WEBVTT - Markets Price in April CPI 0:00:02.520 --> 0:00:13.760 Bloomberg Audio Studios, Podcasts, radio news. This is the Bloomberg 0:00:13.840 --> 0:00:17.920 Surveillance Podcast. Catch us live weekdays at seven am Eastern 0:00:18.200 --> 0:00:22.000 on Apple CarPlay or Android Auto with the Bloomberg Business App. 0:00:22.360 --> 0:00:25.680 Listen on demand wherever you get your podcasts, or watch 0:00:25.760 --> 0:00:26.960 us live on YouTube. 0:00:27.160 --> 0:00:30.520 Concerts Hunter, just Beck, I gotta do this thirty seconds. 0:00:30.600 --> 0:00:33.760 Latin America. You just visited three countries. What was your 0:00:33.800 --> 0:00:37.000 take on the prosperity of South America? 0:00:37.560 --> 0:00:41.400 So I hadn't been to Argentina since twenty eighteen, and 0:00:41.640 --> 0:00:45.280 the city felt less vibrant and that some people pointed 0:00:45.320 --> 0:00:47.280 out to me that could be a COVID effect. I 0:00:47.320 --> 0:00:50.960 think everybody's very bullish on what the Malay administration is 0:00:51.000 --> 0:00:53.400 doing in terms of deregulation, in terms of trying to 0:00:53.400 --> 0:00:55.160 get the economy back on track. But as you know, 0:00:55.240 --> 0:00:59.800 first quarter GDP was weak, and so I think that's 0:01:00.080 --> 0:01:02.880 that's not going to be a straight line up for Argentina. 0:01:02.920 --> 0:01:04.680 They've they've got a lot of work to do to 0:01:04.760 --> 0:01:09.840 deregulate that economy. Brazil is doing better, doing stronger. The 0:01:09.880 --> 0:01:12.880 one thing that Latin America really has going for it 0:01:12.920 --> 0:01:16.319 is that it is not energy dependent on the Middle East, 0:01:16.480 --> 0:01:19.840 and they produce lots of agricultural commodities. 0:01:19.880 --> 0:01:21.400 Just because the time I got to get the CPI, 0:01:21.480 --> 0:01:24.280 I got a three point seven percent year over year 0:01:24.440 --> 0:01:27.560 survey number. Here, could we come in at four percent 0:01:27.600 --> 0:01:28.800 on this report? 0:01:29.240 --> 0:01:30.800 Yes, we absolutely could. 0:01:31.080 --> 0:01:34.040 We absolutely could. And there's some there's some wild there's 0:01:34.040 --> 0:01:36.399 some of those factors are things we should look through. 0:01:36.800 --> 0:01:39.680 So some of it we expect Shelter to add back 0:01:40.080 --> 0:01:43.720 some a couple of percentage points to CPI because of 0:01:43.760 --> 0:01:46.839 some technicalities of the way that that survey is done 0:01:46.840 --> 0:01:50.560 and the timing of the shutdown in October. We certainly 0:01:50.600 --> 0:01:55.080 expect to see an increase in goods prices, especially oil 0:01:55.160 --> 0:01:58.720 based goods, right, and it's the transport of those goods 0:01:58.760 --> 0:02:00.559 as well as just the I think. 0:02:00.480 --> 0:02:02.800 Did she just say she has no clue yet? 0:02:02.880 --> 0:02:05.080 Like most most people, I don't know this get it. 0:02:05.320 --> 0:02:07.200 We've had some people come in here Constance to say, 0:02:07.560 --> 0:02:10.760 you think the inflation's you know, peaking or spiking, Now, 0:02:10.919 --> 0:02:12.480 wait till the second half of the year when it 0:02:12.560 --> 0:02:16.000 really flows through the economy. We could get some startling 0:02:16.120 --> 0:02:16.720 high numbers. 0:02:16.760 --> 0:02:17.680 Are you in that camp? 0:02:18.040 --> 0:02:20.600 So one of the things I was doing in Latin 0:02:20.639 --> 0:02:24.359 America was I was intending a conference of commercial bank 0:02:24.400 --> 0:02:27.720 business economists, and we do a survey of what are 0:02:27.760 --> 0:02:30.560 the what are the biggest risks, And the biggest risks 0:02:30.680 --> 0:02:34.080 on the board were things like trade war, sort of 0:02:34.400 --> 0:02:41.160 uh debt debt profiles of developed economies, but interestingly kinetic 0:02:41.240 --> 0:02:43.680 war or the closure of the Strait of Hormuz did 0:02:44.240 --> 0:02:47.680 was not a frequent shower. And I don't think the 0:02:47.680 --> 0:02:50.520 market is properly pricing this. We're not properly pricing this 0:02:50.919 --> 0:02:55.200 into inflation, we're not properly pricing this into equity markets, 0:02:55.560 --> 0:02:58.240 and it's looking like the strait is going to stay 0:02:58.280 --> 0:02:59.880 closed through the summer. 0:03:00.280 --> 0:03:03.440 To synthesize is do you do you get value from 0:03:03.560 --> 0:03:08.280 CPI in course CPI or you like others including future 0:03:08.360 --> 0:03:10.440 chairman Wars, where you look at other series. 0:03:11.480 --> 0:03:13.480 It's not so much that I look at other series. 0:03:13.520 --> 0:03:16.640 It's that at times of inflection, data becomes a much 0:03:16.680 --> 0:03:21.160 more rear view mirror and much less an indicator of 0:03:21.200 --> 0:03:23.000 what we're going to have in the future. Because if 0:03:23.040 --> 0:03:25.560 we continue to see the straight closed throughout the summer, 0:03:25.800 --> 0:03:28.160 that's a shock that's not currently priced in. 0:03:28.480 --> 0:03:30.360 So concerts we make here it's coming in, you know, 0:03:30.440 --> 0:03:33.320 a little bit higher than expected, just the you know 0:03:33.400 --> 0:03:35.440 kind of the year of a year CPI three point 0:03:35.440 --> 0:03:37.840 eight percent. It's a lot higher than when we were 0:03:37.920 --> 0:03:40.160 last month at three point three percent, and it's probably 0:03:40.200 --> 0:03:41.640 higher than the Fed would like to see it. 0:03:41.640 --> 0:03:43.720 It's for sure higher than the FED would like to 0:03:43.760 --> 0:03:45.560 see it. And I think that's the key thing. If 0:03:45.560 --> 0:03:51.160 we take the Friday's jobs report, which admittedly was concentrated 0:03:51.280 --> 0:03:55.560 in healthcare and leisure, in hospitality, all the problems we've 0:03:55.600 --> 0:03:59.280 been seeing over the past several years with jobs growth 0:04:00.480 --> 0:04:03.960 and this sort of low higher, low fire environment, we 0:04:04.000 --> 0:04:08.160 take that, which seems in a strange equilibrium to quote J. Powell, 0:04:08.520 --> 0:04:11.320 and then we take this stronger inflation very hard to 0:04:11.320 --> 0:04:13.200 see how they will cut into this. And it is 0:04:13.240 --> 0:04:15.600 our estimation actually that they will go to a neutral 0:04:15.600 --> 0:04:16.760 bias at the next meeting. 0:04:17.400 --> 0:04:19.480 Neutral bias. Okay? Is that enough? Though? 0:04:19.560 --> 0:04:22.840 I mean, do we need to start thinking about they 0:04:22.839 --> 0:04:24.480 need to slow down this economy a little bit? 0:04:24.480 --> 0:04:27.200 Maybe? Well, I mean they slowed down the inflation here 0:04:27.200 --> 0:04:27.640 a little bit. 0:04:27.800 --> 0:04:31.720 Yeah, So the question is how much demand destruction are 0:04:31.760 --> 0:04:34.400 we going to get out of this? So this is 0:04:34.680 --> 0:04:37.520 households have spent an extra twenty eight billion dollars on 0:04:37.600 --> 0:04:40.640 gasoline since the war started. Now, that's about two hundred 0:04:40.680 --> 0:04:43.400 and sixty dollars per household. That's a very back of 0:04:43.400 --> 0:04:46.240 the envelope number. Obviously it depends on how much people drive, 0:04:47.480 --> 0:04:50.840 but still it's taking a bite out of consumption. That's 0:04:50.839 --> 0:04:53.880 a dead weight loss. It doesn't go to other consumption, 0:04:54.279 --> 0:04:56.440 so it should reduce demand in other areas. But what 0:04:56.520 --> 0:04:59.440 I'm looking at here is what's happening in services. So 0:04:59.600 --> 0:05:03.680 as we anticipated two to three tenths increase on shelter, 0:05:04.080 --> 0:05:06.640 that's going to normalize and dissipate over the course of 0:05:06.640 --> 0:05:09.520 the rest of the year. So we're looking at shelter 0:05:09.600 --> 0:05:12.040 at three point three that's probably really normalizing it a 0:05:12.080 --> 0:05:15.599 closer to three point oh two point nine. But transportation 0:05:15.720 --> 0:05:20.200 services four point three percent? Is that enough to cause 0:05:20.279 --> 0:05:24.320 demand destruction? In which case this isn't going to become 0:05:24.320 --> 0:05:25.280 a persistent problem. 0:05:25.279 --> 0:05:29.000 But Gospel Constance Hunter at the National Association for Business 0:05:29.040 --> 0:05:33.960 Economics is financial media knowns like me and Paul quote 0:05:34.360 --> 0:05:38.320 three point eight percent inflation. I am aggressively going to 0:05:38.400 --> 0:05:42.400 suggest that the inflation of the haves is different than 0:05:42.440 --> 0:05:45.800 the inflation and the have nots. Discuss that within your 0:05:45.839 --> 0:05:47.960 public policy background in Columbia. 0:05:48.040 --> 0:05:51.880 Yeah, so that's a really important factor. And going back 0:05:51.880 --> 0:05:53.960 to that doction board, right, we're looking at wages that 0:05:54.000 --> 0:05:57.280 are not keeping pace with inflation. We know that wages 0:05:57.680 --> 0:06:02.440 for college educated people are going up faster, so those 0:06:02.760 --> 0:06:05.560 those supervisory wages are going up faster than the non 0:06:05.600 --> 0:06:08.760 supervisory wages. We had some catch up after COVID that 0:06:08.760 --> 0:06:11.240 that has gone away. We're back to a more normal 0:06:11.320 --> 0:06:14.520 label market in that regard, and so this becomes an 0:06:14.600 --> 0:06:18.280 acute political issue for the Republicans, but one that the 0:06:18.320 --> 0:06:21.040 president seems immune to. 0:06:21.320 --> 0:06:21.760 Actually. 0:06:22.279 --> 0:06:25.239 Yeah, but again the three point eight the headline here. 0:06:26.040 --> 0:06:28.320 That starts to get people's attention. 0:06:28.400 --> 0:06:30.160 I think, you know, because you start thinking at four 0:06:30.200 --> 0:06:31.760 percent inflation the last time, you know. 0:06:31.839 --> 0:06:34.120 I mean, I think what gets people's attention, honestly, is 0:06:34.160 --> 0:06:37.200 what we economists call salient prices. So it's things that 0:06:37.240 --> 0:06:40.440 people buy frequently. So remember when egg prices were going up, 0:06:40.480 --> 0:06:42.880 that was all people could talk about, not because eggs 0:06:42.880 --> 0:06:44.880 are a big part of the consumer basket, but because 0:06:44.880 --> 0:06:47.400 you buy eggs on a regular basis. The same goes 0:06:47.400 --> 0:06:50.880 for gasoline. We're heading into summer vacation and travel season, 0:06:51.000 --> 0:06:53.920 so people are going to feel gasoline even more. And 0:06:54.160 --> 0:06:57.400 of course, if you're planning to travel via air, you're 0:06:57.440 --> 0:06:59.960 going to see that airfare impact your travel plan. 0:07:00.600 --> 0:07:04.560 Constance, I gotta ask you this, milk inflation is below 0:07:04.600 --> 0:07:07.840 three point eight percent? Okay, wonderful, Paul, you're buying the 0:07:07.880 --> 0:07:11.280 grass fed stuff blessed by the Dalary Lama. Sure you 0:07:11.320 --> 0:07:15.000 know that's a little more Beef inflation is not milk. 0:07:15.680 --> 0:07:19.360 Chicken inflation is not chicken. I mean, I'm sorry, this 0:07:19.400 --> 0:07:23.880 stuff is moving. I get it. How how painful is 0:07:23.880 --> 0:07:26.360 a three point eight percent statistic? 0:07:26.680 --> 0:07:28.840 It's painful and it's going to get worse. That's I 0:07:28.840 --> 0:07:30.040 think the importance. 0:07:29.600 --> 0:07:31.480 You can predict to four percent inflation? 0:07:31.520 --> 0:07:33.560 Do you think it's going to be above four point 0:07:33.560 --> 0:07:35.600 two percent average for the second quarter? 0:07:35.680 --> 0:07:35.920 Yes? 0:07:36.240 --> 0:07:36.640 Wow? 0:07:37.280 --> 0:07:39.840 What how does that change a political debate in America? 0:07:39.880 --> 0:07:42.680 All your study of the analog of presidents having to 0:07:42.680 --> 0:07:45.840 get up in front of a four point two percent inflation, right. 0:07:45.880 --> 0:07:47.480 I think it's gonna I think it's going to come 0:07:47.480 --> 0:07:49.400 back to biten. I think that's one of the reasons 0:07:49.400 --> 0:07:52.480 that people had anticipated that we would bring an end 0:07:52.560 --> 0:07:57.000 to the war in Iran because the alications are so strong. 0:07:57.160 --> 0:08:01.080 As I said, this administration seems to have its own 0:08:01.320 --> 0:08:05.160 perception of the political feedback loops, which may prove to 0:08:05.200 --> 0:08:07.040 be a bit inactive consens. 0:08:06.640 --> 0:08:10.120 Thank you, so stay with us. More from Bloomberg Surveillance 0:08:10.160 --> 0:08:11.520 coming up after this. 0:08:18.760 --> 0:08:22.360 You're listening to the Bloomberg Surveillance podcast. Catch us Live 0:08:22.400 --> 0:08:25.600 weekday afternoons from seven to ten am Eastern Listen on 0:08:25.640 --> 0:08:29.320 Applecarplay and Android Auto with the Bloomberg Business app, or 0:08:29.480 --> 0:08:30.960 watch us Live on YouTube. 0:08:31.200 --> 0:08:35.440 Edward your Denny joins us this morning. Readjusting ever higher 0:08:36.000 --> 0:08:40.120 ed with your beautiful CJ. Lawrence like charts, even with CJ. 0:08:40.240 --> 0:08:44.800 Lawrence Green in the banner you do a log extrapolation 0:08:44.960 --> 0:08:47.719 of the S and P five hundred. Is that all 0:08:47.760 --> 0:08:50.760 this is is we're climbing a wall of worry because 0:08:50.840 --> 0:08:52.520 no one else out there has a. 0:08:52.559 --> 0:08:58.360 Courage to simply extrapolate forward. Well, I think we definitely 0:08:58.400 --> 0:09:00.640 are climbing a wall of worry, and that's the best 0:09:00.720 --> 0:09:03.319 kind of bull market you can have. You don't want 0:09:03.320 --> 0:09:06.840 everybody being bullish. You want people to have concerns. 0:09:08.320 --> 0:09:08.920 I don't want. 0:09:08.800 --> 0:09:13.920 People to to worry on a personal level, but on 0:09:13.960 --> 0:09:16.920 a professional level, when I see a lot of bearishness 0:09:17.600 --> 0:09:21.560 from a contrarian perspective, it usually works. I made some 0:09:21.600 --> 0:09:26.080 of my best calls on market bottoms when my gut 0:09:26.120 --> 0:09:30.360 was hurting and everybody was was in a panic mode. 0:09:30.720 --> 0:09:33.240 So we're not in panic mode right now. But on 0:09:33.280 --> 0:09:35.600 the other hand, there are a lot of people worrying 0:09:35.679 --> 0:09:38.280 about what's going on in the Middle East, and I'm 0:09:38.320 --> 0:09:41.920 not saying that's not worrisome, but it's it's certainly adding 0:09:41.960 --> 0:09:46.240 to the concerns. They're worrying about the bond market, they're 0:09:46.280 --> 0:09:50.160 they're they're worrying about a k economy that the consumers 0:09:50.679 --> 0:09:53.840 not going to continue to spend, and they're working worrying 0:09:53.880 --> 0:09:56.800 about too much capital spending. So there's a lot of 0:09:56.880 --> 0:10:00.680 worries up there out there. But meanwhile, it's really pretty simple. 0:10:00.760 --> 0:10:05.319 Or the market is also getting kind of thrust up, 0:10:05.400 --> 0:10:09.480 but it's been a rocket ship because of earnings. 0:10:09.360 --> 0:10:12.520 And what we're starting to see once again that you know, 0:10:12.559 --> 0:10:14.880 it's a pillar of this market. I guess last year 0:10:14.920 --> 0:10:18.079 was you know, kind of a narrower breath in this marketplace. 0:10:18.200 --> 0:10:20.559 Is the big tech stocks once again leading this market 0:10:20.640 --> 0:10:23.559 high on good earnings. Certainly, are you concerned about that, 0:10:24.640 --> 0:10:26.520 I guess, narrowing breath in the market. 0:10:27.080 --> 0:10:29.640 Yeah, well again, I think people are always looking for 0:10:29.679 --> 0:10:33.760 something to worry about with regards to the market, and 0:10:34.120 --> 0:10:37.920 the breath issue is back. But however, once again I 0:10:37.920 --> 0:10:42.120 would point out that the earning story is fantastic for 0:10:42.160 --> 0:10:45.520 the S and P five hundred earnings breath is actually improving. 0:10:46.640 --> 0:10:50.440 And not only that, but we've got the small cap 0:10:50.480 --> 0:10:53.040 and MidCap earnings which had been kind of in a 0:10:53.120 --> 0:10:56.720 coma since twenty twenty two. For the past six months 0:10:56.760 --> 0:11:01.280 or so, they're starting to really perk up, and expectations 0:11:01.600 --> 0:11:06.320 are already showing a record high earnings outlook for this 0:11:06.440 --> 0:11:07.040 mid caps. 0:11:07.679 --> 0:11:10.520 So I mean, again, I guess towards the end of 0:11:10.800 --> 0:11:13.480 last year, we did have kind of a rotation out 0:11:13.520 --> 0:11:16.240 of some of those big cap growth names into some 0:11:16.880 --> 0:11:20.040 more Is there any legs left in that kind of trade, 0:11:20.160 --> 0:11:23.400 maybe a small MidCap as you suggested, maybe some other 0:11:23.480 --> 0:11:24.120 sectors here. 0:11:25.520 --> 0:11:29.679 Well, I think that other sectors will participate in this 0:11:31.040 --> 0:11:34.120 latest rally in this bull market. I think we're saying, 0:11:35.120 --> 0:11:37.760 you know, one of the problems is the magnificent seven 0:11:37.800 --> 0:11:42.200 are contributing to that. So consumer discretionary has been boosted 0:11:42.240 --> 0:11:49.320 recently by improvement in Amazon, and communications services have done 0:11:49.360 --> 0:11:57.679 well because Google and Meta dominate that space. But financials, 0:11:57.720 --> 0:12:01.360 I think as still have prospects of doing better. You know, 0:12:01.400 --> 0:12:06.600 the there's signs that the private credit situation is not 0:12:06.679 --> 0:12:09.560 get the worst might actually be be getting better as 0:12:09.559 --> 0:12:12.760 the economy continues to chuck along. 0:12:13.040 --> 0:12:15.040 As your Denny with us folks are goin to. Can't 0:12:15.040 --> 0:12:19.160 say enough about his newsletter. It's wonderful daily brief really 0:12:19.240 --> 0:12:22.280 one of the major subscriptions out there. Ed, I'm going 0:12:22.320 --> 0:12:25.679 to assume long ago and far away at Yale they 0:12:25.720 --> 0:12:30.480 didn't have econ five seventy four applied empirical methods. This 0:12:30.679 --> 0:12:32.760 is back ed your Donny folks was back in a 0:12:32.840 --> 0:12:37.880 simpler time of macro micro our Simon White this morning 0:12:37.960 --> 0:12:43.240 at Off the London Desk has a spectacular walkthrough of 0:12:43.360 --> 0:12:48.960 derivative finance, looking at the Greek letters of gamma, dispersion 0:12:49.480 --> 0:12:54.680 and correlation, and it's worry, worry, worry, OMG, things are terrible. 0:12:55.800 --> 0:12:59.439 If we created a wall of worry with our mathiness 0:13:00.160 --> 0:13:02.280 in modern global Wall Street. 0:13:03.360 --> 0:13:05.960 Well, I don't think I'm inventing a phrase here, but 0:13:06.000 --> 0:13:10.160 it's all Greek to me. I actually did an econometric 0:13:10.800 --> 0:13:15.520 dissertation for James Toubin, and I proved that his theory 0:13:15.720 --> 0:13:18.680 was right for corporations, and so he loved it and 0:13:18.760 --> 0:13:22.320 I got through, I got my PhD and moved on. 0:13:23.520 --> 0:13:27.320 But yeah, I think there's too much. I think a 0:13:27.320 --> 0:13:30.320 lot of economists start with theories, start with the models, 0:13:30.679 --> 0:13:33.960 and then look for the data to confirm it. I 0:13:34.040 --> 0:13:37.959 worked the other way around. You know, Ben bernanke in 0:13:38.000 --> 0:13:42.160 his memoir of being at the FED that when he 0:13:42.240 --> 0:13:44.520 joined the FED he had to learn something that was 0:13:45.240 --> 0:13:47.839 rather new to him, and now he called the current analysis. 0:13:48.559 --> 0:13:50.320 And I kind of like that. In other words, he 0:13:50.360 --> 0:13:53.000 had to learn how the world really works. I had 0:13:53.040 --> 0:13:55.760 to learn about markets and how markets interact with data, 0:13:55.800 --> 0:13:58.840 and data impacts the markets. And that's what I practice, 0:13:58.920 --> 0:14:01.839 I've been practicing on all long. Is current analysis? Okay, 0:14:01.880 --> 0:14:04.160 but that's a reality based economic And let. 0:14:04.040 --> 0:14:06.240 Me get to say, because Paul's got four more questions. 0:14:06.480 --> 0:14:09.880 The bottom line, ed is we have physics envy. And 0:14:09.920 --> 0:14:14.000 it started with you know, Newtonian mechanics nineteenth century, and 0:14:14.040 --> 0:14:18.319 now we've got alpha beta Gamma, Epsilon, delta the others. 0:14:18.440 --> 0:14:21.440 And I just, folks, I just think the difference, the 0:14:21.520 --> 0:14:26.080 distinction between a Yar Denny strategy and some of the 0:14:26.200 --> 0:14:30.600 quad strategy is the angst of the age. Worry, worry, OMG, 0:14:30.800 --> 0:14:33.600 Paul Gamma dispersion. We used to call it. 0:14:33.600 --> 0:14:36.080 We used to call it political economy, and then suddenly 0:14:36.160 --> 0:14:40.280 it became a social science. Uh, and it's not a science. 0:14:40.400 --> 0:14:45.560 It's uh, it's political economy. It's it's too complicated to 0:14:45.600 --> 0:14:46.480 put in a formula. 0:14:47.400 --> 0:14:50.440 So ed, I mean on that front, there, we've got 0:14:50.480 --> 0:14:52.200 the market's got a lot of cross winds as it 0:14:52.240 --> 0:14:55.880 released to geopolitics, whether it be tariffs from earlier this 0:14:56.000 --> 0:14:56.760 year and last. 0:14:56.600 --> 0:14:58.520 Year, to the war in Iran. 0:14:58.640 --> 0:15:01.440 But boy that at least the stock market seems to 0:15:01.480 --> 0:15:04.280 look through all of that and focus on maybe just 0:15:04.400 --> 0:15:06.640 the earnings, which are arguably the most fundamental. 0:15:07.840 --> 0:15:08.280 Yeah. 0:15:08.360 --> 0:15:11.320 I think what's going on in the stock market is 0:15:11.760 --> 0:15:19.600 everybody knows that based on history. 0:15:15.560 --> 0:15:15.640 That. 0:15:17.880 --> 0:15:21.600 Crises, a geopolitical crises in the past have turned out 0:15:21.600 --> 0:15:25.680 to be buying opportunities. So when we get a geopolitical crisis, 0:15:25.680 --> 0:15:28.960 we get kind of scared. For a couple of weeks, 0:15:29.240 --> 0:15:32.440 maybe four weeks, as we did in March, and then 0:15:32.480 --> 0:15:36.840 everybody remembers that that's actually a buying opportunity. And that's 0:15:36.880 --> 0:15:41.240 exactly what happened on March thirty first, is suddenly investors said, well, 0:15:41.280 --> 0:15:44.200 you know, if the president's going to be looking for 0:15:44.240 --> 0:15:46.520 an exit ramp and we're going to have a cease fire, 0:15:47.120 --> 0:15:50.000 then we can buy stocks today at a lower price 0:15:50.080 --> 0:15:51.800 with record higher earnings. 0:15:52.240 --> 0:15:54.280 And thank you so much. How's your beast doing? I 0:15:54.280 --> 0:15:56.520 don't see your dog in the background there in your 0:15:56.520 --> 0:16:01.880 couch dogs? Is Max is walking about? He's walking probably 0:16:01.920 --> 0:16:04.720 reading the Wall Street Journal or Pan on one of 0:16:04.760 --> 0:16:07.160 the two d there, Denny, thank you so much, greatly 0:16:07.160 --> 0:16:10.240 appreciate it. One of the great calls of this bull market. Again, 0:16:10.520 --> 0:16:12.880 we protect the copyright of all of our guests. Look 0:16:12.920 --> 0:16:17.080 through your Denny Global Research for their just fabulous, fabulous 0:16:17.480 --> 0:16:21.720 daily study. Stay with us. More from Bloomberg Surveillance coming 0:16:21.800 --> 0:16:22.800 up after this. 0:16:30.040 --> 0:16:33.640 You're listening to the Bloomberg Surveillance podcast. Catch us live 0:16:33.720 --> 0:16:36.840 weekday afternoons from seven to ten am Eastern Listen on 0:16:36.960 --> 0:16:40.600 Applecarplay and Android Auto with the Bloomberg Business app, or 0:16:40.760 --> 0:16:42.240 watch us Live on YouTube. 0:16:42.640 --> 0:16:47.600 Mark Pinto is a grizzled veteran at Moody's of actually 0:16:47.680 --> 0:16:52.200 sifting through the bs in credit, and he is definitive 0:16:52.760 --> 0:16:55.840 on private credit. Thank you so much for joining us 0:16:55.840 --> 0:16:57.360 for this four hour conversation. 0:16:57.520 --> 0:16:58.520 Four hour conversation. 0:16:58.600 --> 0:17:02.800 Your note is b on grim. You've got ratios here 0:17:02.840 --> 0:17:07.080 that matter. It's wicked inside baseball, and at the top 0:17:07.160 --> 0:17:11.840 you say it's okay. So far, so far, define this 0:17:11.960 --> 0:17:13.439 so far that we are living? 0:17:13.600 --> 0:17:16.120 So far well, I can tell you that the market 0:17:16.240 --> 0:17:20.159 has performed quite well to date. We've been seeing a 0:17:20.160 --> 0:17:24.720 bit of a test, the liquidity test recently, but asequality 0:17:24.800 --> 0:17:28.160 still remains fairly robust, even though we're seeing some pockets 0:17:28.160 --> 0:17:28.600 of discass. 0:17:28.600 --> 0:17:32.480 Everyone we're listening on Global Wall Street says Blooney KKR 0:17:32.600 --> 0:17:35.000 came out yesterday and had to mark something down. 0:17:36.080 --> 0:17:40.080 This is when you lend, you will have right offs. 0:17:40.119 --> 0:17:45.000 This idea of no write offs, no losses doesn't exist 0:17:45.080 --> 0:17:48.399 in the lending world. The question is the materiality. We 0:17:48.480 --> 0:17:51.320 need to look at the reality and look at the materiality. 0:17:51.440 --> 0:17:55.320 So asequality is deteriorating, But the question is whether we're 0:17:55.320 --> 0:17:59.400 seeing a normalization, a reversion to the mean, or whether 0:17:59.480 --> 0:18:02.240 or not it's something more than that, and this market 0:18:02.240 --> 0:18:04.240 hasn't been tested and so we'll have to see where 0:18:04.280 --> 0:18:07.560 this goes. But at the moment they're in a decent place, 0:18:08.320 --> 0:18:10.320 although we're starting to see some deterioration. 0:18:10.640 --> 0:18:15.119 So the market has some comfort level with the public 0:18:15.160 --> 0:18:18.520 credit markets, has some comfort level or understanding of the 0:18:18.560 --> 0:18:19.680 bank lending market. 0:18:20.560 --> 0:18:22.200 What do we know about. 0:18:22.440 --> 0:18:27.320 The private credit market in terms of credit quality, standards, covenants, 0:18:27.359 --> 0:18:28.240 all that kind of stuff. 0:18:28.480 --> 0:18:31.080 We have a comfort level that we're going to be 0:18:31.080 --> 0:18:31.600 okay there. 0:18:31.680 --> 0:18:34.919 Well, in some respects, you get more information in certain 0:18:35.000 --> 0:18:37.879 pockets of private credit than you do in the banking world. 0:18:37.880 --> 0:18:38.720 So for example, with. 0:18:38.720 --> 0:18:45.520 BDCs, you'll get quarterly valuations of every single position. And however, 0:18:46.080 --> 0:18:48.440 this segment of the market is very lightly regulated, and 0:18:48.520 --> 0:18:50.280 I think a lot of people take comfort in the 0:18:50.320 --> 0:18:54.280 fact that you have very intense prudential regulation in the 0:18:54.320 --> 0:18:59.159 banking world, in the insurance world, but more really market 0:18:59.600 --> 0:19:03.080 regularly in the private credit world, which is fairly light touch. 0:19:03.680 --> 0:19:06.879 And so I think investors are. 0:19:08.480 --> 0:19:10.720 Looking at it very closely and figuring out, can I 0:19:10.760 --> 0:19:12.880 trust these numbers that are coming out of the industry. 0:19:13.240 --> 0:19:16.600 So how does an entity like Moody's who rates and 0:19:16.720 --> 0:19:19.520 really looks at the credit quality of fixed income markets 0:19:19.560 --> 0:19:20.160 broadly defined. 0:19:20.200 --> 0:19:21.679 How do you guys look at private credit? 0:19:21.760 --> 0:19:23.760 Well, the good thing about working at a rating agency 0:19:23.880 --> 0:19:26.000 is we get all the data that we need. So 0:19:26.080 --> 0:19:27.840 I like to say, I've been on the buyside, I've 0:19:27.840 --> 0:19:29.760 been on the cell side, and when you're in that 0:19:29.840 --> 0:19:32.720 part of the market, you're kind of snorkeling. When you 0:19:32.760 --> 0:19:34.720 go to a rating agency, you get to scuba dive, 0:19:35.000 --> 0:19:37.600 we get material non public information, We get all of 0:19:37.600 --> 0:19:41.320 the data that we need in order to rate overdone, 0:19:42.160 --> 0:19:46.880 I would say the worry right now is warranted. It's 0:19:46.920 --> 0:19:50.919 been intense, and I think on the other side of this, 0:19:51.040 --> 0:19:53.920 you're going to see more disclosure, You're going to see 0:19:53.920 --> 0:19:56.359 more discipline, and you're going to see more direction. And 0:19:56.400 --> 0:20:01.360 that direction may come from regulators, whether it's regulatory oversight 0:20:01.480 --> 0:20:04.840 for insurance companies and banks that are involved in this market, 0:20:05.119 --> 0:20:08.160 or whether there's slightly more market regulation on the private 0:20:08.200 --> 0:20:11.280 credit industry itself. I think that's coming and that hopefully 0:20:11.359 --> 0:20:15.600 will will will shrink the trust gap that you're starting 0:20:15.600 --> 0:20:16.359 to see in this market. 0:20:16.400 --> 0:20:19.040 Mark Pinto where this Moodies of private credits really get 0:20:19.119 --> 0:20:22.040 join us at today. Okay, so what is the exogen 0:20:22.160 --> 0:20:24.240 is shock here? If I have full faith in credit, 0:20:24.640 --> 0:20:28.160 curve stapening this that the other thing? How is private 0:20:28.240 --> 0:20:33.439 credit linked to any unexpected surprises including price down, yield 0:20:33.520 --> 0:20:34.760 up and full faith in credit? 0:20:34.840 --> 0:20:38.679 Well, I think underwriting is underwriting, and when the credit 0:20:38.720 --> 0:20:41.040 cycle turns, it's going to turn for everyone. It's going 0:20:41.080 --> 0:20:42.440 to turn for the banks, it's going to turn for 0:20:42.480 --> 0:20:45.480 the public markets, it's going to term for private credit markets. 0:20:45.760 --> 0:20:48.919 What's important, though, is how are these loans underwritten, what 0:20:48.960 --> 0:20:52.520 were the covenants, what is the collateral, and also how 0:20:52.640 --> 0:20:55.520 is this being funded. So in the banking market, we 0:20:55.600 --> 0:20:58.960 know that banks are funded by deposits and they engage 0:20:59.000 --> 0:21:03.240 in maturity transfer. In the private credit market, you tend 0:21:03.240 --> 0:21:07.680 to have your funding match the duration of your assets, 0:21:08.000 --> 0:21:12.160 so you're involved in much less maturity transformation and therefore 0:21:12.680 --> 0:21:16.800 less vulnerable to a certain amount of shocks. 0:21:17.320 --> 0:21:20.359 So some folks were suggesting that this was not a 0:21:21.280 --> 0:21:22.720 or some of the stress we've seen in the private 0:21:22.760 --> 0:21:25.560 credit market was not a credit quality problem, but a 0:21:25.680 --> 0:21:30.560 liquidity problem, particularly from the introduction of more and more 0:21:30.640 --> 0:21:32.119 retail investors. 0:21:32.440 --> 0:21:33.400 Is that accurate? 0:21:33.600 --> 0:21:35.399 Yeah, I mean from our view as well, what we 0:21:35.480 --> 0:21:37.840 just saw was a test. It was a the test, 0:21:37.880 --> 0:21:40.120 and it was a liquidity test, and it was a 0:21:40.160 --> 0:21:43.320 test in the non traded BDCs. You have both traded 0:21:43.320 --> 0:21:47.760 BDCs and non traded BDCs in the non traded BDC market. 0:21:48.040 --> 0:21:50.879