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Speaker 3: amazing information sourcing storytelling that they provide, and the latest
Speaker 3: to do so will be Alex Longley, Bloomberg Oil Trader
Speaker 3: Reporter is standing by to talk about what's going on
Speaker 3: with oil. So Brent is up by over two percent,
Speaker 3: WTI crewed up three percent. Almost Brent is going to
Speaker 3: be the thing you look at if you're looking at
Speaker 3: international geopolitical risk. WTI will track it, but it's really
Speaker 3: a little bit lower because that more of a domestic pricing.
Speaker 3: I'll Alex explain that from Ali Smith.
Speaker 4: She asked, so I did, She asked, So that's why
Speaker 4: I feel so if I wanted to know, surely someone
Speaker 4: in the audience wants that's.
Speaker 3: What I was thinking. That's what I was thinking.
Speaker 5: A voice for the people.
Speaker 3: That's my ale explain. Let's get to the next alexplain.
Speaker 3: Alex talk us through the recent spike and why we're
Speaker 3: seeing it.
Speaker 6: It's been a sort of a three pronged rally. Obviously
Speaker 6: today there's extremely high geopolitical risk given the news surrounding
Speaker 6: Israel and Iran, and that's been the kind of final
Speaker 6: catalyst that's pushed Brent crude, as you said, four above
Speaker 6: ninety dollars a barrel. But this also was a broader
Speaker 6: rally in the making. We've had stronger than expected demand
Speaker 6: in the first quarter according to the traders, although we
Speaker 6: had a report from the International Energy Agency today which
Speaker 6: cast that into slight doubt. We've had tighter supplies as
Speaker 6: OPEC keeps its keeps its production relatively low, reduced by.
Speaker 7: Two million barrels a day through until June.
Speaker 6: And we also have globally a reflation trade in which
Speaker 6: some traders are getting back into the oil market who
Speaker 6: left they were looking for portfolio hedges.
Speaker 7: So when you throw in the geopolitical tumult.
Speaker 6: On top of that, you have an oil price that's
Speaker 6: heading well into the nineties barrel and in which traders
Speaker 6: are kind of afraid to short the market heading into
Speaker 6: the weekend.
Speaker 7: And that's why we get rallies like we're seeing.
Speaker 4: Today, is the concern that this is going to be
Speaker 4: like that there's more upside risk here, that we're going
Speaker 4: to stay at this ninety ish level. I mean, what's
Speaker 4: the kind of sentiment right now about the outlook for
Speaker 4: oil prices.
Speaker 6: Yeah, and we've just had a big commodities conference here
Speaker 6: in Europe with all the kind of top traders from
Speaker 6: the independent trading houses so Vitol, Traffic gur or a
Speaker 6: gun for And one of the interesting themes coming away
Speaker 6: from that wasn't so much the more bullish outlook per se,
Speaker 6: which I think is everyone's become accustomed to very quickly,
Speaker 6: but it's actually the speed with which that's changed. We
Speaker 6: had IP week here in London in February and everyone
Speaker 6: was rarely relatively downbeat, was fairly confident that prices would
Speaker 6: remain range bound, and in a little more than six
Speaker 6: weeks since then, this has become a rampantly bullish market.
Speaker 6: We had Vitol talking this week about a kind of
Speaker 6: eighty to one hundred dollars range. As prices move higher,
Speaker 6: you will continue to run into the types of issues
Speaker 6: you do when you have high oil prices, things like
Speaker 6: demand destruction, things like incentivizing US supplies to produce more,
Speaker 6: or US producers to produce more, I should say, and
Speaker 6: also slip it from within OPEK itself. That said, there's
Speaker 6: also not much conviction that if price is wor to
Speaker 6: for which feels very unlikely today, that they're going to
Speaker 6: fall very far because OPEC producers are willing to protect
Speaker 6: that downside.
Speaker 3: Well, exactly, I have to think, at what point do
Speaker 3: the studies use that spare capacity. So they have a
Speaker 3: lot of it, they've been unwilling to use it. Is
Speaker 3: it like a ninety five dollars thing because they're going
Speaker 3: to be very worried about demand destruction.
Speaker 7: Yeah, for sure.
Speaker 6: And I think this is part of the bind of
Speaker 6: the meeting that we're going to have in June is
Speaker 6: And it's not just Saudi Arabia, don't forget, it's the
Speaker 6: UAE as well. There's been aggressively ramping up its production
Speaker 6: capacity in recent years, and it's kind of itching to
Speaker 6: use some of those barrels. That's kind of a question
Speaker 6: for two months down the line. I think for now,
Speaker 6: what opt producers will be looking to see as inn
Speaker 6: the of stability in this higher price level. We haven't
Speaker 6: actually been at ninety dollars a barrow that long in
Speaker 6: the scheme of oil pricing, right, So I think between
Speaker 6: now and then, the question is going to be how
Speaker 6: does the market look, how does do political side of
Speaker 6: the equation look, which you know, even from here to Monday,
Speaker 6: it's pretty hard to have a concrete view on what
Speaker 6: the market's going to do in the next few days,
Speaker 6: and so casting all the way ahead to June and
Speaker 6: having a sort of purity of whether or not there'll
Speaker 6: be bowers being produced either in the Atlantic basin, in
Speaker 6: the US for various reasons, and also in the Middle East.
Speaker 6: I think we have such a widespread of outcomes that
Speaker 6: it's more a case, as Opek said in our own
Speaker 6: report yesterday, of monitoring and then judging closer to the
Speaker 6: time how the market's looking and whether it needs extra barrows.
Speaker 3: As you're talking about the traders like Vita, Traffic, Gura,
Speaker 3: et cetera. They're the guys that move things around. What
Speaker 3: are they talking about in terms of moving oil. Is
Speaker 3: it hard to move oil now because of the disruptions
Speaker 3: that we've seen in the Red Sea, et cetera, Or
Speaker 3: are things okay?
Speaker 6: I think in terms of the Red Sea, it's there
Speaker 6: in the background, but it's not the disruptive force that
Speaker 6: it was. Again, casting back to IP week in February,
Speaker 6: that was a big talking point. Then when the market
Speaker 6: at the front end was super strong, we saw big
Speaker 6: backwardation at the front of the curve, like strong demand
Speaker 6: for immediate barrels and prices trading higher as a result
Speaker 6: of that. We do still have a big backwardation at
Speaker 6: the front of the curve, but I think the feeling
Speaker 6: is that the Red Sea isn't as big of a
Speaker 6: driver there because that was a kind of a three
Speaker 6: to four week shift in supply chain that's now being
Speaker 6: allowed for. So I think on the delivery side you
Speaker 6: don't see that much worry. I think where people are
Speaker 6: talking a lot of the moment is on the demand
Speaker 6: side and on revisions upward, revisions to numbers. Even here
Speaker 6: in Europe, where we're supposedly are kind of a flat
Speaker 6: line oil demand region, if not falling oil demand region.
Speaker 6: But you look at some of the gasoline demand numbers,
Speaker 6: particularly in the Mediterranean, and you're seeing double digit ear
Speaker 6: on your percentage growth, and that kind of runs counterintuitive
Speaker 6: to the idea that demand should be falling in Europe.
Speaker 6: And that's before you get into the real demand powerhouses
Speaker 6: like China. Certainly, again talking to the traders, looking at
Speaker 6: some of the figures in the first quarter of the year,
Speaker 6: lots of numbers were coming in fairly strong, and that's
Speaker 6: partly what's driven this sort of this rampant move higher
Speaker 6: that we've seen in recent weeks.
Speaker 4: So, Alex, the question then that I would have from
Speaker 4: the economy perspective is when you have oil prices that
Speaker 4: are staying at this ninety dollars range, and of course
Speaker 4: remains to be seen of how long that's going to
Speaker 4: be the case for, But when does that start to
Speaker 4: filter it through to consumer prices, whether it's through other
Speaker 4: transit and logistics costs, jet fuel, you know, things of
Speaker 4: that nature. When do we start to feel it?
Speaker 7: And there's a couple of reasons that there's a time lag. Right.
Speaker 6: We often many of the world's biggest consumers will hedge
Speaker 6: their suppliers and Therefore that part that ripple through effect
Speaker 6: to consumers takes months to filter through. I think you
Speaker 6: can make an argument that you are already seeing it
Speaker 6: to an extent. The CPI data this week, for example,
Speaker 6: had a higher filter through from energy prices, and I
Speaker 6: think you'll probably continue to see that in the coming months.
Speaker 6: As as I said before, you know, if we think,
Speaker 6: if we assume there's a two to three month lag
Speaker 6: and we think back to where we were earlier in
Speaker 6: the year, we're now tens of fifteen dollars higher and
Speaker 6: with a sort of a related knock on a onto
Speaker 6: things as you said, like gasoline and jet fuel prices
Speaker 6: to Alex's earlier point, The question is what happens then,
Speaker 6: do we do we hold in the nineties as political
Speaker 6: risks simmers for a few months or dold we have
Speaker 6: a market that moves higher. And I think, you know,
Speaker 6: as we shift from a kind of I think traders
Speaker 6: are kind of getting used to this idea that inflation
Speaker 6: might be slightly stickier than expected this year. The question
Speaker 6: then is going to be, okay, well, how long is
Speaker 6: it going to be stickier than expected? For and if
Speaker 6: crude prices and by association refined product prices sort of
Speaker 6: flatline at a higher level, perhaps the inflationary impact starts
Speaker 6: to die off. On the other side, if we see
Speaker 6: big expansions in refining margins or higher crude prices, then
Speaker 6: that's going to continue well into the rest of Tiety
Speaker 6: twenty four.
Speaker 3: Alex Longley joining us a Bloomberg Oil trader reporter. Thank
Speaker 3: you so much. You were like double al explained.
Speaker 5: Yes, I love that side. It was really nice. So
Speaker 5: you guys just really told so much.
Speaker 3: I love that. Okay, we're looking at is real potentially
Speaker 3: bracing for a direct and unprecedent attack by Iran and
Speaker 3: government targets as soon as Saturday. Of course, that moving
Speaker 3: to the upside when it comes to crude prices to
Speaker 3: the highest level.
Speaker 8: Now since October, you're listening to the Bloomberg Intelligence Podcast.
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Speaker 3: Mollie Smith in with me up for the next two hours.
Speaker 3: I've never angered with you before, but I'm really looking
Speaker 3: forward to.
Speaker 4: Yeah, We've got such a treat I'm so excited, especially
Speaker 4: our first guest coming right out of the University of Michigan,
Speaker 4: where I normally would be writing up this report, but
Speaker 4: we get to talk to Joanne Shoe herself today.
Speaker 3: That's why we love this. So not only do we
Speaker 3: give you all the great analysts, but we also bring
Speaker 3: you int an analysis with the data crosses at the
Speaker 3: ten o'clock hours, So the University of Michigan sentiment coming
Speaker 3: in a bit lighter current conditions, also a bit lighter
Speaker 3: expectations get where I'm going, a bit lighter and one
Speaker 3: year in five to ten year inflation expectations guess what,
Speaker 3: a bit higher. So let's get more to it with
Speaker 3: Joeann Hue. She heads up all the daddy here from
Speaker 3: University of Michigan. She is University of Michigan Surveys of
Speaker 3: Consumer Director. All right, joe Ane, great to chat with you.
Speaker 3: What did you make? What's your takeaway?
Speaker 9: Essentially, consumers didn't really see any sort of changes in
Speaker 9: the economy, not just in this month but actually since January.
Speaker 5: They're in their.
Speaker 9: Income expectations, labor market expectations, their their views of their
Speaker 9: personal finances. Everything has been remarkably stable since January. The
Speaker 9: one exception is this month there was a slight uptick
Speaker 9: in inflation expectations, consistent with what we saw in the
Speaker 9: CPI report earlier this week. Consumers have internalized that information
Speaker 9: and bumped up their expectations for inflation.
Speaker 4: Accordingly Johann, how much of this is too to rising
Speaker 4: gasoline prices versus broader inflation.
Speaker 9: It is partially to do with higher gas prices, but
Speaker 9: typically gas prices tend to affect sentiment more than they
Speaker 9: affect inflation expectations alone. So you know, I think consumers
Speaker 9: are very much preserving judgment about the medium and longer
Speaker 9: term trajectory of the economy. A lot of them are
Speaker 9: mentioning uncertainty over the election, so they are taking some
Speaker 9: signal from gas prices. But you know, they have noticed
Speaker 9: that this inflation slow down is has accelerated, and they're
Speaker 9: not terribly pleased with the pace of disinflation.
Speaker 3: A walkers through the great stuff that you guys do
Speaker 3: of Democrats versus Republicans is a sentiment sort of on
Speaker 3: the same wavelength for both.
Speaker 9: It's a little too early to tell at mid month.
Speaker 9: We'll know more at the end of the month, but
Speaker 9: what we are seeing so far is that, as usual,
Speaker 9: consumers who are who belong with the party that's in
Speaker 9: the White House tend to have higher levels of sentiment
Speaker 9: than consumers in the party not in the White House.
Speaker 9: So right now Democrats have higher levels of sentiment than Republicans.
Speaker 9: Independence are right in the middle. And for all of
Speaker 9: these groups, there just weren't There haven't been that many
Speaker 9: changes since January. It's been four months of remarkable stability
Speaker 9: and how people view the economy.
Speaker 4: So we've seen generally, when you're looking along party lines
Speaker 4: that there have been for the most part, sentiment among
Speaker 4: Democrats and Republicans have been generally rising in recent months,
Speaker 4: while Independents have really been lagging a lot. Can you
Speaker 4: speak to how that you know, what that means for
Speaker 4: the mindset of somebody who perhaps is an undecided voter,
Speaker 4: if that's like how you would make that takeaway.
Speaker 9: It's a little bit hard to say, because even among
Speaker 9: independence there are some that lean Republican and some that lean.
Speaker 3: That lean Democrat.
Speaker 9: So it's really hard to say from our data how
Speaker 9: many people are actually undecided at this point. You know, overall,
Speaker 9: you know, independence have been in the middle the rising
Speaker 9: tide that we saw towards the end of twenty twenty
Speaker 9: three in which sentiments searched, that was something we saw,
Speaker 9: you know, across all three political groups and across the
Speaker 9: all three footal groups. They're all I wouldn't say holding
Speaker 9: their breath, but they are really reserving judgment and waiting
Speaker 9: for the election at the end of this year because
Speaker 9: they do see that a lot of the economy is
Speaker 9: going to hinge on that.
Speaker 3: Well the molly did we see that in the CPI report?
Speaker 3: Butter prices are down belt to basis right, what pastries
Speaker 3: and cereals so like, I don't know your breakfast croissants
Speaker 3: that you're gonna make, It's could be worse.
Speaker 4: I mean, chicken prices were really high though, I don't
Speaker 4: know if you saw that. The poultry market though these days,
Speaker 4: that's crazy.
Speaker 3: My musand makes too much chicken. I'm like, it's not
Speaker 3: but the chicken anything. Yeah, now I can tell them
Speaker 3: why we'll get the CPI exactly get there before I
Speaker 3: let you go, Joanne. If I'm the fed I'm looking
Speaker 3: at this, Is there a takeaway for me? Is there
Speaker 3: a signal.
Speaker 9: I think the signal that that policy maker should take
Speaker 9: from this is that not only has you know, did
Speaker 9: the CPI come in hot earlier this month, earlier this week,
Speaker 9: but consumers have incorporated that into their expectations for the future.
Speaker 9: They are expecting a little bit more inflation in the
Speaker 9: year in the next five years than they were expecting
Speaker 9: just last month. So that's definitely not the trend that.
Speaker 3: That you want to see.
Speaker 5: And so consumers have noticed.
Speaker 3: All right, Joan, Thanks Lott. We really appreciate. It's always
Speaker 3: going to get their perspective instid analysis, right, we get
Speaker 3: the data, we get Joanne, we have you covered on
Speaker 3: all fronts. Joann Shu, University of Michigan, Surveys of Consumer Director.
Speaker 3: Was that cool for you?
Speaker 5: Oh my god?
Speaker 3: Yeah, super fun?
Speaker 5: I feel you got to interview a superstar.
Speaker 3: Oh nice?
Speaker 5: Okay, what a great start to Friday.
Speaker 3: Okay, we like to make my Molly's man happy. Here.
Speaker 4: Next you're going to bring in a tennis star. Then
Speaker 4: you really see me just like fly off.
Speaker 3: The seat because you're like a pro tennis player.
Speaker 4: I mean maybe on the Bloomberg tennis team, but you know,
Speaker 4: no one's looking for breaking points.
Speaker 1: There fair enough, you're listening to the Bloomberg Intelligence podcast.
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Speaker 3: So let's get to the other part of the market today,
Speaker 3: and that's what's happening with banks. So JP Morgan is
Speaker 3: down by almost five percent, Wells Fargo is up by
Speaker 3: one tenth, and City Group now down by about three
Speaker 3: tenths of one percent. Granted, it's a tough tape. It's
Speaker 3: definitely sort of going to a safe haven flight to
Speaker 3: say if you don't want to take on that equity
Speaker 3: risk into the weekend. But nonetheless, let's dig through what
Speaker 3: we learned here. There is literally no other person that
Speaker 3: you want to talk to but Alison Williams, Bloomberg Intelligence,
Speaker 3: Senior Analyst, Global Banks and Asset Managers. She joins us. Now,
Speaker 3: all right, Allison, what was okay? Two questions? Is there
Speaker 3: a macro takeaway for me? And if not, what is
Speaker 3: the takeaway?
Speaker 10: So there is a macro takeaway which is positive, which
Speaker 10: is the fact that credit costs are coming in much
Speaker 10: better than expected, and that's because the reserve builds are
Speaker 10: either coming in lower than expected, such as a city
Speaker 10: group and we actually got releases at JP Morgan and
Speaker 10: wels fargetting.
Speaker 3: Things may not be as bad as me meaning that.
Speaker 10: Their outlook right. So the reserves are really all about
Speaker 10: what they expect for losses, you know, they're meant to
Speaker 10: look at losses over the life of the loan. What
Speaker 10: we've seen over the past you know, a year or
Speaker 10: so is just a change I think in the waiting
Speaker 10: of the scenario, So moving more towards an expectation for
Speaker 10: the goldilocks type of scenario versus the expectations for a recession.
Speaker 10: The you know, JP Morgan is trading down today clearly
Speaker 10: on the net interest income guidance disappointment. I would make
Speaker 10: the point that they have beaten an interest income and
Speaker 10: raised guidance for several quarters in a row. They kept
Speaker 10: their overall guidance for net interest income steady and their
Speaker 10: core net interest income, which we think is the metric
Speaker 10: to focus on, that's actually better. So we think that's
Speaker 10: a good thing, but still might not have been you know,
Speaker 10: enough for some of the bullish investors. But we do
Speaker 10: think that they could just be saving all the good
Speaker 10: stuff for their investor day. So they have investor Day
Speaker 10: coming up in.
Speaker 4: One of the under promise over to yes, and they
Speaker 4: love to see that in the corporate world.
Speaker 10: Well, and they will be you know, they they will
Speaker 10: be telling their full story at investor Day. We expect
Speaker 10: to hear more about, you know, their expectations for returns
Speaker 10: or expectations for capital, their expectations for costs. The costs
Speaker 10: did come in higher at JP Morgan, but that was
Speaker 10: really due to the fdi C special assessment, which is
Speaker 10: something we'd expecting. We're expecting, so we think, you know
Speaker 10: that that's sort of fine. I guess just the one
Speaker 10: off well too, Yeah, so we would not make too
Speaker 10: much out of that. I mean, the bigger banks, the
Speaker 10: more deposits you have, the more you're gonna have to pay.
Speaker 10: And so JP Morgan all the other banks are making
Speaker 10: those payments. We saw those charges at Wells in City
Speaker 10: as well.
Speaker 4: So with this net interest income, I mean, this really
Speaker 4: what is going to be like the big item to
Speaker 4: look for in the bank earnings. We had a great
Speaker 4: story out earlier this week talking about that. You know
Speaker 4: how much this relates to the outlook for the FED
Speaker 4: path and this net interest income. For you guys who
Speaker 4: aren't as familiar with bank bound sheets like myself, this
Speaker 4: is how we described the difference between what banks earned
Speaker 4: on assets and what they pay on debts. So it's
Speaker 4: in their interest to see interest rates stay high and
Speaker 4: it makes that net interest income go higher. So you're
Speaker 4: telling us, then, Alison, that the guidance that they've zield
Speaker 4: been doing this under promise hopefully later over delivered situation,
Speaker 4: and that the guidance has still been pretty weak.
Speaker 10: Well, I think, you know, keep in mind that we're
Speaker 10: looking at guidance for the year, and I think, well
Speaker 10: that interesting income was the focus coming into the quarter,
Speaker 10: Like the credit class I think are are really kind
Speaker 10: of the they the surprise of the quarter, if you will,
Speaker 10: like sort of the key takeaway coming out of the quarter. So,
Speaker 10: you know, net interest income, everyone can see that. The
Speaker 10: last time these banks reported, we there were you know,
Speaker 10: six to seven cuts expected. As of today there's three,
Speaker 10: and so I think investors were looking for that change.
Speaker 10: But keep in mind a lot of those cuts were
Speaker 10: awaited in the second half. Again, we saw how quickly
Speaker 10: things change the last three months, so we don't think
Speaker 10: it's crazy. In fact, we think it's conservative and the
Speaker 10: right thing to do that these banks would be conservative
Speaker 10: and wait before they change around those expectations, right, instead
Speaker 10: of just jumping things all over the place. So I
Speaker 10: think it's right to be conservative. It doesn't mean that
Speaker 10: we're not going to get a change. And really, like
Speaker 10: as pointed out by City Group, the big change is
Speaker 10: going to be to next year. It's really twenty twenty
Speaker 10: five that as we get the changes in these expectations,
Speaker 10: that's where it'll play out.
Speaker 5: Expectations for the FED.
Speaker 10: Expectations for the FED. Yes, I should have clarified that.
Speaker 10: And you know, so keep in mind that most of
Speaker 10: the banks are positioned for higher rates, and I think
Speaker 10: that's really what investors are watching. The other side of
Speaker 10: that are the you know, trends in deposit pricing. If
Speaker 10: we do get lower rates, we could get a benefit
Speaker 10: in terms of the deposit pricing.
Speaker 3: Because they raised it so much before. I'm kidding because
Speaker 3: I didn't do that at all. I mean, I think
Speaker 3: I think my city account is like zero point eight
Speaker 3: nine percent, please please.
Speaker 10: Right, And so the interesting dynamic, right is that you know,
Speaker 10: rates went up immediately they adjusted the prices to the loans,
Speaker 10: but on the deposit side they were slower to adjust.
Speaker 10: And in part, you know, we were at zero percent
Speaker 10: for a long time the pandemic. They were making no money,
Speaker 10: so in part things had to balance out a little bit.
Speaker 10: But you know, once you get to a certain point,
Speaker 10: which is where we are now, you expect that to
Speaker 10: sort of catch up. And so you know that point
Speaker 10: eight nine is up from zero Alex Gosh, I mean,
Speaker 10: aren't you so excited?
Speaker 9: You know?
Speaker 10: But the thing is like, if if rates keep, you know,
Speaker 10: stay where they are, keep going up, you're going to say, hey,
Speaker 10: you know where you know, show me the money.
Speaker 3: Right, oh I am? And don't think that I didn't
Speaker 3: miss when Marcus cut their high old savings rate by
Speaker 3: ten bases points like last week. I was like, you
Speaker 3: got to be kidding me anyway, Allison, thanks very much,
Speaker 3: Alison Williams. She has all of our bank coverage credit
Speaker 3: card coverage as a management coverage here for Bloomberg Intelligence
Speaker 3: Senior Banks analyst. We very much appreciate that.
Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
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Speaker 3: So definitely say haven bid into the market. But we
Speaker 3: did learn a lot about the economy this week. The latest,
Speaker 3: of course, of those you miss data with expectations and
Speaker 3: current conditions coming in light, while those inflation expectation numbers
Speaker 3: were revised higher. So let's get the broader read here
Speaker 3: with Hasaan Naji. He's CEO of Marcus and Millichap. He
Speaker 3: joins us now in the Interactior Broker studio right here
Speaker 3: in Manhattan. I bet you miss California right now.
Speaker 8: Huh, good morning, But I love being in New York.
Speaker 3: You do, Okay, even the rain and the whole thing. Okay,
Speaker 3: what did we learn this week about where the US
Speaker 3: economy is?
Speaker 8: I was actually attending the Urban Land Institute conference, which
Speaker 8: is a very important trade group for commercial real estate.
Speaker 8: There were literally thousands of our clients here over the
Speaker 8: last several days. Everybody's very enthusiastic about the economy. The
Speaker 8: fact that jobs are coming in hotter than expected, and
Speaker 8: even consumer strength is coming in hotter than expected, and
Speaker 8: even some of the inflation readings that are pushing the
Speaker 8: FED out in terms of their timing. Is all good
Speaker 8: news for demand for various types of space, whether it's
Speaker 8: shopping centers, even office buildings are starting to see more
Speaker 8: of a recovery, apartment building, self storage, even mobile home
Speaker 8: parks and student housing. So the demand side of the
Speaker 8: equation is a reason for optimism. The fact that the
Speaker 8: interest rate spikes have really impacted valuations and the fact
Speaker 8: that banks have pulled back from lending or creating huge
Speaker 8: challenges on the transactional side of the equation, both in
Speaker 8: underwriting what the value should be and in securing financing.
Speaker 8: Commercial real estate is very interest rate sensitive. Of course,
Speaker 8: that's where the concerns are.
Speaker 7: Well.
Speaker 4: Tell us about your clients and if what kind of
Speaker 4: challenges they're facing right now, if this is a really
Speaker 4: tough environment to get a loan right now, perhaps to
Speaker 4: be expanding, and just generally how they view the landscape
Speaker 4: as well.
Speaker 8: I would say the biggest challenge is securing financing. And
Speaker 8: the proceeds from a lender were as high as sixty
Speaker 8: five or seventy percent of the price of an acquisition,
Speaker 8: that's down to maybe fifty percent. So not only have
Speaker 8: interest rates gone up, the lender's willingness to finance more
Speaker 8: of the acquisition has declined, and that is creating a
Speaker 8: huge challenge. But more than anything else, now that we're
Speaker 8: two years into this tightening cycle, we're starting to see
Speaker 8: clients recognize the price adjustments that have already occurred becoming
Speaker 8: an opportunity. Blackstone had declared the bottom about a month ago.
Speaker 8: Just a few days ago, they announced a ten billion
Speaker 8: dollar acquisition of a publicly trade rate that they're taking private.
Speaker 8: Those kinds of signals really jive with what we're hearing
Speaker 8: from institutional product clients on the prices being much lower
Speaker 8: than replacement cost. It's getting more expensive and more difficult
Speaker 8: to add new space of any type of product, and
Speaker 8: the replacement cost equation now makes commercial real estate a
Speaker 8: lot more attractive than it was just two years ago.
Speaker 3: So then for the broader back or read on rates,
Speaker 3: does it matter then that rates haven't been cut. Does
Speaker 3: it matter that we're at almost five percent the two
Speaker 3: year or is it just a time I just needed
Speaker 3: time to readjust to a higher for longer world.
Speaker 8: It's a combination of both. Interest rates matter a lot
Speaker 8: at quarter basis point fifty basis point on your financing
Speaker 8: rate makes a big difference, especially on the smaller price
Speaker 8: points for private investors, which make up the bulk of
Speaker 8: the market. By the way, eighty percent of the market
Speaker 8: and the commercial real estate world is priced under ten
Speaker 8: million dollars, So those microcap private client deals are very
Speaker 8: interest rate sensitive, as are the larger acquisitions, of course,
Speaker 8: but time has brought the price adjustments a little bit
Speaker 8: more time will bring more price adjustments, and the Fed's lowering,
Speaker 8: whether it's you know, once or twice, isn't so much
Speaker 8: the mathematical solution people are looking for. It's the psychological
Speaker 8: confirmation that the tightening is over. We're going to start
Speaker 8: to get out of a restrictive zone, which is where
Speaker 8: the FED has had us. I don't think they want
Speaker 8: to keep us in that restrictive zone a minute longer
Speaker 8: than they have to. But unfortunately, inflation is proving to
Speaker 8: be sticky and the time timeline keeps getting pushed out.
Speaker 4: So coming back to replacement costs for just a minute, here,
Speaker 4: I just went through buying a home.
Speaker 3: Oh you did regulation, thank you so much.
Speaker 4: Your rate Oh it thankfully no mortgage on this, But
Speaker 4: there is, thank you so much. But when I was
Speaker 4: going through this process, so obviously this is on the
Speaker 4: residential side, but when I think of replacement costs, I'm
Speaker 4: just thinking of man going through getting an insurance policy
Speaker 4: and how much more expensive that was. Thinking of all
Speaker 4: of how these costs are rising for both the material
Speaker 4: and labors. God forbid, you should ever need this policy
Speaker 4: to help you, So tell us if that's also what
Speaker 4: you're seeing on the commercial side in terms of ensuring
Speaker 4: some of these properties too.
Speaker 1: That is undoubtedly.
Speaker 8: Next to interest rates, the second most talked about issue
Speaker 8: is insurance across all property types, especially in regions that
Speaker 8: are more sensitive to natural disasters Florida, for example, California,
Speaker 8: But across the board, insurance is skyrocketed. So on top
Speaker 8: of the interest rate factor and the increased cost of debt,
Speaker 8: you have inflationary operating costs and then insurance. So that's
Speaker 8: another challenge that the industry is facing. But I have
Speaker 8: to tell you your strategy of paying all cash brilliant
Speaker 8: and then putting financing on it later is very commonly used,
Speaker 8: especially by private investors that now see opportunity to buy
Speaker 8: what they want to buy and at the right price
Speaker 8: point and then figure out the financing a little bit
Speaker 8: down the road. And we're seeing a lot of short
Speaker 8: term financing solutions with the student investors that know that
Speaker 8: interest rates are going to come in at some point
Speaker 8: and they don't want to, you know, sort of tie up.
Speaker 8: They're financing for much longer than they have to in
Speaker 8: order to take advantage of rates coming at some point.
Speaker 5: I suppose I am in a stute investor. Then in
Speaker 5: some way she's.
Speaker 3: Like, I didn't mean it like that, but okay, sounds
Speaker 3: that you are. Yeah, but then yes, absolutely, like because
Speaker 3: then you have it free clear right, and then when
Speaker 3: you need it you have the ability to and you
Speaker 3: can wait until we get down.
Speaker 4: To three yes, yeah, more hope again, this idea being
Speaker 4: that this will be a you know, an if matter
Speaker 4: than or rather, sorry, it's going to be a question
Speaker 4: of when rather than an if.
Speaker 3: Yes.
Speaker 4: So that's got to be something that you guys are
Speaker 4: looking at now too, of just like counting, you know,
Speaker 4: biding your time of like is it two cuts this year?
Speaker 5: Is it three?
Speaker 9: One?
Speaker 5: Zero?
Speaker 3: Is it this year?
Speaker 8: Is we expect two cuts? Even back in October November
Speaker 8: of last year, when people talking about four to six cuts.
Speaker 8: We never bought into that the economy was too strong,
Speaker 8: inflation was too high, and so far that has proven
Speaker 8: to be accurate. But again, it's more of a psychological
Speaker 8: factor than it is a mathematical factor. What I think
Speaker 8: is really important to also keep in mind is that
Speaker 8: as we move forward into the next cycle, the tax
Speaker 8: advantages of commercial owning commercial real estate, especially through direct ownership,
Speaker 8: don't get talked about enough as an asset class. Not
Speaker 8: only do you have an adjusting price point, you have
Speaker 8: a strong economy. Hopefully the economy won't get so weak
Speaker 8: to justify even more of a sort of a reduction
Speaker 8: in rates than we expect. The fact that the economy
Speaker 8: is holding up is good news, and you combine a
Speaker 8: strong economy with the tax benefits and adjusted pricing, I
Speaker 8: think the next cycle is actually gonna be pretty robust
Speaker 8: for commercial real estate, but we're.
Speaker 4: Let you go.
Speaker 3: Wells Fargo also had lower commercial real estate charge offs
Speaker 3: predominantly in the this portfolio that they had. So do
Speaker 3: we feel really confident that we've hit the bottom?
Speaker 8: I absolutely feel strongly that we've hit the bottom.
Speaker 3: How do we kind of bounce along there?
Speaker 8: That depends on the psychological factor of the FED and
Speaker 8: how well the economy holds up. But I will say
Speaker 8: that there is more room to go on the price adjustments.
Speaker 8: We're saying anything that's basically readjusted in valuations since March
Speaker 8: of twenty twenty two by anywhere from fifteen percent on
Speaker 8: the low end twenty five percent on the higher end,
Speaker 8: getting multiple offers from very aggressive buyers. There's record capital
Speaker 8: on the sideline waiting to come back into the market.
Speaker 8: And as we get clarity on the distress not being
Speaker 8: a wave of fire sales by banks, which I don't
Speaker 8: anticipate will happen, that's another reason why capital will come
Speaker 8: back into the market place time.
Speaker 3: We just need time. I feel like we heard a
Speaker 3: lot about that over the last few years, and we're like, no,
Speaker 3: we're a journalist, we need data now, but we just
Speaker 3: don't want to need the time for that. All right,
Speaker 3: Thank you so much, We really appreciate it. Thanks for
Speaker 3: having Hasama Najia adjoining us CEO of Marcus and Millichap.
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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Speaker 3: This is Bloomberg Intelligence Radio, where we give you all
Speaker 3: the news, all the analysis with our great Bloomberg Intelligence team.
Speaker 3: They cover two thousand companies in one hundred and thirty
Speaker 3: industries all around the world. We also like to bring
Speaker 3: you kind of boots on the ground scenario with some
Speaker 3: CEOs that's in the trenches. They do the stuff, they
Speaker 3: know the things on a deep level. And one of
Speaker 3: those companies that we want to focus on is Generak.
Speaker 3: It's basically a generator company, but it's going to be
Speaker 3: so much more than that in the world of the
Speaker 3: energy transition. It is an eight billion dollar company. The
Speaker 3: stock is down by about one and a half percent today,
Speaker 3: but it's a tough tape. Previously it has been on
Speaker 3: a tear. It's an interesting company. It's a leading global
Speaker 3: energy technology company that provides backup and prime power products
Speaker 3: and energy storage. And if you follow the energy transition
Speaker 3: like I do, you know stuff like this is key
Speaker 3: to making all of this work well. The CEO joins
Speaker 3: us now in studio Aaron Yogfeld is a CEO of Generak,
Speaker 3: and he joins us in the Bloomberg Interactive Studio. Thank
Speaker 3: you for being here, Aaron really appreciated. Thanks for having
Speaker 3: me so on a basic, basic question. When we look
Speaker 3: for the energy transition, so as we look to decarbonize,
Speaker 3: where do you sit in that journey?
Speaker 2: Yeah, so you know, there's a lot of things to
Speaker 2: unpack even in that statement.
Speaker 3: No, I know, That's why I asked it.
Speaker 2: The transition itself, right, is it grid one point oh
Speaker 2: to two point zero? We like to refer to it
Speaker 2: as old grid to new grid. And so the challenges
Speaker 2: that grid operators and utilities face today is is being
Speaker 2: compounded by the fact that we're retiring. On the sources side,
Speaker 2: we're retiring a lot of the traditional thermal assets like
Speaker 2: coal plants and gas plants in favor of renewable, which
Speaker 2: is great, but those are in and sources so a
Speaker 2: lot more difficult to plan for and not available as
Speaker 2: by the very nature of the word intermitt and not
Speaker 2: available all the time. And then on the demand side,
Speaker 2: we are seeing inflection points in demand. After decades of
Speaker 2: relative kind of flatness in energy demand, we're now seeing
Speaker 2: increases in demand with ev adoption. We're seeing of course
Speaker 2: AI with data center buildouts, cryptocurrency mining, and so the
Speaker 2: pressure that's being put on grid operators and utilities is
Speaker 2: creating a situation where it's manifesting itself in poorer reliability.
Speaker 2: So as Americans, we're experiencing more and more hours in
Speaker 2: the dark every year, so on average about eight hours
Speaker 2: a year, and that's the average. So our products and
Speaker 2: our company have been serving this need, the need for
Speaker 2: resiliency for a long time for homeowners and business owners.
Speaker 2: And so where we sit today is those products are
Speaker 2: in high demand and have been over the last several decades,
Speaker 2: and we're now starting to look at some of the
Speaker 2: other trends that are manifesting from this. The macro theme
Speaker 2: here of a new grid really going to be focused
Speaker 2: on cost. I think the untold story here going forward,
Speaker 2: and we're starting to see evidence of it in certain
Speaker 2: markets like California where energy prices. Electricity prices have really
Speaker 2: skyrocketed in the US, They've gone up about fifty percent
Speaker 2: over the last two decades. They're projected to double in
Speaker 2: the next two decades. So I think this is the
Speaker 2: thing that as we invest in this transition of the
Speaker 2: grid and as we try to deal with some of
Speaker 2: the some of the challenges that are coming here. The
Speaker 2: combination of less reliability while you're paying more for that
Speaker 2: service is not a great combination. We think we have
Speaker 2: products and services that can help with that.
Speaker 4: Well, let's get into the cost because you know, we've
Speaker 4: been looking at this from you know, I think I
Speaker 4: was telling you to cover the US economy for the
Speaker 4: most part. This is my little side hustle in here.
Speaker 4: But on the outside when we're looking at you know,
Speaker 4: what all of these costs to consumers are. Electricity utilities
Speaker 4: broadly have really been going up, especially if you're in
Speaker 4: an area where you're affected by climate in natural disasters.
Speaker 5: So how is this transition?
Speaker 4: I mean, it sounds like it's going to be probably
Speaker 4: more expensive and then hopefully be you know, a cheaper
Speaker 4: alternative in the long run.
Speaker 5: How do you see that planning out?
Speaker 2: You know, from from our vantage point, certainly costs are
Speaker 2: going up, and I as far as if it works
Speaker 2: out cheaper in the long run, I think it'll be
Speaker 2: cleaner in the long run. I think that, you know,
Speaker 2: I think the effort here that is driving a lot
Speaker 2: of the costs. There's a couple of things. One, the
Speaker 2: grid is just old right when you you know, if
Speaker 2: you take a walk and you go anywhere in most
Speaker 2: places in the US, the grid is above ground. There's polls,
Speaker 2: there's transformers, there's power lines. A lot of that equipment
Speaker 2: has been there for fifty plus years. So it's it's
Speaker 2: like a rod or a bridge. At some point it
Speaker 2: has to be refreshed. And so there's an infrastructure spend. Anyway,
Speaker 2: if you set aside the entire you know, discussion around
Speaker 2: climate change, there still was a big bill coming in
Speaker 2: terms of needing the infrastructure rebuild. Now, on top of that,
Speaker 2: as we decarbonize and we move towards renewables and we
Speaker 2: have to deal with this idea that these these sources
Speaker 2: are going to be intermittent and harder to plan for,
Speaker 2: and we need more of that power. You've got this
Speaker 2: unique setup that says, okay, we've got to invest in
Speaker 2: technology in a way that we haven't had to invest before.
Speaker 2: When you're talking about the power grid and the grid
Speaker 2: is so central to everything we do as homeowners or
Speaker 2: business owners, do you.
Speaker 3: Think that it's going to be more you providing generators
Speaker 3: that yeah, is it gonna be more breading generators or
Speaker 3: providing the grid with storage for like wind and solar.
Speaker 2: I think it's going to be both, right, So generators
Speaker 2: are going to be if you're concerned about a long
Speaker 2: duration outage, right, You've got if you have hurricanes, ice storms,
Speaker 2: things like this that can knock out the power for
Speaker 2: days on end. A generators are great. You know, that's
Speaker 2: an asset you're going to want to own. The idea though,
Speaker 2: is that that asset could also be deployed maybe at
Speaker 2: times when you don't need it, but maybe when the
Speaker 2: grid does. Right, So there's ideas that the generator could
Speaker 2: be part of that solution. Batteries as you say, though,
Speaker 2: Alex is exactly the you know, I think the newest
Speaker 2: technology still from a price standpoint, still pretty expensive though,
Speaker 2: and that's something that I think we've got to deal with.
Speaker 2: And the cost curve is is it's been coming down,
Speaker 2: but yet it's still something that you know, is it's
Speaker 2: not there yet.
Speaker 3: So I was in a so I cover energy for
Speaker 3: for my side hustle, your main hustle, it's semi hustle.
Speaker 3: And so the data center conversation is huge in terms
Speaker 3: of how you power it. And we've seen like Amazon
Speaker 3: buy like a nuclear power center like near where they're
Speaker 3: going to build stuff. Are you going to be like
Speaker 3: going to tech companies and be like, hey, I can
Speaker 3: build you this enormous generator for your data center.
Speaker 2: That's not necessarily us. I mean, we're going to stick
Speaker 2: to smaller installations. We call them behind the meter installation,
Speaker 2: so managing power, either backing up power or managing it
Speaker 2: behind the meter so at the customer connection. You know,
Speaker 2: again Homer business. But the AI conversation has I think,
Speaker 2: I don't want to say it's caught the utility industry
Speaker 2: flat footed, but you know, the projections are enormous. It
Speaker 2: kind of has, I mean the speed at which it's
Speaker 2: you know, the adoption of technology. A single chat GPT
Speaker 2: request takes seventeen times aimes the amount of energy as
Speaker 2: a typical Google search seventeen times just a single god
Speaker 2: Chat GPT request. So think about that and you you
Speaker 2: multiply that across you know, all the places that you
Speaker 2: can use that technology AI, and it's going to be
Speaker 2: fantastic and it's awesome, but it's really energy intensive.
Speaker 5: Wow, I've never heard that number before. That's scary.
Speaker 3: Yeah, and just we got so used to power demand
Speaker 3: not growing at all, and then all of a sudden,
Speaker 3: just the trajectory is enormous, and then how you kind
Speaker 3: of manage that? So, you know, to Molly's question, the
Speaker 3: way that I look at it is absolutely everything's going
Speaker 3: to cost more. I think the question is who's actually
Speaker 3: going to pay for it? Is it the government? And
Speaker 3: then taxes? Is it?
Speaker 2: I got I got news for you. Anything that costs
Speaker 2: more in the energy world the rate payers.
Speaker 3: Yeah, yeah, us like at some point exactly, but we're
Speaker 3: going to have to raise the rates. Aaron, thanks a lot.
Speaker 3: That was really fun. You should definitely come back. Aaron
Speaker 3: Yongfeld joining us. He's CEO of Generic. They're basically a
Speaker 3: power backup company, so really interesting stuff.
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