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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie Hordert. 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. As traders look for clarity on the path ahead for raid cards, the team of Morgan Stanley writer the following. We maintain our call for an additional twenty five basis point cut in December, but the key question is what the data the FED will actually have before December. A prolonged shutdown as a risk to our view of more consecutive cuts. Mike Gape of Matt Hornback of Morgan Stanley join us now for more.
Jent's going to see you both from here morning. Michael's going to come to you first. The data we don't have my right now, dis government shutdown, it makes it less likely we get right cuts in December?
Is that right?
Well, I think we're just reflecting what Powell said that if you're driving a car in the fog, should you should slow down? So he was saying there is a case to be made where if you don't have the data, maybe.
You can't act.
My view would be that if we're still in December and the shutdowns in play and we don't have the data, I'd be really surprised if the FED doesn't cut. I think the drag from a government shutdown at that point could mean growth is essentially zero in the quarter, and I would be surprised if there weren't some spillovers in the limited data that we see. So I think if we don't have data, it's because the government shut down, and I think that probably still justifies a cut.
Well, good to Matt in just one second.
But Michael, from the economic perspective, do you get the sense of this is an economy that needs right cuts, especially give the fact that the slow growth, slow higher low fire kind of churn has been going on for quite a while and may have a lot to do with other factors outside of just a trajectory of US economy.
So We came into the year thinking, no, you probably don't need to cut rates this year, that you would want to ensure that any inflation rise from tariffs's transitory, and then we thought the rate cuts would come in twenty twenty six. So my view is, maybe we don't need it. There's certainly a discrepancy between the data and attention, between the activity and the labor market data, but I'm not on the committee. I don't get to make the choice.
The view is the balance of risks shifted and policy needs to be recalibrated.
So they've made that decision.
They want to move closer to neutral, and I'm just thinking that the data will justify another step in that direction in December, Matt, are you.
Already seeing that?
Is with respect to how the bond market is responding to recent weakness and this idea that it seems as though everyone's buying the transitory story again, they're just not saying.
The T word.
Well, it feels to me as if the market had to adjust its pricing for the December meeting based on what we got out of the.
Meeting last week.
But the market is also at the same time hesitant of completely taking the December meeting off of the table, because I think investors are starting to look at the bigger picture. They're saying, hey, twenty twenty six might be a better year, but we have to get through the
end of twenty twenty five first. And the government shutdown is starting to slowly creep into the mindset of investors and they're thinking, gosh, if the data do come in on the weaker side going into the December meeting, then the Fed should very well continue its gradual move back to a neutral stance.
Day thirty six, longest in history.
The President is now talking to Senate Republicans saying they should just blow up the filibuster in order to do this. Is there a line in the sand where the government shutdown would need to end for you to really think that December's back on the table because all that data will start flowing through again.
Well, I think to the point that Mike made, they're going to get some data. Even if the government does stay shut down for the next couple of weeks.
We might not get as.
Much official government data as we would like to get, but we will still get a set of economic data like the data that we got this morning. We'll get another round there, and we're going to get of course the state unemployment claims data as well, so they're going to have something to work with, and so you know, to us, it's ultimately it's going to be the totality of whatever they have in hand.
That will lead them to decide what to do in December, Mikae and week on the annex.
That's what we can go on, and we can talk to corporate executives, and we've spoken to a fue already this morning. One bank executive come on the program and said things are okay, better than okay, there's no real damage in our loan book, and we expect reacceleration into the new year. This runs counter to the view that you have on the labor market. Can you just flesh out what you do expect to see in the labor market the months to come.
Yeah, So there's certainly a tension in the data. The activity data solid AI related spending, you know, off the charts, upper income households doing well. You were emphasizing that in the previous segment, but the labor market data looks different. So our view is we're maybe a third of the way through the process of firms passing tariffs onto the consumer, so that's going to extend at least into the first.
Quarter of next year.
While that's happening, I think there'll be great reluctance higher. We've seen that the low higher, low fire labor market. The ADP report's very consistent with that. So while that's going on, we think the unemployment rate creeps higher. And we have the federal workers who took the early retirement package who will be rolling off payrolls in October to the tune of about one hundred and fifty thousand. So we think the unemployment rate could finish this year around
four five, four six. And if that's you know, it's not a meaningfully higher move. That's still a very low unemployment rate. But the direction of that move I think is enough for a FED chaer who says he now a little more data dependent to say, let's take another step. So modest deterioration, modest continued cooling is what we think that message will be out of the labor market.
Give me for referencing your world, colleagues. I want to talk about Bank for America just a little bit. I want to talk about what Brian Moynahan's going to be discussing later on this morning. He's talking about less labor intensive revenue growth, and I wonder if we need to focus on less labor intensive GDP growth, And I just wonder what that means for the Federal Reserve. And I'm going to get to what it means for the bond market too, because I don't know if fixed incomes should
trade on the jobs numbers or GDP. What's it going to mean for the Federal Reserve in the quarters to count well?
It's this is also part of the fog story.
This rolling in is a difficult thing to understand and manage in real time. I'm not sure in the short run it changes there thinking all that much, it'll have an implication on the labor market. If it's a supply side, productivity driven story. It'll also be something that brings inflation down right, so that it would reinforce that I'll use the T word, the transitory inflation story. It would reinforce that. I think it would give you more confidence that inflation
should be coming back down. And if anything, it would leave this kind of load dynamic labor market in place. I think both of those would say the Fed will have a gradual easing bias.
If this has market consequences, of course, yes, if you look at payros, there should be some kind of loose relationship between what happens with jobs and what happens with earnings. But this year, at least, we've managed to have a massive step down in jobs growth and earnest growth has been obsolutely fantastic. So equity lands can ignore what happens with jobs? Can the bond market? What should the bond markets right on jobs? So GDP, Well, the bond market
typically trades on the Fed. So if the Fed is going to continue to lower its policy rate, then you would expect the bond market to trade in kind. Now we all know that the bond market is priced for a very gradual easing of policy.
The issue, though, is if the Fed delivers.
On what the market forwards are telling you today about the path of Fed policy. It's not as if the market forwards are just going to sit there and shrug their shoulders. They're going to move and that's the typical behavior in the bond market. When the Fed follows the forwards, the forwards don't sit there. They keep moving in that
same direction. So from our vantage point, if the FED delivers an easing cycle in line with what Mike believes and in line with close to what the market forwards are pricing, the forwards are going to keep moving and that's going to continue to weigh on bond yields. Already, we have a your yield right around four percent. We're the only house on the street that I thought that would happen this year. So as the FED continues to deliver, we do think that bond yields will continue to fall.
At what point are you starting to get more concerned about longer term inflation and a longer term pushback.
In US treasuries? I'm looking right now.
Mike pointed out Michael McKee parsing through the auctionary funding announcement, pointing out that they do plan to increase their T bills and their low duration instruments, and there's this feeling that the Fed's going to monetize, that the Fed's going to increasingly buy that debt, call it whatever you will, in order to keep rates low while also pegging rates
to a fairly low level. At what point does that pose a risk to longer term treasuries and the potential for this to backfire in terms of some investor appetite.
Yeah, I think.
I think you're talking about the bond vigilantes that show up every now and again and typically lose money at the end of the day. You know, from my vantage point, you know, we're going to have to see in the data. Okay, if the FED is lowering interest rates and inflation is moving higher, that would be the type of environment that
I think would get bond investors very, very nervous. We're not really seeing that, right, We're seeing a committee that is divided on what to do in this inflationary environment. But if the inflationary environment turns out as we're forecasting, people should be very relaxed about owning high quality duration and the bond market. And by the way, just on the Treasury refunding that happened this morning, that's very much in line with our projections, not just for this refunding,
but for the next several refundings. We don't believe that the US Treasury is going to increase their coupon issuance until February of twenty twenty seven.
I mean, for all.
Intents and purposes, that's a lifetime away. And a lot of things will happen between now and then, so we don't really see an issuance problem for the investor base and for the bond market.
Mike, I'm just wondering what's the fuzz mandate right now, because if the man date is low unemployment, then right now you could make an argument that maybe it is a positive thing for them to ease, but if it's for financial stability and the idea of inflation acid price inflation will at some point trickle into the real economy, especially in AI and energy costs and some of these other kinds of issues. How do you square whether they're potentially adding fuel to the fire.
Well, and they're risking that right They are taking out insurance right now against what they see is downside risk to employment, and insurance comes at a cost, and that cost is what you just mentioned, the risk of higher inflation over time, that you're a more inflation tolerant fed or you fuel animal spirits and asset markets. But Powell has said many times we do not have good choices right now. So they think risks are higher to the unemployment rate, to the upside of inflation, and there are
concerns about animal spirits and financial markets. So they're taking out in insurance against the labor market. They're betting that the cost of that won't materialize. But that's what markets and investors are concerned about.
Mat can we finish on the FX market? But it's not a strength come back in the last five days. How does your medium term view snack out with your shield term view on the US dollar?
Indeed, Yeah, so we came into this year very barished on the dollar. We held that view until last week. So given what we're seeing from the Committee at this moment in time, in the absence of a full set of economic data, we decided to peel back on that view temporarily. It's a tactical adjustment in what we think will be a trend that extends into twenty twenty six.
It doesn't have.
To play out that way.
One of the things that we're debating as a house today alongside my colleagues in economics is what does twenty twenty six and twenty twenty seven look like That can be a game changer for the US dollar. We're still debating that. But in the meantime, if the FED continues to cut rates, the dollar should have a little bit more room to move left or before possibly swinging higher in the second half of next year.
Stay with us more Bloomberg Surveillance coming up after this Democratic Socialist so rum Mumdowney winning the New York City mayoral race with fifty point four percent of the vote. Catherine Wild, CEO of the Partnership for New York City, writing the following. Ultimately, the impact of the election on business will depend on the extent to which Mumcdowney appoints competent deputies and commissioners to run city agencies.
Catherine joins us now for more. Catherine Gimmrnic Good.
Morning, Thank you for being here with us in New York City. Let's talk about some of this. What did New York just vote for?
Well, I think number one, we have to look at the fact that more voters came out to vote for mayor than we've seen in the fifty six years since nineteen sixty nine, which was my first election in New York when John Lindsay was elected on the Liberal line. Actually, so this was a big turnout, and I think it reflects the frustration of the New York City voters with a couple of things. Number one the high cost of living and doing business in New York City, and which Zoram Mamdanni.
Spoke very effectively to and it.
Reflects a frustration with a series of politicians who have disappointed New Yorkers.
Those high marks in terms of the how many people came out to vote was fueled by support of mam Donni but also those that were against him. There's a lot in the business community, have a lot of concerns. Has he assuaged those concerns yet?
I cannot say that he has asswaged those concerns completely. After the primary election, when everybody was shocked that he beat Andrew Cuomo by thirteen points in that primary in June, he reached out, actually called me right away and said, tell me which business leaders I should meet with to learn from them and to show them that I'm not going to socialize their business.
What did you advise he meet with.
I gave him a number of I gave him a long list of people. I mean, our co chairs of the partnership, Rob Spire and Albert Burla and Jamie Dimond, obviously Larry Fink. Leaders from across come from across the industry as well as the small business representatives, the borough Chambers of Commerce, the Restaurant Hospitality Association, so a mix.
We have a lot of reporting that what business leaders wanted to see was to him to tap Jessica Tish to continue to lead the NYPD be the commissioner.
There is it your understanding that she's going to stay.
Well, I think she's going to stay, and I will say that that was the number one priority. It was an important signal both to the business community about the public safety. As employers, they want the city to be safe, and jesse has done a great job. They just announced this week that crime is down again this month another six and a half percent on her watch, so that was a big app And the fact that her family is iconic in the city's Jewish community. I think it
was also another important piece of that. Mom Donnie did say that he would retain her. I know they have spoken, and she was not going during the campaign. She was not going to make it commitment one or the other because she doesn't think it's professional in her job as police commissioner to participate in campaigns. But I'm hopeful and optimistic that she will stay. She loves her job, she says her mission is not finished. So I'm very hopeful.
You've been in the city a long time tracked its politics have been in exus between business and the political sphere, and I'm just wondering if you've seen real evidence of people leaving the city in fear of higher taxes or some sort of regime that makes it less desirable for them.
Well, people are.
Leaving the city because of high costs in general, and taxes are part of that. And for those who think and a big concern about our incoming mayor is that he may think that somehow spending more government money is going to make the city more affordable, when in fact it's exactly the opposite. City and state budget spending has gone up over fifty percent in the past decade, and that's driving.
Our affordability crisis.
So hopefully we will be successful in finding other ways to fund some of the new mayor's priorities.
Is there any evidence that that's on his docket because he talked about raising taxes on the wealthiest individual as he talked about paying for it that way. Is there any sense that there is some sort of awareness of the debt and sort of the debt cycle that cities can get into that can make things less affordable.
Well, New York City has a legal debt limit, and we also, since the financial crisis of the nineteen seventies, if the mayor gets too aggressive about his spending, a financial control board comes into place and the state takes over the city finances, so we don't have to worry about New York City going bankrupt again.
So that's a check on that.
In the conversations with him about the danger of raising taxes in terms of New York's competitiveness, I mean, right now, those of US professionals in New York are paying fifty five percent of their income in taxes to federal, state, and city government. You move to Florida or Texas, you're paying thirty eight percent. So that's a pretty big number that we have to take into consideration. So I think that he's going to become more practical as he sees the implications.
He has said, I have my goals.
I want to achieve them.
But I'm wide open on how to do that, And that's an opening, I think for business expertise to help him figure this out well.
To achieve them.
He says he's going to raise taxes, but governor, Hokles says, I can't lose any more people to Palm Beach to your point, looking at the tax differentials, So can he even attempt to raise taxes without the governor on board.
He cannot raise corporate or personal income taxes without well, that's not a city prorogative, that is a state prerogative. He can raise real estate taxes, but he has said as he's thought about the implications of freezing the rent, he has said he will actually do property tax reform and try and reduce taxes on rent regulated commercial buildings, multi family buildings. So I am I think that as we see who his appointments are and how he takes
input on his appointments. Last night, I was very pleased that the tax word was not mentioned in his acceptance speech as mayor, so that was a good sign. And he also started out how he's going to achieve his goals is we're going to reduce the cost of government and reduce bureaucracy. So he's sounding more and more like Mike Bloomberg.
Stay with us multiple IMPEG. Savannah's coming up after this. The US Supreme Court hearing garguments today challenging the galaxy of some of President Donald Trump's tariffs. If overturned, the government may face refunding billions of dollars in a blow to the nation's finances. Lisa, This in many ways is about the bond market more than anything else.
If you don't get the four hundred billion dollars of annual revenues that we seem to be on track for from the tariffs, what does that mean for the deficit picture. For some of the bond vigilantes that have gone into hiding and are covering their heads, there is this feeling that they might reassert themselves and push back against some
of the recent price action. Again, it's not going to be until at the end of this year that we get a ruling, maybe the beginning of next year, and by then we might have a sense of what the cocktail of additional tariff measures might be to replace this income.
This is going to be tough for the Supreme Court.
They're going to look at the US Court of International Trade and they said, the US Constitution makes it clear that this authority.
Of commerce is up to Congress.
And they go on to say, it's not that we are not passing judgment on the wisdom or likely effectiveness of the President's policy, but just that it's not constitutional, which is why the administration is trying to make out that these are three big emergencies when it comes to fentanyl, the trade deficit, and having that ability to say have a thread against China when it comes to our Earth's that they need this authority to be within the executive brand.
On the president's list of priorities this week, including what's happened in Virginia, New Jersey and here in New York City was this number one's hearing of the Supreme Court.
He's called it life or death for the US economy, and he said in that CBS sixty minutes interview that the economy will go to hell his words, if AIPA does not withstand the Supreme Court.
So for him this is paramount.
But you talk to people in the administration, there are other ways they can act tariff palsy. It's just not going to be as clean. It's not going to be as a blunt of an instrument. But they could still use other orders like they are using right now. They're using two thirty twos, there are.
Three or ones.
There are other instruments they can use, but it's not as easy.
Let's stay on the story.
Regardless of the Supreme Court ruling, the former commis department official and azec NICACTA expecting Trump's tariffs to live on writing the administration has several other souls that they can implement to execute that trite agenda. And I was like, joins us now for more, welcome to the program. Let's just talk about that. What is it actually at state today? If the President could just make how the moves out swheat to achieve the same means, well, I.
Think the g and it's good to be with you.
The big question is this international Emergency Economics powers out of nineteen ninety seven, that nineteen seventy seven that allows the president to regulate imports during peacetime and take measures to address unusual and extraordinary threats. The core question is
really the limitations of the president's power. Does the president have vast sweeping authority to impose tariffs in a way regulate financial aspects of the United States, or is it Congress that holds the cards there and can only delegate financial revenue raising authority to the president when it expressly says so. Those are the Coole main questions. The Supreme Court has never heard an aep A case before, It's
never interpreted the language. So the main question is does this law give the president sweeping authority to regulate imports through taxes which we through tariffs which are deemed to be taxes by the judges, or is a president's authority much more restrained.
Going into this?
What is your base case for how the Supreme Court will rule?
You know, it's really difficult to say. This is a very, very difficult question. You've got the major questions doctrine which is going to be at heart of this issue which the Supreme Court has to decide. Look constitutional interpretation. If Congress intended to give the president vast political authority over political and economic questions, does it need to expressly states? So, think about the impact of all the other statutes. How much can the executive branch read into this?
Right and right now, we.
Have three pillars of the US government that are at odds with one another. The President has moved in a very unusual way to read the statute very broadly. Congress and large part has remained silent, even though with respect to the care offs in Brazil, Congress has spoken up and has used its lawmaking powers to restrain the president's authority there, and now you've got the judicial branch who
has to make sense of it all. And again, implications are going to be significant with this much revenue at stake.
The administration has talked about why they're using AIPA emergency responses to the trade deficit, to what's going on in terms of China trying to enact export controls on rare earths, and then on fentanyl. Do you think one out of any of those others have more of a case in terms of an emergency authority needed to combat those issues.
Yeah, that's a great question. And this really goes back to the sort of the history of AEPA. AIPA has traditionally been used over the decades is really sanctions authority, right, maximum economic pressure campaign on countries to do not do things. So it really depends on how the US government argues it. The tariffs on India, these AIPA tariffs on India is a maximum pressure campaign because they're buying Russian Russian energy.
We have sanctions on Russia.
The IEPA tariffs used against India feel like sanctions.
They might for the fentanel.
Crisis also feel like a maximum pressure sanctions type legal authority. But if the President just doesn't like a trade deficit with a country, can he use AIPA? I think that the courts may very likely say there's different.
Legal authority for that.
If Congress gaves the president distinct legal authority to address a specific fact pattern, that can he use other legal authorities that are a little bit vague to address that same fact pattern?
And Azak.
From a markets perspective, it's important to ask how much has actually changed since preliberation day. You're looking at an overall terrorfrate that's gone from twelve and a half or from two and a half percent to about twelve and a half versus the headline figure that something closer to twenty percent, and a lot of some of the measures with respect to China in particular have been walked back.
How much have the walls truly been put up in a way that do indicate some sort of separation of the world's two biggest economies.
This is the economic impact, at least first to the United States, right. I think partially what the president is thinking he's doing is really balancing fair trade, but then getting trade deals to bring countries closer into the United States orbits right, And maybe this relationship with China is still up in the air. But I really want to underscore the massive economic impact. We have ninety about ninety
billion dollars collected in the AIPA tariffs alone. Think about the economic impact of either way that the court rules. If the court invalidates AIPA, you've got importers, US importers in large parts who are paying the tariffs, but they pass through those tariffs in some significant respects to their customers. So if the court invalidates i EBA, you've got the importers getting this massive sudden windfall of money, but then
their customers aren't getting anything. We'll present one major shock to the economy, and it's the course uphold IEBA.
Then then these.
Importers are not going to get the money that they were expecting. Yet another major shock to the economy. And going back, if the court does invalidate AEBA, and now you've got importers in line to not only recover the teriffs that they've paid plus interest, because that's how this works. If you actually paid tariffs that the course have invalidated. You're not only entitled to get the tariff revenue back, you have to get the tariff revenue back plus interest.
Think about the sudden shock to the economy depending on either way, based on how the Supreme Court rules.
What are you advising clients?
Are they lining up and figuring out how exactly to request their money back from the government.
Yes, and no.
There's a lot of importers who are thinking about you, watching this very closely and figuring out how they're going to line up up and what the process is because you can't have a stampede all at once for all these importers, right, ninety billion dollars trying to get the money back at the same time. So the courts are going to look for a process. We're looking very much into what kind of process is going to be set up for importers to get their revenue.
But also we.
Represent a lot of the businesses in the United States who've already paid those tariffs, and even if the importers of record get that revenue back, a lot of our clients, a lot of the businesses aren't going to get that revenue back because of those go to the importers and then that's a private transaction issue.
Whether the.
Businesses are going to demand from their importers to get some of that back very unlikely because then that becomes an accounting issue. But there's going to be a stampede, and hopefully the government figures out an orderly process only if the Supreme Court invalidates the terror. But look, the Supreme Court, is this the textual issue? Is this a constitutional issue? Is it a foreign policy issue? All of this is going to the way how the Supreme Court looks at this?
Stay with us.
More Bloomberg surveillance coming up after this. The Pollo Global Management just posted third quarter runings that surpassed Wall Street estimates, as the firm edges closer to reaching one trillion dollars of assets. The Apollo president, Jim's out joined us now for more. Jim good Mornic, Good morning.
I was good to be here.
Congratulations. We choked when you walked in. What happens when you hear a trillion? Does Mark run around popping champagne?
How does this work?
Well?
Listen, as we said yesterday, we've said before, assets under management are just a great vote of confidence for great performance and if you deliver for investors. Over time, we find ourselves that the flywheel of our business is really in place, whether it was capital formation, whether it was origination.
You know, we just find that our business model is really hitting the mark right now and accelerating, and we're very happy with the quarter, but feel very good about the trajectory of the business.
In runt of us, there's a phrase that you entertain used, we are what we originate. Can we talk about that a little bit more sure? Your capacity to scale? Can you just flesh them out? How things attracting at the moment.
Well, they're tracking very well.
But I think you know, if you go back to our investor to day six years ago, in a year ago, we really put a pin in the key attribute of success in our business. As we see the financing markets evolve, when we see the evolution of banking system, when they see the evolution of private capital. You know, many in our industry and we're guilty of it quite a bit. In fact, your first question, we're guilty of it. It's
all about AUM. It's not about AUM. It's about your ability to really generate very strong, proprietary, scalable origination across the spectrum. Whether it's investment grade, private credit or private equity transactions and everything in between. And we have taken that to heart. We have invested a tremendous amount of
money in terms of our origination platform. And I think that's what when investors come to us today on the institutional side, when sovereign funds come to us to partner, when insurance companies come to partner, Yes, it's because of our investor returns, but it's because of our origination.
And I just think that's the bigger story here.
People want to talk about this company, that company, First Brands, Tricolor. You know, it's been sixteen years since the Great GFC. The real story is the evolution of modern finance and the role that we all play. And so I think that's the thread and the theme that investors are really engaging in today. I got back from nine countries in two and a half weeks, which I'm happy to talk about. And the impact around the globe of this model evolving is really the story.
We'll spend some time on that. Just for the record, you brought up First Brand and Strike Color before we did. We'll get to that in just a moment. So you want to talk about origination. Let's talk about it that you originated. You talked about this a bit yesterday. What was the average rating and are you able to maintain excess spread as you scale up.
Yeah.
So if you look at our we think about the world investment grade and non investment grade, not private in public. And when you think about the spreads that we garnered in terms of our non in our investment grade business, you know, it's in the mid three hundreds, and we've been able to really create that spread over the last twenty four months with a little degradation of fifteen to
twenty basis points year over year. On the non investment grade side, it's in the mid four hundreds, and again we've been able to generate that spread over the last twenty four months. And again it's not just the direct private lending, but it's all the things you do to a sponsor. So our origination put foot print is about eighty percent investment grade, twenty percent non investment grade. But really it's the change of the model in the last
twenty thirty years. As a credit investor or fixed income investor, you were an agent in the market whatever the origination machine wanted to deliver.
You it was only price.
That you actually had to negotiate, and so you were an agent, was really not a lot of the ability to really conduct and have the outcome. In our model where we're the origination principle, where we actually have an impact, it allows you really to have a much greater degree of control of documentation and return and yield, and that's going.
To suit us well over time.
So it's this principal agent issue, and we find ourselves really in the leading pack of the origination principal model versus the old model of an agent or vendor model.
And Jim, what this does is it allows you to look at a lot of documents. It allows you to look at a lot of companies. It allows you to see a broad swath of the economy to understand exactly where the pitfalls may be. Do you find some of these arguments about cockroaches and in growing weakness in the economy credible or are you just not seeing it in what you're viewing even among the things that you're rejecting.
You're fifteen sixteen years in a credit cycle right now in terms of the expansion since the GFC, You're going to find issues and challenges in the last five to seven years, you've had companies like SVB and First freeblic Bank and so yes, these are clearly idiosyncratic.
We're seeing a much larger.
Theme of a strong economy Towrdson talked about yesterday in terms of a K shape economy. We're seeing an administration it's very pro business anti not a very regulatory friendly, want to push rates lower, and so all of those things where you will see challenges in certain companies late in a cycle. But we are not seeing any kind of credit cycle on the horizon that's waning anytime soon.
We are not seeing it.
Are you seeing a scary allocation of resources?
And I say this given.
The fact that it has been very top heavy to AI related endeavors. Deutsche Bank this morning a story in the Financial Times looking for ways to hedge against some of their data center loans because they're worried about the overall concentration the risks that you're seeing overnight.
Are you staying away from that?
Well, I think what you're talking about is whenever you see a massive impulse infusion of capital into a sector dark fiber E and p shale in the US software enterprises and now AI in the brought ecosystem, you have to think about debt and equity returns on invested capital, and there's been a tremendous rise in valuations on the debt side, on the equity side in the last twenty four months, and certainly the assumptions that you're making on the debt side as an investor and a lender to
those companies, you're taking more residual risks than you did six, twelve, eighteen months ago.
So valuations are high, you have.
To be a bit more cautious, you want to be a lot more senior, you want to be secured, and so I think there's going to be a dispersion between returns between the investment grade and non investment grade market. But that's just late cycle behavior. And when you look around the globe, as we talked about yesterday, their valuations are high, geopolitical risks are a bit greater, and we don't see rates dramatically lower in the next twenty four months.
So that tells us take the risk down on subordinated credit, lean into senior investment grade opportunities.
Jim, We've seen these capex cychos throughout economic history. You've lift a few of them for a long career as well. But there's something different about this one. And you're well versed in this in a way that I'm not. Some of these assets depreciate rapidly for you and the team. Does that change how you put together some of these deals that you make?
It does? I mean?
I think you're raising a really interesting point. Are we thinking is the right way to think about a data center utility lines and electrical lines seventy eighty ninety years ago when day one all you were doing is wiring the house for lights, and then you wired the house for a dishwasher, a TV and everything else that goes with it, And how do you think about that technology and what really is the advantage of that data center
in five, ten, fifteen years with the power supply. I differentiate that with how you might finance a portfolio of chips GPUs that rapidly appreciate over three to five years. And they might still all. They might both be in technology, but how you fund and structure both of those is very, very different. And I think that's the subtlety behind behind the headlines, which is going to differentiate the winners and losers,
Because in every industry. Even the last twenty years that I just mentioned, those are all sectors that grew in a tremendous amount of capital and you really don't know who the winner is from the debt and equity side for a few years. And so certainly with valuations as high as they are in this cycle right now, you have to take a step back and pause and say, Okay, do I want to be a lender? Do I want to be an equity owner? What's the residual value assumptions
that I'm making. That's really what will differentiate the winners and losers.
I'm not sure how many people have taken a step back, Lisa. At the moment right.
Now, it seems like absolutely nobody. Those debt offerings are absolutely flooding, and frankly, there is a real question about whether there's behavior that potentially isn't as prudent as what you're doing, that could potentially pose some sort of risk the rest of the market.
Well, if you think about the Meg seven, in the last five to seven years, they have been a very very small participant of the IG new issue market. In the last two months, there's been a handful of these companies that have been issued very very large benchmark transactions. And again that's not a zip code. We play in day in and day out. But you have to wonder as a CFO, are they being very strategic about accessing that financing and what's the long term return of those opportunities.
Jamie Timon at JP Morgan has said, we survived build a Blasia will survive this. How do you even the tame think about this development?
You know, we're committed. I've been in New York forty years. I'm a committed New Yorker. The campaign is over now it's about the action plan and he needs to bring people together. He needs to get a leadership team that can take on the challenges of the most complicated city in America. And if you're in New Yorker, you want to see success in this administration. The campaign's over all
the great promises. Now it's about delivering. It's like when you buy a company, you don't celebrate the day you buy it. You celebrate the day you sell it in three to five years. So I think there needs to be a change in tone and he needs to bring the city together. That's the big objective. Bring the city together and bring the best and the brightest to city.
Hall to work with him.
Bill Ackman said, this is an individual who spent a lot of money trying to defeat him. Said, let me know what I can do. So that's the approach. It sounds like Apollo is taking What would you advise him?
Well, again, I think number one, you've heard it. People think, you know, public safety is the number one fiscal stimulus. And there's a lot of concerns about the campaign and what was said about public safety and the focus on that. So I would focus on bringing leadership together. I would focus on really making sure that the city is safe for all citizens and then try to create a very logical engagement with all the constituents.
That's day one.
That's day one.
Let's talk about what's happening right now in this CID economy, which is what gop Mounttowney elected. Affordability. You want to talk about the transmission of monetary policy as well. I think this is an important point. What can we do to support this economy and not exacerbate existing problems.
And laid it out well yesterday.
If he is right, which I believe he is, about the KA economy in terms of the differentiation between those at the highest twenty percent and the bottom twenty percent for the last fifteen Really, since a GFC around the globe and especially in the US, we've leaned politicians have sort of stood back and wanted the monetary policy to solve all the problems. There is only so much that monetary policy can do. The fiscal impact of leadership, not only in the US but in Western Europe.
I was there last week.
They really need to step up and have a plan about technology, investment, employment, education, and a variety of attributes that are not really monetary policy impacts. So again I think I'm not suggesting that we're not really focused on
what the next move of the FED are. They are critically important, but we are skeptical that even a lower impact at any kind of lower rates, it's really just going to fuel what's going on right now in the asset frenzy, rather than having real impact on affordability and housing. Taking FED funds down twenty five d basis points, it doesn't havel your housing crisis. You have a national housing
crisis with affordability. So I think there needs to be a massive pivot away from what monetary policy can do and how really executive leadership and fiscal policy will have a bigger impact.
Should in will are two different things.
And right now it seems like the FED is probably going to cut rates once more this year and then again several times next year, especially potentially with new leadership.
Are you saying that you don't buy the argument that that's going to help the shoppers at Chipotle and the shoppers at Kava be able to afford their burritos and the Mediterranean salad bowls more efficiently, and instead it's going to exacerbate the K and cause act price inflation that leads to a potential threat to financial stability.
Yeah, I don't see. I've got a couple of I've got.
A couple of twenty four to twenty nine year old not suggesting that their consumer attributes are going to change by you know, what the FED does. But I just don't see how the FED policy of this quarter or the next two quarters is going to have a real impact on the accentuation of the K economy.
I just don't see it. I see it. I see it much much broader.
And again, I do think getting back to New York City, we have a portion of the economy and a portion of the demographics that is really focused on you know, education, jobs, employment, affordability, and I just think we've got to think a much longer perspective here.
As an investor, if the FED does cut, do you lean into the bubble? Do you say, all right, well, if you can't beat it, join it. And the idea is you've got to take more risk and get more returns.
That's not what we do.
That's you know, there's folks who spend their day spending time about where the equity market's going this hour, this day, this week. That's just not what we do. We're much more focused on financing the global industrial renaissance transactions we announced with ORSTED last week or earlier this week, what we did in Europe with ourwe I was in Germany in the last ten days. Massive global industrial capital needs.
That's what we're focusing our time today. And that's what our investors want to They want safe, robust, long duration yield. Whether the return on investing capital of XYZ Data Center in fifteen years works, that's not.
What we do.
There was a headline yesterday and what you didn't do, and that was take Papa John's private You probably don't want to talk about that directly, But can we talk about that broader business because ALSA mentioned Carver and what's happened with Chipottele, Like, how tough is that business right now?
How difficult ethics?
I think as a principal investor in equity, in private equity and private capital, you think you need to think about long term consumer trends and what's going to have an impact on various business models. And for us, you know, we've had a real value discipline purchase price matters for
the last thirty five years. It served us extremely well, and so you know, I think that you have to think about the evolution of consumer sentiments, consumer behavior and what your impact is on different business models.
We've got about a minute left.
Can we finish on what I believe is a pr battle between you and the banks at the moment.
Not you directly.
It just feels like everyone's trying to say the cockroaches are somewhere else. And I was listening to you yesterday. Was something that you said about it doesn't matter whether debt originates, so the asset manager or the bank.
Why is that such an important point?
Because I think we've collectively lost our way. We sit on top of this amazing economy. And what we have just found is the litmus test of quality is not public or private. We sort of have collectively lost our way. The litmus test was how good the company is and how they will perform in their business model.
And again, you've got.
Great investors in credit, you've got great banks, you've got great insurance companies. There will be a dispersion of returns over a more challenging cycle. So we're committed to open architecture. We have amazing relationships and partnerships with many, many banks, some of which are public, many of which are private, and we're going to continue that and it really helps
us our origination. But I think the longer story that gets written will really be about credit quality and the sustainability or business rather than something is public private.
That's not the litmus test.
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