Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside
Speaker 1: my co host Matt Miller. Every business day we bring
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
Speaker 1: with essential market moving news. Fund the Bloomberg Markets Podcast
Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
Speaker 1: at Bloomberg dot com slash podcast. So you were making
Speaker 1: a making fun man, First Citizens five ticker. We have
Speaker 1: five letter ticker we have if you're a good company, right,
Speaker 1: if you're like a blue chip, then usually you get
Speaker 1: like one letter like t no. But this is why
Speaker 1: you know this is a good company because Bloomberg Intelligence
Speaker 1: covers the stock. Herman Chen is the analyst here. He
Speaker 1: actually covers the stock good because a lot of questions.
Speaker 1: We got him here. He's in studio. He covers the
Speaker 1: regional banks. Alison Williams joins us on the phone. She
Speaker 1: covers all the big global banks as well. A swaying
Speaker 1: a little bit of a financial roundtable here, Herman, let's
Speaker 1: start with you tell Matt what he needs to know
Speaker 1: about First Citizens and why First Citizen stock is up
Speaker 1: a ga jillion percent here on this news. Sure, so
Speaker 1: First Citizens. It's a regional bank based in Raleigh, North Carolina.
Speaker 1: It has grown tremendously with the deal with C I T,
Speaker 1: which also has offices of New Jersey. So you should
Speaker 1: know c You should know, ye run wasn't it run
Speaker 1: at one point by the former governor of New Jersey
Speaker 1: John Cosign that had Manuchin owned. They own One West,
Speaker 1: which was part of Indiemac, so that that banking operation
Speaker 1: is part of the First Citizens, as well as the
Speaker 1: specially landing operations and the CRI lending that they do
Speaker 1: in the southeast. So it's a over one hundred billion
Speaker 1: dollars bank prior to the SBB deal. It basically doubles
Speaker 1: the size of the of the institution and the deal
Speaker 1: is very lucrative. Hard to say what the tangion book
Speaker 1: value accreciation accretion is, but it's probably around fifty percent.
Speaker 1: So that's why the stock pops into PA. So I
Speaker 1: was thinking about m Global, Yes you were, yeah, but
Speaker 1: C I T was mister Cushner ran that right. In
Speaker 1: any case, this is a bank that I guess has
Speaker 1: made a number of First Citizens, has made a number
Speaker 1: of distressed purchases. Basically still it's only an eight billion
Speaker 1: dollar market cap, Right, how does it work out a deal? Like, Yeah,
Speaker 1: it got a huge pop obviously because it's getting this
Speaker 1: asset at such a big discount. Right. It was It
Speaker 1: has traditionally been a distressed acquirer, and this is part
Speaker 1: of the game plan for for the management team that
Speaker 1: has been at the bank for decades. It's very unique,
Speaker 1: family operated. The grandfather of the CEO was the founder,
Speaker 1: so it's it's a unique operating success story. Yeah, and
Speaker 1: it's very much insider owned. So it's a different type
Speaker 1: of animal that we're used to. Go Alison, I want
Speaker 1: to bring you in here, Alison Williams. She covers the
Speaker 1: big global banks. How come I mean First Citizens Matt
Speaker 1: and I are just learning about First Citizens bank shares.
Speaker 1: This is not JP Morgan Chase. We didn't see much
Speaker 1: interest from the big banks for any of these troubled
Speaker 1: regional banks, did we. Well. I think first of all,
Speaker 1: they're they're limited, Um, you know. JP Morgan by definition
Speaker 1: is limited in terms of what it can acquire. And
Speaker 1: I think that, um, you know, the presumption is that
Speaker 1: the regulators would allow um something if needed. Um. But
Speaker 1: clearly there was interest and clearly this is this is
Speaker 1: a result that I think the government would much rather
Speaker 1: see in terms of um, you know, a smaller bank
Speaker 1: taking on this this deal and creating a competitor at
Speaker 1: the at the at this end of the scale. I mean,
Speaker 1: they were allowed to buy Barrastarns, right, So, but that
Speaker 1: was the U regulation relates to deposits, and so bank
Speaker 1: in the US cannot acquire if they're beyond a ten
Speaker 1: percent market share of deposits, and they kind of grow organically,
Speaker 1: but they can't do acquisitions. And at the time, so
Speaker 1: Washington Mutual was the one that was sort of on
Speaker 1: the edge for them. You know, there was also the
Speaker 1: Wacovia and Wells Fargo deal, but I think that first
Speaker 1: of all, there was the Wammoo had different righte glads,
Speaker 1: so that's like a little bit getting into the weeds
Speaker 1: of things, and the other deal is sort of add
Speaker 1: ten percent. But I think the presumption is, you know,
Speaker 1: if if needed, they would do it. And I think
Speaker 1: you know, also Embarrasserns that was also a government supported deal.
Speaker 1: So I think in times of crisis, obviously the government
Speaker 1: gets involved. We've seen that globally and can sort of
Speaker 1: change the rules. Herman, are we still in is this
Speaker 1: still a time of crisis or you know, was there
Speaker 1: was there a problem structurally or was this just a
Speaker 1: couple of idiosyncratic issues that led to one bank run
Speaker 1: or two bank runs and everything's okay Now. It definitely
Speaker 1: feels like it's lowered to temperature a bit. And we've
Speaker 1: written about how there's only a handful of banks that
Speaker 1: seemed to be stressed, Pacquest, First Republic and the banks
Speaker 1: that have already been folded SVB signature. If you look
Speaker 1: at the discount window usage that the numbers that came
Speaker 1: out last week, and the usage of the new bank
Speaker 1: term liquidity program, things seem pretty stable. So it suggested
Speaker 1: to us that you're not seeing some of the liquidity
Speaker 1: risks that that felled some of these other institutions spread
Speaker 1: to the broader regional bank space. So again you mentioned
Speaker 1: pac West, It's up four and a half percent, First
Speaker 1: Republics up seventeen percent here, So do you expect to
Speaker 1: see some more deals happening to kind of, you know,
Speaker 1: see more combinations occur for some of these other stress banks. Yeah,
Speaker 1: I think that remains to be seen. I think the
Speaker 1: regulators would ideally like a bank like First Republic to
Speaker 1: continue operating as as first Republic without needing any any acquirer.
Speaker 1: That remains to be seen if that can be feasible.
Speaker 1: But but the hope is that the deposits have stabilized
Speaker 1: and eventually, once there's more confidence in the system, they
Speaker 1: can regain some of the deposits that they lost to
Speaker 1: other institutions. Alison, what's the feeling just out there? I mean,
Speaker 1: you talk to these institutional investors for all kinds of
Speaker 1: you know, the financials, the asset managers, the big money
Speaker 1: center banks, regionals, you kind of see it all. What's
Speaker 1: your feeling about kind of just the banking system in general?
Speaker 1: Do we need any more concern Do you think we
Speaker 1: need any more regulatory review here? Where were are we today?
Speaker 1: I mean, I think that the regulatory view and those
Speaker 1: concerns are certainly being raised by politicians, I say, for banks,
Speaker 1: for bank investors, they sort of recognize that there was
Speaker 1: there was some mismanagement at a few institutions that um,
Speaker 1: you know, sort of exacerbated some of the industry wide
Speaker 1: issues in terms of the setup with Kewey and now QTUM.
Speaker 1: But I think broadly in terms of investors, you know,
Speaker 1: now the focus is turning towards the credit aspects, that's
Speaker 1: turning towards recession, and we're starting to hear a lot
Speaker 1: more about the concerns of related to commercial real estate.
Speaker 1: M Herman actually has at out this morning in terms
Speaker 1: of the regional banks on that. I'd love to get
Speaker 1: that Alison and Herman. I keep hearing real estate, real estate,
Speaker 1: real estate, that's the next bogey for banks. Alison. So wait,
Speaker 1: it was hold to maturity portfolios. Yep, And and now
Speaker 1: what a bunch of banks hold big commercial real estate portfolios? Right?
Speaker 1: So yeah, I mean that that shouldn't be h So
Speaker 1: that shouldn't be a surprise. I mean, I think that
Speaker 1: the health to maturity portfolios were a surprise just because
Speaker 1: we haven't seen that being an issue for banks in
Speaker 1: many decades. I think that, you know, commercial real estate
Speaker 1: is something that the you know, everyone's been focused on
Speaker 1: since the beginning of the pandemic, especially office because there
Speaker 1: were so many questions around that. And now you know,
Speaker 1: as we think about getting closer to recession, that is
Speaker 1: gaining focus, you know, not just for the banks, but
Speaker 1: you know broadly from what we're seeing in the CMBs
Speaker 1: market and regional banks do tend to have significant portfolios
Speaker 1: in that area, and they'll turn it over to Herman
Speaker 1: to talk a little bit about some of the work here.
Speaker 1: So I mean Herman. The problem with the Hold to
Speaker 1: Maturity's portfolios wasn't that they had them or that they
Speaker 1: were you know, not marked to market, but that when
Speaker 1: investors want to pull their money out, these banks had
Speaker 1: to sell that stuff in, take huge losses and then
Speaker 1: didn't have enough money. That's that's the that was the worry, right, correct.
Speaker 1: So should we have the same concerns about commercial real estate?
Speaker 1: Have they not marked those portfolios to market? Had they
Speaker 1: not tried to unload them? As you know, everybody, even
Speaker 1: Paul Sweeney, has gotten used to the idea that workers
Speaker 1: are no longer coming to the office. Right, So let's
Speaker 1: take a step back. The original issue with SBB was
Speaker 1: the Health to Maturity portfolio, which was not marked to market.
Speaker 1: The issue with First Republic is they have a big
Speaker 1: chunk of residential mortgage loans that are not marked to market.
Speaker 1: So now the focus has shifted a bit to other
Speaker 1: areas within bank balance sheets that may you know, the
Speaker 1: fair value of that asset may be less than the
Speaker 1: carrying value So that's what we're looking at now in
Speaker 1: terms of focus on commercial real estate, specifically office exposure
Speaker 1: where people are working from home and the cash flows
Speaker 1: are are down from where they were pre pandemic and
Speaker 1: interest rates are rising. So how the bar or refinanced
Speaker 1: that loan? When? When? When that loan comes due? You know,
Speaker 1: this year, next year, in a few years. So it's
Speaker 1: a longer term turn in the maturity profile of these loans,
Speaker 1: but it's something that a lot of folks are looking
Speaker 1: into more. And have you identified a number of banks
Speaker 1: that are going to have the biggest problems? Sure? So,
Speaker 1: I guess if you look at the banks that we
Speaker 1: cover on the regional side, there are a few banks
Speaker 1: that stand out in terms of their commercial real estate exposure.
Speaker 1: Bank oz K is the one that stands out with
Speaker 1: higher CRI concentration. OZK likes ozarks correct, So yeah, nice
Speaker 1: pick up there, man. So it's it's a bank that
Speaker 1: historically has been great in terms of managing their credit quality,
Speaker 1: but they do screen high in terms of office content.
Speaker 1: You know, in my town where I live, they're putting
Speaker 1: up this big mixed use um, you know, office building,
Speaker 1: and I don't know what's going to be in there.
Speaker 1: I don't know where the traffic is going. I don't
Speaker 1: think they thought about that at all, um, But it's
Speaker 1: financed proudly, big sign by local bank. And I remember thinking, boy,
Speaker 1: that's that's the way it works. That's what makes America great.
Speaker 1: You got a local lender financing growth in a local market.
Speaker 1: But now I'm thinking about, oh boy, if they can't
Speaker 1: fill this thing, you know, you know, you think about that,
Speaker 1: and you think about that, you'd drive around any town USA.
Speaker 1: The office buildings, I don't know, are they have full?
Speaker 1: Are they two thirds full? I don't know where I
Speaker 1: would I would say that most of the cre and
Speaker 1: office stress is really in San Francisco and New York. Right,
Speaker 1: So if you're in a suburban market, you're probably going
Speaker 1: to the office more than the folks in Silicon Valley,
Speaker 1: where they're working from home in majority of their time.
Speaker 1: So our view is that the regional banks probably have
Speaker 1: headline risks because of the office exposure, but the actual
Speaker 1: credit losses should be definitely manageable. All right, good stuff.
Speaker 1: Alison Williams, she covers the big global banks. We're gonna
Speaker 1: be talking to her a lot because we have a
Speaker 1: couple of weeks time, we're gonna have the banks, the
Speaker 1: big investment banks and the big money center banks reporting numbers.
Speaker 1: We'll be talking to Alison a lot. She covers the
Speaker 1: big global banks. Herman Chen senior analyst for Bloomberg Intelligence
Speaker 1: covering the regional banks, and he has been the man
Speaker 1: in the hot seat for the last few weeks because
Speaker 1: nobody cares about regional banks until they have to, and
Speaker 1: then it's you know, where's Herman Chan? Get him up here?
Speaker 1: We need to know what's going on. But I'll tell
Speaker 1: you what. At the very beginning of this, Herman taught
Speaker 1: us Tom Matt and I how to look at a
Speaker 1: bank balance sheet and to look at those hell to
Speaker 1: maturity things versus the deposits. And after five minutes we
Speaker 1: figured out that SVB was in trouble. How did the
Speaker 1: regulators miss it? That's that's that's the question that I
Speaker 1: think are not going to be delving into. In fact,
Speaker 1: I think the Senate looks into that starting tomorrow, and
Speaker 1: then Congress looks into it on Wednesday. This is Bloombergen.
Speaker 1: You're listening to the Team Cancer Line program Bloomberg Markets
Speaker 1: weekdays at ten am Eastern on Bloomberg dot Com, the
Speaker 1: I Heard radio app and the Bloomberg Business app. We're
Speaker 1: listening on to mand wherever you get your podcast. All right,
Speaker 1: we were just talking real estate and maybe the risk
Speaker 1: that may you know, point for some of the regional
Speaker 1: lenders out there. Let's just talk about it right from
Speaker 1: the primary perspective. Let'stuck real estate. We can do that
Speaker 1: with Lisa n She does all that stuff. She's a
Speaker 1: real estate lead at Eisener Amper. Joins us here in
Speaker 1: our Bloomberg and Advisory Group. I know it is Is
Speaker 1: it that is courage? Sorry I will say that and
Speaker 1: thank you for having me this. But they got the big,
Speaker 1: the big building on. She was at Burden and she
Speaker 1: was at Eisener Amper. Now she is at Eisener Advisory Group.
Speaker 1: Is that right? Okay, very good, I think. But the
Speaker 1: most important thing is she's here in a Bloomberg Interactor
Speaker 1: Broker studio, so she gets a gold star. She's also
Speaker 1: a lawyer and a CPA. All right, that's enough enough education,
Speaker 1: enough education, Let's get back to it, all right. I
Speaker 1: walk through mid ten Manhattan. I see empty building after
Speaker 1: empty building after empty building. What do you real estate.
Speaker 1: People say about commercial real estate these days, I think
Speaker 1: it's a disaster. Am I overreacting? So we're cautiously optimistic.
Speaker 1: That is the mood, So people are that's my favorite phrase,
Speaker 1: but that is the mood for where we are this
Speaker 1: year and where we are in the cycle. And so
Speaker 1: we know what's going on with the interest rates. Feds
Speaker 1: increase the seven times in twenty twenty two, and they're expected,
Speaker 1: you know, to continue. But are we at the peak?
Speaker 1: And we're hoping that we are at the peak? And
Speaker 1: so the problem with commercial real estate right now is pricing.
Speaker 1: Because there isn't a lot of transaction volume. People don't
Speaker 1: know where the pricing is and so that's really where
Speaker 1: we're hoping that this year we can get a pricing stability.
Speaker 1: Is the lack of transaction volume, like what we hear
Speaker 1: about in residential where sellers don't want to let go
Speaker 1: of their holdings at a low price, so buyers can't
Speaker 1: pick up bargains or has everyone who wants to sell
Speaker 1: already let go of what they've got now. I think
Speaker 1: it's a combination. And when you look at interest rates,
Speaker 1: that's going to change your cash flow and what your
Speaker 1: yield is in your return right, So whether it's personal
Speaker 1: real estate, investing your own home or commercial real estate,
Speaker 1: that interest rate is going to change your bottom line
Speaker 1: and cash flow. And so when interest rates go up
Speaker 1: and valuations go up, your returns go down essentially. And
Speaker 1: so that's really where that combination is, and it's making
Speaker 1: more difficult for people to find out where that happy
Speaker 1: median is. I was just wondering if there are any
Speaker 1: distressed bargains out there. You know, if there's some commercial
Speaker 1: real estate holder that has buildings on Third Avenue and
Speaker 1: they've decided, okay, we can't do anything with this. No
Speaker 1: one wants to have an office on Third Avenue because
Speaker 1: it's kind of gross, and nobody wants to live there
Speaker 1: because they can't, you know, they can't renovate the commercial
Speaker 1: space into a residential space, so they get rid of
Speaker 1: it for fire sale prices or are you seeing any
Speaker 1: of that? So there's two key points in what you said.
Speaker 1: There is just stress opportunity, and where that's coming in
Speaker 1: is on the lending side. So if you're a little
Speaker 1: bit of a riskier investor or you want to get
Speaker 1: in on a preferred or mezzotine lending that's where your
Speaker 1: opportunities are going to come in because people have to
Speaker 1: come in to make those As we've said before, those
Speaker 1: cash flows work, and so you're going to get a
Speaker 1: higher yield and a higher return if you're willing to
Speaker 1: be a riskier investor, right, And so that's going to
Speaker 1: be very helpful for that. Paul, you were just talking
Speaker 1: about you want to take some risk risks. I just
Speaker 1: went along some New Jersey, Jersey shore real estate, but
Speaker 1: I got a mortgage that is brutal um. Can I
Speaker 1: refinance my mortgage in like twelve to eighteen months and
Speaker 1: maybe get a four handle on it? What do I
Speaker 1: wish I could be able to different business? Different business?
Speaker 1: Maybe real estate? Is it just New York and San
Speaker 1: Francisco where it's really challenged in other parts of the
Speaker 1: country are better or we just kind of warped kind
Speaker 1: of given where what market we live in. So when
Speaker 1: you look at the gateway, everyone always focuses on these
Speaker 1: gateway cities. But when you look at the US and
Speaker 1: you look at global real estate, a report came out
Speaker 1: where Florida the transaction value is high right now, and
Speaker 1: people are looking still at those Sunshine States or the
Speaker 1: smile states where you want to do it an opportunity,
Speaker 1: but you also I hate to throw this in there,
Speaker 1: but when you look at climate change, there could be
Speaker 1: a demigration, migration back up north depending on what's going
Speaker 1: on in climate and insurance costs and overhead down in
Speaker 1: some of these more states that are more affected by climate. Right,
Speaker 1: and so when you're looking at it, it's hard to
Speaker 1: sort of say, right now is where we are with
Speaker 1: New York and San Francisco. People want to still live,
Speaker 1: work and play here. It's still New York. I'm with you,
Speaker 1: so we're still optimistic. Shaking his head. No, it's shaking
Speaker 1: his head. No, that's good thing. It's well, I just
Speaker 1: don't know. I just don't know. The commercial I honestly,
Speaker 1: honestly don't know what's going to happen with these commercial
Speaker 1: real estate, office real estate in New York City. I
Speaker 1: really don't know. If I'm Billy Ruden, what am I
Speaker 1: doing with my port? Not just office real estate? Dude?
Speaker 1: Look downstairs, right, we used to have like an H
Speaker 1: and M container store. There was a Victoria's Secret across
Speaker 1: the street, like a Jay Crew or Banana Republic or
Speaker 1: something like that. Though those are all gone. The only
Speaker 1: thing we have is like some high end chocolate tier,
Speaker 1: which I'm sure is a front for something else. No,
Speaker 1: it was awesome. It was packed, even though in a
Speaker 1: pandemic they had people in there. But again, what's the
Speaker 1: what is the smart money saying about New York office
Speaker 1: real estate and San Francisco for that matter. Right, So
Speaker 1: when you're looking at the smart money that those A buildings, right,
Speaker 1: the ones that are beautiful fifteen percent, that makes up
Speaker 1: fifteen percent of the real estate they're they're occupied, Yes,
Speaker 1: that fifteen percent. So the yards is Hudson Yards occupied.
Speaker 1: I wouldn't go into on their vacancy, and I wouldn't
Speaker 1: dare to do that on the radio. But any class
Speaker 1: A building that's going to have the prime amenities is
Speaker 1: going to have an easier time of being able to
Speaker 1: lease it up. That middle sector, which is sixty percent
Speaker 1: of real estate for office and for retail, that's going
Speaker 1: to need some capital. Those those buildings are going to
Speaker 1: need to have either the rescue capital coming in there
Speaker 1: or somebody really doing an infusion. It's the bottom twenty
Speaker 1: five percent that's really what you need to worry about.
Speaker 1: And this is USY not just New York, not just
Speaker 1: San Francisco. So it's that twenty five percent of the
Speaker 1: bottom of the that's going to have to be reconfigured
Speaker 1: and how do you put that in and what do
Speaker 1: you do with that? And that's the real challenge. So
Speaker 1: the top seventy five percent is going to be able
Speaker 1: to be usable, but you think that's sixty percent in
Speaker 1: the middle. I wouldn't put money into that thing. I
Speaker 1: wouldn't put it like a gym or a coffee machine,
Speaker 1: thinking that's going to workers back. But dude, your risk
Speaker 1: tolerance doesn't go on Muni's that's true. That's true. So
Speaker 1: that's where your opportunity is. And when I said to
Speaker 1: you before, a real opportunistic investor or somebody who's willing
Speaker 1: to you're gonna get a higher yield. By the way,
Speaker 1: if you're willing to put that money up, that's the
Speaker 1: higher yield. And that's where the you can make a
Speaker 1: lot of money in that exact space. What are you
Speaker 1: hearing about people actually going back to the office. I mean,
Speaker 1: for a while it was forget about it. The kids
Speaker 1: were telling potential employers, no way, Jose. But as we
Speaker 1: get closer to a recession, I would imagine that resolve
Speaker 1: breaks a little bit, right. I mean, if you need
Speaker 1: to find a job, you're probably going to be willing
Speaker 1: to go in like at least three days a week.
Speaker 1: I think it's the same thing everyone's been saying. It's
Speaker 1: that teamwork, camaraderie, and when people are in offices and
Speaker 1: they're able to be around each other, you're gonna be
Speaker 1: able to create a career for yourself versus sitting at
Speaker 1: home in front of your computer or watching TV. This
Speaker 1: is really where you're going to create your life. And
Speaker 1: I think you mentioned you just mentioned it that when
Speaker 1: we head into a little bit more challenging time, the
Speaker 1: job market's going to change. And so what really makes
Speaker 1: a difference is how you've created a work life balance
Speaker 1: for yourself and how you're going to start working with
Speaker 1: your employers. Also, what we're demanding as employers. You know,
Speaker 1: we're allowing for that work life balance in that three
Speaker 1: days a week, and so you know at some point,
Speaker 1: where where's that going to break and where are we
Speaker 1: going to say, come back to work. It's much more fun.
Speaker 1: We miss you. So at Eisner Advisory Group, I'm guessing
Speaker 1: you guys like transactions. You like the fees associate or transactions.
Speaker 1: What's your outlook for the next twelve months. I mean
Speaker 1: we're going to get some more transactions or is these
Speaker 1: higher interest rates just kind of keeping everybody on the sideline.
Speaker 1: So when you think of transactions, you can also look
Speaker 1: at there's going to be a lot of refinancings that
Speaker 1: have to come up. Where we are in the cycle,
Speaker 1: some of the data is due and so we're going
Speaker 1: to have to go in there and talk to lenders
Speaker 1: make sure we do some workouts. That's where mes lending
Speaker 1: comes in. A preferred equity position can come in. So
Speaker 1: any of the times that you're at some point in
Speaker 1: the cycle, you're going to have to do some conversation
Speaker 1: in speaking to the banks and figuring out where you
Speaker 1: are and making sure that the cash flow is still
Speaker 1: the right yield for your investors. So in times of
Speaker 1: good and bad in real estate, transaction markets can still
Speaker 1: be very We're still excited to see what could happen
Speaker 1: because as we say that, you know, real estate is
Speaker 1: still a nice investment for a part of a portfolio.
Speaker 1: Any tax changes coming into view, or is there any
Speaker 1: possibility of that, I'm not asking about all things I'm
Speaker 1: asking about salt because all I care about a salt, right,
Speaker 1: But I know that you're kind the commercial side that
Speaker 1: doesn't matter. However, I would imagine that legislatures, you know,
Speaker 1: local and state, are looking at making changes that they
Speaker 1: can to attract investors. So there's two different things. I
Speaker 1: think people saw Biden put some real estate proposals that
Speaker 1: he had that we're in the last bill that didn't
Speaker 1: go through. He brought them back in things with ten
Speaker 1: thirty one exchanges that we're a little nervous about. Aggressive. Yes,
Speaker 1: and we do care about salt because we do care
Speaker 1: about those state taxes and wanting to make sure which
Speaker 1: are supposed to sunset out. So there's a lot of
Speaker 1: things that we're keeping our eye on, but not to
Speaker 1: it's depending on where we are in the political cycle.
Speaker 1: So what's going to go through not going political here
Speaker 1: by sunset Paul in twenty five, I know, so the
Speaker 1: big sun shotting provision. We need to all right, be
Speaker 1: mindful of good stuff. Lisa Knee, thank you so much
Speaker 1: for joining us. Thank you for coming into our Bloomberg
Speaker 1: in Actor Broker Studio. Really good stuff. We'll have you back. Lisa,
Speaker 1: Ni's a partner, National tax leader for real Estate practice
Speaker 1: at Eisner Advisory Group. Thank you very much. We got
Speaker 1: that so good stuff on the commercial real estate side.
Speaker 1: Need some deals to happen here, get some big prints
Speaker 1: on the tape. You're listening to the tape cancer our
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Speaker 1: right here. We got Matt and Eye and then we're
Speaker 1: joined by Anne Hunter. Van Kirk, bi senior industry analyst,
Speaker 1: was a bio Pharmaceuticals and Diana were set open bi
Speaker 1: industry analysts covering the consumer staples. Why are they in here?
Speaker 1: Why are they talking to us? Because apparently during the
Speaker 1: pandemic amount a lot of people got a lot of pets,
Speaker 1: and apparently that's like a big business. How big is
Speaker 1: it will? These two analysts project that it will be
Speaker 1: a five hundred billion dollar business by twenty thirty. I
Speaker 1: just don't get it. I'll tell you. I'll tell you
Speaker 1: a quick anecdote. Right, My wife, as you know, is
Speaker 1: from Spain. They were not allowed out, they were not
Speaker 1: allowed out of their homes unless they had to walk
Speaker 1: a dog. Really, so a lot of people who didn't
Speaker 1: have dogs would start renting dogs from their neighbors. That's
Speaker 1: not a joke. They were renting dogs so that they
Speaker 1: could go out on a walk with their dogs. And
Speaker 1: I'm sure they were exhausted. The dogs were dogs. They
Speaker 1: were hiding the hiding the leash. All right, Diana, let's
Speaker 1: start with you on the consumer side here, five hundred
Speaker 1: billion dollars. That's a lot of cash. That gets my
Speaker 1: attention at least. What's driving that. It's basically the humanization
Speaker 1: of pets, um boy, Yes, we are starting to treat
Speaker 1: our pets the same as we would treat children, you know,
Speaker 1: part of our family. And also on the food side,
Speaker 1: there is the you know, you have to put more
Speaker 1: attention to the ingredients that going food, and that allows
Speaker 1: the premunization of food that includes um, you know, the
Speaker 1: premunization of pet food as well. I mean for a
Speaker 1: long time, so I've had three dogs. The first couple
Speaker 1: I just fed normal food. But for Steve he got
Speaker 1: organically grown goat meat or I would even get you know,
Speaker 1: organic cage free chicken and make it for him. No, no, no,
Speaker 1: no, no no, you have to if you care about the
Speaker 1: pet like you do about a family member, which is
Speaker 1: I think it's your point, then you want that pet
Speaker 1: as healthy as possible. Well, the big I think, the
Speaker 1: big ticket item, so I hear from a lot of
Speaker 1: people is healthcare. So Anne Hunter van Kurt jump in here,
Speaker 1: talk to us about like what are people spending healthcare
Speaker 1: wise for their pets? Absolutely, Paul, and actually to pull
Speaker 1: it back, it's actually from that increased spending on goat
Speaker 1: goat products for your pets that's driving the higher healthcare
Speaker 1: needs because pets are living longer. But the we are
Speaker 1: now seeing monoclonal antibodies for pain, for dermatitis. People are
Speaker 1: making healthcare decisions as they would for a human because
Speaker 1: they are humanizing their pets. So rather than perhaps putting
Speaker 1: a pet down, you're you're going to get that cancer
Speaker 1: therapy for them now. So orget like Steve, I had
Speaker 1: his knees done twice, right, And I know somebody else.
Speaker 1: His dog had a knee problem and he just put
Speaker 1: the dog to sleep because he was like, I'm not
Speaker 1: going to spend five grand was seeing his knees done.
Speaker 1: But that's what I had to do at at at
Speaker 1: at a vet in Tuckahoe. They were very good. They
Speaker 1: redid the whole thing with like pig ligaments, and more
Speaker 1: people are making that. Yeah. But is there insurance? I mean,
Speaker 1: there is absolutely insurance. The insurance market is a small
Speaker 1: penetration right now, we think only about two percent, but
Speaker 1: it is definitely growing. You have it from a lot
Speaker 1: of the traditional insurers out there, you know, your your
Speaker 1: state farm or whatever else. But you are also seeing
Speaker 1: it from a lot of the pharmaceutical companies are getting
Speaker 1: involved in it. So let us now has pumpkin insurance.
Speaker 1: It's not something that we think will go to the
Speaker 1: government level. It's like a pumpkin insurance Pumpkin is there
Speaker 1: is there insurance brand? Oh? I see, So not insuring
Speaker 1: a squad, not insuring a squash, now insuring a dog
Speaker 1: or a cat called pumpkin. So Diana talking about like
Speaker 1: companies like Chewy, Like in my building, we have a
Speaker 1: very maladjusted, very angry pitbull by the name of Harry,
Speaker 1: and he and I don't we're not on the same
Speaker 1: page or I need to work on that a little bit.
Speaker 1: But he gets his Chewy delivery like every couple of weeks.
Speaker 1: I mean talk to us about like just the food
Speaker 1: the toy. Does Chewy dominate? I mean, is Chewy? That
Speaker 1: is there any number two after Chewi? Well, actually, Chewie
Speaker 1: has thirty six percent of the pet e commerce market
Speaker 1: in the United States. The second one is Amazon, which
Speaker 1: thirty four percent, and then you have your retail store
Speaker 1: such as Petco, pet Smart, Walmart that each have less
Speaker 1: than ten percent. All right, well they're doing that poorly. Yes,
Speaker 1: that's pretty amazing that they're doing so badly. Well, I mean,
Speaker 1: look at Chewie. I mean it's a fourteen point five
Speaker 1: billion dollar market out of nothing, right, I mean this
Speaker 1: has started I think long after petc and it's just
Speaker 1: completely dominated this market. It seems to me that there
Speaker 1: would be room for someone else to come in because Amazon.
Speaker 1: I get people everyone orders everything from Amazon, but when
Speaker 1: you really care about your pet, you want to order
Speaker 1: something from a brand that's specifically four And also another
Speaker 1: thing that Chewie has is pretty much. It gives you
Speaker 1: this specialty or experience at the comfort of your home.
Speaker 1: We estimate that pet Ecommers has about twenty two the
Speaker 1: pet industry market in the United States, and they will double.
Speaker 1: The industry will double to fifty eight billion, or thirty
Speaker 1: percent of the market by twenty thirty. So there's a
Speaker 1: lot of growth in that part of the market, and
Speaker 1: Chewi has a big percentage of that. What about medical care?
Speaker 1: I noticed when I moved back to New York from
Speaker 1: Berlin that there are a lot of highly priced, but
Speaker 1: well staffed and fast service vets all over the place.
Speaker 1: I think Bond Street is one of the veterinarian chains
Speaker 1: that we have around here. But every couple of blocks
Speaker 1: on the Upper east Side you see these vets springing up.
Speaker 1: How is that? How is that working? How is that structured?
Speaker 1: The vet channel is huge, and it's actually right now
Speaker 1: facing pressures for staffing just because they can't get enough
Speaker 1: people in to keep up with the demand to meet
Speaker 1: with the pets. We cover IDx, which is a diagnostic company,
Speaker 1: and we're seeing increasing rates of diagnostic usage for pets,
Speaker 1: So that's doing fecal tests, urine tests, blood tests, and
Speaker 1: again older pets need need more tests, and they need
Speaker 1: more follow up from those tests. Um, and that's really
Speaker 1: driving a lot of the of the healthcare usage. What's
Speaker 1: the average age of it? I know a dog depends
Speaker 1: on depends on the breed, right because yeah, I mean
Speaker 1: if you smaller dogs live longer. Yeah, exactly. So if
Speaker 1: you have a little mutt, it could live to twenty
Speaker 1: years old. If you have a big cane corso that's
Speaker 1: a pure bread you know, from a line of probably inbread,
Speaker 1: pure bread cane corsos, he's going to live to eight
Speaker 1: or nine. What was Steve? Steve was a rottweiler. Uh,
Speaker 1: he comes from a line of champions and uh, yeah,
Speaker 1: he lived till he was eleven. Unfortunately not longer, right,
Speaker 1: but those lifespans are increasing as an average, and it's
Speaker 1: still like a dog years like seven years to a human.
Speaker 1: I think that's that's still still commonly held, right, Yeah,
Speaker 1: I believe so do Diana real quick. Just on the
Speaker 1: consumer side, what's the what's the growth story there, Like,
Speaker 1: what's the big growth area within like for pets, Well,
Speaker 1: definitely we estimate that pood that food will remain the
Speaker 1: biggest expenditure for pet owners um in terms of what
Speaker 1: is driving that, Like I just said, the humanization of
Speaker 1: pets is driving the premiumization of food. You want, like Steve,
Speaker 1: you want to give Steve or like the Steeves of
Speaker 1: the world, you want to give them the best of
Speaker 1: what you can afford. Um On a subsegment of that
Speaker 1: you have we have fresh frozen, which is pretty much
Speaker 1: you know, a cooked meal that is distributed frozen. So
Speaker 1: we estimate that the growth of that market will be exponential.
Speaker 1: And actually fresh pet has ninety percent of that right,
Speaker 1: gazing stuff. And you guys have a great report out
Speaker 1: on this whole industry. Uh go check it out a
Speaker 1: bi go on the Bloomberg terminal. Diana or set up
Speaker 1: equity research channels and Anne Hunter van Kirk also senior
Speaker 1: annols there at Bloomberg Intelligence talking about the pet food biz.
Speaker 1: You're listening to the Team Cancer Line program Bloomberg Markets
Speaker 1: weekdays at ten am Eastern on Bloomberg dot com, the
Speaker 1: r Heard Radio app and the Bloomberg Business App. We're
Speaker 1: listening on demand wherever you get your podcast. Let's start
Speaker 1: bonds here. We want to talk fix it income. We
Speaker 1: talk to R. J. Gallows, Senior portfolio manager with Federator
Speaker 1: Hermes m r J. Give us a kind of the
Speaker 1: lay of the land here we are coming to the
Speaker 1: end of the first quarter in twenty twenty three. Give
Speaker 1: us a lay of the land. What we've seen in
Speaker 1: the bond market this year versus twenty twenty two, which
Speaker 1: is just there was just no place to hide. Last year,
Speaker 1: well there was there was no place to hide. You know.
Speaker 1: The bond market instead of being a flatliner, was a
Speaker 1: downward sloping line and a very sharp one last year.
Speaker 1: That was a reference to the movie you guys were mentioned.
Speaker 1: I didn't miss it. I did not miss that. But
Speaker 1: the spirit in the bond market it's pretty much the
Speaker 1: opposite of what we saw last year. So, you know,
Speaker 1: the Treasury index was down. I think it was twelve
Speaker 1: and a half percent if I recall last year. The
Speaker 1: US Treasury index right now as of Friday's closes up
Speaker 1: three point five seven percent. Much of the rally has
Speaker 1: been just in the month of March. It's been in
Speaker 1: a very turbulent March month. You mentioned the move index
Speaker 1: has massively surged. You know, the confluence of prior bond
Speaker 1: losses and deposit instability in the sort of second tier
Speaker 1: size of banks was not something that was I think,
Speaker 1: on the market's radar until SDB came along pretty much
Speaker 1: on March ninth. You know, on the month two, five
Speaker 1: and ten year treasury yields are lowered by eighty seven,
Speaker 1: sixty two and forty three basis points. Now interesting, the
Speaker 1: long end is thirty years only down eighteen And the
Speaker 1: reason for that greater voltility the short end of the
Speaker 1: curve is because the nexus of banking stress and FED
Speaker 1: policy has been fundamental. As the banking stresses have emerged,
Speaker 1: the expectations of FED tightening have completely reversed, and the
Speaker 1: FED has sort of blessed that in their own words.
Speaker 1: So it's been a very eventful month in bonds, which
Speaker 1: we said to start the year. Our back are posting
Speaker 1: nice mid single digits total returns in a more uncertain
Speaker 1: world as inflation still high. But the banks are rickety.
Speaker 1: So r J, what has the FED base? I was,
Speaker 1: I was down in Mexico on the beach last week,
Speaker 1: paying zero attention. I saw something from Bullard and then
Speaker 1: I saw cash Car yesterday on TV. But what have
Speaker 1: they kind of implicitly told us about the path this
Speaker 1: year that that they're done, or that you know they're
Speaker 1: almost done. They're certainly not going to cut right. I
Speaker 1: think to the first question, I think they've told us
Speaker 1: that when banking stresses emerge, I think the phrase the
Speaker 1: Sharon pale U's the literature, namely the economics research literature,
Speaker 1: is abundantly clear that when when the bank channel of
Speaker 1: monetary transmission starts to feel pain, then that transmission becomes
Speaker 1: more intense. Credit creations should slow. Banks will probably pull
Speaker 1: back on making loans. The cost of deposits is going
Speaker 1: to go up, bank profits go down, which is why,
Speaker 1: in part why some of these banking stocks have struggled.
Speaker 1: So when banks are feeling the strain of monetary policy,
Speaker 1: the bank transmission channel starts to bite, and that will
Speaker 1: intensify the real economic effects and the anti inflationary effects
Speaker 1: of the monetary policy moves that are already in place.
Speaker 1: We've been waiting for a long time for the lags
Speaker 1: to sort of you know, you know, be worked through.
Speaker 1: Well they got worked through rather rapidly with this banking stress.
Speaker 1: So I think what the FED says, uncertainties high chair
Speaker 1: power comment that the banking stress is like one tightening,
Speaker 1: maybe more you know, alluding to that literature. I was
Speaker 1: just mentioning, and I think that the Feds signaled that
Speaker 1: they're close to The dot plot is not a promise,
Speaker 1: but it is a projection. It's the summary of economic projections,
Speaker 1: and those projections move because they're inherently uncertain. But they
Speaker 1: projected that they will that they will still be easing
Speaker 1: in twenty twenty four. I don't think they'll be easing
Speaker 1: this year. They projected that the FED funds rate on
Speaker 1: a median dot will be five and eighth, you know,
Speaker 1: which is basically maybe one more tightening. But if you
Speaker 1: go out a year from now, the median dot is
Speaker 1: now four and a quarter. It was four and eighth
Speaker 1: at the last meeting. So they they I think, had
Speaker 1: the banking stresses not shown up on our doorstep, might
Speaker 1: have flattened mount the dots trajectory, raising them all closer
Speaker 1: to five for this year and next. Instead, the twenty
Speaker 1: twenty four dot is still in the low four range,
Speaker 1: and even easier in twenty twenty five. I think the
Speaker 1: Fed feels like we're getting closer to a recessionary like outcome.
Speaker 1: They're getting closer to being done. That's friendly for high
Speaker 1: quality bond returns. So done is almost stubbish in itself.
Speaker 1: But it's a cut seems like something that they would
Speaker 1: only do if we saw real stresses. What would happen,
Speaker 1: What would have to happen for them to cut? Um?
Speaker 1: I think? So how also is clear that he doesn't
Speaker 1: see a cut this year, that's not in the cards,
Speaker 1: but uncertainties high, So we'll see how things unfold. Um.
Speaker 1: I think that the FED has gone and the ECP
Speaker 1: has under same. They've tried to separate their UH, their
Speaker 1: financial stability, their macropudential controls and and and tools from
Speaker 1: monetary policy. But there's I think there was a great
Speaker 1: article on Bloomberg about how that's it's hard to do
Speaker 1: that forever. When the financial crisis hit, Ben Bernanke was
Speaker 1: was making loans. That's you know, financial stability, using the
Speaker 1: balance sheet in that way, and then cutting rates and
Speaker 1: ultimately doing QWE and that's monetary policy. So these two
Speaker 1: tools do compliment each other at times. The Fed right
Speaker 1: now is trying to separate them. Why because we still
Speaker 1: have a high inflation problem. If inflation was low, I
Speaker 1: don't they'd be sweating this out very much. Maybe they
Speaker 1: would have eased a little bit, but inflation is still
Speaker 1: way too high. They are making loans, but they aren't
Speaker 1: making loans. The balance sheet has grown rapidly because the
Speaker 1: banks are availing themselves of these support mechanisms that the
Speaker 1: FED has has expanded and motivated people to do because
Speaker 1: they need to help. But I do think that the
Speaker 1: FED still faces an inflation problem. That's why they're sort
Speaker 1: of between a rock and a hard place. And at
Speaker 1: the last week's meeting they were They did the rational things.
Speaker 1: Twenty five basis points is a nod to the inflation
Speaker 1: that is still too high, but all the language that
Speaker 1: it came with, and the dot plot that's still downward
Speaker 1: sloping sort of softens the blow that the FED is
Speaker 1: telling the markets. The FED is not toned death. They
Speaker 1: get it. There are banking stresses in the system, and
Speaker 1: you know they're going to come under some scrutiny as
Speaker 1: to how these banking stresses emerged. The FED doesn't manage
Speaker 1: the banks. They supervise them. There's a difference. So the
Speaker 1: managers should be the ones in trouble for the bank's problems,
Speaker 1: but the supervisors also get called to task about what
Speaker 1: did you see how come you weren't contemplating this your
Speaker 1: stress test, for example. So the Fed's going to get
Speaker 1: some heat from this too. So they're interested in trying
Speaker 1: to balance these objectives of ease the bank stress but
Speaker 1: still allow inflation to hopefully renew its downward path. That's
Speaker 1: the uncertainty event the markets all phase now, J just
Speaker 1: thirty seconds quick, what is your recession call? So from
Speaker 1: a firm wide basis, sederated Hermy's, we've been arguing that
Speaker 1: the recession risk was getting higher and higher as the
Speaker 1: FED got tighter and tighter. Pretty much. If you are
Speaker 1: our macro committee, of which I remember, we have a
Speaker 1: recession emerging in the second half of the year. Our
Speaker 1: view is it will be a somewhat mild recession. It's not,
Speaker 1: you know, not every recession has to be two thousand
Speaker 1: and eight or the onset of COVID. This might might
Speaker 1: be a recession that looks a lot more like the
Speaker 1: early two thousands, for example, And so you have a
Speaker 1: modest diminished, diminished economic activity and it helps to the
Speaker 1: disinflation that the FED needs to take hold. All right,
Speaker 1: great stuff, Thank you very much. R. J. Gallo, Senior
Speaker 1: portfolio manager at Federated Hermes giving us his call on
Speaker 1: all things fixed income. We'll have more coming up. This
Speaker 1: is Bloomberg. You're listening to the tape cancerre Live program
Speaker 1: Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio,
Speaker 1: the tune in app, Bloomberg dot Com, and the Bloomberg
Speaker 1: Business App. You can also listen live on Amazon Alexa
Speaker 1: from our flagship New York station. Just say Alexa play
Speaker 1: Bloomberg eleven thirty. I mean telling Matt, I'm ready to
Speaker 1: take some risk there in my investment portfolio. But everybody's saying,
Speaker 1: you know, the fund manager strategists gotta stay defensive. What's
Speaker 1: the fun in that? Though? Boring? Boring? I agree, but
Speaker 1: let's see what why why do you want to take risk? Now?
Speaker 1: Just a lot of house At the stage of my life,
Speaker 1: I'm ready to let a couple of show live once. Yeah,
Speaker 1: you know, go on the table here. Uh. Katteriita Simon Eddie.
Speaker 1: She's a professional, she does this for a living. She's
Speaker 1: a senior vice president Private Wealth Management of work and Stanley. So, Katerina,
Speaker 1: I'm your client. I call you up, I say, hey,
Speaker 1: I want to go out on the risk profile. Here.
Speaker 1: What would you tell me, Paul, I'll tell you there's
Speaker 1: absolutely nothing wrong with boring, and sometimes sometimes it's good
Speaker 1: to be strategic. Let's replace the work worring web strategic.
Speaker 1: And this is where you know, we kind of just
Speaker 1: you know, see where the market is at and the
Speaker 1: staid and inflation story is still unraveling. We're not quite
Speaker 1: done with that yet. But now this whole regional bank
Speaker 1: situation added another data point, and you know, we're now
Speaker 1: looking at the credit availability and how that is going
Speaker 1: to affect the market. And so while we're waiting for
Speaker 1: the market to normalize, we have to see what's ahead
Speaker 1: of us. And the part that is troubling us the
Speaker 1: most is the fact that earnings still remain below the
Speaker 1: current market values and we're still seeing the earnings revisions,
Speaker 1: you know, which might negatively affect the market. You know,
Speaker 1: as we go on throughout this year, and we are
Speaker 1: our longer term outlook is positive, but we believe that
Speaker 1: we still remain in the bear market. And usually if
Speaker 1: we look back at history with bear markets before the end,
Speaker 1: things sometimes get worse before they get better. As the
Speaker 1: market goes to this normalization process, which absolutely presents buying opportunities,
Speaker 1: but we might want to stay defensive and not quite
Speaker 1: you know, go in, go in on the risk. I'll
Speaker 1: tell you what if a drop in earnings and a
Speaker 1: hawk ish FED is all we have to deal with,
Speaker 1: that makes me feel a lot better. Are we passed?
Speaker 1: Are we are we passed? The bank turmoil? Are we passed?
Speaker 1: Concerns of a systemic failure? Well, in our review, systemic
Speaker 1: failure was not really in the in the mix, but
Speaker 1: we think that, you know, this is definitely a very
Speaker 1: serious situation. But you know, in our review it wasn't
Speaker 1: affecting our entire banking system. With that, there are definitely concerns,
Speaker 1: and this is another thame for FED to focus on,
Speaker 1: you know, while they're really trying to get this this
Speaker 1: inflation numbered down to two percent, you know. But the
Speaker 1: exciting part of this market is that this remains to
Speaker 1: be a stock pickers market. And while we're seeing if
Speaker 1: we're going to get recession and dealing with that slowing
Speaker 1: earnings growth, the question is which sectors are going to
Speaker 1: hold up. And this is where, of course, some people
Speaker 1: are looking already at cyclicals and our review this just
Speaker 1: just a little bit too premature. And we're looking at
Speaker 1: consumer staples, at utilities, and specifically for companies with strong
Speaker 1: earnings growth, with strong balance sheets, with competitive positioning at
Speaker 1: every sector of the market. You know, there are a
Speaker 1: lot of buys out there. We're just not too enthusiastic
Speaker 1: about the index investing at the moment. So what's it
Speaker 1: We've heard a lot about, you know, this being the
Speaker 1: decade of the dividend, you really want to start paying
Speaker 1: attention to good quality dividend paying stocks as opposed to maybe,
Speaker 1: you know, just great growth or how do you think
Speaker 1: about that? Well, dividend always plays the role in the
Speaker 1: overlast allocation. And you know, I generally tell our clients is,
Speaker 1: let's say you wake up on January first, and you
Speaker 1: absolutely have no idea what the market is going to do.
Speaker 1: But if you look at the estimated dividend payments of
Speaker 1: your high dividend stocks, that's your starting point. At that moment.
Speaker 1: You know that at the very least your portfolio is
Speaker 1: going to earn something. So this takes an element of
Speaker 1: risk out of it. And of course for the clients
Speaker 1: that are using their investment portfolios for income, that's a
Speaker 1: really important fact as well. So when we look at
Speaker 1: dividend paying stocks. We look at the sectors that are defensive.
Speaker 1: You know, we are not positioning them as the sectors
Speaker 1: that we want to own right now. We view this
Speaker 1: weakness in the market and we view the volatility as
Speaker 1: the opportunity to rebalance, as the opportunity to improve the
Speaker 1: quality of the holdings, but also to increase the dividend
Speaker 1: yield because it's a very important overall component over the
Speaker 1: long term positive investment results. So do you use the
Speaker 1: term sell the rip? I mean, are you selling on rallies?
Speaker 1: We use a different term. The terms that we use
Speaker 1: is profit taking, because when you have an investment that
Speaker 1: did very well, there's absolutely nothing wrong with taking some
Speaker 1: profits to off the table. But this is not to
Speaker 1: be confused with market timing, where we're absolutely abandoning the sector.
Speaker 1: We might like. Certain market sectors like consumer staples right now,
Speaker 1: of financials present a lot of interesting buying opportunities right now,
Speaker 1: So we would be strategic and pivot from one sector
Speaker 1: to another, but more so as an overweight and underweight
Speaker 1: element versus abandoning a sector like you know, there's a
Speaker 1: lot of conversation right now of technology, and we think
Speaker 1: while we have to be extremely selective in our security selection.
Speaker 1: Technology still presents a lot of interesting buying opportunities. Katarina's
Speaker 1: what's the view of kind of you know, the Morgan
Speaker 1: Stanley Private Wealth Management about crypto because I'm guessing you
Speaker 1: get some inbound calls from clients saying, Hey, do I
Speaker 1: need to have exposure here? Um? If so, how do
Speaker 1: I do it? What's what's kind of the Morgan Stanley call. Well,
Speaker 1: it's very hard to comment on something like this because
Speaker 1: we still don't know what we don't know, but we
Speaker 1: absolutely are aware that the volatility exposure in that space
Speaker 1: is significantly higher than the broad equity markets, and so
Speaker 1: we we tell our clients to proceed cautiously. And while
Speaker 1: we can our advice that we can operate, they're limited
Speaker 1: in this space. We just tell them to, you know,
Speaker 1: just just just manage the risk there and not to
Speaker 1: be exposed more than they're willing to to risk, because
Speaker 1: the risk factor is significantly higher than anywhere else in
Speaker 1: the market. Understood in terms of what you're watching for, um,
Speaker 1: you know, for the end of this rate hike cycle
Speaker 1: and for uh, you know, the end of the earnings downturn.
Speaker 1: What are the signs. I know people don't want to
Speaker 1: go and catch falling knives, love that phrase, but at
Speaker 1: some point you do want to be ahead of the
Speaker 1: pack in terms of buying right well, of course, and
Speaker 1: so what we tell clients is that instead of thinking
Speaker 1: two months out or six months out, which seems to
Speaker 1: be the latest strength, we should go back to thinking
Speaker 1: a couple of years out and focus on good quality
Speaker 1: stocks and understand that what makes this market difference from
Speaker 1: let's say last year, is that we have attractive yields.
Speaker 1: We have attractive interest rate that we can earn on
Speaker 1: everything across the board, from our cash to high quality
Speaker 1: fixed income. And this is where the strategy really comes
Speaker 1: into place because recoveries, they are not always all the same,
Speaker 1: and the last bear market will not the last bloemarket.
Speaker 1: I meant to say, it's not necessarily going to be
Speaker 1: as the same as the bloom market ahead of us.
Speaker 1: So positioning the portfolio insectors that have that competitive advantage,
Speaker 1: that have the benefit of stable earnings in this post
Speaker 1: COVID economy, defining the new normal, what is going to
Speaker 1: be earning s going for and the profect margins are
Speaker 1: squeezed but not every area you know is experiencing the
Speaker 1: same type of effect. Katerina, thanks so much for joining us.
Speaker 1: Really appreciate getting your thoughts there. Katarina Simonetti, Senior vice president,
Speaker 1: Private Wealth Advisor at Morgan Stanley. You're listening to the
Speaker 1: Team Cancer Line program Bloomberg Markets weekdays at ten am
Speaker 1: easting on Bloomberg dot com, the I Heard Radio app
Speaker 1: and the Bloomberg Business app. We're listening on demand wherever
Speaker 1: you get your podcast. Over the last three years, supply
Speaker 1: chain is a topic that we probably didn't know a
Speaker 1: whole lot about, but we've all gotten a lot smarter
Speaker 1: about it. As you know, we hear company after company
Speaker 1: talk about supply chain challenges. Can't get the products, can't
Speaker 1: get the raw materials, lots of cogs in the machine,
Speaker 1: and we've all gotten a lot smarter about how the
Speaker 1: global supply chain works. Nobody is more on the front
Speaker 1: lines of the global supply chain than Gene Siroca. He's
Speaker 1: the executive director of the Port of Los Angeles, which
Speaker 1: is the busiest container support in North America. Joints is
Speaker 1: from our DC studio. Gene, thanks so much for joining
Speaker 1: us again. You've been just so helpful to us as
Speaker 1: we try to figure out what is the global supply chain,
Speaker 1: how does it work, and where are the bugs in
Speaker 1: this system? So it feels like, you know, we're on
Speaker 1: the back end of this in a big way. I'm
Speaker 1: not sure if we're back to normal, but give us
Speaker 1: an update from your perspective of kind of what you're
Speaker 1: seeing at the Port of Los Angeles and kind of
Speaker 1: where you're seeing it just in a supply chain in general. Paul,
Speaker 1: Good afternoon. Great to be here from DC talking to
Speaker 1: you guys again. Global supply chain is witnessing a slowdown
Speaker 1: in demand worldwide, not just us in Los Angeles, but
Speaker 1: across the country and across the globe. We've seen that
Speaker 1: over the past three years, the global supply chain's weaknesses
Speaker 1: have been spotlighted. And that's why I'm here in DC
Speaker 1: this week talking about infrastructure, a ground truth update and
Speaker 1: what's happening operationally, and a little bit about our labor
Speaker 1: contract negotiations. Talk to us about those labor contract contract negotiations.
Speaker 1: You have gone through it or you're going through it now,
Speaker 1: and I think the East Coast goes through it a
Speaker 1: little bit later on. Yeah, we're in about our tenth months,
Speaker 1: which is usually the outer edge of how long it
Speaker 1: takes for the bargaining to really culminate in a contract.
Speaker 1: But we're not quite there yet. The Pacific Maritime Association,
Speaker 1: the Employers Group, and the International Longshore and Warehouse Union.
Speaker 1: The dock workers remain at the table. They're talking on
Speaker 1: a regular basis, and equally is important the rank and
Speaker 1: file dock worker is out on the job everyday moving cargo.
Speaker 1: The productivity numbers are elite there where they're at. There's
Speaker 1: just not a lot of cargo moving right now, So
Speaker 1: would you say the cargo volume is gene versus perhaps
Speaker 1: a normalized time A couple of pieces here. For the
Speaker 1: month of February, with a longer than normal lunar New
Speaker 1: Year break in Asia, we're at about fifty percent capacity
Speaker 1: five zero. It looks like the month of March will
Speaker 1: be a little bit better, an uptick of about twenty
Speaker 1: percentage points in cargo volume for that month, but still
Speaker 1: much lighter than we witnessed in recent years. In fact,
Speaker 1: by the end of the first quarter will be down
Speaker 1: by about a third compared to an all time record
Speaker 1: Q one of twenty twenty two. So in terms of
Speaker 1: the kinks in the system. Are the backups? Where are
Speaker 1: they right now? The backup on ships in Los Angeles
Speaker 1: and Long Beach, the Southern California twin ports was effectively
Speaker 1: gone last August. We set records in five of the
Speaker 1: first seven months last year, while bringing the number of
Speaker 1: ships at anchor from one hundred and nine down to
Speaker 1: single digits by the first week in August. Then there
Speaker 1: was a purposeful shift and cargo to the East and
Speaker 1: Gulf Coast importers exporters weary of these contract negotiations and
Speaker 1: possible work stoppages. Even though both sides have publicly stated
Speaker 1: through the media and other channels that they're not going
Speaker 1: to lock out labor and labor guys are not going
Speaker 1: to go on strike. President met with both sides along
Speaker 1: with then Secretary Marty Walsh of Labor on June tenth,
Speaker 1: first sitting president to my knowledge in history, to meet
Speaker 1: with both sides during an active negotiation. Still not enough
Speaker 1: to convince importers and exporters to keep their cargo in LA.
Speaker 1: So how do you think this plays out? Gene? I'm
Speaker 1: not sure how many of these work issues you've been
Speaker 1: through doing in your career. I'm guessing this isn't your
Speaker 1: first but how do you think this kind of plays out?
Speaker 1: I think we probably need a little more time. As
Speaker 1: I've shared with you guys before, it's not only a
Speaker 1: coastal framework that needs to get done within the collective
Speaker 1: bargaining agreement itself, but there are twenty nine ports on
Speaker 1: the West Coast, each with its own local agreement. Those
Speaker 1: are being sure it up. We probably need just a
Speaker 1: little bit more time to get this done. Again, I
Speaker 1: don't see anything disrupting the supply chain based on the workforce,
Speaker 1: and we'll let these experts continue to chip away at this. Unfortunately,
Speaker 1: last Friday, the White House got a letter signed by
Speaker 1: two hundred and thirty eight organizations imploring the President to
Speaker 1: get involved and bring these negotiations to closure. So we'll
Speaker 1: be talking with folks at the White House again this
Speaker 1: afternoon to give them a lay of the land of
Speaker 1: what's happening on the ground and try to ease anyone's fears.
Speaker 1: There's not going to be disruption from the workforce. Hey,
Speaker 1: you're out there on the West Coast and I know
Speaker 1: significantly south of Sandhill Road. But the collapse of SVB,
Speaker 1: does that have any effect on your organization. Are you
Speaker 1: just too darn big to notice that kind of that
Speaker 1: kind of ripple. Well, as an amateur economist that I've
Speaker 1: talked with you guys about before, this economic equation is
Speaker 1: just so complex. From a jobs market that is still
Speaker 1: towards the employee ten point seven million jobs open, lowest
Speaker 1: unemployment rate since the late nineteen sixties, and even in
Speaker 1: the phase of inflation, although it's come down eight consecutive
Speaker 1: of months, the American consumer still buys SVB. Because we've
Speaker 1: been talking all along a great concern. Some companies couldn't
Speaker 1: even make payroll because that's where their money was. So
Speaker 1: anything that hits the banking system is a shock. We
Speaker 1: all remember what happened in O eight and O nine,
Speaker 1: But to see the administration jump forward so quickly, Treasury
Speaker 1: Secretary yelling backstopping those bank accounts and that of signature
Speaker 1: in New York here we are. Hopefully it's no more
Speaker 1: widespread than what we've seen here the credit Swiss European
Speaker 1: transaction coming over that weekend. Hopefully these are isolated cases.
Speaker 1: But watching this very closely, like every other variable in
Speaker 1: the economic equation. Yeah, the root of that problem I
Speaker 1: guess was specific to SVB and very bad risk management.
Speaker 1: But driven by rates that rose four fifty now five
Speaker 1: hundred basis points in a year and a half. Does
Speaker 1: that have any effect to these high rates have any
Speaker 1: effect on your ports business? Sure it does. And I
Speaker 1: think what folks look at is what are their inventory
Speaker 1: carrying costs most close to home? Right Purchase orders are
Speaker 1: at a low EBB right now for a couple of reasons.
Speaker 1: Obviously the inflation, the concern over the strength of the
Speaker 1: consumer in the intermediate term, although proven to be pretty resilient.
Speaker 1: The interest rates on the cost of those goods that
Speaker 1: importers purchase and exporters finance, that weighs heavily. Folks trying
Speaker 1: to get inventories right sized because the inventory sales ratio
Speaker 1: is still elevated here in the United States, and while
Speaker 1: we're getting emails and text messages on deep discounts from
Speaker 1: our retailers to get older inventory out, the new products
Speaker 1: won't start coming in until there's a bleed down of
Speaker 1: that warehousing inventory across the nation. Again, not just in
Speaker 1: Los Angeles but nationally. Gee. Another global issue that I
Speaker 1: know you have a lot of familiarity with it is
Speaker 1: China given your port and your customers in the trade.
Speaker 1: China reopening maybe a little bit faster than people thought.
Speaker 1: How are you seeing that in your business? What are
Speaker 1: you hearing from your shippers? It's been interesting, and having
Speaker 1: lived in China during Stars, I had a view of
Speaker 1: what a global pandemic might have looked like. This was
Speaker 1: a ten thousand times greater. Obviously now with the benefit
Speaker 1: of hindsight, but with the reopening, we're starting to see
Speaker 1: some stabilization, whether it's land transport, barge traffic, factories and
Speaker 1: their subassembly suppliers getting really back to one hundred percent capacity.
Speaker 1: We never really lost a lot of steam because the
Speaker 1: central government in Beijing and the ports, especially the Shanghai
Speaker 1: Young Shan Deep Seaport, kept us in focus and made
Speaker 1: that long haul traffic, that long haul container shipping business
Speaker 1: a priority. So even while some a pine that shutdowns,
Speaker 1: we're going to hurt international transportation for this container business
Speaker 1: between mainland China in La it stayed strong. We'll see
Speaker 1: a little more steady cadence as we go forward. But
Speaker 1: it all comes down now to the purchase orders that
Speaker 1: are going in from American manufacturers and retailers that usually
Speaker 1: have a window of ninety to one hundred and twenty
Speaker 1: days before ship sailing, so we're seeing all that activity
Speaker 1: right now. It's my belief we'll get on a more
Speaker 1: normal calendar after the fourth of July holiday. You'll start
Speaker 1: seeing seasonal products, year end holidays, and those specialty items
Speaker 1: start coming through as they used to based on the
Speaker 1: timing factors. So you'll see the summer goods, fall fashion, Halloween,
Speaker 1: back to school, and then the year end holiday products
Speaker 1: lining up a little bit more distinctively than they have
Speaker 1: in the recent past. All Right, Jane, thanks so much
Speaker 1: for joining us. Really appreciate getting your perspective. You're insight there.
Speaker 1: Jean Siroka, Executive director of the Port of Los Angeles,
Speaker 1: Thanks for listening to the Bloomberg Markets podcast. You can
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Speaker 1: at Matt Miller nineteen seventy three and on fall swee
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