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Speaker 2: This is the Bloomberg Surveillance Podcast. Catch us live weekdays
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Speaker 3: Right now your most important conversation of the day. Richard Hass,
Speaker 3: Ambassador has serving both parties. Ambassador Hass, of course always
Speaker 3: in forever associated with his Consolin Foreign Relations and Writing
Speaker 3: and Foreign Affairs at magazine. He holds court with Morning
Speaker 3: Joe on an often basis. Rattner's charts on Morning Joe
Speaker 3: had been great. They've been like a font of wisdom.
Speaker 4: He works at.
Speaker 5: It, he works at it. They're also a font of
Speaker 5: accurate information. And the fact that it stands out is
Speaker 5: stand it depressing.
Speaker 3: This is I can't say thank you so much for
Speaker 3: attending today. I want to go to Lloyd Austin Foreign
Speaker 3: Affairs Magazine. The price of principle is dwarfed by the
Speaker 3: cost of capitulation in Ukraine. I guess we have a
Speaker 3: new Secretary of Defense and the apparatus around it. Can
Speaker 3: anybody that you see there based on Trump loyalty work
Speaker 3: at the level of a four star general.
Speaker 5: Well, let's just take a step back. When you read
Speaker 5: Secretary of Austin's article, he never quite defines what capitulation
Speaker 5: in Ukraine is, So I was not overwhelmed with the piece.
Speaker 5: Just capitulation in Ukrainian Anything less than Ukraine regaining its
Speaker 5: nineteen ninety one.
Speaker 6: Borders is capitulation.
Speaker 5: If that's the case, we are unavoidably capitulating because there's
Speaker 5: zero chance Ukraine's going to be able to achieve that militarily.
Speaker 5: So we feel, first of all, we got to define
Speaker 5: what's our definition of success there, what's a reasonable outcome?
Speaker 5: And clearly we're going to have to move to the
Speaker 5: negotiating table because we can't get there simply on the battlefield.
Speaker 4: Will Europe join us at the negotiation table?
Speaker 3: How lonely is President elect Trump and get out of Ukraine?
Speaker 5: Well again, I wouldn't necessarily say it's get out of Ukraine.
Speaker 5: At the negotiating table will be Ukraine and Russia. The
Speaker 5: question is what is US and European policy in the background.
Speaker 5: Are we prepared to continue to support Ukraine enough so
Speaker 5: the Russians will see incentive to compromise the Russians have
Speaker 5: to feel the pain of this war. Unless they do,
Speaker 5: they won't compromise.
Speaker 7: So what has changed for Russia and Ukraine in the
Speaker 7: last week with this election. Has anything materially changed?
Speaker 6: It's a good question. I don't have the answer to it.
Speaker 5: I mean, you can see the direction of a lot
Speaker 5: of the appointments on China, and we can talk about that,
Speaker 5: secondarily probably on the Middle East. Less clear on Ukraine
Speaker 5: because if you look at what say Marco Rubio is
Speaker 5: going to be Secretary of State or the new National
Speaker 5: Security Advisor, they have been critical most recently arms support
Speaker 5: for Ukraine, but they're not necessarily let's throw Ukraine under
Speaker 5: the bus. There's a big gray area in between that.
Speaker 5: So I understand why everybody's uneasy. But again, I think
Speaker 5: a lot of it's going to depend upon what sort
Speaker 5: of a negotiated outcome will President elect Trump support when
Speaker 5: he's President Trump.
Speaker 7: How much is in our hands, the US hands versus
Speaker 7: Ukraine and Russia in terms of making the next step
Speaker 7: to maybe getting to a negotiation, Do we have any
Speaker 7: real influence in pushing that forward?
Speaker 5: Absolutely, we need to be sufficiently supportive of Ukraine. So
Speaker 5: Putin begins to question his assumption that times on his
Speaker 5: side he can just wait out the United States on
Speaker 5: the West. On the other hand, we have to be
Speaker 5: sufficiently conditional in our support for Ukraine, so mister Zelenski
Speaker 5: gets more prepared to compromise. So actually we play a
Speaker 5: critical role, not so much at the table, but in
Speaker 5: setting the context for the table.
Speaker 3: All these people that he's selecting now, I'm going to say,
Speaker 3: based just a generalization, one hundred percent have been on
Speaker 3: the outside.
Speaker 4: You have experience in this.
Speaker 3: When you walk through the doors sixteen Pennsylvania Avenue, when
Speaker 3: you walk through the door of the Pentagon, how do
Speaker 3: you change?
Speaker 4: How does your message? How does your thinking change?
Speaker 5: It reminds me a little bit of Mario Cuomos comment
Speaker 5: that you campaign in poetry and you governed in prose.
Speaker 5: When you walk inside the doors, you start governing in
Speaker 5: prose at a level of detail, at a level of implementation.
Speaker 6: When you work on the hill, you can.
Speaker 5: Propose this or that resolution or legislation, it passes, and
Speaker 5: then you're on to the next piece of legislation. The
Speaker 5: big difference in the executive branch is you own it.
Speaker 5: When I used to teach at the Kennedy School. We
Speaker 5: used to say Tom that ninety percent of life is implementation.
Speaker 5: Ninety percent of life in the executive branch is implementation.
Speaker 5: None of these people, for the most part, have experience
Speaker 5: with implementing policies.
Speaker 3: Speak to people that voted for President elect Trump but
Speaker 3: are really not a fan of President elect Trump. It
Speaker 3: was a negative vote versus the Democrats. Speak to those
Speaker 3: people about how you perceive this will amend from January
Speaker 3: to February to lie of next year.
Speaker 6: Not sure what you're asking me, Sorry, how the people?
Speaker 3: The people, the people, the behavior, the enthusiasm that's reel Now,
Speaker 3: how will they amend the summer of next year?
Speaker 5: Well, again, it's going to be more sobering because what
Speaker 5: they're going to find out, Whether it's on say, immigration policy,
Speaker 5: it's one thing to talk about mass deportations, it's something
Speaker 5: else actually to bring it about. You've got to find people.
Speaker 5: You've got to then presumably arrest people. You've got if
Speaker 5: you want to deport people, you've got to get through
Speaker 5: legal challenges. You then have to find host countries willing
Speaker 5: to take them. You've got to deal with the physical
Speaker 5: and economic, uh disruptions of it, and every.
Speaker 6: Conversation we could have again. You know what, right now we.
Speaker 5: Have sort of positions that have been staked out, actually
Speaker 5: making them policies. Translating into policies is going to be difficult.
Speaker 5: And then also in other areas, like, for example, you've
Speaker 5: talked a lot here about tariffs and the like, there's
Speaker 5: going to be consequences to those and ones when one
Speaker 5: can't just be quote unquote protaph, one's going to have
Speaker 5: to say, well, what about the inflationary effects of that?
Speaker 6: And so forth. So in every one of these areas, we're.
Speaker 5: Going to have to deal with the knock on effects
Speaker 5: of these articulated stances.
Speaker 7: What do you make of just the cabinet picks that
Speaker 7: we've seen this week from the President elect?
Speaker 1: What's your takeaway to mix back?
Speaker 5: I thought I was somewhat reassured by Senator Rubio and
Speaker 5: the fact not quite a cabinet position. National Security Advisor.
Speaker 6: Mister Waltsch.
Speaker 5: Yeah, he's worked in the executive branch, has working in
Speaker 5: the pentagons, so he has the most he has the
Speaker 5: most experience of anybody. They're both internationalists, both very tough
Speaker 5: on China, though exactly what that translates into being a policy.
Speaker 6: It's not clear, but I basically felt that was fine.
Speaker 5: Much less comfortable with the choice for intelligence and above
Speaker 5: all for Secretary of Defense. Again, this is somebody without
Speaker 5: any governing experience. Pentagons one of the biggest, if not
Speaker 5: the biggest management job in the government, and to put
Speaker 5: someone in that seat who doesn't have experience, to me
Speaker 5: is eyewordering.
Speaker 3: We're gonna come back with Richard Hause. I have to
Speaker 3: ask the journalist a question, would you serve within this
Speaker 3: new administration?
Speaker 5: The odds of me being asked, Tom arebout equal to
Speaker 5: your being asked.
Speaker 4: What are you doing for? Cent of your partners.
Speaker 5: Spending a lot of time talking to CEOs about the
Speaker 5: world and how it affects their business plans, supply chains, markets,
Speaker 5: name it, and also try to increase our international business.
Speaker 5: So I've been traveling around the world doing what I can.
Speaker 3: There one thing I've learned doing this new project, Richard,
Speaker 3: is the international nature.
Speaker 4: PAULA, Good morning in San Diego, Chile.
Speaker 3: Chile offers expats and people leaving America a vibrant and
Speaker 3: diverse experience. You can benefit from the country's thriving job market,
Speaker 3: affordable cost of living in rich cultural Hairiness. Richard as
Speaker 3: on the people out there that want to leave America, Now,
Speaker 3: what do you say to them.
Speaker 5: I'm not big on leaving America. This country is still
Speaker 5: the greatest experiment on earth. And if you have problems
Speaker 5: or difficulties, then stay in the system and work block,
Speaker 5: work against things you don't want to see, work in
Speaker 5: favor of those things you want to say. There's so
Speaker 5: many ways to make a difference in government, in the
Speaker 5: private sector, in civil society. I just don't understand this
Speaker 5: argument for leaving and.
Speaker 3: What people in the punditry I see this, They think
Speaker 3: we're four years out to twenty eight. We have a
Speaker 3: congressional election where congress people start running in one year
Speaker 3: for the election of twenty six, which is basically tomorrow.
Speaker 6: You got that.
Speaker 5: We've also got a mayor election in this city in
Speaker 5: New York in exactly a year.
Speaker 6: Got to think about that.
Speaker 5: We also have the two hundred and fiftieth anniversary of
Speaker 5: this country coming up. That could be a collective teaching
Speaker 5: about the value of being a citizen in this American
Speaker 5: democracy of ours.
Speaker 7: Richard, talk to us about the challenges of China. Hear
Speaker 7: for this new Trump administration where do you think the
Speaker 7: US is going as it relates to China these days?
Speaker 5: What's clear to me is the direction in the sense
Speaker 5: that we are going to become tougher, particularly on the
Speaker 5: economic side. I think that's good, and by the way,
Speaker 5: that had already happened under the Biden administration, which continued
Speaker 5: the previous Trump administration. I think there the hours are
Speaker 5: pretty clear. The biggest question I have is to what
Speaker 5: extent will be prepared to resist China geopolitically if China
Speaker 5: does something, for example, against the Philippines in the South
Speaker 5: China see, which has the potential to be the first
Speaker 5: foreign policy crisis for this administration. If China ultimately does
Speaker 5: puts greater pressure on on Taiwan, what tools is this
Speaker 5: administration willing to bring to bear? Would it just be
Speaker 5: economic tools, tariffs and sanctions, or would they be prepared
Speaker 5: to bring military tools to bear. I think that's a big,
Speaker 5: big question.
Speaker 3: The heart of your book, The Bill of Obligations, The
Speaker 3: Ten Habits of Good Citizens is our checks imbalances. You
Speaker 3: mentioned earlier, Ambassador that there's going to be action by
Speaker 3: the new administration, and they'll be legal pushback.
Speaker 4: How will that unfold?
Speaker 5: Tommy rais a big question there. For the first time
Speaker 5: in modern memory, we've become effected a parliamentary system. You've
Speaker 5: got one party, indeed one individual with the lion's share
Speaker 5: of control, the White House, the Senate, the House, and
Speaker 5: Supreme Court that tilts that way. So we no longer
Speaker 5: really have checks and balances to a significant degree at
Speaker 5: the federal level. So the real question is how does
Speaker 5: this president, how does this administration comport itself? Does it
Speaker 5: respect any limits? Yes, they won the election, but forty
Speaker 5: eight to forty nine percent of America voted against them.
Speaker 6: And the real question is.
Speaker 5: Does our system work with this degree.
Speaker 6: Of concentration of power?
Speaker 5: And what makes me a little bit uneasy tom is
Speaker 5: we're beginning to see somehowld I call it extra exstitutional
Speaker 5: institutional things. For example, this potential board of our military
Speaker 5: people to look at the political orientation of the of
Speaker 5: the generals, or what elon Musks and Vivekas are being
Speaker 5: asked to do postage possibly also a trades our position.
Speaker 5: What's interesting about all these things? You should you're giving
Speaker 5: people the authority, but they're not really accountable, and that
Speaker 5: makes me uneasy.
Speaker 3: Legally, a posed can we can someone out there say
Speaker 3: I don't like doge efficiency, whatever it is, I want
Speaker 3: to sue somebody is there.
Speaker 4: I mean, we've never been here, right.
Speaker 5: Right, And traditionally the courts are reluctant to enter into,
Speaker 5: to step into what they consider to be political disputes, So.
Speaker 6: I would be surprised.
Speaker 5: My guess is the president will have a lot of
Speaker 5: authority to create these positions of authority potentially also through
Speaker 5: recess appointments, but beyond the cabinet, beyond positions that have
Speaker 5: to be confirmed.
Speaker 4: Elon Musk.
Speaker 7: You mentioned Elon Musk. I think a lot of our
Speaker 7: listeners and our viewers are wondering what role was he
Speaker 7: going to really play in this government?
Speaker 6: Do you think at the most.
Speaker 7: I understanding he's been down in mar A Lago since
Speaker 7: election day.
Speaker 5: It's it's just when you think you've seen everything, you
Speaker 5: realize you haven't seen everything. And the idea that he's
Speaker 5: on this or that phone call and seems to have
Speaker 5: this brief with no uh with no clear borders to it. Again,
Speaker 5: I think there's real questions about Elon must Yes, he's genius,
Speaker 5: what do you what he's done with space launch, with
Speaker 5: Starlink and the rest is fantastic, but I get nervous
Speaker 5: when I see this degree of power in the hands
Speaker 5: of an individual who's essentially beyond accountability. He's got his
Speaker 5: own political agenda. We've seen it on X during the campaign.
Speaker 5: He's got his own foreign policy agenda. So he's clearly
Speaker 5: going to have a role. Presidents are allowed to have
Speaker 5: kitchen cabinets. That's happened since time immemorial, but usually it's limited.
Speaker 5: And the question is here, how operational does he get?
Speaker 5: I think that's just a question mark out there.
Speaker 4: The heart of your work.
Speaker 3: I think of Ambassador Harmance as well as we need
Speaker 3: to be strong and structured and responsible at home before
Speaker 3: we look to a proactive foreign policy. In this election,
Speaker 3: I would suggest crime was front center off of immigration migration.
Speaker 3: It wasn't Nixon sixty eight or Nixon seventy two. But
Speaker 3: how do we deal domestically with clearly a nation's worry
Speaker 3: about crime.
Speaker 5: Well, first of all, you're right, I think the border
Speaker 5: had tremendous impact, along with inflation and so forth. The
Speaker 5: first thing I say, Tom is not to have less
Speaker 5: foreign policy. Our problems at home are real, but they're
Speaker 5: not caused about what we're doing or spending in the world.
Speaker 5: As a percentage of GDP, all of our defense is
Speaker 5: still only roughly half what we did during the Cold War.
Speaker 5: Look on crime, there's no one thing, but I would
Speaker 5: basically say it's where the Democrats got it so wrong
Speaker 5: with defund the police. We ought to fund the police,
Speaker 5: We ought to train the police, we ought to expand
Speaker 5: the police and make them more professional. And yes they've
Speaker 5: got to be accountable, but we need more police, so
Speaker 5: we need better police.
Speaker 3: This just across a headline in the Bloomberg The US
Speaker 3: Ambassador to Kenya, Meg Whitman, says, she tenders her regulation.
Speaker 3: What will become of her resignation? Tenders her resignation is
Speaker 3: Ambassador to Kenya. What will become of a conventional state department?
Speaker 5: Well, again, Marco Rubio is not a revolutionary. On the
Speaker 5: other hand, he inherits a much weakened state department. The
Speaker 5: best in the brightest no longer are joining the foreign service.
Speaker 5: State department has lost enormous influence to the National Security Council,
Speaker 5: which has grown topsy turvy over the last few administrations.
Speaker 5: So Marco Rubio is one of his big challenges. In
Speaker 5: addition to the world addition to wars in the Middle
Speaker 5: East and war in Europe and the challenge of China.
Speaker 5: Marco Rubio is going to look inside this building and
Speaker 5: he's going to say, oh my god, I do not
Speaker 5: have the horses I need, and that's going to be
Speaker 5: a real problem for.
Speaker 6: What you going to hold him back?
Speaker 4: Migration?
Speaker 7: In reality, what should be the policy here for migration
Speaker 7: in this country?
Speaker 5: We want to have I think a large amount of
Speaker 5: legal immigration. It's been the great strength of America, over
Speaker 5: a million people of the year.
Speaker 6: We ought to look goough at the criteria.
Speaker 5: I think there's too much family unification, not enough getting
Speaker 5: the people in who bring the most talent and skills.
Speaker 5: I want well over a million people a year. Helps
Speaker 5: the economy, helps us demographically. We've got to fix the
Speaker 5: asside system. The idea that someone comes in here says
Speaker 5: I'm coming here for asylum, we can hear their.
Speaker 6: Case for six or seven years. It's crazy.
Speaker 5: I think basically we're going to have to reintroduce some
Speaker 5: version of remain in Mexico or remain outside the United
Speaker 5: States while you press your asylum case. But basically immigration
Speaker 5: is going to take a combination of a good legal program,
Speaker 5: but tougher border, and we've got to deal with those.
Speaker 5: We got to create the capacity to vet the people
Speaker 5: who want to come here.
Speaker 4: One final question, what is the tone?
Speaker 3: The number one question from chief executive officers when you
Speaker 3: speak at Centerview Partners.
Speaker 5: I think the biggest question right now is about China.
Speaker 5: So many of them are one way dependent on investment
Speaker 5: in China, China influenced supply chains. What particularly those in
Speaker 5: the technology space time, they want to know is what
Speaker 5: is the political environment they're going to be operating in,
Speaker 5: whether it's regulation, tariffs, sanctions. Also very concerned about what
Speaker 5: about geopolitics and how might that affect the US relationship.
Speaker 5: But I think for a lot of Americans that's issue
Speaker 5: number one. I would say for a lot issue number
Speaker 5: two might be Mexico, and that's where working out a
Speaker 5: relationship with the new leadership of Mexico. Can we figure
Speaker 5: out something where we can manage our border in a
Speaker 5: way that doesn't cause a massive trade crisis. At the
Speaker 5: same time, with Mexico, you.
Speaker 3: Can't say enough about the Bill of Obligations, the Ten
Speaker 3: Habits of Good Citizens, many other efforts, including the World
Speaker 3: which was my book of the summer I believe years ago.
Speaker 4: Richard Hawes, thank you so much. With Centerview Partners, and
Speaker 4: of course.
Speaker 3: The former president, he's he's very emeritus president, emeritus, absolute consol.
Speaker 6: One day you'll step down from the show and YouTube.
Speaker 4: John says, I'm emeritus every day. Jeh. Thank you, John,
Speaker 4: Thank you for that as well. Richard Hawes, thank you
Speaker 4: so much.
Speaker 2: You're listening to the Bloomberg Surveillance Podcast. Catch US live
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Speaker 3: Jim Carron, he is with Morgan Stanley. Can't say enough
Speaker 3: about the holistic approach he takes. Jim, I saw today
Speaker 3: completely aside from the CPI report, JPL is laying off
Speaker 3: like five percent of their employees.
Speaker 4: You may actually darkened the door there, right. I was
Speaker 4: shocked by that. What does that say about science in America? Right?
Speaker 1: So the jet propultionon laugh, Thank you.
Speaker 4: Tom.
Speaker 1: Always surprised with some of the questions. I get, Oh,
Speaker 1: but it's a shock.
Speaker 4: I mean they're like.
Speaker 1: Iconic, Yes, it is iconic.
Speaker 8: It's it was viewed as welfare for Caltech students because
Speaker 8: you could always get a job there. But look, I
Speaker 8: think science and technology at least may be there from
Speaker 8: what they're doing. It could be a slow period, but
Speaker 8: let me tell you, it's it's not going away.
Speaker 4: Is inflation going away? There seems to be some angst
Speaker 4: about that.
Speaker 8: So I'm in the camp that we do have an
Speaker 8: inflation issue. That doesn't mean that I don't think that
Speaker 8: inflation's coming down right now, and I think that it is.
Speaker 8: I just think that we're going to have a hard
Speaker 8: time keeping it at target levels around two percent for
Speaker 8: an extended period of time. Therefore, any uptick or failure
Speaker 8: for inflation to come down materially creates more anxiety for me.
Speaker 8: And I think that's the way the markets are going
Speaker 8: to think about it, and certainly that is the way
Speaker 8: that the FED is going to react to it as well.
Speaker 7: So should the Fed sit on the sidelines here? Are
Speaker 7: they kind of done for the near term?
Speaker 6: Do you think?
Speaker 4: No?
Speaker 8: I think the Fed is on a mission to four percent,
Speaker 8: because if you listen to their last policy statements, what
Speaker 8: they said is that they're lowering interest rates, they're not easy,
Speaker 8: which means that they still believe that.
Speaker 1: They're very tight right now. Okay, so if anything they
Speaker 1: want to get to.
Speaker 4: Neutral, are they very tight?
Speaker 8: So the last guess, no, Yeah, So I was going
Speaker 8: to say, like on financial conditions, if you look at
Speaker 8: credit spreads, if you look at what's going on in
Speaker 8: equity markets and what have you, it wouldn't seem like
Speaker 8: they are very tight. But based on their own models
Speaker 8: where you think of the neutral rate, what they're worried
Speaker 8: about is if you get a slowdown in the econom
Speaker 8: I mean, you could get what's called reflexivity, which is
Speaker 8: a sudden rise in the unemployment rate. So if you
Speaker 8: don't get rates to the proper levels today, which is
Speaker 8: around neutral, and if you do get this slow down
Speaker 8: in the future, you could get a surprise accelerated rise
Speaker 8: in the unemployment rate. That's what they're trying to stay
Speaker 8: in front of right now.
Speaker 3: Is the FED restrictive for the America that just voted
Speaker 3: for Donald Trump?
Speaker 1: You know, that's a good question.
Speaker 8: It really depends on who you ask, right So if
Speaker 8: you if you ask you know, you know, middle to
Speaker 8: lower class earners in the US, they would say that
Speaker 8: it is because effectively, you know, the price of goods
Speaker 8: has just gone up and maybe even the job situation
Speaker 8: is starting to slow down a little bit, and that
Speaker 8: and that we need more help. Mortgage rates are high,
Speaker 8: But what I think people are missing is that with
Speaker 8: the FED lowering interest rates, will it actually lower your
Speaker 8: mortgage rate or does that create a yield curve steepener,
Speaker 8: meaning that the longer term rates that you borrow at
Speaker 8: may stay elevated because if the FED cuts rates today,
Speaker 8: it may send an inflation impulse into the future, and
Speaker 8: that could bring up those higher term rates that people
Speaker 8: actually borrow at. So I think there's a lot of
Speaker 8: misunderstanding around that in terms of just you know, the
Speaker 8: broad American nobody.
Speaker 1: Cares about the deficits.
Speaker 7: Nobody cares about the national debt, should they?
Speaker 1: Well I care about them. I care intensely about them.
Speaker 8: And I'm not one of these guys that's a deficit
Speaker 8: hawk that's always been talking about it for his entire career.
Speaker 8: But I do think that we're at a level right
Speaker 8: now that is not very good. It can be sustained
Speaker 8: for a period of time, but the growth rate of
Speaker 8: the deficit cannot be sustained.
Speaker 7: So we do have the things growing three four five
Speaker 7: percent a year.
Speaker 8: Well, I mean in nominal terms, as long as nominal
Speaker 8: GDP is higher than the deficit itself, then we can
Speaker 8: actually sustain it. And that's where we are today. The
Speaker 8: problem is is what if we have a shock and
Speaker 8: we need to have a fiscal response, then we're limited
Speaker 8: in terms of what we can do.
Speaker 3: Jim Karen, Morgan Stanley on the little g the growth rate,
Speaker 3: which is the bl and end all the debt and
Speaker 3: the deafth So.
Speaker 4: We have a great charts.
Speaker 3: Just unbelievable bar chart that shows the pieces of inflation, energy,
Speaker 3: food and the rest. And the answer is we used
Speaker 3: to be at two point four ish percent on a
Speaker 3: gobbledygook of Jim Karen moving averages, and then we exploded
Speaker 3: up for a cup of coffee, cup of senka. Yep,
Speaker 3: can't afford coffee senka at nine percent. And the whole
Speaker 3: heart of the matter, Jim Karen, is we haven't come
Speaker 3: down to two point four percent. What is the distance
Speaker 3: between three point three percent and two point four percent?
Speaker 3: Besides some basic math?
Speaker 1: Yeah, so I mean effectively, this is what this is.
Speaker 8: One of the things that the FED has to worry
Speaker 8: about is that we're getting these numbers like point two
Speaker 8: point three percent month over month, and inflation we need
Speaker 8: to start getting point ones. And that's the issue here
Speaker 8: because essentially we need to get not just down to
Speaker 8: that target level, but we have to believe that we're
Speaker 8: going to stay there. It has to be durable, meaning
Speaker 8: that the way the Fed would say it is that
Speaker 8: not only does inflation have to come down, but it
Speaker 8: has to stay anchored at lower levels. And you know, look,
Speaker 8: today's number is a friendly number in the sense that
Speaker 8: did bring down yields. You know, it didn't surprise to
Speaker 8: the upside. I think the markets were worried about that. Effectively,
Speaker 8: this keeps the Fed on track to cutting interest rates
Speaker 8: in December.
Speaker 4: And Paul, what's interesting here within the colors.
Speaker 3: Of the wonderful Bloomberg chart, Good morning in a one
Speaker 3: all the great people putting these graphics together for Bloomberg,
Speaker 3: it's service sector just sustains period yep.
Speaker 7: So I mean, Jim, what do you think this Federal
Speaker 7: Reserve looks at this data today?
Speaker 1: Is this data in.
Speaker 7: Align with what they want to see or coming back
Speaker 7: of the mind. Is still a little bit of a
Speaker 7: tinge of inflation out there?
Speaker 8: I think there's still a tinge of inflation that's out there.
Speaker 8: I mean, you know, one of the things that we
Speaker 8: have to also continue to look at is the housing sector.
Speaker 8: Household related sector services is another aspect of this. Look,
Speaker 8: you know, wage inflation has come down, but it's not
Speaker 8: down enough in order for the FED to be convinced
Speaker 8: that the decline in CPI inflation is likely to stay
Speaker 8: durable at or around lower levels. The next question that
Speaker 8: they have to ask themselves is is it worth the
Speaker 8: cost of pushing inflation down to two percent? Meaning that
Speaker 8: do they just stay at high rates for a while.
Speaker 3: I mean, you know, as we piece this together, I
Speaker 3: do want to point out it's engineering our well, got
Speaker 3: Jim Caron and physics, and then we go over to
Speaker 3: the aerospace engineer Neil kush Carrie. Let's do some math
Speaker 3: here the first and second derivatives of our disinflation vector.
Speaker 3: I mean, I forget about convexity to disinflation, that's not there.
Speaker 4: So what are the first and second derivatives? Look like?
Speaker 4: Oh Newton?
Speaker 8: Yeah, so the rate of change in acceleration is what
Speaker 8: we're talking about in terms of the first.
Speaker 4: And sec square.
Speaker 8: Nailed, Yes, Okay, So look that they're both pointing in
Speaker 8: the right direction. The problem is that the second derivative,
Speaker 8: which is the acceleration, how fast are we moving down
Speaker 8: towards low lower inflation, is starting to become concerned because
Speaker 8: it feels like we're petering out here a little bit.
Speaker 3: Would Jerome Poll say, we don't want a fast second derivative,
Speaker 3: we want for the total economy and for our political society,
Speaker 3: we need to be a little more gentle in our acceleration.
Speaker 1: Yeah, I think that's probably right.
Speaker 8: But it's got to have enough impact to give people
Speaker 8: confidence that inflation is coming down and staying down and
Speaker 8: it's going to be durable so that it doesn't change
Speaker 8: the mindset. So I think Powell is happy with this number,
Speaker 8: not thrilled, but I think that he gives it a
Speaker 8: passing grade.
Speaker 4: Paul features five. We reversed a moonshot, So Trumpian moonshot.
Speaker 7: Jim, what are you talking to your clients about in
Speaker 7: the last seven days since the election and kind of.
Speaker 1: Where we're going from here?
Speaker 8: So look, I mean, you know a lot of things
Speaker 8: going on right now. People talk about the Trump trade
Speaker 8: and what have you. I think a lot of this
Speaker 8: and I know there's a lot of consumed talk around tariffs.
Speaker 8: I think the discussion should really be more about deregulation,
Speaker 8: and I think I think that's really where the animal
Speaker 8: spirits live in the broader economy. Now, it's hard to
Speaker 8: put a fine point on this, but if you think
Speaker 8: about people being policy and depending on who Trump appoints
Speaker 8: to all of these different positions, which you could have,
Speaker 8: is a less regulatory environment. Now, think of all the
Speaker 8: fiscal stimulus that's still in the system, the Chips Act,
Speaker 8: the IRA Act, and everything else. If that starts to
Speaker 8: become deregulated, that money starts to go towards more productive
Speaker 8: use and could generate a higher multiple, higher earnings, and
Speaker 8: everything else. So what's happening in the markets today is
Speaker 8: we're starting to see more of a broadening. So small caps,
Speaker 8: for example, have actually done really well. Mid caps are
Speaker 8: doing very very well. It's the mag seven now all
Speaker 8: of a sudden that's making us a little bit concerned.
Speaker 8: But you know what, that's a broader market, and the
Speaker 8: more people participate in and the more stocks participate in
Speaker 8: the rally, the better off we are.
Speaker 1: And that's what we're seeing.
Speaker 7: How about in fixed income market here, I mean, where
Speaker 7: do we go here for opportunity. I know, folks tell
Speaker 7: me that spreads are at all time tight levels here.
Speaker 4: Yeah, US high yield.
Speaker 7: Has been the best performing its I've made a lot
Speaker 7: of money this year, so it has been the best performer.
Speaker 1: I will give you that.
Speaker 8: Now, Will it be the continue to be the best
Speaker 8: performer going forward is another question. I am in the
Speaker 8: camp that we have a soft landing, which means that
Speaker 8: I think that default risks stay relatively low. So I
Speaker 8: do like the lower end of credit. So I do
Speaker 8: like high yield, but in particular I like bank loans.
Speaker 8: I like leverage credit. At this point, the reason is
Speaker 8: is that I'm uncertain as to where the interest rate
Speaker 8: movements are good are going to go. And bank loans
Speaker 8: tend to be a floating rate instrument, so I think
Speaker 8: that's good.
Speaker 3: So that's where I wanted to go, floating fixed. You
Speaker 3: say it's a floating twenty twenty five.
Speaker 8: At this point, I'm going to say floating just because
Speaker 8: I think that the markets have already priced in this
Speaker 8: terminal rate for Fed funds, which is somewhere around three
Speaker 8: and a half percent. I won't disagree with that too much.
Speaker 8: I'm a little higher. I'm at like three seventy five
Speaker 8: or four. So I think the FED cuts but not
Speaker 8: as much as what the market's pricing. So therefore I
Speaker 8: like the more floating versus the fix.
Speaker 3: Explain that to mere mortals out there, community, go, who's
Speaker 3: this carrying dice?
Speaker 4: Floating fixers? Fix is when I got a coupon, I.
Speaker 3: Know what I'm going to get on a semi annual
Speaker 3: basis right, right, How often does floating float?
Speaker 1: So it depends, but generally every three months. So generally
Speaker 1: every three months.
Speaker 4: We don't know your yield, but you're gonna get.
Speaker 1: Something exactly right, it'll float with the short term.
Speaker 3: Interesting, how many how much percentage point yield do I
Speaker 3: get from taking floating versus fixed?
Speaker 8: So so relative to if I look at fixed high
Speaker 8: yield versus versus floating rate loans. Now, now both of
Speaker 8: these are both high yield instruments. You know you're looking
Speaker 8: at probably about one hundred and fifty basis points extra
Speaker 8: carry one and a half percentage because because essentially the
Speaker 8: curve is relatively flat to inverted, so therefore it's so
Speaker 8: so you're not getting the extra duration and yield pickup.
Speaker 4: But Paul, people are driving off, I do, right.
Speaker 7: Now that is what am I supposed to be doing here?
Speaker 9: All right?
Speaker 1: So where is just just.
Speaker 7: The best value that you see out there and your
Speaker 7: cross asset that makes me think you're a remit you
Speaker 7: can go anywhere?
Speaker 4: Right, Where are you going?
Speaker 8: So a couple lays, you know, let's say on the
Speaker 8: fixed income thing for me, non agency mortgage back securities,
Speaker 8: non non agency mortgage back example, that would be so
Speaker 8: these are loans that are non conforming in the sense
Speaker 8: that they are larger loans, So this would this could
Speaker 8: be residential mortgage backed securities. They're trading wider than investment
Speaker 8: grade credit spreads, and they still have an investment grade
Speaker 8: credit rating, so therefore it's good, has slightly less duration.
Speaker 8: On the equity side, what we're broadly going to say
Speaker 8: is that the mid cap sector is where all the
Speaker 8: value is. So we're talking about twenty two pe multiples
Speaker 8: as being too high. Many of these mid caps. These
Speaker 8: are companies who you know, you know the names, they
Speaker 8: have real earnings and everything else, that are trading with
Speaker 8: PE multiples in the mid teens. If we get more
Speaker 8: of a rotation towards the cyclical sector of the economy,
Speaker 8: which I think we will we have to start looking
Speaker 8: about we have to start looking at materials and industrials.
Speaker 1: Tom, When was the last time.
Speaker 8: Somebody came in here, sat in the seat and said,
Speaker 8: I'm really excited about these material stocks.
Speaker 1: Right? Never, right, It hasn't happened in a long time.
Speaker 8: And I think the time is right right now to
Speaker 8: think about the reindustrialization manufacturing sector, you know, onboarding of
Speaker 8: manufacturing in the US, particularly under a Trump administration. These
Speaker 8: could be interesting cyclical stories.
Speaker 4: Jim, I love you. On YouTube. They're talking to you.
Speaker 3: They're asking me where I put my statistical analysis in
Speaker 3: differential equation of books of on my bedside table. No,
Speaker 3: there's a hallway at home, sort of seventeenth century, and
Speaker 3: there's a hallway, and the phobosi's down at the bottom
Speaker 3: where the dogs.
Speaker 4: Chew on it. Yeah, that's what we got. Twelve miner page.
Speaker 4: There's a lot. Jim Carron, brilliant. Thank you, don't be
Speaker 4: a stranger.
Speaker 2: This is the Bloomberg Surveillance Podcast. Listen live each weekday
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Speaker 2: Just say Alexa playing Bloomberg eleven thirty.
Speaker 4: This is a joy.
Speaker 3: There are people that have studied the failure of the
Speaker 3: American retirement system. I think of Roger Ferguson, of course,
Speaker 3: all that he did with the FED and with Tia Krafft.
Speaker 3: I think of Peter Orzagnaut Lazard his work at Brookings.
Speaker 3: But no one has studied this. From Marissa nineteen seventy four.
Speaker 3: Like Alicia Manel, her title is the most prestigious title
Speaker 3: and management science, the Peter F. Drucker Professor of Management Sciences,
Speaker 3: Boston College. And we're thrilled as she retires that Alisha
Speaker 3: Manel will join us. Alisha, thank you so much for
Speaker 3: joining today. It Boeing Boeing employee screamed, give us back
Speaker 3: what was there before nineteen seventy four. We want to
Speaker 3: go back to old stodgy define benefit programs. Should we
Speaker 3: go back to define benefit programs from the mishmash of
Speaker 3: for O one k.
Speaker 9: Wet.
Speaker 10: I'm delighted to be here today, and my basic answer
Speaker 10: to that is no.
Speaker 9: But I do view the whole debate.
Speaker 10: About four one ks versus defined benefit plans as sort
Speaker 10: of a detour and diversion. From what I've view, is
Speaker 10: the most serious problem with the retirement system, and that
Speaker 10: is that we don't have universal coverage. So there's some
Speaker 10: people who just don't have either the old fashioned to
Speaker 10: find benefit plan or a four to one K and
Speaker 10: so there are people are going to end up only
Speaker 10: on Social Security, and then there's some who weave in
Speaker 10: and out of employers with plans and they end up
Speaker 10: within adequate balances. So I think coverage is the main issue.
Speaker 10: And this DBTC debate, which has been going on for
Speaker 10: decades now, is really not too profitable and I don't
Speaker 10: really understand it. The defined benefit plan was great for
Speaker 10: its time when you had large, hierarchical companies where people
Speaker 10: spent most of their careers. But we're mobile workforce and
Speaker 10: it just wouldn't work right.
Speaker 3: I am fascinated why reform is so hard to do.
Speaker 3: Why it takes so darn long for Washington to common
Speaker 3: sensely reform our retirement plan. Why does it take so long?
Speaker 9: Well, I mean there's some things that are good.
Speaker 10: I mean, the basic part of our system of social security,
Speaker 10: it is a pretty well designed program, given that it
Speaker 10: was enacted in the nineteen thirties and we're in the
Speaker 10: twenty twenties and it still.
Speaker 9: Is very appropriate for today's workforce. We do have a
Speaker 9: shortfall in that program.
Speaker 10: We've known we've going to have a short fall in
Speaker 10: that program for forty years, and it's taken us a
Speaker 10: little long to get around to fixing it. But we
Speaker 10: are now going to be looking at a precipice and
Speaker 10: we're going to have to fix it so that that's
Speaker 10: a good base. In terms of the employer provided system,
Speaker 10: I actually I was skeptical for one K plans when
Speaker 10: they started, but for people who have them, they when
Speaker 10: you introduce automatic enrollment, target date funds, all the things
Speaker 10: that make it sort of automatic and easy, they work
Speaker 10: fine for the people who have them. And no one
Speaker 10: has in the private sector really has the defined Benefit
Speaker 10: plan anymore. We were just looking at some data, so
Speaker 10: only five percent of people approaching retirement have it.
Speaker 9: To find the wow plan.
Speaker 1: Wow Wow, Alicia.
Speaker 7: Many of our viewers and our listeners are thinking about
Speaker 7: social security. What can you tell us about the viability
Speaker 7: of Social Security system in twenty years, thirty years, forty years.
Speaker 9: I can tell you a lot. It's going to be there.
Speaker 9: We do have a shortfall.
Speaker 10: We have high costs and are higher than our tax
Speaker 10: revenues coming in. We have a trust fund that we're
Speaker 10: using to bridge that gap. That trust fund is going
Speaker 10: to be exhausted in twenty thirty three for the retirement program,
Speaker 10: and at that point benefits WI will have to be
Speaker 10: cut about twenty one percent and if nothing is done.
Speaker 10: So that's the bad news I think for people who
Speaker 10: were in about Social Security not.
Speaker 9: Going to be there. The good news is there's.
Speaker 10: Enough money coming in forever to pay seventy nine percent
Speaker 10: of benefits.
Speaker 4: Now.
Speaker 10: I would like to see them at one hundred, not
Speaker 10: at seventy nine percent. So I would like to see
Speaker 10: more revenues getting in, but you know, they'll maybe some
Speaker 10: compromise in between, but there's a base amount that's guaranteed
Speaker 10: going to be there ten years, twenty years, thirty years,
Speaker 10: forty years.
Speaker 3: I look, Alicia Manell at the mistakes you've all made
Speaker 3: in retirement, and so much of it is is Peter
Speaker 3: Orzagg emphasize it Brookings years and years ago, automatic sign.
Speaker 4: Up when you're employed.
Speaker 3: What how do we get people to save more within
Speaker 3: the algebra of simply doing it? It's get more into equities,
Speaker 3: but also you just got to put in more. How
Speaker 3: do we incentivize people to put in more when they've
Speaker 3: got bills to pay?
Speaker 9: I mean no, I mean that's the thing.
Speaker 10: It has to be realistic amounts. People would be nice
Speaker 10: if people could contribute fifteen percent, but not everybody can
Speaker 10: do that. So I think you want to make sure
Speaker 10: that people have some base on which they can save
Speaker 10: automatically at work, no matter what their income level.
Speaker 9: And then people at more income.
Speaker 10: Levels simply cannot say that those percentages.
Speaker 3: Now you're retiring, but I don't believe you. What are
Speaker 3: you going to do with You're a gyro? Alisia Manelle?
Speaker 3: What are you going to do in your non retirement?
Speaker 9: I don't. I have absolutely no clue.
Speaker 10: I'm going to stay on here a service senior advisor
Speaker 10: that may be wonderful, or maybe I'm become Ana.
Speaker 4: Can you you could be a ballerina like at Wellesley.
Speaker 4: I know you were a Queen of Ballerina.
Speaker 3: Wellesley years ago. Can you save the red Sox? I mean,
Speaker 3: can Alisia Manell help them?
Speaker 9: I wish I could. It's not my sweet spot.
Speaker 3: Okay, well, your sweet spot has been informing us about
Speaker 3: retirement and the collapse thereof in so many people's retirement planning.
Speaker 3: Alicia Manell inventing the Center for Retirement Research Boston College.
Speaker 3: But I can't say enough about when she started this, it.
Speaker 4: Was like what are you doing? Exactly what are you doing?
Speaker 4: And it's now just I.
Speaker 7: Mean it's a huge issue. I mean, people are living longer,
Speaker 7: they need more money they made through You're to go
Speaker 7: about their retirement?
Speaker 1: Probably not no valid.
Speaker 2: This is the Bloomberg Surveillance Podcast. Listen live each weekday
Speaker 2: starting at seven am Eastern on Applecarplay and Android Auto
Speaker 2: with the Bloomberg Business app. You can also watch us
Speaker 2: live every weekday on YouTube and always on the Bloomberg terminal.
Speaker 3: Right now, joining us David Salem. He was hugely popular
Speaker 3: last time he was on with me. At least I've
Speaker 3: been out a bit hedge eye risk management here this morning.
Speaker 3: Do you change your investment outlook with a new administration
Speaker 3: or do you try to get onto the beginning of
Speaker 3: spring training when the Red Sox.
Speaker 4: Say this is the year.
Speaker 11: Our approach is data driven. So if the data change
Speaker 11: is a result of the election, then we will change.
Speaker 11: But if they don't, then we don't.
Speaker 3: If nominal GDP is goose, I'm seeing lots of animal
Speaker 3: spirits in an amateur way.
Speaker 4: What is the most productive.
Speaker 3: Nominal GDP real growth, or even a little bit of
Speaker 3: an inflation.
Speaker 11: Pop Well, probably a little bit tom because it's not this.
Speaker 4: It's not the case.
Speaker 11: That the market dislikes relatively high rates of inflation compared
Speaker 11: to history. What the market really dislikes is volatile inflation
Speaker 11: because it's hard to price, it's hard to manage, it's
Speaker 11: hard to set up longer term positions.
Speaker 4: For what it's worth.
Speaker 11: Our view of we look at everything in real term,
Speaker 11: so real GDP, we see it growing modestly through the
Speaker 11: end of our planning horizon, which, due to model limitations,
Speaker 11: is probably through the end of the third quarter of
Speaker 11: twenty twenty five. So you're talking about, you know, two
Speaker 11: point two two point three real GDP against an inflation
Speaker 11: backdrop that we think will be a little bit higher
Speaker 11: than the market is still discounting all the market's been
Speaker 11: moving toward our inflation outlook, if you will, of sort
Speaker 11: of low threes between now and the end of the
Speaker 11: third quarter of twenty twenty five.
Speaker 7: Wow, So what should this Federal Reserve do you talking
Speaker 7: about growth rates like that, an argument can be made
Speaker 7: that this federal reserves are just maybe sit pat a
Speaker 7: little bit.
Speaker 1: But what do you think this federal reserve should do?
Speaker 4: Yeah?
Speaker 11: I hope Paul this answer doesn't frustrate you or a TK,
Speaker 11: But I don't think the Fed's mandate is sufficiently clear.
Speaker 11: And I think with the utmost respect, like you hadnon
Speaker 11: earlier today, I just saw I'm in the lobby cash carry.
Speaker 11: They're just making it up as they go, and they're
Speaker 11: making up not only the mandate but the means that
Speaker 11: they pursue that they employ to pursue. However they define
Speaker 11: the mandate, and that's because they're mandate from Congress is
Speaker 11: insufficiently clear. So you asked me what should they do?
Speaker 11: I don't think anybody can honestly answer that question.
Speaker 4: Tell me what the FED should or should not do?
Speaker 4: Is it December? You go into the next Yeah? All right.
Speaker 11: So just to finish the point, I'm going to just
Speaker 11: put myself into the mindset of the people at the
Speaker 11: FED who have a different definition, definition of the mandate,
Speaker 11: and different models than we ourselves employ. So to answer
Speaker 11: the question, I think that that they ought to be
Speaker 11: very very careful about cutting rates too quickly because the
Speaker 11: out look for inflation. Look, what is inflation. You talked
Speaker 11: about it earlier today when you talked about calculus first
Speaker 11: and second derivatives. We focus intensely on first and second
Speaker 11: derivatives at hedge eye. And when you look at that,
Speaker 11: inflation is essentially a computation that's a ratio. You have
Speaker 11: to look at your base effects, and the base effects
Speaker 11: tell us that it's going to be very difficult for
Speaker 11: them to move this gigantic Supertanker called the US economy
Speaker 11: towards inflation and anything close to the target over the
Speaker 11: next year, and that suggests that they ought to be
Speaker 11: very measured and patient and further reductions of the rate
Speaker 11: of the policy rate.
Speaker 7: One of the key issues with this new administration is
Speaker 7: going to be kind of how they're thinking about global trade.
Speaker 7: One of the first orders of business is China, and
Speaker 7: I know you have strong views.
Speaker 11: On Yeah, how do you think about that? Well, my
Speaker 11: strong views on China are limited exclusively to the perspective
Speaker 11: of like a chief investment office or somebody stewarting a
Speaker 11: large pile of money. And I've held these used for
Speaker 11: a very long time, because when you're allocating capital and
Speaker 11: taking risk, you obviously want to be cognizant of what
Speaker 11: is the worst case for the risk taking and what's
Speaker 11: the best case for the upside. And when you do
Speaker 11: that and look at, for example, publicly traded companies in
Speaker 11: China as this thing from private equity in China, I
Speaker 11: don't see an upside Paul that's even remotely close or
Speaker 11: commensurate with the downside. And the downside we saw obviously
Speaker 11: with Russia's invasion of Ukraine, where either through Fiat regulation
Speaker 11: or law or just by market movement, basically your wealth
Speaker 11: gets taken away at least confiscated for a time period,
Speaker 11: you get wiped out. So the expected return has to
Speaker 11: be very high. And I don't think you see that
Speaker 11: in China publicly traded Chinese companies.
Speaker 3: Yes, I want to come back and focus on the
Speaker 3: equity markets. But let's just begin with the character of
Speaker 3: our exuberance. Yard Denny says, it's the roaring twenties. What
Speaker 3: is the character of our exuberance after the selection?
Speaker 11: Yeah, I actually think to some important respects, it's what
Speaker 11: we might call rational exuberance, right, because you see the
Speaker 11: market is starting to discount. Obviously, policy changes. I think
Speaker 11: probably the single most important policy change that might affect
Speaker 11: the te trajectory of say the US economy and in
Speaker 11: turn the global economy for the next few years doesn't
Speaker 11: emanate from either the White House or Congress. It emanated
Speaker 11: from the Supreme Court with the Chevron Doctrine decision recently
Speaker 11: that basically said to the independent agencies, you don't have
Speaker 11: as much power as you've had in recent decades, and
Speaker 11: you need to go to greater lengths to justify anything
Speaker 11: that you're doing. And I think if that gets taken
Speaker 11: to a kind of logical and prudent extreme by actors
Speaker 11: in the economy generally, particularly those in the agencies, that
Speaker 11: could be very productive of a stimulus to growth. That's
Speaker 11: why I say something some things Tom that are going
Speaker 11: on in the markets today strike me as rational rather
Speaker 11: than irrational.
Speaker 7: And David Salem joins us here in our Bloomberg and
Speaker 7: Actor Broker studio. He's a Managing Director Capital Allocation for
Speaker 7: hedge Eye Risk Management. David, literally a week ago today
Speaker 7: the market woke up to a pretty big election. Did
Speaker 7: that change your view hedgeys view of investment outlook?
Speaker 4: Yeah?
Speaker 11: First, I want to just cite a stat that I
Speaker 11: think you guys will find intriguing. We hear a lot
Speaker 11: of talk in media that the markets at an all
Speaker 11: time high, and I did a recomputation of it this morning.
Speaker 11: Roughly one third of all US stocks publicly traded are
Speaker 11: trading at or below fifty percent of their.
Speaker 4: All time high.
Speaker 7: Not a broad based.
Speaker 4: Yeah, yeah, and I own them all.
Speaker 11: Globally. It's an even more laggardly situation in present, with
Speaker 11: more than half of all stocks traded globally x the
Speaker 11: US trading at least fifty percent below their all time high.
Speaker 11: So that now let me segue over to your good question, Paul, like,
Speaker 11: does an election change the outlook? My work at Hedge
Speaker 11: Eye is an interesting because we have a lot of
Speaker 11: people doing fantastic work that, for better or worse, I
Speaker 11: think it's mostly for the better, focuses on short term opportunity.
Speaker 4: In parallel in the market, I.
Speaker 11: Don't capital allocation was I was brought in to build
Speaker 11: a business takes a medium and much longer term view,
Speaker 11: and in that context, I just want to share with
Speaker 11: you just a few observations. Because we had the election
Speaker 11: on Tuesday. On Wednesday, and Thursday, and because we were
Speaker 11: subject to Chatham House rules, I can't say who I
Speaker 11: met with, but we'll just say a dozen CIOs of
Speaker 11: very large funds from around the world. And the focal
Speaker 11: point was just take a step back, let's all take
Speaker 11: a deep breath and ask ourselves a question, in light
Speaker 11: of everything that's going on in the world, including but
Speaker 11: not limited to yesterday's election, to what extent and how
Speaker 11: should we change the approach that we've been employing for
Speaker 11: some time now. These are institutions that have approaches that
Speaker 11: are idiosyncratically suited to their missions. So one of them
Speaker 11: is frankly the largest fund in the world, so it
Speaker 11: knows that asset size is the enemy of investment success.
Speaker 11: It cannot pursue the strategies that some of the smaller
Speaker 11: funds but nonetheless large funds that were in the room
Speaker 11: are pursuing. And the bottom line poll is that they're
Speaker 11: not inclined to modify the approaches what they're inclined to do,
Speaker 11: which by which I mean the policies and to some
Speaker 11: extent the strategies. But there is acute agony in angst
Speaker 11: about the overcrowding of some particularly some of the alternative
Speaker 11: investment niches that have enabled these institutions to do better
Speaker 11: than the norm until quite recently.
Speaker 4: Agony and Eggs, It's right where I wanted to go.
Speaker 3: Janet, Lauren and Bloomberg driving the ship on this endowment
Speaker 3: failure recently because of alternative investment failure. Is it a
Speaker 3: thing or is it just a moment that we've seen
Speaker 3: this under performance.
Speaker 11: It's a it's a big thing. I think it's even
Speaker 11: though there's a lot of talk about it, Tom, I
Speaker 11: don't think it's sufficiently recognized. The problem that is problem
Speaker 11: that is looming. And one again Chathamhouse rules, so I
Speaker 11: can't say who said it, but one of the CEOs.
Speaker 4: You don't have to do chattermouse. We do chattamouse here.
Speaker 3: We ignore talker as much as we can't continue, I will.
Speaker 11: The point I'm driving at is simply that one of
Speaker 11: the ceo is one of the largest funds in the
Speaker 11: room said, look, we now have actually two distinct sets
Speaker 11: of books. We have our accounting books where we have
Speaker 11: to use the nads provided by all of our alt managers.
Speaker 11: But for risk management purposes, which is what really counts, we're.
Speaker 4: Using our own marks.
Speaker 11: And there's a wide and growing gap between the two. Again,
Speaker 11: it's been widely reported on. The question is when will
Speaker 11: that problem come to the four No organization can be
Speaker 11: better than that.
Speaker 3: Come on, I just read I don't have the details
Speaker 3: in front of me. Somebody I'm going to pick on Princeton.
Speaker 3: It may be wrong, but people are putting out debentures
Speaker 3: or bonds of some type because they can't cash out
Speaker 3: of alternative exactly.
Speaker 11: Yeah, and that'll problem will grow worse.
Speaker 3: You have a permanence to this about three years, five
Speaker 3: years more.
Speaker 11: Well, the word permanence, that's a noun. You can use
Speaker 11: the word the adjective permanent. Right, these are permanent posts
Speaker 11: of capital. But nonetheless there are time horizons for measuring
Speaker 11: performance and assessing the of the higher guns that deploy
Speaker 11: their capital is much shorter than that. But the problems
Speaker 11: haven't all bubbled up at the same time. What you're
Speaker 11: going to have to see, I think this is my
Speaker 11: own opinion, which I'm labeling as such, is that as
Speaker 11: one institution after another finally throws in the towel and says, look,
Speaker 11: we don't actually have as much money as we've been
Speaker 11: professing to control, then the pressure gets unbearably acute on
Speaker 11: others to take reasonable marks, which means marked downs.
Speaker 4: Well.
Speaker 7: In twenty twenty two, when everything went down, everything stocks,
Speaker 7: bonds across the board, I was shocked that we didn't
Speaker 7: see more markedowns of private equity and private credit, the endowments,
Speaker 7: the university endowments, which I have some experience with.
Speaker 1: I didn't say anything.
Speaker 7: So is that a problem for the market, the fact
Speaker 7: that the marketing marked the market rules aren't more maybe
Speaker 7: stringent or timely.
Speaker 4: It is.
Speaker 11: What's even perhaps greater, I think, Paul, for a lot
Speaker 11: of institutions that are loaded to the gills with private stuff,
Speaker 11: is that they've actually made forward commitments. Right the way
Speaker 11: an institutional fund works, you commit the capital gets drawn
Speaker 11: down over time. The question now arises as the capitol
Speaker 11: calls flow in, where do these institutions get the capital
Speaker 11: of the dollars right to meet those capital calls? And
Speaker 11: the answer obviously is they have to sell something. What
Speaker 11: will they sell? That's that's the real elephant, unrecognized elephant
Speaker 11: in the room in my judgment.
Speaker 7: So that what do you think of it? I don't
Speaker 7: know a professional institutional portfolio, what percentage should be? Alternatives
Speaker 7: do you think these days?
Speaker 11: Yeah, it really does depend on the skill of the
Speaker 11: competence of the people that are deploying the money. Right,
Speaker 11: So there's way too much sort of Yale wannabes in mimicry, right,
Speaker 11: and this is a problem.
Speaker 2: Again.
Speaker 11: I won't name names, but one of the major university
Speaker 11: endowments that competes certainly at the board level in terms
Speaker 11: of performance comparisons with Ale itself, has done a computation
Speaker 11: and said, look, our asset size is such a handicap.
Speaker 11: Even if we had the most talented staff. Driving right
Speaker 11: back to the main thread, we can't deploy enough capital
Speaker 11: in a manner that will enable us as well plausibly
Speaker 11: to capture the return premium that induces us to invest
Speaker 11: in private stuff to begin with.
Speaker 3: You got to come back one hundred percent agree that
Speaker 3: David Salemer out of time.
Speaker 4: Thank you so much. With hedgeye risk management. This is
Speaker 4: not a.
Speaker 3: Small matter of folks, Paul way better than me on
Speaker 3: private credit, private equity.
Speaker 4: And alternative yes, alternative investment.
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