It's been a week maybe a month of hearing all the bad things.
Everywhere you turn and it's inflation and it's the Fed and it's Ukraine it's China it's inflation. How bad is it. Well they S&P
500 as of right now is down more or less 20 percent. And that's The definition of a true correction. And so I would say it's
been pretty severe. I think the big question is how much worse can it get.
And no one knows the answer to that. And I certainly don't. But It certainly could get worse before it gets better. And you know
historically when you see such a profound change in monetary Policy which as we're having now are in the beginning stages of
now. Historically it's been at least over the Short term after the change starts bad for equity values. It's
really been the case very often. So it's not surprising that Stocks are down now that the Fed has ended this relatively long
period of almost free money And is headed up
on a substantial substantial upward trajectory in terms of Tightening.
It's not surprising stocks are down. But I think as you just Said it coincides with a lot of other negative news. Most
basically inflation but also some of the other points you make About Ukraine and so forth. And so it could get worse. Do I
think we're On the verge of a financial crisis. I don't. I don't. I just
think it's a Sharp correction in equity values which when you step back and
think about them in so many cases especially tech were hard to Hard to rationalize before this change. I mean there was some
astronomical values as you well know and it's not surprising That they're finally wrapped up being rectified. So you're
talking about the equity markets. We've talked with the bond Markets as well which has really taken it on the chin. What is
the relations between those financial markets on one hand. If I Can put it this way the real world because a lot of your work at
Evercore is dealing with real companies who are buying and Selling companies or pieces of companies. Does it directly
translate into the value of those assets or is it somewhat Removed. It does directly translate in two ways.
The stock market is a Pretty reliable predictor of the broad economy albeit
nine months or so in advance of the real economy is changing. So Right now there's that big debate as to whether we may have a
recession in 2023 and. I think that's about 50/50 myself but
we're good we're slowing down even right now. And and the market Is in effect telling us that in terms of our own business. So
yes it has a big effect because when the volatility is so high And the VIX this morning was thirty two and a half I think
before the day started. People hesitate. They want to step back and wait for the smoke
to clear in the environment to settle and so transactions slow Down. There's no doubt about it.
And you can see that by the way in the valuations of all the Investment banks which have come down a lot for a variety of
reasons but one of them is an anticipated slowdown in Transaction volume. But it's interesting people start to sit on
their hands if like that where they're afraid to make a move and That trumps what otherwise might be an instinct. You know there
are some bargains now. So prices are coming down. The price tax Is lower. It might cause some CEOs to say now's the time to
move. Well and in fact just before I just got my way over here I Was on the phone with some of my colleagues before having a call
tonight with a very very well-known company that we work with Closely. That's a technology company a very big one. And a lot
of the smaller companies they've been interested in buying in Recent years have just been too expensive. These are tiny
companies but they're smaller than this guy. And
We were just observing to ourselves that the valuations have
changed so much in the past few weeks that some of these Companies they've long studied are now possibly at a level they
could buy. So you're right this environment does create Opportunities but people tend to want to see the smoke to clear
or the or there are stability to return before they act. Does it Also change the nature of some companies. People would be
interested acquiring in this sense. You refer to the tech sector Before. A lot of people say what's going on in tech is basically
people who are betting on the come as it were its future Earnings. And now it's not they're not as sure. And also as the
discount rate goes up they're not worth quite as much. Does it Make more of a premium on companies that are more sort of steady
as you go throw off real cash. Year in year out. Does the Temperament change. I think the answer is yes.
And to give you a little metric maybe to support that In so many areas of technology the relevant multiple over the
last three or four years has been the multiple of revenue and so Many companies trading at very very high multiples of revenue.
I met with a company this morning. Which is private but its main comparable is public and the
comparable had been trading I think twelve or 14 times revenue Until very recently. It was a pretty crazy multiples.
Yes there are examples of transformational technology where Occasionally something like that is justified. But that was
pretty widespread and it's changing now. And it was a piece in The New York Times this morning about how unicorns have come
down to earth. And there are so many of that so many cases of That.
But the answer is yes. You said that the stock market is a Pretty reliable indicator of potential slowdown in the economy
overall. For the other way around when the market begins to rise Before the economy does it can go either way. Right now the
market is projecting a slowdown. But we've also seen plenty of Examples where the economy's in bad shape. The market goes up
and the market is telling you that nine months or twelve months From now the economy is going to be better and the Federal
Reserve might well applaud something of a slowdown. I mean They've got to get inflation. What they're seeking said that's
their priority. They're seeking it. And they're they're trying To avoid the so-called hard landing which is a recession. But
they're certainly seeking a slowdown in the economy because most Recent inflation number eight and a half percent that's pretty
high. And so that release the question about the soft versus Hard landing slowdown is one thing recessions another. As you
look out what are your expectations about a possible recession Or maybe as important as you talk to CEOs you talk to companies
do they have that possibly in mind as they think about possible Acquisitions or not. Well very first of all very few that I
would be talking to are yet experiencing a serious slowdown in Their own businesses. This is all
a question of where will we be in six months or so or later. And I think the big debate in the market is mostly about 2023.
Will we see a recession next year. What would cause a recession. It'd be a combination of consumers pulling back because right
now every single American worker including you and me are seeing Our real incomes fall because inflation is running well above
the rate of increase in wages although the rate of increase in Wages by a circle standards is pretty good running at about 5
percent but inflation is running at 8 to 9 percent. So every Single American worker is going backwards right this minute. You
do that long enough. A few months for example and people start To get
conservative and they start to pull back. That would be one factor. And
the second factor would be just the impact of higher interest Rates. So mortgage rates as you know are up about 250 basis
points from their level of full five months ago. That's a lot.
And that's going to impact the mortgage market and the housing
markets. I don't think it's enough to bring them to a halt. But We've all seen it. We've been seeing a very hot housing market
in this country both starts and secondary sales. And I think That level of increase in mortgage rates is probably more to
come on that is going to slow down that market. So combination Of interest rates what I call consumer psychology is it plays
into consumer spending and maybe business. Also just a lot of The volatility pulling back a little bit on investment. Those
three factors are the what could cause a recession. Finally Roger you've been a leader not just on Wall Street but also in
Washington. Is there anything that President Biden can do about This at this point.
Well you notice that the last couple of days really he's changed His tone on this issue.
Two days ago he said this is now my top domestic priority which Is change of tone.
And then yesterday I noticed on his trip he was standing in Front of a big background which said
prices down inflation control. So they've changed their their Priorities or at least the way they state them. Actually I think
that's quite good. And it's not trivial because you want the American public to think that you wake up in the morning with
inflation on your mind and you go to sleep with that on your Mind. And every single thing you can do you're going to do.
