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Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along

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Speaker 1: with Jonathan Farrell and Lisa Abramowitz. Join us each day

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Speaker 1: for insight from the best an economics, geopolitics, finance and investment.

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Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and

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Speaker 1: anywhere you get your podcasts, and always on Bloomberg dot Com,

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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App.

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Speaker 2: Join us now. See Michelle chief flowed with Strategus, the

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Speaker 2: principal wishing she never woke up early this morning. See

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Speaker 2: you a good morning, Good morning.

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Speaker 1: It's great to be.

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Speaker 2: Great to have you with us. This recession chat. What

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Speaker 2: underpins it? Where's it come from? I think a lot

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Speaker 2: of people might look at this situation and say, well, yes,

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Speaker 2: inflation's a problem, but I'm looking at unemployment three point

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Speaker 2: five percent. Claims have ticked a little bit high, but

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Speaker 2: they've come back in again. Where's the recession chat come from?

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Speaker 2: Apart from maybe with you.

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Speaker 3: One, well, so we are do you one? I think

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Speaker 3: the problem is that we've been talking about recession for

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Speaker 3: ages and ages and ages, and as you said, people

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Speaker 3: are getting a little bit tired of the discussions. But

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Speaker 3: if you look around the economy today, it looks fairly strong.

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Speaker 3: Yes there's a soft snow like slow down happening, but

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Speaker 3: generally speaking, things look okay. And I think the main

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Speaker 3: reason is that the labor market is underpinning everything. But

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Speaker 3: if I put my economists hat on, labor market is

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Speaker 3: typically the last one to fall. It is the most

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Speaker 3: lagging indicator here, but it's also the most important, so

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Speaker 3: we can be watching. You know, the lending survey is

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Speaker 3: going to be really important. There is a very very

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Speaker 3: close correlation between lending data and employment, so as you

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Speaker 3: see a lending contract, you should see job losses increase.

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Speaker 3: So we are expecting recession late this year and over.

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Speaker 3: It keeps being pushed out, but it does look very

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Speaker 3: very likely. Given the amount of FED timing you've seen.

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Speaker 4: Todate, markets are almost hoping for this recession. Bring it forward,

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Speaker 4: let's get it over with, and then we can start

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Speaker 4: with the next cycle. And it seems like that impatience

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Speaker 4: has been embedded in all of the bearishness that we've felt.

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Speaker 4: What's worse for risk acids though, a recession at this

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Speaker 4: point or stagflation.

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Speaker 3: Oh, stagflation by far that that is the worst case scenario.

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Speaker 5: You know.

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Speaker 3: One of the things that has been the underpinning markets

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Speaker 3: to this point is this idea that at some point

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Speaker 3: in the next six months eight months, is that the

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Speaker 3: FED is going to start cutting rates. There is a

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Speaker 3: lot of assumption out there that inflation is going to

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Speaker 3: keep coming down. That is the consensus forecast, and there's

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Speaker 3: very very little dispersion in those expectations. So inflation, if

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Speaker 3: it were to reignite and start moving up, that takes

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Speaker 3: away everything which is underpinning the market today.

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Speaker 4: So if we get this ECI print showing that employment

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Speaker 4: costs reaccelerated, which some people expect that to be at

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Speaker 4: the base case, what does that mean in terms of

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Speaker 4: exactly what you just said.

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Speaker 3: Right, That means that the Fed's job is not done.

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Speaker 3: You know, we I think are seeing that. Look, we're

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Speaker 3: getting towards the end of the tiding cycle. Everyone believes

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Speaker 3: that there's going to be a rate hik in May,

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Speaker 3: but almost no one is talking about beyond mey. The

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Speaker 3: other part that nobody's talking about is not only that

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Speaker 3: could they pause, but why couldn't they also return to

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Speaker 3: the market in September with the new rate hike if

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Speaker 3: things are not going as planned. You know, they have

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Speaker 3: said that they're very data dependent. They have said that

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Speaker 3: they need to watch and see what the impact of

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Speaker 3: feed tidening is going to be. And if you're not

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Speaker 3: seeing wage growth come down, then if actually you're seeing

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Speaker 3: inflation really plateau at the kind of a four and

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Speaker 3: a half percent level, what's to stop them from doing

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Speaker 3: a new rate hike? Now that I want to clarify

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Speaker 3: that is not our baseline expectations, but I would put

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Speaker 3: a fairly meaningful chance on that, probably more than what

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Speaker 3: the market is putting right now.

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Speaker 2: You're ever from London. Can you tell me so far

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Speaker 2: this week and the conversations you've had the kind of

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Speaker 2: differences that you're experiencing in the conversations here about the

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Speaker 2: US versus, say London about the US, Are they different

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Speaker 2: at all?

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Speaker 3: They are a little bit different in that no one

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Speaker 3: in the UK is talking about the debt limit, I mean.

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Speaker 3: And I find that for international investors generally they kind of, yeah,

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Speaker 3: we go through this every few years and it always

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Speaker 3: passes okay. And I find that in the US there

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Speaker 3: is definitely a lot more concern. Almost every single client

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Speaker 3: conversation I've had that has come up as.

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Speaker 2: A really significant Who's got it right?

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Speaker 3: Can I see international?

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Speaker 2: You think so?

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Speaker 3: I do. I think that the chances that the chances

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Speaker 3: of it devil are higher than they have been previously,

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Speaker 3: partly because its administration is so belligerent, and that volatility

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Speaker 3: is very disruptive when the market is already very, very

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Speaker 3: vulnerable to any kind of disruption. I shouldn't have said that.

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Speaker 3: I don't take it back, Okay, So that is what

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Speaker 3: is disruptive. But I do think that things will eventually

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Speaker 3: all get past. I'll be fine.

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Speaker 2: I'm not here to correct you either. This was wonderful.

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Speaker 2: Do you want to talk about US politics sometime in

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Speaker 2: the future? Next week, the week after that? We could

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Speaker 2: do a weekly segment, couldn't. We should always ask what

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Speaker 2: the people in London think about the situation over here,

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Speaker 2: but they have a very very different view on things.

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Speaker 6: That was fantastic.

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Speaker 4: It was like, can I say the truth? Okay, I

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Speaker 4: won't here, here's what I'm going to tell clients. It's okay.

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Speaker 2: That is interesting though, see that they seem to be

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Speaker 2: shaking off it. What do you think it is about

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Speaker 2: the US based investor and why they're so much more

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Speaker 2: obsessed with it here, and I wouldn't. Maybe I'm using

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Speaker 2: that word obsessed loosely. Why they're paying more attention to

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Speaker 2: it here? Is there good reason for it?

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Speaker 3: I think this is standard of investors. You look at

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Speaker 3: your own local market, and you're always more active by

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Speaker 3: your own market. That goes across the board. I'm probably

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Speaker 3: more nective about the UK than my US colleagues. The

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Speaker 3: same thing in the US, same thing in Hong Kong,

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Speaker 3: China every day.

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Speaker 1: Daniel from Iowa just emailed me, emailed in and said

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Speaker 1: President Biden is not.

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Speaker 3: Sorry.

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Speaker 1: Angel.

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Speaker 2: As a chairman of Principal, I appreciate it's snow email

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Speaker 2: on his screen. Don't worry about a shot of Principal

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Speaker 2: Asset Management joining us now is Phil Orlando, Chief Equity

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Speaker 2: Market Strategistic Federated Hermes for wonderful to catch up with you, sir.

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Speaker 2: I want to go back to the question. We started

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Speaker 2: this program with just how much momentum is in this

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Speaker 2: economy from Q one gun into Q two and looking

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Speaker 2: at through the rest of the year.

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Speaker 7: Not much that that. You look at the GDP print

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Speaker 7: yesterday at one point one percent, we were at one

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Speaker 7: three I think we were adding near low on the street,

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Speaker 7: so that was was a tough number. And regardless, our

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Speaker 7: view is that its first quarter of GDP is going

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Speaker 7: to be the high water mark for the year. We're

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Speaker 7: expecting negative GDP prints in the third and the fourth

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Speaker 7: quarter of this year. There are some folks that are

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Speaker 7: looking for negative prints the beginning of next year. So

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Speaker 7: our view is that economic momentum is going to be

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Speaker 7: downshifting here over the course of the next year or so.

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Speaker 1: Phil Landa, I want to talk about selling May and

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Speaker 1: go away. You have an arc of the market, an

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Speaker 1: arc of many Mays that were successful, in many Mays

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Speaker 1: and summers that were less than successful. What does the

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Speaker 1: character of selling May and go away this year?

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Speaker 7: I think it's sort of negative. That you've had a

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Speaker 7: very powerful six month rally that's taken the market up

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Speaker 7: about twenty percent here from the mid October lows last

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Speaker 7: year into the forty two hundred level we've seen here

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Speaker 7: just recently. As we look out over the next couple

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Speaker 7: of quarters, you've got inflation that's still sticky. Is about

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Speaker 7: how persistent, how hawkish that a reserve is going to

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Speaker 7: be earnings or decelerating questions about recession, questions about the

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Speaker 7: impact of banks tightening their lending standards, reduced in their

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Speaker 7: loan volumes. Then you've got the whole debt ceiling issue

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Speaker 7: that will probably, you know, come to fruition here in

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Speaker 7: the third quarter. So for all those reasons, our guess is,

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Speaker 7: you know, the market will probably grind lower over the

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Speaker 7: next six months.

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Speaker 1: Lisa then Ladler of ETRO this morning with an absolutely

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Speaker 1: brilliant many decade history of this cliche selling mayon go away.

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Speaker 1: His answer is it's valid, and he really speaks of

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Speaker 1: the mystery of the summer doldrums this year.

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Speaker 4: Well, I think everything's been a mystery. Frankly, twenty twenty

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Speaker 4: three could be chalked up as a full on mystery.

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Speaker 4: And one of the big mysteries is what playbook do

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Speaker 4: we whip out and Phil when you're talking about some

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Speaker 4: sort of downshifting in Q three and Q four. Is

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Speaker 4: this a recessionary playbook or is this a stagflationary playbook?

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Speaker 7: Our view is that we don't know. We're going to

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Speaker 7: be data dependent, but right now, the title of my

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Speaker 7: presentation for clients this year has been Recession Watched. For

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Speaker 7: twenty twenty three. We're watching the data as closely as anyone.

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Speaker 7: And again we've got negative GDP prints in the third

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Speaker 7: and the fourth quarter of this year. I've seen some

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Speaker 7: economists with negative GDP prints in the first half of

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Speaker 7: next year. So somewhere, you know, within those winter months,

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Speaker 7: we're going to be coming up to that razor's edge

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Speaker 7: of whether or not the economy slides over the edge

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Speaker 7: in or recession pill.

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Speaker 2: As you know, the market is not the economy, So

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Speaker 2: can you give me the market co equity leadership which

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Speaker 2: pockets of stocks you want to be in.

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Speaker 7: Well, if we're right that this twenty six month rally

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Speaker 7: here reverses over the course of the next six months,

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Speaker 7: but I think the answer to you know, we've got

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Speaker 7: the NFL draft going on. I think we want to

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Speaker 7: keep the defense on the field right now. So we

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Speaker 7: like cash, we like treasuries, and we like defensive equities

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Speaker 7: in stable demand categories. So large and small cap value

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Speaker 7: stocks and international stocks have low pees, low betas, high

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Speaker 7: dividend yields. So our mantra here is let's hunker down,

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Speaker 7: preserve some capital until we've got some clarity on some

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Speaker 7: of these issues we've just talked about over the next

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Speaker 7: couple of quarters.

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Speaker 2: I can't get it's a buy on the rally and

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Speaker 2: the home builders on the S and P five hundred fill.

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Speaker 7: The homebuilders have looked impressive here over the course of

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Speaker 7: the last couple of months. We've been in a housing

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Speaker 7: recession for the last seven or eight quarters. There's still

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Speaker 7: tremendous pent up demand and the home builders have done

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Speaker 7: better over the last couple of months. How sustainable is that.

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Speaker 7: If the economy goes into recession, we'll have to see.

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Speaker 7: But the homebuilders look attractive here.

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Speaker 2: No question, something's going to give. Just amazing Fidolanda federates it.

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Speaker 1: You know, we really haven't struggle here because the Yankees

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Speaker 1: are two games ahead of the Red Sox end of April.

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Speaker 1: You know, the season really doesn't start till July fourth,

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Speaker 1: but the Yankees are two games ahead of the Red Sox.

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Speaker 1: There's three teams out of the Yankees, which says it

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Speaker 1: all on the miserableness of Doug Cass and Tom Kane,

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Speaker 1: Paul Sweny and Tom Kane with us. Doug Cass of

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Speaker 1: Sea Breeze as well, and Doug you want to link

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Speaker 1: this into the markets right now, and I'm talking about

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Speaker 1: the hunch that George Steinbrenner had years ago to get

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Speaker 1: John Cashman's kid an intern job at the Yankees, which

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Speaker 1: turned into the New York Yankees general manager's decisions of

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Speaker 1: the X decade or so with Brian Cashman. That's worked out,

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Speaker 1: hasn't it.

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Speaker 5: Yeah? Sure, I don't know if you're aware of it

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Speaker 5: that I was very close with John Cashman. Brian's that

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Speaker 5: he was president of Castleton Farms, which is the leading

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Speaker 5: breader of harness racing up standard bred horses. I drove

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Speaker 5: bread and raised tarn sources. John was a gem real.

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Speaker 1: I mean, this is great, Doug.

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Speaker 5: But again, remember Tom and Paul. There is always a

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Speaker 5: baseball analog for the markets.

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Speaker 1: There is, But the baseball analog here is mister Steinbrenner's hunch.

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Speaker 1: What's the hunch out there now killing you and your

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Speaker 1: widely acclaimed caution on the market.

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Speaker 5: Well, I think that if you're if you're buying stocks

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Speaker 5: here with the S and P at forty one thirty five,

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Speaker 5: I recommend prayer. The bottom line is that we've moved

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Speaker 5: back this week into a net short position after being

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Speaker 5: cautiously optimistic and non consensus most of the year. We've

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Speaker 5: had a good and profitable last year. At Sea Breez,

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Speaker 5: we're having an excellent twenty twenty three and we're profitable

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Speaker 5: in April. But we think that the market risks are

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Speaker 5: multiplying and are non trivial. I also recommend prayer to

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Speaker 5: the New York fans, and I'll explain why, because I

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Speaker 5: see a very strong similarity between the S and P

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Speaker 5: index and the Enanke's starting lineup. Today's stock market is

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Speaker 5: non inclusive. By that, I mean it's top heavy. Tome.

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Speaker 5: I mentioned to you, and you quoted me yesterday on surveillance,

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Speaker 5: you take out the seventh largest large cap tech stocks

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Speaker 5: and the S and P into Wednesday's close was down

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Speaker 5: two percent and Nasdaq was flat. So to me, you know,

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Speaker 5: the Yankees can't win a pennant in the World Series

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Speaker 5: without Broder contributions from all the players, nor can the

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Speaker 5: S and P make much further progress with seven stocks

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Speaker 5: accounting for most of the game. So just look very quickly,

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Speaker 5: and I will make it quick. At the starting lineup.

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Speaker 5: The first half of the Yankees are great. The batting

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Speaker 5: order in the bottom is terrible. Look at the Machine

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Speaker 5: and Torres back to back belly to belly with home

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Speaker 5: runs last night. At the top of the Yank orders,

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Speaker 5: Yankee order, we got Volpi, who is as good as

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Speaker 5: Gogle Google. In the last seven years, he's batted over

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Speaker 5: four point fifty. Aaron Judge, of course is Meta, Rizzo

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Speaker 5: is Netflix, le Mayhew is Apple, and Toares is Navidia.

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Speaker 5: But at the bottom him half boy. It's a mess. Piazza.

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Speaker 5: He's first republic Bank Cabrera. He's batting like Horizon. I

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Speaker 5: caravan with. I'm sure so the markets leadership is marrying

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Speaker 5: and I can and I can't recall since the nifty

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Speaker 5: fifty period that ended in nineteen seventy four, such a

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Speaker 5: divergent divergence, and importantly, from a longer term standpoint, I

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Speaker 5: see the next several years as very similar to the

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Speaker 5: years following the bust of the nifty fifty in nineteen

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Speaker 5: seventy four.

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Speaker 1: This is so important, Paul, Paul, I want you to

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Speaker 1: jump in and his Doug and I can blyther way forever.

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Speaker 1: But the nifty fifty of my ute is stunning.

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Speaker 5: Yep, absolutely, Hey, Paul, Yes, you know, I invocus Kooperman.

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Speaker 5: Does I see seven years ahead to invoke Joseph in

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Speaker 5: the Bible, in the Book of Genesis, just as we

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Speaker 5: did following that collapse in the nifty that I guys read.

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Speaker 5: Did you guys read the coach interview in the Financial

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Speaker 5: Times this week? Did not stand the man, and I

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Speaker 5: don't mean stam Usual, Dan Druck and Miller. He's also

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Speaker 5: looking for ten lean years. So I'm in good company.

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Speaker 1: This guy saw like Red Sox fans, Paul Save.

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Speaker 6: We haven't got the O's plane six eighty baseball here. Hey, Doug,

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Speaker 6: Should I be worrying about this whole real estate thing

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Speaker 6: out there? I mean, you walk through midtown Manhattan and

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Speaker 6: the buildings are just empty. Nobody comes in on Mondays

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Speaker 6: or Fridays. That's a problem in and of itself for

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Speaker 6: all the local retaillers. But how about the banks owning

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Speaker 6: all this mortgage debt?

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Speaker 5: Yeah, I think it's from a fundamental standpoint, the situation

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Speaker 5: is certainly suboptimal. The Federal Reserve faces the trilemma the talent,

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Speaker 5: the challenge of simultaneously reducing inflation, minimizing the economic growth

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Speaker 5: and jobs, and maintaining the stability of the financial system.

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Speaker 5: We have stubborn inflation, declining global economic growth, and we're

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Speaker 5: doing nothing to improve supply demand situations for commodities, especially oil.

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Speaker 5: There is this, getting back to what you asked me,

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Speaker 5: there's an unprecedented maturity wall in which a commercial real

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Speaker 5: estate eight has almost one point five trillion dollars resetting.

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Speaker 5: Corporate lending, consumer loans, mortgages will all be resetting at

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Speaker 5: much higher rates. If capital is available at all, and

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Speaker 5: I sit on a number of public boards, I see

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Speaker 5: firsthand the reset in the cost of capital. So I

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Speaker 5: don't think current valuations are consistent with a five percent

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Speaker 5: benchmark interest rate, and they may even be too high

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Speaker 5: for zerp QE in that world that many, including the

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Speaker 5: interest rate futures market, is suggesting, but no longer exists.

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Speaker 1: Paul Sweeney brings us up, folks, because he knows the

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Speaker 1: Dougcast wheelhouse. And I'm going to say this right now,

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Speaker 1: because Cass is a pinata out on Twitter. If he

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Speaker 1: shortens stock goes up an eighth of a point, he

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Speaker 1: gets handled. But the answer, your folks is Doug Cast

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Speaker 1: back to Kidder Peabody a few years back. Actually you

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Speaker 1: read his bank research, it was there was an acuity

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Speaker 1: to it that was really quite something. Doug on First

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Speaker 1: Republic I've dated, and I got to be very careful folks,

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Speaker 1: because I don't editorialize. It was a marketing scheme wrapped

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Speaker 1: around a bank. You're a bank analyst. Should the government

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Speaker 1: institutions come in, Dougcass to do an FRC workout?

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Speaker 5: You know, I remember meeting Harry Keith who formed Keith,

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Speaker 5: Briett and Woods with Norbert Woods and Ing Briette and

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Speaker 5: then Tomas show to ultimately a good devel of mind

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Speaker 5: took over.

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Speaker 1: Under great courage under the crisis of DNA seven.

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Speaker 5: And Harry Keith once said, bank stocks trade always trade

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Speaker 5: between hatred and apathy. That basically describes what's going on. Look.

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Speaker 5: First Republic's management committed its own set of errors. That

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Speaker 5: bank became a very aggressive mortgage lender to the wealthy,

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Speaker 5: leaving it with many below market mortgages as its funding

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Speaker 5: costs rows dramatically. Someone in charge should have seen that,

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Speaker 5: just as someone running Silicon Valley Bank should have known

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Speaker 5: that interst rates would rise and destroy the value of

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Speaker 5: the portfolio. But every time there's a financial crisis, we're

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Speaker 5: reminded that bankers are among the least sophisticated economic actors

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Speaker 5: in the financial ecosystem, They invariably turn out to be

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Speaker 5: the last to know what's going on and what's like

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Speaker 5: unlikely to happen in the future. Perhaps the reason for

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Speaker 5: this is being a banker is incompatible with questioning consensus

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Speaker 5: thinking we got time.

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Speaker 1: I got just time for one question, Doug, because John

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Speaker 1: Tucker walked in and he needs a space as well,

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Speaker 1: Doug Cast, not your single best buy? What's your single

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Speaker 1: best short right now?

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Speaker 5: Wow, that's a tough call. I'm gonna say my single

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Speaker 5: best short right now are the triple Cubes?

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Speaker 1: That cubes? Yeah? Yeah, okay, Doug, we got to leave

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Speaker 1: it there. Thank you so much and great, you know,

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Speaker 1: I really you know the Yankees are two red, Sox

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Speaker 1: are two back.

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Speaker 6: Yeah, I mean the razorre twenty one five who plays

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Speaker 6: eight hundred baseball? You know, And is anybody watching it

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Speaker 6: in Tampa?

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Speaker 1: That's well, that would be Dougcast. Thank you, Thank you

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Speaker 1: so much for joining us to Seabury see him out

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Speaker 1: Seab's partners and actually running real money down there. I

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Speaker 1: should point out as well. We're going to get right

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Speaker 1: to it right now because this conversation is two to two important.

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Speaker 1: Lisa Bramwinson. Tom came mister Farrell waiting with doctor Olarian

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Speaker 1: for the next hour's festivities and with us. And this

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Speaker 1: is really important. As Robert Silentek, he's president, chief executive

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Speaker 1: officer at c b R. Who is CBRE. What you

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Speaker 1: need to know is if you're a computer guy out

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Speaker 1: of Ames, Iowa, and you get a job in Texas

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Speaker 1: and real estate over a number of years, maybe it

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Speaker 1: prepares you for the great financial crisis of two thousand

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Speaker 1: and seven, two thousand and nine. Bob Silantik has been

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Speaker 1: on the watch at CBR three CBRE, I should say,

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Speaker 1: through now not one, but two crises. And he joins

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Speaker 1: us in our studios this morning. Thank you, thank you

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Speaker 1: so much for joining Bloomberg at Thanks counting. Good to

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Speaker 1: be you, more than anybody I know, push against a

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Speaker 1: stereotype of real estate investment trusts. O MG, we're all

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Speaker 1: going to die the stocks of creator. Your stock is down,

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Speaker 1: but you've got a twelve percent total return over the

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Speaker 1: last twelve years. CBI is the outlier. What is your

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Speaker 1: best practice removed from the volatility train wreck of REITs?

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Speaker 8: The best practice in the regard you're talking about, Tom,

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Speaker 8: is that we are very diversified. We're a diverse fight

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Speaker 8: across asset type, diverse fight across service type, diverse fight

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Speaker 8: across geography, and diverse fight across client type. And we're

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Speaker 8: very substantial across all four of those dimensions. So as

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Speaker 8: things EBB and flow, as secular trends emerge, we can

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Speaker 8: push resources into the areas that are favored, as we've

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Speaker 8: done over the last few years by pushing resources into

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Speaker 8: multifamily and pushing resources into warehouses, and pushing resources and

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Speaker 8: outsourcing and project management, and that's worked very well.

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Speaker 1: For bloom Is leading the academics on work from Home

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Speaker 1: out at Stanford. It's you know, we all know it's

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Speaker 1: sort of Graham and life changing and all that. That

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Speaker 1: part of CBRE that is in the cliche of midtown

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Speaker 1: Manhattan sea to Shining Sea that's empty. Is that going

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Speaker 1: to continue? Is this legitimate emptiness that we see now.

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Speaker 8: It's a legitimate backing off of the amount of office

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Speaker 8: space that'll be used. But there's some important trends that

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Speaker 8: are contrary to that. So, for instance, companies in general,

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Speaker 8: and certainly here in New York, there's some famous examples

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Speaker 8: here in New York of leaders that want to get

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Speaker 8: their people back in. Well, the way you get your

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Speaker 8: people back into the office is you create great environments

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Speaker 8: in that office space. And so what you see across

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Speaker 8: New York for the past several quarters, even though office

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Speaker 8: leasing is down, and in the first quarter it was

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Speaker 8: down by about a third year over year, we are

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Speaker 8: running ahead of pre pandemic levels as it relates to

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Speaker 8: high priced office leases, because people want to be in

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Speaker 8: those best buildings.

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Speaker 1: I got a brilliant CBI. He takes over the Lincoln Tunnel.

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Speaker 4: That'll fix Well, yes, perhaps we'll have a fancy Lincoln Tunnel.

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Speaker 4: This is the issue. Though you have dead office space

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Speaker 4: that isn't retrograde, that isn't retrofitted for the sort of

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Speaker 4: fancy experience. What happens to that? Are there just basically

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Speaker 4: no man lands of old office space that no one wants.

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Speaker 8: Well, Lisa, we'd love to have an answer for everything,

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Speaker 8: but we don't. And one of the quandaries we're faced

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Speaker 8: was as an industry is there are going to be

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Speaker 8: some antiquated office buildings and it hasn't been figured out yet.

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Speaker 8: What's going to happen? You know, there's a lot of

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Speaker 8: talk about can you convert them to multifamily residential. Some

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Speaker 8: of you can't, some of them you can. Ironically, the

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Speaker 8: ones that are most able to do that are the older,

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Speaker 8: smaller floor plate buildings, some of the ones that were

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Speaker 8: built in the seventies and eighties, with the very large

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Speaker 8: floor plates and a small amount of elevators relative to

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Speaker 8: the floor plates, etc. It's just not practical to convert

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Speaker 8: them into residential. So we'll have to see what happens.

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Speaker 4: There's a larger question here, especially as we're on the

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Speaker 4: precipice of some change in the economic cycle. We don't

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Speaker 4: know when, we don't know what. But it seems as

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Speaker 4: though there has to be a right sizing with housing

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Speaker 4: prices that have remained resilient and rents that have come

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Speaker 4: down with an economy that is stagnating in certain areas,

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Speaker 4: and even with commercial rents staying relatively elevated, which is

433
00:22:23,440 --> 00:22:25,480
Speaker 4: going to give our valuation is going to fall more

434
00:22:25,480 --> 00:22:28,720
Speaker 4: in the property or our rent's going to fall.

435
00:22:29,280 --> 00:22:32,600
Speaker 8: I don't think you're going to see you're talking multifamily

436
00:22:32,640 --> 00:22:34,879
Speaker 8: resident that yet. Yeah, I don't think rents are going

437
00:22:34,920 --> 00:22:37,480
Speaker 8: to fall a lot and multifamily residential. And the simple

438
00:22:37,520 --> 00:22:41,600
Speaker 8: reason for it is even though you have interest rate issues, etc.

439
00:22:42,080 --> 00:22:45,560
Speaker 8: Demand supply is still very real in that product type,

440
00:22:45,600 --> 00:22:47,359
Speaker 8: like it is in most product types. And the fact

441
00:22:47,400 --> 00:22:50,720
Speaker 8: matter is you still have slightly less than average historical

442
00:22:50,800 --> 00:22:56,359
Speaker 8: vacancy rates in multifamily residential and those high interest rates

443
00:22:56,359 --> 00:22:59,800
Speaker 8: are causing single family homes to be more expensive, which

444
00:22:59,840 --> 00:23:04,040
Speaker 8: is pushing people into multifamily rental properties. So I don't

445
00:23:04,040 --> 00:23:05,680
Speaker 8: think you're going to see a big decline in rental

446
00:23:05,760 --> 00:23:06,280
Speaker 8: rates at all.

447
00:23:06,320 --> 00:23:08,399
Speaker 1: I got eight ways to go here. I could go

448
00:23:08,440 --> 00:23:11,840
Speaker 1: to Miami, I could go to Europe, and you know,

449
00:23:11,960 --> 00:23:14,520
Speaker 1: talk about what you're doing in Los Angeles or frankly

450
00:23:14,560 --> 00:23:17,320
Speaker 1: boom southern economies where everybody from New York's moving to,

451
00:23:17,400 --> 00:23:20,560
Speaker 1: including your Texas as well. Forget about it. Let's go

452
00:23:20,600 --> 00:23:23,600
Speaker 1: to the Pacific Rim in China. C b R E

453
00:23:23,800 --> 00:23:27,320
Speaker 1: has a prism on Asia, like no one do you

454
00:23:27,440 --> 00:23:30,320
Speaker 1: buy the idea that the West can continue to work

455
00:23:30,320 --> 00:23:34,439
Speaker 1: with China and they'll see stability in their property market,

456
00:23:34,680 --> 00:23:36,840
Speaker 1: which is the mother of all volatile markets.

457
00:23:37,520 --> 00:23:40,720
Speaker 8: Well, I was. I was in Asia in Hong Kong

458
00:23:41,000 --> 00:23:45,440
Speaker 8: about three weeks ago, and like so many things tom

459
00:23:45,640 --> 00:23:49,880
Speaker 8: the news, the sensationalism around the political challenge.

460
00:23:49,680 --> 00:23:50,359
Speaker 1: What's the reality.

461
00:23:50,359 --> 00:23:52,800
Speaker 8: The reality there is that we're doing a lot of

462
00:23:52,800 --> 00:23:55,440
Speaker 8: business in China, and our business in China is growing,

463
00:23:55,800 --> 00:23:57,960
Speaker 8: and there's a lot of business being done between the

464
00:23:58,119 --> 00:23:59,960
Speaker 8: US and China and a lot of effort to get

465
00:24:00,160 --> 00:24:04,119
Speaker 8: US companies in there. There is political risk, for sure,

466
00:24:03,640 --> 00:24:08,480
Speaker 8: but those are the largest cities in the world, or

467
00:24:08,520 --> 00:24:10,560
Speaker 8: some of the largest cities in the world. And one

468
00:24:10,600 --> 00:24:12,800
Speaker 8: of the things that's happening as it relates to commercial

469
00:24:12,800 --> 00:24:16,880
Speaker 8: real estate is intermediation, which we've had here in Western

470
00:24:16,920 --> 00:24:19,879
Speaker 8: Europe and in parts of Asia forever but not so

471
00:24:20,080 --> 00:24:23,360
Speaker 8: much in China, is becoming more and more prominent there.

472
00:24:23,400 --> 00:24:27,159
Speaker 8: So we expect to grow our business substantially before we.

473
00:24:27,200 --> 00:24:29,359
Speaker 4: Let you go, and unfortunately it is too short. I

474
00:24:29,400 --> 00:24:31,080
Speaker 4: do want to just get your view on what the

475
00:24:31,119 --> 00:24:33,320
Speaker 4: pricing impact is going to be of some of these

476
00:24:33,359 --> 00:24:36,320
Speaker 4: regional banks with pretty big portfolios of loans that wreck

477
00:24:36,480 --> 00:24:40,520
Speaker 4: that back commercial real estate. What is the likelihood of

478
00:24:40,600 --> 00:24:43,000
Speaker 4: some forced sales that really bring down prices?

479
00:24:43,000 --> 00:24:47,080
Speaker 8: And in your term, there's going to be some forced sales, Lisa,

480
00:24:47,119 --> 00:24:51,800
Speaker 8: But here's something that just gets missed. If you look

481
00:24:51,840 --> 00:24:57,600
Speaker 8: at commercial banks assets across the United States, less than

482
00:24:57,680 --> 00:25:00,919
Speaker 8: one and a half percent is in office buildings in

483
00:25:01,040 --> 00:25:04,239
Speaker 8: office building loans, So yeah, there could be there is

484
00:25:04,280 --> 00:25:07,480
Speaker 8: some pressure now with less capital available, less debta available

485
00:25:07,520 --> 00:25:11,040
Speaker 8: from commercial banks for office building that's being backfilled by

486
00:25:11,119 --> 00:25:16,600
Speaker 8: other sources of capital, private sources of capital, debt funds,

487
00:25:16,640 --> 00:25:22,120
Speaker 8: et cetera. The gsees there is going to be down pressure.

488
00:25:22,160 --> 00:25:24,200
Speaker 8: There is going to be some trouble as it relates

489
00:25:24,359 --> 00:25:28,359
Speaker 8: to the regional banks, but it is certainly not huge

490
00:25:28,359 --> 00:25:30,760
Speaker 8: in a way that would be ruinous for the commercial

491
00:25:30,760 --> 00:25:31,520
Speaker 8: bank industry.

492
00:25:31,640 --> 00:25:34,399
Speaker 4: What about other sectors within the real estate? Are there

493
00:25:34,440 --> 00:25:36,800
Speaker 4: other areas that are more exposed based in the concentration

494
00:25:36,840 --> 00:25:37,560
Speaker 4: of these banks.

495
00:25:37,760 --> 00:25:39,879
Speaker 8: Fundamentals are really good in other areas. And when I

496
00:25:39,920 --> 00:25:42,679
Speaker 8: talk about fundamentals, occupancy rates and rental rates. So just

497
00:25:42,720 --> 00:25:46,040
Speaker 8: to give you a few industrial three and a half

498
00:25:46,080 --> 00:25:50,719
Speaker 8: percent vacant, institutional quality, multifamily less than five percent vacant,

499
00:25:51,080 --> 00:25:54,280
Speaker 8: retail rents around their way up around the US. Hotels

500
00:25:54,359 --> 00:25:57,680
Speaker 8: doing very well. So the fundamentals and things other than

501
00:25:57,720 --> 00:26:00,160
Speaker 8: office are actually quite good right now. I'm sure both

502
00:26:00,160 --> 00:26:02,720
Speaker 8: of you had experiences trying to get into restaurants lately.

503
00:26:02,760 --> 00:26:05,760
Speaker 1: I mean, oh no, it's I don't have a life.

504
00:26:05,800 --> 00:26:07,760
Speaker 1: Lisa has a life, Pharaoh has a life. I don't

505
00:26:07,800 --> 00:26:08,240
Speaker 1: have a life.

506
00:26:08,280 --> 00:26:13,680
Speaker 8: So again, headlines are partially accurate, and it's totally accurate,

507
00:26:13,800 --> 00:26:15,520
Speaker 8: but not you really silentic.

508
00:26:15,640 --> 00:26:17,960
Speaker 1: Just he just shows up at any restaurant across the

509
00:26:18,000 --> 00:26:23,200
Speaker 1: country and Bob, please, did you get the check? Pop

510
00:26:23,280 --> 00:26:24,080
Speaker 1: silentic as.

511
00:26:23,920 --> 00:26:26,520
Speaker 8: Long as it's fast food, Pops silentic.

512
00:26:26,600 --> 00:26:28,520
Speaker 1: Thank you so much. With C B r E a

513
00:26:28,600 --> 00:26:41,720
Speaker 1: real estate update. If you live a study of disruption,

514
00:26:41,840 --> 00:26:44,159
Speaker 1: which many do, you do it at Babson College, and

515
00:26:44,200 --> 00:26:46,960
Speaker 1: that is the land of the great late hugely missed

516
00:26:46,960 --> 00:26:50,280
Speaker 1: Clay Christiansen. You're in Timmer joins us of Babson of

517
00:26:50,320 --> 00:26:54,240
Speaker 1: Wellesley in a fidelity of Boston this morning with exquisite

518
00:26:54,320 --> 00:26:57,159
Speaker 1: technical analysis on where we are. I'm just going to

519
00:26:57,240 --> 00:27:00,600
Speaker 1: cut to the chase within your first five charts for FCO.

520
00:27:01,359 --> 00:27:04,280
Speaker 1: You say we've been in a ten months no man land.

521
00:27:04,840 --> 00:27:09,080
Speaker 1: When do we know we're escaping up or down? Are

522
00:27:09,200 --> 00:27:10,920
Speaker 1: ten months no Man's land?

523
00:27:11,359 --> 00:27:13,520
Speaker 9: Yeah? So we all know how the cycle began, and

524
00:27:13,560 --> 00:27:15,680
Speaker 9: we all want to know how the cycle will end

525
00:27:16,119 --> 00:27:18,720
Speaker 9: and will it end? With the Fed, you know, raising

526
00:27:18,760 --> 00:27:22,000
Speaker 9: rates one more time next week and then pausing, which

527
00:27:22,040 --> 00:27:24,679
Speaker 9: I do think is a likely scenario, because we know

528
00:27:24,760 --> 00:27:28,440
Speaker 9: from history that the FED raises rates to more or

529
00:27:28,520 --> 00:27:31,880
Speaker 9: less add or above the inflation rate, the trailing inflation rate,

530
00:27:31,920 --> 00:27:34,639
Speaker 9: and so the core pcees at four to six, presumably

531
00:27:34,640 --> 00:27:37,119
Speaker 9: on its way down, and the FED is now near five,

532
00:27:37,640 --> 00:27:40,120
Speaker 9: and of course the tips break evens are somewhere two

533
00:27:40,160 --> 00:27:43,000
Speaker 9: to two and a half. So on that, by that measure,

534
00:27:43,080 --> 00:27:46,120
Speaker 9: the FED is well above the neutral rate, if you will,

535
00:27:46,920 --> 00:27:49,639
Speaker 9: So I think for the FED it's mostly a question

536
00:27:49,720 --> 00:27:52,080
Speaker 9: of how quickly do they go back to neutral, which

537
00:27:52,119 --> 00:27:54,800
Speaker 9: will be around three percent, and my guess is not

538
00:27:54,800 --> 00:27:57,840
Speaker 9: not very And then the other question is about the

539
00:27:57,880 --> 00:28:01,840
Speaker 9: earnings front. Right, so the market is price in a

540
00:28:02,080 --> 00:28:08,760
Speaker 9: modest contraction earning. So there's your modest mild recession, you know, scenario,

541
00:28:08,840 --> 00:28:11,359
Speaker 9: which I do think is likely second half of the year.

542
00:28:11,720 --> 00:28:14,200
Speaker 9: But the market's very capable of looking through that, of course,

543
00:28:14,600 --> 00:28:17,760
Speaker 9: as it as it always does, and so on that.

544
00:28:17,920 --> 00:28:21,520
Speaker 9: On that, by that measure, you know, we could see

545
00:28:21,880 --> 00:28:24,480
Speaker 9: a forty percent expansion in the multiple at some point,

546
00:28:24,560 --> 00:28:27,920
Speaker 9: and the expansion at the bottom in October was fifteen

547
00:28:28,320 --> 00:28:30,720
Speaker 9: and so that gets you to twenty one times next

548
00:28:30,760 --> 00:28:33,680
Speaker 9: year's earnings of two twenty five two thirty gets you

549
00:28:33,760 --> 00:28:36,199
Speaker 9: back to the new high. So that's the half the

550
00:28:36,200 --> 00:28:40,120
Speaker 9: glass half full scenario where the market deals with the

551
00:28:40,160 --> 00:28:43,960
Speaker 9: FED deals with a modest slowdown or contraction in earnings

552
00:28:44,280 --> 00:28:47,280
Speaker 9: and then a recovery. And obviously the big question is

553
00:28:47,960 --> 00:28:50,360
Speaker 9: how good are those earnings forecast? We know that the

554
00:28:50,440 --> 00:28:53,840
Speaker 9: consensus numbers tend to be optimistic, and so far the

555
00:28:53,920 --> 00:28:58,280
Speaker 9: numbers for this quarter have been okay. But that that

556
00:28:58,360 --> 00:29:01,040
Speaker 9: becomes really the main question. But if you look at

557
00:29:01,040 --> 00:29:03,760
Speaker 9: the internals, right, the S and P five hundred equal

558
00:29:03,760 --> 00:29:07,880
Speaker 9: weighted index has gone nowhere in ten months. The small

559
00:29:07,920 --> 00:29:11,360
Speaker 9: caps are at the lows, microcaps are at new lows,

560
00:29:11,720 --> 00:29:15,479
Speaker 9: but the megacaps are at recovery highs. And so the

561
00:29:15,520 --> 00:29:18,160
Speaker 9: market has been all over the place. And this, you know,

562
00:29:18,320 --> 00:29:21,160
Speaker 9: these trading range is now ten months old, and back

563
00:29:21,200 --> 00:29:25,200
Speaker 9: in twenty fifteen it was from August fourteen to February sixteen,

564
00:29:25,680 --> 00:29:28,360
Speaker 9: ninety four was a trading range. So if a trading

565
00:29:28,440 --> 00:29:31,400
Speaker 9: range is all we're going to get, you know, after

566
00:29:31,640 --> 00:29:34,320
Speaker 9: all of this craziness of the last three years, you know,

567
00:29:34,400 --> 00:29:37,920
Speaker 9: little bubbles because of financial repression, and then a massive

568
00:29:38,000 --> 00:29:40,400
Speaker 9: rate reset, then I'll take that as a win. But

569
00:29:40,600 --> 00:29:42,760
Speaker 9: the earnings need to you know, the market can look

570
00:29:42,760 --> 00:29:45,200
Speaker 9: past in earnings valley, but it can't look past in

571
00:29:45,280 --> 00:29:47,560
Speaker 9: earnings abyss. And so that really is what it comes

572
00:29:47,560 --> 00:29:47,840
Speaker 9: down to.

573
00:29:47,880 --> 00:29:51,840
Speaker 2: Its lost decades are unusual. We've seen them through history

574
00:29:51,880 --> 00:29:54,719
Speaker 2: and recent history as well. Look to Japan as an

575
00:29:54,760 --> 00:29:58,000
Speaker 2: example of that and other areas as well. European banks

576
00:29:58,360 --> 00:30:01,520
Speaker 2: for much of ten years, that's basically nothing. When you

577
00:30:01,560 --> 00:30:04,520
Speaker 2: look at the US equity market after what many people

578
00:30:04,600 --> 00:30:07,760
Speaker 2: consider to be abubble, that's burst, do you see the

579
00:30:07,800 --> 00:30:10,680
Speaker 2: potential for a lost decade in equity market returns to

580
00:30:10,720 --> 00:30:12,080
Speaker 2: the index level in this country?

581
00:30:12,840 --> 00:30:14,800
Speaker 9: Well, we had one, of course in the two thousands,

582
00:30:14,840 --> 00:30:18,720
Speaker 9: the seventies, the thirties and forties. You know, I call

583
00:30:18,760 --> 00:30:21,840
Speaker 9: them secular bear markets. And secular ball markets tend to

584
00:30:21,920 --> 00:30:25,320
Speaker 9: last about eighteen years produce about an eighteen percent rate

585
00:30:25,360 --> 00:30:28,200
Speaker 9: of growth. And secular bear markets tend to last about

586
00:30:28,240 --> 00:30:31,840
Speaker 9: fourteen years and produce basically zero growth or negative real growth.

587
00:30:32,200 --> 00:30:34,560
Speaker 9: And so one of the big questions is is has

588
00:30:34,600 --> 00:30:37,880
Speaker 9: a secular ball market that I think started in nine

589
00:30:38,160 --> 00:30:41,960
Speaker 9: has it ended and it would be a shorter than

590
00:30:42,320 --> 00:30:45,240
Speaker 9: usual one, although the one from nineteen twenty one to

591
00:30:45,320 --> 00:30:49,120
Speaker 9: twenty nine was very short and extremely powerful. So when

592
00:30:49,120 --> 00:30:51,720
Speaker 9: you look at valuations and you look at you know,

593
00:30:51,760 --> 00:30:54,880
Speaker 9: the new inflation regime, assuming for a moment that it's

594
00:30:54,920 --> 00:30:58,640
Speaker 9: going to be above the FED target zone, and you

595
00:30:58,680 --> 00:31:03,520
Speaker 9: look at interest rates possibly having made secular lows, that

596
00:31:03,560 --> 00:31:07,640
Speaker 9: would argue for a more modest valuation regime, which would

597
00:31:07,680 --> 00:31:10,840
Speaker 9: go in line with kind of a secular bear market.

598
00:31:10,640 --> 00:31:15,120
Speaker 9: But you know, to call it another last decade, I'm

599
00:31:15,160 --> 00:31:17,960
Speaker 9: not prepared to go there yet. A lot of that

600
00:31:18,000 --> 00:31:21,880
Speaker 9: does come down to financial engineering, and you know, converting

601
00:31:21,920 --> 00:31:25,920
Speaker 9: earnings into share buybacks, and that's been an extremely powerful

602
00:31:25,960 --> 00:31:28,440
Speaker 9: engine as well as M and A. Right, if you

603
00:31:28,480 --> 00:31:31,080
Speaker 9: go back to the end of the financial crisis and

604
00:31:31,120 --> 00:31:34,760
Speaker 9: you look at the supply and demand of shares by

605
00:31:34,960 --> 00:31:38,880
Speaker 9: corporates themselves, IPOs and secondaries about two and a half

606
00:31:38,880 --> 00:31:42,400
Speaker 9: trillion of supply, m and A and buybacks, which is

607
00:31:42,400 --> 00:31:47,719
Speaker 9: a retirement of shares from corporates about eight times as high.

608
00:31:47,880 --> 00:31:51,000
Speaker 9: So it's been a massive imbalance of the supply of

609
00:31:51,040 --> 00:31:54,240
Speaker 9: shares and the demand for shares, not even counting end investors,

610
00:31:54,320 --> 00:31:57,800
Speaker 9: it's just the corporates. So if that if that engine

611
00:31:57,920 --> 00:32:01,000
Speaker 9: keeps going, then I think the bull market stays alive.

612
00:32:01,120 --> 00:32:05,320
Speaker 9: But if a higher rate or a tighter fed regime

613
00:32:05,600 --> 00:32:07,959
Speaker 9: kind of you know, slows down that train, then I

614
00:32:07,960 --> 00:32:10,480
Speaker 9: think there's there there's reason to think that it could

615
00:32:10,480 --> 00:32:11,080
Speaker 9: be otherwise.

616
00:32:11,160 --> 00:32:14,160
Speaker 4: Just quickly, is a sixty forty portfolio going to work

617
00:32:14,360 --> 00:32:17,680
Speaker 4: in a higher inflation environment with slower growth?

618
00:32:18,240 --> 00:32:20,479
Speaker 9: So I've looked at this going back one hundred and

619
00:32:20,480 --> 00:32:25,360
Speaker 9: fifty years, and when the inflation rate trends or is

620
00:32:25,880 --> 00:32:29,640
Speaker 9: sustained above the historical average, which is three percent, then

621
00:32:29,680 --> 00:32:33,120
Speaker 9: the sixty forty doesn't work. The forty does not is

622
00:32:33,200 --> 00:32:37,360
Speaker 9: then positively correlated to the sixty. So the question is,

623
00:32:37,400 --> 00:32:39,840
Speaker 9: you know, we were at about a two percent regime.

624
00:32:39,880 --> 00:32:41,440
Speaker 9: We're now at about two and a half if you

625
00:32:41,440 --> 00:32:44,320
Speaker 9: look on a ten year rate of change basis. So

626
00:32:44,400 --> 00:32:47,880
Speaker 9: it really comes down to whether the inflation situation remains

627
00:32:48,040 --> 00:32:52,720
Speaker 9: structural or transitory. And it's interesting I just did a

628
00:32:52,760 --> 00:32:56,160
Speaker 9: deep dive on the nineteen forties. I read the History

629
00:32:56,200 --> 00:32:58,880
Speaker 9: of the Federal Reserve by Ellen Meltzer, and you know,

630
00:32:58,920 --> 00:33:01,640
Speaker 9: they had twenty percent inflation in forty six and forty

631
00:33:01,680 --> 00:33:04,920
Speaker 9: seven when the price controls were lifted and at the

632
00:33:04,960 --> 00:33:08,720
Speaker 9: same time the monetary growth started to reverse, and so

633
00:33:08,840 --> 00:33:11,600
Speaker 9: it really was transitory back then. And you know the

634
00:33:11,680 --> 00:33:14,200
Speaker 9: kind of the post COVID pent up demand versus the

635
00:33:14,240 --> 00:33:17,520
Speaker 9: post war there are some similarities, there's some similarities.

636
00:33:17,640 --> 00:33:20,480
Speaker 1: And then we got to deflation, Eisenhower's true deflation of

637
00:33:20,560 --> 00:33:23,000
Speaker 1: fifty two to fifty three and then John that gets

638
00:33:23,000 --> 00:33:25,760
Speaker 1: you to two to three percent interest rates. Right now,

639
00:33:25,760 --> 00:33:28,520
Speaker 1: do you predict a follow on disinflation deflation?

640
00:33:29,000 --> 00:33:31,200
Speaker 9: Well, I mean the monetary base or the money supply

641
00:33:31,320 --> 00:33:34,320
Speaker 9: numbers are have rolled over, which is what they did

642
00:33:34,320 --> 00:33:37,240
Speaker 9: in the second half of the forties after obviously expanding,

643
00:33:37,320 --> 00:33:40,400
Speaker 9: you know, rapidly from forty two to forty six, and

644
00:33:40,440 --> 00:33:42,560
Speaker 9: then once the price controls were lifted, you had a

645
00:33:42,600 --> 00:33:46,719
Speaker 9: one time price shock. And so hopefully this was a

646
00:33:46,720 --> 00:33:49,600
Speaker 9: one time price shock, and if so, then the inflation

647
00:33:49,760 --> 00:33:53,000
Speaker 9: averages go back to kind of the historical average and

648
00:33:53,040 --> 00:33:55,560
Speaker 9: then sixty forty continues to work and you know, the

649
00:33:55,560 --> 00:33:58,320
Speaker 9: forty this year is sort of doing what it's supposed

650
00:33:58,360 --> 00:33:59,520
Speaker 9: to be doing.

651
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Speaker 2: So this was a clinic. King, you're in thank you,

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Speaker 2: it's going to see you in New York too. You're

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Speaker 2: in some of that Fidelity Investment.

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