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Speaker 2: The US House is passing the bill that would force
Speaker 2: TikTok sale or face a band. We want to get
Speaker 2: a little bit more on this with Daniel Flatley, Bloomberg
Speaker 2: national security reporter, joining us on this. Daniel, what happens
Speaker 2: now and kind of what is the victory here on
Speaker 2: a national security level?
Speaker 3: Yeah, I mean it's a it's a great question. So,
Speaker 3: like you said, the House just voted a pretty big
Speaker 3: vote in terms of support for the sale or band
Speaker 3: of TikTok. That was a vote of three fifty two
Speaker 3: in favor of sixty five against. So that gives it
Speaker 3: some momentum heading into what might be a much murkier
Speaker 3: pass forward in the Senate. You know, we've talked to
Speaker 3: senators over the last couple of days and basically they
Speaker 3: have some concerns as senators are wont to do about
Speaker 3: the speed with which this has passed The House and
Speaker 3: or moved through the House. And also is this the
Speaker 3: right approach? Do we want to you know, target a
Speaker 3: specific company. So we don't know yet. In the Senate's
Speaker 3: out today inconveniently, so we don't know exactly what the
Speaker 3: path forward will be in that chamber. But Biden has
Speaker 3: said that he would sign this if it passes Congress.
Speaker 3: So I think they're moving very quickly at the moment.
Speaker 4: Can you you know, you made this interesting point that
Speaker 4: the future of this looks a little bit murky, But
Speaker 4: can you just remind us what's the national security risk
Speaker 4: that we're facing, you know, such that we need to
Speaker 4: have this bill in order for it to be solved.
Speaker 3: Yeah, no, it's a great question. So critics of TikTok,
Speaker 3: you know, national security officials, including most prominently probably the
Speaker 3: FBI director Christopher Ray, have long sort of warned about
Speaker 3: two primary vectors, if you will, of national security threats
Speaker 3: that could come from TikTok. One is data. So you know,
Speaker 3: the government of China several years ago now passed a
Speaker 3: law that says any company that was within the Chinese
Speaker 3: territory could be compelled to give data over to the
Speaker 3: Chinese government. You know, if they ask for it. So
Speaker 3: that's one big problem. And then the other big problem
Speaker 3: is sort of could TikTok be used in an influence campaign,
Speaker 3: could have used to spread propaganda, you know, all sorts
Speaker 3: of things like that, could have been married potentially some
Speaker 3: of the data that's collected through TikTok with some other
Speaker 3: data that the Chinese government has gotten through hacks or
Speaker 3: other sort of cyber security actions and used to blackmail
Speaker 3: or bribe people. So that's all of that.
Speaker 2: Yeah, that's the one that really makes me nervous. Ll right,
Speaker 2: Daniel Thoughtley, We appreciate it when you're quite busy. A
Speaker 2: Bloomberg National security reporter joining us. So the broader question
Speaker 2: then is if TikTok is banned here in the US,
Speaker 2: what do you do with your ad dollars? Like, where
Speaker 2: do they wind up going? One person to go to
Speaker 2: on this Siemashaw, vice president of Research and Insights at
Speaker 2: Censor Tower. She joins us now to discuss Sema also
Speaker 2: used to work here, and she's really fabulous. You So
Speaker 2: we have I'm an advertiser. What do I do? Do
Speaker 2: I just go pile all that money into Instagram? Well?
Speaker 5: Okay, first, so the best way that we can go
Speaker 5: about thinking about this is thinking about what happened in
Speaker 5: India and June of twenty twenty when India band TikTok.
Speaker 5: So essentially what we saw was huge gains for both
Speaker 5: for Instagram in particular in terms of active users, but
Speaker 5: also on an absolute basis for YouTube. And to step
Speaker 5: up one step back, the reason is we've seen a
Speaker 5: huge growth in the popularity of short form video. Based
Speaker 5: on our data, users spend about three hundred and fifty
Speaker 5: million hours per day on short form video versus one
Speaker 5: hundred and fifty million for social media and less than
Speaker 5: fifteen million for streaming. So it's the popularity of this
Speaker 5: short form video and that's why you saw in Instagram
Speaker 5: roll out reels right. So now about forty over forty
Speaker 5: percent of peopil's time on Instagram is spent on the
Speaker 5: reels portion. So when you're an advertiser, not only do
Speaker 5: you want to be on the app where people have
Speaker 5: the most engagement, but you also want to be on
Speaker 5: the right place on the app. So in Instagram's case,
Speaker 5: it would be in reels. And so to think about
Speaker 5: so that's how much time people spend on short from
Speaker 5: video for TikTok in particular, globally, people spend seventy eight
Speaker 5: minutes per day on it compared to forty eight for Instagram,
Speaker 5: and I think it's like twenty three sub thirty for Snapchat.
Speaker 5: So Instagram has a highly engaged audience. It's become increasingly
Speaker 5: popular with advertisers because it has a younger audience. Right,
Speaker 5: So you see, we've seen ad dollars shift within the
Speaker 5: United States to TikTok, but Instagram remains popular. So I
Speaker 5: think that the short answer is you'll see gains in
Speaker 5: share for Instagram in terms of ad dollars, and probably YouTube,
Speaker 5: maybe less so Facebook because Instagram still has a younger
Speaker 5: audience than Facebook. But I think that is the biggest repercussion.
Speaker 5: But for TikTok itself, the US is ten percent of
Speaker 5: their active users, twenty percent of their in app revenue,
Speaker 5: and they've been growing their advertising business in the US
Speaker 5: and probably globally, so on an absolute basis, this would
Speaker 5: be a blow to them and symbolic because it's if
Speaker 5: it happened in the US, it could be copied in
Speaker 5: Western Europe as well.
Speaker 4: I had absolutely no idea that the proportion of people
Speaker 4: watching short form video versus social media was so skewed
Speaker 4: that way. But let me ask you a question from
Speaker 4: the point of view of an advertiser. So this is
Speaker 4: all about, well, where advertisers is going to put their money.
Speaker 4: But can you take a step back for me and
Speaker 4: give me a picture of where how popular is social
Speaker 4: media short form video spending versus other types of spending, billboards, whatever,
Speaker 4: magazine ads.
Speaker 5: So our data focuses on digital advertise.
Speaker 4: Digital.
Speaker 5: Digital is growing because that's where a greater portion of
Speaker 5: people's attention is, and particularly within apps, right because time
Speaker 5: on apps and you're kind of trapped you're looking at
Speaker 5: the ad, right, so if they place it on your
Speaker 5: feed or in your reels, you don't really have a
Speaker 5: choice but to see it. And because apps like Instagram
Speaker 5: and TikTok knows so much about the user, they can
Speaker 5: target their ads, right, so they can tell their advertisers, look,
Speaker 5: our audience is this, We're going to show your ad
Speaker 5: here where these people will see it. So I don't
Speaker 5: have the breakdown of digital versus traditional, but certainly digital
Speaker 5: is growing at a much much faster rate, and particularly
Speaker 5: in the mobile space.
Speaker 2: I mean, this is a very appealing business model. With
Speaker 2: a lot of growth, So yes, would it be easy
Speaker 2: for another company to buy TikTok. Then, based on all
Speaker 2: these users, all this AD revenue and the growing.
Speaker 5: Platform, assuming they could just buy TikTok as is without
Speaker 5: any other changes, it would be a huge gain for
Speaker 5: somebody who's trying to grow in this space, right, because
Speaker 5: it's really hard now to grow users. Instagram as growing users,
Speaker 5: TikTok has seen a deceleration in the growth rate, it's
Speaker 5: still positive. And then apps like Snapchat are seeing growth internationally,
Speaker 5: but that's because they haven't been there before. But for
Speaker 5: the most part, similar to streaming, it's the apps are
Speaker 5: very saturated right in terms of downloads, so you have
Speaker 5: to think of what can you do to drive that engagement,
Speaker 5: right and so reels and then obviously TikTok have been
Speaker 5: able to get that attention and drive that engagement. So
Speaker 5: if you're somebody who wants to be in this space
Speaker 5: and you're not owned by a Chinese company, this would
Speaker 5: be a great opportunity for you.
Speaker 2: So get into this real quick.
Speaker 4: This is the trick question or the billion dollar question. Now,
Speaker 4: who would be a potential buyer? Do you have any
Speaker 4: thoughts on that?
Speaker 5: I've heard news of a lot of different companies buying it.
Speaker 5: I mean, I think you would depend also on a regulation.
Speaker 5: I mean, clearly one of the existing social media platforms
Speaker 5: may want to buy them. I don't think meta platforms
Speaker 5: would be allowed to do so. But then you have
Speaker 5: someone like a Snap or even smaller ones like Pinterest,
Speaker 5: if they were able to finance such a purchase, that
Speaker 5: would certainly push them way up in terms of active users, engagement,
Speaker 5: and understanding the audience even better because they'd have that
Speaker 5: many more users to analyze.
Speaker 2: Semen, it's so great to see you, amazing analysis and
Speaker 2: stat Semasheaw, vice president of Research Insights over at Sensor Tower,
Speaker 2: giving us the lay of the land on what's up
Speaker 2: next for TikTok. As the House does pass the bill
Speaker 2: to either banon or spin an off, does it go
Speaker 2: to the Senate? Is really now the question?
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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Speaker 2: The other breaking news we had in the last half
Speaker 2: hour is a jug dug in Georgia has dismissed some
Speaker 2: of the counts against former President Trump. Trying to understand
Speaker 2: what that means, particularly how that sets him up going forward.
Speaker 2: Wendy Benjaminson is Washington Senior editor, and she joins us, Now, Wendy,
Speaker 2: what does this mean.
Speaker 6: Well, it is certainly good news for Donald Trump, and
Speaker 6: I'm sure he will he will crow about it and
Speaker 6: offer it up as proof that these are political persecutions. However,
Speaker 6: it leaves some of the more serious charges in place.
Speaker 6: The charges that were dismissed were the charges involving that
Speaker 6: quote unquote perfect many one of his many perfect phone calls,
Speaker 6: so quote unquote to the Secretary of State of Georgia,
Speaker 6: the administer of the elections who you know who heard
Speaker 6: Trump say to him, I just need you to find
Speaker 6: me eleven thousand votes. So that the charge was interfering
Speaker 6: with acted official or solicitation of you know, bad acts.
Speaker 6: So those charges were dismissed. However, there are still these
Speaker 6: rico charges. Those are the racketeering and influence corrupt organization
Speaker 6: charges that prosecutor Fannie Willis has charged Trump with and
Speaker 6: those charges remain, so he is still in jeopardy of
Speaker 6: a felony conviction in the state of Georgia. However, this
Speaker 6: is the same judge who is deciding whether Fannie Willis
Speaker 6: can remain as the prosecutor who you know, over these
Speaker 6: allegations of favoring a certain prosecutor that she was dating
Speaker 6: the man whom she made special prosecutor, so that's still
Speaker 6: hanging over her head. The other reason this may not
Speaker 6: be as great news for Trump as he will undoubtedly
Speaker 6: post or talk about later today is that the judge
Speaker 6: said that Fannie Willis was free to refile charges in
Speaker 6: a different way. So clearly there was some technicality we
Speaker 6: don't know about that led him to dismiss the charges.
Speaker 6: I'm sure we'll know more later.
Speaker 4: Can you give us some sense of the timeline for
Speaker 4: all of these charges in court cases getting resolved, not
Speaker 4: just in Georgia but elsewhere well.
Speaker 6: The hope of some, particularly Democrats, that this would be
Speaker 6: resolved before the election are dimming now there is supposed
Speaker 6: to be jury's election later this month. In the New
Speaker 6: York case over his hush money payments to the porn
Speaker 6: star of Stormy Daniels, whom we allegedly had an affair
Speaker 6: with that's supposed to start later this month. Trump is
Speaker 6: trying to delay it by arguing that they need to
Speaker 6: wait till the Supreme Court rules on immunity. That may
Speaker 6: not be till June. So, like I said, the chances
Speaker 6: of these trials all coming to fruition before the election
Speaker 6: are are slim, but they may be in progress on
Speaker 6: election day, which would be just another unprecedented moment in
Speaker 6: this crazy election.
Speaker 2: Here talk about unprecedented. It is now official. The US
Speaker 2: House passes the bill that would force TikTok sale or
Speaker 2: potentially face a ban. We will talk about that in
Speaker 2: just a moment, sort of what advertisers do in that
Speaker 2: kind of situation. Again, the US passes bill that would
Speaker 2: force TikTok sale or face a ban, as one hundred
Speaker 2: and seventy million people cry, particularly teenagers, cry with pain.
Speaker 2: I do want to get your understanding, Wendy, that what
Speaker 2: is now the smoking gun case that President Trump is
Speaker 2: up against? Right like in all the polling, there is
Speaker 2: always that one thing. If he's convicted on that, I
Speaker 2: won't vote for him. Is there a that still?
Speaker 6: No? Actually, there isn't our Bloomberg News Morning Console poll
Speaker 6: shows that the country the least swing staved voters, who
Speaker 6: are the crucial voters were waiting for are evenly split
Speaker 6: on whether they would still vote for Trump if he
Speaker 6: were convicted on any of these charges.
Speaker 7: There.
Speaker 6: If you just asked the question, would you vote for
Speaker 6: him if he were convicted felon, fifty three percent said
Speaker 6: they would not. But when you divide the cases up
Speaker 6: up into the hush money payments for a point star
Speaker 6: or overthrowing the government, they feel the same way. They
Speaker 6: they're not seeing these cases as one more important than
Speaker 6: the other.
Speaker 2: All right, Wendy, we appreciate it. Thank you very much
Speaker 2: for jumping on with us, Wendy. Benjaminson is Washington Senior editor.
Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
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Speaker 2: Let's get Ben Emmons take here, you senior portfolio manager,
Speaker 2: head of fixed income at you as well. He's standing
Speaker 2: by here. So and also if you were in the market,
Speaker 2: you read his notes. They are so great, they are
Speaker 2: so sweeping. They come at least two to three times
Speaker 2: a day. It's one of my go to things to read. Ben.
Speaker 2: So I do want to say thank you for those notes.
Speaker 2: Do you have a Tesla, Juba tesla or an EV?
Speaker 8: I don't, Alix, by the way, fantastic to be with
Speaker 8: you on the show. I think the last time you
Speaker 8: and I spoke was more than five years ago, actually
Speaker 8: were Yeah, it's true. It was right before the pandemic.
Speaker 8: It was in it was in the studio of New
Speaker 8: York with you. So great. Great to be back with you. Yeah,
Speaker 8: so thank you by the way for the shadow on
Speaker 8: the notes. I I don't have a Tesla. In fact,
Speaker 8: I have a Volvo. That's uh, you know that's kind
Speaker 8: of my favorite from my wife. Yeah, that's like European thing, right,
Speaker 8: It's like, you know, it was stuck with that, yeah,
Speaker 8: you know, but a normal gas car. But you know
Speaker 8: to the EV discussion, you know I wrote about us
Speaker 8: not that long ago, but these EV terrors right as in,
Speaker 8: there's going to be I think part of that trade
Speaker 8: war story coming back that the flood of evs from
Speaker 8: out of China is so significant. I was just reading
Speaker 8: the B y D Company, Right, they're putting out a
Speaker 8: new car for twelve thousand dollars that you can buy.
Speaker 8: And this is why these evs are flooding our markets.
Speaker 8: And I think you're going to get a lot of
Speaker 8: pushback from from from the US and Europe and trying
Speaker 8: to you know, curb those those those cars coming into
Speaker 8: countries because it's a major price competition to the likes
Speaker 8: of Tesla and others.
Speaker 4: Well, can you talk a little bit more about that,
Speaker 4: because we've got all the major automakers got their have
Speaker 4: their own EV plays and then we've seen some some
Speaker 4: of them pulling back, and so where is this all
Speaker 4: going to settle?
Speaker 8: Yeah, I think it's going to settle at lower prices.
Speaker 8: I'm afraid. Right, this is real price competition. And you know,
Speaker 8: I think part of the reason why why Tesla is
Speaker 8: losing its Magnificent seven status it was it had a
Speaker 8: very smart tactic I think about a year two years ago,
Speaker 8: lowering prices and thereforejuiceing the sales. And now you're seeing
Speaker 8: the opposite sign of it, at least for now, right
Speaker 8: there may have to cut more in prices to get
Speaker 8: higher sales, right, So it's the competition aspect microeconomics as
Speaker 8: you will. But I think this is what what what
Speaker 8: the EV market is ultimately about, is going to be
Speaker 8: even lower prices. And for China that doesn't matter, right,
Speaker 8: They like to continue to produce at even lower prices,
Speaker 8: So I expect more competition.
Speaker 2: So, Ben, let's broad out for a second, because we've
Speaker 2: been talking about how the NASDAC is selling off. I've
Speaker 2: used that relative term, and you still have small caps
Speaker 2: holding up. Is this a rotation that we think putting
Speaker 2: yesterday aside, this rotation from tech to small caps has legs.
Speaker 8: I think it does have sum legs alex because it
Speaker 8: makes sense that if you have a specific group semiconductors
Speaker 8: in this case in the video, maybe the star of it,
Speaker 8: but there's other related ones if you think of Broadcom,
Speaker 8: of IBM or any of those companies, that it expands
Speaker 8: itself out to other sectors. Now, I thought what was
Speaker 8: really interesting was the earnings from Navidia highlighting that their
Speaker 8: technology is now being used in healthcare and financial services,
Speaker 8: in automotive and I thought that was like, Okay, this
Speaker 8: is actually along Gens's view about these AI agents, right,
Speaker 8: they're spreading across the industries, and I think this is
Speaker 8: part of that moddening aspect of the market. Like if
Speaker 8: that's true the investment that the administration making in the
Speaker 8: semis in the economy, plus in the VIA being such
Speaker 8: a powerful force on the economy in itself by spreading
Speaker 8: all this technology, then the other sectors are going to
Speaker 8: lift up too. At least the market will try to
Speaker 8: price it. You know what it means for the economy
Speaker 8: for out companies. Of course, in the end of the day,
Speaker 8: we do have to see AI truly pay off with sales,
Speaker 8: meaning you use AI and it can actually generate more sales,
Speaker 8: and say in healthcare of financial financial sector, say right,
Speaker 8: we haven't seen that yet, But I think the market
Speaker 8: wants to broaden out to discount that these sales will
Speaker 8: increase over time as AI is more widely adopted.
Speaker 4: I wonder if we could shift here just a little
Speaker 4: bit and think about the yesterday's CPI print, because we've
Speaker 4: got this broadening out in the equity market, but there's
Speaker 4: also an enthusiasm there for the Fed to continue with
Speaker 4: its easing message, and so I wondered if you thought
Speaker 4: the CPI number yesterday should you know, give anyone some
Speaker 4: confidence that there's still cuts coming, or are you more
Speaker 4: of a mind that, hang on a minute, we might
Speaker 4: see fewer cuts and people are expecting.
Speaker 8: Yeah, I'm more on that on that camp fewer cuts,
Speaker 8: because I think what this CPI data showed was that
Speaker 8: one the disinflation is stalling out. That's clearly now happening.
Speaker 8: Two we're certainly not going to go back to where
Speaker 8: we came from pre pandemic. There's too much pricing pressure
Speaker 8: building in the economy. Still, We're certainly not that the
Speaker 8: disinflation is going to flip over into deflation, even though
Speaker 8: I would know that. Bloomer Intelligence are a very nice
Speaker 8: graph out on how the number of categories with prices
Speaker 8: below zero has definitely increased. But if you look at
Speaker 8: the percentage was about thirty five percent of CPI index.
Speaker 8: That's not too significantly different from a few years ago,
Speaker 8: but it has somewhat increased. I guess again, price competition
Speaker 8: probably in the economy. So I think the feeds at
Speaker 8: that moment to say this CPI data there underscores that
Speaker 8: the economy stays above trend and until the economy truly
Speaker 8: moves back to trend right, just to trend, you cannot
Speaker 8: actually cut rates. I think that that is I think
Speaker 8: the big challenge for the fat here why they probably
Speaker 8: stay on hold for a little while.
Speaker 2: Right, And first of all, if you shot ut Bloomberg
Speaker 2: intelligence like you're coming back all the time, like that's
Speaker 2: a definite plus one for ben Emmons. But if that's
Speaker 2: the case, and I mentioned earlier that Jeffrey is starting
Speaker 2: to talk about that also sort of following Torsten slockover
Speaker 2: at Apollo, why buy small caps?
Speaker 8: Yeah, I think you need to trade that differently. Ale said,
Speaker 8: you know, people, if you traded too simplistically, like cut
Speaker 8: rates and then buy small caps. There's a lot in
Speaker 8: between there, right, you know one the small cup index.
Speaker 8: You know a lot of people look at that like, Okay,
Speaker 8: there's about I guess forty percent or so that our
Speaker 8: companies are highly indebted, non profitable companies. I guess they
Speaker 8: benefit from lower rates. But it's also just I think
Speaker 8: it was of the economy in itself. I think small caps,
Speaker 8: I think of small business, I think of you know,
Speaker 8: what's all happening on the ground. So was I think
Speaker 8: notable is what Bostic said that they went out and
Speaker 8: did a survey among businesses, and as businesses said like, well,
Speaker 8: we think that if you cut rates the economy is
Speaker 8: only going to get stronger. We're actually waiting for you
Speaker 8: to do that and then we'll re see even more activity.
Speaker 8: So it is partly true that I think cutting rates
Speaker 8: will benefit small caps, but there's also some micro aspects
Speaker 8: to it, so I won't be all in our view
Speaker 8: by the way the new edge is said, as Cameron
Speaker 8: probably talked to you about it, is that we're taking
Speaker 8: very selective approach to small caps because as you can
Speaker 8: tell when we haven't set a new record higher small
Speaker 8: caps really because they are downs about radcots. On the
Speaker 8: other end, it's also about specific companies there. So it's
Speaker 8: a bit of a mixed back I think, and it
Speaker 8: probably will stay that way until we get a little
Speaker 8: bit more clarity on if the economy is going to
Speaker 8: keep tracking on the way we are doing right now.
Speaker 4: What do you think is the biggest risk there for
Speaker 4: the economy to keep tracking the way that we're going now?
Speaker 8: Wow, One, it's that we are going to see a
Speaker 8: change in fiscal spending. If that actually happens as in
Speaker 8: more cuts, right then I think the economy could slow,
Speaker 8: but this is clearing out of the story for this year.
Speaker 8: As you can tell. You know, we'll keep rolling the
Speaker 8: the shutdowns like rolling Black House. But it doesn't matter
Speaker 8: for the market because they know, like nobody's gonna put
Speaker 8: any type of significant cut into spending until there's a
Speaker 8: new president in the White House. And and that's the
Speaker 8: big big I'd saying uncertainty from here, you know, whomever
Speaker 8: gets in there. My view on this is is not political.
Speaker 8: Was more about you know, how much you're gonna cut
Speaker 8: really right and still try to keep the economy on
Speaker 8: track right and.
Speaker 2: And also feels like fiscal is gonna come either way.
Speaker 2: Ben Emmons joins US senior portfolio manager, head of fixed
Speaker 2: Income a new Edge. Well, you will definitely becoming gret back.
Speaker 2: It was really great to see your.
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Speaker 2: This is going to be a segment that is near
Speaker 2: and dear to gen Ryan's hard because you are looking
Speaker 2: to buy at home right now.
Speaker 4: I am, and it is very, very painful, and I'm
Speaker 4: going to share that pain with you over the course
Speaker 4: of the rest of the week.
Speaker 2: Yes, I love housing pain. I mean not for you.
Speaker 2: I hate that for you, but I love it as
Speaker 2: a story.
Speaker 4: Yeah, and it is just absolutely shocking. We're first time
Speaker 4: buyers and we are amazed at how disorganized and opaque
Speaker 4: this market is interesting.
Speaker 2: Is it the price? Is it the mortgage? Is it
Speaker 2: the supply? What was the hardest part?
Speaker 4: It's all so hard. It's just hard to pick a
Speaker 4: favorite child here.
Speaker 2: Oh wow, Okay, well this leads us perfectly into our
Speaker 2: next segment. So Lenar is reporting today after the closing bell.
Speaker 2: You're looking at just an earnings estimate of about two
Speaker 2: dollars and twenty one cents for the first quarter. You're
Speaker 2: looking at revenue estimates about seven point four to two
Speaker 2: billion dollars. So nobody else better to talk to than
Speaker 2: Drew reading Bloomberg Intelligence at US home building analyst. Hey, Drew,
Speaker 2: is Jen going to feel better after Lenar reports? I mean,
Speaker 2: I appreciate that she's looking in queens, but still.
Speaker 7: Well, if she's looking for a new home, she'll probably
Speaker 7: fare a little bit better than something in the resale market.
Speaker 7: And it goes back to some of those things we've
Speaker 7: discussed in the past. There's not a whole lot of
Speaker 7: inventory in the resale market, and at the same time,
Speaker 7: builders have been able to buy down mortgage rates, so
Speaker 7: they're making the financing calls a lot more attractive for homeshoppers,
Speaker 7: which is just not able to get in the resale market.
Speaker 4: Yeah, I mean talking about getting into the market, what's
Speaker 4: the incentive for me at this point? Because I feel
Speaker 4: like I'm sitting there. Rates are still pretty high, there's
Speaker 4: not a lot of supplies shuffling around, like where's my inn.
Speaker 7: Yeah, it's it's tough and as I mentioned, in the
Speaker 7: resale market, things are particularly challenging. And we've been describing housing,
Speaker 7: you know, for the better part of a year and
Speaker 7: a half as a tail of two market. So you've
Speaker 7: got the resale market where costs are higher, inventory is lower,
Speaker 7: and you've got the new home market where builders have
Speaker 7: been able to expand their community counts, they're purchasing land,
Speaker 7: they're growing their inventory bases, and at the same time
Speaker 7: they're making the finance and costs a lot more attractive.
Speaker 7: So the competitive dynamics have favored the builders for the
Speaker 7: last year and a half, and we think that continues
Speaker 7: through twenty twenty four.
Speaker 2: Has len our stock already run up enough that anything
Speaker 2: is sort of like the law of good numbers, Like,
Speaker 2: no way the stock is going to rally after earnings.
Speaker 7: Yeah, good question. I mean, since since the beginning of November,
Speaker 7: the builder stocks have been on a tear, you know,
Speaker 7: along with much of the market, and I think it
Speaker 7: speaks to that competitive dynamic that have favored the builders. Intuitively,
Speaker 7: when mortgage rates arising, interest rates are higher, that's not
Speaker 7: typically when you think about investing in the home builders.
Speaker 7: But I think that the dynamics have changed so much
Speaker 7: for them that there's been a lot more interest in
Speaker 7: the group now. You know, if you look at where
Speaker 7: they're trading relative to book values over the last couple
Speaker 7: of month months, they've certainly come back more in line
Speaker 7: with what you'd expect based on future returns on equity.
Speaker 7: It's interesting, though, if you look at some of the
Speaker 7: smaller and MidCap builders, there's still a little bit of
Speaker 7: a disconnect between you know, expected earnings and what they're
Speaker 7: currently trading at One of the things that I think
Speaker 7: is really interesting within the group is kind of, you know,
Speaker 7: the the drum beat has started to get a little
Speaker 7: bit louder, and we've heard some CEOs come out and
Speaker 7: speak in favor of this, as you would expect that
Speaker 7: builders have made a case that their stocks should be
Speaker 7: created higher and there, yeah, I mean there has there
Speaker 7: has been a precedent for this in the past, in
Speaker 7: the case of MVR, and the argument is that the
Speaker 7: business models have changed so much. One, you know, you've
Speaker 7: got businesses which are shifting to more asset lights, so
Speaker 7: they're not holding as much land on their balance sheets,
Speaker 7: they're operating with historically low leverage, and they're becoming more
Speaker 7: systematic in their repurchase of shares because they're generating so
Speaker 7: much cash. So it does bear watching, you know, as
Speaker 7: we get through this year and in the next. If
Speaker 7: investors are willing to underwrite these changes in the business
Speaker 7: model is kind of a longer term thing.
Speaker 4: Can you talk a little bit about how that willingness
Speaker 4: is going to intersect with changes in what the ALOK
Speaker 4: is for FED policy, because after yesterday's CPI print, we're
Speaker 4: sort of wondering how many rate cuts we're going to
Speaker 4: get this year.
Speaker 7: Yeah, it's a good question, and you know, a lot
Speaker 7: of the builder stock performance, and you look back to
Speaker 7: late October early November has been predicated upon what's happening
Speaker 7: with the FED. You know, when there's a lot of
Speaker 7: enthusiasm that the FED was going to start cutting maybe
Speaker 7: in one queue and there's going to be several cuts
Speaker 7: throughout the year. I think that's when you saw the
Speaker 7: stocks really start to take off. And I think what
Speaker 7: you need to see now from the builders in terms
Speaker 7: of terms of an investment, is are lower rates going
Speaker 7: to actually show tangible benefits to the fundamental So one
Speaker 7: of the things that we're looking at specifically is gross margins.
Speaker 7: As we discussed, builders have been offering financing incentives and
Speaker 7: obviously comes out of their profitability. But I think, you know,
Speaker 7: a lot of the enthusiasm stems from the fact that
Speaker 7: with lower rates, builders don't have to be as aggressive
Speaker 7: in all for and incentive. So I think there's there's
Speaker 7: a thought out there that margins should rise throughout the year.
Speaker 7: So that's what we're going to be looking at, is
Speaker 7: has this modest pullback in rates from eight to somewhere
Speaker 7: around seven right now enabled them to kind of dial
Speaker 7: back a little bit.
Speaker 2: I mean, I gotta say this is totally anecdotal. Bit
Speaker 2: like I am addicted to Zillow and I'm addicted to
Speaker 2: Street Easy. I love it for fun. I'm not looking
Speaker 2: to move, But I gotta say I'm noticing things getting
Speaker 2: like snapped up in like thirty two days, thirty six days,
Speaker 2: despite the fact that the thirty year is still pretty sticky.
Speaker 2: I'm like, those are existing homes.
Speaker 1: It's like, is there enough available land for the builders
Speaker 1: out there?
Speaker 2: Well, I mean they're building up a ton in downtown Brooklyn.
Speaker 2: I mean, again purely anecdotal and just talking about well
Speaker 2: like buying up housing and tearing it down and putting up. Yeah,
Speaker 2: there's so many new complexes that are coming up. It's insane.
Speaker 2: And things are going I mean it feels I actually
Speaker 2: really wonder if that eight percent, seven percent, six percent
Speaker 2: hurdle is as much of a hurdle as we thought. Drew.
Speaker 7: Yeah, that's a great point, and I think so we've
Speaker 7: been we've been dealing with mortgage rates that are above
Speaker 7: six percent for more than a year and a half now,
Speaker 7: So I think as we start to get through this year.
Speaker 7: I think you have buyers coming into the market who
Speaker 7: are coming in with a better understanding of what their
Speaker 7: costs are.
Speaker 9: Going to be.
Speaker 7: You know, maybe they have to make an adjustment on
Speaker 7: the particular house or buying, maybe they're making a concession
Speaker 7: on the square footage of the home, but I think
Speaker 7: they have a better understanding of what their costs are
Speaker 7: going to be. And you have to remember, even though
Speaker 7: home sales are down significantly from you know, twenty twenty one,
Speaker 7: we're still selling about four million single family existing homes
Speaker 7: on an annualized basis, so there are still transactions. And
Speaker 7: as that continues, it starts to loosen up that mortgage
Speaker 7: rate lock and effect because you've had people who are
Speaker 7: buying at six seven eight percent rates who aren't going
Speaker 7: to be impacted by that in the next couple of years.
Speaker 7: You know.
Speaker 4: Going back to the search for among homeworlder's for margins
Speaker 4: to us, can you talk a little bit about what
Speaker 4: their cost pressures are like, because what I really want
Speaker 4: to know is ultimately, how is this feeding into the
Speaker 4: inflation picture?
Speaker 7: Yeah? So, and speaking to Lenar specifically, they mentioned during
Speaker 7: their last quarter that their construction costs were down double
Speaker 7: digits from the prior year, so there has been a
Speaker 7: little bit of relief on the construction costs side. The
Speaker 7: expectation is that things will stabilize as we get through
Speaker 7: the remainder of the year. I think the one particular
Speaker 7: challenge for the builders that you know has become more
Speaker 7: of a concern is the cost of land. You know,
Speaker 7: builders bought up bought up a lot of land during
Speaker 7: the pandemic. A lot of it was lower priced, and
Speaker 7: as we're doing higher volumes in the industry, builders are
Speaker 7: starting to cycle through that lower cost land and now
Speaker 7: the stuff that they're delivering now and you know through
Speaker 7: twenty twenty four and into next year, is going to
Speaker 7: carry a higher cost land based so there's going to
Speaker 7: kind of be a give and take between higher cost
Speaker 7: land and what they're able to do. From a pricing perspective,
Speaker 7: what we've seen now, interestingly, is that builders have seen
Speaker 7: a little bit of pricing power on alke for like basis,
Speaker 7: so you will see average selling prices for many builders
Speaker 7: in the group start to come down. A lot of
Speaker 7: that has to do with where they're building or the
Speaker 7: type of product they're building, So there's been a shift
Speaker 7: to smaller square footage houses, but for that same square
Speaker 7: footage house builders have been able to raise prices in
Speaker 7: many of their communities.
Speaker 2: So okay, so just to recap, we're watching concessions, we're
Speaker 2: watching house prices, right, input costs and anything they say
Speaker 2: about higher cost land am i ams summon you up? Right?
Speaker 7: Yeah? The other thing specifically for Lenard's, they're going to
Speaker 7: be the first builder to report with that the month
Speaker 7: of February when we did see rates move up from
Speaker 7: you know this called it six and a half percent
Speaker 7: to seven percent range. So we wouldn't do want to
Speaker 7: see kind of the cadence of orders throughout the quarter
Speaker 7: and if that increase in rate did have an impact.
Speaker 4: Real quickly, just about wrapping up here thirty seconds. Do
Speaker 4: you see any election year issues that we should know
Speaker 4: about for the home builders?
Speaker 7: Well, you did have which was interesting during the State
Speaker 7: of the Union. The administration came out and the kind
Speaker 7: of emphasized housing as a key concern and something that
Speaker 7: they wanted to focus on. I think I think you'll
Speaker 7: you'll continue to see that kind of dialogue happening. But
Speaker 7: I think you know, what they've discussed is kind of
Speaker 7: throwing money at it from the demand side, which we think,
Speaker 7: you know, ultimately ends up being inflationary. We think in
Speaker 7: order from a policy perspective, you need to find a
Speaker 7: way to address housing from the supply side.
Speaker 2: One hundred percent. That makes such good sense. More supply
Speaker 2: prices come down and end a story rather than make
Speaker 2: it easier to buy. In essence, Hey Gray stuff really
Speaker 2: appreciate Drew. Thank you think thank you. You're reading Bloomberg
Speaker 2: Intelligence US home building analysts.
Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
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Speaker 2: Here's an amazing Big Take story that we wanted to
Speaker 2: talk about. The title is how a physics whiz made
Speaker 2: a fortune betting on Nature's catastrophes. And you can access
Speaker 2: this story on the terminal on Bloomberg and also Bloomberg
Speaker 2: dot com. Slash Big Take we do one every day,
Speaker 2: and it's a chance to go deep into the headlines.
Speaker 2: Here some of the underlying trends within the market. So
Speaker 2: let's go to the author, now, Gautam Nick Bloomberg, Senior
Speaker 2: Editor ESG Investing, joins us. Now, Gatum walk us through
Speaker 2: what this article is. It basically feels like making money
Speaker 2: off of disasters.
Speaker 9: Well, yes, on the face of it, that's say, that's
Speaker 9: probably what it is. But it's a bit more laid
Speaker 9: than that. So it has to do with insurance. So
Speaker 9: traditional insurance and reinsurance, you know, do a fairly good
Speaker 9: job of covering modest and medium sized catastrophes, you know,
Speaker 9: storms and hurricanes and earthquakes. But every thirty fifty one
Speaker 9: hundred years you get a Hurricane Katrina like event which
Speaker 9: is completely devastating in its scope. And that's a kind
Speaker 9: of event that traditional traditional insurance company can't really handle.
Speaker 9: So they've turned to a new type of asset class.
Speaker 9: Well it's not new, it's been around for twenty five years,
Speaker 9: but it's really coming into its own more and more now,
Speaker 9: and it's called catastrophe bonds. And the way it works
Speaker 9: is that instead of the insurance company taking the risk
Speaker 9: should disaster happen, that risk has passed on to Wall
Speaker 9: Street investors. So if the disaster does happen, the Wall
Speaker 9: Street investors can lose some or all of their money,
Speaker 9: so it's a pretty risky move. But if it doesn't happen,
Speaker 9: and these bonds are only they run for only three
Speaker 9: to five years, not for much longer. If the disaster
Speaker 9: doesn't occur, then the investor gets to keep its original
Speaker 9: capital plus gets a hefty return on top of that
Speaker 9: for taking better risk.
Speaker 4: So your story, it's fascinating and there's subage today to
Speaker 4: dig into there. But you start off taking a look
Speaker 4: at for Matt Capital Management, and this is the owner
Speaker 4: of the world's biggest collection of astrophe bonds. Can you
Speaker 4: talk a little bit about their strategy and in particular,
Speaker 4: you know, I just want to circle back to a
Speaker 4: comment that you may just now that in this current
Speaker 4: environment these this market is very very interesting, and I
Speaker 4: wonder if you could talk about about how a warming
Speaker 4: planet is figuring into for Meat's strategy.
Speaker 9: Sure, so you know there are always hurricanes and earthquakes,
Speaker 9: but the problem is that more and more people are
Speaker 9: moving to Florida and California and other parts of coastal
Speaker 9: regions in the world where you know, they want to
Speaker 9: have a nice view and a nice seaside experience. But
Speaker 9: those expensive homes are building, when they get hit by
Speaker 9: a storm, they you know, tend to lose a lot
Speaker 9: of money. So that is the real problem. It's that
Speaker 9: human beings are moving to these risky areas, and the
Speaker 9: insurance industries either in some places like California and Florida
Speaker 9: walking away from it. They're not going to ensure people
Speaker 9: the risks are too high, or they're turning to kind
Speaker 9: of instruments like a catastrophe bond to do so. So
Speaker 9: firmat Capital is the world's biggest cat bond investor. Their
Speaker 9: assets are about ten billion dollars and they have a
Speaker 9: very interesting strategy. So like other cat bond investors, they
Speaker 9: do buy these risk models which help you to predict
Speaker 9: the likelihood of a hurricane occurring in a particular year
Speaker 9: or over two three years. But what they do is
Speaker 9: they add a magic source. Because the co founder of
Speaker 9: this firm, John so has, you know, a physics background,
Speaker 9: has a biophysics degree from Harvard. He's been able to
Speaker 9: layer an extra in a sophistication in trying to predict
Speaker 9: the likelihood of risk and return for each of these
Speaker 9: potential catastrophes. So his buying approach is quite clever and sophisticated,
Speaker 9: and he hopes to get an edge from that. So
Speaker 9: that's where Fermat has really you know, they've been involved
Speaker 9: in this market almost inception, and they use this extra
Speaker 9: edge to try and beat the market and other catbord investors.
Speaker 2: And has it worked. What are their returns like?
Speaker 9: Yeah, so their returns last year, which is a very
Speaker 9: good year for all investors, about twenty percent, and I
Speaker 9: think a lot of other investors also came in at
Speaker 9: that level. I should say that. The interesting thing about
Speaker 9: cat bonds it's a really good diversifier. So you know,
Speaker 9: unlike your regular you know, stocks of bonds that fluctuate
Speaker 9: with market movements or the Federal Reserve decisions, a catastrophe
Speaker 9: bonds outcome is down to mother nature. Either she's kind
Speaker 9: or she's unkind. And if you diversify a portfolio with
Speaker 9: cat bonds and you know, you get the benefits of that,
Speaker 9: it's a really good, you know, diversifier that has no
Speaker 9: correlation with the rest of the financial markets.
Speaker 4: Can you talk a little bit about how the current
Speaker 4: environment in the insurance market is affecting for Met's returns,
Speaker 4: because you know, you make the point in the story
Speaker 4: that a lot of insurers are charging more to protect
Speaker 4: customers from devastating weather.
Speaker 9: Well, you know, last year was a record year for
Speaker 9: the issue of catastrophe bonds, and this year is looking
Speaker 9: likely it's going to be again a pretty solid year,
Speaker 9: and that reflects the insurance industry's desperate need to pass
Speaker 9: on some of this risk beyond the traditional reinsurance industry.
Speaker 9: To Wall Street, Wall Street is a huge, you know,
Speaker 9: deep pocket with lots of trillions of dollars at its disposal,
Speaker 9: a lot of you know, risk taking investors, unlike traditional insurance,
Speaker 9: which is a lot more conservative. So as you can
Speaker 9: see from just the number of new issuances that are
Speaker 9: lined up for twenty twenty four that insurers are increasingly
Speaker 9: turning to this market. So one of the issues a
Speaker 9: problem is that secondary perils, as the industry likes to
Speaker 9: call it, so floods, wildfires, and thunderstorms are causing more
Speaker 9: and more insurance damage as opposed to you know, Hurricane
Speaker 9: Ian a Hurricane Katrina like event, and insurers are trying
Speaker 9: to figure out how can they protect their own portfolios,
Speaker 9: their own balance sheets, but also provide insurance to people
Speaker 9: When you have more of these type of events occurring,
Speaker 9: this sort of medium size five ten billion dollar disasters
Speaker 9: versus you know, the once sort a thirty year event,
Speaker 9: and at the same time try to make sure that
Speaker 9: you know their balance sheet is protected. That's not so
Speaker 9: easy to do because we don't have much data on
Speaker 9: these kind of secondary perils. And also the models that
Speaker 9: are used that give an investor some certainty that okay,
Speaker 9: they don't stand to lose. You know, typically rare hurricane,
Speaker 9: the loss estimate is somewhere in the region of two percent.
Speaker 9: It's fairly low. The return you can get is something
Speaker 9: like eight nine percent. So as long as that clarity
Speaker 9: isn't there for these tornadoes, thunderstorms, ice storms that you
Speaker 9: see in Texas, as long as that's happening, the insurance
Speaker 9: industry is going to find it difficult to access the
Speaker 9: camp bond market to cover those kind of perils which
Speaker 9: are becoming more common.
Speaker 2: Gotam, what are the main risk events that now a
Speaker 2: CEO is modeling that may or may not happen like
Speaker 2: because he basically has a model what he thinks will happen,
Speaker 2: and then either take a little bit more risk but
Speaker 2: for more reward, or avoid that altogether. But what are
Speaker 2: the things that he's seeing right now.
Speaker 9: Well, you know, they own something like two hundred and
Speaker 9: fifty or two hundred and eighty individual catastrophe bonds, and
Speaker 9: the whole market maybe has three hundred and twenty or so.
Speaker 9: These are rough figures, so they are very dominant. They
Speaker 9: own a vast swath of this whole market. You know,
Speaker 9: that could include a tsunami campbond for Japan, or typhoon
Speaker 9: camp bond for the Philippines, a hurricane cat bond for Mexico,
Speaker 9: all kinds of different events. So I think their modeling
Speaker 9: is primarily focused still on the big potential disasters such
Speaker 9: as hurricanes or an earthquake in California or wildfires in California,
Speaker 9: unless so on things like thunderstorms, because again they don't
Speaker 9: really have the data or the sophisticated models yet, but
Speaker 9: they're building up that because that's where the catastrophe bond
Speaker 9: market is going to grow. It's going to move away
Speaker 9: from the kind of you know, Hurricane Katrina like events,
Speaker 9: the rare of big, big disaster events, and more to
Speaker 9: you know, Hurricane Sandy like event, which you know there
Speaker 9: is a catbond for you know, the New York Subway
Speaker 9: system has acquired one hundred million catborn I think they've
Speaker 9: renewed perhaps the third time now to protect the subways
Speaker 9: from going underwater should a hurricane Sandy like event hit
Speaker 9: the city head on.
Speaker 4: We have all very little time left, just in thirty seconds.
Speaker 4: Can you tell us what's the next big move in
Speaker 4: catastrophe bounds.
Speaker 9: Well, I think it's just going to grow. There's a
Speaker 9: lot more catastrophes are going to be covered. I think
Speaker 9: some of the secondary perils like flood and wildfires in particular.
Speaker 9: There's more sophisticated modeling available from certain modeling companies. Also,
Speaker 9: there's more data, and so I think that's where the
Speaker 9: cap bond market is going to grow, not to its
Speaker 9: a huge rare disasters, but more of the commoner, medium
Speaker 9: size disasters.
Speaker 2: All right, Gautam, thanks a lot, Thank you so much. Gautam.
Speaker 2: Nike joins Us Bloomberg, senior editor at ESG Investing again
Speaker 2: a great big take, and you can check that on
Speaker 2: the terminal or at Bloomberg dot com slash Big Take.
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