Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Farrell and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best an economics, geopolitics, finance and investment.
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Speaker 2: Join us now. See Michelle chief flowed with Strategus, the
Speaker 2: principal wishing she never woke up early this morning. See
Speaker 2: you a good morning, Good morning.
Speaker 1: It's great to be.
Speaker 2: Great to have you with us. This recession chat. What
Speaker 2: underpins it? Where's it come from? I think a lot
Speaker 2: of people might look at this situation and say, well, yes,
Speaker 2: inflation's a problem, but I'm looking at unemployment three point
Speaker 2: five percent. Claims have ticked a little bit high, but
Speaker 2: they've come back in again. Where's the recession chat come from?
Speaker 2: Apart from maybe with you.
Speaker 3: One, well, so we are do you one? I think
Speaker 3: the problem is that we've been talking about recession for
Speaker 3: ages and ages and ages, and as you said, people
Speaker 3: are getting a little bit tired of the discussions. But
Speaker 3: if you look around the economy today, it looks fairly strong.
Speaker 3: Yes there's a soft snow like slow down happening, but
Speaker 3: generally speaking, things look okay. And I think the main
Speaker 3: reason is that the labor market is underpinning everything. But
Speaker 3: if I put my economists hat on, labor market is
Speaker 3: typically the last one to fall. It is the most
Speaker 3: lagging indicator here, but it's also the most important, so
Speaker 3: we can be watching. You know, the lending survey is
Speaker 3: going to be really important. There is a very very
Speaker 3: close correlation between lending data and employment, so as you
Speaker 3: see a lending contract, you should see job losses increase.
Speaker 3: So we are expecting recession late this year and over.
Speaker 3: It keeps being pushed out, but it does look very
Speaker 3: very likely. Given the amount of FED timing you've seen.
Speaker 4: Todate, markets are almost hoping for this recession. Bring it forward,
Speaker 4: let's get it over with, and then we can start
Speaker 4: with the next cycle. And it seems like that impatience
Speaker 4: has been embedded in all of the bearishness that we've felt.
Speaker 4: What's worse for risk acids though, a recession at this
Speaker 4: point or stagflation.
Speaker 3: Oh, stagflation by far that that is the worst case scenario.
Speaker 5: You know.
Speaker 3: One of the things that has been the underpinning markets
Speaker 3: to this point is this idea that at some point
Speaker 3: in the next six months eight months, is that the
Speaker 3: FED is going to start cutting rates. There is a
Speaker 3: lot of assumption out there that inflation is going to
Speaker 3: keep coming down. That is the consensus forecast, and there's
Speaker 3: very very little dispersion in those expectations. So inflation, if
Speaker 3: it were to reignite and start moving up, that takes
Speaker 3: away everything which is underpinning the market today.
Speaker 4: So if we get this ECI print showing that employment
Speaker 4: costs reaccelerated, which some people expect that to be at
Speaker 4: the base case, what does that mean in terms of
Speaker 4: exactly what you just said.
Speaker 3: Right, That means that the Fed's job is not done.
Speaker 3: You know, we I think are seeing that. Look, we're
Speaker 3: getting towards the end of the tiding cycle. Everyone believes
Speaker 3: that there's going to be a rate hik in May,
Speaker 3: but almost no one is talking about beyond mey. The
Speaker 3: other part that nobody's talking about is not only that
Speaker 3: could they pause, but why couldn't they also return to
Speaker 3: the market in September with the new rate hike if
Speaker 3: things are not going as planned. You know, they have
Speaker 3: said that they're very data dependent. They have said that
Speaker 3: they need to watch and see what the impact of
Speaker 3: feed tidening is going to be. And if you're not
Speaker 3: seeing wage growth come down, then if actually you're seeing
Speaker 3: inflation really plateau at the kind of a four and
Speaker 3: a half percent level, what's to stop them from doing
Speaker 3: a new rate hike? Now that I want to clarify
Speaker 3: that is not our baseline expectations, but I would put
Speaker 3: a fairly meaningful chance on that, probably more than what
Speaker 3: the market is putting right now.
Speaker 2: You're ever from London. Can you tell me so far
Speaker 2: this week and the conversations you've had the kind of
Speaker 2: differences that you're experiencing in the conversations here about the
Speaker 2: US versus, say London about the US, Are they different
Speaker 2: at all?
Speaker 3: They are a little bit different in that no one
Speaker 3: in the UK is talking about the debt limit, I mean.
Speaker 3: And I find that for international investors generally they kind of, yeah,
Speaker 3: we go through this every few years and it always
Speaker 3: passes okay. And I find that in the US there
Speaker 3: is definitely a lot more concern. Almost every single client
Speaker 3: conversation I've had that has come up as.
Speaker 2: A really significant Who's got it right?
Speaker 3: Can I see international?
Speaker 2: You think so?
Speaker 3: I do. I think that the chances that the chances
Speaker 3: of it devil are higher than they have been previously,
Speaker 3: partly because its administration is so belligerent, and that volatility
Speaker 3: is very disruptive when the market is already very, very
Speaker 3: vulnerable to any kind of disruption. I shouldn't have said that.
Speaker 3: I don't take it back, Okay, So that is what
Speaker 3: is disruptive. But I do think that things will eventually
Speaker 3: all get past. I'll be fine.
Speaker 2: I'm not here to correct you either. This was wonderful.
Speaker 2: Do you want to talk about US politics sometime in
Speaker 2: the future? Next week, the week after that? We could
Speaker 2: do a weekly segment, couldn't. We should always ask what
Speaker 2: the people in London think about the situation over here,
Speaker 2: but they have a very very different view on things.
Speaker 6: That was fantastic.
Speaker 4: It was like, can I say the truth? Okay, I
Speaker 4: won't here, here's what I'm going to tell clients. It's okay.
Speaker 2: That is interesting though, see that they seem to be
Speaker 2: shaking off it. What do you think it is about
Speaker 2: the US based investor and why they're so much more
Speaker 2: obsessed with it here, and I wouldn't. Maybe I'm using
Speaker 2: that word obsessed loosely. Why they're paying more attention to
Speaker 2: it here? Is there good reason for it?
Speaker 3: I think this is standard of investors. You look at
Speaker 3: your own local market, and you're always more active by
Speaker 3: your own market. That goes across the board. I'm probably
Speaker 3: more nective about the UK than my US colleagues. The
Speaker 3: same thing in the US, same thing in Hong Kong,
Speaker 3: China every day.
Speaker 1: Daniel from Iowa just emailed me, emailed in and said
Speaker 1: President Biden is not.
Speaker 3: Sorry.
Speaker 1: Angel.
Speaker 2: As a chairman of Principal, I appreciate it's snow email
Speaker 2: on his screen. Don't worry about a shot of Principal
Speaker 2: Asset Management joining us now is Phil Orlando, Chief Equity
Speaker 2: Market Strategistic Federated Hermes for wonderful to catch up with you, sir.
Speaker 2: I want to go back to the question. We started
Speaker 2: this program with just how much momentum is in this
Speaker 2: economy from Q one gun into Q two and looking
Speaker 2: at through the rest of the year.
Speaker 7: Not much that that. You look at the GDP print
Speaker 7: yesterday at one point one percent, we were at one
Speaker 7: three I think we were adding near low on the street,
Speaker 7: so that was was a tough number. And regardless, our
Speaker 7: view is that its first quarter of GDP is going
Speaker 7: to be the high water mark for the year. We're
Speaker 7: expecting negative GDP prints in the third and the fourth
Speaker 7: quarter of this year. There are some folks that are
Speaker 7: looking for negative prints the beginning of next year. So
Speaker 7: our view is that economic momentum is going to be
Speaker 7: downshifting here over the course of the next year or so.
Speaker 1: Phil Landa, I want to talk about selling May and
Speaker 1: go away. You have an arc of the market, an
Speaker 1: arc of many Mays that were successful, in many Mays
Speaker 1: and summers that were less than successful. What does the
Speaker 1: character of selling May and go away this year?
Speaker 7: I think it's sort of negative. That you've had a
Speaker 7: very powerful six month rally that's taken the market up
Speaker 7: about twenty percent here from the mid October lows last
Speaker 7: year into the forty two hundred level we've seen here
Speaker 7: just recently. As we look out over the next couple
Speaker 7: of quarters, you've got inflation that's still sticky. Is about
Speaker 7: how persistent, how hawkish that a reserve is going to
Speaker 7: be earnings or decelerating questions about recession, questions about the
Speaker 7: impact of banks tightening their lending standards, reduced in their
Speaker 7: loan volumes. Then you've got the whole debt ceiling issue
Speaker 7: that will probably, you know, come to fruition here in
Speaker 7: the third quarter. So for all those reasons, our guess is,
Speaker 7: you know, the market will probably grind lower over the
Speaker 7: next six months.
Speaker 1: Lisa then Ladler of ETRO this morning with an absolutely
Speaker 1: brilliant many decade history of this cliche selling mayon go away.
Speaker 1: His answer is it's valid, and he really speaks of
Speaker 1: the mystery of the summer doldrums this year.
Speaker 4: Well, I think everything's been a mystery. Frankly, twenty twenty
Speaker 4: three could be chalked up as a full on mystery.
Speaker 4: And one of the big mysteries is what playbook do
Speaker 4: we whip out and Phil when you're talking about some
Speaker 4: sort of downshifting in Q three and Q four. Is
Speaker 4: this a recessionary playbook or is this a stagflationary playbook?
Speaker 7: Our view is that we don't know. We're going to
Speaker 7: be data dependent, but right now, the title of my
Speaker 7: presentation for clients this year has been Recession Watched. For
Speaker 7: twenty twenty three. We're watching the data as closely as anyone.
Speaker 7: And again we've got negative GDP prints in the third
Speaker 7: and the fourth quarter of this year. I've seen some
Speaker 7: economists with negative GDP prints in the first half of
Speaker 7: next year. So somewhere, you know, within those winter months,
Speaker 7: we're going to be coming up to that razor's edge
Speaker 7: of whether or not the economy slides over the edge
Speaker 7: in or recession pill.
Speaker 2: As you know, the market is not the economy, So
Speaker 2: can you give me the market co equity leadership which
Speaker 2: pockets of stocks you want to be in.
Speaker 7: Well, if we're right that this twenty six month rally
Speaker 7: here reverses over the course of the next six months,
Speaker 7: but I think the answer to you know, we've got
Speaker 7: the NFL draft going on. I think we want to
Speaker 7: keep the defense on the field right now. So we
Speaker 7: like cash, we like treasuries, and we like defensive equities
Speaker 7: in stable demand categories. So large and small cap value
Speaker 7: stocks and international stocks have low pees, low betas, high
Speaker 7: dividend yields. So our mantra here is let's hunker down,
Speaker 7: preserve some capital until we've got some clarity on some
Speaker 7: of these issues we've just talked about over the next
Speaker 7: couple of quarters.
Speaker 2: I can't get it's a buy on the rally and
Speaker 2: the home builders on the S and P five hundred fill.
Speaker 7: The homebuilders have looked impressive here over the course of
Speaker 7: the last couple of months. We've been in a housing
Speaker 7: recession for the last seven or eight quarters. There's still
Speaker 7: tremendous pent up demand and the home builders have done
Speaker 7: better over the last couple of months. How sustainable is that.
Speaker 7: If the economy goes into recession, we'll have to see.
Speaker 7: But the homebuilders look attractive here.
Speaker 2: No question, something's going to give. Just amazing Fidolanda federates it.
Speaker 1: You know, we really haven't struggle here because the Yankees
Speaker 1: are two games ahead of the Red Sox end of April.
Speaker 1: You know, the season really doesn't start till July fourth,
Speaker 1: but the Yankees are two games ahead of the Red Sox.
Speaker 1: There's three teams out of the Yankees, which says it
Speaker 1: all on the miserableness of Doug Cass and Tom Kane,
Speaker 1: Paul Sweny and Tom Kane with us. Doug Cass of
Speaker 1: Sea Breeze as well, and Doug you want to link
Speaker 1: this into the markets right now, and I'm talking about
Speaker 1: the hunch that George Steinbrenner had years ago to get
Speaker 1: John Cashman's kid an intern job at the Yankees, which
Speaker 1: turned into the New York Yankees general manager's decisions of
Speaker 1: the X decade or so with Brian Cashman. That's worked out,
Speaker 1: hasn't it.
Speaker 5: Yeah? Sure, I don't know if you're aware of it
Speaker 5: that I was very close with John Cashman. Brian's that
Speaker 5: he was president of Castleton Farms, which is the leading
Speaker 5: breader of harness racing up standard bred horses. I drove
Speaker 5: bread and raised tarn sources. John was a gem real.
Speaker 1: I mean, this is great, Doug.
Speaker 5: But again, remember Tom and Paul. There is always a
Speaker 5: baseball analog for the markets.
Speaker 1: There is, But the baseball analog here is mister Steinbrenner's hunch.
Speaker 1: What's the hunch out there now killing you and your
Speaker 1: widely acclaimed caution on the market.
Speaker 5: Well, I think that if you're if you're buying stocks
Speaker 5: here with the S and P at forty one thirty five,
Speaker 5: I recommend prayer. The bottom line is that we've moved
Speaker 5: back this week into a net short position after being
Speaker 5: cautiously optimistic and non consensus most of the year. We've
Speaker 5: had a good and profitable last year. At Sea Breez,
Speaker 5: we're having an excellent twenty twenty three and we're profitable
Speaker 5: in April. But we think that the market risks are
Speaker 5: multiplying and are non trivial. I also recommend prayer to
Speaker 5: the New York fans, and I'll explain why, because I
Speaker 5: see a very strong similarity between the S and P
Speaker 5: index and the Enanke's starting lineup. Today's stock market is
Speaker 5: non inclusive. By that, I mean it's top heavy. Tome.
Speaker 5: I mentioned to you, and you quoted me yesterday on surveillance,
Speaker 5: you take out the seventh largest large cap tech stocks
Speaker 5: and the S and P into Wednesday's close was down
Speaker 5: two percent and Nasdaq was flat. So to me, you know,
Speaker 5: the Yankees can't win a pennant in the World Series
Speaker 5: without Broder contributions from all the players, nor can the
Speaker 5: S and P make much further progress with seven stocks
Speaker 5: accounting for most of the game. So just look very quickly,
Speaker 5: and I will make it quick. At the starting lineup.
Speaker 5: The first half of the Yankees are great. The batting
Speaker 5: order in the bottom is terrible. Look at the Machine
Speaker 5: and Torres back to back belly to belly with home
Speaker 5: runs last night. At the top of the Yank orders,
Speaker 5: Yankee order, we got Volpi, who is as good as
Speaker 5: Gogle Google. In the last seven years, he's batted over
Speaker 5: four point fifty. Aaron Judge, of course is Meta, Rizzo
Speaker 5: is Netflix, le Mayhew is Apple, and Toares is Navidia.
Speaker 5: But at the bottom him half boy. It's a mess. Piazza.
Speaker 5: He's first republic Bank Cabrera. He's batting like Horizon. I
Speaker 5: caravan with. I'm sure so the markets leadership is marrying
Speaker 5: and I can and I can't recall since the nifty
Speaker 5: fifty period that ended in nineteen seventy four, such a
Speaker 5: divergent divergence, and importantly, from a longer term standpoint, I
Speaker 5: see the next several years as very similar to the
Speaker 5: years following the bust of the nifty fifty in nineteen
Speaker 5: seventy four.
Speaker 1: This is so important, Paul, Paul, I want you to
Speaker 1: jump in and his Doug and I can blyther way forever.
Speaker 1: But the nifty fifty of my ute is stunning.
Speaker 5: Yep, absolutely, Hey, Paul, Yes, you know, I invocus Kooperman.
Speaker 5: Does I see seven years ahead to invoke Joseph in
Speaker 5: the Bible, in the Book of Genesis, just as we
Speaker 5: did following that collapse in the nifty that I guys read.
Speaker 5: Did you guys read the coach interview in the Financial
Speaker 5: Times this week? Did not stand the man, and I
Speaker 5: don't mean stam Usual, Dan Druck and Miller. He's also
Speaker 5: looking for ten lean years. So I'm in good company.
Speaker 1: This guy saw like Red Sox fans, Paul Save.
Speaker 6: We haven't got the O's plane six eighty baseball here. Hey, Doug,
Speaker 6: Should I be worrying about this whole real estate thing
Speaker 6: out there? I mean, you walk through midtown Manhattan and
Speaker 6: the buildings are just empty. Nobody comes in on Mondays
Speaker 6: or Fridays. That's a problem in and of itself for
Speaker 6: all the local retaillers. But how about the banks owning
Speaker 6: all this mortgage debt?
Speaker 5: Yeah, I think it's from a fundamental standpoint, the situation
Speaker 5: is certainly suboptimal. The Federal Reserve faces the trilemma the talent,
Speaker 5: the challenge of simultaneously reducing inflation, minimizing the economic growth
Speaker 5: and jobs, and maintaining the stability of the financial system.
Speaker 5: We have stubborn inflation, declining global economic growth, and we're
Speaker 5: doing nothing to improve supply demand situations for commodities, especially oil.
Speaker 5: There is this, getting back to what you asked me,
Speaker 5: there's an unprecedented maturity wall in which a commercial real
Speaker 5: estate eight has almost one point five trillion dollars resetting.
Speaker 5: Corporate lending, consumer loans, mortgages will all be resetting at
Speaker 5: much higher rates. If capital is available at all, and
Speaker 5: I sit on a number of public boards, I see
Speaker 5: firsthand the reset in the cost of capital. So I
Speaker 5: don't think current valuations are consistent with a five percent
Speaker 5: benchmark interest rate, and they may even be too high
Speaker 5: for zerp QE in that world that many, including the
Speaker 5: interest rate futures market, is suggesting, but no longer exists.
Speaker 1: Paul Sweeney brings us up, folks, because he knows the
Speaker 1: Dougcast wheelhouse. And I'm going to say this right now,
Speaker 1: because Cass is a pinata out on Twitter. If he
Speaker 1: shortens stock goes up an eighth of a point, he
Speaker 1: gets handled. But the answer, your folks is Doug Cast
Speaker 1: back to Kidder Peabody a few years back. Actually you
Speaker 1: read his bank research, it was there was an acuity
Speaker 1: to it that was really quite something. Doug on First
Speaker 1: Republic I've dated, and I got to be very careful folks,
Speaker 1: because I don't editorialize. It was a marketing scheme wrapped
Speaker 1: around a bank. You're a bank analyst. Should the government
Speaker 1: institutions come in, Dougcass to do an FRC workout?
Speaker 5: You know, I remember meeting Harry Keith who formed Keith,
Speaker 5: Briett and Woods with Norbert Woods and Ing Briette and
Speaker 5: then Tomas show to ultimately a good devel of mind
Speaker 5: took over.
Speaker 1: Under great courage under the crisis of DNA seven.
Speaker 5: And Harry Keith once said, bank stocks trade always trade
Speaker 5: between hatred and apathy. That basically describes what's going on. Look.
Speaker 5: First Republic's management committed its own set of errors. That
Speaker 5: bank became a very aggressive mortgage lender to the wealthy,
Speaker 5: leaving it with many below market mortgages as its funding
Speaker 5: costs rows dramatically. Someone in charge should have seen that,
Speaker 5: just as someone running Silicon Valley Bank should have known
Speaker 5: that interst rates would rise and destroy the value of
Speaker 5: the portfolio. But every time there's a financial crisis, we're
Speaker 5: reminded that bankers are among the least sophisticated economic actors
Speaker 5: in the financial ecosystem, They invariably turn out to be
Speaker 5: the last to know what's going on and what's like
Speaker 5: unlikely to happen in the future. Perhaps the reason for
Speaker 5: this is being a banker is incompatible with questioning consensus
Speaker 5: thinking we got time.
Speaker 1: I got just time for one question, Doug, because John
Speaker 1: Tucker walked in and he needs a space as well,
Speaker 1: Doug Cast, not your single best buy? What's your single
Speaker 1: best short right now?
Speaker 5: Wow, that's a tough call. I'm gonna say my single
Speaker 5: best short right now are the triple Cubes?
Speaker 1: That cubes? Yeah? Yeah, okay, Doug, we got to leave
Speaker 1: it there. Thank you so much and great, you know,
Speaker 1: I really you know the Yankees are two red, Sox
Speaker 1: are two back.
Speaker 6: Yeah, I mean the razorre twenty one five who plays
Speaker 6: eight hundred baseball? You know, And is anybody watching it
Speaker 6: in Tampa?
Speaker 1: That's well, that would be Dougcast. Thank you, Thank you
Speaker 1: so much for joining us to Seabury see him out
Speaker 1: Seab's partners and actually running real money down there. I
Speaker 1: should point out as well. We're going to get right
Speaker 1: to it right now because this conversation is two to two important.
Speaker 1: Lisa Bramwinson. Tom came mister Farrell waiting with doctor Olarian
Speaker 1: for the next hour's festivities and with us. And this
Speaker 1: is really important. As Robert Silentek, he's president, chief executive
Speaker 1: officer at c b R. Who is CBRE. What you
Speaker 1: need to know is if you're a computer guy out
Speaker 1: of Ames, Iowa, and you get a job in Texas
Speaker 1: and real estate over a number of years, maybe it
Speaker 1: prepares you for the great financial crisis of two thousand
Speaker 1: and seven, two thousand and nine. Bob Silantik has been
Speaker 1: on the watch at CBR three CBRE, I should say,
Speaker 1: through now not one, but two crises. And he joins
Speaker 1: us in our studios this morning. Thank you, thank you
Speaker 1: so much for joining Bloomberg at Thanks counting. Good to
Speaker 1: be you, more than anybody I know, push against a
Speaker 1: stereotype of real estate investment trusts. O MG, we're all
Speaker 1: going to die the stocks of creator. Your stock is down,
Speaker 1: but you've got a twelve percent total return over the
Speaker 1: last twelve years. CBI is the outlier. What is your
Speaker 1: best practice removed from the volatility train wreck of REITs?
Speaker 8: The best practice in the regard you're talking about, Tom,
Speaker 8: is that we are very diversified. We're a diverse fight
Speaker 8: across asset type, diverse fight across service type, diverse fight
Speaker 8: across geography, and diverse fight across client type. And we're
Speaker 8: very substantial across all four of those dimensions. So as
Speaker 8: things EBB and flow, as secular trends emerge, we can
Speaker 8: push resources into the areas that are favored, as we've
Speaker 8: done over the last few years by pushing resources into
Speaker 8: multifamily and pushing resources into warehouses, and pushing resources and
Speaker 8: outsourcing and project management, and that's worked very well.
Speaker 1: For bloom Is leading the academics on work from Home
Speaker 1: out at Stanford. It's you know, we all know it's
Speaker 1: sort of Graham and life changing and all that. That
Speaker 1: part of CBRE that is in the cliche of midtown
Speaker 1: Manhattan sea to Shining Sea that's empty. Is that going
Speaker 1: to continue? Is this legitimate emptiness that we see now.
Speaker 8: It's a legitimate backing off of the amount of office
Speaker 8: space that'll be used. But there's some important trends that
Speaker 8: are contrary to that. So, for instance, companies in general,
Speaker 8: and certainly here in New York, there's some famous examples
Speaker 8: here in New York of leaders that want to get
Speaker 8: their people back in. Well, the way you get your
Speaker 8: people back into the office is you create great environments
Speaker 8: in that office space. And so what you see across
Speaker 8: New York for the past several quarters, even though office
Speaker 8: leasing is down, and in the first quarter it was
Speaker 8: down by about a third year over year, we are
Speaker 8: running ahead of pre pandemic levels as it relates to
Speaker 8: high priced office leases, because people want to be in
Speaker 8: those best buildings.
Speaker 1: I got a brilliant CBI. He takes over the Lincoln Tunnel.
Speaker 4: That'll fix Well, yes, perhaps we'll have a fancy Lincoln Tunnel.
Speaker 4: This is the issue. Though you have dead office space
Speaker 4: that isn't retrograde, that isn't retrofitted for the sort of
Speaker 4: fancy experience. What happens to that? Are there just basically
Speaker 4: no man lands of old office space that no one wants.
Speaker 8: Well, Lisa, we'd love to have an answer for everything,
Speaker 8: but we don't. And one of the quandaries we're faced
Speaker 8: was as an industry is there are going to be
Speaker 8: some antiquated office buildings and it hasn't been figured out yet.
Speaker 8: What's going to happen? You know, there's a lot of
Speaker 8: talk about can you convert them to multifamily residential. Some
Speaker 8: of you can't, some of them you can. Ironically, the
Speaker 8: ones that are most able to do that are the older,
Speaker 8: smaller floor plate buildings, some of the ones that were
Speaker 8: built in the seventies and eighties, with the very large
Speaker 8: floor plates and a small amount of elevators relative to
Speaker 8: the floor plates, etc. It's just not practical to convert
Speaker 8: them into residential. So we'll have to see what happens.
Speaker 4: There's a larger question here, especially as we're on the
Speaker 4: precipice of some change in the economic cycle. We don't
Speaker 4: know when, we don't know what. But it seems as
Speaker 4: though there has to be a right sizing with housing
Speaker 4: prices that have remained resilient and rents that have come
Speaker 4: down with an economy that is stagnating in certain areas,
Speaker 4: and even with commercial rents staying relatively elevated, which is
Speaker 4: going to give our valuation is going to fall more
Speaker 4: in the property or our rent's going to fall.
Speaker 8: I don't think you're going to see you're talking multifamily
Speaker 8: resident that yet. Yeah, I don't think rents are going
Speaker 8: to fall a lot and multifamily residential. And the simple
Speaker 8: reason for it is even though you have interest rate issues, etc.
Speaker 8: Demand supply is still very real in that product type,
Speaker 8: like it is in most product types. And the fact
Speaker 8: matter is you still have slightly less than average historical
Speaker 8: vacancy rates in multifamily residential and those high interest rates
Speaker 8: are causing single family homes to be more expensive, which
Speaker 8: is pushing people into multifamily rental properties. So I don't
Speaker 8: think you're going to see a big decline in rental
Speaker 8: rates at all.
Speaker 1: I got eight ways to go here. I could go
Speaker 1: to Miami, I could go to Europe, and you know,
Speaker 1: talk about what you're doing in Los Angeles or frankly
Speaker 1: boom southern economies where everybody from New York's moving to,
Speaker 1: including your Texas as well. Forget about it. Let's go
Speaker 1: to the Pacific Rim in China. C b R E
Speaker 1: has a prism on Asia, like no one do you
Speaker 1: buy the idea that the West can continue to work
Speaker 1: with China and they'll see stability in their property market,
Speaker 1: which is the mother of all volatile markets.
Speaker 8: Well, I was. I was in Asia in Hong Kong
Speaker 8: about three weeks ago, and like so many things tom
Speaker 8: the news, the sensationalism around the political challenge.
Speaker 1: What's the reality.
Speaker 8: The reality there is that we're doing a lot of
Speaker 8: business in China, and our business in China is growing,
Speaker 8: and there's a lot of business being done between the
Speaker 8: US and China and a lot of effort to get
Speaker 8: US companies in there. There is political risk, for sure,
Speaker 8: but those are the largest cities in the world, or
Speaker 8: some of the largest cities in the world. And one
Speaker 8: of the things that's happening as it relates to commercial
Speaker 8: real estate is intermediation, which we've had here in Western
Speaker 8: Europe and in parts of Asia forever but not so
Speaker 8: much in China, is becoming more and more prominent there.
Speaker 8: So we expect to grow our business substantially before we.
Speaker 4: Let you go, and unfortunately it is too short. I
Speaker 4: do want to just get your view on what the
Speaker 4: pricing impact is going to be of some of these
Speaker 4: regional banks with pretty big portfolios of loans that wreck
Speaker 4: that back commercial real estate. What is the likelihood of
Speaker 4: some forced sales that really bring down prices?
Speaker 8: And in your term, there's going to be some forced sales, Lisa,
Speaker 8: But here's something that just gets missed. If you look
Speaker 8: at commercial banks assets across the United States, less than
Speaker 8: one and a half percent is in office buildings in
Speaker 8: office building loans, So yeah, there could be there is
Speaker 8: some pressure now with less capital available, less debta available
Speaker 8: from commercial banks for office building that's being backfilled by
Speaker 8: other sources of capital, private sources of capital, debt funds,
Speaker 8: et cetera. The gsees there is going to be down pressure.
Speaker 8: There is going to be some trouble as it relates
Speaker 8: to the regional banks, but it is certainly not huge
Speaker 8: in a way that would be ruinous for the commercial
Speaker 8: bank industry.
Speaker 4: What about other sectors within the real estate? Are there
Speaker 4: other areas that are more exposed based in the concentration
Speaker 4: of these banks.
Speaker 8: Fundamentals are really good in other areas. And when I
Speaker 8: talk about fundamentals, occupancy rates and rental rates. So just
Speaker 8: to give you a few industrial three and a half
Speaker 8: percent vacant, institutional quality, multifamily less than five percent vacant,
Speaker 8: retail rents around their way up around the US. Hotels
Speaker 8: doing very well. So the fundamentals and things other than
Speaker 8: office are actually quite good right now. I'm sure both
Speaker 8: of you had experiences trying to get into restaurants lately.
Speaker 1: I mean, oh no, it's I don't have a life.
Speaker 1: Lisa has a life, Pharaoh has a life. I don't
Speaker 1: have a life.
Speaker 8: So again, headlines are partially accurate, and it's totally accurate,
Speaker 8: but not you really silentic.
Speaker 1: Just he just shows up at any restaurant across the
Speaker 1: country and Bob, please, did you get the check? Pop
Speaker 1: silentic as.
Speaker 8: Long as it's fast food, Pops silentic.
Speaker 1: Thank you so much. With C B r E a
Speaker 1: real estate update. If you live a study of disruption,
Speaker 1: which many do, you do it at Babson College, and
Speaker 1: that is the land of the great late hugely missed
Speaker 1: Clay Christiansen. You're in Timmer joins us of Babson of
Speaker 1: Wellesley in a fidelity of Boston this morning with exquisite
Speaker 1: technical analysis on where we are. I'm just going to
Speaker 1: cut to the chase within your first five charts for FCO.
Speaker 1: You say we've been in a ten months no man land.
Speaker 1: When do we know we're escaping up or down? Are
Speaker 1: ten months no Man's land?
Speaker 9: Yeah? So we all know how the cycle began, and
Speaker 9: we all want to know how the cycle will end
Speaker 9: and will it end? With the Fed, you know, raising
Speaker 9: rates one more time next week and then pausing, which
Speaker 9: I do think is a likely scenario, because we know
Speaker 9: from history that the FED raises rates to more or
Speaker 9: less add or above the inflation rate, the trailing inflation rate,
Speaker 9: and so the core pcees at four to six, presumably
Speaker 9: on its way down, and the FED is now near five,
Speaker 9: and of course the tips break evens are somewhere two
Speaker 9: to two and a half. So on that, by that measure,
Speaker 9: the FED is well above the neutral rate, if you will,
Speaker 9: So I think for the FED it's mostly a question
Speaker 9: of how quickly do they go back to neutral, which
Speaker 9: will be around three percent, and my guess is not
Speaker 9: not very And then the other question is about the
Speaker 9: earnings front. Right, so the market is price in a
Speaker 9: modest contraction earning. So there's your modest mild recession, you know, scenario,
Speaker 9: which I do think is likely second half of the year.
Speaker 9: But the market's very capable of looking through that, of course,
Speaker 9: as it as it always does, and so on that.
Speaker 9: On that, by that measure, you know, we could see
Speaker 9: a forty percent expansion in the multiple at some point,
Speaker 9: and the expansion at the bottom in October was fifteen
Speaker 9: and so that gets you to twenty one times next
Speaker 9: year's earnings of two twenty five two thirty gets you
Speaker 9: back to the new high. So that's the half the
Speaker 9: glass half full scenario where the market deals with the
Speaker 9: FED deals with a modest slowdown or contraction in earnings
Speaker 9: and then a recovery. And obviously the big question is
Speaker 9: how good are those earnings forecast? We know that the
Speaker 9: consensus numbers tend to be optimistic, and so far the
Speaker 9: numbers for this quarter have been okay. But that that
Speaker 9: becomes really the main question. But if you look at
Speaker 9: the internals, right, the S and P five hundred equal
Speaker 9: weighted index has gone nowhere in ten months. The small
Speaker 9: caps are at the lows, microcaps are at new lows,
Speaker 9: but the megacaps are at recovery highs. And so the
Speaker 9: market has been all over the place. And this, you know,
Speaker 9: these trading range is now ten months old, and back
Speaker 9: in twenty fifteen it was from August fourteen to February sixteen,
Speaker 9: ninety four was a trading range. So if a trading
Speaker 9: range is all we're going to get, you know, after
Speaker 9: all of this craziness of the last three years, you know,
Speaker 9: little bubbles because of financial repression, and then a massive
Speaker 9: rate reset, then I'll take that as a win. But
Speaker 9: the earnings need to you know, the market can look
Speaker 9: past in earnings valley, but it can't look past in
Speaker 9: earnings abyss. And so that really is what it comes
Speaker 9: down to.
Speaker 2: Its lost decades are unusual. We've seen them through history
Speaker 2: and recent history as well. Look to Japan as an
Speaker 2: example of that and other areas as well. European banks
Speaker 2: for much of ten years, that's basically nothing. When you
Speaker 2: look at the US equity market after what many people
Speaker 2: consider to be abubble, that's burst, do you see the
Speaker 2: potential for a lost decade in equity market returns to
Speaker 2: the index level in this country?
Speaker 9: Well, we had one, of course in the two thousands,
Speaker 9: the seventies, the thirties and forties. You know, I call
Speaker 9: them secular bear markets. And secular ball markets tend to
Speaker 9: last about eighteen years produce about an eighteen percent rate
Speaker 9: of growth. And secular bear markets tend to last about
Speaker 9: fourteen years and produce basically zero growth or negative real growth.
Speaker 9: And so one of the big questions is is has
Speaker 9: a secular ball market that I think started in nine
Speaker 9: has it ended and it would be a shorter than
Speaker 9: usual one, although the one from nineteen twenty one to
Speaker 9: twenty nine was very short and extremely powerful. So when
Speaker 9: you look at valuations and you look at you know,
Speaker 9: the new inflation regime, assuming for a moment that it's
Speaker 9: going to be above the FED target zone, and you
Speaker 9: look at interest rates possibly having made secular lows, that
Speaker 9: would argue for a more modest valuation regime, which would
Speaker 9: go in line with kind of a secular bear market.
Speaker 9: But you know, to call it another last decade, I'm
Speaker 9: not prepared to go there yet. A lot of that
Speaker 9: does come down to financial engineering, and you know, converting
Speaker 9: earnings into share buybacks, and that's been an extremely powerful
Speaker 9: engine as well as M and A. Right, if you
Speaker 9: go back to the end of the financial crisis and
Speaker 9: you look at the supply and demand of shares by
Speaker 9: corporates themselves, IPOs and secondaries about two and a half
Speaker 9: trillion of supply, m and A and buybacks, which is
Speaker 9: a retirement of shares from corporates about eight times as high.
Speaker 9: So it's been a massive imbalance of the supply of
Speaker 9: shares and the demand for shares, not even counting end investors,
Speaker 9: it's just the corporates. So if that if that engine
Speaker 9: keeps going, then I think the bull market stays alive.
Speaker 9: But if a higher rate or a tighter fed regime
Speaker 9: kind of you know, slows down that train, then I
Speaker 9: think there's there there's reason to think that it could
Speaker 9: be otherwise.
Speaker 4: Just quickly, is a sixty forty portfolio going to work
Speaker 4: in a higher inflation environment with slower growth?
Speaker 9: So I've looked at this going back one hundred and
Speaker 9: fifty years, and when the inflation rate trends or is
Speaker 9: sustained above the historical average, which is three percent, then
Speaker 9: the sixty forty doesn't work. The forty does not is
Speaker 9: then positively correlated to the sixty. So the question is,
Speaker 9: you know, we were at about a two percent regime.
Speaker 9: We're now at about two and a half if you
Speaker 9: look on a ten year rate of change basis. So
Speaker 9: it really comes down to whether the inflation situation remains
Speaker 9: structural or transitory. And it's interesting I just did a
Speaker 9: deep dive on the nineteen forties. I read the History
Speaker 9: of the Federal Reserve by Ellen Meltzer, and you know,
Speaker 9: they had twenty percent inflation in forty six and forty
Speaker 9: seven when the price controls were lifted and at the
Speaker 9: same time the monetary growth started to reverse, and so
Speaker 9: it really was transitory back then. And you know the
Speaker 9: kind of the post COVID pent up demand versus the
Speaker 9: post war there are some similarities, there's some similarities.
Speaker 1: And then we got to deflation, Eisenhower's true deflation of
Speaker 1: fifty two to fifty three and then John that gets
Speaker 1: you to two to three percent interest rates. Right now,
Speaker 1: do you predict a follow on disinflation deflation?
Speaker 9: Well, I mean the monetary base or the money supply
Speaker 9: numbers are have rolled over, which is what they did
Speaker 9: in the second half of the forties after obviously expanding,
Speaker 9: you know, rapidly from forty two to forty six, and
Speaker 9: then once the price controls were lifted, you had a
Speaker 9: one time price shock. And so hopefully this was a
Speaker 9: one time price shock, and if so, then the inflation
Speaker 9: averages go back to kind of the historical average and
Speaker 9: then sixty forty continues to work and you know, the
Speaker 9: forty this year is sort of doing what it's supposed
Speaker 9: to be doing.
Speaker 2: So this was a clinic. King, you're in thank you,
Speaker 2: it's going to see you in New York too. You're
Speaker 2: in some of that Fidelity Investment.
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