Wall Street Week — Inflation Meets Debt, Rerouting Global Trade, Private Equity Tested

[00:00:00] Speaker 1: This is Wall Street week. I'm David Weston bringing you stories of capitalism. The world is focused on the Strait of Hormuz. What about the other shipping choke points at risk and what can be done before there is a crisis. Private equity has been the source of market beating returns for years. But now the spread has come down and getting your money out can be a problem. Cuba is facing yet another economic crisis in no small part because of U.S. sanctions. President Trump says he's going to make sure the country finally opens up its economic system. We've heard this story before. Could this time truly be different. But we start with the bond market caught between fears of inflation and long term fiscal risks. Rick Reeder is BlackRock's chief investment officer of global fixed income and head of the global allocation investment team. Rick we got CPI numbers this week and there was good news in the fact that they're not going up. On the other hand it's not 2.0 the way we've been promised. So which is more important the good news or the bad news. Well I would say markets have been [00:01:17] Speaker 2: more nervous about this number. And I would think there was a collective industry wide sigh of relief when this number came out because it wasn't you know this is one of those numbers if it comes in high then all of a sudden now you put the Fed in clear hiking mode. And you're starting to see consistent numbers so that so if you go back into the last 10 numbers that we've gotten in core CPI eight of the 10 have been 0.2 rounded or below that. So it's still a bit elevated relative to where the Fed's long term objective is. But I'm going to go back into the last 10 numbers that we've gotten in core CPI eight of the 10 have been 0.2 rounded or below that. So it's still a bit elevated relative to where the Fed's long term objective is. But I think the markets felt pretty good about who we got through it. And it wasn't that high then if you go through the component parts. Otherwise it was a number pretty close to expectations that only almost every regard. You are seeing still things like lodging away from home hotel airlines you're seeing in leisure experiences and about the World Cup effect and otherwise. You're still seeing some pricing pressure around that. But overall it was it was it was an okay number but yeah we're not certainly not a target yet. [00:02:13] Speaker 1: So pull back a little bit and give us a longer term view over the years of how it's bounced around and where we are today compared to where we've been. [00:02:20] Speaker 2: So I mean the big deal for me is the Fed's mandate is price stability. It's not two but you'd like to get it. There is real efficacy around two percent is a normalized equilibrium for what an economy should run out. So you want to get to that number. We haven't gotten there in a long time. By the way you can take the two decades before it's pretty hard to get it as high as two. You're in the ballpark today. And you know when you were running certainly post-COVID you're running at numbers five, six. That was scary. But if you look at inflation expectations and you think about where we've come from. It's pretty stable particularly when you've got an economy that's running with a lot of debt on it. That the thing you really can't have happen. You can't have a deflating dynamic because it enhances the true cost of the debt. Today I would argue it's the number we'd like to see a little bit lower. But it's certainly not daunting by any stretch relative to anything we've seen in history. [00:03:09] Speaker 1: So take COVID out of it for a moment. Go back to like 2024 for example. Where are we in core? What's the trend line? [00:03:16] Speaker 2: Yeah. So you know the thing I find interesting is that is Chairman Warsh is focused on the left side of the decimal place in the right. And I think you have to take that to heart. Meaning if you're in and around the twos you're okay. But when you actually zoom in closer what the markets tend to focus on. There's this been this maniacal focus on the right side. And you know since you know certainly over the last year or so. The trend is pretty good in that it's coming down. But it moves around. And you know the markets tend to focus on the tenths of a percent in terms of these movements. By the way I always get a kick out of the first thing I saw this morning. While Chairman Warsh talked about the left side of the decimal place. And the number was it printed at .2154. And people talk about the rounding. You think about for a broad economy like this. Does anybody really care about the .4? Other than the market participants do. So you know part of when you zoom out and you say okay. That's a pretty good. We're in a pretty good place. Would like to see a trend lower. For me I actually think we are trending a bit lower. We think core PCE by the end of the year is around 2.8. Next year we think it gets to 2.5. And core CPI is running lower than that. Core CPI is running at 1.6. The last six months 2.4. When you strip shelter out it's actually running at about half that. So not bad. You know I'm pretty relaxed about where we are. There are other things I worry about. But you know I don't think that's going to be the thing that disrupts the markets. [00:04:36] Speaker 1: In fairness to some of the commentators and analysts. I understand Chair Warsh has said we care about what's left of it. He also has said we're not done yet. I mean if he really is just happy with the left side and given the numbers you just gave us. He would say mission accomplished. Job done. [00:04:52] Speaker 2: So I think there's a real nuance to that. I mean I think the Fed what the Fed needs to accomplish is get to that 2% number. But that 2% doesn't have to happen today. It doesn't have to happen next week. It's that is a long run number. And I think quite frankly if you are any head of any monetary policy authority you have to be committed to that 2% number. The long end of the yield curve. Every tick of it is dependent on how you articulate that thesis in terms of where you're trying to get to. It doesn't mean you have to raise rates to get there. And I think why these task forces are a very elegant way to get there. These are complex issues. When people ask are you restrictive or not. Well in housing you're not. You're clearly restrictive. You have a dormant housing market. But then you look at the amount of spend on CapEx. Like that's you were not restrictive to that. But you think about what would you have to move rates for the big hyperscalers not to spend on AI. You'd have to raise rates hundreds of base ones to get your IRR to a level that didn't make sense. So I think he is committed to it. I think he's going to think about the tools. You have the balance sheet. You have the money supply. You have a lot of things. A lot of tools at your disposal. Raising the overnight funds rate in my mind is not a terribly effective way to bring that number down. And I think if you really think about it in a sophisticated way, which I think they will, what are the tools and how do we get there and what's the timeframe to try and achieve it? [00:06:12] Speaker 1: So you say the long end of the yield curve really needs to believe the Fed, monetary authorities. If you look at what happened with the 30-year yield during and after that news conference, they were not buying it. It went up to the highest level it's been what since 2007 or something. [00:06:27] Speaker 2: So I think it's a dead ride. I think there are a couple of things to think about there. One, you know, he didn't say hike. And I think the markets, the back end of the curve was like we could get a hike here, which would obviously show maybe a stronger near-term commitment to inflation. So there was a little bit of that. Second thing that I think proved it to be a bit untethered was this idea of, gosh, we didn't hear a lot of the metrics. Markets want to hear the reaction function. And how are you going to interpret data and then how will you react to it? I don't think you need more forward guidance. I think actually pulling back on forward guidance is a good idea. I don't agree with the ethos that people have put out there that less forward guidance means more volatility. Actually, if you go back to 21-22, there was a lot of forward guidance. It wasn't right. As long as the markets understand and can interpret, here are the metrics you're looking at. Here's what your reaction function is going to be to the data. And I think it's quite sincere when Chair Worsh says, let the markets determine where should you be, and then they could react. And that's a good piece of data for the Fed. So anyway, I think that's really important going forward. But I think the long end of the yield curve is a very important thing, how you manage that. And oftentimes, I think you need to use the balance sheet to actually keep the long end down. And we'll see how that goes. [00:07:40] Speaker 1: The markets certainly react to what they think is going on in the monetary policy. Are they also taking into account fiscal policy? And how big a risk is it that actually we won't be able to pay all these debts back? If you look at the term premium, for example, how big a factor is that in keeping things above two to the right or the left at this point? [00:07:58] Speaker 2: David, I actually think you hit on exactly the right point in that. I actually don't think, I think the markets will talk about on the day that maybe the long end backed up. And what does that mean for credibility? I think that was overstated and unfair. However, you do have something going on that we have, not just in the US, you have fiscal burdens that are significant. And by the way, alongside of the amount of financing this week, there was 673 billion of US Treasury debt. You know, it's like issuing Indonesia in a week. It's an awful lot of debt. Plus, you have an immense amount of supply coming through that is AI related. So you're pushing into the system an awful lot of financing. To me, that's why real rates are pressing higher is the cost of finance is going up, driven by fiscal deficits around the world, not just US. But also, we've got to push a load of financing in the market. And the markets are saying, okay, these real rates are attractive. But boy, maybe they have to back up a bit more to get all this financing done. And that to me is a big one. [00:08:56] Speaker 1: Give us a little more detail on how you are balancing your portfolio. And I took a look at some of the numbers and it looked like high yield and securitize you've got a fair amount of and there's some other stuff. [00:09:05] Speaker 2: So my fixed income. So BINC is our big ETF. You know, bonds are very different than equities. In bonds, my upside is they pay you back. So I know I just got to create a portfolio of people that is as boring as possible, that's as stable as possible. What is incredible about today's environment, you can create almost a 7% yield. So we're running about a 680 yield at an average rating of A minus. And by the way, with interest rate exposure, that's under three years. That is, I've lived much of my career never being close to decades for not being able to do that. So then what do I do with it? High yield, emerging markets, some securitized assets. I own more Europe than the US. And I just try and keep the quality of the portfolio in good shape and diversify it like crazy. And, you know, today, you don't have to stretch because these real rates are so high. High yields should be trading 150, 200 base points lower in yield. It's not because we have real rates high because of we have an inflation issue or we have these real rates that are that are, you know, which make corporate investing pretty attractive today. [00:10:11] Speaker 1: Coming up, everyone is focused on the straight of Hormuz and how to get it back open. But that's not the only global bottleneck for shipping key goods and commodities. What should we be doing about the others? This is a story about choke points. The closing of the Strait of Hormuz has reminded the world that for all the flexibility of shipment by sea, geography creates a handful of points around the globe that can wreak havoc with commerce if they are cut off, which makes it all the more important that Mexico is undertaking a massive project to create an alternative to one of the world's most famous waterways. Bloomberg's Simon Hampton has the story. [00:10:53] Speaker 3: In the Veracruz region of Mexico, some 1,200 miles north of the Panama Canal, lies what's known as the Interoceanic Corridor of the Isthmus of Tehuantepec, or CIIT. [00:11:10] Speaker 4: We're standing at the terminal for the train ship here at Coatzacoalcos. This is the only one in Latin America, and it's become a very important service here. [00:11:25] Speaker 3: This port in Coatzacoalcos is one end of the so-called dry canal cutting across Mexico, a combination of rail and road connecting the Pacific Ocean to the Gulf of Mexico. [00:11:36] Speaker 4: It doesn't have to change from the truck to the train and then add all these costs for operations. [00:11:42] Speaker 3: Alejandro Velasquez is the head of investment and commercial development for the CIIT. I've seen it described online as a competitor to the Panama Canal. Do you see it that way? [00:11:53] Speaker 4: Of course not. No, I mean, the corridor is just an alternative. For some industries or for some companies, the corridor will be a better alternative at some point. And some of the times you're going to use just the Panama Canal. At the beginning, it was offering service only for all the oil and derivatives industry. But today, with the growth of the rail service here at the south of Mexico, companies located at the very south of Mexico are considering to use also this service to get to Florida or even to New York. [00:12:29] Speaker 3: And that need for alternatives is rising as supply chain choke points become a recurring feature in the world today. While much of the world focuses on the Strait of Hormuz, a recent report from the Council on Foreign Relations highlighted potential risk spots elsewhere, including in the Strait of Malacca, where as much as 40% of global seaborne trade transits annually, or the Taiwan Strait, where around 44% of the global container fleet transits each year, and the Panama Canal, which handles about 40% of container trade between Asia and America's east coast. [00:13:06] Speaker 5: We were used in an environment where choke points were considered, I would say, secure of access, reasonably accessible. But now it seems to be more and more uncertain in certain areas. [00:13:18] Speaker 3: Jean-Paul Rodriguez is a professor at Texas A&M University's Department of Maritime Business Administration. [00:13:24] Speaker 5: We often say that geography has a sense of humor, which means we have a world composed of 70, 75% of ocean. But connecting these oceans can only be done through a very few strategic locations such as the Panama Canal, the Swiss Canal, the Strait of Hormuz, the Strait of Malacca, among others. When these strategic locations get disrupted, it creates significant, you could say, domino effect on international trade, either by limiting, you could say, opportunities accessibly to key resources and markets, or most of the time imposing substantial deviations over long distances, which creates stress on global supply chains. I would say it goes in cycles. For instance, in the early 70s, the Swiss Canal was closed for close to a decade because of conflicts between Israel and the neighboring Arab countries. So history sometimes repeats itself a little bit. So there are events, and then they abate, they go away, and then we go back to business. But this time, it's a little bit more severe because of, you could say, the projection of power that Iran is exerting on two key strategic locations, which are, of course, the Strait of Hormuz and the Balan-Mandeb Strait as well on the Red Sea. So this time, it's a little bit different. It's two strategic locations which are excessively important. There's not that much you can do outside deviations. You go around if possible. Otherwise, you try to find alternative routes, which tend to be overland route. And this, what is currently happening in the Persian Gulf with United Arab Emirates, Saudi Arabia, contemplating and using their existing, you could say, alternative routes overland through pipelines or for oil, and, of course, with roads or rail for containers. [00:15:13] Speaker 3: Increasingly, shipping companies are pursuing those alternative routes. Middle Eastern countries are pouring money into pipelines to bypass the Strait of Hormuz, while melting polar ice helped a Chinese shipping company become the first to make regular service through the Arctic and avoid Houthi attacks in the Red Sea. For Mexico's CIIT, the Panama Canal's 2023 drought offered an early glimpse of the demand it could face. [00:15:39] Speaker 4: Let's talk about 2023, when the Panama Canal had this trouble about the level of the Gatuns Lake. Three of the main shipping lines called us to ask, like, are you ready to receive containers? Because they were, like, losing a lot of money. Unfortunately, at that time, the train was not ready when they called. But in those cases, also, the idea is to position the corridor as a high-quality and a competitive alternative for the different, of course, disruptions that now we can see they're going to be, like, more frequently. [00:16:18] Speaker 3: But I assume you also want to be more than just an emergency alternative for companies as well? [00:16:23] Speaker 4: Totally, totally. I mean, the fact is that the corridor was born with, like, a main idea. Cross cargo from one side to another and just use two ports. Today, we grew. We're considering four ports at the south of Mexico. [00:16:38] Speaker 3: Yet in a world where choke point disruptions can happen at a moment's notice, the presence of alternative routes is one thing. Identifying and implementing them at speed is another. That's where supply chain logistics firm Exeger comes in. Brandon Daniels is the company's CEO. [00:16:55] Speaker 6: So here you've got aluminum, which is inside of their components. So it says active shipment of aluminum extrusion billets. So it's not just saying, hey, aluminum is a risk, which is what everyone knows today. It's here's the exact part that that aluminum is going into and that you require in order to produce what you're manufacturing. That is subject to a critical risk closure. So you're not going to get those ships through. You're not going to get those components through. The alternative corridors are not open to allowing you to reroute them today. And so what we're doing is then we're assessing and often these are customized or configured by how the customer thinks about the alternatives and thinks about risk. The volume of disruption has increased astronomically and it has laid bare the fragility of our supply chains. Over the last six years, the number one issue at every board is supply chain procurement. It's how are we going to navigate an increasingly volatile world, a world that we were made aware of through COVID. And so when we give you a problem, it's important that we contextualize that problem. And then once they've prioritized it, we actually help them to determine the courses of action. Some of those will be courses of action to reroute goods five days out. [00:18:31] Speaker 7: So how quickly can a company that you're working with go from identifying a risk to implementing a change in the supply chain? [00:18:39] Speaker 6: Once you're actually in the system, once that ERP is connected and we have your suppliers loaded into the system, you can literally see an issue in real time occurring, whether it's the issues with the Houthis attacking vessels in the Red Sea or it's a new party being added to the OFAC list. [00:19:02] Speaker 3: Disruptions are costly for business. Houthi attacks in the Red Sea added an estimated $1 million per voyage and drove up wartime insurance by 900% at its peak. It's hoped that alternative corridors like CIIT combined with platforms like Exeger could help mitigate risk for global trade. [00:19:22] Speaker 6: As the supply chains redistribute, as the supply chains start to utilize these new manufacturing capabilities, as our tariff regimes get put in place and enforced, we're going to see a period where there is going to be a premium on resilience, where there is going to be a premium on restructuring and reshoring. [00:19:47] Speaker 3: But even with more resilience built in, Rodriguez says the world's critical corridors will remain as critical as ever. [00:19:55] Speaker 5: The fundamental reality is these passages cannot be effectively avoided. They are shortcuts within global trade. They have been operational for many of them centuries, for Panama more than 100 years, whereas again 150 years or so. So they are there, and the issue, which is more, I would say, effective or more of a good idea, is to keep them open. You cannot allow, and that's what is tragic about the current circumstances. How did major players in Europe, the UK, France, Germany, among others, have allowed the world's most important shipping routes to be disrupted? Very simplistically, the world economy, the global economy is, I would say, leaning on the principle of freedom of navigation across the world's shipping lanes and the world's strategic passages. And this has been, I would say, a regime or a way of doing things that have been in place for quite a while. Currently, this regime has been questioned, has been disrupted geopolitically, and that creates some problems. [00:21:08] Speaker 3: Land corridors can also be a growth opportunity for the area they pass through. For Mexico, it hopes the CIIT can be not only a corridor, but a driver of growth for a region that has historically been among the countries most underdeveloped. [00:21:24] Speaker 4: The real value is of all these industries coming along the corridor, establishing here, and creating raw material for some other industries, semifinal products, creating all different things, not only for Mexico, but for the rest of the companies along the world. So that's the main idea today of the corridor. It's not only crossing cargo, but also developing value added to the different cargo communities. [00:21:54] Speaker 3: So map this out 10, 20 years down the line. Where do you see this corridor? And where do you see it positioned in global trade? [00:22:02] Speaker 4: Well, 10 years, of course, I see the corridor working together with the industrial parks, the train going every day, and development zones outside the industrial parks. Because as we know, the concept of an industrial park is just the company establishing inside, you know, creating jobs, and that's all. But here, for example, the companies that are going to establish here at the corridor, they have to also benefit the community around the industrial park in order to become a really, really development pole, right? And the federal government is working together with some regulation in order to help the companies to accomplish these important objectives. In 10 years, I see the corridor, of course, with the development of specialized terminals, cars, containers, bulk, anything required. Like maybe a new train line that goes straight from one port to another one, maybe in less than three or less than four hours, moving from one side to another one. And at that time, I'm expecting to be like more competitive or offering more competitiveness than we're offering now. [00:23:20] Speaker 3: So at the start, you said you're not trying to compete with the Panama Canal, but then in 10, 20 years, could you see a position where the corridor has expanded to a point where it does compete with something like the Panama Canal? [00:23:30] Speaker 4: Yeah, maybe at that time, we can we can talk about more competitive alternative. [00:23:40] Speaker 1: Up next, for years, private equity was the path to higher returns than public markets offered. But that's no longer a given. What does that mean for your portfolio? This is a story about beating expectations. For years, private equity has been an important tool in the investor's toolbox because of its ability to deliver better returns than public markets. Not to speak of what it's meant for entrepreneurs like Dan Namorow, who built his own electrical company, never expecting private equity to come knocking on his door. [00:24:15] Speaker 8: When I started my business, having an end goal was not even a thought in my mind. I had no idea about business. Never for a second. If I was approached in year one by someone who said, Dan, you're going to sell this business in eight years for millions of dollars, I would have simply laughed at them. And then private equity arrived. First, I thought it was a joke. I thought it was a scam. I, within eight years, was going to almost 12x my EBITDA and become a newly minted millionaire. [00:24:56] Speaker 1: But that payday came with a tradeoff Dan says he did not fully understand. [00:25:00] Speaker 8: I do not want to disparage the company that acquired mine. But I can say that no matter what an owner thinks is going to happen, they need to take a step back and look at the reality of things. And what I mean by that is you are no longer in control of your business. It absolutely 100 percent hurt not only my soul, but the soul of the business. [00:25:30] Speaker 1: Dan's experience is one founder's account of one deal, not a verdict on private equity as a whole. And for Nemiro, timing was everything. He sold at the top when cheap capital and rising evaluations fueled demand for companies like his and justified high prices. Private equity buyers could pay those high prices because they could generate returns simply off of the financing. But all that has changed. [00:25:56] Speaker 9: The role of private equity is to provide hopefully outsize returns relative to what could be gotten in the public markets. It's provide incrementally higher returns and therefore raise the returns on the whole portfolio. [00:26:12] Speaker 1: According to a report by Bain, private equity deals, fundraising and payouts to investors surged in 2021 fueled by COVID related stimulus. But then dealmaking slowed in 2022, forcing private equity managers to return fewer profits to investors. Steve Ratner has spent much of his career in and around private equity. He is now chairman of Willett Advisors, which manages the personal and philanthropic assets of our founder and majority shareholder Michael Bloomberg. Ratner says changes in the market have made the case for private equity less straightforward for investors. There was a time when interest rates were near zero, where there was sort of a crying need for outsized returns. We now have positive interest rates. Has that reduced some of the attraction of private equity? [00:27:01] Speaker 9: Yes, in two ways. First, anytime interest rates go up, the attraction of equities goes down. Because if you can invest in a fixed income security and get an interest rate of X and that's high enough relative to what you think you're going to get with the risk of the volatility and risk associated with equity securities, you're going to migrate toward fixed income. With respect to private equity specifically, there's an additional issue, which is that private equity is heavily financed with debt. And therefore, when rates go up, the ability to make the numbers work, so to speak, on a private equity investment gets harder because, in effect, your costs have gone up. And so you can't pay as much for the company and still make the kind of return you were hoping to make. [00:27:43] Speaker 1: Steven Kaplan, a professor at the University of Chicago Booth School of Business, has studied private equity for decades. As you know so well, markets go up, markets go down, rates go up, rates go down. But as you look at it, to what extent was private equity doing artificially well because we had historically low interest rates? I mean, approaching zero interest rates. Did that distort the process? [00:28:08] Speaker 10: I don't buy that so much. Private equity really outperformed for, you know, a long period of time in all interest rate environments. And I think the, you know, the late, you know, 20 teens rates were low and maybe that was a help. But the private equity firms also benefit from improving their companies and the public markets also benefited from the lower interest rates. So, you know, it's sort of as an apples to apples comparison. That's why I like just looking at how the private equity does relative to the public markets and the S&P 500 in particular, because the S&P 500 is going to be affected by many of the same things. [00:28:58] Speaker 1: WILLIAM BRANGHAM: According to Professor Kaplan, an analysis of U.S. buyout funds shows that private equity largely delivered on its promise of beating public markets for decades, from the 1990s all the way through 2018. But since 2019, that pattern has reversed, in part because big tech's remarkable rise has pushed public market returns higher, and in part because the higher prices generated during the boom days have made it harder for investors to get their money out. WILLIAM BRANGHAM: The ultimate goal, by and large, is to sell the company at some point. That has become more difficult in recent years, perhaps in part because of the increase in interest rates. Certainly, we talked to limited partners who say, wait, I'd like my money back now. And the general partners say, oh, no, no, it's too soon. Like to hold on for a while. What's the problem with exit right now? [00:29:46] Speaker 10: WILLIAM BRANGHAM: The deals in 2020 and 21, they paid high prices. Then they got hit by interest rate increases. And those deals are not doing so well. And I think a number of the private equity firms don't want to sell because they think if they hold it longer, they'll be able to get a higher value. WILLIAM BRANGHAM: And as a result, they're not selling. And so realizations, or what they call in the industry DPI, which is distributed capital per invested, is on the low side. And that's what LPs are complaining about, rightfully so. [00:30:30] Speaker 1: WILLIAM BRANGHAM: PitchBook reports that the backlog of companies held by private equity firms has now reached over 33,000, up from only 19,000 a decade ago. WILLIAM BRANGHAM: And with less support from cheap leverage and rising valuations, private equity firms are increasingly being judged on what they can actually do with the companies they buy. Andrew Weinberg, founder and CEO of the private equity firm Brightstar Capital Partners, says 2022 represented a fundamental shift. [00:30:57] Speaker 11: ANDREW WEINBERG: I think 2022 is an inflection point for our industry. If you look at the prior 20 years, if you bought something and grew it a few percent a year and took on some leverage and had multiple expansion, that was a great return. And I think the Bain research report did a great job of chronicling this and then said, okay, here's the new norm post 2022, which is the old 5% growth is really now a 12% bottom line growth to achieve the same return that one did before. WILLIAM BRANGHAM: I love it personally because I've been waiting for this market. I've been waiting for a market where the investor can differentiate between the manager that is purely focused on leverage and multiple expansion to the manager that is focused on operational value add and the application of AI. WILLIAM BRANGHAM: So, in terms of being ready for this environment, we have built Brightstar to be ready for this environment. We have a deep team of not only investors, but operators who have experience in the space to do it. And I think what the investor is going to end up seeing is a much bigger differentiation or distribution of returns from managers based upon who has built their firm for this environment. [00:32:04] Speaker 1: WILLIAM BRANGHAM: As performance pressures for private equity funds grow, investors increasingly focus on issues like how they get their money out and what fees they're paying. Jason Tyler, president of wealth management at Northern Trust, helps wealthy families and family offices navigate the changing investment landscape. [00:32:21] Speaker 12: JASON TYLER: Now the fund sponsors are coming up with, first of all, they're trying to get to new investors that didn't typically have either the interest or the ability to invest. And so they're trying to create more liquidity and that will attract investors that don't feel comfortable having their money held up for eight to 10 years. That attracts a smaller investment size. And then on the conversely, a lot of the largest investors, a lot of the ones that we have as clients, their historical ability to invest, they'd say, well, we don't want to pay the fees that these funds have. So we'll be more patient and we'll look for ways to invest directly into companies. Well, now the private equity funds are saying we'll find that opportunity as well. Maybe a client, maybe an investor can invest in our fund. But if they do that, we'll give them an opportunity to invest without the same fees directly into the company. [00:33:16] Speaker 1: JONATHAN: Investors historically don't like to pay fees or at least like to pay the lowest fees they can. At the same time are some family offices or ultra high net worth people discovering actually it's not that easy and it's pretty expensive even to do it yourself. [00:33:31] Speaker 12: JONATHAN: It's a great way to frame it because a lot of investors think, well, I love the investments I've had, but why would I want to pay the fees here? And so a lot of what the top private equity funds do is they're explaining to their investors all the hard work they're doing to source and then do research and their investment thesis and due diligence on companies as a value add so that in direct investors acknowledge and have to appreciate that there is work that's being done by the funds that they're not able to do alone or even potentially with the family office staff that they've hired, which oftentimes are great, great, very strong professionals. But they just don't have the resources of a large private equity fund. [00:34:18] Speaker 1: JONATHAN: There's little doubt that private equity is here to stay. But as financing becomes more expensive and exits take longer, the market could be narrowing the field and rewarding firms that can prove they bring more than capital to the companies they buy. [00:34:33] Speaker 10: JONATHAN: Well, what you're going to see is some of these private equity firms perform. Some of them don't perform. They're not going to get more money. In some cases they will. And that's the capitalist system. [00:34:48] Speaker 1: JONATHAN: But whatever the pressures on private equity firms, for people like Dan Namorow, who are selling, the question isn't whether private equity is beating market expectations, but whether the price they're receiving beats their own expectations. The sale of his electrical business gave him the means to start over, which he's now doing from a beach in Costa Rica, a pretty comfortable way to be able to beat expectations. Coming up, for nearly 70 years, Cuban emigrates have been waiting to return and invest in their native country again. As yet another economic crisis looms, may this just be that time. JONATHAN: This is a story about hope triumphing over experience. Once again, the Cuban economy appears to be on the brink of collapse in the face of tightening U.S. economic sanctions, this time without the potential for help from the Soviet Union or Venezuela. [00:35:51] Speaker 13: JONATHAN: We're not investing in Cuba. It would be a loss. [00:35:59] Speaker 14: JONATHAN: [00:36:01] Speaker 13: JONATHAN: [00:36:08] Speaker 1: The section of Miami known as Little Havana is home to over half of Cuban Americans whose families fled the Castro revolution nearly 70 years ago. And even as Havana, 200 miles to their south struggles, many remain hopeful that things can and must change. [00:36:25] Speaker 15: JONATHAN: JONATHAN: [00:36:35] Speaker ?: JONATHAN: JONATHAN: [00:36:38] Speaker 1: JONATHAN: JONATHAN: JONATHAN: [00:36:41] Speaker ?: JONATHAN: [00:37:09] Speaker 1: JONATHAN: [00:37:11] Speaker ?: JONATHAN: [00:37:39] Speaker 16: JONATHAN: JONATHAN: [00:37:41] Speaker ?: JONATHAN: [00:38:09] Speaker 16: JONATHAN: JONATHAN: [00:38:39] Speaker 1: In June, Cuban lawmakers passed 176 sweeping free market reforms, including the expansion of foreign and private investment, the decentralization of Cuba's economy and liberalization of factors such as tourism, banking, property and agriculture. [00:39:06] Speaker 16: We've had this statement by the Cubans, which is an interesting one, and I think we should, you know, take it seriously. But this is an acceleration. It's much more explicit, and it's an invitation to Cuban Americans to invest in Cuba. It includes privatizations, a wider opening to foreign investment, and the actual withdrawal of the government from central planning system. [00:39:32] Speaker 14: Pavel Vidal is a professor at Pontificia Universidad Javariana in Cali, Colombia. He is Cuban-born and worked at Cuba's Central Bank and the Center for the Study of the Cuban Economy until he left the country in 2012. [00:39:50] Speaker 1: You have to see how they advance in these reforms to show, effectively, that these are not transitory reforms, that they are not simply makeup or announcements, but that they have a disposition to change the structure of property, the structure of property, the structure of property, the structure of property. [00:40:08] Speaker 14: And the economy, the economy, the economy, the economy, the economy, and the economy, and that the state will be removed from the economy and give more space to the national and international capital. [00:40:32] Speaker 1: PAUL SOLMAN: But where some see the promise of the announced reforms, others are deeply skeptical, particularly some Cuban-American investors eager to return to investing in their home country. [00:40:48] Speaker 17: They are afraid as a communist dictatorship of the entrepreneurial class having actually freedom and actually having essentially an opposition that can challenge their government. [00:41:00] Speaker 1: Andro Nidarci Leon is a Cuban-American hotelier whose Lion Grove has substantial real estate investments in the United States. [00:41:07] Speaker 17: Andro Nidarci Leon is a Cuban-American hotelier whose Lion Grove has substantial real estate investments in the United States. They're never going to allow for any meaningful amount of private market activity. They're completely lying, you know, and it's a farce, these steps that they're taking with these supposed reforms. They're doing it to buy time. They're doing it because they're trying to run out the clock on the Trump administration and the efforts of President Trump and Secretary Marco Rubio. That's what they're playing for. The Cuban people know it. [00:41:31] Speaker 18: DONALD TRUMP, President of the United States: We just want them to be a nicely run country. We're going to let our people go back and let them invest in Cuba if they'd like. [00:41:40] Speaker 1: PAUL SOLMAN: Essential to President Trump's plans to open Cuba up to U.S. investment are the heavy sanctions he has imposed, sanctions that have hit the Cuban economy hard, including one of the most promising sectors, tourism. Since May, hotel groups including Melia, Iberostar, Blue Diamond and Archipelago International have either pulled the plug or curtailed operations. And the number of visits last year were down 62 percent from the country's peak in 2018, the lowest in 20 years other than during the COVID-19 pandemic. [00:42:14] Speaker 17: DONALD TRUMP: The offering of services in Cuba is obviously significantly limited by how, you know, broken that economy is. And so for many years now, the tourism market in Cuba, you know, was not a market that had, you know, five star, you know, properties. I mean, upper upscale luxury was not really something that you saw in a significant way in Cuba. It was it was a lower rated market. The good thing is that there is a significant amount of existing properties there, existing assets and existing infrastructure within the tourism industry. I think it requires firms like ours going and acquiring those properties, reinvesting and reimagining and upgrading those properties and also bringing the operating conditions of those properties to a world class scale. And so that's the lens through which we're looking at investing in Cuba. Surely there will also be the development of brand new resorts. I think there will be an opportunity for the development of branded residential product, right, which often is joined together with resorts or other types of hospitality properties. And so we think the future is very bright in that sector without a doubt. And it's a very important pillar of the economic recovery of the island. [00:43:25] Speaker 14: The tourism industry seems to be a sector, at least at least at a moment, is a inicio, that can generate opportunities. So, especially if there is a flexibility to travel to the United States, that could be a natural market, a partir of which there is a boom of visitors, as it happened, for example, with the flexibilities that were introduced in the sanctions and in the trips during the administration of Obama administration. [00:44:01] Speaker 1: Vidal says at this point, the Cuban government isn't looking to places like Mexico or Chile to inform its economic policies. It most often cites Vietnam or even China. As Cuba seeks to rebuild its economy, are there lessons it can learn from other Latin American countries? [00:44:19] Speaker 14: Yes, well, normally the references that prefer the Cuban government, are the references to Vietnam and China. Especially because they are making economic changes and by now they have not mentioned political changes. So, that model of transformation, where the economic changes are made without political changes, is its preference. So, I think that there is a way to do that. [00:44:45] Speaker ?: I think that there is a way to do that. [00:44:45] Speaker 14: I think that there is a way to do that. I think that there is a way to do that. I think that there is a way to do that. I think that there is a way to do that. I think that there is a way to do that. I think that there is a way to do that. I think that there is a way to do that. I think that there is a way to do that. I think that there is a way to do that. There is a way to do that. [00:44:55] Speaker ?: There is a way to do that. [00:44:55] Speaker 14: There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. [00:45:15] Speaker 16: There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. [00:45:55] Speaker 1: There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. [00:46:11] Speaker 14: There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. [00:46:47] Speaker 1: There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. There is a way to do that. [00:47:11] Speaker 17: To be able to support our brothers and sisters. And see our country be reconstructed. And see our country become a beacon of freedom. A beacon of economic prosperity. And hope for the entire region. [00:47:26] Speaker 1: Next Rick Reeder on supporting the yen. And what it has to do with U.S. Treasuries. The Japanese yen has been under siege. Falling to lows against the U.S. dollar. Not seen in decades. So it's not surprising that the Japanese government. Has intervened to support it. But what was more noteworthy. Was U.S. Treasury Secretary Scott Besson's helping hand. Rick Reeder explains what's going on. And why. So there's been a lot of news. About the Japanese yen. And how it's been really under siege. Going up over 160. As we speak right now. It's something under 160. But it's sort of up there. What is causing that? [00:48:11] Speaker 2: So a couple things. I mean I think the big deal is. You know you've got it. You've got a tremendous amount of fiscal. That has to be financed. And I think people worry about. You know is. And particularly. Is the Bank of Japan going to raise rate. Is the Bank of Japan going to be hawkish. To support the currency. And heretofore. They've been a bit deliberate. In terms of moving it. This moving in September. To sort of stabilize the currency. Is a big deal. Intervention. You know I've watched intervention. Happen over time. You need to really. Keep going. With a lot of firepower. I would argue. It's not the most. Not the most durable way. To get there. Markets once they see it. They keep. Towards it. But then they need. To keep seeing it. I think you've got to get that policy. You've got to get monetary policy. To replace. That people believe. That you're going to raise the rate. You're going to be hawkish. When you need to be. And I think out of Japan. We need to see that. And I think. You know. I think you're going to see. A move in September. Maybe they wait. Till December. But I think it's. I think that'll be important. For the markets to stabilize. The one thing I will say. About Japan. That's different. Than in the past. And US Japan. It used to be. I mean. The flows between Japan. And the US. Were quite intense. Obviously from a trade perspective. But also from a. From a. Treasury. JGB perspective. You had an awful lot. That was going back and forth. Domestic accounts in Japan. And otherwise. It's not that large today. So. Anything about China. Has become. A much bigger influence. And obviously in trade. Also in. In. From a monetary point of view. In terms of. From the bond side. Et cetera. So. It's important. It's not. Not as important. As China has become. In the. [00:49:51] Speaker 1: In how we think. About the markets. We had intervention. Last week. And by all accounts. It wasn't just Japan. Treasury Secretary. Besant. Came to their. Assistance. And. Why is that. And how much of that. Was his concern. [00:50:05] Speaker 2: Actually about. Perhaps. They're needing to sell. Treasuries. You know. I don't. You know. I don't know. The answer. from a trade perspective, from a stability of treasuries perspective, from a good partner perspective. My senses there was something, it wasn't that large, but it did. I will say as a market participant, I did open an eye to that and like, wow, we haven't seen that in a while. And then you start to think about how much firepower would you have to bring to the equation if you really were trying to do something around the strengthening of the yen. So, you know, it's worth watching how much more they do. I think if you get another move like that, then it moves it from, okay, now there's something more significant you're doing here. But it was certainly the day I saw it. I thought it makes you think about a lot of the reasons why. And, you know, only he knows and probably his staff knows exactly why they did it. Well, and Secretary Bresson knows a little bit [00:51:00] Speaker 1: about currency markets going back to breaking the pound, right, back in those days. How does it work in currency markets? Can there be a brushback pitch we would have in baseball where the pitcher throws it close to the batter to just get him back off the plate? Did it send a message to the markets saying, don't assume that we're not going to rally? I think a few people in history that have been in [00:51:20] Speaker 2: his seat know currency markets as well as he does. So I think he's very thoughtful about market interpretation. And so my sense is he has a pretty good idea how markets react to it. Listen, I think it is because it was so meaningful in terms of, gosh, we haven't seen Treasury do that in a very long time. I think it definitely was one of those, okay, markets, you should know that we're coming in, we'll do something if we need to. And I think markets will, now I think the first thing they'll do is they'll test it because it wasn't that big and the markets will test you. And I would say over time, you know, the central bank's balance sheets, the Treasury's balance sheets are bigger than the markets, but they have to see your willingness to really put some firepower behind it. My sense is this was, maybe as you described, this brushback pitch or this indication of just keep us in mind, in the back of your mind, if you're going to, if you are thinking about shorting yen and pressing it further, that will be there to react to it. So I think that was, I think that was an important signal. [00:52:20] Speaker 1: And does the U.S. need to be concerned about not just Japan, but other central banks starting to sell treasuries if they really get under duress? Because the yen is not the only currency that's got some [00:52:28] Speaker 2: pressure on. Yeah, I think we watch gold quite a bit. You are seeing a very persistent demand for gold in many parts of the world, reserve managers, central banks that are buying gold in lieu of what traditionally would have been treasuries, presumably, not presumably, certainly. I think that is something we could, you know, part of why I like gold is that as you own a part of that in your portfolio is I do think that is you're playing alongside other central banks, other reserve managers are saying, you know what, I feel more comfortable being in gold, or at least at the margin, owning more gold relative to treasuries. So that is a, that is a big deal. We got to follow that in terms of other central banks that reduce treasuries. When we're issuing the sort of size in treasuries that we are today, every single thing that affects the flow is important. Today, we're relying much more than we ever have on domestic purchase. Think about how much China used to buy, how much Japan used to buy, how much many of the other countries in the world used to buy in treasuries. There's no doubt they've pulled back somewhat. And so we got to watch that because you got to fund [00:53:29] Speaker 1: an awful lot domestically now. You mentioned the fiscal situation in Japan, perhaps contributing to the weakness of the yen. As we know, Japan is not the only country with some fiscal challenges. It may be a little bit more extreme than some others. A lot of others have it, including the United States. So as you look at that problem specifically, how might it affect the larger, is there a possible of a run in the bank when it comes to the treasury? You know, there's an interesting thing also when [00:53:54] Speaker 2: you think about Japan, the weaker currency has done wonders for that market, the equity market there. And, you know, one of the, you know, we like Japan as an equity market, you know, keeping that currency weaker has been quite a boon to equity investors. You think about the companies there and how they perform. So it is definitely one of the, one of the parts of that we think about where do you play Japan? For us, it's been, let's own the equities. We don't need to own the debt. Hedge your currency exposure alongside of that, just get the equity appreciation. That's been, it's been a good trade. My sense is that will continue to be a good trade. You know, the run of the bank thing, I mean, I think the one thing that, you know, companies can have a run on the bank much more aggressively than the government, you know, your ability to actually taxing power. You think about countries like the U.S., yes, we have a big debt number, but we also have, I think the number is 230 trillion of net worth in the United States. You can deal with the debt problem pretty quickly. There are things like wealth tax, which I wouldn't necessarily advocate. There are a lot of things you could do. And when you think about, you know, I look at a company, you know, you think about your interest coverage, you think about your cash flow, how much cash flow do you have? You also think about the quality of your balance sheet. The U.S. as an, as an entity broadly has an extraordinarily strong balance sheet. When you take the entire public-private, so your ability to ultimately get at that, you could, you could stave off a run on the bank pretty darn quickly. [00:55:14] Speaker 1: No question it's an extraordinary balance sheet when you take public-private, but there's been a shift from public to private. So in order to really remedy this, at some point, there may be, have to be some shift back. [00:55:26] Speaker 2: So, I mean, one of the things you're saying is part of that crowding out effect that takes place is why that real rate keeps moving up, is that crowding out effect. So, you know, what ends up happening, once you keep pushing up the real rate, you increase the weighted average cost of capital for companies, for individuals, for financial entities. And then, you know, then it tends to recalibrate itself. And that, you know, oftentimes it takes policymakers to see that, gosh, there's pressure in other parts of the, of the ecosystem that cause you to maybe pull back on the fiscal. Listen, I think over time, it's part of why I believe we got to keep, you know, this economy has to keep growing because we don't get enough fiscal conservatism. I think that is required today. And, you know, by the way, you know, could you see governments change, not just in the U.S., in other countries, because you are, you are seeing some pressures there. [00:56:15] Speaker 1: That does it for us here at Wall Street Week. I'm David Weston. See you next week for more stories of capitalism.