Speaker 1: Boom, Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
Speaker 2: from our global headquarters in New York City. We are
Speaker 2: live on Bloomberg Television weekday mornings from six to nine
Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or
Speaker 2: anywhere else you listen, and as always on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business app. Let's turn to Credit.
Speaker 2: A runny in corporate debck gaining momentum despite fears of
Speaker 2: sticky inflation, spreads on US high yield bonds falling to
Speaker 2: their lowest since January twenty twenty two, even with markets
Speaker 2: pushing bank rate cut expectations. Blue Out is one of
Speaker 2: the beneficiaries of the credit boom, seeing good shares saw
Speaker 2: more than seventy percent over the last year. Mark Libscholtz,
Speaker 2: the co CEO of blue Out, joins us now for
Speaker 2: more market. Morning to here, Good morning, great to be here.
Speaker 2: Let's talk about what's happening in the world credit. So
Speaker 2: we have the right shout. Last year lasted about five
Speaker 2: minutes and banks failed. We moved on really quickly this year.
Speaker 2: If I think in about Commissioner Ray to state Cira, Cira,
Speaker 2: who's going to be next? And we're going to have
Speaker 2: this credit stress of the three hundred and fifty portfolio
Speaker 2: companies that you'll across any distress whatsoevera right now, the.
Speaker 3: Portfolio is straw. The economy read through, our portfolio looks
Speaker 3: quite positive. Certainly, wind back a year and I imagine
Speaker 3: if we were all sitting here I had the privilege
Speaker 3: of having this conversation with you a year ago, I
Speaker 3: think we'd probably all be talking about what type of
Speaker 3: recession will do we be in right about now? And
Speaker 3: we're not. You know, I look across those three hundred
Speaker 3: and fifty companies and you look last quarter, our companies
Speaker 3: on average grew fifteen percent. They're EBA dah. So that
Speaker 3: is no, these are very selected. Obviously, our job is
Speaker 3: finding great companies and to make loans to really strong
Speaker 3: businesses that have a lot of potential, a lot of growth,
Speaker 3: and where we can therefore of a lot of cushion
Speaker 3: in our loans. But nonetheless, if our portfolio is growing
Speaker 3: fifty fteen percent. We are not in a recession nor
Speaker 3: on the edge of it, and we don't see the
Speaker 3: normal indicators yet that would suggest a meaningfully weakening economy.
Speaker 1: Do you find that your portfolio companies can handle paying
Speaker 1: ten twelve, fourteen percent interest rates and survive and thrive?
Speaker 1: Are the higher yields that we're talking about, not restrictive
Speaker 1: based on the growth that they're projecting.
Speaker 3: Cutting through it all, they're doing fine in that context.
Speaker 3: I think what we now know from we didn't know
Speaker 3: a year ago, is this speculative question of with rates
Speaker 3: rising to levels of course and seen in many people's
Speaker 3: working lives, they hadn't even experienced interest rates, they had
Speaker 3: like a positive number to them. But in any case,
Speaker 3: at the end of the day, what we now know
Speaker 3: is we have a full year of those rates have
Speaker 3: run through the p and ls of these companies, And
Speaker 3: I mean, of course, by definition there's going to be
Speaker 3: an incremental company that will struggle more in a higher
Speaker 3: rate environment, but writ large that has been absorbed by
Speaker 3: the system and quite successfully. We're not seeing these waves
Speaker 3: of changes or even the precursors to them, like asking
Speaker 3: for lots of amendments or meaningful changes in hey, can
Speaker 3: I pay in more debt? Can I pick my interest
Speaker 3: instead of pain in cash? So the indicators that are
Speaker 3: not even just what we would suggest an issue kind
Speaker 3: of have to predate an issue just aren't there in
Speaker 3: any meaningful degree yet, which.
Speaker 1: Is fascinating to me because we talk about is it restrictive?
Speaker 1: And then have companies actually felt this. You're talking about
Speaker 1: floating rate note loans, so you're talking about companies that
Speaker 1: actually are handling higher benchmark rates now not necessarily waiting
Speaker 1: to refinance. How has it affected the demand given the
Speaker 1: fact that companies have seemed reluctant to borrow to fuel
Speaker 1: growth given the higher rates.
Speaker 3: So indeed, look, our specialty is senior secured floating right debt.
Speaker 3: So to your point, you know, this environment has been
Speaker 3: very good for us, good for our investors. It's raised
Speaker 3: on a quite quick basis the returns people are and
Speaker 3: of course that's the point to be inflation protected in
Speaker 3: our kind of product. So companies have absorbed that pretty successfully.
Speaker 3: People are borrowing capital, you know, at the end of
Speaker 3: the day again of course supplying demand. We all know
Speaker 3: more expensive capital means people are going to use, perhaps
Speaker 3: less of it, but in the world of private equity,
Speaker 3: in particular in buying a company. And I started in
Speaker 3: private equity myself back in nineteen ninety five. Wasn't even
Speaker 3: called private equity then. And at the end of the day,
Speaker 3: that cost to capital it's a bit of a calculation, right,
Speaker 3: It's how much you can pay for that company. Of course,
Speaker 3: it reduces the value you can pay for an enterprise,
Speaker 3: but it really isn't prohibitive to conducting activity. Which you
Speaker 3: really need is an environment where people have a common
Speaker 3: set of expectations. It's really more about the gap between
Speaker 3: buyer and seller in terms of their expectations than it
Speaker 3: is the absolute numbers.
Speaker 2: Was it aasy back in the nineties?
Speaker 3: Competitive?
Speaker 1: Now?
Speaker 2: Was that less competition? How different was it?
Speaker 3: What? Was a lot different? That is for sure? And
Speaker 3: there certainly allow less competition. If you look back to
Speaker 3: nineteen ninety five when I was lucky enough to join
Speaker 3: k you know there were two large private equity firms
Speaker 3: LBO firms as called then at the time, Forceman Little
Speaker 3: and KKR. The world. Now we're talking thousands and trillions
Speaker 3: of dollars of count.
Speaker 2: Everyone wants a piece of this and I think it's
Speaker 2: a worry that maybe it just ends up with payple
Speaker 2: chasing the same deals, the sloppy deals, and maybe the
Speaker 2: traditional lends get squeezed out. Is that how you see things?
Speaker 3: So the opportunity by virtue of that evolution of the market,
Speaker 3: trillions of dollars of private equity. What we saw at
Speaker 3: Blue Owl was the opportunity to create the financing source
Speaker 3: to meet that need. Now, this is a very young
Speaker 3: industry comparatively, you know, when we talk about that very point,
Speaker 3: thousands of private equity firms Amongst the folks that focus
Speaker 3: on the large area, we focus on the very largest financings,
Speaker 3: very largest companies. There's just a few of us. So
Speaker 3: it's a very young industry by that measure, and I
Speaker 3: think therefore a lot of opportunities ahead.
Speaker 1: To his point, though, a lot of people would argue
Speaker 1: that we know what's going on with some of the
Speaker 1: public markets because basically you've seen the best and the
Speaker 1: brightest kind of weeded out and the others kind of
Speaker 1: fall out of bed and maybe gone to.
Speaker 3: The private market.
Speaker 1: So sort of this question of is there some behavior
Speaker 1: that could lead to a higher default rates that could
Speaker 1: be somewhat masked for the lack of transparency.
Speaker 3: Do you buy into that?
Speaker 1: Do you see colleagues that are operating with maybe less
Speaker 1: or lower standards than yourself.
Speaker 3: I believe that the private market has fundamentally added a
Speaker 3: stabilizing influence in total. Now, of course, again you're going
Speaker 3: to have a dispersion of different participants, so we'll do
Speaker 3: better than others. We're intensely focused on credit that has
Speaker 3: been where we have lived. You know, we've done about
Speaker 3: ninety billion dollars in loans and our running loss rate
Speaker 3: has been six basis points, So there really is a durability.
Speaker 3: But more important for the markets written large, having a
Speaker 3: steady source of capital through ups and downs. During the pandemic,
Speaker 3: we were still providing capital during the run on the
Speaker 3: regional banks. We were providing capital. When inflation was surging,
Speaker 3: we were still providing capital. So a healthy system is
Speaker 3: not one where private markets take over from the public markets,
Speaker 3: but it is one where we have a large vibrant
Speaker 3: private market alongside a large vibrant public market. That is
Speaker 3: a better economic platform.
Speaker 4: You inked a pretty big deal last fall with Mubadala.
Speaker 4: Do you see more interest from some of these sovereign
Speaker 4: wealth firms, particularly in the Middle East.
Speaker 3: We do you know the private lending. Direct lending was
Speaker 3: adopted a generally speaking earlier by US institutions, and part
Speaker 3: of that, I think is just the maturation to a
Speaker 3: degree from really ten years ago this flavor of direct lending,
Speaker 3: the lender of first choice as opposed to lender of
Speaker 3: last resort really didn't exist. So this is kind of
Speaker 3: a ten year industry in that regard, and now we're
Speaker 3: seeing an interest increasing interest with non US investors. Part
Speaker 3: of it, I think is now appreciating the durability, so
Speaker 3: to speak, a safe haven. Where do you want to
Speaker 3: be when times are uncertain? We just talked, you talked
Speaker 3: earlier about the dispersion of views. I think where you
Speaker 3: want to be is senior secured floating rate. So I
Speaker 3: think that the non US investors are appreciating that being
Speaker 3: a core holding. And at the same time, just look
Speaker 3: the absolute returns. When you can generate double digit returns
Speaker 3: taking that very senior position, that very moderated risk, that
Speaker 3: absolute level of return starts to really resonate for people
Speaker 3: in non US markets as well.
Speaker 2: Can I finish with a terrible question, is the evidence whatsoever?
Speaker 2: And it's so that this FED is sufficiently restrictive based
Speaker 2: on what you see, and you'll will specifically.
Speaker 3: So here's what we see in our world. Inflation's a
Speaker 3: sticky animal. We saw it starting a year ago, and
Speaker 3: there's plenty of things. We're not macro prognosticators, but so
Speaker 3: three hundred and fifty companies looking bottom up, we continue
Speaker 3: to see inflation be sticky. There are offsets, for sure. Look,
Speaker 3: shipping costs come down dramatically. We have a consumer products
Speaker 3: company that was paying twenty thousand dollars a container, now
Speaker 3: they're paying thirty five hundred. But wages are sticky. Wages
Speaker 3: are still rising. So we are not through the teeth
Speaker 3: of this inflationary challenge. We're through the worst of it,
Speaker 3: or are not done with it.
Speaker 2: This was probably better to get your answer than ask
Speaker 2: another economist this morning. Mark's going to see you. Thank you, sir,
Speaker 2: mar Lifscheltz there of Blue Out Capital. I think the answer, Bramo,
Speaker 2: I think you heard the same one, right.
Speaker 1: I mean basically no, because if we're looking at companies
Speaker 1: that can handle higher borrowing costs and are still hiring
Speaker 1: and it's still expanding, where's the restrictiveness.
Speaker 3: It's pretty revealing.
Speaker 2: It's the latest. This morning, shares of half Hag Lloyd
Speaker 2: lower in Germany after the shipping giant reported a decrease
Speaker 2: in earnings and warned of a further decrease in twenty
Speaker 2: twenty four on a quote volatile and challenging economic and
Speaker 2: political environment, especially in view of the current situation around
Speaker 2: the Red Sea. Rolph Habin Jansen, the CEO of haf
Speaker 2: hag Lloyd, joins us now for more. Rolph great to
Speaker 2: catch up with you, sir. I want to talk about
Speaker 2: freight rates. When freight rates first night picking up earlier
Speaker 2: this shar year on the back of this story, there
Speaker 2: was a sense from some people that maybe that was temporary.
Speaker 2: Do you see that as the new normal now and
Speaker 2: ultimately are they going higher?
Speaker 5: I think we saw an initial reaction, especially sport rates
Speaker 5: went up a lot, because that's a combination of everybody
Speaker 5: then trying to book things quickly. We were running up
Speaker 5: to Chinese New Year and a lot of uncertainty. I
Speaker 5: think right now we see that the services are stabilizing,
Speaker 5: which means also that the market is getting calmer, and
Speaker 5: as a consequence of that, I think we also see
Speaker 5: sports traits in particularly coming.
Speaker 2: Down just how much time an investment has gone into
Speaker 2: finding alternative routes. Are you considering more land routes? Are
Speaker 2: they viable given the increase in race that you've seen.
Speaker 5: I mean, we have opened up a number of new
Speaker 5: land routes, and we've also taken on some additional ships,
Speaker 5: and of course we've also had to buy a lot
Speaker 5: of additional containers because as all the voyages have become longer,
Speaker 5: we in reality also need more boxes to transport the
Speaker 5: same amount of gorgle rolf.
Speaker 1: How easy is it to pass along the extra cost
Speaker 1: associated with this to the shippers, to the consumers, to
Speaker 1: the to the companies that want to ship.
Speaker 5: I think we see by and large that these costs
Speaker 5: are being passed on, and I think that's also reasonable.
Speaker 5: I mean, if you compare the situation now with what
Speaker 5: we had at COVID there, of course rates exploded. Today
Speaker 5: you have a different situation because there was probably some
Speaker 5: spare capacity in the industry when this crisis hit us,
Speaker 5: and that has certainly helped us to keep global supply
Speaker 5: chains going and also to keep the increase in cost
Speaker 5: within reason.
Speaker 1: So if there isn't any pushback why are some of
Speaker 1: the profitabilities coming down just simply because if you can
Speaker 1: pass it along. Are people shipping less? Are they looking
Speaker 1: to different routes that are shorter.
Speaker 5: I think right now you were still looking at the
Speaker 5: results that come out on companies in the fourth quarter,
Speaker 5: where we had exceptionally low rates that were way be
Speaker 5: low cost. That's also why a lot of companies posted losses.
Speaker 5: I think you will see a recovery and freight rates
Speaker 5: when you start looking at the first and second quarter.
Speaker 5: The question is, of course, what's going to happen once
Speaker 5: the situation around to the Red Sea normalizes.
Speaker 4: I want to talk about the situation in the Red Sea.
Speaker 4: The United States seems to be in a cycle of defense,
Speaker 4: not deterrence when it comes to their posture. Are you
Speaker 4: seeing any signs of deterrence from the United States, through
Speaker 4: the UK or others when it comes to the Hooties.
Speaker 5: Well, first of all, let me say that we really
Speaker 5: welcome all the efforts that are being undertaken by the
Speaker 5: US and their allies to try and stabilize that situation.
Speaker 5: But of course it's very difficult because it's a fairly
Speaker 5: large area that you need to defend. And then so
Speaker 5: far we have seen that the attacks of the hooties continue,
Speaker 5: and it also means that we will then decide we
Speaker 5: have no other choice than to keep our people safe,
Speaker 5: even if that means that some of the supply chains
Speaker 5: are then seven or ten days longer.
Speaker 4: Well, what are governments telling you about securing the Red Sea?
Speaker 4: Do you have a timeline of when you think you
Speaker 4: could start using that route again?
Speaker 5: I think there are many different opinions on when that
Speaker 5: is going to happen. I think we hope that we're
Speaker 5: going to be able to go back through in a
Speaker 5: couple of months, but I know there are also people
Speaker 5: that think that it may last quite a little longer.
Speaker 2: Ralph, thank you Sef for the update. We appreciate it.
Speaker 2: It's an important story has been for the last few months.
Speaker 2: Ralph happened, Yensen there the happek Lloyd CEO, Ja Brice
Speaker 2: and Chafe economists of wels FAGA joined us. Now for more, Hey, j,
Speaker 2: let's get into that CPI upside surprise PPI upside surprise
Speaker 2: going into next week. Jay, what kind of changes, if any,
Speaker 2: would you expect from the outlook from this Federal reserve?
Speaker 6: So, John, in terms of the macroeconomic projections of the Fed.
Speaker 6: I'm not expecting a lot in the summary of economic
Speaker 6: projections there. You know you were noting earlier in terms
Speaker 6: of the dots. I mean, it would only take two
Speaker 6: members to switch from three rate cuts to two, so
Speaker 6: the median could potentially change next next week. And I
Speaker 6: guess you know, if there's an upside risk here to
Speaker 6: the projections for next week, it would be to a
Speaker 6: little bit higher inflation, and you know, maybe the dots
Speaker 6: shifting up as well. But you know, in general, I
Speaker 6: wouldn't expect huge changes from the statement next week or
Speaker 6: from what share pals as in his press conference relative
Speaker 6: to what they've been saying recently.
Speaker 1: Have you changed your view, though, Jay, about the idea
Speaker 1: of how sticky inflation is and how long it's going
Speaker 1: to remain high in the face of a labor market
Speaker 1: that really doesn't show signs of cracking.
Speaker 6: So, so, to answer your first question therely, so, yeah,
Speaker 6: we have pushed back. Are we initially thought that the
Speaker 6: first freight cut we come in May? I mean, I
Speaker 6: think that's kind of off the table more or less
Speaker 6: at this point. We've pushed that back to June. And
Speaker 6: you know, I guess what I would say is I
Speaker 6: think the risk to our forecast would be skewed towards later.
Speaker 6: That is, I would say the probability of July is
Speaker 6: higher than you may at this point. But in general,
Speaker 6: you know, we really haven't really changed our views all
Speaker 6: that much. And in terms of the labor market, I mean,
Speaker 6: so we saw these initial jobless claims today. Now I
Speaker 6: wouldn't make a lot of just one week sort of
Speaker 6: of data if you step back and you take a
Speaker 6: look at it, what we are seeing in terms of
Speaker 6: the labor market is the its rate has coming down
Speaker 6: really quickly. You know, the job openings is also coming
Speaker 6: is coming down as well. And then if you look
Speaker 6: at the unemployment rate, that is starting to move higher here,
Speaker 6: and you know, obviously it's at a very very low
Speaker 6: level still. So what we are seeing is we're seeing
Speaker 6: some softening in the labor market. It's not like it's
Speaker 6: falling apart or anything, but that should, as we go forward,
Speaker 6: continue to bring the employment cost indecks lower.
Speaker 3: How long are we going to remain in this limbo?
Speaker 1: We're trying to understand what the trend is, and you've
Speaker 1: got people who are saying the sky is falling, inflation's reaccelerating.
Speaker 1: Take a look at three months and six month trailing averages,
Speaker 1: and other people say, cut it out, it's.
Speaker 3: On a downward trend.
Speaker 1: You're being over dramatic. How long before we have a
Speaker 1: conclusive decision on those two narratives?
Speaker 3: You know?
Speaker 6: I wish I could answer that question. I just think
Speaker 6: we're going to be in this choppiness though for a
Speaker 6: while here, and so I think we're just we're just
Speaker 6: going to have to live with that. And I think
Speaker 6: what you need to do is, you know, we need
Speaker 6: to step back and we need to say, Okay, we
Speaker 6: all look at this data today, and what does this
Speaker 6: mean for the FED next week? What does this mean
Speaker 6: for the Fed in may? You know, the Fed doesn't
Speaker 6: at this point, it doesn't really know either. It's taking
Speaker 6: these data in its entirety as they come in and it'll
Speaker 6: make its decisions as we go forward. And unfortunately, I
Speaker 6: think we're going to be in this choppiness, you know,
Speaker 6: for a while.
Speaker 1: So right now, as we take a look at the
Speaker 1: way that the market's responding, we see stocks really shrugging
Speaker 1: off pretty much everything. We see bonds reacting, but in
Speaker 1: a controlled sense, what is the threshold for financial conditions
Speaker 1: and the easing of financial conditions to create a problem
Speaker 1: for the Federal Reserve.
Speaker 6: So you know, that's if we continue to trend in
Speaker 6: this direction, stock price is going higher, if we continue
Speaker 6: to see bond spreads coming in in financial conditions and
Speaker 6: that juices the economy even more, I mean, that would
Speaker 6: be I guess you know, it's somewhat of a problem
Speaker 6: for the Fed in terms of its easing path going forward.
Speaker 6: Now they're not targeting stock prices, they're not targeting bond spreads.
Speaker 6: I mean, what they are looking at is the effects
Speaker 6: of these financial conditions on the overall the overall markets
Speaker 6: or the overall economy in general. People make a big
Speaker 6: deal out of stock prices. It does have a wealth
Speaker 6: effect on people, but those wealth effects tend to be
Speaker 6: pretty small. So the point here is you need to
Speaker 6: have a lot of financial conditions loosening here for it
Speaker 6: to really start to have an effect on the FED
Speaker 6: decisions going forward. And I don't think we're quite at
Speaker 6: that point just yet.
Speaker 4: When it comes to JPW, he continuously says at some
Speaker 4: point this year will be cutting. Does that change to
Speaker 4: later this year? Does this timeline just get pushed back.
Speaker 6: I think I think it does, Lisa, you know, I mean,
Speaker 6: because what we're seeing is, yes, the inflation rate is
Speaker 6: trending lower. Now, it's not coming down as much as
Speaker 6: I guess people would like it to be. But what's
Speaker 6: happening is that that inflation rate continues to come down
Speaker 6: and the Fed remaining on hold, the real Fed funds
Speaker 6: rate is passively going higher, and that's acting then as
Speaker 6: a passive tightening on the overall economy. And so in
Speaker 6: some sense they need to be cutting rates. Maybe not
Speaker 6: in May, maybe not in June or July, but they
Speaker 6: probably need to be cutting rates later this year or
Speaker 6: you're going to have a passive tightening of monetary policy,
Speaker 6: which then can potentially slow things a lot more than
Speaker 6: people are expecting right now.
Speaker 2: JA appreciate your views, your opinion, your reaction to this
Speaker 2: this morning. Thank you, sir J Brice and there of
Speaker 2: wels Fargo. This is the Bloomberg Survenllants podcast, bringing you
Speaker 2: the best in markets, economics, an gio politics. You can
Speaker 2: watch the show live on Bloomberg TV weekday mornings from
Speaker 2: six am to nine am Eastern. Subscribe to the podcast
Speaker 2: on Apple Spotify or anywhere else you listen, and as always,
Speaker 2: on the Bloomberg terminal and the Bloomberg Business app.