Latest / Bloomberg Intelligence / What's Next For Businesses Amid Delta Variant Spread

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What's Next For Businesses Amid Delta Variant Spread · 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. Let's talk about Don
0:23
Speaker 1: McCree joins us right now, head of commercial banking at
0:25
Speaker 1: Citizens Financial Group and Don um. We have over the
0:29
Speaker 1: last really our heard um, some really pessimistic outlooks due
0:36
Speaker 1: to the resurgence of the delta variant and maybe MoU
0:41
Speaker 1: or whatever other Greek letters are upon us. Um. How
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Speaker 1: does it look in your world? Well, I think we're
0:48
Speaker 1: we're seeing a little bit of a slowdown, but I
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Speaker 1: have to say that we continue to be quite optimistic
0:53
Speaker 1: and we we think we're going to get through some
0:56
Speaker 1: of these variants. Our clients are actually doing quite well,
1:00
Speaker 1: and our transactional businesses, our M and A business, and
1:02
Speaker 1: our capital markets businesses are all time highs and the
1:05
Speaker 1: pipelines continue to build. So we continue to be, you know,
1:09
Speaker 1: focused on Delta and the and the potential new viruses,
1:12
Speaker 1: but quite optimistic as we look forward and I see
1:15
Speaker 1: that you bought j MP Group. UM is a capital
1:18
Speaker 1: markets business that I'm familiar within US and folks to
1:21
Speaker 1: work there talk to us about j MP and kind
1:23
Speaker 1: of what you guys are thinking about in terms of
1:25
Speaker 1: you know, making this acquisition in terms of your capital
1:27
Speaker 1: markets capabilities. Yeah, so it's it's really exciting for us.
1:30
Speaker 1: We've been on a five year kind of UH strategy
1:34
Speaker 1: to build out our capability sets UH to be able
1:37
Speaker 1: to do really whatever our client states to do at
1:39
Speaker 1: any pointant time. So built out to big syndicated financing business,
1:43
Speaker 1: built out I bought three M and a boutiques, recently
1:46
Speaker 1: bought a valuation firm, have a great debt capital market
1:49
Speaker 1: securities business, and what we were missing was was equities.
1:52
Speaker 1: And j MP is just built a tremendous business over
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Speaker 1: the last several years. It's really recording record results and
2:00
Speaker 1: and it also brings us deep sector experience and some
2:03
Speaker 1: really exciting sectors namely healthcare, UM technology, real estate, and
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Speaker 1: financial services. So we think we think it really is
2:11
Speaker 1: complementary to us. There's very little overlap, so it's kind
2:14
Speaker 1: of a hundred synergistic for us. And most importantly, I
2:17
Speaker 1: think is the the culture there is very similar to
2:21
Speaker 1: our culture and uh, and that's really the most important
2:24
Speaker 1: thing when you're when you're when you're buying a capital
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Speaker 1: markets firm, like like j MP, what's your what's what's
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Speaker 1: your d n A, what's their DNA. What's the similarity
2:32
Speaker 1: and culture that you like? I'd say client focus, uh,
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Speaker 1: you know, first and foremost, and really a premium on
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Speaker 1: building really deep relationships where deep industry expert these is
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Speaker 1: delivered and we've become really the trusted partner with with
2:46
Speaker 1: each of our clients and that just tends to expand
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Speaker 1: the the ways that we can engage with every other
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Speaker 1: every client. What we've been able to do for the
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Speaker 1: last several years is really bring three, four or five
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Speaker 1: six different products to the table, you know, as we
3:00
Speaker 1: built at our client franchise, and j MP thinks very
3:03
Speaker 1: similar to that in terms of the way they really
3:05
Speaker 1: try to build deep client relationships. Don tell tell us
3:08
Speaker 1: about loan demand out there. There's so much liquidity in
3:11
Speaker 1: the marketplace. There's a lot of fiscal stimulus, and we've
3:14
Speaker 1: heard some of the the bank, some of the bigger
3:16
Speaker 1: money center banks and the ernest calls talk about, you know,
3:18
Speaker 1: the loan demand isn't there um necessarily what are you
3:24
Speaker 1: seeing with with your clients in your markets. It's it's
3:26
Speaker 1: it's reasonably muted right now, and you hit the nail
3:30
Speaker 1: on the head is a lot of clients are sitting
3:32
Speaker 1: with a lot of liquidity and they're going to need
3:33
Speaker 1: to use that liquidity before loan demand really picks up.
3:36
Speaker 1: Where we're seeing it is in utilization rates of our
3:39
Speaker 1: of our facilities, which are six to seven points lower
3:43
Speaker 1: than they normally would be as economy recovers. So the
3:47
Speaker 1: good news on the on the flip side is what
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Speaker 1: we're seeing as record capital markets fees. So if companies
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Speaker 1: are financing and needing to raise capital, we're experiencing, you know,
3:55
Speaker 1: very strong capital markets flows which offset some of the
3:58
Speaker 1: weakness on the loan side. But we think, we think
4:00
Speaker 1: it begins to come back. Our loan pipelines are looking
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Speaker 1: you know, reasonably good towards the back end of the year.
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Speaker 1: Uh and and some I would call it transactional loan
4:09
Speaker 1: facilities like abs, warehousing and things like that are beginning
4:13
Speaker 1: to get a lot more active. Does the rates environment
4:16
Speaker 1: depress you. I mean, it doesn't seem like even the
4:19
Speaker 1: terminal rate if you look at it, depressed me emotionally. Yes,
4:24
Speaker 1: it's it's tough. I mean with the flat with rates
4:27
Speaker 1: where they are in a flat yield curve. You know,
4:28
Speaker 1: the spreads are under pressure. We've been able to you know,
4:32
Speaker 1: lower our deposit costs in my business reasonably aggressively, so
4:35
Speaker 1: we've been able to hold our net interest margin. Um
4:38
Speaker 1: so so far, so good. But but you know, the
4:41
Speaker 1: spread income is is certainly under pressure for the entire industry.
4:44
Speaker 1: Don talk to us about the credit quality. What are
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Speaker 1: you seeing in terms of credit quality for your portfolio?
4:49
Speaker 1: And again, it seems it's come in much much better
4:51
Speaker 1: than expected. It seems like over the last eighteen months,
4:54
Speaker 1: given the economic disruptions, what are you see? It's terrific.
4:57
Speaker 1: I mean every I won't say everyone, but the vast
5:00
Speaker 1: majority of our companies are doing better than we expected
5:03
Speaker 1: them to do. So they're they're clearly seeing, you know, um,
5:07
Speaker 1: positive things on the horizon. And a lot of it
5:10
Speaker 1: is because a lot of these companies really hunkered down.
5:13
Speaker 1: And I've said that this this downturn, the COVID downturn
5:16
Speaker 1: was much different than prior downturns, and that it was
5:18
Speaker 1: immediate and it was deep. So CEOs and CFOs got
5:22
Speaker 1: very serious and right sized their businesses very quickly, and
5:25
Speaker 1: that allowed them to build up liquidity and and actually
5:29
Speaker 1: come out of the beginnings of the return with huge
5:32
Speaker 1: amounts of excess capacity. So that's resulted in all the
5:36
Speaker 1: releases that you're seeing all the banks make in terms
5:38
Speaker 1: of their credit reserves. And we still we still see
5:41
Speaker 1: very bright things on the future and we we really
5:44
Speaker 1: have moved beyond the credit issues that we we we
5:47
Speaker 1: were staring at about you know, a year and a
5:49
Speaker 1: half ago. Surely fiscal spending didn't hurt and when we
5:54
Speaker 1: I mean, it's it's not gonna last like that forever, right,
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Speaker 1: So eventually, um, the federal government going to stop spending
6:01
Speaker 1: you know, multiple trillions of dollars extra every year um
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Speaker 1: or or will they What do you think about that?
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Speaker 1: Is there a fiscal cliff or or or is there not?
6:10
Speaker 1: It's it's there. There's there's a there's a fiscal cliff
6:13
Speaker 1: in terms of removing some of the stimulus that's been there.
6:16
Speaker 1: Some of that will be offset with things like the
6:18
Speaker 1: infrastructure program. So it will be different forms of spending
6:22
Speaker 1: which will continue to be simulative stimulated. That that it's
6:26
Speaker 1: not really worrying the client base right now. What's worrying
6:28
Speaker 1: the client base is the supply chain. And if if
6:31
Speaker 1: we hear a common theme from from a broad set
6:34
Speaker 1: of clients, it's the inability to get goods that they're
6:38
Speaker 1: trying to source in the market. And people do expect
6:40
Speaker 1: that to continue for a while. So that's it's in
6:43
Speaker 1: a funny way, that's having a constraining effect on the
6:46
Speaker 1: performance of some companies, even if their order books or strengthening,
6:49
Speaker 1: so as well as they're doing, they would be doing
6:52
Speaker 1: even better if they weren't having the supply chain and
6:54
Speaker 1: in fact their labor problems that a lot of them
6:56
Speaker 1: are facing in terms of if you can hire someone,
6:58
Speaker 1: the cost of the as hires are going up quite substantially.
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Speaker 1: All right, done, You, like a lot of other bankers
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Speaker 1: are saying business is good. What's the biggest risk out there?
7:07
Speaker 1: What's the worry for you guys? I think a big
7:10
Speaker 1: resurgence of covid um so that I think that and
7:13
Speaker 1: or some geopolitical event that nobody can anticipate. I mean
7:17
Speaker 1: so so but the thing we're focused on is tracking
7:20
Speaker 1: you know, COVID. It feels okay to us now and uh,
7:23
Speaker 1: you know, we're out traveling seeing clients, were getting good
7:25
Speaker 1: reports from uh, you know, most of our clients, and um,
7:29
Speaker 1: we're pretty optimistic. And five seconds here, are you back
7:32
Speaker 1: in the offices. Are your teams back? Yes, they are.
7:34
Speaker 1: I'm sitting in New York right now, and uh, we
7:37
Speaker 1: we were trying to get people back. I think it's
7:39
Speaker 1: super important from a cultural standpoint. Yeah. Absolutely, Okay, that's
7:43
Speaker 1: the debate here for a lot of companies. Don McCree,
7:46
Speaker 1: thanks so much for joining us. Yet again, we'd love
7:48
Speaker 1: getting your perspective on what's going on out there. Uh.
7:51
Speaker 1: In corporate America, Don McRee is ahead of commercial banking
7:53
Speaker 1: for Citizens Financial Group. And again is what we've heard
7:57
Speaker 1: from a lot of bankers. Business is good. They're clients
8:00
Speaker 1: are continuing to invest. Uh. They are looking forward, Yeah,
8:05
Speaker 1: looking for capital, looking for returns. Uh. And business is
8:08
Speaker 1: good despite a flat yield curve and low interest rate environment. Now,
8:17
Speaker 1: as Paul has been saying, we're gonna bring in Randy
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Speaker 1: Swimmer right now, Senior Managing Director and co heed of
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Speaker 1: Senior lending. At Churchill Asset Management, they have thirty one
8:25
Speaker 1: billion dollars in committed capital and UM. One of the
8:30
Speaker 1: things that that obviously people are looking for UM desperately
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Speaker 1: and not finding very easily, Randy, is return. I heard
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Speaker 1: Howard Marks the other day say he thinks, you know,
8:42
Speaker 1: three basis points is enough reward for the risk of
8:46
Speaker 1: high yield debt, of junk debt, which I thought was
8:48
Speaker 1: pretty amazing. Where are you finding return? Yeah, so if
8:53
Speaker 1: you think about where high yield used to be, it
8:56
Speaker 1: used to be high yield, it used to be you know,
8:59
Speaker 1: high sing old digits UM. It has not been the
9:02
Speaker 1: case for a while. There's reasons, technical reasons why that's
9:06
Speaker 1: the case. But what's happened with investors. They're looking at
9:09
Speaker 1: the private market now because the premium, the so called
9:13
Speaker 1: illiquidity premium, because the private market typically doesn't trade the
9:17
Speaker 1: way the bond market does. That premium is anywhere from
9:20
Speaker 1: a hundred to three hundred basis points over the liquid
9:25
Speaker 1: credit markets, and that's attractive for investors. So, Randy, give
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Speaker 1: us a sense of you know, the credit quality in
9:34
Speaker 1: the you know, the private capital business, UM, in the
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Speaker 1: leverage loan business, UM, because it seems like it's been
9:43
Speaker 1: better than expected, you know, after just coming through eighteen
9:46
Speaker 1: months of this economic disruption brought about by the pandemic.
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Speaker 1: What are you seeing? Yeah? And in fact, if you
9:52
Speaker 1: look at the overall direct lending and private credit business
9:57
Speaker 1: defaults over the last eighteen months been lower than the
10:02
Speaker 1: broadly syndicated market, which are the large liquid loans and
10:05
Speaker 1: then the high yield market. And in part I think
10:08
Speaker 1: that's because the private credit market has been focused more
10:13
Speaker 1: on defensive industries in general, less on things like oil
10:18
Speaker 1: and gas and retail, which obviously have gotten hammered um,
10:22
Speaker 1: you know, through the COVID period, and more on defensive
10:26
Speaker 1: business to business sectors like healthcare, software, technology, and business services.
10:33
Speaker 1: And so being an active manager in private credit um
10:36
Speaker 1: meant certainly for us going into COVID, we focused on
10:40
Speaker 1: those sectors that are less correlated to consumer spending because
10:44
Speaker 1: historically we've been doing this for fifteen years under the
10:47
Speaker 1: Churchill banner, we've known that recessions do tend to be
10:51
Speaker 1: you know, led on the consumer side, and so the
10:54
Speaker 1: less consumer facing businesses you have generally the better when
10:58
Speaker 1: you go into these And that's exactly it happened for
11:01
Speaker 1: us and a few others in the COVID period. We
11:03
Speaker 1: have no defaults or losses related to COVID, and so
11:06
Speaker 1: then you come out and you're still how the tail
11:09
Speaker 1: wind here with these these we call them to have businesses,
11:12
Speaker 1: the businesses that have done well and have been relatively
11:15
Speaker 1: unaffected by COVID. I wonder about the still the underperformance
11:21
Speaker 1: of UM. You mentioned oil and gas energy, the underperformance
11:26
Speaker 1: of basic materials producers. We haven't seen them bounce back
11:31
Speaker 1: with the rest of the market. And I know at
11:32
Speaker 1: least the in Europe we see basic materials and energy
11:36
Speaker 1: trading just about half the forward pease of the broader market.
11:40
Speaker 1: Is that going to change? Well. Part of the focus
11:45
Speaker 1: now is related to the economy as a whole. And
11:48
Speaker 1: one of the things we recognized about the biological threat
11:52
Speaker 1: that COVID represented was that it really UM was moving
11:57
Speaker 1: around the the the economy and how businesses were reacting
12:04
Speaker 1: to that threat. And what was interesting was as you
12:07
Speaker 1: think about where we were and predicting what was happening
12:10
Speaker 1: with the economy a year ago versus where we are today.
12:14
Speaker 1: The iron is, we thought we were going to be
12:15
Speaker 1: coming out of the downturn UM and at the point
12:20
Speaker 1: where we were going to be looking towards the end
12:23
Speaker 1: with a pretty pretty clear sailing and that would be
12:26
Speaker 1: could be measured across the economy in terms of overall
12:29
Speaker 1: GDP growth and so forth. And what we have discovered
12:32
Speaker 1: instead is that the delta variant has had has really
12:37
Speaker 1: weighed down on the potential growth that we could see
12:41
Speaker 1: across the economy. And obviously things like commodities are driven
12:45
Speaker 1: by that growth. And you can see in the equities markets,
12:48
Speaker 1: since you know, kind of returning from the labor day weekend, UM,
12:51
Speaker 1: there's investors are kind of concerned about what what does
12:54
Speaker 1: that mean in terms of the growth for this year?
12:58
Speaker 1: UM certainly employed him. We've seen that impacted in the
13:02
Speaker 1: most recent label reports. What does that mean sort of
13:04
Speaker 1: medium term for growth because that is going to impact
13:07
Speaker 1: some of these more cyclical businesses. And Randy thanks so
13:11
Speaker 1: much for joining us. We really appreciated getting a look
13:14
Speaker 1: at the middle market private lending business. It is a
13:17
Speaker 1: increasingly liquid business where you can get some very attractive
13:21
Speaker 1: relative returns UH and Randy Schremmer gives us some color there.
13:25
Speaker 1: Randy Schremmer, Senior Managing Director, CO head of senior lending
13:28
Speaker 1: at Churchill Asset Management. Think about thirty one billion dollars
13:31
Speaker 1: in committed capital. Uh. He is a alum of the
13:35
Speaker 1: JP Morgan Chase. That's early in my career. I was
13:37
Speaker 1: at Chase Manhattan Bank. We were leverage lenders to media
13:42
Speaker 1: companies and um. It is a very good business, but
13:45
Speaker 1: it is all about credit quality and doing the really
13:48
Speaker 1: deep dive and credit analysis to see if the cash
13:50
Speaker 1: flow is there to pay you back. As you're lending
13:53
Speaker 1: against cash flow, and a lot of these businesses not
13:55
Speaker 1: against assets like inventory or hard assets, so you can
13:58
Speaker 1: have to do the really good cash flow analysis. Right
14:04
Speaker 1: fifty four highs for the SP five hundred this year,
14:07
Speaker 1: strong earnings, an accommodative Federal reserve, although tapering is certainly
14:12
Speaker 1: on the table later this year. What is an investor
14:16
Speaker 1: to do? Let's bring in Jordan Jackson. He's a global
14:18
Speaker 1: market strategist for JP Morgan Asset Management. He's also a
14:21
Speaker 1: Wahoo from the University of Virginia, but we won't hold
14:24
Speaker 1: that against him. Jordan, thanks so much for joining us here.
14:28
Speaker 1: What are you telling your clients here at JP Morgan
14:31
Speaker 1: Asset Management about this market? Right here? Well, it's as
14:36
Speaker 1: certainly an interesting market. You know, I'm still of the
14:39
Speaker 1: opinion I'm fairly bullish on the market. I I stay
14:43
Speaker 1: constructive due to a couple of reasons. So I think
14:45
Speaker 1: we have a powerful tail wind from the FED um
14:48
Speaker 1: individual fiscal stimulus. I think the key there is tapering
14:52
Speaker 1: is not tightening. Right, We're still looking at an additional
14:54
Speaker 1: rest least seven hundred eight eight hundred billion in fiscal
14:57
Speaker 1: stimulus that should kit the market, uh between now in
15:00
Speaker 1: the middle of the middle of next year. I think
15:02
Speaker 1: bibacks are going to be strong and and may accelerate
15:05
Speaker 1: from here on out. And I think corporate balance sheets
15:07
Speaker 1: are sitting on high levels of cash with with low leverage,
15:10
Speaker 1: and that should should be supportive of subsher hold the
15:12
Speaker 1: distributions going forward. Um. You know, look, I think growth
15:15
Speaker 1: is still going to remain above trend as well. And
15:18
Speaker 1: you know, I think all those paints are pretty goldilocks
15:20
Speaker 1: scenario for for equity markets. Where do you see the
15:23
Speaker 1: best valuations or where do you see the best value?
15:25
Speaker 1: I should probably phrase that differently. Sure, you know, I
15:29
Speaker 1: still see some value in the more cyclical, value orientated
15:32
Speaker 1: parts of the market, but I think investors should really
15:35
Speaker 1: start to strike a bit more of a balanced tone
15:38
Speaker 1: when we start talking about, you know, value versus growth.
15:42
Speaker 1: Obviously that the large tech names continue to kind of
15:45
Speaker 1: play a bit more defense and in a market like this,
15:47
Speaker 1: as growth concerns continue to weary the markets, and and
15:51
Speaker 1: the delta bar continues to spook the markets as well.
15:54
Speaker 1: But I still think we're a biased for uh steeper
15:57
Speaker 1: yeld curves. I still think that we're of yields are
16:00
Speaker 1: at today. They're just not aligned with the fundamental picture
16:04
Speaker 1: or the fundamental outlook, and so um I think in
16:06
Speaker 1: that environment, you know, financials can still do well. I
16:09
Speaker 1: still think energy and industrials again, those value orientated parts
16:12
Speaker 1: of the market can can do well as the economy
16:14
Speaker 1: continues to reopen. So it's a it's a it's less
16:17
Speaker 1: so about you know, trying to overweight value versus growth.
16:20
Speaker 1: But I think striking a bit of a balance between
16:22
Speaker 1: the two makes makes a whole lot of sense. How
16:24
Speaker 1: about that sixty forty portfolio, Jordan, Is that still a
16:28
Speaker 1: thing or is that a thing of the past, Given
16:31
Speaker 1: where global yields are right now, I'd argue that it's
16:36
Speaker 1: it's it's it's it's a thing of the past. You know,
16:38
Speaker 1: when we look at sort of valuations on the equity
16:41
Speaker 1: side and on the fixed income side, you kind of
16:44
Speaker 1: put those two together. On the forward returns that you're
16:46
Speaker 1: getting out of sixty forty portfolio, um including you know,
16:50
Speaker 1: baking in inflation, are are roughing around one to two
16:53
Speaker 1: on it on a real real return going forward over
16:55
Speaker 1: the next five or ten years. So that's just not
16:57
Speaker 1: going to cut it for for investor. But I think
17:00
Speaker 1: it's it's less about you know, how much of a
17:02
Speaker 1: sixty you need or or how much of a floor
17:04
Speaker 1: do you need, but more so about you know, looking
17:07
Speaker 1: at the overall portfolio and identifying where the opportunities to
17:10
Speaker 1: add things like alternatives where you can sort of uh
17:14
Speaker 1: more liquid alternative if you can head some of that
17:16
Speaker 1: equity downside, but also complimenting that with some of some
17:19
Speaker 1: more private alternatives as well, things like real estated infrastructure
17:22
Speaker 1: for those qualified investors who that can provide a uncorrelated
17:27
Speaker 1: return stream um to to the overall portfolio. So I
17:30
Speaker 1: think there's gonna be a lot more conversations around alternatives
17:34
Speaker 1: within that sixty forty portfolio because we know just returns
17:37
Speaker 1: in public markets just aren't going to be there going
17:39
Speaker 1: for it? What about crypto? A lot of people are
17:43
Speaker 1: talking about forty one portfolio. I mean, look, if you're
17:50
Speaker 1: talking about discussions, I'm sure these these are discussions you're
17:53
Speaker 1: having with investors, whether or not you're allocating money to it,
17:55
Speaker 1: right absolutely, And and and investors are are you know,
17:59
Speaker 1: asking for you know, where are their vehicles and and
18:02
Speaker 1: avaluence they can access access to market? Um. You know, look,
18:05
Speaker 1: I I think for those investors who are willing to
18:07
Speaker 1: to stomach that kind of volatility, obviously, the move that
18:10
Speaker 1: you've seen in the crypto markets over the past couple
18:13
Speaker 1: of days certainly comind us that it is is a
18:15
Speaker 1: very very volatile market. But you know, I think cryptal
18:18
Speaker 1: is here to stay. Um. And again, for those investors
18:21
Speaker 1: who are able to craft out a sleeve of the
18:24
Speaker 1: portfolio making some of the volatility, I think, I think
18:27
Speaker 1: go for it. Jordian, do you think this market is
18:30
Speaker 1: going to rationally I guess I'll use that term um
18:34
Speaker 1: kind of discount the tapering that is expected later this year.
18:38
Speaker 1: Do you expect a taper tantrum of any sort or
18:41
Speaker 1: do you think that that's done a good job of
18:42
Speaker 1: kind of signaling where it's going. I like the phrase
18:45
Speaker 1: tapering is not tightening, yes, because they're still growing the
18:48
Speaker 1: balance sheet right, just at a slower pace. Again, absolutely,
18:52
Speaker 1: as I mentioned earlier about about another you know, eight
18:54
Speaker 1: hundred billions, so still set to liquidity. It's set to
18:57
Speaker 1: hit the market from now until the middle of the
18:59
Speaker 1: middle of next year. You know. I think the Fed
19:01
Speaker 1: has done a pretty good job at um you know,
19:04
Speaker 1: communicating tapering is on the table and when tapering is
19:08
Speaker 1: likely to occur, and so I think the markets have
19:10
Speaker 1: more or less are are prepared for it. And I
19:13
Speaker 1: think the big difference that that I got really out
19:16
Speaker 1: of the Jackson hole and the difference that I've identified
19:19
Speaker 1: um or I'm seeing with relative to taper is the
19:25
Speaker 1: chair has been really good at separating tapering from when
19:28
Speaker 1: interest rate hypes are are expected to come. When Ben
19:31
Speaker 1: Berniki came out and made thirteen and made comments about tapering,
19:35
Speaker 1: you saw you saw the front end, oh I s
19:38
Speaker 1: markets essentially moved from pricing in no rate hikes over
19:41
Speaker 1: the next two years to pricing in five rate hyps
19:44
Speaker 1: by September thirteen, UM. And so there was just this
19:47
Speaker 1: there's this idea that you know, a tapering the balance
19:50
Speaker 1: sheet was immediately going to uh push the push the
19:54
Speaker 1: FED to begin hiking rates once tapering was done. I
19:57
Speaker 1: think their own power did a really good job at
19:59
Speaker 1: separating the tapering discussion from the interest rate high discussion,
20:03
Speaker 1: and so where I was a bit more in the
20:05
Speaker 1: camp that the BED would be a little bit more
20:07
Speaker 1: aggressive to tape of the balance you to open up
20:09
Speaker 1: the pathway to high grade from sometimes maybe the fourth
20:12
Speaker 1: quarter of next year, of the first half of I
20:16
Speaker 1: think they've done a good job at sort of sitting
20:18
Speaker 1: on the silines and saying that, hey, it made me
20:20
Speaker 1: the second half before we see some rate hikes. Jordan,
20:24
Speaker 1: thanks so much for joining us. Pleasure having you on
20:26
Speaker 1: the program. Jordan Jackson, global market strategist with JP Morgan
20:30
Speaker 1: Asset Management. This is Bloomberg. Well, the delta variant is
20:39
Speaker 1: keeping this pandemic on the front burner for investors as
20:43
Speaker 1: an issue. The questions include what will this mean for
20:46
Speaker 1: economic growth on a global basis going forward. Let's bring
20:50
Speaker 1: in Constance Hunt, our chief economists for KPMG. Constant, thanks
20:54
Speaker 1: so much for for joining us. We really appreciate you
20:56
Speaker 1: taking the time here, how are you factoring into your
20:59
Speaker 1: g DP model. Um, this lingering pandemic driven by the
21:05
Speaker 1: delta variant. Yeah, hey Paul, great to be with you.
21:09
Speaker 1: It really comes across in two key dimensions. One of course,
21:14
Speaker 1: is the global supply chain. So with the pandemic lingering,
21:18
Speaker 1: it means that factories have the susceptibility to be shut down,
21:23
Speaker 1: that people have the susceptibility of course of calling in
21:26
Speaker 1: sick and being unable to work, and and of course
21:30
Speaker 1: all the issues with shipping. I mean getting someone to
21:33
Speaker 1: work in the merchant marine ship sector during a pandemic
21:37
Speaker 1: is really really difficult. So they're in addition to the
21:41
Speaker 1: supply chain bottlenecks at the factory floor, there are supply
21:46
Speaker 1: chain bottlenecks with regarding getting goods out to market, and
21:50
Speaker 1: of course that has knock on effects and impacts our economy,
21:53
Speaker 1: and we see that most acutely in the chip shortage
21:58
Speaker 1: that's impacting the auto sector as well as in the
22:01
Speaker 1: number of other sectors. And as a result of constants,
22:05
Speaker 1: you're you're reducing your GDP forecast drastically if I'm reading
22:10
Speaker 1: it right or is it well, it's from a quarterly perspective,
22:14
Speaker 1: very drastically, Yeah, down to one point seven percent from
22:17
Speaker 1: six previously. Yeah, for the third quarters, so for the year.
22:22
Speaker 1: Just to put that in perspective, right, that takes us
22:24
Speaker 1: from a six point four percent growth fore to four
22:28
Speaker 1: point seven. So our assumption is that we do see
22:32
Speaker 1: some easing of the delta variant in the fourth quarter.
22:36
Speaker 1: But you know, the mistake we have all made ever
22:39
Speaker 1: since the beginning of this pandemic, and we continue to
22:41
Speaker 1: make because I think people are optimists at heart, um,
22:45
Speaker 1: is that we continue to underestimate the impact of the
22:48
Speaker 1: pandemic or we we revert to the mean of saying, Okay,
22:51
Speaker 1: well we'll get through this and then we'll get back
22:54
Speaker 1: to normal. And you know, when we look at what happened,
22:57
Speaker 1: for example, to consumer confidence in August that our decline,
23:00
Speaker 1: everybody had penned their hopes on September being to get
23:05
Speaker 1: back to normal time, schools would get back to normal,
23:07
Speaker 1: offices would get back to normal, life would get back
23:10
Speaker 1: to normal. And there's just nothing worse than dashed hopes.
23:15
Speaker 1: What is your sense constance for this supply chain? Because
23:18
Speaker 1: you know, Matt and I we talked to you know,
23:20
Speaker 1: lots of corporate executives and from across a whole swath
23:25
Speaker 1: of industries, and we're just hearing that it it continues
23:29
Speaker 1: to be a big issue. How long do you think
23:31
Speaker 1: it will be a big Yeah? And and kind of
23:35
Speaker 1: what does that too for growth? Yeah? Well, I mean
23:38
Speaker 1: here's where you need me to be on with an
23:41
Speaker 1: epidemiologist or a virologist, right, because how long it goes
23:46
Speaker 1: on really depends on how long the pandemic goes on.
23:49
Speaker 1: And and I think obviously, because we have the vaccine,
23:53
Speaker 1: we know we have the potential to have the pandemic
23:57
Speaker 1: go on for a much shorter time than history large
24:00
Speaker 1: pandemics of this nature have gone on. But yet it's
24:04
Speaker 1: the distribution of that vaccine across not just the US
24:08
Speaker 1: population but the world that is really causing the pandemic
24:12
Speaker 1: to linger and and having continued health and economic effects.
24:16
Speaker 1: And if we can answer the question of how long
24:18
Speaker 1: the pandemic goes on, we can answer the question of
24:21
Speaker 1: how long the supply chain problems go on. Yeah, I mean,
24:24
Speaker 1: m the supply chain issues are so broad. One of
24:29
Speaker 1: the issues those just the chip shortage, and surely that
24:34
Speaker 1: is less affected by the virus. Now, Oh, I mean
24:39
Speaker 1: Obviously it had its origins in in um In in
24:44
Speaker 1: terms of the type of chips that were being made, right,
24:47
Speaker 1: so that the year up to five G and then
24:49
Speaker 1: the shift and demand due to the pandemic away from
24:53
Speaker 1: five G related chips to more traditional chips. So there's
24:57
Speaker 1: that aspect. But but I do think the the chip
25:00
Speaker 1: shorg is being impacted by the pandemic because a lot
25:03
Speaker 1: of the factories are not able to operate a full capacity.
25:07
Speaker 1: And then the shipping issue that I mentioned, right, so
25:10
Speaker 1: even if you get them produced, getting them into a
25:12
Speaker 1: port that's clogged up, it has delays um getting them
25:16
Speaker 1: onto a ship, getting them out of of Asia into
25:20
Speaker 1: the port of Los Angeles. I mean, the backup of
25:22
Speaker 1: ships in the Port of Los Angeles is significant, and
25:26
Speaker 1: um there just aren't enough containers to to get the
25:30
Speaker 1: get the goods distributed throughout the country. And we look
25:33
Speaker 1: at if we look at goods consumption in the first
25:36
Speaker 1: half of this year, it grew it in nine annualized rate,
25:40
Speaker 1: and just to put that in perspective, goods consumption in
25:44
Speaker 1: for the whole year grew at about three and a
25:47
Speaker 1: half percent. Right, So this surge and demand for goods
25:51
Speaker 1: is also clogging up the supply chain and taking up
25:54
Speaker 1: room on trucks and container ships. UM that might otherwise
25:58
Speaker 1: be uh you used fight ships and and and and
26:02
Speaker 1: and so we're seeing bottlenecks across multiple dimensions and it
26:08
Speaker 1: just takes time to work through those bottlenecks, even if
26:11
Speaker 1: we could produce the same number of chips at the
26:13
Speaker 1: factory floor, which we are not. What's interesting, uh, Constance
26:17
Speaker 1: and Matt Charlie Pellet Bloomberg Zone. Charlie Pellett gave me
26:19
Speaker 1: a great app to use. It's called find Ship and
26:23
Speaker 1: it kind of tracks all the ships around the globe
26:26
Speaker 1: and boil. There are a lot of ships off the
26:27
Speaker 1: port of Sandals. I know it's on the terminal map,
26:31
Speaker 1: but not everybody has terminal. I know, but not everybody
26:34
Speaker 1: has a terminal in front of them. All right, I
26:37
Speaker 1: just want to point out and that's that is a
26:39
Speaker 1: very cool thing. With map go on the Bloomberg terminal
26:41
Speaker 1: you can also track all the ships. And by the way,
26:44
Speaker 1: I follow us very closely as well, because I want
26:46
Speaker 1: to I need to ship a car, hope. I hope
26:50
Speaker 1: to ship a car and a motorcycle, um and some
26:52
Speaker 1: motorcycles to the US, but it's so expensive to get
26:56
Speaker 1: a container right now, especially for privacy calls. Unbelievable. Please
27:01
Speaker 1: do all right, Constance always great talking to you. Thanks
27:03
Speaker 1: so much for joining us. Constance Hunter talking to us
27:07
Speaker 1: about the Delta derail. This is Bloomberg. Thanks for listening
27:13
Speaker 1: to the Bloomberg Markets podcast. You can subscribe and listen
27:17
Speaker 1: to interviews with Apple Podcasts or whatever podcast platform you prefer.
27:21
Speaker 1: I'm Matt Miller. I'm on Twitter at Matt Miller. Put
27:26
Speaker 1: on fall Sweeney. I'm on Twitter at pt Sweeney before
27:28
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27:31
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