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Speaker 2: Wonderful surprise for you this morning. All things to talk
Speaker 2: about with Robert Kaplan of Colvin Sax, former president of
Speaker 2: de Dells Fed. We could talk for three hours with him,
Speaker 2: but we're gonna do a massive audible here. And the
Speaker 2: kid from you grew up in Brooklyn.
Speaker 3: That my parents did, and I grew up in Kansas.
Speaker 2: They grew up in Prairie Village.
Speaker 3: Yeah.
Speaker 2: And with John Sherman, you enjoyed partial ownership of the
Speaker 2: Bobby Wits.
Speaker 3: That's right of the Bobby Witch.
Speaker 2: I watched him with the Giants in Phoenix here recently.
Speaker 2: He's an electric player. I mean, he's a great player.
Speaker 2: How will the Kansas Royals your team you're part owner
Speaker 2: with John Sherman, how will they compete? Where the payrolls?
Speaker 2: About the size of Aaron Judges payroll I got one
Speaker 2: hundred and eighty two million is a working statistic. This
Speaker 2: is unfair.
Speaker 3: Right, yeah, and that's why in the is a sensitive topic.
Speaker 3: But in the labor negotiations over the next year or two,
Speaker 3: there's going to have to be a discussion about some
Speaker 3: type of balancing salary cap that the sport really really
Speaker 3: needs to create more competitiveness. Having said that, Royals are
Speaker 3: going to I say that some a little bias. Royls
Speaker 3: are gonna be good this year.
Speaker 4: I mean there's I mean the word is in sports radio.
Speaker 4: There's going to be a work stoppage next year.
Speaker 5: They do not need.
Speaker 2: Within the delicacy's Robert kaplan. Of where you sit with
Speaker 2: the Kansas City Royals, are you optimistic there can be
Speaker 2: a constructive agreement.
Speaker 3: I'm optimistic that it's clear the sport needs to deal
Speaker 3: with the disparity like other sports were to get from
Speaker 3: here to there. I don't know, but it's clear it
Speaker 3: would benefit everyone involved in the sport.
Speaker 2: One Kansas final Kansas City question before serious issues. Am
Speaker 2: I right? Kansas City is booming. That's what I notice
Speaker 2: the radar from here. It's booming. The new airport at all.
Speaker 3: Of course, yes, listen, I'm Kansasity's a fabulous place to live.
Speaker 3: I love it. I go back there regularly, and it's
Speaker 3: it doesn't have a lot of Like forty three other
Speaker 3: states in the United States, the state of Kansas and
Speaker 3: Missouri are not growing substantially in terms of population, but
Speaker 3: it's a fabulous place.
Speaker 2: Yeah, it's good. Should we start the show.
Speaker 6: Let's go.
Speaker 2: Let's start to show Paul Sweety with Robert Kaplan, the
Speaker 2: former FED president of Dallas.
Speaker 4: Robert, you know, the FED decision, I guess was not
Speaker 4: surprising in March kind of.
Speaker 7: But if I look at the WRP.
Speaker 4: Function, look at where the market is thinking, the market's
Speaker 4: not really pricing in any cuts or even any rate
Speaker 4: heights for the end of the year, I guess that
Speaker 4: makes sense because there's so much uncertainty out there.
Speaker 3: It makes a lot of sense. If we talked literally
Speaker 3: just a month ago, we would have said we're set
Speaker 3: up for a strong year growth in twenty twenty six,
Speaker 3: tax and centers, regulatory reform, AI data center power boom.
Speaker 3: And I think the FED was hopeful in the back
Speaker 3: half of the year that headline inflation would tail off
Speaker 3: a bit, so they might be able to cut rates
Speaker 3: once or twice. Obviously, because of what's going on in
Speaker 3: the Middle East, I think they're going to need to
Speaker 3: step back, that's the right thing to do and let
Speaker 3: this unfold. Then the market is sort of backed off
Speaker 3: also and is pricing in basically no cuts this year.
Speaker 4: What do you think if I'm at the board level,
Speaker 4: if I'm at the c suite level, I've navigated tariffs.
Speaker 4: Now we have to navigate what may be, you know,
Speaker 4: an inflationary slowing economy due to higher energy prices. What
Speaker 4: is the c suite? What is the board to do
Speaker 4: these days? Are they going to sit on their hands
Speaker 4: as well?
Speaker 2: A little bit?
Speaker 3: Do you think they're what we're seeing? They're not sitting
Speaker 3: on their hands because we are in the middle of
Speaker 3: not only an AI data center power cap x boom,
Speaker 3: but now we're in the early stages of the adoption boom,
Speaker 3: which is going to improve productivity growth in every business
Speaker 3: we talk to has got to be trying use cases
Speaker 3: and trying to figure out how that's going to work.
Speaker 3: And many are concluding that in this new era they're
Speaker 3: better off getting more size and scale and merging, so
Speaker 3: that's not slowing down at all. Having said that, if
Speaker 3: you want to if your forecast for the year, this
Speaker 3: has put a little bit of a damper for many
Speaker 3: businesses on their growth outlook, and they're going to be
Speaker 3: more careful and that will start with hiring and other expenditures.
Speaker 3: But they've got to keep aggressively pursuing this AI situation,
Speaker 3: and mergers will be part of that.
Speaker 2: You're in the early crisciple of this, of course, at
Speaker 2: the Dallas Fed. And we all know how the Texas
Speaker 2: is booming. The philanthropy and Michael Dell and others. Here's
Speaker 2: Anna Crockett from Robert Kaplan's Dallas Fed Salary not sole
Speaker 2: concern for young adults weighing career decisions. So you bringing
Speaker 2: over to AI in the boom, whether it's Deer Valley
Speaker 2: out into Phoenix or everything going on in Texas, what's
Speaker 2: going to be the incentive here to drive employment and
Speaker 2: happy employment forward?
Speaker 3: So what we see and I saw this when I
Speaker 3: was at the Dallas FED, and I see it more now.
Speaker 3: All we've got a lot of what I call mismatches.
Speaker 3: So the FED worries about are we sickly growing? Are
Speaker 3: we weakening? We got difference, We've got a structural problem.
Speaker 3: We've got college graduates, programmers, others can't find jobs. But
Speaker 3: I've never seen more open jobs. Window installers, technicians, plumbers,
Speaker 3: people to work on the Ford Motor Company assembly line
Speaker 3: to make one hundred and thirty five grand here can't
Speaker 3: find them, and so these mismatches have to be worked through.
Speaker 3: And we're kind of struggling with that right now.
Speaker 7: Okay, this is set of the.
Speaker 2: Grassley welders in Iowa a million years ago. What's the
Speaker 2: simple issue, more pay for those working class people.
Speaker 3: Some of it is aspirational. If I go to college,
Speaker 3: I think, did I go to college to be a
Speaker 3: plumber or electrician? Turns out those jobs make a lot
Speaker 3: of money, and so I think you may see you're
Speaker 3: going to need to see more changes in our educational
Speaker 3: system where it wouldn't shock me if fifteen years from
Speaker 3: now a state college offers a skill training option, they'll
Speaker 3: do that. Now.
Speaker 2: This would be Paul an Agricultural and Mechanical school, like
Speaker 2: at College Point Texas.
Speaker 7: Exactly.
Speaker 3: That's right, College station.
Speaker 4: Yeah, comes to stations exactly, Robert. I mean, talk to
Speaker 4: us about the m and A environment. We came into
Speaker 4: the second term of President Trump. The expectation was that
Speaker 4: this was going to be an administration that was going
Speaker 4: to be very supportive of.
Speaker 3: M and a consolidation.
Speaker 7: Have we in fact seen that.
Speaker 3: I think the I'll talk generally, the attitude in boards
Speaker 3: is there is a window here where I think companies
Speaker 3: are more confident that if they want to do a
Speaker 3: merger that they'll be able to get it done, and
Speaker 3: they want to take advantage of that window.
Speaker 6: Private credit.
Speaker 4: If it weren't for the Warner around, Tom and I
Speaker 4: keep saying to each other, Boy, if it weren't for
Speaker 4: the Warner around, this private.
Speaker 6: Credit issue would be maybe a.
Speaker 4: Bigger issue for global Wall Street and concerns about is
Speaker 4: there a systemic risk in the private credit world which
Speaker 4: has seems such a tremendous amount of growth since a
Speaker 4: great financial crisis. How do you guys think about that?
Speaker 3: Yeah, so if you actually look under the hood in
Speaker 3: the portfolios, obviously you want to check what their industry
Speaker 3: exposures are, how much software exposure. It's, by the way,
Speaker 3: there's nothing wrong with software companies. It just you may
Speaker 3: not want them to be leveraged five times even d
Speaker 3: But there's the portfolio issue, which I would argue, if
Speaker 3: growth is solid this year, we're unlikely to have a
Speaker 3: credit cycle in twenty six. So what's going on. There's
Speaker 3: that liquidity mismatch that's big problem, and I think they're
Speaker 3: being confused, meaning there are certain BDC's that you have
Speaker 3: to offer quarterly liquidity. And when investors rush for the
Speaker 3: exits and they think others are, then they're going to rush.
Speaker 3: And I think in portfolios that have good matching of
Speaker 3: assets and liabilities liquidity, they may be fine. Having said
Speaker 3: that this is the crisis before the crisis, to quote
Speaker 3: someone else, if we have a credit cycle in next
Speaker 3: two or three years, I actually think this concern now
Speaker 3: is going to be healthy, because if we have a
Speaker 3: credit cycle, then you're going to see more issues in
Speaker 3: private credit.
Speaker 2: If you're listening across America, good morning to you, Paul Suenian,
Speaker 2: Tom Keane, Bloomberg Surveillance on YouTube, Subscribe to Bloomberg Podcast.
Speaker 2: It's our digital distribution, humbled by that success, and of
Speaker 2: course all of you on traditional audio as well with us.
Speaker 2: Robert Caplan of the Dallas Fed now holding court again
Speaker 2: at Golden Sachs as vice chairman. I would say, like
Speaker 2: Mark Kimmitt and the military SPAN's finance Robert Champlin, you
Speaker 2: spend academics over to finance over to your service at
Speaker 2: the Dallas FED like no one else in America. Once again,
Speaker 2: we're studying within private credit the efficacy of hedging. In
Speaker 2: every single class ever been taught, there's a point where
Speaker 2: a hedge catches up with you. How close are we
Speaker 2: within rehedging? Where the game, the shell game we're playing
Speaker 2: where we get to a shock a tip point that
Speaker 2: upsets the apple.
Speaker 7: Cart so.
Speaker 3: Well, obviously the yield curve is drifted up because oil
Speaker 3: prices have drifted up, the real yields come up, and
Speaker 3: people are concerned that central banks just aren't going to
Speaker 3: cut in the way that we may have thought literally
Speaker 3: a month ago. Having said that, I think that the
Speaker 3: private credit issue, maybe not this year, but over the horizon,
Speaker 3: is about operational risk matching financial risk. And we were
Speaker 3: taught way back when if operational risk is high, be
Speaker 3: careful about the financial risk. And AI and disruption is
Speaker 3: going to increase operational risk. Businesses will figure it out,
Speaker 3: but you don't want to be as highly leveraged, and
Speaker 3: so that's something I think people are going to have
Speaker 3: to go back and screwtin.
Speaker 2: Now this is a private credit people, Paul will say, well,
Speaker 2: we're not leveraged. We're here, I'm listening to Robert Kaplan.
Speaker 3: Well, the companies listen. We would have said in the
Speaker 3: past four or five times, ebit deep, that's not over leveraged.
Speaker 3: Well it is. If there's a risk that your ebit
Speaker 3: D might drop thirty percent because of a new innovation,
Speaker 3: that's the issue.
Speaker 4: What's the message to your bankers these days when you
Speaker 4: sit down with your senior bankers or coverage bankers, and
Speaker 4: all right.
Speaker 7: For the next few weeks, let's go out.
Speaker 4: We want to get this message out to our clients.
Speaker 3: Let's stay close to clients, Let's understand their needs, Let's
Speaker 3: be shared bringing. Let's bring the whole firm to bear,
Speaker 3: including our thought leadership, to help them figure out what's
Speaker 3: going on. Corporate clients are very active. Investment clients across
Speaker 3: all our sectors are trying to figure out and handicap
Speaker 3: what's going on, and our job is to understand them,
Speaker 3: build our relationships, and serve them by bringing the whole
Speaker 3: firm to bear.
Speaker 4: Are you sensing that this I mean the AI revolution,
Speaker 4: I guess we'll call it, or just I'm not sure
Speaker 4: what it is. We used to call big data back
Speaker 4: in the day. But some people are telling me this
Speaker 4: is more important than the Internet, and it might just
Speaker 4: be a cut below electricity in terms of the importance
Speaker 4: of society. I've had somebody expressed to me that way. Boy,
Speaker 4: if I'm a corporate border COEO, I feel like I
Speaker 4: got to get super smart, super quick because it's either
Speaker 4: a friend or an enemy to my business.
Speaker 7: I'm not sure which.
Speaker 3: Yeah, And so here businesses are handling it in the
Speaker 3: following way. A typical business has ten or fifteen use cases.
Speaker 3: You know, how can we change our controllers department, our
Speaker 3: marketing department, all the different things that they do. They're
Speaker 3: in the with partners outside partners of going through those
Speaker 3: use cases. And I'd say we're in the early innings
Speaker 3: and two years now they're going to be a whole
Speaker 3: lot smarter. Two years can be an eternity, yes, but
Speaker 3: businesses will be a whole lot smarter. Some of them
Speaker 3: are saying, I want to do more strategic merger activity
Speaker 3: to help mitigate some of the risk here. But we're
Speaker 3: in we're learning right now. So anybody tells you I
Speaker 3: know exactly how this is going to they don't know.
Speaker 3: The smartest people I know are in the middle of it,
Speaker 3: and they're open to learning and are not prejudging it.
Speaker 2: On AI, what is your observation on a roll up
Speaker 2: of all the competitors now? Are there too many? Just
Speaker 2: on a unit basis, are there too many players?
Speaker 3: Well, so, a lot of our attention, because we can't
Speaker 3: avoid it, is all the CAPEX and the compute infrastructure part. Okay,
Speaker 3: then there's the adoption companies, which are extremely highly valued.
Speaker 3: And the truth is, I have no doubt we need
Speaker 3: to create more compute. How the adoption companies are going
Speaker 3: to shake out? I think that's where more of the
Speaker 3: uncertainty is, and that's where the software situation. The first
Speaker 3: reaction is it's gonna be disruptive. I think the second
Speaker 3: reaction after people calm down, but clients are going to
Speaker 3: need advice to help with the installation of the software.
Speaker 3: Companies are critical of that. So I think we're literally
Speaker 3: wrestling our way through this.
Speaker 2: Thank you for the comments on Kansas City. There was
Speaker 2: I mean, was George Brutt's bat tard.
Speaker 7: I think it was.
Speaker 2: Robert Kavin, Thank you, Thank you awer of the Kansas
Speaker 2: City Royals with the modest interest in gold and sacks,
Speaker 2: and of course it's a public service at the Feederizer
Speaker 2: Bank of Dallas for stay with us. More from Bloomberg
Speaker 2: Surveillance coming up after this.
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Speaker 2: The way that you find young economists, folks, is their
Speaker 2: research comes in. In the old days, it was printed
Speaker 2: in paper and you actually held it in your hands
Speaker 2: and said, oh, now it comes across in this whole
Speaker 2: digital thing and email and all that, and you open
Speaker 2: the PDF file and go, oh yeah, that's what we
Speaker 2: did with Michelle Myers years ago at Bank of America said,
Speaker 2: oh she follows the consumer.
Speaker 7: Like no one.
Speaker 2: I want to go to K shaped and I want
Speaker 2: you to do a classic Michelle Meyer decyle or quintile
Speaker 2: breakdown of the population count of the United States of America.
Speaker 2: We obviously perceive it as the center, tendency and equal
Speaker 2: arms of the K shape. Belooney, define the real K
Speaker 2: shape that's out there.
Speaker 8: So I think it's extremely important always to look below
Speaker 8: the headlines. You have the aggregate numbers, and then you
Speaker 8: have a lot of stories that happen when you did deeper.
Speaker 8: And always in every cycle, the economy is not felt
Speaker 8: evenly across different types of populations, whether you're looking at
Speaker 8: an income level, whether you're looking at across different regions
Speaker 8: of the US, different types of jobs, it's going to
Speaker 8: feel different. And I think we're there now, we've been
Speaker 8: there this entire cycle. Part of that is because this
Speaker 8: has been a cycle of a lot of asset price inflation.
Speaker 8: We have seen markets behave very well, obviously very volatile times,
Speaker 8: but very well.
Speaker 2: She moves a master card and won't answer my question.
Speaker 2: The K shaped on the.
Speaker 7: Shape I'm going to get there. I'm getting there.
Speaker 8: Yeah. So the story is that, yes, you certainly have
Speaker 8: this differentiation. Part of it has to do with household
Speaker 8: balance sheets, which reflects the fact that we've seen a
Speaker 8: lot of asset price inflation, a lot of appreciation, and
Speaker 8: that is clearly supported that top part of the K,
Speaker 8: where the purchasing power has increased because of that phenomenon.
Speaker 4: So in John Tucker's Business flashyalking about a lot of
Speaker 4: financial markets reflecting some angst about inflation maybe creeping back
Speaker 4: into this economy, maybe even more pronounced than we're used to.
Speaker 4: What is your view on inflation given what's going on
Speaker 4: in the geopolitical world these days?
Speaker 8: Of course, so inflation has been a hot topic for
Speaker 8: a while, right you think about tariffs, all the forecasts
Speaker 8: about how it can really boost inflation in a problematic way.
Speaker 8: It ended up being a lot more modest in terms
Speaker 8: of the pass through. But we're now at that point
Speaker 8: again when we're talking about the potential for higher inflation,
Speaker 8: and here it's a little bit more meaningful because you
Speaker 8: have the direct hit to headline inflation from energy prices,
Speaker 8: potentially from food prices as well, depending on what happens
Speaker 8: with fertilizer prices and how that gets passed on to food.
Speaker 8: When you look at the core, you take out food
Speaker 8: and energy there, I think there's very fairly a bigger
Speaker 8: debate as to whether or not some of these higher
Speaker 8: costs of production get passed on to consumer core prices
Speaker 8: when you think about durables, when you think about some
Speaker 8: of the bigger ticket items that tend to have more
Speaker 8: sensitivity to high transport costs, and that will be a
Speaker 8: function of the duration of this shock. We know oil
Speaker 8: prices are high right now, and we know there's a
Speaker 8: lot of uncertainty about where they go, but how long
Speaker 8: they stay high will determine whether or not it passes
Speaker 8: on to the core. And I don't think we're there yet.
Speaker 4: It seems like, you know, one of the concerns is
Speaker 4: we've seen this before, We've seen shocks before. Consumers are
Speaker 4: pretty savvy they kind of maybe you can look through it,
Speaker 4: but sometimes you might see a shift away from the
Speaker 4: stuff I'd like to have, like a new car, yeah,
Speaker 4: versus stuff I have to have now, which is I
Speaker 4: have to put guess what I've already got or something
Speaker 4: like that. So I mean that's I guess that goes
Speaker 4: to your argument. Boy, if this persists, then maybe we've
Speaker 4: got a different discussion.
Speaker 8: And that is critical. It's a reallocation of purchasing power
Speaker 8: and a lot of that is not my choice, and
Speaker 8: it's important to keep that in mind, especially when it
Speaker 8: goes back to Tom's initial point around the key shaped narrative.
Speaker 8: There's a lot of folks out there, a lot of
Speaker 8: households that don't necessarily have as much flexibility, and if
Speaker 8: gas prices arising, they have to spend more of the
Speaker 8: purchasing power at the pump or drive less if they
Speaker 8: can not, everybody can just what they can spend on it.
Speaker 2: Mastercurred, you have a font of information no one else has.
Speaker 2: What is the greatest misconception we have about our use
Speaker 2: of credit cards? What forty two percent annual interest rate?
Speaker 2: I'm kidding, folks, But when you look at charge cards,
Speaker 2: what's what's the myth out there that upsets you? Right now?
Speaker 8: I don't know that there is a myth that up
Speaker 8: sets me as an economist when I'm thinking about the
Speaker 8: overall economic environment. I think it's generally when you look
Speaker 8: at spending trends and you think about the different ways
Speaker 8: that consumer spend. Obviously, using credit is a path and
Speaker 8: it's one that allows for a lot more stability in spending.
Speaker 8: Right when you think about the fact that why we
Speaker 8: have credit cards, why we have other forces forces sources
Speaker 8: of payments, is that it allows you to kind of
Speaker 8: smooth your spending a lot more because you could adjust
Speaker 8: based off of where you are in the labor market,
Speaker 8: what you're seeing in terms of your balance sheet, et cetera.
Speaker 2: Linked in the savings, right, I mean, are we spending spending,
Speaker 2: spending or we actually.
Speaker 8: The savings rate has been pretty stable. So you had
Speaker 8: an unintentionally high savings rate after the pandemic. We all
Speaker 8: know that that a lot of that was drawn down
Speaker 8: pretty quickly, frankly, and in the last several years it's
Speaker 8: been remarkably steady and pretty close to what would be
Speaker 8: considered normal.
Speaker 2: Mister Meyer emails and he says, enough Kansas City royals talk.
Speaker 2: Those phillies look awfully good this year, don't they.
Speaker 8: That would be my husband who is emailing, and probably
Speaker 8: not my father.
Speaker 2: Okay, but yeah, Michelle, thank you so much, honey. Mischel
Speaker 2: Meyern she forgot a master card Economics Institute. Just can't
Speaker 2: say enough about their research on consumer all the great
Speaker 2: work she's done over the years. Stay with us. More
Speaker 2: from Bloomberg Surveillance coming up after this.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us live
Speaker 1: weekday afternoons from seven to ten am. He's durn Listen
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Speaker 2: Coming up, without question, our Global Wall Street Conversation of
Speaker 2: the Day. Paul and we agree, if there wasn't a ward,
Speaker 2: there would be no other topic private credit.
Speaker 4: I think you're right. I think you're right. People are
Speaker 4: just trying to get a handle on is this something
Speaker 4: systemic to we need to worry about this? It could
Speaker 4: have broadened out, you know, I don't know.
Speaker 7: We'll figure out our next guest.
Speaker 9: I'll have to see.
Speaker 7: Well, I was gonna have it.
Speaker 2: I want you to bring in Randy because you and
Speaker 2: I go back and forth in this and frankly Sweeney
Speaker 2: was way out front of this versus me. But basically, Paul,
Speaker 2: please help me. Have we seen this before.
Speaker 4: I've seen a lot of stuff over my career, especially
Speaker 4: on the credit side.
Speaker 6: Randy Schimmer, he's seen it all as well.
Speaker 4: He's a vice chair and chief investment strategist at Churchill
Speaker 4: Asset Management. Most of what we know about the private
Speaker 4: equity and private credit business we've learned from Randy. Randy,
Speaker 4: talk to us about the conversations you're having today, because
Speaker 4: I know you're getting three, four, or five ten phone
Speaker 4: calls before we even get into the office. Yeah, about
Speaker 4: private credit. Do we have a risk in that market?
Speaker 4: Explain that what the responses you're getting here?
Speaker 5: So the timing is great, always being here at the
Speaker 5: center of excellence for private credit. A Bloomberg surveillance with
Speaker 5: you too. So here's what we're We're seeing two things. One,
Speaker 5: it's the Gift of the Month club in terms of
Speaker 5: headline risk. Okay, Iran is the new you know Ukraine,
Speaker 5: AI is the new tariffs government shutdown is the new
Speaker 5: government shutdown. So everything is creating uncertainty and it changes
Speaker 5: every day.
Speaker 6: Is Iran? Are we in?
Speaker 3: Are we out?
Speaker 5: What's going on? Are oil prices at risk? Are they
Speaker 5: not a risk? So investors are obviously focused on this uncertainty.
Speaker 5: Number two, and look at the BDC market is a
Speaker 5: good example of this. The traded BDC's right are looking
Speaker 5: at these risks and they're concerned, so they trade down.
Speaker 5: The non traded BDCs are saying, hmmm, is this a
Speaker 5: liquid asset class that I'm currently in. At the large
Speaker 5: end of the market, they're being told that liquidity in
Speaker 5: private credit is very similar. It's converging with liquidity in
Speaker 5: public credit. The problem is, we Churchill and you know
Speaker 5: this are at the core middle market, which is very illiquid.
Speaker 5: The good news about being very liquid is that it
Speaker 5: is an efficient alternative to the liquid market that is
Speaker 5: trading up and down. If you try to impose liquidity
Speaker 5: on I liquid asset clash, you're going to create expectations
Speaker 5: that are being dashed, and so retail investors are confused.
Speaker 5: They think, Oh, we can get out, No we can't.
Speaker 5: That's confusing.
Speaker 2: I'm confused too, because I went through eighty seven. I
Speaker 2: didn't see it coming. August of ninety eight. I didn't
Speaker 2: see it coming. You see there's a trend here. Yeah,
Speaker 2: Thursday in August oh seven, I didn't see it coming.
Speaker 2: We've got enough experience, Randy Schummberg where we could see
Speaker 2: it coming.
Speaker 7: Yeah.
Speaker 6: Do you need the.
Speaker 2: Institutions like the SEC to come to the rescue in
Speaker 2: d retail private credit so you can get back to
Speaker 2: a normal match of your illiquidity and your institutional clients.
Speaker 3: Yeah.
Speaker 5: So let's look at what you're saying. Is the next
Speaker 5: thing that is coming and one of the biggest concerns,
Speaker 5: and you were talking about it on your news broadcast,
Speaker 5: is that AI could be one of those events, right.
Speaker 5: It could be an eighty seven, it could be an
Speaker 5: seven and eight. The challenge is there's so much that's
Speaker 5: theoretical right now, and the things that's concerning the private
Speaker 5: credit markets is that at the upper end it's mimicking
Speaker 5: the hyperscalers in the public equities market because there's the
Speaker 5: larger you go in terms of deal size, the more
Speaker 5: concentration risk. So at the large end of the private
Speaker 5: credit market there's sixty percent overlap of deals, which what
Speaker 5: does that sound like? That sounds like the public equities
Speaker 5: market where there's like fifty percent of the whole market
Speaker 5: is in these seven stocks. So if there's concentration risk
Speaker 5: and you don't know what that ultimate endgame is, that
Speaker 5: is what's booking investors now in the core middal market,
Speaker 5: you know, and I always bring a story to you,
Speaker 5: so you know it was landscaping companies. One month we
Speaker 5: did accounting firms. What about power backup system? So we're
Speaker 5: looking at a deal right now that is not at
Speaker 5: risk with AI but could actually benefit from the power,
Speaker 5: the incredible power that's required by these AI companies. So
Speaker 5: this company supplies power backup for a lot of businesses,
Speaker 5: not startups for AI, but the existing AI infrastructure, and
Speaker 5: there's so much power that's required for these businesses. So
Speaker 5: if you're lending to a company that is going to
Speaker 5: benefit from that as a tailwind, that's a very different risk,
Speaker 5: and all of our businesses in the coriminal market are
Speaker 5: these very plain, vanilla service businesses that are sheltered from
Speaker 5: a lot of the stuff that's going on. So one
Speaker 5: of the things I think is going to happen Paul
Speaker 5: and Tom to your question is that as this uncertainty
Speaker 5: begins to clarify into more of a coriminal market versus
Speaker 5: a large capminal market, the media and investors will not
Speaker 5: paint all of private credit with one brush.
Speaker 6: What are you seeing in your portfolio today?
Speaker 5: So instead of red signals, we're seeing a lot of
Speaker 5: green signals. So we're not seeing anything like the kinds
Speaker 5: of you know, non accruals. For example, I don't think
Speaker 5: we have any or maybe one out of three hundred deals.
Speaker 5: Our default rates are very low. We're not seeing the
Speaker 5: kind of redemptions in our funds that that is being
Speaker 5: seen in the large cap market.
Speaker 6: Now.
Speaker 5: Granted, ninety five percent of our capitalist institutional we're trying
Speaker 5: to grow our wealth space, but a lot of this
Speaker 5: is education. So when we say we show them, we
Speaker 5: look at our portfolio. When you say, look what's going on,
Speaker 5: the existing investors are actually looking to increase their exposure
Speaker 5: with us. Anybody who's looking to move money out of
Speaker 5: our fund, like a fund right now in our business,
Speaker 5: is looking to move it into another Churchill fund because
Speaker 5: they see relative value. They're comfortable with the manager, they're
Speaker 5: comfortable with the core middle market asset class. They're just
Speaker 5: uncomfortable at the large end.
Speaker 2: Randy Strummer with us here in private credit, folks, We're
Speaker 2: going to go downtown here in a bit here with
Speaker 2: Christina Raffini. But to continue on private credit, am I
Speaker 2: able to buy Churchill's abilities within an IRA or a
Speaker 2: four to oh one K?
Speaker 5: So yeah, they're The issue for that is regulation, right,
Speaker 5: So it's out there. The government is saying four one
Speaker 5: K four one K.
Speaker 2: I can get a piece of Shrimmer Incorporated.
Speaker 7: Not right now.
Speaker 5: You need to go through the regular public channels for that.
Speaker 7: You can't.
Speaker 5: I don't think you can do it through your forum.
Speaker 2: And that causes messy. Gary was in the other day
Speaker 2: and then Gary Goessler, well I quised him. I said, look,
Speaker 2: did this start with this retaalization of Randy Schrimmer's world?
Speaker 7: I blamed it on you.
Speaker 2: But the answer is, what if we de retail, does
Speaker 2: the problem go away.
Speaker 5: Yeah, so here's the problem. The problem is education, right.
Speaker 5: So the beauty of this center talking about eighteen years
Speaker 5: the center of private Credit Excellence here at Bloomberg Surveillance
Speaker 5: and folks like kith Well Kate, the Case Wealth Group
Speaker 5: where I was out there in Kable Island yesterday and
Speaker 5: they were saying, Randy de mystify private credit for us,
Speaker 5: and I was saying, look, here's what's going on. If
Speaker 5: you understand the this is an ill liquid asset class.
Speaker 5: If the retail investors Tom and Paul know that, you're
Speaker 5: not supposed to be able to get out. For example,
Speaker 5: your home is not liquid. If if if Zillo says,
Speaker 5: guess what we're going to give you daily nav on
Speaker 5: your home value? Is that going to make you more
Speaker 5: comfortable with your your home value? No, you know what
Speaker 5: your home is worth, whether it's a daily nov or
Speaker 5: monthly or every year. You don't care. The same with
Speaker 5: private credit. You should feel comfortable with the right manager
Speaker 5: that the assets are good. Don't confuse liquidity in a
Speaker 5: fund with liquidity in the assets.
Speaker 6: I've seen a bunch of I'm sure we all have
Speaker 6: it in the press.
Speaker 4: I mean actual offering documents for these funds and right
Speaker 4: up front, this is ill liquid, yet you don't get five.
Speaker 6: Percent out, but you know, blah blah blah.
Speaker 4: I mean, so it's all there, but somewhere between there
Speaker 4: and the registered investment advisor.
Speaker 3: And the phone call something breaking down.
Speaker 7: Correct.
Speaker 5: So, and we're here to correct that. And again you
Speaker 5: need illiquid investments as a diversifier for the public.
Speaker 2: We're not going to educate people on this. It's not
Speaker 2: a classroom, Randy. We got to solve this thing fast.
Speaker 2: What is the shrimmer a path for the big boys,
Speaker 2: private equity, private credit to avoid this train record? Is
Speaker 2: it the d retail?
Speaker 5: Here's the Here's the answer is the core middle market
Speaker 5: is the answer to this problem because in the core
Speaker 5: midtal market you are avoiding all of the issues which
Speaker 5: is roiling the large cat market right now, which is
Speaker 5: exposed to a lot of these the gifts of the
Speaker 5: month that I'm talking about with oil prices and AI and.
Speaker 2: Uncertainty regime is riven as well.
Speaker 5: Yeah, because if you're if you're trying to pretend that
Speaker 5: that large end of the market is liquid, well you
Speaker 5: might as well be in public credit.
Speaker 7: Okay, one morning, could.
Speaker 4: I raise a private credit fund today.
Speaker 5: Absolutely, we are raising funds. So let me give you a
Speaker 5: little stat We are forty percent. Our deal closings is
Speaker 5: forty percent ahead of last year. In the middle of
Speaker 5: all this stuff. Okay, so our fundraising, you raised like
Speaker 5: sixteen billion dollars last year. I'm out talking to wealth
Speaker 5: investors all the time. And the cool thing now is
Speaker 5: and this is a prediction that even though the noise
Speaker 5: will continue, what's going to happen is the and it's
Speaker 5: not just education. The actual performance of the folks like
Speaker 5: Churchill who know what they're doing, is going to become
Speaker 5: a parent. So it won't be where everybody's painted the
Speaker 5: same brush. You're going to start to see the core
Speaker 5: midal market out performing.
Speaker 2: This has been wonderful. Randy Wan to brief, Thank you
Speaker 2: so much, Randy Strummember with this folks vice chair, Chief
Speaker 2: investment Strategy. It's a trucial asset management. Stay with us.
Speaker 2: More from Bloomberg Surveillance coming up after this.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us live
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Speaker 2: It is good to speak as we try to with
Speaker 2: people with experience. Wayne Sanders has deep experience with the
Speaker 2: United States Army, including instruction at West Point, senior defense
Speaker 2: analysts for Bloomberg Intelligence. So Wayne and my silliness, I
Speaker 2: go to AI and I go. The island is essentially a.
Speaker 7: Quote coral outcrop or.
Speaker 2: A massive slab of rock pushed up from the Persian
Speaker 2: Gulf seafloor. Its topography is quite distinct from the low
Speaker 2: lying sandy islands common in other parts of Persian Golf.
Speaker 7: What would Colin Powell?
Speaker 2: What would General Powell say about sending a small group
Speaker 2: of the eighty second Airborne over to Carg Island.
Speaker 6: Thanks for having me on.
Speaker 9: I pretty much think that Colin Powell would say, you
Speaker 9: need a larger force, and you need to look at
Speaker 9: what some of the second and third and fourth order
Speaker 9: effects are. Yeah, for when you actually land, you look
Speaker 9: at the risks that are associated with landing and Carg Island,
Speaker 9: and you are not only creating a geopolitical concern that
Speaker 9: has to be addressed with putting boots on the ground,
Speaker 9: you have to then be able to defend that for
Speaker 9: us when you're there, which means you're using additional air
Speaker 9: defense capabilities and naval air defense power which right now
Speaker 9: from interceptors that we have, you know, are a concern
Speaker 9: to make sure that we always have enough in a
Speaker 9: China contingency in twenty twenty seven. So he's going to say,
Speaker 9: is the is the juice worth the squeeze when you're
Speaker 9: trying to put all these pieces.
Speaker 7: Together, Herbie talk, is the juice worth squeeze?
Speaker 6: Exactly?
Speaker 7: Paul, with the juice with the squeeze?
Speaker 4: Hey, Wayne, we all, I think all of our audience
Speaker 4: has been trying to get a little bit smarter about
Speaker 4: what it means to security provide security for the straight
Speaker 4: of horn Horn moves. It seems like a very difficult
Speaker 4: operation here from your perspective.
Speaker 7: Is it possible and what would it take?
Speaker 6: Yeah, it's absolutely possible.
Speaker 9: The problem is it's about capacity and how much we
Speaker 9: want to actually put you know, the US naval forces
Speaker 9: in that position as well, not only the operating costs
Speaker 9: and all that I can get into if you want
Speaker 9: me to, but just from the strategic positioning of that
Speaker 9: is putting US naval vessels into the Strait itself to
Speaker 9: provide some level of escort, some level of security to
Speaker 9: be able to provide that always is going to put
Speaker 9: those vessels at risk. And as you've seen, even plumes
Speaker 9: of smoke from something that was damaged but not destroyed
Speaker 9: on civilian infrastructure makes international global news. And so I
Speaker 9: RAN wins a lot of points if they're able to
Speaker 9: do something like that against a US vessel of any
Speaker 9: type that is trying to do that inside the Straits.
Speaker 9: Same thing with US forces landing on card it ends
Speaker 9: up being a much larger piece because the asymmetric warfare
Speaker 9: angle of this, It only takes somebody who's got a
Speaker 9: shoulder fired missile who can come out from the shore.
Speaker 9: Even with our overwatch capability doesn't make it impossible for
Speaker 9: somebody to sneak through with something that's that small.
Speaker 6: It's a suitcase. It's a little bit bigger than that.
Speaker 9: You don't always have to look for this big armed
Speaker 9: drone launcher or missile launcher truck bed in order to
Speaker 9: destroy it. These are more insurgent type capabilities.
Speaker 7: Wayne.
Speaker 2: This is right up your alley here at West Point.
Speaker 2: There's the Robotics Research Center in our young cadets are
Speaker 2: at the drone building Paul cadets often start by building
Speaker 2: first person view drones from scratchy, Wayne Sanders, are we
Speaker 2: drone ready?
Speaker 6: We are not quite drone ready.
Speaker 9: If you look at Secretary of Hexsat's drone dominance program right,
Speaker 9: he wants to have three hundred and forty thousand drones
Speaker 9: within within two years, and you've seen about thirty thousand
Speaker 9: of them start being delivered.
Speaker 6: So you see scalability for drone companies.
Speaker 9: You know, er environment does very well with one way
Speaker 9: attack drones, redcat in teal drones or some of the
Speaker 9: other ones from company standpoint that are building this, But
Speaker 9: the army's taking a different approach as well, as you're
Speaker 9: talking about with West Point, and they are looking at
Speaker 9: ways to pretty much build and create it with additive manufacturing,
Speaker 9: thank three D printing for a lot of that same capability.
Speaker 9: And they're starting all the way back at west Point,
Speaker 9: at these centers of excellence.
Speaker 7: Paul wantshould jump in here. One more question.
Speaker 2: R Jabos claims, O folks still fully employed America, Wayne Sanders,
Speaker 2: As simple as I can, how far ahead is mister
Speaker 2: Putin of Secretary Hexith in the drone war?
Speaker 9: Well from a manufacturing production perspective, they do quite well.
Speaker 9: And really it comes down to if you're talking about
Speaker 9: small drones, small drone production that Russia has as well
Speaker 9: as Ukraine, they've had to over the last three or
Speaker 9: four years. They've actually put it together quite a bit
Speaker 9: of an infrastructure so that they can build these at
Speaker 9: scale based on how fast they're actually going through them
Speaker 9: and obviously getting destroyed, right, so they have the production
Speaker 9: rate and it's one of the reasons why Secretary Hegseth
Speaker 9: is looking at trying with the Replicator one point zero
Speaker 9: and Replicator two point zero programs. The Pentagon is to
Speaker 9: build out that capacity for the small drone market. But
Speaker 9: the US is still the world leader by far in
Speaker 9: terms of what they call Group three, Group four, in
Speaker 9: Group five, uas think your big global hawks, your reaper drones,
Speaker 9: you know, very very sophisticated ISR platforms.
Speaker 6: You're talking about thirty million dollars.
Speaker 9: You're not talking about a you know, ten thousand dollars
Speaker 9: drone that somebody's making with these three D printing assets.
Speaker 4: Wayne Secretary Hexeth has been very emphatic that the US
Speaker 4: Air Forces and Israeli Air Forces have hit thousands of
Speaker 4: targets here are we running out of high value targets
Speaker 4: to hit?
Speaker 9: So that was my original assessment when we were we
Speaker 9: talked about, you know, how long did I think this
Speaker 9: war was going to protract? It really comes down to
Speaker 9: how far down that target list you want to go.
Speaker 9: There's obviously those strategic level targets that were taken out
Speaker 9: right up front, and then you move down into some
Speaker 9: of the hardened military targets. So if you think, even
Speaker 9: like in the US, right you have centers of gravity
Speaker 9: that you would want to hit first, and then it's like, oh, okay, wait,
Speaker 9: we have other valid military targets. Same thing in Iran
Speaker 9: is we've hit all the ones that we thought were
Speaker 9: going to fire back at US first. Now comes the
Speaker 9: question as to how much of this the industry, the
Speaker 9: military industrial complex, do we want to actually continue to
Speaker 9: take out so that even if the regime were to
Speaker 9: stay in place, it would still take them fifteen twenty
Speaker 9: years to rebuild any type of capacity for a conventional
Speaker 9: military force. They're still obviously going to still have their
Speaker 9: asymmetric capabilities because those we can't. All we can do
Speaker 9: is it's almost like playing wacka mole. I hate that term,
Speaker 9: but in terms of that. You've seen that with has Below,
Speaker 9: You've seen that with the Huthis and Hamas. It's one
Speaker 9: of the things that they continue to play against as
Speaker 9: part of what Trump's looking at getting rid of.
Speaker 2: Wayne, don't be a stranger, Paul and I have twelve
Speaker 2: more questions for you. Wayne Sanders's public service to the
Speaker 2: nation in the United States Army and teaching at West
Speaker 2: Point Academy.
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