Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside
Speaker 1: my co host Matt Miller.
Speaker 2: Every business day we bring you interviews from CEOs, market pros,
Speaker 2: and Bloomberg experts, along with essential market moving news.
Speaker 1: Find the Bloomberg Markets Podcast on Apple Podcasts or wherever
Speaker 1: you listen to podcasts, and at Bloomberg dot com slash podcast.
Speaker 1: Let's pivot now to another Washington, DC centric story, that
Speaker 1: is the dead ceiling. There's a potentially the fault and
Speaker 1: kind of where are we in the negotiations and what
Speaker 1: does it mean for the greenback here? So we're gonna
Speaker 1: bring Audrey Child Friedman Freeman. She is the chief G
Speaker 1: ten FX strategist with Bloomberg Intelligence, and Dwayne Wright senior
Speaker 1: government analyst with Bloomberg Intelligence. So, Dwayne, you do this
Speaker 1: policy stuff full time for Bloomberg Intelligence here. I think
Speaker 1: the assumption for all of us up here in Wall
Speaker 1: Street is that they'll work it out at the end.
Speaker 1: Is that an okay assumption? Or is there a material
Speaker 1: risk here of a bad outcome?
Speaker 3: Well, it's above zero. I wouldn't say it's above three
Speaker 3: or five percent, but there's always a risk. I think
Speaker 3: the general mood right now is the meeting that Kevin McCarthy,
Speaker 3: the President, and the Ford leaders had was a positive
Speaker 3: first step. You can't have a second step without making
Speaker 3: that first step. And so we've already heard discussions about
Speaker 3: as second meeting, which is tomorrow. But in between the
Speaker 3: last meeting and this coming meeting, we know that staff
Speaker 3: for both sides are now beginning to have those conversations
Speaker 3: what is the universe of policy items that we can
Speaker 3: talk about that will move the ball forward to avoid
Speaker 3: a default. And we kind of knew this was where
Speaker 3: we were going, but we just had to have that
Speaker 3: first step. And so I think we'll see a bit
Speaker 3: more progress over the next couple of days where we'll
Speaker 3: begin to see what the universe of policies that can
Speaker 3: be included in a debt ceiling bill. So I think
Speaker 3: there's still a lot more confidence that this will happen.
Speaker 3: I just I would put aside what we see publicly
Speaker 3: and hear publicly from the leaders and start to think
Speaker 3: more about what's happening behind the scenes, what we're not
Speaker 3: hearing about. And there seems to be a lot of
Speaker 3: positive conversations.
Speaker 1: Hey, Audrey, when we talk about this debt sealing stuff.
Speaker 1: The budget boy, I think right about the currency market here,
Speaker 1: what do we sing in the currency market? What do
Speaker 1: we sing with the US dollar visa the other major
Speaker 1: currencies as we kind of fumble along towards trying to
Speaker 1: fund our government.
Speaker 4: Well, surprisingly, you may think surprisingly not a lot in
Speaker 4: a sense that there's a lot of talk about this
Speaker 4: problem and this issue, but there's no sign of stress
Speaker 4: in a sense that the effects volatility environment remains very low.
Speaker 4: And the dollar happened till very recently, has been trading
Speaker 4: very much in a range.
Speaker 5: So no strong conviction.
Speaker 4: And certainly no sign of stress with regard to the
Speaker 4: that that limit situation. And I think it's just because
Speaker 4: the view is that, uh, it will get solved in
Speaker 4: the end and we will get some kind of a compromise.
Speaker 4: And we've been there many times. And if you try
Speaker 4: every time you try to trade the dollar on the
Speaker 4: back of this topic, you kind of go around circle
Speaker 4: and finish very very much where you started.
Speaker 6: Audrey, to follow up on that, CRETI GROUPDA in New York,
Speaker 6: by the way, just crashed Paulsueni's party here in the
Speaker 6: Interact Broker studio, Audrey, I want to ask you a
Speaker 6: follow on the dollar question, if only for a while
Speaker 6: the dollar trade was dictated mostly by interest rate differentials
Speaker 6: as a function of the ECB and the hawkishency you
Speaker 6: were still seeing on in Europe. Where as the Federal
Speaker 6: Reserve is ending their tiny cycle, or at least expected to.
Speaker 6: Does the bawl case for the dollar change as we
Speaker 6: get closer to a potential debt default? Do people then
Speaker 6: buy the dollar as the only safety around?
Speaker 4: Yeah, I think that's a very valid question because there's
Speaker 4: an element. I mean, we all know if there was
Speaker 4: to be any kind of default. Let's assume there was
Speaker 4: to be a default situation, even though this is not
Speaker 4: our working assumption, of course, but let's assume. So, I mean,
Speaker 4: the long term consequences, it's pretty easy in a sense
Speaker 4: that it would be negative for the dollar. It would
Speaker 4: accelerate the de loyrialization theme that we've been talking about,
Speaker 4: and that's pretty pretty straightforward. In the short term. The
Speaker 4: other point that the other conclusion that straightforward is that
Speaker 4: it would trigger a risk of market move across all
Speaker 4: asset classes, and I think actually that would be supportive
Speaker 4: for the dollar. If you think about what the dollar
Speaker 4: usually do in terms of risk of market move But
Speaker 4: there is a flip side this time around, in the
Speaker 4: sense that you know, against currencies such as the euro,
Speaker 4: the yen, or the Swiss frank low better currency effects currencies,
Speaker 4: you could actually argue that the market sees this as
Speaker 4: you know, it's very much a US specific problem, even
Speaker 4: though the consequences are global. But it's just negative for
Speaker 4: the dollar against those currencies, and therefore, you know, it's debatable,
Speaker 4: there's an element of uncertainty as to what extent it's
Speaker 4: it's negative for the dollar or positive in the very
Speaker 4: near terms. So there's way around this, you know, in
Speaker 4: terms of trading and in terms of use, because if
Speaker 4: you just accept the fact that a default situation would
Speaker 4: trigger a risk of movement, right then you just you
Speaker 4: think about bullish low better effects and erish high better effects.
Speaker 4: And that's that's a thing, a very valid way to
Speaker 4: think about it.
Speaker 6: Dwine hopp on in here in our last thirty seconds
Speaker 6: or so and talk to us about this dollar story,
Speaker 6: because it felt like when the dollar was just rising
Speaker 6: and rising and strengthening and strengthening, there was a lot
Speaker 6: of I want to say a lot, but there was
Speaker 6: some pressure on the White House on the government to say,
Speaker 6: is currency intervention something we need to explore in the
Speaker 6: kind of doomsday scenario of some sort of debt default.
Speaker 6: Is that a conversation you see perhaps returning.
Speaker 3: That remains to be seen. I think at the end
Speaker 3: of the day we will see a deal, and it
Speaker 3: will likely be at the last hour, maybe the last minute.
Speaker 3: But I think at the end of the day we'll
Speaker 3: see some low hanging fruit, potentially in the last couple
Speaker 3: of hours, where it's a short term spending deal or
Speaker 3: very short term raise, and maybe some repealing or taking
Speaker 3: back of some unspent COVID money. That kind of pushes
Speaker 3: off the conversations of these other pieces that the White
Speaker 3: House and some other policymakers want to discuss. But I
Speaker 3: think that these conversations are probably likely going down happen
Speaker 3: after June as we get to our long term deal.
Speaker 7: All right, very good stuff.
Speaker 1: Really appreciate that Dwayne Wright, senior government analysts with Bloomberg Intelligence,
Speaker 1: he's down in our Washington, DC office. And Audrey Child Freeman,
Speaker 1: chief G ten FX strategist with Bloomberg Intelligence, she is
Speaker 1: in our London office. I appreciate getting the update from
Speaker 1: both of them.
Speaker 8: You're listening to the team. Can's are live program Bloomberg
Speaker 8: Markets weekdays at ten am Eastern on Bloomberg dot Com,
Speaker 8: the iHeartRadio app and the Bloomberg Business App, or listen
Speaker 8: on demand wherever you get your podcasts.
Speaker 1: Let's get the latest, you know, I just need to
Speaker 1: get craty. We need to, I think, just to get
Speaker 1: a little bit smarter here with just the bigger picture
Speaker 1: what's going on with these markets, because I've seen over
Speaker 1: the last several months not a lot of direction, maybe
Speaker 1: not a lot of volume. I think the markets is
Speaker 1: trying to figure this stuff out. There's a lot of
Speaker 1: cross currents out there. So let's bring around tailor some
Speaker 1: really smart people that we have at our.
Speaker 7: You know, within our reach, our disposal.
Speaker 1: Gena Martin Adams, chief equity strategists for Bloomberg Intelligence. She's
Speaker 1: in our Bloomberg Interactor broker studio in New York. And
Speaker 1: Cameron Christ he's Bloomberg macro strategist. He joins us on
Speaker 1: the phone. Cameron, let's start with you. There's been if
Speaker 1: I type an eco go and just look over the
Speaker 1: last couple of weeks.
Speaker 7: Man, there's been a lot of data here, and as.
Speaker 1: You synthesize all that, what do you think the market's
Speaker 1: discounting in terms of growth, in terms of inflation, in
Speaker 1: terms of the FED.
Speaker 7: What's kind of the takeaway do you think?
Speaker 9: Well, I think the market's primary conclusion is that the
Speaker 9: FED is done tightening interest rates, and that's generated I
Speaker 9: guess the expected reaction in equity and six income markets.
Speaker 9: Sixth income has been rallying. Interest rates sensitive portions of
Speaker 9: the equity market have been rallying. If you look at
Speaker 9: the short term registrate market, there is this ongoing concern
Speaker 9: about the director of the economy. We are racing rate
Speaker 9: cuts starting sometime early in the second half of the year.
Speaker 9: And it really what it comes down to is the
Speaker 9: soft survey based data, which ostensibly is forward looking, is
Speaker 9: pretty bad frickly on the business side, which kind of
Speaker 9: feeds through or is a natural consequence I think of
Speaker 9: these concerns about a credit crunch, the so called hard data,
Speaker 9: which is more backward looking, has been relatively better. And
Speaker 9: so the big, the big question that everyone's trying to
Speaker 9: figure out is which which will capitulate. Will the hard
Speaker 9: data sort of come down to the to the the
Speaker 9: growth concerns implied by the soft data, or will the
Speaker 9: hard data remain resilient and eventually the soft data sentiment
Speaker 9: type stuff will will will improve.
Speaker 6: Well, Gina, this is where I want to bring you in.
Speaker 6: He's talking about the soft data the hard data, this
Speaker 6: divergence that the FED is at the end of the
Speaker 6: day done with hiking, yet we're still looking at inflation
Speaker 6: at four point nine percent. If the carnage of the
Speaker 6: equity market is kind of in the rare view mirror,
Speaker 6: what are we missing here? The fanstun tightening, earnings recession
Speaker 6: is in the rare view mirror.
Speaker 5: Why are we not seeing more green on the screen?
Speaker 10: Yeah? I think that's a really good point, and I
Speaker 10: think it really comes down to the differences between the
Speaker 10: inflation indicators and the growth indicators. The inflation indicators are
Speaker 10: coming off of a peak, and that's enabling some perception
Speaker 10: of margin stability finally emerging in the index. Remember, we
Speaker 10: got into this mess not because growth was slowing down,
Speaker 10: but because inflation was spiking, and that created the downdraft
Speaker 10: in earnings results over the course of the last year.
Speaker 10: Really through the S and P five hundred anyway into
Speaker 10: a pretty profound earnings recession because growth held up. Nobody
Speaker 10: seemed to notice that earnings recession, but the market absolutely
Speaker 10: noticed the earnings recession, and it was really perpetuated by
Speaker 10: spiking inflation. Now that inflation has started to ease off,
Speaker 10: even though it's still hot, as you correctly note, it
Speaker 10: is still trending in the right direction. That's enabling this
Speaker 10: sort of margin stability to emerge. PPI is rising at
Speaker 10: a slower pace than CPI. Finally that's creating some stability.
Speaker 10: But at the same time, the market is now saying, Okay,
Speaker 10: the inflation monster is starting to look somewhat contained, but
Speaker 10: what does the growth monster look like going forward? And
Speaker 10: how much of that acceleration and growth has actually been
Speaker 10: priced in the market. And I think that's why you
Speaker 10: have this natural constraint on upside that has emerged. Is Yes,
Speaker 10: inflation does appear to be somewhat more contained than we
Speaker 10: were thinking. Yes, we do think the FED has likely
Speaker 10: gone to a pause state. But will we actually see
Speaker 10: gross accelerate now and what will that mean for earnings
Speaker 10: going into twenty twenty four?
Speaker 1: Cameron, you know, I don't know about this inflation story,
Speaker 1: but I just paid sixty dollars for New York strip
Speaker 1: stake in Midtown Manhattan on Tuesday night.
Speaker 7: That's inflation to me. But be that as it may.
Speaker 1: Are you in get camp that thinks is fed, like
Speaker 1: it's tamed inflation or is it the point of taming
Speaker 1: inflation and in fact can start cutting race later in
Speaker 1: the year.
Speaker 9: I think, I mean taming inflation is I mean maybe
Speaker 9: a bit of a bit of a push. I think
Speaker 9: the trend is towards less inflation looking forward than we've
Speaker 9: had in the past. In the CPI report we had
Speaker 9: this week, for example, the so called super core, which
Speaker 9: is core services excluding housing, that road is only point
Speaker 9: one percent on the month. And yeah, you can always say, well, yes,
Speaker 9: if you strip out everything that goes up, then of
Speaker 9: course there's no inflation, and I'm cognizant of that. But
Speaker 9: this is still one of the lowest readings we've had
Speaker 9: over the last eighteen months. And ultimately, what it comes
Speaker 9: down to is if interest rates do bite, and they
Speaker 9: tend to bite in a non linear fashion, i e. Historically,
Speaker 9: the impact of a tightening cycle is very very gradual
Speaker 9: until it becomes not gradual, and then it becomes very
Speaker 9: very substantial, very very quickly, and I think what we've
Speaker 9: seen in the banking sector certainly risks that same thing
Speaker 9: happening again this time around, and if and as that
Speaker 9: does materialize, and I think the arguments in favor of
Speaker 9: interest rate cuts by the end of the year will
Speaker 9: be reasonably persuasive. And certainly, if you look at a
Speaker 9: panoply of economic and market indicators, they are consistent with
Speaker 9: the FED cutting rates within the next six months.
Speaker 6: Okay, Well, if the FED hypothetically doesn't cut rates within
Speaker 6: the six months, which, as Cam pointed out, is something
Speaker 6: that is still expected in the markets, GENA, I'm still
Speaker 6: confused about where the bare case for equities really lies
Speaker 6: at the end of the day.
Speaker 5: To me, what I think is so striking is that.
Speaker 6: If we're talking about a decelerating growth environment from an
Speaker 6: economic perspective, as Cam just laid out, isn't that the
Speaker 6: ideal time to hop into growth stocks.
Speaker 5: Isn't that when they thrive most.
Speaker 10: Yeah, I think you make a really very good point,
Speaker 10: because whether or not the FED is able to reverse
Speaker 10: is reverse rates is a very controversial topic in the
Speaker 10: equity market right now, mostly because we have seen valuation
Speaker 10: expansion in some of those growthy type names, or another
Speaker 10: way to think about it as the longer duration stocks
Speaker 10: that are most sensitive to interest rates specifically in the
Speaker 10: US have outperformed Intriguingly. That's not been the case globally,
Speaker 10: so this is more of a US specific risk than
Speaker 10: it is a global risk. But nonetheless, the stocks that
Speaker 10: are most sensitive to that reversal have led the rally
Speaker 10: so far this year, in many cases, in particular in
Speaker 10: tech and communication stocks, which are you know, have had
Speaker 10: a magnificent year so far this year coming off of
Speaker 10: a really rough year last year. I think whether or
Speaker 10: not the FED reverses is also intermingled with how deep
Speaker 10: the recession is or how how much the slowdown becomes,
Speaker 10: and that is consequential for equity markets because not only
Speaker 10: is it the FED that drives equity markets, but it's
Speaker 10: also earnings trends. So if the FED is unable to
Speaker 10: reverse policy simply because growth is still quite strong, that's
Speaker 10: not necessarily a bad environment for equities. If the earning
Speaker 10: sort of cycle is working in favor of equities later
Speaker 10: this year and into twenty twenty four, and the FED
Speaker 10: is keeping interest rates stable because economic growth is somewhat stable.
Speaker 10: I don't think that's a terrible environment for stocks, but
Speaker 10: you're right, Is it a great environment for stocks? No,
Speaker 10: because stocks are accustomed to these big swings in the cycle,
Speaker 10: and stocks tend to get their greatest momentum surges on
Speaker 10: major disruptions. And so far, the only major disruption we
Speaker 10: had was inflation. We have not had a major disruption
Speaker 10: to growth. Will we get it still seems likely for
Speaker 10: most investors, and that's creating a headwind in and of itself.
Speaker 10: But if we don't get it and growth turns out
Speaker 10: to be better than expected, then we could continue to
Speaker 10: see these relatively modest gains in the equity market continue.
Speaker 1: So it sounds like a little bit more kind of
Speaker 1: more of the same maybe, So we have to see
Speaker 1: Gina Martin Adams, a chief equity strategist with Bloomberg Intelligence
Speaker 1: and Bloomberg Micro Strategies.
Speaker 7: Camera Christ thanks so much for jordanus.
Speaker 1: Appreciate getting the collective wisdom of you two as we
Speaker 1: try to make sense of this market.
Speaker 7: Again.
Speaker 1: The S and P five hundred off five tenths of
Speaker 1: one percent, the dial off a little bit more of
Speaker 1: a solid one percent on the Dow Jones industrials. Just
Speaker 1: looking at the yields here coming in a little bit
Speaker 1: to ten year treasuries off six basis points three point
Speaker 1: three seven on your ten year treasure.
Speaker 7: I'm gonna also call out.
Speaker 1: We've been calling out and focusing on energy for the
Speaker 1: past couple of weeks.
Speaker 7: Seen some big swings there. WTI crude oil.
Speaker 1: Down two point three percent today WTI crude oil just
Speaker 1: under seventy one dollars a hour, So we'll keep an
Speaker 1: eye on that.
Speaker 8: You're listening to the tape Catcher our line program, Bloomberg
Speaker 8: Markets weekdays at ten am Eastern on Bloomberg Radio, the
Speaker 8: tune in app, Bloomberg dot Com, and.
Speaker 11: The Bloomberg Business App.
Speaker 8: You can also listen live on Amazon Alexa from our
Speaker 8: flagship New York station, Just say Alexa play Bloomberg eleven thirty.
Speaker 1: I want to get over to real estate because if
Speaker 1: you walk around Midtown Manhattan, like I want to do
Speaker 1: as I walk back to Penn Station from the East Side,
Speaker 1: a lot of empty office buildings around Midtown. I don't
Speaker 1: know how you fix this. They're talking about people living
Speaker 1: in them. I don't know how it's going to work.
Speaker 1: But Natalie Wong she's a real estate reporter of Bloomberg
Speaker 1: New She's got a very interesting story. Some of these
Speaker 1: empty buildings are starting to attract some buyers, but not
Speaker 1: the institutional buyers that we're used to. Natalie, who's stepping
Speaker 1: in and taking a look at some of this New
Speaker 1: York City empty office space.
Speaker 12: Hi, thanks for having me.
Speaker 13: We're seeing big interest coming in from the smaller companies,
Speaker 13: smaller developers, family offices even and family around firms who
Speaker 13: are really seeing that New York City is going to
Speaker 13: come back in the long term and have some belief
Speaker 13: that there will be use for office space. Even though
Speaker 13: right now, as you mentioned, but all the empty buildings
Speaker 13: record high vacancies.
Speaker 12: It seems like it's a risky bet to make.
Speaker 14: Yeah, what is the evidence Natalie that they are using
Speaker 14: to justify that bet?
Speaker 13: You know, a lot of them are really looking at
Speaker 13: this remote work as something that will bounce back. Companies
Speaker 13: will need to use offices to bring people back to
Speaker 13: the office, and so far, the offices that they're targeting
Speaker 13: aren't necessarily the dilapidated, distressed offices. They're more the middle
Speaker 13: class buildings that you might see well located streets. Madison
Speaker 13: Avenue of Fifth Avenue, and for those who don't know
Speaker 13: New York, you know, those are streets that people come
Speaker 13: to for retail.
Speaker 12: They're well known.
Speaker 13: Office districts, and they just kind of want to be
Speaker 13: able to own a slice of that market that they
Speaker 13: might otherwise never have had the opportunity to because you know,
Speaker 13: in previous years, during times even just two years ago,
Speaker 13: the buyers that were bidding for those sites were the
Speaker 13: big real estate investment trusts.
Speaker 12: They wear the big institutions like.
Speaker 13: The brook Fields, like PIMCO owned companies, and these guys
Speaker 13: would have never had the opportunity to even compete. And
Speaker 13: now you're seeing prices down twenty six percent in Manhattan
Speaker 13: from the peak valleys of twenty seventeen, and no one
Speaker 13: else wants these buildings right now. So you have these
Speaker 13: individuals that are sitting on huge piles of cash that
Speaker 13: are looking for longer term return investments and are seeing
Speaker 13: these assets as potential properties that they could get into
Speaker 13: the market now and figure it out as you know,
Speaker 13: the market ships.
Speaker 1: So, Natalie, one of the challenges I know in the
Speaker 1: commercial real estate real estate space here in New York
Speaker 1: City is that we don't really know what the values are.
Speaker 1: Because we haven't had a lot of transactions. The expectations
Speaker 1: are that the values have come down pretty substantially, but
Speaker 1: we don't know. Are we seeing any activity from some
Speaker 1: of these you know, new buyers.
Speaker 12: Yes, we are. So we looked at the second half
Speaker 12: of last year and saw.
Speaker 13: That of the few transactions there were eleven over fifty
Speaker 13: million dollars. Of the eleven, seven involved smaller companies, smaller developers,
Speaker 13: family run firms.
Speaker 12: Some were backed by institutional.
Speaker 13: Capital, but these deals were really driven by these smaller guys,
Speaker 13: which is a huge difference from just the first half
Speaker 13: of last year and the past two years. Most of
Speaker 13: those deals were dominated by the big reeds, the big institutions,
Speaker 13: and the big New York City developers. And if we
Speaker 13: dive deeper into those seven deals that these folks were
Speaker 13: involved in, quite a few of them involved offices that
Speaker 13: had pretty high vacancies and that were a big discount
Speaker 13: from sales in previous quarters. So, for example, there was
Speaker 13: a consortium of family run businesses that bought thirteen thirty
Speaker 13: sixth Avenue Avenue of the America. They bought this office
Speaker 13: building from RXR and Blackstone, and they bought it for
Speaker 13: roughly three hundred and twenty million dollars last year, and
Speaker 13: that's a discount from what RXR and investors paid for
Speaker 13: more than a Day to Go in twenty ten at
Speaker 13: four hundred million dollars. So you're seeing these icing discounts
Speaker 13: already happen. Another example that I can point out is
Speaker 13: this February, a consumer's products firm, an Chante Accessories, not
Speaker 13: a big consumers products firm, bottom Madison Avenue building that
Speaker 13: a PIMCO owned company purchased back in twenty seventeen at
Speaker 13: the peak of the market.
Speaker 12: They purchased it.
Speaker 13: At an eleven eleven million dollar discount from what the
Speaker 13: Pimco owned company had purchased it for back in twenty seventeen.
Speaker 13: At that point, they had leased it out entirely. Do
Speaker 13: we Work shortly after we saw what happened with we Work.
Speaker 13: The building basically sat vacant for the past two years
Speaker 13: during the pandemic, and this consumer products company just decided
Speaker 13: to come in buy the entire building and they're going
Speaker 13: to lease part of it to themselves. The rest is
Speaker 13: yet to be seen, but you're seeing them really see
Speaker 13: these deals, and I think the biggest question is is
Speaker 13: that enough of a discount to really show how much
Speaker 13: office values we are going to Some institutions think it's
Speaker 13: going to fall a bit further, so they're on the
Speaker 13: sidelines waiting to see when that'll happen before they come in.
Speaker 13: But there's a lot of dry powder waiting for these
Speaker 13: distressed deals, and you have some of these smaller guys
Speaker 13: going like, Okay, you know what, we can make this
Speaker 13: deal work for us right now.
Speaker 12: We don't know when the international money and the institutional.
Speaker 13: Capital is going to come flowing back to the market,
Speaker 13: so we might not have to call the bottom.
Speaker 12: We might think it's just a good idea to step
Speaker 12: in down in.
Speaker 14: Our final minute here, Natalie, what are you anticipating. The
Speaker 14: potential upside is let's say that these guys are right
Speaker 14: and they're gonna, you know when on this Can you
Speaker 14: talk to me about what some of the potential upside
Speaker 14: might look like in terms of dollars here?
Speaker 13: Great, I mean, a lot of these guys really bought
Speaker 13: the building at such a low basis that for them
Speaker 13: they just really have to bet on the fact that
Speaker 13: there will be some kind of tenant that will want
Speaker 13: to come back to the office. And we're already seeing
Speaker 13: that start to happen in certain cases, right. I mean,
Speaker 13: in New York, most of the leases that had happened
Speaker 13: that were widely publicized were the big skyscrapers and huts
Speaker 13: and yards by Grand Central, the big finance and tech firms.
Speaker 13: But you know, three years into the pandemic or post pandemic,
Speaker 13: we're seeing that some firms do want to bring people back.
Speaker 13: It might not be in a full time basis, but
Speaker 13: they still need an office space. So these guys are
Speaker 13: betting that you know, it may not be the most
Speaker 13: expensive rents that they'll command, but they'll be able to
Speaker 13: capture the middle market people that want to be near
Speaker 13: transit stations, people that will still eventually want a space
Speaker 13: for their workers.
Speaker 1: Thirty seconds here, Natalie, where are they getting the money
Speaker 1: from it?
Speaker 7: Are they using any debt capital or is this all
Speaker 7: just equity?
Speaker 13: That's the biggest question, right, because people can't really access debt,
Speaker 13: and banks certainly do not want to expose themselves more
Speaker 13: to offices, let alone older offices that these people are buying.
Speaker 12: And so a lot of these guys are really.
Speaker 13: Getting it from big cash pills that they're getting from
Speaker 13: generational wealth they've built up from their businesses, or they're
Speaker 13: also getting family offices that are investing in them and
Speaker 13: buying it. So some of these guys are able to
Speaker 13: come in and buy all cash in certain instances because
Speaker 13: of how big their private businesses are. They do have
Speaker 13: those deep banking relationships with lenders who are able to
Speaker 13: trust them as a borrower. And then in some cases
Speaker 13: they're even exploring U seller financing.
Speaker 11: Wow.
Speaker 1: Interesting, really fascinating story, because again, you walk around Midtown
Speaker 1: Manhattan and the tourists are back, You've got to ask yourself,
Speaker 1: when are the employees coming back, if at all, and
Speaker 1: to what degree? And what does that mean for the
Speaker 1: real estate and all the local businesses around those office
Speaker 1: buildings that are impacted by the lower or fewer workers
Speaker 1: in Natalie Wong, real estate reporter for Bloomberg News, and folks,
Speaker 1: what you just heard was some really seasoned, well researched
Speaker 1: reporting right there. That's about as good as it gets
Speaker 1: with all the details there. So we appreciate getting a
Speaker 1: few minutes from Natalie talking about this real estate business
Speaker 1: here in New York. Other parts of the country doing
Speaker 1: a lot better, some still, some challenges here, particularly in midtown.
Speaker 8: You're listening to the team cansher Line Pro Bloomberg Markets
Speaker 8: weekdays at ten am Eastern.
Speaker 11: On Bloomberg dot Com, the iHeartRadio app and the.
Speaker 8: Bloomberg Business App, or listen on demand wherever you get
Speaker 8: your podcasts.
Speaker 1: You know, Madison and I were just talking about it,
Speaker 1: like you know, during my thirty years on Wall Street,
Speaker 1: one of the most amazing I think developments it has been
Speaker 1: the development of the private credit business. The private debt
Speaker 1: market has been really just fascinating. People I think have
Speaker 1: a general understanding of private equity, but I think that's
Speaker 1: so clear understanding of the private debt market. So let's
Speaker 1: get an expert on here to kind of give us
Speaker 1: the latest. Anthony Foeble. He's the CEO of Arkmont Asset Management.
Speaker 1: He's got a lot of experience on the on the
Speaker 1: street in the city of London working in this side
Speaker 1: of the business. Anthony, again, it's been such a great
Speaker 1: growth story of the development and evolution of this market.
Speaker 1: Tell me about Arkmont Asset Manager. How do you guys
Speaker 1: play in this space? How do you view the private
Speaker 1: debt market?
Speaker 15: Yeah, well, thank you for having me on and Yes,
Speaker 15: it's been an extraordinary period of growth, particularly actually in Europe,
Speaker 15: because although private dead existed in the US before the
Speaker 15: Global Financial Crisis, it really only came about following the
Speaker 15: financial crisis in Europe because for historical reasons, all lending
Speaker 15: was done by banks, and we know all about the
Speaker 15: problem for banks had after the GFC, and we've seen
Speaker 15: many of those issues starting to repeat again. And essentially,
Speaker 15: what private debt firms did is they attracted institutional capital
Speaker 15: to step into that significant financing gap that was left
Speaker 15: by the banks, and it's been a tremendous growth story
Speaker 15: as banks have retreated from mid market lending in Europe.
Speaker 15: It's something that happened many years ago in the US
Speaker 15: but is really only a tenure phenomenon in Europe. This
Speaker 15: created a significant void, and private debt firms have been
Speaker 15: more than happy as of their investors to fill that void.
Speaker 14: So does that mean, given what you just said about
Speaker 14: the growth being better today than even following eight where
Speaker 14: are you seeing that in Europe specifically? And why do
Speaker 14: you think Europe is a better bet for private debt
Speaker 14: than the US?
Speaker 15: Yeah, so there are I have to say, it's very
Speaker 15: positive in both the US and Europe, but the fundamental
Speaker 15: trends are are the same, although somewhat accentuated in Europe.
Speaker 15: The trends are sort of banks retreating from lending. But
Speaker 15: as we've seen over the last three to four years,
Speaker 15: particularly in Europe, there's been tremendous volatility in the liquid markets,
Speaker 15: taking the leverage, loan and high yield markets, and it's
Speaker 15: remarkable to think that that really the liquid markets in
Speaker 15: Europe have effectively been shut since February twenty twenty two
Speaker 15: for new issues. And what that's meant is leading private
Speaker 15: equity firms with plenty of dry powder are struggling to
Speaker 15: finance those deals in now both the bank market and
Speaker 15: the liquid markets, and that's presented a tremendous oportuy unity,
Speaker 15: particularly I think in Europe, for private debt firms to
Speaker 15: step in. And as the asset class has grown, firms
Speaker 15: such as Arkman have gotten larger and larger. We now
Speaker 15: manage about twenty five billion dollars in assets under management,
Speaker 15: and that's given us the firepower to do not just
Speaker 15: the historic bank substitution deals, but now increasingly liquid market
Speaker 15: substitution deals.
Speaker 10: So yeah, go.
Speaker 1: Ahead, Anthony, I was just going to ask where are
Speaker 1: you seeing deal activity across Europe these days? Given kind
Speaker 1: of boy are the uncertainly we see out there, and
Speaker 1: particularly in Europe where you guys deal on a more
Speaker 1: close basis with the uncertainty in Ukraine.
Speaker 15: Yeah, I mean it's certainly there has been a slow
Speaker 15: down in deal activity, particularly by private equity firms, and
Speaker 15: it's been a global phenomenon. But may no mistake about it,
Speaker 15: there's still tremendous deal activity taking place and the sort
Speaker 15: of levels of M and A activity we're seeing are
Speaker 15: really back to the twenty eighteen nineteen level, so you know,
Speaker 15: still pretty active markets. What's been really interesting for private debt, however,
Speaker 15: is that we are pretty much the only game in
Speaker 15: town to be able to finance those deals. So ironically,
Speaker 15: while you've seen overall deal volumes drop, the deal volumes
Speaker 15: that the likes of Arkmont and other European managers have
Speaker 15: seen has actually skyrocketed. And it really is for us,
Speaker 15: I mean our touch on your your macro point, but
Speaker 15: for us it has been the perfect market because we've
Speaker 15: seen volumes up for the reasons I just said, we've
Speaker 15: seen significant price improvements as a result of really uryball
Speaker 15: rates going from north percent and now over four percent.
Speaker 15: Spreads have widened as well, so we're sort of generating
Speaker 15: twelve percent type yields on senior debt loans, which is
Speaker 15: which is phenomenal. We've also seen lower level multiples and
Speaker 15: because we're doing these liquid market substitution deals, much higher
Speaker 15: quality companies, which leads me on directly to the point
Speaker 15: you raised about the macro picture. You know, we as
Speaker 15: an industry have tended to focus on non cyclical businesses anyway,
Speaker 15: so typically this industry in Europe is very much skewed
Speaker 15: towards it services, very steady, stable businesses, healthcare, education, and
Speaker 15: steered away from some of the more cyclical sectors. And
Speaker 15: of course those are the deals that are still being done.
Speaker 15: And I do have to say that, you know, compared
Speaker 15: to perhaps even four months ago, the economic picture in
Speaker 15: Europe has improved very markedly, right, you know, the key
Speaker 15: three issues around rising inflation, high energy costs, that energy
Speaker 15: prices are now back to where they were before the
Speaker 15: Ukraine crisis, and you're seeing inflation fall as you are
Speaker 15: seeing in Europe. We're seeing supply chains ease up as
Speaker 15: China dropped to zero curbent policy and a lot of
Speaker 15: the type labor markets that we've experienced both in Europe
Speaker 15: and have similarly used. So you know, whereas once people
Speaker 15: were talking about European recessions, no one's talking about that
Speaker 15: at the moment. It's very much European growth, not stellar growth, right,
Speaker 15: you know that's.
Speaker 1: Fine, So, Anthony, from the perspective of raising capital, capital
Speaker 1: being allocated to this asset class, you know, I remember
Speaker 1: when interest rates were so low, you guys offered a
Speaker 1: pretty nice return.
Speaker 7: How how is it now that rates have risen.
Speaker 15: So it's a very good point.
Speaker 8: You know.
Speaker 15: The way we always positioned ourselves is offering a premium
Speaker 15: return to the liquid markets, which, as you correctly say,
Speaker 15: wasn't difficult when, particularly in Europe, the liquid markets were
Speaker 15: generating practically nothing. One of the great attractions of the
Speaker 15: asset class, though, is that all of our loans are
Speaker 15: floating rate loans. So as we've seen interest rates go
Speaker 15: up in response toizing inflation, that translates directly into higher
Speaker 15: returns investors. And as I said, you know, if you
Speaker 15: look at euro ball rates plus the margin we're generating
Speaker 15: plus fees, you know, we're generating twelve percent yields on
Speaker 15: very safe senior debt and that that is a pretty
Speaker 15: unprecedented situation in my experience.
Speaker 7: Yeah, that is.
Speaker 1: I mean, you know that's the top percent will stick
Speaker 1: up when you're looking at the ten year treasury at
Speaker 1: three point three eight percent. Anthony, thank you so much
Speaker 1: for giving us a few minutes of your time. We
Speaker 1: know you're very busy there, Anthony Foble, he's the CEO
Speaker 1: of Arkmont Asset Management. As he mentioned, twenty five billion
Speaker 1: in assets under management, and that is just another example
Speaker 1: of the growth of the private credit business, the private
Speaker 1: debt business really since, as mister fobl said, since really
Speaker 1: the end of the Great Financial Crisis. So glad we
Speaker 1: could get a few minutes of Anthony's time.
Speaker 8: You're listening to the tape can't live program Bloomberg Markets
Speaker 8: weekdays at ten am Eastern on Bloomberg Radio, the tune
Speaker 8: in app, Bloomberg dot Com.
Speaker 11: And the Bloomberg Business App.
Speaker 8: You can also live on Amazon Alexa from our flagship
Speaker 8: New York station, just say Alexa playing Bloomberg eleven thirty.
Speaker 1: We do want to go to Ira Jersey covers all
Speaker 1: the interest rate stuff for Bloomberg in Intelligence so Ira again,
Speaker 1: Eco go I type that into my Bloomberg terminal manager.
Speaker 1: A lot of stuff out there for markets to digest.
Speaker 1: Give me your takeaway of the PPI data that we
Speaker 1: saw today. How important is that for you and all
Speaker 1: your fellow kind of interest rate geeks.
Speaker 16: Well, so, most of the data that we've seen does
Speaker 16: suggest that the inflation continues to slow right in. This
Speaker 16: morning's numbers certainly suggest that that's continuing to be the case.
Speaker 16: And I think PPI being a little bit better, you know,
Speaker 16: is certainly going to be something that you know, policymakers
Speaker 16: are going to take into account. And when you look
Speaker 16: at things like PPI final demand being up only two
Speaker 16: point three percent year on year, now you know that
Speaker 16: doesn't seem so bad. The issue is is how much
Speaker 16: of this is going to wind up coming out of
Speaker 16: prices that we already see in on the shelves, right so, so,
Speaker 16: so the good thing about this PPI number is it
Speaker 16: tends to have a pretty good relationship with UH with
Speaker 16: with with margins, with corporate margins. So if you take
Speaker 16: core CPI and core pp I and you map that
Speaker 16: the margins, it means that that margins actually could not
Speaker 16: go down as quickly as some people are thinking they might.
Speaker 14: So markets are pricing in those rate cuts. IRA. Where
Speaker 14: in the data this week are you seeing evidence that
Speaker 14: the Fed may not be ready to cut rates at
Speaker 14: least until you know, the end of this year.
Speaker 16: Well, I think the CPI numbers yesterday were pretty clear
Speaker 16: on that point. You know, it's funny that the market
Speaker 16: rallied as much as it did on numbers that basically
Speaker 16: came in as expected. I think people were just fearful
Speaker 16: that the numbers were going to come in a little
Speaker 16: bit better. But when you look at yesterday's CPI data,
Speaker 16: one of you know, if you think about what is
Speaker 16: zero point four percent month on month print, is if
Speaker 16: we were to get that for the entire year, that
Speaker 16: would be almost a five percent year on year CPI.
Speaker 16: So if that's the case, and it doesn't seem like
Speaker 16: that's necessarily going to slow down significantly because looking at
Speaker 16: some of the details, then the Federal Reserve is not
Speaker 16: going to be cutting interest rates later this year. And
Speaker 16: what's interesting is, you know, when you look at WRP,
Speaker 16: you look at Fed Fund's futures, you look at SOFA futures,
Speaker 16: those are the new liboard based futures they're called SOFA
Speaker 16: on the secured overnight financing rate. It's saying, yes, the
Speaker 16: Fed's going to cut. But if you look under the
Speaker 16: hood and you look at the options markets and what
Speaker 16: options markets are pricing, they're actually pricing an unchanged FED
Speaker 16: or a FED that's going to cut one hundred and
Speaker 16: fifty basis points by the end of the year, nothing
Speaker 16: in between. So the interesting thing about that is the
Speaker 16: market's either saying, hey, there might be a disaster credit
Speaker 16: crunch of full on financial crisis, or inflation is going
Speaker 16: to remain pretty high and the Fed's not going to
Speaker 16: do any So so we have to keep in mind
Speaker 16: that this doesn't always happen. But right now there's what
Speaker 16: I call bimodal distribution, where it's basically unchanged or deep cuts.
Speaker 16: It's not really two or three cuts this year as
Speaker 16: the market's currently pricing.
Speaker 1: Well, I mean, I felt so proud of myself Ira
Speaker 1: when I learned the WORP function, and I kind of
Speaker 1: understand what it means. Now you're telling me that it's
Speaker 1: not that representative.
Speaker 16: Well, it's representative of the of It's basically the weighted
Speaker 16: average of the potential outcomes. So it's not the base
Speaker 16: case outcome that that's kind of what I'm saying is
Speaker 16: that there's basically two base cases, and one is for
Speaker 16: massive cuts and the other one is for unchanged. So
Speaker 16: the WRP function is, remember, it's going to tell you
Speaker 16: and this is what FED Fund's futures are going to do,
Speaker 16: or a lot of the other short term instruments we
Speaker 16: use to judge what the market's thinking for for monetary policy,
Speaker 16: and that's that's you know, what's the average now normally
Speaker 16: it's it's normally just usually I should say it's normally distributed.
Speaker 16: And you know that that's what happened on the way up,
Speaker 16: like most people thought, oh, they're going to hike you know,
Speaker 16: to four and a half percent to five and a
Speaker 16: half percent with the average being five percent. You know,
Speaker 16: that was kind of where what we were pricing on.
Speaker 11: The way up.
Speaker 16: But now there's a lot less certainty about the path
Speaker 16: of future monetary policy, whether it's you know, when the
Speaker 16: Fed's going to start cutting, how deep they're going to
Speaker 16: cut if they do cut. And I think what the
Speaker 16: market's suggesting and using the options market, and what it's
Speaker 16: suggesting right now is that you know, if the Fed cuts,
Speaker 16: it's going to cut very aggressively because there's a crisis.
Speaker 16: And that's where you know this couple of you know
Speaker 16: they're not going to cut twenty five basis points twice, right,
Speaker 16: They're going to cut fifty basis points several times if
Speaker 16: they start to cut.
Speaker 14: So, Ira, I want to get your take on that
Speaker 14: big debt ceiling debate while we have you here. You
Speaker 14: mentioned the instruments you use to look at FED moves.
Speaker 14: I wonder when you look at the treasury space in particular,
Speaker 14: is the debt ceiling messing up that instrument for you?
Speaker 16: It is? It is a bit yeah. I mean, if
Speaker 16: you think about where what the market's pricing right now,
Speaker 16: and you look at short term treasury bills that mature
Speaker 16: before June, they are one hundred basis points below the
Speaker 16: FED funds rate, like or on now one hundred and
Speaker 16: fifty basis points below the FED fund rate. In some cases,
Speaker 16: that's not typical, and the reason for that is you
Speaker 16: have money market mutual funds that need to own those
Speaker 16: because they don't want to own junior July bills because
Speaker 16: they're worried that junior July bills might have a delayed payment,
Speaker 16: and for money market funds that have to ensure daily liquidity,
Speaker 16: even a one day delay in payment is massively painful
Speaker 16: for them. So you look at the June eighth or
Speaker 16: the June thirteenth T bills trading at five point four
Speaker 16: five point five percent. That's not saying that the Fed's
Speaker 16: going to hike interest rates next week, which is what
Speaker 16: you'd normally think. It's implying it's implying that the market
Speaker 16: is worried that the that the government is not going
Speaker 16: to pay its bills early in June.
Speaker 1: So going to that point, Ira and Maddie, I'm not
Speaker 1: sure if you're aware of this, but this is how
Speaker 1: deep into the weeds Ira and his team are. You
Speaker 1: guys have a mom that kind of predicts they when
Speaker 1: the government runs out of money.
Speaker 7: I don't.
Speaker 1: I don't want to know how this model works. I
Speaker 1: just want to know kind of a do you have
Speaker 1: this model and what is it telling you?
Speaker 16: Yeah, so it's a it's a daily model where we
Speaker 16: estimate what government spending and revenue is going to be,
Speaker 16: and then how much cash at the end of the
Speaker 16: day the government has, and we show that it is
Speaker 16: exactly the June sixth and June A t bills that
Speaker 16: are most at risk of a government default, and the
Speaker 16: government could squeak by, and we're you know, these sound
Speaker 16: like big numbers when you say words like billions, but
Speaker 16: when you have a seven trillion dollar budget, you know,
Speaker 16: a couple of billion dollars is a rounding error. But
Speaker 16: if we get just a couple of billion dollars two
Speaker 16: billion dollars a week for the next three weeks on
Speaker 16: the Friday payrolls data and taxes go up a little bit,
Speaker 16: then suddenly we can make it the June fifteenth. And
Speaker 16: then June fifteenth, there's a one hundred billion dollars in
Speaker 16: corporate taxes that are going to occur, and then there's
Speaker 16: a So there's like this rolling issue with with where
Speaker 16: we are in the depth ceialing debate. So people who say, like,
Speaker 16: you know, they I know Speaker McCarthy said that he
Speaker 16: didn't believe the June sixth state. He should believe the
Speaker 16: June sixth state because it's accurate. But if we make
Speaker 16: it the June fifteenth, then we make it to July thirtieth.
Speaker 16: And I think that's what some members of Congress are
Speaker 16: hoping and that's what some people's models are saying. Yeah,
Speaker 16: my models were pretty good, So I would suggest that
Speaker 16: there is a risk in early June.
Speaker 1: So I what you're telling me is my government, our
Speaker 1: government lives paycheck to paycheck kind of.
Speaker 16: They're living there, your paycheck to paycheck because they need
Speaker 16: you to pay a little bit more in taxes over
Speaker 16: the next couple of weeks in order to make it
Speaker 16: to the June fifteenth corporate tax date.
Speaker 1: That is truly how the sausage is made in terms
Speaker 1: of financing this government. Right there and Iron his team,
Speaker 1: they have a model, a financial model, like a spreadsheet
Speaker 1: kind of thing that kind of does it for them
Speaker 1: on a daily basis.
Speaker 7: And that's how good their work is. Ira Jersey.
Speaker 1: He covers all the rates and stuff and keeps an
Speaker 1: eye on the US you know, checkbook and wallet and
Speaker 1: stuff like that.
Speaker 8: You're listening to the tape cancer Live program Bloomberg Markets
Speaker 8: weekdays at ten am Eastern on Bloomberg Radio, the tune
Speaker 8: in app, Bloomberg dot Com, and.
Speaker 11: The Bloomberg Business App.
Speaker 8: You can also listen live on Amazon Alexa from our
Speaker 8: flagship New York station, Just say Alexa Play Bloomberg eleven thirty.
Speaker 1: Lots of inflation data coming out this week, giving more
Speaker 1: food for thought for our federal Reserve. Let's check in
Speaker 1: with an economist who thinks about this stuff too, Lydia
Speaker 1: bhussor senior economists e Y Parthion joins us here. So Lydia,
Speaker 1: CPI data, PPI data, what's your inflation called? Given kind
Speaker 1: of some of the data we got this.
Speaker 17: Week, Hi, thanks for having me. So the inflation data
Speaker 17: that we got this week confirmed that that the inflation
Speaker 17: process is well underway and is continuing. And it's not
Speaker 17: just about you know, the CPI report we saw this morning.
Speaker 17: Producer price inflation is pointing to some of this inflation happening.
Speaker 17: Import price inflation is also showing some outright deflation, and
Speaker 17: so it does look like all the pieces are falling
Speaker 17: into place for that this inflation process to accelerate in
Speaker 17: the second half of the year. We are also seeing
Speaker 17: a turn in house prices and some loosening in label
Speaker 17: market conditions, with wage growth also beginning to show some moderation.
Speaker 17: So we do expect to see this inflation accederating in
Speaker 17: the second half. We have, you know, headline inflation falling
Speaker 17: back towards three percent by the end of the year.
Speaker 17: A little bit of three percent, we could see a
Speaker 17: two percent handle by the end of the year, and
Speaker 17: core inflation a little bit of both three percent, and
Speaker 17: that you know, still leaves inflation above the FATS two
Speaker 17: percent target. But that's that's likely to be a faster
Speaker 17: this inflation that some than some are anticipating right now.
Speaker 14: Hey, when you look at the core services shelter, health, insurance,
Speaker 14: and airfares that you were just touching on a little bit,
Speaker 14: that moved up a little bit, right, does that concern
Speaker 14: you at all when it comes to the stickiness question
Speaker 14: of this inflation.
Speaker 17: I mean, in terms of the stickiness we are saying
Speaker 17: on the core services side of the economy. We know
Speaker 17: that that is you know, tied to also some of
Speaker 17: the tightness that we are seeing in the label market.
Speaker 17: We got the jobs report last week which showed some
Speaker 17: renewed pressure on the weight growth front and also the
Speaker 17: unemployment rate remaining remaining historically low. But we also know that,
Speaker 17: as I said, you know a number of label market
Speaker 17: indicators are pointing to loosening in label market conditions, and
Speaker 17: you know, jobless claims have been trending higher. We saw
Speaker 17: on a side breakout this morning, and we are also
Speaker 17: seeing slower libor demand in the label market. We are
Speaker 17: seeing less churn and less people quitting their jobs on
Speaker 17: amount basis, and so that should you know, allow for
Speaker 17: some this inflation to happen in the services sector. And
Speaker 17: at the same time, we also know that some of
Speaker 17: that shelter inflation will also turn in the coming months.
Speaker 17: We've seen some moderation, will likely past peak, but for
Speaker 17: that this inflation to fall, you know, with accelerating momentum,
Speaker 17: we're likely to have to wait, you know, a few
Speaker 17: more months, and that will likely be a key factory
Speaker 17: driving services inflation down in the second half of the year.
Speaker 1: LYDIA, once again, it appears that the US government is
Speaker 1: having a little problem with its checkbook, paying its bills,
Speaker 1: that's sealing all that kind of stuff. This is starting
Speaker 1: to come to a head here. How is that factoring
Speaker 1: how's that risk factoring into your economic forecast?
Speaker 7: An outlook?
Speaker 17: Yeah, I mean the stakes are really high, as you know,
Speaker 17: given you know, the fact that we're not seeing a
Speaker 17: lot of willingness to compromise at the moment, and that's
Speaker 17: putting you know, a risk to the economy and financial
Speaker 17: more market and adding a layer of complication on top
Speaker 17: of you know, the stress we have seen in the
Speaker 17: banking sector, and on top of the fact that we
Speaker 17: are already in an economy that is slowing down and downshifting.
Speaker 17: What we're likely to see in the coming weeks is
Speaker 17: essentially the pressure you know, rising in financial markets. With
Speaker 17: rising financial market velatility, we're likely to see a heap
Speaker 17: to confidence as well on business and consumer confidence. Uh
Speaker 17: and and all of that is likely to exacerbate the
Speaker 17: slowdown that we're seeing in the economy right now. So
Speaker 17: certainly adding some downside race to the economy, we are
Speaker 17: expecting to see a recession unfolding by the middle of
Speaker 17: the year. And you know this, this down shift in
Speaker 17: economic activity that's already visible in many sectors of the
Speaker 17: economy could be you know, deeper as a result of
Speaker 17: this situation.
Speaker 14: I wonder then you you talk about the death sealing issue,
Speaker 14: and you mentioned in there the stress and the bank
Speaker 14: game sector. What do you think the outlook in terms
Speaker 14: of the impact is from that stress that were maybe
Speaker 14: underestimating when we when we look at the economic picture.
Speaker 17: I think, you know, in terms of the impact on
Speaker 17: the banking sector. What we've learned over the past few
Speaker 17: weeks is that this is still ongoing. We're still seeing
Speaker 17: some stress in the banking sector, and that we don't
Speaker 17: know for sure how much credit tightening is currently in
Speaker 17: the pipeline, but we know that as a result of
Speaker 17: these turbulances, banks have become a more worry of lending
Speaker 17: and we were already seeing that tightening in credit condition
Speaker 17: in lending standards before this, you know, banking stress emerged.
Speaker 17: So what we're likely to see is that credit tightening
Speaker 17: filtering into the economy in the next six months, in
Speaker 17: the next twelve month, and that's likely to lead consumers
Speaker 17: and businesses to be even more cautious with the with
Speaker 17: their hiring for businesses and spending as well. So it
Speaker 17: will weigh on the economy, and we factored that in
Speaker 17: into our outlook, and we have you know, as I
Speaker 17: as I mentioned, you know, a recession and folding in
Speaker 17: the middle of the year and some of that weakness
Speaker 17: lingering into twenty twenty four.
Speaker 1: So one of the areas Lydia that has held up
Speaker 1: remarkably well, at least to me, it seems like it's this.
Speaker 7: This labor market.
Speaker 1: You know, three point four percent unemployment, I mean the FED,
Speaker 1: you know, I think perversely would like to see that
Speaker 1: number higher. Where do you think unemployment goes? What's your
Speaker 1: view of the labor market here in the United States.
Speaker 17: Yeah, we're definitely getting mixed messages in terms of the
Speaker 17: label market and mixed signals. I think it's very important
Speaker 17: to take a step back and look at the broad
Speaker 17: set of labor market indicators. We got the jobs report
Speaker 17: last week, and if you take it at the headline level,
Speaker 17: you saw pretty solid job creation and also the unemployment
Speaker 17: rate very low, and that renewed pressure on wage growth,
Speaker 17: which points to a similarly tightened and resilient label market.
Speaker 17: But if you dig a little bit deeper in the report,
Speaker 17: there were some signs that the label market is loosening.
Speaker 17: If you look at the diffusion of job creation, the
Speaker 17: breath of job creation, it has declined quite significantly, so
Speaker 17: job growth has become less broad based. If you look
Speaker 17: at layoffs, they've been creeping higher as well, and our
Speaker 17: conversations with businesses as well is pointing to more strategic
Speaker 17: hiring decisions. We're seeing strategic layoffs as well, and labor
Speaker 17: the man has come back down significantly as well. So
Speaker 17: the down shifting in the label market is happening, and
Speaker 17: what we're expecting to see is essentially companies pulling back
Speaker 17: even further on hiring in the coming months. We're expecting
Speaker 17: to see the unemployment rate rising towards four point five
Speaker 17: percent by the end of the year, and we are
Speaker 17: also expecting to see some layoffs happening, likely around you know,
Speaker 17: nine hundred thousand to a million jobs lost this year,
Speaker 17: but it won't be the same kind of environment we
Speaker 17: were in in two thousand and eight. We're not expecting
Speaker 17: to see the same kind of broad based layoffs in
Speaker 17: the label market. Up to a.
Speaker 14: Million jobs lost feels like, I know, it's a drop
Speaker 14: in the bucket when it comes to the population in
Speaker 14: the US, but that feels like a mildly significant number.
Speaker 14: Where can we look to see indications of that starting
Speaker 14: in terms of the layoffs.
Speaker 17: Picture, Yeah, we are already seeing some signs that layoffs
Speaker 17: are creeping up. Jobless claims have been trending up since
Speaker 17: the beginning of the year. We've heard, you know, if
Speaker 17: you look at job cut mentions in earnings calls. There
Speaker 17: was also a rise in these mentions, and if you
Speaker 17: look at other surveys as well, they are showing that
Speaker 17: job cuts are also increasing, So we can you know,
Speaker 17: there are a number of indicators that are already indicating this.
Speaker 17: These are not broad based layoffs, and that's why it's
Speaker 17: not showing up just yet. And and they're not broad based.
Speaker 17: We've seen pockets of weakness appearing, essentially in the labor market.
Speaker 17: And some of these pockets of weakness have appeared in
Speaker 17: those sectors of the economy that had been hiring quite
Speaker 17: significantly during the pandemic. They've been, you know, facing very
Speaker 17: strong consumer demand and they've been they really overdid it
Speaker 17: in some in some of these sectors in terms of hiring,
Speaker 17: and and they have now had to recalibrate their workforce
Speaker 17: with the retail sector is one example in UH. But
Speaker 17: you know, more generally, I think sectors in general and
Speaker 17: businesses in general will have to adjust to the slower
Speaker 17: demain environment and slower economic environment that we will face
Speaker 17: in the next six months.
Speaker 7: All right, Lydia, thank you so much for joining us.
Speaker 7: Really appreciate getting your thoughts. Lydia Bussor.
Speaker 1: She's a senior economist at e Y Parthyon calling for
Speaker 1: you know, a slow downish economy recession later this year,
Speaker 1: perhaps into next year, and that seems to be a
Speaker 1: building consensus. I guess the question really means for a
Speaker 1: lot of folks, is you know, how prolonged would that
Speaker 1: recession be? How deep would that recession be? I guess
Speaker 1: we will certainly find out going forward.
Speaker 8: You're listening to the tape cans our live program, Bloomberg
Speaker 8: Markets weekdays at ten am Eastern on Bloomberg Radio, the
Speaker 8: tune in app, Bloomberg dot Com, and the Bloomberg Business App.
Speaker 8: You can also listen live on Amazon Alexa from our
Speaker 8: flagship New York station, Just say Alexa Play Bloomberg.
Speaker 11: Eleven thirty.
Speaker 1: Todd Lockman joins us. He's a CEO and president of
Speaker 1: Sovos brand. Sobos is a NASDAC listed stock. Soovo is
Speaker 1: the ticker. It's hitting a fifty two week high today,
Speaker 1: so a good time to get out and start chatting
Speaker 1: about the story.
Speaker 7: I guess.
Speaker 1: The stock is up thirty four percent year to date.
Speaker 1: It's got a market cap of just under two billion dollars.
Speaker 1: Stock's up five percent today.
Speaker 7: Todd, thanks so much for joining us here. I know
Speaker 7: you guys.
Speaker 1: Before we get to your earnings, just give us a
Speaker 1: sense of what you guys do at Sovos brands.
Speaker 7: What brands do you own?
Speaker 18: Absolutely? Yeah, thanks Paul, great too great to be on
Speaker 18: the show.
Speaker 19: So the brands that we own are the REOs brand,
Speaker 19: which is pasta soup, frozen entrees, dry pasta, just launching
Speaker 19: into pizza, we can talk about that, Noosa Yogurt, absolutely delicious, thick, velvety,
Speaker 19: one of a kind yogurt and yogurt category. And then
Speaker 19: Michael Angelo's which is premium frozen Italian cuisine and also
Speaker 19: just launched a mid price sauce brand under the Michael Angelo's.
Speaker 18: But we're a high growth food.
Speaker 19: Company founded in twenty seventeen, really pioneering a new approach
Speaker 19: to packaged food that centers on premium, high quality, delicious
Speaker 19: products and brands with authenticity at their core and really
Speaker 19: try to drive As you can see that we're delivering
Speaker 19: growth that's really unique and disproportionate for the category.
Speaker 14: So, Todd, as Paul was mentioning, a pretty great year
Speaker 14: for you, pretty great earnings as well, what is your
Speaker 14: favorite data point from your all our earnings that you'd
Speaker 14: like to call out what are you most proud of?
Speaker 19: Sure, thanks Mata, saying, well, there's a few, and I'm
Speaker 19: not sure. I mean, we had, as you saw, we
Speaker 19: couldn't be more thrilled the Q one results. I mean,
Speaker 19: the first area that i'd highlight is volume. Volume driven
Speaker 19: twenty seven percent of organic growth, so sixteen percent volume,
Speaker 19: eleven percent price.
Speaker 5: How did you do that, Todd?
Speaker 14: I'm sorry to jump on you here, but that to me,
Speaker 14: that's what stuck out to me as well. And it
Speaker 14: seems like volume surging over price in the inflationary environment
Speaker 14: we're in is really a substantial metric here. What was
Speaker 14: your secret sauce to that?
Speaker 5: No pun intended?
Speaker 18: No, well, I think it was probably kind of intended.
Speaker 18: But it's good.
Speaker 19: I do it all the time, but not many and
Speaker 19: as you pointed out, not many we show we have
Speaker 19: a slide in an earning stick. If you look at
Speaker 19: our peers, they're declining in volume averagely four percent. So
Speaker 19: just as you said, it is very unique for the industry,
Speaker 19: and we're doing that really driving the Raio megabrand. We
Speaker 19: part of our philosophy is we acquire under penetrated brands.
Speaker 19: Tay Superior already in the category very unique. I apologize
Speaker 19: for the train here going across the tracks in Berkeley, California,
Speaker 19: but really, when you take these brands that are underpenetrated,
Speaker 19: we're driving significant distribution gain. So REOs, for particular, we
Speaker 19: had the largest quarterly household penetration gain that we have
Speaker 19: in three years on that brand. So the sauce now
Speaker 19: thirteen percent on the heels of twenty two percent distribution increases.
Speaker 19: So even though we acquired this brand in twenty seventeen,
Speaker 19: we're still putting distribution points on the board for the
Speaker 19: sauce business as well as driving significant growth in our dry, pasta,
Speaker 19: soup and frozen categories. Those combined businesses now are on
Speaker 19: one hundred and thirty million dollars. Retail sales make up
Speaker 19: twenty percent of the REOs franchise of forty six percent
Speaker 19: year on year. The REOs brand Ltm now six hundred
Speaker 19: and eighteen million dollars of forty percent year on year.
Speaker 19: So we're driving volume through distribution awareness gains on a
Speaker 19: franchise that you know still has lots of headroom and
Speaker 19: room to grow.
Speaker 7: That's right.
Speaker 1: I wanted to go here because we think about consumer
Speaker 1: products coming is I don't think about the growth rates
Speaker 1: that you guys are putting up.
Speaker 7: I think it's a CPI kind of growth business.
Speaker 1: So how much more headroom or or how much more
Speaker 1: room to grow do you have with your existing brands
Speaker 1: before you need to go out and maybe consider some acquisitions, sure,
Speaker 1: you know.
Speaker 19: Really significant. Let's just take Raos sauce, you know, for example.
Speaker 19: So if you take you know, the REOs brand, and
Speaker 19: we did achieve another statistic to some still riding on
Speaker 19: the heels of your first question, literally, but we achieved
Speaker 19: the number one share in the food channel. We're the
Speaker 19: number two brand overall now in sauce. When we acquired
Speaker 19: the brand, it was number eight and now number two,
Speaker 19: number one in the food channel. But Raos, although we're
Speaker 19: a you know, sixteen to seventeen percent dollar share, we're
Speaker 19: only a seven percent unit share when the market the
Speaker 19: other two market leaders, number one and number three, their
Speaker 19: unit share is sixteen and eighteen. If you look at
Speaker 19: our penetration of sauce, it's thirteen percent. Our peers are
Speaker 19: above thirty percent. The awareness of our brand is fifty
Speaker 19: eight percent. You have five other sauce brands that have
Speaker 19: awareness greater than ninety percent, and we have fourteen average
Speaker 19: items on shelf when you have two other players with
Speaker 19: over twenty. So you can just see just in sauce alone,
Speaker 19: there's an enormous headroom. And that's why we talk continually
Speaker 19: that we're going to get this six hundred million dollar
Speaker 19: net sales business to one billion and beyond. And that's
Speaker 19: just sauce. And we can go over the same statistics
Speaker 19: for our soup business, which is only a two share,
Speaker 19: our dry pasta business which is only a one to
Speaker 19: three share, and our frozen entre business is less than
Speaker 19: a one share. And again, those three businesses combined are
Speaker 19: growing forty six percent year on year.
Speaker 14: Real quick here, Todd, I know the only one we
Speaker 14: haven't really mentioned is Neusa the yogurt product as well.
Speaker 14: I wonder, and you tell me which project product do
Speaker 14: you have the biggest challenge with in terms of profits?
Speaker 14: And what is your thinking on when to kind of
Speaker 14: change things up on the product side given some of
Speaker 14: those challenges.
Speaker 18: Sure, you know, I'd say, honestly, we were driving really
Speaker 18: would you thirty percent? Eve?
Speaker 19: But dog growth in the quarter, you know, as our
Speaker 19: pricing and productivity and you know volume is more than
Speaker 19: offsetting the inflationary pressures that we have. I mean, we
Speaker 19: were public last year that a headwind notably on the
Speaker 19: noose of business was milk pricing and affected up affected
Speaker 19: the category. You know, milk prices are coming back down,
Speaker 19: so we're seeing a nice benefit. So, you know, I
Speaker 19: think the key headline last year would have been, you know,
Speaker 19: the yogurt businesses. We've talked about it. But right now
Speaker 19: there's a nice tailwind from milk and from resin, and
Speaker 19: there's also a tailwind and there's some there's still some
Speaker 19: uh and there are still some headwinds, whether it's tomatoes,
Speaker 19: olive oil, et cetera. But if you take proteins and
Speaker 19: you take milk, and you take resin, those are all
Speaker 19: nice commodity tail winds for us right now.
Speaker 7: Todd, thanks so much for joining us. Really appreciate it.
Speaker 1: Todd Lackman, he's the CEO and president of Sovo Sprands. Again,
Speaker 1: the NASDAC symbol so Ovo and A stock is hitting
Speaker 1: a fifty two weeks high today as we speak. Ipo'd
Speaker 1: a couple of years ago, and I reported some numbers
Speaker 1: yesterday which the street like stocks up on the news
Speaker 1: of the earning Zone talking about the food business. Now
Speaker 1: REOs it's a famous restaurant in New York City once
Speaker 1: and I mean it's impossible to get into, but back
Speaker 1: in the day, I knew a guy who knew a guy,
Speaker 1: so that got me in there and it was great,
Speaker 1: It was good, awesome.
Speaker 2: Thanks for listening to the Bloomberg Markets podcast. You can
Speaker 2: subscribe and listen to interviews at Apple Podcasts or whatever
Speaker 2: podcast platform you prefer.
Speaker 7: I'm Matt Miller.
Speaker 2: I'm on Twitter at Matt Miller nineteen seven twenty three.
Speaker 7: And I'm Paul Sweeney. I'm on Twitter at pt Sweeney.
Speaker 1: Before the podcast, you can always catch us worldwide at
Speaker 1: Bloomberg Radio