What's Next For Businesses Amid Delta Variant Spread

Citizens Financial Group and Don um. We have over the last really our heard um, some really pessimistic outlooks due to the resurgence of the delta variant and maybe MoU or whatever other Greek letters are upon us. Um. How does it look in your world? Well, I think we're we're seeing a little bit of a slowdown, but I have to say that we continue to be quite optimistic and we we think we're going to get through some

of these variants. Our clients are actually doing quite well, and our transactional businesses, our M and A business, and our capital markets businesses are all time highs and the pipelines continue to build. So we continue to be, you know, focused on Delta and the and the potential new viruses, but quite optimistic as we look forward and I see

that you bought j MP Group. UM is a capital markets business that I'm familiar within US and folks to work there talk to us about j MP and kind of what you guys are thinking about in terms of you know, making this acquisition in terms of your capital markets capabilities. Yeah, so it's it's really exciting for us. We've been on a five year kind of UH strategy to build out our capability sets UH to be able to do really whatever our client states to do at

any pointant time. So built out to big syndicated financing business, built out I bought three M and a boutiques, recently bought a valuation firm, have a great debt capital market securities business, and what we were missing was was equities. And j MP is just built a tremendous business over the last several years. It's really recording record results and and it also brings us deep sector experience and some really exciting sectors namely healthcare, UM technology, real estate, and

financial services. So we think we think it really is complementary to us. There's very little overlap, so it's kind of a hundred synergistic for us. And most importantly, I think is the the culture there is very similar to our culture and uh, and that's really the most important thing when you're when you're when you're buying a capital markets firm, like like j MP, what's your what's what's your d n A, what's their DNA. What's the similarity

and culture that you like? I'd say client focus, uh, you know, first and foremost, and really a premium on building really deep relationships where deep industry expert these is delivered and we've become really the trusted partner with with each of our clients and that just tends to expand the the ways that we can engage with every other

every client. What we've been able to do for the last several years is really bring three, four or five six different products to the table, you know, as we built at our client franchise, and j MP thinks very similar to that in terms of the way they really try to build deep client relationships. Don tell tell us about loan demand out there. There's so much liquidity in

the marketplace. There's a lot of fiscal stimulus, and we've heard some of the the bank, some of the bigger money center banks and the ernest calls talk about, you know, the loan demand isn't there um necessarily what are you seeing with with your clients in your markets. It's it's it's reasonably muted right now, and you hit the nail on the head is a lot of clients are sitting with a lot of liquidity and they're going to need to use that liquidity before loan demand really picks up.

Where we're seeing it is in utilization rates of our of our facilities, which are six to seven points lower than they normally would be as economy recovers. So the good news on the on the flip side is what we're seeing as record capital markets fees. So if companies are financing and needing to raise capital, we're experiencing, you know, very strong capital markets flows which offset some of the weakness on the loan side. But we think, we think

it begins to come back. Our loan pipelines are looking you know, reasonably good towards the back end of the year. Uh and and some I would call it transactional loan facilities like abs, warehousing and things like that are beginning to get a lot more active. Does the rates environment depress you. I mean, it doesn't seem like even the terminal rate if you look at it, depressed me emotionally. Yes, it's it's tough. I mean with the flat with rates where they are in a flat yield curve. You know,

the spreads are under pressure. We've been able to you know, lower our deposit costs in my business reasonably aggressively, so we've been able to hold our net interest margin. Um so so far, so good. But but you know, the spread income is is certainly under pressure for the entire industry. Don talk to us about the credit quality. What are you seeing in terms of credit quality for your portfolio? And again, it seems it's come in much much better

than expected. It seems like over the last eighteen months, given the economic disruptions, what are you see? It's terrific. I mean every I won't say everyone, but the vast majority of our companies are doing better than we expected them to do. So they're they're clearly seeing, you know, um, positive things on the horizon. And a lot of it is because a lot of these companies really hunkered down.

And I've said that this this downturn, the COVID downturn was much different than prior downturns, and that it was immediate and it was deep. So CEOs and CFOs got very serious and right sized their businesses very quickly, and that allowed them to build up liquidity and and actually come out of the beginnings of the return with huge amounts of excess capacity. So that's resulted in all the releases that you're seeing all the banks make in terms

of their credit reserves. And we still we still see very bright things on the future and we we really have moved beyond the credit issues that we we we were staring at about you know, a year and a half ago. Surely fiscal spending didn't hurt and when we I mean, it's it's not gonna last like that forever, right, So eventually, um, the federal government going to stop spending you know, multiple trillions of dollars extra every year um or or will they What do you think about that?

Is there a fiscal cliff or or or is there not? It's it's there. There's there's a there's a fiscal cliff in terms of removing some of the stimulus that's been there. Some of that will be offset with things like the infrastructure program. So it will be different forms of spending which will continue to be simulative stimulated. That that it's not really worrying the client base right now. What's worrying

the client base is the supply chain. And if if we hear a common theme from from a broad set of clients, it's the inability to get goods that they're trying to source in the market. And people do expect

that to continue for a while. So that's it's in a funny way, that's having a constraining effect on the performance of some companies, even if their order books or strengthening, so as well as they're doing, they would be doing even better if they weren't having the supply chain and in fact their labor problems that a lot of them are facing in terms of if you can hire someone, the cost of the as hires are going up quite substantially. All right, done, You, like a lot of other bankers

are saying business is good. What's the biggest risk out there? What's the worry for you guys? I think a big resurgence of covid um so that I think that and or some geopolitical event that nobody can anticipate. I mean so so but the thing we're focused on is tracking you know, COVID. It feels okay to us now and uh, you know, we're out traveling seeing clients, were getting good reports from uh, you know, most of our clients, and um, we're pretty optimistic. And five seconds here, are you back

in the offices. Are your teams back? Yes, they are. I'm sitting in New York right now, and uh, we we were trying to get people back. I think it's super important from a cultural standpoint. Yeah. Absolutely, Okay, that's the debate here for a lot of companies. Don McCree, thanks so much for joining us. Yet again, we'd love getting your perspective on what's going on out there. Uh. In corporate America, Don McRee is ahead of commercial banking

for Citizens Financial Group. And again is what we've heard from a lot of bankers. Business is good. They're clients are continuing to invest. Uh. They are looking forward, Yeah, looking for capital, looking for returns. Uh. And business is good despite a flat yield curve and low interest rate environment. Now, as Paul has been saying, we're gonna bring in Randy Swimmer right now, Senior Managing Director and co heed of Senior lending. At Churchill Asset Management, they have thirty one

billion dollars in committed capital and UM. One of the things that that obviously people are looking for UM desperately and not finding very easily, Randy, is return. I heard Howard Marks the other day say he thinks, you know, three basis points is enough reward for the risk of high yield debt, of junk debt, which I thought was pretty amazing. Where are you finding return? Yeah, so if you think about where high yield used to be, it used to be high yield, it used to be you know,

high sing old digits UM. It has not been the case for a while. There's reasons, technical reasons why that's the case. But what's happened with investors. They're looking at the private market now because the premium, the so called illiquidity premium, because the private market typically doesn't trade the way the bond market does. That premium is anywhere from a hundred to three hundred basis points over the liquid

credit markets, and that's attractive for investors. So, Randy, give us a sense of you know, the credit quality in the you know, the private capital business, UM, in the leverage loan business, UM, because it seems like it's been better than expected, you know, after just coming through eighteen months of this economic disruption brought about by the pandemic.

What are you seeing? Yeah? And in fact, if you look at the overall direct lending and private credit business defaults over the last eighteen months been lower than the broadly syndicated market, which are the large liquid loans and

then the high yield market. And in part I think that's because the private credit market has been focused more on defensive industries in general, less on things like oil and gas and retail, which obviously have gotten hammered um, you know, through the COVID period, and more on defensive business to business sectors like healthcare, software, technology, and business services.

And so being an active manager in private credit um meant certainly for us going into COVID, we focused on those sectors that are less correlated to consumer spending because historically we've been doing this for fifteen years under the Churchill banner, we've known that recessions do tend to be you know, led on the consumer side, and so the less consumer facing businesses you have generally the better when you go into these And that's exactly it happened for

us and a few others in the COVID period. We have no defaults or losses related to COVID, and so then you come out and you're still how the tail wind here with these these we call them to have businesses, the businesses that have done well and have been relatively unaffected by COVID. I wonder about the still the underperformance of UM. You mentioned oil and gas energy, the underperformance of basic materials producers. We haven't seen them bounce back

with the rest of the market. And I know at least the in Europe we see basic materials and energy trading just about half the forward pease of the broader market. Is that going to change? Well. Part of the focus now is related to the economy as a whole. And one of the things we recognized about the biological threat that COVID represented was that it really UM was moving around the the the economy and how businesses were reacting

to that threat. And what was interesting was as you think about where we were and predicting what was happening with the economy a year ago versus where we are today. The iron is, we thought we were going to be coming out of the downturn UM and at the point where we were going to be looking towards the end with a pretty pretty clear sailing and that would be could be measured across the economy in terms of overall

GDP growth and so forth. And what we have discovered instead is that the delta variant has had has really weighed down on the potential growth that we could see across the economy. And obviously things like commodities are driven by that growth. And you can see in the equities markets, since you know, kind of returning from the labor day weekend, UM, there's investors are kind of concerned about what what does that mean in terms of the growth for this year?

UM certainly employed him. We've seen that impacted in the most recent label reports. What does that mean sort of medium term for growth because that is going to impact some of these more cyclical businesses. And Randy thanks so much for joining us. We really appreciated getting a look at the middle market private lending business. It is a increasingly liquid business where you can get some very attractive relative returns UH and Randy Schremmer gives us some color there.

Randy Schremmer, Senior Managing Director, CO head of senior lending at Churchill Asset Management. Think about thirty one billion dollars in committed capital. Uh. He is a alum of the JP Morgan Chase. That's early in my career. I was at Chase Manhattan Bank. We were leverage lenders to media companies and um. It is a very good business, but it is all about credit quality and doing the really deep dive and credit analysis to see if the cash

flow is there to pay you back. As you're lending against cash flow, and a lot of these businesses not against assets like inventory or hard assets, so you can have to do the really good cash flow analysis. Right fifty four highs for the SP five hundred this year, strong earnings, an accommodative Federal reserve, although tapering is certainly on the table later this year. What is an investor to do? Let's bring in Jordan Jackson. He's a global

market strategist for JP Morgan Asset Management. He's also a Wahoo from the University of Virginia, but we won't hold that against him. Jordan, thanks so much for joining us here. What are you telling your clients here at JP Morgan Asset Management about this market? Right here? Well, it's as certainly an interesting market. You know, I'm still of the opinion I'm fairly bullish on the market. I I stay

constructive due to a couple of reasons. So I think we have a powerful tail wind from the FED um individual fiscal stimulus. I think the key there is tapering is not tightening. Right, We're still looking at an additional rest least seven hundred eight eight hundred billion in fiscal stimulus that should kit the market, uh between now in the middle of the middle of next year. I think bibacks are going to be strong and and may accelerate

from here on out. And I think corporate balance sheets are sitting on high levels of cash with with low leverage, and that should should be supportive of subsher hold the distributions going forward. Um. You know, look, I think growth is still going to remain above trend as well. And you know, I think all those paints are pretty goldilocks scenario for for equity markets. Where do you see the best valuations or where do you see the best value?

I should probably phrase that differently. Sure, you know, I still see some value in the more cyclical, value orientated parts of the market, but I think investors should really start to strike a bit more of a balanced tone when we start talking about, you know, value versus growth.

Obviously that the large tech names continue to kind of play a bit more defense and in a market like this, as growth concerns continue to weary the markets, and and the delta bar continues to spook the markets as well. But I still think we're a biased for uh steeper yeld curves. I still think that we're of yields are at today. They're just not aligned with the fundamental picture or the fundamental outlook, and so um I think in

that environment, you know, financials can still do well. I still think energy and industrials again, those value orientated parts of the market can can do well as the economy continues to reopen. So it's a it's a it's less so about you know, trying to overweight value versus growth. But I think striking a bit of a balance between

the two makes makes a whole lot of sense. How about that sixty forty portfolio, Jordan, Is that still a thing or is that a thing of the past, Given where global yields are right now, I'd argue that it's it's it's it's it's a thing of the past. You know, when we look at sort of valuations on the equity side and on the fixed income side, you kind of

put those two together. On the forward returns that you're getting out of sixty forty portfolio, um including you know, baking in inflation, are are roughing around one to two on it on a real real return going forward over the next five or ten years. So that's just not

going to cut it for for investor. But I think it's it's less about you know, how much of a sixty you need or or how much of a floor do you need, but more so about you know, looking at the overall portfolio and identifying where the opportunities to add things like alternatives where you can sort of uh more liquid alternative if you can head some of that equity downside, but also complimenting that with some of some more private alternatives as well, things like real estated infrastructure

for those qualified investors who that can provide a uncorrelated return stream um to to the overall portfolio. So I think there's gonna be a lot more conversations around alternatives within that sixty forty portfolio because we know just returns in public markets just aren't going to be there going for it? What about crypto? A lot of people are

talking about forty one portfolio. I mean, look, if you're talking about discussions, I'm sure these these are discussions you're having with investors, whether or not you're allocating money to it, right absolutely, And and and investors are are you know, asking for you know, where are their vehicles and and

avaluence they can access access to market? Um. You know, look, I I think for those investors who are willing to to stomach that kind of volatility, obviously, the move that you've seen in the crypto markets over the past couple of days certainly comind us that it is is a very very volatile market. But you know, I think cryptal is here to stay. Um. And again, for those investors who are able to craft out a sleeve of the portfolio making some of the volatility, I think, I think

go for it. Jordian, do you think this market is going to rationally I guess I'll use that term um kind of discount the tapering that is expected later this year. Do you expect a taper tantrum of any sort or do you think that that's done a good job of kind of signaling where it's going. I like the phrase tapering is not tightening, yes, because they're still growing the balance sheet right, just at a slower pace. Again, absolutely, as I mentioned earlier about about another you know, eight

hundred billions, so still set to liquidity. It's set to hit the market from now until the middle of the middle of next year. You know. I think the Fed has done a pretty good job at um you know, communicating tapering is on the table and when tapering is likely to occur, and so I think the markets have

more or less are are prepared for it. And I think the big difference that that I got really out of the Jackson hole and the difference that I've identified um or I'm seeing with relative to taper is the chair has been really good at separating tapering from when

interest rate hypes are are expected to come. When Ben Berniki came out and made thirteen and made comments about tapering, you saw you saw the front end, oh I s markets essentially moved from pricing in no rate hikes over the next two years to pricing in five rate hyps by September thirteen, UM. And so there was just this there's this idea that you know, a tapering the balance sheet was immediately going to uh push the push the

FED to begin hiking rates once tapering was done. I think their own power did a really good job at separating the tapering discussion from the interest rate high discussion, and so where I was a bit more in the camp that the BED would be a little bit more aggressive to tape of the balance you to open up the pathway to high grade from sometimes maybe the fourth quarter of next year, of the first half of I think they've done a good job at sort of sitting

on the silines and saying that, hey, it made me the second half before we see some rate hikes. Jordan, thanks so much for joining us. Pleasure having you on the program. Jordan Jackson, global market strategist with JP Morgan Asset Management. This is Bloomberg. Well, the delta variant is keeping this pandemic on the front burner for investors as an issue. The questions include what will this mean for economic growth on a global basis going forward. Let's bring

in Constance Hunt, our chief economists for KPMG. Constant, thanks so much for for joining us. We really appreciate you taking the time here, how are you factoring into your g DP model. Um, this lingering pandemic driven by the delta variant. Yeah, hey Paul, great to be with you. It really comes across in two key dimensions. One of course,

is the global supply chain. So with the pandemic lingering, it means that factories have the susceptibility to be shut down, that people have the susceptibility of course of calling in sick and being unable to work, and and of course all the issues with shipping. I mean getting someone to work in the merchant marine ship sector during a pandemic

is really really difficult. So they're in addition to the supply chain bottlenecks at the factory floor, there are supply chain bottlenecks with regarding getting goods out to market, and of course that has knock on effects and impacts our economy, and we see that most acutely in the chip shortage that's impacting the auto sector as well as in the

number of other sectors. And as a result of constants, you're you're reducing your GDP forecast drastically if I'm reading it right or is it well, it's from a quarterly perspective, very drastically, Yeah, down to one point seven percent from six previously. Yeah, for the third quarters, so for the year. Just to put that in perspective, right, that takes us from a six point four percent growth fore to four

point seven. So our assumption is that we do see some easing of the delta variant in the fourth quarter. But you know, the mistake we have all made ever since the beginning of this pandemic, and we continue to make because I think people are optimists at heart, um, is that we continue to underestimate the impact of the pandemic or we we revert to the mean of saying, Okay, well we'll get through this and then we'll get back

to normal. And you know, when we look at what happened, for example, to consumer confidence in August that our decline, everybody had penned their hopes on September being to get back to normal time, schools would get back to normal, offices would get back to normal, life would get back to normal. And there's just nothing worse than dashed hopes.

What is your sense constance for this supply chain? Because you know, Matt and I we talked to you know, lots of corporate executives and from across a whole swath of industries, and we're just hearing that it it continues to be a big issue. How long do you think it will be a big Yeah? And and kind of

what does that too for growth? Yeah? Well, I mean here's where you need me to be on with an epidemiologist or a virologist, right, because how long it goes on really depends on how long the pandemic goes on. And and I think obviously, because we have the vaccine, we know we have the potential to have the pandemic go on for a much shorter time than history large

pandemics of this nature have gone on. But yet it's the distribution of that vaccine across not just the US population but the world that is really causing the pandemic to linger and and having continued health and economic effects. And if we can answer the question of how long the pandemic goes on, we can answer the question of how long the supply chain problems go on. Yeah, I mean, m the supply chain issues are so broad. One of the issues those just the chip shortage, and surely that

is less affected by the virus. Now, Oh, I mean Obviously it had its origins in in um In in terms of the type of chips that were being made, right, so that the year up to five G and then the shift and demand due to the pandemic away from five G related chips to more traditional chips. So there's that aspect. But but I do think the the chip shorg is being impacted by the pandemic because a lot of the factories are not able to operate a full capacity.

And then the shipping issue that I mentioned, right, so even if you get them produced, getting them into a port that's clogged up, it has delays um getting them onto a ship, getting them out of of Asia into the port of Los Angeles. I mean, the backup of ships in the Port of Los Angeles is significant, and um there just aren't enough containers to to get the

get the goods distributed throughout the country. And we look at if we look at goods consumption in the first half of this year, it grew it in nine annualized rate, and just to put that in perspective, goods consumption in for the whole year grew at about three and a half percent. Right, So this surge and demand for goods is also clogging up the supply chain and taking up

room on trucks and container ships. UM that might otherwise be uh you used fight ships and and and and and so we're seeing bottlenecks across multiple dimensions and it just takes time to work through those bottlenecks, even if we could produce the same number of chips at the factory floor, which we are not. What's interesting, uh, Constance and Matt Charlie Pellet Bloomberg Zone. Charlie Pellett gave me

a great app to use. It's called find Ship and it kind of tracks all the ships around the globe and boil. There are a lot of ships off the port of Sandals. I know it's on the terminal map, but not everybody has terminal. I know, but not everybody has a terminal in front of them. All right, I just want to point out and that's that is a very cool thing. With map go on the Bloomberg terminal you can also track all the ships. And by the way, I follow us very closely as well, because I want

to I need to ship a car, hope. I hope to ship a car and a motorcycle, um and some motorcycles to the US, but it's so expensive to get a container right now, especially for privacy calls. Unbelievable. Please do all right, Constance always great talking to you. Thanks so much for joining us. Constance Hunter talking to us about the Delta derail. This is Bloomberg. 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. Put on fall Sweeney. I'm on Twitter at pt Sweeney before the podcast. You can always catch us worldwide at Bloomberg Radio