Speaker 1: Who you put your trust in matters. Investors have put
Speaker 1: their trust and independent registered investment advisors to the two
Speaker 1: and four trillion dollars. Why Learn more at find your
Speaker 1: Independent Advisor dot com. Welcome to the Bloomberg Surveillance Podcast.
Speaker 1: I'm Tom Keene with David Gura. Daily we bring you
Speaker 1: insight from the best in economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot com, and
Speaker 1: of course, on the Bloomberg. Our first guest this morning's
Speaker 1: Dominate Constant. He's managing director at deutsch Bank Global head
Speaker 1: of Interest rates Research, and he joins us now in
Speaker 1: the studio. Good morning, great to see you. Good morning.
Speaker 1: Let me start with a broad question, and that is
Speaker 1: when when when you're looking at the curve, when you're
Speaker 1: looking at rates, how much is that forecast changed in
Speaker 1: light of say, what we heard from Mario Dragging last week,
Speaker 1: all of the chorus we've heard from from federal'serve policy
Speaker 1: makers as well. Has it changed much over these last
Speaker 1: few months? Yeah? Yeah, I mean we we were around
Speaker 1: the Brexit period, we were a very constructive on rates
Speaker 1: and we had a target of tens and the flatter
Speaker 1: Yeel curve, and basically we think low rates became too
Speaker 1: much of a sort of a bad thing from the
Speaker 1: central bank perspective, especially at the long end. They felt
Speaker 1: that the Yel curve is too flat, was creating problems,
Speaker 1: but in the entitlement industry, creating challenges for say banks,
Speaker 1: because they tend to like steeper Yeel curves. And so
Speaker 1: I think you've seen the sort of jaw boning exercise
Speaker 1: whereby they want to basically get her long rates up
Speaker 1: a little bit, and that's not because they want to
Speaker 1: tighten monster conditions per se, but they'd like a little
Speaker 1: bit of extra risk premium in there that can help
Speaker 1: perhaps entitened entitlement people like the the insurers. And there's
Speaker 1: also been maybe an element whereby the hunt for year
Speaker 1: whereby investors who might otherwise buy bonds end up being
Speaker 1: pushed into riskuer assets by those instead and maybe create
Speaker 1: some kind of overvaluation and those those asset classes that
Speaker 1: that's perhaps a concern. So I think, whether you agree
Speaker 1: with it or not, that's what the central bankers have
Speaker 1: been sort of your aiming at, and that the bj
Speaker 1: A targeted the tenure yield stop it going up all
Speaker 1: down the e CBS, you know, mumbling about taper, where
Speaker 1: not you really believe it. And obviously the feders pushing
Speaker 1: on with what they hope to do, to be able
Speaker 1: to do is raising rates in December. Looking at treasuries
Speaker 1: and specific is long and attractive to you right now
Speaker 1: at all? I think it depends on your horizon, and
Speaker 1: obviously you know your view. I mean my view is
Speaker 1: it's it's it's it's getting attractive. It's not quite there yet.
Speaker 1: I'd like to sort of basically by tenure treasuries, you know,
Speaker 1: above two percent, I think I can probably go there, um,
Speaker 1: but you're going to be buying it over two percent
Speaker 1: with a view it's going to come back down against
Speaker 1: around one and a half if not one in the
Speaker 1: quarter based on what we have as some sort of
Speaker 1: disappointing growth expectations, especially in the US over the next year.
Speaker 1: Who are the FED policy makers that you listened to
Speaker 1: most closely? Of course you listen to to Cheer Yelling
Speaker 1: and vice cheer Fisher, But of the others, who's saying
Speaker 1: stuff that's the most materially interesting to you? Well, I
Speaker 1: think what's interesting is obviously sort of not not necessarily
Speaker 1: anyone in particular, but more the sort of general sort
Speaker 1: of you know, consensus outside the sort of yelling Fisher equation.
Speaker 1: And so you see, for example, some of the Hawks
Speaker 1: who are speaking maybe at the beginning of last year
Speaker 1: you could happily ignore them. Then suddenly you see sort
Speaker 1: of some some more devilish members perhaps you know, like
Speaker 1: Rose and Grown or Evans sort of you know, moving
Speaker 1: towards some of those viewpoints. And then suddenly Dudley sort
Speaker 1: of you know, pops up again and says a tenure
Speaker 1: years or two late. So so you know, things like that,
Speaker 1: I think catch my attention. And and then you know
Speaker 1: that there's some pressure. You know, we we know, you know,
Speaker 1: yelling is obviously you know, very much on the sort
Speaker 1: of dovish side classically speaking, but you know, there's some
Speaker 1: sort of pressure. And I think it's like we kind
Speaker 1: of all agree, you know, we would like to see
Speaker 1: higher rates, but I think the idea is, you know,
Speaker 1: whether they have the guts to do it and that
Speaker 1: kind of uh, you know, it depends on what this
Speaker 1: sort of you know, significant you know, minorities that ends
Speaker 1: up dominic you're talking there about a more cautious view
Speaker 1: where interest rates will go lower for longer and everything
Speaker 1: honkering down GDP estimates and such. When we do the dots,
Speaker 1: if we're going to continue to the do the dots,
Speaker 1: what is the constant long term that they should be
Speaker 1: looking at? Is long term? March of two thousand and
Speaker 1: seventeen is a long term where it is right now?
Speaker 1: Or should they go out because of your view to
Speaker 1: two thousand and twenty and make a guestiment out there? Well,
Speaker 1: I mean I think uh, um, I think long term
Speaker 1: is well, I mean right now, you know, we're thinking
Speaker 1: long terms sort of around you. Obviously these sort of
Speaker 1: two or three years from now. I think the the
Speaker 1: issue that we have in in this sort of growth
Speaker 1: cycle is it's more of a stagnation rather than a recession.
Speaker 1: And what that means is that there's no sort of
Speaker 1: imminent sort of exogenous shock that's being applied to the
Speaker 1: economy that's suddenly gained a sort of turn this cycle.
Speaker 1: And uh and it's kind of like a slow bleed.
Speaker 1: But we see that, we we see the nature of
Speaker 1: the slow blead. That's the idea that you know, as
Speaker 1: you hit fun employment and you almost go beyond what
Speaker 1: we consider funemployment. There's no sort of natural response of
Speaker 1: higher wages and all that kind of stuff, or productivity
Speaker 1: kicking into at a higher level. And that means, you know,
Speaker 1: the long term really can be sort of out that
Speaker 1: sort of two, three, four, five years, But the probabilities
Speaker 1: as such that you you effectively will you know, there
Speaker 1: will be some some negative shocks somewhere in that time horizon,
Speaker 1: and that's where you know that they're done raising rates.
Speaker 1: Basically you stated earlier this morning, the idea that there
Speaker 1: would be negative rates for longer. Does that leak over
Speaker 1: to a currently United Kingdom that's saying no, no, no,
Speaker 1: will never do negative rates. Is it even imaginable that
Speaker 1: Yellen and her follow on will have to consider negative rates?
Speaker 1: I definitely think that the US will have to consider
Speaker 1: negative rates on a you know, on a five ten
Speaker 1: year view, just because once this cycle really is finished. Uh,
Speaker 1: the what's the choice? You're you're gonna cut rates a
Speaker 1: couple of times because that's you know, they won't have
Speaker 1: risen them that far, or you go back to these
Speaker 1: extraordinary measures on quantitive easing, which I think you know,
Speaker 1: have their own issues around them. So my guess is
Speaker 1: it's probably gonna be a combination on both. When the
Speaker 1: market will definitely think about negative rates. There are lots
Speaker 1: of legal issues for negative rates in the States that
Speaker 1: so those have to be addressed. But it's a different
Speaker 1: issue in terms of the market being onto perhaps its price,
Speaker 1: in terms of market expectations they could price them. Uh.
Speaker 1: The I think the UK is different because the UK
Speaker 1: is obviously can have an extremely weak currency. It's having
Speaker 1: a weak currency, it can import inflation quite readily on
Speaker 1: that basis, is something that the US, you know, you
Speaker 1: can't do. The US is a very large economy, it's
Speaker 1: a relative insula. We have a reserve currency, so by
Speaker 1: all means we can try and get our currency down
Speaker 1: at the expense of the rest of the world. But
Speaker 1: even then we're not going to import that much inflation
Speaker 1: because the service sector can hold it up. So I think,
Speaker 1: you know, they're that that's a difference. I mean, so
Speaker 1: the UK can perhaps avoid negative rates if they just
Speaker 1: claps their currency. And one of the arguments of Japan
Speaker 1: and the Eurozone is they've found it very hard to collapse,
Speaker 1: you know, their currency interesting catalytically, what would be more
Speaker 1: powerful here for rates something out of the Bank of
Speaker 1: Japan or the e c B changed in either of
Speaker 1: those banks. Well, I mean, we've actually had a little
Speaker 1: buzzword recently whereby we've been arguing that sort of Japan
Speaker 1: has has kind of women has become the marginal price
Speaker 1: of global assets. And they've done that because obviously they've
Speaker 1: been significant outflows out of Japan. I mean, they you know,
Speaker 1: they are a very big investor, but it's really through
Speaker 1: the j GB yield curve. Their yield curve absolutely collapsed
Speaker 1: earlier this year here on as interest rates came down,
Speaker 1: and that kind of forced a lot of money to
Speaker 1: come out of Japan into other bond markets. And it's
Speaker 1: all part and parcel of the constity of easy thing
Speaker 1: that they're doing, and also to some extent the negative
Speaker 1: rates that they've employed. Uh that works through something we
Speaker 1: call the cross currency basis that got very extreme, which
Speaker 1: is kind of the cost to the Japanese investor of
Speaker 1: hedging their overseas and purchases. So we've been monitoring that
Speaker 1: very carefully and you can sort of see the influence
Speaker 1: they have on yields. And that's why when we talk
Speaker 1: about risk premium going away in our markets. We can
Speaker 1: actually sort of directly link it back to what the
Speaker 1: Japanese investor base is doing. And I think you know,
Speaker 1: if I was are fed and you're sort of saying, well,
Speaker 1: you know, risk premium going away the markets isn't great
Speaker 1: because it may lead to financial fability issues. You know,
Speaker 1: maybe you want to reverse that a little bit. And
Speaker 1: imani not to get you in trouble with Mr Crying
Speaker 1: or compliance, but with your many many contexts over the
Speaker 1: year in London, what is the cranstant thought and the
Speaker 1: future of finance and Wall Street in London. Well, I mean,
Speaker 1: my guess is that the London financial sector will figure
Speaker 1: it out in the sense that you know, London has
Speaker 1: always figured it out, so that it won't be nearly
Speaker 1: as draconian as uh, you know, as people sort of
Speaker 1: perhaps fear. Um, I mean obviously right now. I mean
Speaker 1: that the whole concern around this sort of passporting is
Speaker 1: is a great concern and there are incentives clearly for
Speaker 1: the Europeans who uh you know, to take back certain
Speaker 1: banking functions and sort of in terms of clearing and
Speaker 1: things like that in the Eurozone. Um, but my my
Speaker 1: guess is that you know that there will be. You
Speaker 1: know that London is too, too richer a center for
Speaker 1: financial talent, and they have all the incentives to try
Speaker 1: and work around whatever restrictions their talent was schooled uncertain
Speaker 1: theories in stan Fisher is recently Economic Club of New
Speaker 1: York speech talking on the I S curve Back to
Speaker 1: Hicks thirty nine. It's a different world today. I guess
Speaker 1: are you you using the theories you learned or is
Speaker 1: it a new world for you as you think every
Speaker 1: day and trying to piece the system together. Well, we're
Speaker 1: sort of relying on the theories that we've learned. I mean,
Speaker 1: I I go back to uh Thatcher when she was
Speaker 1: this sort of great quote pro European She knew exactly
Speaker 1: what she was doing in terms of putting the London
Speaker 1: at the center of the financial world and all the
Speaker 1: benefits that that was going to bring with it. And
Speaker 1: you know, for all the sort of headline news around
Speaker 1: these negotiations, I mean, why would you know, why would
Speaker 1: London or the British wanted to shoot themselves in the foot.
Speaker 1: It just doesn't make makes sense. So I think there's
Speaker 1: a lot of posturing going on at the moment. But yeah,
Speaker 1: I mean I would be uh, you know, I'd be
Speaker 1: shocked if there was in London was no longer what
Speaker 1: it currently is. We talked a lot about banks thinking
Speaker 1: of moving headquarters or officers overseas. But among your friends
Speaker 1: and colleagues, is there a conversation about that about eaven
Speaker 1: in London because of the sentiment in the place. Is
Speaker 1: that changed it on since since the vote? Um? No,
Speaker 1: not not not so not so obviously. I mean to
Speaker 1: be honest, I think there's a lot of people sort
Speaker 1: of you know, still can't believe the outcome of vote.
Speaker 1: I remember London itself was overwhelmingly in favor, you know,
Speaker 1: of staying within the the European Union. So um, you know,
Speaker 1: I think obviously people there are people who are concerned
Speaker 1: that if they don't have a British passport, what does
Speaker 1: that mean? And you know there's definitely you know, some
Speaker 1: people are running off and making sure they're getting their
Speaker 1: British passports. I mean, like you hear that from sort
Speaker 1: of some colleagues. Um, But in general now I think
Speaker 1: there's you know, there's a there's there's still somewhat sort
Speaker 1: of disbelief that this is actually happening and this is
Speaker 1: why I think, Um, the the Tory government is trying
Speaker 1: to sort of insist that Brexit really means brexit, because
Speaker 1: it might be very easy for people to think, well,
Speaker 1: you know, maybe it doesn't actually mean that. Uh, And
Speaker 1: so that's why they're sort of having to approach this
Speaker 1: in a hard way. Um. So we'll see what happens
Speaker 1: next year when they find they decide if and when
Speaker 1: they finally decided to pull the trigger on the article.
Speaker 1: From that referendum to the election here in the States,
Speaker 1: how much is is the campaign how much is the
Speaker 1: election weighing on forecasting rates at this point? You mean
Speaker 1: the election in the US? Yeah, well, I think it
Speaker 1: it could have weighed much more, uh, and to something
Speaker 1: that perhaps it still does weigh. But if there was
Speaker 1: a sort of shake up in terms of the political
Speaker 1: sort of outlook in terms of gridlock. Um. So obviously,
Speaker 1: you know, there is a view that if there was
Speaker 1: a clean sweep, particularly by the Republicans, but perhaps by
Speaker 1: the Democrats, then maybe gridlock would end, and that could
Speaker 1: change your outlook. I think if there's ongoing gridlock, um,
Speaker 1: I think people are going to say more of the same,
Speaker 1: and unfortunately more of the same is from an economic
Speaker 1: perspective and certainly from a financial market perspective, is a
Speaker 1: bit disappointing because it's going to mean more financial oppression,
Speaker 1: low volatility, regardless of your views on the actual parties.
Speaker 1: I mean, we don't really want more the same. That's problem. Dominic,
Speaker 1: thank you so much, very generous of you to be
Speaker 1: with us for these hours this morning here at Bloomberg.
Speaker 1: He is with Deutsche Bank. Dominic Constant writing just terrific
Speaker 1: notes and the main theme I heard their folks as
Speaker 1: a real subdued view on rate structure forward, on where
Speaker 1: yields are going. Well. Apple reported earnings yesterday after the bell,
Speaker 1: and we're drawn to the forecast of sales for the
Speaker 1: next quarter, Apples saying that will be between seventy six
Speaker 1: billion and seventy eight billion. Analysts had expected seventy five
Speaker 1: point four billion from what we're doing. By Walter Pi Sick,
Speaker 1: he's an analyst with B T I G. Walter. Always
Speaker 1: great to speak with you. Thanks great to be back on.
Speaker 1: So the question going into this I think was woold
Speaker 1: Samsung's loss here all the trouble caused by the problems
Speaker 1: with the Galaxy Notes seven become Apple's gain and what
Speaker 1: do we learn from the port yesterday and in the
Speaker 1: conference calls about that? Yeah, and I think the answer
Speaker 1: is kind of And by the way, we also heard
Speaker 1: some feedback from some of the operators that reported before
Speaker 1: Apple did, and I think my initial view was, or
Speaker 1: I guess the question was, if someone was buying a
Speaker 1: high end Android phone, did they just stick within that
Speaker 1: ecosystem because that's what they were used to. And I
Speaker 1: think what we've been hearing is that that they have
Speaker 1: actually seen switchers, because there's not particularly on the larger
Speaker 1: the larger models that the seven plus versus the note
Speaker 1: that they were actually pulling these people in, which is
Speaker 1: actually really good news. If Apple can get them in
Speaker 1: their own ecosystem and the customers please with it, it
Speaker 1: becomes sticking on their end, and it's gonna be harder
Speaker 1: for Android whatever vendor wants to get that customer back
Speaker 1: to pull them back. So, whether it was the operators
Speaker 1: earlier in the week or what Apple was saying on
Speaker 1: their call um, it sounds that they are benefiting. Now.
Speaker 1: I just want to put one pause on all this
Speaker 1: is you can't get a seven plus right now right
Speaker 1: that the ship dates are not out until the end
Speaker 1: of the year, So so their own inability to to
Speaker 1: ramp up the volumes on the seven plus, maybe because
Speaker 1: they didn't expect this mix shift to happen um might
Speaker 1: limit how much that they can benefits. I think they
Speaker 1: really need to focus on getting those volumes up to
Speaker 1: grab you know, more and more of those um those
Speaker 1: Samsung customers that just don't have a product right now.
Speaker 1: Kind of Tom is waiting for his his seven Let
Speaker 1: me ask you all to about the way that Tim Cook.
Speaker 1: How Tim Cook's Apple keeps people in that ecosystem. It's
Speaker 1: through services, I imagined. And what color did we get
Speaker 1: yesterday about how Apple has been improving its services. Obviously
Speaker 1: there were problems with Apple Music and and uh it's
Speaker 1: it's other offerings. Has that improved? Have we seen that stabilize,
Speaker 1: that's been that's been fun like this? The new messaging
Speaker 1: is great. It had really lagged behind other third party applications.
Speaker 1: So that was, for one important because look, if you're
Speaker 1: texting all of your friends and it works well, you're
Speaker 1: less likely to leave if you need to stay on
Speaker 1: Apple Phone to do that. But even before things like that,
Speaker 1: the company for years has been focused on when you're
Speaker 1: near your computer or your iPad or things like that
Speaker 1: that you know, all these services kind of transfer. They
Speaker 1: do whatever they can to keep you in so that
Speaker 1: they get your upgrade um every two years or however
Speaker 1: long it ends up being. Are they getting that upgrade?
Speaker 1: What is the character of the upgrade? When you talk
Speaker 1: to Apple bears, do they actually believe that people won't upgrade,
Speaker 1: that they'll sit on the phone for extra six hours
Speaker 1: or six months. Those bears have have had their day,
Speaker 1: i think for the past year, because those upgrade rates
Speaker 1: were clearly extending if you looked at how the numbers were.
Speaker 1: But what's been surprising and frankly reflected on this rally
Speaker 1: in the stock you know, over the past couple of months,
Speaker 1: m has been that the upgrades have actually come in
Speaker 1: for this phone. I mean, everyone think about this months ago, right,
Speaker 1: Everyone's saying, oh, this is not really that great, We're
Speaker 1: gonna wait till next year. And now the operators are
Speaker 1: actually seeing it. So the operators that have now reported
Speaker 1: are talking about upgrade rates or phone sales that that
Speaker 1: should go up, and there's saying like, look, are we
Speaker 1: can't even tell you where the demands can end up
Speaker 1: being because we're still not getting in supply from Apple
Speaker 1: to to really fully judge this, Yeah, it's a terrible
Speaker 1: problem stock exactly. Walter free cash flow forty three, fifty
Speaker 1: seventy and then the modeling of Wall Street is for
Speaker 1: a diminishment of cash flow. Do you buy that or
Speaker 1: does the juggernaut continue? I mean the margins. Obviously, the
Speaker 1: concern was about fifty basis points. Nothing that's not something
Speaker 1: that's gonna crush their ability to degenerate free cash flow.
Speaker 1: Taxes were ticking up a little bit, but again marginally
Speaker 1: not something that's going to change the cash flow. The
Speaker 1: interesting thing was we were thinking that they were gonna
Speaker 1: buy ten billion dollars of stock back. I think they
Speaker 1: only bought about four um. So as a result, I'm
Speaker 1: sorry six so so four less than we expected. So
Speaker 1: the cash position went up to fifty billions. So the
Speaker 1: cash is actually rising um at a time when you know,
Speaker 1: Cook on the call last night again brings up, well,
Speaker 1: we're intensely interested in these things. So you have to
Speaker 1: wonder again, what are they doing with their cash? Dividend work?
Speaker 1: Maybe increase the dividend, maybe acquisitions, will have to say
Speaker 1: who you put your trust in matters. Investors have put
Speaker 1: their trust in independent registered investment advisors to the two
Speaker 1: and of four trillion dollars. Why they see their roles
Speaker 1: to serve, not sell. That's why Charles Schwab is committed
Speaker 1: to the success over seven thousand independent financial advisors who
Speaker 1: passionately dedicate themselves to helping people achieve their financial goals.
Speaker 1: Learn more and find your independent advisor dot com. David
Speaker 1: Cousten is a mathematician from Brown University. He has the
Speaker 1: joy as a strategist of actually doing securities analysis before
Speaker 1: he was a guru, which makes for a different language
Speaker 1: in different work. David thrilled to have you with us
Speaker 1: with Goldman Sex. Of course, I've been watching the earnings
Speaker 1: and the new news for me is next to no
Speaker 1: growth up top in every quarter, every company's manufacturing down
Speaker 1: the income statement. The money question for me for next
Speaker 1: year partial differentials, unit dynamics, price dynamics up at the
Speaker 1: revenue line. You've got to get down to E. But
Speaker 1: whatever margin you want to pick, is there enough wiggle
Speaker 1: room forward to keep that shell game going? Or they
Speaker 1: have they cost cut their way to maximum efficiency. Well, uh,
Speaker 1: with apologies to your pejorative question, I think there's uh,
Speaker 1: there's enough wiggle rum. Yes, the margins are likely to
Speaker 1: remain flat, and that's an important issue to think about
Speaker 1: that with the U. S economy growing at around two percent,
Speaker 1: that means the top line revenue growth, if we include
Speaker 1: some inflation here as well, you're looking at modest top
Speaker 1: line growth called that four percent, a little faster from overseas.
Speaker 1: So that's your revenue line growing in the four for
Speaker 1: perhaps five level broadly across the market, and margins are
Speaker 1: likely to have peaked either late this year or sometime
Speaker 1: in two thousand seventeen, depending on the individual sector of
Speaker 1: the market, but broadly speaking, markets margins have been flat
Speaker 1: for for about five years, and it's been technology margins.
Speaker 1: The technology margins have been the key driver of why
Speaker 1: overall margins have I looked at pepsicolon. I don't know,
Speaker 1: it's just I looked at that company and it really
Speaker 1: stuck out to me, this game of making the margin
Speaker 1: down below, given that there's next to no revenue, do
Speaker 1: they have the wiggle room forward to continue to manufacture
Speaker 1: decent operating income decent eb what over well from an
Speaker 1: earnings point of view, certainly buy backs has been a
Speaker 1: contributor to fast faster earnings growth. Your revenue growth growing
Speaker 1: very very modestly, and there's been some margin. Uh, whatever
Speaker 1: margins they have been able to eek out have been
Speaker 1: largely from buy backs and more technology spending to try
Speaker 1: to eke out singles and doubles basically has been very
Speaker 1: It's been a tough operating environment, and the market has
Speaker 1: reflected that how does real GDP growth affect the markets?
Speaker 1: I know you've been been modeling this. If that changes,
Speaker 1: what effect does that have on the markets. So the
Speaker 1: way to think about real GDP growth is every one
Speaker 1: basis points, every one percentage points faster or slower growth,
Speaker 1: and it's going to add roughly five dollars a shared
Speaker 1: earnings and let's use a base of about a hundred
Speaker 1: and five dollars. So that gives you a immediate translation
Speaker 1: of how to think about your impact on faster or
Speaker 1: slower GDP growth. Uh, the way to think of impact
Speaker 1: on earnings and about seventy of the revenues of US
Speaker 1: corporations are domestic and so therefore the most important driver
Speaker 1: of say sales, of margins of earnings for companies is
Speaker 1: the broad growth pace of growth in the economy, and
Speaker 1: the economy right now is growing at about two uh
Speaker 1: not a you know, super fast growth right clearly, but
Speaker 1: also it's it's it's not in contraction, so it's glowing
Speaker 1: at a at at a muted level. And that is
Speaker 1: what has created uh a idea of what what Larry
Speaker 1: Summer's terms the secular stagnation, the idea that no matter
Speaker 1: how low rates are, it's not inducing corporations to be
Speaker 1: investing money. And so there they've been pretty reluctant, and
Speaker 1: that's what keeps growth slow. David and I were talking
Speaker 1: about what to talk to you about. I've got to
Speaker 1: ask you about M and A without talking specifically about
Speaker 1: telephone or or or Time Warner. Does this game just
Speaker 1: continue because Jennet Yellen has made money so cheap that
Speaker 1: there's no growth. I gotta buy something to keep the
Speaker 1: game going. Well, if we think about the waterfall, and
Speaker 1: that's a good description waterfall of the preference preferred uses
Speaker 1: of cash most companies. First US is capital spending, and
Speaker 1: companies are spending a lot on capex for maintenance. That's first.
Speaker 1: Second is research and development, and the third is M
Speaker 1: and A. Those are the three initiatives that most companies
Speaker 1: pursue in terms of growth, and so the idea of
Speaker 1: allocating capital to M and A makes sense in an
Speaker 1: environment where interest rates, as you point out, are very
Speaker 1: low and you can finance transactions at the big transactions
Speaker 1: like this work in the Costant History Library. Is there
Speaker 1: a successful merger outcome big deals there? There are? There
Speaker 1: are some combinations that make strategic sense in terms of
Speaker 1: the business profile of individual companies. We've done a lot
Speaker 1: of work on spinoffs and so oftentimes you have a
Speaker 1: combination then that leads to a spinoff of another division.
Speaker 1: So there's often investment opportunities around those um but it depends.
Speaker 1: In some cases there's a long approval process that takes place,
Speaker 1: and that makes the investment process a little more difficult.
Speaker 1: Just very quickly your thirty seconds David Costant on the
Speaker 1: general market by holder cell, can you acquire shares today?
Speaker 1: You are looking at modest increase over the next twelve months.
Speaker 1: You're looking at single digit quality five percent type of return.
Speaker 1: So you can call that try in the context of
Speaker 1: other opportunities, but it's still relatively modest in terms of
Speaker 1: historical John that's she's sure you're looking at a new
Speaker 1: Jersey looks better and better. I have some motion front
Speaker 1: property and David, thank you so much. David Custom with
Speaker 1: Golvin Sex can't say enough about the acuity of his research.
Speaker 1: Jonathan Miller has been way too long since we've spoken
Speaker 1: to you. To our global audience. You have been out
Speaker 1: front in the real estate slowed down in New York,
Speaker 1: and I think maybe San Francisco, is it everywhere else
Speaker 1: or is it just contained the stupidity of these two
Speaker 1: zip codes? Uh, I think the it's not. First of all,
Speaker 1: we don't want to insult those two zip codes, but
Speaker 1: sure we do. I can't affordable. Uh. So what we're
Speaker 1: seeing is more of a slowdown in higher priced housing markets,
Speaker 1: higher cost housing music. Uh, we're seeing a little bit
Speaker 1: of that. Actually. So what we've been seeing in these
Speaker 1: markets is an increase in resale inventory, which has slowed
Speaker 1: down the frenetic pace. UM, bidding wars aren't aren't what
Speaker 1: they were, but there's still above average. Where the way
Speaker 1: I described the market right now in general um is, uh,
Speaker 1: we're somewhere between white hot and above average. Okay, that's
Speaker 1: a nice character. There are the vectors of owning a
Speaker 1: home the same as renting a home, right now, those
Speaker 1: two separate markets that you deal in. Uh, yes, absolutely,
Speaker 1: it's still much cheaper to buy. The problem is, um,
Speaker 1: and this is on a national front, is inventory is
Speaker 1: very tight. Uh so we're we're seeing you know, uh,
Speaker 1: affordability being cho lunched. I mean, that's really what it
Speaker 1: comes down to, throw into tight credit on the bank
Speaker 1: lander side. And it's still the same story. Most recent note,
Speaker 1: it was about Greenwich, Connecticut, a town founded in sixteen forty.
Speaker 1: If I'm not mistaken, and you call it a hotbed
Speaker 1: of new urbanism. What's going on in Greenwich? Well, what's
Speaker 1: been fascinating about the suburbs that ring New York City,
Speaker 1: especially the high end markets, is you can see even
Speaker 1: the suburban towns are placing emphasis on in town development,
Speaker 1: proximity closer to the uh commuter lines to get into
Speaker 1: the city. It's not the it's not your grandmother's neighborhood,
Speaker 1: so to speak. Um. What we're seeing also is in
Speaker 1: market side greenwag is there's an incredible disconnect between meaning
Speaker 1: many sellers there are still priced are anchored to two
Speaker 1: thousand seven and that market never really saw the boom
Speaker 1: that we saw in the city, and part of it
Speaker 1: is because consumer tastes have changed. Uh, the city, the
Speaker 1: high end is poached some of the high end demand
Speaker 1: from the sub inventory. Not a problem inwach Uh it is.
Speaker 1: I wouldn't say it's not a problem, but I would
Speaker 1: say it's not. It's not limited that we don't have
Speaker 1: limited supply there. The way to describe Granwage and other
Speaker 1: high end housing markets in the suburban areas is just
Speaker 1: like the city, they're soft at the top, so there's
Speaker 1: very tight inventory lower you know, entry middle markets, and
Speaker 1: it's it's very soft at the high end. There are
Speaker 1: transactions are high end, so you're so prestigious Jonathan Miller
Speaker 1: Miller Samuel that when you're quoted in whatever rag you're
Speaker 1: quoting in a thousand people in New York stand up
Speaker 1: and go, he's an idiot. And they do that because
Speaker 1: nobody believes what you're talking. Wait, wait is it, Tim Keen?
Speaker 1: Just coming? Wait John John, No one buys the slowdown idea.
Speaker 1: The top market uh six million in up for for Granwage.
Speaker 1: No for the real world here. So for so the
Speaker 1: real world here, the top what we call the luxury
Speaker 1: market top ten percent is north of about four two
Speaker 1: what's a monthly mortgage and four point two million? Uh
Speaker 1: many buyers in that market mortgage right about of them
Speaker 1: don't have mortgages. So cash Mark, I want to come
Speaker 1: back very quickly. Here. Do you see that trickling down
Speaker 1: to mere mortals? I mean, Michael barr is trying to
Speaker 1: slip into three bedrooms to fireplaces for what seven hundred
Speaker 1: a month or something? Michael, at least six seventy you
Speaker 1: live out past acron, Ohio. Right, does it trickle down
Speaker 1: you are? Yeah, Yeah, we absolutely are seeing some of that. Um,
Speaker 1: it takes a while because you're really looking at at
Speaker 1: least in New York, the development community is taking about
Speaker 1: two years. That's where I want to go because David
Speaker 1: Gurrow needs a new place. He's making kids so fast.
Speaker 1: He needs a new place out in the land of
Speaker 1: Jonathan Miller. Jonathan, I'm looking at ten thousand, five hundred
Speaker 1: dollars a month. It's a duplex in Brooklyn, screams David Gura.
Speaker 1: There's a balcony with a cal patch on it where
Speaker 1: you can grow as artisanal. Hell, it's a modern new building.
Speaker 1: You have told us years ago. One of the big
Speaker 1: value adds of having you on is the boroughs in
Speaker 1: every city are gonna build new condoe like property to
Speaker 1: house people. Is it really going to be a blunt
Speaker 1: you really buy that there already? Is that as you
Speaker 1: move to the very high end of the market, then
Speaker 1: glut is a harsh word, but it's it's certainly there's
Speaker 1: there's uh much more supply than there is as you
Speaker 1: move lower in price. In fact, the problem is is
Speaker 1: that because there's spent so much emphasis on luxury rental
Speaker 1: development that middle and entry level markets have basically had
Speaker 1: static housing stock, which is forced many to moved to
Speaker 1: the suburbs and become first time buyers. You mentioned on
Speaker 1: the break Westchester. Yes, west Chester in the third quarter,
Speaker 1: and this has been going on for about five quarters.
Speaker 1: That's in Pennsylvania, that is that is in New York.
Speaker 1: Watch we have four sponsors up there p Nce that
Speaker 1: had the most sales in thirty five years. David Girl.
Speaker 1: What's really interesting about this is Scarlett Food's house has
Speaker 1: not gone up in Westchester because of the ice rink
Speaker 1: in the back. D ut. But what's interesting, even with
Speaker 1: that flood of volume over the last year year and
Speaker 1: a half. You're really not seeing pricing housing prices rise
Speaker 1: much yet there's there was a lot of slack, so
Speaker 1: to speak, in the suburban markets, and I think it's
Speaker 1: going to take another year or two before we see
Speaker 1: a lot more price pressure like we're seeing in the city. Well,
Speaker 1: let's talk affordable housing broadly construed. As Thomas pointed out,
Speaker 1: I do live in Brooklyn. I'm on the Park Slope
Speaker 1: List Serve, and I'm amused always when there is the
Speaker 1: add for the bus tours of the suburbs that you
Speaker 1: can take. There is a point at which people begin
Speaker 1: to way the serious move out to Maplewood or two.
Speaker 1: That reminds me for the foreclosure bus tours they had
Speaker 1: during the height of the foreclosure bubble. They exist, and uh,
Speaker 1: you know, I I wonder when that tipping point is
Speaker 1: going to be that you know, you have neighborhoods. People
Speaker 1: like to be in the neighborhoods because of who's in
Speaker 1: the neighborhood. This is a city that's really wrestling with
Speaker 1: this problem right now. Oh yes, And I think this
Speaker 1: is what almost every municipality in the United States is
Speaker 1: wrestling with right now, is affordable housing and affordable housing Uh,
Speaker 1: not in terms of government subsidizement, in terms of middle
Speaker 1: class UM and working class housing. Uh. What we're seeing
Speaker 1: in in for example, your market in Brooklyn is this
Speaker 1: outward radial push. So right now Queen's is setting all
Speaker 1: time price records from the Brooklyn spellover. Are we going
Speaker 1: to see a national policy? I mean, we make jokes
Speaker 1: about this, but this is not funny. It's off people
Speaker 1: are spending fifty plus and I letters from people. This
Speaker 1: is not about New York, San Francisco, Washington, in Boston,
Speaker 1: it's nationwide. Are you going to see a housing policy
Speaker 1: for people that you know? I make jokes about ten
Speaker 1: thousand five than a month. Come on, right, are we
Speaker 1: going to see a policy? You know? I think we
Speaker 1: can only see a policy when somebody actually figures it out.
Speaker 1: There's been a lot of discussion about this over the
Speaker 1: last few years and no real concrete solutions. One of
Speaker 1: the big items I think would be to figure out
Speaker 1: a way to normalize credit UM so that we don't
Speaker 1: create this tightness of inventory UM and and I think
Speaker 1: you know, when you have tight credit, low interest unusually
Speaker 1: low interest rates. Uh. It really has caused development to
Speaker 1: focus on the top of the market nationwide, has the
Speaker 1: cell to buy got more difficult to make? In other words,
Speaker 1: I'm renting in Brooklyn. I know many people who are,
Speaker 1: and the prospect of buying just isn't there is that changing?
Speaker 1: Are people more content renting than they have been in
Speaker 1: the past. Do you expect that's a trend that's going
Speaker 1: to continue. I don't know. If it's content, it's more
Speaker 1: that they you know, they really signed. Yeah, I think
Speaker 1: resigned is a is a better word. And that's why
Speaker 1: we're seeing this phenomenon. People like yourself, Uh that you know,
Speaker 1: and it's not even that rents are rising, it's just
Speaker 1: that they're high. You know. The way I describe the
Speaker 1: rental market in New York is a high plateau. Uh.
Speaker 1: You know, in real estate, we tend to be very linear.
Speaker 1: When rent stopped rising, that means they're gonna fall. But
Speaker 1: that doesn't appear to be the case. Because we're five
Speaker 1: years ahead of population projections from the census. We have
Speaker 1: a record number of employees. There's just a mismatch between
Speaker 1: the jobs are creating and the housing net we're creating.
Speaker 1: When you look at you know, let's go to you know, Westchester,
Speaker 1: the suburbs of New Jersey, John, you were mentioning the
Speaker 1: airfield today used to land airplanes the good old days,
Speaker 1: and Alton, New Jersey where I learned to fly, and
Speaker 1: we would plan in a cornfield, land in a cornfield.
Speaker 1: If you go stink and runway, if you go out
Speaker 1: to Coltsonick, you know wherever it is, it's it's I
Speaker 1: don't is it's across the Hudson, right, Yeah, it's in
Speaker 1: central New Jersey, Central New Jersey. What is the market
Speaker 1: like there, John Miller, Uh, It's it's a similar situation.
Speaker 1: It's much like Fairfield County where you have a Westchester
Speaker 1: where where you're having heavy sales volume. Um. But but
Speaker 1: when you skew to the top of the market, that's
Speaker 1: where it's softest. This is not just a New York thing.
Speaker 1: This is what we're saying. Was seeing that in San Francisco,
Speaker 1: was seeing in l a um where the suburban markets
Speaker 1: are really starting to boom because the the role of
Speaker 1: new urbanism has almost been too successful. The walkability that
Speaker 1: you know, the supply hasn't been able to react to
Speaker 1: demand in the right way. David. I know this is
Speaker 1: sacrilege for you, but a large part of our audience
Speaker 1: is going it's gives me you don't need a grantite counter.
Speaker 1: I mean there's a lot of people saying that that.
Speaker 1: You know, I remember the linoleum was ripped up on
Speaker 1: the kitchen floor and it wasn't a big deal, right John,
Speaker 1: help me here. I built my own counter. Actually may
Speaker 1: made the grantit. Yeah, but a lot of that time
Speaker 1: comes down to the cost of land. The cost of
Speaker 1: land is what's driving the product. John millis never enough time.
Speaker 1: Thank you so much, come back when prices go down.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
Speaker 1: listen to interviews on iTunes, SoundCloud, or whichever podcast platform
Speaker 1: you prefer. I'm out on Twitter at Tom Keene. David
Speaker 1: Gura is at David Gura. Before the podcast, you can
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