Whalen of TCW Says It’s Time to Get ‘Defensive’: Milken Update


(Bloomberg) — It’s the first day of speakers at the Milken Institute Global Conference in Los Angeles, which brings together everyone from dealmakers to celebrities as it returns to its pre-pandemic spring schedule.

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The famed gathering, in its 25th year, has outlined its focus as the power of connection, celebrating “the forces that bring us together while confronting the issues that keep us apart.” It’s a fitting theme for a world jolted by war in Ukraine just as the highest inflation in decades raises the specter of recession and the dregs of a global pandemic refuse to disappear.

Speakers including Ark Investment’s Cathie Wood, Goldman Sachs Group Inc.’s David Solomon and General Motors Co. CEO Mary Barra will address the crowds, with academics, sports stars, entrepreneurs and politicians among the thousands set to gather this week at the Beverly Hilton.

Whalen of TCW Says Firm Is Decreasing Risk (7:23 p.m. ET)

Asset manager TCW is paring back risk in the face of growing economic and geopolitical risks, according to Brian Whalen, the firm’s co-chief investment officer for fixed income.

“We are back to 2019 playbook,” Whalen, who helps oversee over $225 billion of fixed-income assets at TCW, said on a panel at the Milken conference. “We are getting defensive.”

Within credit markets, the firm finds agency mortgages attractive and sees opportunities in junk bonds that are trading at deeply discounted prices, especially when investors can benefit from corporate events such as acquisitions that repay the debt at par, Whalen said.

Lemkin of Canyon Partners Sees ‘Changing of the Guard’ Out of High-Yield Bonds (6:13 p.m. ET)

Investors are leaving high-yield bonds and looking for other opportunities in credit, according to Todd Lemkin, chief investment officer of Canyon Partners.

“It is poetic justice to us,” Lemkin said on a panel during the conference. “Funds are going to start flowing into alternative credit and alternative investments.”

Lemkin described the shift in sentiment among investors as “a bit of a changing of the guard.”

Lemkin also said that Canyon Partners is “very cautious” about investing in China at the moment. The country’s economy has rapidly slowed, and Lemkin feels that the nation “has really lost its way.”

“We are not rushing in there to buy,” he said.

More Milken Coverage: Takeaways from Cathie Wood, Brian Armstrong remarks

Apollo’s Zelter Says Higher Rates Will Slow Growth (4:50 p.m. ET)

A U.S. recession “has to be” one-third to two-thirds of an investment base-case scenario, Apollo Global Management Co-President James Zelter, said in an interview with Bloomberg Television on the sidelines on the Milken conference.

It looks like higher interest rates will slow down the economy, he said. A recession would be driven by financial conditions rather than led by consumers, he added.

Read More: End of easy money heralds financial shock

Zelter said his firm is targeting a part of the private credit market that focuses on how the financial system operates such as inventory, transport and real estate finance.

“That is arguably a $40 trillion opportunity,” he said. He noted that most people think about private credit as the sponsor market, which is only a $5 trillion to $10 trillion opportunity.

Carlyle’s Bernasek Sees a Pause for U.S. Buyout Deals (4:50 p.m. ET)

Brian Bernasek, co-head of U.S. buyout and growth at private equity giant Carlyle Group Inc., said there’s very likely to be a pause on U.S. buyout deals as there was during the first six to eight weeks of the year.

Still, there will be a lot of very good investment opportunities, Bernasek said Monday in an interview with Bloomberg Television on the sidelines of the conference.

“It has been a very good financing market,” particularly for the larger-scale firms, he said.

Qualcomm CEO Says Hybrid Work Is Here to Stay (4:50 p.m. ET)

Cristiano Amon, the CEO of chipmaker Qualcomm Inc., said a hybrid form of working — part office, part remote — is here to stay post-pandemic, fueled by metaverse technologies that will allow people a sense of presence with their colleagues even when they’re not in the same room.

“Working from home drove a broadband transformation,” Amon said, making it possible to use more video and virtual reality than ever before. VR can make it possible for people in the same meeting to throw on goggles and enter the same virtual space. Then eventually, technology will augment our physical reality.

“People will be in Zoom meetings in holographic form,” he added.

Citadel’s Griffin Says Fed Needs 4% Inflation This Year to Avoid Recession (3:50 p.m. ET)

The Federal Reserve will be able to ease off monetary tightening if inflation drops to 4% by year-end, Citadel founder Ken Griffin said.

That “will give the Fed much more latitude in policy,” Griffin said Monday at the Milken Conference. But if it remains near or above the current 8.5%, the central bank “will have to the hit brakes pretty hard,” tipping the economy into recession.

The billionaire also highlighted the big disconnect in the labor market, noting there are twice as many job openings than unemployed people seeking work. That will put even more upward pressure on wages, further exacerbating inflation, he said. That the economy isn’t pulling more people off the sidelines of the job market is a “real problem,” he said.

Griffin also said cryptocurrencies are the “great hot spot” of debate within his Chicago-based firm, noting that most employees who are younger than he are big believers in digital assets.

“They believe that cryptocurrency has an important role in the global economy as a means of facilitating payment,” said Griffin, who has previously expressed skepticism about the value of digital tokens. “These are really sharp people,” he added. “I have to live with the reality that an asset is worth what people perceive it to be worth.”

Corporate Bonds Starting to Look Attractive, Silver Rock’s Meyer Says (2:20 p.m. ET)

This year’s sell-off in corporate bonds has created attractive investment opportunities, especially if the Federal Reserve changes its policy stance in coming years, said Carl Meyer, CEO of credit firm Silver Rock Financial.

“You’ve got lots of bonds trading at 85, 90 cents on the dollar,” Meyer said Monday on a panel at the Milken Conference. “There’s real upside if the Fed were to pivot to dovish later this year. You have a chance to make a lot of money, whether in investment grade or high yield.”

The traditional 60/40 allocation between equities and bonds that has fallen out of favor recently due to low yields could also perform well in the current environment, Meyer added.

“If you think we’re heading for a recession, if you think the Fed is going to have to tame inflation and then go dovish, then maybe 60/40 is the way to go,” he said. “It’s going to serve as both a hedge and a way to make money in your portfolio.”

Shenkman Capital’s Slatky Says CCC Debt ‘Tough Place to Be’ (2:20 p.m. ET)

Shenkman Capital Management expects slowing growth coupled with sticky inflation to hurt the riskiest part of the U.S. high-yield corporate bond market.

“For the bottom end of the market, the CCC part of the market, in stagflation, that’s a really tough place to be,” Justin Slatky, the firm’s chief investment officer, said Monday at the Milken Conference.

The high-quality part of the junk market should be able to withstand stagflation, at least compared with other asset classes, he said. About 40% of the junk and loan market matures from 2024 to 2026 and volatility is likely to pick up as companies struggle with their Ebitda and valuations come down, he added.

“You are going to see bond prices move around quite dramatically, but you’ll probably still going to see default rates stay at a lower level,” he said.

Citi Traders Dealing With the Highest Volatility Since 2008 (1:45 p.m. ET)

Trading desks are dealing with volatility levels that markets haven’t seen in more than a decade, Citigroup Inc. CEO Jane Fraser said.

Traders are coping with inflation that is at its highest level in a generation and investors who are increasingly worried about the likelihood of a global recession, Fraser said Monday at the Milken Conference. As an example of volatility, she mentioned trading on Friday, when bonds sold off at the same time as equities. Normally, the two have an inverse relationship.

“I remember the ’70s and ’80s, and I don’t remember days like that, and some of this is just very odd dynamics around supply and demand,” Fraser said. “When volatility is 2008 or 2009 levels, that’s telling you that no one knows what this is going to be.”

Emerging Market Indexes Should Split Into Baskets, PGIM’s Hunt Says (1:40 p.m. ET)

Emerging market indexes are too broad given disparities between different countries coming out of the Covid-19 crisis, PGIM CEO David Hunt said Monday at the Milken Conference.

“When you think about an index that has South Korea, China, Argentina, and until recently, Russia and Ukraine in it, and you say ‘I’d like to allocate to a basket like that,’ it sounds a little crazy,” Hunt said.

Hunt said PGIM is working with clients on investing approaches that break emerging markets up into different baskets, including a more-developed group, a commodities-related basket and one focused on those on the verge of being “very attractive economies.”

“The world will quite soon pull apart emerging-market indexes and we’ll see something a lot more tailored to the way that capital should be allocated,” he said.

Guggenheim’s Minerd Says Market Not Fed Should Find Neutral Rate (1:30 p.m. ET)

With the market focused on this week’s Federal Reserve meeting, where the central bank is forecast to raise the overnight lending rate by 50 basis points, Guggenheim Partners CIO Scott Minerd questioned the goal of the ebb and flow of monetary policy.

“We don’t know where the neutral and natural interest rate is” and never did, Minerd said Monday on a panel at the Milken Conference. “I’m a great skeptic that the Fed can figure out” where the rate should be to support full unemployment while keeping inflation steady.

“Why don’t we just unpeg rates and let the market find the rate,” he said, adding that former Fed Chairman Paul Volcker took such an approach.

Sovereign Funds ‘Look Past the Noise’ With Private Assets, Kapoor Says (1:08 p.m. ET)

Many sovereign wealth funds have increased their allocation to private assets, which have the benefit of being able to “look past the noise” and invest for the long term, Investcorp Holdings Co-CEO Rishi Kapoor said.

Floating-rate loans have become very attractive to institutional investors, with base rates roughly equal to spreads in recent months, said Kapoor, who oversees the firm’s private equity business in North America and India.

“You have effectively created the ability to double your absolute return on a portfolio of floating-rate loans, even compared to six months ago,” he said Monday at the Milken Conference.

Guggenheim’s Minerd Says Recession Likely, But Not Until 2023 (1 p.m. ET)

The Federal Reserve may be leading the U.S. into a recession as it races to raise rates and get ahead of inflation, but probably not until end of 2023, Guggenheim CIO Scott Minerd said.

“We’ve never been able to reduce inflation by more than two percentage points in the U.S. historically without inducing recession,” Minerd said Monday at the Milken Conference.

The recession will likely not be too bad, he added, because the Fed will be able to pivot quickly. The only way the Fed would be able to avoid a recession is to “let markets find a natural rate.”

PGIM’s Hunt Sees Europe on the Brink of Recession (12:15 p.m. ET)

Wide-ranging sanctions on Russian energy exports could soon tip the European economy into a recession, PGIM Chief Executive Officer David Hunt said.

“We’re only one hydrocarbon sanction away from a recession starting,” Hunt said Monday on a panel at the Milken Conference.

A recession also looks likely for the U.S. if the Federal Reserve’s tightening path stays on the current track, he added, but probably not until 2024.

Apollo’s Rowan Is Preparing for ‘Volatile’ Future (Noon, ET)

Marc Rowan, the co-founder of Apollo Global Management Inc., said that the current market is the “logical conclusion” of 14 years of “money printing,” with the biggest correction likely to occur in growth and technology stocks.

“The world is desperate for safe yield,” Rowan, who is also Apollo’s chief executive officer, said Monday at the Milken Conference, adding that he’s a big fan of senior-secured credit and also likes floating-rate notes.

During a panel, Rowan also said he’s enthusiastic about financial-technology firms, many of which want to focus on fee generation but not on building their balance sheets. That’s where Apollo can come in.

“We’re going to see a revolution in financial services” in the coming decade, he said.

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