David Westin (2:38)

This is Wall Street Week. I'm David Westin bringing you stories of capitalism. Europe is ramping up its defense spending and we go to Sweden to see why a relatively small player is punching way above its weight. And private credit was all the rage. But we are learning the hard way that it may not be for everybody or for Every situation. Plus, we return to Nepal where voters have now gone to the polls in the aftermath of that social media fueled uprising of last year. But we start with the state of the US jobs market where the most recent numbers point to softening. To give us the perspective of an investor, we welcome back Stephen Ratner, Chairman and CEO of Willett Advisors, responsible for investing the personal and philanthropic assets of Michael Bloomberg, our founder and majority shareholder. Let's talk about the US labor market right now. We have had some numbers now indicating some softening over the last two or three months actually. How concerned are you or should we be?

Stephen Ratner (3:36)

Well, actually we've had softening over even the past year. If you look at the number of jobs created on average, it was substantially lower last year than in the previous several years. How concerned should we be? We should be somewhat concerned. It's not a great thing obviously to have the unemployment rate going up, to have the number of jobs going down. None of that can be viewed as good. Obviously you still have had so far anyway very strong GDP growth. So that is in some ways an even more important indicator. But yeah, it's definitely of concern.

David Westin (4:06)

As you say GDP is growing from the numbers we've seen so far for two and a half, 3%, something like that. And we are not creating as many jobs. Is that a shift in the economy about how many jobs we need to have the same output?

Stephen Ratner (4:17)

Well, obviously just the simple math is when those two things happen, you get a productivity increase and that's a good thing. Productivity increases are really what makes the economy more prosperous for everybody. You can't have real incomes go up without productivity growing. In terms of why is this happening? Why is this disconnect happening at this time? There are obviously a bunch of theories. One is AI, which we can come back to. But I think it's absolutely true that companies are battening down the hatches. They are, they are nervous about the tariffs, they're nervous about the uncertainty. There was a huge amount of hiring that went on post Covid when it was hard to find workers. People took whoever they could get and so they're trying to right size, all that. So I think that's, that's really what's mostly driving this.

David Westin (5:00)

Employers are worried about the tariffs, but also they've had to pay tariffs and it's been a difficult thing to pass all along to customers. So is that, is it possible the tariffs are actually helping on the productivity,

Stephen Ratner (5:11)

ironically helping on the productivity, hurting on the jobs? Because basically when companies do have these tariffs that they have to pay and then pass on. They look at other costs and say, what other costs can we cut? And if people are part of it, then they cut the people.

David Westin (5:25)

Some of the job growth we've seen has been in health care. In fact, a month or two ago, it was all in health care. What does that tell us about where our economy is headed? Because we're not really growing jobs almost at all outside of health care.

Stephen Ratner (5:36)

No. In fact, manufacturing jobs were down last month, and they've actually been down pretty consistently over the past year or so. And of course, a lot of people worry a lot about manufacturing. The health care jobs, on the one hand, are perfectly good jobs. We need people to be everything from nurses to doctors to whatever in the healthcare system. But on the other hand, you could make an argument they're not really producing anything. They're taking care of us as we get old, as our society gets older. And we need more and more health care. And so we should also want a more balanced job creation picture in which jobs are being created and all sorts of other things, including manufacturing, including services.

David Westin (6:14)

How does immigration factor into the labor market at this point, if at all? We obviously don't have the same immigration coming in. And there are some reports that people actually may be leaving the country. Is that affecting the labor market?

Stephen Ratner (6:25)

I'm a bit of a contrarian on this. The narrative is, yes, it's affecting the labor market and particularly from people who are pro immigration. They say, cece, we got to have more immigration, and I'm in favor of more immigration. But it's very hard at the moment to see a lack of immigration as the reason. Here you have labor force participation going down. You have the number of job openings going down, you have the number of the unemployment rate going up. So you have a whole bunch of other things that suggest that this is just a very loose jobs market. And also, when you look at CEOs on their quarterly earnings calls, they're not saying it's hard to find people. Nobody is saying that at the moment. They're in fact talking about how many people they're cutting.

David Westin (7:04)

You mentioned AI. Does AI factor in at all yet?

Stephen Ratner (7:10)

Well, if you look at something like manufacturing, I think pretty obviously it doesn't have anything to do with why we're losing manufacturing jobs. I think it is having at least some anticipatory effect in the sense that companies are saying, we don't need to hire as many engineers this year because we're going to have AI doing more of this stuff. We don't need to hire at the, in the financial services world as many new entrants into our, into our staffing because we're going to have AI doing more of this stuff. So I do think it's having an anticipatory effect, although I'd be the first to say I don't think it's actually changing the number of people working at the moment.

David Westin (7:44)

As an investor, how do you take into account the labor market? How does it affect how you position your portfolio?

Stephen Ratner (7:50)

I don't think the labor market per se is, is really that much of an issue for us. I think we would worry about a couple of things. One, the overall state of the market. And when you have rising unemployment and rising inflation at the same time, which we may have, we're going to get a few more reports, then that's, that's, you know, getting perilously close to stagflation. And that is really bad for the market. The Fed, it's bad, it's tough for the Fed, it's bad for the market and so forth. And then there are certain sectors, particularly software, where the anticipatory effect, again of AI seems to be the greatest. And so it becomes fairly perilous to work your way around the stock market under that circumstance.

David Westin (8:31)

Stagflation is the thing that all economists say we have to avoid. That's really dangerous for us. What can we do at this point? By we, I mean the government or private industry. What can we do to really avoid the risk of stagflation?

Stephen Ratner (8:44)

Getting rid of the tariffs would certainly be a good start in terms of reducing costs for business, and therefore they don't have to raise prices quite as much. Beyond that, I'm not sure in the short run there's that much we can do. In the longer run, you want to have a more flexible economy, you want to deregulate, you want to try to make it more competitive, things like that. But in the short run, you sometimes get in this box that we may be heading toward.

David Westin (9:06)

What does this mean for the Fed potentially? I mean, how do they address this? We're going through a transition, obviously with the chair of the Fed. But how they address the situation where we do have growth, we may have a softening labor market and there's concern about basically inflation. At the same time we have slowing growth.

Stephen Ratner (9:23)

It's tough for the Fed. They have a dual mandate, as you know, where they have to focus on both unemployment and on inflation. And so you can't, you know, you can't necessarily do both things at the same Time. There's a Fed meeting in the middle of March. The anticipation of further rate cuts this year has already dropped a bit because of, in part because of the war and the effect on oil prices and how that's going to pass through into inflation. And so the Fed's going to have a tough decision. I think it's highly unlikely, almost implausible, that they would raise rates at this point. The question is how much do they cut them? It had been expected they would cut them twice this year. I think that may become one, it may become none before we're done. But that's the, that's the range of possibilities.

David Westin (10:05)

There's some nervousness in the market these days about private credit, which sort of is a junk adjunct to the AI investment that we have. Is it a real problem? As you look out at the credit markets, do you think there's a real issue there?

Stephen Ratner (10:19)

I think there's definitely going to be some pain. I think there were a lot of loans made to, particularly software companies, what we call ARR loans, where they were made annual recurring revenue. They were made on the basis of revenues as opposed to profits. Revenues don't necessarily mean you're solvent, they just mean you have revenues. And so those kinds of loans. And this happens at every cycle. I don't mean to be blase about it, but it happens in every cycle. So I don't worry too much about private credit. There's going to be pain, but the system is not as leveraged and not as sort of badly engineered as it was in 2000, 2007, 2008.

David Westin (10:56)

You've got investments that don't get marked to market every single day.

Stephen Ratner (11:00)

Oh yeah, yeah.

David Westin (11:01)

So how do you make sure that you get the right data? I mean, we see that in all sorts of places, including China. Sometimes people say, I'm not sure if the data coming out of China is reliable. How do you know that your risk data is reliable?

Stephen Ratner (11:11)

We don't necessarily know it on a day to day basis, but we watch the companies carefully. We have an idea as to what would be good or bad for them. And we do get quarterly marks and we get financial statements. And so we can try to analyze the quarterly marks and see if they're accurate or not. But given that they're private investments, there's not usually a whole heck of a lot we can do about it anyway. And so we just try not to make new mistakes and live with our old ones.

David Westin (11:35)

We have a new risk right now, which is the war with Iran. Has that taught us anything? About safe havens. I mean, if you look what's happened to the dollar and what happened to the US Treasuries, it's interesting what's happened. Actually. Treasuries sold off to some extent. People went to the dollar. Are the nature of safe havens changing?

Stephen Ratner (11:58)

That's a great question. I think the dollar is a safe haven and most people see it. And as you said, that's probably what we've been seeing. I think Treasuries are more complicated because the war creates inflation and inflation is bad for Treasuries. And so you could argue that that's why Treasuries should sell off in this set of circumstances. But look, it's been, it's an, it's been an odd situation because gold until recently and silver also until recently have been so strong that those are normally indicators of a lot of fear out there in the market. But the market has been pretty stable. Even with the last week or two of commotion, it's been pretty stable, all things considered. So it's something people have been puzzling over, which is why, on the one hand, why people have been going to these things like gold, but on the other hand, they still appear to be very much invested in stocks.

David Westin (12:53)

Up next, Europe rushes to get up to speed on defense spending. And a surprising leader in the effort is one we don't typically associate with supplying arms. I'm Barry Ritholtz inviting you to join me for the Masters in Business podcast. Every week we bring you fascinating conversations with the people who shape markets, investing and business. CEOs, fund managers, billionaires, Nobel laureates, traders, analysts, economists, everybody that affects what's going on in the market, whether you own stocks, bonds, real estate, commodities, crypto. You really need to hear these conversations. Sometimes it's behaviorists like Dick Thaler or Bob Shiller. Sometimes it's fund managers like Peter Lynch, Bill Miller, Ray Dalio. Sometimes it's authors. Michael Lewis, author of the Big Short and Moneyball. Regardless of the conversation, these are the folks that move markets each week. That's the Masters in Business podcast with me, Barry Ritholtz. Listen. On Apple, Spotify or wherever you get your podcasts, This is a story about punching above your weight. For decades, Europe relied on America's military might for its security. Confident that large scale war on the continent was a relic of the past. Russia's invasion of Ukraine changed all of that. Now Europe is increasing defense spending, rebuilding industrial capacity, and getting ready to enter the arena on its own if it needs to. And it's Looking to the traditional leaders such as Germany and the United Kingdom to step up. But it turns out that there's a smaller country playing an outsized role, one that might surprise you. When you think of Sweden. You might picture snow covered streets, minimalist design, maybe even Ikea or aba. Defense manufacturing probably isn't the first thing that comes to mind, but maybe it should be. Here at Saab, production has been ramping up. The company reported record orders on the books. And it's not just fighter jets. Saab builds everything from missiles and radar to surveillance systems and naval platforms, capabilities few countries sustain domestically. CEO Michael Johansson describes the magnitude of the new demand.

Michael Johansson (15:25)

I think if I look at our company, we have probably 4 to 5 folded output from like before the war started. So lots is happening and I think we are underestimating the capacity of the European defence industry for a country of

David Westin (15:41)

just 10 million people. That's significant. But the phenomenon is not uniquely Swedish. European defense company stocks are surging, with other major players like Rheinmetall and Leonardo reporting record years along with Saab four years into the war in Ukraine. The demand driving those record numbers is no longer just crisis support. It has become a broader story about Europe's new security posture, a story echoed across the Atlantic as President Trump pushes NATO allies to spend more. We were paying almost all of NATO.

Kathleen Griffith (16:18)

Now they're paying 5 as opposed to not paying 3.

Michael Johansson (16:21)

It's a wake up call.

Stephen Ratner (16:23)

The European people know that we will

Michael Johansson (16:27)

have to stand our own feet, be more independent.

David Westin (16:32)

Anders Vohr Rasmussen is the former NATO Secretary General and Prime Minister of Denmark.

Stephen Ratner (16:37)

For too long we have relied on a combination of cheap energy from Russia,

Michael Johansson (16:42)

cheap goods from China and cheap security

Kathleen Griffith (16:46)

from the United States.

Stephen Ratner (16:47)

That model doesn't work any longer.

Kathleen Griffith (16:50)

Now we have to stand on our own feet.

Stephen Ratner (16:53)

We need to shift gears.

Michael Johansson (16:55)

We will need to make Europe a defence superpower.

David Westin (17:01)

But not every country is willing to or able. According to economist Jacob Kierkegaard, a senior fellow at Brussels based think tank Bruegel.

Jacob Kierkegaard (17:10)

I know we say that Europe is rearming, but the reality is that Europe as a whole is not rearming. There is a limited number of countries that rearm that includes at least two big ones, first and foremost of course Germany, the other one being Poland, and then a number of smaller countries, particularly in Scandinavia and other parts of Egypt, Eastern Europe. And these are countries that actually do have, if you like, latent fiscal capacity. Germany again being the case in point. And therefore there is a self selection. The countries that can have both guns and butter while they're rearming. But those that had to choose, and by that I mean France, Italy, Spain, the uk, they are much more hesitant when it comes to significantly increasing defense expenditures.

David Westin (18:12)

Defence has the potential to become a stronger economic driver across Europe. The EU is targeting 50% of defense procurement to be from EU suppliers by 2030. A meaningful shift considering that after Russia's invasion that number was roughly 25%. But meeting that goal requires production capacity. And that's where Sweden stands out. It has maintained that production capacity for the better part of a century, in part because it historically relied more on exports than other European manufacturers. And that continuity matters. There's a, I would say dramatic ramp up in spending right now, but there were years where there was not as much attention or investment in, in Europe in defense. How did Saab maintain its investments?

Michael Johansson (18:58)

Well, we have never sort of dismantled sort of everything as you are alluding to, within our company. And that goes back to our ownership, I think even though we are stock exchange company publicly listed. We have a strong owner in the Valenberg family and they have always been long term and also very loyal to sort of the deterrence and defence of Sweden for many, many decades. And so we never dismantled, we continuously invested more on our own, I would say, when sort of the government didn't sort of fund everything that we wanted them to fund. And we have always been a company that takes sort of a lot of our top line and our bottom line for that sake to reinvest in R and D, to always be relevant in the short time frame but also long term. So we are a bit unique in that sense. I think you're not only looking at relying upon governments all the time to keep our operations efficient and state of the art.

David Westin (20:02)

Sweden has been ready to step up on defense and its entry into NATO in 2024 sealed the deal. As you describe. Russia's invasion of Ukraine triggered an awful lot within the defense industry. It also was a wake up call for Sweden as Sweden joined NATO. How has that affected Saab's business, if at all? Sweden's being in NATO's now for the

Michael Johansson (20:26)

company, I would say all of a sudden we, we are involved in the common acquisitions that NATO is doing now and then from the acquisition authority within NATO, nspa. And of course we're much more involved in understanding where NATO is going in terms of capabilities needed short and long term, which we were actually outside not having an insight into. We didn't come into play when it comes to acquisitions before we joined NATO really or when we became an invitee it's completely different now. We have framework contracts with NATO, so we get contracts, contracts from that organization. We understand what we can be offering going forward. We work better with the alliance capability, transformation organizations. So this is a big shift and of course it comes down to now we're a country that can be relied upon long term because we are in the alliance. And with that comes that SAAB is long term trustworthy as well.

David Westin (21:34)

Expanded access to NATO markets brings opportunity, but it also brings pressure to scale production, invest in research and carefully manage capital.

Michael Johansson (21:43)

I think we've managed our sort of operational capital and also our capital employed in a very good way. While we are sort of investing five times more in capacity building than we did before the war. We are investing heavily in R and D, but still we have a strong solid balance sheet. And that is of course about sort of making sure that you have contracts that gives you continuous cash flow, but also that some customers are prepared to give you some advance payments. So we don't have to act as a bank. So there's still more to be discussed with governments, but so far, capital wise, we are doing well.

David Westin (22:23)

There was a time when in the United States, and I think in parts of Europe, there was a sense that investors, particularly institutional investors, were reluctant to invest in defense. That seems to be changing now.

Michael Johansson (22:34)

It's been a big change on that side. I mean, I remember in January 22nd, shortly before this tragic war broke out, we had lots of discussions in Brussels about the, what we call the taxonomy and the if this was a sustainable business, which was crazy in the way I see it, because I mean, if you have politicians saying you have a threat environment and we decide as a country that we need a defense force, of course you have to have professional and strong defence industries to create that strong defense. But that was a strange discussion about this type of business. We're not sort of sustainable and investors wouldn't get an eco label sort of stamp on their funds if they invested in defence. That of course sort of disappeared more or less completely. Not all of it, but lots of it when the war broke out and we realized that we had to catch up. So, I mean, if you look at Saab, I think we were 45,000 shareholders before the war broke out and we are 300,000 shareholders as we speak. So it's been a big change in the perception.

David Westin (23:48)

And it isn't just Saab's shareholders who are backing the ramp up in defense production. The Swedish government is right there with them. As explained by Finance Minister Elisabeth Svantisen

Michael Johansson (23:58)

it is definitely a boost in the economy.

David Westin (24:01)

We have 6% this year of GDP

Michael Johansson (24:04)

in different public investments.

Kathleen Griffith (24:07)

I think we are in the top

David Westin (24:08)

in the eu and of course defence spending is one of the big investments. And we have this defence industry, it's

Kathleen Griffith (24:15)

strong, so that's important.

David Westin (24:17)

And what I think a lot about is how could we do that? I mean, this will change the labor market, the economy, how can we have the synergy effects and how can this, this will affect the labor market, the economy. How can we do it in the best way, Innovation, technique, development and so on. I mean, we are raising double defence

Kathleen Griffith (24:43)

spending just now and will be more.

David Westin (24:45)

That in itself is helping because many

Kathleen Griffith (24:50)

of what will be produced will be

David Westin (24:52)

produced in Sweden or in Europe, of course.

Kathleen Griffith (24:55)

So we are helping that way.

David Westin (24:57)

But not all European financial institutions are as supportive of the move in into defense spending, especially when it comes to multilateral lenders like the European Investment Bank.

Jacob Kierkegaard (25:07)

I think much too little has been done. I know that the European leaders, when they meet in their biannual or every quarter, every time they usually have a sentence that says, oh, the EIB and other multilateral lenders should do more. But we are four years into this war. And the direct funding, for instance from the EIB and other multilateral lenders to European defence is very limited. The direct involvement also of say European pension funds remain very limited. And I think that is quite frankly a clear policy failure and what I would call initial executive institutional inertia. You have not had leaders in these institutions, both the policy institutions and the private sector institutions, to basically push this. I think it's a mistake, but it obviously hasn't prevented private capital, venture funding and others from flowing into the sector. And with the equity valuations increases that we have seen, the increase in European funding, venture capital funding in the sector as well. But it has been largely despite the traditional pillars of European financial system, in the large banks, in the pension funds and in the policy lending institutions of the European Union.

David Westin (26:50)

And that may be an important reason why Sweden is punching above its weight when it comes to defense. A combination of being prepared, having the support of investors and recognizing an urgent need. Coming up, looking for and past the cracks in private credit.

Andrew Junkin (27:07)

I get nervous anytime any particular strategy gets a little bit crowded, where it's

David Westin (27:12)

just what is needed and where it may not be. I'm Carol Massar. And I'm Tim Stanwak inviting you to join us for the Bloomberg businessweek daily podcast. Now every day we are bringing you reporting from the magazine that helps global leaders.

Ben Walter (27:33)

Stay ahead.

David Westin (27:33)

We've got insight on the people, the companies and trends that are shaping today's complex economy. That's right, Tim. We're all over global business, finance, tech news, all as it is happening in real time. And we've got complete coverage of the US Market close. Gotta say, basically, if it impacts financial markets, if it impacts companies, if it's impacting trends and narratives that are out there, we are on it.

Ben Walter (27:52)

We also have a lot of fun doing it.

David Westin (27:55)

Bloomberg businessweek also brings you the analysis behind the headlines through conversations with our expert guests. And we are doing this all live each weekday. And then we bring you the best analysis in our daily podcast search for Bloomberg Businessweek on YouTube, Apple, Spotify or anywhere else you listen. Check it out on your way home from work to catch up on the conversations that you miss during the business day and on the weekend. Check it out for a complete wrap up of your business week. That's the Bloomberg Business Week Daily Podcast. I'm Carol Massar. And I'm Tim Stanovec. Subscribe today wherever you get your podcasts. This is a story about one size not fitting all, particularly when it comes to risk. Private credit has become all the rage over the last few years, with some of the largest alternative asset firms catapulting themselves into managing hundreds of billions of dollars.

Kathleen Griffith (28:50)

They've done very, very well over time, built big businesses, and the growth in

David Westin (28:55)

private credit isn't limited to the United States.

Kathleen Griffith (28:57)

They need private capital.

David Westin (28:59)

They need risk taking.

Andrew Junkin (29:00)

We're seeing it in Germany and we're

David Westin (29:01)

seeing it here, where Japan is just more hospitable to private capital. But in recent days, the shine on private credit has come off after some people have had trouble getting their money out.

Stephen Ratner (29:12)

Shares of KKR and Blue Owl were down as much as 10% yesterday, and

David Westin (29:17)

I think we're seeing the first sign

Prashamsa Subedi (29:18)

of stress around these funds.

David Westin (29:21)

Although the lending is private, concerns about the industry have made their way into public markets with shares of Blue Owl, Apollo and others under pressure.

Andrew Junkin (29:30)

I get nervous anytime any particular strategy gets a little bit crowded.

David Westin (29:34)

Andrew Junkin invests in private credit as chief investment officer for the Virginia Retirement System. He oversees pension assets for 230,000 Virginia public employees and allocates about 16% of their $130 billion to private credit.

Andrew Junkin (29:51)

I think the capacity for the private credit markets to absorb the growth that has happened and that is forecasted to continue to happen is probably pretty solid. It's not the highest expected return asset class that we have. That would probably be private Equity, but it is higher than public fixed income, which for us is really investment grade. I mean, that's kind of the sleep at night. Treasuries, agencies, investment grade, corporate portfolio. Private credit has a little bit more credit risk in it, of course, but the yield is higher. And we're expecting returns kind of in the 7, 8, 9% over the long term. Right now, we do think that private credit has expected returns that are a little bit higher, which is one of the reasons in the short term we've been sort of increasing our allocation.

David Westin (30:44)

Marcy Frost is CEO of CalPERS, the largest public pension fund in the United States.

Kathleen Griffith (30:50)

You know, on the private credit side,

Prashamsa Subedi (30:51)

we've been very specialized in working only

Kathleen Griffith (30:54)

with high quality managers.

David Westin (30:56)

We had a 8% allocation to private credit, and I think we're hovering around 4%.

Prashamsa Subedi (31:01)

And we believe that that book is

David Westin (31:03)

diversified enough that, you know, the team

Prashamsa Subedi (31:05)

is really not too concerned about the software exposure.

David Westin (31:08)

For regulators, dramatic rapid growth in any asset class often raises questions.

Kathleen Griffith (31:15)

Anytime an asset class grows very quickly in absolute amounts, but also profitability, it should invite closer scrutiny. It doesn't mean it's necessarily problematic.

David Westin (31:29)

Dan Tarullo served as a member of the Federal reserve board from 2009 to 2017, with particular responsibility for bank oversight. He's now professor of law at Harvard.

Kathleen Griffith (31:39)

Well, there are certainly risks, David. I mean, the way I put things now is we should be on yellow alert, you know, not red alert. The story about private credit, which is to a considerable extent the right story, is that it's filled in a gap that banks either never quite worked in traditionally, which is providing funding of certain sorts in leveraged buyouts, private equity transactions, but also kind of moving into some other areas because of some of the advantages that they have and also because of capital requirements for banks. So if we take that as a starting point and say, okay, for regulatory and business reasons, banks aren't in some of these spaces, private credit moves in. It's not as though the banks are now totally out of the exposure, because banks have been providing and do provide a substantial amount of backup credit credit lines for private credit funds. And thus the exposure of banks is indirect rather than direct. But indirect exposure can be just as damaging as direct exposure.

David Westin (32:49)

JP Morgan just this week decided to limit its indirect exposure by restricting lending to some funds. The degree of risk in private credit depends, of course, on what you're comparing it to, a point Apollo's Mark Rowan knows all too well.

Andrew Junkin (33:04)

And it's de risking for individuals because

Kathleen Griffith (33:06)

people are not funding their investments in

David Westin (33:08)

these BDCs with their treasury portfolio, they're selling their equities.

Andrew Junkin (33:13)

Last I looked, first lien debt is senior to equity.

David Westin (33:16)

They are making an intelligent decision that

Kathleen Griffith (33:18)

they can earn equity like returns without

Andrew Junkin (33:20)

equity like risk, and take money off the table. I mentioned that public Equity is about 32% of our portfolio and that. And that private credit had moved up or credit strategies had moved up. Actually, the funding source for that had been largely public equity. So for us it was kind of a relative value trade.

David Westin (33:38)

Whatever the comparison, managing the risk in private credit is critical, as in any investment. That's a major theme of Lloyd Blankfein's new book Streetwise, about his career at Goldman Sachs. He describes Goldman's risk management system based on marking assets to market daily. Something that's difficult to do with assets like private credit that by their very nature don't change hands regularly. But something Apollo Global Management just announced it was moving toward, it's illiquid.

Kathleen Griffith (34:07)

I mean, it's illiquid for good reasons. If you're financing, you know, lending somebody $200 million on something and you want to sell 10% of it, who's going to do the credit work on such a small piece? And you just don't have the liquidity to see it. And I would say a lot of these people, a lot of the people who are doing this, running these portfolios will say they are marking them. But how do you market?

David Westin (34:30)

Tarullo agrees that the illiquidity of private credit makes it more difficult to keep valuations current. But he also has other concerns.

Kathleen Griffith (34:38)

One of the things that worries me here is that the information gaps we have aren't being plugged to the best of the ability of the regulators. And, you know, if they did that work, we might all be somewhat reassured. I suspect we'd probably find some issues and problems that need to be dealt with. But it's both the opaqueness of the valuations of many of these investments because, you know, there's no price discovery for these illiquid loans, and the fact that the regulators are not helping the rest of us poke through that opacity and figure out exactly what is going on.

David Westin (35:22)

While concerns about the risk profile for private credit are on the rise, others point to its strengths in spite of the recent market turmoil.

Andrew Junkin (35:30)

Obviously, some companies have some credit issues and either they get refinanced or in some cases they get reorganized, but by and large, I would say the default rate has been lower than has been expected historically. And so the returns have commensurately Been probably a little bit higher.

David Westin (35:51)

Making sure that private credit is the right investment depends every bit as much on who's doing the investing as it does on the nature of the credit being extended. What may make sense as part of a large portfolio for an institutional investor may be raised wrong for retail investors saving for retirement.

Kathleen Griffith (36:07)

One of the biggest advantages of private credit has been that the capital is tied up. That means there's not liquidity for the investors. But it also means that the private credit fund has a very good sense of when it's going to face redemptions and how much capital it has available. As the private credit people have moved, have tried to move more and more into retail, we've seen this liquidity. This is the liquidity issue that's blowing up that you referred to earlier. Retail investors just don't think in terms of long term investments and they can't get their money out no matter how badly the underlying investment is doing. But a little bit of liquidity is not the way people who are used to investing in stocks and money market funds and ETFs, it's not the way they think about it. And that limitation on liquidity I think is a lot of what's putting the pressure on at the retail level Right now.

Andrew Junkin (37:11)

We have the potential for individual investor behavior to create some mismatch between the structure and the underlying investments in in the structure. So think back to the global financial crisis. I think a number of academic studies afterwards showed that individual investors in 401ks in many cases panicked and de risked kind of right at the bottom of the market. And if there's a big run to sell, whether it's private credit or private equity, when prices are down, I think that could create some challenges for that market to function efficiently and effectively.

Kathleen Griffith (37:51)

It's not any more likely that a security will be good or bad in the hands of a retail person versus an institution. But the consequences of it being wrong and being bad from a political, sociological sort of way are much worse. Because the political sector can watch with interest but not much action. If big institutions and very high net worth individuals lose money, but a 401k plans start to lose money. Individuals that were brought in late in the cycle, you know there's going to be, there's going to be a lot, there's going to be an inquiry or an inquisition that will follow this.

David Westin (38:33)

As Tarullo says, it's not time for a red alert yet. But the worst case scenario for private credit might not be what we are expecting.

Kathleen Griffith (38:41)

What I regard as the bigger risk right now is not so much financial stability, it's more macroeconomic. That is how much leverage is there totally in this system. We know there's leverage by the companies that are borrowing from the private credit funds. But are the investor, to what degree are the investors in the private credit funds also borrowing? To what degree are the private credit funds themselves borrowing? And once you, you know, you really need to have that sense of how much leverage is there and you need to have a sense of what would happen if the investments into the private credit funds dried up so that they could no longer make the kinds of loans that they've been making. Under those circumstances, I would expect that banks and other providers are probably credit could step into some degree, but I don't think they'd be able to fill the hole entirely. And so you'd have the same kind of problem of concern that you have when banks are encumbered because of losses, they can't make more loans and they are denying credit to creditworthy households and businesses. So as we sit here today, I'm actually somewhat more concerned about the Mac macroeconomic impact of private credit than the financial stability or macro prudential impact of private credit.

David Westin (40:10)

Up next, we turn to the high Himalayas to revisit the aftermath of that social media fueled revolution in Nepal and what it says about uprisings across the globe. This is a story about moving mountains when and whether the power of the people can shift the tectonic plates of governments around the world. Late last year, we brought you to Nepal where an idea about fairness spread across the nation and helped bring down the regime. This past week, the sweeping changes continued as the 34 year old mayor of Kathmandu headed to a landslide victory to be the country's next prime minister. To understand what's happened, we have to go back to the beginning. Our colleague Michael McKee takes us to the high Himalayas for the anatomy of a revolution.

Stephen Ratner (41:10)

We plan to have a very small peaceful protest.

Interviewer (41:15)

Did you stay off of social media or did you go back to posting?

Prashamsa Subedi (41:18)

No, I went back to posting. I will never stop posting. It's fine even if I die.

Interviewer (41:25)

Now more than ever, people have a window into the lives of others. Social media connects youth across countries and continents, but it also shows them riches beyond their reach. And as inequality and unfairness become more conspicuous, some gen zers have taken to the streets in Nepal, a small democratic country wedged between Tibet and India. What started as a few angry posts became a movement that overthrew the government.

Prashamsa Subedi (41:53)

We were marching towards the parliament gate and I was always very opinionated. I used to have opinions on everything. I was a rebel kid. This video is about me asking.

Interviewer (42:04)

Prashamsa subedi is a 22 year old law student who lives with her parents in the outskirts of Nepal's capital, Kathmandu. Not long ago, her life took a surprising turn.

Prashamsa Subedi (42:16)

It was 2024 when I started uploading the videos about my political opinion, what I felt the government was doing wrong. And that's when it took off.

Interviewer (42:28)

In late June, after a Nepali politician downplayed the country's poverty, Subedi posted an angry response on TikTok. A day later, her clip had over a million views.

Prashamsa Subedi (42:40)

How can a leader, Mantri Mantri see that before, when we think of it, these politicians would not have their life public so we would not know what their lifestyle was, how everything was going. But then there is a very famous politician. One of his family members was a vlogger and she used to document their lives and every clip she used to go viral and people used to see what lavish lifestyle they were having, which we could not even imagine. So that is how it all sparked. That is how it all triggered.

David Westin (43:14)

There's sudden visibility to how much richer the rich are than the poor, right? That ability to kind of see over the palace walls.

Interviewer (43:24)

Clay Shirky studies the effect of social media on politics at New York University.

David Westin (43:29)

In revolution after revolution, there has been some sudden change in perception of how the wealthy are living in Nepal. It was around this idea of Nepo babies, right? It was the idea that the children of the rich were not suffering the way the rest of Gen Z was.

Interviewer (43:46)

Something had changed about the way Nepal's youth saw their country and the lives of its wealthiest citizens. It was not just the inequality that felt wrong, but the inequality of opportunity, the idea that those at the bottom would never have the chance to rise up and those at the top might not deserve to be there at all. As the online furor grew, the government made a dramatic decision and Nepal has

Prashamsa Subedi (44:10)

cracked down on a number of social media platforms including Facebook, YouTube, Instagram, X.

David Westin (44:16)

I was first of all utterly hopeless and helpless.

Interviewer (44:22)

18 year old Shaswat Lamican was one of the many Gen zers who was angry about the social media ban.

Kathleen Griffith (44:29)

Talked with some activist friends, figured out what we could do and we concluded that doing a protest will be the

David Westin (44:36)

best way to do it.

Interviewer (44:37)

Lamican says he expected 200 protesters to show up. But across the country, others like him were putting out the same call to friends and influencers.

David Westin (44:47)

The collective action problem is if One person goes to the government and is protesting out front, they are completely helpless. But if 1,000 people do, they have to pay attention. And if 10,000 people do, they're overwhelmed.

Interviewer (45:00)

Tell us what happened on September 8th when you woke up in the morning.

Kathleen Griffith (45:04)

I didn't sleep that day.

Prashamsa Subedi (45:08)

We all plan to wear school dresses so that police could not even like beat us because it's illegal to beat school children. And we were 100 meters away from parliament where we were sitting and we got the sense of tear gas.

Interviewer (45:26)

In an instant, everything changed.

Prashamsa Subedi (45:28)

That is when I got the news of a person being killed. We didn't think it would go that far, but there was a news of a person being targeted. I was just scrolling through the news. I could not work, I could not do anything. I was just scrolling through the one scroll, one, one death. One scroll, one death. After the news that one person is shot and he's dead. I felt so guilty because he might have come watching my videos. So maybe I am responsible for his death.

Kathleen Griffith (45:56)

Police firing acrosaurus at children.

Stephen Ratner (46:00)

Children dying.

Interviewer (46:02)

News of the violence traveled quickly and then escalation.

Prashamsa Subedi (46:08)

The very clip that I would say that ignited the fire in the people was a 17 year old getting shot on his head.

Kathleen Griffith (46:18)

Our palaces were burnt, our banks were looted.

Interviewer (46:22)

By the end of the violence, over 70 people had died, 2,000 injured. On September 9, one day after the poor protests began, many of Nepal's top leaders resigned, including the Prime Minister himself.

Prashamsa Subedi (46:36)

We never imagined this situation. It was like nobody told us we would be a country without a government.

Interviewer (46:43)

But then an unexpected phone call in the middle of the night.

Stephen Ratner (46:47)

The army invited us to sit down with them at the army headquarters to

Kathleen Griffith (46:53)

talk on what to do next, what the future of the country should look like.

Interviewer (46:58)

Subaidi also got the army's call along with a handful of others. The ask, you helped start this, now come fix it. Lamachan, who had started a chat room to organize the protests, helped create another, this time to pick a new leader. The name they chose, Sushila Karki, a retired Supreme Court justice known for fighting corruption and supporting women's rights. Subedi, the law student got her phone number.

Prashamsa Subedi (47:25)

She was asking if we were okay and everything. And we asked her to step up. And then she said, if you guys are trusting on me, then I will have to step up because it's not about me anymore. It's about the country.

Interviewer (47:38)

For Subaydi and others, a look over the palace wall made them angry, but then also hopeful for a better future. Hopefully to take action and now hopeful that their action will be worth the sacrifice.

David Westin (47:56)

On March 5, Nepal's citizens took the next step toward delivering on the changes they sought last September, going to the polls to elect a new prime minister. We spoke with Thomas Carruthers, Chair for Democracy Studies at the Carnegie Endowment for International Peace, and a leading scholar on democracy and and governance globally. He finds the results dramatic.

Ben Walter (48:18)

The March 5 election in Nepal looks like a pivotal moment in Nepalese political history. After the huge demonstrations of last September which pushed for really dramatic political change, voters have delivered that change. Coming to power as prime minister, bringing with him the RSP party is Balendra Shah, in his mid-30s. He's the former mayor of Kathmandu. The news makes a lot of him as an ex rapper, but let's not forget the fact that he's been mayor of the capital city for almost four years. He comes in, interestingly as a centrist. RSP is a centrist party, but comes in with a mandate for sweeping reforms. Nepalese voters are highly dissatisfied, angry. They want change.

David Westin (49:02)

So what do we know about his policies from his time as mayor or what he has campaigned on in this election?

Ben Walter (49:08)

I think we could call him at least he tries to be a sort of technocratic activist, if you will. An activist who tries to focus on good governance, transparency, kind of basic governance reforms. He's not coming for change from the left or from the right, but really from the middle out, which is, I think, appealing to the many youth who protested last fall, who represent a kind of non ideological movements, a sort of post ideological movement which is characteristic of so many of the Gen Z protests that we've seen in the last year.

David Westin (49:39)

The story in Nepal has caught a lot of attention around the world with the social media phenomenon and then the uprising that came after that. From what you understand of Nepal, might that have similar effects in other countries?

Ben Walter (49:52)

Over the last 12 months, we've seen a wave of what quickly got to be named Gen Z protest. We've seen them in Africa, in Kenya and Madagascar. Seen them in other parts of Asia like Indonesia or the Philippines. Seen them in the Middle east with Morocco, seen them in South America, with Peru. All these protests have a couple of things in common. Dominated by young people, often kind of leaderless in their form, rather spontaneous, somewhat non ideological, very delivery oriented. Here's what we want. And nonviolent for the most part. So these protests have certain common characteristics and they have the same kind of drivers. Corruption is just a big issue among young people in all of these regions, all of these countries. Corruption is A big thing. Economic grievances are important. And again, that general sense of underrepresentation. And this is, of course, the issue with so many struggling democracies around the world. So citizens losing their patience, wanting to see that, you know, having political and civil rights also brings them some benefit to their everyday life. It's not just in the developing world. I think people feel it in many, quote, wealthy, established democracies as well.

David Westin (51:02)

All of this happens the backdrop of the war in Iran right now, a very, very different country where Nepal is very, very small. Iran is very, very large. It's something like 90 million people, the size of much of Western Europe. We had seen some uprisings, civil uprisings in Iran, before this war happened. What do you think the effects may be on the young people of Iran and what we're seeing right now?

Ben Walter (51:25)

Well, the young people of Iran stood up incredibly bravely in December and January and were massacred by the thousands by just really an amount of violence we have not seen against protesters anywhere in the world in the last 10 or 20 years.

Kathleen Griffith (51:39)

Years.

Ben Walter (51:40)

Inevitably, Iran is driven by its own political dynamics. But I think many young people in Iran were inspired somewhat by this wave of what I described as Gen Z protests around the world. So maybe not Nepal specifically, but it was one part of a larger wave which I think many young people in Iran feel they would like to be part of and would like to see the ability to have a voice to bring to power someone who listens to them and tries to respond to their needs and interests.

David Westin (52:10)

That does it for us here at Wall Street Week. I'm David Westin. See you next week for more stories of capitalism.