Speaker 1: This is Bloomberg Wall Street Week. I mean may not
Speaker 1: have an overall recession, We're having a rolling recession to
Speaker 1: kind of roll looks pretty strongly it is when it
Speaker 1: comes to jobs. The financial stories that shape our world.
Speaker 1: Three major regional bank failures send shockwaves through the banking system.
Speaker 1: We're all trying to figure out what to make of
Speaker 1: generative AI through the eyes of the most influential voices.
Speaker 1: Welcome down, Doctor Paul Krugman, Ryan moynihan, a Bank of America,
Speaker 1: Zebra Lair of the Paulson Institute, well then Hubbard of
Speaker 1: the Columbia Business School.
Speaker 2: Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
Speaker 1: Moving forward? Or are we on wars in Ukraine and Israel,
Speaker 1: on climate, on college campuses, and on our fight with inflation?
Speaker 1: This is Bloomberg Wall Street Week. I'm David Weston this week,
Speaker 1: Rick Reader of Blackrock on where we're headed in twenty
Speaker 1: twenty four.
Speaker 3: I really think the US economy doesn't go into recession
Speaker 3: except for pandemic financial crisis unless there's some big exage
Speaker 3: in as.
Speaker 1: Sean former IBM had Sam Palmersano on efforts to keep
Speaker 1: tech innovation on the rails.
Speaker 4: The issue with AI is going to be responsible use.
Speaker 1: And Glenn August of Okill Advisors on what comes next
Speaker 1: in distressed investing.
Speaker 5: The extraordinary thing that we're facing is a.
Speaker 6: Trillion plus dollars of debt that's coming due over the
Speaker 6: nextly four years.
Speaker 1: It was hard for Global Wall Street to tell this
Speaker 1: week whether we were really making progress on issues that
Speaker 1: have lingered through the years and on some of more
Speaker 1: recent vintage climate certainly has been an agenda at least
Speaker 1: to talk about for a long time. This week, the
Speaker 1: COP twenty eighth summit wrapped up in the UAE, with
Speaker 1: the man who led it declaring victory that we'll have
Speaker 1: to wait to see whether actions live up to all
Speaker 1: those words. The war in Ukraine continues, with President Olenski
Speaker 1: bringing his message to Washington that he needs more help,
Speaker 1: though once again there was more encouraging talk than there
Speaker 1: was action from Congress. It was a very powerful leading presidents.
Speaker 1: It's being made so clear how we needs to tell.
Speaker 1: But if he gets then no, he can win this war.
Speaker 1: We passed the two month mark in Israel's war with
Speaker 1: Amast and pressure mounted to curtail Israeli operations in Gaza,
Speaker 1: while college presidents back in the United States face the
Speaker 1: spillover on their campuses of issues triggered by the Middle East,
Speaker 1: leading to the University of Pennsylvania losing its president. There
Speaker 1: is a real justification for the penn president stepping down,
Speaker 1: and I believe the other two should come under the
Speaker 1: exact same scrupin. The US economy kept humming along with
Speaker 1: inflation continuing to slow, but that two percent target is
Speaker 1: still evasive.
Speaker 6: We are seeing inflation slowing and it's consistent with what
Speaker 6: the FAED it expects.
Speaker 3: The last mile of the inflation journey is often the
Speaker 3: most difficult.
Speaker 1: And then on Wednesday, the Federal Reserve once again stood
Speaker 1: pat on rates but made it clear it pretty much
Speaker 1: is done with rate hikes and is at least starting
Speaker 1: to talk about some cuts. My question of when will
Speaker 1: it become appropriate to.
Speaker 7: Begin dialing back the amount of policy restraint in place
Speaker 7: that begins to come into view and is clearly a
Speaker 7: discush topic of discussion now in the world and also
Speaker 7: a discussion for US at our meeting today.
Speaker 1: And it was that news out of the FED that
Speaker 1: drove the markets for the week, with the S and
Speaker 1: P five hundred jumping even as the FED share was
Speaker 1: speaking and adding ultimately two point five percent for the
Speaker 1: week overall to end up at forty seven nineteen. That
Speaker 1: is way above the median number for our Bloomberg ls.
Speaker 1: They projected that for the end of this year, and
Speaker 1: is more than two hundred points above where they think
Speaker 1: we'll end up next year. The NASDAK closed on Friday
Speaker 1: at an all time high after adding two point eighty
Speaker 1: five percent, while the yield on the tenure dropped nearly
Speaker 1: thirty two basis points to end the week under four
Speaker 1: percent at three point nine to one. To take us
Speaker 1: through what we've just seen, we welcome now back Barbara
Speaker 1: reinhardtch she's Voya Investment Management CIO and multi Asset Strategy
Speaker 1: and Solutions. So Barbara, thanks for being back with this
Speaker 1: is great to ahead.
Speaker 5: Thank you.
Speaker 1: So what did we see? I don't know if the
Speaker 1: chi fitcher expected that kind of reaction, he sure got it.
Speaker 1: Did the markets overreact? Well?
Speaker 8: I think you always have to put it into context.
Speaker 8: So for just about the past seven weeks, the markets
Speaker 8: have been starting to price in much better inflation data.
Speaker 8: Just remember at the end of the third quarter in
Speaker 8: September bond markets were getting very nervous. Yields were climbing
Speaker 8: close to five percent, and there was some concern that
Speaker 8: the Fed was still going to be increasing interest rates.
Speaker 1: But I think with the.
Speaker 8: Slowing that you've seen in the economy and the slowing
Speaker 8: that you've seen in the employment data, and the good
Speaker 8: progress on inflation, the Fed was really able to bring
Speaker 8: the message home to the markets this year. It may
Speaker 8: indeed be a bit ahead of what the Fed had wanted.
Speaker 8: You saw John Williams today from the New York Fed saying, everyone,
Speaker 8: just a moment, holds your horses. But we do think
Speaker 8: that the progress is made. Inflation is real, and we
Speaker 8: do see the economy slowing.
Speaker 1: Well looking into next year because it's time not start
Speaker 1: thing next year. Have they steered that difficult course between
Speaker 1: recession on the one hand and continued inflation on the
Speaker 1: other Have they managed that? Do you think? We think
Speaker 1: so a voya.
Speaker 8: We have a number of inflation probability indicators and models
Speaker 8: that we'd like to look at, and we're forecasting less
Speaker 8: than a thirty percent chance of a recession in twenty
Speaker 8: twenty four. In fact, if the data continues on this road,
Speaker 8: that it's on. We think it's probably even likely that
Speaker 8: you wouldn't see a recession much before twenty twenty five.
Speaker 1: Wow, So what does that say to the investor going
Speaker 1: into twenty twenty four? I mean, what is different now
Speaker 1: than it was six months ago?
Speaker 8: For example, Well, let's put some things in context, David.
Speaker 8: Over the past two years, the S and P five
Speaker 8: hundred has made very little headway. While stocks are up
Speaker 8: almost twenty percent this year, they were down almost twenty
Speaker 8: percent last year. So since December of twenty twenty one,
Speaker 8: you've basically been flat on the equity market, which is
Speaker 8: very unusual. We do see earnings able to climb about
Speaker 8: ten percent over the course of twenty twenty four, and
Speaker 8: if bond yields continue you to fall modestly. You know,
Speaker 8: if you can get rates down to about three and
Speaker 8: a half percent, you might be able to get a
Speaker 8: little bit of multiple expansion that should give you ten
Speaker 8: to twelve percent in equities over the course of twenty
Speaker 8: twenty four. I would say it will not be smooth,
Speaker 8: and there will be bumps along the way, but there's
Speaker 8: reasons to be optimistic.
Speaker 1: Well, that's the case for equities. If I'm trying to
Speaker 1: decide that sixty forty split between equities and bonds going
Speaker 1: into twenty twenty four, which do you think you tilt
Speaker 1: more towards the bonds, because bonds are looking more attractive
Speaker 1: than they did, certainly in recent years.
Speaker 8: Over the very short term, I would say this, over
Speaker 8: the past seven weeks, most people have really started to
Speaker 8: pile into the equity market. Most of our sentiment indicators
Speaker 8: that we look at in terms of short term temperature
Speaker 8: of the markets are looking quite extended at this point.
Speaker 8: You're susceptible to any type of garden variety pullback at
Speaker 8: this point, just like we had in the summer there
Speaker 8: was a ten percent peach atrough decline. But I would
Speaker 8: say the reason that bonds have really yields at this point,
Speaker 8: you're about one point seven percent on a real ten
Speaker 8: year treasure. That is great news to acid allo cators
Speaker 8: and investors alike. It means that you're getting a return
Speaker 8: on bonds in excessive inflation. It's the first time I
Speaker 8: could tell you we've had positive real yields sustainably since
Speaker 8: the global financial crisis. So it's a great time for
Speaker 8: investors to be looking at the actual value and the
Speaker 8: material value that's in the fixed income markets right now.
Speaker 1: Let's say we have a rising tide which are lifting
Speaker 1: most of the boats, and I think it's fair to say,
Speaker 1: as you look at twenty twenty four, where do you
Speaker 1: think some boats might get more of a lift and
Speaker 1: some less.
Speaker 8: Well, it's interesting, David, So when you think about the
Speaker 8: Federal Reserve cutting interest rates, you immediately go to some
Speaker 8: really heavy cyclical parts of the market that should do
Speaker 8: very well. The US small capst but on a tear
Speaker 8: since the Federal Reserve started to say that they were
Speaker 8: going to be potentially not raising interest rates and even
Speaker 8: nudging them down. But there are some other parts of
Speaker 8: the market that should have been doing better but they're not.
Speaker 8: So something like the emerging markets, you would expect them
Speaker 8: to do very well when the Fed is taking their
Speaker 8: boot off the neck of the markets. They have lagged
Speaker 8: behind significantly, in part because while they're leveraged to the
Speaker 8: global interest rates cycle, their underlying fundamentals are not particularly
Speaker 8: strong at this time. So I think you had to
Speaker 8: be careful when you're talking about the rising tides lifting
Speaker 8: all the votes. We would definitely stay allocated more towards
Speaker 8: the US than the rest of the world. Europe is
Speaker 8: still in recession. I'm concerned that the yen may not
Speaker 8: rally as much as everyone expects this year, and I
Speaker 8: think the emerging markets are still in trouble. So for us,
Speaker 8: we're keeping our US home country bias very much alive
Speaker 8: and well for twenty twenty four.
Speaker 1: Within that US home country bias, one of the biases
Speaker 1: we've all had is the FED. It seems like every
Speaker 1: single day all we care about is the FED. Is
Speaker 1: that going to continue in twenty five four? Are we
Speaker 1: ever going to get pass the point where all we
Speaker 1: care about is what the FED thinks it's doing or
Speaker 1: we think it's doing.
Speaker 8: David, that's a great question, and we all have had
Speaker 8: the FED on the brain since really twenty twenty one.
Speaker 8: I think the real issue that we're going to have
Speaker 8: to face in twenty twenty four that's going to change
Speaker 8: the market's view is going to be the US presidential election.
Speaker 8: Over the past couple of elections that we've had, say
Speaker 8: twenty twenty, twenty sixteen, two thousand and four to two
Speaker 8: thousand as well, it's kind of been this pattern that
Speaker 8: follows the market tends to make some decent gains into
Speaker 8: the beginning of the year, really the first half, and
Speaker 8: then right around the June primaries, the market starts to say, hmm,
Speaker 8: there's some things that could be uncertain about this election.
Speaker 8: Could it be another Supreme Court decided election. Is it
Speaker 8: too difficult to determine who the winner is going to be?
Speaker 8: And the market tends to get a little bit nervous.
Speaker 8: The equity market generally has a week third quarter, and
Speaker 8: then right around October there starts to be enough information
Speaker 8: that the market starts to sniff out who the winner
Speaker 8: is going to be, and then equities generally march higher
Speaker 8: into the end of the year, and we would see
Speaker 8: that as likely replaying this year.
Speaker 1: That June timing could be tricky because everybody, even the Fed,
Speaker 1: agrees we're going to be slowing down the economy through
Speaker 1: the first half of the year. You could have a
Speaker 1: slowing economy. I'm not necessarily going into negative, but a
Speaker 1: lot more modesty is now. At the same time, you
Speaker 1: have that market uncertainty in the middle of the year.
Speaker 1: What you're saying, I think is it could be tricky.
Speaker 8: It could be very choppy. For sure, we think that
Speaker 8: you're going to make decent gains in twenty twenty four,
Speaker 8: in part because your starting point is relatively good. It
Speaker 8: could be a bumpy twenty twenty four for sure.
Speaker 1: It's fascinating. Okay, any hedges, you would recommend.
Speaker 8: None at this moment.
Speaker 1: But thank you, Thanks so much. Gra Always great to
Speaker 1: have you with us. Barbro Reinhardt of Voyem coming up.
Speaker 1: Rick Reader of Blackrock joins us to explain his latest venture,
Speaker 1: Rick's second fixed income ETF from the leader in the field.
Speaker 2: This is Bloomberg Wall Street Week with David Weston from
Speaker 2: Bloomberg Radio.
Speaker 1: This is Wall Street. I'm David Weston. Exchange traded funds
Speaker 1: have grown dramatically, hitting a record ten trillion dollars in
Speaker 1: assets this year. Blackreck is the leading provider of ETFs,
Speaker 1: and we welcome back now Rick Reader. He's Blackrock Chief
Speaker 1: Investment Officer of Global Fixed Income and head of the
Speaker 1: Global Allocation Team. Rick, welcome back to Wall Street Week.
Speaker 1: Good to have you, thanks sir having me so this
Speaker 1: week you announced a second ETF. You announced one back
Speaker 1: in May that was flexible income. As I recall, now
Speaker 1: this is total return. Why'd you do it?
Speaker 7: So?
Speaker 5: A couple of hanks?
Speaker 3: As you said, I mean there's been an explosion of
Speaker 3: demand for ETF. So it's a pretty incredible how the
Speaker 3: industry is developed and how clients are looking more for
Speaker 3: things that are liquid, transparent, use them for tax strategies,
Speaker 3: build models, and the models allow you to be dynamic
Speaker 3: around putting ETFs in, and so there's a whole new
Speaker 3: cohort of investors and existing clients. It's like, gosh, the
Speaker 3: ETF rapper is a really effective one. So we are
Speaker 3: taking a lot of our strategies. So the one we're
Speaker 3: launching now is our total return strategy, very close to
Speaker 3: what is the mutual fund, but it gives people who
Speaker 3: want to.
Speaker 1: Use that rapper, it gives them the ability to do it.
Speaker 3: And you know, we launch this income fund that is
Speaker 3: roughly similar to a fund we run called SiO Strategic
Speaker 3: Income Opportunities. But boy, it's gotten the receptivity to it,
Speaker 3: the rate at which it's grown. Some of it is
Speaker 3: because it's an income producing seven percent yield an environment
Speaker 3: like this with a low volatility to it. Similar people
Speaker 3: are coming in the high yield, but this is actually
Speaker 3: lower volatile. So it's gotten a tremendous amount of attention
Speaker 3: people putting money in, and so we're launching this one,
Speaker 3: which is more of total return. Like when people do
Speaker 3: sixty forty, this would be the forty and so an
Speaker 3: AG index like, but we use a lot of strategies
Speaker 3: to generate more return than the index. So that's why
Speaker 3: it's gotten a lot of attention. And I think you'll
Speaker 3: see a lot of people say, particularly now with rates
Speaker 3: heaven backed up, gosh, equities have had a good go,
Speaker 3: I'm gonna look for some fixed income and total return
Speaker 3: is a nice match to your equity portfolio.
Speaker 1: If I'm putting together the portfolio and let's assume I
Speaker 1: want some ETFs in it, how do I choose your
Speaker 1: ETFs as supposed some others? I mean, how does this
Speaker 1: fit into my portfolio? What does it balance against? So?
Speaker 3: I mean it said one thing about fixed income, and
Speaker 3: I run a lot of equity portfolios and fixed income portfolios.
Speaker 3: The one thing about fixed income is there sixty eight
Speaker 3: thousand fixed income securities versus you know the SMP five hundred,
Speaker 3: there are sixty eight thousand, and your ability to create
Speaker 3: additional return. They're using your research, your analytics, your quant
Speaker 3: fixed income market, to most investors is a pretty opaque market.
Speaker 3: It's just hard to figure out should I buy a
Speaker 3: double a colo, a trip la commercial mortgage backed security.
Speaker 3: So the benefit of and one of the secrets to
Speaker 3: fixed income for so many years, is if you can
Speaker 3: run more income than the index, but then manage your
Speaker 3: volatility because a lot of parts of the index are inefficient,
Speaker 3: too rich, and so you cut out the bad stuff
Speaker 3: and then you build a lot of income and you
Speaker 3: can outperform. And most managers ourselves included post managers and
Speaker 3: fixing them outperform, outperform indicies. You know what we think
Speaker 3: we're pretty good at is we use so much analytics,
Speaker 3: risk management, increasingly artificial intelligence, looking at data signals. You know,
Speaker 3: our research allows us to look at collateral under a mortgage, residential, commercial, mortgage.
Speaker 3: So you know, the ability to tap into our resources
Speaker 3: to try and create you know, real return when income
Speaker 3: is now so beneficial is something that I think, you know,
Speaker 3: why why I think people will.
Speaker 1: Invest in it if I'm looking at various alternatives. How
Speaker 1: much of this is betting on Rick Reader and his
Speaker 1: team being able to manage that complicated world of bonds
Speaker 1: that you just describe. Yeah, so it's a great question.
Speaker 3: I've never asked that in a couple of different So
Speaker 3: we launched the first one, which is this income fund,
Speaker 3: and that is very much and aggressive. We'll look at
Speaker 3: things like European invests, European high yield, to merging markets,
Speaker 3: and so it is very much in aggresive because they're
Speaker 3: trying to keep our income high, you know, seven percent
Speaker 3: income when an index is five ish. So that is
Speaker 3: very much tapping into because we're taking risk to get
Speaker 3: that to get that yield. Total return is still you know,
Speaker 3: we're trying to we're trying to beat the index, but
Speaker 3: we're more tethered to the index. I mean, it should
Speaker 3: be much more sincere to the aggregate index. So people
Speaker 3: should count on it doing interest rate wise, credit wise
Speaker 3: relative to the index. When people put it in their
Speaker 3: portfolio against equities, they should look at it relative to that.
Speaker 3: We've had a really good track record knock wood of
Speaker 3: beating the index and so, you know, but the differentiation
Speaker 3: and total return, we are going to be more index oriented.
Speaker 3: We're just going to try and create an extra hundred
Speaker 3: basis points or so over that index over time versus
Speaker 3: my income one. We're just going to try and create
Speaker 3: a lot of income for you persistently.
Speaker 1: We had a very eventful twenty twenty three. Let's look
Speaker 1: forward to twenty twenty four, and I guess one thing
Speaker 1: setting it up is actually what Jay Powell said here
Speaker 1: just this week at the end of twenty twenty three
Speaker 1: about the possibility of rate cuts. Boy, he really embraced it.
Speaker 1: If anything, it was pretty incredible, David.
Speaker 3: You know, it was very different than we were literally
Speaker 3: a couple of weeks ago, certainly in the last meeting,
Speaker 3: and that was you know, that was pretty aggressive. I
Speaker 3: think it is the right direction to travel. You know,
Speaker 3: you do look at inflation. I mean six month CPI
Speaker 3: core PC are all trending down aggressively. I mean, we
Speaker 3: look at numbers over six month moving averages. Service inflation
Speaker 3: is still a bit sticky, but the averages are coming
Speaker 3: down well into the twos. Core PC we think by
Speaker 3: January is in the two So I think it was
Speaker 3: the right thing to move it. What was surprising is
Speaker 3: how fast I thought there would be a more of
Speaker 3: a transition to it. Listen to long term funds rate
Speaker 3: is two and a half percent. The Fed projections what
Speaker 3: they put in that data yesterday they had real GDP
Speaker 3: of one and a half and they have core PC
Speaker 3: at two and a half. That's pretty normal. I mean
Speaker 3: that is, if you said, over time one and a
Speaker 3: half growth, two and a half inflation, maybe get two
Speaker 3: inflation down to two at some point, but it's not
Speaker 3: that far are We've got a funds rate that's.
Speaker 1: Five and three ace percent.
Speaker 3: That real rate is really high. The Fed has to
Speaker 3: get rates down, has to start to move them down.
Speaker 3: I thought they would take a bit of time because
Speaker 3: of financial conditions, managing financial conditions. I thought they'd take
Speaker 3: a bit more time. But I think the direction travel
Speaker 3: is right, and I think they are moving in a
Speaker 3: direction that is that is the right thing.
Speaker 1: By the way, that real rate actually climbs its inflation
Speaker 1: goes down, right, So to some extent they have to
Speaker 1: come down to just keep the same level of restrictiveness.
Speaker 3: So much your power set, And he said at the
Speaker 3: last meeting too, they asked, so you focus on nominal
Speaker 3: or real rates? And he said it again, he focus
Speaker 3: on the real rate of interest. If they focus on
Speaker 3: the real rate of interest, definitionally inflations two and a half,
Speaker 3: you know, you think about over time, the real rate
Speaker 3: of interest is closer to zero to one running three percent.
Speaker 1: Real rates too high. He's got to at least get.
Speaker 3: It down one hundred base points, and I think he's
Speaker 3: got to get it down two hundred basis points because
Speaker 3: growth is slowing, and he talked about you're starting to
Speaker 3: see more balance in the labor force. Virtually every cater
Speaker 3: is showing still solid, but more balanced alongside of inflation
Speaker 3: coming down. So the real rate definitionally per the way
Speaker 3: they've described, their focus has to come down. And I
Speaker 3: think they're going to get started quite frankly, you know,
Speaker 3: I think they're gonna ge started in may be.
Speaker 1: Could they start a little bit earlier if possible? What
Speaker 1: does that tell me as an investor? I mean, bonds
Speaker 1: of had a tough time as those rates went up.
Speaker 1: The bonds really took it on the chin, so to speak.
Speaker 1: But what does that say for twenty twenty four in
Speaker 1: terms of bonds?
Speaker 3: So I'd say one thing, I don't know. I brought
Speaker 3: a chart. I don't know if you have that chart
Speaker 3: that shows that there was we just went through the
Speaker 3: most extraordinary draw down on the bond market. So for
Speaker 3: three years you had this extraordinary draw down that was
Speaker 3: literally a twenty percent return down. I mean we were
Speaker 3: to the point where long bonds were trading. There's one
Speaker 3: of the long line trades at forty seven and a
Speaker 3: half cents on the dollar. Nobody thinks triple A treasury
Speaker 3: should trade forty seven and a half cents on the dollar.
Speaker 3: But they were issued in twenty post COVID, and now
Speaker 3: they've they've come under this incredible pressure.
Speaker 1: So now I did this presentation today.
Speaker 3: Where I called it, you know, the only way to
Speaker 3: make a big splash is you need the diving board
Speaker 3: to be really high. How does the diving board get
Speaker 3: really high. It's when losses happen before it, and you
Speaker 3: just build the levels. In terms of your upside potential return,
Speaker 3: I think next year, if you believe, which I believe
Speaker 3: in the FED has pressage that we are going to
Speaker 3: start to bring their rate down, you can create a
Speaker 3: lot of income and portfolios, and I think the total
Speaker 3: return performance is going to be really good. Can we
Speaker 3: build portfolios today there are still six and a half
Speaker 3: percent And by the way, for we're building, we're buying.
Speaker 3: We're buying assets in Europe. Now two and three year
Speaker 3: investment created European assets. As a dollar investor, you're getting
Speaker 3: at six and a quarter. They were financing at negative
Speaker 3: interest rates back in twenty twenty one negative. Now we're
Speaker 3: at six and a quarter. Listen, I think the return
Speaker 3: I mean, I think you can clip six percent six
Speaker 3: and a half percent yield that can turn into double
Speaker 3: digit return. You could get a ten if they bring
Speaker 3: the raid down.
Speaker 1: It could such a treat tab in Wall Street. Thank
Speaker 1: you so much. That's Rick Reader of Black Rock coming up,
Speaker 1: waiting for the the other shoe to drop. We talk
Speaker 1: with Glenn August of Oak Hill Advisors on the opportunities
Speaker 1: for distressed investing in the new year.
Speaker 6: We think there's going to be an extraordinary opportunity to
Speaker 6: provide customized capital solutions to help these companies refinance.
Speaker 1: That's coming up next on Wall Street Week on Bloomberg.
Speaker 2: This is Bloomberg Wall Street Week with David Weston from
Speaker 2: Bloomberg Radio.
Speaker 1: This is Wall Street Week. I'm David Weston. Twenty twenty
Speaker 1: three saw record rate hikes directed at curbing inflation, but
Speaker 1: inevitably putting pressure on debtors as the cost of borrowing
Speaker 1: money or refinancing what they already have borrowed goes up.
Speaker 1: To give us a read on how bad the stress
Speaker 1: could get and what opportunities may be presented to investors.
Speaker 1: Welcome now, Glenn August, He's founder and CEO of Oak
Speaker 1: Hill Advisors. Glenn, welcome to Wall Street Week. Great to
Speaker 1: have you here, Thank you for having me. So let's
Speaker 1: start on distress because you have a new i think
Speaker 1: third fund, something over two billion dollars. Why did you
Speaker 1: decide this was a particularly good time to have some
Speaker 1: dry powder to maybe jump into the distress area.
Speaker 6: Well, look, I've been doing distress now for over thirty
Speaker 6: five years, and distressed is an opportunistic strategy, and there
Speaker 6: are moments whe are distressed is super exciting, there's.
Speaker 5: Moments where's less exciting.
Speaker 6: And our view is having capital ready to sees on
Speaker 6: that opportunity always makes sense.
Speaker 5: And as you highlighted in.
Speaker 6: Your opening comments, rates have gone on five hundred basis points.
Speaker 6: Obviously this week, in the last couple of weeks have
Speaker 6: been pretty big weeks for the rates coming down.
Speaker 5: But the extraordinary thing that.
Speaker 6: We're facing is a trillion plus dollars of debt that's
Speaker 6: coming due over the next three four years, and that
Speaker 6: debt needs to get refinanced.
Speaker 5: And as we look at the picture of that the
Speaker 5: profile of that debt.
Speaker 6: We think that it's not going to be able to
Speaker 6: be refinanced in the syndicated markets, and so we think
Speaker 6: there's going to be an extraordinary opportunity to provide customized
Speaker 6: capital solutions to help these companies refinance. And when I
Speaker 6: look over the different distress cycles over the last few decades,
Speaker 6: it was a very different opportunity. There was a big recession,
Speaker 6: there was geopolitical events, whether it's ninety one, two thousand
Speaker 6: and one, two thousand eight global financial crisis. This time,
Speaker 6: it feels like it's not necessarily going to be a
Speaker 6: big recession, although it's obviously still out there as a
Speaker 6: possibility that causes the stress cycle.
Speaker 5: This time is just the reality there's so much debt coming.
Speaker 1: Due, well, is it? In some sense it's glenn a
Speaker 1: macro event of having money essentially free for a long
Speaker 1: period of time, which is pretty extraordinary globally, not just
Speaker 1: the United States, And you come off of that and
Speaker 1: there are consequences that maybe the macro event as a work. Yeah.
Speaker 6: Look, I think that the macro the inflation that we
Speaker 6: saw over the last couple of years post COVID, clearly
Speaker 6: put a major strain on companies, and when you raise
Speaker 6: rates five hundred basis points, that has a big dent
Speaker 6: in free cash flow. And a lot of companies issued
Speaker 6: debt a couple of years ago and rates for lower
Speaker 6: and debt comes due. We look at that profile again,
Speaker 6: A trillion one in the US over the next three
Speaker 6: four years. It's the highest amount of debt coming to
Speaker 6: over the next three years in any point in the
Speaker 6: last twenty thirty years in the leverage finance markets. And
Speaker 6: there's another three hundred four hundred billion of debt coming
Speaker 6: due in Europe.
Speaker 5: And so I think there's really two ways to play distressed.
Speaker 6: I think in this upcoming cycle, one is going to
Speaker 6: be buying into those companies that you think will be
Speaker 6: able to refinance the debt and buying at discounts, and
Speaker 6: we think make double digit opportunities there. And then the second,
Speaker 6: as I said a moment ago, is providing customized capital
Speaker 6: solutions where you can layer in capital, get security because
Speaker 6: a lot of the assets are not secured, get downside protection,
Speaker 6: then have some upside opportunity.
Speaker 1: So the rise of interest rates was a very big
Speaker 1: story for the business world twenty Another big story actually
Speaker 1: was the growth of private credit. Right every single day,
Speaker 1: we seem to see something new in private credit. You're
Speaker 1: very active in private credit, have been for a long time.
Speaker 1: Why is it growing so fast? What is the itch
Speaker 1: that's being scratched there?
Speaker 6: So private credit is an extraordinary asset class. The itch
Speaker 6: that is being scratched, to ease your phrase is the
Speaker 6: demand by private equity sponsors and by non private equity sponsors.
Speaker 5: To get a solution to help their capital structure.
Speaker 6: Either to do new transactions because they're not confident in
Speaker 6: the access to the syndicated markets, to have a bespoke
Speaker 6: transaction that provides for asset sales or business improvement, to
Speaker 6: have flexibility with a partner that.
Speaker 5: You've worked with for years.
Speaker 6: And the reality is that the syndicated markets because of
Speaker 6: the proliferation of clos and the banks withdrawing from the
Speaker 6: market in a pretty meaningful way post GFC, but with
Speaker 6: increased capital requirements, it seems like it's be even further withdrawal.
Speaker 6: In fact, you're seeing banks do private partnerships with people
Speaker 6: like ourselves. We have a big partnership with PMO as
Speaker 6: an exis sample, but others are doing them as well.
Speaker 5: We think that the banks aren't providing the capital. The
Speaker 5: clos are very structured.
Speaker 6: Vehicles, and while they're great vehicles, and we have a
Speaker 6: very large COLO business ourselves, only certain types of assets
Speaker 6: fit in there. And so when we look at the
Speaker 6: private credit market today, the opportunity to invest in the
Speaker 6: first zero to forty percent of a capital structure zero
Speaker 6: to forty five, maybe fifty percent sometimes in a multi
Speaker 6: billion dollar company in industry we like, with management team,
Speaker 6: we like, with sponsorship we like, and the opportunity to
Speaker 6: make ten to eleven percent plus unlevered, I think is
Speaker 6: really attractive.
Speaker 1: Well, it's been great having you here on Wall Street.
Speaker 1: We thank you so much. Glenn. That is Glenn August
Speaker 1: of Oak Hill Advisors Global. Wall Street spent much of
Speaker 1: twenty twenty three focused on tech, including ways in which
Speaker 1: artificial intelligence could change our world. And so much of
Speaker 1: what tech can do depends critically on the data it uses,
Speaker 1: large amounts of it, by the way, and the quality
Speaker 1: of that data it consumes. Sam Pomesno ran ibm as
Speaker 1: chairman and CEO. Among other things, he now co chairs
Speaker 1: that Data and Trust Alliance, which has just released proposed
Speaker 1: data standards on behalf of nineteen companies, And we welcome
Speaker 1: Sam now back to Wall Street Week, So welcome. It's
Speaker 1: good to have you back here. So first of all,
Speaker 1: why'd you start with data? There's a lot of concerns
Speaker 1: about artificial intelligence and what it might do. Why did
Speaker 1: you start with data?
Speaker 4: It's interesting, it's a good question, Ken Schael and I'm
Speaker 4: my partner at the Coachure and this thing got together
Speaker 4: a couple of years ago and said, the issue with
Speaker 4: AI is going to be responsible use and how can
Speaker 4: you as an enterprise use it responsibly because it can
Speaker 4: be transformational.
Speaker 1: This is before all the excitement.
Speaker 4: GPT four and all the things that have occurred now, right,
Speaker 4: And so we formed this consortium of twenty now twenty
Speaker 4: six companies since like Walmart and Nike, Fizerman, American Express,
Speaker 4: I mean NFL, big guys at enterprise guys, right, and
Speaker 4: got together and one of the key projects that they
Speaker 4: thought we should focus on was data. The first one
Speaker 4: was a bias in data and HR practices, which was
Speaker 4: somewhat straightforward compared to let's say quality of data on
Speaker 4: the Internet. And they came up with a whole set
Speaker 4: of procedures that they implemented, processes, etc. And the most
Speaker 4: recent one that their teams worked on was the quality
Speaker 4: of the data, and then how do you responsibly use
Speaker 4: that data so you can build trust.
Speaker 1: There's a large enterprise.
Speaker 4: Whether you're in consumer packaged goods or you're in finance,
Speaker 4: or whatever happens to be, you have to have a
Speaker 4: trusted relationship with the information that you're using to either
Speaker 4: attract customers or transfer funds, or fraud whatever it happens
Speaker 4: to be.
Speaker 1: Data is an asset. It has value. So if people
Speaker 1: did adopt this and it worked, could data sets be
Speaker 1: more valuable than they might otherwise be if you didn't
Speaker 1: have the metadata attached.
Speaker 4: Now you're getting into something that's extremely complicated because the
Speaker 4: answer is yes.
Speaker 1: But then how do you value the asset.
Speaker 4: We've done a lot of work on a balance sheet
Speaker 4: because a lot of these assets are data and software
Speaker 4: tangibles like a building or equipment or a tool or
Speaker 4: whatever it.
Speaker 1: Happens to be.
Speaker 4: So in the economic modeling of these things, it's a
Speaker 4: little more complicated. But your point is absolutely correct intellectually
Speaker 4: that it is an asset.
Speaker 1: It's an asset of the enterprise. It's also an asset
Speaker 1: of the individual.
Speaker 4: I mean I want to get into the consumer that
Speaker 4: is your data, that is your asset, and the fact
Speaker 4: how that data is being used, you should participate in
Speaker 4: its use, as I'd argue, if it's an economic value,
Speaker 4: you should share in the economic value.
Speaker 1: Now that hasn't occurred.
Speaker 4: Us to yet, but I do think some of the
Speaker 4: solutions here is make it almost a commercial relationship between
Speaker 4: the user and the service provider, so that if they
Speaker 4: are using the data correctly and you've complied, that's fine,
Speaker 4: and you get some economic value whatever that it could be,
Speaker 4: free services, whatever that happens to be.
Speaker 1: How is this working or do you anticipate it would
Speaker 1: work across borders? Because this is a global business as
Speaker 1: a part, particularly when you get into generaive AI, it's
Speaker 1: global necessarily, is your vision that this would apply cross borders?
Speaker 1: And yes, let me say even to China.
Speaker 4: Well, if you left China out, I'd say yes. Now
Speaker 4: we're going to get more complicated, or any any any
Speaker 4: authority and government that uses the information for we would
Speaker 4: do not as open democratic principles. Right, that's a complicated.
Speaker 4: Let's just take a more straightforward world. Let's talk about
Speaker 4: to say the West. Right, A lot of these companies,
Speaker 4: as you know, operate around the world in all these places,
Speaker 4: so they're going they will implement these approaches that they've
Speaker 4: said they're going to adopt. Our hope is that we'll
Speaker 4: get more participation from companies outside the United States that
Speaker 4: will do the same thing.
Speaker 5: But the where we began.
Speaker 4: There are a couple of companies that have been involved
Speaker 4: that were non domiciled in the US, but it's not
Speaker 4: a larger portion of the twenty six.
Speaker 5: It's a couple.
Speaker 4: So we really think that by if these large take
Speaker 4: a Walmart adopts people around the world as well, these
Speaker 4: guys don't know what they're doing, or Nike, you know,
Speaker 4: all these companies that operate everywhere else, that we'll get
Speaker 4: up the adoption.
Speaker 1: That's our hope. Sam. It's always good to have you
Speaker 1: on Wall Street Week. Thank you so much. That's Sam Palmisano.
Speaker 1: He is co chair of the Data and Trust Alliance.
Speaker 1: Coming up eating a slice of humble Pie with our
Speaker 1: holiday desserts this year. That's next on Wall Street Week
Speaker 1: on Bloomberg. Finally, one more thought. Winston Churchill reportedly said
Speaker 1: of his successor, Clement Attlee, he's a modest man, but
Speaker 1: he has much to be honest about. It turns out
Speaker 1: that as we move into the final days of twenty
Speaker 1: twenty three, there are a fair number of us who
Speaker 1: have much to be honest about. As we often do.
Speaker 1: We entered the year full of confidence about all sorts
Speaker 1: of things. My confidence that the Jets would finally be
Speaker 1: a contender for the Super Bowl behind their superstar seventy
Speaker 1: five million dollar quarterback Aaron Rodgers, only to lose him
Speaker 1: to injury in the very first game.
Speaker 8: Overall, his contract was about one hundred and twelve millions,
Speaker 8: so even if you can't play, likes.
Speaker 1: Going to be okay. Republicans on Capitol Hill went into
Speaker 1: the new year confidence that they could finally score some
Speaker 1: points with their new majority in the House of Representatives.
Speaker 1: But then it took fifteen ballots to give Kevin McCarthy
Speaker 1: the gavel. There are obstacles in my life. I have
Speaker 1: fallen many times. There was a time I was going
Speaker 1: to be Speaker and I couldn't, and you guys all
Speaker 1: counted me out. I'm speaker. I'm the fifty fifth Speaker
Speaker 1: of the House. And he held on to it for
Speaker 1: only ten months.
Speaker 3: The office of Speaker of the House of the United
Speaker 3: States House of Representatives is hereby declared vacant.
Speaker 1: US automakers went into twenty twenty three confident that the
Speaker 1: demand for electric vehicles would give them momentum toward their
Speaker 1: aggressive goals for replacing internal combustion engines in the near future.
Speaker 1: But by the end of the year, Ford was said
Speaker 1: to cut its production of the F one to fifty
Speaker 1: lightning in half, and GM was redirecting some of its
Speaker 1: EV investment toward its shareholders.
Speaker 8: We never thought that the EV adoption would necessarily be
Speaker 8: a straight line.
Speaker 5: We've seen this in other markets. We're seeing it now
Speaker 5: in the US.
Speaker 8: But I think the thing that everybody has to remember,
Speaker 8: if the growth is slowing, it is still growing.
Speaker 1: On the economic front, China entered the new year by
Speaker 1: lifting its COVID lockdown, which was widely expected to give
Speaker 1: its economy a jumpstart. Is a big reopening to come
Speaker 1: in China. I don't think it's happening now.
Speaker 3: When it does happen, I think you are going to
Speaker 3: see a very strong lifting growth.
Speaker 1: To everyone's surprise, including Presumaly President Geez. It didn't work
Speaker 1: out that way, and China continues to struggle with getting
Speaker 1: its growth engine back on track.
Speaker 7: I have been more optimistic about China in the past,
Speaker 7: and I will say that I have recalibrated my views.
Speaker 5: I mean, it is definitely going through a tough period.
Speaker 1: But when it came to economic expectations, US prognosticators also
Speaker 1: had plenty to be modest about as economists. After economists
Speaker 1: went into the year predicting a recession that didn't come
Speaker 1: at least yet, and markets weren't much better, predicting a
Speaker 1: mere sixty six basis points and rate hikes from the
Speaker 1: Fed in twenty twenty three, and we got one hundred
Speaker 1: and fifty Over in Europe, market similarly got it wrong,
Speaker 1: predicting one hundred and forty one basis points in higher
Speaker 1: rates when it turned out to be two hundred and fifty.
Speaker 1: So as we enter yet another new year full of
Speaker 1: expectations and predictions, it may be wise to remember Winston
Speaker 1: Churchill's suggestion that we may have much to be humble about.
Speaker 1: But as with all rules, this one is honored in
Speaker 1: the breach, and the breach in twenty twenty three must
Speaker 1: surely be miss Taylor Swift. Whatever else happened this year,
Speaker 1: whatever disappointments, the rest of US may have had, Taylor
Speaker 1: Swift had absolutely nothing to be humble about. What she
Speaker 1: has accomplished with her tour is unprecedented.
Speaker 3: Never before have we ever seen an artist.
Speaker 1: Put multiple stadium shows on sale in the same city
Speaker 1: and blow them all out. She did so well that
Speaker 1: Blackstone actually imitated her for their holiday video this year.
Speaker 8: Sixty.
Speaker 1: That does it. For this episode of Wall Street Week,
Speaker 1: I'm David Weston. This is Bloomberg. See you next week.