Wall Street Week 05/03/2024

Summary

This week on Bloomberg's Wall Street Week, David Westin discusses the Fed's decision-making process with Larry Summers, who critiques the Fed's confidence in disinflation and suggests the market has appropriately adjusted expectations for interest rate cuts. The show also addresses the Japanese yen's fluctuation and government intervention, with Summers doubting the efficacy of such measures. The program further explores the state of college campus protests related to the Israeli-Gaza conflict, with Summers expressing concern over the implications for higher education. The impact of the strong US dollar on global markets is another focal point, as is the role of professional sports as an emerging asset class, with insights from Josh Easterly of Sixth Street. The episode concludes with a discussion on emerging markets, US dominance, and the varied economic performances of countries like India, Mexico, and China, with Sonny Beschloss of Rock Creek providing expert analysis.

Takeaways

• 📉 The Federal Reserve's decision not to cut interest rates this year reflects a cautious approach to managing inflation and economic stability.
• 💹 Despite recent market volatility, Larry Summers suggests that the fundamentals of the economy remain largely unchanged from the beginning of the week.
• 🏦 David Bianco highlights that the jobs report indicates a slowing but still healthy economy, with employment and the market remaining strong.
• 🏢 The success of sports as an investment asset class is driven by the demand for live content and the growth of ancillary businesses around sports teams.
• 📈 Josh Easterly discusses the potential for continued growth in private credit, emphasizing its durability and safety compared to traditional banking models.
• 🌐 Sonny Beschloss notes the divergence within emerging markets, with some economies like India and Taiwan showing strength, while others face challenges.
• 💵 The strength of the US dollar is impacting global currency markets, with some countries intervening to support their currencies, but the effectiveness of such interventions is debated.
• 📚 Larry Summers expresses concern over the state of discourse and leadership on college campuses, particularly regarding geopolitical issues and anti-Semitism.
• 🏛️ The importance of college leadership in navigating protests and maintaining educational integrity is emphasized, with a call for a return to serious contemplation of moral issues.
• 🚗 David Bianco suggests that while consumer spending may be affected by higher interest rates, particularly in durable goods, the service sector is expected to hold up.
• 🤝 Partnerships between private credit firms and banks are seen as a prudent approach to risk management, with banks taking a significant portion of the loan while private credit provides the capital.

Q & A

What is the current stance of the Federal Reserve on interest rates according to the discussions?

The Federal Reserve has indicated that it is likely to stay the course with interest rates, suggesting that the next move could be a hike rather than a cut. However, there is recognition that the economy is not in a fundamentally different place than at the beginning of the week, and the Fed is data-dependent, meaning they will adjust their policy as new economic data becomes available.

What does Larry Summers suggest about the market's adjustment to the Federal Reserve's expectations for disinflation?

Larry Summers suggests that the market has appropriately adjusted from expecting six rate cuts this year to about one cut, reflecting the realization that disinflation is not on the secure path that the Fed had hoped for a few months ago.

What was the general sentiment regarding the U.S. economy's performance in the discussed data?

The sentiment is that while there is evidence of a slowing economy, it remains relatively healthy. The jobs market is still strong, and there is a sense that the most likely scenario is no cut or a slight reduction in interest rates this year, with a greater risk of inflation remaining robust rather than a sudden economic downturn.

What is the current status of the Japanese yen and its relation to the U.S. dollar?

The Japanese yen has been fluctuating, with some intervention by the Japanese government to support its value. However, the overall strength of the U.S. dollar, influenced by the Federal Reserve's policies, is a significant factor. The discussion suggests that intervention may not be as effective as private sector capital flows, and the yen's future direction is uncertain.

What are the implications of the strong U.S. dollar on global markets?

A strong U.S. dollar can impact global markets by making American goods and services more expensive abroad, potentially affecting exports. It can also influence capital flows, as investors may be attracted to the relatively higher yields in U.S. assets, which can affect emerging markets and other economies.

What is the current situation regarding protests on college campuses related to the Israeli-Gaza conflict?

Protests on college campuses related to the Israeli-Gaza conflict have continued and, in some cases, escalated. There have been instances of police intervention at various locations, including New York and Columbia, reflecting a broader concern about the impact of these disputes on academic institutions.

What does Larry Summers think about the response of university leadership to the protests?

Larry Summers expresses disappointment and appall at the responses of university leadership, criticizing what he perceives as a lack of action in the face of protests that involve symbols he finds objectionable, such as a keffiyeh on the John Harvard statue.

What is the current state of the equity markets according to David Bianco?

Equity markets experienced a dip mid-week but rebounded by the end of the week, with the S&P 500 showing a slight increase and the Nasdaq performing particularly well. The bond market also showed relief with yields coming down, suggesting some optimism despite economic slowdown concerns.

What is the outlook for the Federal Reserve's interest rate policy according to the discussions?

The outlook suggests that the Federal Reserve may not be inclined towards rate hikes in the near term, with a focus on monitoring economic data closely. There is a possibility of a rate cut in September, but it is suggested that the Fed may prefer to wait until after the election in December before making any significant policy adjustments.

What is the role of private credit in the current financial landscape, as discussed by Josh Easterly?

Private credit is emerging as a significant asset class, providing financing for various sectors, including professional sports. It is seen as a durable and safe business model that offers competitive returns and is less susceptible to market volatility due to its funding structure.

What are the key factors contributing to the growth of private credit, according to Josh Easterly?

The growth of private credit is attributed to its ability to provide financing in areas that are not well-served by traditional banks, especially in the wake of regulatory changes post-global financial crisis. The demand for capital in sectors like sports, technology, and other innovative industries is driving the expansion of private credit.

Outlines

00:00

📉 Economic Insights with Larry Summers

The first paragraph features a discussion with Larry Summers, a Harvard economist, on the current economic situation. It covers the Federal Reserve's recent decisions, the path of disinflation, and the market's adjustment from expecting six cuts to one this year. Summers critiques the Fed's overconfidence and discusses the latest economic data, including wage inflation, housing inflation, and the potential for a soft landing. He concludes that while there's a risk of an economic downturn, a more likely scenario is inflation remaining robust, emphasizing the need for close monitoring of economic data.

05:05

🌐 Global Currency Dynamics and College Protests

The second paragraph addresses global currency issues, particularly the Japanese yen, and the ineffectiveness of intervention in currency markets. It also touches on the geopolitical moment and unrest on college campuses related to the Israeli-Gaza conflict. Larry Summers, a former Harvard president, expresses his concern about the leadership's response to protests and the rise in anti-Semitism in elite education.

10:09

📈 Market Reactions and Economic Outlook

In the third paragraph, David Bianco of DWC Group discusses the market's reaction to the Fed's announcements and the jobs report. He notes that while the economy is slowing, it remains healthy with strong employment. Bianco agrees with Summers on the Fed's cautious approach to inflation and suggests that the bond market's relief is a positive sign. He also addresses concerns about economic growth, stating that the economy is resilient and has distance from a recession. Earnings season is highlighted, with tech companies performing well, while non-tech companies show mixed results.

15:12

🏈 The Business of Professional Sports

The fourth paragraph focuses on the investment potential in professional sports, which has become a significant asset class. Josh Easterly from Sixth Street explains how sports have evolved from a pastime for the wealthy to a serious investment opportunity. He discusses various investment strategies, including equity and debt positions in sports teams and ancillary businesses around sports teams, emphasizing the growth and value in these areas.

20:13

💵 Private Credit and Capital Investment

The fifth paragraph delves into the world of private credit with Josh Easterly, who argues that private credit is not necessarily riskier than other lending and offers better spreads. He discusses the growth of private credit, the importance of match funding, and the role of private credit in providing a durable and safe business model for investors. Easterly also addresses competition, the potential for increased regulation, and the commitment of capital in private credit.

25:13

🌟 US Exceptionalism and Emerging Markets

The sixth paragraph features a discussion with Sonny Beschloss of Rock Creek on the impact of US exceptionalism on emerging markets. Beschloss notes the divergence within emerging markets and highlights the strong performance of certain countries like Taiwan and India. He discusses the challenges faced by countries not benefiting from recent global trends and the importance of considering each market individually rather than generalizing them as a single group.

30:16

🤝 Currency Considerations in Global Investing

In the seventh paragraph, Beschloss continues the discussion on emerging markets, focusing on currency volatility and its impact on investment decisions. He explains that while currency fluctuations are more impactful on bond markets, they have not significantly affected equity markets. Beschloss also addresses the cost of hedging in emerging markets and how it often doesn't justify the returns, leading to a focus on markets with stronger currencies.

35:18

🏆 Valor and Discretion in Decision Making

The eighth paragraph concludes the script with David Westin reflecting on the importance of discretion in decision-making, using examples from law enforcement, corporate deals, and his personal experience in news media. Westin emphasizes the value of admitting mistakes and the courage it takes to change course, highlighting instances from the week's news and his own past experiences.

40:22

📚 Closing Remarks

In the final paragraph, Westin wraps up the episode of Wall Street Week, summarizing the key points discussed and looking forward to the next week's show. He signs off with a reminder of the importance of learning from mistakes and the value of discretion in leadership.

Keywords

💡Shuttle diplomacy

Shuttle diplomacy refers to a diplomatic strategy where a mediator travels back and forth between parties to negotiate an agreement. In the context of the video, it is mentioned in reference to Middle Eastern conflicts, highlighting the ongoing efforts to negotiate peace in a volatile region.

💡Fed (Federal Reserve)

The Federal Reserve, often referred to as the 'Fed,' is the central banking system of the United States. It plays a critical role in setting monetary policy, including interest rates, which influence economic activity. The script discusses the Fed's decision-making process and its impact on financial markets and inflation.

💡Disinflation

Disinflation is a decrease in the rate of inflation over time. It is an important economic concept as it signifies a slowdown in the general price level increases. The video mentions the Fed's expectations for disinflation and how market movements have adjusted in response to the perceived likelihood of this occurring.

💡ECI (Employment Cost Index)

The Employment Cost Index (ECI) is a quarterly statistical release that tracks changes in the cost of labor, including wages and benefits. In the video, it is highlighted as a significant economic indicator that can influence the Fed's policy decisions and market expectations.

💡Yield curve

The yield curve is a graphical representation of interest rates on debt for a range of maturities. It is a widely followed economic indicator that can reflect expectations for future economic activity and inflation. The video discusses how yields across the curve have moved during the week, impacting investor sentiment.

💡Intervention (Currency)

Currency intervention refers to actions taken by a country's central bank or monetary authority to influence the exchange rate of its currency by buying or selling currency on the foreign exchange market. The video discusses Japan's potential intervention in the forex market to support the yen, contrasting it with the broader capital flows.

💡Anti-Semitism

Anti-Semitism is discrimination against, prejudice, or hostility toward Jewish people. The video addresses the issue of anti-Semitism in the context of protests on college campuses, highlighting a perceived double standard in how it is treated compared to other forms of prejudice.

💡Stagflation

Stagflation is a situation in which the economy experiences both stagnation (slow growth and high unemployment) and inflation (a rise in the general price level). The term is used in the video to describe a potential economic scenario that the Fed aims to avoid, as indicated by Chair Powell's statements.

💡Ancillary businesses

Ancillary businesses are secondary or additional revenue streams that complement a primary business. In the context of the video, ancillary businesses are discussed in relation to sports teams, where revenue is generated not just from the team's performance but also from related ventures such as concessions and merchandise.

💡Private credit

Private credit refers to lending activities conducted by non-bank financial institutions, which provide loans to businesses and individuals. The video explores the growth of private credit as an asset class, its perceived risks, and its role in providing capital to various sectors of the economy.

💡Emerging markets

Emerging markets are nations with social, political, and economic systems that are in the process of rapid growth and industrialization. The video discusses the divergence within emerging markets and how certain countries, like India and Mexico, are outperforming others due to various factors including innovation, geopolitical stability, and trade dynamics.

Highlights

Shuttle diplomacy in the Middle East is a key focus, indicating ongoing international efforts to resolve regional conflicts.

Protests on college campuses reflect social and political unrest, particularly concerning the Israeli-Gaza situation.

The Federal Reserve's decision to stay the course suggests a commitment to current monetary policies despite market fluctuations.

Josh Easterly of Sixth Street discusses private credit and its growing role in professional sports investments.

Sonny Beschloss of Rock Creek questions the term 'emerging markets' due to their divergence, highlighting the need for more nuanced investment strategies.

Larry Summers of Harvard critiques the Fed's overconfidence in disinflation prospects and its impact on market expectations.

ECI data indicates a potential issue with wage inflation not decreasing as hoped, affecting service sector forecasts.

Housing market inflation persists despite high mortgage rates, suggesting a robust market that may challenge economic predictions.

The possibility of an economic 'no landing' scenario is considered, where inflation remains robust instead of declining.

The importance of closely monitoring economic data is emphasized to better understand the uncertainties surrounding the economy.

Intervention in currency markets, such as with the Japanese yen, is discussed in the context of its limited effectiveness against private capital flows.

College campus disputes and the perceived lack of university leadership response are seen as concerning indicators for the future of higher education in the U.S.

David Bianco of DWC Group provides insights on market reactions to Fed decisions and jobs numbers, suggesting a dip followed by a rebound for the S&P 500.

The tech sector's earnings growth is highlighted as significantly outpacing other sectors of the market, indicating a bifurcated market scenario.

Josh Easterly outlines the evolution of sports as an asset class, emphasizing its recession-proof nature and the value of live content in the streaming era.

The discussion on private credit explores its growth, perceived risks, and the role of private credit in providing a durable source of credit creation for the U.S. economy.

Afsaneh Beschloss of Rock Creek addresses the varied performance of emerging markets, suggesting a need to move away from generalizing them as a single entity.

Transcripts

Shuttle diplomacy in the Middle East.

Protests on college campuses and the Fed pretty much stays the course for now.

This is Bloomberg Wall Street Week.

I'm David Westin.

This week, Josh Easterly of Sixth Street on private credit

and investing in professional sports.

The fundamentals of sports is great.

And if Sonny Beschloss of Rock Creek on what U.S.

dominance means for emerging market investments,

maybe we shouldn't even be using the term emerging markets

because they diverge from each other so much.

But we start with all those important data

coming out this week, and we turn to our very

special contributor here on Wall Street. He is Larry Summers of Harvard.

So, Larry, welcome back.

It's it's been a very consequential week.

We, of course, had the Fed chair giving a news conference with the decision.

We had ECI data and then we had the jobs numbers at the end.

What do you make of it all?

Well, look, there's been a lot of movement, but I don't know that

we're in a fundamentally different place than we were at the beginning of the week.

We have been realizing now for several months

that disinflation is not on the secure path

that the Fed had hoped it would be a few months ago.

That's why the market has moved to go from six

cuts this year to about one cut this year.

And that has been a broadly appropriate move on the part of the market.

And it was a blunder, frankly, of the Fed to be as confident

as it was about the prospect of disinflation.

If you add up this week's numbers, what did you get?

You got an ECI that was disturbing on the high side,

suggesting that wage inflation wasn't coming down, that service

sector inflation wasn't likely to be coming down in the way people hoped.

You've got a housing numbers suggesting more housing inflation

than many people had been expecting in the presence of 7% mortgages.

And then you got a relatively soft number

this morning and some corroborative

evidence

for that that reminded everybody that the economy may

well not be on fire, that inflation may not accelerate.

So I think you're at the end of it all about where you were

at the beginning of the week

with a sense that the most likely thing is no cut or a little bit

of cutting this year, that there's some risk

that as sometimes happens, the economy will slide off suddenly.

But probably greater than that risk

is the no landing kind of scenario where inflation

remains robust.

So I think everybody's going to have to be watching

all this data very closely.

And ironically, the more we learn,

it's not really true that the more we know

in terms of the uncertainties

about the economy at this point.

So I suspect that Chair Powell would agree with you.

We need more data.

He likes to wait for data.

Is the data dependent, as they say?

At the same time, what I took away, at least from his news conference

this week, was a little bit different from the no landing possibility.

It was sort of we're on the right course.

It's just going to take us longer to get there.

We are restrictive in what we're doing and we will get there and we don't need to

consider hikes.

Is that a fair interpretation of what he said?

And if so, is that where he should be?

I think he's much more confident the policy is restrictive

than is warranted in light of the various factors

we've talked about pushing up the neutral interest rate

in light of good reasons to think that spending may be less

interest sensitive than had previously been

supposed, because, for example, higher interest rates with all the government

short term debt mean more income for people.

I think that the chair is making a mistake if he is confident

the policy is meaningfully restrictive.

Right.

Right now.

So yeah, I have never said that.

I expect the next move to be a hike.

I just think there's more of a possibility

that that's going to be necessary

then I think is in the view at the Fed and to some extent

has been the view in the markets.

But I think you're characterizing the chair's attitude.

Right.

I think if you look at the Fed,

their tendency going back

quite far, most notably in 2021,

has been to take strong views

when the data run against those strong views to retreat less rapidly

than they should of from the strong views that they have taken.

And I think we're seeing another example of that.

On the question of whether monetary policy is significantly restrictive,

we don't know.

It could turn out to be, but we don't have a basis for confidence that it is.

So, Larry, besides the data, the wealth of data

that came in on big topic in the news this week was the Japanese yen.

And what's going on exactly the yen,

whether the government there is intervening or not intervening

to sort of support the yen went up to 160 actually.

You have some experience with intervention and currencies.

Give us where you think we are right now.

And of course, this is related to the Fed because part of the issue is

if the Fed stays higher for longer, its supports the strength of the US dollar

given the massive size of the capital markets.

I think the evidence is reasonably clear

that intervene in doesn't work

even in the scales that the Japanese engaged in.

It's just overwhelmed by the broad magnitude

of private sector capital flows.

That said, nations tend to intervene

when currencies have gotten very far from normal levels

and when they've gotten very far from normal levels, they sometimes bounce back.

So I wouldn't want to confidently presume

that the yen will devalue further from here.

It could go either way.

But even if the yen does have appreciate, I'm

going to attribute that much more to snapback, then I'm

going to attribute it to the efficacy of intervention.

But I think this points up an important issue,

which is that the dollar is extremely strong right now.

That's been a factor that contributed

to our relatively favorable inflation performance.

Larry, I'm sad to say the disputes on college

campuses growing out of the Israeli Gaza situation have continued.

Some ways have gotten worse.

Actually, this week we saw police going in various places

here in New York and Columbia.

But across the country,

you've been outspoken in the past on this issue as a former college

president yourself at Harvard and is now a scholar at Harvard.

What do you think is going on?

And more important, perhaps, what should the colleges be doing?

What should the leadership be doing right now?

This is very depressing and worrisome to me.

As I've said on your show before, David, I think the United States is in

the most dangerous geopolitical moment we've been in

probably two generations.

Given what's happening in China, Russia, Iran, North Korea and so forth.

And it seems to me that anybody sitting in one of those countries

has to be taking great encouragement

from the spectacle that is being made by our young future

elites on so many of our leading college campuses,

and even more by the craven responses

that are typifying university leaderships.

I have not been as appalled by Harvard

ever as I am by the fact that a keffiyeh

has rested over the John Harvard statue

and a Palestinian flag

has been placed in the hand of John Harvard.

That iconic statue on the Harvard campus.

And you can debate whether administrators should be sending in police.

And I think that should always be a last resort.

But they can't keep John

Harvard unadorned with Hamas

supporting symbols that just is appalling

to me.

I don't think there's any question that there's a double standard

throughout the Ivy League and elite higher education

on anti-Semitism and other forms of prejudice.

The lawsuits are largely correct

in making that suggestion,

and I think this is a failure of a fundamental part

of education,

the imbuing people with an ability to contemplate

serious moral issues in serious ways.

There is idealism among some of those protesting,

though some of them are being driven

by outside agitation and outside funding.

And I respect the idea some of those

who live by a theory of civil disobedience and are prepared

for their cause to accept punishment.

But when I see spectacles like

the Law Review of Columbia University

demanding that exam be canceled or grading be

stopped this year because of what happened on that campus,

I think that the speaks a kind of decadence

that causes me to be very worried

about the future of our universities and about

the future, therefore, of

our country.

I wish we could find ways of

getting things back on track.

Larry, thank you so very much for being with us.

Larry Summers, our special contributor here on Wall Street Week.

Coming up, we go through the market reaction to the Fed

and the jobs numbers with David Bianco of DWC Group.

That's next on Wall Street Week on Bloomberg.

This is Wall Street Week.

I'm David Westin.

Equity markets dipped in the middle of the week

but came back on Friday as the S&P 500 added just over

half a percent for the week to end at 5128.

That is just under the Bloomberg LS consensus year end number of 5170.

The Nasdaq had a particularly good week, adding 1.43%, while the yield on

the ten year was down almost 16 basis points,

closing the week at 4.51%.

Here to take us through it all is David Bianco, DWC Equities CIO for Americas.

David, welcome back. Always great to have you.

Thanks for having me. Let's start with the jobs.

There's a lot of data this week. Let's start with the jobs numbers.

What did they tell you?

What did they tell us about where we are on the economy?

It was a really big week

and that was a very powerful segment for Larry Summers and difficult to follow.

The jobs report

was one of the indicators that we got during the week

that the economy is slowing, but it's still a healthy economy.

Employment is still strong.

The employment market is still tight, but

the Fed should get a little bit of help from a slowing economy.

That said, I very much agree with what Larry said regarding the Fed.

Many other things that the Fed shouldn't take this slowing

for granted does mean that inflation is going to keep working its way down.

They need to keep an eye on this risk

because the risk of inflation staying above

their 2% target is still very much with us.

But the good news this week was relief in the bond market.

We saw yields across the curve come down, especially toward the end of the week

and that rally in fixed income rally and equity

markets upon that very lower and lower yield environment.

What we saw is that may followed a tough April, April

showers brought in some May flowers early in the month was early in the month.

So talk to us about growth.

You said it's a slowing economy.

We heard Chair Jay Powell this week say he doesn't see stagflation.

Isn't he the stag? He didn't see the formation.

Are you at all concerned about really slowing growth

to such a degree that should we be worried about the economy?

I'm not worried about the economy yet.

I would have to really see the jobs growth number fall below 100,000 before

really started getting worried about jobs and the economy is very resilient

because it's a service oriented economy and we already went through

a good amount of inventory, liquidation and correction already.

And that often is a cause of at least small recession.

So a lot of risks there always tell risks.

But this economy, I think, has a real safe distance away from a recession.

And because of that, I think the Fed should stay focused on making sure

inflation keeps on working its way down to target.

But things have slowed down.

I would say US GDP growth is still one or two, probably

a little bit above a 2% trend, and that's healthy.

But inflation relative to that growth rate is still too high.

Earnings this season

were another encouraging part of the week.

Really good news out of most tech companies.

Not bad news, but not as good as hoped out of the non-tech.

We'll talk about that specifically.

We've had such a bad vacation

in the S&P 500 and the stock market generally on that.

What about earnings for the top guys, the big tech, I suppose the rest,

how do they compare?

Well, the biggest or what I call the grade eight, which would cut across big

cap tech and communications stocks

and a couple consumer discretionary companies.

These great eight companies continue to lead the market upward

and their earnings growth will be over 50% on a year on year basis, whereas

the other 492 companies of the S&P

only about 2% earnings growth year on year.

So it's it's a bifurcated market.

We're hearing a bunch of consumer oriented companies, staples,

retailers, fast food companies saying they're seeing a slowdown.

Nothing falling off a cliff, but slow down

and their customers are more price conscious.

What is the I'll tell the Fed, you heard Larry say there, it's

certainly a lot less cuts we're expecting than we did at the beginning of the year.

Do you expect any this year?

Well, like I said, this was a week

where particularly the jobs report, but some other

service is a manufacturing ism type of report, says that the economy

is still slower manufacturing and slowing on the service side.

There's hopes for a September cut.

I don't think that be prudent.

I think it's better they wait until after the election, December

and just do some real slow cutting next year.

So give us some investment advice here.

Help us make some money.

What are you particularly interested in right now?

I mean, it sounds like the big eight sounds still pretty attractive.

That's where the growth is,

but that's where they're extremely demanding valuations are.

What I'm doing is that, one,

I do think the equity market is I think it could be stormy the summer

before the elections. So keep some dry powder.

I like financials and they've been doing well.

And part of that's because interest rates are still quite high.

There is risk they go higher.

Longer term yields.

Banks make good money when employment strong,

the economy is fine and interest rates are high.

Another sector that I like, despite interest rates being high utilities,

we see very effectively full capacity utilization.

So explain how that works.

So I urge utilities particularly attractive right now.

It's finally after many, many years of no growth

and shrinking demand for for electricity in the United States.

So many things have converged, whether it be

the data centers where there's rapid growth, electric vehicles,

cryptocurrency mining.

Finally, we have in this digital economy, which is the strong part of the economy.

We've got we've got a lot of electricity demand.

You got a feed a I aged, fed with electricity.

One last thought, if you would, on the consumer, it's driven so much.

Is it going to hold up?

Yes, the consumer is going to hold up.

But this higher first has been a splurge

on consumer spending, kind of the reopening of the economy.

But the higher interest rates are definitely affecting

a certain part of the economy.

And we're seeing continued slowness in durable goods consumption, cars,

the finance costs or buying into people's willingness to buy now.

But service side will hold up.

The economy will hold up.

David, it's always great to have you here.

Thank you so much for being here.

That's David Bianco of DWC.

Coming up,

investing in professional sports as an asset class.

We talk with Josh Easterly of Sixth Street.

It's recession proof content, super valuable.

That's next.

On Wall Street week on Bloomberg.

This is Wall Street Week.

I'm David Westin.

Professional sports has rapidly gone from something the very wealthy do

for fun and prestige to a serious asset class in its own right.

One of those at the front of the sports as an investment movement is Sixth Street.

And we welcome now its co-founding partner, co-president and co-CEO.

He is Josh Easterly. Josh, welcome is great to have you on Wall Street.

Well, David, thanks for having me here.

So let's talk about this, investing in sports.

As I say, it's become a real asset class for investment.

How is that developed?

It seems to have happened fairly quickly.

I don't know if it's fairly quickly or, you know,

or over a long time.

The fundamentals of sports is great.

It's recession

proof content, super valuable in a day and age where

where you're doing where there's streaming

and live content super valuable.

And what it really does is we we finance the ecosystem.

So like all the things we do at Sixth Street, we pick the best risk reward.

And some of those we buy assets, some of them we finance assets,

and I'm happy to talk about that.

Well, I'm curious about that very question, debt versus equity,

because you've done both. We've done both.

You have equity in some teams.

You also have taken debt positions. How do you make that decision?

I think what offers the best rewards so for example, where

the owner of the franchise, a Bay Area football club and San Francisco

on the Women's Soccer League, that was a new franchise.

So we stood up that franchise.

And then on Real Madrid, for example, we finance the stadium.

Burnaby, I was redoing that stadium and we provided financing and

FC Barcelona, we bought meteorites and then the San

Antonio Spurs were a minority equity owner and partners with the owners there.

So we've done it all.

You referred something that it strikes me as serving the United States

and also in Europe,

we've seen the ancillary businesses around the sports teams.

It's not just the sports team anymore.

And then even with the sports teams winning or nap,

but they're also an ancillary business

often around the stadium as you have in Madrid.

So so how do you decide how valuable

the ancillary businesses around the team?

So they're super valuable.

There's revenue streams in those businesses.

We own a business with the Cowboys in the Yankees called Legends,

which provides services to that ecosystem.

And that ecosystem is growing

because their sports owners are trying to find different ways

to monetize the asset their own sports team owners.

And that could be through concessions, that could be through merchandise.

And so Legends is our platform that we get to participate in that that that trend.

Is there a continuing demand for more capital on the part of team owners?

That is to say

we need to raise more capital

so we can invest it back into some of those ancillary businesses.

Yeah, so capital,

think about COVID, take a step back and think about COVID for a second.

The government supported a whole bunch of small businesses.

The one sector they did not support was live sports.

And so in that moment in time, there was a need for capital.

And that capital still exists.

I think sports owners want to make the product better for the fans.

And so Legends is a part of that.

It's a part of that.

And it's been a it's been a good theme for us.

What's next?

How big can this grow?

Sports investment.

I think that ecosystem can continually there's more opportunity

in an ecosystem for sure.

So I think

and it's going to need more capital.

And that ecosystem historically has had institutional money

and now is opening up to institutional money.

So I think it will continue to grow in any market.

I think some things are fully priced and some things aren't.

And you look for things that are not yet fully priced.

Where do you see opportunities that maybe are not fully priced in the sports area?

Well, I think that's I think

that's for us that's a real unique thing about Sixth Street is, as you point out,

if capitalism is working, things get fully priced

and it goes through cycles and then they feel cheap and being able

to have flexible capital across the capital structure from buying assets

to buying revenue streams to financing stadiums to buying teams

to do and minority and majority control investments.

I think that's the power of the platform is we can actually,

you know, when things become fully priced, we can move on.

Who do you compete with?

Got all

different So all different types of people.

That being said, there isn't that much institutional capital in the space

right now and or or general partners or GP's that have built brands.

I think there's only a handful.

Equity securities really built brands in the sports ecosystem.

How related is the success of the team to the value asset?

I mean, I'll pick on one that you mentioned

actually, Dallas Cowboys very, very valuable as a business owners

and maybe one of the most valuable that there is.

They will win a Super Bowl in a long time.

So maybe it's not so essentially a winning Super Bowl

to really deliver of asset value.

Well, I think our experience cowboys, our partner and legends

and our experience with the Cowboys is they have an excellent management team.

Jerry Jones and Stephen

and Jerry Jr is an excellent management team.

My guess is a Super Bowl is going to come their way,

but it's an excellent group of folks and we're happy to be partners with them.

Okay.

Josh Easterly of Sixth Street will stay with us

as we turn to the broader questions of private credit

and whether trees really can grow to the sky.

That's next. On Wall Street.

Week on Bloomberg.

Six three co-president and co-CEO Josh Easterly has remained with us.

So Josh, let's talk more broadly about private credit.

There's an awful lot of talk about it right now.

It's grown really fast.

At the same time, as you look at the overall size of it,

it's still relatively modest compared to a lot of debt out there.

Yeah.

I mean, I think when you think

when we think about private credit, we think there's a lot of growth areas.

It really started in the low middle market,

non-investment grade market, and now it's expanded into upper middle market.

And at some point it's going and we're at the beginning

continue on the sports talk when the first

or second inning on the non-corporate

lane.

So thinking about asset backed finance for asset based finance for non-corporate.

So so let's talk about that.

You started the middle market in some of some riskier lending.

It's grown beyond that.

Why is that?

I mean, why is it that you can take that away from banks or from syndicated loans?

Yeah.

So I'll argue with the premise is riskier.

I don't I don't think it's actually riskier when you look at the loss rates.

The loss rates are on par with the leveraged loan market

historically, and it's actually has better loss rates

than the than the high yield market, about 50 basis points

less on the high yield market, and it offers better spread.

I think when we think about private credit and where private credit has come from,

this was the intended consequence

of the regulation that came out of the global financial crisis, which was to move

risk out of the

banks where taxpayers had written protection

and move it into a safer place.

And I would argue that private credit is actually a safer place.

We can talk about. I'm happy to talk about that.

Well, I do want to with it. But before we do that, how big is it?

I've seen numbers. It's about $2 trillion thereabouts.

And are you seeing the sorts of rates of growth that we're seeing overall?

I've heard it said that it's going to grow like 15% a year for the next few years.

Yeah. Look, I think so.

I think private credit is somewhere on that, not on the non-investment

grade corporate side between a 1.5 trillion and $2 trillion.

But there's always growth aspects of private credit outside

of non-investment grade corporate and including investment grade, non-corporate.

So think of it as consumer receivables.

Think of it as credit cards, mortgages,

and then the then the non-investment grade tranches.

So those growth rates seem right to me.

But there's there's

large areas that private credit continue to expand in.

So so what about the risk factor?

You were saying it's a mistake to say that this is riskier than others.

So, look, I think this has been a little bit the narrative from from banks

who are trying to protect their their syndicated business.

But I think when you look at private credit,

private credit is unique compared to where banks banks

have a study or actually we study business models as a living

and private credit, unlike banks, have match funding.

And so banks, quite frankly, they lend long.

They they fund short with deposits and moments

of crisis deposits come out of the system.

Private credit match fund is so the asset class itself is more durable

then than those same loans sitting in the banks,

mostly because of the funding model.

And there can't be a run on your bank, so to speak.

There would be a run on our bank.

Depositors can't come in and say, I want my money back now

because it's locked up for some period of time.

Look at look at what happened in Silicon Valley Bank.

Not to name names, but that was a

lot of their assets were high quality assets.

A lot of them were actually government guaranteed mortgages.

We can all agree those did have risk on the asset side,

but they had a business model issue, which is a really funding issue,

which was their funding ran from private credit is not secret anymore.

I mean, you read the Bloomberg any given day,

there's an expansion of private credit.

That must mean there's more competition in your sphere.

Does that actually push you to take bigger risks because

other people are willing to do things maybe you otherwise wouldn't be?

Well, we were investors first.

So when I think about our business or when we think about our business,

we we have a way of thinking about credit and risk reward.

We're going to continue to be investors first.

That's how markets work.

And so what I would say is on the competition side,

there has been more competition.

The total addressable market has grown significantly.

Where So at the same time, there's more capital.

The addressable market has grown, too.

And so that shows I don't know if the competition issues

feels as cute as one would think.

As you say, there's some criticism or questioning from some of the big banks.

Are you taking market share for the word calm color?

UBS raised questions about it.

We've heard Jane Fraser raise some questions

when it comes to the insurance part of it, at least.

Are you taking market share every day from banks

and is that what actually the regulators you think want? Yes.

So I think, again, I think this was the intended consequence for for

for the regulation, which was to diffuse the risk

where taxpayers had written put people I think can remember,

can remember the $700 billion

and TARP that had to recapitalize banks.

So I is there what I would say is I think there is

a little bit of protectionism as it relates to the bank model.

Again, we're students of business models and in the non-investment grade

corporate side, banks are in the movie business, not the storage business.

And so they have a lot of fees in that business.

And users of capital, rather, go to the end

user and provider of capital, then have to go through an intermediary,

which has been the historical leveraged loan model.

There is I think you'll correct me if I'm wrong, a certain lack of transparency.

We saw the IMF come out just recently and say there's some risk there

because we don't necessarily know the values of some of the loans.

They they don't get mark to market as often in the market,

the market may not be what you would have in an open public market.

Is there risk there?

Is IMF right, that there's a problem?

Well, first of all, I think, again, I would argue with the premise

investment accounting has you mark to market your loans.

That bank account.

On the other hand, no fees to bank accounts are held to maturity counting

and don't mark their loans and they have a less durable funding model.

And so I don't think

you can look at the asset side without looking at the liability side.

And private credit has a much superior business model given the durability

of funding.

So again, I don't I don't see it.

I'm a little bit we're talking our book a little bit, you know, but when you look

at the overall business model as a much more durable and safe

business model for investors, how much do you partner with banks?

And so what you do, because that's actually something

that people have been concerned about, the IMF mentioned actually the exposure

of some of the regulated banks, perhaps to private credit.

Yeah. So we partner with banks.

Banks are a big lender to this space.

That is what regulators wanted.

They get better risk weighted assets treatment,

but they're only lending 40 to 50%

LTV on the underlying loan we're making.

So there's a whole bunch of capital that sits behind them in subordination.

And so you can think about a world where if every loan that the industry undervote

defaulted, but there was a 50% recovery, banks wouldn't be harmed.

And so, again, I think what banks are doing

is really smart and really prudent and what regulators want them to do.

There's talk about the regulators wanting to regulate more of the private credit.

Some people have called for that.

Is that coming down the pike? And how would it affect your business?

Well,

I think you always have to you have to respect regulators.

So we respect regulators.

We have active dialogs with them.

I think most of the call on regulation is coming from this protectionist view

where the incumbents are losing

market share and losing fee streams that are valuable fee streams.

Again, you have to go back to the risk.

And when you think about private credit and just think about the simple business

model versus a private credit lender, the bank has about 10%

of their of their total assets in equity capital.

So risk bearing capital, private credit has somewhere between 20 and 50%.

So it has much more capital to support the loans and it has match funding.

And so it's a much more durable business model.

And at the end of the day,

there needs to be credit creation for there to be growth in developed economies.

And private credit provides a valuable

source of credit creation to support the US economy.

We talk about the size of private credit between one and a half and 2 trillion,

you said.

How much of that's committed and how much of dry powder is there?

A lot of dry powder sitting on the sidelines right now.

Do you have trouble finding the projects you want to invest in?

No, I mean, we're selective. We're investors first.

So we're finding opportunities where we're slow at doing it.

There's there's most definitely some dry powder.

But when you look at the dry powder compared against the dry powder

and private equity, for example, it's very, very small.

So ultimately, I think the demand for capital will exceed

the supply of capital on the private credit side.

You specialize.

I'm not mistaken.

In private credit, that's what you do.

A lot of the shops you're competing in are multifaceted.

They have different parts of their fund.

Are you tempted to move into other areas?

So when we look at the 62 setbacks, we're $75 billion

plus alternative asset manager across private capital.

So everything from preferred equity

to growth equity to sports investing to direct lending to ABF.

So we have a multi

faceted platform

where we think we can take advantages over time for for ops and for our investors.

Okay, Josh, it's really great to have you here.

Thank you so much, David.

That is Josh Easterly of Sixth Street.

Coming up

on the eve of the Milken Institute conference in Los Angeles,

we talk with sunny specialist of Rock Creek about what the focus on

investing in the United States means for emerging markets.

I think when you put emerging markets

as one term and generalize, it hides the good,

the ugly and the in between.

That's next on Wall Street Week on Bloomberg.

This is Wall Street Week.

I'm David Westin.

Economic challenges in China and geopolitical uncertainties

have made the United States the place to go for investors.

But what does this U.S.

dominant world mean for those investing in emerging markets?

To explore the world of eum investing, we welcome back now Afsane, specialist

CEO and founder of rock creek. So, Sunny.

Always a delight to have you with us.

You know, emerging market investing better than most.

Give us your sense of where that is right now,

because all we hear about is it's all about the United States

investor, United States, the strength of the US dollar.

Great to be with you, David.

And of course, as our letter said recently, that US exceptionalism

or us dynamic investment

theme is still going very, very strong.

And that's really for no reason, except we have great innovation in the U.S.

We have great technology.

And then, of course, rule of law, when it comes to financial markets,

emerging markets

where I have been investing for a long time, but I have worked in also

during my days at the World Bank, I think are going through a phase

where maybe we shouldn't even be using the term emerging markets

because they've diverged from each other so much.

Obviously, the big elephant in the room is always China, and that used to account

for 40% of the equity indices.

Today it is accounting for only 25%.

But what you're seeing through the same themes of the American

growth in our

economy and growth in our equity markets and this sort of term exceptionalism,

if you want to call it that, is also impactful in emerging markets.

If you go to Korea and Taiwan, which now account for 30% of emerging markets,

they have done very well.

If you look at Taiwan, whether you look at one year, three year,

five years, ten years, 20 years, it's always been very competitive with the US.

But why?

Because the goods that Taiwan has been producing, mainly microchips, have been

something that has been very much part of this theme of innovation.

If you go to India in the last five years, ten years,

similarly the economy has done relatively well.

Obviously, we have elections there recently,

but the markets

continue to do very, very well and sort of run between 9

to 11%, depending on which periods you are thinking about.

And now with French shoring, which is definitely impacting India

positively and other countries like Mexico positively,

where our terms of trade with Mexico have changed.

And Mexico, of course, is also benefiting from

FDI for this French shoring, as well as remittances from from abroad.

You see very different kinds of markets in the last few years in Mexico.

So I think when you put emerging markets as one term and generalize,

it hides the good, the ugly and the in-between.

And I think where things have not gone so well in emerging markets

is where, for example, the continent of Africa, where we hoped

for much bigger growth, parts of Latin America

that are not necessarily commodity rich or or very close to the U.S.

in terms of French hiring that have not benefited from this

from these kinds of things.

And those countries have been left behind, especially since COVID

and dragged down the markets together with China and dragged down

dragged down growth in these countries and and the potential for their populations.

So so that was a terrific laying out of the alternatives.

So I can sort of simplify it a little bit.

If this were a horse race, we've got some steady ones that have been investment

destinations for some time, such as South Korea, such as Japan, such as Taiwan,

you have India, which it sounds like is sort of an up and comer, as it were,

and and perhaps Mexico as well.

Where would you rate this in the horse race in terms of the change in position?

Which ones are coming up the fastest?

Well, I think

I think definitely India is coming up the fastest.

But also, let's not forget, if you looked at India the last ten years,

the returns were really, really strong as well.

Taiwan is the big question mark given the geopolitics.

And it's very, very rough location

in the world being right next to China and if and when that could be a military

threat there and what is going on despite that is, is the fact

that their companies are doing well by by producing in Taiwan,

but also now investing in the US and other locations to produce microchips.

Obviously, they have not been as fast and as

as efficient as they would have liked outside of Taiwan.

But I think that's a trend where we might see these Taiwanese

companies continue to do well, but maybe not in Taiwan.

As I talk about the role of currency in all of this,

because obviously those are investments in different currencies.

As I understand it right now, the Fed has been pretty dominant in terms

of their setting rate policy,

and that sort of determines the strength of the dollar.

But when you talk about other currencies, when you invest in a place like India,

for example, or in Mexico, how do you account for currency volatility?

Do you hedge against that? And how expensive is that?

So two or three things.

Obviously, with the really strong policies

that Chairman Powell has had in the US,

our got our economy has done well, but also our currency has stayed very strong.

The interesting thing, as you said, is

our currency has stayed quite strong relative to other currencies.

We saw with the devaluation of yen and what the interventions

in the recent weeks in Japan are still dealing with weaker

yen than than the Japanese government would like.

Europe obviously is is also going through its own

relatively rough patches because growth is not taken

up, has not gone up as much as they would have liked to.

The emerging markets have been a really interesting spot.

I think one thing that has happened in the last few years is the quality

of your central bankers has increased, has improved a lot in emerging markets.

So you do have really good people running them.

And you may remember before, you know, in the beginning of the rate increases,

they were maybe earlier than us in the US to increase rates

went there more used to having these terrible inflationary periods.

So when they saw inflation come, they increased rates earlier.

And and so when we look at the currencies, it is also a tale of two cities

where you see, for example, relatively, relatively, I should say,

stronger currencies again in places like India, places like Mexico, places

like even China has had, you know, again, depending on

which side of the of the ocean you are looking at.

But but then you have other countries that have have not benefited

except for maybe some commodity rich countries around emerging markets

despite that.

Now, two things about the currency factor.

The currencies are stronger.

That impacts more the bond market.

So you have seen bond markets in emerging markets over the last ten years,

the size has increased hugely, both local bond markets

where local, local people invest as well as foreign markets.

The emerging markets

indices are close to 3 trillion or thereabouts.

So so the size of these markets have increased

and people do look at currency very much when they look at them.

You look at the bond markets and the equity markets.

Currency has not necessarily moved the needle too much, except

you could argue with outflows for emerging markets.

Sometimes when their own currency is stronger

relative to the dollar is you see more of an outflow.

And last point I want to make on that is on in China,

where there has been very big outflows and people have maxed out

to the amount they could to bring savings outside of China.

So do you spend the money to hedge when you invest in emerging markets?

Oh, sorry, I did not.

And so the hedging hedging is extremely expensive in emerging markets. Yes.

Except for the much larger, much larger

countries.

Even there, the relative cost of hedging generally

means that you don't hedge too much.

So the cost, yes, generally makes it prohibitive to go into these currencies.

And if the market returns had been so much

higher than what has actually transpired,

maybe you would have you would have been okay with the cost of hedging.

But given given that their markets in general have been

if you look at emerging markets as a totality and you look at the returns,

let's say over the last ten years

and you are just up a few percent, that definitely does not

cover costs of currency Hedging of science have been terribly helpful.

As always, thank you so much.

That is of Sonny Beschloss of Rock Creek.

Coming up, knowing when to hold them and when to fold them.

It's next on Wall Street Week on Bloomberg

Finally, one more thought.

Falstaff and Shakespeare's Henry the Fourth taught us that

the better part of valor is discretion, which I take to mean that sometimes it's

best, perhaps even bravest, to give up the fight rather than continue to lose.

We saw that this week

when a police officer in upstate New York tried to pull over the district attorney

for Monroe County and met resistance from a less than contrite prosecutor,

only to have her realize that backing down was her better course.

I am so sorry.

What I did was wrong.

No excuses.

I take full responsibility for my actions.

I fell short of the values I've held for my entire 33 year career.

We've also seen it in the drama that is Paramount International.

Shari Redstone fought hard for control of the company

her father had founded, stuck with it, even as its market value fell.

And now it's concluded that the better part of valor for her is to sell it.

And this week moved out

the CEO just before the earnings call to facilitate the deal.

Shari Redstone here is desperately trying to get a deal done with Skydance,

which is why she had to get rid of Bob Bakish,

who was opposing the deal pretty vocally from the get go.

Fed Chair Jay Powell showed both valor and discretion this week, valor

in sticking to the Fed's course, but discretion in admitting that

it was taking longer than they thought to get to their destination.

I do think it's clear that that policy is restrictive

and we believe over time it will be sufficiently restrictive.

That will be a question that that the data will have to answer.

I think it's unlikely that the next policy rate move will be a hike.

We definitely saw discretion triumphing over valor and Major League

Baseball's decision this week

to dump altogether those new uniforms they'd worked so hard on with Nike,

the uniforms that showed it's just a little too much of our favorite

baseball players.

It's painful to admit our mistakes, even if doing so will put them behind us.

I learned this the hard way when I ran ABC News

and we enlisted Leonardo DiCaprio to help us with an Earth Day special.

This was back in the days of yore

when journalists were trying to maintain a line between themselves

and entertainment celebrities, and we took it a bit too far

by arranging for Mr.

DiCaprio, fresh off his performance in the Titanic,

to go to the White House to interview President Clinton.

It caused an uproar, but I resisted calls for me to back down

and admitted it all been a mistake, insisting that we had been

trying to get an audience for a serious news program about climate.

And for my troubles was rewarded by sitting down front

at a black tie dinner as the president of the United States got some laughs.

Very much at my expense.

I just want to say this to David West. You know,

I've been in a lot of tough spots.

Don't let this get you down.

You may not be America's news leader,

but you're king of the world.

It sure didn't feel like I was the king of anything that night.

That does it for this episode of Wall Street Week.

I'm David Westin. This is Bloomberg. See you next week.