Markets, Private Equity, And Jackson Hole (Podcast)

this market? I kind of. I'm just not sure how much I should really buy into this bounce off the bottom. What say you? Well, you took the words out of my mouth, right, So we're still in the middle of this storm. And the way I look at it is the FED said that inflation was gonna be transitory. Were the furthest thing from transitory? The FED says that we're not in a recession. We had two back about quarters of negative GDP. As long as I've been doing that,

it's always been the definition. I totally get the tight label market. So technically probably when not in a recession. Now it everything the FED is doing on and is doing and is embarking on right. All of that still needs to be absorbed into the economy, and it takes time. It takes six months to take a year, to take a year and a half. So at some point this data will continue to worsen. When you think about p WC survey firm said they're gonna they're anticipating layoffs. The

inverted yield curve, sentiment again is high. You look at the multiples on Amazon and Apple. Forward on Amazon is fifty six Apples twenty six times in both the growing revenue one another one at seven percent. So valuations still have to come in and there is going to be another leg down that will retest the loads that we saw back in June. But what's the what's the driver of that retesting of the lows? Is it the FED hike? Is it recession worries? Is it it slowed out in consumption.

I mean, I'm admittedly at faulty because I'm a journalist and I was repeatedly told by traders not everything has

a fundamental narrative. But why do you sell out of this market when capital flows from other countries and really the rest of the world could actually provide some sort of support and everything has a fundamental narrative if you're a trader in the short term, but over the six twelve month period, which is a long term period, with everything that the FETE is doing, and because we're in a tight labor market means inflation could be more persistent.

We means the FETE has to act even more aggressively or continue to be aggressive, and all of that is not a positive for stocks. And ultimately, what happens our company's executives, they're making decisions to lay off, They're gonna You're gonna see analysts revise earnings, revision of earnings of ten to off of what prediction is that brings you out of forward multiple today of y two times, which is basically where we were in the middle of January.

So that's not attractive thinking about what the FETE is embarking on and how inflation could be sticky. So so what do you what do you tell your clients about? You know, given that backdrop your call there for equities, I mean, I see the in the first half of the year, the terrible, terrible underperformance of fixed income across the board, whether it's corporates or treasuries, investment created high yield,

there's nowhere to hide. So if we've got another leg down here, what are you telling your clients these days in terms of if they if they have some new money to put the work. Maybe a couple of things right. So I've been very consistent, whether it's on your show or anywhere else, that we were in the tech bubble that burst. We thought we the stock market as a whole, was in a bubble, right. That came down to troll.

The technology got got killed as well. So coming into this year, we're aggressive in cash and we still are today. We're being we're being very patient like buffets all the time, wait for the perfect pitch. You know, we're not out of the situation where we're having a perfect pitch right now, so we're being completely patient. Scenario, we had great returns, everybody did right go in one, So being patient here in twenty two with everything going on is perfectly fine

thing to do. I'm still I've got to say, I'm curious, though, what else do you put your money in? I mean, if you're pulling out of stocks and let's say going to cash, for example, does that mean money markets? Does that mean just blocking the dollars straight out. Where does that money go? Yeah, for us, we put it in money markets that can kneel between one and two percent. It's not a great return, especially when you factor an

inflation completely. Get that. But if we do get a great pitch thrown at us and it's a good time to put capital to work where we can make great returns over a three to five year period, then I mean that could happen over the next two to three months. So even though the return in cash is not great, it's the opportunity that we're looking for that we believe will will occur that will make up for any type of low return you're getting in cash today. We also

are invest in gold. We're also in commodities as a diverse, floid balanced portfolio, and obviously we have some exposure to equities as well. How do your clients fill Did they ask you about crypto bitcoin specifically? And if so, what do you do you? What do you tell them? Yeah? The answer is just like I think of growth socks. Right, when you're investing in growth socks, you're trying to make a prediction of how much a product is going to be sold with that company over a long period of

time and and that prediction is just so speculative. Right, So when you think about like bitcoin and ethereum and others, you're talking about something that is complete speculation. So why would I invest my client's hard own capital and something that is speculative. Yeah, it could turn out great, but also could turn out terrible. Right, So when it comes to investing, I really believe it's about risk in return profile.

So I'd rather buy a great company like McDonald's or Coca Cola or Fiser have free cast full yields of north six seven percent or eight percent or more than that, which is two to three times a ten year treasury, with stable earnings, great management, great economic mode. For me, that's how you invest capital and a little long term you'll succeed, all right, Phel always great to get your thoughts, your perspective. You've been in this game a long time.

You always appreciate your experience. Filth Plumbo founder, CEO and c IO of Plumbo Wealth Management. There pretty I always think about, like who would I not want to hang out with at a cocktail party. Here's this person be a in economics and statistics from Berkeley, and then she goes and gets a PhD in economics from the University of Chicago. I mean, you don't want to hang out with her at a cocktail par I'm not sure, but

Anna Wong is a good buddy of ours. She's a chief US economist for Bloomberg Economics, and I thanks so much for joining us. I don't mean, I don't mean to prejudge, but boy, that's some resume there. What are you looking for tomorrow coming out of Jackson Hole, Wyomings? You know, in addition to seeing what Tom King's gonna wear tomorrow? Well, I, like everybody, I'm expecting a hawkish speech.

I expect that Power will ressert that the FED is unconditionally committed to restoring inflation that to its price press target. He is going to say that he will keep rates in shift of territory until you see compelling evidence that inflation is coming down. You know, the same same old hawkish words. Um. But I think the interesting thing is how whether the whether the speech would be hawkish enough for the markets to kind of quash the thought that you know that the FED is ready to cut rates

in three UM. And I think in order to do that um, power will have to be extra hawkish, for example, giving some numerical guidance saying that that the FED will not cut until core inflation comes down to close to two percent, something like very concrete like that. But I just don't I see very little chance you will be

doing that though. Well, and I mean you got you and your team at Bloomberg Economics came out I think a couple of months ago, which what at the time I thought was just way way way out of consensus call that the FED might take the FED funds rates up to five percent. Is that correct or is that still your call? Yeah? That that is still our call, and I think that by each day the chance of

that call is increasing. Um, we saw the student loan proposal yesterday and we estimated that that will boost core inflation by about point to percentage point, with a risk

of it being higher. And you know, just if you think about the trade off between price and unemployment, that little bit a point to percentage point extra inflation would cost the said two tighten even more in order to generate an eight hundred fifteen thousand job losses in order to bring it, you know, to offer up those little zero point two percentage points. So it's not even though it sounds like a little just a little bit of inflation, in fact, it's pretty like substantial from from a view

assume a flat Philip's curve. For the record, Anna, I would love to be at a cocktail hard idea. Can I just say that? I would? You know, you're invited to the next one? I have um, step one, get a bar card, step two, and long um. But but you know what I'm curious about, and what I would probably ask you at said cock party is how much

can the Federal Reserve really do here? I mean, you're talking about them, I mean everyone's talking about them, looking to be extra extra hawkish, But what more can they really even say here? They've already said that a recession is on the table. They're willing to make that that bet. That's not their base case scenario, but they are willing to do it at the tackle inflation at the expense of a recession. The markets have a very high standard

for Chairman Powell tomorrow. What else can the Federal Reserve really do here? When they're going meeting to meeting and the data is literally all over the place. Yeah, Cretty, that's that's a very good question. I think it will be very hard for for him to to be more hawkish than what the market is already expecting. Tomorrow, he you know, he may be able to say that this is the injection. The whole theme is about reassessing constraints

and the economy. It's all about examining what our star is, what youth star is, what all the stars are. And and I think that that if he is able to say something like, oh, in fact, that our star um or or tomorrow's research papers are arguing that our star in fact substantially higher than two point five percent of the median f MC participate participant thinks right now that

if he acknowledged that, that that's very hawkish. If he acknowledged that the youth star is like six percent natural rate of unemployment and that the FED will need to generate an unemployment of up to six percent, well that would be really hawkish. But that that's why I said he would need to offer up some numerical something numerical and something concrete to to come across is very convincing, and and I just don't think that he would do

that tomorrow. However, I think they have a chance to do in the September September flmc WH where they will have an updated SEP at that point that UM, I would expect that the neutral rate could be revised up from the current two point five So you know, and when you guys came out with that five percent number, it was again way out of consensus. So kudos to you and your team here. But one of the things I look at the you know, the labor market, and I still see a pretty strong labor market is is

that is it real? Do you think or do you think there's some underlying week to say that the FETE is paying attention to that we may not see in the numbers. I think it's real. So if you look at the direction of revisions, we just got to manage your revisions on jobs yesterday. In fact, it turned out that last year, up to earlier this year, the labor market was half a million jobs hotter more than what statistics actually show. That's on top of every month we

have been getting our revisions. I think the issue here, UM is really productivity. UM. That's that explains to why the g d I, the gross Domestic income measure of GDP and GDP are telling you a different story. G d P is saying the economic activity contracted g d I, which is an income based measure that used hours, work times, wages, and corporate profits. That's telling you that the economy is

doing pretty well. And I think that the thing to bridge them all is that, in fact a lot of people are being hired, but they're probably less productive than before because people are calling sick and there are a lot of sick leaves that that that's not being recorded. So that's why we also have negative productivity. I think, I I personally, that's my theory of what's going on. And I'm gonna put you on the spot here thirty seconds.

How much unemployment is too much? Unemployment? Um, you know, every kind of unemployment is if bad, even one extra job lass is bad. So uh, you know. But however, price stability will be important in it ensuring a long expansion. As Power said, all right, Anna, good stuff again you guys, you and your team. Ana, we're just really early and looking increasingly correct with your call with where this you know, this natural rate may go here and we'll hear more.

Fed Chairman Pale tomorrow from Jackson Hole Anna Wong. She's the chief OS economist for bloomerk economics, and you know, creaty. When she came out with that call, I was like, whoa, because the street was at like two and a half percent at the time, and she came out with this five percent number. And she may be proven right. And when all is said and done, you know, one of the criticisms of the Federal Reserve right now in economics

at large simply that they're getting their forecasts wrong. Paul I ad venture to say, I think the youth government lost Annah Long and that's maybe why. Yes, exactly exactly, so we're fortunate to have her there. All right, let's go to Amber Fairbanks, portfolio manager for Mirova up in Boston, and that makes sense. She's undergraduate from umss Amherston, an NBA from Boston College. So all in Boston, go yankees, uh Amber, thanks so much for joining us here. What's

the investment theology focused strategy at your firm? Rova and some rather approach this stainable one. We're really looking at exploiting market inefficiencies that we see around long term secular trends, as well as the belief that the market is really underestimating the risk coming from poor e s G practices.

So let's talk about those E s G practices. I mean, to me, it feels like the s G was all arraged maybe two years ago when the pandemic first struck, for a variety of reasons, um, including how we want to really deal with our our footprint. But I'm curious about how that's evolved in light of I think the recent criticism has gotten. Yeah, I think we've seen some recent criticism starting really the beginning of this year. I know with the Baron's article that came out. There's a

similar economists Economist article that came out as well. Um, you know, I think that certainly there's there's reasons to be looking a little bit closely at E s G given the popularity, and I think, you know, the criticism contains some brain of truth, particularly around the inconsistent implementation of E s G frameworks by investors and kind of E s G being used is virtue signaling as opposed

to really having real world impact. But you know, I think really these are effective debating points, but really none amounts to anything close to a disqualifying argument. I think, really the attention to e FC issues becomes a biduciary duty to investors and to company managers and directors because of financial materiality. And I think that's the most important point is that history has really shown that attention to e sc issues it's really increasingly important in the creation

and preservation of value. And certainly there's done a lot of examples like the VP Deepwater Horizon explosion, you know, Facebook data privacy, that have really pointed to the importance of considering e s G issues um serverally becomes a management of intangible issues around brand and reputation, human capital, for example. So I think that e s G and shareholder capitalism are really fundamentally about good governance. The idea

that it's kind of about inconsistent implementation. It's certainly that's a fair point across some managers, but it really about politicizing e s G investing, which I think is what we've seen in the media recently. You're kind of conflating at virtue signaling and values based investing and really debate about wokeism, where really it's just underestimating the changing nature

of business value creation. Amber give us an example of a name that's in your portfolio or something you've recently added, and how it might fit into your E s G framework. So one of the companies we added UM in December last year and then added to more recently is Macado Libre. It's an e commerce and fintech company in Latin America, especially a really interesting company that the largest e commerce company.

And I think if you look at the growth of e commerce in Latin America, only about six percent of retail sales in Latin America are coming from e commerce. That compared globally to around eighteen percent. Such a tremendous opportunity for growth there. The company has a really strong competitive advantage as well. And then within fintech. You know, if you look at Latin America, about fifty of adults

are unbanked. It's really to lead a poverty. To provide for academic growth, these people need access to affordable financial systems and that's something that Accatto leave I provide. So a company that we were able to add to what we think is a really attractive valuation. It's certainly a growth company UM and I think, you know, it's been such a sentiment driven market, particularly in the beginning of

the year, with growth selling officers sharply. But a company that continues to put very very strong fundamental So we kept our long term valuation approach and we're able to exploit and the short termism that we're seeing in the market today. So from an E s G perspective, I mean, just shut some light for me on this Mercatto Libre story, because for our international audience who aren't perhaps it's familiar.

The way I like to think about and Paul correct me if I'm wrong here, is that it's kind of the Amazon of Latin America to some extent the eBay even if you will, I'm curious why the investing case from Ricatto Libre differs from that on Amazon when it comes to an E s G basis. So it was Amazon has been a lot of socialities that have us concerns.

You have our treatment of workers, for example, as well as their men Somemen, a third party manufacturing, and so it's really those social issues that have us concerned around Amazon.

I think, you know, from a fundamental perspective, from a secular trend perspectives, a company is certainly attractive, but it's really the idea that eventually, over time, those issues, if not managed to correctly, have a financial impact on the company, and I think we've seen that with companies like Amazon to a certain extent, but more companies like Facebook for example. In the alphabet. So Mercedes Benz is also another name here for you guys, give us the case there for

Mercedes Benz. So we add a Mercedes to the portfolio in March's a company that has a really strong plan orund the electrification of vehicles. They're targeting fifty of sales from EPs by the year and then from ebes By and they put forty billion euros and cappex to really tool factories and step up software efforts and so really a strong plan that we think is addressing that growth

towards electric vehicle. It's a company that we bought after the rush of Ukraine conflicts a lot of concerns in the short term around supply chain, but I think if you look at the long term value of Mercedes, it's very much intact stocks trading at a PETE multiple of less than five times, has about a thirty percent great cash flow yield. I think it's a very attractive stock here today. So for your clients, do your clients, for your funds to date? Is the E s G part

of your offering. The primary driver why they're with you guys as opposed to somebody else, is that your typical client. You know, I would say it really comes down to performance over the long term, and I think that that's really what's driving the growth of our assets, where you know, they've grown tremendous new over the last several years. And I think that that's at the end of the day, what's going to continue to drive E s G fun

flu um. It's it's really that integration of E s G to really help us understand company culture, for example, help us understand the company management team in really how companies are addressing both risks and opportunities around E s G, which we think is very material in the creation or destruction of a company value. And we're talking to us about data because you know, when I go do my financial analysis, uh, you know, I can look at income statements,

balance sheets, casual statements, they're all audited. I kind of get a sense I can compare and do all that kind of work. Uh. And Bloomberg actually one of the most widely used functions on the Bloomber terminals FA for financial analysis. Talk to us about the data that's available to do e s G analysis. I've heard that it's it's not nearly as robust as financial data is. Where's

the industry there and what could be done? Yeah, I would definitely agree it's not as robust as you can find in balance seats and income statements as well as on Bloomberg. But I think you know it's really because there's a subject subjective element right now still at the e s G. There's also not a lot of transparency when you're using a lot of these third party rating agencies.

They're relying a lot on the company to closures, which can often lead to a large cat bias where you have companies that are disclosing a lot around e s G data. Um So, for us, it's really about digging deeper. We've really built out our own e s G team so we can take a much closer look at companies. Um So. I think right now there's still an evolution with regards to the third party data providers. Standardization of that data I think will help over time. We're starting

to see that regulation, I think, which will be beneficial. Alright, good stuff, Appreciate getting your thoughts. Amber Fairbanks, portfolio manager for the firm Arrova talking about E S g uh investing. All right, let's talk about the private credit business. This is a business I like. I like the yields that investors can get there. Um, and a lot of capitals flowing to that biz. John Klein, he's a managing director and co portfolio manager private credit at the firm New

Mountain Finance Corporation. John, thanks so much for joining us here. Talk to us about the state year to date of private credit. His boy, my equity portfolio has gotten crushed. Even my corporate bond, my treasuries, they were crushed. Um talked us about the private credit market. Sure, well, good morning and thanks for having me on the show. I

appreciate it. And Um, when I think about the private credit market, I really think it's one of the best performing asset classes that that that we observe here at New Mountain. And I think you're right. I mean, if you own normal fixed income that has true fixed interest rates, you've definitely gotten hurt this year. When you think about every equity market index that I can think of, except

for maybe energy, it's down. Meanwhile, in private credit, we really benefit from the fact that we have floating interest rates. You know, good industry selection and uh and that's been a real tail win for us. But the biggest drivers floating interest rates. And when you have floating interest rates in a rising rate environment, we pay coupons that rise right in line with the FED increases and that's very

important for our investors. So simplify this for me a little bit when it comes to perhaps some of the things that the market is pricing in here a very hawkish um standard, at least for Charman Powell tomorrow. How does that affect you? So when we think about our portfolios, and the most visible portfolio that we manage, his new Mountain Finance Corporation, which is a publicly traded b DC

you can buy and sell shares every day. When we think about that portfolio, you know, it's floating rate loans. So our average loan is going to have a spread of about uh lieb or or SOF plus six hundred

and essentially UM. As the FED raises rates, those loans are tied to the rate increases in the base rate, and so a loan that might have yielded six and a half percent at the beginning of the beginning of the year is now roughly eight and a half percent, and and if and if if rates keep going up, we could see we could see our loans yielding ten ten percent by the end of the year. And so

that's very that's a very powerful tail wind for our investors. John, what are some of the sectors that you guys are favoring right now in your portfolio? So so, yeah, that's a great question. You know, one thing we really like about our strategy, and I think the strategy is mirrored by some other good private credit funds, is that we

really focus on good, defensive growth industries. We want to invest in businesses that have predictability, they have natural tail winds, they have growth to their business models, and so we

really gear our portfolio towards those those sectors. And I think that's very valuable because when you're in a difficult economic environment, the last thing you want in your portfolio is volatile industries, UH, cyclical industries or secularly challenged industries, and those are the those are the types of companies we really seek to avoid. John has a lot of talk that if we're not intercession already, that we're pretty darn close, and that's something that people need to put

into their models probably for next year. How do you guys think about your portfolio in a recession scenario. So in a recession scenario, I think it just ties into a lot of the things that I just said, which is we want businesses, uh that just have that great predictability. So we focus on software businesses that sell software every year to the same customers and have high retention. We like database companies that provide much much must have data

to their customers, not unlike Bloomberg. And really what we don't want to be doing intercessionary environment is we don't want to be taking views on on how many f one fifty pickup trucks are going to be built in Detroit next year, or what housing starts are gonna look like in Arizona. We just think that's very tough to predict.

And if you're a credit investor, we get paid for delivering consistency of return, making sure that we were able to pocket our coupons and get principal when the maturities do. So those defensive industries are really where we like to stay. So let's go back Macro here because that's my my

safe space. As Paul knows, I I like to do that, I'm curious about simply the implication to you when comes to liquidity and how that affects private credit, it kind of feels like it's almost marching to the beat of its own drum. But liquidity is an issue that is hitting the public markets very well. If there's a lag for private credit, walk us through the domino effect there. Well, I guess you know, um, so my safe spade is

bondons up bottens up credit analysis. But but but when I think about, you know, our overall our industry, essentially, when I think about private credit and liquidity that we have is we we just because of floating rates, we're attracting a lot of investor interests, a lot of capital flows that really are attracted to that floating rate secure debt product, and so we basically take the investor inflows that we get into that product and then we're able

to lend to our financial sponsor clients. So we feel good about the overall liquidity in the market, and in general, we see good demand for our loans because the syndicated market does have liquidity challenges, and so we can really prove to be a a good solution for um for folks that want to buy high quality, defensive businesses. UM. And then that's why we think about it. John, just thirty seconds, Just how's the deal flow these days with

your sponsors? So so deal flow is good? I mean when when when we think back to two one, deal flow is at a record and I think, you know, we're we've come off that record just because the overall

economic environment is less strong. But I think our sponsor clients do see good bargains now that the stock market has declined and valuations have settled, and so UM, If if our clients see bargains and the ability to buy good businesses at at better valuations, UM, we think there's a good opportunity for for solid deal flow going forward, even if we don't hit deal flow levels that we saw in two thousand one. All right, John, thanks so

much for taking the time. Really appreciate getting your perspective here. John Klein, He's a managing director and co portfolio manager of Private Credit, the firm's new Mountain Finance Corporation. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller, I'm on Twitter at Matt Miller three. On Fall Sweeney, I'm on Twitter at

pt Sweeney Before the podcast. You can always catch us worldwide at Bloomberg Radio