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Slovak Prime Minister is shot, Memestock's return and inflation takes a half step back. This is Bloomberg Wall Street Week. I'm David weston this week. Paul Talban PJT Partners on what's holding.
M and A back, The current view on anti trust is clearly having a chilling effect.
And Elizabeth Career of JD Power on what difference the new tariffs on Chinese evs will.
Make consumers are looking for lower cost vehicles within the segments of their preference.
We start with the CPI numbers out on Wednesday, giving investors a sigh of relief when it comes to inflation. To explain the numbers in the larger context of the economy and monetary policy. Welcome back now, Rick Reader. He's Blackrock Chief investment Officer for Global fixed Income and head of the Global Allocation Investment Team. Rick, always a treat to have you on Wall Street Week.
Thanks for having me.
So let's start with the CPI number. As you saw what the markets have made out of it, they liked it a lot because they thought maybe inflation is coming down.
What did you make out of those numbers, so the worst fears were allayed. I mean it was it wasn't that far from expectations. You know, the markets can tend to parse a couple of hundreds of basis point through our basis point to determine like it's better or worse. There were some things that were that were better there that we're encouraging, including you start to see some of the transportation services come down. Rent started to come down
of it, So there's some encouraging things. It was pretty much on expectation, but there was a fear because we've had three months in a row of high numbers that maybe we're moving to a more normal, more stable environment. And by the way, it was contiguous to retail sales that were softer. Some of what you've seen play out
in these earnings reports. There's definitely some consumer pullback. So the combination of N and PPI not being that bad, some stability, and then gosh, you're seeing some softness show up. That you've got a federal reserve that you know already raise the bar of hiking rates, but now you can you can start to think, can you get a cut or two done this year? And I think that in bold in that thesis.
It's always in the media have a tendency to look at a number, how much is up or down? There are a lot of things under that number. Address one thing I've been curious about goods versus services because there's a different trend there and inflation. From the Fed's point of view, do they need both goods and services to come down? Because the one is going down, the other not so fast.
So it's pretty remarkable. You know, we're moving to a service oriented economy. More money is being spent on services. But it's actually what's happening because goods prices have come down so much, it's allowing for disposable income to go into services. That's actually booing prices and services ironically. You know, I've said this over time, and I've used a bunch of examples. Like a price of a pair of tennis
shoes is what it was twenty years ago. If you go to a tennis match, it's double what it used to be, So meaning services, goods come down service Thinking about an autos price of autos on relative basis, So what's happening for the Fed? Listen, you want to get the average, you want to get inflation down to around the two percent number. Their mandate is price stability is not two. If you're running two and a half, you know,
core pcees now two eight. But it's pretty stable. We think it'll be pretty stable throughout the year if you've got a good economy nominal GDP. So if you take two eight of inflation, you get real GDP of two, you've got a nominal GDP of four and.
A half to five. Pretty good. I mean, it's a pretty good environment.
Some people have been surprised. I think that the economy has not reacted faster to five hundred basis points and interest rate increases. Some of that is because you can turn out the debts some people do. And one of the things that we've seen recently is a difference for households because you know what they own, their mortgage, which is a longer term thing, and the shorter term debt such as credit cards and auto payments.
I'm not certain that raising interest rates actually brings down inflation. In fact, I would lay out an argument that I actually, if you cut interest rates, you'd bring down inflation. Why is that exactly to your point, look at what's happening now.
Interest expense is growing, has now eclipsed mortgage payments. Lower income who much higher percentage of their of their net worth is in the debt, credit cards, student loans, auto finance, etc. What's happened is you've raised the rate and that has created a real impact. But the other side of it is you actually have an economy because of this massive transfer from the public sector, from the government to the
private sector. People are higher income, middle to higher income are now getting a big benefit from these interest rates, and that's flowing into those are the people that spend an aggregate on services. So there's an ironic thing that I've never seen, nobody's ever seen in history, big transfer of money from the government into the private sector. The private sector now is a creditor versus a debtor in terms of the the big pocket of wealth. It's what's
happening those lower income. So there's the chart we show around. Look at restaurants, high end restaurants killing it, low end restaurants or low income having a really tough time. You saw it in all the earnings in this last quarter. Really big deal today. And then the other side of it is not as lower income getting hurt. Not only is small business getting hurt, local banks getting hurt in part of why I think they need to bring the rate down.
But you look at companies today.
Normally when you raise the interest rate, companies pull back.
Companies term their dead out.
Because we went through not only a transfer of money from the government to the private sector, we kept interest rates down for so long. Seventy percent of the high youd market termed their dead out when the fundsrate was under one. They have no debt company, they have no real maturity wall. So think about what the interest rate does you raise it, it doesn't really matter for companies. In fact, companies are sitting in a lot of cash,
so they're actually getting the benefit of higher rates. So point being, I think the Federal Reserve can get that rate down from five and three a's.
Even if you got it to four four and a half.
Still restrictive relative to a two eight core PCE.
And I just am not.
It's not clear to me you've raised rates five hundred basis points, does it really impact inflation? And I would argue at a certain level it actually maybe is actually helping keep inflation high in a because we've never seen this in history.
Because of those other influences.
So you think it's possible if they cut rates, it actually might deter inflation rather than's go around.
By the way, I throw one other thing, there's been an aging of the population that we've never seen before and a wealth creation at the higher end. It's actually if you break down the demographic today, there's been an incredible growth of the savings and the spending at old from older people at fifty five and above. It's fascinating what's happening. By the way, if you keep the real rate high, huge benefit to those people. They're turning around spending.
So why is inflation high in things like health insurance? Why is inflation high in number of these service sectors, auto insurance, etc. They're sticky, they're unresponsible interest rates, and people are spending. Older people middle to high income are spending and are keeping that service level inflation at high levels.
Is it a good thing for fixed income investors right now? What is the timing good right now?
So I would say I don't think rates are going to come down. You know we're gonna have this incredible rate drop of anytime soon. I do think the world is in more of an easing cycle. You look at obviously in Europe, UK moving faster, emerging markets, many countries moving, so Argentina just dropped the rate in a radical way.
So that is healthy. But there's something in fixing i'm not I think is extremely unique. You can create income. I mean for years, decades we were sitting at rates or a zero.
You had to buy dicey emerging markets, you had to buy dicey parts of the high yield market. Today you can create a six six and a half seven percent yield. And so what you're seeing is people like, gosh, if you can get me six and a half without a lot of volatility. I own equities, I get volatility there, I'm okay with it. Give me my fixing, Come get me a lot of yield without the same volatility. That's
a pretty unique point time. I've said it's the golden era of fixed inc. I'm not because rates are going to come down, but you can build a lot of yield in the portfolios.
So explain something to me I don't understand as a fixed income investor in a marketplace. Normally, if that's true, a lot of money will crowd into fixed income and that should drive their rates down. Actually, right, So you don't get as much out of them. Why isn't the market actually taking a lot of that benefit out of the investment fixed income.
So it's a great question. So there's two things happening. One US government has a huge amount of debt that they've got to keep issuing. And I've said that four hundred billion a week of bills, one hundred and billion a week on average of coupon issue once from the cup. So there's a ton of money that's coming in. You've got a federal reserve that's keeping the front end of the curve. I would argue too high today, but high today. So those are are obviously keeping the yields where they are.
Companies should be borrowing two hundred to three hundred base points lower yield. You know, given we talk about their credit quality is superb today, they're not. Because service level inflation is high. It keeps the rate high. And so as an investor or anybody today who gets to be a lender, you're getting to buy credit asset's a couple hundred base points cheaper than you really should, even though the spreads are tight.
It's just because a risk free rate, because it's given how much where treasuries are it's it's so high today.
One last one on the investment front, and that is the first thing you talked about, the demand from the treasury there to borrow a lot of money. We here increasingly for all wide registers, Ray Value, Jamie Dimond. Everyone talks about the fact that we are really borrowing a lot of money, and sooner or later there's going to
be a problem. We talked to Paul Ryan, somebody you know well last week who said he thinks it's not at all unlikely that the next president, whoever it is, will face perhaps a real debt crisis in the form of a failed treasury auction. Do you see that on the horizon.
So those are all smart people. Can I just say agree?
And so yeah, I think that debt's too big, and I think we're not going to address the size of the debt in the country today.
And I think over the.
Next year or two, I think you'll see auctions thirty or auctions that I'll have a hard time clear in the market. It's just it's too much debt at the same point in time most countries, and you know, you think about China, Japan A.
You know they have alternatives.
They're funding more domestic priorities versus the United States debt, and so I think we have to be pretty careful about that. There's a lot of debt coming. There'll be a point in time if the Fed is moving towards lowering rates, you feel better about we'll be able to fund it.
People are comfortable coming in. I'm not going to lose money.
There's going to be a point in time where rates will move up again and people say, you know, I don't want it. Who's going to fund it? And so I think what will happen is more we'll have to go on the Fed's balance sheet again. Think about Japan, what happened to the currency Listen. I think we got to be careful about it, and I think policy makers are going to need to address it over the next couple of years.
Okay, Rick Reader is going to be staying with us as we turn to the latest developments in the market, including performance of his active fixed income ETF. That's going to be next down on Wall Street week on Bluebird. This is Wall Street. I'm David Weston. Rick Reader of Blackrock has stayed with us. So Rick, there are some larger forces at play right now in financial markets, and one of them is what I would call at least
active ETFs. You have your own Blackrock Flexible Income BINK b A n C. I think we talked about when you first announced it on this program. How's it doing so far?
So good?
I mean, I think we've beaten the aggregate index by you know, since inception eight hundred base, which so for fixed income not equities.
It's pretty good. It's pretty good. We're hanging in l right, you know.
I think we're up this year, you know, the market where rates have moved higher and the only industries most of the industries are down.
So I have no doubt that people are giving you money because you do a better job than the people do. So a lot of it's just on the merits, But what about larger forces. Why is so much money going to ets? And where's it coming from? Other ways? It just because there's that much more money to be invested, or is it coming out of other places?
So a couple of things that are happening.
You know.
Now models have become so financial advisors that can create these models that can be very precise about where you invest, and gosh, I want to have X amount in yielding fixed income. I want to x amount in this type of technology equities. Maybe I'll take some alternatives, use some private credit, but the ability to be precise around I want active ETFs. Then I just want exposure to an index like I use passive ETFs in my funds all the time. I want to get in the highield really quickly.
I can get in through an ETF. I want to buy the SMP through spy. I want to do it really quickly. The marriage of active and passive has become really beneficial to financial advisors. People want to build portfolios, and I just think that's going to grow. I think the whole moniker if it's an active ETF versus passive, I just think it's like, what is your mandate? What are you trying to achieve? And I just think that will continue to grow. And it's so handy for people.
It's tax beneficial and they can move quickly when they want to alter their portfolio.
Another thing that is a phenomenon right now and is growing the private market's betewually private credit. We've had private equity for some time, but private credit has really been growing dramatically. What do you make of that what's driving that right now?
I mean, I think the biggest thing is, you know, if you take of so this before, there's forty seven hundred and fifty banks in the United States, and you know, when you you know, the dynamic recap rate slow, you had a lot of funding, there were a lot of commercial real estate funding, and then local banks regional mind or having a tougher time. There's a dearth of lending
to what would be the traditional lending market. So whether it's corporate credit, real estate, you know, everyis oh my god, commercial real estate, and I want to touch it.
I don't want to touch office.
Office is tricky much of the office real estate markets. But there are things in hospitality, things in logistics, multifamily financing. So what's happened is because of the lending system today being when a lot of banks pulling back have to build capital, it's created this opportunity to create by the way, real yield because of whether risk free rate is, you can create double digit yields with you know, when you think, gosh,
what do I want to get an equity? You know, if I can only get mid high teens and equities, if I can get in credit or real estate collateralized. If I can get load a mid double digit return yields mid load of mid teens yields, that's pretty darn attractive.
One of the things we hear from people in private credit is it is a better model in that you have long money out and long money in. It's committed to you for a previous time, where banks, of course really substantially on deposits that can be withdrawn. Is that a better model in general or are there downsides that model as well? There's some places where that does not work so well.
So listen, I mean a few other federal reserve and you're trying to manage velocity in the system and the lending dynamic and more leaves the banking system, your toolkit becomes more imprecise.
In terms how you manage that. So that is that is that is a tricky part of it. Listen.
I think that, like everything in life, some balance and some moderation, and I think it's quite frankly, I think it's a very positive evolution that.
You have more of a match of asset liabilities.
You think about financial christs and other times it's the mismatch of asset liabilities that creates real stress. So today I think that's more in balance. As the banks build capital through this period, you're creating a better buffer and better foundation. But so anyway, I think there's some positives. And by the way, I think, you know, we run a lot of funds that are daily liquidity. You just
got to manage your asset liability mix. And I think for people, let's say, Gosh, I want to have stuff that I can move around quickly, and then I'm going to go into alternatives where I'm going to lock my money up. I think it's all about balance. And like my mom used to say, like everything in moderation is is good.
US versus the rest of the world Europe, Japan, Asia, things like that. Right now, US seems to be placed. Everyone's going to as fasts they can. Is that likely to continue to think as you see the longer term trends.
So I think there are so depends if you're doing debtor equity. Like I think the equity story in Japan is pretty interesting today. Money that used to go to China's going to Japan. Real technology, women in the workforce that are now have real wages. Japan from an equity out of use interesting India in equity is really you got to do sort of small to mid cap companies. Oftentimes India is interesting in the equity side. I think being a lender in Europe UK is interesting because you're
not growing as fast. They've got to drop rates faster, inflation's coming down faster. So I like on the death side being more in Europe. On the equity side, being in some of these faster what I always call the rivers, the fast rivers a cash flow, and I think the fastest river at cash flow inequities in the US full stop technology.
Evolution is I mean, what we're going through today. Everybody talks about AI.
They don't talk about healthcare, biotech, you know, other parts of technology they're developing. Anyway, I still think in equity the fastest river a cash flow is in the is in the US.
One last one. It's probably unfair. What's the biggest underpriced opportunity right now for an investor?
Most underpriced opportunity? Listen about?
You know, I think I think being boring in UH is is okay today, Like I've been doing this thirty thirty something years. I don't say the number, but today buildings, I mean, you know, if you can build six and a half to seven, that is unbelievable that we're not you know, two years from now. If even to say, remember we got to buy European as a dollar investor, you got to buy European investment in grade credit at five and a half to six.
Remember we were lending the money at negative yields. Like that's pretty that's pretty good.
And then listen, I you know, I think people underestimate how fast technology is changing. Like I think, you know, there's a you know we can talk about, you know, the videos, et cetera. Incredibly impressive. Boy, there's so many secondary and tertiary.
Impacts of what's happening there. Like it's an exciting time.
I mean, this is really we're watching commerce change sort of like you know, I've said it's like the Internet bubble, except for it's not a bubble because it's cash flow attached to it, and so it's a pretty exciting time.
I think, Yeah, real company is making real money like the Internet bubble. Rick, it's always so great to have you. Thank you so much. That's Rick Reader of Black Rock. This is Wall Street Week. I'm David Weston. If inexpensive electric vehicles are the way to get Americans to switch. We're not going to get very many of them for China, as the Biden administration this week announced it would be raising the tariffs on EV's from China to over one
hundred percent. To give us a sense of what this could mean for US consumers, we welcome back now, Elizabeth Kreer. She's JD Power Vice President Electric Vehicle Practice. Elizabeth, welcome back. Good to have you here. So, I guess my basic question is these electric vehicles from China are very inexpensive. Is it likely that Americans would buy them anyway? Is there an appetite for cheap Chinese evs?
Well, the auto industry is a global industry, as you know, and all competition needs to be taken seriously. At the end of the day, the consumer decides. Consumers want choices, new technology, and value. The USV capacity has now died consumer demand for evs and we're starting to see conquest sales through price deals and incentives.
Competition is expected to continue.
To increase, with ten more evs hitting the US market this year, particularly in the mid size suv and truck segments. Suv and truck sales make up over eighty percent of the US market. In contrast, small cars make up less than one percent of the US market. The eleven thousand dollars China seagull would be in this small car segment. The Chevrolet Bolt, also a small car under twenty thousand
dollars with federal tax incentives. During its peak, sold less than a half a percent of industry monthly retail sales. I'm not an expert in geo political decision making, but consumers are looking for lower cost vehicles within the segments of their preference.
There is a void in the marketplace, and this is similar to the.
Late nineteen eighties early nineteen nineties when Hyundai Ikia came to the u US market looking to fill the void. The weather low cost evs are first offered by domestic brands, Asian brands, European brands, or Chinese brands will have to wait and see, but there.
Is a market for them.
But as you just said, Elizabeth, within the segment they're interested in. It sounds like the segment that you Seagulls in, the really small, really inexpensive one that's not potentially that much or a threat to US automakers.
That's correct. That's a very small segment.
So you've been studying consumers and their reactions to electric vehicles. You actually had to report out at the end of March, and as I read that it isn't so much the price point as the charging stations. People really are invoking that as a reason to be hesitant.
Absolutely.
You know, we survey over two thousand new vehicle shoppers every month to gauge their interest in evs, and when we look at the top reasons for rejection those who say I am not interested in an EV, we see lack of charging station availability as the top reason for rejection, but purchase price.
As the second. So that's where EV education comes into play.
There is a learning curve to owning an EV, figuring out where to charge, how frequent to charge, how much to charge, and although for many charging may not truly be an issue in terms of availability, but perception is reality and charging is simply too much of an unknown for them. And same goes for price and understanding the total cost of ownership of owning an EV. Often the savings with the EV incentives and operating costs and maintenance
for that matter, often offset that initial price. But again this needs to be explained to the average shopper. So infrastructure, price, education all very important.
One last one, Elizabeth, if they need to feel comfortable about charging, what's going on right now with Tesla and Musk might not give them a lot of comfort because it looked like they laid off the entire division and then they sort of change their minds. Where are we right now with Tesla and the supercharging and have they really changed their course?
This is potentially a big blow to the infrastructure build out. The supercharger network is the nation's largest and most reliable fast charging network. When NACS was adopted by non Tesla manufacturers, that helped address one of the most pressing needs in the EV space, which is increased availability of public charging. With more evs utilizing those superchargers, that is going to add to the congestion increasing weight times, which will be
exacerbated with increased EV adoption. For now, supercharger has the highest reliability ninety five percent compared to only eighty one percent for non Tesla networks. With the mass layoff, it calls into question Tesla's commitment to growing the network and maintaining the reliability, and this move could also impact the brand's sales. Public charging availability is a primary driver of
why consumers purchase Tesla based on our the ownership study. Similarly, based on our shopping survey, the number one reason people cross shop with Tesla is for the supercharger network. So the supercharger network move could impact the brand sales if customers no longer see the supercharger network as a brand differentiator.
Elizabeth is always so helpful to talk to you about these things. Thank you so much. That's Elizabeth Career of JD Power. Coming up. We're told that M and A is on its way back, but when and what's keeping it the less?
Paul J.
Talvman, he's chairman and CEO of PJT Partners.
M and A volumes continue to be soft.
That's next on Wall Street Week on Bloomberg. This is Wall Street Week. I'm David weston higher interest rates and uncertainty over where they are headed. Put some mergers and acquisitions on hold, but they appear to be on their way back. Perhaps take us through how far they've come. We're welcome now. Paul J. Taubman, he is founder and CEO PJT Partners, So thank you so much for being here. Paul,
give us a sense of where we are. I mean, you had some record years of emerging acquisitions and then it really fell off a cliff a little bit.
How far back are we look?
I think you need to look at this as pre COVID and post COVID because the disruptions of the COVID period extraordinary, And the reality is almost every market is healing and is reaching higher highs other than the M and A market. So we're seeing investment grade debt issuance record levels, spreads as low as have ever been in a similar vein on the equity side, equity issuance now
is ahead of where it was pre COVID. So all of the necessary conditions are in place, and notwithstanding all of the desire to transact and to get ahead of a changing economy, M and A volumes continue to be.
Soft.
So explore the other than part of that. Why is it other than Why is M and A lagging behind the other markets? Well?
I think it's a couple of things.
One is, the current view on anti trust is clearly having a chilling effect on some deals. So we see many deals being contested. You're seeing the FTC and the DOJ being very vigilant in their anti trust enforcement, lots of second requests, elongated periods between announcements and closings, and it's not just those deals that get reviewed. There's a self editing process, and we're seeing a lot of deals
that are debated vigorously in boardrooms. They never see the light of day because companies are uncomfortable putting themselves through that extended review process.
That is one of the big issues.
And I think the second one is private equity, which is such an engine of M and A activity. They've not been on the front legs the way they were historically, and I think a lot of that has to do with interest rates.
On the first issue about regulation, do boards ever get sort of used to it, as it were, because although there is a lot of challenges, not too many have been successful, as I recall, so at some point they say, okay, yeah, they'll challenge, but in fact we'll get it through.
The batting average of the government has not been very high. But what it has done is it's sent a signal that for many deals, even if there's no underlying reason why the transaction should not be approved, you're going to end up with an extended review process and review processes that get elongated, they bring risk. And the more risk there is, question becomes how does the business perform during what could be of twelve to fifteen even eighteen months
between signing and closing. That's a lot of risk that a buyer is underwriting, and I think there are a lot of boards that are uncomfortable with that. Now, to
your point, do we ever get past it? I think once we get past this election and we either have a change in administration and a change in antitrust policy, or there's a sense that the here and now is going to stay for another four years, I think either one of those is likely to be a significant catalyst on those deals that have yet to be brought to the marketplace.
And what about the other item that you mentioned, actually, and that is a question of the P and E. We're here from a lot of limited partners right now. They're a little impatient about getting some of their capital back from the general partners. Are there vehicles that get around that that you might be involved in.
Well, if there definitely are vehicles, but let's just kind of unpack it. What the problem is if you have private equity firms who have bought assets in a low interest rate environment and now all of a sudden, rates are meaningfully higher. There is a reluctance to monetize or to sell those assets in a period where they underwrote it at one multiple and now they're looking at selling it at a different multiple. And one of the great things about private equity firms is they are exquisite in
controlling the exits. And what we're seeing is with a sense that while rates have crested, they have yet to come down. It's not going to be until rates start to come down. We believe that you're going to see a lot of monetizations from the private equity industry, and since there haven't been a lot of monetizations, they have been reluctant to continue to call capital from their limited partners.
And in fact, I think we are at an extended period of time where the capital calls to investors in private equity funds continues to exceed the capital returned, and that's putting pressure on the deployment of capital. So private equity is less aggressive and deploying capital, and they've been less willing to monetize their own assets. And we're trying to work with private equity firms to deal with those liquidity issues.
Out of Milkin and Los Angeles last week we heard a lot about continuation vehicles. Explain exactly what those are, how they work, and how they might release some of the pressure. Perhaps.
So the whole idea of a continuation fund starts with the premise that when you find an asset that you like and you own it and you continue.
To deliver superior results.
This forced shot clock in monetizing it four five six years in just simply to give liquidity to investors, many of whom would be perfectly content if you just continued to own the asset and continue to get excess returns. But you do have other limited partners who have other
needs for the capital want liquidity. So what a continuation vehicle does is it gives those limited partners who want liquidity the ability to leave or to exit the investment and let new funds, new pools of capital come in and the private equity firm continues to own and to manage the asset.
So one of the things that has relieved in that past some of the pressure on private equity has been initial public offerings IPOs, which also have gone through a period a little more fallow. Where are we're in a the IPL market and could that give relief to some of these people.
The answer is, of course it can, but it's easier said than done. So the IPO market is healthier today than it was a year ago. I think a year ago we were looking at pretty much a shut IPO market. We're getting back to levels pre COVID like, but not yet there. One of the issues is there's a disconnect between how the S and P five hundred companies are
performing and the broader set of companies. So whether you're looking at the midcaps, small cap companies, the Russell, all of those indices have meaningfully underperformed the S and P and when you look at those companies, in fact, I think the Russell is down over the last three years
in absolute dollars. So there's been a lot of reluctance to bring companies to market because those companies that are IPO candidates better resemble small and mid cap indosey companies than they do the S and P five hundred, and there's been this divergence. But there's been a number of
IPOs that have successfully been launched in the marketplace. They've traded well in the aftermarket, and that should begin to create some additional liquidity for the private equity firms to return capital to LPs to enable them to be more
front footed in deploying new capital. But what's happened is as the IPO market has been shut for an extended period of time, there are a lot of these planes that are circling up in the air that need to land, and the shadows supply of companies looking to IPO is probably more than the market can handle, So increasingly they're going to need to be other ways to create liquidity for these portfolio companies.
So if you have a willing buyer, winning seller, you need to come up with the price. And obviously i've interest it's go up. That affects the valuation. I suspect that's part of the problem here. But is the problem the level of the interest rates or the uncertainty about where it's heading. Which is the more chilling effect in your business?
I like to say that you know, you either bought things in a higher low interest rate environment and you're selling it in a higher low interest rate environment. And three of those four quadrants work just fine for deals. It's only when you bought things in a low interest rate environment and you're now selling them in a high interest rate environment, that you end up.
With reluctant sellers. And right now, that's the environment we're in.
And what's making it a bit more difficult is there is the prevailing wisdom that while rates are higher, they've crested and.
Are likely to come down.
Now, if ultimately rates stay at these elevated levels and they don't come down, then I think everyone's going to make their peace with the new paradigm and you're going to start to see more transactions. But as long as there's an anticipation the rates are coming down, I think you're going to see a lot of sellers withhold their inventory from the marketplace and you're going to see a more sluggish environment.
You also need financing, and we've heard some of the banks pulling back somewhat because of regulatory other constraints. The same time, private credit we hear about every single day, is that providing the financing. Is there any shortage of financing right now?
I think there's an abundance of capital. The issue is it's more costly capital. And when it's more costly capital, prices need to adjust to the fact that you need to take on a much higher interest burden. And it used to be that you could leverage yourself at four or five six times, and in a low interest rate environment, the interest coverage worked just fine. Now, all of a sudden, you do that math with rates meaningfully higher, and you need to put more equity into deals, which lowers returns.
And the only way that works is you need lower prices. But there's an abundance of capital. Interestingly, money is flowing into credit funds from all all parts, and the reason for that is there's a general sense that over time rates are coming down and if you get in now and you could ride that rate travel down, you're going to end up making hefty profits on your credit.
So credit is in demand.
There isn't a lot of M and A right now, so there's relatively little supply of new inventory. Most of it is refinancings. Reds have collapsed. The issue is just the absolute rate is too high given the current environment. And I as I said before, one or two things are going to happen. Either rates are going to travel back down, in which case we'll get on stuck, or there's going to be a growing sense that this is the new normal, and folks will will make their peace with.
Them as as it were.
Yes, exactly the way to say.
Paul Talbman will be staying with us as we turn to spin offs and whether we've seen the high watermark poor conglomerates. That's coming up next on Wall Street Week on Bloomberg. This is Wall Street Week. I'm David Weston and Paul Talban of PGAT Partners has stayed with us. SA Paul, let's talk about something you're very active, and that is some of the spinoff business, including Geve Vernovo one that we know something about. But you've been in
quite a few of these. What's going on right now with these companies breaking up and spinning off.
Look, the reality is that more focused company achieve better results. And the way you get focus is you shrink the mission and you're able to better allocate capital better and center employees have everyone feel as if what they're doing is the main event, that their mission critical and more focus does drive greater returns. And when you have these four flung conglomerates, which really is a throwback to a different era, this notion of diversification, you end up making
inefficient capital allocations. The company tends not to benefit from the stars in the portfolio when those assets are in favor because there are other parts of the portfolio that are out of favor. You end up with a less competitive cost of capital, and then you've got shareholders who are frustrated, employees who are frustrated, boards who are frustrated, and increasingly there's a sense that let the shareholders, let
them diversify, let them construct their own portfolio. But pure play are clearly in favor, and they command premium valuations.
So the pure plays are in favor. Is it a fad or is it a permanent structural phenomenal because we had in the past times when we're going to put together these conglomerates as big as possible, then we broke them up. But it feels like it sort of goes back and forth and back and forth. Or are there structural factors that may be putting in one direction.
Well, look, I would I would never underestimate Wall Street's ability to come full circle on any issue or any trend. So I hesitate to say we won't see those days again. I think what's different now is you have more vocal shareowners who are much more clear in their disdain for companies to just simply create diversification or size without purpose. And I think that probably is a governor that didn't
exist a decade ago or two decades ago. So you've got much more in tune boards of directors, you have much more vocal shareowners than before. The one cautionary tale to that, David, is if you continue to have a FTC and a DOJ, that's going to block horizontal deals and they're going to prevent companies from getting bigger. I suspect that at some point companies are going to just it's a natural, a natural tendency to look at deals
that can get regulatory approval. They may not be the right deals, but I can see if you're frustrated continuously trying to get deals done in your space and you're trying to grow your business, that you then look to diversifying transactions. But my hope is that companies remain focused on the mission.
So start first with the efficient part of the capital markets. How much of this because the capital markets have become global, they become much more efficient, so the capital goes to where it belongs, if I can put it that way, much more quickly than they did back, for example, in the seventies or eighties. How much of that is driving some of this splitting up into more focused, perhaps smaller companies.
Look, clearly, we're in a world that's speeding up, it's not slowing down, and companies need to have a currency that's competitive. And in many parts of the world you have companies who are listed outside the United States who enjoy a cost or theyn't enjoy they're burdened by a cost of capital disadvantage, and that's an issue. Then you have here in the United States and elsewhere conglomerates who are not getting credit for all of the assets that
are all housed under one roof. And as they're competing for other assets against pure play companies with a higher flying currency, the trades that are hire multiple they're at a competitive disadvantage. So I think there's a necessity to making sure that you're always front footed. So what's different now from a generation to go is people are using their currency. Companies are using their currency. It's a competitive asset, and you need to make sure it doesn't become a liability.
That's driving this.
And the second is you have less patient capital today who's not willing to take comfort in the fact that while the stock doesn't trade well, the underlying assets are worth a lot. They want to see the underlying asset values reflected in the share price.
Does it also redown to the shareholders benefit of potentially I remember talking to Larry C. Calp that you represented with the ge Ornovo's been a saying, look at some people want to really back healthcare, some people want to back energy, some people want to like aviation. And when we had them all together, you had to make a choice. Right now, you can go to one or the other, depending on which one you like. Is it actually more power? Does a lot of shareholders hand?
It's all of those things right now. You know, shareowners can diversify themselves. If you own a healthcare stock and you want to be in airspace as well, you can buy another pure play company and create your own synthetic conglomerate.
That's the first point.
So all of this notion of diversification, which was part of you know, financial theory in the seventies and eighties and probably goes back to the sixties, that's been debunked, which is shareowners can create their own diversification. Second thing is when you're in very large organizations that do many things, oftentimes there's not a sense of purpose and an organizing principle for the employees and for the company to have a clear mission.
That's different.
So I think studies have shown that you get better operating performance. It's not just financial alchemy. You get better operating performance in a focused organization where what you do is mission critical. And I think GE is an incredible success story. Larry Colp and that team have done an
extraordinary job. If you look at where they are today versus where they traded, stock is up I think five folds from the depths for GE, and the combined market capitalization of those three entities is approaching three hundred billion dollars. It's extraordinary what they've been able to do, but it starts with operating performance and then it translates into being able to get that value reflected in the public markets.
You mentioned one of the potential impediments to sort of a more efficient allocation of capital is regulatory potentially, and you mentioned the FTC and Department of Justice, but they're not the only ones in the world. I mean European Common Market that EU has its own competion is what the UK does, China does, Japan does. So are those similarly potential impediments to what you need to get done.
The complexity is multiplying, you know, it's a multiplicative complexity because these are global companies who have global customer bases.
They operate almost everywhere in the world.
The regulatory approvals they need need to come from the EU, the UK, China, the United States. You've got all sorts of different issues, protectionist issues, you've got trade wars, you've got a sense of what's national security issues. You've got the SAFIAT issues in the US, you've got consistent concerns elsewhere. And for global companies to be able to navigate all of that, even for those transactions that should be approved and ultimately are approved, it's just taking longer and that
injects more risks. So it can be navigated, and you need to be thoughtful about it. And lots of deals get done and most deals that get announced do not get successfully challenged. The challenge, though, is you never know whether you're going to be in the crosshairs, whether you're the collateral damage, because the regulators aren't really looking at your transaction, they're trying to just send a signal that others in that industry should think twice before they bring
transactions to the marketplace. And I think that's one of the ways in which we can explain why, in a world that's speeding up, where there's a great desire to constantly grow and develop one's company through acquisitions, divestitures, combinations, why we haven't seen it in the numbers.
I think the.
Regulatory oversight from a global perspective has clearly weighed on activity.
Paul, it's really great, Javin wallstret Week, thank you so much for being here. That's Paul Tullban of PGAT Partners. Finally, one more thought. Artificial intelligence pioneer fafe A Lee says that AI is everywhere. It's not that big scary thing in the future. AI is here with us, And when she says it is here with us, she means with all of us, and in all sorts of different ways.
Our special contributor Larry Summers says that it's not like the automation we've seen in the past, where machines took over manual chores. It's something much more.
Most of the technological changes we've had before came for working people doing relatively routine things. I have a suspicion that AI is coming for the cognitive clash.
Private equity juggernaut. Blackstone says it can use AI to sort through the wealth of data about past deals to figure out which future deals are most likely to work.
Public market investing, which relies obviously on publicly available data, that sort of data will be increasingly and further commoditized in an AI world. And in contrast, the value you a proprietary data and insights that you can clean from a really large private market portfolio accumulator over many years across many businesses that will only be further enhanced.
Besides building our portfolios, AI may end up building our ships for us as well.
Now, I was listening to Jenson Wang speak at a conference the other day, and he showed how they can build a boat through AI, a very complicated supertiker, and then he said, we can build the factory that builds the voat, and then we'll build the robots that build the boat in the factory.
And I'm like, where are the workers?
What do we do? AI can enhance our medical care by cutting through some of what we go through. Now that doesn't help us get.
Better effective in that hopefully we'll eliminate a lot of unnecessary testing, a lot of procedures or activities that don't directly link to the well being of the patient.
AI may even provide companionship for us in our old age. The New York State Office for the Aging has already launched a pilot program giving some across the state AI robots free of charge. They tell corny jokes, they take seniors on virtual trips, and generally hang out with them when no one else is there. Those in the program are reporting a ninety five percent drop in loneliness. So I suppose it was inevitable that generative AI would enter
our love lives as well. The founder of the online dating app Bumble last week described an AI dating concierge that could go out on dates with others AI avatars and scope things out, seeing whether the relationship is worth venturing out on an actual physical date with the real person.
There is a world where your dating concierge could go and date for you with other dating concierge.
No, no, truly, and then you.
Don't have to talk to six hundred people and all of San Francisco for you say, these are the three people you really ought to meet.
But why leave it there? Why not take it all the way and simply leave it up to our avatars to figure out the mysteries of courtship and mating and commitment and save us all all the trouble. Open AI gave us a taste of this and announcing it's all new Chack GPT four this week, complete with a voice that some have said sounds a lot like Scarlett Johansson playing the role of an AI operating system.
In her I'm learning everything about everything, lovely look the world.
But then again, you likely won't have to pay at alimony if things don't work out. That does it for this episode of Wall Street Week, I'm David Weston. See you next week.