WEBVTT - Uncertainty for Venture Banking Following SVB Collapse 0:00:01.280 --> 0:00:05.640 This is Bloomberg business Week Inside from the reporters and 0:00:05.840 --> 0:00:09.400 editors who bring you America's most trusted business magazine, plus 0:00:09.480 --> 0:00:13.640 global business, finance and tech news. The Bloomberg Business Week 0:00:13.680 --> 0:00:18.600 Podcast with Carol Messer and Tim Stenebec from Bloomberg Radio. 0:00:20.000 --> 0:00:21.880 Remember the movie Damian. I don't know if you remember this. 0:00:21.920 --> 0:00:25.040 The day after it was nineteen eighty three. ABCTV streaming 0:00:25.480 --> 0:00:28.640 wasn't even on our narrative day after a nuclear war, 0:00:28.880 --> 0:00:33.879 god forbid. Today, very different scale, but it does kind 0:00:33.880 --> 0:00:35.879 of feel like the day after. We've had twenty four 0:00:35.920 --> 0:00:38.360 more hours to kind of think about what happened over 0:00:38.400 --> 0:00:40.680 the weekend, and it does feel like some calmness has 0:00:40.680 --> 0:00:43.319 come in, has come in, has come back to the market. Yeah, 0:00:43.360 --> 0:00:45.040 but I think, you know, the whole episode is definitely 0:00:45.040 --> 0:00:47.320 revealing puddles in the US economy right now. We're seeing 0:00:47.360 --> 0:00:49.040 some things deep down. You know. I'm really excited to 0:00:49.080 --> 0:00:51.280 get Johnson of JP Morgan in later in the show. 0:00:51.320 --> 0:00:53.600 He's going to tell us what's going on in US housing. 0:00:53.640 --> 0:00:55.600 I mean, for me, that is the key element here. 0:00:55.600 --> 0:00:57.480 If you talk about SVB, you talk about you know, 0:00:57.520 --> 0:00:59.600 what went wrong there. It wasn't necessarily that they were 0:00:59.680 --> 0:01:01.480 lending to venture It was that they had stuff on 0:01:01.480 --> 0:01:03.800 their balance sheet they shouldn't have. Well, speaking of venture, 0:01:03.840 --> 0:01:06.959 we've got a great knowing perspective with us from the 0:01:07.040 --> 0:01:11.039 venture capital world. Longtime venture capitalist Alan Patricof, chairperson co 0:01:11.120 --> 0:01:14.520 founder at Primetime Partners, author of No Red Lights Reflections 0:01:14.520 --> 0:01:17.360 on life fifty years in venture capital and Never Driving Alone. 0:01:17.480 --> 0:01:20.880 Great book, He joins us via zoom from New York City. 0:01:21.280 --> 0:01:23.039 I can say great because Alan joined us to talk 0:01:23.080 --> 0:01:26.080 about it before. Alan, good to have you here with 0:01:26.160 --> 0:01:29.520 Damian myself. It is twenty four hours you got. You 0:01:29.520 --> 0:01:32.440 were gracious enough to join some of our colleagues on 0:01:32.480 --> 0:01:36.440 TV yesterday as you're thinking about Silicon Valley and the 0:01:36.520 --> 0:01:42.360 impact the venture world and capital raising fundraising world four 0:01:42.480 --> 0:01:47.480 startups changed at all. Well, clearly it's got to change 0:01:47.520 --> 0:01:50.920 somebody after what happened yesterday. And you know, as you 0:01:51.040 --> 0:01:53.800 just said a second ago, that the full wasn't really 0:01:54.240 --> 0:01:56.560 in with the venture capitalis. It was the full with 0:01:56.600 --> 0:02:00.560 the bank itself. And as far as I can tell emails, 0:02:00.600 --> 0:02:03.960 I've been getting the bank is back in business again. 0:02:04.480 --> 0:02:07.600 Uh and and based on their own words or lending 0:02:07.640 --> 0:02:11.760 money and I've gotten an email from another bank besides SVB, 0:02:11.919 --> 0:02:15.760 and they are lending money. And the big question over 0:02:15.800 --> 0:02:19.560 the weekend, which you know, unnerved everybody, including me, even 0:02:19.600 --> 0:02:24.440 though I frankly had very little exposure, thank god, so 0:02:24.480 --> 0:02:28.239 I had a little bit less less violent weekend and 0:02:28.400 --> 0:02:33.680 some but it was the concern over the deposits, and 0:02:34.360 --> 0:02:36.880 and I you know, said this broadly over the weekend. 0:02:37.120 --> 0:02:39.919 There was no way the banking system, the stock market 0:02:39.919 --> 0:02:42.360 could open on Monday without solving the problem. And I 0:02:42.360 --> 0:02:46.120 think the government did a great job in solving the 0:02:46.320 --> 0:02:50.960 deposit problem and taking over a couple of banks, and 0:02:51.520 --> 0:02:53.720 so no worry about contagion. Do you think we're done? 0:02:54.960 --> 0:02:59.040 Uh well, no, yes, I think contagion a sense you're 0:02:59.120 --> 0:03:02.400 thinking of. I think the contagion is how it's going 0:03:02.440 --> 0:03:07.520 to affect loans and draw downs from banks and what 0:03:07.639 --> 0:03:10.799 kind of lending they're going to do, and how that 0:03:11.480 --> 0:03:15.639 will affect the industry going forward, because venture lending has 0:03:15.760 --> 0:03:19.359 been a you know, on the edge of the traditional 0:03:19.400 --> 0:03:24.000 banking system and now you know, all of these loans 0:03:24.040 --> 0:03:28.400 and people's nervousness about being able to draw down loans 0:03:28.440 --> 0:03:33.000 in an appropriate fashion timely and whether they really existed 0:03:33.040 --> 0:03:36.800 the bigger The first question was deposits. The second moment 0:03:37.840 --> 0:03:39.240 was if you had a line, are you gonna be 0:03:39.280 --> 0:03:42.760 able to draw down? And obviously they are drawing down 0:03:42.760 --> 0:03:46.400 on all their deposits axsume me and all their lines 0:03:46.680 --> 0:03:49.560 and have made a point of setting we're open for business. 0:03:49.640 --> 0:03:54.880 So I would say that we're back. We can't be 0:03:54.960 --> 0:03:58.800 back to normal. People have to have some second thoughts now. 0:03:59.000 --> 0:04:01.600 Is so how they go forward and basically in terms 0:04:01.640 --> 0:04:04.240 of lending lines and how much they could depend on it. 0:04:04.280 --> 0:04:07.560 I'm surely wanted to. I mean, Alan, look, you've had 0:04:07.600 --> 0:04:10.560 an unbelievable career, right, I mean in your autobiography entitled 0:04:10.560 --> 0:04:12.640 No Red Lights, which released last year, you discussed not 0:04:12.680 --> 0:04:14.920 only the successes of your career but also the failures. 0:04:14.920 --> 0:04:17.760 And one that stood out for me was your that 0:04:17.800 --> 0:04:19.839 you didn't make an investment in Starbucks. I want you 0:04:19.839 --> 0:04:21.719 to take that forward to Chair Powell when he writes 0:04:21.760 --> 0:04:25.200 his autobiography and he has to discuss his failures. Is 0:04:25.240 --> 0:04:27.000 he going to have to state that he was late 0:04:27.040 --> 0:04:28.840 to the game on inflation and that the FED is 0:04:28.880 --> 0:04:30.640 behind the curve or do you think that you know 0:04:30.680 --> 0:04:32.720 they can manage through this and we can achieve that 0:04:33.080 --> 0:04:36.560 soft landing. Well, you really are stretching the point of 0:04:36.920 --> 0:04:41.600 of my making mistake of not investing in a coffee 0:04:41.640 --> 0:04:48.200 chap like that one with the strengths that affect the world. Yeah. Probably, 0:04:49.600 --> 0:04:53.400 You know, the acceleration of rate increasing rates didn't help 0:04:53.440 --> 0:04:55.880 the situation, but you have to understand that did not 0:04:56.040 --> 0:04:59.360 have an impact on the venture business per se, or 0:05:00.279 --> 0:05:03.799 that were outstanding. I think that that didn't topple anything. 0:05:04.480 --> 0:05:08.279 I would personally say that this would not be the 0:05:08.320 --> 0:05:11.440 best time to increase rates again next week. I would 0:05:11.520 --> 0:05:13.800 let the market settle down a little bit here and 0:05:13.839 --> 0:05:18.400 get used to what's happened. But I think the whole 0:05:19.160 --> 0:05:23.560 the real challenge the industry is thinking about venture banking, 0:05:23.680 --> 0:05:27.400 the venture at the sdpiece of the world, which there's 0:05:27.480 --> 0:05:30.280 more at least a dozen or two dozen like that. 0:05:31.640 --> 0:05:35.880 How what role are they going to play going forward? 0:05:36.160 --> 0:05:37.920 How much are you going to depend on those kind 0:05:37.920 --> 0:05:43.560 of lines. The government has clearly done a great job, 0:05:43.640 --> 0:05:47.080 and the fact not just that all the deposits are safe, 0:05:47.080 --> 0:05:50.680 but the fact that they're telling everybody go forward and 0:05:50.839 --> 0:05:54.320 keep lending on the same basis is really a very 0:05:54.360 --> 0:05:59.719 strong sign that the government is standing behind these banks 0:05:59.720 --> 0:06:02.000 and does not want to see well you know, well Alan, 0:06:02.080 --> 0:06:03.960 not just the government, cosal Ventures is going to be 0:06:03.960 --> 0:06:06.320 backstopping pay for some of its impacted companies. Is that 0:06:06.360 --> 0:06:08.320 going to be a role that you know, VC funds 0:06:08.360 --> 0:06:10.279 are going to have to take on in the future, 0:06:10.320 --> 0:06:12.320 you know, being that sort of backstop is something should 0:06:12.360 --> 0:06:16.640 go wrong with the bank and should they Yeah, you know, 0:06:17.000 --> 0:06:20.880 it's misleading to say banks their backstop. They're not doing that. 0:06:21.160 --> 0:06:24.240 If they're an investor in a company as we are, 0:06:25.200 --> 0:06:28.080 and you you depended on a line and all of 0:06:28.120 --> 0:06:30.479 a sudden the lines not there, you got to figure 0:06:30.480 --> 0:06:33.840 out how we got to replace it. And the easiest way, 0:06:33.960 --> 0:06:36.920 of course is to get the existing investors to put 0:06:37.000 --> 0:06:40.720 up additional capital, whether it's at an interim or a 0:06:40.760 --> 0:06:43.840 long term basis. But they're not doing to, you know, 0:06:44.000 --> 0:06:47.200 act as a backstop for lending their act act is 0:06:47.240 --> 0:06:51.360 a backstop to you know, the alternative to these loans 0:06:51.560 --> 0:06:54.200 was going out and raising more actuate capital. So I 0:06:54.240 --> 0:06:57.360 think if anything but this is going to do is 0:06:57.400 --> 0:07:01.800 to put some pressure on companies to build up their 0:07:01.839 --> 0:07:06.520 equity positions and they in the process. It would not 0:07:06.640 --> 0:07:13.280 surprise me if there were some britdowns and some reef 0:07:13.520 --> 0:07:16.680 or financings to build up these balance sheets at lower 0:07:16.760 --> 0:07:19.200 prices than we saw. I mean, the market was very 0:07:19.400 --> 0:07:22.080 very strong in twenty one and twenty two for a 0:07:22.080 --> 0:07:25.520 lot of venture financing, whether it startup or even later stage. 0:07:25.880 --> 0:07:29.120 And I think that to the extent that companies want 0:07:29.120 --> 0:07:33.200 to improve their overall balance sheet position, even if they 0:07:33.240 --> 0:07:37.520 have these lines, they would probably want to build their 0:07:37.560 --> 0:07:40.800 equity and that may be at a lower price in 0:07:40.880 --> 0:07:46.680 the last round. Possibly so Alan in terms of longer 0:07:46.800 --> 0:07:50.120 lasting impact, you know, how does it? I think you 0:07:50.120 --> 0:07:52.600 know the doomsday is like, oh, it's going to affect innovation, 0:07:52.800 --> 0:07:57.600 and you know the startup community is that overblown. There's 0:07:57.640 --> 0:08:00.080 money to be made. Investors will find a way. I 0:08:00.160 --> 0:08:03.200 know it started to wind away. I will not use 0:08:03.240 --> 0:08:06.520 the vernacular, but I don't believe that it is going 0:08:06.560 --> 0:08:09.520 to have very very little impact. I will tell you 0:08:09.640 --> 0:08:13.320 a specific I am involved with one company that had 0:08:13.520 --> 0:08:16.400 a large deposit of one of these banks not named, 0:08:16.680 --> 0:08:20.000 and had a line not used that they had not 0:08:20.200 --> 0:08:24.840 drawn down upon, and they were encouraged on Monday to 0:08:25.040 --> 0:08:28.800 draw down that line, and they did, and the money 0:08:28.960 --> 0:08:33.280 transferred into the bank account of the company. So clearly 0:08:33.360 --> 0:08:38.320 the banks are back providing capital again. But if you 0:08:38.440 --> 0:08:41.120 don't have a line at this time, I don't know 0:08:41.400 --> 0:08:43.319 what the attitude is going to be to put on 0:08:43.920 --> 0:08:45.920 new lines at the moment. And I would think it 0:08:45.920 --> 0:08:48.000 will be prudent for a company to build up its 0:08:48.040 --> 0:08:52.440 equity base that may come at a discount from the 0:08:52.520 --> 0:08:54.920 last round, because a lot of these last rounds were 0:08:55.080 --> 0:08:59.520 very very high prices in retrospect and then they cause 0:09:00.120 --> 0:09:04.640 some uh, you know, some type of markdowns. But other 0:09:04.679 --> 0:09:09.000 than that, the business is so healthy and innovation is 0:09:09.040 --> 0:09:11.199 not going to be stopped. Well, Alan, I mean you 0:09:11.640 --> 0:09:14.360 you're now with Primetime Partners, right, you founded that along 0:09:14.360 --> 0:09:16.920 with Addy Levy, who's with the former SVP of Soul Cycle. 0:09:17.000 --> 0:09:19.240 Your goal, your mandate as a word, is to invest 0:09:19.280 --> 0:09:22.400 in early stage startups that bring products and services to 0:09:22.400 --> 0:09:25.120 individuals above the age of sixty, which of course is 0:09:25.160 --> 0:09:27.360 twenty five percent of the world's population. My question for 0:09:27.400 --> 0:09:30.160 you is those early stage startups that you're investing in, 0:09:30.240 --> 0:09:33.200 would you tell them to bank at some you know, 0:09:33.400 --> 0:09:35.760 made and small sized regional banks going forward, or you 0:09:35.840 --> 0:09:38.160 encourage them to be banking at you know, the big ones, 0:09:38.200 --> 0:09:40.160 the JP Morgan's The City Groups of the World, and 0:09:40.240 --> 0:09:43.560 Alan just got about thirty thirty five seconds unfortunately. Yeah, 0:09:44.640 --> 0:09:47.200 I don't want to answer that question directly, but I 0:09:48.120 --> 0:09:51.120 would say that for the moment, I think they continue 0:09:51.160 --> 0:09:54.360 banking as usual. But remember, for these early early stage deals, 0:09:54.640 --> 0:09:58.320 they're not doing too much banking. They're really relying almost 0:09:58.520 --> 0:10:03.240 entirely on equity stage. All right, Gonna leave it on 0:10:03.240 --> 0:10:05.600 that note. Alan. Always good to get some time with 0:10:05.679 --> 0:10:08.560 you and so appreciated. Alan Patrikof is your person and 0:10:08.559 --> 0:10:11.480 co founder at Prime Time Partners, showing us via new 0:10:12.160 --> 0:10:14.199 zoom excuse me in New York City, and his book 0:10:14.320 --> 0:10:16.679 is No Red Lights Reflections on life fifty years in 0:10:16.760 --> 0:10:19.920 venture capital and never driving alone. Did you know he 0:10:19.960 --> 0:10:22.320 really likes music, Carol? Did you know Alan ran at 0:10:22.360 --> 0:10:24.280 eighty eight years old in New York City Marathon last 0:10:24.320 --> 0:10:27.200 year and he finished and he finished. He's pretty remarkable, 0:10:27.320 --> 0:10:30.280 unbelievable and so delighted to have him here. And just 0:10:30.480 --> 0:10:32.200 you know, I feel like calm right, like it's not 0:10:32.280 --> 0:10:34.600 like the good. It's not good. It's I feel better now. 0:10:34.600 --> 0:10:37.680 If you're talking to Alan, yeah, yeah, it's good. You're 0:10:37.720 --> 0:10:41.280 listening to the Bloomberg Business Week podcast. Catch us live 0:10:41.400 --> 0:10:45.040 week afternoons from three to six Eastern Listen on Bloomberg 0:10:45.080 --> 0:10:48.440 dot com, the Ihart Radio app, and the Bloomberg Business App, 0:10:48.760 --> 0:10:52.320 or watch us live on YouTube. Really looking forward to 0:10:52.320 --> 0:10:55.520 this next guest courtesy of Damian Sashower because I do 0:10:55.559 --> 0:10:57.440 feel like when you're trying to figure out what's going 0:10:57.480 --> 0:10:59.600 on in the outlook, you have to talk to CEOs, 0:11:00.080 --> 0:11:01.679 have to talk to all kinds of companies and all 0:11:01.760 --> 0:11:04.800 kinds of market watchers, especially when there's so many things 0:11:04.800 --> 0:11:07.480 and so much volatility, I think, even in the rate environment. 0:11:07.679 --> 0:11:09.680 So let's get to it. Because one of the things 0:11:09.679 --> 0:11:13.920 that was key in the CPI report today had to 0:11:13.960 --> 0:11:19.440 do with housing specifically right big time, underlying consumer price 0:11:19.520 --> 0:11:23.480 growth accelerating in February, Americans continued to experience the sting 0:11:23.520 --> 0:11:26.240 of rising rates and sticky prices for services over the 0:11:26.280 --> 0:11:29.480 past year. Key housing category, which includes everything from actual 0:11:29.480 --> 0:11:31.720 rents to what a homeowner would charge and rent to 0:11:31.760 --> 0:11:35.000 hotel stays, climbed Damien to a record eight point two percent. 0:11:35.080 --> 0:11:36.600 You want to do the honors and bring in our guests. 0:11:36.600 --> 0:11:38.880 I'm going to do that. John sim head of Securitized 0:11:38.960 --> 0:11:42.520 Products Research at JP Morgan. Welcome to the program. John. 0:11:43.000 --> 0:11:46.440 Housing demand is weak. Existing home sales declined thirty four 0:11:46.480 --> 0:11:48.800 point four percent year over year in January two, an 0:11:48.840 --> 0:11:52.200 all time low. What will it take for housing demand 0:11:52.200 --> 0:11:54.760 to rebound here in the US? So, hey, guys, thank 0:11:54.760 --> 0:11:57.480 you so much for having me on. It's a real pleasure. Yeah, 0:11:57.679 --> 0:11:59.760 you already hit the nail on the head with the CPI. 0:12:00.240 --> 0:12:03.080 I mean, I think the good news is that if 0:12:03.080 --> 0:12:06.000 the Fed officials at least are getting that it's sticky. Um, 0:12:06.080 --> 0:12:08.360 you know, the owner equivalent rent number which which was 0:12:08.440 --> 0:12:10.840 just over eight percent, as you mentioned, it's about a 0:12:10.880 --> 0:12:14.000 third of the CPI number index that comes out. So, 0:12:14.240 --> 0:12:15.760 I mean, the good news is that we're already seeing 0:12:15.880 --> 0:12:20.080 rent growth the climb, and that's that's measured say by 0:12:20.160 --> 0:12:22.240 other factors, say like look at ZILLO is a good 0:12:22.240 --> 0:12:24.120 index one of the ones we use rather than the 0:12:24.160 --> 0:12:26.680 oear measure, which is really lagged, which has kind of 0:12:26.679 --> 0:12:28.240 been the burden I think for for a lot of 0:12:28.320 --> 0:12:30.840 us is watching how slow Um it's like watching paint 0:12:30.920 --> 0:12:34.360 dry almost and then you know, so we do think 0:12:34.400 --> 0:12:36.839 that ZILLO moderation that we're seeing well will hit into 0:12:36.880 --> 0:12:39.240 the low single digits by by the end of the year. 0:12:39.840 --> 0:12:41.440 But the un bad news to that is that that 0:12:41.480 --> 0:12:44.240 oear measure really isn't going to probably reflect that into 0:12:44.240 --> 0:12:47.839 well into twenty twenty four. Um, so it's a it's 0:12:47.840 --> 0:12:50.480 a very slow process. But I guess if you're going 0:12:50.559 --> 0:12:52.440 to look at the good side, is how much could 0:12:52.440 --> 0:12:54.560 it take off of the headline CPI number by the 0:12:54.559 --> 0:12:56.200 time you get to that low single digits, you know, 0:12:56.200 --> 0:12:58.720 into twenty twenty four, it's probably about one and a half, 0:12:58.880 --> 0:13:02.079 maybe even two points. So it will help, but it's 0:13:02.120 --> 0:13:04.440 going to be slow to get there. John, You know, 0:13:04.520 --> 0:13:05.800 I wonder if you could talk to us, I mean, 0:13:05.840 --> 0:13:07.280 a lot of our audience here. You know, we're based 0:13:07.280 --> 0:13:08.800 here in New York City. You know we're only getting 0:13:08.800 --> 0:13:10.360 a small piece of the pie. But I wonder if 0:13:10.400 --> 0:13:13.080 you could talk about, you know, the United States of America, 0:13:13.120 --> 0:13:15.760 the dispersion and housing performance across the major regions. It 0:13:15.800 --> 0:13:18.040 seems to me that some of the biggest you know, 0:13:18.720 --> 0:13:21.720 housing prices appreciation clients have occurred out West. I'm talking Seattle, 0:13:21.760 --> 0:13:25.280 San Francisco, while other regions and I'm thinking Florida, I'm thinking, 0:13:25.400 --> 0:13:29.160 you know, Miami, Tampa, I'm thinking Charlotte, Dallas, Atlanta have 0:13:29.400 --> 0:13:32.200 only seen a fraction of those losses. Talk to us, 0:13:32.200 --> 0:13:36.360 can those regions hold onto those pandemic induced gains? Oh? 0:13:36.440 --> 0:13:38.360 Some of them? I mean that's the that's the definitely 0:13:38.480 --> 0:13:41.679 the story with the clients to spend region without questions. 0:13:41.720 --> 0:13:44.760 So our national headline number is is we think home 0:13:44.800 --> 0:13:47.480 prices well declined by ten percent. A lot of that 0:13:47.559 --> 0:13:49.920 has to do with affordability. I think one thing when 0:13:49.960 --> 0:13:52.520 we're talking regions is to look at a very interesting 0:13:52.559 --> 0:13:56.839 statistic around um the percentage of mussas where it's cheaper 0:13:56.880 --> 0:13:59.200 to rent than it is to buy. And it's right now, 0:13:59.240 --> 0:14:01.640 it's saying ninety nine percent of all ms says it's 0:14:01.640 --> 0:14:04.520 actually cheaper to rent. So that speaks well to the 0:14:04.559 --> 0:14:07.000 rent growth narrative we were saying earlier about why that's positive. 0:14:07.000 --> 0:14:08.960 But well, yeah, well we think home prices will decline 0:14:08.960 --> 0:14:11.319 because I think we get that confusion at times where 0:14:11.320 --> 0:14:13.120 people look at rent say, how could rents go up? 0:14:13.160 --> 0:14:16.000 At home prices go down? Well, because it's actually better 0:14:16.040 --> 0:14:19.280 to rent. But the regions say, like Seattle, you mentioned, 0:14:19.320 --> 0:14:22.920 you know what, They're down fifteen percent already from the peak. 0:14:23.000 --> 0:14:26.880 San Francisco down eleven, San Diego down nine, Denver down eight. 0:14:26.960 --> 0:14:28.920 But then you see places like New York Florida only 0:14:28.960 --> 0:14:31.240 down one percent. So there I think you have the 0:14:31.520 --> 0:14:34.360 little bit of tech, a little bit of work from home, 0:14:34.480 --> 0:14:37.680 probably from the Denver side, and then unwinding there also 0:14:37.760 --> 0:14:39.480 had just big run ups. But then you look at 0:14:39.520 --> 0:14:42.080 areas like Florida, where I think actually benefited a lot 0:14:42.200 --> 0:14:44.240 from the migrations and work from home. It's just a 0:14:44.320 --> 0:14:47.160 lot easier to work from the beach, right. But in 0:14:47.160 --> 0:14:48.920 New York everyone loves to live here, so I think 0:14:48.960 --> 0:14:50.480 that that holds up a little bit, and then we 0:14:50.560 --> 0:14:52.640 are more back in the office. I think hasn't hit 0:14:52.680 --> 0:14:55.320 as hard in New York as it has versus other areas. John, 0:14:55.400 --> 0:14:58.520 can we start to do you start to model that 0:14:59.000 --> 0:15:01.560 I understand it rent a place, you're stuck into that 0:15:01.680 --> 0:15:04.080 cost right for a while, and that plays into the 0:15:04.120 --> 0:15:07.200 inflationary metric. But can you start to model I don't 0:15:07.200 --> 0:15:09.560 know whether it's a year from now or two years 0:15:09.880 --> 0:15:12.480 where you get a better understanding of kind of where 0:15:12.520 --> 0:15:15.520 inflation ultimately will be. Because shelter is such a big 0:15:15.520 --> 0:15:17.320 part of this component, can you start to think about 0:15:17.360 --> 0:15:20.200 when people are renegotiating some of this or a softer 0:15:20.360 --> 0:15:24.280 housing market, that it's a different, a very different picture. Yeah, 0:15:24.680 --> 0:15:26.800 so we got to the one part which is just 0:15:26.920 --> 0:15:29.200 the lag. So we already think that you know, you 0:15:29.320 --> 0:15:31.160 already have one and a half to two percent coming off, 0:15:31.360 --> 0:15:34.080 you know, in twenty twenty four, with all is being equal. 0:15:34.280 --> 0:15:37.000 But then you start getting into potential negotiations of where 0:15:37.080 --> 0:15:40.200 rents could actually get a little too frothy and home 0:15:40.240 --> 0:15:43.160 prices continue to decline, where you could continue even push 0:15:43.960 --> 0:15:48.320 that headline inflation number lower. For sure, we start to 0:15:48.360 --> 0:15:50.480 try to model that out. It's it's pretty tricky, but 0:15:50.720 --> 0:15:52.200 certainly as you start to see a lot of the 0:15:52.280 --> 0:15:54.760 renegotiation for rents, you can even see it locally in 0:15:54.800 --> 0:15:58.360 New York City where you know, the concessions are coming 0:15:58.400 --> 0:16:00.520 in the one month, three, the one half month through 0:16:00.600 --> 0:16:03.000 the free gym membership and whatnot to try to lower 0:16:03.440 --> 0:16:06.640 lower the dynamics of getting you into the property. John. 0:16:06.680 --> 0:16:09.080 You know, mortgage borrows from my perspective, appeared to be 0:16:09.080 --> 0:16:10.680 in a pretty solid position. Right. We know about the 0:16:10.720 --> 0:16:12.280 equity build up, you know, we know about the low 0:16:12.320 --> 0:16:14.280 fixed mortgage rates that they locked into. You know, some 0:16:14.480 --> 0:16:16.680 years back. But it's not all roses now, is it. 0:16:16.720 --> 0:16:18.200 I mean, if you look further down the curve, I 0:16:18.240 --> 0:16:22.880 mean fh borrow delinquencies, you know, subprime auto delinquencies. I 0:16:22.920 --> 0:16:24.120 wonder if you could talk to us about some of 0:16:24.120 --> 0:16:26.720 the more some of these more high frequency data points 0:16:26.760 --> 0:16:28.920 and what they're telling you. Yeah, that's really been a 0:16:29.040 --> 0:16:31.040 key for us to watch, and we've been highlighting that 0:16:31.200 --> 0:16:33.640 really even as the tone prices we're still going up. 0:16:33.680 --> 0:16:35.800 We're saying, look, look for things to crack on the 0:16:35.880 --> 0:16:39.720 low end, and that is low FLICO, high DTI, high 0:16:39.880 --> 0:16:43.160 LTV borrowing, and that typically happens in the fh A programs. 0:16:43.440 --> 0:16:46.200 The DTIs in those programs are around fifty five percent, 0:16:46.320 --> 0:16:48.600 so they're they're basically spending more than half of their 0:16:48.640 --> 0:16:51.520 income on their mortgage payment. So when things start to crack, 0:16:51.600 --> 0:16:53.640 the crack they're going to happen there, and you are 0:16:53.640 --> 0:16:57.240 seeing delinquencies build up in that program and really in 0:16:57.640 --> 0:17:00.359 low FLCO in general. So I think that really speaks 0:17:00.440 --> 0:17:03.520 to stress on the low end of the consumer range, 0:17:03.560 --> 0:17:06.520 and you will probably start to see modification programs come 0:17:06.600 --> 0:17:08.879 in to try to help save them, just like we 0:17:08.960 --> 0:17:11.239 had through the last cycle and through COVID, we've got 0:17:11.320 --> 0:17:14.760 a really good playbook for modifying modifying barros when they 0:17:14.800 --> 0:17:17.040 get into trouble. The other side of it is that 0:17:17.119 --> 0:17:20.920 we watch is around subprime auto. Really what you're seeing 0:17:21.000 --> 0:17:23.560 there is the delinquency sixty plus day delinquencies in the 0:17:23.600 --> 0:17:27.680 autosector for subprime, so we're talking low end again is 0:17:28.160 --> 0:17:30.800 actually as high as what we saw during the Financial crisis. 0:17:31.440 --> 0:17:35.720 Beginning to see stress there as well. Well. As you mentioned, 0:17:35.760 --> 0:17:37.520 it's not all doom and gloom. I think when you 0:17:37.560 --> 0:17:40.399 look at those things that looks scary. You kind of 0:17:40.520 --> 0:17:43.800 mentioned it before that borrowers are in a really really 0:17:43.840 --> 0:17:46.280 good position. You know, they about eighty percent of them 0:17:46.320 --> 0:17:48.280 of locked in a four percent mortgage rate or lower, 0:17:48.520 --> 0:17:51.639 and I think that means that they're going to fight 0:17:51.720 --> 0:17:53.639 to stay in their property. The other side of it 0:17:53.800 --> 0:17:56.040 is just the accumulated equity that they've built up in 0:17:56.080 --> 0:17:58.840 the property themselves. Like just to put it in context, 0:17:58.960 --> 0:18:01.960 the dea that was built up in the mortgage market 0:18:02.920 --> 0:18:05.840 just post the Financial crisis around ten trillion overall for 0:18:05.960 --> 0:18:08.520 like the mortgage market the equity at that time just 0:18:08.640 --> 0:18:11.320 post GFC. So as the home prices were going down 0:18:11.640 --> 0:18:14.000 was about eight trillions, so there was two trillion underwater 0:18:14.440 --> 0:18:16.119 like in the properties, and that's why you saw all 0:18:16.119 --> 0:18:18.600 these exits. People just enp mailing the keys back in. 0:18:19.000 --> 0:18:22.360 But now the equities around thirty trillion and the debt 0:18:22.760 --> 0:18:26.600 is only fourteen so so you know, you can have 0:18:26.680 --> 0:18:28.840 a pretty big correction and these guys are going to stay. 0:18:29.080 --> 0:18:30.680 They're not going anywhere, which is you kind of have 0:18:30.720 --> 0:18:34.320 a frozen market now. Effectively the no one really I 0:18:34.359 --> 0:18:36.719 don't see no one, but it's really hard to afford 0:18:36.800 --> 0:18:39.399 to buy given where mortgage rates are. But there's not 0:18:39.480 --> 0:18:41.240 a lot of supply coming in and not a lot 0:18:41.280 --> 0:18:43.639 of supply pressure because even from the delinquencies that we 0:18:43.720 --> 0:18:46.600 mentioned earlier, the mod programs will start to keep them 0:18:46.680 --> 0:18:49.280 from hitting the markets, so homebuilders don't start building. In 0:18:49.359 --> 0:18:53.080 your view, I think they're already started to slow down 0:18:53.119 --> 0:18:54.800 their builds, so you start you're seeing that in some 0:18:54.920 --> 0:18:58.879 of the construction data back to at one point the 0:18:58.960 --> 0:19:01.000 peak was all control units coming in, the mark was 0:19:01.000 --> 0:19:02.879 about one point seven million. I think you've got the 0:19:02.960 --> 0:19:05.359 total now down to like one point to three so 0:19:06.400 --> 0:19:09.119 now I think you're back to underbuilding again. John one 0:19:09.320 --> 0:19:11.040 one more question while I have you twenty seconds here. 0:19:11.119 --> 0:19:13.480 You know, look securitized products. You know we're hearing about 0:19:13.520 --> 0:19:15.359 you know, some of the stressed in these delinquencies. Is 0:19:15.400 --> 0:19:17.960 that filtering through into the secondary market for structured credit? 0:19:18.000 --> 0:19:20.200 Are you seeing any of that showing up in you know, 0:19:20.280 --> 0:19:22.520 some of these low quality credits and just got about 0:19:22.560 --> 0:19:25.359 thirty seconds. Yeah, not in UM, not at all. In 0:19:25.400 --> 0:19:28.520 the residential sector, You're not seeing that stress there yet. 0:19:28.560 --> 0:19:30.879 The stressor seeing is more coming stress for broader credit 0:19:30.960 --> 0:19:33.720 off right now. You are seeing stress in CMBs though 0:19:33.800 --> 0:19:37.560 from that's a different whole different topic. But yeah, listen, 0:19:37.680 --> 0:19:40.560 great vantage point, John, Thank you so much. Johnson, Managing 0:19:40.640 --> 0:19:43.520 director ahead of Securitized Products Research over at JP Morgan 0:19:43.600 --> 0:19:47.680 jutting us on the phone in New York City. You're 0:19:47.760 --> 0:19:51.320 listening to the Bloomberg Business Week podcast. Catch us live 0:19:51.440 --> 0:19:55.120 weekday afternoons from three to six Eastern on Bloomberg Radio, 0:19:55.320 --> 0:19:58.560 the Bloomberg Business app and YouTube. You can also listen 0:19:58.720 --> 0:20:01.879 live on Amazon All So from our flagship New York station, 0:20:02.160 --> 0:20:06.840 jo Say Alexa playing Bloomberg eleven thirty while the world 0:20:06.960 --> 0:20:09.280 is focused on a ship to EVS at the same time, 0:20:09.400 --> 0:20:12.840 startups around the globe there continuing to work on developing 0:20:12.880 --> 0:20:16.240 and refining the technology behind what the industry calls EVE 0:20:16.400 --> 0:20:20.920 tolls or electrical vertical takeoff and landing aircraft in that 0:20:21.119 --> 0:20:23.480 mix is our next gas Beta. It's a builder of 0:20:23.800 --> 0:20:26.560 EVE toll aircraft and charging systems to move both people 0:20:26.600 --> 0:20:30.080 and cargo around. They count the Amazon Climate Pledge Fund, 0:20:30.160 --> 0:20:32.840 TPG and Fidelity among its investors. So with us to 0:20:32.880 --> 0:20:35.159