How the biggest private equity firms became the new Banks

After the crisis the largest groups launched huge lending arms. But will they falter when interest rates rise?

Mark Vandevelde in New York

Gibson Brands is the legendary guitar maker based in Memphis that has made instruments for Jimi Hendrix and Keith Richards. Now, a legal brawl between two of America’s biggest investment firms means the faltering rock’n’roll emblem has also become a symbol of the shifting hierarchy in global finance.

Bankruptcy proceedings in Delaware have brought a crashing end to Gibson’s plan to reinvent itself by selling smart speakers and guitars that tune themselves. They have also set up a courtroom battle between Blackstone and KKR, two of America’s most powerful financial firms, which are among the biggest lenders to the company.

Which firm wins this skirmish matters less than a bigger victory that belongs to them both. Founded by former bankers, they are part of a group of private equity firms which has spent the years since the financial crisis quietly supplanting their former colleagues in the banking world. By setting up huge lending arms, they have been transformed from heavyweight dealmakers that took stakes in companies into the principal bankers for a large tract of corporate America.

Guns and Roses guitarist Slash plays a guitar made by Gibson, which is caught up in a legal brawl between Blackstone and KKR © Getty

Until the financial crisis, private equity investors hewed closely to the “buyout” playbook pioneered by Henry Kravis and George Roberts when they founded KKR in the 1970s. Acquiring companies whole, they would cut costs and load them up with huge amounts of debt while paying the bank back at a low interest rate.

Now the biggest firms have all but pivoted from private equity to private debt, joining a new breed of lightly regulated asset managers that have filled the void as banks are forced to retreat from risky deals.

Unlike banks, which are dependent on deposits and other short-term funding, these funds raise money from long-term investors such as insurance companies and pension funds. Many of the companies they lend to are owned by other private equity investors. The funds provide a crucial source of credit for companies that cannot tap the bond markets, their advocates contend.

“Banks have had to recapitalise and build larger capital cushions, and combined with recessions and weak recoveries, they really weren’t extending a lot of credit,” says Susan Lund, a partner at the consultancy McKinsey.

Ten years after the crisis, the rapid expansion in private credit raises the question of whether risks have simply been transferred to a different, less regulated part of the market. “It’s true that this is opaque,” says Ms Lund. “But it does not have systemic risk. If the company doesn’t repay the investors will lose, and that’s where it ends.”

Howard Marks, the founder of Oaktree Capital Management who has made billions of dollars investing in distressed debt and profiting from the fallout of credit busts, agrees — up to a point.

“The raw material of this lending boom is not as fallacious as subprime [mortgages],” he says, comparing the borrower-friendly terms of today’s corporate loans with the fraudulent loans obtained by tens of thousands of homeowners whose defaults later brought the banking system close to collapse.

But he adds that such judgments must always be uncertain. The pre-crisis mortgages were “something nobody caught”, he recalls. “You say: ‘What idiots. It’s obvious that was all fallacious. Why didn’t anybody catch it at the time?’ Because we don’t see the flaws until the things are tested.”

As the US enters a 10th year of economic expansion with interest rates still near historic lows, some believe the harshest test is about to start.

Apollo Global Management chief Leon Black is focusing on insurance with its Athene venture © Bloomberg

Michael Patterson has more reason than most to worry about the potential fallout when that growth streak ends. From his position in charge of senior lending funds at one of America’s biggest private credit firms he has watched rivals make bullish calls, relying on economic expansion, he says, to cover their mistakes.

“[People think that] things usually grow and therefore if I’m overly aggressive lending today it’ll kind of catch up over time,” he says. “That has worked for a decade. We are acutely aware of it.”

Oaktree Capital co-founder Howard Marks: 'You can raise a lot of money if you’re a credit manager today. But then you have to put it to work' © Bloomberg

Mr Patterson is a partner in a firm that was once known as Highbridge Principal Strategies. That changed in 2015 when the former owner, JPMorgan Chase, sold the business to its senior staff. Regulators insisted on a change of name, fretting that investors might assume America’s biggest bank still stood behind the newly independent firm, according to a person briefed on the deal.

The rebranded HPS has raised debt funds worth $20bn in the past decade, according to data from Preqin, putting it alongside private equity firms Blackstone, Apollo and Ares among the 10 biggest providers of private credit.

Private credit funds are still small in comparison with the $12tn global non-financial corporate bond market which now accounts for one-fifth of borrowing by companies other than banks. There, too, credit quality has been deteriorating; most of the growth in bond issuance has involved companies that are either on the lowest rung of investment grade ratings or else firmly in junk territory.

Still, private credit funds have carved out a niche by charging more for their money while promising borrowers greater certainty and less hassle.

“If you’re a company that is purchasing a competitor and believe you’re doing so at a really attractive price, you don’t have time to do a bond roadshow over the next three months,” says Mr Patterson. Nor do borrowers want to worry about how a distant geopolitical crisis might move the bond markets. “That’s not how private credit when done well works,” he says. “I don’t need to worry about, oh, the market just moved so I’m going to [alter the agreed interest rate] on your deal.”

Nordic Aviation Capital, a leasing company with a fleet of 500 smaller planes used on regional routes, had even bigger problems when it tried to raise debt financing five years ago.

“The banks were scared of aviation, scared of [what to them were] unknown businesses, and they were basically scared to get into fixed assets,” says chief executive Soren Overgaard. He also talked to insurance companies, which are large debt investors, and received offers from small banks that were willing to take risks, “but the pricing on that was totally insane”.

Nordic typifies the kind of borrowers that have turned to private funds: neither “normal” enough to meet standard banking requirements, nor big enough to merit attention, they can find themselves shut out of the banking system. Lenders such as HPS “don’t have the same capital requirements as a bank does [so] they’re not bound by the same regulatory framework”, says Mr Overgaard. “I guess the banks like to put things into boxes, and if you don’t fit into a box, tough luck.”‘You can raise a lot of money if you’re a credit manager today.
Having watched returns dwindle over a decade when interest rates were close to zero and central banks vied with portfolio managers to buy bonds, pension funds and insurers have raced to commit money to what many see as a lucrative new asset class. Average annual returns for private credit funds have exceeded 5 per cent over every five-year period since 1992, according to figures compiled by Hamilton Lane, a firm that advises public pension funds and others on investments worth more than $400bn.

Drew Schardt, the firm’s head of credit investments, says that even bottom-quartile credit funds perform reasonably well, in contrast to private equity, where returns are heavily dependent on the manager’s pedigree.

Three of the four biggest US private equity firms now manage more money in credit funds than in their private equity arms. That is a marked turnround from decade ago, when debt funds accounted for about one-fifth of their assets. All told, they have amassed a $160bn war chest of capital that has not yet been lent out, twice what they had a decade ago and enough to support perhaps $360bn of business lending once bank debt is added on top.

It is a strategy that has proved especially lucrative for the handful of firms such as Blackstone, KKR and Ares Management that have listed on the stock market, because it provides a more constant flow of revenue than the traditional private equity model.

Blackstone HQ: credit funds provide a useful flow of revenue for the listed firm © Bloomberg

“These firms have figured out that the markets do not place much value on carried interest [the 20 per cent share of investment profits that is traditionally paid to fund managers],” says a banker who holds talks with dozens of private equity funds every year. “Recurring management fees which you get every year is a language stock market investors understand. So you become asset gatherers. If you can grow your credit business faster than the equity side, even with lower returns [for investors], that’s highly profitable.”

Apollo Global Management has taken the idea furthest. Not content with persuading investors to put money into its credit funds, it set up an insurance company that invests its entire balance sheet with the firm. That company, Athene, has struck deals with traditional insurers such as Aviva to assume responsibility for annuity contracts. These convert the wealth amassed by a retiring worker into a promise to pay an annual sum, leaving the insurer responsible for investing the assets and generating a return big enough to cover the lifetime payments.

As Athene’s assets grow, Apollo charges larger fees for investing them in a suite of credit products that encompasses senior loans, collateralised loan obligations and high-yield bonds sold by companies with poor credit ratings.

Apollo’s insurance land-grab has placed $97bn on its books. That is more than triple the size of the entire credit portfolio that Apollo managed a decade ago, and more than one-third of all the assets it manages today. It has also given the firm significant influence over a regulated insurance business that is responsible for the incomes of thousands of retired workers, increasing the stakes if investments go wrong.

“The seven worst words in the world are: Too much money chasing too few deals,” says Oaktree’s Mr Marks. “You can raise a lot of money if you’re a credit manager today. But then you have to put it to work, or sit on it and have people complain that you didn’t do what you said you were going to do. So people are competing to make loans.”

One result of such fierce competition could be increased risk-taking. Strong covenants were attached to fewer than 30 per cent of the leveraged loans written in the US last year, according to a tally by the IMF, leaving creditors with little power to intervene if management teams behave recklessly or a company’s profit heads south.

With interest rates expected to rise, that could be in prospect for a sizeable number of businesses whose cash flow offers little headroom above their interest payments. McKinsey calculates that 6 per cent of US corporate bonds have been issued by companies which need to spend two-thirds of their earnings before interest, tax, depreciation and amortisation in order to meet their interest payments — leaving them in a perilous position when they are forced to refinance at higher rates.

Those that have taken out variable-rate loans could face a more immediate threat, compounded by changes in the ways companies calculate profit that may make their debt riskier than it looks. One-quarter of last year’s buyouts involved “adjusted” ebitda, which inflates profits by adding back some costs that are usually deducted, flattering a borrower’s stated leverage ratios. “Real leverage is actually significantly higher today,” Mr Paterson reckons, even though the difference does not always register in reported profit numbers. “We will see a series of unanticipated bankruptcies, because the reported numbers are historically inconsistent. I’m not calling the time; I have no idea.”

If that forecast is correct, it will mean losses for at least some of the asset management firms gathering assets — and fees — in sections of the credit system where banks now fear to tread. Optimists, including McKinsey’s Ms Lund, say the asset managers now responsible for an outsized share of risky lending are neither as indebted nor as important as the banks. “It’s not to say nobody loses,” she says. “People do, and that’s painful, but it doesn’t have the systemic widespread effects, as those losers aren’t the bank themselves.”

But the differences between banks and asset managers are subtle. Funds that raise their money from public pension funds are capable of inflicting losses on powerful political constituencies, even if they cannot bring down the banking system. And while asset managers are usually far less leveraged than banks — typically matching a dollar of equity with every dollar or two of debt, compared with the $20 or $30 that banks were borrowing ahead of the crisis — they often have far fewer safe assets such as US government bonds.

“So which is riskier,” Mr Marks asks, “an entity that’s 32 times levered and has a diverse loan book, or one that’s two times levered and has a book of all the somewhat unseemly loans?”

The question, he says, may be unanswerable. “It all comes down in the end to judgment. Let’s say that they go into a deal that I say I won’t do because it’s too risky. Am I a fuddy-duddy and are they astute? Or are they nutty and going to get wiped out?”

U.S. Inflation Data Key to Global Markets’ Next Moves

By Nathaniel Taplin

Don’t expect the Fed to save U.S. stocks—or emerging-market economies—even if the sound of crumbling markets gets much louder.

Following Wednesday’s big U.S. selloff, the American grizzly moved decisively into Asia and Europe on Thursday. Shares in Shanghai closed down 5.2%, their worst single day since early 2016, while Japan’s Topix dropped 3.5% and Korea’s Kospi fell 4.4%. The Stoxx Europe 600 slid by 1.8% in early trading.  

Voices from President Trump down are already calling for the Federal Reserve to moderate its rate-hiking course—as it has often done before when panic hit stocks. But with U.S. unemployment at its lowest since the 1960s, oil prices above $80 a barrel, and leading inflation indicators such as wages moving higher, it will take something worse than a stock-market hiccup and presidential grumbling to move the Fed.

A man watches an electronic board showing the stock index and prices at a securities brokerage in Beijing, China, Oct. 11.
A man watches an electronic board showing the stock index and prices at a securities brokerage in Beijing, China, Oct. 11. Photo: roman pilipey/epa-efe/rex/Shutterstock 

 Nor will pressure from overseas derail the U.S. central bank: Mr. Trump isn’t the only policy maker following an “America first” line. In 2015, the Fed was willing to hold fire to let China fight off large-scale capital outflows and a debt-deflation trap. Three years on, Chinese markets are tumbling again and its currency is under pressure. But money has yet to start flooding out of China and official data so far show growth holding up. With the trade conflict heating up, there seems little spirit of generosity toward China in the U.S. right now. 
If even China’s concerns can’t move the Fed, policy makers in lesser emerging markets look out of luck. The finance minister of Indonesia—where the central bank has been raising rates rapidly to defend its currency—this week openly pressed the Fed to take emerging markets’ problems into account. But while China accounts for roughly 15% of global gross domestic product, Indonesia’s share is just 1%.

Several emerging markets have already been hammered this year. The bad news is that they nearly always come off even worse during periods when U.S. stocks are declining sharply. That makes Thursday’s U.S. inflation data key. A soft reading might induce investors to quickly forget this week’s kerfuffle. But if it surprises on the upside, expect more carnage in U.S. markets—with few places to hide at home or abroad.

ECB Succession Race Tests German Faith in Bundesbank Model

With jockeying under way for top posts in central bank and EU posts, Berlin debates whether to lobby for inflation hawk Jens Weidmann

By Tom Fairless

Bundesbank President Jens Weidmann, left, is a leading candidate to replace European Central Bank President Mario Draghi, at right.
Bundesbank President Jens Weidmann, left, is a leading candidate to replace European Central Bank President Mario Draghi, at right. Photo: shawn thew/epa-efe/rex/shutterst/EPA/Shutterstock 

FRANKFURT—The race to succeed Mario Draghi as European Central Bank president presents Germany with a stark choice: Back the country’s own candidate, a foe of Mr. Draghi’s 2.5-trillion-euro bond-buying program, or concede that once-unorthodox monetary tools are here to stay.

Germany’s central bank, long a powerful voice in the global fight against inflation, has grown out of sync in the postfinancial crisis era of stagnant prices and wages, with its greatly expanded role for central banks and outside-the-box policies.  
“Perhaps the sands have shifted,” said Stefan Gerlach, former deputy governor of Ireland’s central bank. “Having been on the wrong side of history, at least as it appears now, has not helped the Germans.”
Now, with the jockeying among European capitals already under way, Berlin must decide in the coming months whether to endorse Jens Weidmann, president of Germany’s central bank, who has likened printing money to the devil and testified against Mr. Draghi’s crisis-era bond program in a German court.

Backing Mr. Weidmann—even if it provokes a veto from countries like France and Italy, where he is already a controversial figure—would show that Germany stands by the philosophy that central banks’ primary responsibility should be to keep inflation low and avoid printing money to buy government debt.

“The political price for Jens Weidmann is high…because he has shown open criticism to some ECB policies,” said Isabel Schnabel, a member of the German Council of Economic Experts.

Mr. Draghi steps down as head of the ECB next autumn, but the race to succeed him is unofficially under way. A handful of officials have publicly flirted with the idea, although no candidate has openly declared an interest.

As the biggest economy in Europe, Germany should have outsize influence in deciding the central-bank chief for the next eight-year term. But the selection will be part a grand bargain among EU members over top European Union jobs, including the head of the European Commission, a fact that is complicating German Chancellor Angela Merkel’s equation. German officials say the government hasn’t decided whether to support Mr. Weidmann or focus on another top EU post.

Installing Mr. Weidmann could bring dividends domestically. Conservatives in Ms. Merkel’s Christian Democratic Union say they badly need a German ECB president to boost their credentials among voters worried about low rates, inflation and a central bank they think is bankrolling profligate governments in Southern Europe. 
Mr. Weidmann, a former economic adviser to Ms. Merkel, has sparred with Mr. Draghi over the best way to address Europe’s economic woes. He has attacked the Italian’s policy of large-scale bond purchases, and resisted Mr. Draghi’s effort to tilt the ECB away from the Bundesbank principles it was modeled on, to be more like the U.S. Federal Reserve, which bought vast sums of U.S. debt after the financial crisis.

Mr. Weidmann has compared central-bank bond buying to a drug. In 2012, he used the devil from German literary classic, Goethe’s “Faust,” to rail against printing money, just weeks after Mr. Draghi’s now-famous pledge to do “whatever it takes” to save the euro. He has, however, backed many other ECB polices, including negative interest rates.

Most economists say Mr. Draghi’s policies supported growth and helped create millions of jobs. The bond-purchase program, known as quantitative easing, lowered bond yields in Italy and other struggling euro members. The bloc’s growth outpaced the U.S. over the past two years, and while inflation has risen, it remains around the ECB’s 2% target, despite concerns in Germany that easy money could lead to much higher levels of inflation  

Critics like Mr. Weidmann charge that the polices took pressure off members to reform their economies. And some of the German central banker’s concerns about bond-buying being addictive have some backing in the numbers. The ECB initially said it would purchase €1.1 trillion of debt and end its bond-buying program two years ago. But the ECB has now bought €2.5 trillion of bonds, and won’t end the program until December at the earliest.

Unwinding that program, and phasing other ECB stimulus measures at a time when the region’s economy appears to be softening, will be the biggest task facing the next ECB president.

Mr. Draghi insists that buying government bonds will remain “part of the toolbox.” 
“It’s a new instrument of monetary policy that will be used for contingencies that we don’t see now,” he said in June. ECB officials that favored quantitative easing the first time around would be more apt than Mr. Weidmann to reach for that tool again in case of emergency.

For his part, Mr. Weidmann hasn’t backed down, though he has softened his language. “I’m much more cautious about using government bond purchases, much more skeptical than many of my colleagues may be,” he said in February.

A senior lawmaker with Ms. Merkel’s conservative said he would have “qualms” about giving up on installing Mr. Weidmann at the ECB’s top, warning that the eurozone debt crisis wasn’t over.

Looking Beyond Lehman

Lee Howell  

mobile phones display

GENEVA – It is human nature to pass judgement for calamitous events that harm almost everyone. It is also natural for the stories that emerge from such events to influence current assessments and future choices. The story of the collapse of Lehman Brothers a decade ago is a case in point – but with a slight twist.

Today, experts point to a “dangerous dependence of demand on ever-rising debt,” and conclude that little has really changed since the global financial crisis. The data on global debt are certainly correct, but any prediction that we draw from them is likely to be overwrought, owing to our own hindsight bias.

We are hardwired to try to make sense of events that shock us, and this often involves recasting them as having been predictable. This heuristic, in turn, leads us to overestimate our ability to predict the future under what we perceive to be “similar” circumstances.

And, of course, one’s prognosis for the global economy depends on one’s own frame of reference. For example, student debt in the United States has now ballooned to $1.5 trillion. From the perspective of younger Americans, that is certainly an alarming development; in the eyes of Europeans, it is also an economic absurdity. Or, consider that Apple and Amazon’s market capitalizations have each topped $1 trillion. Some Americans may be celebrating that fact, but Europeans are increasingly wringing their hands over the growing dominance of US tech titans.

From a broader historical perspective, stock markets always experience booms and busts. Though mean reversion is not a scientific law, there has never been an occasion when rising asset prices did not eventually return to their long-run average. Arguably, the 2008 financial crisis was different, because, as the theorist Geoffrey West writes, it was “stimulated by misconceived dynamics in the parochial and relatively localized US mortgage industry,” and thus exposed “the challenges of understanding complex adaptive systems.”

It is important to acknowledge such challenges. But an even more important point to note is that the profiles of the world’s largest companies today are very different from those of a decade ago. In 2008, PetroChina, ExxonMobil, General Electric, China Mobile, and the Industrial and Commercial Bank of China were among the firms with the highest market capitalization. In 2018, that status belongs to the so-called FAANG cluster: Facebook, Amazon, Apple, Netflix, and Alphabet (Google’s parent company).

Against this backdrop, it is no surprise that the US Federal Reserve’s annual symposium in Jackson Hole, Wyoming, last month focused on the dominance of digital platforms and the emergence of “winner-take-all” markets, not global debt. This newfound awareness reflects the fact that it is intangible assets like digital software, not physical manufactured goods, that are driving the new phase of global growth.

Bill Gates, the founder of Microsoft, recently explained this profound shift in a widely shared blog post. “The portion of the world’s economy that doesn’t fit the old model just keeps getting larger,” he writes. And this development “has major implications for everything from tax law to economic policy to which cities thrive and which cities fall behind.” The problem is that, “in general, the rules that govern the economy haven’t kept up. This is one of the biggest trends in the global economy that isn’t getting enough attention.”

The digitalization that Gates is describing should not be confused with the digitization process that created online trading systems and partly enabled the 2008 financial crisis. The latter process converted data from an analog to a digital format. By contrast, digitalization occurs when the adoption of digital technologies (and the accompanying mindset) leads to rapidly changing business models and value creation through network effects and new economies of scale.

Digitalization demands less in the way of assets, and more in terms of talent. Thus, as Klaus Schwab of the World Economic Forum observes, the “scarcity of a skilled workforce rather than the availability of capital is more likely to be the crippling limit to innovation, competitiveness, and growth.”

This observation hints at the potentially destructive effect that automation, combined with artificial intelligence, will have on labor. Countless middle-class, white-collar jobs that involve routine and repetitive tasks could soon be at risk. Advanced technologies are uniting the material, digital, and biological worlds and creating innovations at a speed and scale unparalleled in human history.

Instead of looking for the “Minsky Moment” when today’s bull markets run out of steam (for they definitely will), we should perhaps give more thought to this trend, which Schwab calls the Fourth Industrial Revolution. The great lesson to be learned from the collapse of Lehman Brothers is that technology should be designed and used to empower people, not to replace them. The goal should be to improve society, not disruption for its own sake.

Lee Howell is a member of the Management Board of the World Economic Forum.

The Myth of the Liberal International Order

It’s dangerous to pine for a time that never really was.

By George Friedman       

In the late 1700s, the philosopher Immanuel Kant put forth a vision of universal peace in which nations would subordinate themselves to principles and entities that would make this possible. Many shared this vision, with good reason. It was believed to have “norms, rules and institutions” that were respected, creating a system that was stable, predictable and able to manage disagreements without creating conflict. Many believe we had achieved that order, which they called the liberal international order, and that it’s now dying. They mourn the loss.
The problem is that the liberal order never really existed. And their nostalgia is dangerous if what they pine for is a fiction.
Not that there weren’t attempts to create such an order. There were three tries in the past century. The first came after the end of World War I. Europe was horrified by what it had done to itself. The United States introduced the idea of a League of Nations that would manage international friction to prevent future self-destructive efforts. Except no nation was prepared to surrender its interests to an international organization, and in any case the organization had no real power to impose its will.

The United States turned out to be the most honest among all nations in this regard, declining to join it in spite of the fact that its architect was the American president, Woodrow Wilson. Other nations joined; joining was easy, since none of them had any intention of obeying the league’s edicts anyway. What made the entire idea absurd was that most of the members were imperial powers with colonies, and their interest was in creating “norms, rules and institutions” for ruling and exploiting those colonies. The League of Nations was primarily but not exclusively a European club, and it lasted only as long as it took European powers who opposed the post-war peace to recover and reassert themselves.
The second attempt came after World War II with a more ambitious entity, the United Nations. The League of Nations made clear that no country would really abide by an international organization, so the U.N. created the Security Council, comprising the United States, the Soviet Union, France, the United Kingdom and China, which could block anything its members didn’t like. And since there was always at least one country at the table that didn’t like something, the U.N. could never really achieve its purpose: stopping wars. (Only once did it do so, in Korea, when the Soviets boycotted the Security Council.)
The United Nations created some tools that major powers might use, things like the World Health Organization and UNICEF and so forth. But the international order, to the extent that it existed, was formed primarily from alliances created in preparation for war against the other. One half of the structure was the Warsaw Pact, an international institution with rules and norms that were not especially liberal.
The other half comprised the allies of the United States, bundled together in a variety of international institutions. There was, of course, NATO. There was the International Monetary Fund and the World Bank. There was U.S.- and U.K.-supported economic integration, starting with the European Coal and Steel Community, which in turn ultimately became the European Union. They were all liberal institutions with rules and norms.
But Europe was not the world. Most of the world belonged to what was inexplicably called the Third World, into which the European imperial system was collapsing. And yes, this world too had norms, rules and institutions. The United States and Soviet Union fought a cold war to absorb these vestiges of empire, or at least to prevent the other side from absorbing them. No one observing the Cold War in real time believed there was much of an order to things, apart from the utter bifurcation of Europe.
All the while, the prospect of nuclear holocaust hung over the world like a cloud of smoke. The Cold War didn’t bring about the end of the world, of course, but its failure to do so wasn’t the result of the strength of our international institutions. It was because the United States and the Soviet Union tried very hard not to engage in nuclear war. As always, with the end of the Cold War, the victors believed two things. The first thing was that they would be able to reshape the world as they chose. The second was that all reasonable people would want to be just like them.
After 1992, it appeared that war had become impossible, and that the international systems that had won the Cold War would remain in place and ensure the peace. NATO would deal with the rogues, and the international financial and trading system, designed for the Cold War, would expand to encompass the world. The problem of the world was now management, and a technocracy able to solve global problems would come together in the various remnants of the Cold War and preside over Kant’s perpetual peace.
Perhaps no entity embodied this dream more than the European Union, the absolute paragon of rules, norms and institutions. The EU saw itself as the civilizing force of the newly liberated nations, there to teach them the civility of technocracy. NATO no longer had a clear purpose and was given the abstract task of providing security, although who was being secured from what was never made clear.
The illusion began to fade after 9/11. It faded further after 2008. But that hasn’t prevented some from mythologizing a system that had failed them. First comes a war, and then comes a pledge for there to never be one again. The defeated, devastated by their loss and with their people living in misery, pull themselves together and rebuild. They create, more or less, what came before them. And with that resurrection, and the rise of other powers, the history of humanity continues.
The problem wasn’t that no one had thought to create something that could mitigate the risk of war. The U.S. and Soviet Union, for all their faults, avoided annihilating the world during the Cold War. The problem is in the vast ambition of the victors, who believe they can defy history with the administration of an unruly world. This is not liberalism. This was the hubris of the victors.

Blackstone’s Byron Wien says S&P 500 on track for year-end rally to 3,000 despite stock-market wreckage


‘I think we had to knock some of the complacency out of the market,’ says Wien

Never mind the market rout that played on Wednesday. Blackstone’s Byron Wien remains bullish on stocks, arguing that the S&P 500 index remains on track to hit 3,000 by year-end — a roughly 8% rise from current levels — despite putting in yesterday the broad-market benchmark’s worst session since February.

“I think we had to knock some of the complacency out of the market, and God knows, we are doing that right now,” Wien told CNBC during a late-morning interview.

“I think this is a correction in an ongoing bull market and I think the market goes higher at year-end,” Wien said.

Read: 5 questions worried Americans will ask after Dow slumps over 800 points

On Wednesday, both the Dow Jones Industrial Average DJIA, -0.49% and the S&P 500 SPX, -0.55% suffered their biggest one-day drop since February, while the Nasdaq Composite Index COMP, +0.09% had its biggest slump since June 2016. The decline took the major indexes below key levels.

Both the Dow and the S&P closed below their 50-day moving averages, a closely watched metric for short-term momentum trends. This was the first time both have ended below this level since July.

Still, Wien said a rally following the November midterm elections is likely “regardless of the outcome.” Midterm congressional elections on Nov. 6 could conceivably see Republicans lose control of the House and, though less likely, the Senate.

Also read: Dow 40,000 is coming, but only after ‘a large panic event’ passes, analyst warns

Read: Trump says the Fed has ‘gone crazy’ after the Dow tumbles 830 points in one day

“I’m pretty confident that the market will have a rally after the midterms, regardless of the outcome,” said the vice chairman of Blackstone Group L.P.’s BX, +0.03% Private Wealth Solutions unit.

That said, Wien believes that the 10-year Treasury note TMUBMUSD10Y, +0.03% will yield 3.5% but doesn’t believe that that level will further disrupt the market’s path to fresh records. Rising rates have been widely blamed for the recent equity-market selloff, because richer rates equate to higher borrowing costs for corporations. That dynamic can force investors to re-evaluate recent prices that have been paid for stocks.

In fact, Wien makes the case that Wednesday’s carnage sets the stage for the move higher, without which, further gains may not have been easily achieved.

“I don’t think [the stock market] was in a position to [rise further] until now.” We needed to “shake some of the complacency” out, he said.

Byron Wien, vice chairman of advisory services for The Blackstone Group LP.