TRANSCRIPT 🔗
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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
00:00:11
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordernt join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. We begin this hour with stock sliding his investors brace of FED check Kevin Walsh's speech on Friday, and wilsh the chief investment officer of Guggenheim Partner's Investment Management, writing the Jackson Hole meeting is an opportunity to clarify the strategy to address inflation. The Hawks have grown louder, but inflation progress should be enough to avoid hikes this fall. And joins us now for more and good morning, good to see.
00:00:57
Speaker 3: You, Good morning, glad to hear we.
00:00:58
Speaker 2: Get into this as you know I am. We're anticipating us getting into the issues around Mark Waltters and his affiliation to Gugenheim. More broadly, I'm going to go through the details as we understand them. As I understand them, whether these loans from insurers were directed to other parts of his empire without being properly disclosed and labeled as affiliated transaction. That seems to be the epicenter of the investigations right now. I'm sure clients are very interested in way you stand and what it means for Gugenheim Asset Management. Where does Gugenheim Masset Management sit in all of that.
00:01:30
Speaker 4: Well, let me see if I can create some clarity around this. In particular, what is not the focus of any inquiry is to our investment management process, our people, our performance and returns, or our trade allocations, which has historically been an area that the SEC would open an inquiry into an investment management firm. That is not the case here. We are working day in and day out for our investors with the same integrity and fiduciary responsibility that we have always engaged in at the firm and will continue to do so. In particular, at this time with markets being so uncertain, we do have an inquiry into a business accounting issue in one of our subsidiaries, and we've been very open with regulators and very cooperative in their investigation and we will continue to do.
00:02:25
Speaker 3: So, and that, as I said, is a business issue.
00:02:28
Speaker 4: We've engaged with our auditors and we feel that the accounting treatment was appropriate. With regard to TWG and its insurance entities, that is a fully separate matter. And of course they are dealing with their regulators and have also very cooperative and as I understand it, have entered into a remediation agreement or a protocol and that has been.
00:02:55
Speaker 3: As I said, very cooperative.
00:02:57
Speaker 4: At this point in time, I think investors need to be assured that we again are working very much diligently day in and day out. Again because these markets are so uncertain.
00:03:09
Speaker 2: How cooperacific client spent out of the past few weeks.
00:03:12
Speaker 4: Very supportive and once it's very clear to them exactly what is happening and.
00:03:18
Speaker 3: We are able to explain.
00:03:20
Speaker 4: Then as a result, we have been able to assure them and I think again assuage their concerns.
00:03:28
Speaker 5: Do you think that the climate has adjusted such You keeps saying that markets are incredibly complicated, and they are, and we're talking about for example, and Nvidia and some of the accounting mechanisms that have been going on with respect to where they book profits versus the hyper scalers as they spend. Do you think that rumors spread faster right now because people feel like there's so much money being spent. It's such a difficult, fraught time with so much money going to private sectors with less transparency.
00:03:55
Speaker 4: Well, look, this is the world within which we are operating. The markets are highly fragmented and stratified. So at this point in time, what we're seeing is we're seeing the intra sensitive parts of the economy are maybe a bit more wobbly. We're going to talk about rates that's obviously having an impact. We're talking about private markets have grown significantly over the last number of years, and with BDCs and some of these other transactions, particularly concerns over software, we're starting to see a lot of investor nervousness. And by the way, we're coming up into that time of the year September and October, which historically is a market volatility period of time, and as a result, investors are more nervous than probably they would otherwise be.
00:04:44
Speaker 5: We were just talking with Earl Davis who said he's going to the back of the theater near the exit door, talking about how he is looking for ten year treasure yells to go between five and five and a quarter percent and thirty year treasuries to go to six percent, but so wouldn't buy them.
00:04:58
Speaker 3: Do you see things the same way?
00:05:00
Speaker 4: I think that's a very provocative statement. What I would say is is that here we are in a trading range on the tenure, and at the low end we've been down into the high threes. At the high end we're four seventy four, seventy five, and at for seventy five, that's pretty much the high end of our range. If we see five percent on treasuries on the tenure, I would tell you that is a buying opportunity. I think the markets aren't able, particularly the equity markets aren't really able to function as well beyond that, and I do believe that titans financial conditions. The thirty year, however, historically has traded much more on inflation concerns. I don't see us going to six percent on the thirty year, and if it does, I would take the opposite view, and I'd back up the truck and I buy a lot
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of six percent thirty year treasuries.
00:05:52
Speaker 3: I think that at this.
00:05:54
Speaker 4: Point in time, what we're also seeing I said stratification earlier, we're seeing that also in the pull up. Another factor that's happening, and that is the sheer amount of debt that's being issued, not just at the treasury level from fiscal spending, but also because of data centers and AI trade.
00:06:14
Speaker 3: The AI trade.
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Speaker 4: That's happening at this point in time, and as a result, we're seeing this very significant amount of need for capital and they want to issue in the long end, which is pulling rates up.
00:06:25
Speaker 5: Do you want to invest in that debt long duration, hyperscaler debt or do you see that as potentially more toxic than US government debt should things turn south.
00:06:35
Speaker 4: I think there are other parts of the infrastructure trade that make a lot more sense, power build out and other kinds of long term real asset investing. My concern about the data center build out and the cost of that is the obsolescence risk in.
00:06:50
Speaker 3: The long term.
00:06:51
Speaker 4: Now, I am selectively an investor in shorter duration offerings, but we have.
00:06:57
Speaker 3: To be thoughtful because the AI.
00:07:00
Speaker 4: Offerings that are coming out in the capital market are not in just one place. They are in unsecured investment grade credit, they're in structured credit, they're infrastructure, So you have to be really thoughtful to make sure that you're getting the right amount of diversification. There's trillions of dollars of capex in this space that is happening over the next several years, and as a result, there's going to be continued need for capital, and I think being thoughtful and layering in is probably a better way to be investing in this space going forward.
00:07:31
Speaker 2: And so much of that is investment grade right to debt. Ol Davis Abimo Lisa was talking about the six percent cod The otherness is an interesting take he had. He was de risking on the credit side, but drop in all the high yield exposure and then refilling at the front end of IG. What do you think the risk is in credit right now? Because we've had a series of conversations that have raised the question as to whether actually it might be sitting in investment grade and not in high yield. With regards to this story, well, in.
00:07:56
Speaker 4: The high yield market has actually shrunk over the last number of years anyway, and has actually moved up in credit quality.
00:08:03
Speaker 3: It is a very.
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Speaker 4: Different market than it was, say, ten years ago, even with regard to the high level of capital issuance and debt issuance that's happening, particularly in the long end on investment grade to fund this AI build out. And by the way, I'm very positive on the AI technology in the long run, but I am concerned in the nearer term with regard to the risk that's happening, and simply again that stratification that's happening because there's so much issuance there that is demanding a higher level of coupon and for me to get invested, it has to be paying a lot more, and that makes sense to me as an investor.
00:08:44
Speaker 3: The risk is elevated and there.
00:08:46
Speaker 4: Is concern, and of course we've become much more aware of the fact that these issuers are three free cash flow negative at this point in time, and I think that's something to be concerned about. Whenever you see has historically a huge amount of debt issuance, whether it's whether it's the fiber optic cable build out of the late nineteen nineties or the financial crisis, you know, the lead into the financial crisis where there's so much debt came out, and any time you see that, you have to sort of say to yourself, I think we need to be thoughtful with regard to this concentration of risk and to be aware that it could have repercussions to the credit market.
00:09:26
Speaker 2: Did you think this s fed? These the times of financial conditions.
00:09:29
Speaker 4: I think the FED has done something with the beginning part of the year in that they increase their balance sheet in the ample reserves regime to by the tune of about three hundred billion dollars in the first six months of the year. Those purchases have now stopped, and I think that it's confusing.
00:09:49
Speaker 3: To the market.
00:09:50
Speaker 4: This is one of the elements that I think Chair Warsh is going to be spending time on. He's already mentioned it is the evaluation of how does the balance sheet act as a tool. And I think that's a very important initiative for the FED to take up. And I would say that by increasing the balance sheet by three hundred billion dollars, that's the equivalent of about a quarter basis point. It's going to be a quarter percent rate cut. And so they've been actually somewhat stimulative. Along with the one big beautiful build attacks benefits, fiscal spending, I mean it's and tariff refunds. This has been a very heavily stimulative first half of the year relatively speaking, that I think actually slows down and may even come to a stop here in the second half. And so I think that investors need to be aware the financial conditions are probably going to naturally tighten. And to Kevin Worrish's perspective, I think the market is going to.
00:10:46
Speaker 2: Do some of the Fed's job for them, unless Besson has other ideas. And I appreciate it. And wilsh your Gegenheim, thanks for dropping by, stay with us. Mult Bloomberg surveillance coming up. After this, trade talks between the US and Canada officially breaking down, Canada firing back against state fifty percent tariffs with a twenty billion dollar council Levy sources, talagates Herupelomberg, the Prime Minister. Mount County's government, sees little chance of negotiations resuming before the midterm elections. To build on this, Bran Gardner of Statehood, let's talk about why we're doing this. Why is the US going
after Canada to the extent it is going after Canada.
00:11:32
Speaker 6: I think it goes to the fact that.
00:11:34
Speaker 7: In my view, the president sees economics and trade is a zero sum game. I think that's the simplest, most accurate explanation for this. So if the US, if Canada loses, the United States wins, I don't think he believes in it as much of a win win scenario. That has underpinned US trade policy, global trade policy for the last forty plus years.
00:11:58
Speaker 6: So I think that is the explanation.
00:12:00
Speaker 2: Roan, we still have USMCA. When you see numbers like fifty percent on some goods, how much have tried tod we actually talking about how much foes under the USMCI and how much foes under this spap Right now.
00:12:12
Speaker 7: This is a I mean, this is still a fairly low percentage of overall trade with Canada, so we can't blow it out of proportion. But the tone, the way the negotiations collapsed, the way that USMCA has been evolving, it does call into question on what changes are coming for us MCA, What is the long term implications for North America trade. I mean, it's kind of amazing that we're sitting here. You know, going into the Trump administration, you would have thought that US Canada relations would be in a better place than US Mexico relations, and they're exactly the opposite. I think we're in a better place with Mexico and more likely to get longer term agreements with Mexico than we are with Canada.
00:12:58
Speaker 5: It's pretty remarkable ran there was a that going into the midterm election cycle there would be some relief from tariffs, or at least the threat of them, to reduce the cost of living. Do you think that that playbook is gone?
00:13:11
Speaker 6: No, I mean I think they're still there, Lisa.
00:13:14
Speaker 7: I mean the cut in tariffs on beef imports recently. I think that that underscores the worries of the administration, their perceived vulnerability on affordability going into the midterms. Look, when when you go into any kind of negotiations like this, various parties can overplay their hand.
00:13:39
Speaker 6: And I'm not going to point fingers.
00:13:40
Speaker 7: Maybe it was the Canadians who thought, because of what you just said, Maybe they thought going into the midterms that they had a stronger hand to play and that they could get a better deal, and taking a page out of the Trump playbook.
00:13:54
Speaker 6: Maybe it's, you know, the art of the deal.
00:13:56
Speaker 7: Maybe once in a while, you just walk away from a deal from negotiations and force the other side to reconsider and.
00:14:04
Speaker 6: Come back with a better deal.
00:14:05
Speaker 7: Maybe that's maybe they're playing a longer game for this. But to your initial question, Lisa, No, I think the administration is still very concerned to on affordability and that's why they're lowering tariffs and other products.
00:14:18
Speaker 5: The reason why I ask is because there was this reported meeting between House Democratic Leader Hakim Jeffreys and Jared Kushner in the past couple of days talking potentially, we're not sure, but reportedly talking about how to work more closely together. If the Democrats win the House, this would be the person who would have to work most closely with the administration. Do you think that that is a significant tell that this administration is preparing for a divided House and gridlock for the second half of President Trump's second term.
00:14:48
Speaker 7: Yes, and I think they understand reality book that they're going to pull out all the stops to either keep the numbers low or defy history.
00:14:57
Speaker 6: But they know what history is, which is that the party out of power.
00:15:01
Speaker 7: The Democrats are likely to pick up seats in the midterms, and since they only need three the bar is pretty low, and so I think it's just facing reality as it is doing the correct outreach. Jeffries himself is going to be in a very difficult spot, so maybe there because he's going to have a fractured conference with some new DSA members, some more mainstream members who.
00:15:24
Speaker 6: Are opposed or in conflict with the left wing of the Democratic Party.
00:15:30
Speaker 7: And so I think the administration is taking the correct steps and doing some outreach. It's going to be a rocky two years, but it doesn't mean that you can't talk to the other side and see maybe are some areas of common ground, some areas where you can avoid conflict unnecessarily.
00:15:46
Speaker 2: Ron and Trump one, A lot of people complained about the tariffs on China then underbid, and very few, if any weccount in Trump too. A lot of people complained about the tariffs on everybody, and yet I see very few people, if any, campaign and to cut them into the mid tims, Brian, why's that no part of the conversation.
00:16:05
Speaker 7: Yeah, I think among the public, I don't think the terrorists are overly popular with the public, but they do resonate with key constituencies, and so there's I think politicians, members of Congress looking at this just don't see any reason to go out and advocate in Very few of them will advocate in favor of rolling them back. Maybe Ram Paul from Kentucky one of the few, but most of them. Let's go back to the beef import example, because that got a huge amount of pushback domestically from US producers.
00:16:46
Speaker 2: Stay with US, multiple impex. Savannah's coming up after this, Troy Kanisky future standard writing. Private markets are holding gup. AI concentration is becoming a portfolio issued. Capital is increasingly concentrated around AI across both public and private markets. Troy joined us now for more. Troy's been so long, my friend, Welcome back to the program. This is a question so many of us have asked. Are we all in the same traite?
00:17:20
Speaker 1: Yeah, I think the concentration has gone up substantially. I mean most of the press and most of the analysts focuses on public markets
where you have more and more tech and AI concentration, which is fairly obvious. But I think what's happened this year, particularly in private markets, is more and more capital, whether it's going for go go growth or whether it's going for AI infrastructure has really increased substantially, and so when you think about the use case for alternatives, you know, one of the principal use cases for something like middle market private equity has always.
00:17:51
Speaker 6: Been growth at a reasonable price.
00:17:53
Speaker 1: But what's becoming more and more important is that diversification away from AI risk because in the event that there isn't a meaningful ar ROI C to justify the continued growth or even the sustainability of the current growth and spending, that could lead to obviously a very negative economic outcome, not to mention a tougher outcome for public and certain types of growth oriented private market exposures.
00:18:18
Speaker 2: Troy, what are the opportunities like elsewhere and to what extent they being crowded out by the issuance we're saying for the Treasury that we're saying from Let's just look at this morning, Self Bank planning to write six billion in Japan, about raising ten billion in Hong Kong, the AI players, the hyperscatus issuing tons and tons of debt. How much crownic gat you saying, Yeah, So.
00:18:39
Speaker 1: I think again, if you look at opportunities for growth away from AI, you know, we focus on in a market private equity where a lot of the exposures are what I refer to as boring is beautiful things like mobile payment applications or paving or specialty foods. You know, these are good core businesses that make up about a third of private sector GDP. However, in other areas there are other growth factors like robotic surgery or infusion care. There's a lot of growth now tied to defense. So the argument isn't that you shouldn't own AI or AI risk. It will more than likely turn out fine. However, if it doesn't turn out fine, it's good to have an exposure or portfolio that can provide you growth like returns without that singular level of concentration risk.
00:19:26
Speaker 5: Do you find a lot of the positions that you're looking for increasingly crowded? Because people have been talking about garb or growth at in a reasonable rate for a while, and then we say the Russell two thousand surge, I know is what you're talking about with private markets, but it is a proxy for smaller companies and the dynamism that people are foreseeing.
00:19:42
Speaker 3: At what point does it get too crowded?
00:19:44
Speaker 5: Is people just sort of chase something that can be relatively immunized from that larger potential risk.
00:19:50
Speaker 3: Yeah.
00:19:50
Speaker 1: Well, it's really interesting because to John's point, the crowding has happened more in terms of AI and a infrastructure.
00:19:58
Speaker 6: However, because there's.
00:19:59
Speaker 1: A dearth capital, the returns that you can make there are still very attractive. Now to your point question, Lisa, what's really interesting is this year we've seen, particularly in our co invest pipeline, a tremendous level of deal activity and the reason for that is pretty straightforward. You have very strong NONLAL GDP growth and many of these small and medium private enterprises need capital just to meet the demand backlog because of the demand shock we're seeing across various growth verticals including defense and again other niche areas. So that's the principal reason the pipeline is on fire, and we just haven't seen any evidence of crowding out in that niche area of the market. Now, to your point on the Russell, the Russell has been on quite a tear and as a reminder, the Russell trades more expensively on a pee basis than the NATSDAK and on an enterprise died eve Ada basis and the SMP, but typically has given you much lower revenue and earnings.
00:20:56
Speaker 6: Growth, So you know, rooting for the Russell.
00:20:58
Speaker 1: We're not saying that it's a bad place to put it, just strikes us as very expensive relative to larger indices that are out there with better growth prospects.
00:21:08
Speaker 5: As benchmark yields go up significantly, particularly in longer term debt, how much does that change the calculus when it comes to private debt versus private equity.
00:21:17
Speaker 1: Yeah, so most private debt is priced at the front end of the curve, right, So if you think of the back end of the curve, that's really an issue.
00:21:23
Speaker 7: More.
00:21:23
Speaker 1: This steepening we're seeing is more of an issue for long duration fixed income obviously for ig markets for secretary best and unfortunately in the front end is where the anchor rate is. For private debt, it's just sofur plus market.
00:21:37
Speaker 6: So having the FED lower.
00:21:39
Speaker 1: Rates by one hundred and seventy five basis points so far has reduced the interest expense for private borrowers by about fifteen percent, which is substantial. That has led to an increase in credit quality. We don't expect further pressures in the front end. We're not expecting or the FED to actually high grate, so that will keep barring pressure lower and ultimately, in the event that the FED cuts over the next several years, that will further increase futy rate borrower credit quality, which as a private lender is very very important.
00:22:13
Speaker 6: Troy.
00:22:13
Speaker 2: It's got to say thank you, sir trog Esci.
00:22:15
Speaker 6: There.
00:22:17
Speaker 2: This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app.