Speaker 1: This is Bloomberg Business Wait inside from the reporters and
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Speaker 1: global business, finance and tech news. The Bloomberg Business Week
Speaker 1: Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
Speaker 2: All Right, she walks in the room, and I get
Speaker 2: excited because she is just one of.
Speaker 3: Our rock stars around here.
Speaker 2: And I know we kind of say sometimes rockstar a lot,
Speaker 2: but we really mean it with this one.
Speaker 3: Zanolie Bosik is in the house. She's a Bloomberg News
Speaker 3: Wall Street reporter.
Speaker 2: She's had quite a couple of weeks between bank earnings,
Speaker 2: interview with Morgan Stanley's James Gormant, and then tonight, no
Speaker 2: Tomorrow Night, she has the next big Risk. She also
Speaker 2: had a conversation with Blackstone John Gray. I feel like
Speaker 2: you're super there's.
Speaker 4: One person for whom hustle culture isn't.
Speaker 5: Now.
Speaker 3: It's really remarkable.
Speaker 2: And what's great is I feel like you get this
Speaker 2: wonderful big picture when you talk with these big names
Speaker 2: from different walks of the financial world about like kind
Speaker 2: of what's really going on.
Speaker 6: It's my favorite project of the year, beyond everything else.
Speaker 6: By a landslide. And it's because it's the simplest question
Speaker 6: in the world. It's what the money managers are hired
Speaker 6: to do, what is the next big risk because their
Speaker 6: business is the business of managing risks. Every time we
Speaker 6: do get different answers, this time around Boas Weinstein. He's
Speaker 6: a very famous credit manager here who is known for
Speaker 6: making money in turbulent times. He's worried about the next
Speaker 6: market sell off, partially because of quantitative tightening. You have Idolu,
Speaker 6: the head of the global private bank at City Group, right,
Speaker 6: she is frankly the first one in the three years
Speaker 6: of this project who has brought up geopolitical risks as
Speaker 6: an issue.
Speaker 4: Shocker.
Speaker 2: I mean, I feel like the last year or so
Speaker 2: easily two years, right, that it's been such a big
Speaker 2: part of our narrative.
Speaker 6: More surprising to me that every time I ask the question,
Speaker 6: this is the first time it was brought up in
Speaker 6: three years, even in the middle of a war. So
Speaker 6: you know, she brought up China tensions with the United States.
Speaker 6: And David Rubinstein, who is the co under of Carlisle Group,
Speaker 6: also billionaire himself, had you know, worked in Washington for
Speaker 6: a long time he's worked back Bloomberg Colley, he does
Speaker 6: have the two shows for Bloomberg.
Speaker 4: Right.
Speaker 6: He also believes that inequality within the United States is
Speaker 6: a big issue as well as among nations that have
Speaker 6: a lot of money and nations that do not have
Speaker 6: a lot of money, and the tension that is going
Speaker 6: to create in the world.
Speaker 2: Can we just run a little bit of the interview
Speaker 2: you do with bo As Weinstein and what he had
Speaker 2: to say about the next big market plunge.
Speaker 3: Let's play it for everybody.
Speaker 7: The next time there's a serious selloff, which is which
Speaker 7: is not just a three week affair. There are a
Speaker 7: number of aspects from the behavioral to also that the
Speaker 7: Fed is not your friend and in fact will not
Speaker 7: be able to come to the rescue of the market
Speaker 7: in the same way because of what's going on now.
Speaker 3: All right, that of course is Boas Weinstein.
Speaker 2: But I love his picture and I think that really
Speaker 2: plays to all of the money plump pumped into the
Speaker 2: economy and then as rates have gone up, just that
Speaker 2: major reset on assets.
Speaker 6: Yeah, and we started with too, because you know, on
Speaker 6: one hand, people are worried about a recession. He's it's
Speaker 6: not about a recession. It's about the market structure that's
Speaker 6: been created after so much easy money. The point he's
Speaker 6: making is there are a lot of investors that have
Speaker 6: under the market that are buying products that didn't exist
Speaker 6: ten years ago. They're buying junk bond funds in scale,
Speaker 6: each he has in scale, and you know some of
Speaker 6: the things you're seeing them buy into, even private credit,
Speaker 6: which is trying to open to retail investors. They existed
Speaker 6: in a zero rate world and in a world where
Speaker 6: rates are much higher, and some of these companies are
Speaker 6: being charged thirteen percent on their debt or more.
Speaker 3: Very different environment, very.
Speaker 6: Different environment, and it's one that most investors are not
Speaker 6: used to, which is part of the reason he thinks
Speaker 6: a saleoff, should there be a significant one, would be exacerbated.
Speaker 8: We also have continued inflation concerns or really David Rubinstein
Speaker 8: told you like inflation is our only choice since the
Speaker 8: debt of this country has grown thirty two x since
Speaker 8: he was in the White House.
Speaker 6: Yes, it's incredible because if you think about it, you know,
Speaker 6: with the Fed, we're talking about the monetary policy side
Speaker 6: of things. David not only talks about the monetary which
Speaker 6: is controlling inflation, through interest rates. What he's talking about
Speaker 6: here is the fiscal problem we've created for ourselves here.
Speaker 6: And you know, he actually brought up an issue that
Speaker 6: Muhammad Alarian had brought up in this project a while back,
Speaker 6: which is this idea that the American dream might be eroded.
Speaker 6: They both gave different reasons, but David's reason, David Rubinstein's
Speaker 6: reason is in part because inequality would be exacerbated in
Speaker 6: an era where you have to only really inflate your
Speaker 6: way out of this thirty two trillion dollars debt problem.
Speaker 6: I guess what, who's watching it now that the debt
Speaker 6: ceiling has been raised. Investors, large investors who worry about
Speaker 6: the long term future of the United States.
Speaker 4: Are the only people paying attention to Etentially.
Speaker 2: Yeah, but do you remember a time where I feel
Speaker 2: like we spent years that every conversation was about the
Speaker 2: debt load of the United States and concerns about it,
Speaker 2: and then it just kind of went away.
Speaker 6: Well, I mean the idea here that the debt servicing
Speaker 6: costs for the United States are going to surpass the
Speaker 6: defense budget of the United States. Interest rates were low then,
Speaker 6: interest rates are higher now, meaning the cost of debt
Speaker 6: is also higher. We're paying multiple more for our debt
Speaker 6: than we are for American health care, American education. Does
Speaker 6: that make sense? I think that every part of the
Speaker 6: isle that's massive, essentially in the things.
Speaker 2: That we need to can we also go towards your
Speaker 2: interview with Jonathan Gray.
Speaker 4: Yes, talk to se what a day by they what
Speaker 4: a day to interview him?
Speaker 8: I mean on the day that a Blackstones assets under management,
Speaker 8: I guess you'd call it that in private equitcase, more
Speaker 8: than a trillion dollars and I think CBC raised more
Speaker 8: than twenty six billion dollars for one fund.
Speaker 4: Apollows on their way to that level. But so much cash, it's.
Speaker 6: An incredible thing to say, oh, you know, Blackstone, instead
Speaker 6: of raising twenty five billion dollars, they're going to raise,
Speaker 6: you know, in the heighth in the you know, the
Speaker 6: low twenty some billion dollars instead for the corporate corporate
Speaker 6: private equity fund. And that's spooky to I mean, yeah.
Speaker 4: That's exactly what grip right, only in the low twenties.
Speaker 6: Yeah, you know Steve short spend, Yeah, exactly. And that's
Speaker 6: the thing about it. I mean, yes, if you have
Speaker 6: two hundred billion dollars of dry powder, which is money
Speaker 6: to spend at Blackstone, you know that extra marginal twenty
Speaker 6: dollars twenty billion dollars. I don't know, but you know
Speaker 6: John Gray's point that he's making similar to all the banks,
Speaker 6: where he really feels like we're hitting a precipice here
Speaker 6: where things can start to come back. Deal activity can
Speaker 6: come back, they can start putting money to work, they
Speaker 6: can start selling assets, and that's how they make money.
Speaker 6: Because the profitability did drop by almost forty percent, and
Speaker 6: part of that is because of that muted deal making.
Speaker 2: Can we assume if they're raising more money or new funds,
Speaker 2: that they are the finding places to put at work
Speaker 2: and they are finding exit strategies because I always wonder
Speaker 2: about the pressure that they're getting from investors to kind
Speaker 2: of put that money to work.
Speaker 4: Yeah, they're not finding exits or to.
Speaker 3: Exit, right.
Speaker 4: Yeah.
Speaker 6: Well, it's interesting that FT had a really good point
Speaker 6: about Blackstone that over time they're the best barometer to
Speaker 6: use of their returns really is above fifteen percent, and
Speaker 6: so you know they've done well by being patient. You
Speaker 6: don't want to sell into a bad market either. But
Speaker 6: if you're not Blackstone and you don't you know, have
Speaker 6: your pick of the crop with whoever you're hiring. Apparently
Speaker 6: their acceptance rate is zero zero three percent now point
Speaker 6: zero zero three percent. You know, wait so that you
Speaker 6: can point zero zero three percent to get into Blackstone.
Speaker 6: That's how hard it is. Point zero zero three percent
Speaker 6: of all analyst applicants get in. It used to be
Speaker 6: two years ago point four percent. That's how hard it
Speaker 6: is to get a job at Blackstone now. But if
Speaker 6: you are other private equity firms, it could be difficult
Speaker 6: because you have to find money to get those deals
Speaker 6: to work. You have to find debt financing.
Speaker 4: If you do have money, you can do deals.
Speaker 8: Scott Kleiman at Apollo, when he was talking about you
Speaker 8: know how much money they're raising, said that they're one
Speaker 8: of the few firms that can pay play offense in
Speaker 8: this area. And he said, our current pipeline of opportunities
Speaker 8: is about three times a year ago and growing.
Speaker 6: I love it when Matt drops names. That is indeed
Speaker 6: the co president of Apollo, one of the most longest
Speaker 6: standing private equity executives in the world. But to the point,
Speaker 6: also on private equity, that's kind of why a lot
Speaker 6: of these firms have brought and beyond private equity. Even
Speaker 6: Apollo is much bigger in private credit.
Speaker 3: Blackstone is They're massive in private credit, right massive.
Speaker 6: It's more of their business and private equity. And the
Speaker 6: point they make is there's only so much skill you
Speaker 6: could have in private equity, because you don't want to
Speaker 6: raise so much money that you can't put into work.
Speaker 6: That is, but to the point that you're making, they
Speaker 6: do have places to put it.
Speaker 2: To work, you know, on the private market. Matt's obsessed.
Speaker 2: I'm obsessed with it. I just find it fascinating. You know,
Speaker 2: we go out to milk and like it's all that
Speaker 2: anybody ever talks about. I feel like the last two
Speaker 2: years it's just been about private lending. Are there any
Speaker 2: concerns nervousness? As you say, It's like, you know, it's
Speaker 2: the interest rate picture and environment changes. It's more expensive
Speaker 2: for those companies that have.
Speaker 3: Borrowed, right Yeah.
Speaker 6: And it's you know, all of these companies, you know, Blackstone, Apollo, KKR,
Speaker 6: they have diversified well well well well beyond private equity
Speaker 6: at this point, they have huge businesses in all these
Speaker 6: other places. They're just big, massive private investment firms. You know,
Speaker 6: some of the biggest investments that that Blackstone is making
Speaker 6: outside of outside of real estate data centers. They're buying
Speaker 6: data centers because they believe that it will be fueled
Speaker 6: by AI. Right, so I think they're not investing in
Speaker 6: the ways that they used to invest in the past.
Speaker 6: They have changed. You know, what's the next trillion look like?
Speaker 6: Laststone is a much bigger firm than a lot of
Speaker 6: its rivals.
Speaker 8: By the way, I was talking with Moody's head of
Speaker 8: cohed of Banking, Global Banking this morning.
Speaker 4: After Cotigue.
Speaker 8: She told me she's not just covering banks anymore. She's
Speaker 8: covering private lenders because that area has.
Speaker 6: Also you could feel him wanting to reach outside the
Speaker 6: banks because so much lending.
Speaker 8: But I wonder for your next year series of the risks, right,
Speaker 8: is this going to be a problem if so much
Speaker 8: lending goes away from banks and into what she called
Speaker 8: the shaf banking.
Speaker 3: System, even though they don't like being called that.
Speaker 4: Isn't that a concern?
Speaker 6: I mean boas once Scene brought it up today, the
Speaker 6: private credit funds. He said it certainly said, you know,
Speaker 6: lending it seven percent is way different than Leney at
Speaker 6: thirty percent. And another thing I'm working on right now
Speaker 6: is starting to calculate just how much of the bankruptcies
Speaker 6: we're seeing or private equity backed. Because we are seeing
Speaker 6: the point a lot of bankruptcies, many of these companies
Speaker 6: are backed by private equity firms. There are going to
Speaker 6: be losses, and we don't even know to the extent
Speaker 6: to which we will see that across private aquitly.
Speaker 3: I mean, I think about regional banking.
Speaker 2: I feel like the crisis at least so far has
Speaker 2: been contained because so much lending middle market right is
Speaker 2: from these private credit firms.
Speaker 4: And I do wonder at a high price.
Speaker 3: Yeah, that's.
Speaker 6: The industry that I'm learning is that when something is
Speaker 6: going wrong, you can throw more money at it.
Speaker 2: Don't miss the Next Big Risk with Shinale Friday, eight
Speaker 2: thirty pm Wall Street Time on Bloomberg Television.
Speaker 3: Shanelli Bosik truly a rock star. This is Bloomberg.
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Speaker 3: All right, everybody, we were all over Caravana yesterday.
Speaker 2: Weird reason.
Speaker 3: I mean it was off stratospheric if you will, right,
Speaker 3: in terms.
Speaker 8: Of closed up forty percent yesterday normal day, one thousand
Speaker 8: percent year to date.
Speaker 3: So and and it's massively profitable.
Speaker 8: No, they don't make a net profit, but they talk
Speaker 8: a lot about their EBITDA growth, which is as David
Speaker 8: Welch points out, it's kind of silly to mention ebit
Speaker 8: DA when your interest expenses are the big problem.
Speaker 3: Exactly. Good point. Well, so you had an interview today.
Speaker 8: Yeah, I spoke with the CEO of Carvana Ernie Garcia
Speaker 8: after he clinched a really important deal that's gonna reduce
Speaker 8: interest expenses by four hundred and thirty million dollars a
Speaker 8: year in the next two years and reduce their total
Speaker 8: outstanding debt by one point two billion dollars.
Speaker 4: Listen to what he had to say.
Speaker 9: We've cut over a billion dollars of expenses out of
Speaker 9: the business in the last year. That's a that's a
Speaker 9: big number, right, and you know we continue to pull
Speaker 9: the expenses out. You know, we cut over one hundred
Speaker 9: million out in Q one. We cut another twenty million
Speaker 9: of expenses out in Q two. So we've got a
Speaker 9: lot of levers. We'll keep pulling that down. We've also
Speaker 9: been driving our URGPU up. So I think the business
Speaker 9: performing really well. And again I think you know, twenty
Speaker 9: twenty two was a tough year for us, but the
Speaker 9: people inside Carbona came together and that's why we're having
Speaker 9: so much success today.
Speaker 8: Our delivery are there still delivery delays, delivery issues. I
Speaker 8: know that for a long time, even in your business,
Speaker 8: the used car business, it was a problem getting buyers
Speaker 8: their cars in a timely manner, and that's been a
Speaker 8: problem obviously for the manufacturers.
Speaker 4: As well for new cars. How does that look right now?
Speaker 9: No way, I think you know. Inside of our business,
Speaker 9: there's kind of two major steps. One step is getting
Speaker 9: the car from the point where purchase it to our
Speaker 9: inspection centers, where we put about one thousand dollars aparts
Speaker 9: in labor in every car to prepare it for the
Speaker 9: buyer WHOI ultimately buy it. And then there's our delivery
Speaker 9: to that customer when they go to our website, they
Speaker 9: buy it online and then we deliver it to their door.
Speaker 9: And we've actually been speeding those timelines up recently. We've
Speaker 9: been testing same data delivery, which is pretty remarkable. We
Speaker 9: had one customer in Phoenix the other day that actually
Speaker 9: got a car delivered an hour and fifty nine minutes
Speaker 9: after placing the order, which is pretty remarkable. So, you know,
Speaker 9: we're trying to give customers a huge selection with our
Speaker 9: online model and then build all of our operations and
Speaker 9: processes in a way that allow them to not only
Speaker 9: have that huge selection but also get the car very quickly.
Speaker 9: And I think that's something we're very proud of.
Speaker 8: How much do you expect buyers to embrace the online
Speaker 8: only model. I mean, you know a lot of people
Speaker 8: want to go into a dealership kicked the tires, look
Speaker 8: under the hood, or they have in the past. How
Speaker 8: much do you see that changing, for example, in terms
Speaker 8: of a percentage of all sales.
Speaker 4: Where do you expect it to go?
Speaker 9: Sure? So, I think different people like different things, and
Speaker 9: they'll continue like different things. I think what we're proud
Speaker 9: of is that we're giving customers a different kind of offering.
Speaker 9: They can go to our website, they can buy a car.
Speaker 9: You know, we've had people buy cars on our website
Speaker 9: and scheduled delvery and as little as ten or fifteen
Speaker 9: minutes and then, as I just told you, our fastest
Speaker 9: delivery was an hour and fifty nine minutes after that.
Speaker 9: So it can be very fast, it can be very easy.
Speaker 9: They get a huge selection of cars, tens of thousands.
Speaker 9: They generally save money. We offer our cars at lower
Speaker 9: prices than most of our competitors because our business model
Speaker 9: enables us to do that. And so it's a different
Speaker 9: kind of offering for different preferences, and different people are different.
Speaker 9: But the great news is, you know today we're about
Speaker 9: one percent of the market. So I think our view
Speaker 9: is that, you know, when you say you can get
Speaker 9: a broader selection and you can save money, you can
Speaker 9: save time, there's probably more than one percent of people
Speaker 9: that want to do that.
Speaker 8: Right I'm looking for a Dodge Challenger RT scat pack
Speaker 8: wide body. They're not super easy to find a dealers
Speaker 8: near me, so I may look to a dealer in California.
Speaker 8: Is that what people are increasingly doing? And do you
Speaker 8: expect it to be maybe two percent of the market
Speaker 8: in say by twenty twenty five, three percent of the
Speaker 8: market by twenty twenty five.
Speaker 4: Well, what I would.
Speaker 9: Say is we've at various times we've had in some
Speaker 9: of our older markets. Market shares already above three point
Speaker 9: five percent and growing very quickly, and I think, you know,
Speaker 9: our product offering is only getting better. I think customers
Speaker 9: are only getting more comfortable online, and so I think
Speaker 9: our view would be much larger than that. Over time.
Speaker 9: We'll have to see exactly where it goes. But I
Speaker 9: think again, the benefits are not being online. Online is
Speaker 9: something that enables customers to save money, to save time,
Speaker 9: to have a huge selection, so we're more likely to
Speaker 9: find that scat back for you. So I think that's
Speaker 9: what customers are really looking for, and we're trying to
Speaker 9: provide it.
Speaker 8: You've had to pull back by your inventory I see
Speaker 8: from our reporting by more than fifty percent.
Speaker 4: Are you going to be able.
Speaker 8: To bring that back because obviously you want to offer
Speaker 8: a broad array of vehicles for customers to choose from.
Speaker 9: Yeah, for sure, I think you know, twenty twenty two
Speaker 9: was about getting back in balance after car prices went
Speaker 9: up and instrates went up, and it made cars unaffordable
Speaker 9: for customers and slowed down their purchases. And I think
Speaker 9: we've done that and I think that's why our results,
Speaker 9: you know, have been so positive recently. But I think undoubtedly,
Speaker 9: as we turn back to growth, you know, which we
Speaker 9: will do in due time, we will certainly want to
Speaker 9: grow on inventory and give customers an even broader selection.
Speaker 9: But even today, with the pullback and inventory size to
Speaker 9: get back in balance, we're offering customer selection of tens
Speaker 9: of thousands of cars, so it's still a pretty great
Speaker 9: place to go check out.
Speaker 8: You know, I saw a figure that your total debt
Speaker 8: load was about two thousand dollars a car in the
Speaker 8: last quarter. I'm wondering what it looks like now after this.
Speaker 4: Deal and where you want to see it.
Speaker 9: Sure, at a high level, I think it probably decreased
Speaker 9: by fifteen to twenty percent. And again I would go
Speaker 9: back to the answer I provided before. I think the
Speaker 9: most important thing we could do as a company is
Speaker 9: just keep delivering great customer experiences, keep building the business
Speaker 9: as best we can. I think the capital choices will
Speaker 9: make over time, but I think that's very secondary to
Speaker 9: just building the core business and the best way we
Speaker 9: possibly can.
Speaker 8: So, I mean, before this happened, obviously there was a
Speaker 8: lot of speculation in the market. People were worried that
Speaker 8: you were on the brink of filing. Now you've been
Speaker 8: thrown this lifeline. Can you say, now that we're past
Speaker 8: that sort of crisis point, are you, does this allow
Speaker 8: you to avoid any chance of bankruptcy.
Speaker 4: In the future.
Speaker 9: I'll say more than that. I think we were never there,
Speaker 9: you know. I think drama always finds a bigger audience
Speaker 9: than reality, which can sometimes be a bit more boring.
Speaker 9: But we always had a great business. We were always
Speaker 9: making a ton of progress. We continue to do so,
Speaker 9: so I think this, you know, this is a great
Speaker 9: transaction for us. I think the quarter was a great
Speaker 9: quarter for us. I think we're in much better shape
Speaker 9: than many people may have believed before, and we're gonna
Speaker 9: work hard to be an even better shape in the future.
Speaker 9: So we'll just keep improving, all right.
Speaker 3: That is of course. Carvana's Ernie Garcia.
Speaker 4: Yeah, very interesting guy and.
Speaker 10: CEO, chairman, majority the co founder too, co founder, and
Speaker 10: so he and his father owned more than eight percent
Speaker 10: of the common stock.
Speaker 8: I don't know the exact number because it's changing now
Speaker 8: that he's buying some of the stock a lot of
Speaker 8: the stock that they're issuing, but they have eighty eight
Speaker 8: percent of the voting shares, so total control position to
Speaker 8: be in, right yes, absolutely, and it's just been I
Speaker 8: mean to be fair to him. The car the car
Speaker 8: business and his in particular, really grew throughout the pandemic.
Speaker 8: But they had low rates, I mean no rates. They
Speaker 8: had easy financing, right, and they had car prices that
Speaker 8: were just absolutely soaring. So all the inventory they already
Speaker 8: had and they had over a billion dollars worth of
Speaker 8: inventory on in their life or in their vending machines
Speaker 8: before people started freaking out and looking for cars.
Speaker 4: They were in the Cappard seat right, perfect right. And
Speaker 4: now you don't.
Speaker 8: Have low rates, you have high rates, you don't have
Speaker 8: easy credit. It's quite difficult. And used car prices are
Speaker 8: going down and he says they're going to go down further.
Speaker 2: So did you feel like if there was an area
Speaker 2: where you didn't quite get maybe a sufficient answer or
Speaker 2: clear enough like.
Speaker 4: You know, because here's the.
Speaker 3: Don't understand in.
Speaker 4: This new paradigm.
Speaker 8: Uh, The thought is they're going to have to cut
Speaker 8: costs significantly and bring debt down much further in order
Speaker 8: to make a profit at some point on a net basis.
Speaker 4: And I kept asking him, how are you going to
Speaker 4: do that? You know, are you going to tighten your belts.
Speaker 8: Are you gonna, you know, cut spending and he I
Speaker 8: don't think he didn't elaborate with a lot of real action.
Speaker 2: You're person like you need to see it. I mean
Speaker 2: you obviously drive them and stuff like.
Speaker 4: I think that's going to be less and less the case.
Speaker 8: I think as we go, especially to EV's, I mean,
Speaker 8: what are you gonna look under the hood?
Speaker 4: App there's nothing there, you know. I guess you could
Speaker 4: kick the tires. They're cheap enough.
Speaker 3: You like to take it for a test.
Speaker 4: I'd love to do all those things.
Speaker 3: You're right, I want you the car person, but I
Speaker 3: want to get in it and feel it.
Speaker 8: Yeah, me too, you know, but some people are happy
Speaker 8: buying them online, especially if you already know what you want.
Speaker 3: That's true. You know, maybe you've done test drive elsewhere.
Speaker 8: Right, And no, I want this Challenger, so I don't
Speaker 8: care if I get it from California.
Speaker 2: So then they have to beat on price. Yes, and
Speaker 2: that's a tough business to be in.
Speaker 6: All right.
Speaker 2: You are listening and watching Bloomberg Business You g if
Speaker 2: you missed Matt's interview, check it out online.
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Speaker 2: So we're gonna take a little bit of a break
Speaker 2: from earnings from FED, talk from yield curves, and because
Speaker 2: it's summer, we're gonna talk some barbecue.
Speaker 4: Okay with that, Well, I mean not.
Speaker 8: It's not just like a summer fun session, right, because
Speaker 8: this actually is very closely connected to markets, to inflation,
Speaker 8: to the FED, because the costs have been soaring.
Speaker 2: I just said we were gonna take a break. Okay, gosh, okay,
Speaker 2: can you just follow my leader? Okay, okay, all right,
Speaker 2: let's get to it.
Speaker 3: Loura Ray Dickie is with us.
Speaker 2: She's CEO of the more than eighty year old family
Speaker 2: run barbecue franchise business, Dicky's Barbecue Restaurants. It's based in Dallas.
Speaker 2: Six hundred and fifty Dickies Barbecue pits locations in forty
Speaker 2: four US states eight other countries. I want to confirm
Speaker 2: some of these numbers with her. Laura joining us on
Speaker 2: zoom in Texas. Laura is so delighted to have you
Speaker 2: here with Matt and myself. And I hate to say it,
Speaker 2: I'm going to say he is right, because labor, beef,
Speaker 2: this is certainly our world. First of all, the business
Speaker 2: of barbecue, how's it going?
Speaker 3: Tell us about it?
Speaker 5: You know, in general, the business of barbecue is good,
Speaker 5: but you are right, those macroeconomic factors that you see
Speaker 5: and you talk about every day all the time are
Speaker 5: definitely affecting us because you know, I hate to say
Speaker 5: this for Duncan, but America runs on trucks actually, and
Speaker 5: so every part of the supply chain has stress for us.
Speaker 5: Whether that's it's all the fuel costs, labor costs. Our
Speaker 5: beef packers, for example, going to a shorter work week
Speaker 5: is directly affecting the price of beef in the market.
Speaker 5: You know, the beef average this year has been out
Speaker 5: about about four dollars and eighty three cents. That's about
Speaker 5: two cents higher than it was in an all time
Speaker 5: home last year. You know, our price actually is about
Speaker 5: three thirty four pounds because of our purchasing power. We're
Speaker 5: actually with the number of restaurants that we have. One
Speaker 5: of the largest well the largest purchaser of beef brisket
Speaker 5: in the country in the restaurant space, and so, you know,
Speaker 5: we really really feel that food inflation. And so while
Speaker 5: business is good, we've certainly had to be very proactive.
Speaker 5: We've taken many reductions. You know, actually in our eighty
Speaker 5: two year history, this is a low urgest menu reduction
Speaker 5: you've ever taken. We've cut our menu by forty one
Speaker 5: percent to fight include inflation, to keep from passing on
Speaker 5: all of those costs to our guests.
Speaker 8: So certainly, let me let's let's try and break this
Speaker 8: down a little bit. Because so, first of all, on
Speaker 8: your menu, when you see prices of beef, I think
Speaker 8: have risen a lot more than pork.
Speaker 4: Pork has risen more than chicken.
Speaker 8: If I'm if I'm not mistaken, I know that feed
Speaker 8: costs are much higher, the cattle herd is smaller. And
Speaker 8: so what does this mean for your menu? Do you
Speaker 8: raise the price then of your beef products? Are people
Speaker 8: choosing more chicken? Are you trying to offer more interesting chicken? Uh,
Speaker 8: you know, entrees so that people take those instead of pork?
Speaker 11: How does it? How does it?
Speaker 4: How do you work it out? Absolutely well.
Speaker 5: So first, you're absolutely right, beef has been the most affective.
Speaker 5: It has the largest market cycle, if you will. It's
Speaker 5: actually ten year cycle, but the last three years or
Speaker 5: really make the most difference in that price per pound
Speaker 5: that you're seeing when you pay, you go to the
Speaker 5: grocery store, you certainly go to restaurants, and so that
Speaker 5: price per pound hid an all time high last year,
Speaker 5: and again we're two cents above that this year, and
Speaker 5: we expect that to stay stable. But in order to
Speaker 5: not pass all of that onto guests, which there's certainly
Speaker 5: a tolerance that that market tolerance that guests just can't
Speaker 5: simply absorb, you price yourself out of the market, so
Speaker 5: we certainly do shift to pork. It's certainly that for
Speaker 5: us the summer of pulled pork, if you will. We
Speaker 5: have a wonderful pulled pork sandwich, our kicken comeback sandwich,
Speaker 5: which is great pulled pork with some wonderful kicking comebacks
Speaker 5: claw on it. And we're doing that intentionally to guide
Speaker 5: guests towards pork. Chicken is in a good place. It's
Speaker 5: still high, but not as high as it has been.
Speaker 5: It's about three dollars and sixty two cents a pound
Speaker 5: right now. It's certainly taken a break from its high
Speaker 5: two years ago, and you can see the influx of
Speaker 5: the wing business as well as the Avian flu and
Speaker 5: some other things like that. But chicken has just a
Speaker 5: much shorter of market cycles, so it can recover much quicker,
Speaker 5: so that you'll see the flux of chicken more so,
Speaker 5: and that's why you'll see specials roll on and off
Speaker 5: with chicken with more frequency. Although there's a lot of
Speaker 5: chicken in the market, it's one of the most popular
Speaker 5: proteins out there, so you have to be kind of
Speaker 5: careful with that because it can really fluctuate pricing again
Speaker 5: due to that short of market.
Speaker 3: There's nothing like it.
Speaker 2: I'm I'm gonna say there's nothing like a brisket.
Speaker 5: S well, I agree with you, I love briscut.
Speaker 8: Well.
Speaker 2: So then how do you guys deal with some of
Speaker 2: the stress points? I'm assuming wages too, and labor is
Speaker 2: another issue, right.
Speaker 5: It is, it's and that's where it's really challenging for
Speaker 5: folks in the business at large, in the restaurant industry
Speaker 5: is because again going back to that supply chain, there
Speaker 5: is stress at every point in the supply chain, whether
Speaker 5: it's the fuel costs for the trucks to get there.
Speaker 5: And with the restaurant business, you have labor not only
Speaker 5: in the supply chain, but obviously in the restaurants themselves.
Speaker 5: And then the food inflation that all guests, all consumers
Speaker 5: are feeling. We certainly feel as well. So you have
Speaker 5: that and you have to be really, really really careful
Speaker 5: about where you can take price, but you also have
Speaker 5: to maintain value. And so for us, we shrunk our
Speaker 5: menu down to our core proteins. We cut anything from
Speaker 5: the menu that we didn't feel that we could pass
Speaker 5: on what we would have to in order to sell that.
Speaker 5: For example, we cut smoke turkey, which has been a
Speaker 5: staple for us and it will only be here for
Speaker 5: the holidays, but we just didn't feel that we could
Speaker 5: pass that on to the guest, and so we made
Speaker 5: that menu reduction.
Speaker 3: Go back to diesel.
Speaker 2: Because I just looked at Matt, I'm like, how many
Speaker 2: energy costs come down? He's like, diesel, Right, you guys
Speaker 2: use diesel to cook it?
Speaker 9: All?
Speaker 4: Right?
Speaker 5: Usually? Well, we do, so we use it. There's lots
Speaker 5: of different pieces, but yes we do. But it's certainly
Speaker 5: in the restaurant in the cooking process, but it's also
Speaker 5: in the freight everything. And sometimes what people forget is
Speaker 5: when you look at all of the markets that you
Speaker 5: see a lot of different opportunities in retail or folks
Speaker 5: that have longer shelf life on their products. But for us,
Speaker 5: because we have two to three days of perishable product
Speaker 5: on hand, we're so susceptible to what the markets are doing,
Speaker 5: and so it's very, very very hard to be able
Speaker 5: to work around that labor cost, those stress points, that
Speaker 5: fuel costs, the labor shortages, and then what the commodity
Speaker 5: markets do. And so we're thankfully in a position where
Speaker 5: we have enough restaurants and we have enough purchasing power
Speaker 5: in the market that we can again kind of speculate
Speaker 5: out by uh buy with speculation, buy and hole, do
Speaker 5: those sorts of things that a lot of smaller restaurant
Speaker 5: chains don't have the opportunity to do, or mom and
Speaker 5: pup may not have the opportunity.
Speaker 8: Take us back loa ray and talk to us about
Speaker 8: the business and your involvement in it, because I think
Speaker 8: a lot of people are listening. You know, they think
Speaker 8: of Dickies as this family owned business and They're like,
Speaker 8: how come you know, I don't know Travis Dickie's granddaughter
Speaker 8: is like a PhD economist. But you actually have extensive
Speaker 8: experience in the markets. You've worked with agencies and covered
Speaker 8: big restaurant chains like Chick fil A and others. So
Speaker 8: you have you come to this CEO position with real
Speaker 8: experience in the industry, and you have really grown the business.
Speaker 8: You have six hundred and fifty restaurants around the world.
Speaker 8: It's not just like a deep one barbecue pit in Texas.
Speaker 8: So tell us, tell us about the business.
Speaker 3: My family in Texas would say just would not be
Speaker 3: the way to say Texas is a good place to be. Anyway,
Speaker 3: go ahead, Well, you.
Speaker 5: Know, actually I'm married in I will say that, so
Speaker 5: I'm actually the granddaughter in law. I missed a meeting
Speaker 5: and got demoted to CEO, is how I like to
Speaker 5: put it. But I did have a lot of experience
Speaker 5: in the industry before I joined actually married and met
Speaker 5: Roland and then was drafted into service and thought it
Speaker 5: would be temporary. And here I stand today. But it's
Speaker 5: been just that kind of journey of working always in hospitality,
Speaker 5: technology and strategic planning and a lot of restaurant clients
Speaker 5: in that genre, and so have worked with lots of
Speaker 5: different brands and there's a lot of similarity, and then
Speaker 5: there's a lot that's unique about Dicky's. But we certainly
Speaker 5: have grown it. We are now third generation. We are
Speaker 5: still family owned and operated. I would love for guests
Speaker 5: to just think that their neighborhood Dickies is the only Dickies.
Speaker 5: I think, then we're doing something right, because that's how
Speaker 5: barbecue should feel. It's that passion food.
Speaker 3: It's really an experience.
Speaker 5: We smoke all of our meats on site. You go
Speaker 5: in and you should be able to smell that hickory smoke.
Speaker 5: You should be able to have that experience where you're
Speaker 5: hand chopped, sliced or if you are a pulled pork fan,
Speaker 5: that brat.
Speaker 2: Stop, I'm starving, starving now, so wait, just quickly, we
Speaker 2: only have about thirty seconds.
Speaker 3: Where's the growth come?
Speaker 2: Because you led the company into international expansion, is that
Speaker 2: the growth and unfortunately just got about thirty seconds left.
Speaker 5: Yes, there's international growth, but there is still domestic growth.
Speaker 5: Believe it or not. California is our second largest market,
Speaker 5: so it's not all vegan country out there, folks. Still
Speaker 5: do like their barbecue, and there's just opportunity in barbecue.
Speaker 5: There's a lot of burgers, there's a lot of chicken,
Speaker 5: but there's less and less a really really great barbecue.
Speaker 5: So there's still markets here.
Speaker 2: It's funny you said California because I was going to say,
Speaker 2: what about plant based barbecue?
Speaker 3: Is that something that you have to think about just
Speaker 3: real quickly?
Speaker 4: Oh god, no.
Speaker 5: No, no, you know what that's I like to say,
Speaker 5: we can serve something for everybody. That's where we would
Speaker 5: do a giant stuff baker without meat, but everything else
Speaker 5: will be a real traditional barbecue.
Speaker 2: All right, Well, come back soon, Loriy Dicky, but you
Speaker 2: have to bring some barbecue next time. Loria Dickey, she's
Speaker 2: chief executive officer of Dicky's Barbecue Restaurants.
Speaker 3: On Zoom from Dallas. I'm starve.
Speaker 4: I can't wait to go to a Dickie's. I'm going
Speaker 4: to find any reason to get on a plane and go.
Speaker 1: You're listening to the Bloomberg Business Week podcast. Catch us
Speaker 1: live weekday afternoons from three to six Easter on Bloomberg Radio,
Speaker 1: the Bloomberg Business App, and YouTube. You can also listen
Speaker 1: live on Amazon Alexa from our flagship New York station.
Speaker 1: Just say Alexa playing Bloomberg eleven thirty.
Speaker 3: Are we still both searching on barbecue stuff?
Speaker 4: No, I was looking. I was reading Hannah Elliott's Mercedes review.
Speaker 2: Okay, we love Hannah Elliott. Hey, right now that we
Speaker 2: want to talk a little bit about that housing market
Speaker 2: and real estate, because there was a story that was
Speaker 2: on the Bloomberg this week about how the US home
Speaker 2: turnover rate in the first half of twenty twenty three
Speaker 2: has fallen to the lowest in at least a decade
Speaker 2: as high mortgage rates compel owners to stay put. So
Speaker 2: Redfinn coming out and saying only one percent of US
Speaker 2: homes have changed hands this year, and that really fits
Speaker 2: in with some of the data we got today Matt
Speaker 2: about previously owned US homes falling to a five month
Speaker 2: low in June unlimited inventory, which then also helped push
Speaker 2: selling prices near record high. I mean there's just homes
Speaker 2: not coming on inventory.
Speaker 8: Yeah, no, because nobody will to get out of three
Speaker 8: percent mortgage right exactly.
Speaker 2: All right, So let's get a take on housing. We've
Speaker 2: got Brad Dilman with US Chief Economist over at Courtland.
Speaker 2: It's a real Estate Investment, Development and Management company. They've
Speaker 2: got to focus I believe that on apartments. And he's
Speaker 2: on Zoom from Atlanta. Brad, Welcome to Bloomberg Business Week
Speaker 2: on this Thursday. Tell us a little bit about what
Speaker 2: you are seeing when it comes to the real estate market.
Speaker 12: Yeah, So we've actually just completed our FORECASTI family rent
Speaker 12: growth outlook forecasts as of Q two, So we got
Speaker 12: actual data four Q two. It came in a little
Speaker 12: bit lower than expected, and we've won all this for
Speaker 12: our models, and we're seeing that we're still expecting a
Speaker 12: five year compound annual rent growth rate of called about
Speaker 12: two point eight percent across the seven hundred and eighty
Speaker 12: submarket SV track. We've been in a big slowdown in
Speaker 12: multi family and it kind of a disinflationary period and
Speaker 12: conventional institutional grade multi family, but it looks like we're
Speaker 12: kind of getting to the end of that. We're still
Speaker 12: expecting annual rent growth to trough this quarter Q three
Speaker 12: and then start to rally a little bit going forward.
Speaker 8: So what's driving rents higher? I mean, here in New York,
Speaker 8: the rent is just too damn high.
Speaker 4: I don't know if you're.
Speaker 3: Aware of that, but yeah, I've I've heard that always too.
Speaker 4: Yeah, but there was like a guy who ran for
Speaker 4: mayor and that was his entire platform. The rent is
Speaker 4: too damn high.
Speaker 8: It works, but no, it is very expensive obviously in
Speaker 8: this city and in many others. But I guess with
Speaker 8: rates at you know, mortgage rates at seven percent, a
Speaker 8: lot of people cannot buy homes. Also, as Carol mentioned, exists,
Speaker 8: homes aren't coming on the market and they're forced to
Speaker 8: either remain renters or go back into the rental market.
Speaker 4: Is that part of the problem.
Speaker 12: Well, so, of course we have seen that big decline
Speaker 12: in the number of homes listen for sale, or even
Speaker 12: just the minor decline that we had recently in the
Speaker 12: existing home sales figures. I think some people are missing
Speaker 12: on that when the existing housing market freezes up, sometimes
Speaker 12: you can see this pop back into new home sales,
Speaker 12: which have actually increased a little bit. I think what
Speaker 12: people are missing there too, is that these new home
Speaker 12: sales are also clearing at a lower average price for
Speaker 12: the new single family home. These are probably homes that
Speaker 12: are actually more in your kind of Tier three and
Speaker 12: even rural markets that some people take the opportunity to
Speaker 12: move to still more affordable areas than the aerswil affordable
Speaker 12: areas like the south or even parts of the Midwest.
Speaker 2: So talk to us though about where you guys mostly
Speaker 2: operate and what you're seeing, because we talk a lot
Speaker 2: about people moving to Florida moving south. I have a
Speaker 2: bunch of family members who have got who were all
Speaker 2: along the East Coast, just in the New York metro
Speaker 2: and they have recently moved to the south, South Carolina,
Speaker 2: the Carolina is in particular. So what are you seeing
Speaker 2: from that perspective.
Speaker 12: Yeah, we've certainly seen those migration trends continue. We do
Speaker 12: monitor cell phone based data to inform some of our
Speaker 12: migration models, and these have indicated that migration has slowed
Speaker 12: down a little bit. But it's been you know, robust
Speaker 12: for call it to a five to eight year period
Speaker 12: now with a real increase during the pandemic, and now
Speaker 12: it's slowed down a little bit. But it's it's very clear,
Speaker 12: you know, anecdotally that you know, people are moving for affordability,
Speaker 12: they're moving for tax reasons, you could argue they're moving
Speaker 12: for political reasons in some cases, or even just to
Speaker 12: make that general you know, value that consumer value arbitrage.
Speaker 12: Florida markets do continue to look relatively strong in our
Speaker 12: bank growth outlooks and in our market rankings. I think
Speaker 12: the real narrative is that we're starting to see smaller
Speaker 12: and smaller markets really start to pop. So instead of
Speaker 12: it really being a story about say, Tampa anymore, it's Tallahassee.
Speaker 12: Instead of it really being a story about Nashville, it's
Speaker 12: you know, Knoxville. These these kinds of markets popping a
Speaker 12: little bit higher than rankings. You can argue in some
Speaker 12: cases that's really a basis effect, right. These are places that,
Speaker 12: certainly from the perspective of a New York city, have
Speaker 12: very low rents, right, And so as people migrate, they
Speaker 12: take with them savings accumulated in other areas. Sometimes they
Speaker 12: can even take that income with them now and deploy
Speaker 12: that area that was more affordable for Just.
Speaker 3: Help me out. So you're in Charlotte, Dallas, Denver, Greenwich, Houston, Orlando.
Speaker 3: Am I missing anything?
Speaker 12: Oh, we have an office in Greenwich. We don't own
Speaker 12: and operate properties there, Okay, but yeah, So Cortland has
Speaker 12: about eighty thousand units owned and managed, so that's a
Speaker 12: quite a large number, you know, we're generally in those
Speaker 12: smile states. We're very big in Texas, very big in Atlanta, Charlotte, Raleigh, Durham,
Speaker 12: you know, the Front Range region. We have a presence
Speaker 12: in Boise as well, Columbus, Ohio so and then of
Speaker 12: course very.
Speaker 4: Long great state of Ohio. Yep, go buck Eyes, Matt's from.
Speaker 12: So that's a you know, a pretty big exposure that
Speaker 12: we have. So we do consider our own portfolio to
Speaker 12: be generally, you know, representative of the national picture. But
Speaker 12: of course the work that I'm doing is really folks
Speaker 12: seen a lot more on just generalized market data to
Speaker 12: look at kind of everything, not just our own book.
Speaker 8: As the chief economists at Cortland, and of course you
Speaker 8: have a lot of experience.
Speaker 9: In that area.
Speaker 8: I think you were at Polty before, head of economic
Speaker 8: research there, So you're looking at the entire country. What
Speaker 8: about housing starts, Brad, you know now that we can
Speaker 8: find some labor, now that construction costs are getting cheaper
Speaker 8: since there are no existing homes coming on the market,
Speaker 8: is it all about building new right now?
Speaker 12: Yeah, So we would estimate that the US is still
Speaker 12: underbuilt by over seven hundred thousand units. So there's certainly
Speaker 12: a need to be building. Now we've been closing that
Speaker 12: gap for about five years. You know, the US had
Speaker 12: been more substantially underbuilt prior to the pandemic, and we've
Speaker 12: really seen that gap close a bit, even with an
Speaker 12: increase in immigration that's occurred over the last few years.
Speaker 12: So yeah, there's certainly you know that it would appear
Speaker 12: that there's the need to be building more homes. And
Speaker 12: like I said, we can in fact see this on
Speaker 12: the new home sales side. So you're seeing that in
Speaker 12: the starts figures there, which is you know, recently rallied,
Speaker 12: even though they were they were sort of revised downward
Speaker 12: a little bit. And really multi family starts, right if
Speaker 12: you look at the government data, they're measuring this, and
Speaker 12: you know, with five structures with five units or more,
Speaker 12: this kind of product has seen starts really kind of
Speaker 12: flirt with forty year highs. Still it's come down a
Speaker 12: little bit, but it's a lot closer to forty year
Speaker 12: highs and say the average over the last ten years.
Speaker 12: So housing is certainly being built, and yeah, they're definitely
Speaker 12: benefiting from a little bit of disinflation on the cost
Speaker 12: input side. And then I think demand that's been understated, right,
Speaker 12: we see these continued job gains beats. You know, maybe
Speaker 12: with the last non farm parels you know, an exception,
Speaker 12: but prior to that, we've seen some very substantial beats.
Speaker 4: That really are are alter teaming months in a row.
Speaker 12: Yeah, by the over the last two years, we only have.
Speaker 2: Twenty seconds left here as an economist from what you're seeing,
Speaker 2: any signs of recession real quickly, we.
Speaker 12: Would say no, we've been in the no recession camp,
Speaker 12: you know for the last couple of years. You think
Speaker 12: it's going to be a soft landing at this.
Speaker 3: Stage, soft landing. I'm just going to tell you if
Speaker 3: I had a buck for off landing every time I
Speaker 3: heard it.
Speaker 4: This week, that's good. I hope you have a lot
Speaker 4: of bus I do you like a power ball? You
Speaker 4: would like to have a soft landing rather than session?
Speaker 3: All right, Braddylaman, thank you so much. Jeef economist at
Speaker 3: Cortland joining us on zoom from Atlanta. Yes, soft landing
Speaker 3: would be good, yeah, or no land Jay Powell probably.
Speaker 4: Like that, right, Yeah, we would congratulate.
Speaker 3: President might like that too.
Speaker 4: He would very much enjoy that.
Speaker 3: All right, you're listening and watching Bloomberg Radio.
Speaker 5: Brother Marc.
Speaker 8: A journal how about you let me drive?
Speaker 4: Oh no, no, no, no, honey, please, I'll do the gravel.
Speaker 1: Let's I want to try it.
Speaker 5: It's a good question.
Speaker 4: This is the drive to the clothes dot com.
Speaker 1: Think well, Bun Young Don on Bloomberg Radio.
Speaker 2: All right, just about eighteen minutes left in today's trading session,
Speaker 2: getting ready to wrap up the Thursday trade. I got
Speaker 2: the date right again, Let's get to it. Carol Masser
Speaker 2: along with Matthew Miller here in her Bloomberg Interactive brokes.
Speaker 4: You get the day right, Everything else just falls into
Speaker 4: place after that.
Speaker 3: Looks that's so nice?
Speaker 4: Yeah again?
Speaker 8: Why I don't normally sit in this seat. There's a
Speaker 8: lot of light behind my head.
Speaker 3: Don't we almost look angelic?
Speaker 8: Not?
Speaker 2: All right, let's get to it, and let's talk about
Speaker 2: the equity trade and the treasury trade, because we definitely
Speaker 2: have seen stocks.
Speaker 3: Lower, treasuries move lower changes.
Speaker 2: Although the yell curve kind of bounce it around a
Speaker 2: little bit as it usually does, it feels like John
Speaker 2: barenco Is, chief investment Officer of Fundamental Investments at all
Speaker 2: Spring Global Investments, on the phone from Meneminee Falls Wisconsin.
Speaker 2: John Welcome, nice to have you here. It does seem
Speaker 2: like fundamentally, if we can focus on that, and we're
Speaker 2: trying to do that as we are in the midst
Speaker 2: of earning season, that it's a good way to kind
Speaker 2: of get an idea of where the markets go. When
Speaker 2: you look fundamentally at the markets, how do you see it?
Speaker 11: Well, first, Carol Matt, thanks for inviting me. It's great
Speaker 11: to be here. I you know, I think the markets
Speaker 11: really have given us a lot us and from the
Speaker 11: past year that they're really more resilient to inflationary pressures
Speaker 11: and rising rates than we expected. And and that's largely
Speaker 11: a function of of you know, all the different stimulus
Speaker 11: programs that uh uh, you know led up to this year.
Speaker 11: Relative to covid it it ultimately was a function of
Speaker 11: lower rates for so long that ultimately allowed consumers and
Speaker 11: corporations to lock in financing for a longer period of time.
Speaker 11: And I think the hybrid work environment and the resulting
Speaker 11: savings that people realized as a result of not traveling
Speaker 11: to work and you know, ultimately saving money from that side,
Speaker 11: while offset by you know, some of the impacts and
Speaker 11: local economies I think has an effect as well. So
Speaker 11: you know, the markets are telling us I think that
Speaker 11: that we are probably heading towards a soft landing or
Speaker 11: even you know, no no recession, and you know, I
Speaker 11: think that that's a uh, you know, an interesting scenario
Speaker 11: to play out. However, I do think that there's clouds
Speaker 11: kind of forming on the horizon as we expect rates
Speaker 11: to stay higher for longer, and that's definitely something to
Speaker 11: pay attention to.
Speaker 8: Yeah, it seems like some you know, the broader markets
Speaker 8: are saying we're good to go. But if you look
Speaker 8: at some individual pockets of the market, for example, bank
Speaker 8: stocks have incredibly low valuations that would indicate a recession,
Speaker 8: but the S and P five hundred is up eighteen
Speaker 8: percent year to date.
Speaker 4: So how do you square that circle?
Speaker 11: Yeah, I think that.
Speaker 6: You know that.
Speaker 11: You certainly have you know, kind of a bifurcation of
Speaker 11: companies that have really kind of been well positioned going
Speaker 11: into this cycle, Companies that are generating high free cash flow,
Speaker 11: companies that have you know, are not reliant on you know,
Speaker 11: the cost of capital to fund their businesses, companies that
Speaker 11: have great growth prospects, and so you know, as you
Speaker 11: look at the indices, many of the of the stock
Speaker 11: indencies are driven by companies with that profile. You know,
Speaker 11: I think if you look more broader, there certainly is
Speaker 11: an undercurrent within the markets and in the debt markets
Speaker 11: relative to you know, what we think are are some
Speaker 11: challenges coming forward in twenty twenty four and twenty twenty
Speaker 11: five with respect to the impact of higher rates and
Speaker 11: those ultimately being realized on the economy. You know, it's
Speaker 11: really interesting fifty percent of all US debt is maturing
Speaker 11: in the next three years, and that debt is financed
Speaker 11: at a one point seven eight percent yield right now.
Speaker 11: Thirty percent of all corporate debt, including leverage loans, are
Speaker 11: maturing in the next three years, so you know, you
Speaker 11: really have, you know, a fairly significant event coming up.
Speaker 11: You know, as the next few years unfold, that really
Speaker 11: is going to really highlight how the cost of carry
Speaker 11: is going to get very expensive.
Speaker 2: Because you do believe, as you as you walk us
Speaker 2: through the scenario, that rates will stay higher for longer, longer,
Speaker 2: mean in your view, especially when we've got I mean,
Speaker 2: at this point, we saw some moves in terms of
Speaker 2: the yield curve with expectations that it's not just a
Speaker 2: rate increase next week, which is pretty much on right
Speaker 2: at this point, but maybe even looking out at the
Speaker 2: September meeting or the November meeting, that we could get
Speaker 2: another rate increase. But when you say rates higher for longer,
Speaker 2: do you say once the FED is done, that rates
Speaker 2: stay high all of next year?
Speaker 5: Yeah?
Speaker 11: How far? I think there's a good chance that that happens.
Speaker 11: We don't think the recession, if there is one, really
Speaker 11: starts to kick into gear until probably early next year.
Speaker 11: And I think the FED is going to be overly
Speaker 11: cautious with respect to lowering rates too early. And you know,
Speaker 11: there's it seems like the markets hung up on every
Speaker 11: single data point that comes out relative to you know,
Speaker 11: whether that means that we're you know, getting rate cuts
Speaker 11: already increases. But I think if you step back and
Speaker 11: look at the bigger picture of what they're trying to
Speaker 11: to engineer here, I think to be very cautious in
Speaker 11: terms of getting into environment where we get into lower rates.
Speaker 4: What do you like in this market?
Speaker 8: I mean, if you have extra cash to put to work,
Speaker 8: where do you put it?
Speaker 12: Yeah?
Speaker 11: I think it's you know, in in in in the
Speaker 11: in the you know commentary that we've put out here midyear,
Speaker 11: we've really focused on, you know, a couple of different things.
Speaker 11: The first is in the fixed income markets. You know,
Speaker 11: obviously there's a great opportunity to invest in money markets
Speaker 11: and get a five plus percent yield in those instruments.
Speaker 11: But you know, we think that that you know, as
Speaker 11: you start to look forward and we do start to
Speaker 11: get to the point where rates are are you going
Speaker 11: to pause for a while? That extending out your maturities
Speaker 11: along the duration curve makes a lot of sense right here. However,
Speaker 11: you want to stay up in quality. I think that
Speaker 11: you know, we're starting to see signs of distress with
Speaker 11: delinquencies pick up and and you know some of the
Speaker 11: you know challenges in in you know, the sub investment
Speaker 11: grade and leverage loan markets, and so we like staying
Speaker 11: up in quality and ultimately trying to lock in higher
Speaker 11: rates for longer as you work through the second half
Speaker 11: of the year. On the equity side, we're very constructive
Speaker 11: on small cap stocks right now. And I know that
Speaker 11: sounds a little counterintuitive going into a period where you have,
Speaker 11: you know, potential recession on the horizon. However, you know,
Speaker 11: small cap stocks have underperformed large cap stocks five consecutive years,
Speaker 11: and I think it's nine of the last eleven years.
Speaker 11: And so you know, when you look at at you know, ultimately,
Speaker 11: you know companies that are are generally poised to outperform,
Speaker 11: you know, coming out of a recession, and if we
Speaker 11: are going into a shallow recession or no recession, you know,
Speaker 11: we like the idea of kind of building up your
Speaker 11: small cap exposure. Coincidentally, they've outperformed in the last two
Speaker 11: months by four percentage points over large cap stocks, and
Speaker 11: so yeah, we really like that segment. Although I think,
Speaker 11: you know, to my earlier point, you have to be
Speaker 11: very cautious. You know, a third of small cap debt
Speaker 11: is in non financials, is coming due over the next
Speaker 11: few years, and so ultimately it really requires active management.
Speaker 11: You don't want to own the broad indices. You want
Speaker 11: to own, you know, those companies that are self funded,
Speaker 11: that are generated as All right.
Speaker 3: John, thank you so much.
Speaker 2: By the way, the Russell is up about eleven percent
Speaker 2: your today SMP time hundred.
Speaker 3: And twenty eighteen percent so far in twenty twenty three.
Speaker 2: John Pranko, Chief Investment Officer of Fundamental Investments over all
Speaker 2: Spring Investments, this is the week.
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