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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and a Marie 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. We begin this
out with stock sinching lower. Jim Zelter and the team over at Apollo Asset Management looking for opportunity outside of equities, saying, quote of interest rates remain higher as we expect, and the terminal Fed funds rate stays higher than where it has been historically. We see private credit as an attractive alternative to over valued public equities. Jim joins us now from More. Jim, good morning and a very happy new
year to you. I'm going to kick off this conversation by stealing one of Leasa's questions to stand twenty twenty five is stocks to rich or a bonds too cheap.
Well, I think we have a backdrop. I think your point about the US and China and Europe and the three parties, you know, it's our view that there's intrsent has been very consistent. The US economy has been the beacon of opportunity in the last several years, strong economic growth, capital coming in from around the globe, and so in terms of those talk, I don't want to talk about the stock market. I really talk about underlying economy. Underlying
economy looks like it's a place to invest. I don't think it's any surprise that when you peel the onion back private capital, which has really been embraced in the US and gives diversity of funding, lets companies grow, start expand, and all the things we're talking about the global renaissance. It's been the place to invest and it's been attracting capital.
Contrasts that to what's going on in the UK and continental Europe, where they are stuck in a financing system that's really fifteen twenty thirty years behind the rest of what's going on in North America. It tells us that the US is the place to invest.
So you think some of these problems in Europe might be more structural in nature.
I think structural is really the key to really analysis. It's very easy to focus on the last three to six months we talk about the Liz Trust moment in the UK. I think it is a great reminder for this current administration, as they've got great ambitions in terms of US investment, capex, tariffs, immigration, a variety of other big initiatives. It's good for this reminder of the Liz Trust moment in the back of their minds.
You know what can happen if you lose confidence.
But there's no doubt I think if you look at what the Drogy document did later last fall, he pointed out in one hundred and fifty eight summary pages of all the challenges that they have not really embraced. And while the banks are in better shape than they've been in a couple of decades in Europe, the US is the standout. We have the greatest financial services sector in the world, we have the deepest, broadest capital markets. We've undergone a tremendous amount of regulations on our banks and
they've continued to thrive in a more narrow world. And that's the page that the Europeans should be looking at embracing securitization, embracing private capital. They've got a massive amount of infrastructure needs and they should be embracing that for their long term economic success.
In the meantime, people are saying that maybe the ghost of list trust is kind of hovering over this administration and hovering over the US treasure market right now, especially given the rise that we've seen in longer term yields. And I'm wondering how susceptible you are to changing your view on how constructive the US economy is if you get some more negative data prints. We had Greg Daco
yesterday talking about a fro in job market. We had Neila Richardson talking about how smaller companies really are feeling rates where they are.
Rates have been higher for the last twelve to eighteen ons they been higher. Obviously, we're in a period right now where what the Fed did and its actions in the fall and what the market has responded to is a very unique period. So you're right, we are in a little bit of a unique zone here with regard to macro and rates in the US. I do think we are in a period where rates do look attractive
versus where equities are. And we're in a period right now where we're still the place of economic growth, but it is a warning sign for the administration about how much they can push. Now. Clearly the other side of the trade, I would not probably be lowering rates right now. I think that you have full employment, economy is doing quite well. I'm not sure I see a need other than economic textbook to lower rates in terms of the target.
But it does create a lot of room for the new administration if they have weakness in any kind of the economy. Because of their initiatives, the Fed put is back, they have a lot.
Of room to move.
Your colleague, sort of edifying your points as you say them towards the slock moments ago, inflation reaccelerating to your point about not necessarily needing to lower rates further, you talk about credit being the sweet spot in debt, maybe even over equities, and that has been the story over a long period of time, the past couple of years. If inflation could be reaccelerating, could you see that story changing at a certain point.
Yes, you could, And I guess this, and there's a lot of consensus out there about where the S and P is in a go where rates are going. But in our view and the backdrop, US economy still the strength of the globe. It's the beacon of economic opportunity. We still have a lot of economic growth in terms
of the industrial renaissance that we've been talking about. So in our view, the breadth of credit investment grade as well as non investment grade, we try to find areas of dislocation or areas of mismatch of capital and opportunity,
and we're still seeing it in credit versus the equity markets. Now, when you look at the S and P five hundred, I would say that it's interesting, you've got we all know what the magnificent seven are, but certainly the other four hundred and ninety three a lot of unloved opportunities that in that basket. And there's probably an opportunity in a non consensus view in terms of those companies in
terms of just pure economic growth. But we are still listen, private crediting has private credit and private capital has been the engine of economic growth in the US. And I will you know again I said earlier, it's not a great iron it's a great irony that the US has been the bastion of economic growth with the embracing of private capital. But you know, one of the greatest investors in US capital history, Warn Buffet in Berkshire. When you
really pull the covers back on Berkshire Hathaway. Of the trillion dollars of assets at the end of twenty three, thirty percent are in the public equities that we know about Apple, Coca Cola, American Express via a seventy percent are private companies. It's the growth engine. He's the greatest capitalist. He's been doing it for fifty years. That's where growth and opportunities in America. Private capital in private companies, and they have access in the debt markets. They don't need
to go public to raise capital anymore. Eight thousand public companies to four thousand. That's the trend in the future. And we're sitting really at an intersection trying to bring those opportunities to the broad group of investors, retirees and savers around the globe.
So you mentioned Europe and Europe certainly the bank channel is overburdened. We've been talking about this for years. The Europeans have drunk and talk about trying to do something with public markets. Are the same way we have here in the United States. It's not happening. I want to understand from your perspective, how you will work with the banks in America going forward from here, because this is not of a new trend where the banks will originate
the loans and then you'll provide the money. How's that going to work in years to come? How big can that opportunity be?
Oh, I think we're I think twenty four was a pivot year for us as a leading firm in this industry and in this sector. There was a great headline, and you and I talked about the three of us have talked about in this show many times, where the great battle between private capital and banks. The reality is, if you look at the commercial dialogue going on between the top five, top ten institutions and the handful of us that lead our industry, the amount of integration dialogue
working together on big deals has never been deeper. Obviously, there was our City Bank transaction, our City Group transaction. There was a transaction we did with Standard Charter BNP, and so I think we're still at the early days. These partnerships need to have substance. They can't be excused the phrase shotgun marriages. They have to be ones that really have substance, dialogue, trust, and some history of doing
a lot of transactions together. We've been fortunate and all the ones we've put together where there has been a lot of either history of personnel or of activity. But I think it's I think still it's early days, early innings. Now there's a lot of headlines just to grab headlines, and there's not a lot of substance behind them. But I think that trend of private capital and bank partnerships is going to extend in twenty five and twenty six.
And I do think if you think about the economic backdrop, I do sense that there is a great opportunity for strategic m and a that clearly feels like it's going to happen. I'm a little bit more skeptical about the massive IPO window.
If you look at the.
Last ten years, equity issuance has been about two hundred and fifty billion, fifty billion IPOs, two hundred billion secondaries. That's removing all the stack numbers. I think you still have a valuation issue with a lot of private equity companies that want to want to come out and do their IPO and so I think we have a consensus view or non consensus view would apollow that that number is going to be not as large as people think.
And so the big mismatch if you have a big credit market, a big equity market, this area of hybrid in between, which we've been talking a lot about applying capital to those over levered companies. That's the opportunity of twenty five and twenty six.
Just to build on the IPI issue just a little bit more. Is that just a valuation issue or do you think it's a role that you have to play here that these companies don't need to go public anymore.
It's a combination of both. It's a great question.
I think it is a valuation issue for probably fifty to sixty percent of them. I think it's very very clear now private companies have access to all sorts of capital, debt and equity, preferred, convertible, whatever it may be.
And so the typical route you needed to.
Go to have your employees be able to monetize their investments broad based capital equity revolvers. You saw what OpenAI did several months ago bringing in a bank facility. There's tremendous pools of capital, private capital to confund and financies companies. So going public is by no means the ticket to liquidity you needed in the past, a lot more.
Options in five to ten years. Will there be a difference between public and private markets, We don't believe.
So I think there will be some differentiations. And I think the question that gets raised right after that question that you ask is well, is there going to be a massive compression in yields and the advantage is going to go to those folks that have the bigger You're going to make money on the origination, the ability to make the three, five, seven, ten billion dollar commitment to XYZ company, that's where you're going to garner the extra spread.
But all the things that we're doing in origination, in capital formation, in trying to bring some liquidity these markets, in terms of secondary activity, with transparency and price discovery, I think the barriers and you know what's what's private is risky and what's public is safe. I think those
barriers will be coming down. And again I go back to this bookshare It's no one really talks about it, but it's it is quite an irony that the greatest public investor of all time seventy percent of those companies.
When you look at the when you look.
At the web page, these are some great American companies and over fifty years he's assembled them and they're massive compounders. And that's seventy percent of the underlying value. Geico being at the top, Clayton Holmes, BNSF, many many other great companies. And I think that's a lesson versus all there's there's companies that are private and there's private equity. You should differentiate between the two. But we clearly want to be part of that big trend and offer those two investors
in the retirements around the globe. It's a big change in market structure.
You're going to be sticking with us to talk about that change in market structure and the changes we could be seeing in Washington, DC. A little bit later this year, Jim's out to the Apollo Asset Management maybe the Register of ABP, predicting a slow down, writing the labor market downshift to a more modest pace of growth in the final month of twenty four where they slow down in both hiring and pay gains, and places say that Nita joins us now for more.
Nita good to see you happy, happy, You're good to see you.
You put out your numbers yesterday. Where did you see weakness and where did you see some strength?
Well, we saw weakness in manufacturing. And this is, you know, doubling down on a trend we've been seeing all year, three consecutive months of shedding jobs in manufacturing. That's very cyclical. On the strength side, we have to turn to a very non cyclical sector, which is healthcare. Healthcare has been posting strong gains for the last six months. You see that in the ADP data. You also see that in the BLS data. It's what's really driving the jobs market now.
And the question is is it enough for twenty twenty five for healthcare to be in the dominant position?
A work is losing leverage against that backdrop. If you're seeing more narrow gains, if we're losing breadth and it's coming from areas outside of cyclical sectors in the economy, are we seeing a loss of leverage for workers? More broadly, We've been talking about this over the past few days. JP Morgan sank get back to work, get back to the office five days a week. We talked about it a little bit earlier this morning that maybe that's why the union's on the docks are maybe settling a little
bit earlier. What are you seeing around pay and signs of a loss of leverage.
We're seeing a lot and I would align with those remarks that workers have lost some leverage from the heyday of the Great Resignation when they were clearly in the driver's seat. There is no one in the driver's seat right now. I think in the labor market it's pretty calm and quiet. But what we're seeing is that pay growth has declined. We're looking at the lowest pay growth for job stairs since twenty twenty one, so that is significant.
But also you have to look at hours work.
Then that's where companies are kind of fine tuning their labor count. Layoffs are very low, there are historical lows for the past two years, but the number of hours people are working have been declining consistently over the past year and a half. That means that workers are making less. Also, I'll point to the Jolts data that came out this week.
Everyone made a big hubbub about the job openings. I went directly to the job quits which are much lower, So people are staying put in their jobs, and that means there's been very little turnover in this labor market.
I agree with you one.
Point nine percent, which is tied with the lowest rate for quits going back to twenty twenty and really raises some eyebrows about just how much mormility and agency workers feel. I am wondering the why behind this. Is it because
of policy uncertainty from companies? Is it because borrowing costs are higher, or they're not making big expansionary moves, or is it because they're still watching what's going on in the artificial intelligence front with the potential that this will make some big changes to their workforce, and they're not sure exactly how.
So let's take those pieces together. I think there is a bit of uncertainty about policies, but when you look at where the weakness is in terms of firm size, it's really been in small firms that we've seen the hit the slowdown in hiring. Big firms are still hiring, and you see that clearly in the ADP data. So that points to more financing constraints than it does to AI investment or uncertainty about what the next tariff policy
will be. Most small firms don't operate in that macro scenario on a consistent basis when adding one or two employees. So when you're looking at that interest rates matter in terms of financing costs for small firms longer term over twenty twenty five, I think that AI investment in those trade offs between capital and labor become much more relevant starting this year, but also into the future.
Are you saying that on the ground, from the bottom up, what you're seeing is that long and variable lags still do exist, and that they just got a lot longer, and that they still are restricting certain smaller companies. It's gotten a lot more variable our lag, So okay, all right, so they've gotten a lot more variable, and that's the reason why you are seeing it only in smaller businesses.
But are you saying that rate staying here might look like they're not necessarily hampering financial conditions, but they are constraining the labor market in a more significant degree at this point than they did even six months ago.
Firms that rely on bank capital and small business loans are feeling the effects of higher interest rates. It may not be translating to the larger firms yet, but in terms of on the ground, the mom and pop, the main street businesses. I think you see that in their hiring decisions, and so yes, that is material because small firms are the engine of growth for the labor market and for the economy, and if you want that dynamism to continue, it really has to be at the small firm level.
So, Nator, what's your reaction to the race and shift over the Federal Reserve? What do you make of things?
Very extension, Well, there's been a couple couple shifts. I think what we're seeing in terms of the commentary around the FED is that they have put out this idea of being more patient. And this is a FED that we're not really used to seeing. Historically, Usually the FED when it's starting a policy change, its moderate, predictable, modest moves every decision meeting. Now we're a said that says, hey, we might take a break, we might go on vacation for this one, and do a rate cut at the
next meeting. And I think that adds a little uncertainty to what the future path of interest rates will be.
And some of us might include some changes to policy that we might expect, and some of us might know and that's been part of the confusion. It's wildly strive for the past month or so.
How does a market factor in what the FED is going to be looking at When we don't have a sense of what policies and input data will potentially be going into their equation. It makes for rather confusing.
Does that make get more confusing for you, Neva?
For me, it's about the data, right. Some of this is just kind of animal spirits. It matters for the markets, it matters for the mood of making investment decisions, But does it matter for that HR director in a company who's trying to figure out how to grow a business in a particular area. Those policy changes are not going to hit that HR director in this month. It might
play out over six months or year. But they have to figure out the here and now in terms of the economic conditions that they're confronting with their customers, not with the FETIS doing.
It's increasing the complex, that's for sure. It's good to see you a white thanks for dropping by Nata Richard than that of id Pai set down to Washington, DC, where Amory is sitting down with a former City of US Intelligence official, Norman rule Hi, a Marie.
Hey, John, thanks so much.
Yeah.
What we're hearing right now from the incoming Trump administration from Steve Wickoff, who went over to Joha to be a part and witness these negotiations and to really lend some support, is that they think that they can have good news to deliver. So of course you want to bring in Norm Rule, who spent decades at the CIA dealing with Middle East and conflicts. Norman, is it your understanding that potentially we could get a Gaza hostage agreement before President by and leaves office.
Good morning. Yes, that is correct.
The incoming Trump administration and outgoing Biden administration have been working very closely with no reports of any disagreements or frictions to achieve this. These statements by President Trump beginning in December that there would be all hell to pay if the hostages were not released injected a new life into this issue, and both Hamas and the Israelis have claimed that they have made concessions to make this hostage deal, which would be the first phase of a longer deal, happen.
This said, the phrase cautious optimism has been used repeatedly in the past. Hamas has not dropped its primary demand, which is that Israel and the war and withdraw Israel has not dropped its primary demand, which is Hamas cannot be allowed to regain control over God. So the exit strategy for this conflict continues to be tied to this hostage deal.
Norm I'm in Washington, d C. Today because of the funeral of President Jimmy Carter, and like Jimmy Carter, President Biden on his final days of office, is working to secure Americans abroad. Now, obviously these hostages I'm talking about the Iranian hostage crisis that Carter dealt with. The conflict the crisis very different in nature, but all roads lead back to Iran. Given your work in decades of experience dealing with Iran, what has changed from Jimmy Carter's presidency to now?
In some ways, the modus operandi of Iran and its proxies and hostage taking remains identical. And in fact, there's another echo from nineteen seventy nine. During the Carter administration, the Algerians played a prominent role in engaging with the Iranians. Today we have the Qatari government playing its large role in dealing with Hamas itself and sometimes the Iranians. So
you do have strange echoes of this period. But since nineteen seventy nine, not only the Carter administration, but the Reagan administration in Lebanon and the United States repeatedly with Iran have dealt with a drumbeat of hostage taking by Iran and its proxies. And these events tend to be multi month, multi year in many cases, where in the end significant financial or political concessions are required to release hostages.
Iran and its proxies have very little care for human life and dignity, but focus on their own interests.
Many observers would point to the peace agreement between Egypt and Israel that Carter was able to get over the finish line. How do you see that shaping the region?
It was dramatic and significant, but at the time it was not something that was a sure thing. The Carter administration entered office hoping to follow the steps of its predecessors, large international conferences involving the Soviet Union, the Geneva Process. In fact, the Carter administration was not initially enthusiastic about sadatsa solo diplomatic engagement. The Washington Post at the time famously described the cool Carter reception as being so chilly
it could freeze the Nile. But it did open for the first time the possibility of something that eventually under the Trump administration became the Abraham Accords. It's just things moved slowly on these issues.
I'd love to end on that point, because we do have an outgoing president who wanted to expand peace in the region that Abraham Accords between Saudi Arabia and Israel, he wasn't able to finish it. Now with an incoming Trump administration that certainly wants to make sure they're able to get that over the finish line, do you see that doable in the next four years.
Yes.
And in fact, the Biden administration also built on the previous Trump administration's work to pull together a Gulf security agreement with an important agreement with the government of Bahrain. And this agreement with Bahrain, which is a bilateral security agreement with the United States, now also includes the United Kingdom and is open to other partners. I think what we're going to see is perhaps not an expansion of
the Abraham Accords, although that is possible. We may see economic integration, we may see greater an expansion of the Bahrain Agreement. We may see a variety of different architectures, but if a two state process can be established, I think it's inevitable that you're going to see this integration of the region, which would mean an expansion of the Abraham Accords and the peace process.
Norm Thank you so much, Jonathan. That was, of course Norman Rule, a former US intelligence of.
This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, and geopolitics. 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.