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This is the Bloomberg Surveillance Podcast. I'm Tom Keene along with Paul Sweeney. Join us each day for insight from the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and always I'm Bloomberg Radio,
the Bloomberg Terminal, and the Bloomberg Business app. If you are a certain persuasion, you remember where you were when you close the book on the Winds of War by Herman wilt Bout, and you said, when's he gonna write the next one war?
And remember and you waited two years.
Young James Stravita's had this feeling as I did, like you waited. Except admiralstra Vetus, of course, lived the American military, the United States Navy of Pug Henry as well. The book is The Restless Wave. It is a novel, a novel idea, a novel from.
Jem four Desk and I'm ready to go to chapter five, and.
It's just wonderful about a young lad before nineteen forty one, across the arc of World War Two. What's the why, Admiralstravitas, Why did you need to write The Restless Wave?
Tom? I'll give you three reasons, I'll do them fast.
One is Winston Churchill said, the further you want to look into the future, the more you have to look into the past, meaning the lessons of World War Two are still with us, great power of war in the Pacific, the rise of technologies. And then third and five, and most importantly you mentioned it, Tom, character we think of Captain pug Henry from the Winds of War. Here we have a young naval officer. He's flawed, he makes mistakes, he's in a love triangle, there's betrayal, the early days
of the Greatest Generation. So any reasons write a sweeping novel about the Second World War.
I'm going to give this away Pulse four chapters into the book. Page three ten, the exo took a breath. Admiral Wright failed us, Sir. He was slow and hesitant. He doesn't understand the new technology. His battle plan looked like Dewey at Manila in the Spanish American War, admiralstavinus, are we living that today with new drone technology and all is A navy have to adapt and adjust.
One hundred percent.
Tom, And look at Ukraine where the Russian Black Sea Fleet has been sunk by the Ukrainians.
Except the Ukrainians don't even have a navy.
They're using drones, cruise missiles, exquisite intelligence, surface forces operating using artificial intelligence. Our navy better learn those lessons and get ready. And that's something that we experienced at the start of World War two as well.
Admiral Tom and I have a million questions on many different hotspots around the world. Let's start with the Middle East here. Can you give us your latest thinking on how things are developing there and how you kind of foresee I guess the next several weeks and months.
Clearly the next big muscle movement is going to be an attack bite Israel in retaliation appropriately for two hundred ballistic missiles that came raining down on Israel five six days ago. So what will that attack look like? I think that's the key question for investors. I think it's going to be big, but not shock and awe level kind of strikes. I'll probably go against the military industrial complex in Iran, probably not against the nuclear power complex,
and probably not against energy. So that should be something that investors and tolerate as we look at rising risk in the region. Bottom line, I think there's about a one in four chance of a broader war in the Middle East that drags the US in. That's uncomfortably high, But I've still bet against a big, sweeping war in the Middle East.
Let's hope not admiral to.
What extent is the US policy being represented by the Israelis here? It seems like the relationship between Biden and Netanya who is not maybe as strong as we would have hoped here. And we have US assets, men and women in the region there So where are we in terms of dealing with the Israelis?
You are correct, we have fifty thousand troops in and around the Middle East, many of them at sea on navy worships, by the way, but many asure as well. So it's critical that we maintain the strongest relationship with Israel, which is our best partner in the region. Unfortunately, at a personal level, it's pretty clear that Prime Minister net Yahoo and President Biden have not good relations.
And here's our hope.
The next tier down, that's General Lloyd Austin working with his counterpart Israeli Minister of Defense Yuav Gallant. That's a pretty good relationship. But a storm cloud to watch, no pun intended, terrible hurricane coming, But a storm cloud to watch is that Yuav Gallant, Minister of Defense, just canceled the meeting in the Pentagon.
So relations are not good at the moment.
Is James Tvetus late in your book?
Arley Burke shows up, No, folks, it's not the name of a boat, it's an actual person. And Arley Burke shows up to drive the story forward. And he says at one point, with some heat in his voice, the difference in an officer good or bad is about ten seconds. There's an officer from the streets of Boston named John Kelly, who is the longest chief of staff the Marines served Donald Trump. And he's come out. He's made real clear he's not a fan of the operations of the former president.
If we have elected President Trump, I mean in twenty sixteen, this was all new, will he be able as commander in chief to form a military apparatus after what we hear from the likes of John Kelly.
First of all, John Kelly is one of my closest friends, and I encourage everybody to listen, to read, to follow what John Kelly has said about attempting to take President Trump to a cemetery in the north of France, and according to John Kelly, President Trump described those buried there as suckers and losers. I think that is a disqualification to be a commander in chief in terms of can
he put together coherent national security for the nation. It depends on who he selects to bring in office alongside him. The quality people. General Jim Mattis, General John Kelly, General h R. McMaster. They're not coming back. You don't have to get kicked by a mule a second time to understand whether that's a good thing to do or not. So if there is a second Trump presidency, we'll have to see who's willing to come in and who does come in.
Paul and I went to the Lawrenceville in Fairport War College where we figured out that Germans had two fronts, the Eastern Front and the Western Front. Israel has two three four fronts. Right now extending over to the persia of your book. The leader's bookshelf isntnaho extended or because of his small geography, can he handle those many fronts?
I think Israel is over extended. I'd say five fronts. It's Hamas in the south, has Beala on the north. Obviously, it is the Hoo theis to the far South. It's also the militias in Syria. And it's Iran itself. I can count that on the five fingers of my hand. That's too many. Israel is only a nation of ten million, seven million Jews. That's too few to ultimately fight wars with countries like Iran newsflash, which has a population of ninety million. That's Iran alone. So Israel needs friends. And
let's go back to paragraph one. How important that relationship is for Israel, end for the United States, between the US and Israel, DROI.
I don't want to lose a sight of Ukraine. Can you give us your latest thinking on what's happening in Ukraine and how it might play out?
I can, and thank you for raising it, because they are losing oxygen to all that is happening in the Middle East. The situation there remains relatively static. The battle lines are in place. Russians are moving forward very slowly in the east. The Ukrainians have carved a small chunk out of Russia in the north. Ultimately, I think after the election we are probably headed for a negotiation because the burn rate, think private equity, the burn rate on
both sides of that battle line is terrible. Pressure will be for a negotiation regardless of who is elected in Washington.
One final question.
In your book The Restless Wave, Kai is trouble? Did you know what Kai in Hawaii? Admiral asking for a few Kai is nothing but trouble In your book, Admiral, did.
You know someone like Kai.
KaiA is a beautiful Hawaiian woman who ends up in a love triangle? Thomas correct, between between a Navy officer and a Marine Corps officer. So in The Restless Wave, yes, Kai is trouble, and yes I have met a few beautiful women in Hawaii over the years.
Bottle that James Tavinis, thank you so much, greatly appreciate it. The Restless Wave, folks, I can't It's not going to be my book of the year because Kai's in it.
I can't help Kai and my book of.
The year Admiral James Travine is The Wrestless Wave. If you love the winds of war, find it. It's hugely free book. Joining us now in for Global Wall Street, It's time to lean forward. He's with pine Bridge Investments, which is, you know, managing money and that huge heritage with aig. Stephen O joins this globalhead of fixed income except he writes, like PhD cell Side, his notes are absolutely exquisite And the key thing Stephen Oh in your note is it's not time to be defensive?
How do you be offensive in fixed income?
Well by writing that it was really looking forward to the fact that despite the type valuations, the economic environment as well as defed as a global central bank easing cycle, will be continued to be supportive of risk assets. So what does that imply for not being defensive? It means that the natural bias in that environment would be defensive. But at a minimum, you take your exposure up to a beta type risk exposure and take potshots at targeted opportunities.
What you don't want to do is go hyper defensive in this type of environment where yield is likely to care today.
So is that simply Paul Sweny buys a thirty year New Jersey hospital bond.
Is that what it demolves down to?
Well, I guess it depends on That's a lot of security selection risk there, so I can't opine on that. But I think broadly speaking terms of where is the risk component fixed income, right, it's going to be in the credit segments, and that's where you don't want to be hyper defensive.
Something we don't talk about, but I think it kind of goes to where you're going, which is talk just about the leverage loan market. What is that and how do investors get exposure to that?
Well, leverage loan in its simplest form is corporate debt that's syndicated and secured by assets of the business. In the simplest history, it was really loans that were issued by banks. But of course banks are not really in the origination of debt anymore. They're in the intermediary business, and the loans that they used to originate, which primarily back leverage buyouts, have now moved to an institutional market
where trays very freely. Of course, whur it's the adjacent market that's talked about ad nauseum for the last you know, five six years is the private credit market as well.
And are there opportunities there? Do you see? I mean, is that something that if you want to take up maybe even a little more risk than above and beyond high yield, that's the market you look at.
Well, well, first, I wouldn't say that it's higher risk than high yield. It's really adjacency risk because those are both blow investment. Great corporate credit. But what you are getting right now is the credit spread over base rates is elevated and it's one of the few places where you are getting excess yield long spreads right now. For the index is over four hundred basis points, which is, you know, over one hundred basis points over the high
yield index. But you do have to adjust that for a like for like risk, because the way to look at it is oftentimes there's a tendency to look at acid class to asset class, and you have to look at ratings to ratings or like risk to like risk, and you're still getting a premium for that component.
Talk to somebody not as sophisticated. They're in a money market fund. Go on, this is good to be true.
Our money market fund yields now too good to be true.
Well, money markets funds by nature are very short term, and it's been a great place to be, although one could make the case of perhaps there was opportunity cost of not being in equities where you look at the yield today and given the shape of the curve at the short end where FED funds and so far is, money market optically provides you a very high yield, but you have to look forward that yield is going to
come down. And so I think it's just a matter of do you utilize money market as primarily a return seeking area or do you use it as a liquidity while you hide out in what is acceptable returns at this point in time?
Could you use it as a liquidity? All right?
Steven John Tucker and I we've been trying to get Tom out of his triple leverage all cash fun I've got the FED that's cutting rates and I'm not in a recession.
Shouldn't Tom be taking.
Some risk here?
Well?
I think anybody's risk appetite is a function of where there are. You know, for all I know, Tom may be so wealthy that he should be taking a lot more risks.
You want to chime in, Oh yeah, what's that tuition bill?
Now?
Thank you exactly continue mister oh uh.
And in terms of where do you want to be in terms of risk right now, I think a balanced approach is the best approach because in certain market environments, the time you want to take risk, and I think you know Warren Buffett said at best is when there's a lot of trauma out there, when there's fear in the marketplace. There is not much fear in the marketplace out there right now, so I don't think this is an environment where you want to start adding more risk
to your portfolio. Is simply a type of market environment where you want to be balanced in your approach because nothing looks particularly cheap, but it's hard to see anything that's going to cause a meaningful sell off in the near term.
September was I think a record month for investment grade issuance. So when Morgan, Stanley, Goldman, Sachs, all those folks were calling, bringing you guys, will you picking up the buying this new stuff?
Well, we constantly look at not only what is the value coming to the marketplace, but what is the value in relation to what's trading in the secondary markets. Overall, and typically there are some new issue concessions, although at times that has been very anemic, and so we have been targeted in our approach to buying some of those new issues. There have been some.
You don't buy everything that comes across the transom.
We're not a ten trillion dollar asset manager that has to be beta. We pick and choose, and we manage a very targeted alpha approach portfolio.
Steve Think Stephen O with Pinebridge brilliant. Note again we protect the copyright of all of our guests. Look to pine Bridge Investments for Steven Oh's brilliant professors showing now from Brown University doing so much for the Taalban Center for their international relations. I guess it's a close selection, Wendy, and I guess there's a lot of tension. And I remember sitting there in shock after Bush Gore going.
How close is close?
Almost like I think it was Kennedy Humphrey in nineteen sixty I really can't remember.
With Mayor Daily Clyde Haberman the New.
York Times twenty four years ago, on this day, high falutin but hardly proud of it. He was talking about fancy Yale people that went to Brown or Yale or whatever fancy ivy league people dominant down to get elected. Is that what we're seeing right now is everybody going basic, you know, for a couple four weeks here because they have to.
Well, I'm Tom I first I want to address this is exactly what I've been talking about Bush Gore, Bush Gore.
You know, statistical polling within the margin of era.
As you remember, they were absolutely statistically tied going into that election. You know, one day one be forty eight, Yether'll be forty five. So exactly what you're pointing out is that, oh, this is historic. We've never seen anything like it. Yes we have, if you're old enough. We saw it in two thousand and that aftermath of that election was a bit messy, we can say.
So I think we have to brace ourselves for that. So I think I don't actually think that they're dumbing down.
I think that the Trump campaign, I mean he can go off the ranch sometimes, has been disciplined in its messaging on border security and inflation. That's I mean basically pocketbook issues and security issues.
And Kamala Harris tried to.
Raise the conversation about her economic plan. It didn't take, so now she's simplifying it. I'm simply gonna make your life economically better. That's what she's doing and leaving off some of that.
Okay, Paul wants to jump in here.
Is that policy professor Schielder to say, I want you to feel good or whatever, whichever candidate you know. I don't want to pick sides, but is that what our policies devolved down to? His feel good statements?
Well, I mean, the problem is, as we've discussed before, is that the federal government is so large now, and it is so enmeshed in every American's life, multiple dimensions that most people don't even grasp how involved it is. So discussing a simple policy change is not simple because any policy change will whipple through a total a set of federal programs and affect.
Lots of different people in different ways. So it's not as.
Easy as it used to be to say I'm going to do a and you're going to feel it in six months.
It just doesn't happen in America anymore.
Hey, Wendy, let's fast forward to maybe the evening of November fifth, maybe the early morning hours November six, maybe bleeding into the day of November six, Are we going to know anything? How is this going to plag out? Do you think?
I think we face the situation in twenty twenty as well. I think there are going to be some states you can expect Georgia, you can expect Arizona in particular those states, and Pennsylvania, by the way, doesn't, to my knowledge, does not open mail in ballots till after they count the in person ballots.
And if there are legal challenges for hand counting, not just in Georgia and Arizona, but other places, it will slow down considerably.
Wisconsin also, So unless which we don't expect one candidate is just going to run the table, We're probably not going to know very much until the weekend, you know, at the soonest, and it will be up to Secretaries of state, attorney generals, governors to certify election results and make sure that county level election officials certify those results in a timely fashion.
That's going to get messy pretty quickly.
Turnout. What do we expect for turnout, Wendy? Do we expect this to be a high turnout election a low turnout election? And does it favor one or the other?
Well?
I'm going to crip for one of my colleagues here at Brown who said that she expects that it will be lower than even twenty twenty because of mail and valliding being so predominant in twenty twenty, but that the general level of enthusiasm is still.
High on Trump core, and you know, is pretty high.
Among Democrats, if you can call it enthusiasm or fear one or the other. But it's not quite the same as it was in twenty eighteen twenty twenty when we saw historic mid two and presidential election turnouts. There's still a little bit of ambivalents and voters don't like to regret their choice.
They don't want to regret their vote.
So if they're still on certain election day, they made our role to stay home.
I want to show.
I mean, I know, with the electoral quality of Rhode Island, the Vice President Harris should have been sipping in there against Lager Beer the other night, but instead she went with the champagne of Wisconsin Beer's Miller High Life.
Okay, what is the symbolism of sipping a beer on TV? What does that get you politically?
Well, Bill Clinton, Win's McDonald's you know, Barack Obama had to find some food that was bad for him. They was willing to eat on camera because we knew he didn't do it otherwise. You know, this is part of I can identify with you.
I'll drink a beer too. I think it's a stretch.
I don't think that's the image necessarily that's going to be a Kamala Harris elected. But I think each candidate and each campaign right now is really like, what do we do to get this momentum?
Okay, addressing your advice in the time we've got left, you get thirty seconds. Trump, what's the Shiller to do for Trump? What's the Shiller to do for Harris?
Trump? I'll make the United States safer. I'll make you safer. I'll make the world safer.
Calmin Harris, I'm gonna make your economic life better and to protect your working rights, your minimum wage, your health care, the fundamental things you need to live a good life. The Democrats always protect, the Republicans always try to destroy.
Can you imagine in her class, I'm pulling a C minus and she's looking at me with eight in her eyes.
Professor Schiller thinking so much from Brown University. There that's what I love. Just short speaking, it is a pedigree of extinction.
He was at Oxford and Nuncia, and I did some amazing work at Morgan Stanley. I'll get to in a moment readable essays on the chaos of continental banking, and then went on to work with the British government and of course service to the Bank of England as well with Oliver Wyman in her studios. This morning, their vice chair Hugh von Steinis joins us. Hugh Paul's going to get to the private credit essay.
Where we are.
We had Jim Zelter in from a Polo Global Management to other day. I got to go back to your wheelhouse where it was like we'd read these fifteen page reports and god damn, I got to read this whole thing. Is it finally with Unit Credit in her Maadi and Commerce Bank that were finally well you were writing about twenty years ago.
Well thanks for having me on. Look my goodness. I wish Andrea the best of luck on this because I think it. I think we need cris culture.
Still, but culture still matters.
Culture still matters. But let's be clear. Luftians took over the Italian Airline, Why can't it happen in reverse. And also UniCredit owns a German bank already, so actually it's it really is an in market German deal. There's two German banks going to merge, we potentially merged with each other, so I think it. Look I was an investor conference
two weeks ago. I'd say my read is the the market thinks there's like a seventy to ninety percent chance it will happen, but they might need to get one or two.
What's the government thing?
David Harrow of Chicago went down in flames, and this finally they're going to get their act together and the continental Europe is going to act more like American and Anglo Saxon.
Banking and Bologne. Do you see a change in the German government or in the Italian government?
It's it's slow. Look so look we are seeing so actually, but below the radar, we are actually seeing some bank m and a. There's actually three live bank deals in the UK at the moment, so you know they're small, but they're happening. Spain's got one on the boil to as well, so there's bits and pieces happening. But let's be honest, it's not us style, and we haven't like as Jim's Elton would say, we don't have the capital markets either with the breadth and depth that we need.
But you certainly, but you certainly can have that. I mean, I mean right before the Great Financial Crisis time, the argument was is London more important than New York? And that was a valid argument to behave totally, and then Bruxit happen.
You get strewed. But is the horse.
Out of the barn for European banking. They will never catch up the Bank of America at the JP Morgan.
So it's interesting at the moment if you look at the top twenty market caps of banks globally, there's only two Europeans. Yeah, on HSBC, HSBC which is effectively Asian, so it's not even European. So it's only one and that's UBS and that's number twenty and so absolutely, and so I think UBS, I think, with my old boss column and Sergio, actually do have a chance to be in the Global super League. Everyone else is in a kind of a European League or even a division below.
And I think that's the challenge.
And I think the European Union and the UK, don't they recognize that as a structural flaw that's going to hinder that part of the world for generations.
Well, absolutely so. You know someone you know, well, Mario Dragy just put out a report. Now it was probably a little bit to more than fifteen pages, Tom, I mean he had one hundred and fifty rex. I mean even one too, but you rolled it for no, no, no, not this time. But actually his finance piece rade a lot of sense, which is, we need securitization markets to open, we need deeper capital markets, and we need some of the larger banks to merge because scale matters in banking.
You see that here you're talking about JP Morgan on Friday with Jeremy's earnings. You know, scale really matters, and we have too few banks with that scale.
All right, Your latest work is a topic that Tom and I talk about a lot, is we're fascinated by the growth of this private credit. Early in my career I was the Chasement Hannen Bank. We were making leverage loans like crazy, making money hand over fist. I would never give up that business to private credit. But that's what happened, hasn't it.
No, Look, it's really fascinating how much banking has changed, and I think it's because you know, the rules, whether they're federals or basil rules are encouraging banks to limit the amount of risky loans they can take. Either they're hard capped or soft capped, or it's just the amount of capital. So the way I think we talked about this last time, the way I think about it is that banking is being retranched. The riskiest pieces are being laid off to private credit or to others, and the
banks are left with slightly the lower risk pieces. Now, from point of view of banking stability, that's not the end of the world. It means they're less profitable. They need more scale. And actually, one interesting thing which I don't think has come out clear is you know there are banks who play to win and the banks who play not to lose. The largest five or six banks say, actually, if I've got private credit, I can write even more loans and lay more off. But that's not how most people think.
So we are seeing deals with banks and private credit top what is going on there.
Explain that how those yes look Just to let's be clear, this is a real thing, and we see the City Group was the most of the biggest city. But we've seen fourteen tie ups in the last twelve months versus only two in the year before, so it is a real thing. Barclays a Blackstone is another big one. Now what's happening is, you know, the big private credit firms need to originate assets because they know what They're hungry for more assets and they can't originate them all themselves,
so they're working with the banks any more deals. There's there's plenty more in the book in the works.
Okay, but the simplistic thing from me mortals listening and good morning worldwide, particularly in you'ven't seen as United Kingdom. The heart of the matter is good people like Jim Zeltner, Mark Rowan and others are trotting out this is painless even though we have ill liquidity.
There's no big deal. You know the drill.
Do you buy it or do you have a skepticism that we see out there from others.
So look, I know, I think for the leading firms who so let's be clearing credit and Paul knows not this. You can make a good deal or a bad deal, and you can lose all your money or take a big haircut so you need to be very thoughtful when you're letting out your sheet. There are smart people and Tom, as we both know, there's some less smart people. So within the private credit, of course there'll be some deals
which go bad. But in this kind of thing, insurance companies, which are about half the assets funding private credit, need yield. And so I think the really interesting sub theme here is that as private credit gets more insurance assets, they lower their cost of capital and they become more relevant for investment grade assets in the in the marketplace. And I think that's the trend, which you know Paulo does brilliantly. Blackstone's doing very well, and I think that is a thing.
And obviously if it's an investment grade, well that is less risky, isn't it, Tom. So you know, don't get me wrong, I'm sure there'll be there'll be a fringe of bad practices, but I think on the whole, actually this is more investment grade than not.
Have you ever worked with pure pot Later and into the TV show industry, I.
Mean here sounds right out of industry. Now are you watching industry? How real is it?
I'm not I should I'm a failure on that. I haven't. You're not watching billions I love, but I haven't watch the industry.
The industry is like I'm looking at it with missus Kin, going, my god, that guy talks just like you. Actually pretty good, Thank you so much.
Too rare to see him.
He's in studio today, of course, from the United Kingdom, working with Dantean Obamad Oliver Wyman. His own important comments there, I'm private credible.
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