Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller.
Speaker 2: Every business day we bring you interviews from CEOs, market pros,
Speaker 2: and Bloomberg experts, along with essential market moving news.
Speaker 1: Find the Bloomberg Markets Podcast on Apple Podcasts or wherever
Speaker 1: you listen to podcasts, and at Bloomberg dot com slash podcast.
Speaker 1: Our next guest, I guess I got to call him
Speaker 1: like my favorite economists, but that's not saying a whole
Speaker 1: lot quite frankly, but he is good and we're glad
Speaker 1: we got a few minutes of his time. You know,
Speaker 1: Carl Ricadona, he's BNP Perry bott and now I trained
Speaker 1: him up here at Bloomberg Intelligence for many years. But
Speaker 1: he's pretty solid. Carl, What are you looking at today?
Speaker 1: You know, we just heard from the good folks Dana
Speaker 1: Peterson at the Leading Economic Indicator of the Conference Board.
Speaker 1: They still have a recession call out there, how about
Speaker 1: you guys at ben P Perry Bow.
Speaker 3: Well, Paul, I should back that up. You taught me
Speaker 3: everything I know. Of course, thanks for that.
Speaker 4: I'll start with that.
Speaker 3: But in terms of the recession view, you know, we
Speaker 3: still see some pretty ominous factors looming on the horizon.
Speaker 3: You've been talking about the resumption of student debt payments. Now,
Speaker 3: you know, there may be some legal room here that
Speaker 3: you know, you have a twelve month grace period, you know,
Speaker 3: to start and whatnot. But if we just look at
Speaker 3: the you know, the view from sixty thousand feet, the
Speaker 3: price tag on that is about one hundred billion dollars annualized.
Speaker 3: So look back to Q one when everything went haywire
Speaker 3: with the cost of living adjustment and Social Security that
Speaker 3: was also about one hundred billion dollar price tag. So
Speaker 3: I'm sure they're not equal, but when you look from
Speaker 3: a you know, when you're squint from a distance, there
Speaker 3: are you know, similar sizes, and so all of the
Speaker 3: things that went up in Q one, discretionary spending and whatnot,
Speaker 3: we could see kind of a similar fallout in the
Speaker 3: Q four period.
Speaker 1: But on top of that, you have, you know, a
Speaker 1: very divided.
Speaker 3: Government that has to pass twelve appropriation bills by the
Speaker 3: end of this month, by the end of September. Rather
Speaker 3: you know, that seems very unlikely, so there's a risk
Speaker 3: of a government shut down. Then the excess saving story
Speaker 3: we've been focusing on this. San Francisco FED wrote on
Speaker 3: this recently. Those savings are rapidly being eroded. You see
Speaker 3: that in the retail earnings you discussed in the earlier segment,
Speaker 3: where Target is noticing that, you know, price sensitivity of
Speaker 3: consumers in Walmart sees a lot of the higher end
Speaker 3: consumers walking into Walmart to go after those bargain prices
Speaker 3: and whatnot. So you kind of see that playing out,
Speaker 3: you know. So there's a bit of a perfect storm
Speaker 3: I think coming about in Q four, which still makes
Speaker 3: me worried about elevated recession risk in Q four and
Speaker 3: into the kind of first part of next year.
Speaker 5: How do you swear that away when a lot of
Speaker 5: this data still is pretty resilient if you're looking at
Speaker 5: retail sales even the Atlanta Feds GDP now for the
Speaker 5: current quarter up around five percent, and when you're seeing
Speaker 5: talking about Walmart coming in and better than expected outlook
Speaker 5: on the consumer. As far as you talked about student loans,
Speaker 5: I mean, is what's the main catalyst here to really
Speaker 5: weigh on consumers when we're looking at the difference between
Speaker 5: spending when you're talking about obviously goods versus services.
Speaker 3: Well, I think the GDP tracker in the you know,
Speaker 3: the early part of the quarter can often go for
Speaker 3: you know, a real loop, and I think that's what
Speaker 3: we're going what we're seeing at the moment. I highly
Speaker 3: doubt we're growing at five percent in the current quarter
Speaker 3: an inflation adjusted terms. So you know, I value the
Speaker 3: Atlanta Fed GDP now tracker.
Speaker 4: It can be volatile follow it, but.
Speaker 6: It does move.
Speaker 3: It does move over the course of the quarter. That's
Speaker 3: not unusual, and so I do think we'll see some
Speaker 3: moderation in that in that indicator over the course of
Speaker 3: the quarter. That being said, there is a theme of
Speaker 3: resilience here, whether it's the labor market or consumer activity
Speaker 3: and whatnot. But you know, you always have to be
Speaker 3: looking forward, and you're hearing those anecdotes of price sensitivity
Speaker 3: from consumers. So the real test will be, you know,
Speaker 3: if this can hold out over the course of the quarter,
Speaker 3: or if July just happened to be a good month
Speaker 3: for retail, whether you know, whether it was driving people
Speaker 3: into shopping malls or Amazon Prime Day or a lot
Speaker 3: of these factors maybe just one off developments. When we
Speaker 3: kind of step back and look at the macro fundamentals,
Speaker 3: the broader GDP trends, So not the quarter on quarter
Speaker 3: change that we see in the GDP now forecast, but
Speaker 3: rather the year and year rate of change is slowing.
Speaker 3: What does disturb me is GDI. So gross domestic income,
Speaker 3: which in a perfect world should track in lockstep with
Speaker 3: the GDP. But you know, the guy who taught me
Speaker 3: everything I know, Paul Sweeney, you know, don't live in
Speaker 3: a perfect world. And the gd I numbers look pretty bad.
Speaker 3: So gross domestic ink, well, first of all, profits are
Speaker 3: slowing and gross domestic income looks pretty lousy. We'll see
Speaker 3: the next print on that when we get the second
Speaker 3: print for Q two GDP. But GDI is a disturbing trends,
Speaker 3: So there's there's definitely fodder for both sides of the
Speaker 3: debate here, and I'm not convinced of the reacceleration narrative
Speaker 3: just yet.
Speaker 1: We've certainly seen Carl over the last I don't know,
Speaker 1: a couple of weeks, some really disappointing economic news come
Speaker 1: out of China. How do you kind of think about
Speaker 1: that as as you think about the impact of the
Speaker 1: US economy.
Speaker 3: Well, I you know that China's obviously a very important
Speaker 3: trading partner, and global commodity prices are very sensitive to
Speaker 3: the health of the Chinese economy, and those commodity prices
Speaker 3: impact the US inflation outlooks. So you know, we're definitely
Speaker 3: watching the situation very closely and trying to understand what's happening,
Speaker 3: you know, in the kind of immediate reopening after COVID
Speaker 3: and then you know, where things settle there, there seem
Speaker 3: to be some key differences. So, you know, in Europe
Speaker 3: and the US, we saw a lot of pent up savings,
Speaker 3: in pent up demand that really led to the you know,
Speaker 3: kind of revenge spending and house price appreciation and and
Speaker 3: you know demand for you know, for a lot of
Speaker 3: consumer spending categories. It looks very different in China, and
Speaker 3: we're you know, we're seeing that play out that the
Speaker 3: reopening of the second largest economy in the world looks
Speaker 3: very different than, you know, than what we've seen in
Speaker 3: the US and Europe, and we're seeing that pass through
Speaker 3: to supply chains, and this is feeding into an inflation
Speaker 3: narrative of of deceleration. But our view has been at
Speaker 3: BNP for quite a while that the last mile is
Speaker 3: going to be where, you know, where the real toughness
Speaker 3: comes out and the real stickiness of the inflation data
Speaker 3: is apparent, and that's going to mean that this FED
Speaker 3: can't you know, we'll have a course correction on the
Speaker 3: the immaculate disinflation narrative, and the FED is going to
Speaker 3: have to remain vigilant in its inflation fight to get
Speaker 3: us all the way back to two percent. It's easy
Speaker 3: to get from nine percent down to six, but from
Speaker 3: six to four is harder. And getting from four to
Speaker 3: two is where will really take some softening of labor
Speaker 3: conditions and some of the categories that have been sticky
Speaker 3: to to really move lower.
Speaker 5: All right, you brought up the FED. We do have
Speaker 5: Jackson Hole next week. How do you view this and
Speaker 5: what this could potentially mean for their signaling ahead of
Speaker 5: that September twentieth decision.
Speaker 3: I don't think they're going to signal much for the
Speaker 3: September decision. Of course, they'll be asked in the you know,
Speaker 3: the press conferences and media exchanges and whatnot what they're thinking,
Speaker 3: and I think they'll give us the you know, the
Speaker 3: generic FED answers of well, there's more data to be seen,
Speaker 3: so we don't want to cast a judgment so we.
Speaker 5: Did get the employment Costs Index CPI PPI and then
Speaker 5: PCE since the last decision. So it feels like those
Speaker 5: FED minutes we got yesterday might be a bit backward looking, right.
Speaker 3: That is spot on analysis because people are focusing on
Speaker 3: some of the hawkish language that was in the minutes
Speaker 3: where they said they're still upside risk to inflation and
Speaker 3: therefore we may need to do more. We have to
Speaker 3: remember they wrote those words, and then we got a
Speaker 3: cooler CPI report, cooler ECI report, a still hot but
Speaker 3: cooling trend in the labor data, right, so that dates
Speaker 3: some of that language. And I think the more important
Speaker 3: takeaway from the minutes was that they're looking at this
Speaker 3: in a very two sided fashion now, is they assess
Speaker 3: risks for the outlook doing too much but also doing
Speaker 3: too little, Whereas before they were always kind of worried
Speaker 3: they were behind the curve and we're just focused on
Speaker 3: catching up. So this is a different, more thoughtful, more
Speaker 3: data sensitive FED going forward. You know, I think this
Speaker 3: may mean that they're on hold, and in fact, they
Speaker 3: may have been at the peak rate of the cycle
Speaker 3: at the July meeting and they're done now, even though
Speaker 3: they don't want to say mission bump right, all.
Speaker 1: Right, Carl, thanks so much for joining us. Always always
Speaker 1: appreciate getting your perspective. Your analysis called wreck Don one
Speaker 1: of the best. He's a chief US economists at b
Speaker 1: n P. Parrybottle.
Speaker 6: You're listening to the team.
Speaker 7: Ken's a live program Bloomberg Markets weekdays at ten am Eastern.
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Speaker 1: Here a Bloomberg. We love talking about central bank activity.
Speaker 1: We're all over that stuff. Today we're going to focus
Speaker 1: a little bit on the Bank of Japan, and we
Speaker 1: have a great guest to help us do that, Regina Schlagger,
Speaker 1: director of Central Bank Policy Research at SGH Macroadvisor. She
Speaker 1: joined us live here in our Bloomberg Interactive Broker Studio.
Speaker 1: I have to admit, Regina, of all the central banks
Speaker 1: and probably least comfortable or knowledge about what they are doing,
Speaker 1: so just give us a sense of what the boj
Speaker 1: has been up to really over the last several years
Speaker 1: and kind of what you expect them to do going forward.
Speaker 8: Sure, Thanks Paul, thanks for having me, and nice to
Speaker 8: see you both this morning. So the Bank of Japan
Speaker 8: has been somewhat of a laggered in terms of central
Speaker 8: bank policy tightening over a recent recent couple of years,
Speaker 8: and so markets are quite focused on the timing of
Speaker 8: their transition to Titan pol see, particularly with respect to
Speaker 8: transitioning out of what they have had in place now
Speaker 8: for many years yield yield curve targeting, which is them
Speaker 8: targeting the ten year yield, and so they have recently
Speaker 8: shifted toward more flexible arrangement or regime with respect to
Speaker 8: yield curve targeting, which markets are obviously taking as a
Speaker 8: signal that they are on the move if you like,
Speaker 8: and soon to be thinking about higher interest rates at
Speaker 8: some point. Markets intensely focused on the timing of that
Speaker 8: and taking every signal they can from the economy to
Speaker 8: try to gauge when they're likely to move.
Speaker 5: And very different like you're seeing. If you juxtapose that
Speaker 5: against the Federal Reserve and other global central banks that
Speaker 5: clearly have been on this aggressive tightening cycle for over
Speaker 5: a year now, how do you think that impacts the
Speaker 5: global economy? Because Japan is the third larger economy behind
Speaker 5: the United States and China.
Speaker 8: Absolutely and as you rightly infer there's a huge yield
Speaker 8: differential now between the US and Japan, and so one
Speaker 8: of the things that we've become aware of is that
Speaker 8: officials officials in Japan are you know, waiting for the
Speaker 8: FED to be done, if you like, with respect to
Speaker 8: their tightening cycle, so that they can start to think
Speaker 8: about how they will move on their own rates and
Speaker 8: narrow that differential. They have a currency right now which
Speaker 8: is at levels that they're not entirely comfortable with, right,
Speaker 8: so the end breaching one right, right, So this is
Speaker 8: a this is a policy driver for them in the
Speaker 8: sense that they have now i think admitted that it's
Speaker 8: a big factor in how they're thinking about how to
Speaker 8: transition smoothly out of this ultra easy policy that they've
Speaker 8: had now for a very long time. And I think
Speaker 8: that you know, really that rate differential is not going
Speaker 8: to narrow.
Speaker 4: Until they actually moved to move on rates.
Speaker 5: So the yen bridging it's now around one for six
Speaker 5: against the dollar. How much does that stoke expectations that
Speaker 5: it could prompt the Bank of Japan to have more
Speaker 5: intervention from here.
Speaker 8: Right, So that right now there is a lot of
Speaker 8: speculation that they could come in in fact overnight. I
Speaker 8: was even reading about expectations that they could come well, well,
Speaker 8: Japan is asleep essentially and do some stealth intervention. There
Speaker 8: is a lot of focus on when and how they'll
Speaker 8: intervene and at what level. I think from a broader
Speaker 8: perspective that whatever that intervention, whenever that intervention is and
Speaker 8: at what level, it's not necessarily as important as what
Speaker 8: they do on the monetary policy side.
Speaker 4: And so the impact on the market.
Speaker 8: I think of any intervention BOJ official sorry ministry finance
Speaker 8: officials execute is not It has a more transient effect
Speaker 8: I think on markets. Then does the speculation about what
Speaker 8: they'll do with interest rates.
Speaker 1: And when we've had a change in leadership of the
Speaker 1: Bank of Japan, just talk to us about that, what
Speaker 1: that means and going forward.
Speaker 4: Yeah, I think this is a really interesting element.
Speaker 8: I mean, we're always at pains to try and discern
Speaker 8: these differences in personality when there's a change in leadership
Speaker 8: at a central bank. In particular, I think that the
Speaker 8: exit of the former Central Bank of Japan governor Couroda,
Speaker 8: you know, ushered in this succession.
Speaker 4: Of a new governor that comes.
Speaker 8: From a school of thought or an academic background where
Speaker 8: he relies more heavily on forward guidance. That's more the
Speaker 8: Bananki Dragi school of thought. And so I think that
Speaker 8: one of the elements that's really obvious to me through
Speaker 8: this transition of the leadership is the extent to which
Speaker 8: he has been starting to impart that forward garden. I
Speaker 8: think that he's going to rely quite heavily on signaling Rhetorically,
Speaker 8: the bank has held quite firm to.
Speaker 4: This ultra easy.
Speaker 8: Policy, but you can detect little nuances in the way
Speaker 8: he's shifting the language so that markets are understanding that
Speaker 8: the bank is on the move.
Speaker 5: And also will have another update when it comes to
Speaker 5: consumer praises. And if you looked at the latest data
Speaker 5: from the prior month, it did advance at a faster clip.
Speaker 5: How do you view the direction of where those prices
Speaker 5: could be headed from here?
Speaker 6: Right?
Speaker 8: So this is a really another really interesting element because
Speaker 8: the headline rate is expected to show.
Speaker 4: That prices fell in this report.
Speaker 8: That would be consistent with the boj's own forecasts.
Speaker 4: They expect in fiscal.
Speaker 8: Year that inflation will have risen, but in the next
Speaker 8: fiscal year they anticipate that inflation will slow to under
Speaker 8: the two percent objectives.
Speaker 1: So they the same. What is this two percent number?
Speaker 1: Everybody's got a two percent invation?
Speaker 4: Yeah, the magic two percent.
Speaker 5: I never heard it from New Zealand in the nineteen eighties.
Speaker 4: Yeah.
Speaker 5: And then Bernaki, I.
Speaker 1: Think Japan's on the two inflation watch as well.
Speaker 4: They're on the watch.
Speaker 1: So I'm looking at the ego function on the Bloomberg
Speaker 1: terminal and putting it in there for Japan. I guess
Speaker 1: the forecast is for CPI. I guess the headline year
Speaker 1: veer three point three percent, right, so getting there but
Speaker 1: not there, getting there but not there first time, by
Speaker 1: the way I've ever pulled up.
Speaker 5: Thing.
Speaker 8: Okay, and also on an on the line basis, I
Speaker 8: think that that that's the important number. You know, with
Speaker 8: X energy, they're very focused on what the core writ
Speaker 8: is doing.
Speaker 1: Okay.
Speaker 5: I have to get your thoughts on when it comes
Speaker 5: to this discussion. GP Morgan actually had a recent note
Speaker 5: about China's Japanification risks, So seeing similar concerns that Japan
Speaker 5: did in the early nineteen nineties kind of set the
Speaker 5: scene for us about how that worked and what that
Speaker 5: could mean potentially for China.
Speaker 8: Well, obviously there is so much concern about China at
Speaker 8: the moment. It's it's you know, it's it's seeping into
Speaker 8: market psychology.
Speaker 4: I think with respect.
Speaker 8: To how it potentially impacts US federal reserves, future outlook
Speaker 8: and other economies, it's it's impacting the extent to which
Speaker 8: weeks we think that central banks might be done in
Speaker 8: their own respective titaning campaigns. But in terms of the Japan,
Speaker 8: you know, in terms of China becoming Japan, I think
Speaker 8: where some way off assessing that that is the decidedly
Speaker 8: the outlook for China.
Speaker 4: Having said that, you know, there are.
Speaker 8: Real concerns there, and I think that China experts more
Speaker 8: more a depth than I have voiced them for many years.
Speaker 1: You know, when I started in the business back in
Speaker 1: the mid eighties, Japan was the bomb. If you were
Speaker 1: a US investment banker, you had to get a tour
Speaker 1: of duty in Tokyo. But that's not the case any
Speaker 1: for like ever for a long time. Give us suchest overview.
Speaker 1: What's the how do you think or how do comds
Speaker 1: think that japan economy will be over the next five
Speaker 1: or ten years.
Speaker 8: Yeah, it's an interesting point. I like you Paul, you know,
Speaker 8: was in Japan around that time, and it was a
Speaker 8: global superpower, no doubt.
Speaker 4: And since it's been in.
Speaker 8: The doldrums obviously, I think that as they emerged from
Speaker 8: from what has been you know, twenty five year slump,
Speaker 8: the economy is probably not likely to see those heady
Speaker 8: days again to the extent that they did in the
Speaker 8: in the eighties and early nineties. That said, I think,
Speaker 8: you know, the Japanese officials have very long memories and
Speaker 8: they'll be very very cautious and careful about moving too
Speaker 8: quickly to curb any kind of ambulance in the economy
Speaker 8: for fear that they might be reverting back to inflation.
Speaker 4: That's under too.
Speaker 1: I mean, again, as you investment banker, there was Asia,
Speaker 1: then there was non Japan Asian, so basically it was
Speaker 1: and everything else. Right now it's China and everything else.
Speaker 1: So it's just how times have changed. For Ginis Schlager,
Speaker 1: thanks so much for joining us, giving us a view
Speaker 1: of that part of the world.
Speaker 7: You're listening to the tape Cansur live program Bloomberg Markets
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Speaker 1: So we've got one of the leading reinsurance companies here
Speaker 1: in our Bloomberg Interactor Broker studio. Juan Adrade, CEO of Everes.
Speaker 1: The based worlds Bermuda scam. But that's how these guys
Speaker 1: do it. One, he's here in our Bloomberg Interactor Broker Studio. One.
Speaker 1: Thanks for coming in, appreciate it. Thanks, talk to us
Speaker 1: about the reinsurance business. What's driving your business these days?
Speaker 1: I'm looking at your stock. It's a fifteen billion dollar
Speaker 1: market cap company. You've got one eg is a ticker
Speaker 1: up about seven percent year to eight thirty percent over
Speaker 1: the last twelve months. What are the key drivers of
Speaker 1: your business?
Speaker 9: Yeah, no, it's a fascinating question. I mean, if you
Speaker 9: think about the confluence of events that we've all lived
Speaker 9: through over the last few years, whether it's the pandemic,
Speaker 9: the supply chain issues, inflation, climate change, all of that
Speaker 9: is driving demand. And again, as you said, we basically
Speaker 9: ensure insurance companies. So when you think about what's driving
Speaker 9: our business right now. It's the fact that these insurance
Speaker 9: companies are looking for protection for earnings volatility essentially, and
Speaker 9: so that increases the demand for our.
Speaker 5: Product, and there's been a price correction in the insurance industry.
Speaker 9: Why there's been a significant price correction, You're absolutely right,
Speaker 9: and it's really down to a supply and demand imbalance.
Speaker 9: The bottom line is, with all the storms and all
Speaker 9: the activity that we've seen since twenty seventeen, reinsurance companies
Speaker 9: have deployed less capital into the market, so that's constrained supply.
Speaker 9: The other thing that's happened on the supply side is
Speaker 9: a lot of third party allocators, pension funds, sovereign wealth
Speaker 9: funds that used to put money into our sector have
Speaker 9: also out and so that's created a supply crunch, if
Speaker 9: you will, in the industry. But at the same time,
Speaker 9: because of inflation, climate change, all of these other things,
Speaker 9: there's more demand. So there's basically a gap of roughly
Speaker 9: one hundred billion dollars between supply and demand, and that's
Speaker 9: what's created the price correction that really started at the
Speaker 9: beginning of this year in a pretty significant way.
Speaker 1: Hey, on, when you bump into a climate change denier.
Speaker 1: What do you say to that person? I always say,
Speaker 1: like somebody when I bump into them, I say, go
Speaker 1: talk to an insurance company. They'll tell you if it's
Speaker 1: real or not.
Speaker 9: What do you say, Well, I think that's good advice,
Speaker 9: by the way, because that is what we do on
Speaker 9: a day and day out basis. Look just look at
Speaker 9: what happened in Maui, and I think that's a perfect
Speaker 9: example of that, right. You know, the island had significantly
Speaker 9: high temperatures because of what's been happening around the world,
Speaker 9: drought which basically dried all the grasses, and then you
Speaker 9: have a hurricane that's turning off the coast, putting out
Speaker 9: sixty seventy mile an hour wings. So once you get
Speaker 9: the spark that started this, and you got those wins,
Speaker 9: you get the fortunately the strategy that unfolded in Maui.
Speaker 9: And look, all of this is scientifically proven, right Wildfires, floods, droughts,
Speaker 9: all of that is directly related to what we're seeing.
Speaker 9: You know, one of the interesting statistics that's out there
Speaker 9: right now the ocean, whether it's the Pacific or the
Speaker 9: Atlantic Ocean right now, is that the warmest temperature it's
Speaker 9: been since recorded history. That tells you something. Now, the
Speaker 9: endgame of that is that you're going to get more
Speaker 9: severe storms because they fuel off of the higher temperatures
Speaker 9: in the ocean. So what I would just say is
Speaker 9: look at the facts.
Speaker 1: So are the insurance companies that you ensure, how is
Speaker 1: that reflected in their business? They I've heard like a
Speaker 1: lot of insurance companies won't even do business in Florida anymore.
Speaker 1: So how do you see that in your business? And
Speaker 1: I mean, are are you charging more for that an
Speaker 1: increase risk? How does that affect your business?
Speaker 9: It affects us in a number of different ways. So yes,
Speaker 9: one is we're charging more. That's part of that price
Speaker 9: correction that we talked about. The second thing is we
Speaker 9: try to embed the latest science into our models to
Speaker 9: be able to do better predictions on where storms are
Speaker 9: going to develop, where they're going to hit the coastlines,
Speaker 9: et cetera, et cetera. But the other thing that you're
Speaker 9: seeing right now, and you've seen the headlines from companies
Speaker 9: moving out of Florida A and moving out of California,
Speaker 9: there's also public policy issues that we have to address.
Speaker 9: I think the governor of Florida, and the legislature did
Speaker 9: a nice job with tort reform in Florida because one
Speaker 9: of their significant issues was not only climate chains and
Speaker 9: the storms that come out of that, but it's also
Speaker 9: fraud and abuse in the system, and so the governor
Speaker 9: took strong actions on that. California is a different story
Speaker 9: at this point in time. You know, you have a
Speaker 9: lot of companies leaving the state because the market is
Speaker 9: not functioning as well as it should be. And at
Speaker 9: the end of the day, we all have shareholders or
Speaker 9: stakeholders and we're for profit business.
Speaker 5: The Hawaii wildfires insured losses are estimated to be around
Speaker 5: three billion dollars. But at the same time, why is
Speaker 5: one of the nation's lowest rates when it comes to
Speaker 5: homeowner coverage just because it really hasn't had a ton
Speaker 5: of natural disasters. How does that affect insurers?
Speaker 9: Yeah, it's a great point because that also goes back
Speaker 9: to Paul's question on climate change. Hawaii itself is not
Speaker 9: known as sort of a natural catastrophe hot spot, similar
Speaker 9: to when you think about Florida or when you think
Speaker 9: about California. What will happen as a result of this
Speaker 9: is prices will go up again, Right, A lot of
Speaker 9: claims will be paid. I think, as you said, it's
Speaker 9: about three to three point two billion in industry lass
Speaker 9: that is expected to come out of that fire. So
Speaker 9: insurance companies will basically adjust their pricing because the risk
Speaker 9: is there.
Speaker 1: Essentially, you guys are a global company. Talk to us
Speaker 1: about how business is different US versus outside of the US.
Speaker 7: Yeah.
Speaker 9: No, Look, I've spent a vast majority of my career
Speaker 9: actually working outside of the United States. And we are global.
Speaker 9: So we're the fourth largest property casualty reinsurer in the world.
Speaker 9: We have customers in one hundred and fifteen countries. And
Speaker 9: you know, our business is really a relationship business, and
Speaker 9: you really have to adapt to how you do business
Speaker 9: in different cultures. Right, whether it's it's an Asian culture,
Speaker 9: a Latin American culture, where you know, before you do
Speaker 9: a deal, they have to understand who you are, they
Speaker 9: need to try us to you, et cetera. Whether it's
Speaker 9: in Europe in the US, you might be more direct,
Speaker 9: get to the bottom line a little bit quicker, et cetera,
Speaker 9: but the issues are fundamentally the same. At the end
Speaker 9: of the day, we're ensuring risk, so we have to
Speaker 9: understand what we're taking on our balance sheet, what we
Speaker 9: price for it, and you also need to understand the geography,
Speaker 9: the climate, the geopolitical issues, regulatory environments, all that.
Speaker 6: Sort of thing.
Speaker 5: We have about a minute left. What's your thought on
Speaker 5: what the reinsurance industry is telling us on where the
Speaker 5: economy is headed.
Speaker 7: Yeah.
Speaker 9: Look, I think if you look at our industry, we're
Speaker 9: sort of a bright light in what's happening in capital
Speaker 9: markets right now. And I'll give your own example. So
Speaker 9: we just posted in the second quarter a twenty five
Speaker 9: percent annualized total shareholder return and a twenty two percent
Speaker 9: plus ROE and so that tells you sort of what
Speaker 9: we're seeing in the opportunities that are out there because
Speaker 9: of the uncertainty in the world right now, heightened risk environment,
Speaker 9: geopolitical issues, climate change issues, et cetera. So we're pretty
Speaker 9: bullish about where the industry is going, not only this year,
Speaker 9: but well into twenty twenty four as well.
Speaker 1: All right, one, thanks so much for joining us. Really
Speaker 1: appreciate you taking the time to come into our Bloomberg
Speaker 1: Interactive Broker studio. Juan Andrade he's the CEO of Everest,
Speaker 1: the tickers EG Everest Group, a New York Stock Exchange
Speaker 1: traded company. You guys have an investor Day coming up
Speaker 1: in November at the NYSEC, so that'll be big for you. Guys.
Speaker 1: Me we'll get you back into studio since you're gonna
Speaker 1: be back in New York. That'll be good stuff.
Speaker 7: You're listening to the team Ken's are Live program Bloomberg
Speaker 7: Markets weekdays at ten am Eastern on Bloomberg dot Com,
Speaker 7: the iHeartRadio app and the Bloomberg Business App, or listen
Speaker 7: on demand wherever you get your podcasts.
Speaker 1: All right, let's talk about commercial real estate. This is
Speaker 1: near and dear to my heart because I walk through Midtown,
Speaker 1: Manhattan every day, back and forth to Penn Station, and
Speaker 1: I'm first hand. I can check out what's happening. Our
Speaker 1: next guest knows about what's happening to Hassam Naji. He's
Speaker 1: the CEO of Marcus and Millichap, which is a New
Speaker 1: York Stock Exchange traded company. MMI is the ticker. He
Speaker 1: joins his live here in our Bloomberg Interactive Broker Studio. Sam,
Speaker 1: thank you very much, which for joining us. All right,
Speaker 1: I walk back and forth twice a day Midtown Manhatan.
Speaker 1: I look up and there's a lot of empty space here.
Speaker 1: This is a disaster in certain big cities. We'll get
Speaker 1: to some of the good parts of commercial real estate,
Speaker 1: but what happens to the New York's, the San Francisco's.
Speaker 1: In reality, they're not converting all this stuff to condos.
Speaker 1: What do you think of? How is this going to
Speaker 1: shake out?
Speaker 10: Good morning, Thanks for having me on. Great to see
Speaker 10: you again. It is going to be painful in the
Speaker 10: next two to four years, there's no way around it.
Speaker 10: But the bifurcation of what's happening with newer, high amenity
Speaker 10: office space versus older, obsolete office space is the story
Speaker 10: in that overall demand is shrunk. The pandemic has changed
Speaker 10: societal patterns that are not going to come back anytime soon.
Speaker 10: We're seeing improvement, by the way. We're up to about
Speaker 10: forty eight fifty percent daily attendance, not vacancy rates, but
Speaker 10: utilization rates of people in office spaces, which is amazing
Speaker 10: to even.
Speaker 6: Share with you.
Speaker 10: And that we're at forty eight or fifty percent up
Speaker 10: from ten or twenty percent right after the pandemic. It
Speaker 10: is a profound reduction of office space demand, which means
Speaker 10: quality buildings can be more popular, and older properties are
Speaker 10: going to see that the vacancies go up significantly.
Speaker 5: And we all know how bullish Paul Sweeny is about
Speaker 5: in office. When it comes to our employees here at Bloomberg,
Speaker 5: what do you think is the key catalyst that could
Speaker 5: fix this situation?
Speaker 10: Time when people realize that working in isolation one hundred
Speaker 10: percent of the time for those that have been virtual
Speaker 10: one hundred percent of the time, really affects your career,
Speaker 10: affects your collaboration, affects your skill sets. That takes time
Speaker 10: to play out, but we're seeing more and more people
Speaker 10: want to come back, just not five days a week
Speaker 10: full time. So amenities, ease of getting to work, different
Speaker 10: ways to attract workers to want to be back together
Speaker 10: are the key strategies we're hearing from our office clients
Speaker 10: all over the country, and they're actively pursuing creative ways
Speaker 10: to do that.
Speaker 5: What about also so much discussion obviously about a recession,
Speaker 5: but whether or not at a certain point the economy
Speaker 5: would slow down in the next few years when that
Speaker 5: could potentially happen, we don't know. But how much is
Speaker 5: that the catalyst, because then you have more power when
Speaker 5: it comes to the employer. And if you are the
Speaker 5: employee and you're looking for a job, does that switch
Speaker 5: the dynamic.
Speaker 10: Absolutely, because we've had no leverage as employers to mandate anything.
Speaker 10: You have to adapt to what the workforce wants in
Speaker 10: a three point seven percent on employment environment. If that shifts,
Speaker 10: of course the dynamics will shift as well. But the
Speaker 10: one thing I really want to highlight is that there's
Speaker 10: so much coverage of this stressed office space putting more
Speaker 10: stress on the banking system, and a lot of headlines
Speaker 10: around that, and I wanted to really share with you
Speaker 10: and your audience that twenty four percent of total bank
Speaker 10: outstanding loans are in commercial real estate and fifteen percent
Speaker 10: of that is in office and a very large portion
Speaker 10: of that office loan portfolio is performing just fine. So
Speaker 10: do we have stress in the system. Absolutely. Is it
Speaker 10: going to get worse as Lisa's rollover for office, Absolutely,
Speaker 10: But is it a threat to the entire banking system?
Speaker 10: The answer is no.
Speaker 1: How About you know, if I want to go build
Speaker 1: a building somewhere in one of the growth markets, my
Speaker 1: cost to capital is much higher. Can I even get
Speaker 1: a loan for commercial real estate? These days. If I
Speaker 1: want to go build an office building.
Speaker 10: The answer is yes, but you're going to pay a
Speaker 10: very high price for that debt. It's going to be
Speaker 10: underwritten so carefully, and as a sponsor a developer you
Speaker 10: have to have an amazing track record and an equity partner.
Speaker 10: It's happening very rarely right now. Part of what happens
Speaker 10: in a cycle like this is you get a big
Speaker 10: pullback in new supply. And thankfully office hasn't had much
Speaker 10: new supply in the last ten years. Otherwise this problem
Speaker 10: would be much bigger. But the construction loans are very
Speaker 10: difficult to get. Land is expensive and materials and laborer
Speaker 10: is also another reason, another deterrent to new supply. The
Speaker 10: other thing to is the other segments of commercial real
Speaker 10: estate outside of office apartments, even shopping centers, self storage units,
Speaker 10: hotels that are performing extremely well because they are aligned
Speaker 10: with a strong economy. We've had great job growth, very
Speaker 10: low unemployment. That is reflected in demand for all kinds
Speaker 10: of commercial real estate space outside of.
Speaker 5: Office And how does that compare when you're talking about
Speaker 5: the portion of loan portfolios. If you are looking at say,
Speaker 5: retail apartments versus office can that offset what we see
Speaker 5: with the issues when it comes to the office space.
Speaker 10: You know, I really believe that the heavily tilted loan
Speaker 10: portfolios toward multifamily apartments. You know, they have occupancy of
Speaker 10: around ninety five percent, and even though rent growth has
Speaker 10: really slowed after three years of very robust above average
Speaker 10: rent growth, apartments are doing great and those loans are
Speaker 10: performing just fine. We have a disconnect on the valuation
Speaker 10: of apartments. Therefore, sales activity, trading activities way down because
Speaker 10: interest rates shot up and the lowest cap rate, lowest
Speaker 10: yield product type in the industry, so there's a big
Speaker 10: disconnect between buyers and sellers. The trading is way down,
Speaker 10: but the loan performance is just fine because the occupancies
Speaker 10: are high and apartments make up the bulk of outstanding loans.
Speaker 1: So if I'm a building owner and I got to
Speaker 1: refinance my debt, wow, that's a tough nut. I mean,
Speaker 1: what's happening in that market.
Speaker 10: If your property is in distress, chances are the lender
Speaker 10: will work with you, because the FAD and the Treasury
Speaker 10: have gone to the banks, have said work with your
Speaker 10: distressed borrowers. That's been the message to avoid a fire sale. Nonetheless,
Speaker 10: you're seeing some distress sales come out of loan portfolios.
Speaker 10: There's no question about it. If you're performing well, if
Speaker 10: your asset is performing well and occupancies are good, rent
Speaker 10: collections are good, there is financing available. But it means
Speaker 10: you have to come up with more equity if you're
Speaker 10: upside down in the valuation and the loan to value
Speaker 10: ratios depending on when you finance the deal. I remember
Speaker 10: most commercial real estate loans are five to seven years
Speaker 10: in term, so five to seven years ago prices were
Speaker 10: a lot lower and occupantcies and rents were a lot lower.
Speaker 10: So there is should be plenty of margin even with
Speaker 10: the who.
Speaker 1: Provides the equity? Who would I go to for equity?
Speaker 1: Is there is there private equity out there for just
Speaker 1: real estate? And I guess the question is are they willing?
Speaker 1: I know some of these people now now that I
Speaker 1: think about it, and they do quite well, will they
Speaker 1: make that equity investment today?
Speaker 10: Absolutely, there's plenty of capital, and one thing we're not
Speaker 10: seeing a shortage of is capital ready to pounce. And
Speaker 10: when we see prices that have adjusted from the peak
Speaker 10: to the tune of ten to twenty five percent. There's
Speaker 10: multiple offers on properties even with the credit crunch.
Speaker 1: Network questions like I'd want to see it like in
Speaker 1: New York and in San Francisco's I haven't seen anything trade.
Speaker 1: I think if you see a marqueability to rade in Manhattan,
Speaker 1: is it going to be down ten percent, thirty percent,
Speaker 1: fifty percent? I think those are the numbers we're going
Speaker 1: to be seeing and we haven't seen that. That's going
Speaker 1: to shock the market, won't it.
Speaker 10: If it's an older office building, it's colosial of the
Speaker 10: fifty percent you're talking about. If it's a newer asset
Speaker 10: with good amenities and great occupancies, it's going to be
Speaker 10: closer to the ten percent you're talking about.
Speaker 5: What's the top question you hear from your shareholders?
Speaker 10: How long will it take for this market correction to reverse?
Speaker 10: And what's the outlook for trading activity? Because our business
Speaker 10: as a leading broker of investment properties and financing of
Speaker 10: commercial real estate in the country North America, I should say,
Speaker 10: including Canada, is all dependent on trading activity, and trading
Speaker 10: activities down somewhere between fifty to sixty percent market wide
Speaker 10: because of the buyers seller price disconnect and very tough
Speaker 10: financing environment, and we think that once the FED is done,
Speaker 10: which may be a little bit down the road, we
Speaker 10: were hoping that by now the FED would really declare
Speaker 10: mission accomplished. On inflation, I think we still have a
Speaker 10: little ways to go, but not far because inflation numbers
Speaker 10: still don't reflect the drop in housing the covalent of
Speaker 10: housing costs because they lag by about a year. So
Speaker 10: when the current leases roll over and the index for
Speaker 10: inflation shows the drop in housing costs, I think inflation
Speaker 10: is going to go down quicker. So I think we're
Speaker 10: very close to that end. And the ending of the
Speaker 10: tightening cycle itself will bring a lot of stability for
Speaker 10: both lenders on setting price and buyers which are going
Speaker 10: to be borrowers essentially. And then put a little time
Speaker 10: on top of that with prices adjusting, sellers are usually
Speaker 10: behind the market by a year and being realistic about
Speaker 10: what price and asset will trade at because they're hoping
Speaker 10: for last year's pricing. When the market is corrected, both
Speaker 10: of those are starting to come together, but we're not
Speaker 10: quite there yet.
Speaker 1: All right, Naji, thanks so much for joining us. Really
Speaker 1: appreciate it. Hasam Naji, he is the president and CEO
Speaker 1: of Marcus and Millichap New York Stock Exchange traded COMPANYMI
Speaker 1: is the ticker at one point three billion of market
Speaker 1: cap out there. So looking at the national brokerage commercial
Speaker 1: real estate, interesting time for that market in some of
Speaker 1: the larger markets. Again, I want to see some marquee
Speaker 1: properties trade in New York and see where that goes. Guys,
Speaker 1: just saw Billy Rudon on the Death Start earlier this
Speaker 1: morning talking about the will State market. That family is
Speaker 1: long NYCE real estate, so see how some of that
Speaker 1: plays out.
Speaker 6: You're listening to the tape.
Speaker 7: Cat's are live program Bloomberg Markets weekdays at ten am
Speaker 7: Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and.
Speaker 6: The Bloomberg Business App.
Speaker 7: You can also listen live on Amazon Alexa from our
Speaker 7: flagship New York station, Just say Alexa play Bloomberg eleven thirty.
Speaker 1: Right now, we're talking about Walmart, and that is also
Speaker 1: another great read on the consumer. Their numbers I thought
Speaker 1: came in pretty well. Stock's kind of trading sideways.
Speaker 5: He's its annual profit forecast.
Speaker 1: I mean, I mean people are shopping at Walmart and
Speaker 1: you can't I mean talk about a staple. I mean,
Speaker 1: they're just you can't avoid Walmart at all. Jen Bartash
Speaker 1: is she covers Walmart. She's a senior industry an also
Speaker 1: Bloomberg Intelligence. Jen, what was a key takeaway from the
Speaker 1: results from our good friends from Bettonville.
Speaker 11: Well, it really when we look at Walmart, obviously they're
Speaker 11: on a roll and they're continuing to draw consumers in.
Speaker 11: The messaging that we heard is that consumers continue to
Speaker 11: be a little bit conservative, but they're being selective about
Speaker 11: where they're shopping, and so they're saving on essentials, they're
Speaker 11: splurging a little bit in other areas. But Walmart has
Speaker 11: really positioned itself well to serve any any customer that's
Speaker 11: coming through its stores with how they're offering value to
Speaker 11: those people.
Speaker 1: All Right, Jen, you taught me or you let me
Speaker 1: know a couple of years ago that the number one
Speaker 1: grocery chain in the US is Walmart. I was shocked
Speaker 1: to learn that. Didn't even think about it. So if
Speaker 1: I go in to do my weekly shopping, do I
Speaker 1: then move over to the aisle and go buy some
Speaker 1: clothes and stuff like that? Does that really happen?
Speaker 11: It actually really does, because part of what they're doing
Speaker 11: is they bring you into the store with compelling prices.
Speaker 11: People are going into shop for groceries and then on
Speaker 11: their way to the checkout, they see a T shirt
Speaker 11: that's maybe five dollars and they think, oh, well, there's
Speaker 11: some value, and that it gets added into their cart,
Speaker 11: Or as they're looking to prepare meals, they're adding small
Speaker 11: kitchen appliances to help with the preparation of those meals,
Speaker 11: and so that cross shopping into general merchandise is happening.
Speaker 11: And one of the things that Walmart called out is
Speaker 11: that even though general merchandise sales are still lower than
Speaker 11: last year, they're sequentially improved meaningfully from first quarter, and
Speaker 11: so that increase in momentum is actually really important as
Speaker 11: we get into back to school when people will be
Speaker 11: looking for clothing and backpacks and shoes and things for
Speaker 11: like that for their kids. So all signs point to
Speaker 11: a pretty good back to school season for Walmart.
Speaker 5: Walmart is in the staples sector in the S and
Speaker 5: P five hundred because that huge percentage of grocery sales,
Speaker 5: but so is Target. Target had been in a discretionary
Speaker 5: sector earlier in the spring, it did get moved into
Speaker 5: Staples because of its percentage with groceries. But Target has
Speaker 5: a bit of a different story. It's still cut its forecast,
Speaker 5: even though we saw improvements when it came to the inventories.
Speaker 5: What is it about Walmart? What is it doing differently
Speaker 5: that some of its counterparts aren't doing well?
Speaker 11: I think the first thing is to just acknowledge the
Speaker 11: fact that Walmart's grocery offering is comprehensive. You can buy
Speaker 11: everything you need for a grocery shop at Walmart. That's
Speaker 11: a little bit different than at Target. Target's food strategy
Speaker 11: has been a little bit more targeted and that they
Speaker 11: were looking specifically for products that may have some sort
Speaker 11: of unique appeal or attribute. So Target never wanted to
Speaker 11: positions itself as a place where you would go and
Speaker 11: do all of your grocery shopping. It was more of
Speaker 11: a place of look at these interesting things for discovery
Speaker 11: that are in the food area, some essentials that you need.
Speaker 11: But that difference in strategy is really showing now with
Speaker 11: the current economic backdrop and the way Walmart is acquiring
Speaker 11: more and more of the food shopping that's out there.
Speaker 1: Hey, Jen, what is Walmart Plus and how do Walmart
Speaker 1: Plus members how do they shop?
Speaker 11: So Walmart Plus is Walmart's subscription service and it's similar
Speaker 11: to Amazon Prime for people who know that, and Walmart
Speaker 11: pruss Is Plus is ninety eight dollars a year. It
Speaker 11: offers you free shipping without any order minimum for things
Speaker 11: shipped to your house. But it also gives you free
Speaker 11: same day delivery to your home from Walmart stores. And
Speaker 11: because Walmart is so big in the grocery business, membership
Speaker 11: has really been growing. It's been increasing, and in fact,
Speaker 11: we actually think that is a much underappreciated aspect of
Speaker 11: Walmart's business that's going to really drive sales and profit
Speaker 11: growth over the next five years.
Speaker 5: We still have a lot of economists that are warning
Speaker 5: about the trajectory of the economy. When you look at
Speaker 5: Walmart's results, though it's saying very much of a different story.
Speaker 5: What's your view of where the economy is headed When
Speaker 5: you have the world's biggest retailers signaling still some strength there.
Speaker 11: Well, you know, when we're looking at the economy in general,
Speaker 11: consumers are still under pressure. I think the advantage that
Speaker 11: Walmart has is that we are in a spot where
Speaker 11: we're seeing, for example, inflation on food come down it's
Speaker 11: still high compared to two years ago, but it is
Speaker 11: starting to come down, and as inflation comes down, Walmart
Speaker 11: is able to very quickly work with their suppliers lower
Speaker 11: their prices and pass it on to customers. And so
Speaker 11: that is the backdrop is still quite conservative, and there
Speaker 11: are still a lot of consumers out there who have
Speaker 11: a lot of have to be careful with their budgets
Speaker 11: or being very selective on where they're spending. But Walmart's
Speaker 11: size and scale does position it well to take advantage
Speaker 11: of tempting them with even better deals as inflation starts
Speaker 11: to come down and people feel like they can spend
Speaker 11: a little bit more.
Speaker 1: Jen does Walmart open new superstores in America anymore? Are
Speaker 1: they pretty much everywhere where they want to be.
Speaker 11: It's pretty rare. They have slowed their new store growth
Speaker 11: where it's they're only a handful of year. A handful
Speaker 11: of year. Sometimes they're replacing old stores or relocating them,
Speaker 11: and then they are very targeted new openings that are happening.
Speaker 11: But the majority of their new store growth is happening
Speaker 11: in the international markets. For example, in Mexico, they're adding
Speaker 11: many new stores every year because they're still in a
Speaker 11: growth phase. They're adding new stores in China and in
Speaker 11: other international markets, and so there is still kepex for
Speaker 11: new store development, but it tends to be outside the
Speaker 11: United States.
Speaker 5: When it comes to back to school shopping, which is
Speaker 5: the key driver in the current quarter, How do you
Speaker 5: view that as far as what that could mean for
Speaker 5: Walmart and other retailers.
Speaker 11: Well, in terms of back to school, Walmart actually said
Speaker 11: that so far they're off to a good start, which
Speaker 11: is a little bit different than the sound we heard
Speaker 11: from Target, which was much more cautious, saying there were
Speaker 11: only a couple of days into the season and that
Speaker 11: they didn't have a good read on it yet. For Walmart,
Speaker 11: one of their strategies they've done in the past year,
Speaker 11: as inflation has been really high, is they've targeted bundles
Speaker 11: of things and kept them at prices that were the
Speaker 11: same as last year. They did that at Thanksgiving for
Speaker 11: Thanksgiving dinner. They're doing that for back to school. So
Speaker 11: they have a basket of thirteen or fourteen most common
Speaker 11: school items, whether it's crayons or colored pencils, and offering
Speaker 11: them at the same price as last year as a bundle.
Speaker 11: And that can be very appealing to consumers. So they've
Speaker 11: very clearly been thoughtful in their approach on how they're
Speaker 11: going to handle back to school and make sure that
Speaker 11: they are attracting customers to what they have to offer.
Speaker 5: I know we might be a little bit ahead of this,
Speaker 5: but any sort of early indications about the holidays.
Speaker 11: Well, you know, historically the rule of thumb in retail
Speaker 11: is that if back to school is strong, holiday tends
Speaker 11: to be strong as well. You know, back to school
Speaker 11: is a very reliable precursor to how the holiday season
Speaker 11: is going. So by the time we get through this
Speaker 11: current quarter and we have an idea of the third
Speaker 11: quarter results, we will have a very good read into
Speaker 11: how we think the holiday season will play out.
Speaker 1: Walmart stock at a all time high here today, and
Speaker 1: they went public back in nineteen seventy, stock at an
Speaker 1: all time high. Stevens and Company took them public and
Speaker 1: Steven's in company good, little invest some bank and little
Speaker 1: Rock really good. Uh, they're still in business, Jen, is
Speaker 1: there any what's the what's the risk to Walmart? What's
Speaker 1: the risk of owning Walmart? Worst case it's a GDP
Speaker 1: road story.
Speaker 11: Well, I mean I think the risk is, you know, potentially.
Speaker 11: You know, the the current management team has done a
Speaker 11: great job in shifting the entire culture of the company,
Speaker 11: but there are you know, we've we saw earlier this
Speaker 11: week some some announcements of some management changes, especially at
Speaker 11: the heads of the different businesses. You know, Doug McMillan
Speaker 11: appears to be ready to stay for a couple more years,
Speaker 11: but you know, when that changes, there's always the risk
Speaker 11: that the company culture that he's worked so hard to
Speaker 11: instill will change, So that you know that that there
Speaker 11: is a risk. And then just because you're the biggest
Speaker 11: person in the room, there are always people coming, you know,
Speaker 11: who have you in their sights, and so complacency, you know,
Speaker 11: is the is the other real risk for Walmart and
Speaker 11: reality to make sure that they're continuing to execute on
Speaker 11: all these different yea, not buying.
Speaker 1: I mean Amazon came in. Amazon came in, and here's
Speaker 1: Walmart still hitting all time highs. I mean, if they've
Speaker 1: shown they can compete against Amazon and that amazing business.
Speaker 5: Model so true.
Speaker 1: I mean you got to take your hat off. And
Speaker 1: that's why if you look at rich Go, there are
Speaker 1: Walton's all over the rich Go, which is the world's
Speaker 1: richest people, so they're doing something right, as is Jen Bartash's.
Speaker 1: Jen Bartasha's senior industry analyst Bloomberg Intelligence, one of our
Speaker 1: absolute best analysts. We appreciate getting a few minutes of
Speaker 1: her time.
Speaker 7: You're listening to the tape Cat's are live program Bloomberg
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Speaker 7: flagship New York station Just Say Alexa playing Bloomberg eleven thirty.
Speaker 1: Again probably one of the bigger news coming out over
Speaker 1: the last several weeks. It's just been this seemingly kind
Speaker 1: of never ending or continuous flow of negative economic data
Speaker 1: coming out of China. Obviously not good for them, because
Speaker 1: remember we started the year and this was going to
Speaker 1: be a good year for China. Reopening was kind of
Speaker 1: the theme, and how how do you play that and
Speaker 1: what would it and we're just not seeing.
Speaker 12: Anyth Yeah, and then there was the downgrade in terms
Speaker 12: of the expectations for GDP growth and then you know,
Speaker 12: oh wait, the property crisis is still escalating or it's
Speaker 12: still very much alive and then you know all this tension,
Speaker 12: geopolitical tensions.
Speaker 6: Yep.
Speaker 12: But we're going to sort this out right.
Speaker 1: We're going to work this out right now with Jennifer Welt.
Speaker 1: She's a chief geoeconomist for Bloomberg Economics. She joined us
Speaker 1: from Washington, d C. First, Jennifer, thanks for joining us.
Speaker 1: Please tell me what a geo economist is. That's a
Speaker 1: new term for me.
Speaker 13: Thanks so much for having me. Yeah, it's a term
Speaker 13: we're still defining. But essentially, we look at the intersection
Speaker 13: of geopolitics and economics, so, for example, geopolitical developments of
Speaker 13: economic impacts, and the use of economic tools to achieve
Speaker 13: geopolitical ends.
Speaker 1: Dave de Wire thought of that. It seems a little
Speaker 1: above his pay grade, all right, Jennifers, So what do
Speaker 1: we think about China here the economic data, I don't know.
Speaker 1: It just doesn't seem very good, and I guess it
Speaker 1: seems disappointing, realtive to maybe expectations.
Speaker 13: Yeah, no, I think that's a really great point, I
Speaker 13: would say from a geopolitical perspective, and this is a
Speaker 13: piece we put out recently. I think we shouldn't over
Speaker 13: exaggerate the impact that this will have on China's geopolitical importance,
Speaker 13: or exaggerate the effect that this will have on their
Speaker 13: foreign policy. There's a history here of rising powers lashing
Speaker 13: out when they feel they've hit their economic peak or
Speaker 13: when they're feeling sensitive about economic challenges, and we don't
Speaker 13: necessarily see that happening with Beijing. I think at the
Speaker 13: same time, we should expect that they'll be more defensive
Speaker 13: when they do feel challenge. But again, we're not looking
Speaker 13: at a major foreign policy crisis on the horizon as
Speaker 13: the result of the latest economic data.
Speaker 12: You know, we had an interview with the front runner
Speaker 12: in the presidential race in Taiwan, who is I guess
Speaker 12: seen as a little bit less favorable of a candidate
Speaker 12: with respect to China. I mean, can you weigh in
Speaker 12: on how China's economic woes are influencing that situation, particularly
Speaker 12: especially because it's so close, because the tensions with Taiwan,
Speaker 12: Taiwan just being so physically close to China.
Speaker 13: Yeah, sure, things so, I think you're referencing the recent
Speaker 13: interview with Taiwan's vice president and leading presidential candidate, Lai Chinda,
Speaker 13: who is actually just wrapping up a transit back through
Speaker 13: the United States on his way back to Taiwan. Lii
Speaker 13: is definitely not Beijing's preferred candidate. They've made that quite clear,
Speaker 13: including in their pretty strongly worded responses to his recent transit.
Speaker 13: This is despite the fact that it's pretty common for
Speaker 13: Taiwanese vice presidents and presidential candidates to come through the
Speaker 13: United States, and this case, lie was on his way
Speaker 13: to Paraguay for the presidential inauguration there. Lai is ahead
Speaker 13: in the polls. It's early days still, but he does
Speaker 13: look to have a pretty strong lead for the elections
Speaker 13: in January, and I think there's a real question of
Speaker 13: how China would react to a live victory should he
Speaker 13: emerge at the top when when the election is held
Speaker 13: in January.
Speaker 1: Jennifer, can you give us a sense of how this
Speaker 1: administration kind of views or would like to see the
Speaker 1: relationship with China go over the next several years. Is
Speaker 1: it one of engagement, is it one of limited engagement?
Speaker 1: Is it one of just shutting China and letting them
Speaker 1: kind of, you know, kind of deal with themselves. What's
Speaker 1: the approach?
Speaker 13: Sure? So, I think that the term is strategic rivalry,
Speaker 13: and the common catchphrase is you know, intense competition requires
Speaker 13: intense engagement, so we're likely to see both of these things.
Speaker 13: And frankly, I think the paradigms of the past of
Speaker 13: it's either engagement or its hawkishness don't really apply anymore.
Speaker 13: I think the administration is trying to balance both of
Speaker 13: these features with trying to engage Beijing, as we saw
Speaker 13: from Secretary Blincoln's visit, Secretary Yellen's visit, discussion of Secretary
Speaker 13: Armando heading out this month, with continuing to take actions
Speaker 13: from the administration's perspective that are aimed at, you know,
Speaker 13: defending US interests, as for example, rolling out the most
Speaker 13: recent outbound investment screening regime.
Speaker 12: I mean, when you think of the struggles that China's
Speaker 12: economy is having right now, how does that change the
Speaker 12: dialogue in the Biden administration in the White House about
Speaker 12: how tough to be with respect to some of their
Speaker 12: geopolitical issues.
Speaker 13: I think from a political perspective, this is a pretty
Speaker 13: good look for the administration. You know, for the first
Speaker 13: time in many, many years, the US GDP growth seems
Speaker 13: to be outpacing China's and that's a pretty exciting story,
Speaker 13: I think from a foreign policy perspective. I don't see
Speaker 13: this changing in a major way. The administration's approach. Again,
Speaker 13: I think that's based on fundamentals that are unchanged here.
Speaker 13: China is going to continue to be a major power
Speaker 13: to be reckoned with. You know, for example, they still
Speaker 13: have plenty of resources to put towards their military modernization,
Speaker 13: their technological advancement, etc. So I think the broad arc
Speaker 13: of the strategy is going to say the same. But
Speaker 13: I would imagine there'll probably be some celebration about the
Speaker 13: recent economic data and how that shows how the administration
Speaker 13: is handling the US economy.
Speaker 1: You know, it's interesting, Jennifer, I kind of feel a
Speaker 1: little bit of a dichotomy here. Trying to take a
Speaker 1: tough government stance against China. There are some executive order
Speaker 1: last week to that end on the technology side, Yet
Speaker 1: it just seems like a parade of US CEOs making
Speaker 1: the way over to Beijing, whether it's Elon Musk or
Speaker 1: Tim Welch or Jamie Diamond. I guess it's a kind
Speaker 1: of a fine line everybody's trying to walk here. We
Speaker 1: want to be tough against China, but we got to
Speaker 1: do business with these folks.
Speaker 13: I think that's absolutely right, and I think that's contributing
Speaker 13: to a slightly more sophisticated discourse on what the future
Speaker 13: of the US China economic relationship looks like. You know,
Speaker 13: the conversation around decoupling is largely seen as a pretty
Speaker 13: infeasible task, and now there is increased conversation about how
Speaker 13: do you quote unquote de risk how do you kind
Speaker 13: of carve out the areas that you're most concerned about.
Speaker 13: And by the way, this applies on the China side
Speaker 13: as well. They've certainly been concerned about overreliance on US
Speaker 13: technology for some time now, even before the latest US
Speaker 13: moves to restrict their access to it. So I think
Speaker 13: that's going to be part of the conversation going forward,
Speaker 13: is how do we maintain an economic relationship that benefits
Speaker 13: both sides while still preserving each side's perceptions of their
Speaker 13: national interests.
Speaker 12: How do you view some of the I guess it's
Speaker 12: maybe unfair to call it unrest or anything like that,
Speaker 12: but the dissatisfaction among the population with well, boy, we
Speaker 12: put our money into these these apartments, or we're not
Speaker 12: getting we're not seeing the return, we're not seeing payments
Speaker 12: on our investments. I think you know, there's some degree,
Speaker 12: at least a certain segment of the population feels a
Speaker 12: little perhaps betrayed by what's happened in the with with
Speaker 12: respect to some of the economic situation that's been going on.
Speaker 12: How do you view the population and their reaction.
Speaker 13: I think that's a really important question. I think it's
Speaker 13: especially important for youth, right, many of whom are emerging
Speaker 13: from college and looking to land their first job, looking
Speaker 13: to find their first home to live in, start to
Speaker 13: kind of acquire assets. That's a really important part of
Speaker 13: you know, sort of the cycle of life there having
Speaker 13: property in your name as you start to build out
Speaker 13: your own life for yourself. And I think people are
Speaker 13: starting to feel sort of a major difference between the
Speaker 13: situation of growing up in the nineties and the early
Speaker 13: twentys and twenty tens, as China was on the ascent
Speaker 13: and livelihoods were significantly improved from prior generations into perhaps
Speaker 13: what is going to be a new mode of as
Speaker 13: Beijing would put it, high quality growth, rather than necessarily
Speaker 13: focusing on the top up GDP numbers.
Speaker 1: You know, it's for a while there. Again, as you mentioned,
Speaker 1: back in those those time periods, it seemed like China
Speaker 1: was opening up and that was a good thing for
Speaker 1: the world. Is it now simply the fact that g
Speaker 1: IS continues to be even more firmly enhanced, that doesn't
Speaker 1: necessarily need to do that anymore, and he can kind
Speaker 1: of go back to maybe what his natural inclination was,
Speaker 1: which would be a little bit more closed.
Speaker 13: I think she is Dual circulation policy is a really
Speaker 13: interesting example of kind of the twin paradigms that they're
Speaker 13: trying to hit here, of one not necessarily being overly
Speaker 13: reliant on foreign technology for fear that access to that
Speaker 13: could be cut off, as they see recent US moves
Speaker 13: as kind of indicative of that perception being valid, while
Speaker 13: at the same time recognizing that in order to continue growing,
Speaker 13: in order to kind of beat the middle income trap,
Speaker 13: China needs to continue advancing technologically, and right now a
Speaker 13: lot of that sort of superior IP and technology exist
Speaker 13: in other economies that they need to learn from. So
Speaker 13: I think that's the thrust of his approach, is trying
Speaker 13: to balance and make that bridge without becoming overly reliant
Speaker 13: on what he sees as being a risky sort of proposition.
Speaker 1: All right, Jennifer, thanks so much for joining US geoeconomists.
Speaker 1: I like the term, and I like Jennifer Welch. You're
Speaker 1: gonna be coming back here. You get new friends with
Speaker 1: Bloomberg Radio. Jennifer Walsch, chief economists for Bloomberg Economics down
Speaker 1: in Washington, d C. Trying to kind of get a
Speaker 1: sense of what you know, geopolitics, economics. They certainly have,
Speaker 1: They certainly influence one another, and that's kind of what
Speaker 1: I think, Jennifer watching Bloomer.
Speaker 12: So many interesting data points and headlines, recently the latest
Speaker 12: one China. Please visit Shadow Bank Investors at home to
Speaker 12: quash on the rest.
Speaker 1: There you go. We're gonna have more coming up. This
Speaker 1: is Bloomberg.
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Speaker 1: A lot of kinds are still talking about the recession.
Speaker 1: I am not buying it. I took it off the
Speaker 1: table a month and a half ago. I'm just not
Speaker 1: buying it. But I like to talk to people who
Speaker 1: actually out there in the marketplace, talk at the companies
Speaker 1: large and small, give them a sense of kind of
Speaker 1: what they're seeing out there. And we've got a great opportunity.
Speaker 7: Now.
Speaker 1: Don McCree joins, as he said, of commercial banking and
Speaker 1: vice chairman at Citizens Financial, publicly traded bank. CFG is
Speaker 1: the ticker about thirteen point three billion dollars in market cap.
Speaker 1: Looks like it's been caught up in some of that
Speaker 1: regional bank's downdraft there off twenty eight percent year to
Speaker 1: data on this stock. Don, thanks, thanks so much for
Speaker 1: joining us here. What are you seeing out there? I mean,
Speaker 1: I think we had Citizens. You guys talked at pretty
Speaker 1: much everybody, small business, it's midsize, larger companies, you compete
Speaker 1: against the big banks. What are you seeing out there
Speaker 1: from your clients?
Speaker 14: You know, it feels pretty good. We're not seeing a
Speaker 14: lot of distress in the portfolio. I think companies are
Speaker 14: generally performing pretty well. I've said before that, you know,
Speaker 14: because of COVID a couple of years ago.
Speaker 4: Companies really tightened their belts.
Speaker 14: They got their their cost bases down, they built their liquidity,
Speaker 14: they refinance their debt, and so they're operating with strong
Speaker 14: balance sheets.
Speaker 4: They've had some of.
Speaker 14: The things that had been plaguing them, like supply chain
Speaker 14: issues and things like that, seem to be behind and
Speaker 14: a lot of the input costs that grew from inflation
Speaker 14: and the rapid changes of inflation have kind of subsided
Speaker 14: a little bit. So I think we're hearing pretty good things.
Speaker 14: There's there's absolutely a cautionary toll tone being flag being
Speaker 14: flown by a lot of the customers, just because there's
Speaker 14: still a lot of uncertainty out in the marketplace right.
Speaker 12: And you wonder if companies have been preparing for recession
Speaker 12: so long, if we don't see quite the depth of
Speaker 12: the reception recession that we could have seen, maybe they
Speaker 12: are just better able to prepare for it. I wonder, though,
Speaker 12: you know, credit is tighter, do you see companies delaying
Speaker 12: transactions deals.
Speaker 14: It's been The demand for loans is definitely tepid, and
Speaker 14: I think a little bit of that, particularly new money transactions.
Speaker 14: I think there's a little bit of a hesitancy to
Speaker 14: invest right now. There's a little bit of a there's
Speaker 14: definitely a little bit of a weakness and the leverage
Speaker 14: buyout markets, and some of the big transaction markets. M
Speaker 14: and A is a little quieter that it's been, and
Speaker 14: a lot of that's because valuations need to adjust and
Speaker 14: buyer buyers and sellers are still quite far apart. We
Speaker 14: tend to play in our investment banking businesses in the
Speaker 14: middle market. That's been a little healthier because the transaction
Speaker 14: sizes are small and you don't have to raise massive
Speaker 14: amounts of capital to complete a transaction. And on the
Speaker 14: M and A side, it's a little friendlier from a
Speaker 14: government standpoint in terms of getting approvals for transactions. But
Speaker 14: I think regular way lending is okay, but it's not great,
Speaker 14: and I think that's more demand than supply.
Speaker 1: Frankly, any stress in your loan portfolio at this point.
Speaker 14: The commercial side's pretty good. CE and I side. Obviously,
Speaker 14: real estate is the flashpoint, and office real estate is
Speaker 14: the place that we're all focused. We're working through the issues.
Speaker 6: Fine.
Speaker 14: We put a lot of disclosure out in the second
Speaker 14: quarter and kind of went through the portfolio, so you know,
Speaker 14: nothing that really is causing us to have sleepless nights,
Speaker 14: and we have an enormous amount of earnings power to
Speaker 14: basically absorb any losses that do come along.
Speaker 12: Look at beyond yourself. There was a series of downgrades
Speaker 12: by Moody's on the regional banks. You guys saw your
Speaker 12: outlook cut, but that was actually a sort of positive thing.
Speaker 12: Looking at your peers, do you what's the extent of
Speaker 12: the commercial real estate stress that you see? That was
Speaker 12: a particular point that you.
Speaker 14: Know, I think, like us, I think most of them
Speaker 14: are working through. It's going to be a two or
Speaker 14: three year kind of work, you know, working through any
Speaker 14: distress we have in the portfolio. We're having a fair
Speaker 14: amount of success restructuring loans that we were worried about.
Speaker 14: So we've taken a couple losses, nothing too significant. And
Speaker 14: I think as I looked at earnings from our peers
Speaker 14: across the board, everyone said about the same thing that
Speaker 14: we said, which is, yeah, we're focused on it. Obviously
Speaker 14: is going to be stressed to stress in the in
Speaker 14: the office market, but there's a lot of equity in
Speaker 14: these deals.
Speaker 4: That's the first to go.
Speaker 14: And then any losses that the banks will take are
Speaker 14: going to be you know, small fractions of the oldverall.
Speaker 12: Yeah, I mean, we've seen some of these large private
Speaker 12: equity firms or real estate firms in particular, like walking
Speaker 12: away from poor investments. I mean, as a to what
Speaker 12: extent are you guys happy to end up with the
Speaker 12: asset at the end?
Speaker 14: Well, we generally won't. You know, we generally won't end
Speaker 14: up with the asset. We go to great links not
Speaker 14: to end up with the assets. So we would probably
Speaker 14: sell the note or or do some other kind of
Speaker 14: restructuring and bring in alternative alternative equity rather than take
Speaker 14: down the asset.
Speaker 1: Let's talk just about the regulations on your industry more
Speaker 1: coming down. What are you telling your showholders about a
Speaker 1: the regulations, how they're going to impact you, and kind
Speaker 1: of what you're trying to do to get ready.
Speaker 14: I think you know, there's there's clearly going to be
Speaker 14: higher capital requirements as to be stricter liquidity requirements, and
Speaker 14: we're preparing for those. We have been preparing for those
Speaker 14: long before the regulatory kind of talk talk about exactly
Speaker 14: what it's going to be started to leak out. So
Speaker 14: I think that our returns will be a little bit
Speaker 14: under pressure. But you know the benefit that we have
Speaker 14: is we have a really diversified business model with a
Speaker 14: lot of earnings power, So if it goes down a
Speaker 14: little bit, we're going to continue to be able to
Speaker 14: return capital to shareholders. And and it's it's it's going
Speaker 14: to be an adjustment, but we've been through these kind
Speaker 14: of adjustments before.
Speaker 12: We had some reporting on how US regulators are going
Speaker 12: to propose requiring banks with as little as one hundred
Speaker 12: billion dollars in assets to issue enough long term debt
Speaker 12: to cover capital losses, and then the head of the
Speaker 12: FDIC coming out and talking about how this bolster's financial stability?
Speaker 1: Do you agree?
Speaker 12: Disagree? I?
Speaker 14: You know, at the margin, it bolsters, you know, stability,
Speaker 14: But we don't think we think that the banks are
Speaker 14: in really good shape. We think capital levels are quite high,
Speaker 14: better than a lot of other parts of the world,
Speaker 14: and well managed banks have really strong liquidity profiles and
Speaker 14: really strong capital absorption absorption capacity.
Speaker 1: How's loan growth across your client base here, because boy,
Speaker 1: we've been shocked with these rise and interest rates. If
Speaker 1: you want to go out and get a mortgage, or
Speaker 1: or if you want to go out and finance some
Speaker 1: capital spending or finance and acquisition, what's loan growth like
Speaker 1: these days?
Speaker 14: It's been it's been kind of flatish, yeah, for the
Speaker 14: last for the last couple of quarters, and we're expecting
Speaker 14: a little bit here and there, depending on the sector,
Speaker 14: but we expect, you know, reasonably low levels of long
Speaker 14: growth for the balance of the year, less on the
Speaker 14: less on the you know, that's on my side, the
Speaker 14: retail side. Should you know, we're having some pretty good
Speaker 14: expansionary growth in places that were growing on the retail
Speaker 14: side in the retail portfolio.
Speaker 12: Have consumers just adjusted faster? Do businesses catch up with
Speaker 12: them to a higher rate environment?
Speaker 7: Yeah?
Speaker 4: I think.
Speaker 14: I think we have to keep from perspective that where
Speaker 14: rates are aren't that high and from a historical standpoint,
Speaker 14: so I think the issue with with borrowers has been
Speaker 14: this beat of the change in rates as opposed to
Speaker 14: the absolute level of rates. So yes, I do think
Speaker 14: that consumers and businesses will adjust to a higher rate environment,
Speaker 14: and I think rates are going to stay high for
Speaker 14: quite a period of time.
Speaker 1: University of Vermont, big fan. Two of my siblings went there,
Speaker 1: your big player. Give us twenty thirty seconds on UVM.
Speaker 14: UVM is doing fantastic where the school is growing. We're
Speaker 14: very financially healthy, you know, great statistics we are. The
Speaker 14: major thrust we have right now is growth of our
Speaker 14: research programs, and we're basically getting enormous levels of research
Speaker 14: grants from a variety of businesses and governments. And it
Speaker 14: feels very strong up there, and Burlington is obviously a
Speaker 14: fantastic place.
Speaker 1: Yeah, go to school man. My brother and sister went there,
Speaker 1: like why, and I had another brother go up there.
Speaker 1: Michael's have been vermonly. What are you guys thinking about?
Speaker 1: It's cold up there, so what do I do? I
Speaker 1: go south. Don McCree, head of Commercial Banking and a
Speaker 1: vice chairman Citizens Financial, joining us live here in our
Speaker 1: Bloomberg Interactive Broker studio. We appreciate getting some of his time.
Speaker 1: This is Bloomberg.
Speaker 2: Thanks for listening to the Bloomberg Markets podcasts. You can
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Speaker 2: at Matt Miller nineteen seventy three.
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