Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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Speaker 3: Alex Deeal Paul Swiney live here on the Bloomberg Interactive
Speaker 3: Broker's Studio streaming live on YouTube, as well as to
Speaker 3: head over to the YouTube dot com and search Bloomberg
Speaker 3: dot com. My first trade on Wall Street, Johnny Cogvin
Speaker 3: leans over to me, my head trader block desk of
Speaker 3: pain Webber, buy three hundred thousand shares of PanAm at
Speaker 3: thirty one and a half and do not lose money.
Speaker 3: I'll give you all day to do it.
Speaker 4: I did.
Speaker 3: I made about four thousand dollars. It took me almost
Speaker 3: the entire day to get this trade done. Six months later,
Speaker 3: I did it in ten minutes. But amazing. AnyWho, that's
Speaker 3: my heritage on the block trading desk trading equities, but
Speaker 3: now streaming on Orogen. He covers all of Wall Street forces.
Speaker 3: It's got a story that I don't like because it's
Speaker 3: got Citadel Securities. Craft's a plan to shake up banks
Speaker 3: trading desk. I like the trading desk. Are they being
Speaker 3: intermediated to some degree?
Speaker 1: A very good morning to you as well.
Speaker 5: He likes you just be clear.
Speaker 1: No, but that's actually that's a word we do not
Speaker 1: use in the story. But in some ways that's a
Speaker 1: good way to think about it. The difference between when
Speaker 1: you were at pain Webern now is the industry model
Speaker 1: has changed dramatically. A lot of trading products, especially ones
Speaker 1: where you've seen that embrace of electronification. It's just not
Speaker 1: easy to make a lot of money in that business.
Speaker 1: I go back to this famous Bearston trader who is
Speaker 1: known as two sticks Eady. He got that name only
Speaker 1: because he would buy something at ninety seven, sell it
Speaker 1: at ninety nine, always had that two point spread. That's
Speaker 1: not what's available now. It's the technology, the process, the execution,
Speaker 1: it's the plumbing of the system has changed. It's not
Speaker 1: so much driven by relationships, and that has allowed these players,
Speaker 1: these market makers on the edges of that trading ecosystem
Speaker 1: to come in and really take market share. That's where
Speaker 1: you've seen people like Citadel and Jane Street and Virtue
Speaker 1: actually starting to gain share. They're still not as big
Speaker 1: as the biggest players, but where they do have an
Speaker 1: advantage is because the trading landscape has changed, because so
Speaker 1: many of the products are becoming categories of one or two.
Speaker 1: Your one or two top players in that space, and
Speaker 1: outside of that competitive mode, everyone else is struggling. Everyone
Speaker 1: has to identify their niche and that is where someone
Speaker 1: like sit sec can come in and say, our niche
Speaker 1: is great technology, great analytics, great ability to execute and process.
Speaker 1: Why don't we go to some of these struggling banks,
Speaker 1: people who need to offer these services but can't really
Speaker 1: refer to offer these services. There's Tier two, the tier
Speaker 1: three banks, the brokerages, and tell them we will do
Speaker 1: it for you. We will be your engine. Just slap
Speaker 1: your name on it, tell the clients you're still doing it,
Speaker 1: but split your commission with us. Your costs go way down,
Speaker 1: and you will show a bitter return on equity, which,
Speaker 1: at the end of the day is the most important
Speaker 1: thing all of them are striving for.
Speaker 5: Okay, here's my super dumb down question. So if that happens,
Speaker 5: what would Paul's trade of pan am back in the
Speaker 5: day look like? How would that now be different.
Speaker 1: It's just that Paul wouldn't be doing it. He was
Speaker 1: sending it off into the pipes that someone else will be.
Speaker 6: Doing it for it.
Speaker 5: He just like puts in like an order and then
Speaker 5: it just like goes and happens, and he's nothing. He
Speaker 5: doesn't have to sit there all day and manage it
Speaker 5: because Citadel is working on the pipes.
Speaker 1: It's not like client ABC comes upon and says, hey,
Speaker 1: here's the deal. He takes it from him and then
Speaker 1: flips it around to X, y Z and and makes
Speaker 1: the spread. It's just become harder, especially in equities, even
Speaker 1: in other products that you would not have previously thought
Speaker 1: about as low touch, they are becoming low touch. Think
Speaker 1: about corners of the credit market that you would not
Speaker 1: have thought would be easy to electronify. But that's happening,
Speaker 1: and that's happening at PACE. But the bigger, I guess
Speaker 1: academic question here is if you're a client, And the
Speaker 1: simple way to think about it is, it's like if
Speaker 1: there were some banks, if there was some Tier two
Speaker 1: banks that were to embrace this model, and you're a
Speaker 1: client going to them, it's almost like a Starbucks selling
Speaker 1: Dunkin Donuts coffee. How long does a client keep going
Speaker 1: to Starbucks to buy that Dunkin coffee instead of going
Speaker 1: to Dunkin directly. And that's Citadel's opportunity because it is
Speaker 1: also doing that. It has also got a platform of
Speaker 1: clients comes straight to them. But it's not all going
Speaker 1: to happen at once. That intermediate term can last a while.
Speaker 1: So if this plan, which is still, let's be clear,
Speaker 1: a bit pie in the sky, but if they're able
Speaker 1: to roll this out and if they're able to get
Speaker 1: people to embrace this, that intermediate term can last a while,
Speaker 1: and that could enable Citadel Securities to make a bigger
Speaker 1: leap in the business quicker than otherwise. And that's important
Speaker 1: because this trading firm of Ken Griffin's has it's clear
Speaker 1: to us, it's clear to a lot of people in
Speaker 1: the market, and in the coming years it will ipo
Speaker 1: and it is going to have a pretty valuation because
Speaker 1: it is completely focus stone having high roe low capital
Speaker 1: intensive businesses because they're convinced that's what investors an analysts like,
Speaker 1: and their entire model is around taking that piece of
Speaker 1: it and scaling it.
Speaker 3: The Citadel's trading operation third party trading operation. Did they
Speaker 3: put up capital to facilitate trades or they just do
Speaker 3: it with flow, because I mean, part of the reason
Speaker 3: is that people would pick up the phone and call
Speaker 3: me back in the day, is that I would put
Speaker 3: up some capital to facilitate a trade, put capital at
Speaker 3: risk to facilitate a trade. Now that first day, I
Speaker 3: wasn't not to put up any capital because that would
Speaker 3: probably would have lost it. But that's kind of how
Speaker 3: it goes. Are they putting up capital?
Speaker 7: They do?
Speaker 1: I mean, and again we'll have to go through the numbers,
Speaker 1: but there are some disclosures. I believe the Citadel Citadel
Speaker 1: Securities capital is somewhere close to eight nine ten billion.
Speaker 1: Jane Street is perhaps double of that. The big banks
Speaker 1: are probably eight nine times that.
Speaker 5: So yes, you can't.
Speaker 1: You can't play this game without any capital. It's not
Speaker 1: as intensive as the bigger operations because they're not doing
Speaker 1: some of the harder stuff. They're not doing some of
Speaker 1: the prime brokerage stuff, which is the financing business where
Speaker 1: a lot of the capital intensity comes into play, and
Speaker 1: that is by design. They're saying, we don't want to
Speaker 1: chase that capital intensive stuff. We don't want the regulators
Speaker 1: to be breathing down our Next we will do the
Speaker 1: stuff which requires efficient use of operating expenses, up to date,
Speaker 1: new age tech stack, which is very different from a
Speaker 1: lot of these other older players who are struggling with
Speaker 1: creaking technology, burgeoning operating expenses, and not cutting edge analytics.
Speaker 1: Citel believes it has all of that and that is
Speaker 1: what gives it that agility and nimbleness. At least that's
Speaker 1: how they see it to go in there and offer
Speaker 1: a service like this and also outcompete some of their
Speaker 1: bigger rivals.
Speaker 5: So who would this be bad for?
Speaker 1: We know who it will be good for securities. Who
Speaker 1: will it be bad for the way they are making
Speaker 1: the pitch is they're going to all of these or
Speaker 1: or they will go to all of these tier two
Speaker 1: players in below and say it's not bad for you,
Speaker 1: it's mutually beneficial. If we weren't there, you would be
Speaker 1: having serious conversations with your board about what products do
Speaker 1: you need to exit because some products just don't make
Speaker 1: money and you can just carry along that dead weight forever.
Speaker 5: But in theory, those tier two companies that will be
Speaker 5: losing some of their.
Speaker 1: They will be losing some of theirs. They will be
Speaker 1: losing some of this way, they will be losing some
Speaker 1: of their commission. In exchange they get higher profitability, So
Speaker 1: they have to figure out if that trade off is
Speaker 1: worth it.
Speaker 3: I think one of the concerners I would have if
Speaker 3: I were a Deutsche Bank I was mentioned in your story.
Speaker 3: Do I want to give up a the commissions and
Speaker 3: be my relationships because I think the market's going to
Speaker 3: know that I'm not really in the game and allocating
Speaker 3: capital and all that kind of stuff, And what does
Speaker 3: that mean for my clients. If I'm not in there,
Speaker 3: I'm forming out a lot of this capital risk and
Speaker 3: so on to an execution cost to Citadel.
Speaker 5: Hence, why not just go right to dunkin Donuts and
Speaker 5: buy past Starbucks.
Speaker 3: Yeah, so I'm sure they have to think about that,
Speaker 3: but for a lot of again a lot of the
Speaker 3: second tier terms, it might make a lot of sense, right.
Speaker 1: And iven Deutsche Bank, which I would not necessarily consider
Speaker 1: inside the competitive motors, I mean they exited, I could
Speaker 1: spots of actory training who are not going to be
Speaker 1: a part of this process. They're not going to Goldman
Speaker 1: Sachs and JP Morgan, Monks, Stelli and say, we're going
Speaker 1: to supplant you, right, because those three are squarely inside
Speaker 1: that competitive mode. It's when you step outside of that
Speaker 1: area that it becomes extremely challenging.
Speaker 4: Street.
Speaker 3: Thanks good stuff, Srinan Rodgers, Senior Financial Report of Bloombergers.
Speaker 3: He's got a story I don't particularly care for, but
Speaker 3: I do understand it. It makes some sense. We'll see
Speaker 3: if we're good friends at sitadel, I can float that
Speaker 3: down the street.
Speaker 2: Here, you're listening to the Bloomberg Intelligence Podcast. Catch us
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Speaker 5: All right, let's get a broader take in the market here.
Speaker 5: Emily Rowland, one of my favorites, co chief investment strategists
Speaker 5: for John Hand Investment Management, joins us. Now, Emily, the
Speaker 5: reaction is clear, right, the S and P responding mortar earnings,
Speaker 5: and you know, the bond market and the currency market
Speaker 5: responding to that CPI data. What's your take over the
Speaker 5: last couple hours?
Speaker 8: Oh so much relief right now, especially seeing that shelter
Speaker 8: component coming in at two point two percent month over month,
Speaker 8: it just felt like it was groundhog Day. Every time
Speaker 8: we've gotten CPI reports this year, it's just been that
Speaker 8: sticky shelter component, and I think there's a lot of
Speaker 8: relief that that's coming down. I think the challenge that
Speaker 8: the market's contending with right now is when does kind
Speaker 8: of good news on disinflation maybe put pressure on growth
Speaker 8: and corporate earnings. So the way that we've been thinking
Speaker 8: about it is, yes, disinflation traction is great for consumers.
Speaker 8: It means the FED can start cutting, and I think
Speaker 8: we solidify to September cut after today's report. But it's
Speaker 8: not necessarily the best thing for corporate revenues. In fact,
Speaker 8: we're finding that a lot of companies are now having
Speaker 8: a harder time.
Speaker 9: Asking those prices along to the end consumer.
Speaker 8: If you look at the guts to the CPI report today,
Speaker 8: it's stuff people want, right like Alex clearly you want
Speaker 8: to go to Idaho. But there's things like airfares, It's
Speaker 8: things like cars, used cars, new cars. It's things like
Speaker 8: you know, other sort of discretionary items that are falling
Speaker 8: because companies have less pricing power.
Speaker 9: That means revenue growth might slow.
Speaker 8: At the same time, the cost of capital is still
Speaker 8: elevated for companies, so their margins are going to come
Speaker 8: under pressure here, and I think that's the reason you're
Speaker 8: not necessarily seeing that massive pivot party that we've seen
Speaker 8: with other CPI releases coming down because it's not the
Speaker 8: best thing for corporate earnings from here.
Speaker 3: Well, I'm a former equity analyst, but I know all
Speaker 3: along that the fixed income guy folks are much smarter.
Speaker 3: The bond market's definitely reacting to what's happening out there.
Speaker 3: We got the two year, as John Tucker LASA called
Speaker 3: the most interest rates sensitive and fed sensitive instrument out there,
Speaker 3: the to year treasury. It's off almost twelve basis points
Speaker 3: four point five percent, and we were at five point
Speaker 3: zero two percent on April thirty. So big moves in
Speaker 3: a bond market, is that? What's that telling this? Emily?
Speaker 8: Yeah, So we've been suggesting that investors lean into high
Speaker 8: quality bonds over the course of this year, even though
Speaker 8: the path has been bumpy. I mean, it's amazing. We
Speaker 8: started at three eighty eight on the ten year treasury
Speaker 8: yield this year we're still not even there yet back
Speaker 8: down to that level. So it's like the market, the
Speaker 8: bond market hasn't really like sniffed out this disinflation trend yet.
Speaker 8: So we were suggesting that investors take advantage of that
Speaker 8: big backup in yields that we've seen to lock in
Speaker 8: those higher interest rates when the Fed does start cutting,
Speaker 8: When rates start to move lower, it can happen really quickly.
Speaker 8: So many of the investors that I've been talking to
Speaker 8: this year like, well, we're just going to wait for
Speaker 8: the Fed to cut in order to leg into duration
Speaker 8: a little bit more. The challenges with that is that
Speaker 8: you're going to miss out on a lot of the
Speaker 8: total return potential in bonds if you wait for the
Speaker 8: Fed to cut. We know that the ten year treasury
Speaker 8: yield are really the entire yield is going.
Speaker 9: To sort of sest that out before the Fed actually
Speaker 9: starts cutting.
Speaker 8: So that's why we think it's important to get paid
Speaker 8: income here while we can at these elevated levels close
Speaker 8: to twenty year highs on bond yields pretty awesome.
Speaker 5: So then if we just go from the ten for second,
Speaker 5: so steep inner trade seems to being played today, but
Speaker 5: that's more because the front end and the stronger buying
Speaker 5: in the front end, how do you want to be
Speaker 5: playing that?
Speaker 8: Yeah, I mean we are suggesting essentially looking at the
Speaker 8: intermediate part of the curve right now for the best opportunities,
Speaker 8: you know, looking at seven to ten years of maturity.
Speaker 9: And again locking that in right now.
Speaker 8: The trends that we're seeing is that it's cash cash
Speaker 8: cash CDs. They're six trillion dollars out like sitting in
Speaker 8: money market funds right now.
Speaker 9: That is unbelievable.
Speaker 8: And so what we're seeing is investors are loving getting
Speaker 8: paid this close to five percent risk free rate. But
Speaker 8: our contention is, hey, by the way, that's fine, it's
Speaker 8: great that there's something else to do with short term cash,
Speaker 8: but it's really a terrible long term investment. So just
Speaker 8: going out the curb, embracing the intermediate part of the curb,
Speaker 8: locking in that five even six percent income for many,
Speaker 8: many years.
Speaker 9: We think we're going to look back and really.
Speaker 8: Identify the fact this was a great opportunity to take
Speaker 8: advantage of these higher yields before inflation comes down even
Speaker 8: further and the Fed starts to.
Speaker 3: Cut How much credit risk should I take here, Emily
Speaker 3: or should I just stick with my safe treasuries.
Speaker 8: I mean, I know it's boring, Paul, I know it's
Speaker 8: foreign to just love high quality bonds.
Speaker 9: But when we look at.
Speaker 8: High yield right now, the yields are elevated, of course,
Speaker 8: but you're not really getting rewarded. I mean, spreads are
Speaker 8: still sitting at around three hundred basis points above treasuries
Speaker 8: on high yield bonds.
Speaker 9: That is pretty unusual.
Speaker 8: We actually did some analysis suggesting that when spreads have
Speaker 8: been this tight, the forward looking twelve month returns on
Speaker 8: high yield bonds are right around zero to one percent
Speaker 8: historically looking over the past forty years, with a range
Speaker 8: of plus ten mind ten. So to us, you just
Speaker 8: don't need to go down the credit spectrum anymore to
Speaker 8: generate impressive yields and bonds.
Speaker 5: Where is the riskiest spot right now?
Speaker 8: Yeah, so it's really in lower quality sort of growth
Speaker 8: at any price on the equity side.
Speaker 9: So we talked about the risks in bonds.
Speaker 8: But on the equity side, you know, seeing small cabs
Speaker 8: rallying today, I'm actually a little bit surprised by that
Speaker 8: because what we saw for most of the last year
Speaker 8: was that small cabs were the biggest participant in the
Speaker 8: pivot party. Right, the idea that the FED can resume
Speaker 8: cutting the cost of capital can come down. That's awesome
Speaker 8: for companies that have the highest levels of indebtedness, right.
Speaker 8: But what we started seeing recently over the past month
Speaker 8: or so is small caps weren't getting as excited about
Speaker 8: rate cuts as they once had because again, it means
Speaker 8: it puts pressure on revenues, it hurts margins, and it
Speaker 8: hurts the lowest quality players. So we would be taking
Speaker 8: an opportunity right now now to kind of sell out
Speaker 8: of growth at any price meme stocks, if you will
Speaker 8: risky your small cap equities and kind of lean into
Speaker 8: higher quality stocks that have great balance sheets, tons of
Speaker 8: cash and a limited need to tap the capital markets
Speaker 8: in order to grow. We think those still do well
Speaker 8: in this decelerating growth environment.
Speaker 3: All Right, we've kind of i think in earnest beginning
Speaker 3: to kick off earnings today, and of course we'll really
Speaker 3: do it tomorrow with some of the big banks slip
Speaker 3: at JP Morgan Chase. Here, what do you need to see?
Speaker 3: What do you think the market needs to see from
Speaker 3: this earning season?
Speaker 8: Yeah, I mean the trickiest part now is that we like,
Speaker 8: finally have a high bar again. You know, not that
Speaker 8: that's a great thing, but eight point eight percent earnings
Speaker 8: growth is what analysts are penciling in for this quarter.
Speaker 8: It's the first time in a while that we've had
Speaker 8: an elevated bar. That would be the highest earnings growth
Speaker 8: since Q one of twenty twenty two.
Speaker 9: One thing we're looking for though, is.
Speaker 8: That eight out of eleven sectors in the S and
Speaker 8: P five hundred are expected to see positive earnings grow
Speaker 8: at this quarter. So if that does come through, that
Speaker 8: would help broaden market breadth, which I think is really
Speaker 8: important for markets given the level of concentration we've seen
Speaker 8: across megacap technau. So I think if earnings can deliver,
Speaker 8: you know, eight nine percent feels a little bit overly
Speaker 8: optimistic to me, then we can get that market bread
Speaker 8: that everybody's looking for.
Speaker 5: You know who says twelve percent, Gina Martin Adams A
Speaker 5: BI we're gonna talk to for next because that's even like,
Speaker 5: here's a bar and then we're going to rise above it. Emily,
Speaker 5: before we let you go though your thoughts on Ai,
Speaker 5: Goldman had a really interesting NOTEUBT that talked about maybe
Speaker 5: the hyperscalers won't be investing as much as maybe we thought.
Speaker 5: Does that change how does that wind up affecting AI trades?
Speaker 5: What do you think?
Speaker 9: Yeah?
Speaker 8: I think what we're going to be looking for this
Speaker 8: earning season across those big AI names is again back
Speaker 8: to the monetization of it. How is this being monetized,
Speaker 8: How is it producing productivity benefits? And to your point, like,
Speaker 8: where's the budget prioritization across these companies? So we'll be
Speaker 8: looking for kind of who the winners and losers are
Speaker 8: across that, especially as it comes to how does everybody
Speaker 8: monetize this incredibly powerful productivity driver?
Speaker 5: From here, great stuff, Emily, Thanks so much. We appreciate
Speaker 5: you at we roll in Co, Chief Investment Strategies for
Speaker 5: John Hancock Investment Management.
Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live
Speaker 2: weekdays at ten am Eastern on afocarplay and Android Auto
Speaker 2: with the Bloomberg Business App. Listen on demand wherever you
Speaker 2: get your podcasts, or watch us live on YouTube.
Speaker 5: I'm Alex the alongside Paul Sweened. This is Bloomberg Intelligence Radio.
Speaker 5: We bring you all the top news and analysis with
Speaker 5: our great Bloomberg Intelligence Team. They cover two thousand companies
Speaker 5: and one hundred and thirty industries worldwide, and we also
Speaker 5: take you outside talk to the CEOs, economists, analysts, and
Speaker 5: also get their take on what's happening. And for this
Speaker 5: we go to real estate because housing stocks are getting
Speaker 5: a nice boost today, whether you're looking at reads, whether
Speaker 5: you're looking at homes, all thanks to those lower yields.
Speaker 5: So we're checking in now with Steve Jacobs, president of tenx.
Speaker 5: He's joining us from Irvine, California, and ten x is
Speaker 5: apparently the largest online commercial real estate auction platform, so
Speaker 5: it's a great window to give us a viewpoint on
Speaker 5: cre market. Thanks for joining u, Steve, and we really
Speaker 5: appreciate it. Can you just talk me through how the
Speaker 5: largest online commercial real estate auction platform works?
Speaker 4: Coork thing nice to talk to you. So we're in
Speaker 4: the business thirteen years and the difference between being online
Speaker 4: and offline is using our technology, our customers do their
Speaker 4: due diligence when they're looking to buy a piece of
Speaker 4: commercial real estate before they actually purchased it, versus offline.
Speaker 4: How due diligence is done after they sign a contract,
Speaker 4: and by doing that we shorten the time frame between
Speaker 4: marketing and and closing a deal to about one hundred
Speaker 4: days nine to one hundred days versus a six month process.
Speaker 4: We also eliminate the risk of retrades and all of
Speaker 4: how we have a ninety eight percent closing rate, and
Speaker 4: we've traded helped We've helped brokers trade over thirty two
Speaker 4: billion dollars of commercial real estate over the last several years.
Speaker 3: All right, So, Kennel from I mean, Steve, from your perspective,
Speaker 3: can you give us a sense of what you're seeing
Speaker 3: out there into the health of the commercial real estate
Speaker 3: market because that obviously it impacts folks in that business
Speaker 3: and effects impacts the banks that finance that business. So
Speaker 3: investors are really interested in this space. What are you seeing?
Speaker 4: So I diden't since the interest rates, you know, it's
Speaker 4: going on two years, it was July twenty two, they
Speaker 4: really popped up. I have a phrase and it's not
Speaker 4: that that exciting, but it's it's it's just math, right,
Speaker 4: And when interest rates were three percent, cap rates on
Speaker 4: investments were lower. All right. Now, what's happened is when
Speaker 4: interest rates going up till five to six, in some
Speaker 4: cases seven percent, it just changes the value of the
Speaker 4: real estate, It changes what you're in return is going
Speaker 4: to be. So what's happened in sort of the state
Speaker 4: of commercial real estate is there's a lot of owners
Speaker 4: that own very nice pieces of real estate. There's nothing
Speaker 4: necessarily wrong with them, but the capital stack in the
Speaker 4: map has just been sort of, you know, sort of
Speaker 4: turned over turned upside down, if you will. And what
Speaker 4: if the building was worth ten million dollars when your
Speaker 4: cap rate was three four percent, Now your cap rate
Speaker 4: is you know, six to eight percent. Your building is
Speaker 4: worth seven or eight million dollars. And that has caused
Speaker 4: a lot of what I like to call stress for
Speaker 4: owners because it has put values in some cases underwater
Speaker 4: based on what the debt is and based on what
Speaker 4: the value of the real estate is. It doesn't mean
Speaker 4: it's a bad piece of real estate. It could be
Speaker 4: a great piece of real estate, fully occupied, people paying one,
Speaker 4: getting your NI your net income on the asset. Just
Speaker 4: on a value approach, it's worth something less than a once.
Speaker 5: So when you look at the buyers and the sellers
Speaker 5: and the gap between maybe what the pricing looks like,
Speaker 5: how has that changed, say in the last six months,
Speaker 5: And what do you think it's going to change in
Speaker 5: the next six months.
Speaker 4: So that's a great question. So it's very interesting. So
Speaker 4: the gap has existed for a couple of years to
Speaker 4: your point, and what we saw at fourth quarter twenty
Speaker 4: three and going into the first quarter of twenty four,
Speaker 4: we saw more activity, more interest from the investors really
Speaker 4: stepping up on our platform bidding and buying assets because
Speaker 4: the messaging that came up from the FED is we're
Speaker 4: done raising rates. What we've now seen coming out of
Speaker 4: Q two is still seeing similar activity. We are seeing
Speaker 4: buyers be more reserved because what we think of, what
Speaker 4: I think that the vestors are waiting for, is a
Speaker 4: message from the FED more than a message we're reducing rates.
Speaker 4: Even if it's twenty five business point, the act of
Speaker 4: reducing the rates will set the tone going forward and
Speaker 4: give more confidence to the underwriting for the investors that
Speaker 4: that there is value to there is there is value
Speaker 4: in their underwriting because rates will go back.
Speaker 3: Steve I one of these fundamental problems with office real estates.
Speaker 3: I don't think anybody really knows where the market is.
Speaker 3: I think if you drive through any town, USA and
Speaker 3: any generic office park, every single one has that sign
Speaker 3: in the grass telling you about how much square feet
Speaker 3: is available with occupancy levels where they are, what is
Speaker 3: the value of commercial real estate? Are you seeing activity.
Speaker 4: There so you're specifically often about yeah office. Yeah, So
Speaker 4: you're right, and I can tell you on our platform
Speaker 4: we've actually been very successful in the last you know,
Speaker 4: six months to a year of trading helping brokers trade
Speaker 4: office assets. But it all comes down to what the
Speaker 4: pricing expectations of the seller is. And based on what
Speaker 4: I said earlier, you may have a a uh. And
Speaker 4: in this case with office you know, fifty percent occupied
Speaker 4: office building, it doesn't matter really how nice it is
Speaker 4: or how what the you know, how nice the common
Speaker 4: areas are in the in the various you know, uh,
Speaker 4: improvements that have been made. Uh. If you have a
Speaker 4: fifty percent office building of six percent occupied, you're kind
Speaker 4: of in trouble because what I think landlords and owners
Speaker 4: are searching for is how to get people back into
Speaker 4: the office space and huddle are companies back in? And
Speaker 4: I just think beyond the real estate, I think businesses
Speaker 4: and companies are struggling still with how do we get
Speaker 4: our employees back in? So if you have a you know,
Speaker 4: a suburban office building that's half vacant and it's an
Speaker 4: older building, maybe a Class B or C, you can
Speaker 4: get to really get real with the value. And if
Speaker 4: you get real with the value, and you might have
Speaker 4: to take a hit, somebody will buy it. When that
Speaker 4: person buys it at quote unquote a differ account, but
Speaker 4: a lot, what the new investor can do is then
Speaker 4: lower the lower basis, right, so they lower the reds.
Speaker 4: So all of a sudden, this particular suburban building that
Speaker 4: might have been charging twenty five dollars a square foot
Speaker 4: under one financial model because it was purchased, you know,
Speaker 4: several years ago. Now then come in buy it at
Speaker 4: a lower price, and now they can, you know, have
Speaker 4: the space be twelve dollars a square foot when the
Speaker 4: rest of the market's twenty. And that's how they'll attract tenants.
Speaker 4: I do think there's a lot of there's been a
Speaker 4: lot of discussion about urban downtowns and how they're really
Speaker 4: in trouble. But also the flip side of that is
Speaker 4: that the Class A, so the best quality office buildings
Speaker 4: are attracting tenants. I do think that they're giving a
Speaker 4: lot of incentives and there's a lot of negotiation going
Speaker 4: on as far as pricing the leases.
Speaker 5: Steven, we just have about a minute left. But I
Speaker 5: was wondering what about mixed use stuff. So you have
Speaker 5: an office building that's only fifty percent occupied, how do
Speaker 5: you get other people in there to do other stuff?
Speaker 5: Like someone was talking to me about a hotel that
Speaker 5: just encompasses four floors of a previous office building.
Speaker 4: So there's a there's a lot, a lot of discussion
Speaker 4: about that. With regards to repurposing these buildings, some of
Speaker 4: them can be, some of them can't be. But a
Speaker 4: lot of these buildings were built for office right, so
Speaker 4: they don't have the right templates, the floor plates right
Speaker 4: to actually convert to hotel. Like think about a hotel room.
Speaker 4: You know needs windows, right, Every room needs windows. Right.
Speaker 4: Office space you need windows, but you can have people
Speaker 4: sitting out in the middle of the floor, not high window.
Speaker 4: It's the same with bringing them to multifamily. Not only
Speaker 4: is it expensive, super expensive, but it's not as easy
Speaker 4: as it sounds. And also you have to look at
Speaker 4: that market demand. You could have a two or three
Speaker 4: story office building in the middle of an office industrial park,
Speaker 4: and I don't think people want to stay in that
Speaker 4: as a hotel or a residence.
Speaker 5: Yeah, we appreciate this. This is really interesting. Thank you
Speaker 5: so much. Stephen. Come back and let us know how
Speaker 5: it's evolving as the Fed moves towards those rate cuts
Speaker 5: and as yields move Flower as well. Stephen Jacobs, president
Speaker 5: of ten X, joining us on the state of commercial
Speaker 5: real estate. But that's so hard, Like, how do you
Speaker 5: price something that's going to evolve over the next five
Speaker 5: to ten years?
Speaker 3: Right, Yeah, it's really really tough. And I just you know,
Speaker 3: and what we hear is reconfiguring this buildings is very difficult.
Speaker 5: Yeah.
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Speaker 5: All right, let's get to that CPI number and then
Speaker 5: the market reaction. Right, the SEB is down by about
Speaker 5: half percent. You're still seeing bidden too. The bond market
Speaker 5: here where yields lower dollar lower as a CPI number cools.
Speaker 5: Lindsay Piezga, as chief economist over at steepel, and she
Speaker 5: joins us. Now, all right, lindsay, what was your take.
Speaker 5: We already saw a JP Morgan move up it's cut
Speaker 5: estimate to September from November.
Speaker 7: Well, I think that might be a little aggressive based
Speaker 7: on one month improved data or one month better than
Speaker 7: expected report. I think rather this supports the FEDS message.
Speaker 9: Of caution as.
Speaker 7: Inflation slowly resumes its previous disinflationary trend. But we want
Speaker 7: to be careful and the Committee wants to be hesitant
Speaker 7: not to repeat it's earlier over zealous assessment of improving
Speaker 7: inflationary conditions, which, as you remember, at the front of
Speaker 7: the year, was met by a number of head fakes.
Speaker 7: So despite the fact that we're seeing improvement in the
Speaker 7: data for now a couple of months, despite the fact
Speaker 7: that we're starting to see more cooling labor market conditions,
Speaker 7: this is still fall shores of that bar that the
Speaker 7: FED has set at many months of good data. But
Speaker 7: that being said, each improving data point, the FED and
Speaker 7: market participants, as we see, are increasingly optimistic that a
Speaker 7: policy change is around the corner.
Speaker 3: Lindy, I guess with a little bit of hindsight, Now,
Speaker 3: what do we make of that first quarter, there's three
Speaker 3: reports on inflation. It came in a little bit higher
Speaker 3: than expected. Were those seasonal? Was there something structural or
Speaker 3: is it just a blip and a generally deflationary longer
Speaker 3: term trend.
Speaker 7: Well, I think this just underscores the bumpy and on
Speaker 7: even nature of inflation. I don't think you can kinpoint
Speaker 7: one component to say that's what drove inflation higher, but
Speaker 7: rather it's a broader message of inflation is not on
Speaker 7: a clear cut downward trajectory. We are going to continue
Speaker 7: to see on evenness and volatility in the numbers. And
Speaker 7: so this is where the FED needs to really stay vigilant,
Speaker 7: and it's focused on reinstating price stability, not just hoping
Speaker 7: that or on a sustainable downward track, but really keeping
Speaker 7: their focus on that bar of many months of good
Speaker 7: data to gain that needed confidence that we are on
Speaker 7: a sustainable downward trajectory back to two percent. This is
Speaker 7: certainly a step in the right direction, absolutely, But is
Speaker 7: it enough to justify a near term rate cut? Not
Speaker 7: quite yet?
Speaker 5: What do we what more? Though? Do you think we
Speaker 5: need to see them? So if we just fast forward
Speaker 5: like to November, like what in these few months, will
Speaker 5: we learn like the extent to which inflation is dropping.
Speaker 5: What would you be looking for?
Speaker 7: Well, we need to see consistent downward momentum. We saw
Speaker 7: a little bit of an improvement in April, but I'm
Speaker 7: not really going to count that as a month of improvement.
Speaker 7: We saw more improvement in May. Absolutely June we're starting
Speaker 7: to see more improvement, So we now have two good
Speaker 7: months under our belt. We need to see this downward momentum,
Speaker 7: this lack of upward pressure and inflation continue not just
Speaker 7: in July and August, but to a meaningful degree to
Speaker 7: really give the Fed enough confidence that September would be
Speaker 7: the appropriate time to take its foot off the break
Speaker 7: and allow a less firm policy response. But again I
Speaker 7: would caution that the FED is somewhat nervous about making
Speaker 7: a larger judgment call on such a short amount of data,
Speaker 7: given that volatility that we saw at the start of
Speaker 7: the year.
Speaker 3: We had a two pretty big kind of consumer oriented
Speaker 3: companies report some weaker than expected results today, Pepsi and
Speaker 3: Delta Airlines. I still don't get the Delta thing. Every
Speaker 3: plane is packed that I go on, But it kind
Speaker 3: of goes to the question of How is the consumer
Speaker 3: out there? How do you view the consumer today?
Speaker 7: Well, the consumer is still resilient. Now, there's no doubt
Speaker 7: that the American household is feeling the pain from higher prices,
Speaker 7: higher borrowing costs, the resumption of student debt payments. But
Speaker 7: we are seeing the consumer continuing to spend. It's more
Speaker 7: of a second derivative decline, a lower pace of still
Speaker 7: positive expenditures as opposed to an outright decline in that
Speaker 7: spending pattern. But we see the support stemming from a
Speaker 7: combination now of organic and inorganic factors. On the organic side,
Speaker 7: with inflation coming down, real earnings have turned positive and
Speaker 7: that's providing welcomed financial stability to many households. We also
Speaker 7: still see a lingering supplement of pandemic savings, and with
Speaker 7: rates relatively elevated, we see positive earnings interests as well.
Speaker 7: Now on the inorganic side, we continue to see a
Speaker 7: reliance on intergenerational wealth transfers four one K hardship withdrawals
Speaker 7: credit cards. But regardless of the combination, what we're seeing
Speaker 7: is there's a number of factors that are continuing to
Speaker 7: suggest a good amount of spending and borrowing. Part of
Speaker 7: power on the part of the American consumer, suggesting ongoing
Speaker 7: resilience and positive activity for the US for the broader
Speaker 7: US economy.
Speaker 5: How would you categorize the job market right now?
Speaker 7: Well, the job market is still tight, but it's less
Speaker 7: tight than what we've seen. We are starting to see
Speaker 7: signs of pooling headline job creation as we saw did
Speaker 7: face some sizeable downward visions to earlier months, but thus
Speaker 7: far for twenty twenty four, we're talking about an average
Speaker 7: hiring pace of around two hundred and twenty five thousand.
Speaker 7: That's on par with what we saw in two hundred
Speaker 7: excuse me, that's on par with what we saw in
Speaker 7: twenty twenty three, with an average of about two hundred
Speaker 7: and fifty thousand. So we're still continuing to see labor
Speaker 7: demand outpaced labor supply, with weight pressures still up near
Speaker 7: four percent. So this is still a solid labor market,
Speaker 7: tight ish conditions, but slightly less tight than what we've seen,
Speaker 7: and that's a welcomed improvement, suggesting that finally, this elevated
Speaker 7: level of great is having the intended negative effect. I'm
Speaker 7: beginning to slow the economy, slow the labor market. But
Speaker 7: again it's this very gradual decline in conditions as opposed
Speaker 7: to falling off a cliff.
Speaker 3: Economic exceptionalism. That's a story, a narrative that I've heard,
Speaker 3: you know, over the last twelve months characterized in the
Speaker 3: US economy visa vis say, you know our friends in
Speaker 3: Europe or in Asia, particularly China. Is that something you
Speaker 3: abscribe to, and if so, what does mean to you?
Speaker 7: Well, I think, first and foremost, we have to put
Speaker 7: the US economy in the context of what we're seeing
Speaker 7: on a global basis, because, as we talk about some
Speaker 7: of these nominal figures beginning to show signs of weakness,
Speaker 7: on a relative basis, the US economy is fary significantly
Speaker 7: better than what we see in many of our developed
Speaker 7: counterparts abroad, which have either fallen into or teetering on
Speaker 7: recessionary conditions. So when we look at the US growth
Speaker 7: rate now follow below two percent, nominally not impressive, but
Speaker 7: compared to what we've seen overseas, the US certainly does
Speaker 7: appear to be the strongest component in that global picture
Speaker 7: post pandemic. In this post pandemic environment, it was.
Speaker 5: At least dirty shirt in a pile laundry, Okay, something
Speaker 5: along those sort of lines. Lindsay when we look forward
Speaker 5: to the election, not necessarily that will impact growth in
Speaker 5: the short term, et cetera. But have you modeled out
Speaker 5: any kind of policies, whether it's tax increases, slash decreases,
Speaker 5: or tariffs, in terms of what the economy might look
Speaker 5: like over the next four years as it relates to inflation.
Speaker 7: Well, I think when we talk about the outcome of
Speaker 7: the November election, we have to remember that in many ways,
Speaker 7: it's going to be a number of sizable barriers regardless
Speaker 7: of who comes into power, whether it's the second round
Speaker 7: Trump administration or a second round Biden administration. We're still
Speaker 7: going to face elevated crisis. We're still going to face
Speaker 7: an ongoing divide between labor demand and labor supply, an
Speaker 7: ongoing gap between asset holders and non asset holders. We're
Speaker 7: going to continue to face demographic issues, geopolitical risks, and
Speaker 7: international crises, and so in many ways, the pressures that
Speaker 7: are going to continue to retard the US economy are
Speaker 7: going to be in place regardless of who's victorious in November.
Speaker 7: The biggest differences, as you mentioned, are going to come
Speaker 7: into play when we talk about immigration, border security, tax policy, specifically,
Speaker 7: corporate tax policy, international trade, and any additional regulations that
Speaker 7: we see put in place. But the US economy is
Speaker 7: on relatively sound solid footing at this point, and I
Speaker 7: do think that we are going to continue to see
Speaker 7: this lack of momentum going into twenty twenty five, regardless
Speaker 7: of who comes into the power in this November.
Speaker 3: All right, Lindsay, thank you so much. We appreciate that.
Speaker 3: As always, Lindsay Pias, she is a cheap economist at stifle,
Speaker 3: joining us from her hometown Chicago, Illinois via zoom.
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Speaker 3: Delta Airlines weaker than expected results here this morning, stock
Speaker 3: trading down about five percent here, dragging down the other
Speaker 3: airline stocks. What's going on at there? I can't remember
Speaker 3: the last time I got on the plane and it
Speaker 3: wasn't packed. George Ferguson, Senior Aerospace, Defense and Airlines AANALS.
Speaker 3: He joins US all of the news. He's a Bloomberg intelligence.
Speaker 3: So George, what do we learn from from Delta what's
Speaker 3: going on out there in the airline business.
Speaker 6: We're learning that fares are softer than I guess we
Speaker 6: all hope or expected. Paul, I think you just fly
Speaker 6: at core times, at really busy times for the airlines
Speaker 6: because somehow they're not getting the same price point data
Speaker 6: the rest of their customers.
Speaker 2: Look.
Speaker 6: Look, I think what we do know is that you
Speaker 6: know that the weakest part of the business right now
Speaker 6: appears to be sort of basic economy or those economy classes,
Speaker 6: and that's weighing it down. So actually, I expect that
Speaker 6: Delta's earnings report will be better than most this quarter.
Speaker 6: So I think it'll get worse and worse as you
Speaker 6: get into the low costs and ultra low cost carriers,
Speaker 6: because again that's I think where the majority of the
Speaker 6: pain is in fairs.
Speaker 5: Yeah, because you know, going through the quarter, like corporate
Speaker 5: travel rose thirteen percent for Delta in the second quarter.
Speaker 5: Revenue from international passengers also increased, and premium products just
Speaker 5: ten percent. So basically, business people are traveling, we're going overseas,
Speaker 5: and we're buying business class or first class. So like,
Speaker 5: is no one going to Idaho in economy?
Speaker 7: Now?
Speaker 6: Well people are going. They're just they're going for lower fares. Right,
Speaker 6: Their load factors were great on Delta, right, they were
Speaker 6: like a eighty seven percent, So they're filling airplanes as
Speaker 6: well as they filled the year prior. I think, you know,
Speaker 6: Delta will get a bit of a tailwind as business
Speaker 6: comes back. That you know, that tailwind applies that Delta,
Speaker 6: United American and the big business airlines, you know, I mean,
Speaker 6: management always paints a really nice picture of how everything
Speaker 6: is going. But every market but Atlantic showed lower yields
Speaker 6: year of a year and yields the price of the
Speaker 6: customer pace per mile they fly. So to me, that's
Speaker 6: synonymous with fares. So what I saw was weaker fares
Speaker 6: that were really bad. Into Latin America down I think
Speaker 6: it was twelve percent or something like that. They're down
Speaker 6: a couple percent for the domestic market. Into Europe it
Speaker 6: was up up one percent. But if you do it
Speaker 6: on a unit revenue basis, I don't want to get
Speaker 6: too complicated about how that works, but let's just say
Speaker 6: that factors in load factors there it was down and
Speaker 6: so what that's telling is that they're having a harder
Speaker 6: time filling airplanes going across to Europe at the price
Speaker 6: point they want to fill. So they notched back a
Speaker 6: little bit how full those airplanes were. So I generally think,
Speaker 6: you know, from a revenue standpoint, not boating well at
Speaker 6: all for the rest of the airlines they're going to report,
Speaker 6: and it was I didn't see any sort of silver lining,
Speaker 6: you know for three Q. I just it looks like
Speaker 6: a weakening market to me.
Speaker 3: So talk to us about capacity out there, George. I
Speaker 3: thought that there's some capacity constraints out there which might
Speaker 3: push fares higher because maybe Boeing wasn't delivering as many
Speaker 3: aircraft that they want, maybe even Airbus as well, so
Speaker 3: the airlines didn't have as many aircraft as they really needed.
Speaker 3: Is that a capacity? What is the capacity of the
Speaker 3: industry these days?
Speaker 6: Yeah, So I think that's a narrative that's definitely been
Speaker 6: going around the street, and I think it's pushed you know,
Speaker 6: some investment in airlines. So we just really we haven't
Speaker 6: seen that, right. I think there's a there's a couple
Speaker 6: of things that are kind of working against that, and
Speaker 6: I think one I think you, US airlines in particular
Speaker 6: have been taking plenty of deliveries they're prioritized by by Boeing. Right,
Speaker 6: Boeing sort of lost business in China. China has been weakening.
Speaker 6: So I don't even know if China needs as many
Speaker 6: airplanes as Boeing used to send to them, but they,
Speaker 6: you know, they went around and got a bunch of
Speaker 6: orders from Southwest United Alaska, and Boeing had been feeding
Speaker 6: them airplanes before we had the you know that some
Speaker 6: of the problems earlier this year with the Alaska you
Speaker 6: know flight so and you know, so that means most
Speaker 6: of the US airlines had the airplanes they expected. We
Speaker 6: saw Delta. They added I think five percent more seats
Speaker 6: and available seat miles they added eight percent. When we
Speaker 6: look at this market, we see in both two Q
Speaker 6: and three Q additions kind of in that five five percent,
Speaker 6: six percent, seven percent range for seats and domestics, seats
Speaker 6: in Latin America, seats going into Europe. And that's well
Speaker 6: above GDP growth rates. And so what I think also
Speaker 6: is going on here is if you were an airline
Speaker 6: and you thought this bounce back travel post pandemic, Hey,
Speaker 6: there's all this pent up demand. They're all going to
Speaker 6: fly this summer and it's going to be growth greater
Speaker 6: than GDP. I think you were wrong, right. We're basically
Speaker 6: saying we think growth in travel is recoupling with GDP
Speaker 6: like it was prior to the pandemic. And you can't
Speaker 6: add five percent seats to this market. The US market
Speaker 6: isn't growing that fast.
Speaker 5: What part of any of this? And you kind of
Speaker 5: sort of answered it. It's just also tough comps because
Speaker 5: we were expecting the scenario that you just lined out.
Speaker 7: Well.
Speaker 6: I mean, another thing we've put together recently. It's on
Speaker 6: the Bloomberg terminal under o A BI space AI r
Speaker 6: l N dashboard and EROG dashboard. We looked at return
Speaker 6: on invested capital. We looked at margins at US and
Speaker 6: global airlines and you know they did you know, they
Speaker 6: did better last year, but if you look at last year,
Speaker 6: those margins weren't pre pandemic margins. I mean, Delta is
Speaker 6: a bit of a standout. Their returns in invested capitol
Speaker 6: are doing better than a lot of their competitors. And
Speaker 6: at Bastian called that out a bunch of times today
Speaker 6: on the call of course, but most airlines in the
Speaker 6: US market are not getting returns in invested capitol or
Speaker 6: margins like they were in you know, prior to the pandemic.
Speaker 6: So it is a tougher compa guess, coming out of
Speaker 6: the pandemic. But this is not the airline industry we
Speaker 6: saw in the past decade. And that's because we got
Speaker 6: record revenues. But those pilots took a big chunk right
Speaker 6: when they got their twenty percent increases, and the airlines
Speaker 6: aren't pricing to get that back.
Speaker 3: All right, George, great stuff has always George Ferguson, senior Aerospace,
Speaker 3: defense and airlines analyts for Bloomberg Intelligence, joining us from
Speaker 3: Prince of New Jersey. Are you flying anytime?
Speaker 5: No, No, A whole lot of nothing. Well we're going
Speaker 5: to Orlando in October.
Speaker 3: Right right, go see Mickey Melson.
Speaker 5: Yeah, but that's a work thing.
Speaker 3: Yeah, travel when I get paid to travel, it's my
Speaker 3: new thing. Or if I'm going to Ireland, which I'm.
Speaker 5: Doing in September, meaning that you go international, do a
Speaker 5: big trip, but like you're not gonna.
Speaker 3: Go yeah, people can come to me.
Speaker 5: It's fair enough. I mean, you know, he's at the
Speaker 5: Jersey Shore, he's got stuff yeah, I don't know. I'm
Speaker 5: not going anywhere, although my best friend is moving to
Speaker 5: Costa Rica. Oh so I feel like it'll be one
Speaker 5: of those things where I'll be like, Hey, I got
Speaker 5: an extra day. I'm gonna get to Costa Rica for
Speaker 5: three days for two hundred bucks on Jet Blue. Yes,
Speaker 5: which feels like it sounds good.
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