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It is FED Day, of course, and the question for a lot of investors today, obviously is what does the FED do here? Did they go twenty five, do they go fifty? What kind of rationale does the FED give for whatever decision they do make, and what does it mean for this economy? Dennis Lockhart joins us. He's a former Atlanta FED president, and he joins us via zoom. Dennis, thanks so much for joining us here. How do you think your Federal Reserve will kind of act later this afternoon?
What do you think we're going to hear from the Fed?
Well, my expectation is that they will opt for a twenty five basis point to cut, but it could go either way. I do think it's a close call, and I could very much be wrong. I have to laugh. Usually I have more time for people to forget, but it's less than four hours until we'll find out, So
I could be proven wrong very very quickly. I think a case can be made for either move, and if the committee is sort of ambivalent, often the leadership of the chair is asserted, and in this case, Chairman Powell may state his preference and I think then the Committee will go along with that.
Why do you think, Dennis, it is such a close call.
Because I think you can make a legitimate case and neither case is panicky, or is emergency based or whatever that twenty five basis points is appropriate or fifty with a little bit of catch up in it and perhaps a bit more of an insurance angle to it. So I think you can make a serious case for either decision.
A fifty basis point move, of course, is not that the normal increment that the Fed typically cuts or raises, and it does have a little bit of a hint of panic, and I don't see any basis for that. That's why I'm opting for twenty five Dennis.
If we were to see a dissenting vote today, would that be news? Would that mean anything to you? Should the market read anything into that?
I don't think so. At first. I doubt that we will see a descending vote. If we see a descending vote. It might come from an inflation hawk who's still concerned about the level of inflation and the distance to two percent. The chair, I think, has welcomed adversity of opinion on the committee. You've heard him say that in his press conferences. I don't think one or two descents would mean that much.
Having said that, at a momentous event like today, where they're pivoting policy in the first cut in what four years, they would, I think like to present a unified face. But it's not going to be a big deal if someone disagrees.
So I was in Canada in Toronto yesterday and I had the pleasure of interviewing Carolyn Rodgers. She's the Deputy Governor of the Bank of Canada, and many times I tried to get her to tell me whether or not they were going to go another twenty five in October. The conversation eventually came into the transmission EFFECTI of monetary policy, and how it took a long time for the hikes to be felt, and then how it's going to take
a long time for the cuts to be felt. How do we know what that transmission mechanism is when you have something like housing which seems to be a structural shift.
Well, we don't know with any precision exactly what that mechanism is. It's estimated as short as a few months, maybe six months to eighteen months. What is generally accepted, of course, is the idea that monetary policy has its effect with a lag, and I think there's plenty of evidence if that's the case. Therefore, the decision that the FED makes today is not going to immediately have an enormous effect on the economy. It will take some time and it will accumulate over the coming months.
Dennis, can you give us a sense of how this FED may proceed over the coming meetings over the next several quarters. Is this something in terms of the cadence of the cuts that they make. Is it's something they want to do in a chunky style? Do they do twenty five basis points every meeting? How do you envision that taking place?
What I would expect to be a methodical, deliberate approach that doesn't bring a lot of surprises to the financial markets. The communications challenge around chunkiness to use your order or pauses and then a resumption and fifty versus twenty five. That requires some very very skillful communication and in order
not to create unnecessary volatility. So I think once they've started this, they'll stay with a base case of twenty five basis points at each meeting until they feel it's time to pause.
So based on that, the futures market is really out priced for that. So we're still looking at over one hundred basis point cut so far for this year if you take a look at work. So if it's a twenty five to twenty five kind of scenario, we still to price out as much as like, I don't know, thirty five forty basis points of cuts. How do you think that J. Powell does that or is it the dots?
Well, he's not going to commit to much in the way of a path of policy, other than perhaps saying something general. Is it that the expectation of the committee is that there will be further reductions in the policy rate, and certainly beyond the end of the year. I think
you'd be very careful about committing to anything. But I think in speeches and in FED speak in general, you'll get some sense that, and of course in the Summary of Economic Projections which will be published today, you'll get some sense of what they're thinking, and I suspect what you're going to see is that they're thinking of seventy five basis points by year end, So the markets are going to have to adjust that thinking, or the markets often have their own point of view.
Do you think the timing of these FED cuts is appropriate here at datish or do you think perhaps this FED might have been at least a meeting maybe too late in terms of starting this process.
Well, according to the minutes, there was a pretty serious discussion of the first cut being in July. They decided to defer that. One reason they did is because the interval between the July meeting the September meeting is the longest on the calendar, and they get quite a bit more information in that eight week period than they get in a six week period, for example. So I think they decided to hold off for more information. So what Jay Palse said at Jackson Hole that the time had come, Boy,
you really can't be very more definitive than that. He had to be. He had to be very confident that he could lead his committee to this decision today. And that's probably because of how seriously they took the idea in July of making a cut in July. So to answer your question, maybe they're a meeting behind, But in the greater scheme of things, I don't think there is great danger associated with maybe being a little bit behind.
All Right, Dennis, thanks a lot. We truly appreciate it. We appreciate all your insight on FED Day. Dennis Lockhart, former Atlanta FED President.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar Play and Android Auto with 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.
Joining us now. Also in the studio is Alo Lua Ganga, a US chief investment officer over at Mercer. So, okay, do you care about twenty five or fifty today? Or how are you looking at this monumental decision at too?
She's laughing at me, you know, I'm laugh because there are two things. Personally, it's monumental because it's the first rate cut in years, so that's the big thing. But is twenty five basis point going to move the need? Unlikely?
Right?
Is just the direction that we're happy about we're finally moving.
All right, So you got your MBA from Stanford. I'm not sure if you're aware, but yesterday Bloomberg business Week magazine came out with the rankings of MBA programs for the six year in a row. Stanford was number one, who Woo Duke was twelve. I don't know what they're doing down there, business Week, but I have to go have a talk with those people. But all right, so
talk to us about the business at Mercier. What are your institutional clients, what are they what's changing these days or maybe in the last twelve to eighteen months back where they're allocating capital these days?
So you know, we're talking about the rate cut. Is it a big deal? It could be, and it could be for defined benefit pension plans because those out there, they are still those out there. I mean a lot of them have benefited from the equity markets, right, so, like that's been great, but in a lower rate environment, the liabilities could become more valuable. So that's what we're watching, right, is that are you appropriately hedged? But then they have
great equity portfolios. They have private equity portfolios that have done well and they've moved into private markets across the board.
So what is that like rate threshold, right, because we're not going back to zero. So if it goes to like four, is that where allocations start to change or is it three? Like? How do you look at that?
So I'll give an example of just the real estate capital markets, right, So, like financing has almost ground to a halt. It's really hard to finance things. Developers are having a hard time. They had one year interest rate type hedges and they're not moving. So an indication there of when things start working is rates low enough to get that to unfreeze the real estate capital markets. So it's great for mortgages, it's great for lending, it's great
for borrowing, all of that stuff. So we start looking at activity and some those other areas private credit.
Alex and I were just fascinated by the growth of private credit. How does that impact your institutional investor clients? Are they asking you to get more exposure to private credit? How do you do so?
Private credit definitely has been one of the areas that's benefited from the higher rate environment. It's floating rate, so the debt covenants and the negotiations that happen there, mean that even though it's not syndicated loan, it's not publicly traded, there was more protections there, so lots of capital that was flowing into just senior direct lending. So clearly, as you're moving into a lower interest rate environment, could that
be impactful. Yes, But on the senior direct lending side, there are other aspects of private credit that are attractive.
So what are their areas also in private credit? And then also side note in terms of say commercial office, commercial real estate. I know that's not private credit, but like in terms of an asset class that's been really messed up.
So I'll say, from a private credit standpoint, opportunistic credits. So some of the more distressed opportunities we're senior direct lending or you know, it's still relatively good. So the opportunistic credit space is great. They have more equity like properties.
But to your point, if you go to something like real estate, real estate valuations, especially core real estate has been stabilizing outside of office and you know, offices is a different category in and of itself, because if you start looking at newer office buildings, older office buildings, what kind of rehab is there The rental everything. So office is still a little challenged, but for the most part, core real estate valuations outside of office has been stabilizing.
I guess one of the challenges there for real estate we've heard from other folks in the real estate business, because Alex and I like to talk to as many people in that commercial real estate business as we can, is just the banks aren't quite as constructive on real estate commercial real estate as maybe people would like, So
it's tough to find financing. Maybe you can get it to the private credit market, but you can't just go to your relationship bank and you know, necessarily get a mortgage on a big piece of commercial.
Yeah, real estate is definitely the area that's taken one of the the hardest hits with the rise in the raid environment. To be frank again, it's painted almost with a broad brush. It truly is office that's having the toughest time. Valuations in other areas has been challenged as well, but it does look like it's starting to stabilize.
What other trends are you seeing right now in terms of interest, money flow, questions, worry spots.
So there's been a big focus with regards to infrastructure and this started some time ago when we started seeing the capital flows from the Inflation Reduction Act and finally dollars going to work there. So that's a focus as we're going into the election. It's also a focus to see if some of those trends stay. So that's one
Private equity has always been an area of focus. However, venture capital, that a lot of clients were very focused on the new innovative types of areas, had slowed somewhat because from a capital standpoint, that's the law, guest, time to get your money back. So venture has been real estate has taken ahead. Venture has taken a little bit of a hit as well.
How about just the big tech trade, the Magnificent seven trade that John Tucker's been in for the past two years. She's just clipping coupons on the way to the bank. Is that still a thing or do we have to go look for other areas of opportunity in the marketplace.
It's the talk about the magnificent seven, it becomes six or what have you. I keep saying it is really because of the index construction, right, So like the weight in the index is what makes it the big focus. It lifts up everything. But if you remove them and look at the rest of the index, like like we've seen some decent returns. Of course, earnings growth coming out of the earning season was good, but the focus on the seven was because of the weight in the index.
So these types of rotations happened.
But the theme of it in terms of AI, which also goes back to your infrastructure play too, how do your clients then, not straight up in video or the equity market, how can they invest in that trend?
I mean, right now, from a publicly traded standpoint, right, there are only a few limited options. However, from a private market standpoint, there are lots of capital that's going into new and innovative companies. It still is venture. It's a longer term type of trend. What we are seeing is investigating from an AI perspective, there is efficiencies, right, so from redundant type of task, but like what are
we really going to get from a benefit standpoint? There's a lot of work going into and seeing how you can integrate it into your day to day, but more private equity and venture investments to get into AI, and then there are only very few from a publicly traded company standpoint, did.
We see Microsoft yesterday unveiling that AI infrastructure fund with yeah, I mean huge amount of money. So speaking of that non public opportunity.
Yeah, I thought the biggest tech trend was me upgrading my iPhone.
Okay, can we just say so, I put my phone down next to Paul. I've had my phone the entire time known me, and because he ordered this new iPhone sixteen pro, he looks at it and starts judging it because he has a chip. So now we've become an iPhone sixteen pros.
No, I'll say, my husband does the same thing. Really, He's like he judges my phone and then I'll get a new one and like a hint to change my exactly.
So that's that's a tech cycle that you can use. Replacement cycle all right in a fixed income space, I don't know. I mean to your treasure's three point sixty five percent, it's not the five percent I had a few months ago, but it's still for like no risk, that's a pretty good return. Do I do that or do I take credit risk?
So to your point, it's not the five percent that it was before. Right now, here's you know we're at current levels, but we know the direction is lower right, So it's how long are you going to be able to sit on that? For as long as you can, that's great. But for our investors that are more institutional in nature longer term, they don't typically turn over their portfolios as much. So if you're focusing on the long term, you go to the spaces that have a little bit
more longevity and where you can get raded. So they were shorter duration at first, you know, maybe a few years ago, and that's moved. They're now investing in equities, private credit to your point, and looking at areas where valuations were depressed. So real estate is an area now that we are looking closely at.
So when you mentioned the areas that have growth, a lot of it does tie into fiscal policy and then obviously that becomes like an election risk, et cetera. But is this time different? Oh God, I hate that I just said that. There's like so much fiscal coming out of DC regardless of who wins in November, and no matter who wins, the will be fiscal spend on stuff. And this is in comparison to say Europe or even Canada, Like, how do you look at that divergence?
So we spend a lot of time looking at the policy or potential policy that's being discussed because the elections are important, of course they're important, but the more important thing is can you get anything through? So what's the makeup of the House, what's the makeup of Senate that will truly drive and determine what we can do on to go ward basis. So we're watching some of those, you know, more local type elections as well.
It's funny they'd be interviewing somebody from BNP Power Boss Strategists there this morning and they had a great flow chart in their piece of research. It's basically if then kind of thing. So if the you know, if it's you know, the economy is good, the economy's bed, if it's the Democrat, if it's Republican, here all the possible outcomes, and they kind of had to play it there and it just kind of made it very clear so again
again that you can't really hedge politically, can you. So it's just yeah, and so I guess the question becomes, you know, can anything actually get done once whoever is in the White House is in the White House.
That's the point. So whoever is in the White House and then can they get anything done.
Right in the interim, we wait for the FED at two o'clock.
And then after that, then what you're going to talk about tomorrow morning?
What did what did that? It was twenty four hours. I don't know. It's just economic data coming up.
But you can drag it out for the week.
There'll be some earnings. Ganga Chief US Interest investment Officer for Mercer Joining is here in our Bloomberg Interactive Broker studio.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Affo card Playing and broud Otto with the Bloomberg Business App. Listen on demand wherever you get your podcasts, or watch us live on YouTube.
We've got some news in the global airspace airline business looks like Alaska Airlines, the Jerry Garcia Airline and Hawaiian the merger looks like it's going to be cleared to close. It's an apartment of camp, it's an innuit. Please, now, I understand that George Ferguson, he knows all this stuff. Senior Airspace and Airlines zanols for Bloomberg Intelligence. So George, what's it meaning for Alaska and Hawaiian to get approval here where where does this combined dentity go? How competitive
can it be? Is this a good deal?
Yeah?
So I think it's.
Uh.
I think it's a good deal for the US consumer because I think there was a risk that potentially Hawaiian could have gone out of business, and so I think, really what this whole thing adds up to is Hawaiian was, you know, was a bit distressed. They've had some problems in their core businesses, especially from you know, wildfires, Japanese travel, things like that. It just hurt their their core business,
their their balance sheet was stressed. And so Alaska coming in and taking them over, you know, shure as that they continue to exist. The combinity had you know, has a footprint that looks like or route network that looks like West Coast US into Alaska, and then Alaska has some long haul into Asia. So it makes Alaska's operations a little more complex with some long haul wide body aircraft. For most US consumers, it's not They're not going to
really be able to tell. But I think the US Department of Transportation, Department of Justice figured out that, you know, like the Spirit in the Spirit Jet Blue merger purchased by Jet Blue, whatever you want to call it. You know, I think letting that fail means it's Spirits in difficult straits. Alaska would have been sorry, Hawaiian had been in a similar place, and I think they've decided let's just let this go.
Does this mean that the Spirit deal could get on the lookthrough or that's definitely dead.
I think that's definitely dead from a Jet Blue perspective. I'm not sure if Justice would think differently about it now, but I think it's dead.
George, what's the current status of just demand for air travel these days? What are the airlines saying these days?
I mean, you know, what we saw in two Q was that budget travel definitely looked like it was taking more of the of a demand. Although you know, it looks like some of those travelers are fading a little bit. And I say, although, because we saw a bunch of capacity come to that marketplace, right, I think, really what we're started to see in two Q this year was a fading of this bounce back travel boom where you know, people were paying anything it took to go on vacation.
And so I suspect we're going to continue to see that as we get into three Q. We're actually working through schedules right now for the US airlines as we do kind of as we close the quarters down, and you know, we're still seeing a decent amount of capacity
coming to the marketplace. So to say decent, you know, we're looking at domestic the other day five six percent growth in seak capacity and you really can't do that in a market that you know, the US economies grow in a couple percent and you don't have this bounce back travel. So we still think three Q looks soft ish. It's not as bad as two Q. Some of the
capacity growth isn't there. We're interestingly, we're seeing more capacity growth come in from the big full service carriers than we're seeing for the budget low cost and notable our carriers like Southwestern, Jet Blue literally pulling back in capacity city as they go into the end of the year.
Right, So you have the big guys are able to compete a little more in capacity and then price, and then the other guys can and that gets confusing. So this is a dumb question. But if I take a look at the big guys, like can you rank these for me here? So you get the Delta American United, They're gonna be the top three, right, what comes after that?
Now Southwest Southwest is the number four, okay, one of the biggest carriers in the country. And then you go into the Alaska's Jet Blues those folks, sorry, so.
Did Alaska and Hawaiian airlines like help them get a big boost?
Like?
Are they in the top five? Now?
Well, Alaska is going to be four or five and Jet Blue is going to be at four or five. So well, Alaska Hawaiian combination probably jumps them a bit above Jet Blue. I haven't looked at this recently. Jet Blue is going to be number five if they got spirit and those two are kind of neck and necks, and I guess they're slightly ahead now Alaska.
All right, George, what we got in your phone? We need our periodic update of Boeing. I know the most recent news was bowing freezing hiring to preserve cash, and you know, what's the update on the strike and kind of where we are with Boeing.
So it goes on. Obviously, you know, folks are talking. I understand that there's a supplier discussion going on today out in the Pacific Northwest. I because Boeing starts to brief suppliers. If it continues, I suspect that, you know, Boeing's draw off suppliers, their off take of the components they're building, is going to have to slow to continue
to preserve cash. I just don't see Hiring doing you know, that much for the cash flow of Boeing, because again, as it drags on, they have to start to really worry about how much cash they're they're burning. They would prefer not to go back to capital markets to show up their balances. We think they're probably going to be close to nine billion in balances as they end three Q and that's going to be pretty tight because that's roughly around what they say they need to run the company.
I'm sure everybody can tighten their belt, every company can tighten their belt and get lower, but they need to be very very mindful of cash burn here.
Yeah. I was like, oh, that's treading the line there. We was talking to the guy over at Moody's who is putting the company a risk on downgrade. If they get a downgrade from like fish S and P and Moody's like, what would that mean? That would be huge, a huge fallen angel.
Right, yeah, it's a big fallen angel. I mean, it's the not the end of the world, right, Companies managed through this.
No, No, I mean it means.
You're going to go to capital markets. If you go to debt markets, it's just going to cost you more to raise write your debt. And a company like Bowing needs this good mix of debt and equity to make the returns work for the equity, and so you kind of hate to be paying higher interest rates. You're going to see you know, some funds that are debt funds can't hold less investment grade paper. They'll end up having this discorged some of that Boeing paper. That means that
you'll see prices gap out in it. Again, it's not.
The end of the world.
You prefer be prefer to be raising money cheaper than what they will be in the high yield markets. But you know, customers, I don't think go away because of it. Nobody can break their commitments for airplanes because of it. Suppliers don't really have other places to go for aerospace business. Right, they could go to Airbus, which is investment grade, and Boeing has to continue to rebuild that balance sheet as they get things like this strike past them.
All right, George, we appreciate you. Thank you very much. George Ferguson Bloomberg Intelligence and your aerospace, defense and airlines analysts are joining us. There.
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John Kapples Joints. He's the CEO for Pivotal Path joint us. Hearn Bloombergate Active Broker Studio. John Real quickly just tell us what you guys are doing over a Pivotal Path as released to the Hedge Fund Business.
Sure, thank you, Paul So. We are a hedge fund research firm and we work with some of the world's largest hedge fund investors and Dowmance pensions, sovereign wealth funds to provide them with the most comprehensive set of data, information and analysis so they can source hedge funds, evaluate them, monitor them, and benchmark them.
Where is the money going to within the hedge fund asset class, where's the money been going to most recently?
Sure so, hedge fund as an asset class is a bit difficult because they trade all asset classes. So if we were to focus on the equity strategies in particular, just like the markets, they have made a significant amount of their returns on the heels of magnificent seven and
a lot of big tech. Going into this FED rate cut, they certainly are more bullish than they have been over the last couple of years, and that means that a larger than expected rate cut is probably going to benefit them in general.
Ok So I mean the as an asset class, how do you frame out for your clients how they should use hedge funds, how wou should be part of a diversified portfolio.
Sure so, again that's kind of the difficulty of calling it an asset class. It can be, but in reality it's a better way to well, it's trading strategies across many assetsses. Right, So, when you look at long short equity, many of our clients large pension funds, they consider it an extension of their equity portfolio. When they look at fixed income relative value or long short credit, it's off
an extension of their fixed income portfolio. For other diversifying strategies like global macro and managed futures and multistrats, it's going to have a different type of role in the portfolio to maybe minimize downsides, provide uncorrelated sources of returns, and hopefully alpha.
Is one of the things I've noticed being on wall streets since the mid eighties is just a the growth of hedge funds, but b the seems like the consolidation that if you're a big like Millennium or City or zero point seventy two, you can get money, tons of money. It flows there. But if you're like the hot shot trader Morgan Sanley has had three or four years and once a go ahead raise a billion dollars, that doesn't seem to be as available today as maybe it was
twenty years ago. Are we seeing too much concentration, do you think in a hedge fund business?
So, I think it's a great question, and I think the answer was yes. Up until about a year and a half ago, we saw the new launches for hedge funds significantly down. We saw new capital for emerging managers significantly down. That has all actually changed. We're seeing a huge trend this year where we're tracking almost one hundred and fifty new launches in twenty twenty four into the
second quarter of twenty five. But more importantly than that, these new launches come from hedge funds that are above a billion dollars in assets, So in terms of pedigree, we're seeing significant amount of quality launches. But in addition to that, a lot of the capital that they're receiving is actually from the multi straps themselves. Yep.
And we actually have a Bloomberg exclusive story out on the Bloomerg terminal today Millennium Citadel breed a fourteen billion dollar pack of hedge fund cubs. So it was just like Julian Robertson from Tiger seated all his cubs. Now it's Ken Griffin and i Isy Englander from the leading.
All the cubs. Wait, so is that just because there's just more money out there? Or like, why is that so you basically have the big guys and investing in the little guys and the whole thing, Like, why are we seeing it like that? And what kind of strategies?
Yeah, I mean there's a number of reasons. I'd say one of the primary reasons is that the institutional investors themselves are starting to based on multistrap performance that actually has been slightly down, not very much, but slightly down, and also relative to a higher risk free rate, they've been looking to create more transparency and doing that through single strategies. It's a lot easier to understand along short equity strategy focused on technology than a multistrat that may
have three hundred different pms in it. So part of it's the investor base that's pushing that. The other part of it is that the investors are also wanting reduced fees, and running these large multistrats is extremely expensive. Part of that's for signing bonuses, retention bonuses, and things like that. That's part of the biggest amount of overhead that has
often passed through to the investors themselves. And so a lot of these pms who have done extremely well inside of these pod shops or multistrats are now seeing an opportunity to spin out, maybe change their quality of life a little bit, and the multistrats themselves are saying, you know what, we should actually fund that and be a part of that, as opposed to losing that talent and in fact they can do so and win in the same time because they can invest in a separate account
and they can still have control but also reduce their overhead costs and the fees that a lot of their investor clients are not happy with.
I don't know for me. One of the biggest piece of news in the hedgewind business rulers just over the last couple of days was Steve Cohen announcing that he was gonna step away some active management of his funds. That must have been a buzz within your industry. What are people saying about that? Absolutely?
I mean, he's definitely one of the pioneers in the industry. He's one of the most well respected investors for sure. One of the issues in the hedge fund industry has always been succession, Right can you get past the founder and get to the next generation of talent and continue to build a high quality institutional business. And that's something
that we still haven't seen that many examples of. So, you know, he says he's going to obviously stay in involved in the business, and that's public information, but we're always looking to see can that next generation of talent manage the business continue to grow assets and continue beyond their founder.
What kind of strategies right now are doing well? Like, what are hedge funds broadly doing, how are they positioned? Like what what are some of your big takeaways on that?
Yeah, I mean there are a number of hedge fund strategies doing well this year, and VIDA well, the TMT or technology, media and telecom managers absolutely, that's been a big part, and companies in similar you know AI exposure. But beyond that, we've also seen financials come back, you know, as we've seen in the market with the market goes, a lot of the hedge funds because they are often long biased, especially in sector focused strategies. So financials is
leading the way. Healthcare is also a very strong performer this year, and these are sector focus managers in biotech, in pharmaceuticals, but especially biotech. And then outside of that, the multistrats continue to do well. They're you know, up about seven percent year to date. That's well ahead of the risk free rate and it's all uncorrelated. Lastly, it's the equity quant managers that had been kind of left for dead after twenty twenty, where they had a five
year period of generating almost no returns. Over the last three plus years, they've been annualizing over nine and a half percent, again uncorrelated, purely in the form of alpha, and so investors are turning back to systematic and quantitative managers as well.
And just broadly defined money still going to hedge funds right, still a net inflow.
Year after year, so this year not really, but it's not for a lack of interest. It's actually much more related to the lack of distributions.
In private equity.
All of the clients that we speak to are actually more interested in hedge funds because they performed so well since COVID and because of the greater liquidity that they offer. And so we're seeing even from private credit, we're seeing for the first time surveys are now telling and our clients are saying the same thing that they're more interested in the liquid side of credit than in private credit. Same thing in private equity. They're starting the pendulum swinging
back towards public equities. The problem is a lot of these investors lack of the liquidity to do so, so assets are not really growing that much beyond organic returns. And in addition to that, even though I've talked about all these new launches. The capital is oftentimes being recycled from those multi stratchs themselves as opposed to new capital flowing in. But the interest is there, all.
Right, John, Really interesting stuff. Really appreciate chatting with you. I noticed that your firm, You and your firm were represented in this Bloomberg are citing your research. John Kaplis's CEO of Pivotal Path, give us an update on what's happening in the world of hedge funds.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecard Play and Android Auto with 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.
It's been dank because you haven't heard you yields a little bit higher, stocks going a whole lot of nowhere. Joining us now for his day is Jeffrey Cleveland, chief economist over at paid An a Regal. All right, Jeffrey, twenty five or fifty place your bets twenty five?
Why I don't see the urgency to cut by fifty? I think you know stocks are at all time highs layoffs are quite low. We had a decent retail sales report yesterday. So usually if the FED goes faster, it's because we're in an obvious financial crime or we're in a recession. And I don't think you can make either of those cases or of those arguments. So it seems like twenty five would be the best path here. But I don't want to protest too much. I mean, I think we're gonna go middle of next year will be
you know, four percent on FED funds. End of next year, end of twenty five will be at three and a half percent. So they want to go faster. I want protest.
It's good for stocks, good for bonds.
I like it. Jeffrey, what do you think, aside from the actual you know, move on the rates, what are you gonna be looking for from the messaging, from the body language and all that kind of parlor game that folks play. What are you gonna be looking for in this meeting?
Well, probably first the dots.
You know, as of June, we had one cut for this year and then we had about four next year. So look for the change in the median dot where they see the policy rate this year and next year. That's some that's possibly some disappointment for the market because market already expects a lot of cutting out over the next eight teen months. I don't even know where that's whether that's going to be confirmed by the dots so well exactly.
So are we just looking at like a bond sell off if they go twenty five and don't confirm almost you know, five cuts this year?
Yeah, potentially potentially because the bond market, It's like at the beginning of the year, Alex, the bond market was expecting seven rate cuts I think at some point in January. So far we haven't had any rate cuts, so the bond market was wrong about that. So in this short run, yeah, that could cause some volatility, you know, So that's an issue today.
I think also the messaging.
I think one, you know, if I was going to build the case to cut more quickly, I would just say, hey, the inflation threat is gone and the real threat now is you know, economic downturn or late further labor market leakness. And then I would say to everyone, hey, we don't need to be at five thirty on the funds rate if inflation is not a risk we need to get back to neutral.
And we want to get there more quickly.
That would be the argument, would say, So how the FED chair tells the story today and the press conference will also be important to take in.
So, Jeffery, is it your belief at this point in time that the economy is in fact in decent shape. Yes, maybe slowing certain parts, but in decent shape.
Yeah.
Absolutely, I mean layoffs are low. I think GDP in the current quarter is tracking two two and a half percent. We think for the full year will be will be almost two and a half percent on GDP.
Paul.
The unemployment rates at four point one four point two percent we think at year end, So that is still a great environment. Now you've got the FED cutting, So this is very bullish for risk assets. I think over the over the medium term, great for bonds, great for stocks.
Where in stocks though I think it was Bank of America, but saying this is a great point for mid cap stocks because you get the valuation boosts from small caps without kind of the risk and the slowing sales growth, but you don't have sort of the top line like you would for large.
Cap Yeah, I mean, I think that's a decent argument I just think that really for me, and if the business cycle has more room to go, then stocks will continue to make new highs, especially if.
You have now a supportive FED.
So that's the lesson of history and all the different business cycles. When you get to the end of the business cycles when you really want to get worried about equities and maybe get more defensive.
I don't think we're there yet. In the next six to twelve months. I think the economy will continue to.
Grow so more like I guess the nineteen ninety style soft landing, that would be what I envisioned for the economy.
Hey, Jeffrey, how about the US labor market. That's obviously something that the FED looks carefully at here. What's your kind of take on where we are with the labor market?
You know, well, everyone's been talking about the unemployment rate rising, so in our view, that has you know, that has happened, but it's due to a you know, perhaps good reason expansion and labor supply that has helped the FED actually because that has eased some of the labor supply demand mismatch wages have cooled a little bit. I think from a central bank perspective, they like to see that the labor market is in balance, but it has pushed up
the unemployment rate a little bit. I don't think we uh the labor market is. It's definitely job growth has slowed, but we're still seeing a decent enough job growth when you look at the three month moving average of non farm payrolls to keep I think downward pressure on the unemployment rate. So when you look at our forecast out into the middle of next year, still have a pretty low unemployment rate, right around four point one four point two percent.
Okay, but that's the case, then why do we need like nine rate cuts?
Yeah?
I mean I don't think you need nine. May I think you could build you know, in our in our model of it, you could build a case for let's say three twenty five basis point cuts this year Alex, and then two in the first half of next year. So more like five not nine. Why Because you don't need to be at five thirty on the funds rate. If inflation is continuing to moderate, you can you can take your foot off the brake a little bit if you will, so, but nine. I can't get on board
with nine rate cuts at this point. That's much more calamitous situation. I think that some investors have in mind.
Yeah, that sounds about right. Jeffrey Cleveland, Chief Economist, Peyton and Regal.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Applecar Play and Android Auto with 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.
Let's take a look at some of the regulatory aspects for m and A. Jenriy, senior litigation analysts for Bloomberg Intelligence. It joins us here Tapestry Capri. What's going on with that big deal?
Yeah, you know, I deal to it. A lot of people were surprised at the FTC sew to try to block this wrapped trial. Yesterday was about an eight day trial and closing arguments are coming up on September thirty. I think the judge wanted a little time in between to look at the evidence.
And this is.
All about two companies that would bring together handbags of the brand's coach Kate's and Michael Cores of course, and yes exactly, and the FTC is concerned that means they would have too much market share in an overly concentrated market for what they call affordable luxury or accessible luxury handbag.
I mean whatever Capri has westatchemed on me too. I appreciate they're not handbags, but come on now, so what do you think is going to happen?
You know, it's funny. I went into this thinking that the FTC would win, and I came out after trial. I sat through most of it now thinking that the companies will win. They did a really good job defending the market. And you know, the reason that initially I thought it could go to the FTC is because it appeared, at least superficially that they had a lot of documents that showed that these companies really only considered each other when it came to pricing and promotions and innovation with
the bags and changes in the bags. They suggested they had a lot of data and evidence. You know, it seemed that they would, but it just didn't really come
out in trial. And what we heard from witnesses was really compelling testimony about how dynamic and changing the market is, how how much competition there is out there, fairly easy entry for mom and pops or for somebody who has a bag that's held by a celebrity on TikTok and now you blow up, and that they really don't think that there would be any ability to raise the price of the Michael Core's bag post acquisition.
Definitely not. But that's can you buy that?
I mean, you can't buy these bags on sale ever? Can you again? You can?
Yeah?
Oh yes, I mean that's part of the issue. The Cores bags have been on sale for a couple of years now because the Core's brand is lost what they call brand heat. In other words, the consumers don't think it's that hip anymore or that cool anymore, and so they've had to reduce the prices for those bags in order to get them to sell their product.
It's made same thing, like coach, same thing.
Yeah, and you can buy all these bags on Canal Street, by the way.
I know exactly. And you know what that's the points here is that when they calculated what the market shares would be and what the concentration would be, they completely left out any sales of pre owned handbags, which is kind of a really burgeoning market right now. I mean even Dillard's has a section for pre owned handbags.
Dillard's has a section for pre owned handbags.
Yes they do, and Alex, if you believe it, what we heard in trial is that those sales outstripped the sales of the new handbags.
Wow o, yeah, learn something new. She's going to the.
Well, I'm just I never thought of. You know, Dillards is like a high end fashion place, so the fact that they have sort of, you know, recycled handbags is something.
I was talking about.
Fakes.
By the way, No, we know, we.
Know, we just ignored you, all right, Jen, thanks a lot. We appreciate that genery of a Bloomberg Intelligence. She is our antitrust expert joining us on that. Also, we got to take a look at Kroger and Alberson at some point as well.
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