Delivering Alpha live updates: ‘More things will break’ in stock market, economy, top investors say

Even with the recent decline in stocks, the market has been resilient this year, but two top investing officials say investors should not be complacent when looking at U.S. stock market returns year-to-date. Things are likely to get worse before they get better, and with cash in the bank able to earn 5%, aggressively betting on stocks in the short-term is a mistake.

“We’re more bearish than most people about what lies ahead,” said Katie Koch, TCW President & CEO. “Things break when you reprice aggressively,” she said.

With the Fed raising rates from zero to above 5%, the lag effects of monetary policy on the economy haven’t fully hit yet and the longer it takes for them to hit, the more things that will break, Koch said.

“You’re getting paid to be patient right now,” Koch said. “Cash has a good return.”

She said TCW is defensively positioned in high quality investment grade and securitized fixed income, including agency MBS, as well as cash and treasuries. “These things are all paying so it pays to be patient and wait to see higher rates work through the system.”

“We haven’t seen the full pain of higher rates,” she said.

Dawn Fitzpatrick, Soros Fund Management CEO & chief investment officer, noted that the hundreds of billions that banks are holding in to-maturity bond portfolios are still holding a lot of pain under the surface that’s being exacerbated by the recent spike in bond rates.

Meanwhile, U.S. consumers have $2 trillion in mortgages that are fixed rate and that means the pain of the interest rate rise isn’t felt as acutely, in real-time, in the U.S. as it is in other markets, where more mortgages are floating rate.

“Everything gets harder from here,” she said.

— Eric Rosenbaum

With yields of 6% available in the bond market, stocks have to do a lot to deliver on a risk-adjusted basis for investors.

They can, according to Ashish Shah, Goldman Sachs Asset Management CIO of public investing, but only for investors willing to look beyond the U.S. market.

Shah sees the setup in the markets as an “interesting buying opportunity” for equities in India and Japan, among other global markets. “Lots of good things are going on across the globe in equities and one of most important things is looking globally,” Shah said in an interview ahead of Delivering Alpha on CNBC’s “Squawk Box.”

How much should investors who buy overseas stocks expect?

“I think you can get 10% in equities, but you have to look internationally,” he said.

The U.S. dollar trend line and the tightness of U.S. balance sheets, combined with bond yields, mean that in the near-term there are headwinds for U.S. dollar-based assets. “It’s a nice setup for cheap assets abroad,” Shah said, point to reflation trades in India, where there considerable investments related to secular trends taking place, and Japan, where diversification of the supply chain is a tailwind.

And where, he said, “valuations are a lot better than in the U.S.”

— Eric Rosenbaum

Kyle Bass, Hayman Capital Management founder and CIO, said investors and companies that are looking to deepen ties with China as opposed to severing them are making “the wrong bet.”

“China’s hooks on Wall Street are so deep into us, all of the big players keep saying we need more integration, not less,” Bass said on “Squawk Box” in an interview on the sidelines of Delivering Alpha. “They’re not interested in our national security, they’re interested in making another dollar, and one day we’re going to wake up and realize that was the wrong bet.”

Bass said that the desire to forge business relationships with China stems from “looking for the cheapest labor, and we’re looking for the cheapest labor with counterparties that are adversarial to our way of life and our values system.”

He called the situation with China a cold war, and said that “we’re not doing a great job but we’re starting to protect ourselves.”

One way Bass says the U.S. should be protecting itself is through an FTC review of TikTok. “TikTok broadcasts straight into our kids’ bedrooms and has never had to obtain an FTC license,” he said.

— Ian Thomas

Les Brun, Ariel Alternatives CEO, says private equity valuations will decline as more companies “run out of cash” and need to complete transactions to fund their growth.

In an interview with CNBC’s “Squawk Box” ahead of the Delivering Alpha summit, Brun said the current situation reminds him of the 2008-2009 period when those in private equity with money were able to make a lot more money, but those holding onto assets that had seen their values drop during the crisis were going to see valuations drop even more because there wasn’t a sufficient pool of buyers. 

The current interest rate environment will add more pressure on valuations.

He said traditional companies are having trouble finding financing at rates that are attractive and transactions have to be completed with either greater amounts of equity or lower valuations. “It has to be one or the other,” he said.

“They will have to find ways to do transactions at valuations that are lower than they expected,” Brun added.

— Eric Rosenbaum

Treasury yields have hit multi-year highs and major stock market averages look poised to cap off a losing September and down quarter. The S&P 500 closed below the 4,300 level for the first time since June earlier this week, while the Dow Jones Industrial Average posted it largest one-day loss since March. Technology stocks have also come under pressure in recent weeks from the threat of rising rates

Comments from Pershing Square’s Bill Ackman later today could play a pivotal role in market sentiment. The renowned billionaire hedge fund manager who’s been a vocal commentator on inflation, the Federal Reserve and the state of the market is slated to speak with CNBC’s Scott Wapner at 4:15 p.m. ET.

— Samantha Subin