Latest / Bloomberg Intelligence / Powell Pivot, Inflation, and CRE

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Powell Pivot, Inflation, and CRE · Bloomberg Intelligence

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Speaker 2: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside
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Speaker 2: Let's check in with Ed Harrison. He's the senior editor
0:57
Speaker 2: of Bloomberg News. Get his thoughts on these markets. Thanks
1:00
Speaker 2: so much for joining us via zoom here. What do
1:02
Speaker 2: you make of what we heard from fed chairman Pal
1:06
Speaker 2: yesterday and then maybe the market's reaction to it.
1:09
Speaker 3: Yeah.
1:10
Speaker 4: I think there are two things there, Matt. One is
1:13
Speaker 4: that there was no pushback from the FED, and I
1:15
Speaker 4: think that's the most significant of the two things. The second,
1:18
Speaker 4: obviously is the dot plot, which was relatively dubbished. But
1:21
Speaker 4: when you add those two together, particularly the one with
1:24
Speaker 4: the lack of pushback, it says that markets have room
1:28
Speaker 4: to rip from here. And this is exactly the opposite
1:30
Speaker 4: of what I was thinking ahead of the meeting. I
1:32
Speaker 4: was writing that the FED would at least do a
1:35
Speaker 4: perfunctory pushback. But that's not what we got. When you
1:38
Speaker 4: look at the transcript of what Powell when he was
1:41
Speaker 4: asked questions Nick Timmeros or the Wall Street Journal, he
1:44
Speaker 4: asked him, look, you know, we've gotten a lot of
1:49
Speaker 4: easing and policy on your behalf. I anticipating a funds
1:53
Speaker 4: rate next year that's a full percentage point lower in
1:56
Speaker 4: September and missed, and Jerome Powell said and respond he said, look,
2:00
Speaker 4: you know, we're just going to do what we have
2:02
Speaker 4: to do. We're not going to think about the market.
2:05
Speaker 4: They're going to do what they need to do, and
2:07
Speaker 4: we'll meet somewhere in the future in some place, and
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Speaker 4: that was enough for the market to say, Okay, look,
2:13
Speaker 4: we have no pushback here. We're definitely just.
2:15
Speaker 5: Gonna let it go.
2:16
Speaker 6: And it's interesting, ed because when you think back to
2:18
Speaker 6: the November meeting, that was really when Powell had pushed
2:22
Speaker 6: back on all of the uh you know, or really
2:25
Speaker 6: more that paid more attention, i should say, to financial conditions,
2:28
Speaker 6: and that was a time when treasury yields were really
2:31
Speaker 6: going higher and you always like, oh, well, this is
2:33
Speaker 6: maybe kind of nice, you know, they're doing a bit
2:35
Speaker 6: of the work for us, Like, we'll take that. And
2:37
Speaker 6: now there's been so much easing just built in in
2:41
Speaker 6: the treasury market for people thinking that this pivot was coming.
2:45
Speaker 6: Of course, on the now the decision has come, stocks
2:48
Speaker 6: and treasuries just ripping further. So is there really does
2:52
Speaker 6: Powell still care about the you know, financial conditions at
2:55
Speaker 6: this point or he's kind of just willing to let
2:57
Speaker 6: them go as they please.
3:00
Speaker 4: Yeah, I think that he's given up. Looking at it, it
3:02
Speaker 4: makes a lot of sense in terms of thinking about
3:05
Speaker 4: where we are in terms of the easing cycle or
3:07
Speaker 4: the tightening cycle. We're basically by giving up on trying
3:11
Speaker 4: to get financial conditions in order. He's moving to a
3:14
Speaker 4: full on, you know, data dependent mode. That means that
3:18
Speaker 4: we're not giving you any guidance except for what you
3:20
Speaker 4: get in the SCP and as the data come in,
3:24
Speaker 4: we're going to do what we need to do, and
3:26
Speaker 4: you guys do what you do. So in terms of
3:28
Speaker 4: going until the end of the year, you know, we
3:31
Speaker 4: got the retail sales that you guys were just talking about,
3:34
Speaker 4: which were bullish, as well as the initial and continuing claims,
3:39
Speaker 4: and the market's just completely disregarded that. You know, you
3:41
Speaker 4: look at the treasury markets at a minimum and they
3:46
Speaker 4: continue to go be below four percent on the ten year,
3:51
Speaker 4: and so what that says is that you you know,
3:53
Speaker 4: the path of lest resistance until the end of the
3:55
Speaker 4: year is towards lower yields. And then we'll have to
3:59
Speaker 4: see what the day to show. And when the data
4:02
Speaker 4: come out, we're gonna see some volatility because there's no
4:05
Speaker 4: guidance as to what the Fed's reaction function will be.
4:09
Speaker 4: Everyone's now thinking March for the first cuts. But if
4:12
Speaker 4: if we see those retail sales numbers again and again
4:15
Speaker 4: and again like that we saw today, then people are
4:19
Speaker 4: gonna have to push back those those expectations.
4:22
Speaker 7: You know.
4:22
Speaker 2: It's I think one of the risks here, as I
4:25
Speaker 2: just kind of look at the market reaction yesterday and today,
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Speaker 2: is that, you know, FED Chairman Powell may have lost
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Speaker 2: the ability to rain in this market if the data
4:33
Speaker 2: does in fact go.
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Speaker 5: The other way.
4:34
Speaker 2: I mean, it's just he seems to have, you know,
4:37
Speaker 2: kind of unleashed the wild spirits, if you will, of
4:40
Speaker 2: this market. I'm not sure how he ever gets back
4:42
Speaker 2: to any kind of cautious narrative here. I'm wondering if
4:46
Speaker 2: he's I'm gonna say, misplayed yesterday, but maybe it was
4:49
Speaker 2: misinterpreted by the market, or it just seems like it's
4:52
Speaker 2: tough to close the barn door now.
4:55
Speaker 4: Yeah, you know, I think that that is a worry.
4:58
Speaker 4: My My worry is, and I've said this before, is
5:02
Speaker 4: nineteen ninety nine. You know, when I talked to you
5:04
Speaker 4: two times ago, I think we were talking about partying
5:07
Speaker 4: like it's nineteen ninety nine. He's allowing that to happen,
5:09
Speaker 4: And obviously if that happens, then what you see is
5:14
Speaker 4: a harder landing down the line. It's very difficult to
5:18
Speaker 4: see a scenario in which you have unemployment at three
5:23
Speaker 4: point seven percent for an extended period of time without
5:27
Speaker 4: the Fed having to continually be at the ready to
5:32
Speaker 4: tighten financial conditions. And that's where we're headed into twenty
5:36
Speaker 4: twenty four. And with markets increasing the price earnings ratios,
5:42
Speaker 4: increasing their bets on cuts of interest rates, it sets
5:47
Speaker 4: up a very nasty headache down the line potentially.
5:51
Speaker 6: Yeah, I mean, let's just roll it back just a
5:53
Speaker 6: little bit here for some perspectives. So we had that
5:55
Speaker 6: awesome jobs report on Friday of last week, you know,
5:59
Speaker 6: great payrolls number, unemployment rate down, and wages were up.
6:03
Speaker 6: Fast forward to this week the CPI report. You know,
6:07
Speaker 6: obviously you know a bit of concerning. I would think
6:09
Speaker 6: for Fed officials there that that service sector inflation is
6:12
Speaker 6: still very much powering ahead, so not much of a
6:15
Speaker 6: dent there. And then of course they didn't get to
6:18
Speaker 6: see today before they met the retail sales and jobs
6:21
Speaker 6: claims data, but you would think all of that would
6:23
Speaker 6: be supporting higher rates at this point and not be
6:26
Speaker 6: talking about cuts.
6:28
Speaker 4: Well, you know, I'd be interested to see what Michelle
6:31
Speaker 4: Bowman has to say, because I know that pale he
6:34
Speaker 4: flicked at her a little bit so as to not
6:37
Speaker 4: leave her dangling in the wind. She's one of the
6:38
Speaker 4: few people who thinks that rates should be higher.
6:42
Speaker 3: He said that we could.
6:43
Speaker 4: Go either way, but really it was a very perfunctory,
6:45
Speaker 4: very lip service type of comment on his part. I
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Speaker 4: think that you know, the wind is blowing towards easing,
6:52
Speaker 4: and to the degree that we see those numbers that
6:56
Speaker 4: you were talking about, Jess go down, then we are
6:59
Speaker 4: going to get the easy that people expect. Perhaps not
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Speaker 4: as quickly as they expect, but you know, the FED
7:04
Speaker 4: is primed in that direction, and I think that that's
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Speaker 4: the path of least resistance at this point in time.
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Speaker 2: So, Ed, I mean, what's your view of inflation here?
7:15
Speaker 2: I mean, I guess the FED feels like it's on
7:19
Speaker 2: the right path, which it arguably is, but I guess
7:21
Speaker 2: it's just a question of timing to when we get
7:25
Speaker 2: to the inflation level that the FED really looks at.
7:27
Speaker 2: What's your view?
7:29
Speaker 4: My view is that we're in an interesting paradigm that
7:34
Speaker 4: we haven't seen over the say, the last twenty years.
7:37
Speaker 4: You know, where you have the deglobalization, you also have
7:41
Speaker 4: a dearth of workers as the baby boomers leave the
7:45
Speaker 4: working population so there are some structural changes that create
7:49
Speaker 4: upward pressure on inflation in the US in particular. And
7:52
Speaker 4: so you know, with core PCEE inflation at three point
7:56
Speaker 4: five percent, that's almost double the FED mandate. Really, you
8:02
Speaker 4: could get down to something in the two say like
8:04
Speaker 4: two to nine in the FED could start to ease,
8:07
Speaker 4: but beyond that it's going to be very difficult. And
8:11
Speaker 4: so I think that there's gonna be a lot of
8:12
Speaker 4: pressure on the FED going forward to continually be at
8:17
Speaker 4: the ready to tighten financial conditions because inflation is likely
8:23
Speaker 4: to continually be sticky given those headwinds.
8:28
Speaker 6: Twenty seconds here, Ed, when's that first cut coming?
8:32
Speaker 4: I would say the first cut is going to come June.
8:36
Speaker 4: That's that's what I would say. Okay, and so we're
8:41
Speaker 4: going to see some some steepening as a result of that,
8:45
Speaker 4: and then it's going to be a rapid cut because
8:48
Speaker 4: by that time it will be clear that the economy
8:51
Speaker 4: has deteriorated.
8:53
Speaker 2: And thanks so much for joining us. Really appreciate it.
8:55
Speaker 2: Ed Harrison, Senior editor for Bloomberg News. We certainly recommend
8:59
Speaker 2: as every thing risk a column, good stuff, goodreads all
9:02
Speaker 2: the time, and we appreciate in a few minutes of
9:05
Speaker 2: his time.
9:06
Speaker 8: You're listening to the team. Can's are live program Bloomberg
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9:20
Speaker 2: People certainly liked what they heard from the FED yesterday.
9:23
Speaker 2: Let's bring in Jay Haffield. He's a CEO, founder and
9:26
Speaker 2: portfolio manager at Infrastructure Capital Advisors. He joins us live
9:29
Speaker 2: here in the Bloomberg Interactor Broker studio like he always does,
9:32
Speaker 2: never mails it in, never phones it in. The kids
9:34
Speaker 2: could learn something from that, Jay. I don't know what
9:37
Speaker 2: did you take yesterday. It's certainly surprised. I think the
9:41
Speaker 2: market with FED Chairman j Pals I guess tone of comments,
9:46
Speaker 2: maybe even the dot pots as well. What did you
9:47
Speaker 2: take away from it?
9:49
Speaker 7: Thanks, Paul and Mollie, Well, we were surprised, like the market,
9:53
Speaker 7: we had thought that the FED was only going to
9:55
Speaker 7: have two cuts priced into the dot plot. It's a
10:00
Speaker 7: welcome relief. But I think that you've had some new participants.
10:06
Speaker 7: They've come on to the FED, like Austin Goldsby, and
10:09
Speaker 7: they're looking at what they should look at which is
10:12
Speaker 7: more mosaic of data instead of myopically focusing on this
10:16
Speaker 7: PC core. We think that's a disaster and makes the
10:18
Speaker 7: FED fundamental disaster, really total disaster. Yeah, the problem is
10:27
Speaker 7: you have to look. If you watch core PC, then
10:30
Speaker 7: you'll end up being incompetent Federal Reserve and you'll call
10:35
Speaker 7: inflation transitory when it's skyrocketing. So what you should do
10:40
Speaker 7: is look at PPI, look at CPI dash R that's
10:43
Speaker 7: R index or in other words, adjust the horrible shelter
10:47
Speaker 7: component of BLS and then use something called judgment instead
10:51
Speaker 7: of a rule that Greenspan used to use. Who was
10:54
Speaker 7: the real star of monetary policy? And so it seems
10:57
Speaker 7: like they've taken the leap, and are you using judgment
11:01
Speaker 7: instead of just focusing on this one measure that's massively flawed?
11:05
Speaker 6: So which ones are?
11:06
Speaker 3: I mean?
11:06
Speaker 6: Will you just rattle off a couple of metrics there?
11:09
Speaker 6: I mean, which one do you think right now has
11:10
Speaker 6: the most of a signal right now for inflation that
11:14
Speaker 6: you're really paying attention to.
11:16
Speaker 7: Well, the reason that we've kind of nailed this cycle
11:18
Speaker 7: since the pandemic is that, unlike the FED, we look
11:22
Speaker 7: at monetary policy which drives housing market. And then we're
11:27
Speaker 7: lucky because they're energy investors. We have a pipeline fund.
11:29
Speaker 7: I founded a pipeline company, So if I would argue,
11:32
Speaker 7: if you have those two inputs, you can ignore monetary policy.
11:35
Speaker 7: Just look at the housing sector and energy prices and
11:38
Speaker 7: you will be a good forecaster. So right now, you know,
11:43
Speaker 7: housing prices did come way down. They have ticked up
11:45
Speaker 7: we talked about the last time, so that's a little
11:47
Speaker 7: bit of risk. But rents are low, so we might
11:49
Speaker 7: have to have yet another index that has just rents.
11:52
Speaker 6: Yeah, like you said, you would not know that looking
11:54
Speaker 6: at the CPI index.
11:55
Speaker 7: Shelter or even our CPI dosh Our is ticked up
11:58
Speaker 7: because case Shiller went up. Rents are down again. This
12:01
Speaker 7: is the mosaic you have to look at. So we
12:04
Speaker 7: do think that inflation is contained, and we are pleasantly
12:09
Speaker 7: surprised that the Fed agree seems to agree with us.
12:12
Speaker 5: Right now, All.
12:13
Speaker 2: Right, Jay, and make sure our headline writers are ready here.
12:17
Speaker 2: What have you done to your s and P five
12:19
Speaker 2: hundred price target?
12:20
Speaker 7: And why so we raised it this morning And the
12:24
Speaker 7: best way to summarize why is a terminal command MI IPR,
12:31
Speaker 7: which I would recommend everybody boots up. We sort of
12:34
Speaker 7: sadly only figured this out about two weeks ago.
12:37
Speaker 6: That's market implied policy rates for everyone tuning in yees.
12:40
Speaker 7: So if you look at one of the columns, it's
12:43
Speaker 7: a sea of red, but that's good red. So those
12:47
Speaker 7: are all the rate cuts that are priced in to
12:49
Speaker 7: all the major bond markets in the world. And so
12:52
Speaker 7: it's kind of obvious this data should exist because we
12:55
Speaker 7: have it in the US right because there's always theres
12:57
Speaker 7: a futures market in every country. And so what's wildly
13:01
Speaker 7: bullish about this is that we were on two or
13:03
Speaker 7: three months ago and we had this non consensus call
13:06
Speaker 7: that the euro economy was terrible and that the Eurozone
13:10
Speaker 7: would be forced to cut or ECB would be forced
13:12
Speaker 7: to cut. But the good news is you don't even
13:14
Speaker 7: need to listen to our rationale because that's what market
13:17
Speaker 7: participants believe now. So I guess they're avid listeners of
13:20
Speaker 7: Bloomberg Radio. And also, if you hover over the Eurozone chart,
13:25
Speaker 7: you can chick you can put up a GPO chart
13:28
Speaker 7: and you can see that it did plummet over the
13:31
Speaker 7: last two or three months. So this is the heart
13:33
Speaker 7: of the Bowld case. But it's even better because the
13:36
Speaker 7: ECB was very recalcitrant today and has what we think
13:40
Speaker 7: is kind of a crazy forecast of plus point eight
13:44
Speaker 7: percent for GDP next year to strongly disagree with. But
13:48
Speaker 7: the good news is you don't we need to agree
13:49
Speaker 7: with our variant view on their economy because market participants
13:54
Speaker 7: in the Eurozone who trade Eurozone futures agree with us.
13:59
Speaker 7: That number tick down a little bit. It was one
14:01
Speaker 7: forty four as the negative the cuts price ten next year.
14:04
Speaker 7: After the Guard's speech, that ticked down six bases points.
14:07
Speaker 7: So that was a pretty hot as speech.
14:08
Speaker 2: All right, So let me just summarize what the good
14:11
Speaker 2: folks at your firm, Infrastructural Capital Visors did this morning.
14:14
Speaker 2: They raised your price targraphy the S and P five
14:16
Speaker 2: hundred to fifty five hundred from fifty one to fifty.
14:20
Speaker 2: That's based on a twenty one and a half multiple
14:22
Speaker 2: on S and P consensus earnings for two seventy So
14:25
Speaker 2: that's your twenty twenty four year in target.
14:27
Speaker 6: Correct and perspective. We're right now at forty seven to
14:30
Speaker 6: twenty five correct.
14:31
Speaker 3: So that's great.
14:32
Speaker 2: Yeah, what's the risk to your outlook here, is it
14:36
Speaker 2: earnings risk, is it macro risk? What are some of the.
14:39
Speaker 7: Well, that's what a lot of people don't appreciate is
14:42
Speaker 7: the multip on the market is ninety percent driven by
14:46
Speaker 7: long term interest rates. So the reason we upgraded it
14:49
Speaker 7: is that we have this non consensus call that rates
14:52
Speaker 7: are going to drop from five but that looked a
14:54
Speaker 7: little bit problematic, so we're pretty conservative conservative about tenure.
14:58
Speaker 7: So but at a three fifty that implies a twenty
15:01
Speaker 7: one times multiple on EPs on smpeps and the consensus
15:07
Speaker 7: is two seventy. And by the way, we did this
15:09
Speaker 7: methodology last year and came up at our forty five
15:12
Speaker 7: hundred target. So it's just a very straightforward. If you
15:16
Speaker 7: don't like, as you're pointing out, don't like one of
15:17
Speaker 7: our metrics, you can just plug in your own. We're
15:20
Speaker 7: using three point five percent, which implies twenty one and
15:23
Speaker 7: a half actually, and to seventy on earnings. And we
15:26
Speaker 7: are bullish about earnings, and we think most people miss
15:29
Speaker 7: the dynamic that earnings normally go up by ten percent.
15:33
Speaker 7: You don't need margin expansion, you don't need a very
15:35
Speaker 7: strong economy because companies are retaining earnings about seventy percent
15:39
Speaker 7: invest about at fifteen percent after tax. That implies ten
15:43
Speaker 7: and a half percent growth. So the earnings estimates are normal,
15:46
Speaker 7: not crazy. And we don't think you need to debate
15:49
Speaker 7: that and wring your hands about it, because it's the
15:51
Speaker 7: companies reinvesting their cash flow primarily driving earnings.
15:56
Speaker 6: So you had a start off by telling us that
15:59
Speaker 6: the FED and the APPOT yesterday indicated three rate cuts.
16:02
Speaker 6: You think that there's only going to be two. The
16:04
Speaker 6: dot plot though there was a pretty wide range in there.
16:07
Speaker 6: You know, that's just the median with three cuts, but
16:09
Speaker 6: there are eight participants who saw fewer reductions, five expect
16:13
Speaker 6: deeper cuts. Who do you I mean, we obviously don't
16:16
Speaker 6: know whose dot really belongs to you, but you could
16:18
Speaker 6: take a reasonably educated guess who do you think is
16:21
Speaker 6: really the voice that you're following the most right now?
16:24
Speaker 7: Well, we think that the thought leader initially was really Goolsby,
16:29
Speaker 7: that he came in and sort of said, the emperor
16:30
Speaker 7: has no clothes, that the labor market is not the
16:34
Speaker 7: key driver of inflation, and so and there are I
16:38
Speaker 7: think that you got to the heart of the matter
16:39
Speaker 7: is that pal was probably forced to come off his
16:42
Speaker 7: tone because he had a number of participants saying that
16:46
Speaker 7: inflation is actually plummeting that the economy is at risk.
16:50
Speaker 7: We think it's fine, but it is at risk if
16:53
Speaker 7: they keep rates because keep in mind, if inflation really
16:56
Speaker 7: is going down, then real rates or skyrocketing if you
16:59
Speaker 7: keep them flat. So it is encouraging that there apparently
17:03
Speaker 7: has been a little bit of a palace coup and
17:06
Speaker 7: the hawks have been moved more to the center or
17:09
Speaker 7: even dubbish.
17:11
Speaker 2: Off top of question. You see, Davis is where you
17:14
Speaker 2: graduated from. I'm a huge fan of the University California system.
17:19
Speaker 2: It's just amazing what they've done over generations, haven't they.
17:23
Speaker 5: Yeah.
17:23
Speaker 7: So the advantage too, that particularly those northern California schools have,
17:27
Speaker 7: like UC Davis, is that if you look at a map,
17:30
Speaker 7: if not from California, it's extraordinarily close to Silicon Valley.
17:33
Speaker 5: Yep.
17:34
Speaker 7: So those are great training schools. You don't learn like
17:36
Speaker 7: my kids Latin and all these other things, but you
17:40
Speaker 7: learn I was trained in business, economics, medical, so just
17:45
Speaker 7: the real professional school. It's practical, it's meant for public
17:49
Speaker 7: you know, kids as top ten percent students. So probably
17:53
Speaker 7: the model of the future. Although these are great schools
17:55
Speaker 7: we have in the Northeast.
17:56
Speaker 2: Yeah, but it's just I mean Professor Galloway from NYUS.
17:59
Speaker 2: I'm a big fan of his. He's a huge proponent
18:01
Speaker 2: of the UC system and what it did for him
18:04
Speaker 2: and what it does for generations of kids in California
18:07
Speaker 2: to bring them to the next level. And that's powered
18:10
Speaker 2: a lot of the economy in the great economy for California.
18:12
Speaker 2: The lext one hundred plus year so Ja Halfield and
18:15
Speaker 2: then you got your MBA from some place in Philadelphia.
18:16
Speaker 2: I don't know Jay Haffield. He's the CEO, founder and
18:19
Speaker 2: portfolio manager at Infrastructure Capital Advisors, raising the price target
18:23
Speaker 2: big time.
18:24
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Speaker 8: flagship New York station. Just say Alexa play Bloomberg eleven thirty.
18:44
Speaker 2: Again. Movements in the markets here, we had a fed
18:46
Speaker 2: that I think, I mean, you look at the market
18:50
Speaker 2: reaction took the market by surprise.
18:51
Speaker 6: With its cheerleaders everywhere. It is a good day.
18:55
Speaker 2: Just ripping here Neil Grossman. He doesn't strike me as
18:58
Speaker 2: a cheerleader, but Neil Grossman's here, CEO TNKG Capital Joints
19:03
Speaker 2: here on our Bloomberg Interactive Broker studio. Neil, what did
19:06
Speaker 2: you make of yesterday and the reaction to the marketplace stuff?
19:09
Speaker 5: Good morning and happy holidays? I think that was Christmas
19:16
Speaker 5: A couple of things. I guess. Number one I think
19:20
Speaker 5: I well, I took away. Number one is under the hood.
19:23
Speaker 5: Mister Powell may have just told everybody he's changing the
19:27
Speaker 5: definition of what inflation measures they're looking for, raising the target,
19:32
Speaker 5: because I was amazed. The thing that really was most
19:35
Speaker 5: amazing to me was the fact that he said, we
19:38
Speaker 5: can't wait till we get to two percent to start
19:42
Speaker 5: removing or providing more liquidity, because that would be too restrictive.
19:46
Speaker 2: So is that a different message there?
19:47
Speaker 5: Well, that means you're two percent no longer really your target.
19:50
Speaker 5: And not only that. I know we've talked about the
19:53
Speaker 5: fact that we're now going to have close to five
19:55
Speaker 5: four years or so of high inflation on an average basis,
20:00
Speaker 5: But he's now I think, what's happened is raised the
20:04
Speaker 5: probability that getting to two percent is dropping, and the
20:08
Speaker 5: potential for reacceleration is a problem. Look, this whole rally started,
20:14
Speaker 5: I guess five six weeks ago when he made the
20:17
Speaker 5: comment that the market's doing the work for them. Ten
20:20
Speaker 5: year notes were about five percent, give or take, and
20:24
Speaker 5: interest rates have dropped a full hundred basis points. Basically,
20:28
Speaker 5: the stock market's up something like twenty percent as of
20:31
Speaker 5: at least as of yesterday. The dollar had been weakening,
20:35
Speaker 5: you had a drop in commodity prices, so everything was
20:39
Speaker 5: since then has functionally said we were providing a lot
20:42
Speaker 5: more liquidity in the market. Unemployment or the employment structure
20:47
Speaker 5: has although yes it's weakened, this is a very interesting thing.
20:50
Speaker 5: In a minute, it's still remarkably strong. So here's an
20:54
Speaker 5: interesting question. After the last employment number, the twelve month
20:57
Speaker 5: trailing average job at creation was still a two hundred
21:01
Speaker 5: and thirty five thousand jobs, pretty high. When was the
21:04
Speaker 5: last time that happened?
21:05
Speaker 6: Would I say pre COVID.
21:07
Speaker 5: Twenty fifteen for short period before that and before that
21:10
Speaker 5: two thousand, so to add two hundred and thirty five
21:13
Speaker 5: thousand jobs a month as an extraordinary rate of job
21:17
Speaker 5: creation in the absence of the fact that it's coming
21:20
Speaker 5: down from what were much much higher levels. So the
21:24
Speaker 5: relative strength of the economy, because if you look at
21:27
Speaker 5: a five hundred thousand a year before, there's a slowing there,
21:31
Speaker 5: but our job creation rate is still extraordinary at a
21:36
Speaker 5: time when more or less maintaining the status quo of
21:39
Speaker 5: unemployments give or take about one hundred thousand a month.
21:42
Speaker 6: Let's just come back for a second to one thing
21:44
Speaker 6: that you had just said, so and correct me if
21:46
Speaker 6: I'm wrong here. But I don't think the expectation was
21:48
Speaker 6: ever that the FED was going to wait for inflation
21:51
Speaker 6: to get to two percent before they started cutting.
21:54
Speaker 5: I don't think that they'd ever made any comment they
21:57
Speaker 5: had a two percent target think.
21:58
Speaker 6: And they still do it.
22:00
Speaker 5: I don't believe that. Why not, because I don't think
22:02
Speaker 5: they're going to get to two percent, And even if
22:04
Speaker 5: they do get close to it, the type of liquidity
22:06
Speaker 5: provisions that will already be in the pipeline are going
22:08
Speaker 5: to be raising the probability that they're not getting there.
22:11
Speaker 5: That's why. Right, So if the market, if the Fed's
22:14
Speaker 5: now talking about three cuts next year, the market's got
22:17
Speaker 5: I don't know, is it six or seven over the
22:19
Speaker 5: next If you're liquifying through the stock the equity market,
22:23
Speaker 5: if you're liquifying through rate cuts, you're you're already lowering
22:28
Speaker 5: number one, the price or raising the probability the prices
22:32
Speaker 5: are not going to fall as far fast number two,
22:35
Speaker 5: which is good, Which is sort of he didn't want
22:37
Speaker 5: to talk about yestidy. I guess we've had a lot
22:39
Speaker 5: of wage settlements in the in the private sector, but
22:43
Speaker 5: also in the in the you know, the the coal
22:46
Speaker 5: adjustments for retirees. By the way, I'm one now, so
22:48
Speaker 5: I'm gonna be getting a lot more. But there was
22:51
Speaker 5: an eight point seven percent increase this year. Every government employee,
22:55
Speaker 5: I believe, and many public quasi public people are also
23:00
Speaker 5: inflation adjusted. So those types of wage increases with inflation
23:04
Speaker 5: following means there's a lot more you know, potential upward
23:08
Speaker 5: pressure that can be consumption driven through a large part
23:11
Speaker 5: of the economy, and they're.
23:13
Speaker 6: Not seeing like in general though, like inflation adjusted earnings
23:16
Speaker 6: as a whole, you know, ripping that much higher. I mean,
23:20
Speaker 6: it's now been positive for what like the last six months,
23:23
Speaker 6: but we're negative for two years.
23:25
Speaker 5: Well, I'm not sure how negative they were. I guess
23:28
Speaker 5: first of all, you had what might be negative in
23:31
Speaker 5: a direct payment, but you have to add in the
23:34
Speaker 5: type of money the government was giving to people in
23:36
Speaker 5: the alternative and also for example, which is on the
23:40
Speaker 5: other side now, but telling people they don't have to
23:42
Speaker 5: pay their mortgages. I mean, there was a lot of loans,
23:45
Speaker 5: student loans, structural issues that made relative income look far
23:50
Speaker 5: better maybe than the straight measure of the payments themselves.
23:56
Speaker 5: And I think what you're going to find, I mean,
23:58
Speaker 5: we'll see, but I think it's gonna be ver very
24:00
Speaker 5: hard for every any business that's got unionized employees and
24:04
Speaker 5: the government itself when it comes time to renegotiate, to
24:08
Speaker 5: sit there when they're employees say that's what they got,
24:11
Speaker 5: we get the same thing, which means there's an enormous
24:13
Speaker 5: amount of risk that that in fact, we have much
24:17
Speaker 5: more wage inflation in the pipeline or wage risk in
24:19
Speaker 5: the pipeline than anyone wants to accept.
24:21
Speaker 6: Not a whole lot of unions left though, really did
24:24
Speaker 6: drive that for it.
24:24
Speaker 5: Well, there are twenty million government employees in this country.
24:28
Speaker 6: They have a good barning power.
24:29
Speaker 5: They still have pretty good but I've never seen a
24:31
Speaker 5: government employee fired. I've never seen them be asked to
24:34
Speaker 5: take a wage cut, so etc.
24:37
Speaker 2: Do you think in hindsight now, just seeing what the
24:39
Speaker 2: markets have done yesterday afternoon this morning don't fit Schuerman
24:43
Speaker 2: j Pal says, Oh, that's not necessarily the message I
24:45
Speaker 2: wanted to give.
24:47
Speaker 5: I think he knew exactly what he was doing. I mean,
24:51
Speaker 5: he had an opportunity to couch this slightly differently as
24:56
Speaker 5: I said. I think that, to me, the single most
24:58
Speaker 5: important comment was a that if we're waiting until we
25:02
Speaker 5: get to two percent, we've waited too long. We see
25:05
Speaker 5: prices coming down. He ignored he didn't use the same
25:09
Speaker 5: statement he'd made six weeks ago. He should have said
25:12
Speaker 5: the market is now providing the type of liquidity we need.
25:15
Speaker 5: We don't need to do as much because of this,
25:17
Speaker 5: but he didn't do it. So I think embedded in
25:20
Speaker 5: this message for the moment is the risk that they
25:24
Speaker 5: they've now accepted a higher level of inflation as parcel
25:28
Speaker 5: of their policy, which I of course think is a
25:30
Speaker 5: terrible outcome.
25:32
Speaker 6: But a lot of people have been calling for that though,
25:34
Speaker 6: you know, saying like look like you know, we've got
25:36
Speaker 6: a structurally different economy that maybe, so an inflation target
25:40
Speaker 6: more around two and a half to three percent is
25:42
Speaker 6: more reasonable for like the world that we're living in now. Well,
25:45
Speaker 6: does that not sound like legit to you?
25:47
Speaker 5: No?
25:48
Speaker 3: Why not?
25:48
Speaker 5: Because it has none of us, none of us have
25:51
Speaker 5: the privilege of my from my perspective, who set the
25:54
Speaker 5: FEDS mandate?
25:56
Speaker 6: Congress?
25:56
Speaker 5: Congress? What is the FEDS mandate.
25:59
Speaker 6: To to maintain price stability and maximum imployment?
26:02
Speaker 5: And what is price stability? Zero inflation? So is it?
26:06
Speaker 5: It is by definition? Now that the fact is the
26:08
Speaker 5: FED was an unusual institution because it had a duel
26:11
Speaker 5: mandate and it's actually there's a lurking third one about
26:13
Speaker 5: long probably stable long trombons. But the bottom line is
26:16
Speaker 5: they have a two factor optimization which allowed them to
26:21
Speaker 5: functionally play with both. I think it was the Swedish
26:24
Speaker 5: Central Bank who motivated this move to two percent, but
26:27
Speaker 5: two percent is still not their theoretical mandate. And in fact,
26:30
Speaker 5: what was really sort of said to me they had
26:33
Speaker 5: inflation at about one quarter to one a half and
26:35
Speaker 5: full employment about a decade and a half ago, and
26:38
Speaker 5: they said, well, that's that's no good. We don't like
26:40
Speaker 5: inflation below a level, and then they all the modifications
26:44
Speaker 5: in how we define inflation and all these other measures.
26:48
Speaker 5: The answer is, if it's not a good thing, the
26:51
Speaker 5: FED should be going to Congress. And by the way,
26:54
Speaker 5: just to go off track, Leena Khan and the FTC
26:58
Speaker 5: to mere the same issue. She is a regulator, an administrator.
27:02
Speaker 5: She's not a legislator. She is trying to functionally change
27:05
Speaker 5: the definitions and the practices in the anti trust world.
27:10
Speaker 5: She should have gone to Congress. She's lost every case, basically,
27:13
Speaker 5: and it's costing American businesses hundreds of millions, if not
27:17
Speaker 5: tens of billions of dollars in business and legal costs.
27:20
Speaker 5: Shouldn't be FED. She should be in front of Congress
27:22
Speaker 5: saying times have changed, things have changed. Please, we need
27:26
Speaker 5: to revisit this. And so my point to your question
27:29
Speaker 5: is all of us, you know, we can all decide
27:32
Speaker 5: what we want, but we live in theoretically, and I
27:34
Speaker 5: think the FETE is telling you that doesn't make it difference.
27:36
Speaker 5: We live in a system where authority is granted from
27:40
Speaker 5: Congress to agencies to apply what they said, not to
27:44
Speaker 5: simply say I don't really care what what Congress said
27:47
Speaker 5: We'll do what we.
27:48
Speaker 2: Want, right, Neil, great stuff. Well, you can do this
27:51
Speaker 2: all day, right.
27:51
Speaker 8: Oh man.
27:52
Speaker 6: I feel like Neil and I could probably talk for
27:54
Speaker 6: the next three hours on this show, but we're gonna
27:56
Speaker 6: have to keep it there for today. Thank you for
27:58
Speaker 6: joining us, all right.
27:59
Speaker 2: Neil Grossman, co founder, former CIO TKNG Capital.
28:03
Speaker 8: You're listening to the tape. Ken's are live program Bloomberg
28:06
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28:10
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28:13
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28:22
Speaker 2: We want to get great to our next guest because
28:23
Speaker 2: we don't talk commercial real estate because I've got some
28:26
Speaker 2: big time opinions. I have known nothing about real estate.
28:29
Speaker 2: I know nothing about it, but i have some opinions.
28:31
Speaker 2: Our next guest really does know stuff about that. Mickey
28:34
Speaker 2: Enough Holly joins us CEO and chairman of Enough Holly Group. Mickey,
28:38
Speaker 2: thanks so much for joining us here in our studio.
28:41
Speaker 2: I'm a huge fan of New York City. I'm a
28:44
Speaker 2: huge fan of New York City.
28:45
Speaker 5: Real estate.
28:45
Speaker 2: But man, I'm hearing some dire stuff. People aren't coming
28:48
Speaker 2: back to the office. I'm looking down Third Avenue. I
28:51
Speaker 2: see lots of empty space there. What's your call on
28:54
Speaker 2: just I don't know how you want to go with
28:55
Speaker 2: this New York or just big cities, or how you're
28:57
Speaker 2: thinking about it.
28:58
Speaker 3: Thank you for having me.
28:59
Speaker 9: So, first of all, I don't I don't believe in
29:03
Speaker 9: the office sector of real estate, so I I invest
29:06
Speaker 9: mainly in the residential sector. People, Yeah, exactly, exactly, So
29:12
Speaker 9: this is the thing. You really, we really followed the demand.
29:15
Speaker 2: So you just go to Florida.
29:16
Speaker 3: Then well no, but let's let's talk about New York.
29:20
Speaker 9: So you know, in the past, I actually converted many
29:24
Speaker 9: office buildings to to residential and then there was the
29:29
Speaker 9: period of time of you know, great office buildings and
29:33
Speaker 9: even office buildings and in the neighborhoods such as at
29:37
Speaker 9: Chelsea and the Flat Iron that were taken by the
29:42
Speaker 9: high tech kind of companies and and going converting back
29:46
Speaker 9: to to office. But my view of the office space
29:50
Speaker 9: is not great. And unless you have a truly class
29:56
Speaker 9: a brand new office space like this one, like this
30:00
Speaker 9: one for example, right with all the dimenities that you
30:04
Speaker 9: have here, which is great, You're not doing well.
30:07
Speaker 3: Residential is a completely different story.
30:09
Speaker 10: Let's talk about that residential. So New York City we
30:12
Speaker 10: were talking earlier. We both agree that it's not dead.
30:15
Speaker 10: But in twenty twenty, there were a lot of people,
30:17
Speaker 10: including myself, where it felt you know, I actually I
30:20
Speaker 10: was sharing with you.
30:21
Speaker 6: I loved how quiet it was.
30:23
Speaker 10: But you did what a lot of people said couldn't
30:25
Speaker 10: be done, which you essentially sold out a beautiful residential
30:29
Speaker 10: building on seventy ninth and Madison Smack in twenty twenty
30:32
Speaker 10: into twenty twenty one. How did you do that and
30:34
Speaker 10: talk to us about how you're what was behind that?
30:37
Speaker 9: So, yeah, going back to twenty twenty, once COVID did,
30:40
Speaker 9: I said, you know, around the March, we started to
30:44
Speaker 9: hear on a daily basis, New York City is dead.
30:47
Speaker 3: New York City is dead.
30:48
Speaker 10: Now did you have butterflies in your store und that time.
30:51
Speaker 3: Just for a little bit or were I was already
30:53
Speaker 3: in and I had to. I had a few projects.
30:57
Speaker 9: One of them was three years in the making. I
31:01
Speaker 9: bought multiple walk up buildings on Medsone Avenue, and I was.
31:08
Speaker 3: I designed, and I started to build the first.
31:12
Speaker 9: Res high end residential building anywhere between Park and Fifth
31:17
Speaker 9: Avenue in twenty five years, right.
31:19
Speaker 3: So think about it.
31:21
Speaker 9: For twenty five years, the only option for anyone that
31:24
Speaker 9: wanted to live between Park and Fifth Avenue, and I
31:27
Speaker 9: would say high sixties to meet the eighties is either
31:32
Speaker 9: one of the core buildings. Some of them are very famous,
31:35
Speaker 9: but old, small, small windows, old elevators, old mechanical systems,
31:41
Speaker 9: and no amenities. Right, so for twenty five years, no
31:45
Speaker 9: one could really figure out how to build a new building.
31:47
Speaker 9: So anyway, we were already coming out with the superstructure
31:51
Speaker 9: on Medicine Avenues between seventy.
31:53
Speaker 3: And nine and eighty, and I was planning.
31:55
Speaker 9: To open the sales office originally in April of twenty twenty.
32:00
Speaker 3: I said, let's stop, right, let's see what is going on.
32:05
Speaker 9: Well exactly, but then when the superstructure, we kind of
32:10
Speaker 9: stopped for about two weeks construction in New York, and
32:13
Speaker 9: then we continue and we're coming up on the ground
32:16
Speaker 9: and the superstructure was almost topping off, and we started
32:21
Speaker 9: to get phone calls from brokers and direct from buyers
32:26
Speaker 9: calling our office. Now we didn't have any sign on
32:29
Speaker 9: the site except our name, our company name. So people
32:33
Speaker 9: google whatever and they found our phone number and they
32:36
Speaker 9: called us.
32:37
Speaker 3: So I said, oh, very interesting. So there is a demand.
32:40
Speaker 3: People are really they're really curious. They want to buy.
32:44
Speaker 9: So September of twenty twenty, I dectarted to open the
32:48
Speaker 9: sales office.
32:50
Speaker 3: The space was ready to open.
32:52
Speaker 9: I didn't open it right September twenty twenty, I opened
32:54
Speaker 9: the sales office and between September and December of twenty twenty,
33:00
Speaker 9: I sold out.
33:01
Speaker 10: That's amazing, that's just incredible because having been here in the.
33:04
Speaker 9: City, the demand is here in good days and bad days.
33:10
Speaker 9: Of course, there is a slowdown. Of course, by the
33:13
Speaker 9: end of the day. If you have, by the way,
33:15
Speaker 9: not only real estate, if you have a product that
33:19
Speaker 9: is well there is a real demand for it, you're
33:23
Speaker 9: going to do well. It's all about the inventory and demand, right.
33:27
Speaker 9: So there was zero inventory and there was a demand, right,
33:31
Speaker 9: So that's why we were I mean, that was the
33:33
Speaker 9: first of three projects that since then sold out. We
33:37
Speaker 9: did sold out on the Upper east Side. All of
33:39
Speaker 9: them were doing extremely well.
33:41
Speaker 10: And I mean, you know, I'm now here in certain place,
33:44
Speaker 10: but I had been on the Upper Eastside. I saw
33:46
Speaker 10: day by day the one on eighty third go up.
33:49
Speaker 10: I mean just absolutely very distinct, and I think it's
33:51
Speaker 10: at the limestone. But the amenities, yeah, it's really pretty incredible.
33:56
Speaker 6: So I want to ask you, you know, selfishly, I
33:58
Speaker 6: just put in a payment for very exciting I just
34:04
Speaker 6: put in a down payment for an apartment on sixty
34:07
Speaker 6: seventh and third so in Lenox. Thank you, But of
34:11
Speaker 6: course I want to hear you know if you think
34:13
Speaker 6: the value is going to go up, but it's you know,
34:15
Speaker 6: it's a build. But you know you've been talking about
34:17
Speaker 6: these luxury buildings, all the amenities. Is there still value
34:20
Speaker 6: though for some of these buildings that are a bit simpler,
34:23
Speaker 6: you know maybe just like good location, doorman, elevator, laundry
34:27
Speaker 6: in uniting and a terrorist but like maybe you don't
34:32
Speaker 6: have the big gym and all these other amazing common spaces.
34:35
Speaker 9: So so I would say I don't know if the
34:38
Speaker 9: value will go up because think about where we are
34:42
Speaker 9: in all luxury product, the way we live today, most
34:47
Speaker 9: of us, right, compared to our parents or definitely our grandparents,
34:52
Speaker 9: different quality, right, the different huge different, right, So there
34:57
Speaker 9: is a demand for quality. Also, most of us are
35:01
Speaker 9: much busier than our parents and definitely grandparents. So we
35:05
Speaker 9: are looking for every moment that we have. We're looking
35:08
Speaker 9: for the lifestyle that everything will be very, very accessible
35:13
Speaker 9: and close to us. Imanities are very important. It's part
35:16
Speaker 9: of the lifestyle that we all or not all most
35:19
Speaker 9: of us that can afford are looking forward.
35:21
Speaker 3: So I would tell.
35:22
Speaker 9: You that there is no question in my mind that
35:26
Speaker 9: the appreciation of value is much higher for a really
35:30
Speaker 9: really good product and not as much for let's call
35:34
Speaker 9: it and all the product. Having said that, location is
35:38
Speaker 9: as always very important. So if you're in the right location,
35:41
Speaker 9: and you have the right bones, and you upgrade your unit,
35:45
Speaker 9: you will do well.
35:46
Speaker 2: I hear that, how would you describe a South Florida
35:50
Speaker 2: right now? Because we have the story here. As you
35:52
Speaker 2: well know, seems like everybody in York City left for Miami.
35:56
Speaker 2: South Florida in general, give us your extens Is it
36:00
Speaker 2: much too fast down there or is that? Or can
36:02
Speaker 2: this market really? I guess drive.
36:05
Speaker 3: So it's actually very interesting.
36:07
Speaker 9: I have two what I call megaprojects in South Florida.
36:11
Speaker 9: I'm building a seventy story one point five million square
36:15
Speaker 9: feet in Miami in downtown Miami, in a neighborhood in
36:20
Speaker 9: Miami World Center, which is a new neighborhood in downtown Miami.
36:24
Speaker 3: And I'm building a very.
36:25
Speaker 9: Similar size tween fifty story towers in Fort Lauderdale in
36:30
Speaker 9: Flegler Village.
36:32
Speaker 3: So here what sooth? Miami and Fort laudell are different.
36:37
Speaker 9: But here's the thing. For us, Okay, it's all about demand.
36:42
Speaker 9: We think that we are quite we are quite good
36:46
Speaker 9: in designing and creating a really good product, but we're
36:51
Speaker 9: not good enough to create a demand. So we really
36:53
Speaker 9: follow the demand. We look at where the demand is
36:56
Speaker 9: and that's where we go. Specifically about Miami, Miami matured
37:01
Speaker 9: to a point in my opinion of no return. Miami
37:04
Speaker 9: is Miami can offer not not everything that you can
37:08
Speaker 9: get in New York City, but almost everything between culture
37:11
Speaker 9: and restaurants and you name it, and sports and everything
37:16
Speaker 9: is there. And of course many months of the of
37:18
Speaker 9: the year, beautiful weather and the beaches and all of that. Right,
37:22
Speaker 9: So you know this is this is for us. This
37:25
Speaker 9: is a really important market and also a market that
37:30
Speaker 9: attracts quite a lot of Latin American buyers that either
37:34
Speaker 9: want to park money in the US or they as
37:37
Speaker 9: investment or they just use their apartments X amount of weeks,
37:43
Speaker 9: you know, a year. So I think I think it's
37:46
Speaker 9: a strong market. I just opened a sales office for
37:50
Speaker 9: the Miami Miami Project four weeks ago. We are we
37:53
Speaker 9: are doing well, So we think it's a strong market.
37:56
Speaker 6: Yeah, and that there's somewhere upside to it.
37:59
Speaker 3: Yes, because here's the thing.
38:01
Speaker 9: Remember, we are still in an environment or we are
38:04
Speaker 9: in an environment of high mortgage rates.
38:06
Speaker 6: Right, so just drapleo seven percent today, but yeah, keep
38:10
Speaker 6: it yeah.
38:11
Speaker 9: Correct, So going forward, thinking about going twenty four to
38:14
Speaker 9: twenty five, we believe and I'm sure that you believe
38:17
Speaker 9: that mortgage rate will start to go down, that there
38:20
Speaker 9: are still buyers that's sitting on the on the just
38:23
Speaker 9: on the fence and waiting right and waiting now long
38:27
Speaker 9: term projects, projects that are going to be complete in
38:30
Speaker 9: three four years anyway, they don't need to commit to
38:34
Speaker 9: take mortgages right now. So it's all about deposit and
38:37
Speaker 9: taking a position in a market that eventually there will
38:41
Speaker 9: be appreciation in price.
38:43
Speaker 10: You know, on this topic, just yesterday the Fed indicated
38:47
Speaker 10: that they are going to be lower and rates next year.
38:49
Speaker 10: So it supports everything that you're talking about. In terms
38:51
Speaker 10: of being below seven percent, the idea that rates will
38:54
Speaker 10: go lower. Is there a point where the housing market
38:57
Speaker 10: could overheat too much? Because I grew up in Upstate.
39:00
Speaker 10: My family member yesterday was just sharing a picture of
39:03
Speaker 10: a I think a fifteen hundred square foothouse going for
39:06
Speaker 10: one point one million dollars. That same house five ten,
39:09
Speaker 10: twenty years ago literally would have been one hundred and
39:11
Speaker 10: fifty thousand dollars. And so I'm just thinking, if more
39:14
Speaker 10: fires put onto the market, it may be good. It
39:17
Speaker 10: will be good for somebody like you for a while,
39:19
Speaker 10: but at some point is that going to create issues?
39:21
Speaker 9: So it's all about it's all about supply. It's all
39:26
Speaker 9: about the inventory, right and in the main you know,
39:30
Speaker 9: in the main cities there is, by by and large,
39:33
Speaker 9: there is lack of supply right now, think about it.
39:36
Speaker 9: It's not only the mortgage rates. There are only few
39:40
Speaker 9: developers that can build today. We were either lucky enough
39:46
Speaker 9: or qualified enough to close.
39:49
Speaker 2: Sorry now it's just run out of time, But we'll
39:52
Speaker 2: get you back the next time. Sounds like you're in
39:53
Speaker 2: New York a lot, so we'll get you back. From Banana,
39:55
Speaker 2: South Florida, making a timely CEO and chairman of that
39:58
Speaker 2: Naftali group. We're gonna have more coming up. This is Bloomberg.
40:02
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