1 00:00:02,920 --> 00:00:07,240 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. 2 00:00:09,960 --> 00:00:13,840 Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live 3 00:00:13,920 --> 00:00:17,239 Speaker 2: weekdays at ten am Eastern on Affocarplaying and broyd Otto 4 00:00:17,360 --> 00:00:20,239 Speaker 2: with the Bloomberg Business App. Listen on demand wherever you 5 00:00:20,320 --> 00:00:24,000 Speaker 2: get your podcasts, or watch us live on YouTube. 6 00:00:25,000 --> 00:00:27,360 Speaker 3: Alex Deeal Paul Swiney live here on the Bloomberg Interactive 7 00:00:27,360 --> 00:00:30,400 Speaker 3: Broker's Studio streaming live on YouTube, as well as to 8 00:00:30,400 --> 00:00:32,800 Speaker 3: head over to the YouTube dot com and search Bloomberg 9 00:00:33,000 --> 00:00:36,200 Speaker 3: dot com. My first trade on Wall Street, Johnny Cogvin 10 00:00:36,280 --> 00:00:38,400 Speaker 3: leans over to me, my head trader block desk of 11 00:00:38,440 --> 00:00:40,800 Speaker 3: pain Webber, buy three hundred thousand shares of PanAm at 12 00:00:40,800 --> 00:00:43,760 Speaker 3: thirty one and a half and do not lose money. 13 00:00:43,840 --> 00:00:45,159 Speaker 3: I'll give you all day to do it. 14 00:00:45,840 --> 00:00:46,240 Speaker 4: I did. 15 00:00:46,479 --> 00:00:49,480 Speaker 3: I made about four thousand dollars. It took me almost 16 00:00:49,520 --> 00:00:51,760 Speaker 3: the entire day to get this trade done. Six months later, 17 00:00:51,800 --> 00:00:54,720 Speaker 3: I did it in ten minutes. But amazing. AnyWho, that's 18 00:00:54,760 --> 00:00:57,320 Speaker 3: my heritage on the block trading desk trading equities, but 19 00:00:57,440 --> 00:00:59,960 Speaker 3: now streaming on Orogen. He covers all of Wall Street forces. 20 00:01:00,000 --> 00:01:02,200 Speaker 3: It's got a story that I don't like because it's 21 00:01:02,240 --> 00:01:05,759 Speaker 3: got Citadel Securities. Craft's a plan to shake up banks 22 00:01:05,800 --> 00:01:09,080 Speaker 3: trading desk. I like the trading desk. Are they being 23 00:01:09,560 --> 00:01:10,800 Speaker 3: intermediated to some degree? 24 00:01:10,880 --> 00:01:12,600 Speaker 1: A very good morning to you as well. 25 00:01:12,959 --> 00:01:15,320 Speaker 5: He likes you just be clear. 26 00:01:16,360 --> 00:01:18,120 Speaker 1: No, but that's actually that's a word we do not 27 00:01:18,200 --> 00:01:20,039 Speaker 1: use in the story. But in some ways that's a 28 00:01:20,240 --> 00:01:24,320 Speaker 1: good way to think about it. The difference between when 29 00:01:24,360 --> 00:01:28,000 Speaker 1: you were at pain Webern now is the industry model 30 00:01:28,040 --> 00:01:32,800 Speaker 1: has changed dramatically. A lot of trading products, especially ones 31 00:01:32,840 --> 00:01:36,039 Speaker 1: where you've seen that embrace of electronification. It's just not 32 00:01:36,200 --> 00:01:38,760 Speaker 1: easy to make a lot of money in that business. 33 00:01:38,800 --> 00:01:41,080 Speaker 1: I go back to this famous Bearston trader who is 34 00:01:41,160 --> 00:01:43,399 Speaker 1: known as two sticks Eady. He got that name only 35 00:01:43,400 --> 00:01:46,080 Speaker 1: because he would buy something at ninety seven, sell it 36 00:01:46,120 --> 00:01:49,960 Speaker 1: at ninety nine, always had that two point spread. That's 37 00:01:50,000 --> 00:01:53,800 Speaker 1: not what's available now. It's the technology, the process, the execution, 38 00:01:53,960 --> 00:01:56,720 Speaker 1: it's the plumbing of the system has changed. It's not 39 00:01:56,840 --> 00:02:00,400 Speaker 1: so much driven by relationships, and that has allowed these players, 40 00:02:00,400 --> 00:02:04,200 Speaker 1: these market makers on the edges of that trading ecosystem 41 00:02:04,280 --> 00:02:06,840 Speaker 1: to come in and really take market share. That's where 42 00:02:06,880 --> 00:02:09,880 Speaker 1: you've seen people like Citadel and Jane Street and Virtue 43 00:02:09,919 --> 00:02:13,000 Speaker 1: actually starting to gain share. They're still not as big 44 00:02:13,040 --> 00:02:15,440 Speaker 1: as the biggest players, but where they do have an 45 00:02:15,440 --> 00:02:18,920 Speaker 1: advantage is because the trading landscape has changed, because so 46 00:02:18,960 --> 00:02:22,280 Speaker 1: many of the products are becoming categories of one or two. 47 00:02:22,680 --> 00:02:24,639 Speaker 1: Your one or two top players in that space, and 48 00:02:24,680 --> 00:02:28,639 Speaker 1: outside of that competitive mode, everyone else is struggling. Everyone 49 00:02:28,680 --> 00:02:32,640 Speaker 1: has to identify their niche and that is where someone 50 00:02:32,720 --> 00:02:35,280 Speaker 1: like sit sec can come in and say, our niche 51 00:02:35,320 --> 00:02:40,240 Speaker 1: is great technology, great analytics, great ability to execute and process. 52 00:02:40,320 --> 00:02:42,280 Speaker 1: Why don't we go to some of these struggling banks, 53 00:02:42,680 --> 00:02:45,480 Speaker 1: people who need to offer these services but can't really 54 00:02:45,520 --> 00:02:47,919 Speaker 1: refer to offer these services. There's Tier two, the tier 55 00:02:48,000 --> 00:02:50,400 Speaker 1: three banks, the brokerages, and tell them we will do 56 00:02:50,520 --> 00:02:52,680 Speaker 1: it for you. We will be your engine. Just slap 57 00:02:52,720 --> 00:02:55,600 Speaker 1: your name on it, tell the clients you're still doing it, 58 00:02:56,280 --> 00:03:00,120 Speaker 1: but split your commission with us. Your costs go way down, 59 00:03:00,240 --> 00:03:02,600 Speaker 1: and you will show a bitter return on equity, which, 60 00:03:02,639 --> 00:03:04,680 Speaker 1: at the end of the day is the most important 61 00:03:04,680 --> 00:03:05,880 Speaker 1: thing all of them are striving for. 62 00:03:06,160 --> 00:03:10,440 Speaker 5: Okay, here's my super dumb down question. So if that happens, 63 00:03:11,280 --> 00:03:13,640 Speaker 5: what would Paul's trade of pan am back in the 64 00:03:13,680 --> 00:03:16,600 Speaker 5: day look like? How would that now be different. 65 00:03:17,639 --> 00:03:19,520 Speaker 1: It's just that Paul wouldn't be doing it. He was 66 00:03:19,560 --> 00:03:21,520 Speaker 1: sending it off into the pipes that someone else will be. 67 00:03:21,440 --> 00:03:22,000 Speaker 6: Doing it for it. 68 00:03:22,360 --> 00:03:24,280 Speaker 5: He just like puts in like an order and then 69 00:03:24,280 --> 00:03:27,040 Speaker 5: it just like goes and happens, and he's nothing. He 70 00:03:27,080 --> 00:03:29,440 Speaker 5: doesn't have to sit there all day and manage it 71 00:03:29,440 --> 00:03:31,080 Speaker 5: because Citadel is working on the pipes. 72 00:03:31,200 --> 00:03:33,240 Speaker 1: It's not like client ABC comes upon and says, hey, 73 00:03:33,280 --> 00:03:34,960 Speaker 1: here's the deal. He takes it from him and then 74 00:03:35,040 --> 00:03:37,200 Speaker 1: flips it around to X, y Z and and makes 75 00:03:37,200 --> 00:03:40,360 Speaker 1: the spread. It's just become harder, especially in equities, even 76 00:03:40,400 --> 00:03:43,200 Speaker 1: in other products that you would not have previously thought 77 00:03:43,200 --> 00:03:45,720 Speaker 1: about as low touch, they are becoming low touch. Think 78 00:03:45,720 --> 00:03:48,760 Speaker 1: about corners of the credit market that you would not 79 00:03:48,920 --> 00:03:51,720 Speaker 1: have thought would be easy to electronify. But that's happening, 80 00:03:51,720 --> 00:03:54,200 Speaker 1: and that's happening at PACE. But the bigger, I guess 81 00:03:54,320 --> 00:03:57,480 Speaker 1: academic question here is if you're a client, And the 82 00:03:57,520 --> 00:04:01,559 Speaker 1: simple way to think about it is, it's like if 83 00:04:01,680 --> 00:04:03,440 Speaker 1: there were some banks, if there was some Tier two 84 00:04:03,480 --> 00:04:06,480 Speaker 1: banks that were to embrace this model, and you're a 85 00:04:06,520 --> 00:04:10,120 Speaker 1: client going to them, it's almost like a Starbucks selling 86 00:04:10,240 --> 00:04:13,760 Speaker 1: Dunkin Donuts coffee. How long does a client keep going 87 00:04:13,760 --> 00:04:16,640 Speaker 1: to Starbucks to buy that Dunkin coffee instead of going 88 00:04:16,640 --> 00:04:20,599 Speaker 1: to Dunkin directly. And that's Citadel's opportunity because it is 89 00:04:20,680 --> 00:04:22,680 Speaker 1: also doing that. It has also got a platform of 90 00:04:22,720 --> 00:04:25,240 Speaker 1: clients comes straight to them. But it's not all going 91 00:04:25,320 --> 00:04:28,239 Speaker 1: to happen at once. That intermediate term can last a while. 92 00:04:28,680 --> 00:04:31,279 Speaker 1: So if this plan, which is still, let's be clear, 93 00:04:31,360 --> 00:04:33,320 Speaker 1: a bit pie in the sky, but if they're able 94 00:04:33,360 --> 00:04:35,960 Speaker 1: to roll this out and if they're able to get 95 00:04:35,960 --> 00:04:39,200 Speaker 1: people to embrace this, that intermediate term can last a while, 96 00:04:39,640 --> 00:04:43,160 Speaker 1: and that could enable Citadel Securities to make a bigger 97 00:04:43,279 --> 00:04:47,200 Speaker 1: leap in the business quicker than otherwise. And that's important 98 00:04:47,200 --> 00:04:51,080 Speaker 1: because this trading firm of Ken Griffin's has it's clear 99 00:04:51,120 --> 00:04:52,400 Speaker 1: to us, it's clear to a lot of people in 100 00:04:52,400 --> 00:04:54,240 Speaker 1: the market, and in the coming years it will ipo 101 00:04:55,360 --> 00:04:58,600 Speaker 1: and it is going to have a pretty valuation because 102 00:04:58,640 --> 00:05:03,160 Speaker 1: it is completely focus stone having high roe low capital 103 00:05:03,200 --> 00:05:07,000 Speaker 1: intensive businesses because they're convinced that's what investors an analysts like, 104 00:05:07,160 --> 00:05:10,919 Speaker 1: and their entire model is around taking that piece of 105 00:05:10,960 --> 00:05:12,600 Speaker 1: it and scaling it. 106 00:05:13,279 --> 00:05:17,800 Speaker 3: The Citadel's trading operation third party trading operation. Did they 107 00:05:17,880 --> 00:05:20,880 Speaker 3: put up capital to facilitate trades or they just do 108 00:05:20,960 --> 00:05:24,719 Speaker 3: it with flow, because I mean, part of the reason 109 00:05:24,760 --> 00:05:26,120 Speaker 3: is that people would pick up the phone and call 110 00:05:26,240 --> 00:05:28,120 Speaker 3: me back in the day, is that I would put 111 00:05:28,160 --> 00:05:30,920 Speaker 3: up some capital to facilitate a trade, put capital at 112 00:05:30,960 --> 00:05:33,040 Speaker 3: risk to facilitate a trade. Now that first day, I 113 00:05:33,120 --> 00:05:34,880 Speaker 3: wasn't not to put up any capital because that would 114 00:05:34,880 --> 00:05:37,520 Speaker 3: probably would have lost it. But that's kind of how 115 00:05:37,560 --> 00:05:39,360 Speaker 3: it goes. Are they putting up capital? 116 00:05:39,480 --> 00:05:39,719 Speaker 7: They do? 117 00:05:40,200 --> 00:05:42,039 Speaker 1: I mean, and again we'll have to go through the numbers, 118 00:05:42,040 --> 00:05:44,360 Speaker 1: but there are some disclosures. I believe the Citadel Citadel 119 00:05:44,400 --> 00:05:47,680 Speaker 1: Securities capital is somewhere close to eight nine ten billion. 120 00:05:48,000 --> 00:05:50,960 Speaker 1: Jane Street is perhaps double of that. The big banks 121 00:05:50,960 --> 00:05:52,640 Speaker 1: are probably eight nine times that. 122 00:05:53,440 --> 00:05:54,279 Speaker 5: So yes, you can't. 123 00:05:54,320 --> 00:05:57,200 Speaker 1: You can't play this game without any capital. It's not 124 00:05:57,560 --> 00:06:00,200 Speaker 1: as intensive as the bigger operations because they're not doing 125 00:06:00,279 --> 00:06:01,680 Speaker 1: some of the harder stuff. They're not doing some of 126 00:06:01,680 --> 00:06:04,360 Speaker 1: the prime brokerage stuff, which is the financing business where 127 00:06:04,440 --> 00:06:06,880 Speaker 1: a lot of the capital intensity comes into play, and 128 00:06:07,200 --> 00:06:09,320 Speaker 1: that is by design. They're saying, we don't want to 129 00:06:09,400 --> 00:06:11,880 Speaker 1: chase that capital intensive stuff. We don't want the regulators 130 00:06:11,880 --> 00:06:14,000 Speaker 1: to be breathing down our Next we will do the 131 00:06:14,040 --> 00:06:20,239 Speaker 1: stuff which requires efficient use of operating expenses, up to date, 132 00:06:20,920 --> 00:06:23,680 Speaker 1: new age tech stack, which is very different from a 133 00:06:23,680 --> 00:06:26,000 Speaker 1: lot of these other older players who are struggling with 134 00:06:26,080 --> 00:06:34,080 Speaker 1: creaking technology, burgeoning operating expenses, and not cutting edge analytics. 135 00:06:34,160 --> 00:06:36,880 Speaker 1: Citel believes it has all of that and that is 136 00:06:36,920 --> 00:06:39,520 Speaker 1: what gives it that agility and nimbleness. At least that's 137 00:06:39,560 --> 00:06:41,560 Speaker 1: how they see it to go in there and offer 138 00:06:41,560 --> 00:06:43,840 Speaker 1: a service like this and also outcompete some of their 139 00:06:43,839 --> 00:06:44,599 Speaker 1: bigger rivals. 140 00:06:44,680 --> 00:06:46,320 Speaker 5: So who would this be bad for? 141 00:06:48,920 --> 00:06:51,920 Speaker 1: We know who it will be good for securities. Who 142 00:06:51,960 --> 00:06:54,000 Speaker 1: will it be bad for the way they are making 143 00:06:54,040 --> 00:06:55,880 Speaker 1: the pitch is they're going to all of these or 144 00:06:55,960 --> 00:06:58,479 Speaker 1: or they will go to all of these tier two 145 00:06:58,560 --> 00:07:01,120 Speaker 1: players in below and say it's not bad for you, 146 00:07:02,000 --> 00:07:05,680 Speaker 1: it's mutually beneficial. If we weren't there, you would be 147 00:07:05,680 --> 00:07:09,159 Speaker 1: having serious conversations with your board about what products do 148 00:07:09,200 --> 00:07:11,680 Speaker 1: you need to exit because some products just don't make 149 00:07:11,720 --> 00:07:14,520 Speaker 1: money and you can just carry along that dead weight forever. 150 00:07:14,560 --> 00:07:16,440 Speaker 5: But in theory, those tier two companies that will be 151 00:07:16,520 --> 00:07:17,600 Speaker 5: losing some of their. 152 00:07:17,680 --> 00:07:20,320 Speaker 1: They will be losing some of theirs. They will be 153 00:07:20,360 --> 00:07:22,000 Speaker 1: losing some of this way, they will be losing some 154 00:07:22,040 --> 00:07:24,960 Speaker 1: of their commission. In exchange they get higher profitability, So 155 00:07:24,960 --> 00:07:27,200 Speaker 1: they have to figure out if that trade off is 156 00:07:27,320 --> 00:07:27,680 Speaker 1: worth it. 157 00:07:28,040 --> 00:07:29,600 Speaker 3: I think one of the concerners I would have if 158 00:07:29,640 --> 00:07:32,240 Speaker 3: I were a Deutsche Bank I was mentioned in your story. 159 00:07:32,600 --> 00:07:34,760 Speaker 3: Do I want to give up a the commissions and 160 00:07:34,840 --> 00:07:38,560 Speaker 3: be my relationships because I think the market's going to 161 00:07:38,600 --> 00:07:41,000 Speaker 3: know that I'm not really in the game and allocating 162 00:07:41,000 --> 00:07:42,440 Speaker 3: capital and all that kind of stuff, And what does 163 00:07:42,480 --> 00:07:44,920 Speaker 3: that mean for my clients. If I'm not in there, 164 00:07:45,120 --> 00:07:48,160 Speaker 3: I'm forming out a lot of this capital risk and 165 00:07:48,240 --> 00:07:51,840 Speaker 3: so on to an execution cost to Citadel. 166 00:07:52,080 --> 00:07:53,880 Speaker 5: Hence, why not just go right to dunkin Donuts and 167 00:07:53,920 --> 00:07:54,760 Speaker 5: buy past Starbucks. 168 00:07:54,800 --> 00:07:56,640 Speaker 3: Yeah, so I'm sure they have to think about that, 169 00:07:56,800 --> 00:07:57,920 Speaker 3: but for a lot of again a lot of the 170 00:07:57,960 --> 00:08:00,560 Speaker 3: second tier terms, it might make a lot of sense, right. 171 00:08:00,480 --> 00:08:03,280 Speaker 1: And iven Deutsche Bank, which I would not necessarily consider 172 00:08:03,400 --> 00:08:06,120 Speaker 1: inside the competitive motors, I mean they exited, I could 173 00:08:06,200 --> 00:08:08,760 Speaker 1: spots of actory training who are not going to be 174 00:08:08,800 --> 00:08:10,720 Speaker 1: a part of this process. They're not going to Goldman 175 00:08:10,760 --> 00:08:12,760 Speaker 1: Sachs and JP Morgan, Monks, Stelli and say, we're going 176 00:08:12,800 --> 00:08:17,520 Speaker 1: to supplant you, right, because those three are squarely inside 177 00:08:17,520 --> 00:08:20,160 Speaker 1: that competitive mode. It's when you step outside of that 178 00:08:20,280 --> 00:08:22,360 Speaker 1: area that it becomes extremely challenging. 179 00:08:22,640 --> 00:08:22,920 Speaker 4: Street. 180 00:08:23,040 --> 00:08:27,040 Speaker 3: Thanks good stuff, Srinan Rodgers, Senior Financial Report of Bloombergers. 181 00:08:27,080 --> 00:08:29,160 Speaker 3: He's got a story I don't particularly care for, but 182 00:08:29,240 --> 00:08:31,880 Speaker 3: I do understand it. It makes some sense. We'll see 183 00:08:31,880 --> 00:08:34,360 Speaker 3: if we're good friends at sitadel, I can float that 184 00:08:34,480 --> 00:08:35,320 Speaker 3: down the street. 185 00:08:35,320 --> 00:08:40,640 Speaker 2: Here, you're listening to the Bloomberg Intelligence Podcast. Catch us 186 00:08:40,679 --> 00:08:43,839 Speaker 2: live weekdays at ten am Eastern on Apple car Play 187 00:08:43,880 --> 00:08:46,679 Speaker 2: and Android Auto with the Bloomberg Business Act. You can 188 00:08:46,720 --> 00:08:50,000 Speaker 2: also listen live on Amazon Alexa from our flagship New 189 00:08:50,040 --> 00:08:53,679 Speaker 2: York station. Just say Alexa playing Bloomberg eleven thirty. 190 00:08:55,040 --> 00:08:56,679 Speaker 5: All right, let's get a broader take in the market here. 191 00:08:56,679 --> 00:08:59,360 Speaker 5: Emily Rowland, one of my favorites, co chief investment strategists 192 00:08:59,360 --> 00:09:03,719 Speaker 5: for John Hand Investment Management, joins us. Now, Emily, the 193 00:09:04,160 --> 00:09:07,240 Speaker 5: reaction is clear, right, the S and P responding mortar earnings, 194 00:09:07,320 --> 00:09:09,440 Speaker 5: and you know, the bond market and the currency market 195 00:09:09,480 --> 00:09:12,160 Speaker 5: responding to that CPI data. What's your take over the 196 00:09:12,240 --> 00:09:13,040 Speaker 5: last couple hours? 197 00:09:13,960 --> 00:09:17,160 Speaker 8: Oh so much relief right now, especially seeing that shelter 198 00:09:17,280 --> 00:09:20,920 Speaker 8: component coming in at two point two percent month over month, 199 00:09:20,960 --> 00:09:23,480 Speaker 8: it just felt like it was groundhog Day. Every time 200 00:09:23,520 --> 00:09:26,480 Speaker 8: we've gotten CPI reports this year, it's just been that 201 00:09:26,520 --> 00:09:29,200 Speaker 8: sticky shelter component, and I think there's a lot of 202 00:09:29,240 --> 00:09:31,840 Speaker 8: relief that that's coming down. I think the challenge that 203 00:09:31,880 --> 00:09:34,959 Speaker 8: the market's contending with right now is when does kind 204 00:09:35,000 --> 00:09:38,440 Speaker 8: of good news on disinflation maybe put pressure on growth 205 00:09:38,480 --> 00:09:40,559 Speaker 8: and corporate earnings. So the way that we've been thinking 206 00:09:40,600 --> 00:09:44,400 Speaker 8: about it is, yes, disinflation traction is great for consumers. 207 00:09:44,440 --> 00:09:46,640 Speaker 8: It means the FED can start cutting, and I think 208 00:09:46,760 --> 00:09:50,720 Speaker 8: we solidify to September cut after today's report. But it's 209 00:09:50,800 --> 00:09:54,160 Speaker 8: not necessarily the best thing for corporate revenues. In fact, 210 00:09:54,160 --> 00:09:56,320 Speaker 8: we're finding that a lot of companies are now having 211 00:09:56,360 --> 00:09:57,479 Speaker 8: a harder time. 212 00:09:57,800 --> 00:10:00,000 Speaker 9: Asking those prices along to the end consumer. 213 00:10:00,400 --> 00:10:03,280 Speaker 8: If you look at the guts to the CPI report today, 214 00:10:03,520 --> 00:10:06,880 Speaker 8: it's stuff people want, right like Alex clearly you want 215 00:10:06,880 --> 00:10:10,320 Speaker 8: to go to Idaho. But there's things like airfares, It's 216 00:10:10,320 --> 00:10:13,680 Speaker 8: things like cars, used cars, new cars. It's things like 217 00:10:14,480 --> 00:10:18,120 Speaker 8: you know, other sort of discretionary items that are falling 218 00:10:18,160 --> 00:10:20,480 Speaker 8: because companies have less pricing power. 219 00:10:20,640 --> 00:10:22,680 Speaker 9: That means revenue growth might slow. 220 00:10:23,040 --> 00:10:25,320 Speaker 8: At the same time, the cost of capital is still 221 00:10:25,400 --> 00:10:28,080 Speaker 8: elevated for companies, so their margins are going to come 222 00:10:28,160 --> 00:10:30,800 Speaker 8: under pressure here, and I think that's the reason you're 223 00:10:30,840 --> 00:10:34,800 Speaker 8: not necessarily seeing that massive pivot party that we've seen 224 00:10:34,840 --> 00:10:37,960 Speaker 8: with other CPI releases coming down because it's not the 225 00:10:38,000 --> 00:10:40,079 Speaker 8: best thing for corporate earnings from here. 226 00:10:40,520 --> 00:10:42,760 Speaker 3: Well, I'm a former equity analyst, but I know all 227 00:10:42,760 --> 00:10:45,960 Speaker 3: along that the fixed income guy folks are much smarter. 228 00:10:46,400 --> 00:10:49,600 Speaker 3: The bond market's definitely reacting to what's happening out there. 229 00:10:49,640 --> 00:10:51,840 Speaker 3: We got the two year, as John Tucker LASA called 230 00:10:51,880 --> 00:10:55,320 Speaker 3: the most interest rates sensitive and fed sensitive instrument out there, 231 00:10:55,360 --> 00:10:57,800 Speaker 3: the to year treasury. It's off almost twelve basis points 232 00:10:57,800 --> 00:11:00,760 Speaker 3: four point five percent, and we were at five point 233 00:11:00,920 --> 00:11:03,800 Speaker 3: zero two percent on April thirty. So big moves in 234 00:11:03,840 --> 00:11:07,400 Speaker 3: a bond market, is that? What's that telling this? Emily? 235 00:11:08,400 --> 00:11:11,800 Speaker 8: Yeah, So we've been suggesting that investors lean into high 236 00:11:11,880 --> 00:11:14,640 Speaker 8: quality bonds over the course of this year, even though 237 00:11:14,679 --> 00:11:16,680 Speaker 8: the path has been bumpy. I mean, it's amazing. We 238 00:11:16,720 --> 00:11:19,600 Speaker 8: started at three eighty eight on the ten year treasury 239 00:11:19,679 --> 00:11:22,160 Speaker 8: yield this year we're still not even there yet back 240 00:11:22,240 --> 00:11:24,560 Speaker 8: down to that level. So it's like the market, the 241 00:11:24,600 --> 00:11:29,720 Speaker 8: bond market hasn't really like sniffed out this disinflation trend yet. 242 00:11:29,800 --> 00:11:32,800 Speaker 8: So we were suggesting that investors take advantage of that 243 00:11:32,880 --> 00:11:35,880 Speaker 8: big backup in yields that we've seen to lock in 244 00:11:35,920 --> 00:11:38,920 Speaker 8: those higher interest rates when the Fed does start cutting, 245 00:11:38,920 --> 00:11:41,800 Speaker 8: When rates start to move lower, it can happen really quickly. 246 00:11:42,360 --> 00:11:44,360 Speaker 8: So many of the investors that I've been talking to 247 00:11:44,480 --> 00:11:46,000 Speaker 8: this year like, well, we're just going to wait for 248 00:11:46,040 --> 00:11:48,400 Speaker 8: the Fed to cut in order to leg into duration 249 00:11:48,520 --> 00:11:51,200 Speaker 8: a little bit more. The challenges with that is that 250 00:11:51,240 --> 00:11:52,880 Speaker 8: you're going to miss out on a lot of the 251 00:11:52,960 --> 00:11:55,680 Speaker 8: total return potential in bonds if you wait for the 252 00:11:55,760 --> 00:11:58,280 Speaker 8: Fed to cut. We know that the ten year treasury 253 00:11:58,320 --> 00:12:00,960 Speaker 8: yield are really the entire yield is going. 254 00:12:00,920 --> 00:12:03,600 Speaker 9: To sort of sest that out before the Fed actually 255 00:12:03,679 --> 00:12:04,480 Speaker 9: starts cutting. 256 00:12:04,559 --> 00:12:07,200 Speaker 8: So that's why we think it's important to get paid 257 00:12:07,240 --> 00:12:10,960 Speaker 8: income here while we can at these elevated levels close 258 00:12:11,000 --> 00:12:13,880 Speaker 8: to twenty year highs on bond yields pretty awesome. 259 00:12:14,400 --> 00:12:16,760 Speaker 5: So then if we just go from the ten for second, 260 00:12:16,840 --> 00:12:20,000 Speaker 5: so steep inner trade seems to being played today, but 261 00:12:20,000 --> 00:12:22,000 Speaker 5: that's more because the front end and the stronger buying 262 00:12:22,000 --> 00:12:23,280 Speaker 5: in the front end, how do you want to be 263 00:12:23,280 --> 00:12:23,680 Speaker 5: playing that? 264 00:12:24,840 --> 00:12:27,800 Speaker 8: Yeah, I mean we are suggesting essentially looking at the 265 00:12:27,840 --> 00:12:31,160 Speaker 8: intermediate part of the curve right now for the best opportunities, 266 00:12:31,640 --> 00:12:36,080 Speaker 8: you know, looking at seven to ten years of maturity. 267 00:12:35,520 --> 00:12:37,280 Speaker 9: And again locking that in right now. 268 00:12:37,320 --> 00:12:39,600 Speaker 8: The trends that we're seeing is that it's cash cash 269 00:12:39,679 --> 00:12:42,960 Speaker 8: cash CDs. They're six trillion dollars out like sitting in 270 00:12:43,000 --> 00:12:44,360 Speaker 8: money market funds right now. 271 00:12:44,400 --> 00:12:45,640 Speaker 9: That is unbelievable. 272 00:12:46,120 --> 00:12:48,760 Speaker 8: And so what we're seeing is investors are loving getting 273 00:12:48,800 --> 00:12:51,720 Speaker 8: paid this close to five percent risk free rate. But 274 00:12:51,800 --> 00:12:54,560 Speaker 8: our contention is, hey, by the way, that's fine, it's 275 00:12:54,600 --> 00:12:57,520 Speaker 8: great that there's something else to do with short term cash, 276 00:12:57,600 --> 00:13:01,440 Speaker 8: but it's really a terrible long term investment. So just 277 00:13:01,520 --> 00:13:04,560 Speaker 8: going out the curb, embracing the intermediate part of the curb, 278 00:13:04,880 --> 00:13:08,240 Speaker 8: locking in that five even six percent income for many, 279 00:13:08,280 --> 00:13:09,079 Speaker 8: many years. 280 00:13:09,640 --> 00:13:12,160 Speaker 9: We think we're going to look back and really. 281 00:13:12,120 --> 00:13:14,680 Speaker 8: Identify the fact this was a great opportunity to take 282 00:13:14,720 --> 00:13:18,640 Speaker 8: advantage of these higher yields before inflation comes down even 283 00:13:18,720 --> 00:13:19,959 Speaker 8: further and the Fed starts to. 284 00:13:19,920 --> 00:13:23,400 Speaker 3: Cut How much credit risk should I take here, Emily 285 00:13:23,520 --> 00:13:26,360 Speaker 3: or should I just stick with my safe treasuries. 286 00:13:27,360 --> 00:13:29,880 Speaker 8: I mean, I know it's boring, Paul, I know it's 287 00:13:29,880 --> 00:13:32,040 Speaker 8: foreign to just love high quality bonds. 288 00:13:32,120 --> 00:13:33,240 Speaker 9: But when we look at. 289 00:13:33,160 --> 00:13:36,120 Speaker 8: High yield right now, the yields are elevated, of course, 290 00:13:36,200 --> 00:13:39,080 Speaker 8: but you're not really getting rewarded. I mean, spreads are 291 00:13:39,120 --> 00:13:42,599 Speaker 8: still sitting at around three hundred basis points above treasuries 292 00:13:42,600 --> 00:13:43,640 Speaker 8: on high yield bonds. 293 00:13:43,720 --> 00:13:45,040 Speaker 9: That is pretty unusual. 294 00:13:45,440 --> 00:13:48,719 Speaker 8: We actually did some analysis suggesting that when spreads have 295 00:13:48,800 --> 00:13:52,160 Speaker 8: been this tight, the forward looking twelve month returns on 296 00:13:52,240 --> 00:13:55,560 Speaker 8: high yield bonds are right around zero to one percent 297 00:13:55,760 --> 00:13:58,840 Speaker 8: historically looking over the past forty years, with a range 298 00:13:58,880 --> 00:14:02,040 Speaker 8: of plus ten mind ten. So to us, you just 299 00:14:02,080 --> 00:14:04,880 Speaker 8: don't need to go down the credit spectrum anymore to 300 00:14:05,000 --> 00:14:07,120 Speaker 8: generate impressive yields and bonds. 301 00:14:07,760 --> 00:14:10,040 Speaker 5: Where is the riskiest spot right now? 302 00:14:11,559 --> 00:14:16,320 Speaker 8: Yeah, so it's really in lower quality sort of growth 303 00:14:16,320 --> 00:14:18,880 Speaker 8: at any price on the equity side. 304 00:14:18,880 --> 00:14:20,600 Speaker 9: So we talked about the risks in bonds. 305 00:14:20,600 --> 00:14:23,480 Speaker 8: But on the equity side, you know, seeing small cabs 306 00:14:23,560 --> 00:14:26,600 Speaker 8: rallying today, I'm actually a little bit surprised by that 307 00:14:27,080 --> 00:14:29,440 Speaker 8: because what we saw for most of the last year 308 00:14:29,640 --> 00:14:32,880 Speaker 8: was that small cabs were the biggest participant in the 309 00:14:33,080 --> 00:14:35,640 Speaker 8: pivot party. Right, the idea that the FED can resume 310 00:14:35,720 --> 00:14:39,280 Speaker 8: cutting the cost of capital can come down. That's awesome 311 00:14:39,280 --> 00:14:42,680 Speaker 8: for companies that have the highest levels of indebtedness, right. 312 00:14:43,160 --> 00:14:45,840 Speaker 8: But what we started seeing recently over the past month 313 00:14:45,960 --> 00:14:49,040 Speaker 8: or so is small caps weren't getting as excited about 314 00:14:49,280 --> 00:14:51,920 Speaker 8: rate cuts as they once had because again, it means 315 00:14:51,920 --> 00:14:55,880 Speaker 8: it puts pressure on revenues, it hurts margins, and it 316 00:14:55,960 --> 00:14:58,920 Speaker 8: hurts the lowest quality players. So we would be taking 317 00:14:58,960 --> 00:15:01,680 Speaker 8: an opportunity right now now to kind of sell out 318 00:15:01,680 --> 00:15:04,920 Speaker 8: of growth at any price meme stocks, if you will 319 00:15:05,640 --> 00:15:08,520 Speaker 8: risky your small cap equities and kind of lean into 320 00:15:08,560 --> 00:15:11,640 Speaker 8: higher quality stocks that have great balance sheets, tons of 321 00:15:11,680 --> 00:15:14,720 Speaker 8: cash and a limited need to tap the capital markets 322 00:15:14,720 --> 00:15:17,280 Speaker 8: in order to grow. We think those still do well 323 00:15:17,640 --> 00:15:19,680 Speaker 8: in this decelerating growth environment. 324 00:15:20,400 --> 00:15:22,440 Speaker 3: All Right, we've kind of i think in earnest beginning 325 00:15:22,440 --> 00:15:24,920 Speaker 3: to kick off earnings today, and of course we'll really 326 00:15:24,960 --> 00:15:26,680 Speaker 3: do it tomorrow with some of the big banks slip 327 00:15:26,720 --> 00:15:29,040 Speaker 3: at JP Morgan Chase. Here, what do you need to see? 328 00:15:29,040 --> 00:15:31,640 Speaker 3: What do you think the market needs to see from 329 00:15:31,680 --> 00:15:32,840 Speaker 3: this earning season? 330 00:15:33,760 --> 00:15:36,640 Speaker 8: Yeah, I mean the trickiest part now is that we like, 331 00:15:36,800 --> 00:15:39,960 Speaker 8: finally have a high bar again. You know, not that 332 00:15:39,960 --> 00:15:42,520 Speaker 8: that's a great thing, but eight point eight percent earnings 333 00:15:42,560 --> 00:15:46,400 Speaker 8: growth is what analysts are penciling in for this quarter. 334 00:15:46,480 --> 00:15:48,960 Speaker 8: It's the first time in a while that we've had 335 00:15:49,440 --> 00:15:52,240 Speaker 8: an elevated bar. That would be the highest earnings growth 336 00:15:52,320 --> 00:15:54,240 Speaker 8: since Q one of twenty twenty two. 337 00:15:55,360 --> 00:15:57,080 Speaker 9: One thing we're looking for though, is. 338 00:15:57,040 --> 00:15:59,200 Speaker 8: That eight out of eleven sectors in the S and 339 00:15:59,240 --> 00:16:02,280 Speaker 8: P five hundred are expected to see positive earnings grow 340 00:16:02,280 --> 00:16:05,160 Speaker 8: at this quarter. So if that does come through, that 341 00:16:05,200 --> 00:16:08,280 Speaker 8: would help broaden market breadth, which I think is really 342 00:16:08,320 --> 00:16:12,400 Speaker 8: important for markets given the level of concentration we've seen 343 00:16:12,480 --> 00:16:15,720 Speaker 8: across megacap technau. So I think if earnings can deliver, 344 00:16:16,160 --> 00:16:18,960 Speaker 8: you know, eight nine percent feels a little bit overly 345 00:16:19,000 --> 00:16:22,760 Speaker 8: optimistic to me, then we can get that market bread 346 00:16:22,840 --> 00:16:24,120 Speaker 8: that everybody's looking for. 347 00:16:24,880 --> 00:16:27,680 Speaker 5: You know who says twelve percent, Gina Martin Adams A 348 00:16:27,760 --> 00:16:30,560 Speaker 5: BI we're gonna talk to for next because that's even like, 349 00:16:30,640 --> 00:16:33,120 Speaker 5: here's a bar and then we're going to rise above it. Emily, 350 00:16:33,200 --> 00:16:35,320 Speaker 5: before we let you go though your thoughts on Ai, 351 00:16:35,400 --> 00:16:38,120 Speaker 5: Goldman had a really interesting NOTEUBT that talked about maybe 352 00:16:38,120 --> 00:16:41,720 Speaker 5: the hyperscalers won't be investing as much as maybe we thought. 353 00:16:41,880 --> 00:16:44,560 Speaker 5: Does that change how does that wind up affecting AI trades? 354 00:16:44,600 --> 00:16:45,120 Speaker 5: What do you think? 355 00:16:46,080 --> 00:16:46,320 Speaker 9: Yeah? 356 00:16:46,360 --> 00:16:48,080 Speaker 8: I think what we're going to be looking for this 357 00:16:48,240 --> 00:16:51,600 Speaker 8: earning season across those big AI names is again back 358 00:16:51,600 --> 00:16:54,720 Speaker 8: to the monetization of it. How is this being monetized, 359 00:16:55,120 --> 00:16:59,000 Speaker 8: How is it producing productivity benefits? And to your point, like, 360 00:16:59,040 --> 00:17:02,640 Speaker 8: where's the budget prioritization across these companies? So we'll be 361 00:17:02,680 --> 00:17:05,280 Speaker 8: looking for kind of who the winners and losers are 362 00:17:05,320 --> 00:17:08,120 Speaker 8: across that, especially as it comes to how does everybody 363 00:17:08,160 --> 00:17:11,040 Speaker 8: monetize this incredibly powerful productivity driver? 364 00:17:11,160 --> 00:17:14,840 Speaker 5: From here, great stuff, Emily, Thanks so much. We appreciate 365 00:17:14,880 --> 00:17:16,920 Speaker 5: you at we roll in Co, Chief Investment Strategies for 366 00:17:17,040 --> 00:17:19,240 Speaker 5: John Hancock Investment Management. 367 00:17:21,000 --> 00:17:24,840 Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live 368 00:17:24,960 --> 00:17:28,320 Speaker 2: weekdays at ten am Eastern on afocarplay and Android Auto 369 00:17:28,359 --> 00:17:31,320 Speaker 2: with the Bloomberg Business App. Listen on demand wherever you 370 00:17:31,359 --> 00:17:35,520 Speaker 2: get your podcasts, or watch us live on YouTube. 371 00:17:36,000 --> 00:17:39,359 Speaker 5: I'm Alex the alongside Paul Sweened. This is Bloomberg Intelligence Radio. 372 00:17:39,359 --> 00:17:41,960 Speaker 5: We bring you all the top news and analysis with 373 00:17:42,040 --> 00:17:45,000 Speaker 5: our great Bloomberg Intelligence Team. They cover two thousand companies 374 00:17:45,240 --> 00:17:47,520 Speaker 5: and one hundred and thirty industries worldwide, and we also 375 00:17:47,560 --> 00:17:51,119 Speaker 5: take you outside talk to the CEOs, economists, analysts, and 376 00:17:51,119 --> 00:17:54,040 Speaker 5: also get their take on what's happening. And for this 377 00:17:54,119 --> 00:17:56,960 Speaker 5: we go to real estate because housing stocks are getting 378 00:17:56,960 --> 00:17:59,160 Speaker 5: a nice boost today, whether you're looking at reads, whether 379 00:17:59,200 --> 00:18:01,880 Speaker 5: you're looking at homes, all thanks to those lower yields. 380 00:18:02,160 --> 00:18:05,240 Speaker 5: So we're checking in now with Steve Jacobs, president of tenx. 381 00:18:05,280 --> 00:18:08,280 Speaker 5: He's joining us from Irvine, California, and ten x is 382 00:18:08,320 --> 00:18:13,040 Speaker 5: apparently the largest online commercial real estate auction platform, so 383 00:18:13,080 --> 00:18:15,480 Speaker 5: it's a great window to give us a viewpoint on 384 00:18:15,720 --> 00:18:18,360 Speaker 5: cre market. Thanks for joining u, Steve, and we really 385 00:18:18,400 --> 00:18:20,439 Speaker 5: appreciate it. Can you just talk me through how the 386 00:18:20,520 --> 00:18:24,320 Speaker 5: largest online commercial real estate auction platform works? 387 00:18:24,960 --> 00:18:28,919 Speaker 4: Coork thing nice to talk to you. So we're in 388 00:18:28,960 --> 00:18:32,800 Speaker 4: the business thirteen years and the difference between being online 389 00:18:32,840 --> 00:18:37,080 Speaker 4: and offline is using our technology, our customers do their 390 00:18:37,160 --> 00:18:38,879 Speaker 4: due diligence when they're looking to buy a piece of 391 00:18:38,880 --> 00:18:42,879 Speaker 4: commercial real estate before they actually purchased it, versus offline. 392 00:18:43,040 --> 00:18:45,520 Speaker 4: How due diligence is done after they sign a contract, 393 00:18:46,160 --> 00:18:49,720 Speaker 4: and by doing that we shorten the time frame between 394 00:18:49,720 --> 00:18:52,399 Speaker 4: marketing and and closing a deal to about one hundred 395 00:18:52,480 --> 00:18:56,359 Speaker 4: days nine to one hundred days versus a six month process. 396 00:18:56,680 --> 00:19:00,280 Speaker 4: We also eliminate the risk of retrades and all of 397 00:19:00,920 --> 00:19:04,199 Speaker 4: how we have a ninety eight percent closing rate, and 398 00:19:04,240 --> 00:19:07,880 Speaker 4: we've traded helped We've helped brokers trade over thirty two 399 00:19:07,880 --> 00:19:11,640 Speaker 4: billion dollars of commercial real estate over the last several years. 400 00:19:11,720 --> 00:19:14,720 Speaker 3: All right, So, Kennel from I mean, Steve, from your perspective, 401 00:19:14,760 --> 00:19:16,680 Speaker 3: can you give us a sense of what you're seeing 402 00:19:16,680 --> 00:19:18,720 Speaker 3: out there into the health of the commercial real estate 403 00:19:18,720 --> 00:19:22,080 Speaker 3: market because that obviously it impacts folks in that business 404 00:19:22,119 --> 00:19:25,040 Speaker 3: and effects impacts the banks that finance that business. So 405 00:19:25,400 --> 00:19:28,280 Speaker 3: investors are really interested in this space. What are you seeing? 406 00:19:29,440 --> 00:19:33,120 Speaker 4: So I diden't since the interest rates, you know, it's 407 00:19:33,200 --> 00:19:35,680 Speaker 4: going on two years, it was July twenty two, they 408 00:19:35,720 --> 00:19:39,040 Speaker 4: really popped up. I have a phrase and it's not 409 00:19:39,040 --> 00:19:42,320 Speaker 4: that that exciting, but it's it's it's just math, right, 410 00:19:42,480 --> 00:19:46,399 Speaker 4: And when interest rates were three percent, cap rates on 411 00:19:46,560 --> 00:19:51,639 Speaker 4: investments were lower. All right. Now, what's happened is when 412 00:19:51,720 --> 00:19:54,280 Speaker 4: interest rates going up till five to six, in some 413 00:19:54,320 --> 00:19:58,280 Speaker 4: cases seven percent, it just changes the value of the 414 00:19:58,280 --> 00:20:01,240 Speaker 4: real estate, It changes what you're in return is going 415 00:20:01,280 --> 00:20:04,160 Speaker 4: to be. So what's happened in sort of the state 416 00:20:04,200 --> 00:20:07,040 Speaker 4: of commercial real estate is there's a lot of owners 417 00:20:07,080 --> 00:20:12,040 Speaker 4: that own very nice pieces of real estate. There's nothing 418 00:20:12,080 --> 00:20:15,280 Speaker 4: necessarily wrong with them, but the capital stack in the 419 00:20:15,320 --> 00:20:19,840 Speaker 4: map has just been sort of, you know, sort of 420 00:20:20,160 --> 00:20:23,639 Speaker 4: turned over turned upside down, if you will. And what 421 00:20:23,840 --> 00:20:27,240 Speaker 4: if the building was worth ten million dollars when your 422 00:20:27,920 --> 00:20:31,160 Speaker 4: cap rate was three four percent, Now your cap rate 423 00:20:31,280 --> 00:20:34,639 Speaker 4: is you know, six to eight percent. Your building is 424 00:20:34,680 --> 00:20:38,120 Speaker 4: worth seven or eight million dollars. And that has caused 425 00:20:38,400 --> 00:20:41,280 Speaker 4: a lot of what I like to call stress for 426 00:20:41,400 --> 00:20:45,720 Speaker 4: owners because it has put values in some cases underwater 427 00:20:46,560 --> 00:20:48,240 Speaker 4: based on what the debt is and based on what 428 00:20:48,280 --> 00:20:50,439 Speaker 4: the value of the real estate is. It doesn't mean 429 00:20:50,480 --> 00:20:52,280 Speaker 4: it's a bad piece of real estate. It could be 430 00:20:52,280 --> 00:20:55,960 Speaker 4: a great piece of real estate, fully occupied, people paying one, 431 00:20:56,800 --> 00:21:00,320 Speaker 4: getting your NI your net income on the asset. Just 432 00:21:00,400 --> 00:21:06,280 Speaker 4: on a value approach, it's worth something less than a once. 433 00:21:06,560 --> 00:21:09,360 Speaker 5: So when you look at the buyers and the sellers 434 00:21:09,440 --> 00:21:12,560 Speaker 5: and the gap between maybe what the pricing looks like, 435 00:21:12,960 --> 00:21:15,160 Speaker 5: how has that changed, say in the last six months, 436 00:21:15,160 --> 00:21:16,359 Speaker 5: And what do you think it's going to change in 437 00:21:16,359 --> 00:21:17,560 Speaker 5: the next six months. 438 00:21:18,200 --> 00:21:20,800 Speaker 4: So that's a great question. So it's very interesting. So 439 00:21:20,840 --> 00:21:23,679 Speaker 4: the gap has existed for a couple of years to 440 00:21:23,720 --> 00:21:29,080 Speaker 4: your point, and what we saw at fourth quarter twenty 441 00:21:29,119 --> 00:21:31,480 Speaker 4: three and going into the first quarter of twenty four, 442 00:21:32,000 --> 00:21:36,560 Speaker 4: we saw more activity, more interest from the investors really 443 00:21:36,600 --> 00:21:42,240 Speaker 4: stepping up on our platform bidding and buying assets because 444 00:21:42,320 --> 00:21:44,640 Speaker 4: the messaging that came up from the FED is we're 445 00:21:44,680 --> 00:21:47,480 Speaker 4: done raising rates. What we've now seen coming out of 446 00:21:47,520 --> 00:21:52,560 Speaker 4: Q two is still seeing similar activity. We are seeing 447 00:21:52,640 --> 00:21:57,600 Speaker 4: buyers be more reserved because what we think of, what 448 00:21:57,720 --> 00:22:01,919 Speaker 4: I think that the vestors are waiting for, is a 449 00:22:01,920 --> 00:22:05,200 Speaker 4: message from the FED more than a message we're reducing rates. 450 00:22:05,280 --> 00:22:08,000 Speaker 4: Even if it's twenty five business point, the act of 451 00:22:08,080 --> 00:22:11,840 Speaker 4: reducing the rates will set the tone going forward and 452 00:22:11,920 --> 00:22:15,600 Speaker 4: give more confidence to the underwriting for the investors that 453 00:22:15,600 --> 00:22:18,920 Speaker 4: that there is value to there is there is value 454 00:22:19,760 --> 00:22:22,120 Speaker 4: in their underwriting because rates will go back. 455 00:22:23,200 --> 00:22:26,919 Speaker 3: Steve I one of these fundamental problems with office real estates. 456 00:22:26,960 --> 00:22:29,639 Speaker 3: I don't think anybody really knows where the market is. 457 00:22:29,720 --> 00:22:32,920 Speaker 3: I think if you drive through any town, USA and 458 00:22:33,000 --> 00:22:37,000 Speaker 3: any generic office park, every single one has that sign 459 00:22:37,119 --> 00:22:39,800 Speaker 3: in the grass telling you about how much square feet 460 00:22:40,080 --> 00:22:44,480 Speaker 3: is available with occupancy levels where they are, what is 461 00:22:44,520 --> 00:22:47,080 Speaker 3: the value of commercial real estate? Are you seeing activity. 462 00:22:46,640 --> 00:22:52,159 Speaker 4: There so you're specifically often about yeah office. Yeah, So 463 00:22:53,400 --> 00:22:57,680 Speaker 4: you're right, and I can tell you on our platform 464 00:22:57,800 --> 00:23:00,760 Speaker 4: we've actually been very successful in the last you know, 465 00:23:00,800 --> 00:23:04,320 Speaker 4: six months to a year of trading helping brokers trade 466 00:23:04,400 --> 00:23:06,760 Speaker 4: office assets. But it all comes down to what the 467 00:23:06,800 --> 00:23:10,919 Speaker 4: pricing expectations of the seller is. And based on what 468 00:23:10,920 --> 00:23:14,760 Speaker 4: I said earlier, you may have a a uh. And 469 00:23:14,840 --> 00:23:18,000 Speaker 4: in this case with office you know, fifty percent occupied 470 00:23:18,040 --> 00:23:21,919 Speaker 4: office building, it doesn't matter really how nice it is 471 00:23:22,119 --> 00:23:24,800 Speaker 4: or how what the you know, how nice the common 472 00:23:24,840 --> 00:23:29,040 Speaker 4: areas are in the in the various you know, uh, 473 00:23:29,320 --> 00:23:31,920 Speaker 4: improvements that have been made. Uh. If you have a 474 00:23:31,960 --> 00:23:37,600 Speaker 4: fifty percent office building of six percent occupied, you're kind 475 00:23:37,600 --> 00:23:41,399 Speaker 4: of in trouble because what I think landlords and owners 476 00:23:41,400 --> 00:23:44,200 Speaker 4: are searching for is how to get people back into 477 00:23:44,200 --> 00:23:48,240 Speaker 4: the office space and huddle are companies back in? And 478 00:23:48,600 --> 00:23:51,520 Speaker 4: I just think beyond the real estate, I think businesses 479 00:23:51,560 --> 00:23:54,680 Speaker 4: and companies are struggling still with how do we get 480 00:23:54,680 --> 00:23:58,119 Speaker 4: our employees back in? So if you have a you know, 481 00:23:58,560 --> 00:24:02,800 Speaker 4: a suburban office building that's half vacant and it's an 482 00:24:02,800 --> 00:24:06,679 Speaker 4: older building, maybe a Class B or C, you can 483 00:24:06,720 --> 00:24:08,880 Speaker 4: get to really get real with the value. And if 484 00:24:08,880 --> 00:24:10,320 Speaker 4: you get real with the value, and you might have 485 00:24:10,359 --> 00:24:12,959 Speaker 4: to take a hit, somebody will buy it. When that 486 00:24:13,000 --> 00:24:15,679 Speaker 4: person buys it at quote unquote a differ account, but 487 00:24:15,760 --> 00:24:17,760 Speaker 4: a lot, what the new investor can do is then 488 00:24:18,240 --> 00:24:21,840 Speaker 4: lower the lower basis, right, so they lower the reds. 489 00:24:21,920 --> 00:24:25,520 Speaker 4: So all of a sudden, this particular suburban building that 490 00:24:25,600 --> 00:24:27,960 Speaker 4: might have been charging twenty five dollars a square foot 491 00:24:28,880 --> 00:24:32,360 Speaker 4: under one financial model because it was purchased, you know, 492 00:24:32,400 --> 00:24:35,679 Speaker 4: several years ago. Now then come in buy it at 493 00:24:35,720 --> 00:24:38,159 Speaker 4: a lower price, and now they can, you know, have 494 00:24:38,680 --> 00:24:40,760 Speaker 4: the space be twelve dollars a square foot when the 495 00:24:40,760 --> 00:24:43,840 Speaker 4: rest of the market's twenty. And that's how they'll attract tenants. 496 00:24:44,040 --> 00:24:45,280 Speaker 4: I do think there's a lot of there's been a 497 00:24:45,320 --> 00:24:50,880 Speaker 4: lot of discussion about urban downtowns and how they're really 498 00:24:50,920 --> 00:24:54,080 Speaker 4: in trouble. But also the flip side of that is 499 00:24:54,119 --> 00:24:57,920 Speaker 4: that the Class A, so the best quality office buildings 500 00:24:58,040 --> 00:25:00,679 Speaker 4: are attracting tenants. I do think that they're giving a 501 00:25:00,680 --> 00:25:04,320 Speaker 4: lot of incentives and there's a lot of negotiation going 502 00:25:04,359 --> 00:25:06,640 Speaker 4: on as far as pricing the leases. 503 00:25:07,440 --> 00:25:09,479 Speaker 5: Steven, we just have about a minute left. But I 504 00:25:09,520 --> 00:25:12,200 Speaker 5: was wondering what about mixed use stuff. So you have 505 00:25:12,280 --> 00:25:14,480 Speaker 5: an office building that's only fifty percent occupied, how do 506 00:25:14,520 --> 00:25:17,200 Speaker 5: you get other people in there to do other stuff? 507 00:25:17,240 --> 00:25:19,320 Speaker 5: Like someone was talking to me about a hotel that 508 00:25:19,600 --> 00:25:22,840 Speaker 5: just encompasses four floors of a previous office building. 509 00:25:23,920 --> 00:25:27,760 Speaker 4: So there's a there's a lot, a lot of discussion 510 00:25:27,800 --> 00:25:31,800 Speaker 4: about that. With regards to repurposing these buildings, some of 511 00:25:31,800 --> 00:25:34,080 Speaker 4: them can be, some of them can't be. But a 512 00:25:34,119 --> 00:25:36,639 Speaker 4: lot of these buildings were built for office right, so 513 00:25:36,680 --> 00:25:41,480 Speaker 4: they don't have the right templates, the floor plates right 514 00:25:41,520 --> 00:25:45,160 Speaker 4: to actually convert to hotel. Like think about a hotel room. 515 00:25:45,520 --> 00:25:49,040 Speaker 4: You know needs windows, right, Every room needs windows. Right. 516 00:25:49,440 --> 00:25:52,280 Speaker 4: Office space you need windows, but you can have people 517 00:25:52,320 --> 00:25:54,399 Speaker 4: sitting out in the middle of the floor, not high window. 518 00:25:54,640 --> 00:25:57,440 Speaker 4: It's the same with bringing them to multifamily. Not only 519 00:25:57,560 --> 00:26:00,840 Speaker 4: is it expensive, super expensive, but it's not as easy 520 00:26:00,880 --> 00:26:02,800 Speaker 4: as it sounds. And also you have to look at 521 00:26:02,800 --> 00:26:04,760 Speaker 4: that market demand. You could have a two or three 522 00:26:04,800 --> 00:26:08,280 Speaker 4: story office building in the middle of an office industrial park, 523 00:26:08,440 --> 00:26:10,560 Speaker 4: and I don't think people want to stay in that 524 00:26:10,640 --> 00:26:12,920 Speaker 4: as a hotel or a residence. 525 00:26:13,119 --> 00:26:16,320 Speaker 5: Yeah, we appreciate this. This is really interesting. Thank you 526 00:26:16,359 --> 00:26:17,879 Speaker 5: so much. Stephen. Come back and let us know how 527 00:26:17,880 --> 00:26:20,840 Speaker 5: it's evolving as the Fed moves towards those rate cuts 528 00:26:20,880 --> 00:26:23,320 Speaker 5: and as yields move Flower as well. Stephen Jacobs, president 529 00:26:23,320 --> 00:26:26,280 Speaker 5: of ten X, joining us on the state of commercial 530 00:26:26,359 --> 00:26:27,919 Speaker 5: real estate. But that's so hard, Like, how do you 531 00:26:27,960 --> 00:26:30,040 Speaker 5: price something that's going to evolve over the next five 532 00:26:30,080 --> 00:26:30,760 Speaker 5: to ten years? 533 00:26:30,840 --> 00:26:33,040 Speaker 3: Right, Yeah, it's really really tough. And I just you know, 534 00:26:33,160 --> 00:26:36,440 Speaker 3: and what we hear is reconfiguring this buildings is very difficult. 535 00:26:36,560 --> 00:26:38,080 Speaker 5: Yeah. 536 00:26:38,280 --> 00:26:42,160 Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live 537 00:26:42,240 --> 00:26:45,760 Speaker 2: weekdays at ten am Eastern on applecar Play and Android 538 00:26:45,800 --> 00:26:48,560 Speaker 2: Auto with the Bloomberg Business app. You can also listen 539 00:26:48,680 --> 00:26:51,800 Speaker 2: live on Amazon Alexa from our flagship New York station. 540 00:26:52,160 --> 00:26:56,120 Speaker 2: Just say Alexa play Bloomberg eleven thirty. 541 00:26:56,440 --> 00:26:58,320 Speaker 5: All right, let's get to that CPI number and then 542 00:26:58,359 --> 00:27:00,280 Speaker 5: the market reaction. Right, the SEB is down by about 543 00:27:00,280 --> 00:27:02,800 Speaker 5: half percent. You're still seeing bidden too. The bond market 544 00:27:02,800 --> 00:27:06,240 Speaker 5: here where yields lower dollar lower as a CPI number cools. 545 00:27:06,280 --> 00:27:09,359 Speaker 5: Lindsay Piezga, as chief economist over at steepel, and she 546 00:27:09,520 --> 00:27:11,560 Speaker 5: joins us. Now, all right, lindsay, what was your take. 547 00:27:11,600 --> 00:27:14,359 Speaker 5: We already saw a JP Morgan move up it's cut 548 00:27:14,960 --> 00:27:17,640 Speaker 5: estimate to September from November. 549 00:27:19,760 --> 00:27:22,119 Speaker 7: Well, I think that might be a little aggressive based 550 00:27:22,160 --> 00:27:26,600 Speaker 7: on one month improved data or one month better than 551 00:27:26,640 --> 00:27:30,960 Speaker 7: expected report. I think rather this supports the FEDS message. 552 00:27:30,520 --> 00:27:32,080 Speaker 9: Of caution as. 553 00:27:31,960 --> 00:27:37,120 Speaker 7: Inflation slowly resumes its previous disinflationary trend. But we want 554 00:27:37,119 --> 00:27:39,680 Speaker 7: to be careful and the Committee wants to be hesitant 555 00:27:39,800 --> 00:27:44,120 Speaker 7: not to repeat it's earlier over zealous assessment of improving 556 00:27:44,119 --> 00:27:46,680 Speaker 7: inflationary conditions, which, as you remember, at the front of 557 00:27:46,760 --> 00:27:49,520 Speaker 7: the year, was met by a number of head fakes. 558 00:27:49,840 --> 00:27:52,480 Speaker 7: So despite the fact that we're seeing improvement in the 559 00:27:52,560 --> 00:27:55,320 Speaker 7: data for now a couple of months, despite the fact 560 00:27:55,320 --> 00:27:58,840 Speaker 7: that we're starting to see more cooling labor market conditions, 561 00:27:59,359 --> 00:28:02,359 Speaker 7: this is still fall shores of that bar that the 562 00:28:02,359 --> 00:28:05,879 Speaker 7: FED has set at many months of good data. But 563 00:28:06,080 --> 00:28:09,520 Speaker 7: that being said, each improving data point, the FED and 564 00:28:09,560 --> 00:28:12,960 Speaker 7: market participants, as we see, are increasingly optimistic that a 565 00:28:12,960 --> 00:28:14,719 Speaker 7: policy change is around the corner. 566 00:28:15,520 --> 00:28:17,480 Speaker 3: Lindy, I guess with a little bit of hindsight, Now, 567 00:28:17,960 --> 00:28:20,000 Speaker 3: what do we make of that first quarter, there's three 568 00:28:20,640 --> 00:28:22,640 Speaker 3: reports on inflation. It came in a little bit higher 569 00:28:22,680 --> 00:28:26,399 Speaker 3: than expected. Were those seasonal? Was there something structural or 570 00:28:26,440 --> 00:28:30,160 Speaker 3: is it just a blip and a generally deflationary longer 571 00:28:30,240 --> 00:28:30,760 Speaker 3: term trend. 572 00:28:32,280 --> 00:28:34,560 Speaker 7: Well, I think this just underscores the bumpy and on 573 00:28:34,680 --> 00:28:37,320 Speaker 7: even nature of inflation. I don't think you can kinpoint 574 00:28:37,480 --> 00:28:40,880 Speaker 7: one component to say that's what drove inflation higher, but 575 00:28:40,960 --> 00:28:43,680 Speaker 7: rather it's a broader message of inflation is not on 576 00:28:43,800 --> 00:28:47,320 Speaker 7: a clear cut downward trajectory. We are going to continue 577 00:28:47,360 --> 00:28:50,959 Speaker 7: to see on evenness and volatility in the numbers. And 578 00:28:51,000 --> 00:28:54,480 Speaker 7: so this is where the FED needs to really stay vigilant, 579 00:28:54,600 --> 00:28:59,640 Speaker 7: and it's focused on reinstating price stability, not just hoping 580 00:28:59,800 --> 00:29:03,000 Speaker 7: that or on a sustainable downward track, but really keeping 581 00:29:03,040 --> 00:29:06,960 Speaker 7: their focus on that bar of many months of good 582 00:29:07,080 --> 00:29:10,120 Speaker 7: data to gain that needed confidence that we are on 583 00:29:10,200 --> 00:29:13,920 Speaker 7: a sustainable downward trajectory back to two percent. This is 584 00:29:13,920 --> 00:29:17,040 Speaker 7: certainly a step in the right direction, absolutely, But is 585 00:29:17,080 --> 00:29:19,959 Speaker 7: it enough to justify a near term rate cut? Not 586 00:29:20,080 --> 00:29:21,040 Speaker 7: quite yet? 587 00:29:21,800 --> 00:29:24,040 Speaker 5: What do we what more? Though? Do you think we 588 00:29:24,120 --> 00:29:26,600 Speaker 5: need to see them? So if we just fast forward 589 00:29:26,640 --> 00:29:30,000 Speaker 5: like to November, like what in these few months, will 590 00:29:30,040 --> 00:29:33,400 Speaker 5: we learn like the extent to which inflation is dropping. 591 00:29:33,760 --> 00:29:34,920 Speaker 5: What would you be looking for? 592 00:29:36,960 --> 00:29:41,760 Speaker 7: Well, we need to see consistent downward momentum. We saw 593 00:29:41,800 --> 00:29:43,840 Speaker 7: a little bit of an improvement in April, but I'm 594 00:29:43,880 --> 00:29:46,640 Speaker 7: not really going to count that as a month of improvement. 595 00:29:46,760 --> 00:29:50,080 Speaker 7: We saw more improvement in May. Absolutely June we're starting 596 00:29:50,080 --> 00:29:52,880 Speaker 7: to see more improvement, So we now have two good 597 00:29:52,920 --> 00:29:57,000 Speaker 7: months under our belt. We need to see this downward momentum, 598 00:29:57,080 --> 00:30:01,400 Speaker 7: this lack of upward pressure and inflation continue not just 599 00:30:01,480 --> 00:30:05,520 Speaker 7: in July and August, but to a meaningful degree to 600 00:30:05,760 --> 00:30:09,080 Speaker 7: really give the Fed enough confidence that September would be 601 00:30:09,120 --> 00:30:12,280 Speaker 7: the appropriate time to take its foot off the break 602 00:30:12,320 --> 00:30:16,720 Speaker 7: and allow a less firm policy response. But again I 603 00:30:16,800 --> 00:30:23,200 Speaker 7: would caution that the FED is somewhat nervous about making 604 00:30:23,400 --> 00:30:26,720 Speaker 7: a larger judgment call on such a short amount of data, 605 00:30:26,920 --> 00:30:29,560 Speaker 7: given that volatility that we saw at the start of 606 00:30:29,560 --> 00:30:29,880 Speaker 7: the year. 607 00:30:30,800 --> 00:30:33,560 Speaker 3: We had a two pretty big kind of consumer oriented 608 00:30:33,600 --> 00:30:37,240 Speaker 3: companies report some weaker than expected results today, Pepsi and 609 00:30:37,520 --> 00:30:39,760 Speaker 3: Delta Airlines. I still don't get the Delta thing. Every 610 00:30:39,800 --> 00:30:43,600 Speaker 3: plane is packed that I go on, But it kind 611 00:30:43,600 --> 00:30:45,200 Speaker 3: of goes to the question of How is the consumer 612 00:30:45,240 --> 00:30:47,800 Speaker 3: out there? How do you view the consumer today? 613 00:30:49,720 --> 00:30:52,840 Speaker 7: Well, the consumer is still resilient. Now, there's no doubt 614 00:30:52,840 --> 00:30:55,760 Speaker 7: that the American household is feeling the pain from higher prices, 615 00:30:55,840 --> 00:31:00,080 Speaker 7: higher borrowing costs, the resumption of student debt payments. But 616 00:31:00,200 --> 00:31:03,480 Speaker 7: we are seeing the consumer continuing to spend. It's more 617 00:31:03,480 --> 00:31:06,720 Speaker 7: of a second derivative decline, a lower pace of still 618 00:31:06,800 --> 00:31:10,720 Speaker 7: positive expenditures as opposed to an outright decline in that 619 00:31:10,880 --> 00:31:15,000 Speaker 7: spending pattern. But we see the support stemming from a 620 00:31:15,000 --> 00:31:20,000 Speaker 7: combination now of organic and inorganic factors. On the organic side, 621 00:31:20,080 --> 00:31:23,479 Speaker 7: with inflation coming down, real earnings have turned positive and 622 00:31:23,520 --> 00:31:27,960 Speaker 7: that's providing welcomed financial stability to many households. We also 623 00:31:28,040 --> 00:31:33,520 Speaker 7: still see a lingering supplement of pandemic savings, and with 624 00:31:33,680 --> 00:31:38,000 Speaker 7: rates relatively elevated, we see positive earnings interests as well. 625 00:31:38,440 --> 00:31:40,680 Speaker 7: Now on the inorganic side, we continue to see a 626 00:31:40,760 --> 00:31:45,200 Speaker 7: reliance on intergenerational wealth transfers four one K hardship withdrawals 627 00:31:45,560 --> 00:31:48,840 Speaker 7: credit cards. But regardless of the combination, what we're seeing 628 00:31:48,920 --> 00:31:51,440 Speaker 7: is there's a number of factors that are continuing to 629 00:31:51,520 --> 00:31:55,040 Speaker 7: suggest a good amount of spending and borrowing. Part of 630 00:31:55,120 --> 00:31:59,280 Speaker 7: power on the part of the American consumer, suggesting ongoing 631 00:31:59,320 --> 00:32:03,680 Speaker 7: resilience and positive activity for the US for the broader 632 00:32:03,800 --> 00:32:05,040 Speaker 7: US economy. 633 00:32:05,040 --> 00:32:07,640 Speaker 5: How would you categorize the job market right now? 634 00:32:09,480 --> 00:32:13,760 Speaker 7: Well, the job market is still tight, but it's less 635 00:32:13,800 --> 00:32:17,160 Speaker 7: tight than what we've seen. We are starting to see 636 00:32:17,200 --> 00:32:21,400 Speaker 7: signs of pooling headline job creation as we saw did 637 00:32:21,440 --> 00:32:25,720 Speaker 7: face some sizeable downward visions to earlier months, but thus 638 00:32:25,760 --> 00:32:28,360 Speaker 7: far for twenty twenty four, we're talking about an average 639 00:32:28,440 --> 00:32:31,160 Speaker 7: hiring pace of around two hundred and twenty five thousand. 640 00:32:31,600 --> 00:32:33,760 Speaker 7: That's on par with what we saw in two hundred 641 00:32:34,080 --> 00:32:35,640 Speaker 7: excuse me, that's on par with what we saw in 642 00:32:35,680 --> 00:32:39,040 Speaker 7: twenty twenty three, with an average of about two hundred 643 00:32:39,080 --> 00:32:42,520 Speaker 7: and fifty thousand. So we're still continuing to see labor 644 00:32:42,560 --> 00:32:47,080 Speaker 7: demand outpaced labor supply, with weight pressures still up near 645 00:32:47,120 --> 00:32:50,760 Speaker 7: four percent. So this is still a solid labor market, 646 00:32:50,840 --> 00:32:55,160 Speaker 7: tight ish conditions, but slightly less tight than what we've seen, 647 00:32:55,360 --> 00:32:59,960 Speaker 7: and that's a welcomed improvement, suggesting that finally, this elevated 648 00:33:00,080 --> 00:33:03,800 Speaker 7: level of great is having the intended negative effect. I'm 649 00:33:03,840 --> 00:33:07,480 Speaker 7: beginning to slow the economy, slow the labor market. But 650 00:33:07,640 --> 00:33:11,400 Speaker 7: again it's this very gradual decline in conditions as opposed 651 00:33:11,400 --> 00:33:12,760 Speaker 7: to falling off a cliff. 652 00:33:14,440 --> 00:33:18,440 Speaker 3: Economic exceptionalism. That's a story, a narrative that I've heard, 653 00:33:18,640 --> 00:33:21,400 Speaker 3: you know, over the last twelve months characterized in the 654 00:33:21,520 --> 00:33:24,160 Speaker 3: US economy visa vis say, you know our friends in 655 00:33:24,200 --> 00:33:27,360 Speaker 3: Europe or in Asia, particularly China. Is that something you 656 00:33:27,400 --> 00:33:30,760 Speaker 3: abscribe to, and if so, what does mean to you? 657 00:33:32,520 --> 00:33:35,960 Speaker 7: Well, I think, first and foremost, we have to put 658 00:33:36,080 --> 00:33:38,800 Speaker 7: the US economy in the context of what we're seeing 659 00:33:38,800 --> 00:33:41,720 Speaker 7: on a global basis, because, as we talk about some 660 00:33:41,760 --> 00:33:44,720 Speaker 7: of these nominal figures beginning to show signs of weakness, 661 00:33:45,040 --> 00:33:49,360 Speaker 7: on a relative basis, the US economy is fary significantly 662 00:33:49,400 --> 00:33:51,440 Speaker 7: better than what we see in many of our developed 663 00:33:51,440 --> 00:33:55,760 Speaker 7: counterparts abroad, which have either fallen into or teetering on 664 00:33:55,960 --> 00:33:59,320 Speaker 7: recessionary conditions. So when we look at the US growth 665 00:33:59,360 --> 00:34:02,920 Speaker 7: rate now follow below two percent, nominally not impressive, but 666 00:34:03,000 --> 00:34:06,440 Speaker 7: compared to what we've seen overseas, the US certainly does 667 00:34:06,480 --> 00:34:11,560 Speaker 7: appear to be the strongest component in that global picture 668 00:34:12,000 --> 00:34:15,879 Speaker 7: post pandemic. In this post pandemic environment, it was. 669 00:34:15,840 --> 00:34:19,240 Speaker 5: At least dirty shirt in a pile laundry, Okay, something 670 00:34:19,239 --> 00:34:22,960 Speaker 5: along those sort of lines. Lindsay when we look forward 671 00:34:23,000 --> 00:34:26,040 Speaker 5: to the election, not necessarily that will impact growth in 672 00:34:26,080 --> 00:34:28,839 Speaker 5: the short term, et cetera. But have you modeled out 673 00:34:28,960 --> 00:34:32,759 Speaker 5: any kind of policies, whether it's tax increases, slash decreases, 674 00:34:32,880 --> 00:34:35,799 Speaker 5: or tariffs, in terms of what the economy might look 675 00:34:35,920 --> 00:34:39,160 Speaker 5: like over the next four years as it relates to inflation. 676 00:34:41,360 --> 00:34:44,520 Speaker 7: Well, I think when we talk about the outcome of 677 00:34:44,560 --> 00:34:47,600 Speaker 7: the November election, we have to remember that in many ways, 678 00:34:48,120 --> 00:34:52,319 Speaker 7: it's going to be a number of sizable barriers regardless 679 00:34:52,600 --> 00:34:55,560 Speaker 7: of who comes into power, whether it's the second round 680 00:34:55,600 --> 00:34:58,839 Speaker 7: Trump administration or a second round Biden administration. We're still 681 00:34:58,880 --> 00:35:01,919 Speaker 7: going to face elevated crisis. We're still going to face 682 00:35:01,960 --> 00:35:06,359 Speaker 7: an ongoing divide between labor demand and labor supply, an 683 00:35:06,360 --> 00:35:10,160 Speaker 7: ongoing gap between asset holders and non asset holders. We're 684 00:35:10,200 --> 00:35:15,040 Speaker 7: going to continue to face demographic issues, geopolitical risks, and 685 00:35:15,239 --> 00:35:19,040 Speaker 7: international crises, and so in many ways, the pressures that 686 00:35:19,080 --> 00:35:22,640 Speaker 7: are going to continue to retard the US economy are 687 00:35:22,680 --> 00:35:26,280 Speaker 7: going to be in place regardless of who's victorious in November. 688 00:35:26,680 --> 00:35:29,319 Speaker 7: The biggest differences, as you mentioned, are going to come 689 00:35:29,360 --> 00:35:34,480 Speaker 7: into play when we talk about immigration, border security, tax policy, specifically, 690 00:35:34,800 --> 00:35:39,600 Speaker 7: corporate tax policy, international trade, and any additional regulations that 691 00:35:39,920 --> 00:35:44,080 Speaker 7: we see put in place. But the US economy is 692 00:35:44,160 --> 00:35:51,200 Speaker 7: on relatively sound solid footing at this point, and I 693 00:35:51,239 --> 00:35:53,320 Speaker 7: do think that we are going to continue to see 694 00:35:53,360 --> 00:35:58,360 Speaker 7: this lack of momentum going into twenty twenty five, regardless 695 00:35:58,640 --> 00:36:01,400 Speaker 7: of who comes into the power in this November. 696 00:36:01,760 --> 00:36:03,640 Speaker 3: All right, Lindsay, thank you so much. We appreciate that. 697 00:36:03,680 --> 00:36:06,760 Speaker 3: As always, Lindsay Pias, she is a cheap economist at stifle, 698 00:36:06,840 --> 00:36:10,720 Speaker 3: joining us from her hometown Chicago, Illinois via zoom. 699 00:36:11,520 --> 00:36:15,440 Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live 700 00:36:15,520 --> 00:36:19,040 Speaker 2: weekdays at ten am Eastern on applecar Play and androyd 701 00:36:19,040 --> 00:36:22,200 Speaker 2: Otto with the Bloomberg Business. You can also listen live 702 00:36:22,320 --> 00:36:25,480 Speaker 2: on Amazon Alexa from our flagship New York station Just 703 00:36:25,560 --> 00:36:28,920 Speaker 2: Say Alexa playing Bloomberg eleven thirty. 704 00:36:30,000 --> 00:36:33,879 Speaker 3: Delta Airlines weaker than expected results here this morning, stock 705 00:36:33,920 --> 00:36:36,480 Speaker 3: trading down about five percent here, dragging down the other 706 00:36:36,600 --> 00:36:39,239 Speaker 3: airline stocks. What's going on at there? I can't remember 707 00:36:39,280 --> 00:36:40,520 Speaker 3: the last time I got on the plane and it 708 00:36:40,600 --> 00:36:44,520 Speaker 3: wasn't packed. George Ferguson, Senior Aerospace, Defense and Airlines AANALS. 709 00:36:44,560 --> 00:36:47,160 Speaker 3: He joins US all of the news. He's a Bloomberg intelligence. 710 00:36:47,360 --> 00:36:50,359 Speaker 3: So George, what do we learn from from Delta what's 711 00:36:50,400 --> 00:36:52,480 Speaker 3: going on out there in the airline business. 712 00:36:53,440 --> 00:36:56,560 Speaker 6: We're learning that fares are softer than I guess we 713 00:36:56,640 --> 00:36:59,640 Speaker 6: all hope or expected. Paul, I think you just fly 714 00:37:00,000 --> 00:37:03,759 Speaker 6: at core times, at really busy times for the airlines 715 00:37:04,160 --> 00:37:06,640 Speaker 6: because somehow they're not getting the same price point data 716 00:37:06,680 --> 00:37:07,759 Speaker 6: the rest of their customers. 717 00:37:08,080 --> 00:37:08,239 Speaker 2: Look. 718 00:37:08,320 --> 00:37:11,960 Speaker 6: Look, I think what we do know is that you 719 00:37:12,000 --> 00:37:14,480 Speaker 6: know that the weakest part of the business right now 720 00:37:14,520 --> 00:37:18,560 Speaker 6: appears to be sort of basic economy or those economy classes, 721 00:37:18,600 --> 00:37:21,440 Speaker 6: and that's weighing it down. So actually, I expect that 722 00:37:21,600 --> 00:37:26,560 Speaker 6: Delta's earnings report will be better than most this quarter. 723 00:37:26,960 --> 00:37:28,920 Speaker 6: So I think it'll get worse and worse as you 724 00:37:28,920 --> 00:37:31,560 Speaker 6: get into the low costs and ultra low cost carriers, 725 00:37:31,840 --> 00:37:33,480 Speaker 6: because again that's I think where the majority of the 726 00:37:33,520 --> 00:37:35,040 Speaker 6: pain is in fairs. 727 00:37:35,400 --> 00:37:37,800 Speaker 5: Yeah, because you know, going through the quarter, like corporate 728 00:37:37,880 --> 00:37:41,120 Speaker 5: travel rose thirteen percent for Delta in the second quarter. 729 00:37:41,840 --> 00:37:45,560 Speaker 5: Revenue from international passengers also increased, and premium products just 730 00:37:45,719 --> 00:37:48,799 Speaker 5: ten percent. So basically, business people are traveling, we're going overseas, 731 00:37:48,800 --> 00:37:51,560 Speaker 5: and we're buying business class or first class. So like, 732 00:37:52,200 --> 00:37:54,799 Speaker 5: is no one going to Idaho in economy? 733 00:37:56,480 --> 00:37:56,560 Speaker 7: Now? 734 00:37:56,719 --> 00:37:59,880 Speaker 6: Well people are going. They're just they're going for lower fares. Right, 735 00:37:59,840 --> 00:38:03,160 Speaker 6: Their load factors were great on Delta, right, they were 736 00:38:03,160 --> 00:38:07,040 Speaker 6: like a eighty seven percent, So they're filling airplanes as 737 00:38:07,120 --> 00:38:10,279 Speaker 6: well as they filled the year prior. I think, you know, 738 00:38:10,320 --> 00:38:12,680 Speaker 6: Delta will get a bit of a tailwind as business 739 00:38:13,160 --> 00:38:15,640 Speaker 6: comes back. That you know, that tailwind applies that Delta, 740 00:38:15,880 --> 00:38:20,839 Speaker 6: United American and the big business airlines, you know, I mean, 741 00:38:21,719 --> 00:38:24,400 Speaker 6: management always paints a really nice picture of how everything 742 00:38:24,480 --> 00:38:28,280 Speaker 6: is going. But every market but Atlantic showed lower yields 743 00:38:28,480 --> 00:38:30,520 Speaker 6: year of a year and yields the price of the 744 00:38:30,560 --> 00:38:33,239 Speaker 6: customer pace per mile they fly. So to me, that's 745 00:38:33,280 --> 00:38:36,680 Speaker 6: synonymous with fares. So what I saw was weaker fares 746 00:38:36,719 --> 00:38:39,200 Speaker 6: that were really bad. Into Latin America down I think 747 00:38:39,200 --> 00:38:42,080 Speaker 6: it was twelve percent or something like that. They're down 748 00:38:42,080 --> 00:38:46,120 Speaker 6: a couple percent for the domestic market. Into Europe it 749 00:38:46,280 --> 00:38:49,560 Speaker 6: was up up one percent. But if you do it 750 00:38:49,600 --> 00:38:52,239 Speaker 6: on a unit revenue basis, I don't want to get 751 00:38:52,239 --> 00:38:54,480 Speaker 6: too complicated about how that works, but let's just say 752 00:38:54,840 --> 00:38:58,319 Speaker 6: that factors in load factors there it was down and 753 00:38:58,400 --> 00:39:00,959 Speaker 6: so what that's telling is that they're having a harder 754 00:39:01,000 --> 00:39:04,280 Speaker 6: time filling airplanes going across to Europe at the price 755 00:39:04,320 --> 00:39:06,960 Speaker 6: point they want to fill. So they notched back a 756 00:39:06,960 --> 00:39:10,919 Speaker 6: little bit how full those airplanes were. So I generally think, 757 00:39:11,040 --> 00:39:14,080 Speaker 6: you know, from a revenue standpoint, not boating well at 758 00:39:14,080 --> 00:39:15,960 Speaker 6: all for the rest of the airlines they're going to report, 759 00:39:16,160 --> 00:39:19,880 Speaker 6: and it was I didn't see any sort of silver lining, 760 00:39:19,960 --> 00:39:23,239 Speaker 6: you know for three Q. I just it looks like 761 00:39:23,280 --> 00:39:24,279 Speaker 6: a weakening market to me. 762 00:39:25,400 --> 00:39:28,400 Speaker 3: So talk to us about capacity out there, George. I 763 00:39:28,440 --> 00:39:31,600 Speaker 3: thought that there's some capacity constraints out there which might 764 00:39:31,600 --> 00:39:35,279 Speaker 3: push fares higher because maybe Boeing wasn't delivering as many 765 00:39:35,320 --> 00:39:37,799 Speaker 3: aircraft that they want, maybe even Airbus as well, so 766 00:39:37,840 --> 00:39:40,640 Speaker 3: the airlines didn't have as many aircraft as they really needed. 767 00:39:40,719 --> 00:39:42,560 Speaker 3: Is that a capacity? What is the capacity of the 768 00:39:42,600 --> 00:39:43,480 Speaker 3: industry these days? 769 00:39:43,840 --> 00:39:45,839 Speaker 6: Yeah, So I think that's a narrative that's definitely been 770 00:39:45,880 --> 00:39:48,480 Speaker 6: going around the street, and I think it's pushed you know, 771 00:39:48,480 --> 00:39:52,240 Speaker 6: some investment in airlines. So we just really we haven't 772 00:39:52,239 --> 00:39:54,160 Speaker 6: seen that, right. I think there's a there's a couple 773 00:39:54,200 --> 00:39:56,719 Speaker 6: of things that are kind of working against that, and 774 00:39:56,800 --> 00:40:01,680 Speaker 6: I think one I think you, US airlines in particular 775 00:40:02,200 --> 00:40:06,759 Speaker 6: have been taking plenty of deliveries they're prioritized by by Boeing. Right, 776 00:40:06,800 --> 00:40:10,480 Speaker 6: Boeing sort of lost business in China. China has been weakening. 777 00:40:10,480 --> 00:40:12,640 Speaker 6: So I don't even know if China needs as many 778 00:40:12,680 --> 00:40:15,640 Speaker 6: airplanes as Boeing used to send to them, but they, 779 00:40:15,719 --> 00:40:17,120 Speaker 6: you know, they went around and got a bunch of 780 00:40:17,200 --> 00:40:22,960 Speaker 6: orders from Southwest United Alaska, and Boeing had been feeding 781 00:40:23,000 --> 00:40:25,839 Speaker 6: them airplanes before we had the you know that some 782 00:40:25,920 --> 00:40:29,279 Speaker 6: of the problems earlier this year with the Alaska you 783 00:40:29,320 --> 00:40:33,239 Speaker 6: know flight so and you know, so that means most 784 00:40:33,280 --> 00:40:36,960 Speaker 6: of the US airlines had the airplanes they expected. We 785 00:40:37,000 --> 00:40:39,800 Speaker 6: saw Delta. They added I think five percent more seats 786 00:40:40,560 --> 00:40:42,920 Speaker 6: and available seat miles they added eight percent. When we 787 00:40:42,960 --> 00:40:46,120 Speaker 6: look at this market, we see in both two Q 788 00:40:46,280 --> 00:40:50,960 Speaker 6: and three Q additions kind of in that five five percent, 789 00:40:51,080 --> 00:40:54,880 Speaker 6: six percent, seven percent range for seats and domestics, seats 790 00:40:54,920 --> 00:40:59,120 Speaker 6: in Latin America, seats going into Europe. And that's well 791 00:40:59,160 --> 00:41:02,040 Speaker 6: above GDP growth rates. And so what I think also 792 00:41:02,120 --> 00:41:04,440 Speaker 6: is going on here is if you were an airline 793 00:41:04,480 --> 00:41:07,719 Speaker 6: and you thought this bounce back travel post pandemic, Hey, 794 00:41:07,719 --> 00:41:10,000 Speaker 6: there's all this pent up demand. They're all going to 795 00:41:10,080 --> 00:41:13,240 Speaker 6: fly this summer and it's going to be growth greater 796 00:41:13,320 --> 00:41:17,040 Speaker 6: than GDP. I think you were wrong, right. We're basically 797 00:41:17,080 --> 00:41:22,160 Speaker 6: saying we think growth in travel is recoupling with GDP 798 00:41:22,760 --> 00:41:25,840 Speaker 6: like it was prior to the pandemic. And you can't 799 00:41:25,880 --> 00:41:28,520 Speaker 6: add five percent seats to this market. The US market 800 00:41:28,600 --> 00:41:29,600 Speaker 6: isn't growing that fast. 801 00:41:30,680 --> 00:41:32,920 Speaker 5: What part of any of this? And you kind of 802 00:41:32,960 --> 00:41:35,560 Speaker 5: sort of answered it. It's just also tough comps because 803 00:41:35,600 --> 00:41:37,640 Speaker 5: we were expecting the scenario that you just lined out. 804 00:41:38,600 --> 00:41:38,719 Speaker 7: Well. 805 00:41:38,760 --> 00:41:41,360 Speaker 6: I mean, another thing we've put together recently. It's on 806 00:41:41,360 --> 00:41:44,000 Speaker 6: the Bloomberg terminal under o A BI space AI r 807 00:41:44,200 --> 00:41:50,320 Speaker 6: l N dashboard and EROG dashboard. We looked at return 808 00:41:50,400 --> 00:41:53,880 Speaker 6: on invested capital. We looked at margins at US and 809 00:41:54,000 --> 00:41:57,680 Speaker 6: global airlines and you know they did you know, they 810 00:41:57,680 --> 00:42:00,440 Speaker 6: did better last year, but if you look at last year, 811 00:42:00,440 --> 00:42:04,160 Speaker 6: those margins weren't pre pandemic margins. I mean, Delta is 812 00:42:04,160 --> 00:42:06,480 Speaker 6: a bit of a standout. Their returns in invested capitol 813 00:42:06,480 --> 00:42:09,000 Speaker 6: are doing better than a lot of their competitors. And 814 00:42:09,320 --> 00:42:11,560 Speaker 6: at Bastian called that out a bunch of times today 815 00:42:12,080 --> 00:42:15,360 Speaker 6: on the call of course, but most airlines in the 816 00:42:15,440 --> 00:42:17,920 Speaker 6: US market are not getting returns in invested capitol or 817 00:42:18,000 --> 00:42:21,320 Speaker 6: margins like they were in you know, prior to the pandemic. 818 00:42:21,440 --> 00:42:25,560 Speaker 6: So it is a tougher compa guess, coming out of 819 00:42:25,560 --> 00:42:28,920 Speaker 6: the pandemic. But this is not the airline industry we 820 00:42:28,960 --> 00:42:32,839 Speaker 6: saw in the past decade. And that's because we got 821 00:42:32,840 --> 00:42:36,440 Speaker 6: record revenues. But those pilots took a big chunk right 822 00:42:36,440 --> 00:42:39,480 Speaker 6: when they got their twenty percent increases, and the airlines 823 00:42:39,480 --> 00:42:41,000 Speaker 6: aren't pricing to get that back. 824 00:42:41,400 --> 00:42:44,440 Speaker 3: All right, George, great stuff has always George Ferguson, senior Aerospace, 825 00:42:44,600 --> 00:42:48,000 Speaker 3: defense and airlines analyts for Bloomberg Intelligence, joining us from 826 00:42:48,000 --> 00:42:50,120 Speaker 3: Prince of New Jersey. Are you flying anytime? 827 00:42:50,360 --> 00:42:52,919 Speaker 5: No, No, A whole lot of nothing. Well we're going 828 00:42:52,920 --> 00:42:56,160 Speaker 5: to Orlando in October. 829 00:42:55,680 --> 00:42:57,320 Speaker 3: Right right, go see Mickey Melson. 830 00:42:57,400 --> 00:42:58,560 Speaker 5: Yeah, but that's a work thing. 831 00:42:58,840 --> 00:43:03,400 Speaker 3: Yeah, travel when I get paid to travel, it's my 832 00:43:03,480 --> 00:43:06,799 Speaker 3: new thing. Or if I'm going to Ireland, which I'm. 833 00:43:06,719 --> 00:43:09,640 Speaker 5: Doing in September, meaning that you go international, do a 834 00:43:09,680 --> 00:43:11,759 Speaker 5: big trip, but like you're not gonna. 835 00:43:11,560 --> 00:43:13,480 Speaker 3: Go yeah, people can come to me. 836 00:43:14,000 --> 00:43:15,520 Speaker 5: It's fair enough. I mean, you know, he's at the 837 00:43:15,600 --> 00:43:19,160 Speaker 5: Jersey Shore, he's got stuff yeah, I don't know. I'm 838 00:43:19,200 --> 00:43:21,040 Speaker 5: not going anywhere, although my best friend is moving to 839 00:43:21,080 --> 00:43:23,680 Speaker 5: Costa Rica. Oh so I feel like it'll be one 840 00:43:23,680 --> 00:43:26,040 Speaker 5: of those things where I'll be like, Hey, I got 841 00:43:26,040 --> 00:43:28,600 Speaker 5: an extra day. I'm gonna get to Costa Rica for 842 00:43:28,760 --> 00:43:31,160 Speaker 5: three days for two hundred bucks on Jet Blue. Yes, 843 00:43:31,239 --> 00:43:32,439 Speaker 5: which feels like it sounds good. 844 00:43:32,600 --> 00:43:37,120 Speaker 2: This is the Bloomberg Intelligence Podcast, available on Apples, Spotify, 845 00:43:37,320 --> 00:43:40,240 Speaker 2: and anywhere else you will get your podcasts. Listen live 846 00:43:40,320 --> 00:43:43,920 Speaker 2: each weekday ten am to noon Eastern on Bloomberg dot com, 847 00:43:44,040 --> 00:43:47,439 Speaker 2: the iHeart Radio app, tune In, and the Bloomberg Business app. 848 00:43:47,560 --> 00:43:50,759 Speaker 2: You can also watch us live every weekday on YouTube 849 00:43:50,800 --> 00:43:52,680 Speaker 2: and always on the Bloomberg terminal