Milken Institute 2023 Global Conference
Panel on Asset Management in Incalculable Times

Announcer: Please welcome the panel on Asset Management in Incalculable Times moderated by CNBC news anchor Sara Eisen.

Sara Eisen,CNBC News Anchor: Hello, welcome everybody.
I feel like we need cocktails at four not water. But thank you all for being here. And I don't think I need to introduce our esteemed panelists their names are going to be behind them. They're all very famous, if you follow the asset management industry and the world of Finance. So it's an honor for me to be here and to be talking about Asset Management in incalculable times. So speaking of the times that we're in… today's a really interesting day to start a conversation about the environment given we had another bank failure this morning and rescue from JP Morgan. We are in this weird Waiting for Godot recession period. We're trying to figure out if we're in a bear Market or something else. So a lot of interesting questions I'm hoping to tackle with some of you guys and what you're telling your clients. Maybe Harvey you could just kick it off because you you've been through the trenches back at Goldman Sachs in 2008-2009, you're now Carlisle and new on the job, I should say. Congratulations.

Harvey Schwartz,CEO Carlyle: Thank you.

Sara Eisen: This is your coming out. So welcome.

Harvey Schwartz: Thank you.

Sara Eisen: How sturdy is our banking system right now, do you think?

Harvey Schwartz: Well, fist Sarah, It's great to be here and it's great to be here with the panel. I've known a number of them for many many years and it's great to see everybody out here in the audience. I think you know the question you’re really asking is: How resilient and how safe is the system today? And if you think about it versus 2008, personally, I don't think this feels like 2008 at all. That's not to minimize how acute it feels or is and the fear that has been stimulated by the last couple of months. But if you really think about 2008 versus today, the leverage in the system was significantly different interconnectedness of major financial institutions was tremendously different asset concentration was different and the regulatory toolkit and the response much more limited versus today. So I think when you talk about the system the system to me particularly for large financials Fields, very very different. Now the investing environment from the environment broadly I think this is one of the most complex times we've been in. And by that what I'm really talking about is if you zoom out and it's hard to zoom out when you have all these events happening. When you zoom out, I think trends that many of us have lived with certainly my generation, in my lifetime interest rates have come down inflation’s come down globalizations occurred technology has been extraordinary. That may be the only Trend that is still locked in place and many of the trends that we've lived with are certainly slowing if not reversing and I think that sets up an incredibly interesting backdrop both economically globally and in terms of an opportunity set. And when I think about for those of us on this panel over the next couple of years, I think that opportunity set to deploy Capital will be Unique. I think this recalibration of interest rates is just changing the cost of capital around the world and I think for our clients and our partners, there'll be very interesting opportunities, which will be a Tailwind for our industry. But I also think we'll be solution providers for capital in terms of helping fix the system. And I think today was a good day for the system and part of this process.

Sara Eisen: Okay, because I what I really wanted to know if anyone else thinks that there's going to be more bank failures in this country.

Harvey Schwartz: See I didn't hear the question that way. But I would have answered it

Sara Eisen: Which is what?

Harvey Schwartz: I think there could be more acute issues. But again, I think the resiliency of the system has been proven to be very very solid. I mean, we've had three bank failures in a couple of months and the system continues to prove that it can handle them. Even if we sometimes critique everybody involved and I think we sort of misunderstand the complexity of the solutions, but I think the system is demonstrating that it can handle and digest problems in a way that in the past wouldn't have been the case.

Sara Eisen: Yie-Hsin do you feel better about the system after today.

Yie-Hsin Hung, President and CEO, State Street Global Advisors: Well, you know, it's very interesting because obviously you've identified a lot of issues that are coming out all of us so fast. Yet when you look at, you know, the first quarter of this year, the vix has been incredibly low, right and the S&P 500 posted very solid results. But you know when you peer below the surface, it does appear that not all is well and good and it's not necessarily benign. And there are three key things that I would point to I think the first is that investors are not necessarily betting on the economy or the ultimate resiliency of the banking sector, although I think the news from JPMorgan actually boosted that But in many respects I think investors are betting on just the Fed continuing to Fed cutting rates and we saw that pretty much with the most interest rate sensitive sector in the first quarter, which is Tech which posted what 20% plus returns and had it not done that the S&P 500 would have been instead of seven percent closer to 2.7 percent.

Number two, I think this banking turmoil has had the effect and the Fed has said as much as being equivalent to an interest rate hike and then some and then I think more to your point Sarah is when you look away from the financial sector and look at the business sector in general. And I think this is where the impact of what is happening in the banking sector is impacted the broader economy, because banking standards credit standards have gone up dramatically and they're today. It's something like 2/3 of historical Peak cycles. And then separately if you look at just balance sheets what you see is that short-term liabilities are well in excess of liquid assets and it is a gap that exceeds what we saw going into the great financial crisis. And so that's where I think the actual concern should be despite what it seems like the market is absorbing everything that's coming its way and sort of moving on from today's news to probably the debt ceiling and whatever else may come our way but in the end, I think there is more underneath the surface. It's potentially worrying and investors should be wary as we move forward.

Sara Eisen: Katie, you know, I've conversations today at milk and a lot of a lot of especially with private Equity folks say this is a great opportunity because banks are going to pull back on lending especially to small and mid-sized businesses and private credit is going to play a really important role in our economy and and save all these businesses. Is that true?

Katie Koch, CEO, TCW: I think private credit has a very important role to play here and we think it could be an incredible opportunity over the next decade. If you deploy the capital appropriately. At the same time, I think that there is a possibility that we have some bad accidents actually in the in the private credit space. So just as brief backdrop and content and context we would be at TCW we would be more in the camp of medium to hard Landing. I wish that wasn't the case because like Harvey I just started as a CEO and I'd like a better environment but doesn't look like we're going to have that in our first year.

Harvey Schwartz: We CEOs we like that smooth Landing.

Katie Koch: I don’t think we're going to get it.

Sara Eisen: But you're also, you know TCW is a big bond shop and bond investors are always more pessimistic.

Katie Koch: Yeah. I know I'm learning that because I used to be such an optimist before. But I'm optimistic that credit will perform. So I feel like from a career perspective that's been good timing. But really when you look at the future here, it's pretty challenging. So just say something quickly on that and then I'll answer the question on private credit. We think, you know just a few things to point out. We've had a 15 year recovery. And so I think you'd agree like in the context of an investing career the longer that recovery and expansion usually the worst the correction because there's so much excess to work out of the system and last week for people who follow this money supply contracted the most that it has since the Great Depression, which is one way of looking at how much that has to contract. The second thing that's happening or we think is gonna happen is, very sadly because there's a human impact to that, is a lot of job destruction and the locus for that's probably going to come through the regional Banks, which Harvey pointed out, the smaller and Regional Banks which could face trouble. And the best way to explain that is that the G-SIBs which we've talked about before and the one that bailed out a regional bank today, they're in a really good position. They actually are much better capitalized as Harvey pointed out than they were going into the last financial crisis and that's good news. And hopefully they'll be able to step up and act counter cyclically. But the regional and small banks are in a very tough spot because of the deposit flight and one thing that people here should really be aware of is that small Banks and Regional banks are incredibly important to small businesses, and who are small businesses important to in America? They contribute to half the GDP and half the employment and so when you get credit taken out of that part of the market, there's a very negative feedback towards job destruction. And then the third thing and I'll end with the comment on private credit is that the price of capital has been repriced very aggressively in a short period of time and whenever that happens stuff breaks. Had a few major things break. There's going to be more things that break ahead and two areas that we would really look at that were concerned about that. We're keeping a lot of dry powder because eventually there be an opportunity. But before that there's going to be accidents would be the commercial real estate market sadly also a problem for the regional Banks because they're large owners of it and the second would be private credit and I'll just end by saying like, yes, it's exciting. I know there's for the LPs and the audience there's a lot of people trying to sell you. I'm sure a private credit now, but what I would really think about is that do these managers, here's the questions, I would ask your manager: are they using strong covenants? Covenants is what gives you a seat at the table when things go sideways and they're going to go sideways. So you want a seat at the table. The second is: have they done a lot of diligence? We ran into a lot of deals where people were using the term diligence light that was fun five years, in the last five years, that's not going to be fun in the next five years for people that did diligent light underwriting. These are really important things for making sure that you're going to be able to navigate this this next part of the cycle. But if you underwrite correctly, there should be great opportunities ahead. We're sitting on a lot of dry powder. We're going to deploy that and we're actually going to close on one of our largest direct lending closes yet in the history. But just remember that 96% of private credit managers started post Global financial crisis. So there are many managers in this space that have only invested in a zero and low rate environment and we can all be Geniuses in a zero rate environment. Just ask us.
We'll tell you.

Sara Eisen: No, it's interesting because I've heard a lot of positive things about private credit today and this is the first warning that I've gotten on it. Kamal, what about you? How are you navigating? Especially some of these problems with banks which it sounds like from the panel everyone thinks ‘Okay. Today was today was helpful, but not necessarily feeling like everything's taken care of’.

Kamal Bhatia, Global Head of Investment, Principal Asset Management: Sure, before I go there. Can I come to the rescue of my fixed income colleagues? I think you asked Katie that they are a pessimistic lot. They might be pessimistic but they're a smart Bunch too. So that's fixed income for sure. Mike will agree with me.

Mike Gitlin, Head of Fixed Income and Incoming President and CEO Capital Group: I appreciate that.

Kamal Bhatia: I link up your questions because I think there's a commonality in your initial question on Banks and the credit cycle. I'll approach it from two standpoints. One is a question you asked about the system and then the other one is about what is really Lost in Translation in this Bank turmoil. So the first one on system I would say is we actually have structured the system in a very smart way you particularly look at the news today and the FDIC structure at the very simplest level is a co-op Insurance structure of Banks. And the reason that structure works well is obviously there tend to be bank failures, but the remaining cohort pays the future premium that doesn't really Force the pressure on taxpayers. So I think as a nation as a society, I think we've all that thinking around bank failures and I think I do give credit to how we've evolved it, now do bank failures happen or not. But the more seminal question of the time is historic bank failures have been really failures of credit. And what has happened I think in the last 10, 15 years is when rates were low we really trained a lot of people to become credit experts. And private credits an example of that. What we have really lost is the art of asset liability management. The failure of banks is the Lost Art of ALM management not an art of credit management and that's the skill set we need to look towards in the market environment ahead of us.

Sara Eisen: Mike, what about you? And by the way, I just want to remind everybody to please participate in the conversation. You can ask questions. I get them live with the QR code. Keep them coming in.

Mike Gitlin: Yeah, so I guess I would say broadly about the markets right now one of the - and bond folks are normally quite pessimistic. That is true. Although I would claim realism is a little better term. But I would say right now there's a lot that we know. So if you ask us all what's troubling we'll say Russia and Ukraine. We'll say inflation is sticky. Commercial real estate is a concern. The consumers fading in their strength will say a lot of things, and we know those. What we'd also say is there is so much cash on the sidelines. If you ask the largest wealth managers 15 to 20% of their system is in cash. If you look at money funds there's five trillion dollars in cash now. Four and a half percent as a heck of a lot better than zero. So they’re earning money on cash. But when you have that much cash on the sidelines and that much pessimism built into the system, you can tell why markets are somewhat resilient right now and there's going to be a lot of opportunities for cash. In the bond markets in particular, you can look at one two, three year duration high quality fixed income and earn five and a quarter five and a half percent. If the Fed does cut in the next couple of years by 150 or 200 basis points you get a Tailwind of owning duration and your total return over two years could be something like 13,14 percent. That's for owning high quality short duration paper. So there's also a lot of concern out there, but there's also a lot of opportunity

Sara Eisen: Well, which brings us to another question that we wanted to tackle here. First of all should you be in cash right now? Should you be in fixed income? Should you be in equities? Sounds like some of you are pretty worried about the equity Market
Yie-Hsin, what are you…what do you think?

Yie-Hsin Hung: Well, you know, I do think this is one of the most difficult environments to try to predict where we're going to go or to forecast, you know, what the future looks like, you know. One thing that we've been paying attention to is similar to what Mike you've been talking about our how our investors postured and you know, we see that individual investors having plowed tons into the market in the beginning half of February almost a record levels have really pulled back ever since the crash of Silicon Valley bank, and they have really nowhere to be seen today. And then if you look at the Institutional Investor universe and we have really good visibility into it because State Street is one of the largest custodians in the world. And so we're able to see we're investors Holdings are largely where flows are going. And in fact tomorrow, I think we're launching two new indicators one is institutional Holdings indicator, and then the other is risk appetite. And so what we're seeing on the ground versus maybe where you know where we suggest investors should go is: number one I would say there's not a lot of panic in the investors Holdings. They have sold off financials. But only about a quarter of what they did and prior Peak cycles and then similarly we're seeing them still stay invested in equities. They're just transitioning to more defensive, conservative, hard quality, um companies. Secondly, to Mike's point, there is an enormous amount of cash. We see it. But the difference is back in 2020 the onset of the pandemic we saw institutions drawing down on that excess cash and buying into the market supporting the rally. We don't see any of that activity today. And then lastly looking at investor flows, which is really what supports our sort of risk appetite indicator. And what we've seen is that investors have moved away from risk seeking to risk aversion and they've been in this posture for something close to 80 days, which is the longest that we've seen really since 2015. And typically when this indicator is as red as it is, you would see the vix somewhere closer to 2x what it is today. And so what I would say is that, you know investors on balance are staying invested in the market, but whatever Capital they may have on the sidelines or willingness to move into areas. It's much more reticent. And so that's something to watch as we go along as to what that behavior will be as things unfold.

Sara Eisen: Mike what do you think of the mountain of cash? I mean, it does make sense you're getting paid for it.

Mike Gitlin: Yeah, I think if you had to choose between cash and Short- to intermediate-duration high quality bonds, I would choose the latter because you can pick up income and you can also position yourself to benefit from the rally and duration. So I would own active short duration fixed income instead. The other thing I'd say is you…

Sara Eisen: Just not three month T-bills. They're not having a good run right now.

Mike Gitlin:We can do better. And then the other the other thing I'd say is you know last year if you looked at every headline it would talk about the death of 60-40 and I would argue that death has been greatly exaggerated. If you look at something like our Flagship balance strategy American balance fund, it's returned over eight percent over 10 years annualized and over 8% 20 years annualized. Last year was a terrible year for fixed income inequities. It was the first year both asset classes were down at the same time in 40 years. Is 60/40, as just a general concept of balance, going to be a good strategy for the next five years? I'd argue it will be. We talked a lot about short duration fixed income in lieu of cash. I would also suggest think back to balance. And then the last thing, I think Katie had a really good point on private credit, I think of it is one of the very few islands that only has tourists. And it's you know, there's…

Katie Koch: Actually I have to just say that, because I see my head of private credit sitting back there and he's been doing this since 2001, so there is one native. He’s there, Rick Miller you can meet him after this.

Mike Gitlin: Okay, but your stat is right. The vast majority of participants are new to the asset class. It's going to be a fine asset class over the long term. In the short term, some of the older vintages have some real Covenant challenges and a lot of the participants haven't worked themself through a real Financial challenging period of time.

Sara Eisen: Kamal, 60-40 still work?

Kamal Bhatia: Yeah, It worked really well last year.

Sara Eisen: Did not work last year. It's working this year.

Kamal Bhatia: Yeah, that's exactly the point. First, I think we have made it almost painful to hold cash, which is just a bad idea, you know. I think everybody should have some amount of cash and we systematically over the last decade made it almost painful to hold cash. So I'm glad what we have done is the Pain's gone away. There's a little bit of joy in holding cash, which is good. But let me go to the 60/40 question because that's a really good way to think about it Sarah. To take a step back and imagine… we work with a lot of investors globally and over 80 countries. And most of these investors who control where money is in motion. On average most of these people want a seven to eight percent return over a long period and what we had done is for them to get seven or eight percent and if cash or short duration fixed income was 0%. We almost force them to go seek something that generated 20% return because how do you get to a blend of eight percent? And what that did was they was an absolute boom in the growth of venture capital not just in America, but in Asia and Europe, there was an absolute boom in all forms of private Equity across the world. This acceleration to those asset classes was explicitly before because they wanted to get to 8% and zero was anchoring it. Now think about it today that zero has become 5%. There need for eight percent hasn't changed. So what does that mean? They don't need to chase 20%. They could do 10% And so the second order thinking you have to bring in is where does the tide received and where can the tide stay now? And I would argue in the world we live in the tide is going to recede in things like Venture Capital. It's receding in private equity. It may actually come to some form of private credit because the net return of private credit and obviously you have to do your credit work. You can paint it with a broad brush, but that seems to be in the right zip code of what these investors want. I would argue public equities General Global public equities with an eight to ten percent risk profile are in the perfect zip code for these clients. So I think the 60/40 concept has to be thought in terms of what these investors want and where they want to where they were where they don't want to be and where they're going to park their money. So my view would be public equities are in, cash is in, certain forms of credit board public and private are in. The real issue is long duration highly leveraged Equity is the real issue in the economy.

Sara Eisen: I feel like he invoked private Equity not in the best way, Harvey. It wasn't in; it wasn't one of the in.

Harvey Schwartz: Well, first thing I feel the need to defend my team only because you pointed out your team. But Marc Jenkins is doing this for 20 years. So I don't know where the tourists are.

Kamal Bhatia: (chuckles) We have a lot of respect for you.

Harvey Schwartz: The tourists aren’t at Carlyle just to be clear. (laughing)

Katie Koch: But my team’s your team because we're Carlisle (inaudible) right? We're on the same team.

Harvey Schwartz: Well, the first thing I'm going to say is I don't know how common it is that a panel tends to generally sort of circle around a consensus, but it does feel like there's a bit of a consensus.

Sara Eisen: I try to avoid that actually.

Harvey Schwartz: No, I know and I'll try and help you in a second. But I think that, you know, if we were all sitting here a year, year and a half ago and you described if you said ‘everybody close your eyes. What do you think the world's going to be? Like if the FED raises nearly 5% we have multiple bank failures. There's a consolidation between the two Swiss banks.’ Again, I think we'd be somewhat surprised at where we are in terms of 60/40 portfolio performance, liquidity state of the system. But what sometimes feels a little bit reminiscent of the 2008 crisis going back to the first question it just fear is high, confidence is low. And personally I think that makes a lot of sense. And so I think what a lot of us are saying, and Mike and I go way back, I think we're saying it's a time for discipline and a disciplined approach to deploying capital. I know that's how the team at Carlisle is thinking about it. Now, how this recalibration of literally the global capital structure occurs, I think for sure, Katie has to be right. There'll be some problems in previously deployed credit. But the return opportunities will be extraordinary and to Kamal’s point the opportunity or an eight or ten percent on a different risk adjusted basis will be enormous for Market participants. But it doesn't have to be today and the wall of capital doesn't have to be put to work today. I think the opportunity sits there and I think while private Equity will also go through a bit of a repricing and as we all know massive amounts of capital going on in a private Equity, I think private Equity while it may pause I think private Equity will continue to grow. I think the trend around the world and the demand for private Capital whether it's private Equity or fixed income, I just think that trend is in place.

Sara Eisen: One thing I feel like we're sort of talking around is the rate environment. Yes, we've gone from zero to five percent a really fast and aggressive way, I'd say for the fed, and the question of what comes next is pretty interesting because now the Market's pricing in actual cuts then it goes down… one reason it's held up. And everyone here I talked to at the Milken conference thinks that inflation is stickier and the fed's going to have to keep raising and stay restrictive. I'm curious how you, Katie, how you guys are thinking of that and how it fits in with your hard Landing view?

Katie Koch: Medium to hard

Sara Eisen: Just medium to Hard? That's how I have my hard-boiled eggs.

Katie Koch: We think that we'll probably get a rate rise this week of a quarter point. There is still inflationary signs. We know that the FED basis some of these decisions on lagging indicators, which take some time to get caught up and we haven't seen massive demand destruction yet. So that would be the core view to wait and then digest and see what see what happens next. Obviously by definition since I said that we are going to have a you know, our view as a medium to hard Landing we would expect more softening in the future.

Sara Eisen: Sorry to cut you off. What is a medium to hard Landing? What does that mean?

Katie Koch: Just meaning that a lot of people think the recession would be short-lived. But we just think it will be more challenging than that and I want to connect just to one point you're asking people about ask that allocation and whether we should be in cash or not. I I just want to observe that because you can kind of get a good sense of consent is that these conferences I still think people are too happy here. Like I think the mood, a little bit too good. Don't you feel like people are still…?

Harvey Schwartz: Well, you're doing a pretty good job bringing it down. Yeah. I don't feel as good now. Yeah. I don't know Mike how do you feel?

Mike Gitlin: I feel great Harvey. Thank you.

Katie Koch: I just like, you know, it just feels like a little bit like things are Okay, and we made the point that we think more things will break. We’re at the early stage of that. But I would make the observation to you that you had mentioned that the vix hasn't gone where you would think it would given some of the news flow and credit spreads also haven't widen dramatically either. Personally I just wanted to answer that question by saying that for individuals. I think it would be wise to keep some cash ready to deploy and for institutions also and for the way that we manage our portfolios, we want to keep a lot of dry powder because I do think you know things will get worse and they'll be massive opportunities. It is absolutely true that the greatest wealth creation opportunities happen coming out of a recession and we're just we're just not there yet and there needs to be more access worked out of the system. So I would strongly encourage people to sit on that drive powder and wait for things to play out and there should be Some incredible investment opportunities. We talked about commercial real estate. I'll just end by saying that hasn't gotten as bad as it's going to get that will get a lot worse before it gets better. And that's something that could take a long time to play out. They'll be a long long tail to that investment opportunity. And so we want to be ready to capitalize on it.

Sara Eisen: Before we move on from cash. We were getting two good questions and they're both exactly the same from Anonymous and attendee 7, which is ‘what will it take to get trillions of dollars of cash off the sidelines?’ Mike? You raised that point.

Mike Gitlin: It's already coming. I mean if you look even just using us, today, we're seeing an average of about 500 million in net new flows into the bond Markets and capital group per week. It's coming. So I think what it takes is…

Sara Eisen: Where's it going into?

Mike Gitlin: It's not going into high yield yet. It is going into high quality short to intermediate duration bonds. It's not coming into equities yet, and it's not going into High yield yet. But doing a hundred basis points better than cash and owning a bit more duration than zero is where the cash is going. And I think you'll see that continue. I think I think you'll see a trillion dollars flow back into the bond markets in the next few years and you know 5% a heck of a lot better than a zero interest rate policy and experimental monetary policy that we saw for gosh 13 years. So I think it's coming and I think you'll see it accelerate.

Sara Eisen: Kamal, how are you guys positioning around the fed and the Outlook?

Kamal Bhatia: Yeah, so I think simple answer is I think Sarah inflation is stubborn, growth is fleeting. And that's a very difficult environment to manage to. To your point on recession and then I'll go to how you think about that from an investment standpoint. You know, this recession is complicated and it's complicated in a simple way if you think about it. I think almost everybody in this room will feel this recession. Because this is a Services recession that's coming upon us. The way our economy has grown is we sort of left the natural comfort of manufacturing, you know, the the ratio of blue collar/White Collar jobs in the economy reversed. So as the broad American economy particularly in lot of well-paying jobs became a Services economy, the recession upon us is going to hit Services the hardest. Yet the people on the other side you see this with the PMI data manufacturing is rebounding. We are bringing Capital back. You know, there is a sort of an anti globalization Trend, you sort of look at leisure statistics, you know, you walk outside this room people out. There are probably never going to feel a recession over the next three years. And so what you have to process is you're going to see two economies. You can see a recession in the service economy. Yet they'll be parts of economy that won't feel a recession and so as an investor you now have to think how do I invest for that sort of bifurcated economy. Our view is twofold. I think there's going to be a lot of positioning in defensive Industries. There's going to be a Renaissance in what I think of as small cap investing in this country. If you look at the GDP construct of America a lot of those Industries who benefit in this market cycle will tend to be smaller companies. Under leveraged smaller companies are going to do well so to the point you heard here that's where I think Equity flows are going to go. To your question on cash, you know, we are new to this environment. We are a big investor in Brazil. We run a big business there and if you look at Brazil, it's one of those economies that has dealt with inflation for as long as I know and if you look at investor behavior in a place like Brazil, What you see is investors tend to hold a lot of cash economies that have high inflation and we do have some stubborn inflation people love cash for a while. And what they tend to do is then they will make trade-off decisions. So they kind of mentally put their cash bucket separate from their equity and fixed and come bucket and I think we are coming upon times in Asset Management in America. You're going to see a lot of that so there is a place for fixed income but it's not the same way we have thought about investing before on the economy.

Sara Eisen: Yie-Hsin, I'm wondering where where you are on the spectrum of Soft Landing medium landing hard landing and I'm going to add in a question here that relates to it specifically about the consumer and Consumer Debt from the audience. Thank you. At an all-time high somewhere around 1.2 trillion and record low record low consumer savings and arising rate environment, how can there be anything but a hard Landing?

Yie-Hsin Hung: We think that there's going to be one more rate hike and we'll see that obviously very soon and then the question will be exactly what is a Fed gonna signal, you know for what's to come. On balance we think that you know, the economy is likely in 2024 to grow modestly sub one percent and that's the same. I mean that we get additional rate Cuts coming into this year called 50 basis points and then potentially another 200 basis points. Next year, I think on the question about the consumer. We actually see it a little bit differently. We think that the consumer and consumers spending is in actually pretty decent shape labor is holding up well. We think household finances are actually in decent shape and of course real wages have been increasing so we don't necessarily subscribe to that view on the consumer end. I did talk earlier about you know concerns that we have sort of in the business sector of your call small to medium-sized companies and seeing more cracks there. You know at the end of the day, I think it is still and I'm glad that there's a lot of debate here because I think when you know, you read the popular process always a discussion of when is effect going to start cutting and you know, is it a hard Landing soft Landing, but it's more or less than the same direction. 

And what we see actually in some of the data that we track we follow something like 250 real-time signals around inflation and to Kamal's point I do think that there is some elements that are pretty sticky today. When we look at clothing when we look at Healthcare. These are costs that are well above the 10 year average similarly food costs have not come down to pre-pandemic levels. And so I think it's worth investors thinking about a potential environment where we have sustained inflation and sustained higher interest rates and that could be with or without some level of growth. And thinking about overall portfolios, perhaps not in the 60/40 mix but really thinking along different factors. So the growth Dimension the inflation Dimension and having different aspects of the portfolio that's going to perform in those environments. So for in a lower growth, does that mean a higher quality bent to the portfolio of higher inflation environment a greater Commodities exposure?

In terms of what it takes to get money off the sidelines into the Market, I think we need to get to a place where there's much more clarity about the path ahead. Whether it's higher or lower, I think that's the time when we see much more money moving into the market. And in the meantime our view is that this is more of a Trader's Market if you have liquidity and liquidity is a premium today being able to deploy that in the private markets as opportunities arise whether that's in the distressed Arena or opportunistic private credit or even secondaries and even in the public markets. I mean we've seen really quick moves in terms of dynamic dislocations, right how you'll spreads blue out last year. We saw treasuries yielding about 4% much lower today. And so having that sort of view around the portfolio thinking about different environments that we could find ourselves in, maintaining that dry powder to take advantage of these opportunities present themselves, but they come very quickly and then being in a position to Pivot is sort of the way that we're thinking about the world.

Sara Eisen: Harvey when does the FED cut rates?

Harvey Schwartz: So the interesting thing I find about the FED discussion is that it's often ‘will they cut rates in a quarter or two quarters?’ And I think when I think about that when we talk about that internally, I think the right way to think about it is the Fed chairman Jay Powell he has a really odd job. I think the difficulty in that job is really been expressed by everyone on this panel, which is just tremendous degree of uncertainty. On the one hand. It's like a tug of war on the one hand you have inflation. He has to fight and another and he has Market stability. And he will have be forced to toggle back and forth between those two things. And along the way probably take undoubtedly a lot of unwarranted criticism for both because that's what we tend to do as a society. But I digress. Yeah, he has a hard job. And so I don't think the FED knows. I don't think they should know because uncertainty is high and I think it's all going to be about the data and I think in the near term they'll be caution. So I think we could again consensus on the panel sounds like roughly one hike that's what we think then a pause but it'll be data driven. Now when we look at our consumer data. Some of the consumer data is very positive. Yes credit card debt is back up to pre-pandemic levels, but the average mortgage rate for trillions of mortgages in the US is three and a half percent. That's an amazing cushion for the consumer it now it's a problem for the lender. but it's an amazing cushion for the consumer in America. And when we look at our data our April activity data for our consumer businesses was up 2% That's mostly focused in travel Leisure experiences areas, you would think but I think and we think this inflation is probably going to be stickier. Now could it abate? Yes. This again gets to the point of the uncertainty. So I'll make two final observations and listen to everybody's been fantastic. I think one thing I would say is that in terms of what brings Capital to the market is always the same thing. It's confidence. In 2009, they had the bank stress tests. And literally that was one of the turning points where capital and confidence came back into the marketplace when quantitative easing was announced. Most people were scared of it. It was misunderstood and they liked it and they liked it a lot. Then we liked it way too much. It was like cake if you've never had cake before. I'm a food guy. So anyway, the I think that confidence will return maybe it's the all clear but when there's some sense of mortgage stability and a real clear path on inflation and rates. I don't think anybody knows exactly when that is we think it'll take a little longer. Now, the other observation I would make is not all capitals created equally, I think you just said it to Traders Market. For our partners, we're talking about very durable long-term capital it can be patient. And it can be invested over years and there is where the opportunity set to us looks quite advantageous, but we wouldn't rush. But I think for shorter-term government money market funds and then where that money is moving. I think Mike's 100% right in terms of ways describing the opportunity set.

Sara Eisen: So it sounds like you all kind of think that the inflation is a sticky thing and I guess I don't know my only pushback would be you know inflation expectations have come down and if you all think the economy is going into recession, which will eventually move joblessness higher. Ultimately won't that cure the inflation problem? Mike, you want to take that?

Mike Gitlin: sure, I mean I'm leaning towards where you are in that and that if you do look at the tips Break Even Market it’s suggesting inflation is going to get down towards two and a half percent over five year period something like that. On average It's probably right. So I think when folks are talking about inflation being sticky, We're looking at four to five percent core PCE that goes down to three to four and then two to three but it takes time. So I think it's more about the time frame. I think that time frame goes over a couple years not a couple quarters. And then you know Sarah your question on when does the FED hike to cut? Yeah cut. When the Fed Cuts you know the way I would think of that is the markets pricing in 50 basis points over the rest of this year. That's really hard to imagine. So I you know, I think we think they'll be on pause for a while and you'll be discussing a cut in 2024. But for the rest of this year hike and then either another hike or in a pause probably feels better for the next seven eight months then immediately beginning to cut.

Sara Eisen: I'm curious, you know when we talked we did a little prep call where we all spoke about the panel and wanted to get some questions to you guys about your business about the asset management business. And I don't remember I think Mike you said every business has been affected by five percent rates. So I'm curious how that's affected your business and we're the growth comes from?

Mike Gitlin: Yeah, it's interesting the gross is coming from I'd say an improvement in choice for the end client meaning in vehicle proliferation and adoption. So in a world, especially in the wealth management side that is focused on mutual funds and moving into separately manage accounts or sma's, Collective Investment Trust or ETFs, which we launched a range of fully transparent active ETFs. It's choice for the end client is really been where we've seen the most change and I think that's going to continue. I think you'll I think you'll see Choice it helps for tax purposes different reasons why someone might opt for a different vehicle. For us It's all about making sure you have the right Investment services available for the client and then let the client determine how they like to consume them. But that amount of change, you know, it's change in terms of the distribution model in terms of how you're interacting with, Your clients operating capacity and expense. There's a lot that goes on with all of that change.

Sara Eisen: Yie-Hsin, what about you? how has it changed what you guys are prioritizing?

Yie-Hsin Hung: You know what I mean to Mike’s comment about moves into fixed income, you know at SSGA we're very large index manager our spider ETFs. So in many ways, we think of ourselves as sort of creating the building blocks for many portfolios. And so I think in many ways we're seeing enormous moves into fixed income whether that's on the fixed income indexing side or fixing a ETFs. Frankly. We've had I think three incredible years already and it feels like we're the beginning stages of what happened with equities moving much more into passive.

We also see interest in active ETFs in the similar fashion. We launched a whole bunch in partnership with other Asset Management firms on the fixed income side. And we think again there's room for sort of a core that's more passively oriented really thinking about asset allocation in the first instance and then layering in you know, those areas where potentially could bring Alpha. And then I think you know just going back to the conversation. We were having about private Equity private credit. I do think you know, our business is a long-term business. And so part of our role is to really help deliver outcomes for investors regardless of the environment we're in. And you know we've seen just a number of public companies come down dramatically over the decades. Similarly IPOs are such smaller volume today. So much value creation is happening in the private markets and I think that's what's going to continue to drive ultimately demand and private equity and private credit in ways that we've already seen. So I think it's really thinking about sort of the near term and being in a position in our case as a provider of investment exposures, what additional exposures should we be bringing out into the market, bringing those insides together help investors create portfolios at a robust enough, preserve Capital take advantage of opportunities, and then really thinking about the longer term structural Trends. And I do agree also that the wealth segment is a fascinating place that I think will continue to grow. We're seeing the benefit of Technology bringing what used to be only available to the largest institutions; it’s just separate accounts, right? I mean hundred thousand dollars even potentially less. Investors can get that same sort of, you know, management of their assets. We're seeing model portfolios. It used to be the purview again of Institutions. That is one of the fastest growing Arenas in the retail Marketplace and then you think about even direct indexing right? I mean, we're in the business today and providing really customized index mandates for very sophisticated institutions that again is coming into you know, individuals hands and so this longer term trend of democratizing investing and making available what's been available to institutions to individual investors I think is another area that we're very bullish on.

Sara Eisen: Katie, how do you focus strategically on this kind of environment?

Katie Koch: Yeah, I’d just say from business perspective two things - that a lot of that resonates that the value proposition for clients needs to go up in this industry. And actually if you look at any industry over time you need to and more and more people come in and it becomes more and more competitive and the Returns come harder to come by actually the value proposition shifts towards clients and delivering that and the Best in Class way which means liquid, transparent and cheaper broadly across all asset classes. So I would agree with that and I think if you're an LP or an individual client the next 10 years should be better for you. You should have an experience with lower fees and less friction and it should be less fun probably for all of us, which is part of the hard job that we have here over the next 10 years and we'll just have to meet together on that from a partnership perspective. And then I just wanted to make the observation. I absolutely agree that Um, when you're trying to invest anywhere on the capitol structure, what we're really trying to do is own a piece of GDP broadly that will translate into returns over time and you know, the productive capacity of this country's moving a lot from public to private markets and I lived through that disruption in the public Equity markets. We now have 50% less publicly listed companies than we did, you know, 20 years ago and that I'm not I'm not against private Equity at all. But it is also true that most individual investors didn't get a lot of access to that wealth creation opportunity and now we're in a very similar place in credit markets where 30% of credit is in private markets. And so I do think we're going to have to think about as a community how we get some of those assets in a safe and reliable way on to the individual investor and I don't think any of us have actually come up with a great answer for that. Obviously. There's some Vehicles out there we all What they are. But I would think that even The Regulators would be focused on figuring out how we do that because generally their view would that wealth creation should be should be broadly distributed. And so I don't I don't have the magic answer for everyone on that. But that's something we're thinking really hard about - how we bridge that that gap between public and private markets particularly for individual investors. And I think whoever figures out how to do that and to deliver it in a really frictionless way that's a that's a massive TAM.

Sara Eisen: Well, first they have to figure out how to regulate Shadow lending and then they can figure out how to regulate democratizing shadow lending.

Harvey Schwartz: I guess they got to spend more time with the regional Banks first. Just a prioritization.

Sara Eisen: Yeah, exactly. So Kamal let me ask you. Is there a growth problem in your industry? You just had a tricky quarter.

Kamal Bhatia: Yeah. Well, so I'll tell you they're very few satisfying Industries and asset management still is one of those and I'll tell you why it's satisfying. It is still an industry where it easily covers its cost of capital. And what's our Capital costs? It's Talent. That's essentially what asset Management's cost of capital is and yes, there is technology cost now and things like that, but it easily covers it. So it's a good industry to be in because you across the board. It is tougher now and I'll tell you why it's tougher. What used to be easy in asset management and 5% environment sort of accelerates this movement is What you had to do have great products, great client service, decent performance and the money came in. Those are not the only sufficient conditions to grow in Asset Management anymore. I think the biggest change for us is the business has become more complicated because the clients have become more sophisticated. You know we were joking about the wealth management space I could tell you even wealth management clients are way more sophisticated. They want more for their dollar and the way they want more for their dollar is they want some sort of complex advice embedded in products now, they just don't simply buy a product. I'll give you two examples where we do a lot of work and I see this is we are big investors in real estate, you know, we have over 100 billion in all sorts of real estate and it used to be that you would have clients who would just invest with you in real estate private equity. Those clients, you know, they've gone through this cycle over time. And now what they say is well, that's not good enough. We want someone who can think About the Arbitrage between REITs and real estate. We want somebody who can think between the Arbitrage between mortgages and cmbs. So the complexity of what people expect from you is higher they still pay you that. So I think the successful firms in Asset Management have to process that complexity. It's a multi-dimensional expectation now than a one-dimensional expectation. You see that even in traditional fixed income, you know, it used to be we were talking a lot about rates and it's easy to manage rates. You know, what's more difficult? Managing FX and we've had an enormous run in the US dollar the US dollar is going to other way and every fixed income investor says, well, you may be great at managing duration, but do you have FX skills? So I think the business of asset management is getting tougher but it's still industry that will easily cover its cost of capital and will reward the clients and the industry itself.

Sara Eisen: This is supposed to be the portion, Harvey, where you guys talk about how AI is transforming your industry and making everything more efficient and exciting. Is there a role here for AI and investing?

Harvey Schwartz: You ask me that? I couldn't hear. Did you say me Harvey?

Sara Eisen: Sure.

Harvey Schwartz: I didn't hear you. Or was it a general question for them?

Sara Eisen: It's General. But yeah, looking at you.

Harvey Schwartz: Well, I'm happy to take a crack at it. I don’t mind. I do think the trends in the industry are hugely positive whether it's democratization product development had a conversation with someone very smart earlier and they said ‘Why do you even refer to it as alternative at this state? It's just really investing.’ and it's about, I think Mike said, very well. It's really just about making sure that we're providing our partners our clients with the right opportunities and the right returns for what they want to achieve over a long period of time. I do think one of the more fascinating things that will happen in the industry over the next decade is the introduction of AI and data science and machine learning. I won’t spend a lot of time on this, but we had a demonstration internally just last week and it was sort of mind-blowing for everybody to see just the developments in chat GPT just recently and how in one of our portfolio companies by spending a very small amount of money they were able to actually completely redefine the efficiency of processes. And this isn't even really the first inning. So I do think the trending technology which has gone on for 40 years is going to be a very steep Trend and I think it will only enable us to be better managers of capital, understand our clients’ needs and deliver to our clients any better, but this this will be Definitely evolutionary in my mind maybe revolutionary but it's going to be…We're early stage in this new part of the process which will go on I think for at least another 10 to 15 years.

Sara Eisen: Anybody else experimenting with Chat GPT or AI in the business?
Or too early?

Mike Gitlin: I'd say from an investment perspective it's really about structuring unstructured data. So for us you have so much data and trying to harness that and use it as a component of your process can be value-added and there's a lot of examples in that it's not meant to answer the question, It's meant to be a piece of the pie, and we're using it in that way and I think that's a one-way train. It's also from operating our business and not just investing, it's making us more efficient and helping us scale our business. So that's really important you effectively Can become more efficient you can operate smartly which is one of our core themes and and at the same time on the investment side, you basically have a 24/7 research assistant.

And that's super helpful when you're looking at capacity to help you make decisions.

Sara Eisen: Related question from the audience on this. Well, it's not on this but I'm going to make it on this which is: We have seen significant layoffs in Tech. Is that coming to Asset Management? Whether it's the environment or I guess having a digital research assistant.

Katie Koch: I'll start with that and answer the previous question too. Tech was just the locus of some of the most excess in the market particularly during the pandemic period. And I think it goes back to the same concept A Lot build up and there's a lot to wash out. The asset management industry writ largely did not have as much so we wouldn't I generally wouldn't expect to see this the same level of cuts. But it is it is quite significant the job destruction that's happening in technology. And I and I'm hopeful that will all of us will be able to pick up some of that engineering talent because we're all going to need it over the next decade. And then I just want to make a quick comment on on AI. We are looking at it in the same ways the other panelists are. I think it's incredibly important our view alluded to this, this is a real thing and it's probably going to be the defining technology of the next 10 years and it is very important and we're spending a lot of time. To understand this particularly in the equity markets Company by company about who understands how to harness this and where the winners and losers are so you really want to think about this in the magnitude of things going from off to online and then eventually to mobile and how much that disrupted the consumer Market it changed the entire consumer market and it's just a totally different Market the companies that didn't figure out how to do that when bankrupt the ones that figured out how to do it have a trillion dollar market cap. And that is what is going to happen here with the use of AI and I know Carla I'm sure we're spending a lot of time asking their companies how they plan to use it. So we'll come up with a good answer for that for you not on the stage but in the future. And I think it's true of all public Equity companies. That's the number one. It's not it's not just our sector. It's not just in technology. It's a cross all sectors. How are you going to use that to redefine your business model and to win in your category and I think healthcare could be by far the biggest beneficiary of that. Healthcare is currently 25% of the GDP in this country for the worst Healthcare outcomes in the OECD and if we could get that data and use it and harness it appropriately there could be a lot of value creation last comment is just that by definition, this is actually massively deflationary. So if you want to think about inflation from a secular perspective, like, you know, it's hard to call it on a 12 to 24 month view but technology continues to be massively deflationary.

Sara Eisen: All right, 45 seconds left. We'll do a speed round for everyone. In the next year when we all meet again at Milken on this stage, hopefully, the best investment will be have been in the past year, what? Kamal?

Kamal Bhatia: The longest duration Bonds in the world.

Sara Eisen: The longest duration bonds in the world?

Kamal Bhatia: Find the longest duration bond, buy it.

Sara Eisen: Mike?

Mike Gitlin: I'll go a little shorter duration because that seems like a hundred year bond is long. But yeah, I would say intermediate duration, high quality fixed income would return something like six or seven percent. The lawyers aren't here so I couldn’t return something like six or seven percent. I think in the backdrop of what we're all talking about that's probably a good investment.

Sara Eisen: Yie-Hsin?

Yie-Hsin Hung:Yeah, I’d be sort of been fixed income too. Probably more treasuries thinking that obviously fixed income yields are very attractive and then depending on the scenario if we think that there's more of a tougher Landing then it'll be a good place to be.

Sara Eisen: Katie it's good thing you went in to run a fixed income business.

Katie Koch: I know. I mean, I'm just thinking sitting here thinking how fortuitous that is. I would say Cash and appropriately structured, highly conservatively structured private credit.

Sara Eisen: Harvey?

Harvey Schwartz: So I think waiting is key and then I think when opportunities present themselves into structured credit, where you're getting the right risk adjusted return particularly in acute environment, I think you get massive outperformance. But I think I think waiting is key.

Sara Eisen: You guys stuck here time queues. Very good. Thank you very much. Thank you all for being here. Thank you, everyone.