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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along

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Speaker 2: with Lisa Bromwitz and Amrie hortert join us each day

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Speaker 2: for insight from the best in markets, economics, and geopolitics

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Speaker 2: from our global headquarters in New York City. We are

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Speaker 2: live on Bloomberg Television weekday mornings from six to nine

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Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or

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Speaker 2: anywhere else you listen, and as always on the Bloomberg

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Speaker 2: Terminal and the Bloomberg Business app. We begin this hour

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Speaker 2: with the recent rally firmly on hold as the world

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Speaker 2: of weights Israel's next move. Investors keeping one eye on

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Speaker 2: US labor market data a head of payrolls on Friday,

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Speaker 2: Jim biancov Bianco Research writing, I've still a no lander,

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Speaker 2: meaning guys, see the economy is okay, not even showing

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Speaker 2: signs of a self landing. I can debate whether we

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Speaker 2: are seeing much calling in this labor market. Jim joins

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Speaker 2: us now for more. Jim, good morning, and welcome to

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Speaker 2: New York. Thanks he at least it went through the

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Speaker 2: JUMPIP connects. You look at what's happening with the quits right.

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Speaker 2: Quits writes down, look at what's happening with the Honring's right.

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Speaker 2: Honding's writes down, Why do you not see that as

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Speaker 2: a sign of a slowed down in the slang pima

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Speaker 2: kit If you look.

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Speaker 3: At the bigger picture of the numbers, they are down

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Speaker 3: from say July or June, but the bigger picture over

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Speaker 3: the last several years, these are still numbers that are

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Speaker 3: very constructive for.

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Speaker 4: The labor market right now. If you look at if you.

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Speaker 3: Want to expand out from the JILT report to payrolls

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Speaker 3: to the household survey, those.

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Speaker 4: Numbers look pretty good now.

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Speaker 3: The one number that is weak has been the rising

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Speaker 3: unemployment rate. But the Fed likes to use the phrase

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Speaker 3: increase in labor supply, which is a euphemism for migration.

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Speaker 4: We've getten more people coming into the country.

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Speaker 3: The growth the population growth rate in the country right now,

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Speaker 3: according to the CBO, is pushing a thirty year high

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Speaker 3: because of migration, and a lot of those people are

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Speaker 3: coming into the country are unemployed, and that's what's getting

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Speaker 3: picked up in the unemployment rate, which is why that

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Speaker 3: number is rising. That's not necessarily a sign that people

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Speaker 3: are losing job.

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Speaker 2: Just say, year at three six state doesn't scream no landing,

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Speaker 2: Ten year at three seventy six doesn't scream no landing.

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Speaker 2: What's your feel on this spun market?

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Speaker 5: You know?

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Speaker 3: I think that at three sixty in the two year note,

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Speaker 3: it is priced in pretty much.

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Speaker 4: The Fed cutting rates all the.

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Speaker 3: Way to say three to three and a quarter that's

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Speaker 3: in ten two year notes shouldn't go anywhere else. Wall

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Speaker 3: Street is really on this idea that we're going to

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Speaker 3: see a curve steepening. I guess I am too, but

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Speaker 3: at this point that's a barish trade because we're going

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Speaker 3: to stay at three sixty, and the way you steep

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Speaker 3: in the curve is the ten year in yield has

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Speaker 3: to start to rise from here. I don't see the

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Speaker 3: two year note going, say under three percent, unless you

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Speaker 3: make the case the economy is really falling apart and

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Speaker 3: the Fed is going to cut rates well beyond say

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Speaker 3: three percent, down to around two percent or lower.

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Speaker 1: I love when people say I'm a no lander, I'm

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Speaker 1: a soft lander. It's sort of like saying I'm a

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Speaker 1: flat earther. But there's sort of a question here about

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Speaker 1: what that means.

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Speaker 2: I mean going forward.

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Speaker 1: Does that mean that there just is no recession or

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Speaker 1: does that mean that there actually is a reacceleration from

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Speaker 1: here of growth and inflation.

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Speaker 3: You know, you brought up a really good point because

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Speaker 3: I've critici size the soft landing camp that it's this

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Speaker 3: thing without a definition.

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Speaker 4: So in a year I'll define it and tell you

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Speaker 4: I was correct.

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Speaker 3: I think, yeah, Well, I think a no lander scenario

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Speaker 3: is if you accept that potential GDP, what would the

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Speaker 3: economy grow without it being stimulated or restrained is around

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Speaker 3: two and a half percent, two to two and a

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Speaker 3: half percent. I think that's the no landing camp, is

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Speaker 3: that we continue to grow at the two to two

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Speaker 3: and a half percent camp. Also, if you wanted to

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Speaker 3: throw inflation in there, I am in the sticky inflation

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Speaker 3: camp that the long run inflation rate is probably closer

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Speaker 3: to a three handle, if not a three handle, then

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Speaker 3: down at two point zero percent, where the Fed thinks

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Speaker 3: it's going to be. So if you add in the

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Speaker 3: two together with nominal GDP, you know two to two

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Speaker 3: and a half percent real growth, three ish percent inflation,

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Speaker 3: we're talking about five and a half percent nominal GDP.

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Speaker 4: And that's where you know the no Landing idea.

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Speaker 1: Comes how much just being a no Lander sort of

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Speaker 1: hinge on this idea that authorities already willing and able

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Speaker 1: to come in and step in, whether it's raycuts, whether

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Speaker 1: it's the Bazuka we goes to Scott from China, whether it's.

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Speaker 2: Potential fiscal stimulus.

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Speaker 1: In the United States despite the deficit that people care

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Speaker 1: about but aren't necessarily pricing.

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Speaker 3: In Oh, I think that you know the no Lander camp,

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Speaker 3: if I defined it at the way I do, it's

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Speaker 3: all of those things give me worried that we don't

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Speaker 3: need the Fed aggressively cut rates, we don't need massive

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Speaker 3: fiscal stimulus, and if we're going to get it, what

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Speaker 3: we're going to do is we're going to produce more

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Speaker 3: inflation and probably second half of twenty five. And that's

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Speaker 3: really the biggest concern right now is are we going

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Speaker 3: to overstimulate because in the no Landing camp where we

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Speaker 3: don't really need that kind of stimulation, but so it

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Speaker 3: looks like we're going to get it anyway.

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Speaker 6: You said you're going to take the over of the

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Speaker 6: Friday's payroll report of one hundred and fifty K, do

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Speaker 6: you just immediately have to then slash sixty seventy thousand

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Speaker 6: off of that because of the revisions we continuously see.

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Speaker 4: Yeah, that's usually what happens.

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Speaker 3: I think twenty five of the last thirty one months,

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Speaker 3: the payroll report beats a Wall Street's estimate, and then

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Speaker 3: the revisions come in. And it's almost to the point

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Speaker 3: right now where people have been more and more asking

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Speaker 3: me is what's your guests on revisions as opposed to

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Speaker 3: what's your guests on the payroll report?

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Speaker 4: Revisions?

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Speaker 3: I think are getting overstated a little bit that usually

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Speaker 3: when they run and cycles the revisions, up until twenty two,

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Speaker 3: the revisions were mostly upward, and since twenty two they've

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Speaker 3: been mostly downward. And so I don't see the revisions

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Speaker 3: as being some kind of dark secret thing that tells

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Speaker 3: us that the economy is in trouble.

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Speaker 4: But yeah, I probably see.

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Speaker 3: That the revisions will pull back on the numbers that

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Speaker 3: we saw in July and August, but the headline number,

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Speaker 3: you know, like I said, most of the time, it

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Speaker 3: seems to be when we get the next.

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Speaker 6: Payroll report, the following one, when you look at what

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Speaker 6: happened in October, we're going to have Hurricane Helen's impact

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Speaker 6: and also the strike workers at the ports. How difficult

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Speaker 6: is it going to be to really extrapolate the labor data.

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Speaker 3: Oh yeah, and don't forget the boning strike too. And

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Speaker 3: so I heard Mike McKee say this the other day,

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Speaker 3: and I'll you know, there is a possibility of a

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Speaker 3: negative payroll report coming up. The payroll survey week is

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Speaker 3: the thirteenth. If these strikes keep going into disruptions into

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Speaker 3: the thirteenth and we find that, you know, getting things

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Speaker 3: back to normal after Hurricane Helene, goes more than two weeks,

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Speaker 3: we could see this start to impact jobs. Remember the

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Speaker 3: way the Jobs for survey works, they have a company report.

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Speaker 3: If the company doesn't have power or it's closed and

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Speaker 3: it doesn't report, they put them down for zero this month.

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Speaker 3: They'll pick it up next month, revise it, and you

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Speaker 3: could see a big dive in the numbers. Hurricane Harvey.

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Speaker 3: We saw that last twenty seventeen, in September, we saw

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Speaker 3: a negative payroll report off of that when it hit.

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Speaker 2: Houston, and a one with Blimback Economics late to this

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Speaker 2: hour and has put some numbers on this. If the

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Speaker 2: strike lasts more than two weeks, we estimate the knock

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Speaker 2: on effects could lower October payrolls do the first November

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Speaker 2: by Money's eighty thousand jumps. They think that's going to

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Speaker 2: lead the Federal Reserve to interest rates again by fifty

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Speaker 2: basis points. If those numbers actually materialize. Wearing you on

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Speaker 2: the fence move November seventh.

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Speaker 3: You know that that's going to be a difficult one

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Speaker 3: because if we were to see that type of number,

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Speaker 3: and that's just off of the port strike, we still

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Speaker 3: got the bone strike, We've still got the hurricane and

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Speaker 3: maybe disruption from the Middle East coming as well. With

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Speaker 3: energy prices, it's going to muddy the water for the FED.

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Speaker 3: It's going to make it very, very difficult to try

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Speaker 3: and discern what is the economy doing.

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Speaker 4: Yeah, we know that there's this port strike. Yeah we

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Speaker 4: know it depressed jobs, but we also know it's temporary,

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Speaker 4: that the.

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Speaker 3: Port strike will eventually end and things will eventually return

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Speaker 3: back to normal.

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Speaker 4: It's going to be very difficult for them.

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Speaker 3: I think Paul set up the case for twenty five

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Speaker 3: at a couple of days ago when he spoke in

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Speaker 3: that that seems to be more of the prudent action,

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Speaker 3: especially that it's two days after the election and there's

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Speaker 3: a reasonable chance we won't know the outcome of the

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Speaker 3: election by November seventh as well.

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Speaker 2: Jim, it's going to say it new Y'll say thank you, sir,

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Speaker 2: Jim bian Cut.

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Speaker 5: We said.

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Speaker 1: Davis, chief economist at Vanguard, Joe, thank you so much

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Speaker 1: for being with us. I want to start just with

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Speaker 1: weakening but not weak. How do you parse the difference

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Speaker 1: at a time where we definitely are seeing weakening?

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Speaker 7: Well sure, and again I think that's also really at

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Speaker 7: the heart of the Federal Reserves response. We've clearly seen

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Speaker 7: a slow down the labor market.

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Speaker 4: Part of that's been very welcome.

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Speaker 7: I mean, we were out of balance for the past

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Speaker 7: two years and had you know, really rapid wage growth.

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Speaker 7: We're approaching the levels now where any further weakening or

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Speaker 7: slow or just slowing or cooling would really put you know,

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Speaker 7: really bigger concerns on the table. I think the Federal

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Speaker 7: Reserve has been weighing this information very importantly, and so

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Speaker 7: you know, really explains you know, some of their.

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Speaker 5: Pretty aggressive moves.

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Speaker 7: I mean, I think the big tension in the market

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Speaker 7: is are there the are the jobs figures really representative

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Speaker 7: of the strength of the economy, or is it things

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Speaker 7: such as GDP growth, which is going to three percent

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Speaker 7: and not showing any signs of a slowdown.

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Speaker 5: So which is it, Joe?

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Speaker 1: I mean, we just had all CEO Mark Rowan speaking

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Speaker 1: with our own Jonathan Farrow, and he was basically saying

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Speaker 1: that the fifty basis point raycut was a really expensive

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Speaker 1: insurance policy and that actually this is not an economy

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Speaker 1: that needs it. Based on GDP and based on earnings.

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Speaker 1: What makes you think that the labor market data, like

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Speaker 1: the underpinnings of jolts that show that quits rates have

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Speaker 1: really gone down, what makes you think that we should

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Speaker 1: more heavily weight that.

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Speaker 7: Well, again, I mean I think the whole insurance phrasing

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Speaker 7: is actually pretty appropriate. You know, again, the economy is

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Speaker 7: pretty resilient. I think we still have some turbulence ahead.

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Speaker 7: Our lead indicators, which you mentioned at the outset, still

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Speaker 7: point to some further weakness, and they're pretty powerful indicators

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Speaker 7: given just the breath of our sample. And so I

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Speaker 7: think what they're trying to do again, let's be clear,

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Speaker 7: the Federal Reserve is all in on the soft landing expectation,

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Speaker 7: and so I think they're going to be fairly aggressive

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Speaker 7: to try to increase the odds that that happens. But

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Speaker 7: there is risk in that strategy if the labor market,

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Speaker 7: which I don't think it is, but if the labor

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Speaker 7: market is setting the false signal and it's the GDP

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Speaker 7: numbers that are more accurate or more representative than you

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Speaker 7: know six months from that, we're going to have this

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Speaker 7: crossroads because the equity market, I think, is looking at

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Speaker 7: GDP and the bond market and the treasury market is

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Speaker 7: looking at jobs.

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Speaker 5: Well, Joe Powell tried.

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Speaker 8: To solve this tension by just saying the labor market

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Speaker 8: is a real time indicator and GDP is not. GDP

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Speaker 8: is historically bad at predicting a recession. Does that mean

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Speaker 8: that we just can completely discount it, completely discount the

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Speaker 8: strength and what it tells us about one inflation coming

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Speaker 8: in and the likelihood that unemployment moves in a more

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Speaker 8: malicious manner.

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Speaker 9: Yeah.

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Speaker 7: I wouldn't be too quick to completely discount GDP because

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Speaker 7: underneath GDP is corporate earnings, corporate profits, business investment, and

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Speaker 7: so I think that it is important. I mean again,

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Speaker 7: I think you know, policymakers, to be fair to chair

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Speaker 7: the power, I think they are looking at a distillation

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Speaker 7: but there's no doubt that the futteral Reserve is weighing

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Speaker 7: the jobs market much more heavily than the GDP numbers. Again,

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Speaker 7: I think, you know, the next several months will.

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Speaker 4: Have some weakness.

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Speaker 7: If we're right, then the federal Reserve will look very prescient.

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Speaker 4: But nevertheless, you know, we're coming at a.

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Speaker 7: Modest crossroads i'd say roughly six months from now, and

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Speaker 7: that is and it's not a Bears crossroads. It's more

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Speaker 7: of is the equity market right and this softness in

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Speaker 7: the labor market's going to stabilize and then we're following

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Speaker 7: GDP or is it going to be the latter and

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Speaker 7: we're going to have GDP go come from three to two.

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Speaker 7: I wish I had more conviction of which one it's

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Speaker 7: going to be. Policymakers are trying to change that calculus

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Speaker 7: in the next several months, but that is really the

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Speaker 7: heart of the issue.

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Speaker 1: I love the way that you're phrasing this because it's

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Speaker 1: really accurate. It makes me feel like, right now the

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Speaker 1: labor market is doing to dictate the bond market, and

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Speaker 1: it's basically the GDP numbers Atlanta Fed. GDP is what

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Speaker 1: almost every analyst who comes on the show, Who's bullish

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Speaker 1: and Equities points to and says, look what's slow down?

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Speaker 1: I just wonder how much the Fed could get ahead

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Speaker 1: of this in economic terms. In other words, if they

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Speaker 1: cut by they just cut by fifty basis points, if

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Speaker 1: they do another fifty basis point cut, say in November,

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Speaker 1: how much could they affect change to actually bring the

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Speaker 1: labor market up to GDP and GDI rather than bring

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Speaker 1: GDP and GDI down to the weakness that we're seeing

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Speaker 1: currently in the labor market.

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Speaker 7: Well, again, I think there are recent actions, there is

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Speaker 7: some lag. So I mean the financial markets respond instantaneously.

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Speaker 7: We're already trying to get ahead of the Futter Reserve.

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Speaker 7: But in terms of the labor market the next three months,

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Speaker 7: they're pretty much baked. I actually wish I knew exactly

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Speaker 7: what the numbers would be, But our leading indicators say, listen,

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Speaker 7: there's still some choppiness, but they're not going to go negative.

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Speaker 7: That would be a surprise to me. And so again

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Speaker 7: I think where it's going to come out. The Federal

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Speaker 7: Reserve is now trying to look six months out and saying, listen,

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Speaker 7: we want to nail that landing. The only risk I

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Speaker 7: think the more bullish part of the economists or analyst

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Speaker 7: community is saying is listen, you don't need to be

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Speaker 7: cutting at all or not much. And so I think

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Speaker 7: the Futter Reserve, if they're going to fight that narrative,

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Speaker 7: they have to explain why they believe they're so restrictive

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Speaker 7: and yet we have three percent GDP growth. I'm still

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Speaker 7: waiting for the answer, but I think that's something that

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Speaker 7: would be helpful for the Thurd Reserve to articulate where

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Speaker 7: they're going to go for the next six months.

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Speaker 6: Joe, but how are you going to review the non

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Speaker 6: farm payers report November third? That's looking back at October

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Speaker 6: when you see all these mismatches in the economy and

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Speaker 6: people will be out of work. We know that because

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Speaker 6: of what's going on with the number of strikes and

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Speaker 6: Boeing and the port.

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Speaker 7: Well again, I think you have to look at other things.

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Speaker 7: I think you have to look at the new entrance

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Speaker 7: coming in. I mean, one of the biggest reasons why

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Speaker 7: we didn't have a more material slowdown this year was

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Speaker 7: just the really the surgeon immigration. So you're going to

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Speaker 7: look at a distillation picture. It's not so much what

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Speaker 7: the headline is it's the breath of job creation. It's

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Speaker 7: industries that are always strong, are they continuing to add

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Speaker 7: at a current pace. It's the hours being worked outside

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Speaker 7: of the strikes and areas. So yeah, yeah, Again, like

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Speaker 7: anything in life, there's going to be noise in that report.

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Speaker 7: I think what you're trying to say more than anything

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Speaker 7: is the diffusion or the breath of industries and companies

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Speaker 7: therefore that are in the continuing to add to just

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Speaker 7: the jobs.

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Speaker 5: Joe.

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Speaker 8: You also talk about something in your research, a phrase

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Speaker 8: that feels like it's been dropped by the wayside as

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Speaker 8: of late, and that is the last mile of inflation.

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Speaker 8: That's some of the unevenness that you see. You expect

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Speaker 8: inflation to remain stubborn in this the second half of

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Speaker 8: twenty twenty four. Does that mean this whole sort of

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Speaker 8: idea that Powell was doing some sort of victory lap,

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Speaker 8: even though he didn't explicitly say it, saying that inflation

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Speaker 8: has been conquered.

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Speaker 5: That that's not exactly right.

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Speaker 7: Well, I get I think the Federal Reserve, you know,

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Speaker 7: they're one of the few institutions that can actually affect

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Speaker 7: the outcome because if everyone believes that inflation is on

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Speaker 7: their control.

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Speaker 5: It tends to go their way.

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Speaker 7: But you know, the housing market and all of its

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Speaker 7: esoteric calculations has been you know, one of the airs

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Speaker 7: that's really been subborn. And I think that you know,

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Speaker 7: even FED officials would acknowledge that. But again, you know,

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Speaker 7: this is a fairly dovish institution. But to give the

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Speaker 7: feder Reserve credit, they said that they could have a

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Speaker 7: trade off of bringdown inflation without a material impact in

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Speaker 7: the labor market. Now, you know, they got a really

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Speaker 7: good luck in terms of the immigration surge, but tracking

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Speaker 7: to date, so again, you know, I'm not cheering against

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Speaker 7: the soft landing. I'm just waiting to see, you know,

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Speaker 7: where does that calculus given their aggressive cuts and what

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Speaker 7: likely will continue for a little bit of while a

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Speaker 7: little bit of time. Where are where are we six

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Speaker 7: months from now? And that's something that we will continue

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Speaker 7: to focus on.

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Speaker 5: Joe before we.

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Speaker 1: Let you go, How much are you expecting the jobs

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Speaker 1: are part to surprise the upside of the down side

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Speaker 1: when we get them on Friday?

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Speaker 7: Oh my goodness. I've been employed for twenty two years

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Speaker 7: in part because I've tried to avoid these questions. But

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Speaker 7: I would say there's monest risk on the downside. But

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Speaker 7: take that with the grain of salt. If I was

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Speaker 7: that accurate, I would probably already be retired.

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Speaker 5: I love it.

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Speaker 1: I expected you to be like, well, suddenly disturbance. Can

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Speaker 1: hear you, Joe Davis, a Vanguard, thank you so.

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Speaker 2: Much for being with us.

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Speaker 5: I really appreciate it.

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Speaker 1: Tony Rodriguez, head of fixed Income strategy at neuven And

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Speaker 1: what do you make of that? What we just we're

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Speaker 1: hearing about from Joe that essentially the bond market is

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Speaker 1: taking its cues from the potential weakening of the labor market,

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Speaker 1: whereas stocks really are looking much more at GDP and GDI.

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Speaker 10: Yeah, I think that's accurate, and I think when you

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Speaker 10: take that to the fixed income context, you're seeing the

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Speaker 10: equity like response in the credit markets. Right So emerging

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Speaker 10: markets are doing well, preferreds are doing well, high yields

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Speaker 10: doing well. So credit risk is highly valued right now,

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Speaker 10: and the fundamentals are very solid, defaults are low, corporate

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Speaker 10: profits are good. So you're seeing the same story in

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Speaker 10: the fixed income market. It's just that it's focused on

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Speaker 10: the credit sectors. So I think the disconnect is maybe

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Speaker 10: that in the treasury market you are seeing people that

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Speaker 10: are kind of hedging against their risk books. So if

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Speaker 10: you have an aggressive equity position, one of the only

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Speaker 10: things that's going to work well. If in fact we

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Speaker 10: get the hard landing that's not the highest probability, treasuries

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Speaker 10: will rally. Treasuries will serve as a hedge. So I

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Speaker 10: think there's a lot of money in that market that

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Speaker 10: is serving as a hedge too, taking risk and the

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Speaker 10: credit markets taking risk in the equity markets private markets.

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Speaker 1: That didn't work though over the past couple of years

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Speaker 1: because the issue the risk was inflation, and the different

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Speaker 1: kinds of risk can mean that the bonds can be

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Speaker 1: a buffer or not. Are you basically saying the increasingly

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Speaker 1: bonds very diversifier because inflation is off the table, that

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Speaker 1: is no longer a concern in any investor's mind that

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Speaker 1: you speak with.

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Speaker 10: Essentially, yes, I mean we wouldn't say inflation risk is

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Speaker 10: off the table completely, but it's certainly much lower risk

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Speaker 10: than it had been.

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Speaker 9: We do think inflation continues to come down.

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Speaker 10: So when you think of fixed income, you want to

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Speaker 10: get income out of it, liquidity and a hedge and stability.

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Speaker 10: Back when inflation really started to take off, in twenty two,

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Speaker 10: there was no income in it, there was no potential

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Speaker 10: for protection because rates were so low, there was still liquidity.

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Speaker 10: We sit here today and you have income now out

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Speaker 10: of your fixed income portfolio. Treasury is probably the least

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Speaker 10: attractive area to find it, but you do have income

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Speaker 10: in it, and you do have now what we think

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Speaker 10: will be a hedge because you're coming off of three

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Speaker 10: and a half to four percent type of levels rather

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Speaker 10: than what had been sub two percent levels.

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Speaker 8: So Tony yesterday, we have a big risk off type day.

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Speaker 8: It's pretty textbook. Over geopolitical fears and Iran in Israel,

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Speaker 8: it's pretty textbook.

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Speaker 5: Except for credit.

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Speaker 8: Market spreads barely move maybe one basis point for the

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Speaker 8: overall market, maybe five for a high yield. Is it

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Speaker 8: a market immune? Did you a political risk? Or is

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Speaker 8: it just more common investors?

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Speaker 1: What is it?

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Speaker 5: Yeah?

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Speaker 9: I don't think it's immune, but I do think it's

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Speaker 9: more common investors.

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Speaker 10: Even at oil prices, while they went up, they didn't

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Speaker 10: spike as much as you might have expected. So I

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Speaker 10: think people, you know, maybe it's the frog and the

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Speaker 10: boiling water type of syndrome that all of these geopolitical

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Speaker 10: risks there are so many hot spots out there, and

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Speaker 10: there has been escalating risk in all of them that

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Speaker 10: maybe the markets have seen the movie before and it's

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Speaker 10: going to be, you know, a really cataclysmic event if

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Speaker 10: in fact, it gets to the point where we start

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Speaker 10: to see really the MIDI theater expand into more players.

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Speaker 10: But for now, I think the market's looking at it

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Speaker 10: as this has just been the ebb and flow of this,

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Speaker 10: you know, continuing escalation that we're seeing. So we haven't

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Speaker 10: had a major disruption, but it's a big risk out

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Speaker 10: there in our minds.

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Speaker 9: Is that geopolitical risk?

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Speaker 6: Yeah, So if you were going to take that risk

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Speaker 6: on board and you were actually really nervous that this

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Speaker 6: was a different movie than the one we've seen, what

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Speaker 6: should you be doing well?

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Speaker 9: From our perspectives. A couple of things.

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Speaker 10: One is that you don't want to be at the

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Speaker 10: high end of your risk budget when you look at

443
00:19:24,119 --> 00:19:25,719
Speaker 10: not only the risks that are out there, but when

444
00:19:25,760 --> 00:19:28,119
Speaker 10: you also look at just valuations and the broader capital

445
00:19:28,160 --> 00:19:31,360
Speaker 10: markets right fixing Kime. You look at credit spreads, equity market,

446
00:19:31,359 --> 00:19:33,879
Speaker 10: you look at valuations. None of them are considered you know,

447
00:19:34,080 --> 00:19:38,240
Speaker 10: historically cheap. They're at best case fare maybe aggressively priced,

448
00:19:38,480 --> 00:19:40,520
Speaker 10: so that tells you you want to have some powder dry,

449
00:19:40,880 --> 00:19:42,399
Speaker 10: you want to be kind of at the midpoint of

450
00:19:42,480 --> 00:19:45,359
Speaker 10: your risk budget. In addition to that, within all the

451
00:19:45,480 --> 00:19:48,679
Speaker 10: various asset classes, we're leaning more towards a little bit

452
00:19:48,760 --> 00:19:51,920
Speaker 10: higher in quality, a little bit higher in liquidity, and

453
00:19:52,040 --> 00:19:54,399
Speaker 10: making sure we have stronger fundamentals and can kind of

454
00:19:54,680 --> 00:19:59,360
Speaker 10: see their way through any potential impact from economic weakness

455
00:19:59,480 --> 00:20:01,000
Speaker 10: coming from geopolitical event.

456
00:20:01,320 --> 00:20:04,560
Speaker 1: There's sort of this counterintuitive feeling right now in market

457
00:20:04,600 --> 00:20:06,199
Speaker 1: is there's a real question. We were talking with way

458
00:20:06,320 --> 00:20:08,639
Speaker 1: Lee of Blackrock earlier this morning, who agrees with her

459
00:20:08,680 --> 00:20:11,280
Speaker 1: colleague Glarry Flankfink, who is talking about that maybe this

460
00:20:11,440 --> 00:20:14,280
Speaker 1: bond market has priced in too many weight cuts at

461
00:20:14,320 --> 00:20:17,040
Speaker 1: the same time that people are talking about the potential

462
00:20:17,040 --> 00:20:19,680
Speaker 1: we're downside surprise that inevitably the Fed would respond to.

463
00:20:19,880 --> 00:20:22,119
Speaker 1: Do you think that there has been sort of an

464
00:20:22,240 --> 00:20:25,399
Speaker 1: overstating of the Fed's reaction function, in other words, a

465
00:20:25,480 --> 00:20:28,040
Speaker 1: more billish position on the economy, or do you think

466
00:20:28,080 --> 00:20:30,639
Speaker 1: that people are going to be surprised by how much

467
00:20:30,680 --> 00:20:32,679
Speaker 1: they are going to have to cut now?

468
00:20:32,760 --> 00:20:35,000
Speaker 10: I think that the markets are pricing in too many

469
00:20:35,080 --> 00:20:38,000
Speaker 10: cuts there's been an overstatement of that. I do think

470
00:20:38,080 --> 00:20:41,480
Speaker 10: that the probability of soft landing increased quite a bit

471
00:20:41,640 --> 00:20:44,080
Speaker 10: when the FED cut fifty is their initial cut, rather

472
00:20:44,119 --> 00:20:46,760
Speaker 10: than twenty five. And also you saw what China has

473
00:20:46,800 --> 00:20:49,680
Speaker 10: done over the last week and change, where again they're

474
00:20:49,720 --> 00:20:53,240
Speaker 10: not game changing things out of China, but they are

475
00:20:53,359 --> 00:20:57,520
Speaker 10: stabilization and first step moves by China. All of that

476
00:20:57,720 --> 00:21:00,879
Speaker 10: helps to reduce the risk of hard landing. So to us,

477
00:21:01,440 --> 00:21:05,800
Speaker 10: the treasury market, the FED funds futures market proggressively pricing.

478
00:21:06,480 --> 00:21:08,600
Speaker 10: Part of that, though, is because of our flows in

479
00:21:08,680 --> 00:21:12,600
Speaker 10: those markets that are hedging. They're using that market to hedge,

480
00:21:12,720 --> 00:21:15,240
Speaker 10: and we do think that if you get a hard

481
00:21:15,359 --> 00:21:19,639
Speaker 10: landing a very significant geopolitical escalation, the Fed's not going

482
00:21:19,720 --> 00:21:22,000
Speaker 10: to stop cutting at three and a quarter to three

483
00:21:22,040 --> 00:21:24,440
Speaker 10: and a half, which is what our target is for

484
00:21:24,520 --> 00:21:26,640
Speaker 10: the middle of next year, you'll see a sub two

485
00:21:26,680 --> 00:21:29,160
Speaker 10: percent funds rate. You'll see a tenure that's at two

486
00:21:29,240 --> 00:21:32,119
Speaker 10: percent or lower. Again, that's a very low probability in

487
00:21:32,160 --> 00:21:35,600
Speaker 10: our minds, but it will be an effective hedge to

488
00:21:35,720 --> 00:21:37,680
Speaker 10: the declines you'll find in your equity market or the

489
00:21:37,760 --> 00:21:39,680
Speaker 10: widening and spreads you might see in the credit market.

490
00:21:39,920 --> 00:21:42,160
Speaker 8: So if that's the low probability, does that mean base

491
00:21:42,280 --> 00:21:44,359
Speaker 8: case just the natural place for yields to go from

492
00:21:44,400 --> 00:21:45,240
Speaker 8: here on that is higher.

493
00:21:45,920 --> 00:21:48,119
Speaker 10: I think base cases rangebound. I mean we kind of

494
00:21:48,160 --> 00:21:50,880
Speaker 10: think fair value tenure three and three quarters to four

495
00:21:50,960 --> 00:21:53,520
Speaker 10: percent is about fair value. It's a real rate that

496
00:21:53,680 --> 00:21:55,040
Speaker 10: might end up in that one and a half to

497
00:21:55,119 --> 00:21:57,440
Speaker 10: two percent area, and we think that's a good long

498
00:21:57,560 --> 00:22:00,639
Speaker 10: run equilibrium level. You rarely get to that level and

499
00:22:00,800 --> 00:22:03,080
Speaker 10: sit at that level, but for now that would be

500
00:22:03,160 --> 00:22:05,440
Speaker 10: what we think is a fair value zone. So it's

501
00:22:05,520 --> 00:22:07,880
Speaker 10: just a fed that needs to get down in terms

502
00:22:07,920 --> 00:22:11,439
Speaker 10: of the funds rate patiently in our minds, not fifty

503
00:22:11,480 --> 00:22:14,440
Speaker 10: base point cuts, but twenty five based point cuts. And

504
00:22:14,560 --> 00:22:17,680
Speaker 10: if that happens, you can get this, you know, sought

505
00:22:17,760 --> 00:22:21,000
Speaker 10: after soft landing, which can help the US economy grow.

506
00:22:21,359 --> 00:22:23,879
Speaker 10: We don't think of three percent then maybe sustain a

507
00:22:23,960 --> 00:22:25,960
Speaker 10: two percent one and a half to two percent type

508
00:22:25,960 --> 00:22:26,320
Speaker 10: of pace.

509
00:22:26,640 --> 00:22:29,480
Speaker 5: What's your call and payrolls on Friday, we'd.

510
00:22:29,359 --> 00:22:31,960
Speaker 10: Say that the risks are probably to the downside, but

511
00:22:32,160 --> 00:22:34,440
Speaker 10: not materially. So one hundred, one hundred and fifty we

512
00:22:34,520 --> 00:22:35,359
Speaker 10: think is the right range.

513
00:22:35,680 --> 00:22:36,800
Speaker 1: Tony Rodriguez Nupie.

514
00:22:36,840 --> 00:22:38,040
Speaker 5: Thank you so much for being with us.

515
00:22:46,760 --> 00:22:48,639
Speaker 2: This was the deal we agreed to it. If the

516
00:22:48,680 --> 00:22:51,280
Speaker 2: stock closed, it an all time hard investigate. Mark Rowan

517
00:22:51,280 --> 00:22:53,000
Speaker 2: would show up alongside me and it's a man of

518
00:22:53,040 --> 00:22:54,639
Speaker 2: its worth market morning. It's good to see you.

519
00:22:54,800 --> 00:22:57,040
Speaker 5: Thank you, and technically you were here, you came to

520
00:22:57,119 --> 00:22:57,919
Speaker 5: visit us, so thank you.

521
00:22:58,359 --> 00:23:00,920
Speaker 2: Thank you. You planned it this way. I'm sure big

522
00:23:01,000 --> 00:23:03,840
Speaker 2: target for twenty twenty nine ten billion dollars of anue larnings.

523
00:23:03,880 --> 00:23:05,560
Speaker 2: I think we have to start with a pretty broad question.

524
00:23:06,119 --> 00:23:09,560
Speaker 2: Race to coming down economy is pretty decent. Let's just cool,

525
00:23:09,600 --> 00:23:13,359
Speaker 2: financial conditions easy. Why people coming to you instead of

526
00:23:13,480 --> 00:23:15,640
Speaker 2: just issuing a bond in public markets?

527
00:23:16,000 --> 00:23:17,480
Speaker 5: I think if they come to us when they can

528
00:23:17,640 --> 00:23:20,240
Speaker 5: issue a bond in public markets and it's can't, is

529
00:23:20,320 --> 00:23:22,760
Speaker 5: not that it's not open, It's that they want to

530
00:23:22,840 --> 00:23:26,479
Speaker 5: do something that the public markets will not allow. Public markets,

531
00:23:26,560 --> 00:23:30,520
Speaker 5: over the past two decades have become very vanilla, call

532
00:23:30,600 --> 00:23:33,239
Speaker 5: it beta. If you want to do something unique, if

533
00:23:33,280 --> 00:23:36,359
Speaker 5: you want to finance the next generation of infrastructure, you

534
00:23:36,440 --> 00:23:39,000
Speaker 5: want to build a project, you want to build data centers,

535
00:23:39,040 --> 00:23:40,840
Speaker 5: you want to build power, you want long data do

536
00:23:40,840 --> 00:23:44,680
Speaker 5: you want special features that's just not available, you come

537
00:23:44,760 --> 00:23:49,200
Speaker 5: to someone like us, and increasingly private markets are offering

538
00:23:49,880 --> 00:23:52,360
Speaker 5: really compelling solutions to investment grade borrowers.

539
00:23:52,520 --> 00:23:54,480
Speaker 2: Let's talk about some of those deals, IC and c

540
00:23:55,080 --> 00:23:59,359
Speaker 2: AB and beth Intel recently. What's the common theme behind

541
00:23:59,400 --> 00:24:00,440
Speaker 2: those three company for you?

542
00:24:00,840 --> 00:24:04,480
Speaker 5: The common theme for US is excess return relative to

543
00:24:04,520 --> 00:24:07,320
Speaker 5: the credit of the underlying borrower. The common theme for

544
00:24:07,440 --> 00:24:10,280
Speaker 5: the issuer is they are achieving something they could not

545
00:24:10,440 --> 00:24:14,600
Speaker 5: otherwise achieve. When we did ABMBV some six billion dollars

546
00:24:14,720 --> 00:24:18,680
Speaker 5: years ago, everyone around us, our peer group, that was interesting.

547
00:24:19,000 --> 00:24:21,280
Speaker 5: That was one off in COVID. You'll never do another one.

548
00:24:21,480 --> 00:24:25,080
Speaker 5: Another investment grade private deal. One hundred billion dollars later,

549
00:24:25,760 --> 00:24:29,160
Speaker 5: we're still doing investment grade private deals. And I see

550
00:24:29,240 --> 00:24:34,160
Speaker 5: nothing but a long line of interesting borrowers and interesting situations.

551
00:24:34,240 --> 00:24:36,600
Speaker 5: Because think about what we're doing in the world today.

552
00:24:37,040 --> 00:24:41,440
Speaker 5: We are building infrastructure, We are building and changing energy transition.

553
00:24:41,600 --> 00:24:43,879
Speaker 5: We're just at the beginning of this. We are building

554
00:24:43,960 --> 00:24:46,399
Speaker 5: the next generation of data and power. Every one of

555
00:24:46,480 --> 00:24:49,800
Speaker 5: those things is long dated. Many of them are complex financings.

556
00:24:50,280 --> 00:24:52,760
Speaker 5: Some will go to the banking system, some will go

557
00:24:52,880 --> 00:24:57,640
Speaker 5: to public markets, but increasingly for these more complicated financings

558
00:24:57,720 --> 00:25:01,120
Speaker 5: and long dated financings, Private market investment grade is where

559
00:25:01,200 --> 00:25:01,960
Speaker 5: borrowers are coming.

560
00:25:02,119 --> 00:25:04,320
Speaker 2: There was a theme an invested and you've talked about

561
00:25:04,359 --> 00:25:09,199
Speaker 2: this with me yourself, privately global industrial renaissance. What are

562
00:25:09,200 --> 00:25:09,920
Speaker 2: you talking about?

563
00:25:10,240 --> 00:25:12,719
Speaker 5: We're talking about is this massive need for capital. I mean,

564
00:25:12,800 --> 00:25:15,080
Speaker 5: you can believe or not believe all the figures that

565
00:25:15,119 --> 00:25:17,600
Speaker 5: are out there, but when you add up the amount

566
00:25:17,600 --> 00:25:20,320
Speaker 5: of money that is needed for energy transition, the amount

567
00:25:20,359 --> 00:25:22,520
Speaker 5: of money that is needed to fix our infrastructure, the

568
00:25:22,600 --> 00:25:24,880
Speaker 5: amount of money that will be needed to build data

569
00:25:24,920 --> 00:25:28,080
Speaker 5: centers and power to supply them, much less to connect

570
00:25:28,160 --> 00:25:31,639
Speaker 5: and redo our power lines. You're talking about the amount

571
00:25:31,640 --> 00:25:33,680
Speaker 5: of money that's been spent since the invention of five,

572
00:25:34,640 --> 00:25:37,639
Speaker 5: all with the backdrop of the US government borrowing two

573
00:25:37,720 --> 00:25:41,560
Speaker 5: trillion dollars to finance itself. On a current basis, this

574
00:25:41,760 --> 00:25:44,520
Speaker 5: is not a question of will private markets grow. The

575
00:25:44,640 --> 00:25:47,879
Speaker 5: question will be how much. Yes, public markets will continue

576
00:25:47,920 --> 00:25:50,920
Speaker 5: to play a really important role, banking system, really important role.

577
00:25:51,320 --> 00:25:54,359
Speaker 5: But this tool, this notion of private investment grade, has

578
00:25:54,440 --> 00:25:58,880
Speaker 5: really not been available to CFOs or others arranging financing

579
00:25:59,400 --> 00:26:00,200
Speaker 5: and increase.

580
00:26:00,240 --> 00:26:02,920
Speaker 2: It will be how labor intensive? Is this for you

581
00:26:03,560 --> 00:26:06,040
Speaker 2: and as you do more deals, do you get a

582
00:26:06,119 --> 00:26:08,800
Speaker 2: benefit from that that you are able to replicate things

583
00:26:08,840 --> 00:26:10,520
Speaker 2: and use less and less people.

584
00:26:10,760 --> 00:26:14,320
Speaker 5: This is scars of experience. So these are all labor intensive,

585
00:26:14,400 --> 00:26:17,520
Speaker 5: and that is actually what the competitive advantage is. The

586
00:26:17,800 --> 00:26:20,720
Speaker 5: investment grade bond market became so efficient and so low

587
00:26:20,840 --> 00:26:25,480
Speaker 5: cost that financial firms stopped allocating resources to it. There

588
00:26:25,480 --> 00:26:27,240
Speaker 5: weren't just not any money in doing that, and so

589
00:26:27,359 --> 00:26:30,080
Speaker 5: the market is very available, but it is very plain vanilla.

590
00:26:30,760 --> 00:26:33,960
Speaker 5: Almost no one has built what we've built. When you

591
00:26:34,040 --> 00:26:37,760
Speaker 5: look at employment at Apollo, the greatest group of employment

592
00:26:38,440 --> 00:26:41,240
Speaker 5: four thousand people, some eight billion dollars that we've spent

593
00:26:41,359 --> 00:26:44,000
Speaker 5: over the past fifteen years all goes to what we

594
00:26:44,119 --> 00:26:47,400
Speaker 5: call origination. Now, not all of these originators are out

595
00:26:47,560 --> 00:26:51,400
Speaker 5: calling on investment grade borrowers. Some are running other types

596
00:26:51,440 --> 00:26:56,679
Speaker 5: of origination vehicles, aircraft finance, fleet finance, receivables finance, inventory finance,

597
00:26:56,760 --> 00:27:00,000
Speaker 5: infrastructure finance. Increasingly, this is.

598
00:27:00,160 --> 00:27:05,240
Speaker 2: How America borrows introduce City and a twenty five billion

599
00:27:05,320 --> 00:27:09,320
Speaker 2: dollar partnership. What's behind that, It's that acknowledgment from you

600
00:27:09,680 --> 00:27:11,359
Speaker 2: that you've got more cash than you know what to.

601
00:27:11,400 --> 00:27:15,760
Speaker 5: Do with I think it's an acknowledgment that origination, the

602
00:27:15,840 --> 00:27:19,760
Speaker 5: control of the product is actually what has value, and

603
00:27:20,080 --> 00:27:22,080
Speaker 5: some of that origination we're going to build ourselves, and

604
00:27:22,119 --> 00:27:24,680
Speaker 5: we've built more of it than any But let's face it,

605
00:27:24,920 --> 00:27:28,320
Speaker 5: we a whole industry is short origination. To the extent

606
00:27:28,400 --> 00:27:30,160
Speaker 5: we can find a meeting of the minance with city,

607
00:27:30,600 --> 00:27:34,000
Speaker 5: that's fabulous. And I think the bigger theme here is

608
00:27:34,080 --> 00:27:36,639
Speaker 5: the banking system, particularly one of the big four banks,

609
00:27:36,880 --> 00:27:41,200
Speaker 5: is actually figuring out what we believe all along. We

610
00:27:41,320 --> 00:27:44,359
Speaker 5: don't want what the bank wants. We don't want the

611
00:27:44,359 --> 00:27:48,920
Speaker 5: bank's customer. We want the asset the bank. We can't

612
00:27:49,000 --> 00:27:54,560
Speaker 5: offer advice, m and A, derivatives hedging, foreign exchange, payments,

613
00:27:54,600 --> 00:27:58,000
Speaker 5: credit cards, or any other service the bank wants to

614
00:27:58,080 --> 00:28:01,520
Speaker 5: offer those things. The bank sometimes wants the loan, but

615
00:28:01,640 --> 00:28:03,200
Speaker 5: more often than not does not want the loan.

616
00:28:03,320 --> 00:28:05,399
Speaker 2: Who do you think fielded the most calls that day

617
00:28:05,440 --> 00:28:07,560
Speaker 2: when that was announced that partnership. Was it Jane Fraser,

618
00:28:07,600 --> 00:28:10,440
Speaker 2: an annoyed asset managers or was it you an annoyed bankers.

619
00:28:10,400 --> 00:28:12,760
Speaker 5: From the comparing of notes last night, it was Jane.

620
00:28:12,920 --> 00:28:16,160
Speaker 2: It was Jane. Did you get the calls you saw

621
00:28:16,280 --> 00:28:16,680
Speaker 2: from AHI.

622
00:28:17,000 --> 00:28:18,800
Speaker 5: We definitely got a few calls.

623
00:28:18,920 --> 00:28:20,280
Speaker 2: Do you get the sense that this is the beginning

624
00:28:20,359 --> 00:28:22,960
Speaker 2: of something bigger? Twenty five billions the number with citsy

625
00:28:23,320 --> 00:28:24,720
Speaker 2: just give me an idea of what this looks like

626
00:28:24,800 --> 00:28:26,879
Speaker 2: further down the line. Does it include other banks too?

627
00:28:27,320 --> 00:28:28,920
Speaker 5: I think it does, and now I think it is

628
00:28:29,000 --> 00:28:31,360
Speaker 5: difficult to serve lots of people in the same way

629
00:28:31,440 --> 00:28:34,480
Speaker 5: with the same terms. But the City partnership is focused

630
00:28:34,640 --> 00:28:37,200
Speaker 5: on a certain type of borrower. I think you'll see

631
00:28:37,240 --> 00:28:40,440
Speaker 5: international partnerships. I think you'll see investment grade partnerships. I

632
00:28:40,520 --> 00:28:43,760
Speaker 5: think you'll see infrastructure related partnerships. I do think that

633
00:28:44,000 --> 00:28:47,120
Speaker 5: we are becoming a partner in some ways to the

634
00:28:47,160 --> 00:28:49,760
Speaker 5: banking system, rather than how it is portrayed in the press,

635
00:28:50,040 --> 00:28:52,600
Speaker 5: which is, you know, a fierce competition over everything.

636
00:28:53,000 --> 00:28:55,680
Speaker 2: This conversation so far has really been about how the

637
00:28:55,760 --> 00:28:59,040
Speaker 2: financing give companies, particularly in this country, is changing, how

638
00:28:59,120 --> 00:29:02,080
Speaker 2: the company's doing the financing is shifting, the emphasis being

639
00:29:02,120 --> 00:29:05,560
Speaker 2: on private markets. Part of your vision is how investing

640
00:29:05,640 --> 00:29:08,040
Speaker 2: is going to change as well, So let's spend some

641
00:29:08,120 --> 00:29:11,080
Speaker 2: time on that. How is investing going to change? How

642
00:29:11,120 --> 00:29:14,080
Speaker 2: do we think about public versus private now, And how

643
00:29:14,160 --> 00:29:15,800
Speaker 2: do you hope we're going to think about it in

644
00:29:15,920 --> 00:29:16,440
Speaker 2: years to come?

645
00:29:16,680 --> 00:29:19,160
Speaker 5: Look for me, this is your forty. It's sometimes hard

646
00:29:19,200 --> 00:29:21,800
Speaker 5: to believe I've been doing it this long, but we

647
00:29:22,000 --> 00:29:26,600
Speaker 5: grew up thinking private was risky and public was safe.

648
00:29:27,280 --> 00:29:30,040
Speaker 5: And probably forty years ago that was true. Private was

649
00:29:30,080 --> 00:29:33,000
Speaker 5: three products private equity, venture capital, and hedge funds, all

650
00:29:33,080 --> 00:29:35,239
Speaker 5: three of which can be risky, but done the right

651
00:29:35,280 --> 00:29:39,240
Speaker 5: way are excellent investments. And public was eight thousand public companies,

652
00:29:39,320 --> 00:29:43,240
Speaker 5: diversified portfolios of stocks and bonds. Let's just say that's

653
00:29:43,280 --> 00:29:45,400
Speaker 5: not how the world is today. The world that we

654
00:29:45,600 --> 00:29:49,800
Speaker 5: see private is safe and risky and public is safe

655
00:29:49,840 --> 00:29:53,600
Speaker 5: and risky. And if that's true, everything we know about

656
00:29:53,640 --> 00:29:57,080
Speaker 5: portfolio management, the way we construct portfolios today is going

657
00:29:57,160 --> 00:30:00,800
Speaker 5: to change. Think of the typical investor a very bland

658
00:30:00,880 --> 00:30:04,520
Speaker 5: I say, a three flavor ice cream portfolio, sure stocks, bonds,

659
00:30:04,560 --> 00:30:08,840
Speaker 5: and a little bit of alternatives. Why well, because when

660
00:30:08,920 --> 00:30:10,840
Speaker 5: something is risky, you put it in a small bucket

661
00:30:10,920 --> 00:30:14,240
Speaker 5: called alternatives, you watch it carefully, and you demand high

662
00:30:14,280 --> 00:30:17,960
Speaker 5: returns out of it. But if private is just another form,

663
00:30:19,000 --> 00:30:21,000
Speaker 5: I think what you're going to see is the whole

664
00:30:21,040 --> 00:30:24,520
Speaker 5: business of what I call replacement fixed income, which today

665
00:30:24,680 --> 00:30:28,080
Speaker 5: means investment grade public credit. I think is going to

666
00:30:28,120 --> 00:30:31,600
Speaker 5: be investment grade public and investment grade private eighteen months

667
00:30:31,640 --> 00:30:34,200
Speaker 5: from now. I do not believe investors will actually know

668
00:30:34,280 --> 00:30:37,280
Speaker 5: the difference between investment grade public and investment grade private.

669
00:30:37,640 --> 00:30:39,600
Speaker 5: It will not be the issuers, It will not be

670
00:30:39,720 --> 00:30:42,120
Speaker 5: the size, it will not be the ratings, it will

671
00:30:42,200 --> 00:30:44,720
Speaker 5: not even be the liquidity. Everything that exists in the

672
00:30:44,760 --> 00:30:49,840
Speaker 5: public markets, repo borrowing, market making, daily pricing, is coming

673
00:30:49,880 --> 00:30:50,840
Speaker 5: to the private markets.

674
00:30:51,160 --> 00:30:53,440
Speaker 2: What is the total addressable market? What kind of numbers

675
00:30:53,480 --> 00:30:54,120
Speaker 2: are we thinking about?

676
00:30:54,480 --> 00:30:57,480
Speaker 5: We're talking about massive marketplace when we look at the

677
00:30:57,760 --> 00:31:01,640
Speaker 5: entirety of our industry, hired of our industry has been

678
00:31:01,680 --> 00:31:05,400
Speaker 5: built out of the alternative bucket of institutional investors. The

679
00:31:05,480 --> 00:31:08,320
Speaker 5: fixed income bucket, which is what I'm talking about now,

680
00:31:08,560 --> 00:31:11,040
Speaker 5: is fifty percent larger than the alternative bucket and is

681
00:31:11,160 --> 00:31:14,160
Speaker 5: mostly one hundred percent private. Works to be public.

682
00:31:14,200 --> 00:31:18,640
Speaker 2: Investment credit I could see different to debt. Can you

683
00:31:18,720 --> 00:31:20,480
Speaker 2: tell me how that's going to be transformed, and whether

684
00:31:20,560 --> 00:31:22,680
Speaker 2: some of the companies that typically would be going public

685
00:31:23,160 --> 00:31:25,600
Speaker 2: are going to stay private. Whether we've got to see

686
00:31:25,600 --> 00:31:28,200
Speaker 2: a big shift in capital markets over the next five

687
00:31:28,320 --> 00:31:28,720
Speaker 2: years or so.

688
00:31:28,840 --> 00:31:30,600
Speaker 5: On that front, well, we're seeing it already. So this

689
00:31:31,280 --> 00:31:34,160
Speaker 5: is a two prong to answer, which is eight thousand

690
00:31:34,200 --> 00:31:37,240
Speaker 5: public companies is now four thousand public companies. Fewer than

691
00:31:37,240 --> 00:31:39,479
Speaker 5: one hundred companies go public every year, and more than

692
00:31:39,480 --> 00:31:42,200
Speaker 5: one hundred companies go private. There do not seem to

693
00:31:42,240 --> 00:31:46,120
Speaker 5: be compelling reasons for companies to be public, particularly with

694
00:31:46,240 --> 00:31:48,959
Speaker 5: what's happened on the investing side. So much of our

695
00:31:49,040 --> 00:31:52,880
Speaker 5: market today is indexed and correlated. Think of passive now

696
00:31:53,000 --> 00:31:57,080
Speaker 5: sixty seventy percent of the overall marketplace. Active management, which

697
00:31:57,200 --> 00:31:59,719
Speaker 5: historically has been the buying and selling of stocks, has

698
00:31:59,760 --> 00:32:02,080
Speaker 5: really been a very, very difficult place to be, has

699
00:32:02,120 --> 00:32:04,440
Speaker 5: failed to beat the index ninety plus percent of the

700
00:32:04,520 --> 00:32:07,080
Speaker 5: time for twenty years. I think we're going to see

701
00:32:07,120 --> 00:32:09,960
Speaker 5: an evolution also take place in equity. It's going to

702
00:32:10,000 --> 00:32:13,400
Speaker 5: happen more slowly. In fixed income, we are going to

703
00:32:13,480 --> 00:32:17,320
Speaker 5: see fixed income replacement, public and private essentially come together.

704
00:32:17,560 --> 00:32:18,920
Speaker 5: And the reason I know that is we're seeing it

705
00:32:19,000 --> 00:32:23,240
Speaker 5: every single day. And in fixed income we have arbiters

706
00:32:23,520 --> 00:32:26,920
Speaker 5: of credit quality rating agencies who tell investors that something

707
00:32:26,960 --> 00:32:29,560
Speaker 5: public and something private is of the same quality in

708
00:32:29,680 --> 00:32:34,160
Speaker 5: equity we lack those arbiters. But nonetheless, I think investors

709
00:32:34,160 --> 00:32:37,400
Speaker 5: are beginning to understand when ten stocks are thirty five

710
00:32:37,480 --> 00:32:40,440
Speaker 5: to forty percent of your portfolio and four stocks have

711
00:32:40,560 --> 00:32:43,880
Speaker 5: determined all your returns for the past four years, and

712
00:32:44,080 --> 00:32:47,120
Speaker 5: one stock has basically been one hundred percent of your quarter.

713
00:32:47,560 --> 00:32:49,400
Speaker 5: I mean, think of what we've done as a country.

714
00:32:49,680 --> 00:32:52,360
Speaker 5: We've taken the largest pool of savings in the world

715
00:32:52,960 --> 00:32:56,160
Speaker 5: four oh one K, twelve to thirteen trillion dollars from

716
00:32:56,200 --> 00:32:58,840
Speaker 5: a group of people who need retirement savings more than evident.

717
00:32:59,320 --> 00:33:04,120
Speaker 5: What are they own? They own daily liquid stock index

718
00:33:04,200 --> 00:33:09,080
Speaker 5: funds generally S and P for fifty years. Why well,

719
00:33:09,160 --> 00:33:12,040
Speaker 5: we have a mistaken belief that public is safe and

720
00:33:12,160 --> 00:33:15,440
Speaker 5: private is risky. You look at the best retirement system

721
00:33:15,440 --> 00:33:18,120
Speaker 5: anywhere in the Western world in Australia, where they've introduced

722
00:33:18,160 --> 00:33:21,840
Speaker 5: superannuation forty years ago. Just a fancy way of saying

723
00:33:21,920 --> 00:33:23,600
Speaker 5: is they gave the equivalent of four oh one K

724
00:33:23,760 --> 00:33:27,000
Speaker 5: investors access to private markets. The returns have been nothing

725
00:33:27,080 --> 00:33:30,840
Speaker 5: short of spectacular. Outcomes for investors can be not a

726
00:33:30,960 --> 00:33:33,680
Speaker 5: little better fifty and sixty percent better.

727
00:33:34,360 --> 00:33:37,840
Speaker 2: You know the view here public is transparent and private

728
00:33:37,920 --> 00:33:40,040
Speaker 2: is a payak. How do you change that view?

729
00:33:40,560 --> 00:33:42,400
Speaker 5: Well, I think it's going to happen in fixed income.

730
00:33:42,480 --> 00:33:45,040
Speaker 5: I think when you get to daily pricing, when you

731
00:33:45,160 --> 00:33:48,080
Speaker 5: get to daily liquidity, when you can see a market.

732
00:33:48,600 --> 00:33:51,400
Speaker 5: But let's not fool ourselves. Markets are different than we

733
00:33:51,520 --> 00:33:54,440
Speaker 5: think they are. Everything changed in two thousand and eight,

734
00:33:55,320 --> 00:33:57,760
Speaker 5: as it should as a response to the financial crisis,

735
00:33:58,120 --> 00:34:00,720
Speaker 5: but we just did not experience as investors those changes

736
00:34:00,760 --> 00:34:02,840
Speaker 5: because right after we change the rules, we printed eight

737
00:34:02,880 --> 00:34:05,800
Speaker 5: trillion dollars and everything went up into the right. One

738
00:34:05,840 --> 00:34:08,600
Speaker 5: of the most interesting things that changed there is no

739
00:34:08,760 --> 00:34:12,120
Speaker 5: liquidity in public fixed income the SATs I've seen it

740
00:34:12,200 --> 00:34:15,160
Speaker 5: takes five days to sell an investment grade corporate bond.

741
00:34:15,680 --> 00:34:18,640
Speaker 5: So when you see a quote, is that liquid, Well,

742
00:34:18,680 --> 00:34:20,839
Speaker 5: we feel good because it's public, it's there, we can

743
00:34:20,880 --> 00:34:23,640
Speaker 5: see it. I do think we're going to end up

744
00:34:23,800 --> 00:34:26,920
Speaker 5: not caring in fixed income in the next eighteen months

745
00:34:27,040 --> 00:34:29,800
Speaker 5: as to whether something is public or private. The comfort

746
00:34:29,880 --> 00:34:32,479
Speaker 5: that people are developing in private markets on the fixed

747
00:34:32,520 --> 00:34:35,880
Speaker 5: income side, I believe will eventually extend to equity and

748
00:34:36,040 --> 00:34:42,400
Speaker 5: we will see equity also adopt side by side with public.

749
00:34:42,440 --> 00:34:45,360
Speaker 5: As I sometimes joke investors will own equity that is

750
00:34:45,440 --> 00:34:48,520
Speaker 5: private rather than private equity, the difference being the leverage.

751
00:34:48,760 --> 00:34:52,080
Speaker 2: You say, wait, you mean investors to regulate to say

752
00:34:52,120 --> 00:34:52,800
Speaker 2: it the same way.

753
00:34:53,120 --> 00:34:56,120
Speaker 5: I think they do. I mean, the conversation with regulators

754
00:34:56,200 --> 00:35:00,000
Speaker 5: is actually a fascinating one because clearly change is scared.

755
00:35:00,920 --> 00:35:05,400
Speaker 5: But the typical conversation is every dollar of borrowing that

756
00:35:05,600 --> 00:35:08,719
Speaker 5: moves outside of the banking system to the investment marketplace.

757
00:35:08,840 --> 00:35:11,200
Speaker 5: And let's face it, there are only two choices for regulators.

758
00:35:11,760 --> 00:35:14,600
Speaker 5: Money in an economy can come from investors or from banks.

759
00:35:14,600 --> 00:35:18,200
Speaker 5: There's no third choice. So every dollar that moves actually

760
00:35:18,320 --> 00:35:21,000
Speaker 5: de levers the banking system and makes it safer, and

761
00:35:21,120 --> 00:35:23,960
Speaker 5: people recoil in shock. And this is just math. A

762
00:35:24,040 --> 00:35:27,040
Speaker 5: bank is levered twelve to fourteen times. The typical institutional

763
00:35:27,120 --> 00:35:30,120
Speaker 5: investor is levered zero. The typical mutual fund levered zero,

764
00:35:30,560 --> 00:35:34,400
Speaker 5: typical BDC levered one point five times, typical retirement services

765
00:35:34,440 --> 00:35:39,840
Speaker 5: company levered eight times. It is deleveraging. The second is disclosure.

766
00:35:40,760 --> 00:35:43,919
Speaker 5: We think it's not transparent. The typical bank disclosure says

767
00:35:44,000 --> 00:35:46,880
Speaker 5: loans to customers and loans to companies. You click on

768
00:35:46,960 --> 00:35:49,759
Speaker 5: our website you can see every security we own every quarter.

769
00:35:50,760 --> 00:35:55,839
Speaker 5: Then you talk about maturity transformation. Maturity transformation is really

770
00:35:55,960 --> 00:35:58,880
Speaker 5: where the economy has suffered and financial markets have suffered.

771
00:36:00,880 --> 00:36:04,040
Speaker 5: Are in business to do maturity transformation. They borrow shortened

772
00:36:04,080 --> 00:36:06,280
Speaker 5: form of deposits and lend long in form of loans.

773
00:36:06,560 --> 00:36:08,600
Speaker 5: That's not a bad thing, that's just how they're set up.

774
00:36:09,320 --> 00:36:12,960
Speaker 5: In the investment marketplace, generally, you're talking about investors who

775
00:36:13,000 --> 00:36:15,960
Speaker 5: are matched from a maturity point of view. And the

776
00:36:16,040 --> 00:36:18,840
Speaker 5: final thing that I always sit with regulators, what percentage

777
00:36:18,880 --> 00:36:21,719
Speaker 5: of assets in the US banking system are investment grade?

778
00:36:22,600 --> 00:36:25,600
Speaker 5: They don't know. We have a perception that they're all

779
00:36:25,680 --> 00:36:28,200
Speaker 5: investment grade, but the reality is about sixty percent of

780
00:36:28,280 --> 00:36:31,080
Speaker 5: bank assets our investment grade. You look at a balance

781
00:36:31,080 --> 00:36:33,920
Speaker 5: sheet like ours and just as an example, we're ninety

782
00:36:34,000 --> 00:36:38,360
Speaker 5: plus percent investment grade. And so it's change, but it

783
00:36:38,480 --> 00:36:41,080
Speaker 5: is actually changed. That is making the system more robust

784
00:36:41,120 --> 00:36:44,279
Speaker 5: and more diversified. And we let's make no mistake, we

785
00:36:44,440 --> 00:36:46,759
Speaker 5: are the envy of the world. We the US are

786
00:36:46,840 --> 00:36:50,120
Speaker 5: the envy of the world. In Europe, they are squeezing

787
00:36:50,160 --> 00:36:53,319
Speaker 5: the banking system through Boslin game, but they haven't yet

788
00:36:53,400 --> 00:36:56,359
Speaker 5: decided to allow investors to fill that gap, and there

789
00:36:56,360 --> 00:36:59,879
Speaker 5: are questions, why are we struggling with financial markets? Well,

790
00:37:00,280 --> 00:37:02,840
Speaker 5: you're squeezing the banking system and you're not allowing investors

791
00:37:02,880 --> 00:37:03,520
Speaker 5: to fill the gap.

792
00:37:03,920 --> 00:37:06,760
Speaker 2: Have you had this conversation with a senator from Massachusetts?

793
00:37:07,520 --> 00:37:09,279
Speaker 2: As that conversation ever happened.

794
00:37:09,480 --> 00:37:12,160
Speaker 5: It hasn't, but I welcome it. I've spent I spend

795
00:37:12,239 --> 00:37:16,560
Speaker 5: lots of time in DC and elsewhere speaking to regulators

796
00:37:16,840 --> 00:37:20,000
Speaker 5: because we are in a really dynamic phase. Everything that

797
00:37:20,120 --> 00:37:23,360
Speaker 5: we think works the way it works has changed, and

798
00:37:23,520 --> 00:37:26,560
Speaker 5: we're about to experience and are experiencing the changes that

799
00:37:27,600 --> 00:37:29,360
Speaker 5: were made in two thousand and eight in response to

800
00:37:29,440 --> 00:37:30,320
Speaker 5: the financial crisis.

801
00:37:30,480 --> 00:37:35,920
Speaker 2: Speaking of changes, Washington, DC is becoming increasingly interventionist. You

802
00:37:36,080 --> 00:37:38,640
Speaker 2: compared some of the benefits of doing business in America

803
00:37:39,719 --> 00:37:42,640
Speaker 2: and doing business in Europe. Doing business in America is

804
00:37:42,680 --> 00:37:44,759
Speaker 2: anturally not as easy as it used to be, and

805
00:37:44,840 --> 00:37:47,399
Speaker 2: it may well get harder. What's your view on where

806
00:37:47,440 --> 00:37:47,839
Speaker 2: we're heading?

807
00:37:49,239 --> 00:37:52,400
Speaker 5: You may be right, but it's all relative. This is

808
00:37:52,480 --> 00:37:54,359
Speaker 5: the single best market to be in at this point

809
00:37:54,400 --> 00:37:55,280
Speaker 5: in time. Barnutt.

810
00:37:56,120 --> 00:37:58,600
Speaker 2: When we spoke before Christmas and we talked about the

811
00:37:58,680 --> 00:38:01,440
Speaker 2: choices on the menu, then for the upcoming election. You

812
00:38:01,560 --> 00:38:04,879
Speaker 2: went too impressed. The menu's changed a little bit. What's

813
00:38:04,960 --> 00:38:05,359
Speaker 2: your view?

814
00:38:06,120 --> 00:38:09,440
Speaker 5: Well, since I'll be under banishment here if I give

815
00:38:09,440 --> 00:38:11,279
Speaker 5: you a direct view, let me to say. The way

816
00:38:11,360 --> 00:38:14,800
Speaker 5: I frame this is you are either more scared of

817
00:38:14,880 --> 00:38:17,560
Speaker 5: four years of the status quo or more scared of

818
00:38:17,600 --> 00:38:19,680
Speaker 5: four years of change. You just have to decide what

819
00:38:19,800 --> 00:38:22,840
Speaker 5: you're more scared of. Me personally, I'm more scared of

820
00:38:22,880 --> 00:38:23,960
Speaker 5: four years of the status quo.

821
00:38:24,280 --> 00:38:25,440
Speaker 2: What's wrong with the status quo?

822
00:38:27,040 --> 00:38:30,959
Speaker 5: I see a direction where the trend is not our friend.

823
00:38:31,320 --> 00:38:34,759
Speaker 5: Right now? We are, as you suggest, we are the

824
00:38:34,800 --> 00:38:36,560
Speaker 5: single best place to do business in the world. We

825
00:38:36,680 --> 00:38:40,200
Speaker 5: are the luckiest people in the world. Can we screw

826
00:38:40,280 --> 00:38:44,319
Speaker 5: it up? Yeah? We can. The notion that we are

827
00:38:44,600 --> 00:38:47,080
Speaker 5: spending two trillion and excess of what we take in

828
00:38:47,719 --> 00:38:51,560
Speaker 5: in peacetime with full employment does not vode well for

829
00:38:51,719 --> 00:38:53,840
Speaker 5: the availability of capital to do what we need to

830
00:38:53,920 --> 00:38:57,000
Speaker 5: do for the next generation. We're spending the next generation's

831
00:38:57,040 --> 00:38:57,680
Speaker 5: money currently.

832
00:38:58,280 --> 00:39:00,279
Speaker 2: Do you see any one of the campaigns that's to do?

833
00:39:00,320 --> 00:39:02,480
Speaker 5: And I think about that on the campaign trail though

834
00:39:03,200 --> 00:39:06,480
Speaker 5: in reality, let's hope. All we can hope for is

835
00:39:06,520 --> 00:39:07,200
Speaker 5: better governance.

836
00:39:07,480 --> 00:39:11,600
Speaker 2: I've said repeatedly on Bloomberg Surveiymans on Bloomberg TV, on

837
00:39:11,640 --> 00:39:14,200
Speaker 2: Bloomberg Radio for years that America has the privilege, the

838
00:39:14,320 --> 00:39:19,160
Speaker 2: unique privilege of acting recklessly. Are we losing that not yet?

839
00:39:20,040 --> 00:39:21,480
Speaker 5: We have a long way to go. We have lots

840
00:39:21,480 --> 00:39:24,279
Speaker 5: of examples around the globe of people who have acted

841
00:39:24,320 --> 00:39:26,480
Speaker 5: recklessly for a much longer period of time than we

842
00:39:26,560 --> 00:39:29,440
Speaker 5: have been acting recklessly. But we also have obligations that

843
00:39:29,560 --> 00:39:32,920
Speaker 5: others do not. Right now, we are the beneficiary of

844
00:39:33,040 --> 00:39:37,320
Speaker 5: being the strongest economy, the strongest capital market, the strongest military,

845
00:39:37,360 --> 00:39:38,880
Speaker 5: and the best place to do business. I mean, if

846
00:39:38,880 --> 00:39:41,279
Speaker 5: you tick off what's happened over the past years here,

847
00:39:41,719 --> 00:39:43,160
Speaker 5: we may not like how we got here and how

848
00:39:43,200 --> 00:39:46,279
Speaker 5: we financed it. Three years ago we decided to build infrastructure.

849
00:39:46,280 --> 00:39:48,960
Speaker 5: We allocated two trillion dollars. None of that's built yet,

850
00:39:48,960 --> 00:39:51,719
Speaker 5: it's all being built. Two years ago, we spent fifty

851
00:39:51,760 --> 00:39:55,239
Speaker 5: two billion dollars of semiconductor subsidies to build semiconductors. Here,

852
00:39:55,520 --> 00:39:57,640
Speaker 5: not a single plant is open. It's all being built.

853
00:39:58,320 --> 00:40:01,520
Speaker 5: A year ago Inflation Reduction Act to encourage the manufacturer

854
00:40:01,600 --> 00:40:04,760
Speaker 5: of renewables one point three to two point three trillion,

855
00:40:05,040 --> 00:40:07,520
Speaker 5: No one really knows. Not a single plant is opened.

856
00:40:08,440 --> 00:40:11,640
Speaker 5: We are the beneficiary and the largest recipient of foreign

857
00:40:11,680 --> 00:40:14,279
Speaker 5: direct investment three years in a row. So people around

858
00:40:14,320 --> 00:40:16,799
Speaker 5: the globe are actually figuring out we're better off here.

859
00:40:17,520 --> 00:40:20,960
Speaker 5: And something tells me we're ramping defense production. All of

860
00:40:21,040 --> 00:40:24,840
Speaker 5: those things are fiscally stimulative and positive for employment. Or

861
00:40:24,880 --> 00:40:28,200
Speaker 5: by the way, we have no legal immigration. This sets

862
00:40:28,280 --> 00:40:32,560
Speaker 5: us up very well fiscally for a strong economy.

863
00:40:32,160 --> 00:40:34,799
Speaker 2: Which I think we're seeing at a reserve is kind

864
00:40:34,800 --> 00:40:36,759
Speaker 2: of interest rates by fifty basis points. Are you in

865
00:40:36,840 --> 00:40:39,520
Speaker 2: tolston slock camp? And you can agree with, agree or

866
00:40:39,560 --> 00:40:42,680
Speaker 2: disagree with. Tulson of course works here. He believes his

867
00:40:42,760 --> 00:40:44,959
Speaker 2: economy doesn't need rate cuts. We're in a great place.

868
00:40:45,000 --> 00:40:45,759
Speaker 2: Do you share that view?

869
00:40:45,920 --> 00:40:48,840
Speaker 5: I said it. I was, I guess unfortunate to be

870
00:40:49,560 --> 00:40:52,799
Speaker 5: on TV an hour after the rate cut. I said,

871
00:40:52,840 --> 00:40:56,240
Speaker 5: this was a very very expensive insurance policy. What's expensive

872
00:40:56,239 --> 00:40:59,880
Speaker 5: about it the notion that we would cut rates. Financial

873
00:41:00,000 --> 00:41:02,239
Speaker 5: markets are wide open, equities are at all time high,

874
00:41:02,280 --> 00:41:05,120
Speaker 5: financing is available, real estate prices are going up in

875
00:41:05,160 --> 00:41:10,240
Speaker 5: every market, and yet we're stimulating, and we're stimulating fiscally.

876
00:41:10,840 --> 00:41:14,360
Speaker 5: It is not clear that we need more rate cuts

877
00:41:14,400 --> 00:41:16,279
Speaker 5: at this point in time, and to the extent we

878
00:41:17,160 --> 00:41:19,719
Speaker 5: encourage growth, and growth was very strong, as you saw

879
00:41:19,800 --> 00:41:24,200
Speaker 5: from GDP for the quarter. To the extent we accelerate

880
00:41:24,280 --> 00:41:26,280
Speaker 5: the economy and have to go in the other direction,

881
00:41:26,560 --> 00:41:27,600
Speaker 5: that would not be a good deck.

882
00:41:28,040 --> 00:41:30,080
Speaker 2: Just pause. You think the FED might have to start

883
00:41:30,120 --> 00:41:32,000
Speaker 2: hiking interest rates again in twenty five.

884
00:41:32,320 --> 00:41:35,000
Speaker 5: I'm not saying that yet. I'm just saying I see

885
00:41:35,080 --> 00:41:37,840
Speaker 5: no reason for the cutting of rates right now. So

886
00:41:37,920 --> 00:41:40,320
Speaker 5: am I in the Torston camp. I'm absolutely in the

887
00:41:40,400 --> 00:41:42,600
Speaker 5: Torston camp. And it's my privilege to have him down

888
00:41:42,640 --> 00:41:44,080
Speaker 5: the hall. I make sure to check in with him

889
00:41:44,080 --> 00:41:44,520
Speaker 5: every morning.

890
00:41:44,840 --> 00:41:46,760
Speaker 2: I do as well, Mark Ryan, this was a privilege,

891
00:41:46,920 --> 00:41:48,840
Speaker 2: a pleasure, good luck for the next five years, and

892
00:41:49,040 --> 00:41:50,160
Speaker 2: I hope it told you every year.

893
00:41:50,520 --> 00:41:51,400
Speaker 5: Every year you get to do it.

894
00:41:51,719 --> 00:41:54,880
Speaker 2: Mark, Thank you, sir, appreciate it. This is the Bloomberg

895
00:41:54,960 --> 00:41:59,600
Speaker 2: Seventans podcast, bringing you the best in markets, economics, angiopolitics.

896
00:42:00,000 --> 00:42:02,360
Speaker 2: You can watch the show live on Bloomberg TV weekday

897
00:42:02,400 --> 00:42:05,600
Speaker 2: mornings from six am to nine am Eastern. Subscribe to

898
00:42:05,680 --> 00:42:08,839
Speaker 2: the podcast on Apple, Spotify or anywhere else you listen,

899
00:42:09,160 --> 00:42:11,760
Speaker 2: and as always on the Bloomberg terminal and the Bloomberg

900
00:42:11,800 --> 00:42:12,359
Speaker 2: Business opp