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If I do want to get to our guest, because eighteen months ago our next guest held our Bloomberg team that it was the golden age of private credit. Dun Dun Dunn with us as Mark at NASIO. He's managing partner at the Global Alternative Credit Investment from Crescent Capital Managing Partners. They had some forty billion in assets under management as the end of twenty twenty two. Mark also chairman and owner of the Milwaukee Brewers baseball club.
Hello, very nice to see you again.
It's great to see you again. You know, I had a question and we were talking over here. What's easier owning an MLB team, investing in today's environment or growing up in New Jersey and telling people that you're from New Jersey. I can say that because I'm from New Jersey. No playing with you.
It's always nice to connect with the fellow Jersey its.
I love New Jersey. Tell us about today's environment versus a year ago.
So I actually bothered to go back and listen to my broadcast and both on television and radio. You have to see how badly I screwed up. You did not. And I think the golden age of credit was almost eighteen months ago I talked about and last year I was worried about stagflation, and fortunately we didn't get that. And so the environment for which we will discuss, the environment for private credit is still is still quite good.
Actually for all levels, for all types. Because it's interesting. I just gave up a real estate panel and they're saying, you know, for valued properties, trophy properties, Class A properties, you know, you're still seeing interest when you go down the scale. It's not so much private credit, no distinctions or yeah.
So real estate credit and including real estate private credits a whole different animal than corporate credit, which is what we focus on, right And there's a number of structural challenges in real estate. There's a maturity wall in CMBs that's coming up very fast with funds that will be you know, needing to have liquidating and even have buyers, which we don't have. Celos for the most part have extended maturities now, and you know, I think also, and it's easy for me to say and they'll say the
same about us, but I'm not sure. And I participated in a lot of conferences like this and managed to oversee a couple of endowments on charitable side. I'm not sure the real estate marks are in the right place just yet, not yet, So that needs to sort of
work its way through. And so it's challenging to find, you know, the right part in the capstack to invest in real estate now, Whereas you could argue the same thing with corporate credit, and it's easier to go senior because right now senior loans you yield over ten percent, which isn't you know, it isn't bad right with with the new you know for you know, so for you know, close to five now.
Well, so it's interesting, so does that does this environment continue? I'm like, I'm just curious. I think we're at this juncture mark where we're trying to figure out, you know, recession, no recession. We'll see what that we get from the Fed this week. I mean, like, first of all, with the Fed, how closely do you watch in terms of what they're doing interest rates. We always does it matter to you?
So moment to moment it doesn't. Now, once you've had you know, four and a half, you know, four hundred and fifty bases point, you know, increase in in the you're right in the last year, you have to start watching. And so but now everybody's on the edge of their seat about whether the Fed's gonna hike and pause or not. And you know, one of the things we talked about. There's a private panel here yesterday for uh they called them finance leaders, but so I I crashed that party,
no part of it. But but you know, Mike Milkin came in and yeah, the tone for the conferences and the theme is somewhat optimism. Yeah, but he came in and talked to us about how we need to have realism and so it really we all know the first priority for the FED is to fight inflation, and they're going to have to beat inflation almost at any cost. So that if that's a when we're rate hike or
even two in a pause, that's great. If it has to keep going, that starts to get into creating real credit issues, not only in you know, corporate credit obviously, but also in obviously in.
Real estate, Well, how problematic could it be?
Well, it's it's very problematic, depending on So I was at a gathering JPM morganhead that Jamie Diamond spoke at, and he was optimistic too, and very bullish on America, which we all you know, I think everyone here is, which is great, and we have a global audience here. You can feel it, you can feel it, right And obviously the fact I think you know that the takeover today by JP Morgan on ufr C definitely it's okay.
Now we're over that hump, you know. However, he left us with the thought everybody should go back to their offices and budget for you know what happens if short rates go to seven percent? Well that is that would put you know, right now, in our credit portfolios, for example, we have a handful of credits that are not you know, within are not covering the cash flow. Yeah, you'll hear a lot of managers like us say, like our portfolio is, for example, the average credit quality of free cash flow
is one point six times plenty of cushion. But the question is how many credits are at when times or below? Right now, we have just a handful and those are the ones we focus on. If you get another two hundred basis points built into the system, there's gonna be a lot more than a handful of credits.
That have com lismore.
I think it depends on Uh, you know, we've always lent to six times cash flow, so I think you know or under so I think we'll be okay. But the broader market has already stretched out to seven and recent transactions you've seen seven times and maybe a pick component which right, pick toggle, which you'll pick toggle go back to?
It all comes around.
It's like the usc UF. You know, student body left, student body right off tackle play.
How likely is it we get another two hundred basis points? Does that even make sense? I mean, the FED certainly seems like they're on this mission, but you you you have to ask at what cost?
Here's where you get worried. Right, everybody is lined up on the side of the trade that that's not going to have everybody. You talk to everybody the in fact, the only person I have said you heard raise that is in this private session that Jamie Diamond had and and so you know, I okay. It creates all kinds of prompts for the deficity. There's the whole domino effect, well beyond what you know I do in my day job, right and and so uh, but they've got to be they can't.
They've got to beat inflation, all right, they have to beat inflation. It's interesting, all right. So so if they continue on the course, which they seem to do, I mean, are you anticipate a recession? I mean, it's interesting this panel I just came off of, and you know, I said a year ago, what's surprised you about what happened
over the past year. And one of the individuals, David who is over at hind So Global Corporate real Estate, are global real estate of all kinds, and just said, I really thought we'd be through the recession at this point. So I'm just curious how you see it.
That's real estate realist colored classes. So it keeps getting pushed out, right, And look, we can manage through a recession. That's not an issue. And I think there are a lot of other things now that are much greater fears that seem to be surmounted. Every banking executive here we had a dinner last night. Did Jane Frazer spoke at Yeah, you know, the US banking system globally is considered the
strongest in the world. She pointed out this forty seven hundred banks in our country, and there's three that have had issues, and so we don't have you know, the financial system is strong. And so the question is whether either rates get so high that they and we still have growth, right and pretty much everywhere, right, Labor costs are high in certain sectors by chains actually sort of figured out. So if it just ends up being a
slow down, that would be okay. And that's surmountable for I think for everything, for not only for corporate credit, but for real estate as well.
So when you look at investments, most attractive is it high yield? Is it bank loans, direct lending?
So we you know, we're the high yel market is finally high yield. Interestingly, you know, the generic high yeal bond market is yielding only quote only eight percent. We're delighted with that. Yeah, anything we have floating rates ten percent plus. So for investors, you know, we now have concerns about credit, so we can't call it the golden
age anymore. Yeah, but for our embedded portfolios, which are in really good shape, and investors are getting hundreds of basis points more in yield now than they did eighteen months ago. Our investors are.
Happy, not too shabby, Brewers. What can we expect this year? Is that easier?
No?
And I'll tell you that I got involved in English football in the last six months. I know you, and I was going to tell you. If you say, well, what's harder investing? I love that one, Brewers or growing up in New Jersey, the answer would have been English football, it's harder. And Todd Bowley may have a perspective, and then I'm clearly a Chelsea I'm sure it doesn't. But so look we're off to a good start. We're eighteen and ten. It beats ten and eighteen like like with credit,
you just worry about everything. We've had a number of injuries. Yeah, but the team looks you know that. You take a lot in sports from the feel of the clubhouse. Yeah, and our clubhouse feels great.
Well. I have to say it was great to catch up with you again. Thank you for giving us all so much time, Mark, ad Andasio again. Wow, good to see you all.
Right.
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We're at the Milkon Institute Global Conference. It's an incredible gathering of so many different individuals, and I'm delighted to have with us Sheila Patels, she's Vice Chairman to be Capital, former chairman of Goldman Sachs Asset Management. Because I feel like, first of all, great to have you here again and tell us to be here. I always feel like a great indicator of the economy is what's going on in the startup world, So tell us what you're seeing. Let's go macro.
First of all, Well, look, I think the macro environment was already difficult for venture given what had gone on in tech, and then you layer on what's going on in banking, and it's a bit of a perfect storm when you think about what founders have to go through in normal times to start a company, much less today.
So has it stopped?
It hasn't stopped.
Okay, it hasn't stopped.
I think the good news is when you hear about dry powder, that's not a fake thing, that's real.
Yeah.
You know, we were fortunate enough with the capital to raise a large fund last year. We still have plenty of that to deploy with our existing companies and to look for new opportunities. I think that one of the things you see experienced investors say to us right now, people that have been LPs over many vintages, is they remember what happened after the global financial crisis. They remember
what happened in the dot com bubble. The next four to five years after those were some of the best vintages. And once again we're in one of those periods, and we have a new series of technologies, one of them being generated of AI that could be so impactful to the good.
I want to talk about that, Tilla, but I want to ask you. I am curious that Silicon Valley Bank, the collapse of that bank, which was so crucial to the startup community and out there in San Francisco, Silicon Valley. What impact did you see as a result of that specifically?
Well, I think you know, one good thing saw was the community came together quite strongly, right behind their companies, together to try to work things out, to try to make sure people were making payroll and all the mundane things that you need to keep an ecosystem going when
it's taken a big hit. I also think you saw recognition, and maybe the UK was a little faster to this than the US that the innovation economy has a huge number of jobs associated with it, so letting it flounder because of an issue like this is not about letting some tech bros suffer in particular zip.
Code in California.
It's about real companies that have been founded anywhere from Ohio to Jakarta, having a funding plan, having a business plan, having hired people, and not being able to fulfill their promises to their clients and their employees.
Did you have any direct impact from the collapse any of your companies, your portfolio companies.
You know, we've been very lucky we had We did not have anything particularly notable for ourselves or our portfolio companies.
We've always encouraged and maybe it's because Howard Morgan has chair with his storied history and venture and me with my Goldmen background and that associated risk obsession, always felt that diversification was important and cash management was important, and so had given that advice, had taken that advice, and you know we're able to manage through it quite quite effectively.
All right, So talk to me about opportunities that you guys are seeing of interest right now? What's coming your way? You mentioned AI, right, we're all just talking generative AI, and it's interesting. It's coming up. I'm sure a lot here in terms of panels. We're all trying to figure out how many opportunities are coming your way? Is it a lot of them? In terms of deals that you're looking at?
Look, I think there's a number of things coming, but I think there's a number of companies we already invested in. Yeah, that people and appreciate that this is AI. You know, it's like, what is that? What is it?
No?
You have it already.
It's why Google knows what you're gonna ask it before you've asked, right.
You're type, it's right when it fills in a letter.
They know your dress size when you're you know, have bought something a certain number of times. It's embedded slowly but surely in so many places. And so what we've seen that we're excited about is there are so many mundane ways AI can make businesses do better, can achieve cost reductions, which in this environment is probably one of the primary things people are looking for. It a way for your business to thrive. At the same time, everybody's
worried about a recession. If you have a business that shows up that can save money, right, you're welcome with open arms, come in, help us, help us save money, or help us find places that are new revenue sources.
So when you think of AI or what you're seeing in terms of you know, possible companies to invest in or you are investing, it is a lot more It's not kind of out there, right, it's much more simplistic. As you say, maybe it makes you more productive. This is what we're talking about.
A great example is a company we invested in a while ago, not recently, but that does document analysis and management, basically information management for the contracts that a company might have. And you think about a huge multinational if thousands and thousands of contracts, right, who knows what's in them, who's managing them like supply chain, who's checking them?
Right?
And that became important during COVID because of disruption clauses. What's important now, well, we've done some projects with that company and our good friends at BCG with whom we have a special relationship, work with them as well, and we realized, you know, for one of the special projects they did, a company they were pitching had CPI clauses embedded all over the place in their deals that they hadn't executed on. So they were owed higher fees for
their services and they had never claimed those fees. They had never asked their clients to act on the CPI clauses that had been embedded because they they forgot what's in the thousands?
Do you think about something like filtering through right?
AI can find things like that in a systematic way, as opposed to you're just relying on who's the person that's most on top of their clients to figure that out.
So in this environment, are is there a valuation reset that you're seeing in terms of some of the deals and when it comes to funding.
Yeah, Look, I think everybody bandies are about different percentages. Probably the most common I think that people are seeing across his face is down forty to fifty percent. Right In terms of valuation significant, it's significant. I think it very much depends on the stage. I think you've seen a lot more weakness in late stage. Within the first quarter, only about eight percent of funding going to late stage, sixty seven percent went to early stage, and funding there
and valuations there are much less challenged. I also think that a lot of people were reliant and hoping that M and A would come back quickly, and I think it's much slower go because even corporate M and A, even companies that were looking to maybe acquire as their source of innovation, because it's still hard for companies to innovate from within. They can afford to wait a bit, and they can afford to push on valuations or push some unique terms.
Is it still like, you know, the goal is it IPO? I mean, we've talked about for years. I feel like that there was so much funding out there and abled startup companies to stick around for a little bit longer, which and some would argue was a good thing that they could really kind of develop themselves. But I'm just curious, what are your expectations in terms of IPO markets and what we might say.
Look, I think inevitably they'll come back, they always do. But I do think it does serve as a wake up call as to is that the best route for every company. And so when you think about growth and you think about most founders' ambitions for their companies, I think IPO is the easy one that seems like, Oh, I'm gonna build this and I'm going to turn it into its standalone success. But for some companies it might make sense to stay private a lot longer and figure
out your funding from that perspective. For some, you know, corporate M and A was something that was rejected two or three years ago that today they look at and say,
maybe that makes sense. Maybe I'd have an installed client base of the ten thousand best customers around the world I need to ride away if I would just allow myself to become part of a bigger enterprise, right And I think more people have opened their eyes to those different types of exit opportunities or future steps for their companies.
One thing I wanted to ask you guys, are playing an enterprise fintech, healthcare, bio. We talked there's a category opportunistic sort of an infrastructure tech for commerce and emerging markets and more. What's the most active area right now when it comes to investing for you guys.
Well, it's interesting, I'd say it's much more about what are the most driven interesting founders. I wouldn't say a sector stands out the most. I do think, you know, enterprise and healthcare still have a fair bit of resilience, and that's been great to see. I mean, healthcare needs so much done and there's so much value there. I feel like there's a lot of activity right now, a lot of activity. Now you have to make sure it's
at the right valuation. Enterprise and software as a service has been more resilient than we expected, and that's I think that's a positive as well. And then you know, one area that we've been spending quite a bit more time on that we already have embedded in some portfolios and we'll probably dedicate ourselves to in a standalone way sometime in the future.
Is climate tech. Climate tech huge interesting.
An AI plus climate we see what we learned there twenty.
Seconds climate tech because of the money we're seeing from governments or what's changed because I feel like.
A carrot and a stick. Do you have the governments that are demanding new rules, new regulations, companies that have to comply standards that are starting you unify from a global perspective, and then you have the flip side, which is the stick. The stick is the risk. The stick is what you'll face by not doing something and finding that you've built a plant in a place that's subject to floods, or you've you know, enshored a risk that's truly unensurable.
So glad we ended on that note. It meant there free to check.
In with you and thank you so much, Thanks so much, a great look and conference.
Thanks for going on. Chili Betel, vice chairman at Being Capital.
Here at Milkin, you're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from three to six Easter on Bloomberg Radio, the Bloomberg Business app and YouTube. You can also listen live on Amazon Alexa from our flagship New York station just say Alexa playing Bloomberg eleven thirty.
Our next guest, I want to get right to him, Steve Klinsky. He's founder and CEO of the private equity and credit from New Mountain Capital and together with its affiliates, manages PE Credit in Netley's Capital. Some assets under management about thirty seven billion dollars. It's a lot.
How are you very well? Thanks for having meh.
It's great to have you back here this year versus last year. What's top of mind?
Well, you know, obviously the economy is still kind of limping along. Yeah, I think inflations getting more under control. You know, the deal volume is low, but I think likely to be picking up and things are quite good for my firm, So you know, it's kind of more of the same from last year.
Well, one thing I wanted to ask you. You your firm was founded back in nineteen ninety nine, so you've gone through the dot com bubble, right, You've gone through the financial care is the pandemic, and then where we are today in terms of bank collapses. We've had a crypto collapse, and I'm just curious, how do those times do you compare to where we are today?
Yeah. I actually started in October eighty one.
So forgive me. Yeah, well, right, that was twenty.
Years of from from an interest rates for tenure troices for fifteen point eight percent, So I lived through eighty seven and all those things. I would say, this is not a crisis like seven or eight. It's not a crisis like when COVID shut the whole world down. I view, in general for the economy overall it's kind of a muddy,
rainy economy. Our companies are actually doing quite well. The thing that is different and new was the collapse of SVB, And if you really lose confidence in the regional banking system, that is a new type of threat. That was a worrisome weekend. It seems like that's quieting down. Yeah, and real estate is under a lot of strain because COVID may have just changed the way people use their offices.
But in the regular world, you know, we owned forty companies and all sorts of industries, and we did well last year and have good budgets for this year. So the actual economy I think is doing, you know, is muddling along.
Any stress points that you're seeing among your portfolio.
Our portfolio, Lockwood is doing quite well, So we don't you know, there's always industries that are growing faster than others. But if you're not over levered, if you can pass through price and you have good market position, I think, you know, defaults been almost zero in private equity. I think there's still going to be quite low relative for the return is generated. Yeah, and feeling good about our own firm, So.
What about putting new money to work. You know, where's the areas of interest.
My firm, a particular, is state active. So in the last month, we sold a company called Signify for eight billion. We bought a big piece of Perkin Elmer in the last sixty days for two billions, so we're both buying and selling. Right, you have to be much more proactive. There's a long list of companies that would like to sell that are not announcing there for sale until they know where prices are in the market settles. But that leaves the opportunity to approach them proactively and make a
one off negotiations. And you are and we've been doing that because we know what industries we like. We track these businesses. We only use about four times debt to EBITDANA average, so we can fully finance what we want to do. So we're just being more proactive. We have another company we haven't announced that we just signed a contract on and so we're quite busy. But we're a little bit different than the average front.
How much of a price reset is there going on in terms of valuations.
You know, it comes in gradually and it's you know, if I had a guess and I've had some investment banker friends kind of confirmed this. If something was ten, it's probably going to be eight. If something was twelve, it's probably going to be ten.
It's not a huge ten.
It's not a you know, I'm not talking about the unicorn stocks that had no revenue, no earnings and were worth eighty billion. Those are that's a totally different market. Companies that were being sold off of their earnings power, I think will be a couple multiple points less than they were. So it is a good buyer's market. It's more expensive to borrow, but you're getting a lower price,
so net that's a positive for the buyer. But it's not again a cataclysm like oh seven or eight was much scarier for the economy.
We're all right, right, it's interesting. Well, so when you I'm thinking about the bank situation, you know, and you know here we are, it does feel like we keep going, it's not a bank crisis, crisis of a few banks. You agree with that or is it hard to tell?
I hope that's the case. Yeah, everything, I see, that's the case. You know, And when I talked to various parties or either politicians on the financial committees or you just talk to people in general. I think there's a natural friction that's slowed down. It could have been a whole run on the banking system following the SVB weekend.
It feels like it's slowed down. You know, obviously there was the big news over the weekend, but it doesn't feel like it's the beginning of a giant blossom of panic. It feels like it's kind of slowed down. Now. The whole regional banking industry may be less profitable, could be a long term constraint on the availability to debt for smaller companies. So I'm not saying it's over, but it doesn't feel like it's a it's a panic about to start.
Are you finding on the predit crisis? Credit a private credit side of things? This is what happens when you get four hours to sleep, the private credit side of things. What are the differences following the collapse of Silicon Valley and the two other regionals.
Well, it's not just so that the whole non bank lending market, of which we're a part of we have a ten billion dollar credit arm has been a It's a great place to be because we were always lending floating rate, so as rates went up, we actually make more on the loans, you know, we're more. I think it's one of the things that has kept the economy going. It's this whole non bank lending market and it's and
the default rates have been very low. The thing also people don't realize is how much equity is in these deals now. So like in our companies, we're usually under forty percent loan to value. Okay, a normal buyout these days maybe half equity half debt. It's not like nine parts debt one part equity the way it was thirty five.
Is that where the default rates are lower in your because because you know some of the criticisms about the shadow bank. Yeah, yeah, well you know that there's not transparency, a little concerned about you know, what is actually going on there. The flip side is that when funding is tight, this is another alternative.
Yeah. I think there's a lot more transparency than people say. For example, we have a publicly traded aren't called New Mountain Finance Company. It's sec reported. We do our earnings calls. We actually kind of go position by position, how what's the multiple to EBITD and how has it changed. So and other people are transparent as well. So I don't think it's that lack of transparent. Yeah, if you remember, the non bank lenders like we are are much less
leverate than banks are. A bank with ten percent equity means it's nine parts debt to one part equity. BDC's like we have are more one to one, are one point two to one. And the people we're lending to have much more equity than they used to in years ago. And let's say you lend to a software company with seven hundred million of equity and three hundred to debt and interest rates go up by twenty million. They're not going to throw away their seven hundred million because you know,
they'll put an extra money or bringing some equity. So it's very different than the nineteen eighty one deals when I started, or you know, it's not Gibson greeting cards, you know, revelunt or stuff. It's a very different world now.
You know, eighteen months ago Bloomberg was writing stories about record deals, direct deals, and the private credit market. What's the headline from your perspective when it comes to private credit in six months or twelve months, are you get back back to record deals?
I don't think it's going to be record deals. Yeah, but I think I think you'll see deal flow has picked up. The non bank lenders are are are active and engaged. And you know what's interesting is again there was just a software deal done by a big private equity firm. It's a thirteen billion dollar deal. Twelve billion of equity, one billion of debt.
Wow, so no debt almost.
Almost no debt. So it's pretty attractive I think to be in the debt. I mean, even if the twelve even if they make a big mistake on their twelve billion, you're pretty safe at the debt level. And so that's an extreme version of but that's that's kind of symbolica what's been happening.
What do you think could be the big surprise on the downside in this environment?
Well, so the two things I worry the most about. I feel good about private equity as a feel I feel good about non back lending. You know, the big things that would be to the negative would be real estate hurting the regional banks which goes through Main Street America. And I am worried about the interest rates on federal debt. I mean, you know this, I think the government overstimulated.
The FED had to respond, and we have thirty trillion of debts, So if it goes up by two percent on the interest rate, that's six hundred billion, and that's almost our defense budget. So I worry about you know, government errors, government borrowing, and and I don't know. I don't know how bad the real estate's going to be. It doesn't feel like it's going to be cosmically bad, but that's a big watch.
Up when it comes to real estate. Do you think it's in more like the middle market and not the big guys.
I think it's in the office building space. And I guess retail has been bad in the malls for a long time. We have a net lease arm where we're lending. You know, the a company has a must have facility they would keep even if they went bankrupt, and it's worth you know, it has value itself. I'm not worried about that part of the market. But I mean, I don't know. With office buildings in New York, yeah, what the vacancies are going to be. And they're more highly
levered than a lot of things. But still it has been outputing every other asset class for a long time. I feel good about my own firm. I think what I hear with in general is the beta is about half as much as the stock market. So yeah, I don't think there's some crisis about to happen in private equity.
Just have about twenty seconds left here. So environment better than a year ago.
Similar than a York I think, I think kind of similar but getting better as inflation gets under. I think the FED has to stop at some point and then it will get better.
All right, I'm going to think the FED stops after this meeting.
Or who knows who.
I feel like it's the great debate, depending on go find out. Thank you so much. But optimism because you guys are doing well.
Yeah, I feel good. Thank you very much.
All right, Steve. Always appreciate Steve Klinsky. He's founder and CEO of the Private Equity and Credit for a New Mountain Capital. Joining us here at Milkin. You are listening and watching Bloomberg Business Week. We are live on YouTube, Bloomberg Originals and of course on Bloomberg Radio.
Bloommarc A Journal.
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Let's mate, I want to drive.
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On Bloomberg Radio blue radios.
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On the radio, you can hear our next guest. Let's get to it. It's time for the drive for the clothes. You've got a bet seventeen and a half minutes left in the trading session, and we are definitely off our best levels of the session. It's kind of a myth day, and it does feel like we've moved from the bank crisis, if you will, and then moved to maybe focus on the FED. Sarah Malick is with us, back with us, chief investment Officer of New Bean UH and here at Milkin.
How are you great? I love being here. Oh thanks for having me, Well, we love having you here. How would you describe this environment right now?
I think the market's concerned about two things right now. Number one is coming up this week it's the FOMC meeting, and number two is coming up soon, which is the debt sealing issue. So starting with the one coming up, the FOMC meeting, I.
Think the FED is one and done. But then I think we're going to have a really long pause.
So we disagree with some of the market views that the FED may soon cut because inflation is going to remain sticky and so not this year. I don't see it this year, even if we do hit a recession, I don't see rate cuts on the table for this year because I think inflation is still very far from the FED stated two percent target and it's going to take quite a while for inflation to get to that level.
What's the problems with that? And I just think about, you know, valuation resets. It's the constant debate that we have here at Bloomberg at you know, if this is the environment we're going to be in, you need to rethink maybe the valuations that are out there. Do you agree?
I think valuations are pricing at a pretty optimistic scenario for the S Andp's trading at a premium, and I think that's optimistic given the downside you could see the earnings going forward, because so take a.
Look at earnings.
Even though first quarter earning earnings have come in fine, we were coming into that fairly negatively with higher than usual cuts to consensus margins are an issue for companies are being compressed.
Revenue growth has been positive, but.
It's it's basically significantly has pricing power in it rather than volume growth.
And if inflation, inflation.
Is rolling over, so I think it's going to be hard for companies to hold onto that pricing power. That's another leg that will take earnings down and that I think then at the S and P looks expensive.
You sound not optimistic, you sound pessimistic.
Well, I think there's still ways for realistic, there's still ways for people to stay invested.
In the markets. Though, what's going to be the debt ceiling? How do you see that scenario? I feel like here we go again, like we've seen this movie several times before. What are the how do you see it maybe playing out? And the problems for investors in the markets.
So for the debt ceiling, you know, we're not seeing the equities price in issues around the debt ceiling yet. The timing of it depends on when axor seats may come through, so they're coming in a little lower than usual, So probably a June July debt ceiling deadline will run into Credit spreads are starting starting to widen, so that's credit spreads are starting to see an issue. Their equities
are not. You know, the issue would be if we were to go past the debt ceiling deadline, you could see downside equities of about ten to fifteen percent, which is what we saw in twenty eleven when we got to that point. So there is issues with the debt ceiling out there if we can't come to a resolution, and we're not getting close to one right now.
Haven't heard you talk about the bank sector. Are you nervous that there's still another shoe to drop? Are we done? How do you see it after what we got from JP Morgan and First Republic over the weekend or this morning.
The banking sector is all about confidence, But the world is different today than the bank runs that we saw, you know, a decade plus ago. It's very digital, so that kind of issue can happen at any time. It's not where we all have to line up at the bank. You know, we'reer to pull our money out, but bigger. But I think, you know, the confidence was put back in the sector today with JP Morgan buying First Republic,
so I think that gives us some stability. But generally the banking system sector we see issues going forward, ranging from net interest margin pressure, tighter regulations, tighter capital requirements, and more competition for deposits. You know, we all have our checking accounts and safest accounts that are really paying low interest rates. Right now, I think that's going to come to an end. Banks have to become more competitive. That's not great for their profitability.
All right, So what's your advice to investors in this environment? Because it does still feel like there's a lot of things coming at us.
So when then equities are focusing on quality companies with strong free cash flow, companies that tend to raise their dividends over time. That's companies with strong fundamentals. Outside of the US, emerging markets get a little bit more bang for your buck. As we go into a recession, the dollar likely weekends. That's good for emerging markets. China is continuing to reopen. And then we outside of equity fixed income, a lot of the pain is priced into fixed income.
With one more FED rate hike on the table, Areas such as high quality, high yield double B rated corporates are paying high single digit total return.
That's almost that's.
Equity like return in fixed income. And then look outside of public markets, to real assets. Private credit tends to be more resilient in an economic downturn, and infrastructure tends to be recession resilience.
This is another two areas that we do, Like, what's the biggest thing that's a risk to kind of the thinking today?
Is it?
I don't know what is it?
Is it?
I feel like we we've kind of figured out what the Fed's going to do, but what is it when you look at the possible things that could kind of change your perspective right now?
I think partly it's people tend to rely on recency bias, so.
We think back Ashton Kutcher tour right, I'm hearing. I'm just going to tell everybody because that's what we do at Milkin. Sorry anyway, so you go ahead, go ahead, But I digress. You can't invest in Ashton, although he does invest So anyway, go ahead.
Sorry.
So recency bias does exist. So I think a lot of people look at the world they think of the POSTGFC of our interest rates were on average FED month funds rate under one percent. But if you look at the about fifty year period pre the Global Financial Crisis, FED funds rates were on average almost six percent.
Right, I think, why why is it so bored? Why is it difficult? Is it just people can't understand it. There's a generation that doesn't understand that that's the way it usually is.
I think a lot of people spent most of their careers in this kind of environment. A lot of people even most of their lives in this kind of environment. And that's kind of like, you know, the psychology of recency bias, where you rely on what you know and you don't maybe don't think about the fact that the normal world was what was free GFC. I think that's what we're going to and that's kind of implications for more than just the banking sector.
All right, this was in my notes for you, and so I want to go there. But the semiconductor space, I love watching it. I feel like it's such a great indicator of the economy. Mind you, it's a cyclical space, and we have to understand that what is it that you're watching specifically.
So we came into this year with our outlook that we do for Barons and said technology was our top pick for the year, Software and semiconductors. Now, we like semiconductors for the long term. However, they're of almost twenty percent year to date. A typical semiconductor downturn last six to nine months, this one has taken ten. I think the stocks got a little bit ahead of themselves, thinking we were going to hit the inflection point at the bottom,
but we are going to hit it. Auto semiconductors like NXP, which reports after the close today, is an area with tailwinds like electric vehicles and self driving cars. I think that the demand for semi's is going to come back. Stocks take a bit of a breather, but then it's off to the races that they hit as they hit that inflection point on the bottom of the cycle.
Just have Sarah, about thirty seconds left here, twenty five seconds. When you look out with confidence, what do you feel comfortable talking about six months from now, twelve months from now, two months from now.
I think I'm more worried about the next few months because of the decks ceiling. Very hard to predict that. I do think in the next six to twelve months we're going to likely see some kind of mild recession and that will clear the decks, clear the decks on earnings. When you look at first quarter twenty twenty four, earnings comps are fairly easy, so I think that's where everything starts becoming easier in terms of what companies are reporting.
All right, well, this was so much fun you and Ashton Kutscher. Who could have thought? Who would have thought? Thank you so much, Thanks for having me really appreciate it. Sarah Mallick of course, the CIO, Chief Investment Officer of New Being joining us here at Milkin. You are listening and watching Bloomberg Business Week. We are live in Beverly Hills on radio, on YouTube, on Bloomberg Originals. This is Bloomberg.
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