Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller.
Speaker 2: Every business day, we bring you interviews from CEOs, market pros,
Speaker 2: and Bloomberg experts, along with essential market moving news.
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Speaker 3: Our great friends of Goldman Sachs kind of a tough quarter.
Speaker 1: You know, I don't feel sorry for them because they
Speaker 1: win a lot more than they don't. I competed against
Speaker 1: them for many, many years, with some success, but always
Speaker 1: always tough competitors everywhere you go. Somebody's also followed this
Speaker 1: company for a long long time. Allison Williams Bloomberg Intelligence.
Speaker 1: She's her senior banks analyst, and you know she's also
Speaker 1: a suit. She's now management. She runs the US Bloomberg Intelligence.
Speaker 1: So it's like, you know, now she's a suit, she's
Speaker 1: a boss.
Speaker 4: You're a boss now exactly you were a boss before
Speaker 4: because I have tough.
Speaker 1: So, you know, Allison, I don't know talk to us
Speaker 1: about Goldman Sachs here. It feels like they kind of
Speaker 1: got a little off track with that retail push and
Speaker 1: maybe that took some attention away from some of their businesses. Yes,
Speaker 1: it is a tough environment, but Goldman Sacks is still
Speaker 1: Goldman Sacks.
Speaker 5: Right they are, and you know you're seeing the other
Speaker 5: side of holatility to some extent, right, So, I mean
Speaker 5: the ro is very tough. This quarter includes a lot
Speaker 5: of one timers, there's some charges, there's you know, they're
Speaker 5: working towards a longer term strategy and I think they're
Speaker 5: doing the right things. The alternative strategy. You're really showing
Speaker 5: this quarter why that they're implementing that in terms of
Speaker 5: moving to a model that's more focused on fees and
Speaker 5: managing assets for clients versus taking the risks directly on
Speaker 5: their balance sheet, which is something that regulators have wanted
Speaker 5: them to move away from for a long time. So
Speaker 5: they had that charge. They also had the charge related
Speaker 5: to Green Sky offset by a little small gain related
Speaker 5: to some sale Marcus Loans. I think, you know, moving
Speaker 5: away from those businesses also strategically the right thing for
Speaker 5: Goldman focused on want what you're good at. Unfortunately, it's
Speaker 5: a tough quarter for the business. But equities trading up
Speaker 5: one percent, I mean that's oppressive in this quarter, and
Speaker 5: that's you know, that's a prime brokerage business, and that
Speaker 5: shows that they're executing on what they do well.
Speaker 4: So when it comes to the consumer business in Green Sky,
Speaker 4: like you mentioned, is part of what we're seeing right
Speaker 4: now with Goldman, just some pain that they have to
Speaker 4: go through to kind of have this transition out of
Speaker 4: and away from those two things.
Speaker 5: Yeah, I mean general, when you shift strategy and do
Speaker 5: some kind of restructuring, you know, first of all, it's
Speaker 5: never in a straight line, and there's always charges before
Speaker 5: you sort of move on to the better stuff. Because
Speaker 5: they were performing well, you probably are were not businesses
Speaker 5: that you're getting rid of, and so it's tough for
Speaker 5: them to take the impairment and shows that that was
Speaker 5: not an asset purchase. Well, but I think that on
Speaker 5: the cost side of things, if we strip out these costs,
Speaker 5: there's stills a little bit more work to do. So
Speaker 5: they do you know, they want to get to a
Speaker 5: sixty percent cost ratio over the cycle. They're at about
Speaker 5: seventy percent once you make all the adjustments. So part
Speaker 5: of that is the tougher part of the cycle. So
Speaker 5: I talked about equity trading which was a real positive fix.
Speaker 5: Trading was weak as expected. You know, Goldman and Morgan
Speaker 5: Stanley especially you're seeing big declines because they had such
Speaker 5: good quarters a year ago due to commodities. And on
Speaker 5: the banking side, Goldman is the m and a revenue leader,
Speaker 5: as you know Paul from competing with them in the past.
Speaker 5: That so they you know, the league tables move around,
Speaker 5: but that's a big chunk for them, and that's just
Speaker 5: going the wrong way right now for the industry. We're
Speaker 5: hearing a lot of constructive comments about the pick up there,
Speaker 5: and you know you've also mentioned from some folks, you know,
Speaker 5: hearing some positive comments, but those are really not going
Speaker 5: to play out in the second half. That's a twenty
Speaker 5: twenty four story.
Speaker 6: All right.
Speaker 1: Let's step back and just talk regulation, not so much
Speaker 1: for for Goldman per se, but just for the banks,
Speaker 1: all right. Post financial crisis, a lot of new regulations
Speaker 1: came on in the industry.
Speaker 3: Fine, we get it.
Speaker 1: There had to be some response and probably well deserved regulations,
Speaker 1: I would have thought, and over time a lot of
Speaker 1: those regulations would just kind of fall to the wayside,
Speaker 1: peel back. But now the discussion is actually even for
Speaker 1: more regulations. What is driving that that need for more
Speaker 1: regulation of the banks? I know Jamie Diamond's been a
Speaker 1: big spokesperson kind of against that with along with Brian
Speaker 1: morning Hand.
Speaker 5: So there's two things, you know, first, which is on
Speaker 5: you know the quote smaller banks, but you know, not
Speaker 5: the not the biggest banks that I cover. Right, So
Speaker 5: we had the issues in March that did raise a
Speaker 5: lot of questions of you know, some of the things
Speaker 5: that were rolled back, Okay, should they have been? And
Speaker 5: so I think that sort of, you know, to your point,
Speaker 5: things started to roll back, but now the question was
Speaker 5: like was that the right thing to do. The second
Speaker 5: part that's more germane to the banks that I cover,
Speaker 5: which is Basil three endgame, which we hope is finally
Speaker 5: the end. So again we've had all these regulations over
Speaker 5: the years. You know, there's some some still finalization that
Speaker 5: we're expecting any day now for the last few weeks.
Speaker 5: And I think that why you're hearing the bank management's
Speaker 5: complain is that you know, first of all, the way
Speaker 5: that the basil works, because you hear this term a lot, right,
Speaker 5: So Basil is really an entity that sort of sets
Speaker 5: the guidelines and then the jurisdictions go out and implement those.
Speaker 5: So the US has a lot of other very strict
Speaker 5: regulations that other countries don't have. Right, so we have
Speaker 5: the stress test every year. That adds a lot of volatility,
Speaker 5: and that really is very punitive to the trading books
Speaker 5: of banks. This buzzle three endgame, again supposedly from what
Speaker 5: we've heard from the proposal outlines, is also going to
Speaker 5: be tough on the trading books of banks. So do
Speaker 5: you really need to have this sort of double whammy
Speaker 5: and these different types of conflicting regulations that you know,
Speaker 5: really make it very difficult. And I think you know
Speaker 5: what the bank managements will say is you might make
Speaker 5: the banks safer, but the risks will still be there
Speaker 5: and they'll be outside of the system.
Speaker 7: Ye.
Speaker 5: And is that really what you want?
Speaker 1: Unintended consequence, because that goes too just to the business
Speaker 1: at Maddie and I talked to talk about a lot,
Speaker 1: which is the private credit business.
Speaker 3: And these private creditors come in with almost these Cheshire smiles.
Speaker 1: You know, they're like, I can't believe how good it
Speaker 1: is for us now because the banks have so much
Speaker 1: regulation that they're reluctant to put some of these loans
Speaker 1: on their books, and so the barers, big private equity
Speaker 1: shops are coming to us and we're making money handover
Speaker 1: faced here.
Speaker 5: And if you look at if you looked at a
Speaker 5: very long term chart of banks, you know since the crisis,
Speaker 5: you will see the huge growth of credit in the
Speaker 5: non bank center, shadow bank, whatever you want to call it,
Speaker 5: private credit is that is certainly a huge player there.
Speaker 5: And then the decrease on banks balance sheets. But again
Speaker 5: like these private credit firms are getting there. You know,
Speaker 5: they're raising capital, you know, from someone, And if you
Speaker 5: think about it, the private private credit is really sort
Speaker 5: of the talk of the entire asset management industry, even
Speaker 5: the traditional managers buying into private credit, the private equity
Speaker 5: managers building up their private credit businesses. So you have
Speaker 5: all this money going there.
Speaker 3: There's more talk.
Speaker 5: About getting this into pension portfolios and other portfolios. So
Speaker 5: you can think about, you know, sort of wear the
Speaker 5: risks and who's going to bear those risks and how
Speaker 5: that's all shaping up.
Speaker 3: Thinking about going into the private credit.
Speaker 1: See I went through thesemen bank, the Chase Manhattan Bank
Speaker 1: credit training, which is the best on Wall Street. Back
Speaker 1: back in the day, I can take those skills and
Speaker 1: go to private credit.
Speaker 8: There you go.
Speaker 4: I should have done it. I mean, there's still time
Speaker 4: for me, you guys, I can get an MBA tomorrow. Allison.
Speaker 4: I want to ask you a weird one in our
Speaker 4: final minute and a half with you. A lot of
Speaker 4: my friends got the Apple savings card with the Goldman.
Speaker 4: What do I need to tell them? Are they gonna
Speaker 4: get ditched by Goldman any day?
Speaker 8: Now?
Speaker 5: What's going on with I mean, they they probably don't
Speaker 5: even know that Goldman's evolved, and except that you probably
Speaker 5: told them that, and that's why those cards are those
Speaker 5: cards are generally.
Speaker 3: Called private label.
Speaker 5: So what Goldman had said right was that they were
Speaker 5: getting away from Marcus. They did keep the GM relationship,
Speaker 5: the Apple relationship, where there's some kind of a relationship,
Speaker 5: but in general, when those relationships fall apart, it's it
Speaker 5: tends to be because the economics just aren't working for
Speaker 5: one or someone else is coming in and willing to
Speaker 5: accept lower economics. So, you know, and of course we
Speaker 5: never know that, We never know that. Most of us
Speaker 5: never know exactly what happens. But you know, that could
Speaker 5: be the case that someone's coming in and just you know,
Speaker 5: more interested in the credit card business, and now that
Speaker 5: it's not so strategically important for Goldman, you know, will
Speaker 5: they be willing to sort of give that away? And
Speaker 5: it's it's also been interesting, right So the other side
Speaker 5: of it is the deposit gathering business, and you see
Speaker 5: Apples introducing this new product, but then you have the
Speaker 5: Marcus product and you see the yields on both of
Speaker 5: those and kind of competing, and you know where we're
Speaker 5: you know, Goldman liked those. They obviously would like to
Speaker 5: get one hundred percent of the economics where they.
Speaker 1: Can, right, Okay, all right, Alison, thanks so much for
Speaker 1: joining us. I know there's a busy, busy few days
Speaker 1: for you.
Speaker 3: Alison Williams.
Speaker 1: She covers all the banks on a global basis for
Speaker 1: Bloomberg Intelligence. She's also the director of research for the
Speaker 1: US business for Bloomberg Intelligence, so we appreciate getting some
Speaker 1: of her time here in the Bloomberg Interactive Brokers Studio.
Speaker 9: You're listening to the Team Ken's are Live program Bloomberg
Speaker 9: Markets weekdays at ten am Eastern on Bloomberg dot com,
Speaker 9: the iHeartRadio app, and the Bloomberg Business app, or listen
Speaker 9: on demand wherever you get your podcasts, Madison.
Speaker 1: When I bought the Jersey Shore Compound earlier this year,
Speaker 1: my mortgage had a six handle on it, and I
Speaker 1: was not happy.
Speaker 3: Just got rooked at because I know Matt.
Speaker 1: Millers is I think sub three on his estate up
Speaker 1: in Westchester. But I'm looking at the bankrate dot com
Speaker 1: US home mortgage thirty year fixed national average today seven point,
Speaker 1: So maybe I'm not that dumb of a buyer. But
Speaker 1: any who, where are mortgage rates going? What's going on
Speaker 1: in that market? I have no idea other than we'd
Speaker 1: call Erica Adelberg. She's an MBS strategist that's mortgage backed
Speaker 1: securities for you out there for Bloomberg Intelligence. She joins
Speaker 1: us here in our Bloomberg Interactive Brokers studio. So, Erica,
Speaker 1: how are mortgage backed securities? How's the market in twenty
Speaker 1: twenty three so far you're to date?
Speaker 8: Hi, thanks for having me on. The market is actually
Speaker 8: just barely up, I think on an excess return basis,
Speaker 8: and it's we actually have great rates are up one
Speaker 8: hundred as you pointed out, they're up about one hundred
Speaker 8: basis points in terms of primary mortgage rates year every year.
Speaker 8: But they are off their recent peaks, so at least
Speaker 8: you didn't take out a seven point three five percent
Speaker 8: mortgage last week or so. As you know, they ratesed,
Speaker 8: you know, fled higher once again when non fine pay
Speaker 8: rolls came in a little stronger than some people had
Speaker 8: hoped her expected. But there has been some retreat in
Speaker 8: that again with CPI coming in a little bit lower.
Speaker 8: So you know, we're still closer to the hives than
Speaker 8: the lows, but you know, we are off the tippy top.
Speaker 8: But anytime you have mortgage rates around or above seven percent,
Speaker 8: it probably is restrictive on an affordability basis for quite
Speaker 8: a few people.
Speaker 4: Yeah, well, it's really interesting. I know that you know
Speaker 4: all about this, but this Redfin report was fascinating to
Speaker 4: me showing that just one percent of the nation's homes
Speaker 4: have changed hands this year. And they also have data
Speaker 4: showing the ninety percent of Americans do have a mortgage
Speaker 4: under six percent. So why would anyone ever be incentivized
Speaker 4: to let that go when, like you said, Paul, now
Speaker 4: we're at the seven handle. What could be the catalyst
Speaker 4: for people to start to say it's time to leave
Speaker 4: behind my home and get a new mortgage.
Speaker 8: I mean to state the obvious. Life happens. You know,
Speaker 8: people have kids, you know, there's divorces, there's you know,
Speaker 8: so over time and and I mean, if you look
Speaker 8: at the very long range average, it's not like seven
Speaker 8: percent is it's it's high, but you know, we've had
Speaker 8: rates a lot higher. It seems like all of our
Speaker 8: you know, older siblings or parents, depending on what generation
Speaker 8: we're in, you know, at one point probably had rates
Speaker 8: that were seven seven to ten percent or you know,
Speaker 8: even higher. And of course all those people have now
Speaker 8: refinanced two and a half percent if they still have mortgages.
Speaker 4: But is that the move then for people listening? Just
Speaker 4: if you are waiting to buy a home, don't wait,
Speaker 4: just do it now in refinance.
Speaker 8: That's that's certainly what a new homebuilder would tell you.
Speaker 3: Yeah, and new.
Speaker 8: Home builders are you know that That's that's really the
Speaker 8: game in town right now, because as you just mentioned,
Speaker 8: except for the people who do have to move for
Speaker 8: one reason or another, very few people are listing their
Speaker 8: their homes. You know, the numbers on listenings are extremely low.
Speaker 8: So the resale market as they call it is, or
Speaker 8: existing home market, is very slow. But new home builders,
Speaker 8: as just alluded to, permits and starts, are up new
Speaker 8: home sales. New home inventories are about a third of
Speaker 8: existing homes of homes listed for sale these days, and
Speaker 8: the new home builders are finding ways to incentivize first
Speaker 8: time home buyers and you know, even some move up
Speaker 8: buyers by offering them slightly lower rates. What's interesting, I
Speaker 8: was reading just the other day that some of these buydowns,
Speaker 8: as they call it, were relatively temporary. They offered like
Speaker 8: a three two one buy down, where it's basically only
Speaker 8: good for three years the first year they buy down
Speaker 8: the rate for three years, then two, then one. They
Speaker 8: have to qualify them at the higher mortgage rate, so
Speaker 8: you know, unlikely to be another subprime teaser mortgage rate,
Speaker 8: but it might become as a rate shock. Maybe some
Speaker 8: people had expected, as you mentioned, rates to fall sooner
Speaker 8: and to be able to refinance in that time, and
Speaker 8: that's what the home builders are selling. They're like, you know,
Speaker 8: for right now, we'll give you a lower rate because
Speaker 8: surely you'll be able to refin in a year or two.
Speaker 8: Some of those people certainly haven't been able to.
Speaker 1: Yeah, I kind of thought I gave myself twelve months,
Speaker 1: which I still plenty plan of time that i'd refinance
Speaker 1: with a FOE handle, and I'm not sure that's going
Speaker 1: to happen, but we'll see, but I will refinance a
Speaker 1: low I'm not too concerned about that, all right, So
Speaker 1: talk to us about Uh yeah, I think about office space,
Speaker 1: and in some of the biggest cities there's so much
Speaker 1: office space, and people are telling us that's going to
Speaker 1: be a real problem for the lenders and so on
Speaker 1: and so forth.
Speaker 3: How does that impact your market, the mortgage backed securities market, I.
Speaker 8: Think the actual office space. There's two ways that could
Speaker 8: impact it. For one thing, as we've just mentioned, there
Speaker 8: is a bit of a lack of availability of homes
Speaker 8: for sale for those who do want to get into
Speaker 8: the market. You know, the new home builders are picking up,
Speaker 8: but actually if you look at the charts of permits
Speaker 8: and starts, we're a lot higher than we were in
Speaker 8: pre pandemic levels. But that's because there had been ten
Speaker 8: years post financial crisis of underbuilding. So there's a big
Speaker 8: troth after two thousand and nine two thousand and eight,
Speaker 8: and it was just creeping slowly up and then shot
Speaker 8: up during the pandemic. So we're about twenty percent below
Speaker 8: pandemic levels. We're well above that we were in the
Speaker 8: ten years beforehand. But what that means, that's the other
Speaker 8: reason there are so few homes being listed. Not only
Speaker 8: are people locked into their mortgages, but honestly, there was
Speaker 8: probably a structural underbuilding of new homes to begin So
Speaker 8: some of the people have talked about converting some of
Speaker 8: this office space into residential loans, residential homes, which could
Speaker 8: offer more opportunities. But you know, from a macro perspective,
Speaker 8: loans that were made to office spaces that are now
Speaker 8: falling a price, maybe even underwater, those have to be refinanced,
Speaker 8: re constructed, you know, on a more regular basis, and
Speaker 8: that could be a drag for lenders, which, whenever you
Speaker 8: have a drag in the banking industry, can be a
Speaker 8: drag generally for the economy.
Speaker 4: Is the decreasing construction costs and kind of the alleviation
Speaker 4: of some of the deeper supply chain issues of the
Speaker 4: pandemic having an impact on home builders that will ever
Speaker 4: gets passed on to home buyers.
Speaker 8: Yeah, actually, in some ways it already is. If you
Speaker 8: look at the difference between the median new home price
Speaker 8: and the median existing home price, because existing home prices
Speaker 8: haven't fallen maybe as quickly as some would have expected
Speaker 8: given the lack of listing, the difference between those is
Speaker 8: almost a record type, like new homes are normally more
Speaker 8: expensive right but right now they're just very marginally more expensive.
Speaker 8: So I think some of that, whether it's you know,
Speaker 8: through price concessions which actually builders say they're not really
Speaker 8: offering as much anymore, or just costs coming down relative
Speaker 8: to what they had been, I think that already is
Speaker 8: manifesting itself, and some people have I've read some people
Speaker 8: even calling for new homes to be priced below existing homes.
Speaker 8: And again this is all median prices, so this is
Speaker 8: not adjusted for square footage or anything. But it's an
Speaker 8: interesting you know, potential.
Speaker 1: Eesg Environmental social governance is that kind of a part
Speaker 1: of the mortgage lending market as well.
Speaker 8: It is interestingly I put out a note yesterday that
Speaker 8: you may have seen that you're referring to, And first
Speaker 8: of all, in terms of Ginny made mortgages, those back
Speaker 8: by FHA, for instance, in some ways those were already
Speaker 8: fundamentally ESG loans because they're targeted towards trying to improved
Speaker 8: affordability for lower income and higher LTV borrowers. Now Fanny
Speaker 8: and Freddie have also started to highlight their efforts. They've
Speaker 8: always they've always had a little bit of a mandate
Speaker 8: there anyway, and their duty to serve. But they have
Speaker 8: these new social criteria scores and social density scores that
Speaker 8: they're publishing that are available here on the terminal that
Speaker 8: tell you just how many of these socially responsible criteria
Speaker 8: they're fitting. And in the research that we put out yesterday,
Speaker 8: we pointed out that some of these highest social responsibility
Speaker 8: loans and Somebody's offer the best risk award characteristics because
Speaker 8: a lot of these homeowners are a little more restricted
Speaker 8: from refinancing, but at the same time they may have
Speaker 8: more more incentive to be move up borrowers, for instance,
Speaker 8: so they tend to have less extension risk too.
Speaker 3: All right, interesting stuff.
Speaker 1: Always talking about the housing market, the mortgage market. Everybody
Speaker 1: has their thoughts and opinions. Eric Adelberg, we get pay
Speaker 1: her to have for those opinions in that analysis. Eric Aidelberg,
Speaker 1: she's a mortgage backed security strategist for Bloomberg Intelligence. Joining
Speaker 1: us here in our Bloomberg Interactive Broker Studio again that
Speaker 1: you know, the bankrate dot com average mortgage rate for
Speaker 1: thirty year mortgage seven point. It's off the highs, as
Speaker 1: Erico was just mentioning, but certainly a lot higher than
Speaker 1: a lot of people want to deal with.
Speaker 3: That question is to what extent? When will that come down?
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Speaker 6: You know.
Speaker 1: Every once in a while, we'd like to get a
Speaker 1: sense of kind of where high net worth investors are
Speaker 1: putting their capital these days, and to do that we
Speaker 1: check in with Michael Sonefeld. He's a chairman and founder
Speaker 1: of Tiger twenty one. Tiger twenty one is a network
Speaker 1: of learning groups for high net worth investors. We usually
Speaker 1: get some really interesting perspective from Michael. So Michael, again,
Speaker 1: the first half of the year was a lot better
Speaker 1: for most investors in twenty twenty two, where you really
Speaker 1: had nowhere to hide last year, whether it's equities or
Speaker 1: fixed income. Maybe some of your alternative investments did better.
Speaker 1: What are your members saying today? How did they feel
Speaker 1: here in mid July after what was a pretty good
Speaker 1: first half of the year.
Speaker 7: Nice to see you guys, And you know, our members
Speaker 7: are mixed, like the reports that you've been sharing all morning.
Speaker 7: On the one hand, inflation is coming down, the business
Speaker 7: climate is good, unemployment is low, but everybody thinks that
Speaker 7: we're sort of at the crest, or many people think
Speaker 7: we're at the crest, and at least half of our
Speaker 7: members think we're going into recession. And when you have
Speaker 7: this kind of diversity, our members try and create something
Speaker 7: like an all weather portfolio where they have some bets
Speaker 7: on the upside and protection on the downside. And that's
Speaker 7: sort of been the magic quest that they're looking for
Speaker 7: in preserving their wealth.
Speaker 4: Part of the flows into the SMP, obviously related to
Speaker 4: the Magnificent Seven, are related to the AI rally. I
Speaker 4: wonder to what extent your clients experience FOMO when something
Speaker 4: like an AI rally is happening, or are they kind
Speaker 4: of immune to that?
Speaker 7: So I just have to say we don't have clients,
Speaker 7: We only have members. These are all entrepreneurs who have
Speaker 7: no problem. These are alleople who built great businesses and
Speaker 7: now we're preserving wealth. But I don't think it's so
Speaker 7: much bomo because our members have been playing AI. Over
Speaker 7: fifty six percent of our members either have or intend
Speaker 7: to make AI investment plays. And one of the things
Speaker 7: that's really different about AI if you think about recent fads,
Speaker 7: either in crypto or the web, twenty years ago, when
Speaker 7: you had these technology plays, you didn't have the equivalent
Speaker 7: of a Microsoft, which is already a cash flowing company,
Speaker 7: also be the technology play if you want to play AI.
Speaker 7: Of course, there's lots of small venture capital opportunities, but
Speaker 7: the best opportunities, many of our members think, are in
Speaker 7: like the Microsoft and the Googles that have the largest
Speaker 7: AI treasure troves, and yet they're really solid businesses. So
Speaker 7: it's very it's a unique moment in AI that this
Speaker 7: kind of fad. I don't mean that it's unimportant. I
Speaker 7: mean this flavor of what everybody is focused on. You're
Speaker 7: not taking the kind of extra ordinary risks that most
Speaker 7: other technology rallies require, because here you have comp have
Speaker 7: real profits and real businesses and real futures no matter
Speaker 7: what happens on AI. But it'll be really enhanced as
Speaker 7: they roll out and continue to build their AI functions.
Speaker 1: Hey, Michael, how about alternative investments? I mean your members
Speaker 1: they sell oftentimes their businesses for tens or hundreds of
Speaker 1: millions of dollars and then they really have to allocate
Speaker 1: capital cross a portfolio. How is investing in alternative investments,
Speaker 1: whether it's head funds or private equity or private credit.
Speaker 1: Has that changed over the last decade for your members?
Speaker 7: So the two biggest changes, The single biggest is that
Speaker 7: private equity fifteen years ago with about ten percent of
Speaker 7: our members' portfolios. Today our members manage one hundred and
Speaker 7: fifty billion dollars and private equity is just about thirty percent. Wow,
Speaker 7: that's been the biggest change. And a big portion of
Speaker 7: that private equity is venture capital because a period of
Speaker 7: time ago you wouldn't have even seen venture capital fifteen
Speaker 7: years and now we think that's the largest sub segment
Speaker 7: of private equity. But on the other side, more recently,
Speaker 7: the biggest down shift we've ever seen is in real estate.
Speaker 7: Real estate was king for fifteen years bouncing between twenty
Speaker 7: seven and thirty percent, and in the last year it
Speaker 7: came down quite precipitously to around twenty two percent. And
Speaker 7: you know, our members are exquisitely sensitive to interest rates,
Speaker 7: and as interest rates are going up, that takes some
Speaker 7: of the potential off the table for real estate. But
Speaker 7: as your last speaker was mentioning, office, which was one
Speaker 7: of the most solid areas in the real estate area,
Speaker 7: is now up for grabs. A lot of problems, not
Speaker 7: just with vacancies, but you know where offices were easy
Speaker 7: to lev and so as buildings, they probably are more
Speaker 7: highly levered and the equity is more at risk. And
Speaker 7: behind that on the negative would be retail and on
Speaker 7: the positive side would be industrial. But the office, you know,
Speaker 7: where the office is going is one of the great
Speaker 7: conundrums that will only figure out over the next decade.
Speaker 4: Well, that's one of the things I find interesting about
Speaker 4: these member feedback results you sent us is that you
Speaker 4: asked about their most favorite public equity sectors and they're tied.
Speaker 4: Twenty four percent said real estate and twenty four percent
Speaker 4: said it. I'm fascinated that real estate is getting as
Speaker 4: much love as the IT space given the big tech
Speaker 4: rally that we've seen this year, can you help me
Speaker 4: make sense of that?
Speaker 7: Sure, our members are by accomplishment about one in ten thousand,
Speaker 7: equivalent to being in the major League. And the largest
Speaker 7: area our members created wealth in maybe a quarter of
Speaker 7: our members, was in real estate. So you have extraordinary
Speaker 7: knowledge that most investors don't have. That's the advantage of
Speaker 7: being in one of our groups and being with somebody
Speaker 7: who built their career in real estate. So my guess
Speaker 7: is that real estate has been beaten up in certain
Speaker 7: areas and our members are a little more attuned. The
Speaker 7: big question we ask in a meeting is if you
Speaker 7: buy something at twenty and it goes down to fifteen,
Speaker 7: should you get out? And the answer is, if you
Speaker 7: really knew what you were investing at twenty and it
Speaker 7: goes down to fifteen, it's a better deal. But as
Speaker 7: I think you guys well know, over the history of
Speaker 7: the stock market, individual investors have never matched the returns
Speaker 7: because they buy at the wrong time and sell at
Speaker 7: the wrong time. And so I think the high interest
Speaker 7: in real estate opportunities shows the sort of expertise that
Speaker 7: our members has looking for deals and navigating in this
Speaker 7: volatile climate.
Speaker 1: Hey Michael, real quick, just give us the latest on
Speaker 1: kind of estate planning. What are your members kind of
Speaker 1: focused on these days.
Speaker 7: Well, first of all, there's a big date coming up
Speaker 7: at the end of twenty twenty five where some of
Speaker 7: the major estate planning tools will sunset. But you know,
Speaker 7: I think our members are focused on the tension between
Speaker 7: giving kids too much and ruining. Essentially, what they saw
Speaker 7: was their entrepreneurial ability to be successful. So this notion,
Speaker 7: this notion of kying to figure out what to do
Speaker 7: and how much to leave. So you know, there's something
Speaker 7: called the giving pledge among billionaires where they are at
Speaker 7: half of their money to foundation and philanthropy, and a
Speaker 7: lot of our members are thinking about philanthropy in a
Speaker 7: new way, particularly with all the problems that are in
Speaker 7: the world today.
Speaker 1: All right, Michael, thank you so much for joining us.
Speaker 1: Always a unique perspective there, Michael Snefelt. He's a chairman
Speaker 1: and founder of Tiger twenty one kind of collection of
Speaker 1: high net worth individuals get a really interesting perspective how
Speaker 1: they allocate capital across the sectors.
Speaker 9: You're listening to the teenth Ken's Are Live program Bloomberg
Speaker 9: Markets weekdays at ten am Eastern on Bloomberg dot Com,
Speaker 9: the iHeartRadio app, and the Bloomberg Business App, or listen
Speaker 9: on demand wherever you get your podcasts.
Speaker 1: We've been hearing from a lot of the big banks
Speaker 1: over the last four or five days talking about their
Speaker 1: business net interesting income positive, but certainly offset by a
Speaker 1: lack of deal making for a lot of these companies.
Speaker 1: Comparisons are very tough. We want to get a sense
Speaker 1: of what's happening in the mn A space. We talked
Speaker 1: to Rob Brown, he's the CEO of Lincoln International. He
Speaker 1: joins us here live in the Bloomberg Interactor Brokers studio.
Speaker 1: They're based in Chicago, one of my favorite towns anywhere. Rob,
Speaker 1: thanks for joining us here. Talk to us about kind
Speaker 1: of the m and A environment we're seeing out there now.
Speaker 1: A lot of uncertainty about the economy and not historically
Speaker 1: it doesn't really bode well for boards and CEOs getting
Speaker 1: out there and putting big capital to work.
Speaker 3: What are you seeing in your practice?
Speaker 6: Yeah, I think what you just allude to, Paul is
Speaker 6: what we've seen really over the last eight months to
Speaker 6: a year, right, the economic uncertainty really slowing down on
Speaker 6: the m and a market, and you're seeing it in
Speaker 6: the release of some of the big bakes and even
Speaker 6: Goldman's release today, in the investment banking business being down.
Speaker 10: So I think that's what we've seen.
Speaker 6: Interestingly, there's some alchemy right now for improved activity, and
Speaker 6: I think there's really four factors that are driving that.
Speaker 6: I think one is, if you go back to how
Speaker 6: we came into the year, there seems to be more
Speaker 6: consensus of a soft landing, or at least not a
Speaker 6: really hard landing.
Speaker 10: And I think there was always that.
Speaker 6: Fear of investors saying, well, joh, I don't want to put
Speaker 6: something to work and have the bottom fall out of
Speaker 6: the economy. So I think the backdrop is we may
Speaker 6: have a recession, but it's probably not going to be
Speaker 6: as severe as I thought. I think the other the
Speaker 6: other key input here is that as each quarter has
Speaker 6: gone by since probably midyear last year, when you saw
Speaker 6: inflation spike and the FED respond aggressively, you're seeing sellers
Speaker 6: expectations moderate.
Speaker 10: Down a bit.
Speaker 6: So you know, twenty twenty one and the first half
Speaker 6: of twenty twenty two were really peak valuations. So I
Speaker 6: think as time has gone on, sellers are starting to
Speaker 6: realize I may not be able to sell it for
Speaker 6: exactly what I could, but I can still get a
Speaker 6: good return. So and I think the two last pieces
Speaker 6: are we are seeing the aperture of the private credit
Speaker 6: markets improve a bit, the credit markets are actually hardening
Speaker 6: up in a good way, and that lenders are saying,
Speaker 6: I will finance this deal. It's going to be expensive, right.
Speaker 6: Rates are high, but they're going to be there. And
Speaker 6: the last and maybe the biggest driver is the amount
Speaker 6: of dry powder sitting in institutional equity holders, in private equity,
Speaker 6: venture capital, and even the private debt funds. It's starting
Speaker 6: to burn a hole in the pocket of investors, and
Speaker 6: on top of that, they're under pressure to show some
Speaker 6: returns and return some capital to raise the next fund.
Speaker 6: So I think all of that kind of pointing maybe
Speaker 6: not up hugely, but starting to trend in the right.
Speaker 6: I think we're expecting much better activity for the back
Speaker 6: half of the year than the first half.
Speaker 4: Well, Paul and I talk about this all the time,
Speaker 4: just that it's a challenging environment to get deals done
Speaker 4: in I'm curious how your conversations and strategies have shifted,
Speaker 4: if at all, Given some of the hawkishness that we've
Speaker 4: seen from the FDC, from the Justice Department when it
Speaker 4: comes to M and A deals.
Speaker 10: Well, there's no doubt about that.
Speaker 6: I mean, we're all trying to wait and see what
Speaker 6: comes out of the new proposed FTC rules for Heart
Speaker 6: Scott Ridino and clearance, and we're in a comment period
Speaker 6: on that, and I know our industry is commenting aggressively
Speaker 6: to we understand.
Speaker 10: Listen, these rules haven't been changed in forty or fifty years.
Speaker 6: It's okay to revisit them, but I think they need
Speaker 6: to be done in a way that's going to achieve
Speaker 6: the objective. So there is worry about that. But I
Speaker 6: think your point is right. Deals are harder to get done.
Speaker 6: I think what we're seeing is more targeted processes, making
Speaker 6: sure you have financing lined up before you approach anybody,
Speaker 6: and really going to investors with a pretty compelling investment
Speaker 6: thesis that says, listen, you know, we know what you
Speaker 6: like to acquire. Here's why you really need to look
Speaker 6: at this. But it's more challenging to get things done right.
Speaker 6: You got to get the financing in place. I think
Speaker 6: the leverage has shifted a bit to the buyers in
Speaker 6: terms of dictating the due diligence schedules and dictating what
Speaker 6: they need to get done. But we are seeing things
Speaker 6: get done. They're taking longer, they're a little more painful,
Speaker 6: but they're getting done.
Speaker 1: Talk to us about the role of private credit because
Speaker 1: that's kind of a relatively new business.
Speaker 3: In Madison.
Speaker 1: I we spend a lot of time talking about We
Speaker 1: try to speak to as many smart people as we
Speaker 1: can about the private credit business because really it's really
Speaker 1: just became a big source of capital after the financial crisis.
Speaker 1: How does that factor into your deals? You typically do
Speaker 1: more middle market transactions. How does that factor into your deal?
Speaker 10: It factors in massively.
Speaker 6: Most of our deals, particularly if we're selling to a
Speaker 6: financial sponsor, a private equity group, or an institutional investor.
Speaker 6: A good chunk of our deals are going to need
Speaker 6: leverage to get done. And the entire market for that
Speaker 6: is a private credit market. I mean, the banks have
Speaker 6: you know, the compliance issues coming out of the global
Speaker 6: financial crisis. The banks are out of this market, so
Speaker 6: now you're dealing with private credit funds, hedge funds, unitronics investors,
Speaker 6: and that market has attracted a tremendous amount of capital
Speaker 6: over the last decade, and they have a lot of
Speaker 6: dry powder too, But that market really closing up a
Speaker 6: bit in the back half of the last year as
Speaker 6: much as the fear of the economy downturning is what
Speaker 6: really casts a little of appall over our market. So
Speaker 6: what happens in that market is a really important driver
Speaker 6: of the overall private the overall private capital markets and
Speaker 6: the deals that get done on the private market.
Speaker 4: Did some of the banking turmoil have any impact on
Speaker 4: you guys via the impact on private.
Speaker 10: Credit, You know, not really.
Speaker 6: I think in particularly you look at SVB, there was
Speaker 6: a little bit of a shock as to you know,
Speaker 6: what does that mean? But they were really in the
Speaker 6: venture debt market, and so the short answer is not really.
Speaker 6: Although one thing I will say that's interesting is our
Speaker 6: European M and A business, and we have offices in
Speaker 6: sixteen countries, twenty offices. We've got a lot of offices
Speaker 6: in Europe. It's a big part of our business. That
Speaker 6: M and A market is actually holding up better than
Speaker 6: the US M and A market this year, partly because
Speaker 6: there still is a bank lending market in some of
Speaker 6: the major economies to get deals done where we don't
Speaker 6: have that here, so they've been able to look through
Speaker 6: some of the private credit markets pulling their horns in.
Speaker 6: I think they also have a situation where in the UK,
Speaker 6: the largest capital market in Europe, they're worried about a
Speaker 6: labor government next year and cap gains rates going up,
Speaker 6: so there's a little bit of a push to get
Speaker 6: things done now.
Speaker 4: The more regulation in the UK.
Speaker 6: Definitely, definitely. I think the regulation headwinds are going to
Speaker 6: be everywhere.
Speaker 1: Okay, you guys are a lot bigger than I thought
Speaker 1: you were in I'm just reading some reporting that you
Speaker 1: guys did.
Speaker 3: It recently got into Australia, India.
Speaker 1: You guys, you said you're in sixteen countries reporting here,
Speaker 1: eight hundred and fifty investment bankers.
Speaker 3: Why don't you guys.
Speaker 10: Public You know we've followed.
Speaker 6: We have followed our public investors or our public competitors. Right,
Speaker 6: there's clearly an appetite for what we do. I think
Speaker 6: for us, we have a pretty clearly stated goal to
Speaker 6: be the leading advisor in the private capital markets, and
Speaker 6: to date we felt that being a private.
Speaker 10: Partnership is the right way to do that.
Speaker 6: But we're constantly evaluating should we have a different ownership
Speaker 6: structure and access to broader capital. So it's something we
Speaker 6: haven't ruled out. And I think we've made some investments
Speaker 6: to be public company ready. If and when we determine
Speaker 6: that's the right thing to do.
Speaker 10: What is the.
Speaker 4: Biggest benefit for you staying private?
Speaker 6: Then you know, for us, I think the thing we
Speaker 6: need to balance that. What's made us unique and what's
Speaker 6: allowed us to grow from seven of us to one
Speaker 6: of the largest private markets M and A Advisors in
Speaker 6: the world has been a real focus on culture that
Speaker 6: attracts people and keeps people for the long time, long term.
Speaker 6: And we've been able to define that measure against it
Speaker 6: managed to it as a private company without having to
Speaker 6: worry about what's going on in every single quarter. And
Speaker 6: you know, if we were to go public, we'd want
Speaker 6: to make sure that we can continue to really have
Speaker 6: that as the oxygen of everything we do. So and
Speaker 6: I think part of it's just different, right We kind
Speaker 6: of know, we know the governance, we know how this works.
Speaker 10: But I think organizations, if.
Speaker 6: They're going to evolve, if they're going to continue to grow,
Speaker 6: have to continually reevaluate, you know, what's the right capital
Speaker 6: structure and ownership structure to achieve our goals.
Speaker 1: So India, for example, a lot of folks are saying
Speaker 1: India over the next twenty years is going to be
Speaker 1: the It's gonna be China.
Speaker 6: Was the last twenty years maybe for example, but better.
Speaker 6: How do you guys view if you I agree with
Speaker 6: that statement. We have been in India a long time.
Speaker 6: We've been in India over a decade. We are about
Speaker 6: to announce in the very near term here an acquisition
Speaker 6: in India that's going to materially increase our presence there
Speaker 6: as And we also have offices in China. As we're
Speaker 6: seeing as we're seeing those off to slow down, as
Speaker 6: we're seeing the economic ties really cool with China, we
Speaker 6: think that the biggest benefactor of that is going to
Speaker 6: be India. I mean India, it's the largest democracy on
Speaker 6: the planet. Their laws based on English common law, it's
Speaker 6: much easier to do business there, and it's a really
Speaker 6: really innovative economy. So we're very bullish on what we're
Speaker 6: seeing in India right now and really doubling down in
Speaker 6: that market.
Speaker 1: And conversely, twenty seconds left China.
Speaker 6: Yeah, you know, I don't see in the near term
Speaker 6: any sort of warming up of the economic ties with China.
Speaker 6: I think that it's very difficult to get a Chinese
Speaker 6: investor clear we were talking about compliance. Trying to sell
Speaker 6: something to a Chinese buyer today in any Western country,
Speaker 6: very very hard.
Speaker 1: Interesting, all right, Rob, thanks so much for joining us.
Speaker 1: Fascinating company which I need to learn more about. Rob Brown,
Speaker 1: CEO of Lincoln International. They're based in the Great City
Speaker 1: of Chicago, but as Rob is just saying, these guys
Speaker 1: are all over and they focus on middle market M
Speaker 1: and A, which, as we've learned from a lot of
Speaker 1: people like Rob, a very lucrative business. Competitive business, but
Speaker 1: very lucrative business, and so we'll pay attention to that
Speaker 1: as well.
Speaker 9: You're listening to the tape Can't Live program Bloomberg Markets
Speaker 9: weekdays at ten am Eastern on Bloomberg Radio, the tune
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Speaker 3: Let's check out with Poocha Kumra.
Speaker 1: She's a European rate strategist at TD.
Speaker 3: Poocha, what did you.
Speaker 1: Make of the UK economic data. The inflation data came
Speaker 1: out today.
Speaker 11: Good morning. Yes, never a dull moment in UK. I
Speaker 11: think for the first time since February, the inflation did
Speaker 11: surprise you downside, and I think this has come as
Speaker 11: a big relief for the hawkish expectations that we're actually
Speaker 11: playing out in UK and right our markets have actually
Speaker 11: moved the tom expectations from close to six point five
Speaker 11: that you saw a month ago to actually five point
Speaker 11: seventy five, which seems much more reasonable. But as you say,
Speaker 11: inflation in UK is still very elevated. Food intation is
Speaker 11: almost thrice the levels that we see in US, so
Speaker 11: I think we do have a long way to go.
Speaker 11: But on the positive side, going forward, the base effects
Speaker 11: both the energy and good prices should actually allow UK
Speaker 11: inflation to actually be more correlated to what we are
Speaker 11: seeing in UK and we have in sorry in Europe,
Speaker 11: and we do see inflation to end the year around
Speaker 11: the four to five percent level, which is a big
Speaker 11: relief for BOE as well as riches.
Speaker 12: Luck.
Speaker 4: You mentioned the cost of food and I wonder to
Speaker 4: what extent your average I'm going to steal this from
Speaker 4: Paul the watering Hole attendees of the UK are able
Speaker 4: to feel any sort of decrease in the inflation numbers
Speaker 4: when they're still going out to get the same meal
Speaker 4: they would have gotten a year ago and it's so
Speaker 4: much more expensive. Do you have a take on when
Speaker 4: the consumer in the UK might start to be able
Speaker 4: to feel any sort of decline to the red hot
Speaker 4: inflation they've been experiencing.
Speaker 11: Yes, I mean the last six months have been pretty
Speaker 11: much high prices everywhere, but we are actually seeing prices
Speaker 11: going down when we go to all supermarket as well
Speaker 11: as grocery stores there. We are actually getting emails from
Speaker 11: all the grocery chains that they are actually reducing prices.
Speaker 11: So I think there is some government pressure also involved.
Speaker 11: And also one of the key things that the government
Speaker 11: as well as the BOE is aware of is that
Speaker 11: we are going to get very big mortgage payments as
Speaker 11: we enter towards the end of the year and twenty
Speaker 11: twenty four, so household buffer is actually going to be
Speaker 11: more compressed and it's going to be a slow move,
Speaker 11: but definitely we are moving in the right direction and
Speaker 11: that should be a good news for you.
Speaker 7: Ken.
Speaker 11: That's why the crank basis points rally in today's session.
Speaker 1: So putji, you talk to your institutional clients around the world,
Speaker 1: and you're talk talking to about the European rates business,
Speaker 1: what's kind of the most common trade that you're hearing people,
Speaker 1: I guess are most interested in right right right now.
Speaker 11: So right now, I think the US CPI as well
Speaker 11: as the UK CPI have actually told us one thing
Speaker 11: that we are done with this entire hiking story you
Speaker 11: want or two hikes more central banks are done And
Speaker 11: the key thing is how long we stay here. From
Speaker 11: a trading perspective, we like long duration and I think
Speaker 11: that is something even investors are looking at. But I
Speaker 11: think after today's UK CPI report, one of the key
Speaker 11: traits that I like is being long UK versus Bunce.
Speaker 11: Just given the fact that that I think euro has
Speaker 11: rallied quite a bit, when inflation will be equally sticky
Speaker 11: in Europe as compared to in UK as.
Speaker 4: Well, are you thinking about currency quite a bit then
Speaker 4: in your calculations.
Speaker 11: When it comes to the general strong pounds.
Speaker 4: In Yeah, the strong pound, and I guess, particularly as
Speaker 4: we're starting to see the decline of the U US
Speaker 4: dollar hitting fourteen months low last week, is that something
Speaker 4: that you think is going to be potentially a tail
Speaker 4: or headwind for you this year.
Speaker 11: I think generally now it's the FEDS show, just because
Speaker 11: the fact that I mean so far, what we saw
Speaker 11: that UK was just not correlated with the moves in
Speaker 11: US as well as in Europe, just because we had
Speaker 11: the strength of inflation, and BOE actually had to come
Speaker 11: up more hawkish as well as hawk fifty basis points
Speaker 11: when most of the central banks are actually at the terminal.
Speaker 11: But I think that pound strength should actually be a
Speaker 11: little new, more muted, and we should now be more
Speaker 11: driven by where FED takes it from here, whether it's
Speaker 11: one hike or two hikes going forward. And I think
Speaker 11: that would be key when it comes to messaging going
Speaker 11: into next week's FED meeting.
Speaker 1: And to what extent just give us a kind of
Speaker 1: a little bit of tutorial here, to what extent does
Speaker 1: the Bank of England and the European Center Bank, to
Speaker 1: what extent do they follow the US FED Reserve?
Speaker 11: Well, to quote unquote, I mean actually's on the central
Speaker 11: back meetings. We are told that we are different, we
Speaker 11: have different economic background to handle it. But I think
Speaker 11: FED is one central bank that basically determines interest rate
Speaker 11: for the entire world, so I think one way or
Speaker 11: the other one when FED actually decides to stop, it
Speaker 11: would actually mean that the other central banks also need
Speaker 11: to do less. So I think yes, FED still plays
Speaker 11: a very key role when it comes to where terminal comes.
Speaker 11: For most central.
Speaker 4: Banks, we think that next week the FED is it
Speaker 4: seems like a foregone conclusion. Here in the state, it's
Speaker 4: a twenty five basis point hike. When you look ahead
Speaker 4: to August for the ECB, is it going to be
Speaker 4: maybe down to twenty five basis points after this inflation print.
Speaker 11: So for when it comes to ECB, they've already told
Speaker 11: us that they will be doing a twenty five basis
Speaker 11: points in July. I think the key question is whether
Speaker 11: they go twenty five again in September. I think at
Speaker 11: this stage they will like to maintain the optionality. But
Speaker 11: we have had hawks even coming in last this week's thing,
Speaker 11: that there's no need to press that much on terminal.
Speaker 11: So I think it is very much possible that we
Speaker 11: are done with one high. But I think central banks
Speaker 11: right now, including FED, wants to keep the optionality for
Speaker 11: going in September as well. And I think the key
Speaker 11: driver right now will be the August Jackson Hole meeting.
Speaker 11: I think that would be the stage, the next stage
Speaker 11: where central banks give us the key insight into what
Speaker 11: they are thinking for the September meeting. I think right
Speaker 11: now all central banks want a little more data to
Speaker 11: convince themselves, whether it's one or two highs and they're done.
Speaker 1: Hey, Pusha, thanks so much for joining us. Really appreciate
Speaker 1: getting your perspective. The European call there the UK call
Speaker 1: on rates Poosiakumra European rates Strategists at TD.
Speaker 9: You're listening to the Tape Cancer Line program Bloomberg Markets
Speaker 9: weekdays at ten am Eastern on Bloomberg Radio. Tune in
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Speaker 9: New York station, Just say Alexa playing Bloomberg eleven thirty.
Speaker 1: So Madison back in my cell said research days, you'd
Speaker 1: have to slip out through San Francisco two or three
Speaker 1: times a year to see institutional investor clients out there.
Speaker 3: Love that town, still one of my faves.
Speaker 1: But then you'd have to go not downtown, you have
Speaker 1: to go slept all the way out to San Mateo
Speaker 1: to see these Franklin Templeton people.
Speaker 3: Now, it wasn't a.
Speaker 1: Bad trip because they have a great Starbucks right there.
Speaker 1: But nice people, smart people, and they manage a bunch
Speaker 1: of money. So I've still got some bodies out there
Speaker 1: from back in the day. Ed Perks, he's out there
Speaker 1: in San Mateo. He's the CIO Franklin Templeton Income Investors. Ed,
Speaker 1: I mean, you got fix income folks had a brutal
Speaker 1: twenty twenty two. There was just nowhere to hide off
Speaker 1: to a little bit better start this year. How are
Speaker 1: you guys position out there with some of your fixingcome,
Speaker 1: you know, kind of asset allocations in your performance?
Speaker 12: Yeah, absolutely, you're right. Twenty twenty two was a tremendous
Speaker 12: challenge for fixed income investors. You know, I think the
Speaker 12: key element for us, for Franklin income investors is multi
Speaker 12: asset flexibility. So really, at no other time in my career,
Speaker 12: really have I theened this play out in a six
Speaker 12: to eight quarter way where we entered twenty twenty two
Speaker 12: with a very strong bias and tilting our multi asset
Speaker 12: portfolios towards dividend paying common stock, and that was really
Speaker 12: just reflecting the landscape and the opportunity set entering last year.
Speaker 12: Ten year rates were I think we were down here
Speaker 12: one and a quarter still one in a quarter, one
Speaker 12: and a half percent, and you just didn't have enough spread.
Speaker 12: And you know, the key things that we looked to
Speaker 12: fixed income for in our portfolios attractive yield, potential for
Speaker 12: some upside, or potential to help diversify our portfolio. And
Speaker 12: I tell you, you know, most of twenty twenty two,
Speaker 12: particularly the start of the year, we couldn't check any
Speaker 12: of those. So we've come full circle though, and today
Speaker 12: we sit from a tilt of nearly seventy five twenty
Speaker 12: five in favor of equities eight to twelve quarters ago
Speaker 12: to now better than sixty forty tilting to fixed income.
Speaker 12: So that landscape has totally changed. And yes, you are
Speaker 12: seeing it, whether you look at broader aggregate bomb market returns, investment,
Speaker 12: great corporate returns. How ye, corporate returns all doing much better,
Speaker 12: a little paling in comparison to something like the NASDAK move,
Speaker 12: But I think fixed income investors have a lot to
Speaker 12: look forward to.
Speaker 4: Well, Okay, since you brought up the NASDAK move, I
Speaker 4: just have to ask you about this. We saw the
Speaker 4: NASDAK dip into the red a couple of minutes ago
Speaker 4: because of some moves that we're seeing in the big
Speaker 4: tech names, the Microsoft's, the Googles. It feels like the
Speaker 4: perfect example of why it's a challenge when you have
Speaker 4: this breadth of names leading the charge when it comes
Speaker 4: to these indices. Is that a concern for you that
Speaker 4: you think think about in terms of your allocation into equities, you.
Speaker 12: Know it as it relates to the Nasdaq in particular,
Speaker 12: given given worry income investors, we really aren't too concerned about,
Speaker 12: you know, some of those moves or the narrowness of
Speaker 12: the leadership. I know that's well been well discussed in
Speaker 12: markets here the last couple of months. You know, we're
Speaker 12: really focused on this kind of broader move. So we
Speaker 12: clearly point more to you know, the S and P
Speaker 12: five hundred, both the difference we've seen, the dispersion we've
Speaker 12: seen year to date between something like the market cap
Speaker 12: weighted index and the equal weighted index. You know that's
Speaker 12: starting to perform a little bit better, But we wouldn't
Speaker 12: be surprised if there's a pretty significant breather here in
Speaker 12: in equity markets, and uh, you know we are going
Speaker 12: to see you know, we'll see even even with companies
Speaker 12: reporting slightly better earnings, we're still looking at at likely
Speaker 12: flat to slightly negative year year earnings. And that's something
Speaker 12: that you know, we think as you look forward into
Speaker 12: the end of twenty three and particularly into twenty twenty four,
Speaker 12: this bar, the hurdle really starts to rise, because consensus
Speaker 12: really bakes in a resurgence in growth in Q four
Speaker 12: and then into twenty twenty four, and we just think
Speaker 12: that maybe a little premature. You know, we're still looking
Speaker 12: at a pretty modest level of GDP growth, we're seeing disinflation.
Speaker 12: We think a lot of companies have actually had a
Speaker 12: bit more of a struggle with unit volumes, but have
Speaker 12: had tremendous pricing that's going to start to wane and
Speaker 12: certainly become much tougher with comps. So you know, we
Speaker 12: wouldn't be surprised if the remainder of this year might
Speaker 12: tilt a little bit more to some of the fixed
Speaker 12: income markets, and equities have some digesting to do of
Speaker 12: this very big move they've had.
Speaker 1: Hey ed in the fixed income space, you know, as
Speaker 1: income investors where are you guys kind of putting.
Speaker 3: Your money to work? Where have you been putting your
Speaker 3: money to work this year?
Speaker 12: Yeah, we've really focused on some of the higher quality
Speaker 12: segments within investment great corporates. And that's a big difference
Speaker 12: from you know, last year, where we started with much
Speaker 12: shorter duration. We're very selective, actually liked high yield bonds.
Speaker 12: We didn't see the economy completely create airing and then
Speaker 12: high yield you can find some really interesting opportunities with
Speaker 12: very minimal interest rate risk as rates move first into
Speaker 12: the fall last year, then this spring before the regional
Speaker 12: banking crisis, and then more recently we've had you know,
Speaker 12: opportunities with the ten year in and around four percent
Speaker 12: through that level a couple of times, and UH and
Speaker 12: spreads while not maybe as wide as a lot of
Speaker 12: credit investors would would you know, would ideally like to see.
Speaker 12: You had yields at levels that we haven't seen in
Speaker 12: a while. You had bond prices because of last year's decimation,
Speaker 12: at much more attractive discounts to face, and like I
Speaker 12: said before, you know, you want to check some of
Speaker 12: these boxes and fixed income today, particularly higher quality investment
Speaker 12: Great corpor Brits you now have that opportunity incomes. Attractive
Speaker 12: total return possibilities are there as we think rates do
Speaker 12: decline over the next four to six quarters, and they're
Speaker 12: nice diversification again in a multi ASID portfolio.
Speaker 1: Right, hey, Ed, why don't you in your lunch break
Speaker 1: hop down on the one on one go a little
Speaker 1: bit south to Coopertino see our friends there that make
Speaker 1: cell phones and tell them to step up and pay
Speaker 1: a real dividend. Is that frustrate you as an income investor
Speaker 1: that you got a company with a ga jillion dollars
Speaker 1: of cash on a balance sheet, one hundred billion dollars
Speaker 1: for free cash flow every year and they pay a
Speaker 1: dividend yield less than one percent.
Speaker 12: Yeah, you're preaching to the choir. We certainly are strong
Speaker 12: advocates of that. We think it just makes sound sense.
Speaker 12: It broadens your investor base, and you know, there's certainly
Speaker 12: other things that we can do with using convertible securities,
Speaker 12: for example in our portfolios or other structured equity like
Speaker 12: investments where you're kind of effectively doing some covered call
Speaker 12: writing and getting some premium. So you know, we do
Speaker 12: have some opportunity in lower dividend paying or non dividend
Speaker 12: paying stocks, but absolutely would firmly agree with you there.
Speaker 1: All right, if you see him, you know, Tim Cook,
Speaker 1: around the neighborhood, maybe can put that in his ear.
Speaker 1: Ed Perks Cio Franklin Income Investors out in San Mateo,
Speaker 1: giving us some good discussion on income investing.
Speaker 2: Thanks for listening to the Bloomberg Markets podcasts. You can
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Speaker 2: at Matt Miller nineteen seventy three.
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