Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller. Every business day we bring
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
Speaker 1: at Bloomberg dot com slash podcast. All right, the question
Speaker 1: here for this felto reserve to what extent can it
Speaker 1: in fact fight inflation? Is it's something more than just rates. Uh,
Speaker 1: isn't a supply chain issue out there that's really kind
Speaker 1: of a challenge? Pre A Miserab, Managing director and Global
Speaker 1: head of rate Strategy at TV Securities, joins us Um.
Speaker 1: I guess my question is does the FED have the
Speaker 1: tools to curb inflation create a soft landing that I
Speaker 1: think people would like to see. So I think the
Speaker 1: FED does have the tool of interest rates both the
Speaker 1: rate channel as well as QT, and they have the
Speaker 1: ability to slow demand aggregate demand. Does that bring inflation
Speaker 1: down to two percent? I do struggling with that as
Speaker 1: you talked about their supply chain issues as commodity price
Speaker 1: increases because of Russia. So I don't think they can
Speaker 1: achieve the two percent target in the very near term,
Speaker 1: but they can absolutely slow aggregate demand, and they can
Speaker 1: tighten financial conditions, and the market is already doing some
Speaker 1: of that work for them. So now, really I think
Speaker 1: that you see, the market didn't really react to even
Speaker 1: as them the fact that it came in weaker than
Speaker 1: expected because the market is giving greater weight to inflation
Speaker 1: and the fact that the Fed will have to respond
Speaker 1: to these very high readings. Yeah, and that kind of
Speaker 1: brings up, you know, the topic that's been you know,
Speaker 1: on people's minds are really less several weeks a couple
Speaker 1: of months, is stagflation. You look at China, uh, and
Speaker 1: there are various levels of lockdown, and that seems to
Speaker 1: be an ongoing issue. Then of course you've got Russia
Speaker 1: and Europe and what it means for commodities and other
Speaker 1: products here that kind of suggests that stagflation is a thing.
Speaker 1: Here are How concerned are you about that? So it
Speaker 1: is a nightmare scenario for the FED because in the
Speaker 1: two mandates pull in different directions, you know, because we
Speaker 1: think that as always inflation starts to decelerate, say the
Speaker 1: monthly readings go from point six point seven right now
Speaker 1: CPI two point three point four. We think the Fed
Speaker 1: at that point will probably be more tolerant of these
Speaker 1: slightly higher than than target inflation and not overdo it.
Speaker 1: But that is a call that the FED will have
Speaker 1: to make closer to your end when they get to
Speaker 1: neutral on the funds rate. QT is continuing. If inflation
Speaker 1: just gives them the ability to push out that when
Speaker 1: they reach their target, we don't think they'll overdo it.
Speaker 1: That's why our end point of the hiking cycle is
Speaker 1: not as high as the market. But there is another
Speaker 1: scenario where inflation really doesn't decelerate and the FED has
Speaker 1: to go significantly about neutral, you know, three and a
Speaker 1: half or higher on the funds rate along with QT.
Speaker 1: That's when I really worry about thet inflation because I
Speaker 1: don't think that the soft landing in that scenario where
Speaker 1: there's so much tightening through monetary policy. I thing is
Speaker 1: a very tough um, you know, aim for the FED.
Speaker 1: So it's only if they're able to tolerate slightly high inflation,
Speaker 1: and I sort of hope they make that call near
Speaker 1: your end. Or that's our basic case, but it depends
Speaker 1: on some deceleration and that inflation momentum. Yeah, I've got
Speaker 1: to ask about the balance sheet here, because this is
Speaker 1: something that there's still a lack of clarity on what
Speaker 1: can we expect on the balance sheet? What is the
Speaker 1: worst case and best case scenario in terms of what
Speaker 1: we hear about that sure, And I completely agree with you.
Speaker 1: I think it's hard for the market to price in
Speaker 1: the balance sheet because there's a nonlinear effect of the
Speaker 1: balance sheet. I would argue that the balance sheet run
Speaker 1: off initially is not a big deal because we are
Speaker 1: far from neutral because supply only picks up slowly. They
Speaker 1: face it in when you get closer to your end,
Speaker 1: when you know the funds rate is closer to normal
Speaker 1: or neutral, and the balance sheet at this point is
Speaker 1: running off almost a hundred billion a month, I think
Speaker 1: the effects starts to grow a lot more, and the
Speaker 1: impact really comes from higher long and real rates. And
Speaker 1: you've already seen a rise in long and reil rates,
Speaker 1: which is I think ultimately what's tightening financial cans. So
Speaker 1: I think that's the channel through which you see the
Speaker 1: tightening in conditions. You see the movement in mortgage rates,
Speaker 1: which starts to impact housing, and I think that it's
Speaker 1: working in the fashion the FED wants it to. But
Speaker 1: I think that's the hard part, calibrating balance sheet which
Speaker 1: they are not nimble on the balance sheet once it starts,
Speaker 1: it's supposed to operate in the background, and then making
Speaker 1: sure that they don't overdo it on the rate hikes channel.
Speaker 1: I think that's the key one. But you know, I
Speaker 1: think what we hear this week will be likely the
Speaker 1: same caps that were talked about in the minute. I
Speaker 1: think that's pricedon. It's really the flow effect of supply
Speaker 1: month after month that starts to I think have impact
Speaker 1: later on in the year. I think that's when we
Speaker 1: see more of that impact of balance sheet run off.
Speaker 1: All right, thank you so much for joining us. Always
Speaker 1: appreciate getting your perspective. Prem Israe, Managing director and global
Speaker 1: head of rate Strategies over there at TV Securities. In
Speaker 1: case you haven't heard it, there's a chip shortage out
Speaker 1: there and it's affecting pretty much every industry out there,
Speaker 1: and we see it hear it on these conference calls
Speaker 1: being called out all the time as a reason for
Speaker 1: supply issues, and to be honest with you, I don't
Speaker 1: get it. Baba babash Bala Christian that joins us. He's
Speaker 1: the CEO and president of Power Integrations. Maybe he can
Speaker 1: answer the question follow I envision all these semiconductor chip
Speaker 1: makers have rows and rows and rows of desks filled
Speaker 1: by nbas who do nothing but forecast chip demand five
Speaker 1: ten years out. Why do we have such a chip
Speaker 1: shortage right now? I don't get it. Good morning, Paul
Speaker 1: and pretty and thanks for inviting me. Uh, excellent question.
Speaker 1: I think part of the reason is that people got
Speaker 1: so used to squeezing everything out of the supply chain.
Speaker 1: They introduced what's known as just in time manufacturing, which
Speaker 1: is actually very risky. What you're saying is everything has
Speaker 1: to work perfectly for you to be able to manufacture
Speaker 1: a car or a product and appliance, and now they're
Speaker 1: seeing the effect for such you know, tight uh supply chain. Uh.
Speaker 1: I would say, if you go back about fifty years
Speaker 1: or so, everybody carried inventory at different stages. So that's that's,
Speaker 1: you know, part of the problem. The second is, I
Speaker 1: really don't think anybody expected the amount of electronics that
Speaker 1: goes into some of the products, whether it's appliance or
Speaker 1: industrial products, or the electrification which is you know, electric cars,
Speaker 1: buses and so on, they are really computers on wheels,
Speaker 1: and I think they miscalculated the amount of capacity needed.
Speaker 1: And when we had the the COVID situation, everybody stopped,
Speaker 1: I mean literally, automotive companies stopped ordering and so there
Speaker 1: was nothing in the inventory, and they stopped manufacturing vapors
Speaker 1: because they thought the whole world is going to come
Speaker 1: to the end in terms of demand. And now we're
Speaker 1: seeing the effects of it. So how do you predict
Speaker 1: or model out some of this demand with the volatility
Speaker 1: of the COVID lockdowns. Now that we are two years
Speaker 1: into this, we know the about China zeroor COVID policy.
Speaker 1: How is that modeling or that forecasting changing. Well, I
Speaker 1: think what is happening right now is the huge amount
Speaker 1: of capacity being put into vapor vapor fabrications. You know,
Speaker 1: vapor plans take a long time, They take three to
Speaker 1: four years established. So this is very typical of a
Speaker 1: stomic and recycle with you know, they put a lot
Speaker 1: of investment and I won't be surprised if three or
Speaker 1: four years will be floating in vapor capacity. UM I
Speaker 1: would say we have been much more we meaning power
Speaker 1: Integrations has been much more careful in planning this. So
Speaker 1: I am happy to say please to say that we
Speaker 1: have not had a supply chain problem for multiple reasons.
Speaker 1: One is a unique boundary model. Secondly, we are multiple
Speaker 1: source into multiple geographies and so that has really helped us.
Speaker 1: Probably the most important if it's never stopped manufacturing wafers.
Speaker 1: Even when there was a downturn in the beginning of
Speaker 1: we kept building inventory. We had so much inventory that
Speaker 1: we had no problems applying when the demand came right back.
Speaker 1: You know, at the beginning of this, I guess the
Speaker 1: beginning of the pandemic, the beginning of the supply chain challenges.
Speaker 1: There's a lot of talk about on shoring chip manufacturing
Speaker 1: in the United States now it's mainly centered in Asia.
Speaker 1: Do you think that's a viable strategy. Is that happening?
Speaker 1: It is a viable strategy. It is happening because as
Speaker 1: far as vapor fabrication goals, it doesn't matter where you
Speaker 1: put it. The cost is about the same because it
Speaker 1: was dominated by um equipment costs, not labor costs. So
Speaker 1: there is no reason to have it in UH low
Speaker 1: cost countries, low cost labor countries. So Uh, it was
Speaker 1: too bad as so much of the capacity went away
Speaker 1: from US, and finally it's good to see that it's
Speaker 1: coming back. Europe is doing the same thing. And by
Speaker 1: the way, we have been very careful not to put
Speaker 1: our technology which we own into countries where we don't
Speaker 1: have intellectual property protection like in China, like Taiwan and Korea.
Speaker 1: As a result, we had in a much better place.
Speaker 1: So you know, we have most most of the foundaries
Speaker 1: that in Japan, some in US and some in Europe.
Speaker 1: I've got to ask about once again the geopolitics of
Speaker 1: this all because I think pre pandemic the story. Paul,
Speaker 1: correct me if I'm wrong here, but I think the
Speaker 1: story was the trade war, right, tariffs that haven't necessarily
Speaker 1: disappeared with the Biden administration. So I have to ask,
Speaker 1: as it takes years, and I believe it will take
Speaker 1: years to bring some of that more of that capacity
Speaker 1: back domestically or onto Europe. I mean, how do how
Speaker 1: do companies like yours and and others navigate the tariff environment,
Speaker 1: the geopolitical environment. Well, that's a good question. As I said,
Speaker 1: we are in a different position, so we are actually
Speaker 1: not capacity limited. We were not capacity limited last year
Speaker 1: and we are not this year either, which is an
Speaker 1: enviable position. So there are a couple of things we
Speaker 1: are doing hopefully other people can follow on. That is
Speaker 1: that we only ship to real demand. We don't ship
Speaker 1: to any orders that are placed. We look at what
Speaker 1: they were buying before, and we only shipped to the
Speaker 1: run rate of what they were buying, or maybe a
Speaker 1: little bit higher because the demand is higher. Secondly, we have,
Speaker 1: as I said, we have a unique boundary model where
Speaker 1: we put our technology into companies in Japan, US and
Speaker 1: Europe where we have a long term contract to keep
Speaker 1: the capacity be and we are able to do that
Speaker 1: because we continue to build it. We continue to build
Speaker 1: during downturns. We did that in two thousand two nine,
Speaker 1: and of course in two thousand we did that again
Speaker 1: during the COVID situation, and we group forty four last year. UM.
Speaker 1: I think it really comes down to making sure that
Speaker 1: you have sufficient inventory, and that's where I think people
Speaker 1: cut too short because they were trying to manage the
Speaker 1: supply chain way too close, and supply chains are incredibly
Speaker 1: complex in in in when it comes to chips. So
Speaker 1: going forward, I think what they have to learn is
Speaker 1: just in time is not a uh not a lowish proposition.
Speaker 1: There's very high risk when you do just in time manufacturing.
Speaker 1: So how do you think just in time be about
Speaker 1: third thirty seconds left? How do you think just in
Speaker 1: time inventory will evolve? I guess I think what will
Speaker 1: happen is everybody will caddies some level of inventory, including
Speaker 1: the automotive companies, appliance companies. UH. That way they are
Speaker 1: buffered from UH you know, disasters or in this case,
Speaker 1: pandemic or you know, any of the supply chain interruptions.
Speaker 1: All right, Ballo, thank you so much for joining us there.
Speaker 1: Bo Bala Krishnan, he's a CEO and president of Power Integrations,
Speaker 1: a semiconductor UH company out there giving us his thoughts
Speaker 1: on the chip market. Again, it's been an issue here
Speaker 1: from pretty much every company in every industry when they
Speaker 1: talk about shortages or supply chain challenges. One of the
Speaker 1: key area is UH they focus on is the semiconductors.
Speaker 1: All right, Well, last Friday, while I had my toes
Speaker 1: in the sand, Amazon stock and it's because one day
Speaker 1: drops since July two thousand six, just extraordinary. So the
Speaker 1: questions what does that mean for Amazon? What does that
Speaker 1: mean for e commerce? What does that mean for retail
Speaker 1: in general as most of the world comes out on
Speaker 1: the other side of this pandemic re Checking with Nikki Baird,
Speaker 1: vice president of strategy at Aptose Retail, Nikki, just, first
Speaker 1: of all, what do you make of Amazon's report and
Speaker 1: then the market reaction to said report. Yeah, I wasn't
Speaker 1: too surprised by the report, certainly from our perspective, our
Speaker 1: retailers are seeing much stronger store sales and much less
Speaker 1: on the e commerce side. I think the reaction was
Speaker 1: was definitely a stronger reaction than I would have expected. Uh,
Speaker 1: you know, just in general, I nobody, I think should
Speaker 1: expect that e commerce is going to continue to grow
Speaker 1: from pandemic highs. It's got to come back at least
Speaker 1: a little bit as consumers ship some of their spending
Speaker 1: back to stores. I've got to ask about how Amazon
Speaker 1: is even a proxy perhaps for broader retail, and that
Speaker 1: Amazon's kind of turning into a logistics business expanding their
Speaker 1: shipping services to the likes of Etsy, to Walmart, to
Speaker 1: other third party retailers. Is if you're to really use
Speaker 1: Amazon as kind of this beacon for broader retail, spending.
Speaker 1: I think it's definitely still fair to use them for that.
Speaker 1: While it is true that they are incredibly good at
Speaker 1: taking services that they used to run their own business
Speaker 1: and monetizing those by offering them to others. Uh, you know,
Speaker 1: it is still definitely the destination shopping force for consumers.
Speaker 1: You know, a lot of people will refer to it
Speaker 1: as the Google of products. So when you have that
Speaker 1: kind of market presence in terms of just capturing consumer attention, Uh, yeah,
Speaker 1: I think you can still use them as a good proxy. Nikki,
Speaker 1: give us your sense of kind of how the consumer
Speaker 1: is doing here again coming out on the at least
Speaker 1: here in in the US of this pandemic um dealing
Speaker 1: with the really intense inflation pressures. How's the consumer doing
Speaker 1: in your mind? You know, I am looking forward to
Speaker 1: getting more feedback on April sales because I think that's
Speaker 1: going to be the first place that we really see
Speaker 1: an indicator of how consumers are going to be looking ahead.
Speaker 1: I think, you know, for the first quarter of the year,
Speaker 1: we saw that then they were relatively unimpacted by inflation
Speaker 1: by uh, you know, any of the concerns that were
Speaker 1: driven from that, and you know, an opening up of
Speaker 1: the economy as people are getting more and more comfortable
Speaker 1: with the stage of the pandemic that we're apparently in
Speaker 1: um But but looking ahead, I think I'm starting to
Speaker 1: hear anecdotally consumers noticing, you know, that inflation is definitely
Speaker 1: starting to bite in their budgets. And I think there's
Speaker 1: anticipation that some of the text credits that were given
Speaker 1: during the depths of the pandemic are are kind of
Speaker 1: reducing the tax refund that consumers are expecting to get
Speaker 1: this year, uh, and that that will start to show
Speaker 1: up in April spending and info may well. What really
Speaker 1: strikes me here is that this was the exact conversation
Speaker 1: we were having September where you had this massive sell off.
Speaker 1: A lot of you will blame no seasonality, some people
Speaker 1: saying that the end of fiscal stimulus was the end
Speaker 1: of what was going to happen at the end of summer.
Speaker 1: It didn't really happen until I would say, you know,
Speaker 1: more recently. But this is a conversation that was almost
Speaker 1: inevitable and something that I think the market had expected.
Speaker 1: So why such a strong reaction. Yeah, I I honestly,
Speaker 1: I'm with you. I don't understand the reaction. I would
Speaker 1: have expected that this kind of responds to be priced in.
Speaker 1: And when you look at the you know, the way
Speaker 1: that consumers are getting up their spending, store sales are
Speaker 1: still incredibly strong and not even just against pandemic numbers
Speaker 1: but against So it's not like retail overall is really hurting. Uh,
Speaker 1: it's it's e commerce is coming back off of you know,
Speaker 1: rapidly accelerated growth that happened during the pandemic, and that
Speaker 1: really should be expected. I mean, I think one of
Speaker 1: the dimensions of this is definitely the cost structure, even
Speaker 1: for e commerce. And in some ways e commerce is
Speaker 1: uniquely vulnerable because they depend very much on digital as
Speaker 1: their pathway for consumers to find them. And you know,
Speaker 1: while we've been talking about logistics costs and um, you know,
Speaker 1: inflation and and everything that reflects in the price of
Speaker 1: the product that the consumer pays, marketing costs online also
Speaker 1: have been hit really hard. By some estimates, there ten
Speaker 1: times customer acquisition costs that companies were paying before the pandemic.
Speaker 1: So when you look at those costs and where you're
Speaker 1: literally getting a tent of the bang for your buck
Speaker 1: in terms of acquiring or driving customers to your site.
Speaker 1: I could see that that's driving some outside concern over
Speaker 1: the longer term health of e commerce. So, Nikki, if
Speaker 1: I do go to the store, which I try to
Speaker 1: avoid at all costs, um am, I going to find
Speaker 1: stuff on the shelves. How's the supply chain and inventory
Speaker 1: right now? You know it is better and it was
Speaker 1: uh and you kind of have to differentiate again, you know,
Speaker 1: essential versus non essentials. Right, So there's some additional things
Speaker 1: that are happening in the food supply chain that stay complex.
Speaker 1: But as far as discretionary spending goes, retailers are are
Speaker 1: fairly well stocked. Probably not as exciting of assortments as
Speaker 1: they really would want them to be. But if you
Speaker 1: go to the store, I think you're going to find stuff, well,
Speaker 1: thank God for that. Yeah, absolutely, all right, we'll see
Speaker 1: how that goes, all right, Nicki Baird, thanks so much
Speaker 1: for joining us there. Nicky Baird, vice president of Strategy
Speaker 1: for Aptose Retail. We're going to head over to the
Speaker 1: Milk and Institute's Global Conference in Los Angeles or Bloommark's BusinessWeek.
Speaker 1: Eric Shatsker interviews Apollo Global Asset manager, CEO and co
Speaker 1: founder Mark Romans. Tick listen, Mark, great to see you,
Speaker 1: good morning, see you. Everybody. Delighted to be back at
Speaker 1: the Milk and Gloo conference and kicking it off with
Speaker 1: this conversation. I did want to comment Mark on on
Speaker 1: the following if anybody needed a lesson and how much
Speaker 1: has changed over the course of the pandemic. It's the
Speaker 1: private equity CEO who's in khakis and a sweater this morning,
Speaker 1: and the journalist who's wearing a tie. Um, well, it's
Speaker 1: consistent with the ethos I've had for a very long time.
Speaker 1: I know, I know, if you are elected to a
Speaker 1: national office and I'm seeing you in your office, I
Speaker 1: wear a tie, or if you're my regulator, I'm wearing
Speaker 1: a tie. Other than that, I don't worry about it. Um.
Speaker 1: As I mentioned, Mark, I went around the audience before
Speaker 1: we began and did what I should do, which is
Speaker 1: to ask your friends and colleagues what they would ask
Speaker 1: if they were me, And they all gave me a
Speaker 1: version of the same question. Uh. And maybe it's not
Speaker 1: surprising given the times we're living in. What are you
Speaker 1: most worried about the same thing I'm always most worried
Speaker 1: about people always. Um, I'll be honest. Um, the business,
Speaker 1: the markets, the things that we're talking about today, inflation,
Speaker 1: the correction in the stock market, I don't worry about
Speaker 1: so much. I mean, if people don't see this as
Speaker 1: the logical conclusion to fourteen years of money printing, I
Speaker 1: don't know where they've been. We've printed money for fourteen years.
Speaker 1: Rates went down, stocks went up. The more risk you took,
Speaker 1: the further out on a growth curve, you were the
Speaker 1: better off you did. Okay, it's now about to run
Speaker 1: in reverse. So SMP. Last I looked the end of nineteen,
Speaker 1: it was three thousand SNPPE today one long term average sixteen.
Speaker 1: It's just not that bad people power of the business. Okay,
Speaker 1: you've brought up the market context. It's probably worth us
Speaker 1: spending it a few minutes at the very least talking
Speaker 1: about that. Um. People would probably say it feels like
Speaker 1: a challenging time to invest for some of the reasons
Speaker 1: that you just enumerated. Right, there's a lot of inflation,
Speaker 1: the most we've seen in four decades. There's war, there's
Speaker 1: the prospect of rising rates. There's quantitative tightening. We haven't
Speaker 1: seen that really. Uh, in a serious way. Yet, um,
Speaker 1: you mentioned that there's a correction in the equity market.
Speaker 1: There's a correction in the credit market too. What kind
Speaker 1: of future are you preparing for? Of all the one
Speaker 1: I mean, but I start with you know, sometimes I'm
Speaker 1: asked to explain what our strategy is and I put
Speaker 1: it in three words, purchase price matters. So if I
Speaker 1: can buy a fundamentally good business today at less than
Speaker 1: I could buy it three months ago, that feels like
Speaker 1: a good outcome. Will there be bumps along the way
Speaker 1: where there be deviations, of course there will be, But
Speaker 1: I think the notion of purchase price matters. Some call
Speaker 1: it value in the extreme. You can be like Laurren
Speaker 1: Buffett and Charlie Monger, But I think it's a strategy
Speaker 1: that's built for multiple market cycles. In the equity business,
Speaker 1: it's the price you pay, it's the companies you buy.
Speaker 1: And in the credit business, it's being senior secured, it's
Speaker 1: not being long duration, being floating rate. There are lots
Speaker 1: of ways still to protect yourself. Maybe it doesn't feel
Speaker 1: as good given what we've been through and just how
Speaker 1: positive the last decade has been. No, it certainly doesn't
Speaker 1: feel as good. Um. But on the subject of purchase
Speaker 1: price mattering and value as a concept and time, there's
Speaker 1: something of an unknown. Uh, it's enough if you can
Speaker 1: buy something for less right now, might you be able
Speaker 1: to buy it for less six months from now? Perhaps?
Speaker 1: I mean, this is always the question of what's cheap
Speaker 1: enough and what what what's what's worth doing? Um? I
Speaker 1: think we have more to go or in what sense?
Speaker 1: I think there's more of a correction to come? I think,
Speaker 1: you know, being a macroeconomics prognosticator is not what we do.
Speaker 1: But understanding fundamentally good businesses that maybe had more options
Speaker 1: three months ago and have fewer options today. We'll find
Speaker 1: that category of things that makes sense for us to do.
Speaker 1: We always do. Yes, history would suggest so. Um. But
Speaker 1: if you think, if you don't have the luxury of
Speaker 1: being the kind of investor that Apollo is, and you
Speaker 1: put your open somebody else's shoes for a moment, do
Speaker 1: you look at the market and say to yourself, I
Speaker 1: think the future that I envision is relatively priced aning
Speaker 1: of them. If there's a little bit more of a
Speaker 1: correction to come, or that is not a noable answer
Speaker 1: right now? I don't think it's a noable answer right now.
Speaker 1: But you know, certainly we saw in today's announcement from
Speaker 1: the FED the signs that they are taking the need
Speaker 1: to get inflation expectations under control very seriously, and that
Speaker 1: will manifest itself through their liquefying their balance sheet and
Speaker 1: selling down, which they outlined this morning, but also through
Speaker 1: rate increases. But you know something, we was in d
Speaker 1: C last week and I spent a lot of there's
Speaker 1: a lot of free time, by the way, in DC,
Speaker 1: it's a great time to go and visit um and
Speaker 1: and the key point I was making is that everything
Speaker 1: that you believe prior to two eight no longer exists.
Speaker 1: And in the context of your question, UM, I'll take
Speaker 1: public markets sixty plus pers. One of the equity market
Speaker 1: today is indexed, is which indexed, meaning it trades on liquidity,
Speaker 1: just people going in and out. The fixed income market
Speaker 1: liquidity driven at this point in time, and so investors,
Speaker 1: the public public fixed income markets, investors who are relying
Speaker 1: on public stocks and public bonds are finding out that
Speaker 1: everything is correlated to liquidity. Because you've had one of
Speaker 1: the worst first quarters ever. You've had equities down about
Speaker 1: fo you've had investment grade credit down. Wasn't that supposed
Speaker 1: to be riskless? Um? And I think institutions kind of
Speaker 1: already know this. Public markets have become beta and if
Speaker 1: you want excess return, you need to step back from
Speaker 1: the public markets. So what you've just said, UM, I
Speaker 1: would summarize with something along the lines of we've lived
Speaker 1: through a dozen years of rock bottom rates and most
Speaker 1: recently endless liquidity, and it felt like a riskless era.
Speaker 1: Does risk matter again now for the first time, maybe
Speaker 1: since before the crisis? Absolutely, I think we're seeing things correct.
Speaker 1: We're a long way from means or medians in the
Speaker 1: equity market, where from the medium, which is pretty scary
Speaker 1: UM and the credit market we also have a long
Speaker 1: way to go. But I do think that the mentality
Speaker 1: with which investors have focused has they've been lulled into
Speaker 1: this sense that everything goes up, that everything is supposed
Speaker 1: to go well, because we've had one could say, thirty
Speaker 1: plus years of declining rates but extreme liquidity in the
Speaker 1: past fourteen. So if you think about what you see
Speaker 1: and what you anticipate, you have an idea of what
Speaker 1: businesses of yours still work, what businesses don't work anymore?
Speaker 1: Yours are others. Look, I think the on the run
Speaker 1: long only markets business are very difficult. To the extent
Speaker 1: you have been the beneficiary of trends, so you know
Speaker 1: there there will be a number of speakers who will
Speaker 1: come here and we'll talk about the massive increase in
Speaker 1: technology and the technology growth curve. And I would say
Speaker 1: tech and growth in particular have benefited from low rates
Speaker 1: because they are their business plans are further out there
Speaker 1: discounted back at much lower rates. Therefore, they've been the
Speaker 1: beneficiaries of this speculative room. And to quote one of
Speaker 1: the speakers will hear from later, technology technological change is real,
Speaker 1: it's fundamental. But that doesn't mean the purchase price doesn't
Speaker 1: matter and the entry point doesn't matter. So I think
Speaker 1: people who have benefited from this extreme low rate, high
Speaker 1: liquidity environment where growth, all manner of growth have been rewarded. Uh,
Speaker 1: I think that's where the greatest correction will come. And that,
Speaker 1: of course is not just the E t F manager
Speaker 1: whom you're thinking of. That presumably extends to growth equity,
Speaker 1: it extends to late stage venture, early stage venture, it
Speaker 1: extends spectrum, it extends to all these markets. I look
Speaker 1: at the traditional alternative market, and so much of the
Speaker 1: traditional alternative market UM has become beta as well, even
Speaker 1: with our our our own firm. You know, I my
Speaker 1: joke internally is you've worked for me for ten years,
Speaker 1: but I still don't know if you're a good investor.
Speaker 1: I think we're about to find out, any sense. Having
Speaker 1: lived through what now three solid market cycles, let's say four, four,
Speaker 1: how long does shake out lasts? No, no known unknown. Look,
Speaker 1: we if we profess to know, we we just mislead.
Speaker 1: But what we can do is return to some basic playbooks.
Speaker 1: So I look at the three businesses we're in. We're
Speaker 1: in the equity business, We're in the hybrid business, and
Speaker 1: we're in the credit business or the yield business. Of
Speaker 1: those three, the yield business is our largest for some
Speaker 1: three hundred and sixty billion senior secured, top of the
Speaker 1: capital structure, floating rate, generally, shorter duration. That feels like
Speaker 1: a good place to be, and it feels like business
Speaker 1: is going to be good because credit creation is going
Speaker 1: to be more difficult. That generally is good for people
Speaker 1: who are able to create credit. If I move to
Speaker 1: the hybrid business, hybrid is the piece of investing where
Speaker 1: you give away all the upside in return for downside protection.
Speaker 1: You essentially become a solutions provider that also feels like
Speaker 1: a pretty good business. People are going to need solutions
Speaker 1: to the extent your business plan was predicated on raising
Speaker 1: easy money every year. Maybe it's changed. Um. Toughest business
Speaker 1: will be the equity business, because the equity business is
Speaker 1: the most volatble and difficult economic times. Um. But there
Speaker 1: it's it's very granular, it's very companies specific, and there
Speaker 1: are a whole host of sectors that will not see
Speaker 1: cycles as a result of what's happening at a macro
Speaker 1: level where they're just fundamentally good businesses. Credit hasn't seen
Speaker 1: a real distress cycle since the Great Financial Crisis? Will
Speaker 1: it see another? At some point? It has to? Um,
Speaker 1: You look, we two thousand and eight is actually a
Speaker 1: really good dividing line, um for the credit markets. So
Speaker 1: much changed the role of the bank's changed, the role
Speaker 1: of the investment marketplace changed. But you're right, it has
Speaker 1: not been tested. Um. We have as a general rule
Speaker 1: not seeing the kind of speculative excesses that we saw
Speaker 1: prior to two tho eight. This, at least the corporate
Speaker 1: side of this credit cycle feels more benign. You don't
Speaker 1: see them kind of pent up leverage so or systematic
Speaker 1: leverage or use of off balance sheet leverage. So I
Speaker 1: would expect it to be significantly more benign than we did,
Speaker 1: but inevitably there will be corrections. Is that also because
Speaker 1: the lenders have less thanks to the deterioration of documents,
Speaker 1: have less power over the borrowers. I'm not sure I
Speaker 1: would say it. Look I said when I was in
Speaker 1: d C last week, Dodd Frank worked. Dodd Frank took
Speaker 1: risk out of government guaranteed institutions and put it into
Speaker 1: the investment marketplace. So in the US today the banking
Speaker 1: system is less than credit creation in Europe at in Asia,
Speaker 1: depending on the country close, we have essentially matched credit
Speaker 1: and the creation of credit with institutions who have the
Speaker 1: capacity to hold long term. That's not true in every market.
Speaker 1: We will have opened the mutual funds, we have e
Speaker 1: t f s, we have some mismatches like that, but
Speaker 1: we don't have the kind of built up leverage on
Speaker 1: regulated balance sheets that we had pre crisis. So I
Speaker 1: personally would expect a more benign crisis. Mark you referred
Speaker 1: to this earlier. UM the thirty year called it bond
Speaker 1: bull market. That was an enormous tail wind for the
Speaker 1: industry that you and your peers in private equity and
Speaker 1: more broadly alternatives built. And then again, as we've acknowledged,
Speaker 1: the tail end of that was the most aggressive central
Speaker 1: bank easing since the Great Depression. Now that we're living
Speaker 1: in a different era's let's form however long at lasts,
Speaker 1: it's definitely a different era. UM. Does a different era
Speaker 1: require a different strategy? I don't know. I mean I'll
Speaker 1: give you for us, and I every market participant will
Speaker 1: be different. UM. We built our yield business on the
Speaker 1: back of what I call fixed income replacement think of
Speaker 1: actually replacement of investment grade fixed income, but with more yield,
Speaker 1: and we built it to serve initially our own retirement
Speaker 1: services balance sheet a theme. The way that business works
Speaker 1: is we make promises to retirees and we back those
Speaker 1: promises with highly rated credit. Whether whether rates are higher
Speaker 1: or low is not really that relevant to us. It's
Speaker 1: about spread. Because if rates are high, promises we make
Speaker 1: two retirees will be high, and if rates are low,
Speaker 1: promises will be low. Our job is to earn a
Speaker 1: spread and therefore inflation market price of securities does not
Speaker 1: really impact the way we invest or how we think
Speaker 1: very much like a pension fund or an endowment or
Speaker 1: sovereign wealth fund, where they also have obligations, sometimes fixed
Speaker 1: to retirees, sometimes not fixed in the case of a
Speaker 1: sovereign wealth fund. And so what we're seeing is the
Speaker 1: biggest rotation is the acceptance by institutions and others that
Speaker 1: publicly traded markets offer beta and if they want excess
Speaker 1: return they need to go step back from the daily
Speaker 1: liquid market and do something else. So is that different? Maybe?
Speaker 1: So a couple of questions arise from me out of that, Ah,
Speaker 1: what about a recession defaults and credit losses? And then
Speaker 1: I'll get to the second question after that. Look on,
Speaker 1: the fundamental risk is collectibility, and it's why in an
Speaker 1: uncertain time and the business we've elected to scale has
Speaker 1: been fixed income replacement, not high yield, not levered loans,
Speaker 1: all of which have a place in the financial ecosystem.
Speaker 1: But the business that we are math sit in is
Speaker 1: the top of the capital structure, senior secured. Typically in
Speaker 1: a recession, you do not suffer significant losses if you're
Speaker 1: a good investor, We've been through a mini test for
Speaker 1: COVID and the shutdown we had in twenty we we
Speaker 1: like where we stand, but I would much rather be
Speaker 1: at the top end of the capital structure today then
Speaker 1: at the bottom. And then on the point about um
Speaker 1: the I guess the nature of the instrument um and
Speaker 1: the degree to which it offers alpha that you can
Speaker 1: no longer find in public markets. How long is that sustainable?
Speaker 1: There is? Think about the amount of money that you're
Speaker 1: deploying into private credit every day. I could look at
Speaker 1: what's going on at your peers right the amount of
Speaker 1: money that they're raising in permanent capital vehicles and that
Speaker 1: they have to invest. This just keeps mushrooming. And at
Speaker 1: what point does that begin to erode the alpha that
Speaker 1: remains in private markets. I think we're a long way
Speaker 1: from that. And you know, there are very subtle gradations
Speaker 1: today that are taking place in the marketplace for alternative credit.
Speaker 1: So um there are two words that go together but
Speaker 1: actually don't mean anything private credit. They sound like something,
Speaker 1: but they're not. Because private credit can be the most
Speaker 1: risky private credit, it can be financing of levered loans,
Speaker 1: or it can be the most secure. Each of us.
Speaker 1: Each of the alternatives firm have chosen their place in
Speaker 1: the ecosystem that they want. The bet that we have
Speaker 1: made is at the top end of that. The primary
Speaker 1: competitor for us is not black Stone, KKRTPG, Carlisle, Aries, Brookfield, whoever.
Speaker 1: It's JP Morgan, Goldman, Sachs be of a securitization market.
Speaker 1: And I feel at three hundred and sixty billion that
Speaker 1: we are just like that. We're just not a massive
Speaker 1: player yet in the market. We're growing fast. As I've said,
Speaker 1: this business is going to double over the next five years.
Speaker 1: Even at seven it's just not that big in the scheme.
Speaker 1: The market is immense. I mean I look at one
Speaker 1: little subsect sector of it, energy transition. Little Apollo has
Speaker 1: put out twenty billion of energy transition financing over the
Speaker 1: past three years. We'll do another fifty billion over the
Speaker 1: next three. The need for capital, and by the way,
Speaker 1: most of that financing senior secured project type financing or
Speaker 1: a little bit of hybrid. It is not for the
Speaker 1: most part risk. It is not for the most part equity.
Speaker 1: The capital needs of our country and the world, given
Speaker 1: the state of change, not just in technology, but in
Speaker 1: commodity usage, are immense, So I think the market will
Speaker 1: definitely get more crowded. There is no market that persists
Speaker 1: for very long without increased competition. But at least at
Speaker 1: the little sector we've chosen, Um, we have a long
Speaker 1: way to go. I was going to save this for
Speaker 1: the end, but I'm going to have frontload it because
Speaker 1: what you just said reminded me of it. What you're
Speaker 1: talking about, Mark is such a different business then the
Speaker 1: business that you got into years ago. It's like night
Speaker 1: and day, you know. So it's it's actually funny because
Speaker 1: I'm I find myself now going, for instance, in d
Speaker 1: C last week, explaining what it is we do. So
Speaker 1: I go down and I say, first, what is an alternative?
Speaker 1: And people look at me, well, of course, it's like
Speaker 1: private equity and this, And I said, an alternative is
Speaker 1: nothing other than an alternative to publicly traded stocks and bonds.
Speaker 1: Some alternatives can be rated double A, and some alternatives
Speaker 1: or equity. There is nothing inherently riskier about private or
Speaker 1: alternative than public, just like public can be double A
Speaker 1: too really risky. And so what we're seeing is the
Speaker 1: growth of this marketplace given the indexation of public markets.
Speaker 1: We're seeing the private market massively expand in size and scale,
Speaker 1: and the alternatives firms, in their own way, are picking
Speaker 1: their spot along that continuum of double A down to
Speaker 1: equity as to where they choose to grow. And I
Speaker 1: think we look forward five years, our clients portfolios are
Speaker 1: going to look profoundly different in what way what you
Speaker 1: start with the top end of the scale, the most
Speaker 1: sophisticated institutions, the largest institutions in the world. They were
Speaker 1: backers of the alternatives industry. They were well known. Now
Speaker 1: of course they want to be our partners in the
Speaker 1: alternatives business, and increasingly they are becoming our partners in
Speaker 1: the alternatives business. As I said, there's no permanent friends
Speaker 1: or permanent permanent enemies anymore. Everyone is in a state
Speaker 1: of flux. The other place we're seeing just massive change
Speaker 1: is at retail, particularly high net worth. You know, over
Speaker 1: the past three or four years, we have seen nothing
Speaker 1: short of a revolution and alternatives take place in the
Speaker 1: retail marketplace. And that's without yet starting. All retail is
Speaker 1: seeing thus far from our industry are existing products at
Speaker 1: institutional fees. Over the next six months, I think you're
Speaker 1: going to see the first products created especially for this marketplace,
Speaker 1: and it will not surprise me in five years if
Speaker 1: a retail investors portfolio is alternatives, except it won't. Alternative
Speaker 1: will mean alternative to publicly traded stock and bond, not
Speaker 1: alternative the way many people have associated it traditionally with
Speaker 1: private equity or hedge fund or risk. And what will
Speaker 1: some of these first purpose build products look like. I
Speaker 1: think they're going to solve fundamental needs. I mean, if
Speaker 1: you think about how a retail investor might have been
Speaker 1: educated historically, a sixty forty portfolio Debton equity, well, it
Speaker 1: feels like a bad idea right now about it's well,
Speaker 1: it's it's certainly been a bad first quarter. Imagine if
Speaker 1: you could replace your publicly traded equity with private equity,
Speaker 1: and I don't mean private equity and a fund, but
Speaker 1: you could have lower risk, better returns, and some amount
Speaker 1: of liquidity. How we do that is up to us
Speaker 1: to crack. But the we've spent as an industry thirty
Speaker 1: five years solving problems for the largest institutions in the world,
Speaker 1: and that creativity has now flipped in part to solve
Speaker 1: problems for this retail marketplace. For the first fifteen or
Speaker 1: twenty years, maybe of your career there was an enormous
Speaker 1: illiquidity premium to be harvested in the private market. To
Speaker 1: what degree has that premium eroted? Well, I'd say this
Speaker 1: so clearly the premium has eroded, so as I sometimes say,
Speaker 1: private equity started thirty five plus years ago as a
Speaker 1: black art and people rarely participated in it, and now
Speaker 1: it's an asset class. And how we as an industry
Speaker 1: go about that asset class remains to be seen. The firms,
Speaker 1: and I'll get to this, The firms no longer look
Speaker 1: exactly the same. Private equity does not mean the same
Speaker 1: thing to each firm. So for us, purchase price matters
Speaker 1: for some of our peers, different story, different focus. I
Speaker 1: look at the transactions we've elected to do as private equity,
Speaker 1: Yahoo being among the most interesting Las Vegas sands. They
Speaker 1: are very as people in this room might say, they're
Speaker 1: very apollo esque. A lot of complexity on the front end,
Speaker 1: a lot of trading of perspiration for purchase price. It
Speaker 1: is our mentality, it's our brand, it's how we come
Speaker 1: to market, and it's it's timely. Maybe hasn't been so
Speaker 1: timely for the past few years. We did just fine,
Speaker 1: but certainly not the kind of market that we really
Speaker 1: excel in. When you say you did just fine, you
Speaker 1: did just fine, of course, but in a competitive context,
Speaker 1: others did better. Right Over the past five years, you
Speaker 1: have been either outperformed by your peers or underperforming your
Speaker 1: peers this year as well, I should add, Um, does
Speaker 1: that matter to you in the short term, No, it
Speaker 1: really does not. I mean I look at this business
Speaker 1: over now thirty years, thirty two years in our case,
Speaker 1: UM generally not generally mid thirties gross returns, high twenties
Speaker 1: net return, generally a thousand basis points better than our peers.
Speaker 1: I'm very proud of that record. I think you'll see
Speaker 1: divergence in the first quarter when we all announce, which
Speaker 1: is next week. So if I'm not right about that,
Speaker 1: I don't know much about our business UM, and I
Speaker 1: think you'll continue to see divergence. But we look at
Speaker 1: the private equity business as an absolute rate of return business.
Speaker 1: We want to produce plus net rate of returns for
Speaker 1: our clients. What clients have not been doing is adjusting
Speaker 1: for risk, lower purchase price, less leverage. I'm very comfortable
Speaker 1: with with the place we have chosen in the ecosystem.
Speaker 1: I asked you earlier if Apollo needed needed to change
Speaker 1: its business model to reflect the new reality, and and
Speaker 1: maybe it doesn't, but do you need to change the
Speaker 1: way people think it? So it's happening, you know, it's
Speaker 1: it's it's it's what I do as CEO. I mean
Speaker 1: what I say is I really can't do anything. I
Speaker 1: could probably pick one thing and do it well, but
Speaker 1: it wouldn't matter in the context of our business. My
Speaker 1: only job is to change how people think, and that
Speaker 1: is what I'm trying to do. I'm trying them in
Speaker 1: each of our business is to understand that for yield,
Speaker 1: it's about safe spread. How do you get safe spread?
Speaker 1: It's about massively scaling origination. If you can't buy it
Speaker 1: in the public market, you have to create it yourself.
Speaker 1: So we wake up every day and we worry about origination.
Speaker 1: I asked them to think about what's the journey that
Speaker 1: our clients are on, the retail clients and the most
Speaker 1: sophisticated clients. A year ago, we had four people in
Speaker 1: global wealth. We now have a hundred and forty people
Speaker 1: in global wealth. Global wealth will be a third of
Speaker 1: our new capital over the next five years, a third
Speaker 1: a third. I think about the other places in the
Speaker 1: world that we're looking you know, um, we are late
Speaker 1: to the game in Asia in terms of really building
Speaker 1: out of presence. I am fully convinced that Asia does
Speaker 1: not need another equity opportunity fund. There's plenty of equity
Speaker 1: in Asia. What Asia lacks is yield and hybrid. The
Speaker 1: banking system is credit creation. We've recently sent over one
Speaker 1: of our most senior partners, and his job is to
Speaker 1: get the bank market share from I think he'll do that,
Speaker 1: and so we do in the context of what we believe,
Speaker 1: in the context of our competitive advantages, particularly in yield
Speaker 1: and fixed income replacement. Our job is to execute the
Speaker 1: plan that we've put out, which is roughly to double
Speaker 1: our business, but to do it in a way where
Speaker 1: we adhere to the promise that we've made to our clients,
Speaker 1: which is excess return per unit of risk, not just
Speaker 1: growth in a u M. I promised that would get
Speaker 1: to some questions. That was listening to the global Apollo
Speaker 1: Global Asset Management see you and co founder Mark rowan
Speaker 1: fascinating discussion with bloomber Business Weeks Eric Shatzker about Apollo
Speaker 1: about the private equity business about alternative investing, how that
Speaker 1: is continuing to be a market that is growing in size.
Speaker 1: Thanks for listening to the Bloomberg Markets podcast. You can
Speaker 1: subscribe and listen to interviews with Apple Podcasts or whatever
Speaker 1: podcast platform you prefer. I'm Matt Miller. I'm on Twitter
Speaker 1: at Matt Miller three pt On Fall Sweeney I'm on
Speaker 1: Twitter at pt Sweeney. Before the podcast. You can always
Speaker 1: catch us worldwide at Bloomberg Radio