Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside my co host Matt Miller.
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Find the Bloomberg Markets Podcast on Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. Madison Mills Paul Sweeney here in the Bloomberg Interactor Broker's studio. Time for little tech talk, So we turned to Ashley Still, senior vice president and general manager, where the creative cloud and document cloud at a little tech firm. You might
have heard of Adobe. So Ashley, we can talk about the cloud because that was the cool kid on the block until about a month ago, and then this thing AI came out of nowhere. At least that's how it seems to me. And now that's all anybody can talk about. I would love to get your based upon your background in tech technology, kind of what you believe AI is and what it can be.
Well, first, thank you for having me. Really appreciate being on the show and talking with you today. So yes, I mean AI has been around for actually a long time, But certainly the technology is rapidly accelerating. And one of the things that changed is kind of the methodologies and being used in AI, where increasingly the algorithms can kind of produce content on their own versus historically more automating repetitive tasks. So in the case of images, obviously you
think of Adobe, you tink of creativity. In the case of images, it's now possible to create content just by simply writing text prompts. So if you want to read balloon, right, you can just the technology can basically imagine, if you will, a red balloon for you, and and that is been advancing pretty rapidly over the past few years.
Ashley, you're you're the perfect person to talk to you about this. You're a former corporate finance analyst. Can you talk to me about the calculation for some of these companies that are reallocating their budgets to throw money at AI. How do you rate that decision?
Well, certainly, Todobe. I mean, we believe that it's incredibly innovative technology that will help make our products better for existing users and help us actually expand who can use our product. So the example that I just gave where you can now create content using simple text prompts that's much more accessible than going, you know, to design school and learning sophisticated applications and tools. But it also makes the sophisticated applications and tools like Photoshop better and more
powerful for the creative professionals. And it's unusual when you have a technology that both expands your market opportunity but also makes your products better and more valuable for your existing customers. And that's why we're excited about generative AI.
So how do you, I guess, integrate generative AI into what you're doing at Adobe? I mean, is this something that you guys have I guess maybe stepped up investment in time and effort and money over the last year two. How's that developed for you guys?
Sure?
Absolutely, I mean we've been investing in AI for a decade at least, but certainly we've been ramping up our efforts around gender AI. And there's a couple of things that we're doing. We announced incredibly exciting and very well received update to Photoshop last week. So we introduced a new beta a Photoshop where there's feature called generative Pill and this enables you to add, remove and extend your content in Photoshop again using simple text prompts. It's all
non destructive. So again this is the power of Photoshop where you can accelerate your work and kind of have new ideas and explore creative possibilities in a really kind of low risk, so to speak way, and just have a lot of fun. So we've had seventy million images generated in Photoshop over the last week alone in a beta application, and again the response from our community has
been fantastic. We also introduced an entirely new experience called Adobe Firefly, and you know, anyone can access this on firefly dot Adobe dot com. So go check out the website. It's completely free and there you can anyone and world with access to a browser can create content again just typing in simple text prompts and really just have a ton of fun.
And Adobe offers the creative cloud across a lot of platforms, from desktop to of course mobile. And one of the big AI questions is how we're going to get the juice we need for lack of a better term, on our phones to power the AI tools that are going to be made available to us. Is that something that you all are thinking about Adobe when you think about AI questions.
Absolutely, you know, and we actually on the document cloud side, we have a very powerful AI model called liquid Mode that's inside of Acrobat on mobile devices, both on iOS and Android, and that actually takes any PDF that's been created in the thirty year history of PDF and basically reformats it so you can read it on a phone. Right.
It takes what would have otherwise been rendered, as you know, an eight and a half by eleven piece of paper which is unreadable, and basically reflows it into an HTML experience magically on your device. And so these devices are incredibly powerful. Certainly, technology always, you know, raises the bar, but we work closely with you know, folks like Google and Apple to constantly improve what's possible on devices.
So Ashley, again you mentioned and we've heard from all this artificial intelligence has obviously been around for a while, but it just feels like maybe it's just the Nvidia, you know, raising their their outlooks so dramatically and the big increase in market capitalization that they saw and in their company that maybe it's just come to everybody's attention right now. But almost every single company in Y S and P five hundred and on their last earnings call
mentioned AI. So I'm wondering, from your perspective, as you have been working with it for a long time, within the creative cloud and the document cloud, what's the biggest risk to I guess just AI and the development of AI.
Do you think, Well, one of the risks that we're very focused on and kind of passionate about is the risk for misinformation. And you know, there's a lot of trust that we all put in content. When we see an image that's you know, on a news site or even you know, shared by family, there's there's a certain amount of trust that you have to have and how
that content was created. And we feel strongly again just based on the pace of change and innovation in AI right now, that we all need what we refer to as nutrition labels for content. We're part of about a thousand member Consortius and open standard that's developing content credentials. Think of this again as a nutrition label for content, and we really believe consumers need this information so that we can trust what we see.
YEP, very very important and that will be a challenge going forward, no doubt. Ashley Still, Senior Vice president and general manager of the Creative Cloud and the document Cloud at Adobe, one of the leading tech companies based in San Jose, California, talking about the Cloud AI. It's everywhere, folks, this is Bloomberg.
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Let's talk markets here, Let's talk fixed income. We talked fixed income. We like to talk to Lared Landaman, general's portfolio manager at TCW. Laird, thanks so much for joining us here. We love getting your view here. It looks like our good friends in Washington, DC are going to avoid a debt default, a debt crisis. How do you kind of put that all into context?
Here?
Were you ever? What was your level of concern? And how do you think we go from here?
Well?
I think we have to say they avoided again. This is sort of a uniquely American thing. It's kind of like country line dancing or something that we go through this dance every once in a while. Yeah, you know, the bigger mistakes are the more likely cooler heads are to prevail, so we never had that much concern about it. We obviously went to a lot of operational hoops to make sure in case there was a brief period of default that you know, we could you know, as a manager,
we could manage that. But I don't think we had any real belief that we were going to have a default at this point.
Are you thinking more than about the next FED meeting? Does that feel like the bigger question.
Mark for you?
Well, I think it is. I mean, I think, you know, the market consensus is certainly one hundred percent over the next two meetings for another hike, and certainly if we got a strong jobs number, and again like the Jolts number, these numbers can bounce around quite a bit, and the
market generally overreacts to this short term news. So we could see short rates get pushed back up near their highs again if we get a strong jobs number, but certainly over the long term, you know, you look at some of the effects that the higher rates are having, whether it's what happened with banks in March or what's happening to the interest expense on US debt right now. Really moving up from nineteen percent of tax resort tax dollars to thirty three percent is now being used for
interest expense. This is going to have a pretty big hit to the economy, and I think the FED is kind of dancing right on the edge here, not realizing that these you know, the monetary policy hits with longer delays.
So lard giving that backdrop. Given where we are with a FED and I guess the debt ceiling, where are you seeing opportunities here at TCW?
Well, I think I think that we think fixed income, you know, is setting up for probably close to double digit types of returns. I think that you you want to be in the intermediate part of the yield curve. The FED is going to have to ease at some point here. The banking system will continue to be under stressed as long as they keep increasing rates or holding them higher, and so eventually they're going to have to
turn this around. The market thinks the fourth quarter of this year is when we start seeing easing, and that will also bring about lower interest rate volatility. I think you're very aware that interest rate volatility has been very high. Sectors like agency mortgages are pretty much as cheap as we've ever seen them because they've been hit by the high volatility. We would go all in right now pretty
much on the agency mortgage basis. We think that that's probably, you know, one of the most liquid and cheapest sectors out there. Avoid sort of large scale exposure to corporates at this point because they could see some spread widening as the economy begins to deteriorate.
What are you thinking about in terms of the biggest losers potentially heading into the second half of twenty twenty four, where are you saying we need to kind of get out of.
Well, if we're looking out over the next year, certainly anything commercial real estate related, particularly around the office office
sector is going to be under pressure. But it'll expand beyond that because, as we're very aware, small and mid sized banks are going to be cutting back lending over the next year, and they support a lot of not necessarily office properties, but they support a lot of smaller projects that can get rolled up into some of the conduit deals that might be residential, multifamily, they might be strip malls, things like that. I think there's going to
be general carnage there. We're seeing appraisals coming down in LA on office properties, you know, fifty sixty percent from twenty nineteen levels, and we certainly think that, you know, you got to avoid office properties La San Francisco, Chicago, New York, and Houston. Those are sort of the big sectors that we're trying to avoid in our portfolio. And we think there could be individual securities that are tied to those office properties that could take very, very large losses.
So that to us is a priority to be avoiding those pitfalls in the portfolio.
How about emerging markets, lair, Is that something that's attractive to you guys at this point?
Well, I would always refer to Pennyfolio, our team leader who's done it for forty plus years. They certainly think that they're seeing some opportunities there. As we look at the type of credit risk you have to take in emerging markets for a largely US based portfolio that we manage, we certainly see better value in things like agency mortgages. As I mentioned, you're not taking a lot of credit risk,
at least as long as this debt deal passes. You're not taking a lot of credit risk, and you're getting spreads that are abu many of the investment grade emerging market countries. So we're going to stick with sort of what we think is cheapest and simplest in the portfolio here, and we'll benefit most from a FED tightening. And that's the agency mortgage basis.
All right, good.
Stuff, Laird Landman, thanks so much for joining us. Laird Landman is the generalist portfolio manager at TCW and that is a trust company of the West back in the days, big big asset management firm, huge inequities, huge in fixed income, based out in Los Angeles, a big account out there.
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Let's check in with a professional here, Quincy Crosby. She is the chief global strategist for LPL Financial, that is the Nasdaq traded company. Lp LA is a ticker to load into your Bloomberg terminal there, Quincy, it looks like the uncertainty surrounding the debt deal to the extent there was some uncertainty for some people, some people more so than others. Looks like that's been kind of lifted here.
Is that important to you or if it is kind of maybe, what else are you looking at now for the next kind of big, big catalyst for this market one way or the other?
Well, yeah, absolutely, I mean the market does think that they're going to get the vote that it's been going to obviously go through the House and then to the Senate, and obviously they want to do it expeditiously. But the market is also focused on the set and you may have seen, you know, this morning, the probability, it's the futures. It's about sixty percent for rat high June fourteenth. That's
client higher of following Loretta Mester's comments. Now she doesn't vote, you know, many many of the because don't vote, but nonetheless they are part of the discussion and she's highly regarded. The question is whether or not the said actually does come in with a raid hike, and the other question is if they do, well it be one or two
that the market can expect. So this is something that the market is trying to piece together how the SAID will see the data coming in, particularly the payroll data and probably the ISM report next week on the price is paid in the service sector. So there's so much
for the market to have to digest. But that really does matter for the market, and so does the debt ceiling, needless to say, and you know, the market has quite a bit of a wall of worry yet yet the market is up for the year, and that is the price action that says, hey, wall of worry, don't stop worrying. We're still going to prevail.
Hey, Quincy, I wanted to reach out to you about this, so it's perfectly you're on our show today to ask you about how US potentially approaching the end of the FED rate hiking cycle, uh might lead to more weakness in the US dollar. And if that is something that you're anticipating and maybe changing some of your thinking and positioning around.
You know, that's that's logical. You know, there's there's there's an entire story about the dollar, whether or not you know, king dollar is finished. And that's one thing, whether or not you know it is China trying to push us the dollar out of the reserve currency status or put the U on right up there with the US dollar. But the other one is predicated on on the economy. It's predicated on on whether or not we do stop
raising rates and we lose the interest rate differential. That's normal, and you know, if the FED does finish when we do expect the FED to be finished, you know, if it's not in June, it'll be sometime in the summer that the dollar will ease further. And that does help global financial conditions. A weaker dollar does help. It helps many of the big tech names. There are global leaders that got a global footprint, and a software dollar does help.
It also helps other companies, you know, the companies in the S and P five hundred that have nothing to do with technology, but that you know, sell overseas. But it also helps emerging markets in that we know from many of the reports coming out that are having trouble servicing their debt dollar denominated debt. The weaker dollar does help.
It also helps commodities. So all of the all of that together should help, should help the overall economy and also help you know, the big companies and help help emerging markets to some degree.
You mentioned some of the companies that have a big presence overseas being some of the bigger beneficiaries within specifically the consumer discretionary and staples sectors. Who do you think the biggest potential winners are because of that overseas presence?
Well, you know, now, all all of the all the companies, I mean, you even have Walmart is active overseas. You have Procter and Gamble, the host raft of names that came out, the pharmaceuticals that sell overseas. All of those companies, coupled with the Microsoft, coupled with Apple, all of those
are major beneficiaries of the weaker dollar. In fact, Nike I could go on and on because remember when the dollar was at its you know, full strength, all we would hear during the early season was how it was hindering their ability to do well. Now we're on the road towards the other extreme with the dollar easing, and
it will ease. It's part of the it's part of the natural equilibrium in currency market that when your central bank, particularly when it's the FED, begins to tail off, your currency is going a week and you still have the euro climbing higher because the European central bank is most likely has a number of more rate hikes in the pipeline.
So you think even a retailer like a Nike has a chance despite some of the bad earnings that we just got from them because of weakening dollar.
Well, no, it won't change a dynamic that is, you know, if you don't have customers or the global economy is slowing dramatically. But what it does do it gives you an edge. It helps your competitiveness overseas. But you know, you still need to have demand, you still need to have top line revenue growth. But what a weaker dollar does do it helps? It gives you an edge.
Hey, Quin, I'm not sure if I'm representative, but boy, up until a few months ago, I didn't even really think about this whole thing called AI, what the kids call AI artificial intelligence. But boy, every CEO on every earnest call talks about how AI is going to be the greatest thing for their business, and it doesn't matter what business they're in. But then you see Nvidia raised their guidance last week and just an explosion in market
capitalization for that company. I don't think I've ever seen that before. I mean, what do you make of this whole AI thing? Is it something that you think about as you think about companies and investments.
Well, yeah, absolutely. I mean, you know, I have returned things to Amazon, and the first time I did it, I didn't know how to do it, and the kids weren't around to tell me or to actually do it for me. So I called the number and the guy who answered wasn't real, but boy was he nice. I felt like calling up again, just so easy to talk
to answering my questions. What the AI we have to you know, put it in the context of why are the companies, the large companies going into this area, why are they working with in the video, for example, Microsoft continuing to present it because they will be able to sell it to other companies so that they could cut costs. This is about cutting costs, and that is that is why it is important because it's the development which has
already begun. But if it intensifies with the attention that we see that in the video has sort of unwound, it's going to be important and companies are going to be able to save money. Customer service is a you know, primary example of how much AI can help. Now, the thing is you need to have strong balance sheets, and companies that are such such as I'm not suggesting it, recommending it that such as a Microsoft to develop it and and fine tune it towards how they can all
evan to other companies. And that's going to be extremely important. You know, you see it and Sada I say this on the internet. Even with Bloomberg write help with automation, that's going to intensify and it's going to become a much more tvalent part of the of the landscape, of the economic landscape. So, by the way, just having the video in that cohort to begin with this is before their earnings, was pretty amazing. Just you know, I've asked you said, what is it? How do you pronounce it?
How does this fit in with you know, the megacat techniques they are part of now the cohort it.
Is actually well the others there will be other Quincy, thank you so much for joining us. Quincy Crosby, chief Global Strategists at LPL Financial talking about these markets, talking about AI. It's a thing. Folks in Vidio knows it. This is Bloomberg.
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You know, I always say, or I have been saying recently, that, well, if I were to come back again and do this Wall Street thing again, I might look at private credit. That is a business that I think is just booming. It's got a great presence in the marketplace. It's desperately needed, particularly after the Great Financial Crisis, when the banks have been kind of pulling back a little bit. So I want to get the latest on what's happening private credit market.
How's it performing in a rate where in a world where rates are arising. Jess Larson can help us out on that. He is the CEO and founder of Briarcliffe Credit Partners. Jess again, I love your business. I love the private credit business. I got my credit training at the Chase Manhattan Bank, so I will stack my skills against anybody out there. Talk to just about the private credit market. How it's behaving, you know, over the last twelve eighteen months in this rising interest rate environment.
Mm hmm. Sould first, Well, good to be back on the show. It's always a pleasure and I'm so glad to hear that in your next life you're going to be a private credit Yes, personal, right, we can do this together.
Very good.
Well, you know it's so interesting when you hear the Bloomberg class, it sounds it's almost a little depressing, right, with all the various equity indices down. So I'm glad that we turn into much more positive news and positive subjects such as the private credit because private credit is not just doing well. We're in a bull market poll,
we're in an absolute bull market. And when we're sitting here in with rates going up, the beautiful thing about private credit is is predominantly floating break So the investors are benefiting from rates going up.
Is that true across the board, I guess globally? Or is that is that something that you're seeing in some regions more than others.
Well, first of all, I think what we need to think about private credit really consists of twenty six substrategies. But the vasa joys of those strategies are floating rate. So whether you are in the Euro market or you're sitting here in the US, if rates going up, your private credit returns will go up, irrespectable of where you find yourself so.
Jess, A big part of your businesses helping these private equity guys finance their deals, and they can go to a you know, a Bank of America JP Morgan, or they can also come to private credit providers. Talk to us about the deal flow you're seeing, because we ain't seeing much on Wall Street.
No, that's exactly what we're all seeing. Is it is kind of quiet right on the private equity side of things. But that doesn't that doesn't stop mid market US companies for needing capital. It's just a question or not where do you go. You can't really go to the private equity market anymore because valuations are low and the last thing you want to do if you want to access capital as a mid market borer is going into a down round.
Right.
We don't want to have low evaluation two years ago, So you want to look at the credit market now three four months ago you could have been forgiven for looking at the banks, but then we saw ISBB Signature Bank, person Public all having trouble. So if you are a mid market company and you need capital, you will be going to the private credit market, are you?
I have to ask this because we can't stop talking about AI are you seeing any increase in AI related deals or are you thinking about it more frequently than you previously did.
I think there's a lot of talk, a lot of headlines, and it's exciting what's going to happen in the future on AI. Right now, we are just more concerned about any type of mid market US companies or borer that needs access to capital. So that's from our daily work. It's less about AI, but it's very interesting to read.
All right.
So just in the US, a mid market company, if I come to I need, you know, a couple one hundred million dollars of credit debt capital, and I go to my choices, are I don't know, a good quality mid sized bank and M and T bank out of Buffalo. What's the difference in the cost to me them versus maybe coming to you.
I think what we will see is with the failure of it be signature ins versus public even though we're not having another way, what we are seeing is there's certainly some lack of regulatory environment that needs to be tightened up a bit. When that tightens up, it will be even more difficult for these banks to actually be a capital provider to borrowers, so the cost of it will go up. But what's really interesting here is what we learned from ASBB signature and versus public is there's
a mismatch between accid and liability. There's also regulatory risk, and there's the whole new risk we never thought about before, the depositor risk. When people start leaving your bank and take that it positive with them, it hampers the bank's ability to lend money and that we do not have in the private credit space, and so we will still be seeing people flock into private credit.
Do you anticipate us seeing more of that moving forward, that deposit flight?
I really hope not right because I think they I think we stabilize the situation pretty well. There are still some issues out there, but I don't think it is necessarily terribly grim. But we have seen you know, depositive makeup from some of the smaller risky banks into some of the largest so you know, less risky banks so to speak, and so there may be a little bit of movement, but I don't think we'll see much movement in the depositors.
So just you know, when when rates were really low, near near zero, the returns that you know, private credit offered a lot of investors were just compelling. Now I can stick money into two year treasure can get four and a half percent. Here, what's the am I?
Am?
I still getting a relative outperformance from investing in private credit. What are you seeing in terms of the fund flow to private credit these days?
Listen, Paul, you're asking exactly the right question, right because you may think that sounds like a good return compared to where we were when we had zero percent rates. But look at this the ten year analyzed growth returns in leverage loans three point eight percent, high yield three point nine, direct lending nine point eight percent, right, so we will still see that thread between your high yield
and your direct lending and your private credit. So definitely you still want you always wanted to take a look at the private credit if you can take the liquid liquid essay class.
Exactly, So just like twenty seconds left, what's a typical holding time frame for private credit?
Well, the private credit funds tend to be five to seven years, where on the private equity it is probably into twelve years. So you're getting a little bit fatter liquidity from your private credit Interactually, and nowadays Paula here this nowadays, you're probably getting very similar rate of returns as we are in a slow growth or a recessionary environment, you equity returns will continue to be volatized, but also lower equity return Yep.
Well all right, Jess, that's gray. So I've have to leave it there just because of the time. JUSTS Larson, CEO and founder Briar Criff Briar Cliff Credit Partners, Private Credit. I'm telling you, folks, it is a awesome business. It looks like a very interesting asset class from a relative return perspective.
This is bloomber 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 seventy three and on.
Ball Sweeney I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.