Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our s each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro. PROGRAMMING NOTE: We’ll be off next week for the holidays but back to our normal schedule on Tuesday, Jan. 3. Confidence: Remember a couple of weeks ago when Wall Street CEOs were getting all gloomy on TV about the economy? No one told consumers. Strong labor markets and slowing inflation pushed a consumer confidence index to an eight-month high, the Conference Board announced on Wednesday. The monthly survey’s findings reflect growing optimism about the country’s economic prospects even as concerns about a possible recession linger. Don’t read too much into that, says David Kelly, the chief global strategist for JPMorgan Asset Management. “The sample of people that they surveyed was probably just a more cheerful bunch than the Grinches they talked to last month,” Kelly told MM late Wednesday afternoon. To wit, Kelly and his team’s 2023 investment outlook notes that personal savings have fallen steadily over the last year amid rocketing inflation and the erosion of Covid-era relief payments. That’s leading many households to rack up debt to account for larger rent payments and a more expensive way of life. “People needed all that extra income just to support a certain standard of living and now they’re trying to sustain it – and they can't sustain it,” Kelly said, adding that’s an indication the “economy is going to slow next year. It doesn't mean we have to have a recession, but it certainly gives [the possibility of] a recession at least a 50-50 shot.” Paper Boys: A new report from the data provider PitchBook predicts weaker returns and a tougher fundraising environment next year for the private equity industry, which happens to be one of the most powerful lobbies in Washington (see: the surprise inclusion of omnibus language urging the SEC to redo some of the analysis behind a proposed private funds rule.) Why is PE in for a down year? The key line in the report is on page 4: “We found that PE fund performance has been driven almost entirely by net asset value (NAV) markups as opposed to realized returns via distributions … Given the deterioration of liquidity for exits, as well as a reset in public market valuations, we think it is unlikely these PE fund markups will ever be fully realized.” My eyes glazed over. What does that mean?: This will be (or should be) a pretty big deal for any politicians who oversee a retirement system that relies on private equity to fund retirement and health care benefits. For the last couple of years, private equity firms have been telling their investors that the companies they had acquired were doing pretty well (generally speaking). Markets were booming and the firms valued those businesses accordingly. If they sold, they probably returned a lot of money to their investors (U.S. private equity funds returned a record amount of money to investors in 2021, per PitchBook). If they didn’t, the window is basically closed. The returns those investments ultimately generate won’t match the value they'd previously presented to their investors (at least for a while). That’s a problem for any investor – including a lot of public pensions – that need to see their portfolios generate cash in the next year. And it’s a big reason why a lot of institutions are selling off their stakes in private equity funds at a discount. “There are institutions that are realistically facing liquidity restraints. Those institutions are going to have to get a bit more creative,” Carlyle Group Managing Director and Head of Research Jason Thomas told MM. “They’re facing a much more complex environment.” IT’S THURSDAY — And the weather over the Midwest is as good a reason as any to fire up “Planes, Trains and Automobiles.” Please send tips to ssutton@politico.com and zwarmbrodt@politico.com.
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