WEBVTT - Surveillance: Hike Probability with Dutta 0:00:05.120 --> 0:00:08.480 This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along 0:00:08.520 --> 0:00:12.360 with Jonathan Farrow and Lisa Abramowitz. Join us each day 0:00:12.400 --> 0:00:16.840 for insight from the best and economics, geopolitics, finance and investment. 0:00:17.280 --> 0:00:22.079 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.320 --> 0:00:26.600 anywhere you get your podcasts, and always on Bloomberg dot com, 0:00:26.640 --> 0:00:31.240 the Bloomberg Terminal, and the Bloomberg Business App. For those 0:00:31.240 --> 0:00:34.800 of you gloomy. This is the interview of the day. 0:00:35.120 --> 0:00:38.479 There have been optimists. They are congenital optimists, and they're 0:00:38.520 --> 0:00:42.560 also reasoned optimists. And one of them is Neil Duddy. 0:00:42.600 --> 0:00:46.040 He's out of US economic research at Renaissance Macro and 0:00:46.120 --> 0:00:49.680 has been extraordinary, not over the last three months, six months, 0:00:49.720 --> 0:00:52.760 but frankly the last two years of saying this is 0:00:53.320 --> 0:00:56.920 America the resilient. The data chart is out there, Neil, 0:00:57.560 --> 0:01:01.960 and it is finally we have legitimate income growth. Will 0:01:02.000 --> 0:01:02.920 we sustain that? 0:01:03.640 --> 0:01:06.720 I believe so, Tom, thanks for having me on. Obviously, 0:01:06.720 --> 0:01:09.840 there's a lot of disinflation in the pipeline, at least 0:01:09.840 --> 0:01:12.160 over the next you know, you could say three to 0:01:12.360 --> 0:01:16.640 four months. The most obvious is used cars. We know 0:01:16.720 --> 0:01:19.640 that wholesale auction prices have been coming down. That's going 0:01:19.680 --> 0:01:22.480 to bleed into consumer prices for use cars and trucks. 0:01:23.840 --> 0:01:28.679 Supply chains are improving, that's going to take some pressure 0:01:28.720 --> 0:01:32.039 off of core goods outside of vehicles, and there's still 0:01:32.080 --> 0:01:35.119 some disinflation and train with respect to shelter looking at 0:01:35.160 --> 0:01:37.520 new lease growth. At the same time, we know the 0:01:37.560 --> 0:01:42.040 labor markets are holding up and that's going to support 0:01:42.560 --> 0:01:46.399 real incomes. And if real incomes are rising, ultimately I 0:01:46.400 --> 0:01:48.600 think consumers are going to go out and spend that money. 0:01:48.880 --> 0:01:52.000 So I think that's sort of the lynchpin for why 0:01:52.040 --> 0:01:53.840 things are holding up better than expected. 0:01:54.000 --> 0:01:56.480 Atlanta has a GDP now numbers. We came in at 0:01:56.480 --> 0:01:58.760 a two percent statistic Q one, and all of a 0:01:58.800 --> 0:02:01.960 sudden we're migrating one one point a two ish on 0:02:02.280 --> 0:02:04.440 Atlanta GDP whatever it is, I really don't care what 0:02:04.480 --> 0:02:05.080 the number is. 0:02:05.120 --> 0:02:10.000 But my question is to the Gloom, what statistic of 0:02:10.200 --> 0:02:15.160 positive GDP in America is a so called growth recession? 0:02:15.880 --> 0:02:19.040 Is it half a percent point five? Do you have 0:02:19.240 --> 0:02:20.480 that number in your head? 0:02:21.680 --> 0:02:24.840 Well, I would define a growth recession as a situation 0:02:24.960 --> 0:02:28.600 where the economy is has a you know, GDP has 0:02:28.639 --> 0:02:30.600 a positive sign in front of it, but that growth 0:02:30.639 --> 0:02:33.720 is not strong enough to keep the unemployment rate from rising. 0:02:33.760 --> 0:02:36.200 So typically in a growth receession, you'd see the unemployment 0:02:36.240 --> 0:02:40.320 rate go up. So it's effectively a below potential growth state, Tom, 0:02:40.800 --> 0:02:42.640 But that's not what we have right now. I mean, 0:02:42.720 --> 0:02:45.800 you mentioned the Atlanta Fed that that number is tracking 0:02:45.840 --> 0:02:50.480 two point four percent, you know, with very little contribution 0:02:50.560 --> 0:02:54.240 from consumer spending. I suspect that probably builds over the summer, frankly, 0:02:54.480 --> 0:02:59.840 but wow, but you know, look, there's more upside to 0:02:59.880 --> 0:03:04.120 the economy than not. But we're growing above potential and 0:03:04.560 --> 0:03:07.079 that means that whatever un employment rate increase you see 0:03:07.160 --> 0:03:09.200 sort of bobbing around three and a half percent, I mean, 0:03:09.200 --> 0:03:11.880 it's probably going to be short lived. Not on a 0:03:11.960 --> 0:03:14.560 situation where we're going to see above four percent unemployment. 0:03:15.040 --> 0:03:18.200 Goldilocks seems to be the moment that we're in. That's 0:03:18.360 --> 0:03:21.280 a lot of people are saying, how long can goldilocks last? 0:03:22.880 --> 0:03:25.680 I mean, talk to me in the fall, Lisa, I mean, 0:03:26.000 --> 0:03:28.880 that's what I'll say. I mean, I think it's I'm 0:03:28.880 --> 0:03:32.160 sort of I'm sort of in the goldilocks for now. Camp. 0:03:32.240 --> 0:03:35.560 I mean, I do think that there are reasons to 0:03:35.600 --> 0:03:39.560 be somewhat suspicious about how long this can last, about 0:03:39.560 --> 0:03:43.760 whether this is a durable sort of sustainable moderation and inflation. 0:03:43.840 --> 0:03:46.840 I think that's a question that needs to be answered. 0:03:46.880 --> 0:03:50.240 I don't think we can answer it just yet. But 0:03:50.360 --> 0:03:53.000 you know, to me, when you think about economic scenarios, 0:03:53.160 --> 0:03:57.080 I think the risk of recession has receded dramatically, and 0:03:57.160 --> 0:03:59.400 so now it's a question for investors about where do 0:03:59.440 --> 0:04:01.000 you put these other percentages? 0:04:01.120 --> 0:04:01.280 Right? 0:04:01.320 --> 0:04:03.960 I mean, do you? I mean, I think the markets 0:04:03.960 --> 0:04:06.000 are right to kind of allocate a little bit more 0:04:06.040 --> 0:04:09.840 to the soft landing story. But I think you know, 0:04:09.840 --> 0:04:12.200 you could. I think you can make a good case, 0:04:12.200 --> 0:04:14.120 and maybe we're getting a little bit over our skis 0:04:14.160 --> 0:04:17.880 here and we should probably put some more potential on 0:04:18.080 --> 0:04:20.799 the resurgence of the inflationary boom scenario. 0:04:20.880 --> 0:04:22.680 Okay, Well, I wanted you to double down on that 0:04:22.720 --> 0:04:24.960 because you were just saying that people are perhaps a 0:04:25.000 --> 0:04:28.599 little too sanguine about the steady disinflation that they expect 0:04:28.640 --> 0:04:33.040 to see. Where is it that you see reinflation coming 0:04:33.080 --> 0:04:35.960 back down the pike, especially if you hear all these 0:04:35.960 --> 0:04:38.520 people saying that FED policy hasn't worked its way through 0:04:38.520 --> 0:04:43.200 the financial system and still has more restraining to do well. 0:04:43.240 --> 0:04:45.520 Home prices are rising again. They're actually arising for the 0:04:45.760 --> 0:04:48.160 for four months in a row. We get weekly data 0:04:48.240 --> 0:04:51.240 from redfin and you know that's more up to date, 0:04:52.279 --> 0:04:54.560 and that shows continued to increases in home prices over 0:04:54.600 --> 0:04:57.479 the summer, even after seasonal adjustment. So you know, to 0:04:57.560 --> 0:05:00.480 the extent that home prices go up, and you know, obviously, 0:05:00.600 --> 0:05:03.120 for a landlord and the underlying value of your asset 0:05:03.200 --> 0:05:05.000 is rising, You're not going to go around saying up, 0:05:05.040 --> 0:05:08.479 I'm going to start cutting your rent. So it leads 0:05:08.480 --> 0:05:11.760 me to believe that we could see some upward momentum 0:05:11.279 --> 0:05:16.039 in housing rental inflation in the CPI statistics sometime you know, 0:05:16.120 --> 0:05:18.120 let's say in the first or second quarter of next year. 0:05:18.160 --> 0:05:20.479 So that would be the most obvious area. But you know, 0:05:20.520 --> 0:05:23.640 more broadly, I mean, let's take a step back, and 0:05:23.800 --> 0:05:25.480 you know, what are we talking about here. We're talking 0:05:25.560 --> 0:05:30.279 about real growth improving. Real growth is improving over time, 0:05:30.360 --> 0:05:35.000 that that erotes physical capacity, and that forces economic actors 0:05:35.000 --> 0:05:39.960 to bid up wages and prices. So I have a 0:05:40.000 --> 0:05:42.520 little bit of skepticism in terms of how far we 0:05:42.560 --> 0:05:46.359 can push this kind of immaculate disinflation story just real quick. 0:05:46.200 --> 0:05:48.719 Here, Neil, Given that, how far do you think the 0:05:48.720 --> 0:05:50.760 Fed could go? I mean, do you think that people 0:05:50.760 --> 0:05:53.760 are pricing out future rate hikes after this month and 0:05:53.800 --> 0:05:56.279 that that's inaccurate? That you think that that's wrong? 0:05:59.120 --> 0:06:01.000 I mean, who am I to say what's right and 0:06:01.000 --> 0:06:03.359 what's wrong? But I would just if they were me. 0:06:03.600 --> 0:06:07.839 I mean, I think the probabilities of a high you know, 0:06:07.960 --> 0:06:10.680 after July are probably somewhat higher than the markets are 0:06:10.680 --> 0:06:11.560 currently expected. 0:06:12.120 --> 0:06:15.719 Neil Doda, They are extraordinary on this two percent American 0:06:16.600 --> 0:06:19.920 real GDP is with Renaissance Macro. 0:06:30.560 --> 0:06:32.800 And I hand joined us now equity strategist over at 0:06:32.800 --> 0:06:34.680 wels Faco and a good morning to you. Great to 0:06:34.720 --> 0:06:36.760 have you with us, say in New York, let's start 0:06:36.760 --> 0:06:38.760 with this. You were looking for ten percent mode for 0:06:38.800 --> 0:06:40.640 ten percent correction. You throw in the town on that 0:06:40.720 --> 0:06:42.839 over the last month. What's gone right for you in 0:06:42.839 --> 0:06:43.279 the team? 0:06:43.640 --> 0:06:45.599 Well, I'll say one of our biggest calls being tied 0:06:45.640 --> 0:06:47.599 to that AI trend, you know, one of our largest 0:06:47.600 --> 0:06:50.479 calls coming to this year median entertainment, and that's actually 0:06:50.560 --> 0:06:52.960 kept up with a tech sector, if not outperformed it. 0:06:53.320 --> 0:06:55.560 I think that call we came in because we wanted 0:06:55.600 --> 0:06:58.840 to see that pivot of spending from really the gird 0:06:58.880 --> 0:07:02.560 opal goods into something more services, a little more of 0:07:02.600 --> 0:07:04.640 that away from home trade. But at the same time 0:07:04.880 --> 0:07:07.520 you see this kind of networking cable, these media groups 0:07:07.560 --> 0:07:10.080 still having that poll. We thought that might be that 0:07:10.160 --> 0:07:12.720 sweet balance. That was one of our largest calls, and 0:07:12.840 --> 0:07:15.080 right now as we see it, we've stepped off that 0:07:15.160 --> 0:07:17.000 pole back call. Well, you know, we'll throw in the 0:07:17.040 --> 0:07:19.800 towel andmit ourselves on that one. But something we're still 0:07:19.840 --> 0:07:21.600 watching here is you know, what is going to be 0:07:21.600 --> 0:07:23.880 the pace of this rally in the back half this 0:07:23.960 --> 0:07:27.040 year and can this AI and really uber top led 0:07:27.200 --> 0:07:30.400 rally continue. I think that's what's really weighing on people's minds. 0:07:30.640 --> 0:07:34.760 Your mathwiness informs your research node. I'm fascinated what you 0:07:34.800 --> 0:07:37.480 think about what revenues are going to do made up 0:07:37.560 --> 0:07:40.960 of unit and price and the calculus jargon here is 0:07:40.960 --> 0:07:45.080 the partial differentials of units and revenues. How do you 0:07:45.080 --> 0:07:46.800 see that playing out over the next year. 0:07:47.000 --> 0:07:49.120 No, that's very important. Right when you have this top 0:07:49.160 --> 0:07:52.320 line figure, it's important to figure if that is declining 0:07:52.320 --> 0:07:55.120 you know, how much can margins really increase to make 0:07:55.200 --> 0:07:57.080 up for it? And if it doesn't, then what about 0:07:57.160 --> 0:08:01.640 prices versus volumes? We've seen volumes declining. Those volumes are declining, 0:08:01.720 --> 0:08:05.640 and price elasticity returns to normal, then what happens to 0:08:05.680 --> 0:08:08.880 that bottom line? These margins continue to be pressured, continue 0:08:08.920 --> 0:08:11.600 to be compressed, But so far the market seems to 0:08:11.640 --> 0:08:14.840 look through those things. Perhaps they're trading already on next 0:08:14.920 --> 0:08:18.080 year's earnings or expectations. What we've seen is not just 0:08:18.120 --> 0:08:20.880 the one and done, but what if we get rate cups? 0:08:21.200 --> 0:08:25.240 That easing also trickles into investors' minds and helps look 0:08:25.280 --> 0:08:29.000 at equity valuations above what perhaps we expected. 0:08:29.240 --> 0:08:31.760 So do earnings matter or do you just basically look 0:08:31.760 --> 0:08:33.680 at what the returns have been and then just say 0:08:33.720 --> 0:08:35.480 we're going to keep buying because everybody else is. 0:08:35.880 --> 0:08:38.679 You know that momentum trade is always interesting. You know, 0:08:38.679 --> 0:08:40.240 do we stay on the train? Who's going to be 0:08:40.280 --> 0:08:42.200 the first to leave the party? But no one wants 0:08:42.240 --> 0:08:44.520 to be the last. I think with earnings, the more 0:08:44.559 --> 0:08:48.000 important is directional than really the figure. Like Tom mentioned earlier, 0:08:48.160 --> 0:08:50.080 you know, is it two hundreds, it two ten? What 0:08:50.240 --> 0:08:52.720 is it? But it's more the sentiment of how much 0:08:52.760 --> 0:08:55.000 contraction are we seeing, if it's going to be light 0:08:55.120 --> 0:08:58.200 enough for investors to look through and really what is 0:08:58.280 --> 0:09:00.880 driving it? Is it the consumer and your need or 0:09:01.000 --> 0:09:03.840 pulling back sharply, that's not what we're hearing. Even with 0:09:03.920 --> 0:09:06.640 bank earnings early in the season, we see that consumer 0:09:06.760 --> 0:09:11.440 still remains resilient, rages remains resilient, Labor markets are supporting that. 0:09:11.760 --> 0:09:15.320 But that general slowing tells us things are cooling a bit. 0:09:15.760 --> 0:09:17.680 But if the Fed is able to give us that 0:09:17.760 --> 0:09:21.240 goldilocks almost that pow put in terms of not just 0:09:21.320 --> 0:09:25.520 equities but really economic consumer spending, then that's a kind 0:09:25.520 --> 0:09:27.280 of a happy scenario for a lot of people. 0:09:27.320 --> 0:09:29.559 It's a confusing market for people who are trying to 0:09:29.600 --> 0:09:31.880 look at facts and extrap laid out some sort of 0:09:31.880 --> 0:09:35.440 price target. From your vantage point, how bullish can you 0:09:35.520 --> 0:09:38.319 get just with a momentum trade even as you see 0:09:38.320 --> 0:09:40.720 some of the earnings come in softer than you'd like 0:09:40.760 --> 0:09:41.320 to see. 0:09:41.559 --> 0:09:44.040 Well, the mollentium trade actually has been flipping a little. 0:09:44.200 --> 0:09:46.120 You know, what we've seen was market leaders, and you're 0:09:46.120 --> 0:09:49.679 seeing the momentum factor. The top top leaders aside from 0:09:49.720 --> 0:09:52.640 those AI names have actually started to rotate, and that 0:09:52.840 --> 0:09:56.240 rotation could also bring a little churn in volatility. So 0:09:56.480 --> 0:09:59.120 when we think about how long the market can ride 0:09:59.120 --> 0:10:03.680 on momentum, quite long, no doubt, But what leads that momentum, 0:10:03.720 --> 0:10:06.560 who those momentum leaders are. I think that continues to 0:10:06.600 --> 0:10:09.160 have some mean reversion to it, and that's what we 0:10:09.320 --> 0:10:11.840 use to look at technicals and think about where we 0:10:11.880 --> 0:10:12.520 want to position. 0:10:12.640 --> 0:10:14.960 Shine a light on your client conversations if you can, 0:10:15.040 --> 0:10:18.000 do you sense capitulation after the last couple of weeks. 0:10:18.440 --> 0:10:20.720 I don't think we're sensing that just yet. I think 0:10:20.800 --> 0:10:23.160 right now the beginning of this year burned a lot 0:10:23.200 --> 0:10:25.920 of people. A lot of people came in more conservative. 0:10:26.120 --> 0:10:28.520 You know, you were mentioning that etf earlier. We're worried 0:10:28.520 --> 0:10:32.640 about protecting against losses. People were happy to take four 0:10:32.679 --> 0:10:36.240 percent five percent in some sort of a bond investment, 0:10:36.360 --> 0:10:38.160 and now they've missed out on twenty percent in the 0:10:38.200 --> 0:10:41.079 first half of this year. So that kind of mentality, 0:10:41.120 --> 0:10:43.600 I think they have to remain strong the rest of 0:10:43.600 --> 0:10:47.160 this year. But in what underweight names have been most painful. 0:10:47.559 --> 0:10:49.320 That's going to be the hard part is when do 0:10:49.360 --> 0:10:51.840 they capitulate on that and we have not seen that. 0:10:51.960 --> 0:10:53.760 This is what lace is getting at. Really, if you've 0:10:53.760 --> 0:10:56.080 sat on cash and you've missed out on this rally 0:10:56.600 --> 0:10:59.400 and you feel foolish, are you chasing the winners? Big tech? 0:10:59.480 --> 0:11:01.480 Where you going to places where you haven't seen the games? 0:11:01.800 --> 0:11:04.080 When you have those conversations, what they sound like? 0:11:04.520 --> 0:11:06.160 You know, I will say, you know, we're not bringing 0:11:06.160 --> 0:11:08.640 out the tissue boxes. Yes yet it's not full tears. 0:11:09.040 --> 0:11:11.960 But it is a difficult conversation. You want to be 0:11:12.320 --> 0:11:15.440 thank you, you want to be chasing in some ways 0:11:15.960 --> 0:11:18.360 you you really believe that I've got to make up 0:11:18.360 --> 0:11:20.440 for this. I've got to get back on this train 0:11:20.840 --> 0:11:23.040 the same time when that trains left. Look for growth 0:11:23.080 --> 0:11:26.080 opportunities in other parts of the market, someplace where maybe 0:11:26.200 --> 0:11:29.199 valuations are a little more friendly. And if we do 0:11:29.320 --> 0:11:31.240 get this growing, where as a. 0:11:31.360 --> 0:11:35.160 Friendly valuation out there, enlighten me. Where's a friendly a 0:11:35.240 --> 0:11:36.359 friendly valuation? 0:11:36.640 --> 0:11:41.160 Well, we can look for actual sustained grow photos autos. 0:11:41.240 --> 0:11:44.280 I think autos given the economy we expect in this slowdown, 0:11:44.320 --> 0:11:46.240 that's a little bit of a hard sell for people. 0:11:47.720 --> 0:11:50.240 I thought you were going to say, Cavan, Well, friend 0:11:50.280 --> 0:11:54.360 evaluations and combinations. 0:11:53.720 --> 0:11:56.040 Walmart's trading to twenty four times earnings. 0:11:56.160 --> 0:11:57.480 That's not that friendly. 0:11:58.120 --> 0:12:01.320 I don't know, I've never seen it. That's absolutely nuts. 0:12:01.320 --> 0:12:04.920 And to thank you one wis aneha was Faga, I. 0:12:05.000 --> 0:12:11.000 Think Amanda Linum joins us now how of macro credit 0:12:11.000 --> 0:12:14.840 research at Blackrock. But there is an equivalent overlay here, 0:12:15.320 --> 0:12:18.120 and that is mister Solomon and others, including mister Fink, 0:12:18.600 --> 0:12:22.360 have to deal with a new interest rate regime which 0:12:22.520 --> 0:12:26.640 hearkens back sixteen years, twenty years, twenty five years. And 0:12:26.679 --> 0:12:30.120 as you brilliantly say in your note of macro credit research, 0:12:30.840 --> 0:12:34.960 there's a new higher cost of capital. Have we adjusted 0:12:35.000 --> 0:12:37.080 to it or are we in early innings? 0:12:37.280 --> 0:12:39.319 I think in good morning, thank you for having me, 0:12:39.679 --> 0:12:42.080 I think we're in the early innings of adjusting to that. 0:12:42.200 --> 0:12:44.440 And I think one of the really interesting things from 0:12:44.480 --> 0:12:47.320 my perspective, and looking through the regional bank earnings even 0:12:47.440 --> 0:12:52.199 yesterday and earlier last last week, was that companies are 0:12:52.240 --> 0:12:55.600 taking reserves against intra sensitive pockets of the market like 0:12:55.640 --> 0:12:58.600 commercial real estate, for example, but they're saying that they'll 0:12:58.640 --> 0:13:01.480 need those reserves even if there is a soft landing, 0:13:01.920 --> 0:13:05.000 and so it's not necessarily reserves in the event of 0:13:05.040 --> 0:13:08.320 a worst case downturn, but it's reserves even if we 0:13:08.440 --> 0:13:11.400 kind of get an okay outcome. And I think that's 0:13:11.480 --> 0:13:14.360 true for areas like leverage loans, for example, where we 0:13:14.400 --> 0:13:17.280 expect the default rate to outpace that for hiled bonds. 0:13:17.320 --> 0:13:19.240 And I think it's also true for areas like commercial 0:13:19.280 --> 0:13:21.560 real estate, where we, as you know, Tom wrote that 0:13:21.559 --> 0:13:23.839 we think we're in the early innings of that distress cycle. 0:13:23.880 --> 0:13:27.319 And I think what's really challenging in this pocket of 0:13:27.440 --> 0:13:30.760 the market is that there's going to be a new 0:13:30.840 --> 0:13:34.280 sense of price discovery. So maybe the LTVs and the 0:13:34.320 --> 0:13:37.840 cap rates that the market has used in previous periods 0:13:37.840 --> 0:13:40.120 to kind of understand where the floor is on commercial 0:13:40.120 --> 0:13:42.760 real estate, they might not be as relevant this time around. 0:13:43.000 --> 0:13:45.280 And so rather we'll look at cash flow of assets. 0:13:45.320 --> 0:13:47.800 We'll look at the basis to require to be bringing 0:13:47.800 --> 0:13:51.480 those properties up to market, and that's very heterogeneous, and 0:13:51.520 --> 0:13:53.080 I don't think we know the answer to that. 0:13:53.120 --> 0:13:54.840 For how a ring fence do you think that pain 0:13:54.920 --> 0:13:56.560 might be, how I slate do you think it will 0:13:56.559 --> 0:13:57.120 be in credit? 0:13:57.559 --> 0:14:00.679 I think for I think we're expecting most of the 0:14:00.679 --> 0:14:03.880 pain to be on the smaller banks that the data 0:14:03.920 --> 0:14:07.280 just tells us have had bigger exposure over time. We're 0:14:07.320 --> 0:14:09.640 also seeing that's where a lot of the reserves are 0:14:09.640 --> 0:14:12.559 being upticked. But I don't think it's limited to those areas. 0:14:12.600 --> 0:14:15.800 And I think in some ways the cash is fungible 0:14:15.800 --> 0:14:18.400 across the system, and so if that's a reason for 0:14:18.800 --> 0:14:20.920 certain parts of the banking system to pull back on 0:14:20.960 --> 0:14:24.280 their lending, then that may be felt in other areas 0:14:24.280 --> 0:14:28.520 of the market that aren't necessarily directly related, but impacted nonetheless. 0:14:28.560 --> 0:14:30.920 And even as as is right now, we're seeing a 0:14:30.960 --> 0:14:35.000 big contraction in auto lending as well as others aside 0:14:35.000 --> 0:14:37.400 from the credit card alone area, which seems to be 0:14:37.720 --> 0:14:40.880 on fire, how much do you expect that to accelerate 0:14:40.960 --> 0:14:43.000 and pressure credit in other areas. 0:14:43.120 --> 0:14:45.040 Yeah, I mean, you guys were talking about it earlier 0:14:45.040 --> 0:14:47.160 this morning with some of the restructuring news, and I 0:14:47.160 --> 0:14:50.520 think it's interesting that companies are already restructuring some of 0:14:50.560 --> 0:14:53.080 the maturities that are coming out twenty twenty five, twenty 0:14:53.120 --> 0:14:55.720 twenty six, twenty twenty seven, and so I think on 0:14:55.760 --> 0:14:58.480 the corporate side that's definitely going to be a pressure point. 0:14:58.640 --> 0:15:00.960 On the consumer side, I think it was really interesting 0:15:01.000 --> 0:15:03.760 you had mentioned that the Federal Reserve data for the 0:15:03.800 --> 0:15:06.680 Center of Microeconomic Analysis earlier this week, there was a 0:15:06.760 --> 0:15:09.760 chart in there that showed financial distress, and it showed 0:15:09.880 --> 0:15:12.600 the percentage of consumers that thought they might need two 0:15:12.640 --> 0:15:16.000 thousand dollars coming up over a period of time and 0:15:16.080 --> 0:15:18.280 those who thought they would be able to get it, 0:15:18.560 --> 0:15:20.960 And those numbers are moving in the wrong direction, and 0:15:21.040 --> 0:15:23.280 so I think for those for the consumers at the 0:15:23.320 --> 0:15:25.800 low end of the of the economic spectrum, I think 0:15:25.800 --> 0:15:28.920 there's going to be a pressure point. That being said, 0:15:29.400 --> 0:15:33.080 I view it as more normalization as opposed to deterioration 0:15:33.160 --> 0:15:34.560 in the consumer That's. 0:15:34.400 --> 0:15:36.280 Where I was going to go with this, especially at 0:15:36.320 --> 0:15:38.560 a time when some people are saying we've only seen 0:15:38.720 --> 0:15:42.640 a small part of the ramifications from the FED tightening cycle. 0:15:43.240 --> 0:15:46.440 How far do you expect the deterioration to go and 0:15:46.480 --> 0:15:48.760 how will be expressed in your credit markets? 0:15:48.880 --> 0:15:52.520 So I think, you know, the first half of twenty 0:15:52.560 --> 0:15:55.840 twenty three has surprised us to the upside in the 0:15:55.960 --> 0:15:59.239 terms of the resilience of the corporate credit market. Specifically 0:16:00.000 --> 0:16:01.960 when you look at the highield market and the leverage 0:16:01.960 --> 0:16:05.320 loan market that hasn't extended though, all the way down 0:16:05.480 --> 0:16:07.760 to the very low end of the capital structure. So 0:16:07.960 --> 0:16:09.760 if you were to look at the current level of 0:16:09.760 --> 0:16:12.120 the high yield index, so three hundred and eighty basis 0:16:12.120 --> 0:16:14.440 points at that level, you would think that triple C 0:16:14.840 --> 0:16:17.320 spreads would be tighter than where they are now, around 0:16:17.320 --> 0:16:19.720 one hundred one hundred fifty basis points tighter actually, So 0:16:19.760 --> 0:16:22.160 we're not seeing that. So I think there's a limit 0:16:22.320 --> 0:16:29.120 to investors comfort with over leveraged deteriorating fundamentals that probably extends, 0:16:29.560 --> 0:16:31.200 and so there's a lot of talk about kind of 0:16:31.200 --> 0:16:35.000 the equity market rally broadening. What I actually think is 0:16:35.000 --> 0:16:38.640 there's probably some scope for resilience still at the high 0:16:38.760 --> 0:16:41.920 end of the high yield spectrum, specifically because supply has 0:16:42.000 --> 0:16:44.920 been so low technicals, which are really important as you 0:16:44.960 --> 0:16:47.160 know in the credit market, have been so friendly. But 0:16:47.200 --> 0:16:49.960 I think that's probably a near term issue. Over time, 0:16:50.200 --> 0:16:52.680 I would expect there to be a bit more weakness 0:16:52.720 --> 0:16:55.800 in that market as we see defaults flow through, as 0:16:55.840 --> 0:16:59.000 we see risk premiere rebuild. Importantly, we don't view a 0:16:59.080 --> 0:17:03.480 recession a necessary ingredient for an uptick in defaults. So 0:17:03.600 --> 0:17:06.560 similar to how these banks are talking about, you know 0:17:06.600 --> 0:17:09.000 we'll need these commercial real estate reserves even in a 0:17:09.040 --> 0:17:12.199 soft landing. I think enough damage has been done in 0:17:12.240 --> 0:17:14.600 the cost of capital environment that Tom alluded to that 0:17:14.800 --> 0:17:17.720 we'll see an uptick into faults. Regardless, it won't be 0:17:17.840 --> 0:17:20.240 broad based. It'll be more focused on, for example, the 0:17:20.320 --> 0:17:22.640 leverage loan market on a relative basis. But I don't 0:17:22.640 --> 0:17:23.320 think we're immune. 0:17:23.400 --> 0:17:25.520 Let's cut to the black rock chase. The bottom line 0:17:25.600 --> 0:17:28.000 is Globen Sachs has a page on commercial real estate. 0:17:28.080 --> 0:17:31.760 Tionelle covered that Allison Williams alluded to that we're talking 0:17:31.800 --> 0:17:35.720 this morning. We've got our wonderful offices at Queen Victoria 0:17:35.800 --> 0:17:38.360 Street in London, and there's a Motel six. I stay 0:17:38.400 --> 0:17:40.600 out across the street. It's like two blocks away, and 0:17:40.640 --> 0:17:44.920 in between our office and the Motel six is this 0:17:45.119 --> 0:17:47.639 office building. It's a b property and it's in the 0:17:47.680 --> 0:17:51.000 media this morning. Basically it's at half its value. I'm 0:17:51.040 --> 0:17:54.679 speaking as an amateur. Maybe it's forty percent, sixty percent discount. 0:17:55.080 --> 0:18:00.240 That seems awfully pervasive in each and every city. How 0:18:00.240 --> 0:18:02.879 to black rocks, how to black stones? How to black 0:18:02.960 --> 0:18:06.280 this black that? How do they adjust to that over 0:18:06.359 --> 0:18:08.639 say two years, over a reeficicycle. 0:18:08.760 --> 0:18:08.960 Yeah. 0:18:09.160 --> 0:18:11.680 So I again, I think we're early in the innings 0:18:11.720 --> 0:18:15.000 of this distress cycle, and I think what's really important 0:18:15.040 --> 0:18:17.440 is the price discovery. I think one of the other 0:18:17.840 --> 0:18:20.800 points of conservatism that are it's really going to be 0:18:20.880 --> 0:18:24.440 relevant in this particular cycle is that we look a 0:18:24.440 --> 0:18:27.160 lot at kind of Class A, Class B, Class C properties, 0:18:27.160 --> 0:18:29.720 but the market is evolving so quickly that those Class 0:18:29.760 --> 0:18:32.440 A properties may be reclassified lower. 0:18:32.600 --> 0:18:33.760 This is going forward. 0:18:35.040 --> 0:18:35.800 This is important. 0:18:35.840 --> 0:18:38.960 And I think just because something is Class A today, 0:18:39.880 --> 0:18:43.000 as it becomes older in ages and there's more competition 0:18:43.160 --> 0:18:47.520 and there's more price discovery, probably lower in competing assets, 0:18:47.880 --> 0:18:48.800 that may get all. 0:18:48.640 --> 0:18:49.480 Turned on its head. 0:18:50.000 --> 0:18:53.400 That's that's that's that's. 0:18:52.320 --> 0:18:54.679 A tech hose of fifteen years ago. When I hear 0:18:54.760 --> 0:18:56.120 you say things like that. 0:18:56.520 --> 0:18:57.080 It really is. 0:18:57.119 --> 0:18:59.560 I'm not saying it's as scarial will be, just you know, 0:19:00.080 --> 0:19:01.840 some similarities, that's in parallels. 0:19:02.080 --> 0:19:04.800 I think it's going to be a longer default cycle. 0:19:05.119 --> 0:19:07.080 In the financial crisis, we know that was a multi 0:19:07.200 --> 0:19:10.200 year cycle. Perhaps it gets frontloaded a bit. 0:19:11.160 --> 0:19:11.920 I don't know. 0:19:11.960 --> 0:19:13.600 I don't I don't think it is priced in it 0:19:13.840 --> 0:19:15.359 because of that. Price discovery is. 0:19:15.600 --> 0:19:17.560 Last discovery phrase. 0:19:19.520 --> 0:19:25.240 Excellent as silly clinic on commercial way to stay. 0:19:35.680 --> 0:19:37.880 Right now, we're gonna have a conversation that we did 0:19:37.920 --> 0:19:40.919 not have with Shnelli Bassek and Allison Williams. They are 0:19:40.960 --> 0:19:44.080 in the heat of the earnings coming out the numbers, 0:19:44.160 --> 0:19:48.200 the PowerPoint and the ratios. But with Strina o Rogen 0:19:48.240 --> 0:19:51.240 of Bloomberg News, we can sit back and actually look 0:19:51.280 --> 0:19:55.399 at the discussion that's being had. Sre I'm looking at 0:19:55.400 --> 0:19:57.720 a board. I'm gonna go all William Cohen on you here, 0:19:58.400 --> 0:20:01.919 David Vinnier who live two thousand and seven, two thousand 0:20:01.960 --> 0:20:05.440 and eight, Peter Oppenheimer who we talked to all the time, 0:20:05.560 --> 0:20:10.280 Kimberly Harris, a new board member, Kevin Johnson. What's the 0:20:10.359 --> 0:20:13.560 spirit of the board if they look and it's too 0:20:13.600 --> 0:20:16.800 much to say the train wreck, but just simply the 0:20:16.840 --> 0:20:21.120