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Terminal and the Bloomberg Business app. We begin this hour with the recent rally firmly on hold as the world of weights Israel's next move. Investors keeping one eye on US labor market data a head of payrolls on Friday, Jim biancov Bianco Research writing, I've still a no lander, meaning guys, see the economy is okay, not even showing signs of a self landing. I can debate whether we are seeing much calling in this labor market. Jim joins us now for more. Jim, good morning, and welcome to
New York. Thanks he at least it went through the JUMPIP connects. You look at what's happening with the quits right. Quits writes down, look at what's happening with the Honring's right. Honding's writes down, Why do you not see that as a sign of a slowed down in the slang pima kit If you look.
At the bigger picture of the numbers, they are down from say July or June, but the bigger picture over the last several years, these are still numbers that are very constructive for.
The labor market right now. If you look at if you.
Want to expand out from the JILT report to payrolls to the household survey, those.
Numbers look pretty good now.
The one number that is weak has been the rising unemployment rate. But the Fed likes to use the phrase increase in labor supply, which is a euphemism for migration.
We've getten more people coming into the country.
The growth the population growth rate in the country right now, according to the CBO, is pushing a thirty year high because of migration, and a lot of those people are coming into the country are unemployed, and that's what's getting picked up in the unemployment rate, which is why that number is rising. That's not necessarily a sign that people are losing job.
Just say, year at three six state doesn't scream no landing, Ten year at three seventy six doesn't scream no landing. What's your feel on this spun market?
You know?
I think that at three sixty in the two year note, it is priced in pretty much.
The Fed cutting rates all the.
Way to say three to three and a quarter that's in ten two year notes shouldn't go anywhere else. Wall Street is really on this idea that we're going to see a curve steepening. I guess I am too, but at this point that's a barish trade because we're going to stay at three sixty, and the way you steep in the curve is the ten year in yield has
to start to rise from here. I don't see the two year note going, say under three percent, unless you make the case the economy is really falling apart and the Fed is going to cut rates well beyond say three percent, down to around two percent or lower.
I love when people say I'm a no lander, I'm a soft lander. It's sort of like saying I'm a flat earther. But there's sort of a question here about what that means.
I mean going forward.
Does that mean that there just is no recession or does that mean that there actually is a reacceleration from here of growth and inflation.
You know, you brought up a really good point because I've critici size the soft landing camp that it's this thing without a definition.
So in a year I'll define it and tell you I was correct.
I think, yeah, Well, I think a no lander scenario is if you accept that potential GDP, what would the economy grow without it being stimulated or restrained is around two and a half percent, two to two and a half percent. I think that's the no landing camp, is that we continue to grow at the two to two
and a half percent camp. Also, if you wanted to throw inflation in there, I am in the sticky inflation camp that the long run inflation rate is probably closer to a three handle, if not a three handle, then down at two point zero percent, where the Fed thinks it's going to be. So if you add in the two together with nominal GDP, you know two to two and a half percent real growth, three ish percent inflation, we're talking about five and a half percent nominal GDP.
And that's where you know the no Landing idea.
Comes how much just being a no Lander sort of hinge on this idea that authorities already willing and able to come in and step in, whether it's raycuts, whether it's the Bazuka we goes to Scott from China, whether it's.
Potential fiscal stimulus.
In the United States despite the deficit that people care about but aren't necessarily pricing.
In Oh, I think that you know the no Lander camp, if I defined it at the way I do, it's all of those things give me worried that we don't need the Fed aggressively cut rates, we don't need massive fiscal stimulus, and if we're going to get it, what we're going to do is we're going to produce more
inflation and probably second half of twenty five. And that's really the biggest concern right now is are we going to overstimulate because in the no Landing camp where we don't really need that kind of stimulation, but so it looks like we're going to get it anyway.
You said you're going to take the over of the Friday's payroll report of one hundred and fifty K, do you just immediately have to then slash sixty seventy thousand off of that because of the revisions we continuously see.
Yeah, that's usually what happens.
I think twenty five of the last thirty one months, the payroll report beats a Wall Street's estimate, and then the revisions come in. And it's almost to the point right now where people have been more and more asking me is what's your guests on revisions as opposed to what's your guests on the payroll report?
Revisions?
I think are getting overstated a little bit that usually when they run and cycles the revisions, up until twenty two, the revisions were mostly upward, and since twenty two they've been mostly downward. And so I don't see the revisions as being some kind of dark secret thing that tells us that the economy is in trouble.
But yeah, I probably see.
That the revisions will pull back on the numbers that we saw in July and August, but the headline number, you know, like I said, most of the time, it seems to be when we get the next.
Payroll report, the following one, when you look at what happened in October, we're going to have Hurricane Helen's impact and also the strike workers at the ports. How difficult is it going to be to really extrapolate the labor data.
Oh yeah, and don't forget the boning strike too. And so I heard Mike McKee say this the other day, and I'll you know, there is a possibility of a negative payroll report coming up. The payroll survey week is the thirteenth. If these strikes keep going into disruptions into the thirteenth and we find that, you know, getting things back to normal after Hurricane Helene, goes more than two weeks,
we could see this start to impact jobs. Remember the way the Jobs for survey works, they have a company report. If the company doesn't have power or it's closed and it doesn't report, they put them down for zero this month. They'll pick it up next month, revise it, and you could see a big dive in the numbers. Hurricane Harvey. We saw that last twenty seventeen, in September, we saw a negative payroll report off of that when it hit.
Houston, and a one with Blimback Economics late to this hour and has put some numbers on this. If the strike lasts more than two weeks, we estimate the knock on effects could lower October payrolls do the first November by Money's eighty thousand jumps. They think that's going to lead the Federal Reserve to interest rates again by fifty basis points. If those numbers actually materialize. Wearing you on the fence move November seventh.
You know that that's going to be a difficult one because if we were to see that type of number, and that's just off of the port strike, we still got the bone strike, We've still got the hurricane and maybe disruption from the Middle East coming as well. With energy prices, it's going to muddy the water for the FED. It's going to make it very, very difficult to try and discern what is the economy doing.
Yeah, we know that there's this port strike. Yeah we know it depressed jobs, but we also know it's temporary, that the.
Port strike will eventually end and things will eventually return back to normal.
It's going to be very difficult for them.
I think Paul set up the case for twenty five at a couple of days ago when he spoke in that that seems to be more of the prudent action, especially that it's two days after the election and there's a reasonable chance we won't know the outcome of the election by November seventh as well.
Jim, it's going to say it new Y'll say thank you, sir, Jim bian Cut.
We said.
Davis, chief economist at Vanguard, Joe, thank you so much for being with us. I want to start just with weakening but not weak. How do you parse the difference at a time where we definitely are seeing weakening?
Well sure, and again I think that's also really at the heart of the Federal Reserves response. We've clearly seen a slow down the labor market.
Part of that's been very welcome.
I mean, we were out of balance for the past two years and had you know, really rapid wage growth. We're approaching the levels now where any further weakening or slow or just slowing or cooling would really put you know, really bigger concerns on the table. I think the Federal Reserve has been weighing this information very importantly, and so you know, really explains you know, some of their.
Pretty aggressive moves.
I mean, I think the big tension in the market is are there the are the jobs figures really representative of the strength of the economy, or is it things such as GDP growth, which is going to three percent and not showing any signs of a slowdown.
So which is it, Joe?
I mean, we just had all CEO Mark Rowan speaking with our own Jonathan Farrow, and he was basically saying that the fifty basis point raycut was a really expensive insurance policy and that actually this is not an economy that needs it. Based on GDP and based on earnings. What makes you think that the labor market data, like the underpinnings of jolts that show that quits rates have really gone down, what makes you think that we should more heavily weight that.
Well, again, I mean I think the whole insurance phrasing is actually pretty appropriate. You know, again, the economy is pretty resilient. I think we still have some turbulence ahead. Our lead indicators, which you mentioned at the outset, still point to some further weakness, and they're pretty powerful indicators
given just the breath of our sample. And so I think what they're trying to do again, let's be clear, the Federal Reserve is all in on the soft landing expectation, and so I think they're going to be fairly aggressive
to try to increase the odds that that happens. But there is risk in that strategy if the labor market, which I don't think it is, but if the labor market is setting the false signal and it's the GDP numbers that are more accurate or more representative than you know six months from that, we're going to have this crossroads because the equity market, I think, is looking at GDP and the bond market and the treasury market is looking at jobs.
Well, Joe Powell tried.
To solve this tension by just saying the labor market is a real time indicator and GDP is not. GDP is historically bad at predicting a recession. Does that mean that we just can completely discount it, completely discount the strength and what it tells us about one inflation coming in and the likelihood that unemployment moves in a more malicious manner.
Yeah.
I wouldn't be too quick to completely discount GDP because underneath GDP is corporate earnings, corporate profits, business investment, and so I think that it is important. I mean again, I think you know, policymakers, to be fair to chair the power, I think they are looking at a distillation but there's no doubt that the futteral Reserve is weighing the jobs market much more heavily than the GDP numbers. Again, I think, you know, the next several months will.
Have some weakness.
If we're right, then the federal Reserve will look very prescient.
But nevertheless, you know, we're coming at a.
Modest crossroads i'd say roughly six months from now, and that is and it's not a Bears crossroads. It's more of is the equity market right and this softness in the labor market's going to stabilize and then we're following GDP or is it going to be the latter and we're going to have GDP go come from three to two. I wish I had more conviction of which one it's going to be. Policymakers are trying to change that calculus in the next several months, but that is really the heart of the issue.
I love the way that you're phrasing this because it's really accurate. It makes me feel like, right now the labor market is doing to dictate the bond market, and it's basically the GDP numbers Atlanta Fed. GDP is what almost every analyst who comes on the show, Who's bullish and Equities points to and says, look what's slow down? I just wonder how much the Fed could get ahead
of this in economic terms. In other words, if they cut by they just cut by fifty basis points, if they do another fifty basis point cut, say in November, how much could they affect change to actually bring the labor market up to GDP and GDI rather than bring GDP and GDI down to the weakness that we're seeing currently in the labor market.
Well, again, I think there are recent actions, there is some lag. So I mean the financial markets respond instantaneously. We're already trying to get ahead of the Futter Reserve. But in terms of the labor market the next three months, they're pretty much baked. I actually wish I knew exactly what the numbers would be, But our leading indicators say, listen, there's still some choppiness, but they're not going to go negative. That would be a surprise to me. And so again
I think where it's going to come out. The Federal Reserve is now trying to look six months out and saying, listen, we want to nail that landing. The only risk I think the more bullish part of the economists or analyst community is saying is listen, you don't need to be cutting at all or not much. And so I think the Futter Reserve, if they're going to fight that narrative, they have to explain why they believe they're so restrictive
and yet we have three percent GDP growth. I'm still waiting for the answer, but I think that's something that would be helpful for the Thurd Reserve to articulate where they're going to go for the next six months.
Joe, but how are you going to review the non farm payers report November third? That's looking back at October when you see all these mismatches in the economy and people will be out of work. We know that because of what's going on with the number of strikes and Boeing and the port.
Well again, I think you have to look at other things. I think you have to look at the new entrance coming in. I mean, one of the biggest reasons why we didn't have a more material slowdown this year was just the really the surgeon immigration. So you're going to look at a distillation picture. It's not so much what the headline is it's the breath of job creation. It's industries that are always strong, are they continuing to add at a current pace. It's the hours being worked outside
of the strikes and areas. So yeah, yeah, Again, like anything in life, there's going to be noise in that report. I think what you're trying to say more than anything is the diffusion or the breath of industries and companies therefore that are in the continuing to add to just the jobs.
Joe.
You also talk about something in your research, a phrase that feels like it's been dropped by the wayside as of late, and that is the last mile of inflation. That's some of the unevenness that you see. You expect inflation to remain stubborn in this the second half of twenty twenty four. Does that mean this whole sort of idea that Powell was doing some sort of victory lap, even though he didn't explicitly say it, saying that inflation has been conquered.
That that's not exactly right.
Well, I get I think the Federal Reserve, you know, they're one of the few institutions that can actually affect the outcome because if everyone believes that inflation is on their control.
It tends to go their way.
But you know, the housing market and all of its esoteric calculations has been you know, one of the airs that's really been subborn. And I think that you know, even FED officials would acknowledge that. But again, you know, this is a fairly dovish institution. But to give the feder Reserve credit, they said that they could have a trade off of bringdown inflation without a material impact in
the labor market. Now, you know, they got a really good luck in terms of the immigration surge, but tracking to date, so again, you know, I'm not cheering against the soft landing. I'm just waiting to see, you know, where does that calculus given their aggressive cuts and what likely will continue for a little bit of while a little bit of time. Where are where are we six months from now? And that's something that we will continue to focus on.
Joe before we.
Let you go, How much are you expecting the jobs are part to surprise the upside of the down side when we get them on Friday?
Oh my goodness. I've been employed for twenty two years in part because I've tried to avoid these questions. But I would say there's monest risk on the downside. But take that with the grain of salt. If I was that accurate, I would probably already be retired.
I love it.
I expected you to be like, well, suddenly disturbance. Can hear you, Joe Davis, a Vanguard, thank you so.
Much for being with us.
I really appreciate it.
Tony Rodriguez, head of fixed Income strategy at neuven And what do you make of that? What we just we're hearing about from Joe that essentially the bond market is taking its cues from the potential weakening of the labor market, whereas stocks really are looking much more at GDP and GDI.
Yeah, I think that's accurate, and I think when you take that to the fixed income context, you're seeing the equity like response in the credit markets. Right So emerging markets are doing well, preferreds are doing well, high yields doing well. So credit risk is highly valued right now, and the fundamentals are very solid, defaults are low, corporate profits are good. So you're seeing the same story in the fixed income market. It's just that it's focused on
the credit sectors. So I think the disconnect is maybe that in the treasury market you are seeing people that are kind of hedging against their risk books. So if you have an aggressive equity position, one of the only things that's going to work well. If in fact we get the hard landing that's not the highest probability, treasuries
will rally. Treasuries will serve as a hedge. So I think there's a lot of money in that market that is serving as a hedge too, taking risk and the credit markets taking risk in the equity markets private markets.
That didn't work though over the past couple of years because the issue the risk was inflation, and the different kinds of risk can mean that the bonds can be a buffer or not. Are you basically saying the increasingly bonds very diversifier because inflation is off the table, that is no longer a concern in any investor's mind that you speak with.
Essentially, yes, I mean we wouldn't say inflation risk is off the table completely, but it's certainly much lower risk than it had been.
We do think inflation continues to come down.
So when you think of fixed income, you want to get income out of it, liquidity and a hedge and stability. Back when inflation really started to take off, in twenty two, there was no income in it, there was no potential for protection because rates were so low, there was still liquidity. We sit here today and you have income now out
of your fixed income portfolio. Treasury is probably the least attractive area to find it, but you do have income in it, and you do have now what we think will be a hedge because you're coming off of three and a half to four percent type of levels rather than what had been sub two percent levels.
So Tony yesterday, we have a big risk off type day. It's pretty textbook. Over geopolitical fears and Iran in Israel, it's pretty textbook.
Except for credit.
Market spreads barely move maybe one basis point for the overall market, maybe five for a high yield. Is it a market immune? Did you a political risk? Or is it just more common investors?
What is it?
Yeah?
I don't think it's immune, but I do think it's more common investors.
Even at oil prices, while they went up, they didn't
spike as much as you might have expected. So I think people, you know, maybe it's the frog and the boiling water type of syndrome that all of these geopolitical risks there are so many hot spots out there, and there has been escalating risk in all of them that maybe the markets have seen the movie before and it's going to be, you know, a really cataclysmic event if in fact, it gets to the point where we start to see really the MIDI theater expand into more players.
But for now, I think the market's looking at it as this has just been the ebb and flow of this, you know, continuing escalation that we're seeing. So we haven't had a major disruption, but it's a big risk out there in our minds.
Is that geopolitical risk?
Yeah, So if you were going to take that risk on board and you were actually really nervous that this was a different movie than the one we've seen, what should you be doing well?
From our perspectives. A couple of things.
One is that you don't want to be at the high end of your risk budget when you look at not only the risks that are out there, but when you also look at just valuations and the broader capital markets right fixing Kime. You look at credit spreads, equity market, you look at valuations. None of them are considered you know, historically cheap. They're at best case fare maybe aggressively priced, so that tells you you want to have some powder dry, you want to be kind of at the midpoint of
your risk budget. In addition to that, within all the various asset classes, we're leaning more towards a little bit higher in quality, a little bit higher in liquidity, and making sure we have stronger fundamentals and can kind of see their way through any potential impact from economic weakness coming from geopolitical event.
There's sort of this counterintuitive feeling right now in market is there's a real question. We were talking with way Lee of Blackrock earlier this morning, who agrees with her colleague Glarry Flankfink, who is talking about that maybe this bond market has priced in too many weight cuts at the same time that people are talking about the potential we're downside surprise that inevitably the Fed would respond to.
Do you think that there has been sort of an overstating of the Fed's reaction function, in other words, a more billish position on the economy, or do you think that people are going to be surprised by how much they are going to have to cut now?
I think that the markets are pricing in too many cuts there's been an overstatement of that. I do think that the probability of soft landing increased quite a bit when the FED cut fifty is their initial cut, rather than twenty five. And also you saw what China has done over the last week and change, where again they're not game changing things out of China, but they are stabilization and first step moves by China. All of that
helps to reduce the risk of hard landing. So to us, the treasury market, the FED funds futures market proggressively pricing. Part of that, though, is because of our flows in those markets that are hedging. They're using that market to hedge, and we do think that if you get a hard landing a very significant geopolitical escalation, the Fed's not going to stop cutting at three and a quarter to three and a half, which is what our target is for the middle of next year, you'll see a sub two
percent funds rate. You'll see a tenure that's at two percent or lower. Again, that's a very low probability in our minds, but it will be an effective hedge to the declines you'll find in your equity market or the widening and spreads you might see in the credit market.
So if that's the low probability, does that mean base case just the natural place for yields to go from here on that is higher.
I think base cases rangebound. I mean we kind of think fair value tenure three and three quarters to four percent is about fair value. It's a real rate that might end up in that one and a half to two percent area, and we think that's a good long run equilibrium level. You rarely get to that level and sit at that level, but for now that would be what we think is a fair value zone. So it's just a fed that needs to get down in terms of the funds rate patiently in our minds, not fifty
base point cuts, but twenty five based point cuts. And if that happens, you can get this, you know, sought after soft landing, which can help the US economy grow. We don't think of three percent then maybe sustain a two percent one and a half to two percent type of pace.
What's your call and payrolls on Friday, we'd.
Say that the risks are probably to the downside, but not materially. So one hundred, one hundred and fifty we think is the right range.
Tony Rodriguez Nupie.
Thank you so much for being with us.
This was the deal we agreed to it. If the stock closed, it an all time hard investigate. Mark Rowan would show up alongside me and it's a man of its worth market morning. It's good to see you.
Thank you, and technically you were here, you came to visit us, so thank you.
Thank you. You planned it this way. I'm sure big target for twenty twenty nine ten billion dollars of anue larnings. I think we have to start with a pretty broad question. Race to coming down economy is pretty decent. Let's just cool, financial conditions easy. Why people coming to you instead of just issuing a bond in public markets?
I think if they come to us when they can issue a bond in public markets and it's can't, is not that it's not open, It's that they want to do something that the public markets will not allow. Public markets, over the past two decades have become very vanilla, call
it beta. If you want to do something unique, if you want to finance the next generation of infrastructure, you want to build a project, you want to build data centers, you want to build power, you want long data do you want special features that's just not available, you come to someone like us, and increasingly private markets are offering really compelling solutions to investment grade borrowers.
Let's talk about some of those deals, IC and c AB and beth Intel recently. What's the common theme behind those three company for you?
The common theme for US is excess return relative to the credit of the underlying borrower. The common theme for the issuer is they are achieving something they could not otherwise achieve. When we did ABMBV some six billion dollars years ago, everyone around us, our peer group, that was interesting. That was one off in COVID. You'll never do another one. Another investment grade private deal. One hundred billion dollars later,
we're still doing investment grade private deals. And I see nothing but a long line of interesting borrowers and interesting situations. Because think about what we're doing in the world today. We are building infrastructure, We are building and changing energy transition. We're just at the beginning of this. We are building the next generation of data and power. Every one of those things is long dated. Many of them are complex financings.
Some will go to the banking system, some will go to public markets, but increasingly for these more complicated financings and long dated financings, Private market investment grade is where borrowers are coming.
There was a theme an invested and you've talked about this with me yourself, privately global industrial renaissance. What are you talking about?
We're talking about is this massive need for capital. I mean, you can believe or not believe all the figures that are out there, but when you add up the amount of money that is needed for energy transition, the amount of money that is needed to fix our infrastructure, the amount of money that will be needed to build data centers and power to supply them, much less to connect
and redo our power lines. You're talking about the amount of money that's been spent since the invention of five, all with the backdrop of the US government borrowing two trillion dollars to finance itself. On a current basis, this is not a question of will private markets grow. The question will be how much. Yes, public markets will continue to play a really important role, banking system, really important role.
But this tool, this notion of private investment grade, has really not been available to CFOs or others arranging financing and increase.
It will be how labor intensive? Is this for you and as you do more deals, do you get a benefit from that that you are able to replicate things and use less and less people.
This is scars of experience. So these are all labor intensive, and that is actually what the competitive advantage is. The investment grade bond market became so efficient and so low cost that financial firms stopped allocating resources to it. There weren't just not any money in doing that, and so the market is very available, but it is very plain vanilla.
Almost no one has built what we've built. When you look at employment at Apollo, the greatest group of employment four thousand people, some eight billion dollars that we've spent over the past fifteen years all goes to what we call origination. Now, not all of these originators are out calling on investment grade borrowers. Some are running other types of origination vehicles, aircraft finance, fleet finance, receivables finance, inventory finance, infrastructure finance. Increasingly, this is.
How America borrows introduce City and a twenty five billion dollar partnership. What's behind that, It's that acknowledgment from you that you've got more cash than you know what to.
Do with I think it's an acknowledgment that origination, the control of the product is actually what has value, and some of that origination we're going to build ourselves, and we've built more of it than any But let's face it, we a whole industry is short origination. To the extent we can find a meeting of the minance with city, that's fabulous. And I think the bigger theme here is the banking system, particularly one of the big four banks, is actually figuring out what we believe all along. We
don't want what the bank wants. We don't want the bank's customer. We want the asset the bank. We can't offer advice, m and A, derivatives hedging, foreign exchange, payments, credit cards, or any other service the bank wants to offer those things. The bank sometimes wants the loan, but more often than not does not want the loan.
Who do you think fielded the most calls that day when that was announced that partnership. Was it Jane Fraser, an annoyed asset managers or was it you an annoyed bankers.
From the comparing of notes last night, it was Jane.
It was Jane. Did you get the calls you saw from AHI.
We definitely got a few calls.
Do you get the sense that this is the beginning of something bigger? Twenty five billions the number with citsy just give me an idea of what this looks like further down the line. Does it include other banks too?
I think it does, and now I think it is difficult to serve lots of people in the same way with the same terms. But the City partnership is focused on a certain type of borrower. I think you'll see international partnerships. I think you'll see investment grade partnerships. I
think you'll see infrastructure related partnerships. I do think that we are becoming a partner in some ways to the banking system, rather than how it is portrayed in the press, which is, you know, a fierce competition over everything.
This conversation so far has really been about how the financing give companies, particularly in this country, is changing, how the company's doing the financing is shifting, the emphasis being on private markets. Part of your vision is how investing is going to change as well, So let's spend some time on that. How is investing going to change? How do we think about public versus private now, And how do you hope we're going to think about it in years to come?
Look for me, this is your forty. It's sometimes hard to believe I've been doing it this long, but we grew up thinking private was risky and public was safe. And probably forty years ago that was true. Private was three products private equity, venture capital, and hedge funds, all three of which can be risky, but done the right way are excellent investments. And public was eight thousand public companies, diversified portfolios of stocks and bonds. Let's just say that's
not how the world is today. The world that we see private is safe and risky and public is safe and risky. And if that's true, everything we know about portfolio management, the way we construct portfolios today is going to change. Think of the typical investor a very bland I say, a three flavor ice cream portfolio, sure stocks, bonds,
and a little bit of alternatives. Why well, because when something is risky, you put it in a small bucket called alternatives, you watch it carefully, and you demand high returns out of it. But if private is just another form, I think what you're going to see is the whole business of what I call replacement fixed income, which today means investment grade public credit. I think is going to be investment grade public and investment grade private eighteen months
from now. I do not believe investors will actually know the difference between investment grade public and investment grade private. It will not be the issuers, It will not be the size, it will not be the ratings, it will not even be the liquidity. Everything that exists in the public markets, repo borrowing, market making, daily pricing, is coming to the private markets.
What is the total addressable market? What kind of numbers are we thinking about?
We're talking about massive marketplace when we look at the entirety of our industry, hired of our industry has been built out of the alternative bucket of institutional investors. The fixed income bucket, which is what I'm talking about now, is fifty percent larger than the alternative bucket and is mostly one hundred percent private. Works to be public.
Investment credit I could see different to debt. Can you tell me how that's going to be transformed, and whether some of the companies that typically would be going public are going to stay private. Whether we've got to see a big shift in capital markets over the next five years or so.
On that front, well, we're seeing it already. So this is a two prong to answer, which is eight thousand public companies is now four thousand public companies. Fewer than one hundred companies go public every year, and more than one hundred companies go private. There do not seem to be compelling reasons for companies to be public, particularly with what's happened on the investing side. So much of our market today is indexed and correlated. Think of passive now
sixty seventy percent of the overall marketplace. Active management, which historically has been the buying and selling of stocks, has really been a very, very difficult place to be, has failed to beat the index ninety plus percent of the time for twenty years. I think we're going to see an evolution also take place in equity. It's going to happen more slowly. In fixed income, we are going to see fixed income replacement, public and private essentially come together.
And the reason I know that is we're seeing it every single day. And in fixed income we have arbiters of credit quality rating agencies who tell investors that something public and something private is of the same quality in
equity we lack those arbiters. But nonetheless, I think investors are beginning to understand when ten stocks are thirty five to forty percent of your portfolio and four stocks have determined all your returns for the past four years, and one stock has basically been one hundred percent of your quarter. I mean, think of what we've done as a country.
We've taken the largest pool of savings in the world four oh one K, twelve to thirteen trillion dollars from a group of people who need retirement savings more than evident. What are they own? They own daily liquid stock index funds generally S and P for fifty years. Why well, we have a mistaken belief that public is safe and private is risky. You look at the best retirement system anywhere in the Western world in Australia, where they've introduced
superannuation forty years ago. Just a fancy way of saying is they gave the equivalent of four oh one K investors access to private markets. The returns have been nothing short of spectacular. Outcomes for investors can be not a little better fifty and sixty percent better.
You know the view here public is transparent and private is a payak. How do you change that view?
Well, I think it's going to happen in fixed income. I think when you get to daily pricing, when you get to daily liquidity, when you can see a market. But let's not fool ourselves. Markets are different than we think they are. Everything changed in two thousand and eight, as it should as a response to the financial crisis, but we just did not experience as investors those changes because right after we change the rules, we printed eight
trillion dollars and everything went up into the right. One of the most interesting things that changed there is no liquidity in public fixed income the SATs I've seen it takes five days to sell an investment grade corporate bond. So when you see a quote, is that liquid, Well, we feel good because it's public, it's there, we can see it. I do think we're going to end up not caring in fixed income in the next eighteen months
as to whether something is public or private. The comfort that people are developing in private markets on the fixed income side, I believe will eventually extend to equity and we will see equity also adopt side by side with public. As I sometimes joke investors will own equity that is private rather than private equity, the difference being the leverage.
You say, wait, you mean investors to regulate to say it the same way.
I think they do. I mean, the conversation with regulators is actually a fascinating one because clearly change is scared. But the typical conversation is every dollar of borrowing that moves outside of the banking system to the investment marketplace. And let's face it, there are only two choices for regulators. Money in an economy can come from investors or from banks. There's no third choice. So every dollar that moves actually de levers the banking system and makes it safer, and
people recoil in shock. And this is just math. A bank is levered twelve to fourteen times. The typical institutional investor is levered zero. The typical mutual fund levered zero, typical BDC levered one point five times, typical retirement services company levered eight times. It is deleveraging. The second is disclosure. We think it's not transparent. The typical bank disclosure says
loans to customers and loans to companies. You click on our website you can see every security we own every quarter. Then you talk about maturity transformation. Maturity transformation is really where the economy has suffered and financial markets have suffered. Are in business to do maturity transformation. They borrow shortened form of deposits and lend long in form of loans. That's not a bad thing, that's just how they're set up.
In the investment marketplace, generally, you're talking about investors who are matched from a maturity point of view. And the final thing that I always sit with regulators, what percentage of assets in the US banking system are investment grade? They don't know. We have a perception that they're all investment grade, but the reality is about sixty percent of bank assets our investment grade. You look at a balance sheet like ours and just as an example, we're ninety
plus percent investment grade. And so it's change, but it is actually changed. That is making the system more robust and more diversified. And we let's make no mistake, we are the envy of the world. We the US are the envy of the world. In Europe, they are squeezing the banking system through Boslin game, but they haven't yet decided to allow investors to fill that gap, and there
are questions, why are we struggling with financial markets? Well, you're squeezing the banking system and you're not allowing investors to fill the gap.
Have you had this conversation with a senator from Massachusetts? As that conversation ever happened.
It hasn't, but I welcome it. I've spent I spend lots of time in DC and elsewhere speaking to regulators because we are in a really dynamic phase. Everything that we think works the way it works has changed, and we're about to experience and are experiencing the changes that were made in two thousand and eight in response to the financial crisis.
Speaking of changes, Washington, DC is becoming increasingly interventionist. You compared some of the benefits of doing business in America and doing business in Europe. Doing business in America is anturally not as easy as it used to be, and it may well get harder. What's your view on where we're heading?
You may be right, but it's all relative. This is the single best market to be in at this point in time. Barnutt.
When we spoke before Christmas and we talked about the choices on the menu, then for the upcoming election. You went too impressed. The menu's changed a little bit. What's your view?
Well, since I'll be under banishment here if I give you a direct view, let me to say. The way I frame this is you are either more scared of four years of the status quo or more scared of four years of change. You just have to decide what you're more scared of. Me personally, I'm more scared of four years of the status quo.
What's wrong with the status quo?
I see a direction where the trend is not our friend. Right now? We are, as you suggest, we are the single best place to do business in the world. We are the luckiest people in the world. Can we screw it up? Yeah? We can. The notion that we are spending two trillion and excess of what we take in in peacetime with full employment does not vode well for the availability of capital to do what we need to do for the next generation. We're spending the next generation's money currently.
Do you see any one of the campaigns that's to do?
And I think about that on the campaign trail though in reality, let's hope. All we can hope for is better governance.
I've said repeatedly on Bloomberg Surveiymans on Bloomberg TV, on Bloomberg Radio for years that America has the privilege, the unique privilege of acting recklessly. Are we losing that not yet?
We have a long way to go. We have lots of examples around the globe of people who have acted recklessly for a much longer period of time than we have been acting recklessly. But we also have obligations that others do not. Right now, we are the beneficiary of being the strongest economy, the strongest capital market, the strongest military, and the best place to do business. I mean, if you tick off what's happened over the past years here, we may not like how we got here and how
we financed it. Three years ago we decided to build infrastructure. We allocated two trillion dollars. None of that's built yet, it's all being built. Two years ago, we spent fifty two billion dollars of semiconductor subsidies to build semiconductors. Here, not a single plant is open. It's all being built. A year ago Inflation Reduction Act to encourage the manufacturer of renewables one point three to two point three trillion, No one really knows. Not a single plant is opened.
We are the beneficiary and the largest recipient of foreign direct investment three years in a row. So people around the globe are actually figuring out we're better off here. And something tells me we're ramping defense production. All of those things are fiscally stimulative and positive for employment. Or by the way, we have no legal immigration. This sets us up very well fiscally for a strong economy.
Which I think we're seeing at a reserve is kind of interest rates by fifty basis points. Are you in tolston slock camp? And you can agree with, agree or disagree with. Tulson of course works here. He believes his economy doesn't need rate cuts. We're in a great place. Do you share that view?
I said it. I was, I guess unfortunate to be on TV an hour after the rate cut. I said, this was a very very expensive insurance policy. What's expensive about it the notion that we would cut rates. Financial markets are wide open, equities are at all time high, financing is available, real estate prices are going up in every market, and yet we're stimulating, and we're stimulating fiscally.
It is not clear that we need more rate cuts at this point in time, and to the extent we encourage growth, and growth was very strong, as you saw from GDP for the quarter. To the extent we accelerate the economy and have to go in the other direction, that would not be a good deck.
Just pause. You think the FED might have to start hiking interest rates again in twenty five.
I'm not saying that yet. I'm just saying I see no reason for the cutting of rates right now. So am I in the Torston camp. I'm absolutely in the Torston camp. And it's my privilege to have him down the hall. I make sure to check in with him every morning.
I do as well, Mark Ryan, this was a privilege, a pleasure, good luck for the next five years, and I hope it told you every year.
Every year you get to do it.
Mark, Thank you, sir, appreciate it. This is the Bloomberg Seventans podcast, bringing you the best in markets, economics, angiopolitics. 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 opp