Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Bond traders are boosting wagers that the Fed is about
Speaker 2: to signal deeper interest rate cuts next year than the
Speaker 2: market anticipates. Wall Street is preparing for a potential rate
Speaker 2: pause in January. We're going to talk about those implications
Speaker 2: on private markets and public credit markets with Marathon Asset
Speaker 2: Management CEO Bruce Richards. You have still inflation above the
Speaker 2: Fed's target, yet the market is expecting another cut. What
Speaker 2: does that mean to you in terms of the trajectory
Speaker 2: of inflation going into a bigger easing cycle ahead, even
Speaker 2: if that easing cycle is less than initially expected.
Speaker 3: Nasionally, great question is open with So forty three straight
Speaker 3: months core CPI is above three percent, forty three straight months,
Speaker 3: it's rather remarkable. We haven't seen a stretch like this
Speaker 3: in a really long time. In the last three months.
Speaker 3: Three point three percent is the number. The Fed poal
Speaker 3: won't tell us this, but they've given up on two percent.
Speaker 2: Huh.
Speaker 3: They've given up untio because they know the numbers three
Speaker 3: and they know tariffs are coming and so that's gonna
Speaker 3: keep it firm. They know proeconomic policies are coming, less
Speaker 3: regulation and so that's gonna keep it firm. They know
Speaker 3: it's not going back down to two, they can't.
Speaker 1: Tell us that.
Speaker 3: So what they're gonna tell us in today's FED meeting
Speaker 3: is they're cutting rates twenty five base points. And so
Speaker 3: from September eighteenth to December eighteen, today, exactly three months,
Speaker 3: they will have reduced rates one hundred base points, probably
Speaker 3: a bit much, given growth is above three percent this
Speaker 3: quarter GDP expected by the Fed, and given where inflation is,
Speaker 3: and so I think we'll see the dot plot go
Speaker 3: from four today where it was previously, to three Next year.
Speaker 3: You have eight meetings, there's only going to be two
Speaker 3: maybe three cuts next year, and so most of the
Speaker 3: time they're gonna be in pause. And that's gonna keep
Speaker 3: the markets anxious next year because most of the times
Speaker 3: they won't won't be easing, and the markets really like.
Speaker 2: The c and ees. So what does this mean in
Speaker 2: terms of the trajectory of inflation next year? If you're
Speaker 2: a fixing come investor, inflation as killer and so do
Speaker 2: you expect that it's going to be a higher than
Speaker 2: anticipated And do you feel, like some investors do, of
Speaker 2: a seventy style repeat.
Speaker 3: I believe that our star. You know, the real rate
Speaker 3: of rates is going to be higher, the nominal rate's
Speaker 3: going to be higher. You know, FED is lower rates
Speaker 3: after today one hundred base points. You have to tell
Speaker 3: your notes gone up seventy five basis points. And so
Speaker 3: the markets, the bond markets aren't believing the fed's language
Speaker 3: as it relates to inflation. They take what the FED
Speaker 3: gives them in terms of the FED easing. Equity markets
Speaker 3: love it, Debt markets love it. It's great for the economy.
Speaker 3: But real rates are higher.
Speaker 1: Well, I think that's so interesting. I mentioned you mentioned
Speaker 1: of course, at two pm today we'll have had one
Speaker 1: hundred basis points of easing. The long end has just
Speaker 1: been you know, it's been shocking to see that move,
Speaker 1: and you know, you talk through the reasoning and what
Speaker 1: that could, why it could be happening, But what does
Speaker 1: it mean for other asset classes? When does the equity
Speaker 1: market wake up to the fact that the long end
Speaker 1: is saying, hello, look at the trajectory of where things
Speaker 1: are going.
Speaker 3: The first thing it means is and we haven't seen
Speaker 3: front rates come down fifty one hundred base points and
Speaker 3: long rates go up by fifty to one hundred base points.
Speaker 3: We haven't seen this dynamic since nineteen nineties. It's not
Speaker 3: happened since then. And what happened then was the commune
Speaker 3: is strong. That's why rates were going up. Yet the
Speaker 3: FED was easing, and so what happened credit spreads went
Speaker 3: to their tightest levels ever. This is investment grade, triple bes,
Speaker 3: double bees, high yield, all to their tightest levels ever.
Speaker 3: So what we're going to and it's stayed there for
Speaker 3: a year and a half, So what we're going to see.
Speaker 3: The first knock on is the commedy's doing well, earnings
Speaker 3: are doing well, and so the corporate credit spreads are
Speaker 3: going to tighten in. But yet you can earn a
Speaker 3: seven percent in liquid markets in both you know, high
Speaker 3: yield and other structured credit instruments that are non investment grade.
Speaker 3: And so it's a good rate, but yet it's really
Speaker 3: tight spread because the credit risk is being mitigated.
Speaker 1: Now, well that's what's happening now, right. I mean, you
Speaker 1: have credit spreads across the spectrum at very very tight levels,
Speaker 1: and you put it all together, you could make a
Speaker 1: case for backing up the truck on investment grade and
Speaker 1: on junk.
Speaker 3: Are you making that case we've been buying, and we'll
Speaker 3: continue to buy, and I think that you'll have a
Speaker 3: low volatility environment for those types of assets. And so
Speaker 3: do you want to back up the truck now? I
Speaker 3: think you want to be equal weight now. But I
Speaker 3: think that within your kind of fixed income allocation, you
Speaker 3: want a nice, healthy allocation because I think the risk
Speaker 3: factors down, the risk factors being credit risk, and you're
Speaker 3: getting paid an average yield despite what's a tight spread.
Speaker 2: So how do you invest through all of this At
Speaker 2: the end of the day, this is the setup. You
Speaker 2: believe that the rate is higher. At the end of
Speaker 2: the day, you are seeing that diversions that you haven't
Speaker 2: seen since the nineties. What do you do with that?
Speaker 3: Well, first of all, I think it starts Sonali with
Speaker 3: the sixty to forty model, right, and the sixty to
Speaker 3: forty model is alive, and well, it's how every investor,
Speaker 3: whether you're a wealth investor in high net worth or
Speaker 3: whether you're an institutional investor, should think about investing the
Speaker 3: sixty to forty model. And so within the sixty best
Speaker 3: equities and that's public equities, and that's how we think
Speaker 3: about it traditionally, but public equities have just had back
Speaker 3: to back years of twenty five percent plus gains. You've
Speaker 3: only had that twice in the nineties and the nineteen fifties,
Speaker 3: and so it's probably not going to be repeated next
Speaker 3: year because we've brought forward some of this price action.
Speaker 3: And so I think this is the time where you
Speaker 3: want to say, Okay, equities will make a seven percent
Speaker 3: return in our historical return, and we'll really want to
Speaker 3: lean into private equity, and so think about public and
Speaker 3: private equity for the sixty percent model. Is how you
Speaker 3: want to think about that?
Speaker 2: Wreas we only have time for one more question left here,
Speaker 2: But you said this thing in the commercial break that
Speaker 2: I really want to get to. You told us you
Speaker 2: think basal three end game is dead. You think that
Speaker 2: that has serious implications for credit markets. Your conversations with
Speaker 2: the banks right now bring us inside of them and
Speaker 2: what that says about.
Speaker 3: Where this is. So I do believe that BASWL free
Speaker 3: end game is dead because I believe part of the
Speaker 3: regulations that we're going to see, the regulatory relief that
Speaker 3: we're going to see, is going to also transform into
Speaker 3: what's happening in the banking system. Rather than have these
Speaker 3: onerous rules placed yet on the banks. I think the
Speaker 3: conversations that Jamie Diamond and Donald Trump and you know,
Speaker 3: and and other people in the administration incoming administration that
Speaker 3: with the bankers has has will.
Speaker 1: Lead to that.
Speaker 3: And I know the FED and Vice Fray mc barr
Speaker 3: has a lot to say about this, but I believe
Speaker 3: it's dead. And so what that means, it means the
Speaker 3: cet one ratios of the banks, which are pretty strong
Speaker 3: and pretty large. It's going to unleash a lot of
Speaker 3: ability for the banks to be able to lend. The
Speaker 3: number one place To're going to lend to isle lend
Speaker 3: across the board, but they'll lend loan on loan, and
Speaker 3: so folks like Marathon will get really attractive financing from
Speaker 3: the banking system. And that attractive financing in the form
Speaker 3: of lower rates that we're going to be borrowing at,
Speaker 3: will help drive our private credit returns. And so the
Speaker 3: forty model getting back to sixty forty is not only
Speaker 3: forty percent fixed income, but half of that should be
Speaker 3: in private credit direct lending. We're seeing twice the deal
Speaker 3: flow that we're seeing today now this past quarter than
Speaker 3: we did in the whole last year. And asset based
Speaker 3: lending is alive and well and taking off in a
Speaker 3: big way. And having that financing available from the banks
Speaker 3: is your big boon to all of us in the
Speaker 3: private credit markets.
Speaker 1: All right, Bruce come back in twenty twenty five, will
Speaker 1: you definitely? All right? Happy holidays, holidays, it's great to
Speaker 1: see you. We've really covered a lot, so look forward
Speaker 1: to speaking again. That is Bruce Richards. He is the
Speaker 1: CEO of Marathon