Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside
Speaker 1: my co host Matt Miller.
Speaker 2: Every business day we bring you interviews from CEOs, market pros,
Speaker 2: and Bloomberg experts, along with essential market moven News.
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Speaker 1: The retailers coming in with some numbers here today, Target,
Speaker 1: TJ Max, we got Walmart tomorrow. Let's let's round table
Speaker 1: this thing with some smart folks. Jen Bartash is senior
Speaker 1: industry an also with Bloomberg Intelligence and Bloomberg News. Jen
Speaker 1: joins us via the cam from the Princeton office of
Speaker 1: Bloomberg Intelligence. And then we got Simone Foxman. She is
Speaker 1: a Bloomberg reporter for Bloomberg Television, joining us here in studio,
Speaker 1: Jen Bartashes, Let's start with you. TGT Target stocks up
Speaker 1: over five percent the market. What is it like here
Speaker 1: out of the Target results.
Speaker 3: Well, when we look at Target, you know with the
Speaker 3: market it likes is that margin is up and it's
Speaker 3: up significantly over last year. At the same time, I
Speaker 3: think everyone recognizes that it's a difficult operating environment, and
Speaker 3: so even though target reduced, it's full of your guidance
Speaker 3: for sales and for profit. I think that people are
Speaker 3: encouraged by the the way that margins are responding even
Speaker 3: in that environment.
Speaker 1: All right, So genders for our viewers on YouTube, I
Speaker 1: want to point out that you have what is probably
Speaker 1: the best quote unquote office in Bloomberg. It is a
Speaker 1: kind of a corner office. Now, no one, I mean
Speaker 1: no one at Bloomberg has offices. We all sit at
Speaker 1: our desks in kind of the bullpen style. But Jenna's
Speaker 1: got bad as close as you can get to a
Speaker 1: corner office. I just want to point that out now
Speaker 1: because she's been running the Princeton office for decades. I mean,
Speaker 1: she's basically the leader down there. So we were able
Speaker 1: to bring her to BI. So that's pretty cool.
Speaker 2: All right, Simone teach Simone Foughtsman sits near a window.
Speaker 1: She does sit near a window.
Speaker 4: I also sit near the great Michael McKee, who's a
Speaker 4: frequent Bloomberg radio. Yes, but I once had my own
Speaker 4: office because I was the only correspondent in the country.
Speaker 4: So anyway, but yes, but you want to hear about
Speaker 4: retail in the United States.
Speaker 1: Yes, So what do you got here on our good
Speaker 1: friends at TJMAX.
Speaker 4: Yeah, I mean beaten a raise really right across the board,
Speaker 4: raising their outlook for the year, seeing compar bill sales
Speaker 4: three to four percent. I mean, the idea value is
Speaker 4: attracting customers. They're seeing increased traffic across all their major brands.
Speaker 4: According to the CEO, there even home Goods that was
Speaker 4: not expected to do quite so well. Comp sales there
Speaker 4: were expected to be slightly in the negative, but we
Speaker 4: saw four percent year on year rise. So even though
Speaker 4: consumers are looking away from their homes, they spent so
Speaker 4: much time there, they've invested there during the pandemic, and
Speaker 4: they are moving on, home goods is still able to
Speaker 4: attract people. So a broadly very positive earnings report for TJX,
Speaker 4: though I will say shares three points six percent higher,
Speaker 4: not the five plus that we see.
Speaker 1: Into time high for TJX. I wild point that out
Speaker 1: all time high for the stock.
Speaker 2: Well, I mean, are people stepping down? Are you starting
Speaker 2: to see that?
Speaker 5: Jen?
Speaker 2: You know, for a long time we've been hearing guests
Speaker 2: come in the studio and tell Paul and me that
Speaker 2: people step down from target to Walmart. Are they stepping
Speaker 2: down from Target to TJX.
Speaker 3: Well, I think across the board, you're talking about what
Speaker 3: we consider to be a flight to value, and so
Speaker 3: regardless of where your household income level lies, people are
Speaker 3: increasingly seeing value. And that's one of the things that
Speaker 3: makes TJX such a great opportunity for people, and that
Speaker 3: it's there's something always new they go in there. It's
Speaker 3: treasure hunt. And if you're talking about the Walmart's and
Speaker 3: the Targets of the world, you're seeing consumers shift into
Speaker 3: areas where they think there is value. So there are
Speaker 3: some shoppers who have moved from Target to Walmart, especially
Speaker 3: when you're talking about essentials, where Walmart's prices are just
Speaker 3: generally very, very sharp. But we're all also seeing people
Speaker 3: move from Walmart down to dollar stores. So it's really
Speaker 3: that progression of the flight to value that is really
Speaker 3: describing the current economic environment and the consumer environment that
Speaker 3: we're seeing.
Speaker 4: And I think when you think about it too, you know,
Speaker 4: the area we've heard folks across the consumer space be
Speaker 4: really negative is those middle income consumers who want to
Speaker 4: cut their discretionary spending, and TJX offers a bit more
Speaker 4: of that discretionary spend. So instead of going to the
Speaker 4: top line retailer, you have people going out and saying,
Speaker 4: I want to do that treasure hunting. I think that
Speaker 4: that is a better use of my wallet than just
Speaker 4: simply going to a store where the kind of where
Speaker 4: I don't have to do that, but I'm also going
Speaker 4: to pay it.
Speaker 1: And simone I noticed, you know, kind of what was
Speaker 1: unusual for TJ Max here is okay, they beat the quarter,
Speaker 1: and but unlike the Target who was cautious in their outlook,
Speaker 1: they boosted. TJ Max boosted their outlook here. So what's
Speaker 1: kind of the the.
Speaker 4: Extremely strong commentary saying that they're off to an incredible,
Speaker 4: a very strong start, I believe is word for word
Speaker 4: in the third quarter. So I think everyone very optimistic
Speaker 4: there that this flight to value, as Jennifer was talking about,
Speaker 4: will continue even if even if a recovery to some
Speaker 4: degree materializes in the way that Target has been I
Speaker 4: guess hoping and praying for on their call, Jen, what do.
Speaker 2: You hear about the excess savings? I heard someone this morning,
Speaker 2: I think carl Rickodonna on Bloomberg Surveillance say that carl
Speaker 2: Rickodonna over at BNP, Perry of BA saying that at least,
Speaker 2: like you know, there's been a debate about whether or
Speaker 2: not Americans still have excess savings left, but he says,
Speaker 2: one thing is for sure that the lower let's say
Speaker 2: three quinn tiles have already blown through it and have
Speaker 2: nothing left.
Speaker 3: Yeah, that's that's what we're seeing too. And there's you know,
Speaker 3: growing use of credit card that credit cards and is
Speaker 3: a little bit on the rise, especially for those quintiles
Speaker 3: that he was talking about, and so those consumers are
Speaker 3: really looking for where to spend that money. And I
Speaker 3: think one of the other things to think about is
Speaker 3: that the retailers in general haven't they still haven't gone
Speaker 3: back to pre pandemic days of promotions and the same
Speaker 3: types of levels of sales and discounts, and so although
Speaker 3: they're offering value, that type of sales environment or promotional
Speaker 3: environment hasn't yet come back. Now that maybe on the
Speaker 3: horizon if things don't change soon. But I think it
Speaker 3: also supports why we're seeing the popularity of things like TJX,
Speaker 3: because people aren't getting those sales at the big box
Speaker 3: retailers or some of the other retailers at the moment,
Speaker 3: and so they're looking for where they can find some
Speaker 3: of those key brands but at a much lower cost.
Speaker 1: Simon, what else are you looking at here in the
Speaker 1: retail space as we get somebody's come to reporting earnings.
Speaker 4: Yeah, I mean tomorrow we have Walmart. That's the big
Speaker 4: dog there. I think shares hit an all time high
Speaker 4: earlier this week, and so I think expectations are very
Speaker 4: high that they can do they can benefit from this
Speaker 4: environment in a similar way to perhaps TJ Max. Is
Speaker 4: that consumers are trading down, They're doing more of their
Speaker 4: spending at Walmart. Walmart plus growing and increasing number of
Speaker 4: subscribers that are using its food businesses and that sort
Speaker 4: of thing. So that'll be an interesting data point to watch.
Speaker 4: I'm also interested. You know, we heard from Target this
Speaker 4: morning about the impact of student loan repayments kicking back up.
Speaker 4: Do we hear that from TJ Max? They have yet
Speaker 4: to have their call, do we hear that from Walmart.
Speaker 4: We're just trying to get a sense of how much
Speaker 4: this is actually going to weigh on consumers as we
Speaker 4: head towards the fall, and then of course head towards
Speaker 4: the holiday season.
Speaker 2: You ever been a TJ Max Paul. Probably yes, I
Speaker 2: have to say, I haven't been there in a while,
Speaker 2: but when I when I would go, and still if
Speaker 2: I would go today, Jenna is right or I don't
Speaker 2: know who said that about hunting for like, it is
Speaker 2: an adventure to go in there because there's so much
Speaker 2: stuff and you know you're gonna find like like three
Speaker 2: cool polo shirts for twenty nine to ninety nine that
Speaker 2: you would normally pay, like I don't know, one hundred
Speaker 2: bucks for.
Speaker 4: So I think that's how you can make sense of it, right.
Speaker 4: You know, when I was younger, I loved doing that
Speaker 4: so much more.
Speaker 3: Uh.
Speaker 4: And I think if my thanks Bloomberg for paying me.
Speaker 4: But I think if my pennies were tighter, I would
Speaker 4: I would worry a little bit more about where each
Speaker 4: dollar was going. Uh, And therefore I would feel like, Okay,
Speaker 4: I've done. I've put in the hard work to go
Speaker 4: and buy this handbag, even though you know, my dimes
Speaker 4: are tight. Whereas Walmart, whereas whereas I guess you go
Speaker 4: to Target, it's much everything's much more laid out for you.
Speaker 2: I mean, my point is it's actually a great way
Speaker 2: to spend an hour or two in the city, like
Speaker 2: like going to a Barnes and Noble and.
Speaker 1: Just hanging out.
Speaker 4: But this is why you come.
Speaker 1: This is the great Matt Miller.
Speaker 2: When I was a kid, I used to do that.
Speaker 1: Far you fall and Jen Bartash is senior Industrial so
Speaker 1: Bloomberg can tell and simoon Foxman from Bloomberg. She's reported
Speaker 1: there joining us talking to us about all things retail.
Speaker 5: You're listening to the team Ken's are live program Bloomberg
Speaker 5: Markets weekdays at ten am Eastern on Bloomberg dot Com,
Speaker 5: the iHeartRadio app and the Bloomberg Business App, or listen
Speaker 5: on demand wherever you get your podcasts.
Speaker 1: Next week, Jackson Hole, I am still searching my inbox
Speaker 1: for the invite Matt, and I'm just I know it's there,
Speaker 1: I just can't find it. But I don't know if
Speaker 1: that's gonna be a big deal. Anyway.
Speaker 2: I heard they disinvited a lot of people, Like remember
Speaker 2: when the Soho House canceled all the bankers memberships. Yes,
Speaker 2: I think that's Jackson All did the same thing a
Speaker 2: couple of years ago.
Speaker 1: All right, let's bring in Danielle di Martino Booth. She's
Speaker 1: the CEO and chief strategist at QI research. She joins
Speaker 1: us live here in our Bloomberg Interactive Brokers studio and
Speaker 1: on YouTube. So that's even better, Danielle. I guess the
Speaker 1: narrative now with our feter reserve and with rates is,
Speaker 1: you know, not how higher they go, but it could
Speaker 1: be how long are we going to stay here? How
Speaker 1: are you viewing that part of the narrative.
Speaker 6: So I think the higher for longer narrative is something
Speaker 6: that markets do not want to accept. But we have
Speaker 6: to bear in mind that Jay Powell started in January
Speaker 6: of twenty twenty two kind of like Obi wan Kenobi,
Speaker 6: this will happen, This will happen, this will happen. These
Speaker 6: are not the droids you're looking for. And so he's
Speaker 6: managed to really extend this narrative. And I think that,
Speaker 6: you know, if you look at what a lot of
Speaker 6: people are starting to believe compared to twelve months ago.
Speaker 6: Now they're saying we might not see quantitative tightening stop
Speaker 6: until the fourth quarter of twenty twenty four. That is
Speaker 6: a form of higher for longer, even if we see
Speaker 6: rate cuts in twenty twenty four.
Speaker 1: All Right, A very smart listener of ours kind of
Speaker 1: wrote in and asked about that the relationship between running
Speaker 1: off the balance sheet and interest rates. You made a
Speaker 1: comment the last time you were here about that. What
Speaker 1: did you mean by that relationship?
Speaker 6: So, I mean we are a nation that exists. Liquidity
Speaker 6: is the lifeblood of the US economy. It's seventy percent consumption,
Speaker 6: but so much of business investment, so much of consumption
Speaker 6: is derived from credit. And when you're pulling liquidity from
Speaker 6: the system, you end up seeing things like the New
Speaker 6: York FEDS work that shows that that companies anticipate rejections
Speaker 6: being at the highest level on record in the next
Speaker 6: twelve months when it comes to a credit card, home loan,
Speaker 6: auto loans, and what have you. So that is a
Speaker 6: reflection of a credit crunch, which I've learned to some
Speaker 6: is a term that showed up in nineteen sixty six.
Speaker 6: Oh two guys from Salomon Brothers created the term. They said,
Speaker 6: they said, a squeeze and a pinch. They might be
Speaker 6: kind of friendly. A crunch is not. A crunch can
Speaker 6: break a bone. And that's what we're in the midst of, quietly,
Speaker 6: and that's what we're seeing with Moodi's and Fitch and
Speaker 6: the warnings that we've got on banks.
Speaker 2: I love that. So what they these two guys of
Speaker 2: Solomon said, you used to be people would say credit
Speaker 2: squeeze or credit pinch, but that was like too fun.
Speaker 6: It was too fun. And so that's what happened in
Speaker 6: nineteen sixty six. You had banks pull back on lending
Speaker 6: while the US government had been spending a lot of money.
Speaker 6: I don't see any parallels here.
Speaker 2: That's sarcasm for those of you who aren't watching.
Speaker 7: And what did we see?
Speaker 6: We saw a massive pullback. So there's something to be
Speaker 6: said for quantitative tightening directly influencing that flow of liquidity
Speaker 6: or not into the system. It's something we see every
Speaker 6: Friday afternoon aft the close. In the fed's h eight document,
Speaker 6: you're seeing commercial and industrial lending negative.
Speaker 2: How much does the treasury issuance sort of add to
Speaker 2: that liquidity problem?
Speaker 6: Well, so the first three hundred billion or so, we're
Speaker 6: kind of benign. You saw money move out of the
Speaker 6: Fed's facility overnight facility. People were like, oh, look at this.
Speaker 6: You know, I'm going to move it into into treasury bills,
Speaker 6: money market funds. Where are we going going forward? I mean,
Speaker 6: if inflation is as sticky as the inflation used to
Speaker 6: say it's going to be. Then, if I'm a money
Speaker 6: market fund, I'm going to say, wait a minute, I'm
Speaker 6: not going to go into bills. If I think the
Speaker 6: Fed's going to raise interest rates one more time in
Speaker 6: twenty twenty three, maybe it's September, maybe it's December, then
Speaker 6: I'll wait and I'll keep my money at the FED.
Speaker 6: Meaning they're not going to naturally absorb all of this
Speaker 6: treasury issuance, keeping that effect benign, and you end up
Speaker 6: having quantitative tightening join with treasury built issuance, and you're
Speaker 6: having a double pulling of liquidity out of the system.
Speaker 1: All right, I consider myself a pretty good reader. That
Speaker 1: the nuns of Blessed Saque instilled that in me early age.
Speaker 1: But I'll tell you what, I am not reading the
Speaker 1: FED meeting minutes come out later today.
Speaker 2: That's why we have people like Danielle.
Speaker 1: That's why I have people like Mount Sacred Heart. So
Speaker 1: we're like, okay, yeah, very good. So what will you
Speaker 1: be looking for in these meeting minutes.
Speaker 6: The softer the landing narrative, the more they're gonna stick
Speaker 6: with their higher for longer.
Speaker 1: Okay, So I.
Speaker 6: Mean, look, minutes can be massaged. Janet Yellen said so
Speaker 6: in two thousand and eight. She said, minutes can be
Speaker 6: like any other tool in the toolbox. It's not like
Speaker 6: the minutes from a corporate board meeting or something like that.
Speaker 6: In the three weeks that are that come in between,
Speaker 6: the Fed can change what actually occurred inside that room.
Speaker 6: It's kind of like magic. So if they want to
Speaker 6: nod to retail sales being stronger than what was expected,
Speaker 6: then you can have a more hawkish tone in these minutes.
Speaker 6: And that's what I'm anticipating.
Speaker 2: What about the difference between j Powell's standard line. You
Speaker 2: know that we're going to keep rates higher for I
Speaker 2: think last time he said for years or did so.
Speaker 2: At the same time, we get a dot plot, which
Speaker 2: I know is not a forecast from the Fed, but
Speaker 2: it is each individual members essentially forecasts, right, that showed
Speaker 2: at least one full percentage point of rate cuts next year.
Speaker 2: How can he say We're going to keep rates at
Speaker 2: this level for years and everybody, even you know, assuming
Speaker 2: I'm assuming the voters are saying no, it's going to
Speaker 2: come down one percent.
Speaker 6: So it's kind of like if you ever heard one martini,
Speaker 6: two martini three Martini's floor, so he can he can
Speaker 6: withstand one or two descents and maintain his power base.
Speaker 6: You start to get to a number like three, and
Speaker 6: you start to say, is there a mutiny on the FMC.
Speaker 6: So we might see descent next year from some of
Speaker 6: the more dubbish contingency. He might want to hold out
Speaker 6: for longer, and that might mean that we see his
Speaker 6: first real dissent. And we have, I mean, we've seen
Speaker 6: Neil Kashgari, who used to be the most delish person
Speaker 6: on planet Earth, become like, you know, we're not finished
Speaker 6: fighting Involution yet. So he's like very hellkish.
Speaker 2: And still and still says we're not done exactly.
Speaker 6: It was just a few days ago.
Speaker 1: Our good friends at Goldman Sachs, I guess, on Sunday
Speaker 1: put out a note saying that they expect the rate
Speaker 1: cut in the second quarter of next year. Was that
Speaker 1: just to sell books or do you think there's something to.
Speaker 6: That talking a book at Goldman? My gosh, I've never
Speaker 6: heard of such, just thinking. Look, Goldman tax has tremendous
Speaker 6: influence on the New York Fed. The New York Fed
Speaker 6: has a permanent vote on the Federal Open Market Committee,
Speaker 6: this is a known known so it's I think Goldman
Speaker 6: is definitely trying to control the narrative, and they've done
Speaker 6: a very good job of that in the past, of
Speaker 6: having you know, a very extra large influence on FED thinking.
Speaker 6: But you know, Powell's not an academic. Powell was the
Speaker 6: one who brokered the treasury scandal at Solomon Brothers with
Speaker 6: Warren Buffett in nineteen ninety eight when he was just
Speaker 6: a Treasury the secretary. Powell's not intimidated by bankers.
Speaker 1: Sorry.
Speaker 2: Interesting, one of the things that you were telling us
Speaker 2: about Palell around s and p you know, thirty seven,
Speaker 2: thirty eight hundred, was that he wants to break the FED. Put.
Speaker 2: He wants to destroy the idea that the FED is
Speaker 2: going to come to your rescue. Mister market. Every time
Speaker 2: the equity indexes fall now we're at forty five hundred,
Speaker 2: he is that making it harder for him to succeed.
Speaker 2: When the market just continues dully as they raise.
Speaker 6: No, it's making it easier for him. I mean, he's
Speaker 6: basically shut down the commercial mortgage backed securities market. So
Speaker 6: that's one corner of securitization that's vaporized into thin air.
Speaker 6: When in March of twenty twenty, the entire commercial real
Speaker 6: estate industry was like, hold on, we need a bail
Speaker 6: out too.
Speaker 1: But he's taken.
Speaker 6: He's actually created price discovery in a market where none existed.
Speaker 6: There was a building that just sold for sixty seven
Speaker 6: percent off of its prior appraisal in San Francisco a
Speaker 6: few days ago. So he's slowly killing off lines of
Speaker 6: speculation into the markets. I think the CLO market is next.
Speaker 6: So let the stock market be as high it once.
Speaker 6: It gives Powell license to continue depleting liquidity from the
Speaker 6: system and taking out some of the most speculative forms
Speaker 6: covers the word yeah, all right, So I mean this
Speaker 6: in the nicest way possible, Danielle.
Speaker 1: But you are that's data geek of the highest magnitude.
Speaker 1: What data are you looking at that? Maybe we're not so.
Speaker 6: I follow two things very closely. The employee retention credit
Speaker 6: it's advertised everywhere by a manage.
Speaker 2: I mean we we.
Speaker 6: It surpassed thirty billion for the first time in the
Speaker 6: month of July, so on a twelve month run rate,
Speaker 6: it's pumping four hundred billion dollars into the economy, very
Speaker 6: real money. That's about one and a half percentage point
Speaker 6: of GDP growth on an annualized basis. We're seeing that
Speaker 6: manifest and much higher international travel. So it's going to
Speaker 6: your kind of your top quintile of earners, if you will,
Speaker 6: and that's being actively sold. So I'm paying very close
Speaker 6: attention to active fiscal stimulus for billion dollars a year
Speaker 6: is not nothing. In Daily Jobcuts dot Com, we've gone
Speaker 6: from five business closings to nine from the summer months
Speaker 6: after the debt sealing reserves into August. The founder of
Speaker 6: the website said he's seeing a massive increase in companies
Speaker 6: just closing up shop in August, saying I don't see
Speaker 6: over the horizon the holiday season, holiday shopping season saving me.
Speaker 6: So I'm paying really close attention to main Street as well.
Speaker 2: Wow, very good, Daniel de Martinez to watch the fiscal side,
Speaker 2: you know, because not a lot of fedgeeks do not
Speaker 2: close enough attention to the fiscal highly relevant.
Speaker 8: It's highly relevant.
Speaker 1: Daniel de Martinez Booth CEO and chief strategist at QI Research,
Speaker 1: joining us live here in our Bloomberg Interactive Broker studio,
Speaker 1: which is always a treat.
Speaker 5: You're listening to the tape Cat's are live program Bloomberg
Speaker 5: Markets weekdays at ten am Eastern on Bloomberg Radio, the
Speaker 5: tune in app, Bloomberg dot Com, and the Bloomberg Business App.
Speaker 5: You can also listen live on Amazon Alexa from our
Speaker 5: flagship New York station. Just say Alexa play Bloomberg eleven thirty.
Speaker 1: You know, against my better judgment, I'm told we got
Speaker 1: to talk about Washington and politics and all that stuff
Speaker 1: that happens the making of the sausage. And if we're
Speaker 1: gonna do that, we're gonna go to our ace, and
Speaker 1: that is Nathan Dean. He's the senior policy Analyst US
Speaker 1: Latin America for Bloomberg Intelligence. Bloomberg Intelligence, we got people
Speaker 1: that just do everything, and we got a guy who
Speaker 1: is mister Washington, DC, and that's Nathan Dean. He joined
Speaker 1: us live here in our Bloomberg Interactive Brokers studio. Nathan,
Speaker 1: where I want to start is kind of with President
Speaker 1: Biden last week seemingly getting a little tougher with China,
Speaker 1: but it seems like you kind of pulled some punches there.
Speaker 1: Talk to us about what Biden did via I think
Speaker 1: executive order last week with China and kind of what
Speaker 1: it means.
Speaker 9: Yeah, exactly. So President Biden put out an executive order
Speaker 9: essentially directing Treasury to limit or prohibit US investments, so
Speaker 9: primarily private equity venture capital fund investment into China in
Speaker 9: certain sectors like quantum computing, AI, artificial I'm sorry, semiconductors. Now,
Speaker 9: this was a much narrower order than what had previously
Speaker 9: been anticipated, so I think the markets were actually kind
Speaker 9: of happy with that. We don't think there's going to
Speaker 9: be that much of an impact here, you know, most
Speaker 9: of I think if you look at the private equity
Speaker 9: firms today, the big ones, they're about two percent below
Speaker 9: in terms of total assets with exposure to China. So
Speaker 9: this is really just a symbolism executive order. Now the
Speaker 9: Treasury has to implement it, so things could change, and
Speaker 9: with anything in the US China relations, you know, Biden
Speaker 9: can always pull the plug if you know it suits
Speaker 9: as well.
Speaker 2: You did have the at the end of last month,
Speaker 2: the House Select Committee on the Chinese Communist Party. Oh
Speaker 2: that's a Is that really the name? The House Select
Speaker 2: Committee on the Chinese Yeah, it's lucky they threw the
Speaker 2: word communist in there, so we know how they feel
Speaker 2: about them, right, that's a little bit loaded. They they
Speaker 2: alleged that Blackrock is investing in Chinese companies acting against
Speaker 2: US interest. Now I'm guessing this is a Republican controlled committee.
Speaker 2: Obviously those guys don't like Larry Fink. He's like the
Speaker 2: new George Soros for a lot on the right. But
Speaker 2: we had a story by Sila brush Out yesterday. I
Speaker 2: said Blackrock, MSCI and other firms are bracing for tighter oversight.
Speaker 2: Is that is that talk on Capitol Hill going after
Speaker 2: these big, big Wall Street fund managers.
Speaker 9: Absolutely, And to your point, it's actually a bipartisan committee
Speaker 9: because being seen tough on China is good politics no
Speaker 9: matter who you are. So you know, when President Biden
Speaker 9: put out his order, we saw a statement from that
Speaker 9: committee from both parties essentially saying that this could have
Speaker 9: gone farther, and they wished it to have gone further. Now,
Speaker 9: the question about Blackrock and the other firms is what
Speaker 9: is considered oversight and what is actually going to happen.
Speaker 9: Now that committee cannot write legislation. They need other committees
Speaker 9: to do that. And with a Republican House, a Democratic Senate,
Speaker 9: and a president who also has to stare Juginepigi in
Speaker 9: the face at certain you know events. You know, I'm
Speaker 9: not sure there's actually going to be actionable concern for
Speaker 9: those firms, So it's mostly headline risk. Just always keep
Speaker 9: in mind that when it comes to China, Congress loves
Speaker 9: to be tough, but it's the White House that actually
Speaker 9: pulls things back and moderates it.
Speaker 2: Well, the White House, I mean Biden last week said
Speaker 2: that the Communist Party are bad folks, right, he said
Speaker 2: the best Elton wrote initiative, he called that the Debt
Speaker 2: and News initiative.
Speaker 9: Well, there's a difference between calling somebody bad folks and
Speaker 9: actually creating a trade deal or you know, sanctions and
Speaker 9: so forth that actually, you know, changes what we here
Speaker 9: in New York City are trading on.
Speaker 1: All Right, you're down in DC, better or worse, you're
Speaker 1: in the swamp. You're part of it. Actually, quite frankly,
Speaker 1: to be honest, what is what is the feeling in
Speaker 1: DC about China? How worried should the world be about
Speaker 1: us and China? What's the feeling in DC?
Speaker 9: So, you know, there was this thought of, you know,
Speaker 9: will we get into a war over a Taiwan and
Speaker 9: we have a national security analyst who has been writing
Speaker 9: about this on the terminal.
Speaker 1: The general thought on Washington is we're still years away.
Speaker 9: I mean that this is not something that you can
Speaker 9: anticipate will happen in the next few years, you know.
Speaker 9: And when it comes to how do you approach this
Speaker 9: in terms of a market perspective, you know, it's sort
Speaker 9: of something that like everything that we've seen before has
Speaker 9: happened in the past. I mean, there's really you know,
Speaker 9: there's not been a lot of actions from China that
Speaker 9: haven't been actually done ten years ago, fifteen years ago,
Speaker 9: so forth. So you know, we're just still in this
Speaker 9: weight and see mode. I think most if you talk
Speaker 9: to most Congress folks, they're just rather happy to blast
Speaker 9: China and get the good politics from it.
Speaker 2: I'm pretty excited because Ohio looks like it's going to
Speaker 2: be the next state to legalize marijuana, and this is
Speaker 2: something that we're following very closely. Right of course, for
Speaker 2: recreational use, that would be the twenty fourth state now
Speaker 2: still federally illegal. And Nathan, you follow closely the Safe
Speaker 2: Banking Act, which I think is actually moving slowly enough
Speaker 2: that following it closely is no problem, right, But the
Speaker 2: cool thing about Ohio is Shared Brown is our senator,
Speaker 2: the Senator from the Great State of Ohio, and he's
Speaker 2: also the chairman of the Senate Banking Committee. So if
Speaker 2: it's legal in his home state, does he have then
Speaker 2: more I guess covered a push for broader legalization federally.
Speaker 9: Yeah. I mean, if Shared Brown wanted this thing done,
Speaker 9: he could have it done today. I mean, there's nothing
Speaker 9: that is prohibiting the Safe Banking Act other than Shared
Speaker 9: Brown and a couple of other senior senators. I'm both
Speaker 9: parties when it comes to the Safe Banking Act. The
Speaker 9: problem they have is or the bill has, is timing
Speaker 9: and the procedures. Now, there's a lot of people hoping
Speaker 9: that the Safe Banking Act goes as part of the
Speaker 9: funding bill that is going to come up to September.
Speaker 9: Now that's most likely going to end in a government shutdown,
Speaker 9: and Speaker McCarthy was talking about having a quick continuing,
Speaker 9: continuing lose resolution into December. That means the Safe Banking
Speaker 9: Act probably won't be assigned to that.
Speaker 1: Then you get into December.
Speaker 9: There's only eight days where Congress is meeting per month, October, November, December,
Speaker 9: and then we're in election season. So I just I'm
Speaker 9: not sure the Safe Banking Act actually has a vehicle
Speaker 9: to get the passage unless Shared Brown steps up and
Speaker 9: says I want this done today. And I have not
Speaker 9: seen anything that says that he's in. You know, he's
Speaker 9: been a lot of he's been flirting a lot of yeah,
Speaker 9: well I like this, but also this and so forth.
Speaker 9: And there's a whole issue right now on Senator Jack.
Speaker 9: It's been trying to negotiate with Republicans on and they
Speaker 9: haven't made any headway on that.
Speaker 1: What are you focusing on down there in DC legislation
Speaker 1: wise or otherwise that Matt and I are totally ignorant of.
Speaker 2: Well, the shutdown, for one, I mean just said, yeah,
Speaker 2: that's big.
Speaker 9: Well the shutdown is actually we you know, we dust
Speaker 9: off our note every two years when this comes out,
Speaker 9: and when it comes to the shutdown, markets get scared
Speaker 9: within the first two days, and then once they realize
Speaker 9: that the economic impact of a short term shutdown isn't
Speaker 9: all that great, markets actually go up. If you look
Speaker 9: at the thirty day shutdown that happened under the President
Speaker 9: of Trump administration, the markets actually were pretty much fine
Speaker 9: with it. And if you're invested in the contractors. Well,
Speaker 9: most contractors, at least the big ones, have eighteen months,
Speaker 9: two year, two and a half year contracts. So the
Speaker 9: only people that are harmed are the contractors work in Washington,
Speaker 9: DC and those of us who can't take our kids.
Speaker 4: To the zoo.
Speaker 1: See I mean when Nake and Deane you can go
Speaker 1: from China to the US government shutdown, to weed to
Speaker 1: the zoo, to the zoo all in one conversation.
Speaker 5: You're listening to the Team canser Line program Bloomberg Markets
Speaker 5: weekdays at ten am Eastern on Bloomberg dot Com, the
Speaker 5: iHeartRadio app, and the Bloomberg Business app, or listen on
Speaker 5: demand wherever you get your podcasts.
Speaker 1: Joining us since Studios. Doug Baker, He's a portfolio manager
Speaker 1: head of preferred Securities at Nouvene. Doug, I'm an issuer.
Speaker 1: Why would I consider issuing preferred stock? Sell me on it.
Speaker 8: It depends what geography you're talking about.
Speaker 10: It If you're talking about the United States, most SERI
Speaker 10: issuances from the bank and the insurance sector. Those two
Speaker 10: sectors banks in particular issue prefers primarily to meet capital requirements.
Speaker 10: Insurance companies capital requirements, but more importantly, they use prefer
Speaker 10: to help manage their ratings.
Speaker 2: So if I'm an investor, do I care if a
Speaker 2: stock is preferred or not when I buy it?
Speaker 1: Oh?
Speaker 10: Absolutely, I mean, because there are several components to the
Speaker 10: capital stock, and as a preferred investor, you're actually senior
Speaker 10: to the common investors, so that that's first off, So
Speaker 10: compared to the common shareholder, your senior.
Speaker 5: But the.
Speaker 10: Similarity with common stock is oftentimes the payments on a
Speaker 10: preferred or considered dividends. So for individuals you get that
Speaker 10: beneficial tax treatment a lot of instances. So so you're
Speaker 10: you're kind of moving up the capital stack.
Speaker 2: You're a little you're safer in the event of a bust,
Speaker 2: which hopefully doesn't happen.
Speaker 8: Yeah, yeah, you are. Arguably you are on paper you are.
Speaker 8: The reality is that it just depends on the situation.
Speaker 1: Are most preferreds are they? Are they investment grading?
Speaker 8: Well, most of the issuers are in mosted issues. So
Speaker 8: so here's how it works.
Speaker 10: If you look at the issuers on average, you're going
Speaker 10: to find that issuers are around.
Speaker 8: A single a rated institution.
Speaker 10: However, the preferreds on average are triple B rated, and
Speaker 10: it's because they're subordinate in the capital stack the rating agencies,
Speaker 10: because that subordination will knock the ratings down typically four
Speaker 10: to five notches versus the senior ratio of that same issuer.
Speaker 8: So you have exposure to investment grade rated companies.
Speaker 10: However, the securities may not necessarily reflect that through their rating.
Speaker 1: All right, So we had the little mini bank crisis.
Speaker 1: The big banks. Oh, everybody's going to pay the price
Speaker 1: with some I guess higher credit, I guess hire more,
Speaker 1: more and more restrictions. How does that impact the preferred
Speaker 1: market and their use of you know, the bank's use
Speaker 1: of the preferred market.
Speaker 10: So it's going to be, in our opinion, a lot
Speaker 10: like two thousand and seven eighty nine, where horrible, horrible
Speaker 10: situation right and earlier this year not as bad, but
Speaker 10: still pretty traumatic. But looking forward, it's going to create
Speaker 10: a great opportunity. We're going to see the regulatory environment change,
Speaker 10: which is going to benefit the credit investor, which includes
Speaker 10: the preferred investor. And one of the things that we're
Speaker 10: seeing now is a big build in capital or likely
Speaker 10: a big build in common equity capital going forward. So
Speaker 10: it's going to be at the expense of the common shareholder.
Speaker 10: It's going to dilute the return on equity, but it's
Speaker 10: going to enhance the credit profile for the credit investor,
Speaker 10: which includes the preferred investor.
Speaker 2: So what do you like?
Speaker 8: What do we like? We like the big banks.
Speaker 10: We think that there are selective opportunities even in the
Speaker 10: regional bank space. We know that that's kind of you know,
Speaker 10: some people think that the regional banks just across the
Speaker 10: board are.
Speaker 8: Risky area of our market.
Speaker 10: But if you actually do the work, you do the
Speaker 10: objective analysis, things like commercial real estate, while they're risks,
Speaker 10: a lot of these headlines that we had earlier this year,
Speaker 10: you apply some analysis, you do some stress testing on it.
Speaker 10: Indeed a risk, but more from an earning's perspective, right.
Speaker 10: So we also like some of the spaces outside of
Speaker 10: our larger sectors banks insurance, like aircraft lessors, So you
Speaker 10: have aircraft leasing companies that are benefiting from this tremendous
Speaker 10: boom in air travel and they're the ones that are
Speaker 10: financing the airplanes. And so you do have some opportunities
Speaker 10: in spaces outside of banks insurance companies to play the
Speaker 10: preferred market. But at the end of the day, most
Speaker 10: of your exposure and preferreds is going to be financial
Speaker 10: services related.
Speaker 1: Right, So when I if I buy a preferred stock,
Speaker 1: I get a fixed rate a floating rate. He does
Speaker 1: it all work?
Speaker 10: It depends what you buy, okay, And that's where I
Speaker 10: think active management can really help out, because there are
Speaker 10: preferreds out there that will just pay the same fixed
Speaker 10: rate coupon over the entire life of the security.
Speaker 8: And if that's a perpetual.
Speaker 10: Security, a lot of investors don't realize they're taking a
Speaker 10: lot of duration risks or interest rate sensitivity risk with that.
Speaker 10: But there's also a large population of securities that they
Speaker 10: may start out paying a fixed rate coupon, but down
Speaker 10: the road that coupon can adjust, and not only does
Speaker 10: that allow you to benefit from a rise and rate environment,
Speaker 10: but it also helps you control that interest rate risk,
Speaker 10: which is really I think the primary risk of those
Speaker 10: fixed rate structures.
Speaker 1: All Right, So what's the risk to the preferred market here?
Speaker 1: I mean, I guess I got concentration risk with the financials.
Speaker 10: Yeah, So that's the first one that we mentioned, and
Speaker 10: then the second one we were just touching on to
Speaker 10: interest rate risk. Okay, Now, in our opinion, we think
Speaker 10: that the interest rate risk is probably the one that
Speaker 10: we can map the best. Truly, though, when it comes
Speaker 10: to financial service exposure, there's only so much we feel
Speaker 10: you can diversify away from that, so we do oftentimes.
Speaker 10: When we're having these these discussions with investors and they
Speaker 10: like preferreds, they want to add preferreds, one of the
Speaker 10: things that we ask them to do is, hey, check
Speaker 10: the rest of your client's portfolio. See how much other
Speaker 10: financial service exposure is there already, because you don't want
Speaker 10: to have them take an unintended bet on a sector
Speaker 10: unless they mean to do so.
Speaker 2: How do you first get into this?
Speaker 5: Was it?
Speaker 2: Were you doing your CFA and you're like, hey, I
Speaker 2: like this section.
Speaker 1: Well he went to the Here we Go University, Chicago
Speaker 1: Graduate School of the Business, which I love. The GSB Moniker.
Speaker 1: They've now received the kajillion dollars from mister Booth, so
Speaker 1: it's a Booth School of Business.
Speaker 2: I get it.
Speaker 1: But I'm a GS big guy. There's not a bum
Speaker 1: I've done like a dozen Chicago NBA guys. There's not
Speaker 1: a bumm in THEO.
Speaker 2: But they're they're all math people.
Speaker 1: Yeah, well, yeah, they're geeky that way the math even
Speaker 1: our listen there are Bramowitz, who is super smart. She's
Speaker 1: undergraduate at Chicago. So they're all good. So anyway, but but.
Speaker 2: Prefers, did you pick this or were you at Neuvien?
Speaker 2: And they were like, somebody's got to do a preferred man,
Speaker 2: it's you.
Speaker 10: I hate to say it, but it's the latter. So
Speaker 10: when I first came into Nouvene, I was actually a
Speaker 10: derivatives guy. Yes, would you sure? And I don't tell
Speaker 10: many people this, but I was a derivative sales.
Speaker 8: Guy at Lehman Brothers.
Speaker 2: Okay, so that doesn't come up very often anymore, you know,
Speaker 2: you don't.
Speaker 8: That's awesome.
Speaker 1: So if I'm a banker, If I'm a banker and
Speaker 1: I'm doing a new issue for Wells Fargo, You're like
Speaker 1: one of my first calls. Right, you're a big buyer
Speaker 1: in the marketplace.
Speaker 8: I would hope, I would hope we're up there. Yeah.
Speaker 10: So we're typically having the conversations with syndicate desks in
Speaker 10: advance of a deal coming.
Speaker 1: They're whining and dining you. They're the guy. You're the
Speaker 1: guy that they need to get to.
Speaker 10: Yeahs kind of gone the way of the dinosaur.
Speaker 8: We don't get this. But what we do is we
Speaker 8: give them the feedback.
Speaker 10: We're going to be one of the largest typically players
Speaker 10: in a book or in a deal for someone like that,
Speaker 10: you know, so our larger competitors are gonna get the
Speaker 10: phone call too. But the nice thing about that is
Speaker 10: we get to help drive the terms of the deal
Speaker 10: in favor of our investors.
Speaker 8: So yeah, we're typically the.
Speaker 10: Ones that will get, you know, the phone calls before
Speaker 10: the deal really comes to market to get a you know,
Speaker 10: temperature check of what we're looking for.
Speaker 2: So when Paul was on the street, it was all
Speaker 2: and I'm sure when you started as well, you were
Speaker 2: flying everywhere twice a week, you were living out of
Speaker 2: a hotel half the time, constantly face to face meetings.
Speaker 2: And now is it completely changed.
Speaker 10: It's actually going back to that oh yeah, back, yeah,
Speaker 10: So we're doing I mean, I think we're the virtual
Speaker 10: you know kind of remote meetings are That's going to
Speaker 10: be still a big component of it. But yeah, I
Speaker 10: think feet on the ground and I think getting involved
Speaker 10: with folks face to face in a room.
Speaker 8: Look, there's just better communication.
Speaker 10: That way, and it also builds a level of trust
Speaker 10: that Hey, you know, it's easy for me to say
Speaker 10: on the phone, like, yeah, we're gonna have interest at
Speaker 10: this type of level, but to do that in person,
Speaker 10: I think there's just a different connection there. And I
Speaker 10: think having that level of trust with you know, our
Speaker 10: partners on the syndicate side, with our investors is truly important.
Speaker 10: So that FaceTime, that in person travel has really picked up,
Speaker 10: i would say, over the past years.
Speaker 1: So, how many new issues do you guys at Moving
Speaker 1: buy like you for your preferred fund?
Speaker 10: Like, there haven't been many lately, and this out this
Speaker 10: is one of the technicals to our market that's been
Speaker 10: incredibly supportive valuations and it's going to stay this way.
Speaker 10: We've had more preferreds redeemed this year than new issue
Speaker 10: can keep up with. So yeah, and part of it
Speaker 10: is that, you know, as the economy slows, our outlook
Speaker 10: is banks aren't going to need as much capital because
Speaker 10: they're balance sheet shrinks, right, not as many people want loans,
Speaker 10: and if they're not making loans all, the size of
Speaker 10: balance sheet shrinks, and their capital is measured as a
Speaker 10: percent of their balance sheet. So we're seeing more redemptions
Speaker 10: and we're seeing new issuance, but when new issuance comes,
Speaker 10: use of proceeds as almost to refinance or to call
Speaker 10: an existing preferred.
Speaker 2: And it gets snapped up because people are looking for
Speaker 2: the prefers. There's no supply.
Speaker 10: They're looking to reinvest their cash, and luckily for them,
Speaker 10: they're in this interest rate environment. The structures that we're
Speaker 10: seen are very attractive, talking mid seven percent type coupons
Speaker 10: with adjustable rate, you know, a component down the road
Speaker 10: after the.
Speaker 8: First call date. You know, it would be a little
Speaker 8: bit more concerned if we.
Speaker 10: Were in a low interest rate environment and folks didn't
Speaker 10: have this attractive opportunity. We do think that the Yeffords
Speaker 10: are coming to market today are going to be a
Speaker 10: rare vintage because of these higher coupons.
Speaker 8: He's attractive structure.
Speaker 10: So so more often than not, we're participating in the
Speaker 10: new deals that we do see.
Speaker 1: All Right, Doug Baker, he is our go to preferred guy, right,
Speaker 1: He's our go to preferred guy, portfolio manager, the head
Speaker 1: of preferred securities at NOVENE.
Speaker 5: You're listening to the tape. Catch are live program Bloomberg
Speaker 5: Markets weekdays at ten am Eastern on Bloomberg Radio. The
Speaker 5: tune in app Bloomberg dot Com and the Bloomberg Business App.
Speaker 5: You can also listen live on Amazon Alexa from our
Speaker 5: flagship New York station Just Say Alexa playing Bloomberg eleven thirty.
Speaker 1: Let's get right to our next guest, Caroline Frederickson, Distinguished
Speaker 1: Visiting Professor at Georgetown Law. Caroline, thanks so much for
Speaker 1: joining us. We love to start as it relates to
Speaker 1: former President Trump and his legal challenges. Why maybe just
Speaker 1: give us a sense of kind of where his greatest
Speaker 1: exposure is with these four issues that he's facing. From
Speaker 1: your perspective, well, I.
Speaker 7: Mean, they're actually therefore prosecutions, but there are a lot
Speaker 7: more than four issues, so you know, it looks I mean,
Speaker 7: I guess I would. I would start by talking about
Speaker 7: which are the most consequential. We could look at both
Speaker 7: the cases that are brought in DC. The federal case
Speaker 7: focusing on January sixth, and the Georgia case is really
Speaker 7: being central to the concern that we have about President
Speaker 7: Trump allegedly trying to undermine our very democratic system. The
Speaker 7: other two cases, albeit important, don't have the same kind
Speaker 7: of real existential issues for the United States of America
Speaker 7: continuing to exist as a democracy. Now in terms of
Speaker 7: what the you know, sort of the ultimate greatest danger
Speaker 7: is for Donald Trump. I mean, we'll still have to
Speaker 7: see how this will unfold because we haven't seen either
Speaker 7: of the prosecutors lay out their case. I think they're
Speaker 7: There are a couple of different theories here, and one
Speaker 7: is that the approach taken by the Department of Justice,
Speaker 7: which has been not to name the the the so
Speaker 7: far unindicted co conspirators, but to really move in a
Speaker 7: different in a different and more focused way, is one
Speaker 7: strategy to try and really focus the attention on Donald Trump,
Speaker 7: perhaps behind the scenes, to try and negotiate with those
Speaker 7: who haven't been named yet in the federal lawsuit, to
Speaker 7: include some of the same people who are actually named
Speaker 7: in the Georgia State prosecution, the Fulton County prosecutor in
Speaker 7: that case. You know, you have nineteen defendants and forty
Speaker 7: one charges, and I think they're taking a very different strategy,
Speaker 7: which is very narrative, which is telling a story and
Speaker 7: working on the potential of the defendants. They're turning on
Speaker 7: each other, some of them taking plea deals and so forth.
Speaker 7: So they're both very consequential for the president. It's really
Speaker 7: hard to say they have both significant prison time for
Speaker 7: you if he is prosecuted.
Speaker 2: I want to ask Professor about something I saw on
Speaker 2: the Times over the weekend that I think a lot
Speaker 2: of people probably read, bringing up the possibility that according
Speaker 2: to the original meeting of the fourteenth Amendment, Donald Trump
Speaker 2: is ineligible to hold government office. And there was a
Speaker 2: paper written by a couple of a couple of I
Speaker 2: guess attorneys that are or were associated with the Federalist Society.
Speaker 2: So this is coming from a fairly conservative group, right,
Speaker 2: in which they argue that because he essentially engaged in insurrection,
Speaker 2: he is barred from holding office due to this amendment
Speaker 2: that was put in place after the Civil War. Does
Speaker 2: that hold any water do you think?
Speaker 7: I think it's a very strong argument. And first of all,
Speaker 7: i'd say they're actually law professors, one of them, Will
Speaker 7: bode Is at the University of.
Speaker 2: Chicago exactly, and Michael Stokes Paulson from the University of
Speaker 2: Saint Thomas.
Speaker 7: And they're very conservative, associated with the Federalist Society, as
Speaker 7: you said, but also originalists. And I think in the
Speaker 7: sense that they that they went back and they looked
Speaker 7: through a lot of the documentation around the around the
Speaker 7: debates around the amendments adoption, and it was clear they
Speaker 7: were not just focused on of those who've been guilty
Speaker 7: of treason during the Civil War the Confederates, but was
Speaker 7: meant to be prospective and keep people who have taken
Speaker 7: an oath of office to the United States from being
Speaker 7: eligible to serve again in such positions of trust. There
Speaker 7: has been one successful effort so far to put some
Speaker 7: keep somebody off the ballot, and that was brought by
Speaker 7: group called Citizens for Responsibility and Ethics in Washington against
Speaker 7: somebody who participated in January sixth insurrection, and they kept
Speaker 7: him from being able to to get elected. So I
Speaker 7: think it's a very strong argument, and I think it's
Speaker 7: going to We're going to see how that will play
Speaker 7: out as election officials take action from parts of.
Speaker 1: The count Carolyn, what's your sense of the timeline here
Speaker 1: with these four cases? When will the first one? I guess,
Speaker 1: I guess, I guess what's the timeline as you understand it?
Speaker 7: Well, it's very fluid right now. I mean, I think
Speaker 7: the Special Prosecutor UH is trying to move forward as
Speaker 7: expeditiously as possible, and it looks like they're going to
Speaker 7: try and get that trial started before the end of
Speaker 7: the year. I mean, these things are you know, UH
Speaker 7: can keep changing. The mar Lago documents case looks like
Speaker 7: it's going to start really underway in spring. The Fulton
Speaker 7: County prosecution in Georgia. I think that's you know, they
Speaker 7: have an interesting schedule that speedy trial rule that means
Speaker 7: that anyone of those defendants can demand speedy trial, which
Speaker 7: can really accelerate the pace of this that prosecution, meaning
Speaker 7: that it could even be starting or you know, mid
Speaker 7: mid fall, you know, October, November and uh, and those
Speaker 7: cases could be divided because they could because some of
Speaker 7: the defendant might commit you'll agree to a plea or
Speaker 7: otherwise get severed.
Speaker 1: All right, well off the obviously fluid situation, as you mentioned,
Speaker 1: will stay on top of it. Thank you very much
Speaker 1: for your time, Caroline Frederickson Distinguish visiting professor at Georgetown Law,
Speaker 1: trying to give us a little bit more clarity as
Speaker 1: this legal issues of the former president continue.
Speaker 5: You're listening to the tape Cat's are Live program Bloomberg
Speaker 5: Markets weekdays at ten am Eastern on Bloomberg Radio, the
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Speaker 5: You can also listen live on Amazon Alexa from our
Speaker 5: flagship New York station. Just say Alexa, play Bloomberg eleven thirty.
Speaker 1: All right, let's talk about the housing market. The residential
Speaker 1: real estate market. US mortgage rate climbs to seven point
Speaker 1: one six percent, matching the highest sense two thousand and one.
Speaker 1: That gets your attention.
Speaker 2: Potentially have great credit. Yeah, and that's the gold standard
Speaker 2: mortgage rate, because if you look at bank Rade, we're
Speaker 2: already up over seven and a half.
Speaker 1: That's right, Yeah, that's right. So we need to figure
Speaker 1: out what's happening out there and what it means for
Speaker 1: this market. Lisa's a sturt event. She joins us. She's
Speaker 1: a chief economist at Bright MLS. Lisa, we had some
Speaker 1: housing data come out today. Housing starts pretty strong, I
Speaker 1: guess the housing industries, the homebuilders are trying to meet
Speaker 1: the demand out there. But what's going on in a
Speaker 1: residential real estate market today? How would you characterize it?
Speaker 11: Yeah, it's such a strange market, housing market, isn't it.
Speaker 11: It's housing has really confounded expectations in so many ways.
Speaker 11: You point to the homebuilder data this morning, New housing
Speaker 11: starts are up from a year ago, up from last month.
Speaker 11: We're seeing that home bolders are really responding not only
Speaker 11: to the demand in the housing market, which has stayed
Speaker 11: surprisingly resilient despite those higher mortgage rates, but they're really
Speaker 11: responding to the fact that inventory is really at near
Speaker 11: record lows and there really is so little for prospective
Speaker 11: home barers to choose from. Home builders are ramping up.
Speaker 11: The amount of inventory that's accounted for by new home
Speaker 11: construction is at its highest level really in the last
Speaker 11: couple of decades, and it's been a really strong housing market.
Speaker 11: We may be, though, prepared to see some changes in
Speaker 11: the market as we head into fall.
Speaker 2: So what what do you think the catalyst for that
Speaker 2: will be, Because I don't know what's going to move
Speaker 2: us out of this stalemate that we're kind of in
Speaker 2: right now. Owners who have low mortgages don't want to sell,
Speaker 2: and buyers can't afford the high mortgages or the prices
Speaker 2: right right.
Speaker 11: So you know, we sort of expected back a year ago,
Speaker 11: when the Fed started raising rates and mortgage rates were rising,
Speaker 11: that we would see a real strong pullback in demand,
Speaker 11: maybe home prices would fall, but in fact, aside from
Speaker 11: a slowdown late last year. We've seen buyers back in
Speaker 11: the market in record numbers in the spring, primarily because
Speaker 11: there's just such strong demand for home ownership. A lot
Speaker 11: of folks have record levels of equity in their homes
Speaker 11: that they're able to roll into a home purchase in
Speaker 11: a sense from buying down at higher rate. But as
Speaker 11: you point out, the real reason why home prices have
Speaker 11: remained firm so far is inventory has been locked down,
Speaker 11: as many homeowners are in those sort of golden handcuffs
Speaker 11: of lower rates. But I think we're at a point
Speaker 11: now where there's just a lot of fatigue in the
Speaker 11: housing market, and rates surpassing seven or even seven and
Speaker 11: a half percent could be what send us to a
Speaker 11: much slower market in terms of transaction level here this fall.
Speaker 1: So a lot of folks are wondering, like myself, when
Speaker 1: mortgage rates are going to decline it? And is there
Speaker 1: a level that once we get there, that I may
Speaker 1: be free up some activity here? Is it five percent?
Speaker 1: Is it six percent? Is it four percent? Is there
Speaker 1: a rate where you think it would kind of thall
Speaker 1: out this market?
Speaker 5: Sure?
Speaker 11: Yeah, right, it's not going to be three percent, right,
Speaker 11: It's not going to be back to where we were
Speaker 11: during the pandemic. I don't think it has to come
Speaker 11: down even to four or five percent to help free
Speaker 11: up some sellers who may be waiting to move but
Speaker 11: feeling that final pinch.
Speaker 5: You know.
Speaker 11: One thing that we're tracking really closely is the fact
Speaker 11: that the spread between the yield on the ten year
Speaker 11: Treasury and the thirty year fixed rate mortgage still remains
Speaker 11: quite wide. So even though mortgage rates will remain relatively
Speaker 11: elevated here in the latter half of twenty twenty three,
Speaker 11: if we do expect and I think we do expect,
Speaker 11: that gap between treasury yields and rates to begin to narrow,
Speaker 11: and we could see rates come down to below six
Speaker 11: percent next year, which I think is what will be
Speaker 11: enough to bring more sellers from the sidelines.
Speaker 2: What's an historical what's a rule of thumb in terms
Speaker 2: of that spread? Where is it typically or has it
Speaker 2: been over say, the last twenty years.
Speaker 11: Yeah, we're typically around maybe one point eight two percentage points,
Speaker 11: So we're now up at three percentage points.
Speaker 2: Ah, So historically we should see mortgage rates about six, right,
Speaker 2: and we're looking at a little bit more than seven.
Speaker 11: That's right, and so if you imagine sort of as
Speaker 11: we move through the rest of the year that we
Speaker 11: could we should expect rates to come down, maybe settling
Speaker 11: around six and a half percent by the end of
Speaker 11: the year, and continue to come down further as we.
Speaker 7: Head into next year.
Speaker 1: All right, So I guess I'm refinancing. I guess with
Speaker 1: a five handle.
Speaker 2: So right, what about Paul top ticked the mortgage market,
Speaker 2: but he got an arm so he's ready to move
Speaker 2: in and pounds when they rates come back down. What
Speaker 2: about new supply coming on the market, So we know
Speaker 2: that there is there are very little transactions in terms
Speaker 2: of previously owned homes. Our builders out there putting up
Speaker 2: new supply like crazy so they can get them into
Speaker 2: the hands of home buyers who are willing to either
Speaker 2: pay cash or go with a seven percent mortgage. Yeah.
Speaker 11: You know, there's been a long period of time during
Speaker 11: which homebuilders had a really tough time with supply chain issues,
Speaker 11: difficulty getting materials and labor. And now over the last
Speaker 11: few months, we've really seen homebuilders ramp up construction because
Speaker 11: there's just simply no other inventory out there and they
Speaker 11: are having to do things to entice buyers in though
Speaker 11: we're seeing more builder financing.
Speaker 2: We're seeing the builder financing at lower rates, right, Lisa,
Speaker 2: that's right, that's right.
Speaker 11: I'm sorry, Billage offering financing at lower rates to help
Speaker 11: bring more buyers in. What we're not seeing is builders
Speaker 11: dropping prices of new construction yet, and maybe they won't
Speaker 11: have to as we head through the rest of the year.
Speaker 11: But we are seeing, you know, some sort of give
Speaker 11: backs in terms of upgrades and other things. But right now,
Speaker 11: there are a lot of home buyers who are on
Speaker 11: the lots of new houses and they didn't expect to be,
Speaker 11: but that's where they are because that's what's available for
Speaker 11: saying I.
Speaker 2: Mean, why would you drop the price. You put up
Speaker 2: a bunch of McMansions and you know, Connecticut commutable area,
Speaker 2: and then you can if you say, hey, we'll give
Speaker 2: you a four point nine to nine percent mortgage, people
Speaker 2: are like, wow, okay, whatever you want.
Speaker 11: Right, And it definitely is region specific.
Speaker 5: Right.
Speaker 11: We have some parts of the country we're not seeing
Speaker 11: as much home building. Here in the Washington area, for example,
Speaker 11: we're still seeing home prices of existing homes rising as
Speaker 11: demand has slowed, and that's simply because we're not seeing
Speaker 11: a lot of new construction that's been coming online.
Speaker 1: So when the home builders are out there building and
Speaker 1: again building permits, housing starts up three three point nine
Speaker 1: percent month on month, much better than forecast here this morning.
Speaker 1: What are they building? Are they building those McMansions or
Speaker 1: are they building what the market really needs, which are
Speaker 1: starter homes.
Speaker 11: Well, the market needs starter homes for sure, but it
Speaker 11: has been a long time since we've seen new construction
Speaker 11: really be the main supplier of starter homes.
Speaker 2: But what we are.
Speaker 11: Seeing is a range of new construction activity in that
Speaker 11: middle market as well as that luxury market, which then
Speaker 11: allows the starter homes in the existing stock to be
Speaker 11: vacated where folks are able to move up. I mean,
Speaker 11: it's part of a whole housing ladder, right, But because
Speaker 11: of the cost of materials, the cost of labor, the
Speaker 11: cost of local regulation for home builders, it's really financially
Speaker 11: challenging for a builder to build at very.
Speaker 7: Low home prices.
Speaker 11: So we really seeing sort of bin market and luxury
Speaker 11: construction by and large.
Speaker 2: What about multifamily.
Speaker 11: Multi Yeah, the rental market has been certainly going like
Speaker 11: gangbusters in many markets. In fact, we've seen that rents
Speaker 11: are beginning to come down year over year. On a
Speaker 11: national basis, rents are down in many markets across the US.
Speaker 11: This is all happening despite the fact that mortgage rates
Speaker 11: are higher. We're seeing just more new rental construction coming online,
Speaker 11: which is giving renters more options. So if we're looking
Speaker 11: for some sort of bright side in the housing market,
Speaker 11: people who are in the rental market are finding more
Speaker 11: options and are finding rents stabilizing, are coming down.
Speaker 1: Heylly, so thanks so much for joining us. I really
Speaker 1: appreciate getting your thoughts here. Lisa Sturt, event chief e
Speaker 1: Commerce for Bright MLS.
Speaker 2: Thanks for listening to the Bloomberg Markets podcast. You can
Speaker 2: subscribe and listen to interviews at Apple Podcasts or whatever
Speaker 2: podcast platform you prefer. I'm Matt Miller. I'm on Twitter
Speaker 2: at Matt Miller nineteen seventy three.
Speaker 1: And I'm Paul Sweeney. I'm on Twitter at pt Sweeney.
Speaker 1: Before the podcast, you can always catch us worldwide at
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