Surveillance: Inflation Persistence With Gray

is with Jonathan Gray this morning. Shall absolutely thank you, Tom John, thank you for joining us as the president and CEOO of Blackstone. You are coming off what you're calling your best quarter in your thirty six year history. Now, records are very hard to keep beating. What do you tell your investors about where you go from here and how you squeeze out that next let of growth. Well, Shinale, it's great to be with you. I'll just stop for a moment and talk about the quarter because it's nice

to focus on it. We really delivered for our customers. We had nearly record appreciation in our funds. We had extraordinary fundraising and for our shareholders record fee related and distributable earnings. And what's driving that, I'd say is a couple of things. First off, is where we focus in terms of investing really thematically. Uh, some areas like global logistics, software and technology, the travel recovery out of COVID, all of those have done quite well. You saw that in

the quarter. And the second thing I note is we continue to expand what our business is about, who we invest for, where we invest. We're moving more and more in core plus real estate and infrastructure, direct lending UM and we're also serving more clients. We're serving more institutions, retail, insurance, and we've described it as a ship that's been operating

in a narrow channel moving to open water. So it was a great quarter for us, and we're excited about what we can do more for our clients now, John, A lot of this has also come from fund realization, you know, investment realization. You've said you've been selling assets as well as investing in them. Now, is it getting harder to invest at these valuations and with all of the choppiness we're starting to see in the markets, Well, it's certainly trickier as values move up to deploy capital.

The good news is we have some competitive advantages. One is we operate in almost all our businesses at very large scale. So this year we've done something like thirteen public to privates that we've been invested in. Uh, that's a real competitive advantage given size. The breath of our platform continues to expand, as I noted before, that helps us a So many of our large investments were in

our newer areas. And then again what we're trying to do is find interesting areas and some of these thematic neighborhoods that we love where we can buy in at a more favorable price. So we bought in India an automotive parts company several years ago that had at that time a very small ev business, but we saw a huge potential. We invested in that considerably. The company is called sona com Star. That company has gone public. Hugely

successful investment. We made something like fifteen times our investors capital because we found a really great company that people didn't realize was an on theme investment. And we're doing that this quarter again in the garage door opener business with a company called Chamberlain, which owns the Liftmaster brand. It's a play on the housing recovery that's happening, as well as e commerce and access to homes, which makes

so much sense through the garage. So I would say our response to a high price market is trying to buy things we like, but do it in a little bit of one derivative off or where we find value in those areas, and that's the real challenge. Do you agree with some of the competitors that you have in the banking industry, some of you know that James Gorman over at Morgan Stanley, John Waldron over at Goldman Sachs.

Do you believe that they have it right when it comes to inflation, that perhaps there are many who are under counting how much of an issue it's becoming. Yes, I would agree that inflation is definitely becoming more pervasive, more persistent than people had hoped uh. And I think that's happening for a couple of reasons. One is, money supply has grown really significantly by more than a third since COVID, which happened monetary fiscal response to the crisis.

But it puts more money in the system, and then at the same time we have some big structural shortages. So in housing we've been building for Yeah, we've been building and fewer homes than we did in the past. We've been investing a lot less in energy of course, um for that, you know, because we're trying to balance that out in terms of green sustainability and so forth. And we've seen fewer people in the workforce. So go ahead, sorry, Jonathan, I want to get away from the CEO speak and

talk about with the structural solution here in weakness. You came out of the University of Pennsylvania the year of Bill Clinton. You're a card carrying bona fide Democrat. You've been hugely charitable, You're an icon across the nation for charity. Help the Democratic Party now with some charity. How do you guys put the progressives and the moderates together? What's the great formula? Wow? Um, that is a big assignment. We're sorry to go. So I think it's where there

are shared objectives, you know. I think there are things where you could say, how can we help people on lower and middle income areas and do things that drive the economy and drive opportunity for them. So immigration would be one where I think we can help the economy. We can help a lot of people. Ideally we can bring people out of the shadows. Housing would be another area where if we build more housing, that could drive you know, down the cost of rental housing and and

buying homes for lots of people. I think in a green energy context, building housing would help a lot. Education, more investment, doing more and vocational schools, community schools, uh in order to help people. What I want to do is create more opportunity. I think the debate in the Democratic Party is about whether we should fundamentally change the system we have or should we give more opportunity to

people who have less opportunities themselves today. And I vote with that second camp, which is I think we have a powerful system that creates incredible companies, but more people need access to it. My wife and I created a program, New York City Kids Rise, in order to give low income children a new city community to yourself. You're buying a building in northern Manhattan in hard cash to build the Gray Elementary School, right we we help support Harlem

Village academies. It's certainly something that's important to us. We named it after my grandfather, Lean Gray, who believed a lot in education, the opportunity it created, and we do want to help as many people as possible. And I think that debate that you touch on, Tom is so important because there is a solution where we can bring more people into the system, give them more opportunity, and still keep the you know, the energy and power of our economic system to create lots of jobs and wealth.

So that's why I wanted to go this idea of pairing some of the social objectives with the financial objectives of the Democratic Party. We've heard from them this desire to change the composition of a FED in large part because of the oversight of Wall Street. And I do wonder, from your vantage point of a seven hun than thirty one billion dollar firm that's expanding into an industry that typically has been private and not regulated as tightly, what

do you expect and hope to see on that front? Wells, as it relates to our firm, I would say we we are regulated, certainly in lots of different ways, and we take that the responsibility to transparency how we operate is really really important. I think the difference between US and large financial firms banks is uh, they're highly levered, right, they operated ten to fifteen times leverage Uh. They also have access to the FED window and their depositors are guaranteed.

None of that exists in our private you know, in our business managing capital for third parties. So we are regulated, but it is a different type of regulation. Our activities are different. And I would just say generally today, I think the financial system in the US is as healthy as i've seen. The banks have a lot of cap at all. There is really good oversighted markets. We're not seeing big accesses out there, John, real quick here, I

know this big year for succession on Wall Street. A lot of your peers have turned over the ranks at the top. Do you have a timeline over a Blackstone for taking the lead? No, we we feel pretty good about what's happening. I didn't do it to us next time. No, no, no, no, I would say this, look we we Uh, we have a really good set up here. Steve Schwarzman is an amazing leader, visionary business person, and I can tell you

somebody who's worked with him now for thirty years. Uh, it's an incredible ye from me and the other So we're sticking with our approach to be a fly on the wall and Gray and Schwartzman go out of it on politics. Jonathan Gregg, thank you so much for joining us with a small real estate startup, fir in Black on this spring. Gainst joins Now, founder and CEO of Exante Data. Yes, let's just start with this. Had a conversation recently with pimcom about the shape of this cycle.

Can you walk me through why this one's going to be different? If you do, indeed think it will be, I think we can already see that it's a totally different cycle. Right, So the recession lasted a couple of months rather than typically several years, Right, so everything is moving at a turbo kind of pace, and really that what is so different about this cycle is is not

just the type of the shock. Obviously, a pandemic shock is normal, like it's different from a normal business cycle shock, but it's also the policy of response, like just the incredible strength of both monetary But what was really unusual is just the size of the fiscal impulse we have had. And and not only is the fiscal impulse huge, it's also the stigma associated with using phiscal policy very aggressively has been kind of removed, and that means that maybe

we'll get more we're going forward. We're already discussing at this on steps in the US, right, even though we've had such a big push already, So it's a totally different cycle. Like we used to have essentially only monetary policy driving the stimulus for a multi year period, right and now finally fiscal policies stepped on the gas, and it's been enough to really change inflation expectations. And look around the world, like, it's not just in the US.

We have inflation that is on the move, it's everywhere, and we even have a bunch of central banks that are like feeling kind of behind and have to catch up. So we have em central banks that they were hundred or even more basis points in one go, and they would say a couple of months ago that they would be on cerri for a long time. We have the UK where we thought they were going to be in serer for a long time and now expectations they're gonna

hight next month. Things are moving really, really fast. The consequences of this shift are basically disagreed upon pretty dramatically depending on who you speak to. Some people are saying it means shorter and hotter cycles. Other people mean say that it means pretty much flattened out cycles with no credit cycle whatsoever, because central bankers have their backs. What's

your view? So I think I think one point that it is really important to make is that the market has this perception from the experience over the last ten years, that as soon as the central bank hikes rates by fifty basis points hunter points, something very moderate, the economy can't take it. I think we have to be very careful there, because what happened over the last ten to fifteen years was that the global economy is gonna weak, and it wasn't necessarily that the rate sensitive sectors got

damaged by those rate hikes. There were other things going on that meant that the central bank had to stop. So how far the central bank can go is a totally open question, right, So, for example, in the UK, now the market is convinced that the UK economy can only take Hunter basis points and then they will have to cut again. Right, that's a really big question, and I think for a number of countries around the world, the economy can take a great deal more on Hunter

basis points. As you've got industry leading work with exante on COVID and you to day with your wonderful musty releases on Twitter. You focus on cases, I'm focusing on a really ugly country by country flow. The Guardian emphasizes Bulgaria Latvia in lockdown and John Farrell's briefing me on the United Kingdom are we ready for another global set

of lockdowns? So? Um, we look at cases, who look at hospitalizations, who look at fatalities, right, we have to look at the whole picture, and clearly we're in a part of the cycle where just the cases is going to give a different picture about how severe this is relative to previous waves, right, because they do don't translate into hospitalizations in the same degree. But that's it. If if you look at what's going on right now, you're right that there's some spikes in Eastern Europe. So I'll

give you an anecdote. Um, a couple of months ago, Romania sold their vaccines to Denmark, which the country I'm born in, because they didn't want to use them their selves. Right, So some countries where the vaccination rates are very low still and they're gonna have issues in the winter. Then there's a different group of countries where we have very very high vaccination rates, where presumably the hospital pressure will

be very very much lower than previous cycles. So we're gonna have pockets of winter waves that are concentrated in the places where that they are very way behind on the vaccinations. And I think from the economic perspective, you're going to find that this wave that we potentially are phasing now is going to be having much much less of an impact than any of the previous ones. And we hope, so we hope, so thank you, sir. As always data we need to frame up and see what

has changed. We do that with the chief yours economist to PIMCO, Tiffany wild enjoins us this morning. Tiffany, in your orbit, in your excel spreadsheet, what have you changed in the last week or what are you really focusing

on the it's subject to change. Well, I think um, and first of all, thanks for having me, um, But but I think what we're seeing is um and that the economy actually is re accelerating after this summer period, summer soft patch, as a result of you know, rising cases associated with this new delta van rising case of COVID nineteen. We are starting to see as those case counts are going down. Um, a pick up in spending

across leisure and travel services industries. And you know, we're talking about the labor market this morning because the claims data just came out. It does suggest to us that you are going to see a re acceleration in the labor market as well. And we expect jobs in October net job gains to to start to pick up when we finally get that report in a couple of weeks, you know, so we do see some really encouraging signs

that the economy is re accelerating, you know. And again this makes us, you know, more confident that um, you know, monetary policy can kind of get on, get on with this tapering business we expect in November and and and we can continue to recover from this pandemic. Will the

FED be surprised by nominal and inflation adjusted wage growth? Um? Well, so, you know, I think that we've had a couple of you know, just in terms of high frequency data over the last couple of months, we've had a couple of very strong wage gains that are that have been reported in in the official statistics. You know, we think that maybe there's a little bit of noise in that um and that you actually could see the wage data moderate

a little bit um. And that's as you get this pick up in leisure services, which tend to just have lower, lower wage jobs, you know. But I think if you think more broadly here, going out to the next year, you know, we should see wages accelerate. And that's because we've seen a broad pickup and productivity in the economy. You know, I should get paid for how productive I am and how much prices are rising, So we should

see wages accelerate, um, you know. And and and ultimately the fact that the labor market is getting tighter um, which which it is, that should also put upper pressure on wages across a wider range of sectors than just kind of the low uh, you know, low income and lower skilled jobs that we're seeing the biggest wage gains right now. Did you hear that, Tom Off, you're more productive, you need to get paid more. That was Tiffany money

better be listening this morning. That's Tiffany want to delivers that sermon on what should happen in the labor market. Tiffany, talk to me about what should happen. November three, Matlazetti was in your seat twenty four hours ago talking up a rate hiker the FED year and next year. Where

are you giving the team at the moment? Yeah, I mean so, so ultimately we we we are we think that you probably get a rate hike in the beginning of three um and and the reason for that is is that we still believe that inflation is likely to moderate by the end of next year. Now, there have been some you know, kind of a series of shocks if you will, you know, that have kept inflation you know, more higher for a little bit longer than I think

people were expecting. Um, you know, but we do ultimately think that that still comes down that should give the feed a little bit of breathing room, uh, in the in the latter half of next year. Um. And as a result, you know, we think that they will ultimately it will be three before before they hike. Tiffany, do you think that FETE officials appreciate the tightening of the

labor market to it's full Um? Yeah, so so I think that there are you know, they've certainly highlighted what what we would agree are sort of quote temporary friends that are probably resulting in the labor market being tighter than it otherwise would be, and you know that's health, you know, just general anxiety around health as a result of this pandemic. A lot of these service jobs, of course, are very public facing, and then of course there's been

child childcare disruption. But I do think there are some you know, kind of more medium term factors here that will take a little longer to work themselves out, but ultimately we do think that they will. And and that's related to actually geography, which is kind of weird, but this work from home dynamic has really changed, you know, kind of the local market dynamics and where jobs are demanded.

So there maybe not you know, you're not demanding as many jobs and some of these urban city centers, um, you're you're demanding those jobs out and kind of more of the suburban or maybe even the rural areas. And so we're getting that mismatch. So really the question is how long does it take for for that labor to

sort of migrate out. We're kind of we're optimistic. Um, you know, we look at at data on migration from the credit reporting agencies and it does suggest that you know, some of these lower income zip codes and lower income folks are able to move. We've seen excess moves from from those zip codes, so that's good news. But ultimately,

these things take a little time to work out. Um and then and then also keep in mind that usually a hot labor market does draw people back into the labor mark, and we saw that from seventeen to twenty nineteen. You know. So I do think labor markets will get tighter. We do think you get some wage inflation, you know. But again, I think all of this is will sort of be moderated to some extent by by some labor supply gains that we're going to get next year as well, Tiffany.

In the meantime, as we were talking about earlier today, the market expectation for five year inflation, if you look at TIPS, is actually climbed to the highest since two thousand and five, at two point eight percent north of that.

Do you think that that is correct, that that is an accurate assessment of the five year inflationary outlook, Well, you know, I think that, you know, obviously there's more going on with the you know, the TIPS market than just in expectations around the near term path of inflation, you know, But what I would say is, I think that the path has become more uncertain lately, UM, and we believe that kind of over that five year time horizon,

it's it's going to remain uncertain. And that's because we think, um, we're moving into what we're calling this kind of age of transition where you have these kind of brown degree transitions, some um, you know, trends towards de globalization and more of a policy focus on inclusivity. And that's both on the fiscal and monetary side, you know, and that has the potential to produce some some upside um and inflation.

But I would just also keep in mind here, and I think this is much less talked about, is that there also some downside risk to inflation as well as a result of this pandemic coming into the next five years. And that's that we've seen productivity and innovation really get jump started, um as a result of this pandemic. You have the work from home, but then you also have

trends towards digitization, um, you know. And I think you know, the other thing is is we've also seen a big build up in in debt and leverage as a result of this pandemic. It's okay now because interest rates are low, but if we have a negative economic shock, it just increases the risk that you get this uh, you know, sort of debt fuel deflationary environment. So I think their risks to the upside and the downside here. You know, of course the market's trying to incorporate that, um, you know.

But I think the other thing to keep in mind here is that if you look further out in the tips market, kind of at the five year five years forward, not to get too wonky, it is kind of trading right around the Fed's target, you know, maybe touch above. So I think the markets of giving the FED a lot of credibility around its long term inflation goals. It's tiphany.

I was reading through the new outlook. Congratulations by the way, because don't how much work goes into that for you and the team, and within that, it just seemed to me that as a team, you seem to think the FED could be constrained down here, that it can't lift rights too much. What do you think that means for how long this cycle will be the shape of this cycle?

Given how constrains you guys think the FED is well well Ultimately, we think this cycle you know, likely will be faster than than what we saw after the Great Financial crisis, you know, and part of that is just because of the policy that we've seen, the really extraordinary policies. So instead of you know, taking years to get back to trend growth after the two thousand eight procession, you know, we're likely going to do it, uh, you know, within

within the next several quarters. And that's really a testament to the amazing physical policy that we've gotten, you know, So just by that definition, this should be a faster you know, kind of a faster cycle, um, you know, but in terms of a FED, so you know, here, I really think that when you start to raise rates, uh, you know, as the tightening really gets in the cracks,

as as sort of was famously described. And and really the question is what is you know, who is the kind of weakest link and is that weakest link systemically important? And that's really going to determine how much the FED can FED can tighten. You've seen a lot of businesses that have had to take on more debt as a result of of just the economic disruptions associated with this pandemic.

And so when the FED starts raising rates. We think that it's really going to turn out that the economy is is more interest rate sensitive maybe than people thought. The other thing to keep in mind here is that the Fed's balance sheet is much larger than it was pre pandemic, and if they want to start to normalize their balance sheet, that just means they're gonna hike the FED funds rate a little bit less than the otherwise

would have. So all of that suggests to us that you know, the target rate and in this cycle is probably going to be lower even than it was last cycle. Tiffany, thank you and congratulations from us and the team for fifty years of pim cut a lot of worse going into that. Thank you. Steve Chef runs with us. Now. I won't speak for State State. Let's build on this march into the epicenter of the earning story. The difference between the companies that can execute and the companies that

are struggling to stave. What should take on that right now? No, I think this is this is the story. Um, it's hard to imagine the multiple going a lot higher next year. You've got growth slowing, some inflation. I think is is very much not transitory, and I think it's going to be persistent. So you're upside of the market is your earnings growth, and right now, so far through the earning season, it's it's it's been pretty good. Um. And I think what we're looking for is how do the margins hold up?

Our company is able to pass on price? And at a stock level, you really need to focus on companies that have pricing power. They have pricing power, they can pass along those costs. Then you know what, inflation is fine for them? Uh if if you can and it starts eating away your margin, I think you need to expect to get to get punished. And I think that's what we're looking at, and we're sifting out the winners

and the losers right now. Steve Steve off has return for the last three years and one of his portfolios solidly upper quartile. And this speaks to federate it and often the rest of you guys saying you've got to be in the market. Speak now to our audiences who are saying, I'm scared stiff, I can't participate. Yeah. Well, first, it's been an honor to grow under Steve. I think he's terrific, But to that point, you've got to look

in the market and say where's the opportunity. So, if we are in an inflationary environment, if that is going to be a bigger impact in the market, which we think it will, the question isn't do I cut bait and run. The question is which parts of the market, which trades, do I put in place? You know that allowed my portfolio to benefit from that trend or at least get hurt the least. And so you know, building up from fixed income that's shorter duration fixed income something

into zero to rerange, not as longer term. It means a little bit more high yield and e M debt where you've got shorter duration and more spread tightening capabilities. It means equity income dividends stocks to supplement your fixed income because you're getting a higher yield and it's a little bit more inflation durable. And it means value cyclicals right now where these companies can pass those prices along.

And then I think the last one is their select opportunities and international and our view, particularly in the international small and midsize space. So you can't just look to run away because if you're not in the market, you won't achieve your goals, you won't get that compounding. But you've got to look for the areas that are most advantaged,

and that's what we're doing across our portfolios. Steve. At what point do higher inflationary reads that we get on a repeated basis, this idea that perhaps it's not transitory, start to lead to higher yields that really put a crimp and equity returns. Yeah, it's it's a great question. I mean, I think it depends on what kind of

equities you're talking about. I think you're gonna see some of the growth names underperform sooner, because remember, when you buy a growth company, you're buying it for their earnings out five or ten years from now, and that can get inflated away. If I'm buying a value cyclical, I'm buying that because I think an oil price is going to be more tomorrow. Well, that's not gonna get inflated away. Um. And I think that's the nuance there at least. But

but we do have to watch yields. It get too high do hurt multiples and that could happen next year. What you just heard their folks from Chivalrone is textbook where growth is a longer term x axis and values of shorter term view. John did I hear earlier on bonds of shivar own recommended the triple lovers all cash from what do you want to finish? That? Was that what you were saying that that's fake news. I'm calling you out the fake news, Steve. Thank you, buddy. Always

gonna catch up. Thank you very much, Steve Chevron that at Federate today. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten AMI 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 In.

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