CalSTRS CIO: Forget Fundamentals, Better Off Owning Whole Market

to podcasts, and on Bloomberg dot com. You know, I'm just looking at a one year chart for the SMP five hundred and obviously, you know, back in March we saw that, you know, thirty four decline in the SMP as a pandemic, and economic impacts of the pandemic really became apparent to investors. But you know, we've retraced much of that decline here and we have to the SMP at thirty one seventy. Here off a little bit today, get a sense of kind of where we go from here.

Chris Ailman, he's a chief investment officer for the California California State Teachers Retirement System. UM, Chris, what are you telling your participants in your plan about the mark market here? Given the tremendous volatility we've seen just over the past you know, three to four months, a good to talk to you, Paul, you know, and that's it. You back up and take the long term view. Look at the market over the last year. What's the prices most people

is we're actually positive. You know, if we had thought last July that we'd have a global pandemic and that the economy would come to a complete stop, you wouldn't expect the market to be up, uh, you know, eight percent from where we were roughly. So this is the time to really back away from the daily news. I know, you know, the p p P paytech protection loans will

dominate the headlines. But in a couple of weeks we're gonna have April again, all of a sudden in July, and it's a good time to back up and look at your investment, rebalance your ats AD allocation, and not get carried away with the volatility of this market. It has been crazy in the first six months, that's said, Chris. All it's really done is gone up. I mean after that massive punge in March. So what what's to say

that that's going to keep going? I mean, really, we're very dependent on those five companies that make up more than a fifth of the market, arn'ty Oh, Vannie hit it on the head. Um has everybody's been saying, this is a market of stocks, And when you look at the SMP five hundreds, those five six stocks are dominating. Uh. The vast majority of the other four stocks are still below where they started the year or just barely trending above. UM. So it's a tough year. You know that. I'm a

big fan of index funs. I say, own the market. Um, this is a time where normally, when you have this kind of volatility, a drop and a rally, where the active manager should make money. But the real economy bears no resemblance to the stock market. It is often its own world. So I have found the active managers are really getting hurt. You know, growth stocks, principally, the large growth stocks have been all the return and value stocks are actually negative on the year. So fundamentals still make

any sense. I mean, just like warm Buffett has said, this market is is baffling in here and it just doesn't make a lot of sense. That said, I think investors are better off owning the entire market as a whole. So they get those growth stocks, but they also get some of those value stocks that are trying to tread water through the virus. So, Chris, you know, you hit on a common theme that we've heard from many that

the market is not really reflective of the economy. What is your call here as we as it relates to the economy. Here we've thrown vs. W's l's use. Um, as it relates to the economy, we're seeing you know, a lot of states seeing becoming hotspots that were in terms of the virus. How are you thinking about the economy over the next several quarters? You know it, you

don't fight the FED. So with that in mind, and that they're trying to stimulate the economy, the federal government on the fiscal side is running such a big deficit. I just don't think they can keep trying to stimulate. So I would say a sloppy W picture of the way a doctor typically signs a prescription note and a picture that W. It's gonna be sloppy. I don't think it's gonna go well in the economy. How does the stock market react, That's a completely different question and tough

to figure out. Um, it should start to bear some resemblance to reality, But uh, this is not your normal market. You've got millions and millions of day traders sitting around watching Bloomberg looking at their screens. Uh, no sports to bed on, very few casinos to go to. So it's suddenly become a speculative market around the world. Um, I think it's really a time for an investor to be weary, not try to be a day trader. And I think

that we're going to have a tough go. I mean, there's just a huge percentage of the economy that is still shut down. Think of the airlines, the cruise ships, not just the restaurants, but all those people you were talking about, the zoos um that got the p PP loans. We still have huge unemployment, even though the statistics don't show giant numbers. People are surviving on that six week

federal stimulus and that just can't go on forever. Chris, you're you know, a big component of of explaining the counsters as like a tanker when you try to to move it to take some time. Are you already looking at the possibility that the president will not be the president post this election, and that maybe it will be a Joe Biden presidency and what would you do with portfolios in that instance, Well, Vannie, I've learned not to try to predict politics. It's crazy, that's a whole another game.

But I have to tell you it's too early, I think, in my view to try and position your portfolio in anticipation about. What I am concerned about is a very sloppy election, a contested election where we'll see it drawn

out in court. A lot of us forget the Gore Bush election many many years ago, and while the market managed that through that crisis because it was only the state of Florida, I'm worried that all the key states could end up in lawsuits, and that this could be a really contested election, which should be bad for the market. That level of uncertainty whether one party or the other wins, it takes control. The market will fet that out in

in January and in February. Um I think it's still going to be Uh, it's going to be a problem for the market once we start hitting August in September, then then the election becomes very clear right in their face, and that uncertainty about who's in control will cause volatility in the markets as a gyrate back and forth, particularly in industries like the drug makers. UM. Uh, what happens in terms of the federal bailoutsh it does risk tax flaw and so many issues when we have an election. Chris,

real quick, maybe thirty seconds. How concerned are you about the deteriorating relationship between the US and China? Paul? That is absolutely something to watch. Our board in one is going to do a deep dive into China and really understand it. It is one of the few economies growing at you know, close to eight percent when it rebounds, but the E s G issues are enormous, and and just the fact that it's the communist system. Are we

comfortable investing in that kind of a market? So that's our number one trading partner, not number one in terms of size, but I mean it's the number two economy in the world. That relationship matters a time, Chris, It is always a pleasure to speak with you. Chris Ellman is the IO of Cansters more than two hundred and thirty five billion dollars in assets under management, and he's talked about a sloppy w type recovery, which doesn't sound

all that ampasizing sound very pleasant, does it? No? It doesn't. Russie's ahead. According to Chris the those housing market has been surprising economists that rallied in the middle of the pandemic. But it's not the end of the story. Coronavirus may drag down home values after all, this according to core Logic. Let's bring in now our reporter who worked on the story with Pruscian Gopal, John Gettleson. Welcome to the program. John.

In your story, you have looked at the core Logic data and you say that through May one, prices will fall about six point six percent. It doesn't sound like a massive drop, given that people are out of work and haven't even been able to look at houses. Why six points ex percent? Well, it's a combination of factors. I mean, there's still a lot of demand out there. There's a lot of millennials who are moving into the housing market. Interest rates are low, so affordability is bill

there um. Even though unemployment is high. Uh, the majority of people are still employed, and there's a lot of people who, uh, you know, want bigger space too. So many factors that may have been brought into play by the coronavirus are supporting housing prizes despite the huge impact on the economy, John, are there you know what we've seen in housing in the passing, including the financial crisis nine, it was a you know, a big difference regionally in

the strength of the housing market. Are we seeing that today as well? Oh yeah, definitely. I mean this report broke out some major metro areas and they said, for example, Las Vegas losing in value UM and Las Vegas is it's a big tourism mecca obviously, and tourism is one of the areas that's being hit hardists UM and Las Vegas was also, according to Core Logic overvalued even before

the crisis. UM. There's other areas like San Diego to State is only falling one point three p m. New York area and this is the metro area, not specifically you know, Manhattan, but they're forecasting over the next twelve months or about a five point nine price decline. So I guess this is the best case scenario. As you say, some areas are going to experience huge declines, like Las

Vegas for example. Does it depend on where the jobs are or where the jobs end up not being if there is some structural unemployment after all, this that's definitely a big part of the problem. Uh. And there's also going to be sort of unforeseen impact that's playing itself out every day. Do people want to live in suburbs, can they work from home? Can they uh you know,

do they want to have a bigger house? And so all of those types of things are going to affect where people move, where they buy, and where they sell. There's also the big demographic issue that even uh pandemic can't stop, which is you've got aging baby boomers and you've got millennials moving into houses. So those big shifts in population are going to be a bigger factor even in the pandemic as people, you know, they're not stopping

having babies, they're not stopping getting old and retiring. So, John, one of the themes that I've heard about a lot over the last several years, and as it relates to housing,

is there's just not enough housing, entry level housing. The housing that's being built today is perhaps you know, more on the higher end of the market, and there's just not enough entry level housing being built and boomers maybe aren't moving out as quickly as they used to, thereby creating a supplied demand and balance on the lower end. Is that still the case, Yeah, that's definitely the case. Affordability is a huge issue. I mean, that's why we

have a lot of homeless people to begin with. That's why a lot of people are living in an apartments, people are renting single family homes. Um. But a big contrast with now and the you know, two thousand eight financial crisis, there was a housing bubble going on. There was overproduction of housing men and uh, there was a huge surplus that when people stop paying their mortgages, people

were underwater. They walked away from their homes. You don't have people walking away from their homes now because people have equity in their homes and because home prices have gone up, but production has not kept pace with demand. Does this all depend on a stock market that keeps going higher? John, if we saw a big correction, would we, you know, with that necessarily entail a very different housing market? Well,

I think there's you know, correlation, but not necessarily caused. Um. The wealth effect fully makes people feel like, oh I can afford to buy a home. I you know, I

feel like risking more. Uh. Home sales did not stop, you know in April and May when the stock market was tanking, so uh, you know, there were a lot of people who said, I can afford to do this now I got my job, and um, mortgage rates are so low because the FED intervention that actually something that you know, uh, cost more than I would have been able to afford a couple of years ago, is now actually affordable because I can get such a low interest rate on it. A three percent mortgage is a lot

cheaper than a four percent mortgage. John, just real quickly, how are how are the more How is the mortgage market are people? Are? We seen a lot of delinquencies. Um, they are definitely going up. There were like nine of single family home loans were in forbearance. Um. Not all of those are officially delinquent, so they are rolling into delinquencies. Um, there's so much below the level that they were at the peak of the post financial crisis, but they're heading

in that direction. Interesting. John Gettoson, thank you so much for that. Just getting a real solid, across the board update on the housing market in the United States. Uh. John Gettlson, a real estate and investment reporter for Bloomberg News. Well, yesterday marked a little bit of a return to what we used to refer to as merger Monday. When you get a lot of deals announced typically a Monday after

weekend's worth of deal talks. We had UH Warren Buffett making a ten billion dollar bet on some energy assets Uber UH increasing it's UH, I guess it's footprint in the food delivery business a couple of those deals yesterday. To get a sense of kind of what the pandemic is doing to the M and A environment, we turn to Rob Brown. He's a managing director and CEO of

North America for Lincoln International based in Chicago. So Rob, give us a sense, if you will, kind of what the M and A environment has been over the last several months as corporate CEOs and investment bankers to try to gauge kind of what the pandemic means for the

business climate. Sure, thanks, Paul. Um. So if you dial back to the beginning of this year, we entered this year really in one of the best M and A markets um of the last probably fifty years, maybe ever, and so it was expected that the M and A activity would continue at that pace through this year. UH. And then the government reactions to COVID and really the stopping of the global economy, as you can appreciate UM

had a material effect on that. In fact, from March through May in global M and A volume was down over at UM and so I think there was just a pause. Let's take away and see there were some deals that went forward, UM for sure, UH. And I think what we're seeing now are buyers and sellers lifting their heads up and saying, Okay, there are going to be deals that get done. And the two you mentioned

that we're nounce yesterday, we're obviously very large deals. But really across the spectrum, what we're starting to see in the three plus deals we have in backlog is that that the M and A market is returning, and I think the expectation is the back half of this year is going to be materially more active than the last three or four months. How have those deals in the works got repriced in the previous weeks, You know many of them, haven't they They've taken, if any reduction in price.

I think they've been small reductions. Because I think what's happened is, UH, if you can show, hey, my business performed well during the downturn, my sector as a sector that may be more attractive or at least equally attractive as it was pre COVID. UH, there's not a lot of value deterioration there because what you what you still

have what's really driving this. There's there's as some estimates are close to a billion five of private equity capital available, what they call dry powder, and you layer on top of that the cash sitting on corporate balance sheets and a stock market that is still expecting these companies to grow when you look at the way the stock market

and multiples are holding up. So I think the deals that are getting done right now, for the most part, are high quality companies that are saying, listen, I performed well, I've shown I truly am essential. I've got a good business model that can withstand something like COVID. So we haven't seen a lot of value deterioration on those businesses. There are some deals we're starting to see come to market, Bonnie,

that are lender driven deals. Maybe a company that wasn't performing well pre COVID and then COVID hit, and now they're really not performing well and they're overlevered, and the lenders are starting to say, hey, we we got to get paid. Let's sully. So we're starting to see a little bit of what we call distressed m and A, although interestingly less of that than we may have thought,

you know, given the real shock to the economy. So Rob, when I think about trends in M and A, to me, it's oftentimes a reflection of confidence, confidence from a CEO and a board about their business, maybe their sector, the overall economy. I can't imagine CEOs are that confident right now. So how are they thinking about M and A. Yeah, it's a it's a great question. And I think what

you're seeing the strategic acquires, the large corporate acquires. I think the way they're thinking about M and A is, you know, over the last four or five, six, seven years, they were under pressure to grow. They'd have organic growth, they'd supplement that with M and A. Their confidence in their business and their outlook was putting them in a position to maybe do acquisitions that are outside of their

core businesses, adding another to the stool, expanding things. What we're seeing is is that ceo still feel that they need to grow. There's pressure to grow, and they can't hit their growth targets solely through organic, so they still want them and to be part of that strategy. But what we're seeing is that lens shrinking where the strategics and the CEOs are saying, I'm going to buy businesses that are in businesses I'm already in where I know them,

where there's really really identifiable synergies that I can price. Uh, and I'm confident enough to do that. I think your point is the lack of his ability and maybe a lack of confidence in where this economy is going. I think that's going to limit some of those Let's get into new businesses, let's get into complementary areas for strategic acchoirs and CEOs. Briefly, rob any vertical or horizontal concerns regular regulation wise or will there be deals done before

November just because we may see a different administration? Uh? Maybe I think the bigger driver for deals is we're in a relatively low tax environment, and you know, if if, if, if the Democrats win, there may be a view that taxes are going to go up in capital gains taxes. Uh, that may not take effect until So I think a little less about the regulatory environment. We are hearing some people say, listen, I'd rather take the gain in a period of time where I know capital gains rates are

relatively low. So I think that could affected. You know, you talk about regulatory um. You know what we're really seeing now in this administration. You know, the regulatory hurdle is really foreign investment um, and and particularly from Asia where this administration doesn't like that so um. But but I think from a regulatory standpoint, you know, it's not clear how things would change if the administration changes. All right, well,

we have plenty time to talk about that. That's for Joyal Brown is m D and CEO of North America at Lincoln International and Middle Market pe firm. Thanks for joining. So we got the BPP data yesterday, and loan recipients included a law firm run by one of President Trum's key defenders in the Russia probe. That's more cassowits. We also had a Kushner family real estate project in there, the publisher of the National Enquirer American media of course,

and lots lots more interesting data to mind. Eight eight thousand loans went to religious organizations. Let's bring into people who have mind the database now, and I know a lot about what they're talking about. Tim O'Brien is Bloomberg opinion columnist, and Mark Niquette joins us as well. Tim, let's begin with you, because there are a lot of headlines about how Trump affiliated companies or those affiliated with at least you know, Trump's trademarks got loans. Was there

anything necessarily shady or unusual about this? Well, I think that the broader thing to think about to begin with is what was this program properly conceived from the beginning and has there been enough oversight to make sure that the most needy businesses got the money they needed to stay afloat? And we don't have enough evidence yet to

know whether that broader goal has been reached. And the problem with all of these stories about insiders getting first in line to get the loans raises you know, one facet of one set of problems around this, which is um there weren't clear guidelines about who was the most deserving and whether those are businesses affiliated um with Democrats

or Republicans. I think there's a real problem with anybody from any party getting getting to the front of the line first because they have connections in Washington, or connections to the s s p A, or connections to the White House. And certainly UM there was concerns about this with Trump from the very beginning Chuck Schumer early on when the people, when when the Care's Act was being drafted, said there would be language in there to make sure

that Trump related entities didn't get any funding. And and then it ended up being at the p P P funding, which is one of the biggest arms of the bail out, was exempt from some of that, and you have to wonder why that occurred. Some Markie wrote just a fantastic article kind of detailing what happened here, what's going on,

where the money is going. What are some of the key takeaways you had, like who were some of the big recipients that may be surprised you that received money, Well, it was it was quite a range of companies that did access the funding, UM, including as you mentioned, a

lot of nonprofits and religious organizations. UM. You know, we saw, as you said, about eighty eight thousand loans for religious organizations, including the Archdiocese of New York UM and nonprofits ranging from universities to museums to zoos that tapped this funding.

And what were striking about is just you know that the breadth of these companies, both nonprofit and and corporations that tapped this loan and sort of gave you a sense of just how you know, deep the impact was or how frantic these companies were to apply for this aid, particularly when this project launched. Yeah, I mean, tim, there was money left over, and there was a lot of problems in actually trying to apply for money. And you know, the idea that money being left over, you know, it's

just wasteful, right. And there's another problem here as well. We don't know who accessed the largest loans. Now we don't know who accessed the smallest ones either, but there were certainly sort of an effort to have small businesses only apply for what they needed. So it does seem like there may have been you know, different levels of invitation to this particular program. Well, you know, there were

two tranches. Remember the first tracks there were there were a lot of problems with the spas, computer systems, banks being gatekeepers too small businesses to get the money. Uh. You know, the first huge tracks of this over three

billion dollars went out the door in two weeks. Um. I think there was a strong effort made when the second round of funding came along to make sure or that most most authentically small businesses that didn't have resources meaning uh, you know, companies that weren't publicly traded, for example, UM had had better channels in to get the money, and it appears that they did. And I think that the fact that there was some money left over UM, I think suggests that at least some of the initial

bleeding was staunched. But UM, we're still in early days in this, and I think the government's gonna have to kind of wrestle with the reality that this may have just been a stop gap measure UM, and also with the reality that theyre just simply hasn't been enough oversight and data collection put in place for the public to really know whether or not these programs have met their goals. Mark, what's the sense of the oversight here? Is there a

belief here? I know we're kind of early days, but is there a consensus or a belief that the oversight was adequate or not so much? No, I think there's there's there's growing pushback that not enough disclosure happened here.

I mean one of the things that that occurred was the Trump administration initially said it wasn't going to disclose any data about the p PP loans, arguing that this was proprietary or confidential information UM, because payroll information was used to calculate the amount of the loans, and the idea was, you know, particularly smaller firms, you know, releasing that payroll data would be you know, proprietary or confidential.

And after pushback from the public and lawmakers, uh SPA and Treasury agreed to release sort of some of the data. We got the names of companies and other details for all loans of more than a hundred fifty thousand, But for loans under a hundred fifty thousand, all you got was a loan amount and the um um some demographic information um. And as it turns out that's that account. About a six of all of the loans follow into

that category of less than a hundred fifty thousand. So we don't we don't have you know, details of who got these loans for the majority of the borrowers. And you're you're seeing pushed by Democrats in particular to say, well,

you know, the disclosure is fine. Um, we see, you know, the names of companies for the larger loans, but we need not really see who took these lower loans, just because that's the only way we're going to be able to evaluate whether this program actually reached the borrowers it needed to. Mark Nikatt, thanks so much for joining us, Mark as a corporate influence reporter for Bloomberg News and of course, Tim O'Brien, senior opinion columns for Bloomberg Opinion.

Thanks for listening to Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Bonnie Quinn. I'm on Twitter at Bonnie Quinn, and I'm Paul Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio