Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along
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Speaker 1: with Mary Burrow, I.
Speaker 2: Want to go through some of the numbers for our audience.
Speaker 2: Divid end up thirty three percent, biggest ever buyback plan
Speaker 2: ten billion dollars, forty billion dollar name yesterday. Just some
Speaker 2: context perspective there that is massive inquiring minds. Mary will
Speaker 2: want to know why have you decided to deliver a
Speaker 2: ten billion dollar buy back shortly after you've signed a
Speaker 2: labor contract that adds nine point three billion to expenses
Speaker 2: over its term.
Speaker 3: Well, as we looked at what was happening from a
Speaker 3: labor perspective, we had built and really the labor environment
Speaker 3: going into our negotiations, we had put conservative estimates into
Speaker 3: our plan. So although it was a little higher than
Speaker 3: what we expected, we believe that we have and our
Speaker 3: guidance for next year, we've already said that we'll be
Speaker 3: able to offset that completely with the plan that we
Speaker 3: already had of a two billion dollar cost out perspective.
Speaker 3: So we did the right thing to recognize our manufacturing
Speaker 3: team members who have done a great job and continue
Speaker 3: to build vehicles safely with high quality. And we also
Speaker 3: thought that we've got to look and make sure that
Speaker 3: we're balanced across all of our stakeholders, and our owners
Speaker 3: are very important. So we think this was a very
Speaker 3: balanced response when we look at what was done from
Speaker 3: a labor perspective and what we're doing as part of
Speaker 3: our capital allocation framework for our owners.
Speaker 2: Well, let's get into that. So shareholders are super happy.
Speaker 2: The name is up by almost eleven percent so far
Speaker 2: this morning. I wonder if you aw Wiz Mary, they
Speaker 2: didn't get the forty percent they wanted. They got twenty
Speaker 2: five plus cost of living adjustments and other things as well.
Speaker 2: Is the old things of this morning not something that
Speaker 2: concerns you.
Speaker 3: When I look at it, I think it's balanced. Again,
Speaker 3: we have very well compensated and you know, when you
Speaker 3: look at the suite of benefits that our represented team
Speaker 3: members have it's a very very appropriate package and frankly
Speaker 3: leading from an industry perspective broader than just the auto industry.
Speaker 3: So I think we did the right thing to recognize
Speaker 3: and reward the hard work of our manufacturing team members
Speaker 3: across the board. But also one of the things our
Speaker 3: manufacturing team members very much value is job security. And
Speaker 3: to have job security, you have to have a strong
Speaker 3: company and you have to look at all of your stakeholders.
Speaker 3: So what we did from a share buyback perspective for
Speaker 3: our owners is I think a very balanced response.
Speaker 2: As you know, this move this morning not just about
Speaker 2: the capital return program, also about cost cuts. We know
Speaker 2: you're looking to fully offset that labor contract the additional
Speaker 2: costs from it. Have you identified where you will cut
Speaker 2: where you need to cut?
Speaker 3: Yes, a lot of this was already underway. At the
Speaker 3: beginning of this year calendar year twenty twenty three, we
Speaker 3: announced it too, billion dollar cost reduction structural cost reduction
Speaker 3: between twenty three and the end of twenty four.
Speaker 4: That's well underway.
Speaker 3: As I said, we also comprehended that we would have
Speaker 3: increases in our labor cost as we looked at what
Speaker 3: the environment was and also wanting to reward our manufacturing employees.
Speaker 3: So you know there's work going across many aspects of
Speaker 3: the business and including making our products more efficient while
Speaker 3: still having the features, the functionality and beautiful designs that
Speaker 3: our customers want. So there's been a concentrated effort at
Speaker 3: the company to lower our fixed costs while enabling wonderful
Speaker 3: products and rewarding the team that is helping us deliver them.
Speaker 2: Clearly, these are additional costs. Are they forcing a change
Speaker 2: in execution or a change in strategy?
Speaker 3: Definitely not a change in strategy. Our strategy is clear.
Speaker 3: It's really based on four pillars of executing our strong
Speaker 3: internal combustion engine program vehicles, and we see we're performing
Speaker 3: very well in the market and we see that we're
Speaker 3: below the average incentives. I think that speaks to the
Speaker 3: strength of our internal combustion engine products. From an EVY perspective,
Speaker 3: we have confidence in the portfolio we have. We're a
Speaker 3: bit disappointed this year that we were constrained by the
Speaker 3: automation to build modules. So this is not something that
Speaker 3: is fundamentally an issue with Altium. It was more manufacturing
Speaker 3: automation issue that we're working and we'll be out of
Speaker 3: it by middle of next year and making improvement every
Speaker 3: quarter from that perspective.
Speaker 4: Also software and this year.
Speaker 3: Earlier this year, Mike Abbott joined our team who brings
Speaker 3: tremendous software expertise and he's built a very strong team
Speaker 3: that we'll share more about when we get to our
Speaker 3: investor day in March of next year. And then autonomy
Speaker 3: and when you look at autonomous vehicles and the importance
Speaker 3: of this technology and the talent that we have at Cruise.
Speaker 3: We are doing an independent review from an incident perspective
Speaker 3: but also overall from a safety perspective, and that will
Speaker 3: guide our path forward there. But we have a very
Speaker 3: capable team there. So the four pillars of our strategy
Speaker 3: have not changed at all. What has changed is our tactics,
Speaker 3: and our tactics are changing because of the world is changing.
Speaker 3: We never thought that the EV adoption would necessarily be
Speaker 3: a straight line. We've seen this in other markets, we're
Speaker 3: seeing it now in the US. But I think the
Speaker 3: thing that everybody has to remember, if the growth is slowing,
Speaker 3: it is still growing. And we think as we get
Speaker 3: more of the EV products we have this year into next,
Speaker 3: we think we're going to see is strong adoption for
Speaker 3: our products, and as the charging infrastructure continues to be
Speaker 3: more robust, we think that's going to drive adoption as
Speaker 3: well as having affordable evs. And that's where when you
Speaker 3: look at the Chevrolet Equinox as well as the Blazer
Speaker 3: and the Bolt that's coming, we're going to be having
Speaker 3: products in that range of affordable vehicles.
Speaker 4: That is going to be very important from EV adoption.
Speaker 2: Two things to unpack there. One is robot taxis. The
Speaker 2: other is EV. So let's deal with robot taxis. First,
Speaker 2: your counting expenses on crews substantially, just how committed are
Speaker 2: you there? I remember only a number of years ago
Speaker 2: we were talking about bringing in fifty billion in revenue
Speaker 2: by twenty thirty, and I get it. Married We'll understand
Speaker 2: that new tech is tough to develop, its to deploy.
Speaker 2: I think we're seeing that across a range of issues.
Speaker 2: But when do you know if it's the right time
Speaker 2: just to walk away from this well, I.
Speaker 3: Think the first of all, when you look at the
Speaker 3: progress that the Cruise team has made over the eight
Speaker 3: last eight years when General Motors acquired crews, I think
Speaker 3: it's substantial and we've already demonstrated that the cruise vehicle
Speaker 3: can perform at a level that's safer than a human driver.
Speaker 3: Let's not forget over forty thousand people on average lose
Speaker 3: their lives in traffic accidents in the US alone, and
Speaker 3: ninety percent of them are caused by human error. What
Speaker 3: we have learned with this incident is it's got to
Speaker 3: be significantly better than a human driver to drive adoption,
Speaker 3: and we have to do a much better job of
Speaker 3: working with the regulators. That's something that GM has a
Speaker 3: long reputation of working and being transparent with regulators at
Speaker 3: the local, state, and federal level. So I think as
Speaker 3: we do that and get the results of the independent
Speaker 3: review we're doing, that will guide us on our path forward.
Speaker 4: From an AV perspective.
Speaker 2: I'm always interested in how we know when we're wrong
Speaker 2: an exit size I think everyone has to go through,
Speaker 2: including myself married. But on this topic of EV's the
Speaker 2: slow down, what's behind it and why aren't we just
Speaker 2: learning that American consumers just don't want these cars?
Speaker 3: Well, I don't think it's that American consumers just don't
Speaker 3: want these cars. I think there still is limited availability
Speaker 3: when you look at the choice that customers had today,
Speaker 3: from an internal combustion vehicle perspective, I think a lot
Speaker 3: of the evs that are out.
Speaker 4: Right now are more expensive.
Speaker 3: You've got to look at where the sweet spot of
Speaker 3: the market is, and when you really want to win
Speaker 3: an EV's you've got to make sure that you are
Speaker 3: meeting the customer who only owns one vehicle. That's the
Speaker 3: bulk of people who buy vehicles today, new vehicles. They
Speaker 3: only own one vehicle or if they have two in
Speaker 3: their family. They're needed every day to earning their livelihoods.
Speaker 3: So we've got to get affordable. There's got to be
Speaker 3: a robust charging infrastructure. So again, the growth hasn't gone
Speaker 3: in reverse. It's slowing. I think we never expected. We
Speaker 3: thought it would be have some bumps along the way.
Speaker 3: I think that's what we're.
Speaker 4: Seeing right now.
Speaker 3: But I think when we have evs that are affordable,
Speaker 3: when people realize how much fun they are to drive
Speaker 3: and the performance and they're not giving anything up, and
Speaker 3: then that all important charging infrastructure, I think you know
Speaker 3: we're going to see them start to grow at a
Speaker 3: more rapid break again. And that's something that we'll continue
Speaker 3: to watch. And that's why we've changed some of our
Speaker 3: tactics to be responsive to where the customer is.
Speaker 2: You've been super generous with your time. Marriage. Just want
Speaker 2: to fit in one further question. Right now, you're a
Speaker 2: forty three billion dollar name. It's a big move this
Speaker 2: morning by ten percent. The forward multiple we're talking about
Speaker 2: four times expected earnings a little more than that after
Speaker 2: today's move. The stock has been dead money for the
Speaker 2: best part of a decade. You've been doing this a
Speaker 2: long time. I know you're super close with investors. What
Speaker 2: is it that you think is in this plan, this
Speaker 2: strategy that you have and a strategy that you've suggested
Speaker 2: this morning hasn't changed that's going to turn this around.
Speaker 3: Well, I think demonstrating our commitment to all of our
Speaker 3: stakeholders and the I think when you look at a
Speaker 3: ten billion dollar accelerated buyback program, it should signal because
Speaker 3: it means we have confidence in the cash generation ability
Speaker 3: of this company. We have confidence in our strategy across
Speaker 3: the four pillars that I covered. Yes, we had some
Speaker 3: challenges that this year with our ultim based evs that
Speaker 3: I think gabe investors some concern, But we're demonstrating the
Speaker 3: confidence that we and the board have that we're executing
Speaker 3: the strategy, and we're going to see growth, strong cash
Speaker 3: flow and strong margins.
Speaker 4: That's what we're going to deliver.
Speaker 2: That's captured in today's move nine percent. Mary, appreciate your
Speaker 2: time ready tell you thanks for catching up with us,
Speaker 2: Mary Parda of GM too.
Speaker 1: Wiseman joins us right now. Global Efects interest rate strategist
Speaker 1: much more than that at Macquarie, with lots and lots
Speaker 1: of experience on this. I love the first sentence of
Speaker 1: your note. Don't believe the hype You've been skeptical. Are
Speaker 1: you combining and dovetailing in with your low rate call
Speaker 1: a true slowdown in the economy?
Speaker 5: Yes? Absolutely. I think the narrative these days from Wall
Speaker 5: Street that I've seen in the last few weeks is
Speaker 5: that the reason the ten year field has been coming
Speaker 5: down is because we're in a disinflationary phase here in
Speaker 5: the economy, and there's going to be more disinflation to
Speaker 5: come in the US. I agree with that we are
Speaker 5: going to see disinflation in the US. It's going to
Speaker 5: come in rants, it's going to come in those eras
Speaker 5: of the CPI that are linked to consumer discretionary spending.
Speaker 5: But let's Also keep in mind one of the reasons
Speaker 5: we're going to see this disinflation is because the consumer
Speaker 5: is slowing. And there you have the don't believe the
Speaker 5: hype story, right, I don't believe the story is about
Speaker 5: record breaking Black Thursdays, by Friday sales and Cyber Monday sales.
Speaker 5: I think what I think these sales were on the
Speaker 5: back of heavy discounting. If you look at what some
Speaker 5: of these corporate execs had said prior to the start
Speaker 5: of the holiday spending season, they talked about having to
Speaker 5: cut prices. We'll all Marty even talked about deflation. So
Speaker 5: this is this is about disinflation. But let's keep in
Speaker 5: mind where this this inflation is going to come from.
Speaker 5: It's going to come from a weakening and pricing power
Speaker 5: at the consumer product and services level. It's going to
Speaker 5: be driven by slow down in agurate demand in the US.
Speaker 2: Also about how they're pank for this stuff Binapailita. You
Speaker 2: look at some of the numbers just booming. What do
Speaker 2: you take away from that?
Speaker 5: So my takeaway is from a macroeconomic perspective, what it
Speaker 5: does is it shifts spending to the early part of
Speaker 5: the season because normally you would have to save up
Speaker 5: a few more shekels as you approach your deadline on
Speaker 5: December twenty fifth to get those purchases done with by now,
Speaker 5: pay later. You don't need to do that, so it
Speaker 5: allows you to spend earlier, especially if you don't have
Speaker 5: access to revolving credit or credit cards. So I think
Speaker 5: that's another reason why we might have seen the so
Speaker 5: called record breaking days on last Friday and Monday. But again,
Speaker 5: if that's if it's the case that spending was only
Speaker 5: pulled forward, it doesn't mean that in aggregate for the
Speaker 5: whole of the season we're going to get that much
Speaker 5: that much hype.
Speaker 6: So far, people have viewed weaker US data as a positive.
Speaker 6: It's both been for a bond rally and a stock rally,
Speaker 6: And you're saying that we could see that bond rally
Speaker 6: continue quite significantly going forward. Will there be a diversion
Speaker 6: so in terms of risk asseesis or have to be
Speaker 6: to fuel a bond rally that goes much deeper than
Speaker 6: where we are now.
Speaker 5: Absolutely, to let the bond rally extend to say where
Speaker 5: the ten yure yield gets the three percent, I do
Speaker 5: think it has to be associated with a sell off
Speaker 5: at risk assets. I don't think you know, to get
Speaker 5: that kind of forceful move early in the bond market,
Speaker 5: you need to have some sort of dislocation in risk ASTs,
Speaker 5: some sort of drop in stocks, but over time, not necessarily.
Speaker 5: I think we can see a situation where, if this
Speaker 5: inflation continues slowly, you get the bond deal going down
Speaker 5: to where it was, let's say in the spring. Three
Speaker 5: and a half percent is not inconceivable without a stock
Speaker 5: market drop as long as it happens slowly and steadily.
Speaker 1: But well, corporations adapt. If I go back to bear Stearns,
Speaker 1: where you're held court, you had an entire security analysis
Speaker 1: team looking at these slowdowns, I don't buy the gloom.
Speaker 1: And the corporations, like General Motors, will adapt.
Speaker 5: I'm not sure what they're going to adapt to. Technological
Speaker 5: progress and changes. They can adapt to. Government policies that
Speaker 5: spur more investment in electric vehicles and clean energy technologies
Speaker 5: they can adapt to. But what do you do when
Speaker 5: you have excess inventory as the auto dealers do?
Speaker 7: Now?
Speaker 5: What do you do when the banks and the finance
Speaker 5: companies are cutting off credit to auto buyers?
Speaker 8: What do you do?
Speaker 5: Then you're not in control of that situation. You're in
Speaker 5: control of what's happening on your factory floor, You're in
Speaker 5: control of promotions, and maybe the way you adapt is
Speaker 5: by cutting prices. Let's face it, that's a way of
Speaker 5: adapting to to hold on to market share in the
Speaker 5: face of excess inventories, in the face of consumers slowing
Speaker 5: their demand. So yeah, they can adapt, but it's not
Speaker 5: necessarily in a way that is going to make their
Speaker 5: stock prices shoot up.
Speaker 2: You've identified a series of places in this economy where
Speaker 2: we could see lower prices retail, Walmart, talked about the
Speaker 2: auto makers, We're talking about GM, maybe lower prices, going
Speaker 2: to see that come through the pipeline soon. What's the
Speaker 2: biggest threat that still lingers for you? The biggest threat
Speaker 2: to that view that this disinflation continue through next year.
Speaker 5: It's supply shocks. I think the lesson of twenty twenty
Speaker 5: twenty two and early twenty twenty three was that we
Speaker 5: cannot control what happens in the rest of the world,
Speaker 5: especially as it pertains to the supply of oil, the
Speaker 5: supply of natural gas. So from my perspective, if we
Speaker 5: get another shock in that market, and by the way,
Speaker 5: it doesn't have to be because of a war, although
Speaker 5: in the past two years that has been the case.
Speaker 5: It could be simply that OPEC plus decides to curtail
Speaker 5: supply and we get a brand going back up to
Speaker 5: the low nineties as a result of that. Again, it's
Speaker 5: a question of how much they curtail supply by, but
Speaker 5: that's the biggest risk right now. The good news is
Speaker 5: that gasoline prices in the US have been falling for
Speaker 5: six weeks straight, I think, and steadily. I think that's
Speaker 5: going to show up in the CPI by the time
Speaker 5: we rolled around to seeing the November numbers and the
Speaker 5: December numbers. But the real reason that the CPI is
Speaker 5: going to still see disinflation is because rents rents in
Speaker 5: the new tenant market and the new lease market are
Speaker 5: coming down. That's going to put a lot of pressu
Speaker 5: ultimately on the yellows as measures of rents of primary residences.
Speaker 5: We're going to get that disinflation over the next few months.
Speaker 2: This is exactly what nil Data of Renaisance Macro is
Speaker 2: talking about tom the disinflation that's in the pipeline for
Speaker 2: rents for used cars, which is why based on what
Speaker 2: Walla said yesterday, it's not that much of an if
Speaker 2: for the likes of Terry, for the likes of Nil Duta,
Speaker 2: which is why they think you're going to get this
Speaker 2: conversation early next year about which you said interest rates.
Speaker 1: Yeah, there's no question there's a school of thought out
Speaker 1: there that this is not if. It's just simply when
Speaker 1: in the path to it. But I would dovetail it
Speaker 1: back to the labor economy, which we've barely touched on today,
Speaker 1: and we've got claims coming up here Thursday. And then
Speaker 1: you mentioned the late jobs report for November. I believe
Speaker 1: it's December eighth. But the basic idea here, John is
Speaker 1: when does a labor economy finally go? If you get
Speaker 1: a labor economy to go, you get there instantly.
Speaker 2: Claims two O nine, keep going back to two nine
Speaker 2: claims to eighty one economy in so many different ways
Speaker 2: over the last eighteen months or so. Terry, it's going
Speaker 2: to see it, Terry wi there at Macquarie.
Speaker 1: Longer going far away. There was KKR nineteen seventy six
Speaker 1: with history made in a style and a method. At
Speaker 1: KKR it was original. Shanale Basset gets an update from
Speaker 1: their co CEO Shanale, Good morning, Thank you, Tom.
Speaker 9: I'm standing by with the co CEO of KKR, Scott
Speaker 9: not All, and it is a really big day for
Speaker 9: KKR because they are doing this. They're buying the rest
Speaker 9: of Global Atlantic, a big insurance company that they don't
Speaker 9: already own. That is an all cash, two point seven
Speaker 9: billion dollar deal. But you're also creating a new unit
Speaker 9: at KKR that houses a core private equity business. If
Speaker 9: you had to give the market one way to understand
Speaker 9: what you're trying to do over there, what is it?
Speaker 10: First of all, Shanali, great to be with you, Thanks
Speaker 10: for having me. Really, what we're trying to do today
Speaker 10: is lay out the big three growth engines we have
Speaker 10: as a firm. So you're right, we are buying the
Speaker 10: minority stake in Global Atlantic we don't already own. We
Speaker 10: already owned sixty three percent of the companies, so we're
Speaker 10: buying the other thirty seven percent. Global Atlantic has been
Speaker 10: a great partnership for us. This is a transaction we
Speaker 10: did in twenty twenty one. The company is more than
Speaker 10: doubled since we announced the original deal in July of
Speaker 10: twenty twenty and it's been highly recurring a lot of
Speaker 10: growth earnings for KKR, so that's part one. We are
Speaker 10: also modifying our compensation ratios so our asset management business
Speaker 10: continues to scale.
Speaker 8: Our run rate management fees have doubled over the last
Speaker 8: three years.
Speaker 10: So the second thing we're doing is reducing the compensation
Speaker 10: ratioon fees, making an offsetting increase on kerry, and that
Speaker 10: will allow us to create more fee related earnings for
Speaker 10: our shareholder.
Speaker 9: You're changing the way you pay people.
Speaker 10: In effect, not the aggregate amount of compensation, but we're
Speaker 10: providing more of the fee related earnings to our shareholders,
Speaker 10: a little bit more carry to our people.
Speaker 8: The net of that is about.
Speaker 10: Neutral, but it will mean more of few related earnings overall.
Speaker 10: And then the third thing we're doing to your point,
Speaker 10: and this is relatively new for us, is we're creating
Speaker 10: a new segment for the firm.
Speaker 8: So we've historically reported.
Speaker 10: As asset management and insurance. We are adding a new
Speaker 10: segment called Strategic Holdings. And what we will include in
Speaker 10: there are the dividends that we're receiving and will begin
Speaker 10: to receive in greater magnitude from our core private equity portfolio,
Speaker 10: which is a portfolio of great diversified recession resistant companies
Speaker 10: that we've been building up over the last several years.
Speaker 9: KKR, Apollo, Brookfield, they're all buying insurance companies. All of
Speaker 9: you are diversifying in pretty meaningful ways if you think
Speaker 9: about it. It's made private equity, by the dollars, by
Speaker 9: the assets under management, a smaller part of all of
Speaker 9: your businesses. What does this mean for the future of
Speaker 9: private equity?
Speaker 10: Private equity is still a growth business for us. We
Speaker 10: expect to continue to grow that part of KKR for
Speaker 10: a long time, both with respect to the flagship strategies,
Speaker 10: but also we've created a number of different growth strategies.
Speaker 10: The core private equity business is part of private equity
Speaker 10: that's now a thirty billion dollar franchise for us.
Speaker 8: So this isn't about an ore. This is about an
Speaker 8: and we see an ability to grow PE and.
Speaker 10: All the other parts of KKR, and we've diversified meaningfully
Speaker 10: over the course of the last ten to fifteen years.
Speaker 8: We're just continuing our way down that path.
Speaker 9: Now, what does Global Atlantic exactly do. It seems like
Speaker 9: what it's really doing is giving you a whole balance
Speaker 9: sheet to be using to compete on you've mentioned capital
Speaker 9: markets is one place there's been a lot of competition
Speaker 9: from your industry to the banks. How does this help
Speaker 9: you now compete in a bigger way?
Speaker 10: Sure, Global Atlantic, as you know, it's largely issued annuities
Speaker 10: to individuals, and so if you think about what we
Speaker 10: do at KKRE, we work for pensioners, retirement retirees all
Speaker 10: around the world now family offices and individual investors as well.
Speaker 10: Global Atlantic distributes its products to that same kind of
Speaker 10: an audience. So historically we've worked for tens of millions
Speaker 10: of retirees. We still do, but now they're just in
Speaker 10: the form of policyholders. And that's our mission at KKR
Speaker 10: is to actually do a great job for all those
Speaker 10: people that we work for.
Speaker 8: We're not confused about who our bosses are.
Speaker 10: And so to the second part of your question on
Speaker 10: capital markets, what Global Atlantic allows us to do is
Speaker 10: create more synergy.
Speaker 8: We didn't necessarily see all this three.
Speaker 10: Years ago when we started our way down this path,
Speaker 10: but we think there's even more we can do to
Speaker 10: unlock value between the two companies, and capital markets is
Speaker 10: just one of those examples.
Speaker 9: Capital markets means you might be appearing on more and
Speaker 9: more deals lending a balance sheet to provide capital for
Speaker 9: big buyouts and other leverage loan deals.
Speaker 8: That's right, and we're already in that business.
Speaker 10: So the way that we built our capital markets business
Speaker 10: is by partnering with a Street, So we'll be alongside
Speaker 10: of the traditional banks and investment banks as we built
Speaker 10: that business. But what Global Atlantic brings us is an
Speaker 10: ability to expand the vision for that franchise. So there's
Speaker 10: more to do across asset based finance. As an example, more,
Speaker 10: when Global Atlantic does their large institutional block transactions, we
Speaker 10: can put some of the Global Atlantic balance sheet.
Speaker 8: GA has its own.
Speaker 10: Sidecard third party capital funds called IVY, so some can
Speaker 10: go into those third party funds, and then we can
Speaker 10: syndicate the excess through our capital markets forranchise as well.
Speaker 10: Just like we do private equity and infrastructure transactions, it
Speaker 10: applies to insurance deals as well.
Speaker 9: Something interesting about these deals is that you already have
Speaker 9: told investors this morning that this will add twenty percent
Speaker 9: to total operating earnings. You're boosting your targets into twenty
Speaker 9: twenty six for few related earnings.
Speaker 4: What are the real financial impacts?
Speaker 9: What can stockholders feel for KKR over the next two
Speaker 9: three years, well, I.
Speaker 10: Think what they'll be able to see is we are
Speaker 10: going to grow all three of our recurring forms of
Speaker 10: earnings in a much more meaningful way going forward, So
Speaker 10: a few related earnings will be higher. We continue to
Speaker 10: see a lot of organic growth in our businesses. Just
Speaker 10: by changing our compensation ratios, you get accretion on few
Speaker 10: related earnings, and we think by virtue of what we're
Speaker 10: renouncing today, we can do even more. With the Global
Speaker 10: Atlantic where we invest that portfolio, it's already gone from
Speaker 10: seventy two billion of AUM when we announced the transaction
Speaker 10: to one hundred and fifty eight billion over the last
Speaker 10: few years.
Speaker 8: We think we can do even more together. But they'll
Speaker 8: also see.
Speaker 10: More insurance operating earnings, which we believe are highly recurring
Speaker 10: and fast growing. And then we'll have this third element,
Speaker 10: which will be the core private equity dividends showing up
Speaker 10: in the strategic holding segment. If you put those three
Speaker 10: things together, we think that'll be seventy percent or more
Speaker 10: of our overall pre tax income is those three forms
Speaker 10: of recurring earnings, and we're going to introduce them a
Speaker 10: new metric around that called operating earnings and we'll talk
Speaker 10: about that later today with our shareholders.
Speaker 4: Scott, we do have to leave it there.
Speaker 9: Thank you for joining us on a big day over
Speaker 9: at KKR. Tom shout on the.
Speaker 1: Basic Thank you so much with a gentleman from KKR
Speaker 1: in the future of what they do, joining us now, Lawyer.
Speaker 1: I'm chief US economist at FS Investments. On an eight
Speaker 1: point nine percent nominal GDP America, Laurie, what's so great
Speaker 1: about your economics is you've got it from the litmus
Speaker 1: paper of the FX market. How alone is the United
Speaker 1: States with an eight point nine percent nominal GDP. When
Speaker 1: Rishie Sonak is telling Francy Qua he's worried about.
Speaker 11: Austerity, I think we are still the growth continued to
Speaker 11: just surprise to the upside, and to me, it's remarkable
Speaker 11: the inconsistency between talking about rake cuts to you know,
Speaker 11: this idea that we're going to need rake cuts in
Speaker 11: the near term to support the economy, or the short
Speaker 11: term idea that we've seen the labor market slow. And
Speaker 11: really we do feel like we're an economy and the
Speaker 11: data would show that we're an economy firing on all cylinders. Government,
Speaker 11: business bending, consumption the only keys that's not really adding
Speaker 11: to it as residential construction. I would say that we
Speaker 11: are the standalone leader on growth.
Speaker 1: And what's so important here, Lisa, A nominal GDP topline,
Speaker 1: that's real GDP posts inflation is there's an assumption here
Speaker 1: by the Bill Ackmans of the world economists and not
Speaker 1: that it's going to plunge down to what six percent,
Speaker 1: five percent? Even that's a boom economy.
Speaker 6: And when you say it, they're talking the inflation component.
Speaker 6: And Laura, that's what I want you to weigh in on.
Speaker 6: How much does it matter if we see a slow
Speaker 6: down do we need to slow down if we continue
Speaker 6: to see the pace of disinflation that we've seen so
Speaker 6: far this year.
Speaker 11: I think there's two pieces to that argument. To me,
Speaker 11: the real and one place from probably off consensus is
Speaker 11: I am really reticent to think that we are going
Speaker 11: to get this magical slow down in inflation back to
Speaker 11: that two percent lane that we have had. On the
Speaker 11: good side, we have a lot of indications that just
Speaker 11: from some slower demand and from some of these resolutions
Speaker 11: and inventory that we're going to see lower goods prices.
Speaker 11: But I think we are really ignoring the big elephant
Speaker 11: in the room, which is services. We still have a
Speaker 11: hot labor market by my measure, we still have wage
Speaker 11: pressure that is way higher than prior to the pandemic,
Speaker 11: and the resting heart rate of inflation is still well
Speaker 11: above two percent. And on the services side really is
Speaker 11: the problem here.
Speaker 4: So I think we need to.
Speaker 11: Be careful about being very complacent about inflation coming down,
Speaker 11: and that really feeds into this non recessionary rate decline
Speaker 11: Goldilocks complacency that has taken hold of equity markets at
Speaker 11: this moment.
Speaker 6: In some ways, the Fed's wall are really kind of
Speaker 6: fed into that yesterday, which is a reason why maybe
Speaker 6: he gave Steams some of these market movements. He said,
Speaker 6: there is just no reason to say you would keep
Speaker 6: rates really high and inflation is back at target, how
Speaker 6: high is the threshold then to cut rates. If we
Speaker 6: do see the disinflation in the pipeline significant, it might
Speaker 6: not be long lasting because of some of these other issues,
Speaker 6: but we do see year over year comps come in
Speaker 6: with autoprice disinflation or outright deflation with rents coming in,
Speaker 6: with the fact that goods, as Walmart said, just prices
Speaker 6: are actually going down outright.
Speaker 11: I think the FED is good at looking around the
Speaker 11: corner on especially this rent issue.
Speaker 4: There's no doubt that rent.
Speaker 11: Is a very lagging indicator, but it's sticky for a reason.
Speaker 11: And all of the short term indicators that you know,
Speaker 11: six months ago were really pointing to rents coming down
Speaker 11: fast have now reversed. And I think something that's very
Speaker 11: important to me is the fact that rents are far
Speaker 11: below the cost that it is to buy a home
Speaker 11: per square foot. You are costing you a lot less
Speaker 11: to rent, and landlords are rational. They're going to see this,
Speaker 11: and they are going to over the next several quarters,
Speaker 11: you know, push rents higher again. So it's something that
Speaker 11: you just can't ignore in the core, even if you
Speaker 11: get the headline hitting two percent. I get nervous when
Speaker 11: the FED tries to micro manage the inflation process.
Speaker 1: Laura, and this with your overarching philosophy of summing all
Speaker 1: this together, are we beyond the pandemic? It sure doesn't
Speaker 1: feel like it to me. It feels like the stimulus
Speaker 1: is still pop and popping, popping. But from where you sit,
Speaker 1: are we beyond COVID Not?
Speaker 11: In the data, Tom, I think we're seeing this trampoline
Speaker 11: effect and the Q three GDP numbers are great example
Speaker 11: of that, and we had a big inventory, you know,
Speaker 11: push higher. We could very well get that. Still detracting
Speaker 11: from the fourth quarter, you're still getting some of these
Speaker 11: big swings in factors that are disguising what's going on
Speaker 11: underneath with demand which is still really red hot. So
Speaker 11: this is a big to me, you know, piece that
Speaker 11: we're looking at. For twenty twenty four, we start to
Speaker 11: see some move away from reliance on savings towards income.
Speaker 11: I think the irony is it could be a period
Speaker 11: of lower growth next year, but actually better sentiment about
Speaker 11: household economics as you see income finally catch up to
Speaker 11: the prior year and a half of inflation.
Speaker 1: Okay, I'm gonna pinion down it. Give me some twenty
Speaker 1: twenty four lower outlook numbers, real GDP.
Speaker 8: What do you think?
Speaker 11: Real GDP one point four and I think the tenure
Speaker 11: stays pretty high. I'm putting it at four percent for
Speaker 11: twenty twenty four.
Speaker 1: I mean, these are Lisa, these are huge slow down numbers.
Speaker 1: And then the question comes over immediately, what does non
Speaker 1: farm payrolls do? David Kelly, a JP Morgan would say
Speaker 1: goes negative.
Speaker 6: Well and This is really the ultimate question, Laura, do
Speaker 6: we get that kind of slow growth but high yield
Speaker 6: along with a full, fully employed America, along with job
Speaker 6: creation that continue to chugle all.
Speaker 11: I think that we look at the recessions that we've
Speaker 11: had in the two thousands, twy tens, even the nineteen nineties,
Speaker 11: we saw very little. If you look at nineteen ninety
Speaker 11: two thousand recessions, we saw very little drop and output,
Speaker 11: but a massive decline in labor in this I think
Speaker 11: upcoming year we're going to see a slower economy, but
Speaker 11: I think that companies continue to view labor as a
Speaker 11: scarce resource. I think the true Goldilocks is not going
Speaker 11: to be defined by output. It's going to be defined
Speaker 11: by the labor market, and we are going to see
Speaker 11: the I think the unemployment rates stay quite low.
Speaker 12: Lar.
Speaker 1: Thank you. We FS investment slower rhyme this morning there
Speaker 1: were a one point four percent called slower economy year.
Speaker 1: Howard Marks, chairman of oak Tree Capital Management, and I
Speaker 1: must point out author of not one, two, but three
Speaker 1: important books on investing of What to Do and just
Speaker 1: as importantly Howard What Not to Do. Howard on Charlie
Speaker 1: Munger getting the odds on your side. How did Charlie
Speaker 1: Munger get the odds on his side?
Speaker 12: He started off with a brilliant mind and a brilliant partner.
Speaker 12: He intensively studied the financials, thinking about the long term.
Speaker 12: He never tried to guess what a company or a
Speaker 12: stock would do in the short term. And he held
Speaker 12: for many years. You know, he was a great practitioner.
Speaker 12: Sit on your hands, and he did it flawlessly in.
Speaker 1: The modern day, in the modern media, I remember reading
Speaker 1: those annual reports. How are years ago there was no
Speaker 1: financial media, there was no blogging internet. The short termism
Speaker 1: we're living it now. What is the lesson of Charlie
Speaker 1: Munger's long termism?
Speaker 12: Well, if you want to hit the long ball, you
Speaker 12: have to be very patient, and you know, when the
Speaker 12: stock moves up the first twenty percent, you can't start
Speaker 12: taking profits. Charlie and Warren have held things for decades.
Speaker 12: And the other thing is they were and Charlie always
Speaker 12: talked about this, you have very few moonshots. Charlie said
Speaker 12: within the last year that most of his wealth came
Speaker 12: from four decisions. And so you know what would have
Speaker 12: happened if he would have started trimming those four decisions
Speaker 12: early he certainly would not have accomplished what he did,
Speaker 12: and I think Warren would the same thing. Maybe the
Speaker 12: number four would be a little different with Warren, but
Speaker 12: you know, you know, Warren's famous for having said, put
Speaker 12: all your eggs in one basket. And I watched the
Speaker 12: basket really closely, and I think that it wasn't one basket.
Speaker 12: But the idea of concentration and patience coupled with good
Speaker 12: decisions makes for a great success. You know, a concentration
Speaker 12: and patience don't accomplish anything if you can't make above
Speaker 12: average investment decisions.
Speaker 7: But putting it all together is the formula for success.
Speaker 6: Howard, you wrote in some of your thoughts about Charlie
Speaker 6: Mungerth that he had very definite opinions, in particular regarding
Speaker 6: the investment management industry. He viewed the industry with considerable skepticism,
Speaker 6: and while a member of it, I found myself in
Speaker 6: agreement with him more often than not. What exactly are
Speaker 6: you talking about in particular?
Speaker 12: You know, I think both Charlie and Warren felt that
Speaker 12: our industry, relatively few members of it made substantial contributions
Speaker 12: to their clients wealth. Many more members that were well paid.
Speaker 12: He was always one who questions incentives. He says, you
Speaker 12: give me incentive, an incentive, I'll tell you the behavior.
Speaker 12: And and I think that, you know, I think that
Speaker 12: Warren and Charlie, if you're their operation, they, in fact
Speaker 12: Warren's ed and quotes, not a partnership, not a corporation
Speaker 12: of partnership. And they considered there there the people they
Speaker 12: manage money for.
Speaker 7: Their shareholders to be their partners.
Speaker 12: And they considered themselves to be working for their partners
Speaker 12: and not themselves, and their own wealth and success was
Speaker 12: a byproduct of working of doing great work for the partners.
Speaker 12: So you know, I like to put my sameself in
Speaker 12: the same boat. Those sentiments appeal to me greatly, and
Speaker 12: I've tried to follow that.
Speaker 6: How difficult has it been to sort of to adapt
Speaker 6: the strategy to different eras When you had conversations with
Speaker 6: Charlie Munger, there are questions around tech and how that
Speaker 6: changed the investment thesis. How did they think about the
Speaker 6: changing concept of what a wonderful company looked like and
Speaker 6: what fair value was.
Speaker 7: You know, you, on the one hand, you have to
Speaker 7: evolve with the times.
Speaker 12: On the other hand, you know they never went a
Speaker 12: full bore into the tech sector. You know, their famous
Speaker 12: are having made a lot of money with Apple, but
Speaker 12: you know, most tech the way they said it, they
Speaker 12: put it on the too hard pile. And if you
Speaker 12: have if you understand that your success will come from
Speaker 12: a small number of holdings, that means you don't need twenty.
Speaker 7: Thirty thirtyfty sixty. You don't need to exploit all the sceptors.
Speaker 7: You just have to find a few great ones.
Speaker 12: Of course, on the other hand, you know Tom said
Speaker 12: that we're you know, we're in a new era with
Speaker 12: all the communications we have. Part of what that means
Speaker 12: is that the world is a more interconnected, intelligent place.
Speaker 12: You know, back fifty years ago we used to be
Speaker 12: able to exploit things nobody else knew. Today there's very
Speaker 12: little information that doesn't make its waste speedily around the world.
Speaker 1: Howard to help us with one final question here to
Speaker 1: the management the future management of Berkshire Hathaway. They have
Speaker 1: a from COVID buildup of cash a four hundred and
Speaker 1: twelve billion out to half a trillion dollars five hundred
Speaker 1: and twenty five trillion. You and everybody else out there
Speaker 1: is living with explosive money market fund growth. You know
Speaker 1: the story in that forward here for Berkshire, Hathaway, what's
Speaker 1: the best use of there in our mounds of cash?
Speaker 12: You know, the people who run Berkshire today and will
Speaker 12: run it tomorrow understand the limitations of size. All things
Speaker 12: being equal, size makes it harder to outperform. They have
Speaker 12: the best probability of outperforming of any company their size,
Speaker 12: but their size will matter. And you know one of
Speaker 12: my professors at University of Chicago. I asked him afterwards,
Speaker 12: how would you manage a big fund? He'd say, I
Speaker 12: would index the cord and manage the hell out of
Speaker 12: the periphery. And I would imagine that at their size,
Speaker 12: they'll have to move in the direction of something like that,
Speaker 12: although they will not give up on outperformance.
Speaker 1: Howard Marx, thank you with oak Tree Capital Management. In
Speaker 1: remembrance of Charlie.
Speaker 6: I'm so pleased that we get to speak with Tipenstein,
Speaker 6: co founder and co chair of Carlisle Group, host of
Speaker 6: Peer to Peer Conversations on Bloomberg Television, because David is
Speaker 6: somebody who talks with all the executives across Wall Street,
Speaker 6: Main Street and beyond to understand how they're dealing with
Speaker 6: some of these transformative technologies of the moment, and David,
Speaker 6: I want to start there kind of where the similarities
Speaker 6: are in how some of these executives are thinking about
Speaker 6: the developments and artificial intelligence in a generative AI.
Speaker 13: Well, everybody wants to be an expert on AI and
Speaker 13: figure out how it's going to affect their company positively
Speaker 13: or negatively, but honestly, nobody really knows for sure yet
Speaker 13: how it will work. We're really inning one of artificial
Speaker 13: intelligence in terms of how major companies are going to
Speaker 13: use it or have it used against them. So everybody's
Speaker 13: trying to hire artificial experts or get people into their
Speaker 13: firm who can help them assess whether artificial intelligence is
Speaker 13: going to be useful to them or helpful to them,
Speaker 13: And nobody really knows yet, So I can't say anybody
Speaker 13: is certain how it's going to impact their business yet.
Speaker 1: David, mister Zevino stealed Marsh mcclennan and others, and then
Speaker 1: Nannie goes to AIG where different than other executives, he
Speaker 1: has to deal with disaster. What did you learn about
Speaker 1: how he handles the unexpected?
Speaker 13: Well, insurance is about dealing with the unexpected, really, and
Speaker 13: so AIG became the largest insurance company in the world
Speaker 13: for many, many years, and as a result of that,
Speaker 13: it had enormous tentacles throughout the entire financial complex. It
Speaker 13: clearly extended itself too much, didn't anticipate problems that arose,
Speaker 13: particularly in the mortgage area, and as a result had
Speaker 13: to be bailed out by the US government to tune
Speaker 13: of about one hundred and eighty billion dollars. Now that
Speaker 13: money's been paid back with interest. But AIG is no
Speaker 13: longer the biggest insurance company in the world, and it
Speaker 13: doesn't have quite the tentacles around the world that it
Speaker 13: once did, but still a very profitable company.
Speaker 1: David and Newsmaker yesterday. This is what Rubinstein does. He's
Speaker 1: steering the thunder from journalist David Rubinstein with Bill Ackman
Speaker 1: yesterday and the track that this nation will take. What
Speaker 1: did you learn from mister Rackman, David Rwinstein.
Speaker 13: Well, Bill is a very impressive person who obviously is outspoken,
Speaker 13: has been outspoken on many issues over many years. Recently
Speaker 13: has become quite visible in what he's been saying about Harvard.
Speaker 13: But he said in the interview which will air not
Speaker 13: too long from now that he's made a new bet.
Speaker 13: He's made a number of macro bets that have turned
Speaker 13: out to be extremely positive. One of them, he made
Speaker 13: it over one hundred times his money on a bet
Speaker 13: that he made a number of years ago in the
Speaker 13: time of COVID. Now he's made a bet that interest
Speaker 13: rates will be cut sooner by the Fed than is
Speaker 13: otherwise expected. And if that bet is successful, I guess
Speaker 13: he'll make a fair amount of money. But that's the
Speaker 13: big issue that many people are grappling with. Will the
Speaker 13: Fed decide and it needs to lower interest rates before
Speaker 13: the political season starts, let's say, in the summer or
Speaker 13: the fall of next year.
Speaker 1: Dave, excuse me, go ahead, Lisa, please my fault.
Speaker 6: David, is it surprising to you that a big hedge
Speaker 6: fund is focused on making big bets on treasuries right now?
Speaker 13: Well, many hedge funds people are doing that. Honestly, he
Speaker 13: has not done the so called treasury trade that others
Speaker 13: have done, where he's buying treasuries and shorting treasury futures.
Speaker 13: He hasn't done that. This is basically a bet that
Speaker 13: the Fed will succumb to some pressure to lower interest
Speaker 13: rates before too long. Now, the conventional wisdom in Wall
Speaker 13: Street is that the Fed will lower interest rates at
Speaker 13: some point during their first or second quarter, more likely
Speaker 13: the second quarter. I think his bet is it'll probably
Speaker 13: do it sooner than the conventional wisdom. And I have
Speaker 13: said publicly before, and I still think it's the case
Speaker 13: that the Fed will get in trouble if it lowers
Speaker 13: interest rates around the political season, because the Republicans will say, well,
Speaker 13: you're helping Joe Biden by lowering interest rates if you
Speaker 13: do so over the summer or in the early fall.
Speaker 13: So the Fed is going to lower interest rates, probably
Speaker 13: to avoid political criticism. It don't have to do it
Speaker 13: sooner than later.
Speaker 1: David, you mentioned mister Ackman in Harvard in the Horror
Speaker 1: of the Eastern Mediterrane. I want to go to your
Speaker 1: Duke University where they have a bridge. Folks. There's an
Speaker 1: old bridge called the Free Expression Bridge. And to make
Speaker 1: a long story short, they had to paint over a
Speaker 1: pro Palestinian tone as well. David, I want you to
Speaker 1: talk to the great and good right now about how
Speaker 1: those of means and success should deal with their shock
Speaker 1: at our American universities.
Speaker 13: Well, the American university system is still the envy of
Speaker 13: the world, and our private universities are really the places
Speaker 13: that people from all over the world want to attend.
Speaker 13: There's been a shock that many people didn't realize how
Speaker 13: strong the anti Israel feeling has been in some campuses,
Speaker 13: and the result of that has been outraged by some alums.
Speaker 13: Some universities have handled this better than other universities. I
Speaker 13: am the chairman of the board of the University of Chicago,
Speaker 13: and we have a tradition of not issuing statements on
Speaker 13: political matters or outside matters, and we have an issue
Speaker 13: one in this case. But in many cases other universities
Speaker 13: have not had that policy, and they've got in trouble
Speaker 13: for issuing statements that don't please one side or the other.
Speaker 13: It's a difficult way to walk his fine line, and
Speaker 13: I don't know that anybody has figured it out properly
Speaker 13: or correctly.
Speaker 1: David All glorious day for Bloomberg Surveillance with Doug cass
Speaker 1: and Howard Marks with us and membrance of Charlie Munger.
Speaker 1: Give us your thoughts on the hugely successful experiment that
Speaker 1: was Berkshire Hathaway.
Speaker 13: For those who don't know. Charlie Munger was from Warren
Speaker 13: Buffett's hometown of Omaha. He moved to Los Angeles and
Speaker 13: later reconnected with Warren Buffett, who hadn't really known before,
Speaker 13: but he had worked for Warren Buffet's grandfather at one
Speaker 13: point in a store. Charlie Munger was had outspoken, very
Speaker 13: very smart, a lawyer who transitioned from being a lawyer
Speaker 13: to being an investor, and his track record early on
Speaker 13: was actually better than Warren Buffett's in some respects. They
Speaker 13: teamed up became an incredible team of people who were
Speaker 13: mostly known to the public through their annual meetings where
Speaker 13: Warren Buffett and Charlie Munger would answer questions for six
Speaker 13: hours on end. And Charlie Munger was quite well known
Speaker 13: for his I would say, dismissive ideas of some other
Speaker 13: people's thoughts about investing. He was a very fundamentalist kind
Speaker 13: of investor and he transformed Warren Buffett. Warren Buffett was
Speaker 13: taught to buy things very cheap, and buy things cheap
Speaker 13: you can always make money. It was Charlie Munger's view
Speaker 13: that you should buy good companies. Maybe you pay a
Speaker 13: reasonable price for it, but buying good companies is better
Speaker 13: than buying cheap companies which may not be that good.
Speaker 13: And Warren Buffett gives a lot of credit credit to
Speaker 13: Charlie Munger for having transformed his views on the investment world.
Speaker 1: David, thank you for joining us today with us remember,
Speaker 1: and so Charlie Munger and of course with your excellence.
Speaker 1: Look for a conversation with Peter Zefino. Peer to peer
Speaker 1: conversations hugely anticipated in the next ten days. A conversation
Speaker 1: with Bill Eckman that move I would suggest move Markets.
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