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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. Let's turn to Credit.
A runny in corporate debck gaining momentum despite fears of sticky inflation, spreads on US high yield bonds falling to their lowest since January twenty twenty two, even with markets pushing bank rate cut expectations. Blue Out is one of the beneficiaries of the credit boom, seeing good shares saw more than seventy percent over the last year. Mark Libscholtz, the co CEO of blue Out, joins us now for more market. Morning to here, Good morning, great to be here.
Let's talk about what's happening in the world credit. So we have the right shout. Last year lasted about five minutes and banks failed. We moved on really quickly this year. If I think in about Commissioner Ray to state Cira, Cira, who's going to be next? And we're going to have this credit stress of the three hundred and fifty portfolio companies that you'll across any distress whatsoevera right now, the.
Portfolio is straw. The economy read through, our portfolio looks quite positive. Certainly, wind back a year and I imagine if we were all sitting here I had the privilege of having this conversation with you a year ago, I think we'd probably all be talking about what type of recession will do we be in right about now? And we're not. You know, I look across those three hundred and fifty companies and you look last quarter, our companies on average grew fifteen percent. They're EBA dah. So that
is no, these are very selected. Obviously, our job is finding great companies and to make loans to really strong businesses that have a lot of potential, a lot of growth, and where we can therefore of a lot of cushion in our loans. But nonetheless, if our portfolio is growing fifty fteen percent. We are not in a recession nor on the edge of it, and we don't see the normal indicators yet that would suggest a meaningfully weakening economy.
Do you find that your portfolio companies can handle paying ten twelve, fourteen percent interest rates and survive and thrive? Are the higher yields that we're talking about, not restrictive based on the growth that they're projecting.
Cutting through it all, they're doing fine in that context. I think what we now know from we didn't know a year ago, is this speculative question of with rates rising to levels of course and seen in many people's working lives, they hadn't even experienced interest rates, they had
like a positive number to them. But in any case, at the end of the day, what we now know is we have a full year of those rates have run through the p and ls of these companies, And I mean, of course, by definition there's going to be an incremental company that will struggle more in a higher rate environment, but writ large that has been absorbed by
the system and quite successfully. We're not seeing these waves of changes or even the precursors to them, like asking for lots of amendments or meaningful changes in hey, can I pay in more debt? Can I pick my interest instead of pain in cash? So the indicators that are not even just what we would suggest an issue kind of have to predate an issue just aren't there in any meaningful degree yet, which.
Is fascinating to me because we talk about is it restrictive? And then have companies actually felt this. You're talking about floating rate note loans, so you're talking about companies that actually are handling higher benchmark rates now not necessarily waiting to refinance. How has it affected the demand given the fact that companies have seemed reluctant to borrow to fuel growth given the higher rates.
So indeed, look, our specialty is senior secured floating right debt. So to your point, you know, this environment has been very good for us, good for our investors. It's raised on a quite quick basis the returns people are and of course that's the point to be inflation protected in our kind of product. So companies have absorbed that pretty successfully. People are borrowing capital, you know, at the end of
the day again of course supplying demand. We all know more expensive capital means people are going to use, perhaps less of it, but in the world of private equity, in particular in buying a company. And I started in private equity myself back in nineteen ninety five. Wasn't even called private equity then. And at the end of the day, that cost to capital it's a bit of a calculation, right, It's how much you can pay for that company. Of course, it reduces the value you can pay for an enterprise,
but it really isn't prohibitive to conducting activity. Which you really need is an environment where people have a common set of expectations. It's really more about the gap between buyer and seller in terms of their expectations than it is the absolute numbers.
Was it aasy back in the nineties?
Competitive?
Now?
Was that less competition? How different was it?
What? Was a lot different? That is for sure? And there certainly allow less competition. If you look back to nineteen ninety five when I was lucky enough to join k you know there were two large private equity firms LBO firms as called then at the time, Forceman Little and KKR. The world. Now we're talking thousands and trillions of dollars of count.
Everyone wants a piece of this and I think it's a worry that maybe it just ends up with payple chasing the same deals, the sloppy deals, and maybe the traditional lends get squeezed out. Is that how you see things?
So the opportunity by virtue of that evolution of the market, trillions of dollars of private equity. What we saw at Blue Owl was the opportunity to create the financing source to meet that need. Now, this is a very young industry comparatively, you know, when we talk about that very point, thousands of private equity firms Amongst the folks that focus on the large area, we focus on the very largest financings,
very largest companies. There's just a few of us. So it's a very young industry by that measure, and I think therefore a lot of opportunities ahead.
To his point, though, a lot of people would argue that we know what's going on with some of the public markets because basically you've seen the best and the brightest kind of weeded out and the others kind of fall out of bed and maybe gone to.
The private market.
So sort of this question of is there some behavior that could lead to a higher default rates that could be somewhat masked for the lack of transparency.
Do you buy into that?
Do you see colleagues that are operating with maybe less or lower standards than yourself.
I believe that the private market has fundamentally added a stabilizing influence in total. Now, of course, again you're going to have a dispersion of different participants, so we'll do better than others. We're intensely focused on credit that has been where we have lived. You know, we've done about ninety billion dollars in loans and our running loss rate has been six basis points, So there really is a durability. But more important for the markets written large, having a
steady source of capital through ups and downs. During the pandemic, we were still providing capital during the run on the regional banks. We were providing capital. When inflation was surging, we were still providing capital. So a healthy system is not one where private markets take over from the public markets, but it is one where we have a large vibrant private market alongside a large vibrant public market. That is a better economic platform.
You inked a pretty big deal last fall with Mubadala. Do you see more interest from some of these sovereign wealth firms, particularly in the Middle East.
We do you know the private lending. Direct lending was adopted a generally speaking earlier by US institutions, and part of that, I think is just the maturation to a degree from really ten years ago this flavor of direct lending, the lender of first choice as opposed to lender of last resort really didn't exist. So this is kind of a ten year industry in that regard, and now we're
seeing an interest increasing interest with non US investors. Part of it, I think is now appreciating the durability, so to speak, a safe haven. Where do you want to be when times are uncertain? We just talked, you talked earlier about the dispersion of views. I think where you want to be is senior secured floating rate. So I think that the non US investors are appreciating that being a core holding. And at the same time, just look
the absolute returns. When you can generate double digit returns taking that very senior position, that very moderated risk, that absolute level of return starts to really resonate for people in non US markets as well.
Can I finish with a terrible question, is the evidence whatsoever? And it's so that this FED is sufficiently restrictive based on what you see, and you'll will specifically.
So here's what we see in our world. Inflation's a sticky animal. We saw it starting a year ago, and there's plenty of things. We're not macro prognosticators, but so three hundred and fifty companies looking bottom up, we continue to see inflation be sticky. There are offsets, for sure. Look, shipping costs come down dramatically. We have a consumer products company that was paying twenty thousand dollars a container, now they're paying thirty five hundred. But wages are sticky. Wages
are still rising. So we are not through the teeth of this inflationary challenge. We're through the worst of it, or are not done with it.
This was probably better to get your answer than ask another economist this morning. Mark's going to see you. Thank you, sir, mar Lifscheltz there of Blue Out Capital. I think the answer, Bramo, I think you heard the same one, right.
I mean basically no, because if we're looking at companies that can handle higher borrowing costs and are still hiring and it's still expanding, where's the restrictiveness.
It's pretty revealing.
It's the latest. This morning, shares of half Hag Lloyd lower in Germany after the shipping giant reported a decrease in earnings and warned of a further decrease in twenty twenty four on a quote volatile and challenging economic and political environment, especially in view of the current situation around the Red Sea. Rolph Habin Jansen, the CEO of haf hag Lloyd, joins us now for more. Rolph great to catch up with you, sir. I want to talk about
freight rates. When freight rates first night picking up earlier this shar year on the back of this story, there was a sense from some people that maybe that was temporary. Do you see that as the new normal now and ultimately are they going higher?
I think we saw an initial reaction, especially sport rates went up a lot, because that's a combination of everybody then trying to book things quickly. We were running up to Chinese New Year and a lot of uncertainty. I think right now we see that the services are stabilizing, which means also that the market is getting calmer, and as a consequence of that, I think we also see sports traits in particularly coming.
Down just how much time an investment has gone into finding alternative routes. Are you considering more land routes? Are they viable given the increase in race that you've seen.
I mean, we have opened up a number of new land routes, and we've also taken on some additional ships, and of course we've also had to buy a lot of additional containers because as all the voyages have become longer, we in reality also need more boxes to transport the same amount of gorgle rolf.
How easy is it to pass along the extra cost associated with this to the shippers, to the consumers, to the to the companies that want to ship.
I think we see by and large that these costs are being passed on, and I think that's also reasonable. I mean, if you compare the situation now with what we had at COVID there, of course rates exploded. Today you have a different situation because there was probably some spare capacity in the industry when this crisis hit us, and that has certainly helped us to keep global supply chains going and also to keep the increase in cost within reason.
So if there isn't any pushback why are some of the profitabilities coming down just simply because if you can pass it along. Are people shipping less? Are they looking to different routes that are shorter.
I think right now you were still looking at the results that come out on companies in the fourth quarter, where we had exceptionally low rates that were way be low cost. That's also why a lot of companies posted losses. I think you will see a recovery and freight rates when you start looking at the first and second quarter. The question is, of course, what's going to happen once the situation around to the Red Sea normalizes.
I want to talk about the situation in the Red Sea. The United States seems to be in a cycle of defense, not deterrence when it comes to their posture. Are you seeing any signs of deterrence from the United States, through the UK or others when it comes to the Hooties.
Well, first of all, let me say that we really welcome all the efforts that are being undertaken by the US and their allies to try and stabilize that situation. But of course it's very difficult because it's a fairly
large area that you need to defend. And then so far we have seen that the attacks of the hooties continue, and it also means that we will then decide we have no other choice than to keep our people safe, even if that means that some of the supply chains are then seven or ten days longer.
Well, what are governments telling you about securing the Red Sea? Do you have a timeline of when you think you could start using that route again?
I think there are many different opinions on when that is going to happen. I think we hope that we're going to be able to go back through in a couple of months, but I know there are also people that think that it may last quite a little longer.
Ralph, thank you Sef for the update. We appreciate it. It's an important story has been for the last few months. Ralph happened, Yensen there the happek Lloyd CEO, Ja Brice and Chafe economists of wels FAGA joined us. Now for more, Hey, j, let's get into that CPI upside surprise PPI upside surprise going into next week. Jay, what kind of changes, if any, would you expect from the outlook from this Federal reserve?
So, John, in terms of the macroeconomic projections of the Fed. I'm not expecting a lot in the summary of economic projections there. You know you were noting earlier in terms of the dots. I mean, it would only take two members to switch from three rate cuts to two, so the median could potentially change next next week. And I guess you know, if there's an upside risk here to the projections for next week, it would be to a little bit higher inflation, and you know, maybe the dots
shifting up as well. But you know, in general, I wouldn't expect huge changes from the statement next week or from what share pals as in his press conference relative to what they've been saying recently.
Have you changed your view, though, Jay, about the idea of how sticky inflation is and how long it's going to remain high in the face of a labor market that really doesn't show signs of cracking.
So, so, to answer your first question therely, so, yeah, we have pushed back. Are we initially thought that the first freight cut we come in May? I mean, I think that's kind of off the table more or less at this point. We've pushed that back to June. And you know, I guess what I would say is I think the risk to our forecast would be skewed towards later. That is, I would say the probability of July is
higher than you may at this point. But in general, you know, we really haven't really changed our views all that much. And in terms of the labor market, I mean, so we saw these initial jobless claims today. Now I wouldn't make a lot of just one week sort of of data if you step back and you take a look at it, what we are seeing in terms of the labor market is the its rate has coming down really quickly. You know, the job openings is also coming
is coming down as well. And then if you look at the unemployment rate, that is starting to move higher here, and you know, obviously it's at a very very low level still. So what we are seeing is we're seeing some softening in the labor market. It's not like it's falling apart or anything, but that should, as we go forward, continue to bring the employment cost indecks lower.
How long are we going to remain in this limbo?
We're trying to understand what the trend is, and you've got people who are saying the sky is falling, inflation's reaccelerating. Take a look at three months and six month trailing averages, and other people say, cut it out, it's.
On a downward trend.
You're being over dramatic. How long before we have a conclusive decision on those two narratives?
You know?
I wish I could answer that question. I just think we're going to be in this choppiness though for a while here, and so I think we're just we're just going to have to live with that. And I think what you need to do is, you know, we need to step back and we need to say, Okay, we all look at this data today, and what does this mean for the FED next week? What does this mean for the Fed in may? You know, the Fed doesn't
at this point, it doesn't really know either. It's taking these data in its entirety as they come in and it'll make its decisions as we go forward. And unfortunately, I think we're going to be in this choppiness, you know, for a while.
So right now, as we take a look at the way that the market's responding, we see stocks really shrugging off pretty much everything. We see bonds reacting, but in a controlled sense, what is the threshold for financial conditions and the easing of financial conditions to create a problem for the Federal Reserve.
So you know, that's if we continue to trend in this direction, stock price is going higher, if we continue to see bond spreads coming in in financial conditions and that juices the economy even more, I mean, that would be I guess you know, it's somewhat of a problem for the Fed in terms of its easing path going forward. Now they're not targeting stock prices, they're not targeting bond spreads.
I mean, what they are looking at is the effects of these financial conditions on the overall the overall markets or the overall economy in general. People make a big deal out of stock prices. It does have a wealth effect on people, but those wealth effects tend to be pretty small. So the point here is you need to have a lot of financial conditions loosening here for it to really start to have an effect on the FED decisions going forward. And I don't think we're quite at that point just yet.
When it comes to JPW, he continuously says at some point this year will be cutting. Does that change to later this year? Does this timeline just get pushed back.
I think I think it does, Lisa, you know, I mean, because what we're seeing is, yes, the inflation rate is trending lower. Now, it's not coming down as much as I guess people would like it to be. But what's happening is that that inflation rate continues to come down and the Fed remaining on hold, the real Fed funds rate is passively going higher, and that's acting then as a passive tightening on the overall economy. And so in
some sense they need to be cutting rates. Maybe not in May, maybe not in June or July, but they probably need to be cutting rates later this year or you're going to have a passive tightening of monetary policy, which then can potentially slow things a lot more than people are expecting right now.
JA appreciate your views, your opinion, your reaction to this this morning. Thank you, sir J Brice and there of wels Fargo. This is the Bloomberg Survenllants podcast, bringing you the best in markets, economics, an gio politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple Spotify or anywhere else you listen, and as always, on the Bloomberg terminal and the Bloomberg Business app.