CNBC Excerpts from the CNBC Delivering Alpha Conference

September 28, 2023

WHEN: Today, Thursday, September 28

WHERE: CNBC Delivering Alpha conference

Following are excerpts from the unofficial transcripts of interviews during the CNBC Delivering Alpha conference in New York today, Thursday, September 28.

Mandatory credit: CNBC Delivering Alpha conference.

Betting on the Future panel featuring Brad Gerstner, Altimeter Founder & CEO

Brad Gerstner on AI

We have over inflation in some assets, right? OpenAI at $90 billion may be ahead of itself, just like we saw stocks get ahead of themselves in 2021. But it doesn’t mean that AI itself is not going to be profound.

Brad Gerstner on bubbles

I’ve lived through a few bubbles. We like to describe these moments as super cycles, right? The internet, mobile, cloud computing and now AI. They’re the start of these things that are going to be profoundly impactful in our lives. But at those moments, you can also have overhype and overprice. And so as an investor or a builder, you have to get comfortable with two simultaneous but competing truths. On the one hand, we probably overestimate in the very short term which leads to price inflation, the impact that these things will have. But much like the internet in ’98 and ’99 where there was overpricing in the short run, we dramatically underestimated the impact it was going to have over the preceding decade.

Brad Gerstner on Google/ChatGPT

The culture at Google had evolved in such a way that it had become more of a research institution than a product-led growth institution. They weren’t delivering products and as a result of that, people were leaving the organization. So what is the verb in the age of AI? Do you Bard or do you ChatGPT? GPT has become the default verb for all things AI. And to relinquish that spot by letting OpenAI go first when you had the technology, you had the supercompute, you had the capabilities to release that product, I think was a mistake.

Brad Gerstner on Nvidia

What Jensen has done at Nvidia is one of the great strategic moves by any technology leader over the last decade. If you cover chips or think about chips, you need to think about them differently than the way we’ve thought about them for the last 20 years. The data center is no longer a building full of computers, each having their own chip. The data center is the computer. Right? These are built as supercomputers today and the provider of those supercomputers is a company like Nvidia where they’re not only supplying the chip, they’re supplying the interconnects, they’re supplying the software, all the things.

Brad Gerstner on Google Bard

Let’s say that Google with Bard is just as good as ChatGPT. So then the question is, will Bard have the same economics of Google search? And what I’m arguing this, even if they’re competitive, even if Bard is the best, they’re not going to have the same monopoly profits in the age of AI as they had with search.

Brad Gerstner on risk increasing

Brad Gerstner: I think the risk has increased, that the Fed is overshot…I’m not certain whether we’re going to have a hard landing or a soft landing. But I am certain that the probability that we’re going to have meaningful slowing in 2024 has gone up.

Scott Wapner: So have you taken your positioning down?

Brad Gerstner: So as a result of that, we’ve reduced our exposure quite considerably, you know by you know, at least 50% since the start of the year. So dollars at risk on the long side relative to dollars at risk on the short side are down by at least 50%.

Brad Gerstner on the Fed

The markets still calling a bit of the bluff of the Fed, but I think there’s a good shot you have one more rate hike, because I think they’re really committed. He wants to be Volcker. He doesn’t want to be remembered as the Fed chair that didn’t slay inflation. He doesn’t want to see it tick back up. But he also acknowledges that the envelope as the pilot of the economy, to stick that landing is very, very narrow. Right? And so what it probably means is that we’re going to have more slowing in 2024 than they want. But the reason the market is pricing in two or three rate cuts next year, is because the market is saying the economy is going to be worse than you’re currently forecasting.

Brad Gerstner on the IPO market

Brad Gerstner: This was definitely a cracking of the door. This was definitely the on ramp for the 1,000 unicorns that have been funded over the course of the last several years to get to the public market, but it was also a wake-up call….. The clearing event that occurred was a sobering up of the board of directors and the founders of these companies to say that liquidity is more important than price. These companies need to get into the public market. I think I tweeted about it you know, a couple of days later.

Scott Wapner: You did. You said VC backed companies should go public sooner.

Gerstner: Correct. If you’re over $3 billion in valuation, hanging out in the private markets and thinking that the private market participants are going to overpay for your stock is wishful thinking.

Brad Gerstner on outlook

We’re at the precipice of a rate cutting cycle, very different set of facts. But we also may have in fact, you know, stepped on the economy. We’re slowing it down, the Fed intends to slow it down. So I’m very optimistic over the course of the next two or three years. Why? Because we’re not going to continue to hike rates. And we’re at the beginning of one of the biggest tech booms in the history of technology. AI is going to be bigger than the internet bigger than mobile and bigger than cloud software.

Fed for Thought featuring Rebecca Patterson, Council for Economic Education Board Chair and Rick Rieder, BlackRock Senior Managing Director, Chief Investment Officer of Global Fixed Income

Rebecca Patterson on Fed rates

Rebecca Patterson: Well, Fed would love it if inflation were already at two and growth were still at three and change.

Steve Liesman: Right.

Rebecca Patterson: That would be happier. But, but no, I think the Fed is probably not unhappy to see the market doing this. The speed is the one thing that perhaps is unsettling to them if I had to guess. You know, any kind of volatility, this size of a move in the 10 year this quickly, it’s, it creates contagion across every asset class and we’re seeing that in the last week. I’m sure they don’t love that. But who can plan that?

Rick Rieder on Fed activity

This is a pretty extraordinary period of time because you’ve got an immense amount of cash that’s sitting on the sidelines that just wants to sit in money market funds. And then you’re getting this immense amount of supply that’s coming to the market and today when you think about like what is your disposition around putting money to work when you’ve got a Fed telling you they’d like to do more, they want to make sure they bolt down inflation, how much duration risk, how much yield curve risk that you want to take today out the curve when term premium is pretty, is is too flat today when you don’t have enough term premium to go out the yield curve. So the decision you have to make is how do I get coupon, how do I get income for clients in fixed income and try and dull your volatility and dull your potential drawdown when you’ve got, you know, Fed that wants to wants to keep moving so, you know, it’s a, it’s more, you know, bull markets are more fun, but quite frankly, in environments like this, you know, how you can actually generate positive return is, becomes quite frankly a fun challenge.

Rick Rieder on rate cuts

But now, you know, now you’re not pricing in the cuts like we were before. Now you get the lock in rates. I mean, think about where real rates are, you know, you’re buying a 5 year note if you assume inflation is going to let’s say we settle at two and a half to three, you’re getting paid a couple 100 basis points or more in real rate to lock these rates in. So I think you can extend a little bit out the curve, but the idea that I got to buy 30 years in inverted yield curve when it’s not a hedge. You think about portfolio allocation. It used to be a hedge because for 30 years, rates came down, we’re in a stable low inflation environment today, if inflation is higher, the back end of the yield curve is gonna get hit the same time equities are gonna get hit. It’s not a hedge, it actually compounds a potential downside. So we like being in the in the front now a bit to the belly of the curve.

Rebecca Patterson on recession

I’m looking for a modest recession next year. Not a, not a ’08, ’09 situation, but not the Fed’s projections either, which now show no negative growth. And I think that will allow plus inflation coming down to start easing but closer to what’s priced in. But I think we ought to remember that it’s, it seems to me more likely than not that the Fed will continue with quantitative tightening even while it’s easing, which means that the easing flowing through is going to feel different than what we’re used to in the past because they have to get that balance sheet down. It’s still, we’re still 30% of GDP.

Rebecca Patterson on what yields mean to stock valuation

If yields are staying supported, because, because we’re losing demand from overseas or because there’s too much supply or because our credit rating gets downgraded by Moody’s or inflation stays much higher than expected, that’s not necessarily a great place to be for the stock market. If we have a higher yield because we have strong economic growth and we have great earnings coming from strong demand, then you can you can live through that.

Rick Rieder on yield issuance

We’re getting 500 billion a week in fixed income and the equity buyback authorization is 800 billion, 800 billion to buyers, 20 billion of sellers, organic sellers, let alone the 401k buying, the wealth buying, it’s a pretty extreme point in time. I agree with Rebecca the fundamentals will win over the intermediate to long term but boy this amount of issuance when you don’t have that that incredible depth of buyer base, in fact those, many of those buyers are now sellers including the Fed, it’s a pretty incredible—

Rick Rieder on the impact on AI

Now you take AI, and I think you’re gonna take it totally to the next level. You know, there have been a series of academic studies that show that somewhere between 35 and 50% of the jobs will either be augmented or replaced by AI. Now, you start to think about and, you know, this is why when people say this is what inflation will look like two years hence three years hence, wage pressure is what’s created a lot of and it’s obviously the Fed’s focus on around service level inflation. If you’re going to create and you by the way you look at some of the labor issues today, that will accelerate the investment in AI software efficiencies within your business and I think you’re gonna see that in a pretty profound way over the next few years.

Navigating Geopolitics, Finding Opportunities panel featuring Dina Powell McCormick, BDT & MSD Partners Vice Chairman & President of Global Client Services and Raymond McGuire, Lazard President

Raymond McGuire on Israel/Saudi Arabia Alliance

We can’t overstate the importance of this kind of alliance not only geopolitically, but geoeconomically. Important put this in context, the MENA region is about a $4 trillion economy, which puts it somewhere between India and Germany. And if you look at the sovereign wealth fund that exists there, there’s probably $2 trillion or so of assets that will be deployed across the globe.

Dina Powell McCormick on Saudi Arabia

We’d much rather work with the Saudis, then push them towards Russia, Iran, or China. And I think that, frankly, was a wakeup call when you had the Chinese foreign minister brokered the deal between Iran and Saudi Arabia. The United States has a critical role to play. We want to be the force in the region that our allies can rely on and we have for decades. And frankly, I think that’s one of the biggest reasons we’re talking to Saudi Arabia.

Raymond McGuire on energy transition

As we talk about energy transition, and the ability to achieve energy transition, when 80 to 90% of the critical minerals that are refined around the world are refined by China. 80 to 90%. And if you look at China diplomacy around the world, especially on the continent of Africa, which controls and the source of many of the critical minerals, China’s in control. Copper, gallium, cobalt, China is in control of many of those critical minerals. The opportunity exists for us to get involved and invest there through not only economic diplomacy, but diplomacy. So I look at China’s position in the supply chain in the control that they exert today in the importance of us being able to invest so that we see some of that control.

Dina Powell McCormick on China

In his One Belt, One Road plan he is seeking to have China be the economic dominant power in the world. They’re increasing, you know, their military platform around the world. And in places like Africa where as Ray is saying, there are important minerals, they have a long term plan, just as he says. And I think our plan needs to get a little bit more aggressive right now. We have to actually name them as the competitor that they are and frankly, what we’re doing now with our allies is probably the best set of barriers.

Raymond McGuire on mineral urgency

There is an alarm that needs to be sounded and maybe formed like this, get the attention that people who are in the decision making position. Public private needs to come together. That sense of urgency needs to be amplified. Flags need to be thrown, they can’t be yellow flags. They’ve got to be red flags. We need to have this sense of urgency, and we need to do it today. Invest today, which makes sure that tomorrow is better than today, and our best days are ahead of us and not behind us.

Raymond McGuire on energy needs

Raymond McGuire: Now when it gets to supercomputing, the amount of energy that’s necessary to support that, the demand on the grid is going to be much greater than the supply that we have today. We just don’t have enough infrastructure.

Brian Sullivan: That’s just a scary statement you kind of just made.

Raymond McGuire: We don’t have the infrastructure today to meet that demand. We just don’t. If you think about the alternative sources, either it be wind or power, they’re all dependent critical materials, all of them. So it’s just not out of a blue that we’re going to be able to create these things or manufacture them.

Dina Powell McCormick on carbon capture

The carbon recapture issue is so critical and who has the resources to invest in that? It is often many of the large energy companies that you know well. And so, I think that back to kind of making sure that this is innovation, capital allocation, a real market opportunity, whichever countries get to it first, are the smartest and most secure, and whatever companies get to it first will own the market.

Raymond McGuire on energy market

If what they were delivering were as competitive economically, I think you’d see a different reaction in the marketplace. In the capital markets, which are rigorous analysis of the expectation of future profitability. Without that scale, it’s tough to see that the market is going to react as positively, which is why you see the energy companies trading at such almost historic highs.

Finding the Alpha in Tech panel featuring Lydia Jett, SoftBank Investment Advisers Managing Partner

Lydia Jett on AI utilization

Every single company is talking about the utilization of AI today and it’s really hard to substantiate that as a like core technical AI but I do think, we’re starting to think about optimizations through technical tools, not just headcount reduction. We are starting to think about reaching consumers through better UI and bringing more automation tools to consumers. And so, you’re starting to see the utilization of technology and I’m going to use the term more broadly because I think the concept AI is a little bit farcical right now in terms of how overused it is. But I’m starting to see real innovation impact how companies are thinking about bringing better tools to customers and that’s an exciting sea change.

Lydia Jett on recent IPOs

I would argue looking at the performance of the last couple of weeks IPOs, these are well priced IPOs. You know, I think there’s a little marginal pop, they aren’t trading down much and you’re just not seeing a lot of volatility in them. And I think that is so preferable to the big pops we saw back in 2020, 2021.

Lydia Jett on consumers trading down for value

We certainly see within some of our non-discretionary consumer companies, you certainly see a real trade towards value. And so, you know, basket sizes may be staying flat, but unit volumes are coming way down. So, company, consumers are trading down, they’re trading down for value, they’re still consuming. And then we’ve got discretionary companies in the portfolio where it’s sort of illogical that consumers are still paying, but I think consumers are still relatively healthy and looking for fashion-oriented items on trend.

Lydia Jett on future of tech

I saw an analysis that said 540 tech companies have closed in the last year. We are nowhere near that being peak number. You know, I expect a lot more companies to realize they aren’t actually establishing product market fit in closure. At the same time, I am really excited about the operating environment that many of those that will remain are in. You know, I think it is a lot more fun to operate when there is less money in the system, less competition, and so, I’m excited about these companies that are well positioned to continue to compete in this environment. When we look at our own portfolio, I think, you know, 70 plus percent of our portfolio has north of a quarter billion dollars in revenue. 95% of our portfolio has 12 months of runway, you know. I’m really excited to see how these companies that were over capitalized but have clearly established product market fit do in this next couple year period.

Alpha Alternatives panel featuring Les Brun, Ariel Alternatives Chairman & CEO and Jenny Johnson, Franklin Templeton President & CEO

Jenny Johnson on alt portfolio allocation

I mean you have pension funds that are 50% or more because they can deal with it. I think the challenge today is that the average investor’s 5% or less. I mean most of them are zero and you’re hearing a desire for most firms to at least move their base of investors to at least 15%, and I think that’s important because there are excess returns in the private market. You do get paid for a liquidity premium and to have that not available to your average investor is I think a real problem

Les Brun on alternative investing

Alternatives represent an opportunity to sort of mitigate your risk, umm and take advantage of absolute alpha as well. The notion that it’s not getting to the average investor is absolutely spot on, but that’s changing really quickly with everybody now focused on the great investor pool and is yet untapped and is a great source of capital for alternative investments broadly and still generates a substantially great return both in fees as well as absolute returns investments for those folks who are creating those products

Les Brun on rate cycle

if you’re flush with cash, then now’s a great time to be in the private equity space. If you’re long assets and trying to sell them you’re not getting the premium price that you thought you might be able to get otherwise. But those of us who are old enough and I’ll only include myself in this have been around the cycle or two to watch this go up and down. There is there is a predictability to it that is unnerving in some ways, upsetting to younger folks, but you know, predictable for us old folks.

Jenny Johnson on private vs. public

People don’t want to be public company CEOs, if you can avoid being a public company CEO, where you’re so focused and admittedly it’s companies like Franklin Templeton, right, where our portfolio companies are asking what are your quarterly earnings? How are you doing? Did you miss it? In a time of great technological change, CEOs have to be investing for things for the future. You know, we talked about blockchain and you know, we’re doing a lot in that space. But I don’t think it pays off for 5, 7, 10 years. And there’s more pressure to be able to produce those earnings where as a private company can often take a step back to take three steps forward, which is harder for a public company.

Les Brun on valuations

At the height of the market, height of the market being the lowest interest rate point, you had a multiple and average multiple numbers in the private equity market somewhere around 14 times, 15 times higher in some technology companies, but generally speaking on average around there. Today, that number is probably yes, it’s still in double digits, but it’s probably 10. And on its way down to seven, eight… But generally speaking, there is pressure on prices and valuations to come down. And I think that’s across the board.

Les Brun and Jenny Johnson on the shrinking pond

Les Brun: The pond you’ve got to fish in is smaller. And so the private equity marketplace is going to be the ones to supplant the public markets.

Jenny Johnson: Which is why I think it’s so important that we figure out responsible ways to bring the private markets the average investor, it’s not right that they’re left out of that market of what you know, they’re playing in the shrinking on and then this, this market outside, we have to figure out how they can access those returns.



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