1 00:00:00,040 --> 00:00:02,600 Speaker 1: Who you put your trust in matters. Investors have put 2 00:00:02,680 --> 00:00:07,000 Speaker 1: their trust and independent registered investment advisors to the two 3 00:00:07,000 --> 00:00:10,680 Speaker 1: and four trillion dollars. Why Learn more at find your 4 00:00:10,760 --> 00:00:26,439 Speaker 1: Independent Advisor dot com. Welcome to the Bloomberg Surveillance Podcast. 5 00:00:26,840 --> 00:00:30,560 Speaker 1: I'm Tom Keene with David Gura. Daily we bring you 6 00:00:30,600 --> 00:00:35,640 Speaker 1: insight from the best in economics, finance, investment, and international relations. 7 00:00:36,040 --> 00:00:40,640 Speaker 1: Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot com, and 8 00:00:40,720 --> 00:00:47,560 Speaker 1: of course, on the Bloomberg. Our first guest this morning's 9 00:00:47,560 --> 00:00:49,879 Speaker 1: Dominate Constant. He's managing director at deutsch Bank Global head 10 00:00:49,880 --> 00:00:52,519 Speaker 1: of Interest rates Research, and he joins us now in 11 00:00:52,560 --> 00:00:54,800 Speaker 1: the studio. Good morning, great to see you. Good morning. 12 00:00:55,440 --> 00:00:57,040 Speaker 1: Let me start with a broad question, and that is 13 00:00:57,080 --> 00:00:59,080 Speaker 1: when when when you're looking at the curve, when you're 14 00:00:59,080 --> 00:01:01,440 Speaker 1: looking at rates, how much is that forecast changed in 15 00:01:01,520 --> 00:01:03,800 Speaker 1: light of say, what we heard from Mario Dragging last week, 16 00:01:03,880 --> 00:01:07,120 Speaker 1: all of the chorus we've heard from from federal'serve policy 17 00:01:07,120 --> 00:01:09,440 Speaker 1: makers as well. Has it changed much over these last 18 00:01:09,480 --> 00:01:13,480 Speaker 1: few months? Yeah? Yeah, I mean we we were around 19 00:01:13,520 --> 00:01:16,720 Speaker 1: the Brexit period, we were a very constructive on rates 20 00:01:16,720 --> 00:01:20,000 Speaker 1: and we had a target of tens and the flatter 21 00:01:20,080 --> 00:01:23,960 Speaker 1: Yeel curve, and basically we think low rates became too 22 00:01:24,040 --> 00:01:26,280 Speaker 1: much of a sort of a bad thing from the 23 00:01:26,319 --> 00:01:29,000 Speaker 1: central bank perspective, especially at the long end. They felt 24 00:01:29,040 --> 00:01:31,720 Speaker 1: that the Yel curve is too flat, was creating problems, 25 00:01:31,800 --> 00:01:35,640 Speaker 1: but in the entitlement industry, creating challenges for say banks, 26 00:01:35,640 --> 00:01:38,080 Speaker 1: because they tend to like steeper Yeel curves. And so 27 00:01:38,120 --> 00:01:40,280 Speaker 1: I think you've seen the sort of jaw boning exercise 28 00:01:40,280 --> 00:01:43,320 Speaker 1: whereby they want to basically get her long rates up 29 00:01:43,319 --> 00:01:45,399 Speaker 1: a little bit, and that's not because they want to 30 00:01:45,440 --> 00:01:48,480 Speaker 1: tighten monster conditions per se, but they'd like a little 31 00:01:48,480 --> 00:01:51,320 Speaker 1: bit of extra risk premium in there that can help 32 00:01:51,560 --> 00:01:56,680 Speaker 1: perhaps entitened entitlement people like the the insurers. And there's 33 00:01:56,680 --> 00:01:59,880 Speaker 1: also been maybe an element whereby the hunt for year 34 00:02:00,480 --> 00:02:03,800 Speaker 1: whereby investors who might otherwise buy bonds end up being 35 00:02:03,800 --> 00:02:06,880 Speaker 1: pushed into riskuer assets by those instead and maybe create 36 00:02:07,200 --> 00:02:11,160 Speaker 1: some kind of overvaluation and those those asset classes that 37 00:02:11,280 --> 00:02:13,919 Speaker 1: that's perhaps a concern. So I think, whether you agree 38 00:02:13,919 --> 00:02:16,000 Speaker 1: with it or not, that's what the central bankers have 39 00:02:16,080 --> 00:02:18,200 Speaker 1: been sort of your aiming at, and that the bj 40 00:02:18,200 --> 00:02:20,320 Speaker 1: A targeted the tenure yield stop it going up all 41 00:02:20,360 --> 00:02:23,239 Speaker 1: down the e CBS, you know, mumbling about taper, where 42 00:02:23,280 --> 00:02:26,320 Speaker 1: not you really believe it. And obviously the feders pushing 43 00:02:26,360 --> 00:02:29,079 Speaker 1: on with what they hope to do, to be able 44 00:02:29,120 --> 00:02:31,480 Speaker 1: to do is raising rates in December. Looking at treasuries 45 00:02:31,480 --> 00:02:34,600 Speaker 1: and specific is long and attractive to you right now 46 00:02:34,840 --> 00:02:37,960 Speaker 1: at all? I think it depends on your horizon, and 47 00:02:38,000 --> 00:02:40,000 Speaker 1: obviously you know your view. I mean my view is 48 00:02:40,400 --> 00:02:43,440 Speaker 1: it's it's it's it's getting attractive. It's not quite there yet. 49 00:02:44,160 --> 00:02:47,640 Speaker 1: I'd like to sort of basically by tenure treasuries, you know, 50 00:02:47,720 --> 00:02:51,240 Speaker 1: above two percent, I think I can probably go there, um, 51 00:02:51,280 --> 00:02:52,880 Speaker 1: but you're going to be buying it over two percent 52 00:02:52,960 --> 00:02:54,519 Speaker 1: with a view it's going to come back down against 53 00:02:54,520 --> 00:02:56,040 Speaker 1: around one and a half if not one in the 54 00:02:56,120 --> 00:02:58,880 Speaker 1: quarter based on what we have as some sort of 55 00:02:58,880 --> 00:03:03,720 Speaker 1: disappointing growth expectations, especially in the US over the next year. 56 00:03:04,760 --> 00:03:07,320 Speaker 1: Who are the FED policy makers that you listened to 57 00:03:08,040 --> 00:03:10,200 Speaker 1: most closely? Of course you listen to to Cheer Yelling 58 00:03:10,240 --> 00:03:13,720 Speaker 1: and vice cheer Fisher, But of the others, who's saying 59 00:03:13,960 --> 00:03:16,359 Speaker 1: stuff that's the most materially interesting to you? Well, I 60 00:03:16,400 --> 00:03:21,000 Speaker 1: think what's interesting is obviously sort of not not necessarily 61 00:03:21,000 --> 00:03:24,880 Speaker 1: anyone in particular, but more the sort of general sort 62 00:03:24,919 --> 00:03:30,000 Speaker 1: of you know, consensus outside the sort of yelling Fisher equation. 63 00:03:30,040 --> 00:03:32,560 Speaker 1: And so you see, for example, some of the Hawks 64 00:03:33,000 --> 00:03:35,600 Speaker 1: who are speaking maybe at the beginning of last year 65 00:03:35,640 --> 00:03:38,240 Speaker 1: you could happily ignore them. Then suddenly you see sort 66 00:03:38,280 --> 00:03:40,520 Speaker 1: of some some more devilish members perhaps you know, like 67 00:03:40,600 --> 00:03:42,720 Speaker 1: Rose and Grown or Evans sort of you know, moving 68 00:03:42,800 --> 00:03:45,839 Speaker 1: towards some of those viewpoints. And then suddenly Dudley sort 69 00:03:45,840 --> 00:03:47,920 Speaker 1: of you know, pops up again and says a tenure 70 00:03:47,960 --> 00:03:50,320 Speaker 1: years or two late. So so you know, things like that, 71 00:03:50,640 --> 00:03:53,200 Speaker 1: I think catch my attention. And and then you know 72 00:03:53,280 --> 00:03:55,680 Speaker 1: that there's some pressure. You know, we we know, you know, 73 00:03:55,760 --> 00:03:57,680 Speaker 1: yelling is obviously you know, very much on the sort 74 00:03:57,680 --> 00:04:00,600 Speaker 1: of dovish side classically speaking, but you know, there's some 75 00:04:00,680 --> 00:04:02,880 Speaker 1: sort of pressure. And I think it's like we kind 76 00:04:02,880 --> 00:04:05,040 Speaker 1: of all agree, you know, we would like to see 77 00:04:05,160 --> 00:04:07,960 Speaker 1: higher rates, but I think the idea is, you know, 78 00:04:08,000 --> 00:04:09,640 Speaker 1: whether they have the guts to do it and that 79 00:04:09,760 --> 00:04:12,080 Speaker 1: kind of uh, you know, it depends on what this 80 00:04:12,240 --> 00:04:15,160 Speaker 1: sort of you know, significant you know, minorities that ends 81 00:04:15,200 --> 00:04:20,000 Speaker 1: up dominic you're talking there about a more cautious view 82 00:04:20,600 --> 00:04:23,440 Speaker 1: where interest rates will go lower for longer and everything 83 00:04:23,720 --> 00:04:27,799 Speaker 1: honkering down GDP estimates and such. When we do the dots, 84 00:04:28,440 --> 00:04:30,800 Speaker 1: if we're going to continue to the do the dots, 85 00:04:31,440 --> 00:04:34,440 Speaker 1: what is the constant long term that they should be 86 00:04:34,480 --> 00:04:37,200 Speaker 1: looking at? Is long term? March of two thousand and 87 00:04:37,240 --> 00:04:39,920 Speaker 1: seventeen is a long term where it is right now? 88 00:04:40,320 --> 00:04:43,120 Speaker 1: Or should they go out because of your view to 89 00:04:43,279 --> 00:04:48,080 Speaker 1: two thousand and twenty and make a guestiment out there? Well, 90 00:04:48,120 --> 00:04:52,239 Speaker 1: I mean I think uh, um, I think long term 91 00:04:52,400 --> 00:04:54,880 Speaker 1: is well, I mean right now, you know, we're thinking 92 00:04:54,920 --> 00:04:56,839 Speaker 1: long terms sort of around you. Obviously these sort of 93 00:04:57,000 --> 00:04:59,440 Speaker 1: two or three years from now. I think the the 94 00:05:00,000 --> 00:05:02,359 Speaker 1: issue that we have in in this sort of growth 95 00:05:02,360 --> 00:05:06,719 Speaker 1: cycle is it's more of a stagnation rather than a recession. 96 00:05:06,800 --> 00:05:09,039 Speaker 1: And what that means is that there's no sort of 97 00:05:09,120 --> 00:05:12,560 Speaker 1: imminent sort of exogenous shock that's being applied to the 98 00:05:12,560 --> 00:05:15,679 Speaker 1: economy that's suddenly gained a sort of turn this cycle. 99 00:05:16,160 --> 00:05:18,400 Speaker 1: And uh and it's kind of like a slow bleed. 100 00:05:18,680 --> 00:05:20,719 Speaker 1: But we see that, we we see the nature of 101 00:05:20,760 --> 00:05:23,200 Speaker 1: the slow blead. That's the idea that you know, as 102 00:05:23,240 --> 00:05:25,440 Speaker 1: you hit fun employment and you almost go beyond what 103 00:05:25,480 --> 00:05:28,360 Speaker 1: we consider funemployment. There's no sort of natural response of 104 00:05:28,480 --> 00:05:30,640 Speaker 1: higher wages and all that kind of stuff, or productivity 105 00:05:30,720 --> 00:05:34,000 Speaker 1: kicking into at a higher level. And that means, you know, 106 00:05:34,040 --> 00:05:36,760 Speaker 1: the long term really can be sort of out that 107 00:05:36,839 --> 00:05:40,440 Speaker 1: sort of two, three, four, five years, But the probabilities 108 00:05:40,440 --> 00:05:44,480 Speaker 1: as such that you you effectively will you know, there 109 00:05:44,480 --> 00:05:48,520 Speaker 1: will be some some negative shocks somewhere in that time horizon, 110 00:05:48,560 --> 00:05:50,800 Speaker 1: and that's where you know that they're done raising rates. 111 00:05:50,800 --> 00:05:54,440 Speaker 1: Basically you stated earlier this morning, the idea that there 112 00:05:54,440 --> 00:05:59,200 Speaker 1: would be negative rates for longer. Does that leak over 113 00:05:59,680 --> 00:06:02,880 Speaker 1: to a currently United Kingdom that's saying no, no, no, 114 00:06:03,000 --> 00:06:07,040 Speaker 1: will never do negative rates. Is it even imaginable that 115 00:06:07,320 --> 00:06:11,159 Speaker 1: Yellen and her follow on will have to consider negative rates? 116 00:06:11,680 --> 00:06:15,360 Speaker 1: I definitely think that the US will have to consider 117 00:06:15,680 --> 00:06:18,240 Speaker 1: negative rates on a you know, on a five ten 118 00:06:18,360 --> 00:06:22,960 Speaker 1: year view, just because once this cycle really is finished. Uh, 119 00:06:23,400 --> 00:06:26,880 Speaker 1: the what's the choice? You're you're gonna cut rates a 120 00:06:26,880 --> 00:06:28,800 Speaker 1: couple of times because that's you know, they won't have 121 00:06:28,880 --> 00:06:32,360 Speaker 1: risen them that far, or you go back to these 122 00:06:32,440 --> 00:06:35,000 Speaker 1: extraordinary measures on quantitive easing, which I think you know, 123 00:06:35,040 --> 00:06:37,120 Speaker 1: have their own issues around them. So my guess is 124 00:06:37,160 --> 00:06:39,120 Speaker 1: it's probably gonna be a combination on both. When the 125 00:06:39,160 --> 00:06:41,680 Speaker 1: market will definitely think about negative rates. There are lots 126 00:06:41,680 --> 00:06:43,640 Speaker 1: of legal issues for negative rates in the States that 127 00:06:43,760 --> 00:06:45,320 Speaker 1: so those have to be addressed. But it's a different 128 00:06:45,320 --> 00:06:47,599 Speaker 1: issue in terms of the market being onto perhaps its price, 129 00:06:48,120 --> 00:06:51,880 Speaker 1: in terms of market expectations they could price them. Uh. 130 00:06:51,920 --> 00:06:54,840 Speaker 1: The I think the UK is different because the UK 131 00:06:55,120 --> 00:06:58,200 Speaker 1: is obviously can have an extremely weak currency. It's having 132 00:06:58,200 --> 00:07:02,280 Speaker 1: a weak currency, it can import inflation quite readily on 133 00:07:02,360 --> 00:07:04,719 Speaker 1: that basis, is something that the US, you know, you 134 00:07:04,839 --> 00:07:07,480 Speaker 1: can't do. The US is a very large economy, it's 135 00:07:07,480 --> 00:07:10,040 Speaker 1: a relative insula. We have a reserve currency, so by 136 00:07:10,040 --> 00:07:11,760 Speaker 1: all means we can try and get our currency down 137 00:07:11,760 --> 00:07:13,320 Speaker 1: at the expense of the rest of the world. But 138 00:07:13,360 --> 00:07:15,480 Speaker 1: even then we're not going to import that much inflation 139 00:07:16,120 --> 00:07:18,320 Speaker 1: because the service sector can hold it up. So I think, 140 00:07:18,360 --> 00:07:20,600 Speaker 1: you know, they're that that's a difference. I mean, so 141 00:07:20,640 --> 00:07:23,240 Speaker 1: the UK can perhaps avoid negative rates if they just 142 00:07:23,240 --> 00:07:25,800 Speaker 1: claps their currency. And one of the arguments of Japan 143 00:07:25,840 --> 00:07:28,920 Speaker 1: and the Eurozone is they've found it very hard to collapse, 144 00:07:29,080 --> 00:07:32,680 Speaker 1: you know, their currency interesting catalytically, what would be more 145 00:07:32,800 --> 00:07:35,480 Speaker 1: powerful here for rates something out of the Bank of 146 00:07:35,520 --> 00:07:37,960 Speaker 1: Japan or the e c B changed in either of 147 00:07:38,040 --> 00:07:40,560 Speaker 1: those banks. Well, I mean, we've actually had a little 148 00:07:40,600 --> 00:07:43,840 Speaker 1: buzzword recently whereby we've been arguing that sort of Japan 149 00:07:43,960 --> 00:07:46,160 Speaker 1: has has kind of women has become the marginal price 150 00:07:46,400 --> 00:07:48,880 Speaker 1: of global assets. And they've done that because obviously they've 151 00:07:48,920 --> 00:07:51,800 Speaker 1: been significant outflows out of Japan. I mean, they you know, 152 00:07:51,800 --> 00:07:54,960 Speaker 1: they are a very big investor, but it's really through 153 00:07:55,800 --> 00:07:59,280 Speaker 1: the j GB yield curve. Their yield curve absolutely collapsed 154 00:07:59,320 --> 00:08:03,360 Speaker 1: earlier this year here on as interest rates came down, 155 00:08:03,800 --> 00:08:06,880 Speaker 1: and that kind of forced a lot of money to 156 00:08:06,880 --> 00:08:09,640 Speaker 1: come out of Japan into other bond markets. And it's 157 00:08:09,680 --> 00:08:11,440 Speaker 1: all part and parcel of the constity of easy thing 158 00:08:11,440 --> 00:08:13,920 Speaker 1: that they're doing, and also to some extent the negative 159 00:08:14,000 --> 00:08:17,160 Speaker 1: rates that they've employed. Uh that works through something we 160 00:08:17,240 --> 00:08:19,920 Speaker 1: call the cross currency basis that got very extreme, which 161 00:08:19,960 --> 00:08:22,280 Speaker 1: is kind of the cost to the Japanese investor of 162 00:08:22,400 --> 00:08:25,840 Speaker 1: hedging their overseas and purchases. So we've been monitoring that 163 00:08:25,920 --> 00:08:29,440 Speaker 1: very carefully and you can sort of see the influence 164 00:08:29,440 --> 00:08:31,080 Speaker 1: they have on yields. And that's why when we talk 165 00:08:31,120 --> 00:08:34,559 Speaker 1: about risk premium going away in our markets. We can 166 00:08:34,559 --> 00:08:36,559 Speaker 1: actually sort of directly link it back to what the 167 00:08:36,640 --> 00:08:39,400 Speaker 1: Japanese investor base is doing. And I think you know, 168 00:08:39,440 --> 00:08:41,079 Speaker 1: if I was are fed and you're sort of saying, well, 169 00:08:41,120 --> 00:08:43,440 Speaker 1: you know, risk premium going away the markets isn't great 170 00:08:43,480 --> 00:08:45,760 Speaker 1: because it may lead to financial fability issues. You know, 171 00:08:45,760 --> 00:08:47,599 Speaker 1: maybe you want to reverse that a little bit. And 172 00:08:47,920 --> 00:08:49,880 Speaker 1: imani not to get you in trouble with Mr Crying 173 00:08:49,960 --> 00:08:53,640 Speaker 1: or compliance, but with your many many contexts over the 174 00:08:53,720 --> 00:08:56,520 Speaker 1: year in London, what is the cranstant thought and the 175 00:08:56,640 --> 00:09:02,320 Speaker 1: future of finance and Wall Street in London. Well, I mean, 176 00:09:02,679 --> 00:09:07,560 Speaker 1: my guess is that the London financial sector will figure 177 00:09:07,600 --> 00:09:09,960 Speaker 1: it out in the sense that you know, London has 178 00:09:09,960 --> 00:09:12,439 Speaker 1: always figured it out, so that it won't be nearly 179 00:09:12,440 --> 00:09:15,600 Speaker 1: as draconian as uh, you know, as people sort of 180 00:09:15,600 --> 00:09:19,040 Speaker 1: perhaps fear. Um, I mean obviously right now. I mean 181 00:09:19,080 --> 00:09:21,960 Speaker 1: that the whole concern around this sort of passporting is 182 00:09:21,960 --> 00:09:26,000 Speaker 1: is a great concern and there are incentives clearly for 183 00:09:26,040 --> 00:09:29,320 Speaker 1: the Europeans who uh you know, to take back certain 184 00:09:29,440 --> 00:09:32,240 Speaker 1: banking functions and sort of in terms of clearing and 185 00:09:32,280 --> 00:09:35,280 Speaker 1: things like that in the Eurozone. Um, but my my 186 00:09:35,360 --> 00:09:37,360 Speaker 1: guess is that you know that there will be. You 187 00:09:37,400 --> 00:09:41,480 Speaker 1: know that London is too, too richer a center for 188 00:09:41,600 --> 00:09:44,400 Speaker 1: financial talent, and they have all the incentives to try 189 00:09:44,480 --> 00:09:50,000 Speaker 1: and work around whatever restrictions their talent was schooled uncertain 190 00:09:50,200 --> 00:09:53,679 Speaker 1: theories in stan Fisher is recently Economic Club of New 191 00:09:53,760 --> 00:09:56,640 Speaker 1: York speech talking on the I S curve Back to 192 00:09:56,760 --> 00:09:59,280 Speaker 1: Hicks thirty nine. It's a different world today. I guess 193 00:09:59,640 --> 00:10:04,040 Speaker 1: are you you using the theories you learned or is 194 00:10:04,080 --> 00:10:06,360 Speaker 1: it a new world for you as you think every 195 00:10:06,400 --> 00:10:10,200 Speaker 1: day and trying to piece the system together. Well, we're 196 00:10:10,240 --> 00:10:12,760 Speaker 1: sort of relying on the theories that we've learned. I mean, 197 00:10:12,760 --> 00:10:16,440 Speaker 1: I I go back to uh Thatcher when she was 198 00:10:16,480 --> 00:10:19,800 Speaker 1: this sort of great quote pro European She knew exactly 199 00:10:19,800 --> 00:10:23,440 Speaker 1: what she was doing in terms of putting the London 200 00:10:23,480 --> 00:10:26,160 Speaker 1: at the center of the financial world and all the 201 00:10:26,200 --> 00:10:28,560 Speaker 1: benefits that that was going to bring with it. And 202 00:10:29,000 --> 00:10:31,040 Speaker 1: you know, for all the sort of headline news around 203 00:10:31,080 --> 00:10:34,959 Speaker 1: these negotiations, I mean, why would you know, why would 204 00:10:35,280 --> 00:10:38,559 Speaker 1: London or the British wanted to shoot themselves in the foot. 205 00:10:38,559 --> 00:10:41,160 Speaker 1: It just doesn't make makes sense. So I think there's 206 00:10:41,160 --> 00:10:44,560 Speaker 1: a lot of posturing going on at the moment. But yeah, 207 00:10:44,640 --> 00:10:46,480 Speaker 1: I mean I would be uh, you know, I'd be 208 00:10:46,520 --> 00:10:49,720 Speaker 1: shocked if there was in London was no longer what 209 00:10:49,760 --> 00:10:53,360 Speaker 1: it currently is. We talked a lot about banks thinking 210 00:10:53,400 --> 00:10:57,560 Speaker 1: of moving headquarters or officers overseas. But among your friends 211 00:10:57,600 --> 00:11:00,199 Speaker 1: and colleagues, is there a conversation about that about eaven 212 00:11:00,200 --> 00:11:02,560 Speaker 1: in London because of the sentiment in the place. Is 213 00:11:02,600 --> 00:11:05,719 Speaker 1: that changed it on since since the vote? Um? No, 214 00:11:05,800 --> 00:11:08,960 Speaker 1: not not not so not so obviously. I mean to 215 00:11:09,000 --> 00:11:11,839 Speaker 1: be honest, I think there's a lot of people sort 216 00:11:11,840 --> 00:11:14,000 Speaker 1: of you know, still can't believe the outcome of vote. 217 00:11:14,240 --> 00:11:17,560 Speaker 1: I remember London itself was overwhelmingly in favor, you know, 218 00:11:17,720 --> 00:11:22,000 Speaker 1: of staying within the the European Union. So um, you know, 219 00:11:22,080 --> 00:11:25,080 Speaker 1: I think obviously people there are people who are concerned 220 00:11:25,080 --> 00:11:27,360 Speaker 1: that if they don't have a British passport, what does 221 00:11:27,400 --> 00:11:29,320 Speaker 1: that mean? And you know there's definitely you know, some 222 00:11:29,320 --> 00:11:31,160 Speaker 1: people are running off and making sure they're getting their 223 00:11:31,160 --> 00:11:33,640 Speaker 1: British passports. I mean, like you hear that from sort 224 00:11:33,640 --> 00:11:36,600 Speaker 1: of some colleagues. Um, But in general now I think 225 00:11:36,600 --> 00:11:40,000 Speaker 1: there's you know, there's a there's there's still somewhat sort 226 00:11:40,000 --> 00:11:42,079 Speaker 1: of disbelief that this is actually happening and this is 227 00:11:42,120 --> 00:11:46,200 Speaker 1: why I think, Um, the the Tory government is trying 228 00:11:46,240 --> 00:11:49,280 Speaker 1: to sort of insist that Brexit really means brexit, because 229 00:11:49,360 --> 00:11:51,559 Speaker 1: it might be very easy for people to think, well, 230 00:11:51,600 --> 00:11:53,600 Speaker 1: you know, maybe it doesn't actually mean that. Uh, And 231 00:11:53,679 --> 00:11:55,640 Speaker 1: so that's why they're sort of having to approach this 232 00:11:55,720 --> 00:11:58,120 Speaker 1: in a hard way. Um. So we'll see what happens 233 00:11:58,200 --> 00:12:00,920 Speaker 1: next year when they find they decide if and when 234 00:12:00,920 --> 00:12:03,560 Speaker 1: they finally decided to pull the trigger on the article. 235 00:12:04,000 --> 00:12:06,560 Speaker 1: From that referendum to the election here in the States, 236 00:12:06,600 --> 00:12:08,720 Speaker 1: how much is is the campaign how much is the 237 00:12:08,720 --> 00:12:13,200 Speaker 1: election weighing on forecasting rates at this point? You mean 238 00:12:13,200 --> 00:12:16,920 Speaker 1: the election in the US? Yeah, well, I think it 239 00:12:17,440 --> 00:12:20,560 Speaker 1: it could have weighed much more, uh, and to something 240 00:12:20,679 --> 00:12:23,520 Speaker 1: that perhaps it still does weigh. But if there was 241 00:12:23,559 --> 00:12:26,840 Speaker 1: a sort of shake up in terms of the political 242 00:12:26,920 --> 00:12:29,640 Speaker 1: sort of outlook in terms of gridlock. Um. So obviously, 243 00:12:29,720 --> 00:12:31,640 Speaker 1: you know, there is a view that if there was 244 00:12:31,640 --> 00:12:34,480 Speaker 1: a clean sweep, particularly by the Republicans, but perhaps by 245 00:12:34,480 --> 00:12:37,880 Speaker 1: the Democrats, then maybe gridlock would end, and that could 246 00:12:37,960 --> 00:12:42,000 Speaker 1: change your outlook. I think if there's ongoing gridlock, um, 247 00:12:42,520 --> 00:12:44,240 Speaker 1: I think people are going to say more of the same, 248 00:12:44,600 --> 00:12:47,480 Speaker 1: and unfortunately more of the same is from an economic 249 00:12:47,520 --> 00:12:50,840 Speaker 1: perspective and certainly from a financial market perspective, is a 250 00:12:50,880 --> 00:12:53,640 Speaker 1: bit disappointing because it's going to mean more financial oppression, 251 00:12:53,760 --> 00:12:58,520 Speaker 1: low volatility, regardless of your views on the actual parties. 252 00:12:58,559 --> 00:13:01,680 Speaker 1: I mean, we don't really want more the same. That's problem. Dominic, 253 00:13:01,800 --> 00:13:03,480 Speaker 1: thank you so much, very generous of you to be 254 00:13:03,559 --> 00:13:05,800 Speaker 1: with us for these hours this morning here at Bloomberg. 255 00:13:05,880 --> 00:13:10,720 Speaker 1: He is with Deutsche Bank. Dominic Constant writing just terrific 256 00:13:10,760 --> 00:13:12,880 Speaker 1: notes and the main theme I heard their folks as 257 00:13:12,920 --> 00:13:17,720 Speaker 1: a real subdued view on rate structure forward, on where 258 00:13:17,760 --> 00:13:33,439 Speaker 1: yields are going. Well. Apple reported earnings yesterday after the bell, 259 00:13:33,480 --> 00:13:35,520 Speaker 1: and we're drawn to the forecast of sales for the 260 00:13:35,559 --> 00:13:37,880 Speaker 1: next quarter, Apples saying that will be between seventy six 261 00:13:37,920 --> 00:13:41,200 Speaker 1: billion and seventy eight billion. Analysts had expected seventy five 262 00:13:41,880 --> 00:13:44,400 Speaker 1: point four billion from what we're doing. By Walter Pi Sick, 263 00:13:44,440 --> 00:13:46,680 Speaker 1: he's an analyst with B T I G. Walter. Always 264 00:13:46,720 --> 00:13:49,440 Speaker 1: great to speak with you. Thanks great to be back on. 265 00:13:49,840 --> 00:13:52,920 Speaker 1: So the question going into this I think was woold 266 00:13:52,920 --> 00:13:56,080 Speaker 1: Samsung's loss here all the trouble caused by the problems 267 00:13:56,080 --> 00:13:58,280 Speaker 1: with the Galaxy Notes seven become Apple's gain and what 268 00:13:58,360 --> 00:14:01,280 Speaker 1: do we learn from the port yesterday and in the 269 00:14:01,320 --> 00:14:05,760 Speaker 1: conference calls about that? Yeah, and I think the answer 270 00:14:05,800 --> 00:14:07,680 Speaker 1: is kind of And by the way, we also heard 271 00:14:07,720 --> 00:14:10,440 Speaker 1: some feedback from some of the operators that reported before 272 00:14:10,520 --> 00:14:13,520 Speaker 1: Apple did, and I think my initial view was, or 273 00:14:13,559 --> 00:14:15,960 Speaker 1: I guess the question was, if someone was buying a 274 00:14:16,040 --> 00:14:18,800 Speaker 1: high end Android phone, did they just stick within that 275 00:14:18,840 --> 00:14:21,440 Speaker 1: ecosystem because that's what they were used to. And I 276 00:14:21,480 --> 00:14:23,560 Speaker 1: think what we've been hearing is that that they have 277 00:14:24,000 --> 00:14:27,640 Speaker 1: actually seen switchers, because there's not particularly on the larger 278 00:14:28,400 --> 00:14:31,000 Speaker 1: the larger models that the seven plus versus the note 279 00:14:31,440 --> 00:14:33,280 Speaker 1: that they were actually pulling these people in, which is 280 00:14:33,280 --> 00:14:35,240 Speaker 1: actually really good news. If Apple can get them in 281 00:14:35,280 --> 00:14:38,000 Speaker 1: their own ecosystem and the customers please with it, it 282 00:14:38,080 --> 00:14:40,280 Speaker 1: becomes sticking on their end, and it's gonna be harder 283 00:14:40,320 --> 00:14:42,960 Speaker 1: for Android whatever vendor wants to get that customer back 284 00:14:43,520 --> 00:14:45,480 Speaker 1: to pull them back. So, whether it was the operators 285 00:14:45,520 --> 00:14:48,160 Speaker 1: earlier in the week or what Apple was saying on 286 00:14:48,200 --> 00:14:50,760 Speaker 1: their call um, it sounds that they are benefiting. Now. 287 00:14:51,040 --> 00:14:52,840 Speaker 1: I just want to put one pause on all this 288 00:14:52,920 --> 00:14:56,000 Speaker 1: is you can't get a seven plus right now right 289 00:14:56,240 --> 00:14:58,000 Speaker 1: that the ship dates are not out until the end 290 00:14:58,000 --> 00:15:01,600 Speaker 1: of the year, So so their own inability to to 291 00:15:01,760 --> 00:15:04,240 Speaker 1: ramp up the volumes on the seven plus, maybe because 292 00:15:04,240 --> 00:15:07,600 Speaker 1: they didn't expect this mix shift to happen um might 293 00:15:07,800 --> 00:15:10,080 Speaker 1: limit how much that they can benefits. I think they 294 00:15:10,120 --> 00:15:12,600 Speaker 1: really need to focus on getting those volumes up to 295 00:15:12,680 --> 00:15:15,240 Speaker 1: grab you know, more and more of those um those 296 00:15:15,280 --> 00:15:18,800 Speaker 1: Samsung customers that just don't have a product right now. 297 00:15:18,920 --> 00:15:21,080 Speaker 1: Kind of Tom is waiting for his his seven Let 298 00:15:21,080 --> 00:15:23,600 Speaker 1: me ask you all to about the way that Tim Cook. 299 00:15:23,920 --> 00:15:27,240 Speaker 1: How Tim Cook's Apple keeps people in that ecosystem. It's 300 00:15:27,240 --> 00:15:29,480 Speaker 1: through services, I imagined. And what color did we get 301 00:15:29,560 --> 00:15:32,720 Speaker 1: yesterday about how Apple has been improving its services. Obviously 302 00:15:32,720 --> 00:15:36,640 Speaker 1: there were problems with Apple Music and and uh it's 303 00:15:36,680 --> 00:15:39,480 Speaker 1: it's other offerings. Has that improved? Have we seen that stabilize, 304 00:15:40,440 --> 00:15:43,040 Speaker 1: that's been that's been fun like this? The new messaging 305 00:15:43,080 --> 00:15:48,000 Speaker 1: is great. It had really lagged behind other third party applications. 306 00:15:48,200 --> 00:15:51,360 Speaker 1: So that was, for one important because look, if you're 307 00:15:51,720 --> 00:15:53,800 Speaker 1: texting all of your friends and it works well, you're 308 00:15:53,880 --> 00:15:55,760 Speaker 1: less likely to leave if you need to stay on 309 00:15:55,800 --> 00:15:58,920 Speaker 1: Apple Phone to do that. But even before things like that, 310 00:15:59,280 --> 00:16:02,200 Speaker 1: the company for years has been focused on when you're 311 00:16:02,200 --> 00:16:04,920 Speaker 1: near your computer or your iPad or things like that 312 00:16:04,920 --> 00:16:07,040 Speaker 1: that you know, all these services kind of transfer. They 313 00:16:07,080 --> 00:16:09,520 Speaker 1: do whatever they can to keep you in so that 314 00:16:09,600 --> 00:16:12,800 Speaker 1: they get your upgrade um every two years or however 315 00:16:12,840 --> 00:16:15,880 Speaker 1: long it ends up being. Are they getting that upgrade? 316 00:16:15,920 --> 00:16:18,640 Speaker 1: What is the character of the upgrade? When you talk 317 00:16:18,720 --> 00:16:24,200 Speaker 1: to Apple bears, do they actually believe that people won't upgrade, 318 00:16:24,240 --> 00:16:27,600 Speaker 1: that they'll sit on the phone for extra six hours 319 00:16:27,680 --> 00:16:31,160 Speaker 1: or six months. Those bears have have had their day, 320 00:16:31,200 --> 00:16:33,560 Speaker 1: i think for the past year, because those upgrade rates 321 00:16:33,560 --> 00:16:36,680 Speaker 1: were clearly extending if you looked at how the numbers were. 322 00:16:36,720 --> 00:16:40,200 Speaker 1: But what's been surprising and frankly reflected on this rally 323 00:16:40,200 --> 00:16:42,760 Speaker 1: in the stock you know, over the past couple of months, 324 00:16:43,280 --> 00:16:45,440 Speaker 1: m has been that the upgrades have actually come in 325 00:16:45,480 --> 00:16:47,800 Speaker 1: for this phone. I mean, everyone think about this months ago, right, 326 00:16:47,960 --> 00:16:49,920 Speaker 1: Everyone's saying, oh, this is not really that great, We're 327 00:16:49,920 --> 00:16:52,320 Speaker 1: gonna wait till next year. And now the operators are 328 00:16:52,320 --> 00:16:54,440 Speaker 1: actually seeing it. So the operators that have now reported 329 00:16:54,440 --> 00:16:57,760 Speaker 1: are talking about upgrade rates or phone sales that that 330 00:16:58,000 --> 00:17:01,160 Speaker 1: should go up, and there's saying like, look, are we 331 00:17:01,200 --> 00:17:03,520 Speaker 1: can't even tell you where the demands can end up 332 00:17:03,520 --> 00:17:06,359 Speaker 1: being because we're still not getting in supply from Apple 333 00:17:06,400 --> 00:17:08,840 Speaker 1: to to really fully judge this, Yeah, it's a terrible 334 00:17:08,880 --> 00:17:17,040 Speaker 1: problem stock exactly. Walter free cash flow forty three, fifty 335 00:17:17,080 --> 00:17:20,480 Speaker 1: seventy and then the modeling of Wall Street is for 336 00:17:20,520 --> 00:17:23,840 Speaker 1: a diminishment of cash flow. Do you buy that or 337 00:17:23,840 --> 00:17:28,840 Speaker 1: does the juggernaut continue? I mean the margins. Obviously, the 338 00:17:28,880 --> 00:17:31,680 Speaker 1: concern was about fifty basis points. Nothing that's not something 339 00:17:31,720 --> 00:17:34,800 Speaker 1: that's gonna crush their ability to degenerate free cash flow. 340 00:17:34,920 --> 00:17:37,720 Speaker 1: Taxes were ticking up a little bit, but again marginally 341 00:17:37,800 --> 00:17:39,960 Speaker 1: not something that's going to change the cash flow. The 342 00:17:40,040 --> 00:17:42,760 Speaker 1: interesting thing was we were thinking that they were gonna 343 00:17:42,800 --> 00:17:45,679 Speaker 1: buy ten billion dollars of stock back. I think they 344 00:17:45,720 --> 00:17:48,160 Speaker 1: only bought about four um. So as a result, I'm 345 00:17:48,160 --> 00:17:51,280 Speaker 1: sorry six so so four less than we expected. So 346 00:17:51,320 --> 00:17:55,399 Speaker 1: the cash position went up to fifty billions. So the 347 00:17:55,560 --> 00:18:00,280 Speaker 1: cash is actually rising um at a time when you know, 348 00:18:00,359 --> 00:18:02,560 Speaker 1: Cook on the call last night again brings up, well, 349 00:18:02,600 --> 00:18:05,560 Speaker 1: we're intensely interested in these things. So you have to 350 00:18:05,600 --> 00:18:09,160 Speaker 1: wonder again, what are they doing with their cash? Dividend work? 351 00:18:09,240 --> 00:18:18,560 Speaker 1: Maybe increase the dividend, maybe acquisitions, will have to say 352 00:18:20,200 --> 00:18:23,600 Speaker 1: who you put your trust in matters. Investors have put 353 00:18:23,640 --> 00:18:27,560 Speaker 1: their trust in independent registered investment advisors to the two 354 00:18:27,560 --> 00:18:30,639 Speaker 1: and of four trillion dollars. Why they see their roles 355 00:18:30,680 --> 00:18:34,320 Speaker 1: to serve, not sell. That's why Charles Schwab is committed 356 00:18:34,560 --> 00:18:39,480 Speaker 1: to the success over seven thousand independent financial advisors who 357 00:18:39,560 --> 00:18:45,040 Speaker 1: passionately dedicate themselves to helping people achieve their financial goals. 358 00:18:45,400 --> 00:18:57,119 Speaker 1: Learn more and find your independent advisor dot com. David 359 00:18:57,200 --> 00:19:00,399 Speaker 1: Cousten is a mathematician from Brown University. He has the 360 00:19:00,480 --> 00:19:04,919 Speaker 1: joy as a strategist of actually doing securities analysis before 361 00:19:04,960 --> 00:19:07,520 Speaker 1: he was a guru, which makes for a different language 362 00:19:07,840 --> 00:19:09,919 Speaker 1: in different work. David thrilled to have you with us 363 00:19:09,960 --> 00:19:13,560 Speaker 1: with Goldman Sex. Of course, I've been watching the earnings 364 00:19:13,600 --> 00:19:16,800 Speaker 1: and the new news for me is next to no 365 00:19:17,040 --> 00:19:21,640 Speaker 1: growth up top in every quarter, every company's manufacturing down 366 00:19:21,680 --> 00:19:25,040 Speaker 1: the income statement. The money question for me for next 367 00:19:25,160 --> 00:19:29,760 Speaker 1: year partial differentials, unit dynamics, price dynamics up at the 368 00:19:29,800 --> 00:19:31,600 Speaker 1: revenue line. You've got to get down to E. But 369 00:19:31,960 --> 00:19:35,120 Speaker 1: whatever margin you want to pick, is there enough wiggle 370 00:19:35,240 --> 00:19:38,960 Speaker 1: room forward to keep that shell game going? Or they 371 00:19:38,960 --> 00:19:45,040 Speaker 1: have they cost cut their way to maximum efficiency. Well, uh, 372 00:19:45,160 --> 00:19:48,199 Speaker 1: with apologies to your pejorative question, I think there's uh, 373 00:19:48,440 --> 00:19:53,240 Speaker 1: there's enough wiggle rum. Yes, the margins are likely to 374 00:19:53,280 --> 00:19:57,560 Speaker 1: remain flat, and that's an important issue to think about 375 00:19:57,880 --> 00:20:01,440 Speaker 1: that with the U. S economy growing at around two percent, 376 00:20:02,520 --> 00:20:05,920 Speaker 1: that means the top line revenue growth, if we include 377 00:20:06,000 --> 00:20:08,840 Speaker 1: some inflation here as well, you're looking at modest top 378 00:20:08,880 --> 00:20:12,000 Speaker 1: line growth called that four percent, a little faster from overseas. 379 00:20:12,080 --> 00:20:15,000 Speaker 1: So that's your revenue line growing in the four for 380 00:20:15,200 --> 00:20:20,000 Speaker 1: perhaps five level broadly across the market, and margins are 381 00:20:20,040 --> 00:20:23,560 Speaker 1: likely to have peaked either late this year or sometime 382 00:20:23,600 --> 00:20:27,399 Speaker 1: in two thousand seventeen, depending on the individual sector of 383 00:20:27,440 --> 00:20:30,760 Speaker 1: the market, but broadly speaking, markets margins have been flat 384 00:20:30,840 --> 00:20:35,240 Speaker 1: for for about five years, and it's been technology margins. 385 00:20:35,240 --> 00:20:38,959 Speaker 1: The technology margins have been the key driver of why 386 00:20:39,119 --> 00:20:44,000 Speaker 1: overall margins have I looked at pepsicolon. I don't know, 387 00:20:44,200 --> 00:20:46,040 Speaker 1: it's just I looked at that company and it really 388 00:20:46,040 --> 00:20:49,240 Speaker 1: stuck out to me, this game of making the margin 389 00:20:49,359 --> 00:20:52,760 Speaker 1: down below, given that there's next to no revenue, do 390 00:20:52,880 --> 00:20:56,720 Speaker 1: they have the wiggle room forward to continue to manufacture 391 00:20:57,480 --> 00:21:00,919 Speaker 1: decent operating income decent eb what over well from an 392 00:21:00,920 --> 00:21:03,080 Speaker 1: earnings point of view, certainly buy backs has been a 393 00:21:03,119 --> 00:21:06,879 Speaker 1: contributor to fast faster earnings growth. Your revenue growth growing 394 00:21:06,960 --> 00:21:10,119 Speaker 1: very very modestly, and there's been some margin. Uh, whatever 395 00:21:10,160 --> 00:21:11,800 Speaker 1: margins they have been able to eek out have been 396 00:21:11,960 --> 00:21:15,560 Speaker 1: largely from buy backs and more technology spending to try 397 00:21:15,600 --> 00:21:19,280 Speaker 1: to eke out singles and doubles basically has been very 398 00:21:19,320 --> 00:21:21,600 Speaker 1: It's been a tough operating environment, and the market has 399 00:21:21,600 --> 00:21:25,679 Speaker 1: reflected that how does real GDP growth affect the markets? 400 00:21:25,680 --> 00:21:28,480 Speaker 1: I know you've been been modeling this. If that changes, 401 00:21:28,520 --> 00:21:30,800 Speaker 1: what effect does that have on the markets. So the 402 00:21:30,840 --> 00:21:34,200 Speaker 1: way to think about real GDP growth is every one 403 00:21:34,560 --> 00:21:38,200 Speaker 1: basis points, every one percentage points faster or slower growth, 404 00:21:38,200 --> 00:21:40,320 Speaker 1: and it's going to add roughly five dollars a shared 405 00:21:40,359 --> 00:21:42,399 Speaker 1: earnings and let's use a base of about a hundred 406 00:21:42,400 --> 00:21:45,200 Speaker 1: and five dollars. So that gives you a immediate translation 407 00:21:45,240 --> 00:21:48,359 Speaker 1: of how to think about your impact on faster or 408 00:21:48,400 --> 00:21:51,959 Speaker 1: slower GDP growth. Uh, the way to think of impact 409 00:21:52,080 --> 00:21:55,879 Speaker 1: on earnings and about seventy of the revenues of US 410 00:21:55,920 --> 00:21:59,480 Speaker 1: corporations are domestic and so therefore the most important driver 411 00:21:59,600 --> 00:22:03,040 Speaker 1: of say sales, of margins of earnings for companies is 412 00:22:03,080 --> 00:22:05,520 Speaker 1: the broad growth pace of growth in the economy, and 413 00:22:05,560 --> 00:22:08,640 Speaker 1: the economy right now is growing at about two uh 414 00:22:08,880 --> 00:22:12,840 Speaker 1: not a you know, super fast growth right clearly, but 415 00:22:12,920 --> 00:22:15,200 Speaker 1: also it's it's it's not in contraction, so it's glowing 416 00:22:15,240 --> 00:22:17,520 Speaker 1: at a at at a muted level. And that is 417 00:22:17,560 --> 00:22:22,200 Speaker 1: what has created uh a idea of what what Larry 418 00:22:22,240 --> 00:22:24,960 Speaker 1: Summer's terms the secular stagnation, the idea that no matter 419 00:22:25,000 --> 00:22:28,520 Speaker 1: how low rates are, it's not inducing corporations to be 420 00:22:28,600 --> 00:22:31,439 Speaker 1: investing money. And so there they've been pretty reluctant, and 421 00:22:31,480 --> 00:22:33,760 Speaker 1: that's what keeps growth slow. David and I were talking 422 00:22:33,800 --> 00:22:35,240 Speaker 1: about what to talk to you about. I've got to 423 00:22:35,240 --> 00:22:37,640 Speaker 1: ask you about M and A without talking specifically about 424 00:22:37,680 --> 00:22:40,959 Speaker 1: telephone or or or Time Warner. Does this game just 425 00:22:41,080 --> 00:22:45,080 Speaker 1: continue because Jennet Yellen has made money so cheap that 426 00:22:45,200 --> 00:22:47,879 Speaker 1: there's no growth. I gotta buy something to keep the 427 00:22:47,920 --> 00:22:51,199 Speaker 1: game going. Well, if we think about the waterfall, and 428 00:22:51,240 --> 00:22:54,520 Speaker 1: that's a good description waterfall of the preference preferred uses 429 00:22:54,560 --> 00:22:57,600 Speaker 1: of cash most companies. First US is capital spending, and 430 00:22:57,640 --> 00:23:00,680 Speaker 1: companies are spending a lot on capex for maintenance. That's first. 431 00:23:00,920 --> 00:23:03,199 Speaker 1: Second is research and development, and the third is M 432 00:23:03,200 --> 00:23:06,160 Speaker 1: and A. Those are the three initiatives that most companies 433 00:23:06,359 --> 00:23:09,640 Speaker 1: pursue in terms of growth, and so the idea of 434 00:23:09,840 --> 00:23:12,439 Speaker 1: allocating capital to M and A makes sense in an 435 00:23:12,560 --> 00:23:15,240 Speaker 1: environment where interest rates, as you point out, are very 436 00:23:15,280 --> 00:23:19,320 Speaker 1: low and you can finance transactions at the big transactions 437 00:23:19,359 --> 00:23:22,280 Speaker 1: like this work in the Costant History Library. Is there 438 00:23:22,320 --> 00:23:26,720 Speaker 1: a successful merger outcome big deals there? There are? There 439 00:23:26,720 --> 00:23:31,399 Speaker 1: are some combinations that make strategic sense in terms of 440 00:23:31,440 --> 00:23:35,200 Speaker 1: the business profile of individual companies. We've done a lot 441 00:23:35,200 --> 00:23:38,199 Speaker 1: of work on spinoffs and so oftentimes you have a 442 00:23:38,240 --> 00:23:41,440 Speaker 1: combination then that leads to a spinoff of another division. 443 00:23:41,480 --> 00:23:45,479 Speaker 1: So there's often investment opportunities around those um but it depends. 444 00:23:45,480 --> 00:23:50,120 Speaker 1: In some cases there's a long approval process that takes place, 445 00:23:50,160 --> 00:23:52,479 Speaker 1: and that makes the investment process a little more difficult. 446 00:23:52,560 --> 00:23:55,000 Speaker 1: Just very quickly your thirty seconds David Costant on the 447 00:23:55,040 --> 00:23:58,320 Speaker 1: general market by holder cell, can you acquire shares today? 448 00:23:59,040 --> 00:24:02,800 Speaker 1: You are looking at modest increase over the next twelve months. 449 00:24:02,840 --> 00:24:05,600 Speaker 1: You're looking at single digit quality five percent type of return. 450 00:24:05,680 --> 00:24:07,760 Speaker 1: So you can call that try in the context of 451 00:24:08,920 --> 00:24:11,679 Speaker 1: other opportunities, but it's still relatively modest in terms of 452 00:24:11,720 --> 00:24:14,639 Speaker 1: historical John that's she's sure you're looking at a new 453 00:24:14,720 --> 00:24:19,560 Speaker 1: Jersey looks better and better. I have some motion front 454 00:24:19,560 --> 00:24:23,920 Speaker 1: property and David, thank you so much. David Custom with 455 00:24:24,040 --> 00:24:27,520 Speaker 1: Golvin Sex can't say enough about the acuity of his research. 456 00:24:39,359 --> 00:24:41,960 Speaker 1: Jonathan Miller has been way too long since we've spoken 457 00:24:41,960 --> 00:24:44,320 Speaker 1: to you. To our global audience. You have been out 458 00:24:44,600 --> 00:24:48,200 Speaker 1: front in the real estate slowed down in New York, 459 00:24:48,240 --> 00:24:51,399 Speaker 1: and I think maybe San Francisco, is it everywhere else 460 00:24:51,560 --> 00:24:54,440 Speaker 1: or is it just contained the stupidity of these two 461 00:24:54,520 --> 00:24:58,520 Speaker 1: zip codes? Uh, I think the it's not. First of all, 462 00:24:58,560 --> 00:25:00,719 Speaker 1: we don't want to insult those two zip codes, but 463 00:25:00,880 --> 00:25:06,160 Speaker 1: sure we do. I can't affordable. Uh. So what we're 464 00:25:06,160 --> 00:25:09,280 Speaker 1: seeing is more of a slowdown in higher priced housing markets, 465 00:25:09,320 --> 00:25:12,840 Speaker 1: higher cost housing music. Uh, we're seeing a little bit 466 00:25:12,840 --> 00:25:15,639 Speaker 1: of that. Actually. So what we've been seeing in these 467 00:25:15,680 --> 00:25:20,880 Speaker 1: markets is an increase in resale inventory, which has slowed 468 00:25:20,880 --> 00:25:25,359 Speaker 1: down the frenetic pace. UM, bidding wars aren't aren't what 469 00:25:25,400 --> 00:25:27,920 Speaker 1: they were, but there's still above average. Where the way 470 00:25:27,920 --> 00:25:31,840 Speaker 1: I described the market right now in general um is, uh, 471 00:25:32,000 --> 00:25:34,920 Speaker 1: we're somewhere between white hot and above average. Okay, that's 472 00:25:34,920 --> 00:25:39,040 Speaker 1: a nice character. There are the vectors of owning a 473 00:25:39,119 --> 00:25:41,720 Speaker 1: home the same as renting a home, right now, those 474 00:25:41,720 --> 00:25:45,600 Speaker 1: two separate markets that you deal in. Uh, yes, absolutely, 475 00:25:46,040 --> 00:25:51,000 Speaker 1: it's still much cheaper to buy. The problem is, um, 476 00:25:51,040 --> 00:25:53,399 Speaker 1: and this is on a national front, is inventory is 477 00:25:53,520 --> 00:25:57,720 Speaker 1: very tight. Uh so we're we're seeing you know, uh, 478 00:25:58,400 --> 00:26:01,119 Speaker 1: affordability being cho lunched. I mean, that's really what it 479 00:26:01,160 --> 00:26:04,400 Speaker 1: comes down to, throw into tight credit on the bank 480 00:26:04,480 --> 00:26:08,480 Speaker 1: lander side. And it's still the same story. Most recent note, 481 00:26:08,720 --> 00:26:12,800 Speaker 1: it was about Greenwich, Connecticut, a town founded in sixteen forty. 482 00:26:13,000 --> 00:26:14,919 Speaker 1: If I'm not mistaken, and you call it a hotbed 483 00:26:14,960 --> 00:26:18,000 Speaker 1: of new urbanism. What's going on in Greenwich? Well, what's 484 00:26:18,160 --> 00:26:22,040 Speaker 1: been fascinating about the suburbs that ring New York City, 485 00:26:22,200 --> 00:26:25,680 Speaker 1: especially the high end markets, is you can see even 486 00:26:25,720 --> 00:26:29,080 Speaker 1: the suburban towns are placing emphasis on in town development, 487 00:26:29,400 --> 00:26:33,920 Speaker 1: proximity closer to the uh commuter lines to get into 488 00:26:33,920 --> 00:26:39,560 Speaker 1: the city. It's not the it's not your grandmother's neighborhood, 489 00:26:39,560 --> 00:26:43,560 Speaker 1: so to speak. Um. What we're seeing also is in 490 00:26:43,680 --> 00:26:50,560 Speaker 1: market side greenwag is there's an incredible disconnect between meaning 491 00:26:50,680 --> 00:26:54,120 Speaker 1: many sellers there are still priced are anchored to two 492 00:26:54,119 --> 00:26:57,840 Speaker 1: thousand seven and that market never really saw the boom 493 00:26:57,880 --> 00:27:00,560 Speaker 1: that we saw in the city, and part of it 494 00:27:00,600 --> 00:27:05,399 Speaker 1: is because consumer tastes have changed. Uh, the city, the 495 00:27:05,480 --> 00:27:07,520 Speaker 1: high end is poached some of the high end demand 496 00:27:07,520 --> 00:27:11,239 Speaker 1: from the sub inventory. Not a problem inwach Uh it is. 497 00:27:11,760 --> 00:27:13,760 Speaker 1: I wouldn't say it's not a problem, but I would 498 00:27:13,800 --> 00:27:16,919 Speaker 1: say it's not. It's not limited that we don't have 499 00:27:16,920 --> 00:27:20,360 Speaker 1: limited supply there. The way to describe Granwage and other 500 00:27:20,440 --> 00:27:23,280 Speaker 1: high end housing markets in the suburban areas is just 501 00:27:23,359 --> 00:27:25,879 Speaker 1: like the city, they're soft at the top, so there's 502 00:27:26,080 --> 00:27:29,639 Speaker 1: very tight inventory lower you know, entry middle markets, and 503 00:27:29,680 --> 00:27:32,680 Speaker 1: it's it's very soft at the high end. There are 504 00:27:32,760 --> 00:27:36,280 Speaker 1: transactions are high end, so you're so prestigious Jonathan Miller 505 00:27:36,320 --> 00:27:39,600 Speaker 1: Miller Samuel that when you're quoted in whatever rag you're 506 00:27:39,680 --> 00:27:42,600 Speaker 1: quoting in a thousand people in New York stand up 507 00:27:42,640 --> 00:27:45,119 Speaker 1: and go, he's an idiot. And they do that because 508 00:27:45,240 --> 00:27:48,479 Speaker 1: nobody believes what you're talking. Wait, wait is it, Tim Keen? 509 00:27:48,600 --> 00:27:53,920 Speaker 1: Just coming? Wait John John, No one buys the slowdown idea. 510 00:27:55,320 --> 00:27:59,960 Speaker 1: The top market uh six million in up for for Granwage. 511 00:28:00,200 --> 00:28:04,439 Speaker 1: No for the real world here. So for so the 512 00:28:04,480 --> 00:28:07,439 Speaker 1: real world here, the top what we call the luxury 513 00:28:07,440 --> 00:28:10,120 Speaker 1: market top ten percent is north of about four two 514 00:28:12,160 --> 00:28:15,800 Speaker 1: what's a monthly mortgage and four point two million? Uh 515 00:28:16,000 --> 00:28:19,960 Speaker 1: many buyers in that market mortgage right about of them 516 00:28:20,000 --> 00:28:22,439 Speaker 1: don't have mortgages. So cash Mark, I want to come 517 00:28:22,480 --> 00:28:25,600 Speaker 1: back very quickly. Here. Do you see that trickling down 518 00:28:25,720 --> 00:28:28,280 Speaker 1: to mere mortals? I mean, Michael barr is trying to 519 00:28:28,320 --> 00:28:31,960 Speaker 1: slip into three bedrooms to fireplaces for what seven hundred 520 00:28:32,000 --> 00:28:35,600 Speaker 1: a month or something? Michael, at least six seventy you 521 00:28:35,640 --> 00:28:42,160 Speaker 1: live out past acron, Ohio. Right, does it trickle down 522 00:28:43,000 --> 00:28:46,560 Speaker 1: you are? Yeah, Yeah, we absolutely are seeing some of that. Um, 523 00:28:46,600 --> 00:28:50,200 Speaker 1: it takes a while because you're really looking at at 524 00:28:50,280 --> 00:28:53,000 Speaker 1: least in New York, the development community is taking about 525 00:28:53,000 --> 00:28:55,880 Speaker 1: two years. That's where I want to go because David 526 00:28:55,920 --> 00:28:58,440 Speaker 1: Gurrow needs a new place. He's making kids so fast. 527 00:28:59,040 --> 00:29:01,560 Speaker 1: He needs a new place out in the land of 528 00:29:01,640 --> 00:29:05,080 Speaker 1: Jonathan Miller. Jonathan, I'm looking at ten thousand, five hundred 529 00:29:05,080 --> 00:29:09,400 Speaker 1: dollars a month. It's a duplex in Brooklyn, screams David Gura. 530 00:29:09,920 --> 00:29:12,480 Speaker 1: There's a balcony with a cal patch on it where 531 00:29:12,480 --> 00:29:15,840 Speaker 1: you can grow as artisanal. Hell, it's a modern new building. 532 00:29:16,280 --> 00:29:18,040 Speaker 1: You have told us years ago. One of the big 533 00:29:18,120 --> 00:29:21,080 Speaker 1: value adds of having you on is the boroughs in 534 00:29:21,200 --> 00:29:27,240 Speaker 1: every city are gonna build new condoe like property to 535 00:29:27,640 --> 00:29:30,640 Speaker 1: house people. Is it really going to be a blunt 536 00:29:30,800 --> 00:29:33,880 Speaker 1: you really buy that there already? Is that as you 537 00:29:33,920 --> 00:29:35,720 Speaker 1: move to the very high end of the market, then 538 00:29:36,600 --> 00:29:39,400 Speaker 1: glut is a harsh word, but it's it's certainly there's 539 00:29:39,440 --> 00:29:42,560 Speaker 1: there's uh much more supply than there is as you 540 00:29:42,600 --> 00:29:46,440 Speaker 1: move lower in price. In fact, the problem is is 541 00:29:46,480 --> 00:29:50,240 Speaker 1: that because there's spent so much emphasis on luxury rental 542 00:29:50,280 --> 00:29:55,719 Speaker 1: development that middle and entry level markets have basically had 543 00:29:55,760 --> 00:30:00,440 Speaker 1: static housing stock, which is forced many to moved to 544 00:30:00,440 --> 00:30:02,640 Speaker 1: the suburbs and become first time buyers. You mentioned on 545 00:30:02,720 --> 00:30:06,840 Speaker 1: the break Westchester. Yes, west Chester in the third quarter, 546 00:30:07,280 --> 00:30:09,680 Speaker 1: and this has been going on for about five quarters. 547 00:30:09,720 --> 00:30:13,120 Speaker 1: That's in Pennsylvania, that is that is in New York. 548 00:30:13,120 --> 00:30:17,720 Speaker 1: Watch we have four sponsors up there p Nce that 549 00:30:17,800 --> 00:30:21,160 Speaker 1: had the most sales in thirty five years. David Girl. 550 00:30:21,200 --> 00:30:24,080 Speaker 1: What's really interesting about this is Scarlett Food's house has 551 00:30:24,120 --> 00:30:27,080 Speaker 1: not gone up in Westchester because of the ice rink 552 00:30:27,120 --> 00:30:36,160 Speaker 1: in the back. D ut. But what's interesting, even with 553 00:30:36,240 --> 00:30:38,880 Speaker 1: that flood of volume over the last year year and 554 00:30:38,880 --> 00:30:42,000 Speaker 1: a half. You're really not seeing pricing housing prices rise 555 00:30:42,120 --> 00:30:44,960 Speaker 1: much yet there's there was a lot of slack, so 556 00:30:45,040 --> 00:30:47,760 Speaker 1: to speak, in the suburban markets, and I think it's 557 00:30:47,760 --> 00:30:49,640 Speaker 1: going to take another year or two before we see 558 00:30:49,640 --> 00:30:51,840 Speaker 1: a lot more price pressure like we're seeing in the city. Well, 559 00:30:51,920 --> 00:30:55,360 Speaker 1: let's talk affordable housing broadly construed. As Thomas pointed out, 560 00:30:55,360 --> 00:30:57,200 Speaker 1: I do live in Brooklyn. I'm on the Park Slope 561 00:30:57,240 --> 00:30:59,800 Speaker 1: List Serve, and I'm amused always when there is the 562 00:31:00,000 --> 00:31:02,200 Speaker 1: add for the bus tours of the suburbs that you 563 00:31:02,240 --> 00:31:04,120 Speaker 1: can take. There is a point at which people begin 564 00:31:04,160 --> 00:31:07,160 Speaker 1: to way the serious move out to Maplewood or two. 565 00:31:07,480 --> 00:31:10,440 Speaker 1: That reminds me for the foreclosure bus tours they had 566 00:31:10,520 --> 00:31:14,040 Speaker 1: during the height of the foreclosure bubble. They exist, and uh, 567 00:31:14,120 --> 00:31:17,360 Speaker 1: you know, I I wonder when that tipping point is 568 00:31:17,360 --> 00:31:19,440 Speaker 1: going to be that you know, you have neighborhoods. People 569 00:31:19,480 --> 00:31:20,760 Speaker 1: like to be in the neighborhoods because of who's in 570 00:31:20,760 --> 00:31:22,480 Speaker 1: the neighborhood. This is a city that's really wrestling with 571 00:31:22,520 --> 00:31:24,440 Speaker 1: this problem right now. Oh yes, And I think this 572 00:31:24,520 --> 00:31:27,160 Speaker 1: is what almost every municipality in the United States is 573 00:31:27,200 --> 00:31:31,000 Speaker 1: wrestling with right now, is affordable housing and affordable housing Uh, 574 00:31:31,120 --> 00:31:34,280 Speaker 1: not in terms of government subsidizement, in terms of middle 575 00:31:34,320 --> 00:31:38,160 Speaker 1: class UM and working class housing. Uh. What we're seeing 576 00:31:38,200 --> 00:31:41,440 Speaker 1: in in for example, your market in Brooklyn is this 577 00:31:41,520 --> 00:31:46,840 Speaker 1: outward radial push. So right now Queen's is setting all 578 00:31:46,920 --> 00:31:49,880 Speaker 1: time price records from the Brooklyn spellover. Are we going 579 00:31:49,960 --> 00:31:54,040 Speaker 1: to see a national policy? I mean, we make jokes 580 00:31:54,080 --> 00:31:56,600 Speaker 1: about this, but this is not funny. It's off people 581 00:31:56,600 --> 00:32:01,160 Speaker 1: are spending fifty plus and I letters from people. This 582 00:32:01,240 --> 00:32:04,680 Speaker 1: is not about New York, San Francisco, Washington, in Boston, 583 00:32:04,720 --> 00:32:09,320 Speaker 1: it's nationwide. Are you going to see a housing policy 584 00:32:09,360 --> 00:32:11,360 Speaker 1: for people that you know? I make jokes about ten 585 00:32:11,400 --> 00:32:14,160 Speaker 1: thousand five than a month. Come on, right, are we 586 00:32:14,200 --> 00:32:17,000 Speaker 1: going to see a policy? You know? I think we 587 00:32:17,040 --> 00:32:20,320 Speaker 1: can only see a policy when somebody actually figures it out. 588 00:32:20,840 --> 00:32:23,400 Speaker 1: There's been a lot of discussion about this over the 589 00:32:23,440 --> 00:32:28,360 Speaker 1: last few years and no real concrete solutions. One of 590 00:32:28,360 --> 00:32:31,480 Speaker 1: the big items I think would be to figure out 591 00:32:31,480 --> 00:32:35,280 Speaker 1: a way to normalize credit UM so that we don't 592 00:32:35,960 --> 00:32:41,160 Speaker 1: create this tightness of inventory UM and and I think 593 00:32:41,400 --> 00:32:44,920 Speaker 1: you know, when you have tight credit, low interest unusually 594 00:32:44,920 --> 00:32:49,760 Speaker 1: low interest rates. Uh. It really has caused development to 595 00:32:49,800 --> 00:32:52,600 Speaker 1: focus on the top of the market nationwide, has the 596 00:32:52,680 --> 00:32:56,920 Speaker 1: cell to buy got more difficult to make? In other words, 597 00:32:57,160 --> 00:33:00,200 Speaker 1: I'm renting in Brooklyn. I know many people who are, 598 00:33:00,200 --> 00:33:04,600 Speaker 1: and the prospect of buying just isn't there is that changing? 599 00:33:04,600 --> 00:33:06,240 Speaker 1: Are people more content renting than they have been in 600 00:33:06,280 --> 00:33:07,680 Speaker 1: the past. Do you expect that's a trend that's going 601 00:33:07,720 --> 00:33:11,480 Speaker 1: to continue. I don't know. If it's content, it's more 602 00:33:11,600 --> 00:33:14,080 Speaker 1: that they you know, they really signed. Yeah, I think 603 00:33:14,120 --> 00:33:16,200 Speaker 1: resigned is a is a better word. And that's why 604 00:33:16,240 --> 00:33:20,200 Speaker 1: we're seeing this phenomenon. People like yourself, Uh that you know, 605 00:33:20,240 --> 00:33:23,120 Speaker 1: and it's not even that rents are rising, it's just 606 00:33:23,160 --> 00:33:25,520 Speaker 1: that they're high. You know. The way I describe the 607 00:33:25,560 --> 00:33:29,000 Speaker 1: rental market in New York is a high plateau. Uh. 608 00:33:29,040 --> 00:33:31,440 Speaker 1: You know, in real estate, we tend to be very linear. 609 00:33:31,480 --> 00:33:34,120 Speaker 1: When rent stopped rising, that means they're gonna fall. But 610 00:33:34,400 --> 00:33:36,800 Speaker 1: that doesn't appear to be the case. Because we're five 611 00:33:36,880 --> 00:33:41,320 Speaker 1: years ahead of population projections from the census. We have 612 00:33:41,360 --> 00:33:44,640 Speaker 1: a record number of employees. There's just a mismatch between 613 00:33:44,720 --> 00:33:47,880 Speaker 1: the jobs are creating and the housing net we're creating. 614 00:33:49,480 --> 00:33:52,520 Speaker 1: When you look at you know, let's go to you know, Westchester, 615 00:33:52,640 --> 00:33:54,880 Speaker 1: the suburbs of New Jersey, John, you were mentioning the 616 00:33:54,960 --> 00:33:59,680 Speaker 1: airfield today used to land airplanes the good old days, 617 00:33:59,720 --> 00:34:02,840 Speaker 1: and Alton, New Jersey where I learned to fly, and 618 00:34:02,880 --> 00:34:05,600 Speaker 1: we would plan in a cornfield, land in a cornfield. 619 00:34:05,600 --> 00:34:07,880 Speaker 1: If you go stink and runway, if you go out 620 00:34:07,920 --> 00:34:10,600 Speaker 1: to Coltsonick, you know wherever it is, it's it's I 621 00:34:10,640 --> 00:34:14,080 Speaker 1: don't is it's across the Hudson, right, Yeah, it's in 622 00:34:14,120 --> 00:34:16,560 Speaker 1: central New Jersey, Central New Jersey. What is the market 623 00:34:16,600 --> 00:34:20,080 Speaker 1: like there, John Miller, Uh, It's it's a similar situation. 624 00:34:20,280 --> 00:34:24,279 Speaker 1: It's much like Fairfield County where you have a Westchester 625 00:34:24,840 --> 00:34:29,759 Speaker 1: where where you're having heavy sales volume. Um. But but 626 00:34:30,120 --> 00:34:32,560 Speaker 1: when you skew to the top of the market, that's 627 00:34:32,560 --> 00:34:36,279 Speaker 1: where it's softest. This is not just a New York thing. 628 00:34:36,360 --> 00:34:39,120 Speaker 1: This is what we're saying. Was seeing that in San Francisco, 629 00:34:39,200 --> 00:34:42,080 Speaker 1: was seeing in l a um where the suburban markets 630 00:34:42,560 --> 00:34:46,600 Speaker 1: are really starting to boom because the the role of 631 00:34:46,640 --> 00:34:50,160 Speaker 1: new urbanism has almost been too successful. The walkability that 632 00:34:50,440 --> 00:34:54,000 Speaker 1: you know, the supply hasn't been able to react to 633 00:34:54,080 --> 00:34:55,920 Speaker 1: demand in the right way. David. I know this is 634 00:34:56,000 --> 00:34:58,719 Speaker 1: sacrilege for you, but a large part of our audience 635 00:34:58,800 --> 00:35:02,360 Speaker 1: is going it's gives me you don't need a grantite counter. 636 00:35:03,040 --> 00:35:05,520 Speaker 1: I mean there's a lot of people saying that that. 637 00:35:05,680 --> 00:35:08,160 Speaker 1: You know, I remember the linoleum was ripped up on 638 00:35:08,200 --> 00:35:11,840 Speaker 1: the kitchen floor and it wasn't a big deal, right John, 639 00:35:12,239 --> 00:35:16,719 Speaker 1: help me here. I built my own counter. Actually may 640 00:35:16,760 --> 00:35:20,399 Speaker 1: made the grantit. Yeah, but a lot of that time 641 00:35:20,440 --> 00:35:23,920 Speaker 1: comes down to the cost of land. The cost of 642 00:35:24,040 --> 00:35:28,200 Speaker 1: land is what's driving the product. John millis never enough time. 643 00:35:28,320 --> 00:35:30,439 Speaker 1: Thank you so much, come back when prices go down. 644 00:35:40,000 --> 00:35:44,359 Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and 645 00:35:44,440 --> 00:35:49,520 Speaker 1: listen to interviews on iTunes, SoundCloud, or whichever podcast platform 646 00:35:49,640 --> 00:35:53,200 Speaker 1: you prefer. I'm out on Twitter at Tom Keene. David 647 00:35:53,239 --> 00:35:56,879 Speaker 1: Gura is at David Gura. Before the podcast, you can 648 00:35:57,000 --> 00:36:12,920 Speaker 1: always catch us worldwide. I'm Bloomberg Radio. M Who you 649 00:36:12,920 --> 00:36:15,640 Speaker 1: put your trust in matters Investors have put their trust 650 00:36:16,080 --> 00:36:20,000 Speaker 1: and independent registered investment advisors to the two and four 651 00:36:20,040 --> 00:36:24,480 Speaker 1: trillion dollars Why Learn more at find your Independent Advisor 652 00:36:25,040 --> 00:36:26,360 Speaker 1: dot com.