1 00:00:02,920 --> 00:00:10,840 Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. You're listening to the 2 00:00:10,840 --> 00:00:15,040 Speaker 1: Bloomberg Intelligence podcast. Catch us live weekdays at ten am 3 00:00:15,040 --> 00:00:17,480 Speaker 1: Eastern on Apple, card Playing and broyd Otto with the 4 00:00:17,520 --> 00:00:21,320 Speaker 1: Bloomberg Business App. Listen on demand wherever you get your podcasts, 5 00:00:21,640 --> 00:00:23,320 Speaker 1: or watch us live on YouTube. 6 00:00:24,880 --> 00:00:28,840 Speaker 2: Let's head over to talk about what's happening and our 7 00:00:28,920 --> 00:00:31,880 Speaker 2: good friends at Walmart again, a really good quarters and 8 00:00:32,400 --> 00:00:36,520 Speaker 2: revenues beat the earnings, talking pretty I think people again, people, 9 00:00:36,880 --> 00:00:38,280 Speaker 2: I think really look at Walmart is kind of a 10 00:00:38,320 --> 00:00:40,920 Speaker 2: read on the US consumer and that was kind of, 11 00:00:41,000 --> 00:00:43,199 Speaker 2: I guess, a pretty good report there. Let's check out 12 00:00:43,240 --> 00:00:46,720 Speaker 2: Jen Bartashes. She follows all the retailers for Bloomberg Intelligence. 13 00:00:46,760 --> 00:00:51,000 Speaker 2: She is in Prince, New Jersey. I'm guessing, Jen, what's 14 00:00:51,040 --> 00:00:53,519 Speaker 2: your takeaway from our good friends in Bettonville. 15 00:00:54,440 --> 00:00:57,440 Speaker 3: Yeah, good morning, Paul. When I look at today's results, 16 00:00:57,480 --> 00:00:59,440 Speaker 3: I think one of the striking things that is a 17 00:00:59,520 --> 00:01:02,320 Speaker 3: takeaway that is beyond just the story of the higher 18 00:01:02,400 --> 00:01:05,040 Speaker 3: income consumer which everyone is focused on, is that the 19 00:01:05,120 --> 00:01:08,520 Speaker 3: multiple year strategy that Walmart's been employing to change their 20 00:01:08,600 --> 00:01:12,000 Speaker 3: business mix is really starting to yield results, and that's 21 00:01:12,000 --> 00:01:15,040 Speaker 3: allowing them to grow operating income ahead of revenue. That's, 22 00:01:15,160 --> 00:01:18,480 Speaker 3: you know, driving profitability, and it's driving that long term 23 00:01:18,560 --> 00:01:21,440 Speaker 3: margin expansion that they think they can sustain. So to me, 24 00:01:21,800 --> 00:01:24,480 Speaker 3: this is a great quarter, and yes they do have 25 00:01:24,560 --> 00:01:27,199 Speaker 3: a great read on the consumer, but it is also 26 00:01:27,280 --> 00:01:29,759 Speaker 3: starting to show that all of those investments are really 27 00:01:29,840 --> 00:01:31,919 Speaker 3: paying off in the way that they're evolving the company. 28 00:01:32,959 --> 00:01:35,920 Speaker 2: So, Jen, I'm vowing to do a store walk this 29 00:01:36,080 --> 00:01:37,720 Speaker 2: Saturday for the Walmart near here. 30 00:01:38,240 --> 00:01:38,920 Speaker 4: How do I do that? 31 00:01:39,200 --> 00:01:39,400 Speaker 5: Would? 32 00:01:39,480 --> 00:01:40,120 Speaker 6: How would you do it? 33 00:01:40,520 --> 00:01:40,560 Speaker 7: Like? 34 00:01:40,640 --> 00:01:41,040 Speaker 3: What do I do? 35 00:01:41,120 --> 00:01:41,880 Speaker 6: Will you drive there? 36 00:01:41,920 --> 00:01:44,760 Speaker 2: And I'm going to get there? There's a million aisles. 37 00:01:44,840 --> 00:01:47,200 Speaker 2: These things are huge, they are you know. 38 00:01:47,319 --> 00:01:49,240 Speaker 3: I mean, what I would say, Paul is wander around 39 00:01:49,280 --> 00:01:50,800 Speaker 3: a little. But what I do when I go into 40 00:01:50,840 --> 00:01:52,640 Speaker 3: stores is I find one of the people who are 41 00:01:52,720 --> 00:01:55,560 Speaker 3: picking the online grocery orders or they're online orders, and 42 00:01:55,640 --> 00:01:58,160 Speaker 3: I follow them around and that way I get a 43 00:01:58,240 --> 00:01:59,920 Speaker 3: sense of what it is, what is it that people 44 00:02:00,080 --> 00:02:02,480 Speaker 3: are actually buying, what are they putting in their basket? 45 00:02:02,920 --> 00:02:06,120 Speaker 3: And how are employees actually effectively navigating that big store. 46 00:02:06,800 --> 00:02:08,239 Speaker 3: So that would be one tip I have for you. 47 00:02:08,720 --> 00:02:15,040 Speaker 6: That's very cool. Okay, you definitely should be doing. Get 48 00:02:15,080 --> 00:02:19,359 Speaker 6: that guy Jen, when we look at the areas of 49 00:02:19,520 --> 00:02:21,520 Speaker 6: mix that you were mentioned that they sort of were 50 00:02:21,600 --> 00:02:24,760 Speaker 6: changing their business mix, that huge part is e commerce, 51 00:02:24,919 --> 00:02:28,639 Speaker 6: right it is If their main competitor though, is Walmart 52 00:02:28,760 --> 00:02:31,200 Speaker 6: for e commerce, how does that evolve? 53 00:02:32,520 --> 00:02:35,000 Speaker 3: Well, you know what Walmart's been doing is they've added 54 00:02:35,040 --> 00:02:38,320 Speaker 3: a lot of sellers to their marketplace. It's unlocking ad 55 00:02:38,400 --> 00:02:42,920 Speaker 3: revenue growth, it's unlocking the ability to charge for fulfillment services. Now, 56 00:02:43,000 --> 00:02:45,120 Speaker 3: these are all things that sound very familiar because they 57 00:02:45,160 --> 00:02:47,440 Speaker 3: are things that Amazon, for example, is very strong at. 58 00:02:47,840 --> 00:02:50,680 Speaker 3: But that doesn't mean that it can't help Walmart evolve 59 00:02:50,720 --> 00:02:53,000 Speaker 3: and it can't help make Walmart a much stronger company 60 00:02:53,040 --> 00:02:56,000 Speaker 3: in the long term. I think the advantage that Walmart 61 00:02:56,040 --> 00:02:59,080 Speaker 3: has is because they have that strong store base, they 62 00:02:59,080 --> 00:03:01,920 Speaker 3: can help keep some of the costs to fill digital 63 00:03:02,040 --> 00:03:05,800 Speaker 3: orders down, which helps them with that overall profitability profile 64 00:03:05,840 --> 00:03:06,160 Speaker 3: as well. 65 00:03:07,400 --> 00:03:09,680 Speaker 2: When you talk to investors about Walmart, again, it's stock 66 00:03:09,760 --> 00:03:11,560 Speaker 2: hitting an all time high here today. 67 00:03:12,960 --> 00:03:13,679 Speaker 5: It ain't cheap. 68 00:03:13,760 --> 00:03:15,360 Speaker 2: How do you talk to them about valuation? I had 69 00:03:15,600 --> 00:03:18,320 Speaker 2: like twenty six twenty seven times on a pe basis, 70 00:03:18,639 --> 00:03:19,880 Speaker 2: how do you talk to them about valuation? 71 00:03:20,600 --> 00:03:24,079 Speaker 3: To get to your question, Paul it's really when I'm 72 00:03:24,120 --> 00:03:26,600 Speaker 3: talking to investors, it's you know, about where is the 73 00:03:26,639 --> 00:03:29,720 Speaker 3: company headed? Right. So I think one of the things 74 00:03:29,760 --> 00:03:32,720 Speaker 3: that's admirable about the company, or that is is really 75 00:03:32,800 --> 00:03:35,080 Speaker 3: something they just do so well, is they keep their 76 00:03:35,120 --> 00:03:39,040 Speaker 3: cooperation tight. They're good at controlling costs, but they are 77 00:03:39,200 --> 00:03:43,040 Speaker 3: not They don't hesitate to invest in opportunity, but they 78 00:03:43,040 --> 00:03:45,080 Speaker 3: also will walk away from things that don't pan out. 79 00:03:45,120 --> 00:03:46,560 Speaker 3: So I think, you know, you saw that with the 80 00:03:46,600 --> 00:03:49,960 Speaker 3: announcement earlier this month about closing health clinics. At one 81 00:03:50,000 --> 00:03:51,880 Speaker 3: point they thought they might be able to you know, 82 00:03:52,160 --> 00:03:55,640 Speaker 3: drive a big business out of that realistically couldn't make money, 83 00:03:55,800 --> 00:03:58,760 Speaker 3: closed it down. So I think that that spirit of 84 00:03:59,400 --> 00:04:02,120 Speaker 3: trial and or the willing to the willingness to actually 85 00:04:02,240 --> 00:04:05,720 Speaker 3: try to flex, but then know when to say, Okay, 86 00:04:05,840 --> 00:04:07,960 Speaker 3: this isn't this isn't what we wanted. It's something that 87 00:04:08,080 --> 00:04:11,000 Speaker 3: has become a strength of the company and helps, you know, 88 00:04:11,120 --> 00:04:14,440 Speaker 3: helps put it up as a as a company that justifies, 89 00:04:14,560 --> 00:04:18,240 Speaker 3: you know, potentially a higher valuation versus some other strict 90 00:04:18,440 --> 00:04:21,120 Speaker 3: retail peers that are really just focused on growing a 91 00:04:21,200 --> 00:04:21,880 Speaker 3: retail business. 92 00:04:22,320 --> 00:04:24,280 Speaker 6: I think she's gonna think and ask one more question. Yeah, 93 00:04:24,320 --> 00:04:27,040 Speaker 6: I am gonna do it. What Amazon has, though, that 94 00:04:27,160 --> 00:04:29,880 Speaker 6: Walmart doesn't is a w S. That's where they're going 95 00:04:29,960 --> 00:04:31,800 Speaker 6: to get their bulk of their margin. That's where they 96 00:04:31,839 --> 00:04:35,280 Speaker 6: get all the juicy, sexy revenue. Walmart doesn't have that. 97 00:04:35,920 --> 00:04:36,480 Speaker 2: So is that so? 98 00:04:36,680 --> 00:04:39,320 Speaker 6: So how does it sort of ramp up other revenue 99 00:04:39,360 --> 00:04:42,200 Speaker 6: streams that can yield that kind of growth and margin. 100 00:04:44,160 --> 00:04:46,480 Speaker 3: That's a that's a that's the question of the day, 101 00:04:46,640 --> 00:04:49,880 Speaker 3: right because you don't actually want Walmart to be another Amazon. 102 00:04:50,000 --> 00:04:52,840 Speaker 3: You want Walmart to be Walmart. And so I think 103 00:04:52,880 --> 00:04:54,640 Speaker 3: that when you look at some of the areas that 104 00:04:54,720 --> 00:04:57,159 Speaker 3: they're doing well, especially in some of the international markets 105 00:04:57,200 --> 00:04:59,920 Speaker 3: where they're they're playing around with it in things like fintech, 106 00:05:00,320 --> 00:05:02,320 Speaker 3: you know, those are areas where I think that there's 107 00:05:02,440 --> 00:05:05,520 Speaker 3: some great opportunity for the company without them having to 108 00:05:05,920 --> 00:05:08,880 Speaker 3: try to be a cookie cutter of Amazon and you 109 00:05:08,960 --> 00:05:11,640 Speaker 3: know and have some you know, have something like an 110 00:05:11,640 --> 00:05:16,800 Speaker 3: AWS that is not natural to their their current operations. 111 00:05:17,360 --> 00:05:19,040 Speaker 2: All right, Jen, thanks so much for joining us. I 112 00:05:19,120 --> 00:05:22,920 Speaker 2: appreciate it. Jen Bartasha. She covers all the retail stuff 113 00:05:23,560 --> 00:05:27,920 Speaker 2: for Bloomberg Intelligence, including Walmart again, which had a really 114 00:05:27,960 --> 00:05:31,400 Speaker 2: good Quarterstock up six percent here, all time high. So 115 00:05:31,560 --> 00:05:33,520 Speaker 2: good stuff for that, I think a good you know, 116 00:05:33,560 --> 00:05:35,280 Speaker 2: a little just kind of a bullet point there. For 117 00:05:35,960 --> 00:05:37,600 Speaker 2: if you're trying to get a sense a beat on 118 00:05:37,680 --> 00:05:40,440 Speaker 2: how the consumer's doing, doing fairly well. 119 00:05:42,080 --> 00:05:45,960 Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live 120 00:05:46,080 --> 00:05:48,960 Speaker 1: weekdays at ten am Eastern on applecar. 121 00:05:48,600 --> 00:05:51,080 Speaker 7: Play and Android Auto with the Bloomberg Business. 122 00:05:51,480 --> 00:05:54,279 Speaker 1: You can also listen live on Amazon Alexa from our 123 00:05:54,360 --> 00:05:58,719 Speaker 1: flagship New York station, Just Say Alexa, playing Bloomberg eleven thirty. 124 00:06:00,080 --> 00:06:03,240 Speaker 6: I'm Alexei alongside Paul Sweeney. This is Bloomberg Intelligence Radio. 125 00:06:03,279 --> 00:06:06,760 Speaker 6: We are live interactive broker studio right here in midtown Manhattan. 126 00:06:06,839 --> 00:06:08,640 Speaker 6: So here was the front page of the Ft today 127 00:06:09,080 --> 00:06:13,200 Speaker 6: when I logged in. Apparently, Starwood Real Estate Investment Trust 128 00:06:13,400 --> 00:06:17,480 Speaker 6: CREATE is one of the largest unlisted property funds, and 129 00:06:17,600 --> 00:06:20,240 Speaker 6: it has drawn more than one point three billion dollars 130 00:06:20,320 --> 00:06:22,839 Speaker 6: of its one point five to five billion unsecured credit 131 00:06:22,920 --> 00:06:26,520 Speaker 6: facility since the beginning of twenty twenty three. That sounds bad. 132 00:06:26,839 --> 00:06:29,680 Speaker 6: That sounds like they're in a cash crunch kind of scenario. 133 00:06:29,760 --> 00:06:30,000 Speaker 3: Poul. 134 00:06:30,720 --> 00:06:33,320 Speaker 6: And as we keep hearing, commercial real estate isn't a 135 00:06:33,360 --> 00:06:35,320 Speaker 6: really tough spot. But yet I haven't seen a lot 136 00:06:35,360 --> 00:06:36,080 Speaker 6: of shoes dropping. 137 00:06:36,360 --> 00:06:37,680 Speaker 2: I haven't either. I don't know how this is going 138 00:06:37,720 --> 00:06:39,320 Speaker 2: to play out. Maybe our next guest I'll help us 139 00:06:39,320 --> 00:06:41,440 Speaker 2: out with that. Rich Hill, head of real Estate Strategy 140 00:06:41,440 --> 00:06:43,480 Speaker 2: and Research at Cohen and Steers, joining us here in 141 00:06:43,480 --> 00:06:46,480 Speaker 2: our Bloomberg Interactive Broker studio. Why because we're here every 142 00:06:46,560 --> 00:06:50,040 Speaker 2: day m hm, And that's how we roll. Rich, I 143 00:06:50,160 --> 00:06:53,120 Speaker 2: walk from Penn Station to Hear every day, all through 144 00:06:53,160 --> 00:06:55,400 Speaker 2: Midtown Manhattan. Now, I know this is not the world, 145 00:06:55,440 --> 00:06:57,520 Speaker 2: it's only Midtown Manhattan. But there's a lot of vacant 146 00:06:57,560 --> 00:07:00,760 Speaker 2: real estate. People aren't coming back. I saw via Twitter 147 00:07:00,880 --> 00:07:04,200 Speaker 2: yesterday via a report Bank Bank of America research report 148 00:07:04,480 --> 00:07:07,800 Speaker 2: that kind of showed vacancies, and it seems like they're 149 00:07:07,920 --> 00:07:10,120 Speaker 2: calling this new normal, which is about fifty percent of 150 00:07:10,200 --> 00:07:13,560 Speaker 2: commercial real estate properties. They're calling that the new normal, 151 00:07:14,000 --> 00:07:17,360 Speaker 2: just because that's kind of what the date is showing. A. 152 00:07:17,480 --> 00:07:18,680 Speaker 2: Do you agree with that? And B what does it 153 00:07:18,760 --> 00:07:20,680 Speaker 2: mean for the owners and the lenders and all that 154 00:07:20,760 --> 00:07:21,239 Speaker 2: kind of stuff? 155 00:07:21,240 --> 00:07:22,000 Speaker 7: The new system? 156 00:07:22,080 --> 00:07:23,480 Speaker 8: First of all, thanks for having me in this morning. 157 00:07:23,520 --> 00:07:27,280 Speaker 8: It's good to see you guys. Look, I'll begin by 158 00:07:27,280 --> 00:07:29,760 Speaker 8: saying people like to talk about commercial real estate as 159 00:07:29,800 --> 00:07:34,600 Speaker 8: a big, singular asset class, but in reality, it's actually 160 00:07:34,680 --> 00:07:38,240 Speaker 8: eighteen different sub sectors under a big umbrella, and those 161 00:07:38,280 --> 00:07:41,960 Speaker 8: eighteen sub subsectors can behave very differently in very different 162 00:07:42,040 --> 00:07:45,880 Speaker 8: market environments. So you're leading with New York City, You're right, 163 00:07:46,400 --> 00:07:50,960 Speaker 8: New York City office vacancies are high, retail vacancies are high. 164 00:07:51,680 --> 00:07:52,760 Speaker 5: Leading with maybe. 165 00:07:52,880 --> 00:07:55,640 Speaker 8: Retail, that doesn't actually tell the whole story, because if 166 00:07:55,640 --> 00:07:57,960 Speaker 8: you actually look at what's happening with retail real estate 167 00:07:58,240 --> 00:08:01,120 Speaker 8: across the United States, it's actually really strong footing. For 168 00:08:01,200 --> 00:08:04,240 Speaker 8: two reasons. I think, you know, you rewind ten years ago. 169 00:08:04,280 --> 00:08:07,560 Speaker 8: Everyone was talking about the retail apocalypse, so no one 170 00:08:07,680 --> 00:08:10,680 Speaker 8: really was building new retail properties over the past ten 171 00:08:10,720 --> 00:08:13,720 Speaker 8: to fifteen years, so you had no new supply coming. 172 00:08:13,880 --> 00:08:16,960 Speaker 8: And then COVID was a great Darwinistic event where it 173 00:08:17,080 --> 00:08:20,040 Speaker 8: actually sort of right sized all the retail properties that 174 00:08:20,200 --> 00:08:23,560 Speaker 8: were maybe on the edgines. You couple that with the 175 00:08:23,600 --> 00:08:27,160 Speaker 8: fact that e commerce companies realized that physical retail real 176 00:08:27,280 --> 00:08:32,040 Speaker 8: estate can provide micro fulfillment to their customers. The retail 177 00:08:32,080 --> 00:08:35,200 Speaker 8: real estate market is actually on pretty strong footing, particularly 178 00:08:35,320 --> 00:08:38,559 Speaker 8: open air shopping centers, whether it be community centers, neighborhood centers, 179 00:08:38,800 --> 00:08:39,720 Speaker 8: or even power centers. 180 00:08:40,200 --> 00:08:42,360 Speaker 6: That's a really interesting point, and you're right, we kind 181 00:08:42,400 --> 00:08:44,520 Speaker 6: of lump it all in in commercial real estate. We 182 00:08:44,559 --> 00:08:48,600 Speaker 6: think office, So is that is that troublespot office commercial 183 00:08:48,679 --> 00:08:51,360 Speaker 6: real estate? And again like when is that shoe dropping? 184 00:08:51,600 --> 00:08:57,160 Speaker 8: Yeah, Look, it doesn't do any good to say anything 185 00:08:57,280 --> 00:09:01,560 Speaker 8: other than the facts about office. Office is struggling nationwide, 186 00:09:02,080 --> 00:09:04,120 Speaker 8: by the way, we probably built too much of it 187 00:09:04,200 --> 00:09:07,880 Speaker 8: prior to COVID. Work from home dynamics have have tipped 188 00:09:07,920 --> 00:09:11,720 Speaker 8: that nationwide, office vacancies are twenty percent and they're increasing 189 00:09:11,760 --> 00:09:14,319 Speaker 8: from here. And so there's a lot of ways you 190 00:09:14,360 --> 00:09:16,959 Speaker 8: can unpack office. Though, just like I said, you know, 191 00:09:17,080 --> 00:09:18,920 Speaker 8: maybe the truth is somewhere in the middle. It's not 192 00:09:19,000 --> 00:09:20,640 Speaker 8: as bad as everyone fears, and it's not as good 193 00:09:20,679 --> 00:09:23,280 Speaker 8: as everyone fears. If you look at office, new, clean 194 00:09:23,360 --> 00:09:26,920 Speaker 8: and green office even in New York City is doing exceptionally. 195 00:09:26,440 --> 00:09:28,319 Speaker 2: Well, like Hustin Yards is doing well, right, and that 196 00:09:28,440 --> 00:09:29,480 Speaker 2: one Vanderbilt thing. 197 00:09:29,640 --> 00:09:32,360 Speaker 8: One vendor Bilt least up to almost one hundred percent 198 00:09:32,559 --> 00:09:36,240 Speaker 8: during the middle of COVID. So class B and C properties, 199 00:09:36,320 --> 00:09:38,200 Speaker 8: Class B and C properties are properties that were built 200 00:09:38,240 --> 00:09:42,000 Speaker 8: in the nineteen seventies and nineteen eighties with no cop 201 00:09:42,280 --> 00:09:44,640 Speaker 8: X put CAPEX put into it over decades and decades 202 00:09:44,679 --> 00:09:45,160 Speaker 8: and decades. 203 00:09:45,920 --> 00:09:46,280 Speaker 5: I get it. 204 00:09:46,360 --> 00:09:48,640 Speaker 8: No one wants to work there. So we're sort of 205 00:09:48,720 --> 00:09:51,480 Speaker 8: in this weird time period where office is struggling. I 206 00:09:51,520 --> 00:09:53,679 Speaker 8: want to be clear. Office is only around twenty percent 207 00:09:54,080 --> 00:09:56,839 Speaker 8: of the serie market. It's only around three percent of 208 00:09:56,880 --> 00:09:59,520 Speaker 8: the US listed rate market. But look, everyone loves a 209 00:09:59,520 --> 00:10:00,840 Speaker 8: great Greek tragedy. 210 00:10:00,960 --> 00:10:01,280 Speaker 5: I get it. 211 00:10:01,480 --> 00:10:04,480 Speaker 8: Like it sells clicks, it sells papers. It is a 212 00:10:04,600 --> 00:10:06,559 Speaker 8: really challenging asset class. And so I don't want to 213 00:10:06,559 --> 00:10:07,000 Speaker 8: belabor that. 214 00:10:07,640 --> 00:10:12,720 Speaker 2: What's the lending environment like now for real estate investors? 215 00:10:12,840 --> 00:10:15,520 Speaker 2: What are the banks doing where they were the real 216 00:10:15,600 --> 00:10:17,000 Speaker 2: estate investors sourcing their capital. 217 00:10:17,120 --> 00:10:21,160 Speaker 8: Yeah, so this is probably the single most important topic 218 00:10:21,200 --> 00:10:23,760 Speaker 8: when we talk about commercial real estate. The reason being 219 00:10:23,800 --> 00:10:26,680 Speaker 8: that commercial real estate isn't inherently a levered asset class. 220 00:10:27,120 --> 00:10:29,439 Speaker 8: When people buy a commercial real estate property, they put 221 00:10:29,480 --> 00:10:32,520 Speaker 8: debt on it. There's not very few properties that don't 222 00:10:32,559 --> 00:10:34,800 Speaker 8: have debt on it. So it is a levered asset class. 223 00:10:35,640 --> 00:10:38,600 Speaker 8: And so that's actually why valuations are being pressured so much. 224 00:10:38,679 --> 00:10:41,880 Speaker 8: We think property valuations generically are down around twenty percent. 225 00:10:42,120 --> 00:10:45,560 Speaker 8: Office valuations are probably down thirty five percent. The reason 226 00:10:45,640 --> 00:10:48,959 Speaker 8: they're down so much isn't necessarily because of fundamentals. Fundamentals 227 00:10:49,040 --> 00:10:52,079 Speaker 8: ex office are on pretty strong footing. It's because the 228 00:10:52,200 --> 00:10:55,120 Speaker 8: right side of the balance sheet is repricing. Both financing 229 00:10:55,200 --> 00:10:58,440 Speaker 8: cost higher and the availability of debt much lower than 230 00:10:58,480 --> 00:11:01,160 Speaker 8: it where it used to be. So look, lenders aren't 231 00:11:01,240 --> 00:11:04,000 Speaker 8: lending as much as they used to. If you look 232 00:11:04,000 --> 00:11:08,480 Speaker 8: at the Mortgage Bankers Mortgage Bankers Association Senior Loan their 233 00:11:09,080 --> 00:11:12,400 Speaker 8: Loan Origination Index, it's close to the lowest level since 234 00:11:13,080 --> 00:11:14,320 Speaker 8: we've been in twenty fourteen. 235 00:11:14,640 --> 00:11:15,040 Speaker 1: I get it. 236 00:11:15,600 --> 00:11:18,640 Speaker 8: A lot of people have loans on their balance sheet 237 00:11:18,640 --> 00:11:20,440 Speaker 8: and they're working through those. But you made a really 238 00:11:20,480 --> 00:11:24,839 Speaker 8: good point. Distress hasn't really come about yet. And I 239 00:11:24,880 --> 00:11:27,080 Speaker 8: think there's a really important point. And I'll pause here 240 00:11:27,120 --> 00:11:30,320 Speaker 8: for a second. Lenders and borrowers are in a pretty 241 00:11:30,400 --> 00:11:34,079 Speaker 8: challenging position. So they're actually solving the prisoner's. 242 00:11:33,720 --> 00:11:36,360 Speaker 6: Dilemma, meaning that a bank doesn't want to own an 243 00:11:36,360 --> 00:11:36,920 Speaker 6: office space. 244 00:11:37,200 --> 00:11:39,079 Speaker 8: So a bank doesn't want to own it, they're not 245 00:11:39,160 --> 00:11:41,520 Speaker 8: in the business of it. And guess what the regulatory 246 00:11:41,600 --> 00:11:43,920 Speaker 8: capital charges for owning a property on your balance sheet 247 00:11:44,120 --> 00:11:46,880 Speaker 8: are actually higher than if you were just to modify 248 00:11:46,960 --> 00:11:49,800 Speaker 8: the loan at say a ninety nine percent LTV BLTV. 249 00:11:49,880 --> 00:11:52,200 Speaker 6: Ooh, okay, break it down for US loan to value. Okay, 250 00:11:52,280 --> 00:11:54,400 Speaker 6: So what would that mean if you if you brought 251 00:11:54,440 --> 00:11:56,160 Speaker 6: that down to nine nine percent LTV. 252 00:11:56,480 --> 00:11:56,680 Speaker 7: Yeah. 253 00:11:56,800 --> 00:11:59,160 Speaker 8: So let's assume ten years ago you did a loan 254 00:11:59,280 --> 00:12:01,559 Speaker 8: at a fifty percent and LTV. So you had a 255 00:12:02,080 --> 00:12:04,959 Speaker 8: property that was worth ten dollars and you put a 256 00:12:05,040 --> 00:12:07,199 Speaker 8: loan on it was the worth five dollars, so fifty 257 00:12:07,240 --> 00:12:10,599 Speaker 8: percent LTV. Fast forward ten years, the value of that 258 00:12:10,679 --> 00:12:13,040 Speaker 8: property drops from ten to five, and you still have 259 00:12:13,120 --> 00:12:16,199 Speaker 8: five dollars of loan. That's one hundred percent LTV. The 260 00:12:16,360 --> 00:12:20,679 Speaker 8: regulators are actually incentivizing the banks to actually modify and 261 00:12:20,760 --> 00:12:24,120 Speaker 8: extend loans. So some people might call it kicking the 262 00:12:24,200 --> 00:12:26,600 Speaker 8: can down the road. I don't necessarily think it's kicking 263 00:12:26,640 --> 00:12:28,839 Speaker 8: the can down the road. I just think borrowers and 264 00:12:28,920 --> 00:12:32,439 Speaker 8: blenders are incentivized to figure out way out of this 265 00:12:32,679 --> 00:12:35,560 Speaker 8: of this environment. It's a pretty challenging environment for everyone 266 00:12:35,679 --> 00:12:38,160 Speaker 8: right now, and so they are coming to a less 267 00:12:38,280 --> 00:12:40,640 Speaker 8: bad situation modifying extending these loans. 268 00:12:40,760 --> 00:12:42,280 Speaker 2: One of the things I've seen in the last ten 269 00:12:42,360 --> 00:12:44,520 Speaker 2: years and been amazed about. Alex n I talk about 270 00:12:44,520 --> 00:12:47,280 Speaker 2: it a lot, is the growth of private credit. Is 271 00:12:47,400 --> 00:12:49,840 Speaker 2: private credit coming into the real estate space to maybe 272 00:12:50,920 --> 00:12:52,080 Speaker 2: just find some opportunity here. 273 00:12:52,200 --> 00:12:57,200 Speaker 8: Yeah, it has been for some time. Okay, twenty fifteen, 274 00:12:57,400 --> 00:13:00,559 Speaker 8: private credit market share of total lending was probably ten 275 00:13:00,600 --> 00:13:02,920 Speaker 8: percent plus or minus, and I'd probably say it's a 276 00:13:02,960 --> 00:13:05,000 Speaker 8: little bit less than that. At the peak of the 277 00:13:05,080 --> 00:13:07,800 Speaker 8: market it was around twenty percent or so. But look, 278 00:13:07,960 --> 00:13:10,679 Speaker 8: there is something to be said for private for private 279 00:13:10,720 --> 00:13:14,560 Speaker 8: credit finding a home within commercial real estate. There's forty 280 00:13:14,600 --> 00:13:17,800 Speaker 8: two hundred banks across the United States. Bank share is 281 00:13:17,880 --> 00:13:21,599 Speaker 8: around forty percent of total lending. There will be some 282 00:13:21,720 --> 00:13:24,760 Speaker 8: banks that pull back for various different reasons. There has 283 00:13:24,840 --> 00:13:27,120 Speaker 8: to be a home for those additional loans, and I 284 00:13:27,200 --> 00:13:30,520 Speaker 8: do think private credit, if you have the expertise not 285 00:13:30,600 --> 00:13:32,720 Speaker 8: to just underwrite the loans, but work out the loans 286 00:13:32,800 --> 00:13:35,079 Speaker 8: when some of them inevitably go bad, there's a home. 287 00:13:35,200 --> 00:13:37,000 Speaker 8: There's a home for private credit. Do I think it's 288 00:13:37,000 --> 00:13:39,599 Speaker 8: going to fifty percent market share? No, I sort of 289 00:13:39,640 --> 00:13:41,800 Speaker 8: think the upper limits is around twenty percent. We're probably 290 00:13:41,800 --> 00:13:43,440 Speaker 8: a little bit less than that right now. But there's 291 00:13:43,440 --> 00:13:44,480 Speaker 8: a home for private credit. 292 00:13:44,600 --> 00:13:46,640 Speaker 6: So when we talk about the shoe and commercial and 293 00:13:46,760 --> 00:13:49,720 Speaker 6: office commercial real estate not dropping, it sounds like maybe 294 00:13:49,760 --> 00:13:51,679 Speaker 6: it won't drop at all. It'll just be sort of 295 00:13:52,400 --> 00:13:54,120 Speaker 6: John Tucker's doing the wave and I don't really know 296 00:13:54,200 --> 00:13:57,360 Speaker 6: why that is, but get oh, we hit it. 297 00:13:59,240 --> 00:14:01,880 Speaker 8: That person just came back down number for a moment, 298 00:14:02,360 --> 00:14:04,439 Speaker 8: doubt the tick up counts. 299 00:14:04,559 --> 00:14:05,000 Speaker 5: Yes it does. 300 00:14:05,320 --> 00:14:08,320 Speaker 6: That was amazing. This is not maybe going to drop. 301 00:14:08,400 --> 00:14:10,319 Speaker 6: It's just going to be worked out and then no 302 00:14:10,440 --> 00:14:13,040 Speaker 6: one's going to be sitting with really terrible loans forever. 303 00:14:13,800 --> 00:14:16,319 Speaker 8: So this is going to take longer than what was 304 00:14:16,440 --> 00:14:19,080 Speaker 8: feared a year ago. A year ago when you had 305 00:14:19,160 --> 00:14:21,680 Speaker 8: banks coming under stress, I think a lot of people 306 00:14:21,760 --> 00:14:26,280 Speaker 8: were fearing a quick collapse in commercial real estate lending. 307 00:14:26,800 --> 00:14:27,720 Speaker 4: That has not occurred. 308 00:14:28,160 --> 00:14:30,560 Speaker 8: This will be a slow burn over a number of years. 309 00:14:30,920 --> 00:14:32,840 Speaker 8: I want to be clear, though, we are not calling 310 00:14:32,960 --> 00:14:35,480 Speaker 8: for no distress in the commercial real estate market. I 311 00:14:35,600 --> 00:14:37,880 Speaker 8: mentioned to you that property evaluations are down around twenty 312 00:14:37,960 --> 00:14:40,480 Speaker 8: percent right now. We are expecting them to be down 313 00:14:40,560 --> 00:14:43,120 Speaker 8: peak to trough around twenty five to thirty percent, So 314 00:14:43,240 --> 00:14:45,560 Speaker 8: around two thirds of the way through the next leg, 315 00:14:45,640 --> 00:14:49,920 Speaker 8: lower is going to be rising distress. And by the way, 316 00:14:50,160 --> 00:14:52,360 Speaker 8: that actually might be a contrarian bullish sign. 317 00:14:52,600 --> 00:14:54,440 Speaker 2: So what do I mean by set at the bottom? 318 00:14:54,480 --> 00:14:59,600 Speaker 8: Maybe exactly exactly. It basically means sellers are finally capitulating 319 00:14:59,680 --> 00:15:02,000 Speaker 8: and knowing where buyers want to buy. That's a healthy 320 00:15:02,040 --> 00:15:02,840 Speaker 8: contrarian signal. 321 00:15:02,960 --> 00:15:06,120 Speaker 2: See Richel Like, I think half of the real estate 322 00:15:06,200 --> 00:15:09,040 Speaker 2: finance people in the business came out of Morgan Stanley. 323 00:15:09,120 --> 00:15:10,680 Speaker 2: It's like a mafia there, those guys that are all 324 00:15:10,720 --> 00:15:13,040 Speaker 2: over the place. Richard is off one of them. Richiel, 325 00:15:13,080 --> 00:15:15,480 Speaker 2: head of real estate strategy and Research at Cohen and Steers, 326 00:15:15,680 --> 00:15:17,800 Speaker 2: joining us here in at Bloomberg Interactive Brokers Studio, talking 327 00:15:17,840 --> 00:15:21,440 Speaker 2: about the overall commercial real estate business, not just office 328 00:15:21,720 --> 00:15:23,520 Speaker 2: and octimity. But that's a one of them. I can't 329 00:15:23,520 --> 00:15:24,880 Speaker 2: wait to see what some of these buildings on Third 330 00:15:24,920 --> 00:15:27,520 Speaker 2: Avenue when they change hands, what the discount is going 331 00:15:27,560 --> 00:15:29,160 Speaker 2: to be. I think it's gonna be huge, like the 332 00:15:29,200 --> 00:15:31,320 Speaker 2: Lipstick Building, just to pick one, that iconic building, but 333 00:15:32,000 --> 00:15:33,000 Speaker 2: it's not an a property. 334 00:15:35,440 --> 00:15:39,280 Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live 335 00:15:39,400 --> 00:15:42,120 Speaker 1: weekdays at ten am Eastern on Affo car Playing and 336 00:15:42,240 --> 00:15:45,080 Speaker 1: broud Otto with the Bloomberg Business App. Listen on demand 337 00:15:45,160 --> 00:15:48,240 Speaker 1: wherever you get your podcasts, or watch us live. 338 00:15:48,160 --> 00:15:49,240 Speaker 5: On YouTube. 339 00:15:50,760 --> 00:15:53,320 Speaker 6: From Alex Steel alongside Paul Sweeney and John Tucker. This 340 00:15:53,360 --> 00:15:55,640 Speaker 6: is Bloomberg Intelligence Radio. We bring you all the top 341 00:15:55,720 --> 00:15:58,680 Speaker 6: news and economics and finance all around the world. But 342 00:15:58,720 --> 00:16:01,560 Speaker 6: they're great Bloomberg Intelli Legends analysts. They cover two thousand 343 00:16:01,600 --> 00:16:04,960 Speaker 6: companies and one hundred and thirty industries worldwide. What's not 344 00:16:05,160 --> 00:16:07,840 Speaker 6: at a record it's small caps. So they pushed higher 345 00:16:07,960 --> 00:16:10,080 Speaker 6: yesterday they were near a two year high, but not 346 00:16:10,200 --> 00:16:12,960 Speaker 6: yet at a record, and today they're a little bit softer, 347 00:16:13,200 --> 00:16:15,720 Speaker 6: So you have to wonder if that whole rally broadening 348 00:16:15,760 --> 00:16:18,880 Speaker 6: out thing is still on the docket. Let's get more 349 00:16:18,880 --> 00:16:22,720 Speaker 6: here with David Kudla, founder's CEO and chief investment strategist 350 00:16:22,760 --> 00:16:26,320 Speaker 6: at Mainstay Capital Management. He's on Zoom from Naples, Florida. 351 00:16:27,000 --> 00:16:30,560 Speaker 6: So that's not too shabby. Yeah, nice job on that one, David. 352 00:16:30,880 --> 00:16:34,200 Speaker 6: Forty thousand for the Dow. It's a nice round number. 353 00:16:34,320 --> 00:16:35,640 Speaker 6: We like nice round numbers. 354 00:16:35,920 --> 00:16:39,560 Speaker 4: You buying it, Yeah, I'm buying it. Good morning, Alex 355 00:16:39,640 --> 00:16:42,800 Speaker 4: and Paul. You know, the market just has a lot 356 00:16:42,840 --> 00:16:45,760 Speaker 4: of things going for right now. There are things that 357 00:16:45,800 --> 00:16:48,920 Speaker 4: were tailwinds or were headwinds have become tailwinds. We've got 358 00:16:49,000 --> 00:16:53,560 Speaker 4: strong earnings, we've got a fed that you know, I 359 00:16:53,640 --> 00:16:56,880 Speaker 4: think Jay Pal's looking for a reason to cut, and 360 00:16:57,160 --> 00:17:00,320 Speaker 4: I think the jan Ellen once Jay palett cuts so 361 00:17:00,440 --> 00:17:04,399 Speaker 4: that you can afford the service the debt our national 362 00:17:04,480 --> 00:17:09,080 Speaker 4: debt better. And we we look at we look forward 363 00:17:09,160 --> 00:17:13,679 Speaker 4: at at market fundamentals. We look forward to what's happening 364 00:17:13,760 --> 00:17:16,399 Speaker 4: with generative AI and what that means in terms of 365 00:17:16,480 --> 00:17:20,080 Speaker 4: what we're calling the next industrial revolution. Uh, this deal 366 00:17:20,200 --> 00:17:24,560 Speaker 4: with Apple and open AI and the power that people 367 00:17:24,560 --> 00:17:27,240 Speaker 4: are gonna have in the in the holding their hand 368 00:17:27,280 --> 00:17:30,600 Speaker 4: at a handheld device. Yeah, there's there's some things that 369 00:17:30,640 --> 00:17:33,600 Speaker 4: can trip us up. But you know, the market's really 370 00:17:34,080 --> 00:17:36,760 Speaker 4: really in good shape right now. On market sediment has 371 00:17:36,920 --> 00:17:39,880 Speaker 4: changed so much investor sediment from just two weeks ago, 372 00:17:39,920 --> 00:17:40,600 Speaker 4: it's incredible. 373 00:17:41,680 --> 00:17:45,520 Speaker 2: So, Uh, David talks about earnings. What are your takeaways 374 00:17:45,560 --> 00:17:48,760 Speaker 2: here for this earnings which have generally been pretty solid 375 00:17:48,920 --> 00:17:50,360 Speaker 2: across the board, what are your takeaways? 376 00:17:51,560 --> 00:17:54,680 Speaker 4: Well, you know, we went through their earnings trough and 377 00:17:55,000 --> 00:17:57,399 Speaker 4: you know, we've emerged from that, and now when we 378 00:17:57,480 --> 00:18:00,680 Speaker 4: look at first quarter earnings, we're coming in well ahead 379 00:18:00,680 --> 00:18:03,960 Speaker 4: of expectations. Profit margins are the best in two years, 380 00:18:04,520 --> 00:18:07,960 Speaker 4: and that's really the key, you know, when when there's 381 00:18:08,000 --> 00:18:10,440 Speaker 4: a questions, so many questions about the FED. Look, we've 382 00:18:10,480 --> 00:18:12,280 Speaker 4: been just since the beginning of the year, we've been 383 00:18:12,320 --> 00:18:14,920 Speaker 4: all over the map on how many FED rate cuts 384 00:18:14,960 --> 00:18:17,840 Speaker 4: we'll get this year, anywhere between zero and seven or 385 00:18:17,880 --> 00:18:21,960 Speaker 4: even a rate hike. But when we look over at fundamentals, 386 00:18:22,280 --> 00:18:26,000 Speaker 4: just corporate earnings are coming in better than expected, and 387 00:18:26,440 --> 00:18:30,000 Speaker 4: you know that's that's obviously positive for stocks and one 388 00:18:30,000 --> 00:18:32,880 Speaker 4: of the most important long term factors. And we're looking 389 00:18:32,920 --> 00:18:35,560 Speaker 4: for double digit growth and earnings down the road this year. 390 00:18:35,720 --> 00:18:39,720 Speaker 4: So it's a it's a scenario that if we continue 391 00:18:39,800 --> 00:18:46,000 Speaker 4: with some multiple expansion, earnings continue to do well. The Fed, 392 00:18:46,080 --> 00:18:49,920 Speaker 4: if anything that is looking to show that they're on 393 00:18:50,080 --> 00:18:54,160 Speaker 4: a cutting cycle, they want to cut at least once 394 00:18:54,240 --> 00:18:57,639 Speaker 4: to show they're on a cutting cycle. It's just they're 395 00:18:57,640 --> 00:18:59,800 Speaker 4: having trouble. They got help with non farm payrolls, they 396 00:18:59,800 --> 00:19:03,679 Speaker 4: got help with retail sales CPI. You know, we're going 397 00:19:03,720 --> 00:19:06,920 Speaker 4: to see an opening here and that'll just be more, 398 00:19:07,200 --> 00:19:11,200 Speaker 4: you know, another catalyst, more horsepower for the bulls out 399 00:19:11,200 --> 00:19:13,400 Speaker 4: there to take the market higher. So does that mean 400 00:19:13,480 --> 00:19:16,960 Speaker 4: that is coming I'm sorry, I was going to say, 401 00:19:17,359 --> 00:19:22,159 Speaker 4: with it coming on more in the spirit of a 402 00:19:22,280 --> 00:19:30,160 Speaker 4: normalization of FED policy, not because the recessionary forces out 403 00:19:30,200 --> 00:19:33,840 Speaker 4: there are becoming overwhelming and we're seeing a slow economy. 404 00:19:33,920 --> 00:19:36,679 Speaker 4: We're not seeing that GDP has remained quite strong. 405 00:19:37,359 --> 00:19:40,440 Speaker 6: So when you talk about the AI and New Industrial Revolution, 406 00:19:41,320 --> 00:19:44,640 Speaker 6: what's so interesting is that utilities over the last few 407 00:19:44,680 --> 00:19:48,600 Speaker 6: weeks in may have been the second best performing sector 408 00:19:48,680 --> 00:19:51,879 Speaker 6: in the S and P along with tech. Can utilities 409 00:19:52,000 --> 00:19:55,960 Speaker 6: be a growth sector in this environment that you're outlining. 410 00:19:57,440 --> 00:19:59,280 Speaker 4: I think that's yet to be seen. You know, the 411 00:19:59,359 --> 00:20:02,840 Speaker 4: belief there are the thesis there is that there is 412 00:20:02,960 --> 00:20:07,800 Speaker 4: going to be so much demand for all these super 413 00:20:07,920 --> 00:20:13,320 Speaker 4: chips and and all the the the the energy required 414 00:20:13,880 --> 00:20:20,480 Speaker 4: for this revolutionist implementation of of general of AI. I 415 00:20:20,520 --> 00:20:23,840 Speaker 4: think it's also investors looking for more areas they can 416 00:20:23,920 --> 00:20:26,040 Speaker 4: diversify into. But I think it's you have to be 417 00:20:26,119 --> 00:20:29,440 Speaker 4: seen how much that really translates. You know, that that 418 00:20:29,640 --> 00:20:35,040 Speaker 4: demand for energy translates into actually pushing utility stocks higher. 419 00:20:35,680 --> 00:20:38,880 Speaker 4: It's not it's not a typical reaction function we've seen 420 00:20:38,920 --> 00:20:41,560 Speaker 4: in the past, but we can see how it could 421 00:20:41,560 --> 00:20:42,560 Speaker 4: be one going forward. 422 00:20:43,560 --> 00:20:46,960 Speaker 2: David, you know, aside from the AI play, you know, 423 00:20:47,640 --> 00:20:49,600 Speaker 2: a lot of investors feel like maybe they've kind of, 424 00:20:49,640 --> 00:20:51,520 Speaker 2: at least in the short term, missed some of the 425 00:20:51,560 --> 00:20:54,960 Speaker 2: Big seven Magnificent seven plays. What are some other areas 426 00:20:55,000 --> 00:20:58,520 Speaker 2: that you think there's maybe value out there in the marketplace? 427 00:20:59,560 --> 00:21:01,760 Speaker 4: Yeah, well we we you know, we've been saying this 428 00:21:01,920 --> 00:21:04,120 Speaker 4: for a while, even when we've had these sell offs 429 00:21:04,160 --> 00:21:07,240 Speaker 4: in the Magnificent seven or the Fabulous for or really 430 00:21:07,400 --> 00:21:11,680 Speaker 4: just megacap tech, to stay with them because you know, 431 00:21:11,720 --> 00:21:14,760 Speaker 4: they're really becoming all weather stocks with these fortress balance 432 00:21:14,800 --> 00:21:17,600 Speaker 4: sheets and wide boats around them and uh, you know 433 00:21:17,960 --> 00:21:20,600 Speaker 4: they're balance sheets that you know, companies like Apple, it 434 00:21:20,880 --> 00:21:25,440 Speaker 4: doesn't Microsoft, doesn't matter what rates are doing. So so 435 00:21:25,560 --> 00:21:28,320 Speaker 4: it's it's such a good place to have a good 436 00:21:28,400 --> 00:21:32,240 Speaker 4: Porsche or portfolio and large caps, specifically large cap tech 437 00:21:32,320 --> 00:21:35,240 Speaker 4: with that focus on AI. But yeah, we can we 438 00:21:35,400 --> 00:21:38,560 Speaker 4: look to other areas that have done well, and it 439 00:21:38,600 --> 00:21:42,639 Speaker 4: will depends how the economy moves forward. There's still this 440 00:21:42,840 --> 00:21:47,960 Speaker 4: risk we move into a stagflationary environment, which might lead 441 00:21:48,040 --> 00:21:52,440 Speaker 4: US towards commodities. Uh, there's also you know, do we 442 00:21:52,600 --> 00:21:55,680 Speaker 4: have a hard landing, soft landing or no landing. We've 443 00:21:55,680 --> 00:21:57,880 Speaker 4: been calling for the no landing scenario. I think we're 444 00:21:57,920 --> 00:22:01,000 Speaker 4: somewhere between soft landing and no landing. But clearly I 445 00:22:01,080 --> 00:22:04,040 Speaker 4: think golden locks economy. So a lot of different sectors 446 00:22:04,080 --> 00:22:07,680 Speaker 4: are looking good and overseas, you know, there are even 447 00:22:07,760 --> 00:22:08,600 Speaker 4: some areas there that. 448 00:22:08,920 --> 00:22:11,280 Speaker 6: Are attractive well well where over seeds. I know that 449 00:22:11,720 --> 00:22:13,880 Speaker 6: the NK in Japan has been a huge hot spot, 450 00:22:13,920 --> 00:22:15,360 Speaker 6: particularly with the weaker yen. 451 00:22:16,800 --> 00:22:21,080 Speaker 4: Yeah, that's that's really our main play is Japan. You know, 452 00:22:21,200 --> 00:22:24,480 Speaker 4: we've a lot of it is is in fact the 453 00:22:24,520 --> 00:22:26,720 Speaker 4: currency play, and you need if you invest in Japan 454 00:22:26,840 --> 00:22:29,280 Speaker 4: do with a currency hedged vehicle. 455 00:22:30,200 --> 00:22:32,720 Speaker 5: But you know, the the the. 456 00:22:34,640 --> 00:22:37,639 Speaker 4: Rally in the in the EK two twenty five, I mean, 457 00:22:37,920 --> 00:22:41,000 Speaker 4: we reached a high here here that we haven't seen 458 00:22:41,359 --> 00:22:43,840 Speaker 4: since nineteen eighty nine when I was walking around the 459 00:22:43,880 --> 00:22:47,560 Speaker 4: campus at Stanford learning how to invest in learning about business, right, 460 00:22:47,640 --> 00:22:51,920 Speaker 4: I mean, it's been that long, and so there's you know, 461 00:22:52,000 --> 00:22:57,000 Speaker 4: with corporate reforms, things that still are bringing true from abbynomics, 462 00:22:57,720 --> 00:23:03,720 Speaker 4: Japan is in a position struggling with monetary policy obviously, 463 00:23:04,280 --> 00:23:06,359 Speaker 4: but with that week currency, they're just they're a ne 464 00:23:06,359 --> 00:23:09,480 Speaker 4: ex supporting country. Their products are so competitive abroad, and 465 00:23:10,240 --> 00:23:12,080 Speaker 4: so that's why they've done so well. You've just got 466 00:23:12,160 --> 00:23:14,800 Speaker 4: to hedge that bet. Europe is starting to look a 467 00:23:14,840 --> 00:23:18,200 Speaker 4: little bit better too, from where they were a year ago. 468 00:23:18,920 --> 00:23:19,040 Speaker 5: Uh. 469 00:23:19,600 --> 00:23:22,280 Speaker 4: The concern here is where rates go, you know, when 470 00:23:22,320 --> 00:23:24,639 Speaker 4: you come to emerging markets and some of those some 471 00:23:24,800 --> 00:23:30,680 Speaker 4: of the other more interest rate sensitive economies like you know, 472 00:23:30,760 --> 00:23:34,920 Speaker 4: we we've seen China researchs in China earlier but or recently, 473 00:23:35,000 --> 00:23:37,800 Speaker 4: but we would continue to avoid there for now because 474 00:23:37,840 --> 00:23:40,800 Speaker 4: of the structural problems they have. But it's really right 475 00:23:40,920 --> 00:23:45,240 Speaker 4: now for US. It's America first. The US economy is 476 00:23:45,320 --> 00:23:48,600 Speaker 4: on is still rolling, you know, in a in a 477 00:23:48,680 --> 00:23:52,159 Speaker 4: pretty strong manner. The consumer is still strong. We're wondering, 478 00:23:52,440 --> 00:23:54,720 Speaker 4: you know, how many times have we heard the consumers 479 00:23:54,800 --> 00:23:56,760 Speaker 4: running out of money? The consumer is gonna they're going 480 00:23:56,800 --> 00:23:58,960 Speaker 4: to run out of pandemic money, They're running out of money, 481 00:23:59,000 --> 00:24:02,640 Speaker 4: they're borrowing. But the consumer's still strong. And that's that's 482 00:24:02,720 --> 00:24:05,399 Speaker 4: the mainstay of our economy. So no pun intended. That's 483 00:24:05,440 --> 00:24:08,880 Speaker 4: the main stay of our economy. And you know we're 484 00:24:09,520 --> 00:24:14,280 Speaker 4: we're America first with looking for some opportunities to tactically yeah, 485 00:24:14,760 --> 00:24:19,000 Speaker 4: out to some other areas to manage portfolio risk. 486 00:24:19,600 --> 00:24:23,200 Speaker 2: All right, David, I always appreciate checking in with you. 487 00:24:23,320 --> 00:24:25,720 Speaker 2: David Coodley, he's a founder and he's a chief executive 488 00:24:25,720 --> 00:24:28,240 Speaker 2: officer and he's a chief investment strategist over at Mainstay 489 00:24:28,640 --> 00:24:33,160 Speaker 2: Capital Management based in Michigan, but smartly right now in Naples, Florida, 490 00:24:33,520 --> 00:24:35,840 Speaker 2: coming at us from zoom all right, the Naples days 491 00:24:35,840 --> 00:24:37,680 Speaker 2: a kind of done. It's going to get like unbearably hot. 492 00:24:38,080 --> 00:24:40,640 Speaker 2: Where you want to be from now on Jersey Shore, baby. 493 00:24:40,640 --> 00:24:42,720 Speaker 6: Yeah, you kind of do. Also, like today it's not 494 00:24:42,800 --> 00:24:44,600 Speaker 6: that nice in New York. It's rainy and grows, but 495 00:24:44,720 --> 00:24:48,040 Speaker 6: man is it humid? Yes, So henceforth the Jersey Shore, 496 00:24:48,200 --> 00:24:50,840 Speaker 6: the Paulsweeni House. We're all waiting for our invite. I mean, 497 00:24:50,920 --> 00:24:52,920 Speaker 6: John Tecker and I were like, I don't really need 498 00:24:53,000 --> 00:24:56,000 Speaker 6: one down there too. I guess I haven't. Okay, I'm 499 00:24:56,000 --> 00:24:58,360 Speaker 6: waiting for an invite to y'all house. I guess that's 500 00:24:58,400 --> 00:24:59,000 Speaker 6: not gonna happen. 501 00:25:00,600 --> 00:25:04,440 Speaker 1: You're listening to the Bloomberg Intelligence Podcast Catch us Live 502 00:25:04,560 --> 00:25:07,480 Speaker 1: weekdays at ten am Eastern on applecar. 503 00:25:07,119 --> 00:25:09,840 Speaker 7: Play and Android Auto with the Bloomberg Business Act. 504 00:25:10,000 --> 00:25:12,800 Speaker 1: You can also listen live on Amazon Alexa from our 505 00:25:12,880 --> 00:25:17,240 Speaker 1: flagship New York station just Say Alexa playing Bloomberg eleven thirty. 506 00:25:19,359 --> 00:25:22,440 Speaker 2: Deer is one of those names that reported earnings, and again, 507 00:25:22,880 --> 00:25:25,040 Speaker 2: when I think about Deer, I think about it in 508 00:25:25,119 --> 00:25:27,000 Speaker 2: the context of being a really good snapshot of where 509 00:25:27,040 --> 00:25:30,400 Speaker 2: the US farmer is in terms of their economic well being. 510 00:25:30,480 --> 00:25:33,879 Speaker 2: Chris Chilo, he follows Deer, He follows all those industrial 511 00:25:34,080 --> 00:25:38,080 Speaker 2: companies for Bloomberg Intelligence. He joins us here, Chris, what 512 00:25:38,160 --> 00:25:41,520 Speaker 2: does it takeaway from Deer this quarter in the outlook? 513 00:25:42,720 --> 00:25:44,200 Speaker 2: You're right, it's all about the outlook. 514 00:25:45,000 --> 00:25:47,640 Speaker 9: We expected them to cut their twenty twenty four outlook. 515 00:25:48,040 --> 00:25:50,760 Speaker 9: You saw that from their peers at CNACH and Aco. 516 00:25:50,960 --> 00:25:55,320 Speaker 9: They both lowered their expectations this quarter. But the haircut 517 00:25:55,480 --> 00:25:58,120 Speaker 9: this quarter for Deer was more than we had anticipated. 518 00:25:58,240 --> 00:26:01,600 Speaker 9: They actually took net income down. So we're looking at 519 00:26:02,119 --> 00:26:05,080 Speaker 9: nettingcome around seven billion dollars this year, which would imply 520 00:26:05,800 --> 00:26:08,000 Speaker 9: earnings a little north to twenty five dollars a share, 521 00:26:08,440 --> 00:26:12,200 Speaker 9: or roughly eight percent below the street. And really there's 522 00:26:12,240 --> 00:26:15,320 Speaker 9: two things for the reduction and the outlook. One, farm fundamentals, 523 00:26:15,800 --> 00:26:19,440 Speaker 9: farm economics continue to deteriorate, so we're seeing weaker, broadly 524 00:26:19,880 --> 00:26:23,000 Speaker 9: weaker demand across the globe. And then two, they're going 525 00:26:23,080 --> 00:26:26,280 Speaker 9: to have to underproduce retail demand here because inventories continue 526 00:26:26,320 --> 00:26:30,639 Speaker 9: to pile up given the softer demand backdrop, So production 527 00:26:30,760 --> 00:26:32,920 Speaker 9: will be down significantly in the back half of the year. 528 00:26:33,680 --> 00:26:35,880 Speaker 9: But I think now the question becomes, is this cut 529 00:26:36,040 --> 00:26:38,280 Speaker 9: going to be enough to de stock the channel moving 530 00:26:38,320 --> 00:26:39,120 Speaker 9: into twenty five? 531 00:26:39,760 --> 00:26:39,920 Speaker 5: Is it? 532 00:26:43,160 --> 00:26:45,080 Speaker 9: I don't think so, no, because I think we're going 533 00:26:45,160 --> 00:26:49,200 Speaker 9: to see further degradation and the retail demand environment. You know, 534 00:26:49,320 --> 00:26:52,600 Speaker 9: the backdrop isn't particularly encouraging for farmers. I mean, we're 535 00:26:52,600 --> 00:26:56,320 Speaker 9: still looking at lower crop prices, you have higher production expenses, 536 00:26:56,640 --> 00:26:59,560 Speaker 9: interest rates, they're still quite elevated, so net farm income 537 00:26:59,600 --> 00:27:01,960 Speaker 9: is going to be double digits for a second straight year. 538 00:27:03,000 --> 00:27:05,680 Speaker 9: On top of that, you have broadly weaker farmer sentiment. 539 00:27:06,200 --> 00:27:07,840 Speaker 9: They went out and bought a lot of equipment over 540 00:27:07,880 --> 00:27:09,720 Speaker 9: the last three years, so there's really no impetus to 541 00:27:09,760 --> 00:27:12,439 Speaker 9: go out and start spending again. And this is an 542 00:27:12,440 --> 00:27:15,360 Speaker 9: election year, so add another layer of uncertainty on top 543 00:27:15,440 --> 00:27:18,280 Speaker 9: of that, So I guess really struggle to see a 544 00:27:18,359 --> 00:27:20,399 Speaker 9: catalyst at least in the near term that's going to 545 00:27:20,480 --> 00:27:22,080 Speaker 9: really really accelerate demand. 546 00:27:22,400 --> 00:27:24,119 Speaker 2: Well does that mean is that good news for the 547 00:27:24,200 --> 00:27:25,719 Speaker 2: John Tuckles of the world who want to go out 548 00:27:25,760 --> 00:27:27,680 Speaker 2: and buy it John dear tractor. Are they can get 549 00:27:27,680 --> 00:27:30,439 Speaker 2: a deal here? Are they going to get some competitive pricing? 550 00:27:31,680 --> 00:27:35,119 Speaker 9: You certainly can get a deal. We're starting to hear 551 00:27:35,359 --> 00:27:38,600 Speaker 9: more and more about competitive pricing, particularly in South America. 552 00:27:38,720 --> 00:27:42,479 Speaker 9: But there's too much inventory globally. We heard that from 553 00:27:42,560 --> 00:27:45,240 Speaker 9: Deer on the call, at least for particularly for North America. 554 00:27:45,640 --> 00:27:48,200 Speaker 9: That seemed to be a change intra quarter here where 555 00:27:48,240 --> 00:27:50,680 Speaker 9: they're going to have to underproduce for the back half 556 00:27:50,720 --> 00:27:54,119 Speaker 9: of the year. So both new and use too much inventory. 557 00:27:55,280 --> 00:27:58,120 Speaker 9: That being said, a lot of this equipment, even though 558 00:27:58,400 --> 00:28:00,760 Speaker 9: it's sitting on lots, does come at an a significantly 559 00:28:00,840 --> 00:28:03,120 Speaker 9: higher price point than even just five years ago given 560 00:28:03,160 --> 00:28:05,000 Speaker 9: all the technological advancements. 561 00:28:05,480 --> 00:28:08,800 Speaker 6: So basically this is still a cyclical business and we 562 00:28:08,960 --> 00:28:11,240 Speaker 6: haven't hit the bottom of the cycle. Let yet. Do 563 00:28:11,280 --> 00:28:14,560 Speaker 6: you have visibility on when we may do that? It's 564 00:28:14,600 --> 00:28:15,280 Speaker 6: a great question. 565 00:28:16,240 --> 00:28:18,400 Speaker 9: No, I'm one in the camp that thinks that we're 566 00:28:18,440 --> 00:28:21,600 Speaker 9: in a little bit more of a prolonged downturn. You know, 567 00:28:21,880 --> 00:28:25,200 Speaker 9: historically downturns in this business don't last one year. And 568 00:28:25,280 --> 00:28:27,720 Speaker 9: if you look at you know, consensus expectations are for 569 00:28:27,840 --> 00:28:31,080 Speaker 9: roughly flat sales and earnings for deer and that the 570 00:28:31,160 --> 00:28:35,080 Speaker 9: ag equipment peers for next year. Historically, downturns last two 571 00:28:35,160 --> 00:28:38,000 Speaker 9: to four years. We typically look at peak to truck 572 00:28:38,040 --> 00:28:41,000 Speaker 9: the clients north to thirty percent. We'll be down roughly 573 00:28:41,080 --> 00:28:45,000 Speaker 9: fifteen percent in terms of volume this year. Historically speaking, 574 00:28:45,240 --> 00:28:48,760 Speaker 9: that tends to accelerate in year two. So it really 575 00:28:48,880 --> 00:28:51,280 Speaker 9: ultimately comes down to I think what are crop price 576 00:28:51,400 --> 00:28:53,360 Speaker 9: is going to do? I think that would be probably 577 00:28:53,400 --> 00:28:56,720 Speaker 9: the early sign that maybe we're approaching a bottom. But 578 00:28:56,800 --> 00:29:01,120 Speaker 9: we're looking at another bumper crop this year bearings adverse weather, 579 00:29:01,320 --> 00:29:03,720 Speaker 9: then I think you're going to see continued downward pressure 580 00:29:03,800 --> 00:29:04,320 Speaker 9: there though. 581 00:29:04,400 --> 00:29:07,280 Speaker 2: Chris, what are the what are the crops that you 582 00:29:07,400 --> 00:29:09,640 Speaker 2: look at and investors look at they see whether it's 583 00:29:09,640 --> 00:29:11,360 Speaker 2: gonna be a good year or bad year for farmers? 584 00:29:11,480 --> 00:29:12,640 Speaker 2: Is it soybeans? 585 00:29:12,720 --> 00:29:13,000 Speaker 10: Corn? 586 00:29:13,400 --> 00:29:14,239 Speaker 2: What do you look at? 587 00:29:15,400 --> 00:29:18,640 Speaker 9: So there's three that matter. It's corn, It's soybeans, and wheat. 588 00:29:19,160 --> 00:29:21,719 Speaker 9: If you think about in the US, those three crops 589 00:29:21,800 --> 00:29:25,640 Speaker 9: alone account for roughly fifty five percent of farmer cash 590 00:29:25,840 --> 00:29:29,680 Speaker 9: receipts or farmer crop cash receipts, which are essentially farmer revenue. 591 00:29:29,760 --> 00:29:32,000 Speaker 9: So those are the ones that really move the needle, 592 00:29:32,120 --> 00:29:36,440 Speaker 9: particularly for the large, high horsepower equipment which really you know, 593 00:29:36,600 --> 00:29:37,640 Speaker 9: drive the earnings power. 594 00:29:37,720 --> 00:29:41,280 Speaker 6: For deer, this may be a really weird question, but 595 00:29:41,640 --> 00:29:47,640 Speaker 6: the used tractor business DoD Deer and Caterpillar, etc. Do 596 00:29:47,720 --> 00:29:51,040 Speaker 6: they own the resale the secondhand business or is it 597 00:29:51,120 --> 00:29:52,920 Speaker 6: a different type of dealer that does that and is 598 00:29:52,960 --> 00:29:56,000 Speaker 6: there any sort of benefit to be made for them 599 00:29:56,040 --> 00:29:56,680 Speaker 6: on that level. 600 00:29:58,160 --> 00:30:03,360 Speaker 9: So, generally speaking, dealers independent businesses. That being said, the 601 00:30:03,440 --> 00:30:06,520 Speaker 9: OEMs do have pretty significant influence there, so they do 602 00:30:06,640 --> 00:30:11,600 Speaker 9: make their own business decisions. But you know, like I said, 603 00:30:11,840 --> 00:30:14,560 Speaker 9: it's both a problem in the used market as well 604 00:30:14,560 --> 00:30:18,600 Speaker 9: as that there's too much inventory out there, and until 605 00:30:18,680 --> 00:30:20,720 Speaker 9: you could start maybe clearing some of that out on 606 00:30:20,760 --> 00:30:24,200 Speaker 9: the second and third hand market, it's really tough to 607 00:30:24,720 --> 00:30:28,000 Speaker 9: re accelerate demand for new equipment because most new equipment 608 00:30:28,040 --> 00:30:31,040 Speaker 9: purchases typically will involve a trade in of older equipment 609 00:30:32,160 --> 00:30:35,400 Speaker 9: and really the second and third buyers tend to be smaller, 610 00:30:35,480 --> 00:30:38,520 Speaker 9: mid sized type farmers. So unless there's some kind of 611 00:30:38,560 --> 00:30:42,480 Speaker 9: improvement in farmer profitability, particular for those those farmers that 612 00:30:42,720 --> 00:30:46,480 Speaker 9: are more pressured, it's really tough to you know, accelerate 613 00:30:46,560 --> 00:30:47,040 Speaker 9: that demand. 614 00:30:47,600 --> 00:30:53,640 Speaker 2: So soybeans, wheat, corn, When does that stuff like get planted, harvested, 615 00:30:53,680 --> 00:30:54,520 Speaker 2: all that kind of stuff. 616 00:30:55,680 --> 00:30:58,160 Speaker 9: Right now, we're right in the heart of planting season. 617 00:30:58,760 --> 00:31:01,160 Speaker 9: I think about roughly fifty percent of the corn crop 618 00:31:01,280 --> 00:31:05,920 Speaker 9: is in the ground. Yeah, particularly in North America, this 619 00:31:06,120 --> 00:31:09,000 Speaker 9: is the planning season. South America a little different. You 620 00:31:09,080 --> 00:31:12,160 Speaker 9: get multiple growing seasons down there due to the to 621 00:31:12,280 --> 00:31:17,600 Speaker 9: the climate. But really we're squarely focused in on corn, corn, 622 00:31:17,680 --> 00:31:20,720 Speaker 9: and soybeans right now. And really, you know, if you 623 00:31:20,760 --> 00:31:24,960 Speaker 9: look at soil moisture, it's actually quite favorable. So there's 624 00:31:25,000 --> 00:31:28,560 Speaker 9: really expectations that this is going to be another bumper crop. 625 00:31:29,440 --> 00:31:31,520 Speaker 2: So you think you're can get a bumper crop because 626 00:31:31,560 --> 00:31:32,600 Speaker 2: the soil is moist. 627 00:31:33,680 --> 00:31:36,880 Speaker 9: We have moist soil now, so you know, like I said, 628 00:31:36,960 --> 00:31:40,400 Speaker 9: bearing some kind of drought, I think you probably see 629 00:31:40,480 --> 00:31:43,120 Speaker 9: more downward pressure on crop prices, which kind of leads 630 00:31:43,200 --> 00:31:45,520 Speaker 9: us to be probably a little bit more cautious heading 631 00:31:45,560 --> 00:31:48,400 Speaker 9: into twenty twenty five, just because farmer incomes are still 632 00:31:48,400 --> 00:31:50,760 Speaker 9: going to be under tremendous pressure, really what we think 633 00:31:50,800 --> 00:31:53,640 Speaker 9: will be for at least a third straight year, and 634 00:31:53,800 --> 00:31:56,400 Speaker 9: that's really just going to you know, temper buying the expectations. 635 00:31:56,480 --> 00:31:58,240 Speaker 6: All right, Chris, we really appreciate it. 636 00:31:58,320 --> 00:31:58,440 Speaker 9: Chris. 637 00:31:58,520 --> 00:32:00,360 Speaker 6: You'll you know, joining us bloom We're gonna tell legends, 638 00:32:00,680 --> 00:32:03,120 Speaker 6: senior US machinery analysts. But it keep you two moist, 639 00:32:03,200 --> 00:32:04,880 Speaker 6: like you can't have floods and you can't have drought. 640 00:32:05,000 --> 00:32:08,640 Speaker 2: You know, John, your assignment today, Go home and feel 641 00:32:08,680 --> 00:32:11,160 Speaker 2: your soil. See how moist it Isn't I don't, but 642 00:32:11,720 --> 00:32:14,920 Speaker 2: you run the danger of the seats rotting before they 643 00:32:15,040 --> 00:32:15,720 Speaker 2: sprout if. 644 00:32:15,600 --> 00:32:16,360 Speaker 5: It's two moist. 645 00:32:16,400 --> 00:32:18,440 Speaker 2: So exactly too much moisture gonn to be a problem 646 00:32:18,480 --> 00:32:19,360 Speaker 2: with farming businesses. 647 00:32:19,400 --> 00:32:21,640 Speaker 5: Top Oh my god, at least with my pegonias. 648 00:32:21,720 --> 00:32:23,160 Speaker 6: I mean, that's why you have crop insurns, like you 649 00:32:23,280 --> 00:32:25,160 Speaker 6: really need it because you're just I mean, even though 650 00:32:25,160 --> 00:32:27,080 Speaker 6: you might complain about all the handouts, et cetera, but 651 00:32:27,200 --> 00:32:28,400 Speaker 6: like it's huge, it's big. 652 00:32:30,920 --> 00:32:34,760 Speaker 1: You're listening to the Bloomberg Intelligence podcast Catch us Live 653 00:32:34,880 --> 00:32:37,400 Speaker 1: weekdays at ten am Eastern on Apple. 654 00:32:37,160 --> 00:32:40,160 Speaker 7: Car Play and Android Auto with the Bloomberg Business app. 655 00:32:40,320 --> 00:32:43,120 Speaker 1: You can also listen live on Amazon Alexa from our 656 00:32:43,160 --> 00:32:47,520 Speaker 1: flagship New York station, Just say Alexa play Bloomberg eleven thirty. 657 00:32:49,320 --> 00:32:51,400 Speaker 2: If you remember, about a week ago, I attended the 658 00:32:51,400 --> 00:32:54,720 Speaker 2: Boston Consulting Group Edge Expo in Boston, Massachusetts. Had the 659 00:32:54,760 --> 00:32:57,000 Speaker 2: opportunity to chat with a lot of smart people top 660 00:32:57,040 --> 00:33:01,000 Speaker 2: execs at BCG. One was with Global Chair Rich Lesser. 661 00:33:01,400 --> 00:33:04,600 Speaker 2: He engages with CEOs, boards of directors, and senior leaders 662 00:33:04,640 --> 00:33:08,160 Speaker 2: around the world on critical topics, including climate change and 663 00:33:08,280 --> 00:33:11,920 Speaker 2: artificial intelligence. I began the conversation by asking Rich what 664 00:33:12,200 --> 00:33:14,680 Speaker 2: he spends the most time talking to clients about. Let's 665 00:33:14,680 --> 00:33:15,160 Speaker 2: take a listen. 666 00:33:15,680 --> 00:33:18,080 Speaker 10: So it's been a remarkable decade and it's not even 667 00:33:18,160 --> 00:33:18,880 Speaker 10: half over yet. 668 00:33:19,400 --> 00:33:21,080 Speaker 5: And I think the two. 669 00:33:21,080 --> 00:33:23,840 Speaker 10: Characteristics that we are living with right now to a 670 00:33:24,080 --> 00:33:28,040 Speaker 10: very high degree is uncertainty and change, and they're not 671 00:33:28,160 --> 00:33:31,040 Speaker 10: the same thing. Uncertainty causes you to want to hunker down, 672 00:33:31,160 --> 00:33:33,560 Speaker 10: you know, just get through it. Change forces you to 673 00:33:33,640 --> 00:33:37,280 Speaker 10: be bold, to invest, to take some risk. And right now, 674 00:33:37,440 --> 00:33:40,560 Speaker 10: more than I can remember, CEOs get pooled in both 675 00:33:40,680 --> 00:33:44,400 Speaker 10: directions how to navigate, particularly if you're like a European CEO. 676 00:33:44,520 --> 00:33:47,400 Speaker 10: You've got two wars not so not so far away, 677 00:33:47,440 --> 00:33:50,400 Speaker 10: and you've got all the pressures of energy costs and 678 00:33:50,520 --> 00:33:53,600 Speaker 10: all the uncertainty of all these elections this year and 679 00:33:53,640 --> 00:33:55,920 Speaker 10: so forth. You've got an enormous amount of uncertainty. But 680 00:33:56,000 --> 00:33:58,200 Speaker 10: of course, just like CEOs everywhere in the world, you've 681 00:33:58,240 --> 00:34:01,200 Speaker 10: got rapid technology evolution, and you've got to prepare for 682 00:34:01,320 --> 00:34:03,960 Speaker 10: climate change, all sorts of things. So I think that's 683 00:34:04,080 --> 00:34:05,920 Speaker 10: the tension point, is how to balance. 684 00:34:05,640 --> 00:34:08,359 Speaker 2: Those Let's talk about climate change a little bit here. 685 00:34:08,800 --> 00:34:10,960 Speaker 2: It feels like maybe we're at a little bit of 686 00:34:10,960 --> 00:34:12,680 Speaker 2: an ebb here in the US. I'm not sure if 687 00:34:12,719 --> 00:34:14,719 Speaker 2: I don't think that's necessarily case in Europe, but I'm 688 00:34:14,760 --> 00:34:16,840 Speaker 2: feeling a little bit here. How do you engage with 689 00:34:16,920 --> 00:34:20,279 Speaker 2: your clients about climate change? What's the challenge these days? 690 00:34:20,360 --> 00:34:23,040 Speaker 2: Is it convincing them that it's there, that it's an issue, 691 00:34:23,360 --> 00:34:27,040 Speaker 2: convincing them that they need to maybe invest in getting 692 00:34:27,120 --> 00:34:29,440 Speaker 2: to a cleaner economy. What are some of the challenges 693 00:34:29,480 --> 00:34:30,000 Speaker 2: you guys have seen. 694 00:34:30,120 --> 00:34:33,839 Speaker 10: I think it's really important to separate what people want 695 00:34:33,920 --> 00:34:38,320 Speaker 10: to talk about publicly and what they do. Many many CEOs, 696 00:34:38,360 --> 00:34:42,080 Speaker 10: particularly of leading US companies, have made pretty substantial commitments 697 00:34:42,120 --> 00:34:43,840 Speaker 10: over the last two to three years. 698 00:34:44,560 --> 00:34:47,560 Speaker 5: But in making those commitments, they were. 699 00:34:47,640 --> 00:34:50,040 Speaker 10: Very, very visible and public about it a couple of 700 00:34:50,120 --> 00:34:52,600 Speaker 10: years ago, and I think right now the sense is 701 00:34:53,080 --> 00:34:55,040 Speaker 10: you don't walk away from your commitments. And I know 702 00:34:55,400 --> 00:34:58,600 Speaker 10: very few CEOs, very few that I think are really 703 00:34:58,640 --> 00:35:00,919 Speaker 10: trying to walk away from their amendments. I think most 704 00:35:00,960 --> 00:35:03,120 Speaker 10: of them have tried to put them in their processes 705 00:35:03,239 --> 00:35:06,359 Speaker 10: and sure they get delivered. But at the same time, 706 00:35:06,840 --> 00:35:09,759 Speaker 10: it's become such a politicized topic. We're all going to 707 00:35:09,800 --> 00:35:11,520 Speaker 10: live on this planet, we're all going to bear the 708 00:35:11,600 --> 00:35:16,800 Speaker 10: consequences of climate change, but unfortunately, in the public discourse 709 00:35:17,200 --> 00:35:19,200 Speaker 10: and in a very you know, it's an election year. 710 00:35:19,160 --> 00:35:20,640 Speaker 5: It's just become very political. 711 00:35:20,960 --> 00:35:23,520 Speaker 10: And I don't think CEOs want to be so public 712 00:35:24,080 --> 00:35:27,160 Speaker 10: on these very difficult, divided, divisive topics. 713 00:35:27,239 --> 00:35:28,480 Speaker 5: So they're much quieter. 714 00:35:29,000 --> 00:35:32,799 Speaker 10: They're not walking away from their previous commitments, but they're 715 00:35:32,840 --> 00:35:36,160 Speaker 10: also being careful about new commitments, partly because of the 716 00:35:36,200 --> 00:35:38,640 Speaker 10: public attention and partly because they don't know where the 717 00:35:38,680 --> 00:35:40,480 Speaker 10: policy environment is going next year. 718 00:35:40,680 --> 00:35:43,080 Speaker 2: And you know, I guess an example that is ESG. 719 00:35:43,360 --> 00:35:46,440 Speaker 2: It was the termed for so many years and now 720 00:35:46,480 --> 00:35:48,640 Speaker 2: it's really fallen out of favor here in the US 721 00:35:48,719 --> 00:35:51,960 Speaker 2: in particular. But again I guess the underlying commitment for 722 00:35:52,120 --> 00:35:53,440 Speaker 2: many of those folks are still there. 723 00:35:53,680 --> 00:35:54,960 Speaker 5: Well. The problem is ESG. 724 00:35:55,840 --> 00:35:58,920 Speaker 10: Even people who were committed weren't always sure exactly what 725 00:35:59,360 --> 00:36:02,239 Speaker 10: ESG was and what it meant. It was initials that 726 00:36:02,320 --> 00:36:05,960 Speaker 10: were bundling three very different kinds of attributes together, and 727 00:36:06,680 --> 00:36:09,719 Speaker 10: then it got politicizes a term without even people knowing 728 00:36:10,120 --> 00:36:13,200 Speaker 10: why they shouldn't like it sometimes, so I think very 729 00:36:13,280 --> 00:36:16,200 Speaker 10: few CEOs are using ESG language right now. You talk 730 00:36:16,239 --> 00:36:19,479 Speaker 10: about your climate and sustainability commitments, you often talk about 731 00:36:19,520 --> 00:36:23,120 Speaker 10: diversity and inclusion, good governance. I don't think anybody questions 732 00:36:23,200 --> 00:36:25,880 Speaker 10: makes for stronger companies. But when you put it together 733 00:36:25,880 --> 00:36:28,920 Speaker 10: in ways people don't understand, you're just almost looking for trouble. 734 00:36:29,360 --> 00:36:31,400 Speaker 10: And I think CEOs the last thing they want to 735 00:36:31,440 --> 00:36:32,400 Speaker 10: do is look for trouble. 736 00:36:32,840 --> 00:36:34,520 Speaker 2: You know, when you look at the economic data, which 737 00:36:34,600 --> 00:36:37,120 Speaker 2: is what we get Boomberg do all the time, and 738 00:36:37,280 --> 00:36:38,640 Speaker 2: we talk about it all the time. For a lot 739 00:36:38,640 --> 00:36:42,000 Speaker 2: of smart people, what are you hearing about the economy 740 00:36:42,080 --> 00:36:44,879 Speaker 2: from some of your CEO clients out there, seems again 741 00:36:44,920 --> 00:36:47,520 Speaker 2: there's some shifting wins out there for a lot of people. 742 00:36:47,920 --> 00:36:51,759 Speaker 2: Those that won't assets, life's good. Those that don't maybe 743 00:36:51,840 --> 00:36:54,480 Speaker 2: not so much. That inflation thing, for example. 744 00:36:54,200 --> 00:36:55,680 Speaker 5: Is a real problem. What are you hearing? 745 00:36:56,160 --> 00:36:59,880 Speaker 10: So, Look, we've been on the more optimistic side of 746 00:37:00,040 --> 00:37:02,719 Speaker 10: the economic outlook for a while back, when everybody was 747 00:37:02,760 --> 00:37:06,960 Speaker 10: saying recession or super high inflation. We were of a position, 748 00:37:07,120 --> 00:37:10,000 Speaker 10: led by our chief economist Philip Carlson, that we could 749 00:37:10,040 --> 00:37:12,080 Speaker 10: get to a soft landing and that that was not 750 00:37:12,160 --> 00:37:14,960 Speaker 10: as low a probability scenario. Now we're living in a 751 00:37:15,040 --> 00:37:18,640 Speaker 10: soft landing world. But one soft landings for companies have 752 00:37:18,800 --> 00:37:22,080 Speaker 10: hard edges. You still have wages growing faster than your 753 00:37:22,120 --> 00:37:25,120 Speaker 10: power to raise prices. You still have low growth, not 754 00:37:25,280 --> 00:37:28,040 Speaker 10: super high growth. It's hard to drive your own growth 755 00:37:28,040 --> 00:37:31,680 Speaker 10: agenda without doing a lot of innovation, and so it's 756 00:37:31,760 --> 00:37:34,560 Speaker 10: not so easy. And second, we're finding actually the glide 757 00:37:34,600 --> 00:37:37,200 Speaker 10: path for the last thousand feet to the ground. We 758 00:37:37,280 --> 00:37:39,799 Speaker 10: got a glidepath from thirty thousand feet of risk down 759 00:37:39,840 --> 00:37:42,200 Speaker 10: to a couple thousand. But you know, getting from a 760 00:37:42,320 --> 00:37:45,080 Speaker 10: world of high two s low threes down to a 761 00:37:45,200 --> 00:37:48,080 Speaker 10: well below two and a half. Approaching two is proving 762 00:37:48,160 --> 00:37:50,680 Speaker 10: to be tricky, and the consequence of that, as you say, 763 00:37:50,800 --> 00:37:54,120 Speaker 10: is that interest rates are high and there's much less 764 00:37:54,160 --> 00:37:56,960 Speaker 10: sign of them coming down, and in that environment it 765 00:37:57,040 --> 00:37:59,920 Speaker 10: makes a couple things hard. First, for many many consumers, 766 00:38:00,040 --> 00:38:02,200 Speaker 10: you don't have much in the way of savings, buying 767 00:38:02,239 --> 00:38:04,520 Speaker 10: a car, buying a house, renovating a house, all of 768 00:38:04,560 --> 00:38:07,720 Speaker 10: those things go up much more than the underlying prices 769 00:38:07,800 --> 00:38:10,759 Speaker 10: do because of the interest costs. And second, for many 770 00:38:10,800 --> 00:38:13,280 Speaker 10: of the capital investments we need to make, including climate 771 00:38:13,320 --> 00:38:16,200 Speaker 10: and sustainability, things that look like they made a lot 772 00:38:16,239 --> 00:38:18,480 Speaker 10: of economic sense a couple of years ago are much 773 00:38:18,520 --> 00:38:21,200 Speaker 10: harder to justify now. So if you have a lot 774 00:38:21,239 --> 00:38:23,279 Speaker 10: of assets, you're right, it's not bad right now you 775 00:38:23,360 --> 00:38:25,840 Speaker 10: can get good value on But if you've got to 776 00:38:26,120 --> 00:38:29,280 Speaker 10: make investments, take on debt, do things, that is trickier. 777 00:38:29,760 --> 00:38:31,600 Speaker 2: We spent a lot of time at your conference here 778 00:38:31,680 --> 00:38:34,840 Speaker 2: talking about AI and the investment needed in AI and 779 00:38:34,960 --> 00:38:39,560 Speaker 2: the commitment needed and the ethics around AI. How prevalent 780 00:38:39,680 --> 00:38:41,920 Speaker 2: is that in your discussions with your declines at the 781 00:38:42,040 --> 00:38:43,640 Speaker 2: CEO level, the board level. 782 00:38:44,040 --> 00:38:49,600 Speaker 10: I am blown away by how much energy CEOs are 783 00:38:49,719 --> 00:38:53,040 Speaker 10: putting into thinking this topic through. But for me, the 784 00:38:53,080 --> 00:38:55,279 Speaker 10: big difference between the last six months and say the 785 00:38:55,360 --> 00:38:58,239 Speaker 10: first nine or ten months since the big announcements. The 786 00:38:58,360 --> 00:39:00,560 Speaker 10: last six months people are less focused on thinking it 787 00:39:00,640 --> 00:39:03,160 Speaker 10: through in the sense of understanding the technology and more 788 00:39:03,160 --> 00:39:06,480 Speaker 10: about how they can drive business impact at scale. And 789 00:39:06,680 --> 00:39:09,480 Speaker 10: for us, it's been honestly one of the most exciting 790 00:39:09,600 --> 00:39:12,319 Speaker 10: periods I can remember on something where we went from 791 00:39:12,400 --> 00:39:14,680 Speaker 10: less than twenty clients a year ago to day working 792 00:39:14,760 --> 00:39:17,480 Speaker 10: on this to three hundred and fifty. I mean, we've 793 00:39:17,520 --> 00:39:20,440 Speaker 10: never had something like that. And I think that for us, 794 00:39:20,600 --> 00:39:23,279 Speaker 10: there's a lot of opportunity that we're seeing now get 795 00:39:23,440 --> 00:39:27,920 Speaker 10: materialized versus theorized, and CEOs are realizing it. They have 796 00:39:28,040 --> 00:39:29,880 Speaker 10: to balance it, they have other priorities they have to do. 797 00:39:30,080 --> 00:39:31,840 Speaker 10: They have to do it in a responsible way. To 798 00:39:31,920 --> 00:39:34,760 Speaker 10: your point, be careful, there aren't hidden biases. Be careful, 799 00:39:34,760 --> 00:39:37,920 Speaker 10: they're not misusing the technology. But the underlying sense of 800 00:39:38,000 --> 00:39:40,840 Speaker 10: opportunity right now has gone up quite a lot. And 801 00:39:40,920 --> 00:39:44,000 Speaker 10: I think the more they see other companies delivering actually 802 00:39:44,080 --> 00:39:48,440 Speaker 10: putting it into results, that they post deeper customer relationships. 803 00:39:48,680 --> 00:39:50,120 Speaker 5: The faster we'll see that come along. 804 00:39:50,320 --> 00:39:52,800 Speaker 2: Yeah, we met with well the goodness for BCGS. You 805 00:39:52,840 --> 00:39:54,719 Speaker 2: have a lot of smart people on this topic here, 806 00:39:54,840 --> 00:39:58,000 Speaker 2: we've met them here today. One aery was the ethics site, 807 00:39:58,000 --> 00:40:00,880 Speaker 2: your chief ethics officers talking about that. Yeah, that's got 808 00:40:01,000 --> 00:40:02,879 Speaker 2: to be front and center. I would think for total 809 00:40:02,920 --> 00:40:05,759 Speaker 2: discussions before you start thinking about putting dollars to work, 810 00:40:05,800 --> 00:40:07,440 Speaker 2: you have to have a commitment, it seems like, to 811 00:40:07,680 --> 00:40:09,600 Speaker 2: try to do this as responsible. 812 00:40:09,120 --> 00:40:11,760 Speaker 10: As Yes, and it has to be owned by the CEO, 813 00:40:12,040 --> 00:40:14,000 Speaker 10: not owned by the technology team. 814 00:40:14,160 --> 00:40:16,240 Speaker 5: Right, this is a CEO level issue. 815 00:40:16,360 --> 00:40:18,640 Speaker 10: What are the governance frameworks, What are the kind of 816 00:40:19,120 --> 00:40:20,800 Speaker 10: biases to look out for? How do you have a 817 00:40:20,880 --> 00:40:23,680 Speaker 10: process where you don't just put technology into the wild 818 00:40:23,760 --> 00:40:25,800 Speaker 10: and hope you did a good job, but you're monitoring 819 00:40:25,920 --> 00:40:29,480 Speaker 10: it in an ongoing basis, figuring out what the risks are, 820 00:40:29,719 --> 00:40:32,360 Speaker 10: escalating the things to the right level, intervening in the 821 00:40:32,440 --> 00:40:36,280 Speaker 10: right ways. That is a CEO and a top leadership agenda, 822 00:40:36,640 --> 00:40:40,920 Speaker 10: and it's really important. But we are seeing companies navigate 823 00:40:41,040 --> 00:40:43,880 Speaker 10: that really well. And so yes, you have to be 824 00:40:43,960 --> 00:40:46,359 Speaker 10: really careful, but that can't be the reason you don't 825 00:40:46,480 --> 00:40:47,719 Speaker 10: choose to act. 826 00:40:47,880 --> 00:40:50,239 Speaker 2: Yeah, all right, You've been in this consulting game a 827 00:40:50,320 --> 00:40:55,359 Speaker 2: while here, how has it changed? You know, certainly before 828 00:40:55,400 --> 00:40:57,759 Speaker 2: the pandemic. I'm guessing the business models for a lot 829 00:40:57,800 --> 00:40:58,720 Speaker 2: of companies have changed. 830 00:40:58,760 --> 00:40:58,880 Speaker 10: Here. 831 00:40:59,000 --> 00:41:01,080 Speaker 2: How how is your day to day house and consulting 832 00:41:01,120 --> 00:41:02,879 Speaker 2: business evolved in over the least? 833 00:41:02,960 --> 00:41:07,560 Speaker 10: Right, So, I'd say there are two massive changes over 834 00:41:07,640 --> 00:41:11,040 Speaker 10: the last five to ten years. Until five or ten 835 00:41:11,080 --> 00:41:13,400 Speaker 10: years ago, it was very clear, get to the right 836 00:41:13,440 --> 00:41:16,600 Speaker 10: answer for very difficult problems. Make sure the change really happens. 837 00:41:17,160 --> 00:41:20,720 Speaker 10: I think the focus right now on driving real lasting 838 00:41:20,960 --> 00:41:23,520 Speaker 10: impact goes up and up and up. We see it 839 00:41:23,600 --> 00:41:26,080 Speaker 10: in so many clinident discussions. They don't just want partners 840 00:41:26,120 --> 00:41:28,080 Speaker 10: to give them good ideas or give them a page 841 00:41:28,120 --> 00:41:31,400 Speaker 10: of recommendations. They want impact partners that can team with 842 00:41:31,520 --> 00:41:36,000 Speaker 10: to drive stuff through. And two, they need an enablement focus. 843 00:41:36,080 --> 00:41:38,600 Speaker 10: They need a focus on building because the world's going 844 00:41:38,680 --> 00:41:42,320 Speaker 10: to keep changing, So making change once, however successful, is 845 00:41:42,440 --> 00:41:45,800 Speaker 10: not sufficient. What you need to do is enable your organization, 846 00:41:46,000 --> 00:41:49,560 Speaker 10: the people and the technology to keep learning, to keep growing, 847 00:41:49,680 --> 00:41:52,480 Speaker 10: to keep evolving. So the role of people like us 848 00:41:53,000 --> 00:41:56,239 Speaker 10: are not just to make great change happen one successfully, 849 00:41:56,520 --> 00:41:59,480 Speaker 10: but to build skills within the organization, so in the 850 00:41:59,640 --> 00:42:02,759 Speaker 10: organist and keep growing and learning and evolving, and those 851 00:42:02,840 --> 00:42:05,520 Speaker 10: two things have grown dramatically over the last five years. 852 00:42:05,760 --> 00:42:06,120 Speaker 5: All right. 853 00:42:06,160 --> 00:42:10,120 Speaker 2: That was Global Chair Rich Lesser of BCG Boston Consulting Group. 854 00:42:10,160 --> 00:42:13,279 Speaker 2: I was up there attending their Boston Consulting Group Edge 855 00:42:13,360 --> 00:42:16,200 Speaker 2: Expo in Boston, talking to a lot of their leaders 856 00:42:16,360 --> 00:42:18,600 Speaker 2: senior partners there at bcgpas some of the issues they 857 00:42:18,640 --> 00:42:21,520 Speaker 2: are working with their clients are on. A lot of 858 00:42:21,600 --> 00:42:26,719 Speaker 2: it was about competition, global competition technology, particularly AI as well. 859 00:42:26,840 --> 00:42:29,640 Speaker 2: So a lot going on there and they're getting more 860 00:42:29,640 --> 00:42:32,000 Speaker 2: and more engaged with their clients. 861 00:42:32,280 --> 00:42:36,759 Speaker 1: This is the Bloomberg Intelligence podcast, available on apples, Spotify, 862 00:42:36,960 --> 00:42:40,120 Speaker 1: and anywhere else you get your podcasts. Listen live each 863 00:42:40,160 --> 00:42:43,319 Speaker 1: weekday ten am to noon Eastern on Bloomberg dot com, 864 00:42:43,640 --> 00:42:47,000 Speaker 1: Beheart Radio app, tune In, and the Bloomberg Business app. 865 00:42:47,160 --> 00:42:50,160 Speaker 1: You can also watch us live every weekday on YouTube 866 00:42:50,400 --> 00:42:52,160 Speaker 1: and always on the Bloomberg terminal.