Speaker 1: This is Bloomberg Wall Street Week.
Speaker 2: And we may not have an overall recession, we're having
Speaker 2: a rolling recession. Econm of roll looks pretty strongly. It
Speaker 2: is when it comes to jobs.
Speaker 1: The financial stories that shape our world.
Speaker 2: Three major regional bank failures send shockwaves through the banking system.
Speaker 2: We're all trying to figure out what to make of
Speaker 2: generative AI.
Speaker 1: Through the eyes of the most influential voices.
Speaker 2: Welcome down, Doctor Paul Krugman, Ryan moynihan, a Bank of America,
Speaker 2: Debro Lair of the Paulson Institute, well then Hubbard of
Speaker 2: the Columbia Business School.
Speaker 1: Bloomberg Wall Street Week with David Weston from Bloomberg Radio Momentum.
Speaker 2: Donald Trump has it, Netflix has it, US economy has it,
Speaker 2: and China is trying to get it back. This is
Speaker 2: Bloomberg Wall Street Week. I'm David Weston. This week former
Speaker 2: Treasury Secretary Bob Rubin on the need to get the
Speaker 2: US fiscal house in order.
Speaker 3: Once you get to legislating, there isn't the will. There's
Speaker 3: a lot of talk, but the talk is always divided politically.
Speaker 2: We're him a POORI of HPS Investment Partners on private
Speaker 2: credit trees growing to the sky, and Charmine most of
Speaker 2: our rock money investing into a rising market. Golal Wall
Speaker 2: Street saw some impressive performances this week, as former President
Speaker 2: Trump continued his march to the Republican presidential nomination with
Speaker 2: a big win in New Hampshire, even as his remaining rival,
Speaker 2: former UN investor Nikki Haley, said, not so fast.
Speaker 4: This race is far from over.
Speaker 5: There are dozens of states.
Speaker 6: Left to go.
Speaker 2: Netflix showed that not all streaming businesses are troubled as
Speaker 2: it posted big fourth quarter wins on subscribers and on revenue.
Speaker 7: We're really thrilled with our engagement trends domestically, Anglibly, our
Speaker 7: engagement is a bit impacted by our paid sharing. Think
Speaker 7: about it, like fewer households using the same account. So
Speaker 7: as those folks spin off and get their own accounts
Speaker 7: and we win them over with our programming, that will
Speaker 7: normalize and continue to grow.
Speaker 2: Even as the streaming giant moved into the world of
Speaker 2: live entertainment with a big deal with the WWE.
Speaker 8: We're pleased with the deal and we love the fact
Speaker 8: that Netflix was willing to take a bet on us
Speaker 8: for us with raw it was yet another test of
Speaker 8: someone new in the space.
Speaker 2: Obviously an established.
Speaker 8: Streaming entity, the streaming entity, if you will. It was
Speaker 8: a good bet by us, and we think a good
Speaker 8: bet by them.
Speaker 2: China recognized that it needed to get some momentum back
Speaker 2: by cutting its bank reserve requirement ratio in a bid
Speaker 2: to boost its economy.
Speaker 9: There is still a sufficient room for China's monetary policy
Speaker 9: in the next stage, and we will.
Speaker 10: Continue to strike a balance between short term and long term,
Speaker 10: between stable growth and risk prevention.
Speaker 2: But the US economy continued to show its strong momentum
Speaker 2: with surprisingly robust GDP growth numbers for the fourth quarter.
Speaker 6: Well, we got to look at GDP first, because that's
Speaker 6: what everybody has been watching, up by three point three percent,
Speaker 6: a significantly.
Speaker 4: Higher number than anticipated.
Speaker 2: Equity markets spent most of the week marching higher, with
Speaker 2: just a little bit of a sell off on Friday.
Speaker 2: For the week, the S and P five hundred was
Speaker 2: up just over one percent, ending up at forty eight ninety,
Speaker 2: which is only sixty points away from the median consensus
Speaker 2: estimate of the Bloomberg else for the end of the year,
Speaker 2: the NASAC roads just under one percent, and the yield
Speaker 2: on the tenure rose just two basis points, tanned up
Speaker 2: at four point one four. Welcome back now, Sarah Malik,
Speaker 2: CIO of neuven to help us sort all this out. So, Sarah,
Speaker 2: thanks so much for being back with us. I guess
Speaker 2: my question is when it comes to equities, what is
Speaker 2: causing all this momentum? It just keeps coming.
Speaker 4: Good to see you, David Well.
Speaker 9: The January effect is in full force CISPA, and it's
Speaker 9: been driven by the Bellweather technology sector.
Speaker 4: There's been three reasons for the rally.
Speaker 9: First, inflation is moderating, Second, the economy remains surprisingly strong,
Speaker 9: and third, expectation for rate cuts.
Speaker 4: Now, we got two out of points this week that
Speaker 4: support that narrative.
Speaker 9: PCEE, which is the Fed's preferred barometer of inflation, came
Speaker 9: as in naziks expected and GDP blue Pass expectations coming
Speaker 9: in at three point three percent. So where do we
Speaker 9: go from here?
Speaker 4: But we have an FMC meeting next week. I think
Speaker 4: the Fed continues to watch and wake.
Speaker 9: There's no reason for them to start talking about rate
Speaker 9: cuts at this point with the economy so strong and
Speaker 9: also with inflation while it's moderating, I'd like I think
Speaker 9: they'd like to see more of a consistent trend. So
Speaker 9: while when we're going past earning season, with forty percent
Speaker 9: of marketcap reporting next week, I think it's going to
Speaker 9: be tough to find a catalyst after that. S and
Speaker 9: P evaluations that are about a twenty percent premium to average.
Speaker 9: I think that's going to be your headwind going forward,
Speaker 9: and that'll cause the rally to peter out eventually.
Speaker 2: So, Sarah, before we get to what comes after, let's
Speaker 2: talk about next week and tech. You mentioned technology being
Speaker 2: a big driver. We've got some big tech names out
Speaker 2: next week. What are you expecting?
Speaker 4: But it's a high bar for earning season in general,
Speaker 4: where consensus.
Speaker 9: Expects earnings to grow by about five percent, And what
Speaker 9: we're seeing is the haves and the have not. So
Speaker 9: the halves are the companies beating sales and earnings, those
Speaker 9: socks are going up two percent. When that happens to
Speaker 9: have nots companies missing on sales and earnings, they're dropping
Speaker 9: by about five percent. So next week, all the megacap companies, Amazon, Apple,
Speaker 9: Alphabet report, I think they are going to be the
Speaker 9: leaders for Ernie's growth.
Speaker 4: But we prefer.
Speaker 9: Amazon and Alphabet over Apple Apple I think still has
Speaker 9: headwinds while Wee coming back into the market could cause
Speaker 9: them to lose market share, and importantly iPhone it fifty
Speaker 9: percent of their profitability has been normalizing to flat unit
Speaker 9: growth hosts the COVID bump. Also, we're worried about their
Speaker 9: app store and the profitability there given regulations. Now Alphabet
Speaker 9: and Amazon, they're benefiting from a cyclical upturn and advertising.
Speaker 9: Also Amazon finally bearing the fruits of their investments in
Speaker 9: their retail business.
Speaker 4: All of that I think positive for Alphabet and Amazon.
Speaker 2: So what about some of the risks, the downside risks
Speaker 2: for equities and particularly are those expectations about raid cuts.
Speaker 2: I mean, there's been a back and forth between the
Speaker 2: Fed and the markets here about what's coming up. What
Speaker 2: is the risk here that, in fact the markets may
Speaker 2: be disappointed.
Speaker 9: I think that's a good risk that is definitely out there.
Speaker 9: Came in twenty twenty four with the market expecting six
Speaker 9: to seven rate cuts this year starting in March. As
Speaker 9: of today, the March rate cut is now a fifty
Speaker 9: to fifty chance, So we're already starting to push those out.
Speaker 9: I don't think we're going to get six rate cuts
Speaker 9: with the economy functioning so strongly.
Speaker 4: Second risk for the market is valuations.
Speaker 9: We came into this year with SMP valuations at about
Speaker 9: twenty percent above average.
Speaker 4: That's going to be a headwin for the markets. And
Speaker 4: also let's take a look at yields.
Speaker 9: The ten year yield now backing up to about four
Speaker 9: point two percent.
Speaker 4: That's a headwind for equities too.
Speaker 9: So that's why I said host earnings a catalyst for
Speaker 9: the next leg up for.
Speaker 4: Equities to cross five thousand on the SMP is hard
Speaker 4: to find.
Speaker 2: Sarah's always such a treat to have you with us
Speaker 2: on Wall Street Week. Thank you for being here at
Speaker 2: Sarah Mallick of neuvene US Equity has had a pretty
Speaker 2: good run in twenty twenty three, which has led some
Speaker 2: people to think about taking some money off the table
Speaker 2: at those high valuations. For a different view, We welcome
Speaker 2: back now Charmin most of aur Rokwani. She's chief investment
Speaker 2: officer of Goldman Sachs Wealth Manager. Great to have you
Speaker 2: back with the Charmine. So let's look at your out
Speaker 2: your outlook, America powers out. We're going to put the
Speaker 2: image up for those who can see it on the
Speaker 2: screen nineteen fifty nine Cadillac one of my favorite cars
Speaker 2: of all time. So give us your sense about why
Speaker 2: you think, boy, it's time to stay with US equities.
Speaker 10: First and foremost. Our view of US pre eminence is intact,
Speaker 10: and that's why we chose that car. It is such
Speaker 10: an American looking car. It's so clear it can't be
Speaker 10: confused with cars from any other place. It also shows
Speaker 10: that America's been pre eminent for quite some time. We
Speaker 10: have a great quote from Bruce Springinstein's song Pink Cadillac
Speaker 10: there where people are saying, oh, after the global financial crisis,
Speaker 10: this was the end of the American century and if
Speaker 10: the century belonged to China. And our view is actually no,
Speaker 10: US pre eminence is going to continue for the long run,
Speaker 10: and that's driven by a number of factoris. But that
Speaker 10: results in great earnings per share growth, very consistent, persistent,
Speaker 10: reliable growth, and that's why one should stay invested.
Speaker 2: So if you look backwards, which you do in your outlook,
Speaker 2: actually you have remarkable numbers. If you take one hundred
Speaker 2: million dollars you correct me if I'm wrong here, back
Speaker 2: in two thousand and nine, it would be worth just
Speaker 2: under a billion dollars today invested in US docs as
Speaker 2: opposed to if you took a developed markets equities non US,
Speaker 2: it would be four hundred million, I believe, and if
Speaker 2: you did it in developing markets it'd be three hundred
Speaker 2: and eighteen. China two hundred and twenty nine million as
Speaker 2: opposed to just under a billion dollars. That's a pretty
Speaker 2: extraordinary performance.
Speaker 10: When we show these numbers to our clients, they are
Speaker 10: so surprised because, as you say, one hundred million would
Speaker 10: be just under a billion dollars just in US equities
Speaker 10: and not even a quarter of that in China. And
Speaker 10: for everybody who thinks of China's growth rate, it goes
Speaker 10: to show that economic growth alone doesn't drive equity markets
Speaker 10: or earnings per share growth. And so that's why when
Speaker 10: we tell clients stay overweight US equities from a strategic
Speaker 10: long term perspective, they look at that data and it's
Speaker 10: easier to persuade them to do that.
Speaker 2: Such an important thing. You said, stay in they could.
Speaker 2: One of the questions is is it time to take
Speaker 2: the money off the table. Because we always hear that
Speaker 2: disclaimer about past performance in future, Why isn't this the
Speaker 2: time to say, oh, you know what I did pretty
Speaker 2: well in equities, I should put the money someplace else.
Speaker 10: So there'd be three places people could put their money.
Speaker 10: One would be you could put your money in non
Speaker 10: US equities. And that is a function of whether you
Speaker 10: think earnings per earnings per share growth will be faster.
Speaker 10: Do you think economic growth is going to be more sustainable.
Speaker 10: Does one think that evaluations are more attractive. Another place
Speaker 10: would be bonds, and another would be cash. And we
Speaker 10: actually make the case that even though the returns for
Speaker 10: US equities relative to all these other assets has been
Speaker 10: outsized since the global financial crisis, we still recommend stay
Speaker 10: with US equities. And the argument there is that, first
Speaker 10: of all, when you're looking at cash and bonds, you're
Speaker 10: going to have substantially lower returns over the long growth.
Speaker 10: Second one is you look at other parts of the world.
Speaker 10: Even though valueations look expensive, you need to adjust for
Speaker 10: sector weights, meaning US SMP five hundred benchmarks have a
Speaker 10: lot more earnings from technology stocks, so you have faster
Speaker 10: growing companies, faster growing earnings for share relative to for example,
Speaker 10: the UK equity market. It's really remarkable s and P
Speaker 10: five hundred when you look at the earnings about thirty
Speaker 10: percent comes from technology. In the UK equity market only
Speaker 10: one percent. So when you're looking at benchmarks, you need
Speaker 10: to adjust for sector weights and then the US is expensive,
Speaker 10: but not that expensive relative to other market.
Speaker 2: That was one of the things I got from your report.
Speaker 2: I had that, folks, because I hear it's expensive. It's expensive.
Speaker 2: It is fully valued. If you look at price earnings
Speaker 2: ratios and things. It's pretty historically it's up there, right,
Speaker 2: it's going to worry bit historically, but you're saying, if
Speaker 2: you really look at the right way, it's not as
Speaker 2: expensive as you think it is.
Speaker 10: Yes, it is correct that it's expensive. So if we
Speaker 10: look at its own history, it's what we call in
Speaker 10: the tenth decign meaning equities have been cheaper ninety percent
Speaker 10: of the time. But when you look at it relative
Speaker 10: to other markets, you can't just look at the price
Speaker 10: to forward earnings. For example, you need to say, well,
Speaker 10: if index has a lot more technology versus another index
Speaker 10: that has a lot more energy and financials, the one
Speaker 10: with a lot of energy and financials will look cheaper,
Speaker 10: but that's only because it has slower earnings growth. Once
Speaker 10: you make that adjustment, these other markets don't appear as cheap.
Speaker 10: Of course China is the exception, but we actually don't
Speaker 10: recommend client clients invest in trying to no matter how cheap.
Speaker 2: It looks, it's not too good. So there are some
Speaker 2: risks in your outlook, and it struck me in looking
Speaker 2: at them, it looks like they're pretty much all either
Speaker 2: geopolitical or straight up political.
Speaker 10: That is correct. We start with the all the things
Speaker 10: going on in the Middle East, so we start with
Speaker 10: the Israel Hamas, or we look at Iran. We're saying,
Speaker 10: what is the risk there? What about Iran Russia relationships?
Speaker 10: What does that mean? So everything related to the Middle
Speaker 10: East is on that list, and fears of escalation. It's
Speaker 10: not as if there's zer or probability of even further
Speaker 10: escalation beyond what we've seen. Obviously, with what's going on
Speaker 10: in the region, risk of terrorism goes up, and then
Speaker 10: domestically in the US we have it as our lowest risk,
Speaker 10: even though people are very concerned about it. We don't
Speaker 10: think this kind of pessimism is warranted. They'll be volatility
Speaker 10: around the elections, but at the end of the day,
Speaker 10: the system of checks and balances in the US and
Speaker 10: the strength of the institutions is what makes the country
Speaker 10: pre eminent. So we think clients need to look past
Speaker 10: that and past that volatility.
Speaker 2: Thank you so much, Sherman. Really great to have you
Speaker 2: back with us as charmian. Most of our ROCKMANI of
Speaker 2: Goldman Sachs coming up. They say US deficits are unsustainable.
Speaker 2: We talk with the man who helped design the last
Speaker 2: serious attempt to deal with the debt and deficits, former
Speaker 2: Treasury Secretary Bob Rubin. That's next on Wall Street Week
Speaker 2: on Bloomberg.
Speaker 1: This is Bloomberg Wall Street Week with David Weston from
Speaker 1: Bloomberg Radio.
Speaker 2: Thirty four trillion dollars. That's what the US government owes
Speaker 2: its creditors, foreign and domestic, and it's only getting worse.
Speaker 4: The problem is that's led us to years and years
Speaker 4: of borrowing too much.
Speaker 9: We now have a debt that's about to be at
Speaker 9: record levels, interestatements that are the fastest growing part of
Speaker 9: the budget, about to be larger than defense.
Speaker 2: Some say that the problem is that we're spending too much.
Speaker 5: Do you have to start cutting what you spend? Why
Speaker 5: is it everybody in this room balances a budget. I
Speaker 5: balanced a budget as governor of South Carolina. Why is
Speaker 5: Congress the only group that refuses to balance a budget?
Speaker 2: Others point to the Trump tax cuts.
Speaker 11: There are a lot of people who basically on Wall Street,
Speaker 11: who you and I would know, who voted for Trump
Speaker 11: once or even twice, and basically, look, I don't like
Speaker 11: the guy, but I like the policies, and they got
Speaker 11: what they wanted, the tax of the TCGA the Tax
Speaker 11: Cutting Jobs Act being the most prominent.
Speaker 2: And the answer likely is both, which was why President
Speaker 2: Clinton both raised taxes and cut spending in his nineteen
Speaker 2: ninety three omnimous Budget Reconciliation Act, the last time that
Speaker 2: the federal government really got serious about addressing the debt.
Speaker 6: I think he laid out the case. He brought people together.
Speaker 6: He was willing to do things that were painful for
Speaker 6: the people who were his friends. He was able to
Speaker 6: explain the case to the American people.
Speaker 2: And to explain to us where we are in the
Speaker 2: debt and deficit and where we were back in nineteen
Speaker 2: ninety three. We welcome now one of the architects of
Speaker 2: that plan that President Clinton pursued. He is Bob Ruin,
Speaker 2: former Treasury Secretary. So, Bob, thank you, so much for
Speaker 2: being on Wall Street week.
Speaker 3: David, happy to be with you.
Speaker 2: So at the time, you actually were Director of National
Speaker 2: Economic Council and you helped put together a plan with
Speaker 2: Lloyd Benson the Treasury, but President Clinton really pushed it through.
Speaker 2: Give us a cent of how bad the problems were
Speaker 2: you were facing. Then what caused you to do what
Speaker 2: you did in ninety three Act.
Speaker 3: David, We met with the president elect Governor of Arkansas
Speaker 3: in Little Rock after the election the economic theme the
Speaker 3: Income Economic Team, and we talked to him about what
Speaker 3: kind of an strategy he should have, and he said,
Speaker 3: listening to all this, our deficit is a threshold issue
Speaker 3: and we want everything else. We've got to do that
Speaker 3: because we have to get our fiscal house in order,
Speaker 3: and that was really our focus. Now we did it
Speaker 3: in the same time we did public investment. But the pressures,
Speaker 3: I think were very substantial. There was a lot of
Speaker 3: concern in the business community, there was a lot of
Speaker 3: concern in the markets, and there was a real public
Speaker 3: political environment which unfortunately we don't have today to address these.
Speaker 3: He not only had the substance of it, which is
Speaker 3: President Clinton, the few that this was the rest of
Speaker 3: issue at threshold issue. We also have a political environment in.
Speaker 2: Which it was doable if we can try to tease
Speaker 2: those two things out. How much of it was the
Speaker 2: market reaction what you were seeing. Basically, we have the
Speaker 2: incidents supposedly where Jim Carvell said, I want to come
Speaker 2: back as the bond market.
Speaker 3: Well that was James said that he wanted to come well,
Speaker 3: because what happened there was we were having a debate
Speaker 3: within the administration should we focus on fiscal matters or
Speaker 3: should we focus on public investment. We end up doing both,
Speaker 3: but with a program, the ninety three Deaths Production program
Speaker 3: that was very heavily focused on death reduction. And that's
Speaker 3: when James said he want Because we argued, and I
Speaker 3: think rightly argued, and it turned out to be correct
Speaker 3: that markets would react very favorably if we were serious,
Speaker 3: and also the better reserve would react very favorably. So
Speaker 3: James and responses all that said he would like to
Speaker 3: come back into the next life is the bond market.
Speaker 2: So that is a somewhat market oriented approach. I mean,
Speaker 2: you'd come out of Goldman Sachs, you knew the market's
Speaker 2: terribly well, you took that sort of approach the whole question.
Speaker 2: How much of that drove what it was? Was it
Speaker 2: really just almost dollars and cents in what was going
Speaker 2: on in the markets.
Speaker 3: Well, it was more than it was more than just
Speaker 3: the markets, And I think this is something unfortunately it
Speaker 3: hasn't been focused on, but it was the market's David,
Speaker 3: and when we got serious about Death's reduction, it was
Speaker 3: very favorable for the markets. And also Green's been reacted
Speaker 3: very well in terms of maintaining a relatively livable would
Speaker 3: a practical speaking a rate, a FED Fund rate that
Speaker 3: was consistent with growth, but it went way beyond that.
Speaker 3: We wanted to have the resilience after if you're going
Speaker 3: to have, if you have an economic or anir security
Speaker 3: emergency of some sort, you want to be able to
Speaker 3: deal with it without creating fiscal havoc. And another thing,
Speaker 3: when I was at Goldman Sachs and Steve Freeman and
Speaker 3: I were the co CEOs of Coleman Sacks in ninety
Speaker 3: one and in ninety two, one thing that I had
Speaker 3: the impression was that business was very concerned about our
Speaker 3: fiscal position, not only because the fiscal position per se,
Speaker 3: but also because it gave them the feeling government wasn't.
Speaker 3: It was incapable of dealing with our problems. So business
Speaker 3: confidence I think was a very important factor. And once
Speaker 3: we acted, I think it had a really positive effect
Speaker 3: on business confidence.
Speaker 2: Well, giving me a sense of what that means as
Speaker 2: a practimatory, is that does that translate into investment or
Speaker 2: lack of investment?
Speaker 3: Yeah, that's exactly what it. Well, investment plan in terms
Speaker 3: of expansion and generally just John Maynor Kaines famously referred
Speaker 3: to animal spirits in his letter, his famous letter to
Speaker 3: President Roosevelt, and animal spirits make a new confidence makes
Speaker 3: a very big difference. And yeah, it does in terms
Speaker 3: of hiring plans, expansion plans, investment, And that absolutely is
Speaker 3: what happened.
Speaker 2: Give me a sense of what was going on politically
Speaker 2: in the country that obviously President Clinton was reflecting to
Speaker 2: some extent what he thought that people felt.
Speaker 3: Yeah, I think there was the people. I think there
Speaker 3: was a feeling there was a broad public concern about
Speaker 3: our fiscal position. And then Songus ran, Paul Songus ran
Speaker 3: for president on a fiscal unfortunately died as you know
Speaker 3: in that process, but on a fiscal discipline plank, if
Speaker 3: you want to call it. That our programs say, and
Speaker 3: that attracted a lot of favorable attention. Then ross Borough
Speaker 3: came along and he ran also on a fiscal discipline theory,
Speaker 3: and he got about nineteen percent of the vote, if
Speaker 3: I remember correctly. President Clinton believed it to begin with.
Speaker 3: But then you had the politics I guess you'd call
Speaker 3: converge around this point of view as you saw songis
Speaker 3: and then as I said, Perro and President Clinton made
Speaker 3: that central to his economic problem.
Speaker 2: Now let's bring it forward to today, because there's a
Speaker 2: lot of talk about the debt and deficit, which is
Speaker 2: frankly a lot larger both in nominal dollars and in
Speaker 2: comparative dollars than it was back then. Let's talk about
Speaker 2: what you learned in ninety three, what you did in
Speaker 2: ninety three that could considably be applied to twenty twenty four.
Speaker 3: It's also a lot bigger, David, And this is the
Speaker 3: really important thing as a percentage of GDP and the
Speaker 3: pen of our economy, and that I think is the
Speaker 3: critical point. I think that the risks that we identified then,
Speaker 3: the multiple risks, that the same as they are today.
Speaker 3: I think that the risks are even greater today because
Speaker 3: our debt GDP Radio Simbio estimates at about one hundred percent
Speaker 3: right now. It's the highest in the history of the
Speaker 3: country except for nineteen forty six and forty seven we
Speaker 3: were coming back out of World War Two. I think
Speaker 3: the risks are enormous, and some of them are materializing already,
Speaker 3: like higher interest rates and effect on inflation in part
Speaker 3: not full. Others haven't materialized yet, but I think they're
Speaker 3: out there and sooner related will materialize if we don't
Speaker 3: correct our our physical trajectory.
Speaker 2: You talked about some of the market indicators and even
Speaker 2: forces that you saw in ninety three that sort of
Speaker 2: pointed you in a direction quite at President Clinton, in
Speaker 2: the direction of really making the death set of special issue.
Speaker 2: Are we seeing those indicators of the forces today in
Speaker 2: the markets.
Speaker 3: I think that we are seeing the effects, but it's
Speaker 3: unfortunately from a political point of view, David, I don't
Speaker 3: think they're getting connected in a meaningful way with deficit reduction.
Speaker 3: The tenure was about I think one and a half percent, say,
Speaker 3: two years ago, and now it's about four and a
Speaker 3: half percent.
Speaker 10: Now.
Speaker 3: That's a lot of factors that go into that, but
Speaker 3: I think part of it is our fiscal situation and
Speaker 3: the effect that's had on inflation. I think it's been
Speaker 3: an aggravator over if you will, an effect on inflation.
Speaker 3: And I think there's a general concern about the imbalance
Speaker 3: between supplying demand for savings and the excess demand that's
Speaker 3: created by our deficits. Unfortunately, from political point of view,
Speaker 3: I don't think the dots are being connected the way
Speaker 3: they were back in ninety two to three when we acted.
Speaker 3: Ninety three we acted, but ninety two when Predident Clinton
Speaker 3: was putting his plans together.
Speaker 2: There's a lot of talk these days when we talk
Speaker 2: about the FED about the neutral rate and debate about
Speaker 2: whether it is the neutroid higher. And I guess my
Speaker 2: question is does the deficit and the debt normally, all
Speaker 2: the things being equal, drive the neutroid higher?
Speaker 3: I think over time, But I think you can also
Speaker 3: have a long period of time, and we had a
Speaker 3: long period of time, David. We had actually a long,
Speaker 3: long period of time during which all of this was
Speaker 3: having little effect, and then all of a sudden, the
Speaker 3: ten ure went, as I said, a moment ago, from
Speaker 3: roughly one and a half to roughly four and a half.
Speaker 3: And there's certainly our periods when you can have a
Speaker 3: long time what's happening is out of sync with reality,
Speaker 3: but that doesn't go on forever, and when it corrects,
Speaker 3: it can correct savagely. A good example was the Eurozone,
Speaker 3: the sovereign Eurostone crisis. For years, a Greek bondstrated roughly
Speaker 3: speaking parody with ghiblier take with German buns, and then
Speaker 3: all of a sudden it exploded. And I think it's
Speaker 3: a good example of how what isn't sensible ultimately doesn't continue.
Speaker 2: There's the politics of it, which I want to talk about.
Speaker 2: Before that, Let's talk about the approach taken to it.
Speaker 2: Let's talk about, for example, the Biden administration. We can
Speaker 2: talk about the Trump ininstration. If you walk with the bidminstration.
Speaker 2: When you were there back in the nineties, you came
Speaker 2: from Golden Sachs, you had other people there who knew
Speaker 2: the markets pretty well. There was a healthy dose of
Speaker 2: how are the markets reacting this? What does that do
Speaker 2: for us? Do we still have that or is it
Speaker 2: more ideologically driven? Because some people think we've sort of
Speaker 2: shifted the orientation, particularly the Democratic Party, more toward protectionism,
Speaker 2: more toward populism.
Speaker 3: Well, you've asked multiple questions. I'll give you I'll give
Speaker 3: you my view. I've given a lot of thought to this,
Speaker 3: and I know the people there pretty well. If you
Speaker 3: look at the proposals, the major policy proposals that President
Speaker 3: Biden made, they were all paid for in the proposals. Now,
Speaker 3: ultimately they had to go through Congress, and when they
Speaker 3: went through Congress, they came out, some of them paid
Speaker 3: forwards and some of them not. I think he's actually
Speaker 3: pretty good on this. I think there are other issues
Speaker 3: were I might have a different view than he does,
Speaker 3: but I think on fiscal stuff, actually he's got a
Speaker 3: pretty good sense of it. I think on the proposals
Speaker 3: that they had three major bills, IRA, Chips and infrastructure,
Speaker 3: and in the original propos and then of course for
Speaker 3: that build back better. The proposals were fully paid for
Speaker 3: dad to go through Congress, and in Congress they in
Speaker 3: some cases they lost the pay for us. You know
Speaker 3: you mentioned populism or progressive Yeah, populism. If you look
Speaker 3: at what is referred to as industrial policy, and they
Speaker 3: referred to as industrial policy, it's their label, but it's
Speaker 3: not picking winners and losers. Now, it may be in
Speaker 3: the minds of some of those people. But if you
Speaker 3: look at those proposals, and I've talked to their people
Speaker 3: about this a lot, I think they actually make a
Speaker 3: lot of sense on a purely economic basis. Their externalities
Speaker 3: they basically dealt with shortfall with insecurities in our system,
Speaker 3: in our excuse me, in our economic system with respect
Speaker 3: to our economic security or economic functioning, are geopolitical or
Speaker 3: national security functioning that markets were not going to meet
Speaker 3: and had to be met by government. So that I
Speaker 3: think is not industrial policy in the traditional sense, and
Speaker 3: let's pick winners and losers. It was let's fill holes
Speaker 3: that the private sector simply isn't filling, and those are
Speaker 3: holds of economic and incial security.
Speaker 2: So from your perspective, the overall approach, you don't take
Speaker 2: much issue with. No, really, do we end up with
Speaker 2: where we are, where we have increasing deficits in increasing debts?
Speaker 3: Oh weud a minute. What I talked about was the proposals. No,
Speaker 3: I think we're in a terrible place because, unfortunately, once
Speaker 3: you get to legislating, there's a lot of talk, but
Speaker 3: the talk is always divided politically between the Republicans who
Speaker 3: refuse to raise taxes, and the Democrats who won't deal
Speaker 3: with titlements. Now, I think there was a reality to this.
Speaker 3: About sixty percent or something of the increase in the
Speaker 3: debt from thousand to twenty twenty two was because of
Speaker 3: the tax cuts. So if it hadn't been for that,
Speaker 3: the debt, instead of being one hundred percent CDP would
Speaker 3: about sixty percent. Another way to look at it is
Speaker 3: exactly what I just said, which is what one percentage
Speaker 3: of what percent would the debt be of GDP. We
Speaker 3: had those two tax cuts, and you come out to
Speaker 3: this about the same number, around sixty three percent or
Speaker 3: something like that. So I think in very large measure,
Speaker 3: what happened is we had two very big tax cuts,
Speaker 3: neither what we paid for, so we decided not to
Speaker 3: pay for what we were spending, and that's how we
Speaker 3: got where we are. But looking forward, we're gonna have
Speaker 3: to deal with both spending and taxes. So I think
Speaker 3: for the reasons I just said, when you get realistic
Speaker 3: about it, I think you're going to have to be
Speaker 3: largely on the tax side.
Speaker 2: Bob, it's really been great having on wallstret Grieg. Thank
Speaker 2: you so much. That's Bob Ruben. He's the former Treasury Secretary.
Speaker 2: Coming up, Private credit continues. It's March to the Sky
Speaker 2: and we talk about how far you can go with
Speaker 2: Pornaba Pori out of Liquid Credit and HPS Investment Partners.
Speaker 2: That's next on Wall Street Week on Bloomberg.
Speaker 1: This is Bloomberg Wall Street Week with David Weston from
Speaker 1: Bloomberg Radio.
Speaker 2: This is Wall Street Week. I'm David Weston. Credit drives
Speaker 2: the US and global economies, and we've gone for a
Speaker 2: world where somewhere there was too much credit, and now
Speaker 2: some people are questioning whether there's enough to help us
Speaker 2: understand the issues. We welcome back port of a Portie.
Speaker 2: She's HPS Investments head of Liquid Credit. So great to
Speaker 2: have you back on Wall Street Week. I never thought
Speaker 2: I'd be talking about this because we thought we don't
Speaker 2: too much money. Now people are saying there's not enough supply.
Speaker 2: People are looking for it. Where are we in the
Speaker 2: supply demand for credit?
Speaker 12: Yeah, so there was no supply last year, or very
Speaker 12: little supply anemic as they like to say. I think
Speaker 12: what happened is that you saw big bond mackert rally.
Speaker 12: Obviously sort of in the fourth quarter of last year.
Speaker 12: We came into this year and the capital markets opened
Speaker 12: up for business again, people feeling a lot better about
Speaker 12: the world. People felt like the FED had sort of
Speaker 12: landed this soft landing, I guess, and you can see
Speaker 12: it in the markets. Price priced quite nicely for lots
Speaker 12: of cuts, and so you've seen a lot of supply.
Speaker 12: You've seen most of that supply in the high old
Speaker 12: loan markets and really high quality assures. You've seen a
Speaker 12: lot of investment grade supply, and you've seen a lot
Speaker 12: of treasury supply. And I think that there's a couple
Speaker 12: of reasons. I think one is that most folks are
Speaker 12: worried about the economy slowing towards the middle of the year.
Speaker 12: So the Q two bottom is sort of the what
Speaker 12: the narrative looks like now, So getting in front of
Speaker 12: that is number one. I think Number two is there
Speaker 12: is a lot of demand for credit right now because
Speaker 12: absolute yields are are relatively high, and so the market's
Speaker 12: open back up. And three, people are worried about the
Speaker 12: election cycles you sort of move forward in the course
Speaker 12: of the year and whether that's going to create a
Speaker 12: lot of volatility which will impact the ability to bring
Speaker 12: high yod asurres and loans to market.
Speaker 2: So as a practical matter, if you have more demand
Speaker 2: for the credit, that drives the price up of the
Speaker 2: credit and it drives the yield down. It gets cheaper,
Speaker 2: as it were, are you getting paid these days for
Speaker 2: the risk you're taking credit?
Speaker 12: So spreads and credit, But if you sort of go
Speaker 12: up and down the stack, you know, investment grade are
Speaker 12: sort of one hundred over and high yield is three
Speaker 12: fifty three sixty over. Loans are low five hundreds over.
Speaker 12: Spreads are pretty tight, and investment grade and in high yield
Speaker 12: I think, actually I think I saw a statistic today
Speaker 12: that high yield spreads were as tight as they have
Speaker 12: ever been post the GFC. Wow, So they're tight. Loans
Speaker 12: are not. Loans are sort of in the middle, you know,
Speaker 12: non recessionary average loan spreads are in the low five hundreds.
Speaker 12: That's where it sits today. I think the difference, and
Speaker 12: this is kind of the the problem is that yields
Speaker 12: are yields are high, and spreads are tight, and so
Speaker 12: when yields are that high, you have a little bit
Speaker 12: of cushion if you're a little bit wrong on spreads
Speaker 12: and spreads back up a little bit and go up
Speaker 12: by fifty basis points or one hundred basis points over
Speaker 12: a couple of years. So you're not making you know,
Speaker 12: eight to nine percent in highield bonds, you're making seven
Speaker 12: and a half to eight and a half percent in
Speaker 12: HIGHO bonds. So I think I think that in the
Speaker 12: in the context of what what are the options in
Speaker 12: the market today, credits far more compelling than equities for
Speaker 12: a variety of reasons. Yields are pretty high, and rates,
Speaker 12: despite the short end coming in, are likely to stay
Speaker 12: somewhat elevated on the back end, So that spread plus
Speaker 12: the base rate gets you to a yield that kind
Speaker 12: of makes sense for people.
Speaker 2: There's been something of a conversation going on between the
Speaker 2: markets and the FED about exactly what they're going to
Speaker 2: do in terms of cutting, how much they cut, how
Speaker 2: fast they cut, what is the market pricing in right
Speaker 2: now on that, and what happens if they're disappointed.
Speaker 12: Yeah, we have two different conversations. So the FED dot
Speaker 12: flat is, you know, three twenty five basis point cuts.
Speaker 12: The market is pricing in five or six cuts this year,
Speaker 12: and that's a lot.
Speaker 6: You know.
Speaker 12: Our view is that the market is kind of priced
Speaker 12: for perfection. So you know, if the FED were to
Speaker 12: deliver six cuts, the question is why, And if it's
Speaker 12: a recession, that's not great. If the FED doesn't deliver it,
Speaker 12: the market's expecting it and expecting it in the context
Speaker 12: of a soft landing. So there's not a little there's
Speaker 12: not a lot of room error.
Speaker 2: What about that possibility of a troubled economy that would
Speaker 2: require that many cuts. I mean, we spent a lot
Speaker 2: of last year with econdents of people saying we're gonna
Speaker 2: have a recesion, We're going to recession. Didn't happen. Now
Speaker 2: it seems like we're saying, no, not going to have
Speaker 2: a recession. Where is the credit market right now and
Speaker 2: pricing in the possibility of a recession, not just a
Speaker 2: slowdown of a recession.
Speaker 12: The credit market is not pricing in a recession. Spreads
Speaker 12: are as tight as they've been and in fact, you know,
Speaker 12: I was looking at some numbers. It's just an interesting
Speaker 12: notable that if you look back to the beginning of
Speaker 12: last year, spreads were close to five hundred over on
Speaker 12: the high yod market. I want to say, versus kind
Speaker 12: of we said three sixty ish. Today, treasures are exactly
Speaker 12: the same place.
Speaker 2: When people are financing these days, are they moving over
Speaker 2: to credit away from equity.
Speaker 12: It seems like there's a decent amount of demand for
Speaker 12: credit right now for sure, across the board. I mean,
Speaker 12: ranging from treasuries to investment grade because that's another way
Speaker 12: to play that rate trade, to high yield, to loans,
Speaker 12: to private credit. There's a lot of demand.
Speaker 2: I don't know if it's a conversation where there's more
Speaker 2: of a tug of war between private credit and liquid credits,
Speaker 2: syndicated things like that, with reports that the banks are
Speaker 2: trying to get back into that business take some business
Speaker 2: back away from private credit, are you seeing that?
Speaker 6: Yeah?
Speaker 12: I mean, look the markets. The supply in the markets
Speaker 12: has been there's been a lot of supply across loans
Speaker 12: and HYO bonds and investment grade. In January, that supply
Speaker 12: has come through the banks. That's come through the banks
Speaker 12: because there are buyers that are back that are buying
Speaker 12: liquid credit. So you're definitely definitely seeing that today and
Speaker 12: if that trend continues, some of those big, big, mega
Speaker 12: I mean there are mega deals that were done in
Speaker 12: the private credit space, you know that were three billion,
Speaker 12: five billion dollars in size last year that were really
Speaker 12: really megacap deals. I suspect that if this trend continues,
Speaker 12: you won't see as many of those mega trend deal
Speaker 12: megacap deals. The rub is if it doesn't and if
Speaker 12: there is volatility, and if the FED doesn't deliver six
Speaker 12: cuts and they deliver three cuts, and if their slower growth,
Speaker 12: this is going to go back the other way. Because
Speaker 12: there's one one variable, which is that there's a lot
Speaker 12: of companies in twenty five that need to refinance their debt.
Speaker 12: And what that means is that they oftentimes come to
Speaker 12: market a year in advance of twenty twenty five. So
Speaker 12: you're going to see a lot of paper that actually
Speaker 12: needs to start to get refinanced in the marketplace. And
Speaker 12: so this question of whether whether the markets are going
Speaker 12: to sort of stay open, if you will, to allow
Speaker 12: for that to happen in the syndicated space is really
Speaker 12: the question that will happen. And that's the relevant question
Speaker 12: for whether this private credit trend will continue.
Speaker 2: How much market share can private take away from the banks?
Speaker 12: Well, I mean, the estimates are that private credit is
Speaker 12: going to grow by fifteen plus percent a year.
Speaker 2: So but it's still a relatively small portion. If you
Speaker 2: look at total amount of loans, right.
Speaker 12: It's five percent of all back now exactly totally.
Speaker 2: So even if it's growing fifteen percent, it takes a
Speaker 2: long time.
Speaker 12: It takes a long time. But remember, private credit is
Speaker 12: not I mean, there's been this narrative about it. It's
Speaker 12: not sort of credit out of thin air. I mean,
Speaker 12: as you said, it's credit that was underwritten by banks,
Speaker 12: So that's one place. It's credit that was underwritten by
Speaker 12: syndicated investors. That's another home that it's coming from. And
Speaker 12: there's even and we're seeing in some of the insurance companies,
Speaker 12: you know, private investment, right, I mean, there's a lot
Speaker 12: of flow that's going to the land of private credit.
Speaker 12: I don't see what's going to make that stop.
Speaker 2: What's miss price right now?
Speaker 1: Quickly?
Speaker 12: I think treasuries are going to stay. We're anchored in
Speaker 12: a sort of tenure or four four and a half percent,
Speaker 12: which means that I think credit generally is a pretty
Speaker 12: good place to be. I would say probably loans are
Speaker 12: more interesting just because we don't believe that that's going
Speaker 12: to cut that much. So that's probably an interesting place.
Speaker 2: It was great to have you on Walter Rereeve, Thank
Speaker 2: you so much. That's part of a PORTI of HPS investment. Finally,
Speaker 2: one more thought. A goal without a plan is just
Speaker 2: a wish, so wrote and Twant Descent Exuberrie in The
Speaker 2: Prince eighty years ago. There's no shortages of wishes these days,
Speaker 2: from wishing to become president again to wishing to win
Speaker 2: a Super Bowl, some maybe for the first time. But
Speaker 2: the question is whether we can come up with a
Speaker 2: plan to make our wishes come true. Benchair J. Powell
Speaker 2: certainly had a wish to bring inflation down. That's after
Speaker 2: his wish that it not be there in the first
Speaker 2: place didn't come true.
Speaker 13: I think we're experiencing a big uptick in inflation, bigger
Speaker 13: than many expected, bigger than certainly than I expected.
Speaker 2: But he promised that if it did come the FED
Speaker 2: had the tools it needed to handle it.
Speaker 13: We will do what it takes to get inflation down,
Speaker 13: and in principle that could mean that if finisher conditions
Speaker 13: get looser, we have.
Speaker 2: To do more. And as of right now, it looks
Speaker 2: like his plan is working.
Speaker 13: You see that people are not writing down rate hikes.
Speaker 13: That's us thinking that we have done enough, but not
Speaker 13: feeling that really strongly confidently and not wanting to take
Speaker 13: the possibility of a rate hike off the table.
Speaker 2: Florida Governor Ron DeSantis had a big wish to be
Speaker 2: the next president. I'm Rondie Santis, and I'm running for
Speaker 2: president to lead our great American comeback. But it looks
Speaker 2: like he didn't have enough of a plan to get there,
Speaker 2: so he dropped out of the race last Sunday. I
Speaker 2: am today suspending my campaign. I'm proud to have delivered
Speaker 2: on one hundred percent of my promises, and I will
Speaker 2: not stop now. Bob Iger had a plan, as well
Speaker 2: as a wish, to make the Walt Disney Company the biggest,
Speaker 2: most successful entertainment company in the world.
Speaker 14: Disney has a unique ability to grow strong brands and
Speaker 14: expand fantastic creative content, as we've proven with our successful
Speaker 14: acquisitions of both Pixar and Marvel, and.
Speaker 2: For years, his plan worked better than just about anyone
Speaker 2: could have expected.
Speaker 13: They are the number one company today as an entertainment
Speaker 13: media company without peer.
Speaker 2: But the plan to move into streaming proved more difficult
Speaker 2: than people thought, leaving Bob. Like other entertainment CEOs, searching
Speaker 2: for a new plan for a new age.
Speaker 14: Originally, when all these services launched, it was the library
Speaker 14: that brought people there, and the originals kept them.
Speaker 7: It's now flipped the other way.
Speaker 2: Even as Netflix moved into the live entertainment or sports
Speaker 2: arena with its deal this week with the WWE. On
Speaker 2: the other hand, I'm not sure how many people had
Speaker 2: a plan for Generative AI to transform the world. Chipmaker
Speaker 2: and Vidia's plans started out to make the gaming industry
Speaker 2: come alive, but it turned out to be just what
Speaker 2: the doctor ordered for AI, and right now Nvidia's wishes
Speaker 2: as well as its shareholders, are coming true, which of
Speaker 2: course brings us to Detroit Lions, the team I grew
Speaker 2: up rooting for back in Flint, Michigan. No matter how
Speaker 2: bad it got, and believe me, it got bad, we
Speaker 2: Lions fans clung to our wish, never mind that they
Speaker 2: posted the worst eight year run in NFL history from
Speaker 2: two thousand and one to tho eight, and never mind
Speaker 2: that they accumulated more losses cumulative than any other team
Speaker 2: apart from the Arizona Cardinals. But that was then, and
Speaker 2: this is now. Is the Lions place for a slot
Speaker 2: in the super Bowl this coming Sunday. Sure they have
Speaker 2: a franchise quarterback in Jared Goff.
Speaker 6: Yeah.
Speaker 2: I think the quarterback is often a.
Speaker 15: Product of what's around them. And you know, obviously I've
Speaker 15: got a lot of confidence in myself, but I got
Speaker 15: a lot of great players around me who have helped
Speaker 15: me out this year and made things easier.
Speaker 2: Sure they have a one of a kind coach in
Speaker 2: Dan Campbell.
Speaker 15: This is where we wanted to get it right, This
Speaker 15: is where we wanted to go. This is you know,
Speaker 15: for for all the lines fans, this was the whole idea,
Speaker 15: right And I know it's you know, everybody been dying
Speaker 15: for it for so long that this is the point.
Speaker 2: But it all started with a wish to win and
Speaker 2: a plan to get there. And that wish and that
Speaker 2: plan came from Sheila Ford Hamp, a scion of the
Speaker 2: Ford family who took over as principal owner when her
Speaker 2: mother passed away. By all accounts, Ms ford Hamp brought
Speaker 2: to the owner suite something that had been sorely lacking,
Speaker 2: a single minded, passionate quest to win whatever it took,
Speaker 2: and surrounding herself with the team she needed to get
Speaker 2: us there. Maybe the motor City truly is on its
Speaker 2: way back.
Speaker 3: You see, it's the hottest fires that make the hardest steel.
Speaker 6: Add hard work and conviction and then know how that
Speaker 6: runs generations deep in every last one of us.
Speaker 2: That's we are, that's our story that does it. For
Speaker 2: this episode of Wall Street Week, I'm David Weston. This
Speaker 2: is Bloomberg. See you next week.