Bloomberg Wall Street Week - July 7th, 2023

This is Bloomberg Wall Street Week.

I mean may not have an overall recession, We're having a rolling recession. To conge roll looks pretty strongly when it comes to jobs.

The financial stories that shape our world.

Three major regional bank failures send shockwaves through the banking system. We're all trying to figure out what to make of generative AI.

Through the eyes of the most influential voices.

Welcome down, Doctor Paul Krugman, Ryan moynihan, Bank of America, deebro Lair of the Paulson Institute, well then Hubbard of the Columbia Business School.

Bloomberg Wall Street Week with David Weston from Bloomberg Radio.

Different summer holidays. Secretary Yelling goes to Beijing, Opek goes to Vienna, and the Fed stays home. To ponder those jobs numbers. This is Bloomberg Wall Street Week. I'm David Weston. This week's special contributor Larry Summers on those jobs numbers and what they tell us about where long term rates are headed. Credit expert pornam Apuri of HPS on the continued resilience in the credit markets and whether it will last.

Private credit market continue to grow and.

Colony Capital founders, I'm investing in the Gulf States, and how it led him to a New York courtroom.

I thought, this is a great opportunity to start shipping at the system from somebody outside of the system.

With the fourth of July holiday in the United States and Wimbledon underway in England, it was time this week to focus on summer holidays. The president g over in China didn't get much of a summer break from disappointing economic numbers.

The reality is is that people have given up on the Chinese recovery. China's moving off its old economic growth model, but it hasn't moved comfortably into what's.

Next, even as Beijing welcomed Treasury Secretary Yellen for a visit to try to keep the conversation.

Going consp more regular channels of communication.

Eature Marching Countries members started their July in Vienna, with Saudi Arabia kicking things off by extending its unilateral oil production limits.

We had to do it because there was another ask for the more immediate expectations of their market that the operplus would need to do.

While Swedish Prime Minister Ulf Christerson traveled to Washington for talks with President Biden, including on his country's admission to NATO. But with all the traveling around, it was good to know that the Federal Reserve remained on the job in Washington, as we got minutes from its most recent rate meetings, which showed that they weren't entirely on the same page last month about whether they should pause.

The idea of slowing down the pace of rate increases and continuing to slow the pace of rat increases makes sense, and I.

Think more restrictive monetary policy will be needed to achieve the FOMC schools of stable prices.

Then at the end of the week, we got the job's umbers for June, with a little something for everyone. The US added two hundred nine thousand new jobs than the month before and less than anticipated, but still the unemployment number still went down by a tenth the three point six percent, and wage growth accelerated to an annual

Today's jobs Friday and leading up to it during the week, there are other indicators for the jobs market suggesting that the jobs market's still very healthy and a lot of job creations still occurring, particularly at services. So the jobs report was a little softer than the bond market feared. But you have to realize the bond market was really fearful of a super strong jobs report that would make the Fed have to do more than one or two heights from here. And the jobs report when it came in,

Well, are we through? Are we getting to a breakthrough on bonds here? Basically? Are we breaking through to new levels in the tenure? And for them out of the two.

That's the interesting question. It's are we walking into a new norm? And is that new norm the old norm from ten to twenty years ago. I think what's happening, particularly in the ten year yield being over four percent, is that the bomb markets starting to run out of patience for the FED to win this inflation war. Inflation is coming down, but it's coming down too slowly because it's been two years now that inflation has been well

Well, and if you look at things like the ten year break even versus the PCE core numbers. There's a very substantial difference now that there hasn't been historically, and one of those I guess it has to come down or come up. That's right.

So when you look at ten year treasury yields at about four percent, the break even or essentially the inflation expectation embedded in that four percent yield is about a two and a quarter percent break even inflation expectation as recall. So essentially the long term has been saying it believes the Fed that the FED is going to get inflation back to its two percent target, but eventually is not

As a student of the markets, what is your best sense of how long the FED has If I can put it that way, we're going to get CPI data. Next week, we're going to ask other data coming in. We most of us expect that there's going to be a twenty five point basis point increase in July. Right, the question is what happens in September? What happens after September? How long does the FED have?

So now we're going into the back half of twenty twenty three, and the first two years were that period of time where the bomb market is willing to give the FED a couple of passes. But now, if inflation doesn't get down faster, I don't think the FED will be forgiven by the bomb market over the long term.

If in fact, we're baking in higher levels for the tenure, let's just stay on the tenure here. What does that mean for the equity market? Because there's a discount factor here, and typically equity valuations go down, and particularly in some of the growth stocks such as tech right, which has been doing pretty well well.

This week is about interest rates, and we'll continue to watch interest rates over the rest of the year. Next week we get some more reports on earning season. I think earnings will be about fifty five dollars in the quarter, or two hundred and twenty dollars for this year. The SMP's trading at twenty times this year's earnings estimate, and tech the tech sectors trading at thirty times this year's

Okay, so let's assume for the moment that earnings actually measure up and actually support those valuations. Where's it going to come from? Is that from price equity ratios? Is that from top line growth? Where are we going to find it?

Well, most of the top line growth that we're seeing is really just inflation and basically the same things occurring at earnings. And I do expect fifty five dollars of earnings for the second quarter which would be down a few percent from last year. But earnings at the SMP have been about fifty five dollars per share on a seasonally adjusted basis for the past two years, so earnings have been flat since late twenty twenty one. Where's the

Tech and particularly some big tech, has really been dragging the market average up. Without a doubt that's come down or does the rest of the market catch up?

Right?

I believe that mark the tech sector is due for a correction. I don't know if it's in the coming days weeks, but I think over the course of the rest of the year that the tech sector will correct by about ten percent. And for those who are in the debate about will the rest of the market catch up to tech, will that bring the market to even new highs for the year? I doubt it. I think in order to be bullish on the market, you need

AI going to save this.

AI may save the decade in terms of productivity and decent economic growth, but I don't think AI is going to save the really weak earnings growth I see for the S and P for the rest of the year.

What about government investment, because we have Bidenomics now as President Biden Fairmount investment coming into industrial policy exactly right as we had in Japan in the eighties. Is that likely the kicking to really help drive growth and productivity? And if so, how long does it take?

Well, it will take time. We'll find out what returns on investment and what productivity we get out of that over time. But in the meantime, we do see investment in manufacturing capacity in the United States, but manufacturing output has been weak and we are still in this manufacturing recession. It's all on the service side of the economy that's booming right this moment.

David's always a treat to have you with us, Thank you so much. That's David Bianco of DWS coming up our special contributor Larry Summers on what the jobs numbers tell us about the strength of the economy and where long term interest rates are headed. That's next on Wall Street Week on Bloomberg.

This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio.

This is Wall Street Week. I'm David Weston. We're delighted now have to have our special contrader, Larry Summers of Harvard to help take us through the job's numbers and other eco numbers. What they told us is week Larry, great to have you back with us. What did you make of the jobs numbers? And by the way, there were other eco numbers as well this week.

David, these are hot numbers.

The rate of job creation is twice as great as the growth in the number of adults in an economy that's already overheated. That's not consistent with bringing inflation down to its target level. And you see that in the wage data, which is pointing to inflation way above.

The Fed's target.

We've got a low unemployment rate at three point six percent, and.

If you look at any of the other labor market indicators that we got this week, quit rate, the level of vacancies, the layoff rate, the insured unemployment data, all of that, based on past patterns, is suggesting an even tighter unemployment rate than the three point six percent.

So I think we've got an economy.

That is currently very strong, not sustainably strong in terms of the rate of job creation, and not very surprisingly given that strength, we continue to have inflation and indicators of forward inflation well above target. So I think the market is right to judge that once again the Fed has underestimated inflation for basically the eighth quarter in a row.

Not nearly as strong as.

The ADP number, But if you step back to the bigger picture, nobody thinks we can continue indefinitely to create jobs twice as fast as the adult population grow. That means we're having tighter and tighter labor markets, and that means an inflationary picture, and the Fed's going to have to respond to that.

Larry, you were one of the very first, maybe the very first to identify this risk Kreen Wall Street, but also in your pieces for the Washington Post. I guess the two questions that occur to anyone is number one, what's it going to take for the FED to get really inflation or control number one? Number two is why has it taken so long?

It's taken so long because we started out so late, and given how late we started, we didn't move sufficiently because we believed mistakenly that the neutral interest rate was still very low, and we believed mistakenly that raising interest rates would have large impacts on the economy that were greater than the impacts of interest rates in the current structure, And we haven't really recognized that it's a basic feature of the inflation process that while you get transitory fluctuations,

But nobody ever thought.

We were in underlying eight percent inflation country when we were having eight percent inflation.

So the fact that.

The rate has come down shouldn't be confused with saying that we can be confident that we're on a path of this all being okay, and certainly not worth saying that we're We can be confident that we're on a path for this all being okay without the FED doing more to raise race. So anything's possible, and all of these judgments stated are statistical. Maybe we'll get a big productivity boom out of AI very quickly, though I think

Let I want to turn to a different subject here that you wrote about in the Washington Post this week, and that is the so called the front of action decision coming out of the Supreme Court. Station you not only are an esteemed economist, you not only were section of the Treasury. He also ran Harvard for some time. You really lay out there how difficult this issue is, that it's a broader issue, it's an important issue of their broader issue. Then simply raise.

I wish the Supreme Court hadn't acted.

I wish it had let the world continue on the path that it was. Let private institutions make their choices about how they're going to pursue fairness as they see it. But right now there's a critical choice that leading universities face.

That's one approach.

I think if they do that, they will be increasingly resented.

By the broad public.

They will diminish the intellectual quality of their classes, and in fact, they will have done very little to promote social justice. The alternative path is that they step back and that they recognize that really the important test for them in this era is their overall contribution to opportunity in America, and if that's what they want to maximize,

Students with computers.

And crucially crucially turn their energy two strengthening what happens in our public schools across the country. Look David, only about one and a half percent of the students who score in the top ranges of the SATA are African American YEP. Until we fix that, no durable solution to these problems. That needs to be a crucial part of the mission of our elite schools.

So terribly important, so profound. Thank you so much, great to have you back with us. That's our special Conturlly Larry Summers coming up. The oil and gas riches of the Gulf States have given them enormous funds to invest in the West, but they're also attracting substantial investments from the West. Tom Barrick has been an active player in the region for decades. He'll tell us what he has learned.

If we're not there to hand in glove fix the rest of the things they need, China will be there.

This is Wall Street Week on Bloomberg.

This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio.

The Gulf States. Since oil was first discovered in Saudi Arabia in nineteen thirty eight, the region has dominated the world of geopolitics because of its rich deposits of oil and gas, and this week Saudi Arabia once again sought to assert its power by extending production limits.

We needed to head on, reach out to these issues, attend to them, and go for what we think would be that I tricipy to attend to this market situation, but.

For investors it's not just a question of what Saudi Arabia and the UAE will mean for the price of oil or cutter for natural gas, but also what investments they'll make with all those revenues.

Secondly, what we see in the golf is a remarkable determination to pursue reforms. There are some putting that the fortunes of the golf are oil and gas. In fact, the fortune of the golf is decisiveness in putting economy on long term sustainable path.

Investments like the Kingdom's public investment fund in ev makers, Rivian and Lucid.

They're not really just about EV's, They're about the whole ecosystem that comes with EV's and technology.

We're making bets for the future and for the green future as well.

Or it's l iv Golf venture being merged with the PGA.

I think getting together is the best thing for golf. This fight that was going on in the lawsuits that were raging in a one side the golfers from Live you know, taking shots at the PGA and vice versa. That's not constructive for the game.

The UAE is one of the largest shareholders of the Carlisle Group and recently agreed to acquire a seventy percent equity stake in Fortress from Softbag, but Alla will own seventy percent of Fortress equity while Fortress Management will hold a thirty percent equity interest. But the investment funds don't only flow from the Gulf States to the West. Saudi Arabia looks to raise some of the five hundred billion

Twenty three financial institutions participated in the close of the Degree and Hydrogen and.

According to UN statistics, the UAE is the largest recipient of foreign direct investment in West Asia. And to take us through the possibilities of investing in the golf, welcome now someone who has spent his career there is Tom Barrick under of Colony Capital. Tom. Great to have you here. Thank you so much for being on Wall Street week.

Great to be with you.

David.

Thank as I say, you really have spent your career in and around the golf. Give us an investors perspective right now in the golf, where are their opportunities but also where are their perils?

So it's always been a misunderstood era, right, because it's tribes and flags. When we talk about the golf there's fifty four countries really that make up kind of the consortium of golf countries for big ones. But if you think about it, the resource curse, so from nineteen sixty on, the discovery of oil and gas in the small populations led them in really a seventy year period to dominate

Classes around the world.

So the goal at the moment is for them to diversify outside investments and at the same time start moving their own economies and their own young populations to a non resource based economy. That's the biggest challenge in most of these countries. The royal family directs the politics, and the politics is also driving the business decisions. So you have the same individuals positions that are looking at these big themes over long periods of time. And the constituency

Whenever one invests cross border, there's political risk involved. How does one assess the political risk in that region? Certainly we've seen it flare up in Saudi Arabia in various ways. How does one assess that and make sure that you're protected from that possibly affecting your investment.

Slowly and carefully. I'm a great example of that. So I think for all business men, soft diplomacy is part of the goal that you're trying to reach longline relationships, understanding the geopolitical risks of where you are, the rule of law, the cultural orientation. We've always talked about this cultural sickth sense, but foreign policy has so much to do with it, especially in this region. It's a dangerous place.

World War One.

They as a group are the largest buyers of US military equipment. Sada, Arabia, katar Abu Dhabi are our largest foreign buyers of US military and we have military agreements with all of them. But foreign policy ebbs and flows in that part of the region, and as we've seen now with sanctions, for instance in Russia and the threat of sanctions elsewhere, the rule of law sometimes is confusing to them as to the difference between foreign policy, military policy, business practice, business diplomacy.

Time you refer to your personal experience and being exposed to some of the risks and what you call soft power with investing. You obviously were indicted in nine counts, you had a seven eight week trial and New York you were quitted on all charges. Must say, what did you learn from that experience that would be helpful to others.

In twenty sixteen, Bob Muller started investigating President Trump for Russia, and by the way, I have nothing but respect for Muller and his team. They did the job they were supposed to do, and they did it elegantly in the manner of which it was supposed to be done. And during that time he had asked me to testify voluntarily, which I did, And this was about Russia. But in that process the Gulf States were starting to surface for interest.

Who is Donald Trump?

I thought this for me at the time time was an incredible opportunity. I mean, you and I have talked before.

Was never really political.

Donald have been a friend of mine forever. I thought, this is a great opportunity to start shipping at the system from somebody outside of the system. So what got confused with me was my interaction, which was always business. As I said that the rulers of all these countries also are the ones making all the business decisions. So the sovereign wealth funds ultimately are governed and ruled by

Thank you so much for ving Walster. We really appreciate it. That's Tom Barrett. He's the founder of Colony Capital.

Coming up.

People keep waiting for reel cracks in credit. Portam Apori of HPS. It tells us whether they are coming.

You've got spreads that are actually not that wide and perhaps not representative of the risk in the corporate credit market.

This is Wall Street Week on Bloomberg.

This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio.

This is Wall Street Week. I'm David Weston. Solid jobs numbers out this week underscored the likely to have another FED rate hike later this month, with more possible in the fall, posing further challenges for the credit markets. Were welcome now a credit expert. She's Pronum a Pori, governing partner of HPS Investment Partners. So Portuma, thank you so much for joining us. Let's start with that question of monetary policy. People are expecting the FED to keep hiking at least.

For a while.

What does that mean for the credit markets you deal with.

Yeah, so we generally deal with leverard credit, and I think that we are of the view that they're lazy to be one more hike, maybe there's two more hikes. I think that in general we're sort of closer to the end of said hikes than obviously we are at

So when I checked it this morning on the Bloomberg, the spread for high yields just take high yield with something like above four hundred and fifty bases points, Where do you expect that to be going? Is that where we end up? Or is that going to continue to rise? And so when.

Yeah, so I think you got a big push and pull, which is that base rates are pretty high in north to five percent uh, and then you've got spreads that are actually not that wide and perhaps not representative of the of the risk in the corporate credit market. And I would actually say that's true for investment grade as well. I think investment grade is you know, one forty over plus or minus and high yields in the sort of

Well, it take us through how it works in credit, the mechanics of it, because I've seen some reports that there may be a delayed response because some companies, and this is both for investment grade but also for high yield or leverage loans locked in rates you know, at a lower rate that's coming due in the next couple of years. I'm told a fair amount of money is coming due and it may be a little difficult to get refinanced at acceptable levels.

Yes, I'd sort of take that into two pieces. So in general, you got a bunch of fixed rate bonds, whether that be investment grade or high yield bonds that were issued at a different moment in time in the market when the five year and the tenure were significantly lower. Those fixed rate bonds are a real asset right now in the in the current rate environment. I think on the on the second ended spectrum, you've got the loan market, which is a large, large market, which is all anchored

We look toward refinancing. Has the bargaining power shifted between the lender and the barrow or There was report actually just this week that KKR had to make concessions lenders to refinance a deal in a Dutch food company without talking about the specifically of that. Are you seeing that phenomenon or do you expect it more generally? We had covenant light, maybe we're going away from that. Yeah.

I'd also answer that in two ways. So the first is it depends. The answer is true, some of these bigger, well known businesses that are large, large corporate capital structures, there are some covenants and stuff that are getting put in place when they're being issued through the liquid markets. But I wouldn't say there's been a huge seat change. It's gotten better, but I wouldn't say there's tons of covenants.

Okay, Pornema, thank you so much for being on Wall Street. We really appreciate it. That's PORNIMFORI. She's at HPS Investment Partners. That does it for this episode of Wall Street Week. I'm David Weston. This is Bloomberg. See you next week.