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00:00What do you make of the numbers today. What do you make of what Home Depot told us. What did you make of what Wal-Mart told us all. Retail sales up 1 percent. DA Bell is a bit of a stretch and this is why the consumer is not buying more. In fact if you go to Home Depot Wal-Mart and see that consumers actually walked out of the stores with less but they spent a lot more because the prices were up a lot. So take this for example because retail sales is not inflation adjusted. It's just an absolute nominal number. So take this for example CPI that we've recently had showed that month over month airline ticket prices went up 18 percent. So imagine because airline ticket prices are part of your retail sales. So imagine if there's only one item that you have in your entire retail sales and you are flying from New York to L.A. the cost of this month 18 percent more. You have the same exact ticket you bought. But retail sales is one of 18 percent. It's nonsensical to think that retail sales is actually doing better because it's not inflation adjusted is actually down some present. So we saw at Home Depot and Amazon is that inventories is built around 20 to 30 percent. That's a scary concept. They built and they sold less. But yet they reported more. And so that's why the stocks are probably going to get hit from here. And the retail consumer sector and the sell from Goldman is absolute right. Consumer debt has exploded upwards which is a record of 16 trillion. People borrow more against the home or more against credit cards. Personal savings isn't this close to their low of 6 percent. And consumer sentiment as you point out in this survey plunged from one hundred to fifty nine where it is now. And so the consumer is not a good place. Yes. OK consumer is not in a good place. That's your takeaway. Yet we see two aerials jumping up 9 10 basis points. The idea is that the Fed's going to have to act more aggressively now because inflation is high and they can say oh the consumer can hold in. If what you say is true what kind of policy mistake are we heading for. Like what does the market look like in six months. If you're looking at higher rates and more aggressive fed and a consumer that you see already struggling. Exactly. The Polish was a Polish mistake was already made. The fact that the trillions were dumped into the system through the various stimulus packages and the Fed running up its balance sheet. And Bernanke said well last week I think was actually Sunday when he spoke. And he said the Fed way too way too long. And now as Palin says the pain is going to have to call. And so there you have the Fed has to tighten so far under their belt. They have six or eight to go. Treasuries have moved nicely up 150 basis points. Equities declined about 20 percent. And the high yield market widened a few hundred basis points. So or a couple of basis points. So high yield is now gone from low yield of 4 percent to a more reasonable high yield of around 7 8 percent. So what we see in the marketplace is the markets have adjusted. There is heavy volume in these last couple of weeks. And so there's a lot of capitulation. The markets can now move into this bear market rally which we're entering right now. It's a bear market rally. But the best is yet to come in terms of the downside. We've already lost 25 trillion in terms of the system and net asset value in the debt and equity markets more in the private markets as well. Illiquidity over the course of the year will get worse. So the Fed has no choice but to High Flyers just to get inflation under control and to obstruct the floodgates tightening program which are going to start next month's. Sorry can we just get by spam liquidity issue. Liquidity is gonna get worse. How much worse is it gonna get. Bruce. Well they're tightening financial conditions. They've only tightened twice. They've only raised rates 100 basis points and there's a total 300 basis points to raise rates. So I ask you and the markets what do you think happens later this year when the markets become center when the Fed has raised rates six or eight times where they're now selling one point one trillion of treasuries and that pace for an annual basis versus buying treasuries and mortgages. And so what happens then. I think liquidity gets worse. We haven't had a vacuum of liquidity where the market really Japs lower and there's no bid and there's no Fed play. And we're going to move to that before this is over. OK that looks dark. What does that look like in the stock market and what does that look like in the private markets. Well I said the beginning of the year that the stock market and why everyone's calling for higher earnings. As I watched higher earnings and higher stock prices I said no the stock market would go down 20 percent this year and give back all of last year's all of two thousand twenty one's gains. And indeed it's already happened. So I think the equity markets are fine from Europe. But before it's said and done I think we have to test 10000 of the NASDAQ IBEX down all around 4 percent and probably around 30 six on S & P which is down around 10 percent. So multiples have contracted from twenty one point five S & P multiples to about 17 and change where we are now. I think they'll go down to a very reasonable 14 to 15 times multiple before this is said and done. But the Fed has a long way to go. They're just in the first couple of innings. Well tightening game and it's less about employment. I know we're talking about that early on the show less about employment and jobs because if 1 or 2 percent of the employment were to deteriorate in order to get inflation under control that a hundred percent of the universe has to spend on food and fuel and everything else that it requires or daily living including their housing. And that's ravaging America and punishing savings and punishing and causing consumers to take on more debt. In fact you're more indebted now today than ever been in the history of the U.S.. That's kind of the debt story from a different angle. You've just given us some numbers on where you think equities are going. You talked about the yield you now getting. You're not getting in in high yield 6 7 percent. How much time do you think that number gets back end of this year. I kind of. Are you going to wait for the back end of this year before you buy. What are you going to be buying. Bruce so we're starting to dip our tail right now and buy senior secured notes and bonds and loans that are yielding about 8 to 10 percent. We have a strong private equity sponsor behind you. We're senior to them because we own the debt and we're getting paid eight to 10 percent. Those yields were around 4 5 and 6 percent to start the year. And now it's a very reasonable rate. There are thousands of high yield issuers out there. So again I think the markets are stabilizing for now will rally. This will be a bear market trap. But you'll have a recession before this is all said and done because a soft landing is too hard to orchestrate. And with that recession default rates will go from less than 1 percent for high yield where it is now to in excess of 5 percent where it is where it's going to go we believe. And the high yield market will probably move to a 10 percent level at that point. So while we have a lot of dry powder we've done that I think pretty brilliant job. And in the 2020 twenty one period and positioning yourselves around high yield direct lending and distressed. We've raised a lot of money around that. Well we've performed quite well as we have a lot of DAX based on profits we've recently taken as well as capital some reserve. And so I think we're gonna have a second big bite to sample a recession that's more traditional and says where that where the Fed chant bail out the recession because there's a whole tightening to control inflation. Press Does this distressed sovereign debt market make another tasty apple. We had a question from a viewer that asked about if you are finding any opportunities in the distressed sovereign debt in emerging markets but less. BELL I think emerging markets was more front of mind right now. What's more front of mind right now is is because we're buying quality and high grade and investment grade in the emerging markets going up and credit. Same thing in high yield for winning triple CS and wanting to be stronger and fresh. Now let's talk about the sovereign risk when I think about sovereign. I'm thinking a little bit more. I know this is shock a little bit more about what I'm seeing in Europe. And the widening in spreads is remember the ECB is being. Trillions and trillions of treasuries and driving rates to negative yields. And now beginning next month they stop buying treasuries. And so what's happening. Italy's widening. Spain is widening. Portugal's widening. And that's what you want to keep your eye on is the widening of spreads in the European countries. And that's probably the biggest risk factor that we're going to see because there's 27 countries in the EU and there's several these countries going to fall into recession probably including Germany and the U.K. but Germany and Italy and Spain. And you know you're going to see a few countries in Europe fall into recession. It's going to be very low growth because they don't have the strength and demand come from your home. And meanwhile Greece. Yes. And we're going to see another debt crisis. Is that what you're pointing us in the direction of. I don't. I think that's thing. Italy's debt has increased massively. We're gonna have no growth servicing that. That's gonna be a problem particularly as Mario Draghi is about to step aside. It's a little early for me to call that because I'll need a lot more information to make that call. I'm just saying I'm watching that we're watching that marathon very very closely and understanding that as the US slips into recession sometime next year. Europe is probably already there this year at a time when the ECB has got to arrest inflation because you're on the front line in charge of energy costs and other inflation that you're importing onto the continent. And so it's a very precarious place. That's not really being discussed right now. And we're taking a very cautious approach based upon the early read that we have a marathon.

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Marathon's Richards on Inflation, Fed Policy, Strategy

Marathon Asset Management CEO Bruce Richards discusses the impact of inflation on US consumer spending, Federal Reserve policy, and investment strategy on "Bloomberg Markets." (Source: Bloomberg)

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