https://www.youtube.com/watch?v=nyoj0OdqnRI
So, Roger, let's go beyond the deficit and talk about other things that are
affecting business today and specifically what we see in the yields, because goodness knows, they've come up a long way really fast. Well, we've seen, to quote my friend Howard marks a sea change in the financial market environment in the sense that the very long, roughly 15 year period of ultra low interest rates, at least I would argue, is over. It's not temporally interrupted. It's over. And and now today we in round numbers, we have a 5% ten year yield. And we haven't seen that for, I think, since 2007. And I think a lot of market participants in particular to your question, business leaders are just beginning to crack their grasp that we are in a new era in terms of the structure of interest rates. It's a profound change because it affects not just obviously cost of capital, but it affects asset allocation. It affects returns. I mean, if you're a financial imagine you're a private equity firm and these they are so ubiquitous. This fundamentally changes the return prospects for them because the cost of that leverage is such that they can't leverage X, Y, Z investment to the same degree today that they could have a year or two ago. So but I think I think a lot of people are just waking up to this, and I'm sure some people listening to this would disagree that we've seen the end of ultra low interest rates, but I'm convinced we have. And and it's a really a profound change. Now, how much it affects you as a CEO depends on the nature of your business, how capital intensive it is. Are you, by the nature of your business as a to generate consistent free cash flow or are you are you generating deficits instead and doing a lot of financing? So if you're if you're Apple, you actually do borrow because of your international business versus domestic and the role of share buybacks. But you're not a net borrower in terms of net debt and you know it affects you, but it doesn't affect you very dramatically. But if you are Blackstone or your KKR or your Apollo and so forth, very dramatic effect. So you say some corporate leaders are just waking up to this process. Is that at least in part, the answer to a more fundamental question? At least I have. The economy seems to be charging along. When you look at GDP numbers, you look at retail sales, you look at so many indicators, even the labour market maybe loosening a bit, but it's still a pretty strong labour market. What how can the economy doing this? Well, we've had this many rate hikes out of the Fed and this increase in the yields on the bonds. I think the economy is slowing. Now you're right that it's still resilient. It's not falling off a cliff. We're not there's no evidence at the moment of an incipient recession. I mean, like next week or next month. But I think it is slowing. You look at the housing sector and of course, the sharp rise in mortgage rates always would have the effect it's having here. But new home sales, mortgage applications all sharply down, as you would imagine. And you look at a whole series of other surveys at Evercore, we do a series of proprietary surveys, trucking, temporary employment agencies, airlines, restaurants, a whole series of them. We do them regularly, and I think it's quite a good set of data. And they're pointing to a serious slowdown. So the composite reading of our surveys is above recession levels, but has come down a lot. So I think the economy, despite the backward looking strong data, is slowing down. Are we about to have a recession? I don't think so. I don't know about next year, but not I don't think in the rest of this year, 2023. But there's definite slowdown occurring. By the way, for your data, I get Ed Hammond slides every day and I read him every day. But you know what I mean? I do know exactly what you mean. I read those surveys every single day in some sci fi form. So how does a corporate CEO respond? I mean, obviously there's a lot of different corporate CEOs, a lot of reactions. But do they just pull on their horns at this point? In part because it's more expensive, but also in part because I, as CEO, don't know exactly where it's going? Well, of course, it depends on what your business is. So you're seeing some surprising strength given the level of interest rates given, given how old this recovery simply is, as recovery is more than three years old. It began in the early second half of 2020. You know, you see Walmart doing very well. You see Procter and Gamble doing very well. And those are really broad based companies and they're a sign of the resilience of this economy. On the other hand, you know, you see some companies there was there've been some big earnings reports the last day or two, which have been somewhat disappointing. Alphabet and so forth, really depends on on on the business you're in. But if you take all these earnings reports together, they do show resilience. I say it's slowing, but there's still considerable resilience, especially businesses that depend on the day in, day out consumer, because the consumer is still has, for example, considerable excess pandemic related excess savings. And as you say, labor markets remain pretty tight. And so consumers are doing well from an employment point of view. And a lot of consumers are right about even in terms of real after tax income. But still they are resilient. We have a lot of uncertainty about exactly where the economy is going, where rates are going, things like that. We also have geopolitical uncertainty right now. We had Ukraine already, which is to many a shock that we'd have a ground war in Europe at this point. Now we have Israel and Hamas, which we've had disputes about before. There have been problems over there. But boy, this is a pretty ugly one. And that's before you get to issues with China and making sure that we're handling that situation with Taiwan sufficiently. How does a corporate CEO internalize at the very at this very moment and it could be different tomorrow, the the tragedies and they are tragedies are unfolding in Israel and Gaza. And on the other hand, as you say, Ukraine are not a major economic event for the United States of America and for most chief executives are almost any chief executives. So you're worried about it? For lots of reasons, but probably not about what it's going to do to your next quarter or how you're going to plan your if, God forbid, the conflict in the Middle East becomes a wider one, and I just hope this doesn't happen, but everybody's talking about the possibilities, whether it's Hezbollah opening a second front against Israel, the role of Iran and so forth, we just have to hope that doesn't happen. But if it does, that will be, I think, a different matter, because financial markets, I think, would react very negatively to that. You could see much higher oil prices, for instance, and it could go from something that you think is terrible but doesn't affect your business to something that starts affecting your business, among other things. So that frightens consumers and frightens customers. So at this very second, probably doesn't affect your business. It isn't a big economic event, but one has to worry whether that could change. So Roger, as you say so correctly, this is fundamentally a humanitarian issue. What we saw happened in Israel and what has been ongoing in Ukraine for some time, the people on the ground who are really whose lives are being affected profoundly, and we have to keep that uppermost in our minds. At the same time, there are business aspects, there are economic aspects. And so I want to ask this as delicate as I can, are there opportunities from some of the dislocation we're seeing in the sense that if you have a strong balance sheet, if you have a strong company, some of the prices might be coming down because of increased yields, because of interest rates? Are there some companies are saying, you know, this might be my opportunity to move into some area and make an acquisition, otherwise I could not have done. Well, an obvious area of opportunity that Ukraine, in effect, the conflict in Ukraine created had to do with energy. So, you know, the United States is again, United States I'm sorry, is is at an all time high in terms of oil production. And a lot of the world, you know, has has reacted to the Ukraine conflict by saying we don't want to be dependent on our prior sources of energy, especially if you're European. So, you know, I would say the energy sector as a whole in the United States has taken advantage of that and and ramped up production. You know, beyond that, probably not that much. And I think if if this conflict in Israel and Gaza becomes wider, it's not an opportunity. It's a problem. So, I mean, the whole China dynamic is creating a lot of opportunities because a lot of people, of course, are diversifying their supply chains and moving and investing in India, for example, are investing in Vietnam or Malaysia, what have you. And that's causing a lot of rethinking of investment. But in terms of Ukraine and the Israeli tragedy, not quite yet.
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