Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amerie Hordert. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
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Speaker 2: Terminal and the Bloomberg Business app. We begin the sound
Speaker 2: with investors searching for direction in a pivotal year potentially
Speaker 2: for the Federal Reserve. FED Governor Stephen Myron doubling down
Speaker 2: on his dubvish starts calling for the Central Bank to
Speaker 2: cut interest rates by more than a percentage point in
Speaker 2: twenty twenty six. Governor Myron joins us. Now four more. Governor,
Speaker 2: good morning and happy new year.
Speaker 3: Happy to here, Thanks for having me back.
Speaker 2: It's good to see you've been very very transparent about
Speaker 2: where you were on the dot plot and what your
Speaker 2: forecast is. So let's start there. Where are you for
Speaker 2: this year? Wes you don't what are you looking fun.
Speaker 3: Yeah, so I'm on surprisingly the lowest dot. I'm looking
Speaker 3: for about a point and a half of cuts. A
Speaker 3: lot of that is driven by my view of inflation.
Speaker 3: I gave a speech about this and you know, about
Speaker 3: a month ago in December Columbia University. My view is
Speaker 3: that almost all of the excess inflation over target is
Speaker 3: due to quirks of how we calculate inflation. So, as
Speaker 3: you have talked about with many of your guests many
Speaker 3: times before, shelter inflation really really lags a lot. And
Speaker 3: because average tenant rents have caught up to new tenant rents,
Speaker 3: because market rents have been running at at one percent
Speaker 3: rate for a couple of years now, I think it's
Speaker 3: appropriate to sort of think about underlying inflation as abstracting
Speaker 3: from that a little bit. You know, the shelter inflation
Speaker 3: is indicative of a supply demand in balance from twenty
Speaker 3: twenty two to twenty twenty three, not twenty twenty seven.
Speaker 3: We need to be making policy for twenty twenty seven
Speaker 3: because of policy lags. And there side of it is
Speaker 3: the portfolio management fees that I'm sure you've talked about
Speaker 3: again with many of your guests. Many times stock market
Speaker 3: went up mechanically inflation was higher despite many of your
Speaker 3: other guests, I'm sure no doubt telling you about fee
Speaker 3: compression and these asset management industry for decades, so you
Speaker 3: was tracked from those two things. Underlying inflation is running
Speaker 3: a two point three percent that's with the noise of
Speaker 3: our target.
Speaker 2: That sounds like an argument for neutral. You're making an
Speaker 2: argument though, for this year, for a combination. Where does
Speaker 2: that come from? Why are you looking for a combinative
Speaker 2: monetary policy? Stats coming out to Washington. Yeah, so a
Speaker 2: couple things.
Speaker 3: First of all, as I just said, underlying inflation's running
Speaker 3: within noise of our target, and that's a good indication
Speaker 3: of where overall inflation is going to be going in
Speaker 3: the medium term. But then the unemployment rate is four
Speaker 3: point six percent, right, So that means that there's about
Speaker 3: a million Americans who don't have jobs, who could have
Speaker 3: jobs without causing unwanted inflation, without causing unwanted up, we're
Speaker 3: pressure on inflation. I don't think it's right to tell
Speaker 3: those people that they shouldn't have jobs because we're just
Speaker 3: mechanically calculating inflation in some silly way. I just don't
Speaker 3: think that makes a lot of sense. The other thing
Speaker 3: is that because we've kept policy tighter than I think
Speaker 3: it ought to be, that makes me mark down our
Speaker 3: growth forecast for the future relative to where it should be.
Speaker 3: And so if we didn't need if we hadn't kept
Speaker 3: been keeping policy in my view too tight over the
Speaker 3: last year or so, it wouldn't be necessary to provide
Speaker 3: that type just correctly.
Speaker 2: You say marked down in the future, because they fat
Speaker 2: actually marked up GDP for twenty six What do you
Speaker 2: mean in the future.
Speaker 3: No, So, like when you look at these dots right
Speaker 3: in the set, they're projections of appropriate policy, and projections
Speaker 3: of economic fundamentals like growth and inflation conditional upon appropriate policy.
Speaker 3: So my projections for growth and inflation are conditional upon
Speaker 3: getting my policy forecast right, my policy projection. If I
Speaker 3: don't get my policy projection because the rest of the
Speaker 3: committee is more hawkish than I am, then we wouldn't
Speaker 3: meet my growth and inflation projections. We'd underperform them. And
Speaker 3: so because policy has been in my view too tight
Speaker 3: for the last year, that means that my expectations of
Speaker 3: growth will ultimately be will ultimately be unsatisfied because we
Speaker 3: didn't get the policy that I wanted.
Speaker 4: You have GDP two point six percent roughly over the
Speaker 4: next few years. Are you saying that the appropriate growth
Speaker 4: rate is something like that two percent and two point
Speaker 4: six percent and not necessarily three percent.
Speaker 3: Are above Well, so that's conditional upon getting upon getting
Speaker 3: the policy projection that I want, right, I think, and
Speaker 3: I think, and part of that is due part of
Speaker 3: the reason why it's a little bit lower than I
Speaker 3: think two point eight two point nine is probably where
Speaker 3: more where it would be if we got if we
Speaker 3: sort of had the great policy the entire time. Part
Speaker 3: of the reason it's a little bit lower than that
Speaker 3: is because we got to account for policy having been
Speaker 3: too tight over the last twelve months.
Speaker 1: There's also a question about the reaction function.
Speaker 4: You're talking about the data that we're going to be
Speaker 4: getting tomorrow.
Speaker 1: What would you have to see to change your view?
Speaker 4: I mean, if we saw, let's say, the unemployment rate
Speaker 4: go down to four point four percent, would you start
Speaker 4: to question whether one hundred and fifty basis points of
Speaker 4: cuts is really necessary this year?
Speaker 3: That's a great question. And before I answer it, let
Speaker 3: me step back a foot and say that my forecast
Speaker 3: is conditional upon shelter inflation coming down right, And there's
Speaker 3: people who agree with me, by the way, like you
Speaker 3: look at the research from Goldman Sachs, you know, it's
Speaker 3: pretty similar to where I am on shelter. They've got
Speaker 3: shelter inflation running below the pre COVID rate by the
Speaker 3: end of the year, similar to where I have it.
Speaker 3: Where I differ from a lot of my colleagues again,
Speaker 3: is thinking that goods inflation is not drive being driven
Speaker 3: by tariffs. Don'tee tariffs drive being driven by goods inflation.
Speaker 3: I see goods inflation. I'm not sure what driving I
Speaker 3: listed a few possibilities in the speech in December. I
Speaker 3: think the jury is still out on that one. But
Speaker 3: if I end up being right on inflation and gold
Speaker 3: sorry on shelter. If I end up being right in
Speaker 3: shelter and Goldman ends up being read in shelter, and
Speaker 3: I end up being wrong on tariffs and everybody else
Speaker 3: is right on tariffs, then we're going to undershoot our target.
Speaker 3: Two sided risk is back, And I think that people
Speaker 3: haven't really internalized that yet. And I think it's important
Speaker 3: to appreciate that. Now, where would I be wrong? Because
Speaker 3: so much of my disinflation forecast is based upon shelter.
Speaker 3: I'm going to be wrong if market rents pick up again.
Speaker 4: So you're saying this is all an inflation issue and
Speaker 4: not anything to do with the labor market.
Speaker 3: Now, as I said before, unemployment is unemployment is somewhat
Speaker 3: above the somewhat above what where I view the natural rate,
Speaker 3: and so it's sixty basis points a million people you
Speaker 3: know of unnecessary unemployment that we could reduce by having
Speaker 3: a more appropriate policy.
Speaker 1: Now it's Talisa's point.
Speaker 5: Is there a line in the sand and the unemployment
Speaker 5: rate tomorrow that would maybe have you think about this
Speaker 5: a little bit differently? What if the unemployment rate drops
Speaker 5: down four point five percent or even four point four percent?
Speaker 3: Yeah, I would absolutely add I would absolutely jus my projection.
Speaker 3: So if you look at the September step, right, I
Speaker 3: was fifty business points higher than I was in the
Speaker 3: December step. Part of the reason why I adjusted my
Speaker 3: dot down by fifty basis points is because the labor
Speaker 3: market didn't perform from my expectations that I had in September,
Speaker 3: and because inflation actually I performed to the downside, right,
Speaker 3: So it was appropriate to adjust my dot down and
Speaker 3: then on top of that, we had the two type
Speaker 3: policies I described. So if the data come in a
Speaker 3: little bit better, yeah, of course I'm going to adjust
Speaker 3: my expectation.
Speaker 5: In just the past few weeks, we've heard from a
Speaker 5: number of your colleagues talking about how actually they feel
Speaker 5: like we're pretty close to neutral. Have you made any
Speaker 5: inroads convincing them that they're not right about this the
Speaker 5: way you see the world.
Speaker 3: You know, I can't, I can't speak for them, but
Speaker 3: you know, I think that every month we come in
Speaker 3: and the unemployment rate takes up a little bit, and
Speaker 3: the inflation, you know, the inflation data sort of seemed
Speaker 3: to be doing a little bit better. I think it's
Speaker 3: really difficult to argue that policy is neutral, especially when
Speaker 3: we've been on this course of gradual listening to the
Speaker 3: labor market for a couple of years now. It's just
Speaker 3: really difficult in my mind to sort of argue that
Speaker 3: that that policy is not is not restricting the economy.
Speaker 2: A couple of ways I want to pick, can yeah,
Speaker 2: and one is neutral and the other is correct. I
Speaker 2: think it's very difficult to say this is where I
Speaker 2: think neutral is, and this should be the correct policy rate,
Speaker 2: because it's such a guessing game as to where neutral is.
Speaker 6: And I think you understand that.
Speaker 2: Of course, I also want to pick up the difference
Speaker 2: between being an economist and being a policy maker. When
Speaker 2: you say two way risk, I think that really makes
Speaker 2: us all think about speed and the appropriate speed to
Speaker 2: adjust monetary policy when there risk two sided risk. Why
Speaker 2: do you think we should be going this fast this
Speaker 2: year in your mind to cut that aggressively in twenty
Speaker 2: twenty six.
Speaker 3: Sure, so, same thing as I said in the lest
Speaker 3: few times I've been here. We're still materially above neutral
Speaker 3: in my mind, And there's not really a reason to
Speaker 3: be materially above neutral if the labor market isn't a
Speaker 3: weakening path and inflation is underlying inflation's already running close
Speaker 3: store target and on trajectory to hit it. To hit
Speaker 3: the target, there's just not a real reason to be
Speaker 3: so restrictive. And we're running unnecessary risks on the labor
Speaker 3: market by being so restrictive, And so in my mind,
Speaker 3: it's like we're selling options for nothing, and I don't
Speaker 3: see why we're selling those options.
Speaker 2: This just requires such a strong amount of conviction, though
Speaker 2: coming down to the pandemic. I think what we all
Speaker 2: lean was a massive degree of humidity because there were
Speaker 2: so many things that we thought were obvious that actually
Speaker 2: things just turned out to be completely the opposite. And
Speaker 2: I wonder if this year we should have the same
Speaker 2: approach to monetary policy. As a monetary policy official, do
Speaker 2: you have to sit here and say, actually, the prudent
Speaker 2: way to do things is actually to move slowly and
Speaker 2: work things out meeting by meeting, because that's what I
Speaker 2: hear from other members of the committee, And I'm wondering
Speaker 2: why you see things so differently.
Speaker 3: Sure, so, first of all, I'll say that I was
Speaker 3: right about inflation at coming out of the pandemic. And
Speaker 3: if you sort of go back to twenty twenty when
Speaker 3: I was in the Treasury Department, you know, we were
Speaker 3: arguing for a smaller stimulus package because we didn't see
Speaker 3: we didn't see COVID as a similar type of recession
Speaker 3: that we had POSTGFC, post dot com bubble, where you
Speaker 3: had persistently leveraging, dragging on demand that caused the balance
Speaker 3: sheet recession with a persistent, slow, crappy recovery. Right, COVID
Speaker 3: was like a switch turned off. Right people stayed home
Speaker 3: and the switch turned on when they started going out again,
Speaker 3: and so there wasn't going to be a slow recovery.
Speaker 3: And that's why we were pushing for smaller stimulus packages,
Speaker 3: because we didn't think that it narrated that type of package.
Speaker 3: We were concerned about inflation picking up. So I did
Speaker 3: get that. I did get that right, and I do
Speaker 3: understand the value of of being cautions and having humiliating
Speaker 3: these things. I will say my forecast, as I said before,
Speaker 3: is predicated upon shelter inflation, and shelter is a weird
Speaker 3: thing where market rents give us a window into measured
Speaker 3: into the path of measured inflation that's very different than
Speaker 3: other sections of the inflation index. We know that market rents,
Speaker 3: a weighted average of single family and multi family market
Speaker 3: rents have been growing at a one percent rate for
Speaker 3: two years now. We know that average tenant rents have
Speaker 3: caught up to new tenant rents. Right, there are statistically
Speaker 3: mechanical relationships that give you a lot of confidence that
Speaker 3: measured shelter inflation is going to come down a lot. Right.
Speaker 3: You don't have that type of confidence when you're talking
Speaker 3: about goods. I said before, I don't know what's driving
Speaker 3: goods inflation, right, I don't have this this forecast that
Speaker 3: goods inflation is going to is going to come down
Speaker 3: because it's just driven by tariffs that my colleagues seem
Speaker 3: to have. Right. I don't have that type of confidence
Speaker 3: on areas the index that I think are much more
Speaker 3: difficult to understand. Shelter is a mechanic thing from market
Speaker 3: rents to measured inflation, and therefore it's in my mind
Speaker 3: appropriate to have that high degree of confidence. And to
Speaker 3: Leasa's point, where would I be wrong if the market
Speaker 3: rents pick up again? If the market rents pick up,
Speaker 3: then I'm going to say my mechanical pass through from
Speaker 3: market rents into measured shelter inflation is getting invalided, and
Speaker 3: we'll see that.
Speaker 4: Just to hone in a little bit on the housing aspect,
Speaker 4: since that has been a really hot topic, how much
Speaker 4: signal would you take if you did start cutting more
Speaker 4: aggressively at the fetcher reserve and tenure yield rows and
Speaker 4: that actually created an issue for mortgage rates and the
Speaker 4: pass through there. It might actually help with the disinflation,
Speaker 4: but it might as exactly be the outcome that you're
Speaker 4: looking for.
Speaker 3: Yeah, so this is an area where I where I'd
Speaker 3: want to have I'd want to not jump to conclusions
Speaker 3: because I want to sort of try and analyze it
Speaker 3: very carefully and think about what the market is saying,
Speaker 3: think about what the economy is doing. And if it's
Speaker 3: the case that you cut rates and you sort of
Speaker 3: get a burst of activity in some sector of the
Speaker 3: economy that's not housing and that ends up crowding out housing,
Speaker 3: then you know, you wouldn't really mind. You're focused on aggregates,
Speaker 3: You're focused on inflation, very inflation, You're focused on er unemployment. Right.
Speaker 3: If it looks like you cut rates and the bottom
Speaker 3: market is giving you a very clear signal and I'm
Speaker 3: not just talking about like you know, trading behavior for
Speaker 3: a week. I'm talking about a very clear signal over
Speaker 3: the course of a period of time that it's not
Speaker 3: the right move, then I think, yeah, you want to
Speaker 3: you want to take that signal, and you want to
Speaker 3: think about what's the market telling me that I missed?
Speaker 3: Is the market right? Am I wrong? Let me rethink
Speaker 3: my framework.
Speaker 6: You're going to miss this.
Speaker 2: When it's all over, it feels like you're enjoying this
Speaker 2: are you going to miss this when you have to
Speaker 2: leave the Federal Reserve?
Speaker 3: Well, you know, Uh, that's not part of my forecast.
Speaker 6: How are you going to hang around?
Speaker 4: Oh?
Speaker 3: I have no idea. You know, we'll see. I don't
Speaker 3: I don't make personal decisions.
Speaker 6: Okay, you've had nothing at all from anybody.
Speaker 3: Uh, you know, I think that you know, we're very
Speaker 3: clearly now getting into getting into the new year, and
Speaker 3: the president. You know, the President has said in the
Speaker 3: past that he would make announcements as we got there,
Speaker 3: So you know, I imagine we'll be getting some at
Speaker 3: some point. But you know, I don't know. I don't
Speaker 3: know anything about my future, so I would I wouldn't
Speaker 3: mind it.
Speaker 6: Stay with us.
Speaker 2: More Bloomberg surveillance coming up after this. We'll begin this
Speaker 2: hour with stocks continuing to pull back from all time high,
Speaker 2: seemshap of principal asset management seeing upside ahead, writing, widespread
Speaker 2: fiscal stimulus, monetary normalization, accelerating AI driven capex, and adoption
Speaker 2: are all factors that should underpin robust growth. SEEMA joint
Speaker 2: is now for more seeming there they kind of structure
Speaker 2: all big picture stories for the next twelve twenty four
Speaker 2: months or so. Let's talk about the last twelve twenty
Speaker 2: four hours, Seema. We're pushing back on executive pay, on
Speaker 2: capital return. These are things you wouldn't typically associate with
Speaker 2: the United States, certainly wouldn't typically associate them with the
Speaker 2: Republican Party. As you sit there in London and your
Speaker 2: investors think about allocating capital to the United States, does
Speaker 2: it give you pause?
Speaker 7: Well, Hi, John, I think it does to some extent.
Speaker 7: I mean, at any time that you have government into mention,
Speaker 7: it typically does put off investors, obviously by varying amounts.
Speaker 7: There are some things that he said there which I
Speaker 7: think they don't necessarily add up. I mean, in terms
Speaker 7: of putting off investors from corporate housing, you almost need
Speaker 7: them there to encourage greater supply, which would be your
Speaker 7: best way of resolving afordability issues. And then even on
Speaker 7: the defense side, you know, trying to put off the
Speaker 7: investment is hardly going to be conducive to some of
Speaker 7: the things that he's saying. The other thing about this
Speaker 7: as well, is that coming into twenty twenty six, there's
Speaker 7: obviously been a lot of optimism. One of the thing
Speaker 7: that's been non people's assumptions is that policy upheaval volatility
Speaker 7: is going to be a little bit less in what
Speaker 7: we had last year, And of course, as you said,
Speaker 7: the last for the eight hours suggests the exact opposite.
Speaker 7: So I think that there's some things in here which
Speaker 7: may not have immediate impact, but cerddenly from an investor's standpoint,
Speaker 7: this is a moment of pause that maybe twenty twenty
Speaker 7: six is not going to be as smooth as a
Speaker 7: lot of people anticipated.
Speaker 6: Well, let's just reflect on the last twelve months. So
Speaker 6: earnings have been great.
Speaker 2: Payroll growth it's been absolutely terrible, and investors have been
Speaker 2: okay with that because earnings have been great and the
Speaker 2: equity market has been hitting all time highs. At the
Speaker 2: same time, consumer sentiment has been rock bottom. Now, if
Speaker 2: you're a politician, to address the consumer sentiment issues, you
Speaker 2: might have to introduce policies that aren't going to be
Speaker 2: favorable for the kind of things that have driven us
Speaker 2: to all time highs and the equity market, the kind
Speaker 2: of things that are driven a long term bull market
Speaker 2: in the United States. Se I mean, do we have
Speaker 2: to think about those issues a little bit more going
Speaker 2: into the midterms and beyond that for a whole generation
Speaker 2: of individuals that haven't participated in this run up in
Speaker 2: the equity market. They're voting for this stuff and they're
Speaker 2: going to keep voting for this stuff, and it's the
Speaker 2: kind of stuff that's not going to be favorable for
Speaker 2: risk assets.
Speaker 7: It is, I think it's you know, some of those pockets.
Speaker 7: So it's a question of how much does it impact
Speaker 7: the aggregate. So you know, as you said to your point,
Speaker 7: affordability is going to be the buzzword. It has been
Speaker 7: for the last month or two, it's likely to continue.
Speaker 7: How could we see that playing out, Well, there's obviously
Speaker 7: the couple of policies around a dividend. There's also the
Speaker 7: idea about maybe potentially lowering some of the tariffs that
Speaker 7: are impacting some of the lowing hassles the most. Now,
Speaker 7: those things ideally if we think about think that through
Speaker 7: if they can get passed, and that would suggest that
Speaker 7: you could see some upside for consumer discretionary. But ultimately,
Speaker 7: because of the case show, but mainly because the top
Speaker 7: ten percent really do it count thro around half of
Speaker 7: you as consumer spending, it doesn't necessarily move the needle.
Speaker 7: What we want to see is a constructive and can
Speaker 7: back up where Ernie's can continue to do well, and
Speaker 7: it's important that those policies, and at the moment it
Speaker 7: doesn't look like it will be, but it doesn't as
Speaker 7: long as those policies are not going to be impacting
Speaker 7: the Ernie's growth for a lot of these companies that
Speaker 7: we're focusing on.
Speaker 4: This is the reason why I see that so many
Speaker 4: people have looked past some of the volatility and at
Speaker 4: least headlines coming from Washington, DC. There is one aspect
Speaker 4: though that has remained relatively unnoticed, at least with respect
Speaker 4: to bond markets, and that is that you can expect
Speaker 4: an expansion of the fiscal deficit, possibly quite considerably, especially
Speaker 4: if anything even close to what the President is proposing
Speaker 4: relating to the government relating to the military comes to pass.
Speaker 4: Why do you think that's not shaking up fixed income
Speaker 4: markets in any material way.
Speaker 7: Well, I think at the moment, one of the considerations
Speaker 7: is a lot of this won't get past your Congress.
Speaker 7: So there's enough I wouldn't say fiscal discipline or considerable concern,
Speaker 7: but there's enough of a pushback that a lot of
Speaker 7: this won't come to pass.
Speaker 6: But I think that you're absolutely right.
Speaker 7: And saying that this is a key risk. When we're
Speaker 7: looking at the acuity market, we feel pretty positive about
Speaker 7: the macro backdrop and earnings. The one caveat to this
Speaker 7: so or is that bond deals have to stay fairly
Speaker 7: well behaved. You cannot see a very significant sell off
Speaker 7: against this backdrop. I mean, ultimately for this year, what
Speaker 7: we're expecting is that earnings or is it equity returns
Speaker 7: won't be driven by multiple expansions. They have to come
Speaker 7: from earnings, and any significant increase in interest rates bond
Speaker 7: deals could be a real hurdle for the expectations of
Speaker 7: I guess low double digit returns that we have.
Speaker 1: Well, I guess to build on that.
Speaker 4: We've just seen the fastest start to a year for
Speaker 4: corporate and government bond issue is ever. We have seen
Speaker 4: two one hundred and sixty billion dollars worth of sales
Speaker 4: from these entities over just the first few trading days.
Speaker 1: And I just wonder at what point you start to get.
Speaker 4: Real pushback from debt markets that are saying, what are
Speaker 4: we funding exactly? Is there sort of a blank check
Speaker 4: that we're offering to governments and corporations to just build
Speaker 4: to nowhere?
Speaker 7: You know, coming into twenty twenty. See, if I think
Speaker 7: everyone's you know, concerned about the debtload doesn't have been
Speaker 7: so many many years, and the assumption has been that
Speaker 7: twenty twenty six is not the year when this is
Speaker 7: going to come to a head.
Speaker 6: As long as the macro is.
Speaker 7: Okay, as long as the economy is doing okay the
Speaker 7: fairdest cutting rates, then this is something the issues is
Speaker 7: something that companies can continue to absorb. But of course
Speaker 7: there is a time limit to that. Now we don't
Speaker 7: know when that's going to be. But at least just
Speaker 7: looking at the economics behind everything which is driving the market,
Speaker 7: we do feel fairly sanguine about that. We're hoping it's
Speaker 7: a twenty twenty seven story, not a twenty sixth story.
Speaker 5: As a global strategy, when you see what the president
Speaker 5: is doing, the state intervention really in full swing when
Speaker 5: it comes to the United States right now. Do you
Speaker 5: expect this to be a theme this year for more industries,
Speaker 5: not just ones that are critical for national security?
Speaker 7: Well, I think that interventionist is as you said, it's
Speaker 7: not just it potentially isn't about just national security. I think,
Speaker 7: as I said before, I think affordability is really key,
Speaker 7: which is why we're hearing so much about housing. Maybe
Speaker 7: intervention in or at least pushing back from companies ort
Speaker 7: least stopping them from passing on some of the tap increases.
Speaker 7: I think those are all things that we could anticipate
Speaker 7: for twenty twenty six, and I think as an Internet
Speaker 7: for investor, one of the things that we do here
Speaker 7: in Europe and across Asia is these concerns about the
Speaker 7: US outlook. Is one of the reasons why you are
Speaker 7: seeing this global diversification trade just gaining more and more momentum.
Speaker 7: People really starting to look outside of the US and
Speaker 7: also recognizing the fundamental strengths that exist in other countries.
Speaker 6: I don't think that we're looking.
Speaker 7: At a kind of a flood of movement away from
Speaker 7: the US, but I think it does just add to
Speaker 7: the attractiveness for other markets.
Speaker 5: How seriously do you take some of the President's statements,
Speaker 5: because I'm thinking of just housing itself. He even said
Speaker 5: I will call on Congress to codify it. This has
Speaker 5: to be legislation that goes through the House of Representatives
Speaker 5: and the Senate, not policy by truth.
Speaker 7: Yeah, you don't have to take everything with a pinch
Speaker 7: of sol and I think the reason that we're not
Speaker 7: seeing the bond market react is because there is this
Speaker 7: belief that it's not going to get through Congress. So
Speaker 7: these are very popular words. Some of it, Inepoli, I
Speaker 7: think will trickle through, but we're not expecting an avalanche
Speaker 7: of policy moves, but a lot of policy rettroc should
Speaker 7: be expected ahead of the midterms.
Speaker 2: Stay with us more Bloomberg surveillance coming up after this.
Speaker 2: The polit Global Management president Jim soeuter right in the
Speaker 2: following twenty six US outlook is consistent with a stagflation
Speaker 2: re environment, and we expect interest rates to be higher
Speaker 2: for longer.
Speaker 6: Jim joins US now for more. Jim go Mornic, Good morning, John.
Speaker 3: How are you happy.
Speaker 6: I'm well, it's good to see you.
Speaker 2: I want to pick up on this headline from our
Speaker 2: friends over the ft in the last month, Apollo's cutting
Speaker 2: risk and still piling cash.
Speaker 6: Is that true? What do you guys have to well?
Speaker 8: I would say that we've always been known as a
Speaker 8: discipline investor. We talk about purchase price matter as we
Speaker 8: talk about alignment with our investors, and I think that
Speaker 8: what that statement is is really about the gauntlet for
Speaker 8: approving investments that Apollo has gotten higher and higher over
Speaker 8: the last year or so. As we see an environment
Speaker 8: that down the fairwee I'll use a golf analogy. Down
Speaker 8: the fairway, you've got a lot of great things going on,
Speaker 8: you know, massive capex cycle, good economic growth, consumer and
Speaker 8: solid shape, a variety of great attributes. That being said,
Speaker 8: the rough where there's lots of challenges between geopolitics, between
Speaker 8: the concern about inflation, between the concern about the return
Speaker 8: of invested capital and AI there's a variety of left
Speaker 8: hail items that have certain grown in stature. As I
Speaker 8: listened to some of the macro commentary here, I think
Speaker 8: there's a great deal of humility about the macro view
Speaker 8: of how the predictions. As I meant, I've said here
Speaker 8: many times. We sat here after SVB, we all thought
Speaker 8: massive capital slow down and spending and credit crisis. The
Speaker 8: US economy really was massively resilient. You guys talked earlier
Speaker 8: about what's going on with the deficit. I think it's
Speaker 8: a little bit it's the economy stupid. The US economy.
Speaker 8: People just don't want to shorten the great momentum of
Speaker 8: what's going on, and we have an administration. It's very
Speaker 8: politically savvy about populist topics. He's been very responsive. But
Speaker 8: again this back to us, back to the question you had.
Speaker 3: We're putting money to work. This week was a busy week.
Speaker 8: We announced six billion of deals of transactions, all great companies. Again,
Speaker 8: we're leaning into larger companies that are part of the
Speaker 8: global industrial renaissance. One with that Brad Jacobs of forty
Speaker 8: to thirty five year winner in the building product space.
Speaker 8: The second one with Russell Investments really simplifying their capital structure.
Speaker 8: And then the last transaction was very interesting. Actually it
Speaker 8: was for veilor Xai. It was really a sale lease
Speaker 8: back on a massive amount five billion of Nvidia chips.
Speaker 8: So all three really interesting transactions, but really well structured
Speaker 8: downside risk, and I think that's our view right now.
Speaker 8: We want to be investing capital. But you've got to
Speaker 8: acknowledge you can wake up on a Saturday morning and
Speaker 8: see us with activities around the globe that really enhances
Speaker 8: the tail risk of geopolitics. You can get a stroke
Speaker 8: of the pen announcement yesterday with regard to housing, and
Speaker 8: so I think you have to be very very careful
Speaker 8: about how you invest long term at scale.
Speaker 2: To extend the analogy, though, to your point, the fair
Speaker 2: way is getting narrower, the rough is getting deeper. In
Speaker 2: the last few years it has not been that way.
Speaker 2: Allocate to risk and you'll perform. You'll do well world.
Speaker 2: It's like a tougher environment. The analogy for golf. For
Speaker 2: those who play a lot of golf, it's worth the
Speaker 2: US Open. US Open is known for tight fairways and
Speaker 2: really punitive rough and if you cape in the faaraway,
Speaker 2: you're going to be a great victor and you're going
Speaker 2: to have great success. I think there's going to be
Speaker 2: as last year will remind us you can have some
Speaker 2: bumps in the road during the course of the year.
Speaker 2: That definitely changed the trajectory on liquidity, on momentum, on
Speaker 2: risk appetite. So but I think the long term trend
Speaker 2: is quite positive. But I do think you have to
Speaker 2: be very measured about how you execute your business model.
Speaker 4: So if that's the US Cup, do you go to
Speaker 4: the Ryder Cup just.
Speaker 1: You know, I mean the idea, do you stand your
Speaker 1: I google that evidently I bombed it on it.
Speaker 4: I'm curious if you go overseas, you know, because to
Speaker 4: differs fy away from the United States.
Speaker 8: We've been We've been i would say two account that
Speaker 8: we've been very vocal and I've been vocaling on this
Speaker 8: program about Europe. You know, we we when you look
Speaker 8: at the needs of governments around the globe, especially in Europe,
Speaker 8: in Germany in particular, and some more so in the UK,
Speaker 8: the government does demand for capital far aways their ability
Speaker 8: to participate, and so we want to be part of
Speaker 8: that renaissance and that part of the globe in places
Speaker 8: like Japan and Australia. We want to be part of
Speaker 8: the retirement solutions and some of the global industrial renaissance
Speaker 8: with a changing banking system. We're not a broadly speaking,
Speaker 8: a developing an emerging markets investor. So while we have
Speaker 8: a view on what's going on in Latin America today,
Speaker 8: that's a negligible part of our capital. That's just not
Speaker 8: what we do. We're really a G seven and larger
Speaker 8: economy investor.
Speaker 4: So you were talking about how you're getting more conservative.
Speaker 4: Corporations and governments are attacking the market at a record
Speaker 4: pace so far this year, about two hundred and sixty
Speaker 4: billion dollars of bond issuance from governments and corporations around
Speaker 4: the world have been issued the fastest pace ever. Is
Speaker 4: this because there is a lot of optimism out there
Speaker 4: or is this because they see a small window that
Speaker 4: could close and they want to get in.
Speaker 8: I don't think it's a small when when you look
Speaker 8: at the numbers that have been put out by the
Speaker 8: large financial institutions, the big banks about net issuance in
Speaker 8: the IG market, it's north of like it's anywhere from
Speaker 8: eight hundred billion to a trillion two net issuance, which
Speaker 8: is one of the largest numbers in the last ten
Speaker 8: to fifteen years. Same can be said in the high
Speaker 8: yield and the leverage loan market, the net issuance is
Speaker 8: going to be quite high. So with real rates and
Speaker 8: real yields fairly high in a historic basis, with a
Speaker 8: variety of pensioners and investors around the globe looking for
Speaker 8: long duration yield, it's a pretty powerful mix of supply
Speaker 8: and demand in terms of taking that overhang, if you will.
Speaker 8: I think one of the big questions is does the
Speaker 8: equity New issue IPO calendar actually come to fruition. And
Speaker 8: the second thing that people aren't talking about is where
Speaker 8: oil is right now. It's very deflationary if it were
Speaker 8: to stay at these levels or even go lower. Again,
Speaker 8: we're talking about all the things that can go wrong.
Speaker 8: I'm a credit guy. You know, bonds don't go to
Speaker 8: two hundred, they go to zero. I'm cautious by definition,
Speaker 8: but you know, in oil at these levels on WTI
Speaker 8: at fifty six fifty seven, and that's very deflationary and
Speaker 8: very positive for economic growth. So you know, again, I
Speaker 8: think that there's a variety of balancing acts here going on.
Speaker 8: But you know, to John's first question, I would say
Speaker 8: that we think that there's a variety of issues that
Speaker 8: one needs to deal with, but at the same time,
Speaker 8: you want to be putting money to work in large scale. Now,
Speaker 8: if you look at the traditional high yield market, the
Speaker 8: triple CLBO buyout, that activity is just not happening in
Speaker 8: scale anymore. It's being funded in private credit, which I'm
Speaker 8: sure we'll talk about because of our big white paper
Speaker 8: in December. But at the end of the day, it's
Speaker 8: really about credit and the ability for this IPO calendar
Speaker 8: to come to.
Speaker 2: We're shield on some of this gym because I can
Speaker 2: tell you sort of openly and honestly what I've struggled
Speaker 2: with I don't know what to look at anymore.
Speaker 6: Payrolls has been a bit of a head fake.
Speaker 2: In the last twelve months, we've seen a real deceleration
Speaker 2: in payrolls growth, but it's not been relevant to the
Speaker 2: performance of risk ansets more broadly, something that you and
Speaker 2: the team have talked about for a number of years now.
Speaker 2: When we saw interest rates go to four pushing five percent,
Speaker 2: Lisa and I were talking about this for the best
Speaker 2: part of twelve months. How on earth is this economy
Speaker 2: going to deal with four to five percent interest rates?
Speaker 2: And we dealt with that just about Okay, what should
Speaker 2: we be focused?
Speaker 8: I think, you know, I think to answer that question,
Speaker 8: it's really we talk about the changing backdrop of market structure.
Speaker 8: The reality is in the US today, it's been an
Speaker 8: extended credit cycle. It's harder to have a real economic
Speaker 8: recession because of the diversity of funding across the board.
Speaker 8: We have the healthiest banks and the globe. We have
Speaker 8: a securitization market that's alive and well in record size
Speaker 8: of issuance. That disperses a lot of risk around the economy.
Speaker 8: In terms of balance sheets, you have a consumer in
Speaker 8: pretty good shape. You have a housing market where forty
Speaker 8: percent of folks don't have a mortgage. I'm not saying
Speaker 8: we're not going to have an economic cycle. We will
Speaker 8: have an economic cycle, we will have a credit cycle.
Speaker 8: But if the post SVB environment is any lesson to
Speaker 8: us all because of the advances and the evolution of
Speaker 8: the US economy since the GFC, it's a lot harder
Speaker 8: to push over this machine than it had been in
Speaker 8: the past. The transmission mechanism of the FED that used
Speaker 8: to be instantaneous is not what it used to be.
Speaker 8: We saw it in the last two years with housing
Speaker 8: in the US because of the thirty year mortgage concept
Speaker 8: or the lack of a mortgage versus countries like the
Speaker 8: UK where most folks are on a five or seven
Speaker 8: year floating rate mortgage. That has an immediate impact on
Speaker 8: the breaks of the consumer and the economy, not the
Speaker 8: case in the US. So the strength, the breadth of
Speaker 8: market structure, how companies finance, the role of banking, the
Speaker 8: ability for FED, the FED to actually have that transmission
Speaker 8: mechanism of raising rais and slung the economy down.
Speaker 3: It's not what it used to be. It's not your
Speaker 3: father's economists.
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