Okay, I think we're going to try to get started, so maybe ask everyone to sit down. Okay, well, good afternoon, everybody. I think we'd love to have everybody sit down that's going to be in this session, which is going to be a great session. If anyone can hear us, all right. Well, I have the privilege today of introducing an incredible panel of investors. I'm Dena Powell McCormick, Vice Chair and President of BDT and MSD Capital. Can anyone hear us? Okay, good. So we have Scott Goodwin, co-founder and managing partner of Diameter Capital Partners; Secretary of State Mike Pompeo, the 70th Secretary of State of the United States and Executive Chairman of Impact Investments; Bob Prince, Co-CIO of Bridgewater Associates; Barry Sternlicht, Chairman and CEO of Starwood Capital Group; and Patrick Zhong, who's with us, founding managing partner of M31 Capital. Thank you all for being here today. Truly some of the smartest minds in alternative asset investment. I was doing a little bit of reading to get ready for the panel, and when you think about the alternative asset market today, it represents about $22 trillion of AUM. To put that in context, that's 15% of all global assets today. And in a volatile market, I think investors are really wondering how to think about that spread and where to make those investments most thoughtfully. Scott, I'm going to start with you. I kind of think of Scott today as our private credit guru, if I may. Diameter Capital is doing such a remarkable job, but you and I have talked recently about just the current level of volatility in the markets and how you see credit rates evolving in those markets, both as yield-generating products but also as potential hedges against broader market risks. Tell us a little bit of the state of private credit today.
Thanks, Dena. Can you hear me? I can hear you. All right. Private credit, obviously, when you talk about alternatives, it's the buzzword. Everyone's chasing it, everyone's going into it. We started a business a couple years ago, and frankly, it's a great product. It's a yield product, but if you're talking about geopolitical risk, which is what this panel is about, when you're in private credit, you can't really change your mind. So I think with alternatives, you want to have a mix of privates and a mix of public alts. I'll give you an example. In 2021, we made an investment in a Ukrainian telecom company that has a quarter of its revenues from Ukraine at 20 cents on the dollar. The Secretary is now on the board of that company, and the debt's maturing at par, so we've made four or five times our money. If we couldn't change our mind at that point in time and sell, you know, US bank loans at par and buy that at 20 cents, we wouldn't have been able to make that investment. So I really think there's value in both. Private credit still provides incremental yield versus public credit, but that margin has compressed. And if you think about credit or spreads and yields as a hedge, I think we have to think about the election. If you have a sweep on either side, both sides are spenders, and you know, then maybe the biggest risk is government debt. That's the biggest geopolitical risk. If you have a sweep, if you don't have a sweep and you have more of a mixed situation, then you're back to where you are now, where rates can serve as a hedge a bit. And when you think about them as a hedge, though, go with the sweep scenario, what starts to happen? Yeah, I think you have a bear steepening on either side, and you're not in a Liz Truss situation. You're in a Liz Truss situation where you've got the, you know, UK 30-year bond bid list for 250 basis points, right? But US long rates 5, 6%, that's where we're going if you have a sweep on either side, and the market's not prepared for that at all. It was cheap to hedge it a month ago, now it's less cheap and maybe more priced in. But I think that's where you'll go initially over two to three months.
Makes sense. Barry, just kind of to build on what Scott's saying, you and I were just at a conference where you also spoke, and Paul Tudor Jones, I'd have to say in the most rosy way, was a little bit doom and gloom. He was extremely concerned about deficit, out-of-control spending. And to Scott's point, it's very interesting, most economists today sort of look at either presidential candidate as, you know, growing spending without really wanting to address entitlement reform and all the things that former Congressman Mike Pompeo used to be for, but that's not politically popular anymore. How do you think about that, and are you where Paul is in terms of the huge risk that's coming if we don't address wild spending and not deficit control? That's an easy question for you, is it?
It is, and everyone can hear us, right? Great, thanks. We're facing a very loud din there. Yeah, Paul Jones spoke Wednesday at the conference, and he was very bearish about the deficit in the US. And I think, you know, as I think about how we think about managing our capital, it is a Black Swan risk, right? That at some point the world says you have no plan to bring down the deficit. And I think neither party will talk about it. At least, I will say if Trump is elected and actually Musk creates this efficiency group in the government, you can take hundreds of billions of dollars out of Washington. And it's a lack of goals, you know, it doesn't really have accountability, the system for actually achieving goals. So I think it isn't just about raising taxes to cure the deficit, it's also about spending smart, spending less, and spending on things that matter. I always thought that if I were unfortunately ever taking this job, president of the United States, I'd start with a zero baseline budget, like what do we have to do and what do we have resources to do, and everything else, you know, like any CEO, you just say I'm not going to do that, I'm going to prioritize. And one thing we don't prioritize in our $8 trillion budget is education, which is the only thing that you can spend money on that has a return on investment, because they won't be unemployed, they'll be trained for the new jobs with AI coming. It's an incredibly important initiative that nobody's doing. So I think about the risk of the long end going nuts, and Scott said 5 or 6% on the 10-year. You know, conventional wisdom is it's going there, it will stay here. I think the short end will come down, you know, we'll see next week. And I think the world is waiting. The Western world cannot afford interest rates this high. We all became too indebted with the pandemic, we printed too much money, Japan, all of Europe, the ECB. So the US, and I asked Larry Summers, got me very depressed because I was talking to Larry and I said, does Powell actually think about the interest expense when he raises rates? The biggest victim is the federal government because now we're paying a trillion dollars in interest expense. It was $200 billion three years ago. So our deficit is expanding because we're paying interest on interest on interest, and there's no return. So he says no, Powell doesn't care, and I was very depressed to hear that because otherwise interest rates would be 3%, inflation sub-2% without rent, and you know, the short end would be 3, 3.5%, which is what the market thinks it'll get to. But our economy is weird right now, it's very narrow. I mean, AI is boosting the GDP numbers. The amount of money being spent behind data centers alone is like an infrastructure bill, right? A trillion dollars. So America doesn't feel it, which is what you're seeing in the election. But I think there's so much spending that's independent of interest rates. Amazon is not doing a $500 million megawatt data center with us because of interest rates. They're going to put that money in. Same with healthcare. Healthcare is expanding. We added almost 4 million jobs since May of '22 in healthcare since he raised rates 500 basis points. So this economy is not responding the way it should to higher rates. The only thing it's hurting is the housing market, and the housing market is creating future growth for real estate players in prices, both in housing and in rents. So I think this is a terrible strategy. I've been very critical of him because this technique has not worked on this economy, and you can see it. You can see what's happened. So yeah, I think you have to think, I think you should be hedging your investments. I think you have to think about rates, and I personally am short bonds against my real estate portfolio because I think you have to think about what happens if rates get out of control and one day nobody shows up, right? Chinese aren't buying our debt anymore, so who's going to buy it?
So say a little bit more about the housing market and the commercial real estate market. You know, it's interesting, you see a lot of tightening in some areas, some states are benefiting. You know, give us both kind of the state of play nationally and where geographically you're most worried about.
Yeah, well, let's focus quickly on the US. I mean, we had a 4 million housing deficit going into this rate rise, coming out of builders that were a lot less speculative coming out of the GFC, and now he's added another million deficit to the housing. So the whole, but you're still finishing the last of the projects started pre-rate rise. So this year we'll have 600,000 apartments finished, but in 2026 it'll be 230,000. So there's a huge drop, which means there'll be future rent increases, which will be in inflation since a third of CPI is rent equivalent, right? So he's creating future inflation. And the housing market, we're building 750,000 homes instead of a million, and the market has shifted to majors from the small builders because they can't get credit because the regional banks are shot. So the market is completely changed. And when it comes back, you know, I think you'll see people not moving in the United States. So existing home sales have fallen from 6 million to 4 million because nobody wants to give up their 3% mortgage, right? But I think the whole living complex, whether it's single-family, land, residential, those are all really good investments to make today for a lower rate environment in the future, which I think we will see, even if the long end goes up. You know, I don't, I think you'll see the short end come down. So, and housing, you know, there's no MLS in Europe, there actually is no, so there's interesting opportunities. No inventory, there's no central inventory system, and in Europe you really hire a broker and he has that inventory. It's crazy that that doesn't exist, but there are people trying to fix that, but it's sort of odd. And you know, in places like the Middle East, the housing markets have been buoyant and there's infinite demand. But everyone across the globe needs affordable housing, and it's the number one issue and challenge that we all look at. His Excellency spoke about investing with purpose. Everyone wants to figure out how to fix it, and nobody can figure out how to fix it yet. Modular hasn't worked, nothing. But you'll need incentives from governments and investors willing to take lower returns for the utility of providing housing, which is becoming unaffordable in many markets.
Before I move to Secretary Pompeo, I'm going to put you on the spot a little bit. What do you think of Vice President Harris's housing incentive? I'll call it that. You, Barry?
No, I'm not going to make Mike answer that. You mean me? Yeah, might be an easier question. It's always local. I mean, the federal government can, will distort markets. And I was meeting with the Boston Housing Commissioner, they want to build affordable, but they don't help you do it. Like credits to convert obsolete office to residential, it's expensive. You got to put light wells in, the buildings don't all convert, but you can do some of it, will work. Some of it has to be torn down. They're going to have to help you. But again, the government has unique reason to not have half of the buildings, the BNC buildings in New York, be empty, become, you know, migrant housing or something. And, or worse, so not that migrant housing is awful, but you know, you're going to have to readapt the office asset class in certainly in many US cities into other uses. I think any housing credits, like we're in the LIHTC business, which is low-income housing, they can't even get the credits lined up. I mean, they say it, but the Republicans and the Democrats seem like they want to do it, but they never do it. So it's a shame because in New York City, which is losing people, there's almost a 1% vacancy rate. There's almost no residential in construction in New York, none. Rents are flying, making the city more unaffordable. And yet the government, she tried, the governor tried to pass the bill and it got shot down from the left and the right. Yeah, and that's what's happening.
