1 00:00:00,120 --> 00:00:06,800 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 2 00:00:11,640 --> 00:00:15,440 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 3 00:00:15,480 --> 00:00:18,680 Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day 4 00:00:18,720 --> 00:00:22,280 Speaker 2: for insight from the best in markets, economics, and geopolitics 5 00:00:22,440 --> 00:00:24,920 Speaker 2: from our global headquarters in New York City. We are 6 00:00:24,920 --> 00:00:27,680 Speaker 2: live on Bloomberg Television weekday mornings from six to nine 7 00:00:27,720 --> 00:00:31,280 Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or 8 00:00:31,320 --> 00:00:33,960 Speaker 2: anywhere else you listen, and as always on the Bloomberg 9 00:00:34,040 --> 00:00:38,040 Speaker 2: Terminal and the Bloomberg Business app. Thel Orlando Federated writing this, 10 00:00:38,159 --> 00:00:41,159 Speaker 2: we're not buyers of the SPX whole hog here, however, 11 00:00:41,200 --> 00:00:43,600 Speaker 2: we still expect the rully in stocks will broaden out 12 00:00:43,760 --> 00:00:47,239 Speaker 2: from mag seventh Centric to include domestic large camp value, 13 00:00:47,360 --> 00:00:50,360 Speaker 2: small cap growth and international film. Pleased to say it's 14 00:00:50,360 --> 00:00:52,440 Speaker 2: with us now for more, Phil, Let's go straight to it. 15 00:00:52,520 --> 00:00:54,880 Speaker 2: The data of yesterday. How much weight would you put 16 00:00:54,920 --> 00:00:56,520 Speaker 2: on that manufacturing reed? 17 00:00:57,920 --> 00:01:00,240 Speaker 3: John? Good morning, Thank you again very much for me 18 00:01:00,320 --> 00:01:04,360 Speaker 3: back on. I think yesterday's data was very significant that 19 00:01:04,400 --> 00:01:07,480 Speaker 3: the ism, as you guys pointed out, was back above 20 00:01:07,600 --> 00:01:12,680 Speaker 3: the fifty level, the contraction line of demarcation if you will, 21 00:01:12,680 --> 00:01:15,759 Speaker 3: for the first time in sixteen months. And as Lisa 22 00:01:15,800 --> 00:01:18,880 Speaker 3: pointed out, the number that was stunning was the prices 23 00:01:18,920 --> 00:01:22,240 Speaker 3: paid component. So you've got a situation where the economy 24 00:01:22,360 --> 00:01:28,119 Speaker 3: is strengthening, yet inflation is sticky, perhaps even accelerating. Now 25 00:01:28,240 --> 00:01:31,120 Speaker 3: pair that with the LI data we saw last week. 26 00:01:31,520 --> 00:01:35,560 Speaker 3: Leading economic indicators went back positive for the first time 27 00:01:35,600 --> 00:01:37,959 Speaker 3: in twenty two months. And you sit down and talk 28 00:01:38,000 --> 00:01:41,440 Speaker 3: to our bond people and they look at these inverted 29 00:01:41,440 --> 00:01:44,000 Speaker 3: deal curves that we've been watching for the last two years, 30 00:01:44,680 --> 00:01:47,600 Speaker 3: funds to tends, twoes to tens, three months to tens. 31 00:01:47,720 --> 00:01:50,520 Speaker 3: They're flattening out. Our bond guys think that those may 32 00:01:50,600 --> 00:01:55,200 Speaker 3: become positively sloped again. So the risk of recession or 33 00:01:56,240 --> 00:01:59,640 Speaker 3: lower risk of a modest soft landing is starting to 34 00:01:59,680 --> 00:02:04,120 Speaker 3: shift to a stronger period of economic growth. But the 35 00:02:04,240 --> 00:02:07,280 Speaker 3: inflation question, I think is the more important one. Look 36 00:02:07,840 --> 00:02:11,640 Speaker 3: at last week's PCEE print core two point eight percent 37 00:02:11,680 --> 00:02:14,040 Speaker 3: for the month of February. Now what really caught our 38 00:02:14,080 --> 00:02:17,600 Speaker 3: attention was the changes in the SVP. At the Fed's 39 00:02:17,639 --> 00:02:22,280 Speaker 3: last meeting, they're going to increase their core PC forecast 40 00:02:22,360 --> 00:02:26,000 Speaker 3: to two point six percent for next year and kept 41 00:02:26,000 --> 00:02:29,200 Speaker 3: their two percent target in place for calendar twenty six. 42 00:02:29,800 --> 00:02:32,359 Speaker 3: So the FED is telling us that inflation is still 43 00:02:32,400 --> 00:02:34,640 Speaker 3: a problem. It's going to be a problem as the 44 00:02:34,680 --> 00:02:37,840 Speaker 3: economy comes back, And what all of that means is 45 00:02:37,840 --> 00:02:40,800 Speaker 3: that it's going to be less rate cuts relative to 46 00:02:40,840 --> 00:02:43,160 Speaker 3: what the market was expecting just a couple of months ago. 47 00:02:43,280 --> 00:02:45,360 Speaker 2: So, Phil, given everything you've said, every item on that 48 00:02:45,400 --> 00:02:47,239 Speaker 2: list in the last couple of minutes, is that good 49 00:02:47,280 --> 00:02:49,359 Speaker 2: or bad for stocks? Let's make it really simple, good 50 00:02:49,440 --> 00:02:50,720 Speaker 2: or bad for stocks? 51 00:02:51,360 --> 00:02:54,960 Speaker 3: So SMP five hundred up ten percent here in the 52 00:02:55,000 --> 00:02:57,400 Speaker 3: first three months of the year, up twenty eight percent 53 00:02:57,480 --> 00:03:00,880 Speaker 3: since October. In our view, stocks are ahead of themselves, 54 00:03:01,240 --> 00:03:05,200 Speaker 3: but we expect sort of a rolling correction, if you will. 55 00:03:05,480 --> 00:03:07,960 Speaker 3: The MAG seven in the last fifteen months is up 56 00:03:08,040 --> 00:03:11,600 Speaker 3: ninety nine percent. The Forgotten four ninety three is up 57 00:03:11,639 --> 00:03:15,080 Speaker 3: twenty two percent. Our view has been that this rally 58 00:03:15,160 --> 00:03:17,440 Speaker 3: was broaden out, that we would see some profit taking 59 00:03:17,480 --> 00:03:23,600 Speaker 3: in the MAG seven and the domestic large cap value stocks, 60 00:03:23,639 --> 00:03:26,480 Speaker 3: the small cap GIRLD stocks, the international stocks which were 61 00:03:26,560 --> 00:03:29,200 Speaker 3: largely left for dead over the course of the last 62 00:03:29,240 --> 00:03:31,480 Speaker 3: year or so, they would find some love and we'd 63 00:03:31,480 --> 00:03:34,240 Speaker 3: start to see some improvement in the share prices of 64 00:03:34,240 --> 00:03:35,040 Speaker 3: those categories. 65 00:03:35,200 --> 00:03:37,360 Speaker 4: But phil how much do higher rates really challenge the 66 00:03:37,400 --> 00:03:40,560 Speaker 4: idea of broadening out, particularly to small caps, considering that 67 00:03:40,600 --> 00:03:44,360 Speaker 4: these companies usually are more leveraged and are more vulnerable 68 00:03:44,440 --> 00:03:45,160 Speaker 4: to higher rates. 69 00:03:46,120 --> 00:03:49,640 Speaker 3: Fair point, But remember that the US economy is doing 70 00:03:49,680 --> 00:03:55,400 Speaker 3: relatively better than a lot of our trading partners Japan, Germany, UK, 71 00:03:55,600 --> 00:03:59,960 Speaker 3: all in recession. The reality is that small cap companies 72 00:04:00,040 --> 00:04:02,040 Speaker 3: here in the United States do eighty percent of their 73 00:04:02,080 --> 00:04:06,160 Speaker 3: business right here at home, and from an economic standpoint, 74 00:04:07,400 --> 00:04:11,360 Speaker 3: we're doing better here in terms of underlying fundamentals. The 75 00:04:11,520 --> 00:04:16,040 Speaker 3: sectors within the small cap market, Biotechnology, for example, is 76 00:04:16,040 --> 00:04:21,920 Speaker 3: our favorite, is really well positioned. Biotech stocks have very 77 00:04:21,920 --> 00:04:27,520 Speaker 3: strong pipelines, the valuations have probably never been cheaper, and 78 00:04:27,560 --> 00:04:32,240 Speaker 3: with interest rates down at the margin, the prospect of 79 00:04:32,520 --> 00:04:36,120 Speaker 3: M and A activity is enhanced today versus where they 80 00:04:36,160 --> 00:04:38,760 Speaker 3: were a year or so ago. We do like small 81 00:04:38,800 --> 00:04:39,240 Speaker 3: cap here. 82 00:04:39,480 --> 00:04:40,159 Speaker 5: What about oil? 83 00:04:40,360 --> 00:04:42,120 Speaker 4: How much is oil? The new mag seven at this 84 00:04:42,160 --> 00:04:44,560 Speaker 4: point where people are talking about the fact that suddenly 85 00:04:44,960 --> 00:04:47,120 Speaker 4: there is the reality check of supply and demand, to 86 00:04:47,160 --> 00:04:48,960 Speaker 4: the fact that this economy isn't rolling over the way 87 00:04:49,000 --> 00:04:49,840 Speaker 4: so many people thought. 88 00:04:50,880 --> 00:04:54,839 Speaker 3: Music to our ears Lisa, that we were very lonely 89 00:04:54,880 --> 00:04:58,080 Speaker 3: at the beginning of the year talking about oil WTI 90 00:04:58,279 --> 00:05:01,279 Speaker 3: in the mid sixties, thinking that we could see eighty 91 00:05:01,320 --> 00:05:03,520 Speaker 3: to ninety dollars a barrel by the end of the year. 92 00:05:03,680 --> 00:05:06,400 Speaker 3: We're now sitting in the mid eighties three months into 93 00:05:06,440 --> 00:05:08,320 Speaker 3: the year, so this has happened a lot quicker than 94 00:05:08,320 --> 00:05:12,359 Speaker 3: we thought. But the combination of increased geopolitical risks in 95 00:05:12,520 --> 00:05:15,880 Speaker 3: combination with the fact that we don't have a lot 96 00:05:15,920 --> 00:05:18,880 Speaker 3: of levers here. In the past we might have utilized 97 00:05:18,920 --> 00:05:22,839 Speaker 3: the Strategic Petroleum Reserve to perhaps adjust the price of oil. 98 00:05:23,160 --> 00:05:25,960 Speaker 3: We took the SPR down three hundred and fifty million 99 00:05:25,960 --> 00:05:28,240 Speaker 3: barrels a couple of years ago and didn't replace it. 100 00:05:28,760 --> 00:05:31,120 Speaker 3: So at this point we are sort of at the 101 00:05:31,200 --> 00:05:35,440 Speaker 3: mercy of the vicissitudes of what's going on globally. Crude 102 00:05:35,440 --> 00:05:39,080 Speaker 3: oil last September was at ninety five dollars a barrel. 103 00:05:39,279 --> 00:05:42,560 Speaker 3: What we could see the crude oil market retest that 104 00:05:43,120 --> 00:05:45,839 Speaker 3: gasoline prices at three point fifty or so a gallon 105 00:05:45,880 --> 00:05:48,919 Speaker 3: now could be at four dollars over the course of 106 00:05:48,960 --> 00:05:52,160 Speaker 3: the next couple of quarters. So this move and energy 107 00:05:52,279 --> 00:05:54,520 Speaker 3: for us is real and energy has been one of 108 00:05:54,600 --> 00:05:57,800 Speaker 3: our favorite categories on the domestic large cap value side. 109 00:05:57,880 --> 00:06:00,200 Speaker 1: Well, Phil, with Brent already trading within your reign range 110 00:06:00,240 --> 00:06:02,000 Speaker 1: of eighty nine dollars a barrow, what do you see 111 00:06:02,000 --> 00:06:02,800 Speaker 1: for your end. 112 00:06:04,760 --> 00:06:08,839 Speaker 3: Higher We think that the TI could could trade up 113 00:06:08,839 --> 00:06:14,080 Speaker 3: another ten dollars, and Brent, you know, maintaining that spread, 114 00:06:14,120 --> 00:06:16,120 Speaker 3: could probably approach one hundred dollars a barrow. 115 00:06:16,800 --> 00:06:18,599 Speaker 2: So when we were talking to Nowt in November and 116 00:06:18,640 --> 00:06:21,280 Speaker 2: you were talking about double digit rallies on a sm 117 00:06:21,279 --> 00:06:23,440 Speaker 2: P five hundred, did you ever expect things to go 118 00:06:23,480 --> 00:06:26,280 Speaker 2: as far as they have in the Stone market. 119 00:06:26,080 --> 00:06:29,880 Speaker 3: Not as quickly as as it has that We've got 120 00:06:30,279 --> 00:06:32,960 Speaker 3: a six thousand target on the S and P fully 121 00:06:33,000 --> 00:06:38,120 Speaker 3: discounting calendar twenty twenty five earnings, the market seems to 122 00:06:38,160 --> 00:06:41,000 Speaker 3: be focusing on that number. We didn't think that we 123 00:06:41,040 --> 00:06:43,559 Speaker 3: would get up, you know, the fifty two to fifty 124 00:06:43,640 --> 00:06:46,000 Speaker 3: three hundred level in the first quarter of this year. 125 00:06:46,040 --> 00:06:48,880 Speaker 3: So the rally, this twenty eight percent rally we've seen 126 00:06:48,920 --> 00:06:51,880 Speaker 3: over the last five months, has been much faster than 127 00:06:51,920 --> 00:06:53,840 Speaker 3: we had expected last fall. 128 00:06:53,839 --> 00:06:56,039 Speaker 2: So much faster. Great to catch up, Phil, Thank you, 129 00:06:56,080 --> 00:07:09,080 Speaker 2: sir Filowlando, Thanks for that federates at times. Troygeski of 130 00:07:09,160 --> 00:07:11,960 Speaker 2: FS Investments saying the performance of the US economy is 131 00:07:11,960 --> 00:07:15,160 Speaker 2: an opportunity for a spring cleaning of portfolios, writing this 132 00:07:15,560 --> 00:07:17,360 Speaker 2: cash has been a great place to hang out for 133 00:07:17,440 --> 00:07:20,040 Speaker 2: quite some time and still offers a positive real rate 134 00:07:20,080 --> 00:07:23,440 Speaker 2: of return. But gradually deploying those massive cash hoards into 135 00:07:23,480 --> 00:07:27,840 Speaker 2: a select group of alternative strategies can substantially increase return 136 00:07:27,880 --> 00:07:32,120 Speaker 2: potential without having to take on uncomfortable levels of risk. 137 00:07:32,240 --> 00:07:34,640 Speaker 2: Try and police to say, is with us now for more? 138 00:07:34,840 --> 00:07:35,040 Speaker 3: Try? 139 00:07:35,040 --> 00:07:36,680 Speaker 2: I want to reflect on the data we've had so 140 00:07:36,800 --> 00:07:39,720 Speaker 2: far this week, going into a week full of economic 141 00:07:39,800 --> 00:07:43,200 Speaker 2: data really concluding with payrolls on Friday morning, would you 142 00:07:43,280 --> 00:07:46,400 Speaker 2: see that data that strength as a good thing or 143 00:07:46,440 --> 00:07:48,320 Speaker 2: a bad thing for risk assets? 144 00:07:49,360 --> 00:07:53,080 Speaker 6: Well, for risk assets it still continues to be a 145 00:07:53,120 --> 00:07:56,240 Speaker 6: good thing over the medium term, in that stronger economic 146 00:07:56,280 --> 00:07:59,080 Speaker 6: growth leads to more revenue, leads to lower default rates 147 00:07:59,120 --> 00:08:02,200 Speaker 6: and credit. We're getting to that inflection point though, where 148 00:08:02,280 --> 00:08:05,360 Speaker 6: you had a violent enough curve move yesterday that equity 149 00:08:05,360 --> 00:08:08,000 Speaker 6: markets finally paid attention. Right if you think a Q one, 150 00:08:08,480 --> 00:08:11,040 Speaker 6: you know you had another quarter where fixed income was down, 151 00:08:11,480 --> 00:08:13,920 Speaker 6: you know, like a broken record, like we joke around about, 152 00:08:14,160 --> 00:08:16,280 Speaker 6: but equity is able to power ahead because not only 153 00:08:16,280 --> 00:08:18,760 Speaker 6: did you have very strong earnings, but obviously the economic 154 00:08:18,800 --> 00:08:22,320 Speaker 6: growth surprises relative to robust and Powell started to job 155 00:08:22,360 --> 00:08:24,400 Speaker 6: own about someone's say, premature cuts. 156 00:08:24,440 --> 00:08:25,760 Speaker 3: So you know, we're at a. 157 00:08:25,800 --> 00:08:29,360 Speaker 6: More dangerous level in terms of valuations, but generally that 158 00:08:29,440 --> 00:08:32,240 Speaker 6: rebounded manufacturing should be looked at it as a positive 159 00:08:32,280 --> 00:08:33,640 Speaker 6: outcome and a positive driver. 160 00:08:33,880 --> 00:08:36,000 Speaker 2: Atroy you said the equity markets started to wake up. 161 00:08:36,000 --> 00:08:37,480 Speaker 2: I mean, I've got a question that we were down 162 00:08:37,520 --> 00:08:40,120 Speaker 2: point two percent yesterday on the SMP with down point 163 00:08:40,160 --> 00:08:42,640 Speaker 2: two percent this morning. I think the equity market is 164 00:08:42,640 --> 00:08:43,679 Speaker 2: still snoozing, isn't it. 165 00:08:44,480 --> 00:08:49,719 Speaker 7: Yeah, well, compared to previous higher rate driven dislocations, I 166 00:08:49,760 --> 00:08:51,559 Speaker 7: mean the most recent one, of course, was August to 167 00:08:51,640 --> 00:08:55,080 Speaker 7: October last year, where you got a material curve move in. 168 00:08:55,360 --> 00:08:57,440 Speaker 6: You know, point two percent. Point two percent is kind 169 00:08:57,440 --> 00:08:59,400 Speaker 6: of a rounding error, but you know, at twenty one 170 00:08:59,440 --> 00:09:01,560 Speaker 6: times for earnings, you just have to ask yourself, how 171 00:09:01,640 --> 00:09:04,960 Speaker 6: much more upside do you have when so much the 172 00:09:05,000 --> 00:09:07,120 Speaker 6: good news is priced in and to the points you've 173 00:09:07,120 --> 00:09:10,560 Speaker 6: been making already, there's a material risk of substantially higher 174 00:09:10,640 --> 00:09:12,280 Speaker 6: rates at the back end of the curve, we still 175 00:09:12,320 --> 00:09:16,280 Speaker 6: are fairly inverted. The curve has obviously been gradually pricing 176 00:09:16,280 --> 00:09:20,040 Speaker 6: out cuts this year. But bottom line is, to Lisa's point, 177 00:09:20,080 --> 00:09:23,360 Speaker 6: in this scenario where there are no cuts, you have 178 00:09:23,440 --> 00:09:25,400 Speaker 6: to think the back end of the curve is going higher, 179 00:09:25,440 --> 00:09:28,000 Speaker 6: and we could retest the five percent level at some 180 00:09:28,080 --> 00:09:31,920 Speaker 6: point given the substantial supply that's coming on and obviously 181 00:09:31,920 --> 00:09:34,160 Speaker 6: a technical picture that's not terribly supportive. 182 00:09:34,360 --> 00:09:38,439 Speaker 4: That's five percent this year, we have thought and. 183 00:09:38,400 --> 00:09:41,600 Speaker 6: We still think that's definitely possible. I mean, look the way, 184 00:09:42,360 --> 00:09:44,560 Speaker 6: when you think of the FOD reaction function for the FED, right, 185 00:09:44,600 --> 00:09:46,760 Speaker 6: we've always said that this cutting cycle is going to 186 00:09:46,760 --> 00:09:49,360 Speaker 6: be the mirror image of the fifteen to eighteen or sorry, 187 00:09:49,440 --> 00:09:51,079 Speaker 6: this hiking cycle is going to be in the mirror 188 00:09:51,080 --> 00:09:54,120 Speaker 6: image of the fifteen to eighteen cutting cycle, very slow 189 00:09:54,160 --> 00:09:57,120 Speaker 6: and steady, and there's a reasonable probability that the FED 190 00:09:57,200 --> 00:09:59,720 Speaker 6: first starts to cut, you know, the back end sells 191 00:09:59,760 --> 00:10:03,360 Speaker 6: off as inflation expectations get anchored higher. In the event 192 00:10:03,400 --> 00:10:05,320 Speaker 6: that they don't cut at all and they continue to 193 00:10:05,360 --> 00:10:08,559 Speaker 6: pursue QT, which they still are as you know, there's 194 00:10:08,600 --> 00:10:10,840 Speaker 6: certainly a risk that we make higher, highest as cycle, 195 00:10:10,880 --> 00:10:13,240 Speaker 6: and that's one of the risks that markets have priced out, 196 00:10:13,320 --> 00:10:15,640 Speaker 6: we think far too fast, particularly late last year and 197 00:10:15,679 --> 00:10:19,760 Speaker 6: early this year. So yeah, it's not that fixed incomes 198 00:10:19,920 --> 00:10:23,280 Speaker 6: is tragic like it was in twenty twenty, early twenty one, 199 00:10:24,160 --> 00:10:26,520 Speaker 6: or late twenty one as well. It's just that the 200 00:10:26,600 --> 00:10:29,679 Speaker 6: risk reward still isn't fantastic like many people have been 201 00:10:29,760 --> 00:10:30,600 Speaker 6: articulating it is. 202 00:10:30,720 --> 00:10:33,079 Speaker 4: I love the idea of fixed income as tragic, Troy. 203 00:10:33,160 --> 00:10:36,160 Speaker 4: There is this question though, about what assets get hit hardest. 204 00:10:36,520 --> 00:10:38,280 Speaker 4: If a ten year yield does climb back up to 205 00:10:38,320 --> 00:10:41,080 Speaker 4: five percenta starts to retest some of these levels. Is 206 00:10:41,080 --> 00:10:43,560 Speaker 4: it just public equity markets or is it also some 207 00:10:43,600 --> 00:10:45,800 Speaker 4: of the private markets that have seen incredible amounts of 208 00:10:45,840 --> 00:10:48,560 Speaker 4: cash flow in that are kind of peg to floating 209 00:10:48,600 --> 00:10:50,840 Speaker 4: rate types of instruments. 210 00:10:51,559 --> 00:10:54,679 Speaker 6: Yeah, so I think when you start with private credit 211 00:10:54,760 --> 00:10:57,160 Speaker 6: is one example, which has been an area of tremendous 212 00:10:57,160 --> 00:11:01,480 Speaker 6: growth and really very attractive positive returns, not only in 213 00:11:01,480 --> 00:11:04,200 Speaker 6: twenty one and twenty three, but also in twenty twenty two, 214 00:11:05,040 --> 00:11:07,320 Speaker 6: where the index is up roughly six to seven percent 215 00:11:07,360 --> 00:11:10,840 Speaker 6: in a very tough year. You know, so when you're 216 00:11:10,880 --> 00:11:14,720 Speaker 6: always rooting for higher front end rates for longer with 217 00:11:14,920 --> 00:11:19,560 Speaker 6: the lowest probability of those that tighter FED policy creating. 218 00:11:19,160 --> 00:11:20,400 Speaker 7: The economy right. 219 00:11:20,440 --> 00:11:22,000 Speaker 6: And that's why when we first came up with the 220 00:11:22,040 --> 00:11:24,760 Speaker 6: scenario last year we called the dare To Dream scenario, 221 00:11:24,840 --> 00:11:27,640 Speaker 6: because you know, from a probability standpoint, it was almost 222 00:11:27,679 --> 00:11:29,360 Speaker 6: too good to be true. But of course that is 223 00:11:29,400 --> 00:11:31,400 Speaker 6: now the base case, where the FED is typed a lot, 224 00:11:31,800 --> 00:11:34,720 Speaker 6: They're keeping rates higher for longer and the economy continues 225 00:11:34,760 --> 00:11:37,840 Speaker 6: to be incredibly robust. However, to your point, if you 226 00:11:37,880 --> 00:11:41,079 Speaker 6: get a high enough back end in financial conditions tighten enough, 227 00:11:41,520 --> 00:11:44,400 Speaker 6: that could lead to slightly higher defaults over time, so 228 00:11:44,440 --> 00:11:46,560 Speaker 6: you give back some of that excess income in the 229 00:11:46,600 --> 00:11:50,080 Speaker 6: form of defaults. But so far we're seeing it is 230 00:11:50,280 --> 00:11:53,760 Speaker 6: very low default rates, the ability for companies to restructure 231 00:11:53,960 --> 00:11:58,719 Speaker 6: with strong handed growth private equity and public equity partners, 232 00:11:59,559 --> 00:12:03,560 Speaker 6: and that means less income being returned through defaults, which 233 00:12:03,600 --> 00:12:05,880 Speaker 6: is really as good of a scenario as you can 234 00:12:05,920 --> 00:12:07,840 Speaker 6: hope for in private credit markets. 235 00:12:07,920 --> 00:12:09,800 Speaker 4: I get the sense, and it's not just from you, Troy, 236 00:12:09,840 --> 00:12:11,880 Speaker 4: but a lot of investment managers who come on say, 237 00:12:11,960 --> 00:12:13,920 Speaker 4: you know, cash, you're running out of time. You got 238 00:12:13,920 --> 00:12:16,360 Speaker 4: to deploy it, whether it's alternatives, whether it's into other 239 00:12:16,400 --> 00:12:19,520 Speaker 4: parts of the equity market, the you know forgotten four 240 00:12:19,559 --> 00:12:22,600 Speaker 4: hundred and ninety three. As we heard earlier, is there 241 00:12:22,760 --> 00:12:26,120 Speaker 4: really a sort of pressure for time for cash? And no, 242 00:12:26,160 --> 00:12:27,920 Speaker 4: I'm not just talking my own book, but there is 243 00:12:27,960 --> 00:12:30,600 Speaker 4: this question of if the Fed's going to hold rates 244 00:12:30,679 --> 00:12:32,560 Speaker 4: higher for longer, and it doesn't seem like this is 245 00:12:32,559 --> 00:12:35,920 Speaker 4: that restrictive. Why couldn't you clip five percent on a 246 00:12:36,320 --> 00:12:38,440 Speaker 4: money market fund for the foreseeable future? 247 00:12:39,360 --> 00:12:42,480 Speaker 6: Oh yeah, Look, we've argued for the last two years, 248 00:12:42,520 --> 00:12:45,160 Speaker 6: right that what you want to focus on is northwest 249 00:12:45,240 --> 00:12:48,360 Speaker 6: quadron strategy strategies that have higher returns with lower risk, 250 00:12:48,400 --> 00:12:53,160 Speaker 6: and cash actually is one of those alternatives to traditional 251 00:12:53,240 --> 00:12:56,880 Speaker 6: fixed income and all also equities. However, when you look 252 00:12:56,920 --> 00:12:59,559 Speaker 6: at where you are today, you know, really five and 253 00:12:59,679 --> 00:13:02,240 Speaker 6: quarters five and a half's the peak, right. The probability 254 00:13:02,280 --> 00:13:04,800 Speaker 6: of the FED hiking from here has always been non existent. 255 00:13:04,800 --> 00:13:07,120 Speaker 6: It still is non existent. So you only have one 256 00:13:07,120 --> 00:13:10,400 Speaker 6: way to go, and that's lower. Now, as we've discussed, 257 00:13:10,480 --> 00:13:13,720 Speaker 6: it's going to be very slow, very plotting cutting cycles, 258 00:13:13,720 --> 00:13:16,240 Speaker 6: so you'll still have incomes. But the question is, when 259 00:13:16,240 --> 00:13:19,239 Speaker 6: you think of you know whether you're looking at actuarial 260 00:13:19,320 --> 00:13:23,439 Speaker 6: studies or what folks need to retire comfortably. Typically you're 261 00:13:23,440 --> 00:13:26,320 Speaker 6: in that high single digit to low teen drains, and 262 00:13:26,360 --> 00:13:29,000 Speaker 6: the question now is should you at least gradually think 263 00:13:29,000 --> 00:13:31,400 Speaker 6: about deploying you know that extra two and a half 264 00:13:31,440 --> 00:13:34,240 Speaker 6: trillion in money markets at extra four trillion commercial bank 265 00:13:34,320 --> 00:13:38,360 Speaker 6: deposits into strategies where you're not taking uncomfortable levels of risk. 266 00:13:38,440 --> 00:13:40,560 Speaker 6: You're not going to walk into a potential ten or 267 00:13:40,559 --> 00:13:43,800 Speaker 6: fifteen percent draw down, or if you're in inequities, or 268 00:13:43,840 --> 00:13:46,760 Speaker 6: you're reaching for duration right now, as many have done 269 00:13:46,840 --> 00:13:49,199 Speaker 6: the past two years, much to their chagrin, and you 270 00:13:49,320 --> 00:13:52,120 Speaker 6: take a five to seven percent duration related draw down 271 00:13:52,440 --> 00:13:55,800 Speaker 6: where you have certainly your conceding liquidity, you're going to 272 00:13:55,880 --> 00:13:59,240 Speaker 6: have marginally more risk, but you're boosting your return potential 273 00:13:59,240 --> 00:14:01,840 Speaker 6: to high smolel digits the low teens. And you know, 274 00:14:01,920 --> 00:14:04,600 Speaker 6: one of the unique things about private credit now, which 275 00:14:04,640 --> 00:14:08,000 Speaker 6: is really fascinating, is that you actually have potentially higher 276 00:14:08,040 --> 00:14:10,839 Speaker 6: returns in the debt part of the capital structure than 277 00:14:10,840 --> 00:14:13,160 Speaker 6: the equity part of the capital structure, right because that 278 00:14:13,360 --> 00:14:16,720 Speaker 6: extra debt service payments that go to the lenders comes 279 00:14:16,720 --> 00:14:19,240 Speaker 6: at the expense of free cash flow for a lot 280 00:14:19,240 --> 00:14:22,160 Speaker 6: of big cap LBO firms, so the equity for the 281 00:14:22,280 --> 00:14:24,640 Speaker 6: terms there will be lower to the benefit of the 282 00:14:24,680 --> 00:14:27,600 Speaker 6: debt holder. So it's an unusual period of market industry, 283 00:14:27,680 --> 00:14:28,000 Speaker 6: for sure. 284 00:14:28,080 --> 00:14:30,880 Speaker 2: I love how Lisa tolking around book is standing cash 285 00:14:31,160 --> 00:14:33,800 Speaker 2: if a lot of people as single names, right, you know, 286 00:14:34,200 --> 00:14:35,680 Speaker 2: But for Bramo is standing cash. 287 00:14:35,720 --> 00:14:38,840 Speaker 4: I'm just look, I'm not, you know, swing my head 288 00:14:38,840 --> 00:14:39,120 Speaker 4: too much. 289 00:14:39,160 --> 00:14:40,000 Speaker 3: I actually carry on. 290 00:14:40,400 --> 00:14:41,280 Speaker 1: We don't have to continue. 291 00:14:41,320 --> 00:14:43,320 Speaker 2: I want to squeaze this in. Actually it's a random question, 292 00:14:43,360 --> 00:14:45,800 Speaker 2: so forgive me for this. The Ft had a strange 293 00:14:45,800 --> 00:14:48,080 Speaker 2: front page yesterday and I'd love your thoughts on it. 294 00:14:48,080 --> 00:14:50,440 Speaker 2: It was about the record supply, the bond issuance we 295 00:14:50,480 --> 00:14:52,600 Speaker 2: had in the corporate debt market, and this really odd 296 00:14:52,640 --> 00:14:55,600 Speaker 2: link about the election in the back end of this year. 297 00:14:55,600 --> 00:14:57,920 Speaker 2: And I have to say, I haven't even thought of that. 298 00:14:58,280 --> 00:15:01,520 Speaker 2: We linking the boom and supply in the first quarter 299 00:15:01,560 --> 00:15:04,640 Speaker 2: of twenty four to the prospect of the market closing 300 00:15:04,720 --> 00:15:06,960 Speaker 2: up in four q this year. 301 00:15:08,680 --> 00:15:11,640 Speaker 6: You know, I think that's a bridge too far. I 302 00:15:11,680 --> 00:15:14,840 Speaker 6: think what's really happened here again, you know, in our 303 00:15:14,880 --> 00:15:17,600 Speaker 6: investment committee meeting we discussed that a lot of the 304 00:15:17,640 --> 00:15:20,760 Speaker 6: explanatory variables for what's going on in terms of market 305 00:15:20,760 --> 00:15:24,600 Speaker 6: price action as well as in terms of risk appetite 306 00:15:24,680 --> 00:15:27,280 Speaker 6: gets back to those huge cash boards that the FED 307 00:15:27,360 --> 00:15:30,680 Speaker 6: created during the pandemic and still lurk with us today. 308 00:15:30,760 --> 00:15:33,880 Speaker 6: So what we've seen across the board, whether it's middle 309 00:15:33,920 --> 00:15:36,680 Speaker 6: market corporate lending, whether it's senior serit of commercial real 310 00:15:36,760 --> 00:15:39,920 Speaker 6: estate lending, whether it's HYO bonds or IG and even 311 00:15:39,960 --> 00:15:46,120 Speaker 6: agency pastors which really have horrific technicals, is a gradual, steady, 312 00:15:46,320 --> 00:15:50,680 Speaker 6: relentless tightening. And obviously issuers are taking advantage of that, 313 00:15:50,800 --> 00:15:52,640 Speaker 6: and you're looking at the past two years and they're 314 00:15:52,680 --> 00:15:55,080 Speaker 6: thinking the next six to nine months forward. This is 315 00:15:55,240 --> 00:15:57,640 Speaker 6: probably one of the better points to issue new debt 316 00:15:57,960 --> 00:16:01,640 Speaker 6: and lock in new financing. Just as critically, if you 317 00:16:01,720 --> 00:16:04,160 Speaker 6: have a roll day coming, whether it's floating rate, dead 318 00:16:04,240 --> 00:16:06,760 Speaker 6: or fixed, you know this is the window you're getting. 319 00:16:07,320 --> 00:16:09,680 Speaker 6: And if you have turbulences at the back half of 320 00:16:09,720 --> 00:16:12,760 Speaker 6: the year, you're probably getting better pricing now than you 321 00:16:12,800 --> 00:16:15,479 Speaker 6: know perhaps in Q four. But I think that's a stretch. 322 00:16:15,400 --> 00:16:18,240 Speaker 2: Very diplomatic even calling a stretch. Troy, Thank you, Troy, 323 00:16:18,400 --> 00:16:31,080 Speaker 2: ESCI of FS Investments. Joining us now to discuss is 324 00:16:31,080 --> 00:16:34,520 Speaker 2: Stephen Cook of the Council on Foreign Relations. Stephen waterfore 325 00:16:34,560 --> 00:16:36,840 Speaker 2: to get your insight, your valuable insight on this program 326 00:16:36,880 --> 00:16:39,200 Speaker 2: this morning, Could you talk us to us about possible 327 00:16:39,240 --> 00:16:41,640 Speaker 2: consequences from that striking Damascus. 328 00:16:42,920 --> 00:16:46,160 Speaker 5: Yeah, this is a significant escalation and the risk of 329 00:16:46,320 --> 00:16:51,000 Speaker 5: the Iranians responding in any number of ways is very 330 00:16:51,080 --> 00:16:57,040 Speaker 5: very high. The Iranians have attacked American forces and American 331 00:16:57,080 --> 00:17:00,560 Speaker 5: forces are in Iraq and Iran, which are obviouss we've 332 00:17:00,560 --> 00:17:03,240 Speaker 5: seen that happen over the course of the conflict that 333 00:17:03,240 --> 00:17:06,440 Speaker 5: began on October seventh. There is also the very real 334 00:17:06,520 --> 00:17:11,240 Speaker 5: possibility that whatever restraints the Iranians have placed on Lebanon's 335 00:17:11,280 --> 00:17:16,080 Speaker 5: his Belah may start to loosen. There's already a very 336 00:17:16,080 --> 00:17:20,919 Speaker 5: significant conflict between Israel and His Belah. The two have 337 00:17:21,000 --> 00:17:24,840 Speaker 5: been trading fire since October seventh, and strikes against each 338 00:17:24,880 --> 00:17:28,600 Speaker 5: other's countries have been getting bolder and deeper in recent 339 00:17:28,640 --> 00:17:33,399 Speaker 5: weeks and months. So this is a very big step 340 00:17:33,520 --> 00:17:37,200 Speaker 5: for the Israelis, who quite rightly point out that the 341 00:17:37,320 --> 00:17:41,200 Speaker 5: multi front conflict that they are fighting is a consequence 342 00:17:41,359 --> 00:17:45,359 Speaker 5: of the Iranian sponsorship of the Axis of Resistance in 343 00:17:45,440 --> 00:17:49,480 Speaker 5: the North obviously in Gaza, as well as the Huti's 344 00:17:49,880 --> 00:17:54,639 Speaker 5: unrelenting fire on Israel from Yemen. So the Israelis clearly 345 00:17:54,680 --> 00:17:56,840 Speaker 5: want to go after what they consider to be the 346 00:17:56,880 --> 00:17:57,600 Speaker 5: head of the snake. 347 00:17:58,160 --> 00:18:01,600 Speaker 1: Ironian forign Minister amid Lyon in the early hours this 348 00:18:01,600 --> 00:18:06,480 Speaker 1: morning said that he summoned the Switzerland envoy to give 349 00:18:06,520 --> 00:18:09,040 Speaker 1: a message to United States. Potentially this is also going 350 00:18:09,040 --> 00:18:11,760 Speaker 1: on with maybe back channels in Oman. What kind of 351 00:18:11,880 --> 00:18:14,880 Speaker 1: back channel do you see potentially between Washington and Tehran 352 00:18:15,200 --> 00:18:16,720 Speaker 1: to try to take the temperature down. 353 00:18:17,720 --> 00:18:21,520 Speaker 5: There is and has long been a robust communication between 354 00:18:21,520 --> 00:18:25,520 Speaker 5: Tehran and Washington through the Swiss embassy. The United States 355 00:18:26,000 --> 00:18:28,720 Speaker 5: communicated to the Iranians at the outset of the conflict, 356 00:18:28,920 --> 00:18:31,679 Speaker 5: communicated to the Iranians after the incident in Tower twenty 357 00:18:31,720 --> 00:18:35,240 Speaker 5: two when three American soldiers were killed, that the Iranians 358 00:18:35,520 --> 00:18:38,360 Speaker 5: needed to back off otherwise there would be very significant 359 00:18:38,359 --> 00:18:41,880 Speaker 5: consequences for them. I imagine the Iranians are using that 360 00:18:41,920 --> 00:18:47,080 Speaker 5: in reverse, communicating to the United States that unless Washington 361 00:18:47,119 --> 00:18:50,879 Speaker 5: brings the Israelis to heal, the Iranians have the capability 362 00:18:51,040 --> 00:18:53,439 Speaker 5: of raising a storm of violence in the region. 363 00:18:53,840 --> 00:18:57,320 Speaker 1: How close are the Americans to bringing the Israelis to 364 00:18:57,400 --> 00:19:00,680 Speaker 1: heal given the fact that they had this call yesterday, 365 00:19:00,720 --> 00:19:03,520 Speaker 1: a strategic call, and then potentially we are going to 366 00:19:03,520 --> 00:19:05,560 Speaker 1: see Israeli officials in Washington next week. 367 00:19:06,720 --> 00:19:09,399 Speaker 5: I think that the American influence on the Israelis at 368 00:19:09,400 --> 00:19:13,000 Speaker 5: this point is rather limited. The Israelis frame their conflict 369 00:19:13,040 --> 00:19:14,879 Speaker 5: with Hamas and in fact there are a conflict on 370 00:19:14,960 --> 00:19:19,320 Speaker 5: multiple fronts, as an existential threat under those circumstances. Although 371 00:19:19,359 --> 00:19:24,800 Speaker 5: the United States is obviously an important strategic partner of 372 00:19:24,840 --> 00:19:29,520 Speaker 5: the Israelis, advice given is not always advice taken. We 373 00:19:29,600 --> 00:19:33,439 Speaker 5: have seen this throughout the conflict. President Biden believed that 374 00:19:33,480 --> 00:19:36,240 Speaker 5: his bear hug of the Israeli government would give him 375 00:19:36,280 --> 00:19:39,320 Speaker 5: the leverage with the Israelis to shape their military operations 376 00:19:39,359 --> 00:19:43,920 Speaker 5: in the Gaza Strip. That has not happened. So the 377 00:19:44,000 --> 00:19:48,240 Speaker 5: conversations between Washington and Jerusalem yesterday virtually in next week's 378 00:19:48,280 --> 00:19:53,920 Speaker 5: meetings are about Israeli planned military operations in Rufa. Prime 379 00:19:53,920 --> 00:19:56,320 Speaker 5: Minister Nataniello said those plans have been approved and the 380 00:19:56,359 --> 00:20:01,840 Speaker 5: idea of is ready to execute them. It's unclear whether 381 00:20:01,960 --> 00:20:04,760 Speaker 5: these talks will bear fruit for the United States and 382 00:20:04,880 --> 00:20:08,680 Speaker 5: shaping the way the Israelis undertake this operation. 383 00:20:08,800 --> 00:20:10,439 Speaker 4: Steven, there are a lot of moving pieces here, and 384 00:20:10,480 --> 00:20:12,560 Speaker 4: you honed in on the northern border of Israel, the 385 00:20:12,640 --> 00:20:16,160 Speaker 4: border with Lebanon, the Hesblah conflict that has been ongoing 386 00:20:16,200 --> 00:20:17,840 Speaker 4: for a long time, the tit for tat and not 387 00:20:18,000 --> 00:20:21,400 Speaker 4: being the true source of an escalation that could draw 388 00:20:21,520 --> 00:20:24,360 Speaker 4: in a larger swath of the region and potentially disrupt 389 00:20:24,440 --> 00:20:27,280 Speaker 4: things like oil markets. I'm wondering how close you think 390 00:20:27,280 --> 00:20:29,480 Speaker 4: we are to that. If you could quantify how much 391 00:20:29,520 --> 00:20:32,880 Speaker 4: closer we are now after these assassinations than we were 392 00:20:32,920 --> 00:20:35,320 Speaker 4: before them, it would be really important, because this is 393 00:20:35,320 --> 00:20:37,560 Speaker 4: really what a lot of strategists are honing in them 394 00:20:37,600 --> 00:20:38,080 Speaker 4: this morning. 395 00:20:39,000 --> 00:20:40,840 Speaker 5: Well, it's hard to put numbers on it, especially for 396 00:20:41,000 --> 00:20:44,280 Speaker 5: historically minded political scientists like myself, but I would say 397 00:20:44,320 --> 00:20:49,040 Speaker 5: that it is a strong likelihood that we will see 398 00:20:49,480 --> 00:20:53,000 Speaker 5: a significant conflict between Israel and Hesbelah in the north. 399 00:20:53,600 --> 00:20:57,359 Speaker 5: The constraints on both parties have been loosening in recent 400 00:20:57,440 --> 00:21:00,919 Speaker 5: weeks and months. The strike in ask Us yesterday that 401 00:21:01,000 --> 00:21:05,440 Speaker 5: killed two IRGC generals something that the Iranians are going 402 00:21:05,480 --> 00:21:08,520 Speaker 5: to be unable to not respond to. I think the 403 00:21:08,520 --> 00:21:10,760 Speaker 5: only thing really holding the Israels back right now is, 404 00:21:10,800 --> 00:21:14,439 Speaker 5: in an odd and twisted way, is concreditional dysfunction. The 405 00:21:14,480 --> 00:21:17,639 Speaker 5: Israels need that security assistance that has been locked in 406 00:21:17,680 --> 00:21:21,360 Speaker 5: Congress in order to acquire the kind of precision munitions 407 00:21:21,400 --> 00:21:24,360 Speaker 5: they would like to use in a conflict with his Belah. 408 00:21:24,560 --> 00:21:28,280 Speaker 5: But I think in the next four six months we're 409 00:21:28,359 --> 00:21:30,800 Speaker 5: likely to see a major escalation in the North. 410 00:21:31,040 --> 00:21:33,800 Speaker 4: Was to stop that from percolating out into a broader 411 00:21:33,840 --> 00:21:37,600 Speaker 4: region that really does disrupt broader trade markets in the 412 00:21:37,640 --> 00:21:39,439 Speaker 4: way that a lot of people have suspected was the 413 00:21:39,480 --> 00:21:40,400 Speaker 4: worst case scenario. 414 00:21:41,760 --> 00:21:45,800 Speaker 5: Yeah, I think the major factor here is that the 415 00:21:46,240 --> 00:21:48,880 Speaker 5: Israelis and has ball getting involved in a major conflict 416 00:21:48,920 --> 00:21:52,399 Speaker 5: that the Iranians and the Huthis continue to interfere with 417 00:21:52,440 --> 00:21:57,359 Speaker 5: global shipping and meaning also for the oil markets. Neither 418 00:21:57,440 --> 00:21:59,760 Speaker 5: Israel nor Lebanon are major players in the energy markets, 419 00:21:59,760 --> 00:22:01,920 Speaker 5: so there's a lot of gas off booth their coach. 420 00:22:02,359 --> 00:22:06,160 Speaker 5: But the knock on effects in which Iran and its 421 00:22:06,200 --> 00:22:09,080 Speaker 5: access of resistance can disrupt the global economy as they've 422 00:22:09,119 --> 00:22:12,080 Speaker 5: done or tried to do in the Red Sea is 423 00:22:12,080 --> 00:22:15,000 Speaker 5: something that I think everybody needs to be well aware. 424 00:22:14,760 --> 00:22:17,480 Speaker 2: Of Steven, appreciate your time this morning. Thanks very insight 425 00:22:17,560 --> 00:22:21,520 Speaker 2: so Stephen Cook there of CFR. This is the Bloomberg 426 00:22:21,560 --> 00:22:26,240 Speaker 2: Surveillance Podcast, bringing you the best in markets, economics, angiopolitics. 427 00:22:26,520 --> 00:22:29,000 Speaker 2: You can watch the show live on Bloomberg TV weekday 428 00:22:29,000 --> 00:22:32,240 Speaker 2: mornings from six am to nine am Eastern. Subscribe to 429 00:22:32,280 --> 00:22:35,520 Speaker 2: the podcast on Apple, Spotify or anywhere else you listen, 430 00:22:35,800 --> 00:22:38,360 Speaker 2: and as always, on the Bloomberg Terminal and the Bloomberg 431 00:22:38,400 --> 00:22:39,000 Speaker 2: Business app.