Bloomberg Wall Street Week: Marks, Beschloss, Chavez

Kevin Johnson sec Chairman j Clayton. Bloomberg wool Street Week with David Weston from Bloomberg Radio, Up, Up, and away. As the economy starts to come back, bringing jobs with it, and the U s it's new records in COVID vaccines. What's not to like? This is Bloomberg Wall Street Week. I'm David Weston. So an investment world where so much seems to be going so right. What do you do

if you're looking for some distress, some distress somewhere. That's the question we put to a claim distress investor and author, Howard Marks of oak Tree Capital Management. Well, that's a great question, uh begs an easy answer. Uh. One answer is that we're active providing solutions to companies that want to recapitalize their balance sheet, change their debt structure in some way, or just add additional liquidity. Not distress situations, but UH, there are cases where there's an appetite for

credit and uh and the market doesn't make it available. Uh. We are active around the globe, and there is more to do in Asia and in Europe than there is in the United States. UM, and UH you know there. I think we distinguish ourselves as investors UH by what we do when our strategy is not in great favor. Every strategy goes in and out of favor, and this is the time to uh try to be resourceful and yet maintain our standards. It's very challenging, no, no doubt

about Howard. Look back for a moment you had your year end. No, that sort of went through it and as I say, it was a remarkable downturn and then snap back up right away to make money. You had to move really fast. About a year ago, right now, I know that you had raised I think a record amount of capital Ktree Capital Management at the time. Could you get the money out the door put it to work fast enough? The fund we raised was actually raised

on July one, so the greatest opportunities were passed. We used the opportunities that arose in UH, primarily in March, somewhat carried over into April and May. We used to complete the investment of our prior fund. So we had a fund that was about invested UH at the beginning of and we got it fully invested. UH. That was that was the best of the buying. The market has rebounded, The economy is in the process I think of rebounding with the markable speed. At the same time, it's not

even it's uneven. So let's talk about some of those disparities, particularly things like travel and leisure. Are there still some opportunities there APPS, because that seems to be lagging behind a lot of the rest of the economy. Yes. Well, you know the easy calls, the things that are obviously

going to rebound. UH. They're not fully back to where they were in times of prosperity in terms of their UH, in terms of the investment opportunities subsiding, but they are if it's clear they're coming back, they're treated as certainly coming back. UH. And to to get to higher returns these days, you have to be willing to extend credit to somebody who's not clearly coming back. Are there any sectors you're still avoiding at this point? No, we are

open to anything. I mean, our our our style usually constrains us, for example, to not do technology. Uh, But other than that, we're wide open. Howard, it strikes me that one of the things that's different from anything I think I've ever seen, maybe any of us ever seen, is the degree to which the government, both on fiscal and monetary policy, is intervening in the marketplace. Is that sort of a dampener on your business in the sense that, for example, when it comes to distress debt, you've got

a lot of zombie companies I read. I think it's like the public and traded companies in the United States right now. Our zombie companies do not generate enough cash to pay off their dad. Does that really make it more difficult for some of like oak Tree? No? That well, that's no, that's the that's ensured. That's the kind of

situation that prevents opportunities to us. Uh. If companies have no problems, no exigencies, Uh, then then the distress investor doesn't have any problems and any act anything to do. So we we we take companies which are in extremists, are producing bad news where the future doesn't look so great. And if we can buy those securities at the right price uh, which means a price that overestimates the problems. That's how you make money as an investor. So we

don't shy away from difficulties. But isn't there a price support under those companies if I can put it that way, Because essentially money is free, they can borrow more money even though they're losing money. They're not generally enough cash again to pay service their debt. Doesn't that actually make it more difficult to get the right price for you? Yes it does, Yes it does. Uh. I mean the right price for us is to be able to buy

things for less than their worth. That's our goal. We need the cooperation from somebody who's willing to sell things for less than their worth. Uh. And usually you get that when when the asset holders feel urgency to sell. What about currency? Where are you on the US dollar? How much is that factor into your decisions? Because there are a lot of taking We don't take an opinion on currency. One of the six tenants of Oak Tree's investment philosophy is that our decisions are not guided by

macro forecasts. So you don't worry about long term weakness of the dollar. Well, I worry about it, uh for other reasons, not in saying, well will I invest in this thing which is in pounds or rupees or a minby or patios or something like that, and not tactically like that. But you know, I mean it's a concern. Uh what what the you the way the US is behaving the visa be the dollar. Uh, but on the other hand, not clear what one does about it. That was Howard Marks, co founder and co chairman of oak

Tree Capital Management. Coming up, we can beat our Wall Street Week round table of a Sani Bechelists from Rock Creek and Mona Mahajan of Alliance to find out where the investment opportunities are in this land of plenty. That's next down Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Everything is coming up roses for investors, it appears, at least this week. The question is where are the opportunities and

for that matter, where are the threats? In all of this and to answer that question, we're conveting our very special Wall Street Week round table right now of Asani USh Lost. She is the founder and CEO of Rock Creek and Mona Mahudgen. She is the U S investment strategist for Alliance. Thank you both for being here, Welcome back. Gonna let me start with you. I talk about opportunity and threats. I used to do a swat analysis, you know, strengths, weaknesses, opportunities,

threats and business plans. Take the opportunity and threats for a U S investor right now in this market, given the fact that everything looks pretty good. Yeah, absolutely, Look, it's been a phenomenal market really in many ways across asset classes. In our view, that's been driven by two

key themes this year. The first theme is clearly this rotation we're seeing, at least in the equity space um from growth into the more value oriented sectors at least on a year to date basis, and really since November of last year. You know, keep in mind, last November we saw presidential elections, we saw the approval of our first vaccines, and when you look at sectors like energy, financials, industrials up nearly set plus since that time. The second theme,

of course, is this rise in rates. The ten has gone from point nine one now also supportive of some of those value sectors and putting a little bit pressure on the growth sectors. UM. For us, the opportunity really is we do see a continuation of the reopening trade. We think there's at least one last leg to go um and that really you know, the highest conviction areas that we like there do include those that are leveraged

to higher rates. We think, you know, yields could continue to grind higher and maybe a little bit choppy now, but we see a two handle on the tenure at some point. Uh. In that environment, we think financials continue to do well. Certainly yield curve plays continue to do well, such as steepeners um the reopening, the true reopening of

the US economy. We think those the areas that do well in that environment are those that are levered to better earnings growth like leisure travel, you know, think your true reopening sectors and the final bucket we put in that the opportunities is really those that are levered to the new policy agenda. We're seeing so parts of the infrastructure market parts of five G and cybersecurity that are

being lumped into infrastructure now. Now just quickly on the threats. UM, As we are heading to the second half of this year, we certainly are seeing some headwinds emerge. First and foremost, we will at some point hit peak reopening growth here in the US, probably in two Q or three Q of this year. UM, we will have you know that

the highest growth rates we've seen probably in over a decade. UM. Secondly, we are seeing, as we noted earlier, yields continue to grind higher, driven by of course reopening, but also potentially inflation. And you know, thirdly, I think we are looking at a fed that at some point David will have to come off of this crisis level accommodation. You know, they said in the last press conference it's when they see

it in the data, not in the forecast. Well, that data is certainly going to come to fruition in the next couple of quarters. So keep in mind we've we've had a great first half thus far. We might see another leg higher in this value rotation, but at some point we will consolidate those games. UM. Maybe it's seasonal, maybe it's selling May and go away. Maybe not May this year, but a little bit further out. But just keep in mind those the tail headwinds in the second

half of this year may start to emerge. Sorry, Mona really focused right into your backyard, at least part of your backyard when she talked about investments leverage to policy because you for a long time I talked about climate and green investing asana. You've been a champion of that. We certainly heard about the infrastructure plan two point two five trillion, a lot of it directed towards climate issues.

That's an opportunity. At the same time, you need to be a bit of a stock picker if you can say that within that realm, not all climate projects are created equally. Assume you're absolutely right, Davy, then I very much agree with everything Mona said. I think added to what she said on the infrastructure side that you just mentioned.

Whether it ends up being two point to five or one point nine or one point six or you know, somewhere in between, those numbers are quite huge, and even if they get spent some of them more quickly, some of them over time, they're going to have a more growth oriented kind of impact on the overall, Econo ME and what we're seeing as we are sitting here is unbelievable amount of investments that are going into that intersection of innovation, with e V innovation, with take with medicine innovation,

with some of the other trends that we've talked about, but in particular climate related investments. So I think all of them will be also impacting markets in a very positive way. Sort of looking longer term, I agree with Mono Tho that we will have some short term corrections because you know, interest rates are historically low, even if we had the kind of bond markets particether the long end that we've had this year, we have been historically at a very very low level of interest rates, and

people have got very used to that. Those of us who've been around a few cycles know that it will not last like this, and there will be some sort of impact as inflation picks up even for a short time UH and goes back to UM to lower levels over longer term. On the interesstrar to the only last point I want to make is that UM the need for it is in the US, but also the need

for it is global. There is huge need if we're going to meet our climate goals to make sure that this infrastructure investments that we're talking about the US are also carried through globly. Mono. One of the things that we're reading about now is perhaps some risk coming from the divergence we're seeing. Uh, the United States is really going ahead full steam with vaccinations. China, if if anything, doing better than we are on the only with the

with the COVID nigeene. Europe not so much, and goodness knows, parts of the lower and middle income countries are lagging behind MONA. Is that simply opportunity for US investors or is there also some risk if the U s GE's too far ahead of the rest of the world. Yeah. Absolutely. You know, one of the themes that we're we're seeing emerge again this year is this return to US what

we're calling exceptionalism. Uh. Certainly we have been ahead of Europe, as you noted, in terms of the vaccine rollout and really setting up nicely for a strong set of summer months ahead of US. UM we're seeing this play out in the markets as well. The US dollar many expected to come into the year continuing to be weak. In fact, we've seen stabilization and even an upward trend. The dollar

index is now up about three percent year to date. UM. Similarly, in equity industries, you know, the SMP is now back at the top of the pack. UM. Clearly there could be a catch up trade, and it's one thing we're thinking about now, especially as the US markets have run. There could be a catch up trade from Europe to be to be had here. You know, if they are lagging just a few months behind us in this vaccine rollout, um, we could see a real reopening of their economies and

maybe another quarter or two. Keep in mind, the European industries are more levered to these value cyclical parts of the market. Uh, they have a lot of bank exposure, energy exposure, etcetera, industrials exposure, and so it is something we're cognizant of and really thinking about. You know, China and North Asia, as you noted, or ahead of us.

So perhaps their peak growth has already happened in the last couple of quarters, and we're certainly seeing that reflected in the marketplace as well as their industries have started to roll over. So you know, over the next quarter or two we are certainly seeing this this flight to US assets both in the equity and bond market UM, and that really has, uh, you know, been driven by the fundamental story behind how the US is outperformed UM from a vaccine and COVID perspective, but just being being

mindful that Europe could play catch up in the months ahead. Okay, thank you so very much for our special Wall Street Week round table of Sania Bachelists of Rock Creek, and Monamahydgen of Alliance. Coming up. You may think you know what cryptocurrency is all about, but Marty chap Is, a Six Street Partners says it's not necessarily what you think it is. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from

Bloomberg Radio. Wall Street. Central banks and retail investors have one thing in common. They're growing interest in cryptocurrencies. According to Coin Shares, inflows into crypto funds and products hit a record four point five billion dollars in the first quarter of this year. Here's Mike Novograts of Galaxy Investment Partners. I think about there's a hundred hundred forty trillion dollars of US wealth UM four hundred trillion dollars in global wells.

So we're now up to a one a half half a percent of global wealth is in crypto, and that's growing. I think it'll be a percent by the end of the year. Bitcoin gets the most attention among its crypto peers, but critics of digital currencies raise concerns about their structure and their volatility. I don't completely buy the whole thing. You're essentially saying that we're going to create a store of value and a medium of exchange around something that

only exists inside of a computer somewhere. It's not a physical asset that Steve Ratner of will It Advisors, and here's n y U Stern School professor Neuriel Rubini Beatson is not having any income, doesn't even use that, doesn't have any quick the serdervice doesn't have a what's the value is just the sellfulfilling bubble. Beyond bitcoin, it's the

underlying technology of blockchain that is attracting investor interest. According to CB Insights, startups focusing on blockchain raised about two point five billion dollars in just the first quarter of this year, outpacing the amount raised in all of What it's really doing is it's building an infrastructure to actually transact on. That's Peter Krauss of Aperture Investors. Central banks are also feeling the pressure to create their own central

bank digital currencies. A recent survey by the Bank for International Settlements found that eighty six percent of central banks are currently engaged, up from six in two thousand seventeen. The motivation for central banks has been partly to guard against the risk of financial exclusion or digital dollarization if

payments shift to privately controlled alternatives. Here's Financial Times editorial board chair Jillian Tet what the Central Bank is essentially want to do right now is a version of very well, version of if you can't beat him, join them. Um. They're almost trying to just intermediate the disintermediators. Marty Chavez is someone who really knows his way around blockchain and

distributed ledgers. He's been part of Silicon Valley startups, He's taught the course at Stanford, He's been the c i O and then the chief financial officer of Goldman Sachs, and now he's a senior advisor at six Street Partners.

And he says that digital currencies may ultimately hold the key to global reserve currency dominance the way I would look at it, and actually the whole class at at Stanford GSB on exactly this topic how software eight finance last spring and the courses one thesis which is that the way finance is playing out, it's actually arrived. There are all these old dichotomies. You're on the bi side of you're on the cell side, your trader or salesperson are you? And I t right, those categor stories are

all disappearing fast, and it's all becoming. You are a producer of some banking and financial services and you've wrapped them in a computer interface so called API, and then you're consuming a p I s from lots of other people. And if you're not a world class producer of these a p I s around your products and services, you're

dead and you might just not know it yet. So in that sense, I would I would say what Jamie is saying, I agree with them, um, But it means that banks have to get really great at digitizing and technology. And also many banks, not all, have been great, and they have been doing this for a long time. How can the banks compete with some of these new startups who can take a lot more risk and be a lot more innovative a lot faster. Well, many banks have

been working on this for a long time. So for instance, one of the one of the things that we worked on very effectively at Goldman Sachs for years UM is

a group we call the Principal Strategic Investments. It was in the trading division, and the ideas go out and find these startups and sometimes collaborate with clients and and also with competitors to create some of these startups and participate early on in the cycle of innovation and become an investor and the customer of the startups and learned from them. That's been an incredibly successful journey for Goldman, and other banks have done variants of it as well.

How do you address the builder by question and bye bye, I guess I include aquahiers where you may be buying a small company in part because the talent that you're getting with it, but a lot of the software that was needed simply didn't exist in the early nineties, and so it was absolutely the right strategy then. But as time passed, we we changed that strategy and realized that was no longer working. UM, that the world had transformed.

That were cloud services, a p I s amazing new tools, and the idea of building it all your own didn't make any sense. And so the new the new waterfall is first order business. We would like we would like it to be an open source. We would like to use software that's out there um freely available, and participate in the creation of that open source. If that's not gonna work, then the next position is, let's let's look for some vendors and we want them to operate according

to universal standards. And so we can hold the vendors to account on their reliability and cost and other things. But if it doesn't work, we can switch to another provider, same a p I. And then the last resort is we would go build it ourselves. That was Martin Chavez of Six Street Partners. Coming up, we wrap up the week with our special contributor Larry Summers of Harvard. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from bloom Bird Radio.

We're going to complete the week, as we do every week, with our special coternity Larry Summers of Harvard. Larry, Welcome, back. Great to have you with us. I think a lot of the week was given over to infrastructure, whatever that means. President Biden has his two point two five trillion dollar plan, a lot of semantics about what was included, what's not included, And I want to you to address that as an economist, how important is it to get clear but what infrastructure is?

Because President Biden said it's bridges and tunnel. Sure, it's also broadband in it, but then he said it's anything that enhances the life of the middle class. That seemed a little broad. Look, what's most important is that we make the investments as a country that we need to, not what we call them. We need better bridges, we need to expand broadband, we need to build more schools, We need to make sure there's adequate housing for UH

low income families. The semantics really aren't so important. Frankly, I'd have liked to see more traditional infrastructure in this package, because I think we're decades behind, and I'm not sure this is big enough to bring us to the forefront, and I'm not sure there's enough really major, large scale UH projects. He has eighty billion dollars to help amtracks operating UH budget, but there are no major new UH systems, so I'd have liked to see a bolder, bigger vision

on infrastructure. And the other thing I'd have liked to see David is more discipline. Discipline to make sure we procure in a cost effective way. God knows, the First Avenue subway in New York costs seven times as much per mile as the subway in Paris, and they're not especially efficient UH in Paris. I'd have liked to see

more speed in implementation. I've talked many times at about a bridge near my office at Harvard, three D foot bridge that took them five and a half years to repair, when you know Julius Caesar built much longer bridges in UH nine days. And I'd have liked to see rigorous analysis, and we may get that analysis that this spending is

going to be incremental. For example, there's no question we should have electric charging stations across America and electric cars, but we built gas stations without the government ever paying. Does the government really need to pay as much as is contained in this bill to get electric charging stations across the country. So I think Democrats are completely right

on the need for much more resources. But I think some Republicans have a point when they emphasize efficiency, when they emphasize alacrity, and when they emphasize UH discipline in UH setting the functions. But this is hugely important for our economy. This is certainly worth UH in many of the areas substantially more government borrowing. So it's hugely important to get the money to do the investment, but it's almost as important to make sure that it gets done

right or as close to right as possible. You've worked at the top levels of government. Do we need to rethink the way our government really administers itself in this sense? When was the last time the US government spent two point two five trillion dollars and did it the right way? Can we have a rigorous system for return on investment, which is what you do in a corporation, to say, okay, well invest this money, but this is what we expect back. I think we're gonna I think we need UH more

of that. Look, corporations don't have to negotiate their investment plans with something that is analogous to UH the Congress UH. Corporations don't have the complexity and the breadth of the program. And by the way, David is you know, anyone who studied the history, for example, of corporate high t systems will know that there were a lot of white elephants built hundreds of billions of dollars poured into UH nothingness. So I think it's a mistake to venerate everything UH

the private sector touches. But yes, this should be a huge UH priority in the design of UH all of this. But of course more extensive review can be the enemy of UH more alacrity, but more more, more speed. But I think we with the right kind of administration UH can do much better. Taking take an area like high transmission IGH density power lines, the issue there is not

lack of money, it's lack of regulatory approval. And we got to figure out how to get the states cooperating so each state doesn't hold up all the other states UH in UH that area. I'd like to see President Biden talking more about the importance of doing it well and acknowledging more UH some of UH the past failures. On the other hand, I think there are some who sees on the semantic issues, who sees on some of the things UH that weren't great, who give the Pentagon

a complete pass on every failed weapons system. But if some mass transit system in an urban area UH doesn't work exactly right on schedule or overruns its cost, go into a state of hysteria. And that's wrong. And so I'd say to my friends in the Republicans side, let's have some symmetry and what you're prepared to do with respect to military procurement and what you're insisting on in

these areas. Larry another big story this week where the i m F meetings, the Spring meetings of the i m F, and it really underscores something we're watching, which is increasing divergence around the world, both in terms of the vaccination programs as well as in the economic growth. We see it even between the United States and Europe at this point, but then when you go to the low and middle income countries, it is quite stark, both

on the vaccination rate and also the economy. What Cannon should be done with this is something you've been talking about for well over a year now. Look what we understand better today than we did six months ago is that this is going to be heavily about the ways in which the virus does does or does not evolve. If it stops evolving, we're gonna get this problem completely under control. If it keeps evolving, it's going to become

an endemic problem. And evolution happens in proportion to how much the virus is all over the world, And that means uncontrolled COVID anywhere is a big threat to people everywhere. And and this is a critical point that I've been working on. We're gonna have one of these things every decade or so. We're gonna have a threat like this every decade or so, and we need an infrastructure to make sure that we're constantly watching and ready to stop

it at its source. At the beginning, Okay, let's wrap this up with a lightning quick ground of summer says. Start off with the central bank Digital currencies much the vogue right now. We've learned that most central banks are working at digital currency. Five years from now, well, the Federal Reserve have its own digital currency. I doubt it will have a bunch of stuff with digital accounts, but

no real digital currency. We also heard this week from Secretary Yell and Secretary Treasury yelling about coordinate with O E. C D on a corporate minimum tax internationally. Is that going to happen within the next year, bravo, And it's gonna be as or more important than the next the next trade agreement we reach with some other UH country. This is the international integration issue of this moment. For some of us living in New York, we got hit

with a big new tax. If you made a lot of money in New York, you're gonna pay a lot more taxes here. There's a lot of concerned about that, individual stories about people moving away. But in the larger sense, do you think this might affect the economy of New

York State? You deserve to pay more taxes. It should happen, but New York City, New York City and New York State can't do it alone without substantial consequences in this environment, and I am very fearful that, particularly without federal deductibility, this is going to do a lot of damage to New York's tax base and settle off a downward spiral. And finally, larry the big story from last week with Archias, the sort of implosion of Archias. Should we expect within

the near future more regulation of family offices? I wouldn't be surprised, but even more. I'd expect more more regulation of prime broker lending to UH family offices. Uh. This didn't but could have set off a really negative cascade of forced selling and then forced liquidations on the LTCM model. That didn't happen, but it could have, and we've got to revisit those issues. Okay, many many thanks to our special contribute here at Walls Sting week. He is Larry

Summers of Harvard. Finally, one more thought, getting more bees with honey than with vinegar, especially if they're rich bees. This week saw a lot of talk about taxing the rich the United States, whether they're companies or they are people. New York State is doing more than just talking about it. After Governor Cuomo last year pleaded with the rich to

stay in New York. This week, the New York Governor agreed to a budget slapping big new taxes on those making over a million dollars, taxes that could raise the marginal rate for the richest New Yorkers up over fifty two. Only time is going to tell whether the state's ninety billionaires or thirty millionaires vote with their feet because of

all these new taxes. But we are already seeing what using a bit of honey instead may mean as the Chinese government plans new tax bricks on the wealthy in Hong Kong, seeking to make up for all those violent demonstrations in the political crackdown, with the result that investment managers have set up more than a hundred new companies in recent months, and banks like Goldman Sachs, City Group, Bank of America, and Morgan Stanley are ramping up their

staffing over there. None of which is to say that those of us who have benefited from the boom markets shouldn't pay our fair share, much less that we want to trade off civil liberties for tax breaks. But we do have to hope that the people making decisions keep in mind that pesky law of unintended consequences. That does it. For this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week.