Speaker 1: This is the Bloomberg Surveillance Podcast.
Speaker 2: I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz.
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Speaker 2: Drew Matis's chief market strategist at MetLife Investment Management. He
Speaker 2: has been wonderful about gaming the optimism of the American
Speaker 2: economic experiment. Drew, let's start with that glass half full,
Speaker 2: glass half empty at MetLife.
Speaker 3: Well, the good news is there's not gonna be a
Speaker 3: recession this year. The bad news is it's still coming,
Speaker 3: and you know it's we've had to move back our
Speaker 3: forecast from midyear to the start of next year. The
Speaker 3: reason we went that far actually is because we think
Speaker 3: can so comers are still in this ballgame. They're still
Speaker 3: in this you only live once mentality post COVID.
Speaker 4: But we do think when you get to the.
Speaker 3: Start of next year, you'll have a lot of more
Speaker 3: headwinds and some of the data now that's currently pointing
Speaker 3: towards a recession will probably be even worse. And we
Speaker 3: think the turn of the year is about the right time.
Speaker 2: The raging economic debate, and maybe this will be alluded
Speaker 2: to in the academics of Jackson Hole is whither our start?
Speaker 2: Whither the rate post pandemic? We're gliding too, Matt life
Speaker 2: is riveted to the actuaro return expected within longer term portfolios.
Speaker 2: Have you adjusted that view, have you lowered your expectations
Speaker 2: for return or can you be more optimistic about a
Speaker 2: better return post pandemic?
Speaker 3: So I'll say this when we think about you know,
Speaker 3: so let's get past the next recession whenever that is right.
Speaker 4: We think it's next year. But let's just say in.
Speaker 3: The future, when you come out of that recession, what
Speaker 3: are you going to have? We're very optimistic there, and
Speaker 3: that means higher potential growth rates. We think that there's
Speaker 3: the potential for participation rate rebound even beyond what we're seeing.
Speaker 3: Higher productivity, although it's hard to get lower than we
Speaker 3: currently are, but we expect the rebound and productivity that's
Speaker 3: sustainable and will be sizable, and we expect therefore that
Speaker 3: potential growth will be higher, and with potential growth being higher,
Speaker 3: we expect neutral interest rates to also be higher.
Speaker 4: At that point, do.
Speaker 5: You build that out a little bit more. What's going
Speaker 5: to drive higher that productivity, potential growth, high neutral interest rates?
Speaker 5: Where does all that come from?
Speaker 3: I think so, first of all, from kind of a
Speaker 3: worker perspective, I think you're going to have people engaging
Speaker 3: in the workforce for longer, over longer periods of their lives,
Speaker 3: and during healthier periods of their lives. I think the
Speaker 3: healthy period of people's lives are going to expand, and
Speaker 3: I think that that's a consequence of some of the
Speaker 3: gains made in biotech during the during the COVID problem.
Speaker 3: So I think that that So that's first and foremost. Secondly,
Speaker 3: work from home will encourage older workers potentially stay in
Speaker 3: the workforce for a little bit longer, and I think
Speaker 3: firms are going to respond to that by making it
Speaker 3: easier for older workers to stay in the workforce for longer.
Speaker 3: And so not only are we going to potentially have
Speaker 3: this rebound that we're seeing in kind of the so
Speaker 3: called prime working age group, but we're also going to
Speaker 3: see other groups actually engaging more aggressively in the workforce
Speaker 3: and that'll be good for the US economy as a
Speaker 3: whole productivity wise. You know, I'm doing this for my
Speaker 3: office via zoom, right. I mean, in the past, this
Speaker 3: would have been very difficult for us to pull off,
Speaker 3: and it's just a much more convenient and productivity enhancing arrangement.
Speaker 3: And I think if you go through and look at
Speaker 3: whether it's the cost of putting objects in space which
Speaker 3: is deteriorate significantly or lowered significantly, when you look at
Speaker 3: gains in biotech. You know, for twenty five years we
Speaker 3: were promised miracles in biotech and we finally saw some,
Speaker 3: and no one's paying attention, right because we were distracted
Speaker 3: by the fact that, you know, it was a crisis situation.
Speaker 3: But you know, those things all add up and they'll
Speaker 3: all begin to interact with each other in ways that
Speaker 3: you know, I can't probably fathom completely how they'll all interact,
Speaker 3: but they'll be productivity enhancing and I think we're in
Speaker 3: for a big productivity ride once we get through this
Speaker 3: next countern.
Speaker 5: How right sensitive do you think the economy will be
Speaker 5: that you describe?
Speaker 3: You know, I think initially every every economy is very
Speaker 3: sensitive because you have to finance all this stuff. But
Speaker 3: I think you know, in some ways, you know, the
Speaker 3: die is cast in some of these industries. You're seeing
Speaker 3: the deteriorate or the lowering of price and cost of
Speaker 3: getting things into orbit. That's already happened, and so you know,
Speaker 3: I think for Noaly, it's just a matter of how
Speaker 3: do we exploit it best? And you know whether or not,
Speaker 3: you know, my forecast is going to hinge on on
Speaker 3: on kind.
Speaker 4: Of you know, you know, am I right? Am I wrong?
Speaker 3: Which I know sounds obvious, but I do think that
Speaker 3: you know, the history has shown you should be optimistic
Speaker 3: for developments in technology, not pessimistic.
Speaker 2: So then what does that give your GDP statistic out
Speaker 2: one year? I'm not talking about quarter to quarter or
Speaker 2: that on a longer broader term. You're in a meeting
Speaker 2: in met life for people's idea of short term is
Speaker 2: ten years? What's your GDP run rate? Can you get
Speaker 2: above two percent real GDP?
Speaker 3: If I had to put potential growth ten years from now,
Speaker 3: I'd probably put it closer to three than two and
Speaker 3: a half.
Speaker 2: Wow, three real percent real GDP?
Speaker 4: I think that that is a reasonable estimation.
Speaker 2: Wow, that John, that is a Wow, statistic from dumatics.
Speaker 2: I can't convey how off norm that is. And that
Speaker 2: goes to the responsibilities of an insurance company. Yeah, where
Speaker 2: they're really focused every day on a long term view.
Speaker 5: As tray, can we finish on and this just quickly.
Speaker 5: If we get a rate hiking cycle ending with a
Speaker 5: hike this week, let's just say that, maybe you get
Speaker 5: another one, but who knows when they start cutting. Have
Speaker 5: you got firm ideas on what they cut back to,
Speaker 5: because clearly there's a consensus out there that we don't
Speaker 5: go back to zero. What's your view on that currently?
Speaker 3: I think that I think there'll be a three handle
Speaker 3: at the low point for the next.
Speaker 5: Cycle, Okay, and you think the bond market is well
Speaker 5: priced for that. Given the way you see the yell
Speaker 5: curve evolving in the last few months, I'm actually.
Speaker 3: A little surprised at where the your curve is given
Speaker 3: this expectation that we're in a you know, we're going
Speaker 3: to have a soft landing. To be honest, I think
Speaker 3: you know, when you think about what a soft landing means,
Speaker 3: it means that the FED probably wouldn't have to refers course,
Speaker 3: so they're going to be stuck a kind of this fire,
Speaker 3: you know, five percent five percent plus for a FED funds, right,
Speaker 3: And so where should the rest of the your curve
Speaker 3: be in that kind of scenario? And what should that
Speaker 3: yr curve be shaped like? And when I look at
Speaker 3: the current shape of the your curve, I don't I
Speaker 3: don't see that reflecting that belief.
Speaker 5: Dree Matis, thank you of MetLife Investment Management.
Speaker 2: Marilyn Watson briefs now had a global fundamental fixed income
Speaker 2: strategy at Blackrock. This is an incredibly important conversation, folks
Speaker 2: on what the prescription is forward which Maryland is to
Speaker 2: be flexible in nimble. I'm going to editorialize into twenty
Speaker 2: twenty five how am I flexible in nimble clipping coupons
Speaker 2: in fixed income?
Speaker 6: So in fixed income at the moment, as you say,
Speaker 6: I think you do need to be flexible, and you
Speaker 6: need to be nimble because it's a very uncertain environment.
Speaker 6: Still at the moment you can get very attractive carry
Speaker 6: at the front end of the curve. Still also in
Speaker 6: commercial paper, in some short dated investment grade bonds, and
Speaker 6: at the moment it pays to actually not take too
Speaker 6: much duration risk, not take too much risk, but just
Speaker 6: clip those coupons and get the income. But as the
Speaker 6: economy evolves in the US and in Europe and elsewhere,
Speaker 6: as we get more information from the FED tomorrow, from
Speaker 6: the ECB on Thursday, and over the next few weeks
Speaker 6: and next couple of months, as we continue to see
Speaker 6: more economic data from the US or from the Eurozone,
Speaker 6: which as you mentioned earlier, has seen some pretty weak
Speaker 6: data in the Eurozone at the moment, then we will
Speaker 6: continue to see a shift both in the Yelk curve
Speaker 6: and in the opportunities that I think they're available. So
Speaker 6: at the moment, I think it pays to get the carry,
Speaker 6: to not take too much risk, but then to be
Speaker 6: able to really deploy that dry powder when the opportunities arise.
Speaker 2: I need to conflate in here, Maryland the news now,
Speaker 2: and it's Torsen Slack writing for Apollo. Looking at loans.
Speaker 2: I mentioned loans in the previous hour is a mystery
Speaker 2: to me. The default rate of high yield and such.
Speaker 2: Is the market too complacent about what is to come
Speaker 2: in commercial real estate, what is to come in these
Speaker 2: strange leverage loan vehicles in derivatives within your world? Are
Speaker 2: we too complacent.
Speaker 6: So I don't know that it's too complacent, but I
Speaker 6: don't think there's a very clear view on the trajectory
Speaker 6: of the economy going forward. At the moment, you know,
Speaker 6: our core view is that there won't be your recession
Speaker 6: this year in the US. We think that the US
Speaker 6: remains pretty resilient, and while it is slowing, it remains
Speaker 6: on a pretty solid footing. And when you look at
Speaker 6: the commercial real estate sector then it has already been
Speaker 6: negatively impacted by the very aggressive rate hikes, but as
Speaker 6: you say, perhaps not as much as some people may
Speaker 6: have expected. When you look at leverage loans and elsewhere
Speaker 6: you look at, you know, high yield overall has performed
Speaker 6: very well this year. But I think at the moment,
Speaker 6: you know, a lot of investors are still looking at
Speaker 6: really getting in, i think, in the bottom up fundamentals.
Speaker 6: So there's a big difference between the different bonds and
Speaker 6: the different issuers that you also buy within the highal
Speaker 6: sector and the spread and the total yield that you
Speaker 6: can get there as well. But at the moment, I
Speaker 6: think there isn't really a consensus on the trajectory of
Speaker 6: the economy and how bad if it's bad at all.
Speaker 6: It will be next year, so I don't know if
Speaker 6: it's complacent. I think there's just not yet enough data
Speaker 6: for the market to be able to tell.
Speaker 5: Let's work through some of this work from Torston Slot
Speaker 5: this morning and Marilond good morning, all able to share
Speaker 5: their full quote. Markets are not taking the ongoing rise
Speaker 5: in default rates for high yield and loads seriously. Many
Speaker 5: investors argue that this is just normalization, or these are
Speaker 5: companies nobody has heard about, the reality is that more
Speaker 5: and more companies are defaulting because the cost of capital
Speaker 5: is higher. Higher cost of capital is precisely how monetary
Speaker 5: policy works by making it more difficult to get financing.
Speaker 5: The FED hikes are biting harder and harder, and all
Speaker 5: investors should have a view on how high they think
Speaker 5: default rates will go during this cycle. Marilyn, can you
Speaker 5: have a view on that today? And would that leads
Speaker 5: you to believe that you should back away from easure
Speaker 5: of this market which are going to face much much
Speaker 5: higher funding costs when they come back to market in
Speaker 5: maybe twelve months eighteen months from now.
Speaker 6: Yeah, I think you can. And as I say, at
Speaker 6: the moment, you don't need to take the credit risk
Speaker 6: in the high yield sector when you can get very
Speaker 6: decent carry elsewhere much higher up the credit spectrum. I
Speaker 6: think also, you know, when you're looking at your overall allocation,
Speaker 6: when you look at the equity market versus the high
Speaker 6: old market, for example, we also like some of the
Speaker 6: beta in the equity markets, so you don't need to
Speaker 6: take the risk there, you don't need to take the
Speaker 6: credit risk. So you can take a view, and our
Speaker 6: position at the moment, I would say is relatively cautious.
Speaker 6: It's relatively you know, high quality, and as I say,
Speaker 6: we're being very nimble and we're really stirring clear of
Speaker 6: too much duration risk, although we have added a little
Speaker 6: bit there. But we're also just being very very cautious
Speaker 6: from a bottom up perspective, and we want to know
Speaker 6: and understand exactly what we're buying in every single issuer,
Speaker 6: in every securitized asset, in every investment grade bond. We
Speaker 6: want to understand exactly the fundamentals from bottom up perspective
Speaker 6: of the issue itself and of the sector as a whole.
Speaker 6: I think you can take a view and at the moment,
Speaker 6: we don't think it pays to take the risk further
Speaker 6: down the credit spectrum.
Speaker 5: You mentioned they're taking on a little bit more duration risk.
Speaker 5: Can you give us a little bit more kind of there?
Speaker 5: What have you been doing?
Speaker 6: So we've added a little bit on the margins because
Speaker 6: you know, it is our view that the Fed, you know,
Speaker 6: will hike again this week and then maybe pause. The
Speaker 6: Fed itself has indicated in the you know, the previous
Speaker 6: summary of Economic projections potentially one more hike, but we
Speaker 6: don't know that yet. Obviously, we need to see a
Speaker 6: lot more data to see whether that comes through or not.
Speaker 6: But we have been adding a little bit more duration
Speaker 6: in the front end and the belly of the curve
Speaker 6: in the US. Also in the Eurozone, you know, we
Speaker 6: think that the ec people will hike again this week.
Speaker 6: They may hike again in September, but that's nowhere near
Speaker 6: a clear cut scenario anymore given the data, and it
Speaker 6: does we do think it now pays to take a
Speaker 6: little bit duration, more duration risk, a little bit more yields,
Speaker 6: and just to lock in some of those rates.
Speaker 5: Not even the hawks on the ECB you want to
Speaker 5: commit to an I think beyond this week. Find that interesting,
Speaker 5: marinin Thank you, Mariam, what's in a black rock and
Speaker 5: Joy London mantin it's good to see it.
Speaker 2: Yeah, I remember John when you whispered to me somewhere
Speaker 2: in May of twenty twenty General Motors, Tom, General Motors
Speaker 2: are going to do it twenty to sixty and then
Speaker 2: a challenge last year to say the least, and now
Speaker 2: ebbing and flowing you thirty five to forty. It has
Speaker 2: been a challenge for General Motives, including all manufacturers through
Speaker 2: the pandemic and now they look to profitability. Joining us
Speaker 2: as chief financial officer driving the financial ratios at the
Speaker 2: complexities of the future of General Motors, Paul Jacobson joins.
Speaker 1: Us this morning.
Speaker 2: Paul defined profitability. We're in the income statement. Are you
Speaker 2: zeroed in on on profitability out twenty four months out
Speaker 2: five years for General Motors.
Speaker 7: Well, good morning, Tom, and thanks again for having us.
Speaker 7: It's always always a pleasure to be with you, especially
Speaker 7: on a day like today where we're announcing the tremendous
Speaker 7: results that the GM team put forward, and I just
Speaker 7: want to extend a great big thanks to them worldwide
Speaker 7: for the results that they posted during the quarter. You know,
Speaker 7: when we're looking at when we're looking at profitability, you know,
Speaker 7: it's a whole range of outcomes. Obviously, ebit matters. But
Speaker 7: one of the things I think we've been really focused on,
Speaker 7: and I think it's worked for us, is the combination
Speaker 7: of market share and margin and growth. So the end
Speaker 7: of the day, it's not just about producing and selling
Speaker 7: more vehicles. It's about making sure that we're maintaining and
Speaker 7: expanding our margins going forward. And when you look at
Speaker 7: the track record that we've had, especially over the last
Speaker 7: six months, but really over kind of the last six quarters,
Speaker 7: the team's done an amazing job producing vehicles that customers demand,
Speaker 7: and you know, our biggest challenges we can't get them
Speaker 7: fast enough. But customers have really responded and we really
Speaker 7: appreciate that.
Speaker 2: Okay, that's right where I want to go, and that
Speaker 2: there's a shortage of you know, there's always in every
Speaker 2: company four or five vehicles. Everybody wants the same car.
Speaker 2: Do you have a lot of pricing flexibility now into
Speaker 2: twenty twenty four, Can you raise prices?
Speaker 7: Well, I'm not sure that we're going to be able
Speaker 7: to raise prices across the board, but one of the
Speaker 7: things that we've seen that has really manifested itself is
Speaker 7: customers demanding higher trim levels. In fact, we created over
Speaker 7: the last eighteen months the Denali Ultimate, which was a
Speaker 7: higher end trim level than our high end Denali on
Speaker 7: the GMC Ukon's in response to customers wanting them. And
Speaker 7: now what we see when we look at our trucks
Speaker 7: in our SUVs, about seventy to seventy five percent of
Speaker 7: them are being priced at premium levels where customers are
Speaker 7: demanding that. So I think we've done a good job
Speaker 7: of responding to where customer demand is and what they're
Speaker 7: looking for in our products. As far as the core prices,
Speaker 7: obviously the business is really competitive. We focus on price
Speaker 7: stability and I think I think our results show that
Speaker 7: we've done a good job with that.
Speaker 1: John a pickup truck. This used to be you know, you.
Speaker 2: You you wanted an old GM pickup truck that you
Speaker 2: could drive around with your guitar next to you, and
Speaker 2: you know, the.
Speaker 5: Whole scrump yourself.
Speaker 2: If you're done at Auburn University and you get an
Speaker 2: old GM pickup truck that you paid dead paid three
Speaker 2: thousand dollars, you could see the road through the floor.
Speaker 2: GMC Sierra Denali Ultimate Ready ninety one dollars. That's not
Speaker 2: Paul sell them today.
Speaker 5: So Paul, are you telling us that you're expecting higher
Speaker 5: average selling prices in the second half.
Speaker 7: Yeah, so, John, we we saw we saw higher ATPs
Speaker 7: in the second quarter, about sixteen hundred dollars higher than
Speaker 7: the first quarter sequentially. You know, I think we're going
Speaker 7: to continue to watch it. We've taken this whole year
Speaker 7: with a little bit of caution, just understanding the macro
Speaker 7: that's out there, and what we said at the beginning
Speaker 7: of the year was if the customer held in and
Speaker 7: we were able to maintain pricing, we expected to significantly
Speaker 7: outperform the guidance that we posted. And then after the
Speaker 7: first quarter, we raise guidance by five hundred million dollars
Speaker 7: on the EBIT line, and now we're raising it by
Speaker 7: a billion dollars. So we see a lot of stability
Speaker 7: in the market. We're just kind of taking it one day,
Speaker 7: one month at a time and watching the results come in.
Speaker 7: We've got to be focused on quality, and we've got
Speaker 7: to be focused on getting production in the vehicles that
Speaker 7: customers want.
Speaker 5: Let's just talk about customers a little bit more. We
Speaker 5: saw some data recently I think from the further reserve
Speaker 5: in the last couple of weeks about people being rejected
Speaker 5: for auto loans, Paul, can you give us an idea
Speaker 5: of how some of these purchases are being financed and
Speaker 5: the kind of trends you seeing develop.
Speaker 7: So, you know, we've got a lot of good insight
Speaker 7: on that through our GM Financial captive company, and their
Speaker 7: results are pretty strong. We continue to write new loans.
Speaker 7: In fact, we've written at a higher share the first half
Speaker 7: of the year than traditionally, which is not a bad thing.
Speaker 7: We're there to meet our customers where they need us,
Speaker 7: and GM Financial has done a great job of that.
Speaker 7: We watch the credit metrics on a weekly basis across
Speaker 7: their entire portfolio, and we haven't seen anything that gives
Speaker 7: us a reason for concern. You know, we have really good,
Speaker 7: high quality borrowers on our new vehicles and the credit
Speaker 7: is performing quite well from that, so we understand obviously
Speaker 7: in the subprime world in some of the used cars,
Speaker 7: where we've seen banks tightening a little bit, that's not
Speaker 7: necessarily our Forte, but certainly where we're lending on new vehicles,
Speaker 7: the results are pretty strong.
Speaker 2: And Paul, I'm going to pick on Ittey mccaulley. It's
Speaker 2: City Group, and that you know from the pandemic from
Speaker 2: the end of twenty nineteen, I got a shareholder return
Speaker 2: of three percent, four percent per year, whatever the number is,
Speaker 2: it's low single digit. Clearly it's not acceptable. The fact is,
Speaker 2: somebody is knowledgeable, as Ittay mccaullay or the team over
Speaker 2: at Bloomberg Intelligence looks for huge share price.
Speaker 1: Performance from GM.
Speaker 2: What is going to be the catalyst for people to
Speaker 2: realize a new profitability of GM.
Speaker 1: What's the thing that's going to.
Speaker 2: Get me to it's McCauley's price target, which is a double.
Speaker 1: Yeah.
Speaker 7: So that's the question of the day, Tom, and one
Speaker 7: that we spend a lot of time thinking about. Obviously
Speaker 7: for our shareholders, you know, one of the things that
Speaker 7: we've got to do is we've just got to continue
Speaker 7: to consistently perform. I'm a big believer that the market
Speaker 7: can ignore fundamentals too long, and when you look at
Speaker 7: the type of performance that we've been driving, I think
Speaker 7: we're establishing a really good track record of credibility. So
Speaker 7: that's job one number two. On the macro side, Clearly,
Speaker 7: it's been a bit of a headwind over the last
Speaker 7: eighteen months. As you know, expectations are consistently downward from
Speaker 7: where we are, which is why it's so important now
Speaker 7: that we've put two quarters out there with a raise
Speaker 7: on the guidance this year will be really, really strong.
Speaker 7: We're overcoming pension headwinds, we're overcoming some normalization at GM
Speaker 7: Financials earnings. But you know, the results are going to
Speaker 7: be very similar, if not, if not potentially better better
Speaker 7: than last year. So that's what we're focused on. On
Speaker 7: the market, I think it'll come around. You know, we've
Speaker 7: got to make sure that the macro clears up a
Speaker 7: little bit. I think we've seen that over the last
Speaker 7: couple of months. And you know, I think we've got
Speaker 7: to make sure that we reach an agreement with the
Speaker 7: UAW not just for us, but as an industry because
Speaker 7: obviously there's some uncertainty around that in investors' eyes. But
Speaker 7: we're focused on executing. We're focused on getting a deal
Speaker 7: that works for our people and rewards them for the
Speaker 7: tremendous work that they're doing across the board.
Speaker 5: Paul, Ready, I'm fair of us to save this question
Speaker 5: until the end because we only have a couple of
Speaker 5: minutes left, but I need to get this in. There
Speaker 5: is some subtle indicators worldwide the EV demand is tailing.
Speaker 5: GOFF and I asked this question to you as a CFO,
Speaker 5: how do you manage the risk of a massive investment
Speaker 5: cycle and a huge push wholesale just going into EV
Speaker 5: not working out and in five to ten years consumers
Speaker 5: don't want this stuff. We see greater efficiency through hybrids,
Speaker 5: maybe even fantastic sustainable fuels. Paul, as a CFO of
Speaker 5: a car company right now, how do you manage that risk?
Speaker 7: Well, John, I think that's it's a great question, but
Speaker 7: it's one that you know, when I look at the
Speaker 7: portfolio of vehicles that we have really really great internal
Speaker 7: combustion engine vehicles and a growing EV business off of
Speaker 7: a platform where we've designed EV's from.
Speaker 1: The ground up.
Speaker 7: A lot of the evs that are on the market
Speaker 7: are you know, traditional ice vehicles where you know companies
Speaker 7: have put a battery solution into it and it's it's
Speaker 7: not optimized in that standpoint. When you look at the
Speaker 7: Altium platform of vehicles where we're growing production very very rapidly.
Speaker 7: Now we think we've got vehicles that customers demand, and
Speaker 7: you certainly see that in our order books across the board.
Speaker 7: So one of the things that you haven't seen from
Speaker 7: us is the type of pricing volatility that many of
Speaker 7: our competitors are experiencing with some of those vehicles that
Speaker 7: were early to market. We think our vehicles, when you
Speaker 7: look at the Silverado EV forty percent more range than
Speaker 7: anything else that's out there across the board. We think
Speaker 7: we can win customers over over the long term, but
Speaker 7: we've also got a very good ice portfolio to fall
Speaker 7: back on and it's driving incredible performance for us.
Speaker 5: I said it was unfair. It was unfair because we
Speaker 5: need a much longer conversation about this in the future. Paul,
Speaker 5: appreciate your time, sir, the General Motors c FO, this
Speaker 5: is a joy.
Speaker 1: Let us SeGW me here right now. To Michael Jesus.
Speaker 2: He's out of Georgetown with tours of duty along the way,
Speaker 2: particularly in municipal finance. He is now global head of
Speaker 2: fixed income research at Morgan Stanley and I just I
Speaker 2: can't say enough Michael, the idea of a guy with
Speaker 2: massive policy credit like you, a municipal bond, the granularity
Speaker 2: of municipal bonds in America doing global fixed income research.
Speaker 2: What does your skill set bring to this new position
Speaker 2: at Morgan Stanley. To me, it's radically different than most
Speaker 2: quote global heads of fixing.
Speaker 8: Well, I think at the very high level, develop markets
Speaker 8: in general have had this interaction with public policy that
Speaker 8: we used to just really be the area for emerging markets, right,
Speaker 8: So I think you need those interacting skill sets, and
Speaker 8: even like day like today and tomorrow, where we're waiting
Speaker 8: on the FED, it's important to understand the public policy
Speaker 8: nuance behind all of that.
Speaker 1: Right.
Speaker 8: So one of the reasons that we're so constructive on
Speaker 8: the bond markets right now is that the FED is
Speaker 8: kind of, over the last eighteen months gone over this
Speaker 8: trajectory where it was creating substantial uncertainty in the bond
Speaker 8: market in order to deal with inflation that arguably was
Speaker 8: created by some of the fiscal policy choices made along
Speaker 8: the way by the US government and by both parties.
Speaker 8: Understanding that trajectory means that whether or not the FED
Speaker 8: goes through with that second hike in September, that they're
Speaker 8: signaling that the job is almost done or that they've
Speaker 8: almost got inflation under control, as they feel they do.
Speaker 8: You switch from massive uncertainty in the bond markets for
Speaker 8: creating volatility in the way that I think municipal bond
Speaker 8: investors understand that if you've got elevated volatility and you've
Speaker 8: got negative total returns because yields are going higher, that
Speaker 8: regardless of the fundamentals, that's a really negative backdrop. We're
Speaker 8: kind of reversing that and putting on right.
Speaker 2: Right now, I'm fascinated by when I look at fixed
Speaker 2: income in the equity market, we all have a legacy
Speaker 2: of shadows and opaqueness out there. Right now, all my
Speaker 2: radar is up on this opaque word loans, yeah, or
Speaker 2: leveraged loans are that? Does Morgan Stanley Fixed Income Research
Speaker 2: feel there are challenges in the fixed income space, shadows
Speaker 2: that we really can't observe.
Speaker 8: Well, yeah, absolutely. I mean, so, for example, once we
Speaker 8: get into twenty twenty four and then really escalates through
Speaker 8: twenty twenty eight, in leverage finance, there is a substantial
Speaker 8: wall of maturities and unless you get a meaningful amount
Speaker 8: of free cash flow growth, you're going to get an
Speaker 8: interest coverage going down substantially. So, for example, if you assume,
Speaker 8: which I think is a far too concern, the assumption
Speaker 8: that you don't get any free cash flow growth. About
Speaker 8: a third of single bees, all of a sudden, have
Speaker 8: sub one one time's coverage. So that's a real challenge,
Speaker 8: and arguably it's one of the structural challenges that's kept
Speaker 8: spreads relatively attractive. Another one that's kept spreads relatively attractive
Speaker 8: is the bank demand issue and how that's changed since
Speaker 8: the regional banking crisis. So these are things we have
Speaker 8: to watch on the horizon. They're secular headwinds, but I
Speaker 8: think the setup for high grade bonds right now is
Speaker 8: pretty positive, at least into your end, because they're taking
Speaker 8: away this uncertainty from the FED and fighting inflation.
Speaker 5: Something we've been digging into over the last week or
Speaker 5: so is who is actually paying these market rates? And
Speaker 5: a question I've asked, and if you could give us
Speaker 5: an idea, don't expect the precise numbers, but just the
Speaker 5: difference between what a company's coupon is right now from
Speaker 5: debt isssue would issued in the last couple of years.
Speaker 5: So what the market rate for that interest is if
Speaker 5: they came to the market today, Just how wide?
Speaker 9: Yeah?
Speaker 4: Is that? Well?
Speaker 8: Okay, So our chief process strategist Andrew Sheets wrote about
Speaker 8: this on Sunday, and it's fascinating that in a lot
Speaker 8: of ways across the capital structure of markets, the bond
Speaker 8: yield if the bond is yielding more than the assets financing,
Speaker 8: which is totally upside down. So the Investment Great Corporate
Speaker 8: Credit Index yields about five point four percent, the Russell
Speaker 8: one thousand, the earning yield is only about four point
Speaker 8: eight percent. That's not totally unprecedented, but it's pretty unprecedent.
Speaker 8: It's only happened two percent of the time in the
Speaker 8: last twenty years.
Speaker 1: Right.
Speaker 8: That difference kind of makes sense if you thought that
Speaker 8: we were about to accelerate economic growth pretty substantially, but
Speaker 8: we've got the opposite. If you are economists think we're
Speaker 8: continuing to slow down. Obviously we haven't slowed down as
Speaker 8: much as we thought we would, but without that growth,
Speaker 8: then there's a problem if you're having to finance with
Speaker 8: a higher yield than you're actually earning.
Speaker 5: From Tom touched on this, When does it start to bite?
Speaker 5: Can we just build that out just a little bit
Speaker 5: more that it's going to buy certain parts of the
Speaker 5: economy and certain issues more than others quickly than others,
Speaker 5: but just on average, what does it start to buy?
Speaker 8: Well, I think it's already starting to bite, and I
Speaker 8: think the last CPI print sort of showed that right.
Speaker 8: And it's part of the reason that our economists that
Speaker 8: think that they were here, they would tell you that
Speaker 8: the Fed, yes, they're going to hike this month, but
Speaker 8: I think ultimately are probably not going to hike in
Speaker 8: September because the accumulated effect of everything that's being done
Speaker 8: so far is going to be tightening in and of
Speaker 8: itself over the course the rest of the year. So
Speaker 8: that is also a good setup for bonds and bond
Speaker 8: yields and total returns.
Speaker 2: What is a Bloomberg total return index to off Lehman
Speaker 2: and Barclays. I'm looking at a Microsoft. I picked Microsoft, folks,
Speaker 2: just because the yearnings. I believe or not, Microsoft does
Speaker 2: have debt. I don't know if you were.
Speaker 1: Aware of that.
Speaker 2: I go out ten years to Microsoft two and five
Speaker 2: eighths of thirty three, and I've enjoyed a time king
Speaker 2: price decline from one thirty down to ninety seven.
Speaker 1: What's the likelihood, given a.
Speaker 2: High rates is sustained high rates that we see a
Speaker 2: price breakdown through the lows of the last number of months.
Speaker 8: I don't know that you necessarily get a substantial price breakdown.
Speaker 8: I think a lot of the return you're going to
Speaker 8: see is going to come off of yield and coupon,
Speaker 8: mostly because while the FED could be closer to the
Speaker 8: end h being done hiking, there's still the secular headwinds
Speaker 8: that we talked about, right, There's still the bank demand
Speaker 8: headwind there's still some lingering credit issues. So it's not
Speaker 8: in the chilly environment where you're going to get yields
Speaker 8: moving a lot lower or spreads moving a lot tighter,
Speaker 8: But clipping that coupon in and of itself is quite
Speaker 8: attractive relative to equities, which are probably going to be
Speaker 8: more challenged than our estimates.
Speaker 1: Channeling Mike Wilson there, I mean, you see you think channeling.
Speaker 1: You know, how much do you and the equity guys
Speaker 1: talk to each other?
Speaker 2: By that, I mean, Mike's making all the adlines today
Speaker 2: talking about the challenges of a bear market.
Speaker 1: Short Paul he hasn't changed his view as well.
Speaker 2: But how much does fixed income and Morgan Stanley go
Speaker 2: back and forth with equity?
Speaker 8: The collaboration is constant. Yeah, I mean We're still on
Speaker 8: the same floor by each other. We're on calls weekly, collaborating,
Speaker 8: making sure that we're challenging each other. So uh, the answer,
Speaker 8: in short is a lot.
Speaker 5: Michael, this was great. That's going to say it, thank you,
Speaker 5: thank you, just awesome as a wise.
Speaker 2: And now joining us the David Rubinstein as well with
Speaker 2: the Carlisle Group, and of course has worked for Bloomberg
Speaker 2: Wealth as well. What a timely conversation, David. What did
Speaker 2: Barry Sternlick say about the commercial real estate dibeccle to come.
Speaker 9: Well, he thinks it's going to be a hurricane, you know,
Speaker 9: kind of a Category five hurricane. What you have is
Speaker 9: a combination of people not going back to work physically
Speaker 9: and people really uh, because of higher interest rates, not
Speaker 9: valuing buildings as much as they used to. So the
Speaker 9: result is you have an enormous amount of commercial office
Speaker 9: space in this country that's worth a fraction of what
Speaker 9: it was supposed.
Speaker 4: To be worth.
Speaker 9: And at some point over the next couple of years
Speaker 9: or so, Barry Sternlick would say, and others would say
Speaker 9: as well, this real estate is going to have to
Speaker 9: go into the fault in some way or another. The
Speaker 9: banks are not going to be able to really justify
Speaker 9: the debt that they have on the buildings, and the
Speaker 9: landlords aren't going to be able to pay the debt.
Speaker 9: So you're going to see a very large effort to,
Speaker 9: i say, sell out of this debt at discounts, and
Speaker 9: it's going to cause some problems in the banking community
Speaker 9: and the real estate community.
Speaker 2: There's a suppleness to Barry Sternlick's career. Folks, if you're
Speaker 2: just joining us, this is the conversation. They would like
Speaker 2: to say to mister Rubinstein. That will extend this discussion
Speaker 2: for one hour. But John Ferrell would be upset by that.
Speaker 2: At nine zero zero, David Rubinstein, this is so important.
Speaker 2: Who is Barry Sternlick and why do people like you
Speaker 2: lean forward?
Speaker 9: Barry Sternlick is one of the major forces in the
Speaker 9: US real estate market. He built a very large company
Speaker 9: in the commercial office building and commercial real estate world,
Speaker 9: but he also built a large hotel company. He ultimately
Speaker 9: sold that to Marriott, but Starwood Hospitality was for a
Speaker 9: long time one of the largest hotel companies the United States.
Speaker 9: Consisted of major brands like Weston and Sheridan, among others.
Speaker 9: He also invented the W brand, which is now owned
Speaker 9: in effect by Marriott. But even when he sold all
Speaker 9: that to Marriott, he kept his real estate company, which
Speaker 9: is now one of the largest in the United States,
Speaker 9: and it owns enormous amounts of properties across the spectrum
Speaker 9: of real estate properties, and he would say a lot
Speaker 9: of it is struggling. He has turned some buildings back
Speaker 9: to the lenders, as most real estate developers and owners
Speaker 9: of real estate are beginning to do, unfortunately. And so
Speaker 9: he made his name, I would say, initially in the
Speaker 9: late nineteen eighties buying distressed real estate from the RTC.
Speaker 9: And I suspect he thinks there's going to be a
Speaker 9: lot of distressed real estate in the next couple of
Speaker 9: years as well. Hopefully he hopes it's not going to
Speaker 9: be his real life state.
Speaker 2: Did well, okay, But to stress real estate, David Rubinstein
Speaker 2: clearly means the Japanese show up. We're beginning to see
Speaker 2: that Crane CJ. Hughes over at Cranes writing out new
Speaker 2: Japanese interest in the island of Manhattan as well.
Speaker 1: Well.
Speaker 2: History repeat itself in our commercial real estate Tobacco, where
Speaker 2: the foreigners show.
Speaker 9: Up well, usually what happens is foreigners show up before
Speaker 9: the debacle curse, not after the debacle curse.
Speaker 1: Right now, I think.
Speaker 9: You're seeing a slow diminution and values in office buildings.
Speaker 9: Anybody who's watching this show knows that when you go
Speaker 9: to a major office building in New York or other
Speaker 9: major cities todays, you don't see a lot of people there,
Speaker 9: and therefore, eventually the people using that real estate are
Speaker 9: going to say, I don't need as much space as
Speaker 9: I used to because people are working from home three
Speaker 9: days a week or two days a week, and therefore
Speaker 9: I'm going to shrink in my next lease the amount
Speaker 9: of space I have, And therefore you're going to see
Speaker 9: enormous shrinkage in the I think, the usage of office buildings,
Speaker 9: and as a result, the values of the leases are
Speaker 9: going to go down, and as a result of buildings
Speaker 9: property of value is going to go down as well.
Speaker 9: In some cases, the banks are going to be forced
Speaker 9: to take over the building because the landlord can't afford
Speaker 9: to service the debt any longer. This is going to
Speaker 9: take place over another two or three.
Speaker 1: Years or so.
Speaker 2: Is Barry sternlicked an optimist? I guess the durability of
Speaker 2: work from home and the migration of commercial real estate
Speaker 2: office to individual residences. Does he think we could pull
Speaker 2: that off.
Speaker 9: I think he thinks we're not likely overnight to be
Speaker 9: able to go right back to the five days a
Speaker 9: week and using all the space we used to do.
Speaker 9: And so I think he's quite cognizant of the fact that
Speaker 9: the world has changed in the United States. Outside the
Speaker 9: United States, he would say people are going back to offices,
Speaker 9: and it's not quite the phenomenon we have in the
Speaker 9: United States.
Speaker 4: For a number of reasons.
Speaker 9: The United States, you don't see people going back to
Speaker 9: the office five days a week, with very few exceptions.
Speaker 9: But he's a very talented real estate investor. I've known
Speaker 9: him for quite some time. And he also moved his
Speaker 9: entire operations from the Northeast to Miami ahead of everybody
Speaker 9: else moving to Miami. So he was ahead of the
Speaker 9: curve there, as he is in many other areas, and
Speaker 9: I think he's operating quite effectively down there. His company
Speaker 9: now has over one hundred billion dollars of real estate properties,
Speaker 9: and while he has given some of them back to
Speaker 9: the lenders, on the whole, I think he's done pretty
Speaker 9: good shape.
Speaker 2: Barry Sternlicka in the hotel business. Of course, Starwood is
Speaker 2: iconic there within hotels. What did he say about the
Speaker 2: future of hotels? All I know, David, is every time
Speaker 2: I call a hotel, the price is dramatically higher than
Speaker 2: it was twelve months ago or twenty four months ago.
Speaker 9: Well, because they know you're going to stay there, they
Speaker 9: probably are jacking up the rate, thank you, because they'm
Speaker 9: sure you can afford it. But I would say that
Speaker 9: the hotel business has been is coming back from the
Speaker 9: depths of the COVID period of time when essentially nobody
Speaker 9: was using hotels and the stock price of hotel companies
Speaker 9: were way down. Now hotels are coming back because we're
Speaker 9: seeing in the United States enormous amount of spending on
Speaker 9: discretionary travel, on discretionary going away from home kinds of things, restaurants,
Speaker 9: amusement parks, hotels, and so that the spending is up
Speaker 9: quite nicely in that area, and hotels are coming back.
Speaker 9: He's not so much in the hotel business as he was,
Speaker 9: but he's a leading light in terms of his thought processes,
Speaker 9: and he's really helped create a number of brands, not
Speaker 9: only w but he also created the backer Rat hotel
Speaker 9: brand as well.
Speaker 2: David, in the time we've got left, I've got to
Speaker 2: bring up a bombshell interview earlier this morning, Drew T
Speaker 2: Matdis was iconic at Ubs with Maury Harris. He now
Speaker 2: holds court at MetLife. Drew Madis, with exceptional optimism on
Speaker 2: the American economy, looked for long term growth that would
Speaker 2: approach three percent real GDP. That's a hugely optimistic view
Speaker 2: out of American exceptionalism.
Speaker 1: Do you share that.
Speaker 2: Optimism that we underplay what our real GDP growth is
Speaker 2: and what it will mean to our financial system.
Speaker 9: Well, that's a very high real GDP growth an economy
Speaker 9: of our size, real GDP growth probably around two percent
Speaker 9: or two point two two point three percent is probably
Speaker 9: realistic in the current environment. I think three percent or
Speaker 9: greater real GDP growth when inflation is still reasonably high,
Speaker 9: I think is quite a high growth because if you
Speaker 9: have three percent inflation and you're saying three percent real growth,
Speaker 9: that's really six percent GDP growth the way it's measured,
Speaker 9: and I think that's probably not likely an economy of
Speaker 9: our size. We did grow at six percent at one
Speaker 9: quarter after the after COVID because we were so low.
Speaker 9: But right now I think economies of our size, real
Speaker 9: GDP growth two percent is probably realistic.
Speaker 2: David, thank you so much. The most timely interview I've
Speaker 2: heard with very Sternlink. You'll see it tonight on Bloomberg Television,
Speaker 2: Very Sternlink of Starwood with mister Rubinstein in the Carlile Group.
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Speaker 1: Thanks for listening. I'm Tom Keen, and this is Bloomberg