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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and a Marie hort Ern. 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. Brian Leavitt
of Vanvesco Joints surround the table here in New York. Brian, good morning to you. We're looking ahead to economics eight this morning at eight thirty Eastern Time. We're looking back at payrolls from last Friday, bloom out payrolls for important and we're attempting to look ahead to more of the same. I just wonder how messy the days is going to be after the one two punch we've seen across several states in America, Hurricane Alean onto Hurricane Milton.
Yes, some of the data may be messy, but I think the law larger themes are still in place, and I know that there's a lot of focus on today's CPI report. The reality is, I continue to believe that the inflation story is largely behind us.
It's passe.
If you look at the Fed's preferred measure of inflation very much in the comfort zone. If you look at the inflation break evens, which give you the bond markets expectation of inflation relatively benign. I mean, the inflation story was one of large stimulus and a pandemic that caused supply challenges. I don't think it's something that is re emerging. Rather, it's a market that's responded to some good economic activity.
And it's responded as follows, a two year back at four percent, a ten year back at four percent. How do you think about the influence of the bond market and the equity market alignment.
I'm okay with that.
I would rather see better economic data and less rate cuts than bad economic data and a lot of ray cuts.
You know, the markets. The bond market's.
Been moving in this three and a half to four and a half percent range, give or take this year, depending on the direction of the data. Now, if you think of four percent is a general proxy for what nominal growth will be in this country two percent real, two percent inflation, So that seems like a reasonable value. Is things deteriorate and growth you come down a little bit, So I think we're probably at the upper end of
that range. Again, Yeah, we had a good payroll report, but if you look at survey data, it's somewhat mixed and doesn't seem like an economy heading into a recession, but doesn't seem like one that's reaccelerating either.
Which raises a question. Did the sell off in the bond market that we've seen over the past few.
Weeks actually raise the specter of.
A pretty big rally if you get a downside surprise and CPI In other words, does inflation start to matter a whole lot more?
Again, maybe in the short term, but I would say in the long term or in the intermediate term, it's going to be more about growth. And one of the ways to think about it is just look at the correlations between stocks and bonds, which have become negatively correlated. Again, so it's become a good news as good news bad news is bad news.
Type of environment.
And so I'm focused on the growth side of this story. You know, when I see a good payroll report or a CPI report, that's you know, even a little bit above of what the expectation is. To me, I'm thinking that's a good nominal growth backdrop. That's good for corporate profitability. It doesn't increase concerns to me significantly that this FED can ease or the FED may have to raise rates again, or inflation's coming back again. I think that's a twenty twenty two story.
So you like treasure is here in terms of where they're at and the value that they're giving. That's what I'm getting from you. We just heard Bill Waddell talk about potential four hundred and fifty billion dollars in recovery funds needed to pay for what's going on in Florida.
This isn't going to be the last. A lot of people saying these storms coming a lot more frequently, and aside from just the storms and paying for all of this, it raises a question of how much more spending needs to happen and whether that spending can really be tolerated by a treasuring market where the auctions are starting to get messier.
Well, they may be.
Getting a little bit messier, but we haven't seen the treasury break from nominal growth potential. I mean people view treasuries as perhaps trading like a credit They don't measury market. It largely trades on the direction of the economy and what the Federal Reserve is going to do. So I'm not concerned that additional spending will cause rates to jump because we're concerned about the credit worthiness of the US A rate that's going to continue to move in line with inflation and with growth.
And you know, it's sort of like.
Every time rates come down, you say to investors, well, you've been sitting in money markets.
You should have locked in.
This is like the third or fourth bite at the app Well they've gotten People used to beg me for four percent, right, and now this is the third or fourth time they've had the opportunity to take advantage of that beyond thirty days, maybe think about it for five years or ten years.
So I think investors should take advantage of it.
Hurricanes are not just going to be expensive, but the fact is they can also increase fuel costs. We are seeing this risk in the oil market, not just domestically but also internationally. What's going on in the Middle East.
What kind of.
Impact you see from the price of oil, not just on inflation data, potentially also its relationship with the bond.
Well, we know energy prices tend to rise late cycle, right, so that's a phenomenon where you get these moves and energy prices and that's when the consumer rolls over.
But let's think of the starting point.
So the starting point is the US is producing or is drilling more oil right now than any country in the history of the world ever, right, some thirteen million barrels per.
Day or more.
And we started this environment or we've you know, the expansion of the Middle East war into Lebanon and Israel and Iran, and these hurricanes with oil in the sixties in the United States, so we've moved up into the mid seventies, but certainly not the one hundred and twenty dollars that we were looking at when ahead of the global financial crisis. I drive around my neighborhood gasolines, you know, two seventy five, you know, two eighties, So we're not
at a level that's you know, prohibitive. In fact, that's part of the soft landing story. Consumer networth at an all time high gasoline beflow three. But yes, if this were to skyrocket significantly, don't think that it's an inflation story. That's a tax on the US consumer story. But US drilling hopefully prevents that.
So what's your biggest risk then, to the soft landing scenario.
The biggest risk would be a rollover in economic activity. I mean, we've had interest rates high for a very long period of time, and you know, usually when the yield curve inverts, you wait eighteen months for the Fed to have to normalize the yell curve and you go into a recession. And this time that has not happened.
The bankers were tightening lending standards, now they're not. Corporate bond spreads are very benign, so it doesn't feel like a recession, largely because most American households have fixed rate mortgages, so the increase in rates hasn't hit. Now those are famous last words. Right anytime you're two years after tightening cycle, you're saying no overseet you know, you say, well, I guess we got through this.
So that would be the risk.
I'm laser focused on the growth side, not on the inflation side. But right now, the evidence suggests it's an economy that's pretty resilient.
Let's finish on Nanning's Importan twenty four as Delta JP Morgan wels FONC Bank of America's Vita subramanium.
The bar isn't high, do you agree?
Yeah, the bar isn't high.
It's you know, the expectations are fairly low. We're likely to surpass expectations on earnings as we as we tend to do. And again it's a good nominal growth back job. You know, investors sitting here looking at the equity market saying all time highs on the equity market, can I invest?
You know, we've had, you know.
Twelve hundred all time highs since the S and P five hundred went live.
And you know people say buy low, sell high.
I say, by high, sell higher, And I think we're in a I think we're in a or maybe never sell. I think we're in a bowl market. And peak inflation, peak tightening, peak rates should be good for equities.
He's still but it's just pro vescot Pran is going to say, I get the thank you, say, Tom, welcome back to the program, set giant step back. Can we just spend some time from thirty five thousand feet. Can you explain to us how different this universe will lurk in ten, fifteen, twenty years time.
Yeah, certainly. You know, today the auto industry is about a two point seven trillion dollar industry. It's essentially a box with wheels industry with about ten percent operating margins. The robotaxi industry will be about a one point seven
trillion dollar industry, but massively more profitable. Right you and I. When we take an uber pay about a dollar to two dollars a mile, it only costs about thirty cents to operate one of these per mile, So it's it becomes a software business, a subscription based business, and the multiples that these companies will trade it will be tech multiples.
So I have Tesla at something like two hundred and fifty billion out of the one point seven trillion, but you apply a tech multiple to it, and now all of a sudden, it's more than half of my entire Tesla valuation. So it dramatically increases the valuation of the mobility sector, the auto sector, because it gives all of us as consumers greater utility. We don't have to own a car, get chased by the cops, deal with parking, don't get into accidents. It's really a transformational thing for society.
I'm sure we'll hear a lot about that tonight. It help solve the urban housing crisis. No more parking garages, etc. Really a breakthrough type thing for society. The real question, obviously is when is it's going to happen.
Well, let's talk about that.
So how quick did you think we'll see the shift from consumers just pulling away from buying a single automobile and maybe buying a subscription to one of these services.
Yeah, I think this will be a very slow process. This is not years, This could even be decades.
It will happen, though, you know, we had Carlos Stavars from Stilantis at our conference a couple of years ago, and he said, you'll have to re engineer cities entirely, you know, not the example of the champ Sela, say, where it's really a human decision of how to drive, and so cities left to re engineer themselves.
Regulatory will be the big question mark that we'll need, and that's always a slow process. It will happen, but it will be years, maybe decades. Before we get kind of full ubiquity, but certain cities you'll see it happen quicker than others.
Tim, I want to pick up on that this question of the sheer technology of it versus the regulation of it versus the oversight, especially to time, where the host of data that you're going to need to make this happen, as well as the oversight and the potential manipulation of people's driving patterns is going to become in cold relief when everything is a national security issue, how high are
the hurdles. Do you have a sense of who's even working on trying to get some sort of regulatory framework and oversight into how this would operate, let alone whether it even could.
Yeah, I mean I was at cs a couple of years back, and there were congressmen from you know, US states who were speaking about this topic. So there is a political movement to get this happening, even in the US. It is a state by state issue in the US. But remember we're saving thousands of lives, you know, hundreds of millions of dollars in productivity, etc. So there is a political motivation to get it done. But obviously you have questions about liability, the automaker get the liability, does
the person driving get the liability? So the US it's somewhat complicated. Europe is even more difficult to get this. On the finishing line, you have the European Commission, which is a multiple countries have to all agree together. We all know how difficult that is. China, however, is I think we're ground zero where this will happen. We're already seeing it happen. It's a you know, obviously central government can actually make this happen, So we'll see it happen
in China. Quicker. My numbers have China with a much bigger robotaxi number than Europe or the US. Then it'll gradually happens state by state, I think in the US, and then finally, we do think it will eventually happen in Europe.
And John, the person who's leading the charge here is a politically polarizing human being, Elon Musk, and he's making himself more so. And I wonder whether that puts Tesla in a better position or a worse position when it comes to still being the leader of the whole robo taxi movement in the future.
Yeah, I mean you guys probably know that I can answer that question better than I can, But what I would say is, I don't anticipate him doing something completely different than what we've seen already, at least in your term from ROBOTAXI fleets from Cruz and from Weimo. I expect them to announce tonight a fleet service similar to that with their vehicle. Those programs already have approval right in the US by those certain cities and states. I
can see that being a similar path forward. But I do want to stress the technology that Tesla has with that SD is different. It is AI base. We have it on the roads in Level two plus and people's cars. It is very different and it is better, quite frankly than a lot from a lot of Level two plus on the road that we have. And there is an arms race for Nvidia chips and Tesla has quite a lot. So you know, over time, I think people will look at the kind of proof in the pudding and see
obviously the data that will bear it out. We have to see the safety statistics and what happens. But you know, it's an arms racer GPUs. Tesla has a lot of them. FSC is a great product there's a lot of people working in this company, not just one individual. I think we all have friends who work there who are very interesting in dynamic people, and it's a dynamic company first and foremost.
Well, no one said Elon Musk wasn't dynamic. Tom, You're very optimistic when it comes to a long term. Can we really narrow this to the short term? This event is delayed by two months? How hi is the bar for Elon Musk and Tesla this evening?
Sure? You know I've said that near term. I don't actually expect this to be a big a big catalyst for the stock. It had run into the event. We had a delivery number that was in line, and the stock still kind of sold off a bit. I think there was some folks who moved into Tesla because of all the carnage happening from you know, the German OEM's profit warning never let a good crisis go to waste.
I think I was the person who said that, thank you, Tom, sorry, credit, I no worries, and so a lot of that happened, and basically, you know, the stock pulled back, so it showed you that the stock ran into the event. So I don't anticipate a big up move, but I do expect that people like myself will finally get numbers on how to model robotaxis. I also think they could talk about optimist because on the invitation it said we robot So I do wonder if we could hear more about optimists.
It's definitely not in people's numbers, so it could be a catalyst more longer term, as we start putting these things, these higher multiple non auto things in our models, we'll remember this day of you know, in the future and look back as opposed to tomorrow seeing the stock price, you know, demonstrably higher or lower.
Tell them how strong do you think some of the hands in this stock are?
Now?
Given the Elon Musk himself said basically, if you don't believe in autonomous driving, don't hold this name. That was basically what he came out within the last twelve months. How strong do you think the hands are in this name? Given them riding we've seen off the Eighthril low.
Yeah, but I think people are starting to believe, if not starting to believe, they have been believing in the past several months. I mean, you can't get to a market cap close to whatever eight hundred billion dollars just on a car business. It just doesn't work. The math isn't there. You have to believe it's a tech company, and autonomy is one of the only ways you can really get there. I mean, not even with energy storage, not with regulatory credits. One of me is a real
software subscription based business. People clearly giving credit for it based on where the stock is right. So I actually think folks are believers in it. We just need details more than anything, and not just PowerPoint slide. So we'll see the vehicle, I think tonight we'll see what it looks like. I mean that in of itself is not going to get folks excited, but I think it'll give credibility that this is real. And then this is happening
and could happen. We could have a service maybe within the next six or twelve months.
We hope been promised that for a long time. Tom to run a s some thank you, sir, appreciate the up day. Dan Gun has a SOUS alternative asset management, saying the stock market still looks good to me. Broadening gains are encouraging and despite all the worries over everything market camp and equal weighted and decease reach essentially at high stand joined, nap for more dank and morning.
Good morning, sir, how are you going to see?
Why do you always act surprised.
Because I'm not listening to start?
Thanks, you're listening now now call life on sav good.
It's good to see.
Look.
Equity spread, equities a record highs. Credit spreads are incredibly tired. I think we should start in credit. When you look at credit right now, how tight are things at the moment?
Yeah, listen, they are. I think depending on your index, you're effectively at all time tights. I mean that's not exactly true. If you use the JP Morgan index, for instance, their IG indexes called ten or so basis points away from all time tights. The high Yealed indexes ninety basis points away from all time tights. Bloomberg obviously has an index that's similarly close to all time tights. But but I don't think in that sense the credit market tells
you anything that the equity market is not. We're obviously, as we've discussed and you discussed with other guests, pricing in for lack of a better word, of soft landing or just a continuation of the expansion and risk assets in general or appreciating in that type of environment.
Is it sufficient that they're even talking about interest right cards? Is that just good enough? The fact that we've got bank drop for growth and we've got a central bank that's even having a conversation about lower and interest right small.
Well, let's just state the obvious. We're not just having a conversation about it. We've already realized a fifty basis point reduction, We're probably going to realize two more twenty five basis point reductions this year. There's obviously a debate about whether that's completely necessary or not, but from a expected value standpoint, that's probably should be your baseline. And so it's again, we're not just discussing it. It's happening. And so the more important thing for risk assets is
not whether rates are going up or down. It's what's the broader economic and earnings backdrop. And in that sense, yes, rates are coming down, and that's an added benefit, certainly for companies that have to refinance and the maturity wall and the credit market, et cetera. But ultimately what matters is that cash flows still look pretty good and the economy still looks pretty good, and so from that standpoint, why shouldn't risk assets appreciate.
There's a question about whether the bond market, treasury market in particular, is increasingly kind of dancing to its own music. As long as good data comes out, even if fields go higher, it doesn't really matter for risk assets. At what point is that sort of a threat that gets crossed as yields continue to grind up war it well.
I think it's also important for investors to remember that the relationship between yields in the treasury market and risk assets is a moving target, and in particular in the post two thousand period, roughly higher yields, which are associated with higher growth and not necessarily higher inflation, have been a positive for risk assets. They can move in tandem, and I think you had a period of time obviously where inflation was spiking, where that relationship was inverted. People
were concerned about inflation. But as we've moved now towards growth concerns. Right now, I think higher yields are not necessarily a problem for the equity market in the sense that if they are corroborating the idea that the economy
is continuing to grow, maybe the FED. A lot of what's happened, obviously, is that the FED can cut as much as was originally priced in stupidly, I might add, but in that environment, why wouldn't equities appreciate even if the yield in the tenure goes from three to fifty to let's say four.
So to pair that with credit is solas thinking that structurally, credit spreads are going to be tighter this time around relative to the higher benchmark yield, simply because the higher yield reflects how good the momentum in the economy is, which should all things being considered, make a lot of the companies who even are lower rated look more credit worth.
You know, that's one hundred percent accurate. I would also add, and we've discussed this in the past, this is not your mother's credit market. It's more highly I don't know that my mother had a really, really impressive colid market, but I mean it is true.
The market is more highly rated.
You have a higher proportion of debt at the top of the high yield structure than at the bottom. Companies have higher cash and lower debt to ebitar ratios, leverage radios. So there's all sorts of reasons why the market should be in a sustainable way, tighter than what we've seen historically, and in conjunction with that, you have, to your point,
the better economic backdrop, which improves the environment. The faults are relatively constrained, So all of that together makes for a more attractive credit market and should over time obviously if you have a receessioned this change, but over time should support higher valuations in the credit market as well as the equity market.
Given everything we've said, what's your advice to people who have missed out on all of this?
In the Satin cash? What did they do?
High society?
Where do they go?
This is like the Sasquatch. I don't think those people exist.
You don't think exists.
No, I don't think they know.
Some persons tell us what you meane.
Well, Lisa might know one person who has sat in cash for some time.
I think it's Lisa for what it's worth.
But I don't think.
I don't think after a bull market so to speak, in both equity and credit that has lasted this long has not sucked in most investors at this point, and I think you're at a point in the cycle now where I don't think we should be having the conversation, is it a bull market, is it about to end?
Et cetera, et cetera.
I think the conversation now should be considerably more nuanced than has been for some time, in the sense that, Okay, things are doing okay, risk assets continue to appreciate. Where's the outperformance going to come from? Is it still tech stocks? Should I rotate into energy? Is it defensives? What factors should I be overweighting, et cetera, et cetera. Where in the capital structure should I be positioned? Triple c's have had a very good year. Obviously that's not a market
so much as a bunch of idiosyncratic names. But those are the types of discussions that asset managers have all the time. But I think for a lot of viewers out there are watching should be happening to a greater degree today.
When you say that money doesn't exist, you're not saying that money is not real. You're just saying that that's not the kind of capital that's going to get deployed to risk.
Which money did I say doesn't exist?
Money market funds?
Oh?
Yes, sure, no, Well listen, that's listen. This is a favorite topic of mind that six trillion exists. But I think we people come on television and write notes and talk about it as if it's this monolithic item which is going to spur equities higher as cash goes from six trillion to t That's not how it works. First of all, a portion of that money is institutional, a portion of that money is retail, some of it's in tax advantage funds. It's not like they're all comparable to Nvidia.
But the most important point I would make, and I've made repeatedly, and I will do it until I die, that's six trillion needs to be scaled for something because number up. So you can't compare today's six trillion to six trillion five years ago. What do you compare it to? My preference is the S ANDP market cap? How much is on the sidelines compared to the market cap. So let's do the math real quick. There's six trillion or so of money and market there's six trillion of cash
or show in money markets. Let's treat it like it's a monolith of total equity market cap SB five hundreds called fifty trillion or so. So that's I don't know, ten twelve, something percent of the equity market cap. That's not out of step with what we've seen over the last ten or fifteen years. Yes, there's a lot of money on the sideline, but there's a share of biable assets in the s and P five hundred. If that's your argument, it's not necessarily high. That's not to say
that it will not come down. It will at some point six trillion will go to five trillion, and some of that will go into the equity market. But do I think that is a reason for me to be even more bullish or bullish at all?
No, I don't think I.
Can tell you that was such so much better ounser than the first one exists.
Well, all I can say is I love this. We should comput it.
I don't. I must have had a Will Ferrell moment. I don't remember saying the sixth this morning.
DA Honestly to me, that sort of we should get clips of everyone's saying money on the sidelines is a reason to buy, and then all the people saying money on the sidelines is a fiction. Stop it already next time, Okay, just I am curious. I want to get to this because Solis really specializes in distressed investing right now the world that you just pictured, no distress there.
What do you guys do well?
Listen, distress managers have been wrestling with this for many, many years, and I don't think SOLIS is any different in that regard. That is to say that when you the traditional distress manager in previous cycles probably doesn't exist much today. SOLAS does as much investing up the capital structure these days as we do down the capital structure. So we're capable and have owned not Visa, but like we could own Visa, and we could own dish unsecured bonds.
And when you have an environment like we've had for some time where the dish unsecured bond equivalent is few and far between, has been the case these days. There's not so much workouts, there's not so many structurings. You have to find risk adjustede returns elsewhere. And we've done that, increasing in the equity market and up the capital structure, and I think that's been rewarding for us over the last few years. I think we're pretty pleased with our performance.
The way that I talk about it is we're taking what the market gives us. There might have been a time where we were trying to force the issue in saying distress managers, multi billion dollar distress managers, this is the only sandbox in which we can play. We've traditionally played in that sandbox. We must stay there. I don't think we have that view and have in for a decade. We're all over the capital structure, and I would argue, justifiably so our.
Distressed hedge fund's being made out of business by some of the big private capital funds that are out there doing a lot of rescue finance.
That doesn't help.
But I think the bigger issue for distressed investors in general is there's just not been very much distress. The maturity wall, which everyone keeps talking about, hasn't been binding. Restructurings get done, and the lack of covenance in in the loan market and elsewhere make it easier for companies to go longer before they enter court restructurings, and when they do, there's fewer assets to fight over, which gave birth elemies with this whole separate conversation. But yeah, listen again,
I think we're finding stuff to do. We've talked about the energy market. Oil is twenty bucks off its Highs, but a lot of those names, or a lot of those stock names, are basically AD Highs.
We continue.
We talked about the consumer ad nauseam on here. There's any different number of ways you could play the consumer. We've talked about cruise lines, We've talked about in the media space where we sold this as a history. It's well known that we were a large holder of MGM Studios, so we having expertise in that area. There's stuff to do there. I don't think there's any shortage of stuff to do. Again, if you don't sit here and say that's the only sandbox in which we can.
Play, Dan, this was great. It's going to see it.
My pleasure is always good. It was real.
It happened.
Dan green House of Solis Alternative Assett.
I'm gonna have to watch the tape.
This is the Bloomberg Sevenance podcast, bringing you the best in market economics, Angie of 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.