So you've had experience in Washington as well as in New York, on Wall Street.
We spent a lot of time people get paid a lot of money trying to analyze these
elections about what they will mean for investors.
What's your experience? I think elections are hugely
consequential for investors because there's a lot at stake here.
Take, for example, tax policy. If you are lower taxes for wealthy
people in business, then obviously there's one team that you want to vote
for. If you want lower taxes for working
people and people below, then it's another team you want to vote for.
There's all kinds of policy decisions. We've seen an enormous amount of
legislative activity. These last two years, typically this
year. And that's the kind of thing that
happens after an election. So as you say, we've had a lot of
legislation through Congress as the last Congress, and particularly given the
fact that it was really evenly divided in Congress.
So looking back, before we look forward, do you think overall that was good for
investors? Not so good.
I'm not sure it was great for investors, but a lot of it was stuff that we really
needed to do for the sake of our economy, particularly the climate
change. I don't think we should kid ourselves.
Addressing climate change is going to be expensive for companies and therefore
for investors. But we have to do it.
Prescription drug costs. We have to get under control.
So I think from an investor's point of view, some of this may cost them some
money. But I think there were things that had
to be done for society as a whole. Looking forward to the midterms.
We don't know what the results will be, obviously, but some people are
projecting we could have a switch in the majority in either the House or the
Senate or even conceivably in both. If you get a divided government, which
is what that would be essentially, is that potentially good for investors
simply because they won't do very much at all.
They can't get much done and there's some stability.
Yes, I think you're right. If we have divided government, it's
highly unlikely, particularly in the run up to another presidential, that we're
going to get much done. Look, it depends what you think the
alternative is. If you think the alternative was a
Congress and a White House controlled by people who essentially wanted to make
investors happy, then obviously that's not as good and vice versa.
I happen to personally believe we still have huge problems in this country that
we need to address long term structural problems like the debt and the deficit,
for example. And having government frozen is not
really the way it's supposed to work. You're supposed to legislate every year,
not just every year out of one year out of 5, 4 or something like that.
You oversee the investment of a lot of money and not necessarily investing
yourself and really overseeing people who do that in the course of doing that.
Do you take into account which industries, which companies might do
better under a Republican administration rather than a Democratic one?
Sure, you can easily see that. As you point out, most of our money is
invested through other managers who do actual stock picking and so forth.
But we spend a lot of time meeting with them, as you would imagine.
And yes, absolutely, they think a lot about what might happen in Washington,
how that would affect the investor ability to use a word that might not be
a word of different sectors, different industries, different companies.
So, sure, what goes on in Washington, I don't think any investor would tell you
that what goes on in Washington isn't incredibly consequential for the economy
and therefore, we all pay a lot of attention to it.
This week we had the Federal Reserve come out, raised interest rates another
75 basis points, if you can, comparing contrast fed decisions on where we are
on the 10 year yield, for example, versus who is in charge of Congress,
which is more consequential potentially for investors.
Well, I personally think the Fed is the biggest game in town in terms of
affecting the economy. I'm not quite a Milton Friedman
monetarists, but I believe enough in the power of monetary policy to believe that
it's it is the biggest thing that affects the economy.
And by the way, it probably affects the stock market even more directly.
In a sense, when interest rates go up, it's the enemy of stock prices.
They tend to go down. And you've seen that happen this year
and vice versa. During 2020 21, when the Fed put all
that liquidity into the market, the market went up.
The old saying, don't fight the Fed. So I watch the Fed very closely.
And I think it is it is far more of an influence on the economy than Congress.
So higher interest rates are the enemies, you say, of the stock market in
the short term. But doesn't inflation have something to
do with the value of investments as well, if in fact it particularly when
you talk about bonds, but other investments as well, if you've got
inflation that really isn't under control.
Doesn't that affect your investments? It might.
But, you know, inflation is actually good for some investments.
That's good for what we call real assets, things like real estate,
commodities and things like that. It really depends, I think, a lot on
what accompanies that inflation. If you happen to still be in a high
growth or a reasonably growing economy and you've got some inflation, that
could actually be a positive if you get stagflation or you get high inflation
and a recession like what we had in the late, late 70s, early 80s, then
obviously that's bad for investors. So nobody likes inflation is
destabilising the businesses, he said, destabilizing to American families.
But and therefore, it's not something investors want.
But it's not necessarily the end of the world for investors.
You talk about tax policy and you also talked about the Fed and what happens
with interest rates. But what regulatory policy?
Well, I could almost certainly the opposite in a way that you may see more
activity by the regulators because they might feel like the clock is running out
on their term in office or whatever. They might want to get stuff done.
I've been a little surprised in that I would expect a very robust regulatory
environment out of this administration. They've appointed people to many of the
top regulatory positions who are very much pro regulation.
And you can see it's starting to happen at the FCC and places like that.
So I do think you're going to see a lot of regulatory activity over the next two
years, regardless of what happens in the election.
One of the things that this administration said they really want to
go after, if I can put it that way, private equity using things like Clayton
CAC, Section 8, interlocking directors, things like that.
They think that there's some and I trust things going on there.
Is there a chilling effect on private equity right now?
Because they also have other things that there are headwinds for them?
Well, the biggest headwind for private equity at the moment is the fact that in
an environment like this, deals tend to slow down or even stop.
And you can see if you look at the overall MBNA volumes, how how much
slower it is now than it was because the sellers all want yesterday's prices, the
virus want to pay today or tomorrow's prices.
So you have a disconnect there, I think. I think the problem in general and
mergers over the last really 20 years or more has been a pretty benign antitrust
environment. And when I was in when I was in the MFA
business, you know, clients would come in and the media, they want to talk
about which of their competitors they could buy and that game.
I think in this environment is starting to wear out and that and so that relates
a bit to private equity in terms of their portfolio companies.
But I don't think private equity in and of itself is an antitrust problem.
It's not as easy to raise money these days.
It's more expensive. You can find and some people have
trouble finding it, period. Does that mean that private credit is
stepping up to that is more and more of the funding coming from private credit?
You're going to see that. First of all, there's just less credit
and there's going to be less credit, fewer deals, fewer acquisitions, less
credit. But yes, the banks have, I wouldn't say,
gone out of business, but the banks have come very leery about lending.
The high yield debt market has effectively closed.
And so, in fact, you are exactly seeing that private credit stepping into the
breach, which is attractive for investors, because it often you can get
low double digit kinds of yields or returns on that.
Obviously not as attractive for the borrower who is paying, you know, a few
hundred basis points not that long ago. Is it attractive for financial
stability? Because coming out of the 2008 crisis,
we had a lot of regulation of the banks. We sort of know, I think, what's going
on there. By and large, a lot of money went to
private credit. I'm not sure that it's transparent to
regulators. No.
And that's that's a broader problem that we've had really since two thousand
eight or nine, which is that the more you regulate parts of the financial
system, the money tends to flow to the unregulated parts of the financial
system. Having all that credit going on outside
of the regulated part of the economy is not ideal.
One last question. This is asking you to be a soothsayer,
which is tricky. We saw what happened with the UK pension
funds when that mini budget came out. It was not good, but one wouldn't have
thought the pension fund funds were leveraged highly.
And yet it turns out through some derivatives they were.
Do you see any indications or other parts in the marketplace where you might
not expect leverage at all? But as the interest rate go up, it
really puts pressure on some investors? That's a great question.
The UK is my understanding that whole pension thing was a very unusual product
policy move that they did. I don't know that it's replicated here.
And obviously the point is that the UK didn't know it was a problem until it
became a problem. And so I don't think you know about
these problems until they really appear. So I don't I don't have anything off the
top of my head in terms of things that I worry about.
But a lack of liquidity, rising interest rates does put strain on the financial
system and then something will pop loose.