Bloomberg Markets Full Show (06/21/2022)

Bloomberg Markets Full Show (06/21/2022)

Show Video

From the financial centers of the world. This is Bloomberg Markets with Alix Steel and Guy Johnson. It is 30 minutes into the US trading day on this Tuesday June 21st. Here are the top market stories that we're following for you at this hour. Place your recession bets. Biden doesn't think one is inevitable while Elon Musk does. The odds of a recession

this year and what it means for stocks breaking up is easy. Kellogg splits into three companies as it got too big to handle. Shares are off the highs of the session up now by just three point seven percent and a few unresolved problems. Elon Musk continues to throw his Twitter takeover in doubt. More from our exclusive interview from the Qatar Economic Forum in Doha from New York. I'm Alix Steel with my post. Guy Johnson who is in Doha today. Welcome everyone to Bloomberg Markets. Guy you've

had a front row seat to the biggest names in business and economics. What's your takeaway so far. Where are you guys talking about. So we spent the weekend covering the airline sex and what was happening in aviation Alex at the ISE conference that we've moved over to the CAC our economic forum today. Look there's

lots going on the conversation that you started at the top of the show about a recession. I think it's absolutely front and center for the airline sector. It's how long does this demands hold up for. Everybody wants to go somewhere anywhere this summer. But what happens after that. And are we starting to see high gas prices etc. maybe downgrading people's optimism about their travel plans going forward that you just get into the wider macro story. We've been hearing from Elon Musk today hearing for a whole sort of host of CEOs. They're all definitely hedging their bets at this point in time but they are all

preparing their businesses it seems for the possibility of an economic slowdown. I was sort of John Slattery over at G.E.. He was talking about the fact that if his business kind of does this that's fine if it then tapers off a little bit. That's great. But if it does this and then this then they've had a lot of people and that's going to be a problem. So I think that does seem to be the sense right now Alex. Everybody's just trying to sort of see what happens. Yes they're expecting a slowdown. Maybe they're expecting a recession. The open question is how severe will that recession be. Yeah guy. And one particular

indicator what we're going to see signs of those cracks is in the housing market. Lenore had some solid numbers but the outlook really murky. And we just got a May existing home sales and a month by month basis were down by about three point four percent. And a total number here it's five point four one million. That sounds good. In February that number was six point four. So we're down a million in terms of existing home sales in just the span of a few months and more to delve into this topic later on in the show with John Zeigler CEO of Rent. Because as the housing market gets shaken up that's going to mean potentially more renters and that means even higher prices on your monthly bills. Let's get back to that point. The guy was just making in terms

of the recessionary alarms that most businesses are starting to really think about investment banks kind of adding to that. Morgan Stanley Goldman Sachs say equities have further to fall. Here's what some of the global leaders have said at the Qatar Economic Forum. Recession is inevitable at some point as to whether there is a recession in the near term. I think that is more likely than not. There's nothing inevitable about the recession not yet recession but we're getting very close to me.

My baseline is one of a hard landing. Inflation's not going to cure itself Francine. So seeing a cooling of the economy is something that we believe is appropriate. Interest rate increases are likely to flow through to lower economic activity and that's going to put pressure on budgets and the equity markets are calling for that. Which brings us to the question of the Day. Do we get a recession this year. Let's bring the question to Bloomberg's international economics and policy correspondent Michael McKee and Romaine Bostick Bloomberg Markets the Clothes co-host. All right guys let's weigh in. Michael start with you on the economic front and we'll get to the equity front

recession this year. Yes or no. Yeah I followed into the camp that they teach you in economics 1 0 1. If you're gonna make a forecast give us a point figure or a timeframe but don't give both. I think that people really know whether we're going to be in recession this year. Some think we're already in it. Others see the economy decelerating and the Fed sees the economy accelerating a little bit from where it's been. Now the problem is a lot of this has to do with Covid. Does something come back

and shut us down again. A lot of it has to do with the war. Does that keep dragging on and keep weighing on prices for energy which leads people to drive less perhaps and do a little bit less business. Most people's consensus is that it'll be next year but it could be this year. Roommate from a market perspective this is really important. If it's 20 20 to recession you want to position it one way. If maybe that recession comes late 2023 maybe maybe earnings hold up for now maybe. Actually you want to position maybe a little bit more aggressively into into that story. You've got a little bit of time before the recession really bites. And I think

you're already seeing that reflected in a lot of the expectations for earnings growth at least here in 2020 to and even into the early part of 2023. But those are analysts estimates when you look at sort of what you're getting specifically out of the CEOs and CFO themselves and what they're predicting. I think you are seeing at least a lot more concern about inflationary pressures and of course a potential recessionary pressures overlaid that with the draw down that we have right now in markets. As Ali says a Friday we were down something like twenty three percent on the S&P 500. And I'll tell you just on a historical basis and who knows if history repeats itself but on a historical basis we've never had that magnitude of a draw down and a persistent draw down of that nature that didn't accompany a recession. Yeah. And you know I mean it talks about many strategists are saying that we're not gonna get a bottom in markets until we finally get the recession. I know this is a surprise for everyone but Mike Mills. No Morgan Stanley is a little bit bearish. Yeah yeah. I think that markets are fairly priced. However it does not price the risk of a recession in our view which is as much as 20

percent lower or roughly 3000 bear market will not be over until a recession arrives with the risk of one is extinguished which is leads to the point. What sectors have more downside. From that mean energy really comes to mind. Well energy comes to mind. And a lot of the cyclical sectors what you've seen under pressure look there's already been a lot of talk that you have certain components of the market and the economy for that matter that are technically in recession. I mean depending on how you measure it obviously it doesn't meet the NBER its official designation of that. But when you look at real incomes when you look at the shift in spending around certain sectors from goods to services and the idea that that service is now showing weakness there's an argument to be made that we're already there. The question is do we sort of go over that precipice into

a full blown official economic recession as Michael Barr was alluding to and just kind of punch back at Mike too. He talks about kind of the imperfection of economic forecasting. We know that. I mean Mike knows sort of the old quip from Paul Samuelson. The idea that economists have predicted nine of the past five recessions there's a great track. Absolutely. Mike question though Mike is is the Fed worried about a recession. Does the Fed actually wants a recession. I was listening to Tidjane Thiam the former Credit Suisse CEO a little bit earlier on. He was talking about the fact that the

Fed probably still has to shock the market and shock consumers because what it's worried about is not just inflation but inflation expectations. We've got to get the University of Michigan data out on Friday. If we're starting to embed the idea that further out we are still going to have elevated inflation elevated north might of 2 percent. Are we still in the business of having to think about the fact that the Fed may still need to shock us that actually we may see even bigger hikes coming towards us and that will accelerate this process towards a recession. I think it can be a magnitude of change in the numbers that will drive what the Fed does. The Friday number from the Michigan survey is going to be a final number for the

survey that already came out. So it might change a little bit. Paul said it could go down a little. Probably not. But next month will be key as will the CPI numbers for next month before the Fed decides how far it's going to go. They don't really want to go 1 percent. They've already accepted the idea. They may have to do 75 basis points again but they don't want a recession and they do fear it. They are going to try to be as careful as possible but it is as everybody says a big blunt hammer. So it's hard for them to be that precise. And the problem is all the data are backward looking. So the Fed doesn't really know where

it is at any particular point in time. There are some indications that inflation is going to be harder to correct than they had anticipated including the fact that the war goes on. Housing prices today the existing home sales median price went up even though home sales have been going down. So that feeds into inflation. At some point they're going to look for a turn

in the prices that are being charged. And part of their problem with that too is Covid in the pandemic. And they don't know when all those things are going to start going away. So it's going to be tough for them. So Mike we talk about the kind of the persistence of this. Everyone keeps talking. Does the Fed need to sort of shock. And all you're looking at headline CPI right now has been basically running well above whatever a 2 percent target. You want to pin on it for something like 14 15 months. Cream of course CPI has been running above that for 13 months I think. And if even if you look at the PCI deflator that you know

the Fed is supposedly prefers here. I think that's been running something above 4 percent now for something like almost 12 months now. If I if I'm right there. But the point is that this has been going on now for basically a year. And the idea that it will sort of ebb on its own at least in a meaningful way. I don't see any real evidence of that. And there was another survey out when you talk about sentiment it was the Conference Board survey I think at the beginning of last week of CEOs that showed CEOs sentiment was at the lowest level that we've seen in quite some time. And there was some great data out by Lisa Charlotte who talked about that that number that we had on that Conference Board data I think was at 42 that we haven't had a reading that low. Once again that didn't actually accompany a recession in some form or another. But we haven't had a recession based on pandemic before and that's the problem. The inflation rate started to go down last year and then Covid came

back and it went back up again. And that's the problem for the Fed is the things that have interrupted the supply chain like committed like the war. They don't go away. They keep persisting. And everybody thinks they're going to end but they haven't. When they do we'll see some ebbing. But yes they're going to have to raise rates to bring overall inflation down. A dot this time things are different. Guys thanks. Good conversation. Memories Romaine Bostick and Michael McKee. Really

appreciate your time. All right. Coming up it's more in our Question of the Day. Do we get a recession this year. And the equity implication. One of my husband senior investment strategist at Edward Jones will be joining us next. This is Bloomberg.

At the moment the demand is very strong. There is massive demand. If I could get more aircraft into the air I'd be doing it tomorrow. I think the demand will probably remain in place probably for the next 18 months two years. We've got the upslope from continued Covid recovery. There is a very very deep need for flying for training that has been content for two years. Internationally we're only a 50 percent of our pre Cold War levels and demand is a lock rate. And we've got a situation here

where people have build up savings but you're also dealing with inflation rates that we haven't seen. But the aviation ecosystem is still as you said suffering from some of the same staffing challenges that we're seeing in other sectors too. So the problem then is that you've got the demand is can't be serviced. Does that mean that demand is going away. Possibly but not entirely. But actually the outlook remains very very positive. Some of the aviation CEOs that I've been talking to over the last couple of days at the ISE annual general meeting which has been taking place here in Doha what they were talking about there was what they see going forward from here really strong demand right now. But the question the real question they're trying to figure out they're quite optimistic about it. They tend to be airline CEOs is how sustainable is that after the

summer and that colored feathers in ready to our question of the day. Do we get a recession this year. And if so what is it. Yes. Let's try and answer that question now in a different way. M.R. Margin senior investment strategist at Edward Jones Edward Jones one point seven trillion in Clime

Asset joins us now. How would you answer that question. Because I think it's going to have a meaningful impact on the way that people invest if we get a recession this year or whether it's a 2023 story or 2024 story. Yeah it's a great one. And you know look I think generally the timeline for a lot of not only recessionary calls but even the Fed inflation have been pulled forward. So our base case had likely been if we do get a downturn it would hit sometime in 2023. Given just what's occurred in the last week we can a half

with the CPI print and then the Fed meeting last week. Some of that timeline is pulled forward. The Fed is now moving seventy five. Likely another seventy five and probably another 50 and 50 after that. So keep in mind these are unprecedented levels of Fed rate hiking. We haven't seen that probably in nearly 30 years. And so in that backdrop you know markets are savvy. We know the history. The Fed doesn't have a great track record out of the last 14 tightening cycles. Eleven had ended in a

recession and now we're in a tightening cycle that is moving quite a bit more aggressively. So the risks of a downturn are increasing. Probably we're looking towards the end of this year. But the only silver lining or once a silver lining will point to is that we don't yet see the scope for a deep or prolonged downturn. So in that backdrop maybe what the market's already

priced in S&P down over 20 percent NASDAQ down over 30 percent. We're already starting to sniff out this mild downturn in the economy. And so the risk reward is getting more interesting here for sure. Mona it just that dovetails with what Mike Wilson and Morgan Stanley been talking about. We know he's a bear right. But he's talking very much about the idea that you can't really know the bottom in equities until you until the recession actually starts even if it's not a prolonged deep depression or a downturn. But the bottom is going to keep on moving lower. Do you agree with that sentiment. And if so are there sectors that

have to price that in Moore versus those that have already priced that in. Yeah you know we have a slight nuance version of that which we say we won't really see a sustainable market rally or rebound until we see inflationary pressures consistently moving downward. So that's not going to be one print probably not even to print but wait to prints. We need to see 3 4 consistent prints lower and hopefully in both the headline and core part of inflation before we start to see. And then that could trigger a fed moving more gradually. And then that could trigger a more sustainable rebound in the overall market and economy. So we think that will be the key going forward. When do we get that. How do we get that. And I think the Fed actions are certainly part of the demand part of that equation. To your point on how we can position ourselves well we think certainly

in the near term a little bit more of a defensive posture does continue to make sense here. While we continue to like large cap over small cap even sectors like health care like the Staples part of the market they have pricing power a little bit of inflationary hedge. But of course in a downturn they hold up relatively well. Even parts of the investment grade bond market starting to you know the risk we were there as we noted is is quite interesting as well and a little bit more defensively positioned. So for the near term that's what we would see going into or though that could change. How different is that picture look. If inflation remains elevated even in a downturn there is this expectation that

downturn is going to pull inflation sharply lower. There is some historical precedent that doesn't always happen. What happens if inflation stays higher during this downturn. How does that affect the inflation. The investment outlook. Yeah. You know what you're pointing to there is probably one of our tail risk scenarios certainly not a base case but it is

essentially the stagflation free environment where inflation continues to run hot even as the Fed continues to move higher and higher. Essentially that would impact the demand side and really have no impact on the supply side. And that really what would be what would be driving inflation higher as well. That is really probably one of the worst outcomes for markets broadly. That's when we would potentially see maybe a more prolonged downturn and harder to find places to hide in that environment. But certainly we would probably reconsider the commodity complex

there as well. Interestingly you know parts of of you know growth can do well if inflation continues to run hotter as well but generally not as many places to hide. And probably you would want to become even more defensively position in parts of your portfolio as well. Mono is only about 30 seconds left but as cash become part of that. You know I think generally if you're waiting for the economy to turn in inflation to turn you could actually increase your cash balances until we start to see signs of that. But that is really if we start to see signs of the stagflation right now our based

cases for a mild downturn. Keep in mind we started this year from a position of strength. So we do think a mild not deeper prolonged recession which is starting to get priced in. We don't think you need to raise much cash here and in fact start to look for opportunities over the next 12 months or so. That could start to make sense. Rebalancing. Diversification. Key to portfolio right now. In January it feels like so long ago. Thanks so much. It was good to catch up with your money. Mahajan a senior investment strategist at Edward Jones. Coming up forget Tesla shares are up after Elon Musk remarks at the Qatar

Economic Forum in Doha. I give a little bit more clarity on Tesla's workforce plans. Some of that interview is coming up next. This is Bloomberg. So Elon Musk says Tesla intends to keep increasing its hourly workforce while the number of salaried staff ultimately will shrink at least in the short term. Now in an interview a little bit earlier on today with Bloomberg's editor in chief John Micklethwait at the CAC Economic Forum in Doha Musk covered well a wide range of subjects. When we have that conversation including of course his acquisition of Twitter. There are still

a few unresolved matters. You probably read about the question as to whether the number of fake and spam users on the system is less than 5 percent. As for the claims which I think is probably not most people's experience on when using Twitter. So we're still awaiting resolution on that matter and that is a very significant matter. So we're awaiting resolution on that. And then of course there is the question of will the debt portion of the ground come together. And then will the shareholders vote in favor. So I think those are the three things that stand in the

way that need to be resolved before the transaction. What about the general state of the economy. Does that weigh on you when you think about this. I mean you just described it. You have a super bad feeling about the economy. Are you still in that position. I just said you earlier Joe Biden has just come out and said that a recession in America is not inevitable. How do you feel about the economy. Well I think a recession is inevitable at some point

as to whether there is a recession in the near term. I think that is more likely than not. It certainly isn't. It's not a certainty but it appears more likely the price. Can you set the record straight on one thing which is this issue about the layoffs. I think you've said initially that Tesla 10 percent of the workforce will be cut then 10 percent of salaried would be cut then salaried would stay fly a flat. An overall headcount would go up. What is the number. I know. There's already I think been a lawsuit about the 10 percent is is 10 percent. The goal to reduce the workforce. So what is the number that we should think about all that you're planning.

Yes. So Tesla is reducing the salaried workforce by roughly 10 percent over the next probably three months or so. The we expect to grow as our hourly workforce. We're quite clear that we'd expect to grow our hourly workforce but we we grow very fast with those on the salaried side. And we grew a little too fast in some areas. And so it requires a reduction in salaried workforce. We're about two thirds hourly and one good salary. So I guess technically a 10 percent reduction in the salad workforce is only probably a three three and a half

percent reduction in total headcount. Ellis says those CEO Elon Musk speaking with Bloomberg editor in chief John Micklethwait up in the cutout economic forum in Doha is one of the companies is kind of changing their workforce as we're headed into some kind of impact from the Fed hiking rates. He says definitely recession at some point. President Biden has a little bit more flexibility says it's not inevitable. We'll take a look at one part of the economy that does seem to be under pressure and that's the housing market. SALES of previously owned homes in the US are falling for a fourth month in May. We discuss what it means for the rental market with rent. CEO John Ziegler that's coming up next on a day where the

S&P is up by about two and a half percentage points right around those highs of the session. This is Bloomberg. We're an hour into the U.S. trading session and we're pretty much around the highs of the session. A big relief rally underway. Bloomberg's Abigail Doolittle is tracking some of those moves. Abigail. Well Alex it's really pretty interesting if we take a look at this four day chart of the S&P 500. We of course after the Fed chair the FOMC meeting and Fed chair Jay Powell spoke we had a big rally for stocks here that is. And then we had to brutal down days. Well now we are higher. The S&P 500 right now up about two and a half percent on the session. So perhaps we're seeing a continuation of that rally provoked by

the idea that Jay Powell was saying that don't get used to the idea of seventy five hikes. We don't know that yet but there's a possibility of that. That sometimes happens after meetings that certainly supported the possibility of it is supported by what we're seeing sector wise. Lots of strength for sectors of the S&P 500 the energy sector on fire once again at four point seven percent. So my guess is that the chips and semi cap equipment which has been under so much pressure today a nice rally at

three point six percent banks up two point six percent and ahead of the Fed stress tests on Thursday. The expectation that these big banks will be able to release a lot of dividends and buybacks and then Tesla and a class of its own up eight point four percent. Of course we're just looking listening to an earlier interview with CEO Elon Musk talking about the workforce reduction. Investors seem to think that perhaps the worst is a what as out of the way. So again up eight point four percent. Now is the worst out of the way for the S&P 500. Now this is a long term technical chart. You can see that the S&P 500 does

appear to have hit support that was found ahead of the big topping process for a lack of a better way to put it. Holding in here there's reason to think we are going to see some kind of bear market bounce up toward above 4000 maybe still 443 hundreds certainly supported by the RSI. Let's see whether or not this develops. It has to come from a sentiment standpoint. One place that could come from is bitcoin. There appears to be a capitulation bottom in place. The chart we're about to take a look at doesn't really show that capitulation but capitulation is essentially a big move lower and then strong buying. We certainly have that. If we take a look at this multiday chart of Bitcoin. Down down down. Here's the buying. We want to see it

continue higher. Right now though over this time period Bitcoin down sharply. But Guy I would say Bitcoin right now technically confirmed to go back above thirty thousand dollars per bitcoin maybe even more. Abigail I interrupted you there. I apologize. Thank you very much indeed. Bloomberg's Abigail Doolittle. Let's move on from what we're seeing in terms of the technical charts what we're seeing in terms of the housing market. One of

the critical critical aspects of the US economy that we really want to pay attention to. Existing home sales in the US fell for a fourth straight month. That's me data we're talking about here. They dropped to the lowest level in almost two years. We're seeing mortgage rates surging were up circa 6 percent. Now Alix Steel obviously called the bottom in that market. But let's see what it means for the housing market more broadly. Joining us now John Ziegler CEO of Rams which is a leading digital marketing solutions company which basically helps renters find homes. So it took him out of the rental market here. John great

to have you on the show. Really appreciate your time today. Let's talk about what is happening here. We are seeing yields rising really quite sharply in the bond market that's rippling through into the mortgage market. How's that then rippling through into the rental market. What are you seeing right now. Well you know thanks for having me back and what we're seeing is a continued continued strength in the in the rental market. We've seen a really strong run up over the last year rental rates year over year up between for one and two bedroom apartments between 26 and 27 percent year over year. Now what we have seen is really a slowing down to that increase. Since January we've only seen

rates go up across the market by about 2 to 3 percent. And in fact we saw the first decline month over month in this past month with one bedrooms declining by point three percent month over month and two bedroom point 4 percent. So we're starting to see a moderation in that. I think it's more just a fact of of of the vast increases we've seen already year over the years. And then also now you're starting to see a weakening of the consumer. We're looking at a chart here that tracks rents and you're looking at one bedroom rental prices in New York up. Forty six percent. These are huge numbers. Long Beach California up 62 percent. Whereas the top I mean at some point people just cannot afford

this. And that's what we were talking about really. Those are year over year numbers and those are really in the major markets that have increased the most. One thing to point out is really in the Sunbelt and then some of the really larger cities like New York City have seen massive increases your year. We're starting to see those modulate as well. The other thing to note is that a lot of those increases are in the upper level so that the Tier 1 the Tier 1 properties. And so what we're going to see coming forward is a lot of a lot of inventory coming online. It'll be

new inventory typically going to be more expensive. It'll bring those higher those those higher rents. And what that will do is as you look at the overall averages you're real continue to push those even if in the middle tier they may stay more modulated or even begin to decrease as we see the impact of inflation on the consumer spend. John what kind of a gap do you currently see between rents and incomes. You know we've actually seen you know the amount up until last month. Rents in terms of a percentage of income upstate. About a

you know about the same. You've seen over the course of 20 21 pretty significant income increases as well. And so rents really went along with that. But as we said really the effective income is going to be come to come down as we have inflation hitting people's pocketbooks much more. And so really it's more of a wait and see at this point. We anticipate seeing that start that

that started to tip to the other side. John during the pandemic in 2020 we saw a lot of movement out of cities into places like Miami Connecticut New Jersey for example. More suburban areas of Miami is a different story. But I wonder if you still see that kind of trend in the rental market or has that topped out. I mean we see that trend continuing but what I'd say is people have also moved back into the major markets as well. You have some markets that are actually seeing declines. But I mean there is demand all over. And so we really do have I wouldn't necessarily say it's a housing crisis but there is

certainly a shortage of housing. As we begin to catch up. OK so we've got a shortage now. We're seeing very strong demand. That's pushing prices up. That's the upslope John. What is the downslope looked like. How severe do you think it'll be. Is this going to be a kind of a shallow slowing or kind of topping process. We stay at these elevated levels for a while or do we crash back down. If you're looking a year out 18 months out what kind of shape do you think this market is going to be in. Yeah I think that's a really good question. And I think it really depends on on on the on the tier of of

apartment and rentals you're talking about. I think you're going to see a probably an impact on the lower levels where we'll begin to decline. We think that August we're going to start to really see a sort of a resetting of the baseline for mortgages. I don't necessarily see a crashing of them but I do think we're going to see increases decline and really begin a new baseline.

But you know look the potential for recession prolonged inflation at levels that we're at it's a little bit anyone's guess what that would have is an impact on folks that are renting. John this may seem like an obvious question but what is actually driving the increase in rents. Is it a supply and demand issue. What's your best read on that. So you know we're going to really look over the last year because as I said we've actually seen a small decrease last month but really it's all things right to sort of the perfect storm. You had huge liquidity from the government going into the market. You had a very strong consumer. You had you know almost almost unprecedented wage increases certainly in a lot of the industries. At the same time you had to work from home environment. We're now suddenly people want more flexibility to

be able to move. And you had home prices increasing at unprecedented rates. So it drove all across the board these. The ability to really price in that demand. John a lot of people are looking for ways to diversify their portfolios. They're trying to figure out how they should insulate their portfolios against inflation against the potential for a slowdown as well. Do you think rental real estate is one place they should be looking. It's a really good question and I'm probably not the best person to ask because I'm not an investor on that side. My own my own thought is you know you still have to finance those properties. And with rates increasing at the rate they do it is probably

becoming less of an attractive asset than maybe it was before. I mean you've had mortgage rates increased 25 basis points week after week. You know we're up to five point seventy eight. We can we can sell I think make perhaps a lot of the juice that was in that in that as an investment is started to move out in it in terms of if you're getting into it now which and then to add on to that question John. Over the last few months there's been a lot of talk is like where's the hidden leverage. Right. Like

we're not going to have an oh wait. Again we won't have a two thousand again. But we're gonna have something as a result of all this easy money. What kind of leverage are you noticing within the housing market. Do you see anything along those lines particularly in the tours. So you know in terms of leverage in the market where. I think the opportunity with with what we're seeing now is going to be in finding those properties that that maybe are still under managed that really have an opportunity to to increase value. I don't think you're going to buy purely from financial

leverage as much as you're going to do it from operational leverage much like we saw with lot of the private equity firms that were buying very cheap in 07 expecting just to have some sort of financial leverage turned around and ultimately it needed to operate the businesses better. Right. That's a good point. All right John thanks a lot. We appreciate your time today. John Zeigler CEO of Rent. Thank you very much. All right. Coming up Goldman Sachs warns that the risk of recession in the U.S. is rising. So to speak to Beth Haneke a co head of the global financing group within Goldman Sachs investment banking division. Coming up next. This is Bloomberg. This is Bloomberg Markets CAC up. You're looking at a live shot of the principal room coming up Jane Harman the Wilson Center.

Distinguished fellow joining Bloomberg Television today. 12:00 noontime time. This his bring back. It is our question of the day. Do we get a recession this year. What are different parts of the market priced for. Joining us now is Beth Hammack Goldman Sachs co head of the Global Financing Group at the Investment Banking Division. Also joining us Bloomberg Markets Sonali Basak. This is a great Wall Street perspective. Beth thank you so much for joining us. Do we get a recession this year from where you sit. What are your thoughts. Thanks so much for having me today. That is obviously the question that's top of mind for many of our CEOs and many of the corporations that we speak to. Our economists as you've noted

this morning had increased their odds in a recession this year but really more focused into next year. And so that's what we're watching really carefully right now to see how the data plays out how the economy persists and where we end up. But the good news is that the financing markets are very open right now. And so we're helping clients who need funding make sure that they get the capital they need to operate their businesses. It's funny because on one hand you do have a high yield bonds really

falling off for the year really reaching levels you haven't seen since late 2020. But you have your CEO a few weeks ago really in May telling me that even though the process has been orderly it hasn't really spilled over into credit spreads. It would be something more concerning if it did. Beth I'm wondering from your perspective what is the level you're looking out for in terms of absolute yields or in terms of turmoil that you can get in high yield markets that would really start to scare you. Well the markets definitely have been volatile this year. We've seen pretty significant moves starting in rates. We sold off anywhere

from one hundred and seventy five to 200 basis points in rates. And you're right Sonali credit has definitely moved wider in the ISE space. It's about 60 basis points. When we look at high yield a little more than 100 basis points. And so we are trending towards the whites that we've seen in the recent past. We're not making all time highs. We're certainly not looking at sort of the stress moments of 2020 or 2008. But we are watching it carefully to see where things are you know where things are

breaking down. For the most part I'd say investment grade markets remain very strong and high yield has been a little bit more cautious. There's plenty of capital out there in investors hands that needs to get put to work. And so it's just a matter of them having the moments where they feel excited about reengaging in the markets. You know that's when you look at kind

of those riskier borrowers here. How much are you worried about their ability to kind of make it through the downturn that we are seeing ahead of us. And how much do you worry that you know in light of what happened in 2020 that the money might not be there for them this time around. Well the good news is that many of the corporations took the advantage of very low rates and tight spreads over the past several years to do a lot of refinancing. And so what we've seen is that balance sheets are actually quite strong going into this moment going into this period of higher inflation and for companies who really needed to. They've done some good work in making sure that they are in a position where they can continue to focus on growth or if need be. Look at you know maybe pausing some of the growth plans to

potentially restructure their balance sheet and make sure they've got the capital they need to weather what might be a bit of a storm ahead. Beth I'm also trying to get my mind around from where the leverage then is going to be. So if companies may be levered but they have low interest rates they locked it in their balance sheets are not that bad. They're actually pretty good. That's not like an away kind of scenario when you take a look at the landscape. Where is that leverage going to come from

that's really going to get squeezed. Well I think you're absolutely right we're not looking at an 0 8 kind of scenario. I think when we we step back and try to look at parallels for this market environment. The closest thing that I come to in my mind is something more like a nineteen ninety four. I know there aren't a lot of people in the market who lived through that moment I believe. Unfortunately one of them. But look it's the last time that we were in a sort of modest recessionary environment. I think that's what hopefully this is setting up to be. Obviously time will tell. We need to watch the data more carefully to see if inflation is going to be tempered that that obviously up their game pretty significantly. But the 75 basis

point hike last week. And so they're really taking the the the fear of the problems that inflation can bring quite seriously with this moment. We haven't even seen the most of what we can see from quantitative tightening as well. And we're already hearing so many market participants talk about lighter liquidity in the market. So to what extent is that a concern for you and

how do you expect things to play out. We definitely see investors with a lot of cash still to put to work and so I know there's there's concerns there's worries about where are those next buyers going to come in from where reset. In our conversations with investors right now they're moving into cash as a more defensive move. It's not that they don't want to re-engage in the markets. It's not that they won't be putting that capital work. But we've had such a significant move so quickly that they want to take a moment and reassess what the outlook is from here. So they can make sure that they're stepping at the right moment for their for their shareholders that there are other investors. I want to pick your brain as also someone who is deeply entangled into the workings of the Treasury as the chair of the Treasury Borrowing Advisory Committee. How do you think about the volatility in the Treasury market and how that might impact markets moving forward.

So it's definitely been a very significant move and it's one that we've spent some time in the borrowing committee talking about and obviously policymakers are spending a lot of time looking at that. Anytime you have such a fundamental shift in the macro environment as we've had at the beginning of this year you're expected to see some amount of volatility. And so we did a presentation at our main meeting our last meeting where we really looked at what those moves have been. And when you vol adjust it for the overall sea change in the rapid environment shift that we're seeing is the liquidity shifts. Is this top of

order book. The bid ask spread widening. Is that more than you would anticipate given the increase in volatility. And really when you step back it's not. Now obviously there are some signs that we need to be watching very carefully to see how things progressed from here. But at this point I would say the markets have been pretty orderly for the size of moves and the size of the seismic shift really that we've seen every day. So why do I keep reading so much about liquidity gaps.

I think that the environment we've lived in for the past ten to twelve years has been just a real abundance of liquidity and I think when we go back and look from a historical perspective that this this past 10 years post financial crisis is going to be the anomaly not the not the. The space we're living in right now. But of course we all have very short memories. Markets in particular. And so we expect them. We expect the liquidity to be what we've seen over the recent past. And I think given the type of moves that we're seeing now the 10 to 15 basis point moves per day rather than the 2 to 4 basis point moves per day that that depth of order book that we'd experienced in the past couple of years when you're in a call market is just really not possible. And we really shouldn't expect that going forward that we're also

getting a question from a viewer who is asking about what you're saying about 1994. In 1994 we weren't waiting for China to come out of Covid 0. And what does that play into your inflation call as it pertains to the US as well. It's definitely something to watch and I think one of the things I would expect as the Fed drills in a bit more into this inflation story that we'll start hearing about is demand side inflation versus supply side inflation. And the Covid zero policy that we get from China is really causing a supply side inflation which the Fed with the many tools that they have really can't do that much about. And so I think we'll be looking for is as we look at these inflation numbers coming out over the next several months as we're watching and unpacking them how much is really coming from the supply side and how much is coming from the demand side. And I think the Fed wants to get to a place where they can use their tools to help slow the demand

side inflationary pressures that we've seen. But I think they recognize their tools are going to be a little bit more limited. And we need some of the global policies whether it's the war in the Russia Ukraine to come down or Covid 0 and China to really help mitigate some of the supply side pressures or feeling that this big slowdown we've seen an issuance whether it's in the debt markets or it's in the equity markets how much of an impact is that going to have on the Wall Street banks as well at large. Well we're going to get into the end of quarter in the next week or so and then obviously we'll be into earnings season and so the banks fully report. I think what you've heard from most the financials conferences to date is that the equity markets and

equity revenues have been down because of that. The IPO market obviously has been much more challenged given the fact that that the volatility we've seen has made it a bit more difficult. But companies are getting creative. And so we've seen companies coming into the the debt markets investment grade as we've talked about has been very robust. The high yield market remains reasonably strong. And as it relates to the equity markets we've seen a good number of secondaries some walk trading and some private markets have stayed pretty vibrant. Derivative activity remains very high. And so I think there's a lot of optimism out there still. Thank you so much. I really enjoyed this conversation Beth.

Thank you. Beth Hannigan Goldman Sachs and Bloomberg IBEX thank you for joining me as well. This is Bloomberg.

2022-06-26 23:10

Show Video

Other news