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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This is the Bloomberg

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Speaker 1: Surveillance Podcast. Catch us live weekdays at seven am Eastern

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Speaker 1: on Apple car Play or Android Auto with the Bloomberg

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Speaker 1: Business App, Listen on demand wherever you get your podcasts,

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Speaker 1: or watch us live on YouTube.

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Speaker 2: Gotta make sense of it all exactly.

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Speaker 3: We can do that with Cam Dawson, chief investment officer

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Speaker 3: at New Edgewells.

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Speaker 4: She joins us here in our Bloomberg Interactive Broker studio.

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Speaker 3: Cam, what did you make of the trading activity yesterday?

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Speaker 3: It was really a whip saw.

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Speaker 5: Yeah, yesterday is an was an outside reversal or what

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Speaker 5: we call in show business a bearish in golfing, So

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Speaker 5: when you have price action like this, it usually does

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Speaker 5: proceed more volatility, which just means that we should get

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Speaker 5: used to seeing some more of this chop. We're looking

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Speaker 5: for the sixty five hundred level where we're trading right

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Speaker 5: now to hold.

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Speaker 6: That's really important.

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Speaker 5: That's your one hundred day moving average. If that doesn't hold,

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Speaker 5: it brings sixty one hundred in play your two hundred

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Speaker 5: day moving average, which would also be the peak back

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Speaker 5: in February. So if you got to those levels, you'd

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Speaker 5: certainly see more oversold conditions. Notably, today the market is

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Speaker 5: not over sold yet externally on something like an RSI.

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Speaker 5: It's also not oversold internally, meaning breadth hasn't been totally

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Speaker 5: washed out yet, So all of us put together probably

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Speaker 5: accept more chop and churn.

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Speaker 2: So yeah, because the S and P five hundred finished

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Speaker 2: yesterday well just below it's one hundred day moving average,

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Speaker 2: we haven't seen that happen in months. I think the

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Speaker 2: last time was when President Trump announced the tariffs back

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Speaker 2: in April, right.

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Speaker 5: Yeah, And I think it's fascinating that just a couple

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Speaker 5: of weeks ago we had had the longest streak above

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Speaker 5: the fifty day moving average since two thousand and seven.

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Speaker 7: Wow.

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Speaker 5: So we were in this environment of incredibly low volatility, which,

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Speaker 5: of course we know low volatility tends to breed complacency,

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Speaker 5: and we saw complacency in many places, with fineral margin

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Speaker 5: loan balances surging higher by thirty five percentiment retail traders

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Speaker 5: were going all in adding leverage. All of this suggested

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Speaker 5: is that people were thinking that the good times were

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Speaker 5: going to keep on rolling. But of course, as we know,

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Speaker 5: what's the law of perversity, is that the market will

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Speaker 5: work to make the greatest fool out of the greatest

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Speaker 5: number of people to the greatest possible extent.

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Speaker 4: Yesterday was a day.

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Speaker 3: You know, we had the Nvidia numbers Wednesday evening, setting

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Speaker 3: up for good trading on Thursday because it seemed like

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Speaker 3: the AI play was still very.

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Speaker 4: Much in play, but then it wasn't.

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Speaker 3: Yeah, so how important is that AI theme as a

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Speaker 3: growth driver for the overall market?

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Speaker 4: How important is that?

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Speaker 1: Still?

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Speaker 5: It's still incredibly important, And we think that there's an

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Speaker 5: important nuance to the Nvidia numbers, which is that In

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Speaker 5: Video's strong earnings actually makes the questions around AI overspending

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Speaker 5: even louder. Okay, because the AI questions were not whether

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Speaker 5: or not companies were spending.

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Speaker 6: We knew that.

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Speaker 5: We knew that by the Capex guidance, so we knew

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Speaker 5: in Video results would be good. The big question was

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Speaker 5: are the people who are spending on AI Capex are

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Speaker 5: they earning a return on it that is justified to

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Speaker 5: different shareholders, not just their equity shareholders, but now all

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Speaker 5: of this death that they're raising as well.

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Speaker 2: So then what's it going to take for the market

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Speaker 2: to feel better? I guess about all the capex spending

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Speaker 2: and AI.

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Speaker 6: Yeah, it's an interesting question.

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Speaker 5: If you were to see somebody like Meta come out

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Speaker 5: and say we're reducing our capex spend next year, potentially

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Speaker 5: because the stock has done so much, how would.

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Speaker 6: The market react.

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Speaker 5: Would they be supportive of that or would it cause

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Speaker 5: a further unwind of all of these earnings expectations as

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Speaker 5: well as valuations that are built on this idea that

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Speaker 5: you're going to see trillions of dollars of spend. So

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Speaker 5: I think that that is the big question as we

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Speaker 5: go into twenty twenty six, is that do they continue

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Speaker 5: to wraphet up capex expectations in the face of a

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Speaker 5: market that seems to have lost its tolerance for it.

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Speaker 3: So we did get a lot of economic data today,

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Speaker 3: We're going to get some more today with some pmis.

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Speaker 3: We're going to get the EU mission data as well. Here,

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Speaker 3: how do you think the FED is kind of ingesting

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Speaker 3: all this data we're starting to get?

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Speaker 1: Then?

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Speaker 5: Yeah, well the data is now so backward looking, and

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Speaker 5: important to note that when they meet next in December,

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Speaker 5: they're not going to have the October or November jobs report,

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Speaker 5: so they're still going to be in this flying blind,

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Speaker 5: which means that it's likely that they lean towards this

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Speaker 5: hawkish side of things in the unknowing of what the

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Speaker 5: jobs market is doing. I would say, though, is that

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Speaker 5: if we see this equity market volatility continue, it actually

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Speaker 5: likely pushes them more towards a rate cut, because the

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Speaker 5: best argument that you have for not cutting rates was

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Speaker 5: looking at broad financial conditions. But if broad financial conditions,

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Speaker 5: which include equities, include credit, and include volatility, if those

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Speaker 5: move to titan, that actually could push the FED to

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Speaker 5: delivering a cut because of what it could be implying

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Speaker 5: about the underlying economy.

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Speaker 2: So I'm just curious how much of this aggressive selling

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Speaker 2: that we've been seeing is really about technical dynamics.

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Speaker 5: I think it's a large part of it because when

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Speaker 5: we look at the trading in September in October, it

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Speaker 5: really wasn't justified for as much as high as things

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Speaker 5: had moved, you had over a thirty percent rally in

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Speaker 5: the socks in those two months alone, the semiconductor index,

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Speaker 5: So there was a frothiness, a speculative nature of the

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Speaker 5: way that we saw things trade back in those two months.

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Speaker 6: So we've effectively now reversed.

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Speaker 5: Most of that of that rally higher, and the question

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Speaker 5: is do you have to shake out any further hands

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Speaker 5: because you saw so much leverage being added and you

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Speaker 5: saw people really trying to add on to risk.

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Speaker 6: Some of that is just getting the air taken out

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Speaker 6: of it.

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Speaker 3: Earnings, we had a good, solid earnings this season. We

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Speaker 3: have still have some more retailers to go here, but

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Speaker 3: double digit growth in the third quarter, double digit growth

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Speaker 3: in the second quarter. How do you feel about the

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Speaker 3: earnings power this market? Is it enough to support this market?

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Speaker 1: Yeah?

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Speaker 5: We continue to come back to looking at Ford earnings

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Speaker 5: expectations and say, look, twenty five and twenty twenty six

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Speaker 5: estimates are still moving higher. That is usually broadly supportive

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Speaker 5: of risk assets. The caveat to that is that earnings

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Speaker 5: do lag overall prices, meaning that the street consensus will

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Speaker 5: always be late to the game. We've been using the

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Speaker 5: song the Deep track from Britney Spears first album, Don't

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Speaker 5: let Me be the last to know, because earnings usually

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Speaker 5: are the last to know when you see a turn.

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Speaker 6: Go back to year like twenty twenty two, you had a.

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Speaker 5: Peak in the market that was actually four to five

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Speaker 5: months before the peak and earnings estaments. So what we

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Speaker 5: continuously have to do is really test earning sestments to

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Speaker 5: think are they continuing to be revised higher or potentially

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Speaker 5: are their rooms for revisions lower.

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Speaker 2: You read those tea leaves. This is what we try to.

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Speaker 6: Do, all to a soundtrack of Britney Spears.

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Speaker 4: Yes h Hi, Cameron, thank you so much for joining us.

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Speaker 4: Really appreciated.

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Speaker 3: Cameron Dawson, Chief investment Officer, New Edge Wealth, trying to

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Speaker 3: get a handle on this market today with us.

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Speaker 4: More from Bloomberg Surveillance coming up after this.

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Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live

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Speaker 1: weekday afternoons from seven to ten am Eastern Listen on

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Speaker 1: Applecarplay and Android Otto with the Bloomberg Business app, or

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Speaker 1: watch us live on YouTube.

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Speaker 2: We know we got that much delayed September job support yesterday.

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Speaker 2: It was a mixed bag at best, and it was

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Speaker 2: just part of the story that we saw that volatility

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Speaker 2: yesterday in the stock market. So let's talk econ data,

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Speaker 2: which now we're getting more and more of it now

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Speaker 2: that the government shutdown is over. We've got Lena shul Yativa,

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Speaker 2: senior economist at the Conference Board, with us here live

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Speaker 2: in studio Elena, what did you make of I want

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Speaker 2: to ask what did you make of the reaction to

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Speaker 2: the job support yesterday, given the fact that it was

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Speaker 2: two months old.

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Speaker 8: It's two months old, but that's what we have. It

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Speaker 8: was so exciting to finally have the data, right. Well,

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Speaker 8: it's kind of the last clear data ahead of the shutdown.

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Speaker 8: So and already you see a pickup in the unemployment

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Speaker 8: rate even before the shutdown. Is probably going to affect

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Speaker 8: the data on the private jobs, right it will also

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Speaker 8: we will probably also see a pickup in the unemployment

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Speaker 8: rate given that a lot of federal government employees are

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Speaker 8: running rolling off from the payroll in October. So that's

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Speaker 8: a signal that the risks to the labor side of

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Speaker 8: the dual mandate for the Fed are actually rising. So

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Speaker 8: to me, the market reaction yesterday makes a lot of

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Speaker 8: sense with the odds of a cut rising, right, But

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Speaker 8: I think it's still very undecided territory. You know, there's

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Speaker 8: a lot of discussion about you know, payrolls itself. The reading,

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Speaker 8: the headline reading was pretty solid, so whatever you want.

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Speaker 6: To make of it.

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Speaker 2: I have a follow up on this unemployment rate though,

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Speaker 2: going up second month in a row, right, Well, we're

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Speaker 2: talking about September now to four point four percent, highest

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Speaker 2: in four years. What do you make of some people

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Speaker 2: going but wait a minute, it rose for the right

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Speaker 2: quote unquote right reasons because workers who were on the

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Speaker 2: sidelines came back in and were actively looking for work.

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Speaker 2: And I guess that's when you're considered unemployed, right, is

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Speaker 2: when you're actively looking for work. You're part of that survey.

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Speaker 2: What do you make of that?

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Speaker 8: I agree that you know, unemployment rate rising because people

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Speaker 8: cannot find jobs and they're looking is better than outright layoffs.

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Speaker 8: But you know, permanent layoffs also increased in the report yesterday,

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Speaker 8: So again there's a lot of mixed signals there. And yes,

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Speaker 8: the unemployment rate increased since it's droughed back in twenty

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Speaker 8: twenty three, has been driven by long term unemployment people

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Speaker 8: not able to find jobs. At the end of the day,

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Speaker 8: whatever the reason is, right, the increase in the unemployment

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Speaker 8: rate is a bad thing, and if anything, it increases

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Speaker 8: the risks that things could deteriorate. So I think it's

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Speaker 8: still unclear what's going to happen on decemb tenth.

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Speaker 4: Elena, Is there an unemployment rate?

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Speaker 3: Is there a headline rate that the Fed says, oh boy,

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Speaker 3: we got to do something here in terms of maybe

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Speaker 3: getting a little bit more aggressive. Is there a rate

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Speaker 3: out there they think is a trigger rate?

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Speaker 8: Well, they do have a summer of economic projections, right

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Speaker 8: so I'd say that that should be our kind of

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Speaker 8: like goal in terms of seeing what they think is

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Speaker 8: better and good. And if unemployment rate continues to rise,

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Speaker 8: and probably in October and November it will rise for

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Speaker 8: the reasons that I mentioned, that would go above the

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Speaker 8: projection of what they see as a predicament for three

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Speaker 8: rate cuts this year. So that should be our guide,

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Speaker 8: I think. But in terms of like an absolute value,

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Speaker 8: there is no such thing.

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Speaker 7: It depends on the supply side.

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Speaker 2: Right now, as we start to get more economic data,

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Speaker 2: we're going to start to get reports where the government

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Speaker 2: shutdown you can really see it play out in the numbers.

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Speaker 2: My question is how much should we hang our hat

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Speaker 2: on those numbers because the government shutdown was just a

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Speaker 2: moment in time and now it's over.

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Speaker 8: Well, you have government federal government employees leaving for all

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Speaker 8: kinds of different reasons. Are they going to be able

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Speaker 8: to find a job that easily in the private set

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Speaker 8: that when the hiring rate is so low. So yes, okay,

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Speaker 8: I understand the shutdown is over. I don't think that

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Speaker 8: the rebound will be.

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Speaker 2: You know, because you don't think you'll be really quick.

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Speaker 2: You don't think it's going to be a full one.

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Speaker 2: So you think we're going to take a big hit

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Speaker 2: to GDP because this was the forty three day shutdown.

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Speaker 8: We estimate half a percentage point in Q four, so

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Speaker 8: it's lower than say CBO's estimate. You know, we still

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Speaker 8: have some time in the fourth quarter to recuperate some losses,

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Speaker 8: so probably half a percentage point, which wire is significant

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Speaker 8: by historical standards.

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Speaker 3: It appears in this labor market there's there's some layoffs,

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Speaker 3: but there's not like a mass layoffs, but there's certainly

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Speaker 3: not a big hiring out there.

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Speaker 4: Is that Is that a typical.

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Speaker 3: Environment for a labor market or they're not letting people go,

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Speaker 3: but they're not hiring them.

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Speaker 8: It's quite typical. Well, when the economy is kind of

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Speaker 8: a full employment, so you know, it's a good spot

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Speaker 8: to be. It doesn't mean that things are deteriorating, but

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Speaker 8: it's a risky situation because you know, what's the next

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Speaker 8: step for a company. If you need to cut costs,

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Speaker 8: if something you know happens, some exogenous shock happens, you

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Speaker 8: don't have that cursion when you can kind of like

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Speaker 8: slow down. You're hiring to cut costs. The next step

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Speaker 8: is layoffs if something happens. But so far it's been

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Speaker 8: relatively healthy.

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Speaker 2: Were there any signs in this job support that raised

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Speaker 2: inflation flags for you? I know, wages went up, not

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Speaker 2: buy a lot, and you know, is it keeping up

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Speaker 2: with inflation? I don't think.

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Speaker 8: It's still elevated. It's still elevated, but it takes time.

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Speaker 8: And I always look at Atlanta FED numbers. You know,

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Speaker 8: job switches, job stairs. There's no big margin between those

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Speaker 8: two right now. So to me, it says that labor

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Speaker 8: market wage inflation is subsiding, so it should not be

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Speaker 8: a big source of inflation going forward, which actually Chia

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Speaker 8: Powell mentioned a few times.

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Speaker 3: You know, it's one of the greatest functions I think

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Speaker 3: on the Bloberg terminal, and again there's a gazillion functions.

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Speaker 7: FED go FD GO.

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Speaker 3: It just gives you everything you need to know about

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Speaker 3: the FED and the data points in the next meetings

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Speaker 3: and the news and all that kind of stuff. So

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Speaker 3: wherever did the FED go had on the back there?

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Speaker 3: December tenth? It tells me is the next meeting? What

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Speaker 3: do you think the FED will do?

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Speaker 8: They'll wait till the last minute. The basebook even matters

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Speaker 8: like the one that we are getting ahead of the

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Speaker 8: Thanksgiving holiday. So how bad or how good it is? It?

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Speaker 7: Is it?

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Speaker 8: The state of the labor market? Where is it? And

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Speaker 8: what a company is saying about inflation and passing the

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Speaker 8: cost onto the consumer?

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Speaker 2: Elen, know where is it written in stone that the

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Speaker 2: Fed has to have a meeting on a particular day?

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Speaker 2: I mean, if the government saying, look, we're going to

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Speaker 2: put out the November job support, which is going to

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Speaker 2: have a little bit of the October job support December sixteenth,

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Speaker 2: why isn't the FED just going, okay, well we'll move

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Speaker 2: on meeting into like December seventeenth.

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Speaker 8: Well that's going to be a havoc in the markets. Okay,

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Speaker 8: So that's probably not a good idea to do. There

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Speaker 8: are a lot of different things. You know, the FED

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Speaker 8: is data dependent, but they don't have to be like

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Speaker 8: literally data dependent. There's still a lot of alternative data.

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Speaker 8: And you know, you guys have this al t go

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Speaker 8: thing on the terminal. So there's still a lot of

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Speaker 8: good data out there to for us to understand what's

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Speaker 8: going on. I think the thing is that the risks

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Speaker 8: to the labor market are still elevated. Is still true,

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Speaker 8: and that's why the FED cut to time in the fall.

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Speaker 3: So all right, so we've beaten this labor thing to death.

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Speaker 3: Just give us your quick call on the inflation environment

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Speaker 3: out there.

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Speaker 8: Oh so hard to tell without the data. We do

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Speaker 8: have good data on the labor mars, it's very difficult

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Speaker 8: to kind of try to gauge what's happening on the

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Speaker 8: inflation side. Stephen Myron, the Governor, was on Bloomberg TV

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Speaker 8: just just a few minutes ago, yes, and he was

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Speaker 8: saying that, you know, this housing inflation is probably a

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Speaker 8: reflection of what happened in the past. So we cannot

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Speaker 8: really look at three percent inflation and say, okay, this

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Speaker 8: is the true state of affairs. Housing inflation is subsiding,

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Speaker 8: the data is not reflecting that. The labor market inflation

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Speaker 8: is probably also subsiding. So this sector inflation is moving

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Speaker 8: in the right direction. We probably have a little bit

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Speaker 8: of a tariff inflation in the goods prices, but that

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Speaker 8: will too subside. It will just take some time. It

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Speaker 8: will be a temporary increase in inflation. But I think

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Speaker 8: in a big scheme of things, inflation is probably going

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Speaker 8: to subside next year.

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Speaker 4: All Rylena, thank you so much for joining us.

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Speaker 3: Alan issues Tiava, senior US economists at the Conference Board,

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Speaker 3: one of our favorite former economists at Bloomberg.

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Speaker 4: We appreciate getting some of your time.

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Speaker 2: To stay with us.

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Speaker 4: More from Bloomberg Surveillance coming up after this.

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Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us live

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Speaker 1: weekday afternoons from seven to ten am Eastern. Listen on

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00:16:39,000 --> 00:16:42,640
Speaker 1: Applecarplay and Android Otto with the Bloomberg Business app, or

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Speaker 1: watch us live on YouTube.

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Speaker 3: Let's go to a professional here when we think about

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Speaker 3: these markets. Jeff Crumpleman, and he's CIO and head of

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Speaker 3: Equities at Mariner Wealth Advisors, located in Cincinnati, Ohio, one

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Speaker 3: of my favorite towns. I used to go there all

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Speaker 3: the time to see a couple of institutional investor accounts.

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Speaker 7: We try to go see a.

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Speaker 3: Ballgame when I was Thereolute for you, Jeff, thanks for

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Speaker 3: joining us here. What's your call here? We've had a

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Speaker 3: you look back on twenty twenty five. Equities it done well, Yes,

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Speaker 3: it's been volatile. Fixed income has done well. We've got

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Speaker 3: some solid high single digit returns there. What are you

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Speaker 3: thinking about as you think about twenty twenty six.

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Speaker 9: So our thesis going into this year was clear air turbulence,

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Speaker 9: which I think pretty well describes what's going on. I

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Speaker 9: think that's still apropos as we go into the end

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Speaker 9: of the year, and you know, as people try and

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Speaker 9: prophesize and they're trying to find reasons for what happened

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Speaker 9: yesterday with some mixed news. You know, the thing about

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Speaker 9: clear air turbulence is there's no radar systems to detect it.

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Speaker 7: It just happens in clear sky.

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Speaker 9: So in terms of what we do think will play out,

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Speaker 9: we had a target of sixty six hundred on the

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Speaker 9: S and P four calendar year twenty twenty five. I

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Speaker 9: think we're going to be, you know, pretty close, and

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Speaker 9: that's that's a pretty nice outcome, albeit with a bit

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Speaker 9: of air flocking in there. Our kind of theme and

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Speaker 9: thesis as we think about twenty twenty six is the

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Speaker 9: year of risk awareness and diversification two point zero. So

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Speaker 9: I think you want to avoid concentrations. I think you

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Speaker 9: do want to be a little more balanced than we've

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Speaker 9: seen this year, and I think that we're going to

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Speaker 9: have healthy result, but the market's kind of tired as

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Speaker 9: we go into the year.

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Speaker 7: We would be just fine.

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Speaker 9: As people talk about bubbles and troubles, which we don't

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Speaker 9: agree with, but to see the market kind of rest

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Speaker 9: and digest the strong earnings for a quarter or so

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Speaker 9: I think would be very realistic.

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Speaker 2: Probably a healthy thing, I think, yes, So let's talk

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Speaker 2: valuation because a lot of what the volatility we've been

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Speaker 2: seeing has been centered around are these stretched valuations we're seeing,

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Speaker 2: particularly an AI But you say valuation is a poor

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Speaker 2: timing tool for investors, Sure, what do you mean by that?

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Speaker 2: And then what would be a good timing tool?

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Speaker 9: Well, you know people, it's funny they're all wiggy about valuation.

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Speaker 5: Now.

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Speaker 9: We've been at twenty two times earnings for a long time.

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Speaker 9: We were twenty two times going into this year. We're

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Speaker 9: a little less than that right now. So the advance

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Speaker 9: has been earnings growth, not valuation. I think the AI

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Speaker 9: trade has made people more old this is like two

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Speaker 9: thousand and just more sensitive to valuation now.

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Speaker 7: It's always been there, and it's a terrible timing tool.

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Speaker 9: So whether you talk about Alan Greenspan irrational exuberance in

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Speaker 9: ninety six before it doubled in one, or you talk

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Speaker 9: about questions I've been getting going all the way back

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Speaker 9: to twenty seventeen eighteen when people said, hey, Jeff, twenty

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Speaker 9: two times is rich.

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Speaker 7: How can we go up from here?

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Speaker 9: And you have double digit targets on the S and

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Speaker 9: P five hundred, So it's just a very terrible it's

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Speaker 9: fundamentals and valuation can remain elevated if fundamentals are strong.

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Speaker 9: And I'll add this, this is not your grandfather's index

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Speaker 9: when people compare this to the fifty year average of

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Speaker 9: fifteen sixteen times earnings. You know, back forty years ago industrials,

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Speaker 9: financials and energy were fifty percent of the S and

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Speaker 9: P five hundred market cap. Today they're twenty percent. Return

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Speaker 9: on equity was sixteen today it's twenty two. Margins were

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Speaker 9: nine percent profit margins that profit margins today they're fourteen.

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Speaker 9: It is not your grandfather's in dex So, yeah, that's

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Speaker 9: a good point.

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Speaker 3: Yeah, thirty seconds left. Here is there sector out there

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Speaker 3: that screens well for you?

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Speaker 4: At this point?

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Speaker 9: Yeah, you know, just to kind of shift gears from

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Speaker 9: all this tech stuff. First of all, I appreciate your

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Speaker 9: comment about Walmart earlier on the show.

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Speaker 2: Well, thank you for listening, Jeff hey Man.

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Speaker 4: You know what you learn.

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Speaker 9: But healthcare would be a selective consumer. And healthcare and

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Speaker 9: I think energy could be a surprise as usually that is.

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Speaker 4: A surprise because we got oil at fifty eight dollars

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Speaker 4: a barrel here.

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Speaker 9: Yep. But if you look at the charts, we're starting

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Speaker 9: to see some interest as people diversified from just a

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Speaker 9: tech trade.

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Speaker 5: Yep.

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Speaker 2: I'm just going to interject them in a budget with Walmart,

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Speaker 2: is they're going to move their stock listing from the

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Speaker 2: New York Stock Exchange to the Nasdaq?

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Speaker 3: Is that?

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Speaker 2: Am I missing something? Is that a big deal? Because

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Speaker 2: talk about this is not your grandfather's market anymore. I

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Speaker 2: don't know if I could remember a time when I think, oh, yeah,

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Speaker 2: sure that that move makes sense. Does that make sense

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Speaker 2: to you?

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Speaker 9: Well it does because e commerce was up twenty seven percent.

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Speaker 9: It's so much more of a technology company. So you know,

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Speaker 9: think about it. When you search for something automatically, you

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Speaker 9: go online to Walmart, you know.

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Speaker 4: So yeah, for the NYC.

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Speaker 6: I would not have allowed that to happen.

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Speaker 4: I would have done anything to keep that name there.

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Speaker 3: Jeffrumplement's CIO and head of Equities at Mariner Well Advisors

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Speaker 3: based there in Cincinnati, Ohio.

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Speaker 4: Stay with us more from Bloomberg Surveillance coming up after this.

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Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live

438
00:21:52,440 --> 00:21:55,520
Speaker 1: weekday afternoons from seven to ten am Eastern. Listen on

439
00:21:55,680 --> 00:21:59,280
Speaker 1: Applecarplay and Android Otto with the Bloomberg Business app, or

440
00:21:59,440 --> 00:22:00,840
Speaker 1: watch us live on YouTube.

441
00:22:00,880 --> 00:22:03,280
Speaker 2: Talking about the FED. Can't stop talking about the FED

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Speaker 2: as we lead up to their two day meeting December

443
00:22:06,160 --> 00:22:09,200
Speaker 2: ninth and tenth, And in an environment where we're thinking

444
00:22:09,480 --> 00:22:13,600
Speaker 2: perhaps we could be in for some interest rate cuts,

445
00:22:13,680 --> 00:22:16,440
Speaker 2: lower rates for longer. What does that all mean to

446
00:22:16,760 --> 00:22:19,800
Speaker 2: commercial real estate? Let's bring in an expert to sift

447
00:22:19,880 --> 00:22:22,800
Speaker 2: through it all, Rich Hill in our Interactive Broker studio

448
00:22:22,840 --> 00:22:25,199
Speaker 2: with this global head of real Estate Strategy and Research,

449
00:22:25,320 --> 00:22:28,080
Speaker 2: Principal Asset Management. Rich, good to see you here in

450
00:22:28,119 --> 00:22:28,840
Speaker 2: the studio.

451
00:22:28,720 --> 00:22:29,840
Speaker 7: Good morning, Thanks for having me in.

452
00:22:30,240 --> 00:22:32,240
Speaker 2: So just paint the picture for us as we head

453
00:22:32,320 --> 00:22:34,880
Speaker 2: into this FED meeting where there's a big question mark

454
00:22:34,880 --> 00:22:36,480
Speaker 2: as to whether or not we get that third interest

455
00:22:36,560 --> 00:22:39,040
Speaker 2: rate cut of the year. What is the commercial real

456
00:22:39,160 --> 00:22:41,960
Speaker 2: estate landscape looking like heading into that meeting?

457
00:22:42,200 --> 00:22:44,479
Speaker 7: Yeah? Sure, Well, first of all, I think it's important

458
00:22:44,480 --> 00:22:45,040
Speaker 7: to level set.

459
00:22:45,320 --> 00:22:47,560
Speaker 10: Commercial real estate is one of the few asset classes

460
00:22:47,600 --> 00:22:51,600
Speaker 10: in the world where valuations have significantly reset. Private real

461
00:22:51,720 --> 00:22:54,040
Speaker 10: estate valuations are down twenty to twenty five percent in

462
00:22:54,080 --> 00:22:55,119
Speaker 10: the US and Europe.

463
00:22:55,240 --> 00:22:57,399
Speaker 7: Public valuations are down around the same amount.

464
00:22:58,000 --> 00:23:00,719
Speaker 10: We think this is a cycle going through an normal reset.

465
00:23:01,440 --> 00:23:03,800
Speaker 10: That's hard to understand because there's a lot going on

466
00:23:04,000 --> 00:23:05,600
Speaker 10: and a lot of noise. But let me explain what

467
00:23:05,720 --> 00:23:09,080
Speaker 10: I think that means. List it reads trough first, because

468
00:23:09,080 --> 00:23:12,440
Speaker 10: they're leading indicators in both downturns and recoveries. List it

469
00:23:12,480 --> 00:23:14,840
Speaker 10: reads trot in not October of twenty twenty three, and

470
00:23:14,920 --> 00:23:17,399
Speaker 10: they're up more than thirty five percent from those levels.

471
00:23:18,080 --> 00:23:21,639
Speaker 10: Private valuations trough twelve to eighteen months later. We've now

472
00:23:21,760 --> 00:23:24,640
Speaker 10: seen five consecutive quarters in the United States where total

473
00:23:24,680 --> 00:23:25,520
Speaker 10: returns are higher.

474
00:23:25,680 --> 00:23:27,000
Speaker 7: It's six quarters in Europe.

475
00:23:27,560 --> 00:23:30,000
Speaker 10: There's actually something that happens though on a lagging indicator

476
00:23:30,000 --> 00:23:32,600
Speaker 10: that I think confuses a lot of people distress in

477
00:23:32,640 --> 00:23:35,760
Speaker 10: the commercial real estate markets. Doesn't peak out until after

478
00:23:35,840 --> 00:23:39,000
Speaker 10: private valuations trough. Why is that happening, Well, it's part

479
00:23:39,040 --> 00:23:42,320
Speaker 10: of the grieving process. Banks don't like to sell distress

480
00:23:42,400 --> 00:23:45,640
Speaker 10: loans and to distressed markets. They like to sell distress

481
00:23:45,720 --> 00:23:48,200
Speaker 10: loans and too stabilized markets. So that's where we think

482
00:23:48,240 --> 00:23:51,240
Speaker 10: we are. You bring up a good question, though, what

483
00:23:51,320 --> 00:23:54,040
Speaker 10: about interest rate cuts. You hear a lot of commercial

484
00:23:54,080 --> 00:23:57,520
Speaker 10: real estate professionals saying we want lower interest rates. That's

485
00:23:57,560 --> 00:24:00,720
Speaker 10: not our review. We want stable interest rates. And the

486
00:24:00,760 --> 00:24:03,760
Speaker 10: reason I say we don't want lower interest rates, and

487
00:24:03,800 --> 00:24:06,159
Speaker 10: I'm really talking about long term interestrates because commercial real

488
00:24:06,280 --> 00:24:08,400
Speaker 10: estate bar ersk financed themselves with long term interest rates.

489
00:24:09,320 --> 00:24:11,720
Speaker 10: If you have meaningfully lower interest rates, be careful what

490
00:24:11,800 --> 00:24:14,560
Speaker 10: you wish for. That actually might mean a weaker economy.

491
00:24:14,800 --> 00:24:18,160
Speaker 10: That might mean tighter financial conditions, wider credit spreads. That's

492
00:24:18,200 --> 00:24:20,600
Speaker 10: not good for any risk asset, including commercial real estate.

493
00:24:20,920 --> 00:24:23,720
Speaker 10: What we're really rooting for here is stability. That's what

494
00:24:23,840 --> 00:24:25,359
Speaker 10: we think the market needs to see. That's what we

495
00:24:25,400 --> 00:24:27,120
Speaker 10: think commercial real estate investors want to see.

496
00:24:27,720 --> 00:24:29,919
Speaker 4: Explained something to you. But I've learned about commercial real

497
00:24:30,040 --> 00:24:30,560
Speaker 4: estate business.

498
00:24:30,800 --> 00:24:34,600
Speaker 3: Yeah, it's controlled by these Morgan Stanley guys They're everywhere.

499
00:24:34,720 --> 00:24:38,240
Speaker 3: The Morgan Stanley commercial real estate business is based their

500
00:24:38,280 --> 00:24:38,960
Speaker 3: best on the street.

501
00:24:38,960 --> 00:24:39,600
Speaker 7: But it's a good ball.

502
00:24:39,720 --> 00:24:42,000
Speaker 3: They and they leave Morgan Stanley and they put their

503
00:24:42,040 --> 00:24:44,840
Speaker 3: tentacles all around the commercial It's a total scam. They're

504
00:24:44,960 --> 00:24:48,720
Speaker 3: everywhere and nobody's better at it than these Morgan Stanley folks.

505
00:24:49,040 --> 00:24:54,280
Speaker 3: Rich in the US. Here have we troughed in let's say, office,

506
00:24:54,359 --> 00:24:56,159
Speaker 3: Have we trofed on office here? Because I'm here in

507
00:24:56,280 --> 00:24:58,760
Speaker 3: some positive murmers even about like New York and San Francisco.

508
00:24:58,920 --> 00:25:02,439
Speaker 10: Yeah, sure, So it's really hard to and I'm your

509
00:25:02,480 --> 00:25:05,920
Speaker 10: super cliche here office with a really broad brush. And

510
00:25:06,000 --> 00:25:08,080
Speaker 10: the reason I say that is JLLL has a great

511
00:25:08,160 --> 00:25:11,720
Speaker 10: statistic that ninety percent of vacancy in the United States

512
00:25:12,240 --> 00:25:14,720
Speaker 10: is concertated in thirty to thirty five percent of buildings.

513
00:25:15,160 --> 00:25:18,680
Speaker 10: New York City really strong, it seems really strong rebound.

514
00:25:19,080 --> 00:25:22,000
Speaker 10: San Francisco beginning to see some real signs of light.

515
00:25:22,760 --> 00:25:25,360
Speaker 10: And if you're a long term investor, yeah, you're you're

516
00:25:25,359 --> 00:25:28,240
Speaker 10: pretty bullish on San Francisco because of how beaten down

517
00:25:28,320 --> 00:25:30,600
Speaker 10: it is. I think the market is still trying to

518
00:25:30,640 --> 00:25:33,040
Speaker 10: figure out what the high quality buildings are from the

519
00:25:33,080 --> 00:25:35,880
Speaker 10: lower quality buildings. We actually don't have an office problem

520
00:25:35,920 --> 00:25:38,119
Speaker 10: in the United States. We have a Class B and

521
00:25:38,200 --> 00:25:39,160
Speaker 10: C office.

522
00:25:38,920 --> 00:25:41,000
Speaker 2: Problem because those older buildings you mean.

523
00:25:40,960 --> 00:25:43,240
Speaker 10: One hundred percent And if you were renting a Class

524
00:25:43,320 --> 00:25:45,359
Speaker 10: B and C office property prior to COVID, you probably

525
00:25:45,400 --> 00:25:49,480
Speaker 10: didn't value the office experience. Here's my ultimate point with office.

526
00:25:49,640 --> 00:25:51,840
Speaker 10: I don't know when at bottoms. I'm not really good

527
00:25:51,880 --> 00:25:54,440
Speaker 10: at picking bottoms. Other people do better job of that

528
00:25:54,560 --> 00:25:56,760
Speaker 10: than me. But I do think over the medium to

529
00:25:56,840 --> 00:25:58,359
Speaker 10: long term, we're going to look back and we're going

530
00:25:58,440 --> 00:26:00,320
Speaker 10: to say the office sector is one of the sectors

531
00:26:00,359 --> 00:26:03,440
Speaker 10: that performed really well over the next ten years. Usually

532
00:26:03,520 --> 00:26:05,960
Speaker 10: last cycles losers aren't the next cycles loss.

533
00:26:06,640 --> 00:26:09,240
Speaker 2: Okay, So if Class B and C is sort of

534
00:26:09,440 --> 00:26:12,520
Speaker 2: not the place to be in terms of office, is

535
00:26:12,600 --> 00:26:14,800
Speaker 2: it the place to be when you're thinking about converting

536
00:26:14,920 --> 00:26:18,040
Speaker 2: office to residential, which we've seen a lot of in

537
00:26:18,200 --> 00:26:19,200
Speaker 2: some of our major cities.

538
00:26:19,280 --> 00:26:24,240
Speaker 10: Yeah, highly attractive investment thesis really hard to do in practice.

539
00:26:24,760 --> 00:26:27,480
Speaker 10: There's probably one hundred and fifty to two hundred buildings

540
00:26:27,520 --> 00:26:29,840
Speaker 10: across the United States where you can actually do it.

541
00:26:30,760 --> 00:26:33,600
Speaker 10: Why is it working so well in New York City? Well,

542
00:26:33,720 --> 00:26:35,760
Speaker 10: it comes back down to how you think about affordability

543
00:26:35,800 --> 00:26:38,600
Speaker 10: in the United States. Morally, big believers that you don't

544
00:26:38,640 --> 00:26:41,200
Speaker 10: need to regulate what you have, you need to build

545
00:26:41,240 --> 00:26:43,560
Speaker 10: more of what you don't have. We don't have enough

546
00:26:43,600 --> 00:26:46,200
Speaker 10: housing in New York City, and frankly, we don't have

547
00:26:46,400 --> 00:26:49,280
Speaker 10: enough housing across the United States for various different reasons.

548
00:26:49,600 --> 00:26:53,399
Speaker 10: So I'm a really big proponent of converting office into multifamily.

549
00:26:53,880 --> 00:26:55,720
Speaker 7: It's just not for the faint of heart, and it's

550
00:26:55,840 --> 00:26:57,280
Speaker 7: a lot harder to do and.

551
00:26:57,600 --> 00:27:00,080
Speaker 2: Probably pretty expensive to retrofit.

552
00:26:59,720 --> 00:27:02,320
Speaker 7: Is it not, Yeah, it is. In many cases.

553
00:27:02,560 --> 00:27:05,560
Speaker 10: It's actually easier to raise a building right to bulldoze

554
00:27:05,600 --> 00:27:07,399
Speaker 10: it and build from the ground up, because it's not

555
00:27:07,520 --> 00:27:09,119
Speaker 10: that much different. But if you could be view with

556
00:27:09,119 --> 00:27:11,800
Speaker 10: the right floor plate in office and converted to multifamily,

557
00:27:12,119 --> 00:27:14,400
Speaker 10: really lucrative investment thesis, that's true.

558
00:27:14,440 --> 00:27:16,600
Speaker 3: I don't know thought about it because when we raised

559
00:27:16,640 --> 00:27:19,280
Speaker 3: and built a home, I was shocked at how cheap

560
00:27:19,320 --> 00:27:21,840
Speaker 3: it was to tear down a home. The guy could

561
00:27:21,840 --> 00:27:23,720
Speaker 3: have quoted any ten x what do he quoted me?

562
00:27:23,760 --> 00:27:25,280
Speaker 3: And I would have paid it because I had no idea.

563
00:27:25,400 --> 00:27:27,520
Speaker 2: Because it's really about the land it's sitting on, right

564
00:27:27,560 --> 00:27:28,440
Speaker 2: in location location.

565
00:27:28,560 --> 00:27:31,119
Speaker 3: Okay, dude brought in like a back hole and just

566
00:27:31,280 --> 00:27:33,000
Speaker 3: knocked it down in like fifteen minutes.

567
00:27:33,119 --> 00:27:33,439
Speaker 2: Crazy.

568
00:27:33,600 --> 00:27:35,760
Speaker 4: I mean, it was unbelievable. I didn't understand about that,

569
00:27:35,920 --> 00:27:36,239
Speaker 4: all right.

570
00:27:36,280 --> 00:27:39,520
Speaker 3: So where rich is the best value out there in

571
00:27:39,840 --> 00:27:42,160
Speaker 3: the broader commercial real estate these days?

572
00:27:42,160 --> 00:27:43,320
Speaker 4: Where are you guys seeing it?

573
00:27:43,440 --> 00:27:45,240
Speaker 7: Yeah, there's three things that I want to talk about today.

574
00:27:45,880 --> 00:27:48,399
Speaker 10: The first point, we can't be talking about commercial real

575
00:27:48,480 --> 00:27:50,160
Speaker 10: estate and you can't be talking about markets if you're

576
00:27:50,160 --> 00:27:50,960
Speaker 10: not talking about.

577
00:27:50,720 --> 00:27:51,720
Speaker 7: AI and data centers.

578
00:27:51,880 --> 00:27:54,840
Speaker 10: Okay, so we think data centers are really interesting, but

579
00:27:54,920 --> 00:27:57,800
Speaker 10: with a nuance. First of all, I think it's important

580
00:27:57,840 --> 00:28:01,560
Speaker 10: to unpack AI demand from data set demand. Data center

581
00:28:01,640 --> 00:28:03,760
Speaker 10: demand is constrained by land and power.

582
00:28:03,840 --> 00:28:04,159
Speaker 7: Right now.

583
00:28:04,680 --> 00:28:06,680
Speaker 10: You actually have way more demand than you have the

584
00:28:06,760 --> 00:28:10,440
Speaker 10: ability to create data centers right now. That's the first point.

585
00:28:10,600 --> 00:28:12,840
Speaker 10: The second point is when you're investing in a data center,

586
00:28:12,920 --> 00:28:16,240
Speaker 10: you're actually investing in infrastructure, the land, the ability, power

587
00:28:16,280 --> 00:28:18,280
Speaker 10: of the land, the fib that goes to the land.

588
00:28:18,760 --> 00:28:20,920
Speaker 10: The third point, which I think is a nuance that

589
00:28:21,080 --> 00:28:23,520
Speaker 10: the markets just now beginning to understand, is not all

590
00:28:23,600 --> 00:28:26,040
Speaker 10: data centers are created the same. When we think about

591
00:28:26,119 --> 00:28:28,960
Speaker 10: data centers. We think about cloud data centers. That's when

592
00:28:29,280 --> 00:28:32,920
Speaker 10: you and I are on Bloomberg right now, uses cloud.

593
00:28:33,240 --> 00:28:35,639
Speaker 10: There's AI inference, which is when you and I go

594
00:28:35,760 --> 00:28:39,160
Speaker 10: on chat g GPT and prompt chat GPT, and then

595
00:28:39,160 --> 00:28:42,560
Speaker 10: there's generative AI. General of AI is training models for

596
00:28:42,680 --> 00:28:43,600
Speaker 10: future AI demand.

597
00:28:44,040 --> 00:28:44,800
Speaker 7: We're really quite.

598
00:28:44,680 --> 00:28:47,800
Speaker 10: Bullish on cloud and AI inference. We're much more cautious

599
00:28:47,840 --> 00:28:51,320
Speaker 10: on generative AI. But we think focusing on cloud and

600
00:28:51,400 --> 00:28:55,080
Speaker 10: AI inference, which is actual existing demand, that's a really

601
00:28:55,160 --> 00:28:57,920
Speaker 10: interesting asset class. We're a developer in the United States

602
00:28:58,200 --> 00:29:00,720
Speaker 10: and we think we can develop these that unless IRRs

603
00:29:00,800 --> 00:29:02,800
Speaker 10: and call it the twenty percent range, which ends up

604
00:29:02,800 --> 00:29:03,680
Speaker 10: being really attractive.

605
00:29:03,920 --> 00:29:06,280
Speaker 7: So A'll pause there. You might have questions about data centers,

606
00:29:06,320 --> 00:29:07,560
Speaker 7: and then we can do to move on.

607
00:29:07,680 --> 00:29:09,680
Speaker 2: I just I don't think we've hit a topic where

608
00:29:09,720 --> 00:29:14,280
Speaker 2: we haven't talked about AI. It is infiltrating just about everywhere.

609
00:29:15,480 --> 00:29:19,080
Speaker 2: Real quick rich, where within commercial real estate can can

610
00:29:19,440 --> 00:29:22,040
Speaker 2: can they benefit most from AI?

611
00:29:22,400 --> 00:29:26,560
Speaker 10: Yeah, data centers number one, but it's actually helping the

612
00:29:26,840 --> 00:29:30,040
Speaker 10: entire world in a lot of different ways. I'll come

613
00:29:30,120 --> 00:29:32,280
Speaker 10: back to what you were talking about office. There's a

614
00:29:32,320 --> 00:29:34,880
Speaker 10: lot of questions about how AI is going to impact office.

615
00:29:35,200 --> 00:29:37,600
Speaker 10: The reality is, I think we're still early dings about

616
00:29:37,640 --> 00:29:40,360
Speaker 10: how it's going to impact office, what workers are going

617
00:29:40,400 --> 00:29:42,280
Speaker 10: to be upskilled, what workers are going to be downskilled,

618
00:29:42,320 --> 00:29:43,160
Speaker 10: what workers are going.

619
00:29:43,120 --> 00:29:43,760
Speaker 7: To be outskilled.

620
00:29:43,840 --> 00:29:46,960
Speaker 10: But there are going to be markets that benefit significantly

621
00:29:47,320 --> 00:29:51,200
Speaker 10: from AI. It is changing, It is changing the world,

622
00:29:51,320 --> 00:29:54,120
Speaker 10: and commercial real estate is a big beneficiary of that.

623
00:29:54,280 --> 00:29:55,440
Speaker 7: So we think there's going to be a lot of

624
00:29:55,800 --> 00:29:58,120
Speaker 7: efficiencies that are driven by AI, which thanks so much.

625
00:29:58,120 --> 00:29:58,640
Speaker 4: Appreciate that.

626
00:29:58,760 --> 00:30:01,320
Speaker 3: Richell, Global Head of will Say Strategy and Research at

627
00:30:01,400 --> 00:30:03,720
Speaker 3: Principal Asset Management.

628
00:30:04,520 --> 00:30:09,320
Speaker 1: This is the Bloomberg Surveillance podcast, available on Apple, Spotify,

629
00:30:09,480 --> 00:30:13,720
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630
00:30:13,880 --> 00:30:17,320
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631
00:30:17,440 --> 00:30:21,400
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632
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633
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