Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Lisa Abramoids along
Speaker 1: with Tom Keane and Jonathan Farrow. Join us each day
Speaker 1: for insight from the best in economics, geopolitics, finance and investment.
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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App. Let's bring
Speaker 1: in Seth Carpenter, who has been quoted so frequently this
Speaker 1: morning on the show, chief global economist at Morgan Stanley
Speaker 1: is Seth, what's your initial reaction to these numbers?
Speaker 2: Yeah, the tick up I think is there that there
Speaker 2: is a bit of softening. We've been saying for a
Speaker 2: long time. I think everybody's been looking for some softening
Speaker 2: in the economy as this year progresses, and I think
Speaker 2: that's what we're getting.
Speaker 3: The level is important.
Speaker 2: It's still quite low, so it's not as though we've
Speaker 2: fallen off a cliff or anything like it. I think
Speaker 2: the market reaction that you cited is also important. You know,
Speaker 2: we have one more rate hike as our baseline forecast
Speaker 2: at the main meeting, and then none after that, and
Speaker 2: I think the market is going to have to sort out.
Speaker 2: You know, when is the Fed going to say the
Speaker 2: softening is there, it's enough softening without it being too
Speaker 2: much softening, And you know, these data go go in
Speaker 2: that direction.
Speaker 1: So we get these data points, and then we also
Speaker 1: got earlier this morning, and we'll get throughout the day
Speaker 1: the regional banking results, which have also pointed to potentially
Speaker 1: some withdrawal of credit. How do you factor that into employment?
Speaker 1: How do you factor that into the Fed's decision?
Speaker 2: The banking situation is clearly important. It tightens financial conditions,
Speaker 2: it tightens access to credit. But we have to keep
Speaker 2: in mind the tightening access to credit and tightening financial
Speaker 2: conditions is exactly what the FED has been trying to
Speaker 2: do since they started raising interest rates. The hard part is,
Speaker 2: you know how much is this? Chair Powell at the
Speaker 2: last meeting, at the March meeting said maybe it's about
Speaker 2: one or two rate hikes worth of tightening. Sure, we've
Speaker 2: got much data since then that says that he's wrong
Speaker 2: about that. It clearly matters. It clearly has increased cost
Speaker 2: of funding for banks, but we haven't seen again, we
Speaker 2: haven't seen. It looked like things are going off of
Speaker 2: a cliff, and so it's marginally more tightening, which again
Speaker 2: for us is the reason why one more heighten makes sense.
Speaker 2: But we don't need to go back to the place
Speaker 2: where the markets are pricing at six percent peak rates.
Speaker 1: For the FED, there's this tension right now when you
Speaker 1: talk about the lag effects that will take place as
Speaker 1: some of the credit tightening continues at a time when
Speaker 1: you're already seeing deterioration in the labor market. Do we
Speaker 1: have a sense of how controlled this increase in unemployment
Speaker 1: could be. Are we just going to go to four
Speaker 1: and a half percent, as a FED is predicting, and
Speaker 1: stay there or is there a risk that it will
Speaker 1: accelerate on itself which is traditional in downturns.
Speaker 2: Risk absolutely, and the amount of control that you the
Speaker 2: way you phrase it control, that's what the FED is
Speaker 2: hoping for, but it is it is impossible to believe
Speaker 2: that they have a huge amount of precision over these
Speaker 2: sorts of things. They're going to be feeling their way.
Speaker 2: I think what might be instructive for this cycle is
Speaker 2: to go back to the nineteen nineties. That hiking cycle
Speaker 2: was pretty fast like this one. At change pace. They
Speaker 2: stopped hiking at one point, and then they actually cut
Speaker 2: a little bit. They did a mid cycle correction, if
Speaker 2: you will, cut a little bit, and then held rates
Speaker 2: high for several years after that. I think that kind
Speaker 2: of recalibration is entirely possible, precisely because there's not going
Speaker 2: to be a lot of precision over the real economy.
Speaker 1: You know, as we talk about the destination, that was
Speaker 1: one of the big comments people at the IMF had that,
Speaker 1: whether they were on the side of the IMF or not,
Speaker 1: that we're going back to where we were pre pandemic.
Speaker 1: Based on some of these additional views with respect to
Speaker 1: credit tightening, with respective potentially overshooting, with the pace of
Speaker 1: unemployment creeping higher, do you think that that is the
Speaker 1: highest likelihood that we are going back to a low inflation,
Speaker 1: low right situation.
Speaker 2: I'm not convinced that's the single most likely outcome, at
Speaker 2: least not for the next few years. Is there a
Speaker 2: possibility of a recession, Absolutely, the risks are clearly higher
Speaker 2: than they were before. However, I'm enough to remember when
Speaker 2: we've had recessions in this country without the funds rate
Speaker 2: going back to zero, and I suspect even in that version.
Speaker 2: It's not our baseline that we have a recession. But
Speaker 2: even if we did have a mild recession, I don't
Speaker 2: think they're going to cut all the way to zero.
Speaker 1: How does the geopolitical overhang factor into this? And I
Speaker 1: say this as Treasure Secretary Jenne Yellen is said to
Speaker 1: speak in less than two hours and talk about how
Speaker 1: they're going to put national security before economic influence. How
Speaker 1: much does that factor the fragmentation and the higher inflationary
Speaker 1: regime going forward.
Speaker 2: Oh, it just adds another layer of complexity and difficulty
Speaker 2: in forecasting when it comes to the inflationary side of things.
Speaker 2: If we disrupt global supply chains, it does mean that
Speaker 2: any urgent demand won't be met with as much supply
Speaker 2: or as quickly with the supply, and so it could
Speaker 2: lead to more bouts of inflation. I don't know that
Speaker 2: it necessarily means we shift into a permanently higher inflationary
Speaker 2: regime there. That's going to depend on whether or not
Speaker 2: the FED can control the economy rein in aggregate demand
Speaker 2: to keep inflation from staying high. But ultimately it will
Speaker 2: make things more volatile. You'll see more macroeconomic volatility.
Speaker 1: We've been talking about all the FED speak that we're
Speaker 1: going to be getting today, jamming it in ahead of
Speaker 1: the quiet period. What do you hope to learn from
Speaker 1: FED speakers?
Speaker 2: I know, as always it's a question of what is
Speaker 2: it that they're looking at. I have consistently had the
Speaker 2: view that they are trying to slow the economy but
Speaker 2: not kill the economy, And so the real question is
Speaker 2: is the softening that we're seeing in the labor market,
Speaker 2: just like we were talking about before with the initial
Speaker 2: claims data, is that softening enough for them to say,
Speaker 2: we'll stay roughly where we are. Like I said, our
Speaker 2: base case is one more hike. Are we seeing enough
Speaker 2: downward momentum for them to feel comfortable that the economy
Speaker 2: is lowing enough for inflation to continue its downward trend
Speaker 2: and for over the next couple of years to get
Speaker 2: back to target.
Speaker 1: Seth Carpenter of Morgan Stanley, thank you so much for
Speaker 1: being with.
Speaker 4: Us to ignore this the feed speak.
Speaker 1: Well, I really wanted you to do that again because
Speaker 1: I really enjoy it when.
Speaker 5: You do it.
Speaker 1: Come on, go ahead, you want me to go again,
Speaker 1: Waller Mester, it's really good anyway, all of them, they're
Speaker 1: going to be sting many of us alongside.
Speaker 4: It's just shaking his head. All of this joined us
Speaker 4: from avicor Jenny. What do you make of that just
Speaker 4: before the quiet period that many Feed speakers.
Speaker 5: What I make of it is that your ability to
Speaker 5: do tongue twisters is absolutely phenomenal.
Speaker 4: An you know, DJ back in the day, of course,
Speaker 4: was absolutely so.
Speaker 5: All I can say is is when looking at this
Speaker 5: morning and the setup, given the earnings volatility we've seen
Speaker 5: so far today, is cautious at the outset. Let us
Speaker 5: recall the last time Secretary Yellen spoke alongside the Fed,
Speaker 5: which was Jay Powell. We had an enormous amount of
Speaker 5: volatility and the fact that we're in all likelihood going
Speaker 5: to get two conflicting messages, a bunch of Fed speak
Speaker 5: coming out, probably hinting towards one and done, which is
Speaker 5: our view as opposed to okay, well the economy is
Speaker 5: now taking a second spot to political relations coming from
Speaker 5: the Treasury secretary. There's a lot of confusion.
Speaker 4: One and done, then pause. Some people see that pause
Speaker 4: as bullish, others don't. I might include you in that.
Speaker 4: Over the weekend, I was reading your research to start
Speaker 4: a new week. This quote jumped out to me, twenty
Speaker 4: three's pause is likely to see a further sell off,
Speaker 4: recession volatility spike before the inevitable new ballmarket gain. Can
Speaker 4: you put some numbers on that? How are you thinking
Speaker 4: about that situation?
Speaker 3: Sure?
Speaker 5: So, if you look at it, the history of pauses
Speaker 5: tends to be on a twelve month basis quite positive.
Speaker 5: We expect that. But the problem here is you've still
Speaker 5: got to get through the recession. And yes, we've all
Speaker 5: been waiting for the recession for a year now. Remember
Speaker 5: there were two back to back negative GDP quarters to
Speaker 5: start twenty twenty two, So the watch is on. But
Speaker 5: ultimately part of this calculus is that we've had so
Speaker 5: much more tightening since that time. It doesn't take away
Speaker 5: the concept of recession. The watchpot is going to boil.
Speaker 5: And so for us, when we look at the last month,
Speaker 5: what's clear is that the reason the market traded positively
Speaker 5: into the trough of the banking turmoil back in March
Speaker 5: is because it began discounting the pause prematurely. It's in
Speaker 5: the price now, so it isn't necessarily a bullish outcome.
Speaker 5: And look, it's been our expectation, as you know, and
Speaker 5: This is a frustrating market for both bulls and bears.
Speaker 5: But it's been our expectation for six months now that
Speaker 5: at some point, given a recession ahead of US one
Speaker 5: or more than May, your indsease is going to test
Speaker 5: those October lows.
Speaker 1: So if you were John Williams, you'd probably be glued
Speaker 1: to Eternal this morning looking at these small bank earnings
Speaker 1: and parsing through their balance sheets to understand the state
Speaker 1: of credit creation in the United States. It seems like
Speaker 1: what they're doing right now, what would your conclusion be
Speaker 1: in terms of is this just an idiosyncratic issue that
Speaker 1: leaves us in the same place, or was this clearly
Speaker 1: something more.
Speaker 5: Well, you know, the whole concept of idiosyncratic across every
Speaker 5: company that's reporting is a little bit of a misnomer.
Speaker 5: In general. This is a process. Part of the fact
Speaker 5: that we created so much liquidity through fiscal and monetary
Speaker 5: expansion over a couple of years to fight the pandemic
Speaker 5: means that the other side of this unwind is a
Speaker 5: process as opposed to a shock. This is all part
Speaker 5: of the process, and frankly, when you look at the
Speaker 5: longer term, it's better that it's going to take a
Speaker 5: while than you know, more sort of near death experiences
Speaker 5: like last month, But doesn't mean that the stress is
Speaker 5: going to go away. It's just going to roll out
Speaker 5: over a longer period.
Speaker 1: What does this process mean? Does that mean that regional
Speaker 1: banks are uninvestable for you? Or does this mean that
Speaker 1: you're going to just sort of see a roll up
Speaker 1: in a survival of the fittest.
Speaker 5: So the question here is where are the next dominos
Speaker 5: likely to fall? And I don't know that we know
Speaker 5: any more about that now than we did two or
Speaker 5: three weeks ago, or even two or three hours ago
Speaker 5: before these reports came out, So I think we'll just
Speaker 5: have to look. And part of the issue that we
Speaker 5: have is that you had such a sell off over
Speaker 5: that month in the regional banks. And look, the fact
Speaker 5: of the matter is is when you sort of anticipate
Speaker 5: the news and I don't think anyone's surprised by the
Speaker 5: earnings reports we've seen this morning, but the shares don't
Speaker 5: respond even after this massive sell off. That's not a
Speaker 5: great message.
Speaker 4: Is Tesla idiosyncratic?
Speaker 3: No?
Speaker 2: Why not?
Speaker 5: Because basically what you're seeing, and this is the dichotomy
Speaker 5: and why the market's actually been trading sideways look ed.
Speaker 5: Heiman has been extremely optimistic about the trajectory of inflation
Speaker 5: over this year and internets we're going to get a
Speaker 5: two handle on inflation. Is that and all clear? Well,
Speaker 5: it's probably not, because the way that you get to
Speaker 5: the two handle is through an economic downturn, and that's
Speaker 5: what that earnings report is happening.
Speaker 4: When do we get that two handled this year, next year,
Speaker 4: at the end of this year we think so, you
Speaker 4: think at the end of this year we do handle
Speaker 4: on CPI?
Speaker 3: We do?
Speaker 4: Is that headline?
Speaker 6: Core?
Speaker 4: What is that?
Speaker 5: So again you can Parson, you can Parson, We'll go
Speaker 5: with Core. We'll go with Core PC just to make
Speaker 5: the fad happy, Okay.
Speaker 1: Can I just ask you, given the fact that we
Speaker 1: really haven't gotten great earnings, there have been plenty of disappointments,
Speaker 1: why has the market not come around to your view
Speaker 1: and the parish views of the likes of Mike Wilson.
Speaker 5: Well, because again, part if you look at the last year,
Speaker 5: we were so so obsessed with inflation that the fact
Speaker 5: that it's coming down in an environment where yes, we've
Speaker 5: done a huge amount of tightening, but the liquidity provision
Speaker 5: over those first couple of years to fight. The pandemic
Speaker 5: is so extreme. If you look at M two, M
Speaker 5: two is contracting right now, but the growth trend line
Speaker 5: regression line is still well below where we are. So
Speaker 5: there's residual liquidity in the system and positioning has been
Speaker 5: bearished for the most part. So we're at this stalemate.
Speaker 4: It just to be clear. Hey, you're still at forty
Speaker 4: one fifty year end on the S and P.
Speaker 5: Five hundred year right now.
Speaker 4: We're at forty one to fifty right now. You just
Speaker 4: see a lot of volatility story now and then.
Speaker 5: Right if anyone thinks about convexity in their portfolio, it
Speaker 5: is time to load up on convexity. Whether you're bullish
Speaker 5: or bearish. The vix at seventeen is way too low and.
Speaker 4: The year right now, Bromo, you're ready to go?
Speaker 1: Yeah, absolutely, let's.
Speaker 4: Go where we go it, let's go we go on vacation.
Speaker 4: Are where am I going?
Speaker 1: You're gonna go to a Dacy Morn game?
Speaker 4: I'd love to.
Speaker 1: I know that's where you want to go.
Speaker 4: I'm trying to secure tickets, something to talk to management
Speaker 4: to get the time off. Get the tickets first, obviously,
Speaker 4: then have the debate internally in the newsroom. Can I
Speaker 4: cover it? Can we take a camera? Can you pay
Speaker 4: for the flights?
Speaker 7: Something like that, Giny and thank you appreciate it, buddy.
Speaker 4: Let's talk about the banks and we can do that
Speaker 4: with Christopher Maronak, the director of research at Jenny Montgomery Scott, Christopher.
Speaker 4: Wonderful to catch up with you, sir. Thanks for taking
Speaker 4: some time because I know how busy you've been this
Speaker 4: morning just going through Bancuff, the Bancuff, the bank. Chris,
Speaker 4: what jumps out for you this morning from the names
Speaker 4: you've looked at?
Speaker 6: So the banks are profitable and you see thamsbile book
Speaker 6: value and tangibile capital growing, so we're happy about that.
Speaker 6: I think deposits have been mixed. Some company deposits are
Speaker 6: off slightly. Really, deposit outflows were a lot less problematic
Speaker 6: than I think feared in March, so the real numbers
Speaker 6: suggest that deposits are coming down, but really coming down
Speaker 6: at a measured pace. I think liquidity is still really high,
Speaker 6: and I think banks are now putting out a bunch
Speaker 6: of information about the uninsured deposits, about office real estate,
Speaker 6: about deposit granularity. So I think that really starts to
Speaker 6: build confidence. We have credit quality generally very good for
Speaker 6: the quarter, no major change, maybe small uptics and charge offs,
Speaker 6: but overall, the banks are preparing for the recession if
Speaker 6: and when it comes, and I think capital generally is
Speaker 6: moving in the right direction.
Speaker 1: Christopher, if this is all positive, then why are the
Speaker 1: shares negative even after all of the losses that we've
Speaker 1: seen so far this year.
Speaker 6: So I think the banks still climb the wall to
Speaker 6: worry about the recession, and many investors remember how bad
Speaker 6: it was in two thousand and eight, nine and ten,
Speaker 6: So we have to get through this period no different
Speaker 6: than the uncertainty that existed back in COVID and twenty twenty.
Speaker 6: It took the bank six months to finally recover and
Speaker 6: go back to better valuation that I'm afraid that might
Speaker 6: be the case again this year.
Speaker 3: We're hoping it's more like three or four months and
Speaker 3: not six.
Speaker 6: But the reality is banks still have a lot of
Speaker 6: unrealized security losses and held the maturity and available for sale.
Speaker 3: We haven't worked through all those yet.
Speaker 6: We still have a lot of investors kind of haircutting
Speaker 6: capital for those losses, and I think at some point
Speaker 6: we have to get through that and see better securities
Speaker 6: values in the quarters ahead.
Speaker 3: But in the meantime credit is stable.
Speaker 6: We think over all the banks will stay profitable, and
Speaker 6: the fears about big deposit outflows and deposit runs really
Speaker 6: have not proven.
Speaker 3: To be true.
Speaker 1: Although we are seeing net interest margins come in below
Speaker 1: estimates pretty much across the board. I mean even Cinavius,
Speaker 1: which just reported, and they came out with better than
Speaker 1: expected deposits, better than expected loan growth, love fewer than
Speaker 1: expected provisions for credit losses. And yet here we are
Speaker 1: once again net interest margin coming in lower than expected,
Speaker 1: three point four to three percent versus three point five
Speaker 1: to one percent. Is it takeaway just that the profitability
Speaker 1: case for these banks has been severely challenged and will
Speaker 1: continue to be going forward.
Speaker 3: I would say it's it's not severely challenged.
Speaker 6: I think it's modestly challenged, and some of that is
Speaker 6: really just to catch up on the cost of funds.
Speaker 6: Most banks deposits are way behind the FED funds rate.
Speaker 6: It's about three hundred basis points wide. It's as wide
Speaker 6: as I've ever seen it in thirty years covering banks.
Speaker 6: So I think that's going to narrow in the next
Speaker 6: few quarters, so that catch up has definitely hurt margins,
Speaker 6: but I think the repricing ability of new loans is
Speaker 6: still very good for the banks. A lot of new
Speaker 6: loans are coming on in the high six is low sevens,
Speaker 6: and that's going to actually help margins stabilize.
Speaker 3: So margin declines are real at the moment.
Speaker 6: I think there's more of them in the second quarter,
Speaker 6: But I think the downside risk is not as bad
Speaker 6: as investors fear.
Speaker 3: But again, we have to prove this to investors.
Speaker 6: A lot of folks are from Missouri that want to
Speaker 6: be shown that this is really true.
Speaker 4: It's about upside potential as well, not just downside risk.
Speaker 4: As you know, Chris, and you alluded to some of
Speaker 4: this just briefly, the threat of regulation from here. Do
Speaker 4: you think that threat of regulation is going to keep
Speaker 4: people away from these banks despite whatever happens with the
Speaker 4: fundamentals in the months to come.
Speaker 6: Sure, And the reality is that I think we still
Speaker 6: do not know what's going to happen with FDIC deposit premiums,
Speaker 6: that the Fed and FDSC are very slow to approve
Speaker 6: bank deals.
Speaker 3: That's grinding, and we have a possible change in the.
Speaker 6: White House, which really impacts regulation here in the several
Speaker 6: quarters from now, so that is a very good reason
Speaker 6: not to own banks. But I also think there are
Speaker 6: a fair amount of investors who have to own some position.
Speaker 6: They can't be at zero. They may be underweight, but
Speaker 6: they can't be at zero. So I think you're going
Speaker 6: to see some nibbling on the stocks as time passes,
Speaker 6: But there are a lot of folks on the sidelines.
Speaker 3: I think your point's very accurate.
Speaker 4: There's a lot of economists who are looking for this
Speaker 4: data that comes out in early May, the Senior Loan
Speaker 4: Officer Opinion Survey. Christopher and I wonder if we can
Speaker 4: sort of front run then a little bit based on
Speaker 4: what we've heard from the banks so far. There are
Speaker 4: people who sit around this table with U Chris every
Speaker 4: single day that talk about the beginning of a process
Speaker 4: that leads to time of financial conditions and lending standards.
Speaker 4: Are you hearing that from executives from these banks they've
Speaker 4: reported so far this week?
Speaker 3: Absolutely.
Speaker 6: I think we heard it in January before all this
Speaker 6: started to happen, So it's very much a reality.
Speaker 3: It will continue to get tighter.
Speaker 6: But the good news is there are companies who have
Speaker 6: to borrow and banks who want to lend to them,
Speaker 6: they're just going to be tougher on the standards. I
Speaker 6: think that actually bodes well for credit quality through the cycle.
Speaker 6: Loan to values are going to be lower than folks realize.
Speaker 6: I think the rates that people will accept from banks
Speaker 6: will be higher.
Speaker 3: That's ultimately good for business.
Speaker 6: But there's no doubt it's a tighter credit market out there,
Speaker 6: and what happened in the past six weeks has certainly
Speaker 6: put an exclamation point on that tightening.
Speaker 1: Have you got in a sense based on what we've
Speaker 1: gotten from earnings of how significant the roll up will be,
Speaker 1: of how much there will be mergers and acquisitions and
Speaker 1: a consolidation to become a larger regional bank rather than
Speaker 1: just a smaller one.
Speaker 6: So I think there's always winners and losers in the
Speaker 6: bank space, and I think consolidation will continue to happen.
Speaker 6: Even if the regulators take their slow time to approve deals,
Speaker 6: We'll still see consolidation over time. So what I'm looking
Speaker 6: for is the strongest companies will start to raise capital
Speaker 6: to prove they can that will differentiate them, that will
Speaker 6: help their stock prices recover sooner, and that ultimately will
Speaker 6: lead to consolidation. There definitely will be a difference between
Speaker 6: buyers and sellers on valuations, even though it may not
Speaker 6: seem it today. I think that differentiated will start to
Speaker 6: happen in the next six to eight weeks.
Speaker 4: Chris, as I say, I know you're super busy this morning,
Speaker 4: so thanks again for confinats some time for us as
Speaker 4: you pull through these bank earnings. Christopher Maronak, the of
Speaker 4: Jenny Montgomery Scott Lebby Cantrell joins US now had a
Speaker 4: public policy over at PIMCO Libya. I've been looking forward
Speaker 4: to this conversation. Thanks for being with us this morning.
Speaker 4: Can we start there. I think it's a really really
Speaker 4: important topic for US today and maybe over the next decade. Lebby,
Speaker 4: what kind of actions are you expecting from this administration
Speaker 4: off the back of comments like these?
Speaker 8: Yeah, well, John, your earlier comments I think are spot on.
Speaker 8: The rhetoric of the previous administration was quite strong. We
Speaker 8: saw that somewhat followed up by policy. But this administration
Speaker 8: actually the rhetoric has been maybe a little bit softer.
Speaker 8: They've really emphasized strate hegic competition, but also cooperation, cooperation
Speaker 8: follows sort of closely after that emphasis on competition. But
Speaker 8: I would argue that the policies have actually been more
Speaker 8: substantive from the Biden administration and more putative in many
Speaker 8: ways as it relates to China. So, as Lisa mentioned,
Speaker 8: we saw those export controls on semiconductors. We think that's
Speaker 8: the beginning of a broader process around export controls. But importantly, John,
Speaker 8: and this should be forthcoming in the next few weeks, months,
Speaker 8: but definitely by come midsummer, is this executive order on
Speaker 8: capital outflows that would require at least disclosure, if not
Speaker 8: prohibition of some capital outflows from the United States to
Speaker 8: China and specific sectors for sure, But it could have
Speaker 8: spillover effects to the public markets as sort of this
Speaker 8: chill in general goes on in terms of investment from
Speaker 8: the US to China.
Speaker 1: Libby, how many of the investors you speak with fully
Speaker 1: appreciate what the implications of this are from a pricing perspective,
Speaker 1: from a demand perspective, just in general, from reshaping the
Speaker 1: way that markets really really trade.
Speaker 8: I think a lot of our clients realize that the
Speaker 8: political risk of investing in China has increased, and maybe
Speaker 8: the economic benefit of investing in China is also not
Speaker 8: as much of a sort of as clear cut as
Speaker 8: it was at least several years ago. So we are
Speaker 8: sort of seeing a reticence, especially in our US clients,
Speaker 8: more of a kind of a tilt toward to home bias,
Speaker 8: you know, Still an appreciation for diversification, still understanding that
Speaker 8: China is going to be a source of global growth
Speaker 8: over the secular and super secular timeframe, but also just
Speaker 8: sort of realizing that some of these investments may be
Speaker 8: fraught and again maybe tied up in both the political
Speaker 8: rhetoric but also some of these policies coming out of Washington.
Speaker 1: It's one thing to avoid buying Chinese bonds or stocks.
Speaker 1: It's another thing to question the valuations of say an
Speaker 1: Apple or some of the other technology giants at a
Speaker 1: time when so much of their businesses really rely on
Speaker 1: not just them, frankly, auto manufacturers, fast food companies. There's
Speaker 1: so many basic corporate America so standbys that are tied
Speaker 1: to China growth. How much is that appreciated?
Speaker 8: Yeah, again, I mean I think that it's not to
Speaker 8: say that the domestic market in China is not going
Speaker 8: to continue to grow, and I think some of those
Speaker 8: companies are aimed more at that domestic that domestic market,
Speaker 8: but just in general being a US investor, and of
Speaker 8: course that's who we're talking to in terms of our
Speaker 8: US based clients, and they do sort of see that
Speaker 8: this is more fraught in terms of actually investing US
Speaker 8: dollars into China Chinese companies. It's not to say that
Speaker 8: this is not going to you know, this is going
Speaker 8: to stop altogether, but I think this administration is any
Speaker 8: a pretty clear signal that they are going to at
Speaker 8: least require some disclosure and some oversight into how kind
Speaker 8: of US dollars are being allocated in China and importantly,
Speaker 8: are they going to sectors that could increase sort of
Speaker 8: the military and competitive of China.
Speaker 4: Libby, this is the United States looking out to the
Speaker 4: rest of the world. Let's talk about the rest of
Speaker 4: the world looking into the United States. A big, big
Speaker 4: topic of conversation. As you know, later this summer is
Speaker 4: going to be the debt ceiling. We've had tax Day.
Speaker 4: I think a lot of people are trying to use
Speaker 4: that to try and understand where that X date might fall. Libby,
Speaker 4: have you got a deeper understanding, a better understanding of
Speaker 4: where that date might be.
Speaker 8: Well, I think we're we're beholden to the data just
Speaker 8: as anybody else's. I mean, there was some promising data
Speaker 8: that came out yesterday just in terms of, you know,
Speaker 8: potentially getting past this June fifteenth tax filing date. I
Speaker 8: think that's been the open question. Can we is there
Speaker 8: sort of enough capacity for the Treasury to get to this,
Speaker 8: to beyond this June fifteenth date, meaning that then they
Speaker 8: have more extraordinary measures to deploy, and then likely the
Speaker 8: X date will fall sort of mid July, end of July,
Speaker 8: maybe even August or even early September. I think there
Speaker 8: was some question around that and some concern that actually
Speaker 8: they may not get past that June fifteenth date. I
Speaker 8: think yesterday John, what we saw in terms of the
Speaker 8: data and the receipts is that we may actually be
Speaker 8: able to get past at June fifteenth date, meaning the
Speaker 8: X date is pushed it more to later in the summer.
Speaker 8: And I think actually there's some folks in Congress though
Speaker 8: that wouldn't mind the X date being more being closer
Speaker 8: right more right around the quarters, because then that sort
Speaker 8: of forces folks to actually come to the table and
Speaker 8: to seek a resolution.
Speaker 4: Speaker McCarthy says, he's got a plan. Do you think
Speaker 4: there's a plan out there at the moment that you
Speaker 4: see as realistic.
Speaker 8: Well, he does have a plan, and he's you know,
Speaker 8: he's now now there's a bill actually, So it was
Speaker 8: a plan on Monday when he was up here in
Speaker 8: New York. Now that it's actually in legislative text, I think, John,
Speaker 8: the real open question is can he get two hundred
Speaker 8: and eighteen members. Of course, Republicans are like two hundred
Speaker 8: and twenty two in the House of Representatives. That means
Speaker 8: he can only lose four in order to actually get
Speaker 8: this through the House. Now, you know, investors in the
Speaker 8: market should realize that whatever is passed, if this ultimately
Speaker 8: this bill gets passed, it will not be signed into laws.
Speaker 8: This is of course dead on arrival in the Senate.
Speaker 8: But it's important from a Speaker McCarthy perspective because it
Speaker 8: would increase his leverage with the White House. Right now,
Speaker 8: all he does is has legislative text, and he doesn't
Speaker 8: necessarily have a bill that's been able to pass the
Speaker 8: past the House. I think that's the open question John,
Speaker 8: if he is able to pass this again this will
Speaker 8: not get signed into LOB but then at least it
Speaker 8: sort of starts formally these negotiations and certainly increases his
Speaker 8: sort of his positioning and negotiating power with the president.
Speaker 4: Libby, you're one of the very best. We're lucky to
Speaker 4: catch out with you again. Let me cancel there, Pim
Speaker 4: car Let's do this again soon on this topic.
Speaker 1: Shanelli Bosik is joining us now ahead of an interview
Speaker 1: with somebody on the other side potentially of this, John Gray,
Speaker 1: who is president and CEO of Blackstone.
Speaker 5: Yeah.
Speaker 9: Absolutely, John, thank you for joining us so much because
Speaker 9: you have such a large place in this story when
Speaker 9: we're looking at lending contracting across the country and so anyways,
Speaker 9: but let's start with your results here, John, because when
Speaker 9: you look at the numbers, you've beat on earnings per share,
Speaker 9: but assets under management. We've been waiting quarter after quarter here,
Speaker 9: you're so close dating that one trillion dollar mark. You've
Speaker 9: said things are kind of slowing out there in the environment.
Speaker 9: At what point do things start to turn around here
Speaker 9: to kind of help push black zone a little bit
Speaker 9: further in this environment.
Speaker 10: Chanale, it's great to be with you. I would just
Speaker 10: say We're incredibly proud of the quarter. We protected investor
Speaker 10: capital and that performance is ultimately what's going to propel
Speaker 10: us forward to raise more capital. We did see forty
Speaker 10: billion dollars of inflows more than two hundred billion over
Speaker 10: the last year, and for our shareholders, we delivered nearly
Speaker 10: a dollar in distributable earnings despite limited performance fees. And
Speaker 10: we really think we have the right model. We've got
Speaker 10: staying power where we can hold assets in a difficult
Speaker 10: period in firepower nearly two hundred billion dollars to deploy,
Speaker 10: so our views, we just keep executing for our investors
Speaker 10: and the assets will take care of themselves over time.
Speaker 9: Now we want to look a little bit broader across
Speaker 9: the universe here because Blackstone, of course is one of
Speaker 9: the biggest private landlords in the country, everything from warehouses
Speaker 9: to single family homes. I'm wondering, if you take out
Speaker 9: your crystal ball, John and kind of look across the economy,
Speaker 9: what are people not seeing about the real estate market.
Speaker 9: What's the next shoot drop?
Speaker 10: Well, I think on real estate, the issue is people
Speaker 10: are looking through a very narrow lens and they're thinking
Speaker 10: about real estate all is one thing and the reality
Speaker 10: is where you invest matters. So if you look at
Speaker 10: office buildings, traditional office buildings in the US, which fortunately
Speaker 10: for US are less than two percent of our portfolio,
Speaker 10: there we're seeing really unprecedented weakness. Vacan see rates are
Speaker 10: twenty percent, rents are under pressure, and valuations are under
Speaker 10: significant pressure. But if you look across to logistics Global Logistics,
Speaker 10: which is forty percent of what we own, their things
Speaker 10: look very different, almost unprecedented strength. You've got vacancy rates
Speaker 10: less than three percent. You've got rents growing double digit,
Speaker 10: mark to market lease rates of forty fifty percent between
Speaker 10: where the market rents are and what's in place, and
Speaker 10: so I think it's a pretty vast world out there.
Speaker 10: In real estate, hotels continue to exhibit strength, data centers,
Speaker 10: student housing, but yes, commercial real estate in the office
Speaker 10: sector's challenge, and we expect that'll continue for some time.
Speaker 1: Has that unprecedented weakness john been fully priced in when
Speaker 1: it comes to the office space.
Speaker 10: Well, I think you see it in the stocks of
Speaker 10: the public rates. They've traded off very dramatically. Some of
Speaker 10: the big public office companies are off fifty seventy five percent.
Speaker 10: You've seen in the price market, valuations in the limited
Speaker 10: trades that are happening are down significantly. I think some
Speaker 10: folks in terms of funds, private funds may not have
Speaker 10: marked fully to what's been happening. I think you'll see
Speaker 10: more of that. We tend to be ahead of the
Speaker 10: curve on those things. But I think the good news is,
Speaker 10: because I know there's a lot of focus on the
Speaker 10: banking sector, is that leverage levels around commercial real estate
Speaker 10: going into this, we're pretty low. So I think banks
Speaker 10: probably lent against office buildings at about sixty percent of value,
Speaker 10: so they should have a pretty good cushion, and office
Speaker 10: buildings as a percentage of their balance sheets is pretty small.
Speaker 10: So it's an area where there will be real headwinds.
Speaker 10: Equity owners will take some real hits, but the broader
Speaker 10: real estate market looks a lot healthier.
Speaker 1: How concerned are you, John, even in the broader real
Speaker 1: estate space about some of the issues that we've seen
Speaker 1: in the small banks, given that they own a significant
Speaker 1: portion of the lending books to commercial real estate across
Speaker 1: the industry.
Speaker 10: Well, there's no question that credit will be tighter to
Speaker 10: commercial real estate. Some of the good news is the agencies,
Speaker 10: the government agencies Fanny and Freddie lead the way in
Speaker 10: multifamily lending and apartment lending, there is strength in other areas.
Speaker 10: Real estate lending is broader than just banks because insurance companies,
Speaker 10: commercial mortgage backed securities exist, mortgage reates are out there,
Speaker 10: so there are multiple sources of capital. But I do
Speaker 10: think credit will be tighter in commercial real estate. The
Speaker 10: one benefit to existing owners is construction lending is going
Speaker 10: to get a lot tighter, and so you'll see less
Speaker 10: new supply long term that's a positive. But yes, I
Speaker 10: think we will see less capital available. It will dampen
Speaker 10: things a bit, but ultimately fundamentals around supply and demand
Speaker 10: or what drives value, and that's why if confidence going
Speaker 10: forward in most of the sectors, certainly away from office buildings.
Speaker 9: John, I'm really curious about an update here on b Rate,
Speaker 9: the real estate fund that has faced on withdrawals over
Speaker 9: the last couple of months. Performance has been pretty stellar
Speaker 9: over three years, more than seventeen percent, but it has
Speaker 9: turned negative this year so far. I'm wondering what the
Speaker 9: pitch is to invest this year when performance is starting
Speaker 9: to be more muted.
Speaker 10: Well, the performance this year, interestingly, Shanali has been hurt
Speaker 10: mostly by the interest rate hedges we put in place
Speaker 10: to protect the fund, which really helped us last year.
Speaker 10: The historic decline in March and rates impacted, but if
Speaker 10: you looked at the performance pre those hedges, you would
Speaker 10: have had positive performance in the quarter. I think rates
Speaker 10: have now moved down a fair amount, so that headwind
Speaker 10: should be away from us. The other thing I'd point
Speaker 10: to is the cash flow growth. In the first quarter,
Speaker 10: estimated cash flow growth for b rate was nine percent,
Speaker 10: led by hotels, student housing logistics, which we talked about,
Speaker 10: So the underlying cash flow growth is good. It looks
Speaker 10: like inflations getting under control. The ten years has moved down,
Speaker 10: which long term is a positive for this portfolio, so
Speaker 10: we feel really good. It's a portfolio of rental housing
Speaker 10: logistics in the sun belt of the United States. It's
Speaker 10: exactly what you want to own, and we think once
Speaker 10: you get through this more volatile markets period, people will
Speaker 10: focus again on fundamentals and that'll be quite helpful for
Speaker 10: the flows in be reach.
Speaker 9: You know, we started to talk about the banking market
Speaker 9: as it pertains to commercial real estate, but you know,
Speaker 9: I want to cite some of Bloomberg's own reporting here.
Speaker 9: Black Zone had been in talks with Valley to buy
Speaker 9: some assets from Silicon Valley Bank. I'm really curious what
Speaker 9: this says about your ambition in this banking kind of
Speaker 9: tumult period. Do you think you could do more by
Speaker 9: means of working with regional banks providing more credit where
Speaker 9: credit is tightening up, especially given some of your private
Speaker 9: credit books are up more than nine percent so far.
Speaker 10: I think that's a great question, Chanale. Interestingly, of the
Speaker 10: forty billion we raised in the quarter, sixty percent of
Speaker 10: it came in our credit insurance and real estate credit areas.
Speaker 10: Investors are allocating more capital. We have in total in
Speaker 10: those areas three hundred and fifty billion dollars, and so
Speaker 10: I think there's a real opportunity. We're actually in discussions
Speaker 10: today with a number of regional banks to partner with them.
Speaker 10: They have very valuable relationships with borrowers out there across
Speaker 10: the country. We have long term capital, and so in
Speaker 10: consumer financing and small and medium business financing, particularly in
Speaker 10: the asset backed area, we think there's a real opportunity
Speaker 10: to deploy more capital. And I think it's one of
Speaker 10: the real strengths of the alternatives business. As you know,
Speaker 10: this used to just be about private equity, real estate,
Speaker 10: private equity, but what we do today is much broader,
Speaker 10: and I think the private credit area is really at
Speaker 10: a golden moment because we do see tightening out there,
Speaker 10: and yet we have this large pool of capital to deploy,
Speaker 10: and so I think you'll see us become much more active.
Speaker 1: John, do you think that private credit will come into
Speaker 1: its golden era at a time where private equity is fading,
Speaker 1: where the valuations make less sense, at a time when
Speaker 1: rates are so high and offset some of the potential
Speaker 1: equity valuation.
Speaker 10: You know, I think we see cycles, and so if
Speaker 10: you look at private equity, it's had enduring performance premiums.
Speaker 10: That's certainly been the case for us. Our group has
Speaker 10: done a terrific job deploying capital. What you're seeing now
Speaker 10: is a cyclical slowdown in transaction activity. That's what happens
Speaker 10: at moments when people are cautious. But ultimately this recovers,
Speaker 10: and so our ability to find great businesses, to intervene
Speaker 10: with those companies, to partner with management teams create value
Speaker 10: that still exists. We announced a sizeable public to private
Speaker 10: of a company called Seavent in the online event management
Speaker 10: space for a north of four billion dollars this quarter.
Speaker 10: I think you'll see us find more opportunities over time.
Speaker 10: I think it just says right now things are a
Speaker 10: little bit slower, but they'll come back, and I think
Speaker 10: that business is going to do quite well.
Speaker 9: He John, I'm really curious about your thoughts here on
Speaker 9: rates and inflation. You've heard a number of your banking
Speaker 9: rivals and peers say already that maybe the market is
Speaker 9: not really prepared for the eventuality of higher rates, and
Speaker 9: you've said also that maybe cuts this year are also
Speaker 9: not on the horizon. So what is the thing that
Speaker 9: the market is not seeing here about the direction of travel.
Speaker 10: Well, I would say on the inflation front, I'll give
Speaker 10: you a little bit of optimism. We see inflation moving
Speaker 10: into the rare view mirror. And I say that because
Speaker 10: across our portfolio the statistics are really encouraging. Our procurement
Speaker 10: managers at portfolio companies are saying inflation in terms of
Speaker 10: input costs was only up two percent in the quarter.
Speaker 10: Shipping costs have come back almost back to twenty nineteen levels.
Speaker 10: Even wages, which we're up as high as seven percent
Speaker 10: in our portfolio six months ago, are now at five
Speaker 10: point six percent, and the availability of workers has gotten
Speaker 10: a lot better for our portfolio companies. And if you
Speaker 10: looked at the CPI number last month, it was five percent,
Speaker 10: but if you exclude shelter, which is a lagging indicator,
Speaker 10: it was up just three point four percent. So that
Speaker 10: is the good news. I think the more challenging news
Speaker 10: to your question on rates is the FED is going
Speaker 10: to want to make sure this inflation really gets down.
Speaker 10: So I think the idea that they're going to pivot
Speaker 10: is a mistake. I think they're much more likely to
Speaker 10: pause hold rates and an elevated level and continue to
Speaker 10: see the economy decelerate. And now when you add in
Speaker 10: what we've been talking about with regional banks, that's going
Speaker 10: to create further tightening, and so credit is becoming less available,
Speaker 10: more expensive. It's really you know, sort of the blood
Speaker 10: flow through the circulatory engine of the economy, and that
Speaker 10: is slowing, and I think that will lead to a
Speaker 10: sequential slowdown in the economy, so that will stay tight.
Speaker 10: But the good news for investors for consumers is inflation's
Speaker 10: coming down, and we think that's really positive.
Speaker 1: John twenty seconds, how long is it going to take
Speaker 1: for deal making to come back.
Speaker 10: You know, I think it's going to take some stability
Speaker 10: in markets, certainly getting past this inflation, people having more confidence.
Speaker 10: Hopefully it happens in the back half of the year.
Speaker 10: I think it's the latest sometime in the early part
Speaker 10: of next year.
Speaker 1: John Gray of Blackstone and Bloomberg Shanolipassic, thank you both
Speaker 1: so much for being here. Subscribe to the Bloomberg Surveillance podcast
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Speaker 1: I'm Lisa Abramowitz, and this is Bloomberg.