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Speaker 2: Let's go up to Canada. Here the railroaders they're striking.
Speaker 2: I think that's a big deal. But let me ask
Speaker 2: somebody who knows about this stuff, Lee Clascow. He's a
Speaker 2: senior transportation analyst for Bloomberg Intelligence. Lee, is this Canadian National,
Speaker 2: Canadian Pacific they're striking it?
Speaker 3: Do we have that right? And what does it mean?
Speaker 4: Well, they've locked out their employees because the union threatened
Speaker 4: to strike. So berrero, do you have to kind of
Speaker 4: shut down operations safely to make sure that you know,
Speaker 4: not only your employees can be get home, but also
Speaker 4: you know the equipment is safely stored. So that's kind
Speaker 4: of what we've seen happen. That's obviously going to impact
Speaker 4: volumes of the Canadian rails, both Canadian Pacific and Canadian National.
Speaker 4: They make up around twenty five percent of originated car
Speaker 4: loads in North America and you know, the impact will
Speaker 4: be felt across the supply chain because it's not just
Speaker 4: a Canadian thing. You know, it's also going to impact
Speaker 4: the rails that they interchange with. And also both Canadian
Speaker 4: Pacific and Canadian National also go into the United States.
Speaker 4: CP also goes directly into Mexico. About a third of
Speaker 4: Canadian Nationals volumes or revenues i should say, are tied
Speaker 4: to cross border traffic, so you know, it's not just
Speaker 4: going to be impacting Canada. How we see it playing
Speaker 4: out is that, you know, these kind of work stoppages
Speaker 4: don't last that long. Typically, usually they're usually forced into
Speaker 4: some sort of arbitration, you know, when it starts really
Speaker 4: impacting the economy. The Canadian government kind of a hands
Speaker 4: off approach going into Thursday when the deadline was there.
Speaker 4: You know, they might take more of a kind of
Speaker 4: a direct approach now that freight is starting stopping to flow,
Speaker 4: you know, and for the railroads, the two railroads impacted,
Speaker 4: it's going to impact their earnings. You know, a lot
Speaker 4: of the freight is going to be just delayed, it's
Speaker 4: not necessarily going to be lost, but some of their
Speaker 4: you know, more truck competitive freight like intermodal that's a
Speaker 4: little more time sensitive could get lost to other modes,
Speaker 4: namely trucks.
Speaker 5: You've also talked about how, due to the different labor disruption,
Speaker 5: shippers have been diverting free from those Canadian ports toward
Speaker 5: the US West Coast. So what I'm wondering is who
Speaker 5: kind of wins and who loses from this, because you've
Speaker 5: also talked about how this sort of situation has helped
Speaker 5: boost Union Pacific and other sort of internal modal traffic
Speaker 5: in recent weeks.
Speaker 4: Yeah, so you know how we see this playing out
Speaker 4: is you know who's going to benefit it. Well, if
Speaker 4: if it's freight that's headed into Canada that's going to
Speaker 4: end up in the United States, it's not going to
Speaker 4: go into Canada because the steamships are going to avoid
Speaker 4: those sports due to the workstop it. So they might
Speaker 4: try to bring that freight into southern California or the
Speaker 4: Gulf Coast and the East Coast. But that being said,
Speaker 4: the Gulf Coast and East Coast are also facing those
Speaker 4: ports are also facing their own labor issues. They have
Speaker 4: a contract that comes up in September thirtieth with their unions,
Speaker 4: and right now there doesn't seem like there's an agreement
Speaker 4: at least in the near term. So you know a
Speaker 4: lot of shippers have been redirecting their freight to southern California.
Speaker 4: So then who wins. Well, big winners would be Union
Speaker 4: Pacific in Burlington Northern and also in Burlington Northern that's
Speaker 4: a fully owned subsidiary by Berkshire Hathaway. And so also
Speaker 4: some of the intermodal players might benefit too because you'll
Speaker 4: have maybe longer lengths of haul, which should drive higher
Speaker 4: revenues for the players. And also, you know, we expect
Speaker 4: to see a little bump in truck spot load rates
Speaker 4: next week, as you know, maybe more and more capacity
Speaker 4: might be needed to move that time sensitive freight that's
Speaker 4: being impacted by the Canadian labor strife.
Speaker 3: Lee, I wonder if is this time of year particularly crucial.
Speaker 2: I'm thinking about the retailers maybe stocking at their shelves
Speaker 2: getting ready for you know, the holiday season.
Speaker 3: Was this time period chosen or is this just happenstance?
Speaker 4: This has happenstance, This is just like when their contract
Speaker 4: came up, you know, and not all labor issues have
Speaker 4: been terrible this year. CSX yesterday announced that they've reached
Speaker 4: an agreement four or five months ahead of their deadline
Speaker 4: with about twenty five percent of their unionized workforce, which
Speaker 4: included a three and a half percent pay increase on
Speaker 4: an annual basis over the next five years. So it's
Speaker 4: not it's not all bad news for labor, but but
Speaker 4: it and you know, it's not all bad news when
Speaker 4: it relates to labor, I should say, uh, but you know,
Speaker 4: we hope that things in Canada come to a close
Speaker 4: uh and and the rails get back to work, not
Speaker 4: only you know, for the economies involved, but you know
Speaker 4: the people involved as well.
Speaker 5: What does this mean for commodities traffic growth from here?
Speaker 5: Because it's largely dependent on the pace of of course
Speaker 5: China's economic recovery, and since it's also a major importer
Speaker 5: of North American materials as well.
Speaker 4: Yeah, so you know, as China goes, so does a
Speaker 4: commodity demand globally. You know, in addition to covering railroads,
Speaker 4: we cover marine shipping, the dry ball and tanker market
Speaker 4: as well. They're a major player and importer of goods.
Speaker 4: You know, their economy has not been as good as
Speaker 4: many were expecting. Uh, And that is definitely going to
Speaker 4: have an impact on demand, you know, with rails. You
Speaker 4: know what we should see on the commodity side is
Speaker 4: a lot of lumpiness in the weekly volume data that
Speaker 4: we get from the trade Association, the American Rail Association,
Speaker 4: and so you know, while a lot of that freight
Speaker 4: is not going to get lost like two other modes
Speaker 4: like maybe more truck competitive stuff, it's just going to
Speaker 4: get delayed. So it's going to create probably more lumpy
Speaker 4: earnings for Canadian National, Canadian Pacific in the third and
Speaker 4: fourth quarter. You know, probably it's going to weigh on
Speaker 4: the third quarter and maybe be somewhat of a tailwin
Speaker 4: in the fourth quarter.
Speaker 2: All right, Lee, thanks so much for joining us. I
Speaker 2: always appreciate getting your views there. Lead classical senior transport
Speaker 2: logistics and shipping analysts for Bloomberg Intelligence joining us via
Speaker 2: zoom from Princeton, New Jersey. On that Canadian railways they
Speaker 2: lock out their workers as talks fail, snarling trade there,
Speaker 2: so that brings up the risk of a possible strike here.
Speaker 2: So Lee is our global leader of all that trucking
Speaker 2: and railroads and logistics and all that kind of stuff.
Speaker 2: See is our go to guy there.
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Speaker 2: Let's go to out this Jackson hawayoming a little bit
Speaker 2: more west of Chicago.
Speaker 3: Michael McKee joins is there.
Speaker 2: He's Bloomberg International Economics and Policy correspondent, and he is
Speaker 2: the authentic Western dude, born and raised in Colorado, Colorado State,
Speaker 2: the whole thing.
Speaker 3: So he's at home out there. Tom Keen in the
Speaker 3: suit and the bow tie not so shure, but Michael
Speaker 3: McKee fits right in there, like the cowboy hat. I
Speaker 3: know he's sporting to camp. I was waiting for it
Speaker 3: the friends on YouTube. Michael, what's the.
Speaker 6: But everybody asked, so I need to and you.
Speaker 2: Delivered, And you delivered, no question. You're bringing the game.
Speaker 2: What's the feeling out there in Jackson Hole, Mike. What
Speaker 2: is the expectation for FED Chairman J Powell tomorrow?
Speaker 6: Expectations aren't really high that he's going to give us
Speaker 6: a whole lot new he'll say that the inflation numbers
Speaker 6: have been good, they have more confidence about reaching their
Speaker 6: two percent inflation target, and that it may soon be
Speaker 6: appropriate to change policy. He doesn't want to commit to
Speaker 6: a September eighteenth rate cut because we do have data
Speaker 6: coming in two inflation reports, that a jobs report that
Speaker 6: could change their mind. I suppose, But I think what
Speaker 6: he wants to do is leave the markets believing they're
Speaker 6: going to cut without guaranteeing it.
Speaker 5: And of course we've had a few different FED speakers
Speaker 5: this morning, as you know, so Kansas City FED President
Speaker 5: Jeffrey Smith obviously speaking on Bloomberg Television earlier. So he
Speaker 5: was talking about how, especially if you're thinking about the
Speaker 5: payroll visions don't really change how they were thinking about policy.
Speaker 5: But then something else that I thought was interesting was
Speaker 5: Patrick Harker was speaking about how he already thought markets
Speaker 5: have priced in a move for FED action, and he
Speaker 5: also said that the easing cycle may put the FED
Speaker 5: funds rate near three percent. I thought that was interesting
Speaker 5: because he was a little bit more specific than some
Speaker 5: of the other FED speakers that you've heard. What's your
Speaker 5: kind of takeaway from this as far as some gleaning
Speaker 5: some of this new information from them ahead of obviously
Speaker 5: pal tomorrow speaking.
Speaker 6: Well, it's pretty clear the markets are priced in at
Speaker 6: least one rate cut, a little bit more than one
Speaker 6: at this point. Is they keep their options open. You
Speaker 6: can see that in the futures and the overnight index swaps.
Speaker 6: But the idea of what neutral is going to be
Speaker 6: and where the Fed is going to end its rate
Speaker 6: cutting cycle is going to be a big matter of
Speaker 6: debate going forward. A lot of people from the Fed say,
Speaker 6: we don't know yet because we're not sure what's happened
Speaker 6: with the demand level, the potential growth of the economy.
Speaker 6: I don't want to get all wonky, but basically our star,
Speaker 6: as they say, and if it has, if it has
Speaker 6: gone up, then they cut less. If if it's gone
Speaker 6: back to pre pandemic levels, then we could get down
Speaker 6: around three or so. They don't want to go much
Speaker 6: further than that because they want some space to cut rates.
Speaker 6: And the one thing they will all tell you they
Speaker 6: don't have a number yet, but they say it will
Speaker 6: not be zero.
Speaker 2: Again, Michael, is the feeling out there in Jackson Hole
Speaker 2: that the FED, in terms of timing of cutting rates,
Speaker 2: that they're on the right glide path or is there
Speaker 2: concern that maybe they're a little bit late here As
Speaker 2: we look at some of this data over the last
Speaker 2: several days and weeks.
Speaker 6: FED folks don't think they're late. You get the argument
Speaker 6: from Wall Street that they might be. There are people
Speaker 6: on Wall Street who think the Fed's behind the curve.
Speaker 6: But their view is you look at the data, and
Speaker 6: the data aren't telling us the economy is falling off
Speaker 6: a cliff. Jobs claims this morning barely moving and on
Speaker 6: a non seasonally adjusted basis actually going down. There's no
Speaker 6: layoffs happening. And what they're hearing from their constituents, the
Speaker 6: CEOs and companies in their districts is that they're still
Speaker 6: demand out there. People are still spending money, not as much,
Speaker 6: not as fast, but they are still spending and so
Speaker 6: the outlook still pretty good, which means they don't feel
Speaker 6: an urgency to move that some people on Wall Street
Speaker 6: would like them to have.
Speaker 5: It's interesting looking at the moves in the bond market.
Speaker 5: So after we heard for Kansas City, a FED president
Speaker 5: at Jeffrey Smid, you're actually looking over at the tenure
Speaker 5: yield rising. It's close to about a three eighty four
Speaker 5: right now. So he was saying about how more data
Speaker 5: is needed for a rate cut. But when you're hearing
Speaker 5: that type of rhetoric, is that just basically them trying
Speaker 5: to signal, don't expect to say a fifty basis point
Speaker 5: rate cut out a September meeting something that aggressive. To
Speaker 5: be thinking more, maybe a more measured pace in line.
Speaker 5: When it comes to markets and their anticipation for.
Speaker 6: This, it depends on who is talking. Deef Schmid represents
Speaker 6: the Kansas City District, which has traditionally been one of
Speaker 6: the more hawkish on inflation, so it's understandable that he
Speaker 6: is reluctant to commit at this point. But I think
Speaker 6: they all want to leave the impression that we're about
Speaker 6: to start a cutting cycle. If it's not going to
Speaker 6: be in September, it's going to be shortly after that
Speaker 6: unless we see some sort of dramatic reversal in inflation.
Speaker 6: They just don't want to have to ratify the market's
Speaker 6: wishes and start cutting too far too fast.
Speaker 2: All right, Michael McKee, thank you so much for joining us.
Speaker 2: Thank you for the cowboy hat that I love.
Speaker 3: It makes the hit. Michael McKee, He's not just a cowboy.
Speaker 2: He covers all the economic stuff for Bloomberg News Intellivision,
Speaker 2: but he is a colunt on, a native, so he
Speaker 2: fits in.
Speaker 5: That is I'm so excited we got to see it.
Speaker 5: This is a suspense of us waiting to see if
Speaker 5: the hat was there, and he delivered.
Speaker 3: Basically for the FED chairman pal tomorrow. I mean, you
Speaker 3: know they don't. He doesn't have to do a whole
Speaker 3: lot tomorrow.
Speaker 5: So the options market, actually, the volatility that was had
Speaker 5: been priced in come down pretty dramatically. So right now
Speaker 5: the options market's pricing and eight tenths of a percent
Speaker 5: swing for the S and P five hundred in either direction,
Speaker 5: and for context, last week it actually had been over
Speaker 5: one percent, it had been around one point two percent.
Speaker 5: So really it's just based on the positioning and investors
Speaker 5: expecting volatility to fade, and a lot of it. Because
Speaker 5: we've talked about we've already had at least a half
Speaker 5: dozen FED speakers come out signal that rate cuts are
Speaker 5: expected next month. So really it's all about what traders
Speaker 5: are talking about, the tone, and if he keeps that
Speaker 5: tone going tomorrow exactly.
Speaker 2: And then I'll be interesting to see kind of the
Speaker 2: pace of rate cuts. How they cut rates going forward?
Speaker 2: Is it twenty five basis points.
Speaker 3: Each each meeting?
Speaker 2: Every other meeting that he does a front load with
Speaker 2: fifty be interesting to see how this all plays out.
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
Speaker 1: weekdays at ten am Eastern on Apple car Playing and
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Speaker 1: wherever you get your podcasts, or watch us live on YouTube.
Speaker 2: Just meant sitting in for Alex Steel here on Paul Sweeney.
Speaker 2: You live here in our Bloomberg Interactive Brokers studio. We're
Speaker 2: streaming live on YouTube as well, so check us out there.
Speaker 2: Brian Jacobson joins us here. He's the chief economist at
Speaker 2: Annex Wealth Management, joining us from Brookfield, Wisconsin via that
Speaker 2: zoom thing. Hey Brian, thanks so much for joining us here.
Speaker 2: We're about to hear from FED Chairman j pal Tomorrow
Speaker 2: out in Jackson Hole. What's your view of the economy
Speaker 2: right here?
Speaker 6: Yeah?
Speaker 7: I think well, it obviously had to change based upon
Speaker 7: some of those BLS revisions that we got as far
Speaker 7: as suddenly, poof, there goes eight hundred, eighteen thousand jobs.
Speaker 3: But for the most part.
Speaker 7: My view is that we went from great growth to
Speaker 7: good growth to now sustainable growth. And obviously the trick
Speaker 7: is whether or not that sustainable growth will tip over
Speaker 7: into a recession. We don't necessarily think that it will.
Speaker 7: A lot of that does depend upon the FED beginning
Speaker 7: to really take its foot off of the break of
Speaker 7: the economy. It's been trying to slow things down. We
Speaker 7: don't necessarily think that it needs to really completely take
Speaker 7: its foot off of the break. That's just not their style.
Speaker 7: They are likely to do a twenty five basis point cut.
Speaker 7: I think Collins from Boston said it pretty well about
Speaker 7: being very slow and methodical about the rate cuts, which
Speaker 7: is very different than what they did in the past,
Speaker 7: which is they'd be slow and methodical in hiking and
Speaker 7: then have to cut aggressively. And now it's the complete
Speaker 7: opposite of that aggressive hiking, more slow, methodical cutting and
Speaker 7: st on the way.
Speaker 5: And looking at the latest Atlanta FED GDP model for
Speaker 5: the current quarter, it has growth around two percent. As
Speaker 5: you know, that can be very volile at times. Another
Speaker 5: thing I like to look at the paul in the
Speaker 5: terminal as a function ECFC, so you can look at
Speaker 5: the economic forecast annually as where's quarterly, But you're still
Speaker 5: seeing strength there. So whenever people are pointing to say,
Speaker 5: for instance, Brian, that last July payrolls report that's all
Speaker 5: slow down and hiring, that was just one report. Of course,
Speaker 5: we haven't seen a trend of that just yet. Where
Speaker 5: exactly do you see when people are trying to argue
Speaker 5: for the weakness here, Because when you're looking at consumer
Speaker 5: spending that obviously makes up the bulk of GDP more
Speaker 5: than two thirds of that that drives the economy, it
Speaker 5: still seems like people are maybe they're shifting which type
Speaker 5: of retailers they're going to, right when we see results
Speaker 5: from Walmart and Target here, kind of diverging paths, but
Speaker 5: still seems like there's a strong consumer out there.
Speaker 7: Yeah, the consumer is strong, but not as strong as
Speaker 7: they used to be, And I think that's one of
Speaker 7: the key things when people are talking about some of
Speaker 7: the weakness, a lot of that is focused more on
Speaker 7: what's been going on with small and medium sized businesses
Speaker 7: in the UNI it States, high cost of financing. They've
Speaker 7: seen really orders being canceled over the last few years.
Speaker 7: Manufacturing in particular has really been struggling. I think it's
Speaker 7: been like twenty one months in a row, with maybe
Speaker 7: one or two of those months above fifty. But for
Speaker 7: the most part in recessionary territory, the service sector activity
Speaker 7: has stayed rather buoyant. But now the fears are more
Speaker 7: about what is happening next. It's not necessarily disagreement about
Speaker 7: where are we now, but where are we headed? And
Speaker 7: I think that's where you see some of these early indicators,
Speaker 7: you know, the Walmart and Target earnings. I think we're
Speaker 7: good examples. Why is it that they've been doing well
Speaker 7: because of discounting. Customers really view it easier to buy, say,
Speaker 7: throw pillows to spruce up a room as opposed to
Speaker 7: doing a complete remodel, right, and so that benefits Target
Speaker 7: at the expense of say home depot or other companies
Speaker 7: that are more in that higher ticket price things that
Speaker 7: maybe need to be financed. And so I think the
Speaker 7: consumer is strong, but not as strong as they used
Speaker 7: to be.
Speaker 2: What's the risk here that the FED is late and
Speaker 2: this is really at risk of a recession, maybe even
Speaker 2: tho some folks say we're already in one.
Speaker 7: Well, yeah, I think that they are late, but that
Speaker 7: doesn't necessarily risk a recession because of the resiliency of
Speaker 7: the consumer and the overall economy. In fact, with the
Speaker 7: rate cuts coming in September, you know, maybe they should
Speaker 7: have done that back in July. If not sooner, maybe
Speaker 7: they should do fifty basis points. It's not necessarily about
Speaker 7: saying what I would like them to do about but
Speaker 7: what I think they will do, which is that twenty
Speaker 7: five basis points, and so if they slowly take their
Speaker 7: foot off the break, I think that's going to be
Speaker 7: good enough for the economy to avoid a recession. I
Speaker 7: don't think we need any sort of outsized move higher.
Speaker 7: I would like to see a bigger move higher, you know,
Speaker 7: basically to allow that real federal funds, right, the inflation
Speaker 7: adjusted one, to come back down to something that I
Speaker 7: think is more on target with that two percent inflation
Speaker 7: that we're headed towards. But the Fed is likely to
Speaker 7: deliver kind of weak beer here in terms of a
Speaker 7: twenty five basis point cut. Maybe the big disappointment is
Speaker 7: that even any cut is not necessarily going to accelerate
Speaker 7: economic growth immediately. The initial effect is actually to serve
Speaker 7: as an economic drag as people pull back their activity.
Speaker 7: The borrowing, waiting for something more meaningful until maybe you
Speaker 7: get four cuts under your belt. Because does it matter
Speaker 7: if it's six and a half percent on a mortgage
Speaker 7: versus six point twenty five. Probably not, But six and
Speaker 7: a half versus five and a half, that's a bigger difference.
Speaker 5: Talk to us about some of your favorite corners of
Speaker 5: the economy, especially when you're thinking about those closely tied
Speaker 5: to growth when it comes to industrials, consumer staples, energy,
Speaker 5: as well as financials.
Speaker 7: Yeah, some of those have been a little bit painful.
Speaker 7: We've been overweight energy for a while, just thinking that
Speaker 7: these companies are cash cows and they're probably going to
Speaker 7: continue to do well. The big disappointment there has really
Speaker 7: been on the demand side of the equation in terms
Speaker 7: of China's growth being very slow, helping to push down
Speaker 7: oil prices. But still from that fundamental basis the cash
Speaker 7: flow generation. We do like that area, and they could
Speaker 7: get a boost if we do see an eventual reacceleration,
Speaker 7: but we're not banking on an economic reacceleration For some
Speaker 7: of those more cyclical areas, those are more based on
Speaker 7: let's say the valuations, and that a lot of these
Speaker 7: companies have already gone through an earnings recession. If you
Speaker 7: look on the Bloomberg terminal as far as you know,
Speaker 7: the FA function for the financial analysis for these different
Speaker 7: indices for the different areas, you can see how it
Speaker 7: is that small mid sized companies they have been in
Speaker 7: and out of recession for basically the last two years,
Speaker 7: and now the expectation is for that earnings recession to
Speaker 7: continue for the next couple of quarters. That seems pretty realistic.
Speaker 7: So if that's already priced in, maybe we could actually
Speaker 7: see the valuations provide a bit of a foundation for
Speaker 7: longer term gains in those areas.
Speaker 5: I'm glad you brought that up, because, of course Bloomberg Intelligence, Paul,
Speaker 5: if you crunch Geno Martin Adams team over on the
Speaker 5: equity side, they actually had been talking about coming into
Speaker 5: this quarter, how the rest of the S and P
Speaker 5: five hundred to four ninety three were actually going to
Speaker 5: have in turn of profit growth when you're excluding those
Speaker 5: MAGS seven type companies. And so even though we're seeing
Speaker 5: maybe some of the growth pull back a little bit
Speaker 5: for big tech companies, of course, the comps a year
Speaker 5: over year, it's hard to match that when you had
Speaker 5: that gangbuster revenue forecast a last May of in twenty
Speaker 5: twenty three, of course from Nvidia. But when you're looking
Speaker 5: ahead to sort of the remainder of those companies, maybe
Speaker 5: not even just the four ninety three and the S
Speaker 5: and P five hundred, but you were just talking about
Speaker 5: small caps and mid type cap companies. What else do
Speaker 5: you need to see there because people talk so much
Speaker 5: about small caps. Obviously you're economists, but when you're thinking
Speaker 5: about sort of the pain that we've seen reflective in
Speaker 5: the equity market, say with the Russell two thousand, we
Speaker 5: saw it really outperform the broader benchmarks in July, but
Speaker 5: then pull back at the start of this month. At
Speaker 5: what point do you see kind of a turn there,
Speaker 5: Because we do know that a lot of those smaller
Speaker 5: companies are very debt heavy oriented, and what that could
Speaker 5: mean if there could be some relief there, if we
Speaker 5: get some rate cuts on the way the rest of
Speaker 5: the year.
Speaker 7: Rate cuts would help, because when you saw that massive
Speaker 7: rotation from large cap the small cap, it was around
Speaker 7: the time that we got that decent CPI print where
Speaker 7: it says suggested that okay, rate cuts are on their way,
Speaker 7: and then you also then had Trump's popularity rising and
Speaker 7: so maybe some regulatory relief. Since then, we've seen Trump's
Speaker 7: popularity decline, and we've also seen some resiliency with some
Speaker 7: of those megacap tech stock they're earning. So even if
Speaker 7: the stock prices are pretty volatile, the fundamentals seem pretty
Speaker 7: well intact.
Speaker 3: Now.
Speaker 7: One of the big areas is I just think don't
Speaker 7: underestimate the power of low expectations for some of those companies,
Speaker 7: because if you are expecting a gradual turn in earnings,
Speaker 7: a lot of these companies have a lot of built
Speaker 7: in operating leverage. So as long as you get a
Speaker 7: little bit of growth, it doesn't have to be a lot.
Speaker 7: It can amplify to the bottom line, and that's where
Speaker 7: you could probably see some of that earnings acceleration. So
Speaker 7: that's really what we're looking at. They've already done the
Speaker 7: hard work in terms of bracing for recession that has
Speaker 7: happened or that was isolated to their particular industry or
Speaker 7: their particular community, and so if you see just some stability,
Speaker 7: maybe a slight bit of an acceleration and economic activity,
Speaker 7: that should really accrue to the bottom line and improve
Speaker 7: the valuation picture.
Speaker 2: Hey, Brian, thanks so much for joining us. Really appreciate
Speaker 2: getting some of your thoughts there. Brian Jacobson. He's a
Speaker 2: chief economist at Annex Wealth Management. Joining us from Brookfield, Wisconsin,
Speaker 2: just a little bit west of Milwaukee. Again, you heard
Speaker 2: me say before, I'll say it again pound for pound,
Speaker 2: some of the smartest money managers are in Milwaukee, Wisconsin.
Speaker 3: That's rightly.
Speaker 5: I have a lot of sources that.
Speaker 3: Are out exactly you know as University Wisconsin.
Speaker 1: I don't know you're listening to the Bloomberg Intelligence Podcast.
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Speaker 2: I just meant sitting in for Alex Steo on Paul sweety.
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Speaker 2: to us in Boston, our new home starting September third
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Speaker 2: FM in Boston. Looking at Peloton stocks of twenty five percent,
Speaker 2: I mean the lost narrows. I guess sales came in
Speaker 2: a little bit better and expected and pretty decent profit outlooks.
Speaker 2: So I guess a turnaround plan here that people have
Speaker 2: been waiting to see some positive effects. Maybe that's actually
Speaker 2: happening here again, stock up twenty five percent. So let's
Speaker 2: check in with KEITHA. Ranganathin. She's a media analyst for
Speaker 2: Bloomberg Intelligence. She joins us from Princeton via that Zoom
Speaker 2: technology thing. Gihill, what did you make of the Peloton's
Speaker 2: results and.
Speaker 3: Is it twenty five percent move higher? Is I warranted?
Speaker 4: Yeah?
Speaker 8: I don't know about that, Paul. I think twenty five
Speaker 8: percent might be a little bit of an overreaction. But
Speaker 8: then again, remember it's down from you know, what was
Speaker 8: it trading at one sixty or something? Yeah, sixty seven.
Speaker 5: Yeah, that's when I was on the biking, So it's
Speaker 5: a drawdown of close to one hundred percent. Keep it.
Speaker 8: It definitely is, but you know, you're you're absolutely right, Paul.
Speaker 8: So there there definitely were some green shoots from the
Speaker 8: fiscal fourth quarter results. I mean up to this point,
Speaker 8: I think Peloton's management was really trying to do too
Speaker 8: many things at once, So they were trying to reintegrate
Speaker 8: subscriber growth and at the same time they were also
Speaker 8: tasked with, uh, you know, reducing costs, and of course
Speaker 8: those two are kind of a little bit incompatible because
Speaker 8: you need to kind of run promotions, you need to uh,
Speaker 8: undertake a lot of marketing spend to to you know,
Speaker 8: kind of re energize subscriber growth, and those two were
Speaker 8: just so incompatible with each other. So obviously now they're
Speaker 8: just focusing on the cost element of it. They're really
Speaker 8: right sizing their cost base. What we're seeing is, you know,
Speaker 8: strong discipline across the board, and with that we've seen
Speaker 8: not just an increase in their profitability for the quarter
Speaker 8: they reported, but also their guidance for fiscal twenty twenty
Speaker 8: five was super encouraging. So their adjusted EBADUF forecast came
Speaker 8: in almost twice or double what you know, consensus was expecting.
Speaker 8: But again, Paul, as we kind of think about the
Speaker 8: longer term strategy here, the question is, I mean, can
Speaker 8: there really ever be a turnaround in the true sense
Speaker 8: of the word, meaning, you know, can demand inflect and
Speaker 8: so far, you know what management said and all the
Speaker 8: signs that we're seeing is the visibility is extremely limited.
Speaker 8: So yes, we can have some short term gains in
Speaker 8: terms of you know, the profit metrics, but the long
Speaker 8: term metric, which is really revenue and subscriber growth, I
Speaker 8: think that's going to continue to be challenged.
Speaker 5: Looking at that all time closing high, so it was
Speaker 5: January thirteenth, twenty twenty one, one hundred and sixty seven dollars,
Speaker 5: forty two cents there. You look where it's trading now
Speaker 5: four dollars and about fifteen cents there. But when you're
Speaker 5: talking about this turnaround strategy, Paul and I earlier were
Speaker 5: talking about he has a couple different products from Peloton,
Speaker 5: but usually he's mentioning his girlfriend news is a more
Speaker 5: now than he does. But how do you get as
Speaker 5: from a shareholder type perspective, because when you have an
Speaker 5: inflection point like Covid, obviously this was a stock that
Speaker 5: was one of those types of darlings. Though what when
Speaker 5: it comes to demand, like you were talking about, how
Speaker 5: do they rectify that and how do shareholders really view it?
Speaker 5: Because how do you get that stock back to even
Speaker 5: Eclipse one sixty seven.
Speaker 8: It's going to be very hard just to kind of
Speaker 8: get it back. And remember this is a company that
Speaker 8: is in transition on many different fronts. So they actually
Speaker 8: do not have a CEO right now, so the CEO
Speaker 8: search is ongoing. So they're doing everything that they can
Speaker 8: right now at least to kind of right the ship.
Speaker 8: So headcount reduction, marketing expense reduction. You know, obviously they're
Speaker 8: closing a lot of the retail showroom space inventory, they're
Speaker 8: kind of right sizing that. So they're doing everything that
Speaker 8: they can. But if you kind of look out at
Speaker 8: the long term, like what is the business model, like,
Speaker 8: we do need some kind of clarity on that. Do
Speaker 8: they get into different you know modalities, I mean they've
Speaker 8: so far they've mainly they're principally really just a bike company,
Speaker 8: even that the treadmill really hasn't taken off in a
Speaker 8: big way, and even with their hardware, yes it you know,
Speaker 8: obviously they're one of the best connected fitness products out there,
Speaker 8: but they've had problems with recalls and that kind of
Speaker 8: causing churn. So you know, again, will like getting into
Speaker 8: different modalities like the roar or even strength training will
Speaker 8: it really kind of move the needle. I'm not necessarily sure,
Speaker 8: which means that the only other option for them is
Speaker 8: to really find a buyer. And there have been some
Speaker 8: rumors that, you know, private equity companies might be interested.
Speaker 8: But then if private equity gets involved, then it really
Speaker 8: comes down to, you know, trimming the costs even further
Speaker 8: and just it kind of becomes more about like just
Speaker 8: extracting whatever cash you can from the company.
Speaker 2: Hey, Githa, let's switch Gears to Paramount. It looks like
Speaker 2: we may have a bidding war there, Mister Edgar Bronfman
Speaker 2: up to his offer today. What's the feeling about Paramoun
Speaker 2: and how this might play out?
Speaker 8: So's it's getting very interesting, Paul, And I'm not really
Speaker 8: sure what Brafman's endgame is here. So obviously he wouldn't
Speaker 8: get involved in this, you know, kind of at this
Speaker 8: late stage if he didn't get some encouragement in my view,
Speaker 8: from Cherry Redstone. And again I'm not really sure what
Speaker 8: Cherry Redstone wants here. I mean, she obviously has she
Speaker 8: ultimately kind of calls the shots. I don't know whether
Speaker 8: she's doing this because she wants sky Dance to kind
Speaker 8: of sweeten their deal. Obviously, you know, the fifteen dollars
Speaker 8: per share for the public shareholders was not something that
Speaker 8: sat well with them. Brafman has kind of upped that
Speaker 8: a little bit. It's it's a sixteen dollars per share
Speaker 8: cash out. But we're not sure whether whether Sharry Redstone
Speaker 8: really is is kind of manipulating this in any way,
Speaker 8: or whether she's kind of the voice behind this, or
Speaker 8: whether she simply wants to see Brafman kind of have
Speaker 8: this bid just to just to make sure that there
Speaker 8: aren't that she's reducing her litigation risks. So again, it's
Speaker 8: a little bit unclear, but definitely I think think Brompmann
Speaker 8: coming in sweetening his bid does set the stage in
Speaker 8: a way for a bidding war. So it's going to
Speaker 8: be interesting to see whether sky Dance comes in and
Speaker 8: you know, Sweten's their proposal.
Speaker 5: You've also talked about how a lot of questions still
Speaker 5: remain when it comes to some of the risks, including
Speaker 5: its valuations. So Class B shares of paramount down about
Speaker 5: twenty four percent year to date. Unpack sort of the
Speaker 5: valuation type issues that it's facing when it comes to
Speaker 5: a potential bidding.
Speaker 3: War, like this.
Speaker 8: Yeah, So the valuation has always been a sticking point.
Speaker 8: And you know, the major shareholder outcry against the sky
Speaker 8: Dance proposal was that it was in fact only benefiting
Speaker 8: you know, maybe two people, right, one with Sherry Redstone
Speaker 8: and the other is of course the Ellisons and the
Speaker 8: sky Dance team itself. Now, what Brafman is arguing is
Speaker 8: that in his proposal, he's matching quite a bit of
Speaker 8: what sky Dance has offered. The one thing that he's
Speaker 8: not doing is diluting existing shareholders. And the way that's
Speaker 8: is diluting existing shareholders is by forcing Paramount to actually
Speaker 8: buy the sky Dance studio at a fairly high multiple.
Speaker 8: We think that the multiple is about fourteen to fifteen
Speaker 8: times ibada. Meanwhile, you have the rest of the media
Speaker 8: landscape trading at about six times, and Paramount itself close
Speaker 8: to only about seven or eight times. So obviously a
Speaker 8: very rich multiple bear for sky Dance, you know, again,
Speaker 8: diluting the shareholders, and Brafman is saying his deal does
Speaker 8: not do that when it comes to valuation. I mean,
Speaker 8: the reason that we're seeing, you know, all of the
Speaker 8: media stocks challenge the way that they are is because
Speaker 8: of their heavy exposure to linear TV, linear TV which
Speaker 8: is in secular decline. And you know, the writing is
Speaker 8: obviously on the wall because we saw both Paramount and
Speaker 8: Warner Brothers in their most recent quarter actually take huge
Speaker 8: programming write downs, and so you know, as that exposure
Speaker 8: to linear TV remains high, this valuation is going to
Speaker 8: be a constant question mark. One could argue though, that
Speaker 8: Paramount still has significant exposure to a very good film
Speaker 8: and TV production studio and should therefore trade definitely higher
Speaker 8: than at that fifteen dollars that sky Dance was offering.
Speaker 2: Keitha once again great stuff Keith wrong andoh and US
Speaker 2: media analys from Bloomberg Intelligence from Princeton. You knowes, I
Speaker 2: hired a lot of really really really good people at
Speaker 2: Bloomberg Intelligence.
Speaker 3: None better. Thank Keith wrong enoughing. She's become one of
Speaker 3: the top.
Speaker 2: Top media analysts on Wall Street and a relatively short
Speaker 2: period of time.
Speaker 3: So it's great, great stuff.
Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
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Speaker 2: Just meant sitting in for Alex Steel on Paul Sweeney.
Speaker 2: We're broadcasting live from the Bloomberg Interactive Brokers studio, and
Speaker 2: we're also streaming live on YouTube as well well. Presumably
Speaker 2: we're gonna hear from Fatcherman j Pal tomorrow and he'll
Speaker 2: presumably confirm what the market believes, which that interest rates
Speaker 2: are soon to begin falling. That should be good for
Speaker 2: a number of asset classes, including real estate, both commercial
Speaker 2: and residential.
Speaker 3: So let's get an update there. Ben Miller's the CEO
Speaker 3: fund Rise.
Speaker 2: Fundrise is the largest direct to consumer alternative asset manager
Speaker 2: in the US. Hey, Ben, again, it looks like interest
Speaker 2: rates are going to begin falling. How does that inform
Speaker 2: your view of real estate?
Speaker 9: Yeah, for the first time in a while, real estate
Speaker 9: has a bowl market tailwind. Basically, real estate is highly
Speaker 9: interest rates sensitive, and with the rise from interest rates
Speaker 9: going from zero to five percent five and a half percent,
Speaker 9: that really hurt real estate prices, especially institutional real estate
Speaker 9: prices that price off yield. Now we're talking about rates
Speaker 9: falling by potentially fifty percent, you know, from five and
Speaker 9: a half to three percent, and that could have a
Speaker 9: huge impact on real estate prices.
Speaker 5: And when you're talking specifically about those real estate prices,
Speaker 5: obviously there's commercial and then residential real estate. But you've
Speaker 5: talked about how apartments are likely to see a rally
Speaker 5: but not necessarily is clear when it comes to single
Speaker 5: family housing kind of unpacked that for us.
Speaker 9: Yeah, well, so single family housing is priced by supply
Speaker 9: and demand, and so what's surprised I think a lot
Speaker 9: of bears in the last couple of years is that
Speaker 9: high interest rates didn't lower single family housing prices. Actually,
Speaker 9: housing prices stayed healthy, and that's because most people have
Speaker 9: long term fixed rate mortgages. The average mortgage is below
Speaker 9: five percent. I think seventy five percent of people have
Speaker 9: a mortgage below five percent. And so the reality is
Speaker 9: that high interest rates really didn't impact the housing market
Speaker 9: like people expected, and home sellers didn't want to bring
Speaker 9: their house to market when interest rates are so high.
Speaker 9: So what ended up happening is supply of new housing,
Speaker 9: Supply of housing from existing homeowners was absolutely depressed. It's
Speaker 9: the lowest almost in history. And that low supply of
Speaker 9: housing kept prices up because prices are are determined by
Speaker 9: where supply needs demand. So now as interest rates are
Speaker 9: to fall, on one hand, that's good, will make housing
Speaker 9: more affordable. On the other hand, it may bring more
Speaker 9: houses to market. That's kind of if more houses come
Speaker 9: to market, that could actually cause prices to actually stay
Speaker 9: dampened despite falling interest rates.
Speaker 3: Right, And that's kind of where I wanted to go.
Speaker 5: Bet.
Speaker 2: I'm looking at the Mortgage Bankers Association thirty or fixed.
Speaker 2: It peaked kind of back in late twenty three at
Speaker 2: about seven point eight seven point nine percent. We're now
Speaker 2: down to six point five. Where do you think mortgage rates.
Speaker 3: Need to go?
Speaker 2: Is there like a clearing level you think where with
Speaker 2: the marginal seller would come back into the market, we'd
Speaker 2: get some more activity in the real estate, residential real estate.
Speaker 9: My view is that mortgages will end up in the
Speaker 9: mid fives as most likely. But I unfortunately, if you
Speaker 9: look at like the last decade, the average mortgages were
Speaker 9: in the threes. And so for a house to got
Speaker 9: as affordable as it was in the twenty tens, you
Speaker 9: really need not just rates to fall, but you need
Speaker 9: wages to increase, and that's going to take a long time.
Speaker 4: And so.
Speaker 9: Affordability is going to remain a challenge, I think through
Speaker 9: the rest of this decade as we make progress on
Speaker 9: wages and bring rates down but not to where they
Speaker 9: were last decade.
Speaker 5: And when it comes to when it obviously higher rates
Speaker 5: and how that has slowed new construction, especially when it
Speaker 5: comes to apartments. What do you think that could mean
Speaker 5: for when you have the direction in the path for
Speaker 5: cuts potentially coming soon here but not necessarily what it
Speaker 5: seems like not at an aggressive pace, but even if
Speaker 5: it is more gradual, do you think that could ease
Speaker 5: some of the slowing that we did see with new
Speaker 5: construction for apartments.
Speaker 9: Right, So, just to recap what happened was the low
Speaker 9: rates in twenty twenty one twenty twenty caused spike and
Speaker 9: new construction, especially in apartments. It's all time high. And
Speaker 9: that new supply started in twenty twenty one and is
Speaker 9: delivering now and so right now we're at all time high.
Speaker 9: But if you look at starts or new construction, we
Speaker 9: finance and build a lot of housing. We probably have
Speaker 9: our financing new construction in the thousands of units, and
Speaker 9: you're seeing that it's very difficult to start a new
Speaker 9: apartment project a lend is very reluctant to lend. The
Speaker 9: lending low proceeds to maybe fifty five percent of the
Speaker 9: cost of the project, and at may be seven percent
Speaker 9: interest rate, maybe even higher. So it's very hard to
Speaker 9: make a pencil, and so new constructions falling off a cliff.
Speaker 9: And as a result, by late next year, there'll be
Speaker 9: some of the lowest new supply in probably modern history.
Speaker 9: So we're going to go from an oversupplied undersupplied market.
Speaker 9: As a result, I think that we'll see rents continue
Speaker 9: to grow, rent prices continue to grow because of the
Speaker 9: falling supply of new apartments.
Speaker 3: Hey, Ben, let's switch gears a little bit.
Speaker 2: On the commercial side, I think the most concern for
Speaker 2: you know, most investors is on the office market. Where
Speaker 2: are we in terms of the kind of flushing out
Speaker 2: and trying to find a bottom there. I don't see
Speaker 2: a lot of transactions that would help me to get
Speaker 2: a sent said, maybe this market's bottoming.
Speaker 9: No, No, I mean it's there's a real fundamental change.
Speaker 9: I mean it's the market has lost somewhere between thirty
Speaker 9: to fifty percent demand for office as a result of
Speaker 9: work from home. So from pre pandemic to now office
Speaker 9: occupancy is probably going to fall thirty to fifty percent.
Speaker 9: That will have a consequence to office rents and office prices,
Speaker 9: and that process is going to take at least a
Speaker 9: half a decade, another five years. I think of decline repricing,
Speaker 9: sort of compounding or vicious cycle dynamics, and so that
Speaker 9: is I think not only is it obviously bad for
Speaker 9: the three trillion dollars of office which probably will lose
Speaker 9: at least a trillion dollars of value, maybe trillion a
Speaker 9: half dollars of value, but also for downtowns across the
Speaker 9: across the country, Downtown DC, downtown San Francisco. I think
Speaker 9: they're the city budgets and the state of those of
Speaker 9: those streetscapes are going to see a lot of challenges
Speaker 9: that no one has like good solutions in the midterm.
Speaker 9: I mean, probably going to take again half a decade
Speaker 9: to really find the bottom and really figure out how
Speaker 9: to rebuild those downtowns.
Speaker 5: One question I have is when it comes to work
Speaker 5: from home. I know Paul's very passionate about this. We
Speaker 5: actually have a workshift column here at Bloomberg, and so
Speaker 5: there was an article earlier this summer where they talked
Speaker 5: about empty office is risk wiping out about two hundred
Speaker 5: and fifty billion dollars in commercial property values. So that
Speaker 5: US office vacancy rate is forecast a hit peak of
Speaker 5: twenty four percent by twenty twenty six. If you looked
Speaker 5: at where it was sitting basically in the first quarter
Speaker 5: of this year was around nineteen point eight percent. Paul, So,
Speaker 5: I kind of wanted to pick your brain when it
Speaker 5: comes to what you're looking at this bin and that
Speaker 5: kind of dynamic from the work from home sort of
Speaker 5: aspect in your sort of purview and.
Speaker 3: What you do.
Speaker 9: Yeah, So Fundrais is a technology company and also an
Speaker 9: investment company, and so we understand a lot about both
Speaker 9: how technology effects the markets, and also we have two
Speaker 9: million users, two million customers, and so we have a
Speaker 9: really good sense of how people behave across the United States.
Speaker 9: And so the reality is that we're from home is
Speaker 9: not only permanent, but I think we're still actually at
Speaker 9: the beginning of a cycle of technology affecting office. And
Speaker 9: we saw this happen with e commerce. You know, nineteen
Speaker 9: ninety nine, e commerce there was only one percent of
Speaker 9: all commerce. Now it's sixteen percent. Of all commerce and
Speaker 9: work from home today is you know, approximately twenty twenty
Speaker 9: five percent, and I think it will grow because we'll
Speaker 9: see more technological progress. AI will have huge impacts on
Speaker 9: the efficacy of working from home, Virtual reality rivals, cars,
Speaker 9: and so I think that the extrapolations into the future
Speaker 9: are underestimating the impact of technology.
Speaker 2: Yep, that's going to be a long term trend. And
Speaker 2: again for the commercial real estate, particularly the office profound
Speaker 2: one Ben Miller. He is a CEO of Fundraise. We
Speaker 2: appreciate getting a few minutes of his time.
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