WEBVTT - Bloomberg Wall Street Week April 7th, 2023 0:00:00.520 --> 0:00:03.680 This is Bloomberg Wall Street Week. We turn our attention 0:00:03.840 --> 0:00:08.320 to the markets this week. USCPI nevers reinforcing concerns about inflation, 0:00:08.440 --> 0:00:11.559 the financial stories that chief our world, a really different 0:00:11.600 --> 0:00:14.520 reaction to mark its more indications of just how hot 0:00:14.560 --> 0:00:16.959 the US economy really is. Through the eyes of the 0:00:17.000 --> 0:00:21.440 most influential voices Larry Summers, the former Treater Secretary, Katherine Keating, 0:00:21.560 --> 0:00:24.759 CEO of BNY, Mellen Sam's l Sherman N, founder of 0:00:24.760 --> 0:00:28.440 Equatic Group Investment in Bloomberg wool Street Week with David 0:00:28.480 --> 0:00:32.760 Weston from Bloomberg Radio. A whole lot of drama from 0:00:32.800 --> 0:00:35.400 a former US president indicted to a one hundred and 0:00:35.440 --> 0:00:39.000 sixty six year old Swiss bank, saying goodbye to professional 0:00:39.000 --> 0:00:43.000 wrestling officially becoming part of Lala Land. This is Bloomberg 0:00:43.000 --> 0:00:47.040 Wall Street Week. I'm David Weston. This week's special contributor 0:00:47.120 --> 0:00:50.480 Larry Summers on picking up the pieces of banking regulation. 0:00:51.159 --> 0:00:55.440 Owen Thomas of BXP on whether commercial real estate could 0:00:55.440 --> 0:00:58.840 be the next shoe to drop. Challenges in real estate 0:00:58.880 --> 0:01:02.000 are going to be tied to the economy and kept 0:01:02.040 --> 0:01:04.600 the beer of Ari's management on what all of this 0:01:04.720 --> 0:01:09.040 means for the credit world. The immediate effect is it's 0:01:09.080 --> 0:01:12.039 actually taken the banks out of our businesses in a 0:01:12.040 --> 0:01:27.200 lot of ways. There was a lot for Global Wall 0:01:27.200 --> 0:01:29.600 Street to watch this week, not all of it was 0:01:29.640 --> 0:01:32.160 in the markets. We saw a former president of the 0:01:32.200 --> 0:01:34.399 United States or reigned on criminal charges, so the first 0:01:34.440 --> 0:01:38.080 time ever, and as usual, the former president, mister Trump 0:01:38.120 --> 0:01:41.559 did not let it pass without comment. This fake case 0:01:41.720 --> 0:01:44.720 was brought only to interfere with the upcoming twenty twenty 0:01:44.760 --> 0:01:47.559 four election. The same day that mister Trump was facing 0:01:47.560 --> 0:01:50.160 the music in court, the leadership of Credit Suite was 0:01:50.200 --> 0:01:53.160 facing its own music had what was likely the last 0:01:53.160 --> 0:01:57.320 shareholders meeting ever for Credit Suie. It's a bits of 0:01:57.440 --> 0:02:03.040 reality to see the she didn't have time to bear fruit. 0:02:03.760 --> 0:02:06.800 And if all that weren't enough drama, Global Wall Street 0:02:06.840 --> 0:02:11.240 witnessed the combination of Hollywood powerhouse Endeavor with World Wrestling 0:02:11.400 --> 0:02:16.600 Entertainment will combine with Endeva's Ultimate Fighting Championship to form 0:02:16.600 --> 0:02:18.239 a new company that's going to be listed on the 0:02:18.240 --> 0:02:21.239 New York Stock Exchange. When we weren't distracted by the 0:02:21.240 --> 0:02:23.560 theater of it all, we had plenty to keep us 0:02:23.600 --> 0:02:26.440 busy in the real economy and in the market as 0:02:26.440 --> 0:02:29.760 OPEC plus caught everyone out by cutting oil production by 0:02:29.800 --> 0:02:32.680 a million barrels a day. It's either going to be 0:02:32.720 --> 0:02:37.919 seen as a precautionary master stroke or it's going to 0:02:38.000 --> 0:02:42.040 be seen as an unintentional Bober tightness. JP Morgan CEO 0:02:42.120 --> 0:02:45.320 Jamie Diamond issue his annual letters shareholders and to the 0:02:45.320 --> 0:02:48.560 world warning that the crisis of the bank's quote is 0:02:48.600 --> 0:02:51.560 not yet over and even when it is behind this, 0:02:51.800 --> 0:02:55.120 there will be repercussions from it for years to come. 0:02:57.680 --> 0:03:00.520 And then we ended the week with those US jobs numbers, 0:03:00.560 --> 0:03:03.040 adding another two hundred and thirty six thousand in March. 0:03:03.160 --> 0:03:05.560 That's down from three hundred thousand plus in February, but 0:03:05.680 --> 0:03:08.359 still enough to take the unemployment rate down to three 0:03:08.360 --> 0:03:10.919 point five percent. The equity markets didn't get a chance 0:03:10.919 --> 0:03:13.880 to react and given the good Friday holiday, but before 0:03:13.919 --> 0:03:16.160 that we had the SMP five hundred down just a 0:03:16.240 --> 0:03:18.760 tenth of a percent, while the NAZAC was off just 0:03:18.840 --> 0:03:21.880 over one percent. The bond market was open half of 0:03:21.919 --> 0:03:24.160 the day on Friday, and the initial action was the 0:03:24.200 --> 0:03:26.960 anticipation of higher rates, with a yield on both the 0:03:27.040 --> 0:03:29.840 ten year and the two year spiking up take US 0:03:29.840 --> 0:03:33.080 through all this shortened trading week. Were welcome now Chris Alman, 0:03:33.440 --> 0:03:36.880 chief investment officer at Calcer's and Julian Tet Financial Times, 0:03:36.920 --> 0:03:39.120 Chair of the editorial board and editor at Large for 0:03:39.160 --> 0:03:41.360 the US, So welcome back to Walster to both of you. 0:03:41.600 --> 0:03:44.000 Thank you for being here. Crystally, start with you. We 0:03:44.120 --> 0:03:47.320 had a series of economic data this week that seemed tommunicated, 0:03:47.360 --> 0:03:50.200 We're really getting softer, maybe we're winning the war against inflation, 0:03:50.320 --> 0:03:52.720 and then the jobs numbers came in and said, maybe 0:03:52.720 --> 0:03:55.360 not so fast. What did you make of it. It's 0:03:55.400 --> 0:03:58.400 a conundrum, you know, David, and has continued to be 0:03:58.440 --> 0:04:00.920 a conundrum the FEDS data dress, so we know they're 0:04:00.920 --> 0:04:03.040 going to pay attention to these numbers. They're going to 0:04:03.080 --> 0:04:05.680 look at the CPI next week is a real key indicator. 0:04:06.160 --> 0:04:08.520 The bond market, the stock market have been telling us 0:04:08.560 --> 0:04:11.280 that the Fed is going to pull off a soft landing. 0:04:11.320 --> 0:04:14.600 I mean, it's amazing to say. It's hard to believe though, 0:04:14.840 --> 0:04:17.599 so we'll see. I think the next week and two 0:04:17.600 --> 0:04:20.920 weeks are going to be really challenging CPI and then 0:04:21.000 --> 0:04:23.800 earnings reports, and that really is going to weigh on 0:04:23.800 --> 0:04:28.359 the market. Because I'm expecting negative comments from CEOs, so 0:04:28.480 --> 0:04:30.320 Jennie as I said, the initial reaction to the bond 0:04:30.360 --> 0:04:33.120 market was maybe higher rates, somewhat higher rates, rather than 0:04:33.120 --> 0:04:35.280 the lower rates. What does this tell the feed about 0:04:35.279 --> 0:04:37.719 that may meeting in these jobs numbers? Is this a 0:04:37.760 --> 0:04:41.320 further indication maybe it's too soon to start pausing. Well, 0:04:41.360 --> 0:04:43.600 I think one way to summarize what's happened in the 0:04:43.680 --> 0:04:46.680 last twenty four hours is a bond markets to remembered 0:04:46.680 --> 0:04:50.679 the message don't fight the Fed, because after the March 0:04:50.839 --> 0:04:54.279 madness of collapsing banks, there was a tremendous amount of 0:04:54.320 --> 0:04:57.680 wishful thinking months investors that the Federal Reserve would then 0:04:57.680 --> 0:05:01.480 go for wooden stock cutting rates said itself in terms 0:05:01.480 --> 0:05:05.000 of official statements, has been really clear over and over 0:05:05.040 --> 0:05:08.600 again that they are not looking for rate cuts. If anything, 0:05:08.640 --> 0:05:11.800 they are expecting to continue to hike. And it's worth 0:05:11.800 --> 0:05:14.680 stepping back for a second and saying that any other situation, 0:05:15.040 --> 0:05:17.760 if you had a three point five percent unemployment rate 0:05:18.080 --> 0:05:21.120 and a four point two percent annual wage growth rate, 0:05:21.440 --> 0:05:25.479 there's no way you'd be talking about cutting rates. So 0:05:25.520 --> 0:05:27.400 I think what's going on right now as a market 0:05:27.480 --> 0:05:30.120 of playing catch up and actually listening to what the 0:05:30.160 --> 0:05:33.839 Federal Reserve is saying instead of just hoping or dreaming 0:05:34.160 --> 0:05:36.960 that it might be something different. And Chris, I'm curious 0:05:37.000 --> 0:05:39.400 you're along term investor. Obviously with calsters you have to 0:05:39.400 --> 0:05:41.400 worry about all those pensions you have to pay off. 0:05:41.440 --> 0:05:44.000 One from your point of view, are we better off 0:05:44.080 --> 0:05:46.080 getting this behind us more quickly than we are right now? 0:05:46.120 --> 0:05:48.360 Because this is a slow process here of getting inflation 0:05:48.440 --> 0:05:51.839 ut of control. It has been a very painful process, 0:05:51.880 --> 0:05:54.719 but that's the nature of inflation. The Fed's only tool 0:05:54.800 --> 0:05:57.680 is to raise rates, and that's an ineffective tool to 0:05:58.320 --> 0:06:03.000 compete against wage and what was starting commodity inflation. So 0:06:03.640 --> 0:06:05.359 I would like it to get over fast, but I 0:06:05.360 --> 0:06:08.120 don't think it will, David, because as Julian said, the 0:06:08.480 --> 0:06:13.080 markets are expecting a soft landing. But it's just really 0:06:13.080 --> 0:06:15.159 hard to believe that Powell can pull that off. I 0:06:15.200 --> 0:06:18.720 hope he can. But the numbers tell us that unemployment 0:06:18.800 --> 0:06:22.200 should start to increase pretty sizably. And if you talk 0:06:22.279 --> 0:06:25.320 to CEOs, they're worried about a heavy recession coming up 0:06:25.320 --> 0:06:27.600 in the future. Well, Chris, what about that? Because the 0:06:27.680 --> 0:06:31.320 more we keep anticipating possibly a breakage if I can 0:06:31.360 --> 0:06:32.920 put it that way in the labor market, and yet 0:06:32.920 --> 0:06:36.880 it doesn't happen. Does j Powell need to be a 0:06:36.960 --> 0:06:39.560 spike up an unemployment in order to get where he 0:06:39.600 --> 0:06:42.560 wants to go? I don't know that he needs it. 0:06:42.760 --> 0:06:46.840 You know, the wages were only up four percent. That's 0:06:46.839 --> 0:06:50.320 still higher than he wants, but that's not bad. These 0:06:50.400 --> 0:06:53.440 numbers just are quite a conundrum, and I think that 0:06:53.800 --> 0:06:57.440 Powell's only tools to raise rates. He will continue at 0:06:57.480 --> 0:07:00.720 some point pause and as Julian pointed, the markets are 0:07:00.720 --> 0:07:04.040 expecting a pivot as early as the third Quarder. I 0:07:04.120 --> 0:07:07.240 just don't see that. But we're going to find out 0:07:07.279 --> 0:07:10.440 which is right, the FED or the markets. Jillian, Does 0:07:10.440 --> 0:07:12.400 the FED have a problem right now? They got the 0:07:12.400 --> 0:07:15.160 inflation issue wrong? I think everyone, including the Fed even 0:07:15.200 --> 0:07:17.800 admits that they got it wrong, the so called transitory inflation, 0:07:18.040 --> 0:07:20.760 and then we had that banking problem that developed starting 0:07:20.760 --> 0:07:22.600 with Silicon Valley Bank. Will come back and talk about 0:07:22.600 --> 0:07:25.040 that more detail. But is the FED got a problem 0:07:25.080 --> 0:07:27.360 here of credibility? They've made a couple of big mistakes, 0:07:27.360 --> 0:07:30.320 have they not? Jillian? Well, I think they certainly have 0:07:30.440 --> 0:07:32.360 made a couple of big mistakes. I mean, I've been 0:07:32.400 --> 0:07:35.840 one of those who've been really critical about the superlis 0:07:35.920 --> 0:07:38.520 monetary policy going on for far too long in the past. 0:07:38.960 --> 0:07:41.040 You know what they're trying to do right now, and 0:07:41.080 --> 0:07:43.920 I think the market has forgotten this is they are scrambling. 0:07:43.960 --> 0:07:48.120 They're racing to re establish their credibility because frankly, for 0:07:48.160 --> 0:07:53.360 a central banker, there's nothing worse than thinking they've lost credibility. So, 0:07:53.560 --> 0:07:56.200 you know, they have made it really clear that they 0:07:56.240 --> 0:07:58.560 are not going to be bullied by the markets into 0:07:58.600 --> 0:08:02.280 cutting prematurely. They're also, though this is really important point, 0:08:02.360 --> 0:08:05.120 they're trying very hard to signal to the markets, but 0:08:05.200 --> 0:08:08.400 they are separating out monetary policy measures that are helped 0:08:08.400 --> 0:08:13.520 to the design to target the economy from financial stability measures. 0:08:13.560 --> 0:08:16.120 They're trying to deal with the financial stability issue through 0:08:16.160 --> 0:08:19.720 all kinds of macropredential tools, and they're trying to indicate 0:08:19.760 --> 0:08:21.680 that they're not going to lose some policy just for 0:08:21.720 --> 0:08:25.320 the financial stability reasons. Now, I think in many ways 0:08:25.360 --> 0:08:27.760 that is the right decision. I think there's very clear 0:08:27.800 --> 0:08:30.720 to signal for their credibility that they are committed to 0:08:30.840 --> 0:08:34.760 trying to tackle inflation. And it's also very very important 0:08:34.800 --> 0:08:37.679 for the FED to signal that they have the credibility 0:08:37.800 --> 0:08:40.920 given that we have this little thing called a potential 0:08:41.000 --> 0:08:44.400 death ceiling crisis coming down the tracks. You know, there's 0:08:44.440 --> 0:08:46.360 never a good time for the FED. To lose credibility. 0:08:46.800 --> 0:08:49.520 Right now would be dreadful. So I think there's a 0:08:49.520 --> 0:08:52.000 lot to play for. As chrisss in terms of the 0:08:52.080 --> 0:08:54.839 market catching up to where the FED is from your 0:08:54.880 --> 0:08:56.640 mouth to Guard's ears that that's a little problem with 0:08:56.720 --> 0:08:58.760 death ceiling. I hope that that's true. I think all 0:08:58.800 --> 0:09:02.920 wallstry hopes that that's true. So Julian Ted and Chris Elmont, 0:09:03.720 --> 0:09:05.600 Julian Ted and Chris Elmer will be staying with us 0:09:05.640 --> 0:09:07.240 as we turned from what we saw this week to 0:09:07.280 --> 0:09:09.839 the aftermath of the banking disruption that's gonna have next 0:09:09.840 --> 0:09:21.880 on Walter Week on Bloomberg, Frank Cappiello, let's pursue that 0:09:22.400 --> 0:09:24.880 if we can, does the stock market really have to 0:09:24.880 --> 0:09:29.120 be affected in the long run by Watergate? It could 0:09:29.160 --> 0:09:32.080 be over the next couple of years if all of 0:09:32.080 --> 0:09:37.479 the energies of the administration are spent in these investigations 0:09:37.559 --> 0:09:40.080 or warding off investigations, depending on your point of view, 0:09:40.320 --> 0:09:42.640 And if he loses the confidence of Congress and the 0:09:42.679 --> 0:09:45.600 confidence of a large part of the electorate. The loss 0:09:45.640 --> 0:09:49.400 of confidence could freeze the administration from moving forward. And 0:09:49.520 --> 0:09:52.320 I think what you had this week was can be 0:09:52.360 --> 0:09:56.200 summed up in one, well two words, really Watergate and Oil. 0:09:56.400 --> 0:09:59.720 That was Lewis Register back in May nineteen seventy three 0:09:59.679 --> 0:10:02.280 went in another US president was having some difficulties with 0:10:02.400 --> 0:10:05.800 the law, and as they did this week, the new 0:10:05.840 --> 0:10:08.079 Oil was very much in the news. The number one 0:10:08.120 --> 0:10:11.600 movie back then was The Poseidon Adventure and the number 0:10:11.600 --> 0:10:14.320 one song was Tie a Yellow Ribbon Around the Old 0:10:14.360 --> 0:10:17.840 Oak Tree by Tony Orlando and Dawn Jillian ted As 0:10:17.840 --> 0:10:19.880 the Financial Times and Chris Ailment of councilors are so 0:10:20.000 --> 0:10:21.640 with us. So in the last one we were talking 0:10:21.640 --> 0:10:24.120 about the aftermath or what we saw in the banking system, 0:10:24.160 --> 0:10:25.959 both here in the United States and in Switzerland. Jelian 0:10:26.040 --> 0:10:27.800 want to turn to you because, as you wrote in 0:10:27.840 --> 0:10:31.720 the Financial Times this week, you covered two financial banking 0:10:31.760 --> 0:10:35.960 crisis in the past. How was this different from those? Well, 0:10:36.000 --> 0:10:39.280 it was very striking this current crisis because in some 0:10:39.320 --> 0:10:42.240 ways it was similar. Bank crisis are always about a 0:10:42.280 --> 0:10:47.199 collapse of credit, meaning trust in the banking system. Fractional 0:10:47.240 --> 0:10:51.480 banking doesn't work without trust, and that's what Sparks Bank runs. 0:10:51.480 --> 0:10:53.640 And that's true of the saucy bubble, it's true of 0:10:53.720 --> 0:10:57.000 today everything in between. But what was really different this 0:10:57.120 --> 0:11:00.640 time around was the speed of response and the virality 0:11:01.160 --> 0:11:03.880 because so much of it was conducted on social media 0:11:04.400 --> 0:11:08.280 and through mobile banking channels. And what we discovered is 0:11:08.559 --> 0:11:11.160 that they've fed system for trying to cool a banking 0:11:11.240 --> 0:11:14.320 crisis just are not in the twenty first century when 0:11:14.360 --> 0:11:18.240 it comes to trying to contain a panic. We also 0:11:18.360 --> 0:11:21.839 found out that the contagion risks associated with small to 0:11:21.960 --> 0:11:25.200 medium sized banks are significant in their world of social 0:11:25.280 --> 0:11:28.800 media and mobile banking. You go back to the savings 0:11:28.840 --> 0:11:31.600 and loans crisis, and no one really cared if small 0:11:31.640 --> 0:11:33.959 banks collapse because they didn't really create great such a 0:11:34.040 --> 0:11:38.640 chain reaction. In the current hyper connected world of digital 0:11:38.800 --> 0:11:43.880 finance and digital social media, it really matters if panic thrupt, 0:11:43.960 --> 0:11:47.200 if trust is lost. The good news is, of course, 0:11:47.280 --> 0:11:51.120 that we actually had fairly small overall losses from this crisis. 0:11:51.240 --> 0:11:53.120 I mean, twenty two point five billion if you look 0:11:53.160 --> 0:11:56.400 at what the FDUIC says, and that's pretty small compared 0:11:56.400 --> 0:11:59.880 to the history of banking crisis. The bad news is though, 0:12:00.160 --> 0:12:03.959 that what SVP was was very much a symptom, not 0:12:04.120 --> 0:12:07.240 a cause. It was a symptom the fact that the 0:12:07.480 --> 0:12:11.280 financial system has had way too much, too cheap money 0:12:11.360 --> 0:12:14.959 for too long many financial institutions, that investors have been 0:12:15.000 --> 0:12:18.640 taking really dumb bets with that cheap money, engaging in 0:12:18.679 --> 0:12:22.320 a version of a carriage trade, and eventually those chickens 0:12:22.400 --> 0:12:24.400 are going to come home to roost. So I think 0:12:24.400 --> 0:12:26.000 the best way to see what happened in much is 0:12:26.000 --> 0:12:29.120 a symptom, not a cause, of a financial system that 0:12:29.280 --> 0:12:31.760 is seriously displicated. Chris. We've heard from Jamie Diamond, the 0:12:31.840 --> 0:12:34.199 head of JP Morgan, this week saying he thinks we're 0:12:34.240 --> 0:12:35.960 past the worst of it. There may be another failure 0:12:36.000 --> 0:12:38.240 too long the way, but it's not really fundamentally going 0:12:38.320 --> 0:12:40.360 to continue to be a banking crisis. From your point 0:12:40.360 --> 0:12:43.040 of view as an investor, where might the next shoe drop? 0:12:43.080 --> 0:12:44.880 Because one of the problems here, as I understand it 0:12:45.000 --> 0:12:47.800 was unrealized losses on balance sheets. I'm not sure that's 0:12:47.840 --> 0:12:51.120 only at the banks. No, I agree, David, and I 0:12:51.240 --> 0:12:55.160 don't know. I don't disagree with Jamie Diamond. We may 0:12:55.200 --> 0:12:58.600 be over the worst. I don't expect a lot of failures, 0:12:58.679 --> 0:13:01.319 but there's going to be a lot of pain. First off, 0:13:01.360 --> 0:13:04.040 when the FED raises rates from zero to five hundred 0:13:04.080 --> 0:13:09.000 in nine months, commercial real estate, particularly office real estate, 0:13:09.280 --> 0:13:11.840 is going to be hurt by that. Cap rates have risen, 0:13:11.920 --> 0:13:15.160 and while they haven't reappraised, those properties are down probably 0:13:15.200 --> 0:13:17.880 twenty percent in value, and the people that loan the 0:13:18.000 --> 0:13:21.400 money on those buildings are usually the regional banks. So 0:13:21.800 --> 0:13:24.880 we'll probably enter a period again this fall of extend 0:13:24.960 --> 0:13:28.679 and pertend where building owners have wiped out their equity 0:13:28.720 --> 0:13:30.439 and they throw the keys back at the bank, and 0:13:30.520 --> 0:13:33.160 the bank doesn't want to pull back that loan. They 0:13:33.160 --> 0:13:35.800 don't want the commercial real estate. So I think we're 0:13:35.800 --> 0:13:39.080 gonna have a long hangover period of pain, just simply 0:13:39.160 --> 0:13:43.240 because the FED raised rates so quickly. Julie, I also 0:13:43.240 --> 0:13:45.439 wanted about in another area, and that's private equity, which 0:13:45.520 --> 0:13:47.640 is just exploded. As you know, I'm not sure how 0:13:47.720 --> 0:13:50.280 transparent some of the losses might be in private equity. 0:13:50.400 --> 0:13:52.360 The valuations certainly must have come down on some of 0:13:52.400 --> 0:13:56.560 those companies. Well, David, that sounds like a mostly British understatement, 0:13:56.880 --> 0:13:59.360 because the reality is that private equity is private, and 0:13:59.440 --> 0:14:03.360 we just don't know. And what is really striking about 0:14:03.440 --> 0:14:06.959 the last few years the gigantic credit bubble, and I 0:14:07.000 --> 0:14:08.840 do call it a bubble because of the cheap money, 0:14:09.880 --> 0:14:13.000 was that more of it happened through private capital markets 0:14:13.320 --> 0:14:16.480 than we've ever seen before in history. And the problem 0:14:16.520 --> 0:14:18.559 with that, and the good news about that is when 0:14:18.600 --> 0:14:22.520 it starts to implode, it doesn't necessarily immediately hit the 0:14:22.680 --> 0:14:25.120 regulated banks, and of course the regulated banks are at 0:14:25.160 --> 0:14:28.520 the core of credit transmission and the economy. But the 0:14:28.600 --> 0:14:31.960 bad news is that private equity can't be seen quite 0:14:32.000 --> 0:14:34.840 so easy. What's happening inside it is private, and the 0:14:34.960 --> 0:14:37.160 marks tend to take a very long time to come down. 0:14:37.760 --> 0:14:41.560 So you are going to see more of a hissing sound, 0:14:41.640 --> 0:14:44.000 if you like, as the bubble the flates, not the 0:14:44.120 --> 0:14:47.920 dramatic pop. And one of the downsides of that is 0:14:47.960 --> 0:14:50.240 that there's going to be a lot of quite unpredictable 0:14:50.320 --> 0:14:54.080 chain reactions because we just don't know the complications of 0:14:54.240 --> 0:14:57.520 where these losses will end up being felt. One area 0:14:57.600 --> 0:15:00.880 I'm very curious about right now is a universe endowments, 0:15:01.440 --> 0:15:04.880 because endowments have to produce a certain amount of income 0:15:04.920 --> 0:15:08.120 each year to pay the bills to qualify the charitable status. 0:15:08.160 --> 0:15:12.000 In some areas of the world, they're not like sovereign 0:15:12.040 --> 0:15:14.600 wealth funds that can just swallow losses for a few years. 0:15:15.200 --> 0:15:17.880 And a lot of university endowments have dashed into the 0:15:17.920 --> 0:15:20.920 private equity in VC markets in recent years, and they 0:15:21.000 --> 0:15:23.880 could start to see the outlook looking pretty nasty in 0:15:23.920 --> 0:15:26.560 the next few years. As I recall, Chris, in the past, 0:15:26.640 --> 0:15:28.920 you have expressed some skeptics as a private equity. I 0:15:28.960 --> 0:15:31.040 think you pulled back, didn't you, A counselers, What about 0:15:31.080 --> 0:15:36.080 pension plants and their investments in private is there vulnerability there? Well, David, 0:15:36.160 --> 0:15:39.960 We've actually been a steady state investor. I'm skeptical of evaluations, 0:15:40.040 --> 0:15:42.480 just as Jillian said. But you know a lot of 0:15:42.560 --> 0:15:45.520 private equity. You can read it from the employment numbers. 0:15:45.600 --> 0:15:47.960 They're still kind of steady, so they're not writing it down. 0:15:48.280 --> 0:15:50.920 But they are also a fundraising so they're not motivated 0:15:51.000 --> 0:15:53.880 to write it down. And I think really that when 0:15:53.920 --> 0:15:57.120 you look at private equity, particularly as Julian said, at 0:15:57.160 --> 0:16:00.880 the endowment level, there's no distribution. We're not seeing any 0:16:00.960 --> 0:16:06.000 transactions merger Monday has disappeared, so it is putting a strain. 0:16:06.120 --> 0:16:09.760 I think there's a very serious liquidity crunch going on 0:16:10.040 --> 0:16:12.840 around the world, not just in the USA. We can 0:16:12.960 --> 0:16:17.360 survive it, but it's very tough. People with cash are 0:16:17.480 --> 0:16:20.200 hoarding it and right now we're not getting any money 0:16:20.240 --> 0:16:23.400 back from private equity or real estate, and that's putting 0:16:23.440 --> 0:16:26.800 a pinch on everybody's balance sheet. So people with negative 0:16:26.880 --> 0:16:29.240 cash flows are going to find it harder and harder 0:16:29.320 --> 0:16:33.000 to keep looking at new opportunities. That just as a long, 0:16:33.200 --> 0:16:35.760 slow grind. I don't think it's going to lead to 0:16:36.040 --> 0:16:40.240 an immediate liquidation where somebody sells a good asset on 0:16:40.360 --> 0:16:43.760 a fire sale, because there are other people, like she 0:16:43.880 --> 0:16:46.280 mentioned sovereign wealth funds willing to buy that up. So 0:16:46.920 --> 0:16:50.360 it's a tough, tough period. Many things to Chris Alement 0:16:50.400 --> 0:16:53.040 of Calister's and Jillian Tett of The Financial Times. Coming up, 0:16:53.080 --> 0:16:55.480 we're gonna turn from credit over the subject of commercial 0:16:55.600 --> 0:16:58.920 real estate with Owen Thomas of The XP and this 0:16:59.160 --> 0:17:04.960 is Wall Street Week on Bloomberg. This is Bloomberg Wall 0:17:05.040 --> 0:17:16.280 Street Week with David Weston from Bloomberg Radio, looking for 0:17:16.480 --> 0:17:20.400 cracks when Silicon Valley Bank went down. It sent tremors 0:17:20.560 --> 0:17:23.080 through the banking sector. Yeah, it's amazing. I mean, we 0:17:23.359 --> 0:17:27.680 continue to get new news on banking. Now we've got 0:17:27.760 --> 0:17:31.800 the SVB takeover. We've also got news that First Republic 0:17:31.840 --> 0:17:34.360 will continue to be supported by the government. With fear 0:17:34.440 --> 0:17:39.200 of contagion triggering an immediate and massive government intervention, Treasury 0:17:39.280 --> 0:17:43.119 worked with the fit nif BIC to protect depositors in 0:17:43.240 --> 0:17:48.720 the resolution of SVB. Our intervention was necessary to mitigate 0:17:48.920 --> 0:17:53.719 systemic risks and protect the broader US banking system. Now 0:17:53.800 --> 0:17:56.360 that we may be past the worst of the bank failures, 0:17:56.440 --> 0:17:59.879 investors are looking around for what comes next, with realist 0:18:00.080 --> 0:18:03.480 day being a prime suspect. Some like Bruce Flatt of 0:18:03.560 --> 0:18:07.280 Brookfield say there's a big difference between top line properties 0:18:07.440 --> 0:18:10.320 and the others. There's a real talty. It's the best 0:18:10.400 --> 0:18:12.119 of the best and the worst of the worst. The 0:18:12.240 --> 0:18:15.680 best of the best today is really really good. High 0:18:15.960 --> 0:18:21.439 quality space is very sought after by companies because they 0:18:21.480 --> 0:18:24.679 want to bring them people back and have new, engaging space, 0:18:25.040 --> 0:18:28.720 while others like Joshua Friedman of Kenyon Partners say even 0:18:28.760 --> 0:18:31.440 the top of the food chain could get hit. In 0:18:31.560 --> 0:18:35.000 real estate, we don't know whether the market clearing prices 0:18:35.080 --> 0:18:38.560 or cap rate, leaving people like former FDIC chairman Bill 0:18:38.640 --> 0:18:43.080 Isaac to think hard about where real estate investments are heading. 0:18:43.520 --> 0:18:45.879 You always have to fear a commercial real estate. It's 0:18:45.920 --> 0:18:49.840 one of the risky activities in which banks engage, and 0:18:50.160 --> 0:18:53.400 every now and again it gets over built and out 0:18:53.440 --> 0:18:56.879 of control and people take losses. So that's always an 0:18:56.920 --> 0:19:01.080 area of a bank that you should have under type control. 0:19:04.560 --> 0:19:06.640 And to give us his thoughts on where real estate 0:19:06.760 --> 0:19:08.840 is headed, welcome now a true expert in the area. 0:19:08.960 --> 0:19:12.840 He is Owen Thomas, the chairman and CEO of BXP 0:19:13.080 --> 0:19:16.040 formerly known as Boston Properties. So welcome. Great to have 0:19:16.160 --> 0:19:18.200 you back in Wall Street week. Great David, great to 0:19:18.240 --> 0:19:20.280 be here. Thank you. So the twenty four thousand and 0:19:20.280 --> 0:19:22.720 sixty four thousand and sixty four billion dollar question is 0:19:22.840 --> 0:19:25.440 at real estate the next shooter drop and the aftermath 0:19:25.480 --> 0:19:27.560 of what we saw with the banks. The challenges in 0:19:27.680 --> 0:19:30.200 real estate are going to be tied to the economy. 0:19:30.600 --> 0:19:33.320 So it all depends on do we have a recession, 0:19:33.440 --> 0:19:35.920 how deep will the recession be, how long will interest 0:19:36.000 --> 0:19:39.960 rates be high? And the answer to that question will 0:19:40.040 --> 0:19:42.959 determine you know, the challenges that the real estate industry 0:19:43.000 --> 0:19:45.840 will face in the quarters ahead. We had a Bluebird 0:19:45.840 --> 0:19:50.440 report saying that vacancy rates for office properties in Manhattan 0:19:50.480 --> 0:19:52.480 where a record high right now. I think something like 0:19:52.560 --> 0:19:55.080 fifteen percent something like that. How much of that is 0:19:55.080 --> 0:19:57.160 because the economic downturn and how much of it's because 0:19:57.160 --> 0:19:58.800 people just aren't coming back to the office they're working 0:19:58.840 --> 0:20:02.280 from home. Yes, I think that's a big misperception in 0:20:02.400 --> 0:20:06.960 the market today. The office business faces two significant headwinds. 0:20:07.080 --> 0:20:10.000 One is a slowdown in economic conditions and the other 0:20:10.160 --> 0:20:12.359 is work from home. When you have a slowdown in 0:20:12.400 --> 0:20:16.560 the economy, businesses are more challenged in terms of their 0:20:16.640 --> 0:20:19.199 P and L and they do things to cut costs. 0:20:19.320 --> 0:20:23.359 And you see layoffs going on almost every day right now. 0:20:23.520 --> 0:20:26.840 And as you have layoffs, companies take less space or 0:20:26.880 --> 0:20:29.879 they put subble space back on the market. And by 0:20:29.920 --> 0:20:32.399 the way, this is no different than any other downturn 0:20:32.520 --> 0:20:35.159 that we've ever experienced. Office in many forms of real 0:20:35.320 --> 0:20:38.720 estate are economically sensitive. So I think in the premium 0:20:38.800 --> 0:20:43.280 end of the market, what's impacting our leasing activity today 0:20:43.440 --> 0:20:46.160 is much more the economic conditions than work from home. 0:20:46.520 --> 0:20:48.840 And the evidence of that that I would give you 0:20:49.600 --> 0:20:52.920 is in twenty twenty two, last year, our company leased 0:20:53.040 --> 0:20:56.879 nearly six million square feet of space, which is basically 0:20:56.920 --> 0:21:00.119 at ninety five percent of our long term averages if 0:21:00.160 --> 0:21:03.480 you think about it. Last year interest rates that started 0:21:03.480 --> 0:21:05.840 to go up, but the economy was much more solid 0:21:05.880 --> 0:21:08.439 and there were a lot fewer people in the office. 0:21:08.640 --> 0:21:12.199 Now you've moved to twenty three, office leasing is slowing 0:21:12.320 --> 0:21:14.720 down the economies worse than there are actually more people 0:21:14.800 --> 0:21:17.280 working in the office. So what is your experience of BIS, 0:21:17.520 --> 0:21:19.879 particularly in the tech area, because we've heard about a 0:21:19.960 --> 0:21:22.440 lot of layoffs in tech, downsizing in tech. Are you 0:21:22.640 --> 0:21:26.400 seeing that in your office situation? Yes, well, that has 0:21:26.440 --> 0:21:30.040 an impact. The technology firms, particularly the larger ones, were 0:21:30.119 --> 0:21:34.720 important net absorbers of office space since the global financial crisis, 0:21:35.200 --> 0:21:37.320 and as you know, over the last six months, many 0:21:37.359 --> 0:21:41.960 of those companies their growth has slowed and they're focused 0:21:42.359 --> 0:21:45.159 very much on their profitability and they many of them 0:21:45.240 --> 0:21:48.320 have done layoffs and many of them have put subly 0:21:48.400 --> 0:21:50.720 spaced on the market. And by the way, they've all 0:21:50.800 --> 0:21:53.520