Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller. Every business day, we bring
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
Speaker 1: at Bloomberg dot com slash podcast. Let's get to the
Speaker 1: housing market. We have Brad Dillman with us. He's the
Speaker 1: chief economist over at Courtland, joining us out of Hot Lanta. Brad, Um,
Speaker 1: we've had some interesting well existing home sales yesterday, I
Speaker 1: think they were down two percent, which I've found quite interesting,
Speaker 1: and I've seen more and more stories that maybe these
Speaker 1: high prices are driving people away from um making purchases.
Speaker 1: How do you look at the housing market right now?
Speaker 1: You agree with that statement. I mean, there's no question
Speaker 1: that we've seen a lot of price movement resulting from
Speaker 1: low mortgage rates over the last two years at this point,
Speaker 1: and then of course we have the supply eye conditions
Speaker 1: that are are often spoken about as well. They're contributing
Speaker 1: to those pressures. Brad. One of the things we've heard
Speaker 1: from a lot of the home builders, Uh this quarter
Speaker 1: and in recent quarters, is they can't build as many
Speaker 1: houses as they want because it's maybe supply chain issues, um, labor,
Speaker 1: those types of issues. How big even of a challenge
Speaker 1: is that for the US in terms of trying to
Speaker 1: you know, build up our housing stock to get people
Speaker 1: into homes. Yeah, I think we definitely know that that's
Speaker 1: a challenge. Just quantifying that is really part of the
Speaker 1: even bigger challenge that we're facing. But when we focus
Speaker 1: just on what's happened recently on and we're missing the
Speaker 1: bigger picture and the bigger pictures one where coming out
Speaker 1: of the Great Recession, we did a lot of things
Speaker 1: to inflate housing to help engender a recovery, and that
Speaker 1: in turn contributed to this undersupply situation that we're in today.
Speaker 1: So part of what we're looking at is not so
Speaker 1: much a question of what's going to happen on the
Speaker 1: supply chain side, but what are going to be the
Speaker 1: ramifications of this out of control home price appreciation that
Speaker 1: we've seen over the last eighteen months. Well, we had
Speaker 1: a story on the Bloomberg a couple of days ago
Speaker 1: that said one of the ramifications is exacerbated in equal inequality,
Speaker 1: you know, because if you're a young person and you
Speaker 1: can't come up with a down payment today and prices
Speaker 1: keep rising, you're not coming up with a down payment
Speaker 1: tomorrow either. And at the end of the day, you're
Speaker 1: going to be someone without a home. And we know
Speaker 1: that's a big store of wealth for people that do
Speaker 1: own them. What would be your prescription, Brad, in order
Speaker 1: to get us out of this situation? I mean it's
Speaker 1: something that you know, governments have tried around the world
Speaker 1: throughout history to figure out for for so long, right,
Speaker 1: and we've never really come up with a good way
Speaker 1: to deal with higher price with prices that are two high. Yeah.
Speaker 1: And also it depends on the school of economic thought
Speaker 1: one subscribes to, but many people with points of view
Speaker 1: that simply by intervening and markets at different times, you
Speaker 1: end up creating the condition for some kind of an
Speaker 1: issue down the road. I think we could see that
Speaker 1: over the last twenty years in this country when we
Speaker 1: look at the effort that we're done to to increase
Speaker 1: the home ownership rate after the dot com ver session
Speaker 1: actually been beginning in the late nineties, in many ways
Speaker 1: contributing to the oversupply and the out of control home
Speaker 1: price appreciation that was the housing bubble experience, and then
Speaker 1: the very efforts to get us out of that, creating
Speaker 1: this undersupply situation that we're in today. I don't have
Speaker 1: an answer. I'm just one economist. I'm not you know,
Speaker 1: a policy walk, as it were. But one thing I
Speaker 1: would look at is the alternatives in the rental space.
Speaker 1: If we look at what's happening in the housing starts,
Speaker 1: we can't see that multifamily housing starts are really taken off.
Speaker 1: Permitting has looked good to we know there's been this
Speaker 1: development in the single family for rent space. But to
Speaker 1: your point about what this means for people building equity
Speaker 1: and building their own wealth over time, that's a different question. So, Brad,
Speaker 1: one of the things you know when we hear from
Speaker 1: the home builders is and and you know, folks that
Speaker 1: look at the real estate business, the housing that is
Speaker 1: being built isn't necessarily for the first time buyer um,
Speaker 1: and that's creating this inequality that Matt mentioned, or is
Speaker 1: adding to it. I guess, um. Yeah, obviously the margins
Speaker 1: are much better for these builders on the big McMansions
Speaker 1: and so on. But is there anything that can be
Speaker 1: done to kind of you know, incent builders to build
Speaker 1: homes for the people that really need them. There's always
Speaker 1: policy actions that could be taken to do things like that.
Speaker 1: On the margin, we've heard different things being discussed at
Speaker 1: different times of the last five years. If it ranges
Speaker 1: from trying to use state powers to overcome local zoning
Speaker 1: ordinances and things like this. But we'll also see the
Speaker 1: population respond, right, so people live at home longer to
Speaker 1: say about more money, they migrate to affordability, and there's
Speaker 1: certainly markets in the country. I point to Boise, Idaho
Speaker 1: as an example. There's just a lot of activity going
Speaker 1: on is people who have moved to an area where
Speaker 1: they can price themselves back into the market when it
Speaker 1: comes down to the savings that they can you know,
Speaker 1: accrue in a more expensive area and then move to
Speaker 1: a more affordable one in order to deploy those savings
Speaker 1: in the housing market. I've heard so much about Boise
Speaker 1: the last few weeks it makes me kind of want
Speaker 1: to look into that's either Schuster Boisett maybe. I mean,
Speaker 1: I don't recall hearing this much about Boise. Since I
Speaker 1: think legends of the Fall, I believe there was a
Speaker 1: scene in that movie where Brad Pitt goes back to Boise.
Speaker 1: But I gotta check that. I gotta check it out.
Speaker 1: Folks from the West Coast when they get priced out
Speaker 1: of the Bay are at Boise was like a place
Speaker 1: to go. So anyway, Brad Dilman, thank you so much
Speaker 1: for joining us. Uh. Brad Delman, chief economist for Courtland,
Speaker 1: joining us on the phone from Atlanta again talking about
Speaker 1: the housing market and UH, for those that are looking
Speaker 1: to buy a house, very difficult times here, limited inventory,
Speaker 1: higher prices making it very difficult in the rental market
Speaker 1: also is no joke on a lot of these markets here.
Speaker 1: So again looking for that market to stabilize. A lot
Speaker 1: of ECO data today, including the Leading Index for the
Speaker 1: month of August I came in and gain of zero
Speaker 1: point nine, a little bit better than expected of some
Speaker 1: good new zero. Let's break it down with Ottoman Azldrem.
Speaker 1: He is director of Economic Research and Global Research Chair
Speaker 1: at the Conference Board. Ottoman, what are the key drivers
Speaker 1: that we saw in the August Leading Index? Um, good morning. Yes,
Speaker 1: the ALI rose sharply and that those games were pretty
Speaker 1: widespread among the ten different components uh in the index. Uh.
Speaker 1: You know whether you you're looking at UM orders or
Speaker 1: labor markets or housing markets, financial indicators pretty widespread, strong
Speaker 1: gains there. And how how sustainable do you think this is? Well? Uh,
Speaker 1: you know, the monthly games have picked up over the
Speaker 1: last three months, UM, and the index has really the
Speaker 1: trajectory has picked up compared to earlier in the year.
Speaker 1: So that does suggest to some sustainable growth in the economy. Um.
Speaker 1: You know, the ALI is pointing to basically a strong
Speaker 1: expansion in the U s economy in a way, UM,
Speaker 1: to the underlying fundamentals are fairly strong. It's kind of
Speaker 1: normalizing growth. UM. But the way ahead there could be
Speaker 1: some headwinds and there could be some turbulence. So automania.
Speaker 1: You know. How does you know this delta variant continues
Speaker 1: to really be a difficult challenge around the world, certainly
Speaker 1: here in the US, particularly in certain parts. How does
Speaker 1: that factor in? I mean it kind of suggests. Does
Speaker 1: your data suggest that people are kind of looking beyond that? Well, um,
Speaker 1: the data does reflect that to some extent. Uh. The
Speaker 1: delta does put a damper on UH sort of the
Speaker 1: expected UH switch to more services and more in service
Speaker 1: in person services in the economy. That does derail that
Speaker 1: outlook a little bit, and it does show up in
Speaker 1: the labor markets and employment insurance numbers. It also shows
Speaker 1: up in know what consumers are expecting about business conditions, uh,
Speaker 1: you know, in six months, in twelve months, um so. UM,
Speaker 1: you know, the the resurgence of the delta does put
Speaker 1: some concern, especially for those consumer services categories. UM So
Speaker 1: what about the inflationary hit? I mean, is this just
Speaker 1: not as much of um a headwind as maybe we
Speaker 1: had thought it would be. We think that you know,
Speaker 1: inflation will likely stay more transitory or transient, um, although
Speaker 1: it will prices will be you know high for a
Speaker 1: while yet before starting to come down at the end
Speaker 1: of the year. Um. There's possibly an adjustments going on
Speaker 1: people getting used to uh those higher prices. But that
Speaker 1: is also another area that we're watching in terms of
Speaker 1: risks to this business cycle. Expanse should outman. You know,
Speaker 1: when Matt and I talked to corporate executives, we hear
Speaker 1: pretty much across most industries that supply chain challenges are big,
Speaker 1: big crimp in the reopening of their businesses and uh
Speaker 1: short and kind of crimping their margins and so on.
Speaker 1: How does that factor into kind of the data you
Speaker 1: look at. Yeah, that's another area that we're watching closely,
Speaker 1: and we're hearing from our members at the conference board
Speaker 1: about these UH demand and supply mismatches that are showing
Speaker 1: up in supply chain disruptions. UM and UM. I think, um,
Speaker 1: you know, another area that highlights UH those disruptions is
Speaker 1: the new orders data. And I think some of that
Speaker 1: holatility that we're seeing there is partly due to those
Speaker 1: supply chain issues. UM. You know that I think again
Speaker 1: will likely be more temporary than permanent. As the economy
Speaker 1: around the world, you know, reopens, these issues will get
Speaker 1: sorted out, but there are some UH frictions that are
Speaker 1: creating these volatilities in the outlook. Again, you have to
Speaker 1: expect the supply chain issues, well, even if they're temporary,
Speaker 1: still last quite a while. I mean, we talked about
Speaker 1: a six month period and I don't hear from CEOs
Speaker 1: of at least big automakers that they expect this to
Speaker 1: be resolved in six months. Certainly, you know, And and
Speaker 1: some of this is happening in the context of longer,
Speaker 1: longer term changes, structural changes and supply chains that have
Speaker 1: been underway, you know, after the you know last great
Speaker 1: recession that we saw, so that triggered some of those changes.
Speaker 1: And the context is one of these UM major UH
Speaker 1: reorganization I guess in supply chains and these demands, supply
Speaker 1: mismatches and disruptions are certainly not helping UH. And as
Speaker 1: you mentioned, you know some some UH sectors are much
Speaker 1: more vulnerable to those than others. All right, Ottoman, thanks
Speaker 1: very much, Ottoman. Azzle drom there, director of Economic Research
Speaker 1: and the Global Research Chair for the Conference board. E
Speaker 1: s G. Environmental, Social and Governance has certainly become a
Speaker 1: very big topic in investing, both equity side and fixed
Speaker 1: income side. Let's bringing an expert there on the credit
Speaker 1: part of it, Robert Lamb, co head of Credit at
Speaker 1: Man new Merrick. Rob thanks much for joining us here.
Speaker 1: I love to just step backt view and say, what
Speaker 1: is E s G investing to you and how does
Speaker 1: it factor into your credit strategies? Yeah, great question. UM,
Speaker 1: I look at it from this perspective. You know, percent
Speaker 1: of all US high old mandates are managed by traditional
Speaker 1: discretionary managers UM, and to me that means that the
Speaker 1: majority of credit investors in the market are using a
Speaker 1: very similar investment process. So when the market structure is
Speaker 1: so skewed, it actually creates inefficiencies, and I believe real
Speaker 1: opportunities to harness those inefficiencies as well. Currently, I actually
Speaker 1: don't believe that credit investors are using enough data in
Speaker 1: their investment process. So the reason for this is because
Speaker 1: that some data sets and quantitative techniques are frankly just
Speaker 1: out of reach for many traditional discretionary investors. So, taking
Speaker 1: a step back, as your question highlighted, UM, when I
Speaker 1: think about the rise of systematic credit strategies where our
Speaker 1: value proposition is to use a fully systematic, quantitatively driven
Speaker 1: investment process that can really leverage the explosion of alternative
Speaker 1: data that we've seen over the last number of years,
Speaker 1: I think that actually goes hand in hand and it's
Speaker 1: quite complementary to how we're approaching E s G as well. Um,
Speaker 1: and E s G has certainly seen an equally eye
Speaker 1: opening increase in data availability and of course along with
Speaker 1: that data complexity. But what is it? What is E
Speaker 1: s G? Do we just assume, at least for the
Speaker 1: first few generations that this is really greenwashing for the
Speaker 1: most part, I mean nice terms and a lot of talk,
Speaker 1: but I mean surely you're not making money on doing
Speaker 1: things that are that are truly UM, environmentally sustainable and sacrificing,
Speaker 1: you know, an advantage for good social and governance. Yeah,
Speaker 1: it's a it's a good point, and I certainly hope
Speaker 1: that UM the majority of what the market is presenting
Speaker 1: and what we're presenting is not interpreted it as greenwashing,
Speaker 1: although I think UM as an industry as a whole,
Speaker 1: we have to be very careful about that concept because
Speaker 1: it does happen, and I think that there's real tangible
Speaker 1: good that's being happened being done in E s G
Speaker 1: research and strategies. It's really adding transparency and accountability to
Speaker 1: the companies. UM. But greenwashing as a concept, right, kind
Speaker 1: of that surface level marketing of of E s G
Speaker 1: UM can really be harmful to the adoption of E
Speaker 1: s G within credit and within all asset classes. So
Speaker 1: UM that has the potential to reverse a lot of
Speaker 1: the good that's been happening UM with this increased focus
Speaker 1: in in E s G. And to your other question, UM,
Speaker 1: uh you are asking about you know what is E
Speaker 1: s G and UM is it? Is it kind of
Speaker 1: a source of alpha or source of returns that that
Speaker 1: investors should be considering UM. I think as as a
Speaker 1: high level E s G is a a focus as
Speaker 1: as you highlight environmental, social, and governance aspects UM that
Speaker 1: spans a huge number of sub bodels actually UM and
Speaker 1: a huge number of aspects UM to be able to
Speaker 1: capture and evaluate a company within within those uh those parameters.
Speaker 1: So it's a highly debated topic whether E s G
Speaker 1: is an alpha source and I think the views really
Speaker 1: span the spectrum UM, and from my perspective, I kind
Speaker 1: of look at it from a number of different angles, right,
Speaker 1: I mean the primary question that you have, what are
Speaker 1: some businesses that you invest in that make money? A
Speaker 1: lot of my businesses make money. In fact, let's talk
Speaker 1: about them. I mean, I just I want to get
Speaker 1: to the to the heart of it, you know, So
Speaker 1: give us an example, so, you know, give us some
Speaker 1: examples rob that you know, you know, the E s
Speaker 1: G investors hold out as this, these are wins by
Speaker 1: doing E s G investing, employing this into our investment strategy,
Speaker 1: we've generated superior returns. Yeah. So I think some of
Speaker 1: the more unique aspects of E s G UM include
Speaker 1: things like what a company is doing in terms of
Speaker 1: their diversity policies. What are companies doing in terms of
Speaker 1: lowering their incidents rates and infractions? Right? Um? What are
Speaker 1: they doing in terms of helping and kind of improving
Speaker 1: the labor policies for their employees? Now, those are concepts
Speaker 1: that are relatively new to the market. If we were
Speaker 1: talking about this to three years ago, you know a
Speaker 1: lot of people would or maybe even further than that,
Speaker 1: maybe five years ago, a lot of people wouldn't even
Speaker 1: be considering that when evaluating a company. Now that it's
Speaker 1: on the table, and now that it's such a prevalent factor,
Speaker 1: it can really be a driver of returns. So when
Speaker 1: you evaluate that you know, that coal company, or that
Speaker 1: energy company or even that technology company. Um, you're going
Speaker 1: to want to consider kind of what are those diversity
Speaker 1: policies and what are those factors? And I don't believe
Speaker 1: the market is fully priced that in right now. So
Speaker 1: that's yeah. One of the things Robb but I don't
Speaker 1: understand is what or who determines whether a company is
Speaker 1: e s G compliant, Like does does the SEC say, okay,
Speaker 1: this security this bond is s G compliant. Um? You know,
Speaker 1: regular regulatory bodies bodies can certainly UM step in in
Speaker 1: a small aspect of of kind of the E s
Speaker 1: G segment UM. As an example, you know, green bonds
Speaker 1: has been a relatively small segment UM. Not all projects
Speaker 1: or sorry, not all bonds can be a green bond,
Speaker 1: even if it's coming from an E s G UH
Speaker 1: focus company. It has to be earmarked for a specific
Speaker 1: UM for a specific project and use of capital UM.
Speaker 1: But for the most part, I think there are independent
Speaker 1: firms UM that are doing a really good job at
Speaker 1: evaluating kind of the E s G qualities of companies.
Speaker 1: Kind of similar in in my opinion, parallel to rating agencies.
Speaker 1: Rating agencies kind of have an independent view of UM
Speaker 1: the credit risk. Maybe you're better off, maybe you have
Speaker 1: an edge if there isn't a one body saying this
Speaker 1: is e s G and this isn't if you can
Speaker 1: spot it before your competitors do. In any case, very
Speaker 1: interesting stuff. Robert Lamb, co head of credit at man Numeric. Wow, Wow, wow,
Speaker 1: Wow with you dude. Tenure yield is all of a
Speaker 1: sudden above one forty yep, yep, what on earth is
Speaker 1: going on. Let's get over to Chrift Gaffney right now.
Speaker 1: He's president of world markets at t I A a bank,
Speaker 1: And um, you know I saw someone writing today, Chris
Speaker 1: that the move in Evergrand was a delayed response to
Speaker 1: report yesterday. I don't buy delayed responses in markets, So
Speaker 1: this isn't likely a delayed response to Jerome Pale's perceived
Speaker 1: hawkishness yesterday. But what is happening in rates? Yeah, we're
Speaker 1: seeing the curves steep, and I think it's uh just
Speaker 1: to move by uh, certainly by bond investors believing that
Speaker 1: you know, the the economic rebound is going to continue
Speaker 1: and and uh um you know, a realization that growth
Speaker 1: is going to increase and and rate uh you know,
Speaker 1: inflation is going to run a little hotter than maybe
Speaker 1: in a little quicker than previously thought. Yeah. And so Chris,
Speaker 1: I guess you know, for these equity markets, by the
Speaker 1: dip folks, they're right again. I guess yeah, And and uh,
Speaker 1: you know I I kind of agree with them. I mean,
Speaker 1: the financial conditions for equity investors look very good right
Speaker 1: now going forward, you know, whether you have a shorter
Speaker 1: or medium term view. Um, you know, consumers balance sheets
Speaker 1: are are very healthy. Still, uh, company balance sheets are healthy. Um,
Speaker 1: that should lead to higher earnings and and those higher earnings,
Speaker 1: of course, is what supports equity prices. Now there there's
Speaker 1: certainly some risks in the market, and uh, you know,
Speaker 1: evergram presents kind of a new risk out there. Um,
Speaker 1: we've got the delta COVID, you know, variant UM. But
Speaker 1: I think the the economic environment still is very kay
Speaker 1: oh oh oh are we losing you, Chris? I'm here?
Speaker 1: Are you there? Okay, Yeah, we're just it's like if
Speaker 1: you're on a wire phone at your house and you're
Speaker 1: too far away from the base, and it's that's what
Speaker 1: it sounds like. UM. Alright, so we're seeing raids take off,
Speaker 1: We're seeing UM stocks take off. What are you concerned
Speaker 1: about anything right now? Are their headwinds that make you
Speaker 1: want to, you know, check yourself little here? Yeah, I
Speaker 1: mean there's still concerns and and I guess the main
Speaker 1: concern is really in the lack of UM. You know,
Speaker 1: the price pressure is being put on on on the margins.
Speaker 1: And when I say that, uh company margins, UM are
Speaker 1: gonna get squeezed. We're seeing and put prices uh increase
Speaker 1: pretty much across the board and uh, um, you know,
Speaker 1: they they're not going to be able to probably pass
Speaker 1: all of those increases onto their uh to the ultimate consumers.
Speaker 1: So I do expect to see some margins with Another
Speaker 1: thing that concerning is, of course, um you know, the
Speaker 1: lack of labor participation UM in the US economy. Um
Speaker 1: you know, is this a tight labor market. It certainly
Speaker 1: seems like it's tight in some instances, but um, you know,
Speaker 1: the company's lack of hiring, lack of being able to
Speaker 1: hire workers is certainly going to um weigh on on
Speaker 1: on the earnings, especially for the service sector where they
Speaker 1: just don't have enough people to take care of the
Speaker 1: business that they have coming in. So uh, that certainly
Speaker 1: should weigh on uh some of those company earnings. But
Speaker 1: again I think those are you know, it's it's it's
Speaker 1: something that will work them their way through the system.
Speaker 1: And Chris, let's let's talk about valuation in these equity
Speaker 1: markets here. You know, as a former equity analyst, I
Speaker 1: was trained to look at valuation, whether it's pe or
Speaker 1: ev to but uh, and it just feels like this market. Yes,
Speaker 1: we've had some good earnings growth over the last few quarters,
Speaker 1: but evaluations feel a little stretched. Should we be concerned
Speaker 1: or how Yeah, no, I I totally agree that valuations
Speaker 1: are probably stretched here in the US. UM. But it
Speaker 1: gets back to you know, with the interest rates where
Speaker 1: they are. UM. You know, low interest rates, ultra low
Speaker 1: interest rates support higher price earnings. UM. You know, are
Speaker 1: we at an earnings peak? Um? You know that's another
Speaker 1: question our earnings and it can be going to be
Speaker 1: able to continue to grow. I think in this environment, um,
Speaker 1: we we can see higher earnings. So while they are stretched, UM,
Speaker 1: it's not a major concern. I I don't think, and
Speaker 1: in fact, I think we have further to go um
Speaker 1: on on the on the earnings, especially especially if the
Speaker 1: FED continues to keep rates at these ultra low levels.
Speaker 1: By the way, is the dead ceiling something that matters
Speaker 1: to you? Does that good question? Has that a problem?
Speaker 1: You think? It's not? Um, you know they Uh, it's
Speaker 1: it's there'll be some gamemanship on both sides, but uh,
Speaker 1: we won't default on the US that and uh you
Speaker 1: know that that feeling will be raised. UM. I think
Speaker 1: really Evergrand is a similar situation. China is not going
Speaker 1: to let um you know Evergrand failure impact uh their
Speaker 1: overall economy. So UM, I think in both situations, UH,
Speaker 1: it'll work its way through the system. Um. Yeah, it's
Speaker 1: it's uh um, you know, a highlights h that the
Speaker 1: amount of that. That's the one thing it does do
Speaker 1: is it highlights just how much that is out there,
Speaker 1: and so that is a concern. All right. Hey, Chris,
Speaker 1: thanks so much for joining us. Really appreciated Chris Gaffney,
Speaker 1: president of World Markets at t I A A Bank,
Speaker 1: giving us his thoughts on these markets. He is in
Speaker 1: the buy the dip camp and he has been correct.
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