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Speaker 2: We have a perfect guest to speak of our equity.
Speaker 2: Conversation of the day is stephenoth He is with Federated
Speaker 2: him as we're thrilled that he could join us here
Speaker 2: this morning. Just as a general statement, and it goes
Speaker 2: back to the day you and I looked at AOL
Speaker 2: Time Warner and said, really, did these deals work out?
Speaker 2: My answers, No, there's no evidence they're a value.
Speaker 3: Add They haven't added a lot of value.
Speaker 2: Tom. It's gotta go longer than nasty, but it's not TV.
Speaker 2: You gotta have longer.
Speaker 3: This is an interesting deal though, I mean, you know,
Speaker 3: Netflix getting ahold of these studios.
Speaker 2: I think it's it.
Speaker 3: Could really I've been the whole Hollywood industry.
Speaker 2: I think that's what can create profit where Federated can
Speaker 2: invest in it.
Speaker 3: We're not in Netflix. Well, we're in all these stocks,
Speaker 3: but we're not heavy there. You know, we we'd rather
Speaker 3: on on these mag seven names. We kind of play
Speaker 3: relative value, and for us right now, Amazon is maybe
Speaker 3: a better value if you will. I mean, people talk
Speaker 3: about a bubble, but you can buy Amazon at eighteen
Speaker 3: times cash flows. It's really not bad for a company
Speaker 3: that we look at it and say to you, you're
Speaker 3: you're getting aws AI and you're kind of getting the
Speaker 3: retail business for free.
Speaker 2: Yep.
Speaker 4: See twenty twenty five. It has been a really wonderful
Speaker 4: year for investors. I mean, fifteen percent in the S
Speaker 4: and P twenty percent in the NASTAC fixed income, high
Speaker 4: single digit returns. What's kind of the setup for twenty
Speaker 4: twenty six for you guys?
Speaker 2: We think it's pretty good.
Speaker 3: We've got a two year target of eighty six hundred,
Speaker 3: we've got seventy eight hundred for next year, and really
Speaker 3: driven by earnings growth. At this stage, we've got earnings
Speaker 3: at yeah, three ninety out three years, and you know
Speaker 3: Stock's eight nominal GDP growth. Nominal GDP growth looks really
Speaker 3: good to us. You've got the AI revolution driving earnings,
Speaker 3: You've got enormous productivity. We've got GDP next year up
Speaker 3: three percent. I think the consensus is two we've been
Speaker 3: on the high side along, we've been more right than
Speaker 3: wrong on that. But you know, you've got a lot
Speaker 3: of stimulus coming next year that we think could get
Speaker 3: you a surprise on the upside, and with the job
Speaker 3: market relatively stable, that means a big boost in productivity,
Speaker 3: which is a big boost in earning. So I think
Speaker 3: the setup looks pretty good.
Speaker 2: Paul, SPX eighty six hundred, I'm all in is Dow
Speaker 2: sixty thousand?
Speaker 4: Yeah, a forty eight.
Speaker 2: I've never done that. I've never done That's the first.
Speaker 4: Again, what sectors kind of screen well for you guys, Steve,
Speaker 4: because we've had tech has been such a start for
Speaker 4: so long, and then the AI story over the last
Speaker 4: two or three years has been the star.
Speaker 5: What sectors screenwall.
Speaker 3: Right, So what we're trying to do is we don't
Speaker 3: want to be out of this AI trade because it's
Speaker 3: the driver, but we're just modestly overweight those stocks and
Speaker 3: again playing relative value within there, and we think the
Speaker 3: big picture next year is finally this broadening out happens.
Speaker 3: The FED cutting helps the interest rates sensitive parts of
Speaker 3: the economy that have been suffering, so that starts to
Speaker 3: live housing, regional banks, emerging markets actually had a good
Speaker 3: year this year off of very low levels. We think
Speaker 3: that's a really interesting place. So we are playing this
Speaker 3: broadening out trade, but not going underweight or avoiding. The
Speaker 3: drivers of the same witch are the tech stocks, but
Speaker 3: we think they're kind of they're going to becoming a
Speaker 3: relative value play within there. We don't really see them
Speaker 3: as necessarily leading the market forward next year.
Speaker 2: Help us with the gloom that's out there. Three years
Speaker 2: of double digit return. People are modeling a fourth year
Speaker 2: of double digit return. It's like three times Paul. Since
Speaker 2: World War Two, we've had this oddity. How should people cautious,
Speaker 2: including clients have federated, How should they be enthusiastic if
Speaker 2: they don't feel that way.
Speaker 3: Well, what we've been saying, Tom, is we're in a
Speaker 3: secular bull market here. This is only the third one
Speaker 3: in the last hundred years. They happen after you've had
Speaker 3: a fifteen year bear where everyone is lost a lot
Speaker 3: of money, which they did between ninety nine and thirteen,
Speaker 3: and they're forever cautious for a generation.
Speaker 2: The scar that's what it's like. Depression, be right, That's.
Speaker 3: What drives the bull and that's why here you know,
Speaker 3: as soon as we get a little bit of a pop,
Speaker 3: everyone's talking about bubbles. We put out on our website
Speaker 3: earlier this week a bubble monitor, because in our experience,
Speaker 3: you've got to look at bubbles from the perspective of
Speaker 3: several different dementi that tend to happen kind of in
Speaker 3: conjunction with one another, not just one. So overinvestment one
Speaker 3: people talk a lot about. But excess liquidity, we're not there. Actually,
Speaker 3: the Fed's probably too tight regulatory errors.
Speaker 2: We're not there. You know.
Speaker 3: Over investment you could sort of make the case maybe,
Speaker 3: but if you look at the levels of investment relative
Speaker 3: to GDP in this phase, it's still below what you
Speaker 3: saw in the other big industrial revolutions, and it's being
Speaker 3: funded by cash excess debt, we're not there. And over evaluations,
Speaker 3: we just went through the story on Amazon. I don't
Speaker 3: think we're there yet either. So we've got a few
Speaker 3: things for lashing y'all. A little bit of fraud out
Speaker 3: there that's never good. But you know, we think generally
Speaker 3: we're early. Before you start calling for a bubble.
Speaker 2: To get your Wednesday started. Stephen off with this, he's
Speaker 2: a federal inter mens here Inequity's got a real equity show.
Speaker 2: We'll do some bonds with Irig Jersey later, and we'll
Speaker 2: do some real estate as well. We're doing commodities today,
Speaker 2: we can do that. We'll do commodities as well. Paulstrading
Speaker 2: and Time Keen. The way you listen to us, Thank you,
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Speaker 2: to see handsome Steve Off.
Speaker 4: Yeah, just click a button. There you go, Steve. How
Speaker 4: about US equities versus maybe rest of world equities. We
Speaker 4: had a little bit of a migration earlier in the
Speaker 4: year out of the US maybe into Europe and some
Speaker 4: other markets. How do you think about that?
Speaker 3: Yeah, I mean those markets were really cheap, and a
Speaker 3: lot of it was actually a currency place. Okay, yeah,
Speaker 3: because you know that was a big move I just
Speaker 3: came back in September. I was out in Japan with
Speaker 3: our Japanese analysts and just came back last week from
Speaker 3: a long trip out to Europe talking to folks out there,
Speaker 3: so I'm a little fresh on that. And I would
Speaker 3: say this, if you look at EFA, which is a
Speaker 3: technical term for basically the developed world outside the USA,
Speaker 3: Europe looks okay to US. You know, it's not as
Speaker 3: cheap as it used to be relative to US, it's
Speaker 3: still relatively inexpensive, and the downside isn't really there the
Speaker 3: econ you know, the governments are spending more money thanks
Speaker 3: to President Trump on defense, but on the other hand,
Speaker 3: there's not a lot of upside and there's not a
Speaker 3: lot of AI technology in Europe, so it's kind of backstage.
Speaker 3: We think it's okay. Japan is really interesting. It's it's
Speaker 3: you know, restructuring, first time the real estate markets finally
Speaker 3: come back after thirty years. Tom you probably remember the
Speaker 3: days when Tokyo real estate was more expensive than all
Speaker 3: of the United States, et cetera. But it's starting to
Speaker 3: really come back now. So we think that's interesting. But
Speaker 3: basically the way we're staged here is we're modestly overweight
Speaker 3: so called EFA Developed because of Japan. We're overweight EM
Speaker 3: because emerging markets is the only place outside the US
Speaker 3: where you can get technology stocks basically in Asia, and
Speaker 3: we think that looks interesting. We think Latin America next
Speaker 3: year looks pretty interesting. So we're overweight there, but our
Speaker 3: big overweights remain in the US because that's where you know,
Speaker 3: this is the leaders here in this industrial revolution.
Speaker 4: Right, I mean, evaluation here is just extraordinary, isn't it.
Speaker 3: Well, As I said earlier, I think on the max
Speaker 3: seven in some cases it is are, but there's other
Speaker 3: ones in there that look pretty valuable and pretty cheap.
Speaker 3: And then on the other side of it, the rest
Speaker 3: of the broader market actually is inexpensive. So we think
Speaker 3: in the US the big story next year is finally
Speaker 3: this broadening out trade. It's going to benefit from these
Speaker 3: raid cuts from the FED, the regional banks, the housing sector,
Speaker 3: the industrials.
Speaker 2: So you know, we're.
Speaker 3: Playing the broadening out trade in the US, hanging in
Speaker 3: there with the US tech stocks but trading relative value
Speaker 3: and then looking outside for more attack in Asia.
Speaker 2: Let's go William Priest here, what is the Steve Off?
Speaker 2: What is a steve ofth process to identify quality free
Speaker 2: cash flow growth.
Speaker 3: Right, So you know people talk about quality and I
Speaker 3: had never met a PM in my life who didn't
Speaker 3: say he buys quality stocks. So you know, you got
Speaker 3: to define it so that we start with a management
Speaker 3: team that we believe in and has a track record
Speaker 3: of growth. The second is we look at cash flows
Speaker 3: being generated by the business in a business position that
Speaker 3: can sustain and protect those cash flows. And we want
Speaker 3: to see cash flows. We want to see pretty good,
Speaker 3: solid balance sheets. We don't want to see people playing
Speaker 3: around with fake earnings.
Speaker 2: Because the time I got to bring this up, folks,
Speaker 2: this is so important what you're hearing here. This is
Speaker 2: like the mistakes that are made out there. The fundamental
Speaker 2: outlaw underlying of quality free cash flow is the partial
Speaker 2: differential of revenue growth. What you started with anominal yeah
Speaker 2: GDP absolutely, if you don't have a revenue growth beeps
Speaker 2: above norm however you want, you know, fan distribution whatever.
Speaker 2: If you don't have revenue growth, you can't get down
Speaker 2: to the bottom of the feld.
Speaker 3: You can't get cash flaw.
Speaker 2: Yeah, it's just that simple part. I can't say nominal
Speaker 2: GDP is where I am.
Speaker 4: Steve, we said the biggest IPO of the year, price
Speaker 4: less name Medline.
Speaker 2: I missed this.
Speaker 4: What is it? I mean, six point three billion dollar IPO.
Speaker 4: That's going to be kind of a bullish sign, right,
Speaker 4: I mean, I mean it just seems like if you're
Speaker 4: raising that kind of capital in this market for a
Speaker 4: traditional healthcare company, what do you make of that?
Speaker 3: The middle syllable economy is confidence.
Speaker 5: YEP.
Speaker 3: So you're absolutely rightful with that question. It's something when
Speaker 3: I review everything's going on with our board every quarter,
Speaker 3: our clients. I look at IPO activity M and a
Speaker 3: activity of late. I found myself kind of as the
Speaker 3: reception a Federal Hermes after five pm when the regular
Speaker 3: staff goes home and you've got these road shows coming through. Uh,
Speaker 3: and it's you know, Steve is introducing me able to you.
Speaker 3: But you know there's a lot of activity there. We're
Speaker 3: never not nowhere near back the bubble days, if you will,
Speaker 3: when things are really popping through lunches.
Speaker 2: Yeah.
Speaker 3: I love to see this activity because to me, it
Speaker 3: is a sign that animal spirits are coming back into
Speaker 3: the economy, and that's what drives everything else.
Speaker 2: Medline MDL and thank you Paul, I miss this completely.
Speaker 2: Did you get your eight thousand shares?
Speaker 6: Yes?
Speaker 2: Sure, absolutely, I just want to be sure we're taking
Speaker 2: care of But this is like, Paul, this is like
Speaker 2: the way it used to be. I mean, and you said.
Speaker 4: We're seeing some M and A activity out there, We're
Speaker 4: seeing some IPO activity out there. A lot of that
Speaker 4: boats I mean, or suggests that the market's pretty comfortable
Speaker 4: with where things are right here. So get that thing.
Speaker 2: Steve, wonderful to have you in. Thank you. Likewise, stranger
Speaker 2: Stephen a legend at Princeton Federated amazild that he could
Speaker 2: come in stay with us. More from Bloomberg Surveillance coming
Speaker 2: up after this.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us Live
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Speaker 2: One of my great inventions is the phrase chart paragraph. Charter.
Speaker 2: Came out of Bear Stearns and Golden Sex years ago,
Speaker 2: John Writing's work. David Malpasses worked on Ossius and Dudley
Speaker 2: and the team there carrying on that tradition. Eric Winnigrad
Speaker 2: is brilliant at Alliance Bernstein doing the chart paragraph thing.
Speaker 2: I want to get to aggregate paycheck in a moment.
Speaker 2: Steve Authur new Guests just came in with a wild
Speaker 2: two year optimism on the equity market and the equivalent
Speaker 2: Dow is now fifty nine sixty thousand, and he pins
Speaker 2: it off nominal GDP gus current GDP, real GDP plus
Speaker 2: the inflation component. What do you see out two years?
Speaker 7: Well, so I think that's the important part of that
Speaker 7: is the inflation component. Right, A nominal GDP has been
Speaker 7: elevated this year because inflation has been sticking. With inflation
Speaker 7: still running three percent, nominal GDP is going to be higher,
Speaker 7: and Steve is right, equities benefit from higher nominal GDP.
Speaker 5: So that all makes sense.
Speaker 7: The question on a forward basis is, if inflation comes down,
Speaker 7: as we expect that it will, what does real GDP do?
Speaker 7: What does real growth do? And I think the jury's
Speaker 7: out on that. You can tell optimistic stories around AI
Speaker 7: and the booster productivity history tells you it usually takes
Speaker 7: longer than a year or two for these technological advances
Speaker 7: to really manifest themselves in terms of massive productivity growth.
Speaker 7: So we share the idea that the economy will continue
Speaker 7: to expand. I would say that we are not quite
Speaker 7: as optimistic as Steve seems to be. I'm an economist,
Speaker 7: or sort of. I lose my guild card if I'm
Speaker 7: too optimistic about anything.
Speaker 2: I switch Deceber. We're asking the economists what the market
Speaker 2: will do, and we're asking strategists and managers what the
Speaker 2: economy will do.
Speaker 4: Well, Eric, what do you make of the economy The
Speaker 4: labor data we got yesterday?
Speaker 7: So I don't think the labor market data really changed
Speaker 7: our picture of the economy, right.
Speaker 4: The labor market is certainly.
Speaker 7: A lot slower than it was six nine months ago,
Speaker 7: where we're in a low higher, low fier economy.
Speaker 4: I think people are aware of that.
Speaker 7: I think that it is I would phrase it as
Speaker 7: sort of precariously balanced, in the sense that labor supply
Speaker 7: has been constrained by migration policy, and labor demand has
Speaker 7: been constrained by a variety of different factors, and so
Speaker 7: we're sort of sitting close to a neutral ish level
Speaker 7: at a lower level of hiring. What I do take
Speaker 7: information from, though, is that it is only close to balanced.
Speaker 7: The unemployment rate has gone up for several months in
Speaker 7: a row. Now is at a new cycle high. And
Speaker 7: that's tells you that labor demand is falling faster than
Speaker 7: labor supply. It's not a lot faster, but it is faster,
Speaker 7: and to me, that's the primary driver of why I
Speaker 7: expect the FED to cut as we move through next year.
Speaker 4: We're going to get some inflation data tomorrow. There, how
Speaker 4: do you view that? What do you expecting to see tomorrow? Again?
Speaker 7: You know, the evidence that we have, and this is
Speaker 7: the first week that we've gotten data since the government
Speaker 7: shutdown ended. The evidence that we have from private sector sources,
Speaker 7: from other places is that the economy didn't change meaningfully
Speaker 7: during the shutdown. I expect the inflation data to show that,
Speaker 7: which is to say that it's going to be sticky.
Speaker 7: You know, I don't think we should expect a dramatic
Speaker 7: change from where we were before. Goods prices are elevated
Speaker 7: because of tariffs. Services prices are coming down, but only slowly.
Speaker 7: We're still stuck sort of around three percent, and it
Speaker 7: won't be until next year that we see real progress
Speaker 7: on that.
Speaker 2: A lot of good analysis yesterday is really really valuable.
Speaker 2: A lot on LinkedIn and Twitter, Eric Uinigrette, I love
Speaker 2: your phrase aggregate paycheck. That's sort of how each and
Speaker 2: every house listening and watching the show feels. There's like
Speaker 2: the aggregate paycheck into the house. Do we risk a
Speaker 2: negative real aggregate paycheck.
Speaker 7: We've been close at different times this year. You know,
Speaker 7: that's where inflation really starts to bite, because salaries adjust,
Speaker 7: but they don't adjust as quickly as prices do. And
Speaker 7: so you have at various times this year been dancing
Speaker 7: with the idea of households losing ground in aggregate. Right,
Speaker 7: so this doesn't mean every household, but some households losing
Speaker 7: ground relative to where prices are. Right now, we're sitting
Speaker 7: on a six month annualized basis just above zero, and
Speaker 7: to me, that's the primary driver of the economy. We
Speaker 7: can talk about capecs, investment, we can talk about AI
Speaker 7: and all that. At the end of the day, this
Speaker 7: is still a consumer driven economy. And if the household
Speaker 7: paycheck doesn't stay above water, things start to look pretty
Speaker 7: pretty dangerous.
Speaker 2: Then in Dartmouth College, when you looked at this, you
Speaker 2: bring it over to the political mandate. If we have
Speaker 2: flat real wages, a crushing aggregate paycheck in America. That
Speaker 2: really drives a central bank to a more accommodative strategy.
Speaker 4: Right, Well, it should do, right.
Speaker 7: You know, it's a challenge for the central bank because
Speaker 7: if the reason that the paycheck is running close to
Speaker 7: zero is that inflation is too high, it's not clear
Speaker 7: that they're supposed to cut rates, right. Maybe they're supposed
Speaker 7: to stay tight and address it through the inflation side
Speaker 7: of the mandate. I think Chair Powell's been eloquent in
Speaker 7: talking about this and saying that the FED is being
Speaker 7: pulled away from its mandate in both directions. That's why
Speaker 7: you see the discord within the Fed. That's why you
Speaker 7: see the sense in both directions there is some evidence
Speaker 7: of economic weakness. There is also evidence of inflation stickiness,
Speaker 7: and so it's not clear what they're supposed to do.
Speaker 7: But Tom, when you say, you know, this brings up
Speaker 7: the political side of things. We have not had to
Speaker 7: think about this for a while, but we will as
Speaker 7: the year progressive. We're rolling toward midterm elections, and you know,
Speaker 7: with affordability looking likely to be one of the primary issues,
Speaker 7: it's not clear how the American public will react in
Speaker 7: a political sense if the paycheck were to fall into
Speaker 7: negative territory, or if they were to feel that things
Speaker 7: are deteriorating.
Speaker 4: You say that the run rate of hiring has clearly
Speaker 4: slowed this year and remains weak by historical standards. Why
Speaker 4: is that so? I think there's a couple of aspects
Speaker 4: to that.
Speaker 7: One is that labor supply has slowed, there are fewer
Speaker 7: workers available. Another part of it is that businesses have
Speaker 7: gotten a little fat on labor. I think that people
Speaker 7: hired and you know, rewind a few years when we
Speaker 7: were here talking about labor shortages and businesses couldn't find people.
Speaker 7: As a result, once they found them, they've been very
Speaker 7: reluctant to let them go. So businesses have been running
Speaker 7: at full staff for a while, which diminishes their hiring needs.
Speaker 7: But the primary driver I think has been economic uncertainty.
Speaker 7: Businesses have not wanted to hire in an environment where
Speaker 7: they don't know the policy regime. The month, if you
Speaker 7: have to pick a month where hiring really deteriorated the
Speaker 7: most and moved into this lower trajectory, it was April,
Speaker 7: right after the tariffnounce And I don't know that that's
Speaker 7: a reaction to tariff specifically so much as it is
Speaker 7: a reaction to the uncertainty.
Speaker 2: We do our Eric winnigred audible here folks on China
Speaker 2: with his work at Dartmouth and their acclaimed Asian studies
Speaker 2: program Dembra eight can publish out of London today for
Speaker 2: Bloomberg on luxury and there's a basic idea that the
Speaker 2: three cities in China that do luxury Shanghai, Hong Kong vision.
Speaker 2: I guess it will come back. I'm reading Bloomberg News
Speaker 2: on the fiscal structure of the Xi administration, the GI government,
Speaker 2: and I'm seeing some real stress there. How do you
Speaker 2: received China for Americans in the next year.
Speaker 7: So from an American perspective, you know, China is not
Speaker 7: as relevant as it was before because of the tariff policy.
Speaker 7: There's been a redirection of exports. If you look at China,
Speaker 7: their trade surplus has hit a record this year, even
Speaker 7: as their trade into the US has diminished because of
Speaker 7: tariff policy. They are exporting more to Europe, they are
Speaker 7: exporting more within Asia, they are exporting more to South America.
Speaker 7: They have to continue exporting because in order to keep
Speaker 7: growth positive, they have to continue producing and domestic demand
Speaker 7: in China. As we've talked about before is very weak.
Speaker 7: So if they're going to produce it and people in
Speaker 7: China won't buy it and they can't sell it to
Speaker 7: the US, they have to find somewhere else to sell it,
Speaker 7: and they have. And I find it a little bit
Speaker 7: ironic that in the US we're talking about the affordability crisis,
Speaker 7: China is essentially exporting deflation everywhere else in the world
Speaker 7: because we won't let them export it here anymore.
Speaker 2: So you know, look, that's brilliant, Lisa, write that down.
Speaker 2: Place that was brilliant not to import their price decline.
Speaker 7: Yeah, and look, there may be sound political reasons for that.
Speaker 7: You know, we've talked about wanting to reshore manufacturing and
Speaker 7: all of these already.
Speaker 2: Now it's the manufacturing jobs and the jobs report, Paul,
Speaker 2: there's no evidence we're not yet.
Speaker 7: And again this goes back to business uncertainty. We might
Speaker 7: at some point. Part of our forecast for next year
Speaker 7: is the idea that you'll get a little bit more
Speaker 7: capex in the US as uncertainty fades. But there's a
Speaker 7: reason that we were producing stuff offshore in the first place,
Speaker 7: which is that it's a whole lot cheaper. And if
Speaker 7: you can produce it a lot cheaper, then you can
Speaker 7: sell it a lot cheaper. And so you know, this
Speaker 7: idea that you can just sort of cut China out
Speaker 7: of our production chain and not have an impact prices
Speaker 7: doesn't make any sense, and we're seeing that.
Speaker 2: Eric, Thank you so much Alliance Producing. Eric winnigred I
Speaker 2: can't say enough about his work. He's a chief US
Speaker 2: economist is thrilled to get his perspective. Stay with us.
Speaker 2: More from Bloomberg Surveillance. Coming up after this.
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Speaker 2: Stephen Kim is Withley, I didn't know you were. How
Speaker 2: did you end up in Evercore? Does? Did ed Heyman
Speaker 2: call up and say please?
Speaker 5: Now? It was fortuitous? It was really it was really
Speaker 5: a great move on my part because so much of
Speaker 5: my sector is dominated by or influenced by macro And
Speaker 5: what better macro shop on the planet is?
Speaker 2: How do you read ed Heymen? How does a guy
Speaker 2: like you own the high ground in American housing? What
Speaker 2: do you read in ed Heyman where you lean forward?
Speaker 5: Well, I think ed Heiman has phenomenal contacts, and so
Speaker 5: he hears so much about what people are thinking across
Speaker 5: pretty much every sector that gives him an ed. I
Speaker 5: think that nobody else can mas the.
Speaker 2: FED bet as we get disinflation and they's tight about
Speaker 2: multifamily housing, signal family housing everywhere but where Paul Sweeney lives. Okay,
Speaker 2: do you get just as a beginning conversation, do you
Speaker 2: agree that housing prices in housing inflation will dampen this year?
Speaker 5: My view is that actually you could see existing home
Speaker 5: prices go retreat a bit, you know, one to two percent.
Speaker 5: I don't think it'll be palpable, because you don't. I
Speaker 5: think that would be very problematic. But I think you
Speaker 5: could see prices down one to two percent this year
Speaker 5: next year on the exist in the existing market, and
Speaker 5: I think actually that would be you know, positively received.
Speaker 5: And I think that really what would drive that is
Speaker 5: homeowners who have been wanting to sell finally saying, you
Speaker 5: know what, we're going to make the move and I'm
Speaker 5: willing to take a little bit of a lower price
Speaker 5: because I still have significant amounts of home equity. I
Speaker 5: think that's something to really watch for in twenty twenty six.
Speaker 4: Tom, You know, Steve's a player. He does not have
Speaker 4: to schlep into the evercore Isi offices in York City.
Speaker 4: He hangs a shingle in Raleigh, North Oh. Yeah, one
Speaker 4: of the most beautiful parts of the country down there,
Speaker 4: and he's right next to my duke, so you can
Speaker 4: go over there anytime he wants to see some good basketball.
Speaker 5: Stephen.
Speaker 4: We have Lenar reported today. It's some disappointing numbers that
Speaker 4: last night, some disappointing numbers here. Talked to us about
Speaker 4: Lenar and what these home building companies are telling you
Speaker 4: guys these days.
Speaker 5: Well, the first thing to say upfront is that Lenar
Speaker 5: has a lot of idiosyncratic aspects to it. Right now,
Speaker 5: it's very, very fascinating, but there's no question there is
Speaker 5: a read across They are the second largest home builder
Speaker 5: in the country and it is tough out there. And
Speaker 5: what they told you was that even though mortgage rates
Speaker 5: have you know, trended down, it has not stimulated an
Speaker 5: improvement in home buying demand that was anywhere near what
Speaker 5: they were hoping for. Okay, so that's certainly an important
Speaker 5: read across it generally confirms frankly, what I think most
Speaker 5: folks you know, would have gleaned if they if they,
Speaker 5: you know, just we're sort of paying attention to what
Speaker 5: the builders have been saying.
Speaker 2: All right.
Speaker 4: As a former director of research, this stuck out of me, Steve,
Speaker 4: you cover fourteen stocks, You've got fourteen holds.
Speaker 5: I do right now.
Speaker 2: I have going on.
Speaker 5: We used to have. We used to be the permeable,
Speaker 5: you know, And a couple of months ago we said
Speaker 5: we still like the long term potential, but we basically
Speaker 5: hit the pause button. We said this group cannot be owned.
Speaker 5: And there was a lot of uncertainty, not only because
Speaker 5: the market was not responding to the lower rates that
Speaker 5: we saw coming into September, but also because the government
Speaker 5: was becoming increasingly interested in and proactive or talking like
Speaker 5: they were going to be proactive, and it was very
Speaker 5: difficult to determine what exactly they might do. Their initial commentary,
Speaker 5: mostly communicated through Bill Poulty of the FHFA, was not
Speaker 5: looking good to me and or investors. Right now, Bill
Speaker 5: Poulty has sort of taken a step back, but it
Speaker 5: is still very uncertain what the government is going to do.
Speaker 5: And so in that kind of environment, I was, I said,
Speaker 5: we can't really make a convicted call with conviction. You know,
Speaker 5: a couple of months I've transpired. We're thinking about a
Speaker 5: few things. So you know, we'll see what twenty twenty
Speaker 5: six looks like. But that's the explanation of what's going
Speaker 5: on right now with the ratings.
Speaker 2: Across America this morning. The way you listen to us
Speaker 2: Stephen Kim, he is the evercore ISI on American housing,
Speaker 2: the research ones. I can't say enough about the acuity. Okay,
Speaker 2: let's start with this scam. What's a buydown?
Speaker 5: So a mortgage rate buydown is an innovation that has
Speaker 5: actually has its genesis from many, many years ago. We're
Speaker 5: simply put anytime that any of us had gotten a mortgage,
Speaker 5: at some point we were actually asked, well, what kind
Speaker 5: of how many points do you want to put down?
Speaker 5: How much money do you want to put down upfront
Speaker 5: to get a little bit of a lower rate? You know,
Speaker 5: generally speaking, you know, you put one percent down or
Speaker 5: one point they call it one, you know, one percent down,
Speaker 5: and you can buy down the mortgage rate, call it
Speaker 5: twenty twenty five basis points. You know, it depends on
Speaker 5: you know, what's happening with the bond market at the time.
Speaker 5: But something like that, you know, people put one or
Speaker 5: two points down. There's a couple of wrinkles though. One
Speaker 5: is the seller can sometimes pay for that instead of
Speaker 5: the buyer. And so these home builders who are sellers, right,
Speaker 5: have been doing that so that they can offer a
Speaker 5: lower rate. But they're not just buying down one or
Speaker 5: two percent, you know, to putting one or two points in.
Speaker 5: They're actually sometimes putting down ten points and you know,
Speaker 5: ten percent of the loan amount and buying down the
Speaker 5: mortgage rate like one hundred and fifty two hundred basis points.
Speaker 5: This sort of thing. That's what's been going on for
Speaker 5: most of the last two years.
Speaker 2: To keep the business going. Why don't they just cut
Speaker 2: price and affect a clean trendsaction.
Speaker 5: So here's the important thing to understand. If you pay
Speaker 5: four percent of effectively the home price, you can buy
Speaker 5: down the rate one hundred basis points. Right. That takes
Speaker 5: let's say the mortgage rate down from let's say seven
Speaker 5: percent down to six.
Speaker 8: Sweeney's taking notes, I'm taking all right, that's like a
Speaker 8: twelve percent reduction in the mortgage payment, roughly ten to
Speaker 8: ten to twelve percent reduction in the mortgage payment.
Speaker 5: Well, how would you affect that if you didn't change
Speaker 5: the rate and you just you know, lowered the home price,
Speaker 5: it would be a twelve hundred basis point hit. Right,
Speaker 5: you have to lower the price twelve twelve percent to
Speaker 5: get a reduction, right if the rate was the same. Right, So,
Speaker 5: so which would you rather do? Give up four hundred
Speaker 5: basis points a margin or give up twelve hundred basis
Speaker 5: points in margin. They'll just said, you know what, I
Speaker 5: can do that math, I'm going to go with the
Speaker 5: buy down. It'll cost me less, the buyer is happy,
Speaker 5: the payment gets reduced the same to tyebo.
Speaker 2: On is this is legal? What's going on? So?
Speaker 5: It is legal?
Speaker 2: Right?
Speaker 5: Beak but there, but but there's a button. It's legal,
Speaker 5: but the government has set certain limits to how much
Speaker 5: the seller can pay, and those limits are generally depending
Speaker 5: on the mortgage type, six percent, six points or three points.
Speaker 5: But I just told you that the builders were doing
Speaker 5: ten points sometimes even more. How do they do that?
Speaker 5: Because there's a loophole if you do your buy down
Speaker 5: a certain way called the forward purchase commitment. It's exempt,
Speaker 5: and with a stroke of a pen, that exemption could
Speaker 5: be modified or removed. And so we point out this
Speaker 5: as a potential vulnerability that the builders should think about
Speaker 5: as we look into twenty twenty six and twenty twenty cent.
Speaker 4: Interesting, we're talking to Stephen Kim, head of housing research
Speaker 4: at Evercore is side is.
Speaker 2: Enough inside baseball?
Speaker 4: That was some theme stuff the mortgage back Mortgage Bankers
Speaker 4: Association thirty or fixture rates like six point three percent
Speaker 4: or something. Is there a rate that's going to prompt
Speaker 4: sellers to say, all right, I'm ready to like sell
Speaker 4: my house, move down to Florida wherever I'm going to go,
Speaker 4: and move down to Raleigh to the Triangle, And is
Speaker 4: there a rate that will clear this market because nobody's.
Speaker 5: Putting their house up for sale. I think that we
Speaker 5: get that question all the time. As you might imagine, right,
Speaker 5: there's this locked in effect of low mortgage rates. Somebody's
Speaker 5: got like a three and a half percent or three
Speaker 5: percent mortgage rates. They loving it, you know, because prevailing,
Speaker 5: as you said, is six point three This is great.
Speaker 5: And so people have asked people initially said, well, all
Speaker 5: those people are going to like die in their homes.
Speaker 5: They're never going to move, right, that's a little simplistic.
Speaker 5: The reason why one moves. Some of it's financial, a
Speaker 5: lot of it ain't, yep. A lot of it is,
Speaker 5: you know what, mom's getting older, you know, we really
Speaker 5: need to go see her, or we're not seeing their
Speaker 5: grandkids enough, or I'm retiring. There's all kinds of reasons
Speaker 5: why the house that was good for you ten years
Speaker 5: ago is not really that great for you anymore. And
Speaker 5: I would say that given the incredibly low amount of
Speaker 5: housing turnover that we've seen, it is very clear that
Speaker 5: millions of people we estimate about four million people right now,
Speaker 5: would normally have moved in the last few years but
Speaker 5: have not yet. Now the impetus for them to want
Speaker 5: to move has not gone away. Those things that I
Speaker 5: just retirement, being close to the kids, being close to
Speaker 5: the aging parents, you know, those those are itches that
Speaker 5: do not go away unless they are scratched, and until
Speaker 5: they are scratched. So we think there's a significant penuptimend.
Speaker 5: Now that's not a rate thing, though, right, that's a
Speaker 5: steady pressure that's building building, and it's going to keep
Speaker 5: building until they actually move. I think therefore that we
Speaker 5: should think about the unlock with respect to rates is
Speaker 5: it's not binary. There's not like a magic rate, but
Speaker 5: certainly rates go on and the lower makes it a
Speaker 5: little bit easier. You leave a little less money on
Speaker 5: the table. But meanwhile, it's really these life factors that
Speaker 5: I think are more important.
Speaker 2: Well, and it's unfair to you. You know have record,
Speaker 2: you know you're looking at national and you've got all
Speaker 2: your list of companies, and that if you had a
Speaker 2: cup of coffee right now with a new mayor in
Speaker 2: New York City or with the governor of New York,
Speaker 2: the governors of the tri state area, this American housing
Speaker 2: crisis is tangible. What's the Stephen Kim's solution? Yeah, for Queens,
Speaker 2: what's the solution for Kansas City, what's the solution for
Speaker 2: la Well.
Speaker 5: One of the reasons why I'm not in politics. There
Speaker 5: are many, by the way, but one of the reasons
Speaker 5: is because I don't think that the housing market is
Speaker 5: really really lends itself to a quick fix. There are fixes,
Speaker 5: but the fix comes from supply. You need to increase supply,
Speaker 5: and if you do that, you will put some downward
Speaker 5: pressure on pricing. However, if pricing goes negative full retreat,
Speaker 5: you're going to kill demand because who wants to buy
Speaker 5: a leveraged you know, get themselves into a significantly lever
Speaker 5: transaction when prices are going down, right, your home equity
Speaker 5: is the first hit, right, So that's why I say
Speaker 5: I would say Goldilocks is a price reduction across the
Speaker 5: market one to two percent, adding supply, and you're going
Speaker 5: to work yourself out of this thing eventually. But it's
Speaker 5: not a quick fix Research Triangle Park. It's Raleigh, Durham
Speaker 5: Chapel Hill, North Carolina.
Speaker 4: It's been a great, great market for forty years.
Speaker 5: Yes, how is it today? It's very good. You have
Speaker 5: a lot of in migration from places like New York,
Speaker 5: but much more so I would say the DC market.
Speaker 5: Most of the people that I run into are generally
Speaker 5: from DC, some Chicago, some California. There's a lot of tech,
Speaker 5: there's a diversified employment based there's also the state capitol
Speaker 5: y you have the three major universities, NC, State, UNC
Speaker 5: and Duke that are there. So it's a great market.
Speaker 2: We're the CEO of Cornyn Steers in earlier what's it
Speaker 2: real estate to hear something and you know, I talked
Speaker 2: about the culture of management, so to go to Stephen
Speaker 2: Kim single best Buy, I assume that's wrapped around management
Speaker 2: as well, which is the superior operating officer of homebuilders right.
Speaker 5: Now, I think in the home building area, I think
Speaker 5: it's it's pretty clear that Dr. Horton has an exceptional
Speaker 5: management team. They demonstrated that what's.
Speaker 2: Their distinction, what are you different?
Speaker 5: Well, it's a good, really good question, because it's not
Speaker 5: just one thing, but through decades of managing their company,
Speaker 5: they have successfully migrated from being sort of a scrappy
Speaker 5: entrepreneurial kind of company to being a more large scale
Speaker 5: but still entrepreneurial company. And they have made some very
Speaker 5: savvy bets without necessarily dictating it just from the top.
Speaker 5: So their their skill is in homebuilding, so much of
Speaker 5: the decision making has to happen locally, and they've been
Speaker 5: able to incentivize their people interesting and empower those people
Speaker 5: to make really good that's hard.
Speaker 2: Paul ten year track record, eighteen point nine percent per year.
Speaker 2: It's trained like Apple comput exactly. I think they nailed two,
Speaker 2: but forced.
Speaker 4: I'll tell you the nail gun Tom. That is revolutionized
Speaker 4: the home building. I see these frame people frame up
Speaker 4: a house in like fifteen minutes. Now, it was unbelievable.
Speaker 2: I mean a construction site. As a kid, they gave
Speaker 2: me a hammer, Tom, go to lud Suirley. That was
Speaker 2: the assumption.
Speaker 4: Good stuff real quickly. Cost of building a house is
Speaker 4: lumber going? I mean, where are we just the cost
Speaker 4: of building a house these days?
Speaker 5: So you know, we certainly have had seen some material
Speaker 5: inflation of how wherever lumber has actually been very well contained,
Speaker 5: and labor has also been surprisingly well contained. Going into
Speaker 5: the year, we thought, all my goodness, you know, with
Speaker 5: all the deportations and all that rhetoric, that we were
Speaker 5: going to see a lot of the laborers disappear, and
Speaker 5: that didn't happen.
Speaker 4: Actually, why didn't that happen because I that was always
Speaker 4: called out here in it.
Speaker 5: It was. One of the things is that the multifamily
Speaker 5: starts dropped significantly because you had had kind of a
Speaker 5: boom there like a few years ago, and then that
Speaker 5: came down and a lot of the same workers, you know,
Speaker 5: who are there's no there's no multi family. Well then
Speaker 5: they go to single family. So that's part of it.
Speaker 5: And the second of all, you know the guys, you know,
Speaker 5: the guys who might be afraid I shows up. Yeah,
Speaker 5: that keeps them away for a couple of days or something.
Speaker 5: But you know what if they don't work, they don't eat. Yeah, right,
Speaker 5: so they're very tenacious.
Speaker 2: All right, Stephen, thank you so much for coming on.
Speaker 2: Kim has head pausing research at ever court is I
Speaker 2: stay with us. More from Bloomberg Surveillance coming up after this.
Speaker 1: This is the Bloomberg Surveillance Podcast. Listen live each weekday
Speaker 1: starting at seven am Eastern on Apple Corplay and Android
Speaker 1: Auto with the Bloomberg Business App. You can also listen
Speaker 1: live on Amazon Alexa from our flagship New York station,
Speaker 1: Just say Alexa, Play Bloomberg eleven thirty Paul Stunian Time.
Speaker 2: Keep Paul like Wednesday before the holidays, you know, and
Speaker 2: Lisa's got the party dresser?
Speaker 5: Yep?
Speaker 2: I mean you can't see the Bloomberg. Is it two
Speaker 2: or three parties tonight?
Speaker 4: It's two?
Speaker 2: Yes? Okay?
Speaker 9: Dress was a steal. Okay, so the newspaper okay, speaking
Speaker 9: of a steal.
Speaker 4: Okay.
Speaker 6: You know how I always talk about the Costco hot dog,
Speaker 6: you know, dollar fifty deal. Okay, but the Wall Street
Speaker 6: Journal says you have to check out their vacation deals.
Speaker 9: I'm telling you, I almost.
Speaker 6: Booked my trip to Greece through Costco because of the offers.
Speaker 6: It's actually been around for a while, like Costco started
Speaker 6: babbling about twenty five years ago.
Speaker 4: Yeah.
Speaker 5: Yeah.
Speaker 9: You walk out and there's huge advertisements everywhere.
Speaker 6: It has like eight hundred in house agents, thirteen buyers,
Speaker 6: five call managers. I mean they it's multimillion dollars. It's
Speaker 6: not just booking in vacation packages, but it's cruises, it's
Speaker 6: rental cars.
Speaker 4: It's like the whole I didn't notice the thing. Yeah
Speaker 4: my rental cars through there.
Speaker 9: Yeah yeah yeah, but saving money I am because.
Speaker 6: I compared it. I mean, granted, I'm paying for the membership,
Speaker 6: and that's the thing. You have to be a member
Speaker 6: in order to get the vacation. It comes with a
Speaker 6: few It's not Expedia, it's not booking dot Com. It's
Speaker 6: not that big. But you get like airline tickets through
Speaker 6: a package, so you don't get to kind of choose
Speaker 6: the exact airline like you It's kind of like Costco.
Speaker 6: You go there and you get what you get. And
Speaker 6: you don't get upset. You know, as my mom used
Speaker 6: to say.
Speaker 2: We should say, folks surveillance. Lisa Mattea is not have
Speaker 2: a business affiliation with Costco now, except I want your
Speaker 2: record number shopping carts.
Speaker 9: It's one in half, one and a half three.
Speaker 2: You got radar, you've got red lights in the back.
Speaker 2: One here, so you don't take someone out in vegetables.
Speaker 9: Next it gets dangerous.
Speaker 6: Okay, global coffee prices, right, we've been talking about it.
Speaker 6: They've been going higher and higher for that cup of coffee.
Speaker 6: But I mean, let's face it, you can't kick the
Speaker 6: caffeine habit, right, So what Bloomberg has this article in
Speaker 6: the terminal. It says what more people are doing to
Speaker 6: make the cup more affordable? So they say drinkers are
Speaker 6: kind of trading down, like they're choosing the cheaper drive
Speaker 6: through options. Maybe they're going to convenience store coffee instead.
Speaker 4: Don't knock the wah wah.
Speaker 6: They have really good coffee, cutting back on the number
Speaker 6: of times they make the coffee run too.
Speaker 9: That's another thing. And then you have the real like.
Speaker 6: Die hard coffee fans who are going for they're binding
Speaker 6: the grind, they're buying the grinders, right, they're buying the
Speaker 6: drip coffee.
Speaker 4: Make sure you're.
Speaker 9: Buying the fancy espresso machine. Yes, that fill the counter space.
Speaker 6: Yes, they say it's pricey, you know, upfront, but it's
Speaker 6: worth it because you say, even having to go, you know,
Speaker 6: to the store every day.
Speaker 2: I mean, I got the charge. And Bloomberg folks just
Speaker 2: just grat in commodities. Will Kennedy driving that forward for
Speaker 2: us pretty much is the bottom of COVID and all
Speaker 2: that Paul ready, yep, up three hundred and sixty seven percent,
Speaker 2: twenty seven percent per year. That on a quick look
Speaker 2: at the commodity coffee.
Speaker 4: My double short Moca on Saturday when I'm out doing
Speaker 4: the errands, five dollars and sixty cents and then I
Speaker 4: tip a buck. So there you go. That's my six
Speaker 4: dollars and sixty cents for a double short Moca. Some
Speaker 4: people do that, do it once a week. That's kind
Speaker 4: of mine. Once a week. Sure, that's your thing, all right,
Speaker 4: because we've got we've got again seven thousand different varieties
Speaker 4: of coffee up on the sixth floor here. That's Bloomberg
Speaker 4: from all parts, very good, they are very good. I
Speaker 4: do have to say, next, okay.
Speaker 9: This next one.
Speaker 6: It's it's it's how more moms are taking over their
Speaker 6: kids adult kids dating profiles. And this is like the
Speaker 6: kid's request. So the kids are saying, you know what,
Speaker 6: I'm tired, I'm burnt out. This is in the journal
Speaker 6: they're saying. They're saying, mom, take over my profile.
Speaker 4: Okay.
Speaker 6: And it's not just mom, it's dads, it's the brothers
Speaker 6: and sisters.
Speaker 4: Even grandma's getting in on the action. Okay.
Speaker 6: They're redoing their profiles. They're you know, getting them a
Speaker 6: little bit better. They say it can bring some new perspectives.
Speaker 6: But there's some challenges too, because family members have different opinions, right,
Speaker 6: I mean, you know some people go for certain things.
Speaker 4: You're not doing this for others. I never did.
Speaker 9: They didn't have this when I was dating that my
Speaker 9: son does.
Speaker 4: Yeah, okay, he did. It didn't lead to anything.
Speaker 6: He found his other kids girlfriend by through a friend
Speaker 6: you know, at school.
Speaker 5: Yeah, very good.
Speaker 2: I don't know.
Speaker 5: I think it's God.
Speaker 2: I think the most intelligent thing, ladies, the most intelligent
Speaker 2: thing I heard the newspapers today was just.
Speaker 4: Go to a bar, exactly exactly the old fashioned way.
Speaker 6: Go to a bar, talk to somebody, You actually talk
Speaker 6: to someone I know.
Speaker 5: Put the phone.
Speaker 2: Dinversation at home yesterday? Is there a way to get
Speaker 2: rid of Nintendo? Switch is easy?
Speaker 4: For no?
Speaker 2: They threw a tantrum the newspapers a Lisa Manteo, thank
Speaker 2: you so much.
Speaker 1: This is the Bloomberg Surveillance podcast, available on Apple, Spotify,
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