Bloomberg Audio Studios, podcasts, radio news. This is the Bloomberg Surveillance Podcast. Catch us live weekdays at seven am Eastern on Apple car Play or Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts, or watch us live on YouTube.
David Sherman, chief investment Officer, Crossing Bridge Advices, joins us here in Studio Wine Studio.
I have no idea.
Maybe he's returning some gifts here, David Boy And you look at the equity markets in twenty twenty five, fifteen percent gains in ES and p five hundred and twenty percent gains in Nasdaq fixed income pretty much high single digit returns across fixing them across the board in twenty twenty five, What are we doing twenty six.
Ray No look. Valuations are high, spreads are tight, multiples are high, commodities are high. Geopolitical risk tensions are high. Uncertainty is high. I think that people are not praising in enough liquidity or premium to tail risk. That being said, the economy of the US, at least and in the world, has done a lot better than people expected, especially after being liberated. So therefore, you know it's sort of an interesting act between two very different outcomes that could occur.
You've seen that, by the way, in portfolio managers, right, You've had some equity perform managers have had standing years and some they've had just mediocre years where they've actually underperformed fixed income. And I think that just sort of goes to show the joke about the recession the economy being a K economy. I think our financial professionals are a bit of a K.
Yeah, that's a good way to describe it. But I think if I had one word for twenty twenty five, it might be resilience, Right, I mean from the consumer to corporations, because you see it in their earnings. Whatever you threw with us, right, I mean, we just kept coming back. Can talk about Liberation Day even despite the terroorffs. I mean, this is an economy that continues to grow at a pretty good clip. We'll see what happens in Q one. But what about opportunities outside the US?
So we're primarily credit oriented fixed income and what's great is we've actually found a lot of opportunities outside the US, which is one of the few times in my I hate to say a forty year career now. But one of the things that happened was, for my first time in my entire career, we invested in a debtorin possession syndicated financing bond by Deutsche Bank. So this is something
anyone can buy that's a professional. Debtor in possession is the death they lend to companies when they're in bankruptcy. I was an autoparts company. Auto OEM manufacturer called it Morelli, but you're getting sofur plus eight hundred. It's coming out sometime in twenty six a one h two takeout price,
cash required. And what's interesting is as Japan's insurance are going up, we're going to see more of this because the government of Japan has been encouraging companies to no longer hoard and to be more focused on improving outcomes for shareholders, and there's been activism. So this was an
LVO again autoparts. It's on my first step. And in Japan, the reason it happened is Japanese institution's view bankruptcy is failure, so they're not willing to participate to create this and this is what creates the opportunity and then so that's a great opportunity. We think the Nordic high yield market still represents the most interesting high yield market in the world today, So we think those two things are very interesting.
And then obviously with the commodity places, that's changing the whole dynamics of how people think about places like Latin America and Africa.
Where do you see fixed income opportunities in your part of the curve? These you know, you did a debtor in possession of financing and that's high.
Risk, actually very low risk, low risk to you. Okay, Now, I think it's actually very low risk. So for instance, when Pacific Gas and Electric went into bankruptcy, they usued debtor in possession financing. It was actually rated triple B, so it was rated in investment grade. And the reason I think it's less risk is, yes, the company's in bankruptcy, but you're the first person to get paid other including
the tax authorities, and you're usually secured. So unless the company is administratively insolvent or is ill liquid and just vaporizes like First Brands, you're perfectly fine. Now, obviously in First Brands case, they're the debtor in possession financing was looks like fools money.
Yep, So why are you getting paid eight hundred basis points of spread?
Then if you're you know, it's interesting. One it's automotive, so it's OEM. Two it's Japan's first step. Three they had to syndicate a Japanese company into the Europe and US market. Three dips pay a big spread because it's a lot of work and very few people can participate, similar to other assets.
Ye.
So if Japan views bankruptcy as failure, what is the US view bankruptcy? I'm just curious, mind, Yeah.
That's a good question. I don't know. In fact, I don't think the bankruptcy process is working very well in the United States. So back in the seventies there was no restructuring process. Then they've created the bankruptcy laws, and now with all the securitized products like CLO's assetbacks, you have different groups with very very different agendas, which is
why we have the creditor on credit or warfare. I think it's very difficult, and you know, bankruptcy shouldn't cost twenty thirty million dollars as a starting point to get out of bankruptcy.
Twenty twenty six, where do you guys from a credit perspective, see opportunities going forward.
I guess it's again a k theme. We're going to be on really high quality, relatively liquid stuff and part of the portfolio, and then we hope to be opportunistic on the bottom half. And where we see the opportunistic part is really outside of the United States. There'll be opportunities the United States, but between the structural issues with again the credits on creditor and the clos unless you're in the club or in the room where happens from
online from Hamilton, it's a big problem. So where we find the more interesting opportunities is overseas, and we think the Nordic market, which is I've talked about on the show before, has more yield. Be are quality securities, but they also went through a big boom. When you go through big boom, bad underwriting happens and they'll be underwriting problems.
And we think that fundamentally those companies are good companies with bad balance sheets, which is not necessarily the case, and that i'd say tomorrow, a lot of the US companies that are bankrupts are just kicking the can down the road, and we think that that'll be a very good opportunity. We're involved in one. Now we're super excited.
Oh good for you. Nice way to head into the new year. But real quick, before we let you go, the FED, what your expectations for rate cuts next year?
So I am a bottom up practitioner with value bent, so people should discount a lot. But it's pretty clear to me that the administration wants rates lower. They're going to get short term rates lower, whether people like it or not. The real question will be we have a housing problem, meaning people don't find it affordable, and the question is what can the government do about making that
more affordable. And one of the outliers I have is that somehow the treasuring in the FED couarda and buying mortgages or create policy to protect the rates.
Dave, thanks so much for joining us. Appreciate it. David Sherman, he's a chief investment officer Crossing Bridge Advisors. Talk to us a little bit about the credit side and where there might be some opportunities in twenty twenty six.
Stay with us.
More from Bloomberg Surveillance coming up after this.
You're listening to the Bloomberg Surveillance podcast. Catch us Live weekday afternoons from seven to ten am Eastern Listen on Apple Karplay and Android Atto with the Bloomberg Business app, or watch us live on YouTube.
We know that consumers have been in it to win, it powering the strongest US economic growth in two years in the third quarter, when GDP grew at an annual rate of four point three percent. Can it continue? What's the fourth quarter going to show? What's next year going to show? Bill Adams, chief economist of America Bank, joins us to give us some insights. So Bill, a bit of a hard act to follow after that the number we got for Q three, But what's your expectation for
what Q four might look like? But more importantly, looking ahead, what about Q one?
Q four, I think you have to remember was the quarter of the government shutdown, and so that was a substantial headwind, and we're likely to see a much softer number for Q four GDP. I have annualized real GDP in Q four of under one percent.
With that said, I think twenty twenty six is likely.
To be a year of solid economic growth and broadening economic growth, where lower interest rates from the Fed and we're expecting raycus to likely continue in the new year are going to support some recovery of existing home sales and industries related to the housing market as well.
Bill talk to us.
About you know this Fed of reserves, look at that inflation, looking at the labor market.
Let's start with the labor market here. What's your view of the US labor market.
I mean, if you just look at the headline inflation rate or okay, everything's okay, don't worry.
There's been a big disconnect in the past year between pretty good real GDP growth on the one hand, and a softening labor market on the other. I have been following very closely measures of the labor market that tend to be more cyclical during economic slowdowns. If you look at the unemployment rate for black or African American workers, that's up to eight point four percent in the November jobs report. It's up more than two and a quarter
percentage points since the middle of this year. That's a very large increase, and so that points to a substantial softening of labor demand in the last three to six months. We have seen the payrolls numbers holding up being positive for most of this year.
We'll see whether those get.
Revised in early twenty twenty six, There is a lot of guesswork. I guess you could say the d has an estimate of jobs added at newly forming companies and jobs lost at companies that are going out of business, and that model creates a.
Lot of uncertainty in the payrolls numbers months to month.
My sense is that that's likely to be revised down, given that the unemployment rate has been moving higher and that we've been seeing these measures like the Black unemployment rate softening. Even more so, I think the Fed they have a mandate for maximum employment.
They don't have a mandate for maximum GDP growth. It's maximum employment and stable prices.
And the unemployment rate taking higher as well as these forward looking measures of labor demand also softening, I think points to a need for more support for the economy into the new year.
Well, Bill, you certainly don't have to search far to find wild cards possible wild cards in next year, everything from AI to we've got the transition happening at the Federal Reserve. But I'm going to throw this out there and say, I think the biggest wildcard next year might just be the consumer. And a lot of of course is contingent upon what happens in the job market. What's the biggest wildcard to your mind.
I think the end of Chuir Powell's term in May is going to be a potential source of volatility for the economy and.
For financial markets.
We'll have to see who the new appointee at the FED is going to be.
But I think the President.
Has been open throated and calling for someone who will support the economy with lower interest rates, and I think that has financial markets nervous about politicization of US monetary policy. Now, I will say, over the last couple of months, the case, to my mind, of for lower interest rates has become a little more plausible.
Based on economic data.
We already talked about the softening of the labor data if.
You look at the inflation data.
Now, I don't know how much credence to put into the November CPI report given the data gaps that we've had recently. But oil prices are down, the housing market continues to soften.
That's going to reduce shelter price inflation.
Rents are also rising slower nationally, with the largest decrease in rent inflation in the parts of the economy. The parts of the nation where we've added the most housing supply recently the sun Bell so that is going to keep inflation moving on a lower trajectory into twenty twenty six, with the exception of terror price increases.
I think the US is set up.
For a cooler labor market, cooler inflation backdrop, and services which to my mind supports lower interest rates. Might make this FED leadership transition less fraut over time.
But I think as that announcement of the next FED.
Chair is being made, and as markets are trying to anticipate what that change in leadership could mean, I see that as a potential source of volatility.
Bill we all know about the K shaped economy out there, and with that just kind of as a backdrop, how do you view the US consumer here? Because boy, it just it feels like you never count out the US consumer.
I will say I was concerned about the consumer going into the holidays shopping season. The initial data that we've seen for Black Friday spending going into early December, it looks pretty good. I think the consumer has again held up the economy this holiday season. Probably helped that the government shutdown ended and then there was a reasonable gap between the end of the government shutdown and people getting their salaries again, and then the holiday shopping season really
kicking off in late November. I think the consumer we still continue to have this as you say, k shaped economy. Low and moderate income consumers are definitely under pressure from the cost of living, but I think the overall consumer is supported by the acid price increases, especially the robust increase in the stock market in the last year, and
a lot of American consumers. An increasing number of American consumers are retirees, and so for retiree households, it's the cost of living and then also asset price returns and their income from pensions and from social security that are driving consumer spending. And retiree households have been under pressure from inflation, yes, but also benefiting from the stock market
and from other asset price returns. So I think that part of the consumer market is really holding up the economy and is insulated from concerns about the job market and job availability.
In twenty twenty six, which you see.
Weighing on a lot of conventional measures of consumer confidence like the Conference Sports Consumer Confidence.
Index bill are seen your bio that you're fluent in Mandarin, Chinese, what is that about?
Where do you pick that up?
Dude?
I bombed the Spanish placement test on my first week of college and I needed to pass a foreign language. So long story short, I found myself learning Chinese, and I actually kicked off my career as an economist as the Conference Board's China Economists from two thousand and nine to twenty eleven.
All right, all right, see when you read people's bios, I love it. I love that kind of stuff.
My son, twenty one year old son, he's all into Japanese and I'm like, dude, just take French Spanish like regular people. No, he's doing Japanese and he's doing a semester in Japan and he's got lined up a summer internship in Tokyo.
So I don't know.
We'll see how that goes.
Fine, So when i'm mee see people like Bill fluent and Chinese? Who does that?
All right, Bill, thanks so much for journey. Appreciate it. Bill Adams, he's a chief economist of co America Bank. You appreciate getting a few minutes of his time.
Stay with us. More from Bloomberg Surveillance coming up after this.
You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from seven to ten am Eastern Listen on applecar Play and Android Otto with the Bloomberg Business app, or watch us live on YouTube.
Holiday shopping I think it was I don't know. It seemed pretty busy out there to me out there in the marketplace. I know people were clicking away on the e commerce side.
I know I was clicking away.
Yep.
So a lot of that might have been happening behind closed doors, as they.
Say, and as you do the returns.
You know, some companies are charging you for returns for the what is it re talking fee?
I guess that's back it's a thing again, yep, all right, Yeah, I don't know.
There are a lot of gifts under the tree, That's all I know.
And that I was like, I don't want anything.
I don't want anything.
Julia Wilson, Principal Advisory Strategies KPMG, based in Atlanta, Georgia. Juliet, from your perspective, what are your clients telling you about kind of the holiday season, the retail space out there?
Are people spending money?
I think they were, But I think over all your kind of view of a holiday might have been the word of the day. So so holiday was stronger than expected. We saw consumer spend the results coming out higher than analysts had predicted. But I would say it was kind of a you know, at least in my house, what we called it was the year of the sweater So it was a very practical holiday spending, you know, withheld all of the headwinds, but it didn't give anybody a.
Ton of surprises.
You know, things were very practical that the smart consumer kind of played out well.
Ours was socks socks.
Yeah, well, you know what, the SNL had a great skit. They always do it. It was it's an old skit, but they did it where the mom gets a robe every year, but everybody else in the family gets like really cool gifts and she's like, okay, I have another robe. So I feel you on the sweater robe sock thing. But what about gift cards? You remember when they were sort of all the rage, people were going out and buying gift cards because they didn't know what else to do.
Do you think that was as it crept up on them?
Yeah, absolutely so, I think gift cards and we'll really see where the consumer plays out in terms of the categories because of the gift card trend, I think a lot of people the sentiment, you know, And actually we had fewer days between Black Friday and Christmas Day this year, so a lot of people it caught them by surprise. And so gift card as the gift of choice is definitely something that we predicted with our consumer Pulse survey.
And then I'll actually played out.
So I think you'll see a lot of spend over this weekend to see if you know, if electronics kind of nudge ahead, or if people are still using the gift card to get the things that they kind of were holding out on just as they were, you know, a bit spind thrift over the period.
Alexis, you know that Julia is a big time consoling because right behind her is a white board, and whenever a white board is brought out in a meeting, I'm in, I get up and I leave, thank you very much.
I'm transition.
It's actually a painting, but yeah, I can get the whiteboards. On the other side of the room, there is a whiteboard and lots of business books.
That's how they do it.
That's how the consultants think they're big time out of the box, Juia. How do retailers reach their consumers these days? I mean, I mean, you know, how do you reach a John Tucker who's not at the beck and Call of influencers on social media?
So, you know, the new retail strategy is definitely being where the consumer is, so omnichannel demand is kind of the thing and finding them whether you're you do like to see it in your feed. So the traditional social media outlets of Facebook, Instagram, et cetera are not gone, Chat, GPT, Jim and I everything. Making sure that you're searchable there and that it's easy to click through is kind of the second area. I would say this is the first year that we really saw AI take off from a
consumer perspective. And then the traditional ad it's not gone. You know, there's some of us that are still in. You know, we watch TV, we watch it, you know, we do things on YouTube, et cetera, and so finding that that perfect mix is complex, but we have a lot more tools today to get in front of the consumer.
All Right, who here is doing dry January? Try January being that you don't drink for the month of January.
I've heard, you know, sprinkle January is another thing. Our consumer survey said about one in three Americans are participating in Dry January. It's for health reasons, is the number one reason, but the second reason is to spend less money. So I think we if we aren't knocked over the head with the thing of the frugal consumer, we're continuing to see that even as we head into Dry January. But it is our strained consumer thinking about help and wellness for sure.
You know, AI has kind of seeped into all aspects of our lives, all aspects of the economy. How are retailers, how are consumers using AI in their purchasing.
I have to tell you, as a last minute shopper, AI does not bring the package to your door. So that's one thing that we could maybe look for in the future. If you're buying in the last ten hours of the holiday a shopping spree, then you do need to go in a store and physically pick it up.
But I think AI is helpful. You know, we just mentioned that the returns that are about to happen, so figuring out where to go, how to print a label, some of those really tactical things that you'd have to sift through and try to figure out AI is helping the consumer on that side. But from the retailers perspective, you know, we can't forget just how important it is for them to use it to drive productivity and enhance personalization. So KPMG, we talked about the front, middle and back office.
AI is really helping us do some of those things of you know, the chats to when a consumer has a question about how to put together a toy or where to return. Chatbots are one of the first places to leverage AI.
Juey, thank you so much for joining us. Really appreciate it.
Julian Wilson, she's a principal Advisory Strategy group at KPMG.
Talking about retail and retail sales.
Here stay with us.
More from Bloomberg Surveillance coming up after this.
You're listening to the Bloomberg Surveillance podcast. Catch us live weekday afternoons from seven to ten am Eastern Listen on Applecarplay and Android Auto with the Bloomberg Business app, or watch us live on YouTube.
Scott Sperling Joints us here chief executive officer THHL Partners. For those of us that have been in the business a couple of eons. That would be Thomas H.
Lee Partners.
Did a lot of biz with them back in the day.
Scott news Away, thanks so much for joining us here. Talk to us about kind of the m and a environment out there. Scott, what do you expect for twenty twenty six. It seems like we've got a pretty decent We got the FED cutting rates, the economy is pretty good, earnings are pretty good.
It would seem like you.
Guys, as we'd be writing some tickets here, what's your expectation?
And certainly on the larger end, if you look at the return to normalcy in terms of our anti trust regime, that certainly opened up a number of opportunities to do things that make sense in terms of bringing companies together that could streamline their costs, provide better service more cost effectively for consumers.
So I think those opportunities exist.
I think on the private equity side, the cost of capital hasn't been a huge problem. That's not really what's driven some of the slow down that we've seen over the course of the last twenty four months.
I think that's more.
Specific to the fact that in the twenty one into early twenty two period, a lot of things were required at multiples that may have made less sense than it's to people at the time, and it's taking a while for those companies to grow into their valuations, and that has really slowed down both the number of things that have come to market as well as the ability to get deals done at prices that in today's world would
make sense from a risk adjusted return perspective. So the industry has been slow for the last couple of years. In private equity, we do anticipate that picking up. I think time has been helpful. Their companies have continued to perform by and large and therefore growing into valuations that might have been too high from a multiple perspective a few years ago. So I think we'll see more activity. I hope to see more activity as we go into
twenty twenty six in private equity. And as I said, for overall M and A, you are seeing this handful of rather large deals occur that that you would not have seen three years ago.
Yeah, Scott, because when I was looking, I was looking at some of the numbers, roughly four point eight trillion dollars in deal value this year, but the amount of deals were pretty modest, right, So what does that tell you about the deals that are happening and how that's setting us up for twenty twenty six.
Sure, you know, again we're seeing some very large strategic consolidations. Those are things that under the prior antitrust authorities would not even be considered. Those Both the DOJ and the FTC leadership had theories that did not correspond to either the laws most people saw or to a long tradition about how to evaluate antitrust, and so that put a real, real chill, as we know, on any kind of activity
of this kind. But the opportunity now to actually do things that make sense for consumers in particular, or customers if it's a business business type situation. I think that's allowing these very large acquisitions to occur.
That's making up the bulk of.
That of that number that you spoke of.
Scott, I love to get your thoughts on kind of kind of where the market is in terms of monetizing or exiting investments. It's my understanding that three to five years is a nice folding period for the average private equity fund, but many funds over the last decade or so have been five years, seven years, maybe even longer, which is impact the returns for your LPs. What's the environment like now for monetizing some of the investments you guys as an industry.
Have made, so you know, again, I think that it's getting better. I think that the ability to see more more offerings of companies from private equity players so that there could be more opportunity to see acquisitions occur at multiples that would make sense that also provide a reasonable
return for those companies that were acquired. Again, in this particularly let's call it the twenty one to twenty two period, it's been more difficult, as I mentioned earlier, for those deals to happen, and as a result, the time frame the average hold has extended to I think for many funds that were formed in that period and slightly before
to over that five year number. I think five point eight years is the last number that I saw as average, so that would be longer than we have generally seen for most sets of vintages over the course of the almost forty five years I've been doing this.
We've got some big companies on deck to go public next year, including SpaceX and open AI. I'm just wondering, what are you what sort of excites you that if you can't talk specifics there and then what about industries? But I have to think consolidation is going to continue in things like AI and healthcare.
Hard for me to talk about the valuations of entities like that. You know, obviously they're building, you know, potentially great companies. Uh, whether or not the valuations that they come to market at will make sense over the long term, you know, who knows. I think there's a lot of talk, and you know, we'll see what the reality is.
You know, certainly.
The market tends to gather momentum when you have I pos that do well. We've been in a period the last couple of years where even if there's been a good initial pop, the companies that have gone public have tended to float back down towards their original offering in many of them below. So I think it's really crucial that when companies like that come out, that they come out at valuations that are sustainable and that can provide
a reasonable return. I think in terms of areas of growth, you know, we look at areas like pharmacy services where you know, there's an enormous confluence going on right now between technology, generative AI technologies that are enablers of drug development and the ability to take those drugs through their clinical trial processes, and the need and ability to provide therapeutics for a whole range of diseases. So we think
that's a really interesting area as we look at it. Obviously, the application of AI across a broad range of automation is going to really drive i've continued productivity, we hope in the economy that will offset some other flaws that we have when you look below the surface in our
current economy. And so companies that are continuing to actually solve more automation specific problems for a broad, broad range of functions something that you know, we continue to look at UH and then other areas wealth management, you know, continue to be areas of great interest to us. So we think there'll be a range of things that are
going to be interesting opportunities. You know, you have to work really hard in private equity, I would say these days, even at the prices that that are currently allowing deals to occur, to be able to add value operationally to these companies, we need to have a very specific thesis about how you're going to take a company.
We're to leave it here Scott just spends the time, but thank you so much for joining us. We really appreciate getting a few minutes of your time. Scott Spurling, Chief executive Officer, THL Partners.
This is Bloomberg.
This is the Bloomberg Surveillance Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, seven to ten am Eastern on Bloomberg dot com, the iHeartRadio app tune In, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg terminal