Speaker 1: This is Bloomberg Business Week. I'm Carol Masser and I'm
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Speaker 1: Bloomberg dot com. Well earlier this month, Bloomberg News came
Speaker 1: out with a story noting that muni bond sales this
Speaker 1: year down around nineteen percent at about three fifty one
Speaker 1: billion dollars. That's according to data compiled by a Bloomberg
Speaker 1: So with a look at the muni market and credit
Speaker 1: market overall, we welcome right now Yafa rat and your
Speaker 1: senior Managing director and head of municipal Credit at Hilltop Securities,
Speaker 1: joining us via zoom two. Not a great year for
Speaker 1: at least sales of munis. Yafa, what store, Well, we're
Speaker 1: super excited about three as the fixed income markets of
Speaker 1: finally yielding some interesting returns on attacks exempt basis. However,
Speaker 1: we also similarly encourage significant vigilance as you evaluate which
Speaker 1: potential securities you might want to be constructive on. There
Speaker 1: are going to be some mind fields out there as
Speaker 1: we head into well, let's talk about that here, because
Speaker 1: there did seem to be a little bit more enthusiasm
Speaker 1: in the munity space, particularly, I think because expectations and
Speaker 1: one was so dour for a lot of these cities
Speaker 1: and states, and then of course we saw that the
Speaker 1: pandemic actually helped a lot of these cities and states,
Speaker 1: if not get back into the black, and at least
Speaker 1: certainly our right size some of the issues here, what
Speaker 1: pulls people back into this market? What sort of wets
Speaker 1: investors appetite. So I do think that if we're heading
Speaker 1: into some sort of economic or any type of recessionary pressures,
Speaker 1: I do believe that we should be constructive on essential
Speaker 1: purpose revenue bonds, particularly waters who are power where in
Speaker 1: excess of I D percent of the transactions are rated
Speaker 1: A or higher. And if people are looking for more
Speaker 1: yieldy opportunities, uh, we would definitely be looking at charter
Speaker 1: schools where about two thirds of the ratings would be
Speaker 1: Chippleby or double B, and frankly, about a third of
Speaker 1: the market is not rated. What about thinking to please
Speaker 1: continue now, I was simply going to say that the
Speaker 1: rates um and the the risk adjusted rates right now
Speaker 1: are actually attractive for the first time in a number
Speaker 1: of years. What are you anticipating in terms of new issuance.
Speaker 1: Can you get kind of a good feel in terms
Speaker 1: of what kind of market environment it will be for
Speaker 1: for that, Yeah, that's a great question. And frankly, we
Speaker 1: know that new issue market volume last year was down
Speaker 1: close to twenty percent, and we've seen estimates for three
Speaker 1: ranging from a similar number about three fifty billion, two
Speaker 1: all the way up to five hundred billion. My instinct
Speaker 1: tells me it's probably be closer to two levels, maybe
Speaker 1: slightly higher. We'll see some new money opportunities we've learned
Speaker 1: how to structure high yield deals in the current environment,
Speaker 1: as well as there will be more refunding opportunities. So
Speaker 1: my guest is somewhere um slightly higher than yeah. But
Speaker 1: one of the interesting things I think coming off of
Speaker 1: the pandemic was that we realized we could kind of
Speaker 1: almost work for many of us work anywhere in the country,
Speaker 1: you had a lot of movement for the first time,
Speaker 1: you had a population that was stuck. You didn't see
Speaker 1: a lot of movement or mobility for decades finally moving around.
Speaker 1: How does that impact you think potentially where we see
Speaker 1: that new issuments are where the UNI market looks more interesting,
Speaker 1: the returns better because of some of those pandemic movements. Yeah,
Speaker 1: there's no doubt that that we've seen movements, particularly to
Speaker 1: the southeast, where people are quote unquote moving to Florida
Speaker 1: thirty forty years earlier than had been and originally anticipated.
Speaker 1: It's certainly a tax positive climate. And what happens as
Speaker 1: a result when you're seeing demographic shifts is you're seeing
Speaker 1: the need for more roads, more bridges, more schools, hospitals,
Speaker 1: and public service type building. So definitely we're going to
Speaker 1: expect to see additional volume in the states that are
Speaker 1: absorbing the demographic shift. Yeah, I'm wondering about opportunities. You
Speaker 1: talked about opportunities from the perspective of you know what
Speaker 1: we'll see next year, right talking about infrastructure projects, utilities,
Speaker 1: what are areas of concern areas to avoid, so I'm
Speaker 1: particularly sensitive about senior living, healthcare, and project finance. Let
Speaker 1: me unwrap a little bit the senior living issue. Frankly,
Speaker 1: senior living occupancy, which is your primary determinant of revenue,
Speaker 1: has not restored fully back to pre COVID levels. At
Speaker 1: the same time, senior living operators or deal with inflationary increases,
Speaker 1: particularly as it relates to labor and food, which together
Speaker 1: account for more than two thirds that they're operating budget.
Speaker 1: I guess I'm just surprised to hear that from a
Speaker 1: demographics perspective, because we hear so much about you know,
Speaker 1: older generations aging into the senior living homes, so it's
Speaker 1: surprising for me. Yeah, ten thousand baby boomers are aging
Speaker 1: into sixty five and older per day at this point.
Speaker 1: Completely agree with you the it's the funding paradigm that
Speaker 1: needs a little fixing right now. Your revenues are not
Speaker 1: growing at the same rate that your expenditures are growing,
Speaker 1: given pressures only on labor and food, and as a result,
Speaker 1: it's creating a whole lot of headline noise. In fact,
Speaker 1: half of the defaults in the muni market this year
Speaker 1: we're in the retirement sector alright, We're gonna leave it
Speaker 1: on that note. Yeah though, thank you so much. Yea A. Ratner,
Speaker 1: Senior Managing director and head of Municipal credit at Hilltop Securities,
Speaker 1: joining us on this last trading day of the year.
Speaker 1: So about when another chart when it comes to economic
Speaker 1: growth and talking about the way that we're thinking about
Speaker 1: economic growth in a post COVID environment and environment where
Speaker 1: interest rates are no longer at zero, where inflation is high,
Speaker 1: where pandemic recoveries are losing momentum. Check out this one.
Speaker 1: Global growth what close to six percent. We're looking at
Speaker 1: pretty anemic growth over the next few years globally sub
Speaker 1: three and projected that's that's normal. And I know there's
Speaker 1: gonna be a lot of hay made over these projections
Speaker 1: because I think you know, most of the projections are
Speaker 1: wrong three percent to two percent. We're not just about
Speaker 1: being wrong, but everyone's fretting because everybody sort of wants
Speaker 1: to put it back. You have that big spike up
Speaker 1: in You have a lot of distortions on these averages.
Speaker 1: But when you talk to older investors, people have been
Speaker 1: through multiple cycles, they'll tell you, look, if you can
Speaker 1: get two to three percent growth in the at least
Speaker 1: in the major economies for markets. That's how pretty darn good.
Speaker 1: Much better than a recession, right, much better than negative growth.
Speaker 1: And part of the problem is that growth gets certainly tainted.
Speaker 1: And it's a whole different story when you're dealing dealing
Speaker 1: also with high inflation rates right in terms of our
Speaker 1: purchase see power and what it ultimately means. But this
Speaker 1: is the question for three, do we get that soft landing,
Speaker 1: even if we get a little bit of growth, that's
Speaker 1: much better than any kind of recession. Any other charts
Speaker 1: out there, yep, interest rates? Interest rate? Did they go up?
Speaker 1: Did they go up? Yes? India just talked about what's
Speaker 1: going on in uh, you know, Latin America. I mean
Speaker 1: they have been on a tear. Here's a chart for
Speaker 1: you guys on radio. Again, no surprise, Central Bank benchmark
Speaker 1: rates broadcast on radio. Yeah, well this is a simulcast. Man,
Speaker 1: I'm not so glad you realized what day by Friday
Speaker 1: he gets anyway, when we do traffic and again to
Speaker 1: ignore the boys, let them do their things. But if
Speaker 1: you look at two for you guys on radio, it's
Speaker 1: just you know, a straight mountain up, if you will,
Speaker 1: in terms of what we've seen for global interest rates.
Speaker 1: But I do wonder too as what yeah, well, I mean,
Speaker 1: I mean this chart really says it all. I mean,
Speaker 1: you talk about the end of what was effectively a
Speaker 1: zero bound world, and let's face it, really a negative
Speaker 1: yielding world when you consider that so many nations that
Speaker 1: were actually uh have negative sign in front of their
Speaker 1: benchmark rates. Here, that's it, easy money, it's over. But
Speaker 1: what's the anomaly? Like, keep that chart up, everybody on TV.
Speaker 1: You're going back to we know we had easy money
Speaker 1: for so luch. You put that chart out back before
Speaker 1: the financial crisis, and you get a better sense here
Speaker 1: of this house sort of things. I mean, if this
Speaker 1: is a that's what I was going to say, a
Speaker 1: reversion to a reversion to the man I want to hear.
Speaker 1: I have to say that I am I allowed to
Speaker 1: give opinions. I want to hear J. Powell and at
Speaker 1: least disclaimer, please for roomain talk a little bit more
Speaker 1: about the normalization a policy, because remember they did start
Speaker 1: to talk about that prior to the inflation really getting
Speaker 1: out of control and they had to pivot and just
Speaker 1: focus on inflation labor market. But there has been this
Speaker 1: sense and The FED did a lot of papers on this,
Speaker 1: saying you cannot stay at the zero bound forever and
Speaker 1: there has to be normalization. But the problem that you
Speaker 1: referred to earlier this week romane For anyone under the
Speaker 1: age of forty, they've they've never lived in an environment
Speaker 1: where we've essentially been adult says I have no friends
Speaker 1: under the age of I'm your friend. Are you under
Speaker 1: feel good for your age? Okay, we have a great
Speaker 1: guest to talk about. What is normal? Uh as we
Speaker 1: are in this final trading day or let's get to it.
Speaker 1: Let's bring in Caleb brun Sheese, an economic analyst at
Speaker 1: the Decision Intelligence Company Morning consult She joins us from Washington,
Speaker 1: d C. Kayla, it is good to have you here
Speaker 1: with us. What is normal in a world where, for
Speaker 1: a decade or so prior to the pandemic, everybody was
Speaker 1: used to very low rates, easy money, a very different environment.
Speaker 1: Was that abnormal, as Metty would say, versus what we're
Speaker 1: seeing today? So good afternoon, Thank you for having me.
Speaker 1: And that is a great question and I think a
Speaker 1: difficult one to answer. Um. Definitely, we had settled into
Speaker 1: what felt like a period of normalcy pre pandemic, and
Speaker 1: what we've been experiencing since the start of the pandemic
Speaker 1: is definitely not normal um. As you can see from
Speaker 1: two what what what what we've seen with inflation. I
Speaker 1: do think in some ways may bring about a bit
Speaker 1: of a rebalancing. Some of these crazier dynamics that we've
Speaker 1: seen lately may um start to reshuffle a little bit.
Speaker 1: Maybe some of the the stories that have been going
Speaker 1: above trend in this recovery are now starting to normalize
Speaker 1: a little bit, and some others may still be catching up.
Speaker 1: So I think potentially this could be a year like that.
Speaker 1: I am curious, Kayla about when we talk about trends,
Speaker 1: because there are a lot of people that sort of
Speaker 1: are looking or at least hoping for some degree of
Speaker 1: being reversion, at least when it comes to certain asset classes.
Speaker 1: And I'm wondering if there has been so much damage
Speaker 1: from the pandemic, from inflation and from the fits and
Speaker 1: the central banks fight against it, that it's almost impossible
Speaker 1: for us to go back to that, at least not
Speaker 1: in the short term. It varies a lot depending on
Speaker 1: which market you'd be talking about. Take housing, for example,
Speaker 1: Right now, we've had this very dramatic collapse, but that's
Speaker 1: coming up against many years of kind of chronic under
Speaker 1: supply that we've sort of seen since the last housing collapse.
Speaker 1: Uh So, in that case, even though we are seeing
Speaker 1: this very dramatic correction, I do think that there's sort
Speaker 1: of a floor there that's going to present values from
Speaker 1: falling too much because it's up against this long term,
Speaker 1: longer term trend of chronic undersupply. So it varies a
Speaker 1: lot from market to market, but you know, it's different
Speaker 1: with labor markets. To there are certain industries that still
Speaker 1: have some room to grow, to recover to their pre
Speaker 1: pandemic level, which are constituting some of the growth. Okay,
Speaker 1: that's exactly where I want to go. Is the labor market.
Speaker 1: One area of frustration I think for J. Powell has
Speaker 1: been the resilience of the labor market. He mentioned several
Speaker 1: times this year that it's unsustainably hot. When will we
Speaker 1: start to see some sort of cracks when it comes
Speaker 1: to labor in this country? And are those cracks can
Speaker 1: actually get so big that they're going to start to
Speaker 1: be a concern where we do see widespread jobs just argue,
Speaker 1: is it his frustration or is it also some of
Speaker 1: his saving grace because it allows him to keep you
Speaker 1: know what I mean, doesn't fall on apart. That is
Speaker 1: a really good point. I mean, and I don't want
Speaker 1: to be you know, looked at somebody who's like cheering
Speaker 1: for job losses here, but he's called the job market
Speaker 1: unsustainably hot several times this year. Yeah, And I think
Speaker 1: a lot of the concern with that comes from the
Speaker 1: wage games that come along with it when we still
Speaker 1: have labor force nticipation below where it was pre pandemic
Speaker 1: um and certain of these sectors, a lot of a
Speaker 1: lot of them tend to be sort of lower paying
Speaker 1: services sectors like leader and hospitality, health services, things like
Speaker 1: that that lost a lot of jobs in the pandemic
Speaker 1: and are still growing. Those are the ones that are
Speaker 1: still contributing to jobs games the most um and where
Speaker 1: we're seeing a little bit stronger wage games. And the
Speaker 1: concern with that is that those wage games stick into
Speaker 1: that services component because it's a cost input for services
Speaker 1: and keeps inflation elevated. So that's kind of a concern
Speaker 1: with that. We to the start of your question that
Speaker 1: we have started to see definitely some cooling in the
Speaker 1: labor market. But I think because these sectors that are
Speaker 1: still growing are bigger ones, I think it's UM not
Speaker 1: making it show up at the top line as much.
Speaker 1: And that's an interesting point. And I and the focus Carol,
Speaker 1: I think on wages, I understand why. But those that
Speaker 1: wage growth spiral, if you call it that, you know
Speaker 1: that's also fueled, of course, a lot of the consumer
Speaker 1: spending as well. And last time I check, that's little,
Speaker 1: huge component of this economy. Yeah. Huge, Well, and let's
Speaker 1: go to it because you know, one of the things
Speaker 1: when we were planning on our planning call this morning,
Speaker 1: kalas you know, Romaine was pointing out, you guys have
Speaker 1: so much important data. What are you seeing when it
Speaker 1: comes to consumer spending? That is the backbone of our economy. Absolutely,
Speaker 1: and that's really the area that I actually spend the
Speaker 1: most of my time watching UM and I'm definitely keeping
Speaker 1: a close eye on it. At the start of UH,
Speaker 1: my big concern is that consumer budgets are just starting
Speaker 1: off in a much weaker position than they did in
Speaker 1: two UM. We've see in our surveys that we collect
Speaker 1: from among consumers that there's a it's been rising all
Speaker 1: year the share who are saying that their monthly expenses
Speaker 1: total more than their incomes, so they've been working away
Speaker 1: at their savings. Debt debt levels have been increasing and
Speaker 1: getting more expensive with interest rates, so all of those
Speaker 1: factors I think are making the consumer a bit weaker.
Speaker 1: What's been surprising is how resilient spending has been so far.
Speaker 1: But um, the question now is kind of our income
Speaker 1: is going to close the gap enough with inflation to
Speaker 1: kind of allow them to keep spending or you know,
Speaker 1: we're seeing more price sensitivity. The holidays were a big
Speaker 1: toll on many, so are they going to be able
Speaker 1: to sustain positible growth in Well, I'm curious, Kayla, when
Speaker 1: you look at the data that we've gotten so far,
Speaker 1: and I'm particularly talking about some of the ratios with
Speaker 1: regards to credit balances, debt servicing, household debt servicing, and
Speaker 1: things like that. Here, have any of those ratios given
Speaker 1: you concern? Because when you point those out to certain
Speaker 1: people and you say this could be bad, they say, well,
Speaker 1: you have to compare to you know, the financial crisis
Speaker 1: and other sort of recessionary periods that we went through,
Speaker 1: and they say, well, it's not bad. When you stack
Speaker 1: it up against that. Yeah, I agree with that, and
Speaker 1: I think that certainly was what helped us throughout two.
Speaker 1: We've kind of only just gotten back to you know,
Speaker 1: pre pandemic debt levels UM or debt utilization as a
Speaker 1: share of income. But what worries me is that, you know,
Speaker 1: you think about how what the consumers used to spend.
Speaker 1: They have incomes, they have savings, they have debt uh
Speaker 1: and and where we are now is they've worked their
Speaker 1: way through the savings through their savings to a larger
Speaker 1: degree than they did at the start of last year.
Speaker 1: Incomes are still not keeping up with prices. If that changes,
Speaker 1: that could help, But for now, purchasing power is going
Speaker 1: down UM. And then debt levels is that final piece
Speaker 1: which has not been a big concern in twenty two.
Speaker 1: I'd say we're kind of back to neutral now it
Speaker 1: could be a bigger piece in Can we just mention
Speaker 1: for our radio and it was an incredible chart, let's
Speaker 1: throw it up again for TV. It was inflation adjusted
Speaker 1: wages falling for nineteen months. So we saw that individuals,
Speaker 1: you know, based on the inflation picture for a long time,
Speaker 1: we're doing okay based on what they were being paid.
Speaker 1: But the last nineteen months that's not been the case.
Speaker 1: And this is a brutal chart. And and and I know
Speaker 1: that a lot of the data we get we don't
Speaker 1: it doesn't have that the luxury of being inflation adjusted. Obviously,
Speaker 1: you can kind of do the map yourself here, but
Speaker 1: I think if you see more of these charts on
Speaker 1: an inflation adjusted basis, it would cause a little bit
Speaker 1: more concerned I think out there. Yeah, I think so too.
Speaker 1: But if if if inflation does indeed come down then
Speaker 1: and we you know, sort of purchasing power essentially increases,
Speaker 1: then we could start to see a difference that that
Speaker 1: could be if you know, if it's the key that
Speaker 1: could be, and what's the lack of time? And when
Speaker 1: we talk about just the psychology of these markets and
Speaker 1: and more important psychology of the consumers. It's not just
Speaker 1: whether they have the capacity to do things, that's how
Speaker 1: they feel. Right, I'm still here, I mean, I mean,
Speaker 1: in all series is I mean, I don't remember who
Speaker 1: said it, but I remember I don't remember years ago,
Speaker 1: was you know one of the some political Kennedy was
Speaker 1: talking about how the economy really is a feeling for
Speaker 1: most people. They're not looking at charts like that. That's
Speaker 1: how they feel. And if they feel things are bad,
Speaker 1: it's going to be bad. I'd say we certainly saw
Speaker 1: that with our index of consumer sentiment this year UM,
Speaker 1: which is interesting because it's been it was way down.
Speaker 1: It came down below you know what it got to
Speaker 1: in in the height of when everything was going crazy. UM.
Speaker 1: Our index of consumers enement had been recovering, but it's
Speaker 1: been like really down all year UM as inflation went up.
Speaker 1: And I think that chart that you just showed, I
Speaker 1: agree that was a great chart showing inflation adjusted wages
Speaker 1: UM that that declining purchasing power. Consumers are feeling that,
Speaker 1: and because of other forces, it hasn't necessarily showed up
Speaker 1: in in certain parts of the economy, like the labor market,
Speaker 1: like consumers spending to some extent UM. But absolutely that's
Speaker 1: reflective of what consumers are feeling. It's the power of
Speaker 1: the Bloomberg Kala. Yeah. You know, if somebody was running
Speaker 1: from your point out morning console, they have some a
Speaker 1: lot of great data to I'm just saying, you're running
Speaker 1: for office. That's the kind of chart you show, right, Yeah, exactly.
Speaker 1: Hey Caleb Brun, Thanks so much for joining us this
Speaker 1: afternoon and really appreciate your time. Cayler Brune is economic
Speaker 1: analysts at morning consults. We're going to continue to look
Speaker 1: ahead here any recent big changes in Washington as well,
Speaker 1: awesome departures out of the Biden administration we're learning today,
Speaker 1: and of course a new Congress coming in in January three.
Speaker 1: So a big set up here for investors as we
Speaker 1: move out of two into Please to say, joining us
Speaker 1: right now to talk a little bit more about this
Speaker 1: is Bryce Stode, old friend of the program, joining us
Speaker 1: here on the stay as a senior vice president we
Speaker 1: should point out, and senior portfolio manager over at SIT
Speaker 1: Investment Associates. Uh, all right, let's get right to it. Bryce,
Speaker 1: you go back to the beginning of this year and
Speaker 1: you look at some of your worst fears, some of
Speaker 1: your worst predictions here, did the markets actually meet that?
Speaker 1: Did they come in higher than that or lower than that?
Speaker 1: It was incredibly difficult. A year in twenty two, we
Speaker 1: were very pessimistic. We saw the Fed is way way
Speaker 1: way behind the curve. You know, just just over a
Speaker 1: year ago their twelve month forecast for FED funds was
Speaker 1: less than one percent. I mean we we knew they
Speaker 1: were going to have to pivot them, but not to
Speaker 1: this degree. No, we we thought it could be the
Speaker 1: worst bond market in history, which we're thinking maybe down
Speaker 1: five percent, not not thirteen to fifteen percent. And it's
Speaker 1: just an incredibly terrible year because you know, the FED
Speaker 1: was so far behind the curve that by the time
Speaker 1: they did try to catch you up, it was just
Speaker 1: so extreme that in such a short period of time
Speaker 1: that just really blew everyone away, and so that obviously
Speaker 1: bled over to the stock market and caused the combined
Speaker 1: market stocks and bonds to just be shockingly bad. That
Speaker 1: having said that, it does set up for a much
Speaker 1: better the FED can't raise rates another four percent. You know,
Speaker 1: there's so many things that are you know, saying from
Speaker 1: the afterlife you watch me, you know I could do that. Well,
Speaker 1: there is that, And as a as a bond person,
Speaker 1: you know, we're just naturally paranoid. We're always thinking about
Speaker 1: the downside. So it's been kind of strange lately to
Speaker 1: have this sense of optimism. Fore, I'm like, what was that.
Speaker 1: I forgot what it felt like to be optimistic as
Speaker 1: a bond RS. The one thing I would say is, yeah,
Speaker 1: I hear you. I mean it felt so miserable to
Speaker 1: see both the stock and bond market just take a
Speaker 1: big hit to see that correlation. You know, that's not
Speaker 1: what's supposed to happen. Having said that, you know, what
Speaker 1: is it that gives you certainty that you feel like
Speaker 1: you can start to predict at this point? Well, I
Speaker 1: think inflation being at ten percent in twenty two is
Speaker 1: just just horrific, and twenty three people are equivalent about
Speaker 1: it being somewhere between two and four. I'm like, hey,
Speaker 1: you can buy investment great bonds at five. You will.
Speaker 1: We're automatically at least within the UH. You know, you
Speaker 1: can conceive a real yield as a complete game changer.
Speaker 1: So I and I see inflation coming down um much
Speaker 1: quicker than I think other people do because they are
Speaker 1: really The way the math works is if oil is
Speaker 1: that e D and stays at eight, that's zero inflation.
Speaker 1: So I'm not calling for deflation like a lot of
Speaker 1: people think it has to go back to where it
Speaker 1: was in Dwayne one. No prices could just stabilize where
Speaker 1: they are, and we have zero CPI. So those kind
Speaker 1: of things are are are what give me a lot
Speaker 1: of optims. I think the Fed's got two more rate
Speaker 1: increases in them, and that's it. Two more rate increases
Speaker 1: of basis points each fifty basis points. What do you
Speaker 1: see now, you're I'm trying to not be pinned down.
Speaker 1: I think it will be fifty. And a very wise
Speaker 1: man said to me earlier today that you know, everybody's
Speaker 1: speculating about what's going to happen in terms of the
Speaker 1: FED and market outlooks. You know, a lot of them
Speaker 1: got it wrong this year. So what is really the
Speaker 1: smart conversation is there's something that you can really kind
Speaker 1: of hang your hat on here. Who is this wise man?
Speaker 1: Did you just make this person up? You know him? Well,
Speaker 1: it's not man. Well, the economy is transitioning from stay inflation,
Speaker 1: you know, zero growth of temper cent inflation to stag nation.
Speaker 1: We're gonna have another year zero growth, but we're not
Speaker 1: going to have timber cent inflation. Um, so it's a
Speaker 1: different animal and that's a tough tough market for stocks.
Speaker 1: Fine for bonds, but stocks we're getting earnings boost by
Speaker 1: purely inflation. They're not going to get that lift. So
Speaker 1: the first half of the year is going to be
Speaker 1: little tough um, and there's gonna be some misinterpretation about
Speaker 1: what's going on. One real, real problem with the way
Speaker 1: Powell is looking at things is that he sees this
Speaker 1: cost push inflation from wages is just not gonna happen.
Speaker 1: Wage inflation was or wage increases were trailing CPI for
Speaker 1: the last eighteen months. So that's a rare situation where
Speaker 1: you have negative wage growth, it's gonna flip back to positive.
Speaker 1: That's what normally is. It normally outpaces inflation because of productivity.
Speaker 1: And he's gonna misinterpret that. He's gonna think, oh no,
Speaker 1: that is that means it's going to feed into forever inflation,
Speaker 1: this this vicious circle cycle, which it doesn't. And so
Speaker 1: that's what's really going to cause, uh, the stock market
Speaker 1: headaches because people that will wait for the pivot will
Speaker 1: get disappointed, back and forth, back and forth. But by
Speaker 1: by the time they finally capitulate and say, oh wow,
Speaker 1: wages have been going up and it hasn't been showing
Speaker 1: up in CPI And in fact, when you use new
Speaker 1: rents for core CPI, CPI is pretty darn lull. People
Speaker 1: will start to look at a three month annualized CPI
Speaker 1: rate instead of the CPI rate instead of the year
Speaker 1: over year. And when that transition happens, and they'll be
Speaker 1: like February March, you better be fully invested in stocks
Speaker 1: because they'll pop. All right, We're gonna leave it on
Speaker 1: that note, Hey, Bryce, thank you so much. Bryce Dody,
Speaker 1: senior portfolio manager at SIT Investment Associates, joining us there
Speaker 1: via zoom. Many people are not laughing about the housing
Speaker 1: market right now. Those mortgage rates. I don't know if
Speaker 1: you noticed, but in the US rods for the first time, uh,
Speaker 1: since mid November, we've seen them kind of pulling off
Speaker 1: some of those highs. But nonetheless we've seen a slow
Speaker 1: down difficult for buyers and both sellers when it comes
Speaker 1: to housing. So we thought, as we get ready to
Speaker 1: flip into a new year, let's check in on the
Speaker 1: housing market. We've got a good guest to do that,
Speaker 1: Jason Kern. He is the president of the investment management
Speaker 1: at over At Courtland. He joins us from Atlanta. Jason,
Speaker 1: welcome to the show. So the housing market, Um, let's
Speaker 1: just go for it. What's to hold for those in
Speaker 1: housing industry and for buyers and sellers? Yeah, figurey much.
Speaker 1: An happy new year to you all. Um, Well, you know,
Speaker 1: our our business are at Cortland is in the multi
Speaker 1: family housing sector, so we own manage develop multi family
Speaker 1: apartment buildings basically, so the single family housing market is
Speaker 1: a bit of an adjunct and almost a competitor in
Speaker 1: some ways in the sense that not of our residents
Speaker 1: and our apartments leave our units in order to make
Speaker 1: a first time home purchase. And so ironically, even though
Speaker 1: the rising interstate environment that you all were just talking
Speaker 1: about three fifty basis points of FED funds raises over
Speaker 1: the last six months, that has certainly negatively impacted our business.
Speaker 1: But the slight silver lining actually for us is that
Speaker 1: it has increased the you know, the expensive inaffordability of
Speaker 1: single family housing. So in a in a weird sort
Speaker 1: of way, it keeps a lot of our tenants in place,
Speaker 1: just because unfortunately it's harder for them to buy that
Speaker 1: first time home when there are mortgages have gone from
Speaker 1: three percent to seven percent almost overnight. Jay, think you
Speaker 1: talk a little bit more about that, because I thought
Speaker 1: one of the more interesting things about some of the
Speaker 1: housing data we got this year. Of course, we saw
Speaker 1: the big drop off in housing starts for single family
Speaker 1: homes and permits as well. Of course, the trend line,
Speaker 1: as I'm sure you know from multi family has been
Speaker 1: a little bit more an upward trajectory at least in
Speaker 1: the second half of the year here, and I am
Speaker 1: curious what's driving that. Is it short term issues driving
Speaker 1: at or are there longer term structural issues driving that? Yeah, truly,
Speaker 1: I mean there's a long term, very beneficial supply demand
Speaker 1: dynamic in the in the multi family and the single
Speaker 1: family housing area. As an owner, as a landlord like
Speaker 1: Courtland is, you know, there is a fundamental undersupply to
Speaker 1: this day as we speak of housing across single and
Speaker 1: multi family are our research sort of shows that we're
Speaker 1: probably a million and a half homes short of the
Speaker 1: demand that's out there. There's others of a prognosticate that
Speaker 1: it's more like three or four million. But that puts
Speaker 1: you in a pretty positive place in terms of demand
Speaker 1: for your housing units or homes. Now that obviously that
Speaker 1: gap can be shrunk by a lot of new supplies.
Speaker 1: You just talked about the home builders building a lot
Speaker 1: of single family homes. Developers like ourselves and our competitors
Speaker 1: building apartment units and certainly there was a lot of
Speaker 1: development going on, which is really kind of an appropriate
Speaker 1: response to all that demand for housing out there. The
Speaker 1: current interest rate environment impacts obviously all aspects of the
Speaker 1: US and the world economy, but one place it does
Speaker 1: impact is that development activity. And we have seen new
Speaker 1: development starts in our space drop off precipitously since it's
Speaker 1: just rates have started to go up. To us, help
Speaker 1: us quantify the birds depending on debt finance to get
Speaker 1: those projects, well, Jason, help us quantify that just for
Speaker 1: for your business alone, I mean, how much has it
Speaker 1: cost you to develop a project that, uh, you know
Speaker 1: a few years ago you could have developed for for less.
Speaker 1: I mean, how much more are you having to pay
Speaker 1: as a result of higher interest rates? And at what
Speaker 1: point it become not worth it anymore? Even if there
Speaker 1: is the supply and demand issue that you talked about
Speaker 1: with what between one and a half and and formally
Speaker 1: in housing units being short, it's gonna very much depend
Speaker 1: by market obviously as always, but I mean generally speaking,
Speaker 1: you know, the Sofer rate, which is our base rate
Speaker 1: that we used for floating right debt, has gone at
Speaker 1: least four hundred basis points spreads. I've gapped out fifty
Speaker 1: basis points on top of that, so you're talking about
Speaker 1: five basis points of extra interest costs. Also, the banks
Speaker 1: at the moment are very stingy in terms of lending,
Speaker 1: particularly on higher risk development lending, and so the sort
Speaker 1: of access to that debt and the level of leverage
Speaker 1: that you can get on a project has been impeded,
Speaker 1: and so it just makes it much more difficult. I mean,
Speaker 1: our of our business is a you know, a spread
Speaker 1: yield business. So you know, we are assuming a certain
Speaker 1: amount of rent income that we can earn on an
Speaker 1: asset after we build it or when we own it.
Speaker 1: And when your cost of debt skyrockets like it has,
Speaker 1: it just makes those margins shrink and sometimes disappear. Makes
Speaker 1: a lot of development projects simply untenable from the financial
Speaker 1: Well let's go there, let's go down into your business.
Speaker 1: So are you guys planning to build new units? Um,
Speaker 1: talk to us about the environment for that. How do
Speaker 1: you finance it? Our banks willing to lend the money?
Speaker 1: Is it easy to come by? Give us an idea? Yeah,
Speaker 1: it's it's become more challenging, and we're we're in a
Speaker 1: bit of a hold right now. We are incredibly busy,
Speaker 1: as you might imagine, for the eighteen months leading up
Speaker 1: to June of this year. I guess I can still
Speaker 1: say that in the last couple of days here so
Speaker 1: we were we did probably seven billion of new apartment
Speaker 1: acquisitions during that eighteen month period and have done little
Speaker 1: to nothing in the last six months, not surprisingly h
Speaker 1: not starting new developments at the moment, really taking a
Speaker 1: wait and see attitude. It's part of what the overall
Speaker 1: industry is doing. There's a there's a wide bit ass
Speaker 1: spread whether you're developing or whether you're buying and selling apartments,
Speaker 1: to see what buyers are willing to pay given higher
Speaker 1: interest rates, given a lack of price discovery, just not
Speaker 1: a lot of transactions are happening. That tends to create
Speaker 1: a little bit of rigor mortists in our industry, and
Speaker 1: people that are selling aren't yet capitulating in terms of
Speaker 1: how much they're willing to cut their cut their prices.
Speaker 1: Um So I expected to be quite slow going back
Speaker 1: to the original question for the first half of three.
Speaker 1: But like all financial markets, uncertainty is the big bugaboo
Speaker 1: that is keeping people on the sidelines. I expected by
Speaker 1: the middle of three, we're gonna see some clarity at
Speaker 1: least in terms of what j Powell and the VET
Speaker 1: are doing. Our estimates that we might actually start seeing
Speaker 1: rap cuts in the middle of the year. And once
Speaker 1: you have that clarity, you're gonna have a lot of
Speaker 1: capital that's currently sitting on the sideline come back into
Speaker 1: the market. I think it could be a very busy
Speaker 1: and very interesting second half as that as that as
Speaker 1: that potential capital though also sort of adjusted to the
Speaker 1: potential reality that even if you do get a VET
Speaker 1: pivot a cut, which I think at least based on
Speaker 1: market pricing, is still a bit of a long shot.
Speaker 1: But if you do get it, it's not like they're
Speaker 1: going to take it back down to you know, the
Speaker 1: zero bound where we were at the start of the year.
Speaker 1: Can they live with five percent, four percent or even
Speaker 1: three percent on a FED funds rate and whatever that
Speaker 1: feeds into with regards that acrost the capital, Yeah, you can.
Speaker 1: And you know, the price adjustment that we're currently experiencing
Speaker 1: um will increase the going in yields and returns on
Speaker 1: assets on labored basis. So then if you add on
Speaker 1: leverage that is more expensive and maybe to lower LTV.
Speaker 1: Those two things can balance out. Especially in multi family.
Speaker 1: We have a couple of great advantages. Number one to
Speaker 1: supply demand dynamic I talked about Number two. We were
Speaker 1: able to do a lot of our borrowing from the
Speaker 1: government agencies. Freddie Mack and fannie May may have some
Speaker 1: very good programs that are very helpful for accessing more
Speaker 1: attractive finance and the multi family sector UH specifically UH.
Speaker 1: And thirdly, it's just just the fact that it is
Speaker 1: really sort of one of the bell weathers of the
Speaker 1: real estate industry. Investor capital over the last few years
Speaker 1: as gradually and now dramatically been going from office product,
Speaker 1: retail product to both multi family and industrial. So that's
Speaker 1: I think a booty the market and great transaction volume
Speaker 1: that will actually, I think surprise a lot of people
Speaker 1: second happen next year. Jason, what can you tell us
Speaker 1: about the rents that are being paid to to your
Speaker 1: firm right now? Are you seeing delinquencies? Are you seeing
Speaker 1: them being paid on time? Is anything shifted over the
Speaker 1: last few months as as consumers cash cushion has gotten smaller? Yeah,
Speaker 1: we haven't really experienced it. Even during COVID, we didn't
Speaker 1: experience significant delinquencies. Our occupancies stay relatively stable, um you know.
Speaker 1: I think that's partly reflective the fact that we're in
Speaker 1: some of the stronger markets in the US were very
Speaker 1: Sun Belt focused, where there's a lot of immigration, a
Speaker 1: lot of job growth out of wage growth, and our
Speaker 1: apartments tend to be they're not luxury apartments, um. Are
Speaker 1: average rents or somewhere an eighteen hundred dollars per month.
Speaker 1: Our average resident is paying about of their income in
Speaker 1: rents are quite sustainable. From that perspectives, that gives you
Speaker 1: an ability to increase rents, which we we certainly did,
Speaker 1: like all of our competitors, when rents were rising dramatically.
Speaker 1: That those rent increases, as we all know, have decelerated dramatically.
Speaker 1: Still in positive territory, we're still rolling over rents at
Speaker 1: higher than what we charged a year ago, but really
Speaker 1: not seeing a lot of delinquencies. And again I think
Speaker 1: that's down to the fact that our communities have a
Speaker 1: good credit quality, Our rents are attainable, affordable, uh, and
Speaker 1: our residents are able to sustain um you know. And
Speaker 1: then you know, a lot of cases they're income to
Speaker 1: have actually increased as well. As inflation has h has
Speaker 1: been a big part of the picture. Hey, Jason, we
Speaker 1: talked earlier about the adult living communities that are out
Speaker 1: there in the context of the municipal bond market or
Speaker 1: municipal market. Um, I believe right, that's what we did. Yeah,
Speaker 1: just a reminder, give us an idea of your mix
Speaker 1: of your business and what you're seeing in terms of
Speaker 1: demand there. Yeah, go ahead. We're not in the We're
Speaker 1: not in the act of adult business anymore so. Our
Speaker 1: our properties are straight traditional, no age restriction whatsoever. So
Speaker 1: couldn't comment. Okay, forgive me. I think it was on
Speaker 1: your website. That's why I was a little confused. I've
Speaker 1: seen it on the website to return on investments. Give
Speaker 1: us an idea of that in terms of what eats
Speaker 1: away at our o I for your investors specifically, is
Speaker 1: it labor costs, is it materials? What is it specifically?
Speaker 1: Is it the higher rate environment overall? Yeah, I would
Speaker 1: say inflation is not as big an impact on our
Speaker 1: business as interest rates, which is hugely impactful. Inflation really
Speaker 1: hits us in terms of the cost of materials and
Speaker 1: we're developing or renovating assets and obviously it's our labor
Speaker 1: costs a bit, and it can impact us if you know,
Speaker 1: the sort of disposable income of our residents starts to
Speaker 1: get hipped away by massive inflation. Again, I think wages
Speaker 1: have kept pretty good based with those across our portfolio. Um, well,
Speaker 1: what I would say is that multifamily is actually quite
Speaker 1: unique in the sense that a lot of the returns
Speaker 1: that we generate for our investors don't rely on us
Speaker 1: kind of sitting around waiting for the capital markets to
Speaker 1: increase pricing. We can add a ton of value by
Speaker 1: renovating units, by going in and you know, renovating, putting
Speaker 1: a new appliances, you know, swapping out counters, cabinets, uh,
Speaker 1: you know, taking out flooring, that sort of thing. So
Speaker 1: we can, if we're smart about it, we can spend
Speaker 1: capex that has a really good return on investment. And
Speaker 1: even on the operating side, multifamily is operationally intensive by
Speaker 1: its nature, and we pride ourselves on when we buy
Speaker 1: a new asset, we go and there we're branding and Cortland,
Speaker 1: we're putting our team in place, all of our technologies,
Speaker 1: all of our service models in place, so that we
Speaker 1: can hopefully generate higher occupancy premium rents just by providing
Speaker 1: a better service closer to hospitality than sort of traditional
Speaker 1: apartment living in one money vision. So I thinks are
Speaker 1: all good are alive endeavors. Jason, We're gonna have to
Speaker 1: leave it there. Thank you so much for finding us.
Speaker 1: That's a Jason Kern from Cortland. Really appreciate it. Thanks
Speaker 1: for listening to Bloomberg Business Week. Download the podcast on iTunes, SoundCloud,
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