Speaker 1: This is Bloomberg business Week Inside from the reporters and
Speaker 1: editors who bring you America's most trusted business magazine, plus
Speaker 1: global business finance and tech news. The Bloomberg Business Week
Speaker 1: Podcast with Carol Masser and Tim stinebec from Bloomberg Radio. Well,
Speaker 1: we often talked about the high childcare costs that we
Speaker 1: have here in the US. This week, though, in the
Speaker 1: upcoming new issue of Bloomberg Business Week at on newsstands
Speaker 1: on Thursday, already on the Bloomberg In online at Bloomberg
Speaker 1: dot com Slash business Week, a story on the exorbitant
Speaker 1: childcare costs in the UK, which happened to be the
Speaker 1: most expensive among the O E c D countries, and
Speaker 1: how the calls will reform in that country are growing louder.
Speaker 1: So let's get to it, and let's get to her story.
Speaker 1: From Bloomberg News Equality reporter Olivia knot a Hulu with
Speaker 1: us on the phone from London, along with Bloomberg Business
Speaker 1: Week editor Jil Whever. He is here in our Bloomberg
Speaker 1: Interactive Broker studio. All right, Joel, I thought it was
Speaker 1: bad here, really bad, it is actually, But it turns
Speaker 1: out that we are not alone and that the UK
Speaker 1: actually has things even worse, m Olivia, what did What
Speaker 1: are the numbers reveal as you dug into the story? So,
Speaker 1: I think the most striking one is what you mentioned
Speaker 1: in terms of just the fact that proportion proportionate to
Speaker 1: what people earn, the UK has the highest childcare costs
Speaker 1: in UM in the O E c D, which is
Speaker 1: obviously very striking, and just the sense that some people
Speaker 1: are paying more on childcare costs and their mortgages UM.
Speaker 1: Some people are, some women are finding it's actually well,
Speaker 1: some parents and women to sticks are finding that it's
Speaker 1: more cost effective not to work because they earn less
Speaker 1: than they would pay on childcare UM. So that's coming
Speaker 1: some of the figures that we're seeing at the moment. Okay,
Speaker 1: so if it's so expensive that people are giving up
Speaker 1: their jobs just to take care of their kids, that
Speaker 1: cannot bode well for the economy. And this is an
Speaker 1: economy that has already I know, I know the word
Speaker 1: brex it maybe give you a little PTSD sail Olivia,
Speaker 1: but but what does this mean for the economy. So
Speaker 1: one of the general effects, one of the things that
Speaker 1: people generally find is that when childcare is very expensive
Speaker 1: and when women are generally the people who will kind
Speaker 1: of um take the hit and either cut back their
Speaker 1: hours or stay at home. And what we're seeing that
Speaker 1: that potentially could be the case in the UK. So
Speaker 1: what we've seen in the latest data available that um
Speaker 1: quite a few women left the workforce to stay at
Speaker 1: home and that's kind of been roughly happening over two
Speaker 1: which is one of the first time that's happened in
Speaker 1: about twenty years, so that's quite concerning. And overall, what
Speaker 1: one report found that you know, that cost if the
Speaker 1: UK had a similar employment rate female employment rates to Sweden,
Speaker 1: then you know the economy would gain a hundred and
Speaker 1: seventy seven billion pounds dollars a year, so you know,
Speaker 1: that could potentially be quite a big economic win. Olivia,
Speaker 1: I think it's worth talking about why why are costs
Speaker 1: so high? Is this a function of supply because clearly
Speaker 1: you're seeing you know, demand is strong but maybe decelerating
Speaker 1: with all these women leaving the workforce. Because the cost
Speaker 1: is so high, there must be a supply constraint hidden
Speaker 1: in here that's creating high cost of childcare? What is it?
Speaker 1: And one that's part of it? So you do speak
Speaker 1: to women who well to parents where it's pretty normal
Speaker 1: for them, for example, to triumph a childcare placed before
Speaker 1: they're born, and that kind of can be exacerbated depending
Speaker 1: on where you live. But what if you talk to
Speaker 1: anyone in the industry, what pretty much everyone says, without
Speaker 1: um exception, is that the way that childcare subsidies are
Speaker 1: structured basically means that although childcare costs are partly subsidized,
Speaker 1: when your child turns three or four, um, the cost
Speaker 1: of that the cost of those substitutes aren't fully met
Speaker 1: by the government, so providers have to hike their costs
Speaker 1: in order to meet those costs, which makes having which
Speaker 1: makes there anyone who's not doing no subsidies basically very
Speaker 1: very very expensive UM. And so what people in the
Speaker 1: industry are generally saying is that for the immediate term,
Speaker 1: what's just needed. It's just more cash. Hey, Olivia talked
Speaker 1: to us about the political will to actually do something substantial,
Speaker 1: because when I think about it here in the US,
Speaker 1: I feel like it's very low when it comes to
Speaker 1: the list of priorities of you can throw billions of
Speaker 1: dollars around and it's still not really touched. Childcare in
Speaker 1: the US, right, it's like in the UK. Well, I
Speaker 1: think it is a growing it is a growing theme.
Speaker 1: So last year there was this big protest called March
Speaker 1: the Mummy isn't really kind of really court people's attentions
Speaker 1: because they were just all these mums saying that they
Speaker 1: were fed up basically. And also last year they started
Speaker 1: the inquiry and the issue and the Labor Party, the
Speaker 1: opposition party, is really kind of doubling down. So recently, um,
Speaker 1: one of their officials went to Estonia because they have
Speaker 1: a really kind of exemptary model of childcare and there's
Speaker 1: this growing kind of recognition that something needs to be
Speaker 1: done because a lot of people are really really angry
Speaker 1: and it is going to be is potentially going to
Speaker 1: be a key electoral issue going forward. What did you
Speaker 1: say Estonia? What can we learn from Estonia here? Well,
Speaker 1: it's interesting apparently they have relatively low childcare costs, but
Speaker 1: there's a lot of kind of childhood of courts are
Speaker 1: very low basically, and that really kind of has helped
Speaker 1: the female employment rates. UM. So yeah, Labor's education spokesperson
Speaker 1: went went to Estonia and and they have really good
Speaker 1: educational outcomes as a result. Also Worth mentioning that if
Speaker 1: if you're going to start a march, March of the
Speaker 1: Mummies is definitely going to get in some people's attention,
Speaker 1: want the T shirt along with that. So what's the
Speaker 1: likelihoods and everything? All right? So, Olivia, what's the likelihood
Speaker 1: though that anything changes or is there a time frame
Speaker 1: that that's being thought about? Well, the thing is that
Speaker 1: the election the next general elections in the next two years.
Speaker 1: So if if major reform is going to be done,
Speaker 1: then the clock is ticking. And what one study said
Speaker 1: is that most kind of liberal economies which are similar
Speaker 1: to us, have had some kind of major reform of
Speaker 1: childcare in the past five years or so, but the
Speaker 1: UK it's biggest change within two thousand and seventeen, and
Speaker 1: a lot of people said that in many things worse.
Speaker 1: So what some people would say that changes over to
Speaker 1: you basically, and considering the laundry list of issues that
Speaker 1: the Labor Party is going to try to contend with,
Speaker 1: this is obviously one of them. But how would you
Speaker 1: rank this relative to the other issues that the party
Speaker 1: is really focused on right now? Well, I think the
Speaker 1: cost of living in the UK does eclipse almost anything.
Speaker 1: It feels like at the moment, and although inflation isn't
Speaker 1: as pronounced as it was saying at some point last year,
Speaker 1: it's still I think, just just people getting by and
Speaker 1: the health of the economy is the number one concern.
Speaker 1: But obviously part of that is childcare cost for families
Speaker 1: are just a really, really substantial expense, So I'd say
Speaker 1: for that particular group of the voters it is pretty high.
Speaker 1: So just on that political front, like what what could
Speaker 1: become of this, is anybody willing to really step into
Speaker 1: the ring and say this is a political issue that
Speaker 1: we can really get behind, or is it's still just
Speaker 1: so divisive like it is here in the US that
Speaker 1: no one's really willing to go to back for it.
Speaker 1: I think it's difficult because fundamentally what's being asked for
Speaker 1: in the short term, at least, there's a lot of money.
Speaker 1: In the UK does feel like there's a lot of
Speaker 1: things which needs another a lot of money for for example,
Speaker 1: the NHS, the health services, the other it's another massive issue.
Speaker 1: A lot of public place servants want more, want higher
Speaker 1: pay for much inflation, There's so many things kind of
Speaker 1: competing for the government's attention. It's hard to know if
Speaker 1: they would. It's hard to to know if they will
Speaker 1: choose this as the issue where they're going to pour
Speaker 1: money into UM, but so I think that's my way
Speaker 1: of thinking. It's hard to know at this point. Yeah.
Speaker 1: An interesting aspect of the story too that they're mostly
Speaker 1: are largely privately held companies, a lot of them are leveraged,
Speaker 1: and the insolvencies of Search often leads to you know,
Speaker 1: ultimately higher class as well. Olivia really interesting story a
Speaker 1: via Ka ta Hulu. She's a quality reporter at Bloomberg
Speaker 1: News on the phone from London along with the editor
Speaker 1: of Bloomberg Business Week, told Webber the story in the
Speaker 1: upcoming new double issue up Bloomberg Business Week, out later
Speaker 1: this week, but already on the Bloomberg and Bloomberg dot com.
Speaker 1: This is Bloomberg business Week Inside, from the reporters and
Speaker 1: editors who bring you America's most trusted business magazine, plus
Speaker 1: global business, finance and tech news. The Bloomberg Business Week
Speaker 1: Podcast with Carol Messer and Tim stinebec from Bloomberg Radio
Speaker 1: on our radar. This week thirteen filings which institutional investment
Speaker 1: managers are required to file quarterly, and it really does
Speaker 1: give investors some clues on how some of the most
Speaker 1: watched investors have been investing their money. We are usually
Speaker 1: obsessed with them and watched them because they can move
Speaker 1: share prices. Our next guest uses machine learnings to create
Speaker 1: index replication et s to track all the investments such
Speaker 1: as hedge funds, VC venture cow but and also private equity.
Speaker 1: Bob Elliott is the CIO at Unlimited and is former
Speaker 1: senior investment executive at Bridgewater Associates. His bio reminds us
Speaker 1: that he built and led Ray Dalios personal investment research
Speaker 1: team for Newly a decade and he's here in our
Speaker 1: Bloomberg Interactive Broker studio. Hey, welcome, Nice to have you
Speaker 1: here with Gena and myself. How are you? Thanks so
Speaker 1: much for having me. Great to be here. What was
Speaker 1: it like to be with Ray years? It was great.
Speaker 1: It was, you know, really a formative time in my career,
Speaker 1: particularly starting around the financial crisis and navigating that challenging time,
Speaker 1: and then of course you know, the decade and a
Speaker 1: half cents and so it was really about about the
Speaker 1: best place and about the best time to to learn
Speaker 1: how the macro economy works and how how financial markets work.
Speaker 1: So it's really it was a great time. So talk
Speaker 1: to us about what you've taken from your lessons at
Speaker 1: Bridgewater and brought to your new organization. I mean, it
Speaker 1: sounds fantastic because it sounds like the confluence of hedge
Speaker 1: funds and AI and machine learning, and these are all
Speaker 1: things that people are very, very captivated by. So how
Speaker 1: are you utilizing a machine or learning in your process? Now? Well,
Speaker 1: if you think about it, most investors, whether they're explicit
Speaker 1: about it or not, use a set of decision rules
Speaker 1: to make to inform their investment decisions, right, And of
Speaker 1: course some people are more explicit about it, using an
Speaker 1: explicit systematic approach. Some people call themselves discretionary, but they're
Speaker 1: using heuristics. And what we can do is we can
Speaker 1: draw on our understanding of the types of decisions that
Speaker 1: those investors are making, the types of assets that they're
Speaker 1: making across different hedge fund strategies. So like equity long
Speaker 1: short managers are a little different than global macro folks
Speaker 1: than fixed income are. And with that understanding, we can
Speaker 1: actually look at the returns of those managers and infer
Speaker 1: what they're doing and close to real time, and that's
Speaker 1: what we're really doing. That's what our technology is all about,
Speaker 1: is understand seeing what they're doing, seeing the outcomes of
Speaker 1: their strategies, knowing what they could plausibly be betting on
Speaker 1: long and short, and then we can take that understanding
Speaker 1: and package it into an et F structure and make
Speaker 1: it accessible to everyone in a in a very tax
Speaker 1: efficient form. What kind of back testing did you do
Speaker 1: to really figure out that this works? Because because once
Speaker 1: you get the filings right, all of these investment folks
Speaker 1: could have been out of the positions in different positions.
Speaker 1: So I'm trying to understand how this strategy can be
Speaker 1: used going forward. We don't actually look at the filings.
Speaker 1: We look at the returns, which is really important because
Speaker 1: it's still after the fact, isn't it. It is after
Speaker 1: the fact that we actually have pretty timely returned some
Speaker 1: some returns information that's daily, some of it is a
Speaker 1: few days after the end of the month, and so
Speaker 1: we have a pretty good real time sense of what
Speaker 1: types of positions these folks have on. And the interesting
Speaker 1: thing is at sort of the industry wide level or
Speaker 1: hedge fund style level, they don't move that fast. Uh,
Speaker 1: you know, the shifts, say from being very into growth
Speaker 1: stocks and tech stocks to being more positioned in value stocks.
Speaker 1: Really transitioned from say the summer of until early two.
Speaker 1: That's a pretty normal, normal shift in thinking and positioning
Speaker 1: amongst hedge fund managers. That's sort of twelve to eighteen
Speaker 1: month time frame. And so when we're when we're doing
Speaker 1: what we're doing, we're a few weeks behind the actual positions.
Speaker 1: But you know, relative to uh, relative to capturing understanding
Speaker 1: of what these most sophisticated asset managers are doing, it's
Speaker 1: it's it's a pretty good job of capturing what they're doing.
Speaker 1: And then when you're actually capturing what they're you're doing,
Speaker 1: are you investing alongside them effectively or are you ever
Speaker 1: going against them? For instance, if they're going more long
Speaker 1: small caps, are you always going more along small caps
Speaker 1: or are you taking that as a contrary signal and
Speaker 1: going short small caps in your strategy. What we're doing
Speaker 1: with our first product is we're replicating the returns of
Speaker 1: the aggregate hedge fund industry. So we're going along with
Speaker 1: what we see those managers doing and trying to match
Speaker 1: it as closely as we can. And that's because you know,
Speaker 1: the truth is hedge fund managers are pretty darn good
Speaker 1: at investing them, surely inaggregate, particularly when you when you
Speaker 1: consider the the strategy. So if you add back the fees,
Speaker 1: which is really one of the things that we can
Speaker 1: do because we don't have to charge two and twine,
Speaker 1: we use technology to replicate what they're doing rather than
Speaker 1: charge two and twenty and so grossive fees. You know,
Speaker 1: if you add back the fees, hedgemen managers are great,
Speaker 1: it's just the challenges. You can't invest in them typically
Speaker 1: without that high fee structure. And so what we're trying
Speaker 1: to do is infer what they're doing and offer it
Speaker 1: a much lower fee structure than a typical LP position.
Speaker 1: How does this work for VC and p E because
Speaker 1: they're not all the same worlds. Absolutely absolutely, those those
Speaker 1: positions and those exposures are different. Although the same idea
Speaker 1: that there's a set of core decision rules that those
Speaker 1: investors are making to identify what type of investments they
Speaker 1: wanted they want to put in, they want to invest
Speaker 1: in is it's it's the same basic concept except they're
Speaker 1: what we're doing is we're looking at their private market
Speaker 1: investments and finding look alike type companies in the public
Speaker 1: markets that we can use that look a lot like
Speaker 1: the type of investments that they're doing, particularly later stage
Speaker 1: investments that they're doing. We can take that understanding, find
Speaker 1: lookalikes in the public markets and use that and package
Speaker 1: that as an e t F to make it widely accessible.
Speaker 1: And the tradeoff is it's imperfect, but you also don't
Speaker 1: have your money locked up for you know, ten or
Speaker 1: twelve years, and you don't have to pay two and
Speaker 1: twenty fees. So how do you speaking of fees, I
Speaker 1: think immediately of transactions costs, I would think that this
Speaker 1: is a pretty lumpy sort of transactions cost strategy where
Speaker 1: you have the thirteen F filings, all of your transactions occur.
Speaker 1: How do you manage those transactions costs and also manage
Speaker 1: the impact that you may have on the market by
Speaker 1: having such a lumpy trading period. Yeah, because we're looking
Speaker 1: at the returns, we actually get information, incremental information kind
Speaker 1: of all the time. Every week or two we're getting
Speaker 1: new incremental information, and so that allows us to evolve
Speaker 1: the portfolio through time in instead of in a concentrated way,
Speaker 1: in an incremental way, and that and that helps reduce
Speaker 1: the transactions costs that that we see. We also typically
Speaker 1: are trading and you know some of the biggest liquid markets,
Speaker 1: the sixty biggest liquid markets in the world, and so
Speaker 1: those markets fortunately have much lower transactions costs. Then if
Speaker 1: you know, we were trading very specific positions, so no
Speaker 1: fees or low fees. Low fees we we charge at
Speaker 1: basis point management fee, which you know, when you think
Speaker 1: about that in the context of say two and twenty
Speaker 1: type products, right, you know, a typical hedge fund strategy
Speaker 1: charge what four hundred basis points on average per year
Speaker 1: looks like a good deal, and you know, I probably
Speaker 1: don't have to sell you all on the et F structure.
Speaker 1: But it also comes with the incredible tax efficiency of
Speaker 1: an et F, whereas most of these hedge fund structures
Speaker 1: are fund to fund structures are typically LP positions and
Speaker 1: their tax at ordinary income, which is much less efficient
Speaker 1: than an ETF. Bob, how do you think, though, you know,
Speaker 1: we're coming out of this environment where money was so
Speaker 1: cheap for such a long time, and we're also coming
Speaker 1: out of a pandemic where again we had just so
Speaker 1: much money flooding the market. How might that we're all
Speaker 1: trying to figure out what everything is on the other
Speaker 1: side and whether we are in somewhat of a new normal, right, so,
Speaker 1: how do you think about how that might potentially impact performance?
Speaker 1: For sure, the dynamic for fifteen years of unbridled monetary
Speaker 1: stimulation was if you bought pretty much pretty much everything
Speaker 1: went up, and the more risky the thing that you bought,
Speaker 1: the more it went up. Typically, And and that air
Speaker 1: is over and the fetes make it very clear that
Speaker 1: that era is over. And so now we're in an
Speaker 1: era of of tighter monetary policy and a lot more
Speaker 1: macroeconomic uncertainty. And that's a period of time where alpha
Speaker 1: typically shines, right because you have the most sophisticated asset
Speaker 1: managers who can who spend billions of dollars on you know,
Speaker 1: the smartest minds to figure out what's likely to transpire,
Speaker 1: and that's where they really shine is in those difficult moments,
Speaker 1: those uncertain moments, where they can position their portfolios agilely
Speaker 1: in a way that helps them navigate the difficult ronment.
Speaker 1: If you look back last year, you know, hedge funds,
Speaker 1: the hedge fund industry in general in aggregate was roughly
Speaker 1: flat at a time when you know sixty stock index
Speaker 1: investing was down fifteen or that's the that's the type
Speaker 1: of significant outperformance that you can see in these in
Speaker 1: these very challenging times from the sophisticated asset managers. So
Speaker 1: you gave us the opening to talk about positioning, So
Speaker 1: I'm just going to dive right in. What are you
Speaker 1: seeing with respect to position And you talked a little
Speaker 1: bit about the value growth transition or the growth value
Speaker 1: transition over the last year. What are the big themes
Speaker 1: in terms of positioning this year. I think the biggest
Speaker 1: thing which connects to that aggregate uncertainty is we're actually
Speaker 1: seeing managers playing about as conservatively as we have seen
Speaker 1: in the last twenty five years other than the acute
Speaker 1: crisis periods of oh eight and twenty. And I think
Speaker 1: that speaks to the fact that there is a lot
Speaker 1: of uncertainty, macro uncertainty about exactly where we're going. Is it,
Speaker 1: you know, higher for longer or has the FED tightened
Speaker 1: enough to tip us into recession? And in those moments,
Speaker 1: um you don't have to you don't have to hold
Speaker 1: your max positions in order to UH, in order to
Speaker 1: continue to earn, to continue to deliver those returns. And
Speaker 1: so that's what we're seeing as a conservativism. And then
Speaker 1: under the under the hood, what we're seeing is a
Speaker 1: bunch of positioning in line with that, tilted towards value stocks,
Speaker 1: tilted towards higher top part of the credit stack, positions
Speaker 1: like that that are defensive in nature in this environment.
Speaker 1: All right, we're gonna have to leave it there. I'm
Speaker 1: good to know. I know you're just getting these funds
Speaker 1: off the ground, or get you got one fund off
Speaker 1: the ground, right, one fund, the h F n D
Speaker 1: E t F. Looking looking forward to hear a little
Speaker 1: bit more as you guys build out. Bob Elliott, Chief
Speaker 1: Investment Officer Unlimited. Here in our studio, you're listening to
Speaker 1: the Bloomberg Business Week Podcast. Catch us live week days
Speaker 1: from two to five pm Eastern on Bloomberg Radio, the
Speaker 1: Bloomberg Business Bank You do. You can also listen live
Speaker 1: to our flagship New York station, Just say Alexa, play
Speaker 1: Bloomberg eleven, Dirty This Next story, Today's Big Take and
Speaker 1: Big Take podcast. You can find it at Bloomberg dot
Speaker 1: com or wherever you get your podcast. Don't miss also
Speaker 1: the Big Take on Bloomberg Radio. That's weeknights at eleven pm.
Speaker 1: Wall Street Times story at eleven pm Wall Street Time.
Speaker 1: So you want to know what the story is because
Speaker 1: it also happens to be one of our most read
Speaker 1: It's about how global cities and businesses are still struggling
Speaker 1: to get workers back into offices and the economic cost
Speaker 1: of not being able to And it's really pronounced when
Speaker 1: you think about Manhattan. So let's get to it, uh.
Speaker 1: In our interactive broker studios. Emma Court, she's reporter at
Speaker 1: Bloomberg knew she and some of our colleagues here wrote
Speaker 1: this story, and she joins Gina and myself, So all right,
Speaker 1: break it down to us because we keep talking. I
Speaker 1: keep talking with executives like people are coming back, but
Speaker 1: it's a lot of hybrid work still going on, especially
Speaker 1: here in New York City. Yeah, so I think that
Speaker 1: there are kind of two key takeaways from our story.
Speaker 1: The first is that workers are back in offices. They're
Speaker 1: just back full time. They're not back at the same
Speaker 1: levels they used to be, and they're definitely not back
Speaker 1: at the same levels on Mondays and Friday's. The second
Speaker 1: big takeaway is as a result of some of these
Speaker 1: big shifts and work schedules. We know that workers are
Speaker 1: spending less money in and around the office than they
Speaker 1: used to be. Thinking about it, your coffee in the morning,
Speaker 1: you're salad at lunch, you're happy hour after work. That's spending,
Speaker 1: you know, isn't happening near the office anymore. It maybe
Speaker 1: help it happening elsewhere, but it's not happening, you know,
Speaker 1: here in Manhattan sometimes. So we calculated that the cost
Speaker 1: of this shift in spending for Manhattan is a missed
Speaker 1: twelve point four billion dollars a year. So that's twelve
Speaker 1: point billion dollars of consumers spending near the office that
Speaker 1: isn't happening anymore as a result of workers being in
Speaker 1: the office about thirty percent less. Amazing. Can you break
Speaker 1: that down a little bit by industry, because we all
Speaker 1: think of obviously the restaurant, the retailer, maybe the transportation services.
Speaker 1: What are the most impacted industries and what are the least? Yeah,
Speaker 1: so it really the effect of this is pretty wide ranging, right,
Speaker 1: so we know if you're not taking the subway in
Speaker 1: the morning, the m t A isn't getting your fair
Speaker 1: for instance. We know this is affecting a wide variety
Speaker 1: of businesses. Some of the ones we focused on the story.
Speaker 1: We're you know, a food vendor in Zukkati Park downtown
Speaker 1: called Sam's Falafel, very good falafel, this is not UM
Speaker 1: and then Sweet Green in UM you know, Midtown Manhattan. UM.
Speaker 1: But we also know it poses issues for the City
Speaker 1: of New York because the City of New York funds
Speaker 1: itself through sales tax revenue on if sales are consumed,
Speaker 1: you know, if supers are spending less, then that's less
Speaker 1: tax revenue. We also know that if you don't need
Speaker 1: to be in the office all the time, you might
Speaker 1: move further way and you might move out of New
Speaker 1: York City. And so that is a big kind of
Speaker 1: longer term existential risk for the city because you know,
Speaker 1: sales income tax revenues fund all these like essential things
Speaker 1: in the city. How much of this is financial industry
Speaker 1: And we've heard from a lot of the big bank CEOs, right,
Speaker 1: and I feel like the financial sector, whether it's a
Speaker 1: Jamie Diamond or some others who who have been pretty
Speaker 1: vocal about like getting back to the work a lot
Speaker 1: of it. Because you did mention, you know, the financial
Speaker 1: district in Manhattan that this is one of the places
Speaker 1: where we're seeing not a lot of people come back
Speaker 1: to work. So it sounds like a lot of it
Speaker 1: is in finance. It's really the business districts. So like
Speaker 1: if you think of the areas in New York City
Speaker 1: where like you know, they're kind of animated each day
Speaker 1: by people coming in and not a lot of people
Speaker 1: live there. This is really what we're talking about. We're
Speaker 1: talking about, you know, the financial district and downtment Manhattan,
Speaker 1: and we're talking about Midtown Manhattan like predominantly. Can we
Speaker 1: dig in a little bit too, sort of the transportation issue.
Speaker 1: We talked a little bit about this offline, but I'm
Speaker 1: just fascinated by this idea that you know, the subway
Speaker 1: has to run no matter who's on it, and they're
Speaker 1: not going to get any writers on Monday and Friday.
Speaker 1: I know you mentioned that they are responding to that
Speaker 1: to some degree, but how much is the m t
Speaker 1: A really just quaking at this notion that we're not
Speaker 1: going to get back to five days a week. It's
Speaker 1: a huge problem. It's a huge problem. And in fact,
Speaker 1: like if you think about the m t A, right,
Speaker 1: they need fares to sustain their operations. And they've said
Speaker 1: they are facing this really long term problem because they
Speaker 1: don't expect ridership levels to come back anytime soon, and
Speaker 1: so they're looking, you know, staring down big you know,
Speaker 1: billion dollar deficits over the next several years and they
Speaker 1: need to fill it somehow. So that might mean they've said,
Speaker 1: you know, fair increases, it might mean service cuts. In fact,
Speaker 1: they're already talking about cutting service on about seven train
Speaker 1: lines on Mondays and Fridays when people are working from home,
Speaker 1: including the one train, the L and F trains. These
Speaker 1: are you know, kind of commuter trains, right they you know,
Speaker 1: these are people typically coming from other parts of Manhattan
Speaker 1: or Brooklyn, Queens, the bronx Um taking these trains into
Speaker 1: the city and they're not doing that as much anymore.
Speaker 1: Problem of course with that is there are still a
Speaker 1: lot of people who do need to work in person
Speaker 1: five days a week. We don't typically talk about them
Speaker 1: when we have this conversation, but you know, they have
Speaker 1: to get to work still. So if there's cuts to service,
Speaker 1: they're the ones who are going to suffer, and they
Speaker 1: can't afford to take an uber into the city, you know,
Speaker 1: just because everyone else is staying home. Hey, Emma, you know,
Speaker 1: if we go back to right after the pandemic and
Speaker 1: my office has started to open. I mean, I even
Speaker 1: look at the Bloomberg office. You know, it was slow
Speaker 1: and coming in terms of people coming back, and eventually
Speaker 1: it does feel a lot more normal. Um nowadays. Is
Speaker 1: it just a case of it's going to take some
Speaker 1: time ultimately for leaders to put you know, even more
Speaker 1: pressure on workers, or is there really a shift in
Speaker 1: that we're going to see hybrid work continue forever? Because
Speaker 1: I do feel like we haven't quite figured out whether
Speaker 1: people whether it still continues to be a mix. And
Speaker 1: I'm just curious what you heard from folks and doing
Speaker 1: this story. That is such a good question. Um, I
Speaker 1: think it's a question a lot of people want to
Speaker 1: answer to. I mean, I don't I can't predict the future,
Speaker 1: but you know, I think one of the impetus is
Speaker 1: for doing this story was the idea that, know, this
Speaker 1: is stabilizing, like hybrid work, you know, seems to be
Speaker 1: here to stay. We haven't seen like big changes in
Speaker 1: the numbers in a while, and so it does seem
Speaker 1: like office occupancy is at a sort of stable level
Speaker 1: right now, pending any big changes, but by big employers
Speaker 1: or something, um and we know like they're you know,
Speaker 1: employers want people in, but they realize the same thing
Speaker 1: that a lot of us realize, which is that commutes
Speaker 1: are terrible and people do work really long hours from home.
Speaker 1: And so there is a little bit of a you know,
Speaker 1: there are arguments definitely on on both sides. I think
Speaker 1: what we what we were thinking about, what the story is.
Speaker 1: Can we figure out what why this matters? Right, Like,
Speaker 1: you know, I want to work from home, my employer doesn't.
Speaker 1: Why does this matter for cities, for businesses, for transit systems,
Speaker 1: and what are the implications of that? Yeah, I think
Speaker 1: we think of this as like the story is a
Speaker 1: little bit of a sort of a you know, charting
Speaker 1: the path forward for cities, for businesses, for for the
Speaker 1: rest of us to start thinking about this issue, because look,
Speaker 1: I don't have an issue with people working from home,
Speaker 1: to be clear, I've got a lot of responses on
Speaker 1: Twitter that are like, but you know, we do need
Speaker 1: to reckon with the implications of that. And in a
Speaker 1: city like New York, we all know this entire city,
Speaker 1: the infrastructure has been built around these big offices and
Speaker 1: hattan that people go into every day. If that isn't happening,
Speaker 1: something's got to give. Like, some people are going to
Speaker 1: suffer the economic effects of that. That's just math. You know,
Speaker 1: I'm not saying everyone should have to work in person,
Speaker 1: but I do think we need to understand that there
Speaker 1: are costs to that, and there they fall on, you know,
Speaker 1: certain segments of society and certain people in certain companies.
Speaker 1: So let's talk about sort of the real time implications
Speaker 1: and maybe some of the evidence that you uncovered as
Speaker 1: you're investigating this. You recognize that the MTV m t
Speaker 1: A is thinking about transitioning, right, they're going to cut
Speaker 1: some lines on Mondays and Fridays. Were there any other
Speaker 1: sort of examples of a retail or cutting hours, or
Speaker 1: a restaurant only opening a few days week, or you know,
Speaker 1: how how flexible are some of these companies in addressing
Speaker 1: these issues. Yeah, that's a really really good point. So
Speaker 1: we looked at, for instance, um, you know, the m
Speaker 1: t A is a really good example. We also looked
Speaker 1: at Sweet Green. So sweet Green has said, you know,
Speaker 1: we used to have a really good kind of starting
Speaker 1: end of the week and now Mondays and Fridays are
Speaker 1: just not back the way they used to be UM,
Speaker 1: and they're actually looking at renegotiating leases with landlords so
Speaker 1: they could have a more flexible rent schedule, maybe more
Speaker 1: like a percentage of sales than a fixed price every month.
Speaker 1: So I think, you know, there are some examples of
Speaker 1: how places can kind of, you know, change the terms
Speaker 1: of engagement if you will. We've also heard from places
Speaker 1: that are UM, like the Fitzpatrick Hotel Group, which is
Speaker 1: here in Midtown and Hottan. They have two hotels, and
Speaker 1: they're like, how can we drum up some business on
Speaker 1: a Friday evening at the bar, Like maybe we could
Speaker 1: raffle off a free trick free trip to Iron Okay,
Speaker 1: did people come running in? Well? I don't think they've
Speaker 1: done it. Okay, Okay. I was like, hey, I'll go sir.
Speaker 1: You know UM. And they're also trying to see if
Speaker 1: can they encourage because you know, business travelers are cutting
Speaker 1: their trips short too. That's part of you know, if
Speaker 1: there's no one in the office, why am I traveling
Speaker 1: to New York City on a Monday. Nobody's gonna be here? Well,
Speaker 1: and Fridays are like a big bar date, and so
Speaker 1: if if people are on coming to the office. It
Speaker 1: trickles out in that impact as well, and we gotta run.
Speaker 1: Thank you, Emma Court at Bloomberg News. Here on Bloomberg
Speaker 1: Business Week, you're listening to the Bloomberg Business Week Podcast.
Speaker 1: Catch us live week days from two to five pm
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Speaker 1: but you let me drive out. Who's honey, please gravels,
Speaker 1: I want to drive good question. This is the Drive
Speaker 1: to the Globe up on Bluebird Radio. All right, everybody,
Speaker 1: we got about sevent two minutes left in the trading session,
Speaker 1: keeping an eye on those markets. That does look like
Speaker 1: stocks taking another bit of a leg up, but it
Speaker 1: looks like for the most part, we've got one percent gains.
Speaker 1: As we heard from Charlie on each of your major
Speaker 1: equity average is really the nav deck once again the
Speaker 1: outperformer up about one and a half percent. All right,
Speaker 1: so let's get to it. Our Drive to the closed
Speaker 1: guest is Dave Donna Beatie, and he's Chief investment Officer
Speaker 1: of CIBC Private Wealth Management. They have roughly ninety three
Speaker 1: billion in assets under management, and he joins us once
Speaker 1: again on the phone from Baltimore. Dave, nice to have
Speaker 1: you here with Gina and myself. So what's top of
Speaker 1: mind for you when you think about what investors need
Speaker 1: to be doing or where the markets and asset classes
Speaker 1: might be going from here? Sure? So, I think that
Speaker 1: the good news is that by by your end we
Speaker 1: expect higher equity prices. I think though, that we have
Speaker 1: a bit of a challenge here over the next couple
Speaker 1: of months. As good as the momentum has been so
Speaker 1: far in three I do think that we have a
Speaker 1: likelihood of a recession coming probably later this year, which
Speaker 1: which tells me that at current valuations, markets don't quite
Speaker 1: have that priced in yet. So we do see one
Speaker 1: more potential down leg in this bear market in in
Speaker 1: the short term. UM, So some some caution is appropriate,
Speaker 1: I think today for investors. But we do think we're
Speaker 1: setting up for a um the beginning of the new
Speaker 1: bowl market in the second half of the year, and interestingly,
Speaker 1: what it's likely to prompt that is the the recession itself.
Speaker 1: It sounds strange some times we're talking about recession and
Speaker 1: new bowl market and the same breadth. But that's actually
Speaker 1: usually how it works, and we've done the work on
Speaker 1: that going back over the last ten recession. Dave, can
Speaker 1: you talk to us a little bit about how inflation
Speaker 1: and the broader inflation landscape plays into your strategy. I mean,
Speaker 1: you think the market is definitely very captivated by the
Speaker 1: will we or will we not fall into recession? How deep,
Speaker 1: how long? But certainly inflation has played a really big
Speaker 1: part in the equity market outcomes. How do you see
Speaker 1: inflation playing out in terms of ex equity market impact
Speaker 1: over the course of sure, So we had a actually
Speaker 1: a commodity hedge in place starting in early one right
Speaker 1: through through late two because we believe that we're going
Speaker 1: to see this inflation acceleration. We took that out of
Speaker 1: our asset allocation models because we believe inflation is has
Speaker 1: peaked and is on a downward trajectory. Expect that to
Speaker 1: continue here for uh, you know, for at least a
Speaker 1: few more months. Um. One of the things we need
Speaker 1: to look out for is is kind of what happens now.
Speaker 1: In other words, inflation has come from you know, from
Speaker 1: nine to eight to seven to six point something, probably
Speaker 1: where the CPI will be when it's reported tomorrow. Year
Speaker 1: of the year, there's a chance that we go down
Speaker 1: quickly below four percent, but then inflation kind of gets
Speaker 1: stuck and it doesn't go down to two or two
Speaker 1: and a half like the FED one. So that's a
Speaker 1: potential dilemma for the FED, you know, kind of later
Speaker 1: in the year that we have a high on and
Speaker 1: will probably not be terribly well received by either stock
Speaker 1: or bond markets. And if inflation does get stuck in
Speaker 1: that three to four percent range, do you see that
Speaker 1: as consequential for your strategy longer term? Does that mean
Speaker 1: you lean into value, you lean into small caps? What
Speaker 1: are your thoughts on sort of a broad market strategy
Speaker 1: in a stuck kind of inflation landscape. Yeah, I think
Speaker 1: in a stuck inflation landscape, obviously income becomes more important.
Speaker 1: So we would emphasize dividend growers, not necessarily the highest
Speaker 1: yielding stocks, but the ones that are going to be
Speaker 1: able to grow their dividends year in and year out
Speaker 1: and keep pace without a somewhat higher trend to inflation.
Speaker 1: And then I think around that's your core, and then
Speaker 1: around that you look for opportunities that are just just inexpensive,
Speaker 1: and today, uh, you know, small caps would would certainly
Speaker 1: fit that definition at least for a small allocation. And
Speaker 1: then the other area that's both cheap and where you
Speaker 1: can find more yield are in the international equity markets,
Speaker 1: particularly the developed international markets, which many of which have
Speaker 1: higher payout ratios than the the S and p FID. Hey,
Speaker 1: you know one thing, Dave our rich Miller a Bloomberg
Speaker 1: business we wrote a story about, you know, forget the
Speaker 1: harder soft economic landing, meet the rolling recession, and this
Speaker 1: whole idea of you're going to see you know, different
Speaker 1: segments of our world and our environment go through recession.
Speaker 1: We've already seen it with housing, right because of higher
Speaker 1: mortgage rates, and then it will move on to another recession.
Speaker 1: If we get that kind of recessionary environment, if you will,
Speaker 1: a rolling recession. Does that change your thoughts about kind
Speaker 1: of the market, you know, maybe taking another one leg
Speaker 1: down and then getting ready for a new bowl market?
Speaker 1: Could that impact it? If we're in kind of a
Speaker 1: fuzzy okay growth not a clear cut recessionary environment, sure,
Speaker 1: but they call it a growth recession, right, or it
Speaker 1: would change it somewhat, but but but not a lot,
Speaker 1: because the we're not just interested in in g d
Speaker 1: P and whether it's growing or not, it's how does
Speaker 1: that translate into earnings and um I. As much as
Speaker 1: the earnings estimates have been coming down over the last
Speaker 1: couple of months, what we think, they're still too high,
Speaker 1: and even a let's call it a growth recession or
Speaker 1: stagnation environment, something short of a recession would happen, it's
Speaker 1: still probably going to translate into a a down year
Speaker 1: for earnings. And we've looked at that possibility of the
Speaker 1: rolling sector recession and it could happen. But there are
Speaker 1: so many leading indicators um that indicate a more general
Speaker 1: recession that it's kind of overwhelming that we've had an
Speaker 1: equity bear market, that's a very strong for looking indicator,
Speaker 1: deeply inverted yield curve, obviously tighter liquidity from number of sources,
Speaker 1: and even the old index of leading economic indicators has
Speaker 1: tilted way into negative territory. So it's possible we don't
Speaker 1: have a statistical recession, but but you have to very
Speaker 1: much build at this time. It's different argument to say
Speaker 1: that what are the biggest concerns within your client base
Speaker 1: right now? Are they also mostly concerned about recession? Are
Speaker 1: they still talking inflation? You know, it's it's some of both.
Speaker 1: And where those two things converge, obviously is what what
Speaker 1: is the Fed going to do right? How are they
Speaker 1: going to process inflation risk versus versus recession risk? So
Speaker 1: we've got a lot of questions about how many more
Speaker 1: rate hikes and um, you know, is the Fed going
Speaker 1: to raise rates a little bit more and then pause
Speaker 1: or are they going to start cutting rates right away?
Speaker 1: And and um our our view there is that we've got,
Speaker 1: you know, probably two more rate hikes, um and then
Speaker 1: a multi month pause from from the Fed. So that
Speaker 1: maybe a little bit of disappointment that the you don't
Speaker 1: go right from the last rate hike to rate cuts
Speaker 1: which they start that happened before. I just don't think
Speaker 1: the circumstances we have now warnt because I don't think
Speaker 1: inflation is going to come down quite fast enough for
Speaker 1: the Fed to be able to yeah, point being, we're
Speaker 1: gonna peak at at a fairly restrictive point monetary policy
Speaker 1: and stay there for months. All right, We're gonna leave
Speaker 1: it on that note. Dave Donna Beede and chief Investment
Speaker 1: Officer at CIBC Private Wealth Management joining us on the
Speaker 1: phone from Baltimore. This is the Bloomberg Business Week Podcast,
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