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Speaker 2: Stephen Major joins us legendary at HSBC's Global Macro Advisor
Speaker 2: now at Tradition, and we're just thrilled he could come
Speaker 2: back on today. Stephen Major, congratulations on this effort. At Tradition.
Speaker 2: You are associated with the belief in price up, yield down.
Speaker 2: Do you maintain a structural dampening of yield into the
Speaker 2: coming years?
Speaker 3: Shul Tom says yes. The elaboration on that, Tom is
Speaker 3: that the returns on off of from fixed income are
Speaker 3: really quite healthy. And if you think about the amount
Speaker 3: of cash that people are holding, so is it some
Speaker 3: seven trillion dollars in money markets now? I think before
Speaker 3: I started my garden leave six months ago, it might
Speaker 3: have been nearer six but seven trillion dollars in cash
Speaker 3: that's not going to be earning what it was at
Speaker 3: the start of this year. So there's plenty of cash
Speaker 3: to go into fixed income here now. If you look
Speaker 3: at the returns of other asset classes, it gets quite interesting.
Speaker 3: You know, I get people asking me about gold, about bitcoin,
Speaker 3: What do I know about that? But people ask and
Speaker 3: you look at it, just about everything's given you a
Speaker 3: good return s and P five hundred. Obviously we know
Speaker 3: the numbers there. The bomb markets had a positive return,
Speaker 3: Gold is on a tear. Gold goes up every day.
Speaker 3: It seems bitcoin not. But then again, it's all about
Speaker 3: the context of the last few years of performance. So
Speaker 3: it seems that most people are going to go into
Speaker 3: twenty twenty six with a healthy return based on whatever
Speaker 3: they've got. People have done all right. The question is
Speaker 3: how do you set your portfolio up for twenty twenty six.
Speaker 3: And I would say bonds have a central place. I mean,
Speaker 3: if you can get five six percent return in the
Speaker 3: next year, you should be happy. The trouble is people
Speaker 3: aren't happy with that.
Speaker 4: They're greedy.
Speaker 3: So that's a slightly longer answer, Steve.
Speaker 5: We've seen since the beginning of twenty twenty five, and
Speaker 5: we had all that uncertainty about the tariffs and introduction
Speaker 5: of the tariffs and Liberation Day, a lot of risk
Speaker 5: at most risk assets have rebounded one that has not
Speaker 5: has been the US dollars still down about I don't know,
Speaker 5: eight nine, ten percent from the early year highs. What
Speaker 5: do you make of the US dollar here?
Speaker 3: Yeah, Paul, Again it's context because we're down on the year,
Speaker 3: but on the last five years, we're up by a
Speaker 3: similar amount.
Speaker 2: Yep.
Speaker 3: So five years is an investment cycle, business cycle sort
Speaker 3: of time period. So, yeah, the dollar is down. It
Speaker 3: could be down a lot more if you told me
Speaker 3: some of the things that have been happening this year.
Speaker 3: I mean, you go back to the start of this year,
Speaker 3: if you had known some of the steps that have
Speaker 3: been taken. So you mentioned tariffs, but you could also
Speaker 3: talk about the FED chair for example. You could talk
Speaker 3: about the data releases, what happened at the Employment Bureau,
Speaker 3: all these things. I mean, I've forgotten half of what
Speaker 3: happened this year already. But if you told me these
Speaker 3: events were going to happen at the start of this year,
Speaker 3: I'd say, yeah, the dollar will be down. So is
Speaker 3: the dollar down by more than we would reasonably expect? Well,
Speaker 3: it seems okay. And actually in the context of the
Speaker 3: last five years, it seems okay. And when people tell
Speaker 3: me that there's a d dollarization going on. I don't
Speaker 3: see it in the data, and I always ask, well,
Speaker 3: what else are you going to hold?
Speaker 2: Actually is?
Speaker 3: And so it's an unsatisfactory answer because it's the same
Speaker 3: answer to the same question. But I'm afraid it's still
Speaker 3: the case that the dollar is something that you have
Speaker 3: to hold. It takes a big chunk of everyone's portfolio.
Speaker 3: I live in a region in the UAE, in the
Speaker 3: Middle East where many currencies are linked to the dollar exact.
Speaker 3: There's no evidence of that changing.
Speaker 6: Stephen.
Speaker 5: In the US treasury market, you know, we've got the
Speaker 5: two year at three point fifty, We've got the ten
Speaker 5: year at call it four fifteen, so sixty five basis
Speaker 5: points or so there of steepening.
Speaker 6: What does that tell you.
Speaker 3: Well, the steepening has come from the front, hasn't that.
Speaker 3: In fact, you pick your point on the curve, the
Speaker 3: middle point, let's say sevens to ten's has done very little,
Speaker 3: which means your positive total return this year of what
Speaker 3: best part of five percent is coming from the coupon.
Speaker 3: You just clip the coupon, that's fine. But if you
Speaker 3: go to the front of the curve, those yields have
Speaker 3: come down a lot, which means the FED has cut
Speaker 3: by more than most people expected at the start of
Speaker 3: the year. By definition, for the year to fall, it
Speaker 3: had to beat the forwards for you to make money,
Speaker 3: and that's what's happened. The longer end has slipped a
Speaker 3: little bit. But there's a lot of focus on this
Speaker 3: steepening of the US curve. Well, actually it's a ball steepening, right,
Speaker 3: It's a bullish steepening. And many people who were calling steepening.
Speaker 3: I bet we're arguing that yields would have to go
Speaker 3: up in the longer end, and that hasn't happened. That
Speaker 3: happened in Germany, it's happened in Japan, and the reasons
Speaker 3: are quite clear why it happened. It didn't happen in
Speaker 3: the US.
Speaker 2: Stephen Major where this folks of tradition based out of
Speaker 2: Dubai in or London Studios at que Queen Victoria Street,
Speaker 2: and we welcome all of you across America around the
Speaker 2: world to the Pacific rim good evening and over to
Speaker 2: Indian and mister Major's Dubai is well. Steve Major, I
Speaker 2: look at the curves in the pros you Jim Carron
Speaker 2: coming up with Morgan Stanley, Which spread is the best
Speaker 2: spread for our audience to study if they know there's
Speaker 2: twenty eight flavors of spreads. The vanilla spread is twos
Speaker 2: is compared to tenure. But which is the steve major
Speaker 2: spread that provides the most information and guidance.
Speaker 3: Yeah, if you want number on the curve, it's probably
Speaker 3: five to thirty year. You can ask Jim next. Send
Speaker 3: in my regards, but Jim will have an idea as well.
Speaker 3: I think twos tens can be quite distorted because two's
Speaker 3: is about the FED. That that is as simple as that.
Speaker 3: Two's is not a credit risk story. It's not a
Speaker 3: sovereign risk story. It's not about auctions or anything. Really,
Speaker 3: twos is safe, twos is about the FED. Tens starts
Speaker 3: to be a bit more cyclical, a bit more about
Speaker 3: the data and looking into longer term sort of trends.
Speaker 3: I think fives thirties is your best measure of the
Speaker 3: curve because you're capturing something that is close to where
Speaker 3: the FED is and sensitive to rates, but not quite
Speaker 3: as sensitive as twos, and I think I think it
Speaker 3: captures the whole story. Five thirties.
Speaker 2: Let's stay on this steave major in honor of Jim Carren,
Speaker 2: physics major in Bowden. Let's just stay on the physics
Speaker 2: of the moment, and I want to look at this
Speaker 2: first and second derivatives of the way the curve is changing.
Speaker 2: Is there an accelerat of tendency or is there a
Speaker 2: quiet stability to yield dynamics right now?
Speaker 3: Look, I think that the bomb market has performed very well.
Speaker 3: And one of the measures I would say on the
Speaker 3: health of this bomb market is the asset swap spread.
Speaker 3: So that's the difference between the treasuries and the swaps.
Speaker 3: When the treasury yield is going up at a faster
Speaker 3: rate than the swaps, that you might infer that there's
Speaker 3: something amiss. There's something wrong with the treasuries. People are
Speaker 3: worried about the term premium and other measures of risk.
Speaker 3: They're worried about the longer, longer term credit quality even
Speaker 3: of the US government. But the fact is those treasures
Speaker 3: have been coming in, they've been doing better, the yields
Speaker 3: have been coming in versus the swaps, and it could
Speaker 3: be because they got over sold. It could be that
Speaker 3: the fiscal narrative has been overplayed. I mean, I look
Speaker 3: at the fiscal position of the US. I don't think
Speaker 3: it's that bad, but I sound like a heretic. I'm
Speaker 3: just looking. I was looking at the data. It's actually
Speaker 3: come in better than people expected, and the US Treasury
Speaker 3: is finding you buyers of its bonds. You can think
Speaker 3: about what stable coin might do to the demand supply
Speaker 3: dynamics longer term, for example. But I just think that
Speaker 3: there's a narrative out there that is just ready to
Speaker 3: go all the time, and it tends to be very
Speaker 3: negative on the US Treasury and on the US government,
Speaker 3: and it's willing this risk premium called it term premium
Speaker 3: if you want to be there, and it just isn't.
Speaker 3: It's nothing like what people that expected. The curve has steepened,
Speaker 3: but that's because short dated yields went down. That's a
Speaker 3: very different explanation to the one that people were offering
Speaker 3: one year ago.
Speaker 6: Stephen. If you look back on twenty twenty five, it's
Speaker 6: been a great year.
Speaker 5: I'm looking at the world equity indices, the WI function,
Speaker 5: the Bloomberg terminal, double digit returns across the globe. You're
Speaker 5: on equities. We had US fix income high single digit
Speaker 5: total returns in twenty twenty five. What do we set
Speaker 5: up what's the setup for twenty twenty six?
Speaker 3: Do you think, I mean, Paul yours, you're so right,
Speaker 3: you couldn't really go wrong. I'm sure they're going to
Speaker 3: meet people who did go wrong, but you just I
Speaker 3: think the biggest mistake anyone could make will be taking
Speaker 3: profits too early in this rally, and whether that's gold
Speaker 3: or S and P five hundred and there are better
Speaker 3: people than me that have given you explanations as to
Speaker 3: why this will continue in twenty twenty six. So it
Speaker 3: does seem that the economy is resilient, the growth numbers
Speaker 3: are robust, the Fed's going to be dubbish. Whoever's going
Speaker 3: to be in charge will be cut in rates by
Speaker 3: more than the current chair for sure. So that's quite
Speaker 3: a nice setup going into twenty twenty six. It's very
Speaker 3: difficult to see how this could be derailed. But that's
Speaker 3: exactly when you should start to worry, because when it's
Speaker 3: so obvious and everyone's doing the same thing, then you
Speaker 3: need to be diversified. And I'm meeting people that are
Speaker 3: not touching the bomb market. They're coming up with all
Speaker 3: reasons for not holding bonds. That says to me, there
Speaker 3: might even be a structural short out there. Interesting, people
Speaker 3: are holding less than they need to of global fixed income.
Speaker 3: Don't forget credit spreads are tight as well, again relative
Speaker 3: to history. So to me, the government markets, led by
Speaker 3: the Treasury, they look like reasonable value. You're going to
Speaker 3: get five to six percent total return, probably again in
Speaker 3: twenty twenty six. I think the biggest problem is greed.
Speaker 3: That people expect that you should be able to make
Speaker 3: ten to fifteen percent because they've got used to it.
Speaker 3: But I think we all know that that expectation isn't realistic.
Speaker 5: Just along that line there Stephen spots silver hits fresh
Speaker 5: record above seventy dollars an hour. So the commodity markets
Speaker 5: are just going nuts. What do you think of that?
Speaker 5: Gold and silver medium and all those pressures.
Speaker 3: Well, we're quite big players in gold at tradition and
Speaker 3: the trend there is very clear. The people I speak to,
Speaker 3: the gold brokers, gold traders, all convinced it continues. Again.
Speaker 3: The problem with gold, I think for many people is
Speaker 3: they don't hold enough. So when something's going up, by definition,
Speaker 3: you don't hold enough of it, do you. So look,
Speaker 3: I can imagine that a personal portfolio should have ten
Speaker 3: to fifteen percent in gold institutions could be moving in
Speaker 3: that direction as well, and that probably get enough gold
Speaker 3: in the world.
Speaker 2: Stephen Major with us and of course based out of
Speaker 2: Dubai and all of us work in Hong Kong, particularly
Speaker 2: during COVID. But he's in London. Do you know why
Speaker 2: he's in London?
Speaker 6: Why?
Speaker 5: Okay u?
Speaker 2: I mean, Steve, I don't care about the dan bond market.
Speaker 2: The idea that west Ham would be relegated and have
Speaker 2: to go down to the minor leagues is just anathema
Speaker 2: to me. I mean, Santo's trying to get it done.
Speaker 2: They got full of here, Okay, I get it. Come on,
Speaker 2: Stephen Major, what does west Ham do to not It's
Speaker 2: like if the Baltimore Orioles were sent down to Triple A.
Speaker 2: Steve Major, what does west Ham need to do? Yeah?
Speaker 3: I guess for those that don't follow football. One of
Speaker 3: the things that we're talking about here is that there's
Speaker 3: a sixty thousand seater stadium, the old Olympic Stadium that
Speaker 3: could be in the lower leagues, which would would be
Speaker 3: a bit of an odd situation, right, but it's still
Speaker 3: We're only halfway on the season, and I think that
Speaker 3: Westam had been a bit unlucky, to tell you the truth,
Speaker 3: and they haven't really had the of the green, so
Speaker 3: there's still time. I'm a patient man. I think let's
Speaker 3: talk again in a few months and hopefully we'll be
Speaker 3: out of trouble.
Speaker 2: It is still early in this season. I love when
Speaker 2: they do this. They do this in YouTube when they
Speaker 2: show the highlights, they show the map of London with
Speaker 2: all the stadiums around. It's so cool. It's like if
Speaker 2: New York City had five Major League Baseball team rights, right,
Speaker 2: It's just fair, very cool. Tell us about Dubai, Steve Major.
Speaker 2: The time we've got left, we're going to go to
Speaker 2: an important inter year folks with Sir mic over at
Speaker 2: Novo Nordisk in a bit. But Stephen Major, tell us
Speaker 2: about your in Dubai, the vibrancy of Dubai. You know
Speaker 2: what what the Emirates have done with that airport, with
Speaker 2: that airline. What is the new Dubai look like to
Speaker 2: a global traveler like Steve Major.
Speaker 3: It's getting busy. I mean you can see the numbers.
Speaker 3: The population's north of ten million, and it's nearly ninety
Speaker 3: percent non Emiraties, so foreigners like me. But the place
Speaker 3: is booming, and it's not just Dubai's AVDB and the
Speaker 3: other emirates as well. And as you know, some of
Speaker 3: the big funds, some of the hedge funds have got
Speaker 3: as many people sitting in Dubai's they've got in London
Speaker 3: or New York. So you know, the numbers speak for themselves.
Speaker 3: And I think the geography, the location is very good, right,
Speaker 3: the sort of time zone works well. And then and
Speaker 3: then it's very high tech and it's a can do
Speaker 3: kind of society. So I think there's many reasons why
Speaker 3: people are based there.
Speaker 2: Mean Steven Major with Tradition as we celebrate his return
Speaker 2: to the street and look for his outlooks very prominent
Speaker 2: out on LinkedIn with Tradition. Stay with us. More from
Speaker 2: 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: We continue looking at what we learn from yield. Jim
Speaker 2: Kieren is with Morgan Stanley. He's been definitive for decades
Speaker 2: on yield Jim. First of all, Stephen Major sends his
Speaker 2: kind greetings. He talked about Yeah, you know, you guys
Speaker 2: go way back here in the battle. He has a
Speaker 2: structural optimism about fixed income Grab the coupon, and he
Speaker 2: calls it a bullish steepener and that good things will
Speaker 2: turn out. Do you agree?
Speaker 4: Well?
Speaker 7: First of all, good morning and Merry Christmas to you both.
Speaker 7: And Steve Major is absolutely one of the best in
Speaker 7: the business. I call him the James Bond of interest
Speaker 7: rates strategy. I will say that, you know, grab the
Speaker 7: coupon is definitely the way I'm thinking about the fixed
Speaker 7: income markets in twenty twenty six. And the reason that
Speaker 7: I say that is that when I look across the
Speaker 7: Yeld curve, how much do I believe that yields will
Speaker 7: actually be moving lower in twenty twenty six. I don't
Speaker 7: really think that they will. The front end, maybe because
Speaker 7: the Fed, the Fed's going to cut, the Yeld curve
Speaker 7: is going to steepen. But for the rest of the curve,
Speaker 7: I think it's more of a sideways range. It may
Speaker 7: drift a little bit higher. So I think the most
Speaker 7: we can expect out of twenty twenty six is the
Speaker 7: coupon and the yield and the bond, and that should
Speaker 7: be a good estimate for your expected return.
Speaker 5: So how do you think about this Federal Reserve this year?
Speaker 6: Jim?
Speaker 5: We've gotten some cuts here. I think we're going to
Speaker 5: get maybe some more in twenty twenty six, but it's
Speaker 5: not a lockdown at this point.
Speaker 6: How are you thinking about that?
Speaker 2: So?
Speaker 7: Look, you know, I do think that the I do
Speaker 7: think that the Fed's going to cut possibly two more times.
Speaker 7: And I know there's a lot of concern about the
Speaker 7: next FED chair, whoever's coming in. I don't think it's
Speaker 7: about interest rate cuts. What I think it's really about
Speaker 7: is the overall regulatory aspect of the Fed. I think
Speaker 7: the next FED chair, and in President Trump's selection for
Speaker 7: the next FED chair, has a lot more to do
Speaker 7: about how the Fed will act as a regulator versus
Speaker 7: how they're going to think about interest rates. Look, this
Speaker 7: is probably going to be two more cuts, is probably
Speaker 7: going to be under Powell. If another FED chair comes in,
Speaker 7: is there another rate cut? Possibly? But it's really going
Speaker 7: to depend on the inflation data that's out there, So
Speaker 7: I'm not overly excited about that. What I'm really excited
Speaker 7: about is effectively what the regulatory nature of the FED
Speaker 7: will be. And it does seem like we're moving into
Speaker 7: a zone, or at least a time period where there's
Speaker 7: going to be a lot of deregulation.
Speaker 2: What do you tell the equity beasts at Morgan Stantley,
Speaker 2: the fixed income people call the stock market people beast,
Speaker 2: I mean, you know they're out of control. What does
Speaker 2: the bond market, Jim Careen signal to people focused on
Speaker 2: the S and P five.
Speaker 7: Hundred, It actually is a very positive signal for equities
Speaker 7: because look, I mean, credit spreads are typing, yes, but
Speaker 7: they're not widening.
Speaker 2: Default risks are relatively low.
Speaker 7: We're not really seeing a materially a material widening of
Speaker 7: default risks or increase in default risks. Interest rates, while
Speaker 7: they may drift a little bit higher in the back end,
Speaker 7: they don't seem like they're moving out of control. You know,
Speaker 7: they might go a little higher, but certainly not to
Speaker 7: levels that I think will destroy the equity markets. So
Speaker 7: I think twenty twenty six, at least from the bond
Speaker 7: markets perspective, I don't think the bond market's going to
Speaker 7: get in the way of equities I don't think that
Speaker 7: we're in and unless we get a shock higher in inflation,
Speaker 7: which is the risk in my opinion for twenty twenty six,
Speaker 7: if that happens, then all bets are off. But if
Speaker 7: that doesn't materialize, and I don't think it will, then
Speaker 7: I think it's really saying smooth sailing for equities. Equities
Speaker 7: have to make their own way, but bonds aren't going
Speaker 7: to be the hurdle that we have to jump over.
Speaker 5: Historically, Jim, it's been us. Large cap has kind of
Speaker 5: been the way to go. Is it time to think
Speaker 5: about mid caps and maybe even smaller cap?
Speaker 7: So you know, this is a really good question. So
Speaker 7: I still think large cap is going to do well
Speaker 7: in twenty twenty six. Certainly, a lot of the cap
Speaker 7: X spending is there, a lot of the benefits from
Speaker 7: taxes are there. But I do think that twenty twenty six,
Speaker 7: and this is the way that we're positioning our portfolios
Speaker 7: across fixed income and equities, is that we do think
Speaker 7: that the cyclical components of the markets are going to
Speaker 7: see an upturn. So what we likely will see is
Speaker 7: the broader markets the four ninety three right outside of
Speaker 7: the mag seven, we'll actually start to perform better.
Speaker 2: Now.
Speaker 7: Why because what we're already seeing if you look at confidence,
Speaker 7: if you look at even just the decline and interest
Speaker 7: rates that we've had over the past year, all of
Speaker 7: that works with a lag, and the cyclical sectors are
Speaker 7: likely to be what benefits from that. But it's probably
Speaker 7: not going to be Paul until until the end of
Speaker 7: the first quarter. I think the first quarter of twenty
Speaker 7: twenty six, we'll still see the soft patch bleed over
Speaker 7: from twenty twenty five, and it's not until then that
Speaker 7: I believe that the tax policies, the fiscal stimulus, the
Speaker 7: lower interest rates, which act with a lag, will actually
Speaker 7: start to take hold. And I would expect the labor
Speaker 7: markets to even get better starting around the second quarter.
Speaker 7: But I still think there's going to be weakness in
Speaker 7: front of us, at least until March thirty one.
Speaker 2: I'm I'm just fascinated here by Jim Kieren Folks in
Speaker 2: the physics of a sixty forty portfolio. We got three
Speaker 2: groups of people, Jim Karen. We got people their standards
Speaker 2: the dock, and after three years of double digit equity performance,
Speaker 2: the boats really really left the dock. We got people
Speaker 2: that did the right thing sixty forty, and they're like, well,
Speaker 2: I underperformed. Should have just loaded the boat on Nvidia.
Speaker 2: And then we got people trying to find a new
Speaker 2: sixty forty. What does Jim Caron's new sixty percent stocks
Speaker 2: forty percent bonds look like?
Speaker 7: Yeah, it's you know, this is a question of our time, right.
Speaker 7: So I think that the interest rates cycle that we
Speaker 7: have from nineteen eighty one to twenty twenty one was
Speaker 7: pretty much just downward rates, which meant that bonds were stable.
Speaker 7: Sixty forty is a passive way to look at the markets,
Speaker 7: was a very very good allocation. But now that interest
Speaker 7: rates are likely to move sideways over time, that means
Speaker 7: that sixty forty is no longer optimal. So what it
Speaker 7: means is that you probably need to have a bit more,
Speaker 7: a bit more equity, a bit less bonds, because bonds
Speaker 7: aren't going to be the stable returns. Plus bond return
Speaker 7: correlations are very high relative to equity return correlations, so
Speaker 7: therefore one is edged necessarily against the other. So this
Speaker 7: is another factor that you know that I look at.
Speaker 7: So I would say it's it's a little more our equities,
Speaker 7: a little less ball.
Speaker 2: Jim, I got the first look at GDP here and
Speaker 2: I know you haven't seen this. Excuse me the second look.
Speaker 2: I know you haven't seen this, but these are jaw
Speaker 2: dropping ellen Zendner's statistics. I mean, this is unbelievable. I
Speaker 2: got a GDP annualized not three point three, but a
Speaker 2: stick up four point three. I got personal consumption, thank you,
Speaker 2: Paul Sweeney two point seven up to three point five.
Speaker 2: I'm iballing seven percent nominal Jim, Karen, what do bonds
Speaker 2: do in a Trump boom economy?
Speaker 7: Well, see that's the thing, right, you know, we're getting
Speaker 7: much stronger than expected data. I think we're starting to
Speaker 7: leave this soft patch. And if we get this capex
Speaker 7: spending which has been you know, going on in twenty
Speaker 7: twenty five, if that continues into twenty twenty six, and
Speaker 7: we get a furthering of the higher levels of productivity,
Speaker 7: than what that means is that you're going to get
Speaker 7: higher growth and lower inflation. So it doesn't mean that inflation.
Speaker 7: So right now we're talking about GDP growth being good,
Speaker 7: but inflation data has been relatively stable. Well, the next
Speaker 7: inflation data is going to be the point. So if
Speaker 7: we have really high inflation for the next print. That's
Speaker 7: a problem. If we have stable inflation and we're printing
Speaker 7: these types of GDP numbers, that's really good, especially for equities.
Speaker 6: Just extraordinary.
Speaker 5: Again on that economic data at the top is just
Speaker 5: referring to mortgage backed securities. They've had a great year
Speaker 5: in twenty twenty five. On the agency side, here is
Speaker 5: that still a call for twenty twenty six.
Speaker 7: It's our highest overweight in our portfolio, especially non agency
Speaker 7: mortgage backed securities. The housing market. Whether we look at
Speaker 7: the technicals, you look at the credit fundamentals.
Speaker 2: A lot of the regulation that.
Speaker 7: Came in since the financial crisis Dot Frank has meant
Speaker 7: that the credit quality of these assets is a lot stronger.
Speaker 7: The yield and the spread that you get out of
Speaker 7: mortgage is relative to their equivalent investment grade or even
Speaker 7: some investment grade bonds is better. So you're getting higher
Speaker 7: quality bonds with a higher yield in the mortgage space.
Speaker 7: So it is it is an overweight for us. We're
Speaker 7: not worried about the housing market in this in this
Speaker 7: particular cycle, so we really like that.
Speaker 2: So yes, for twenty twenty six, we have thirty seconds.
Speaker 2: Just give me the Jim Karen nutshell of seven percent
Speaker 2: nominal GDP. It's like China. We have China GDP.
Speaker 7: Well, well, at least for a little while. But yeah,
Speaker 7: So what it means is that bond yields are likely to.
Speaker 2: Drift a bit higher.
Speaker 7: I think that's natural, but it's not going to get
Speaker 7: in the way. And I think that's the key. So
Speaker 7: just because we see the ten year yield, you know,
Speaker 7: going up, doesn't mean it gets in the way of
Speaker 7: growth in the economy. Because if you're supporting a seven
Speaker 7: percent nominal GDP, you would expect bond yields to be
Speaker 7: a little bit higher, but it's not going to be restrictive.
Speaker 7: So I'd say that the economy seems like it's running
Speaker 7: a bit hot and inflation is not. So in economy
Speaker 7: hot inflation y that is a high productivity environment.
Speaker 2: When we invented this, folks, This is what's about Jim
Speaker 2: Karen setting you up for twenty twenty six. Stay with us.
Speaker 2: More from Bloomberg Surveillance coming up after this.
Speaker 1: This is the Bloomberg Surveillance podcast. Listen live each weekday
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Speaker 1: say Alexa play Bloomberg eleven thirty.
Speaker 2: We migrate to private credit. Pau's been anticipating this all
Speaker 2: day with Churchill Asset Management giving us huge, huge perspective
Speaker 2: in twenty twenty five. What does private credit in that
Speaker 2: wall of money do within eight point two percent nominal GDP,
Speaker 2: you and I have never seen.
Speaker 4: That's a big number.
Speaker 8: I'll bet you a lot of those are middle market companies,
Speaker 8: by the way, in the service sectors, because we're seeing
Speaker 8: a lot of growth. So yeah, I always coming with a
Speaker 8: fun fact. The first of all, Happy holidays. Great to
Speaker 8: be in the studio. We usually either have a strong
Speaker 8: fourth quarter and then build up the pipeline in the
Speaker 8: first quarter or for whatever reason, not great fourth quarter,
Speaker 8: but the first quarter is building.
Speaker 4: We've had both.
Speaker 8: We had a I think a record fourth quarter and
Speaker 8: we've got a record pipeline for the first quarter. So
Speaker 8: I think this this GDP report mirrors the confidence that
Speaker 8: our private equity investors have, and we've had a few
Speaker 8: of them on our podcast just talking about the opportunities
Speaker 8: with these smaller companies and the growth, particularly in the
Speaker 8: service sectors, guys, I mean this is where a lot
Speaker 8: of them. I'll bet you you dissect that four point
Speaker 8: three and the eight percent you know that you're looking at,
Speaker 8: I'll bet you a lot of that's in the service
Speaker 8: sectors right now.
Speaker 5: Just a Bloomberg had headline kept coming across the tape
Speaker 5: here in the M and A Space service now to
Speaker 5: buy armis for about seven point seven five billion dollars
Speaker 5: in cash. The deals are coming, yeah, fast and furious.
Speaker 5: Talk to us about your pipeline for twenty Yeah.
Speaker 8: So what's interesting about the pipeline now is with interest
Speaker 8: rates coming down and inflation kind of quiescent relative to
Speaker 8: the growth, and that's to be the case. I mean,
Speaker 8: we're seeing a really balanced to macro. I was listening
Speaker 8: to Jim Caron before I came on with you, and
Speaker 8: I agree with one hundred percent with what he's saying.
Speaker 8: It's very constructive for credit. I think that the deal
Speaker 8: flow that we are seeing now is mirroring the kind
Speaker 8: of deal flow we saw in twenty nineteen.
Speaker 4: It's pretty strong.
Speaker 8: I think interest rates being where they are as a
Speaker 8: big driver.
Speaker 2: I like that, and you know, we all have our
Speaker 2: COVID stories. But I remember sitting in a chair on
Speaker 2: an island looking at a plane going over and saying,
Speaker 2: am I going to be on the last plane? And
Speaker 2: I was? And the answer is that was a medical
Speaker 2: crisis that was not a financial crisis. How does this end?
Speaker 2: If you have six seven percent phenomenal, if you have
Speaker 2: this shape has boom, private equity, private credit? Do you
Speaker 2: have a theory on how this ends?
Speaker 4: So Tom tell me you.
Speaker 8: I can give you the theory if you tell me
Speaker 8: what cycle we are in right now? Are we in
Speaker 8: the twenty ten to twenty twenty five satalogue?
Speaker 2: Okay, what that well said? Right?
Speaker 5: So?
Speaker 8: Or are we in a mini cycle that just picked
Speaker 8: up after Liberation.
Speaker 2: Day or coming out of the eighteen nineties? World War
Speaker 2: One got in the way, Thank you, folks. There was
Speaker 2: just a concerted technology lift.
Speaker 8: Correct and now AI with AI being I'll bet you
Speaker 8: behind a lot of that, you're going to see a
Speaker 8: lift that's going to continue for a while.
Speaker 2: I've never said the stuff for saying today, yep, eight
Speaker 2: point two, this is.
Speaker 4: This is a good Christmas presents.
Speaker 6: President.
Speaker 2: Do you need someone to empty ash trees at Churchill? Yeah?
Speaker 2: We get back in the business.
Speaker 8: No, you're doing the heavy lifting right now. This is
Speaker 8: great thought leadership.
Speaker 2: We love it.
Speaker 6: Randy.
Speaker 5: What are your investors telling you these days? I mean,
Speaker 5: do they want you to, hey, put more money to
Speaker 5: work or monetize more?
Speaker 6: What they want it?
Speaker 8: They want it put to work quickly but safely, so
Speaker 8: they want you know. They're worried about default risk, right, Okay,
Speaker 8: they're also worried about growth. Are we in a bubble?
Speaker 2: Right?
Speaker 4: We talked about that a lot.
Speaker 8: So KBRI came out with a really interesting stat So
Speaker 8: they looked at the last decade. They looked at leverage
Speaker 8: loan growth versus corporate lending growth. So leverage loans including bonds,
Speaker 8: syndicated loans, private credit six percent over the last ten years.
Speaker 8: If you look corporate lending, which includes C and I loans,
Speaker 8: so bank loans and investment grade bonds five percent. Not
Speaker 8: much of a bubble there, six versus five.
Speaker 5: You know, in the much bigger market, Captain, where you
Speaker 5: guys typically play. In this Warner Brothers Discovery situation, there
Speaker 5: are debt deals flying all over the place. Bridges are
Speaker 5: being refinanced here and there, and the banks are coming
Speaker 5: in and guarantees.
Speaker 2: The credit in that part.
Speaker 6: Of the market is everywhere. So what's it like in
Speaker 6: your market?
Speaker 2: Yeah?
Speaker 8: So when I got out of the Uner versus Chicago
Speaker 8: and I was interviewing my mentors said, talk about capital formation.
Speaker 4: This is in nineteen seventy nine.
Speaker 8: This is what we are looking at right now with
Speaker 8: private markets because they are looking and taking away the
Speaker 8: opportunity for financing these deals that the banks had but
Speaker 8: they've given up. There was you saw the announcement that
Speaker 8: leverage loan guidance was being removed. Everybody was like, oh
Speaker 8: my god, the banks are getting back into it. I'm sorry,
Speaker 8: but they're cultures that the armies of risk and compliance
Speaker 8: people that have been built up in the banks over
Speaker 8: the last four decades, those aren't going anywhere.
Speaker 2: How do you edge folks? I should say, excuse me.
Speaker 2: Randy Schimmer with his vice chair chief investment Strategists at
Speaker 2: Churchill Asset Manager and a massive thanks to Stuart Paul.
Speaker 2: He's in the car already, is.
Speaker 6: Yes, No, he's ski and ski out. Yeah really yeah,
Speaker 6: that's how.
Speaker 2: He didn't tell us that. Yeah, that's Wong and the
Speaker 2: team rock. You know. They it's like Lee Cooperman had
Speaker 2: got the backdrop behind it. They're in somebody this summer,
Speaker 2: Randy Schimmer with us year. How do you pass off
Speaker 2: your risk? How do you hedge in the new world
Speaker 2: of private Yeah.
Speaker 8: Well, we're actually not passing off of the risk. That's
Speaker 8: the beautiful part about our model. We hold the risk
Speaker 8: along with everybody else. We're investing alongside everyone. The Lasa
Speaker 8: Matteo for one K. We talked about that last time. TIAA,
Speaker 8: which is our parent company, Triple A Company, holds the
Speaker 8: same risk that Lisa one K.
Speaker 2: Compare it in the old days to the scam of
Speaker 2: a general partner with many limited partners that you know,
Speaker 2: I'm not going to go to the history, folks, but
Speaker 2: it ended ugly. It's a partnership from casually talking, But
Speaker 2: what kind of flavor of partnership is it.
Speaker 8: It's a sharing of risk partnership, but a sharing of
Speaker 8: reward partnership. So all of the income stream that these
Speaker 8: loans are producing, which right now is close to double
Speaker 8: digits still because interest rates are high.
Speaker 2: What triple leverage all cash and.
Speaker 8: This is with no leverage, Okay, so the risk will
Speaker 8: is very balanced. And we looking into twenty twenty six
Speaker 8: we talked about this. I actually think that with tariff
Speaker 8: inflation under control, that the macro risk and this is
Speaker 8: Jim Karn's point, the macro risk is looking pretty strong.
Speaker 8: So now it's portfolio selection, Fellas. This is what is like,
Speaker 8: how does a bad loan get into your portfolio? The
Speaker 8: only way it gets in your portfolio if you put
Speaker 8: it there. So the whole thing is about assets selection
Speaker 8: and having twenty years of experience and not doing bad.
Speaker 2: I mean, ask one more question, because Paul's got fourteen okay,
Speaker 2: but then how do you get rid of a bad loan?
Speaker 8: Well, you work it out, and that's what we do.
Speaker 8: And by the way, some people don't like being landlords.
Speaker 8: They don't like fixing the sink or the plumbing or
Speaker 8: whatever's going wrong. We are landlords. We take care of
Speaker 8: the properties. We own it, We fix it, we get
Speaker 8: it back in shape and allow the private equity sponsor
Speaker 8: to sell the business. We're not in business of taking
Speaker 8: risk on the credit side because we're not getting outsize us.
Speaker 8: We're just getting our principal and interest back.
Speaker 4: So we're conservatives.
Speaker 5: So do you hold your loans to maturity or until.
Speaker 8: Or until they pay off it's very unusual for the
Speaker 8: loans to actually go to maturity. Something usually happens the
Speaker 8: private acuity firm will will refinance, they'll sell you guys.
Speaker 8: Came out with a great data piece for the lead
Speaker 8: Left this week.
Speaker 4: On the leverage loan.
Speaker 8: Number of dividend recaps being done in this market in
Speaker 8: the leverage lone space at record highs for the for
Speaker 8: the recent quarter. So you know, people are taking money
Speaker 8: out of these deals. They're giving those. Now do you
Speaker 8: finance that? Do you mind the private guys, We don't
Speaker 8: mind taking some of the money, but we don't like
Speaker 8: them taking all the money out because we like them
Speaker 8: to have some skin in the game. You know, if
Speaker 8: you keep fifty percent of your money in, we'll do
Speaker 8: that deal, okay.
Speaker 5: Because is it still a tough market to monetize the
Speaker 5: investments for these private equity guys.
Speaker 4: It's getting better.
Speaker 8: So you've got this trillion plus you know iceberg that
Speaker 8: is slowly melting. The reason to smelting is because interest
Speaker 8: rates are coming down and so financing costs, which is
Speaker 8: driving M and A. And you've seen now record M
Speaker 8: and A coming out of the choot, which is driving
Speaker 8: our deal flow.
Speaker 4: Interest rates make that possible.
Speaker 5: I'm looking at this Jimmy O'Connors and Window Mountain. I'm
Speaker 5: fascinated by it. Road trip we're going there. What's the
Speaker 5: sector you like in twenty twenty? Does it have to
Speaker 5: be an AI deal?
Speaker 8: Get they give you a good deal that we just
Speaker 8: approved in the linen management area and health care healthcare companies.
Speaker 4: Right, you go to the hospital.
Speaker 8: You know, some of this disposable, but you've got the
Speaker 8: you know, the bed clothes and stuff like that. You know,
Speaker 8: there's a lot of this this under the radar stuff
Speaker 8: that's very cool and low risk. You're Chicago, Chicago, the
Speaker 8: academic pile.
Speaker 2: Yes, what was your salary hope when you interviewed out
Speaker 2: of booth?
Speaker 8: Well, I think my first job, I was getting twenty five.
Speaker 2: Twenty five K. The fancy people were getting forty and
Speaker 2: you'd never get there right exactly, Okay, Lisa, we're doing
Speaker 2: the newspapers right now because I'm not here tomorrow to
Speaker 2: the end of the year. Michael Arrowit, thank you so
Speaker 2: much for doing this. This is some empower the four
Speaker 2: one kay people salaries. Americans say they consider the minimum
Speaker 2: to be financially successful. Randy Schimmer twenty five thousand, boomers
Speaker 2: ninety nine thousand, rounded up one hundred thousand fossils. Gen
Speaker 2: X born after sixty.
Speaker 9: Five, two hundred twelve thousand, millennials one hundred and eighty thousand.
Speaker 9: The average is two hundred seventy thousand dollars a year.
Speaker 9: Gen Z's clocking in at five hundred and eighty seven thousand.
Speaker 4: That's a wealth investor right there. And we look at
Speaker 4: for that.
Speaker 2: I mean, Lisa, what happened?
Speaker 6: I don't the kids come out?
Speaker 10: It's too expensive for everything nowaday for the kid.
Speaker 2: Somebody at a beautiful vignette here of the starter homes
Speaker 2: we all lived in or rented. I mean, you know,
Speaker 2: I lived above a pizza parlor, you know, right down
Speaker 2: from Gitsie's White Hots in Rochester. The cockroaches would come
Speaker 2: up at night after the pizza parlor closed. We all
Speaker 2: lived at these dumps. I mean except for Swimmer. He
Speaker 2: was rocking right from day one. And now these kids.
Speaker 10: Want to grant it, you know, they want the makers.
Speaker 2: Are you doing that tomorrow?
Speaker 4: They don't know.
Speaker 2: Or Fels said, go two thousand dollars, sneakers. They just
Speaker 2: went for a bigger value. Did you do the transaction
Speaker 2: on Golden Goose sneakers. It went for a bigger, bigger
Speaker 2: value than Versace Golden. I went by the store and
Speaker 2: I just you know, I try to distract the women
Speaker 2: when we go buy the store, you know, fancy sneakers.
Speaker 2: Randy Shimmer, thank you so much for being Let's really
Speaker 2: appreciate you coming in. Stay with us. More from Bloomberg
Speaker 2: Surveillance coming up after this.
Speaker 1: This is the Bloomberg Surveillance Podcast. Listen live each weekday
Speaker 1: starting at seven am Eastern on Apple Corplay and Android
Speaker 1: Auto with the Bloomberg Business app. You can also listen
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Speaker 1: Just say Alexa Play Bloomberg eleven thirty.
Speaker 2: Let's get right too at the newspapers with Lisa Mateo.
Speaker 10: All right, I want to start with this big affordability issue.
Speaker 10: The price of new cars and trucks in the US
Speaker 10: increase thirty three percent since twenty twenty. The average price
Speaker 10: of new carbrook the fifty thousand dollars barrier.
Speaker 2: This fall.
Speaker 10: JD Power the average monthly payment for a new car.
Speaker 10: It says it's estimated at seven hundred and sixty dollars
Speaker 10: a month, which means a lot of families can't afford that.
Speaker 6: So what happens.
Speaker 10: Experts are saying the typical forty eight to sixty month
Speaker 10: car Loan term will it how has given way to
Speaker 10: seventy two month learn terms, and even even longer. They're
Speaker 10: saying they're reaching one hundred months or more than eight years,
Speaker 10: especially when you get those larger use card.
Speaker 2: Does the article say what it's done to use car prices?
Speaker 10: It hasn't said that, but it said because people have
Speaker 10: been holding onto their used cars for so long, holding
Speaker 10: out that now they need the new car and they
Speaker 10: have no choice but to kind.
Speaker 2: Of And to me, it's the auto insurance. I mean,
Speaker 2: you know, use hundred bucks a month and those days are.
Speaker 5: Over yep, yep. It is crazy expensive. And then if
Speaker 5: you want to go like ev, you got to pay
Speaker 5: a premium.
Speaker 2: On topic last night, the entire discussion at dinner last
Speaker 2: night was electric utility bills. I mean people are talking
Speaker 2: Red Sox baseball. You know what the Bears did to
Speaker 2: the Packers. No, we're talking the governor bills. The governor
Speaker 2: elected New Jersey. She got hired pretty much on that
Speaker 2: topic alone. She's going to bring down utility bills.
Speaker 10: I want is there an age cutoff for when you
Speaker 10: kick the youth off the auto insurance from exactly the
Speaker 10: family plan.
Speaker 2: Or keep it on the cell phone bill? Just asking
Speaker 2: because they're for Social Security and I'm still paying for
Speaker 2: their cell phone bill. Next.
Speaker 10: Okay, restaurants, they found a new way to fatten up
Speaker 10: your check. Okay, if you've noticed, have you gotten the
Speaker 10: dessert menu lately?
Speaker 2: If you notice our dessert.
Speaker 10: Wines listed on there? Yes, shortly, Okay, they've been doing
Speaker 10: it more and more a long time. They're like thought
Speaker 10: of unsophisticated, too sweet like people, eh, but now they're
Speaker 10: on the menu because they cost a fraction of what
Speaker 10: reds would cost from a similar year. So, for example,
Speaker 10: if you get a glass of old wine from nineteen
Speaker 10: eighty nine, the sweet ones, it'll be fifty dollars, where
Speaker 10: as a bottle from that same nineteen eighties zyear will
Speaker 10: cost several thousand dollars. So people are more willing to
Speaker 10: get the sweet wine at the end. And then because
Speaker 10: they have higher sugar content, the bottles can be left
Speaker 10: open longer, and so they can.
Speaker 6: Extend the life of us. Bot what you're doing that
Speaker 6: see and then it.
Speaker 10: Takes less, you know, manpower to just offer a dessert
Speaker 10: wine than a fancy dessert where you need a special
Speaker 10: chef and you need you know, additional manpower.
Speaker 5: To get jamison neat. We're fine.
Speaker 2: So what did you do when Bailey's was introduced?
Speaker 6: It was like just ignored christ ignore that, ignore that.
Speaker 2: Yeah.
Speaker 6: Yeah, so norther in Northern Ireland, I have a problem.
Speaker 5: Because they don't have Jamison's in Northern Ireland.
Speaker 6: Really they don't.
Speaker 5: We have to get I think she is old bush Mill.
Speaker 6: It's a whole Northern Ireland, Republic of Ireland thing.
Speaker 10: I was going to be quite okay, this is the
Speaker 10: last one. Okay. We took you from sweet wine to beer.
Speaker 10: Okay in the Wall Street Journal saying this is not
Speaker 10: just any beer. It is a new version of Boston Beer's,
Speaker 10: highly boozy Utopia's brand. It is the strongest yet thirty
Speaker 10: percent alcohol by volume.
Speaker 2: Through illegal in fifteen states.
Speaker 10: Just to give you idea, traditional Sam Adams is like
Speaker 10: five to six percent, okay, but thirty percent puts it
Speaker 10: right up there with Kognak, like the same the level.
Speaker 2: You're really on a trend here today before the holidays
Speaker 2: don't open up.
Speaker 10: But they're saying, don't try and make this at home
Speaker 10: because the beer is so strong it ate through the
Speaker 10: side of an insulated paper cup, so it.
Speaker 5: Could be dangerous your inside.
Speaker 10: Thank you, But apparently it's a it's a small portion,
Speaker 10: like a little you know, niche aspect. But but some
Speaker 10: people like it. It's all about for them the innovation.
Speaker 2: Okay, well, thank you so much, Lisa, say the newspapers.
Speaker 1: This is the Bloomberg Surveillance podcast, available on Apple, Spotify,
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