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00:00It does feel like this bizarro world where on one hand we're talking about the Fed cutting
00:04and continuing to cut, labor market weakness and equity prices at all-time highs and spreads
00:10at all-time tights. Is there some real tension in that? I think, look, the tension is on the
00:16inflation front, right? The Fed's already told you they're going to miss their mandate for
00:19seven years in a row. Probably very few of your viewers have invested in a period like that.
00:25The offset of that is there's not a lot of supply in the market and the S&P is being
00:30bought back a trillion, trillion and a half. And we see a lot of annuity buyers coming in,
00:34keeping credit spreads tight. The other thing is, I think this is a lot like the 1990s where
00:39we were getting a productivity boom. And so when you look at the S&P kind of revenue per
00:43employee, it's breaking out. It's breaking out to the upside. The market is picking up
00:48on that. I'd say today, I think the U.S. is in market will continue to perform. We're
00:53probably most excited about on the margin what's happening in Asia. There's a ton of corporate
00:57reform taking place in Japan. That's been our second most active market. Korea, cheap
01:03market. They're trying to follow the Japan playbook. And even China, I go there all the
01:08time. There are things that are starting to signal that Xi maybe appreciates this intersection
01:13between national security and economics and the stock market's doing a little bit better.
01:17So as the dollar weakens, I still think the U.S. is the market that you want to be in. But on the
01:22margin, I'd be taking a little bit more out and going internationally, particularly around those
01:27three markets I highlighted in Asia. We're going to talk about Asia and trade in a moment. We're
01:32going to bring in our reporter in Asia with President Trump. But I want to focus in on the 1990s
01:40comparison. We had Paul Tudor Jones on here earlier this month, and he made the same comparison
01:46saying, you know, October of 1999 is a lot like October of 2025. And of course, the Nasdaq still
01:53had a long way to run at that point, right? Still doubled into March of 2000. Do you think we're in
01:58that same kind of bubblicious environment? I think it's earlier stage. When you look right now,
02:04the CapEx and the R&D around AI is about 5% of GDP. Typically, it usually gets around 7 or 8% of GDP
02:12when you have a real bubble. So I don't think we're quite there yet. I think you'll hear from all
02:17the earnings today. The companies have to spend on this. Ultimately, over time, I think the value is
02:22going to shift from the enablers of AI, which is utilities, industrials and tech right now to the
02:28applications of AI. And that probably will be more broad based. That's exactly what we saw during the 1990s.
02:33But very similar in 94, you had a bond market upheaval. That was 2022. People moved to the sidelines.
02:42Everybody's been calling for a recession the whole time. We've had terrible manufacturing data. But the
02:47services economy is doing well. And a little bit on the manufacturing side right now, it's like it's hard to hurt
02:51yourself falling out of the basement window. I mean, we're already at pretty low levels. You know, we have a pretty
02:57interesting window. We have 150 to 200 companies. We continue to power forward. I would say some of
03:03the hiring is moderating. The government data, when it does come back, will look a lot worse
03:09because ultimately, Doge will take the government jobs down. And that's somewhere between a third and
03:15a half of jobs. I think people haven't focused on that. So the headline data may look worse than what
03:20we're seeing in the KKR or the weekly jobless claims or what you see in ADP, which are all
03:26reliable, reliable sources. I know in September, you had written that had it not been for some of
03:32the supply issues with labor, we would have been looking at an unemployment rate that looks something
03:36like 5%. And it does feel like every day there's a new headline like X company is letting go of
03:41workers. Scott Kleiman told Matt and I yesterday that the question being grappled with right now is to
03:46what degree AI is responsible for some of those replacements, especially when you look at KKR
03:50portfolio companies. Is there a real trend of that happening?
03:54So let's start with the public data. Remember, the single biggest driver has been healthcare and
03:57education. It's been about 100% of job growth over the last 12 to 18 months. So when you get the big
04:03headline number, you really have to dissect it. And what you see is that sector has been the main
04:08driver. You are also, you are, to your point, you are starting to see joblessness in the college
04:16grads. They're having a harder time getting jobs. And then the government is what I said. What's
04:21happening, though, in the headline level, though, remember, it's not just demand slowing. The point
04:25you're making is an excellent one, which is what we were flagging, is the supply is slowing. So it affects the
04:30denominator, which makes the unemployment rate, if you adjust for that, actually closer to five. And so if I'm a Fed
04:35governor right now, I've been trying to have the swivel between inflation and employment. And I, until
04:41recently, was much, would have been much more focused on inflation. What I think we've been
04:47signaling, you know, on our cuts and our forecast is that they need to shift to employment. I think
04:52the absolute level of rates in the U.S. is too high for the economy right now. You see this in the low
04:58to middle income spending. You see this in leveraged structures. And ultimately, you see those in housing.
05:03Those are all critical variables to the economy. So I think the Fed needs to cut. I also think they need
05:09to signal that they're going to stop QT. And we'll probably do that at a level that's a lot higher
05:15than what we've seen in the past. But I do think the inflation story is going to be, you know, this
05:21higher resting heart rate for inflation in this cycle. You guys have been reporting on this. I think
05:25you've been spot on, which is this time it's different, right? We've been talking about this regime
05:29change at KKR, where you have bigger deficits, more geopolitics, messy energy transition and stickier
05:36services inflation. That's why I think even though they lower rates, they don't go back to the lower
05:40bound that all the reporting you've been doing for years that you can kind of throw that playbook out.
05:46And why is KKR doing more in infrastructure? Why are we doing more in corporate carve outs? Why are we
05:50doing more in asset based finance? Those are all products that should excel in a world where you have
05:56higher nominal GDP and higher inflation. And I think the Fed is going to be forced to cut into that
06:01a bit, not as much as the, you know, the bulls think, but they're going to have to continue to
06:06bring the absolute level of rates down. It's not about financial conditions. They're pretty easy
06:11right now. Right. They are. I mean, I look at F Congo on the Bloomberg terminal all the time
06:15and they look pretty easy. My question is, you know, lowering rates will help maybe someone buy a
06:22house or maybe help someone buy a car. And Lord knows they need the help because the prices are so high.
06:28Yeah. But will it bring jobs back if AI is replacing those jobs? I look, I think there's a I mean,
06:35there are a couple of questions in there. One is we can't celebrate rates being cut because when they
06:40went as much as we did in the past, the the beta to rates was much higher. Right. Because remember,
06:45when they've raised rates, most consumers had turned out. So on the way down, it's not like it's
06:50going to change overnight that you get just the benefit, none of the pain. So I think that the easing of
06:55rates will probably affect 26 and in 27 on the AI stuff. I have a little bit of a different view,
07:01which is I don't think it's going to this. This is what people said in the 1990s with the Internet is
07:06going to disintermediate all these jobs. I do think certain industries are going to be under a lot of
07:11pressure. But at an aggregate right now, we need workers in the U.S. And one of the key themes I go all
07:17around the world traveling, going to kick errors, offices, meeting with companies. The demand for skilled talent
07:22right now is at an all time high. And so what are the big themes, investment themes that come out of
07:27that worker retraining? We've been doing a lot around that from investment employee ownership.
07:31We're doing a lot around that productivity enhancements. There's a lot. I mean, you can
07:35come in every day and say the glass is half empty. I think we've been saying they're writing and is it
07:40the glass has been half full because there are lots of areas that serve as foils to all of the madness
07:45that you guys have to report. Just quickly, though, if it is the 1990s and the ramp up, couldn't a glass half
07:51empty be that there is another side to this, that we go too far. And if it's an economy becoming more
07:55dependent on AI, then the downside looks ugly. So we're going to get there because typically what
08:01happens is capital overspends. I would just caution that when you look at the just the CapEx and AI in
08:08the first half of the year, it was greater than all the growth in personal consumption. That's a huge
08:13number. So these things tend to play out, but they take years, not months. And so I would just I would
08:20caution on trying to call the top in the fourth quarter of this year. Ultimately, though, what
08:25will happen is returns get diminished because capital comes in and competition increases. And
08:30that's the law of the jungle in terms of financial services. And that's probably what's going to
08:34happen. But I don't think that's today. So what should we be doing for our LPs and that we invest
08:40on behalf of is we should be high grading who our counterparts are, finding the companies that really
08:46have real cash flow. Don't speculate. Don't adopt the thesis of if they if you build it, they'll
08:51come. That's what happened in 2000 and happened in 2001. What KKR is and we were talking about this
08:59before the show, we're doing a lot of structured deals right now where we're getting guaranteed cash
09:05flows. And that's the way you mitigate some of the downside. So I can't speak to the overall
09:09industry. There's a ton of capital coming in. I would also say this whole notion of the private
09:14markets are becoming more like the public markets. Linear deployment, diversification, correlation,
09:19all those portfolio tools that have been in the public markets for 20 years. You know, when I joined
09:24KKR in 2011, our portfolio managers really started to implement that. And I think it's kept us in out
09:29of harm's way. And I think that's where the industry is going. I was reading your thoughts from the road
09:34and you were in Japan and China. What are your takeaways from the news we have today? And how does that
09:41dovetail with your experience in Asia? Look, I think the Asian markets are going to perform weaker
09:45dollar. I think the news that was just reported is what we hear on the ground. Everybody I met with
09:50in China said there's going to be a deal. So I think I think tariffs come down 20 or 30 percent. I think
09:56the two entities, particularly President Trump and Scott Bessent, want to get a bigger deal done. And then you
10:03have the hawks, both Republicans and Democrats, under them. I think they'll probably have the potential to do a little
10:09bit more because I think the two entities need each other. We need rare earths and ultimately they
10:14need to to boost their technology infrastructure. And so I think they're going to try to find a way
10:20to to to meet in the middle. I don't think it's going to be perfect and will be tension and will
10:24clearly have left the decades that I used to go there where China was going to consume or China
10:30exported. This is a very different China that we see right now. They're huge in industrial automation.
10:35They're huge in digitalization and they're really big in the green economy. I think they're going to
10:39continue to export that and that'll create a little bit of a deflationary impact on the world. But even
10:44with that said, I think these two entities at the top level want to try to get something done. And I think
10:49the markets both in the U.S. and in China have have been responding to that. Japan, on the other hand, that
10:56continues to be our go to market. Big corporate carve out market going back to Abenomics. They wanted to make that
11:02better. We've turned over a lot of prime ministers recently. But the corporate reform story is alive
11:09and kicking. And it's it's an incredibly powerful story. Cheap financing, negative real rates. People
11:15need to invest. And the corporations want help making their businesses better. So that's a good
11:21backdrop. It's a great backdrop for what we do. And I know KKR has been very active there. Henry,
11:25I have in my mind a chart that you put out earlier this year and it looked at a bunch of different asset
11:30classes, be it private capital, cash or the global ag. And if the spread was like this in years past,
11:35the chart you had is here's where we are going forward. Everything is going to start to compress.
11:40Does that suggest it's just an environment where one, we should expect lower returns and two,
11:45alpha is just harder to come by? I would. Well, one, I agree when I disagree on the lower returns.
11:52I would agree with you, Danny, that I think that you're starting with higher multiples,
11:55rates are lower and margins are high so that by mathematically your expected returns go down.
12:01I actually think the alpha opportunity is higher. You're starting to see this in hedge funds.
12:04They're starting to perform again. Macro managers are doing well. And what we're doing is the bread
12:09and butter of what KKR does. Many more corporate carve outs. So if that's not what you do well,
12:15that's going to be an issue. Public to private. There's a lot of stocks that have been left behind.
12:19You spend a lot of time reporting on the stars. What's happened is a lot of companies have not
12:25performed. They want to go private, be out of the limelight, and they want to use that capital.
12:30They want to use KKR as a partner to grow. Or you're seeing what you reported on with Harley
12:36Davidson or what we talked about just recently with Dr. Pepper, where these companies are splitting up
12:42and they want to have a better corporate footprint. This whole idea of going from capital heavy,
12:47lower multiple to capital light or some type of accelerating growth. When you divide the S&P
12:53into its returns, the companies that are growing faster with a higher return on capital are getting
12:58the bigger multiples. And CEOs are waking up to that. And they're coming and partnering with us
13:03and they're repositioning their footprint. So I think corporate M&A is going to pick up. I don't
13:08think it's going to go back to the boom times. But I think the corporate repositioning story,
13:12we're already in one of the strongest bull markets that I've seen in my 35 years doing this.
13:16I want to ask the difference between the Middle East and Asia, because you've been to both regions
13:22a couple of times already this year. And when I do a story on PE and doing a corporate carve out,
13:29they always seem to have a Middle Eastern partner lately. And that's different from what we saw in
13:33China and Japan, right? So what's it like in Saudi and the UAE? What's the opportunity?
13:39So I would say that that region, and there's obviously a big conference going on there right now,
13:44I would say that that region is going from being just an area where people raise money to one
13:49where people are investing in that region. You've seen that with the appointment of General Petraeus
13:54at KKR. We put almost $2 billion to work in the Middle East around fertility, aircraft leasing,
14:03as well as pipelines. So that area is starting to grow. The third point is what you talked about,
14:09which is Middle East entities are starting to invest and become part of the private equity mix.
14:15And you saw that with with EA. I think there's going to be more of that. So I think that there's
14:20a leveling of the global competitive landscape. And it's about, again, how do you create operational
14:25improvement? How do you think about the strategic industries that you want to be in? Clearly Saudi
14:30thinks that that EA is a strategic asset. And so I think you're going to see movement around in terms
14:37of where capital goes, not just fundraising, going to the Middle East and being handed off,
14:41but ultimately partnerships between US firms, Middle East firms, other types of things like that,
14:46where people invest in that region. They need expertise in the region. They need capital in the
14:51region, but they also want to take some of their capital abroad. And that's really what we picked up on
14:55the ground.
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