Interest rates today are not 'ridiculously high', says THL Partners' Scott Sperling

Joining us now is Scott Sperling, Co CEO of THL Partners and good to see you as always. I I kind of get the feeling this is going to be like Druckenmiller 2 point O. Did you see Stan? I did, I actually. Were you nodding a lot? You know, I think the concerns that he expressed are reasonable concerns that we all need to be thinking about. And the scarier part of it is obviously the long term set of issues that we’re dealing with. And I think how that affects particularly your thoughts about sustainable interest rate levels has has a big impact on all of us as investors. You bring up some of the some of the same things and I’m just you can explain it after I just mentioned a couple of things, sticky inflation, big bond issuances which can affect interest rates, it’s it’s supply and demand too. So there’s a lot of reason why reasons why rates probably shouldn’t come down, what the feds talking about. You know, first let’s put in perspective, the rates today are not ridiculously high. The rates today in terms of a long term picture are not unreasonable and people can do business and there’s lots of financing for private equity available and it all makes sense. It has to do with how does that impact your entry price and what’s the right assumption about exit multiple when you’re buying the business. So for us it’s buying the whole business and looking at it for the stock market, it’s what do you think the multiples should be on a sustainable basis longer term for a given stream of of cash flows. So we may be optimistic about certain earnings streams, but it will be impacted by the value will obviously be impacted by what you think the longer term rate situation is. I think the one of the big fears is as you look at that supply and demand, you look at the fact that we will be approaching 130, then 150 and 190% of GDP on the current path that we’re on over the course of the next two decades. That’s a lot of treasuries that need to be financed and where’s that money coming from right now? Japan, which had been one of the biggest buyers of Treasuries, the way the exchange rates are working, it makes it more difficult for them to be an active participant. The issues with China are we’re all well aware of and there’s no solution that we’re looking at longer term. And then if you look at the Fed, can the Fed continue to effectively ease through being an aggressive purchaser? That’s a open question. So you know that that that’s one of a series of of things to be concerned about in the context near term of the economy is probably better than many of us thought it might be at this point, but not as good as what people think. But probably when you, you know it’s again the skin deep thing when you dig down a little bit below, you have to be concerned with some of the credit ratios that you’re seeing out there, the amount of pressure on consumers, the aggregate or cumulative effect of very significant inflation over time. And then from a business perspective, we’re in a very difficult regulatory environment that some things may be good, some things may not be good in other contexts, but it all adds cost. We’re in the midst of energy transition and that may be a good thing longer term, but let’s not underestimate the very significant cost it has. And then on the labor side, there are shortages of of very key skilled employees. So it may be that you’re looking at a overall unemployment rate that that may go up a bit and you think that’s easing. But in so many key industries, take healthcare, the lack of technicians, the, the people who provide a lot of the more skilled services, I mean that’s a big issue and that leads to significant inflation in an industry that does not have offsetting revenue increases. So you’ve got to manage that. So there are a lot, there are a lot of a lot of pressures once that one thing that makes me want to you know have a good weekend, OK, well good weekend. If you want to take the other view of it is you know the market is has migrated over the course of a decade to Better Business models, more recurring revenue models arguably in many cases lower capital intensity. Although if you look at one of the the the better opportunities in semiconductors that’s obviously a very capital intense, incredibly capital intense business. But the nature of the of the demand there is something that will continue to grow. So there are areas, there are pockets I think that are that. But overall Scott, I think corporate cost structures are going to be higher and and maybe the economy is going to be not as good as people. We have to continue to be aggressive in how we manage those cost structures in light of things that you can’t fully control. So I think wage inflation will continue to be well above the 2% overall inflation target range that you know there. The election could have an impact in terms of the NLRB make up but you know we’ve been in a very aggressive environment for that. But again there are other there are other forces at work there any cuts this year when do we get to 2% inflation when do we get to 2%. I’m not that’s what scares me. I don’t I don’t think we’re getting to a sustainable 2%. We may till when we may go down ever they got to move the goal posts. Yeah, it’s hard. Again, when you think about other societal needs or or or wants again energy transition, the the ability to provide people with so-called living wage better wages, those are really strong forces that work to counter other elements of productivity that might drive us towards. I didn’t even AI that might be increased productivity that’s going to be expensive and energy intensive and everything else. I mean if you look at the investment in servers, data centers, energy, you know, nobody as we move towards more electric everything, right. Nobody has yet explained how we’re going to get that capacity and how we’re going to pay for that capacity. And I think if ideologically we also have a, it has to be this and it can’t be everything. So there are people who don’t like nuclear or people who basically say natural gas is is not really cut off the fuel and we might have to continue to spend some money on defense. Well, you know, the IT is clear we’re in a world that is dramatically different than we imagined. Yeah, 20 years ago when we decided that, you know, we should cut defense spending and breakdown a lot of the production capacity of our defense industry. All right. It’s still, you know, aren’t you happy to be a crappy weekend? Crappy weekend, Scott, thanks to you. No, it to all good points and very similar to what we heard earlier this week.