukraine despite a three-day ceasefire, Russia May Day parade. So you know we continue to be uncertain with what's going to happen with the price of oil, which clearly is an important determinant for the global economy, truly the lubricant of the global economy, and something that gets reflected and passed through to so many different other avenues of the economy, and therefore the inflation component of higher oil is something that markets are currently concerned about. But here in the United States, where we have a abundant supply of oil and gas, despite the higher prices being viewed as of a lesser concern, and we see the markets continuing to power higher. We'll talk about Barons and their outlook for for U.S. equities. We'll also take a dive into new Fed chair Kevin Warsh and what he's thinking, what we may be able to expect from the Federal Reserve. Perhaps that's playing into financial markets thinking. We'll talk about the airline industry with the bankruptcy of Spirit Airlines last week and what impact that may have on all of us as consumers, but also as investors. And then we'll also talk a little bit about the hantavirus and which stock seems to be the stock that the markets are gravitating towards. But let's

Rockefeller’s Edge Was Efficiency

Keith Lanton 1:59

let's start out this morning, talk about oil, because certainly oil energy is something that is front and center, and we're gonna go back and take a look at when oil first really became a major commodity, not only in the United States, but in the world, and who is more synonymous with oil than John D. Rockefeller, perhaps the first true super wealthy American businessman would today be viewed as one of the mega billionaires that make up the Mag 7. John D. Rockefeller, I think it's important to understand him because I think today we somewhat misunderstand who he was and what he was and why he was so successful. And if we understand that, we can potentially become better investors, and we could also perhaps become better at running our own businesses once we understand what made John D. Rockefeller tick and what made John D. Rockefeller so successful. Many of us think he was a person who monopolized the oil industry, and to an extent that's true, but we think of that often that he was a oil wildcat or a somebody who was out there drilling wells, and that was the key to his success. And well, he certainly eventually got into that business. That was not at all the key to his success. And a lot of the keys to his success were being in the right time at the right place because he was he was ready and he was prepared. So when we think about what made him so successful, we can think about what made Henry Ford, who we've talked about, so successful. And what made him so successful, we often think of as cars, but really the key to Ford's success is there were lots of people making cars in the early 1900s. What Henry Ford did is he revolutionized the assembly process and the assembly line. More recently, we can think of other super successful business folks like Steve Jobs and what he accomplished with Apple. But what Steve Jobs accomplished with Apple, when we think about Apple, is he was a genius at design, simplification, making sure things worked together, that they were aesthetically beautiful, and that the consumer truly appreciated the product. And then we had the perfect one-two punch at Apple, where we had Steve Jobs, who was a tremendous design and aesthetic and integrator. And then when he tragically passed away, Apple changed leadership to Tim Cook, who proved to be a masterful person who was wonderful at setting up global supply chains and logistics and being able to distribute Apple products throughout the world. So again, there were lots of cell phone manufacturers. There was Blackberry, there was there was Nokia, and there were there was Motorola. But Apple won the day and it was because of their creative design. And we can say the same thing about Bill Gates back in the 1970s, 1980s, the world was focused on the emerging PC revolution and that everybody was going to have their own personal computer in their homes. And what Bill Gates saw was yes, but we need an operating system to operate that computer. And if I can create the operating system that goes into all those computers, I don't need to be producing computers, I can be producing operating systems. Again, arguably going back into that time period, lots of folks would say that the Microsoft DOS operating system was not the best. Of course, that's opinion, but nevertheless, what Bill Gates was able to do is he was able to work out a deal with IBM and be able to get his operating system to be the one that was chosen. And we can also take a look and think about someone else in recent history, Warren Buffett. There are lots of great investors, , but Warren Buffett became a greater investor than all the others because he took an insurance company, novel concept, take an insurance company where you have the payout premium so many years later, 20, 30, 40 years, so you can invest for the long term. So he took an insurance company and turned it into an investment company, and then he took that process of being a value investor, being able to have super long patience, being a buy and hold investor, not a trader, and he turned it into something super successful because he had a different mindset and a different process. And these are the things to think about when you look to identify companies, and you perhaps think about what it is that you are doing, what is your business. Many of us are in businesses that we have lots of competition at, but what may distinguish us is not the business that we are in, but what is the need that we are satisfying, what are we doing differently than our competition? We may be in a business that produces any type of good or service, but if we are doing something in a different way, delivering in a different way, doing it more efficiently, more effectively, with a beautiful, more beautiful design, having a different mindset, that is what potentially can differentiate us. So let's go back in time, let's go back to the mid-1800s, let's go back to John D. Rockefeller, and Rockefeller's path to the oil industry was less about a passion for fuel and more about a passion for bookkeeping, math, and efficiency. He didn't start in oil, he actually started in produce. He didn't attend a four-year university. What he did is he attended a vocational school, and at the age of sixteen, he completed a 10-week business course at a school that was essentially a trade school for business where he learned accounting, double entry bookkeeping, and this knowledge is what enabled him to outmanage his competitors over the years. So before he ever touched a barrel of crude oil, Rockefeller was a commission merchant. And in fact, he started his first job on September 26, 1855, and he celebrated that day for the rest of his life, and he called it Job Day, the day that he began to work. And by the time he was nineteen years old, he formed a partnership and he was a middleman for farmers, so nothing to do with oil and gas at this point. It's eighteen fifty-nine, he's buying and selling produce, grain, hay, and meats. And what he was doing is he was becoming an expert at bookkeeping and he was becoming an expert at logistics in terms of moving around these commodities. And what he did was he became a truly intricate, intricate process of of being able to manage the flow of these goods and services. And what he saw is he then saw a budding opportunity in oil, but not oil as we think of it today as oil that will run your car or oil that will heat your home, but oil that was being used initially and for a long time as a cheaper and more efficient substitute for kerosene that was was kerosene was replacing whale oil. What's

Monetizing Waste Others Threw Away

Keith Lanton 8:35

interesting is Rockefeller, where he saw this opportunity in oil, he decided early on that he was not interested in digging wells, he wasn't interested in in in in wildcatting and taking big risks. He preferred the cleaner and more controllable world of the refinery, where his bookkeeping skills could squeeze every cent of profit out of the process. He didn't just do things differently, he approached oil refining with a level of scientific and list logistical precision that was unheard of in the eighteen sixties. While his competitors were out there looking for the next big strike, Rockefeller treated oil like a manufacturing process. He was diligently seeking to eliminate waste. He was obsessed with efficiency. At a time when other refiners were sloppy, he tracked every penny. Most refiners only cared about the kerosene that they produced and threw away the rest. You know what the rest was? The rest was what today is what makes up gasoline. At the time, that was waste, that was garbage. What used to happen is in order to create kerosene, you had to heat up oil to a certain temperature. In that process, before you got to the temperature that would distill or create the kerosene so the kerosene would be extractable, before you got to that point, you got to the point where you had what is today considered gasoline. So you produced gasoline and you produced kerosene from that oil. The gasoline for most was garbage. Throw it away, throw it into the rivers, in fact, burn it off so that you can keep what was most important, which was the which was the kerosene, and get rid of what is today the gasoline. But Rockefeller at the time, cars didn't exist. He was interested in that waste product and he was seeking a way in order to monetize it. So he developed things called paraffin, which then became wax for candles in the 1800s. He used that gasoline byproduct to make a product which many of us know today as basoline, that is called petroleum jelly, and machine lubricants is what he used that that oil for those byproducts. Instead of dumping them in the rivers, he created new revenue streams. And at the time, again, gasoline didn't exist, he was still diligently working on reducing his

Vertical Integration To Cut Costs

Keith Lanton 10:56

cost. He hated being dependent on third parties who could raise prices on him. So what he decided to do is he decided to own the entire supply chain. So what he did is when he noticed that that that the suppliers of oil barrels where he needed to store his oil were marking up the prices because he was demanding so much, he felt they were overcharging him. So what he did is he went out and he said, I'm gonna cut these suppliers out, they're charging me too much, I am going to make my own barrels. He went out and bought forest tracts of land. He built his own kilns to dry the wood and set up factories to assemble the barrels. And he dropped his cost for those oil barrels from $2.50 to 96 cents. Next, he decided I need to be able to transport this oil, and again, this is not oil and gasoline as we think of it today, this is kerosene still. He said I need to be able to transport this more cost efficiently with the next step. He felt that the railroads were trying to squeeze him on his shipping rates because he was becoming a big customer. And what he did is he invented and discovered and implemented the first network of pipelines to move oil directly from the wells to his refineries, effectively cutting the railroads out of the loop and reducing his logistics costs to a fraction of his competitors. The other thing he did as he grew, and he started to need the railroads again in order to ship oil to places where he didn't have pipelines, is he got large enough where he was able to negotiate very attractive rates for his for his shipping, but at the time he used a tactic which currently is no longer permissible. He didn't just negotiate rebates or discounts for himself, he negotiated drawbacks. Now, this was, with the benefit of hindsight, a ruthless tactic where the railroads would pay Rockefeller a fee for every barrel his competitor shipped. Essentially, his rivals were unknowingly subsidizing his business every time they moved their own product. So Rockefeller's success came down to a simple mathematical advantage. By the eighteen eighties, he could refine and ship oil for significantly less than anyone else. He didn't just compete on price, he designed a system where it was physically impossible for anyone else to be able to be as profitable as he was. And then what happened is as he was getting himself super efficient, the weeding kerosene maker taking advantage of all these byproducts of of what today is gasoline to make other

Preparation Meets Gasoline Demand

Keith Lanton 13:22

products. And then at that moment in time there was another simultaneous invention going on, and this was called the internal combustion engine, something that we view as gasoline, and Rockefeller was in the right place at the right time, or as the Roman philosopher Seneca would say, luck is what happens when preparation meets opportunity. Before anything else, Alexander Grambell said preparation is the key to success. So thinking about being ready, M ammad Ali, great sports figure, said the fight is won or lost far away from the witnesses, behind the lines, in the gym, and out there on the road, long before I dance under those lights. Now, Rockefeller himself was not a super loquacious person, but he did say, I do not think there is any other quality so essential to success of any kind as the quality of perseverance. It overcomes overcomes almost everything, even nature. So at this point in time, because of all this preparation, being the lowest cost producer, suddenly we start to see a demand for this product called gasoline. And then we have this gentleman, John D. Rockefeller, able to take his business, which was already tremendously successful. He was able to take it and expand it to a tremendously large business as the public started to crave gasoline in huge quantities, and he was able to standardize the type of product he delivered, standardized that gasoline, standardized that kerosene, and hence the name. That is why he called his company Standard Oil, because he wanted everyone to know that it was based on the standards that he set, the high standards he set versus the other brands that are out there that may not be as as reliable as Standard Oil. So we can take that lesson away, think about what business that we are in, what it is that we are doing that is unique or different, and very often it's not the product or service that we are delivering, and think about how this may impact not only our our business, but impact us in terms of investing when we look at different companies, what it is that they are doing that is super unique, super special, do they have a leader or a leadership team at the top that is able to think differently and be able to deliver on that unique value proposition? All right,

AI Stocks Push Records Despite Oil

Keith Lanton 15:43

so changing gears entirely to where we are this morning as we are up against the backdrop of events in the Middle East and what is taking place as well with the upcoming summit between President Trump and President G. Equity futures right now are pointing to a flattish opening following the sixth consecutive higher weekly finish for the SP and the NASDAQ. Strong earnings and a seemingly endless demand for AI have powered the indices to fresh record highs in recent weeks, with the market largely overlooking hostilities between the U.S. and Iran. Momentum around earnings growth could take a back seat this week as there is a considerable number of companies set to report, with only 11 SP 500 companies on a considerable drop in the number of companies set to report, with only 11 S P 500 companies reporting. Still, the market is attempting to look past volatility on the geopolitical front, with futures trading near fair value despite a bump in oil prices this morning. Dow futures are down about 20 points, SP futures down six, Nasdaq down 31, so very close to flat this morning. Oil off of its highs of the morning, still trading up about $2 a barrel to about $97.5 a barrel. Bond market because possibly because of these elevated oil prices a little weaker, the 10-year treasury up to a $439 from about a $436. Equity indices in the Asia Pacific region started the week on a mixed note. One super strong market powered by the AI momentum is the South Korean Cosby, with stocks like Samsung and SK Heinex powering the South Korean markets higher. Japanese market down about half of a percent, Hong Kong Hang Singh up one-tenth of one percent, China was up one point one percent, India was down one point seven percent. Speaking of Asia, Treasury Secretary Bessant will visit Japan and South Korea over the next couple of days ahead of President Trump's trip to China. China did report a solid trade surplus for April, but the report did show a drop in crude oil imports, as China may be having difficulty getting all the oil it needs given the tensions and the blockage of the Strait of Hormuz. In Europe, major European industries are trading mostly on a lower note, Italy up slightly, rest of Europe down a little bit this morning, the big drawdown in France down a little bit over 1% in the in the French markets. Taking a look at some individual stocks, Apollo Global Management symbol APO is in discussions to sell mid-cap financial investment corporation. That symbol is MIFC, that's according to the Wall Street Journal. An IPO this week from Cerebras, symbol CBRS. They have increased their IPO range to 150 to 160. Cerebras certainly right place, right time. They are a company that makes wafer processors for artificial intelligence chips, and they also have software that is tied into that, and markets eagerly anticipating the IPO from Cerebras symbol will be CBRS. Recent stock that had gotten lots of attention when the world was focused on cryptocurrency. We've certainly moved past that and moved on to AI, but the Circle Group, which is a stable coin infrastructure company reporting earnings per share, and the stocks up about 3% this morning. Symbol on circle is CRCL. Some news this morning. President Trump saying Iran's latest peace proposal is totally unacceptable. Wall Street Journal saying the peace proposal left some gaps between both sides on the nuclear program, so suggesting maybe there is some room there to negotiate. Forty countries will meet today to discuss a mission to escort ships through the Straits of Hormuz. Israeli Prime Minister Benjamin Netanyahu was on 60 minutes last night. He says the war in Iran is not over until a rich uranium is removed from Iran. Also getting lots of attention this morning comments that that Israel wants to end its $3.8 billion a year that it gets in military support from the United States over the next 10 years and would like to shift from aid to partnership. New York Times saying that when President Xi and President Trump meet, that the top topics will be, of course, Iran, trade, artificial intelligence, and Chinese maybe seeking some concessions from the U.S. on Taiwan. So we'll see what President Trump decides to do with respect to Taiwan. Energy Secretary Chris Wright said the White House is opening to suspending the glass gas tax. Bloomberg is reporting that American and French passengers on the cruise ship with the Hanavirus, some passengers now who have come off, one American, one French testing positive, and that certainly is a source of some concern as well, although the initial reports from medical experts is that the Hanavirus does not spread easily, but nevertheless a growing source of concern. Axios reporting that Republicans' chances of keeping the House are increasing following court rulings and redistricting, but Democrats are still feeling confident heading into the midterms. Reuters reporting that the Senate Banking Committee will hold a vote on a bill that would create a regulatory framework for cryptocurrencies. And political reporting that the House will remove a provision for the housing bill that requires rental homes built by large investors to be sold after seven years. That's something that was getting lots of attention. pushback from Wall Street and possibly Wall Street will quietly be able to get what it wants. We'll see. Nvidia may be the leader in AI chips, but Alphabet is emerging as big tech's broad winner with businesses including Google Search, Google Cloud, YouTube, Waymo, manufacturer of artificial intelligence chips, and their Gemini AI model, which ranks among the best. And Google is also a major investor in Anthropic, which has With its clawed AI tool, has gotten lots of praise from users. this week, what do we got going on? We report that about a dozen SP 500 companies will be reporting earnings this week, including Constellation Energy today, Cisco Systems on Wednesday, applied materials on Thursday. The height of the economic calendar this week will be the consumer price index, which will come out on Tuesday. On Wednesday, the producer price index will be released, and the Census Bureau will report retail sales on Thursday. Today, we will get a report on new home sales. Thursday is when President Trump is scheduled to meet with President Xi in China, and they will go over the topics that we discussed. All right, let's move on to Barron's.

Barron’s Target For S&P 500

Keith Lanton 22:48

Barron's ran a story in the trader column. Why the S P 500 is headed to 8,000, which is about 8% higher than where it is currently. It's about $7,400 right now. Barron is saying that everyone seems afraid of the stock market's current rally, continuing conflict in the Middle East, high oil prices, and inflation concerns will do that. Yet the SP 500 rose 2.3% last week. The NASDAQ was up 4.3%, the Dow up just 0.1%. Nasdaq and SP closed the week out on record highs. Driving the gains, as we mentioned, super strong earnings. Through Thursday, 87% of SP 500 companies had beaten profit estimates. Only a few companies came up short. Those stocks were punished, but those that beat on the top and bottom lines saw gains on average of 1.1%. Those gains have been the bedrock of the recent market rally. Barron's is cautious saying that while they are optimistic of more gains, that trees don't grow to the sky, so rallies won't last forever. But if you were to take a look at this rally and take a look at when when the SP 500 gains 12 SP 500 when the S P 500 sets a record high, typically the gains over the next 12 months are about 12 percent. So getting to that 8,000 maybe more likely than not, but certainly there are some obstacles along the way, which we've talked about, the Iran conflict, continuing earnings momentum, inflation, Federal Reserve policy, all potential obstacles, but Barron's feeling that with the momentum and the wind at its back, that the markets can trade higher in the near term. We talked about Standard Oil, we talked about Rockefeller, we talked about Ford, Microsoft, Apple.

Airlines Shift From Cheap To Premium

Keith Lanton 24:46

What business are they in? Well, Barons ran a cover story talking about the end of the ultra cheap airfares and talking about the airlines and what we have to look forward to going forward. But one thing that we can think of here with with respect to airfares is that we are going to see a sea change in the airline industry with the elimination of one ultra-low-cost carrier, also known as ULCC, kind of the definition. That was Spirit Airlines, which succumbed to a perfect storm. Jet fuel prices that doubled this year, some nagging issues with engines that sideline some planes, and a customer base that was squeezed by inflation as they catered to a demographic that was more price conscious. So for travelers, the immediate fallout is clear. Domestic airfares are already up 36% this year. We're already seeing a shift in airlines that typically catered to more budget-oriented customers. JetBlue rolling out junior mint, , so some extra leg room more like business class seats. Also, Frontier is adding roomier seats, and Southwest has abandoned its legendary open seating policy to start charging for bags and legroom. So the industry is realizing you can't win on price alone when fuel and labor costs are this volatile. So, what is the play for investors? Well, the blue chip skies for investors, some are suggesting that the blue chip airlines, maybe Delta and United, having emerged as the industry winners. They aren't just flying planes, they are running high margin loyalty programs and credit card partnerships that don't care about the price of oil. So the bottom line is what is taking place in the airline industry is we are focused on flying airplanes, and that's certainly an important part of the airline business. But perhaps what we may not realize is that the credit card operations are the key operations for the blue chip airlines like Delta and United, and to a lesser extent, American, which is seeking to get their operations in order and be more competitive with Delta and and United. So what we have here is we have Delta and United and up-and-coming American are credit card companies that happen to operate an airline. So if you look at the financial breakdown for Delta, which is the financial leader in terms of in terms of the airlines, they received $8.2 billion from American Express in 2025. Their operating revenue is $63.4 billion. So about 12% of their operating revenue came from American Express. But when it comes to operating income, they had total operating income of $5.8 billion. They got $8.2 billion from American Express. So to put that into perspective, their money or the revenue that they received from American Express was 1.4 times their operating income. In other words, 100% of their profitability could be attributed to their air their their credit card business. And early 2026 data shows the dependency on this credit card business is deepening as fuel costs rise and traditional flying profit margins are squeezed. But the long-term goal at American Express is to raise that $8 billion to $10 billion annually. At the same time, it's to turn around those airline operations. The expectation is that fuel costs will come down, and then you will have not just a headwind and a tailwind, to use airline terminology, but but two tailwinds operating for these airlines where they will be earning money flying people from point A to point B, especially as they enhance their premium offerings. At the same time, they will be seeking to increase the revenue that they are getting from those from those loyalty programs, and those loyalty programs are quietly becoming super significant and creating a lot more of a stable business for these airlines. If you think about going back 10-15 years ago at a time like this, airlines like Delta United American would be suffering mightily because of these high energy prices, high jet fuel costs, and today that is a lot less of the case. So again, that begs the question: what business are the major airlines in and how have they transformed their businesses? We talked about the hantavirus and the spread of

Moderna Pops On Hantavirus Focus

Keith Lanton 29:18

human transmission, and company that has become the market's favorite for being able to hope for for a cure for the hantivirus has become company that we are all super familiar with from the COVID pandemic, and that is Moderna. It's become the market's favorite hantivirus stock. Chances of hantavirus becoming a another COVID-19 appear unlikely for now, but the market is positioning itself for that outcome anyway, as as we see Moderna's stock this morning is up another 7.2% to 58.25 in pre-market trading after U.S. National tested positive for the Andy strain of the virus. the stock was up 12% on Friday, and right now it's on track for its highest close since 2024. The company confirmed it was exploring a hanovirus treatment in a statement on Thursday, describing its efforts as early stage and ongoing as part of a broader push to address emerging infectious diseases. All right, two more things we're gonna talk about. One is a big private credit company, and then we'll talk about Kevin Walsh at the Federal Reserve and how he may change Federal Reserve policy.

Ares Capital And Private Credit Scrutiny

Keith Lanton 30:33

So let's talk about a big private credit company that trades on the New York Stock Exchange, and this company's is Aries Capital, symbol is ARCC, and Aries Capital has remained an investor favorite even as investors have exited from many private credit funds. Aries trades at just 1% below its book value, while publicly traded credit REITs are averaging 20% discounts to book value, and that could be in part because it pays a dividend that is considered generous, and most Wall Street analysts rate it a buy. The $30 billion Aries Fund, symbol ARCC, is the largest publicly traded business development company, a form of a private credit fund exempt from corporate tax. The fund has averaged 12% annualized returns since its 2004 initial offering and has maintained or raised its dividends for 17 years running. So what's the concern? Well, Aries differs from other high-rated BDCs in ways that could arguably, according to Barron's, make it riskier. More of its holdings are equity investments than other BDCs, business development companies, while fewer are in first lien senior secured loans, which is something that many private credit funds are viewing as kind of the gold standard here in time of concern. Notably, more of the investment income bucked by Aries is in the form of IOUs, means I'm going to pay you later. I don't have the cash on hand. And they've done that in order to win loan deals. Aries allowed many borrowers to defer paying cash interest with what's called payments in kind. Payments in kind on notes are instead of me paying you cash, I tack the interest on to what you owe me. So if you owe me $100,000, you're paying me interest of 10%. At the end of the year, you're going to owe me $110,000. $100,000 plus the $10,000. You owe me $110,000, I'm going to charge you interest on $110 next year, but you haven't paid me a cent. So there's a real strong necessity that you're able to pay me back. Otherwise, I didn't get the interest ever. In 2025, non-cash payment in kind, interest and dividends were 34% of Aries' net income. Ten years ago it was about 8%. In most of the past 10 years, Aries dividend payouts haven't been covered by cash components of net interest and dividend income, according to the fund company's financial statements, according to Barron's. Money from loan repayments, investment gains, and capital inflows helped Aries satisfy its dividend obligations. Now Aries responded that they have had very few bad loans, and its approach has worked for two decades. They told Barons in the past five years dividends were fully covered by cash collected as interest and dividends along with investment gains. Now to calm nerves, other fund managers have highlighted how much of their holdings are first lien senior secured loans, which sit on top of a company's capital stack and get paid first if a borrower comes to grief. Such loans made up 80% of the average business development company portfolio last year, according to Raymond James. Blackstone, in fact, for their secured lending fund, another highly valued business development company, says that 98% of their investments are first lien loans, but first lien loans are only 60% of the portfolio at Aries. 11% were second and junior loans, and the remaining 29% were various kinds of equity or stock. Now, Aries says that their dividend equities and selections have done well. In fact, the sale of four equity positions helped them cover the March quarterly dividend. So clearly Aries taking a different approach, saying it has worked. The market right now has confidence in Aries, but Barron's saying you really need to dig deep and make sure that you're comfortable with what they're doing, not necessarily saying they can't continue to do what they're doing, not saying they can't continue to have success, but suggesting that diligence is required and that their the composition of their portfolios perhaps is not as bulletproof in times of distress as some of their competitors. Whether that matters or not probably depends on how distressing things get. All right, finally, new Fed governor coming in, new sheriff in town, Kevin Walsh will be the next Fed governor.

Kevin Warsh And A New Fed Framework

Keith Lanton 34:49

The dominant view on Wall Street is that Kevin Walsh will be boxed in, meaning that he will be boxed in between President Trump who wants rate cuts and other Fed governors who don't want those rate cuts. Trump administration obviously pushing for those rate cuts, and the Fed's policy committee at the moment looks like they're headed in the opposite direction. But Barron saying that assessment underestimates both the man and the moment. Barron's saying that Walsh has a workable path to satisfy both constituencies and it runs through the middle. If he convinces the Federal Open Market Committee to hold rates steady through the summer, removes the Fed's current signal that a rate cut is coming, and waits for more clarification on the impact of energy prices, he will accomplish three things. One, he'll satisfy the Hawks on the committee, two, he'll deny the White House an easy target, and three, he'll preserve the credibility he will need to make larger moves later this year. And the White House is already taking a softer tone with the Fed. In fact, Treasury Secretary Bessant, who had previously argued for aggressive Fed rate cuts, has softened his position, saying that he is no longer demanding rate cuts, and Walsh has therefore time to wait without looking like he is defying the White House. Investors already just adjusted their expectations and they expect the Fed to be on pause, keeping the Fed funds target rate at its current rate of 350 to 375. Now, if Walsh can buy time, hold those rates steady throughout the rest of this year, perhaps until December, he may be able to navigate pushing through some of the reforms that he is seeking. And one of those reforms is to reduce the Fed's $6.7 trillion balance sheet. He has suggested that a balance sheet more akin to $3 trillion would be appropriate. He's also looking to change the expectations of how we measure inflation. He is suggesting a measure that doesn't look at the PCE, which is what the current Fed looks at, doesn't look at the CPI, which the Fed at one time focused on. Instead, he suggests looking at a measure which is known as a trimmed mean measure. And what this does is it takes off both extremes, things that are causing the inflation rate to run very hot and things that are running the causing the inflation rate to run very cold, so taking out the outliers, whatever they are, not just food and housing, and taking a look at that at that trimmed measure as kind of a now I'm paraphrasing a new core measure. And currently, if you take this trim measure and view it as a new core measure, that is currently running closer to the 2% level that the Fed views as the justifiable or the appropriate rate for inflation. So if Kevin Walsh can trim the balance sheet, if he can get us to focus on this trimmed rate of inflation, well then the expectations are that he may be able to get other Fed governors to go along with an interest rate cut later in this year as he seeks to shift Fed policy and to shift how the Fed operates by making these changes. Now, what would potentially the effects of these changes be if they were in fact to come to fruition? If he is successful, if he follows through on this plan and he is to trim the Fed's balance sheet and he is to cut interest rates and he is to get us to focus on the trimmed rate of inflation, it's very possible experts suggest that we could see a steeper yield curve. In other words, he would be able to lower those short-term rates, but some suggest that by trimming the Fed's balance sheet and concerns remain out there about the U.S.'s growing debt, that the h longer-term rates would remain elevated. Picking the exact you know rates that you'd see on 10 years and 30 years is of course impossible, but the the general feeling is that you'd have a steeper yield curve, whatever those short-term rates are, those long-term rates would be would be higher, possibly meaningfully higher, whatever meaningfully means, and you'd have a steeper yield curve going forward. Some are suggesting that that's what the for the the Warsh Fed may may look like, an environment where we see a steeper yield curve, a little bit less direction from the Fed, a little bit less forecasting from the Fed, and a softer balance sheet from the Federal Reserve. And that, of course, will all have implications for not just bonds, but other investments, including stocks and how companies manage their balance sheets and how individuals manage their personal finances when it comes to things like mortgages. If in fact we are in for a time of lower short-term rates, that would potentially create an opportunity for homeowners possibly to step up, buy new homes, and engage in in mortgages that have arms or shorter-term interest rates where they are adjustable to short-term rates. So, time will tell. These are some of the things that may be coming down the pipeline, and we will , of course, adjust as we get more information.

Where To Listen And Final Disclosures

Keith Lanton 39:36

That's everything I've got.

Alan Eppers 39:37

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Sophie Cohen 39:55

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