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Speaker 2: Trade wars tariffs may be not top of mind for
Speaker 2: US voters. What is, though, no doubt about it, is inflation.
Speaker 2: It does continue to weigh on a lot of folks
Speaker 2: minds as a November presidential election looms. Consumer confidence last
Speaker 2: month hitting the lowest level since mid twenty twenty two,
Speaker 2: way down by concerns about elevated food and gas costs.
Speaker 2: And that's where we want to go. Is the inflation
Speaker 2: print that we are getting this week. Let's see what
Speaker 2: our team has to say about that. Back with us
Speaker 2: is Bloomberg News International Economics and Policy Correspondent Michael McKee,
Speaker 2: along with Bloomberg News Chief correspondent for Global macro Markets
Speaker 2: Liz McCormick, both here in our study. All right, guys,
Speaker 2: So Johnny Yella, kind of setting the stage there. First
Speaker 2: of all, Mike, I want to ask you the possibility
Speaker 2: of us tariffs on Chinese goods. How does that historically? Tariffs?
Speaker 2: How does that impact kind of our economy and really
Speaker 2: the inflation picture.
Speaker 3: It's not good for the economy and it's not good
Speaker 3: for inflation, and that's been shown over and over and
Speaker 3: over again. Basically, US companies importing things from China pay
Speaker 3: the tariffs, not the Chinese, and so then they raised
Speaker 3: prices to recoup those costs from Americans. So Americans have
Speaker 3: to pay more money, and of course prices go up,
Speaker 3: so that hits inflation. The latest CBO numbers studying the
Speaker 3: Donald Trump tariffs show that they cost jobs, and they
Speaker 3: cost the economy. It helps certain sectors, very narrow sectors
Speaker 3: at times, but not always. The steel tariffs that Trump
Speaker 3: put on US steel companies simply raised rices but didn't
Speaker 3: do any more business, and several of their mills ended
Speaker 3: up closing down. So tariff's economists generally agree are a
Speaker 3: terrible idea. And then Marie did ask if this would
Speaker 3: contribute to inflation. Unfortunately, the Treasury Secretary sort of had to.
Speaker 3: I think it was her job to dodge that question.
Speaker 2: Yeah, I bet so. Let's come on in on this.
Speaker 2: You watch a lot of different things that impact certainly
Speaker 2: the market's the reaction in the treasury trade. I mean
Speaker 2: roll that in and just roll into what we really
Speaker 2: care about is the inflation print this week.
Speaker 4: Right exactly. I mean, all this the tariffs looming in
Speaker 4: the background doesn't help, like we're trying to get over
Speaker 4: the hurdle like you're saying of this week with the
Speaker 4: PPI and CPI, But the whole theme of like reshoring
Speaker 4: in general has been a background inflationary. Then if you
Speaker 4: add a new kind of let's not say tariff war,
Speaker 4: that won't help. But yeah, everyone is almost getting like
Speaker 4: someone said to me, everyone is all I hear is
Speaker 4: wait till Wednesday, right, Wait till Wednesday when we have
Speaker 4: this CPI print. And you know there's the backdrop to
Speaker 4: this is as we know, the labor data was a
Speaker 4: little softer, we're seeing cracks, the jolts was a little better.
Speaker 4: So people are thinking, if we can get this trend
Speaker 4: of hot inflation to end, maybe it's a lower print.
Speaker 4: The bond market may be off to the races, but
Speaker 4: we'll see, right, we've been waiting for a good number
Speaker 4: before and it hasn't panned out. So there's a lot
Speaker 4: of focus and of course smart. We have PPI, which
Speaker 4: used to be something with a worm. Now we have
Speaker 4: to talk about PPI.
Speaker 2: I know, Mike, you always like.
Speaker 3: Somebody put it this morning. It's the undercard for the main.
Speaker 5: Event, right, Well, what else are you looking at?
Speaker 1: Though?
Speaker 5: Are we see PPI? We see CPI. It feels like
Speaker 5: we're back to good economic data being good for the market.
Speaker 5: Are we back and does it flip flop covering stocks?
Speaker 3: Depends and it depends on what the data turned out
Speaker 3: to be. Are they good? And then who defines good?
Speaker 3: Because if the if you're looking for higher market rates
Speaker 3: and you get inflation staying where it is, that's what
Speaker 3: you're going to get. It looked like, I mean, from
Speaker 3: what I've seen in terms of the corporate bond markets,
Speaker 3: it looks like a lot of companies came to market
Speaker 3: because they don't they think the possibilities. We get a
Speaker 3: higher print and therefore rates go up. So go to market. Now,
Speaker 3: if you are looking for some progress, it would be
Speaker 3: good to have the CPI numbers go down, even just
Speaker 3: a little bit to suggest that we're back on the
Speaker 3: road to lower inflation, and the FED can once the
Speaker 3: well fed isn't going to start thinking about cutting rates
Speaker 3: right away, but the markets will.
Speaker 4: Well, Gods, I was going to say, like a few
Speaker 4: fun facts here, I was looking at stuff.
Speaker 2: Is that now Mike knows this, I'm sure.
Speaker 4: But so this CPI print people are saying is really
Speaker 4: going to inform in June. You know, the officials when
Speaker 4: they have that June meeting will change their dot plot.
Speaker 4: Right now, there is another CPI, but it comes on
Speaker 4: the last.
Speaker 2: Day of the two day meeting in June.
Speaker 4: So this, this CPI matters a lot. I see a
Speaker 4: lot of people focusing on that that it may inform
Speaker 4: the dot plot even more than although I think Cherva
Speaker 4: Pala has said people can change their mind the day
Speaker 4: of the meeting, so the June one release won't not matter.
Speaker 4: But there's a lot riding on this, so I think.
Speaker 4: And you know, when you start seeing people give you
Speaker 4: three decimal places on CPI, it's really important.
Speaker 2: And the last no rounding up here, guys, it really matters.
Speaker 4: Yeah, but I mean the last two core rounded two
Speaker 4: point four. But people will show you each one to
Speaker 4: three decimals.
Speaker 2: So if it could just round down enough.
Speaker 4: To be lower, it'll be good for the bond market.
Speaker 2: You guys constantly remind us, and I know we have
Speaker 2: a lot of conversations around this table. It's not just
Speaker 2: one month, right, we need to see several months when
Speaker 2: it comes to inflation kind of starting to really significantly
Speaker 2: or at least trend down and stick down and you know,
Speaker 2: kind of keep that pattern.
Speaker 6: Right.
Speaker 2: That's what Mickey.
Speaker 3: Bowman, Fed governor said last week. She didn't think we
Speaker 3: were going to get any rate cuts this year, and
Speaker 3: she said she needs to see three or more months
Speaker 3: of inflation getting closer to two percent before she's going
Speaker 3: to believe it's real. Now she's the most hawkish, but
Speaker 3: we're in a situation where we're talking about one cut
Speaker 3: to no cuts is the definition of does.
Speaker 2: We're looking at CPI the way with three point six
Speaker 2: percent ex food and energy, that's not two percent, not
Speaker 2: even close.
Speaker 4: No, no, But at least if it's trending down, like
Speaker 4: I said, the month over rough, if you can get
Speaker 4: a little better. But on the flip side, let's just
Speaker 4: say which is you know, obviously the consensus is a
Speaker 4: little lower, but if it's hotter like at the last
Speaker 4: FED meeting, people feel like Chairman Powell, really let's call
Speaker 4: it in the wonky land caught off the tail risk
Speaker 4: of hikes. But if it reaccelerates, you wonder if even
Speaker 4: the options traders price in a little bit that maybe
Speaker 4: we get a hike. I mean, that's gone now, so
Speaker 4: I think that would be more of a surprise if
Speaker 4: it's you know, reaccelerates, you know, so let's.
Speaker 1: Hope that doesn't.
Speaker 3: Remember the FED doesn't look at CPI as well, that's engage.
Speaker 7: It looks at PCE.
Speaker 3: Headline is two point seven percent, So that's a significant difference,
Speaker 3: and it's largely due to housing. And there's gonna be
Speaker 3: a lot of focus on the housing numbers in the
Speaker 3: CPI report. Do they finally start to show the decline
Speaker 3: that everybody has been waiting for or are they still
Speaker 3: hanging in there? But the interesting thing is you take
Speaker 3: out housing from CPI and you get an index that
Speaker 3: looks a lot like what they have in Europe because
Speaker 3: they don't put housing into their CPI, and it would
Speaker 3: put bullfit about two point four percent, So you know,
Speaker 3: it's it's an interesting position for the FIT to be in.
Speaker 4: Yeah, that's why they kind of focused in on the
Speaker 4: super core, right ex. Housing and all this there's a
Speaker 4: lot of you know, in the weeds that they're looking at.
Speaker 2: I will say, at Milkin, like a bunch of investors
Speaker 2: we talked about talked to said, we have such a
Speaker 2: shortage supply of housing and like none of these inflationary
Speaker 2: pressures are going to go away anytime soon. And that
Speaker 2: is not something like you can just build a ton
Speaker 2: of homes or rental properties or whatever overnight. And so
Speaker 2: you feel like builders are very, very cautious.
Speaker 3: It's a very difficult problem to solve. I saw a
Speaker 3: commentator on Friday saying, you know, the administration should move
Speaker 3: to start making more housing, you know, getting more housing built.
Speaker 3: But the problem is not so much a national policy
Speaker 3: on housing. It's local policies in each city about zoning
Speaker 3: and density, and it's going to take a lot of
Speaker 3: work to really change all that.
Speaker 4: Plus the backdrop is you have all these people who
Speaker 4: have two and a quarter mortgages saying I'd kind of
Speaker 4: like to sell, but no I'm not. You know, I
Speaker 4: don't want a six percent mortgage. So that is adding
Speaker 4: to the lack of availability of houses.
Speaker 5: Right Well, I'm looking at the economic calendar we have PPI.
Speaker 5: As you mentioned, Mike, the undercard, CPI, jobless claims, housing starts.
Speaker 5: How do we try to filter through each of these
Speaker 5: data points as they come in, because when I look
Speaker 5: at the terminal, look at WARP or different ways to
Speaker 5: track what rates investors are betting on, it's very whiplashy
Speaker 5: at times.
Speaker 8: Well yeah, to.
Speaker 4: Say the least, right, yeah, no, And I think, you know,
Speaker 4: I think for the economy, like the inflation, PPI, CPI,
Speaker 4: but then retail sales, there's a lot of focus on
Speaker 4: that because the consumer has somehow seemed to flow along,
Speaker 4: although I guess it's somewhat bifurcated.
Speaker 2: So given up buying food because it's so expensive, so
Speaker 2: they're just going to buy stuff and travel.
Speaker 4: And in fact, I'm like glad when I'm alone and
Speaker 4: I'm like I could eat peanut butter and jellie, no joke, right, Like.
Speaker 2: You look at it, like you think about it, it comes up,
Speaker 2: you know. Argument.
Speaker 3: The interesting thing is that you say that because food
Speaker 3: prices have been flat for a couple of months, they
Speaker 3: have not been going up, and yet this is what's
Speaker 3: in everybody going down to everybody's mind, well, yes, some
Speaker 3: go down, most just stay where they are. But in
Speaker 3: food there is a lot of basic commodity prices at work,
Speaker 3: because your meats, your vegetables, your fruits are all going
Speaker 3: to be dependent on the commodity markets and whether things
Speaker 3: are going up.
Speaker 5: Chocolate expensive, Yeah, I heard that the other day.
Speaker 3: People are upset about chocolate, but that you got to
Speaker 3: blame the weather and god.
Speaker 2: I think, well, so what's the net net? So, Liz,
Speaker 2: So it's interesting. So it'll be one month's report. So
Speaker 2: I don't know what's top of mind as we get
Speaker 2: ready for obviously PPI first, then CPI, because your story
Speaker 2: is like, okay, the only thing that matters.
Speaker 4: Well, it's not just us saying that. The data, you know,
Speaker 4: if you look at the trading days for CPI, it
Speaker 4: has really mattered. And I really think the backdrop of
Speaker 4: some signs of labor cooling a little bit means, like
Speaker 4: someone said, if CPI is soft, the market's off to
Speaker 4: the races. I meaning people just feel like that's last
Speaker 4: shit of we need to see some sign of disinflation
Speaker 4: picking up again, you know, going the right direction down,
Speaker 4: you know. So I think if it came in point
Speaker 4: two or something, you're gonna see the bond market run,
Speaker 4: you know, a point three, you know, maybe is good
Speaker 4: enough for a.
Speaker 2: Little bit about core headline. I'm talking about corey.
Speaker 4: Yeah, because I think the bond market just feels like, hey,
Speaker 4: Fed cut off the idea of hikes, at least they
Speaker 4: put off for now. Labor markets sewing some signs of
Speaker 4: some easing if we can get inflation to start going
Speaker 4: in the right direction. And you know, you've had a
Speaker 4: lot of investors on saying they're buying bonds anyway because
Speaker 4: they think yields are good and we might not get
Speaker 4: these yields again. So I think something's got to really
Speaker 4: mess up that apple krt, like really hot inflation. Otherwise,
Speaker 4: I think the market wants to rally.
Speaker 5: Anything that you.
Speaker 3: Think market does want to rally, well, I think interesting
Speaker 3: note Jay Powell is speaking tomorrow and he'll be talking
Speaker 3: about the economy and he's not gotting anything new to
Speaker 3: say because he won't have seen the CPI numbers. He'll
Speaker 3: be over in Europe and so he you know, it's
Speaker 3: kind of a non event for the Fed chairman, which
Speaker 3: is unusual. But I think what we may see if
Speaker 3: we get a lower print on CPI is we start
Speaker 3: to get the overreaction in markets of oh, we're going
Speaker 3: into recession now because and especially if retail sales come
Speaker 3: in as soft as expected, and now they got to
Speaker 3: cut rates. Because it just goes back and forth.
Speaker 2: It's a ping pong pretty madic, right, Like I just feel.
Speaker 3: I'll make this very quick. Philip Jefferson, who was who's
Speaker 3: the vice chair of the FED said, gave a speech
Speaker 3: on FED communication today. He said, overall, it's good to
Speaker 3: tell the markets what's going on, but there's a lot
Speaker 3: of confusion when so many people are speaking.
Speaker 2: I agree, I think true. Everybody just stop talking for
Speaker 2: a while, but not you guys. Listen Cormick, Mike McKee,
Speaker 2: this is Bloomberg.
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Speaker 2: We want to talk about reads. Real estate investment trusts
Speaker 2: not doing so well this year, but not surprising considering Billy,
Speaker 2: the higher US interest rate environment.
Speaker 5: We're seeing reads under pressure. We've seen analysts pounding the
Speaker 5: table saying now's the time to buy.
Speaker 2: But well, you do wonder right in terms of valuations,
Speaker 2: maybe it makes sense. I just got to throw some
Speaker 2: data at everybody. According to Bloomberg Data, US reads as
Speaker 2: a whole down nearly seven percent year to date. Office
Speaker 2: reads down about five percent so far this year. Industrial
Speaker 2: and warehouse reads down seventeen percent year to date. And
Speaker 2: this is again according to Bloomberg Data. Our next guest
Speaker 2: invests in the space with us as Steve Brown. He's
Speaker 2: senior portfolio manager at American Century Investments. They've got two
Speaker 2: hundred and forty three billion in assets under management total.
Speaker 2: He's joining us here in our studio. Nice to have
Speaker 2: you here with us. How are you, thank you, I'm good,
Speaker 2: Thanks for having me. Well, it's great to have you here.
Speaker 2: You know, we were just talking with Liz McCormick and
Speaker 2: Michael McKee of Bloomberg about the inflation print this week.
Speaker 2: It's top of mind for us because obviously it's top
Speaker 2: of mind for the Federal Reserve and what they might
Speaker 2: do in terms of monetary policy. What are the metrics
Speaker 2: you most keep a watch on for your world.
Speaker 6: Sure, in our world we really focused on real estate fundamentals,
Speaker 6: but in terms of the broader economy, we see cpis
Speaker 6: lower today than it was twelve months ago, so that's
Speaker 6: a positive.
Speaker 5: We also see that.
Speaker 6: The FED hasn't cut rates or hasn't raised rates since
Speaker 6: July twenty three, so they haven't cut rates, but they've
Speaker 6: maintained short term rates at a flat level since July
Speaker 6: last year. And then finally, the tenure, which we do
Speaker 6: spend monitoring. You know, it's bumped around this year. It's
Speaker 6: around four and a half percent, but it got as
Speaker 6: high as five percent in October of twenty three, so
Speaker 6: it is a little lower than it was five or
Speaker 6: six months ago.
Speaker 5: Are you putting money to work right now? Like what's
Speaker 5: going on in terms of Again, Carol mentioned all the
Speaker 5: stats about the underperformance in twenty twenty four, we've seen
Speaker 5: people saying now is the time to put some cash
Speaker 5: to work.
Speaker 6: Sure, we are putting money to work, and what we're
Speaker 6: focusing on is properties, property sectors that have pricing power,
Speaker 6: meaning the ability to raise rents higher than inflation. And
Speaker 6: there's a number of sectors like that to invest in,
Speaker 6: whether it's senior housing, data centers, single family rental, Class
Speaker 6: A malls, open air shopping centers, but there are a
Speaker 6: number of property sectors that do have pricing power in
Speaker 6: twenty twenty four, well.
Speaker 2: It's interesting. So of those, it's interesting data centers something
Speaker 2: again coming out of milk, and when we talked to
Speaker 2: artificial intelligence, it felt like the investment landscape was like, okay,
Speaker 2: data centers and energy, renewable energy to power all of
Speaker 2: those data centers. What specifically tell us little bit about
Speaker 2: the activity that you're seeing there and where you're going.
Speaker 6: Sure, within our investment universe, we have a couple of
Speaker 6: data center reachs. They're quite large though, and obviously they're
Speaker 6: benefiting from the demand created by AI capital spending. There's
Speaker 6: more demand from the AI tenants to expand or take
Speaker 6: more space and data centers. The companies we have large
Speaker 6: positions in data centers are expanding their data centers and
Speaker 6: are building new ones, and their existing data centers do
Speaker 6: have access to power to handle the higher demand from
Speaker 6: their tenants, the higher power demand. So it's a good setup.
Speaker 6: So in terms of an earnings outlook, you know, five six, seven, eight, nine,
Speaker 6: ten percent within the red space, it's pretty attractive in
Speaker 6: twenty twenty four, in twenty twenty five, driven by AI
Speaker 6: driven capital spend, they don't necessarily have in Vidia as
Speaker 6: a tenant, but they have in Vidia's clients as tenants
Speaker 6: in the data centers.
Speaker 5: Right, I'm looking at Digital Realty. They sold one and
Speaker 5: a half billion dollars in shares last Week's right with
Speaker 5: raising this cash and the ability to put money to
Speaker 5: work within data centers, which to me is fascinating. Is
Speaker 5: that an area where you're looking at individual companies? Are
Speaker 5: you guys buying it through a basket portfolio?
Speaker 6: Like we focused on a couple names that were very
Speaker 6: excited about. Digital Realty is certainly one. Equinex is another
Speaker 6: Digital Really Yes, they did a billion and a half
Speaker 6: equity raised last week. It's the fund development projects in
Speaker 6: twenty twenty four to twenty five and beyond. They have
Speaker 6: access to capital, both debt and equity, has proven by
Speaker 6: last week, the stock's trading at a nice premium, so
Speaker 6: it's a premium to net asset value, so it's a
Speaker 6: good time to raise equity. But they have a good
Speaker 6: use of the proceeds in terms of expansions and ground
Speaker 6: up development within their global data center footprint, so they'll
Speaker 6: get a good return on that money. And I think
Speaker 6: the stock has bounced back nicely from that large capital.
Speaker 5: Race, and when you're looking at some of these sub
Speaker 5: sectors within reachs just because of the different exposure, do
Speaker 5: rate cuts kind of predicate how you guys put money
Speaker 5: to work and how you think about which areas are
Speaker 5: better set up than others, and how does that kind
Speaker 5: of play out.
Speaker 6: If we do move into environment with the FEDS cutting
Speaker 6: short term registrates, you know, the question is why is
Speaker 6: the Fed cutting rates? Is it because inflation is moderated,
Speaker 6: That'd be one scenario. If they're cutting rates because we're
Speaker 6: falling into a recession, that'd be another scenario. I think
Speaker 6: if they're just cutting rates because the because CPI is
Speaker 6: coming down from say three point eight to three or
Speaker 6: something like that, then there's certain property sectors that have
Speaker 6: sort of been out of favor would probably rally pretty aggressively,
Speaker 6: like we saw in the fall of last year. The
Speaker 6: Reeds had a very aggressive rally when the ten year
Speaker 6: finally peaked and started to roll over, and there were
Speaker 6: certain sectors like the office sector and some other sectors
Speaker 6: that have been that have more highly levered balance sheets
Speaker 6: that went up the most in price. They benefited the
Speaker 6: most from the advent of lower rates that happened in
Speaker 6: November and December of last year, and if we go
Speaker 6: into that type of environment this year, that would probably
Speaker 6: happen again to.
Speaker 2: Office anything opportunistic. I mean some would say okay, actually
Speaker 2: coming off of milk and folks are saying, this might
Speaker 2: be the buying time of a lifetime in a bunch
Speaker 2: of office properties because they've been so beaten down.
Speaker 6: How do you see it, Well, last year we did
Speaker 6: generate some alpha in the strategy through our office investments,
Speaker 6: not really owning in the first half, coming into them
Speaker 6: in the spring of twenty twenty three when they were
Speaker 6: training at thirty to forty percent discounts to nav and
Speaker 6: then they rallied quite strongly when the ten year peaked
Speaker 6: at the end of October, and then the rates dropped
Speaker 6: from five to say four percent in last year. They
Speaker 6: have hung in there so far. This year, as you
Speaker 6: mentioned at the top of the show, is really driven
Speaker 6: by one big New York name, SL Green that's done
Speaker 6: a lot of interesting transactions. The rest of the names
Speaker 6: have sort of lagged the inly. SL Green. I would
Speaker 6: say that you know we're paying attention. We are underwaid
Speaker 6: office today because we're concerned about demand. They don't have
Speaker 6: pricing power, meaning that supply is greater than demand on
Speaker 6: the office sector because of really the embrace of work
Speaker 6: from home. But we do think that there is demand
Speaker 6: for class A office and we do think that if
Speaker 6: we have a soft landing, you know, job growth will
Speaker 6: continue and that will point to a better outlook for
Speaker 6: office I would say, though, many of the companies have
Speaker 6: above average leverage and they don't have pricing power, So
Speaker 6: that's a bit of a turn off right now.
Speaker 5: And when you look at some of the different central
Speaker 5: banks and the different effects that that has on a
Speaker 5: global perspective. Are there areas that you guys are focused on.
Speaker 5: Are you guys a global fund, Like do you look
Speaker 5: at US versus say, Europe.
Speaker 6: Sure, we do have a global strategy. That's our course
Speaker 6: strategy actually, and other economies around the world have had
Speaker 6: lesser nominal growth in the US, so they have more
Speaker 6: flexibility to cut rates. So we have seen that in Asia.
Speaker 6: Parts of Asia quite exciting, Europe which is not showing
Speaker 6: much economic growth, but that sets them up for the
Speaker 6: potential to cut rates. There's some interesting discount to nav ideas.
Speaker 6: There discounts to the property value there. It's quite a
Speaker 6: bombed out area.
Speaker 5: Also, are there any names that you can mention that
Speaker 5: fit kind of that.
Speaker 6: Well, I would say a couple of things. One is
Speaker 6: we've been able to invest in the data center reads
Speaker 6: or data center real estate companies also in Europe and Asia,
Speaker 6: so that's been exciting. And we've we've begun to look
Speaker 6: through the sort of the wreckage of European properties because
Speaker 6: they're training a big discount to ANAV And I mentioned
Speaker 6: regional Class A regional malls have pricing power and there's
Speaker 6: some regional mall names in Europe that are attractive that
Speaker 6: we think will have good total return for twenty twenty four.
Speaker 2: Well, it's interesting, and we're going to hear, you know,
Speaker 2: French President Manuel McCrone catching up with our own John
Speaker 2: Micklethwaite talking specifically about a big event going on over
Speaker 2: in Paris, all about bringing investment in but was questioned
Speaker 2: about potentially consolidation among the financial space and whether a
Speaker 2: French bank cooks up with another European bank or so
Speaker 2: and so forth. So I'm just curious how you think
Speaker 2: about kind of that broader real estate play in terms
Speaker 2: of some of the bigger macro trends that are going
Speaker 2: on in Europe today?
Speaker 6: Sure, Well, One are the big trends, as you mentioned,
Speaker 6: is consolidation, were also a reduction in capital to various
Speaker 6: activities like real estate. Construction lending is down both in
Speaker 6: North America and Europe because of a variety of reasons,
Speaker 6: just a higher risk associated with construction lending and poorer returns.
Speaker 6: So while that's a fact of life, and that was
Speaker 6: true in twenty twenty three and it's true this year
Speaker 6: twenty twenty four, what we're seeing though is a slow
Speaker 6: down and supply in both Europe, which you mentioned, as
Speaker 6: well as in North America. And we think that sets
Speaker 6: up a good environment for real estate and pricing power
Speaker 6: as we move through twenty twenty four and twenty five,
Speaker 6: as supply growth could come into like one to two
Speaker 6: percent supply growth and demand growth could be two to three,
Speaker 6: so you'd have a improving the demand would be great
Speaker 6: and supply both in many sectors in the US as
Speaker 6: well as Europe.
Speaker 2: Well, and one thing I want to ask you, since
Speaker 2: you are global, and it just feels like all of
Speaker 2: a sudden, everybody's talking about Japan and opportunities, are you
Speaker 2: seeing any opportunities in terms of the real estate over
Speaker 2: in Japan.
Speaker 6: Yes, we've had a lot of success in Japan this year,
Speaker 6: mostly through the Japanese developers. They're not the j reads,
Speaker 6: but they're the developers and the option of They own
Speaker 6: large swaths of commercial property and greater Tokyo, and they've
Speaker 6: benefited from the improved growth prospects in Japan and the
Speaker 6: huge discounts to NAV they were trading at, say, six
Speaker 6: to twelve months ago, it was not uncommon to see
Speaker 6: Japanese JA Japanese developers trading at thirty to forty percent
Speaker 6: discounts to AAV and as there was greater confidence in
Speaker 6: a sort of a modest recovery in the Japanese economy
Speaker 6: with a little bit inflation thrown in these names, these
Speaker 6: Japanese developers really worked quite well over the last sixty
Speaker 6: months or so.
Speaker 2: Where don't you want to be thirty seconds at all?
Speaker 2: Stay away at any here? China and I don't know
Speaker 2: if you've got exposure to China quickly.
Speaker 6: China's not in our index, but Hong Kong is and
Speaker 6: Hong Kong's had a nice rally. We still have some
Speaker 6: questions about that, but I'd say the areas we're concerned
Speaker 6: about is we're still concerned about US self storage. It's
Speaker 6: a sector where they don't have pricing power. I mentioned
Speaker 6: some sectors of pricing power. Well, rents are going down
Speaker 6: really ten to fifteen percent in the self storage sector. Interesting,
Speaker 6: so we just we don't have confidence to really embrace
Speaker 6: that because rents are going down.
Speaker 2: It feels like there was such a build out, and
Speaker 2: I think we're all like enough storing stuff and paying
Speaker 2: for it. Just get rid of it and go travel. Essentially,
Speaker 2: Steve Brown, we covered the world. Thank you so much.
Speaker 5: Thank you it.
Speaker 2: Steve Brown. He's senior portfolio manager at American Century Investments
Speaker 2: two hundred and forty three billion dollars in assets under manager.
Speaker 1: That you're listening to the Bloomberg Business Week podcast. Listen
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Speaker 2: The war zon folks that chip bore that is so
Speaker 2: far superpower is led by the United States and European Union,
Speaker 2: have funneled nearly eighty one billion dollars towards cranking out
Speaker 2: the next generation of semiconductors, escalating a global showdown with
Speaker 2: China for chips, supremacy and folks. That's just the wave,
Speaker 2: the first wave of a lot more to come. It's
Speaker 2: a big topic, trend, industrial policy, and sign of our times.
Speaker 2: What is going on in the global semiconductor space. It
Speaker 2: is also today's Bloomberg Big Take here to continue our
Speaker 2: coverage on the global semi surge. Bloomberg News US Semiconductor
Speaker 2: and networking reporter he is Ian King. He is in
Speaker 2: our San Francisco bureau. Ian, Great to have you back
Speaker 2: with us. The world we know is spending big time
Speaker 2: on semiconductors. Just remind us of some of the size
Speaker 2: and scope that is going on, who's doing it, and
Speaker 2: what each country's game seems to be in all of this.
Speaker 7: Yeah, I mean, there are a number of factors at
Speaker 7: play here. We're talking about, at least in terms of
Speaker 7: what's been announced, close to four hundred billion dollars of
Speaker 7: investments are either being made or will be made. The
Speaker 7: end goals here are independence and or greater capacity to
Speaker 7: produce something which is increasingly being seen as fundamental to
Speaker 7: economic strength and also security. And that's really what's happening
Speaker 7: here is we're seeing a reversal of globalization. I mean,
Speaker 7: this industry was post a child for globalization since it
Speaker 7: first came into being in the late nineteen sixties.
Speaker 2: You know what I find fascinating. It's not like it's
Speaker 2: you know, China spending on Chinese companies in the chip
Speaker 2: space or US companies spending you know, are the US
Speaker 2: government only spending on US companies? You know, they're allocating
Speaker 2: money around the world to facilities. US government has given
Speaker 2: you know, right, money to TSMC and Samsung. Like it's
Speaker 2: interesting that it's kind of an all out of front.
Speaker 7: Yeah, I mean, you've got a back winners, right, this
Speaker 7: industry is down to essentially three or four leading companies
Speaker 7: in terms of this ability to make the absolute bleeding
Speaker 7: edge technology in this industry. So frankly, a start from
Speaker 7: scratch approach just would be hopeless if you're looking at
Speaker 7: it from the US perspective, Intel, which was the national
Speaker 7: champion for many decades, frankly falling behind. So you've got
Speaker 7: to head you bet, you got to give money to
Speaker 7: some song. You've got to give money to TSMC, So
Speaker 7: that's what's happening here. I mean, you've got massive specialization
Speaker 7: in this industry as well, so you've really got a
Speaker 7: back winners.
Speaker 5: And Ian when I look at the article, not only
Speaker 5: are you countering or trying to catch up to China,
Speaker 5: the US lags South Threa, the US lags Taiwan. Are
Speaker 5: there any expectations of how they can continue to close
Speaker 5: the gap and actually surpass at least one or two
Speaker 5: of those as opposed to trying to really catch the
Speaker 5: giant in China.
Speaker 7: Yeah, I mean there are a couple of things to
Speaker 7: impact with what you said there. We're not catching China
Speaker 7: here in terms of technology leadership. The US is still
Speaker 7: well ahead of China in terms of design, even in
Speaker 7: terms of manufacturing, in terms of capacity of manufacturing certain
Speaker 7: types of more simpler chips. Yes, China is definitely making
Speaker 7: a big move and definitely as a threat in that respect,
Speaker 7: but there's still probably several years behind even the US.
Speaker 7: At the same time, the other part of your question,
Speaker 7: there's no doubt that South Korea and Taiwan are well
Speaker 7: ahead of whether US is, and frankly, everything rests on
Speaker 7: Intel's shoulders. If Intel can do what it says it's
Speaker 7: going to do, then the US is back in the game.
Speaker 7: SA is addicting twenty eight percent of advance and reconductor
Speaker 7: manufacturing will be back in the US if frankly, Intel
Speaker 7: can execute.
Speaker 5: And that's a big if, right Ian. I just think
Speaker 5: about how Intel has kind of been lapped by Nvidia
Speaker 5: and other rivals, at least when it comes to the
Speaker 5: stock performance over the last few years.
Speaker 7: Yeah, I mean the stock performance reflects really what investors
Speaker 7: see as the prospects for these companies. What's really happening
Speaker 7: in Intel is they've outlined this plan, which people think
Speaker 7: is the right plan, to invest massively in technology and
Speaker 7: infrastructure and to recast their business model. That's said, though,
Speaker 7: this is an extremely capital in terms of industry, and
Speaker 7: that means that in the short term, your innings, your growth,
Speaker 7: it's going to be horrible. And that's really what we're
Speaker 7: seeing at Intel, that they're not the company that they
Speaker 7: were and the other companies are growing much faster. So
Speaker 7: that's where the money has gone into the fast growth companies.
Speaker 7: Whether that is that, you know, is a is a
Speaker 7: vote on whether people believe Intel will do it or not.
Speaker 7: That's another question and it's probably going to be a
Speaker 7: couple of years before we'll really get the answer to it.
Speaker 5: Yeah, I just want to look at stock performance within
Speaker 5: the semi the Philadelphia Semiconductor's Index over the last three years, Carol,
Speaker 5: Intel down forty three percent, Nvidia five hundred and fifty
Speaker 5: five percent, Clack up one hundred and forty nine percent,
Speaker 5: one hundred and three percent. So really a big bifurcation.
Speaker 2: Well, and in particular the struggles of Intel, which Ian
Speaker 2: has written so much about. And we'll see ultimately whether
Speaker 2: all of these investments. You know, it's a lifeline for
Speaker 2: them right now, but you do wonder what will happen
Speaker 2: longer term. Having said that, Ian, you understand, I know
Speaker 2: I bring this up all the time, but semiconductor cycles,
Speaker 2: what happened that all of a sudden, you know, everybody
Speaker 2: is spending big time. Was it the shortages during the pandemic?
Speaker 6: Was it?
Speaker 5: Is it?
Speaker 2: Ai, Like, what is it all of a sudden that
Speaker 2: it feels like things are ramped up in a big way.
Speaker 7: I mean, you've just answered the question in at least
Speaker 7: two regards. And the other element to that is, of course,
Speaker 7: this idea of national security that in the past we
Speaker 7: were happy with this completely diversified, geographically supply chain. Then
Speaker 7: during the pandemic we got a nasty shock. Then we
Speaker 7: got out a massive sense of like, hey, these things
Speaker 7: are actually on the rise. We need the more and
Speaker 7: more as an answer to our technology needs. And then
Speaker 7: we also need to guarantee national security. And oh, look,
Speaker 7: we're not actually making any of these anymore. Perhaps we should,
Speaker 7: Perhaps we should rekindle that skill before it disappears. At
Speaker 7: least that's been the US perspective China economic independence and
Speaker 7: also independence in terms of its military and security from
Speaker 7: the West. So there are a myriad of conflicting viewpoints
Speaker 7: here and conflicting drivers here, But what they're all boiling
Speaker 7: down to is like everybody's doing a DIY effort. Everybody
Speaker 7: wants independence, you know.
Speaker 2: And what I do wonder about you know, I think
Speaker 2: about TSMC. You obviously knew how big they were in
Speaker 2: terms of, you know, kind of building the chips for
Speaker 2: the world, if you will, But I feel like it's
Speaker 2: for the general public. It's come out over the last
Speaker 2: couple of years, maybe coming off of the pandemics sixty minutes,
Speaker 2: there's just been kind of mass market pieces on their role.
Speaker 2: What I do wonder about is all the spending, whether
Speaker 2: it's in the emerging economies, what India's spending, which Pan
Speaker 2: is spending? Like how what might be happening today kind
Speaker 2: of changed some of the longer term trends in the
Speaker 2: chip industry overall. Could it be happening, could something? Could
Speaker 2: it be telling some kind of more significant stories longer term?
Speaker 7: Absolutely, I mean we're talking about a massive diversification about
Speaker 7: regional centers of supposed excellence and capabilities. Some of these
Speaker 7: things will fall flat on their face, There's no doubt
Speaker 7: about that. Nonetheless, the trend was towards China, that China
Speaker 7: was the largest market for these things as an end user,
Speaker 7: as a buyer, and China was pouring huge amounts of
Speaker 7: money into its own independence. The US has basically tried
Speaker 7: to stop that in a lot of technological barriers that
Speaker 7: have gone up. But you've got Japan trying to get
Speaker 7: back in the game. Japan in the nineties when I
Speaker 7: first started looking at this industry was the leader. So
Speaker 7: there are many things that play here. But I mean,
Speaker 7: right now, not everybody is going to be successful, and
Speaker 7: some countries like India are starting from a long way back.
Speaker 5: Yeah, And when I look at some of the efforts
Speaker 5: that have been going on ian China, trying to China
Speaker 5: being slowed down by some of those restrictions, export controls
Speaker 5: and some of those kind of geopolitical aspects, how is
Speaker 5: that shaping out or how can that shape out? Who
Speaker 5: could win in some of these smaller countries, in some
Speaker 5: of these regions that aren't as developed right now?
Speaker 7: Yeah, I mean the obvious answer for a lot of
Speaker 7: companies is if you can't sell in China, if China
Speaker 7: can't be the heartland for where you do business, then well,
Speaker 7: let's look at where the rest of the world's population is.
Speaker 7: Let's look at where there's a lot more growth to
Speaker 7: be had. In India is the obvious answer there with
Speaker 7: its massive population, it's you know, it's educational base. The
Speaker 7: problem I think for India in terms of the semiconductor
Speaker 7: industry is you need a lot of infrastructure and you
Speaker 7: lead a lot of experience, and India has none of
Speaker 7: those things. It has a lot of expat Indians working
Speaker 7: in the semiconductor industry, most notably in this country, but
Speaker 7: in terms of the types of infrastructure that you need
Speaker 7: and you know, these things are enormously sensitive, really complex
Speaker 7: facilities are not just you know, slap a factory up
Speaker 7: and have some workers trained, and it really is the
Speaker 7: cutting edge. So it's going to be difficult for them
Speaker 7: to get into this industry in a meaningful way in
Speaker 7: the near term.
Speaker 2: We say about a lot of things, it's complicated, but
Speaker 2: really in the semiconductor industry really is Ian. Thank you
Speaker 2: so much, so appreciated. And you know, on this Intel
Speaker 2: in advanced talks with Apollo Global Management over a deal
Speaker 2: that would have the investment firm providing more than eleven
Speaker 2: billion dollars in funding for a chip manufacturing plan in Ireland.
Speaker 2: This was coming from the Wall Street journal. Ian, of course,
Speaker 2: is our Bloomberg News US semiconductor and networking reporter.
Speaker 1: Mark a journal.
Speaker 5: Now about you let me drive?
Speaker 4: Oh no, no, no, no, honey, please out of the riding gravels.
Speaker 1: I want to drive.
Speaker 7: It's a good question. Good time.
Speaker 1: This is the drive to the globe. Do well on
Speaker 1: Bloomberg Radio.
Speaker 2: TikTok, everybody, Just about eighteen minutes left in today's trading session.
Speaker 2: Our next guest says, in general, he and his team
Speaker 2: are seeing quote a deeper opportunity set overseas when it
Speaker 2: comes to stock. So let's get to it. Our drive
Speaker 2: to the closed guest on this Monday. Ben Manash is
Speaker 2: co founder and portfolio manager at Tobion in Tahoe City, California.
Speaker 2: Nice to have you here, Ben, Did I say it correctly?
Speaker 2: I'll sweating it a little bit here. Nice to have
Speaker 2: you here with belly and myself. All right, So, deeper
Speaker 2: opportunity set overseas. I love that you go there. We've
Speaker 2: kind of had a little bit of a global day.
Speaker 2: We heard from the French President, just a lot of
Speaker 2: conversations from some big bank CEOs who are over in Paris,
Speaker 2: so thinking about kind of the global world. We just
Speaker 2: talked about the global chip that's on in countries that
Speaker 2: are spending big time to develop out their semiconductor space.
Speaker 2: So deeper opportunities set overseas, how so? And why.
Speaker 1: Yeah?
Speaker 8: Sure? So at the core we to our global value
Speaker 8: investors and we invest in just a handful of companies
Speaker 8: globally with a very long term time horizon. So our
Speaker 8: perspective is always built from that bottom up opportunity set
Speaker 8: and just weighing up opportunities globally and really valuation would
Speaker 8: be the first points of order as to why we
Speaker 8: see more opportunity overseas. You know, with the US market,
Speaker 8: the SMP trading and around twenty six times training earnings,
Speaker 8: MSCIEF so Developed International around sixteen times, and EM equally
Speaker 8: around sixteen times. We think the broad opportunity in terms
Speaker 8: of valuation is a lot more attractive overseas and really
Speaker 8: skewed by individual companies individual sectors. So for example, the
Speaker 8: Magnificent seven obviously around thirty percent of the SMP today
Speaker 8: by waiting and which on aggregate trade it over forty
Speaker 8: times trading twelvemonth gap earning. So really that's the main
Speaker 8: anchor why we're seeing opportunities.
Speaker 2: Its kind of like the world being on sale versus
Speaker 2: the United States, simply put.
Speaker 8: At the most simple level, yes, and you know you
Speaker 8: have to look beneath the hood a little, and the
Speaker 8: margins and the returns on equity are pretty high in
Speaker 8: the US, which we actually think is somewhat of a risk.
Speaker 8: You know, the longdon net margin of the SMP today
Speaker 8: is eleven point six percent. That compares to a long
Speaker 8: term of around nine percent. And this is in the
Speaker 8: context of you know, three and a half percent inflation
Speaker 8: sub four percent unemployment, of fiscal deficit, all things which
Speaker 8: at the margin would suggest more of a normalization reduction
Speaker 8: in margins in the US rather than things continuing to
Speaker 8: go upwards.
Speaker 5: And Ben, when we but when you're looking at that
Speaker 5: valuation discrepancy, what is normal? Because I cover equity capital markets,
Speaker 5: and when I talk to some of these CEOs of
Speaker 5: foreign companies who want to list here in New York,
Speaker 5: it's because they get a better multiple, they get a
Speaker 5: better valuation, there's a deeper pool of capital, so that's
Speaker 5: just naturally maked in in their view.
Speaker 8: What do you say to that, Well, i'd i'd quote,
Speaker 8: I'd quote mister mister Ben Graham, And I'm always saying
Speaker 8: that over the long term, the market's more of a
Speaker 8: weying or mechanism, and in the short term it's more
Speaker 8: of voting mechanism, the flow of funds. And he may
Speaker 8: have gathered from my accent. I'm not from California, I'm
Speaker 8: from the UK. And you know, we've we seeing a
Speaker 8: huge number of companies either being taken out by private
Speaker 8: equity or choosing to relist in the US. We saw
Speaker 8: arm you know, wonderful company with ip and heritage from
Speaker 8: Cambridge University, choosing to list in the United States for
Speaker 8: that very reason. But over time, we think, if if
Speaker 8: the earnings yields are attractive enough from the quality of
Speaker 8: the businesses are good, I able to deliver good returns
Speaker 8: on capital over the long term. You feel normalize.
Speaker 2: You came to play, and you've got some specific stocks
Speaker 2: that are on your radar, and I do want to
Speaker 2: get to them. And while you say deeper opportunities set overseas,
Speaker 2: we start with a couple of names that are homegrown
Speaker 2: here in the United States, and I'm thinking about Berkshire Hathaway,
Speaker 2: which we know you like. We just had Warren Buffett,
Speaker 2: of course, holding his annual investor meetings, so we've been
Speaker 2: talking about a lot. It's up about fifteen percent so
Speaker 2: far this year. What's the specific strategy are thinking here?
Speaker 8: Yes, So, like a lot of people I was, I
Speaker 8: was in Omaha last weekend listening and it was striking
Speaker 8: to see how any of the questions focused on succession
Speaker 8: and what will happen when mister Buffett is no longer
Speaker 8: with us. So our perspective on Barksher today is actually
Speaker 8: it's less about how capital is allocated incrementally and actually
Speaker 8: more about the system of Buckshan where the capital is
Speaker 8: coming from. So if I can elaborate on that very quickly,
Speaker 8: I mean Barksher has created over the past several decades
Speaker 8: this mechanism which allows them to invest almost twice as
Speaker 8: many gross assets as they have book value and equity,
Speaker 8: and the fundling there has come through surplus capital and
Speaker 8: insurance insurance float which mister Buffett frequently talks about, and
Speaker 8: a deserved low cost of debt. And that means, in
Speaker 8: our opinion at least, that even if the returns on
Speaker 8: the asset side, both the common start but also the
Speaker 8: wholly owned businesses and the cash that they have, even
Speaker 8: if they're let's say average you know, ten hyper returns,
Speaker 8: you get a baked in leverage on the equity which
Speaker 8: will give you kind of twelve percent types return on
Speaker 8: equity for which you're paying one and a half times
Speaker 8: book and around fourteen times look through earnings, which compares
Speaker 8: very favorably to where the S and P is, and
Speaker 8: some very favorably compared to the intrinsic strength of the
Speaker 8: structure and the businesses that formula and.
Speaker 5: You like auto own interesting name. I want to talk
Speaker 5: about the foreign companies though, how did you call it
Speaker 5: the UK home depot? I live in New York, grew.
Speaker 2: Up in California, only refits kitchens, and.
Speaker 5: Yeah, what's the what's the pitch on how din and
Speaker 5: I guess coming back to the valuation perspective, how does
Speaker 5: it compare to real home depot?
Speaker 8: Yeah, so it's it's similar to home depot. It's always
Speaker 8: dangerous to draw these analogies. I did bring it up.
Speaker 8: But the nuance in the business is twofold. First of all,
Speaker 8: they focused very much on the kitchen marksucket and the
Speaker 8: joinery market as opposed to broad home renovation. But the
Speaker 8: second important nuance is they focus just on trades people.
Speaker 8: It's an important part of the business for Holbens, but
Speaker 8: that focus on trade is really important because that relationship
Speaker 8: is much stickier. But also trades people value proximity to
Speaker 8: work much much more than di wires tend to. So
Speaker 8: Howden's has they have around thirty three percent market share
Speaker 8: of the kitchen in the UK, but close to a
Speaker 8: monopoly with trades people. There are over eight hundred depots
Speaker 8: in the UK, so the tradesman is missing a certain
Speaker 8: piece a cabinet or something like that. They can be
Speaker 8: at and get to a home depot very quickly. That
Speaker 8: means they're able to generate very very good margins around
Speaker 8: sixty percent gross profit margins even better than home depot.
Speaker 8: And the price is great. It's not just comparing. It's
Speaker 8: on around sixteen.
Speaker 2: Fine to go to different companies. I agree with you,
Speaker 2: belly like, I love going to other places. Ben, Thank
Speaker 2: you so much, really appreciate Ben Binesh there joining us,
Speaker 2: giving us a couple of names from Tourbillon Investment Management.
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