A Deep Dive Into Markets And Investing

are the middle markets doing? How are some of the small midsized companies doing. We always here about in these earning seasons some of the bigger companies. But let's take a look at what the middle market is doing. Lawrence, thanks so much for joining us here. I know you guys are out with a new report looking at the middle market of this economy. What are some of the key takeaways that you guys found great, very happy to

be here, Thanks for having me. Gall of Capital is one of the largest lenders to medium sized businesses in the United States, and we put together this report to look at actual monthly results from the early months in a quarter to see what's going on in the real US economy, not projections, not conjecture. So our report is based on UH, the actual results from July and August, on revenue and on profitability. And what we see almost across the board is a booming degree of growth, booming

growth and revenue, booming growth and profits. Very few one but not many warning signs UH and and this is one of the strongest periods of growth we've ever seen. Hang On, you say there's one warning sign, Well, we have in the aggregate about growth rate and revenue, about growth rate and profits, but not in industrials. Industrial profits are down. We're seeing margin contraction, and that margin contraction

is especially alarming because revenue is still growing. I think we're seeing the impacts of UH declining productivity, of inflation in cost components. We're seeing the impact of shipping and logistic issues. In contrast to that. On the consumer side, consumer margins have been exploding up almost fiftuh in in this period, and I say it's a warning side for industrials because eventually those margin issues may start migrating over

to other industry areas. So, Lawrence, you mentioned the supply chain, and we're hearing that from companies across the board on a global scale. Even Apple had to take down their iPhone sales forecast due to supply chain issues. I would think from middle market me don't have the buying clout in the marketplace that might be even more pronounced. What are you hearing my My message to listeners is do your Christmas shopping now. Grinches for Halloween and he's not leaving,

and he may not even be leaving for Christmas. Of two. Yes, middle market companies that can't hire their own ships have certain disadvantages over some of the big box or or internet retailers. But fundamentally, what's going on is we have an excess of demand. Now that's good. People want to buy things, but we've pumped five trillion dollars of fiscal stimulus into the economy and nothing's going to change that. We have a lot of buyers chasing fewer goods than exist.

I think that the the supply chain issues will vary from sector to sector, but you're going to see in why areas of consumer products this Christmas something similar to the toilet paper effect we saw when COVID first hit. That people are going to see some stock outs than other people are gonna try and really load up, and the stockouts are going to be worse than fundamentally called for it. I really have concerns about the degree of

consumer disappointment coming this Christmas. It's going to be a big, big Christmas for gift cards. It's not the great the greatest time to try and ship in nine eleven and a garage full of Yukati's back from Germany to New York. What about the labor um shortages that we've been hearing so much about. Isn't that a concern as well? Sure it is, and it's a puzzle. We're down five million jobs from before covid uh and you would have thought there'd be, you know, a fair amount of demand for

those jobs. But it's not just it's not just non managerial labor. It's across the board. Consulting firms are having trouble hiring. NBA's entry level jobs for college graduates are going begging. It's a little bit peculiar to to really get to the bottom of. And it also emboldens everybody who's got a job that they don't love to think about moving somewhere else. One of the statistics that came

out and we're seeing this in our portfolio companies. Is that that employee turnover at all different levels is going up. That's a whack to productivity. It's great that wages and UH compensation are going up. That's good for Americans, it's good for American families. But it has to go hand in hand with productivity or drives more inflation. Lawrence, where are you, guys, goal of capital, looking to invest your capital?

Put your money to work. So we're very we're very excited about industrial businesses that have control over their supply chains. We have proved a deal just two days ago, for example, after a lot of work and a deep live company that manufactures inputs for other manufacturing processes. But we established for ourselves that their supplies are domestic in the United States, that they're raw materials are shipped by train and truck, and that there's not a lot of commodity price wings.

Take that same business with inputs coming from Asia, where you have the risk that COVID could spring back up in Asia, You've got the risk of shipping costs, you've got the risk of international commodities, and it would have

been a very different picture. We do a lot of investing in business to business software companies where the projects where the software is designed to improve productivity, and that plays into a lot of the themes we just finished talking about, like shortages of skilled labor, tremendous high returns on investment, in efficiency, inefficiency driven capex through through technology

through software. I think something we've seen and that our report is is giving good news about is in the healthcare field, where actually healthcare services companies have been doing a good job of controlling their labor costs, of of not letting their labor costs get out of whack with increases in productivity. That's actually quite a bullish thing, something

that we haven't seen in some prior cycles. So we haven't seen the inflation hit the health care sector yet, and that's an area we continue to look at very favorably. All Right, well, great talking to you. Thanks so much for joining us, Lawrence. Always great to get your insight. Lawrence called there from gold Capital, one of the biggest lenders to the middle market in America, talking to us about um the economics of middle market business right now

and giving us his outlook as well. This is Bloomberg. Let's bring in liz Anne Saunders. Now she is chief investment strategist Charles Schwab and um, you know they have trillions of dollars and assets under management, so good to listen to what she has to say, Lizzie, And let me first get your take on the CPI five point four percent year over year growth. It's the fastest we've

seen since two thousand eight. Is inflation a concern? Uh, well, sure, and I think it's it's being reflected in more volatility in the market. There's lots of other risks that have manifested themselves in in some of the weakness we've seen recently,

but inflation is clearly one of them. And although we're not seeing kind of an ongoing huge month over month, sirte, we're staying at very elevated levels and I think that that has become a risk factor for the market and really puts the FED, I think, in a bit of a pickle because they would certainly concede that supply chain bottlenecks as a driver of inflation is not something solved by tighter monetary policy. So uh, it's the uncertainty around

monetary policy response is is elevating as well. Lauzanne given that the CPI number. Give us your thoughts about stagflation. It's something a lot a lot of people have had to go to Google and figuring out what stagflation is, because it's not something we're just gonna talked about for a while. You as the kid of kids, So what

are your thoughts there, Lausanne? Well, I think of it almost stagflation with the lower case, since stagflation with an upper case s Clearly we're in um stagflation lowercase version right now, given that we're in an environment where growth expectations are rolling over. GDP now has gone from you know, six point three to one point three in the last few months. At the same time, elevating inflation is remaining elevated.

But the kind of systemic wage price spiral environment that went on for years in the midst from the mid seventies to the early eighties, was driven by a lot of forces that are or at least not yet in place here. It was a very different structure in terms of the labor market, greater munization, productivity was quite weak, which is clearly not the case right now. We're not

seeing systemic wage increases. But maybe most important, and this is the more esoteric thing to to watch for is that what what feeds an environment like the nineties seventies has a lot to do with psychology. The psyche changes it. It gives workers and and even companies a feeling of power in terms of either being able to ask for consistently higher wages, consistently being able to pass higher costs on.

So it's sort of the psyche changes and the and the power um is created, and that's where the spiral kicks in. And I don't think we're there yet, but um, it's certainly something to watch for. We are, though, in um extremely cash rich environment. Luzan, And I know I've been talking to you about so much cash on the sideline for over a decade now, but it's getting a

little ridicut you list. I mean, I was thinking you had two trillion and assis under management, and you have more like seven and a half trillion dollars and assets under management. There's a lot of money out there, yes and no. So I think sometimes the math is done incorrectly if you look if you're talking about, you know, cash on the sidelines, so to speak, within uh sort of the investor sphere. If you look at the amount

of money and money market funds. Yes, the level is very high, at about four and a half trillion dollars, but relative to the value of the stock market, it's less than ten percent, which is at the very low end of the historical range. If you're talking about cash in the economy, that household tool using say the savings rate, Yes, it's it's nine percent or so, which is above the seven and a half or so recent average. But that's down about the way from the liquidity driven spike of

last year to where it is now. And we can't assume that we're going to go back down to historic averages. We can stabilize area, we don't know whether households are going to want to keep a bit more of a savings cushion, So we just can't assume that we go all the way back to the long term norm. So I'm not sure that argument is as strong if you look at sort of relative numbers rate of change versus.

We do see, though, in some assets, a lot of speculation, right, I mean the fact that a string of code that makes up a bitcoin is worth almost sixty thou dollars. I get that there are believers out there, and I love a good fad, but it's a little bit crazy, right, Well, I think it's going on in lots of other nontraditional assets classes, the meme stocks, heavily shorted tech, nonprofitable bankruptcy companies, stacks, crypto and uh yeah, there there's not a lot of

fundamental basis for what's happening. The only bright sort of news about all that is that heightened speculative froth has

been more concentrated in those non traditional areas. Then, and say, you know the leadership names within an index like the SMP, and that's I think what is very different today versus say period where the speculative froth was concentrated in the leadership names in the benchmark indexes of the SMP in the AZTEC In just about thirty seconds, what's the area that you're focusing on right now in terms of this market. I think you want to if you're if you're a

stock picker, you want to be focused on quality. I think quality is going to reign in terms of leadership in these very uncertain times. I also think you really want to take advantage of the discipline of rebalancing given the massive leadership rotational swings that we're seeing I think that is probably the most beneficial discipline right now that investors can employ what is a much trickier market environment. Luzianne, thank you so much for joining us. We always appreciate

getting your thoughts and wisdom. Lazanne Saunders, she's a chief investment strategist for Charles Schwab and again assets under management for Charles Schwab uh seven point five trillion with eight t so just extraordinary there. Now let's bring in Hondres Pairson.

He's the chief investment officer of Global fixed Income over at now Vene and you must be honors a a dinner guest in high demand right now as everybody kind of freaks out about inflation and we start to see rates finally rise, the tenuere um getting up to one sixty. Now it's back down to one fifty five, but still, um, there's actual movement here. What do you make of it? Yeah? Thanks for having me on um. Yeah, there was so many exciting times, a lot of a lot of crosscurrents

that's still playing to earn the fixing come markets. And we just released our que for outlook report and we're still we're still quite constructive for the rest of the year, particularly when we look at the kind of the credit parts of fixed income, we still think there are some

opportunities for this reflation trade to continue. And at the core we still take some comfort here that you know, COVID cases, hospital rates are declining, and economic gride growth is holding up quite well, and certainly supply side issues is something that we're keeping a close eye on, but we do expect that to ease over time, and then

finding inflation you know, obviously top of mind today. Um, we still continue to think it's it's going to not be fully transitory, but manageable and not too problematical markets. So that all in all kind of keeps us in a in a quieter positive light and quite constructive for the rest of the year. Well, Andrews were you know, the growth is certainly still very good, although we are past peak growth, but a lot of investors are concerned

that we're and add our near peak valuation. So where do you see opportunities, I guess in your world, Yeah, I mean, certainly growth is expected to slow down when so some of the imp numbers come out to speak obviously, but it's still you know, global rates close to six percent for this year and for twenty two sort of five percent. That's still very healthy in our minds. So we're even kind of talking about how the markets are more or less priced um sort of for reality, not

price for for perfection. And we look at fundamentals being quite strong. Again, I mentioned economy growing um and earning school for corporation is very healthy. So what we what we're focusing in on right now for opportunities is basically basically sort of looking at corporate credit risk, preferring that over the governments and mortgages. We like lower quality over higher quality. In other words, were comfortable dipping down and to the lower rated kind of opportunities. We still kind

of prefer shorter duration over longer duration. We do expect rates to be grinding higher and for the rest of the year, but all in all a view is uh, it's really more of a coupon clipping kinter top environment more or less a income carry kind of play. So we're comfortable reaching for a little bit of yield and

certainly what spread levels are not exciting. We are comfortable going after acid classes like laverge loans, preferred securities, certain parts of the emerging market, so again kind of going after that credit part. The plus sectors of fixed in commerces are preferred approach at this point. And you know, we hear similar um a sentiment from Howard Marks right now as well. You're not then at all worried about a wave of defaults. Even though people are talking stagflation.

No one's really talking about the economic economic growth grinding to a halder or been coming close to contracting. No, we're we're we're not worried about that at this point. And the learning's growth again for corporations very healthy. The faults have been coming down to record levels. Expect to be below one percent for for this year kind of one in a quarter, one and a half or two

thousand twenty two. You know, rating agencies obviously have some influence in the fixed income space, and they have been upgrading their ratings significantly more than we're seeing downgrades, and and all in all, you know, start plaction. Obviously, it's a topic that that you hear a lot about right now. Our view is that with again economic growth being as healthy as it is right now, um, that's really not

the top of mind on our end. So you know, we cannot come back to the fact that we're seeing healthy growth all in all, supply chains obviously being a bit concerning and taken longer to kind of play through than I think most everybody was expecting, but the demand remains very, very strong, and we think that's going to be addressed over time. And as I mentioned, inflation is

mostly going to be transitory in our minds. So so all in all, I think staculations, you know, it's really not a concern of ours, and defaults continues to be very low. So the fundamentals continue to be to be very strong here if you take kind of step back and try to ignore, you know, many of the cross currents that we're dealing with, and that's why we remain quite constructive, particularly on the credit side of fixing. Coman Andrews. You mentioned emerging markets. Talk to us about China. Hear

lots of changes there from our governmental regulatory perspective. How do you you China? Yeah, China, it's certainly, you know, top of mind for for all investors at this point, and you know, key focus of the past few weeks, particularly around the everground kind of type ongoing uncertainty. You know, I would say, you know, we we still are quite constructive in China overall. It's particularly to look at the sovereign kind of have level of Chinese government. Lawns were

actually quite we quite like them. We're not too concerned about that. If anything, you know, a little bit of a flight to safety there and our mind. Um, you know, it could be quite attractive and there is diversification and not quite as correlated to other parts of the fixed income space. So you know, certainly from the sovereign side,

require comfortable. On the corporate side, you know, we we're keeping of our clothes eye am that we prefer to take a little bit of await and see to make sure that we get a little bit of a better feel for how they're going to be handled. Ever grand but um, there's still a lot of moving parts in that. Okay, Anders, thank you so much for joining us. We always appreciate

getting your global perspective. And Parson, chief investment Officer of Global fixed Income for Nouvine, another big, huge asset manager one point to trillion dollars in assets under management. Well more coming up. This is Bloomberg Markets. Good morning. Looking at the markets here, kind of mixed obviously as we head into the teeth of this third quarter earnings. Next year, it looks like tax rates are going up, and what does that mean for individual investors now is they think

about their portfolio. Let's check in with Dan Griffin. He's senior vice president and director of Wealth Strategy at Huntington's Private Bank based in North Canton, Ohio, the great state of Ohio. Dan, thanks so much for joining us again here talk to us about taxes. It appears at taxes are going up. We don't know by how much. So when you talk to your clients, what do you tell them about taxes and tax planning. Well, glad to be here, Matt and Paul, and thanks for having me. It's a

it's a great question. It's a wonderful thing to be able to go into another year end here with a little bit of frantic ear end planning. As everyone remembers last year, we were in a similar situation as we can think back to people's concern over what was going to happen with the potential flip in the Senate and we didn't know what was going to happen there, and I fear that we're kind of in the same position

right now. So what we're telling people is be prepared, make sure you've got good advisers in place, make sure you've got a plan in place, and make sure that you're prepared to be flexible around what could be any number of responses from Washington that could happen. Is there anything you can do to limit your your income hit to taxes? I mean, obviously, if you've got money after income taxes lying around, you can put it into muni's

and there a number of other things. But in terms of a salaried woman or man, is there anything besides an IRA that can be done? Oh? Sure. I think for a lot of people, what you might want to be thinking about would be obviously reductions in this year and then reductions in the future. The folks that were most concerned about and that we're working hardest to advocate for, are the people who are going to end up in

that highest bracket position. And ironically a lot of our clients think that they're in the highest tax bracket, but they're not. So that's one of the first things to think about is even with the proposals that are on the table, there are many people who aren't going to be affected. It's probably only about nine hundred thousand households in the United States that are actually paying taxes at the highest brackets. So the first thing that we suggest

to people is, let's make sure that you're affected. There are plenty of folks around the country club tables who complain about being in the highest tax brackets and may not actually be there, and so that's the first thing, is feeling feeling out whether or not your tax providers can put you in that position. So that's one of the first things that we do. Dan, We're going into this third quarter earning season a lot of folks saying this is really critical for the market. How do you

feel about these markets here? Are you concerned about valuation or are you still kind of all in for your clients. No, we're still uh cautiously optimistic. I think we're in a position where we are still investing post recession with a real recognition that there's going to be some inflation risks. You know. In the position I'm in, I get to talk to a lot of business owners as they go

through the process. Um, you all mentioned earlier the challenges associated with UH with working making sure they can get enough stuff and making sure they can get enough people supply chain is a big, big question mark for a lot of people, and so substitution is a big one. And with substitution, whether it's UM substituting technology for labor or different technology itself or different products, with that substitution comes new opportunities. And so I think that's a reason

to be optimistic. What do you think in terms of UM, what we got, in terms of what the markets got left in it? I mean, we've had a great run already and now they're all these headwinds popping up. People are worried about inflation. The term stagflation is being thrown around regardless of how we want to define it. Um, do we still have room to run in this SMPY.

We think the answer is yes. And again, the opportunity to talk to small businesses throughout the Midwest shows us that a lot of businesses are to you to be cautiously optimistic, not that there aren't headwinds, but that they can get through those headwinds and potentially get to a place that's even better. We're seeing that even if people say, you know what, I'm not able to continue my business. I'm gonna sell it, but I'm going to sell it to people that I know we're going to be able

to take it to a different level. And so though all though people are definitely recognizing the challenges that exist out there, that we still hear optimism at the at the ground level, and I think that that's justified, all right, Dan, So it's interesting here where do you see some opportunities here? I mean a lot of folks are worried about evaluation. Are you kind of looking for value or you looking for growth or maybe geez, growth at a reasonable price.

We're doing both. I think what's been really interesting, both on the tax planning standpoint and on the investing standpoint, is that we've been a lot more strategic about talking to our clients about taking advantages of what what are

smaller dips in the market. So even in a day like today where it looks like the market might be down just a bit, is that a time to talk about doing things like roth conversions or even doing some some investing in the right places or rebalancing to take advantage of those I think that's the hard part is instead of waiting for big chunks when the market drops to do things, we're looking to make little marginal changes on the edges, which ultimately is the path to success.

All Right, Dan, thanks so much for joining us. Always a pleasure talking to you. Dan Griffith is senior vice president and the director of Wealth Strategy for the Huntington's Private Bank. Um. I guess I should disclose that I bank with Huntington's and so does my entire family because we're from the great state of Ohio. You know, Ohio State University. Yeah, I'm sure Dan is a fan of

the Ohio State buck Eyes and uh. Just the idea of being able to to to move back and live in a country where you can watch football every weekend. It's just it's it's enough to draw me back, you know. Yeah, we gotta get back here with Although the housing markets still a little tight met yeah, well, you know, um, I hope it loosens up a little bit. I do see that inflation is um is in places like used cars and fuel, and you don't see it as much

right now in uh, in previously owned homes. So we can we can just hope that over the next few months that market calms down a little bit. This is Bloomberg. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three. Put on fal Sweeney I'm on Twitter at pt sweeney Before the podcast. You can always catch us worldwide at Bloomberg Radio