1 00:00:02,920 --> 00:00:10,840 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. You're listening to the 2 00:00:10,840 --> 00:00:15,000 Speaker 1: Bloomberg Intelligence podcast. Catch us live weekdays at ten am 3 00:00:15,040 --> 00:00:17,480 Speaker 1: Eastern on Affo car Playing and broyd Otto with the 4 00:00:17,520 --> 00:00:21,320 Speaker 1: Bloomberg Business app. Listen on demand wherever you get your podcasts, 5 00:00:21,640 --> 00:00:23,320 Speaker 1: or watch us live on YouTube. 6 00:00:25,120 --> 00:00:28,720 Speaker 2: Let's go up to Canada. Here the railroaders they're striking. 7 00:00:29,120 --> 00:00:30,800 Speaker 2: I think that's a big deal. But let me ask 8 00:00:30,840 --> 00:00:33,360 Speaker 2: somebody who knows about this stuff, Lee Clascow. He's a 9 00:00:33,400 --> 00:00:38,080 Speaker 2: senior transportation analyst for Bloomberg Intelligence. Lee, is this Canadian National, 10 00:00:38,159 --> 00:00:40,600 Speaker 2: Canadian Pacific they're striking it? 11 00:00:40,720 --> 00:00:42,159 Speaker 3: Do we have that right? And what does it mean? 12 00:00:43,040 --> 00:00:46,120 Speaker 4: Well, they've locked out their employees because the union threatened 13 00:00:46,120 --> 00:00:49,000 Speaker 4: to strike. So berrero, do you have to kind of 14 00:00:50,120 --> 00:00:53,280 Speaker 4: shut down operations safely to make sure that you know, 15 00:00:53,640 --> 00:00:56,360 Speaker 4: not only your employees can be get home, but also 16 00:00:56,560 --> 00:00:59,880 Speaker 4: you know the equipment is safely stored. So that's kind 17 00:00:59,920 --> 00:01:04,120 Speaker 4: of what we've seen happen. That's obviously going to impact 18 00:01:04,200 --> 00:01:08,600 Speaker 4: volumes of the Canadian rails, both Canadian Pacific and Canadian National. 19 00:01:09,120 --> 00:01:11,600 Speaker 4: They make up around twenty five percent of originated car 20 00:01:11,680 --> 00:01:14,520 Speaker 4: loads in North America and you know, the impact will 21 00:01:14,560 --> 00:01:17,200 Speaker 4: be felt across the supply chain because it's not just 22 00:01:17,280 --> 00:01:20,240 Speaker 4: a Canadian thing. You know, it's also going to impact 23 00:01:20,520 --> 00:01:24,280 Speaker 4: the rails that they interchange with. And also both Canadian 24 00:01:24,280 --> 00:01:27,279 Speaker 4: Pacific and Canadian National also go into the United States. 25 00:01:27,640 --> 00:01:31,880 Speaker 4: CP also goes directly into Mexico. About a third of 26 00:01:32,040 --> 00:01:36,559 Speaker 4: Canadian Nationals volumes or revenues i should say, are tied 27 00:01:36,640 --> 00:01:39,520 Speaker 4: to cross border traffic, so you know, it's not just 28 00:01:39,680 --> 00:01:43,880 Speaker 4: going to be impacting Canada. How we see it playing 29 00:01:43,959 --> 00:01:48,120 Speaker 4: out is that, you know, these kind of work stoppages 30 00:01:48,560 --> 00:01:53,080 Speaker 4: don't last that long. Typically, usually they're usually forced into 31 00:01:53,160 --> 00:01:56,320 Speaker 4: some sort of arbitration, you know, when it starts really 32 00:01:56,400 --> 00:02:00,440 Speaker 4: impacting the economy. The Canadian government kind of a hands 33 00:02:00,480 --> 00:02:04,400 Speaker 4: off approach going into Thursday when the deadline was there. 34 00:02:05,240 --> 00:02:07,760 Speaker 4: You know, they might take more of a kind of 35 00:02:07,800 --> 00:02:12,200 Speaker 4: a direct approach now that freight is starting stopping to flow, 36 00:02:13,160 --> 00:02:15,640 Speaker 4: you know, and for the railroads, the two railroads impacted, 37 00:02:15,720 --> 00:02:18,799 Speaker 4: it's going to impact their earnings. You know, a lot 38 00:02:18,880 --> 00:02:21,720 Speaker 4: of the freight is going to be just delayed, it's 39 00:02:21,760 --> 00:02:24,480 Speaker 4: not necessarily going to be lost, but some of their 40 00:02:24,680 --> 00:02:28,160 Speaker 4: you know, more truck competitive freight like intermodal that's a 41 00:02:28,200 --> 00:02:32,520 Speaker 4: little more time sensitive could get lost to other modes, 42 00:02:32,600 --> 00:02:33,400 Speaker 4: namely trucks. 43 00:02:34,240 --> 00:02:39,080 Speaker 5: You've also talked about how, due to the different labor disruption, 44 00:02:39,320 --> 00:02:42,320 Speaker 5: shippers have been diverting free from those Canadian ports toward 45 00:02:42,639 --> 00:02:45,560 Speaker 5: the US West Coast. So what I'm wondering is who 46 00:02:45,720 --> 00:02:47,600 Speaker 5: kind of wins and who loses from this, because you've 47 00:02:47,639 --> 00:02:50,239 Speaker 5: also talked about how this sort of situation has helped 48 00:02:50,280 --> 00:02:53,880 Speaker 5: boost Union Pacific and other sort of internal modal traffic 49 00:02:53,960 --> 00:02:54,720 Speaker 5: in recent weeks. 50 00:02:56,200 --> 00:02:58,320 Speaker 4: Yeah, so you know how we see this playing out 51 00:02:58,520 --> 00:03:01,280 Speaker 4: is you know who's going to benefit it. Well, if 52 00:03:01,600 --> 00:03:04,519 Speaker 4: if it's freight that's headed into Canada that's going to 53 00:03:05,200 --> 00:03:08,000 Speaker 4: end up in the United States, it's not going to 54 00:03:08,080 --> 00:03:10,600 Speaker 4: go into Canada because the steamships are going to avoid 55 00:03:10,680 --> 00:03:13,280 Speaker 4: those sports due to the workstop it. So they might 56 00:03:13,360 --> 00:03:17,040 Speaker 4: try to bring that freight into southern California or the 57 00:03:17,120 --> 00:03:19,560 Speaker 4: Gulf Coast and the East Coast. But that being said, 58 00:03:19,600 --> 00:03:22,200 Speaker 4: the Gulf Coast and East Coast are also facing those 59 00:03:22,320 --> 00:03:25,040 Speaker 4: ports are also facing their own labor issues. They have 60 00:03:25,120 --> 00:03:29,320 Speaker 4: a contract that comes up in September thirtieth with their unions, 61 00:03:29,960 --> 00:03:32,720 Speaker 4: and right now there doesn't seem like there's an agreement 62 00:03:33,800 --> 00:03:35,840 Speaker 4: at least in the near term. So you know a 63 00:03:35,920 --> 00:03:41,200 Speaker 4: lot of shippers have been redirecting their freight to southern California. 64 00:03:41,480 --> 00:03:44,800 Speaker 4: So then who wins. Well, big winners would be Union 65 00:03:44,800 --> 00:03:50,120 Speaker 4: Pacific in Burlington Northern and also in Burlington Northern that's 66 00:03:50,160 --> 00:03:54,520 Speaker 4: a fully owned subsidiary by Berkshire Hathaway. And so also 67 00:03:54,640 --> 00:03:57,920 Speaker 4: some of the intermodal players might benefit too because you'll 68 00:03:58,000 --> 00:04:02,320 Speaker 4: have maybe longer lengths of haul, which should drive higher 69 00:04:02,400 --> 00:04:05,960 Speaker 4: revenues for the players. And also, you know, we expect 70 00:04:06,000 --> 00:04:08,800 Speaker 4: to see a little bump in truck spot load rates 71 00:04:09,480 --> 00:04:12,720 Speaker 4: next week, as you know, maybe more and more capacity 72 00:04:12,880 --> 00:04:16,800 Speaker 4: might be needed to move that time sensitive freight that's 73 00:04:16,839 --> 00:04:20,080 Speaker 4: being impacted by the Canadian labor strife. 74 00:04:20,760 --> 00:04:23,719 Speaker 3: Lee, I wonder if is this time of year particularly crucial. 75 00:04:23,720 --> 00:04:26,200 Speaker 2: I'm thinking about the retailers maybe stocking at their shelves 76 00:04:26,240 --> 00:04:29,200 Speaker 2: getting ready for you know, the holiday season. 77 00:04:29,920 --> 00:04:34,039 Speaker 3: Was this time period chosen or is this just happenstance? 78 00:04:34,920 --> 00:04:37,400 Speaker 4: This has happenstance, This is just like when their contract 79 00:04:38,000 --> 00:04:42,040 Speaker 4: came up, you know, and not all labor issues have 80 00:04:42,360 --> 00:04:46,520 Speaker 4: been terrible this year. CSX yesterday announced that they've reached 81 00:04:46,520 --> 00:04:50,560 Speaker 4: an agreement four or five months ahead of their deadline 82 00:04:50,680 --> 00:04:54,800 Speaker 4: with about twenty five percent of their unionized workforce, which 83 00:04:54,880 --> 00:04:58,400 Speaker 4: included a three and a half percent pay increase on 84 00:04:58,480 --> 00:05:02,720 Speaker 4: an annual basis over the next five years. So it's 85 00:05:02,800 --> 00:05:04,840 Speaker 4: not it's not all bad news for labor, but but 86 00:05:04,920 --> 00:05:07,840 Speaker 4: it and you know, it's not all bad news when 87 00:05:07,880 --> 00:05:10,600 Speaker 4: it relates to labor, I should say, uh, but you know, 88 00:05:11,440 --> 00:05:15,960 Speaker 4: we hope that things in Canada come to a close 89 00:05:16,440 --> 00:05:18,360 Speaker 4: uh and and the rails get back to work, not 90 00:05:18,480 --> 00:05:21,800 Speaker 4: only you know, for the economies involved, but you know 91 00:05:21,839 --> 00:05:22,960 Speaker 4: the people involved as well. 92 00:05:23,560 --> 00:05:27,400 Speaker 5: What does this mean for commodities traffic growth from here? 93 00:05:27,640 --> 00:05:30,920 Speaker 5: Because it's largely dependent on the pace of of course 94 00:05:31,080 --> 00:05:34,360 Speaker 5: China's economic recovery, and since it's also a major importer 95 00:05:34,520 --> 00:05:36,360 Speaker 5: of North American materials as well. 96 00:05:38,000 --> 00:05:41,080 Speaker 4: Yeah, so you know, as China goes, so does a 97 00:05:41,160 --> 00:05:44,880 Speaker 4: commodity demand globally. You know, in addition to covering railroads, 98 00:05:44,920 --> 00:05:47,360 Speaker 4: we cover marine shipping, the dry ball and tanker market 99 00:05:47,440 --> 00:05:51,880 Speaker 4: as well. They're a major player and importer of goods. 100 00:05:52,200 --> 00:05:55,120 Speaker 4: You know, their economy has not been as good as 101 00:05:55,240 --> 00:05:59,120 Speaker 4: many were expecting. Uh, And that is definitely going to 102 00:05:59,200 --> 00:06:02,120 Speaker 4: have an impact on demand, you know, with rails. You 103 00:06:02,200 --> 00:06:05,360 Speaker 4: know what we should see on the commodity side is 104 00:06:05,880 --> 00:06:09,520 Speaker 4: a lot of lumpiness in the weekly volume data that 105 00:06:09,600 --> 00:06:14,960 Speaker 4: we get from the trade Association, the American Rail Association, 106 00:06:16,040 --> 00:06:19,760 Speaker 4: and so you know, while a lot of that freight 107 00:06:19,880 --> 00:06:22,240 Speaker 4: is not going to get lost like two other modes 108 00:06:22,320 --> 00:06:24,920 Speaker 4: like maybe more truck competitive stuff, it's just going to 109 00:06:24,960 --> 00:06:28,040 Speaker 4: get delayed. So it's going to create probably more lumpy 110 00:06:28,080 --> 00:06:31,680 Speaker 4: earnings for Canadian National, Canadian Pacific in the third and 111 00:06:31,800 --> 00:06:35,960 Speaker 4: fourth quarter. You know, probably it's going to weigh on 112 00:06:36,040 --> 00:06:38,599 Speaker 4: the third quarter and maybe be somewhat of a tailwin 113 00:06:38,680 --> 00:06:39,400 Speaker 4: in the fourth quarter. 114 00:06:39,839 --> 00:06:42,040 Speaker 2: All right, Lee, thanks so much for joining us. I 115 00:06:42,040 --> 00:06:45,000 Speaker 2: always appreciate getting your views there. Lead classical senior transport 116 00:06:45,400 --> 00:06:48,360 Speaker 2: logistics and shipping analysts for Bloomberg Intelligence joining us via 117 00:06:48,440 --> 00:06:51,560 Speaker 2: zoom from Princeton, New Jersey. On that Canadian railways they 118 00:06:51,640 --> 00:06:55,520 Speaker 2: lock out their workers as talks fail, snarling trade there, 119 00:06:55,600 --> 00:06:58,560 Speaker 2: so that brings up the risk of a possible strike here. 120 00:06:58,640 --> 00:07:02,000 Speaker 2: So Lee is our global leader of all that trucking 121 00:07:02,160 --> 00:07:04,679 Speaker 2: and railroads and logistics and all that kind of stuff. 122 00:07:05,120 --> 00:07:06,520 Speaker 2: See is our go to guy there. 123 00:07:08,040 --> 00:07:11,920 Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live 124 00:07:12,040 --> 00:07:14,960 Speaker 1: weekdays at ten am Eastern on Apple car Play and 125 00:07:15,080 --> 00:07:17,960 Speaker 1: Android Auto with the Bloomberg Business app. You can also 126 00:07:18,080 --> 00:07:21,240 Speaker 1: listen live on Amazon Alexa from our flagship New York 127 00:07:21,320 --> 00:07:24,679 Speaker 1: station Just Say Alexa playing Bloomberg eleven thirty. 128 00:07:26,000 --> 00:07:28,720 Speaker 2: Let's go to out this Jackson hawayoming a little bit 129 00:07:28,720 --> 00:07:29,800 Speaker 2: more west of Chicago. 130 00:07:30,080 --> 00:07:31,160 Speaker 3: Michael McKee joins is there. 131 00:07:31,200 --> 00:07:34,360 Speaker 2: He's Bloomberg International Economics and Policy correspondent, and he is 132 00:07:34,440 --> 00:07:39,720 Speaker 2: the authentic Western dude, born and raised in Colorado, Colorado State, 133 00:07:39,800 --> 00:07:40,160 Speaker 2: the whole thing. 134 00:07:40,240 --> 00:07:43,000 Speaker 3: So he's at home out there. Tom Keen in the 135 00:07:43,120 --> 00:07:46,040 Speaker 3: suit and the bow tie not so shure, but Michael 136 00:07:46,120 --> 00:07:48,240 Speaker 3: McKee fits right in there, like the cowboy hat. I 137 00:07:48,320 --> 00:07:50,520 Speaker 3: know he's sporting to camp. I was waiting for it 138 00:07:50,920 --> 00:07:53,880 Speaker 3: the friends on YouTube. Michael, what's the. 139 00:07:54,240 --> 00:07:56,920 Speaker 6: But everybody asked, so I need to and you. 140 00:07:57,040 --> 00:07:59,800 Speaker 2: Delivered, And you delivered, no question. You're bringing the game. 141 00:08:00,240 --> 00:08:02,520 Speaker 2: What's the feeling out there in Jackson Hole, Mike. What 142 00:08:02,920 --> 00:08:05,680 Speaker 2: is the expectation for FED Chairman J Powell tomorrow? 143 00:08:08,160 --> 00:08:10,800 Speaker 6: Expectations aren't really high that he's going to give us 144 00:08:10,840 --> 00:08:14,239 Speaker 6: a whole lot new he'll say that the inflation numbers 145 00:08:14,280 --> 00:08:16,920 Speaker 6: have been good, they have more confidence about reaching their 146 00:08:16,920 --> 00:08:20,160 Speaker 6: two percent inflation target, and that it may soon be 147 00:08:20,280 --> 00:08:24,000 Speaker 6: appropriate to change policy. He doesn't want to commit to 148 00:08:24,480 --> 00:08:27,440 Speaker 6: a September eighteenth rate cut because we do have data 149 00:08:27,520 --> 00:08:30,360 Speaker 6: coming in two inflation reports, that a jobs report that 150 00:08:30,480 --> 00:08:33,640 Speaker 6: could change their mind. I suppose, But I think what 151 00:08:33,760 --> 00:08:36,280 Speaker 6: he wants to do is leave the markets believing they're 152 00:08:36,360 --> 00:08:38,120 Speaker 6: going to cut without guaranteeing it. 153 00:08:39,000 --> 00:08:41,480 Speaker 5: And of course we've had a few different FED speakers 154 00:08:41,559 --> 00:08:44,040 Speaker 5: this morning, as you know, so Kansas City FED President 155 00:08:44,120 --> 00:08:48,160 Speaker 5: Jeffrey Smith obviously speaking on Bloomberg Television earlier. So he 156 00:08:48,360 --> 00:08:51,120 Speaker 5: was talking about how, especially if you're thinking about the 157 00:08:51,160 --> 00:08:54,840 Speaker 5: payroll visions don't really change how they were thinking about policy. 158 00:08:54,960 --> 00:08:57,520 Speaker 5: But then something else that I thought was interesting was 159 00:08:57,559 --> 00:09:01,160 Speaker 5: Patrick Harker was speaking about how he already thought markets 160 00:09:01,200 --> 00:09:03,640 Speaker 5: have priced in a move for FED action, and he 161 00:09:03,800 --> 00:09:06,600 Speaker 5: also said that the easing cycle may put the FED 162 00:09:06,640 --> 00:09:08,880 Speaker 5: funds rate near three percent. I thought that was interesting 163 00:09:08,920 --> 00:09:10,800 Speaker 5: because he was a little bit more specific than some 164 00:09:10,920 --> 00:09:13,360 Speaker 5: of the other FED speakers that you've heard. What's your 165 00:09:13,400 --> 00:09:15,760 Speaker 5: kind of takeaway from this as far as some gleaning 166 00:09:15,800 --> 00:09:18,160 Speaker 5: some of this new information from them ahead of obviously 167 00:09:18,880 --> 00:09:20,360 Speaker 5: pal tomorrow speaking. 168 00:09:22,040 --> 00:09:23,840 Speaker 6: Well, it's pretty clear the markets are priced in at 169 00:09:23,920 --> 00:09:25,839 Speaker 6: least one rate cut, a little bit more than one 170 00:09:25,920 --> 00:09:28,959 Speaker 6: at this point. Is they keep their options open. You 171 00:09:29,000 --> 00:09:32,000 Speaker 6: can see that in the futures and the overnight index swaps. 172 00:09:32,040 --> 00:09:34,160 Speaker 6: But the idea of what neutral is going to be 173 00:09:34,240 --> 00:09:36,079 Speaker 6: and where the Fed is going to end its rate 174 00:09:36,160 --> 00:09:38,000 Speaker 6: cutting cycle is going to be a big matter of 175 00:09:38,080 --> 00:09:40,920 Speaker 6: debate going forward. A lot of people from the Fed say, 176 00:09:41,000 --> 00:09:43,880 Speaker 6: we don't know yet because we're not sure what's happened 177 00:09:44,000 --> 00:09:48,080 Speaker 6: with the demand level, the potential growth of the economy. 178 00:09:48,280 --> 00:09:50,760 Speaker 6: I don't want to get all wonky, but basically our star, 179 00:09:51,240 --> 00:09:54,280 Speaker 6: as they say, and if it has, if it has 180 00:09:54,400 --> 00:09:57,720 Speaker 6: gone up, then they cut less. If if it's gone 181 00:09:57,760 --> 00:09:59,920 Speaker 6: back to pre pandemic levels, then we could get down 182 00:10:00,120 --> 00:10:01,920 Speaker 6: around three or so. They don't want to go much 183 00:10:01,960 --> 00:10:04,520 Speaker 6: further than that because they want some space to cut rates. 184 00:10:04,840 --> 00:10:06,240 Speaker 6: And the one thing they will all tell you they 185 00:10:06,280 --> 00:10:07,959 Speaker 6: don't have a number yet, but they say it will 186 00:10:08,040 --> 00:10:08,840 Speaker 6: not be zero. 187 00:10:08,840 --> 00:10:12,360 Speaker 2: Again, Michael, is the feeling out there in Jackson Hole 188 00:10:12,480 --> 00:10:15,800 Speaker 2: that the FED, in terms of timing of cutting rates, 189 00:10:15,840 --> 00:10:18,400 Speaker 2: that they're on the right glide path or is there 190 00:10:18,440 --> 00:10:20,600 Speaker 2: concern that maybe they're a little bit late here As 191 00:10:20,640 --> 00:10:22,120 Speaker 2: we look at some of this data over the last 192 00:10:22,480 --> 00:10:23,679 Speaker 2: several days and weeks. 193 00:10:25,520 --> 00:10:28,320 Speaker 6: FED folks don't think they're late. You get the argument 194 00:10:28,480 --> 00:10:30,880 Speaker 6: from Wall Street that they might be. There are people 195 00:10:30,960 --> 00:10:32,720 Speaker 6: on Wall Street who think the Fed's behind the curve. 196 00:10:33,240 --> 00:10:36,280 Speaker 6: But their view is you look at the data, and 197 00:10:36,360 --> 00:10:38,640 Speaker 6: the data aren't telling us the economy is falling off 198 00:10:38,679 --> 00:10:41,959 Speaker 6: a cliff. Jobs claims this morning barely moving and on 199 00:10:42,040 --> 00:10:45,120 Speaker 6: a non seasonally adjusted basis actually going down. There's no 200 00:10:45,400 --> 00:10:50,000 Speaker 6: layoffs happening. And what they're hearing from their constituents, the 201 00:10:50,320 --> 00:10:53,240 Speaker 6: CEOs and companies in their districts is that they're still 202 00:10:53,280 --> 00:10:56,040 Speaker 6: demand out there. People are still spending money, not as much, 203 00:10:56,280 --> 00:10:59,079 Speaker 6: not as fast, but they are still spending and so 204 00:10:59,320 --> 00:11:02,640 Speaker 6: the outlook still pretty good, which means they don't feel 205 00:11:02,760 --> 00:11:06,400 Speaker 6: an urgency to move that some people on Wall Street 206 00:11:07,040 --> 00:11:07,959 Speaker 6: would like them to have. 207 00:11:08,960 --> 00:11:11,199 Speaker 5: It's interesting looking at the moves in the bond market. 208 00:11:11,400 --> 00:11:14,400 Speaker 5: So after we heard for Kansas City, a FED president 209 00:11:14,480 --> 00:11:17,120 Speaker 5: at Jeffrey Smid, you're actually looking over at the tenure 210 00:11:17,200 --> 00:11:20,400 Speaker 5: yield rising. It's close to about a three eighty four 211 00:11:20,520 --> 00:11:23,120 Speaker 5: right now. So he was saying about how more data 212 00:11:23,240 --> 00:11:25,160 Speaker 5: is needed for a rate cut. But when you're hearing 213 00:11:25,280 --> 00:11:28,280 Speaker 5: that type of rhetoric, is that just basically them trying 214 00:11:28,320 --> 00:11:31,120 Speaker 5: to signal, don't expect to say a fifty basis point 215 00:11:31,240 --> 00:11:33,679 Speaker 5: rate cut out a September meeting something that aggressive. To 216 00:11:33,800 --> 00:11:36,280 Speaker 5: be thinking more, maybe a more measured pace in line. 217 00:11:36,440 --> 00:11:38,440 Speaker 5: When it comes to markets and their anticipation for. 218 00:11:38,520 --> 00:11:43,760 Speaker 6: This, it depends on who is talking. Deef Schmid represents 219 00:11:43,800 --> 00:11:46,719 Speaker 6: the Kansas City District, which has traditionally been one of 220 00:11:46,720 --> 00:11:50,480 Speaker 6: the more hawkish on inflation, so it's understandable that he 221 00:11:50,720 --> 00:11:54,160 Speaker 6: is reluctant to commit at this point. But I think 222 00:11:55,320 --> 00:11:57,760 Speaker 6: they all want to leave the impression that we're about 223 00:11:57,800 --> 00:12:00,520 Speaker 6: to start a cutting cycle. If it's not going to 224 00:12:00,559 --> 00:12:02,959 Speaker 6: be in September, it's going to be shortly after that 225 00:12:03,120 --> 00:12:06,400 Speaker 6: unless we see some sort of dramatic reversal in inflation. 226 00:12:06,920 --> 00:12:10,040 Speaker 6: They just don't want to have to ratify the market's 227 00:12:10,080 --> 00:12:13,240 Speaker 6: wishes and start cutting too far too fast. 228 00:12:14,320 --> 00:12:16,520 Speaker 2: All right, Michael McKee, thank you so much for joining us. 229 00:12:16,640 --> 00:12:18,120 Speaker 2: Thank you for the cowboy hat that I love. 230 00:12:18,120 --> 00:12:20,880 Speaker 3: It makes the hit. Michael McKee, He's not just a cowboy. 231 00:12:20,920 --> 00:12:23,800 Speaker 2: He covers all the economic stuff for Bloomberg News Intellivision, 232 00:12:23,800 --> 00:12:25,040 Speaker 2: but he is a colunt on, a native, so he 233 00:12:25,120 --> 00:12:25,400 Speaker 2: fits in. 234 00:12:25,640 --> 00:12:27,679 Speaker 5: That is I'm so excited we got to see it. 235 00:12:27,760 --> 00:12:29,600 Speaker 5: This is a suspense of us waiting to see if 236 00:12:29,600 --> 00:12:31,080 Speaker 5: the hat was there, and he delivered. 237 00:12:30,920 --> 00:12:33,120 Speaker 3: Basically for the FED chairman pal tomorrow. I mean, you 238 00:12:33,160 --> 00:12:34,920 Speaker 3: know they don't. He doesn't have to do a whole 239 00:12:34,960 --> 00:12:35,560 Speaker 3: lot tomorrow. 240 00:12:35,640 --> 00:12:38,360 Speaker 5: So the options market, actually, the volatility that was had 241 00:12:38,400 --> 00:12:40,600 Speaker 5: been priced in come down pretty dramatically. So right now 242 00:12:40,640 --> 00:12:43,040 Speaker 5: the options market's pricing and eight tenths of a percent 243 00:12:43,160 --> 00:12:45,560 Speaker 5: swing for the S and P five hundred in either direction, 244 00:12:45,679 --> 00:12:48,120 Speaker 5: and for context, last week it actually had been over 245 00:12:48,240 --> 00:12:50,320 Speaker 5: one percent, it had been around one point two percent. 246 00:12:50,480 --> 00:12:53,640 Speaker 5: So really it's just based on the positioning and investors 247 00:12:53,720 --> 00:12:56,120 Speaker 5: expecting volatility to fade, and a lot of it. Because 248 00:12:56,280 --> 00:12:58,719 Speaker 5: we've talked about we've already had at least a half 249 00:12:58,800 --> 00:13:01,120 Speaker 5: dozen FED speakers come out signal that rate cuts are 250 00:13:01,200 --> 00:13:03,640 Speaker 5: expected next month. So really it's all about what traders 251 00:13:03,640 --> 00:13:05,199 Speaker 5: are talking about, the tone, and if he keeps that 252 00:13:05,280 --> 00:13:06,920 Speaker 5: tone going tomorrow exactly. 253 00:13:06,640 --> 00:13:08,160 Speaker 2: And then I'll be interesting to see kind of the 254 00:13:08,280 --> 00:13:10,760 Speaker 2: pace of rate cuts. How they cut rates going forward? 255 00:13:10,840 --> 00:13:12,240 Speaker 2: Is it twenty five basis points. 256 00:13:12,040 --> 00:13:13,240 Speaker 3: Each each meeting? 257 00:13:13,400 --> 00:13:15,480 Speaker 2: Every other meeting that he does a front load with 258 00:13:15,559 --> 00:13:17,400 Speaker 2: fifty be interesting to see how this all plays out. 259 00:13:18,840 --> 00:13:22,680 Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live 260 00:13:22,800 --> 00:13:25,480 Speaker 1: weekdays at ten am Eastern on Apple car Playing and 261 00:13:25,600 --> 00:13:28,480 Speaker 1: broud Otto with the Bloomberg Business app. Listen on demand 262 00:13:28,559 --> 00:13:32,200 Speaker 1: wherever you get your podcasts, or watch us live on YouTube. 263 00:13:34,360 --> 00:13:36,880 Speaker 2: Just meant sitting in for Alex Steel here on Paul Sweeney. 264 00:13:36,880 --> 00:13:38,840 Speaker 2: You live here in our Bloomberg Interactive Brokers studio. We're 265 00:13:38,880 --> 00:13:41,400 Speaker 2: streaming live on YouTube as well, so check us out there. 266 00:13:42,080 --> 00:13:44,440 Speaker 2: Brian Jacobson joins us here. He's the chief economist at 267 00:13:44,520 --> 00:13:48,959 Speaker 2: Annex Wealth Management, joining us from Brookfield, Wisconsin via that 268 00:13:49,280 --> 00:13:51,640 Speaker 2: zoom thing. Hey Brian, thanks so much for joining us here. 269 00:13:51,679 --> 00:13:53,760 Speaker 2: We're about to hear from FED Chairman j pal Tomorrow 270 00:13:54,880 --> 00:13:59,240 Speaker 2: out in Jackson Hole. What's your view of the economy 271 00:14:00,080 --> 00:14:00,400 Speaker 2: right here? 272 00:14:02,040 --> 00:14:02,240 Speaker 6: Yeah? 273 00:14:02,280 --> 00:14:04,760 Speaker 7: I think well, it obviously had to change based upon 274 00:14:04,880 --> 00:14:07,080 Speaker 7: some of those BLS revisions that we got as far 275 00:14:07,080 --> 00:14:09,880 Speaker 7: as suddenly, poof, there goes eight hundred, eighteen thousand jobs. 276 00:14:10,440 --> 00:14:12,160 Speaker 3: But for the most part. 277 00:14:12,400 --> 00:14:14,719 Speaker 7: My view is that we went from great growth to 278 00:14:14,840 --> 00:14:18,320 Speaker 7: good growth to now sustainable growth. And obviously the trick 279 00:14:18,600 --> 00:14:21,320 Speaker 7: is whether or not that sustainable growth will tip over 280 00:14:21,400 --> 00:14:23,960 Speaker 7: into a recession. We don't necessarily think that it will. 281 00:14:24,600 --> 00:14:27,840 Speaker 7: A lot of that does depend upon the FED beginning 282 00:14:28,080 --> 00:14:31,040 Speaker 7: to really take its foot off of the break of 283 00:14:31,200 --> 00:14:33,840 Speaker 7: the economy. It's been trying to slow things down. We 284 00:14:33,920 --> 00:14:37,120 Speaker 7: don't necessarily think that it needs to really completely take 285 00:14:37,160 --> 00:14:39,600 Speaker 7: its foot off of the break. That's just not their style. 286 00:14:40,120 --> 00:14:42,480 Speaker 7: They are likely to do a twenty five basis point cut. 287 00:14:42,880 --> 00:14:45,800 Speaker 7: I think Collins from Boston said it pretty well about 288 00:14:45,880 --> 00:14:48,440 Speaker 7: being very slow and methodical about the rate cuts, which 289 00:14:48,440 --> 00:14:50,000 Speaker 7: is very different than what they did in the past, 290 00:14:50,400 --> 00:14:53,200 Speaker 7: which is they'd be slow and methodical in hiking and 291 00:14:53,320 --> 00:14:55,920 Speaker 7: then have to cut aggressively. And now it's the complete 292 00:14:55,960 --> 00:14:59,760 Speaker 7: opposite of that aggressive hiking, more slow, methodical cutting and 293 00:14:59,800 --> 00:15:00,680 Speaker 7: st on the way. 294 00:15:01,440 --> 00:15:04,440 Speaker 5: And looking at the latest Atlanta FED GDP model for 295 00:15:04,560 --> 00:15:07,200 Speaker 5: the current quarter, it has growth around two percent. As 296 00:15:07,240 --> 00:15:09,680 Speaker 5: you know, that can be very volile at times. Another 297 00:15:09,720 --> 00:15:11,320 Speaker 5: thing I like to look at the paul in the 298 00:15:11,560 --> 00:15:13,720 Speaker 5: terminal as a function ECFC, so you can look at 299 00:15:13,720 --> 00:15:16,880 Speaker 5: the economic forecast annually as where's quarterly, But you're still 300 00:15:16,920 --> 00:15:20,400 Speaker 5: seeing strength there. So whenever people are pointing to say, 301 00:15:20,480 --> 00:15:23,600 Speaker 5: for instance, Brian, that last July payrolls report that's all 302 00:15:23,640 --> 00:15:25,680 Speaker 5: slow down and hiring, that was just one report. Of course, 303 00:15:25,720 --> 00:15:27,840 Speaker 5: we haven't seen a trend of that just yet. Where 304 00:15:27,960 --> 00:15:30,640 Speaker 5: exactly do you see when people are trying to argue 305 00:15:30,680 --> 00:15:32,640 Speaker 5: for the weakness here, Because when you're looking at consumer 306 00:15:32,720 --> 00:15:35,480 Speaker 5: spending that obviously makes up the bulk of GDP more 307 00:15:35,520 --> 00:15:37,840 Speaker 5: than two thirds of that that drives the economy, it 308 00:15:37,920 --> 00:15:40,840 Speaker 5: still seems like people are maybe they're shifting which type 309 00:15:40,880 --> 00:15:43,000 Speaker 5: of retailers they're going to, right when we see results 310 00:15:43,040 --> 00:15:45,960 Speaker 5: from Walmart and Target here, kind of diverging paths, but 311 00:15:46,240 --> 00:15:48,080 Speaker 5: still seems like there's a strong consumer out there. 312 00:15:49,160 --> 00:15:51,360 Speaker 7: Yeah, the consumer is strong, but not as strong as 313 00:15:51,400 --> 00:15:52,640 Speaker 7: they used to be, And I think that's one of 314 00:15:52,720 --> 00:15:54,600 Speaker 7: the key things when people are talking about some of 315 00:15:54,640 --> 00:15:56,880 Speaker 7: the weakness, a lot of that is focused more on 316 00:15:56,960 --> 00:15:59,560 Speaker 7: what's been going on with small and medium sized businesses 317 00:15:59,600 --> 00:16:02,280 Speaker 7: in the UNI it States, high cost of financing. They've 318 00:16:02,360 --> 00:16:05,320 Speaker 7: seen really orders being canceled over the last few years. 319 00:16:05,400 --> 00:16:08,640 Speaker 7: Manufacturing in particular has really been struggling. I think it's 320 00:16:08,680 --> 00:16:11,280 Speaker 7: been like twenty one months in a row, with maybe 321 00:16:12,160 --> 00:16:14,000 Speaker 7: one or two of those months above fifty. But for 322 00:16:14,040 --> 00:16:17,360 Speaker 7: the most part in recessionary territory, the service sector activity 323 00:16:17,400 --> 00:16:20,280 Speaker 7: has stayed rather buoyant. But now the fears are more 324 00:16:20,280 --> 00:16:23,800 Speaker 7: about what is happening next. It's not necessarily disagreement about 325 00:16:23,840 --> 00:16:26,760 Speaker 7: where are we now, but where are we headed? And 326 00:16:26,840 --> 00:16:29,440 Speaker 7: I think that's where you see some of these early indicators, 327 00:16:29,640 --> 00:16:31,720 Speaker 7: you know, the Walmart and Target earnings. I think we're 328 00:16:31,760 --> 00:16:34,320 Speaker 7: good examples. Why is it that they've been doing well 329 00:16:34,560 --> 00:16:38,720 Speaker 7: because of discounting. Customers really view it easier to buy, say, 330 00:16:38,880 --> 00:16:41,480 Speaker 7: throw pillows to spruce up a room as opposed to 331 00:16:41,600 --> 00:16:44,720 Speaker 7: doing a complete remodel, right, and so that benefits Target 332 00:16:45,000 --> 00:16:47,880 Speaker 7: at the expense of say home depot or other companies 333 00:16:47,920 --> 00:16:50,480 Speaker 7: that are more in that higher ticket price things that 334 00:16:50,640 --> 00:16:52,800 Speaker 7: maybe need to be financed. And so I think the 335 00:16:53,040 --> 00:16:56,040 Speaker 7: consumer is strong, but not as strong as they used 336 00:16:56,040 --> 00:16:56,200 Speaker 7: to be. 337 00:16:57,240 --> 00:16:58,960 Speaker 2: What's the risk here that the FED is late and 338 00:16:59,520 --> 00:17:02,200 Speaker 2: this is really at risk of a recession, maybe even 339 00:17:02,240 --> 00:17:03,600 Speaker 2: tho some folks say we're already in one. 340 00:17:04,760 --> 00:17:07,240 Speaker 7: Well, yeah, I think that they are late, but that 341 00:17:07,320 --> 00:17:11,040 Speaker 7: doesn't necessarily risk a recession because of the resiliency of 342 00:17:11,240 --> 00:17:14,879 Speaker 7: the consumer and the overall economy. In fact, with the 343 00:17:15,119 --> 00:17:17,720 Speaker 7: rate cuts coming in September, you know, maybe they should 344 00:17:17,760 --> 00:17:20,160 Speaker 7: have done that back in July. If not sooner, maybe 345 00:17:20,200 --> 00:17:23,560 Speaker 7: they should do fifty basis points. It's not necessarily about 346 00:17:24,200 --> 00:17:26,280 Speaker 7: saying what I would like them to do about but 347 00:17:26,520 --> 00:17:28,880 Speaker 7: what I think they will do, which is that twenty 348 00:17:28,920 --> 00:17:31,600 Speaker 7: five basis points, and so if they slowly take their 349 00:17:31,600 --> 00:17:33,200 Speaker 7: foot off the break, I think that's going to be 350 00:17:33,320 --> 00:17:37,280 Speaker 7: good enough for the economy to avoid a recession. I 351 00:17:37,320 --> 00:17:39,920 Speaker 7: don't think we need any sort of outsized move higher. 352 00:17:39,960 --> 00:17:42,399 Speaker 7: I would like to see a bigger move higher, you know, 353 00:17:42,480 --> 00:17:45,760 Speaker 7: basically to allow that real federal funds, right, the inflation 354 00:17:45,880 --> 00:17:49,119 Speaker 7: adjusted one, to come back down to something that I 355 00:17:49,160 --> 00:17:52,120 Speaker 7: think is more on target with that two percent inflation 356 00:17:52,560 --> 00:17:55,159 Speaker 7: that we're headed towards. But the Fed is likely to 357 00:17:55,280 --> 00:17:57,639 Speaker 7: deliver kind of weak beer here in terms of a 358 00:17:57,680 --> 00:18:01,119 Speaker 7: twenty five basis point cut. Maybe the big disappointment is 359 00:18:01,200 --> 00:18:04,879 Speaker 7: that even any cut is not necessarily going to accelerate 360 00:18:05,000 --> 00:18:09,480 Speaker 7: economic growth immediately. The initial effect is actually to serve 361 00:18:09,520 --> 00:18:13,200 Speaker 7: as an economic drag as people pull back their activity. 362 00:18:13,320 --> 00:18:16,600 Speaker 7: The borrowing, waiting for something more meaningful until maybe you 363 00:18:16,680 --> 00:18:19,720 Speaker 7: get four cuts under your belt. Because does it matter 364 00:18:19,760 --> 00:18:21,560 Speaker 7: if it's six and a half percent on a mortgage 365 00:18:21,680 --> 00:18:24,480 Speaker 7: versus six point twenty five. Probably not, But six and 366 00:18:24,520 --> 00:18:27,040 Speaker 7: a half versus five and a half, that's a bigger difference. 367 00:18:27,440 --> 00:18:30,840 Speaker 5: Talk to us about some of your favorite corners of 368 00:18:30,920 --> 00:18:33,680 Speaker 5: the economy, especially when you're thinking about those closely tied 369 00:18:33,720 --> 00:18:36,760 Speaker 5: to growth when it comes to industrials, consumer staples, energy, 370 00:18:36,880 --> 00:18:38,080 Speaker 5: as well as financials. 371 00:18:39,160 --> 00:18:41,280 Speaker 7: Yeah, some of those have been a little bit painful. 372 00:18:41,359 --> 00:18:44,200 Speaker 7: We've been overweight energy for a while, just thinking that 373 00:18:44,400 --> 00:18:47,359 Speaker 7: these companies are cash cows and they're probably going to 374 00:18:47,400 --> 00:18:50,440 Speaker 7: continue to do well. The big disappointment there has really 375 00:18:50,480 --> 00:18:52,880 Speaker 7: been on the demand side of the equation in terms 376 00:18:52,920 --> 00:18:55,560 Speaker 7: of China's growth being very slow, helping to push down 377 00:18:55,680 --> 00:18:58,840 Speaker 7: oil prices. But still from that fundamental basis the cash 378 00:18:58,880 --> 00:19:02,200 Speaker 7: flow generation. We do like that area, and they could 379 00:19:02,280 --> 00:19:06,160 Speaker 7: get a boost if we do see an eventual reacceleration, 380 00:19:06,320 --> 00:19:09,440 Speaker 7: but we're not banking on an economic reacceleration For some 381 00:19:09,560 --> 00:19:12,680 Speaker 7: of those more cyclical areas, those are more based on 382 00:19:12,920 --> 00:19:16,000 Speaker 7: let's say the valuations, and that a lot of these 383 00:19:16,040 --> 00:19:20,240 Speaker 7: companies have already gone through an earnings recession. If you 384 00:19:20,280 --> 00:19:22,040 Speaker 7: look on the Bloomberg terminal as far as you know, 385 00:19:22,119 --> 00:19:24,920 Speaker 7: the FA function for the financial analysis for these different 386 00:19:24,960 --> 00:19:28,040 Speaker 7: indices for the different areas, you can see how it 387 00:19:28,160 --> 00:19:31,359 Speaker 7: is that small mid sized companies they have been in 388 00:19:31,640 --> 00:19:35,560 Speaker 7: and out of recession for basically the last two years, 389 00:19:36,000 --> 00:19:39,879 Speaker 7: and now the expectation is for that earnings recession to 390 00:19:39,960 --> 00:19:43,680 Speaker 7: continue for the next couple of quarters. That seems pretty realistic. 391 00:19:43,840 --> 00:19:46,679 Speaker 7: So if that's already priced in, maybe we could actually 392 00:19:46,760 --> 00:19:50,399 Speaker 7: see the valuations provide a bit of a foundation for 393 00:19:50,640 --> 00:19:52,200 Speaker 7: longer term gains in those areas. 394 00:19:52,359 --> 00:19:55,760 Speaker 5: I'm glad you brought that up, because, of course Bloomberg Intelligence, Paul, 395 00:19:55,800 --> 00:19:58,200 Speaker 5: if you crunch Geno Martin Adams team over on the 396 00:19:58,240 --> 00:20:01,399 Speaker 5: equity side, they actually had been talking about coming into 397 00:20:01,600 --> 00:20:03,920 Speaker 5: this quarter, how the rest of the S and P 398 00:20:04,040 --> 00:20:06,159 Speaker 5: five hundred to four ninety three were actually going to 399 00:20:06,240 --> 00:20:08,800 Speaker 5: have in turn of profit growth when you're excluding those 400 00:20:08,920 --> 00:20:11,240 Speaker 5: MAGS seven type companies. And so even though we're seeing 401 00:20:11,560 --> 00:20:13,760 Speaker 5: maybe some of the growth pull back a little bit 402 00:20:13,800 --> 00:20:15,919 Speaker 5: for big tech companies, of course, the comps a year 403 00:20:15,960 --> 00:20:17,840 Speaker 5: over year, it's hard to match that when you had 404 00:20:17,920 --> 00:20:21,840 Speaker 5: that gangbuster revenue forecast a last May of in twenty 405 00:20:21,920 --> 00:20:24,600 Speaker 5: twenty three, of course from Nvidia. But when you're looking 406 00:20:24,640 --> 00:20:27,000 Speaker 5: ahead to sort of the remainder of those companies, maybe 407 00:20:27,040 --> 00:20:28,359 Speaker 5: not even just the four ninety three and the S 408 00:20:28,400 --> 00:20:30,080 Speaker 5: and P five hundred, but you were just talking about 409 00:20:30,400 --> 00:20:33,159 Speaker 5: small caps and mid type cap companies. What else do 410 00:20:33,200 --> 00:20:34,920 Speaker 5: you need to see there because people talk so much 411 00:20:34,920 --> 00:20:37,680 Speaker 5: about small caps. Obviously you're economists, but when you're thinking 412 00:20:37,680 --> 00:20:40,159 Speaker 5: about sort of the pain that we've seen reflective in 413 00:20:40,200 --> 00:20:42,240 Speaker 5: the equity market, say with the Russell two thousand, we 414 00:20:42,320 --> 00:20:45,920 Speaker 5: saw it really outperform the broader benchmarks in July, but 415 00:20:46,040 --> 00:20:47,679 Speaker 5: then pull back at the start of this month. At 416 00:20:47,720 --> 00:20:50,000 Speaker 5: what point do you see kind of a turn there, 417 00:20:50,040 --> 00:20:51,760 Speaker 5: Because we do know that a lot of those smaller 418 00:20:51,800 --> 00:20:55,000 Speaker 5: companies are very debt heavy oriented, and what that could 419 00:20:55,080 --> 00:20:56,760 Speaker 5: mean if there could be some relief there, if we 420 00:20:56,800 --> 00:20:58,280 Speaker 5: get some rate cuts on the way the rest of 421 00:20:58,320 --> 00:20:58,600 Speaker 5: the year. 422 00:21:00,080 --> 00:21:02,399 Speaker 7: Rate cuts would help, because when you saw that massive 423 00:21:02,480 --> 00:21:05,399 Speaker 7: rotation from large cap the small cap, it was around 424 00:21:05,480 --> 00:21:08,040 Speaker 7: the time that we got that decent CPI print where 425 00:21:08,080 --> 00:21:10,960 Speaker 7: it says suggested that okay, rate cuts are on their way, 426 00:21:11,280 --> 00:21:13,920 Speaker 7: and then you also then had Trump's popularity rising and 427 00:21:14,000 --> 00:21:18,000 Speaker 7: so maybe some regulatory relief. Since then, we've seen Trump's 428 00:21:18,000 --> 00:21:21,879 Speaker 7: popularity decline, and we've also seen some resiliency with some 429 00:21:22,040 --> 00:21:24,719 Speaker 7: of those megacap tech stock they're earning. So even if 430 00:21:24,800 --> 00:21:28,639 Speaker 7: the stock prices are pretty volatile, the fundamentals seem pretty 431 00:21:28,680 --> 00:21:29,280 Speaker 7: well intact. 432 00:21:29,600 --> 00:21:29,760 Speaker 3: Now. 433 00:21:30,000 --> 00:21:32,000 Speaker 7: One of the big areas is I just think don't 434 00:21:32,040 --> 00:21:36,280 Speaker 7: underestimate the power of low expectations for some of those companies, 435 00:21:36,359 --> 00:21:40,240 Speaker 7: because if you are expecting a gradual turn in earnings, 436 00:21:40,480 --> 00:21:42,320 Speaker 7: a lot of these companies have a lot of built 437 00:21:42,400 --> 00:21:45,159 Speaker 7: in operating leverage. So as long as you get a 438 00:21:45,240 --> 00:21:47,320 Speaker 7: little bit of growth, it doesn't have to be a lot. 439 00:21:47,440 --> 00:21:50,960 Speaker 7: It can amplify to the bottom line, and that's where 440 00:21:51,000 --> 00:21:53,800 Speaker 7: you could probably see some of that earnings acceleration. So 441 00:21:53,920 --> 00:21:56,080 Speaker 7: that's really what we're looking at. They've already done the 442 00:21:56,160 --> 00:21:59,800 Speaker 7: hard work in terms of bracing for recession that has 443 00:22:00,240 --> 00:22:03,840 Speaker 7: happened or that was isolated to their particular industry or 444 00:22:03,880 --> 00:22:07,640 Speaker 7: their particular community, and so if you see just some stability, 445 00:22:08,080 --> 00:22:12,080 Speaker 7: maybe a slight bit of an acceleration and economic activity, 446 00:22:12,560 --> 00:22:14,840 Speaker 7: that should really accrue to the bottom line and improve 447 00:22:14,960 --> 00:22:16,040 Speaker 7: the valuation picture. 448 00:22:16,600 --> 00:22:18,639 Speaker 2: Hey, Brian, thanks so much for joining us. Really appreciate 449 00:22:18,680 --> 00:22:20,680 Speaker 2: getting some of your thoughts there. Brian Jacobson. He's a 450 00:22:20,760 --> 00:22:25,800 Speaker 2: chief economist at Annex Wealth Management. Joining us from Brookfield, Wisconsin, 451 00:22:26,040 --> 00:22:29,160 Speaker 2: just a little bit west of Milwaukee. Again, you heard 452 00:22:29,200 --> 00:22:31,000 Speaker 2: me say before, I'll say it again pound for pound, 453 00:22:31,400 --> 00:22:34,360 Speaker 2: some of the smartest money managers are in Milwaukee, Wisconsin. 454 00:22:34,520 --> 00:22:35,639 Speaker 3: That's rightly. 455 00:22:35,680 --> 00:22:36,840 Speaker 5: I have a lot of sources that. 456 00:22:36,840 --> 00:22:39,160 Speaker 3: Are out exactly you know as University Wisconsin. 457 00:22:39,200 --> 00:22:43,879 Speaker 1: I don't know you're listening to the Bloomberg Intelligence Podcast. 458 00:22:44,200 --> 00:22:47,440 Speaker 1: Catch us live weekdays at ten am Eastern on applecar 459 00:22:47,560 --> 00:22:50,480 Speaker 1: Play and Android Auto with the Bloomberg Business app. You 460 00:22:50,560 --> 00:22:53,800 Speaker 1: can also listen live on Amazon Alexa from our flagship 461 00:22:53,880 --> 00:22:57,680 Speaker 1: New York station, Just say Alexa play Bloomberg eleven thirty. 462 00:23:00,000 --> 00:23:01,960 Speaker 2: I just meant sitting in for Alex Steo on Paul sweety. 463 00:23:02,000 --> 00:23:04,639 Speaker 2: We're live here in our Bloomberg Interactive Brokers studio or 464 00:23:04,680 --> 00:23:08,080 Speaker 2: streaming live on YouTube as well. And if you're listening 465 00:23:08,119 --> 00:23:10,920 Speaker 2: to us in Boston, our new home starting September third 466 00:23:10,960 --> 00:23:13,760 Speaker 2: will be ninety two nine FM. That's the day after 467 00:23:13,920 --> 00:23:16,880 Speaker 2: Labor Day, Bloomberg Radio moving to ninety two to nine 468 00:23:17,119 --> 00:23:22,000 Speaker 2: FM in Boston. Looking at Peloton stocks of twenty five percent, 469 00:23:22,640 --> 00:23:24,879 Speaker 2: I mean the lost narrows. I guess sales came in 470 00:23:24,920 --> 00:23:27,480 Speaker 2: a little bit better and expected and pretty decent profit outlooks. 471 00:23:27,520 --> 00:23:30,720 Speaker 2: So I guess a turnaround plan here that people have 472 00:23:30,800 --> 00:23:33,720 Speaker 2: been waiting to see some positive effects. Maybe that's actually 473 00:23:33,880 --> 00:23:35,880 Speaker 2: happening here again, stock up twenty five percent. So let's 474 00:23:35,960 --> 00:23:38,280 Speaker 2: check in with KEITHA. Ranganathin. She's a media analyst for 475 00:23:38,320 --> 00:23:42,080 Speaker 2: Bloomberg Intelligence. She joins us from Princeton via that Zoom 476 00:23:42,240 --> 00:23:46,560 Speaker 2: technology thing. Gihill, what did you make of the Peloton's 477 00:23:47,000 --> 00:23:47,679 Speaker 2: results and. 478 00:23:48,240 --> 00:23:50,080 Speaker 3: Is it twenty five percent move higher? Is I warranted? 479 00:23:51,680 --> 00:23:51,880 Speaker 4: Yeah? 480 00:23:51,880 --> 00:23:53,520 Speaker 8: I don't know about that, Paul. I think twenty five 481 00:23:53,560 --> 00:23:55,200 Speaker 8: percent might be a little bit of an overreaction. But 482 00:23:55,280 --> 00:23:57,840 Speaker 8: then again, remember it's down from you know, what was 483 00:23:57,880 --> 00:24:02,520 Speaker 8: it trading at one sixty or something? Yeah, sixty seven. 484 00:24:03,160 --> 00:24:05,280 Speaker 5: Yeah, that's when I was on the biking, So it's 485 00:24:05,280 --> 00:24:07,600 Speaker 5: a drawdown of close to one hundred percent. Keep it. 486 00:24:08,800 --> 00:24:12,080 Speaker 8: It definitely is, but you know, you're you're absolutely right, Paul. 487 00:24:12,160 --> 00:24:15,320 Speaker 8: So there there definitely were some green shoots from the 488 00:24:15,400 --> 00:24:18,400 Speaker 8: fiscal fourth quarter results. I mean up to this point, 489 00:24:18,480 --> 00:24:21,439 Speaker 8: I think Peloton's management was really trying to do too 490 00:24:21,480 --> 00:24:24,600 Speaker 8: many things at once, So they were trying to reintegrate 491 00:24:24,640 --> 00:24:27,120 Speaker 8: subscriber growth and at the same time they were also 492 00:24:27,280 --> 00:24:30,400 Speaker 8: tasked with, uh, you know, reducing costs, and of course 493 00:24:30,440 --> 00:24:32,920 Speaker 8: those two are kind of a little bit incompatible because 494 00:24:32,920 --> 00:24:35,719 Speaker 8: you need to kind of run promotions, you need to uh, 495 00:24:36,359 --> 00:24:39,399 Speaker 8: undertake a lot of marketing spend to to you know, 496 00:24:39,520 --> 00:24:42,159 Speaker 8: kind of re energize subscriber growth, and those two were 497 00:24:42,240 --> 00:24:44,840 Speaker 8: just so incompatible with each other. So obviously now they're 498 00:24:44,960 --> 00:24:47,520 Speaker 8: just focusing on the cost element of it. They're really 499 00:24:47,640 --> 00:24:50,960 Speaker 8: right sizing their cost base. What we're seeing is, you know, 500 00:24:51,160 --> 00:24:55,359 Speaker 8: strong discipline across the board, and with that we've seen 501 00:24:55,440 --> 00:24:59,880 Speaker 8: not just an increase in their profitability for the quarter 502 00:25:00,119 --> 00:25:03,440 Speaker 8: they reported, but also their guidance for fiscal twenty twenty 503 00:25:03,520 --> 00:25:07,920 Speaker 8: five was super encouraging. So their adjusted EBADUF forecast came 504 00:25:07,960 --> 00:25:12,760 Speaker 8: in almost twice or double what you know, consensus was expecting. 505 00:25:13,119 --> 00:25:14,960 Speaker 8: But again, Paul, as we kind of think about the 506 00:25:15,040 --> 00:25:18,760 Speaker 8: longer term strategy here, the question is, I mean, can 507 00:25:18,840 --> 00:25:21,720 Speaker 8: there really ever be a turnaround in the true sense 508 00:25:21,720 --> 00:25:25,560 Speaker 8: of the word, meaning, you know, can demand inflect and 509 00:25:25,840 --> 00:25:28,440 Speaker 8: so far, you know what management said and all the 510 00:25:28,480 --> 00:25:32,200 Speaker 8: signs that we're seeing is the visibility is extremely limited. 511 00:25:32,320 --> 00:25:34,200 Speaker 8: So yes, we can have some short term gains in 512 00:25:34,280 --> 00:25:36,640 Speaker 8: terms of you know, the profit metrics, but the long 513 00:25:36,760 --> 00:25:39,800 Speaker 8: term metric, which is really revenue and subscriber growth, I 514 00:25:39,840 --> 00:25:41,560 Speaker 8: think that's going to continue to be challenged. 515 00:25:42,000 --> 00:25:44,080 Speaker 5: Looking at that all time closing high, so it was 516 00:25:44,160 --> 00:25:47,720 Speaker 5: January thirteenth, twenty twenty one, one hundred and sixty seven dollars, 517 00:25:47,880 --> 00:25:50,439 Speaker 5: forty two cents there. You look where it's trading now 518 00:25:50,920 --> 00:25:53,720 Speaker 5: four dollars and about fifteen cents there. But when you're 519 00:25:53,720 --> 00:25:56,320 Speaker 5: talking about this turnaround strategy, Paul and I earlier were 520 00:25:56,359 --> 00:25:58,600 Speaker 5: talking about he has a couple different products from Peloton, 521 00:25:58,680 --> 00:26:01,080 Speaker 5: but usually he's mentioning his girlfriend news is a more 522 00:26:01,200 --> 00:26:03,880 Speaker 5: now than he does. But how do you get as 523 00:26:03,920 --> 00:26:07,560 Speaker 5: from a shareholder type perspective, because when you have an 524 00:26:07,600 --> 00:26:10,720 Speaker 5: inflection point like Covid, obviously this was a stock that 525 00:26:10,840 --> 00:26:13,919 Speaker 5: was one of those types of darlings. Though what when 526 00:26:13,960 --> 00:26:16,119 Speaker 5: it comes to demand, like you were talking about, how 527 00:26:16,200 --> 00:26:19,000 Speaker 5: do they rectify that and how do shareholders really view it? 528 00:26:19,240 --> 00:26:21,480 Speaker 5: Because how do you get that stock back to even 529 00:26:21,520 --> 00:26:23,200 Speaker 5: Eclipse one sixty seven. 530 00:26:24,320 --> 00:26:26,399 Speaker 8: It's going to be very hard just to kind of 531 00:26:26,480 --> 00:26:28,520 Speaker 8: get it back. And remember this is a company that 532 00:26:28,720 --> 00:26:32,639 Speaker 8: is in transition on many different fronts. So they actually 533 00:26:33,160 --> 00:26:35,800 Speaker 8: do not have a CEO right now, so the CEO 534 00:26:36,000 --> 00:26:39,400 Speaker 8: search is ongoing. So they're doing everything that they can 535 00:26:39,600 --> 00:26:41,840 Speaker 8: right now at least to kind of right the ship. 536 00:26:42,119 --> 00:26:46,080 Speaker 8: So headcount reduction, marketing expense reduction. You know, obviously they're 537 00:26:46,119 --> 00:26:49,840 Speaker 8: closing a lot of the retail showroom space inventory, they're 538 00:26:49,880 --> 00:26:52,680 Speaker 8: kind of right sizing that. So they're doing everything that 539 00:26:52,720 --> 00:26:54,399 Speaker 8: they can. But if you kind of look out at 540 00:26:54,480 --> 00:26:57,159 Speaker 8: the long term, like what is the business model, like, 541 00:26:57,280 --> 00:26:59,639 Speaker 8: we do need some kind of clarity on that. Do 542 00:26:59,760 --> 00:27:02,760 Speaker 8: they get into different you know modalities, I mean they've 543 00:27:02,960 --> 00:27:06,080 Speaker 8: so far they've mainly they're principally really just a bike company, 544 00:27:06,359 --> 00:27:09,080 Speaker 8: even that the treadmill really hasn't taken off in a 545 00:27:09,119 --> 00:27:12,800 Speaker 8: big way, and even with their hardware, yes it you know, 546 00:27:12,920 --> 00:27:15,760 Speaker 8: obviously they're one of the best connected fitness products out there, 547 00:27:16,080 --> 00:27:18,760 Speaker 8: but they've had problems with recalls and that kind of 548 00:27:18,880 --> 00:27:23,600 Speaker 8: causing churn. So you know, again, will like getting into 549 00:27:23,640 --> 00:27:26,560 Speaker 8: different modalities like the roar or even strength training will 550 00:27:26,600 --> 00:27:30,280 Speaker 8: it really kind of move the needle. I'm not necessarily sure, 551 00:27:30,480 --> 00:27:33,280 Speaker 8: which means that the only other option for them is 552 00:27:33,320 --> 00:27:35,720 Speaker 8: to really find a buyer. And there have been some 553 00:27:35,840 --> 00:27:38,600 Speaker 8: rumors that, you know, private equity companies might be interested. 554 00:27:39,000 --> 00:27:41,280 Speaker 8: But then if private equity gets involved, then it really 555 00:27:41,359 --> 00:27:44,280 Speaker 8: comes down to, you know, trimming the costs even further 556 00:27:44,800 --> 00:27:47,359 Speaker 8: and just it kind of becomes more about like just 557 00:27:47,440 --> 00:27:49,520 Speaker 8: extracting whatever cash you can from the company. 558 00:27:49,920 --> 00:27:52,600 Speaker 2: Hey, Githa, let's switch Gears to Paramount. It looks like 559 00:27:52,680 --> 00:27:56,840 Speaker 2: we may have a bidding war there, Mister Edgar Bronfman 560 00:27:57,440 --> 00:28:00,000 Speaker 2: up to his offer today. What's the feeling about Paramoun 561 00:28:00,040 --> 00:28:00,960 Speaker 2: and how this might play out? 562 00:28:02,320 --> 00:28:05,720 Speaker 8: So's it's getting very interesting, Paul, And I'm not really 563 00:28:05,880 --> 00:28:09,600 Speaker 8: sure what Brafman's endgame is here. So obviously he wouldn't 564 00:28:09,640 --> 00:28:11,800 Speaker 8: get involved in this, you know, kind of at this 565 00:28:11,960 --> 00:28:15,520 Speaker 8: late stage if he didn't get some encouragement in my view, 566 00:28:15,600 --> 00:28:18,159 Speaker 8: from Cherry Redstone. And again I'm not really sure what 567 00:28:18,400 --> 00:28:21,320 Speaker 8: Cherry Redstone wants here. I mean, she obviously has she 568 00:28:21,440 --> 00:28:24,040 Speaker 8: ultimately kind of calls the shots. I don't know whether 569 00:28:24,160 --> 00:28:27,040 Speaker 8: she's doing this because she wants sky Dance to kind 570 00:28:27,040 --> 00:28:29,879 Speaker 8: of sweeten their deal. Obviously, you know, the fifteen dollars 571 00:28:29,880 --> 00:28:33,080 Speaker 8: per share for the public shareholders was not something that 572 00:28:33,200 --> 00:28:36,480 Speaker 8: sat well with them. Brafman has kind of upped that 573 00:28:36,600 --> 00:28:38,960 Speaker 8: a little bit. It's it's a sixteen dollars per share 574 00:28:39,080 --> 00:28:42,600 Speaker 8: cash out. But we're not sure whether whether Sharry Redstone 575 00:28:42,680 --> 00:28:46,160 Speaker 8: really is is kind of manipulating this in any way, 576 00:28:46,440 --> 00:28:49,000 Speaker 8: or whether she's kind of the voice behind this, or 577 00:28:49,040 --> 00:28:51,440 Speaker 8: whether she simply wants to see Brafman kind of have 578 00:28:51,600 --> 00:28:54,760 Speaker 8: this bid just to just to make sure that there 579 00:28:54,800 --> 00:28:58,120 Speaker 8: aren't that she's reducing her litigation risks. So again, it's 580 00:28:58,120 --> 00:29:00,640 Speaker 8: a little bit unclear, but definitely I think think Brompmann 581 00:29:00,680 --> 00:29:03,600 Speaker 8: coming in sweetening his bid does set the stage in 582 00:29:03,720 --> 00:29:06,920 Speaker 8: a way for a bidding war. So it's going to 583 00:29:06,920 --> 00:29:08,960 Speaker 8: be interesting to see whether sky Dance comes in and 584 00:29:09,720 --> 00:29:11,240 Speaker 8: you know, Sweten's their proposal. 585 00:29:11,680 --> 00:29:14,840 Speaker 5: You've also talked about how a lot of questions still 586 00:29:14,920 --> 00:29:17,600 Speaker 5: remain when it comes to some of the risks, including 587 00:29:17,680 --> 00:29:21,400 Speaker 5: its valuations. So Class B shares of paramount down about 588 00:29:21,440 --> 00:29:24,200 Speaker 5: twenty four percent year to date. Unpack sort of the 589 00:29:24,360 --> 00:29:27,120 Speaker 5: valuation type issues that it's facing when it comes to 590 00:29:27,240 --> 00:29:28,240 Speaker 5: a potential bidding. 591 00:29:28,040 --> 00:29:28,440 Speaker 3: War, like this. 592 00:29:29,880 --> 00:29:32,760 Speaker 8: Yeah, So the valuation has always been a sticking point. 593 00:29:33,120 --> 00:29:37,120 Speaker 8: And you know, the major shareholder outcry against the sky 594 00:29:37,240 --> 00:29:40,040 Speaker 8: Dance proposal was that it was in fact only benefiting 595 00:29:40,800 --> 00:29:43,640 Speaker 8: you know, maybe two people, right, one with Sherry Redstone 596 00:29:43,680 --> 00:29:46,240 Speaker 8: and the other is of course the Ellisons and the 597 00:29:46,280 --> 00:29:50,840 Speaker 8: sky Dance team itself. Now, what Brafman is arguing is 598 00:29:51,040 --> 00:29:53,880 Speaker 8: that in his proposal, he's matching quite a bit of 599 00:29:53,960 --> 00:29:56,240 Speaker 8: what sky Dance has offered. The one thing that he's 600 00:29:56,360 --> 00:29:59,880 Speaker 8: not doing is diluting existing shareholders. And the way that's 601 00:30:00,440 --> 00:30:04,320 Speaker 8: is diluting existing shareholders is by forcing Paramount to actually 602 00:30:04,520 --> 00:30:07,480 Speaker 8: buy the sky Dance studio at a fairly high multiple. 603 00:30:08,120 --> 00:30:10,320 Speaker 8: We think that the multiple is about fourteen to fifteen 604 00:30:10,360 --> 00:30:13,040 Speaker 8: times ibada. Meanwhile, you have the rest of the media 605 00:30:13,560 --> 00:30:16,960 Speaker 8: landscape trading at about six times, and Paramount itself close 606 00:30:17,000 --> 00:30:19,240 Speaker 8: to only about seven or eight times. So obviously a 607 00:30:19,400 --> 00:30:24,160 Speaker 8: very rich multiple bear for sky Dance, you know, again, 608 00:30:24,240 --> 00:30:26,920 Speaker 8: diluting the shareholders, and Brafman is saying his deal does 609 00:30:27,000 --> 00:30:29,920 Speaker 8: not do that when it comes to valuation. I mean, 610 00:30:30,000 --> 00:30:32,440 Speaker 8: the reason that we're seeing, you know, all of the 611 00:30:32,480 --> 00:30:34,960 Speaker 8: media stocks challenge the way that they are is because 612 00:30:34,960 --> 00:30:38,360 Speaker 8: of their heavy exposure to linear TV, linear TV which 613 00:30:38,400 --> 00:30:40,600 Speaker 8: is in secular decline. And you know, the writing is 614 00:30:40,640 --> 00:30:43,120 Speaker 8: obviously on the wall because we saw both Paramount and 615 00:30:43,280 --> 00:30:46,640 Speaker 8: Warner Brothers in their most recent quarter actually take huge 616 00:30:46,760 --> 00:30:51,040 Speaker 8: programming write downs, and so you know, as that exposure 617 00:30:51,160 --> 00:30:54,680 Speaker 8: to linear TV remains high, this valuation is going to 618 00:30:54,720 --> 00:30:57,560 Speaker 8: be a constant question mark. One could argue though, that 619 00:30:57,640 --> 00:31:01,200 Speaker 8: Paramount still has significant exposure to a very good film 620 00:31:01,280 --> 00:31:05,240 Speaker 8: and TV production studio and should therefore trade definitely higher 621 00:31:05,320 --> 00:31:07,840 Speaker 8: than at that fifteen dollars that sky Dance was offering. 622 00:31:07,960 --> 00:31:10,360 Speaker 2: Keitha once again great stuff Keith wrong andoh and US 623 00:31:10,400 --> 00:31:13,680 Speaker 2: media analys from Bloomberg Intelligence from Princeton. You knowes, I 624 00:31:13,800 --> 00:31:16,080 Speaker 2: hired a lot of really really really good people at 625 00:31:16,120 --> 00:31:17,000 Speaker 2: Bloomberg Intelligence. 626 00:31:17,520 --> 00:31:20,960 Speaker 3: None better. Thank Keith wrong enoughing. She's become one of 627 00:31:21,000 --> 00:31:21,680 Speaker 3: the top. 628 00:31:21,680 --> 00:31:24,160 Speaker 2: Top media analysts on Wall Street and a relatively short 629 00:31:24,200 --> 00:31:24,680 Speaker 2: period of time. 630 00:31:24,760 --> 00:31:26,000 Speaker 3: So it's great, great stuff. 631 00:31:27,480 --> 00:31:31,360 Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live 632 00:31:31,480 --> 00:31:35,000 Speaker 1: weekdays at ten am Eastern on applecar Play and Android 633 00:31:35,000 --> 00:31:37,760 Speaker 1: Auto with the Bloomberg Business app. You can also listen 634 00:31:37,920 --> 00:31:40,960 Speaker 1: live on Amazon Alexa from our flagship New York station. 635 00:31:41,360 --> 00:31:44,400 Speaker 1: Just say Alexa playing Bloomberg eleven thirty. 636 00:31:46,040 --> 00:31:48,040 Speaker 2: Just meant sitting in for Alex Steel on Paul Sweeney. 637 00:31:48,240 --> 00:31:50,960 Speaker 2: We're broadcasting live from the Bloomberg Interactive Brokers studio, and 638 00:31:51,040 --> 00:31:55,240 Speaker 2: we're also streaming live on YouTube as well well. Presumably 639 00:31:55,320 --> 00:31:57,600 Speaker 2: we're gonna hear from Fatcherman j Pal tomorrow and he'll 640 00:31:57,920 --> 00:32:01,400 Speaker 2: presumably confirm what the market believes, which that interest rates 641 00:32:01,440 --> 00:32:04,000 Speaker 2: are soon to begin falling. That should be good for 642 00:32:04,040 --> 00:32:07,520 Speaker 2: a number of asset classes, including real estate, both commercial 643 00:32:07,640 --> 00:32:08,440 Speaker 2: and residential. 644 00:32:08,480 --> 00:32:10,400 Speaker 3: So let's get an update there. Ben Miller's the CEO 645 00:32:10,520 --> 00:32:11,040 Speaker 3: fund Rise. 646 00:32:11,360 --> 00:32:14,920 Speaker 2: Fundrise is the largest direct to consumer alternative asset manager 647 00:32:15,760 --> 00:32:18,840 Speaker 2: in the US. Hey, Ben, again, it looks like interest 648 00:32:18,880 --> 00:32:22,040 Speaker 2: rates are going to begin falling. How does that inform 649 00:32:22,120 --> 00:32:23,880 Speaker 2: your view of real estate? 650 00:32:26,760 --> 00:32:29,320 Speaker 9: Yeah, for the first time in a while, real estate 651 00:32:29,400 --> 00:32:36,480 Speaker 9: has a bowl market tailwind. Basically, real estate is highly 652 00:32:36,520 --> 00:32:40,960 Speaker 9: interest rates sensitive, and with the rise from interest rates 653 00:32:41,040 --> 00:32:43,560 Speaker 9: going from zero to five percent five and a half percent, 654 00:32:44,440 --> 00:32:49,640 Speaker 9: that really hurt real estate prices, especially institutional real estate 655 00:32:49,680 --> 00:32:53,640 Speaker 9: prices that price off yield. Now we're talking about rates 656 00:32:53,680 --> 00:32:57,480 Speaker 9: falling by potentially fifty percent, you know, from five and 657 00:32:57,520 --> 00:33:01,720 Speaker 9: a half to three percent, and that could have a 658 00:33:01,880 --> 00:33:03,560 Speaker 9: huge impact on real estate prices. 659 00:33:05,240 --> 00:33:08,240 Speaker 5: And when you're talking specifically about those real estate prices, 660 00:33:08,280 --> 00:33:11,000 Speaker 5: obviously there's commercial and then residential real estate. But you've 661 00:33:11,000 --> 00:33:13,160 Speaker 5: talked about how apartments are likely to see a rally 662 00:33:13,200 --> 00:33:16,240 Speaker 5: but not necessarily is clear when it comes to single 663 00:33:16,520 --> 00:33:19,520 Speaker 5: family housing kind of unpacked that for us. 664 00:33:22,080 --> 00:33:27,520 Speaker 9: Yeah, well, so single family housing is priced by supply 665 00:33:27,600 --> 00:33:30,239 Speaker 9: and demand, and so what's surprised I think a lot 666 00:33:30,320 --> 00:33:32,560 Speaker 9: of bears in the last couple of years is that 667 00:33:33,120 --> 00:33:36,760 Speaker 9: high interest rates didn't lower single family housing prices. Actually, 668 00:33:37,400 --> 00:33:41,640 Speaker 9: housing prices stayed healthy, and that's because most people have 669 00:33:41,840 --> 00:33:46,680 Speaker 9: long term fixed rate mortgages. The average mortgage is below 670 00:33:46,800 --> 00:33:49,600 Speaker 9: five percent. I think seventy five percent of people have 671 00:33:49,720 --> 00:33:53,440 Speaker 9: a mortgage below five percent. And so the reality is 672 00:33:53,600 --> 00:33:56,000 Speaker 9: that high interest rates really didn't impact the housing market 673 00:33:56,080 --> 00:34:03,120 Speaker 9: like people expected, and home sellers didn't want to bring 674 00:34:03,160 --> 00:34:06,920 Speaker 9: their house to market when interest rates are so high. 675 00:34:07,320 --> 00:34:09,760 Speaker 9: So what ended up happening is supply of new housing, 676 00:34:10,200 --> 00:34:14,839 Speaker 9: Supply of housing from existing homeowners was absolutely depressed. It's 677 00:34:15,080 --> 00:34:18,719 Speaker 9: the lowest almost in history. And that low supply of 678 00:34:18,840 --> 00:34:24,799 Speaker 9: housing kept prices up because prices are are determined by 679 00:34:24,920 --> 00:34:29,680 Speaker 9: where supply needs demand. So now as interest rates are 680 00:34:29,760 --> 00:34:32,959 Speaker 9: to fall, on one hand, that's good, will make housing 681 00:34:33,040 --> 00:34:35,839 Speaker 9: more affordable. On the other hand, it may bring more 682 00:34:35,920 --> 00:34:39,160 Speaker 9: houses to market. That's kind of if more houses come 683 00:34:39,200 --> 00:34:43,080 Speaker 9: to market, that could actually cause prices to actually stay 684 00:34:44,360 --> 00:34:47,359 Speaker 9: dampened despite falling interest rates. 685 00:34:47,560 --> 00:34:48,840 Speaker 3: Right, And that's kind of where I wanted to go. 686 00:34:48,920 --> 00:34:49,040 Speaker 5: Bet. 687 00:34:49,080 --> 00:34:51,720 Speaker 2: I'm looking at the Mortgage Bankers Association thirty or fixed. 688 00:34:51,760 --> 00:34:54,120 Speaker 2: It peaked kind of back in late twenty three at 689 00:34:54,200 --> 00:34:57,359 Speaker 2: about seven point eight seven point nine percent. We're now 690 00:34:57,400 --> 00:35:00,080 Speaker 2: down to six point five. Where do you think mortgage rates. 691 00:35:00,120 --> 00:35:00,440 Speaker 3: Need to go? 692 00:35:01,200 --> 00:35:04,560 Speaker 2: Is there like a clearing level you think where with 693 00:35:04,719 --> 00:35:07,600 Speaker 2: the marginal seller would come back into the market, we'd 694 00:35:07,640 --> 00:35:11,520 Speaker 2: get some more activity in the real estate, residential real estate. 695 00:35:14,520 --> 00:35:16,520 Speaker 9: My view is that mortgages will end up in the 696 00:35:16,600 --> 00:35:22,120 Speaker 9: mid fives as most likely. But I unfortunately, if you 697 00:35:22,200 --> 00:35:26,319 Speaker 9: look at like the last decade, the average mortgages were 698 00:35:26,320 --> 00:35:29,000 Speaker 9: in the threes. And so for a house to got 699 00:35:29,000 --> 00:35:32,040 Speaker 9: as affordable as it was in the twenty tens, you 700 00:35:32,200 --> 00:35:35,279 Speaker 9: really need not just rates to fall, but you need 701 00:35:35,320 --> 00:35:38,480 Speaker 9: wages to increase, and that's going to take a long time. 702 00:35:39,640 --> 00:35:39,920 Speaker 4: And so. 703 00:35:42,200 --> 00:35:45,640 Speaker 9: Affordability is going to remain a challenge, I think through 704 00:35:45,680 --> 00:35:48,400 Speaker 9: the rest of this decade as we make progress on 705 00:35:48,719 --> 00:35:53,040 Speaker 9: wages and bring rates down but not to where they 706 00:35:53,120 --> 00:35:54,560 Speaker 9: were last decade. 707 00:35:55,719 --> 00:35:59,880 Speaker 5: And when it comes to when it obviously higher rates 708 00:36:00,160 --> 00:36:03,480 Speaker 5: and how that has slowed new construction, especially when it 709 00:36:03,520 --> 00:36:05,359 Speaker 5: comes to apartments. What do you think that could mean 710 00:36:05,440 --> 00:36:07,520 Speaker 5: for when you have the direction in the path for 711 00:36:07,640 --> 00:36:11,200 Speaker 5: cuts potentially coming soon here but not necessarily what it 712 00:36:11,239 --> 00:36:13,440 Speaker 5: seems like not at an aggressive pace, but even if 713 00:36:13,480 --> 00:36:15,680 Speaker 5: it is more gradual, do you think that could ease 714 00:36:16,040 --> 00:36:17,920 Speaker 5: some of the slowing that we did see with new 715 00:36:18,000 --> 00:36:19,239 Speaker 5: construction for apartments. 716 00:36:21,040 --> 00:36:24,120 Speaker 9: Right, So, just to recap what happened was the low 717 00:36:24,200 --> 00:36:28,080 Speaker 9: rates in twenty twenty one twenty twenty caused spike and 718 00:36:28,200 --> 00:36:32,000 Speaker 9: new construction, especially in apartments. It's all time high. And 719 00:36:32,120 --> 00:36:37,120 Speaker 9: that new supply started in twenty twenty one and is 720 00:36:37,280 --> 00:36:40,919 Speaker 9: delivering now and so right now we're at all time high. 721 00:36:41,560 --> 00:36:45,000 Speaker 9: But if you look at starts or new construction, we 722 00:36:45,440 --> 00:36:49,120 Speaker 9: finance and build a lot of housing. We probably have 723 00:36:49,440 --> 00:36:52,840 Speaker 9: our financing new construction in the thousands of units, and 724 00:36:53,320 --> 00:36:55,960 Speaker 9: you're seeing that it's very difficult to start a new 725 00:36:56,000 --> 00:37:02,120 Speaker 9: apartment project a lend is very reluctant to lend. The 726 00:37:02,200 --> 00:37:06,920 Speaker 9: lending low proceeds to maybe fifty five percent of the 727 00:37:07,000 --> 00:37:10,160 Speaker 9: cost of the project, and at may be seven percent 728 00:37:10,200 --> 00:37:13,920 Speaker 9: interest rate, maybe even higher. So it's very hard to 729 00:37:14,160 --> 00:37:17,640 Speaker 9: make a pencil, and so new constructions falling off a cliff. 730 00:37:18,040 --> 00:37:21,480 Speaker 9: And as a result, by late next year, there'll be 731 00:37:22,200 --> 00:37:26,000 Speaker 9: some of the lowest new supply in probably modern history. 732 00:37:26,120 --> 00:37:28,600 Speaker 9: So we're going to go from an oversupplied undersupplied market. 733 00:37:29,000 --> 00:37:34,440 Speaker 9: As a result, I think that we'll see rents continue 734 00:37:34,480 --> 00:37:39,080 Speaker 9: to grow, rent prices continue to grow because of the 735 00:37:39,200 --> 00:37:41,000 Speaker 9: falling supply of new apartments. 736 00:37:41,719 --> 00:37:43,200 Speaker 3: Hey, Ben, let's switch gears a little bit. 737 00:37:43,320 --> 00:37:45,680 Speaker 2: On the commercial side, I think the most concern for 738 00:37:46,719 --> 00:37:51,200 Speaker 2: you know, most investors is on the office market. Where 739 00:37:51,239 --> 00:37:54,080 Speaker 2: are we in terms of the kind of flushing out 740 00:37:54,080 --> 00:37:56,279 Speaker 2: and trying to find a bottom there. I don't see 741 00:37:56,320 --> 00:37:59,719 Speaker 2: a lot of transactions that would help me to get 742 00:37:59,719 --> 00:38:01,240 Speaker 2: a sent said, maybe this market's bottoming. 743 00:38:02,440 --> 00:38:06,680 Speaker 9: No, No, I mean it's there's a real fundamental change. 744 00:38:06,760 --> 00:38:10,359 Speaker 9: I mean it's the market has lost somewhere between thirty 745 00:38:10,400 --> 00:38:13,719 Speaker 9: to fifty percent demand for office as a result of 746 00:38:13,760 --> 00:38:17,200 Speaker 9: work from home. So from pre pandemic to now office 747 00:38:18,000 --> 00:38:20,840 Speaker 9: occupancy is probably going to fall thirty to fifty percent. 748 00:38:21,480 --> 00:38:24,920 Speaker 9: That will have a consequence to office rents and office prices, 749 00:38:25,640 --> 00:38:29,640 Speaker 9: and that process is going to take at least a 750 00:38:29,680 --> 00:38:34,360 Speaker 9: half a decade, another five years. I think of decline repricing, 751 00:38:35,160 --> 00:38:41,279 Speaker 9: sort of compounding or vicious cycle dynamics, and so that 752 00:38:41,640 --> 00:38:44,200 Speaker 9: is I think not only is it obviously bad for 753 00:38:44,880 --> 00:38:47,600 Speaker 9: the three trillion dollars of office which probably will lose 754 00:38:47,600 --> 00:38:50,200 Speaker 9: at least a trillion dollars of value, maybe trillion a 755 00:38:50,200 --> 00:38:54,160 Speaker 9: half dollars of value, but also for downtowns across the 756 00:38:54,600 --> 00:38:58,520 Speaker 9: across the country, Downtown DC, downtown San Francisco. I think 757 00:38:58,600 --> 00:39:02,680 Speaker 9: they're the city budgets and the state of those of 758 00:39:03,680 --> 00:39:08,719 Speaker 9: those streetscapes are going to see a lot of challenges 759 00:39:09,000 --> 00:39:13,360 Speaker 9: that no one has like good solutions in the midterm. 760 00:39:13,440 --> 00:39:16,160 Speaker 9: I mean, probably going to take again half a decade 761 00:39:16,200 --> 00:39:19,040 Speaker 9: to really find the bottom and really figure out how 762 00:39:19,080 --> 00:39:20,759 Speaker 9: to rebuild those downtowns. 763 00:39:21,719 --> 00:39:24,479 Speaker 5: One question I have is when it comes to work 764 00:39:24,560 --> 00:39:27,120 Speaker 5: from home. I know Paul's very passionate about this. We 765 00:39:27,200 --> 00:39:30,160 Speaker 5: actually have a workshift column here at Bloomberg, and so 766 00:39:30,280 --> 00:39:33,120 Speaker 5: there was an article earlier this summer where they talked 767 00:39:33,120 --> 00:39:36,040 Speaker 5: about empty office is risk wiping out about two hundred 768 00:39:36,040 --> 00:39:39,400 Speaker 5: and fifty billion dollars in commercial property values. So that 769 00:39:39,560 --> 00:39:42,640 Speaker 5: US office vacancy rate is forecast a hit peak of 770 00:39:42,719 --> 00:39:45,839 Speaker 5: twenty four percent by twenty twenty six. If you looked 771 00:39:45,880 --> 00:39:48,799 Speaker 5: at where it was sitting basically in the first quarter 772 00:39:48,880 --> 00:39:51,800 Speaker 5: of this year was around nineteen point eight percent. Paul, So, 773 00:39:51,920 --> 00:39:53,960 Speaker 5: I kind of wanted to pick your brain when it 774 00:39:54,080 --> 00:39:57,200 Speaker 5: comes to what you're looking at this bin and that 775 00:39:57,360 --> 00:39:59,320 Speaker 5: kind of dynamic from the work from home sort of 776 00:39:59,400 --> 00:40:01,560 Speaker 5: aspect in your sort of purview and. 777 00:40:01,600 --> 00:40:01,960 Speaker 3: What you do. 778 00:40:03,760 --> 00:40:07,200 Speaker 9: Yeah, So Fundrais is a technology company and also an 779 00:40:07,239 --> 00:40:13,160 Speaker 9: investment company, and so we understand a lot about both 780 00:40:13,680 --> 00:40:16,640 Speaker 9: how technology effects the markets, and also we have two 781 00:40:16,680 --> 00:40:19,640 Speaker 9: million users, two million customers, and so we have a 782 00:40:19,680 --> 00:40:23,000 Speaker 9: really good sense of how people behave across the United States. 783 00:40:23,640 --> 00:40:26,719 Speaker 9: And so the reality is that we're from home is 784 00:40:26,760 --> 00:40:29,600 Speaker 9: not only permanent, but I think we're still actually at 785 00:40:30,160 --> 00:40:34,360 Speaker 9: the beginning of a cycle of technology affecting office. And 786 00:40:34,480 --> 00:40:37,160 Speaker 9: we saw this happen with e commerce. You know, nineteen 787 00:40:37,239 --> 00:40:39,640 Speaker 9: ninety nine, e commerce there was only one percent of 788 00:40:39,719 --> 00:40:43,080 Speaker 9: all commerce. Now it's sixteen percent. Of all commerce and 789 00:40:43,200 --> 00:40:48,520 Speaker 9: work from home today is you know, approximately twenty twenty 790 00:40:48,600 --> 00:40:50,879 Speaker 9: five percent, and I think it will grow because we'll 791 00:40:50,920 --> 00:40:55,440 Speaker 9: see more technological progress. AI will have huge impacts on 792 00:40:55,880 --> 00:41:00,880 Speaker 9: the efficacy of working from home, Virtual reality rivals, cars, 793 00:41:01,120 --> 00:41:04,200 Speaker 9: and so I think that the extrapolations into the future 794 00:41:04,200 --> 00:41:06,480 Speaker 9: are underestimating the impact of technology. 795 00:41:06,719 --> 00:41:09,440 Speaker 2: Yep, that's going to be a long term trend. And 796 00:41:09,520 --> 00:41:12,480 Speaker 2: again for the commercial real estate, particularly the office profound 797 00:41:12,560 --> 00:41:15,560 Speaker 2: one Ben Miller. He is a CEO of Fundraise. We 798 00:41:15,600 --> 00:41:17,600 Speaker 2: appreciate getting a few minutes of his time. 799 00:41:18,000 --> 00:41:22,520 Speaker 1: This is the Bloomberg Intelligence podcast, available on apples, Spotify, 800 00:41:22,719 --> 00:41:25,879 Speaker 1: and anywhere else you'll get your podcasts. 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