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Speaker 2: Unfortunately he's been driving this salweek. Richard claiit with us
Speaker 2: now his work at Columbia University definitive on fancy economics
Speaker 2: called dynamic stochastic general equilibrium theory holding court at the
Speaker 2: FEDS Vice Chairman, I'm not going to mince words in
Speaker 2: frankly a professor Claret, are you still at Columbia?
Speaker 3: I am?
Speaker 2: You get a piece of chalk out every See. The
Speaker 2: problem is Xavier Sally Martin wouldn't allow Ai in the class.
Speaker 2: You would allow Ai in a freshman class to make
Speaker 2: the kids smarter.
Speaker 4: Right, I don't teach a freshman anymore.
Speaker 5: But would you let Ai in the class?
Speaker 4: Well, not in the classroom, but when I teach, I
Speaker 4: assume the students are making reference to it, which is
Speaker 4: why I've actually put a focus on having.
Speaker 5: In class presentations.
Speaker 4: There you go, there you gold fashion Socratic dialogue.
Speaker 6: I'm going to cut to the Chase Socratic Dialogue. You
Speaker 6: saved Jerome Pale, Folks. I'm not going to mince words
Speaker 6: about it. It's called a dual engine leadership mode model.
Speaker 6: And it was Clarida's vice chairman and a guy from
Speaker 6: Wall Street's chairman. And when he came in you allowed
Speaker 6: him to relax and grow with your prodigious academic abilities.
Speaker 6: Does Chairman worsh need a clarity?
Speaker 4: Well, that that'll be his decision. I enjoyed my four years,
Speaker 4: That's that's for sure. But there are a lot of
Speaker 4: good people at the FAT and I think that's a
Speaker 4: decision he'll he'll make. He's got a very good advice
Speaker 4: chair right now and Phil Phil Jefferson. But at some
Speaker 4: point there will be a vice chair vacancy.
Speaker 2: Is that something that the committee when he goes in
Speaker 2: front of these tough guys in the Hill, they can
Speaker 2: demand you have a vice chair of the academic skills.
Speaker 4: Well, it's not clear that that's what would be on
Speaker 4: their wish list, but.
Speaker 5: Possibility, I suppose. I mean they could request that.
Speaker 7: Certainly, Kevin Warrish has called for a new accord with
Speaker 7: the Treasury Department. Yeah, what does you mean by that?
Speaker 4: Well, you know, this is one of those things where
Speaker 4: this is what they call in DC very big tent language.
Speaker 4: It means different things to different people. The one accord
Speaker 4: that we do know about, which is the one that
Speaker 4: was struck in nineteen fifty one between the Treasury and
Speaker 4: the FED, was a signal moment and Fed independence because
Speaker 4: they got the FED out of the business of essentially
Speaker 4: camping treasure yels. In fact is I'd like to teach
Speaker 4: my students. We all know that World War Two ended
Speaker 4: in nineteen forty five, but the FED didn't get the
Speaker 4: memo till nineteen fifty one because the Truman administry from
Speaker 4: pressure to the FED to keep a cap on rates,
Speaker 4: the FED declare independence in the accord. I think now
Speaker 4: if there is a Treasury Fed accord, it would not
Speaker 4: be so much focused on that. It would be focused
Speaker 4: on for example, should the FED a whole two trillion
Speaker 4: dollars in mortgage backed securities? Should the FED the composition
Speaker 4: of the Fed' portfolio really be tilted toward tea bills
Speaker 4: unless from holding ten and thirty year treasury So I
Speaker 4: think there are a lot of conversations to have, and
Speaker 4: even during my time on the FED there were discussions
Speaker 4: before the pandemic about rethinking the Fed' portfolio composition, So
Speaker 4: I think that's entirely appropriate. But I think we're a
Speaker 4: long way away from any formal accord.
Speaker 7: So what do you expect this Federal Reserve to do
Speaker 7: in County your twenty six?
Speaker 5: Well, first we have to get the chair confirmed. He
Speaker 5: that's not a foregone conclusion, right.
Speaker 4: I think once he has a hearing, he will get
Speaker 4: confirmed because he's very well qualified, but it may be
Speaker 4: maybe a while before he.
Speaker 5: Has a hearing.
Speaker 4: I think it's important to note that the pal FED
Speaker 4: in December when they release those dots, those famous or
Speaker 4: infamous dots, the pal FED, or at least a majority
Speaker 4: of the FED in December, thought at least one rate
Speaker 4: cut this year would be appropriate, and I think eight
Speaker 4: folks thought maybe.
Speaker 5: Two rate cuts would be appropriate.
Speaker 4: So I do think that when Warsh gets in, if
Speaker 4: the economic data play out the way that I and
Speaker 4: others expect, I think he'll be able to persuade the
Speaker 4: committee to continue to cut rates down.
Speaker 5: Describe around three percent?
Speaker 2: Okay, Richard Claarterer with this, folks, the former vice chairman
Speaker 2: of the FED, hugely visible does a great job helping
Speaker 2: us on the FED day. The FED decides, thrilled he
Speaker 2: could be in studio with us for you across the
Speaker 2: nation and around the world. Thank you for your attendance.
Speaker 2: On YouTube, subscribe to bloomberg A podcasts. I look at
Speaker 2: all this, I look at the parlor game, and just
Speaker 2: what it comes down to is staggering from me from
Speaker 2: meeting when mister Wartz joins, do we have a theory
Speaker 2: of monetary policy? Or is it every president and governor
Speaker 2: for themselves?
Speaker 4: Tom fantastic question, because I do think that based upon
Speaker 4: what Kevin has said with his very voluminous paper trail
Speaker 4: over the last fifteen years, will I think that will
Speaker 4: be a discussion. I think Kevin has expressed some skepticism
Speaker 4: for reliance on what he believes are flawed models, too
Speaker 4: much of a backward looking approach.
Speaker 5: What I would point out, at least during my.
Speaker 4: Four years is the palfed and certainly declared device chair.
Speaker 4: It was not handcuffed to the models, even though I
Speaker 4: developed many of them.
Speaker 2: I give you great credit, Paul can I Editorial, I
Speaker 2: give you great credit for this. You are the one
Speaker 2: person who could have said we'd go for the models.
Speaker 4: Well, and in fact my first speech in October of
Speaker 4: twenty eighteen, I basically made the case that the economy
Speaker 4: appeared to have stronger growth potential and a potential for
Speaker 4: lower unemployment than the FED models thought, and that the
Speaker 4: Powerfed should be willing if the labor market was continuing
Speaker 4: to blossom and inflation didn't appear.
Speaker 5: To allow that to happen.
Speaker 4: In fact, I think I said, you know, monetary policy
Speaker 4: is not a problem if too many people are working, right,
Speaker 4: And indeed the Powerfed cut rates in twenty nineteen with
Speaker 4: an unemployment rate out of fifty year low. So I
Speaker 4: think the FED has probably been less handcuffed to models
Speaker 4: than Kevin's remarks might suggest. But I certainly think based
Speaker 4: upon that there will be a discussion of the best
Speaker 4: way to incorporate modeling into FED analysis.
Speaker 7: What happens to j Powell when he does step down
Speaker 7: from FIT? Does he stay on at the FED? Does
Speaker 7: he leave? Typically they ride off into the sunset?
Speaker 5: Right they do.
Speaker 4: In fact, there's only one example in FED history of
Speaker 4: a chair that did not write off into the sunset,
Speaker 4: and a very important FED chair gentleman named marinell Eckles,
Speaker 4: so important as.
Speaker 5: A building angles form.
Speaker 4: There you go, and Eccles was an FDR appointee and
Speaker 4: when Harry Truman came in, Harry Truman wanted a different
Speaker 4: FED share, but Eckles stayed on for four years as
Speaker 4: governor and actually turned out to be a real thorn
Speaker 4: and Harry Truman's side.
Speaker 5: But fast forward to Pal.
Speaker 4: You know j pal'sman asked many times and including at
Speaker 4: the most recent press conference, what his intentions are when
Speaker 4: his term is chair is up, and he's really not commented.
Speaker 4: So there's the possibility he could stay on. I myself
Speaker 4: think that it's unlikely that he stays on for the
Speaker 4: remainder of his term, which goes through twenty twenty eight.
Speaker 2: Richard clarieda with this. So we did a Bloomberg function.
Speaker 2: It was great Michael when Key organized it. It was all
Speaker 2: these worthies in the audience. Catherine Maine comes up and
Speaker 2: gives me a hug to Queen of Descent over at.
Speaker 6: The Bank of England, what's wrong with us being like
Speaker 6: the Bank of England?
Speaker 5: And they come out like a Supreme Court decision.
Speaker 2: Oh no, it's a FED meeting five to four and
Speaker 2: the chairman voted against the majority.
Speaker 5: Is that a bad thing. I don't think it's a
Speaker 5: bad thing.
Speaker 4: I think the back of England really beginning under Mervyn
Speaker 4: King's tangents actually viewed it as a feature, not a bug,
Speaker 4: to have close votes encourage thoughtful dissent. And as I recall,
Speaker 4: the governor has been on losing sight on some votes.
Speaker 4: There unusual in FED history. In fact, I did prepare
Speaker 4: for your show. I went back and looked. Saint Louis
Speaker 4: FED has a great database on this, and you'd have
Speaker 4: to go back to nineteen thirty nineteen thirty nine the
Speaker 4: last time a chair actually lost an FMC vote, and
Speaker 4: that was Mariner Eccles.
Speaker 5: But Jane William Miller and Paul Volker lost votes on
Speaker 5: discount rate adjustments. But again we're going back forty to
Speaker 5: fifty years.
Speaker 8: Did you hear?
Speaker 3: What do you prepare for the show?
Speaker 5: Are you kidding me? You'd be the only one, Richard?
Speaker 7: What's the FED focusing on now? Is it the labor market?
Speaker 7: Is it inflation? Where's the balance?
Speaker 9: These days?
Speaker 4: They've been pretty consistent for a while that inflation is
Speaker 4: too high. It's been above target for five years, it'll
Speaker 4: probably be above target this year.
Speaker 5: For six years.
Speaker 4: But the FAT has a dual mandate, and the unemployment
Speaker 4: rate is basically right now at a point that they
Speaker 4: think is consistent with a healthy labor market. But they
Speaker 4: are noticing that payroll employment gains have been very modest. Indeed,
Speaker 4: when we get the revisions later this week, it actually
Speaker 4: may show negative payroll gains in the second half of
Speaker 4: the year. And so I do think that I take
Speaker 4: them at their word when they say they would not
Speaker 4: welcome any additional rise in the unemployment rate, and I
Speaker 4: think they would react to that. But so long as
Speaker 4: the economy sort of turns along as people expect, I
Speaker 4: think they are trying to balance that against their concerns
Speaker 4: about elevated inflation.
Speaker 2: Paul Sweeney with Richard Clarita right now, can I ask,
Speaker 2: can we go NERD right now?
Speaker 5: Monday freezing money? Okay? Did you recruit Woodford to Columbia?
Speaker 3: Was that you're trying?
Speaker 4: I was not sure when Mike was recruited that. I
Speaker 4: certainly was enthusiastic and worked hard on getting him to Columbia,
Speaker 4: which was a huge appointment for Columbia.
Speaker 5: Now twenty two years ago, I.
Speaker 2: Told you, Michael Woodford, folks, it's a thousand page book.
Speaker 2: Everybody owns it, Martin Felt saying once said Tom, no one's.
Speaker 5: Ever read it cover to cover. Clarida had, Yeah.
Speaker 2: But the bottom line, and I'm bringing this up, folks,
Speaker 2: because we had an Ezra Prosade the other day from
Speaker 2: Cornell with his wonderful important books out Doom the Doom
Speaker 2: Look really important book. And the bottom line is we
Speaker 2: assume Woodford like Oiler equations, they come down to a
Speaker 2: point of stability, and within the system there's stability. The
Speaker 2: result is stability. And Professor Presada is saying, no, it's
Speaker 2: not they're going to go out on the X axis
Speaker 2: and be unstable.
Speaker 4: Discuss well, okay, I think at a thirty thousand foot
Speaker 4: level in thirty seconds, all macro models, or almost all
Speaker 4: macro models, really your best thought of as approximations typically
Speaker 4: linear in a neighborhood of where you want to be,
Speaker 4: and the real world can be a lot messier and
Speaker 4: very nonlinear, a term that I know pomps up on
Speaker 4: this show, and I think, what I'm just beginning to
Speaker 4: read his book but he's been highlighting is we could
Speaker 4: be in a prolonged period of very nonlinear market and
Speaker 4: economic development.
Speaker 2: And geopolitical development. Yeah, so if you're halfway through the book.
Speaker 2: He sold the movie, right, ye, DiCaprio is playing. I
Speaker 2: mean it's a gloomy book. It's shockingly gloomy.
Speaker 5: Yeah.
Speaker 4: Yeah, again, I have not I've not I've not worked
Speaker 4: through it, but I certainly must read for me, So
Speaker 4: I'll wait till I finish it.
Speaker 5: Before I wait, Hey, Richard worked.
Speaker 7: We're thirteen months into this whole tariff thing. I'm going
Speaker 7: to look back on and say, boy, this was nothing.
Speaker 7: It didn't seem to be that big of an isi you.
Speaker 7: And that's not when I heard it. Early on. I
Speaker 7: heard a lot of folks saying, boy, this is going
Speaker 7: to be inflationary and so on and so forth. We
Speaker 7: just haven't seen it. So with a little bit of hindsight, yeah, yeah,
Speaker 7: what's happened.
Speaker 4: So let me reinforce what you said when we eventually,
Speaker 4: when we get the data for twenty twenty five, it
Speaker 4: may show GDP growth the same as it was in
Speaker 4: twenty twenty four, maybe down to tenth. It will likely
Speaker 4: show inflation unchanged from twenty twenty four, And so a
Speaker 4: future historian may well say what you just said, which
Speaker 4: is what was the big deal GDP.
Speaker 5: Growth didn't move, inflation didn't move. I think a couple
Speaker 5: of things.
Speaker 4: One is that the ultimate tariffs put in place were
Speaker 4: a lot lower than the Liberation Day levels, and his
Speaker 4: best and has emphasized that was part of the negotiating strategy. Secondly,
Speaker 4: you know, there's a saying in baseball sometimes you'd rather
Speaker 4: be lucky than good. I think the other thing that
Speaker 4: happened is whatever headwind there might have been from tariff's
Speaker 4: counterfactually was offset by the buoyant capax spending, especially by
Speaker 4: the tech companies, and the fact that the stock market
Speaker 4: is very optimistic on this story, so that generates a
Speaker 4: wealth effect and an investment effect. And then thirdly, US
Speaker 4: companies absorbed more of the tariff hit in somewhat reduced margins,
Speaker 4: and you know, in the area they did have that
Speaker 4: room profit margins have been very healthy, and they didn't
Speaker 4: pass it through to the consumer. And again, of course,
Speaker 4: we have the IEPA decision the Supreme Court is about
Speaker 4: to release, and that may further lead to LOWERJUS. Put
Speaker 4: it this way, I think if you calculate the actually
Speaker 4: the tariff revenue we're collecting divided by imports, it's coming
Speaker 4: in in about ten percent, and Liberation Day was like
Speaker 4: thirty five percent.
Speaker 5: So that's sort of the order of magnitude.
Speaker 3: I got eight other questions.
Speaker 2: I got to squeeze us in to be responsible or
Speaker 2: zeg and pose and creating a firestorm with an idea
Speaker 2: of resilient higher rate or even driving higher rates somewhat
Speaker 2: due to the surprise of higher wages. Right, it's up
Speaker 2: at the Peterson Institute. Do you and PIMCO worry about
Speaker 2: price down yield up?
Speaker 5: Well, you know, we get paid to worry about it.
Speaker 4: What we do observe, at least in the treasure rate
Speaker 4: market is the fact which is really since the last
Speaker 4: FED rate hike, which was two and a half years ago,
Speaker 4: ten your treasure yields have been in a pretty tight
Speaker 4: range four and three quarters at the high end, three
Speaker 4: and three quarters at the low end. Now that also
Speaker 4: you also need to note that underlying real rates, which
Speaker 4: we can see from the inflation index bond market, are
Speaker 4: much higher than they were in twenty nineteen, and so
Speaker 4: we're going to have a steeper yield curve than we
Speaker 4: did pre pandemic, which is a good thing. I think
Speaker 4: we're going to probably have elevated somewhat elevated volatility relative
Speaker 4: to the decade before the pandemic, in which rate volatility
Speaker 4: was suppressed through.
Speaker 5: A zero negative humor. At one point, I think in
Speaker 5: Europe there was.
Speaker 4: Like eighteen trillion dollars of negative yielding sovereign DUTs. So
Speaker 4: we do pay attention to it, but we think a
Speaker 4: lot of the repricing that needed to happen because of
Speaker 4: the fiscal outlook has basically already happened and is in
Speaker 4: the price.
Speaker 2: I am begging when you get through the doom loop,
Speaker 2: When I get through the doomop, I would be honored
Speaker 2: to have you and Prisadon in the same studio together.
Speaker 2: Would be like a service to a lot of people
Speaker 2: thinking about this. His public service to the nation at
Speaker 2: the Federal Reserve System.
Speaker 5: Richard Clarday.
Speaker 3: He is Global Economic Advisor at pimcof.
Speaker 2: Stay with us more from Bloomberg Surveillance coming up after this.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us Live
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Speaker 2: I am hate because it's bringing back all my quant nightmares.
Speaker 2: I actually study this like I look at Kurtosis and
Speaker 2: it's like E equals x minus ux squared and.
Speaker 3: The y item is well, lots of mew in there.
Speaker 5: Yes, it's very MEWI as well, joining us out of
Speaker 5: the Queen of Greek letters.
Speaker 2: Amy wou Silverman had a derivative strategy at RBC Capital Markets.
Speaker 2: If you take your world and it's goussy and like
Speaker 2: a bell curve like our high school the height of
Speaker 2: our high school class, and then you transfer it over
Speaker 2: to the oddities of log normal or even to ta
Speaker 2: lab in place saus. You can't use that material now,
Speaker 2: can you, Because the dispersion is stupid.
Speaker 5: Right.
Speaker 10: The duck is quacking tom so you know, I know
Speaker 10: we've beaten this analogy to death of this duck. On
Speaker 10: the surface of the lake, it looks calm, I mean,
Speaker 10: a little choppier now, but those little duck feet are
Speaker 10: even more violent underneath when we think aboutsion. So just
Speaker 10: the difference between average single stock volatility and index level volatility.
Speaker 10: You know, there's a reason why VIX even though it's eighteen,
Speaker 10: it's still sub twenty that's kind of crazy. But then
Speaker 10: go over to something like VXN your nastac vall that
Speaker 10: spreads through the roof, because we got a little zigging,
Speaker 10: but we got a lot of zagging. They tend to
Speaker 10: cancel each other out. But that average single stock move
Speaker 10: has been mindful.
Speaker 5: Where's the opportunity then? Right now Monday morning, it's nuts.
Speaker 2: We had that huge up Friday, right Paul room Jemmy,
Speaker 2: that was like a thousand points up fifty thousand. Now
Speaker 2: Amy was silber, and where's the opportunity now given wacko dispersion?
Speaker 10: So I think the big question right now is we're
Speaker 10: at a crossroads. Does this dispersion continue? I can tell
Speaker 10: you everyone's piled into the dispersion trade, But the question
Speaker 10: is do we at some point just get a lift
Speaker 10: of correlation. Everything all goes risk off at the same time,
Speaker 10: you know, and then that duck's falling off a waterfall
Speaker 10: or something. That's the big question that hasn't happened a
Speaker 10: long time. I think there's more nervousness could occur.
Speaker 7: Last week, last ten days when we saw the selloff
Speaker 7: in the tech names generally software in particular, it felt
Speaker 7: panicky to me. It felt like something unusual. Did you
Speaker 7: see that in the options markets, in the derivatives markets?
Speaker 10: Yeah, And one big question I get now is what
Speaker 10: is IGV volatile? They kind of telling you since then,
Speaker 10: so I can tell you that pickup and skews that
Speaker 10: that demand for hedges has faded. So it's not like
Speaker 10: people are betting that we're going to see further downside there.
Speaker 10: You're actually seeing a decent amount of dispersion just within IGV.
Speaker 10: But the question is, you know, how frequently will we
Speaker 10: continue to have retail save the day? That's what happened again,
Speaker 10: that's your playbook?
Speaker 7: Is that what happened since April?
Speaker 10: Second? Yeah, overall, you know you saw that Friday, and
Speaker 10: to be fair, they won the last few rounds. And
Speaker 10: the question is that does that like at the stool
Speaker 10: continue or does something.
Speaker 7: Just abou ETF phenomena. Is it more pronounced today than
Speaker 7: it was in the past because ETFs have so much
Speaker 7: money that retail maybe has a bigger play in the market.
Speaker 10: It's a great question. I think there's just overall democratization.
Speaker 10: There's there's ease in how you trade. You can trade
Speaker 10: a fractional option, you can go on your iPhone or
Speaker 10: smartphone and do it. But you know, we're seeing a
Speaker 10: lot of flows. I spoke with our ETF team into
Speaker 10: something like Voo, which is tends to be more retail heavy.
Speaker 10: ETF just historic and flows there. And then you see
Speaker 10: them again saying like we believe in the AI theme.
Speaker 10: We're going to go back at it. We won that
Speaker 10: liberation day round. There's no reason we don't believe by
Speaker 10: the DIP continues to work.
Speaker 3: And it was.
Speaker 2: Silverman with this head of derivative strategy at RBC, a
Speaker 2: quant template over the equity market. How can people in
Speaker 2: boring four oh one ks use your work? You talk
Speaker 2: to fancy people with fancy Greek letters, but mere mortals
Speaker 2: like I'm in a tutel one cage because I'm triple
Speaker 2: leveraged all cash fun John Tucker, are you in a
Speaker 2: five oh one k like because you loaned the boat
Speaker 2: on Nvidia.
Speaker 5: No, No, it's you know, it's done remarkably well.
Speaker 7: Yeah, exactly.
Speaker 5: No, that doesn't mean I'm retiring.
Speaker 7: Don't panic, but there might be a work don't appear.
Speaker 9: I'm thinking, yeah, could be nice, sat tied up to
Speaker 9: the Atlantic Highlands work there amy.
Speaker 3: How can people with their mere mortals use your work.
Speaker 10: Yeah, I can tell you they they already are. So
Speaker 10: the growth in income funds, for instance, where your your
Speaker 10: long and index or your long stocks, and then your
Speaker 10: your your favorite word time you're harvesting volatility, you're selling
Speaker 10: yield to collect a little bit more yield. You know,
Speaker 10: those are some of the biggest strategies that are growing.
Speaker 10: Folks like it, and they tend to like it even
Speaker 10: in years like twenty twenty two where the market drew
Speaker 10: down twenty percent, and they like it in years where
Speaker 10: the market is something they give up the.
Speaker 3: Game if they're harvesting a hedge to.
Speaker 10: Get so obviously, yeah, so obviously there's that risk of
Speaker 10: your limiting upside. I think for a lot of people
Speaker 10: it's more about that yield collection is attractive. Depending on
Speaker 10: where they are in their time horizon, that might make
Speaker 10: more sense, and they're okay with that, especially if they
Speaker 10: think we're getting kind of heady in terms of evaluations.
Speaker 7: Well, I would think your desk is writing a lot
Speaker 7: of business because boy, if I were a salesperson, I
Speaker 7: could do the one if here, what if here the
Speaker 7: AI trade is ending and so on and so forth.
Speaker 7: You can't be out of this market, be writing options
Speaker 7: all over the place.
Speaker 10: It's been you know, I will tell you the volume
Speaker 10: and options has been really busy. I think last last
Speaker 10: week in XLP so the staples we saw more than
Speaker 10: a million trade on the put side. I mean, just stunning.
Speaker 10: And what you would arguably say is a boring defensive industry.
Speaker 10: It's very active. And the other thing is, you know,
Speaker 10: there's also the Trump tweeter risk. That's my bad joke
Speaker 10: of you know, Twitter risk from Trump at any moment
Speaker 10: can just shift the game geopolitical risk. It's one reason
Speaker 10: we still think geldv All makes sense on the upside.
Speaker 2: Okay, very importantly, Amy was San Folks is our surveillance.
Speaker 2: Taylor ts correspondent here. Should Taylor do the super Bowl?
Speaker 10: I think she's busy planning. Sure, yeah, yes, she's She's
Speaker 10: transcended the Supervislin, my husband's nursing is Patriots loss. So
Speaker 10: you know it hasn't been great for us.
Speaker 3: Amy or Silverman, thank you so much, really really appreciate it.
Speaker 2: With RBC Capital Markets, stay with us. More from Bloomberg
Speaker 2: surveillance coming up after this.
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Speaker 2: This is the best research real estate note i've seen.
Speaker 2: Thank you, John Tucker Richel with this global had of
Speaker 2: real estate strategy.
Speaker 6: Your note is a brand fresh air because it's not
Speaker 6: a monolithic note.
Speaker 3: There's all sorts of nuance in that.
Speaker 6: For an investor right now, is a general statement, I
Speaker 6: need to acquire reach shares.
Speaker 3: Does that make sense now? Given the cacophony of your note,
Speaker 3: So it doesn't.
Speaker 8: It doesn't.
Speaker 11: So let me explain what I mean by that. Reads
Speaker 11: have been out of favor for the past several years,
Speaker 11: and I get it right. We've been a high growth environment,
Speaker 11: we've been a rising interest rate environment, and that's not
Speaker 11: conducer for reads.
Speaker 8: But you were talking about.
Speaker 11: A rotation that we're seeing previously, and reads are participating
Speaker 11: in that rotation. They're now up five percent year to
Speaker 11: date to the sixth best sector of the S and
Speaker 11: P five hundred, after being the worst sector last year.
Speaker 11: But commercial real estate is not a singular asset class.
Speaker 11: It's actually eighteen different subsectors. That do something very differently
Speaker 11: at different points in time. And I think that's our
Speaker 11: key view here. This is not a single sector beta
Speaker 11: trade that we're seeing for commercial real estate. We think
Speaker 11: this is a cycle for dispersion, where we're seeing significant
Speaker 11: dispersion and returns across property types, markets, and even fun vehicles.
Speaker 11: We think that's a market that's right for alpha. But no,
Speaker 11: this is not a market where you're supposed to be
Speaker 11: just buying everything.
Speaker 7: That was my mistake commercial real estate. I used to
Speaker 7: think that was just office. Now I know better, it's
Speaker 7: you know, it's retail, it's you know, it's all these
Speaker 7: other places, data centers and all that kind of stuff.
Speaker 7: Where is the value today in commercial real estate? Where
Speaker 7: are the opportunities? Where are you guys allocating capital to say?
Speaker 3: Sure?
Speaker 11: Well, we like to say themes still matter, but they
Speaker 11: require hyper focus. So one of the things that we're
Speaker 11: talking about, I always like to start with the housing market,
Speaker 11: because the housing market is everyone's favorite sector. Right now,
Speaker 11: You've heard this statistic thrown out all the time that
Speaker 11: the US is under house five million, seven million, eight
Speaker 11: million homes. That's mathematically true, but it's actually the wrong discussion.
Speaker 11: It's the wrong debate. We think we have a housing
Speaker 11: mismatch in the United States. We've built too many homes
Speaker 11: of certain types in some markets and not enough homes
Speaker 11: and other of types and other markets. So we actually
Speaker 11: might have a convince class a multi family over supply
Speaker 11: problem in the United States. But we haven't built enough
Speaker 11: affordable housing in the United States. We haven't built enough
Speaker 11: middle class housing in the United States. And you can't
Speaker 11: move a house from a high growth market in Texas
Speaker 11: to someplace in the Midwest. By the way, Chicago, Illinois
Speaker 11: the number one apartment market in the United States right now.
Speaker 7: So how do we get to a place where we are?
Speaker 7: We do have this lack of housing here. My contention
Speaker 7: is if I'm Toll Brothers or whomever, I'm building a
Speaker 7: million dollar McMansion because I've got a nice fat margin
Speaker 7: on that, I don't have the same margin building a
Speaker 7: two or three or four hundred thousand dollars starter home
Speaker 7: or something like that. But that's just the economics of
Speaker 7: the marketplace. How do you change that?
Speaker 11: Yeah, so you're absolutely right, it doesn't cost really anything
Speaker 11: less or more to do a conventional class a versus
Speaker 11: affordable housing.
Speaker 8: All you're talking about is the difference than the amenities.
Speaker 11: So as a result, people only built it by new
Speaker 11: pretty building commercial real state properties and homes. It is
Speaker 11: very hard to buy to build affordable housing without government
Speaker 11: subsidies of some sort. But I think the market's changing
Speaker 11: where we're going to do this with lower cost price
Speaker 11: points like manufactured housing insense.
Speaker 2: Richel, with his principal asset management glob I, had a
Speaker 2: real estate as strategy with a really really nuanced note
Speaker 2: about what to do what not to do as well.
Speaker 2: So off your note. I looked at hotels. We all
Speaker 2: know in this room hotel prices are nuts. You go
Speaker 2: around the world, it's absolutely nuts. I look at host HST,
Speaker 2: which is I guess a fancy hotel property read and
Speaker 2: it's not given me the returns that I'm seeing in
Speaker 2: those price per nights in those luxury hotels.
Speaker 5: Why is that?
Speaker 2: Yeah?
Speaker 11: Sure, So we think there is a case shaped recovery
Speaker 11: occurring in the US economy right now.
Speaker 8: What that basically means is high.
Speaker 11: Endcome earners are doing really well, middle income earners are
Speaker 11: not doing as well, and low income owners are really
Speaker 11: struggling right now. You can see that in autodelinquency rates,
Speaker 11: student student student delinquency rate, credit card delinquency rates. The
Speaker 11: high income portion of hotels are doing really well and
Speaker 11: some other portions of hotels are not doing so well.
Speaker 11: So there's this real interesting mismatch going on where RevPAR
Speaker 11: so rooms per night, where the highest income cohort is
Speaker 11: accelerating while everything else is flapped slightly down.
Speaker 7: So what are we doing here in commercial real estate?
Speaker 7: Is it all data centers? Is that where I'm putting
Speaker 7: my money? Because it seems like a data center read
Speaker 7: there's got to be an ECF for a reader or
Speaker 7: something there.
Speaker 11: There are data center rates see, and they've been around
Speaker 11: for almost a decade now, but we think data centers
Speaker 11: are becoming a really nuanced asset class.
Speaker 8: So maybe ten years ago everyone was bullishly.
Speaker 5: Optimistic about them.
Speaker 8: Now people have maybe turned.
Speaker 11: A little bit too bearishly to barish on them.
Speaker 8: But there's three types of data centers.
Speaker 11: There's cloud data centers, there's AI and FEMS data centers,
Speaker 11: and there's general AI. Cloud is really attractive because we're
Speaker 11: using cloud right now. Cloud's been around for or it's
Speaker 11: not going away. We actually like AI in ferns because
Speaker 11: when we go on chat g GPT that uses cloud.
Speaker 8: In ferns or AI in fernce. Excuse me.
Speaker 11: Generative AI is when you're training models for future unknown
Speaker 11: AI demand.
Speaker 8: That's where a lot of the.
Speaker 11: Supplies coming, and that's where a lot of the spec
Speaker 11: buildings coming.
Speaker 8: We're cautious on those, but we like these segments here.
Speaker 8: We don't like these segments here.
Speaker 5: The market's evolving.
Speaker 2: Away from principal asset management. With what you've done Conen
Speaker 2: Steers and all over the year you work at Georgetown
Speaker 2: years ago, when you're at a super Bowl party and
Speaker 2: somebody says to you, Rich, what do you do about
Speaker 2: the housing crisis in America? Our kids can't afford it.
Speaker 2: The average the average first time home buyer now is
Speaker 2: what John seventy two, seventy three.
Speaker 5: Yeah, No, that's just about how do.
Speaker 3: You answer this national question we have.
Speaker 8: The first question is you have to acknowledge it. It's
Speaker 8: very real.
Speaker 11: Housing pressure for a lot of people across the United
Speaker 11: States is very, very high.
Speaker 8: What do I think you have to do?
Speaker 6: Well?
Speaker 11: The easy answer to say government, public private partnerships. That's
Speaker 11: probably easier said than done. I think what we need
Speaker 11: to do is take a queue from the manufactured housing market.
Speaker 11: So that's markets that's firmly known as mobile homes, where
Speaker 11: you're building really nice homes with relatively cheap or inexpensive products.
Speaker 11: I think if we can find a way to use
Speaker 11: manufactured homes technology for a lack of better term, and
Speaker 11: go vertical with it, that would be a long way
Speaker 11: to solve that affordable housing crisis in the United States.
Speaker 7: Office real estate, New York City. Where are we today?
Speaker 11: Yeah, So I like to tell people that the leading
Speaker 11: indicator for a rebound in the office market is what
Speaker 11: is happening in the debt markets.
Speaker 8: The commercial mortgage backed.
Speaker 11: Security market so cnbs boomed for New York City office
Speaker 11: in twenty twenty five, and it's often a pretty good start.
Speaker 8: In twenty twenty.
Speaker 11: Six, commercial mortgage lending was back to historical averages for office.
Speaker 11: The market likes gateway coastal markets like New York City
Speaker 11: and San Francisco. Right now, we actually might have already
Speaker 11: missed the bottom in San Francisco, it's back that much.
Speaker 8: So this is a market of have and have nots.
Speaker 8: We don't have an office problem in the United States.
Speaker 8: We have a Class B and C office problem.
Speaker 11: That's too many office buildings built in the nineteen seventies
Speaker 11: and nineteen eighties that didn't put any capecks into them
Speaker 11: over the past several decades.
Speaker 8: No one wants those buildings new properties. They're great challenges.
Speaker 11: We have ninety percent of office vacancy focused on thirty
Speaker 11: five percent.
Speaker 3: We got to go, do you bulldoze those properties?
Speaker 8: You do?
Speaker 11: Because it's actually it's actually just as expensive to rebuild
Speaker 11: as it is.
Speaker 3: Are you based in New York? I don't even know.
Speaker 8: Yeah, I work just a couple walks down.
Speaker 5: You don't want to say that because we'll call you everything.
Speaker 5: I am always having to be come up. Oh time.
Speaker 5: It's such a drive. It was so hard to get.
Speaker 5: This is fabulous. Richell.
Speaker 2: Don't be as stranger with principal asset manager Richell Global
Speaker 2: had a real estate strategy.
Speaker 5: Stay with us.
Speaker 2: More from Bloomberg Surveillance coming up after this.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us live
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Speaker 2: I'm going to go somewhere where I'm curious and I
Speaker 2: really don't think it's front center. But Lindsay Newman's going
Speaker 2: to brief us here, absolutely phenomenal geopolitical risk expert at
Speaker 2: G zero Media at King's College, London, Iran doctor Newman.
Speaker 2: I guess there's this idea of X number of our
Speaker 2: fleet in the vicinity of Iran. How do you interpret
Speaker 2: the movement reports of US military assets in the Middle East?
Speaker 12: K job warning, Yes, well, we how we interpret this
Speaker 12: is to say that no surprise here, the Trump administration
Speaker 12: is pulling all levers simultaneously. So just at the end
Speaker 12: of last week, of course, there were these indirect bilot
Speaker 12: talks between the US Iran. We also sell simultaneously. Not
Speaker 12: well reported that the administration issued a new executive order
Speaker 12: assessing the threat of Iran and extending the national emergency
Speaker 12: that Iran poses to America in order to open the
Speaker 12: door for more secondary tariffs. So this is the key
Speaker 12: economic leverage piece that we expect that the administration will pursue.
Speaker 12: And then, of course this time around the second from administration,
Speaker 12: it's also all about force and force posturing. So we know,
Speaker 12: as you've said, that the administration has moved a massive
Speaker 12: amount of kit into the area. It includes a strike
Speaker 12: carrier wars. It also includes naval destroyers, some other aircraft,
Speaker 12: as well as anti aircraft defense systems, which will be
Speaker 12: critical in the event that the US decides to pursue
Speaker 12: some military action in Iran and Iran decides, of course,
Speaker 12: to retaliate against US assets in the region or more adventurism.
Speaker 7: In the region, Doctor Newman, what type of agreement is
Speaker 7: the US pushing for?
Speaker 12: Yeah, I mean, the big question, this is the question Paul, right,
Speaker 12: because last week we saw that talks were scheduled to
Speaker 12: go ahead in Turkey and they were going to be multilateral,
Speaker 12: and then the talks were called off, and then they
Speaker 12: were rescued in to be relocated in Oman, and they
Speaker 12: were indirect bilateral talks, as they said. And the sort
Speaker 12: of back and forth even on the location shows that
Speaker 12: these two sides are not in alignment. They're not alignment
Speaker 12: about where they're willing to talk, who they're willing to
Speaker 12: have in the room, and they're certainly not in alignment
Speaker 12: about what they're even talking about. Iran has been very
Speaker 12: clear that the conversation is only about its nuclear capabilities.
Speaker 12: It's not even about enrichment. It's only about reassurances that
Speaker 12: their nuclear capabilities are for non military purposes. But the
Speaker 12: US has been very clear and this was again stated
Speaker 12: last week by Secretary of State Rubio also in the
Speaker 12: Executive Order, to say that the conversation the US is
Speaker 12: intending to have is about all nuclear capabilities there cannot
Speaker 12: be in nuclear ron. It's also about ballistic missiles. It's
Speaker 12: also about Iran's regional proxy support, and even a bit
Speaker 12: more about what's going on at home in Iran. The
Speaker 12: two sides do not have the same level of items
Speaker 12: on the table, and that means that any so called
Speaker 12: deal that can be reached feels very sort of out
Speaker 12: of rain.
Speaker 7: What is the current nuclear capabilities of Iran right now?
Speaker 12: I mean, you know, I think it's anyone's guest, Paul.
Speaker 12: I mean, we know that over the last several years,
Speaker 12: there was an Operation Midnight Hammer, where the US pursued
Speaker 12: strike action against three nuclear facilities in Iran. Following you,
Speaker 12: Israeli also action against the facilities. But we know that
Speaker 12: sort of inspectors have not been allowed in of late.
Speaker 12: Estimates are that those strikes last year definitely degraded some
Speaker 12: enrichment capabilities, but you know it's really a sort of
Speaker 12: black box issue.
Speaker 2: Ludcy Newman with this geopolitical risk expert at G zero Media,
Speaker 2: with all of the abilities of King's College, London, they
Speaker 2: have been definitive on the study of conflict and or lindsay,
Speaker 2: I'm absolutely fair, and I say this with a mens respect.
Speaker 2: Did you watch the Super Bowl or the be beginning
Speaker 2: of the Super Bowl from London?
Speaker 12: Doctor Newman, you know I didn't watch the beginning, but
Speaker 12: I will tell you that my sons insisted on watching
Speaker 12: it this morning, so we watched it at six am.
Speaker 12: In the replay. I didn't get a chance to watch
Speaker 12: the halftime show. I'm very intrigued to watch it, but
Speaker 12: my day has not allowed yet for me to watch
Speaker 12: the halftime show. I did see it was resplendent and
Speaker 12: people seem excited about it.
Speaker 5: We expect to report.
Speaker 2: From jeezuro Media on bad BENETI and doctor Newman all
Speaker 2: kidding aside, Doctor Newman, we have a method in America
Speaker 2: of showing the flag, showing the military. We have a
Speaker 2: Budweiser commercial with an eagle coming off the back of
Speaker 2: the horse and it's obligatory that at these big events
Speaker 2: six or seven fancy military aircraft fly over in that. Okay,
Speaker 2: well that's fine, but we have to deploy our resources
Speaker 2: to the Pacific, deploy our resources to the Middle East.
Speaker 2: A pro like you, how do you respond to America
Speaker 2: considered comfortable about five airplanes flying over football stadium?
Speaker 3: But are we ready to offense and defense in the
Speaker 3: Middle East?
Speaker 6: Yeah?
Speaker 12: Tom, I mean, we know the polling shows that seventy
Speaker 12: percent of Americans are not in support of this idea
Speaker 12: of seeing the US engaged in military action in Iran,
Speaker 12: whether it's in support of the protesters that you know,
Speaker 12: the thousands have died and not those still left in Iran,
Speaker 12: or if it's even about Iran's nuclear capabilities. Those are
Speaker 12: stark numbers, right. So only thirty percent, less than a
Speaker 12: third of Americans really want to see the US engaged
Speaker 12: in military action. And that's because we know there's a
Speaker 12: long history of getting involved in forever wars. You know,
Speaker 12: as you raised with me the last time. Laurence Freedman
Speaker 12: has talked about this recently. You know, this idea of
Speaker 12: the fallacy of a short war, that there could be
Speaker 12: some you know, ambition that it would be surgical and
Speaker 12: focused but you can't control with the other side once
Speaker 12: you take any sort of action. So Americans have been
Speaker 12: clear that you don't really want to see the US
Speaker 12: involved in ongoing conflicts like that. But the Trump administration
Speaker 12: has been clear that it's going to apply all forms
Speaker 12: of pressure.
Speaker 7: What do you think Iran wants at this point in
Speaker 7: these negotiations.
Speaker 12: Well, Iran wants to see some sort of negotiation to
Speaker 12: negotiate continue. We know last year there were five runs
Speaker 12: of negotiations that then the administration in the US said well,
Speaker 12: this isn't we're not reaching a deal, so we're going
Speaker 12: to pursue force. Aaran just wants to see de escalation
Speaker 12: and punt this whole latest blip in the escalatory cycle
Speaker 12: down down, down the road, because it hopes that it
Speaker 12: can sort of lead to just an ongoing, more permanent
Speaker 12: de escalation. I think that that's a hard scenario to
Speaker 12: imagine happening. I think that the US has been pretty
Speaker 12: clear in saying, you know, if you're a US citizen
Speaker 12: in Iran, get out or otherwise stockpile. That's a very
Speaker 12: stark indicator to watch for. But Iran is certainly hoping
Speaker 12: that it can convince the US administration to just keep talking.
Speaker 2: Lindsey, Thanks so much. Lindsey Newman with US Today, Geopolitical
Speaker 2: Risks Expert G zero Media at King's College in London.
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