Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside my co host Matt Miller.
Every business day we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market moving news. Find the Bloomberg Markets podcast called Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast.
What's the cybersecurity outlook? Let's see. Wendy Whitmore is head of Unit forty two at Palo Alto Networks. Our next guest in studio with us. Thanks for starting. Why would you leave Palo Alto to come to New York. It's like twenty below here.
It is cold here, There's no doubt about that.
Annie, tell us what is what is the unit? Unit? Do I have that right? Unit forty two.
Yeah, Unit forty two is really Paloouto Network special forces on the ground if you will, so we consult. We solve our clients crises, so incident response and breach investigations, threat intelligence and threat hunting throughout the world.
And tell us a little bit about your clients. Who are they, what kind of work do they do?
Our clients really do a bit of everything, right, they are global two thousand companies or smaller organizations or governments throughout the world. We partner with a tremendous amount of intelligence organizations to share information throughout the world as well related to cyber threats and attacks.
Okay, what's the landscape right now in terms of cyber security? I mean it's just like I also get at least once a month, it seems now, a letter from whatever organization. Last month it was from Robert Wood Johnson University Hospital system saying they had a breach of their security, their their computer systems and some data patient data was leaked out. And oh you know, here's a consolation prize. We're going to give you a year free of cyber security threat
detection or credit monitoring, whatever it is, credit monitoring. What's the landscape right now? Things seem to have gotten a lot worse.
The landscape is a bit chaotic, especially going into twenty twenty four. We're going to have over sixty major elections throughout the world happening in this year alone. Right, this will be the largest voting that's ever occurred. So I think an easy way to remember it is the three s's speed scale and sophistication. We're seeing attacks happen faster than they have been before. So when an attacker gets in an environment, they are stealing data within a matter
of hours in some cases. From a scale perspective, you mentioned, you know, maybe on a weekly basis that you're getting a letter write about another breach that's occurred. This scale attackers for the first time in history, they're no longer doing only spear phishing, which is sending an email to an employee right and they click on a link and
they get infected that way. They're actually exploiting vulnerabilities at scale, So within hours there could be hundreds of thousands of systems affected by a three CX and Microsoft Exchange for example.
And then sophistication. It's long been certainly that nation state actors are highly sophisticated, but now we're looking at cyber criminals who have a deeper understanding of business to business interactions and processes than we've ever seen before, and they're using that to their advantage.
Wow, So a few things I'm scared. A few things you just mentioned there that definitely made me scared. You're mentioning cybersecurity elections and nation states of course makes me think twenty sixteen, you know, we are heading toward another election here in the US, very likely could have Trump on the ballot again. I don't know, do we start thinking again about potential Russian interference in the US election?
I mean, where is your mind at right now in terms of threats with this election coming up?
I think that's a great question. But I think the reality is we have to be thinking about nation state interference from countries throughout the world. Right, we have now with the onset and advent of generative AI, we have the ability to speed up written and verbal communications and make them sound more polished and genuine than we've ever
seen before. So I would imagine from a disinformation campaig, we're going to see more of those emanating from throughout the world, and we really need to be concerned about where information is coming from.
From a business perspective, and particularly one of the areas that uncovered with the small businesses, and they are especially vulnerable because they just don't have the resources I would imagine to combat this on a regular basis. They're liable when that information when a client's information is stolen, right, I mean from a legal perspective, they have to keep that in mind certainly.
You know, cybersecurity is really a team sport at this point. And you hit on a key factor of that, which is small businesses are not only responsible for their own information, but for those of their clients, and they may have a chain where they're part of a big supply chain
for a large organization that does have more resources. So that is a huge challenge for executives throughout the world today is to make sure that not only they're securing their own communications, but their clients are consumers and everyone they're doing business with.
Yeah, you know, this was actually even like a really big top heading into Davos this week that the survey that some of these diplomats were conducted on were heading into the World Economic Forum, that they ranked misinformation and disinformation as the one as the top risk out of ten for the short term and the long term. So I thought that or sorry, the short term risk being being this misinformation. So it is really interesting, I mean, how does that then affect like the work that you do.
Do you feel like this is even more like under a microscope and being scrutinized right now?
Well, I think the challenge with disinformation for example, is it's not like a traditional cyber attack where you're necessarily stealing data from an organization and there's some piece of evidence to prove right. It really relies on the reader, the viewer, the consumer of that information to be discerning and to understand and do their fact checking to really, you know, get to the degree of is this information legitimate or not to the degree that it has impact
on a business and the economy. I think that's a you know, true factor. So twenty twenty four we're likely to see more of that than we've seen before.
So with computing capacity you know, growing exponentially, et cetera, so forth, I would imagine it's not a question of when, but if, not a question of if, but when you're going to suffer a cyber attack, a devastating cyber attack, how do you protect yourself?
And no doubt organizations are aware this is happening at
a faster pace, right than we've ever seen before. So I think the keys there are really being able to understand what visibility into your environment, so understanding what are legitimate communications and interactions what are not, And then what something that everyone can do is practice in advance, right practice these plans make sure you know how to get a hold of your employees and your team members, and in the event that you don't have access to your
primary email and other types of communications, that you can really respond quickly. On a personal note, I cannot stress enough do not reuse the same passwords for every single account, for every application, and for every application you can make sure you have multi factor authentication enabled so that you make yourself less of a target.
And don't click those emails. John say alert, Oh.
Wendy, do you have like just anecdotally, like, what's give us some horror stories that you've dealt with.
Well, So, for example, just last week, we're working for an incident response, meaning a breach investigation for a healthcare organization,
and in this case it's a ransomware actor. Not only do they reach out to try to extort the healthcare organization, they're reaching out individually to patients and in this case it's cancer patients, and they're saying, hey, for three dollars, you can preview the information that we've stolen about you, and for fifty dollars you can pay us to make sure that we don't expose this further on the internet.
This is horrific behavior. We're likely to see more of this as these ransomware actors continue to monetize their attacks.
They ever caught the ransomware actors or they rush or some far off place where you're never going to you just reach them.
Well, the great news I think is there's a lot more information now, So multiple governments throughout the world are collaborating on these attacks. We have law enforcement actually going after disrupting these ransomware actors their infrastructure, so the tools that they're using to host and wage these attacks. And then certainly we're moving to the point where we're now disrupting from an actual arrest standpoint too. So good news, but still slow going in that aspect.
So one more here for you, Wendy. We had some news out of JP Morgan this morning. They're saying that they've seen an increase in hackers that are trying to infiltrate their systems and JP Morgan spends about fifteen billion dollars a year on technology as part of its attempts to bolster its cyber defenses. Obviously we're not all JP Morgan, but this could get very expensive.
Oh, no doubt. I mean, this has a true economic impact, right. But I think the good news there and the silver lining is we're seeing so many more organizations really effectively prepare to detect these attacks. So in JP Morgan's case, they're detecting them, they're preventing them, they're gathering data that they're sharing with the community so that more and more others can also protect and defend themselves as well. So I think there's a good story there as well.
Okay, I'm changing my passer from JBT one two three four.
It's not password one two three Oh no, that was my old one.
Okay, Wendy, thanks so much. Wendy Whitmore is senior vice president, head of Unit forty two at Pallo Outdo Networks in the studio, so she gets a goals start today.
You're listening to the team, can't her live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot Com, the iHeartRadio app and the Bloomberg Business App, or listen on demand wherever you get your podcasts.
Is twenty twenty four, the year for a rebound. Our next guest has some thoughts on that. Thomas Smell is CEO of f E International. Before we get to the deals. What do you guys do? What is the company you have all about?
So f International we focus on middle market tech, M and A too, work with buys and sellers of companies up to generally three hundred million in evaluation. In total, we've closed over fifteen hundred transactions.
So you're in an advisory capacity exactly where an advisor. Yeah, okay, twenty twenty three is a year year. I would imagine you want to forget what's the outlook?
Yeah, So I mean twenty twenty three I think finished on a reasonable high. So if we look at our deal volume second half of twenty twenty three versus second half of twenty twenty two, we're up fifty six percent. So deals are still happening, particularly in the middle market. Lower middle market, I think where a lot of people see deal volumes slow down as really those much larger transactions, So it's much less those billion dollar and above deal's happening, but the still activity lower down.
Yeah, and it sounds like this year obviously, if interest rates are going to come down, that should probably help give a boost to the outlook.
This year, right, Yeah, for sure, I think last year there was a lot of uncertainty about what's going to happen to interest rates, and they kept getting pushed upwards, so a lot of buyers were kind of sitting on the sidelines waiting to see what would happen. Now, I think most analysts are predicting maybe two or three interest rate cuts this year, so buyers are definitely getting more active,
particularly those who are using debt. But on the flip side, there's still four trillion dollars of dry powder with private equity firms that they need to deploy, which is sitting there in cash, so there's still the ability to do deals even if they don't use debt.
How does it work. Do they come to you mostly or you see the opportunity, are like, hey, this is something that might make sense in terms of M and A, and you approach those companies.
So generally they will come to us. We've been in business like fourteen years now, so we get a lot of word of mouth. Founders will come directly to us wanting us to help sell their business. Maybe they're ready to move on, maybe they've had an approach and they want someone to help advise them. And then we'll work through the process of reaching out to suitable buyers and negotiating from that.
How do they reach that decision? Give me a specific like when they know it's time to do something.
Yeah, So for a lot of people, that's very much the personal decision. So like everyone has, I think in the entrepreneurial world has their number. The number might be ten million, fifty million, one hundred million, two hundred million. Personally they want to walk away with when they get to that level in terms of where they can sell their company, they might just decide to walk away. Then some people walk away when they have a change of
personal circumstances. Maybe they've got kids going to college and they want to kind of spend more time with them, or maybe they want to spend less time with them and where they want to take time away from from work. It can work in even directions. A lot of the time, founders just get an approach, So they get an approach from a buyer that gets them excited about the idea of selling and they just want someone to help kind
of work through the process with them. Other times, I think, particularly in kind of the current world of tech, it moves so quickly, founders will have new ideas that they're like, well, I've got a new business idea. How about I sell my current company. I'm going to go work on this instead, and I'll get some liquidity in the meantime.
So you'd mentioned private equity. Are you working in transactions a lot that in which case that is buyer or is this mostly you know, one business acquiring another.
Yeah, so privacy probably makes up about fifty percent of the deals we work on. We work with a lot of public companies as well, who are trying to make acquisitions at all levels. I think a lot of people think public companies only buy billion dollar businesses, but the reality is, if there's a strategic fit, they might look at a five million dollar business, a ten million dollar business, fifty million dollar market cap business. And then a lot
of individuals are like very small funds. You might not necessarily call them private equity, but they're kind of successful individuals or partnerships have raised a small amount of money to buy a business as well. Particularly in the US, that's a very active demographic of buyer.
Okay, So looking forward to twenty twenty four, are there any particular sectors that you deal with that look better than others? Where is the deal activity in terms of that.
So I think that the big trend at the moment is anything related to AI. And I think the interesting thing about AI is, even if you don't necessarily understand it, every single business out there has a way they can improve with the use of AI. Lots of other kind of sub industries that have come up over the years have not necessarily had that kind of ability to be
applied in literally every business. So lots of companies we're working with or acquiers that come to us and say, hey, we're looking to buy a business interest in AI, either to augment what they already have, so maybe they can add some tools or even like a team to their existing kind of business or whatever they might have, so you can augment that by adding AI, or maybe if you're building a business in the AI space, it's a great time to sell because it's such a hot market.
So at the moment, we have a nine figure transaction we're representing. They've built the business in three years to over twenty million in revenue, no outside funding, currently actively looking for a buyer, and it's so far extremely interesting with buyers just because of the amount of kind of AI focus it has.
Last one here a few of Thomas, And we've been talking a bit about earlier in the show about the regulatory outlook for M and A, especially with the Jeb Blue and Spirit deal that didn't come through. So tell us a little bit about that from your perspective, and especially if we're heading into an election year and maybe that administration could change.
Yeah, So I think buyers are always aware of political changes, and that's not just necessarily in the US. That's geopolitically. There's things all over the world that could affect effect deals. So from that perspective, buyers will always be thinking about it. Regulatory risk is very much specific to the industry you might be working within. So recently we worked on a business in the CBD space, which we successfully sold, but
there's constant regulatory changes with CBD. So if you're an acquirer looking to buy businesses in that space, either you're going to be extremely confident and knowledgeable of that industry, or you're going to do a lot of extra research into what might necessarily change or what could potentially change in future, or maybe you'll even risk adjust your offer and say, well, there's regulatory risk in this market, we're going to pay less for that business.
Thomas A pleasure and thanks for stopping by in the in studio guest A gold star for Thomas Smoe, CEO of FI International Advising on.
M and A.
You're listening to the tape Cansur live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com.
And the Bloomberg Business App.
You can also listen live on Amazon Alexa from our flagship New York station, Just Say Alexa play Bloomberg eleven.
Thirty Joining us now Robert Stein, Managing director partner at Blankie Shine Wealth Management. How does an investor play this? Back and forth? Fed going to cut March Now it's later, fewer cuts maybe what how do you view all this?
Well, good morning, John and Molly, And I think if we go back a month ago, when I was in the Bloomberg Radio studios, I did say that, you know, the markets were anticipating and asking for in twenty twenty four a rate cut. In fact, obviously you saw equity markets,
risk assets price that in super aggressively. We were in the camp of as I said then, and I still believe that it's going to be higher for longer, and the federers are going to have to walk that tightrope simply because if you look at the sort of trajectory of inflation through history, you get two humps of inflation, and the FED can't pull down sort of the interest rate to re ignite some of the inflationary pressures. They have to ensure that inflation is anchored before they go ahead.
I mean about seventy eight percent of the time historically speaking, inflation comes in two waves. So you know what the FED basically is done now is that for twenty twenty four, it's not a no on rate hikes. It's no for right now.
How much do you think of the disinflation we've seen that the FED can really take credit for. This is something I've been wondering and I feel like so much of it has just been like the supply side normalizing, you know, since from those big COVID disruptions and a lot of those supply chains getting back in order. Do you really think, though, Rob, that these at the FED can take credit for a lot of what we've seen.
Yeah, I think we've been We're in a territory including the FED, that no one has ever seen before. So you know, retail is working through that, services are working through that, Federal reserve, businesses are working through that. You know, one thing's good is this supply chain got tighter and then I got sort of a lot more efficient, if you will, And I think a lot of businesses became a lot more efficient even moving forward. So that's going to be leading to greater profitability for a lot of
businesses that learn through COVID. But if you look at the shift in consumption, and two thirds of the economy is consumption, it's basically the services sector that's still seeing that spike up. Look at airline prices, look at all the inflationary prices where people are like shifting their spending. We just got retail sales goods. You know, American consumer will always find a way, whether it's the credit card or whether it's the savings that they had saved up to.
You know, make certain that Christmas is still Christmas at home. But it's going to take some time to see we're going to see a lot more pressure build on the consumer. But the shift in spending is quite clear. It's still services for this year.
Okay, we can definitely say there is something of a pivot the degree to which you can argue about and we're definitely headed towards that two percent, although with maybe fits and starts, so a disinflationary environment or outright deflation in some sectors. I asked this of all our equity guests, what does that mean for earnings, especially the top line sales growth.
Earnings?
If you look at you know again, that's going to be at the forefront. We just had the two biggest points you know, a year to date. As it relates to CPI information as well as market it's not exactly going in the right direction in terms of as much movement as the FED needs to see, but the earnings is on the forefront. And corporations. If you look at tech two years ago, tech literally started laying off in anticipation of a recession. We're looking at banks right now.
At the end of last year they started laying off. So it's basically a rolling sector recession. You know, pick your company, but a lot of companies are basically being a lot more conservative now that job's number is basically the you know, not going in the direction that the FED needs it as quickly as as at least the markets would like it.
So interest rates could come down quicker.
So a rolling sector recession, does that mean we're in some an actual economic recession or heading toward one.
I don't know if that'll actually transpire. If you look at the last two years, different sectors have had recessions at different times. That's why I think this time is different from a quote unquote recession standpoint. I know we've been waiting for about a year and a half holding
our breath for the official data to come out. But if you look at the different sectors and the performance of the different sectors, outperformance in some and underperformance in others, I think sectors, that's where you have to sort of
be tactical in your performance of your acid allocation. As you look into the market for twenty twenty four, the sectors that perform the best on a relative basis, let's say technology are still going to perform well this year, but relatively other sectors will sort of come back, let's call it healthcare, energy. I think those are times to start looking at overwaiting those sectors for twenty twenty four.
Okay, so I put all that into the blender, turn it on high. What do I come up with? Where do where am I going to put my money.
Again, the sixty forty sort of acid allocation is where we're at. We like about a ten percent allocation within that forty within alternative investments. But I really like energy for the first six months. I think obviously the geopolitical tensions that we're seeing earnings growth in that sector alone as up forty percent in the last four years. And
then you also have buybacks. I mean, their dividend rich right now, and so where they're gonna basically have that free cash flow is how they're going to allocate that. And we believe there's a lot of value there plus a lot of m and a activity that we saw is going to be a creative So we like the energy sector moving forward. And then healthcare. Healthcare again just like energy is going to prevent a present a lot of value plus dividends you get paid while you eight.
So Robert, just on our last thirty seconds or so, here just have to confirm you you're coming to us from Palm Desert, California today? Is that right? Okay?
Tell me is that the t is that a TV screen or your window in the background, to be honest, but if you.
Look right through us We've got basically a Palm Desert chamber of commerce. You know, snow cap mountains out here. It's seventy degrees, so come on out.
And also nearby is a beautiful tennis center, which I got to ask, are you going to be at Indian Wells in March.
We love the Indian Wells tennis event. It's the first class event, and it's international and it's growing every year, so it's a perfect time to hear.
Yeah, that's big on my list for next year. This year going to Miami Open.
Now back to tennis for you.
It has to We haven't even talked about the Australian Open yet. It's really just a huge oversight on our part. We will be getting that to you everyone. Don't worry, Bob.
Thanks a lot. I appreciate it. Robert Scheine, Managing director and partner at Blankie Shine Wealth Management.
You're listening to the tape Cat's are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and.
The Bloomberg Business App.
You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa playing Bloomberg eleven thirty.
Goldman Sachs recently raised six hundred and fifty million dollars for investing in life sciences startups. Is this an area for you? Let's say asker next Kuss Zoe penn in the partner at Lenanda Impact Ventures. She's joining us from all these guests in locations like I want to be Harry True you go to Antarctica then? And where do you then? Mexico.
I'm telling you the bachelorette parties are killer. But Zoe Patten joined us from Spain today.
Nice when us.
Star day, Zoey, what's up?
I'm doing well here? Thank you very warm.
So let's ask you on the on the risk spectrum, where do startups in health, nature and biotech? Where do they lie.
Risk? So when a Hernanda we invest in very early stage impact ventures across all those areas, and it is it is we are very early stage. So it is high risk. I mean that's bench capital for you.
How much is it?
But high reward If if you get a home run up one of these, how many home runs do you get? Typically?
So in VC, you're looking in a portfolio of twenty five to thirty maybe two max. But that's the name of the game, and everybody who works in this industry knows that the.
Past the numbers game. Yes, that's right. Well, I mean tell us about some of the home runs you've had and like to what extent you can tell us about them.
So some of the areas that we've investing in. In terms of the life sciences that you were asking about, We've got a company called Closed Loop Medicine, and this one deals with dosage. So when you take a pill, everybody's taking the same dosage, get an adult dosage and a child dosage. But we're not all made of the same things. Our biology is very unique to each of us and as a result, many of us get side effects.
And you know, if you go back to how drugs are designed back in the seventies and eighties, there were not many women involved in those clinical trials, so many of the drugs that we take have much more exaggerated impact on female bodies too. So Closely Medicine works with pharmaceutical companies to do personalized digital dosage, so that's using artificial intelligence and tracking lots of data. So that's that's one of the ones. And then another one called resistant Map.
It's a very recent investment that we've done so very very early. But you know, with the recent pandemic, everybody's become much more aware of beneath for biosecurity and how pathogens can be used as a weapon. You know, quite worrying really, And one of the next pandemic that nobody really talks about is antibiotic resistance. So what resistant map does is it's able to map all the different strains and say where all over the world where you've got
the worst antibiotic resistance. To make people aware of this.
Yeah, we you know, especially with my kids, it's like every time they went to the doctors, they get a Marxist cylind or some antibiotic and you had to start wondering about like the resistance levels and what the ultimate result of that is. Hey, as an average joke, can I get in on the ground floor?
Can you get in the ground floor in impact investing or life science?
Well, any of the companies that you're talking about.
This is like.
I want to get rich too, incredible.
Yeah, I'm sure, I'm sure, I think we all but no, it's important not just getting rich. It's about having impact as well, and making things at a better place, better healthcare for everybody, more accessible, and yeah, better lives for everyone. That's what impact investing is all about.
I've got to think that there's got to be some kind of AI application here, So tell us a little bit how that's coming into your space, and if that's all the.
Intersection of AI and life sciences, et cetera.
I don't know that SEMs right got my attention. All right, Well, all right, well John wants to know about it, So tell John what's going on there?
Okay? So, I mean, we've just seen this money all going into from gold and Sacks, and I must say it's not the only big fund that they've got. They've also got a climate fund as well. So Goldman Sachs are making some interesting moves just generally and not just in the life sciences. But we've seen lots of people go into the life sciences twenty years ago similarly as they did with clean tech, and get quite bruised. So
the question is why are we seeing this again? So yeah, that's where the AI comes in, making it cheaper quicker to build models using existing data and synthetic data. And then your previous person that you had in the studio talking about compute power too, So in relevance to life sciences, you've got the ability to build new biological and chemical models as well having this extra compute power. But what's also interesting, and I think this is where Goldman Sachs
are picking up, is as market forces as well. We're seeing this trickle down effect and from the big tech players, there's Magnificent seven that we're calling them now investing heavily into this space. So you've got six out of those seven from the Minnixent seven investing in healthcare and AI
and life sciences. Just to give you one example which I'm sure people are hearing about on the news, so Google, Google D nine spinout isomorphic Labs, so they're reducing the time for drug discovery, fining two large deals worth nearly three billion dollars with Eli Lilly and the artists. So that's really interesting. Revenue apparently coming in quite early on, which we didn't see with that first trend twenty years ago. In the early two thousands, they were mostly developing single assets,
single drugs. So if it doesn't work out, you spend an awful lot of money at the beginning stage to then lose a lot, so extremely high risk. So what we're seeing is we're reducing that risk by being able to discover more potential drugs using artificial intelligence, increase data, to reduce the risk at every single stage of a life science business. And I think that's why you're seeing now Goldman Sachs and many other people forging back into
life sciences, which is a very very impactful area. So the more money that goes into this and the more chances we have success, this is a very good thing for everyone.
Zoe, Do these companies come to you or do you go scout these companies out? How does that work?
Oh, it's always a bit of both. Actually, what we like to do with Hernandez we have certain megatrends that we go for, So we've got certain fields and different areas of impact that we feel are the hot areas over the next five to ten years. And for instance, we've started to focus a lot of time now into
tech bio companies. So this is does come under life sciences in its one particular area, which is more about computational biology, so using AI with biology so that it's the less capital intensive end of the life science is just let's say that, and that's where we're expanding our field, and we will often go out and look to the universities, work with the angel investors who have a background in this area, and go out and find as much as
we do they come to us. So it's a pretty much a half and half sourcing strategy.
So, Zoe, you started out by telling us that, you know, for every twenty five or so strikes, maybe two or three of them hit. So it's obviously a lot of them that don't work out. I know, we don't like to harp on our you know, misfortunes, but can you tell us about maybe some of these that haven't worked out for you guys?
Difficult to name names right now, but what will tend to happen is just it's kind of they've gone for a single asset strategy. If you're talking about life sciences, you spend a lot of money up front, and if that one doesn't turn out to have the product market fits, so people are not willing to pay at that point. But you've had to spend a lot of money and you run out of money. But it's as simple as that with the life sciences. So that's why many of
them haven't worked out in the past. But like I was saying, with everything that's happening now, you get more bites at the cherry with artificial intelligence in these companies. So it's reducing that risk and being able to spot what's not going to make it. Just saying, you know, time is the most precious thing for these entrepreneurs as well as investors. If you're not going to work out,
let them go again. Let them build on the failures of that one, because you know, all science is built on the the you know, on the shoulders of many of those that have gone before. Let them roll again into another one. So failure is not the disaster as many see it would be painted. It's just the next stage.
So we have pleasure to talk to you, appreciate you start in buying. So we our partner ed Ata Impact Ventures, joining us from some jealous Spain.
You're listening to the Team Cancer Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg, the iHeartRadio app and the Bloomberg Business app, or listen on demand wherever you get your podcast.
Can I say jaw dropping data this morning on retail sales?
Yeah?
Why not?
I mean it was just like, way off expectations.
We look, the consumer, you know, loves to surprise. Isn't that no recession? That's been the story, John.
Or I think, as I put it, the consumers not falling off a cliff.
Yeah, that was your crystal ball this morning. You nailed it, and I said we had to hold tight just to make sure.
A US retail sales. As Molly wrote in the Bloomberg story that you can read on top Go rising at the strongest place in three months. In December, treasury yields popped on the news. So how does this all gel with the current investment climate? Let's put that to our next guest, Geetu Sharma, founder and investment manager at Alpha's Future, joining us from I'm going to guess the coldest place on a planet Earth right now? Minneapolis? How bad is it.
Hi there?
Yeah, it's pretty cold here. I think with the wind chills it's about minus twenty.
We're in Antarctica.
Molly's just back from Antarctica. She says, it's colder here in New York than it.
Wasn't a serious Antarctica. It's summer right now. It's beautiful down there.
All right, well, anyway, you know, every time I count out the American consumer, I'm dead wrong. What do you make of the data that we got today, and more importantly, what does it imply for FED policy and just markets overall?
Yeah, I think like you were talking earlier, the consumer remains very strong and is consuming, is willing to spend, and we're not seeing any kind of slow down in demand right now. Besides the strong retail sales data, we also read about positive humban the sentiment, the mortgage demand going up as well. And last week we saw unemployment rate at about three point seven percent, which is you know,
one of the lowest or fifty sixty years. So we're really not seeing any kind of shop significant slowdown that would imply that a recession is coming. In fact, we're seeing a consumer and an economy that continues to be very strong, very resilient in the pace of high interest rates, and you know, and inflation has come down, so that of course is giving a positive post to the consumer as well.
Of course, and you know you had mentioned in your notes just just before the show gets you that the outlook for disinflation remains uncertain, and obviously we did see that CPI report. I believe that was last week. The time is fine, but it was, as you said, you know, it's a bit bumpy. So how are you parsing through these different reports? And I'm really, you know, sticking to your guns that inflation is on a firm downward trajectory.
I think it's at this point point of time, it's really hard to say how far inflation will go down further. We've seen some really sharp declines in twenty twenty three and that has brought inflation down from nine person from a higher nine person in June twenty two to about two to three person right now. But it's often said that the last leg is the most difficult, and we
did see the recent CPI data slightly nudge up. And one of the biggest challenges I think for the FED is that we just continue to be very sticky and that's trending around four person right now, and that can keep inflation at the current levels of two to three person, which is still about pet's target. And as long as they're can be staying strong and the inflation is stable at this higher number, I don't see how the FED woul't want to cut so rapidly as the market is expecting S and p FI.
I've found it, as you mentioned, it ain't cheap at this point, but I look a little broader small mid caps. Not only do they seem to be massively under owned my investors at this point and by institutions, they're about thirteen to fourteen times earnings. You can own these? Is that an alternative?
I think it's a very difficult situation in terms up investing right now, because what we've seen is a large part of last year's value was driven by tech and AI and secular trends around AI, and the rally was not only in the large cap tech but also in the small and MidCap tech. So there is this segment of the market which has high growth, strong cash flows, profitable and continues to do well and has expensive valuations.
On the other hand, you have everything else in the economy, whether it's industrials or describtionary or even the defensive sectors that have not participated in the rally, have underperformed last year and are at especially the industrials and the financial energy sectors. They remain exposed to recession risks, so they're most cyclical and have downside risks. If we do head
into a recession. So the question is do you, uh, do you continue to invest in tech which has this positive profitability, demand growth trends but is expensive, or do you how much of your portfolio do you weigh in towards some of these value sectors which have not performed so far?
Is there like, is there like a magnificent magnificent seven in like small and mid caps?
I don't think so.
They're all magnificent across the board there, you two. So if we're talking about the possibility of recession, I feel like we've got to talk about these FED wagers here and looking at investors that are pricing in as many as six rate cuts next year. Obviously the FEDS dot plot indicating just three. Where do you stand in that debate? Because that's a that's a pretty big discrepancy between three and six. And also why do you investors just not believe the Fed time and time again?
So I think the market tends to swing from one end to the other. We you know, and and a lot of the market projections as well as the FED projections have not come through for a while. We you know, the market expected with session in twenty three that didn't come through. We were expecting one more rate high towards the end of the year that didn't come through. So there's been you know, data has been shifting, and it's really you know, hard to predict what's going to happen.
But clearly the difference between what the Fed is stop is anticipating, which is a soft planning scenario stable growth INFISH going to two by twenty twenty five. The Fed is looking at normalizing interest rates to about four four and a half person this year, whereas the market is forecasting a more dire situation that ultimately leads to a recession and the BED has to cut a lot more.
I think it remains this remains a big debate in the market right now, and every day we are seeing moves that are reflecting, you know, a ship from one side of this debate to the other. Not really direction.
We're going to have to leave it there at Gitu Sharma, the founder investment manager at Alpha's Future, thanks for being with us date, I really appreciate it. From what'd you say twenty below Windshield Minneapolis will not be signing me up for that.
You're listening to the tape. Cat's are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, tune in app, Bloomberg Dot.
And the Bloomberg Business App.
You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa play Bloomberg eleven thirty.
Investor's question the timing of FED rate cuts, among other things. And with that context, let's bring in our next guest, Molly Ron Sanchez, the chief investment officer at Fiduciary Trust International. Hi, thanks for stupping.
By, great, Thank you, thanks for having me.
So what's in the driver's seat?
Well, from a market standpoint, I think markets are sort of languishing a little bit here because there isn't a catalyst we had. As you well know, markets ended the year on a strong note. We already have seen the most too important economic data for January that was the labor report and CPI.
So at this.
Point I think the focus turns to earnings. We've seen a couple of bank earnings, but we will see earnings over the next two to three weeks. That'll give us an idea about how the macro is filtering into the micro and perhaps more importantly, CEO's expectations for twenty four.
Give us a little some of what we saw from the bank earnings and what your biggest takeaway was from that.
Yeah, so almost that is quote as we expected, nothing alarming, and economic activity and the banking system remain in good shape. And I'm not sure that sort of bank earnings signal much on the on the macro, we have to wait for other companies.
For sure. We're maybe the last mile is going to be real difficult to get to the Fed's target of two percent. But we are in a disinflationary or in some sectors outright deflationary environment. What does that do to earnings.
Well, it creates two things. I think it's going to be much more challenging to pass on, and so revenue and profit margins are going to be needed.
To sort of oporates for it.
Doesn't it does. Indeed, I think there's after two years of where not only did you pass on rising input cost, but a little more, and I think that environment is clearly behind us. I think it's much more challenging and if you do raise prices, you could see it manifest itself in lower volume. So there's that trade off between sales volume and sales revenue.
But prices are still going up. No, I mean, yes, at a slower rate, but I mean there still is some pricing power there, maybe.
Just not as much there is, And I think as we move on it'll be it'll be less and less and so at least as we sit here today, the moderation I think is evident and well, especially sort of in the goods market, it definitely.
Is Okay, So what do you like at this point?
So I think the market looks, broadly speaking, looks you know, compelling to us. I do think the first half of the year is going to be choppy for risk assets i e.
Equities.
I think we pulled forward a fair amount of return to the fourth quarter, the soft landing that became evident by year end. Again, twenty three was about the hard landing, the no landing, but ultimately we've landed on the soft landing and I think that's the high consensus or conviction trade.
And so the first half of the year I think for risk assets is about a choppy market as you look to validate that meaning, I need to see economic data decelerate, not too much come in to around a trend or slightly inside of two percent, and I need to continue to see labor markets soften and the same for inflation. In that environment, I think it sets up better for the second half. And that's one of the reasons why fixed incomes attractive for us, because I get paid to eight.
Probably more attractive on a day like today as well. When you see what was the two years up to say, thirteen BIPs before John, you have four.
To thirty five of the yield right now thirteen basis points enter the ten op six four to twelve. We both Mully and I both missed five percent. Speak oh okay, sorry, that's why she's going to Antarctica in Mexico. But we missed the boat. I missed the boat on five four twelve. Still a screaming buy.
I don't know about a screaming by, but it's it's attractive. Two fronts want to carry trade and so looking at sort of risk free return four to four and a quarter is appealing, and it gives you a hedge in case the economy does decelerate faster than we think. It'll be a hedge against risk assets that'll that'll come under some pressure. And I think you could see if we do have an economic recession. Again, that's not our view.
Interstrates will will come down inside of four and you'll have a total raid return.
That again is reasonable application. You're sixty forty.
That's right, and so we are neutral on US equity, slight underweight in Europe and a slide overweight and fixed income.
So you're saying we're looking for a catalyst right now, earnings being one of them. But I guess on the ECO calendar, you know, we do have a FED meeting in two weeks. I guess maybe not expecting to be particularly exciting from a policy standpoint, but any early thoughts ahead of that, and what new clues we might be hearing from the FED, and just maybe the timing of cuts this year.
Sure, I don't think we're going to sort of hear much. They are coalescing around the hold. I don't think they want to pre sell a cut, and I think they want to have some patients here. I know the market things differently. It's building in a first cut in March, and for us it's just too premature. March is not
a line in the sand. I think the way investors need to be looking at this is that I am going to see the Federal Reserve move from a fighting inflation campaign in twenty three to managing the economic cycle in twenty four. And if the economy moderates as we expect, they'll be latitude and scope to lower rates. Five and a half's not the right number, so I think it's more of a second half development. And again under the
heading of watch what you wish for? If they were to move in March, given the fact there's only two more labor reports, you would need to see more of a rollover of economic data for them to move, and I prefer to see the economy moderate than rollover.
I think we all would prefer that.
Yes, let's throw politics into the mix. I'm hearing the word tariff pop up again again by a certain candidate. What sort of risk does that bring it into the equity space?
Well, it just adds to a fair amount of uncertainty from a geopolitical and here in the US as well. Obviously we're early, it's an election year. I think in the first half of the year though, it will be more about the economy and about the FED and inflation. In the second half a year, I think you could see market volatility attributed to political develop.
And the conventional wisdom is that FED policy makers aren't going to act close to an election. Do you believe that and how does that sort of change the timing of the expectation of rate cuts.
Yeah, I do not believe that. I think they're in an environment where they have been very aggressive needed to be to fight inflation. I think their job is complete on that front, and they are in a restrictive posture, and as we move closer to election, there's a lot of economic data to see where we end up and whether it truly is a soft landing and where inflation ends up, and I think in that regard, the FED would like to moderate its stance and move from restrictive to neutral.
I think they're also, you know, pretty decisively and you know, a pivot right now toward lower interest rates. So I don't think that it would really be as controversial if they were to, you know, cut interest rates sometime around the election. If that's obviously so pre calibrated at this.
Point, I'd agree with that, all right, they can't afford to pass They kind of put.
You on the spot with my unfair questions, But how many cuts this year from the Fed.
Did you say the Fed thinks three, the market thinks six, and I think it's between three and six. It's at least three, all right, And I'd say.
Four S and P five year in target.
So a modest return of five to seven percent for the S and P five.
Hundred, all right, So five, that's okay, all right.
That sounds like a good number also for that round.
Yeah, okay, thanks, good to see it. Ron Bron Sanchez, the chief investment Officer at Fiduciary Trust International, coming in from the Islands, Long Island.
Best to the Island of Manhattan.
Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seven twenty three.
And I'm Paul Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.