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Speaker 1: For a better sense of what these deficits in Congress,

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Speaker 1: this difficulty in dealing with them may mean for the

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Speaker 1: world of Wall Street. Welcome now back Roger Oltman. He's

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Speaker 1: founder and senior chairman of Evercore. Roger, thank you so

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Speaker 1: much for being back with us.

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Speaker 2: To be here with you, David, so you've had a.

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Speaker 1: Lot of experience in Washington, in the Treasury Department as

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Speaker 1: well as here on Wall Street. First of all, explain

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Speaker 1: what you think j. Powe means when he says it's unsustainable.

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Speaker 3: Well, as Herbside once said, when something's unsustainable, it actually stops.

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Speaker 3: But I know what I think when I hear that term.

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Speaker 3: I'm not sure exactly what he means. But as a

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Speaker 3: person who's spent so much time in and around markets,

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Speaker 3: I think that it's just a matter of time before

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Speaker 3: global financial markets turn their attention to this very poor

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Speaker 3: fiscal trajectory in the United States and reject it and absent.

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Speaker 3: Unless we change course fiscally on our own voluntarily. Before

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Speaker 3: that moment, there'll be a crisis, and it'll only be

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Speaker 3: Many would argue it will only be a crisis that

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Speaker 3: will cause the authorities to adjust fiscal policy.

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Speaker 2: For example, additional revenue.

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Speaker 3: So that's what I think of when I hear the

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Speaker 3: term unsustainable as it relates to the deficit. They will

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Speaker 3: come a moment of reckoning when financial markets reject this course,

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Speaker 3: will have a crisis, and that will force the hands

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Speaker 3: of the Congress and the executive branch in terms of

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Speaker 3: changing policy. That's not a good way to do it.

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Speaker 3: I hope we don't do it that way. Be much

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Speaker 3: better to in effect agree that we need a different

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Speaker 3: path and proactively choose one. But at the moment you

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Speaker 3: have to be a real optimist to think that's going

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Speaker 3: to be the way it happens.

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Speaker 1: We like to think of markets as anticipating the future

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Speaker 1: to some extent and discounting it and really taking into account.

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Speaker 1: Are the markets not discounting at all right now? Or

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Speaker 1: is that perhaps part of the reason we're seeing, for example,

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Speaker 1: the yield on the thirty year, for example, go up.

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Speaker 1: Is it because of some beginning of concern about repaying

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Speaker 1: all that debt.

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Speaker 3: It's hard to say. I would not say that right

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Speaker 3: this moment. Fiscal concerns are one of the top two

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Speaker 3: or three factors driving markets. Whether they're affecting the thirty

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Speaker 3: years debatable. There recently been a couple of very sloppy

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Speaker 3: treasury auctions, although they were shorter maturity auctions than that,

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Speaker 3: and that's always a sign of concern.

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Speaker 2: And keep in mind we're at a moment we.

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Speaker 3: Have this very poor fiscal trajectory at a moment of

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Speaker 3: quantitative tightening. So the FED has gone from buying billions

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Speaker 3: of dollars of treasury and government backed securities during the

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Speaker 3: quantitative easing period, which lasted a very long time, to

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Speaker 3: now selling down aggressively its bond portfolio.

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Speaker 2: And what that means is.

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Speaker 3: It's adding to the supply in effect of treasuries that

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Speaker 3: the market has to absorb because the Fed is a seller.

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Speaker 3: And then you have the Treasury itself issuing giant amounts

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Speaker 3: of new securities.

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Speaker 2: That's adding to the complexity.

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Speaker 1: So you mentioned there are better ways that you would

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Speaker 1: prefer than actually going up to a crisis. Over the

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Speaker 1: course of the summer, we had Hank Pulson, the former

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Speaker 1: Treasure sector on and he said, actually, when you deal

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Speaker 1: with these issues, you're better off dealing with them earlier

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Speaker 1: than later because the choices get harder to go on

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Speaker 1: from your experience in Washington, because you did serve under

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Speaker 1: President Clinton, and that's the last time we sort of

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Speaker 1: got our arms around the deficits. I recall, what are

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Speaker 1: the ways that we might choose right now if we

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Speaker 1: wanted to, For example, the news Speaker of the House,

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Speaker 1: Mike Jordan says, maybe we have a bipartisan commission.

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Speaker 3: Well, there've been a variety of commissions over the years,

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Speaker 3: including Simps and Balls of course famously, and they haven't

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Speaker 3: gotten very far.

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Speaker 2: And you'd have to be.

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Speaker 3: Really optimistic to think this one would too, no matter

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Speaker 3: how it's set up.

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Speaker 2: Pank, of course is right. We're much better off.

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Speaker 3: Grappling with this voluntarily then having a crisis and having

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Speaker 3: changes in effect forced on Washington by the markets. But

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Speaker 3: we're just not on a path right now to do that.

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Speaker 3: I mean, the heart of the matter, and certain people

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Speaker 3: would disagree with this, but I think the heart of

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Speaker 3: the matter is revenues, and the revenue share of GDP

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Speaker 3: is just much lower than traditionally it used to be.

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Speaker 3: Now it's been much lower for a few years, but

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Speaker 3: you know, when I was serving in government, the revenue

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Speaker 3: share of GDP was around twenty percent, sometimes a little higher,

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Speaker 3: and today it's in the seventeen percent range, and you

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Speaker 3: can't solve this problem without additional revenue. Yes, there should

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Speaker 3: be a role for spending restraint too, I agree with that,

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Speaker 3: But if you don't find a way to add revenue,

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Speaker 3: you're not going to solve this. And right now, as

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Speaker 3: you well know, the politics of anything whatsoever having to

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Speaker 3: do with tax increases, no matter who they might fall on,

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Speaker 3: are toxic.

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Speaker 1: So Roger, let's go beyond the deficit and talk about

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Speaker 1: other things that are affecting business today, and specifically what

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Speaker 1: we've seen in the yields, because goodness knows, they've come

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Speaker 1: up a long way really fast.

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Speaker 3: Well, we've seen, to quote my friend Howard Marks, they

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Speaker 3: see change in the financial market environment in the sense

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Speaker 3: that the very long, roughly fifteen year period of ultra

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Speaker 3: low interest rates, at least, I would argue, is over.

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Speaker 3: It's not temporarily interrupted, it's over. And now today we

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Speaker 3: in round numbers, we have a five percent ten year

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Speaker 3: yield and we haven't seen that for I think since

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Speaker 3: two thousand and seven, and I think a lot of

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Speaker 3: market participants, in particular to your question, business leaders are

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Speaker 3: just beginning to grasp that we are in a new

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Speaker 3: era in terms of the structure of interest rates profound

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Speaker 3: change because it affects not just obviously cost of capital,

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Speaker 3: but it affects asset allocation, it affects returns. I mean,

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Speaker 3: if you're a financial imagine you're a private equity firm

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Speaker 3: and they are so ubiquitous, this fundamentally changes the return

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Speaker 3: prospects for them because the cost of that leverage is

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Speaker 3: such that they can't leverage XYZ investment to the same

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Speaker 3: degree today that they could have a year or two ago.

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Speaker 3: But I think I think a lot of people are

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Speaker 3: just waking up to this, and I'm sure some people

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Speaker 3: listening to this would disagree that we've seen the end

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Speaker 3: of ultra low interest rates, but I'm convinced we have, and.

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Speaker 2: It's really a profound change. Now. How much it affects you.

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Speaker 3: As a CEO depends on the nature of your business,

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Speaker 3: how capital intensive it is. Are you by the nature

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Speaker 3: of your business, a you generate consistent free cash flow

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Speaker 3: or are you generating deficits instead and doing a lot

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Speaker 3: of financing. So if you're Apple, you actually do borrow

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Speaker 3: because of your international business versus domestic and the role

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Speaker 3: of share buybacks. But you're not a net borrower in

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Speaker 3: terms of net debt, and you know it affects you,

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Speaker 3: but it doesn't affect you very dramatically. But if you're

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Speaker 3: Blackstone or your KKR or your Apollo, it's help forth

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Speaker 3: very dramatic effect.

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Speaker 1: So you say some corporate leaders are just waking up

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Speaker 1: to this process. Is that, at least in part the

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Speaker 1: answer to a more fundamental question, at least I have

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Speaker 1: the economy seems to be charging along when you look

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Speaker 1: at GDP numbers, you look at retail seals, you look

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Speaker 1: at so many indicators, even the labor market maybe loosening

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Speaker 1: a bit, but it's still pretty strong labor market. How

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Speaker 1: can the economy doing this well, We've had this many

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Speaker 1: rate hikes out of the Fed, and this increase in

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Speaker 1: the yields on the bonds.

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Speaker 3: I think a lot of the data we're looking at

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Speaker 3: that you just referred to is definitely definitionally backward looking data.

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Speaker 3: So we're about to get the third quarter growth figure

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Speaker 3: GDP growth figure, it's going to be pretty good, I think,

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Speaker 3: But that quarter ended nearly a month ago.

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Speaker 2: I think the economy is slowing. Now. You're right that

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Speaker 2: it's still resilient, it's not falling off. A cliff. We're not.

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Speaker 3: There's no evidence at the moment of an incipient recession,

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Speaker 3: I mean like next week or next month, but.

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Speaker 2: I think it is slowing.

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Speaker 3: You look at the housing sector, and of course the

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Speaker 3: sharp rise in mortgage rates always would have the effect

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Speaker 3: that's having here, but new home sales, mortgage applications all

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Speaker 3: sharply down, as you would imagine. And you look at

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Speaker 3: a whole series of other surveys. At EVERCOREP we do

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Speaker 3: a series of proprietary surveys trucking, temporary employment agencies, airlines, restaurants,

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Speaker 3: a whole series of them, and we do them regularly,

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Speaker 3: and I think it's quite a good set of data,

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Speaker 3: and they're pointing to a serious slowdown. So the composite

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Speaker 3: reading of our surveys is above recession levels.

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Speaker 2: But it's come down a lot.

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Speaker 3: So I think the economy, despite the backward looking strong data,

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Speaker 3: is slowing down.

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Speaker 2: Are we about to have a recession? I don't think so.

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Speaker 3: I don't know about next year, but not I don't

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Speaker 3: think in the rest of this year twenty twenty three.

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Speaker 2: But there's definitely slow down occurring.

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Speaker 1: By the way, for your data, I get Edheimen's slides

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Speaker 1: every day, and I read them every day.

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Speaker 2: Well you know what I mean, I do know exactly

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Speaker 2: what you mean.

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Speaker 1: I read those surveys every single day in some slide form.

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Speaker 1: So how does a corporate CEO respond? I mean, obviously

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Speaker 1: there's a lot of different corporate CEOs, a lot of

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Speaker 1: different reactions. But do they just pull in their horns

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Speaker 1: at this point? And partly because it's more expensive, but

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Speaker 1: also important because I a CEO don't know exactly where

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Speaker 1: it's going well.

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Speaker 3: And of course it depends on what your business is.

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Speaker 3: So you're seeing some surprising strength given the level of

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Speaker 3: interest rates, given how old this recovery simply is a

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Speaker 3: recovery is more than three years old. It began in

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Speaker 3: the early second half of twenty twenty. You know, you

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Speaker 3: see Walmart doing very well. You see pro and Gamble

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Speaker 3: doing very well, and those are really broad based companies

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Speaker 3: and they're a sign of the resilience of this economy.

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Speaker 3: On the other hand, you know, you see some companies

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Speaker 3: there have been some big earnings reports the last day

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Speaker 3: or two which have been somewhat disappointing alphabet and so forth.

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Speaker 2: Really depends on the business you're in.

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Speaker 3: But if you take all these earnings reports together, they

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Speaker 3: do show resilience. I say it's slowing, but there's still

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Speaker 3: considerable resilience, especially businesses that depend on the day and

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Speaker 3: day out consumer, because the consumer still has, for example,

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Speaker 3: considerable excess pandemic related excess savings, and as you say,

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Speaker 3: labor markets remain pretty tight, and so consumers are doing

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Speaker 3: well from an employment point of view, and a lot

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Speaker 3: of consumers are right about even in terms of real

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Speaker 3: after tax income, but still they are resilient.

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Speaker 1: We have a lot of uncertainly about exactly where the

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Speaker 1: economy is going, where rates are going, things like that.

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Speaker 1: We also have geopolitical instry right now. We had you already,

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Speaker 1: which is too many a shock that would have a

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Speaker 1: ground war in Europe at this point. Now we have

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Speaker 1: Israel and Hamas, which we've had disputes about before. There

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Speaker 1: have been problems over there, but boy, this is a

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Speaker 1: pretty ugly one. And that's before you get to issues

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Speaker 1: with China and making sure that we're handling that situation

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Speaker 1: with Taiwan sufficially. How does the corporate CEO internalize that

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Speaker 1: if they do.

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Speaker 3: Well at this very moment, and it could be different tomorrow.

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Speaker 3: The tragedies and the art tragedies are unfolding in Israel

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Speaker 3: and Gaza. And on the other hand, as you say, Ukraine,

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Speaker 3: are not a major economic event for the United States

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Speaker 3: of America and for most chief executives are almost any

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Speaker 3: chief executives, So you're worried about it for lots of reasons,

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Speaker 3: but probably not about what it's going to do to

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Speaker 3: your next quarter or how you're going to plan your

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Speaker 3: next year. Now, if God forbid, the conflict in the

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Speaker 3: Middle East becomes a wider one, and I just hope

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Speaker 3: this doesn't happen, But everybody's talking about the possibilities, whether

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Speaker 3: it's Hasbala opening a second front against Israel, the role

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Speaker 3: of Iran, and so forth. We just have to hope

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Speaker 3: that doesn't happen. But if it does, that will be

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Speaker 3: I think a different matter, because financial markets, I think

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Speaker 3: would react very negatively to that.

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Speaker 2: You could see much higher oil prices, for.

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Speaker 3: Instance, and it could go from something that you think

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Speaker 3: is terrible but doesn't affect your business, to something that

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Speaker 3: starts affecting your business, among other things, because it frightens

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Speaker 3: consumers and frightens customers. So at this very second, probably

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Speaker 3: doesn't affect your business. Isn't a big economic event, but

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Speaker 3: one has to worry whether that could change.

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Speaker 1: So Roger, as you say so correctly, this is fundamentally

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Speaker 1: a humanitarian issue. What we saw happened in Israel and

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Speaker 1: what has been ongoing in Ukraine for some time. The

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Speaker 1: people on the ground who are really lives being affected profoundly,

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Speaker 1: and we have to keep that uppermost in our minds.

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Speaker 1: At the same time, there are business aspects, there are

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Speaker 1: economic aspects, and so I want to ask this as

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Speaker 1: delicately as I can. Are there opportunities from some of

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Speaker 1: the dislocation we're seeing in the sense that if you

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Speaker 1: have a strong balance sheet, if you have a strong company,

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Speaker 1: some of the prices might be coming down because of

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Speaker 1: increased yields and because of interrace rates. Are there some

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Speaker 1: companies saying, you know, this might be my opportunity to

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Speaker 1: move into some area and make an acquisition.

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Speaker 2: Otherwise I could not have.

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Speaker 3: Done well an obvious area of opportunity that Ukraine. In effect,

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Speaker 3: the conflict Ukraine created had to do with energy. So

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Speaker 3: you know, the United States is again, the United States,

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Speaker 3: I'm sorry, is at an all time high in terms

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Speaker 3: of oil production, and a lot of the world you know,

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Speaker 3: has reacted to the Ukraine conflict by saying, we don't

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Speaker 3: want to be dependent on our prior sources of energy,

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Speaker 3: especially if you're a European. So I would say the

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Speaker 3: energy sector as a whole in the United States has

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Speaker 3: taken advantage of that and ramped up production.

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Speaker 2: You know, beyond that, probably not that much.

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Speaker 3: And I think if this conflict in Israel and Gaza

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Speaker 3: becomes wider, it's not an opportunity, it's a problem.

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Speaker 2: So I mean, the whole China dynamic is creating a.

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Speaker 3: Lot of opportunities because a lot of people, of course

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Speaker 3: are diversifying their supply chains and moving and investing in

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Speaker 3: India for example, or investing in Vietnam or Malaysia, what

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Speaker 3: have you. And that's causing a lot of rethinking of investment.

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Speaker 3: But in terms of Ukraine, in the Israeli tragedy, not

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Speaker 3: quite yet.

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Speaker 1: Roger, it's always such a pleasure I have you with

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Speaker 1: this here on will shreet. Thank you so much such

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Speaker 1: Roger Altman of Evercore