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Speaker 2: I'm Lisa A.
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Speaker 3: Kadi Kaminski joined US now Chief Research Strategies to out
Speaker 3: for Simplex Katie, what a call at the start of
Speaker 3: the year. This short that you've had on bonds is
Speaker 3: paying off in a big way over the last month.
Speaker 3: You've put out a headline and you knew it would
Speaker 3: get attention. You've raised the prospect to gun to six.
Speaker 3: So let's breathe some life into that conversation. What is
Speaker 3: it that you saw at the start of the year
Speaker 3: that's continuing now and you think these forces are here
Speaker 3: to stay.
Speaker 2: Yeah.
Speaker 4: So we've seen short signals and fixed income all year, albeit.
Speaker 2: Not as strong as last year.
Speaker 4: But what's really interesting about this, particularly recently, is we've
Speaker 4: started to see the market agree with us, and we've
Speaker 4: also seen some of the fundamental players out there say
Speaker 4: this might have to happen higher rates for longer.
Speaker 3: So, Katy, is it time to back away concerning at
Speaker 3: the start of the year's contrarian Why is it a
Speaker 3: movie you want to stick with?
Speaker 4: Well, this is a really good question, because I'm asking
Speaker 4: myself this as well. Is that if we've looked at
Speaker 4: the data with technical signals, when the curve is still inverted,
Speaker 4: trend signals short tend to work really well. As we
Speaker 4: see a flatter curve, it becomes more mixed.
Speaker 2: And if we can see a steeper.
Speaker 4: Curve, I plan that we're probably going to be long
Speaker 4: So we're still within that transition period where we could
Speaker 4: have a very interesting trend.
Speaker 2: Environment as we see the curve flatten out.
Speaker 4: And everyone realized why hold long term debt when you
Speaker 4: can have such a good return short term And if
Speaker 4: the data isn't clear that we're going to cut rates quickly,
Speaker 4: it's a sticky inflation play.
Speaker 2: It's a question about long term cash flows.
Speaker 4: And I think people are starting to really realize this
Speaker 4: is this is the real.
Speaker 2: Issue, Katie.
Speaker 1: Every single day we ask people why now the bond
Speaker 1: sell off is something people were talking about for quite
Speaker 1: a while. Suddenly it seems to be reasserting itself. Do
Speaker 1: you have an answer to the now of the selloff?
Speaker 4: Yes, I really think it has to do with behavior,
Speaker 4: and I think that everyone would rather wait to see
Speaker 4: if something is going to come to fruition, and that's
Speaker 4: exactly what you're.
Speaker 2: Seeing this week.
Speaker 4: Everyone's sitting around waiting to hear commentary. They're pretty sure
Speaker 4: they know what it's going to be. And I think
Speaker 4: the real truth is that we're starting to see the
Speaker 4: data is pretty consistent with the narrative that this is
Speaker 4: going to take some time and that higher rates could
Speaker 4: be part of what is the new normal in a
Speaker 4: world where we've experienced so much inflation and sort of
Speaker 4: a very different post pandemic economy.
Speaker 2: And I think that's where it's starting to turn around.
Speaker 4: And I'm sortain to see fundamental investors agree with the
Speaker 4: technical signals.
Speaker 1: How important is it that stocks have been able to
Speaker 1: rally in the face of higher yields. Is this sort
Speaker 1: of defy the idea that this is sustainable and something
Speaker 1: people can lean into. The yields are going to stay
Speaker 1: this high and the whole world isn't going to collapse
Speaker 1: as a result.
Speaker 4: Yeah, that's a tricky one because I think the backdrop
Speaker 4: of yesterday.
Speaker 2: So yesterday definitely brought that to light. You saw an
Speaker 2: environment where.
Speaker 4: Stocks were up, the NASAQ was up a ton, and
Speaker 4: yields were up to sixteen year highs.
Speaker 2: That's a weird situation for markets.
Speaker 4: I think if it's actually the case that those two
Speaker 4: things coincide, it means the market's accepting higher.
Speaker 2: Rates, which could be a good thing. On the other hand,
Speaker 2: I'd be a.
Speaker 4: Little skeptical of how big of a move we've had
Speaker 4: this month. We could have just had a little bit
Speaker 4: of relief rally yesterday, So I think we need to
Speaker 4: watch that correlation trade a little bit more closely.
Speaker 2: Going forward and see if.
Speaker 4: This positive correlation environment is actually going to stick.
Speaker 3: Hey, Kitty, we can say the rights on the screen.
Speaker 3: I just want to how many people are paying them, Kitty.
Speaker 3: We haven't had the great refinancing yet. People maybe think
Speaker 3: it begins next year in high yield Kitty, do you
Speaker 3: think this economy can tolerate these kind of rights beyond
Speaker 3: site six to nine months?
Speaker 4: This is the really tough question, and I think that's
Speaker 4: what Mark showed us, is that suddenly it seems like people.
Speaker 2: Wake up and they say, wait a minute, there's a
Speaker 2: good deal for yield here, or this isn't working.
Speaker 4: And I think it's very hard to predict when people
Speaker 4: are actually going to refinance and when those particular events
Speaker 4: are either going to change their behavior. The truth is
Speaker 4: people behave differently and they in a higher rate environment.
Speaker 4: We've seen that shift in short term rates. We haven't
Speaker 4: seen it in high yield. We haven't seen it in
Speaker 4: long term debt yet. This week was interesting to me
Speaker 4: because it said people might be starting to wake up.
Speaker 4: You're starting to see headlines about selling treasuries. You guys
Speaker 4: are just asking about that. Could it be the time?
Speaker 4: Maybe this fall?
Speaker 3: Ketty, just one more question. The six percent, the number
Speaker 3: six lot of attention. Is that actually a call from you?
Speaker 3: Is that a forecast?
Speaker 4: No, we don't forecast, but we do see trends in data,
Speaker 4: and if you look over longer term horizons, six percent
Speaker 4: isn't a crazy number for a tenure. I know it
Speaker 4: is for those of us that have been living in
Speaker 4: a decade of really low interest rates. But those of
Speaker 4: us who look at the technical signals and long term
Speaker 4: historical patterns, what you see is that that's not a
Speaker 4: restrictive rate for many periods in economic history. So it's
Speaker 4: not strange to think that we might have higher rates
Speaker 4: if we have surprises on the upside and inflation in
Speaker 4: the fall.
Speaker 3: Katy, great, cool to start the year. Just fantastic and
Speaker 3: great to catch up with you late into Walgus, Katy
Speaker 3: Kaminski there of alpha simplex on this bond.
Speaker 1: Market, weighing in on how this economy has been strong
Speaker 1: but will deteriorate in the face of some of these yields.
Speaker 1: Chief economist and macro strategist at Dreyfus and Mellon, I
Speaker 1: want to just start there, Vincent. Are these yields sustainable
Speaker 1: where they are right now?
Speaker 5: Yeah?
Speaker 6: They sound easier to explain than when they were sub
Speaker 6: two percent a few years ago. Inflation is going to
Speaker 6: settle down in two percent, the term premium or the
Speaker 6: risk premium that investors are going to pay, are going
Speaker 6: to turn positive instead of negative, and the equal real
Speaker 6: rate or the natural rate of interest is probably higher
Speaker 6: given how robust economic activity is. So yeah, it's sustainable.
Speaker 6: It's particularly sustainable because a key message of chair pal
Speaker 6: at Jackson Hole is going to be the policy rate
Speaker 6: is going to rest on a high plateau for a while.
Speaker 6: That's going to feed into longer term yields.
Speaker 1: We've been talking all morning about long and variable lags
Speaker 1: and whether they're very long and very variable or what
Speaker 1: that they're very short. We've already seen the worst of it,
Speaker 1: and now the market is adapting and adjusting. To use
Speaker 1: the phrase frequently used on this show, which is it?
Speaker 6: So it depends on sector, and that is the question
Speaker 6: for Jackson Hole. By the way, it's about shifts in
Speaker 6: the economy. From a monetary policy maker, comes down to
Speaker 6: the question, what's the transmission to monetary policy? How long
Speaker 6: are the lags? Answer is sector bi sector. The lag
Speaker 6: defective monetary policy is local, not national. You already went
Speaker 6: through one segment of the economy where it's shorter real estate.
Speaker 6: Home buyers depend critically on mortgage rates, builders depend critically
Speaker 6: on marketable rates. So that has borne the brunt of
Speaker 6: the remarkable FED tightening a lot sooner than any other areas.
Speaker 6: Other parts of the economy have cushion between aggregate demand
Speaker 6: and monetary policy. Households still have a lot of retained
Speaker 6: saving from the fiscal ar jest. They got in twenty
Speaker 6: twenty and twenty twenty one, they're working it down. As
Speaker 6: that buffer gets smaller and smaller, you'll see the interest
Speaker 6: rate effect bite more.
Speaker 1: Let's develop on that a little bit more, especially as
Speaker 1: we get earnings from Macy's and Low's and exporting goods
Speaker 1: this morning. Showing a kind of motley picture of where
Speaker 1: the consumer is and how much savings they have left.
Speaker 1: What's your sense of the fact that everyone's been saying
Speaker 1: the savings are running out, the savings are running out.
Speaker 1: Now they're going to be running out, and they still
Speaker 1: have it. Does that make you think that they're not
Speaker 1: going to run out or that people just were perhaps
Speaker 1: a little premature and how quickly they thought they would
Speaker 1: dry up.
Speaker 6: So it probably tells us we didn't appreciate how big
Speaker 6: the say cash load was at the beginning. That is,
Speaker 6: household saved a lot more of what they got from
Speaker 6: the government than we expected and continued to save for
Speaker 6: a while to come. You know, if you just look
Speaker 6: at a typical saving rate relative to what households actually
Speaker 6: were doing, they must have worked down at least a
Speaker 6: half the cashload. But that's still half. And by the way,
Speaker 6: we should also remember that states and localities also got
Speaker 6: fiscal transfers and they have a cash pile on the
Speaker 6: sideline as well. And those state governments and localities in
Speaker 6: particular are the ones that are really very cyclically sensitive.
Speaker 6: So essentially what the federal government did was lengthen the
Speaker 6: legs of monetary policy by immunizing by insulating some of
Speaker 6: the intra sensitive parts of our economy too. To Fed policy.
Speaker 1: Instrument, this is important and it really speaks to what
Speaker 1: could happen if the Fed keeps rates where they are,
Speaker 1: even if they don't raise them again, but keeps them
Speaker 1: where they are through the remainder of this year and
Speaker 1: all of next year and even potentially into twenty twenty five.
Speaker 1: How long do they have to keep rates where they
Speaker 1: are to start feeling the bite to make it so
Speaker 1: that you know it actually has the transmission mechanism that
Speaker 1: it was intended.
Speaker 6: Yeah, there's a couple of really important points about that.
Speaker 6: One is, remember how chair pal describes the path for rates.
Speaker 5: It's how fast.
Speaker 6: You raise them, what level will you go to? And
Speaker 6: then how long you keep them there? And we're really
Speaker 6: at that third stage. How long do they keep them there?
Speaker 6: And in some sense it doesn't matter if they raise
Speaker 6: them an extra quarter point or a half point, or
Speaker 6: they keep them unchanged. They can compensate by keeping the
Speaker 6: policy rate there for a longer time, and that's now
Speaker 6: the strategy of monetary policy. And the longer they keep
Speaker 6: rates on that plateau, the more effects of the prior
Speaker 6: increases in rates we're going to see on the economy.
Speaker 6: So that's the big message to hammer home to investors.
Speaker 6: They got that the funds rates going may go up
Speaker 6: another quarter point, that's not the important point. The important
Speaker 6: point is it's not going to be cut nearly as
Speaker 6: quickly as you might think. Right now. Next year, they're
Speaker 6: keeping rates at a plateau. They're waiting for the legs
Speaker 6: of the effects of monetary policy to play through. If
Speaker 6: they're patient and see those legs, they don't have to
Speaker 6: add incremental restraint because they've got the restraint in the
Speaker 6: pipeline already.
Speaker 1: Just quickly here, do you think that Vedcher Powell is
Speaker 1: going to say anything substantive this week?
Speaker 6: I think he can pack a little dubbish. He doesn't
Speaker 6: have to talk about pain like he did last year.
Speaker 6: He just has to be a little more neutral than
Speaker 6: he came across at his last press conference, he's got
Speaker 6: markets about where he wants. The main message he's going
Speaker 6: to want to send is rates are going to be
Speaker 6: around around current levels for a lot longer than you think, and.
Speaker 1: That seems to be what people are adapting to right now,
Speaker 1: and the implications for longer term seem to be really
Speaker 1: kind of giving everyone some angst in terms of what
Speaker 1: yield is the appropriate yield for the rest of.
Speaker 2: The risk market.
Speaker 1: Vincent Reinhardt, thank you so much for your insights.
Speaker 3: Let's talk retail, Chuck rum John just now seeing a
Speaker 3: retail analyst over at Gorgan Haskett. Chuck, you named it.
Speaker 3: You came out with that phrase in the last couple
Speaker 3: of months on this program. You said, discretionary recession. Are
Speaker 3: you seeing signs of that from the earnings we've seen
Speaker 3: this morning?
Speaker 7: Yeah, I mean, I mean generally speaking, almost everybody's copying
Speaker 7: negative and I think you know, you can go back
Speaker 7: to last week's Target report and you look at the
Speaker 7: big bell weathers between Walmart and Target, and you know, Walmart,
Speaker 7: who sells a lot more food business, was really strong
Speaker 7: and Target, whose business is more discretionary in nature, continues
Speaker 7: to be really soft. But I think, as you guys know,
Speaker 7: the market's forward looking, and I think we're starting to
Speaker 7: see some signs of stabilization and discretionary as service spending
Speaker 7: we think is starting the plateau. We're seeing some signs
Speaker 7: and home furnishings that that certain parts of the business
Speaker 7: are starting to stabilize. We heard from TJ and Ross
Speaker 7: last week, wayfair earlier in August, so you know, we'll see.
Speaker 7: But there's a lot of mixed data points out there today.
Speaker 1: Let's talk about some of the specifics that have come out.
Speaker 1: Macy's in particular, evidently first saw a bit of a
Speaker 1: pop as a reaffirmed guidance, and then now shares are
Speaker 1: lower as they're looking at markdowns being insufficient to clear inventory.
Speaker 1: Is there any larger story to tell here about price tolerance,
Speaker 1: about the middle tier retailers and how tough it is
Speaker 1: for them to really move their materials.
Speaker 7: Well, no, I mean, I think the bottom line for
Speaker 7: Mecis is that you know, some art to their banners
Speaker 7: were really good, and I think generally speaking, inventory levels
Speaker 7: across retail continue to be really healthy, but there's there's
Speaker 7: definitely weakness across certain parts of retail.
Speaker 5: There's no really size fits all. Right.
Speaker 7: Now, we continue to watch the trend and you know,
Speaker 7: we'll see how some of the data points come out,
Speaker 7: Like a company like Lows, whose numbers are actually a
Speaker 7: lot better than expected today. You wouldn't expect to see
Speaker 7: that with rates moving higher, but their business continues to
Speaker 7: be really healthy.
Speaker 6: Yeah.
Speaker 1: Well, people are renovating their homes rather than moving out
Speaker 1: because they want to keep their mortgage rates at you know,
Speaker 1: three percent or whatever. I do want to talk about
Speaker 1: Dick boarding hoods shares plunging after they missed their forecast
Speaker 1: talking about theft as one of the biggest reasons. How
Speaker 1: much more have we heard about theft among all the retailers,
Speaker 1: particularly over the past two years.
Speaker 7: It is an issue that is not getting any better,
Speaker 7: and the problem is retailers can't price to it right away,
Speaker 7: and that's where the margin surprise comes from. Everybody's talking
Speaker 7: about it. Targets, talked about it on Depot, has cited it,
Speaker 7: and even Dix. But this issue today wasn't necessarily because
Speaker 7: the theft. Their same store sales were below plan and really,
Speaker 7: for the first time since the pandemic, they kind of
Speaker 7: put up, you know, a foul ball for them at.
Speaker 1: This point, we're looking at a situation where people are
Speaker 1: expecting discretionary spending to run out. Is there an area
Speaker 1: of the market where we're seeing this or are we
Speaker 1: just not seeing this? And do you view some of
Speaker 1: the warnings that we've heard from Walmart's CEO and Target
Speaker 1: CEOs as simply being trying to lower the bar so
Speaker 1: they have an easier time crossing it later.
Speaker 5: That's a good question.
Speaker 7: One of the things that we're starting to see, and
Speaker 7: we heard it in Macy's report today and Target called
Speaker 7: about last week, was a rise in delinquencies in their
Speaker 7: credit card businesses, and that's something we.
Speaker 5: Really need to keep an eye on.
Speaker 7: We have not heard that in several years, and we're
Speaker 7: starting to hear it today. Like I said, Macy's credit
Speaker 7: income was much weaker, so we're seeing some cracks in
Speaker 7: the consumer. But broadly speaking, we still are pretty upbeat.
Speaker 7: You know, when you look at real wage growth, you know,
Speaker 7: three consecutive months of positive real wage growth, we haven't
Speaker 7: seen that in years. We actually think back to school
Speaker 7: could be really healthy. You know, the weather is certainly
Speaker 7: breaking across the country, like you'd expect to see. Balance
Speaker 7: sheets for the consumer in really good shape, so we're
Speaker 7: more optimistic than we were three months ago. I know
Speaker 7: we talked about that discretionary recession. It's really really company specific.
Speaker 3: Right now, Chuck, you know the new blame game. There's
Speaker 3: already made excuse in the oven from Target and Walmart
Speaker 3: at least has talked about it a million times. Student
Speaker 3: loan repayments. Who does that affect more?
Speaker 5: They do'll affect more the targets of the world than Walmart.
Speaker 7: I mean, anybody who has a student loan tends to have,
Speaker 7: you know, household income of seventy five thousand or above,
Speaker 7: So it's going to be an issue.
Speaker 5: I don't think it's a huge issue.
Speaker 7: And again we come back to real wage growth offsetting
Speaker 7: a lot of those student loan repayments. But at the
Speaker 7: end of the day, people who haven't been paying a
Speaker 7: student loan are going to be It's a net negative.
Speaker 5: At the end of the day.
Speaker 1: When you talk about the fact that we are seeing
Speaker 1: people shift from services back to goods, which goods are
Speaker 1: getting the biggest pop from that? Is it the idea
Speaker 1: of investing in your home because you're not moving.
Speaker 3: Is it close?
Speaker 1: Are there areas you're looking at.
Speaker 5: Yeah, that's a great question.
Speaker 7: You know, we follow Costco and Costco gives monthly comps
Speaker 7: and so you get a really good snapshot on the
Speaker 7: consumer in certain parts of their business. We're starting to
Speaker 7: see that stabilization in consumer electronics. We're starting to see
Speaker 7: in home furnishings. And when I see stabilization, I mean
Speaker 7: we're not seeing declines. You know, we're seeing sort of
Speaker 7: you know, flat levels on unit volumes. And we'll continue
Speaker 7: to see. Like I said, the consumer has money, consumer
Speaker 7: has jobs so that they're willing to spend.
Speaker 5: And if we see services start to pull back.
Speaker 7: We think when people are spending more time in their home,
Speaker 7: they'll continue to invest in their home. And that's an
Speaker 7: area that we think could continue. And you see again
Speaker 7: like numbers like home DEEPO last week, stabilization lows numbers Today,
Speaker 7: we're actually pretty healthy relative to expectations. Home furnishings, you're
Speaker 7: starting to see signs of it. So I think that's
Speaker 7: what the market wants to start to look for.
Speaker 3: Chuck a bit more constructive. Thank you, sir, Chuck Grum
Speaker 3: of Golden Basket.
Speaker 1: David Rubenside, I am so happy to say joins us now,
Speaker 1: host of that show and co founder of Carlisle. Let's
Speaker 1: just start there. Isn't this the golden era for pensions
Speaker 1: where they can actually get the returns that they need
Speaker 1: to get to meet their obligations.
Speaker 8: Well, clearly, fixed income returns are much better than they
Speaker 8: were a year or two or three ago, but money
Speaker 8: pension funds in the United States, state pension funds are
Speaker 8: underfunded still, and even kal PURRS, which is the largest
Speaker 8: state pension fund at four hundred and sixty five billion dollars,
Speaker 8: is underfunded. Underfunded the Centsment actuarily it's about twenty percent
Speaker 8: below having full funding. Now, these pension funds are still
Speaker 8: in better shape than the US government's Social Security program,
Speaker 8: which is not funded at all. That's a completely pay
Speaker 8: as you go program, and that's much worse shape relatively speaking,
Speaker 8: to compare to the state pension funds. But some state
Speaker 8: pension funds are massively underfunded. Kentucky, Connecticut, Illinois are funded
Speaker 8: at maybe forty percent of their overall obligation. So it's
Speaker 8: a challenge. And the fixed income rates that are now
Speaker 8: higher than they were before are a plus for those
Speaker 8: funds for sure, But there are many state pension funds
Speaker 8: that are still massively underfunded, and.
Speaker 1: This is the reason why there had been a concern
Speaker 1: in a low rate environment of how much some of
Speaker 1: these funds would have to lever up to get the
Speaker 1: returns that they needed to become funded. At this point,
Speaker 1: do you feel like the risk taking appetite, I should say,
Speaker 1: among some of these funds is diminished or has grown
Speaker 1: as they see the opportunity to actually meet those obligations
Speaker 1: without asking for additional contributions from members.
Speaker 8: Well, I think a lot of the state pension funds
Speaker 8: are pleased that the fixed income element of their portfolio
Speaker 8: is now going to perform much better. So if you
Speaker 8: can get five percent yields on treasuries, you're getting very
Speaker 8: close to what you need to do, which say six
Speaker 8: point eight percent in cal Pers case. But most of
Speaker 8: the state pension funds are designed for actuarial purposes to
Speaker 8: yield about six to seven percent or so a year.
Speaker 8: Some of them are able to do it and some
Speaker 8: are not. But I would say the easy money is
Speaker 8: probably behind them, which is to say, the high tech world,
Speaker 8: which showed some really great equity returns in recent years,
Speaker 8: that's probably behind most of the state pension funds. Now
Speaker 8: they're really going to have to do the hard work
Speaker 8: of getting this without the high rates of return that
Speaker 8: you often got in venture capital or other kinds of
Speaker 8: private investments.
Speaker 1: Money never feels easy, David, Come on, at what point
Speaker 1: has it ever been easy money at a certain time
Speaker 1: when people are looking forward? How much are they looking
Speaker 1: to private equity to sort of give that same kind
Speaker 1: of feeling and going forward?
Speaker 8: Well, private equity has performed pretty well over the last
Speaker 8: ten twenty and thirty years or so for large public
Speaker 8: pension funds, and those that have done very well are
Speaker 8: the ones that are have done enormous amounts of private equity.
Speaker 8: For example, the best funded state pension fund in the
Speaker 8: United States is probably the State of Washington. State of
Speaker 8: Washington is overfunded by more than one hundred percent. It
Speaker 8: has about one hundred and twenty percent or so what
Speaker 8: it needs, and they have used a lot of private
Speaker 8: equity to get there. So those that were participating in
Speaker 8: private equity from the nineteen eighties, nineties and on have
Speaker 8: actually done pretty well. Some have lagged behind. I think
Speaker 8: the biggest issue you have now is that you have
Speaker 8: expectations are very high among employees about what their retirement
Speaker 8: benefits are going to be and we have to make
Speaker 8: certain that we can actually achieve those retirement benefits. It's
Speaker 8: very easy for state legislature to say we're going to
Speaker 8: give you certain benefits, but it's actually not as easy
Speaker 8: to earn those benefits. And therefore you either have to
Speaker 8: increase the taxation on everybody in the state, or you
Speaker 8: have to in which means the state contribution to the
Speaker 8: pension bones is greater, or you have to increase the
Speaker 8: tax in effect that the pensioneers or future pensioneers are paying,
Speaker 8: and that's the only way you deal with it. You
Speaker 8: can sometimes get a higher rate of return, but there's
Speaker 8: no easy way. You either pay people, either tax people hire,
Speaker 8: or you have to have higher rates of return. It's
Speaker 8: no easy way to get to their desired results. Now,
Speaker 8: as they mentioned earlier, social security system we have in
Speaker 8: this country is a pay as you go system. So
Speaker 8: when I pay my Social Security out of my salary
Speaker 8: every week or so, that's going to fund benefits right away.
Speaker 8: We don't have a system like Canada or Australia or
Speaker 8: most countries where you have a funded national pension system.
Speaker 8: We're never going to be able to afford that. Unfortunately,
Speaker 8: because we have promised benefits that are so high that
Speaker 8: we're just not going to be able to achieve the
Speaker 8: kind of system we have in Canada where they fully
Speaker 8: funded are not almost fully funded the pension benefits that
Speaker 8: they promised their workers.
Speaker 1: Not to diverge too much from the point, But isn't
Speaker 1: this part of the reason why yields have risen as
Speaker 1: much as they have on treasuries, particularly on the long end,
Speaker 1: as people take a look at that fiscal situation and
Speaker 1: don't really see an answer for how it's going to
Speaker 1: come more into balance.
Speaker 8: Well, yields have gone up because interest rates have gone up,
Speaker 8: and that's made it easier for people who are fixed
Speaker 8: income investors to get a higher rate of return, and
Speaker 8: that will probably continue for some time. But I do
Speaker 8: think that it's an issue that all of us have
Speaker 8: to deal with because we have a demographic issue. In
Speaker 8: the United States. People are living longer than they were before.
Speaker 8: For example, when the soci Security system was set up
Speaker 8: in roughly nineteen thirty four, so the average American lived
Speaker 8: to about sixty five years old, and so you were
Speaker 8: able to collect your Social Security at sixty five. So
Speaker 8: there wasn't a big gap because most people weren't living
Speaker 8: too much longer then they were going to be eligible
Speaker 8: to get their pension benefit from social Security. Now, if
Speaker 8: the average age is that's say eighty one, eighty two,
Speaker 8: eighty three, you've got a big gap there because people
Speaker 8: are retiring, let's say, and collecting your Social Security at
Speaker 8: sixty five or sixty seven or seventy, but they're living
Speaker 8: much longer. And in addition, we've taken the social Security
Speaker 8: system and used it for so many other purposes, so
Speaker 8: we have a big gap in the end. You know,
Speaker 8: the only way to solve that problem is increasing taxes
Speaker 8: on Social Security, which is hard to do politically, or
Speaker 8: you have to reduce benefits, what's even harder to do.
Speaker 8: So there's no easy way out of that problem.
Speaker 1: And it's something that we're going to hear about a
Speaker 1: politicians speaking gingerly about, certainly in an election season. Going
Speaker 1: back to this question around how some of the punch
Speaker 1: and plans that do have to be funded are handling this,
Speaker 1: Do you expect them to lean more into alternatives at
Speaker 1: a time where some people are questioning whether the golden
Speaker 1: era is over, whether we've already seen particularly with the
Speaker 1: IPO market in stasis and the sense of takeouts not
Speaker 1: really happening to the same degree that it's going to
Speaker 1: be more humdrum rather than the explosive returns and growth
Speaker 1: that we've seen over the past few decades.
Speaker 8: Well, the market is more saturated than it was twenty
Speaker 8: or thirty years ago, there's no doubt, and returns will
Speaker 8: be higher to achieve, harder to achieve. But there's no
Speaker 8: doubt that alternative investments, which may mean i'd say distressed
Speaker 8: real estate, distress debt, buyouts, growth capital, venture capital, those
Speaker 8: things tend to outperform public equities by a fair bit.
Speaker 8: And as long as people need to get higher yields,
Speaker 8: you're going to see a fair amount of money going
Speaker 8: into these so called alternatives. Will they outperform by the
Speaker 8: same amount that they did ten or twenty years ago,
Speaker 8: Maybe not, but it will be outperformed, there's no doubt
Speaker 8: about it in my view.
Speaker 1: There's going to be also a continued focus on ESG, etc.
Speaker 1: Given the fact that there has been quite a bit
Speaker 1: of pushback, and I know that you did speak with
Speaker 1: Nicole Musico about that. What did she have to say
Speaker 1: about that?
Speaker 8: Well, ESG has become controversial in the United States. The
Speaker 8: controversy over ESG does not really exist so much outside
Speaker 8: the United States. Obviously we politicize the United States to
Speaker 8: some extent. But I don't think ESG is going away.
Speaker 8: I think people will talk about it less. Larry Fink,
Speaker 8: for example, says he doesn't use the word ESG anymore,
Speaker 8: the phrase ESG because it's so incendiary in the minds
Speaker 8: of some. But the truth is that most investors want
Speaker 8: to have some sense that the investments they are doing
Speaker 8: are not just join the environment or doing things that
Speaker 8: are i'd say not appropriate. But there's no doubt that
Speaker 8: some people have fought back and there is a reaction
Speaker 8: against ESG in the United States. I don't think it's
Speaker 8: going to mean the esg's going away, but people talk
Speaker 8: about it more gingerly.
Speaker 1: Let's say, David Rubinstein, thank you so much for taking
Speaker 1: the time and for your really insightful interviews David Rubinstein
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Speaker 1: I'm Lisa Abramowitz, and this is Bloomberg