Speaker 1: This is Bloomberg Wall Street Week.
Speaker 2: I mean may not have an overall recession, We're having
Speaker 2: a rolling recession. To conge roll looks pretty strongly when
Speaker 2: it comes to jobs.
Speaker 3: The financial stories that shape our world.
Speaker 2: Three major regional bank failures send shockwaves through the banking system.
Speaker 2: We're all trying to figure out what to make of
Speaker 2: generative AI.
Speaker 3: Through the eyes of the most influential voices.
Speaker 2: Welcome down, Doctor Paul Krugman, Ryan moynihan, Bank of America,
Speaker 2: deebro Lair of the Paulson Institute, well then Hubbard of
Speaker 2: the Columbia Business School.
Speaker 3: Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
Speaker 2: Different summer holidays. Secretary Yelling goes to Beijing, Opek goes
Speaker 2: to Vienna, and the Fed stays home. To ponder those
Speaker 2: jobs numbers. This is Bloomberg Wall Street Week. I'm David Weston.
Speaker 2: This week's special contributor Larry Summers on those jobs numbers
Speaker 2: and what they tell us about where long term rates
Speaker 2: are headed. Credit expert pornam Apuri of HPS on the
Speaker 2: continued resilience in the credit markets and whether it will last.
Speaker 4: Private credit market continue to grow and.
Speaker 2: Colony Capital founders, I'm investing in the Gulf States, and
Speaker 2: how it led him to a New York courtroom.
Speaker 5: I thought, this is a great opportunity to start shipping
Speaker 5: at the system from somebody outside of the system.
Speaker 2: With the fourth of July holiday in the United States
Speaker 2: and Wimbledon underway in England, it was time this week
Speaker 2: to focus on summer holidays. The president g over in
Speaker 2: China didn't get much of a summer break from disappointing
Speaker 2: economic numbers.
Speaker 1: The reality is is that people have given up on
Speaker 1: the Chinese recovery. China's moving off its old economic growth model,
Speaker 1: but it hasn't moved comfortably into what's.
Speaker 2: Next, even as Beijing welcomed Treasury Secretary Yellen for a
Speaker 2: visit to try to keep the conversation.
Speaker 6: Going consp more regular channels of communication.
Speaker 2: Eature Marching Countries members started their July in Vienna, with
Speaker 2: Saudi Arabia kicking things off by extending its unilateral oil
Speaker 2: production limits.
Speaker 7: We had to do it because there was another ask
Speaker 7: for the more immediate expectations of their market that the
Speaker 7: operplus would need to do.
Speaker 2: While Swedish Prime Minister Ulf Christerson traveled to Washington for
Speaker 2: talks with President Biden, including on his country's admission to NATO.
Speaker 2: But with all the traveling around, it was good to
Speaker 2: know that the Federal Reserve remained on the job in Washington,
Speaker 2: as we got minutes from its most recent rate meetings,
Speaker 2: which showed that they weren't entirely on the same page
Speaker 2: last month about whether they should pause.
Speaker 8: The idea of slowing down the pace of rate increases
Speaker 8: and continuing to slow the pace of rat increases makes sense,
Speaker 8: and I.
Speaker 4: Think more restrictive monetary policy will be needed to achieve
Speaker 4: the FOMC schools of stable prices.
Speaker 2: Then at the end of the week, we got the
Speaker 2: job's umbers for June, with a little something for everyone.
Speaker 2: The US added two hundred nine thousand new jobs than
Speaker 2: the month before and less than anticipated, but still the
Speaker 2: unemployment number still went down by a tenth the three
Speaker 2: point six percent, and wage growth accelerated to an annual
Speaker 2: pace of four point four percent. The equity markets, well,
Speaker 2: they weren't really sure what to make of it all,
Speaker 2: with the SMP down over one percent but still ending
Speaker 2: at four to three nine eight that is well above
Speaker 2: the Bloomberg Elves media estimate of forty one hundred for
Speaker 2: the year end, while the NASDAG gave up almost one percent.
Speaker 2: But the real action this week, The real action was
Speaker 2: over in the bond market, where the yield and the
Speaker 2: two year went above five percent on Thursday, settling down
Speaker 2: a bit on Friday to close at three point four
Speaker 2: point nine three three, while the tenuere added twenty two
Speaker 2: basis points to stay above four percent at four point
Speaker 2: five eight to take us through the holiday shortened week
Speaker 2: in the markets. Welcome back now, Dave Bianco. He is
Speaker 2: chief investment and strategist at WDS. Thanks for coming back
Speaker 2: with this. Dave, great to have you here, so give
Speaker 2: us your sense of what the markets did this week.
Speaker 2: As I say, the aquite markets weren't quite sure about it,
Speaker 2: but boy, the bond market really reacted. What do the
Speaker 2: jobs numbers tell us?
Speaker 6: Today's jobs Friday and leading up to it during the week,
Speaker 6: there are other indicators for the jobs market suggesting that
Speaker 6: the jobs market's still very healthy and a lot of
Speaker 6: job creations still occurring, particularly at services. So the jobs
Speaker 6: report was a little softer than the bond market feared.
Speaker 6: But you have to realize the bond market was really
Speaker 6: fearful of a super strong jobs report that would make
Speaker 6: the Fed have to do more than one or two
Speaker 6: heights from here. And the jobs report when it came in,
Speaker 6: we saw a couple of things. One the two year yield, sorry,
Speaker 6: the two yearield fell below five percent, but the ten
Speaker 6: year yield rose above four percent and it stayed above
Speaker 6: four percent today. I think the action on the ten
Speaker 6: year yield is the really interesting action this week.
Speaker 2: Well, are we through? Are we getting to a breakthrough
Speaker 2: on bonds here? Basically? Are we breaking through to new
Speaker 2: levels in the tenure? And for them out of the two.
Speaker 6: That's the interesting question. It's are we walking into a
Speaker 6: new norm? And is that new norm the old norm
Speaker 6: from ten to twenty years ago. I think what's happening,
Speaker 6: particularly in the ten year yield being over four percent,
Speaker 6: is that the bomb markets starting to run out of
Speaker 6: patience for the FED to win this inflation war. Inflation
Speaker 6: is coming down, but it's coming down too slowly because
Speaker 6: it's been two years now that inflation has been well
Speaker 6: above the Fed's target. And if it doesn't come down quicker,
Speaker 6: I think the bomb market's going to lose its patience.
Speaker 2: Well, and if you look at things like the ten
Speaker 2: year break even versus the PCE core numbers. There's a
Speaker 2: very substantial difference now that there hasn't been historically, and
Speaker 2: one of those I guess it has to come down
Speaker 2: or come up. That's right.
Speaker 6: So when you look at ten year treasury yields at
Speaker 6: about four percent, the break even or essentially the inflation
Speaker 6: expectation embedded in that four percent yield is about a
Speaker 6: two and a quarter percent break even inflation expectation as recall.
Speaker 6: So essentially the long term has been saying it believes
Speaker 6: the Fed that the FED is going to get inflation
Speaker 6: back to its two percent target, but eventually is not
Speaker 6: good enough. I think the bomb market's at the stage
Speaker 6: whered saying you need to move faster because if we
Speaker 6: have to reassess the risk of another inflation outbreak, and
Speaker 6: you take more than a year or two to solve
Speaker 6: the problem, it takes you two to three or more
Speaker 6: years to get back to target. The bomb market's going
Speaker 6: to have to reprice its inflation expectation and risk premium.
Speaker 2: As a student of the markets, what is your best
Speaker 2: sense of how long the FED has If I can
Speaker 2: put it that way, we're going to get CPI data.
Speaker 2: Next week, we're going to ask other data coming in.
Speaker 2: We most of us expect that there's going to be
Speaker 2: a twenty five point basis point increase in July. Right,
Speaker 2: the question is what happens in September? What happens after September?
Speaker 2: How long does the FED have?
Speaker 6: So now we're going into the back half of twenty
Speaker 6: twenty three, and the first two years were that period
Speaker 6: of time where the bomb market is willing to give
Speaker 6: the FED a couple of passes. But now, if inflation
Speaker 6: doesn't get down faster, I don't think the FED will
Speaker 6: be forgiven by the bomb market over the long term.
Speaker 6: I think what you'll have is that the four percent
Speaker 6: ten year treasure yield and perhaps even higher than that,
Speaker 6: stays there even as the economy continues to slow, because
Speaker 6: the bomb market wants compensation for this elevated inflation risk
Speaker 6: in this decade that we're in.
Speaker 2: If in fact, we're baking in higher levels for the tenure,
Speaker 2: let's just stay on the tenure here. What does that
Speaker 2: mean for the equity market? Because there's a discount factor here,
Speaker 2: and typically equity valuations go down, and particularly in some
Speaker 2: of the growth stocks such as tech right, which has
Speaker 2: been doing pretty well well.
Speaker 6: This week is about interest rates, and we'll continue to
Speaker 6: watch interest rates over the rest of the year. Next
Speaker 6: week we get some more reports on earning season. I
Speaker 6: think earnings will be about fifty five dollars in the quarter,
Speaker 6: or two hundred and twenty dollars for this year. The
Speaker 6: SMP's trading at twenty times this year's earnings estimate, and
Speaker 6: tech the tech sectors trading at thirty times this year's
Speaker 6: earnings estimate. The higher interest rates go, the stronger the
Speaker 6: earnings growth and real earnings growth that needs be generated
Speaker 6: by the SMP and the tech sector to justify these valuations.
Speaker 6: The valuations are very demanding and they're not being helped
Speaker 6: by these interest rates.
Speaker 2: Okay, so let's assume for the moment that earnings actually
Speaker 2: measure up and actually support those valuations. Where's it going
Speaker 2: to come from? Is that from price equity ratios? Is
Speaker 2: that from top line growth? Where are we going to
Speaker 2: find it?
Speaker 6: Well, most of the top line growth that we're seeing
Speaker 6: is really just inflation and basically the same things occurring
Speaker 6: at earnings. And I do expect fifty five dollars of
Speaker 6: earnings for the second quarter which would be down a
Speaker 6: few percent from last year. But earnings at the SMP
Speaker 6: have been about fifty five dollars per share on a
Speaker 6: seasonally adjusted basis for the past two years, so earnings
Speaker 6: have been flat since late twenty twenty one. Where's the
Speaker 6: earnings growth going to come from? Well, that's why the
Speaker 6: whole market's just overly counting on tech to make up
Speaker 6: for what's likely a mnemic earnings growth everywhere else.
Speaker 2: Tech and particularly some big tech, has really been dragging
Speaker 2: the market average up. Without a doubt that's come down
Speaker 2: or does the rest of the market catch up?
Speaker 1: Right?
Speaker 6: I believe that mark the tech sector is due for
Speaker 6: a correction. I don't know if it's in the coming
Speaker 6: days weeks, but I think over the course of the
Speaker 6: rest of the year that the tech sector will correct
Speaker 6: by about ten percent. And for those who are in
Speaker 6: the debate about will the rest of the market catch
Speaker 6: up to tech, will that bring the market to even
Speaker 6: new highs for the year? I doubt it. I think
Speaker 6: in order to be bullish on the market, you need
Speaker 6: to believe that tech goes even higher. I don't think
Speaker 6: it's likely that the rest of the market will drive
Speaker 6: the overall market higher. If tech doesn't climb higher itself.
Speaker 2: AI going to save this.
Speaker 6: AI may save the decade in terms of productivity and
Speaker 6: decent economic growth, but I don't think AI is going
Speaker 6: to save the really weak earnings growth I see for
Speaker 6: the S and P for the rest of the year.
Speaker 2: What about government investment, because we have Bidenomics now as
Speaker 2: President Biden Fairmount investment coming into industrial policy exactly right
Speaker 2: as we had in Japan in the eighties. Is that
Speaker 2: likely the kicking to really help drive growth and productivity?
Speaker 2: And if so, how long does it take?
Speaker 6: Well, it will take time. We'll find out what returns
Speaker 6: on investment and what productivity we get out of that
Speaker 6: over time. But in the meantime, we do see investment
Speaker 6: in manufacturing capacity in the United States, but manufacturing output
Speaker 6: has been weak and we are still in this manufacturing recession.
Speaker 6: It's all on the service side of the economy that's
Speaker 6: booming right this moment.
Speaker 2: David's always a treat to have you with us, Thank
Speaker 2: you so much. That's David Bianco of DWS coming up
Speaker 2: our special contributor Larry Summers on what the jobs numbers
Speaker 2: tell us about the strength of the economy and where
Speaker 2: long term interest rates are headed. That's next on Wall
Speaker 2: Street Week on Bloomberg.
Speaker 3: This is Bloomberg Wall Street Week with David Weston from
Speaker 3: Bloomberg Radio.
Speaker 2: This is Wall Street Week. I'm David Weston. We're delighted
Speaker 2: now have to have our special contrader, Larry Summers of
Speaker 2: Harvard to help take us through the job's numbers and
Speaker 2: other eco numbers. What they told us is week Larry,
Speaker 2: great to have you back with us. What did you
Speaker 2: make of the jobs numbers? And by the way, there
Speaker 2: were other eco numbers as well this week.
Speaker 1: David, these are hot numbers.
Speaker 8: The rate of job creation is twice as great as
Speaker 8: the growth in the number of adults in an economy
Speaker 8: that's already overheated. That's not consistent with bringing inflation down
Speaker 8: to its target level. And you see that in the
Speaker 8: wage data, which is pointing to inflation way above.
Speaker 1: The Fed's target.
Speaker 8: We've got a low unemployment rate at three point six percent, and.
Speaker 9: If you look at any of the other labor market
Speaker 9: indicators that we got this week, quit rate, the level
Speaker 9: of vacancies, the layoff rate, the insured unemployment data, all
Speaker 9: of that, based on past patterns, is suggesting an even
Speaker 9: tighter unemployment rate than the three point six percent.
Speaker 1: So I think we've got an economy.
Speaker 8: That is currently very strong, not sustainably strong in terms
Speaker 8: of the rate of job creation, and not very surprisingly
Speaker 8: given that strength, we continue to have inflation and indicators
Speaker 8: of forward inflation well above target. So I think the
Speaker 8: market is right to judge that once again the Fed
Speaker 8: has underestimated inflation for basically the eighth quarter in a row.
Speaker 8: They've been surprised on what's happened to inflation, and because
Speaker 8: there's a ris on what's happening with inflation and the
Speaker 8: strength of the economy, they're going to be surprised by
Speaker 8: what they have to do to interest rates. And so
Speaker 8: I think that you've seen an appropriate adjustment in medium
Speaker 8: term interest rates to this reality. My best guess is
Speaker 8: that you're going to see further adjustment as the data
Speaker 8: continues to come in. But I think it's a mistake
Speaker 8: to be distracted by the wiggles. Yes, the ADP number
Speaker 8: yesterday was super duper strong, and today's number was.
Speaker 1: Not nearly as strong as.
Speaker 8: The ADP number, But if you step back to the
Speaker 8: bigger picture, nobody thinks we can continue indefinitely to create
Speaker 8: jobs twice as fast as the adult population grow. That
Speaker 8: means we're having tighter and tighter labor markets, and that
Speaker 8: means an inflationary picture, and the Fed's going to have
Speaker 8: to respond to that.
Speaker 2: Larry, you were one of the very first, maybe the
Speaker 2: very first to identify this risk Kreen Wall Street, but
Speaker 2: also in your pieces for the Washington Post. I guess
Speaker 2: the two questions that occur to anyone is number one,
Speaker 2: what's it going to take for the FED to get
Speaker 2: really inflation or control number one? Number two is why
Speaker 2: has it taken so long?
Speaker 8: It's taken so long because we started out so late,
Speaker 8: and given how late we started, we didn't move sufficiently
Speaker 8: because we believed mistakenly that the neutral interest rate was
Speaker 8: still very low, and we believed mistakenly that raising interest
Speaker 8: rates would have large impacts on the economy that were
Speaker 8: greater than the impacts of interest rates in the current structure,
Speaker 8: And we haven't really recognized that it's a basic feature
Speaker 8: of the inflation process that while you get transitory fluctuations,
Speaker 8: you don't stop an underlying wage inflation without having a
Speaker 8: significant slowdown in economic activity. And since we haven't yet
Speaker 8: had a significant slowdown in economic activity. It shouldn't be
Speaker 8: surprising that we've still got inflation well above target, nor
Speaker 8: should anybody take comfort from the fact that the components
Speaker 8: of inflation that everybody recognized were transitory. The fact that
Speaker 8: they've come down, in some cases even going into reverse,
Speaker 8: is better than if they have, much better than if
Speaker 8: they hadn't.
Speaker 1: But nobody ever thought.
Speaker 8: We were in underlying eight percent inflation country when we
Speaker 8: were having eight percent inflation.
Speaker 1: So the fact that.
Speaker 8: The rate has come down shouldn't be confused with saying
Speaker 8: that we can be confident that we're on a path
Speaker 8: of this all being okay, and certainly not worth saying
Speaker 8: that we're We can be confident that we're on a
Speaker 8: path for this all being okay without the FED doing
Speaker 8: more to raise race. So anything's possible, and all of
Speaker 8: these judgments stated are statistical. Maybe we'll get a big
Speaker 8: productivity boom out of AI very quickly, though I think
Speaker 8: that's unlikely. Maybe the inflation process will behave very differently
Speaker 8: than it has in the past, But I think the
Speaker 8: best guess has to be that the FED is going
Speaker 8: to have to raise rates more.
Speaker 2: Let I want to turn to a different subject here
Speaker 2: that you wrote about in the Washington Post this week,
Speaker 2: and that is the so called the front of action
Speaker 2: decision coming out of the Supreme Court. Station you not
Speaker 2: only are an esteemed economist, you not only were section
Speaker 2: of the Treasury. He also ran Harvard for some time.
Speaker 2: You really lay out there how difficult this issue is,
Speaker 2: that it's a broader issue, it's an important issue of
Speaker 2: their broader issue. Then simply raise.
Speaker 1: I wish the Supreme Court hadn't acted.
Speaker 8: I wish it had let the world continue on the
Speaker 8: path that it was. Let private institutions make their choices
Speaker 8: about how they're going to pursue fairness as they see it.
Speaker 8: But right now there's a critical choice that leading universities face.
Speaker 8: One option is that they can gerrymander the inflation, the
Speaker 8: admissions criteria and change just exactly how they do it,
Speaker 8: and encourage people to put certain sentences in their essays
Speaker 8: and do away with standardized tests that have a lot
Speaker 8: of information, and fight to try to keep the exactly
Speaker 8: same percentages of racial groups where they are.
Speaker 1: That's one approach.
Speaker 8: I think if they do that, they will be increasingly resented.
Speaker 1: By the broad public.
Speaker 8: They will diminish the intellectual quality of their classes, and
Speaker 8: in fact, they will have done very little to promote
Speaker 8: social justice. The alternative path is that they step back
Speaker 8: and that they recognize that really the important test for
Speaker 8: them in this era is their overall contribution to opportunity
Speaker 8: in America, and if that's what they want to maximize,
Speaker 8: it'll be a very different path. No more legacy admissions,
Speaker 8: no more special admissions for people who've been coached extensively
Speaker 8: to be good at aristocratic sports, deciding to expand their
Speaker 8: class sizes so that more can benefit from what they bring,
Speaker 8: and not defining their greatness by just how exclusive they are.
Speaker 8: Using the power of distance education for their education to
Speaker 8: be defined by more than what happens in the fall
Speaker 8: and spring semester on their campus, but training teachers during
Speaker 8: the summering able.
Speaker 1: Students with computers.
Speaker 10: And crucially crucially turn their energy two strengthening what happens
Speaker 10: in our public schools across the country. Look David, only
Speaker 10: about one and a half percent of the students who
Speaker 10: score in the top ranges of the SATA are African
Speaker 10: American YEP. Until we fix that, no durable solution to
Speaker 10: these problems. That needs to be a crucial part of
Speaker 10: the mission of our elite schools.
Speaker 2: So terribly important, so profound. Thank you so much, great
Speaker 2: to have you back with us. That's our special Conturlly
Speaker 2: Larry Summers coming up. The oil and gas riches of
Speaker 2: the Gulf States have given them enormous funds to invest
Speaker 2: in the West, but they're also attracting substantial investments from
Speaker 2: the West. Tom Barrick has been an active player in
Speaker 2: the region for decades. He'll tell us what he has learned.
Speaker 5: If we're not there to hand in glove fix the
Speaker 5: rest of the things they need, China will be there.
Speaker 2: This is Wall Street Week on Bloomberg.
Speaker 3: This is Bloomberg Wall Street Week with David Weston from
Speaker 3: Bloomberg Radio.
Speaker 2: The Gulf States. Since oil was first discovered in Saudi
Speaker 2: Arabia in nineteen thirty eight, the region has dominated the
Speaker 2: world of geopolitics because of its rich deposits of oil
Speaker 2: and gas, and this week Saudi Arabia once again sought
Speaker 2: to assert its power by extending production limits.
Speaker 11: We needed to head on, reach out to these issues,
Speaker 11: attend to them, and go for what we think would
Speaker 11: be that I tricipy to attend to this market situation, but.
Speaker 2: For investors it's not just a question of what Saudi
Speaker 2: Arabia and the UAE will mean for the price of
Speaker 2: oil or cutter for natural gas, but also what investments
Speaker 2: they'll make with all those revenues.
Speaker 12: Secondly, what we see in the golf is a remarkable
Speaker 12: determination to pursue reforms. There are some putting that the
Speaker 12: fortunes of the golf are oil and gas. In fact,
Speaker 12: the fortune of the golf is decisiveness in putting economy
Speaker 12: on long term sustainable path.
Speaker 2: Investments like the Kingdom's public investment fund in ev makers,
Speaker 2: Rivian and Lucid.
Speaker 7: They're not really just about EV's, They're about the whole
Speaker 7: ecosystem that comes with EV's and technology.
Speaker 5: We're making bets for the future and for the green
Speaker 5: future as well.
Speaker 2: Or it's l iv Golf venture being merged with the PGA.
Speaker 13: I think getting together is the best thing for golf.
Speaker 13: This fight that was going on in the lawsuits that
Speaker 13: were raging in a one side the golfers from Live
Speaker 13: you know, taking shots at the PGA and vice versa.
Speaker 13: That's not constructive for the game.
Speaker 2: The UAE is one of the largest shareholders of the
Speaker 2: Carlisle Group and recently agreed to acquire a seventy percent
Speaker 2: equity stake in Fortress from Softbag, but Alla will own
Speaker 2: seventy percent of Fortress equity while Fortress Management will hold
Speaker 2: a thirty percent equity interest. But the investment funds don't
Speaker 2: only flow from the Gulf States to the West. Saudi
Speaker 2: Arabia looks to raise some of the five hundred billion
Speaker 2: dollars it needs to build NEO from Western investments. We
Speaker 2: had really significant interest from the market.
Speaker 12: Twenty three financial institutions participated in the close of the Degree
Speaker 12: and Hydrogen and.
Speaker 2: According to UN statistics, the UAE is the largest recipient
Speaker 2: of foreign direct investment in West Asia. And to take
Speaker 2: us through the possibilities of investing in the golf, welcome
Speaker 2: now someone who has spent his career there is Tom
Speaker 2: Barrick under of Colony Capital. Tom. Great to have you here.
Speaker 2: Thank you so much for being on Wall Street week.
Speaker 1: Great to be with you.
Speaker 5: David.
Speaker 2: Thank as I say, you really have spent your career
Speaker 2: in and around the golf. Give us an investors perspective
Speaker 2: right now in the golf, where are their opportunities but
Speaker 2: also where are their perils?
Speaker 5: So it's always been a misunderstood era, right, because it's
Speaker 5: tribes and flags. When we talk about the golf there's
Speaker 5: fifty four countries really that make up kind of the
Speaker 5: consortium of golf countries for big ones. But if you
Speaker 5: think about it, the resource curse, so from nineteen sixty on,
Speaker 5: the discovery of oil and gas in the small populations
Speaker 5: led them in really a seventy year period to dominate
Speaker 5: the investible world. So from producing oil and gas being
Speaker 5: the beneficiary of receiving those dollars up until now to
Speaker 5: reinvest in them and saying we've got a diversify. We
Speaker 5: have growing populations were now becoming more astute and aligned
Speaker 5: in the international economy. How do we diversify, What do
Speaker 5: we diversify into? And remember the constituencies. It's not a
Speaker 5: pension fund, so they're investable universe of the big sovereign
Speaker 5: wealth funds, which by the way, are the largest investors
Speaker 5: in the world today. Idea, Mubadala, PIF kia Qia are
Speaker 5: multi thousand investment groups investing in all asset.
Speaker 1: Classes around the world.
Speaker 5: So the goal at the moment is for them to
Speaker 5: diversify outside investments and at the same time start moving
Speaker 5: their own economies and their own young populations to a
Speaker 5: non resource based economy. That's the biggest challenge in most
Speaker 5: of these countries. The royal family directs the politics, and
Speaker 5: the politics is also driving the business decisions. So you
Speaker 5: have the same individuals positions that are looking at these
Speaker 5: big themes over long periods of time. And the constituency
Speaker 5: is the legacy. It's not for the retirement of individuals,
Speaker 5: so it's booming.
Speaker 2: Whenever one invests cross border, there's political risk involved. How
Speaker 2: does one assess the political risk in that region? Certainly
Speaker 2: we've seen it flare up in Saudi Arabia in various ways.
Speaker 2: How does one assess that and make sure that you're
Speaker 2: protected from that possibly affecting your investment.
Speaker 5: Slowly and carefully. I'm a great example of that. So
Speaker 5: I think for all business men, soft diplomacy is part
Speaker 5: of the goal that you're trying to reach longline relationships,
Speaker 5: understanding the geopolitical risks of where you are, the rule
Speaker 5: of law, the cultural orientation. We've always talked about this
Speaker 5: cultural sickth sense, but foreign policy has so much to
Speaker 5: do with it, especially in this region. It's a dangerous place.
Speaker 5: Why is it danger because all of these countries have
Speaker 5: been our allies really from the beginning of.
Speaker 2: World War One.
Speaker 5: They as a group are the largest buyers of US
Speaker 5: military equipment. Sada, Arabia, katar Abu Dhabi are our largest
Speaker 5: foreign buyers of US military and we have military agreements
Speaker 5: with all of them. But foreign policy ebbs and flows
Speaker 5: in that part of the region, and as we've seen
Speaker 5: now with sanctions, for instance in Russia and the threat
Speaker 5: of sanctions elsewhere, the rule of law sometimes is confusing
Speaker 5: to them as to the difference between foreign policy, military policy,
Speaker 5: business practice, business diplomacy.
Speaker 2: Time you refer to your personal experience and being exposed
Speaker 2: to some of the risks and what you call soft
Speaker 2: power with investing. You obviously were indicted in nine counts,
Speaker 2: you had a seven eight week trial and New York
Speaker 2: you were quitted on all charges. Must say, what did
Speaker 2: you learn from that experience that would be helpful to others.
Speaker 5: In twenty sixteen, Bob Muller started investigating President Trump for Russia,
Speaker 5: and by the way, I have nothing but respect for
Speaker 5: Muller and his team. They did the job they were
Speaker 5: supposed to do, and they did it elegantly in the
Speaker 5: manner of which it was supposed to be done. And
Speaker 5: during that time he had asked me to testify voluntarily,
Speaker 5: which I did, And this was about Russia. But in
Speaker 5: that process the Gulf States were starting to surface for interest.
Speaker 5: Never never for any evil purpose, never for any attendant purpose,
Speaker 5: just saying in this campaign, we don't know who Donald
Speaker 5: Trump is?
Speaker 2: Who is Donald Trump?
Speaker 5: I thought this for me at the time time was
Speaker 5: an incredible opportunity. I mean, you and I have talked before.
Speaker 2: Was never really political.
Speaker 5: Donald have been a friend of mine forever. I thought,
Speaker 5: this is a great opportunity to start shipping at the
Speaker 5: system from somebody outside of the system. So what got
Speaker 5: confused with me was my interaction, which was always business.
Speaker 5: As I said that the rulers of all these countries
Speaker 5: also are the ones making all the business decisions. So
Speaker 5: the sovereign wealth funds ultimately are governed and ruled by
Speaker 5: a monarchy. These are ham monarchies, never inappropriate. The big
Speaker 5: funds uh Ada Mubattle is run by some of the
Speaker 5: brightest young professionals. Ever, as is qia as is Pif,
Speaker 5: never an ounce of impropriety, and on the heels of
Speaker 5: the Moeler investigation, some of the prosecutors when they left
Speaker 5: go back into their own regimes. By the way, let
Speaker 5: me just start was saying, people are always asking me,
Speaker 5: is that Are the prosecutors corrupt? Are they evil? Did
Speaker 5: this come from Merrick Garland? Was he targeting you? And
Speaker 5: my answer is absolutely not.
Speaker 2: Thank you so much for ving Walster. We really appreciate it.
Speaker 2: That's Tom Barrett. He's the founder of Colony Capital.
Speaker 1: Coming up.
Speaker 2: People keep waiting for reel cracks in credit. Portam Apori
Speaker 2: of HPS. It tells us whether they are coming.
Speaker 4: You've got spreads that are actually not that wide and
Speaker 4: perhaps not representative of the risk in the corporate credit market.
Speaker 2: This is Wall Street Week on Bloomberg.
Speaker 3: This is Bloomberg Wall Street Week with David Weston from
Speaker 3: Bloomberg Radio.
Speaker 2: This is Wall Street Week. I'm David Weston. Solid jobs
Speaker 2: numbers out this week underscored the likely to have another
Speaker 2: FED rate hike later this month, with more possible in
Speaker 2: the fall, posing further challenges for the credit markets. Were
Speaker 2: welcome now a credit expert. She's Pronum a Pori, governing
Speaker 2: partner of HPS Investment Partners. So Portuma, thank you so
Speaker 2: much for joining us. Let's start with that question of
Speaker 2: monetary policy. People are expecting the FED to keep hiking
Speaker 2: at least.
Speaker 1: For a while.
Speaker 2: What does that mean for the credit markets you deal with.
Speaker 4: Yeah, so we generally deal with leverard credit, and I
Speaker 4: think that we are of the view that they're lazy
Speaker 4: to be one more hike, maybe there's two more hikes.
Speaker 4: I think that in general we're sort of closer to
Speaker 4: the end of said hikes than obviously we are at
Speaker 4: the beginning. So I think we're coming to the tail
Speaker 4: end of the hike cycle, and people are starting to
Speaker 4: now look at twenty four and you know, when is
Speaker 4: the FOD going to cut and what's going to are
Speaker 4: the what are the indicators they're looking at that would
Speaker 4: make them cut.
Speaker 2: So when I checked it this morning on the Bloomberg,
Speaker 2: the spread for high yields just take high yield with
Speaker 2: something like above four hundred and fifty bases points, Where
Speaker 2: do you expect that to be going? Is that where
Speaker 2: we end up? Or is that going to continue to rise?
Speaker 2: And so when.
Speaker 4: Yeah, so I think you got a big push and pull,
Speaker 4: which is that base rates are pretty high in north
Speaker 4: to five percent uh, and then you've got spreads that
Speaker 4: are actually not that wide and perhaps not representative of
Speaker 4: the of the risk in the corporate credit market. And
Speaker 4: I would actually say that's true for investment grade as well.
Speaker 4: I think investment grade is you know, one forty over
Speaker 4: plus or minus and high yields in the sort of
Speaker 4: load of mid four hundreds over. So I think our
Speaker 4: view is credit spreads are not indicative of risk necessarily.
Speaker 4: Yields all in are reasonably wide. So that's the that's
Speaker 4: the trick, and I would suspect that you'll see spreads
Speaker 4: go a little wider, primarily because we do think you're
Speaker 4: going to continue to see some margin deterioration for lever
Speaker 4: credit Number one and number two. We do think we're
Speaker 4: in a bit of a longer sort of higher for
Speaker 4: longer rate environment which will which will pressure cash flows
Speaker 4: as well for corporates.
Speaker 2: Well, it take us through how it works in credit,
Speaker 2: the mechanics of it, because I've seen some reports that
Speaker 2: there may be a delayed response because some companies, and
Speaker 2: this is both for investment grade but also for high
Speaker 2: yield or leverage loans locked in rates you know, at
Speaker 2: a lower rate that's coming due in the next couple
Speaker 2: of years. I'm told a fair amount of money is
Speaker 2: coming due and it may be a little difficult to
Speaker 2: get refinanced at acceptable levels.
Speaker 4: Yes, I'd sort of take that into two pieces. So
Speaker 4: in general, you got a bunch of fixed rate bonds,
Speaker 4: whether that be investment grade or high yield bonds that
Speaker 4: were issued at a different moment in time in the
Speaker 4: market when the five year and the tenure were significantly lower.
Speaker 4: Those fixed rate bonds are a real asset right now
Speaker 4: in the in the current rate environment. I think on
Speaker 4: the on the second ended spectrum, you've got the loan market,
Speaker 4: which is a large, large market, which is all anchored
Speaker 4: on a base rate plus a spread. And so as
Speaker 4: that base rates moved from you know, one percent to
Speaker 4: north of five percent, that's her businesses a lot. So
Speaker 4: if you think about sort of corporate balance sheets, you know,
Speaker 4: and incremental four hundred basis points of cost of leverage
Speaker 4: on their debt stack that is loan related has been
Speaker 4: pretty painful as.
Speaker 2: We look toward refinancing. Has the bargaining power shifted between
Speaker 2: the lender and the barrow or There was report actually
Speaker 2: just this week that KKR had to make concessions lenders
Speaker 2: to refinance a deal in a Dutch food company without
Speaker 2: talking about the specifically of that. Are you seeing that
Speaker 2: phenomenon or do you expect it more generally? We had
Speaker 2: covenant light, maybe we're going away from that. Yeah.
Speaker 4: I'd also answer that in two ways. So the first
Speaker 4: is it depends. The answer is true, some of these bigger,
Speaker 4: well known businesses that are large, large corporate capital structures,
Speaker 4: there are some covenants and stuff that are getting put
Speaker 4: in place when they're being issued through the liquid markets.
Speaker 4: But I wouldn't say there's been a huge seat change.
Speaker 4: It's gotten better, but I wouldn't say there's tons of covenants.
Speaker 4: I think the documentation structures certainly gotten better though, So
Speaker 4: I think that's one too, is the loan and high
Speaker 4: yield space. The issuance numbers have been very indemic this year,
Speaker 4: so there hasn't actually been a ton of net new issuance.
Speaker 2: Okay, Pornema, thank you so much for being on Wall Street.
Speaker 2: We really appreciate it. That's PORNIMFORI. She's at HPS Investment Partners.
Speaker 2: That does it for this episode of Wall Street Week.
Speaker 2: I'm David Weston. This is Bloomberg. See you next week.