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Markets, Private Equity, And Jackson Hole (Podcast) · Bloomberg Intelligence

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Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney. Alongside
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Speaker 1: my co host Matt Miller. Every business day, we bring
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Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
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Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
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Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
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Speaker 1: at Bloomberg dot com slash podcast. All right, let's talk
0:22
Speaker 1: to Phil Plumbo. He's a founder, CEO and CIO Plumbo
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Speaker 1: Wealth Management. Phil, do we have another leg down in
0:28
Speaker 1: this market? I kind of. I'm just not sure how
0:31
Speaker 1: much I should really buy into this bounce off the bottom.
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Speaker 1: What say you? Well, you took the words out of
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Speaker 1: my mouth, right, So we're still in the middle of
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Speaker 1: this storm. And the way I look at it is
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Speaker 1: the FED said that inflation was gonna be transitory. Were
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Speaker 1: the furthest thing from transitory? The FED says that we're
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Speaker 1: not in a recession. We had two back about quarters
0:51
Speaker 1: of negative GDP. As long as I've been doing that,
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Speaker 1: it's always been the definition. I totally get the tight
0:56
Speaker 1: label market. So technically probably when not in a recession.
0:59
Speaker 1: Now it everything the FED is doing on and is
1:02
Speaker 1: doing and is embarking on right. All of that still
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Speaker 1: needs to be absorbed into the economy, and it takes time.
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Speaker 1: It takes six months to take a year, to take
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Speaker 1: a year and a half. So at some point this
1:13
Speaker 1: data will continue to worsen. When you think about p
1:15
Speaker 1: WC survey firm said they're gonna they're anticipating layoffs. The
1:20
Speaker 1: inverted yield curve, sentiment again is high. You look at
1:24
Speaker 1: the multiples on Amazon and Apple. Forward on Amazon is
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Speaker 1: fifty six Apples twenty six times in both the growing
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Speaker 1: revenue one another one at seven percent. So valuations still
1:36
Speaker 1: have to come in and there is going to be
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Speaker 1: another leg down that will retest the loads that we
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Speaker 1: saw back in June. But what's the what's the driver
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Speaker 1: of that retesting of the lows? Is it the FED hike?
1:48
Speaker 1: Is it recession worries? Is it it slowed out in consumption.
1:51
Speaker 1: I mean, I'm admittedly at faulty because I'm a journalist
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Speaker 1: and I was repeatedly told by traders not everything has
1:57
Speaker 1: a fundamental narrative. But why do you sell out of
1:59
Speaker 1: this market when capital flows from other countries and really
2:03
Speaker 1: the rest of the world could actually provide some sort
2:05
Speaker 1: of support and everything has a fundamental narrative if you're
2:09
Speaker 1: a trader in the short term, but over the six
2:10
Speaker 1: twelve month period, which is a long term period, with
2:13
Speaker 1: everything that the FETE is doing, and because we're in
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Speaker 1: a tight labor market means inflation could be more persistent.
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Speaker 1: We means the FETE has to act even more aggressively
2:21
Speaker 1: or continue to be aggressive, and all of that is
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Speaker 1: not a positive for stocks. And ultimately, what happens our
2:28
Speaker 1: company's executives, they're making decisions to lay off, They're gonna
2:31
Speaker 1: You're gonna see analysts revise earnings, revision of earnings of
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Speaker 1: ten to off of what prediction is that brings you
2:42
Speaker 1: out of forward multiple today of y two times, which
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Speaker 1: is basically where we were in the middle of January.
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Speaker 1: So that's not attractive thinking about what the FETE is
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Speaker 1: embarking on and how inflation could be sticky. So so
2:55
Speaker 1: what do you what do you tell your clients about?
2:57
Speaker 1: You know, given that backdrop your call there for equities,
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Speaker 1: I mean, I see the in the first half of
3:01
Speaker 1: the year, the terrible, terrible underperformance of fixed income across
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Speaker 1: the board, whether it's corporates or treasuries, investment created high yield,
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Speaker 1: there's nowhere to hide. So if we've got another leg
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Speaker 1: down here, what are you telling your clients these days
3:16
Speaker 1: in terms of if they if they have some new
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Speaker 1: money to put the work. Maybe a couple of things right.
3:20
Speaker 1: So I've been very consistent, whether it's on your show
3:22
Speaker 1: or anywhere else, that we were in the tech bubble
3:24
Speaker 1: that burst. We thought we the stock market as a whole,
3:28
Speaker 1: was in a bubble, right. That came down to troll.
3:32
Speaker 1: The technology got got killed as well. So coming into
3:36
Speaker 1: this year, we're aggressive in cash and we still are today.
3:40
Speaker 1: We're being we're being very patient like buffets all the time,
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Speaker 1: wait for the perfect pitch. You know, we're not out
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Speaker 1: of the situation where we're having a perfect pitch right now,
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Speaker 1: so we're being completely patient. Scenario, we had great returns,
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Speaker 1: everybody did right go in one, So being patient here
3:54
Speaker 1: in twenty two with everything going on is perfectly fine
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Speaker 1: thing to do. I'm still I've got to say, I'm curious, though,
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Speaker 1: what else do you put your money in? I mean,
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Speaker 1: if you're pulling out of stocks and let's say going
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Speaker 1: to cash, for example, does that mean money markets? Does
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Speaker 1: that mean just blocking the dollars straight out. Where does
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Speaker 1: that money go? Yeah, for us, we put it in
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Speaker 1: money markets that can kneel between one and two percent.
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Speaker 1: It's not a great return, especially when you factor an
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Speaker 1: inflation completely. Get that. But if we do get a
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Speaker 1: great pitch thrown at us and it's a good time
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Speaker 1: to put capital to work where we can make great
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Speaker 1: returns over a three to five year period, then I
4:33
Speaker 1: mean that could happen over the next two to three months.
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Speaker 1: So even though the return in cash is not great,
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Speaker 1: it's the opportunity that we're looking for that we believe
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Speaker 1: will will occur that will make up for any type
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Speaker 1: of low return you're getting in cash today. We also
4:46
Speaker 1: are invest in gold. We're also in commodities as a diverse,
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Speaker 1: floid balanced portfolio, and obviously we have some exposure to
4:52
Speaker 1: equities as well. How do your clients fill Did they
4:55
Speaker 1: ask you about crypto bitcoin specifically? And if so, what
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Speaker 1: do you do you? What do you tell them? Yeah?
5:01
Speaker 1: The answer is just like I think of growth socks. Right,
5:03
Speaker 1: when you're investing in growth socks, you're trying to make
5:05
Speaker 1: a prediction of how much a product is going to
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Speaker 1: be sold with that company over a long period of
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Speaker 1: time and and that prediction is just so speculative. Right,
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Speaker 1: So when you think about like bitcoin and ethereum and others,
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Speaker 1: you're talking about something that is complete speculation. So why
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Speaker 1: would I invest my client's hard own capital and something
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Speaker 1: that is speculative. Yeah, it could turn out great, but
5:24
Speaker 1: also could turn out terrible. Right, So when it comes
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Speaker 1: to investing, I really believe it's about risk in return profile.
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Speaker 1: So I'd rather buy a great company like McDonald's or
5:32
Speaker 1: Coca Cola or Fiser have free cast full yields of
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Speaker 1: north six seven percent or eight percent or more than that,
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Speaker 1: which is two to three times a ten year treasury,
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Speaker 1: with stable earnings, great management, great economic mode. For me,
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Speaker 1: that's how you invest capital and a little long term
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Speaker 1: you'll succeed, all right, Phel always great to get your thoughts,
5:50
Speaker 1: your perspective. You've been in this game a long time.
5:53
Speaker 1: You always appreciate your experience. Filth Plumbo founder, CEO and
5:56
Speaker 1: c IO of Plumbo Wealth Management. There pretty I always
6:04
Speaker 1: think about, like who would I not want to hang
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Speaker 1: out with at a cocktail party. Here's this person be
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Speaker 1: a in economics and statistics from Berkeley, and then she
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Speaker 1: goes and gets a PhD in economics from the University
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Speaker 1: of Chicago. I mean, you don't want to hang out
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Speaker 1: with her at a cocktail par I'm not sure, but
6:19
Speaker 1: Anna Wong is a good buddy of ours. She's a
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Speaker 1: chief US economist for Bloomberg Economics, and I thanks so
6:24
Speaker 1: much for joining us. I don't mean, I don't mean
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Speaker 1: to prejudge, but boy, that's some resume there. What are
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Speaker 1: you looking for tomorrow coming out of Jackson Hole, Wyomings?
6:33
Speaker 1: You know, in addition to seeing what Tom King's gonna
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Speaker 1: wear tomorrow? Well, I, like everybody, I'm expecting a hawkish speech.
6:41
Speaker 1: I expect that Power will ressert that the FED is
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Speaker 1: unconditionally committed to restoring inflation that to its price press target.
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Speaker 1: He is going to say that he will keep rates
6:52
Speaker 1: in shift of territory until you see compelling evidence that
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Speaker 1: inflation is coming down. You know, the same same old
6:59
Speaker 1: hawkish words. Um. But I think the interesting thing is
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Speaker 1: how whether the whether the speech would be hawkish enough
7:06
Speaker 1: for the markets to kind of quash the thought that
7:11
Speaker 1: you know that the FED is ready to cut rates
7:13
Speaker 1: in three UM. And I think in order to do
7:17
Speaker 1: that um, power will have to be extra hawkish, for example,
7:21
Speaker 1: giving some numerical guidance saying that that the FED will
7:25
Speaker 1: not cut until core inflation comes down to close to
7:28
Speaker 1: two percent, something like very concrete like that. But I
7:32
Speaker 1: just don't I see very little chance you will be
7:34
Speaker 1: doing that though. Well, and I mean you got you
7:37
Speaker 1: and your team at Bloomberg Economics came out I think
7:40
Speaker 1: a couple of months ago, which what at the time
7:43
Speaker 1: I thought was just way way way out of consensus
7:46
Speaker 1: call that the FED might take the FED funds rates
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Speaker 1: up to five percent. Is that correct or is that
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Speaker 1: still your call? Yeah? That that is still our call,
7:56
Speaker 1: and I think that by each day the chance of
7:58
Speaker 1: that call is increasing. Um, we saw the student loan
8:02
Speaker 1: proposal yesterday and we estimated that that will boost core
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Speaker 1: inflation by about point to percentage point, with a risk
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Speaker 1: of it being higher. And you know, just if you
8:14
Speaker 1: think about the trade off between price and unemployment, that
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Speaker 1: little bit a point to percentage point extra inflation would
8:22
Speaker 1: cost the said two tighten even more in order to
8:26
Speaker 1: generate an eight hundred fifteen thousand job losses in order
8:30
Speaker 1: to bring it, you know, to offer up those little
8:33
Speaker 1: zero point two percentage points. So it's not even though
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Speaker 1: it sounds like a little just a little bit of inflation,
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Speaker 1: in fact, it's pretty like substantial from from a view
8:42
Speaker 1: assume a flat Philip's curve. For the record, Anna, I
8:45
Speaker 1: would love to be at a cocktail hard idea. Can
8:48
Speaker 1: I just say that? I would? You know, you're invited
8:50
Speaker 1: to the next one? I have um, step one, get
8:52
Speaker 1: a bar card, step two, and long um. But but
8:56
Speaker 1: you know what I'm curious about, and what I would
8:58
Speaker 1: probably ask you at said cock party is how much
9:01
Speaker 1: can the Federal Reserve really do here? I mean, you're
9:02
Speaker 1: talking about them, I mean everyone's talking about them, looking
9:05
Speaker 1: to be extra extra hawkish, But what more can they
9:08
Speaker 1: really even say here? They've already said that a recession
9:12
Speaker 1: is on the table. They're willing to make that that bet.
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Speaker 1: That's not their base case scenario, but they are willing
9:16
Speaker 1: to do it at the tackle inflation at the expense
9:19
Speaker 1: of a recession. The markets have a very high standard
9:23
Speaker 1: for Chairman Powell tomorrow. What else can the Federal Reserve
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Speaker 1: really do here? When they're going meeting to meeting and
9:29
Speaker 1: the data is literally all over the place. Yeah, Cretty,
9:33
Speaker 1: that's that's a very good question. I think it will
9:35
Speaker 1: be very hard for for him to to be more
9:39
Speaker 1: hawkish than what the market is already expecting. Tomorrow, he
9:43
Speaker 1: you know, he may be able to say that this
9:47
Speaker 1: is the injection. The whole theme is about reassessing constraints
9:50
Speaker 1: and the economy. It's all about examining what our star is,
9:54
Speaker 1: what youth star is, what all the stars are. And
9:58
Speaker 1: and I think that that if he is able to
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Speaker 1: say something like, oh, in fact, that our star um
10:04
Speaker 1: or or tomorrow's research papers are arguing that our star
10:08
Speaker 1: in fact substantially higher than two point five percent of
10:11
Speaker 1: the median f MC participate participant thinks right now that
10:15
Speaker 1: if he acknowledged that, that that's very hawkish. If he
10:19
Speaker 1: acknowledged that the youth star is like six percent natural
10:23
Speaker 1: rate of unemployment and that the FED will need to
10:26
Speaker 1: generate an unemployment of up to six percent, well that
10:29
Speaker 1: would be really hawkish. But that that's why I said
10:32
Speaker 1: he would need to offer up some numerical something numerical
10:36
Speaker 1: and something concrete to to come across is very convincing,
10:40
Speaker 1: and and I just don't think that he would do
10:43
Speaker 1: that tomorrow. However, I think they have a chance to
10:46
Speaker 1: do in the September September flmc WH where they will
10:50
Speaker 1: have an updated SEP at that point that UM, I
10:53
Speaker 1: would expect that the neutral rate could be revised up
10:57
Speaker 1: from the current two point five So you know, and
11:00
Speaker 1: when you guys came out with that five percent number,
11:02
Speaker 1: it was again way out of consensus. So kudos to
11:04
Speaker 1: you and your team here. But one of the things
11:07
Speaker 1: I look at the you know, the labor market, and
11:11
Speaker 1: I still see a pretty strong labor market is is
11:14
Speaker 1: that is it real? Do you think or do you
11:17
Speaker 1: think there's some underlying week to say that the FETE
11:19
Speaker 1: is paying attention to that we may not see in
11:20
Speaker 1: the numbers. I think it's real. So if you look
11:25
Speaker 1: at the direction of revisions, we just got to manage
11:29
Speaker 1: your revisions on jobs yesterday. In fact, it turned out
11:32
Speaker 1: that last year, up to earlier this year, the labor
11:35
Speaker 1: market was half a million jobs hotter more than what
11:39
Speaker 1: statistics actually show. That's on top of every month we
11:42
Speaker 1: have been getting our revisions. I think the issue here,
11:46
Speaker 1: UM is really productivity. UM. That's that explains to why
11:50
Speaker 1: the g d I, the gross Domestic income measure of
11:55
Speaker 1: GDP and GDP are telling you a different story. G
11:58
Speaker 1: d P is saying the economic activity contracted g d I,
12:02
Speaker 1: which is an income based measure that used hours, work times, wages,
12:07
Speaker 1: and corporate profits. That's telling you that the economy is
12:10
Speaker 1: doing pretty well. And I think that the thing to
12:12
Speaker 1: bridge them all is that, in fact a lot of
12:15
Speaker 1: people are being hired, but they're probably less productive than
12:18
Speaker 1: before because people are calling sick and there are a
12:21
Speaker 1: lot of sick leaves that that that's not being recorded.
12:24
Speaker 1: So that's why we also have negative productivity. I think,
12:27
Speaker 1: I I personally, that's my theory of what's going on.
12:30
Speaker 1: And I'm gonna put you on the spot here thirty seconds.
12:32
Speaker 1: How much unemployment is too much? Unemployment? Um, you know,
12:39
Speaker 1: every kind of unemployment is if bad, even one extra
12:42
Speaker 1: job lass is bad. So uh, you know. But however,
12:46
Speaker 1: price stability will be important in it ensuring a long expansion.
12:50
Speaker 1: As Power said, all right, Anna, good stuff again you guys,
12:54
Speaker 1: you and your team. Ana, we're just really early and
12:56
Speaker 1: looking increasingly correct with your call with where this you know,
13:00
Speaker 1: this natural rate may go here and we'll hear more.
13:03
Speaker 1: Fed Chairman Pale tomorrow from Jackson Hole Anna Wong. She's
13:06
Speaker 1: the chief OS economist for bloomerk economics, and you know, creaty.
13:10
Speaker 1: When she came out with that call, I was like, whoa,
13:11
Speaker 1: because the street was at like two and a half
13:13
Speaker 1: percent at the time, and she came out with this
13:15
Speaker 1: five percent number. And she may be proven right. And
13:18
Speaker 1: when all is said and done, you know, one of
13:19
Speaker 1: the criticisms of the Federal Reserve right now in economics
13:22
Speaker 1: at large simply that they're getting their forecasts wrong. Paul
13:24
Speaker 1: I ad venture to say, I think the youth government
13:26
Speaker 1: lost Annah Long and that's maybe why. Yes, exactly exactly,
13:30
Speaker 1: so we're fortunate to have her there. All right, let's
13:36
Speaker 1: go to Amber Fairbanks, portfolio manager for Mirova up in Boston,
13:42
Speaker 1: and that makes sense. She's undergraduate from umss Amherston, an
13:46
Speaker 1: NBA from Boston College. So all in Boston, go yankees,
13:49
Speaker 1: uh Amber, thanks so much for joining us here. What's
13:52
Speaker 1: the investment theology focused strategy at your firm? Rova and
13:58
Speaker 1: some rather approach this stainable one. We're really looking at
14:01
Speaker 1: exploiting market inefficiencies that we see around long term secular trends,
14:06
Speaker 1: as well as the belief that the market is really
14:08
Speaker 1: underestimating the risk coming from poor e s G practices.
14:13
Speaker 1: So let's talk about those E s G practices. I mean,
14:15
Speaker 1: to me, it feels like the s G was all
14:18
Speaker 1: arraged maybe two years ago when the pandemic first struck,
14:21
Speaker 1: for a variety of reasons, um, including how we want
14:24
Speaker 1: to really deal with our our footprint. But I'm curious
14:26
Speaker 1: about how that's evolved in light of I think the
14:29
Speaker 1: recent criticism has gotten. Yeah, I think we've seen some
14:33
Speaker 1: recent criticism starting really the beginning of this year. I
14:36
Speaker 1: know with the Baron's article that came out. There's a
14:38
Speaker 1: similar economists Economist article that came out as well. Um,
14:42
Speaker 1: you know, I think that certainly there's there's reasons to
14:45
Speaker 1: be looking a little bit closely at E s G
14:48
Speaker 1: given the popularity, and I think, you know, the criticism
14:51
Speaker 1: contains some brain of truth, particularly around the inconsistent implementation
14:56
Speaker 1: of E s G frameworks by investors and kind of
14:59
Speaker 1: E s G being used is virtue signaling as opposed
15:01
Speaker 1: to really having real world impact. But you know, I
15:04
Speaker 1: think really these are effective debating points, but really none
15:08
Speaker 1: amounts to anything close to a disqualifying argument. I think,
15:12
Speaker 1: really the attention to e FC issues becomes a biduciary
15:15
Speaker 1: duty to investors and to company managers and directors because
15:19
Speaker 1: of financial materiality. And I think that's the most important
15:22
Speaker 1: point is that history has really shown that attention to
15:25
Speaker 1: e sc issues it's really increasingly important in the creation
15:29
Speaker 1: and preservation of value. And certainly there's done a lot
15:31
Speaker 1: of examples like the VP Deepwater Horizon explosion, you know,
15:35
Speaker 1: Facebook data privacy, that have really pointed to the importance
15:39
Speaker 1: of considering e s G issues um serverally becomes a
15:42
Speaker 1: management of intangible issues around brand and reputation, human capital,
15:46
Speaker 1: for example. So I think that e s G and
15:50
Speaker 1: shareholder capitalism are really fundamentally about good governance. The idea
15:54
Speaker 1: that it's kind of about inconsistent implementation. It's certainly that's
15:58
Speaker 1: a fair point across some managers, but it really about
16:01
Speaker 1: politicizing e s G investing, which I think is what
16:03
Speaker 1: we've seen in the media recently. You're kind of conflating
16:06
Speaker 1: at virtue signaling and values based investing and really debate
16:10
Speaker 1: about wokeism, where really it's just underestimating the changing nature
16:14
Speaker 1: of business value creation. Amber give us an example of
16:18
Speaker 1: a name that's in your portfolio or something you've recently added,
16:20
Speaker 1: and how it might fit into your E s G framework.
16:26
Speaker 1: So one of the companies we added UM in December
16:29
Speaker 1: last year and then added to more recently is Macado Libre.
16:32
Speaker 1: It's an e commerce and fintech company in Latin America,
16:35
Speaker 1: especially a really interesting company that the largest e commerce company.
16:39
Speaker 1: And I think if you look at the growth of
16:40
Speaker 1: e commerce in Latin America, only about six percent of
16:43
Speaker 1: retail sales in Latin America are coming from e commerce.
16:46
Speaker 1: That compared globally to around eighteen percent. Such a tremendous
16:49
Speaker 1: opportunity for growth there. The company has a really strong
16:52
Speaker 1: competitive advantage as well. And then within fintech. You know,
16:55
Speaker 1: if you look at Latin America, about fifty of adults
16:57
Speaker 1: are unbanked. It's really to lead a poverty. To provide
17:01
Speaker 1: for academic growth, these people need access to affordable financial
17:05
Speaker 1: systems and that's something that Accatto leave I provide. So
17:07
Speaker 1: a company that we were able to add to what
17:09
Speaker 1: we think is a really attractive valuation. It's certainly a
17:12
Speaker 1: growth company UM and I think, you know, it's been
17:15
Speaker 1: such a sentiment driven market, particularly in the beginning of
17:18
Speaker 1: the year, with growth selling officers sharply. But a company
17:20
Speaker 1: that continues to put very very strong fundamental So we
17:23
Speaker 1: kept our long term valuation approach and we're able to
17:26
Speaker 1: exploit and the short termism that we're seeing in the
17:28
Speaker 1: market today. So from an E s G perspective, I mean,
17:31
Speaker 1: just shut some light for me on this Mercatto Libre story,
17:34
Speaker 1: because for our international audience who aren't perhaps it's familiar.
17:37
Speaker 1: The way I like to think about and Paul correct
17:39
Speaker 1: me if I'm wrong here, is that it's kind of
17:40
Speaker 1: the Amazon of Latin America to some extent the eBay
17:44
Speaker 1: even if you will, I'm curious why the investing case
17:47
Speaker 1: from Ricatto Libre differs from that on Amazon when it
17:50
Speaker 1: comes to an E s G basis. So it was
17:53
Speaker 1: Amazon has been a lot of socialities that have us concerns.
17:56
Speaker 1: You have our treatment of workers, for example, as well
17:59
Speaker 1: as their men Somemen, a third party manufacturing, and so
18:02
Speaker 1: it's really those social issues that have us concerned around Amazon.
18:05
Speaker 1: I think, you know, from a fundamental perspective, from a
18:09
Speaker 1: secular trend perspectives, a company is certainly attractive, but it's
18:12
Speaker 1: really the idea that eventually, over time, those issues, if
18:17
Speaker 1: not managed to correctly, have a financial impact on the company,
18:20
Speaker 1: and I think we've seen that with companies like Amazon
18:22
Speaker 1: to a certain extent, but more companies like Facebook for example.
18:25
Speaker 1: In the alphabet. So Mercedes Benz is also another name
18:30
Speaker 1: here for you guys, give us the case there for
18:34
Speaker 1: Mercedes Benz. So we add a Mercedes to the portfolio
18:38
Speaker 1: in March's a company that has a really strong plan
18:41
Speaker 1: orund the electrification of vehicles. They're targeting fifty of sales
18:45
Speaker 1: from EPs by the year and then from ebes By
18:50
Speaker 1: and they put forty billion euros and cappex to really
18:53
Speaker 1: tool factories and step up software efforts and so really
18:56
Speaker 1: a strong plan that we think is addressing that growth
18:58
Speaker 1: towards electric vehicle. It's a company that we bought after
19:02
Speaker 1: the rush of Ukraine conflicts a lot of concerns in
19:05
Speaker 1: the short term around supply chain, but I think if
19:08
Speaker 1: you look at the long term value of Mercedes, it's
19:10
Speaker 1: very much intact stocks trading at a PETE multiple of
19:13
Speaker 1: less than five times, has about a thirty percent great
19:16
Speaker 1: cash flow yield. I think it's a very attractive stock
19:18
Speaker 1: here today. So for your clients, do your clients, for
19:24
Speaker 1: your funds to date? Is the E s G part
19:27
Speaker 1: of your offering. The primary driver why they're with you
19:30
Speaker 1: guys as opposed to somebody else, is that your typical client.
19:36
Speaker 1: You know, I would say it really comes down to
19:38
Speaker 1: performance over the long term, and I think that that's
19:41
Speaker 1: really what's driving the growth of our assets, where you know,
19:44
Speaker 1: they've grown tremendous new over the last several years. And
19:46
Speaker 1: I think that that's at the end of the day,
19:48
Speaker 1: what's going to continue to drive E s G fun
19:51
Speaker 1: flu um. It's it's really that integration of E s
19:54
Speaker 1: G to really help us understand company culture, for example,
19:57
Speaker 1: help us understand the company management team in really how
20:00
Speaker 1: companies are addressing both risks and opportunities around E s G,
20:03
Speaker 1: which we think is very material in the creation or
20:06
Speaker 1: destruction of a company value. And we're talking to us
20:09
Speaker 1: about data because you know, when I go do my
20:10
Speaker 1: financial analysis, uh, you know, I can look at income statements,
20:13
Speaker 1: balance sheets, casual statements, they're all audited. I kind of
20:17
Speaker 1: get a sense I can compare and do all that
20:19
Speaker 1: kind of work. Uh. And Bloomberg actually one of the
20:21
Speaker 1: most widely used functions on the Bloomber terminals FA for
20:24
Speaker 1: financial analysis. Talk to us about the data that's available
20:28
Speaker 1: to do e s G analysis. I've heard that it's
20:31
Speaker 1: it's not nearly as robust as financial data is. Where's
20:36
Speaker 1: the industry there and what could be done? Yeah, I
20:39
Speaker 1: would definitely agree it's not as robust as you can
20:42
Speaker 1: find in balance seats and income statements as well as
20:45
Speaker 1: on Bloomberg. But I think you know it's really because
20:48
Speaker 1: there's a subject subjective element right now still at the
20:52
Speaker 1: e s G. There's also not a lot of transparency
20:55
Speaker 1: when you're using a lot of these third party rating agencies.
20:58
Speaker 1: They're relying a lot on the company to closures, which
21:01
Speaker 1: can often lead to a large cat bias where you
21:03
Speaker 1: have companies that are disclosing a lot around e s
21:05
Speaker 1: G data. Um So, for us, it's really about digging deeper.
21:08
Speaker 1: We've really built out our own e s G team
21:10
Speaker 1: so we can take a much closer look at companies.
21:12
Speaker 1: Um So. I think right now there's still an evolution
21:15
Speaker 1: with regards to the third party data providers. Standardization of
21:18
Speaker 1: that data I think will help over time. We're starting
21:21
Speaker 1: to see that regulation, I think, which will be beneficial. Alright,
21:24
Speaker 1: good stuff, Appreciate getting your thoughts. Amber Fairbanks, portfolio manager
21:28
Speaker 1: for the firm Arrova talking about E S g uh investing.
21:35
Speaker 1: All right, let's talk about the private credit business. This
21:38
Speaker 1: is a business I like. I like the yields that
21:40
Speaker 1: investors can get there. Um, and a lot of capitals
21:43
Speaker 1: flowing to that biz. John Klein, he's a managing director
21:46
Speaker 1: and co portfolio manager private credit at the firm New
21:49
Speaker 1: Mountain Finance Corporation. John, thanks so much for joining us here.
21:53
Speaker 1: Talk to us about the state year to date of
21:56
Speaker 1: private credit. His boy, my equity portfolio has gotten crushed.
22:00
Speaker 1: Even my corporate bond, my treasuries, they were crushed. Um
22:04
Speaker 1: talked us about the private credit market. Sure, well, good
22:08
Speaker 1: morning and thanks for having me on the show. I
22:09
Speaker 1: appreciate it. And Um, when I think about the private
22:12
Speaker 1: credit market, I really think it's one of the best
22:15
Speaker 1: performing asset classes that that that we observe here at
22:18
Speaker 1: New Mountain. And I think you're right. I mean, if
22:20
Speaker 1: you own normal fixed income that has true fixed interest rates,
22:24
Speaker 1: you've definitely gotten hurt this year. When you think about
22:27
Speaker 1: every equity market index that I can think of, except
22:30
Speaker 1: for maybe energy, it's down. Meanwhile, in private credit, we
22:34
Speaker 1: really benefit from the fact that we have floating interest rates.
22:38
Speaker 1: You know, good industry selection and uh and that's been
22:41
Speaker 1: a real tail win for us. But the biggest drivers
22:43
Speaker 1: floating interest rates. And when you have floating interest rates
22:46
Speaker 1: in a rising rate environment, we pay coupons that rise
22:49
Speaker 1: right in line with the FED increases and that's very
22:51
Speaker 1: important for our investors. So simplify this for me a
22:56
Speaker 1: little bit when it comes to perhaps some of the
22:58
Speaker 1: things that the market is pricing in here a very
23:00
Speaker 1: hawkish um standard, at least for Charman Powell tomorrow. How
23:05
Speaker 1: does that affect you? So when we think about our portfolios,
23:09
Speaker 1: and the most visible portfolio that we manage, his new
23:12
Speaker 1: Mountain Finance Corporation, which is a publicly traded b DC
23:16
Speaker 1: you can buy and sell shares every day. When we
23:19
Speaker 1: think about that portfolio, you know, it's floating rate loans.
23:23
Speaker 1: So our average loan is going to have a spread
23:25
Speaker 1: of about uh lieb or or SOF plus six hundred
23:29
Speaker 1: and essentially UM. As the FED raises rates, those loans
23:33
Speaker 1: are tied to the rate increases in the base rate,
23:37
Speaker 1: and so a loan that might have yielded six and
23:40
Speaker 1: a half percent at the beginning of the beginning of
23:42
Speaker 1: the year is now roughly eight and a half percent,
23:45
Speaker 1: and and if and if if rates keep going up,
23:47
Speaker 1: we could see we could see our loans yielding ten
23:50
Speaker 1: ten percent by the end of the year. And so
23:52
Speaker 1: that's very that's a very powerful tail wind for our investors. John,
23:56
Speaker 1: what are some of the sectors that you guys are
23:58
Speaker 1: favoring right now in your portfolio? So so, yeah, that's
24:02
Speaker 1: a great question. You know, one thing we really like
24:05
Speaker 1: about our strategy, and I think the strategy is mirrored
24:07
Speaker 1: by some other good private credit funds, is that we
24:10
Speaker 1: really focus on good, defensive growth industries. We want to
24:15
Speaker 1: invest in businesses that have predictability, they have natural tail winds,
24:19
Speaker 1: they have growth to their business models, and so we
24:23
Speaker 1: really gear our portfolio towards those those sectors. And I
24:28
Speaker 1: think that's very valuable because when you're in a difficult
24:30
Speaker 1: economic environment, the last thing you want in your portfolio
24:34
Speaker 1: is volatile industries, UH, cyclical industries or secularly challenged industries,
24:40
Speaker 1: and those are the those are the types of companies
24:43
Speaker 1: we really seek to avoid. John has a lot of
24:45
Speaker 1: talk that if we're not intercession already, that we're pretty
24:48
Speaker 1: darn close, and that's something that people need to put
24:50
Speaker 1: into their models probably for next year. How do you
24:54
Speaker 1: guys think about your portfolio in a recession scenario. So
25:00
Speaker 1: in a recession scenario, I think it just ties into
25:02
Speaker 1: a lot of the things that I just said, which
25:04
Speaker 1: is we want businesses, uh that just have that great predictability.
25:08
Speaker 1: So we focus on software businesses that sell software every
25:12
Speaker 1: year to the same customers and have high retention. We
25:15
Speaker 1: like database companies that provide much much must have data
25:19
Speaker 1: to their customers, not unlike Bloomberg. And really what we
25:23
Speaker 1: don't want to be doing intercessionary environment is we don't
25:26
Speaker 1: want to be taking views on on how many f
25:29
Speaker 1: one fifty pickup trucks are going to be built in
25:31
Speaker 1: Detroit next year, or what housing starts are gonna look
25:34
Speaker 1: like in Arizona. We just think that's very tough to predict.
25:37
Speaker 1: And if you're a credit investor, we get paid for
25:39
Speaker 1: delivering consistency of return, making sure that we were able
25:43
Speaker 1: to pocket our coupons and get principal when the maturities do.
25:47
Speaker 1: So those defensive industries are really where we like to stay.
25:51
Speaker 1: So let's go back Macro here because that's my my
25:54
Speaker 1: safe space. As Paul knows, I I like to do that,
25:57
Speaker 1: I'm curious about simply the implication to you when comes
26:00
Speaker 1: to liquidity and how that affects private credit, it kind
26:02
Speaker 1: of feels like it's almost marching to the beat of
26:05
Speaker 1: its own drum. But liquidity is an issue that is
26:08
Speaker 1: hitting the public markets very well. If there's a lag
26:11
Speaker 1: for private credit, walk us through the domino effect there. Well,
26:17
Speaker 1: I guess you know, um, so my safe spade is
26:19
Speaker 1: bondons up bottens up credit analysis. But but but when
26:22
Speaker 1: I think about, you know, our overall our industry, essentially,
26:27
Speaker 1: when I think about private credit and liquidity that we
26:29
Speaker 1: have is we we just because of floating rates, we're
26:32
Speaker 1: attracting a lot of investor interests, a lot of capital
26:35
Speaker 1: flows that really are attracted to that floating rate secure
26:39
Speaker 1: debt product, and so we basically take the investor inflows
26:42
Speaker 1: that we get into that product and then we're able
26:45
Speaker 1: to lend to our financial sponsor clients. So we feel
26:49
Speaker 1: good about the overall liquidity in the market, and in general,
26:52
Speaker 1: we see good demand for our loans because the syndicated
26:55
Speaker 1: market does have liquidity challenges, and so we can really
26:59
Speaker 1: prove to be a a good solution for um for
27:02
Speaker 1: folks that want to buy high quality, defensive businesses. UM.
27:06
Speaker 1: And then that's why we think about it. John, just
27:09
Speaker 1: thirty seconds, Just how's the deal flow these days with
27:12
Speaker 1: your sponsors? So so deal flow is good? I mean
27:16
Speaker 1: when when when we think back to two one, deal
27:19
Speaker 1: flow is at a record and I think, you know,
27:21
Speaker 1: we're we've come off that record just because the overall
27:24
Speaker 1: economic environment is less strong. But I think our sponsor
27:27
Speaker 1: clients do see good bargains now that the stock market
27:30
Speaker 1: has declined and valuations have settled, and so UM, If
27:35
Speaker 1: if our clients see bargains and the ability to buy
27:37
Speaker 1: good businesses at at better valuations, UM, we think there's
27:41
Speaker 1: a good opportunity for for solid deal flow going forward,
27:45
Speaker 1: even if we don't hit deal flow levels that we
27:47
Speaker 1: saw in two thousand one. All right, John, thanks so
27:50
Speaker 1: much for taking the time. Really appreciate getting your perspective here.
27:52
Speaker 1: John Klein, He's a managing director and co portfolio manager
27:55
Speaker 1: of Private Credit, the firm's new Mountain Finance Corporation. Thanks
28:02
Speaker 1: for listening to the Bloomberg Markets podcast. You can subscribe
28:05
Speaker 1: and listen to interviews with Apple Podcasts or whatever podcast
28:09
Speaker 1: platform you prefer. I'm Matt Miller, I'm on Twitter at
28:13
Speaker 1: Matt Miller three. On Fall Sweeney, I'm on Twitter at
28:17
Speaker 1: pt Sweeney Before the podcast. You can always catch us
28:20
Speaker 1: worldwide at Bloomberg Radio