Surveillance: Greenwich Economic Forum

joining us. And there are a lot of people who live here. It was really easy for them to come to this conference, many of them who lived in New York City prior to the pandemic. Many people who have come, including businesses. How do you, as the governor, plan to keep them considering the poll the lure of low tax dates. I think we have one of the great education systems in the country, so a lot of people want to

come here for their families to start things up. Stanford Greenwich has become a real financial center, fintech center, you know, cryptocurrency, financial services. Obviously, we've got the insurance capital of the world, so there's a great ecosystem and base for finance. And I think a lot of We've had a lot of finance companies come up to Connecticut over the last few years, and we've noticed that right with all of them moving their headquarters to both Connecticut and also to Florida because

it's a low tax state. You're running against Bob Stefanowski, and they're about thirty days left in this election cycle. He's been espousing lowering taxes. You've previously raised taxes. How do you sort of speak to this issue given that you talk about the education system, you talk about some of the services that cost money. Well, to be exact, we inherited a two billion dollar budget deficits as far as the eye could see, and we balanced that by

holding the line on spending. It was the first governor in thirty years not to raise income taxes, and this last year we put in place the biggest middle class tax cut there is. But um making life a little more affordable in this inflation every time, but bigger. You're right,

I've gotten place of rainy day fund. I'm gonna hear from the finance people here today whether I'm aeryl on the side of caution, I hope i am, But I'm gonna be ready you said that you're gonna be listening to Ray Dalio talk about how the world's about to implode, and then you're gonna sit there and hide under your chair as you try to prepare your budget. How do you plan to uh really with withstand whatever is to calm given the negativity out there, and given that it

is hard to borrow right now with rates where they are. Well, two things. I've got a fifteen percent of our budget set aside in cash. We call it the rainy day funds. So if capital gains start slipping, which it already has, you know, we'll be ready. I don't have to raise taxes. I don't have to cut education, you know, funding going forward. I budgeted very conservative for this fiscal year. I think we could see sort of the storm clouds out there.

I assumed we were going to have less revenues this year already, so I think we're ready for what may be coming. I go back to the election cycle, because this is the midterm election cycle, as I'm sure you are more aware of than anybody else. In Bob Safinowski, your opponent, does keep talking about the importance of keeping some of the businesses here to keep the revenues. How do you balance lowering taxes to be competitive with states that have really drawn a lot of Wall Street businesses

if you think the money to actually make the state livable. Look, we had a couple of fortuneies move into the state. We had dozens of other companies, but Lisa, more importantly, a lot of our local companies are growing and expanding big time. We had new more new business startups than ever before. You know, I've often said I don't want more taxes, but I don't mind more taxpayers. Our economic pie is growing and that's why we have a surplus.

So your tone has shifted a little bit in the election cycle, with more focus on just get out and vote. Why is there the emphasis on getting people to vote? Do you think that there is something that will keep Democrats home? I think anger sometimes motivates people. I'm more optimistic believe in the state. I've got to make people believe we're turning things around. We're making progress every day, and I don't want people to be complacent. I want

you to have a stake in this election. So yeah, vote, all right? So going forward, how I'm concerned are you about some of the businesses that have been leaving. Given the low tax issue, and given the fact that some of the revenues are going to be strained for possibly years if what Ray Dalio says comes to pass. I think a lot of the companies that are coming to Connecticut and staying in Connecticut a respect tax stability. They know that for the first time in years, we have

not raised taxes. That makes a big deal, but it's it's bigger than that. Again, they love the best education system in the country. They love the fact that we provide job training so they'll get the people they need and the skills they need. Do you feel like there's

a shift right now? And we talk about this all the time on Bloomberg Surveillance about how there is constraint on the fiscal response to crises at this moment, because when you're dealing with inflation, you're dealing with the situation where you cannot borrow money in the same in kind of way. How are you preparing for that with the lack of ability to plug gaps with simply selling bonds. Hey, look, there's a big macro economic world out there and we're

a small piece of it. We get buffeted by international and national things all I can do is prepared, and I've prepared by you know, making sure we have a lot of dry patterns they suggested before billions of dollars set aside. I can't go out and borrow my way out of this. Maybe that's a little game they play in Washington. You can't do that at the state level. And when you look out today and you hear all of these executives of major alternative investment firms, many of

which including Apollo. We're gonna be speaking with Apollo coming up, have moved recently to Connecticut. What are you listening to? What if you heard from them that you find most compelling to sort of shape your narrative going forward. I think they like being here. They don't necessarily have to be in New York City or Boston, depending of you know, five days a week, maybe it's one or two days a week. Otherwise, I think they like the lifestyle here,

They like the coach system. They like the fact we have a very well trained, smart educated workforce helps them grow and expand right here. Do you have more tax hikes planned for anyone? I know that there were tax hikes overall, perhaps not for the middle class, but overall there were some tax hikes that you did with your first budget. Do you plan on doing that again or was that a one time thing? No, we didn't. We

didn't do that. As I said, I was the first guy not to raise the income tax, you know, on anybody, and we're not doing that. People want tax stability. They want to say, what's the state not only look like now, but what's it gonna look like in five years? They can plan according to Look. I come out of the business world. I need to know what the world's gonna look like in a few years so I can put together my projections and make them happen. Why are you

a Yankees fan? They like to win, blow, blow anything, And we are looking at a situation after the Mets going on, and you've been trying to encourage CVI Cohen, who is also a resident of your state, to buy your local team. Is that correct? Yeah, we have the yard Goats. It's an amazing minor league baseball team up at Hartford, and uh I doting thought, boy, if you want to get a foothold here bigger in Connecticut buying the yard Goats and make them a Mets franchise. So

that's your pitch to him. That's why is he so give us the inside scoop? Is he going to buy? I think he plays his cards pretty close to the best. I think so too, Ned Lamont, thank you so much for being with us, Governor of Connecticut, here with us in Greta. Right now, we have someone who has been in the bond market for decades, Jim Zelter, co president of Apollo Global, who has really helped found the entire credit business which now has more than three fifty billion

dollars of assets under management. And as John's been talking about all morning, this was the day of bond vigilantes. This is the year of bond vigilantes, and this is raising so much fear among people who have gotten used to zero rates over such a long period of time. Are you more nervous today or more excited? Well, you gotta respect it. Um. First of all, nice to be here this morning. Um. You know, certainly there's a big paradigm ship going on right now, and you have to

respect the markets. As you said, the body vigilantes, they'll get rates where they should be, more so than the Fed or the central banks. But um, it's an interesting paradigm shift where you see where rates have been, and we've been in this period where uh there's been an undoe focus on low rates and it's put valuations very very high. So it's a period of transition. You have to respect it, but also you want to be on your front foot, which we've been able to do over

the last several months and will continue to do. So what does that mean, Well, what it really means is if you've been proved in the last decade and not not been over your skis and valuations and have been thoughtful about what you put on the books. There's a very interesting time. The cost of capital now matters, purchase price matters, and those who have capital and have a lot of flexibility in their toolbox, you will find many

interesting companies from which to give capital to. Are you taking more risk right now or less risk than you are a month ago? You know, we were measured. We run a very very large platform, as you said, over five fifty billion and aggregate over almost four billion in debt. You really can't pick the bottom um, it's really impossible to predict. You can prepare along the way, but we are we are methodically putting opportunities to work. Um, We've

been active in the CLO market. We've been active in working with some of the banks on the large stocks indications, Citrix in particular. So, you know, I think I have a healthy respect for what's going on, but I don't think we are in the corner of cowering by any means. I love the sanitized language that you're using. And then I think about some of the stories that we've written, including you're talking about clos. We've worked with banks, We've

helped them. You made incredible amounts of money, especially recently with UK c ls in the wake of some of the volatility with citrics. The banks that are all with all of these hung Bridge loans, right commitments that they made to finance mergers and acquisitions that are perhaps not priced the way that they were at the time of commitment. How many opportunities do you have to go in and

buy some of these assets for the banks. Well, if you just put today in context with a decade or so ago in the in the GFC, the banks were arguably long five plus billion of loans and high yield. Today that number is circa eighty to a hundred billion, So it's a much smaller opportunity set uh, and much fewer, you know, not not as many names. So we we have a constant dialogue. We're a very active trader with the banks, you know, no permanent friends, no permanent enemies.

You know. We we act, We act very very in great dialogue with them, but uncertain names. We will we will partner um in many regions, especially in the US and Europe, with the large banks. Are they willing to sell well, I think I think it's it's you. You have to have a realistic dialogue, and it's it's a it's a challenging position. I think they want to move on,

they want to get back in business. I mean, the reality is the high yield financing markets are arguably shut down right now, um and I think that they would like to be in addition to be able to make new loans at appropriate levels and get paid fairly for those. So it's going to be an interesting period of transition between now and the end of the year. Traditionally, alternative asset managers, including Apollo have lights investing in credit that

is not traded very often. Right, you invest in a company, you get more control, you also have higher yield. Is that the same now or do you find more opportunities. And the public credit markets, given that yields are now north of ten percent in many cases and arguably north of eight percent even for pretty high rated credits, well, there's a lot of a lot you brought up there, Um. In our credit business, we are really a performing investor.

We're looking to extend, extend capital the companies that are growing and get paid back. So there's not really a distressed angle in our typical credit business, um to you, as you raised, um, there are when you had the dislocation we've had thus far, there are opportunities in the public markets, within the investment grade market with low dollar price, long duration assets, pretty interesting opportunities. And the private markets, you know, new capital is coming with better terms and

better pricing. So you're at this unique period right now where there's actually opportunities and the higher end of both of those markets. It's interesting. High yield on a yield basis is somewhat attractive on a spread basis is sort of historical levels, and you know the the spreads this morning or mid five hundreds approaching six hundred, that's typically a time when when you get interested in high yield. Right now, the yields are approaching ten percent, which is

a very attractive number. So you know, it's our it's my view that, you know, having done this for a few decades now, things are happening faster and faster and faster. The rate rise in the US and globally in the last you know, six months has been historic in only the space speed which has happened, but also the amount and in the past that might have happened over twelve, eighteen,

twenty four months. So it's my suspicion that by the time we really are officially in a recession in twenty three or twenty four, the opportunity to buy paper will some of it will have evaporated. So you have to be measured in patient along the way. Do you think we're going to see a default cycle a kin Toy saw in two thousand and eight or even some of

the prior ones into the early two thousands. Yes, you will see some degree of a default cycle when you you can't slow down the economy with the breaks that the the monetary policy is leading to today without expecting some accidents, it's going to happen. Reside reside mortgages have gone from the low to mid two is the north of six percent. There's going to be a default cycle. It may not be as pervasive, it may not be as wide and deep, but there will be some companies.

And also not only the amount of debt, but the actual interest costs have have have increased dramatically on a floating rate basis. What's more attractive to you at this point looking for those idiosyncratic companies where you want to invest in or investing in niche investors UH actually going to other asset managers and saying we'll give you money, We'll give you a stake in our assets and go

at it. Well, my answer us obviously both. Um. You know you're alluding to our recent announcements in Diameter, in Sofa, Nova, in Havevelli. These are all great managers that are proven their their wisdom and their judgment over time in their in their strategies. We're providing capital for them to grow. At the same time, we're very active on our own accounts, so you know we have we have a large platform,

We're connected to a lot of folks, Um. But I think from us you'll see a strategy of being able to do both of those in concert you mentioned clos and I mentioned the United Kingdom. I know that that has been a public issue in terms of how much money you made buying clos at the right time and then seeing a policy response from the Bank of England.

How much are you playing in the UK market right now? Well, I think from our perspective, the UK market, you know, it's it is a robust economy going through some great challenges, and you know, we were very active in post the GFC in the resi market place over there. I suspect in the residential market, in the commercial real estate market, you'll see us active over the next couple of years

as they go through their challenges in the economy. Um, it's earlier, you know, really our activity in the celo market was really US and raw the Europe, with some in the UK. UM. But as you said earlier, like the cello market right now, if you look at the most senior tranches, um, it's a pretty draft coney assumption. They're assuming ten plus percent defaults for the next five years, which we think in some cases an opportunity to be a buyer. And is in Europe a similar story kind

of taking place or is that yes? I means well in my view, Europe is a bit behind the US in terms of it's always um a bit tighter when the market's tight, and it and its accentuates the wides and courage of volatility. So there's plenty for us to focus on right now in the US. I think Europe and the UK will be a twenty three and twenty four opportunity set, but certainly the US is our primary

focus right now. When we talk about investing alongside some smaller niche investors, do you have any interest in a big European bank that might be going through some distress, that might be splitting up certain aspects of its business. Would you ever be interested in acquiring certain aspects of

that business? Well, you know, over the as I said, since since I weight or nine, there's been many instances in two thousand twelve and two thousand fifteen where we had strategies that really partnered with the banks or we're an off tank for the banks, whether it was credit card subsidiaries in Spain and Ireland, whether it was for real estate portfolios in in Germany and in the UK. We were always there as a partners like we were in O eight O nine for the U S Bank.

So if there's a global bank and they are considering large scale strategic transactions, we certainly expect to be part of those dialogues. How much does your base case include four to four and a half percent fed funds rates for perhaps a year or even two, you know, I think that's got to be the base case. You were in a higher rate regime that has shocked the system, and the monetary policy makers are trying to really shock the economy on this on this nasty concept of inflation.

So you have to expect we're in a higher rate period for some period of time. We're not macro investors, You've got plenty of other folks that can come up here and talk to you, but we're certainly in a higher rate regime for some period of time, and that's definitely shaping this view in terms of what's required in terms of payment from a lot of these companies. Jim Selter, thank you so much for taking the time a co

president of Apollo Global. Lucky this morning not just because we have Muhammed our area around the table with us, but also because we joined by Naria Calvino, the Deputy Prime Minister of Spain, mad and Vice President, fantastic to have you with us in the building. Thanks for having me. Let's start here. The prospect of joint debt to do something about the energy crisis in Europe. Is that something

you think we can find agreement on at the European level. Well, when we were hit by the pandemic, Europe reacted in a very decisive manner on the basis of unity and solidarity. I think that now this time around, that we're faced with global challenges again, a war at the DOORSEP of Europe, we should react with the same principles. You know. Whether that entails additional debt, isissuance or not, we will see.

But in any case, we should act, you know, together in a decisive manner to tackle these challenges based on preliminary discussions. Would say the Germans, if they conveyed to you that that's something they would support. We were with Actually we had the bilateral summits between Spain and Germany this last week and we had an exchange with the ministers,

also with with the Chancellor Shoals. He was one of the persons that was behind the issues of joint debt to address and to tackle the challenges from the pandemic. We didn't go into into the details, but I am quite sure that German is aware of the need to react in a manner which makes us stronger and allows us to to face the current challenges in the best possible manner for our populations. To your excellency, there was a market consensus developing that this is going to be

a very difficult winter for Europe. It winter that may see Europe fall into recession. What's not clear is the length and depth of this potential recession. Do we have any indicators of what happens if indeed Europe falls into recession this winter? But I think what what what will happen will depend on what we do. That is something I think we have learned in the last three years. So I am not really deterministic in the sense of this is what's going to happen. We need to now

take the right decisions to avoid this situation arising. Where mid in this work in the in the World Bank and I m F annual meetings. This is a very challenging and delicate point in time. The global economy is slowing down, inflation is is increasing in some Western economies. But I hope that we are able to make the right decisions to avoid these scenarios to arise in practice. And what do we say to people who say the

initial conditions are such that there's almost no policy flexibility. UM, the ECB has to address inflation, UM, fiscal space is limited and if you go too far, the bond vigilantes may come in. Just look at what has happened to the UK. And the reality is that even if governments wish to move, the amount of measures available to them is much more limited than in the past. It is indeed tricky. It's not easy to to articulate economic policy these days. I think that one basic principle is a

good coordination of monetary and fiscal policy. From the perspective of Spain, just to give you an example, we're very strongly committed to pursuing the path of deficit and dead reduction, and I think that is going along and helping monetary policy implementation in the EU. I I do hope that we find the right balance, you know, between fighting inflation and not endangering growth, because if we want to pursue as fiscal responsibility, growth and job creation is a necessary

function for it to be sustainable. Let's talk about the growth forecast from both the Banker Spain and from the Spanish government. The Banker span understand for twenty three is at one point four pc, your government at two point one pc. Do you think that articulates to the Spanish people just how much pain the economy is about to go through. One thing that's been thrown at this federal reserve is that their forecasts have been unrealistic, that they've

been too aspirational. Is that realistic correspirational? No, it's realistic absolutely. In you know, we had very strong growth in twenty twenty one, around five point five percent. We're having very strong growth in twenty twenty two around four point four percent, and that's a quite prudent forecast. And what we anticipate

is a slowdown of growth in twenty twenty three. Obviously, I mean, the European economy is very much affective by what happens in Germany, so it would be unrealistic, you know, not to think that there will be a slowdown, But all institutions, national, public, private, international, they foresee the Spanish

economy to continue to grow in twenty twenty three. And there are some elements that make it particularly resilient and strong at this point in time, whether it's the FEDS aggressive interest rates hiking cycle, or the strength of the dollar. There's a perception that a lot of people are going to be going to Washington and talking to the American authorities and saying what you do here has major repercussion, not just for Neurope, but beyond that, especially in the

developing world and US. You must have a global perspective. Do you think that's even a realistic conversation to have in Washington, d C. These days? I do think they are well aware of the impact of their decisions throughout the world. You know, just like putting actions in Ukraine are having a worldwide impact, which is not only having to do with security, defense, not only having to do with inflation. Also, food security is a key issue that we will certainly be talking about in the course of

this week. I do think that the U S authorities are well aware of the impact of their decisions on emerging economies and on on inflation throughout the world and growth throughout the world. Of course, do you think they should snap back from this tiny cycle? Well, you know, I would never there to to say anything to a monetary policy authority. I am, I am. I hope that they will get it right. You know, both in the

US and and in Europe. I mean, the sources of inflation are very different on both sides of the Atlantic. It's a demand driven as well as supplied driven inflation. In the case of the US, it is really a supply side shock you were talking about in just a moment ago. It's it's energy prices going up. Is the underlying course of inflation in the EU that would call

for a differentiated monetary policy. But as you were rightly saying, interests exchange rates are very very sensitive and very important in these regardens, so that that is driving the relationship between monetary policy in different parts of the world. I really hope they get it right. How clue me is this going to be in a couple of days? Dan in Washington? How a pressing is this meeting going to be? Well? I think that we're quite used to tackling and dealing

with crisis. Since you were referring to two thousand and seven, two thousand and eight, I was already around at the time dealing with financial regulation. I think, you know, ever since, we haven't really left a very complex scenario where multiple inter relationships are hitting each other and having an effect, you know. So I think that it's good we have

the G twenty. It's good that we're meeting this week, and I hope we do have a good outcome in terms of articulation of a good economic policy at this point in time. Let's do that against so diplomatic as I would expect. Thank you, now you're calving another Deputy Prime Minister of Spain, Vice President, Thank you, yeah, Gandray Holden, host of City Joint just right now, the chief US Economists and you. Let's start to have why another seventy

five for you in the next month. So I think it really goes back to what you were just discussing that the FED has two issues here. One is an economic fundamentals issue, and there that's right. There's been a lot of progress in terms of tightening financial conditions, probably further to go, a lot of that's already priced in.

But then they also separately have a communication issue, and I think that's what they're managing, and that's what you've see in some of those comments from Evans and from Brainerd where yes, of course interest rates get higher and you get into a range that may be more restrictive. You start thinking about should you slow down, should you pause? The issue is from a communications perspective, how do you explain to markets in the public that you still have

resolved in fighting inflation. If you're slowing down rate hikes, you're pausing rate hikes. And it ultimately is back to the data. Is the data going to give the FED flexibility to do that when we see CPI slowing down, when we see a job market that's loosening. Um, So I think that's what they're really watching. Now Are we seeing any of those things? Are the two things that you mentioned. I think you can argue in labor markets maybe saw the first sign of some loosening and you

heard Vice share Brainer talk about this yesterday. Um, where we had job openings come off meaningfully. So we had a ratio of about two job openings to every one unemployed individual. Historically normal ratio would be maybe one one point one. That came down now to one point seven openings to everyone unemployed individual. So it's moving in the right direction for the FED if they want to see some of that excess demand coming off. However, that the

level one point seven openings to everyone unemployed individual. I mean, just intuitively, that's a lot of excess demand for labor that's still out there. And uh, Andrew, we have a big release this week cp I UM is there a level that you think shape markets confidence one way or the other. So consensus, I think is eight point one annualise? Is there a one number or do we need several numbers of a certain trend to really kind of move

fed rhetoric? Yeah, Hi, Greg, I think it really is going to come down to where does that core monthly inflation number come in. That's what we saw last month where it was a stronger core reading, and Brainer talked about this yesterday. Core goods in particular stays strong. There's a pretty broad consensus that core goods prices should be coming off. Until recently, at least, we had commodity prices that we're moving lower, used car prices that look like

they should move lower. We've seen that in the wholesale prices. So we're really watching that core goods component in the release to see if that slows down. Right now, we look at that that core CPI inflation month on month, we have that at city at zero point five percent. Month on month consensus around zero point four percent month on month, you saw that slow down to a zero point two or even as zero point three, that would be a signal to markets that maybe you're getting some

easing and price pressure. Um. I think though the risks are actually still to the upside that you know, maybe we'll see that zero point four even zero point five like we're projecting. Andrew picked up on that quote as well from Vice champ Raina. She said there was ample room for marching recompression to outpreduce goods inflation as demand calls,

supply constraint, seas, and imagries increase. Andrew tell me the pot of inflation that's actually going to be stick here, and then Greg and I can have a commis sanction about what that means for corporate profits. So I would take this back to the labor market. I think, like I was saying, there are reasons to think that core goods inflation might slow down a bit if I look at services, labor intensive services, and then I go back to that job market where we have one point seven

job openings for every one unemployed individual. We have wage growth according to the Atlanta fit Wage Tracker. That's still running upwards of six point seven percent year on year average early earnings a little bit slower, but still well above levels that would consistent with two percent inflation. That's

where I really worry about persistent inflationary pressure. You'll have some pressure in rents, also in shelter prices, that's basically lagged effects from price increases that we've seen in the fast but in the past. But really non shelter services and the tight labor market is where I would be most concerned about persistent inflationary pressure. Greg we often talk about the SMP five hundred and whether the federals F

has a price target. I wonder if I've got an EPs target because right now you've got the vice chair nd of guess that there's ample room for marching recompression. Isn't that basically the FED sounding the earnings in corporate

America are going to come down. Yes, But she's not wrong either, because you're looking at record profit margins right well above anything we've seen on a long term trend basis, and so there is ample room, right and so um, you know, our expectation is profit margins to come down. I've been saying that for over a decade now. But you know from labor costs increases, just input costs generally U on the rise and revenues slay to come down.

And keep in mind onhan that corporates have put on all this low cost debt, that that's a good news bad news store. The good news is when you know the operating leverage is working in your favor, you you have ample profits. Uh. And when that reverses, it goes the other way. So I think there's more of a downside deceleration or acceleration to the downside than anticipated. And you just find a question from me to you, this seventy basis point hike in November, is that the last

one of the sinko? It? Maybe? It maybe? And that's where it comes back to does the FED get that flexibility from the data? I think if if you see margin compression like you were just talking about, if you see goods inflation that's slowing, if we see a job market that looks like it's showing some signs of loosening, that would give the FED the at least the signs that it needs to see to start that process of

slowing down. If you don't see those things and I think that's the risk we could get another seventy five basis points that your subsequent meetings. I'm sure at the market will price to pivots somewhere in between at some point in our future. Andrew, thank you. Andrew Hollin host Ifer City, looking for seventy five for the FED next month.

This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene, and this is Bloomberg