Surveillance: High Returns Over, says Tangen

Bank Investment Management. Forget about it. This guy is steered the aircraft carrier of Norway's prodigious oil wealth. Forward through the Storm is Nikolake Tangan and what you should know is he's the most interesting portfolio guy out there, including his support of a Sterling Munch show at the British Museum a few years ago. Nikolaion, want to go to the success of your show and obviously the classic painting the scream. It seems everyone now is screaming, how did

you do fo blended and not screamed this year? Well, um, I would say we're screaming, but we are. We are pleased with the results and the funds up fourteen and a half present last year and in absolute numbers is the second best year we have had in the twenty five year history. I want to talk to you and quiz you closely on the uproar right now on the

value of E S G investing. You've got a number of companies that you you stepped aside from and in nine thousand holdings you say we're not going to mention who they are, blah blah blah. I want you to give us a primer now on the plus, the minus, the pros and cons of E S G Alsa mcclearly plus. And you know, perhaps in the old days there was a bit of a trade off between uh, you know E S G and returns. Now I really think they

go hand in hand. The thing is, if you if you own a company now which is not sustainable, doesn't have a sustainable business model, you know, not only will you not get finance, you not get insurance, nobody would want to work with you, and you will have no clients. So it just really goes together to a degree we haven't seen before. Tell me about a sharp ratio analysis

of what you do. You are the aircraft carry You can barely move the needle with any individual stock or even sector selection as well in the firmaent we're in, including what we saw from the American Central Bank yesterday. How do you find alpha? How do you find a sharp ratio return? That's constructive? You're absolutely right. We are a very large fund and so there aren't that many places we can hide it, and we are quite index

nearing what we do. But at the same time, there are a lot of smaller tweaks we can do in terms of give us an exaction, give us an example. Well, there are companies we can choose not to own. For instance, um uh, you know wire Card in Germany, we did not own that it collapsed. He saved us, you know, a huge amount of money. So we can do this negative selection, which is which has been good for us over the years. Um so we do have some means.

Actually last year we have we had access returns of of point seventy five, which you know was like eighty billion Norwegian growner. So we can do things even though we are in next year. Lisa, what he just said there is absolutely fundamental to the mathematics of management. It's not what you do, it's what you don't do that

adds alpha, which you don't buy. And we were talking about E s G and how you're moving into E S G and I just want to sit on that for a minute, Nikolai, because I know your fund has been really forward on this at a time when oil is outperforming, and we see that this transition has been incredibly difficult and in an era of inflation, it is the energy stocks that are doing the best. How do you arrange around that? Well, we are we owned the big integrated old companies, and you know, there are two

ways so handled kind of navigating these towtory. You can either sell out of the companies and just run away from the problems, or you can stay in the companies and be a constructive and long term shareholder and actually help the transition. And that is what we are doing. So we are there. We've got clear expectation when it comes to how we want these companies to behave and and to do their business and um, and we own them and you know we have made money in these Nikola.

Can you add to that portfolio holding in tandem with your expectation that oil will continue to rally or does that go against sort of the fundamental ethos of the fund no, there is no there is no contradiction here. We can own the integrated oil companies. We think they have a very very important part to play in the in the in the green transition. Indeed, it's interesting when you look at the various um uh you know, uh

ways that that they do. This is uh the yeah, you know, they're really on top of the technology and and very very important players. So we we really want to be the owner here, Nikolai. At a time of such great inflation, you've come out and you've talked about how you expect returns to be a lot lower in the years to come. How much lower and what are you doing to offset some of the obligations that you're gonna have to cover with the returns that you previously

enjoyed but are not going to be getting. Yeah, well, first of all, we are very very long term owner, right. We have an investment horizon of you know, thirty to two hundred years, so we're looking at this in the long term. But it's it's clear that we are now starting at a at a point where interest rates are extremely low, markets are very very high, Inflation is rampant across across the world, across sectors and so on. So

this is not a great starting point. So therefore we do tell people and Norwegian people that they should expect lower returns going forward. I want to ask some more questions, Nikola. I want off script, but you just mentioned the word rampant, which the Financial Times headlines today is rampant inflation. Do you have an optimism that inflation will come in as we move on from the pandemic and we get our supply and demand dynamics globally straightened out. No, I think

it would remain high for a long time. One more question, if I may, and this goes to your philanthropy. You're the largest collector of Nordic ard essentially in the world. With your vast wealth that you've garnered, you do have what I'm gonna call a Norwegian and Scandinavian perspective. Nikola. You have a hundred and twenty some mile border with Russia and Norway, and of course all eyes are to the east in Finland. What should be the Scandinavian response

to the new Russia. Hey, that's a that's a tough question. I think that's beyond my level of expertise. I think you should ask you know all the people in NATO about that and uh and not me. Lay I guess that might be your answer. Thank you, sir for joining us. Nikola Tangan that of the Norwegian Wealth Fund. He is

one of the great philanthropists of New York City. And of course Blackstone Front and center now and the debate on investment in real estate here Arsenal Bass, thank you, Tom John Gray, thank you so much for joining us. Of course black Stones President and CEO. Oh John, you just have come off of a quarter in which you brought more money in in three months than you often do in a single year. How does this continue into the new year with all the troubles we're seeing in

the economy. Well, Shinali, it's great to be here. I just want to take a moment and talk about this quarter in the year we had which were amazing and the best in our firm's history. We had a hundred and fifty five billion of inflows, as you noted, in terms of record levels a U m up fort and it just reflects the fact that we continue to deliver for our clients. We had our best performance in our history, and we continue UH to broaden our platform investing with

retail investors, insurance and so forth. And that's giving us powerful momentum and record results. How does this yeah continue? Yeah? With what with record results have also come record pay I mean the amount that you have risen your compensation and benefits has outpaced most of Wall Street. There's a war on talent going on out there, and I want to know how that positions you moving forward. Yes, So

two things I'd say as it relates to talent. One of the great things about our business is we have this long term alignment where our investment professionals benefit from rising incentive fees and performance fees. So when we deliver for our customers, their compensation goes up. Obviously on a year like one. That bodes well for our individuals, and it creates variability in our comp structure if things head

in the other direction. So we've got I think, a special position, and we've been able to pay our people well and still grow our margins. So we feel really good about that. You also asked about fundraising continuing, and on that point, what I'd say is, even with the markets off, the SNP is still up from where it was two years ago. And we're also seeing the fact that I think a lot of investors are gonna be looking to move out of fixed income, and we think

alternatives in our firm will be a beneficiary. So on multiple fronts, we feel pretty good. Now. A lot of people are worried about the market today, but you're investing in firms for ten fifteen years down the road. So are you taking advantage of this opportunity to deploy more

money in any case? Well, we certainly, as investors with new capital we have a hundred and thirty five billion of dry powder, recognize that prices, particularly in public markets and in sectors like technology, can create new opportunities for us. So yes, our teams are on the ground. We're looking for markets that have gotten potentially dislocated at times like this, Uh, investors can sort of throw the baby out with the bathwater,

and that creates opportunities. So yeah, we're looking at things and it's helpful for new capital. On the entirety of small business. You have a real bird's eye view on small business America as some of these medium sized firms through your investments. How significant is the inflationary pressure at a time where we've been talking significantly about how big companies are able to withstand it a lot better. Look,

I think inflationary pressures hitting everybody. It's hitting small businesses, it's hitting consumers, and it's hitting big businesses as well. I would say, stepping back, what's happening to the economy is really a series of shock, both demand and supply shock. On the demand side, the ten trillion of stimulus fiscal and monetary um has led everybody to have more consumption power, so you see people buying appliances and cars traveling. That's

creating a huge demand pull shock. And on the supply side, you know, we've got shortages and energy and commodities, labor, housing, all those areas, and that's driving prices up. And so this definitely feels like it will be persistent. It's certainly pervasive, and companies have to alter to that. The companies that are most vulnerable are those who have a lot of

input costs. So if you think about a business that has a lot of labor costs, or business that has a lot of raw materials and they don't have the ability to pass on price, maybe like a food manufacturer, that's those are businesses that are vulnerable. There are other businesses, of course, that have more pricing power and less exposure to those input costs. Fortunately, a lot of our portfolios oriented that way because we've been worried about inflation and

ultimately the normalization of rates as well. John Jonathan, there is a concern here about a repricing in public markets, how far it has to go, and yet we have heard that we really have not seen that repricing and private markets people aren't selling, so you're not seeing that real time adjustment to this higher inflationary outlook. And frankly, a FED with a very different tone, do you expect the private markets to materially correct in the next six

to twelve months. I think the private markets and public markets clearly correlate and and I would say sometimes there is a lag to your point, but oftentimes what you'll see as a slow down in private market activity, so you could see less companies being sold as people reprice

assets a little bit. That can be the case. I think where it's probably most pronounced is in the technology and growth areas where the public markets have pulled back, and so I think on some of the rounds of some of the private companies, fast growing companies will be a reset that takes a little bit of time. But I would point out not all markets have pulled back. The real estate market, for instance, because the fundamentals are

very strong, particularly the sectors were focused on. We're seeing pretty robust sales, and I think some sellers are thinking about selling. They're worried about rates. Um. So I'm not sure all markets have pulled back in the same way. But to your point, there is a lag at times in the private market. John, you mentioned a worry about

rates twice in the last couple of minutes. I'm wondering what you think about what John waldron Over at Goldman Zachs had to say about what's gone on in the last couple of years, bringing into question the independence of the FED and its ability to really control the trajectory going forward. Well, there are lots of FED pundits. Um, I'm happy I've got my job. I'm not the FED chair.

What I would say is, I'll focus on the future, because that's what really matters as investors, and I think the future is pretty clear that the FED realizes inflation has become elevated and they've got to modulate what they've been doing, and so they're gonna shrink the sides of their balance sheet. They're gonna raise rates and that's the new environment we're in, and as investors, I think you

want to be thinking about that. You want to be thinking about an environment at least in the near to intermediate term where growth is actually pretty good, but inflation is running higher and the feed is raising rates, and you want to buy assets that can do better in that kind of environment. Jonathan Gray, thank you so much. With Blackstone their chief executive officer, and Sanela Basta, thank you so much jointing us. Now it's Markie pit Town

Cidia poll folio managed at old Spring Global Investments. Markie your line, we think the recent sell off and volatility is not indicative of the market direction for the year. I read your notes and then I check the time you send that at once twenty Eastern time yesterday, So I wonder whether you changed your mind after you heard

from Chairman pal uh No. I haven't. And I think once again the hallmark of the ft is they talk a lot tougher than their actions to talk about four rate increases, but at the same time the fedestal buying securities adding to its portfolio. So to me, you're really

seeing mixed actions. We're not seeing the FED that's looking to tighten, and to see the FED aggressively tightened five times this year, I think is completely out of the question from the m O that the FED has been using, where they're just as focused on the economy and on unemployment and not as focused as as maybe market participants on slamming down inflation. Margie, you are a definitive student of how the financial system incorporations adapt and adjust to

all this FED blather. Two ideas. Bill Ackman goes out, does the Treasury play, and then buys Netflix large. Let's call that the Akman gambit. And then this afternoon it's going to be what's it mean for Apple? What does all this FED guessing and the guessing of inflation, what's it mean for real people out in the real world. Like Bill Ackman, Well, I think we really once again have to look at earnings, and I think earnings are

going to be pretty good. I think margins, the early leads margins by companies have been maintaining at these high historic levels, and I think that's key to stock pricing. Yes, we've seen some areas of the market, the more speculative, some of the overly popular names have a big cratering here in the last several months, but I don't think that's indicative of the total market and the ability generator earnings.

So I think it will be pretty pretty good earning season and the markets vastly overreacting to what the earnings are going. To say, Margie, going back to the FED though, the fact that you can really struggle off the rhetoric that we heard that most people took a hawk ish You got some message from the fact that they didn't stop upond purchases at this meeting. Why is that so important to you? Well, I think it's important because that's been one of the things they've done to keep rates low,

if you remember, that was the idea. And yet they're still continue with this buying program, even though they're also talking about we're going to be tough on raising rates. So to me, there's a real dichottic me there. Uh, they're not going to start to to taper really till till after March, and it seems to me that if they really were going to do something, we would see

it now. And also I think that it's it's one thing to think that FED needs to slam on the brakes, crash inflation, therefore slow the economy and raise unemployment, and that would go against their other mandate, which is trying to maintain full employment. So I think to see wayes going up employment unemployment rates being very low. They're not too unhappy with what they're seeing, and they've never, uh at least recently, tried to overreact and anticipate the way

the market would like to see them. Amount. We've seen some big moves at the index level in the security market, even bigger ones beneath the surface. What have you been doing to start the year. What have you've been doing in the portfolio? Well, actually, I've been looking to add incrementally where some names have gotten hit. There are a lot of great names that peaked maybe in the fall, say November, even December, and a lot of those names

are down. Maybe over that period. Maybe You're to day came down say five, But I think that's the reasonable price discount for companies that look pretty attractive long term. John, it's the highlight of the day to see someone who's August as Margie Patel embraced the modern language of cratering, Never did I think I would hear that you claimed, Markie patell say something was greater. That's great, Sprint Global Investments mark out with you. Thank you. How do we

adapt to China GDP? Come on, that's a that's from that's a China statistic. I mean, we're going to put Johns on this in a moment. That's a China statistic from fifteen years ago. Well, it's you got to subtract the inflation rate out of that, so that that's not as good as news, but six is pretty good. We can't really compare our GDP numbers to China's only a whole lot. Only Kathleen Best Johnson can do that. She

joins us down Chief US Financial Economists, Actor and economics. Kathleen, how do we go from the oddities of this moment and the look back to fourth quarter to the slamming on the brakes that's predicted. How do we affect that as an economy as a nation. Well, we we've had a bumpy ride here with the pandemic. We've had outside gains in any given quarter and then we see a

pull back and and this is no exception. Um, you know, I think the Amicron variant, while it was less virulent certainly still tamped down on economic activity, and you know, beneath those numbers, you know, typically I would just comment that, you know, typically when inventories are up as much as they are contributing four point nine percent, that would be bad and it would weigh on growth. But this time

I think Mike's right, it's actually a positive sign. Maybe supply chains are easy and we'll actually have some goods for consumers to purchase once we get past this winter. Low Kath, Hey, we gotta jump straight to the FED. I just wouldn't you initial thoughts after that news conference yesterday, which just got so many people's attention. I was more surprised by how much you revealed. I didn't expect that yesterday. Yeah,

I I would agree. I was also surprised we didn't get a little bit of a pushback when asked whether the FED would would be comfortable, you know, going every meeting in his fifty basis points on the table um, he really steered away from that, said, well, we have no plans. We gave no guidance, but in a sense he gave us guided saying that's quite possible. It's not maybe their base case, um, but but you can't deny that that's at least them something considering, and inflation is

the number one thing that they're aiming at right now. Cathy, do agree with Matt Lazettie over at Deutsche Bank Asan was highlighting earlier, who talked about front loading the rate hikes and then seeing what effect, if any, that has on inflation in the back half of the year. Yeah, I think the one concern that I have, it is a big concern, is as the fallout in the financial markets,

because we know that actually feeds into financial conditions. So you could have an unwanted, really choking of economic activity where we're so trying to get the full employment right, maximum and inclusive employment. So I think that's the risk for the Fed. Guess they want to tame inflation, but you don't want to kill off the expansion while you're doing it. So the market is not the economy. That's

the common trope out of Wall Street. So from your perspective, how much of a selloff would it take for it to actually trickle into the real economy. Well, we look, I guess it would have sound like Gairman poal, We look at the broad financial conditions, so we have our own index. Others do too, so it would be more than just the equity market. But it does figure prominently the VIX index, the move index in the bond market that the spread right in the intends to TuS and

the corporate bond your curve. So you know, if we see meaningfully tightening um, one sense of FED would be happy with that. I guess it can't be disorderly. If it starts to be to go borderline disorderly, then then that's going to be a real signal for the FED that they need to be careful and slow down. Cathy, this is a difficult one to answer I now, so

take as much time as you need. But the difference between orderly and disorderly, what is the dividing line between orderly and disorderly, Well, it's there is there's no quantitative, exact benchmark that we can use. Um. You kind of know it or see it right when it's happening, and we know what things like the treasury market has trouble, you know, filling orders, or you get a gap between on the run and off the run. I know that's

a bit in the big weeds. But if you get a breakdown and kind of the normal function in the markets. That's a real big red flag. But I also think if we start stocks, you know, let's put it this way, typically you don't see a bear market in the equity market musts we're going into recession um And you don't see the your curve inverting typically unless we're heading to recession. So those are sort of the extreme benchmarks. I think that we would you know, the FED would be looking

at ket You got one more question. Scott Miners stopped the show yesterday with the study of the late nineteen forties in defense of Mr Minor and people laughing at a study of forty one, the fact is, boy, does it look the same. Do you see elements here of the late nineteen forties where we could crash into a serious disinflation or outright Eisenhower deflation. Well, it's something we

internally are debating actually as a team. Is you know, right now inflation is running hot and it may continue to but at some point Fed titans, physical policies tightening and supply chains come online. The second half of the year, you get pretty big disinflation and at some categories, right like used car prices, we would expect to see outright

deflation and falling crisis. So I do think that once we get past this inflation hump, however you want to characterize it, but we look at it's kind of a hub um. You're in for more disinflation pressures and kind of back to the old norm. Kathy, thank you. It was excited to catch up with you this morning. Thanks O bam with us. That GDP print just fantastic canticles. Chance it's that. 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