Speaker 1: This is Bloomberg Wall Street Week.
Speaker 2: And we may not have an overall recession, we're having
Speaker 2: a rolling recession.
Speaker 1: To Cone rowl looks pretty strongly. It is when it
Speaker 1: comes to jobs. The financial stories that shape our work.
Speaker 2: Three major regional bank failures send shockwaves through the banking system.
Speaker 2: We're all trying to figure out what to make of
Speaker 2: generative AI.
Speaker 3: Through the eyes of the most influential voices.
Speaker 2: Welcome down, Doctor Paul Krugman, Ryan moynihan, a Bank of America,
Speaker 2: deebro Lair of the Paulson Institute, well then Hubbard of
Speaker 2: the Columbia Business School.
Speaker 3: Bloomberg Wall Street Week with David Weston from Bloomberg Radio
Speaker 3: show me the money.
Speaker 2: To keep the government going, to justify rate cuts, and
Speaker 2: for former President Trump to post his bond. This is
Speaker 2: Bloomberg Wall Street Week. I'm David Weston. This week, nad
Speaker 2: Meggie of Blackstone on the case for investing in real
Speaker 2: estate despite all you've.
Speaker 4: Heard, what we see is a generational investing opportunity while
Speaker 4: others are looking in the rear view mirror.
Speaker 2: And Lindsay Rosner of Golden Sachs on the risks and
Speaker 2: opportunities in fixed income when yields are high but spreads.
Speaker 5: Are tight, We're finding an interesting pocket is actually in
Speaker 5: structured products.
Speaker 1: But we start with the US economy.
Speaker 2: Calling a Goldilocks doesn't go far enough for Nobel Laureate Paul.
Speaker 4: Krugman, I've been arguing with people who say, you know,
Speaker 4: this is a Goldilock's.
Speaker 6: Economy, and that's wrong. Goldilocks found a parts.
Speaker 7: That was neither too hot nor too cold.
Speaker 4: But you've got an economy that's hot where you want
Speaker 4: it to be hot, like in GDP growth, and cold
Speaker 4: where you want it to be cold.
Speaker 2: On inflation, even as sentiment numbers lag well behind.
Speaker 8: The levels of sentiment are more like deeper session levels
Speaker 8: than sort of mildly pessimistic levels. I think a lot
Speaker 8: of that is unrelated to the economy, and a lot of.
Speaker 2: That negative sentiment is because of inflation, with some saying
Speaker 2: that the way the FED calculates it makes it seem
Speaker 2: worse than.
Speaker 1: It really is.
Speaker 9: The Fed's inflation numbers are artificially high. I think if
Speaker 9: you look at real housing costs and you talk to
Speaker 9: the people who own collectively hundreds of thousands of residential
Speaker 9: units across the country, even in the best markets, rents
Speaker 9: are basically flat. Most people aren't moving from their home
Speaker 9: because their mortgage is low, so their occupant zy costs
Speaker 9: are flat. So to say, inflation because of some metric
Speaker 9: that the FED is using, is six percent, and that's
Speaker 9: thirty percent of inflation. I think you're overstating inflation by
Speaker 9: as much as one point eight percent. So I think
Speaker 9: inflation is actually pretty pretty benign right now. The economy
Speaker 9: is doing pretty well, so why should the Fed suddenly
Speaker 9: lower rates?
Speaker 2: This week we got the most recent numbers on inflation,
Speaker 2: the ones the FED pays attention to, and core PCEE
Speaker 2: came in just about we're expected, showing inflation growing two
Speaker 2: point four percent year over year. After the most recent numbers,
Speaker 2: we sat down with San Francisco FED President Mary Daily
Speaker 2: and asked her how she squares the strong growth and
Speaker 2: jobs numbers with the relatively weak consumer centim figures.
Speaker 10: When you think about how hard it is to work
Speaker 10: as hard as you can work multiple jobs and not
Speaker 10: be able to afford things one month to the next,
Speaker 10: that has a psychological toll that I think we can't underestimate.
Speaker 10: And as the economy continues to make gains and we
Speaker 10: bring inflation down, that scar, if you will, will.
Speaker 11: Start to heal.
Speaker 10: But people need that certainty, and that's why we keep
Speaker 10: saying we're not done until we're done. You know these
Speaker 10: good inflation data that we're seeing. That's not price stability too.
Speaker 2: Is For people in financial media and on Wall Street,
Speaker 2: the number one issue is rate cuts.
Speaker 11: Yes, that is their number one issue.
Speaker 10: But we work for the American people, not necessarily not
Speaker 10: for markets.
Speaker 1: So but explain it to it.
Speaker 2: In your summary of economic projections, the last one you
Speaker 2: have three in for the year. That's a projection. It's
Speaker 2: not a promise. But some people think you should have more.
Speaker 2: Maybe some people think you have less. Why are we
Speaker 2: talking about rade cuts at all? Given the strength of
Speaker 2: the economy and the economy scems, we're doing just fine
Speaker 2: with the rate cuts you've put in place.
Speaker 10: So we put a projection out about what we think
Speaker 10: we'll need to do if the economy evolves as we
Speaker 10: expect it to. So what's the expectation inflation continues to
Speaker 10: come down gradually the labor market and the economy slow,
Speaker 10: but don't tip over, and then it would be appropriate
Speaker 10: as inflation comes down to bring the nominal rate of
Speaker 10: interest down to make sure we're not how holding on
Speaker 10: even tighter, because we want to avoid the following. We
Speaker 10: want to avoid holding on all the way to two percent.
Speaker 10: They're putting policy very tight and then cause an unnecessary
Speaker 10: downturn that you give people lower inflation, but you cost
Speaker 10: them their jobs. So that's a balancing act. That means
Speaker 10: we have to be calibrating. So I want to just
Speaker 10: be clear. Though you don't see many FED officials, including myself,
Speaker 10: talking about rate cuts. You see us talking about restoring
Speaker 10: price stability, bringing inflation down, being data dependent, looking at
Speaker 10: the full balance, being patient and methodical. So I do
Speaker 10: think that message is clear. It's not always what peoples
Speaker 10: necessarily want to hear, but it is a clear message
Speaker 10: that we've been on.
Speaker 2: I'm not expecting you to tell us one you're going
Speaker 2: to cut rates. But let me ask a different question.
Speaker 2: I'm old enough to remember when Potter student in the Supreme
Speaker 2: Court said about obersentity, you'll know it when you see it.
Speaker 2: How will you know it when you see it? That's
Speaker 2: the time we should start cutting rates.
Speaker 11: That's a great question.
Speaker 10: So what I look at is what I think of
Speaker 10: as a dashboard of indicators and The dashboard of indicators
Speaker 10: has the published data, which everybody focuses on, but those
Speaker 10: tend to be data points, and you don't want to
Speaker 10: be data point dependent.
Speaker 11: You want to be data dependent, So you have to.
Speaker 10: Look underneath the hood of those data and really see
Speaker 10: what's driving them. And also you have to talk to people.
Speaker 10: And what I'm looking for right now is for the
Speaker 10: published data continue to gradually slow and inflation to gradually
Speaker 10: come down, but for the behavior when I talk to firms,
Speaker 10: when I talk.
Speaker 11: To businesses, etc.
Speaker 10: That they're saying, oh, yes, we're not going to continue
Speaker 10: to raise prices. Oh yes, we see input costs coming down.
Speaker 10: Workers saying we see jobs, we want to stick.
Speaker 11: With our employer. We are not worried about.
Speaker 10: Five percent wage growth because we don't feel inflation's going
Speaker 10: to continue. I'm looking for those things to all come
Speaker 10: together and form a collage of evidence, if you will,
Speaker 10: that we are on the path to price stability sustainably.
Speaker 11: I'm seeing parts of that.
Speaker 10: I see a lot of green shoots, as we like
Speaker 10: to say, but we're not there yet.
Speaker 1: You talked about your dashboard.
Speaker 2: Let me ask about one specific figure on your dashboard,
Speaker 2: and that is inflation.
Speaker 1: Numbers.
Speaker 2: There's some concern now that maybe inflation's overstated. I've talked
Speaker 2: to a couple of people who are pretty active in
Speaker 2: real estate, commercial real estate in recent days who said
Speaker 2: the owner equivalent ret is overstating inflation. As pactic matter,
Speaker 2: somebody said, actually recently on this program as much as
Speaker 2: one point seven to one point eight percent, are you
Speaker 2: concerned that maybe we're overstating inflation right now?
Speaker 10: So that's a really terrific question, and it might help
Speaker 10: for me to just talk about how I look at
Speaker 10: the data. So there are multiple inflation indicators, and you
Speaker 10: can unpack all of them into what's driving them. But
Speaker 10: we can't just look at those published inflation data to
Speaker 10: see the story. We have to actually go into communities
Speaker 10: and look at what's happening with local house price appreciation,
Speaker 10: what's happening with rental price appreciation, and there you do
Speaker 10: see the elements of the slowing you.
Speaker 11: Would expect to see.
Speaker 10: So I actually am growing more confident that housing inflation,
Speaker 10: shelter inflation, and rental inflation are coming down. The speed
Speaker 10: at which they come down is still unknown, but I'm
Speaker 10: not seeing signs that they're picking back up yet.
Speaker 2: What is the reason why you have such a concentration
Speaker 2: of tech in your district. I mean, we tend to
Speaker 2: think about Silicon Valley as being close to Stanford and
Speaker 2: Berkeley and some universities. Is it the educational system there,
Speaker 2: is it some other factors? Is just critical mass?
Speaker 10: I think there is a bit of critical mass, and
Speaker 10: there's a number of research studies that say, you know,
Speaker 10: these network effects are large. So one of the things
Speaker 10: we've seen is, and you see this anywhere in the country,
Speaker 10: really is that people might start in Silicon Valley, they
Speaker 10: might start in Austin, Texas, they might start in Boston,
Speaker 10: but then they move, you know, family things take them
Speaker 10: other places. We have a lot of lovely states to
Speaker 10: live in, so people go other places, and then they
Speaker 10: build those tech centers around them because they have the expertise.
Speaker 2: As strong as the tech sector is in Mary Daily's region,
Speaker 2: commercial real estate has been struggling a bit, as it
Speaker 2: has in some other major urban areas.
Speaker 12: I was just in New York recently and it seemed
Speaker 12: a lot more animated than certainly parts of downtown San Francisco.
Speaker 12: But again, I think the venture money is here, and
Speaker 12: we have a highly educated population, so as a labor market. Literally,
Speaker 12: no one can compete with a Bay area and that
Speaker 12: force for what the future is with some of this
Speaker 12: new technology is what's going to animate these large agglomerations
Speaker 12: San Francisco, Boston, New York and Los Angeles, Houston and
Speaker 12: Miami because of what's going on in financial services and
Speaker 12: the relocations in Miami. So I'm a I'm not a
Speaker 12: doom low person at all for these cities. I think
Speaker 12: they are going to recover. There is going to be pain,
Speaker 12: as I just said, there are defaults, there are losses,
Speaker 12: there is retail closure, and I think the mix of
Speaker 12: real estate, especially in downtown San Francisco, where we have
Speaker 12: very little housing, so it's very dependent on the workforce
Speaker 12: for animation, and without that workforce, without a return to work,
Speaker 12: San francisc is going to be challenged, Whereas New York
Speaker 12: has a good mix of housing and office space within
Speaker 12: the urban core. Boston to the same degree, and San
Speaker 12: Francisco is going to have to figure this out with
Speaker 12: housing and to reanimate parts of its downtown.
Speaker 10: Commercial real estate's a big name for a lot of
Speaker 10: different segments. So if you're an industrial and warehousing space,
Speaker 10: you're feeling very good.
Speaker 11: About things right now.
Speaker 10: If you're in retail space or even multi family housing
Speaker 10: out in suburban areas, then you're feeling really good.
Speaker 11: You're confident.
Speaker 10: The place where you're seeing weakness and everybody knows it
Speaker 10: is in the urban cores of particularly cities like Seattle, Portland,
Speaker 10: San Francisco. LA is doing a little bit better, but
Speaker 10: you can find pockets of this in LA and that
Speaker 10: has to do with the fact that a lot of
Speaker 10: people are still working from home in those communities. Those
Speaker 10: big office complexes that were built up for those individuals
Speaker 10: to work in, they just aren't They're not filled, and
Speaker 10: so there will be a repricing and a resettlement. The
Speaker 10: thing is, we've known it's coming for a while, and
Speaker 10: I see private equity money, venture money sitting on the sidelines,
Speaker 10: ready to come in when the price is right.
Speaker 11: So there'll be some repricing, there'll be.
Speaker 10: Some loss of valuations, for sure, but it doesn't seem
Speaker 10: today to be the kind of disorderly adjustment that you
Speaker 10: would worry about. It's something that is more orderly, even
Speaker 10: though it might be certainly going to be painful for
Speaker 10: those involved, is not going as likely to be as disruptive.
Speaker 2: One of the concerns is about regional banks, which tend
Speaker 2: to be more exposed to really commercial real estate. And
Speaker 2: then we've heard about that from the FED in Washington,
Speaker 2: absolutely sure about that.
Speaker 1: How do you assess it out there?
Speaker 2: You have a little experience with this with Silicon Valley
Speaker 2: Bank and things like that. Well, how do you assess
Speaker 2: the risk for the banks, the regional banks?
Speaker 10: So I would separate the failure of Silicon Valley Bank,
Speaker 10: Signature Bank, and First Republic, which really they all three
Speaker 10: had the same experience, which is depositors who were uninsured
Speaker 10: ran and that's a different situation than the commercial real estate.
Speaker 11: But what they did.
Speaker 10: What that situation did is it alerted all investors and
Speaker 10: depositors to the fact that there's a portfolio underlying the
Speaker 10: health of a bank, and we should focus on that portfolio.
Speaker 11: I think it's useful to remind people too.
Speaker 10: We have over forty five hundred banks in the United
Speaker 10: States and only three failed. So the banking system is
Speaker 10: safe and sound and resilient, but there will be adjustments.
Speaker 10: And one of the things that you've heard the Chair
Speaker 10: of Supervision Michael Barr speak about and other the FDIC
Speaker 10: chair and occ is really focusing their efforts on ensuring
Speaker 10: that banks are preparing for those adjustments, So it's certainly there.
Speaker 10: The final thing, though, that I think is really often
Speaker 10: not known, is that regional banks don't have a lot
Speaker 10: in these big urban core office buildings. Those are really
Speaker 10: investor owned, and so it's useful to separate the concerns
Speaker 10: you might have about regional banks on commercial real estate
Speaker 10: from those big, monolithic empty buildings that everybody's worried won't
Speaker 10: get filled.
Speaker 2: Many thanks to Mary Daily, president of the San Francisco Fed.
Speaker 2: Coming up, we go over the week in the markets
Speaker 2: with Barbara Reinhardt of VOYE.
Speaker 1: That's next on Wall Street Week on Bloomberg.
Speaker 3: This is Bloomberg Wall Street Week with David Weston from
Speaker 3: the Blomberg Radio.
Speaker 1: This is all straight week. I'm David Weston.
Speaker 2: Most equity markets continue their upward climb this week, with
Speaker 2: the S and P five hundred closing it another record
Speaker 2: high of fifty one thirty seven, up just under one
Speaker 2: percent for the week and still nicely over the median
Speaker 2: year end number of five thousand from our Bloomberg Elves.
Speaker 2: Despite the Elves continuing to raise their estimates every week,
Speaker 2: the Nasdaq had an even stronger week, adding one point
Speaker 2: seven four percent, while the yield on the tenure was
Speaker 2: down just under seven basis points to end the week
Speaker 2: at four point one eight.
Speaker 1: To take us through the week.
Speaker 2: Of the markets, we welcome back now with Barbara Reinhardt,
Speaker 2: Voya Investment Management, CIO of Multi Assets Strategies and Solutions.
Speaker 2: Great to have you back with his barber. So, so,
Speaker 2: what's causing this form reporting of the markets? Is it
Speaker 2: that strong economy Mary Daily.
Speaker 1: Just talked about.
Speaker 13: Well, I think there's a couple of things, David. Number
Speaker 13: one is you have to remember the Fed pivot rally
Speaker 13: that's been in place for the past two months has
Speaker 13: been pretty powerful, and it's been driven by a lot
Speaker 13: of multiple expansions. Specifically, since the end of October, multiples
Speaker 13: have driven about eighty seven percent of the S and
Speaker 13: P five hundreds run. But you've had a relatively good
Speaker 13: earning season as well, right, so earning's estimates continue to
Speaker 13: kind of bottom out and hook back up. The US
Speaker 13: seems to be leading the way in this charge, and
Speaker 13: it seems as though the markets digesting that the federal
Speaker 13: Reserve may not cut or may not cut as much
Speaker 13: as they expect this year, and they're taking it pretty
Speaker 13: much in stride.
Speaker 2: Well, that's one of the things I'm interested because where
Speaker 2: the market was on how many cuts and where it
Speaker 2: is today is quite different. So then cut it like
Speaker 2: in half the number of cuts, and yet the markets
Speaker 2: didn't seem to take that to adversly.
Speaker 13: Why is that, Well, the bond market certainly did, right,
Speaker 13: so you had the long long data. Treasuries had backed
Speaker 13: up pretty significantly, but the equity market was pretty much
Speaker 13: able to power through it. And we think one of
Speaker 13: the reasons that this is the case is that many
Speaker 13: companies US companies, specifically large cap companies have termed out
Speaker 13: their debt so they don't have big refinancing risks coming
Speaker 13: up in twenty three, twenty four or twenty five. They're
Speaker 13: looking to later dates more like twenty twenty seven and
Speaker 13: twenty twenty eight before they have to worry about refinancing.
Speaker 13: And we think that's a big reason that the equity
Speaker 13: market can look through some of the noise of pricing
Speaker 13: in FED cuts.
Speaker 2: One of the concerns you hear a lot about is
Speaker 2: concentration in the equity markets, particularly there's magnificent seven or
Speaker 2: help many our count it. How concerns should we be
Speaker 2: about that concentration that is not broad enough in the
Speaker 2: equity markets.
Speaker 13: Well, the concentration is indeed going global. You see it
Speaker 13: in the US markets, you see it in the international
Speaker 13: markets as well, specifically in Europe and also in Japan.
Speaker 13: In the US, though, I think there's a really interesting point.
Speaker 7: To look at this. So if you take go back
Speaker 7: to the dot.
Speaker 13: Com period in the early two thousands, right, the top
Speaker 13: five companies, they had a net income margin of about
Speaker 13: twenty percent. Right, if you take a look at the
Speaker 13: top five companies in the S and P five hundred
Speaker 13: this year, their margin is closer to thirty to thirty
Speaker 13: one percent. I think you cannot strip out the operational
Speaker 13: dominance of these large companies and the high free cash
Speaker 13: flow that they are indeed throwing off every year. And
Speaker 13: I think when you take a look at it on
Speaker 13: a pe basis, no question the market's expensive, But when
Speaker 13: you drill down on some of those other metrics, some
Speaker 13: of the frost starts to come out of it, and
Speaker 13: it's being supported by relatively strong earnings and relatively good
Speaker 13: free cash flow as well.
Speaker 2: One of the things you hear about is evaluation. I mean,
Speaker 2: does it make sense to buy more at these valuations
Speaker 2: because it seems to be a lot is where they
Speaker 2: say price.
Speaker 1: To perfection and price of perfection.
Speaker 13: Short there's not many places that you can find great
Speaker 13: value at this point, along with improving fundamentals. But we
Speaker 13: do think that the US is going to have another
Speaker 13: relatively strong year relative to the rest of the world.
Speaker 13: I know there's a lot of chatter going on in
Speaker 13: the markets right now about maybe buying Europe, maybe buying
Speaker 13: the emerging markets. China may do a big fiscal stimulus.
Speaker 13: We think that the relative valuation and the premium that
Speaker 13: the US commands is for a relatively good reason. We're
Speaker 13: sticking closer to home. We're sticking in US large cap stocks.
Speaker 13: If the FED were to aggressively start cutting interest rates,
Speaker 13: it may make sense to go down and cap size.
Speaker 13: But right now, I think you're better off being in
Speaker 13: the US. And because the rest of the world isn't
Speaker 13: feeling particularly well, it's kind of the somewhat reminiscence of
Speaker 13: the mid nineteen nineties. US was doing well, rest of
Speaker 13: the world was on its back. Relative strengths for the
Speaker 13: US dollar is another one to consider as well, when
Speaker 13: you're going global.
Speaker 2: On its back, but Japan is not quite the way
Speaker 2: it was on its back as before. Is that sort
Speaker 2: of coming up a little bit? I hear some talk
Speaker 2: about Japan.
Speaker 13: It only took thirty four years for it to recapture
Speaker 13: it's nineteen eighty nine high. So look, Japan is a
Speaker 13: really interesting market to US. I think that if you're
Speaker 13: going to go out to Japan, you have to head
Speaker 13: your currency back into US dollars.
Speaker 7: Japan, because they've been.
Speaker 13: Through so much over the past really three decades, they
Speaker 13: don't the market doesn't tend to respond much to recessions
Speaker 13: as you do, say in the US or in Europe.
Speaker 13: But Germany right now is in a middling recession. Emerging
Speaker 13: markets don't feel particularly good. If I had to be
Speaker 13: any place, i'd probaly stick in US large caps.
Speaker 1: US A large cap, not medium and small.
Speaker 13: No US large.
Speaker 1: Yeah, it's too hard to pick those stocks in as
Speaker 1: small as the large.
Speaker 13: As a probate, you need a fed rate cutting cycle
Speaker 13: to really get that smaller cap size of the market.
Speaker 2: Going one last quick one, what about terming out debt
Speaker 2: and fixed income because you might want to lock in
Speaker 2: some of these rates.
Speaker 13: Look, we think that there's a lot of money sitting
Speaker 13: in money market funds. At this point, everyone says I
Speaker 13: can get five percent in money market funds, Why do
Speaker 13: I want to do anything else? Even if the Federal
Speaker 13: Reserve doesn't cut interest rates this year, five percent won't
Speaker 13: be there forever. There's a reason that cash is generally
Speaker 13: not part of an asset allocation portfolio. I would say
Speaker 13: that the most interesting piece right now to us looks
Speaker 13: like longer data treasuries. We think that they're good insulation
Speaker 13: against economic slowdown and you're getting that positive real yield.
Speaker 1: Robert's always a true to have you. Thank you so much,
Speaker 1: Barbert Reinhardt a voya.
Speaker 2: Commercial real estate has taken something of a bading recently,
Speaker 2: as higher interest rates and lower occupancy rates at least
Speaker 2: when it comes to offices have forced a repricing and
Speaker 2: a fair amount of refinancing as well. Blackstone is one
Speaker 2: of the leading investors in the asset class and welcome
Speaker 2: now it's global co head for real estate. He is
Speaker 2: in the Deem Midgie. Many thanks to Redemed for being here.
Speaker 2: So the deam give us a sense of where we
Speaker 2: are in commercial real estate. Have we seen the bottom.
Speaker 4: Thank you David for having me on the program. You know,
Speaker 4: if you take a step back, we've had two really
Speaker 4: difficult years for commercial real estate and there are really
Speaker 4: two reasons for that. One of those is a historic
Speaker 4: increase in rates, which put downward pressure on valuation multiples
Speaker 4: for real estate. The other thing that's happened is office
Speaker 4: buildings have faced a lot of pressure and the combination
Speaker 4: of that has resulted in negative headlines and negative sentiment.
Speaker 6: And frankly, those headlines will continue.
Speaker 4: To be negative because you're still going to have stories
Speaker 4: of banks dealing with loans that they made in a
Speaker 4: different environment at a different moment when rates were lower,
Speaker 4: sponsors owners who maybe did deals in a different rate environment.
Speaker 4: But from our perspective, that's all priced into asset values today,
Speaker 4: and in fact, when we look forward, we see something
Speaker 4: very different. What we see is a generational investing opportunity,
Speaker 4: buying opportunity while others are looking.
Speaker 6: In the rear view mirror.
Speaker 4: And what we believe is happening is that values are bottoming.
Speaker 4: And the reason for that is number one, interest rates
Speaker 4: inflation is cooling. Rates have come down from their October
Speaker 4: hives from last year, and credit formation is once again
Speaker 4: happening in real estate.
Speaker 6: All in, borrowing.
Speaker 4: Costs are down two hundred basis points over the last
Speaker 4: five or six months, and transaction activity is picking back up.
Speaker 4: The other thing that's happening that I think is under
Speaker 4: reported is this idea of new construction, which is down
Speaker 4: thirty to seventy percent in our core sectors versus two
Speaker 4: years ago, and I think that in the medium term
Speaker 4: will lead to a sharper recovery than the market likely expect.
Speaker 4: And then the third thing I would say, which is
Speaker 4: critically important, and we've been saying this for years, is
Speaker 4: where you invest matters. There's a huge bifurcation across asset classes.
Speaker 4: We all know what's happening with office values are under pressure,
Speaker 4: rents or under pressure.
Speaker 6: In fact, US office represents only one and a half percent.
Speaker 4: Of our global portfolio because we were nervous about office.
Speaker 4: On the flip side, look at data centers, which are
Speaker 4: our fastest growing asset class two percent vacancy, twenty five
Speaker 4: percent rent growth, ten times the demand that we saw
Speaker 4: only five years ago. And the AI revolution is just
Speaker 4: getting started. So for us, it's all about understanding the
Speaker 4: difference between the winners and the losers, and doubling down
Speaker 4: in the places where we see more growth.
Speaker 2: We hear from about warehouses with e commerce, and especially
Speaker 2: now data centers with generative AI and the expectation we're
Speaker 2: need a lot more data centers. Are people already rushing
Speaker 2: into those properties that make it less attractive to you?
Speaker 6: No, it's interesting.
Speaker 4: It's actually quite the opposite, which is to say that
Speaker 4: in both data centers and warehouses, for example, the fundamentals
Speaker 4: from a long term perspective are as attractive as they've
Speaker 4: ever been, Yet there's a shortage of capital pursuing these opportunities.
Speaker 4: There's a shortage of liquidity in the system. So even
Speaker 4: as debt capital is coming back, there's still quite a
Speaker 4: bit less competition today than a couple years ago. So
Speaker 4: when I think about data centers, for example, this is
Speaker 4: an asset class.
Speaker 6: Where we took a view a few years ago.
Speaker 4: That the combination of digitization of the economy, the cloud,
Speaker 4: artificial intelligence would all result in a greater demand for
Speaker 4: data centers because all of this data that's being created
Speaker 4: needs to be housed inside servers, inside data centers. And
Speaker 4: what we see on the ground is that the major
Speaker 4: technology companies have announced that they're going to invest one
Speaker 4: trillion dollars of capital into their digital infrastructure over the
Speaker 4: next five years. That's going to drive more demand for
Speaker 4: data centers, and yet very few people can capitalize on
Speaker 4: this opportunity at a moment like this because you need
Speaker 4: scale capital. Data center developments used to be one hundred
Speaker 4: million dollars. Now they can be as big as a billion,
Speaker 4: two billion, three billion dollars. Very few people have that
Speaker 4: kind of capital. The other thing you need to have
Speaker 4: is a large land bank. You need to have access
Speaker 4: to power, which takes years to procure. You need to
Speaker 4: have relationships with the major technology companies. And so what
Speaker 4: we've done is we own a platform that we bought
Speaker 4: three years ago, QTS Data Centers. It's the fastest growing
Speaker 4: data center company in the world. We've taken that development
Speaker 4: pipeline from one billion dollars only four years ago, three
Speaker 4: years ago to today eighteen billion dollars.
Speaker 6: We've grown the installed.
Speaker 4: Capacity by sixfold over this very short period of time,
Speaker 4: and we still think we're in the early innings.
Speaker 6: But again, not anyone can do this.
Speaker 1: You mentioned Europe earlier.
Speaker 2: What opportunity do you see for you Blackstone in real
Speaker 2: estate in Europe.
Speaker 6: Sure, you know.
Speaker 4: I think sometimes people are surprised by the fact that
Speaker 4: our most active region globally has been Europe in light
Speaker 4: of a sort of nominal backdrop GDP growth that's been
Speaker 4: quite quite flat. But what it turns out is that
Speaker 4: sentiment is so negative today and liquidity is so short
Speaker 4: that you have folks who need to raise cash. And
Speaker 4: so we've been buying from groups who for whatever reason,
Speaker 4: are willing to part ways with high quality assets in
Speaker 4: this moment. But we're buying at prices today that don't
Speaker 4: require us to believe a V shaped recovery. And so
Speaker 4: just as one to example, we're acquiring.
Speaker 6: Warehouses throughout Europe.
Speaker 4: We've acquired four billion euros of warehouses in only the
Speaker 4: last twelve months, and what we see is deep value.
Speaker 4: And as we look forward, we think that that buying opportunity,
Speaker 4: in buying opportunity in Europe continues because there are very
Speaker 4: few folks who have the scale that we do who
Speaker 4: can compete with us across the continent.
Speaker 2: The theme it's a real treat to have you on
Speaker 2: Wall Streeter, thank you for being here.
Speaker 1: That is Nade Meggie of.
Speaker 2: Blackstone Coming up, we move from investing in real estate
Speaker 2: to investing in fixed income with Goldman Sachs Asset Managements,
Speaker 2: a head of multi sector investing, Lindsay Rosner.
Speaker 5: Typically when there are geopolitical flares, you see a flight
Speaker 5: to quality rally, people go into treasuries.
Speaker 7: That has not been the case.
Speaker 1: That's next down Wall Street Week on Bloomberg.
Speaker 3: This is Bloomberg Well Street Week with David Weston from
Speaker 3: Bloomberg Radio.
Speaker 1: This is Wall Street Week. I'm David Weston.
Speaker 2: After years of little or no return, fixed income is
Speaker 2: back as an attractive asset class. To take us through
Speaker 2: the opportunities and the risks. We welcome Lindsay Rosner, Goldman
Speaker 2: Sachs Asset Management, head of Multi sector Investing. So, Lindsay, welcome.
Speaker 2: Is really great to have you on Wall Street Week.
Speaker 7: Thank you for having me excited to be here.
Speaker 2: So let's talk about those opportunities and risks because they
Speaker 2: are out there. Where is there risk you can take
Speaker 2: that you get paid for right now?
Speaker 1: In fixed income?
Speaker 5: Yes, So it's a really interesting environment right now. Yields
Speaker 5: are abundant, they abound. However, spreads are tight, so you
Speaker 5: really need to be thoughtful about where you are taking
Speaker 5: that risk. And to your question, where are there opportunities
Speaker 5: ret large US investment grade, very very tight spreads, high yield,
Speaker 5: pretty tight, tighter than average as well. Where we're finding
Speaker 5: an interesting pocket is actually in structured product. And what
Speaker 5: I mean by that is commercial mortgage backed securities colos,
Speaker 5: even some massive back securities.
Speaker 2: So why isn't the market pricing that accurately? Now, what's
Speaker 2: the market got wrong about that?
Speaker 5: Well, I think it's not necessarily that the market got
Speaker 5: it wrong, But what's happening in the market has changed
Speaker 5: so dramatically. And where we lived in twenty twenty three
Speaker 5: and even started in January was a world in which
Speaker 5: the FED may continue to hike or at least hike
Speaker 5: and hold at those high interest rate levels. It is
Speaker 5: very difficult for some of the collateral and some of
Speaker 5: these different structures in structured product to give value. And
Speaker 5: one of the big things, like commercial mortgage backed securities,
Speaker 5: underlying it is commercial real estate. If there is a
Speaker 5: wall of maturity, how does that get refinanced and what rates?
Speaker 5: And again the market was pricing in what those rates
Speaker 5: would be would be a lot higher, which decrease the value.
Speaker 7: Now we had a.
Speaker 5: Really consequential CPI print in October which told us, hey,
Speaker 5: a soft landing is very much on the table and
Speaker 5: the deflation or disinflation is really taking holds. That has
Speaker 5: really changed that narrative that you see in the rates market,
Speaker 5: and for us, we believe that also changes the expected
Speaker 5: return or the outcome for various parts of structured products.
Speaker 1: So pick up on that. I'm curious.
Speaker 2: There has been a real shift in the expectations about
Speaker 2: rad cuts this year, and some people think that's a
Speaker 2: bad thing because when it was many rate cuts. But
Speaker 2: I wonder if the reason the markets were pricing in
Speaker 2: that many rate cuts was actually the anticipation a chance
Speaker 2: of recession, and as that goes away, it actually reduces
Speaker 2: the need to cut rates, so.
Speaker 5: There is definitely less of a view of recession. Goldman
Speaker 5: had a fantastic hall last year calling for a softish landing.
Speaker 7: I think it was lonely in that camp.
Speaker 5: Many were calling for a recession, and in fact we
Speaker 5: really are getting a soft landing ish situation as that
Speaker 5: recession has really come off the table. If the Fed
Speaker 5: doesn't have to do those insurance cuts to protect the economy, instead,
Speaker 5: they can be more metered and take some time to
Speaker 5: be sure that inflation is coming down and that growth
Speaker 5: actually is not reaccelerating too much. So there's kind of
Speaker 5: this like happy medium kind of channel they're looking for.
Speaker 2: Right now, as we sit here, it looks like things
Speaker 2: are pretty good in the United States. The economy teams
Speaker 2: are doing pretty well. The labor market's in pretty good shape.
Speaker 2: You know, the rates have gone up, but they don't
Speaker 2: seem to be going up too far. What is the
Speaker 2: risk we should be looking out for that we may
Speaker 2: not be missing. I think early on in your career
Speaker 2: you had some experience with that at l Amen.
Speaker 14: Yes.
Speaker 5: I did have some experience with risks at Lehman Brothers.
Speaker 5: I was two years out of college. As I like
Speaker 5: to say, I am not responsible. I feel like I
Speaker 5: have to put that out there. But I learned a lot.
Speaker 5: And what I learned and it's never left me, is
Speaker 5: that you don't necessarily know what the risk will be,
Speaker 5: but risk will come. And I think this is the
Speaker 5: idea of the black Swan as well, and they happen
Speaker 5: with frequency. So it's important, especially when things feel really good,
Speaker 5: to say what could be the problems. A few things
Speaker 5: that come to mind number one, geopolitical. You can literally
Speaker 5: spin the globe, put a finger down and you're likely
Speaker 5: to point out a geopolitical tension, flair issue, or maybe
Speaker 5: even something more pronounced. Right now, all the geopolitical issues
Speaker 5: that are out there, especially ones that started even in
Speaker 5: twenty twenty three or earlier than that, they are unresolved.
Speaker 5: It's not like we've crossed a geopolitical tension or issue
Speaker 5: off the list and say that one we can put aside.
Speaker 7: It's done. It still exists.
Speaker 5: So that's something that's really important to remember that can
Speaker 5: be out there now. What's been interesting in the market
Speaker 5: is typically when there are geopolitical flares, you see a
Speaker 5: flight to quality rally, people go into treasuries.
Speaker 7: That has not been the case.
Speaker 5: So there is this real exuberance in euphoria. And it's
Speaker 5: exactly then that we like to say, are we thinking
Speaker 5: about things properly?
Speaker 7: Are they properly valued?
Speaker 5: So geopolitical would be one thing that I would think about.
Speaker 5: The other one, I think is just an interesting technical
Speaker 5: that's developed in the market, which is the private credit
Speaker 5: world has grown and I'm sure you've spoken a lot
Speaker 5: on this show with people who are part of private credit,
Speaker 5: or at least speaking about it. And it is a
Speaker 5: one point seven trillion dollar right now.
Speaker 7: That's really big. We've never seen it this big.
Speaker 5: And the interesting dynamic is that money has been committed
Speaker 5: to it, but not all.
Speaker 7: The capital has been called.
Speaker 5: So, as you're a private credit investor, you're waiting for
Speaker 5: your capital to be called to go service deals, where
Speaker 5: do you put it?
Speaker 7: And I think that's a big question.
Speaker 5: It's probably not sitting under a pillow or under a
Speaker 5: mattress somewhere. It's maybe in money markets. It's maybe in
Speaker 5: US investment grade funds, or maybe it's in public high yields,
Speaker 5: because that is a yield more analogous to what investors
Speaker 5: thinks they'll get in private credit.
Speaker 2: That makes me wonder about liquidity because if it all
Speaker 2: got called tomorrow, which is not, but if it all
Speaker 2: got called tomorrow, they would take a lot of liquidity
Speaker 2: out of the marketplace. At the same time, you have
Speaker 2: the FED starting to really run down the balance sheet.
Speaker 2: But is taking liquidity out? Is there a prospect of
Speaker 2: really a liquidity issue here?
Speaker 7: That is exactly the issue. I mean you said it.
Speaker 5: If that capital needs to be called, likely there will
Speaker 5: be a liquid of something to get that money out
Speaker 5: the door. And so that is something we're also thinking about.
Speaker 5: If investors have to sell, where are they going to sell?
Speaker 5: And with spreads, as I mentioned, so tight, I mean
Speaker 5: something's like US investment grade is at the tenth percentile,
Speaker 5: really really tight spreads. Could they stay at this level
Speaker 5: if there were four sellers or outflows, It'd be hard.
Speaker 7: To imagine it could.
Speaker 5: And so big picture, when we're thinking about investing our
Speaker 5: portfolios and I invest, me and the team in public
Speaker 5: fixed income, we are constructive on risk, but we aren't
Speaker 5: all in. We're using I would say about forty or
Speaker 5: fifty percent of our risk budget, meaning we have dry
Speaker 5: powder for if and when a geopolitical tension happens, flares up,
Speaker 5: maybe something like private credit and a movement of capital
Speaker 5: and the need to deploy money happens, or just a
Speaker 5: plain vanilla black swan of hers and they do. We
Speaker 5: want to be ready to be a liquidity provider private.
Speaker 2: Quid you missed mentioned a couple times private credit, which
Speaker 2: is huge, and we do talk about a fair amount.
Speaker 2: Is there a risk there in private country credit because
Speaker 2: of the name private, That is to say, we don't
Speaker 2: necessarily know the valuations the underlying assets where they don't
Speaker 2: mark to market the same way we do in a
Speaker 2: public market. Is that a risk for the system overall
Speaker 2: that could redound to all of our dis benefit.
Speaker 5: Well, there is less transparency. You're absolutely right. There actually
Speaker 5: was a paper published by the FED on February twenty
Speaker 5: third discussing all of this. But certainly, having both the
Speaker 5: lack of transparency and the lack of liquidity, private credit
Speaker 5: is locked up. It is not in the world I
Speaker 5: live in a public fixed income you can typically and
Speaker 5: in most situations, get liquidity or your money both invested
Speaker 5: or taken away on any given day. It is not
Speaker 5: that in private credit. So I think where there is
Speaker 5: a lack of transparency there is more risk. Between the
Speaker 5: lack of transparency and also the lock up. You are
Speaker 5: given more of a spread or an additional yield compensation
Speaker 5: for that, so it should be priced into it.
Speaker 7: But there is something there. You're absolutely right.
Speaker 2: Linda's a real treat to have you on Wall Street, Reeve.
Speaker 2: That's Lindsay Rosner of Goldman Sachs. Finally, one more thought.
Speaker 2: Last weekend, Warren Buffett sent his annual letter to shareholders
Speaker 2: and even as Berkshire Hathaway approached a market cap of
Speaker 2: one trillion dollars, he doubled down on his quest for
Speaker 2: companies that quote can deliver wealth almost beyond measure. Even
Speaker 2: airs to such a holding, can ugg sometimes live a
Speaker 2: lifetime of leisure.
Speaker 1: That is an ug from Warren Buffett.
Speaker 2: We've recently had plenty of examples of wealth beyond measure,
Speaker 2: even from those not pursuing Warren Buffet Charlie Munger's conservative
Speaker 2: investment strategy. Much of this untold wealth has come from tech,
Speaker 2: as Elon Musk as a master over two hundred million dollars,
Speaker 2: and Jeff Bezos, Mark Zuckerberg, and Bill Gates are all
Speaker 2: with him in the top five on the Bloomberg Billionaires list.
Speaker 1: Coming up fast as the co.
Speaker 2: Founder of Nvidia Jensen Wong, who shot up the list
Speaker 2: of twenty in just a few short months with a
Speaker 2: net worth of nearly seventy million dollars thanks to his
Speaker 2: AI company, capturing the imagination of investors everywhere.
Speaker 14: Look the godfather of AI in Jensen and Video. I mean,
Speaker 14: this is really the yearning's heard around the world, the
Speaker 14: most important earnings in many years, and it chows this
Speaker 14: AI party. It's just getting started.
Speaker 1: But it's not just tech.
Speaker 2: The man who owns everything from Vovkli Coo to jivon
Speaker 2: She to Louis Vitant, Bernard Orna is the second richest
Speaker 2: person in the world, coming in just under Musks two
Speaker 2: hundred million dollars.
Speaker 15: Benois seventy four years old. He's actually changed the rules
Speaker 15: recently to make sure he can run the company until
Speaker 15: he's eighty. But clearly the succession story at LVMH will
Speaker 15: be in everybody's mind over the next few years.
Speaker 2: Here is the rich get richer, some of them a
Speaker 2: lot richer, and kind of is like Paul Romer warn
Speaker 2: about the dangers of leaving so many of our fellow
Speaker 2: citizens behind.
Speaker 16: If you look at employment the average adult, the average
Speaker 16: number of adults who have a job in the United
Speaker 16: States has gone down, mostly because the people who are
Speaker 16: high school educated have such miserable prospects that some of
Speaker 16: them have given up. The rest are staying there in
Speaker 16: the market.
Speaker 2: Other economists like Larry Summers, say that economic growth and
Speaker 2: innovation doesn't require a tax system that prefers the accumulation
Speaker 2: of vast amounts of capital.
Speaker 17: It defies belief that the young Bill Gates, the young
Speaker 17: Mark Zuckerberg, the young Steve Jobs would have not done
Speaker 17: their projects if they thought they would have had to
Speaker 17: pay a bit higher capital gains taxes, and we would
Speaker 17: have been without those companies.
Speaker 2: And Warren Buffet himself has condemned a tax system where
Speaker 2: his secretary pays a higher tax rate than he does.
Speaker 2: But whatever the risks or benefits to unimaginable wealth, there's
Speaker 2: plenty of evidence that wealth doesn't have to translate in
Speaker 2: to a life of leisure.
Speaker 1: Warren warned about.
Speaker 2: The wealthy routinely contribute enormous amounts to charity, led by
Speaker 2: Bill Gates.
Speaker 1: Elon Musk, and our very own Mike.
Speaker 2: Bloomberg, each of whom, according to the Chronicle of Philanthropy,
Speaker 2: gave away more than a billion dollars last year alone,
Speaker 2: and Warren himself is always at or near.
Speaker 1: The top of that list.
Speaker 2: This week we got another reminder of how much good
Speaker 2: can be done with great wealth when we learned of
Speaker 2: a gift of one billion dollars to the Albert Einstein
Speaker 2: College of Medicine in the Bronx, which will pay for
Speaker 2: the tuition for all of its students in perpetuity. It
Speaker 2: came from a longtime member of the school's faculty and
Speaker 2: former board chair, doctor Ruth Gottessman.
Speaker 18: I'm happy to share with you the starting in August
Speaker 18: this year, the Albert Einstein College of Medicine will be
Speaker 18: tuition free.
Speaker 1: And where did it come from?
Speaker 2: Those companies Warren Buffett and his partner Charlie Munger have
Speaker 2: been picking through the years. It turns out that doctor
Speaker 2: Ruth Goddessman is the widow of Sandy Goddessman, who connected
Speaker 2: with Buffett around the time Warren took over the company
Speaker 2: in nineteen sixty five. He became one of Berkshire's biggest
Speaker 2: shareholders and served on its board, and when he passed
Speaker 2: away two years ago, he left one billion dollars in
Speaker 2: stock to his widow with the instruction to quote, do
Speaker 2: whatever you think is right with it, and now she's
Speaker 2: done just that. Warren Buffett also once said that someone
Speaker 2: sitting in the shade today because someone planted a tree
Speaker 2: a long time ago. Thanks to the Goddessmans, the medical
Speaker 2: students at Albert Einstein will sit in the shade in perpetuity.
Speaker 1: That does it.
Speaker 2: For this episode of Wall Street Week, I'm David Weston
Speaker 2: this is Bloomberg.
Speaker 1: See you next week.