WEBVTT - Guggenheim Securities Co-Chairman Jim Millstein Talks Market Outlook

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Joining us at the desk Jim Milstein, Goggenheim Securities co chairman,

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<v Speaker 2>A legend on Wall Street and in Washington. Jim was

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<v Speaker 2>the Treasury Department's Chief of Structuring Officer under President Obama

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<v Speaker 2>and a very good person to talk to when people

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<v Speaker 2>are very worried about the economy, frankly, and so, you know,

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<v Speaker 2>one thing is that you see investors pricing in now

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<v Speaker 2>two rate cuts this year, they're worth three priced in.

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<v Speaker 2>So the outlook is still a little bit sour, but

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<v Speaker 2>maybe not as dire as before. You see so much

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<v Speaker 2>under the surface because you're also a structuring advisor. Do

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<v Speaker 2>you think that the fear is warranted?

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<v Speaker 3>Well, I think the you know, the chaff said at

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<v Speaker 3>the last interview, he did the really he's looking to

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<v Speaker 3>the Treasury Department into the White House at this point

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<v Speaker 3>to see the direction of their policy. You know, tariffs

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<v Speaker 3>are a big change in the potential economy of the

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<v Speaker 3>United States and the world economy, and so that will

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<v Speaker 3>influence both short term price pressures as well as economic activity.

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<v Speaker 3>So I think he's kind of frozen for a while

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<v Speaker 3>until he sees really where we're going with tariffs and

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<v Speaker 3>how the rest of the world reacts to those tariffs,

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<v Speaker 3>and whether we get a growth slow down as a

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<v Speaker 3>result of retaliatory tarwer you know, high tariffs being imposed

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<v Speaker 3>here and retaliatory tariffs being imposed outside.

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<v Speaker 4>Can we already tell I mean, Jim Farley, the CEO

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<v Speaker 4>Ford said, these tariffs or the threats thereof, are causing

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<v Speaker 4>chaos and costs, and it seems to me that in

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<v Speaker 4>the next round of CPI, PPI and PCE, we're going

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<v Speaker 4>to start seeing that shine through.

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<v Speaker 3>Yeah, I think you're I mean, just anecdotally. I think

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<v Speaker 3>some of us are already seeing prices go up on

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<v Speaker 3>the things we buy as a result of suppliers and

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<v Speaker 3>sellers getting ahead of it. So yeah, I think you know,

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<v Speaker 3>in the short run, tariffs are an increase in the

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<v Speaker 3>price level, but thereafter, you know, it may just stay

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<v Speaker 3>at that level. So the rate of change may not

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<v Speaker 3>be great in twenty twenty six as it will be

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<v Speaker 3>in twenty twenty five when the tariffs are imposed.

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<v Speaker 4>Well, but Jim, all this, you know, all this uncertainty

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<v Speaker 4>in not only tariff policy, but we don't know what's

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<v Speaker 4>going to happen with regulation and tax cuts. Are in

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<v Speaker 4>question right mass deportations that seems to be affecting everything

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<v Speaker 4>from small businesses when you look at the nfib NO

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<v Speaker 4>expansion to you know, Morgan Stanley and City saying, like

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<v Speaker 4>the M and A bankers and the IPO guys that

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<v Speaker 4>we have not really necessary right now.

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<v Speaker 3>Yeah, I mean, listen, I think one of the two

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<v Speaker 3>big pieces of legislation that President Trump got through in

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<v Speaker 3>his first term was his US NCA the tariff deal,

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<v Speaker 3>the trade deal between Mexico and Canada.

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<v Speaker 4>Trade deal anyone's ever seen, according to the White House.

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<v Speaker 1>Yes, and.

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<v Speaker 3>As a result, I mean that's been in place now

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<v Speaker 3>for seven eight years. And US manufacturers, which is the

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<v Speaker 3>sector that the Trump administration now wants to promote. US

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<v Speaker 3>manufacturers laid out their supply chains in Canada and Mexico

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<v Speaker 3>based on the rules of the road established by the

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<v Speaker 3>usmca So you know that no one should be surprised

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<v Speaker 3>that they were surprised by the threat of imposing twenty

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<v Speaker 3>five percent tariffs on Mexico and Canada are two largest

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<v Speaker 3>trading partners, and why are they our two largest trading

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<v Speaker 3>partners Because the USMCAA created a roadmap for how to

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<v Speaker 3>take advantage of relatively lower wages in Mexico and take

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<v Speaker 3>advantage of relatively lower commodity prices in Canada to set

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<v Speaker 3>up your supply chains for domestic manufacturing, you.

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<v Speaker 2>Know, aside from tariffs obviously creating a lot of havoc

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<v Speaker 2>in the market. That's fair to say. On tax cuts,

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<v Speaker 2>one question I have this was supposed to be one

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<v Speaker 2>of the biggest parts of the pro growth agenda, that

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<v Speaker 2>and lighter regulation. But how likely is it that we

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<v Speaker 2>see a lot of those promises come to fruition And

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<v Speaker 2>if we don't, does it stifle that pro growth story.

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<v Speaker 3>Well, let's first be clear and level set right.

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<v Speaker 1>So, the extension of the twenty.

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<v Speaker 3>Seventeen tax cut, Tax Cut and Jobs Act is basically

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<v Speaker 3>the status quo ante. If it isn't extended, you would

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<v Speaker 3>have a tax height hike on households. The corporate tax

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<v Speaker 3>cuts were made permanent, but the household cuts were not.

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<v Speaker 3>So they if they don't extend them, you're going to

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<v Speaker 3>get a tax hike. But if they do extend them,

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<v Speaker 3>it's just the same tax regime we're in today.

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<v Speaker 1>Now.

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<v Speaker 3>President Trump has a campaign talked about further tax cuts,

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<v Speaker 3>no tax on tips, no tax on social security, no

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<v Speaker 3>tax on overtime. You know that would uh. The the

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<v Speaker 3>estimates are all over the places to what that cost

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<v Speaker 3>to revenue would be. But it let's assume it's somewhere

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<v Speaker 3>between two hundred and three hundred billion dollars a year,

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<v Speaker 3>so over the ten year period, another two to three

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<v Speaker 3>trillion dollars worth of UH incremental debt for those tax

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<v Speaker 3>cunts at a time we're already running a deficit, uh

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<v Speaker 3>equal to seven percent of GDP. So let me just

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<v Speaker 3>stop there a little bit, cause this is really to me.

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<v Speaker 3>You know, I guess f If you're a hammer, everything

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<v Speaker 3>looks like a nail. If you're a debt restructuring guy, uh,

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<v Speaker 3>everything looks like a need for a debt restructuring. Today,

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<v Speaker 3>our debt our federal debt to GDP ratio is basically

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<v Speaker 3>one to one. We're running a seven percent of GDP

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<v Speaker 3>deficit this year, okay, which means that debt is increasing

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<v Speaker 3>by seven percent a year, whereas the economy has only

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<v Speaker 3>been growing a two to three percent a year. So

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<v Speaker 3>we're basically becoming more indebted over time because the growth

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<v Speaker 3>of the economy is not outpacing the growth of the debt.

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<v Speaker 3>So there's a massive need for what we call in

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<v Speaker 3>the trade fiscal consolidation. We need to get our house

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<v Speaker 3>in order and create revenues closer to spending.

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<v Speaker 4>Well, and they're hoping to get those revenues with tariffs.

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<v Speaker 4>I guess in terms of the cuts, I mean, Scott

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<v Speaker 4>Beston has this three to three to three plan, but

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<v Speaker 4>it seems so unrealistic to get the deficit from seven

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<v Speaker 4>percent down to three percent if you're only able to

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<v Speaker 4>find like fifty eight dollars and twenty six cents in

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<v Speaker 4>waste and fraud, right, because they're not attacking Medicare and

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<v Speaker 4>Medicaid and military spending, they're trying to fire people at

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<v Speaker 4>us AID.

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<v Speaker 2>Which guys especially as growth is expected to slow. I

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<v Speaker 2>think that that's the part no one's talking about here,

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<v Speaker 2>that how do you grow into that? At the GDP

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<v Speaker 2>forecastulting revised.

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<v Speaker 3>So that's to be fair to mister Besson, he's talking

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<v Speaker 3>about a four year trajectory to get the deficits down

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<v Speaker 3>from seven percent of GDP to three percent of GDP.

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<v Speaker 3>He's talking about goosing the growth rate of the economy

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<v Speaker 3>to three percent, not in the of low twos, high

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<v Speaker 3>ones that we've been in and trying to moderate inflation

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<v Speaker 3>by having more energy production.

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<v Speaker 1>You know, with oil in the sixties.

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<v Speaker 3>You're not going to get more energy production here in

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<v Speaker 3>the United States.

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<v Speaker 1>It's just it's just not return on capital. Isn't there

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<v Speaker 1>for that.

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<v Speaker 3>So let's put aside whether or not that's the best

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<v Speaker 3>way to deal with inflation.

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<v Speaker 1>How do you goose the growth rate? Well, the theory of.

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<v Speaker 3>The administration is that deregulation is going to free animal

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<v Speaker 3>spirits in the business community, that the tariff walls are

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<v Speaker 3>going to create a surge and domestic investment to produce

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<v Speaker 3>because behind those tariff walls you can be more competitive

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<v Speaker 3>against foreign competition. The problem with all of that is

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<v Speaker 3>it takes a lot of time. Deregulation is going to

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<v Speaker 3>take a lot of time. The rules that are currently

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<v Speaker 3>on the books that they want to get rid of

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<v Speaker 3>the agencies actually just can't say done by executive order.

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<v Speaker 3>They have to go through a rule making process. They

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<v Speaker 3>had notice and hearing, and they have to unwind the

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<v Speaker 3>regulatory state. Is going to take even if they move

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<v Speaker 3>with lightning speed, is going to take a year or

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<v Speaker 3>two to fully unleash the animal spirits.

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<v Speaker 1>And with regard to setting up new.

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<v Speaker 3>Production facilities in the United States and reorganizing our supply chains.

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<v Speaker 1>That's a multi year effort.

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<v Speaker 3>So and you're doing it against the backdrop of high tariffs,

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<v Speaker 3>potentially retaliatory tariffs, which could be a growth slowdown, as

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<v Speaker 3>you say, Sali, which means that tax revenues might shrink

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<v Speaker 3>in the in the short term, and god forbid, we

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<v Speaker 3>have a recession and then not only do tax revenue shrink,

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<v Speaker 3>but expenses go up because of all the countercyclical programs

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<v Speaker 3>we have to ease the pain of a recession.

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<v Speaker 2>Even if you see the FED cut twice this year,

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<v Speaker 2>does that relieve these companies of the pain they're struggling

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<v Speaker 2>through refinancing at these higher rates.

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<v Speaker 1>No, the answer is no.

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<v Speaker 3>The so you know, you look at the credit markets

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<v Speaker 3>and the corporate credit markets. There was a huge surge

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<v Speaker 3>of refinancing activity that went on when rates were low

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<v Speaker 3>in the early post COVID period, when the FED had

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<v Speaker 3>driven rates back again down to virtually zero before the

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<v Speaker 3>bout of inflation. Most corporate debt has a maturity of

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<v Speaker 3>five to seven years, so we're now at the end

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<v Speaker 3>of the maturity of that wall of refinancing that went

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<v Speaker 3>on there now, So now we've got a new wall

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<v Speaker 3>of refinancing that's required at much higher interest rates. So

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<v Speaker 3>even if the Fed knocks fifty basis points off the

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<v Speaker 3>low end of the curve, the early the short end

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<v Speaker 3>of the curve, the uh far end that n you know,

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<v Speaker 3>the belly of the curve out uh in the five

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<v Speaker 3>to seven years, zip code companies are that did their

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<v Speaker 3>financing back in two thousand, two thousand, uh, two thousand, twenty,

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<v Speaker 3>two thousand, twenty one are now gonna be refinancing in

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<v Speaker 3>a much higher interest rate environment.

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<v Speaker 1>Uh. And you know it's the As the.

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<v Speaker 3>Uncertainty, the general macro uncertainty creeps into the credit markets,

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<v Speaker 3>you're seeing as slow, not not dramatic, but a slow

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<v Speaker 3>uptick in spreads uh in the non investment grade market.

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<v Speaker 3>And so both h uh, higher base rate and higher

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<v Speaker 3>spreads are gonna create higher interest burdens.

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<v Speaker 4>Why are spreads so tight right now? I mean, especially

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<v Speaker 4>if you see an increase in bankruptcy or a concerning

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<v Speaker 4>absolute number of bankruptcies, why do you have spreads, even

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<v Speaker 4>junk spreads so tight.

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<v Speaker 3>There's a there's just a tsunami of credit availability.

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<v Speaker 1>Right now.

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<v Speaker 3>There has been uh, you know, the growth of the

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<v Speaker 3>private credit businesses, which is unrelenting and can tenuous, you know,

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<v Speaker 3>which in some way is really taking recycling money out

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<v Speaker 3>of the insurance industry, which used to be big bond

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<v Speaker 3>investors and continue to be bond investors into a series

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<v Speaker 3>of specialist funds to do their underwriting. And you know,

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<v Speaker 3>there's plenty of bank liquidity available.

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<v Speaker 1>And private credit. Yeah that was I say private credit.

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<v Speaker 2>Well to that end, is this masking some of the

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<v Speaker 2>pain that's really under the surface.

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<v Speaker 1>What are you seeing.

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<v Speaker 2>Because when you think about a bank, say, well, consumers

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<v Speaker 2>are fine. Consumers are fine, but Bank of America and

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<v Speaker 2>average FICO scores well over seven fifty is almost eight

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<v Speaker 2>hundred for many of its credit lines, and so you're

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<v Speaker 2>not really seeing the American consumer there. You're not seeing

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<v Speaker 2>the painful companies that are maybe being turned away from

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<v Speaker 2>a JP Morgan type firm today.

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<v Speaker 1>Yeah.

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<v Speaker 3>There, I mean, so you take the you know, four

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<v Speaker 3>years of pretty high inflation, and while there has been

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<v Speaker 3>wage growth to compensate that, wage growth is moderating, So

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<v Speaker 3>you're really seeing the consumer starting to be pinched. And

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<v Speaker 3>that's why you're seeing the first set of distress show

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<v Speaker 3>up in consumer oriented companies. You know again, it's this

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<v Speaker 3>is with sign upol credit availability and a change in

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<v Speaker 3>the capital structures, particularly in the middle market arena where

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<v Speaker 3>you have not so much bank finance but private credit

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<v Speaker 3>and private credit is usually one or two lenders. So

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<v Speaker 3>when a company gets into trouble, even a private equity

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<v Speaker 3>sponsored company, you can have a conversation like this about

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<v Speaker 3>what are we doing?

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<v Speaker 1>Nobody else knows about what are we gonna do about it?

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<v Speaker 3>And so there's an awful lot of what we call

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<v Speaker 3>liability management exercises going on in private conversations between a

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<v Speaker 3>private credit fund and a private equity fund, or a

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<v Speaker 3>private credit fund and a family owned business.

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<v Speaker 4>So I'm bringing up these stats a lot lately. That

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<v Speaker 4>bank balances have declined over the past twelve months back

0:13:06.559 --> 0:13:10.720
<v Speaker 4>to pre pandemic levels, this across all income groups. Wage

0:13:10.720 --> 0:13:13.960
<v Speaker 4>growth has slowed over the past twelve months across all

0:13:13.960 --> 0:13:18.360
<v Speaker 4>income groups, and that Americans inflation adjusted debt is rising

0:13:18.440 --> 0:13:22.280
<v Speaker 4>past you know, twenty nineteen levels across all income groups.

0:13:23.080 --> 0:13:26.240
<v Speaker 4>And yet everyone says, never count the American consumer out.

0:13:26.520 --> 0:13:27.320
<v Speaker 1>I've been doing this for.

0:13:27.200 --> 0:13:28.640
<v Speaker 4>Twenty five years.

0:13:28.679 --> 0:13:29.760
<v Speaker 1>It's a good thing to say.

0:13:29.720 --> 0:13:33.080
<v Speaker 4>Yeah, right, why is the American consumer so resilient and

0:13:33.120 --> 0:13:33.960
<v Speaker 4>does that continue?

0:13:34.400 --> 0:13:36.920
<v Speaker 3>It's about credit availability, you know. And just look at

0:13:36.920 --> 0:13:39.320
<v Speaker 3>the federal government, right, as long as people are prepared

0:13:39.360 --> 0:13:44.880
<v Speaker 3>to fund you know, one point seven trillion dollar deficit,

0:13:45.480 --> 0:13:49.559
<v Speaker 3>we can the Congress can continue to spend with abandon.

0:13:49.600 --> 0:13:51.840
<v Speaker 3>As I said earlier, you know, I think we're coming

0:13:51.880 --> 0:13:54.560
<v Speaker 3>to the end of that cycle because we're at the

0:13:54.559 --> 0:13:58.840
<v Speaker 3>point where the debt's growing faster than the economy. But

0:13:58.960 --> 0:14:02.080
<v Speaker 3>as long as there's the last lender there willing to

0:14:03.080 --> 0:14:06.360
<v Speaker 3>lend you that time to finance your spending, you're going

0:14:06.440 --> 0:14:11.280
<v Speaker 3>to take it. When the alternative is you know, a restructuring.

0:14:11.120 --> 0:14:15.120
<v Speaker 1>Yeah, or no iPhone right, Yeah, they're giving them away.

0:14:15.400 --> 0:14:17.000
<v Speaker 1>You just have to sign a contract. Yeah.

0:14:17.800 --> 0:14:20.480
<v Speaker 2>Obviously a lot of things to watch around the corner. Jim,

0:14:20.520 --> 0:14:22.360
<v Speaker 2>we thank you so much for your time. Of course,

0:14:22.360 --> 0:14:24.200
<v Speaker 2>that is Jim Milstein of Guggenheim Securities