Speaker 1: This is Bloomberg Wall Street Week.
Speaker 2: I mean may not have an overall recession. We're having
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Speaker 2: it comes to jobs.
Speaker 1: The financial stories that shape our world.
Speaker 2: Three major regional bank failures sent shockwaves through the banking system.
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Speaker 1: The eyes of the most influential voices.
Speaker 2: Welcome down, Doctor Paul Krugman, Ryan moynihan, a Bank of America,
Speaker 2: deebro Lair of the Paulson Institute, well then Hubbard of
Speaker 2: the Columbia Business School.
Speaker 1: Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
Speaker 2: Inflation numbers, big mergers, IPOs, but they were all overshadowed
Speaker 2: by war in the Middle East. This is Bloomberg Wall
Speaker 2: Street Week. I'm David Weston. This week. Richard Hawes of
Speaker 2: Centerview Partners on Israel's war against Hamas in Gaza. Special
Speaker 2: contributor Larry Summers on the controversy over Harvard's position on
Speaker 2: the war.
Speaker 3: The statement by thirty student groups blaming all violent sewn
Speaker 3: Israel was a absurdity.
Speaker 2: And Greg Fleming of Rockefeller Capital Management on how investors
Speaker 2: respond to geopolitical turmoil.
Speaker 4: Investors David have a hard time measuring geopolitical risk.
Speaker 2: Global Wall Street began the week trying to absorb the
Speaker 2: awful news coming out of Israel and Amma's terrorist attack
Speaker 2: on civilians and military. As word came of death and destruction.
Speaker 1: It's simply.
Speaker 2: Depravity in the worst measurable way. And the initial Israeli
Speaker 2: responds with more on the way out of an understanding
Speaker 2: that there are civilians.
Speaker 5: Here whom are not our enemy and.
Speaker 2: We do not want to target them.
Speaker 1: We are asking them to evacuate so that we would
Speaker 1: be able to continue to.
Speaker 6: Strike military targets belonging to hamas in the Gazza stere.
Speaker 2: Even as we kept one eye on Israel, the world
Speaker 2: of finance and business went on with a major merger
Speaker 2: in the oil industry between Exxon and Pioneer. You have
Speaker 2: to become a diversified company with.
Speaker 7: Slots right into our existing unconventional business.
Speaker 2: Another initial public offering came to market, this one from Birkenstock.
Speaker 2: The first trade was at forty one bucks. This deal
Speaker 2: got priced at forty six, so you're talking about an
Speaker 2: elebor percent decline for the open. The critical CPI numbers
Speaker 2: came in on Thursday, the last read before the FEDS
Speaker 2: meeting next month.
Speaker 8: The numbers come in a little bit hotter than anticipated,
Speaker 8: with CPI up four tenths. The forecast was for a
Speaker 8: three tenths increase, but that's down from six tenths to
Speaker 8: the months before. The core comes in up three tenths,
Speaker 8: which is bang on.
Speaker 2: In the end, the markets reacted to all the turmoil
Speaker 2: this week with surprising calm. But before we go through
Speaker 2: the markets, we begin with the big story of the week,
Speaker 2: and for that we welcome Richard Hawes, now of Center
Speaker 2: Few Partners and so recently ambassador has served as President
Speaker 2: and Council of Foreign Relations for almost twenty years. So Richard,
Speaker 2: thank you so much for being here. You have a
Speaker 2: new newsletter out called Home and Away on substack. You
Speaker 2: write today about this subject, and one of the things
Speaker 2: you warn about is if Israel in fact goes into Gaza,
Speaker 2: it could create more problems than it solves. Explain.
Speaker 9: But don't get me wrong, David, I believe Israel should
Speaker 9: get involved in Gaza. It should go after those who
Speaker 9: undertook these heinous barbaric acts. It's important to say that
Speaker 9: terrorists cannot act with impunity. Israel also needs to restore
Speaker 9: the terrens, rebuild its defenses, which obviously failed. But to
Speaker 9: go in really big, I do worry would cause at
Speaker 9: least as many, if not more, problems than it would solve.
Speaker 9: You'd create a lot of sympathy for the Palestinians and
Speaker 9: for Hamas because there would inevitably be all sorts of
Speaker 9: civilian casualties. Israel itself would take many more casualties it's military,
Speaker 9: some of them would be abducted. I worry this could
Speaker 9: become the grounds for war, widening that in Lebanon and
Speaker 9: other places. Iran, using his bulla there, would take this
Speaker 9: as something of an opportunity. I think the United States,
Speaker 9: which has been rightfully so supportive of Israel up to now,
Speaker 9: would be pressured to rethink its position, maybe call for
Speaker 9: a ceasefire. So Israel really needs to think about what
Speaker 9: it does. The good news Israel does have options, and
Speaker 9: I would say what it ought to do is really
Speaker 9: two things. It ought to go in but very discreetly,
Speaker 9: where it has intelligence, go after those Hamas fighters could
Speaker 9: be very targeted on them, could be from the air
Speaker 9: could be from the ground with smaller units. Secondly, rebuild
Speaker 9: your defenses they failed. Rebuild the walls, put troops there,
Speaker 9: increase your readiness. Don't underestimate Hamas ever Again, but in
Speaker 9: Western Israel, be prepared potentially for next time, if only
Speaker 9: because you don't want there to be a next time.
Speaker 2: Talk about the specific objective of any sort of invasion
Speaker 2: of guys. It's understandable the Prime Minister Nya, who must
Speaker 2: act as you say, what was done by Hamas is
Speaker 2: beyond inexcusable, just inconceivable what happened. At the same time,
Speaker 2: the Prime Minister is said he wants to eliminate Hamas?
Speaker 2: Is that a realistic objective in Gaza?
Speaker 9: Short answers know it's to be very hard to find
Speaker 9: himas It's not like it's an army in an open
Speaker 9: battlefield with tanks and planes and the rest.
Speaker 2: Doesn't It doesn't work that way.
Speaker 9: Also, Hamas is much a movement or network, it's even
Speaker 9: an idea, David. So it's not just that you're going
Speaker 9: to create all sorts of resistance. Remember Donald Rumsfeld's quote
Speaker 9: when we were using drones to kill terrorists, How do
Speaker 9: we know we're not creating more future terrorists than the
Speaker 9: ones we're getting. I think that would come into play.
Speaker 9: So Hamas or some organization like it, some movement like it,
Speaker 9: will survive, might even be stronger afterwards. And as the
Speaker 9: Israelis learned in many places in lebanonor and Gaza, historically
Speaker 9: easier to get in than it is to get out.
Speaker 9: And when you get out, how do you know you
Speaker 9: could put something better than endoors in its place. So again,
Speaker 9: Israel needs to act, but it needs to act smart.
Speaker 9: It needs to act in a really careful way.
Speaker 2: You know Gaza, You've been to Gaza City, you know
Speaker 2: how difficult that terrain is. As it were, it's so
Speaker 2: densely popular that it'd so many buildings. One of the
Speaker 2: objectives here is to rescue the hostages, of which we
Speaker 2: don't know how many there are, but upwards of one
Speaker 2: hundred at least hostages. Is that realistic? Is it conceivable
Speaker 2: that they could go in and actually rescue the hostages?
Speaker 2: Really hard?
Speaker 9: To rescue hostages, you need totally good intelligence, then you
Speaker 9: need total surprise. That's loading assumption on assumption. I think
Speaker 9: the more likely way the hostages get out is there's
Speaker 9: a swap You've got hundreds of Hamas operatives in Israeli prisons,
Speaker 9: thousands of Palestinians from the West Bank who have the
Speaker 9: Israelis and charged with crimes. So I think if there's
Speaker 9: an exchange here, that would be the way we work. Indeed, David,
Speaker 9: one of the reasons I would argue, one of the
Speaker 9: two reasons Hamas took so many hostages was one to
Speaker 9: deter Israeli attacks, but secondly to set up this kind
Speaker 9: of a swamp.
Speaker 2: Richard, you mentioned the possibility of expanding this conflict beyond
Speaker 2: Israel and Gaza. And obviously this is first and foremost
Speaker 2: to a humanitarian issue, a tragedy and inconceivable tragedy. It
Speaker 2: also has potential economic ramifications, particularly if there's expansion. What
Speaker 2: about you mentioned Lebanon, You mentioned particularly Iran, because a
Speaker 2: lot of people on Wall Street are very concerned if
Speaker 2: this goes, for example, to involve Iran, then it could
Speaker 2: really have substantial economic effects.
Speaker 9: But they ought to be worried about that, and that's
Speaker 9: why again it's so important it's not widened. I think
Speaker 9: the United States or to let Iran know that it
Speaker 9: will be held accountable for anything that Habola does. As
Speaker 9: well as not an independent entity. I think we may
Speaker 9: be able to get the Chinese involved. China's the principal
Speaker 9: importer of Iranian oil. If the Chinese don't want to
Speaker 9: see that oil flow interrupted by American arms, they may
Speaker 9: want to lean on Iran terrain in Hbola. There's things
Speaker 9: we can and should do here because this could grow,
Speaker 9: could grow.
Speaker 2: In other ways too day.
Speaker 9: But you can imagine Arab regimes around the region threatened
Speaker 9: potentially by public unrest if things get bad enough in Gaza,
Speaker 9: so in the Middle East. One of the rules of history,
Speaker 9: as bad as things get, they can all always get worse.
Speaker 9: That ought to be one of our goals here. By
Speaker 9: our I mean the United States and Israel to manage this.
Speaker 2: Richard, you are a career diplomat, and from what I've
Speaker 2: read of history, typically these things are resolved ultimately through
Speaker 2: some sort of agreement, not throughout and out warren destruction
Speaker 2: of the other side. It's too early to really move forward,
Speaker 2: I'm sure on diplomacy, but it may not be too
Speaker 2: early to think about what that might look like down
Speaker 2: the road and position ourselves.
Speaker 9: I think I have to think about tranches or phases
Speaker 9: we talked about one which is a prisoner for a
Speaker 9: hostage swap. I can imagine some kind of a ceasefire
Speaker 9: or modus vivendi agreement. The big question, though, is how
Speaker 9: do you make some progress on the Palestinian issue. Wildly optimistic, ambitious,
Speaker 9: I get it, but I think what we've learned, David
Speaker 9: is normalization between Israel and Arab governments can only go
Speaker 9: so far. It can't survive if you will absent or
Speaker 9: apart from the Palestinians totally. There's got to be a
Speaker 9: Palomestinian dimension to this. It won't be with hamas they
Speaker 9: have ruled themselves out for time immemorial. But Israel needs
Speaker 9: a Palestinian partner. Israel needs a Palestinian state, not as
Speaker 9: a favorite to the Palestinians, as a favor to itself.
Speaker 9: If Israel is going to remain a democratic, Jewish, secure,
Speaker 9: prosperous state, it needs a Palestinian state that's willing to
Speaker 9: coexist with it peacefully. That has to be the long
Speaker 9: term goal of Israeli and American foreign policy and diplomacy.
Speaker 2: I know how difficult it is.
Speaker 9: I spent decades working on it, but I think what
Speaker 9: we've learned the hard way of the last few days.
Speaker 9: In a vacuum where there is no hope, then if
Speaker 9: the only game in town is terrorists, terrorists will do
Speaker 9: with terrorists do, and we can't allow that to be
Speaker 9: the only game in town.
Speaker 2: There are those who specula that we can't know. Certainly,
Speaker 2: I can't know what was really in Hamas's mind, but
Speaker 2: there are those who speculating part of the triggering banked.
Speaker 2: Here were reports about a possible arrangement with Saudi Arabia, Israel,
Speaker 2: and the United States, even at this late date in
Speaker 2: understanding Saudi Arabia right now said they're going to suspend
Speaker 2: that talks about really reconciling with Israel. Is there a
Speaker 2: potential constructive rule for Saudi Arabia in this sort of
Speaker 2: solution you described so, I think you're right.
Speaker 9: I think Hamas at Iran's Behess probably wanted to normalization.
Speaker 9: Hamas also wanted to do its version of station identification.
Speaker 9: They like to portray themselves. It's the only Palestinian entity
Speaker 9: willing and able to take on Israel. Look Saudi Arabia,
Speaker 9: the Crown prins MBS wants to normalize with Israel. He
Speaker 9: can't in this setting right now. It's too volatile, the
Speaker 9: Palestinian angles too uncertain, but it's important, but they still.
Speaker 2: Want to do it.
Speaker 9: Saudi Arabia wants the security pack with the United States.
Speaker 9: They want a nuclear program that the United States supports.
Speaker 9: So yes, I think we already get Saudi Arabia involved,
Speaker 9: and that could be one of the ways again to
Speaker 9: work with Israel, which wants normalization with Saudi Arabia. That's
Speaker 9: one of the reasons Israel might need to think more
Speaker 9: creatively about what they hold out as a possibility to
Speaker 9: Palestinians who are willing to live with it in peace.
Speaker 2: Richard, thank you so very much for spending time with us.
Speaker 2: That is Richard has now Centerview Partners. Coming up, we
Speaker 2: go through the market reaction to a very busy week
Speaker 2: with Mona Mahajen of Edward Jones. That's next on Walfree
Speaker 2: Week on Bloomberg.
Speaker 1: This is Bloomberg Well Street Week with David Weston from
Speaker 1: Bloomberg Radio.
Speaker 2: This is Wall Street Week. I'm David Weston. There was
Speaker 2: plenty for the markets that digests this week, including but
Speaker 2: going beyond, events in the Middle East. In the end,
Speaker 2: the S and P five hundred was up almost a
Speaker 2: half a percent end at forty three twenty eight, while
Speaker 2: the Anasdak lost almost two tens of percent. While the
Speaker 2: real ups and downs really were once again over in
Speaker 2: the bond market, with the yield on the tenure starting
Speaker 2: the week up over four point eight to zero and
Speaker 2: giving up over eighteen basis points in a shortened trading
Speaker 2: week to end up at four point six y two.
Speaker 2: Take us through what we saw. Welcome back now, Monhama Hodgen.
Speaker 2: She is Edward Jones, Senior Investment Strategeres Mada. Great to
Speaker 2: have you back with us. Let's start with that bond activity.
Speaker 2: It has been pretty busy in the bond market in
Speaker 2: the last couple of weeks. Last week was how the
Speaker 2: yields go way up this week they came in. What
Speaker 2: was the cause of it as far as you could say,
Speaker 2: how much of that was safe haven because of the
Speaker 2: geopolitical turmoil?
Speaker 10: Yeah, thanks David. What a harrowing week in the headlines,
Speaker 10: But to your point, markets held in there. There was
Speaker 10: a lot of resilience coming out of the broader s
Speaker 10: and P five hundred in particular, and we do think
Speaker 10: part of that was driven by this flight to safety
Speaker 10: or safe haven response. So typically when a geopolitical crisis hits,
Speaker 10: you see investors flock towards areas like the dollar, like gold,
Speaker 10: and like treasury bonds. So all three of those played
Speaker 10: out this week, but most notable for markets was the
Speaker 10: flight to treasury bonds, which pushed yields notably lower. So,
Speaker 10: as you just showed in that chart, yields had been
Speaker 10: climbing almost two highs of this cycle just as of
Speaker 10: last week, and this week they reversed that course. So
Speaker 10: that brought some much needed relief for broader equity markets.
Speaker 10: And it's interesting, even though equity markets did end up higher,
Speaker 10: where did people and where did investors hang out? Well,
Speaker 10: we really saw outperformance come from the defensive parts of market,
Speaker 10: areas like consumer staples, like utilities, some of those interest
Speaker 10: rate sensitive parts of market like real estate. So it
Speaker 10: wasn't necessarily a tech driven or AI rally that we've
Speaker 10: seen really in recent weeks as well. So more broadly,
Speaker 10: we'd say this move in treasury yields was partly a
Speaker 10: flight to safety response, partly maybe last week was a
Speaker 10: top in the near term for yields. We certainly heard
Speaker 10: a couple of Fed officials this week talk about maybe
Speaker 10: a pause in the rate hiking cycle. We do think
Speaker 10: there may be some volatility ahead, especially as there's uncertainty
Speaker 10: around these auctions that are coming up. But more broadly,
Speaker 10: we think the trend over time could be stability and
Speaker 10: hopefully a move lower.
Speaker 2: So let's talk about that moment specifically. You talked about
Speaker 2: highs of the cycle on a top what leads you
Speaker 2: to believe that maybe that's what we've seen. We also
Speaker 2: got some CPI numbers that were a little bit high
Speaker 2: this week, a little hot. We had University of Michigan
Speaker 2: sentiment coming in with increased expectations of inflation. So what
Speaker 2: makes you think that maybe we've seen the high of
Speaker 2: the cycle on the tenure, Yeah.
Speaker 10: It was interesting. The inflation prints were certainly mixed. We
Speaker 10: had again a little bit of a tick higher and
Speaker 10: headline inflation and the gradual move lower and core inflation.
Speaker 10: But even despite the mixed inflation numbers, which normally would
Speaker 10: have spooked markets and driven treasure yields higher, we saw
Speaker 10: a pretty muted response. So treasure yields were steady today.
Speaker 10: We actually saw another move lower, and in our view,
Speaker 10: you know, while we do think there's volatility always around
Speaker 10: the bond market. We do think the FED and really
Speaker 10: global central banks may be looking towards a pause. The
Speaker 10: FED has already talked about rate cuts in twenty twenty four. Now,
Speaker 10: what are some of the counters to this. Well, certainly
Speaker 10: the US has incurred a lot of deficits over time,
Speaker 10: and those deficits will have to be funded, and we've
Speaker 10: seen that. You know, this week we had a thirty
Speaker 10: year yield auction. There wasn't as much demand as we
Speaker 10: had hoped. That did temporarily drive yields higher and we
Speaker 10: saw sell off in the market. So we may get
Speaker 10: bouts of volatility like that, but we think generally the
Speaker 10: direction of travel, especially as a FED, you know, it's
Speaker 10: very much doing the quantitative tightening. Now it's not a
Speaker 10: big buyer in the bond space, but over time that
Speaker 10: program may stabilize as well. So we do think over
Speaker 10: time we'll see central banks kind of coordinate in a
Speaker 10: pause and pivot lower, which will put some downward pressure
Speaker 10: on the bond deal space.
Speaker 2: That just was only asked, what is the volatility in
Speaker 2: the bond market, and particularly on the long end in
Speaker 2: the thirty year that we've seen. As you say, there
Speaker 2: aren't as many buyers because the FED is out of
Speaker 2: the game and there are questions about what's going with
Speaker 2: China and Japan as well. At the same time, the
Speaker 2: supply is really really large. Are you concerned at all
Speaker 2: about increased volatility in the bond market or do you
Speaker 2: think it's going to settle back down if why?
Speaker 10: Yeah. You know, what we'd say broadly is the environment
Speaker 10: we really had that propelled a lot of these growth
Speaker 10: stocks and risk appetite over the last ten years. And
Speaker 10: you know, post financial crisis was an environment where the
Speaker 10: FED was closer to the zero bound and treasurreye olds
Speaker 10: were in the one and a half to two percent range.
Speaker 10: When we think about the next ten years, it could
Speaker 10: look very different. So to your point, we don't expect
Speaker 10: the FED to go back to the zero bound, and
Speaker 10: we do think treasuries may remain elevated versus history, so
Speaker 10: maybe somewhere in the three to four percent range. So
Speaker 10: in that environment, you really do have to think about
Speaker 10: acid allocation maybe a bit differently. You know, growth and
Speaker 10: value you or maybe a combination of both makes more sense.
Speaker 10: And certainly bonds have a better or more substantial role
Speaker 10: in your portfolio. You can now get yields, you can
Speaker 10: now get some potential for appreciation. If over time we
Speaker 10: do get treasure fields moving lower, that does support investment
Speaker 10: grade and longer duration bonds as well. So what we'd
Speaker 10: say overall is, while we may not stay at these
Speaker 10: elevated levels, we certainly don't expect to return to where
Speaker 10: we saw in the last decade. As well.
Speaker 2: You're also going to yield out of cash or cash
Speaker 2: equivalents like CDs and things like that. Are your clients
Speaker 2: going into CDs because it can be pretty attractive right now,
Speaker 2: and goodness knows, it's pretty flexible, not much risk there.
Speaker 10: Yeah, it's certainly interesting, especially when we get these headlines
Speaker 10: and volatility, politics, geopolitics. There is this natural response, should
Speaker 10: I just hide out in the CDs? They're offering five
Speaker 10: percent plus?
Speaker 9: You know?
Speaker 10: Our response is always, look, they are attractive for now.
Speaker 10: They have some interesting yields, really what we haven't seen
Speaker 10: in any time in recent history. So we understand the appeal.
Speaker 10: But for long term investors there's a few risks, one
Speaker 10: reinvestment risks, So over time those yields may not be there,
Speaker 10: they may start moving lower, so when you have to
Speaker 10: reinvest those CDs, it may be a lower rate. Two,
Speaker 10: there's an opportunity cost, and we've already seen the S
Speaker 10: and P five hundred up about twelve percent this year,
Speaker 10: even with the volatility, and so you know already it's
Speaker 10: exceeded that five percent or so cash like yields. And
Speaker 10: then thirdly, you know we've seen historically over time cash
Speaker 10: relative to really any other asset class has underperformed. So
Speaker 10: for long term investors, we would certainly recommend complementing slowly
Speaker 10: some of that CD cash like money with longer duration
Speaker 10: parts of the market, with strategic acid allocations, you know,
Speaker 10: that are aligned to your goals longer term. So that's
Speaker 10: what gets you to meet or exceed your financial quicker.
Speaker 2: Resu And do you need to go into bonds and
Speaker 2: for fear that maybe the fids are going.
Speaker 10: To start cutting rates, You know, we do think that
Speaker 10: there is an attractive opportunity and really it's compelling versus
Speaker 10: anytime in recent history for that longer duration part of
Speaker 10: the market in the investment grade space, and usually historically
Speaker 10: that period between a FED pause and that first cut
Speaker 10: is your opportunity. Markets start pricing it in very quickly
Speaker 10: as the sped starts signaling rate cuts ahead. So we
Speaker 10: think the months ahead could provide that window of opportunity
Speaker 10: for bond investors really like we haven't seen in recent years.
Speaker 10: And so we do think there's a compelling opportunity for
Speaker 10: bond investors in the mind.
Speaker 2: Why did we actually get to that pause? Thank you
Speaker 2: so much to Monamahadjen of Edward Jones. Coming up, we
Speaker 2: turn to the world of real estate in a time
Speaker 2: of higher rates with Kathy Marcus co CEO of Pgium
Speaker 2: real Estate.
Speaker 5: I think sellers are having a very tough time coming
Speaker 5: to term with the new prices.
Speaker 2: That's next on Wall Street Week on Bloomberg.
Speaker 1: This is Bloomberg Wall Street Week with David Weston from
Speaker 1: Bloomberg Radio.
Speaker 2: Repricing the world. That's what sharply higher rates mean for
Speaker 2: just about every asset.
Speaker 11: Class starting in the mid sixties who had an inverse
Speaker 11: correlation between bond yields and stock prices. Then you went
Speaker 11: for about a twenty twenty five year period where for
Speaker 11: most of the time you had a positive correlation. We're
Speaker 11: back in negative correlation territory.
Speaker 2: We're seeing it in stocks.
Speaker 12: By observation over I don't know forty years or so
Speaker 12: of watching equity markets is that they are keenly attuned
Speaker 12: to interest rates as a more direct transmission mechanism to
Speaker 12: equity prices, simply because interest rates are our discount, our
Speaker 12: discount rate on future cash flows.
Speaker 2: We're seeing it in the drop off in M and
Speaker 2: A activity as sellers come to terms with the new
Speaker 2: lower prices that buyers are willing to pay.
Speaker 7: We're certainly beginning to see a significantly a greater amount
Speaker 7: of activity. It hasn't manifested itself yet in announced transactions,
Speaker 7: but announced M and A for the first six months
Speaker 7: of the year was down.
Speaker 2: And boy, are we seeing it in bonds.
Speaker 4: We're more or less in the range for treasuries that
Speaker 4: we're that we're going to see.
Speaker 2: But perhaps no asset class has been hit harder by
Speaker 2: the jumping rates than real estate, and in particular commercial real.
Speaker 6: Estate financing is harder to get today because of concerns
Speaker 6: about real estate, and also buildings have to have strong
Speaker 6: cash flows to support the higher interest rates that are
Speaker 6: associated with financing.
Speaker 2: Leaving investors to wonder whether now is the time to
Speaker 2: pick up some bargains or whether they'd be trying to
Speaker 2: catch a falling knife.
Speaker 13: I think the banks in the US will lose hundred
Speaker 13: and fifty billion dollars in office over time here, and
Speaker 13: they are about there's about two trillion of equity in
Speaker 13: the bank, so it's like a ten percent hit to
Speaker 13: US banking equity. But I really think the focus on
Speaker 13: losses in US commercial real estate is going to be
Speaker 13: in the office.
Speaker 2: Sector and to sort through the bargains from the falling
Speaker 2: knives in real estate. We welcome to somebody who knows
Speaker 2: the area terribly well, Kathy Marcus. She is PGIM real
Speaker 2: Estate co CEO and GLOE COO. Kathy, Welcome to Wall Street.
Speaker 2: Great to have you here.
Speaker 12: Thank you.
Speaker 2: So lots going on with real estate, in part because
Speaker 2: of what's gone on with rates. Start with the beginning question,
Speaker 2: there's been sort of a repricing of real estate because
Speaker 2: of those higher rates. Where are we in that process.
Speaker 5: Well, there are really two parallel repricings that are going
Speaker 5: on right now, one which has already happened and potentially
Speaker 5: over corrected a little bit, which are the public real
Speaker 5: estate markets, the re market, and then the private real
Speaker 5: estate markets, which have taken much much more time and
Speaker 5: where we might be you call it sixty to seventy
Speaker 5: percent through and that is an average because the different
Speaker 5: sectors are behaving very, very differently. The fundamentals are very
Speaker 5: different among the different sectors, and the impact that rates
Speaker 5: have had on the valuations and the private valuation process
Speaker 5: in general is a little bit different and had the
Speaker 5: experiences have been different for the different sectors on the
Speaker 5: private side.
Speaker 2: Are sellers having a tough time coming to terms of
Speaker 2: the new prices?
Speaker 5: I think sellers are having a very tough time coming
Speaker 5: to term with the new prices and the gap between
Speaker 5: where buyers and sellers think things should trade, and then
Speaker 5: overlay that with where the lenders may or may not
Speaker 5: be willing to lend. The transactions market is so muted
Speaker 5: right now. I can't actually remember a time that it's
Speaker 5: been dismuted before, and it's only gotten worse since rates
Speaker 5: have spiked, you know, really just recently.
Speaker 2: Well, if you have to refinance in this world is
Speaker 2: a very different world from just two or three years ago,
Speaker 2: at what point to do a lot of the sellers
Speaker 2: have to refinance and it really has to change what's
Speaker 2: going on.
Speaker 5: Well, that will happen over time and there are, you know,
Speaker 5: maturities that are coming up. There are maturities that have
Speaker 5: already occurred where there's been a bit of a kicking
Speaker 5: the can down the road, particularly in the office sector.
Speaker 5: So if you think about it and office loan matures
Speaker 5: and so what normally happens. You could refinance that office
Speaker 5: asset generally at the same or higher loan balance, or
Speaker 5: you could sell the asset. Neither one of those things
Speaker 5: is really possible right now. The option that's available to
Speaker 5: people right now is to potentially extend the loan, and
Speaker 5: often that requires some sort of an equity paydown, which generally,
Speaker 5: particularly office space, is not that appealing to borrowers because
Speaker 5: in some cases they feel like they're throwing good money
Speaker 5: after that.
Speaker 2: So that's office space. As you suggest that, there are
Speaker 2: a lot of different parts that come under real estate,
Speaker 2: and there's a big variety. Where are there some opportunities
Speaker 2: out there right now that you're interested, particularly within the
Speaker 2: broader real estate market.
Speaker 5: I'm really glad you mentioned that, because it is definitely
Speaker 5: a common misconception that the office sector dominates the investable
Speaker 5: universe in real estate, and that's not the case. It's
Speaker 5: never been the case that it's dominated. It certainly has
Speaker 5: been higher than it is right now. But in the
Speaker 5: private markets, if allocations to office were in the high
Speaker 5: forty percent range, they're now about twenty percent. And in
Speaker 5: the public markets, the percentage of the read index that
Speaker 5: is pure office is hovering somewhere around five percent. So
Speaker 5: it is far less of a sort of eight hundred
Speaker 5: pound gorilla than it was at one point. But I
Speaker 5: do think that gets a little bit overblown in terms
Speaker 5: of where we see opportunity right now, the operative term
Speaker 5: is necessity things like housing, things like grocery, anchored retail,
Speaker 5: things like infi logistics. So the basic necessities of life.
Speaker 5: We call them sort of necessity retail necessity properties. It's food,
Speaker 5: shelter and your Amazon deliveries, right, the things that nobody
Speaker 5: can live without.
Speaker 2: Talk about shelter just for a moment, because we are
Speaker 2: hearing about the possibility that it's difficult or even impossible
Speaker 2: to get insurance for some housing. Now, certainly we have
Speaker 2: issues in California, We've had them in Florida. How is
Speaker 2: that affecting the marketplace?
Speaker 5: It's impacting all kinds of property. It's not just single
Speaker 5: family homes, which is really where the headlines tend to be.
Speaker 5: But in certain markets in California, in Florida, so many
Speaker 5: Insuran have pulled out of those markets because of all
Speaker 5: of the losses that they've had with climate issues over
Speaker 5: the past couple of years, to the point that you're
Speaker 5: really talking about order of magnitude about thirty percent increases
Speaker 5: year over year for the past couple of years in
Speaker 5: insurance coverage. So that's obviously very difficult for individual homeowners,
Speaker 5: but it's also difficult for investors, those.
Speaker 2: Of us who are basically I says, tend to be
Speaker 2: US centric and our thinking, particularly when it comes to
Speaker 2: real estate. Yes, but there's real estate around the world.
Speaker 2: As you look around the world, do you see markets
Speaker 2: that are particular opportunities right now?
Speaker 5: There are certainly markets where the dynamic is different and
Speaker 5: that can create opportunity. And in particular where I would
Speaker 5: say there's great opportunity is in Mexico in the industrial
Speaker 5: space and particularly along the border, and you have a
Speaker 5: lot of multinational companies that are located there looking for
Speaker 5: logistics and distribution type space, and many of those leases
Speaker 5: their dollars denominated, so you have kind of the premium
Speaker 5: over a very similar You can have an Amazon build
Speaker 5: south of the border or Amazon building north of the border,
Speaker 5: and there's a pretty significant spread in those yields. So
Speaker 5: that I find to be very interesting and we find
Speaker 5: that to be a very compelling investment right now. If
Speaker 5: I go to Asia, the markets are functioning, you know,
Speaker 5: much more normally in Asia than they are in the
Speaker 5: US and or Europe. And while transactions activity is definitely
Speaker 5: muted there, it's not in the same scale that it
Speaker 5: is in terms of the decrease for Europe and Asia.
Speaker 10: And Europe.
Speaker 5: Really the repricing there, I think is a little bit
Speaker 5: further along than it is in the US. But the
Speaker 5: interest rates you know, obviously really impacting the European market.
Speaker 5: The European banks are pretty much out of the market
Speaker 5: from a lending perspective, and that has been composed a
Speaker 5: little bit even more stress on that market. And we
Speaker 5: have to consider the fact that while you know, the
Speaker 5: rising interest rates we've been at about a little more
Speaker 5: than a year here in the US where that's had
Speaker 5: a huge impact, but Europe was you know, really immediately
Speaker 5: impacted by the Ukraine War, and so it's been just
Speaker 5: a longer period of distress in Europe.
Speaker 2: I've heard said Kathy that every business at this point
Speaker 2: is a tech business. I'm not sure if that's right,
Speaker 2: but certainly tech is changing your business. How is it
Speaker 2: changing your business?
Speaker 5: It's changing our business in many many ways. And you
Speaker 5: might have seen that we recently launched an innovation lab,
Speaker 5: and that is multi pronged in terms of having leveraging
Speaker 5: AI and data, in particular our proprietary data from our
Speaker 5: platform in order to have better investment outcomes. But another
Speaker 5: really big and actually quite important aspect of the research
Speaker 5: and development and investment that we intend to do in
Speaker 5: technology through our lab, with our university partners and with
Speaker 5: other technology companies is to address issues around climate and ESG.
Speaker 5: And it's very interesting in the real estate space because
Speaker 5: there really isn't that kind of controversy around ESG that
Speaker 5: you might find in other sectors. You know, having lower
Speaker 5: energy costs and using less water, that's just more income
Speaker 5: for you as an investor in real estate, and that's
Speaker 5: just going to improve your value. So we really have
Speaker 5: a great focus on that. And if you think about
Speaker 5: you know how many companies have made net zero pledges
Speaker 5: by twenty fifty. The only way to get there is
Speaker 5: really to have technology, to use technology, most of which
Speaker 5: does not exist.
Speaker 2: Kathy's great to have you on Willshret Week. Thank you
Speaker 2: for being here. That's Kathy Marcus. She's PGUM real Estate
Speaker 2: co CEO and Global COO. Coming up, A deadly game
Speaker 2: of chess plays out in the Middle East. We go
Speaker 2: through the moves with Bloomberg Senior market editor John Authors.
Speaker 2: That's next on Wall Street Week on Bloomberg. Ok, okay,
Speaker 2: this is Wall Street.
Speaker 1: Weeek.
Speaker 2: I'm David weston. The tragic warren Israel inflamed sentiments around
Speaker 2: the world, and as people very publicly chose sides, it
Speaker 2: drew some institutions into the controversy, including Harvard, which even
Speaker 2: its former president Larry Summers, took issue.
Speaker 3: With the statement by thirty student groups blaming all violents
Speaker 3: on Israel was a moral absurdity that appeared to reflect
Speaker 3: views at Harvard, and I thought it was very important
Speaker 3: that the Harvard administration, the Harvard leadership made clear that
Speaker 3: those students were not speaking for the Harvard community. And
Speaker 3: at the same time, in the same way that previous
Speaker 3: leaders flew the Ukrainian flag over Harvard Yard after Putin's
Speaker 3: invasion in the same way that Harvard stood with America
Speaker 3: after nine to eleven, I thought it was appropriate for
Speaker 3: there to be a strong Harvard statement condemning in the
Speaker 3: strongest possible terms Tomas terrorism, and after a couple of
Speaker 3: days without such a statement, that I expressed my view publicly,
Speaker 3: having expressed it privately before. There was an initial statement
Speaker 3: that frankly I wasn't very strong and didn't distance Harvard
Speaker 3: from the student groups. And now I'm glad to report
Speaker 3: that President Gay has condemned terrorism in strong terms and
Speaker 3: has distanced Harvards from the thirty student group.
Speaker 2: Thanks to our special contributor to Larry Summers of Harvard.
Speaker 2: Our one more thought this week. It comes from our
Speaker 2: senior markets editor, John Arthur's.
Speaker 14: At this point, I think we are fully discounting the
Speaker 14: obvious next step, which is that this will lead to
Speaker 14: a broader Israeli incursion into the Gaza Strip and what
Speaker 14: could obviously be quite an ugly land war. But the
Speaker 14: idea that that is going to have any collateral consequences,
Speaker 14: or that it's going to spread into southern Lebanon, Hezbola,
Speaker 14: Iran most significantly, at this point, I would say, isn't
Speaker 14: priced in by the markets at all. I'm not saying
Speaker 14: it should be priced in as one hundred percent as
Speaker 14: a certainty, but the risks are so great that we
Speaker 14: do get that kind of escalation that I'm surprised markets
Speaker 14: are as calm as they are. If it spreads to Iran,
Speaker 14: that's the single biggest question. And once it spreads to
Speaker 14: Iran again, it depends exactly how it does so how
Speaker 14: far it goes. But then comparisons to the Yom Kiporl
Speaker 14: war in nineteen seventy three at least become possible. You
Speaker 14: can see why the Israeli aim, after the appalling things
Speaker 14: that Hamas has just done, would be to eliminate Hamas.
Speaker 14: You can also see that that's going to be really
Speaker 14: difficult to do and possible, arguably impossible to do without
Speaker 14: causing the kind of civilian casualties that other people are
Speaker 14: not going to be able to tolerate. That that will
Speaker 14: create a broader disturbance across the region. I don't really see.
Speaker 14: It would be wonderful if there was, if there was
Speaker 14: some kind of a deal whereby even the Saudi Arabians
Speaker 14: felt comfortable to recognize Israel, that's conceivable, But the whole
Speaker 14: point of this exercise appears to have been to stop
Speaker 14: that from happening. Obviously, it would be really wonderful if
Speaker 14: the Israeli Palestinian question itself could be resolved. I don't
Speaker 14: myself see how these appalling events have brought that any closer.
Speaker 14: The idea of an outcome in which both Israelis and
Speaker 14: Palestinians considered to be just unfair is further away than ever,
Speaker 14: which is a tragedy. But I just don't quite see
Speaker 14: how that's kind of a positive outcome is available, how
Speaker 14: we would expect to get there from here?
Speaker 2: That does it? For this episode of Wall Street Week,
Speaker 2: I'm David Weston. This is Bloomberg. See you next week.