Speaker 1: This is Bloomberg Wall Street Week.
Speaker 2: And we may not have an overall recession, we're having
Speaker 2: a rolling recession. Econe roll looks pretty strongly. It is
Speaker 2: when it comes to jobs.
Speaker 1: The financial stories that shape our world.
Speaker 2: Three major regional bank failures send shockwaves through the banking system.
Speaker 2: We're all trying to figure out what to make of
Speaker 2: generative AI.
Speaker 1: Through the eyes of the most influential voices.
Speaker 2: Welcome down, Doctor Paul Krugman, Ryan moynihan, a Bank of America,
Speaker 2: deebro Lair of the Paulson Institute, Len Hubbard of the
Speaker 2: Columbia Business School.
Speaker 1: Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
Speaker 2: A whole lot of stress in Moscow, in the banking sector,
Speaker 2: at what's left of credit series, and even in a
Speaker 2: surprisingly resilient economy. This is Bloomberg Wall Street Week. I'm
Speaker 2: David Weston. This week Michael jay A Blackstone on where
Speaker 2: the economy is headed and what it means for his business.
Speaker 3: Our business model is really made for times like this.
Speaker 2: Former fdi C chair Shila Behar on what we learned
Speaker 2: from the FED stress tests.
Speaker 4: I don't think we should take a lot of comfortable
Speaker 4: that there's a lot of work that needs to be done.
Speaker 2: And Darren Walker of the Ford Foundation on what the
Speaker 2: Supreme Court ruling out a firm reaction means for us.
Speaker 5: All the playing field tilts towards those who are already advantage.
Speaker 3: Stress.
Speaker 2: Measuring it and dealing with it was the order of
Speaker 2: the day this week in Global Wall Street. It all
Speaker 2: started in Moscow with a letter of Prutin backing down
Speaker 2: in the face of a mutiny. Raghi Drusian, Dear friends,
Speaker 2: today I address once again for all Russian citizens. I
Speaker 2: thank you for your endurance, solidarity and patriotism. At UBS
Speaker 2: in Switzerland, it wasn't so much an attempted mutiny as
Speaker 2: it was cleaning house. With reports that more than half
Speaker 2: of the Credit SUITEZ team it inherited will be shown
Speaker 2: the door.
Speaker 3: UBS is preparing to cut more than half of the
Speaker 3: credit Swee workforce that i ITT bought back.
Speaker 2: In the United States, the Supreme Court raised the stress
Speaker 2: level for colleges and universities, trying to make sure they
Speaker 2: have diverse student bodies.
Speaker 6: This essentially ends affirmative action as we know it.
Speaker 2: US Bank's got a report card this week on their
Speaker 2: ability to withstand stress in the aftermath of the Silicon
Speaker 2: Valley bank failure.
Speaker 6: All in all, all the banks had passed pretty clean
Speaker 6: read but for.
Speaker 2: Those waiting for FED rate cuts, the stress level if
Speaker 2: anything went up as housing numbers came in surprisingly strong,
Speaker 2: and Chair Pale over at Central Portugal wouldn't rule out
Speaker 2: consecutive rate hikes yet to come.
Speaker 3: But I wouldn't take moving at consecutive meetings off the table.
Speaker 2: At all, while his counterpart at the ECB, Christine Legard,
Speaker 2: said she's not even considering a rage pause at this point.
Speaker 4: If our baseline stands, then we also know that we
Speaker 4: will very likely hike again.
Speaker 2: But for all the stress this week, the markets pretty
Speaker 2: much took it in stride. The S and P five
Speaker 2: hundred was up another two point three five percent end
Speaker 2: of the week at forty four to fifty, and that
Speaker 2: is way above the medium call of our Bloomberg elves
Speaker 2: who are saying by the end of the year she
Speaker 2: hit forty one hundred. The NASAC wasn't too far behind,
Speaker 2: of about two point two percent of the week, while
Speaker 2: the yield on the ten year was up nine basis points,
Speaker 2: finishing the week at three point eight three to take
Speaker 2: us through what was driving the markets this week. We
Speaker 2: welcome net back Rebecca Patterson, who earlier served as chief
Speaker 2: market strategist at Bridgeway. Rebecca, always great to have you here.
Speaker 2: Thank you for being here. So as you look at
Speaker 2: all that happened, a lot happened this week. Actually, yeah,
Speaker 2: what do you think was driving the markets? Because for
Speaker 2: the stock market sure liked whatever they saw.
Speaker 6: Well, I think there's still a sense out there that
Speaker 6: there's a reasonable probability of a soft landing that the
Speaker 6: FED maybe have to hike one or two more times max,
Speaker 6: but that's largely discounted now, and that the everything is
Speaker 6: going to line up perfectly, a moderation and growth but
Speaker 6: not too much, and a quick moderation and inflation that
Speaker 6: it would allow the FED to ease significantly next year.
Speaker 6: I think that hope, and you get some data that
Speaker 6: supports it, some that doesn't, is what's really leading the
Speaker 6: stocks higher. Largely. Obviously there's structural issues with AI and
Speaker 6: how that could help tech stocks in particular and ancillary
Speaker 6: businesses through new sources of revenue. But I think the
Speaker 6: macro picture is really these hopes for a soft landing,
Speaker 6: which I still personally think are premature.
Speaker 2: So we're about halfway through the year now, exactly halfway
Speaker 2: through the year. Did you expect that's what this is
Speaker 2: where we'd be when January one came around.
Speaker 6: You know, the beginning of the year, we had the
Speaker 6: China reopening, and everyone was very excited about that. It
Speaker 6: happened faster, it was sort of a big bang reopening.
Speaker 6: I have been a little surprised with the degree of
Speaker 6: how quickly it's moderated. You know, the fact that we
Speaker 6: have youth unemployment in China at over twenty percent. Manufacturing
Speaker 6: in China is contracting out right now. Services is positive,
Speaker 6: but just barely so. China is going to need to
Speaker 6: do more stimulus, and we have the poll up Euro
Speaker 6: meeting coming up in July. I think if they do something,
Speaker 6: it'll be then. But if we don't see something bigger
Speaker 6: than the incremental steps they've taken so far, and something
Speaker 6: really aimed at the consumer, building consumer confidence, getting companies
Speaker 6: to bring people back to work, I think that one
Speaker 6: keeps moderating. I think the other thing that surprised me
Speaker 6: so far this year was the strength and tech. I mean,
Speaker 6: I think everyone's been surprised by the strength and tech
Speaker 6: You've still had higher yields this year, you still had
Speaker 6: fed hikes, and normally those longer duration assets are going
Speaker 6: to be more sensitive to that. But I think what's
Speaker 6: driven it regardless has been the very strong underlying consumer
Speaker 6: because at the end of the day, there's still a
Speaker 6: big consumer cyclical component to tech stocks. But in addition,
Speaker 6: again these structural hopes around AI and what that's going
Speaker 6: to bring.
Speaker 2: As you say, China right now seems to be disappointing,
Speaker 2: if anything, a bit. We'll see how it plays out
Speaker 2: the rest of the year. What's the knock on effect
Speaker 2: of that? For example in the United States. I mean,
Speaker 2: China has traditionally been the source of a lot of
Speaker 2: growth globally. It looks like it's not going to be
Speaker 2: play that same role for the United States economy.
Speaker 6: Well, it's so interesting. I think the US could actually
Speaker 6: be a small net beneficiary when it comes to stock market.
Speaker 6: So again, think back to November, December, January, when we
Speaker 6: had the speculation and then actual reopening in China. You
Speaker 6: saw economies that are more sensitive to China, that have
Speaker 6: stronger trade relationships business relationships benefit even more than the
Speaker 6: US did. So Germany, for example, fifty percent of their
Speaker 6: GDPs exports. China is a huge trade partner Italy a
Speaker 6: lot of the emerging Asian economies commodity prices, so all
Speaker 6: the capital was going to these more cheaply valued, attractively
Speaker 6: valued stocks overseas that would benefit from China. Now with
Speaker 6: China sputtering and people saying where do I want to
Speaker 6: allocate for the second half of the year, even though
Speaker 6: certain parts of the US equity market could be seemed
Speaker 6: very pricey, especially some of those tech names, the US
Speaker 6: economy still looks more resilient than a lot of places overseas.
Speaker 6: So one thing that could be a surprise for the
Speaker 6: second half of the year is that the US outperforms again.
Speaker 6: You know, it's amazing to say that with the tech
Speaker 6: stocks valued where they are today, and I think that
Speaker 6: has to slow at some point soon, especially with the
Speaker 6: FED continuing to raise rates. But if the US is
Speaker 6: the best house on the block, and I think it
Speaker 6: will be in the second half of the year, most likely,
Speaker 6: that might keep capital coming in here, which means a
Speaker 6: stronger dollar, and so certain US stocks will benefit more
Speaker 6: than others.
Speaker 2: We all pay so much attention to the central banks,
Speaker 2: not just the FED with the center banks. We heard
Speaker 2: from them this week. It's CenTra over in Portugal, and
Speaker 2: certainly we heard a message from j Powell, from the
Speaker 2: feder Reserve, from Christine Lagarden, even from mister Bailey that
Speaker 2: if anything's indicated we're going to have higher for longer.
Speaker 2: How does that affect the market?
Speaker 6: You know, I think that's really going to be an
Speaker 6: end of the year and early next year story. So again,
Speaker 6: right now, the market is pricing in higher for longer
Speaker 6: for this year, especially compared to January. January, we're still
Speaker 6: thinking we could get rate cuts during this year. That's
Speaker 6: largely been removed, but we're still looking at a market
Speaker 6: discounting significant easing next year.
Speaker 1: Now.
Speaker 6: J Powell himself has said that for inflation to get
Speaker 6: back to two percent their target, it's probably not happening
Speaker 6: until twenty twenty five. So are they actually going to
Speaker 6: be easing a year ahead of that? If inflation's above target? Maybe,
Speaker 6: if there's a huge crisis, or if the jobless claims
Speaker 6: and the payroll numbers deteriorate very materially. But if they don't,
Speaker 6: it's hard for me to see that easing coming. So
Speaker 6: I think that is going to be a headwind for
Speaker 6: equities in the US and globally probably as we get
Speaker 6: towards later in the year, and the FED is signaling
Speaker 6: that we're not there yet.
Speaker 2: As a recovering lawyer, I have to ask one quick
Speaker 2: one about the Supreme Court. We had several controversial decisions
Speaker 2: come down. Do they have any economic effect you think?
Speaker 6: You know, the one decision that we got about the
Speaker 6: student loan forgiveness that that that's not going to go forward.
Speaker 6: You the decision itself is not as economically important, But
Speaker 6: there is a relative to this, which is that student
Speaker 6: loans have been Forbaard right, they haven't had to pay
Speaker 6: them since March twenty twenty, and that ends this fall.
Speaker 6: The Bureau of Economic Analysis is saying thirty eight billion
Speaker 6: annual rate of disposable income they had from not paying
Speaker 6: those loans. That goes away. So I think when we
Speaker 6: think about what could hurt GDP at the end of
Speaker 6: the year, Q four, Q one, this could be a
Speaker 6: material hit for the consumer.
Speaker 4: Interesting.
Speaker 2: I'm not sure we'd figure that out yet. Thank you
Speaker 2: so much, re Becca, it's really great to have you
Speaker 2: with us. That's Rebecca Patterson, formerly with Bridgewater. Coming up
Speaker 2: we go over the results of the first bank stress
Speaker 2: tests since all those bank failures back in March, with
Speaker 2: former FDIIC chair Sheila Beher. That's next time Wall Street
Speaker 2: Week on Bloomberg.
Speaker 1: This is Bloomberg Wall Street Week with David Weston from
Speaker 1: Bloomberg Radio.
Speaker 2: This is Wall Street Week. I'm David Weston. This week,
Speaker 2: the Federal Reserve is at least the results of their
Speaker 2: stress tests and all twenty three banks pass. I would say,
Speaker 2: with flying colors, to take us through what we learned,
Speaker 2: and maybe it is important what we may not have
Speaker 2: learned from these tests. Were welcome now, Shila Beer she
Speaker 2: of course served as the chair of the fdi C,
Speaker 2: so she'l thanks so much for being back with us.
Speaker 2: What did these trust tests tell us about the state
Speaker 2: of the banking industry.
Speaker 4: Well, they told us that in a severe stress scenario,
Speaker 4: as if it has defined it, they would survive quite
Speaker 4: well and still have plenty of capital to keep blending.
Speaker 4: But I think there are a lot of problems with
Speaker 4: the scenario and the assumptions that underpin the stress tests,
Speaker 4: so I don't think we should take a lot of
Speaker 4: comfort from it. There's a lot of work that needs
Speaker 4: to be done, and to us credit, the Fed acknowledge
Speaker 4: that there are a lot of different potential risks out
Speaker 4: there that may not be reflected. So I do think
Speaker 4: we should not take a lot of a lot of
Speaker 4: comfort in this. The big issue obviously is they don't
Speaker 4: stress high interest rates. That is the issue confronting the
Speaker 4: bank banking industry right now. And ironically, if you assume,
Speaker 4: as their stress test does, that rates go back to
Speaker 4: zero in a severe recession, that actually helps banks that
Speaker 4: have a lot of unrealized losses in their on their
Speaker 4: books because when you take rates back to zero, those
Speaker 4: loll yielding assets regain value quickly, So in a way,
Speaker 4: they're rewarding banks for not managing their indust rate ris
Speaker 4: very well, and that's a big problem. The other issue
Speaker 4: is that again related interest rates, is what happens if
Speaker 4: we have a protracted period where the yield curve is inverted,
Speaker 4: meaning that short term borrowing rates are higher than long
Speaker 4: term rates, which is a situation we've had for a
Speaker 4: while now. That leads you into a situation which we're
Speaker 4: already seeing where banks cost of funding what they have
Speaker 4: to pay on deposits or borrowing will exceed what they
Speaker 4: can get on their loans, and that's going to be
Speaker 4: a real challenge for banks, and those are the kinds
Speaker 4: of issues the FAD really needs to be thinking about
Speaker 4: and putting banks through. Not this kind of artificial assumption
Speaker 4: that if we have a recession, rates go back to
Speaker 4: zero and we start the party all over again and
Speaker 4: their assets are inflated and they don't have to pay
Speaker 4: anything on the deposits anymore. That's just not realistic.
Speaker 2: Surely, your reference to the interest rate risk takes me
Speaker 2: back to one of the reasons why we were particularly
Speaker 2: eager to see these results in the wake of the
Speaker 2: failure of Silicon Valley Bank and other banks that were
Speaker 2: interest rate risks. Are there things that could be done
Speaker 2: with the stress tests that would have kicked out that
Speaker 2: problem or is it not a stress test or capital
Speaker 2: issue at all?
Speaker 4: It is, so I don't think it's I don't think
Speaker 4: it's realistic, to be honest with you, it's it's not
Speaker 4: the kind of scenario we should be worried about. And
Speaker 4: so yes they should be. Assuming that interest rates stay high,
Speaker 4: inflation stays high, interest rates have to stay high. We
Speaker 4: still have you know, we don't we have a hard
Speaker 4: landing we don't have a soft landing and that the
Speaker 4: yield curd remains inverted for some period of time. That's
Speaker 4: the worst case, nightmare scenario that we need to prepare for.
Speaker 4: I hope it doesn't happen, but it certainly could. And
Speaker 4: I think, you know, keeping interest rates high even if
Speaker 4: we have an economic slow down to recession I think
Speaker 4: is a much more likely. And this idea that the
Speaker 4: FED is going to go back to zero again, that's
Speaker 4: completely inconsistent with the FED itself has been saying about,
Speaker 4: you know, keeping great tie until inflation is defeated. So
Speaker 4: that's really what they need to be working back. And
Speaker 4: now we have real life examples with these recent regional
Speaker 4: bank failures. That's exactly what took them down. They're unrealized
Speaker 4: they had deposit runs, they had a lot of underwater
Speaker 4: securities which they had to start selling to meet deposit redemptions.
Speaker 4: That caused losses. That's what brought them down. So you're
Speaker 4: seeing that in real life right now. And these are
Speaker 4: very poorly managed banks. I think most banks are managing
Speaker 4: these risks well. But this is the scenario that the
Speaker 4: FED needs to take the banking system through.
Speaker 2: How does liquidity figure out because one of the issues
Speaker 2: obviously on lots of banks affails, they just didn't have
Speaker 2: the equalities, so they had to sell the securities. As
Speaker 2: you pointed out, does liquidity factor in the stress as
Speaker 2: should it?
Speaker 4: It does not. Really There are separate tests on liquidity.
Speaker 4: They're not public, but they probably should be public, and
Speaker 4: that liquidity risk needs to be integrated into the capital
Speaker 4: stress testing because you cannot separate these out. A bank
Speaker 4: that is perceived to be weak by the market will
Speaker 4: likely have deposit runs or you know, accelerated deposit withdrawals.
Speaker 4: That means that they might have to sell securities they
Speaker 4: weren't planning on selling so called hold maturity securities, which
Speaker 4: will have a big impact on capital. So these need
Speaker 4: to be integrated together. You can't just have a clean separation.
Speaker 4: And again that's that's part of the broader interstrate scenario,
Speaker 4: is liquidity risks as they impact capital that the FED
Speaker 4: should be running these banks through.
Speaker 2: We're talking about the banking sector. They're regulated banking sector
Speaker 2: right now. There's a lot of transactions being done outside
Speaker 2: of that, as you know so well, and if anything
Speaker 2: has that has been growing dramatically ironically, perhaps in part
Speaker 2: because of the difficulties the banks are having, so they're
Speaker 2: getting out of some of the business the private credit
Speaker 2: is stepping into. Is there an effective way to take
Speaker 2: into account the possible systemic risk from the non bank banks.
Speaker 4: So it's a huge issue because in my experience, you know,
Speaker 4: we had a non bank lending during the Great Financial Crisis.
Speaker 4: They were doing the line share of the mortgage limiting, right.
Speaker 4: The big banks were doing thesecuritizations that fed the beast,
Speaker 4: but they were doing the line's share, and they still
Speaker 4: do frankly. But those sources of credit dry up very
Speaker 4: quickly if you get into distressed market situations. The banks
Speaker 4: that have stable to pass the ones that keep blending.
Speaker 4: So if you keep squeezing the banks, and if we overreact,
Speaker 4: especially with the smaller banks, the regional community banks, two
Speaker 4: recent failures you're going to have, you're going to even
Speaker 4: push even more of that into the private sector. You're
Speaker 4: going to constrain their ability in the non bank sector,
Speaker 4: You're going to constrain their ability to lend. That's going
Speaker 4: to make the system even more fragile. There's also not
Speaker 4: a lot of transparency between the intersection of the regulated
Speaker 4: banks and the non bank sector. Again, this was a
Speaker 4: huge problem during the Great Financial Crisis. Most of the
Speaker 4: mortgage lendings was that the non banks, but it certainly
Speaker 4: flowed back into the banks when troubles emerged.
Speaker 2: You refer to regional banks and also community banks and
Speaker 2: their role overall in the ecosystem. That's certainly come to
Speaker 2: the forefront. How concerned should we be about the role
Speaker 2: of the community banks, the regional banks versus the big
Speaker 2: money center banks, And is there something we could do
Speaker 2: to really ensure their strength because they do provide a
Speaker 2: lot of the lending and the credit to some of
Speaker 2: the smaller businesses across the country.
Speaker 4: I do, and those are the engines of job growth.
Speaker 4: So yes, I've been saying for some time now we
Speaker 4: need at least to have a temporary guarantee for transaction
Speaker 4: to positive accounts that these smaller banks have with their
Speaker 4: business customers and other institutions like local governments, nonprofits. These
Speaker 4: are accounts that are used by their customers to pay bills,
Speaker 4: to make payroll, to bring revenues in, pay expenses. They're operational,
Speaker 4: they don't move easily, but they're almost always above the
Speaker 4: insured deposit limits. Because you got a lot of money
Speaker 4: flowing in and out to pay expenses, payroll, and other bills,
Speaker 4: so we provided a temporary guarantee for them. During the
Speaker 4: Great Financial Crisis, we were seeing depositive stability. Then with
Speaker 4: the smaller banks, those deposits were migrating to the so
Speaker 4: called two big defail banks. You want to stop that.
Speaker 4: We've had enough consolidation already, So providing reinstituting at least
Speaker 4: on a temporary basis this guarantee again, I think would
Speaker 4: be hugely stabilizing to those regional and community banks. Unfortunately,
Speaker 4: in Dodd Frank for whatever reason, it took the authority
Speaker 4: away from the FDI see using what's called the systemic
Speaker 4: Risk Exception, to which is an extraordinary procedure to reinstate that.
Speaker 4: Now there's a fast track approval process in the Hill.
Speaker 4: It needs to be required. The President has to ask
Speaker 4: for it. The President, for whatever reason, has not asked
Speaker 4: for it. But I do think there's insufficient focus on
Speaker 4: stabilizing liquidity for these community and regional banks. The more
Speaker 4: they have to, you know, pay really high rates on
Speaker 4: deposits or borrow from the Federal Homeland Bank, it's this
Speaker 4: really expensive borrowing, the more that is going to distress
Speaker 4: them and constrain their ability to win. We need to
Speaker 4: stabilize those accounts, especially transaction accounts, with a much higher,
Speaker 4: if not unlimited, guarantee, at least on this temporary basis.
Speaker 2: So this is very helpful. Thank you so much for
Speaker 2: joining us on again. Shila bet She is the former
Speaker 2: chair of the FDI. See coming up the world of
Speaker 2: private equity today from the perspective of one of the
Speaker 2: biggest players, we talk with Blackstone CFO Michael J. That's
Speaker 2: next on Wall Street Week on Bloomberg.
Speaker 1: This is Bloomberg Well Street Week with David Weston from
Speaker 1: Bloomberg Radio.
Speaker 2: This is Wall Street Week. I'm David Weston. Investors these
Speaker 2: days faced a number of real uncertainties about where the
Speaker 2: economy is going, as well as what the FED is
Speaker 2: likely to do in response to that. One of the
Speaker 2: ways to look at what those uncertainties really tell us
Speaker 2: and what we should do about it is through the
Speaker 2: lens of alternative investing. And we welcome to somebody who
Speaker 2: is at one of the biggest most successful term investment
Speaker 2: houses that there is. It is Blackstone. He's the chief
Speaker 2: financial officer there. He is Michael J. So Michael, welcome
Speaker 2: to Wall Street. We great to have you.
Speaker 3: David is great to be here, Thanks for having me.
Speaker 2: So let's start with a macro here if we could,
Speaker 2: what is the Blackstone view the operating thesis right now
Speaker 2: abo where we are in the economy and where it's
Speaker 2: headed on inflation, on whether we're going to have a
Speaker 2: big downturn or not.
Speaker 3: Sure well on the macro, which obviously affects everything. We
Speaker 3: do benefit from having the lens of a really big
Speaker 3: portfolio of investments. So we have stakes and over two
Speaker 3: hundred companies that together have over two hundred million of
Speaker 3: revenues and aggregate. We have a real estate portfolio with
Speaker 3: over twelve thousand individual assets. We have a very big
Speaker 3: private credit portfolio. So that's a very sort of rich sample,
Speaker 3: and I'd start with the good news. So the good
Speaker 3: news first, I think is we pretty definitively, definitively see
Speaker 3: inflation trending down. You know, if you look at the
Speaker 3: inflation prints, the standard metrics, and you adjust for shelter
Speaker 3: which sort of lagged on the way up and is
Speaker 3: now lagging on the way down. If you look, for example,
Speaker 3: at core CPI, a very important metric x shelter that's
Speaker 3: running in the mid threes. And if you look at
Speaker 3: CPI by itself X shelter, it actually hit about two
Speaker 3: percent last month, so we definitely see the direction of
Speaker 3: travel being down. Other good news is the performance of
Speaker 3: the and resilience of the economy and of many companies
Speaker 3: to date. So in our own portfolio, we talked about
Speaker 3: this publicly in the first quarter, our private equity portfolio
Speaker 3: companies grew with double digit revenues in the first quarter,
Speaker 3: with stable resilient margins. We see in our portfolio, you know,
Speaker 3: clear signs that costs have peaked in the last few quarters,
Speaker 3: including with respect to wages very importantly. So there's some
Speaker 3: good news on both those fronts. Now, against that, of course,
Speaker 3: is the challenge of the cost of capital and the
Speaker 3: availability of capital. And there I think you see the
Speaker 3: confluence of three really big things. First, obviously the escalation
Speaker 3: and short rates over the last fourteen months or so
Speaker 3: five hundred basis points. I think the FED has basically
Speaker 3: achieved its goal of achieving positive real rates for the
Speaker 3: first time in this country in many years. And we're
Speaker 3: going to take the FED at its word and plan
Speaker 3: for higher for longer short rates. Second, quantitative tightening, you know,
Speaker 3: as you and I know, I think a few years
Speaker 3: ago we sort of couldn't stop talking about QT, and
Speaker 3: now I think we don't talk about it enough. And
Speaker 3: so pre COVID. The FED balance sheet, as you know,
Speaker 3: is four trillion or so. It more than doubled in
Speaker 3: the subsequent couple of years. And now they're embarking on
Speaker 3: a balance sheet reduction program where they're basically, through runoff
Speaker 3: of assets, shrinking that balance sheet by about a trillion
Speaker 3: annual run rate a year. So that's going to have
Speaker 3: significant effects over time, and we already see some of
Speaker 3: the impact in certain markets and how they're behaving, like
Speaker 3: agency mortgages. And then third, as a result of the
Speaker 3: banking challenges, especially the regional banking challenges of earlier in
Speaker 3: this year, we do think you'll see credit contraction from
Speaker 3: that over time. So those are three big forces, and
Speaker 3: I think the result of all that is the FED
Speaker 3: is basically going to deliver what it intended, which is
Speaker 3: a slowdown in the economy. And I think, you know,
Speaker 3: you should expect to see deceleration in the economy, you know,
Speaker 3: in the coming months.
Speaker 2: So take all that together, a complex and nuanced view,
Speaker 2: strengthen the economy at the same time reductional liquidity, some uncertainty.
Speaker 2: What does that mean for dealmaking?
Speaker 3: I think we're seeing the overall M and A cycle
Speaker 3: playing out probably as we more or less expected even
Speaker 3: a year ago, which is, you had this really big
Speaker 3: rate shock again, the five hundred zero to five hundred
Speaker 3: basically in fourteen or fifteen months, and during that time period,
Speaker 3: M and A activity essentially froze. We are now seeing
Speaker 3: on the ground some thawing of that freeze, and I
Speaker 3: think the reasons for that, you know, having seen these
Speaker 3: cycles before, are you know that seller expectations need to
Speaker 3: be recalibrated and that takes time. And then in this
Speaker 3: particular circumstance, I think market participants are now you know,
Speaker 3: seeing that we're nearing the end of this dramatic rate
Speaker 3: increased cycle and therefore feeling like there's a little less uncertainty,
Speaker 3: a little more certainty, and are readier to transact. And
Speaker 3: so if you look at our own business, you know,
Speaker 3: just in this month of June, we've been busy people,
Speaker 3: and so in the last couple of weeks, you know,
Speaker 3: we announced things like a two billion dollar investment in
Speaker 3: one of the country's fastest growing utilities in almost billion
Speaker 3: dollar additional investment in the country's largest private developer, renewables.
Speaker 3: In the legitistics area real estate, which we're big fans of,
Speaker 3: we've been selling and buying. We announced the sale of
Speaker 3: over three billion dollars of logistics assets to a public
Speaker 3: company earlier this week, and we also acquired three different
Speaker 3: portfolios of logistics assets in both the US and Europe.
Speaker 3: So I think those probably constitute green shoots or potential
Speaker 3: green shoots. I think you'll be hearing that that term
Speaker 3: will be more in fashion this summer, I think among
Speaker 3: Wall Street types, but really for us, in terms of
Speaker 3: our business, our business model is really made for times
Speaker 3: like this. At its core, you know, we're all about
Speaker 3: long term, locked up committed capital through fund structures, and
Speaker 3: what that allows us to be is patient, and it
Speaker 3: allows us obviously to have capital and time when capital
Speaker 3: is short. And indeed, we have nearly two hundred billion
Speaker 3: dollars of dry powder to invest opportunistically in the coming
Speaker 3: time period. And our history has shown that those couple
Speaker 3: of years coming out of a cycle are some of
Speaker 3: the best times to invest. So We're excited about what
Speaker 3: the future will bring.
Speaker 2: As you see that thaw, and if I can draw
Speaker 2: the analogy the green shoots coming up through the ice.
Speaker 2: More or less is the nature of the deals changing.
Speaker 2: We saw a piece in the Wall Street Journal this week,
Speaker 2: actually Blackstone has mentioned it, the suggestive private equity is
Speaker 2: doing more smaller deals, maybe because of the uncertainty of
Speaker 2: the price of financing, even regulatory overhang. You are you
Speaker 2: seeing smaller deals than you did before?
Speaker 3: I think, well, we have our own particular perspective. We
Speaker 3: scale is one of our big advantages in our private
Speaker 3: allows us to do things others can't do. In our
Speaker 3: private equity business. You know, we've successfully in the last
Speaker 3: couple of years been able to engineer a couple of
Speaker 3: really large deals of partnership with Emerson in the climate
Speaker 3: technologies area. Copeland is the name of the business, recently
Speaker 3: a five billion dollar take private of a business called Seavent.
Speaker 3: So we do think that's one of our edges. And
Speaker 3: so you can't paint with the broad brush that the
Speaker 3: deals are getting smaller. I do think that the development
Speaker 3: of the direct lending market, which there's been a lot
Speaker 3: of focus on in the private credit area, you know,
Speaker 3: has in this cycle, and I think secularly allows for
Speaker 3: deal making to continue, including at relative scale, in a
Speaker 3: way that maybe five ten years ago is less less doable.
Speaker 2: As you look at the landscape out there, where are
Speaker 2: the investment opportunities and how dependent on the assumptions that
Speaker 2: were done or close to done with the hiking of
Speaker 2: the rate.
Speaker 3: Sure, well, it's a multifaceted answer, and we have a
Speaker 3: broad business and so we have sort of a balanced
Speaker 3: attack and aren't relying on one single strategy. But I
Speaker 3: think for sure on the credit side, lending money right
Speaker 3: now in this environment is a very compelling thing to
Speaker 3: do with very good risk reward, probably some of the
Speaker 3: best risk reward we've seen in a long time in
Speaker 3: the credit area. So in things like direct lending, you know,
Speaker 3: you can generate double digit returns given where base rates
Speaker 3: are and spreads for being in the very senior most
Speaker 3: part of the capital structure with a lot of equity
Speaker 3: beneath you. So that is very attractive. In other forms
Speaker 3: of private credit, whether it's asset back credit or real
Speaker 3: estate credit, similarly, it's a very good time to invest
Speaker 3: from a risk award standpoint. So that's one big theme
Speaker 3: and then on the equity side a little bit apropos
Speaker 3: what I talked about when I went through the deals
Speaker 3: we're doing, I'd say, we're still applying some of our
Speaker 3: same key themes around sort of the sectors and areas
Speaker 3: we want to invest in, but now we think we'll
Speaker 3: do it in a more interesting environment, maybe somewhat more
Speaker 3: dislocated environment to find value. So that's really how we're
Speaker 3: approaching it.
Speaker 2: You mentioned real estate. Obviously, Blackstone has a very substantial
Speaker 2: presence in real estate. It's been a lot in the news,
Speaker 2: there's a lot of report of the challenges for commercial
Speaker 2: real estate. What is your perspective on that. Are we
Speaker 2: headed toward a real, substantial downturn in real estate?
Speaker 3: Well, it's interesting, I think. You know, when you see
Speaker 3: the acronym CRE in a newspaper article, you can be
Speaker 3: sure it's probably going to portray the sector and paint
Speaker 3: it with a broad brush. The reality is there's real
Speaker 3: bifurcation in terms of the dynamics in real estate as
Speaker 3: an industry. It's a big industry. You have one sector
Speaker 3: traditional off especially in the US, that really does a
Speaker 3: fundamental challenges in vacancy, levels of twenty percent plus and
Speaker 3: so forth. That happens to be a very small portion
Speaker 3: of our portfolio, less than two percent of our global
Speaker 3: real estate equity portfolio. And then you have a number
Speaker 3: of sectors where fortunately we're concentrated through I think some
Speaker 3: good sector selection decisions, where the fundamentals are really quite
Speaker 3: good vacancies, and many of those sectors are at two
Speaker 3: to five percent, which is almost at or just above
Speaker 3: the frictional level of vacancy. It really matters where you
Speaker 3: invest in the portfolio construction. I think our firm is
Speaker 3: created in real estate over the last decade or really
Speaker 3: some of our finest work.
Speaker 4: Is a firm.
Speaker 2: Michael, thank you so much for being wellser really great
Speaker 2: to have you here. That's Michael Jay. He's the chief financial.
Speaker 1: Officer of Blackstone.
Speaker 2: Coming up, the Supreme Court rocks the nation once again
Speaker 2: with its decision on a pron of action. We'll talk
Speaker 2: with the head of the Ford Foundation, Darren Walker, on
Speaker 2: what it could mean for all of us. That's next
Speaker 2: on Wall Street Week. I'm Bloomberg.
Speaker 1: This is Bloomberg Wall Street Week with David Weston from
Speaker 1: Bloomberg Radio.
Speaker 2: This is Wall Street Week. I'm David Weston. The Supreme
Speaker 2: Court rocks the nation once again with its decision on
Speaker 2: a pirn of action, and to take us through what
Speaker 2: exactly the Supreme Court's ruling this week might mean for
Speaker 2: talent in this country. Welcome now, Darren Walker. He is
Speaker 2: the head of the Ford Foundation. Darren, thank you so
Speaker 2: much for being back with us. You've written an op
Speaker 2: ed piece in the New York Times, a very profound
Speaker 2: one questioning some of the fundamentals of the Supreme Court's decision.
Speaker 2: And let me ask you, because you go through your
Speaker 2: personal experience and how that informs your view on this
Speaker 2: what do you think that the Chief Justice Roberts and
Speaker 2: the other five members of what do you think they
Speaker 2: don't understand about America today?
Speaker 7: Well, I think what they have not taken into account
Speaker 7: is the reality that our great history in this country
Speaker 7: also has some regrettable dimensions. The race that has regrettably
Speaker 7: been a part of our country's history, the vestiges of
Speaker 7: that remain with us. We are still a highly segregated
Speaker 7: society and our educational system, our workplaces, our criminal justice system,
Speaker 7: and other systems in this country. And to simply say,
Speaker 7: in order to stop discriminating, we must stop discriminating creates
Speaker 7: a false moral equivalency between those who historically sought to
Speaker 7: keep the Jim Crow hierarchy, the racial hierarchy that characterize
Speaker 7: this country for most of our history. Those people are
Speaker 7: doing the same thing as those of us who have
Speaker 7: sought to bring about more justice and redress the history
Speaker 7: the vestiges of racism that unfortunately remain with us today.
Speaker 2: Have we made real progress with what is called by
Speaker 2: some affirmative action, I mean we can go back. It's
Speaker 2: been around for a long time now, go back to
Speaker 2: the Bakhi decision in nineteen seventy eighth. That's a long
Speaker 2: time ago.
Speaker 5: Now.
Speaker 2: Did having affirmative action help us make progress in resrection?
Speaker 2: We should be making.
Speaker 7: Progress well, David, I would not be here with you
Speaker 7: today were it not for affirmative action. There is no
Speaker 7: doubt that an entire generation of African Americans and Latinos
Speaker 7: in this country have been propelled forward in part because
Speaker 7: of affirmative action. I'm a proud affirmative action baby. I
Speaker 7: benefited from living in a country that believed in my potential,
Speaker 7: and even though I was a poor kid living in
Speaker 7: a rural community, America cheered me on this country wanted
Speaker 7: me to win and succeed, and that manifest in the
Speaker 7: ways in which my public educational grants, graduating from college
Speaker 7: without any debt. All of this made it possible for
Speaker 7: me to get on the mobility escalator and write it
Speaker 7: as far as I could and my talent would bring me.
Speaker 7: But there had to be a sense understanding of racial consciousness.
Speaker 7: And what the Supreme Court and others seemed to be
Speaker 7: saying is that it is time for us to move
Speaker 7: beyond having any consciousness of race. We're not saying I
Speaker 7: don't profess to believe that race has to be the
Speaker 7: deciding factor, but to say that it is unconstitutional to
Speaker 7: have any consciousness of race and the legacy of racism
Speaker 7: that remains with us, I think is not good for
Speaker 7: our democracy, the multiracial, multicultural democracy, this great experiment called
Speaker 7: America won't work if we simply wash away an erase
Speaker 7: the history, the reality today of our countries racism and
Speaker 7: the bias that unfortunately remains.
Speaker 2: Darren, thank you so much on being on Wall Street Week.
Speaker 2: That is Jarren Walker. He is the president of the
Speaker 2: Ford Foundation that does it for this edition of Bloomberg
Speaker 2: Wall Street Week. If you missed any part of today's program,
Speaker 2: You can listen on demand with our Wall Street Week podcast.
Speaker 2: Find that on Apple, Spotify, or anywhere else you get
Speaker 2: your podcasts. I'm David Weston. Stay with us. Today's top
Speaker 2: stories and global business headlines are coming up right now