Surveillance: Golden Era with Zelter

Zelter Jim's Elter's co president Apollo Asset Management. They're on a roll. We all know that. We thank them for Torston slock in his wisdom on a daily basis and he'll try to keep up with Mr Sluck. Jim's Elter joins us. This morning, Jim, there's a fire sale going on in Zurich, Switzerland. I believe you guys have a nodding acquaintance with it. Described the theft this warning and yesterday is Apollo took on assets. I'm a beleaguered Swiss bank. Well,

good morning mcgogmarrying all of you. Um, you know for us that the transaction. Referring to the securitized products business. We've thought for years that there is a great theme going on, a great evolution of a lot of assets that are as strategies that are within the banks are moving to the alternative side of the business. And you know, SPG is a tremendous is really a finance company of

finance companies. It's a massive business with a twenty year track record and bringing that team on two d plus people, three hundred origination platforms underneath it. Uh. It really is our objective of fixed income replacement, getting investment grade returns, but doing it in a more thoughtful, actually candially a less risky manner. So a massive transaction for us. The way we're able to do it was very nuanced. We'll

talk about that in our earnings call today. But we're very excited and we we think this whole area of private credit and I saw your your past guests, this is the golden era for private credit. You know, rates have been rising. E commedy is doing pretty well. You can get double digit yields, but in this particular and the security coaged products business, it's really investment grade risk,

a tremendous predice. I learned a long time ago, Jim, that the heart of this, as you correctly mentioned, as you need to retain two hundred and fifty warm bodies. As you bring them over, explain the incentive. How you're going to incentivize those people to join Apollo well like like we've done for for decades time, and when we bring them in, we we have an aligned business plan.

It's not just about growing the assets, but doing it in a productive way where credit losses are negligible or zero and we're aligned on the trajectory of the business. We're really aligned on what the investors get. At the end of the day, it's all about investor returns, and we're we're aligned at making a productive business that it's acreed to the shareholders of Apollo. So we do that in an aligned basis, which we've done. Um, that's the

that's the success long term. And I think that you know what what this management team who is there, they're extremely excited to be part of a business where we can offer this type of long term trajectory in terms of benefits and compensation, but also in alignment with the

shareholders at the funds. Alignment of shareholders at Apollo. But also the most critical aspect is long term predictable capital, so they can go about their business, they can execute their business and and grow their business with long term, sticky matched assets. That's really the key to success. It's no more complicated than that. Jim. You've deployed a lot of capital very recently, a lot of capital, and we've

always seen the correction take place in public markets. There's been this bigger conversation about whether we've seen the correction take place yet in private markets. I just wonder how you think that's going to play out through the next twelve months and what that might mean for the volume of transactions we can expect from you of the next few quarters. Sure, well, you know, for us, you know our discipline, our determination, you know the theme we've always

talked about here is purchase price matters. You know, we're we're finally in an environment we're for years folks asked us, how are we going to perform in a higher rate environment. I think the results of the last twelve months show us that. You know, for us, this is easily the best time to be an investor in new issue vintage credit. The best that I've been here, I been here seventeen

eighteen years. You know, you're getting double digit returns by lending at the top of the capital structure, so you know, voracious demand and on the portfolio. As you're asking, you know, we're we're not seeing I mean, it's certainly a very bifurcated economy. I'll let I'll let you ask towards in the economics questions. But for us, if we if we have followed this discipline of our mantra purchase price matters, we're lending to great companies that are you know, well positioned.

And the reality is it's very difficult to you know, put one term on which way the economy is going in terms of you know, upside downside with the rates. It's very bifurcated. You have many industries that are consumer lad you know, the cruise industry, hospitality, entertainment, travel, they're doing quite well. Those that are much more hard industry are having a little bit more challenging time, you know, the autos and such. But for us, there's a lot

of companies that that need capital. We've expanded our capital base not only the size of our capital, but what puts us in a unique standing is the breadth of our capital. We can offer scale solutions, you know, down in the mid single digits, which are very equative to our uh you know, spread related earnings of our of our retirement services, and that makes a lot of sense for us. We're we're really thinking about that incremental return for a unit of risk, and for us, it's a

great time to be in our business. Do you expect that we're gonna just miss a default cycle altogether, then, you know, I think I think at least it's gonna be one where certain industries get hit a bit harder, and it's going to be you know, we all talked about, you know, our default it's going to go from two to three or four percent. They probably will pick up higher in two but it's not going to be broad based across the high yield sector or the leverage loan sector.

It's going to be concentrated in four or five industries. But I would say that the theme that you're seeing in you're in the last two weeks in your show, you know, companies are much more focused on returning capital the shareholders. You know, we're not in that zero cost of capital world anymore. What's going on to the big oil majors, what's going on at Disney, what's going on a lot of other companies. These companies now are very focused on cash flow generation. Uh, And that's what we've

done for for thirty two years. And you know, it's that's that's a playbook that lasts. It's real bust. But for us, there will be a certain degree of a credit cycle, but it's not going to be broad brush across every asset, or at least we're not running our business right now with that intention in mind. There was a long time when private credit was largely the sphere of institutional investors, and then over the past few years pre pandemic, mostly there was a real push into the

individual investor. How much is that still the opportunity versus going back and really doubling down on institutions. Well, I think they're both growing. I mean, you know, the institutions have been in this business for thirty years in terms of what they did in private equity and then all the other alternatives. And in the last three or four years, you know, the global wealth channels around the globe which are voracious, the amount of global wealth has been created.

You know, in the US but in Asia and in Europe and India, in Hong Kong and such, there's a there's a voracious app appetite for high quality managers that have proven themselves in products that makes sense, good education, appropriate fees, appropriate liquidity. But we think it's it's a you know, a once in a decade opportunity. It's not surprising that a handful of firms are very focused on it.

When we did our investor Day sixteen months ago, it was one of our three critical priorities or initiatives, along with origination and capital solutions. But it's still front and center for us. And you know, certainly, I think this rate rise actually makes it quite attractive for many folks to do uh, to enter this world. And you know, we're we're a building, We're building a tremendous resource base to be able to really create products, invest appropriately and

in service clients necessarily. Jim, We'll find a question it's Manchester United and once in a decade opportunity. Well, listen, I'm more focused on US sports. But the reality is there's there's an amazing amount of sports ecosystem financing going on and and we expect to be part of that going forward. Do you want to elaborate on some of that. Well, I just think what you're seeing right now, and you

know these sports are global. I know you and time you have your view on certain teams in the Premier League, and I wouldn't even think about getting in the middle of the YouTube on that one. Jim's adam of a file, Jim, if you ever want to look over there again, we can consult we canna. Yeah, you know, I think you know. I call Mr Lee you and have Mr Zelter over experience will mediate. Yeah, thank you were taking face for that too. Investments image to basis points in the sixth

pack of John Courage. It'll be great, Jim, that was great. Jim's out to that of Apollo, one of our most popular guests. Everyone leans forward for Ian Shepherdson, Chief economist Pantheon Macro, You're brave to go where no one goes, which is to actually study inventory dynamics. I would suggest it's the most ignored part of a g d P calculation.

What do you see in the inventory dynamics right now? No, I see a downshift, a big downshift, and hence quite a good probability of a shockingly low negative g EP number for the first quarter and probably for the second quarter as well, So quite a sharp reversal at the headline level from what we saw at the end of last year, and the economy group by nearly three percent, But the half of that growth was craziness in the imagery data, which is not sustainable, and that actually will reverse.

So in terms of appearances, markets are going to really struggle over the next couple of months. You know, we just had a huge payroll print. We're probably going to get some big numbers, partly because of the warm weather in January for retail sales, home sales, construction, all the rest of it. But I also think we're shaping up for a negative Q one GDP number. So this is going to be very hard to read and very confusing. Does a negative Q one GDP meaning n B er recession. No,

I don't think it does at all. So the NBR defines recession in much more broad terms. It's all about falling output, falling incomes, falling employment. I don't think we're going to get that. The market shorthand for recession, of course, is two quarters of falling GDP, and I think it's a very good chance that we get that. But but my guess is that the US is is quite well

placed to skirt a formal n b our recession. I do think that the state of the private sectors finances offer quite a big cushion against what the FED is doing. So the FED is hammering away with rates for the private sector's death service costs are still very low, the balance sheets are pretty strong, savings build up is still there for some people anyway, and so there's quite a lot of protection against what the FED is doing. And I think that pushback means that we can probably skirt

around recession if we have one. I don't think it will be very bad, and I don't think it'd be very long. But my base cases we dodge it all together. What does that mean in terms of how quickly inflation will disinflate? So this is a gazillion dollar question. Can we get the sustained disinflation that we need without a recession?

And I think there's some very encouraging signs there. So, in particular, the downshifting wage growth over the last year and a half since that crazy peak in the summer of twenty one when it was over six percent, very scary FED was very worried about age price spiral at that point, but you know, Vice chair Brand had said a couple of weeks ago she doesn't see a wage price spiral, and the e c I data last week,

I think pretty much confirmed that story. Wage growth now is hovering just around four, which is still on the high side, but it's coming down without unemployment going up because participation is gradually creeping higher. The labor market is normalizing. And if we can see in the next couple of quarters at wage growth gets down a little bit below four, then we're back into a sustainable place without having to break the economy to get there. But this is still

kind of speculative to some extent. The trend is in the right direction, but we haven't quite got to the destination that we need to be at just yet. This sounds great, and a lot of people buy into it.

A lot of people have bought risk assets in the heels of justice call and then use car prices went up, and I pointed this very small sector because it highlights the good disinflation that is not linear, This idea that because of the lag effects perhaps from the supply that was not out there during the years of the pandemic, there isn't the same number of vehicles to get resold, and suddenly those bag effects are no longer beneficial to

the disinflationary narrative. How important is it to watch the reinflation of certain good sectors that really were the basis of this trend altogether? Yeah, so so good. Following goods inflation has been a big driver of the improvement that we've seen, and car prices have been quite a big part of that. We saw an enormous jump in new

vehicle sales in January. They were up nearly eighteen percent in one month, and I think that's probably an indication that we saw a strong number for for used vehicle sales as well. We don't have that data yet, and that's probably what pulled prices are because I don't think any dealers were expecting to see sales rise by eighteen percent, so I think they got short of inventory. They had to go to the auctions to find inventory, and so

prices spiked. I'm really hopeful that this is a one time thing, but it is going to hit the CPIM and we know we're gonna get some lumpy numbers and for those people at the FED and the markets who will want to seize on those numbers. Yeah, the next couple of months could be quite tricky, but I do think the ultimately margin compression for car dealers is going to all those prices down quite a long way. But not every month. It just it just doesn't work like that.

You know, I I want you to take your wonderful pantheon ability in Asia and a reopening of China. I want you to drag it over to an estimate of the resilience of the American economy. The bears are in retreat right now, Equities up today, Pepsicola would bang up earnings, etcetera, etcetera. Do you have a glass half full on the American economic experiment? And is it because of the China reopening?

The China reopening is helpful for sure. I mean it's especially going to be helpful for US manufacturing because essentially what happens in Chinese manufacturing today has a meaningful impact on what happens in the US manufacturing two to three months down the line. That there's a pretty clear line between the two. So we're feeling quite excited now about

China for the spring. You know, the COVID wave is less disruptive than we than we feared it would be, and the rebound and some of the services pretty strong already. That is going to transmit through to those US numbers. So what looks right now like a pretty nasty squeeze on US manufacturing, Probably it's going to be easing somewhat by the spring, so we're very happy to see it. But of course, you know, manufacturing is only what nine

percent of pay rolls and eleven of GDP. It's not a game changer, but it's certainly helpful at the margin, and it is part of the story why we don't have in our base case forecast a US recession. Had China stayed in the whole, you know, that would have been more of a problem. So at the margin it's helpful. Of course, at the moment, Chinese inflation PPI inflation is still negative. It's like almost minus three percent, and a

year and a half ago it was plus eleven. So that's helpful as well because that's working through gradually into disinflation pressure in the US, coupled with the domestic margin compression that we're seeing in retail, So those two things together it's quite a nice story. You know, still got falling prices in China, but we've got stronger growth as well. So it's the right combination, and we know we hope it persists. It's it's kind of our base case that

we're gonna We're gonna keep that for a while. Let's get to the important question. I should Men City get relegated? Well, if they cheated, they should, absolutely, very seriously. I think he was thinking about new cast has decided that he answered that question five days ago. Well, you know it would put us up one place, will put us more firmly in the Champions League. Shot Champions League positions worth something unpleasant to happen to them. So yeah, I wouldn't mind.

There we go, and we got there, and Chefferson of Pantheon Macrow, we can only saying thank you as always on the American economy, and I look till he joins his chief economist Wilmington's trust look tilly the state of the American labor economy. It's a jumble to me, claims odd jolts odd, everything odd. What do you and Wilmington's trusts make of our job economy? Yeah, it's obviously an incredibly tight labor market. As Mike was just saying, the low level of claims really sinks up with what we

saw with job growth in the month of January. Are Interestingly, if you look at the non seasonally adjusted numbers, you usually get two point eight or three million lost jobs in January. Uh, this time around, this past January, you get a loss of two point five million jobs. Of course, the seasonal adjustment pushes that higher. And what we really see is in this tight labor market, employers are holding

onto their employees. We know how challenging it is to hire people, so it's really more of a story of wanting to hold onto people. That's the story behind the strong jobs number for January, and we're also seeing that with the claims this morning. We think that, you know, the job growth obviously is very strong, but it's more about the differential you just referred to. The jolts jumped up on a one month basis. It looks a little

bit fishy. Before that it had come down more than ten percent, But it's really the mismatch that's gonna matter more than total job growth. Tom is wage growth gonna cooperate. So Lisa can see her immaculate disinflation. Well, we've already seen I hear people talk about is it possible to have this immaculate Uh you disinflation. Uh, It's easy to point out that we've already had it for three months, right,

We've got this is not just a one off. You've got three months of much slower inflation while you still have the strong wages in the tight labor market. We think that it's going to get much more challenging when you get to the middle of this year and beyond, because the labor shortages are going to persist. We also see supply chain challenges, and then also the energy transition is going to keep some upward pressure on inflation, so we expected to keep coming down in the near term.

We're encouraged that average earily earnings actually we're pretty mild with the zero point three pc increase, and if you look at production and supervisory workers, the slowdown in wage growth from last year into this year is even more encouraging. So if you do get some noisiness, but you do get this sense of disinflation just based on the year over year composition of the way that the data is

drawn up, how do you then get confidence? How do you give confidence that there's going to be a stickier inflation later in the year when all anecdotal evidence is speaking to the other. Yeah, well, we think that it's going to be keep coming down on a year of your basis. As you point out, you've got those base effects. We just don't think it's ever going to really come back down to what we saw between the global financial

crisis and the COVID pandemic. We've got higher inflation on a trend basis now between two and a half and three and a half percent on a multi year basis going out, it could dip pretty low in the middle of this year. We know what's going on with shelter, and even if we just see the shelter numbers flat line,

that would imply some very low inflation numbers. Willington Trust were much more focused on nine and twelve and twenty four months out, and those higher inflation numbers are going to keep rates higher and actually offer some some opportunities for investors. So it's not a whole lot of confidence, Lisa about what the month of a month or even

to the middle of this year. Has a lot more to do with that longer term trajectory we see those challenges, we also think they're navigatable, well navigatable, which really space to the Torsten slock. No landing kind of scenario at a time when a lot of people are pushing out potentially even for years, any type of recession. Are you among those? Yeah, it could go out or it could happen this year. You know, we've got basically a fifty fifty chance we think of a soft landing versus of

mild recession. It's going to come back to employers. We know that employers are dealing with higher borrowing costs, a little bit of softening in demand. If they keep hiring, then you know you've got as consumers, you've got job growth, you've got wage growth, and that will keep the economy's head above water. In the middle of this year. If companies get spooked and those higher borrowing costs hit their capex and their hiring decisions, well that's gonna lead to recession.

I actually think it's gonna have a lot more to do with the lagged defects and all of the hikes that were last year. Much more important than whether the FED stops at five or five point one. You know, of one or two more types here, hikes here, and there.

Businesses are reevaluating those those CAPEX decisions. Now, look, you earned your stripes at the Philadelphia said, which is one of the most interesting research capabilities, given the terrain, given the geography as well, and to me, it really hearkens back to the study of the core American economy, which I'm gonna call domestic final sales. When you take out the foreign dynamics, the inventory dynamics, and you just look at this thing, domestic final sales. Is it half full

or half empty. We've definitely seen the slowdown, and that's our preferred measure. It's a little bit like looking like core cp I, right, you strip out the international we actually go with private final sales to strip about the government as well. And what we've seen there is an appreciable slowdown in the economy. I mean, it was just barely positive for the most recent GDP report, I think

zero point two per cent. And what we see there is a natural slowdown that was going to happen anyway from COVID, but it's also the impacts of the federal reserves policy. We know that residential investment has been hit very hard, and that's exactly what they're trying to do is to engineer that slowdown in the economy. And Pal referred to this just the other day, the final sales numbers, because what we do see is that slowdown that should help to bring in fish and down and of course

we need just wait to see which way that breaks. Tilly, thank you so much. With Wilming to us, this is a joy. Right now, we're gonna go down memory lane. Which was that long ago and far away with a guy named David mel Pass who's got a job in Washington right now holding up a bank. There was it, bear Sterns, absolutely definitive emerging market coverage. There was something about it in the air in the pixie dust, and Catherine Rooney Vera was part of that. She's chief market strategists,

had a global macro research at Bolt of Capital. I've got to go back to emmy show and David mal passing all of it. What was it like is bear Sterns literally, in my my opinion, invented em coverage on Wall Street. Thank you for that kind introduction, Tom and bear Stearns was fun. It was a great place to work, and really I miss it. Um but Ian was a strong point, David mal past John riding Emmy shadow. As you mentioned some of the heavy hitters. UM. I was

an emerging market fixed income research and so enjoyed that time. Yes, but you know it was it was a different battle, but then it was e M. Connected to the center is Bill Rhodes would say, the central banker to the world is Jerome Powell right now, the central banker to Emmy Shios, Latin America or the Pacific rim what's the power of our our central bank leader? Now? Well, emerging markets are do very poorly in UM a federal reserve hiking cycle with the dollar appreciating in value. So that's

why we saw emerging markets get devastated last year. And I think Tom and Lisa that that's why we've seen emerging markets be the new Darling um year to date. It was one of the worst performers in two and it's one of the top performers this year, precisely because it seems the Fed is, uh, maybe it's gonna stop pretty soon. UM. I still think it's a bit early to jump into that trade. I think that the momentum

could would carry us higher for the next month or so. UM, But the FED could do more and more than the market is currently anticipating, as as your guests have had. Nauseam mentioned um, but but but there's a certain euphoria I think right now in for the riskiest paper and for the mean reversion trade euphoria. Can you build on that? What is driving the euphoria other than just you know,

I guess positioning squeeze. Yeah. I was talking with your previous guests in the green room winning in and she called it. Everyone's jazzed about the China reopening trade and that's fantastic for emerging markets. China is a very important trade partner for Latin America and it's very important as well for Asia ex China. Right, so, as China reopens um the surrounding areas Malaysia, Thailand, those areas are going to get a bounce in tourism, and Latin America is

also going to benefits. So I think there's that aspect. A weakening dollar is very favorable for emerging markets. Economic growth this year is going to be stellar in emerging markets India more than six percent growth. China is going to lead the growth um and that's going to be positive versus the developed markets were here in the US,

in my view, we're going to be flat at best. Well, but so do you think that just to sort of put something concrete around this, do you think that right now that China reopening has been fully priced and even overpriced when it comes to how it's been represented in emerging markets? Just risk your assets in general? Yes, And I think that before I recommend going long on a sustainable fashion to institutional or even retail investors, we do

have to see a pullback correction and risk assets. I think US recession is not person particularly in the equity markets, and we have not seen difficulties with financing. There's a lot of names in the emerging space as well as in high yield that have not had those financing difficulties that I do expect to come to the four as we feel the repercussions and the ramifications of five hundred basis points and tightening in more than a year. Two

things right now very important. You sturing at the University of Miami, and you're gonna tell them we just had a new depth of inversion on the two tents spread negative eighty five point to nine eight points. Three month thirty is at one oh seven. It's not through to new depth yet, but there's the van else. But what is the signal of new deep deep deep substantial inversion. Yeah, it's been really fun to being a professor at UM teaching global economics, especially Tom, in this time of in

our lifetimes. Um. Look, I'll go back to emerging markets again. They did their homework. Brazil increased rates one thousand, more than one thousand basis points last year alone. UM. So I think that's part of the euphoria, you know, plowing into these countries, these names, these geographies, these assad classes, um, that are very juicy and yield. Okay, I've got to ask Lisa. Lisa asked for me as well. Both of us tried to price a condo in Miami the other

day and fell off our chair. Can you you're you're living it, You're living the Star Boom. I'm a beneficiary of your beneficiary. Okay, give us give all of our listeners and viewers worldwide a snapshot into the sustainability of the Florida Boom. Can it continue? The good news is that we have diversity both in UM, you know, the the diaspora from New York, New Jersey and from Latin America. So all those people are coming. So it's not just

the New Yorkers that certainly have bit up. Not just my house price Tom which has jumped significantly in value, um, but also the wait list to get into schools. It's very difficult now it's to um to get into the private schools because of this influx. I think it is diverse. I think the mayor and the and the politicians that have done a fantastic job of enticing capital, and it's diverse in nature. So I don't envy you looking at real estate in Miami. Um, I'm one of the New

Yorkers that moved down. But thankfully there's grass coming up through the driveway. Basically the most the most interesting thing that you said in a know, not Florida real estate. I'm still looking at the two tents spread, which shows you how much of you know a nerd or whatever you wanna call me. But I'm watching right now. Equities rally continue to extend the rally, even though people pile into ten year treasuries at a time when they're expecting

more rate hikes. This doesn't add up. Do you understand this, Catherine? No, And I think Victoria Fernandez said it very well. It doesn't add up, and so that's why I like tea bills. I've been saying this for an extended period of time. In fact here on Bloomberg a couple of months ago, four point seven percent three months, six month tea bills. It makes sense to me. I think it's a strong it's a good idea to be in cash and cash equivalents. Some of my top picks in the equity space last

year I continue to like. Which are staples underperformed this year, UM, utility, energies, and healthcare in the equity space, and I think we do need to remain defensive under the expectation that this can't continue. Right. We can't have record low unemployment in fifty three years, UM productivity really kind of dis molt um, and labor costs still still rising. With the Fed getting to its two percent inflation target, we're gonna see Thank

you so much, Cassaroney, very Capital Markets. Joining from Miami. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern. I'm Bloomberg Dot com, the I Heart Radio app tune In, and the Bloomberg Business app. You can watch us live. I'm Bloomberg Television and always on the Bloomberg Terminal. Thanks for listening. I'm Tom Keane, and this is Bloomberg