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Speaker 2: This is the making the Sausage, folks. I have never
Speaker 2: forgiven leguard at Gorgieva for dropping the printing of the
Speaker 2: three books of the IMF World Bank Meetings in the spring.
Speaker 2: I would dutifully paw the airline would tilt to the
Speaker 2: left when I had them on the airline, and I
Speaker 2: would actually read these things, the Bluebook, the Green Book,
Speaker 2: the Brown Book, whatever. And the Green Book is on
Speaker 2: financial stability. The only one left who reads a pdf
Speaker 2: eighty four pages cover to cover the Green Book is
Speaker 2: Alexis Crow, and she joins us right now with the
Speaker 2: PwC thing. You're at the meetings, and I love your
Speaker 2: note because you nail it was the unspoken not spoken there.
Speaker 2: That's always the most important thing.
Speaker 3: Thanks so much, Tom for having me. Yeah, it's always
Speaker 3: fascinating to find out what the Straussian silences are. And
Speaker 3: there obviously everyone's focused on the war currently energy markets,
Speaker 3: fiscal response, monetary policy. People are not asking as you
Speaker 3: highlight on financial stability, which is often the most interesting report.
Speaker 2: So I go to box one that the Paul what
Speaker 2: you do here cliff notes, Okay, executive summary boring. You
Speaker 2: go to box one point one, which is like the
Speaker 2: appendix of eighty four NERD PhD pages. Rising Japanese government
Speaker 2: bond yields could affect global asset allocation, which goes again too.
Speaker 2: These distortions in the yield bark the unspoken to.
Speaker 3: Me one of so these imbalances. There was actually a
Speaker 3: fantastic panel on imbalances. The fiscal imbalances are are very clear.
Speaker 3: I would say that when we look though at where
Speaker 3: equity markets are, one of the reasons why we see
Speaker 3: the Nikke hitting historic high last week SMP as well
Speaker 3: is because of the fiscal We think.
Speaker 2: Of the bonuses PwC has gotten in Seoul. I mean
Speaker 2: Korea's happened.
Speaker 3: It did crash twelve percent right at the start of
Speaker 3: the conflict. The cosby yep, but it's coming back, it's
Speaker 3: coming back, but it's again. I think off the back
Speaker 3: of this fiscal impulse, where we are is that financial
Speaker 3: markets are expecting this bigots to open and we'll pay
Speaker 3: for that.
Speaker 4: Down the line, Alexis.
Speaker 5: We had another guest earned a week that was at
Speaker 5: the IMF and the World Bank Spring meetings, and they
Speaker 5: highlighted the maybe the disconnect between the concern they felt
Speaker 5: at those meetings about geopolitics, about globally economic risk. In fact,
Speaker 5: the markets are hitting all time highs here.
Speaker 4: What do you make of that again?
Speaker 3: I mean, I think if we look at when you've
Speaker 3: had shocks to demand, whether it was concerns on the
Speaker 3: initial waves of protectionism Trump. We know in twenty eighteen
Speaker 3: the sudden economic stops related to the pandemic Russia, Ukraine.
Speaker 3: Even in the wake of Liberation Day, governments have stood
Speaker 3: in and said we will support households and consumers. We've
Speaker 3: seen Madame Legarde yesterday actually highlighting that some of those
Speaker 3: measures need to be very tailored to the lowest part
Speaker 3: of the income distribution, otherwise monetary policy will have to
Speaker 3: step in and over titan. So it is building up
Speaker 3: in balances, but we just keep kicking the check in
Speaker 3: the overdraft.
Speaker 5: Down the line, how about the sense of the US
Speaker 5: as a safe haven that took a big hit last year,
Speaker 5: have we removed that risk? Or how does the participants
Speaker 5: in that meeting, how did they view the US These days.
Speaker 3: It's really fascinating to watch the performance of safe haven
Speaker 3: assets coming out of this conflict. So right at the
Speaker 3: start of the conflict, I would say yields on the
Speaker 3: tenure absolutely should have been falling more than they did.
Speaker 3: Dxy should have rallied and should continue to rally more
Speaker 3: than it has. The shekel hit a thirty year high
Speaker 3: against the dollar yesterday. So this debasement trade, the diversification trade,
Speaker 3: some of these numbers tell me, is not over. Okay,
Speaker 3: it's certainly not as dramatic as it was in the
Speaker 3: wake of Liberation Day, but for qualitative reasons and quantitative reasons,
Speaker 3: investors are looking elsewhere.
Speaker 5: But it just seems like the dollar, you know, certainly
Speaker 5: when we had the war kickoff, well the xy innx
Speaker 5: popped right back to one hundred from ninety six level,
Speaker 5: so it seemed like it had that safe haven. But
Speaker 5: now we're kind of bleeding off a little bit here
Speaker 5: in the dollar.
Speaker 3: Yet again it is and if you look at where
Speaker 3: we are, if you look at a five year average,
Speaker 3: it's not as impressive. You came up nine hundred basis
Speaker 3: points right after the start of January twenty twenty five
Speaker 3: with the expectation.
Speaker 6: Of drag et cetera.
Speaker 3: So I would say it's it's not as impressive as
Speaker 3: one would think private credit.
Speaker 5: How much of a concern is it to Global Wall
Speaker 5: Street here? I mean, we've had a lot of folks,
Speaker 5: including the banks that just reported saying it's not issue,
Speaker 5: even the regional banks that just report it not an issue.
Speaker 5: How did the folks at the IMF and the World
Speaker 5: Bank think about that?
Speaker 3: Still, I think the consensus is not systemic because it
Speaker 3: is a slender part of the overall lending platform. It's
Speaker 3: not that jesibs are it's not a heavy part of
Speaker 3: their lending. But interestingly enough, you had several Central Bank
Speaker 3: deputy governors and governors saying, guess what, there were also
Speaker 3: moments in credit markets that were also a slender part
Speaker 3: of the credit market that had a contagion effect and
Speaker 3: had a runnable scenario, So we have to look out
Speaker 3: for that.
Speaker 6: I would say.
Speaker 3: The other thing that people were not talking about is
Speaker 3: dreg in the US traditional banking sector and the impact
Speaker 3: that that might have further down the line, you actually
Speaker 3: have the US jesibs having very healthy profitability not necessarily
Speaker 3: needing to reduce capital requirements, and that I think is
Speaker 3: something that was silent that should be spoken about.
Speaker 2: Can I rip up the script? Rip okay? You darken
Speaker 2: the doors saying wandered down? I think it was Yeah,
Speaker 2: she played golf there. I tried, you tried. Do you
Speaker 2: have a favorite soccer team? Do you have a football team?
Speaker 2: I liked Liverpool, Liverpool they always when, they never when
Speaker 2: was the last day in Liverpool? I mean, they're always good.
Speaker 3: This is my teenage day.
Speaker 2: Coventry came up, which is they're coming up from the
Speaker 2: minor leagues. Uh, Wolver something was declined yesterday and the
Speaker 2: Tots are about ready to go down, which is unbelievable.
Speaker 2: What state of the United Kingdom? I mean, the King
Speaker 2: Charles was really emotional about the Queen's hundredth birthday. I think,
Speaker 2: are they still coming over to America?
Speaker 4: I think so?
Speaker 2: I mean, what is a state of your United Kingdom
Speaker 2: with all your brilliant academics there.
Speaker 3: Well, it's benefiting from a little bit of an offset
Speaker 3: from the US. Right, You've had record numbers of US
Speaker 3: applications for seasonship in the UKA and residency. So it
Speaker 3: is still benefiting.
Speaker 6: And you know what, Tom, it's.
Speaker 3: Asset management that thrives and lives on. It's not the
Speaker 3: traditional investment banking, not traditional insurance, but asset management. Because
Speaker 3: hedge fund wives would prefer to live in London to Frankfurt,
Speaker 3: and so this is actually something it's actually quite robust
Speaker 3: that The difference here, and you're going to hate me
Speaker 3: for this, the difference here is that the conversation generally
Speaker 3: tends to be quite myopic in contrast with the rest
Speaker 3: of the continent. So you're still looking back to the
Speaker 3: Brexit question and the referendum question.
Speaker 2: This is a basic question for Americans. If Roger becomes
Speaker 2: Prime minister, does he trumpify the United Kingdom?
Speaker 6: What does that look like? We've talked about this in the.
Speaker 3: Past, But does that mean, you know, an acceleration of
Speaker 3: the foundations and the institutions and questioning institutional integrity. I mean,
Speaker 3: I think that's that's one question mark. The other thing
Speaker 3: that we should think about is the rise of the
Speaker 3: right is not your dad's GOP.
Speaker 6: The rise of the right.
Speaker 3: Is not traditional obviously less fair uh free markets, and
Speaker 3: so what we work with our clients to think about,
Speaker 3: is where can the government actually intervene, even if you've
Speaker 3: been supportive of a government into your business, And how
Speaker 3: does your share price take a tumble off the back
Speaker 3: of that?
Speaker 2: Can you get tickets for Paul to Royal Birkdale Golf
Speaker 2: Club July? Nice? Pretty sure?
Speaker 4: Open Champion, the Open champ.
Speaker 2: It's my favorite, isn't it like the worst? Like rough
Speaker 2: and all that. It's just weather.
Speaker 4: It's just weather the United Kingdom. You know it's nay
Speaker 4: when it's nay golf, So that's how they do it.
Speaker 2: It's going. I mean, is it a long walk from
Speaker 2: Saint Andrews to the fancy golf clubs?
Speaker 4: I think it's like no, it's right there, it's right there,
Speaker 4: right there.
Speaker 1: Yeah.
Speaker 4: I mean, you shank your ball on number eighteen, you're
Speaker 4: right in front of the last class exactly.
Speaker 2: Thank you so much for coming in today. Well you
Speaker 2: could make this like a three hour conversation here. What's
Speaker 2: going on? Is PwC optimistic on the American economy? Just
Speaker 2: as simple as.
Speaker 3: That demand is strong? Right, demand is strong, and it's
Speaker 3: it's still teetering on that twin engine of AI related
Speaker 3: investment spend data centers, but also consumption. Consumption is strong
Speaker 3: across income.
Speaker 2: You're seeing a productivity thing pop in. Whether it is or.
Speaker 3: Is not a bad debate is still out for the
Speaker 3: highest skilled part of the income or for the highest
Speaker 3: skilled part of the skilled distribution. I have not seen
Speaker 3: the productivity impact thatmer from AI.
Speaker 6: Correct.
Speaker 2: I agree? I agree? Okay, Thank you, Rick. Alexis Crow
Speaker 2: always so much for being with us this morning air
Speaker 2: with PwC with some really really good perspective. Of course,
Speaker 2: her attendance at the IMF meeting's partner Chief Economists PwC
Speaker 2: us stay with us. More from Bloomberg Surveillance coming up
Speaker 2: after this.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us live
Speaker 1: weekday afternoons from seven to ten AM's durn Listen on
Speaker 1: Apple Karplay and Android Otto with the Bloomberg Business up,
Speaker 1: or watch us live on YouTube.
Speaker 2: They're really good. Becha Wasser in here in Washington quickly
Speaker 2: here on the meetings to come up in Islam about
Speaker 2: as well. She is definitive on defense at Bloomberg Economics.
Speaker 2: Becca will the military representatives of Iran show up? Or
Speaker 2: is it basically the politicians and the theology that shows.
Speaker 7: Up well, I think great now Iran is sending who
Speaker 7: it is that they can send. There has been significant
Speaker 7: changes in their leadership, to say the least, after US
Speaker 7: and Israeli strikes on keynodes of the Iranian system. So
Speaker 7: I think who they get is who they get. But
Speaker 7: you know, the US is sending the vice presidents, and
Speaker 7: so one would hope that they would come at a similar,
Speaker 7: if not comparable level.
Speaker 4: Becca if there is no peace agreement.
Speaker 5: We understand that the ceasefire, as per President Trump ends
Speaker 5: tomorrow Wednesday evening Washington time. Is the expectation that hostilities
Speaker 5: will resume if there is no extension.
Speaker 7: I think if there is no extension of the ceasefire,
Speaker 7: we can expect to see the blockade continue. We can
Speaker 7: also expect to see additional strikes. President Trump himself has
Speaker 7: threatened that strikes would continue if a deal was not struck.
Speaker 7: This could be read as political pressure put on ran
Speaker 7: to get them to come to the negotiating table and
Speaker 7: capitulate to his demands and to make concessions in those
Speaker 7: negotiating negotiations. But I think really what it comes down
Speaker 7: to is if there is no deal, hostilities will escalate
Speaker 7: and we can see this conflict go on for a
Speaker 7: little bit longer, if not a much longer period of time, Becka.
Speaker 5: President Trump has recently tweeted that the blockade has been
Speaker 5: a tremendous success and that the US totally controls the
Speaker 5: Strait of Hoour moves is that the feeling in kind
Speaker 5: of wider circles there because it doesn't seem to be
Speaker 5: much oil flowing in around of the strait these days.
Speaker 7: Well, I think it depends on what circles you are
Speaker 7: talking to. If you are talking to the US military.
Speaker 7: US Central Command has said that twenty seven ships have
Speaker 7: been disabled or diverted, but if you look at data,
Speaker 7: for example, from Lloyd's lists, they suggest that about twenty
Speaker 7: six ships have actually been able to make it through
Speaker 7: the blockade despite US enforcement. So at the end of
Speaker 7: the day, the question of is the straight open or closed?
Speaker 7: It seems as though it's largely closed. But the folks
Speaker 7: who really decide whether it's open or the shippers, Becka.
Speaker 2: Do we have any understanding And I've seen this way
Speaker 2: that way in the zeitgeist. Are we running out of missiles?
Speaker 2: Just as simple as that, I can't get a straight answer.
Speaker 2: What do you see?
Speaker 7: So the answer is no, the United States is not
Speaker 7: running out of missiles. However, what it is doing is
Speaker 7: it is mortgaging its future in terms of security with missiles.
Speaker 7: There are sufficient stockpiles for today for what is needed,
Speaker 7: but what is dwindling is the rate of those stockpiles.
Speaker 7: So this means that the US military might be less
Speaker 7: prepared for potential future crises that they might face, which
Speaker 7: is why there's so much effort going on to rebuilding
Speaker 7: those stockpiles and why you see such an emphasis on
Speaker 7: munitions and the current DOO D budget.
Speaker 2: I was in Washington yesterday. I wonder at the office,
Speaker 2: you know, I mean looking for Becca. I can't find her.
Speaker 2: I mean, you know, she's just a player. She's deep
Speaker 2: and let you exactly. She's probably in some bunker somewhere
Speaker 2: and there's Tony Cabaco there. Becca. From where you sit,
Speaker 2: is the Pentagon communicating with the press upset that we
Speaker 2: have where the normal press is not invited into the
Speaker 2: press conferences? Are we getting the full picture?
Speaker 7: I mean, I think we're getting a certain level of
Speaker 7: transparency with those continued press conferences that we've seen. Secretary
Speaker 7: of Defense Pete Hegseth and Chairman of the Joint Chiefs
Speaker 7: of Staff Dan Caine run But that doesn't mean that.
Speaker 6: It's the full picture.
Speaker 7: They're giving the good news story that they want to give,
Speaker 7: they're giving the data that they want to provide. The
Speaker 7: transparency is welcome, But until you have a free press
Speaker 7: who can actually question whether the statistics are real, whether
Speaker 7: they are getting the full story, that's when you know
Speaker 7: you're missing a critical step.
Speaker 2: So what's your question to the Secretary of Defense right now?
Speaker 7: Are you prepared for future crises? You can do what
Speaker 7: you need to do for today, but are you able
Speaker 7: to have the stockpiles, the readiness for what might happen
Speaker 7: potentially for higher and conflict in the Indo Pacific?
Speaker 6: Are you ready?
Speaker 2: Listen, when you go to brand Ice, you say, you
Speaker 2: don't say the Pacific Ocean, you say the Indo Pacific.
Speaker 2: That's the way they roll at Brandi's beck that what
Speaker 2: you're telling me is this trip of President Trump to China.
Speaker 2: I guess they're going to wander buy and see President
Speaker 2: g I mean, this is like a big deal, right,
Speaker 2: This is not like some you know, may distraction.
Speaker 7: No, it's a huge deal. It's a huge deal, and
Speaker 7: it's something that frankly, President Trump has prioritized and made
Speaker 7: an equally big deal about, in part because he's tried
Speaker 7: to play both sides a conciliatory tone towards China that
Speaker 7: is a little bit different than what we've seen in
Speaker 7: previous administrations, will at the same time trying to be
Speaker 7: tough on China on certain issues. We've seen that initially
Speaker 7: with tariffs witch have since come down. So at the
Speaker 7: end of the day, it really is going to be
Speaker 7: quite telling about what the future of that relationship looks like,
Speaker 7: as well as the view of what American power is
Speaker 7: around the globe. That's what that meeting is going to
Speaker 7: help us determine.
Speaker 5: Beca should we be concerned or should we question the
Speaker 5: fact that Secretary of State Rubio and the State Department
Speaker 5: appear to be nowhere in sight as it relates to
Speaker 5: what's going on in ouran and then negotiations and I
Speaker 5: don't know Secretary stuff.
Speaker 7: I think President Trump has decided who his point people are.
Speaker 7: He has been very, very dependent on Steve Whitcoff, on
Speaker 7: Jared Kush, as well as making Vice President jd Vance
Speaker 7: own part of this file so you know, I would
Speaker 7: probably say three is a crowd. If you add one
Speaker 7: more in, it might get a little bit complicated. But
Speaker 7: I also think that Secretary of State Rubio has a
Speaker 7: number of different files that he is in charge of,
Speaker 7: including those in the Western hemisphere, and I think he's
Speaker 7: quite content to work on those, in part because of
Speaker 7: how contentious these negotiations are.
Speaker 2: Are we going to have a final question? Backer are
Speaker 2: we going to have a budget shock because of all this?
Speaker 2: I mean, that's a hard of what you're doing for
Speaker 2: Annawang and all of economics. Are we just do we
Speaker 2: need to be stealed for a defense budget shock?
Speaker 7: I mean, I just look at the request. It's a
Speaker 7: one point five trillion dollar request. Does the Pentagon expect
Speaker 7: to get that much? Probably not. It's a maximalist request
Speaker 7: at this point in time. But if you look at
Speaker 7: the enormous amount of missiles that have been expended just
Speaker 7: in the Iran conflict alone, if you look at the
Speaker 7: levels of readiness with double tap carrier deployment, you are
Speaker 7: going to expect to see a bill for that. And
Speaker 7: that's a bill that's going to come do later, not
Speaker 7: right now. So I do think that there is going
Speaker 7: to be a little bit of a shock, but it
Speaker 7: is going to compound over time.
Speaker 2: Spectacular brief Beka Wasser, thank you, thank you, thank you.
Speaker 2: With Bloomberg Economics, they are on defense, answering a lot
Speaker 2: of the questions of Paul and I have because it's confusing.
Speaker 4: Oh yeah, yeah, you know, that's all there.
Speaker 2: Is to it. Stay with us. More from Bloomberg Surveillance
Speaker 2: coming up after this.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us live
Speaker 1: weekday afternoons from seven to ten am Eastern Listen on
Speaker 1: Applecarplay and Android Otto with the Bloomberg Business app, or
Speaker 1: watch us live on YouTube.
Speaker 2: Troy Gaisky with us here, who on a ninety day
Speaker 2: basis looks at all the stocks he's losing money on.
Speaker 2: He's chief market strategies, future standard. I haven't asked this
Speaker 2: on air yet. Would you prefer twice a year or
Speaker 2: four times a year earnings report on amalgamated chin strap
Speaker 2: that you're you know, on way too many shares of Yeah.
Speaker 8: Look, I would say one of the advantages we've seen
Speaker 8: for in one of the drivers of companies going private
Speaker 8: or staying private longer. We could talk about them re
Speaker 8: ipoing later has been you can focus more on medium
Speaker 8: to long term growth, right, because it's all about growth
Speaker 8: in the equity part of capital structure, you know, the
Speaker 8: continuous quarterly reporting. This put a lot of pressure on
Speaker 8: management to be a little too short term focused. So
Speaker 8: that could be a healthy development tom but obviously capital
Speaker 8: markets are going to brush back really hard.
Speaker 2: Interesting to say. The least Paul's been talking about on
Speaker 2: morning is Troy Guyeski is streuture standard? Are you going
Speaker 2: to participate? Is this the right phrase? The musk ipo?
Speaker 4: Oh, that's right, SpaceX, right, are we Yeah, yeah.
Speaker 6: We'll look so through some of our our venture capital portfolios.
Speaker 8: We have exposure on behalf of clients and so yes,
Speaker 8: there will be participation in that on the behalf of
Speaker 8: our clients. But in terms of taking a position in
Speaker 8: the IPO itself, the answer is no. You know, our
Speaker 8: liquid multi strategy really doesn't trade I pos out of
Speaker 8: the open and look, we wish the best for those
Speaker 8: late stage private offerings, but as you know, you know,
Speaker 8: as they get funded later and later, the valuations tend
Speaker 8: to creep up, up and up and up. I mean,
Speaker 8: the one advantage SpaceX has over open AI and entropic.
Speaker 8: In this race of jillion dollar I pos is, there
Speaker 8: is some diversification benefit. If you look at open A andthropic,
Speaker 8: you know, they're very similar to hyperscalers, but at least
Speaker 8: in SpaceX you're getting a different growth vertical that can
Speaker 8: provide some degree diversification and may cause institutions to pay
Speaker 8: a bit more All vertical.
Speaker 2: Yeah, that's you know, say vertical. It's impressive, Troy.
Speaker 5: We had to sell off in the market, you know,
Speaker 5: right around the beginning end of the Rand war, but
Speaker 5: then we had a sharp rebound here blinked you miss there? Right?
Speaker 4: What do you make of that there?
Speaker 6: Yeah, you know it's really crazy. You know when you
Speaker 6: go back in really, since the Eurozone crisis, every correction slash.
Speaker 8: Bear market, mini bear market has been V shaped, with
Speaker 8: the exception of twenty twenty two, right, And you think
Speaker 8: about the reason that wasn't V shaped. Is it just
Speaker 8: took so long for markets to just to materially higher
Speaker 8: front end rates. And the Fed's going from zero to
Speaker 8: five and a quarter and they're draining money supply at
Speaker 8: the fastest pace since the Great Depression.
Speaker 6: And that was an accident.
Speaker 8: Obviously, this time was on purpose, you know when you
Speaker 8: think of the technicals behind that. So we talked about
Speaker 8: this in the past to some extent. Where you have
Speaker 8: a long only buyer base, or a retail buyer base
Speaker 8: that's been conditioned to never sell right, just hold through.
Speaker 6: Then what happens is you get this seismic shift.
Speaker 8: Tariffs, Iran war, The large multi strate hedge funds start
Speaker 8: selling more, selling down their lungs, putting on shorts.
Speaker 6: The trend followers flip from either long or neutral. The negative.
Speaker 8: The risk parity managers which manage their books to volatility.
Speaker 8: As volatility expands, they cut their risk, and you have
Speaker 8: this sharp decline. You reach a clearing level, your retail
Speaker 8: comes in, multistrats start to relever, and it reverses very,
Speaker 8: very rapidly. But this is a certain event of v
Speaker 8: shaped recovery for the ages. Yeah, I mean even more
Speaker 8: violent than Liberation Day.
Speaker 2: Trey Gaski, where this future is up twenty six fourteen,
Speaker 2: they pulled back a little bit. The President still speaking
Speaker 2: over at the desk star with mister Kurr and a
Speaker 2: whole bunch of headlines off that we'll get to them
Speaker 2: here in a moment. We are advantage of Troy Gayski,
Speaker 2: Chief market Strategistic future standards. So you know, if you're
Speaker 2: at the Massachusetts Institute of Technology and you look at
Speaker 2: what researchers have done with extrapolation, they use lease squares,
Speaker 2: polynomial fits. That's what the Red Sox doing their infield is, well,
Speaker 2: can you extrapolate O MIT one earnings? In revenue? Can
Speaker 2: you take the glory double digit moment we're in and extrapolate?
Speaker 8: You know, I've always said it's hard enough to look
Speaker 8: twelve to eighteen months forward, let alone twenty four to
Speaker 8: thirty six, right, So we used.
Speaker 2: To routinely do three month guesses in the back of
Speaker 2: a research.
Speaker 6: Report, exactly three months.
Speaker 2: Right.
Speaker 8: So the key I think now to remember for this
Speaker 8: year's earnings and early next year is you still have
Speaker 8: a relatively strong consumer. You still have massive AIAI infrastructure spends,
Speaker 8: which obviously feed the whole semiconductor complex and business fixed
Speaker 8: investment complex, and that makes it potentially achievable to grow
Speaker 8: revenue nine percent in SMP and earnings at seventeen. Right,
Speaker 8: you should continue that strength into next year. But tom
Speaker 8: past Q one, Q two of next year, we need
Speaker 8: to start seeing a material AI R o I C
Speaker 8: to really justify increased spends, right or that's when you
Speaker 8: could get into earnings trouble. So the the biggest obvious
Speaker 8: risk to markets right now is the four hyper scalers
Speaker 8: sit around the table in a non al agpaalistic fashion
Speaker 8: and they say, in you know, mid twenty seven, you
Speaker 8: know what, guys, we haven't metaversed all this money, but
Speaker 8: like we torched a lot of it.
Speaker 6: What metaversed? Remember the metaverse? It's like something say no, no,
Speaker 6: the meta remember the.
Speaker 8: Metaverse that was That was you know, Zuckerberg's big plan
Speaker 8: to create an alternati reality. And there's seven seven seventy
Speaker 8: seven billion dollars gone.
Speaker 5: No.
Speaker 8: So so they sit down and they say, hey, like,
Speaker 8: we've spent more money than potentially we should.
Speaker 6: We're not getting the AI R o I C. And
Speaker 6: they start to flatline their spends.
Speaker 8: That would certainly be a correction cause of event and
Speaker 8: would suck a lot of GDP growth out of the economy.
Speaker 6: So that's one of the most known risks, and I
Speaker 6: think you can say with confidence that's not going to
Speaker 6: happen the next twelve fifteen months. After that, you have
Speaker 6: to at least be aware.
Speaker 2: Of nice nicely summarized.
Speaker 5: So what is the from your perspective, the AI play now,
Speaker 5: Because at least in the first two or three years,
Speaker 5: it was that's just throw money at this thing, and
Speaker 5: anybody who was throwing money the stocks were really rewarded
Speaker 5: if you could get AI into your story somehow. Yeah,
Speaker 5: now it seems like the markets a little bit more
Speaker 5: discerning here.
Speaker 8: Yeah, look, I think you know, joking Lee, you're at
Speaker 8: that stage in some cases where companies at AI and
Speaker 8: their share price goes up and then you know, the
Speaker 8: guys that short look at that and laugh and then
Speaker 8: they kind of bury it within a day or two.
Speaker 8: But in our business, right, the biggest exposure we have
Speaker 8: to benefit clients is through sort of the infrastructure play,
Speaker 8: whether it's digital infrastructure financing, whether it's plays on continued
Speaker 8: spends like power control systems that affects not only power
Speaker 8: control system manufacturers but also those involved in HVAC and cooling.
Speaker 8: That has been one of the most profitable ways to
Speaker 8: play it. And the good news is you don't have
Speaker 8: to pay unreasonable prices because you know, in middle market
Speaker 8: private equity you're entering somewhere between seven thirteen times Etiba
Speaker 8: Da versus the Russell two thousand, which trades roughly at
Speaker 8: nineteen times EBD truck.
Speaker 2: I ask you with us and we continue the Chief
Speaker 2: Market Strategy's future standards. A nice lung conversation, valuable conversation.
Speaker 2: Within this morning we said good morning. The way you
Speaker 2: choose to listen to us, thank you so much, major
Speaker 2: shout out ninety nine to one FM, Nathan and Hagar Radio.
Speaker 5: Oh.
Speaker 4: I like Amy Marsh She's my DC content and she's
Speaker 4: you know, be you hockey and all that. She's the
Speaker 4: University of South Carolina.
Speaker 2: Which it's good to be down there yesterday to see
Speaker 2: mister Hager. He was clearly was shutting down his day.
Speaker 2: You know, he was heading for the door when I
Speaker 2: walked in.
Speaker 4: Yeah, lunchtime as time, you.
Speaker 2: Know, hey, Adam Sotel, whole thing. We said good morning
Speaker 2: to Washington on up to Boston, Good morning, serious exempt
Speaker 2: Channel one twenty one on YouTube. We are humbled by
Speaker 2: the distribution, Thank you so much. The way to do
Speaker 2: that is to sign up it Bloomberg Podcasts and we
Speaker 2: are live to you and then tape later at some
Speaker 2: point Jake haven't figured out yet, but we're there on
Speaker 2: YouTube as well, the Vics nineteen point zero two. Right now, Troy,
Speaker 2: I look at the entire setup here and the backdrop.
Speaker 2: The thing that's out there in every conversation is our
Speaker 2: debt and our deficit, whether it's government or corporate. Ken
Speaker 2: Rogoff and Kerman Reinhard make a big deal about you
Speaker 2: gotta combine both discuss the backdrop of debt fueling our
Speaker 2: nominal GDP.
Speaker 6: Yeah.
Speaker 8: So when you think again about maybe more obvious risks
Speaker 8: that Tom, even you and I can figure out right
Speaker 8: is the deaf situation is to some extent unsustainable. Right,
Speaker 8: we're issuing let's call it, five point eight to six
Speaker 8: point two percent of all the treasuries ever issued in
Speaker 8: the history of the country.
Speaker 6: That's a big number.
Speaker 8: Part of the reason why the Fed really will have
Speaker 8: pressure to bring the front end down faster to control
Speaker 8: that back at the end of the yell curve. But
Speaker 8: if you think about on the future, right, if there
Speaker 8: becomes a situation where markets at least back a little bit,
Speaker 8: if financing the back end the curve, that turns again
Speaker 8: into one of those classic scenarios where you have a
Speaker 8: bear steepener. Maybe not right, Barrish move from two to tens,
Speaker 8: which in turn causes multiple impression. So think about what
Speaker 8: we just went through with ran War right. One of
Speaker 8: the reasons it was briefly painful in liquid markets is
Speaker 8: you had bonds selling off at the same time it
Speaker 8: had equity selling off, and that again is one of
Speaker 8: the more obvious risks. Not this year, not next year,
Speaker 8: but unless we can continue to grow nominal GDP at
Speaker 8: five to five and a half and constrain government spending
Speaker 8: to one to two, it's a risk that's becoming more
Speaker 8: and more obvious in.
Speaker 4: The equity market.
Speaker 5: So we had a rotation Troy kind of starting late
Speaker 5: last year in out of some of the higher growth,
Speaker 5: high multiple stuff into maybe some of the more cyclical,
Speaker 5: maybe even smaller mid caps. I saw a little bit
Speaker 5: of reversal back into some of the big cap tech names.
Speaker 4: How do you think about that casion?
Speaker 6: Yeah, So it's funny.
Speaker 8: So in middle market private equity we always talk about
Speaker 8: growth at a reasonable price. It's been really really hard
Speaker 8: to find in public markets really since q E three.
Speaker 8: You go back to q E three, it was really
Speaker 8: more of a asset inflation exercise than a way to
Speaker 8: really break a disinflationary cycle.
Speaker 6: You know, you started to see you know, hyperscalers.
Speaker 8: You know, let's call it the mag seven minus Tesla
Speaker 8: top ten Tesla at waterline growth at a reasonable price levels,
Speaker 8: so lowest multiples they've been in quite some time, still
Speaker 8: very tremendous growth in the near term. And so it's
Speaker 8: logical that once you hit that clearing point and you
Speaker 8: start to rally back, that some flow goes back to
Speaker 8: what are clearly some of the greatest companies mankind's ever
Speaker 8: seen at some of the lowest multiples they've been at
Speaker 8: in quite some time.
Speaker 2: Sure to ask you, this is going to wrap up.
Speaker 2: Here is the future standard. I'm going to do a
Speaker 2: massive audible here. Nice when you were doing Kemy and Mite,
Speaker 2: did you even speak to the mechanical engineers like Kevin.
Speaker 6: Warsh Well, you know, of course two it's not course ten,
Speaker 6: but yes we did, we did. Did you hear that shit?
Speaker 5: Am?
Speaker 2: So the future chure?
Speaker 6: I did that one for you, Tommy.
Speaker 2: You know, it's just, folks, what we're talking about here,
Speaker 2: there's a whole cottage industry and engineering A massive, massive
Speaker 2: shade between a mechanical engineer. Gayski is a legit chemical engineer.
Speaker 2: I studied, I did not graduate. I studied aerospace. I
Speaker 2: mean you look at the aerospace of the double le's
Speaker 2: like children, right, we're sliding through.
Speaker 8: I mean, so what's called course six nony T they
Speaker 8: argue is as challenges as chemi at most places because
Speaker 8: the competition to get in bends the curve higher.
Speaker 6: But back to you, you're we call that foreign students,
Speaker 6: Is that right? Can you say that? Tom?
Speaker 2: So?
Speaker 8: If you think about, you know, mechanical engineering very challenging discipline,
Speaker 8: and we had a lot of guys in our fraternity
Speaker 8: that were in mechanical engineering, so have tremendous respect for them.
Speaker 2: But you know, yeah, Kevin Worrish is showing up like
Speaker 2: some dude that took English literature somewhere and wanted through
Speaker 2: NBA and married into a silver spoon. Yeah, he's a
Speaker 2: mechanical engineer from Pennsylvania. That's not small potatoes.
Speaker 6: Yeah, his IQ's clearly well by the bahs. You know,
Speaker 6: let's closes.
Speaker 2: Are Michael barscoing this is too much nerd patrol thermodynamics.
Speaker 2: I'm sitting there. There's a common feature of all of engineering.
Speaker 2: Chris is of course ten and Mi I t ten
Speaker 2: point two one three. That's the first three of absolute
Speaker 2: terror of thermodynamics. That's where it gets hard, you know.
Speaker 8: So to be to give mechanical engineering credit, they have
Speaker 8: to take it as well, right, yeah, and not ten
Speaker 8: two on three, But obviously they're they're version for me though, Tom,
Speaker 8: You're right, thermodynamics is usually the like punch in the
Speaker 8: face moment. I don't even remember why, but I took
Speaker 8: fluid mechanics before them damics, and that was the punch
Speaker 8: in the face moment for me.
Speaker 6: Like you think you got everything locked down, No you don't.
Speaker 6: Now you're now you're taking real process.
Speaker 2: Tell you exactly where I was sitting in Boulder, Colorado.
Speaker 2: I think it was after a hockey trip. I'm on
Speaker 2: the tower, which is a physics tower, and I'm in
Speaker 2: quantum mechanics doing Schroderger equations, and I'm like, why am
Speaker 2: I sitting here?
Speaker 6: What is going on?
Speaker 8: It's really humbling, and you know, it's a nice reminder
Speaker 8: for markets too. I mean, whenever you get through these
Speaker 8: periods of challenge and uncertainty, you know, as an asset manager,
Speaker 8: you have to be humble, right, You have to understand
Speaker 8: that you don't have perfect predictive power, and that's why
Speaker 8: it's so important to focus on that risk award discipline.
Speaker 6: How much can you lose it get wrong?
Speaker 2: That's just a new CEO of Apple Turgis mechanical engineers.
Speaker 6: Well, let's give Kevin than not too man. He's like
Speaker 6: a smart guy, you know, but.
Speaker 2: The new CEO and Apple folks took it the hard way,
Speaker 2: like true guy guy asking trug guy asking you his
Speaker 2: future standard. Thank you so much. Stay with us. More
Speaker 2: from Bloomberg Surveillance coming up after this.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us live
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Speaker 2: Seem likely joins US Global cohead Fixed Income at Blackrock.
Speaker 2: I came out of moynand last night and it was
Speaker 2: one of your black Rock Day forty two buildings at
Speaker 2: Midtown yep in Blackrock symbol at the eighth night. The
Speaker 2: other I can't remember. And you know the bottom line
Speaker 2: is we're all enviously Europe, and it could be Zerioka,
Speaker 2: it could be Milan or it could be what they've
Speaker 2: done at Heathrow and that we're doing that in our
Speaker 2: own American way, and we're doing that with bonds, aren't.
Speaker 9: We We are?
Speaker 10: Yeah, bon bonds are really racing right now. We're our
Speaker 10: lows this year or fifty percent higher.
Speaker 9: Than the same time last week.
Speaker 2: Did Blackrock You guys got to be this first, second
Speaker 2: third call on any bond. I'm looking at the point
Speaker 2: ahnd miracle here in New York. It could be Laguardi,
Speaker 2: it could be Kansas City's new outport, and it's not
Speaker 2: like one bond, it's like six seven eight creative complexities
Speaker 2: of getting a billion dollar project done. How does Black
Speaker 2: Rocks sift through that? Well?
Speaker 10: I mean as far as municipal finance, I mean, yeah,
Speaker 10: there's there's complexity and there's a lot of back and
Speaker 10: forth on how to structure those deals. We've actually seen
Speaker 10: really solid demand for munis. I mean we've taken in
Speaker 10: I think that's probably our fourth or fifth largest category
Speaker 10: this year, so several billion in well mixed sense. I mean,
Speaker 10: I think investors are looking at the yield environment and investors,
Speaker 10: especially in high tech states, are very attracted to munis.
Speaker 5: Right now, what do you make of the Is it
Speaker 5: fixing them call in twenty twenty six clipping coupon or
Speaker 5: can I do something more than that?
Speaker 4: Now I'm going to ban not a fad living right, No,
Speaker 4: it's not, it's not.
Speaker 10: You know, a vast majority of the universe is still
Speaker 10: well above four percent.
Speaker 5: We are.
Speaker 10: We are seeing demand just off the charts right now
Speaker 10: for fixed income. I think, you know, the big messages,
Speaker 10: all of the geopolitical risk, a lot of the you know,
Speaker 10: headline volatility.
Speaker 9: You have to look through it because.
Speaker 10: These supply shocks can be sharp, they can be really powerful,
Speaker 10: but eventually they received, they'll result one way or another.
Speaker 10: And so I think our investors are actually reflecting that
Speaker 10: they they are looking through it.
Speaker 9: They are allocating.
Speaker 10: Then they're allocating very strongly, and the flows have been
Speaker 10: mostly you know, the majority of our flow is probably
Speaker 10: over half for treasures, but that's you know, between you
Speaker 10: have you have of course ESCUB, which again is the
Speaker 10: largest flowing bond e TF this year, but also after
Speaker 10: that it's the Broad Fund g o VT. So you know, yes,
Speaker 10: some some people are sheltering in the front end of
Speaker 10: the curve, but others are allocating more towards durations.
Speaker 5: So how about you U versus non US. Where do
Speaker 5: you see the flows there? So it was a trade
Speaker 5: there for a while to you know, really go out.
Speaker 10: It's interesting I was looking at I mean, so vast
Speaker 10: majority is still US, yeah, but I was looking at returns,
Speaker 10: strongest returns this year. Inflation protected securities are doing well,
Speaker 10: but local em was doing really well. Now again that's
Speaker 10: a dollar trade though, and so that's gone back and forth.
Speaker 9: So you just have to I think, if.
Speaker 10: You're going to do local EM or or you know,
Speaker 10: international development, you just have to have a currency view
Speaker 10: on that.
Speaker 4: So all right, I'm just getting you to notes.
Speaker 5: Twenty twenty five was a record for inflows into your
Speaker 5: I share stuff. Off to another strong star for twenty
Speaker 5: twenty six. Where's the money coming from? Is it money
Speaker 5: coming out of am I selling my x y Z
Speaker 5: mutual fund and putting it into your wrapper because it's
Speaker 5: a better rapper. Where's that money coming from?
Speaker 10: There's some money that is migrating from mutual funds. You've
Speaker 10: you've all heard the headlines around conversions, and then you know,
Speaker 10: I do think the active complex has really grown quite
Speaker 10: a lot, right, and so I think the interest in
Speaker 10: active ets fixed income ETFs.
Speaker 9: Has been very, very strong.
Speaker 10: That's that's how power growth in the last couple of
Speaker 10: years in a way that it wasn't before. It was
Speaker 10: mostly index you know, you get back three years now
Speaker 10: a lot of it's active.
Speaker 2: Where are fees for bond funds if we bondmed is
Speaker 2: that it or can you actually drive a t tick
Speaker 2: tick lower? Well?
Speaker 10: Look, I think in terms of index products, I think
Speaker 10: there's a you know, well established, you know, market dynamic
Speaker 10: there and that that's sort of played out active space,
Speaker 10: you know it. You have a lot more variation in
Speaker 10: the strategies, and you have a lot of different use
Speaker 10: cases depending on the strategy. So I think you could
Speaker 10: see a more significant variation in fees and the active
Speaker 10: complex than you do in indexing.
Speaker 4: Tom.
Speaker 5: I mean, listen to this one point two trillion dollar
Speaker 5: shares bond ETF platform.
Speaker 9: It's actually close to one to three almost.
Speaker 4: I mean, what do you guys do with that stuff?
Speaker 6: I mean, what do you investig to Paul's.
Speaker 2: Serious question, cal you guys two three four in your
Speaker 2: good competitors, you're the market, right.
Speaker 10: I mean we're still as an industry, we're still about
Speaker 10: three percent of the entire bond market.
Speaker 9: So there's people don't know that.
Speaker 2: I think they think Lawrence Fink is twenty two of
Speaker 2: the market. In terms of ABBY in Boston, Good Morning Abbey.
Speaker 2: Abby in Boston is another twenty two percent.
Speaker 10: In terms of bond ETFs, the industry is about three
Speaker 10: percent of the market, and so you know, there's a
Speaker 10: lot more runway. I think the industry right now is
Speaker 10: around three point six. We were saying it's going to
Speaker 10: get to six training by.
Speaker 9: The end of the decade.
Speaker 10: I think we'll get there pretty easily, and maybe well
Speaker 10: before that. So there's just a lot more runway. I mean,
Speaker 10: you look at the curve of equity ETF adoption and
Speaker 10: and bonditfs will follow that.
Speaker 2: Steve Lentley on the marketing stuff that I read, I
Speaker 2: mean barons of you know, Saturday Mornings, got all this stuff.
Speaker 2: But basically there's you know, Paul Sweeney playing vanilla passive
Speaker 2: ETFs pretty much plane vanilla active ETFs, and then there's
Speaker 2: all this fancy hedged add on stuff. Is there any
Speaker 2: track record that hedging works or is it a shell
Speaker 2: game where it works and then once every six years,
Speaker 2: once every seven years doesn't work well?
Speaker 10: So it depends on what you're hedging. I mean, I
Speaker 10: think we have a suite of interest rate hedge products.
Speaker 10: On our most popular products, like LQD, there's an l
Speaker 10: QD H H y G, there's an H y.
Speaker 9: G H et cetera.
Speaker 10: Those do work well in rising rate environments by definition,
Speaker 10: following rate environments not so well. So I think you know,
Speaker 10: what we've seen investors do is allocate to those when
Speaker 10: they're worried about rising rates, and then the flows do
Speaker 10: come out when when things reverse. So we've tried to
Speaker 10: just build a robust toolkit for different environments. Investors tend
Speaker 10: to behave that way.
Speaker 5: How about just in terms of credit risk, are you
Speaker 5: seeing your client's embracing credit risk these days?
Speaker 9: Are not so much?
Speaker 10: It's interesting, I mean, ig investment grade is definitely, you know,
Speaker 10: among our larger flows this year, high yield is mixed,
Speaker 10: and I think you know reflects sort of this I
Speaker 10: think angst over where we're sitting right now in terms
Speaker 10: of volatility.
Speaker 9: So but but investment grade has been strong.
Speaker 2: L QD twelve months trailing seven point eight percent. Yeah,
Speaker 2: it's like, how do you do that? Cleaning your three
Speaker 2: percent fee.
Speaker 9: LQDPE is not three percent, it's fourteen.
Speaker 10: But yeah, but no, I think investment grade overall has
Speaker 10: has seen, you know, pretty consistent flows. It's it's really
Speaker 10: down the capital structure where people have been had a
Speaker 10: little more of a mixed view.
Speaker 9: It's a little more nuanced because of all the volatility.
Speaker 2: We're out of time. I forgot to ask him about
Speaker 2: private credit. Oh, they're not worried. Seven handlers are looking
Speaker 2: at me. Yeah, you can do that next Steve. We'll
Speaker 2: do it next time. Steve Global, cohead of ice Shares
Speaker 2: fixed Income at Blackrock.
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