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Amanda Line, I'm chief credit strategist for Golden Sacks joint us here in studio Manni, thanks so much for joining us here. What's your how's your market? How's the credit market behaving over the last you know, six seven, eight weeks?
I would say, if I had to frame the credit market, it's it's generally resilient, but I think with an expectation of some volatility through midyear. But even so, we're not expecting spreads to really underperform in any material way. We have a forecast for wider spreads, but it's basically putting
the market around the three or averages. I think, to your point, Paul, what's most interesting in this market is kind of this paradigm shift that we're seeing in terms of various pockets of the credit market, so pockets in liquid credit, pockets in private credit, even in infrastructure funding this AI build out. It's just driven by the size
and the magnitude of the opportunity. But by our estimates, there's already been four hundred billion of AI related supply since the middle of twenty twenty five, most of that in investment grade. But the needs are here are so large that we expect US markets to participate euro Swiss,
Sterling private markets. And then even in what we wrote about last night is in the investment grade market, the traditional investment grade market, we're seeing more of these kind of complex JV structures that are being used to finance data centers.
Amanda want to talk private credit and whether or not what we're seeing in the private credit market right now is really is systemic risk. I mean, is this market underestimating a credit market downturn that could possibly be worse than expected.
We don't believe it is. That doesn't mean that there can't besion, however, across managers and vintages and funds. The reason that we don't view it as a systemic risk it's a couple of fold But most importantly, there's not an asset liability mismatch like we saw in the financial crisis in certain pockets of the financial system that would allow for the kind of run on the bank. Moreover, actually, there's not a lot of leverage in these vehicles, and if there's a lot of noise right now on kind
of BDC redemption activity. But if you use a very conservative estimate about the size of the private credit market, retail is around fifteen percent, and so there's a lot of concern from investors that because retail investors are requesting more redemptions than normal, that that behavior will feed over
to the institutional community. But actually, I think one of the important points to raise is that in institutional funds there was never the option in the first place to withdraw and la redemptions, and so that capital is very much in draw down kind of locked up facilities, And if anything, our conversations with institutional investors would use a disruption in the credit markets as an oppertunity to deploy the significant dry.
Powder that they have.
I would say the other point that's raised a lot of software, I think it's far too early to write off the entire sector. You know, we're very close in coordination with our equity analysts on kind of their views on this sector. But at a very high level, if
there's a disruption in software for private credit. There's also going to be a disruption in software in the syndicated leverage loan market, and there again, private credit is probably in a position to deploy capital into that dislocation, like we've seen in other periods of time, like twenty twenty two.
I'm a risk taker. I'm ready to take some high yield risk clos leverage loans. How's that part of the market.
That part of the market is actually holding in well, although I would say probably since the last time I saw you a little more cautious on kind of the lower end of that quality spectrum, so we're fine reaching into the high end of high yield. We would prefer high yield over leverage loans. You were talking about kind of the path for FED policy, you know, is a it is a somewhat of a tailwind if the FED stays on hold. That's better for the yield backdrop of
leverage loans. But I think you have this overhang of software that will be hard to disprove in the near term, and so we prefer highyield bonds over loans. I would say for investors that are looking to kind of take more complexity or earn more yield. We actually like parts of mezzanine colos a bit of a niche topic. So what is so those are so basically, if you're looking for floating rate risk, if two options, you could kind of own the leverage loans outright, you could own it as.
Part of a structure.
The COLO structure introduces kind of some protection, some structure in the in subordination, and so that's something that for the investors that play in structured products, we like that. But to answer your question, Paul, we're not shying away from taking credit risk in this environment. We're seeing a little bit more thoughtful.
Where are you seeing the most appetite right now for fixed income?
By far, Alexis the yield based investor has kind of been a very strong anchor for spreads, and so this kind of quiet rise in treasury yields has allowed investors kind of deploy capital into the corporate credit market even those spreads are still on paper. A bit snug that could change is if the bond market starts to behave
in a disorderly way. We've seen that around for example, the yen carry trade, the budget negotiations, debt ceilings, So that's something to watch but so long as this is kind of a gradual rise in yields for okay reasons meaning you know, sticky but not terrible inflation or maybe improving growth, that's actually a great backdrop for allocators in credit. And that's by far been the strongest support. I would say foreign demand is also it was a record in
twenty twenty five. There was a lot of concern about waning appetite for US credit from foreign investors. We did not see that at all.
Man, Thank you so much for joining us as always a man to line them. She's a chief credit strategist at Goldman Sachs. Stay with us or from Bloomberg Surveillance. Coming up after this.
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Going on in terms of economic data, this week, we also had a big FED meeting. We're going to get a new chair of the FED that seems to be moving along after a long delay. Sprink it all down with our next guest, Ken Kim, senior economists at k p mg Ken, what did you make of the FED and announcement this week, the press conference from J pal and what looks to be like a changing of the guard here? How do you think about the FED these days?
So, yeah, the biggest news was, you know, the four descents, although one of the descents was to be expected with Stephen Moran advocating for a twenty five.
Base point cut.
But the three other descents from the Reserve Bank presidents, you know, they indicate unease with the perhaps the inflation outlook because of the Middle East situation. Oil prices sharply higher, home meeting oil, diesel, jet fuel, you name it, all the above. So that's an indication that going forward, you know, the FEDS we think more concerned about inflation rather than
a labor market for the time being. We didn't get one d and seventy eight thousand new jobs created in March, which gives the FEDS some latitude in our opinion to lean against inflation for the time being. And the other notable thing about the press conference was J Powell the current FET chair, but only for another few weeks, indicating that he's going to remain on the board as a governor so we didn't know that until the press contract.
We haven't seen that happen in decades, in decades, and the last time it happens like nineteen forty eight, all right, I was talking about it back into the archives for that one. GDP numbers we got a first look this week. Two percent growth. Pretty impressive there for the first quarter, but the war had just sort of begun, right, What do you think the impact is going to be here if there's war continues, When does GDP really get dented because of it?
Yeah, I mean the GDP figures were pretty solid as you indicate, we could see it impacted, you know, for second quarter. Pretty much going on right from here on out. Consumers as well as businesses are dealing with higher energy prices, and you know, they're paying it out of their wallet or pocketbooks, and that means less spending for other, you know,
discretionary items. You're right, there was momentum at the end of the first quarter, and some of that, you know, the tax refunds did provide the impetus for the consumer to spend it on new vehicles and martch Retail sales was pretty solid as well. But you know, it's been a long time. Get consumers have been having to deal with cumulative inflation, so this is just you know, another shock to that.
Is there a recession call in your outlook at all or is it not.
It's some low probability calls. So we do have different scenarios. We think recession probably is thirty percent, but that is elevated because on any other you know, given day in the normal economy, recessions are usually in the low teens, you know, eleven, twelve, fourteen percent, So we think they have picked up, but still, you know, you have to have we frame it is seventy percent that that doesn't occur.
Yeah, there's been a lot of talk about disconnecting this market between what's going on in stocks, and yet we've got the backdrop of a lot of uncertainty, changing of the guard of the FED, the war with the run. But historically markets have done well during wartime.
No, yeah, I mean, certainly the markets are showing resiliency just like the overall US economy and the consumer. So that's ongoing despite the pickup and uncertainty with the breakout of the Iran US war.
So not surprised, but what you're seeing in the equity markets right now.
Well, certainly AI is you know on the back of the recent rally, so there is you know, more investment going into AI initiatives. And in the first quarter GDP report, non residential business investment that was up quite strong, up ten point four percent, and equipment spending capital spending was up seventeen point two percent on the annualized basis, the
largest in like three years. So there certainly is you know a lot of tail wind for AI which is helping equity markets withstand what's happening in the energy markets.
Are you surprised that the US consumer continues to spend money? I mean, inflation has been there, it's ramped up because of the war in terms of gasoline and some other costs. Are you surprised that the consumer is still hanging in there or are you one of those people that says, hey, never underestimate the strength of the US consumer.
No, we have been surprised. You know, last year, we certainly thought the tariffs would impact consumer spending with you know, rising inflation. We did get rising inflation, but again, the consumer, you know, remains resilient and we're still seeing the same behavior in twenty in the early part of twenty twenty six, and you know a lot of that has to do with you know, fomo fear of missing out. You know,
they want to continue to spend it on experiences. We have seen some weakness in good spending, but spending on going out, whether it's the concerts. Say now we're talking about right, that's right, right, that's happening in France. But you know, certainly that's an impact too.
Can when do gas prices really become a problem for the consumer, because you've got six dollars a gallon gas in California, we've got it averaging about four forty here nationwide. At what level does it really become an issue?
Well, we think it's already a problem. But again, you know there's always offsets. So the offset is the labor market still remains pretty good for the most part, even though Fetcher Pow did characterize it as weak. You know, you have that low hiring, low firing kind of phenomena going on, but the most part, in the first three months, the US did create on average close to seventy thousand jobs, so you know that is helping to support consumer spending.
Wages are growing at three and a half percent, still slightly above inflation, so you still have a positive spread there or carry purchasing power, so those factors are helping for the time being.
George Ken thank you so much. Ken Kim, senior economist at KPMG. During us here, stay with us. More from Bloomberg Surveillance coming up after this.
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Our next guest, Barbara Hampton, CEO of us A Rare Earth. Barbara, thank you so much for joining us here. What is USA rare earth and what do you guys? What are you guys focusing on?
USA?
Rare Earth is the global leader in rare earths.
Nice.
We have been building a mind to magnet value chain, and that value chain people ask me, wait, it's not a supply chain. You're not trying to get the all the expense out of a supply chain that goes from the ground all the way to the production of magnets. No, what we have to do is break China's stranglehold on this industry for decades. China set it as a strategy to own this space, and this space is critical to
every sector of the economy. Permanent magnets and rare earths are in everything from semiconductors to jet fighters to frankly, our communication devices, and so the fact that at moments notice China could cut that off puts US at extreme risk. And what we're doing at USA rare earth is strengthening mining processing, metal making, and magnet making so that we can break that stranglehold and supply the world.
Does this country sort of in house if you will have enough to do that in the country itself, we have access to the minerals that are needed. Yes, you've seen MP come to market with light rare earths. You may have seen US announce our intent to build a mine and round top mountain in.
Texas that is rich in heavy rare earths. Between those two, the US has domestic supplies that would fuel this marketplace. But the fact is we can and should work with allies to make sure or that we make use of other deposits around the world build a resilient and a supply chain for actual magnet production that takes advantage of a value chain with optionality.
Who are some of those partners?
Some of those partners are fantastic places like Brazil.
You may have seen.
We've just announced our intent to acquire Sarah Verde. Sarah Verde is a company that has opened the Pella Ma mine in Brazil, producing all four magnetic rare earths, light rare earths as well as heavy rare earths and the mind there has a fifteen year, one hundred percent off take agreement with a special purpose vehicle funded by multiple government agencies, US government agencies as well as private investors.
So here we have a producing mine in Brazil that can bring those essential elements into our economic and defense interests.
So what is the goal for the US do you think in terms of rare Earth? Is it to become Is it a realistic goal to become completely independent of China and maybe some other nefarious actors or non allies. I guess I should frame it is that even possible?
It is possible, Okay, it is possible, in fact necessary. The founders of USA Rare Earth actually recognized well before China's disruptions that with the growth of technology physical AI, China may very well consume all of their resources and might not be able to supply those to the rest of the world. Therefore, the folks who invested in the pelam Min and Brazil over well over a decade, as well as the board of USA Rare Earth, said this
is a great investment opportunity. So we do have the capacity outside, but more importantly, we need to do this. You'll see this as well as other segments of our economy where we've allowed out China to take a leadership role, and frankly, it's dangerous.
Talking to Barbara Hampton, CEO at USA Rare Earth, got to talk about the role of the federal government here, the US government taking a ten percent stake in the company. How does that change things, if at all, in your mission or how you're getting to attain your mission.
Well, and actually I should clarify, but when the deal is completed signed, it'll be less than a ten percent stake, okay.
And by the way, this is with the Department of Commerce.
The USA Rare Earth worked with the Chips Program Office Secretary Lutenek had recognized this absolute imperative that we've got to solve this the geopolitical issue, and discovered that yes, USA Rare Earth has these very strategic assets. So the team did incredible due diligence, understood the business plan, believe in the thesis, and said this is investable from the Chips Program Office. Now, the stake the government will take is not a governance stake. It's a solely and economic
interest in the company. What this means is that as we build this domestic capacity and take advantage of the domestic resource of Roundtop, the US taxpayer will benefit from that government investment. I think it's a win win.
I'm looking at your publicet traded company, yes, and tickers USAAR has a market cap. You guys have a market a five point six percent. Stock is up one hundred and eighty filly percent. I'm sorry, five point six percent. Thank you very much, thank you. We've been throwing around terms with all this AI spending that are just crazy. I know, we tind to stock's up one hundred and eighteen percent this year. It's up one hundred and seventy
percent over the trailing of twelve months. What's kind of the what's the investment story you tell your shareholders these days?
What we want shareholders to pay attention to is the growing value chain. What we're building as a platform where this fragmented market can actually come together and help reduce friction. If you were to go around this marketplace today outside of China, what you would find is the survivors who live through all of decades of disruption by China. They are gritty, they are tenacious, but most of them are
rather small and many have been starved for investment. I'll take less Common Metals, the only scaled producer of heavy Rare Earth Metals, alloys and strip cast outside of China, USA. Rare Earth acquired them last fall and this premise of now they have surety of off take because we need their materials to make magnets and they also have our help in finding sources of oxides for their metal making.
Once we can work across the value chain, have the business leaders of these value chain businesses, the segments, the links in the chain. Once they can understand here's how we see the marketplace scaling, they can have the confidence to invest and grow their businesses. So we've been working with people, sometimes in m and A, sometimes in partnerships, supply agreements, off take agreements. We've got to align ourselves for a growing supply chain outside of China.
I feel a little better now.
I do too, and I've learned.
I think I've learned a lot. I feel like we've got a path forward for some of these access to rare earths on a long term basis, because they are probably more products than we even know about. Barbara, thank you so much for joining us. Appreciate that, Barbara Hompton, she's the CEO of US, a rare earth publicly traded company. I did not know that USAAR is the ticker to stocks. Been at document mendus performer, So that reflects the kind of the importance I guess that the market is certainly
placing upon rare earths. I think as investors we learn more and more how important these things are every day and kind of the supply chain associated with that. So we've learned a lot to that. We appreciate that and stay with us. More from bloom Surveillance coming up after this.
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I'm looking at the Mortgage Bankers Association thirty year fixed mortgage YEP six point three seven percent. I mean it's better than it was, you know, like a year ago, just touching seven. But I'm not sure it's where it needs to be for.
For buyers to come off the sidelines and right sellers.
To say, Okay, I'll put my house on the market and I'll move to Florida or whatever and downsize because I'm sitting on a three or four percent mortgage. Then i go buy something in Florida at six Yeah, where's the incentive exactly? That goes to the whole affordability issue. I'm not just not sure where we are right now. Odetta Kushy, she knows. Deputy Chief Economists at First American ODEBDA, can you give us a sense of kind of where the residential housing market is these days? I mean we're
now getting right into the spring selling season. What's what's the market look like?
Yeah?
Thanks, It's been a soft start to the spring housing market. The existing home sales number has really struggled to get meaningfully above four million annualized sales. Consider that pre pandemic, something closer to five and a half million was really the norm. So we've really been stuck there since the latter part of twenty twenty two, so not a ton of momentum. But I do think that the underlying fundamentals are stronger than a year ago. We know that inventory
is up compared with a year ago. Affordability is actually at its best level since twenty twenty two. That's in part due to lower mortgage rates, but also we've seen house price growth remain lower than income growth, and that's allowed affordability to slowly improve.
Are there parts of the country ODEATA where prices are actually home prices are actually coming down. I mean, we're talking about maybe the rate of growth slowing down, but are there parts of the country where prices are just straight up coming down?
There are we're actually seeing We talk a lot about this ke shaped economy everywhere, but we're seeing that in the housing market as well. There's a clear regional divide. When we look at our Northeast Midwest markets, they're still experiencing house price growth versus the some southern markets Mountain West markets where we're seeing outright price declines.
So take Cape Coral, Florida.
This is a market where we're seeing over eight percent your rear price declines. You know, compare that with a place like Poughkeepsie, where we're still seeing price growth. And that's really a function of the fact that a lot of the Northeast Midwest markets haven't built quite as many homes. There's not quite as much inventory on the market, whereas a lot of our pandemic Darling markets, if you will, they saw a lot of inventory grow and now they're starting to see some price cuts.
Shout out to Poughkeepsie. Yeah, now part of the countries of a part of New York State that was really going through a revitalization right now.
You know, a couple empty nesters retired to Syracuse. Wow, and their Syracuse grads and they're like, the cost of living is so much less, and we like a plversity and were like, dude, it's cold, we got to bed at you got to get party cloks down there. Talk to us about who's actually buying new homes today. I'm really thinking about some of the first time home buyers. It seems like a lot of those, so we read
a lot about it. They're just their affordability issues just make it very tough for young folks to buy homes.
It is. I mean, saving for a down payment has historically been the primary hurdle for potential first time home buyers, and then of course they don't have the money from the sale of an existing home to bring to that closing table. So it remains a very challenging market for potential first time home buyers. But then the existing homeowners, they're struggling with the fact that they're they're rate locked in.
We know that seventy eight percent of existing homes with a mortgage have a rate below six percent, so their rate locked in. And you know, inventory is improved compared to a year ago, but it's still historically constrained, and so maybe it's challenging for them to find.
A bigger, better home to move up to.
And so it still is a challenging market. But I think on the margin is improving and beginning to normalize, which should put us in a better position this year for the spring home buying season relative to last year.
Oh, Denna, how much of the affordability issue is the fact that we've got investors large and small coming in gobbling up a lot of the time single family or two three you know, multi family homes homes that would traditionally be going to a first time home buyers, and it's hard to compete with them.
A lot of the time.
They're also coming in with a lot of buying muscle and cash. It's hard to beat cash.
Yeah, the investor's share of sales is still relatively small. I still think that the wider issue in the housing market is that we've really been chronically underbuilding compared with household for me for over a decade, and that chronic underbuilding has contributed to this this housing shortage, and it's worse in some parts of the country than others. But I think that that issue is still the primary issue contributing to our affordability concerns today.
Deed, how did that come to that underbuilding for such a long period of time, How did that happen? How does that typically happen?
Well, builders have faced several supply side headwinds at the you know, at the end of the global financial crisis, they lost a lot of skilled labor and they're still
struggling with the lack of skilled labor. In the construction industry, material costs of increased, there's regulatory hurdles to building that make it more expensive to build that's in part why we see more building in the South Texas, Florida than we do in Boston, for example, right is some of those regulatory challenges, and so I do think that the supply side headwinds for builders, which they're still grappling with today.
They're sometimes referred to as the five ls of home building, lots, legal, et cetera. And so I think that that's been one of the primary challenges.
I'm talking to Odetta Kushy, Deputy chief economist over at First American. Odetta, when I look at the fifteen year five point seven seven percent, how is that sitting with folks who are looking to refinance? Are we seeing more people applications for refinancing sort of outstrip applications for new buys.
We have seen a refinance demand increase on it certainly on a year every year basis. There are still relatively few who are in the money to refy. Typically we're seeing refis happen with maybe the twenty twenty five twenty twenty four vintages that those are really the folks that are in the money. So you know, looking out this year,
you can have periods of refi boomlets. If rates dip a little bit, but we're not expecting any sort of major refi boom because again, so many folks locked into those super low rate mortgages over the pandemic.
Odeedita, thanks so much for joining us. Really appreciate Odeta Kushy, Deputy Chief Economists, a first American.
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