Speaker 1: This is Bloomberg Wall Street Week.
Speaker 2: The global push into infrastructure, breaking the IPO logjam in text.
Speaker 2: The financial stories that shape are work cutting inflation without
Speaker 2: losing jobs. Do we need rate cuts? And if so,
Speaker 2: how many? Investing in a time of geopolitical turmoil.
Speaker 3: Through the eyes of the most influential voices.
Speaker 2: Ten Rogueff economists of Harvard, former FDIC had Shila Bert
Speaker 2: ge CEO, Larry Kulp, San Francisco FED President Mary Daily, Bloomberg.
Speaker 3: Wall Street Week with David Weston from Bloomberg Radio.
Speaker 2: Shuttle diplomacy in the Middle East, protests on college campuses,
Speaker 2: and the FED pretty much stays the course for now.
Speaker 2: This is Bloomberg Wall Street Week. I'm David Weston. This
Speaker 2: week Josh Easterly of Sixth Street on private credit and
Speaker 2: investing in professional sports.
Speaker 1: The fundamentals of sports.
Speaker 2: It's great And if sny beche loss of Rock Creek
Speaker 2: on what US dominance means for emerging market investments.
Speaker 4: Maybe we shouldn't even be using the term emerging Marcus
Speaker 4: because they've diverged from each other so much.
Speaker 2: But we start with all those important data coming out
Speaker 2: this week, and we turn to our very special contribute
Speaker 2: here on Waltreet Week. He is Larry Summers of Harvard,
Speaker 2: So Larry, welcome back. It's been a very consequential week.
Speaker 2: We of course had the FED chair giving a news
Speaker 2: conference with the decision, We had ECI data, and then
Speaker 2: we have the jobs numbers at the end. What do
Speaker 2: you make of it all?
Speaker 5: Look, there's been a lot of movement, but I don't
Speaker 5: know that we're in a fundamentally different place than we
Speaker 5: were at the beginning of the week. We have been
Speaker 5: realizing now for several months that disinflation is not on
Speaker 5: the secure path that the Fed had hoped it would
Speaker 5: be a few months ago. That's why the market has
Speaker 5: moved to go from six cuts this year to about
Speaker 5: one cut this year. And that has been a broadly
Speaker 5: appropriate move on the part of the market. And it
Speaker 5: was a blunder, frankly, of the Fed to be as
Speaker 5: confident as it was about the prospect of disinflation. If
Speaker 5: you add up this week's numbers, what did you get?
Speaker 5: You got an ECI that was disturbing on the high side,
Speaker 5: suggesting that wage inflation wasn't coming down, that service sector
Speaker 5: inflation wasn't likely to be coming down, and the way
Speaker 5: people hoped. You got a housing number suggesting more housing
Speaker 5: inflation than many people had been expecting in the presence
Speaker 5: of seven percent mortgages, and then you got a relatively
Speaker 5: soft number this morning and some corroborative ism evidence for
Speaker 5: that that reminds everybody that the economy may well not
Speaker 5: be on fire, that inflation may not accelerate. So I
Speaker 5: think you're at the end of it all about where
Speaker 5: you were at the beginning of the week, with a
Speaker 5: sense that the most likely thing is no cut or
Speaker 5: a little bit of cutting this year. That there's some
Speaker 5: risk that, as sometimes happens, the economy will slide off suddenly,
Speaker 5: But probably greater than that risk is the no landing
Speaker 5: kind of scenario where inflation remains robust. So I think
Speaker 5: everybody's going to have to be watching all this data
Speaker 5: very closely and ironically, the more we learn, it's not
Speaker 5: really true that the more we know in terms of
Speaker 5: the uncertainties.
Speaker 6: About the economy at this point.
Speaker 2: So I suspect the share power would agree with you,
Speaker 2: we need more data. He likes to wait for data,
Speaker 2: and he's the data dependent.
Speaker 1: As they say.
Speaker 2: At the same time, what I took away at least
Speaker 2: from his news conference this week was a little bit
Speaker 2: different from the no landing possibility. It was sort of
Speaker 2: we're on the right course, it's just going to take
Speaker 2: us longer to get there. We are restrictive in what
Speaker 2: we're doing, and we will get there and we don't
Speaker 2: need to consider hikes. Is that a fair interpretation what
Speaker 2: he said? And if so, is that where he should be.
Speaker 5: He's much more confident the policy is restrictive than is
Speaker 5: warranted in light of the various factors we've talked about
Speaker 5: pushing up the neutral interest rate, in light of good
Speaker 5: reasons to think that spending may be less intrasensitive than
Speaker 5: had previously been supposed, because, for example, higher interest rates
Speaker 5: with all the government's short term debt mean more income
Speaker 5: for people. I think that the Chair is making a
Speaker 5: mistake if he is confident that policy is meaningfully restrictive.
Speaker 6: Right now.
Speaker 5: So yeah, I have never said that I expect the
Speaker 5: next move to be a hike. I just think there's
Speaker 5: more of a possibility that that's going to be necessary
Speaker 5: than I think. He has been the view at the FED,
Speaker 5: and to some extent has been the view in the markets.
Speaker 2: A HILARI. Besides the data, the wealth of data that
Speaker 2: came in. A big topic in the news this week
Speaker 2: was the Japanese yen and what's going on exactly the yen,
Speaker 2: whether the government there is intervening or not intervening to
Speaker 2: sort of support the end when it went up to
Speaker 2: one to sixty. Actually, you have some experience with intervention
Speaker 2: and currencies. Give us where you think we are right now.
Speaker 2: And of course this is related to the FED, because
Speaker 2: part of the issue is if the FED stays higher
Speaker 2: for longer, it supports the strength of the US.
Speaker 5: Dollar given the massive size of the capital Marcus, I
Speaker 5: think the evidence is reasonably clear that intervention doesn't work,
Speaker 5: even in the scales that the Japanese engaged in.
Speaker 6: It's just overwhelmed by the broad.
Speaker 5: Magnitude of private sector capital flows. That said, nations tend
Speaker 5: to intervene when currencies have gotten very far from normal levels,
Speaker 5: and when they've gotten very far from normal levels, they
Speaker 5: sometimes bounce back. So I wouldn't want to confidently presume
Speaker 5: that the end will devalue further from here.
Speaker 6: It could go either way.
Speaker 5: But even if the end does appreciate, I'm going to
Speaker 5: attribute that much more to snapback. Then I'm going to
Speaker 5: attribute it to the efficacy of intervention. But I think
Speaker 5: this points up in important issue, which is that the
Speaker 5: dollar is extremely strong right now. That's been a factor
Speaker 5: that's contributed to our relatively favorable inflation performance.
Speaker 2: I'm sad to say the disputes on college campuses growing
Speaker 2: out of the Israeli Gods' situation have continued some ways
Speaker 2: have gotten worse. Actually this week we saw police going
Speaker 2: in various places here in New York at Columbia, but
Speaker 2: across the country. You've been outspoken in the past on
Speaker 2: this issue as a former college president, yourself at Harvard
Speaker 2: and is now a scholar at Harvard. What do you
Speaker 2: think is going on? And more important, perhaps what should
Speaker 2: the colleges be doing? What should the leadership be doing?
Speaker 1: Right now?
Speaker 5: This is very depressing and worrisome to me. As I've
Speaker 5: said on your show before, David, I think the United
Speaker 5: States is in the most dangerous geopolitical moment we've been
Speaker 5: in probably two generations, given what's happening in China, Russia,
Speaker 5: rod North Korea, and so forth. And it seems to
Speaker 5: me that anybody sitting in one of those countries has
Speaker 5: to be taking great encouragement from the spectacle that is
Speaker 5: being made by our young future elits on so many
Speaker 5: of our leading college campuses, and even more by the
Speaker 5: craven responses that are typifying university leaderships.
Speaker 2: Larry, thank you so very much for being with us,
Speaker 2: says Larry Summer is our special contributor here on at
Speaker 2: Wall Street Week. The equity markets dipped in the middle
Speaker 2: of the league, but came back on Friday, as the
Speaker 2: S and P five hundred added just over half a
Speaker 2: percent for the week to end at fifty one to
Speaker 2: twenty eight. That is just under the Bloomberg Elves consensus
Speaker 2: year end number of fifty one to seventy. The NAZAC
Speaker 2: had a particularly good week, adding one point four to
Speaker 2: three percent, while the yield on the tenure was down
Speaker 2: almost sixteen basis points, closing the way at four point
Speaker 2: five to one percent. Here to take us through it
Speaker 2: all is David Bianco, DWS Equities CIO for Americas. There's David.
Speaker 2: Welcome back. Always great to have you, Thanks for having me.
Speaker 2: Let's start with the jobs. There's a lot of data
Speaker 2: this week. Let's start with the jobs numbers. What did
Speaker 2: they tell you? What did they tell us about where
Speaker 2: we are in the economy.
Speaker 7: It was a really big week and that was a
Speaker 7: very powerful segment from Larry Summers and difficult to follow.
Speaker 7: The Job's report was one of the indicators that we
Speaker 7: got during the week that the economy is slowing, but
Speaker 7: it's still a healthy economy. Employment is still strong, and
Speaker 7: the employment market is still tight. But the FED should
Speaker 7: get a little bit of help from a slowing economy.
Speaker 7: That said, I very much agree with what Larry said
Speaker 7: regarding the Fed and many other things that the Fed
Speaker 7: shouldn't take this slowing for granted. Has mean that inflation
Speaker 7: is going to keep working its way down. They need
Speaker 7: to keep an eye on this risk because the risk
Speaker 7: of inflation staying above their two percent target is still
Speaker 7: very much with us. But the good news this week
Speaker 7: was relief in the bond market. We saw yields across
Speaker 7: the curve come down, especially toward the end of the week,
Speaker 7: and that rally and fixed income rally in equity markets
Speaker 7: upon that lower yield environment.
Speaker 1: What we saw is that May.
Speaker 7: Followed a tough April April showers brought in some mayflowers early.
Speaker 2: Months early in the month. A month so I talked
Speaker 2: about about growth, you said, it's a slowing economy. We
Speaker 2: heard share J. Powell this week say he doesn't see stagflation,
Speaker 2: doesn't need the stag, he doesn't see the flation. Are
Speaker 2: you all concerned about really slowing growth to such a
Speaker 2: degree they should be worried about the economy.
Speaker 1: I'm not worried about the economy yet.
Speaker 7: I would have to really see the job's growth number
Speaker 7: fall below one hundred thousand before I really started getting
Speaker 7: worried about jobs. And the economy is very resilient because
Speaker 7: it's a service oriented economy, and we already went through
Speaker 7: a good amount of inventory liquidation and correction already, and
Speaker 7: that often is a cause of at least small.
Speaker 1: Recession, so a lot of risks.
Speaker 7: There are always tail risks, but this economy I think
Speaker 7: has a real safe distance away from a recession. And
Speaker 7: because of that, I think the fitches stay focus on
Speaker 7: making sure inflation keeps on working its way down to target.
Speaker 7: But things have slowed down. I would say US GDP
Speaker 7: growth is still in a two probably a little bit
Speaker 7: above of two percent trend, and that's healthy, but inflation
Speaker 7: relative to that growth rate is still too high.
Speaker 6: Earnings this season.
Speaker 7: We're another encouraging part of the week, really good news
Speaker 7: out of most tech companies, not bad news, but not
Speaker 7: as good as hoped out of the non tech company.
Speaker 2: We'll talk about that specifically. We've had such a fibrication
Speaker 2: in the SPP five hundred and the stock market generally
Speaker 2: on that. What about earnings for the top guys, the
Speaker 2: big tech asppose of the rest? How do they com
Speaker 2: bear well?
Speaker 7: The biggest or what I call the Grade eight, which
Speaker 7: would cut across big cap tech and communication stocks and
Speaker 7: a couple of consumer discretionary companies. These great eight companies
Speaker 7: continue to lead the market upward, and their earnings growth
Speaker 7: will be over fifty percent on a year on year basis,
Speaker 7: whereas the other four hundred and ninety two companies of
Speaker 7: the s and P only about two percent Ernie's growth
Speaker 7: year on year. So it's a bifurcated market. We're here
Speaker 7: in a bunch of consumer oriented companies, staples, retailers, fast
Speaker 7: food companies saying they're seeing a slowdown, nothing falling off
Speaker 7: a cliff, but slow down and their customers more price conscious.
Speaker 2: David, it's always great to have you here. Thank you
Speaker 2: so much for being here. That's David Bianco of DWS
Speaker 2: coming up, investing in professional sports as an asset class.
Speaker 2: We talk with Josh Easterly of Sixth Street.
Speaker 1: It's recession proof, content, super valuable.
Speaker 2: That's next on Wall Street Week on Bloomberg.
Speaker 3: This is Bloomberg Wall Street Week with David Weston from
Speaker 3: Bloomberg Radio.
Speaker 2: This is Wall Street Week. I'm David Weston. Professional sports
Speaker 2: has wrapped gone from something the very wealthy do for
Speaker 2: fun and prestige to a serious asset class in its
Speaker 2: own right. One of those at the front of the
Speaker 2: sports as an investment movement is Sixth Street and we
Speaker 2: welcome now it's co founding partner, co president and co CIO.
Speaker 2: He is Josh Easterly. Josh, welcome, It's great to have
Speaker 2: you on Wall Street.
Speaker 1: Well, David, thanks for having me here.
Speaker 2: So let's talk about this investing in sports. As I say,
Speaker 2: it's become a real asset class for investment. How is
Speaker 2: that developed? It seems to have happened fairly quickly.
Speaker 1: I don't know if it's fairly quickly or or or
Speaker 1: a long over a long time. The fundamentals are sports
Speaker 1: is great. It's recession proof, content super valuable in a
Speaker 1: day and age where you're doing where there's streaming and
Speaker 1: so life content is super valuable. And what Sixth Street
Speaker 1: we alway does is we finance the ecosystem. So like
Speaker 1: all the things we do at Sixth Street, we pick
Speaker 1: the best risk reward and some of those we buy assets,
Speaker 1: some of them we finance assets. And I'm happy to
Speaker 1: talk about that.
Speaker 2: Well, I'm curious about that that very question, debt versus equity,
Speaker 2: because you've done both.
Speaker 1: We've done both.
Speaker 2: You have equity in some teams, you also have taken
Speaker 2: debt positions. How do you make that decision?
Speaker 1: I think that what offers the best fisk reward. So
Speaker 1: for example, where the owner of the franchise the Bay
Speaker 1: Area Football Club in San Francisco on the Women's Soccer League,
Speaker 1: that was a new franchise, so we stood up that franchise.
Speaker 1: And then on Real Madrid, for example, we financed the stadium.
Speaker 1: Bernabo was redoing that stadium and we provided financing. And
Speaker 1: FC Barcelona we bought Metea rites and then the Santas
Speaker 1: Spurs were a minority equity owner and partners with the
Speaker 1: owners there. So we've done it all.
Speaker 2: You refer to something that it strikes me certain the
Speaker 2: United States and Also in Europe, we've seen the ancillary
Speaker 2: businesses around the sports teams. It's not just the sports
Speaker 2: team anymore then, even with the sports meetings, winning or not,
Speaker 2: but they're also an ancillary business, often around the stadium
Speaker 2: as you have in Madrid. So how do you decide
Speaker 2: how valuable the an businesses around the team?
Speaker 1: So they're super valuable, there's revenue streams in those businesses.
Speaker 1: We own a business with the Cowboys and the Yankees
Speaker 1: called Legends, which provides services to that ecosystem. And that
Speaker 1: ecosystem is growing because their sports owners are trying to
Speaker 1: find different ways to monetize the asset they own sports
Speaker 1: team owners and that could be through concessions, that could
Speaker 1: be through merchandise, and so Legends is our platform that
Speaker 1: we get to participated in that trend.
Speaker 2: Is there a continuing demand for more capital on the
Speaker 2: part of team owners, that is to say, we need
Speaker 2: to raise more capital so we can invest it back
Speaker 2: into some of those ancillary businesses.
Speaker 1: Yeah, so capital. Think about COVID. Take a step back
Speaker 1: and think about COVID for a second. The government supported
Speaker 1: a whole bunch of small businesses. The one sector they
Speaker 1: did not sport, was live sports and so in that
Speaker 1: moment in time, there was a need for capital, and
Speaker 1: that capital still exists. I think sports owners want to
Speaker 1: make the product better for the fans, and so Legends
Speaker 1: is a part of that. Sixth Streets a part of that,
Speaker 1: and it's been a good theme for us.
Speaker 2: What's next? How big can this grow sports investment?
Speaker 1: I think that ecosystem can continually. There's more opportunity in
Speaker 1: that ecosystem, for sure, so I think, and it's going
Speaker 1: to need more capital. And that ecosystem historically hasn't had
Speaker 1: institutional money and now is opening up to institutional money.
Speaker 1: So I think it will continue to grow.
Speaker 2: In any market, I think some things are fully priced
Speaker 2: and some things aren't. And you look for things that
Speaker 2: are not yet fully priced. Where do you see opportunities
Speaker 2: that maybe are not fully priced in the sports area, Well, I.
Speaker 1: Think that's so. I think that's for us. That's a
Speaker 1: really unique thinking about Sixth Street is, as you point out,
Speaker 1: if capitalism is working, things get fully priced and it
Speaker 1: goes through cycles and then they feel cheap and being
Speaker 1: able to have flexible capital across the capital structure, from
Speaker 1: buying assets to buying revenues, streams the financiing stadiums to
Speaker 1: buying teams to do a minority and majority control investments.
Speaker 1: I think that's the power of the platform is we
Speaker 1: can actually, you know, when things become fully priced, we
Speaker 1: can move on. Who do you compete with all different
Speaker 1: types of people? That being said, there isn't that much
Speaker 1: institutional capital in this space right now, and or general
Speaker 1: partners are gps that have built brands. I think there's
Speaker 1: only a handful, including Six Street, has really built brands
Speaker 1: in this fource ecosystem.
Speaker 2: How related is the success of the team to the
Speaker 2: value asset I mean, I'll pick on one that you mentioned. Actually,
Speaker 2: Dallas Cowboys very very valuable as a business. I understand
Speaker 2: it maybe one of the most valuable that there is.
Speaker 2: They won a Super Bowl in a long time, so
Speaker 2: maybe it's not so essentially a win a super Bowl
Speaker 2: to really deliver asset value.
Speaker 1: Well, I think our experience the Cowboys are a partner
Speaker 1: and Legends, and our experience with the Cowboys is they
Speaker 1: have an excellent management team Jerry Jones and Steven and
Speaker 1: Jared Junior as an excellent management team. My guess is
Speaker 1: a Super Bowl is going to come their way. But
Speaker 1: it's an excellent group of folks and we're happy to
Speaker 1: be partners with them.
Speaker 2: So, Josh, let's talk more broadly about private credit. There's
Speaker 2: an awful lot of talk about it right now. It's
Speaker 2: grown really fast. At the same time, as you look
Speaker 2: at the overall size of it, it's still relatively modest
Speaker 2: compared to a lot of data out there.
Speaker 1: Yeah, I mean, I think when you think when we
Speaker 1: think about private credit, I think there's a lot of
Speaker 1: growth areas. And it really started in the lower middle market,
Speaker 1: non investment grade market. Now is expanded into the upper
Speaker 1: middle market and at some point it's going and we're
Speaker 1: at the beginning to continue on the sports talk when
Speaker 1: the first and second ending on the non corporate lane.
Speaker 1: So think about asset backfinance or asset based finance for
Speaker 1: non corporate.
Speaker 2: So let's talk about that. It started the middle market
Speaker 2: and some risk of your lending, it's grown beyond that.
Speaker 2: Why is that, I mean, why is it that you
Speaker 2: can take that away from banks or from syndicated loans.
Speaker 6: Yeah.
Speaker 1: I'll argue with the premises risk here, I don't think
Speaker 1: it's actually riskier when you look at the loss rates.
Speaker 1: The loss rates are on par with the leverage low
Speaker 1: market historically, and this actually has better loss rates than
Speaker 1: the high old market, about fifty basis points less on
Speaker 1: the high old market, and it offers better spread.
Speaker 2: Are you seeing the sorts of rates of growth that
Speaker 2: we're seeing overall? I've heard it said that it's going
Speaker 2: to grow like fifteen percent a year for the next
Speaker 2: few years.
Speaker 1: Yeah, Look, I think so. I think private credit somewhere
Speaker 1: on the non investment grade corporate size between one point
Speaker 1: five and two joint dollars. But there's all these growth
Speaker 1: aspects of private credit outside of non investment grade corporate,
Speaker 1: including investment grade non corporate. So think of it as
Speaker 1: consumer receivables, figure it as credit cards, mortgages, and then
Speaker 1: the non investment grade tranches. So those growth rates seem
Speaker 1: right to me. But there's there's large areas that private
Speaker 1: credit continue to expand in.
Speaker 2: So so what about the risk factor you were saying,
Speaker 2: it's a mistake to say that this is risky than others.
Speaker 1: So look, I think this has been a little bit
Speaker 1: of the narrative from from banks who are trying to
Speaker 1: protect their their syndicated business. But I think when you
Speaker 1: look at private credit, private credit is unique compared to
Speaker 1: where banks banks have a business we're studying where actually
Speaker 1: we study business models is a living and private credit
Speaker 1: unlike banks, have match funding, and so banks quite frankly,
Speaker 1: they lived long. They fund short with deposits and moments
Speaker 1: of crisis, deposits come out of system. Private credits match funded.
Speaker 1: So the asset class itself is more durable than those
Speaker 1: same loans sitting in the banks, mostly because of the
Speaker 1: funding model.
Speaker 2: They can't be a run on your bank, so to speak,
Speaker 2: can't be a run on our bank. Depositors can't come
Speaker 2: and say I want one buy back now because it's
Speaker 2: locked up for brit Look.
Speaker 1: Look what happened in Silicon Valley Bank. Not to name names,
Speaker 1: but that was a lot of their assets for high
Speaker 1: quality assets. A lot of them were actually government guaranteed mortgages.
Speaker 1: We could all agree those didn't have risk on the
Speaker 1: assets side, but they had a business model issue which
Speaker 1: is a really funding issue, which was their funding ran
Speaker 1: from private credits.
Speaker 2: Is not a secret anymore. I mean you read the Bloomberg.
Speaker 2: Any given day there's an expansion of For I have
Speaker 2: a credit, that must mean there's more competition in your sphere.
Speaker 2: Does that actually push you to take bigger risks because
Speaker 2: other people are willing to do things maybe you otherwise
Speaker 2: wouldn't be well.
Speaker 1: Sixth Street were investors first, So when I think about
Speaker 1: our business, so when we think about our business, we
Speaker 1: have a way of thinking about credit visk reward. We're
Speaker 1: going to continue to be investors first. That's how markets work.
Speaker 1: And so what I would say is on the competition side,
Speaker 1: there's been more competition that total addressable market has grown significantly,
Speaker 1: where so at the same time it's more capital the
Speaker 1: addressable market has grown too, and so that fills I
Speaker 1: don't know if the competition issues, it feels as cute
Speaker 1: as one one.
Speaker 2: I think, as you say, there's some criticism. We're questioning
Speaker 2: from some of the big banks, are you taking market
Speaker 2: share for them? We've heard Calm color or Ubs raised
Speaker 2: questions about it. We've heard Jane Fraser Rais of questions
Speaker 2: when it comes to the insurance part of it, at least,
Speaker 2: are you taking market share every day from banks? And
Speaker 2: is that what actually the regulators do you think want?
Speaker 6: Yeah?
Speaker 1: So I think that again, I think this was the
Speaker 1: intended consequence for the regulation, which was to diffuse the
Speaker 1: risk where taxpayers had written put people I think can
Speaker 1: remember can remember the seven hundred billion dollars and TARP
Speaker 1: that had to recapital those banks. So is there What
Speaker 1: I would say is I think there is a little
Speaker 1: bit of protectionism as it relates to the bank model
Speaker 1: again where students of business models and in the non
Speaker 1: investment grade corporate side, banks are in the moving business,
Speaker 1: not the storage business, and so they have a lot
Speaker 1: of fees in that business, and users of capital rather
Speaker 1: go to the end user and provider of capital than
Speaker 1: have to go through an intermediary, which has been the
Speaker 1: historical leverage loan model.
Speaker 2: There is, I think you'll correct me if I'm wrong,
Speaker 2: a certain lack of transparency. We saw the IMF come
Speaker 2: out just recently and say there's some risks there because
Speaker 2: we don't necessarily know the values of some of the loans.
Speaker 2: They don't get marked to marketers often, and the market
Speaker 2: to market may not be what you would have in
Speaker 2: an open public market. Is there risk? There is an
Speaker 2: IMF right that there's a problem.
Speaker 1: First of all, I think again I would argue with
Speaker 1: the premise investment accounting, has you marked the market air
Speaker 1: loans that bank accounting on the other hand, no offense
Speaker 1: to banks out there use held a maturity county and
Speaker 1: don't mark their loans, and they have a less storable
Speaker 1: funding model. And so I don't think you can look
Speaker 1: at the assets side without looking at the liability side.
Speaker 1: And private credit has a much superior business model given
Speaker 1: the durability of funding. So again I don't see it.
Speaker 1: I'm a little bit we're talking in our book a
Speaker 1: little bit, but when you look at the overall business model,
Speaker 1: a much more durable and safe business model for investors.
Speaker 2: How much do you partner with banks and so what
Speaker 2: you do, because that's actually something that people have been
Speaker 2: concerned about. IMF mentioned actually the exposure of some of
Speaker 2: the regular banks perhaps to private credit.
Speaker 1: Yeah, so we partner with banks. Banks are a big
Speaker 1: lender to the space. That is what regulators wanted. They
Speaker 1: get better risk weighted assets treatment, but they're only lending
Speaker 1: forty to fifty percent LTV on the underlying loan we're making.
Speaker 1: So there's a whole bunch of capital that sits behind
Speaker 1: them and subordination. And so you could think about a
Speaker 1: world where if every loan that the industry underwrote defaulted,
Speaker 1: but there was a fifty percent of recovery banks wouldn't
Speaker 1: be harmed again. I think what banks are doing is
Speaker 1: really smart and really prune in and what regulators wanted
Speaker 1: to do.
Speaker 2: Okay, Josh, is really great to have you here. Thank
Speaker 2: you so much. David. That is Josh Easterly of Sixth Street.
Speaker 2: Coming up on the eve of the Milken Institute Conference
Speaker 2: in Los Angeles, we talk with Offsni Bechelists of Rock
Speaker 2: Creek about what the focus on investing in the United
Speaker 2: States means for emerging markets.
Speaker 4: I think when you put emerging market as one term
Speaker 4: and generalize, it hides the goods, the ugly, and the
Speaker 4: in between.
Speaker 2: That's next on Wall Street Week on Bloomberg.
Speaker 3: This is Bloomberg Wall Street Week with David Weston from
Speaker 3: Bloomberg Radio.
Speaker 2: This is Wall Street Week. I'm David Weston. Economic challenges
Speaker 2: in China and geopolitical uncertainties have made the United States
Speaker 2: the place to go for investors. But what does this
Speaker 2: US dominant world mean for those investing in emerging markets.
Speaker 2: To explore the world of em investing, we welcome back
Speaker 2: now of Sonny Bachelists singing on and founder of Rock Creek.
Speaker 2: So something always a delight to have you with us.
Speaker 2: You know emerging market investing better than most. Give us
Speaker 2: your sense of where that is right now, because all
Speaker 2: we hear about is it's all about the United States
Speaker 2: investing United States, the strengths in the US dollar.
Speaker 4: Great to be with you, David, And of course, as
Speaker 4: our letter said recently, that US exceptionalism or US dynamic
Speaker 4: investment theme is still going very, very strong, and that's
Speaker 4: really for no reason except we have great innovation in
Speaker 4: the US, we have great technology AI and then of
Speaker 4: course rule of law. When it comes to financial markets,
Speaker 4: emerging markets where I have been investing for a long time,
Speaker 4: but I have worked in also during my days at
Speaker 4: the World Bank, I think are going through a phase
Speaker 4: where maybe we shouldn't even be using the term emerging
Speaker 4: markets because they've diverged from each other so much. Obviously,
Speaker 4: the big elephant in the room is always China, and
Speaker 4: that used to account for forty percent of the equity indices.
Speaker 4: Today it is accounting for only twenty five percent. But
Speaker 4: what you're seeing through the same themes of American growth
Speaker 4: in our economy and growth in our equity markets, and
Speaker 4: this sort of term exceptionalism, if you want to call
Speaker 4: it that is also impactful in emerging markets. If you
Speaker 4: go to Korea and Taiwan, which now account for thirty
Speaker 4: percent of emerging markets, they have done very well. If
Speaker 4: you look at Taiwan, whether you look at one year,
Speaker 4: three year, five years, ten years, twenty years, it's always
Speaker 4: been very competitive with the US. But why because the
Speaker 4: goods that Taiwan has been producing, mainly microchips, have been
Speaker 4: something that has been very much part of this theme
Speaker 4: of innovation. If you go to India in the last
Speaker 4: five years, ten years, similarly, the economy done relatively well.
Speaker 4: Obviously we had elections there recently, but the markets continue
Speaker 4: to do very very well and sort of run between
Speaker 4: nine to eleven percent, depending on which periods you are
Speaker 4: thinking about. And now with French shoring which is definitely
Speaker 4: impacting India positively and other countries like Mexico positively, where
Speaker 4: are terms of trade with Mexico have changed, and Mexico
Speaker 4: of course is also benefiting from FDI for this French
Speaker 4: shoring as well as remistances from abroad, you see very
Speaker 4: different kinds of markets in the last few years in Mexico.
Speaker 4: So I think when you put emerging markets as one
Speaker 4: term and generalize. It hides the goods, the ugly, and
Speaker 4: the in between. And I think where things have not
Speaker 4: gone so well in emerging markets is where, for example,
Speaker 4: the continent of Africa where we opened for much bigger growth,
Speaker 4: parts of Latin America that are not necessarily commodity rich
Speaker 4: or very close to the US in terms of French
Speaker 4: shoring that have not benefited from these from these kinds
Speaker 4: of themes, and those countries have been left behind, especially
Speaker 4: since COVID and dragged down the markets together with China
Speaker 4: and drag down, drag down growth in these countries and
Speaker 4: the potential for their populations.
Speaker 2: So that was a terrific laying out of the alternative. So,
Speaker 2: if I can sort of simplify it a little bit, if
Speaker 2: this or a horse race, We've got some steady ones
Speaker 2: that have been investments destinations for some times, such as
Speaker 2: South Korea, such as Japan, such as i Wan. You
Speaker 2: have India, which it sounds like it's sort of an
Speaker 2: up and comer as it were, and perhaps Mexico as well.
Speaker 2: Where would you rate this in the horse race in
Speaker 2: terms of the change in position, Which ones are coming
Speaker 2: up the fastest?
Speaker 4: Well, I think I think Definitely, India is coming up
Speaker 4: the fastest, but also let's not forget if you looked
Speaker 4: at India the last ten years, the returns were really
Speaker 4: really strong as well. Taiwan is the big question mark
Speaker 4: given the geopolitics and it's very very rough location in
Speaker 4: the world, being right next to China and if and
Speaker 4: when there could be a military threat there and what
Speaker 4: is going on despite that is the fact that their
Speaker 4: companies are doing well by producing in Taiwan but also
Speaker 4: now investing in the US and other locations to produce
Speaker 4: micro chips. Obviously, they have not been as fast and
Speaker 4: as as efficient as they would have liked outside of Taiwan,
Speaker 4: but I think that's a trend where we might see
Speaker 4: these Taiwanese companies continue to do well, but maybe not
Speaker 4: in Taiwan.
Speaker 2: So I talk about the role of currency in all
Speaker 2: of this, because obviously those are investments in different currencies.
Speaker 2: As I understand it, right now, the FED has been
Speaker 2: pretty dominant in terms of their setting rate policy, and
Speaker 2: that sort of determines the through the dollar. But when
Speaker 2: you talk about other currencies, when you invest in a
Speaker 2: place like India, for example, or in Mexico, how do
Speaker 2: you account for currency volatilely do you hedge against that?
Speaker 2: And how expensive is that?
Speaker 4: So two or three things. Obviously, with the really strong
Speaker 4: policies that Chairman Power has had in the US, our
Speaker 4: economy has done well, but also our currency has stayed
Speaker 4: very strong. The interesting things you said is our currency
Speaker 4: has stayed quite strong relative to other DM currencies. We
Speaker 4: saw with the evaluation of yen, and what the interventions
Speaker 4: in the recent weeks in Japan, still dealing with weaker
Speaker 4: yen than the Japanese government would like. Europe obviously is
Speaker 4: also going through its own relatively rough patches because growth
Speaker 4: has not taken up, has not gone up as much
Speaker 4: as they would have liked to. The emerging markets have
Speaker 4: been a really interesting spot. I think one thing that
Speaker 4: has happened in the last few years is that the
Speaker 4: quality of your central bankers has increased, has improved a
Speaker 4: lot in emerging markets, so you do have really good
Speaker 4: people running them. And you may remember before you know,
Speaker 4: in the beginning of the rate increases, they were maybe
Speaker 4: earlier than us in the US to increase rates when
Speaker 4: they're more used to having these terrible inflationary periods. So
Speaker 4: when they saw inflation come they increased rates earlier, and
Speaker 4: so when we look at their currencies, it is also
Speaker 4: a tale of two cities where you see, for example,
Speaker 4: relatively relatively i should say, stronger currencies again in places
Speaker 4: like India, places like Mexico, places like even China has
Speaker 4: had you know, again depending on which side of the
Speaker 4: of the ocean you're looking at. But then you have
Speaker 4: other countries that have not benefited, except for maybe some
Speaker 4: commodity rich countries around emerging markets. Despite the emergen Now
Speaker 4: two things about the currency factor. The currencies are stronger.
Speaker 4: That impacts more of the bond markets. So you have
Speaker 4: seen bond markets in emerging markets over the last ten years.
Speaker 4: The size has increased hugely, both local bond markets where
Speaker 4: local people invest, as well as foreign markets. The emerging
Speaker 4: markets industries are close to natree trillion or thereabouts, So
Speaker 4: the size of these markets have increased, and people do
Speaker 4: look at currency very much. When they look at them,
Speaker 4: you look at them the bond markets. On the equity markets,
Speaker 4: currency has not necessarily moved the needle too much, except
Speaker 4: you could argue with outflows for emerging markets sometimes when
Speaker 4: their own currency is stronger relative to the dollars, you
Speaker 4: see more of an outflow. And last point I want
Speaker 4: to make on that is in China where there has
Speaker 4: been very big outflows and people have maxed outs to
Speaker 4: the amount they could to bring savings outside of China.
Speaker 2: So do you spend the money to hedge when you
Speaker 2: invest in e merging markets? Oh?
Speaker 4: Sorry, I did not answer the hedging. Hedging is extremely
Speaker 4: expensive in emerging markets, yes, except for the much larger,
Speaker 4: much larger countries. Even there, the relative cost of hedging
Speaker 4: generally means that you don't hedge too much. So the cost, yes,
Speaker 4: generally makes it prohibitive to go into these currencies. And
Speaker 4: if the market returns had been so much higher than
Speaker 4: what has actually transpired, maybe you would have you would
Speaker 4: have been okay with the cost of hedging. But given
Speaker 4: that their markets in general have been if you look
Speaker 4: at emerging markets as a totality and you look at
Speaker 4: the returns let's say over the last ten years, and
Speaker 4: you are just up a few percent, that definitely does
Speaker 4: not cover costs of currency edging.
Speaker 2: Sign has been terribly helpful as always, Thank you so much.
Speaker 2: That is a Sonny Besch Loss of Rock Creek, fal
Speaker 2: Staff and Shakespeare's Henry the Fourth taught us that the
Speaker 2: better part of valor is discretion, which I take to
Speaker 2: mean that sometimes it's best, perhaps even bravest, to give
Speaker 2: up the fight rather than continue to lose. We saw
Speaker 2: that this week when a police officer in upstate New
Speaker 2: York tried to pull over the district attorney from Monroe
Speaker 2: County and met resistance from a less than contrite prosecutor,
Speaker 2: only to have her realize that backing down was her
Speaker 2: better course.
Speaker 6: I am so sorry.
Speaker 1: What I did was wrong.
Speaker 3: No excuse is.
Speaker 6: I take full responsibility for my actions.
Speaker 2: I fell short of the values I've held for my
Speaker 2: entire thirty three year career. We've also seen it in
Speaker 2: the drama that is Paramount International. Cherry Ridstone fought hard
Speaker 2: for control of the company her father had founded, stuck
Speaker 2: with it even as its market value fell, and now
Speaker 2: has concluded that the better part of valor for her
Speaker 2: is to sell it, and this week moved out the
Speaker 2: CEO just before the earning skull to facilitate the deal.
Speaker 8: Cherry Redstone here is desperately trying to get a deal
Speaker 8: done with sky Dance, which is actually had to get
Speaker 8: rid of Bob Bakish, who was opposing the deal pretty
Speaker 8: vocally from the get goal.
Speaker 2: Fencher J. Powell showed both valor and discretion this week,
Speaker 2: valor in sticking to the Fed's course, but discretion in
Speaker 2: admitting that it was taking longer than they'd thought to
Speaker 2: get to their destination.
Speaker 9: I do think it's clear that policy is restrictive, and
Speaker 9: we believe over time it will be sufficiently restrictive. That
Speaker 9: will be a question that the data will have to answer.
Speaker 9: I think it's unlikely that the next policy rate move
Speaker 9: will be a hike.
Speaker 2: We definitely saw a discretion triumphing over valor in Major
Speaker 2: League Baseball's decision this week to dump all together those
Speaker 2: new uniforms they'd worked so hard on with Nike, the
Speaker 2: uniforms that showed us just a little too much of
Speaker 2: our favorite baseball players. It's painful to admit our mistakes,
Speaker 2: even if doing so will put them behind us. I
Speaker 2: learned this the hard way when I ran ABC News
Speaker 2: and we enlisted Leonardo DiCaprio to help us with an
Speaker 2: Earth Day special. This was back in the days of yore,
Speaker 2: when journalists were trying to make a line between themselves
Speaker 2: and entertainment celebrities, and we took it a bit too
Speaker 2: far by arranging for mister DiCaprio, fresh off his performance
Speaker 2: in The Titanic, to go to the White House to
Speaker 2: interview President Clinton. It caused an uproar, but I resisted
Speaker 2: calls for me to back down and admitted it all
Speaker 2: bit a mistake, insisting that we had been trying to
Speaker 2: get an audience for a serious news program about climate
Speaker 2: and for my troubles was rewarded by sitting down front
Speaker 2: at a black tie dinner as the President of the
Speaker 2: United States. Got some laughs, very much at my expense.
Speaker 2: I just want to say this to David Weston. You know.
Speaker 6: I've been in a lot of tough spots.
Speaker 1: Don't let this get you down.
Speaker 5: You may not be America's newsleader, but you're king of
Speaker 5: the world.
Speaker 2: It sure didn't feel like I was the king of
Speaker 2: anything that night. That does it For this episode of
Speaker 2: Wall Street Week, I'm David Weston.
Speaker 6: This is Bloomberg.
Speaker 2: See you next week.