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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along

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Speaker 2: with Lisa Bromwitz and am Marie Hordern. Join us each

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Speaker 2: day for insight from the best in markets, economics, and

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Speaker 2: geopolitics from our global headquarters in New York City. We

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Speaker 2: are live on Bloomberg Television weekday mornings from six to

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Speaker 2: nine am Eastern. Subscribe to the podcast on Apple, Spotify

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Speaker 2: or anywhere else you listen, and as always on the

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Speaker 2: Bloomberg Terminal and the Bloomberg Business app. As turned to

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Speaker 2: the economy, US consumer confidence seeing its biggest drop in

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Speaker 2: nearly four years. The Confidence Board writing consumers became pessimistic

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Speaker 2: about future business conditions and less optimistic about future income.

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Speaker 2: Your lendership at Saver of the Conference Board joined us

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Speaker 2: now for more. Can you Lena, good morning? Come morning now.

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Speaker 2: I respect the data, but the Conference Board consumer confidence

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Speaker 2: figure doesn't usually move markets as much as it did yesterday.

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Speaker 2: People are nervous, and the nervous about where the consumers

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Speaker 2: at the moment, what's your rate on things?

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Speaker 3: I think probably the market moves comes after both the

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Speaker 3: Michigan survey and the Consumer Conference survey both showed the

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Speaker 3: same thing, so that is telling you the issue is

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Speaker 3: a little bit more broad based. So I think, you know,

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Speaker 3: the important thing is that expectations fail quite significantly. And

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Speaker 3: what concerned me in that survey, in that particular survey,

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Speaker 3: is that consumers are expecting fewer jobs available six months

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Speaker 3: from now, so that is probably at the highest level

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Speaker 3: in more than a decade. That index is telling me that,

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Speaker 3: you know, consumers don't see much availability in the job market,

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Speaker 3: so we know the turnover is lower than it used

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Speaker 3: to be, so you know, when you get laid off,

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Speaker 3: when you get fired or whatever, you know, you are

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Speaker 3: finding fewer and fewer possibilities, and consumers are concerned about that.

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Speaker 1: What's the difference between normalization and the economy and outright cooling.

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Speaker 3: So we expect normalization, so this is something like two

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Speaker 3: percent growth in GDP by the end of the year.

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Speaker 3: But if we see terriffs, and this is something we

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Speaker 3: model at the Conference board, we see quite a big

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Speaker 3: hit from the tariffs. If we get a combined impact

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Speaker 3: from China, Mexico and Canada tariffs that have been discussed

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Speaker 3: of about one percentage points on growth, So that would

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Speaker 3: be a significant slowdown to a stall speed in the

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Speaker 3: economy of around one percent, So that would be a disaster.

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Speaker 1: The reason why I ask is because on one hand,

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Speaker 1: you could say, these numbers are pretty negative, all right,

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Speaker 1: go to cash, sit in your mattress. On the other hand,

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Speaker 1: you could say, we've actually been in a really robust

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Speaker 1: growth kind of scenario with jobs being created in a

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Speaker 1: significant way, and actually this reduces some of the inflationary

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Speaker 1: risk that we had heard about maybe late last year.

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Speaker 1: Why is it the former more than the latter.

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Speaker 3: So I think these numbers are not catastrophic, you know,

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Speaker 3: the numbers that we saw in the Conference Board survey,

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Speaker 3: because they're still in kind of a range, the bottom

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Speaker 3: of the range, but still within a range that the

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Speaker 3: index has been over the last several years. And over

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Speaker 3: the last several years, what did we see. We saw

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Speaker 3: consumers spending at quite a solid rate. So the problem

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Speaker 3: here is that the declining confidence comes at the time

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Speaker 3: when the savings rate is at a very low level.

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Speaker 3: At three point eight percent, this is very low by

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Speaker 3: historical standards, and what usually happens when confidence declines, the

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Speaker 3: savings rate starts to increase, and you know when your

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Speaker 3: income is the same or even declining because of inflation.

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Speaker 3: That means only one thing, and that thing is the

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Speaker 3: decline in consumer spending. Consumers have always been the driver

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Speaker 3: of economic growth, and at the time when we rely

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Speaker 3: on consumers so much, that means slowed down in economic growth.

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Speaker 4: One of the big criticisms of the University of Michigan

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Speaker 4: survey is that it's very political. How much political bias

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Speaker 4: do you think is in the Conference Board survey?

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Speaker 3: Absolutely that has the same issue. And if you look

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Speaker 3: at the breakdown by political party, obviously Democrats are more pessimistic.

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Speaker 3: Even independence are more pessimistic than Republicans. But even in

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Speaker 3: the Conference Board survey, the Republican sentiment is actually leveling

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Speaker 3: off as well. So we saw it across the political

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Speaker 3: spectrum in this survey.

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Speaker 4: When it comes to the right and responses, I love

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Speaker 4: these because you get a sense of what's going on

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Speaker 4: in people's minds. They talk about inflation and tariffs. Is

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Speaker 4: anyone talk about the fact that there might be a

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Speaker 4: tax hike if TCJA wasn't extended. Is that concerning any consumers?

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Speaker 3: I don't think we're they here. So what we see

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Speaker 3: in the writings is the increase in policy concerns, in

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Speaker 3: political concerns, in tariffs. Yes, so those things that we

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Speaker 3: hear on the news every day. Inflation is still a

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Speaker 3: bit concerned, but it's being kind of like replaced by

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Speaker 3: all this political agenda that we're hearing. I don't think

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Speaker 3: the taxes are on the agenda just yet.

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Speaker 2: Lena always got to catch ups, go to see it.

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Speaker 2: I appreciate it, Lena, should I say at the conference,

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Speaker 2: Bot joining us now, Brian Gardner, stayful to build on

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Speaker 2: the conversation. Brian, welcome to the program sir. For people

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Speaker 2: just waking up this morning, you want to ask somebody

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Speaker 2: with the processes you and Tyler are, can you walk

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Speaker 2: us through on where we are at the moment and

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Speaker 2: how much longer this might take?

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Speaker 5: All right, so it's spring training for baseball. Let's put

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Speaker 5: it in baseball terms, right, in terms of a nine

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Speaker 5: in a game. We're in the first NY, It's that clear.

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Speaker 5: It is very, very early in the process. This is

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Speaker 5: an important step. Last night, it was a prerequisite for

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Speaker 5: the rest of the debate that's going to play out

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Speaker 5: through the rest of the spring, maybe into the summer,

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Speaker 5: maybe into the fall. But we are really early in

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Speaker 5: the process.

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Speaker 4: Given it so early in the process, what does it

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Speaker 4: say to you that to get over the finish line

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Speaker 4: we had to have President Trump act like the Speaker

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Speaker 4: of the House, basically whipping votes last night.

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Speaker 5: I think that's an rhetorical question. I think it kind

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Speaker 5: of answered it yourself. The fact that what should be

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Speaker 5: a fairly easy vote just to get the process started

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Speaker 5: and moving was essentially root canot last night and very

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Speaker 5: very difficult to get enough votes to switch from node yes.

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Speaker 5: And it kind of belies the difficulty that is going

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Speaker 5: to be down the road because among the yes's were

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Speaker 5: a lot of members who have concerns over the Medicaid cuts,

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Speaker 5: the potential Medicaid cuts. There's nothing formal in the bill yet,

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Speaker 5: but they've been speaking to the to the leadership, to

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Speaker 5: the White House. Their concerns are out there, and if

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Speaker 5: those Medicaid cuts start to materialize and become part of

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Speaker 5: actual legislation, those guesses are really at play. And on

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Speaker 5: the on the flip side, as you as the report

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Speaker 5: just mentioned the fiscal Conservatives, you know they went along

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Speaker 5: with it, but they want more cuts. Well, if they

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Speaker 5: get their more cuts, then you're going to lose some

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Speaker 5: of the other yeses like I just mentioned, who are

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Speaker 5: concerned about the deepness of the cuts. It's a very difficult.

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Speaker 5: The political capitalist is very very difficult.

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Speaker 4: And they have a razorsin majority when you talk about

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Speaker 4: those like we saw last night. Yeah, when you talk

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Speaker 4: about these medicaid cuts, it's not outright that they're talking

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Speaker 4: about medicaid, But we're talking about eight hundred and eighty

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Speaker 4: billion dollars that comes from the Energy and Commerce Committee.

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Speaker 4: What else could it be if it's not medicaid?

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Speaker 5: And that's the issue, right, So for people who don't

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Speaker 5: understand last night, what they voted on just has top

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Speaker 5: line numbers. There's no legislative language. There's no policy language

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Speaker 5: in that document, but it assigns eight hundred and eighty

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Speaker 5: billion dollars in savings to the Energy and Commerce Committee.

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Speaker 5: While you look at the Energy and Commerce Committee and

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Speaker 5: see what they're what their jurisdiction is, and you get

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Speaker 5: to medicate, Now, where can you find offsets elsewhere? Maybe

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Speaker 5: even outside of that committee. And what I have pointed

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Speaker 5: out to clients is that when you look at the

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Speaker 5: tax cuts, there may be some tough decisions coming down

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Speaker 5: the road on maybe some items not being extended, or

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Speaker 5: some current policies such as maybe a cap on the

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Speaker 5: corporate salt deduction, maybe that comes into play. Maybe a

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Speaker 5: stock buyback tax which is already in law, maybe that

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Speaker 5: gets increased. So there's going to be very intense negotiations

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Speaker 5: that have market impacts over the next couple of months.

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Speaker 1: Brian, the estimate from the Committee for a Responsible Federal

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Speaker 1: Budget says that this current proposal will increase the federal

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Speaker 1: deficit by nearly three trillion dollars over the upcoming years.

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Speaker 1: Is that the base case for you going forward that

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Speaker 1: this is essentially how much any kind of bill will

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Speaker 1: increase the deficit roughly.

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Speaker 5: I think one thing that is happening, which is I

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Speaker 5: think as a positive, is that we're getting back to

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Speaker 5: a more sustainable trajectory on debt. Debt's not going to

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Speaker 5: come down. We're certainly not getting to a balanced budget,

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Speaker 5: but we're getting back to an historical norm which has

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Speaker 5: really been we've been out of kilter with that during

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Speaker 5: COVID and I think Scott Besson mentioned this in your

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Speaker 5: interview with him earlier in the week, which was which

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Speaker 5: was absolutely fantastic. You know, just getting back to a

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Speaker 5: sustainable trajectory on debt and deficits and then dealing with

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Speaker 5: longer term problems after that, because longer term problems, longer

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Speaker 5: term debt solutions have to include social security and Medicare,

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Speaker 5: and those are off the table for right now.

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Speaker 2: Brian went to the World Series Oktober October ok taber Okay,

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Speaker 2: Yank god it look.

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Speaker 5: I mean, you know, the speaker in the leadership they

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Speaker 5: had a big win last night. Let's not let's not

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Speaker 5: diminish that they've been talking about a very aggress an

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Speaker 5: ambitious timeline of having this all wrapped up in the spring.

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Speaker 5: I've always been a little bit skeptical about that. If

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Speaker 5: they can do it, you know, hats after them, it

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Speaker 5: would be an enormous accomplishment.

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Speaker 3: Changing.

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Speaker 5: Yeah, because of the negotiations that are going to go on.

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Speaker 5: I think we're going to go on in the summer,

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Speaker 5: and I think, Jonathan, we can be back here in

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Speaker 5: September looking towards the playoffs at that point and still

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Speaker 5: be talking about this as it gets closer to the

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Speaker 5: finish line.

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Speaker 6: At that point.

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Speaker 2: Brank Ahma Stipil Bryant appreciate it. Sert Tech Malony, the

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Speaker 2: CEO of FS investment management, seeing high quality companies outside

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Speaker 2: of tech and right in the following market. Concentration is

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Speaker 2: the most important theme in today's market. History has shown

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Speaker 2: prolonged periods of concentration are followed by equally long diversification cycles.

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Speaker 2: Opportunities can often be found in recent lankets. To join

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Speaker 2: us studio for mot ted, it's got to see it

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Speaker 2: to be Are we moving out from a prolonged period

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Speaker 2: of concentration towards right now beginning a long period of diversification.

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Speaker 6: Well, by its nature, it's almost impossible to think about

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Speaker 6: specific timing around that. So I might have been wrong.

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Speaker 6: I would have been wrong a year or two ago

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Speaker 6: in thinking that the concentration was already at dangerous levels

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Speaker 6: and due to online. So while we're not sure the

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Speaker 6: last couple of months have been the beginning of an unwind,

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Speaker 6: we are reasonably sure that the level of concentration is dangerous.

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Speaker 6: And I want to point out that's not desparing to

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Speaker 6: come about any of the companies that make up the concentration.

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Speaker 6: They're wonderful companies in some cases, with reasonable valuations under

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Speaker 6: certain assumptions, But when you put them together, the level

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Speaker 6: of concentration and you look back in history at times

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Speaker 6: when we've been even remotely close to this, it's ended

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Speaker 6: badly for investors who were over concentrated in those spaces.

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Speaker 2: When the stock goes up into the right on the chart,

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Speaker 2: a lot of people don't think it's dangerous and talk

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Speaker 2: to me about what's dangerous about it? And when you

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Speaker 2: think about diversification, what does that actually mean in practice?

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Speaker 6: Well, what's dangerous about it is if one thing goes

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Speaker 6: wrong for one of those companies, and because they're so interconnected,

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Speaker 6: it would be likely to be a chain reaction across

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Speaker 6: the companies. Not just the companies, but the equities that

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Speaker 6: are incredibly highly valued. So diversification is, you know, famously

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Speaker 6: one of the free lunches and investing. And it's interesting

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Speaker 6: you have moments in time over history where people forget

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Speaker 6: that because, as you say, they get enamored by up

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Speaker 6: under the right. And it's been really easy to make

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Speaker 6: money and these seven stocks for the last couple of years,

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Speaker 6: So I'm going to keep doing it. It's very hard

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Speaker 6: to predict what will unwind it. It is reasonably reasonably

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Speaker 6: high confidence bet that it will unwind at some point.

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Speaker 1: Yeah, there's been the sense that you actually are punished

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Speaker 1: if you aren't necessarily heavily weighted in them because they've

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Speaker 1: been the outperformers. I'm wondering how you position around that,

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Speaker 1: whether you expect the unwined to be somewhat violent as

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Speaker 1: it was, say in the two thousand period of time,

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Speaker 1: or whether it could just be what we've seen over

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Speaker 1: the past couple of months, which is, you know, a correction.

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Speaker 1: It's kind of happened, but the rest of the market's done.

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Speaker 6: Fine, right exactly. And I think you approach it from

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Speaker 6: two different angles. One bottoms up the idea of finding

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Speaker 6: a number of other stocks and bonds that you can

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Speaker 6: buy to balance out your portfolio and make sure that

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Speaker 6: you've got good conviction and long term returns and there,

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Speaker 6: and then top down thinking about risk management again, our

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Speaker 6: portfolios that have the MAG seven in their benchmarks tend

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Speaker 6: to own a decent amount of MAC seven. Were not

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Speaker 6: negative necessarily on the individual stocks or the space. What

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Speaker 6: we're concerned about is a risk management question and managing

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Speaker 6: risk at a portfolio level and looking at a small

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Speaker 6: number of stocks driving all of the returns and most

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Speaker 6: of the risk in a portfolio, which you think is dangerous.

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Speaker 1: It's notable that since December seventeenth you can see that

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Speaker 1: correction in the mag seven even though the S and

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Speaker 1: P equal weight is actually up on the period, so

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Speaker 1: a lot of people are doing the same. You made

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Speaker 1: another point that I thought was really interesting, which is

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Speaker 1: that liquidity chain ideas can really shift at a time

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Speaker 1: where everyone's talking about private markets as being the bastion

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Speaker 1: of hope and returns. You challenge that you actually think

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Speaker 1: that in public markets there potentially is more opportunity.

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Speaker 6: Why Well, we said this quoint notion that overtime liquidity

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Speaker 6: is a feature, not a bug, and you have moments

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Speaker 6: in time where all the money will chase illiquids because

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Speaker 6: of an appearance of higher returns or a value proposition

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Speaker 6: that looks really compelling until people want to get their money.

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Speaker 6: And we think it also depends on who the investor

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Speaker 6: is right, So large, very sophisticated institutional investors with large

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Speaker 6: pools of assets should have a meaningful part of their

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Speaker 6: portfolio in privates and alternatives. As it starts to become

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Speaker 6: mass market, we worry about what that means for a

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Speaker 6: mass market investor who might need access to his or

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Speaker 6: her liquidity and might discover at the worst possible time

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Speaker 6: that they don't have it.

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Speaker 2: We talked a lot about the United States and diversifying

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Speaker 2: within the United States across various asset classes. Can you

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Speaker 2: walk us through how you think about things internationally at

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Speaker 2: a time where Europe has really started to outperform to

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Speaker 2: stand the year, We've.

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Speaker 6: Always thought that having a global lens is the best

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Speaker 6: way to invest, even if you're just focused on a

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Speaker 6: given region, but certainly if you have the opportunity to

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Speaker 6: invest across the world. We think that US exceptionalism, regardless

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Speaker 6: of at this point, regardless of whether or not you

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Speaker 6: believe that it's durable or not, it's priced in. So

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Speaker 6: if you look around the world, you're paying a lot

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Speaker 6: for the US exceptionalism. Be to work out, you're paying

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Speaker 6: significantly less in various pockets around the world. And that's

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Speaker 6: across asset class that stocks that sponds, that's beyond that.

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Speaker 6: So we think there are lots of opportunities outside the US,

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Speaker 6: plenty of opportunities inside the US as well, And it's

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Speaker 6: probably never been a better time to be a skilled

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Speaker 6: manager thinking about risk at a portfolio level and being

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Speaker 6: able to make those trade offs around the world.

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Speaker 2: Ted, this was smart. It's going to catch up with you.

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Speaker 1: Appreciate here.

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Speaker 2: Thank you, Ted Maloney, the of FS Investment Management. Let's

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Speaker 2: get the market conversation. Megan Robson of BMP parabout joined

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Speaker 2: us now for more meccan, Good morning, Marning.

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Speaker 1: Thanks.

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Speaker 2: We're seeing a little bit of nervousness in equities and

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Speaker 2: my stress a little bit. We're still several percentage points

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Speaker 2: away from all time highs. Are you seeing any concern

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Speaker 2: and credit and credit spreads.

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Speaker 7: That so it aggregates, No concerning it. We've been extremely

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Speaker 7: range bound since the US election, so within five to

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Speaker 7: seven basis points for USIG for example, and really the

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Speaker 7: key drivers. Despite all of the headlines that we've seen,

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Speaker 7: you still have one very strong technical picture. Yield buyers

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Speaker 7: are supporting the market. High yields prevent supply from rising

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Speaker 7: too much. And then fundamentals are still very solid. Look

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Speaker 7: at fourth quarter we saw double digit earnings growth for

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Speaker 7: ig issuers, and so I think investors for now are

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Speaker 7: focusing on those two features rather.

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Speaker 2: Than tariffs less unpacked fundamentals first, and talk about fundamentals,

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Speaker 2: what's the greatest threat to fundamentals at the moment, we.

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Speaker 7: Think it's a drop in earnings. So in order to

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Speaker 7: really see high yield interest coverage get to a problematic level,

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Speaker 7: which we think is around three point five times, it

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Speaker 7: doesn't take just higher rates where we are now, you

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Speaker 7: really need that drop in ibadav ten percent or so.

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Speaker 7: So the combination would really be the perfect storm of

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Speaker 7: having higher rates and also a drop in earnings. But

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Speaker 7: we do think it's the growth slowdown is a bigger

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Speaker 7: threat for credit than elevated rates.

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Speaker 1: I thought your point there was really interesting about the

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Speaker 1: fact that rates are high enough that you won't see

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Speaker 1: that supply shock that could potentially send yields or spreads

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Speaker 1: much wider. I am wondering on the other side, though,

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Speaker 1: the demand side, whether you're seeing some potential buyers from

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Speaker 1: say Japan fall off the map a bit because yields

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Speaker 1: are rising there. I mean, there's some interesting sort of

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Speaker 1: divides that are reversing the trend that have been in place,

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Speaker 1: that has been in place for many years. Has that

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Speaker 1: started to ebb some of the foreign demand?

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Speaker 7: So foreign demand, to your point, is a risk of

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Speaker 7: this year as you continue to see the front end

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Speaker 7: of the US rates curve elevated. So hedging costs for

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Speaker 7: those Japanese investors are still quite high, and then jgb's

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Speaker 7: are rising, so that trade off between USIG and local

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Speaker 7: japan bonds is shifting a bit in favor of Japan.

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Speaker 7: But for now we haven't seen selling of us I

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Speaker 7: think it's a risk to watch, but not a trend

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Speaker 7: that's taken hold.

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Speaker 1: One thing we've been talking about all morning is sequencing

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Speaker 1: of policy, and right now we're talking about tariffs, We're

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Speaker 1: talking about some of the potential cuts to the government

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Speaker 1: later this year. People are expecting that maybe we'll get

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Speaker 1: the reprisal of those deals that have been put on hold,

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Speaker 1: the sense that maybe that will come back to the

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Speaker 1: fore Do you think that that could introduce a whole

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Speaker 1: host of supply if there are a lot of mergers

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Speaker 1: acquisitions that do get done, is that going to be

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Speaker 1: funded through the credit market?

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Speaker 2: It could be.

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Speaker 7: I think one interesting point is in your discussion earlier

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Speaker 7: about the negative sentiment, So credit markets are not pricing

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Speaker 7: in risks of this, but you are seeing the uncertainty

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Speaker 7: play out in some areas. So look at IG supply

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Speaker 7: for February. This could be the first month where we

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Speaker 7: are actually below consensus expectations. And what's really interesting about

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Speaker 7: it is following the election, you saw this boost and optimism.

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Speaker 7: You thought you were going to see animal spirits, tons

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Speaker 7: of M and A, and that really has not happened yet.

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Speaker 7: So I think treasure CEOs are sort of holding back

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Speaker 7: in that activity. Should we see more certainty later on

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Speaker 7: in the year, I think some of that could pick up,

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Speaker 7: but for now it's something that we haven't seen so far.

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Speaker 4: People are wanting certainty when it comes to tariffs. The

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Speaker 4: President this morning is saying, just let it all happen.

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Speaker 4: Talking about these tariffs potentially on the auto sector. What

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Speaker 4: do you think in terms of industries are going to

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Speaker 4: be the most vulnerable.

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Speaker 7: So we do think it's going to be a sector story.

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Speaker 7: Our base case, we're assuming around a forty percent tariff

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Speaker 7: on China, five percent rest of the world. Those would

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Speaker 7: be implemented gradually, So in aggregate, we think that's manageable

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Speaker 7: for credit. But there are certain sectors that really stand out,

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Speaker 7: So I'll highlight two. In usig we think autos is

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Speaker 7: very vulnerable, very intertwined with Canada. In Mexico, we don't

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Speaker 7: think that's fully in the price. And then in the

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Speaker 7: high yield market building products. Think about tariffs on things

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Speaker 7: like steal. It could be a tremendous challenge which is

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Speaker 7: not in the price at the moment.

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Speaker 2: Can we finish on all its times? I won't name

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Speaker 2: the name. How would you feel if an auto company

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Speaker 2: came out and sanctioned a big buyback right now on

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Speaker 2: the equity side, how would you feel about that?

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Speaker 5: Well?

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Speaker 7: Not definitely not my area of expertise.

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Speaker 2: For someone who's nervous about investing in auto credit without

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Speaker 2: making more notice, sure, I think.

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Speaker 7: That you know, if we see releveraging and sort of

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Speaker 7: people increasing their balance sheet in a way that is concerning,

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Speaker 7: it just adds to the to the to the list

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Speaker 7: of worries for.

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Speaker 6: The auto sector.

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Speaker 2: Trying to keep you out of trouble, all right, Megan

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Speaker 2: Robson of bemppower By, I'm not trying to get you

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Speaker 2: in trouble. This is the Bloomberg Surveillance Podcast, bringing you

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Speaker 2: the best in markets, economics, angiopolitics. You can watch the

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