WEBVTT - Bloomberg Wall Street Week - December 2nd, 2022 0:00:00.520 --> 0:00:03.760 This is Bloomberg Wall Street Week. We turn our attention 0:00:03.840 --> 0:00:07.600 to the markets this week. Us CPI never's reinforcing concerns 0:00:07.600 --> 0:00:10.800 about inflation. The financial stories that chief are worth a 0:00:10.840 --> 0:00:13.760 really different reaction to Mark. It's more indications of just 0:00:13.960 --> 0:00:16.360 how hot the U. S economy really is. Through the 0:00:16.400 --> 0:00:19.799 eyes of the most influential voices Larry Summers, the former 0:00:19.800 --> 0:00:22.880 Treator Secretary, Katherine Keating, CEO of v n Y Moms, 0:00:22.960 --> 0:00:26.239 Sam's l Sharmon and founder of Equity Group Investment. In 0:00:26.320 --> 0:00:30.280 Bloomberg Wall Street Week with David Weston from Bloomberg Radio 0:00:30.560 --> 0:00:34.120 Easy does it whether it's fed rate hikes or China 0:00:34.200 --> 0:00:37.199 letting up on code restrictions or steering clear of a 0:00:37.280 --> 0:00:40.479 rail strip. This is Bloomberg Wall Street Week. I'm David Weston, 0:00:41.880 --> 0:00:44.680 this week's special contributor to Larry Summers on the jobs 0:00:44.760 --> 0:00:48.680 numbers and Chair Poll's take on inflation. Mike Arroghetti of 0:00:48.760 --> 0:00:52.839 Aery's Management on the remarkable growth in private credit. Private 0:00:52.840 --> 0:00:56.080 credit has ended out perform when rates are going up. 0:00:56.680 --> 0:00:59.960 And Tom montag And and Finucan on their new Tea 0:01:00.080 --> 0:01:03.920 PG venture into the world of carbon credits. We saw 0:01:03.960 --> 0:01:20.240 an opportunity to improve the whole market. It was a 0:01:20.240 --> 0:01:23.720 week of searching for the happy medium, as China began 0:01:23.840 --> 0:01:26.880 the week in an uproar over COVID restrictions. Put in 0:01:26.920 --> 0:01:31.000 perspective by former US Ambassador to China, Gary Locke, this 0:01:31.160 --> 0:01:35.959 is clearly the worst sense genumen square. But things ended 0:01:35.959 --> 0:01:38.840 the week a bit more calm for China after authorities 0:01:38.920 --> 0:01:42.040 signaled some easing in the COVID policy, as urged by 0:01:42.080 --> 0:01:45.880 World Bank President David Melpass I think they could use 0:01:45.920 --> 0:01:50.120 a recalibration more targeting of their of their lockdowns. We 0:01:50.160 --> 0:01:53.200 started the week with a looming rail strike, but President 0:01:53.240 --> 0:01:56.680 Biden and Congress sought to calm things down by stepping 0:01:56.680 --> 0:01:59.840 in and imposing a deal on the parties. The US 0:02:00.400 --> 0:02:03.040 is passing the bill to avert the strike by those 0:02:03.040 --> 0:02:06.840 freight rail workers, and consumers seemed to be seeking their 0:02:06.880 --> 0:02:10.480 own happy medium as they started their holiday shopping. It 0:02:10.639 --> 0:02:14.080 was kind of muted Black Friday. You know. It was 0:02:15.360 --> 0:02:20.280 solid customer traffic overall, but not strong, all of which 0:02:20.320 --> 0:02:23.120 brought us to FED Chair Powell, who struck a balance, 0:02:23.160 --> 0:02:25.760 or at least tried to, between raising rates too much 0:02:26.160 --> 0:02:29.480 and not raising them enough. We need to raise interest 0:02:29.560 --> 0:02:32.000 rates to a level that is sufficiently restrictive to return 0:02:32.040 --> 0:02:36.000 inflation to two. There's considerable uncertainty about what rate will 0:02:36.000 --> 0:02:41.000 be sufficient. But then the US job numbers came in 0:02:41.080 --> 0:02:44.160 on Friday, and there was nothing modern about those two 0:02:44.440 --> 0:02:47.840 sixty three thousand jobs created November, and employers are paying 0:02:47.840 --> 0:02:50.680 more for every one of them, with average hourly wages 0:02:50.720 --> 0:02:54.800 up a whopping point three point six percent month over month, 0:02:55.000 --> 0:02:58.760 and that's five point up year over year. The markets 0:02:58.760 --> 0:03:00.920 took a look at all the and didn't like it 0:03:01.040 --> 0:03:03.520 one bit, that's at least at first, But by the 0:03:03.600 --> 0:03:05.840 end of the day on Friday had settled back down 0:03:06.120 --> 0:03:09.200 and overall the SP five gained over one for the 0:03:09.240 --> 0:03:11.880 week and the NAZAC was up over two percent, while 0:03:11.880 --> 0:03:14.280 the yield on the ten year fell to under three 0:03:14.280 --> 0:03:17.000 point five percent for the week after starting out at 0:03:17.040 --> 0:03:19.680 nearly three point seven. Here to help us sort through 0:03:19.680 --> 0:03:23.000 this all, welcome now, Greg Peters back to Wall Street 0:03:23.000 --> 0:03:25.840 week co ce io for fixed income at PIGIM, and 0:03:25.960 --> 0:03:30.040 Christina Hooper welcome back from Investco. She's chief marketing strategis there. 0:03:30.040 --> 0:03:31.880 So Christine, let me start with you. I think the 0:03:32.320 --> 0:03:34.960 J Paul was trying to calm things down, but I'm 0:03:34.960 --> 0:03:38.200 not sure he accomplished that. He did not accomplish that, 0:03:38.320 --> 0:03:41.160 but that's the market's fault, not his fault. I think 0:03:41.200 --> 0:03:44.560 he was very clear, uh in telling us what we 0:03:44.600 --> 0:03:47.320 already knew, which is that the FETE is likely to 0:03:47.360 --> 0:03:50.840 downshift a fifty basis points in December, but the terminal 0:03:50.920 --> 0:03:53.760 rate is very unclear and we have a ways to 0:03:53.800 --> 0:03:57.200 go in terms of taming inflation. Really the only positive 0:03:57.320 --> 0:04:01.000 was around housing and talking about the rolling over there. 0:04:01.440 --> 0:04:03.800 But other than that, I think he was a straight 0:04:03.840 --> 0:04:09.040 shooter about setting the table for what uncertainty there is 0:04:09.160 --> 0:04:11.360 in terms of where the terminal rate is and where 0:04:11.360 --> 0:04:14.720 the FED pauses. But Greg he also set the table 0:04:14.760 --> 0:04:17.239 for being really concerned about wage inflation because he talked 0:04:17.279 --> 0:04:20.160 about the really dislocation partaken on the Jolts numbers, and 0:04:20.200 --> 0:04:22.960 then those numbers came in on Friday and we're exactly 0:04:22.960 --> 0:04:26.640 what he was hoping would not happen. I think. Yeah, 0:04:26.680 --> 0:04:29.279 So the strong nonfarm pay will report and the recent 0:04:29.320 --> 0:04:32.800 economic data actually is a blunt reminder actually that the 0:04:32.920 --> 0:04:35.560 data are in charge. So it doesn't matter if you're 0:04:35.600 --> 0:04:40.480 abundant or fulil manager or even FED share Powell. It's 0:04:40.520 --> 0:04:43.200 all driven by the data. So for him or anyone 0:04:43.240 --> 0:04:47.680 to proclaim that, you know, rate rises are pausing or pivoting, 0:04:48.040 --> 0:04:50.920 it's just really kind of a fool's Errand because you're 0:04:51.000 --> 0:04:54.440 driven by the data, and the data is what's driving 0:04:54.480 --> 0:04:58.520 the FED uh and should drive the market absolutely if 0:04:58.560 --> 0:05:01.000 if you don't mind my adding back in June, the 0:05:01.040 --> 0:05:03.560 FED communicated that it was going to only hype by 0:05:03.600 --> 0:05:06.560 fifty basis points. Then two data points came out within 0:05:06.680 --> 0:05:09.719 days of the FED meeting. We got um CPI, we 0:05:09.839 --> 0:05:14.240 got Michigan inflation expectations, and they pivoted to seventy basis point. 0:05:14.440 --> 0:05:17.000 So Greg is absolutely right. The data is going to 0:05:17.080 --> 0:05:20.160 drive this and that really renders Powell speech pretty irrelevant. 0:05:20.160 --> 0:05:22.880 So so Greg, if the data are driving the Federal Reserve, 0:05:23.000 --> 0:05:25.640 what's driving investors? If you're an investor, what do you 0:05:25.680 --> 0:05:29.919 make of these data? And where do you go? You know? 0:05:29.960 --> 0:05:33.279 What is this circular reference problem that we have? It's 0:05:33.640 --> 0:05:35.960 it's it's clear to me at least that the markets 0:05:35.960 --> 0:05:38.920 are focusing less on the data and more on what 0:05:38.960 --> 0:05:42.080 the FED has to say. The challenge, I think is 0:05:42.120 --> 0:05:44.960 that the rhetoric coming out of the FED is quite 0:05:44.960 --> 0:05:47.080 disparate and not all over the place, So the message 0:05:47.160 --> 0:05:51.000 being what is quite mixed. But to me, it's really 0:05:51.600 --> 0:05:54.760 hard for me to swallow that. You know, rates have rallied, 0:05:54.839 --> 0:05:58.960 risk assets have also rallied um and we have an 0:05:59.000 --> 0:06:01.400 even senior recession yet and we haven't seen the peak 0:06:01.440 --> 0:06:04.720 in rates. And we've had one data print David of 0:06:05.240 --> 0:06:08.359 lower infl UH and lower inflation. So you're a fixed 0:06:08.360 --> 0:06:11.279 income guy, Greg, what do you do in fixed income 0:06:11.360 --> 0:06:15.240 given that circumstances? Yeah, so I think it's been this 0:06:15.240 --> 0:06:18.680 this this obviously very difficult market for fix income. If 0:06:18.680 --> 0:06:22.799 you think about where the tenure started this endeavor post COVID, 0:06:22.920 --> 0:06:25.760 it was fifty basis points right, So you know we're 0:06:25.760 --> 0:06:27.920 at three and a half now. I do think fields 0:06:27.960 --> 0:06:31.839 move higher here as we repriced more rate hikes. But 0:06:31.960 --> 0:06:35.120 I have to tell you, uh, you know we we've 0:06:35.120 --> 0:06:37.919 repriced is such a dramatic degree that I see a 0:06:37.960 --> 0:06:42.560 tremendous amount of value fixingcome yields higher all equal is 0:06:42.600 --> 0:06:45.920 a good thing. Spreads wider all of equal a good thing. 0:06:46.080 --> 0:06:49.600 So while we can't time it, I feel really bullish 0:06:49.680 --> 0:06:52.240 on the outlook for fixed income. Thank you so much, 0:06:52.240 --> 0:06:55.760 Investco Christina Hooper and p jims Greg Peters coming up. 0:06:55.839 --> 0:06:58.640 Bank of America veterans Tom Montag and and Finukein joined 0:06:58.640 --> 0:07:01.320 Wall Street Week for an exclusive explanation of their brand 0:07:01.400 --> 0:07:04.280 new carbon credit venture backed by TPG. That's next on 0:07:04.360 --> 0:07:09.360 Wall Street Week on Bloomberg. This is Bloomberg Wall Street 0:07:09.400 --> 0:07:19.720 Week with David Weston from Bloomberg Radio. This is Wall 0:07:19.760 --> 0:07:22.160 Street Week. I'm David Weston. Global. Wall Street got some 0:07:22.240 --> 0:07:25.040 big news this week. It's two of its most prominent citizens, 0:07:25.040 --> 0:07:28.200 Tom Montag, the former CEO of Bank of America, and 0:07:28.200 --> 0:07:31.160 and For Nuken, the former vice chair of Bank America, 0:07:31.240 --> 0:07:33.600 got together and announced a big new venture fact in 0:07:33.640 --> 0:07:36.960 parted by TPG and involves carbon credits. Were delighted to 0:07:37.040 --> 0:07:39.160 say to welcome them now to Wall Street Week for 0:07:39.160 --> 0:07:41.720 an exclusive discussion about this new venture. So thank you 0:07:41.840 --> 0:07:43.800 very much, Ana and Tom for being here. And let 0:07:43.840 --> 0:07:46.000 me start with you. You're the chair of this new venture. 0:07:46.360 --> 0:07:48.400 Explain where it came from. How long you've been working 0:07:48.440 --> 0:07:52.880 on this? Thanks Steven, and good to be here. So, uh, 0:07:53.040 --> 0:07:55.920 this is an evolution actually of work that Tom and 0:07:55.960 --> 0:07:59.640 I did at Bank of America, Uh, for our own company. 0:07:59.680 --> 0:08:02.800 But So for our clients, whereas more and more companies 0:08:02.840 --> 0:08:05.720 are looking to become carbon neutral, which is the first 0:08:05.760 --> 0:08:10.480 step becoming at zero, they do an audit, they review 0:08:10.520 --> 0:08:13.880 what they can do, and there's a delta between everything 0:08:13.920 --> 0:08:18.400 they could do and what is carbon neutrality. And the 0:08:18.920 --> 0:08:22.640 sort of basic practice has been to fill in that 0:08:22.720 --> 0:08:26.640 delta for the short term with carbon credits. But they 0:08:26.640 --> 0:08:30.200 are not plentiful. They have had some controversy around them 0:08:30.200 --> 0:08:34.240 because looking back, UH they've not been well vetted and 0:08:34.320 --> 0:08:38.920 they may not be as as um as good as 0:08:38.920 --> 0:08:42.480 they could be. So we saw an opportunity to improve 0:08:42.559 --> 0:08:46.320 the whole market. Want to fill what clients need to 0:08:46.400 --> 0:08:49.800 put money into the developing world, in other words, cash 0:08:50.320 --> 0:08:57.000 into protecting forests for UH removal as well. So this 0:08:57.120 --> 0:09:01.880 is carbon reduction, carbon rem NOEL carb and removal. And 0:09:03.200 --> 0:09:05.120 in order to do that, we needed to set up 0:09:05.120 --> 0:09:09.200 a system that would be UH much more I think 0:09:09.280 --> 0:09:12.560 acceptable to not only companies but to the n g 0:09:12.679 --> 0:09:15.520 O world. So what I'm talking about is that these 0:09:15.559 --> 0:09:21.200 credits would be vetted through proprietary quality guard rails, they 0:09:21.200 --> 0:09:25.240 would have third party ratings, it would be a methodology, 0:09:25.760 --> 0:09:29.560 methodology that's transparent and so people could feel comfortable with 0:09:29.679 --> 0:09:32.480 this new product. So, so time you're giving the CEO 0:09:32.520 --> 0:09:35.320 of this, you've spent a career really in and around 0:09:35.360 --> 0:09:37.720 the markets, whether Goldman Sacks or a Bank of America. 0:09:37.920 --> 0:09:40.040 Are you making a market in these carbon credits? Is 0:09:40.040 --> 0:09:41.480 that the way it's going to you're putting together people 0:09:41.520 --> 0:09:44.040 who put them together with the people who need them. 0:09:44.160 --> 0:09:46.000 We're making a market in the sense David, that we're 0:09:46.000 --> 0:09:48.960 actually you know, we're offering a product that they can buy. Uh, 0:09:49.040 --> 0:09:52.920 it's not yet a tradeable product. At some point it maybe, 0:09:53.120 --> 0:09:55.320 but at this point, you know, we as and said 0:09:55.320 --> 0:09:59.120 were we just we have we've established rubicon carbon kind 0:09:59.120 --> 0:10:01.360 of solutions, Penny in the first product we have it. 0:10:01.400 --> 0:10:04.680 This is what we called rubicon carbon tons, and that 0:10:04.840 --> 0:10:07.840 is what we are offering to enterprises around the country. 0:10:07.880 --> 0:10:10.719 We'll tell us what's in that Rubicon carbon ton when 0:10:10.720 --> 0:10:13.880 it's available, what is in there. So what we've done 0:10:13.920 --> 0:10:15.760 is that you know our three words if you go 0:10:15.800 --> 0:10:20.080 to our website rubicon carbon dot com, our scale, confidence 0:10:20.240 --> 0:10:23.880 and innovation. And so we basically have already purchased a 0:10:24.000 --> 0:10:27.480 number of carbon credits and we sell them to you 0:10:27.600 --> 0:10:30.520 in a basically a portfolio and the port there's two 0:10:30.559 --> 0:10:33.439 different portfolios. There'll be a third, uh, and they'll probably 0:10:33.440 --> 0:10:36.000 be more over time. We have a nature based portfolio 0:10:36.080 --> 0:10:38.480 and an emissions based portfolio, and we will have a 0:10:38.640 --> 0:10:42.640 removals and each one of those underlying those rubicon carbon 0:10:42.679 --> 0:10:46.599 tons in nature has numerous projects that we've already purchased 0:10:47.600 --> 0:10:51.400 and we curate is constantly. So we we've hired Dr 0:10:51.480 --> 0:10:54.360 Jen Jenkins as our chief sustainability officer, and not only 0:10:54.400 --> 0:10:56.200 do we look at them when they come in, but 0:10:56.280 --> 0:10:59.200 we're always looking at and curating what's in there. So 0:10:59.240 --> 0:11:03.440 you would buy the right to retire carbon credits in 0:11:03.440 --> 0:11:06.520 the portfolio of your choice at any time that you 0:11:06.559 --> 0:11:10.320 wish so. And do you essentially certify the in fact 0:11:10.320 --> 0:11:12.480 these credits exist and that they're legitimate? And you and 0:11:12.520 --> 0:11:14.360 I have talked in the past about things like greenwashing. 0:11:14.480 --> 0:11:16.800 Does this address that problem to some extent? And do 0:11:16.840 --> 0:11:21.560 you need the government to certify it? Well, let's just 0:11:21.600 --> 0:11:24.600 go back here for a minute. I think the problem 0:11:24.600 --> 0:11:30.599 with carbon credits is more retrospective than it is current. Retrospectively, 0:11:31.520 --> 0:11:36.439 it was a nascent industry early on, small players and 0:11:36.720 --> 0:11:41.040 um standards were not set, so Yeah, in some question 0:11:42.240 --> 0:11:47.240 places they were questionable, but today we have much more transparency. 0:11:47.320 --> 0:11:51.920 We're working with NGOs, we are not only will work 0:11:52.000 --> 0:11:57.240 with those that certify and verify. Today we're essentially taking 0:11:57.280 --> 0:12:01.599 another step and we are doing our own project level diligence. 0:12:01.640 --> 0:12:05.000 So this is sort of an insurance on top of 0:12:05.040 --> 0:12:08.800 an insurance, and actually beyond that, we're going to be 0:12:08.840 --> 0:12:12.319 doing some work in terms of insurance itself and risk management. 0:12:12.840 --> 0:12:15.760 So if you are a client and you came to us, 0:12:15.920 --> 0:12:18.760 I think that you would have much more confidence. First 0:12:18.800 --> 0:12:24.079 of all, the projects themselves are forward looking, not retrospective. 0:12:24.520 --> 0:12:27.920 We recognize what the issues were in the years gone by. 0:12:28.080 --> 0:12:33.040 We're not buying renewable projects in O E c D countries, 0:12:33.160 --> 0:12:37.679 meaning we're not trying to UH make renewables in America, 0:12:37.800 --> 0:12:41.120 which are actually cheaper and easy to get to part 0:12:41.120 --> 0:12:44.360 of the credit basket. What we are doing is looking 0:12:44.400 --> 0:12:47.840 to the developing world to help, and I think everybody 0:12:47.880 --> 0:12:52.280 needs removables, So we'll be transparent, will be easy to use. 0:12:52.840 --> 0:12:57.920 The credits are verified, certified, and we're taking a second 0:12:57.920 --> 0:13:01.440 look at them through uh gent I CANS Group. I 0:13:01.480 --> 0:13:04.880 think that this is a sort of end to end process. 0:13:05.320 --> 0:13:08.640 We are working with developers, were working with bropers and 0:13:08.679 --> 0:13:11.640 we may actually source credits ourselves in the years to come. 0:13:11.840 --> 0:13:13.200 And let me come back to you and talk about 0:13:13.240 --> 0:13:16.240 the future of this business as as it were. How 0:13:16.240 --> 0:13:18.960 big is the bread box? Well, let's just talk about 0:13:18.960 --> 0:13:23.840 how big is the need? Uh? By any dimension, we 0:13:23.880 --> 0:13:26.839 are looking at a need a delta of three and 0:13:26.920 --> 0:13:30.520 a half to four trillion dollars a year needed to 0:13:30.840 --> 0:13:36.440 create and NED zero world by and UH, the scientists, 0:13:36.440 --> 0:13:39.880 the NGO's governments would like to see us get halfway 0:13:39.920 --> 0:13:45.360 there by so or at least they're just simply isn't 0:13:45.760 --> 0:13:49.720 enough money to do that in the current equation. Governments 0:13:49.760 --> 0:13:52.559 can't do it, philanthropy can't do it, and businesses are 0:13:52.559 --> 0:13:54.840 really not set up to do it. You will see 0:13:54.880 --> 0:13:56.679 more of that in the years to come. But we're 0:13:56.720 --> 0:13:59.880 talking about four trillion dollars a year that is needed 0:14:00.000 --> 0:14:04.000 to fill this delta. Meanwhile, through uh, some commitments that 0:14:04.040 --> 0:14:06.199 have been made, you know, about ninety percent of the 0:14:06.240 --> 0:14:09.120 world is committed to some form of net zero. But 0:14:09.360 --> 0:14:13.360 the Glasgow Financial Alliance for Net Zero, otherwise known as 0:14:13.440 --> 0:14:18.560 Chief FANS, is a collection of five financial firms who 0:14:18.559 --> 0:14:21.280 have committed to be net zero. For financial firms to 0:14:21.320 --> 0:14:24.000 be net zero, all of their clients have to be 0:14:24.080 --> 0:14:27.520 net zero. That means not just big corporates, but middle 0:14:27.560 --> 0:14:32.840 market companies, small businesses, and ultimately consumers. So imagine that 0:14:32.960 --> 0:14:37.360 kind of um task ahead of us to help clients 0:14:37.400 --> 0:14:43.360 and customers become first carbon neutral, ultimately net zero. Well, 0:14:43.360 --> 0:14:45.520 speaking for myself, I find it very exciting and we'll 0:14:45.560 --> 0:14:47.520 be really curious to see how it develops. Thank you 0:14:47.560 --> 0:14:49.960 so much for sharing with us. That's Tom montag and 0:14:49.960 --> 0:14:53.400 and for Nuken of Rubicon Carbon. Coming up, we're gonna 0:14:53.400 --> 0:14:55.920 explore the large and growing world of private credit with 0:14:56.080 --> 0:14:59.240 Mike Arrighetti of Aries Management. That's next on Walter Read 0:14:59.360 --> 0:15:06.600 on Bloomberg. This is Bloomberg Wall Street Week with David 0:15:06.640 --> 0:15:18.240 Weston from Bloomberg Radio. Okay, credit, it's what makes the 0:15:18.280 --> 0:15:21.680 business world go round, and years of fiscal and monetary 0:15:21.720 --> 0:15:24.880 stimulus have made sure there's plenty of credit to go around. 0:15:25.320 --> 0:15:27.840 But now the Fed and other central banks would like 0:15:27.920 --> 0:15:30.400 there to be just a little less lending so we 0:15:30.400 --> 0:15:36.040 can get inflation down. History cautions strongly against prematurely loosening policy. 0:15:36.280 --> 0:15:38.640 We will stay the course until the job is done, 0:15:38.760 --> 0:15:42.080 which is hitting deals, particularly when it comes to private equity. 0:15:42.280 --> 0:15:46.840 What effects deal making is uncertainty. Uncertainty is the enemy 0:15:47.040 --> 0:15:49.560 of deal making. But it turns out that as the 0:15:49.600 --> 0:15:52.760 government regulates lending from the banks more the world of 0:15:52.840 --> 0:15:56.600 private credit has exploded. And more you regulate parts of 0:15:56.640 --> 0:15:58.680 the financial system, the money tends to flow to the 0:15:58.720 --> 0:16:01.600 unregulated parts of the finance national system. Having all that 0:16:01.840 --> 0:16:04.600 credit going on outside of the regulated part of the 0:16:04.640 --> 0:16:07.440 economy is not ideal. But that leaves the question whether 0:16:07.600 --> 0:16:10.200 private credit will be able to step in as the 0:16:10.200 --> 0:16:14.680 banks pull back. Private credit is really important, but private 0:16:14.680 --> 0:16:17.920 credit has also pulled back a little bit, not because 0:16:17.960 --> 0:16:22.520 of uh, the availability of financing or because they're stuck 0:16:22.560 --> 0:16:26.400 with bad loans like some of the large banks are, 0:16:26.800 --> 0:16:32.800 but because of the enormous uncertainty. And to take us 0:16:32.840 --> 0:16:35.240 into this large and growing world of private credit, we 0:16:35.280 --> 0:16:37.600 welcome now one of the leaders in the area. He 0:16:37.840 --> 0:16:41.120 is Mike Arreghetti, CEO of Areas Management. So Mike, thank 0:16:41.160 --> 0:16:43.160 you so much. Welcome to Wall Street. Were great to 0:16:43.200 --> 0:16:45.040 have you here, Thank you very much. We hear so 0:16:45.160 --> 0:16:47.440 much about private credit these days and how big it is, 0:16:47.480 --> 0:16:49.720 how big it's gotten give us your sense of just 0:16:49.800 --> 0:16:52.240 how big it is right now and why it's gotten 0:16:52.320 --> 0:16:55.680 this big. So when we talk about private credit, let 0:16:55.680 --> 0:16:59.640 me just zoom out quickly. We're talking about lending that 0:16:59.760 --> 0:17:03.080 is happening outside of the banking system, and that could 0:17:03.160 --> 0:17:09.439 be in corporate, real estate, infrastructure, consumer. I think a 0:17:09.440 --> 0:17:12.320 lot of the recent dialogue that that folks are paying 0:17:12.320 --> 0:17:15.679 attention to is more along the opportunity and corporate lending. 0:17:16.160 --> 0:17:18.920 That's the most devolved and the most developed market built 0:17:18.960 --> 0:17:22.560 here in the US and globally. In terms of sizing, 0:17:23.080 --> 0:17:25.600 no one white knows just because a lot of this 0:17:25.680 --> 0:17:29.240 is in private hands. But order of magnetitude, the private 0:17:29.280 --> 0:17:32.280 credit market for corporate than the US is about one brillion. 0:17:33.320 --> 0:17:37.240 Juxtaposed that with CNI loans in the banking system, that 0:17:37.240 --> 0:17:39.960 that due to two and a half times that uh 0:17:40.000 --> 0:17:42.520 and almost at parity in terms of size. But the 0:17:42.600 --> 0:17:45.439 leverage loan and HIH yield market. So what effect is 0:17:45.480 --> 0:17:49.280 the increasing interest rates had the private credit business? Obviously 0:17:49.280 --> 0:17:51.399 it's affecting a lot of business right now. It's harder 0:17:51.400 --> 0:17:53.320 to get loans if you can get them at all, 0:17:53.359 --> 0:17:56.159 They're more expensive. Yeah, I think private credit has tended 0:17:56.200 --> 0:17:59.639 to outperform when rates are going up for two main reasons. 0:17:59.720 --> 0:18:02.960 Number one, the structure of the loans are short duration 0:18:03.040 --> 0:18:06.760 and floating rate, though they typically reprice every thirty to 0:18:06.920 --> 0:18:09.479 ninety days, so as rates are going up, the return 0:18:09.560 --> 0:18:13.080 is going up. Um that. Obviously, in an environment where 0:18:13.080 --> 0:18:15.800 we're seeing a lot of building the equity markets and 0:18:15.920 --> 0:18:19.840 valuations are challenged in the high grade markets, private credit 0:18:19.920 --> 0:18:22.040 is a place where people can actually go to benefit 0:18:22.160 --> 0:18:26.400 from from rising rates. The flip side of that, obviously 0:18:26.480 --> 0:18:29.480 is that as rates are going up, debt service becomes 0:18:29.480 --> 0:18:32.960 more challenging or leverage borrowers, and so part of the 0:18:33.000 --> 0:18:37.120 conversation today is as you're generating this bess return, at 0:18:37.160 --> 0:18:41.960 what point does the incremental interest rate challenge the companies? 0:18:42.119 --> 0:18:45.399 I would say, as we sit here today, uh, still 0:18:45.680 --> 0:18:49.920 really strong fundamental economic performance within the portfolios and not 0:18:50.119 --> 0:18:52.480 any signs of stress really making their way through as 0:18:52.520 --> 0:18:54.119 a result of the rate high might just pick up 0:18:54.160 --> 0:18:55.679 on a couple of things you said there, because I 0:18:55.720 --> 0:18:58.159 talked to one investor who said there's no such thing 0:18:58.200 --> 0:19:01.119 as truly bulletproof in business, but these are close to it. 0:19:01.320 --> 0:19:02.919 And I guess it's because of the two things you 0:19:03.000 --> 0:19:05.919 mentioned the short duration and also the fact you've got 0:19:05.920 --> 0:19:08.560 floating rates, so if interest rates go up, you're protected. Well, 0:19:08.600 --> 0:19:10.960 I hope that person he spoke to is an area's 0:19:11.000 --> 0:19:13.280 investor already, but if they're not, I hope to watch 0:19:13.560 --> 0:19:17.440 this show of bulletproof. Is always something that you don't 0:19:17.440 --> 0:19:19.520 want to talk about an investment, but I would agree 0:19:19.520 --> 0:19:23.040 at this point in the cycle, private credit is a 0:19:23.080 --> 0:19:26.680 good place to be floating rate. As we said, short duration, 0:19:26.720 --> 0:19:30.040 but also senior succored. So if you think about where 0:19:30.080 --> 0:19:34.600 these exposures sit in a company's balance sheet or relative 0:19:34.640 --> 0:19:38.240 to the value of an asset, today, most private credit 0:19:38.320 --> 0:19:42.360 loans are sitting in the top half of the capital structure, 0:19:42.400 --> 0:19:47.879 which means that there's institutional equity supporting those loans dollar 0:19:48.000 --> 0:19:51.119 for dollar. So there's a significant amount of equity valuation 0:19:51.320 --> 0:19:54.240 that would have to deterior rate before you begin to 0:19:54.280 --> 0:19:57.560 have a conversation about principle US on private credit. Mike, 0:19:57.600 --> 0:20:00.840 you mentioned areas investors, and I wonder whether you're having, 0:20:00.840 --> 0:20:04.119 if anything, an easier time in getting investors these days, 0:20:04.160 --> 0:20:07.000 because interest rates going up necessarily affect the value of 0:20:07.040 --> 0:20:09.439 equities just because of the discount rate. It makes it 0:20:09.520 --> 0:20:14.120 less attractive. Has private credit has become more attractive relative 0:20:14.200 --> 0:20:16.879 to equities as an alternative investment I think so. You 0:20:16.920 --> 0:20:20.560 know in areas managers posted three fifty billion dollars of 0:20:20.600 --> 0:20:23.880 assets globally, and we have funds that we offer across 0:20:23.920 --> 0:20:27.600 the alternative spectrum, including private equity. I would say, as 0:20:27.600 --> 0:20:33.040 a general observation investor, appetite for door play equity product 0:20:33.160 --> 0:20:36.360 is pretty muted right now, simply because, as you point out, 0:20:36.680 --> 0:20:39.520 valuations are challenged and if you think about the drivers 0:20:39.520 --> 0:20:42.280 a return in that market, earnings growth is going to 0:20:42.320 --> 0:20:46.800 be muted. Availability of leverage is difficult. Cost of capitals 0:20:46.840 --> 0:20:48.720 by Mike, thank you so much for joining us in 0:20:48.760 --> 0:20:51.040 Wall Street Week. As Mike Arri got it, he CEO 0:20:51.520 --> 0:20:56.360 of Arias Management, coming up. We wrap up the week 0:20:56.400 --> 0:21:00.480 with our special contributy to Larry Summers of Harvard. That's 0:21:00.480 --> 0:21:10.880 next on Wall Street Week on Bloomberg. This is Wall 0:21:10.880 --> 0:21:13.280 Street Week. I'm David Weston. We're joined now once again 0:21:13.280 --> 0:21:15.240 by a very special contributor to Wall Street Week. He 0:21:15.359 --> 0:21:17.480 is Larry Summers of Harvard. So, Larry, I have to say, 0:21:17.800 --> 0:21:19.680 until Friday, I thought the big story was going to 0:21:19.800 --> 0:21:22.120 be what j Powell had to say. And then those 0:21:22.200 --> 0:21:24.520 jobs nevers came in, And obviously the number of jobs 0:21:24.600 --> 0:21:27.960 is really impressive, but also the average hourly wage. Wow, 0:21:28.920 --> 0:21:31.240 look what we saw was a seven and a half 0:21:31.280 --> 0:21:35.160 percent annual rate wage increase for the month, a six 0:21:35.200 --> 0:21:38.480 percent wage increase for the last three months, at a 0:21:38.520 --> 0:21:42.399 five percent increase for the year. So it's high, and 0:21:42.600 --> 0:21:47.200 it's rising, and the labor market is strong, and we're 0:21:47.280 --> 0:21:51.760 still in unprecedented territory in terms of the gap between 0:21:51.880 --> 0:21:55.440 vacancies and jobs. And I think that what that's got 0:21:55.440 --> 0:21:57.920 to tell you is that we had a long way 0:21:57.960 --> 0:22:01.960 to go to get an inflation down where the FED 0:22:02.040 --> 0:22:05.800 has said that it wants it uh to be. We 0:22:05.800 --> 0:22:08.000 don't know where this is, how this is all going 0:22:08.119 --> 0:22:12.280 to play out, but for my money, the best single 0:22:12.359 --> 0:22:17.160 measure of core underlying inflation is to look at wages. 0:22:17.960 --> 0:22:23.479 It's interesting. That's what Paul Krugman acknowledged today when he 0:22:23.520 --> 0:22:28.040 said that he was shaken in his views by these numbers. 0:22:28.119 --> 0:22:31.040 And I think what this is telling us is that 0:22:31.160 --> 0:22:34.280 the Fed's got a long way to go, and so 0:22:34.440 --> 0:22:35.880 how is that going to happen? I mean, we heard 0:22:35.960 --> 0:22:38.440 J Powell talk about the Jolts numbers, for example, say 0:22:38.440 --> 0:22:40.639 we've got a big gap between the people trying to 0:22:40.680 --> 0:22:42.639 get people to work and the people actually working. As 0:22:42.640 --> 0:22:44.680 long as you have that, you've got this pressure. He said, 0:22:44.720 --> 0:22:47.080 we've got to get demand down so that in fact 0:22:47.119 --> 0:22:49.120 we are not seeking as many people in the workforce, 0:22:49.280 --> 0:22:51.160 But how do they get done. It's not getting done yet. 0:22:51.720 --> 0:22:54.040 It's not getting done yet. And what that says is 0:22:54.119 --> 0:22:58.160 we're probably gonna need increases in interest rates. I suspect 0:22:58.200 --> 0:23:01.040 they're going to need more increased as an interest rates, 0:23:01.119 --> 0:23:05.680 and the market is now judging or than they're now saying. Look, 0:23:06.080 --> 0:23:10.520 every every time they revise their forecast of inflation up, 0:23:10.920 --> 0:23:14.919 and they regard revised their forecast of ultimate unemployment up 0:23:14.960 --> 0:23:17.760 as well. And gosh, we've all been at the airport 0:23:17.880 --> 0:23:19.719