Speaker 1: This is Bloomberg Wall Street Week.
Speaker 2: The global push into infrastructure, breaking the IPO logjam in tex.
Speaker 3: The financial stories that shape.
Speaker 2: Our world, cutting inflation without losing jobs. Do we need
Speaker 2: rate cuts? And if so? How many? Investing in a
Speaker 2: time of geopolitical turmoil.
Speaker 1: Through the eyes of the most influential voices.
Speaker 2: Ten Rogueff economists of Harvard, former FDIC had Shila Bert
Speaker 2: ge CEO, Larry Culp, San Francisco FED President Mary Daily.
Speaker 1: Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
Speaker 4: Market sped on a September rate cut, Vice President Harris
Speaker 4: wins a key endorsement, and the Paris Olympic Games begin
Speaker 4: after a rail sabotage. This is Bloomberg Wall Street Week.
Speaker 4: I'm Romain Bossed again for David Weston, and we begin
Speaker 4: with the week in markets. I saw our rotation out
Speaker 4: of big tech and into small caps. When you take
Speaker 4: look at an S and P five hundred that rallied
Speaker 4: here on this Friday afternoon but still ended the week
Speaker 4: in the red. You have to overlay that with the
Speaker 4: massive outperformance that we saw in the small and mid
Speaker 4: cap space four straight weeks now where we've seen the
Speaker 4: Russell two thousand outperform, the Nastac outperform, the mag seven
Speaker 4: outperform the broader market overall, and a lot of that
Speaker 4: seems to be predicated on the belief the interest rates
Speaker 4: might be coming down soon. Peter Boro is joining us
Speaker 4: right now, the chairman and CEO of Computer Trading, to
Speaker 4: talk a little bit about some of the moves that
Speaker 4: we saw this week, and Peter, some of this did
Speaker 4: seem to be driven by the macro, whether it was
Speaker 4: the economic data or maybe the feed through into what
Speaker 4: folks think that macroeconomic data is going to mean for
Speaker 4: the Fed.
Speaker 5: Absolutely, but it could also go back to rule number
Speaker 5: one that we all learn by low sell high. This
Speaker 5: market has been one where everybody's been buying high, and
Speaker 5: so what did we have. We had a natural rotation
Speaker 5: to over sold stocks out of stocks that were highly overbought.
Speaker 5: Now the question is has the underlying fundamentals changed to me?
Speaker 3: They have, As you know, the.
Speaker 5: Last time I was on here, we talked about the
Speaker 5: seven c's of all the commodities that market in general
Speaker 5: has been much weaker, grains, crude oil, cotton, copper in particular,
Speaker 5: So that may be an indication that the FED is
Speaker 5: more likely to ease, and therefore the small cap stocks
Speaker 5: benefit significantly in a interest rate environment where rates are
Speaker 5: going down or more stable.
Speaker 4: They would benefit from rates going down. But if economic
Speaker 4: conditions are weakening to the point where the FED thinks
Speaker 4: it needs to cut rates, how is that going to
Speaker 4: benefit small caps?
Speaker 3: Great question.
Speaker 5: So that also gets into the yield curve and interest
Speaker 5: rates and whether the FED cuts are longer rates going
Speaker 5: to go up is going to be a bear steepener.
Speaker 5: But the first reaction is mean reversion, so that's buying
Speaker 5: things that were over sold and selling things that were overbought.
Speaker 5: There could be this week, and part of it could
Speaker 5: be the fact that Vice President Harris has done significantly
Speaker 5: better in the polling, and that may imply the expiration
Speaker 5: of the Trump tax cuts, which could lead to higher
Speaker 5: capital gains rates, which could lead to selling winners again
Speaker 5: and harvesting some of your losses which were in the
Speaker 5: small cap. So a lot of positive things have come.
Speaker 3: Together for that.
Speaker 4: It's interesting you raised that point here about people basically
Speaker 4: buying effectively the laggers. I mean, I was looking at
Speaker 4: one stock today on this Friday, neul Brands. Of course,
Speaker 4: it makes all those little rubber may things that you
Speaker 4: have in your cabinet, some more than thirty percent on
Speaker 4: the day. But then when you look at its performance
Speaker 4: prior today on a year to date basis, of course,
Speaker 4: it was also down double digits here, So people are
Speaker 4: definitely looking at the bottom of the barrel and maybe
Speaker 4: finding some hope there. But it gets back to the
Speaker 4: question about economic conditions, consumer spending. And we had a
Speaker 4: PCE report on Friday. You had a GDP report a
Speaker 4: couple of days ago that, while still healthy, certainly showed
Speaker 4: some softening.
Speaker 3: When it comes to the consumer, no question about it.
Speaker 5: And what I look at for the strength of the
Speaker 5: consumer is I look at Visa, I look at MasterCard,
Speaker 5: and those stocks have been underperforming, let's say relative to
Speaker 5: American Express, where American Express tends to be the card
Speaker 5: of choice for higher income HULU. So the economy seems.
Speaker 3: To be slowing.
Speaker 4: It's interesting when we look at some of the market
Speaker 4: moves over the last I don't know, five or six weeks.
Speaker 4: I mean, you've obvious seen a bid come into some
Speaker 4: of those economically sensitive areas like utilities, like materials. Probably
Speaker 4: one of the more interesting stealth rallies out there and
Speaker 4: stealth to me at least, was some of the moves
Speaker 4: that you saw in banks over the last couple of weeks.
Speaker 4: And not just the big banks. We're talking about some
Speaker 4: of those regional banks that everybody sold off about a
Speaker 4: year and awf half ago.
Speaker 5: Yes, So who's going to be the biggest beneficiary of
Speaker 5: those cutting interest rates is going to be the regional banks.
Speaker 5: And over the last three weeks they have really outperformed
Speaker 5: the Goldman Sachs as JP Morgan's of the world. It's
Speaker 5: been to me that's been more impressive than the rally
Speaker 5: in the small cap IWN.
Speaker 4: All right, Peter, always a great conversation, one of the
Speaker 4: best in the business. Peter Borish of Computer Trading Company.
Speaker 2: Vice president Harris emerged this week as the likely alternative
Speaker 2: to former President Trump, focusing investors on what her approach
Speaker 2: to the economy would be and whether it would differ
Speaker 2: from that of President Biden to take us through the choices.
Speaker 2: Welcome back now, are very special contributor here in Wall
Speaker 2: Street Week. He is Larry Summers of Harvard Lurie. Great
Speaker 2: to have you back with us. What do we know
Speaker 2: or think we know about what a Kamala Harrison administration
Speaker 2: would do with the economy versus a Donald Trump.
Speaker 3: We don't know much yet.
Speaker 6: The campaign's only been going for two days, but I
Speaker 6: think we've got some strong bases for optimism. First, it's
Speaker 6: been the Biden Harris administration, and if you step back,
Speaker 6: it really has a remarkable record. I don't think any
Speaker 6: administration has so outperformed the economic forecasts on the day
Speaker 6: that it came into office as the Biden Harris administration has.
Speaker 6: And that's because of an approach that is about investing
Speaker 6: in America and investing in America's future.
Speaker 3: And if you look at some of the.
Speaker 6: Things Vice President Harris has done, they have that orientation
Speaker 6: to the future. She knows that our children are our future,
Speaker 6: and that's why the childcare credit and investing in children
Speaker 6: investments that reduce the child poverty rate by a half
Speaker 6: when they were in effect, were so important to her.
Speaker 6: She knows that fiscal responsibility is central, and that's why
Speaker 6: she puts emphasis on the fact that we need to
Speaker 6: raise taxes where it is replacing the ineffective massive corporate
Speaker 6: tax cuts that President Trump put into place. She understands
Speaker 6: that much of our future lies in exporting to the
Speaker 6: rest of the world. It's not her approach to call
Speaker 6: Africa and Al Salvador countries as President Trump did. It's
Speaker 6: her approach to work to strongly support their development because
Speaker 6: she knows that more prosperous countries around the world make
Speaker 6: for a more prosperous United States. It's a new generational
Speaker 6: approach and a start contrast with what came before with
Speaker 6: Donald Trump, and, judging by what he's saying on the
Speaker 6: campaign trail, a even larger contrast with what would come
Speaker 6: if he were elected. What he describes David is a
Speaker 6: prescription for massive inflation. Ignore the deficit, bash the Fed,
Speaker 6: trash the dollar, cut back on labor supply by trying
Speaker 6: immediately to send millions of people home, stop subsidizing clean energy,
Speaker 6: and put massive tariffs on so businesses can't get cheap inputs.
Speaker 6: It's hard to imagine a better strategy for creating inflation,
Speaker 6: for creating high interest rates, and the Trump's strategy. President
Speaker 6: Harris I believe will avoid all those pro inflation mistakes,
Speaker 6: and much more important, We'll build a future oriented economy
Speaker 6: through our kids, through our technologies, through containing our debts,
Speaker 6: and through working with the world.
Speaker 2: So let's talk about those pro inflation policies, and specifically
Speaker 2: on the fiscal stemua the side, because you've been outspoken
Speaker 2: about that in the past. That that has contributed to inflation,
Speaker 2: and we're investing in children obviously is one thing. She's
Speaker 2: also has been for expanded medicare. In fact, at one
Speaker 2: point she was for medicare for all. She backed off
Speaker 2: that a bit. She's also for rental assistance programs. What
Speaker 2: do you make of those? Are those good ideas? Assuming
Speaker 2: she could get those through? Are those good for the economy.
Speaker 6: I don't think it's fair to judge Donald Trump by
Speaker 6: the things he was saying when he was campaigning for
Speaker 6: office the first time, or even before, and that was
Speaker 6: a very different context. And I don't think that Vice
Speaker 6: President Harris feels committed to the things she said during
Speaker 6: her campaign for the presidency before she joined the Biden
Speaker 6: administration partnership and advocated those policies for four years. No,
Speaker 6: I don't think medicare for all is a good idea,
Speaker 6: and I wouldn't expect that a Harris administration would push
Speaker 6: medicare for all.
Speaker 2: Lauria, next week, you and I will both you got
Speaker 2: an Aspen for the Aspen Economic Strategy for meetings, And
Speaker 2: while we're doing that, the FED will be meeting in Washington.
Speaker 2: We'll have another Fed decision. We just had Bill Dudley,
Speaker 2: whom you know well we all respect, come on just
Speaker 2: this week in a Bloomberg opinion piece saying it's time
Speaker 2: for them to cut rates as early as next week,
Speaker 2: a part of the so called Sam rule about where's
Speaker 2: where on umployments going. What do you think about that?
Speaker 6: On current facts, I would not cut rates next week.
Speaker 6: I think we need to be very careful about making
Speaker 6: the move, especially since when the FED starts to cut rates,
Speaker 6: there will inevitably be an expectation of some cascade of
Speaker 6: rate cuts. It's certainly true that as the news has
Speaker 6: come in over the last several months, it's tended to
Speaker 6: be on the low inflation and on the soft economy side,
Speaker 6: and so markets have now adjusted to expect a rate
Speaker 6: cut in September. I had thought that that was a possibility,
Speaker 6: but not a probability. On current facts, I'd certainly regard
Speaker 6: it as probability, both in terms of what should happen
Speaker 6: and what will happen. But I think it's the better
Speaker 6: part of prudence, particularly in so unsettled an environment where
Speaker 6: the deficit figures are coming in in a very problematic way.
Speaker 6: I think it's the better part of prudence for the
Speaker 6: Fed to wait a little longer before cutting rates.
Speaker 2: Larry, It's always such a pleasure to have you with us.
Speaker 2: Thank you so much. That is our special Wall Street
Speaker 2: Week contribuer, Larry Summers of Harvard, coming up, the view
Speaker 2: from Goldman Sachs on where this economy is taking investors
Speaker 2: with Sherman, most of our Ruckmanney.
Speaker 7: Us pre eminence is intact and stay invested.
Speaker 2: That's next on Wall Street Week on Bloomberg.
Speaker 1: This is Bloomberg Wall Street Week with David Weston from
Speaker 1: Bloomberg Radio.
Speaker 2: This is Wall Street Week. I'm David Weston. A stock
Speaker 2: market that just won't quit, a bond market rewarding fixed
Speaker 2: income at long last, and inflation apparently coming under control
Speaker 2: at least for now. What's an investor to do? As
Speaker 2: Chief investment officer for Golden Sachs Wealth Management, Charmian most
Speaker 2: of our Rock Money answers that question every single day,
Speaker 2: and we welcome her back now to Wall Street Week.
Speaker 2: Always a delight to have you here, Charmin thank you for.
Speaker 7: Joining us, Thanks for having me.
Speaker 2: Okay, So you talk to investors all the time, customers
Speaker 2: all the time. What are they asking about? What are
Speaker 2: they concerned about?
Speaker 7: Right now, they're asking the questions about our two key
Speaker 7: investment teams. We have been tending clients to be overweight
Speaker 7: US equities, and we've been telling them to stay invested.
Speaker 7: So after this big market rally that's been going on
Speaker 7: for so long, as you pointed out, clients are saying,
Speaker 7: are those themes still valid? Should we still be overweight
Speaker 7: US equities? And should we still stay invested after this
Speaker 7: unexpected be significant rally following twenty twenty three, which was
Speaker 7: also very strong. And our answer to both of those
Speaker 7: questions is yes, US pre eminence is intact, and stay invested.
Speaker 2: So let's break that down first of all the equities part,
Speaker 2: then we'll get to the US part. Equities, we do
Speaker 2: have real returns now in fixed income? Doesn't that shift
Speaker 2: the emphasis at least somewhat because you can make real
Speaker 2: money now on bonds?
Speaker 7: Well, our view is that the upside in US equities
Speaker 7: is substantially greater. So when you're looking at the return
Speaker 7: to expectations, we do recommend especially with US clients, they
Speaker 7: need to look at the returns on an after tax basis.
Speaker 7: So you can't just look at the yield, for example,
Speaker 7: on treasury bonds or on corporate bonds and then compare
Speaker 7: that to the expected return for US equities. You actually
Speaker 7: need to look at both on an after tax basis.
Speaker 7: And one of the most amazing things about US equities
Speaker 7: are if you have them in some passive tax efficient form,
Speaker 7: you have very little bit of a tax liability and
Speaker 7: there's much more long term upside. So we actually recommend
Speaker 7: clients be at their duration target for their fixed income acts,
Speaker 7: but still overweight US equities versus non US equities.
Speaker 2: What about the valuation in the equity marketing, Some people
Speaker 2: are concerned, we're getting a pretty high valuation. So you
Speaker 2: say there's a lot of upside left inequities. Are we
Speaker 2: sure about that?
Speaker 7: So there's no short term upside. In fact, the US
Speaker 7: equity market has exceeded our expectations for this year. So
Speaker 7: our good case for US equities this year when we
Speaker 7: published our initial outlook was up thirteen percent, and so
Speaker 7: now we're up about seventeen percent. You're today roughly, And
Speaker 7: so when we look at that we'll say, yes, it
Speaker 7: has exceeded our expectations, but earnings have been better than expected.
Speaker 7: Typically when you start having the Fed cut interest rates,
Speaker 7: as long as we don't go into a recession. On average,
Speaker 7: US equities are up nineteen percent for the next twelve months,
Speaker 7: so we may not have much upside left for the
Speaker 7: rest of this year, but already the markets starting to
Speaker 7: think about twenty twenty five and what earnings will be.
Speaker 7: And then as investors shift focused to twenty twenty five
Speaker 7: and earnings and price targets, that's when you'll see some
Speaker 7: more upside.
Speaker 2: You said something terribly important there, as long as we
Speaker 2: don't go into recession. We had Bill Dudley actually with
Speaker 2: an opinion piece in Bloomberg this week saying he's got
Speaker 2: some concerns now, growing concerns with a slower economy, sink
Speaker 2: with a p some rule that fell into the complicated
Speaker 2: rule about unemployment, and when it points to recession that
Speaker 2: he says, there is now our growing risk of recession
Speaker 2: and maybe the Fed should cut as early as next week.
Speaker 2: What do you think about that?
Speaker 7: We actually followed Bill Dudley and try to talk to
Speaker 7: him often and think very highly of his opinion. He
Speaker 7: went into twenty twenty three expecting a recession and a
Speaker 7: very high probability, So we've had this discussion with him
Speaker 7: on the likelihood of recession. We started this year with
Speaker 7: a probability of thirty percent for the odds of a recession,
Speaker 7: and we have stuck with that, and people say, why
Speaker 7: aren't you lower. Some people are substantially lower. We haven't
Speaker 7: changed our recession probability, partly because of the shape of
Speaker 7: the yield curve. The yield curve is significantly inverted, or
Speaker 7: it was more inverted before, and it has stayed that way,
Speaker 7: and we have what we call a yield curve diffusion index,
Speaker 7: and when that triggers, more often than not, you get
Speaker 7: a recession. That's why we're at thirty percent. However, when
Speaker 7: we think about these various indicators, like the sam rule
Speaker 7: that you refer to, we also have to consider and
Speaker 7: factor in some unusual situations. So people talk about the
Speaker 7: amount of immigration in the US, and so that has
Speaker 7: pushed up the unemployment rate or post pandemic. We were
Speaker 7: at such low unemployment rates that getting slightly above that
Speaker 7: is not necessarily an indication of a recession.
Speaker 2: Around the corner.
Speaker 7: So do we worry about our recession? Do we need
Speaker 7: to be on the alert about it look at other indicators? Yes,
Speaker 7: But are we worried about a recession anytime in the
Speaker 7: next twelve months or so? Not at this point. Thirty
Speaker 7: percent probability. That means seventy percent probability of no recession.
Speaker 2: Charman, it's always such a pleasure having you on. Thank
Speaker 2: you so much. That's Charmine most about ROCHMANI of Goldman Sachs.
Speaker 2: Geopolitical risk remains high and economies around the world face
Speaker 2: different paths ahead. Take us through what this means for investors.
Speaker 2: Welcome back now, David Hunt. He's president and CEO of PGIM.
Speaker 2: Great to have you back.
Speaker 3: It's wonderful to be back with you, David.
Speaker 2: So let's talk with the geopolitics, because we have a
Speaker 2: heightened level of geopolitical risk these days all around the
Speaker 2: world pretty much where ever, Look, how does that affect investors?
Speaker 8: Well, the first thing I would say, David, is that
Speaker 8: it may be heightened the relative to the last ten
Speaker 8: or twelve years, but I would not say it's necessarily
Speaker 8: heightened relative to the longer term sweep of history. We've
Speaker 8: actually had a period of real I would say moderation
Speaker 8: since the GFC in terms of political flashpoints, and it's
Speaker 8: really been the last few years between the health pandemic
Speaker 8: two wars that we've started to see these re emerge,
Speaker 8: and I would say it's more of a getting back
Speaker 8: to normal than it is actually a high of the averages.
Speaker 8: I would also say that I think that this kind
Speaker 8: of summer of democracy, which we're still working our way through,
Speaker 8: is only heightening that as well. So I think we
Speaker 8: have even more geopolitical risk. And indeed, as I travel
Speaker 8: the world talking to our large institutional investors, their number
Speaker 8: one risk is geopolitical. It is not what's the ved
Speaker 8: going to do, It's not where are we in the
Speaker 8: interest rate cycle. They really want to talk about the
Speaker 8: heightened geopolitical risk and what that does for their portfolio construction.
Speaker 2: So talk to me a bit about that very issue,
Speaker 2: the intersection, if you will, how that intersects with the
Speaker 2: politics and the geopolitics. I mean, how does the politics
Speaker 2: potentially affect the long term growth of a Europe, of
Speaker 2: a Japan, of the United States.
Speaker 8: Long term investors have a very different attitude toward I
Speaker 8: think volatility in general and that's probably the biggest difference.
Speaker 8: I think a lot of the popular media confuse volatility
Speaker 8: and risk really not the same thing. So when I
Speaker 8: say we have heightened volatility, that actually can spell as
Speaker 8: much opportunity as it does risk. I mean, the only
Speaker 8: way you lose money is to sell an asset for
Speaker 8: less than you bought it for or take a permanent impairment,
Speaker 8: but simply because market's move does not create a loss,
Speaker 8: and long term investors tend to look through those cycles
Speaker 8: and they use changes in market levels to actually get
Speaker 8: in at a more attractive price. So as we look
Speaker 8: forward to the increased volatility, our key focus is do
Speaker 8: our clients have enough liquidity so that they can move
Speaker 8: and move in size when the.
Speaker 3: Time is right.
Speaker 8: And I would say that as people have moved more
Speaker 8: into privates and more into liquid assets, that liquidity has
Speaker 8: become a bit squeezed, and a lot of the work
Speaker 8: we're doing with clients is to make sure that they
Speaker 8: have the liquidity so that they can move when the
Speaker 8: timing is right.
Speaker 2: It's one of the things your institutional investors take a
Speaker 2: look at your social clients is long term growth prospects.
Speaker 2: Because right now, right now, it looks like, for example,
Speaker 2: Europe is different from the United States, just to joke
Speaker 2: one example.
Speaker 8: No, it's a great example, And I would say that
Speaker 8: we are seeing a pretty big rotation in how people
Speaker 8: view growth opportunities and where they're putting capital work. So
Speaker 8: if you start in Europe, you know, in general, people
Speaker 8: are quite I think pessimistic about growth. The EU is
Speaker 8: no bigger now than it was in twenty eighteen, and
Speaker 8: it really doesn't seem to be breaking out of the
Speaker 8: cycle of low productivity and low growth that it's had. Meanwhile,
Speaker 8: you then go to Asia and you find, on the
Speaker 8: one hand, Japan, which is I would say in a
Speaker 8: new you know, kind of found optimism. They finally have
Speaker 8: inflation back, which they're grateful for. Growth has come back,
Speaker 8: They are very constructive about some of the reforms that
Speaker 8: they've made to corporate governance, and I would say there's
Speaker 8: more optimism there and about internet actional investors looking in
Speaker 8: than we've had in a long time. And in fact,
Speaker 8: I would say that Japan has been the leading country
Speaker 8: to benefit from the tensions with China because many people
Speaker 8: are now building their plants and building their supply lanes
Speaker 8: around a strategy that's based in Japan, So Japan I
Speaker 8: think is much more positive. China, on the other hand,
Speaker 8: is probably in a more difficult position. Even last week
Speaker 8: with the Third Plan, and we did not see the
Speaker 8: kind of concerted action that we all thought was going
Speaker 8: to be needed. So I think people are worried about growth,
Speaker 8: and they're worried that there isn't going to be a
Speaker 8: resurgence of consumer spending, which is what's really need to
Speaker 8: rebalance the economy, but rather continued focus on manufacturing. So
Speaker 8: there's no new money at the moment going into China.
Speaker 8: Then you come back to the US and as difficult,
Speaker 8: and we like to focus on all the problems of
Speaker 8: the US. Actually, productivities has looked not bad. Growth is looked,
Speaker 8: you know, like it's powering through this difficulty. Wages continue
Speaker 8: to be pretty strong, so you know, the US is
Speaker 8: on a relative basis at this point doing very well.
Speaker 8: So the net of that is that there is really
Speaker 8: money coming out of Europe. There is money, no more
Speaker 8: money going into China. There's quite a bit more money
Speaker 8: going into the US and Japan, and then select emerging
Speaker 8: markets like I would say Mexico, Vietnam, Indonesia, which you're
Speaker 8: benefiting from the changes in the global supply chain. So
Speaker 8: it's a very differencing shift in how people are putting
Speaker 8: their money to work geographically.
Speaker 2: Let's pick up on one thing that you just referred to,
Speaker 2: which I find puzzling because here in the United States,
Speaker 2: maybe in part is the election not unteally, we tend
Speaker 2: to be very critical of what's going on economically. We're
Speaker 2: in a lot of trouble, a lot of uncertainty things,
Speaker 2: and yet the rest of the world seems to want
Speaker 2: to invest here. The inflows are remarkable here, by the way,
Speaker 2: a lot of people want to come here. It's one
Speaker 2: of the firt reason we have an immigration problem is
Speaker 2: who wants to move here? Who's got it wrong? I mean,
Speaker 2: are we misperceiving our own economy or is the rest
Speaker 2: of the world overestimating what we can do.
Speaker 8: I think it's maybe a little bit of both, and
Speaker 8: maybe a third as well. I think that there's no
Speaker 8: question that the corporate sector and therefore what's driving earnings
Speaker 8: and therefore kind of the markets is in better health
Speaker 8: than almost any of us would have predicted eighteen months ago.
Speaker 8: That doesn't necessarily mean that consumer sentiment or the average
Speaker 8: person feeling that way, and for them, they're much more
Speaker 8: likely to feel actually, the world's twenty percent more expensive
Speaker 8: than it was three years ago, and my wages haven't
Speaker 8: gone out by twenty percent, So for the median worker,
Speaker 8: you don't feel that things are quite so great here.
Speaker 8: So both of those stories I think are equally true.
Speaker 8: But what we do have, I think is a very
Speaker 8: dynamic economy. And if the pandemic told us anything, it
Speaker 8: was you know, we were chaotic. Every state did it differently.
Speaker 8: We couldn't enforce rules, all of the things that we
Speaker 8: don't like about ourselves, and yet we came out of it,
Speaker 8: I think, pretty strongly, pretty quickly, and our corporate sector
Speaker 8: was able to actually rebalance with a lot of help
Speaker 8: from the government obviously, and I'd say that our rebound
Speaker 8: is a real sign of strength of the fundamentals of
Speaker 8: the US economy.
Speaker 2: David is such a treat always to have you on.
Speaker 2: Thank you so much. That is David Hunt of p
Speaker 2: JIM coming up the path forward for commercial real estate
Speaker 2: with Owen Thomas, chairman and CEO of b XP.
Speaker 9: All CEOs, in my opinion, want their employees to be
Speaker 9: working in person more and one of those carts is
Speaker 9: to be in a great building.
Speaker 2: That's next on Wall Street Week. I'm Bloomberg.
Speaker 1: This is Bloomberg Wall Street Week with David Weston from
Speaker 1: Bloomberg Radio.
Speaker 2: This is Wall Street Week. I'm David Weston. Commercial real
Speaker 2: estate has been among the slow US to recover from
Speaker 2: the pandemic. We talked to b XP chairman and CEO
Speaker 2: Owen Thomas about the path forward for the space.
Speaker 3: It has been a rough time.
Speaker 9: I always say though, perception is worse than reality, and
Speaker 9: commercial real estate is bouncing back. Defined as office, there
Speaker 9: are two external drivers that really drive the office business,
Speaker 9: certainly the business of BXP. One is interest rates and
Speaker 9: the other is corporate earnings growth.
Speaker 3: I think the interest rate story is pretty.
Speaker 9: Obvious, you know, real estate stocks real estate are primarily
Speaker 9: a financial asset, and if the cost of capital is lower,
Speaker 9: those asset assets are worth more.
Speaker 3: You know, we had a very favorable inflation report.
Speaker 9: Last week, and since that came out, and with the
Speaker 9: prospect of more rate cuts and the fact that the
Speaker 9: ten year now is below four point two percent, you know,
Speaker 9: it's really escalated our stock price over the last week.
Speaker 9: The second important driver is corporate earnings growth. Because that leasing.
Speaker 9: In twenty twenty three, the S and P five hundred
Speaker 9: earnings growth was flat and zero. In twenty twenty two
Speaker 9: it was very tipid. But here in twenty twenty four,
Speaker 9: in the first quarter it was up eight percent and
Speaker 9: this quarter is predicted to be even higher. So when
Speaker 9: companies are profitable and they're making money and they're growing
Speaker 9: their earnings, they're more likely to grow higher people and
Speaker 9: take more space. And we're seeing that in our leasing activity.
Speaker 9: In the first quarter at bxp our, the square footage
Speaker 9: that we leased was up thirty percent from the first
Speaker 9: quarter of twenty three, and in the second quarter we're
Speaker 9: seeing continued escalation both in terms of signed leases in
Speaker 9: our pipeline for future.
Speaker 2: Quarters up thirty percent. Boots that off of a low base.
Speaker 9: It was off a low base, yeah, because we went
Speaker 9: through as interest rates went up in twenty twenty two
Speaker 9: and twenty twenty three. You know, as I mentioned, corporate
Speaker 9: earnings growth slowed way down, and when that happens, companies
Speaker 9: aren't growing, they're thinking about waste cut costs, and we
Speaker 9: saw that a lot of BLAEF space got put in
Speaker 9: the market. There wasn't a lot of new requirements in
Speaker 9: the market. But now that the business, the environment around
Speaker 9: corporate earnings is improving, it's improving our leasing because companies
Speaker 9: are growing again.
Speaker 2: So strong corporate earnings make it a little easy to
Speaker 2: hire more people. As you say, yes, you have to
Speaker 2: actually get the people into the office.
Speaker 3: Yes, that's true too.
Speaker 2: How's that going, how's return to agics going? Yeah?
Speaker 9: I do think there's no question that work from home
Speaker 9: has an impact on office demand. I do think in
Speaker 9: the premium sector where we operate, it's a little bit
Speaker 9: less so because the clients that we have generally want
Speaker 9: their employees to be in the office many days per week.
Speaker 9: But in terms of what we actually see, BXP manages
Speaker 9: today about fifty four million square feet and we have
Speaker 9: badge data on about fifty percent of that space. And
Speaker 9: so what we're seeing today versus the last quarter before
Speaker 9: the pandemic is in New York Tuesday to Thursday, on
Speaker 9: buildings that are comparably leased, the visitation is the same. So,
Speaker 9: in other words, the badge swipes haven't diminished at all.
Speaker 9: So Tuesday to Thursday New York is back, and Monday
Speaker 9: is coming up slowly and Friday is very slow. By
Speaker 9: the way Friday was slowing down before.
Speaker 3: The pandemic, but it's definitely slower today.
Speaker 9: So that number in Boston is about eighty percent, also rising.
Speaker 9: So Boston is also improving Tuesday to Thursday, and then
Speaker 9: San Francisco lags. It's at fifty two percent, but again
Speaker 9: that is slowly improving. And the other thing that we
Speaker 9: see in the data is that if you look at
Speaker 9: the unique weekly visits of a worker, that gap between
Speaker 9: the East and the West Coast is less. However, those
Speaker 9: individuals are coming into the office fewer days per week
Speaker 9: on the West Coast than they are in New York
Speaker 9: or Boston.
Speaker 2: When it comes to the stock market, it has been
Speaker 2: driven so much this year by that so called Magnificent seven, Yes,
Speaker 2: which seems to be a lot of it related to
Speaker 2: artificial intelligence.
Speaker 3: Yes.
Speaker 2: Is that spilling over into commercial real estate market?
Speaker 3: It is? It is.
Speaker 9: So if you look overall in space demand today, I
Speaker 9: actually would say the technology companies is the biggest gap.
Speaker 9: We see most of the demand today coming from financial
Speaker 9: services companies, law firms, professional service firms, and the technology
Speaker 9: companies are not leasing space at nearly the level that
Speaker 9: they were before or during the pandemic. Primarily driven by
Speaker 9: the large tech companies. However, in San Francisco, to your point, David,
Speaker 9: there are a number of AI companies, small startups and
Speaker 9: medium sized companies that are taking space. I think the
Speaker 9: net absorption from those companies over the last year eighteen
Speaker 9: months has been about two to three million square feet.
Speaker 9: And also interestingly, those workers are in the office I
Speaker 9: think in many cases up to five days a week.
Speaker 2: So when you get a new project, the three forty
Speaker 2: one matters in Otherwise, is the financing there for it?
Speaker 3: Yes, so great question.
Speaker 9: So on the financing, I think you have to divide
Speaker 9: it between the private market and mortgage financing that's secured
Speaker 9: by the properties, and also the public unsecured market. So
Speaker 9: on the private side and mortgages, it's challenging. You know,
Speaker 9: there are many banks, insurance companies, other lenders that are
Speaker 9: not getting repayments of their office loans and therefore they
Speaker 9: don't have fresh capital to lend on new office projects.
Speaker 9: It's very hard to get. We did a very large
Speaker 9: secured mortgage financing last year on an ironclad building in
Speaker 9: East Cambridge and we didn't get a quote from a
Speaker 9: US lender. We ended up closing the deal with European
Speaker 9: and Asian lenders.
Speaker 3: So that's on the private secured side.
Speaker 9: But if you look at the unsecured market, you know
Speaker 9: there are a handful of well, there are many ruts
Speaker 9: that are investment grade or not investment grade rated, and
Speaker 9: they're funding themselves in the public investment grade bond market,
Speaker 9: which is what we do, and so we have access
Speaker 9: to that market. In fact, are spread are at long
Speaker 9: term averages, so we're you know, not being per se
Speaker 9: penalized for being an office company in that market. The
Speaker 9: overall cost of the financing is a lot higher than
Speaker 9: it used to be, just because the ten year treasury
Speaker 9: rate is much higher than it was two or three
Speaker 9: years ago.
Speaker 2: Go back to your Cambridge building in for a second.
Speaker 2: No domestic bidders for it done, so it came from overseas.
Speaker 2: Is that a larger trend? Because the United States in
Speaker 2: general is an investment haven right now, you're seeing a
Speaker 2: lot of foreign direction investmor coming in. Does that apply
Speaker 2: to commercial real estate?
Speaker 3: I think so.
Speaker 9: I think that there are buildings that are selling office
Speaker 9: buildings today. I think primarily they are distressed types of
Speaker 9: deals and the buyers tend to be family offices. And
Speaker 9: distressed asset funds, and my guess is the underlying capital
Speaker 9: for those is a mix of both domestic and non
Speaker 9: US sources. But you know, broadening that out, there also
Speaker 9: are large international, sophisticated investors that want to continue to
Speaker 9: invest in US real estate. We announced last year a
Speaker 9: major joint venture with Norgis of the Norwegian Central Bank,
Speaker 9: and they invested seven hundred and fifty million dollars in
Speaker 9: two life science developments that we are completing in East Cambridge,
Speaker 9: and that was obviously a very significant commitment.
Speaker 2: Since we started really talking a lot about commercial real estate,
Speaker 2: there's a lot of emphasis on the premium buildings. You're
Speaker 2: in premium, but there's an A and a B and
Speaker 2: a C and things like that. Is that difference maintaining,
Speaker 2: is it exacerbating? Is it diminishing the distinction?
Speaker 9: Yeah, it's certainly maintaining and maybe even escalating further. So,
Speaker 9: the way we describe it is there's premier workplaces and
Speaker 9: there's everything else. And the premier workplaces we're defining as
Speaker 9: basically the top ten percent.
Speaker 3: Of buildings in our market.
Speaker 9: Those buildings tend to be a little bit larger, so
Speaker 9: it's about fifteen to twenty percent of the space. What
Speaker 9: is the definition of a premier workplace. Well, it's a
Speaker 9: building where if you have an industry leading client would
Speaker 9: be interested in leasing space in the building if it
Speaker 9: was available.
Speaker 3: So it's that top ten percent.
Speaker 9: And if you look at the data for those buildings,
Speaker 9: first of all, the asking rent for that ten percent
Speaker 9: is fifty four percent higher today than the whole the
Speaker 9: other ninety percent, and the vacancy the direct vacancy rate
Speaker 9: is about seven and a half percentage points. It's about
Speaker 9: eleven low elevens percent, which is seven percent seven percentage
Speaker 9: points lower than the rest of the market which is
Speaker 9: at like seventeen or eighteen. And then lastly, the net
Speaker 9: absorption if you look at it for the five central
Speaker 9: business districts where we operate, the net absorption of space
Speaker 9: into that top ten percent has been a positive eight
Speaker 9: plus million square feet, and for everything else it's been
Speaker 9: negative over thirty million square feet.
Speaker 2: It is the XP chairman and CEO Owen Thomas mellow
Speaker 2: Brooks taught us that it is in merchandising that the
Speaker 2: real money from the movie Is is made. This week,
Speaker 2: a lot of people in Paris are hoping that there
Speaker 2: will be real money to be made from selling Olympics merchandise,
Speaker 2: which four years ago is in Tokyo, brought in over
Speaker 2: one hundred and twenty seven million dollars for that Olympics,
Speaker 2: and they'll need every penny of that to help cover
Speaker 2: the Paris operating budget of over four point three billion dollars.
Speaker 2: If Paris wants to get some real money for merchandising,
Speaker 2: maybe they should get a celebrity or two involved, like
Speaker 2: George Clooney, who with a friend put together a tequila
Speaker 2: brand he sold after four years for one billion dollars.
Speaker 8: Everything about Kosamigos's real is nothing made up. George and
Speaker 8: I signed every batche will sign because we want to
Speaker 8: make sure that it's exactly what it's supposed to be.
Speaker 2: Then there's the new Louis Vitan Timberland boots going for
Speaker 2: a mere twenty eight hundred and fifty dollars for the pair.
Speaker 2: Master Marketer Elon Musk appears to be raking in plenty
Speaker 2: of real money from a wide range of merchandise, including
Speaker 2: everything from spacesuit onesies for infants with SpaceX logo on
Speaker 2: the sleeve to a men's fragrance named Burnt hare described
Speaker 2: as quote the essence of repugnant desire to a cyber
Speaker 2: truck inspired cat bed. And now, for all of those
Speaker 2: wanting to try their own hand at making some real
Speaker 2: money for merchandising the way George Clooney and Elon Musk have,
Speaker 2: you can go to Harvard to learn how. For a
Speaker 2: mere twelve thousand dollars, you can take Professor Anita Elberse's
Speaker 2: four day course That's the Business of Entertainment, Media and
Speaker 2: Sports and study everything from David Beckham's brand management to
Speaker 2: how Beyonce launches her new albums. But you'll have to
Speaker 2: get in line behind executors from Hollywood and Madison Avenue,
Speaker 2: as well as Channing Tatum and ll Coolja. It's a
Speaker 2: safe bet, however, that one person who will not be
Speaker 2: needing any fancy Harvard course is the marketer in chief.
Speaker 2: He is, of course, the former President of the United States,
Speaker 2: Donald J. Trump, whose red Maga hats and other clothing
Speaker 2: have become ubiquitous. According to website Chummy Tees, Online searches
Speaker 2: for the former president's T shirts spiked by over seven
Speaker 2: thousand percent after that attempt on his life in Pennsylvania.
Speaker 2: That is the largest spike in searches and clicks to
Speaker 2: our website we've ever seen, they say. And if that
Speaker 2: weren't enough, Axios reports that a Trump owned company was
Speaker 2: out with limited edition sneakers that include on the shoes
Speaker 2: a picture of mister Trump right after the shooting with
Speaker 2: blood on his face. And for your two hundred and
Speaker 2: ninety nine dollars, you'll get not only the sneakers, but
Speaker 2: a chance to get one of ten pairs that will
Speaker 2: be autographed by the former president and given out at random.
Speaker 2: So Vice President Harris is now in a fierce contests
Speaker 2: not only for votes, but to win the merchandise competition.
Speaker 2: She's playing from behind, but her supporters had unofficial T
Speaker 2: shirts and water bottles online within minutes of President Biden's
Speaker 2: announcement last Sunday, and it took her new campaign only
Speaker 2: twelve hours to get the real merch out there. But
Speaker 2: to make sure she comes out on top, she might
Speaker 2: want to take another look at the greatest movie about
Speaker 2: merchandising of all time. We've been down this aisle already.
Speaker 3: We've never been down this isle. It's pain.
Speaker 9: Church brought me.
Speaker 2: I'm a married spot.
Speaker 3: I'm a marriage spot.
Speaker 2: That does it for this episode of Wall Streight Week.
Speaker 2: I'm David Weston. This is Bloomberg. See you next week.