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Speaker 2: the economy, US consumer confidence seeing its biggest drop in
Speaker 2: nearly four years. The Confidence Board writing consumers became pessimistic
Speaker 2: about future business conditions and less optimistic about future income.
Speaker 2: Your lendership at Saver of the Conference Board joined us
Speaker 2: now for more. Can you Lena, good morning? Come morning now.
Speaker 2: I respect the data, but the Conference Board consumer confidence
Speaker 2: figure doesn't usually move markets as much as it did yesterday.
Speaker 2: People are nervous, and the nervous about where the consumers
Speaker 2: at the moment, what's your rate on things?
Speaker 3: I think probably the market moves comes after both the
Speaker 3: Michigan survey and the Consumer Conference survey both showed the
Speaker 3: same thing, so that is telling you the issue is
Speaker 3: a little bit more broad based. So I think, you know,
Speaker 3: the important thing is that expectations fail quite significantly. And
Speaker 3: what concerned me in that survey, in that particular survey,
Speaker 3: is that consumers are expecting fewer jobs available six months
Speaker 3: from now, so that is probably at the highest level
Speaker 3: in more than a decade. That index is telling me that,
Speaker 3: you know, consumers don't see much availability in the job market,
Speaker 3: so we know the turnover is lower than it used
Speaker 3: to be, so you know, when you get laid off,
Speaker 3: when you get fired or whatever, you know, you are
Speaker 3: finding fewer and fewer possibilities, and consumers are concerned about that.
Speaker 1: What's the difference between normalization and the economy and outright cooling.
Speaker 3: So we expect normalization, so this is something like two
Speaker 3: percent growth in GDP by the end of the year.
Speaker 3: But if we see terriffs, and this is something we
Speaker 3: model at the Conference board, we see quite a big
Speaker 3: hit from the tariffs. If we get a combined impact
Speaker 3: from China, Mexico and Canada tariffs that have been discussed
Speaker 3: of about one percentage points on growth, So that would
Speaker 3: be a significant slowdown to a stall speed in the
Speaker 3: economy of around one percent, So that would be a disaster.
Speaker 1: The reason why I ask is because on one hand,
Speaker 1: you could say, these numbers are pretty negative, all right,
Speaker 1: go to cash, sit in your mattress. On the other hand,
Speaker 1: you could say, we've actually been in a really robust
Speaker 1: growth kind of scenario with jobs being created in a
Speaker 1: significant way, and actually this reduces some of the inflationary
Speaker 1: risk that we had heard about maybe late last year.
Speaker 1: Why is it the former more than the latter.
Speaker 3: So I think these numbers are not catastrophic, you know,
Speaker 3: the numbers that we saw in the Conference Board survey,
Speaker 3: because they're still in kind of a range, the bottom
Speaker 3: of the range, but still within a range that the
Speaker 3: index has been over the last several years. And over
Speaker 3: the last several years, what did we see. We saw
Speaker 3: consumers spending at quite a solid rate. So the problem
Speaker 3: here is that the declining confidence comes at the time
Speaker 3: when the savings rate is at a very low level.
Speaker 3: At three point eight percent, this is very low by
Speaker 3: historical standards, and what usually happens when confidence declines, the
Speaker 3: savings rate starts to increase, and you know when your
Speaker 3: income is the same or even declining because of inflation.
Speaker 3: That means only one thing, and that thing is the
Speaker 3: decline in consumer spending. Consumers have always been the driver
Speaker 3: of economic growth, and at the time when we rely
Speaker 3: on consumers so much, that means slowed down in economic growth.
Speaker 4: One of the big criticisms of the University of Michigan
Speaker 4: survey is that it's very political. How much political bias
Speaker 4: do you think is in the Conference Board survey?
Speaker 3: Absolutely that has the same issue. And if you look
Speaker 3: at the breakdown by political party, obviously Democrats are more pessimistic.
Speaker 3: Even independence are more pessimistic than Republicans. But even in
Speaker 3: the Conference Board survey, the Republican sentiment is actually leveling
Speaker 3: off as well. So we saw it across the political
Speaker 3: spectrum in this survey.
Speaker 4: When it comes to the right and responses, I love
Speaker 4: these because you get a sense of what's going on
Speaker 4: in people's minds. They talk about inflation and tariffs. Is
Speaker 4: anyone talk about the fact that there might be a
Speaker 4: tax hike if TCJA wasn't extended. Is that concerning any consumers?
Speaker 3: I don't think we're they here. So what we see
Speaker 3: in the writings is the increase in policy concerns, in
Speaker 3: political concerns, in tariffs. Yes, so those things that we
Speaker 3: hear on the news every day. Inflation is still a
Speaker 3: bit concerned, but it's being kind of like replaced by
Speaker 3: all this political agenda that we're hearing. I don't think
Speaker 3: the taxes are on the agenda just yet.
Speaker 2: Lena always got to catch ups, go to see it.
Speaker 2: I appreciate it, Lena, should I say at the conference,
Speaker 2: Bot joining us now, Brian Gardner, stayful to build on
Speaker 2: the conversation. Brian, welcome to the program sir. For people
Speaker 2: just waking up this morning, you want to ask somebody
Speaker 2: with the processes you and Tyler are, can you walk
Speaker 2: us through on where we are at the moment and
Speaker 2: how much longer this might take?
Speaker 5: All right, so it's spring training for baseball. Let's put
Speaker 5: it in baseball terms, right, in terms of a nine
Speaker 5: in a game. We're in the first NY, It's that clear.
Speaker 5: It is very, very early in the process. This is
Speaker 5: an important step. Last night, it was a prerequisite for
Speaker 5: the rest of the debate that's going to play out
Speaker 5: through the rest of the spring, maybe into the summer,
Speaker 5: maybe into the fall. But we are really early in
Speaker 5: the process.
Speaker 4: Given it so early in the process, what does it
Speaker 4: say to you that to get over the finish line
Speaker 4: we had to have President Trump act like the Speaker
Speaker 4: of the House, basically whipping votes last night.
Speaker 5: I think that's an rhetorical question. I think it kind
Speaker 5: of answered it yourself. The fact that what should be
Speaker 5: a fairly easy vote just to get the process started
Speaker 5: and moving was essentially root canot last night and very
Speaker 5: very difficult to get enough votes to switch from node yes.
Speaker 5: And it kind of belies the difficulty that is going
Speaker 5: to be down the road because among the yes's were
Speaker 5: a lot of members who have concerns over the Medicaid cuts,
Speaker 5: the potential Medicaid cuts. There's nothing formal in the bill yet,
Speaker 5: but they've been speaking to the to the leadership, to
Speaker 5: the White House. Their concerns are out there, and if
Speaker 5: those Medicaid cuts start to materialize and become part of
Speaker 5: actual legislation, those guesses are really at play. And on
Speaker 5: the on the flip side, as you as the report
Speaker 5: just mentioned the fiscal Conservatives, you know they went along
Speaker 5: with it, but they want more cuts. Well, if they
Speaker 5: get their more cuts, then you're going to lose some
Speaker 5: of the other yeses like I just mentioned, who are
Speaker 5: concerned about the deepness of the cuts. It's a very difficult.
Speaker 5: The political capitalist is very very difficult.
Speaker 4: And they have a razorsin majority when you talk about
Speaker 4: those like we saw last night. Yeah, when you talk
Speaker 4: about these medicaid cuts, it's not outright that they're talking
Speaker 4: about medicaid, But we're talking about eight hundred and eighty
Speaker 4: billion dollars that comes from the Energy and Commerce Committee.
Speaker 4: What else could it be if it's not medicaid?
Speaker 5: And that's the issue, right, So for people who don't
Speaker 5: understand last night, what they voted on just has top
Speaker 5: line numbers. There's no legislative language. There's no policy language
Speaker 5: in that document, but it assigns eight hundred and eighty
Speaker 5: billion dollars in savings to the Energy and Commerce Committee.
Speaker 5: While you look at the Energy and Commerce Committee and
Speaker 5: see what they're what their jurisdiction is, and you get
Speaker 5: to medicate, Now, where can you find offsets elsewhere? Maybe
Speaker 5: even outside of that committee. And what I have pointed
Speaker 5: out to clients is that when you look at the
Speaker 5: tax cuts, there may be some tough decisions coming down
Speaker 5: the road on maybe some items not being extended, or
Speaker 5: some current policies such as maybe a cap on the
Speaker 5: corporate salt deduction, maybe that comes into play. Maybe a
Speaker 5: stock buyback tax which is already in law, maybe that
Speaker 5: gets increased. So there's going to be very intense negotiations
Speaker 5: that have market impacts over the next couple of months.
Speaker 1: Brian, the estimate from the Committee for a Responsible Federal
Speaker 1: Budget says that this current proposal will increase the federal
Speaker 1: deficit by nearly three trillion dollars over the upcoming years.
Speaker 1: Is that the base case for you going forward that
Speaker 1: this is essentially how much any kind of bill will
Speaker 1: increase the deficit roughly.
Speaker 5: I think one thing that is happening, which is I
Speaker 5: think as a positive, is that we're getting back to
Speaker 5: a more sustainable trajectory on debt. Debt's not going to
Speaker 5: come down. We're certainly not getting to a balanced budget,
Speaker 5: but we're getting back to an historical norm which has
Speaker 5: really been we've been out of kilter with that during
Speaker 5: COVID and I think Scott Besson mentioned this in your
Speaker 5: interview with him earlier in the week, which was which
Speaker 5: was absolutely fantastic. You know, just getting back to a
Speaker 5: sustainable trajectory on debt and deficits and then dealing with
Speaker 5: longer term problems after that, because longer term problems, longer
Speaker 5: term debt solutions have to include social security and Medicare,
Speaker 5: and those are off the table for right now.
Speaker 2: Brian went to the World Series Oktober October ok taber Okay,
Speaker 2: Yank god it look.
Speaker 5: I mean, you know, the speaker in the leadership they
Speaker 5: had a big win last night. Let's not let's not
Speaker 5: diminish that they've been talking about a very aggress an
Speaker 5: ambitious timeline of having this all wrapped up in the spring.
Speaker 5: I've always been a little bit skeptical about that. If
Speaker 5: they can do it, you know, hats after them, it
Speaker 5: would be an enormous accomplishment.
Speaker 3: Changing.
Speaker 5: Yeah, because of the negotiations that are going to go on.
Speaker 5: I think we're going to go on in the summer,
Speaker 5: and I think, Jonathan, we can be back here in
Speaker 5: September looking towards the playoffs at that point and still
Speaker 5: be talking about this as it gets closer to the
Speaker 5: finish line.
Speaker 6: At that point.
Speaker 2: Brank Ahma Stipil Bryant appreciate it. Sert Tech Malony, the
Speaker 2: CEO of FS investment management, seeing high quality companies outside
Speaker 2: of tech and right in the following market. Concentration is
Speaker 2: the most important theme in today's market. History has shown
Speaker 2: prolonged periods of concentration are followed by equally long diversification cycles.
Speaker 2: Opportunities can often be found in recent lankets. To join
Speaker 2: us studio for mot ted, it's got to see it
Speaker 2: to be Are we moving out from a prolonged period
Speaker 2: of concentration towards right now beginning a long period of diversification.
Speaker 6: Well, by its nature, it's almost impossible to think about
Speaker 6: specific timing around that. So I might have been wrong.
Speaker 6: I would have been wrong a year or two ago
Speaker 6: in thinking that the concentration was already at dangerous levels
Speaker 6: and due to online. So while we're not sure the
Speaker 6: last couple of months have been the beginning of an unwind,
Speaker 6: we are reasonably sure that the level of concentration is dangerous.
Speaker 6: And I want to point out that's not desparing to
Speaker 6: come about any of the companies that make up the concentration.
Speaker 6: They're wonderful companies in some cases, with reasonable valuations under
Speaker 6: certain assumptions, But when you put them together, the level
Speaker 6: of concentration and you look back in history at times
Speaker 6: when we've been even remotely close to this, it's ended
Speaker 6: badly for investors who were over concentrated in those spaces.
Speaker 2: When the stock goes up into the right on the chart,
Speaker 2: a lot of people don't think it's dangerous and talk
Speaker 2: to me about what's dangerous about it? And when you
Speaker 2: think about diversification, what does that actually mean in practice?
Speaker 6: Well, what's dangerous about it is if one thing goes
Speaker 6: wrong for one of those companies, and because they're so interconnected,
Speaker 6: it would be likely to be a chain reaction across
Speaker 6: the companies. Not just the companies, but the equities that
Speaker 6: are incredibly highly valued. So diversification is, you know, famously
Speaker 6: one of the free lunches and investing. And it's interesting
Speaker 6: you have moments in time over history where people forget
Speaker 6: that because, as you say, they get enamored by up
Speaker 6: under the right. And it's been really easy to make
Speaker 6: money and these seven stocks for the last couple of years,
Speaker 6: So I'm going to keep doing it. It's very hard
Speaker 6: to predict what will unwind it. It is reasonably reasonably
Speaker 6: high confidence bet that it will unwind at some point.
Speaker 1: Yeah, there's been the sense that you actually are punished
Speaker 1: if you aren't necessarily heavily weighted in them because they've
Speaker 1: been the outperformers. I'm wondering how you position around that,
Speaker 1: whether you expect the unwined to be somewhat violent as
Speaker 1: it was, say in the two thousand period of time,
Speaker 1: or whether it could just be what we've seen over
Speaker 1: the past couple of months, which is, you know, a correction.
Speaker 1: It's kind of happened, but the rest of the market's done.
Speaker 6: Fine, right exactly. And I think you approach it from
Speaker 6: two different angles. One bottoms up the idea of finding
Speaker 6: a number of other stocks and bonds that you can
Speaker 6: buy to balance out your portfolio and make sure that
Speaker 6: you've got good conviction and long term returns and there,
Speaker 6: and then top down thinking about risk management again, our
Speaker 6: portfolios that have the MAG seven in their benchmarks tend
Speaker 6: to own a decent amount of MAC seven. Were not
Speaker 6: negative necessarily on the individual stocks or the space. What
Speaker 6: we're concerned about is a risk management question and managing
Speaker 6: risk at a portfolio level and looking at a small
Speaker 6: number of stocks driving all of the returns and most
Speaker 6: of the risk in a portfolio, which you think is dangerous.
Speaker 1: It's notable that since December seventeenth you can see that
Speaker 1: correction in the mag seven even though the S and
Speaker 1: P equal weight is actually up on the period, so
Speaker 1: a lot of people are doing the same. You made
Speaker 1: another point that I thought was really interesting, which is
Speaker 1: that liquidity chain ideas can really shift at a time
Speaker 1: where everyone's talking about private markets as being the bastion
Speaker 1: of hope and returns. You challenge that you actually think
Speaker 1: that in public markets there potentially is more opportunity.
Speaker 6: Why Well, we said this quoint notion that overtime liquidity
Speaker 6: is a feature, not a bug, and you have moments
Speaker 6: in time where all the money will chase illiquids because
Speaker 6: of an appearance of higher returns or a value proposition
Speaker 6: that looks really compelling until people want to get their money.
Speaker 6: And we think it also depends on who the investor
Speaker 6: is right, So large, very sophisticated institutional investors with large
Speaker 6: pools of assets should have a meaningful part of their
Speaker 6: portfolio in privates and alternatives. As it starts to become
Speaker 6: mass market, we worry about what that means for a
Speaker 6: mass market investor who might need access to his or
Speaker 6: her liquidity and might discover at the worst possible time
Speaker 6: that they don't have it.
Speaker 2: We talked a lot about the United States and diversifying
Speaker 2: within the United States across various asset classes. Can you
Speaker 2: walk us through how you think about things internationally at
Speaker 2: a time where Europe has really started to outperform to
Speaker 2: stand the year, We've.
Speaker 6: Always thought that having a global lens is the best
Speaker 6: way to invest, even if you're just focused on a
Speaker 6: given region, but certainly if you have the opportunity to
Speaker 6: invest across the world. We think that US exceptionalism, regardless
Speaker 6: of at this point, regardless of whether or not you
Speaker 6: believe that it's durable or not, it's priced in. So
Speaker 6: if you look around the world, you're paying a lot
Speaker 6: for the US exceptionalism. Be to work out, you're paying
Speaker 6: significantly less in various pockets around the world. And that's
Speaker 6: across asset class that stocks that sponds, that's beyond that.
Speaker 6: So we think there are lots of opportunities outside the US,
Speaker 6: plenty of opportunities inside the US as well, And it's
Speaker 6: probably never been a better time to be a skilled
Speaker 6: manager thinking about risk at a portfolio level and being
Speaker 6: able to make those trade offs around the world.
Speaker 2: Ted, this was smart. It's going to catch up with you.
Speaker 1: Appreciate here.
Speaker 2: Thank you, Ted Maloney, the of FS Investment Management. Let's
Speaker 2: get the market conversation. Megan Robson of BMP parabout joined
Speaker 2: us now for more meccan, Good morning, Marning.
Speaker 1: Thanks.
Speaker 2: We're seeing a little bit of nervousness in equities and
Speaker 2: my stress a little bit. We're still several percentage points
Speaker 2: away from all time highs. Are you seeing any concern
Speaker 2: and credit and credit spreads.
Speaker 7: That so it aggregates, No concerning it. We've been extremely
Speaker 7: range bound since the US election, so within five to
Speaker 7: seven basis points for USIG for example, and really the
Speaker 7: key drivers. Despite all of the headlines that we've seen,
Speaker 7: you still have one very strong technical picture. Yield buyers
Speaker 7: are supporting the market. High yields prevent supply from rising
Speaker 7: too much. And then fundamentals are still very solid. Look
Speaker 7: at fourth quarter we saw double digit earnings growth for
Speaker 7: ig issuers, and so I think investors for now are
Speaker 7: focusing on those two features rather.
Speaker 2: Than tariffs less unpacked fundamentals first, and talk about fundamentals,
Speaker 2: what's the greatest threat to fundamentals at the moment, we.
Speaker 7: Think it's a drop in earnings. So in order to
Speaker 7: really see high yield interest coverage get to a problematic level,
Speaker 7: which we think is around three point five times, it
Speaker 7: doesn't take just higher rates where we are now, you
Speaker 7: really need that drop in ibadav ten percent or so.
Speaker 7: So the combination would really be the perfect storm of
Speaker 7: having higher rates and also a drop in earnings. But
Speaker 7: we do think it's the growth slowdown is a bigger
Speaker 7: threat for credit than elevated rates.
Speaker 1: I thought your point there was really interesting about the
Speaker 1: fact that rates are high enough that you won't see
Speaker 1: that supply shock that could potentially send yields or spreads
Speaker 1: much wider. I am wondering on the other side, though,
Speaker 1: the demand side, whether you're seeing some potential buyers from
Speaker 1: say Japan fall off the map a bit because yields
Speaker 1: are rising there. I mean, there's some interesting sort of
Speaker 1: divides that are reversing the trend that have been in place,
Speaker 1: that has been in place for many years. Has that
Speaker 1: started to ebb some of the foreign demand?
Speaker 7: So foreign demand, to your point, is a risk of
Speaker 7: this year as you continue to see the front end
Speaker 7: of the US rates curve elevated. So hedging costs for
Speaker 7: those Japanese investors are still quite high, and then jgb's
Speaker 7: are rising, so that trade off between USIG and local
Speaker 7: japan bonds is shifting a bit in favor of Japan.
Speaker 7: But for now we haven't seen selling of us I
Speaker 7: think it's a risk to watch, but not a trend
Speaker 7: that's taken hold.
Speaker 1: One thing we've been talking about all morning is sequencing
Speaker 1: of policy, and right now we're talking about tariffs, We're
Speaker 1: talking about some of the potential cuts to the government
Speaker 1: later this year. People are expecting that maybe we'll get
Speaker 1: the reprisal of those deals that have been put on hold,
Speaker 1: the sense that maybe that will come back to the
Speaker 1: fore Do you think that that could introduce a whole
Speaker 1: host of supply if there are a lot of mergers
Speaker 1: acquisitions that do get done, is that going to be
Speaker 1: funded through the credit market?
Speaker 2: It could be.
Speaker 7: I think one interesting point is in your discussion earlier
Speaker 7: about the negative sentiment, So credit markets are not pricing
Speaker 7: in risks of this, but you are seeing the uncertainty
Speaker 7: play out in some areas. So look at IG supply
Speaker 7: for February. This could be the first month where we
Speaker 7: are actually below consensus expectations. And what's really interesting about
Speaker 7: it is following the election, you saw this boost and optimism.
Speaker 7: You thought you were going to see animal spirits, tons
Speaker 7: of M and A, and that really has not happened yet.
Speaker 7: So I think treasure CEOs are sort of holding back
Speaker 7: in that activity. Should we see more certainty later on
Speaker 7: in the year, I think some of that could pick up,
Speaker 7: but for now it's something that we haven't seen so far.
Speaker 4: People are wanting certainty when it comes to tariffs. The
Speaker 4: President this morning is saying, just let it all happen.
Speaker 4: Talking about these tariffs potentially on the auto sector. What
Speaker 4: do you think in terms of industries are going to
Speaker 4: be the most vulnerable.
Speaker 7: So we do think it's going to be a sector story.
Speaker 7: Our base case, we're assuming around a forty percent tariff
Speaker 7: on China, five percent rest of the world. Those would
Speaker 7: be implemented gradually, So in aggregate, we think that's manageable
Speaker 7: for credit. But there are certain sectors that really stand out,
Speaker 7: So I'll highlight two. In usig we think autos is
Speaker 7: very vulnerable, very intertwined with Canada. In Mexico, we don't
Speaker 7: think that's fully in the price. And then in the
Speaker 7: high yield market building products. Think about tariffs on things
Speaker 7: like steal. It could be a tremendous challenge which is
Speaker 7: not in the price at the moment.
Speaker 2: Can we finish on all its times? I won't name
Speaker 2: the name. How would you feel if an auto company
Speaker 2: came out and sanctioned a big buyback right now on
Speaker 2: the equity side, how would you feel about that?
Speaker 5: Well?
Speaker 7: Not definitely not my area of expertise.
Speaker 2: For someone who's nervous about investing in auto credit without
Speaker 2: making more notice, sure, I think.
Speaker 7: That you know, if we see releveraging and sort of
Speaker 7: people increasing their balance sheet in a way that is concerning,
Speaker 7: it just adds to the to the to the list
Speaker 7: of worries for.
Speaker 6: The auto sector.
Speaker 2: Trying to keep you out of trouble, all right, Megan
Speaker 2: Robson of bemppower By, I'm not trying to get you
Speaker 2: in trouble. This is the Bloomberg Surveillance Podcast, bringing you
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