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Speaker 2: Gotta make sense of it all exactly.
Speaker 3: We can do that with Cam Dawson, chief investment officer
Speaker 3: at New Edgewells.
Speaker 4: She joins us here in our Bloomberg Interactive Broker studio.
Speaker 3: Cam, what did you make of the trading activity yesterday?
Speaker 3: It was really a whip saw.
Speaker 5: Yeah, yesterday is an was an outside reversal or what
Speaker 5: we call in show business a bearish in golfing, So
Speaker 5: when you have price action like this, it usually does
Speaker 5: proceed more volatility, which just means that we should get
Speaker 5: used to seeing some more of this chop. We're looking
Speaker 5: for the sixty five hundred level where we're trading right
Speaker 5: now to hold.
Speaker 6: That's really important.
Speaker 5: That's your one hundred day moving average. If that doesn't hold,
Speaker 5: it brings sixty one hundred in play your two hundred
Speaker 5: day moving average, which would also be the peak back
Speaker 5: in February. So if you got to those levels, you'd
Speaker 5: certainly see more oversold conditions. Notably, today the market is
Speaker 5: not over sold yet externally on something like an RSI.
Speaker 5: It's also not oversold internally, meaning breadth hasn't been totally
Speaker 5: washed out yet, So all of us put together probably
Speaker 5: accept more chop and churn.
Speaker 2: So yeah, because the S and P five hundred finished
Speaker 2: yesterday well just below it's one hundred day moving average,
Speaker 2: we haven't seen that happen in months. I think the
Speaker 2: last time was when President Trump announced the tariffs back
Speaker 2: in April, right.
Speaker 5: Yeah, And I think it's fascinating that just a couple
Speaker 5: of weeks ago we had had the longest streak above
Speaker 5: the fifty day moving average since two thousand and seven.
Speaker 7: Wow.
Speaker 5: So we were in this environment of incredibly low volatility, which,
Speaker 5: of course we know low volatility tends to breed complacency,
Speaker 5: and we saw complacency in many places, with fineral margin
Speaker 5: loan balances surging higher by thirty five percentiment retail traders
Speaker 5: were going all in adding leverage. All of this suggested
Speaker 5: is that people were thinking that the good times were
Speaker 5: going to keep on rolling. But of course, as we know,
Speaker 5: what's the law of perversity, is that the market will
Speaker 5: work to make the greatest fool out of the greatest
Speaker 5: number of people to the greatest possible extent.
Speaker 4: Yesterday was a day.
Speaker 3: You know, we had the Nvidia numbers Wednesday evening, setting
Speaker 3: up for good trading on Thursday because it seemed like
Speaker 3: the AI play was still very.
Speaker 4: Much in play, but then it wasn't.
Speaker 3: Yeah, so how important is that AI theme as a
Speaker 3: growth driver for the overall market?
Speaker 4: How important is that?
Speaker 1: Still?
Speaker 5: It's still incredibly important, And we think that there's an
Speaker 5: important nuance to the Nvidia numbers, which is that In
Speaker 5: Video's strong earnings actually makes the questions around AI overspending
Speaker 5: even louder. Okay, because the AI questions were not whether
Speaker 5: or not companies were spending.
Speaker 6: We knew that.
Speaker 5: We knew that by the Capex guidance, so we knew
Speaker 5: in Video results would be good. The big question was
Speaker 5: are the people who are spending on AI Capex are
Speaker 5: they earning a return on it that is justified to
Speaker 5: different shareholders, not just their equity shareholders, but now all
Speaker 5: of this death that they're raising as well.
Speaker 2: So then what's it going to take for the market
Speaker 2: to feel better? I guess about all the capex spending
Speaker 2: and AI.
Speaker 6: Yeah, it's an interesting question.
Speaker 5: If you were to see somebody like Meta come out
Speaker 5: and say we're reducing our capex spend next year, potentially
Speaker 5: because the stock has done so much, how would.
Speaker 6: The market react.
Speaker 5: Would they be supportive of that or would it cause
Speaker 5: a further unwind of all of these earnings expectations as
Speaker 5: well as valuations that are built on this idea that
Speaker 5: you're going to see trillions of dollars of spend. So
Speaker 5: I think that that is the big question as we
Speaker 5: go into twenty twenty six, is that do they continue
Speaker 5: to wraphet up capex expectations in the face of a
Speaker 5: market that seems to have lost its tolerance for it.
Speaker 3: So we did get a lot of economic data today,
Speaker 3: We're going to get some more today with some pmis.
Speaker 3: We're going to get the EU mission data as well. Here,
Speaker 3: how do you think the FED is kind of ingesting
Speaker 3: all this data we're starting to get?
Speaker 1: Then?
Speaker 5: Yeah, well the data is now so backward looking, and
Speaker 5: important to note that when they meet next in December,
Speaker 5: they're not going to have the October or November jobs report,
Speaker 5: so they're still going to be in this flying blind,
Speaker 5: which means that it's likely that they lean towards this
Speaker 5: hawkish side of things in the unknowing of what the
Speaker 5: jobs market is doing. I would say, though, is that
Speaker 5: if we see this equity market volatility continue, it actually
Speaker 5: likely pushes them more towards a rate cut, because the
Speaker 5: best argument that you have for not cutting rates was
Speaker 5: looking at broad financial conditions. But if broad financial conditions,
Speaker 5: which include equities, include credit, and include volatility, if those
Speaker 5: move to titan, that actually could push the FED to
Speaker 5: delivering a cut because of what it could be implying
Speaker 5: about the underlying economy.
Speaker 2: So I'm just curious how much of this aggressive selling
Speaker 2: that we've been seeing is really about technical dynamics.
Speaker 5: I think it's a large part of it because when
Speaker 5: we look at the trading in September in October, it
Speaker 5: really wasn't justified for as much as high as things
Speaker 5: had moved, you had over a thirty percent rally in
Speaker 5: the socks in those two months alone, the semiconductor index,
Speaker 5: So there was a frothiness, a speculative nature of the
Speaker 5: way that we saw things trade back in those two months.
Speaker 6: So we've effectively now reversed.
Speaker 5: Most of that of that rally higher, and the question
Speaker 5: is do you have to shake out any further hands
Speaker 5: because you saw so much leverage being added and you
Speaker 5: saw people really trying to add on to risk.
Speaker 6: Some of that is just getting the air taken out
Speaker 6: of it.
Speaker 3: Earnings, we had a good, solid earnings this season. We
Speaker 3: have still have some more retailers to go here, but
Speaker 3: double digit growth in the third quarter, double digit growth
Speaker 3: in the second quarter. How do you feel about the
Speaker 3: earnings power this market? Is it enough to support this market?
Speaker 1: Yeah?
Speaker 5: We continue to come back to looking at Ford earnings
Speaker 5: expectations and say, look, twenty five and twenty twenty six
Speaker 5: estimates are still moving higher. That is usually broadly supportive
Speaker 5: of risk assets. The caveat to that is that earnings
Speaker 5: do lag overall prices, meaning that the street consensus will
Speaker 5: always be late to the game. We've been using the
Speaker 5: song the Deep track from Britney Spears first album, Don't
Speaker 5: let Me be the last to know, because earnings usually
Speaker 5: are the last to know when you see a turn.
Speaker 6: Go back to year like twenty twenty two, you had a.
Speaker 5: Peak in the market that was actually four to five
Speaker 5: months before the peak and earnings estaments. So what we
Speaker 5: continuously have to do is really test earning sestments to
Speaker 5: think are they continuing to be revised higher or potentially
Speaker 5: are their rooms for revisions lower.
Speaker 2: You read those tea leaves. This is what we try to.
Speaker 6: Do, all to a soundtrack of Britney Spears.
Speaker 4: Yes h Hi, Cameron, thank you so much for joining us.
Speaker 4: Really appreciated.
Speaker 3: Cameron Dawson, Chief investment Officer, New Edge Wealth, trying to
Speaker 3: get a handle on this market today with us.
Speaker 4: More from Bloomberg Surveillance coming up after this.
Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live
Speaker 1: weekday afternoons from seven to ten am Eastern Listen on
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Speaker 2: We know we got that much delayed September job support yesterday.
Speaker 2: It was a mixed bag at best, and it was
Speaker 2: just part of the story that we saw that volatility
Speaker 2: yesterday in the stock market. So let's talk econ data,
Speaker 2: which now we're getting more and more of it now
Speaker 2: that the government shutdown is over. We've got Lena shul Yativa,
Speaker 2: senior economist at the Conference Board, with us here live
Speaker 2: in studio Elena, what did you make of I want
Speaker 2: to ask what did you make of the reaction to
Speaker 2: the job support yesterday, given the fact that it was
Speaker 2: two months old.
Speaker 8: It's two months old, but that's what we have. It
Speaker 8: was so exciting to finally have the data, right. Well,
Speaker 8: it's kind of the last clear data ahead of the shutdown.
Speaker 8: So and already you see a pickup in the unemployment
Speaker 8: rate even before the shutdown. Is probably going to affect
Speaker 8: the data on the private jobs, right it will also
Speaker 8: we will probably also see a pickup in the unemployment
Speaker 8: rate given that a lot of federal government employees are
Speaker 8: running rolling off from the payroll in October. So that's
Speaker 8: a signal that the risks to the labor side of
Speaker 8: the dual mandate for the Fed are actually rising. So
Speaker 8: to me, the market reaction yesterday makes a lot of
Speaker 8: sense with the odds of a cut rising, right, But
Speaker 8: I think it's still very undecided territory. You know, there's
Speaker 8: a lot of discussion about you know, payrolls itself. The reading,
Speaker 8: the headline reading was pretty solid, so whatever you want.
Speaker 6: To make of it.
Speaker 2: I have a follow up on this unemployment rate though,
Speaker 2: going up second month in a row, right, Well, we're
Speaker 2: talking about September now to four point four percent, highest
Speaker 2: in four years. What do you make of some people
Speaker 2: going but wait a minute, it rose for the right
Speaker 2: quote unquote right reasons because workers who were on the
Speaker 2: sidelines came back in and were actively looking for work.
Speaker 2: And I guess that's when you're considered unemployed, right, is
Speaker 2: when you're actively looking for work. You're part of that survey.
Speaker 2: What do you make of that?
Speaker 8: I agree that you know, unemployment rate rising because people
Speaker 8: cannot find jobs and they're looking is better than outright layoffs.
Speaker 8: But you know, permanent layoffs also increased in the report yesterday,
Speaker 8: So again there's a lot of mixed signals there. And yes,
Speaker 8: the unemployment rate increased since it's droughed back in twenty
Speaker 8: twenty three, has been driven by long term unemployment people
Speaker 8: not able to find jobs. At the end of the day,
Speaker 8: whatever the reason is, right, the increase in the unemployment
Speaker 8: rate is a bad thing, and if anything, it increases
Speaker 8: the risks that things could deteriorate. So I think it's
Speaker 8: still unclear what's going to happen on decemb tenth.
Speaker 4: Elena, Is there an unemployment rate?
Speaker 3: Is there a headline rate that the Fed says, oh boy,
Speaker 3: we got to do something here in terms of maybe
Speaker 3: getting a little bit more aggressive. Is there a rate
Speaker 3: out there they think is a trigger rate?
Speaker 8: Well, they do have a summer of economic projections, right
Speaker 8: so I'd say that that should be our kind of
Speaker 8: like goal in terms of seeing what they think is
Speaker 8: better and good. And if unemployment rate continues to rise,
Speaker 8: and probably in October and November it will rise for
Speaker 8: the reasons that I mentioned, that would go above the
Speaker 8: projection of what they see as a predicament for three
Speaker 8: rate cuts this year. So that should be our guide,
Speaker 8: I think. But in terms of like an absolute value,
Speaker 8: there is no such thing.
Speaker 7: It depends on the supply side.
Speaker 2: Right now, as we start to get more economic data,
Speaker 2: we're going to start to get reports where the government
Speaker 2: shutdown you can really see it play out in the numbers.
Speaker 2: My question is how much should we hang our hat
Speaker 2: on those numbers because the government shutdown was just a
Speaker 2: moment in time and now it's over.
Speaker 8: Well, you have government federal government employees leaving for all
Speaker 8: kinds of different reasons. Are they going to be able
Speaker 8: to find a job that easily in the private set
Speaker 8: that when the hiring rate is so low. So yes, okay,
Speaker 8: I understand the shutdown is over. I don't think that
Speaker 8: the rebound will be.
Speaker 2: You know, because you don't think you'll be really quick.
Speaker 2: You don't think it's going to be a full one.
Speaker 2: So you think we're going to take a big hit
Speaker 2: to GDP because this was the forty three day shutdown.
Speaker 8: We estimate half a percentage point in Q four, so
Speaker 8: it's lower than say CBO's estimate. You know, we still
Speaker 8: have some time in the fourth quarter to recuperate some losses,
Speaker 8: so probably half a percentage point, which wire is significant
Speaker 8: by historical standards.
Speaker 3: It appears in this labor market there's there's some layoffs,
Speaker 3: but there's not like a mass layoffs, but there's certainly
Speaker 3: not a big hiring out there.
Speaker 4: Is that Is that a typical.
Speaker 3: Environment for a labor market or they're not letting people go,
Speaker 3: but they're not hiring them.
Speaker 8: It's quite typical. Well, when the economy is kind of
Speaker 8: a full employment, so you know, it's a good spot
Speaker 8: to be. It doesn't mean that things are deteriorating, but
Speaker 8: it's a risky situation because you know, what's the next
Speaker 8: step for a company. If you need to cut costs,
Speaker 8: if something you know happens, some exogenous shock happens, you
Speaker 8: don't have that cursion when you can kind of like
Speaker 8: slow down. You're hiring to cut costs. The next step
Speaker 8: is layoffs if something happens. But so far it's been
Speaker 8: relatively healthy.
Speaker 2: Were there any signs in this job support that raised
Speaker 2: inflation flags for you? I know, wages went up, not
Speaker 2: buy a lot, and you know, is it keeping up
Speaker 2: with inflation? I don't think.
Speaker 8: It's still elevated. It's still elevated, but it takes time.
Speaker 8: And I always look at Atlanta FED numbers. You know,
Speaker 8: job switches, job stairs. There's no big margin between those
Speaker 8: two right now. So to me, it says that labor
Speaker 8: market wage inflation is subsiding, so it should not be
Speaker 8: a big source of inflation going forward, which actually Chia
Speaker 8: Powell mentioned a few times.
Speaker 3: You know, it's one of the greatest functions I think
Speaker 3: on the Bloberg terminal, and again there's a gazillion functions.
Speaker 7: FED go FD GO.
Speaker 3: It just gives you everything you need to know about
Speaker 3: the FED and the data points in the next meetings
Speaker 3: and the news and all that kind of stuff. So
Speaker 3: wherever did the FED go had on the back there?
Speaker 3: December tenth? It tells me is the next meeting? What
Speaker 3: do you think the FED will do?
Speaker 8: They'll wait till the last minute. The basebook even matters
Speaker 8: like the one that we are getting ahead of the
Speaker 8: Thanksgiving holiday. So how bad or how good it is? It?
Speaker 7: Is it?
Speaker 8: The state of the labor market? Where is it? And
Speaker 8: what a company is saying about inflation and passing the
Speaker 8: cost onto the consumer?
Speaker 2: Elen, know where is it written in stone that the
Speaker 2: Fed has to have a meeting on a particular day?
Speaker 2: I mean, if the government saying, look, we're going to
Speaker 2: put out the November job support, which is going to
Speaker 2: have a little bit of the October job support December sixteenth,
Speaker 2: why isn't the FED just going, okay, well we'll move
Speaker 2: on meeting into like December seventeenth.
Speaker 8: Well that's going to be a havoc in the markets. Okay,
Speaker 8: So that's probably not a good idea to do. There
Speaker 8: are a lot of different things. You know, the FED
Speaker 8: is data dependent, but they don't have to be like
Speaker 8: literally data dependent. There's still a lot of alternative data.
Speaker 8: And you know, you guys have this al t go
Speaker 8: thing on the terminal. So there's still a lot of
Speaker 8: good data out there to for us to understand what's
Speaker 8: going on. I think the thing is that the risks
Speaker 8: to the labor market are still elevated. Is still true,
Speaker 8: and that's why the FED cut to time in the fall.
Speaker 3: So all right, so we've beaten this labor thing to death.
Speaker 3: Just give us your quick call on the inflation environment
Speaker 3: out there.
Speaker 8: Oh so hard to tell without the data. We do
Speaker 8: have good data on the labor mars, it's very difficult
Speaker 8: to kind of try to gauge what's happening on the
Speaker 8: inflation side. Stephen Myron, the Governor, was on Bloomberg TV
Speaker 8: just just a few minutes ago, yes, and he was
Speaker 8: saying that, you know, this housing inflation is probably a
Speaker 8: reflection of what happened in the past. So we cannot
Speaker 8: really look at three percent inflation and say, okay, this
Speaker 8: is the true state of affairs. Housing inflation is subsiding,
Speaker 8: the data is not reflecting that. The labor market inflation
Speaker 8: is probably also subsiding. So this sector inflation is moving
Speaker 8: in the right direction. We probably have a little bit
Speaker 8: of a tariff inflation in the goods prices, but that
Speaker 8: will too subside. It will just take some time. It
Speaker 8: will be a temporary increase in inflation. But I think
Speaker 8: in a big scheme of things, inflation is probably going
Speaker 8: to subside next year.
Speaker 4: All Rylena, thank you so much for joining us.
Speaker 3: Alan issues Tiava, senior US economists at the Conference Board,
Speaker 3: one of our favorite former economists at Bloomberg.
Speaker 4: We appreciate getting some of your time.
Speaker 2: To stay with us.
Speaker 4: More from Bloomberg Surveillance coming up after this.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us live
Speaker 1: weekday afternoons from seven to ten am Eastern. Listen on
Speaker 1: Applecarplay and Android Otto with the Bloomberg Business app, or
Speaker 1: watch us live on YouTube.
Speaker 3: Let's go to a professional here when we think about
Speaker 3: these markets. Jeff Crumpleman, and he's CIO and head of
Speaker 3: Equities at Mariner Wealth Advisors, located in Cincinnati, Ohio, one
Speaker 3: of my favorite towns. I used to go there all
Speaker 3: the time to see a couple of institutional investor accounts.
Speaker 7: We try to go see a.
Speaker 3: Ballgame when I was Thereolute for you, Jeff, thanks for
Speaker 3: joining us here. What's your call here? We've had a
Speaker 3: you look back on twenty twenty five. Equities it done well, Yes,
Speaker 3: it's been volatile. Fixed income has done well. We've got
Speaker 3: some solid high single digit returns there. What are you
Speaker 3: thinking about as you think about twenty twenty six.
Speaker 9: So our thesis going into this year was clear air turbulence,
Speaker 9: which I think pretty well describes what's going on. I
Speaker 9: think that's still apropos as we go into the end
Speaker 9: of the year, and you know, as people try and
Speaker 9: prophesize and they're trying to find reasons for what happened
Speaker 9: yesterday with some mixed news. You know, the thing about
Speaker 9: clear air turbulence is there's no radar systems to detect it.
Speaker 7: It just happens in clear sky.
Speaker 9: So in terms of what we do think will play out,
Speaker 9: we had a target of sixty six hundred on the
Speaker 9: S and P four calendar year twenty twenty five. I
Speaker 9: think we're going to be, you know, pretty close, and
Speaker 9: that's that's a pretty nice outcome, albeit with a bit
Speaker 9: of air flocking in there. Our kind of theme and
Speaker 9: thesis as we think about twenty twenty six is the
Speaker 9: year of risk awareness and diversification two point zero. So
Speaker 9: I think you want to avoid concentrations. I think you
Speaker 9: do want to be a little more balanced than we've
Speaker 9: seen this year, and I think that we're going to
Speaker 9: have healthy result, but the market's kind of tired as
Speaker 9: we go into the year.
Speaker 7: We would be just fine.
Speaker 9: As people talk about bubbles and troubles, which we don't
Speaker 9: agree with, but to see the market kind of rest
Speaker 9: and digest the strong earnings for a quarter or so
Speaker 9: I think would be very realistic.
Speaker 2: Probably a healthy thing, I think, yes, So let's talk
Speaker 2: valuation because a lot of what the volatility we've been
Speaker 2: seeing has been centered around are these stretched valuations we're seeing,
Speaker 2: particularly an AI But you say valuation is a poor
Speaker 2: timing tool for investors, Sure, what do you mean by that?
Speaker 2: And then what would be a good timing tool?
Speaker 9: Well, you know people, it's funny they're all wiggy about valuation.
Speaker 5: Now.
Speaker 9: We've been at twenty two times earnings for a long time.
Speaker 9: We were twenty two times going into this year. We're
Speaker 9: a little less than that right now. So the advance
Speaker 9: has been earnings growth, not valuation. I think the AI
Speaker 9: trade has made people more old this is like two
Speaker 9: thousand and just more sensitive to valuation now.
Speaker 7: It's always been there, and it's a terrible timing tool.
Speaker 9: So whether you talk about Alan Greenspan irrational exuberance in
Speaker 9: ninety six before it doubled in one, or you talk
Speaker 9: about questions I've been getting going all the way back
Speaker 9: to twenty seventeen eighteen when people said, hey, Jeff, twenty
Speaker 9: two times is rich.
Speaker 7: How can we go up from here?
Speaker 9: And you have double digit targets on the S and
Speaker 9: P five hundred, So it's just a very terrible it's
Speaker 9: fundamentals and valuation can remain elevated if fundamentals are strong.
Speaker 9: And I'll add this, this is not your grandfather's index
Speaker 9: when people compare this to the fifty year average of
Speaker 9: fifteen sixteen times earnings. You know, back forty years ago industrials,
Speaker 9: financials and energy were fifty percent of the S and
Speaker 9: P five hundred market cap. Today they're twenty percent. Return
Speaker 9: on equity was sixteen today it's twenty two. Margins were
Speaker 9: nine percent profit margins that profit margins today they're fourteen.
Speaker 9: It is not your grandfather's in dex So, yeah, that's
Speaker 9: a good point.
Speaker 3: Yeah, thirty seconds left. Here is there sector out there
Speaker 3: that screens well for you?
Speaker 4: At this point?
Speaker 9: Yeah, you know, just to kind of shift gears from
Speaker 9: all this tech stuff. First of all, I appreciate your
Speaker 9: comment about Walmart earlier on the show.
Speaker 2: Well, thank you for listening, Jeff hey Man.
Speaker 4: You know what you learn.
Speaker 9: But healthcare would be a selective consumer. And healthcare and
Speaker 9: I think energy could be a surprise as usually that is.
Speaker 4: A surprise because we got oil at fifty eight dollars
Speaker 4: a barrel here.
Speaker 9: Yep. But if you look at the charts, we're starting
Speaker 9: to see some interest as people diversified from just a
Speaker 9: tech trade.
Speaker 5: Yep.
Speaker 2: I'm just going to interject them in a budget with Walmart,
Speaker 2: is they're going to move their stock listing from the
Speaker 2: New York Stock Exchange to the Nasdaq?
Speaker 3: Is that?
Speaker 2: Am I missing something? Is that a big deal? Because
Speaker 2: talk about this is not your grandfather's market anymore. I
Speaker 2: don't know if I could remember a time when I think, oh, yeah,
Speaker 2: sure that that move makes sense. Does that make sense
Speaker 2: to you?
Speaker 9: Well it does because e commerce was up twenty seven percent.
Speaker 9: It's so much more of a technology company. So you know,
Speaker 9: think about it. When you search for something automatically, you
Speaker 9: go online to Walmart, you know.
Speaker 4: So yeah, for the NYC.
Speaker 6: I would not have allowed that to happen.
Speaker 4: I would have done anything to keep that name there.
Speaker 3: Jeffrumplement's CIO and head of Equities at Mariner Well Advisors
Speaker 3: based there in Cincinnati, Ohio.
Speaker 4: Stay with us more from Bloomberg Surveillance coming up after this.
Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live
Speaker 1: weekday afternoons from seven to ten am Eastern. Listen on
Speaker 1: Applecarplay and Android Otto with the Bloomberg Business app, or
Speaker 1: watch us live on YouTube.
Speaker 2: Talking about the FED. Can't stop talking about the FED
Speaker 2: as we lead up to their two day meeting December
Speaker 2: ninth and tenth, And in an environment where we're thinking
Speaker 2: perhaps we could be in for some interest rate cuts,
Speaker 2: lower rates for longer. What does that all mean to
Speaker 2: commercial real estate? Let's bring in an expert to sift
Speaker 2: through it all, Rich Hill in our Interactive Broker studio
Speaker 2: with this global head of real Estate Strategy and Research,
Speaker 2: Principal Asset Management. Rich, good to see you here in
Speaker 2: the studio.
Speaker 7: Good morning, Thanks for having me in.
Speaker 2: So just paint the picture for us as we head
Speaker 2: into this FED meeting where there's a big question mark
Speaker 2: as to whether or not we get that third interest
Speaker 2: rate cut of the year. What is the commercial real
Speaker 2: estate landscape looking like heading into that meeting?
Speaker 7: Yeah? Sure, Well, first of all, I think it's important
Speaker 7: to level set.
Speaker 10: Commercial real estate is one of the few asset classes
Speaker 10: in the world where valuations have significantly reset. Private real
Speaker 10: estate valuations are down twenty to twenty five percent in
Speaker 10: the US and Europe.
Speaker 7: Public valuations are down around the same amount.
Speaker 10: We think this is a cycle going through an normal reset.
Speaker 10: That's hard to understand because there's a lot going on
Speaker 10: and a lot of noise. But let me explain what
Speaker 10: I think that means. List it reads trough first, because
Speaker 10: they're leading indicators in both downturns and recoveries. List it
Speaker 10: reads trot in not October of twenty twenty three, and
Speaker 10: they're up more than thirty five percent from those levels.
Speaker 10: Private valuations trough twelve to eighteen months later. We've now
Speaker 10: seen five consecutive quarters in the United States where total
Speaker 10: returns are higher.
Speaker 7: It's six quarters in Europe.
Speaker 10: There's actually something that happens though on a lagging indicator
Speaker 10: that I think confuses a lot of people distress in
Speaker 10: the commercial real estate markets. Doesn't peak out until after
Speaker 10: private valuations trough. Why is that happening, Well, it's part
Speaker 10: of the grieving process. Banks don't like to sell distress
Speaker 10: loans and to distressed markets. They like to sell distress
Speaker 10: loans and too stabilized markets. So that's where we think
Speaker 10: we are. You bring up a good question, though, what
Speaker 10: about interest rate cuts. You hear a lot of commercial
Speaker 10: real estate professionals saying we want lower interest rates. That's
Speaker 10: not our review. We want stable interest rates. And the
Speaker 10: reason I say we don't want lower interest rates, and
Speaker 10: I'm really talking about long term interestrates because commercial real
Speaker 10: estate bar ersk financed themselves with long term interest rates.
Speaker 10: If you have meaningfully lower interest rates, be careful what
Speaker 10: you wish for. That actually might mean a weaker economy.
Speaker 10: That might mean tighter financial conditions, wider credit spreads. That's
Speaker 10: not good for any risk asset, including commercial real estate.
Speaker 10: What we're really rooting for here is stability. That's what
Speaker 10: we think the market needs to see. That's what we
Speaker 10: think commercial real estate investors want to see.
Speaker 4: Explained something to you. But I've learned about commercial real
Speaker 4: estate business.
Speaker 3: Yeah, it's controlled by these Morgan Stanley guys They're everywhere.
Speaker 3: The Morgan Stanley commercial real estate business is based their
Speaker 3: best on the street.
Speaker 7: But it's a good ball.
Speaker 3: They and they leave Morgan Stanley and they put their
Speaker 3: tentacles all around the commercial It's a total scam. They're
Speaker 3: everywhere and nobody's better at it than these Morgan Stanley folks.
Speaker 3: Rich in the US. Here have we troughed in let's say, office,
Speaker 3: Have we trofed on office here? Because I'm here in
Speaker 3: some positive murmers even about like New York and San Francisco.
Speaker 10: Yeah, sure, So it's really hard to and I'm your
Speaker 10: super cliche here office with a really broad brush. And
Speaker 10: the reason I say that is JLLL has a great
Speaker 10: statistic that ninety percent of vacancy in the United States
Speaker 10: is concertated in thirty to thirty five percent of buildings.
Speaker 10: New York City really strong, it seems really strong rebound.
Speaker 10: San Francisco beginning to see some real signs of light.
Speaker 10: And if you're a long term investor, yeah, you're you're
Speaker 10: pretty bullish on San Francisco because of how beaten down
Speaker 10: it is. I think the market is still trying to
Speaker 10: figure out what the high quality buildings are from the
Speaker 10: lower quality buildings. We actually don't have an office problem
Speaker 10: in the United States. We have a Class B and
Speaker 10: C office.
Speaker 2: Problem because those older buildings you mean.
Speaker 10: One hundred percent And if you were renting a Class
Speaker 10: B and C office property prior to COVID, you probably
Speaker 10: didn't value the office experience. Here's my ultimate point with office.
Speaker 10: I don't know when at bottoms. I'm not really good
Speaker 10: at picking bottoms. Other people do better job of that
Speaker 10: than me. But I do think over the medium to
Speaker 10: long term, we're going to look back and we're going
Speaker 10: to say the office sector is one of the sectors
Speaker 10: that performed really well over the next ten years. Usually
Speaker 10: last cycles losers aren't the next cycles loss.
Speaker 2: Okay, So if Class B and C is sort of
Speaker 2: not the place to be in terms of office, is
Speaker 2: it the place to be when you're thinking about converting
Speaker 2: office to residential, which we've seen a lot of in
Speaker 2: some of our major cities.
Speaker 10: Yeah, highly attractive investment thesis really hard to do in practice.
Speaker 10: There's probably one hundred and fifty to two hundred buildings
Speaker 10: across the United States where you can actually do it.
Speaker 10: Why is it working so well in New York City? Well,
Speaker 10: it comes back down to how you think about affordability
Speaker 10: in the United States. Morally, big believers that you don't
Speaker 10: need to regulate what you have, you need to build
Speaker 10: more of what you don't have. We don't have enough
Speaker 10: housing in New York City, and frankly, we don't have
Speaker 10: enough housing across the United States for various different reasons.
Speaker 10: So I'm a really big proponent of converting office into multifamily.
Speaker 7: It's just not for the faint of heart, and it's
Speaker 7: a lot harder to do and.
Speaker 2: Probably pretty expensive to retrofit.
Speaker 7: Is it not, Yeah, it is. In many cases.
Speaker 10: It's actually easier to raise a building right to bulldoze
Speaker 10: it and build from the ground up, because it's not
Speaker 10: that much different. But if you could be view with
Speaker 10: the right floor plate in office and converted to multifamily,
Speaker 10: really lucrative investment thesis, that's true.
Speaker 3: I don't know thought about it because when we raised
Speaker 3: and built a home, I was shocked at how cheap
Speaker 3: it was to tear down a home. The guy could
Speaker 3: have quoted any ten x what do he quoted me?
Speaker 3: And I would have paid it because I had no idea.
Speaker 2: Because it's really about the land it's sitting on, right
Speaker 2: in location location.
Speaker 3: Okay, dude brought in like a back hole and just
Speaker 3: knocked it down in like fifteen minutes.
Speaker 2: Crazy.
Speaker 4: I mean, it was unbelievable. I didn't understand about that,
Speaker 4: all right.
Speaker 3: So where rich is the best value out there in
Speaker 3: the broader commercial real estate these days?
Speaker 4: Where are you guys seeing it?
Speaker 7: Yeah, there's three things that I want to talk about today.
Speaker 10: The first point, we can't be talking about commercial real
Speaker 10: estate and you can't be talking about markets if you're
Speaker 10: not talking about.
Speaker 7: AI and data centers.
Speaker 10: Okay, so we think data centers are really interesting, but
Speaker 10: with a nuance. First of all, I think it's important
Speaker 10: to unpack AI demand from data set demand. Data center
Speaker 10: demand is constrained by land and power.
Speaker 7: Right now.
Speaker 10: You actually have way more demand than you have the
Speaker 10: ability to create data centers right now. That's the first point.
Speaker 10: The second point is when you're investing in a data center,
Speaker 10: you're actually investing in infrastructure, the land, the ability, power
Speaker 10: of the land, the fib that goes to the land.
Speaker 10: The third point, which I think is a nuance that
Speaker 10: the markets just now beginning to understand, is not all
Speaker 10: data centers are created the same. When we think about
Speaker 10: data centers. We think about cloud data centers. That's when
Speaker 10: you and I are on Bloomberg right now, uses cloud.
Speaker 10: There's AI inference, which is when you and I go
Speaker 10: on chat g GPT and prompt chat GPT, and then
Speaker 10: there's generative AI. General of AI is training models for
Speaker 10: future AI demand.
Speaker 7: We're really quite.
Speaker 10: Bullish on cloud and AI inference. We're much more cautious
Speaker 10: on generative AI. But we think focusing on cloud and
Speaker 10: AI inference, which is actual existing demand, that's a really
Speaker 10: interesting asset class. We're a developer in the United States
Speaker 10: and we think we can develop these that unless IRRs
Speaker 10: and call it the twenty percent range, which ends up
Speaker 10: being really attractive.
Speaker 7: So A'll pause there. You might have questions about data centers,
Speaker 7: and then we can do to move on.
Speaker 2: I just I don't think we've hit a topic where
Speaker 2: we haven't talked about AI. It is infiltrating just about everywhere.
Speaker 2: Real quick rich, where within commercial real estate can can
Speaker 2: can they benefit most from AI?
Speaker 10: Yeah, data centers number one, but it's actually helping the
Speaker 10: entire world in a lot of different ways. I'll come
Speaker 10: back to what you were talking about office. There's a
Speaker 10: lot of questions about how AI is going to impact office.
Speaker 10: The reality is, I think we're still early dings about
Speaker 10: how it's going to impact office, what workers are going
Speaker 10: to be upskilled, what workers are going to be downskilled,
Speaker 10: what workers are going.
Speaker 7: To be outskilled.
Speaker 10: But there are going to be markets that benefit significantly
Speaker 10: from AI. It is changing, It is changing the world,
Speaker 10: and commercial real estate is a big beneficiary of that.
Speaker 7: So we think there's going to be a lot of
Speaker 7: efficiencies that are driven by AI, which thanks so much.
Speaker 4: Appreciate that.
Speaker 3: Richell, Global Head of will Say Strategy and Research at
Speaker 3: Principal Asset Management.
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