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This is Bloomberg Business Week inside from the reporters and editors who bring you America's most trusted business magazine, plus global business, finance and tech news as it happens. Bloomberg Business Week with Carol Messer and Tim Stenebek on Bloomberg Radio.
Hi, everyone, this is Bloomberg Business Week of Carol Masser along with Barry Ridholts, who just said, did you smell that? What was that?
That's hamburger, some sort of Meatia is grilling. It's delicious.
Somebody has not had right.
I'm late for my noon feeding.
Barry Ridholts. He's chairman and chief investment officer Ridthelt's Wealth Management. I'm Carol Masser, of course of Bloomberg Business Week. Barry of course hosts of Masters in Business and at the Money. We're here at future Proof at Huntington Beach, California, and we've got an incredible sixty minutes coming up. Sarah Malik join us a little bit later on. Right now, we want to get to our first guest, and that is
Pria Misra who's with us. She's a portfolio manager of global fixed income currency and Commodities at JP Morgan Asset Management joining us here at future Proof. How are you.
I'm great, this is beautiful. Thanks for having me.
Well, thanks for being here. I know, I just we always talk about taking the show outside, you know, when you're in college, You're like, let's take on this is what we are.
Doing today from your outside.
So I want to ask you about the elections because we have some reporting and it noted that a Kamala Harris victory in the elections is seen as better for treasuries worse for stocks than a win for Donald Trump. This was a Bloomberg Terminal subscriber survey. Are you thinking about the elections and what it means for the investment universe and what does it mean in your view?
So we are all we're all definitely thinking about the elections. It's a big election. It's a very close election. But I'll make a couple of points. You know, the presidency is clearly extremely important, but Congress is very important to get a lot of things done, you know, or not done, because the twenty seventeen cuts are likely to expire if Congress doesn't do anything. So beyond the presidency, we're looking at the Senate races, the House races, so the entirety
of the election is going to be important. Secondly, there's a lot of policies that are up in the air, right from tariff, immigration, you know, regulation, I talked about taxes, spending. I think it may be a little simplistic to say that one outcome is necessarily good for the economy or good for markets. I think we also have this deficit issue which is out there the other of them. For either of them exactly, whether it's spending or it's taxes
or tariffs, they all have fiscal implications. I mean, what I'll say is, as I manage our portfolio, is one our position for one way or the other. It really from a risk awards standpoint, Given that the election is won by not a lot of forty thousand votes or one hundred thousand votes, we're talking not about, you know, a very clear dividea. So I would say it's best not to position before the election, to see the election outcome and then to see what, you know, what policies
are prioritized. Is it going to be taxes first? Is it tariffs first, which is going to have a very different implication. There's also so I would say when we look at the election and the outcome on markets, I look at the impact on growth and inflation. I look at the impact on the deficit. And then what I really hope is FED independence, you know, remains, But that is I don't think we should take that for granted.
Is there any impact there, because that's going to have an impact on treasuries as a safe haven, the dollar is a safe have and these are all things which require an independent center bank. So there's a lot. But I would say it's.
Sad for independence. You really are concerned.
I am a little concerned. I mean, we've seen this little bit before. And I think now with the fact that you know the FED was late in hiking rates, are they going to be late in cutting rates? They're about to embark on a cutting cycle. And if we have the President or Congress talk too much about what about FED policy, it's not great to inspire confidence in the US capital markets, and we need we need foreign investments.
And as the FED cut rates, I actually think for will look at US fixed income, they'll look at the US equity market. So I do hope that that FED independence remains. I think it's something we should keep at the back of our mind as we think about market implications of the election.
So the Fed has taken rates high enough that money market funds are yielding over five percent. They now stand over six trillion dollars. That's a lot of money. What happens as the FED begins to cut rates, where does that capital go looking for yield?
Sure And that's the question I would say every asset management person, every wealth manager salivating at the thought of that six trillion. Historically, that money does move once the FED starts to cut rates, starts to move first into fixed income and then into risky assets. But here's the catch. We're in a soft landing, and soft landing rate cuts
are rare. So can we apply the Historically the Fed is cutting in a recession, so the money moves into fixed income because well, equities might look a little scary this time round. If the soft linding is maintain, and that's a that's an if. I think there's a case we're in a good spot. If the Fed was to cut rates quickly enough, we might stay in that soft landing. We have a chance. It's a narrow path, but I
think there's a chance we stay there. I think that money moves into different asset classes, not all of it. There is a reason people own cash, liquidity, cash management, but a certain portion of it, especially as you realize that there's reinvestment risk. That money is not going to stay at five percent. As the Fed cut rates and forwards are arguing for a little below three percent, that
cash is going to give you three percent. As people start to internalize that, and I think the FED cutting starts that, that money then in a soft landing, moves into equities, credit and government bonds. If the economy slows down, I think you're going to see more into fixed incomes. So there's a bit of a bifurcated outlook for that money depending on how the economy evolves from here.
So it's interesting when the FED was raising so a longer duration bonds get a little with punished. Twenty twenty two is a tough year if the Fed is starting on a longer cycle of rate cuts, and some people have talked about high three low four percent is where they end up. What do you do with your duration? Where do you want to have your bonds? What sort of longevity you're looking for in the whole things.
Sure, I think bonds finally give you income. So I joke that fixed income finally has income in it, which is good real income. You know, not only are you getting that nominal income, but net of inflation, you're actually earning real returns. The other thing bonds are giving us diversification, which you talked about twenty two, is the opposite of diversification because risk assets struggled and bond struggled. That's changed. And actually you don't have to take my word for it.
Look at the last couple of months, just the last two payroll reports that come in a little weaker than before, and this fear of a hard landing or a recession starts to come up. Risk assets struggle and bonds do really well. So you talk about longer term perspective, I think there's a lot of TALC that has happened. That sixty forty is dead. No, sixty forty is back, because that fixed income component is giving you that diversification. So we've actually been adding to it. Because we're in a
soft landing. We have risk assets in the form of spread, high quality, investment grade, high yield spread, securitized spread. Owning some duration is a good hedge if the economy starts to slow down, our spread products will underperform. But then that treasury long and we're long intermediate. I think the two year doesn't give you that much. You start to go long fives and tens. We should not worry that much about whether they go twenty five or fifty. Let's
look at the totality of cuts. Exactly where they end up is right around three percent. We're not pricing in a recession. So if we do get into a recession at that point the Fed's cutting to two percent one percent, there's a lot of room from in terms of price appreciation for that duration. So I like adding duration. We're buying any backups any election related You talked about elections, I bring up any election related volatility, supply and auction
that doesn't go well. Anytime interstrates rise, I think it should be viewed as a buying opportunity to add that duration, especially if you've got risk assets on the other side of your portfolio.
All right, we're going to leave it on that note. Pria, thank you so much. Really enjoyed having you. Pria Mizra joining us. Of course, Global fixed income, Currency and Commodities portfolio manager at JP Morgan Asset Management. Thank you so much. Prank you. Hey, folks, I just want to bring you some headlines from Intel. We do have just crossing the
Bloomberg terminal. It looks like Intel, specifically the company CEO has landed Amazon as an AWS customer for the company's manufacturing business, potentially bringing work to new plants under construction in the United States, boosting his efforts to turn around the embattled chip maker. So we're seeing some headlines there. I thought I saw one other headline also to pause Poland Germany factory projects by about two years. So we
know the woes. We've talked about it a lot. I highly recommend that you check out some of the reporting that's being done by Ian King that really talks about how this has been long and coming. Intel shares though on these headlines, folks, in the aftermarket, we're seeing the stock pop around eleven percent here, so we'll continue to watch that, all right. Want to get back to future Proof Carol Masser along with Barry Ridtholtz here and want to get to an interesting guest, Christian Phase.
Hi, Kristin, Hi, thanks for having me.
Well, thanks for being here. He's founder and CEO Faz and Company. I can describe the company, but I'm going to let you describe it. Tell us what you guys are up to.
Absolutely, thank you very much.
It's great to be here, great sort of venue to have a conference.
So we were a private credit fund.
We run a private credit fund that gives accredited investors the opportunity to get exposure to what we think is a really interesting asset class, and that's real estate bridging finance against residential.
Property, something you know a little bit about.
I do know a little bit about.
Yeah, So I've been involved in the sector for almost twenty years. Originally was a lawyer. Grew up in Australia, which you might be able to tell from my accent.
Spend time over in London.
Spend time in London. Yeah, so recovering lawyer as well, Barry so happy to be a lawyer.
That's half of the lawyers aren't practicing seven years after graduation.
Why is it that? Because another podcast that's.
A whole nother conversation. So what sort of real estate you guys focus on? Is it just residential or is it a variety of sectors?
No, it's residential. So we're very careful to explain that to to investors. Obviously, there's parts of the real estate market that are quite troubled and instead of making headlines like commercial and different parts. But we're small, balanced, single
family residential. Our average loan size is four hundred and fifty thousand dollars, So it is kind of really targeting what we describe as property entrepreneurs buying the worst house on a nice street, replacing the bathrooms, kitchen, and then selling for the flip. Right, Yeah, it's fix and flip. It is fix and flip finance, and you know, it's a big market in the US. It's a big opportunity. Like you're saying, I've done it, built a business in the UK, there was very active in the fixed and
flip market. That's now the largest non bank mortgage lender in the UK and now being active in the US for the last two years.
And it's a huge market here.
I did the investors who are like constantly sending me texts and saying I want to buy your house? Are these the people that you like are dealing no.
All the time?
Right, I get those on houses I don't even know them. I'm like, yes, send me, you definitely want to sell that one, right, here's.
My price, and it's like you know some crazy number, you want it, it's yours, but no, tell me, like like we're dealing with.
We describe them as property entrepreneurs. I mean, I think that it's a bit of a misnomer because a lot of people turn on the TV and see the glamorous couple, you know, flipping houses making lots of money, and it all looks quite easy. It's not that. In reality, it is kind of they're real hustlers. They have to work hard,
and we target property professionals. They're they're doing this full time, and they do it multiple times a year, so five, ten times a year, and so they're good customers for us. Once we acquire them, we can be their funding partner of choice. They keep coming back to us and so yeah, so it's a very entrepreneurial boro but product.
So my brother has been doing this for years, right, sort of a side hustle, but he does four or five houses a year, and the conversation has always been, hey, I'm funding this primarily with my own money. I asked him, have you thought about getting venture funding or any sort of credit for this? Because you could turn this into eight or ten houses a year if you really want to. And it's some of these houses are fairly it's not
always the worst house in a nice block. Sometimes it's a very nice house on a really nice block.
Yeah. Yeah, well, I'll have to give you my number. You can give to your brother for afterwards.
We see the ideal happening.
I proved people that are not trying to sort of maximize leverage. So the average LTV across our books less than sixty percent, so they're pretty conservative. But with a bit of leverage, they can do a couple of projects as opposed to being exposed to just a few, you know, the lesser number, and there's a lot of tailwinds for the asset class. You know, there's just fundamentally not enough houses being built here in the US, the same as in many arts of the world.
Yeah, but that's a whole other story because it's in terms of, you know, acquisition of land and you've got to get neighborhoods to sign on. It's not just a case of here's the money, and it's not.
Just a funding issue.
But then the other sort of addition to that is that over sixty percent of housing stock in the US is over forty years old, so you do have a lot of aging stock that does need to be referbed. And so with not enough housing stock and a lot of older stock in the market, you know, refirbing is kind of is something that's very much needed.
Something I've got to ask you though, and I'm curious about what your brother says, is that you know, there are people who want to do projects. There aren't plumbers, there aren't electricians, there aren't contractors. There isn't a younger generation. I have two contractors in the family too, and but there is not a younger generation who wants to do this kind of stuff.
Yeah, definitely, and I think through COVID that's been a difficult time as well. You know, costs even crease, yeah even still, Yeah, it's tough. And also you don't have a lot of end borrowers that want to take a seven percent mortgage to buy the end product. So it's kind of a time of disruption. I kind of see that as a time of opportunity in many respects. You know,
banks aren't active in this market. They're just not really equipped to provide the quick sort of streamline finance that we provide, and so you know, so I think it's a great opportunity for investors to get a superior risk adjusted return against what is a relatively liquid underlying asset class.
So you're talking about the age of the housing stuff. Did I get this right? Sixty percent of the homes for forty years old or older. Yeah, So we're talking about referbs. I see a lot of knockdowns in some of the neighborhoods, either by my house or out by the beach or anywhere else. It seems like a lot of contractors are just, hey, let's not fix this, let's just build a bigger one.
Yeah.
Is that a space you work in?
Also?
So we don't.
So we think that a ground up construction is quite a significantly higher risk proposition to be investing in. So we try and focus just on fix and flip where it's not sort of it's not sort of changing the construction of the bill. It's really just a tartup and then an opportunity to sell because we want it to be quick. You know, it's twelve months or less in duration our funding.
Well, that's quick.
It is quick. Yeah, but you know the typical borrow a little bit.
Yeah, but it's it's quick, and that's that helps the underlying investors because it's it's there's a lot of volume of loans underlying.
So what's the relationship between you and the fixer flipper? Is it just a credit relationship? Do you do anything with them? How do how does a participation work?
So it's a direct relationship. So I think that's one of the advantages of our fund as well. We're not sort of buying loans originated by other originators. We have a direct borol relationship. That means we're very close to the underlying credit. You know, we can sort of understand what that borrow's true circumstances.
Are, Like, you want to make sure this works.
We want to make sure it works. Yeah, And it's a relationship lend. You know, we ideally want to be the preferred funding provider. They come to us, once they have a good experience, we get to know them. Once a borrow repays us, the risks around fraud and the things that sort of keep you up at night are significantly diminished. So we want to sort of be you know, finding good customers, lend to them again and again.
I don't know if I missed this, did you say, what a typical loan, like, what the rate is? And I'm just curious about the returns on these investments for you guys.
Yeah, sure, So I'm not sure if I'm alowed to talk about our investment returns and our fund but we offer investors a fixed return of ten percent and we're lending out at about twelve percent per random so there's a bit of a margin there for us, but it's a good sort of risk adjusted return for our investors. We say to our investors it's one percent a month. So the typical borrow does come to say I only need it for three months. Maybe it ends up being
six months, but it's six percent. Is the cost of the funding for them. And what we say to the borrow is if they're too tight on the margin, then they shouldn't be doing the project. You know, that's kind of just a cost of doing business for them.
Traditionally in on the property the usual mortgage stuff.
Firstly, in yeah, so we I mean, our head of underwriting comes from a bank.
We sort of experienced team.
We say, we do everything that a bank does, you know, we fi COO score the borrowers.
We look to make sure that we're only.
Lending to corporates, but we look through to the individuals and make sure that they're credit worthy individuals. It's full recourse against those individuals and it's firstly security against the property.
Just fifteen seconds. Is there any area in the United States that's particularly hot that you're working in or is it all over?
It's we're quite selective in the States. Florida is a very strong smack of frost. But it's been on the op so I guess you watch closely.
You know.
It's a great interview, and you still have like a million press rights, right, Christian, such great stay.
I love you to match you. Thank you, Thank you.
Christian Phase. He is founder in CEO Phase and Company. We're headed for a break, folks, for from future Proof with Barry and myself. This is Bloomberg.
This is Bloomberg Business Week with Carol Messer and Tim Stenebeck on Bloomberg Radio.
Carol Masser along with Barry Redholts, were live at future Proof having some fun Huntington Beach, California. How could you not? I want to set this up a little bit, Okay. Bloomberg news story that was recently out just last month talked about the one point seven trillion dollar private credit industry. You talk about it a lot. We talk about it a lot, how it's grown so much as higher rates are basically forced byout firms to look further afield for
funding while traditional lenders pull back. We know the story. What's interesting is banks have now become more competitive in recent months trying to regain the leverage loan markets, so they're starting to get a little upset in response. We've talked about credit funds starting to push their pricing down, raising concerns about a potential race to the bottom. So that's my setup because I want to ask our next
guest whether that's what's going on. Alona Gornick is managing director senior investment strategist at Churchill Asset Management, which, as we'd like to remind everybody, is the fifty billion dollars private capital affiliate of NEU ven.
Welcome, Welcome, Thank you so much for having me, Carol Berry.
I feel like we know so much about Churchill. You do in particular, but I've also talked with Ken consel So a lot about what's going on. He often talks about just being the golden era of private credit, but are we seeing a little bit of a race to the bottom as banks are getting more involved. Tell me what's happening in terms of the deals that are going on right now.
Sure, it's been a really interesting competitive landscape. As we think about the different segments of the middle market, I feel like they are individually each facing this sort of bank pressure in a very different way. I think a lot of the activity you're talking about is largely hitting that upper middle market segment, which makes a lot of sense for corporate barers of the size that banks really
want to attract. In the core middle market, where Churchill's focus, we generally see a little bit less of that bank interaction or bank threat if you will, in that same traditional sense. But generally what we are seeing is a little bit more competition for the most part, with some
upper middle market direct lenders somewhat coming down market. Given there isn't as much activity that they can pursue in that upper middle market or a little bit more of a competitive threat, they might want to expand their wings,
if you will. But there are ways in the core middle market where we can really expand and stay disciplined and avoid some of that race to the bottom, which can come in the form of maybe tighter spreads, looser covenants to no covenants, coming down in market in terms of the size of the business, which is really where we want to stay away from.
So private credit private credit really seems to navigate the rising rate environment pretty well. Most of the most of the various fun and deals form of sofur A plus some upgrade. So as rates go up, SOFA rises replacement of libor, and you guys seem to maintain a fairly robust spread and pretty good returns over time. Who are you targeting with your products? These tend to be locked
up a little longer than I think. A lot of rias are used to tell us a little bit about who you're marketing to and why you're at this event.
Sure, so private credit has generally been very focused on the institutional market. It really makes a lot of sense to have committed capital locked up where you can draw it down over time as a manager. But what be seeen has been incredible opportunity set in the wealth market that is just tapping the surface right of starting to
explore private markets, private equity, private credit. But in size the wealth market is equal in terms of the institutional market, so think about going from zero percent effectively up to five percent. When you think about institutions and their exposure private credit, they're generally anywhere between five to fifteen percent. I mean Kelper's was out I think last week talking
about targeting five going to eight percent massive institution. Think about the wealth channel getting from zero to even five. That's a huge untapped opportunity that we would like to meet. But to do that, we need more accessible products. It has been very difficult to think about wealth coming into a product that has a five million dollar minimum that is nowhere near what a wealth manager or an advisor can touch. So we're really focused on this market. This
is a great conference to do it. There's about two thousand advisors here, but when I think about the wealth channel, I think there's about three hundred thousand advisors. It's so fragmented. How is Churchill going to access this market? So we absolutely need education, We need resources, We need distribution folks on the ground all over the country. We need specialists
to help with that education. And we need partners, you know, like technology platforms like Case and I Capital help us create funds and ultimately product development that have lower minimums. These non traded perpetually non traded BDCs that allow you to come in for twenty five hundred dollars instead of five million and ten ninety nine's much more easy to access, really simple, really interesting.
Do you think investors are ready for the possibility of it having higher risk as an investment or also having their money maybe locked up and not as liquid in these kinds of deals.
I'd say the top three concerns or at least hesitation points that advisors have when I'm on the road are number one, the liquidity risk, Number two default risk in the asset class that they're not very familiar with, and number three it would generally be accessibility, like how am I going to get access to this product and comfortably get it if in fact we are in a rate
declining environment? How will that impact my return picture. With liquidity, you have to really educate folks that these are ultimately not traded assets.
Right.
We're putting it in a wrapper that affords you potentially some liquidity and a quarterly redemption, but underneath it, the assets aren't really meant to trade. So you really have to educate the client and thinking if this is something your portfolio that you will not touch for a very long time, enjoy current income along the way. That's what you want to really think about, and diversify the portfolio with an enhanced return. I think that's what's really resonating.
What's the typical lock up period.
So we don't have one in these funds and a non traded BBC, you're actually first twelve months you'll have a soft lock at ninety eight. But then after that you can really redeem your entire amount up to a cap where we as a manager would cap it at five percent of the enemy of the fund.
So really that window and we saw this craziness with a B credit and be read earlier this last year. I've always thought of that as I call it the widows and orphans redemption if yours And my favorite story is surgeon forty seven years old, wife, two young kids, suddenly passes away. They don't want to be in an I liquid thing, and so that's what that five percent
is really for. So for the typical line who's not they expect to hold this for three years, five years, seven years, what sort of expectation do you have.
I think what's great with advisors is really trying to help them educate their clients about a very long term hold here. I think what's really resonating in terms of benefits about private credit are one that income generation. It's incredible to think about income generation in terms of a predictable path to retirement. So if it's on your way or when you're in retirement, that is a multi year
potential investment addition to your portfolio. But if you think about the income component of that, it's very similar to fixed income and public credit, but with a really nice yield premium to it. And you were talking about this earlier. Historically, the yield premium for private credit, particularly direct lending versus the upper kind of large corporate credit, has been anywhere between one hundred and fifty to two hundred and fifty
basis points. That's pretty historically kind of where the average has been around two hundred. Right now, we're actually seeing it widen out to about two fifty two sixty five, which has been because of that really that comeback in the bank market. When things come back, activity picks up, spreads tighten out, but not as much in that middle market.
So our premium is actually increasing, So current income is really going to be really attractive for advisors when they think about multi year in terms of at three, is it five, is it seven?
Is it for the long haul? Is there any stress that you guys are seeing? I mean, I do think that there was, you know, milk in the last couple of years and milk in this year. Like the concerns about stresses in the private credit area because we feel like that there isn't enough transparency. You know, you know the arguments, but I'm just curious, you know, re renegotiating the terms of deals to make sure that you know there's no defaults and that you can kind of see
the deal through. What are you seeing on that front?
I think that there are pockets of stress or distress happening in the market, and I think it's going to be vintage specific still, yes, and actually showing it. It's ugly head a little bit more so when you think about the most aggressive deals were generally done in and around the time where we saw massive recovery post COVID.
At twenty twenty one, valuations were really high, really fantastic software healthcare services businesses were getting bought from double digit multiples, and along with that came a pretty heavy dose of leverage, pretty easy kind of money, very low to no covenants. It's that which we're seeing. If you had any issue before COVID and now in an interest rate environment that's been twice as high as it was two years ago, you're going to feel a little bit of pain right now.
So we're starting to see a little bit of that unfold so that stress that those cracks. But I'd say it isn't broad based across all of private credit. I'd say it's sort of isolated to vintages and then even certain parts of the market where you took a little too much leverage, then the business should be able to handle.
So let's talk a little bit about the industry itself. We've seen broad adoption of private credit when rates were really low and double digit growth every year. How much longer can this sector continue to grow at such a rapid rate?
So we get this question a lot on the road in terms of is this growth a bubble? How much of this is sustainable? And it's important to think about this, and I know you've talked a few of my colleagues or we think look back at the growth so far, if you really unpack that, a lot of it has
been really more secular driven rather than fad driven. Right, These are changes that are evolutionary nature that had to happen at some point or you had for the first time a commensurate demand in both investors' interest in the asset class with that search for a yield in the low rate environment and borrowers who are really looking for a more efficient, customized speed to certainty of execution type of solution. And both of those happened in lockstep. But
now where are we. We're not in a low rate environment anymore. Right, Borrowers already know that this is a fantastic customized solution. They can avoid going to S and PN moodies. But what's going to push it to the next level? And I think what we've got is looking at dry powder that's on the side for equity, massive amounts of dry powder that still needs to be put
to work. And if you think about every dollar private equity that's put to work, there's typically another private credit dollar put to work if you think about a fifty to fifty debt to equity structure. So I do think that they'll be sustainable demand going forward.
A great overview, certainly of something that has become hot, and I feel like year after year after year we talked so much about what's going on in private credit. Alona, thank you so much.
Yes, definitely, thank you for having me.
Ellen and Gornick, senior investment strategist at Churchill Asset Management. You are listening and watching Bloomberg Business Week from future Proof. This is Carol mass Long Barry Redholts. We're live at Futureproof in Huntington Beach, California, and I was going to do an introduction, but I just want to get right to her because we have so much to talk about. Great to have back with a Sarah Mallock. She's Chief Investment Officer, head of Equities and fixed income over at
new Van Asset Management. There are one of the world's largest investment managers one point two trillion dollars in assets under management, not just shack real mind, right, that is real money. How are you great?
It's great to be here. It's a sunny day in Huntington Beach. How can I complain?
I agree?
I agree.
That seems to be the consensus, like let's go out side and play.
All right, so here we've just it's not it's not what the Fed's doing. It's just the consensus is it's beautiful, right, This is not going to be bad the investment environment. Let's talk about today. I feel like we've seen some of the megacaps continue to be pulling back. How are you thinking about, first of all, the equity side of things right now, Well, let's start with technology. I think July tenth was was an important day for tech stocks.
That's where in second quarter earnings, people decided they weren't good enough. So even with Nvidia and there are one hundred and twenty two percent revenue growth in the second quarter, these socks had gotten crowded and it just wasn't good enough, and stock started sounding crazy in your view, Well, it's just, you know, it's tough to say what's really priced in
in terms of artificial intelligence. And I think what people are really waiting for, though, is some signs of return on investment or monetization from all these huge AI investments that companies have made. And in any cycle where we're in this ultra growth cycle, you're not just going to
see that immediately. So a bit of a pause here as we wait to see that these socks are even though they're growing gangbusters, still there's there's so much crowding in them and the valuations and everything just I think, you know, they roll over for a bit until we get the next catalyst, which, by the way, Jensen's on the road in early October that could be a catalyst.
No more delays from Blackwell.
And also, you know, the stock is not incredibly expensive, so I think that could also be another reason why Nvidia does eventually bounce off the bottom and go up. But in the meantime probably training range of one hundred and one hundred and forty okay.
So but but you know, we're almost done with September. We're coming up on you know, Q three earnings. By every estimate, that looks like we're going to be at or near record earnings. Isn't that what's going to drive stock prices high?
Well, before we get to those third quarter earnings, let's talk about being almost done with September, because it is the middle of September. For the past four years in a row, the second half of September has seasonally been the worst two weeks of the year for the stock market. So we have a little bit in front of us beyond retail sales, and that fed meeting in a couple
of days. Earnings have been strong, and even if a recession is coming, and we are in that camp, but the recession east to camp, as Bob was talking about earlier today on my panel, you know, the earnings are not showing that yet. Employment markets are so reasonably strong, consumers showing some signs of cracking. So I think we're okay for now. But we do have the last two weeks of September to contend with.
Didn't we kind of pull that September trouble back to the beginning of September. That's when the mess really was And it's almost like September's in the rear view mirror, even though we're only in the first day of the second half.
What's tough to say, because first of all, retail sales cut, you know important this month consensus is one point two percent growth, but remember if we go back to last month, consensus was point three percent. They retail sales printed at one percent in markets. That's what caused the markets to remount. I don't think that's going to happen tomorrow because of
what's in front of us on Wednesday. I think if the FED cuts by twenty five basis points, which is our expectation markets might sell up on that news because they've already priced that in.
Now the FED cuts by fifty.
Or even more, we have to wonder are the markets going to get concerned that the FED knows too much and they're too worried?
Basically, I don't know how they can can.
I I got to ask a question because every time someone says the FED knows something, we don't know. The FED didn't know inflation was coming, they were late. The FED didn't know inflation was peaked, they were late. What do you say, I didn't know the inflation had bottom. I'm saying they're a large, cautious institution that tends to move very deliberately, and so the FED knowing what we don't know is less of a concern than hey, when are these guys going to figure out what we've already
figured out. I look at it differently than you.
Well, I agree with you on the FED being cautious, and that's why we think they only cut by twenty five is first of all, economy is slowing, but it's not on the precipice of a recession.
Yeah.
But on the second part of you know, I guess it has a little bit more to do with if the FED sneezes of the rest of us catch a cold. So if they come in at this higher rate cut, it's not necessarily do they know a recession is coming. It's that if they're so concerned about it, should the rest of the world be concerned about it. You have
an SMP that's trading around fifty six hundred. Obviously the S and P five hundred is not concerned about a recession at this point, so that would be I think what would get people unnerved.
So my favorite question anytime we're talking about the FED is not whether it's twenty five or fifty, what's the terminal rate? Where did they end up when everything is said and done.
I think that's the challenge. So, first of all, this year, so in antelection, your FED tends to do more rather than less, So that's another reason I think they start slowly. You might get one or two more rate cuts by the end of this year.
Then it just.
Depends on are we going to get that recession that we've now talked about for two years straight or not.
I think that we are.
If we get to that, then I think we get multiple rate cuts next year.
So our view is they start.
Off a little bit slow, maybe more slowly than the market expects, but then they start to accelerate as employment markets really crack and the consumer continues to slow, and then you know, we get to a level where, you know, depending on the level of the recession, you know, then we'll sort of see where the FED finally ends up in terms of its terminal rate.
Is there a trade that we should be talking about?
I think we should first of all, Okay, so fixed income tends to outperform equities into twelve months after rate cuts, so we should be talking about fixed income. Secondarily, I think we should be talking about quality overall. If we are going into this recession, companies with strong balance sheet, companies with the ability to continue to grow their dividends.
And provide income for investors.
Also rate sensitive sectors like reats, which tend to have lagged for the two years. As a FED raise rates, we should outperform as a FED cuts rate. So looking for this is a little different than what we've been thinking about last years has been about who can survive rate hikes, who can survive ultra high inflation. Now we're thinking about who performs well during rate cuts, which companies might will be able to survive some form of a recession.
So you mentioned some consumers are showing signs of cracking. A lot of the bottom half of the economy is reliant on credit cards. If we see rate cuts, does that start to alleviate some of that pain?
I think it could.
Already we're seeing we are seeing consumer delinquencies pick up. Second quarter earnings companies were not super optimistic on the consumer. Rate cuts I think will help, But the question will be will it be enough? Is it too little, too late?
I think given what already, what we've experienced in terms of rate hikes for the last couple of years, and the fact that we think the FED starts slowly, I'm not sure that a couple of rate cuts is enough to get us into the soft landing camp that we all hope for.
All Right, I was going to ask you what's the big risk that we have to worry about? Five seconds? What's the big risk?
Probably geopolitics, one that we're not talking about as much anymore, and you know, will that bubble up in any of the you know, unfortunately where it's happening. I think you know, non US markets are something that people aren't talking that much about right now, All.
Right, good stuff as always, Sarah Mallick, Chief investment Officer, head of Equities and fixed Income over at new Van Asset Management.
You're listening to Bloomberg Business Week with Carol Messer and Tim Stenebeck on Bloomberg Radio and television.
All right, everybody, we are back at future Proof Carol Masser along with Barry Ridholtz and our next guest, participating in a panel here at future Proof about capturing the next generation of investors. It's something we've talked about a theme, right are you on?
No there, I am. It's a theme because we've been talking to there's so many young young people here, tell so many young advisors. It's a place if you want to look into where this industry is going. We're better right exactly, and Betterment is one of the companies that has been looking into where this business is going.
And we've got the CEO sour Levy. How are you.
I'm doing well, Thank you for having me.
So what are you doing with the younger folks and how do you get them and how do you get them to come onto the platform.
So Betterment Advisor Solutions is really our ria platform that helps this next generation of advisors reach the next generation of investors, right, and so so one step removed, if you will, and what we offer is really a seamless platform to move between investing and cash and retirement. And I think the key to this generation. There's a lot that is the same with this generation as the prior generation, right, a long term outlook. I want to be better off down the road than I am today. I want to
pay low taxes. But what's different is their expectation of technology.
Right.
Fundamentally, they have grown up in a world where everything from e commerce to streaming is delightful and easy, and they expect the same of the platform they use for financial advice. And I can access on my phone, I can access on my phone whenever I want.
Right, So late iss use of technology friction free. What else are they looking for? Are they different than their parents in terms of what they want in terms of their portfolios?
I don't think they're different. We don't see them being different in terms of their portfolios. I mean, I think there's a lot of theory around how the sixty forty portfolio has evolved because.
We've done stories about gen Z kind of shunning the sixty forty and more interested in, you know, investing things like sneakers and you know, rather than stock. So help us understand, Well, can't you say that they kind of have the same goals.
Well, I think ultimately their goals are to retire comfortably. And when you think about social security and the challenges that, you know, they're unlike their predecessors, you know, in the prior generations, they're not as comfortable with the role government is going to play, and they're fearful about what's going to happen in social security. They don't have the luxury
of a pension right which their predecessors had. And so I think the idea that personal investing and a defined contribution plan is their future means they have to take more control. And I think what's challenging about taking more control is that there's tons of information out there, and there's disinformation, there's misinformation, right, So how do you make sense of it all? I think is the biggest struggle
for them. And so they're seeking advice, and the ones who get great advice from advisors are the ones who are more confident that they will be able to retire comfortably.
Huh. Really interesting. So technology, we've been talking about AI constantly this whole week. You guys have been embracing AI. Explain how you use AI to deliver a better product and better performance for your clients and their clients.
So I think of AI really as a continuum from automation. We've been delivering fantastic automation for advisors and for retail customers for a decade and a half, and AI really supercharges what we've been doing right. You know, there's a lot of fear around which I think is unnecessary around you know, is AI going to take over the jobs? And I think the better way to think about it
is AI. People who don't understand AI, those are the ones who are whose jobs are going to be threatened because you need to harness the power of AI to basically accelerate and supercharge everything the humans are doing right.
And so whether that's paraplanning, whether that's marketing, collateral customer service, there are all sorts of ways where generative AI can basically strengthen the advisor's relationship with their customer by freeing up time and money, which is ultimately what they're after.
I mean, it's all about making things easier, right and.
Seamless, easier, faster, cheaper.
I am curious too in terms of the younger generation. I mean, are they feeling like it is going to be largely you talked about four one ks and that it's going to be the financial markets, because I think I have you know, I had a dat who had a pension and VA benefits and k and like just multiple things. And there's a generation that isn't going to have it. Is it going to be all about the markets? And they've got to figure this out?
Well, you're exactly right, and I think that is the fear that they have, right, is that I'm not going to have the same kind of social safety net that my parents had, and so I'm going to need defend
for myself. And then to the sort of asset class question they're wondering also, some of them have a different set of beliefs or you know, a social frame that they want to put around their investing, and so they want to make choices, whether that's at the margin or completely about where is that money going ultimately in service of a comfortable retirement.
So you'd mentioned there's not that different goal, but a different method to get there. If you're a twenty something or a thirty something, does a sixty forty really make sense? You have decades before you retire. How do you feel about the people who advocate just straight equity, no bonds.
So we think about diversification. We believe from a long term perspective, you want to be diversified domestic, international, equity, bonds, some alternatives as a part of that portfolio. And I think where you are in your life stage that that affects the mix.
So not necessarily sixty forty, seventy thirty eighty twenty. Correct.
The mix is about your risk tolerance and your timeline.
Last question, and just got about ten to fifteen seconds. Does a younger generation want investment advice or do they want to do more on their own or is it a combination. The smart ones want investment advice, they do so they just go.
Back absolutely, particularly as their lives get more complicated.
That makes sense, do you see that? Ring? Sarah, Thank you so much, Thanks for having what a great way for us to wrap up day one of our coverage. Share. Thank you so much. Sarah Levy. She's the CEO of Betterment All right, that's it for day one.
You're ready for take it absolutely. Hopefully the weather stays like this. Another Burger Nashville Chicken slider.
It's been eating it all right, everybody gonna do it for Barry Retolts and myself. This is Bloomberg BusinessWeek.