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Speaker 2: Going back to that Tesla story, disappointing Quartered socks off
Speaker 2: twelve percent, Elon must trying to redirect the focus of
Speaker 2: investors on other parts of the company, AI, robotaxis and
Speaker 2: the like. Steve Man joins as he covers the global
Speaker 2: auto industry for Bloomberg Intelligence.
Speaker 3: Steve, what you make of the quarter last night? Holistically?
Speaker 3: For the Tesla.
Speaker 4: Story, I mean, I still like their long term, medium
Speaker 4: term A look on AI, I'm not you know, in
Speaker 4: our view were not including eight billion optimous robots. I
Speaker 4: think that's a little bit out there. But AI is
Speaker 4: will continue to drive the stock. But I think today
Speaker 4: people are focused on their auto business. It's it's a
Speaker 4: little bit worrying. I think investors were expecting their automotive
Speaker 4: gross margin to flatten out in the second quarter versus
Speaker 4: the first, but it did decline about one hundred and
Speaker 4: fifty basis points to thirteen thirteen point nine percent, which
Speaker 4: is in line with you know, the legacy automaker's automotive
Speaker 4: growth marginal fourteen percent. So there is some concerns with
Speaker 4: the investors. Is you know, are there any more upside
Speaker 4: on margin? Are they you know, are they really that
Speaker 4: good with cost?
Speaker 5: But I guess the question is how do we value
Speaker 5: the stock?
Speaker 6: So I hear you that the auto part of their
Speaker 6: business is very much maybe in line with what other
Speaker 6: auto companies are talking about, but they trade an estimated
Speaker 6: pe of like ninety times, Like is it worth it
Speaker 6: for that? If it's if it's also being valued as
Speaker 6: an AI company.
Speaker 4: I think there's a couple of things that the investors
Speaker 4: are focused on beyond this second quarter. You know, they
Speaker 4: did pull ahead the start of production for a more
Speaker 4: affordable EV from like the second half of next year
Speaker 4: to the first half, which is critical. I think the market,
Speaker 4: the the EV market today globally is actually consumers in
Speaker 4: the EV market actually looking for a more affordable EV
Speaker 4: something that's you know, less than fifty thousand US dollars.
Speaker 4: You know, most of the EV's offered today are above
Speaker 4: fifty thousand dollars, So, you know, I think the investors
Speaker 4: are hoping that, you know, into twenty twenty five and
Speaker 4: into twenty twenty six, we're gonna get a rebound in
Speaker 4: EV sales because there's gonna be more affordable EV's, budget friendly,
Speaker 4: EV's for the mass market.
Speaker 2: Steve Tesla right now is an auto company and it's
Speaker 2: an other company. Elon wants you to focus on the
Speaker 2: other Can you define what's in that other bucket and
Speaker 2: when investors believe it will be material to their revenution profits.
Speaker 4: Yeah, you know, he talks about AI quite a bit,
Speaker 4: you know, robo taxi, optimism, robot but if you think
Speaker 4: of AI, I think there's you know, potentially even more
Speaker 4: ways to generate revenues from AI. One of the things
Speaker 4: that I think the market is also focused on other
Speaker 4: than robotaxi, taking a passenger from point A to point
Speaker 4: B is for example. You know, these cars have huge
Speaker 4: battery storage capacity, right, and these things, if they can
Speaker 4: move about on its own, you can really help out
Speaker 4: the utilities in terms of, you know, redistributing power across
Speaker 4: the grid.
Speaker 6: Well to that point, I mean, their energy business was
Speaker 6: actually quite impressive. It had its highest installation of batteries
Speaker 6: and revenue ever and energy accounted for just twelve percent
Speaker 6: and sixteen percent of Tesla's revenue and gross profit, respectively.
Speaker 6: I mean, yeah, it's going to fluctuate, but that's pretty strong.
Speaker 4: Yeah, it's it's a good good sign. I think, uh,
Speaker 4: you know, those those tend to be a little bit
Speaker 4: lumpy because the orders are big, and so whenever they
Speaker 4: deliver the the the order and when they ever they
Speaker 4: book it that that tends to be lumpy. I think
Speaker 4: we'll have to see if it's going to be consistent.
Speaker 4: But I think the investors are very focused on the
Speaker 4: auto business. You know, what are they when are they
Speaker 4: going to roll out the new are they going to
Speaker 4: be on time? And rolling out the new EV the
Speaker 4: affordable EV? And then longer term it's really uh, you
Speaker 4: know AI, is he going to deliver? What what is
Speaker 4: he going to say in October?
Speaker 1: Uh?
Speaker 4: You know the the AI event that he's hosting. You know,
Speaker 4: there was there were a lot of questions about that
Speaker 4: during the call, but he's pretty they were pretty tight lip.
Speaker 3: So what is that October evan?
Speaker 2: You tell us what the company says it is and
Speaker 2: what you think it may be good distinction?
Speaker 4: Yeah, yeah, I think I think for the most part,
Speaker 4: it's going to be, you know, what is this new
Speaker 4: vehicle they're launching. I think investors will be focused on,
Speaker 4: what is this new vehicle, What is the price of
Speaker 4: this vehicle? How are you going to manufactures so it
Speaker 4: further cuts you know, per unit costs. The other one
Speaker 4: is the full self driving, the full driving system that
Speaker 4: they're trying to roll out, the robo taxi that they're
Speaker 4: trying to roll out. I think people are going to
Speaker 4: be focused on when is that going to generate you know,
Speaker 4: material earnings and material revenue. Now I think it's not
Speaker 4: going to be until twenty thirty, but so but I
Speaker 4: really think the other thing that's going to get really
Speaker 4: people really excited is is it is the Optimist robot.
Speaker 4: Because the Optimist Robot, they really haven't talked too much
Speaker 4: about it yet. I don't think it's going to get
Speaker 4: to eight billion unit sales anytime soon. But you know,
Speaker 4: if they can incorporate those Optimist robot into their manufacturing,
Speaker 4: I think there's going to be a lot of potential
Speaker 4: for cost cuts.
Speaker 6: Okay, so the addressable market isn't John Tucker buying one.
Speaker 6: The adressible market is must using them to build a car.
Speaker 6: That's right, Okay, so don't worry you disappointed?
Speaker 5: Now everything for me to this.
Speaker 6: Point, like if John Tucker wanted one, could eventually he
Speaker 6: actually buy one?
Speaker 7: No, I don't.
Speaker 4: I don't think he doesn't. It's not for sale right now.
Speaker 4: I think what he's he's I think what he's going
Speaker 4: to try to do is, uh, you know, built this robot,
Speaker 4: optimize this robot. Uh, you know within the confines of
Speaker 4: Tesla first be you know, they're going to make it
Speaker 4: good enough, then they're going.
Speaker 8: To offer it to the public.
Speaker 4: All right, So maybe that's going to be not soon.
Speaker 6: Yeah, yeah, So you gotta wait, you gotta wait, John Tucker,
Speaker 6: all right, Steve thinks lot really appreciated. Steve Man Bloomberg Intelligence,
Speaker 6: Global Autos and Industrials research analysts. You have to wonder,
Speaker 6: just people on the call, like really addressable mark? Is
Speaker 6: everyone on the planet? I don't know that's could you.
Speaker 2: Look at the stands, I mean from starting the year
Speaker 2: till like the third week of April, the stock was
Speaker 2: down fifty percent. Since then up seventy five percent. So
Speaker 2: I mean it's just do you buy off on all
Speaker 2: these other bets outside of the car business.
Speaker 3: You have to bend metal or don't you?
Speaker 5: And then how do you?
Speaker 8: That's always been the.
Speaker 3: Case for Tessa story. You have to believe in Elon.
Speaker 3: That's simple as that.
Speaker 6: But it's going even bigger and bigger. It's like the
Speaker 6: other gets bigger and bigger with more stuff.
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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Speaker 6: This Bloomberg Intelligence Radio, Happy Wednesday, everybody, Happy hump Day,
Speaker 6: and Alex c alongside Paul Sweeney and John Tucker. We
Speaker 6: are broadcasting to you live from Interactive Broker Studio right
Speaker 6: here in Midtown Manhattan. So John Tucker laid out, the
Speaker 6: market declined perfectly. And my really silly question is well,
Speaker 6: Wire stocks down? And I say silly because you can say, oh,
Speaker 6: of course, you know Google Tesla the disappoint and therefore
Speaker 6: stocks are down.
Speaker 5: Is that it?
Speaker 6: Or is it a continuation of last week? And the
Speaker 6: rotation theme is still intact? Is there something else going
Speaker 6: on here. Bill Dudley talking in a Bloomberg opinion article
Speaker 6: about how he changed his mind. He thinks that a
Speaker 6: cut should come in July because employment doesn't look that good.
Speaker 5: So let's get the.
Speaker 6: Read here with Kim Forrest, founder and chief investment officer
Speaker 6: of Boca Capital Partners, joining us from Pittsburgh. Kim, it's
Speaker 6: a dumb question. Wire stocks down so much?
Speaker 9: Okay, I'm going to answer it with a dumb answer.
Speaker 8: Are you ready?
Speaker 9: Yeah, because there's more sellers than buyers.
Speaker 4: No.
Speaker 5: I love this answer. Actually I know well.
Speaker 9: I learned this on my very first day at Parker
Speaker 9: Hunter when I was a cell side analyst. That's how
Speaker 9: one of the radio announcers would say, Parker Hunter anyhow. Yes,
Speaker 9: And they didn't cover this in MBA program on valuation.
Speaker 9: But when people get afraid that maybe they've paid too
Speaker 9: much for a stock, or maybe that things aren't going
Speaker 9: the way they think, they sell and selling makes stocks
Speaker 9: go down because when there's more sellers and buyers, the
Speaker 9: prices fall. And that is why we love markets, because
Speaker 9: it does the inverse. When there are more buyers than sellers,
Speaker 9: prices go up. But the fundamentals really are is everything okay,
Speaker 9: And it looks like some things are okay and some
Speaker 9: things aren't, and it depends on what day the market
Speaker 9: thinks more of one than the other.
Speaker 2: What do you make of this whole AI trade in
Speaker 2: the marketplace certainly was a theme not just for tech
Speaker 2: companies but for the whole market beginning in twenty twenty three.
Speaker 3: How do you view it?
Speaker 2: Because again we've had Tesla talking about it last night,
Speaker 2: Google talking about it still.
Speaker 9: Well, I have a nuanced view because I was a
Speaker 9: software developer in company that actually developed neural networks and
Speaker 9: then used neural networks. So and that is the underlaying
Speaker 9: technology that's behind chat, GPT and autonomous driving and all
Speaker 9: of that kind of stuff. So here's the skinny on that.
Speaker 9: I strongly believe the moment for AI is finally here
Speaker 9: because computers can be fast enough and we have enough
Speaker 9: of the right data to be able to train models.
Speaker 9: But investors are always impatient with new technology, and they thought,
Speaker 9: just like they thought autonomous druck cars were just around
Speaker 9: the corner in twenty sixteen, they're not. It always takes
Speaker 9: longer to develop really good technology. AI is really good,
Speaker 9: but it's not going to pay off in the next
Speaker 9: fifteen to twenty minutes. So investors are becoming aware of
Speaker 9: that right now, especially as Google kind of outlined its
Speaker 9: spending plans that go on for the foreseeable future.
Speaker 6: Well, that's where I think that question then goes to
Speaker 6: my first question of why our stocks are selling off,
Speaker 6: and that basically they have to spend to then monetize,
Speaker 6: and there's going to be a gap between the spending
Speaker 6: and the monetization and there's still a race to spend.
Speaker 6: And as an investor, how do you value something like that?
Speaker 9: Well, in my mind, you don't yet, right I don't
Speaker 9: know what Google is going to be able to monetize
Speaker 9: because we're not clear what problem they're solving. Like that's
Speaker 9: the first thing we have to ask, what problem are
Speaker 9: you solving? Is it worth solving with technology? And how
Speaker 9: much money will you get? And we don't have any
Speaker 9: of those answers, But we do have this idea that
Speaker 9: AI is going to work out. So how we play
Speaker 9: this is we've been buying the semis and then storage
Speaker 9: companies or semis that have to do with storage, because
Speaker 9: we know AI takes tons of data, unbelievable amounts of data,
Speaker 9: probably more data than it takes electricity. I mean, I
Speaker 9: can't emphasize how much data is needed. Okay, I've ever
Speaker 9: done that, but that's what we've been doing. So we
Speaker 9: buy companies like net app, which makes storage enterprise storage devices,
Speaker 9: and then Micron because they make one of the elements
Speaker 9: of storage, which is called nand it's a technology a
Speaker 9: chip that you can store things on. And that is
Speaker 9: how we've played it because we don't know what time
Speaker 9: frame we're going to be in. We just know somewhere
Speaker 9: within the next ten years, AI is going to be
Speaker 9: a thing and show productivity and people will pay for it.
Speaker 2: Outside of technology, Kim, are there areas that are interest you?
Speaker 8: Oh?
Speaker 9: All of them are interesting, honestly. You know, energy is
Speaker 9: a big question mark because it's been kind of unloved
Speaker 9: as we've done the move towards green and now we're
Speaker 9: kind of going maybe we need you know, energy for
Speaker 9: a while longer, you know, the old fashioned kind that
Speaker 9: we dig out of the earth. That's kind of interesting,
Speaker 9: and I think if we're going to be in a
Speaker 9: declining interest rate environment, maybe things like housing and then
Speaker 9: ancillary areas around housing, like home goods and that sort
Speaker 9: of thing. You know, items that people buy when they
Speaker 9: buy a new house that might be interesting. And again,
Speaker 9: these are kind of three to five year time periods
Speaker 9: for us. We don't ever really want to make bets
Speaker 9: on the next six months because anything can happen, right,
Speaker 9: So we're always looking out three to five.
Speaker 6: Years, which brings me though to the election can because
Speaker 6: I appreciate that you're not going to tradeer on the election,
Speaker 6: But there are some policies that feel binary and election
Speaker 6: and energy maybe one of them in a Trump versus
Speaker 6: Harris world, which would then affect investment and returns and
Speaker 6: prices in the next, say, three to five years, which
Speaker 6: is your time frame.
Speaker 5: How do you wind up thinking about it?
Speaker 9: Sure, well, I'm kind of a realist too. As much
Speaker 9: as you would like the world to be driven by renewables,
Speaker 9: it's not practical, isn't if you look at any of
Speaker 9: the numbers. Even as the use of renewables have gone up,
Speaker 9: so too has the use of non renewables. Right, So
Speaker 9: I think if you you know, sure the scale may
Speaker 9: be tilted towards renewables, maybe you play it by finding
Speaker 9: a company that does both. And a lot of the
Speaker 9: energy companies are trying to get a green footprint somehow,
Speaker 9: so I think that might be where you look.
Speaker 2: Fixed income, Kim, how are you guys allocating to fixed
Speaker 2: income these days? Because you know, folks can sit into
Speaker 2: your treasure and get down your you know, four point
Speaker 2: four percent.
Speaker 9: I know, well, we're short. We're still in the short term,
Speaker 9: right Like whenever I have to replace a bond, I'm
Speaker 9: trying to go as short as I can to get
Speaker 9: the highest amount. And two to three years is where
Speaker 9: we're liking to buy. Anything longer than that, I don't know.
Speaker 9: It just seems too risky because it could go literally
Speaker 9: either way. Right if we're going to reinflate, if the
Speaker 9: curve is going to go back to normal, maybe long
Speaker 9: term rates will go up a bit, short term rates
Speaker 9: will fall. So let's live it up and buy some
Speaker 9: short term rates because we usually we don't trade them.
Speaker 9: We just let them expire, right, So we're buying the
Speaker 9: yield so maturity.
Speaker 5: Before we let you go.
Speaker 6: Let's get into the debate about small caps. Do you
Speaker 6: say yay or nay to small caps?
Speaker 9: I am a big ya. I have about half of
Speaker 9: my portfolios in small I would say mid cap. I
Speaker 9: can't really look at anybody less than a billion dollars,
Speaker 9: I don't have the temperament for the companies that live there.
Speaker 9: That being said, those high quality small companies often get
Speaker 9: bought by larger companies, and that's kind of what we're
Speaker 9: looking for, is companies that have a really great track
Speaker 9: record of making products that their clients love, and a
Speaker 9: lot of them tend to get bought out and it
Speaker 9: really does add a boost to your returns. So that's
Speaker 9: what we look for.
Speaker 5: All right, good stuff, Kim, We appreciate you.
Speaker 6: Thank you very much, Kim. Forrest founder and CIO. A
Speaker 6: book of capital partners joining us on that. Okay, de reine.
Speaker 5: But it's interesting.
Speaker 6: It's an M and A play. It's not like a
Speaker 6: fed cutting play. It's not necessarily a rotation play, but
Speaker 6: at takeout play.
Speaker 5: So that's also quite interesting.
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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Speaker 5: It's Bloomberg Intelligence Radio.
Speaker 6: We bring you all the top news and business finance,
Speaker 6: economics and earnings. There are lens of our Bloomberg Intelligence
Speaker 6: folks that cover two thousand companies and one hundred and
Speaker 6: thirty industries worldwide, and now is our great time we
Speaker 6: get to focus on Google aka Alphabet that's dock down,
Speaker 6: following the most since February twenty six and hitting its
Speaker 6: lowest level since June eighteenth. This is really hitting it
Speaker 6: the earnings from yesterday. So Man Deep saying Bloomberg Intelligence
Speaker 6: senior tech industry analyst is joining us now in studio
Speaker 6: to dissect it. So on the one hand, we have
Speaker 6: the CAPEX spend and the other hand we have.
Speaker 5: The YouTube stuff. Which one you want? Which is the
Speaker 5: bigger driver of the downside today?
Speaker 10: Capex I mean simply because this quarter companies are not
Speaker 10: getting a pass on boosting CAPEX. That wasn't the case
Speaker 10: last quarter. But clearly I think investors vary about how
Speaker 10: much CAPEX these companies are going to throw on AI.
Speaker 10: And look, in the case of Alphabet, there is revenue
Speaker 10: in the cloud segment, so they quantified the AI impact
Speaker 10: on cloud which was high single digit contribution to cloud segment,
Speaker 10: and cloud segment actually saw on acceleration in top line growth.
Speaker 10: But YouTube miss, I think I attribute that more to
Speaker 10: software spending outside of financial services and retail sectors like automotive.
Speaker 10: They're not spending on digital ads right now because the
Speaker 10: sector is going through a cyclical downturn. So there is
Speaker 10: that cyclical element to YouTube's business. But I think there
Speaker 10: are a lot of positives. Course search growing at fourteen percent.
Speaker 10: I mean, think about the scale of search and the
Speaker 10: fact that they are able to grow double digits. That's
Speaker 10: quite impressive, and that too at a very healthy margin.
Speaker 10: I mean, the biggest fear for this company was margins
Speaker 10: are going to get degraded because of you know, AI
Speaker 10: and whatnot. That we haven't seen that. So a lot
Speaker 10: of positives, but clearly kapex was an overhang.
Speaker 2: All right, I've been making a point today. If any
Speaker 2: team deserves a benefit of the doubt of higher CAPEX,
Speaker 2: it's Sundar, Punchai and all the folks at Google. Let's
Speaker 2: stop whining about capex. Have they ever not generated to
Speaker 2: return on their spending?
Speaker 10: I mean, the problem with Google's management team is they
Speaker 10: say very little on their earnings call. Like even when
Speaker 10: you answer them, like ask a question, they would answer
Speaker 10: it with as little words as possible, So you know
Speaker 10: it sounded like they are bullish on their AI opportunity
Speaker 10: and it's actually monetizing. Uh, some of that capex is
Speaker 10: going towards Wemo. If you think about you know, robotaxis
Speaker 10: and what Tesla had to go through their call last night.
Speaker 10: Wemo actually did two million rides here to date and
Speaker 10: these are all autonomous rides and they're expanding to other cities.
Speaker 10: So think about, you know, the skill in that business
Speaker 10: if they're able to do actually autonomous driving successfully. So
Speaker 10: I do think their capex as well spent, but they
Speaker 10: just don't explain it that well to the street, you know,
Speaker 10: to get the credit.
Speaker 6: So when it comes to then the AI spend, what
Speaker 6: other companies are going to get judged in the same
Speaker 6: harsh light and what's Google's one up on them?
Speaker 10: If any Meta I mean you saw a negative reaction
Speaker 10: with Alphabet, I mean think about what happened to be worse.
Speaker 10: Meta is going to be worse. Even last quarter when
Speaker 10: they raise their capex, Meta had a negative stock reaction
Speaker 10: simply because investors are concerned about how much this company
Speaker 10: is going to spend on metaverse versus AI. And so
Speaker 10: in the case of Meta, they're losing eighteen billion dollars
Speaker 10: a year on reality labs. They're spending Capex in addition
Speaker 10: to the AI Capex, which they launched a new large
Speaker 10: anglid model. And to my mind, any company right now
Speaker 10: with their own large anglid model, whether it's Alphabet, Meta
Speaker 10: or a Microsoft Open AI, they have an advantage. They
Speaker 10: have the best reasoning capability when it comes to the
Speaker 10: AI spend and it's actually a future driver of revenue.
Speaker 10: So it all comes down to how they are going
Speaker 10: to monetize it. And I think with Microsoft and Google
Speaker 10: they have an advantage because it shows up in the
Speaker 10: cloud revenue. In the case of Meta, they have to
Speaker 10: monetize the AI spend through ad revenue or a subscription
Speaker 10: based you know, chat pot offering, which nobody knows when
Speaker 10: that will come.
Speaker 2: What is Gemini and John Talker and I be using it.
Speaker 10: It's a better way to search for certain type of queries.
Speaker 10: So whenever you want you know something with a detailed
Speaker 10: answer as opposed to going through ten blue links to
Speaker 10: find that answer. Gemini is great. The one good thing
Speaker 10: about Gemini is when you search for a query, it's
Speaker 10: going to show you the relevant YouTube link, whereas if
Speaker 10: you search that on chatch Ept or Claude. It's not
Speaker 10: going to have that YouTube link. So it's going to
Speaker 10: generate the text, it's going to generate a summary, it's
Speaker 10: going to answer your query, but it won't have that
Speaker 10: appropriate YouTube link. And that's Google's biggest advantage with the
Speaker 10: large anguage models.
Speaker 3: It's do you have to pay for that?
Speaker 10: Yeah, it's a twenty dollars subscription for the advanced version
Speaker 10: that app will that that's kind of and that's where
Speaker 10: I mean you are not like you don't think it's
Speaker 10: a big deal, But I think Google owning maps and
Speaker 10: YouTube is such a big deal in this arena of
Speaker 10: large anglid models, because it's one thing to generate a
Speaker 10: text based response, it's another thing to have a blue
Speaker 10: link with the YouTube video that they want you to
Speaker 10: see or the map link that they want you to
Speaker 10: click on inside that response. And other large anglid models
Speaker 10: can't do it because they don't own these assets.
Speaker 5: So well, before we go.
Speaker 6: One thing though, but the meta is that if if
Speaker 6: these companies, though don't spend, then at some point when
Speaker 6: all this is monetizable in a big, big way, all
Speaker 6: of a sudden numbers Gonta complain that then Meta's super
Speaker 6: far behind.
Speaker 5: So what's the chicken in the egg here?
Speaker 10: I mean, I still think nobody wants to be the
Speaker 10: first one to pull back on capex. So it really
Speaker 10: is a question of when do we have sufficient supply
Speaker 10: of GPUs, And because the market is supply constrained when
Speaker 10: it comes to the chip side of the equation, nobody
Speaker 10: wants to come across and say, oh, I have enough
Speaker 10: and I don't need to spend on cap anymore. And
Speaker 10: I think right now, these companies generate so much cash
Speaker 10: every year, like Alphabet will generate over one hundred billion
Speaker 10: in free cash flow, so they can afford to spend
Speaker 10: sixty billion in capex, and they're looking to make a
Speaker 10: twenty three billion dollar acquisition that fell through, but clearly
Speaker 10: they want to spend their free cash flow, which.
Speaker 6: To your point, like, yeah, go ahead, you earned it,
Speaker 6: you spend it, all right, Mandy, you're the best, so helpful,
Speaker 6: so great, I asked Mabe slept.
Speaker 5: He said yes, but I don't know if that's as
Speaker 5: at home too, to make it even worse, I know, I.
Speaker 6: Know, but he was on late yesterday, early today and
Speaker 6: all that stuff. All right, Mandy, the best Mandy is
Speaker 6: saying Bloomberg Intelligence senior tech industry analysts.
Speaker 5: It's like, I feel like.
Speaker 6: Investors want both, Like they want the growth and they
Speaker 6: want the company to be profitable with it, but then
Speaker 6: they don't want the CAPEC spend.
Speaker 5: It's like, dude, you can't have both.
Speaker 2: Yeah, But then you get analysts like Dan Ives It
Speaker 2: just says, you know, you pick the manager teams, you
Speaker 2: pick the technology, and you just go and you just
Speaker 2: got to shut your eyes and you know, not worry
Speaker 2: about the peaks and valleys, and you think that Tesla again.
Speaker 3: First, you know, the first quarter through the third.
Speaker 2: Week of April down fifty percent, only to bounce back
Speaker 2: seventy five percent, So you.
Speaker 3: Gotta be ready for those roller coachs with these tech names.
Speaker 8: I guess yeah.
Speaker 6: But then the problem with Tesla is, at least I
Speaker 6: feel like it's clearly laid out if you're listening to
Speaker 6: a Google conference call. The problem with Texla A Tesla
Speaker 6: is like when he says something about a robotaxi and
Speaker 6: Elon Musk says, our solution would work anywhere, even a
Speaker 6: New Earth. What I don't understand, like that they're all
Speaker 6: these it's Elon musky stuff.
Speaker 5: And that must be very difficult.
Speaker 3: Where is that elon musk risk that you take.
Speaker 5: Or musky stuff? As I am saying it.
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Speaker 2: Let's tell commercial real estate because I have no idea
Speaker 2: what's going on here. I need to see some price action,
Speaker 2: price discovery out.
Speaker 3: There in the marketplace.
Speaker 2: If I'm going to buy an office building on Third
Speaker 2: Avenue in Manhattan, what kind of discount am I going
Speaker 2: to get? Fortunately, Abbail Duolottle knows a ton of people
Speaker 2: in that business. Abigail Doulttle's on markets reporter, but she's
Speaker 2: got her She's wired into that commercial real estate business,
Speaker 2: which means the whole Morgan Stanley real estate mafia.
Speaker 3: Alumni crew.
Speaker 2: One of them is Sunny Kelsey Co Chief executive Officer Bgo.
Speaker 2: I said, who is bgl? They got eighty five billion
Speaker 2: in assets under management? What rock have I been sleeping under?
Speaker 2: So these guys are big, Sonny. Thank you so much
Speaker 2: for joining us here in our studio. Abbigil, thank you
Speaker 2: so much for joining us as well.
Speaker 3: Sonny.
Speaker 2: All I know is I walk down Third Avenue in
Speaker 2: a lot of empty buildings, and I'm just wondering how
Speaker 2: representative is that of the commercial real estate business. How
Speaker 2: do you guys view the commercial real estate business today?
Speaker 2: It's got to be like something you've never seen before.
Speaker 7: It is something like we've never seen before. And you think,
Speaker 7: after thirty four years, you see everything, and you know,
Speaker 7: we always get asked to compare cycles, and every cycle
Speaker 7: is different, and this one is definitely different. I'll answer
Speaker 7: your question in a second. But the context around it
Speaker 7: is you just pick the asset class that's been hit
Speaker 7: the worst in the last four years, right two years
Speaker 7: of a pandemic call it, where people were working from home,
Speaker 7: and a bunch of other stuff, and then you've got
Speaker 7: it piling on in terms of kind of bad secular
Speaker 7: news for the for the office sector. Right. Work from
Speaker 7: home was one problem on real estate owner, so I
Speaker 7: think it's a problem. Work from home was one problem
Speaker 7: which never would have happened without technology like Zoom. But
Speaker 7: then you have AI, you have a bunch of other
Speaker 7: stuff coming, which are all going to come after jobs.
Speaker 7: Presumably office and gateway cities like New York City is
Speaker 7: probably the if you want to take about lower left,
Speaker 7: if that's the bad place to be, that's a bad
Speaker 7: place to be, right. I do agree when the baby
Speaker 7: gets thrown out with the bathwater and they say all
Speaker 7: real estate is bad. You know, people focus on that
Speaker 7: because it's kind of what's present.
Speaker 6: Right.
Speaker 7: We're Abigail and our talking about how the streets and
Speaker 7: not here in the retailers are all empty that used
Speaker 7: to be here. That's what you see, right. What you
Speaker 7: don't see as much is people are still living somewhere.
Speaker 7: You still get your goods and services. Somehow those are
Speaker 7: coming to you from a warehouse somewhere as opposed to
Speaker 7: coming to you because you're going to a store. Not
Speaker 7: that those have been immune, right, But office it's been tough,
Speaker 7: and honestly, I don't see it getting better in the
Speaker 7: near term.
Speaker 6: Well, then to that point, what part of real estate
Speaker 6: is cyclical versus secular? Yes, so like the warehouse point
Speaker 6: you make, that has to be a secular shift. But
Speaker 6: we're still in a cyclical market, so that's going to
Speaker 6: be very tricky, correct.
Speaker 7: Yeah. Well so look, I would say as I think
Speaker 7: about investing, I think about the four quadrants. And people
Speaker 7: think about dead equity, public, private, I actually think about cyclical,
Speaker 7: secular and headwind tailwind Right, So if you think about
Speaker 7: who what's in secular decline and as secular headwinds, office
Speaker 7: is the best asset class to think about, right, All
Speaker 7: the top down news is bad, the bottom up news
Speaker 7: is bad. Capital markets are bad. Terms of what has
Speaker 7: cyclical tailwinds? Right, What has cyclical tailwinds and secular tailwinds?
Speaker 7: Anything related to technology. So I'm sure you've had a
Speaker 7: lot of people come in to talk about data centers.
Speaker 7: We have a big data center business too. It's been great.
Speaker 7: The issue is it's no secret that it's great. So
Speaker 7: there's a lot of money piling in. There's a huge
Speaker 7: amount of demand, which is what makes great secular cyclical opportunity.
Speaker 7: I think where we actually do our job, where we
Speaker 7: make where we can be in a position to make
Speaker 7: the most money is places that have secular tailwinds and
Speaker 7: cyclical headwinds. Okay, right now, most things have cyclical headwinds
Speaker 7: right now because the capital markets. When you ask Paul
Speaker 7: when things are going to come back, until credit comes
Speaker 7: back into the market, we're not going to see it.
Speaker 7: But right now it's a great time to be in warehouses.
Speaker 7: The secular tailwinds are still pretty good, but it's expensive
Speaker 7: to build them, it's expensive to buy them. And so
Speaker 7: if you can figure that out with data, with anything
Speaker 7: else to kind of get an edge, that's good. Housing
Speaker 7: is the best bet in my view right now. And
Speaker 7: this is a US common hap of our portfolios. US
Speaker 7: half as non US people have to live somewhere. We
Speaker 7: have a structural housing shortage, but we have some issues,
Speaker 7: and so to me, it's actually the really interesting.
Speaker 1: Place to be.
Speaker 11: Well, speaking of your portfolio, it's not all bad because
Speaker 11: right here over on Park Avenue four twenty five, I've
Speaker 11: walked by that building many times.
Speaker 8: It's the new Citadel building.
Speaker 11: It is absolutely beautiful and there is the Bental Greek green.
Speaker 8: Oak stamp right on it.
Speaker 11: You know, when we think about this pain though, it
Speaker 11: really comes back to rates, and you've had you know,
Speaker 11: we've stayed in touch, and I know that you've had
Speaker 11: a great call on rates that back in twenty twenty one,
Speaker 11: twenty twenty two, when the Fed forecast or telegraph that
Speaker 11: they were going to raise, you took a particular view.
Speaker 11: Bond traders didn't do this. I know a lot of
Speaker 11: other commercial real estate investors that were more the hopium
Speaker 11: talk to us about what you were seeing, what you did,
Speaker 11: and what it meant for your portfolio.
Speaker 7: So I think, and again I'm not an economist, but
Speaker 7: my philosophy has always been you can do nothing about
Speaker 7: what you can't control, so focus on what you can control.
Speaker 7: We can control the rate environment. So when the FED
Speaker 7: raise rates, and they did it at the pace they
Speaker 7: did it and at the you know, the slope at
Speaker 7: which they did it, our view was we couldn't count
Speaker 7: on when they were going to come back down again.
Speaker 7: That was and so what do we do We invested
Speaker 7: against that. Now, part of it is why did we
Speaker 7: think they were doing what they were doing right? And
Speaker 7: I think a lot of people focused what I would
Speaker 7: say on the demand side. They focus on cash. They
Speaker 7: talked on central banks had pumped in COVID money all
Speaker 7: that stuff. We actually focus on the supply side, the
Speaker 7: benefit of having a big global industrial portfolios. We see
Speaker 7: three put we have a big business in Asia. We
Speaker 7: saw China shut down, the world's largest manufacturer shut down
Speaker 7: for three years. It's a little bit of a statement
Speaker 7: of hyperbole, but they shut down for three years. Our
Speaker 7: view was, you are not going to get back to
Speaker 7: normality until China reopened. China didn't reopen until the end
Speaker 7: of twenty two beginning of twenty twenty three, after the
Speaker 7: five year Congress. So until that happened, it was our
Speaker 7: vu that you weren't going to see stuff come back
Speaker 7: to normal again, right, whatever normal is, by the way,
Speaker 7: And so the way we kind of thought about it
Speaker 7: is we're going to ignore it. There are a lot
Speaker 7: of people that are trying to invest against, hoping cap rate,
Speaker 7: interest rates to come down quickly and then bet against that.
Speaker 7: I have too much scar tissue from too many other cycles.
Speaker 2: Which you buy a third Avenue office building today at
Speaker 2: thirty cents on the dollar, I think.
Speaker 7: They're plenty on offer, and we haven't bought any yet.
Speaker 7: All Right, at some point it will get interesting. I
Speaker 7: think the issue right now, back to the cyclical secular
Speaker 7: thing is there's so many headwinds to office right now, and.
Speaker 11: We're about conversion.
Speaker 7: So conversion looks great theoretically. It sounds great theoretically, but
Speaker 7: if you talk about one of those Third Avenue office
Speaker 7: buildings with a forty thousand square foot floor plate and
Speaker 7: you try to actually cut that up into an apartment,
Speaker 7: people are going to be living in Bowling alleys. And
Speaker 7: that's basically if you just visualize it. So, actually, conversion
Speaker 7: work great. Downtown after nine to eleven, a lot of
Speaker 7: stuff got converted, but those are older buildings with better ceiling,
Speaker 7: heights and other stuff. They converted a lot to multifamily
Speaker 7: and a lot to hotels, bigger window, every of that
Speaker 7: sounds but yeah, yeah, people never used to live on
Speaker 7: Wall Street. Now people live on Wall Street. But that's why, Look,
Speaker 7: it's gonna be a it's gonna be a slow grind too.
Speaker 6: So when you say office building is publishing thirty cents
Speaker 6: on the dollar, yeah, I get that. We're still in
Speaker 6: the headwind place. Yeah, but is it like fifteen cents
Speaker 6: on the dollar. You're like, okay, fine, like it when
Speaker 6: did it become a valuation thing.
Speaker 7: It becomes a valuation thing when you have some degree
Speaker 7: conviction you can lease that space.
Speaker 5: Okay, So it still has to come back.
Speaker 7: To the fun It has to come back to the fundamental.
Speaker 7: So that has to come back to that number one.
Speaker 7: Number two, the financing markets are upside down for real estate.
Speaker 7: You know there's news today about it.
Speaker 2: You've got banks that they kill free business. They wine
Speaker 2: and dine you for thirty years. Now you go back
Speaker 2: to them. Now I need the money. Well, I could
Speaker 2: buy this B plus property on Third Aven thirty cents
Speaker 2: on a dollar.
Speaker 3: You know this is a good deal.
Speaker 4: Right.
Speaker 7: Well, look, first of all, most many managers of our
Speaker 7: scale are both on the equity. So twenty billion of
Speaker 7: our eighty five billion. We're a lender, okay, all right,
Speaker 7: So we have a lending business. So the pain I
Speaker 7: am seeing our lenders bear right now, we bear as
Speaker 7: a lender as well. So that's complicated the regulators. Basel three.
Speaker 7: There are a lot of headwinds against banks, regular way
Speaker 7: banks coming back into commercial real estate lending. That's why
Speaker 7: the private markets have exploded the way they have, and
Speaker 7: I think our views that they're going to continue to
Speaker 7: be really robust. But the problem is a first mortgage
Speaker 7: on sixty percent loan to today's value that costs someone
Speaker 7: nine to ten percent is not a normally functioning capital market.
Speaker 11: This is not well, you know, to pick up on
Speaker 11: something that Alex and Paul were just asking about relative
Speaker 11: and Alex in particular the valuation so Igon Namdar not
Speaker 11: so long ago one even further, he was saying some
Speaker 11: of these buildings you could get them at less than
Speaker 11: ten cents on the dollar. He was saying, he thinks
Speaker 11: it's the bottom. It's hard to not think that's the bottom.
Speaker 11: But so many people that I talked to, so many
Speaker 11: of my sources, this is the one point of agreement
Speaker 11: as to whether how much pain is ahead or not.
Speaker 11: That it's going to take a long, long, long time
Speaker 11: to work out. So how long do we just skirt
Speaker 11: along the BOTO just have about twenty seconds?
Speaker 7: Well, if we're just talking about office, I'm not.
Speaker 3: Sure we're at the bottom of out.
Speaker 8: They that's gonna that's interesting though.
Speaker 3: Yeah, I don't know.
Speaker 2: Until I start seeing some of these things on Third
Speaker 2: Avenue start trading in the comparable place in Boston and
Speaker 2: San Francisco, we'll see Sonny CALSI thank you so much
Speaker 2: for joining us.
Speaker 3: Sonny Cawsei is a co chief executive officer.
Speaker 2: B g and Ablegail do Little, markets reporter for Bloomer News,
Speaker 2: joining Talk a little bou comercial real estate. You can't
Speaker 2: put it all in one bucket. It's not all office.
Speaker 2: It's a lot of different stuff out there, but office
Speaker 2: is tough, like keeping track.
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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Speaker 6: Let's get more Now on the money behind this race,
Speaker 6: Max Abelson joins us Bloomberg News finance reporter article about
Speaker 6: the get rich quicks ideas. I was gonna call them schemes,
Speaker 6: but they're not ideas. They're not schemes, they're ideas from
Speaker 6: Wall Street donors. They need to raise money fast for
Speaker 6: president for Vice President Harris Well.
Speaker 12: First of all, I have to give a shout out
Speaker 12: to the journalists who's really responsible.
Speaker 8: For this work.
Speaker 12: Who is Amanda Gordon, My friend and colleague who's been
Speaker 12: reporting on the rich people who love Donald Trump, the
Speaker 12: former president, and the rich people who want to make
Speaker 12: Kamala Harris the next president.
Speaker 8: And you know, listen, I don't want to give the
Speaker 8: wrong idea.
Speaker 12: I mean, wealthy Democratic donors on Wall Street have been,
Speaker 12: you know, putting a lot of money, were putting a
Speaker 12: lot of money into the effort to reelect Biden. It's
Speaker 12: not as if they had closed their purses and their
Speaker 12: wallets and then all of a sudden they're opening it up.
Speaker 12: But I think what Amanda's journalism highlights in a really
Speaker 12: vivid way is that they are going strong, and they're
Speaker 12: going hard, and.
Speaker 8: They don't have a lot of time to raise this money.
Speaker 12: And when I say they, I want to be clear
Speaker 12: that we're talking about, like, you know, essentially the krem
Speaker 12: Delak of Democratic donors. You've got you know, do you
Speaker 12: all know the name Blair Ephron su yep Center View.
Speaker 12: I mean, you got Brad carp that's a Bradcarpey is
Speaker 12: technically a lawyer, but I think there's a part of
Speaker 12: big law that's.
Speaker 8: Essentially an extension of Wall Street.
Speaker 12: You've got Mark Lazari, Ray MacGuire where a profile of
Speaker 12: for BusinessWeek back.
Speaker 8: When he was running for mayor.
Speaker 12: If you all remember that, you know it's funny at Blackstone. Obviously,
Speaker 12: the most important donor inside Blackstone is Steve Schwartzman, who's
Speaker 12: giving a lot of money to Republicans.
Speaker 8: But don't forget Blackstones.
Speaker 12: John Gray is there to you know, I don't know
Speaker 12: if he's essentially probably I'm assuming not wealthy enough to
Speaker 12: counterbalance Schwartzman, but still a lot of money. The list
Speaker 12: goes on, Peter Orzag, Roger Altman. These are the people
Speaker 12: who've been at the highest levels of Wall Street's kind
Speaker 12: of democratic caucus for a long time. And you know,
Speaker 12: you just you just sense a lot of excitement about Harris,
Speaker 12: and they're going to be spending a lot of money.
Speaker 2: It's interesting because I think Wall Street and just business
Speaker 2: in general is trying to get a sense of these
Speaker 2: early days. What is what would a Harris presidency.
Speaker 3: Mean for business? Would it be good for business?
Speaker 2: And I see a man that quotes uh Jim Kramer
Speaker 2: in here telling investors on CNBC Wednesday that Harris Winn
Speaker 2: would quote absolutely absolutely.
Speaker 3: No doubt about an end quote be good for us business.
Speaker 12: Only Jim Kramer would would say no doubt about it,
Speaker 12: when of course no one ever knows what the future holds.
Speaker 12: But you know, speaking of business, I think it's important
Speaker 12: to pause and to remind our listeners that you know
Speaker 12: Donald Trump, we know what Donald Trump will do for
Speaker 12: the business community, and let's talk about it. I mean,
Speaker 12: the big the big news is that he likes low taxes,
Speaker 12: and I mean I mean low corporate taxes and then
Speaker 12: low taxes on on onnwealthy people. He also has pledged
Speaker 12: to deregulate and and he has shown that that that
Speaker 12: he wants to That's why you have real enthusiasm for
Speaker 12: him on Wall Street. You know Howard Lutnick, John Paulson,
Speaker 12: Woody Johnson, John Katzvetids. There are really really deep wells
Speaker 12: of really rich Wall Street executives who want this guy
Speaker 12: to win.
Speaker 8: A Meed Malik.
Speaker 12: They've been raising money for him, They're going to be
Speaker 12: raising money for him. I don't want listeners to think
Speaker 12: that when Wall Street looks at the twenty twenty four
Speaker 12: presidential election, all of their money is going to Democrats,
Speaker 12: because that is not the case. But I think that
Speaker 12: there is a really big part of Wall Street that
Speaker 12: looks at Kamala Harris with a kind of optimism, with
Speaker 12: the kind of optimism that she gets them, that she
Speaker 12: understands them. I don't think they look at her the
Speaker 12: way that they would look at Bernie Sanders or Elizabeth
Speaker 12: Warren as a sort of is a loaded word, but
Speaker 12: as a.
Speaker 8: Kind of enemy. I think they look at her.
Speaker 12: Maybe the right way to say this is as a
Speaker 12: potential ally well.
Speaker 2: I mean, Bloomberg's been reporting that the Harris campaign pulled
Speaker 2: in one hundred million dollars just from the announcement through
Speaker 2: Monday evening. Presumably that's from smaller donations, as opposed to
Speaker 2: point in somebody's Wall Street it is from smaller donations.
Speaker 6: Well, I was going to say to that point that
Speaker 6: it also is from new donors, not just smaller but new,
Speaker 6: which also raises the question that she would be the
Speaker 6: first woman and the first Indian American to be elected president.
Speaker 6: Obviously President Obama was African American, so she would not
Speaker 6: be the first African American. But and the idea is
Speaker 6: are that it is that hope going to bring in
Speaker 6: a lot of new donors that otherwise wouldn't have donated,
Speaker 6: even on the high end.
Speaker 8: Yes, listen to the statistics. That's as stittius, you're ready.
Speaker 12: There are one point one million unique donors, not one
Speaker 12: point one donations, one point one million different donors who
Speaker 12: contributed in that.
Speaker 8: What was it?
Speaker 12: It was like thirty six hours after she announced two thirds,
Speaker 12: not fully two thirds, sixty two percent giving for the
Speaker 12: first time.
Speaker 1: Wow.
Speaker 12: But no matter how much how many small, small donations
Speaker 12: she gets, she's gonna have to raise a lot of money,
Speaker 12: and she's gonna have to do it quickly. So I
Speaker 12: think that the way the landscape looks is that she's
Speaker 12: getting support from like a you know, a Barry Diller,
Speaker 12: you know, a literal billionaire, and she's going to need
Speaker 12: support from from those one point one million unique donors,
Speaker 12: you know, practically two thirds doing it for the first time.
Speaker 8: She is going to be embracing I.
Speaker 12: Think both of those, although obviously I'm pretty sure that
Speaker 12: when it comes to publicly bragging, she's going to be
Speaker 12: publicly bragging about those small donors and not publicly bragging
Speaker 12: about the building.
Speaker 2: On Saturday coming up, Harris is scheduled to appear at
Speaker 2: a donor event featuring the performances of James Taylor, Yo
Speaker 2: Yo Ma and Emmanuel ax sounds.
Speaker 3: It's like an episode from the West Wing.
Speaker 8: Shout out to Yoyoma though I love I love the box, but.
Speaker 3: Don't you want somebody who's more in tune with, you know,
Speaker 3: the younger generation.
Speaker 6: Well she also came out yesterday to Beyonce, which she
Speaker 6: had full rights to use. So there's also that Yo Yoma. Yeah,
Speaker 6: well that's really Beyonce. Yea, this is but this is
Speaker 6: pane Is. You got to have the different level.
Speaker 3: Well, her husband's also in the game.
Speaker 2: He will attend several fundraisers next week, including an event
Speaker 2: in Martha's Vineyard featuring me David Letterman.
Speaker 8: Listen, the kids love Yo Yoma, though, I'm telling you
Speaker 8: they do.
Speaker 5: So I guess, like, what are you trying to appeal to?
Speaker 5: Are you trying to appeal to the kids base?
Speaker 6: So you're trying to appeal to heavy donors, Like what
Speaker 6: is that goal when you're coming out to Beyonce or your.
Speaker 1: You're trying to appeal to the voters, the younger voters especially.
Speaker 8: I can I answer that.
Speaker 12: I want to answer the question. Though Emmanuel axe Ye
Speaker 12: really lovely pianist. Okay, we have listeners to when when
Speaker 12: you're not listening to Blue mcg radio, listen to some
Speaker 12: Manuel acts, great pianists.
Speaker 6: I do love Yo Yom, but then again, I don't
Speaker 6: think I'm the young kids.
Speaker 8: But it's a good metaphor though. It's a good metaphor.
Speaker 12: She's gonna want Beethoven listeners and Mozart listeners and she's
Speaker 12: gonna want Beyonce listeners, And that's a way.
Speaker 8: It's kind of a good simile for the Swifties.
Speaker 3: Where the Swifties, can I get the swiftiest thing that's
Speaker 3: a big coach.
Speaker 6: Actually funny you say that Michael McKee has been texting
Speaker 6: a group chat that we have kind of NonStop as
Speaker 6: to who Taylor swift full indoors?
Speaker 5: Will she endorse.
Speaker 6: Kamala Harris, and will that, you know, move her away
Speaker 6: from any MAGA attendees.
Speaker 5: And I'm trying to be like, dude, chill, that's not.
Speaker 3: Gonna happen, all right, I mean, jesus, this.
Speaker 5: Band's won't for Harris. Yeah, we're good anyway.
Speaker 6: Much more coming up rather at the state of commercial
Speaker 6: real Estate.
Speaker 5: Hey, Max, really appreciate it. Max Abilson joining us.
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