Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. This is Bloomberg business
Speaker 1: Week Inside from the reporters and editors who bring you
Speaker 1: America's most trusted business magazine, plus global business, finance and
Speaker 1: tech news. The Bloomberg Business Week Podcast with Carol Messer
Speaker 1: and Tim Stenebeck from Bloomberg Radio.
Speaker 2: As I mentioned, we are covering all angles of what
Speaker 2: Donald Trump returning to the White House means, what it
Speaker 2: means for the markets, the courts, for trade, for international alliances,
Speaker 2: and of course for the climate too. Mark Gongloff, an
Speaker 2: editor at Bloomberg Opinion who writes about climate change, does
Speaker 2: not have great news, at least in his opinion. He
Speaker 2: writes that quote for the climate, the best we can
Speaker 2: hope for is that the aftermath of the twenty twenty
Speaker 2: four election will remain just short of catastrophic. Mark joins
Speaker 2: us here in the Bloomberg Interactive at Brokers Studio. So, Mark,
Speaker 2: where do we begin with the climate and a second
Speaker 2: Trump administration? And because I think we can kind of
Speaker 2: look to what he did in his first administration and
Speaker 2: what comments he's made since then, not necessarily a priority
Speaker 2: for him.
Speaker 3: You could say that, to say the least it is
Speaker 3: not a priority for him. In fact, he was actively
Speaker 3: hostile to it in his first term, And as far
Speaker 3: as we can tell, we have two things to go by.
Speaker 3: We have his first term where he was actively hostile
Speaker 3: to it, pulled us out of the Paris Climate Accord,
Speaker 3: gutted environmental regulations, tried to put a bunch of climate
Speaker 3: deniers in the government, on and on the Project twenty
Speaker 3: twenty five, this blueprint that the Heritage Foundation put together
Speaker 3: that he disavowed, but then it has been written by
Speaker 3: a lot of his former advisors, calls for doing that
Speaker 3: on steroids and privatizing the National Weather Service, and doing
Speaker 3: a whole bunch of other stuff, drilling for oil, and
Speaker 3: a whole bunch of stuff like that. So none of
Speaker 3: it looks great. On the other hand, there are some
Speaker 3: reasons for hope.
Speaker 4: You've also written about how Americans clearly care about climate change.
Speaker 4: But then the second time, in three different presidential elections,
Speaker 4: you've seen someone come in that's elected, that obviously has
Speaker 4: a different opposition towards that. What's the conundrum there? Why
Speaker 4: is there a divergence?
Speaker 3: Yeah, it's crazy. Consistently people say we really care about
Speaker 3: climate change, we really want to do something about it,
Speaker 3: and then they turn around to vote against that. It's
Speaker 3: weird dichotomy that you've seen in this election of many others.
Speaker 5: People.
Speaker 3: You know, inflation is an enormous problem, and that that
Speaker 3: is something that affects people's daily lives. Climate is affecting
Speaker 3: their daily lives if there's a big hurricane, if there's
Speaker 3: a drought, if there's a wildfire. But that's not a
Speaker 3: constant drumbeat. How do I feed my kids? So I
Speaker 3: understand that if you're going to go to the polls
Speaker 3: and be mad about inflation, you're going to vote about
Speaker 3: inflation or the economy. The difficult thing we need to
Speaker 3: message is that this is an economic issue. Climate change
Speaker 3: is going to raise prices in the future and cause
Speaker 3: economic loss in the future, but it's it's and it's
Speaker 3: causing those losses as we speak, you know, insurance, insurance exactly,
Speaker 3: building costs are going up. All these things are problems
Speaker 3: and in the now, and so we have to express
Speaker 3: that message better. And that's one of the things about
Speaker 3: Trump taking over again and cutting off the US government
Speaker 3: sort of activism in climate is that we have to
Speaker 3: sort of take up that mantle ourselves.
Speaker 2: Well, you mentioned it's not hopeless, and I wonder about
Speaker 2: the people that he has around him right now, and
Speaker 2: that could change. We know how he was in his
Speaker 2: first term and what some of those folks are saying
Speaker 2: now about the former president and president elect. But what
Speaker 2: about someone like Elon Musk being so close to him
Speaker 2: because he's I think it's fair to say, done a
Speaker 2: lot for the transition to cars run on by electricity.
Speaker 3: It's such a weird thing. Yes, I mean, he made
Speaker 3: his fortune is based on Tesla, and one of the
Speaker 3: weird things those that if you cut off the IRA,
Speaker 3: cut off the Inflation Reduction Act and in subsidies for
Speaker 3: other electric car makers, suddenly Tesla is king of the
Speaker 3: hill without that many competitors. So there are some competing
Speaker 3: interests there. It is possible though that he could kind
Speaker 3: of bend Trump's on that, but I don't know if
Speaker 3: we can rely on that at this point. We may
Speaker 3: have to rely on state and local governments. You know,
Speaker 3: Washington kept alive a carbon tax, a cap and trade
Speaker 3: scheme that they have there to help sort of like
Speaker 3: make carbon more expensive. That's a huge thing to help
Speaker 3: keep fossil fuel use down. Other state and local governments
Speaker 3: are doing that. And the other thing, the ironic thing
Speaker 3: is that you know, Trump is called climate change in
Speaker 3: Chinese hoax. If we stop subsidizing green tech production in
Speaker 3: the US, a lot of that business is going to
Speaker 3: go overseas, and a lot of it is going to
Speaker 3: be dominated by nobody, none other than China. It already
Speaker 3: is to some extent. They're making super cheap evs or
Speaker 3: making super cheap solar panels, and they're spreading them around
Speaker 3: the world, and we risk missing the US when I
Speaker 3: say we, the US risks missing out on that business.
Speaker 3: And you know that ability that manufacturing in those jobs
Speaker 3: that the IRA did start was starting to provide, and
Speaker 3: that's another reason to hope. A lot of those jobs
Speaker 3: are being created in Republican districts, and so a lot
Speaker 3: of Republican lawmakers are already saying, hey, maybe keep your
Speaker 3: hands off of this.
Speaker 4: Please, so project twenty twenty five because there's a lot
Speaker 4: of discussion about this. It's unclear about everything that's in it.
Speaker 4: But how does climate change end up fitting into this specifically?
Speaker 3: Well, they really talk about the NAA, which runs the
Speaker 3: National Weather Service, and a bunch of other things. They
Speaker 3: talk about taking that, breaking it up, stripping it down.
Speaker 3: The National Weather Service, which provides you know, all tons
Speaker 3: and tons of data climate data, they want to sort
Speaker 3: of they don't privatize that, but they want to commercialize
Speaker 3: it so that it sells all that stuff, sells all
Speaker 3: of its data to like Acuweather, for example, which is
Speaker 3: like a private company. Acuweather says it doesn't want any
Speaker 3: part of this, but it's of course saying that now
Speaker 3: because it wants to stay out of that. Who knows
Speaker 3: what's going to happen. But if it wants to take
Speaker 3: pull climate change out of the science that the National
Speaker 3: Weather Service and THENAA perform, and that will be a
Speaker 3: huge loss for scientists here and all around the world.
Speaker 3: They'll have to scramble for other data sources. And it's just,
Speaker 3: you know, we all need to be rowing in the
Speaker 3: same direction. We've got four years in order to really
Speaker 3: close the window. We've got a window of four years
Speaker 3: to cut fossil fuel emissions down enough to keep warming
Speaker 3: to the window that we've all said we want like
Speaker 3: two degrees celsius or less. You know, everybody needs to
Speaker 3: be growing in the same direction to make that happen.
Speaker 3: If the US pulls its data out of that fight.
Speaker 3: It's powers out of that fight, and it doesn't help anybody.
Speaker 2: I'm wondering where markets come in here, Mark, because you know,
Speaker 2: we mentioned the rising costs of insurance and I don't
Speaker 2: know if you've been on since I found this out
Speaker 2: about a friend of mine, but apparently he can't sell
Speaker 2: his condo in Florida because it keeps flooding their insurance issues.
Speaker 2: And to me, that sounds like the market is kind
Speaker 2: of taken.
Speaker 5: Care of this.
Speaker 2: Yeah, it's anecdotal, but you are seeing some issues, especially
Speaker 2: with some other regulations in Florida related to the collapse
Speaker 2: of that building and surfside a few years ago, that
Speaker 2: are making it really difficult to sell real estate in
Speaker 2: certain areas.
Speaker 5: Donald Trump's a real estate guy. Yeah, Like, is that
Speaker 5: message and in Florida?
Speaker 2: Like, is that message going to get to him that Okay,
Speaker 2: this is an issue because it is affecting the cost
Speaker 2: of housing and he wants to bring that down.
Speaker 3: I don't know what messages will get to him, but
Speaker 3: I do think because who knows what, but messages will
Speaker 3: get to politicians in Florida. I mean, they already see
Speaker 3: that the real estate market is having problems, especially in
Speaker 3: the coastal areas. Insurance rates are going up, so that
Speaker 3: is going to be a big market and you can
Speaker 3: see that in other parts of California, wildfire prone areas
Speaker 3: in California, flood prone places in Louisiana and Texas. It's
Speaker 3: going to be an issue all around the country, not
Speaker 3: just in Florida, and it will be an economic issue.
Speaker 3: On the other hand, I guess if you pull away
Speaker 3: government support and subsidies for clean tech, then that becomes
Speaker 3: another sort of the countervailing market thing. We're already seeing
Speaker 3: hedge funds making a bunch of money by betting a
Speaker 3: glimpse against clean tech this week.
Speaker 5: Is that going to.
Speaker 3: Keep going if the government? If the US government pulls
Speaker 3: it stops away, will VC's keep put money into that stuff?
Speaker 3: So that's another market wrinkle that we have to think about.
Speaker 4: We've talked a lot broadly about the US government, but
Speaker 4: what about when it comes to local government and what
Speaker 4: they can do for those types of policies or initiatives
Speaker 4: when it comes to climate change.
Speaker 3: Yeah, there's so much that they can do. Nashville and Columbus,
Speaker 3: Ohio both past mass transit bills this week and others.
Speaker 3: Two states that voted for Trump, Yeah, exactly, Ohio and Tennessee.
Speaker 3: Those are deep red states, but there are local governments
Speaker 3: in these two towns, past mass transit bills, Washington, as
Speaker 3: I mentioned, past this cap and trade bill. So there
Speaker 3: are lots of things going on. But then at the
Speaker 3: same time, again it's difficult because I think with South
Speaker 3: Dakota voted against a pipeline that would pipe carbon dioxide.
Speaker 3: So you have these carbon capture Another big thing we're
Speaker 3: going to need maybe is carbon capture and storage, which
Speaker 3: we'd gone on about how effective that is. But if
Speaker 3: you have that, you want to pipe that carbon to
Speaker 3: other places. South Dakota said no, we don't want that
Speaker 3: pipeline in our backyard. And so it is a fight.
Speaker 3: But local governments can do a lot. California State of
Speaker 3: California has done so much to affect the US audio,
Speaker 3: the entire US auto industry with its environmental regulations, and
Speaker 3: so states can have that kind of power.
Speaker 2: I'm gonna throw a curveball at you, Mark. But we
Speaker 2: talked to Elon Musk, what about someone like RFK Junior
Speaker 2: who has a history of in environmentalism.
Speaker 3: Yeah, again, I don't know our FK Junior Elon Musk,
Speaker 3: Donald Trump. These are people who have brains that are
Speaker 3: more complicated than I fully understand, So I don't know
Speaker 3: maybe how those three will work together.
Speaker 5: They It is possible that he could.
Speaker 3: Also have some sort of an influence onto He already
Speaker 3: has had some an influence on Trump, helped Trump get elected.
Speaker 3: Trump feels like maybe he owes him something and so
Speaker 3: he may be more willing to listen to an environmental
Speaker 3: pitch from him who knows. It does sound like his
Speaker 3: focus has been less about the environment in the last
Speaker 3: few years, much more about health.
Speaker 5: Yeah, health and FDA and Moer vaccines. Yeah.
Speaker 2: Well, we certainly do live in interesting times. Mark on Luff,
Speaker 2: we are grateful to have you writing a it. Mark
Speaker 2: is an editor at Bloomberg Opinion. He writes about climate change.
Speaker 2: Check out his columns and more on the Bloomberg Terminal
Speaker 2: opin Go and at Bloomberg dot com slash Opinion.
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Speaker 2: Well, the Associated Press reporting this afternoon at the shoe
Speaker 2: company Steve Madden is set to cut imports from China
Speaker 2: by as much as forty five percent. This is a
Speaker 2: result of this week's election of Donald Trump. The ATHV
Speaker 2: reporting that Steve Madden has been building a factory network
Speaker 2: in Cambodia, Vietnam, Mexico, and Brazil. So those jobs not
Speaker 2: necessarily coming to the US, but certainly the supply chain
Speaker 2: being changed. I would imagine that c suites all over
Speaker 2: the US are scrambling right now to figure out what
Speaker 2: they're going to do to prepare for the next Trump administration.
Speaker 2: And that's why we've got Nina Trattman with us. We
Speaker 2: know she's all over this. She's Bloomberg News senior editor
Speaker 2: who writes the Bloomberg CFO Briefing newsletter. You can ascribed
Speaker 2: to it by going to Bloomberg dot com slash CFO Briefing.
Speaker 2: She joins us here in the Bloomberg BusinessWeek studio. We're
Speaker 2: also joined by Mandy Fields. She's CFO at elf Beauty.
Speaker 2: She joins us from Oakland, California. Nina, why was Mandy
Speaker 2: a good person to talk to? You this week after
Speaker 2: the victory by Donald Trump.
Speaker 6: Yeah, thanks for having me again, and thanks Mandy for joining.
Speaker 6: I think, well, of course, we are looking for companies
Speaker 6: who can tell us how this will influence their planning
Speaker 6: strategy and their finances. And I think ELF is an
Speaker 6: interesting company because, and we'll talk to Mandy more about
Speaker 6: this in a second, they import a lot from China.
Speaker 6: They have a sort of price point customer that is
Speaker 6: sort of basically one that is sort of exposed potentially
Speaker 6: to inflation.
Speaker 7: So like the average product.
Speaker 6: I think Mandy told me before is sort of paying
Speaker 6: six dollars fifty and so of course there's a sensitivity
Speaker 6: to potential inflation and increases in prices. So yeah, why
Speaker 6: don't we turn to you, right, Mendy talk to us
Speaker 6: a little bit about how you navigated the first round
Speaker 6: of tariffs under Trump's first administration and how that could
Speaker 6: could help as a playbook for this time round.
Speaker 8: Well, thank you so much for having me this afternoon.
Speaker 8: We are certainly familiar with tariffs. We were impacted by
Speaker 8: tariffs back in twenty nineteen, and we experienced them at
Speaker 8: about a twenty five percent level on the majority of
Speaker 8: our product that we import. From China, and at that time,
Speaker 8: we had a couple different tools in our toolkit to
Speaker 8: help offset the impact of tariffs. We had call savings
Speaker 8: and concessions with our suppliers. We saw the foreign exchange
Speaker 8: rate between the US and the Chinese Wan move into
Speaker 8: our favor. I mean, we also had pricing. We took
Speaker 8: pricing on about a third of our portfolio at that
Speaker 8: time to help mitigate the impact of tariffs. I would say,
Speaker 8: now continue, yeah, I would just say now that you know,
Speaker 8: back in twenty nineteen, I would say maybe ninety nine
Speaker 8: percent of our product what's coming out of China. We've
Speaker 8: made a lot of progress now about eighty percent coming
Speaker 8: out of China. But we also have diversification in our
Speaker 8: back pocket, and so we have identified suppliers in other
Speaker 8: parts of Asia outside of China, and then also working
Speaker 8: with suppliers here in the US and in Europe also
Speaker 8: helping to produce our products. And we also have further
Speaker 8: diversification from a top line standpoint with in this latest quarter,
Speaker 8: we just reported twenty one percent of our net sales
Speaker 8: coming out of other countries outside of the US that
Speaker 8: when we import into those countries are also not subject
Speaker 8: to tariffs, so that also will help us mitigate any
Speaker 8: incremental tariffs that we might face.
Speaker 2: What about how this hits the bottom line of the
Speaker 2: company and sort of where it's absorbed the changes. Are
Speaker 2: they absorbed through price increases or would traff be absorbed
Speaker 2: through price increases or do you just get this hit
Speaker 2: on this with the bottom line.
Speaker 8: Well, in the twenty nineteen instance of tear, we actually
Speaker 8: were able to expand our gross margins during that time
Speaker 8: because we did take pricing, we had the cost savings,
Speaker 8: we had FX move into our favor. Now, some of
Speaker 8: those things like FX, we're not in control of, so
Speaker 8: that was just an additional help that we had during
Speaker 8: that time period. So I guess I would say it's
Speaker 8: too early to tell what this next round of tariffs
Speaker 8: may look like, but certainly we had the playbook from
Speaker 8: twenty nineteen when we got the twenty five percent level.
Speaker 4: So what kind of preparations could you potentially do in
Speaker 4: in advance of this, especially when you're thinking about what
Speaker 4: shareholders are looking toward when it comes to these types
Speaker 4: of potential issues.
Speaker 8: Well, I think many companies are just scenario planning. You know,
Speaker 8: what can you potentially expect to see on the road
Speaker 8: ahead and certainly leveraging the history that you have in
Speaker 8: this area. You know, we treat our pricing very seriously,
Speaker 8: and we actually have only taken pricing in response to
Speaker 8: kind of macro things, the tariffs back in twenty nineteen
Speaker 8: and the twenty twenty one twenty twenty two period in
Speaker 8: response to the container cost increases that we were seeing
Speaker 8: just with travel on ocean, and so we really take
Speaker 8: that very seriously. As Nita mentioned, our average price point
Speaker 8: at six dollars and fifty cents, and so we're very
Speaker 8: much a value price point and we want to maintain
Speaker 8: that value. And so even in twenty nineteen when we
Speaker 8: took pricing on a third of our portfolio, we were
Speaker 8: not the only ones that took pricing. I mean there
Speaker 8: was pricing across the board. As we know, we went
Speaker 8: through a period of inflation posts that time, and so
Speaker 8: certainly want to take that very seriously and minimize what
Speaker 8: we'd have to do from a pricing standpoint.
Speaker 6: Mandy, how do you think about inflation and the impact
Speaker 6: on consumer confidence. We talked about this when we spoke
Speaker 6: earlier this week that you said, of course tariffs can
Speaker 6: drive inflation and of course, this country has just gone
Speaker 6: through a massive wave of inflation. Like, how do you
Speaker 6: think your consumers would potentially react to that?
Speaker 8: Yeah, So I do think that there is broadly, not
Speaker 8: just in beauty and not just with ELF, but just
Speaker 8: a broader fatigue from inflation. I think you're seeing that
Speaker 8: with many companies talking about value being of utmost importance
Speaker 8: to consumers. And even when you look at the beauty category,
Speaker 8: category overall is down five percent, but ELF, you know,
Speaker 8: we just delivered a forty percent quarter, continue to resonate
Speaker 8: with consumers, and I do believe our value proposition is
Speaker 8: as a key differentiator for us in the market. And
Speaker 8: so I think consumers are fatigued on price increases and
Speaker 8: all those things and are going to be seeking value
Speaker 8: in an inflationary period.
Speaker 5: Yeah.
Speaker 2: I think that for a lot of people who are
Speaker 2: looking at sort of a post mortem of the election,
Speaker 2: they would certainly agree with that. And voters certainly voted
Speaker 2: expressing that. It seems like I'm wondering about other policies
Speaker 2: that within the Newtrump administration that you've got your eye on,
Speaker 2: apart from tariff. So, I mean, what does a second
Speaker 2: Trump administration mean for ealth beauty.
Speaker 8: Well, I think irrespective of who is in office, you know,
Speaker 8: we're really focused on what we can control, and we
Speaker 8: know that our investors, our employees, everyone is focused on
Speaker 8: what we're able to do from a net sales growth standpoint,
Speaker 8: what we're able to do from an EBITDA expansion standpoint,
Speaker 8: and really continuing to build market share in this environment.
Speaker 8: Those are the things that we can control and are
Speaker 8: focused on at this time.
Speaker 4: We only have about thirty seconds left. But how do
Speaker 4: you view the trajectory when it comes to the debate
Speaker 4: around what could happen with corporate taxes?
Speaker 8: Yeah, you know, I would say that, you know, we
Speaker 8: have been more focused on the tariff impact because we
Speaker 8: do know that that is a bigger potential for us
Speaker 8: to have to scenario plan against. From a corporate tax standpoint,
Speaker 8: I think a little bit of a less of an
Speaker 8: issue for us. We're pretty vanilla when it comes from
Speaker 8: a tax a tax basis, and so not have not
Speaker 8: been as focused or see that as much of an
Speaker 8: issue for us as we look out.
Speaker 2: All Right, Mandyfield's the CFO at elf Beauty joining us
Speaker 2: from Oakland, California.
Speaker 5: Also here.
Speaker 2: Bloomberg News Senior Editor Nina Trettman. She writes the Bloomberg
Speaker 2: CFO Briefing newsletter. You can sign up for that at
Speaker 2: Bloomberg dot com slash CFO Briefing.
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Speaker 4: For so much discussion, especially on the back of that
Speaker 4: Federal Reserve decision as widely expected obviously yesterday where the
Speaker 4: Fed did cutreads by a quarter point here, but some
Speaker 4: other bright spots that we might look more broadly in
Speaker 4: the economy. The worst period of stress for underlying credit
Speaker 4: for credit borrow is actually behind investors, and the beginnings
Speaker 4: of a more constructive credit cycle are showing signs of
Speaker 4: becoming clear, according to Kroll bond Ratings agency, who ended
Speaker 4: up analyzing the three most recent years of data for
Speaker 4: fifteen hundred companies. But of course I have to point
Speaker 4: out that there's still a problem even as interest rates
Speaker 4: have fallen in recent months, because many Americans are still
Speaker 4: feeling the strain of higher borrowing costs from everything for
Speaker 4: mortgages to credit card rates. So who better to walk
Speaker 4: us through the dynamics Here Bill Cox, global head of Corporate,
Speaker 4: Financial and Government Ratings at the bond rating firm k
Speaker 4: b r A, joining us from Bucks County, Pennsylvania to
Speaker 4: discuss why rate cuts will help most but not all borrowers.
Speaker 4: You know what, Bill, I was actually looking at the
Speaker 4: latest Freddie McData. When you're looking at fixed mortgage rates,
Speaker 4: whether you're looking at the thirty or the fifteen year,
Speaker 4: I mean the thirty year right now, it's around six
Speaker 4: point eight percent in the latest weeks of data. The
Speaker 4: fifteen years around six percent. I know, we saw it
Speaker 4: come down just marginally in recent months, but now they're
Speaker 4: back higher. Kind of set the scene here on the
Speaker 4: back of the Federal Reserve decision and sort of the
Speaker 4: conundrum here we're seeing more broadly when it comes to
Speaker 4: borrowing costs from mortgages, credit cards, auto loans, and all
Speaker 4: of the things above.
Speaker 5: Yeah, and that's right.
Speaker 9: I mean, the ten year Treasury is obviously the most
Speaker 9: important factor when it comes to mortgage and other consumer
Speaker 9: borrowing costs, and that has moved up a little bit,
Speaker 9: and we've also seen in your forward curve with regard
Speaker 9: to base rates for corporate borrowers, the so for forward
Speaker 9: curve that that's also bumped up a little bit. Where
Speaker 9: a few months ago when we were researching this report,
Speaker 9: we were seeing a terminal rat at around three hundred
Speaker 9: basis points on the base rate, we're seeing that bump
Speaker 9: up to close to three point fifty nowt So certainly
Speaker 9: some shakeout still going on with regard to interest rates,
Speaker 9: but overall, as you said in your summary, just the
Speaker 9: period we're entering right now is more constructive for middle
Speaker 9: market borrowers as the period where they were dealing with
Speaker 9: high inflation, rapidly rising interest costs, and other things like
Speaker 9: slowing economy in some sectors is really coming to an end,
Speaker 9: and we're seeing some financial metrics significantly improve.
Speaker 2: I'm wondering if your assessment changes at all with the
Speaker 2: election of Donald Trump, because some of his policies have
Speaker 2: been criticized as being inflationary tariffs, for example, and also
Speaker 2: the concern about less government revenue as a result of
Speaker 2: tax cuts perhaps on tips, tax cuts on social secure
Speaker 2: or no taxes on social security promises that he made
Speaker 2: on his campaign, which we don't know if he'll be
Speaker 2: able to get through, but you know, certainly economists we're
Speaker 2: sounding the alarm bells about those.
Speaker 9: Yeah, I think that's right, Tim. I think that that
Speaker 9: last part you said is most important. We don't know
Speaker 9: what we'll get through and what of these policies will
Speaker 9: be in the short run versus the longer run. Right now,
Speaker 9: the focus is on how are our interest rates moving?
Speaker 9: And as I said, the base rates look at SOFUR,
Speaker 9: which is what most of the private credit industry is
Speaker 9: borrowing against, that has continued to come down along with
Speaker 9: the FED cuts, and it's expected to continue to come
Speaker 9: down by another hundred and fifty basis points. And then
Speaker 9: in addition to that, what's really interesting in the private
Speaker 9: credit landscape right now is that.
Speaker 5: Spreads are coming in.
Speaker 9: So the re emergence of the BSL market and competition
Speaker 9: amongst lenders has led to spreads coming down from six
Speaker 9: fifty six to seventy five a year and a half
Speaker 9: ago to we're seeing some spreads at four seventy five.
Speaker 9: So certainly a more constructive borrowing environment for middle market credit.
Speaker 4: And I alluded to the latest report that you were
Speaker 4: looking at when it comes to private credit research, Why
Speaker 4: do you think the worst period of stretch for underlying credit,
Speaker 4: especially for borrowers is actually behind us? And what do
Speaker 4: you see things ahead here? You do go into twenty
Speaker 4: twenty five with a lot of question marks about where
Speaker 4: things could be headed on some of the policy decisions
Speaker 4: in Washington.
Speaker 5: Yeah, that's right.
Speaker 9: I mean putting that aside, which is a big thing
Speaker 9: to put aside right now, because we don't know what
Speaker 9: things will be constructive for certain industries versus others. Certainly
Speaker 9: there are some winners already as the markets are suggesting,
Speaker 9: but broadly speaking, based upon the data that we have,
Speaker 9: which is a significant amount of data that's derived from
Speaker 9: the fact that we rate hundreds of transactions that are
Speaker 9: either feeder notes into private credit strategies, or credit facilities
Speaker 9: into private credit, or colos from private credit. What we
Speaker 9: do when we rate those transactions is we gather financial
Speaker 9: information on the underlying borrowers in the portfolios of those
Speaker 9: respective transactions, we sign credit scores, and then we monitor
Speaker 9: the credit performance of those companies over time. We've done
Speaker 9: this about three thousand, five hundred or so times in
Speaker 9: the past two years alone. And as you pointed out
Speaker 9: in the intro, we've looked at close to fifteen hundred
Speaker 9: unique companies so far this year, and that portfolio of
Speaker 9: fifteen hundred is a pretty good reflection of the broader landscape.
Speaker 9: It includes companies in size that revenues are above seven
Speaker 9: hundred million all the way down to companies that are
Speaker 9: sixty million and below those the upper and lower quartile,
Speaker 9: and it's also a pretty diverse group from the perspective
Speaker 9: of industries, which is very similar to what we understand
Speaker 9: the broader landscape of private credit to be. And what
Speaker 9: we're seeing in that portfolio in the research that we
Speaker 9: did just launched this week was first we were trying
Speaker 9: to figure out why we are seeing so many fewer
Speaker 9: defaults than we would have expected, given the rapid rise
Speaker 9: in rates and the other headwinds that especially highly leveraged
Speaker 9: borrowers were facing. And what we discovered was surprising. I
Speaker 9: think you all have reported, and we've all read, and
Speaker 9: we've seen in the portfolio an increase instance of interest
Speaker 9: deferrals and other sorts of restructurings and accommodations that some
Speaker 9: lenders and sponsors have made for some companies under stress.
Speaker 9: But what we found is that the drivers of the
Speaker 9: relatively lower default rates are actually revenue growth, which has
Speaker 9: been really robust, In fact, nineteen percent compounded annually in
Speaker 9: the past three periods, and ebit dog growth in this
Speaker 9: portfolio of thirty three percent annually. That is tremendous growth,
Speaker 9: and it speaks to the resilience of these companies in
Speaker 9: the business models on average. Again, there are exceptions out there,
Speaker 9: and we could talk about them in a second, but
Speaker 9: what we found particularly remarkable is that forty percent of
Speaker 9: the companies actually saw their interest coverage ratios improved despite
Speaker 9: the rapid rise in interest costs.
Speaker 2: We are out of time, but you've got to come
Speaker 2: back and join us to talk about some of those companies.
Speaker 2: Bill Cox, Global head of Corporate, financial and Government Ratings
Speaker 2: at the bond rating firm KBR.
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Speaker 4: Jess Matton, Timstinovik here the Bloomberg Interactive Broker Studio. We
Speaker 4: have a little less than twenty minutes to go ahead
Speaker 4: of the closing. But of course, as we've been mentioning
Speaker 4: the S and P five hundred as well as NASTAC
Speaker 4: one hundred on pace for their best weeks of the year.
Speaker 4: Obviously a busy week when you had the US presidential election,
Speaker 4: obviously business decision that looming thirteen f deadline, of course,
Speaker 4: another flurry of corporate earnings. But to walk us through
Speaker 4: sort of the week that was, who better to have
Speaker 4: with us Jim Worden, CEO at the Wealth Consultant Group
Speaker 4: here in the Bloomberg Interactive Broker's Studio with us. I
Speaker 4: have to get your take after such a big, busy
Speaker 4: week with such a lot of different things on the
Speaker 4: calendar here and now that we're past that, how have
Speaker 4: you been talking to your clients? What are some of
Speaker 4: their top questions, and how are you suggesting to them
Speaker 4: to position into year in now that we're past some
Speaker 4: of these big events.
Speaker 7: Great question. Great to be with you here, by the way,
Speaker 7: this this is fantastic. So, you know, not a whole
Speaker 7: lot has changed for us, like we we kind of
Speaker 7: we're talking about you know, we're we're looking at the
Speaker 7: FED cutting two to four times, you know, getting getting
Speaker 7: closer to the year. You know that was prior to
Speaker 7: the fifty basis point cut. So we're right on track
Speaker 7: that the narrative for us hasn't really changed a whole
Speaker 7: lot in terms of what we're looking at. We still
Speaker 7: think that the consumer is really strong, there's a lot
Speaker 7: of cash on hand, you know, those are those are
Speaker 7: some of the things that we're looking at. And you
Speaker 7: know that we actually earlier this year we thought that
Speaker 7: we could hit six thousand, and so this is like
Speaker 7: a good day of today's the day. But we're actually thinking,
Speaker 7: you know, looking forward, that we could have seven thousand
Speaker 7: for the S and P. Five hundred is what we're saying. Well,
Speaker 7: it's going to be next year, it's not gonna be right.
Speaker 4: Now, it's really a thousand point games.
Speaker 7: Yeah, we think so and like really for us, it's
Speaker 7: it's looking at margins. Lower rates is going to translate
Speaker 7: into better margins. Lower inflation translates into better margins. You
Speaker 7: get what's happening with AI integration, and that's that's going
Speaker 7: to help with margins. Then you get earnings s and
Speaker 7: P five hundred. Unless analysts really downgrade there, we should
Speaker 7: see seventeen percent fifteen to seventeen percent from mid to
Speaker 7: small sized companies, twenty seven percent earnings growth. So those
Speaker 7: are good numbers. Obviously we could, you know, see some
Speaker 7: analyst downgrades there, but those are good numbers. And then
Speaker 7: you see just you know, the six and a half
Speaker 7: trillion dollars of cash, you got one trillion potential in
Speaker 7: buybacks going into next year. And then there's the healthy,
Speaker 7: healthy consumer and cammer markets by the way too, because
Speaker 7: when volatility comes down, a lot of these systematic trading
Speaker 7: strategies start getting back in.
Speaker 2: Okay, that said, you also argue that there should be
Speaker 2: some caution due to what you're seeing in the bond market.
Speaker 7: So we're looking at that and like we think it's
Speaker 7: going to be a little bit range bound until the
Speaker 7: markets really figure out what are we going to do
Speaker 7: with Trump, and you know what, where is this going
Speaker 7: to go with tariffs? Where is it going to go
Speaker 7: with immigration? There is some concerns I would say, for
Speaker 7: sure with the bond market about inflation or reflation, and
Speaker 7: so that that's something we're looking at.
Speaker 5: It Are those fears warranted?
Speaker 7: I think partially they are. But at the same time,
Speaker 7: I'm talking to bond managers, large bond managers that are saying, hey,
Speaker 7: if it gets to this rate, we're going to start
Speaker 7: buy more. So I think there's you you certainly have
Speaker 7: some headwinds, but you also have some tailwinds that would
Speaker 7: make rates go higher or lower.
Speaker 4: So with the yield story, at what point does that
Speaker 4: put a lid on potential gains? More broadly, in the
Speaker 4: US docks. If you just look at the ten year
Speaker 4: where it was trading mid September, round three six, right
Speaker 4: now it's around four to three, had reached above actually
Speaker 4: four to four, So I mean right now it's over
Speaker 4: seventy bases point move in such a short amount of time.
Speaker 4: Obviously there's a lot of factors that went into that.
Speaker 4: But at what point if we see the high of
Speaker 4: this year around four to seven, could that be something
Speaker 4: that could put a little games more broadly for stocks.
Speaker 7: I think, yeah, it's the closer we get to five
Speaker 7: that is not going to be good for stocks, especially
Speaker 7: small cap stocks, and we've kind of been saying that.
Speaker 7: I think what really changed here is that you had
Speaker 7: all this concern about a recession, and you know, are
Speaker 7: we going to have one? And rates came rates came down.
Speaker 7: A lot of the people, a lot of the bond
Speaker 7: managers were saying, it's it's it's a hard landing. We've
Speaker 7: been saying for a while it's likely going to be
Speaker 7: a soft landing, and now I think we're still going
Speaker 7: to see that. But you know, there's some people now
Speaker 7: that may be saying like, oh, well, you know, FED
Speaker 7: fund futures are factoring in too many rate cuts, And honestly,
Speaker 7: I don't I don't have a crystal ball, but I
Speaker 7: would say that it's not out of the woods for
Speaker 7: the Fed to say, hey, look we've cut a little bit,
Speaker 7: let's pause, and then we can cut some more if needed.
Speaker 2: What would you say to folk out there who say, wow,
Speaker 2: stocks look pretty expensive by historical standards right now?
Speaker 7: Yeah, they do, they do.
Speaker 5: So how I win new money to work?
Speaker 7: Well, no, we are. We think there's we think there's
Speaker 7: some good names out there, but like some names are
Speaker 7: are expensive. And this is not a twenty twenty one
Speaker 7: market where everything goes up and that got really really frothy,
Speaker 7: you know. There, we have to be a lot more
Speaker 7: selective here.
Speaker 4: I want to ask you more about that because when
Speaker 4: you're looking more specifically at valuations in the terminal, you
Speaker 4: can look at the blended forecasts for the S and
Speaker 4: P five hundred and Trump first took office during his
Speaker 4: inauguration day in early twenty seventeen. If you looked at
Speaker 4: that forecast for the valuations for the S and P
Speaker 4: five hundred, what's around seventeen right now? It's close to
Speaker 4: about twenty two to twenty three. And obviously the economy
Speaker 4: is very different, inflation's very different than it was at
Speaker 4: that time. How do you position for that and do
Speaker 4: when you have the S and P five hundred up
Speaker 4: over fifty percent over the past two years. If you
Speaker 4: think back to what the markets were doing in twenty
Speaker 4: fifteen early twenty sixteen, which obviously wed Brexit in the
Speaker 4: middle of that year, how do you position on that
Speaker 4: when you had a big rally the last couple of years,
Speaker 4: and during that point, the economy, the stock market was
Speaker 4: in a very different place.
Speaker 7: Sure, there's fantastic questions, and so for us, we still
Speaker 7: like technology. We've paired back because things were getting a
Speaker 7: little bit too stretched, but we see that there's opportunities
Speaker 7: and industrials and financials, real estate, some of these were
Speaker 7: really beaten up in twenty twenty two and part of
Speaker 7: twenty twenty three. Consumer staples is one area that we like,
Speaker 7: and so I think our focus really right now is
Speaker 7: finding quality. It's and it's quality growth. So if we
Speaker 7: find companies that are growing thirty forty fifty percent and
Speaker 7: maybe they have a high valuation, we're okay with that,
Speaker 7: but obviously we want to know, like where's their growth
Speaker 7: going to be the year after next and the year
Speaker 7: after that.
Speaker 5: Where do you want to stay away from?
Speaker 7: Sore. There's more that we like than that we don't like.
Speaker 7: But I would say it's it's the commercial office, real estate,
Speaker 7: small regional banks. We're we're steering clear of those for now.
Speaker 7: And I know, I know some of these have kind
Speaker 7: of gotten a bounce here, but those are areas we
Speaker 7: just don't you know, We're not trying to time some
Speaker 7: of those positions. We we want to we want to
Speaker 7: find the intersection of good quality and if possible, value
Speaker 7: and momentum.
Speaker 2: All right, Jim, appreciate you joining us today. I'm just
Speaker 2: trying to absolutely what the regional banks are doing today.
Speaker 2: Jim Warden, cio at the Wealth Consulting Group, joining us
Speaker 2: here in the Bloomberg Interactive Brokers Studio.
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Speaker 8: Mm hmm