Soft US Jobs, Swedish Defense Spending, Private Credit Woes

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1:45Steven Rattner:Radio. News.

2:00This is Wall Street Week. I'm David Weston 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 U.S. 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.

2:47Let's talk about the U.S. 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? 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, we still have had, so far anyway, very strong GDP growth.

3:21So that is, in some ways, an even more important indicator. But yeah, it's definitely of concern. As you say, GDP is growing from the numbers we've seen so far for 2.5%, 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? 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?

3:57There 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 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 really what's mostly driving this. 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.

4:29So is it possible the tariffs are actually helping on the productivity, ironically? Helping on the productivity and 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. 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. No.

4:59In 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 healthcare 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 our society gets older and we need more and more healthcare. 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.

5:35How 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? 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, see, see, we've 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.

6:05You have the number of job openings going down. You have the number of 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. You mentioned AI. Does AI factor in at all yet? 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.

6:38I 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 in the financial services world as many new entrants 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. As an investor, how do you take into account the labor market? How does it affect how you position your portfolio?

7:12I don't think the labor market per se 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 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.

7:48And so it becomes fairly perilous to work your way around the stock market under that circumstance. Stagflation is a thing that all economists say we have to avoid. That's really dangerous for us. What can we do at this point? I mean, the government or private industry, what can we do to really avoid the risk of stagflation? 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.

8:24But in the short run, you sometimes get in this box that we may be heading toward. 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 do they address this situation where we do have growth, we may have a softening labor market, and there's concern about basically inflation at the same time that we have slowing growth? 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 necessarily do both things at the same time.

8:55There's a Fed meeting in the middle of March. The anticipation of further rate cuts this year has already dropped a bit, 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 done. But that's the range of possibilities. There's some nervousness in the market these days about private credit, which sort of is an adjunct to the AI investment that we have.

9:36Is it a real problem as you look out at the credit markets? Do you think there's a real issue there? 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 blasé about it, but it happens at every cycle. So I don't worry too much about private credit.

10:09But there's going to be pain, but the system is not as leveraged and not as badly engineered as it was in 2007, 2008. You've got investments that don't get marked to market every single day. Oh, yeah. 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? 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.

10:43And 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. 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 U.S. Treasuries, it's interesting what's happened, actually. The Treasury sold off to some extent. People went to the dollar. Are the nature of safe havens changing?

11:20That'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 Treasury should sell off in this set of circumstances. But look, 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.

12:00It's been pretty stable, all things considered. So it's something people have been puzzling over, which is why, on the one hand, people have been going to these things like gold. But on the other hand, they still appear to be very much invested in stocks. 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.

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13:34This 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.

14:12When you think of Sweden, you might picture snow-covered streets, minimalist design, maybe even IKEA or ABBA. 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. I think if I look at our company, we have probably four to five folded output from before the war started.

14:54So lots is happening, and I think we are underestimating the capacity of the European defense industry. For a country of 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 Ryan Mattel 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.

15:37We were paying for almost all of NATO. Now they're paying five as opposed to not paying two. It's a wake-up call. The European people know that we will have to stand our own feet, be more independent. Anders Föhr-Rasmussen is the former NATO Secretary General and Prime Minister of Denmark. For too long, we have relied on a combination of cheap energy from Russia, cheap goods from China, and cheap security from the United States. That model doesn't work any longer. Now we have to stand on our own feet. We need to shift gear. We will need to make Europe a defense superpower. But not every country is willing or able, according to economist Jacob Kierkegaard, a senior fellow at Brussels-based think tank Bruegel.

16:31Steven Rattner:I know we say that, oh, 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 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, well, they're rearming.

17:17Steven Rattner:But those that have 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. Defense 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.

18:04And that continuity matters. There's a, I would say, dramatic ramp up into spending right now. But there were years where there was not as much attention or investment in Europe in defense. How did Saab maintain its investments? 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 a stock exchange company, publicly listed, we have a strong owner in the Wallenberg family. and they have always been long term and also very loyal to sort of the deterrence and defense 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.

18:58And 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 &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, not only looking at relying upon governments all the time to keep our operations efficient and state of the art. 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.

19:42How has that affected Saab's business at all, Sweden's being in NATO now? For the company, I would say all of a sudden we are involved in the common acquisitions that NATO is doing now and then from the acquisition authority within NATO and its PA. 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 from that organization.

20:27We understand what we can be offering going forward. We work better with the Alliance Capability Transformation organizations. This is a big shift. And of course Because it comes down to now we are 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. Expanded access to NATO markets brings opportunity. But it also brings pressure to scale production, invest in research and carefully manage capital. 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 &D, but still we have a strong solid balance sheet.

21:24And 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. 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. It's been a big change on that side. I remember in January 22, shortly before this tragic war broke out, we had lots of discussions in Brussels about what we call the taxonomy and if this was a sustainable business, which was crazy in the way I see it.

22:16because 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 defense industries to create that strong defense. But that was a strange discussion about this type of business were not sort of sustainable and investors wouldn't get an eco-label stamp on their funds if they invested in defense. 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.

23:05So it's been a big change in the perception. 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 Svantesen.

23:20Steven Rattner:It is definitely a boost in the economy. We have 6 % this year of GDP in different public investments. I think we are in the top in the EU. And of course, defence spending is one of the big investments. And we have this defence industry. It's strong. So that's important. And what I think a lot about is how could we do that? I mean, this will change the labour market, the economy. How can we have the synergy effects? And how can this... This will affect the labour market, the economy. How can we do it in the best way? Innovation, you know, technique, development and so on. I mean, we are raising double defence spending just now, and there will be more.

24:07Steven Rattner:That in itself is helping. because much of what will be produced will be produced in Sweden or in Europe, of course. So we're helping that way. But not all European financial institutions are as supportive of the move into defense spending, especially when it comes to multilateral lenders like the European Investment Bank. 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're four years into this war, and the direct funding, for instance, from the EIB and other multilateral lenders to European defense is very limited.

25:01Steven Rattner: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 venture capital funding in the sector as well, But it has been largely despite the traditional pillars of the European financial system in the large banks, in the pension funds, and in the policy lending institutions of the European Union.