Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: This is Wall Street Week. I'm David Weston bringing you
Speaker 2: stories of capitalism. The world is focused on the strait
Speaker 2: of hor moves. What about the other shipping choke points
Speaker 2: at risk? And what can be done before there is
Speaker 2: a crisis? Private equity has been the source of market
Speaker 2: beating returns four years, but now the spread has come
Speaker 2: down and getting your money out can be a problem.
Speaker 2: Cuba is facing yet another economic crisis, in no small
Speaker 2: part because of US sanctions. President Trump says he's going
Speaker 2: to make sure the country finally opens up its economic system.
Speaker 2: We've heard this story before. Could this time truly be different?
Speaker 2: But we start with the bond market, caught between fears
Speaker 2: of inflation and long term fiscal risks. Rick Reader is
Speaker 2: Black Reg's Chief investment Officer of Global Fixed Income and
Speaker 2: head of the Global Allocation Investment Team. Rick, we got
Speaker 2: CPI numbers this week, and there was good news in
Speaker 2: the fact that they're not going up. On the other hand,
Speaker 2: it's not two point zero the way we've been promised.
Speaker 2: So which is more important the good news of the
Speaker 2: bad news?
Speaker 3: Well, I will say markets have been more nervous about
Speaker 3: this number, and I would think there was a collective
Speaker 3: industry wide sigh of relief when this number came out,
Speaker 3: because it wasn't you know, this is one of those
Speaker 3: numbers it becomes in high then all of a sudden,
Speaker 3: now you put the FED in clear hiking mode and
Speaker 3: you know, starting to see consistent numbers that. So if
Speaker 3: you go back into the last ten numbers that we've
Speaker 3: gotten in core CPI, eight of the ten have been
Speaker 3: point two rounded or below that. So it's still a
Speaker 3: bit elevated relative to where the fed's long term objective is.
Speaker 3: But I think the markets felt pretty good about woo.
Speaker 3: We got through it and it wasn't that high. And
Speaker 3: then if you go through the comple in parts otherwise
Speaker 3: a number of pretty close to expectations in only almost
Speaker 3: every regard you are seeing still things like lodging away
Speaker 3: from home, hotel, airlines, you're seeing leisure experiences about the
Speaker 3: World Cup effect, and otherwise you're still seeing some pricing
Speaker 3: pressure around that. But overall it was it was it
Speaker 3: was an okay number, but yeah, we're not certainly not
Speaker 3: a target yet, So.
Speaker 2: Pull back a little bit and give us a longer
Speaker 2: term view over the years of how it's bounced around
Speaker 2: and where we are today compared to where we've been.
Speaker 3: So, I mean, the big deal for me is a
Speaker 3: fence mandate, is price stability. It's not two, but you'd
Speaker 3: like to get it. There is real efficacy around two
Speaker 3: percent is a normalized equilibrium for what an economy should
Speaker 3: run out. So you want to get to that number.
Speaker 3: We haven't gotten there in a long time. By the way,
Speaker 3: you can take the two decades before. It's pretty hard
Speaker 3: to get it as high as too. You're in the
Speaker 3: ballpark today and you know when you were running, certainly
Speaker 3: post COVID, you're running at numbers five six. That was scary.
Speaker 3: But if you look at inflation expectations today, think about
Speaker 3: where we've come from, it's pretty stable. Particularly when you've
Speaker 3: got an economy that's running with a lot of debt
Speaker 3: on it. That the thing you really can't have outen.
Speaker 3: You can't have a deflating dynamic because it enhances the
Speaker 3: true course of the debt. Today, I would argue it's
Speaker 3: the number we'd like to see a little bit lower,
Speaker 3: but it's certainly not daunting by any stretch relative to
Speaker 3: anything we've seen in history.
Speaker 2: So take COVID out of it for a moment. Go
Speaker 2: back to like twenty twenty four for example, where are
Speaker 2: we in core? What's the trend line?
Speaker 4: Yeah?
Speaker 3: So, you know, the thing I find interesting is that
Speaker 3: is Chairman Warsh has focused on the left side of
Speaker 3: the decimal place and the right And I think you
Speaker 3: have to take that to heart. Meaning if you're in
Speaker 3: and around the two's, you're okay. But when you actually
Speaker 3: zoom in closer with the markets than to focus on
Speaker 3: there's it's been this maniacal focus on the right side.
Speaker 3: And you know, since you know, certainly over the last
Speaker 3: year or so, the trend is pretty good and that
Speaker 3: it's coming down, but it moves around, and you know,
Speaker 3: the market's tent to focus on the tents of a
Speaker 3: percent in terms of these movements. By the way, I
Speaker 3: always get a kick of the first thing I saw
Speaker 3: this morning while Chairman Warsh talked about the left side
Speaker 3: of the decimal place, the number was it printed at
Speaker 3: point two one five four and people talking about their rounding.
Speaker 3: You think about, for a broad economy like this, does
Speaker 3: anybody really care about the point five other than the
Speaker 3: market participants do? So, you know, part of what when
Speaker 3: you zoom out and you say, Okay, that's a pretty
Speaker 3: good We're in a pretty good place. Would like to
Speaker 3: see a trend lower. For me, I actually think we
Speaker 3: are trending a bit lower. We think core PC by
Speaker 3: the end of the year is around two to eight.
Speaker 3: Next year we think gets to two five. And course
Speaker 3: CPI is running lower than that. Course CPI is running
Speaker 3: at one point six the last six months two point four.
Speaker 3: When you strip shelter out, it's actually running at about
Speaker 3: half that. So not bad. You know, I'm pretty relaxed
Speaker 3: about where we are. There are other things I worry about,
Speaker 3: but I but you know, I don't think that's going
Speaker 3: to be the thing that disrupts the markets.
Speaker 2: And in fairness to some of the commentators and analysts,
Speaker 2: I understand cher Warsh said we care about what's left
Speaker 2: the He also has said we're not done yet. I mean,
Speaker 2: if he really is just happy with the left side,
Speaker 2: and given the numbers you just gave us, he would
Speaker 2: say mission accomplished, job done.
Speaker 3: So I think there's a real nuance to that. I mean,
Speaker 3: I think the FED, what the FED needs to accomplish
Speaker 3: is get to that two percent number. But that two
Speaker 3: percent doesn't have to happen today. It doesn't have done
Speaker 3: it next week. It's that is a long run number,
Speaker 3: and I think, quite frankly, if you are any head
Speaker 3: of any monetary policy authority, you have to be committed
Speaker 3: to that two number. The long end of the eel curve.
Speaker 3: Every tick of it is dependent on how you articulate
Speaker 3: that thesis in terms of where you're trying to get to.
Speaker 3: It doesn't mean you have to raise rates to get there,
Speaker 3: and I think why these task forces are a very
Speaker 3: elegant way to get there. These are complex issues when
Speaker 3: people ask are you restrictive or not? While in housing
Speaker 3: you're not. You're clearly restrictive. You have a dormant housing market.
Speaker 3: Then you look but then you look at the amount
Speaker 3: of spend on cap X like that's you were not
Speaker 3: restricted to that. But you think about what would you
Speaker 3: have to move rates for the big hyperscalers not to
Speaker 3: spend on an AI. You'd have to raise eight hundreds
Speaker 3: of base once before to get your IRR to a level.
Speaker 3: It did make sense, So I think he is committed
Speaker 3: to it. I think think he's going to think about
Speaker 3: the tools. You have, the balance sheet, you have, the
Speaker 3: money supply you have a lot of things, a lot
Speaker 3: of tools at your disposal. Raising the overnight funds rate,
Speaker 3: in my mind, is not terribly effective way to bring
Speaker 3: that number down. And I think I think if you
Speaker 3: really think about a sophisticated way, which I think they will,
Speaker 3: what are the tools, how do we get there, and
Speaker 3: what's the timeframe to try and achieve it.
Speaker 2: So you say, the long end of the curve really
Speaker 2: needs to believe the Fed monetary authorities. If you look
Speaker 2: at what happened with a thirty year yield during and
Speaker 2: after that, news conferences cedit they were not buying it.
Speaker 2: It went up to the highest level's once since two
Speaker 2: thousand and seven or something.
Speaker 3: So I think it did right. I think there are
Speaker 3: a couple of things to think about there. One, you know,
Speaker 3: he didn't say hike, and I think the markets the
Speaker 3: back end of the curve was like, we could get
Speaker 3: a hike here, which would obviously show maybe a stronger
Speaker 3: near term commitment to inflation. So there was a little
Speaker 3: bit of that. Second thing that I think proved it
Speaker 3: to be a bit untethered. Was this idea of gosh,
Speaker 3: we didn't hear a lot of the metrics markets want
Speaker 3: to hear the reaction function and how are you going
Speaker 3: to interpret data and then how you react to it.
Speaker 3: I don't think you need more forward guidance. I think
Speaker 3: actually pulling back on forward guidance a good idea. I
Speaker 3: don't agree with the ethos that people have put out
Speaker 3: there that less forward guidance needs more volatility. Actually, if
Speaker 3: you go back to twenty one twenty two, there was
Speaker 3: a lot of forward guidance. It wasn't right as long
Speaker 3: as the markets understand and can interpret, here are the
Speaker 3: metrics you're looking at. Here's what your reaction function is
Speaker 3: going to be to the data. And I think it's
Speaker 3: quite sincere when sheer War says, let the markets determine
Speaker 3: where should you be and then they could react, And
Speaker 3: that's a good piece of data for the FED. So anyway,
Speaker 3: I think that's really important going forward. But I think
Speaker 3: the long end of the yield curve is a very
Speaker 3: important thing. How you manage that, and you know, oftentimes
Speaker 3: I think you need to use the balance sheet to
Speaker 3: actually keep the long end down and we'll see how
Speaker 3: that goes.
Speaker 2: The markets certainly react to what they think is go
Speaker 2: on the monetary policy. Are they also taking account fiscal
Speaker 2: policy and how big a risk is it that actually
Speaker 2: we will be able to pay all these debts back
Speaker 2: if you look at the term for example, how big
Speaker 2: a factor is that and keep things above two to
Speaker 2: the right or the lesson.
Speaker 3: Desk one, David, I actually think you hit on exactly
Speaker 3: the right point in that. I actually don't think I
Speaker 3: think the markets will talk about on the day that
Speaker 3: may be the long end backed up and what does
Speaker 3: that mean for credibility. I think that was overstated and unfair. However,
Speaker 3: you do have something going on that we have not
Speaker 3: just in the US, you have fiscal burdens that are significant.
Speaker 3: And by the way, alongside of the amount of financing,
Speaker 3: this week there was six hundred and seventy three billion
Speaker 3: of US treasury debt you know, which I've talked it
Speaker 3: was like issuing Indonesia in a week. It's an awful
Speaker 3: lot of debt. Plus you have an immense amount of
Speaker 3: supply coming through that is AI related, so you're pushing
Speaker 3: into the system an awful lot of financing. To me,
Speaker 3: that's why real rates are pressing higher, is the cost
Speaker 3: of finance is going up driven by fiscal deficits around
Speaker 3: the world. Not just us, but also we've got to
Speaker 3: push a load of financing in the market, and the
Speaker 3: markets are saying, okay, these real rates are attractive, but boy,
Speaker 3: maybe they have to back up a bit more to
Speaker 3: get all this financing done. And that that, to me
Speaker 3: is is a big one. Give us a little more
Speaker 3: detail on how you are balancing your portfolio. And I
Speaker 3: took a look at some of the numbers and looked
Speaker 3: like high yield and securitize you got a fair amount
Speaker 3: of and then there's some other stuff. So my fixed
Speaker 3: income or further so bink is our big, big etf
Speaker 3: You know, bonds are very different than equities. In bonds,
Speaker 3: they my upside is they pay you back. So I know,
Speaker 3: I just got to create a portfolio of people that
Speaker 3: is as boring as possible, it's as stable as possible.
Speaker 3: What is incredible about today's environment. You can create almost
Speaker 3: a seven percent yield, So we're running about a sixt
Speaker 3: eighty yield at an average rating of as and by
Speaker 3: the way, with interest rate exos, that's under three years.
Speaker 3: That is I've lived much of my career never being
Speaker 3: close to decades for not being able to do that.
Speaker 3: So then what do I do with it high yield,
Speaker 3: merger market, some securitized assets. I own more Europe than
Speaker 3: the US, and I just try and keep the quality
Speaker 3: of portfolio in good shape and diversify it like crazy.
Speaker 3: And you know, today you don't have to stretch because
Speaker 3: these real rates are so high. A high yield should
Speaker 3: be trading one hundred and fifty two hundred base pints
Speaker 3: lower and yield. It's not because we have real rates
Speaker 3: high because of we have an inflation issue where we
Speaker 3: have these real rates that are that are you know,
Speaker 3: which make corporate investing pretty attractive today.
Speaker 2: Coming up, everyone is focused on the Strait of hor
Speaker 2: Moves and how to get it back open. But that's
Speaker 2: not the only global bottleneck for shipping key goods and commodities.
Speaker 2: What should we be doing about the others? This is
Speaker 2: a story about choke points. The closing of the Strait
Speaker 2: of hor Moves has reminded the world that, for all
Speaker 2: the flexibility of shipment by sea, geography creates a handful
Speaker 2: of points around the globe that can wreak havoc with
Speaker 2: commerce if they are cut off, which makes it all
Speaker 2: the more important that Mexico is undertaking a massive project
Speaker 2: to create an alternative to one of the world's most
Speaker 2: famous waterways. Bloomberg Simon Hampton has the story.
Speaker 5: In the Very Cruz region of Mexico, some twelve hundred
Speaker 5: miles north of the Panama Canal lies what's known as
Speaker 5: the inter Oceanic Corridor of the Isthmus of Tijwantpeck or Si.
Speaker 6: We're standing at the terminal for the train ship here
Speaker 6: at Pasaquaco. This is the only one in Latin America
Speaker 6: and it's become a very important service here.
Speaker 5: This port in Kuwatsicoelcos is one end of the so
Speaker 5: called Dry Canal cutting across Mexico, a combination of rail
Speaker 5: and road connecting the Pacific Ocean to the Gulf of Mexico.
Speaker 6: It doesn't have to change from the truck to the
Speaker 6: train and then add all these costs for operations.
Speaker 5: Alejandro of Aleskiez is the head of investment and commercial
Speaker 5: development for the CIIT. I've seen it described online as
Speaker 5: a competitor to the Panama Canal. Do you see it
Speaker 5: that way?
Speaker 6: Of course not? No, I mean the corridor is just
Speaker 6: an alternative. For some industries or for some companies, the
Speaker 6: corridor will be a better alternative at some point and
Speaker 6: some of the times you're going to use just the
Speaker 6: Panama Canal. At the beginning, it was offering service only
Speaker 6: for all the oil and derivative industry. But today, with
Speaker 6: the growth of the service here and at the south
Speaker 6: of Mexico, companies located at the very south of Mexico
Speaker 6: are considering to use also these service to get to
Speaker 6: Florida or even to.
Speaker 5: New York, and that need for alternatives is rising as
Speaker 5: supply chain choke points become a recurring feature in the
Speaker 5: world today. Oh much of the world focuses on the
Speaker 5: Strait of Hormuz. A recent report from the Council on
Speaker 5: Foreign Relations highlighted potential risk spots elsewhere, including in the
Speaker 5: Strait of Malacca, whereas much as forty percent of global
Speaker 5: seaborne trade transits annually, or the Taiwan Strait. We're around
Speaker 5: forty four percent of the global container fleet transits each year,
Speaker 5: and the Panama Canal, which handles about forty percent, have
Speaker 5: contained a trade between Asia and America's East Coast.
Speaker 7: We were used in an environment where choll points were
Speaker 7: considered i would say, secure of access, reasonably accessible, But
Speaker 7: now it seems to be more and more uncertain in
Speaker 7: certain areas.
Speaker 5: Jean Paul Rodriguez is a professor at Texas A and
Speaker 5: M University's Department of Maritime Business Administration.
Speaker 7: We often say that geography has a sense of humor,
Speaker 7: which means we have a world composed of seventy seventy
Speaker 7: five percent of ocean, but connecting these oceans can only
Speaker 7: be done through a very few strategic locations, such as
Speaker 7: the Panama Canal, the Swest Canal, the Strait of Ormuz,
Speaker 7: the Straight of Malacca, among others. When these strategicication gets disrupted,
Speaker 7: it creates significant you could say, Domino effect on international trade,
Speaker 7: either by limiting you could say, opportunities accessibilit to key
Speaker 7: resources and markets, or most of the time, imposing substantial
Speaker 7: deviations over long distances, which creates stress on global supply chains.
Speaker 7: I would say goes in cycles. For instance, in nearly seventies,
Speaker 7: the Swiss Canal was closed for close to a decade
Speaker 7: because of the conflicts between Israel and the neighboring Arab countries.
Speaker 7: So it story sometimes repeats itself a little bit. So
Speaker 7: there are events and then they abate, they go away,
Speaker 7: and then we go back to business. But this time
Speaker 7: it's a little bit more severe because of you could say,
Speaker 7: the projection of power that Iran is exerting on two
Speaker 7: key strategic locations, which are of course the Strait of
Speaker 7: Hormuz and the above and Mandad straight as well on
Speaker 7: the Red Sea. So this time is a little bit different.
Speaker 7: It's two strategic locations which are excessively important. There's not
Speaker 7: that much you can do outside the deviations. You go
Speaker 7: around if possible. Otherwise you try to find alternative routes,
Speaker 7: which tend to be overland route, and this what is
Speaker 7: currently happening in the Persian Gulf, with United Emirates Saudi
Speaker 7: Arabia contemplating and using their existing you could say, alternative
Speaker 7: routes overland through pipelines or for oil, and of course
Speaker 7: with roads or rail for containers.
Speaker 5: Increasingly, shipping companies are pursuing those alternative routes. Middle Eastern
Speaker 5: countries are pouring money into pipelines to bypass the Strait
Speaker 5: of Hormus, while melting polar ice helped the Chinese shipping
Speaker 5: company become the first to make regular service through the
Speaker 5: Arctic and devoid who the attacks in the Red Sea
Speaker 5: for Mexico see the Panama Canals twenty twenty three drought
Speaker 5: offered an early glimpse of the demand it could face.
Speaker 6: Let's look about twenty twenty three, when the Panama Canal
Speaker 6: had this trouble about the level of the Gatoon's lake.
Speaker 6: Three of the main shipping lines called us to us
Speaker 6: like are you ready to receive containers because they were
Speaker 6: like losing a lot of money. Unfortunately at that time,
Speaker 6: the trend was not ready when they called.
Speaker 8: But in those.
Speaker 6: Cases also the idea is to position the corridor as
Speaker 6: a high quality and a competitive alternative for the different
Speaker 6: of course disruptions that now we can see they are
Speaker 6: going to be like more more frequently.
Speaker 5: But I assume you also want to be more than
Speaker 5: just an emergency alternative for companies as well.
Speaker 6: Totally, totally, I mean, the fact is that the corridor
Speaker 6: was born with like a main idea cross cargo from
Speaker 6: one side to another and just used two ports. Today
Speaker 6: we grew we're considering four ports at the south of Mexico.
Speaker 5: Yet in a world where chokepoint disruptions can happen at
Speaker 5: a moment, notice, the presence of alternative roots is one thing.
Speaker 5: Identifying and implementing them is another that's with supply chain
Speaker 5: logistics firm EXEG. It comes in Brandon Daniels is the
Speaker 5: company's CEO.
Speaker 9: So here you've got aluminum which is inside of their components.
Speaker 9: So it says active shipment of aluminum extrusion billets. So
Speaker 9: it's not just saying, hey, aluminiums a risk, which is
Speaker 9: what everyone knows today, it's here's the exact part that
Speaker 9: that aluminum is going into and that you require in
Speaker 9: order to produce what you're manufacturing that is subject to
Speaker 9: a critical risk closure.
Speaker 10: So you're not going to get those ships through. You're
Speaker 10: not going to get those components through. The alternative corridors
Speaker 10: are not open to allowing you to reroute them today,
Speaker 10: and so what we're doing is then we're assessing and
Speaker 10: often these are customized or configured by how the customer
Speaker 10: thinks about the alternatives and thinks about risk. The volume
Speaker 10: of disruption has increased astronomically and it has laid bare
Speaker 10: the fragility of our supply chains.
Speaker 11: Over the last six years. The number one issue at
Speaker 11: every board is supply chain procurement. Is how are we
Speaker 11: going to navigate an increasingly volatile world, a world that
Speaker 11: we were made aware of through COVID, and so when
Speaker 11: we give you a problem, it's important that we contextualize
Speaker 11: that problem and then once they've prioritized it, we actually
Speaker 11: help them to determine the courses of action. Some of
Speaker 11: those will be courses of action to reroute goods five
Speaker 11: days out.
Speaker 5: So how quickly can a company going that you're working
Speaker 5: with go from identifying a risk to implementing a change
Speaker 5: in the supply chain.
Speaker 11: Once you're actually in the system, once that ERP is
Speaker 11: connected and we have your suppliers loaded in the system,
Speaker 11: you can literally see an issue in real time occurring,
Speaker 11: whether it's the issues with the hooties attacking vessels in
Speaker 11: the Red Sea, or it's a new party being added
Speaker 11: to the oh fact list.
Speaker 5: Disruptions are costly for business who The attacks in the
Speaker 5: Red Sea added an estimated one million dollars per voyage
Speaker 5: and drove up wartime insurance by nine hundred percent at
Speaker 5: its peak. It's hoped that alternative corridors like CIIT, combined
Speaker 5: with platforms like exeger, could help mitigate risk for global trade.
Speaker 11: As the supply chains redistribute. As the supply chains start
Speaker 11: to utilize these new manufacturing capabilities. As our terra regimes
Speaker 11: get put in place and enforced, we're going to see
Speaker 11: a period where there is going to be a premium
Speaker 11: on resilience, where there is going to be a premium
Speaker 11: on restructuring and reshoring.
Speaker 5: But even more resilience built in. Rodriguez says, the world's
Speaker 5: critical corridors will remain as critical as if.
Speaker 7: The fundamental reality is these passages cannot be effectively avoid
Speaker 7: They are shortcuts within global trade. They have been operational
Speaker 7: for many of them centuries, for Panama more than one
Speaker 7: hundred years again one hundred and fifty years or so.
Speaker 7: So they are there. And the issue, which is more
Speaker 7: i would say effective, or more of a good idea,
Speaker 7: is to keep them open. You cannot allow and that's
Speaker 7: what is tragic about the current circumstances. How did major
Speaker 7: players in Europe, the UK, France, Germany among others have
Speaker 7: allowed the world's most important shipping routes to be disrupted
Speaker 7: Very simplistically, the world economy, the global economy is i
Speaker 7: would say, leaning on the principle of freedom of navigation,
Speaker 7: US the world's shipping lanes and the world's strategic passages,
Speaker 7: and this has been I would say, a regime or
Speaker 7: a way of doing things that have been in place
Speaker 7: for quite a while. Currently this regime is being questioned,
Speaker 7: has been disrupted geopolitically, and that creates some problems.
Speaker 5: Land corridors can also be a growth opportunity for the
Speaker 5: area they pass through. For Mexico, it hopes the ciit
Speaker 5: can be not only a corridor but a driver of
Speaker 5: growth for a region that has historically been among the
Speaker 5: countries most underdeveloped.
Speaker 6: The real value is of all these industries coming along
Speaker 6: the corridor, establishing here and creating a raw material for
Speaker 6: some other industries, semi final products, creating all different things,
Speaker 6: not only from Mexico, for the rest of the companies
Speaker 6: along the world. So that's the main idea today of
Speaker 6: the corridor. It's not only crossing cargo, but also developing
Speaker 6: value added to the different cargo community life.
Speaker 5: So Mephos team, twenty years down the line, where do
Speaker 5: you see this corridor and where do you see a
Speaker 5: position in global trade?
Speaker 6: Well, ten years of course I see the corridor working
Speaker 6: together with the industrial parks, the train going every day,
Speaker 6: and development zones outside the industrial parks, because as we
Speaker 6: know the concept of industrial park is just the company
Speaker 6: establishing inside, you know, creating job and that's all. But here,
Speaker 6: for example, the companies that are going to establish here
Speaker 6: at the corridor, they have to also benefit the community
Speaker 6: around the industrial park in order to become a really
Speaker 6: really development pod. Right, And the federal government is working
Speaker 6: together with some regulation in order to help the commpanies
Speaker 6: to accomplish these important objectives. In ten years, I see
Speaker 6: the corridor, of course, with the development of specialized terminals, cars, containers,
Speaker 6: bulk anything required, like maybe a new train line that
Speaker 6: goes straight from one point to another one, maybe in
Speaker 6: lesson and three or less than four hours moving from
Speaker 6: one side to another one. And at that time I'm
Speaker 6: expecting to be more competitive or offering more competitiveness than
Speaker 6: we're offering now.
Speaker 5: So at the start you said you're not trying to
Speaker 5: compete with the Panama Canal. But then in ten twenty years,
Speaker 5: could you see a position with the Cardo has expanded
Speaker 5: to a point where it does compete with something like
Speaker 5: the Panama cat.
Speaker 6: Yeah, maybe at that time we can talk about more
Speaker 6: competitive alternative.
Speaker 2: Up next. For years, private equity was the path the
Speaker 2: higher returns than public markets offered. But that's no longer
Speaker 2: a given. What does that mean for you your portfolio? This
Speaker 2: is a story about beating expectations. For years, private equity
Speaker 2: has been an important tool in the investor's toolbox because
Speaker 2: of its ability to deliver better returns than public markets,
Speaker 2: not to speak of what it's meant for entrepreneurs like
Speaker 2: Dan Namro, who built his own electrical company never expecting
Speaker 2: private equity to come knocking on his door.
Speaker 4: When I started my business, having an end goal was
Speaker 4: not even a thought in my mind. I had no
Speaker 4: idea about business. Never for a second. If I was
Speaker 4: approached in year one by someone who said, Dan, you're
Speaker 4: gonna sell this business in eight years for millions of dollars,
Speaker 4: I would have simply laughed at them.
Speaker 2: And then private equity arrived.
Speaker 3: First I thought it was a joke. I thought it
Speaker 3: was a scam.
Speaker 4: I within eight years was going to almost twelve x
Speaker 4: my EBITA and become a newly minted millionaire.
Speaker 2: But that payday came with a trade off. Dan says
Speaker 2: he did not fully understand.
Speaker 4: I do not want to disparage the company that acquired mine,
Speaker 4: but I can say that no matter what an owner
Speaker 4: thinks is going to happen, they need to take a
Speaker 4: step back and look at the reality of things. And
Speaker 4: what I mean by that is you are no longer
Speaker 4: in control of your business. It absolutely one hurt not
Speaker 4: only my soul, but the soul of the business.
Speaker 2: Dan's experience is one founder's account of one deal, not
Speaker 2: a verdict on private equity as a whole. And for Nemro,
Speaker 2: timing was everything he sold at the top when cheap
Speaker 2: capital and rising evaluations fuel demand for companies like his
Speaker 2: and justified high prices. Private equity buyers could pay those
Speaker 2: high prices because they could generate returns simply off of
Speaker 2: the financing. But all that has changed the.
Speaker 12: Role of private equity is to provide hopefully outsized returns
Speaker 12: relative to what could be gotten in the public markets.
Speaker 12: It's provide incrementally higher returns and therefore raise the returns
Speaker 12: on the whole portfolio.
Speaker 2: According to a report by Bain, private equity deals, fundraising
Speaker 2: and payouts to investors surged in twenty twenty one, fueled
Speaker 2: by COVID related stimulus, but then dealmaking slowed in twenty
Speaker 2: twenty two, forcing private equity managers to return fewer profits
Speaker 2: to investors. Steve Ratner has spent much of his career
Speaker 2: in and around private equity. He is now chairman of
Speaker 2: Willet Advisors, which manages the personal and philanthropic assets of
Speaker 2: our founder and majority share holder, Michael Bloomberg. Ratner says
Speaker 2: changes in the market have made the case for private
Speaker 2: equity less straightforward for investors. There was a time when
Speaker 2: interest rates were near zero, where there was sort of
Speaker 2: a crying need for outsize returns. We now have positive
Speaker 2: interest rates. Has that reduced some of the attraction of
Speaker 2: private equity?
Speaker 12: Yes, in two ways. First, anytime interest rates go up,
Speaker 12: the attraction of equities goes down, because if you can
Speaker 12: invest in a fixed income security and get an interest
Speaker 12: rate of x, and that's high enough relative to what
Speaker 12: you think you're going to get with the risk of
Speaker 12: the volatility and risk associated with equity securities, you're going
Speaker 12: to migrate toward fixed income. With respect to private equity specifically,
Speaker 12: there's an additional issue, which is that private equity is
Speaker 12: heavily financed with debt, and therefore when rates go up,
Speaker 12: the ability to make the numbers work, so to speak,
Speaker 12: on a private equity investment gets harder because in affect,
Speaker 12: your costs have gone up and so you can't pay
Speaker 12: as much for the company and still make the kind
Speaker 12: of return you were hoping to make.
Speaker 2: Stephen Kaplan, a professor at the University of Chicago Booth
Speaker 2: School of Business, has studied private equity for decades. As
Speaker 2: you know, so well, markets go up, markets go down,
Speaker 2: rates go up, rates go down. But as you look
Speaker 2: at it to what extent was private equity doing artificially
Speaker 2: well because we had historically low interest rates, I mean,
Speaker 2: approaching zero interest rates? Did that distort the process?
Speaker 13: I don't buy that so much. Private equity really outperformed
Speaker 13: for a long period of time in all interest rate environments.
Speaker 13: And I think the you know, the late you know,
Speaker 13: twenty teens rates were low, and maybe that was a help.
Speaker 13: But the private equity firms also benefit from improving their companies,
Speaker 13: and the public markets also benefited from the lower interest rates.
Speaker 13: So you know, it's sort of as an apples to
Speaker 13: apples comparison. That's why I like just looking at how
Speaker 13: the private equity does relative to the public markets and
Speaker 13: the S and P five hundred in particular, because the
Speaker 13: S and P five hundred is going to be affected
Speaker 13: by many of the same things.
Speaker 2: According to Professor Kaplan. An analysis of US buyout funds
Speaker 2: shows that private equity largely delivered on its promise of
Speaker 2: beating public markets for decades from the nineteen nineties all
Speaker 2: the way through twenty eighteen. But since twenty nineteen that
Speaker 2: pattern has reversed, in part because Big Tech's remarkable rise
Speaker 2: has pushed public market returns higher, and in part because
Speaker 2: the higher prices generated during the boom days have made
Speaker 2: it harder for investors to get their money out. The
Speaker 2: ultimate goal, by and large, is to sell the company
Speaker 2: at some point. That has become more difficult in recent years,
Speaker 2: perhaps in part because of the increase in interest rate.
Speaker 2: Certainly we talked to limited partners who say, wait, I'd
Speaker 2: like my money back now, and the general partners saying,
Speaker 2: oh no, no, it's too soon. I'd like to hold
Speaker 2: on for a while. What's the problem with exit right now?
Speaker 13: The deals in twenty twenty and twenty one, they paid
Speaker 13: high prices, then they got hit by interest rate increases,
Speaker 13: and those deals are not doing so well. And I
Speaker 13: think a number of the private equity firms don't want
Speaker 13: to sell because they think if they hold it longer,
Speaker 13: they'll be able to get a higher value and as
Speaker 13: a result, they're not selling, and so realizations or you
Speaker 13: know what they call in the industry DPI, which is
Speaker 13: distributed capital per invested is on the low side, and
Speaker 13: that's what LPs are complaining about rightfully so.
Speaker 2: Pitchbook reports that the backlog of companies held by private
Speaker 2: equity firms has now reached over thirty three thousand, up
Speaker 2: from only nineteen thousand a decade ago, and with less
Speaker 2: support from cheap leverage and rising valuations, private equity firms
Speaker 2: are increasingly being judged on what they can actually do
Speaker 2: with the companies they buy. Andrew Weinberg, founder and CEO
Speaker 2: of the private equity firm bright Star Capital Partners, says
Speaker 2: twenty twenty two represented a fundamental shift.
Speaker 14: I think twenty twenty two is an inflection point for
Speaker 14: our industry. If you look at the prior twenty years,
Speaker 14: if you bought something and grew at a few percent
Speaker 14: a year and took on some leverage and had multiple expansion,
Speaker 14: that was a great return. And I think the main
Speaker 14: research report did a great job of chronicling this and
Speaker 14: then said, Okay, here's a new norm post twenty twenty two,
Speaker 14: which is the old five percent growth is really now
Speaker 14: a twelve percent bottom line growth to achieve the same
Speaker 14: return that one did before. I love it personally because
Speaker 14: I've been waiting for this market. I've been waiting for
Speaker 14: a market where the investor can differentiate between the manager
Speaker 14: that is purely focused on leverage and multiple expansion to
Speaker 14: the manager that is focused on operational value add and
Speaker 14: the application of a So in terms of being ready
Speaker 14: for this environment, we've built Bright Start to be ready
Speaker 14: for this environment. We have a deep team of not
Speaker 14: only investors but operators who have experience in the space
Speaker 14: to do it. And I think what the investor is
Speaker 14: going to end up seeing is a much bigger differentiation
Speaker 14: or distribution of returns from managers based upon who has
Speaker 14: built their firm for this environment.
Speaker 2: As performance pressures for private equity funds grow, investors increasingly
Speaker 2: focus on issues like how they get their money out
Speaker 2: and what fees they're paying. Jason Tyler, president of Wealth
Speaker 2: Management at Northern Trust, helps wealthy families and family offices
Speaker 2: navigate the changing investment landscape.
Speaker 15: Now the fund sponsors are coming up with. First of all,
Speaker 15: they're trying to get to new investors that didn't typically
Speaker 15: have either the interest or the ability to invest, and
Speaker 15: so they're trying to create more liquidity, and that will
Speaker 15: attract investors that don't feel comfortable having their money held
Speaker 15: up for eight to ten years. That attracts a smaller
Speaker 15: investment size. And then on the conversely, a lot of
Speaker 15: the largest investors, a lot of the ones that we
Speaker 15: have as clients, their historical ability to invest, they'd say, well,
Speaker 15: we don't want to pay the fees that these funds have,
Speaker 15: so will be more patient and we'll look for ways
Speaker 15: to invest directly into companies. Well, now the private equity
Speaker 15: funds are saying, we'll find that opportunity as well. Maybe
Speaker 15: a client, maybe an investor, can invest in our fund,
Speaker 15: but if they do that, we'll give them an opportunity
Speaker 15: to invest without the same fees, directly into the company.
Speaker 2: Investors historically don't like to pay fees, or at least
Speaker 2: like to pay the lowest fees they can. At the
Speaker 2: same time, are some family offices are ultra high net
Speaker 2: worth people discovering actually it's not that easy, and it's
Speaker 2: pretty expensive even to do it yourself.
Speaker 15: It's a great way to frame it because a lot
Speaker 15: of investors think, well, I love the investments I've had,
Speaker 15: but would I want to pay the fees here? And
Speaker 15: so a lot of what the top private equity funds
Speaker 15: do is they're explaining to their investors all the hard
Speaker 15: work they're doing to source and then do research and
Speaker 15: their investment thesis and due diligence on companies as a
Speaker 15: value add so that in direct investors acknowledge and have
Speaker 15: to appreciate that there is work that's being done by
Speaker 15: the funds that they're not able to do alone or
Speaker 15: even potentially with the family office staff that they've hired,
Speaker 15: which oftentimes are great, great, very strong professionals, but they
Speaker 15: just don't have the resources of a large private equity fund.
Speaker 2: There's little doubt that private equity is here to stay.
Speaker 2: But as financing becomes more expensive and exits take longer,
Speaker 2: the market could be narrowing the field and rewarding firms
Speaker 2: that can prove they bring more than capital to the
Speaker 2: companies they buy.
Speaker 13: Well, what you're going to see is some of these
Speaker 13: private equity firms perform, some of them don't perform. They're
Speaker 13: not going to get more money. In some cases they will,
Speaker 13: and that's the capitalist system.
Speaker 2: But whatever the pressure's on private equity firms. For people
Speaker 2: like Dan Namro who are selling, the question isn't whether
Speaker 2: private equity is beating market expectations, but whether the price
Speaker 2: they're receiving beats their own expectations. The sale of his
Speaker 2: electrical business gave him the means to start over, which
Speaker 2: he's now doing from a beach in Costa Rica, a
Speaker 2: pretty comfortable way to beat expectations coming up. For nearly
Speaker 2: seventy years, Cuban emigrants have been waiting to return and
Speaker 2: invest in their native country again, as yet another economic
Speaker 2: crisis looms. May this just be that time? This is
Speaker 2: a story about hope trying over experience. Once again, the
Speaker 2: Cuban economy appears to be on the brink of collapse
Speaker 2: in the face of tightening US economic sanctions, this time
Speaker 2: without the potential for help from the Soviet Union or Venezuela.
Speaker 1: We're not invest in Cuba.
Speaker 5: It would be a lot.
Speaker 13: The only way I'd live in Cuba is if the
Speaker 13: Cuban system collapses and Cuba becomes a democracy.
Speaker 5: And communism falls, I would return to Cuba.
Speaker 2: The section of Miami known as Little Havana is home
Speaker 2: to over half of Cuban Americans whose families fled the
Speaker 2: Castro Revolution nearly seventy years ago, and even as Havana,
Speaker 2: two hundred miles to their south, struggles, many remain hopeful
Speaker 2: that things can and must change.
Speaker 16: Cuba's in a lot of trouble because, unfortunately for them,
Speaker 16: it's run by a bunch of incompetent communists, and being
Speaker 16: communist is bad.
Speaker 12: Being an incompetent communist is.
Speaker 9: Like the worst.
Speaker 2: Before the revolution, in nineteen fifty nine, Cuba had the
Speaker 2: third largest GDP per capita in Latin America. Today, the
Speaker 2: Economic Commission for Latin America and the Caribbean estimates that
Speaker 2: the country has the lowest nominal GDP per capita in the.
Speaker 16: Region because of the US sanctions. They've just been staffed
Speaker 16: a finance for so long. I think every sector, pretty
Speaker 16: much every sector is open to investment.
Speaker 2: Emily Morris is a research fellow at University College London.
Speaker 2: There's a lot of uncertainty about Cuba right now. I
Speaker 2: want to ask you to predict what will happen, but
Speaker 2: give me a range of scenarios that might happen.
Speaker 16: Okay, Well, the first scenario is I suppose the intended
Speaker 16: scenario for the actions that have been taken by the US.
Speaker 16: You create such a lot of hardship that somehow the
Speaker 16: population turned against their government or the government is forced
Speaker 16: to resign, and then you have a change of regime
Speaker 16: and you have a new political system, and then you
Speaker 16: have the restoration of capitalism. The second scenario is that
Speaker 16: the US continues to create more and more hardship and
Speaker 16: it just situation just gets worse and worse in Cubas.
Speaker 16: The third scenario if you went in and took out
Speaker 16: either the president or Raoul Castro who's ninety five, and
Speaker 16: then somebody who else would step in, and then the
Speaker 16: fourth scenario is what you know they refer to, as
Speaker 16: you know, greater military action, which would be to put
Speaker 16: to ramp up the pressure by using US military to
Speaker 16: damage infrastructure, all the rest of it. Again unlikely to
Speaker 16: achieve the objectives.
Speaker 2: Some who hope for changeing the Cuban economy point to
Speaker 2: President ds Canal's proposed reforms.
Speaker 17: In the non state sector, the list of prohibited activities
Speaker 17: will be narrowed. There is also a set of regulations
Speaker 17: to encourage foreign direct investment. They concerned the rate of superficies,
Speaker 17: removing obstacles the use of bank accounts in Foreign Direct
Speaker 17: Investment Approval Timeline.
Speaker 2: In June, Cuban lawmakers pass one hundred and seventy six
Speaker 2: sweeping free market reforms, including the expansion of foreign and
Speaker 2: private investment, the decentralization of Cuba's economy, and liberalization of
Speaker 2: factors such as tourism, banking, property, and agriculture.
Speaker 16: We've had this statement by the Cubans, which is an
Speaker 16: interesting one and I think we should you take it seriously.
Speaker 16: But this is an acceleration. It's much more explicit in
Speaker 16: it's an invitation to Cuban Americans to invest in Cuba.
Speaker 16: It includes privatizations, a wider opening to foreign investment, and
Speaker 16: the actually withdrawal of the government from central planning system that.
Speaker 18: In this very difficult context in twenty twenty, the balance
Speaker 18: seems to have tipped in favor of those who favor
Speaker 18: market reforms, but they have a credibility problem.
Speaker 2: Pavel Vidal is a professor at Ponteficia Universidad Havariana in Cali, Colombia.
Speaker 2: He is Cuban born and worked at Cuba's Central Bank
Speaker 2: and the Center for the Study of the Cuban Economy
Speaker 2: until he left the country. In twenty twelve.
Speaker 18: We need to see how they move forward with these
Speaker 18: reforms to effectively demonstrate that these aren't temporary reforms, mere
Speaker 18: cosmetic changes or announcements, but that they are genuinely willing
Speaker 18: to change the ownership structure, the mechanisms of the economy,
Speaker 18: and that the state will withdraw from the economy, giving
Speaker 18: more room to domestic and foreign capital internationality.
Speaker 2: But where some see the promise of the announcement, others
Speaker 2: are deeply skeptical, particularly some Cuban American investors eager to
Speaker 2: return to investing in their home country.
Speaker 8: They are afraid as a communist dictatorship of the entrepreneurial
Speaker 8: class having actually freedom and actually having essentially an opposition
Speaker 8: that can challenge their government.
Speaker 2: Andrew Nadarci Leon is a Cuban American hotelier whose Lion
Speaker 2: Growth has substantial real estate investments in the United States.
Speaker 8: They're never going to allow for any meaningful amount of
Speaker 8: private market activity. They're completely lying, you know, and it's
Speaker 8: a farce this, you know, these steps that they're taking
Speaker 8: with these supposed reforms, they're doing it to buy time.
Speaker 8: They're doing it because they're trying to run out the clock.
Speaker 8: On the Trump administration and the efforts of President Trump
Speaker 8: and Secretary Mark or Rubio. That's what they're playing for.
Speaker 8: The Cuban people know it.
Speaker 2: We just want them to be a nicely run country.
Speaker 5: We're going to let our people go back and let
Speaker 5: them invest in Cuba if they'd like.
Speaker 2: Essential to President Trump's plans to open Cuba up to
Speaker 2: US investment are the heavy sanctions he has imposed, sanctions
Speaker 2: that have hit the Cuban economy hard, including one of
Speaker 2: the most promising sectors, tourism. Since May, hotel groups including Melia, Iberostar,
Speaker 2: Blue Diamond, and Archipelago International, have either pulled the plug
Speaker 2: or curtailed operations, and the number of visits last year
Speaker 2: were down sixty two percent from the country's peak in
Speaker 2: twenty eighteen, the lowest in twenty years other than during
Speaker 2: the COVID nineteen pandemic.
Speaker 8: The offering of services in Cuba is obviously significantly limited
Speaker 8: by how broken that economy is, and so for many
Speaker 8: years now, the tourism market in Cuba, you know, was
Speaker 8: not a market that had you know, five star properties,
Speaker 8: I mean upper rop scale luxury. Was not really something
Speaker 8: that you saw in a significant way in Cuba it was,
Speaker 8: it was a lower rated market. The good thing is
Speaker 8: that there is a significant amount of existing properties there,
Speaker 8: existing assets and existing infrastructure within the tourism industry. I
Speaker 8: think it requires firms like Hours going and acquiring those properties,
Speaker 8: reinvesting and reimagining and upgrading those properties, and also bringing
Speaker 8: the operating conditions of those properties to a world class scale.
Speaker 8: And so that's the lens through which we're looking at
Speaker 8: investing in Cuba. Surely there will also be the development
Speaker 8: of brand new resorts. I think there will be an
Speaker 8: opportunity for the development of branded residential product right which
Speaker 8: often is joined together with resorts or other types of
Speaker 8: hospitality properties. And so we think the future is very
Speaker 8: bright in that sector, without a doubt, and it's a
Speaker 8: very important pillar of the economic recovery of the island.
Speaker 8: To reaism.
Speaker 18: But as I said, tourism we need you seems to
Speaker 18: be a sector, at least initially that can generate opportunities,
Speaker 18: especially if travel restrictions for US citizens are eased. They
Speaker 18: could provide the natural market for a boom in visitor arrivals,
Speaker 18: as happened for example, with the easing of sanctions and
Speaker 18: travel restrictions during the Obama administration.
Speaker 2: Vinallo says, at this point, the Cuban government isn't looking
Speaker 2: to places like Mexico or Chile to inform its economic policies.
Speaker 2: It most often cites Vietnam or even China. As Cuba
Speaker 2: seeks to rebuild its economy. Are there lessons that can
Speaker 2: learn from other Latin American countries?
Speaker 18: Normally the models the Cuban government tends to look to
Speaker 18: are Vietnam and China, especially since they are making economic
Speaker 18: changes and so far have not mentioned political changes. So
Speaker 18: that transformation model, well, that's their preference. I'm not saying
Speaker 18: that's the model that will prevail. There are factors that
Speaker 18: would hinder the possibility of carrying out reforms along Vietnamese
Speaker 18: and Chinese lines without political changes. So I think Latin
Speaker 18: America's influence, it's democratic institutions and the rule of law
Speaker 18: offer lessons that will have to reach Cuba at some point.
Speaker 16: Cuba is very close to Vietnam. They've had experts coming over.
Speaker 16: They explicitly say that they're studying or they're following the
Speaker 16: Vietnamese model but adapting it to the Cuban reality and
Speaker 16: so on. They're looking for a Vietnam model a very
Speaker 16: different kind of economy. The Vietnamese model or economy at
Speaker 16: the time of the beginning of the transition was very rural,
Speaker 16: is very urban society. It's a very externally dependent economy.
Speaker 16: So you know, the conditions are different. But the idea
Speaker 16: of following a transition path towards a mixed economy is
Speaker 16: clearly and explicitly stated now by the Cuban government.
Speaker 2: But some of those who know best say that for
Speaker 2: real economic reform, Cuba will need to change its entire
Speaker 2: political system away from state control.
Speaker 18: It is not clear what model is supposed to guide
Speaker 18: this proposed transformation in Cuba. In fact, that's a problem.
Speaker 18: They want state owned enterprises to retain a significant role,
Speaker 18: along with significant state intervention in the economy. That would
Speaker 18: be more of a Scandinavian type model, where market reforms
Speaker 18: are expanded but the state continues to play a significant
Speaker 18: role in regulating economic processes, which would mark a departure
Speaker 18: from Latin America.
Speaker 2: For Cuban Americans, it's been a long wait to see
Speaker 2: conditions on the ground change enough to bring them back.
Speaker 2: There's been hope for some seventy years, and at least
Speaker 2: so far, the experience has not risen to the level
Speaker 2: of those hopes, But make no mistake about the appetite
Speaker 2: to return.
Speaker 8: You know myself, I think the entire Cuban exile community
Speaker 8: has been dreaming about this day to be able to
Speaker 8: support our brothers and sisters and see our country be reconstructed,
Speaker 8: and see our country become a beacon of freedom, a
Speaker 8: beacon of economic prosperity and hope for the entire region.