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McKinsey Plots Thousands of Job Cuts in Slowdown for Consulting Industry · Bloomberg Intelligence

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  Speaker 2: You know what firm is celebrating one hundred years what
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  Speaker 2: McKenzie really, Yeah, it's one hundred years in business and
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  Speaker 2: of course they kind of invented the modern consultancy business overall.
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  Speaker 2: But what's interesting is, of course the solutions that they
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  Speaker 2: tend to prescribe, you know, streamlining and cutting down staff
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  Speaker 2: and consolidating is something that they now.
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  Speaker 3: Need to do to themselves.
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  Speaker 2: Okay, treat our Notterrogon is Bloomberg News is chief Wall
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  Speaker 2: Stret correspondent.
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  Speaker 3: He's been writing about this and Treed.
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  Speaker 2: This all comes on the heels of a pretty, i
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  Speaker 2: don't want to say disappointing, but lackluster five years.
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  Speaker 4: And that's that's probably the best way to describe it, right,
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  Speaker 4: any company that earns fifteen billion dollars a year, you
• 1:03
  Speaker 4: can't really look at their performance and say, wow, they're
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  Speaker 4: in terrible shape. But around twenty twenty one, McKenzie at
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  Speaker 4: revenue at the fifteen billion dollar mark. Here we are
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  Speaker 4: in twenty twenty four to twenty five. By the time
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  Speaker 4: this year, NZ, we're going to be sixteen billion, just
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  Speaker 4: a little bit over. So they've operated in this narrow
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  Speaker 4: band of fifteen billion dollars to sixteen billion dollars in
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  Speaker 4: annual revenue, which is great. Any other management consulting firm
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  Speaker 4: would absolutely love to post numbers like that. For McKinsey,
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  Speaker 4: it is the sense that their revenue has flatlined a
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  Speaker 4: little bit. And you did mention their one hundred year
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  Speaker 4: celebrations right which twenty twenty six, that is when they
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  Speaker 4: will turn one hundred. So they had this annual partner
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  Speaker 4: gathering which also doubled up as this kickoff for their
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  Speaker 4: one hundred year festivities. And for those who were there
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  Speaker 4: who listened to Bob's Turnfels, the global managing partner at McKenzie,
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  Speaker 4: the de facto leader, you could send some plain spoken bravado.
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  Speaker 4: His words to his partners were, we will kick some
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  Speaker 4: ass as we start our second century. He was asking people,
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  Speaker 4: are you in for this mission? And those who say yes,
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  Speaker 4: I can assure you good times are ahead because it
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  Speaker 4: is also an acknowledgment that the last few years have
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  Speaker 4: been rocky, not just from its standpoint of its financial health,
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  Speaker 4: but you have to think about some of the challenges
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  Speaker 4: in the controversies that McKenzie has had to navigate, the
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  Speaker 4: opioid scandal, some of the criticism over their work in
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  Speaker 4: China and Saudi Arabia and even back home here in
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  Speaker 4: the US with Ice for instance. These are questions that
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  Speaker 4: were asked and stuff that McKenzie has had to answer,
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  Speaker 4: and it presented an unwelcome distraction. But the bottom line
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  Speaker 4: is for this firm is when it looks at its numbers,
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  Speaker 4: it does realize people won't like hearing this, but at
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  Speaker 4: management levels that's how they talk about it. It realized
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  Speaker 4: that there was some bloat and the message that's percolating
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  Speaker 4: through the firm right now is it's time to get leaner.
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  Speaker 5: I was interviewing with McKenzie when I was in business school,
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  Speaker 5: and like the second round, they asked me to get
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  Speaker 5: up on a whiteboard and sketch out kind of like
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  Speaker 5: a business flow model. I just turned it them and
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  Speaker 5: said thank you, but no thank you and walk out
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  Speaker 5: the door. Anytime you bring a whiteboard I'm out of there.
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  Speaker 5: I can't think like it. So when trade it stocks
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  Speaker 5: for a living? After that, shre Why has revenue been flat?
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  Speaker 6: Here?
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  Speaker 5: Is there some concern that maybe all this AI spending
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  Speaker 5: is taken away from other budgets.
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  Speaker 6: Where maybe I don't need the consulting or.
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  Speaker 4: That's certainly the concern on the forward perhaps, but just
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  Speaker 4: in the last few years the reality of the industry
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  Speaker 4: and McKinsey in some ways is the flag bearer for
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  Speaker 4: the industry. But there are perhaps other major consulting films
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  Speaker 4: that are struggling even more.
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  Speaker 6: And the fact is that.
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  Speaker 4: The demand for traditional consulting services may not be as
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  Speaker 4: high as it used to be. Companies and clients are
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  Speaker 4: getting cost conscious. When your clients are not able to
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  Speaker 4: post great revenue growth, the only other level that they
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  Speaker 4: can pull is expenses, and consulting fees are the first
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  Speaker 4: ones thrown out the.
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  Speaker 6: Window, right Advertising is the first one. I think advertising
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  Speaker 6: then consultant for us.
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  Speaker 3: But is McKenzie's solutions so out of the box.
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  Speaker 2: I mean, at this point what McKinsey recommends is kind
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  Speaker 2: of dogma in corporate boardrooms. You don't need to hire
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  Speaker 2: mckenzy to tell you how to do some of these things.
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  Speaker 4: Look and I think the way you're framing it is
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  Speaker 4: just a little bit more of a polite way of
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  Speaker 4: some of the memes that you see out there right,
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  Speaker 4: which is this idea that all that consulting firms do
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  Speaker 4: is prescribe, grow revenue and cut costs. And you know,
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  Speaker 4: in the moment, it might be funny, but to some
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  Speaker 4: extent it is an oversimplification of what they do because
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  Speaker 4: if you look at the list of clients that they've
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  Speaker 4: wrapped up. We talked about them starting out in nineteen
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  Speaker 4: twenty six university professor who advised a local meatpacker, Armors
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  Speaker 4: and company. From that, what they've grown up to they
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  Speaker 4: are the go to advisor to blue chip companies from
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  Speaker 4: Coca Cola and Goldman Sachs to everyone else and also
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  Speaker 4: countries that span the globe. And a lot of these
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  Speaker 4: people are repeat clients. So you have to assume that
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  Speaker 4: is not as simple as wrote advice that they're doling out,
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  Speaker 4: because for these big companies to turn to McKinsey again
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  Speaker 4: and again tells you that they see value in most
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  Speaker 4: of what they do. There might be some extreme cases
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  Speaker 4: on either side. One it might be some undesirable work,
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  Speaker 4: and two it might just be obvious advice. But for
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  Speaker 4: the most part, they're clearly doing something that companies value
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  Speaker 4: and country's value.
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  Speaker 2: Speaking of countries you mentioned China and Saudi Arabia, China
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  Speaker 2: wants its companies to continue to bring in consults, but
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  Speaker 2: they just want them to be homegrown consultants.
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  Speaker 4: Right and like that seems to be the push in China,
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  Speaker 4: which is a good job relying on all of these
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  Speaker 4: Western firms to figure out how you need to modernize
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  Speaker 4: and be ready to compete on a global scale, but
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  Speaker 4: they're also encouraging them now to turn to homegrown consulting firms.
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  Speaker 4: Saudi Arabia is a completely different channel. We have a
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  Speaker 4: person at McKenzie estimated that in the prior decades are
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  Speaker 4: twenty fourteen to twenty twenty, for McKinsey earned at least
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  Speaker 4: five hundred million dollars a year from the kingdom, which
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  Speaker 4: is either with companies affiliated with Saudi Arabia or the
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  Speaker 4: government itself. But the challenge in Saudi Araba is also
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  Speaker 4: obviously you've seen some of the recent headlines where they're
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  Speaker 4: pulling back on consulting expenses. Some of these Spine and
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  Speaker 4: the Sky projects are not working out as they had
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  Speaker 4: hoped for, and again consulting fees are going away, and
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  Speaker 4: Saudi Arabia had become one of mckinzie's most important clients globally,
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  Speaker 4: so that is obviously also a place where they don't
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  Speaker 4: necessarily see a lot of room for rapping growth.
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  Speaker 6: Stay with us. More from Bloomberg Intelligence coming up after this.
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  Speaker 2: We are monitoring the latest on Netflix's bid for Warner
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  Speaker 2: Brothers Discovery.
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  Speaker 3: I think we're in week two or week three, were
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  Speaker 3: we Yeah.
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  Speaker 6: I've just been out there for a long time.
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  Speaker 2: Take a long time to absolutely so, I mean they
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  Speaker 2: were thinking twelve to eighteen months could be longer. Of course,
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  Speaker 2: we need to bring in Jennifer Read Bloomberg Intelligence senior
• 7:07
  Speaker 2: litigation analysts who's been on top of all the regulatory concerns.
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  Speaker 2: And jen you heard what Lisa was saying about this
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  Speaker 2: letter that the co CEOs, Greg Peters and Ted Saranda's
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  Speaker 2: have released. Did we learn anything new from that letter
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  Speaker 2: that helps clarify and clear up the regulatory murkiness.
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  Speaker 7: I mean, I think what they said in the letter
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  Speaker 7: is what they had to say. You know, right now,
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  Speaker 7: they are trying to convince the shareholders of Warner Brothers
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  Speaker 7: that they are going to be a better buyer than Paramount.
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  Speaker 7: They're in a fight for the assets, and they've heard
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  Speaker 7: what the concerns are, that it's going to kill the
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  Speaker 7: movie theater experience and kill movie theaters, That people will
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  Speaker 7: lose jobs, people who create content will lose jobs because
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  Speaker 7: it's one fewer buyer of content, and so they're just
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  Speaker 7: trying to assuage these people that that won't be the
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  Speaker 7: case if Netflix ends up actually being the fire of
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  Speaker 7: Warner Brothers.
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  Speaker 5: Down the road, red headline crossing the Bloomberg terminal, Nick
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  Speaker 5: Reiner arrested by LAPD. Bail set at four million dollars.
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  Speaker 6: That's according to Bloomberg News. We'll have some more reporting
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  Speaker 6: on that going forward.
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  Speaker 5: If you were advising that Warner Brothers Discovery board, which
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  Speaker 5: do you would you recommend from a regulatory standpoint, which
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  Speaker 5: is the least amount of.
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  Speaker 7: Risk oh, I think from an anti trust perspective, it
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  Speaker 7: would be Paramount, and the reason is because there are overlaps.
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  Speaker 7: Both companies have risk, both companies raise anti trust issues,
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  Speaker 7: but I think the issues that are raised by the
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  Speaker 7: Paramount bid may be more easily defensible or easily more
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  Speaker 7: easily fixed than the issues that come up with Netflix.
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  Speaker 7: And then you also have you know, what we've seen
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  Speaker 7: in the news that it seems that the owners, the
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  Speaker 7: people who are behind Paramount are allies with the administration,
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  Speaker 7: and this administration has said that they will be involved
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  Speaker 7: in this, and that obviously gives them a lake up
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  Speaker 7: with respect to that situation.
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  Speaker 2: Jen you not noted in your research that there is
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  Speaker 2: a consumer lawsuit filed against Netflix's bid for Warner Brothers,
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  Speaker 2: and it's a proposed class action suit as well. Does
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  Speaker 2: that matter? Does that make a difference to what we're
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  Speaker 2: seeing right now?
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  Speaker 7: You know it does. I'll say that these consumer lawsuits
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  Speaker 7: seeking to block a deal, it's sort of aligned alongside
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  Speaker 7: any kind of federal or state scrutiny that would occur.
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  Speaker 7: They are rarely successful, and this is usually because the
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  Speaker 7: Department of Justice or the FTC, whoever the reviewer is
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  Speaker 7: at the time is really considered the expert in antitrust right,
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  Speaker 7: and a judge would prefer to sit back and let
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  Speaker 7: that play out and see what happens there then to
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  Speaker 7: be the one to decide to block a deal, because
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  Speaker 7: that's what the consumers are looking for. It's not you know, money,
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  Speaker 7: which is what you usually see in a class action,
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  Speaker 7: but to enjoin the closing of the deal.
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  Speaker 3: But it adds risk no matter what.
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  Speaker 7: It's yet another piece of opposition that you never know
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  Speaker 7: could turn into something along with states right, that could
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  Speaker 7: get involved, that could align with this consumer action or
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  Speaker 7: align with the federal agency, the Department of Justice, that
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  Speaker 7: could end up going after a deal. So yes, it
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  Speaker 7: adds risk. I would say it's limited risk, but it does.
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  Speaker 5: So if Paramount wins, there's going to be, just my
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  Speaker 5: understanding of the media business, a lot more job losses
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  Speaker 5: for every set designer, every writer.
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  Speaker 6: That Warner Brothers has. Paramount has won as well. That's right,
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  Speaker 6: And I would argue.
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  Speaker 5: The synergies and I've seen research that the synergies ie
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  Speaker 5: job cuts are two x Paramount versus Netflix. Does that
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  Speaker 5: factor into what the regulators look at it?
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  Speaker 8: Does?
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  Speaker 7: You know it didn't as much in the past, but
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  Speaker 7: this has been a trend in the last ten years.
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  Speaker 3: They will look at the impact on workers.
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  Speaker 7: This is what we call in the antitrust world a
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  Speaker 7: monopsony issue, too few buyers of a service. And the
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  Speaker 7: Department of Justice is coming off success with.
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  Speaker 3: That theory of harm.
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  Speaker 7: They were able to block Simon and Schuster from acquiring
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  Speaker 7: Penguin Random House and it was all about fewer bidders
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  Speaker 7: for top selling authors and similar right, fewer bidders for
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  Speaker 7: content for writers for creatives. And so they won that
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  Speaker 7: in court recently, and so it is a theory that
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  Speaker 7: they could they could pursue and it's a viable anti
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  Speaker 7: trust theory of harm.
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  Speaker 2: My other question for you, and I guess this should
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  Speaker 2: have been the first question I asked you, is Netflix
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  Speaker 2: has promised all kinds of things. They're going to continue
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  Speaker 2: to release Warner Brothers movies and theaters. They promise no
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  Speaker 2: overlap or studio closures. Netflix has a habit, a tendency
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  Speaker 2: of going back on their word. They reverse course on advertising,
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  Speaker 2: the reverse course on live sports. So how much can
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  Speaker 2: we really trust legally any of what they're saying?
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  Speaker 7: Nothing, You really can't And honestly, sometimes there are consent
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  Speaker 7: orders settlements entered with the government where these kinds of
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  Speaker 7: promises are memorialized in writing. And even in that case,
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  Speaker 7: what anti trust practitioners would tell you is that it
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  Speaker 7: often fails. Right that those and the companies would say, look,
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  Speaker 7: we're publicly traded companies. We have a fiduciary duty to
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  Speaker 7: our shareholders. Economic conditions change, things change, and so that
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  Speaker 7: had to change our strategy. So really what they say
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  Speaker 7: today doesn't have a lot of meaning. Now, if it
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  Speaker 7: were memorialized in a consent order, maybe it has a
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  Speaker 7: little bit more clout because then somebody could go after
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  Speaker 7: it in court if they failed to abide by those promises.
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  Speaker 7: But even in those cases, you know, this doesn't mean
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  Speaker 7: very much.
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  Speaker 5: Do we know which regulatory body, the Department of Justice
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  Speaker 5: or the Federal Trade Commission, which one's going to review
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  Speaker 5: this deal?
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  Speaker 6: Do we care?
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  Speaker 7: It'll very likely be the Department of Justice because they
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  Speaker 7: have experience in this area that that's how these deals
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  Speaker 7: are cleared to one or the other.
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  Speaker 6: So do I hire.
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  Speaker 5: Like DOJ Council just to argue my case, or do
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  Speaker 5: the dudes it's Simpson Thatcher or wherever they have those
• 12:29
  Speaker 5: people do I hire a specialist law firm to do this.
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  Speaker 7: I will tell you you hire a big anti trust
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  Speaker 7: firm where many of the partners probably came from the
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  Speaker 7: Department of Justice or Federal Trade Commission that revolving yes.
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  Speaker 2: Final question to you, Jen, is a burden all on
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  Speaker 2: Netflix to prove that this is not an antitrust breaking deal?
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  Speaker 2: Or does Warner Brothers Discovery have a role to play here?
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  Speaker 3: They've been fairly quiet well.
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  Speaker 7: The burden if they have a deal and it goes
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  Speaker 7: before the Department of Justice, the burden is on the
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  Speaker 7: Department of Justice actually to prove that the deal is
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  Speaker 7: anti trust concerns. I think they have a fairly easy
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  Speaker 7: burden because right off, with the.
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  Speaker 2: Overlapering streaming says it is the burden on Netflix to
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  Speaker 2: defend against that person on Warner Brothers Discovery.
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  Speaker 7: Once there's an agreement sign it will be up to
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  Speaker 7: both of them, mostly Netflix as the buyer, but the
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  Speaker 7: seller also has to be a participant and cooperate in
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  Speaker 7: defending the deal.
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  Speaker 3: What does Warner Brothers do in the meantime right now?
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  Speaker 7: I think they should just be sitting quietly because it
• 13:26
  Speaker 7: might be there's a battle for the assets, and it
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  Speaker 7: might be there are yet higher bids coming which would
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  Speaker 7: be a benefit to them. So it seems to me
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  Speaker 7: that I think they've been fairly quiet. Seems to me
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  Speaker 7: that's probably a good strategy for them.
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  Speaker 6: Oh boy, I'm looking at this the U.
• 13:40
  Speaker 5: This the paramount acquisite they've got on the lawyer's clearing.
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  Speaker 5: They've got Cravat, they got Latham, got three of them monsters.
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  Speaker 3: Yes, yes, now you're serious.
• 13:51
  Speaker 5: Each of those firms and including the firms representing Netflix,
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  Speaker 5: they probably had to say, proceed with this deal.
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  Speaker 6: We think it will pass muster right.
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  Speaker 7: Well, what they say says we think we can defend this.
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  Speaker 7: I don't think any lawyer would say for sure, we're
• 14:04
  Speaker 7: clearing this deal for you. They would say, look, we
• 14:06
  Speaker 7: think we have defenses, and that if those defenses don't
• 14:10
  Speaker 7: work before the Department of Justice, you have yet another
• 14:12
  Speaker 7: shot before a judge. Because it isn't really at the
• 14:15
  Speaker 7: end of the day, up to the Department of Justice.
• 14:16
  Speaker 7: It's up to a federal judge.
• 14:17
  Speaker 3: You have to go to court and the Department you
• 14:20
  Speaker 3: can win. Merging companies can win these deals in court.
• 14:23
  Speaker 6: Stay with us. More from Bloomberg Intelligence coming up after this.
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  Speaker 5: Scarlet Fumpaul, So when you were live here in our
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  Speaker 5: Bloomberg Interactive Broker studio in New York City, we are
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  Speaker 5: streaming live on YouTube as well. You know, we love
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• 16:29
  Speaker 9: The best estimates we've found from chainnalysis and bubble maps
• 16:33
  Speaker 9: to crypto research firms were that the Trump family made
• 16:36
  Speaker 9: about three hundred and fifty million dollars of real profit
• 16:39
  Speaker 9: on these meme coins.
• 16:42
  Speaker 2: Wow, help them market these coins? Who helped them, you know, presumably.
• 16:47
  Speaker 3: Profit off of that.
• 16:48
  Speaker 2: That's the gist of your story and was it a
• 16:52
  Speaker 2: difficult question to answer.
• 16:54
  Speaker 9: Yeah, Like, on the one hand, the whole thing sort
• 16:55
  Speaker 9: of happened in the open, and it felt like there
• 16:58
  Speaker 9: was a sort of knew what happened. On the other hand,
• 17:01
  Speaker 9: as I tried to dive in and figure out who
• 17:03
  Speaker 9: was behind this, it was really tough. You'd think that
• 17:07
  Speaker 9: people might be proud to say that they'd helped the
• 17:10
  Speaker 9: president with an important business venture, but really nobody was talking.
• 17:14
  Speaker 9: The trail took us in a very convoluted way, but
• 17:17
  Speaker 9: it ended up with a guy who uses an icon
• 17:21
  Speaker 9: of a cartoon cat wearing an astronaut suit on Twitter.
• 17:26
  Speaker 9: He goes only by meal and he runs a crypto exchange,
• 17:31
  Speaker 9: or he was the co founder of a crypto exchange
• 17:33
  Speaker 9: called Metiora that was actually home to a ton of
• 17:37
  Speaker 9: these giant mean coin launches, and all of them were
• 17:41
  Speaker 9: Most of them seemed to follow this pattern where they'd
• 17:44
  Speaker 9: go up a lot on hype when they got announced
• 17:46
  Speaker 9: and then soon crash, and we were trying to figure out,
• 17:50
  Speaker 9: you know, who knew what When a trail took us
• 17:54
  Speaker 9: to Istanbul to Singapore, you got to read the story
• 17:58
  Speaker 9: to see how close we.
• 18:00
  Speaker 6: So what was is the Trump meme coin still in existence.
• 18:06
  Speaker 9: Yeah, these things like never really die, but there's uh,
• 18:09
  Speaker 9: there's no excitement around it anymore. The price is down
• 18:12
  Speaker 9: about ninety percent from its peak.
• 18:15
  Speaker 6: Do I find the price?
• 18:17
  Speaker 8: You know?
• 18:17
  Speaker 9: Their coin market is a pretty big, uh crypto tracking site.
• 18:23
  Speaker 9: But one funny thing we found in reporting this was
• 18:26
  Speaker 9: talking to meme coin traders. A lot of them said
• 18:29
  Speaker 9: that Trump actually killed this boom. Like for a while,
• 18:33
  Speaker 9: we were all having a lot of fun trading these
• 18:34
  Speaker 9: meme coins, but the Trump's made so much money off
• 18:37
  Speaker 9: theirs that the gamblers in the casino were like, you
• 18:41
  Speaker 9: know what we're You've we've emptied our pockets. We got
• 18:45
  Speaker 9: We're done with this. We need bring on prediction markets.
• 18:47
  Speaker 9: We need something different to gamble on.
• 18:49
  Speaker 2: So are meme coins they peaked already, they've died or
• 18:52
  Speaker 2: I mean there's still there, but no one's making money
• 18:55
  Speaker 2: off of them the way they used to.
• 18:56
  Speaker 9: Yeah, it's a little bit like if you remember the
• 18:58
  Speaker 9: NFT bubble, the digital crypto art. For a minute, it's
• 19:04
  Speaker 9: hot and people are making good money, they're telling their friends,
• 19:08
  Speaker 9: and then at some point people just they crashes and
• 19:13
  Speaker 9: people move on. So a lot of the same people
• 19:15
  Speaker 9: who were in on NFTs got in on meme coins.
• 19:20
  Speaker 9: And while this was while this was running, it was
• 19:23
  Speaker 9: a great business. We talked to one twenty two year
• 19:26
  Speaker 9: old who started one of the biggest meme coin creation
• 19:30
  Speaker 9: and trading apps. His company, which just had a few employees,
• 19:33
  Speaker 9: generated a billion dollars from the during this meme coin bubble.
• 19:38
  Speaker 9: But now a lot of the people who are excited
• 19:40
  Speaker 9: about meme coins have moved on to prediction markets, where
• 19:45
  Speaker 9: the Trump family has its own interests as well.
• 19:49
  Speaker 2: Yeah, Don Junior, right, has some pretty big stakes or
• 19:52
  Speaker 2: it has a pretty key role in some of the companies.
• 19:54
  Speaker 9: Yeah, he's an advisor to both Calshi and Polymarket, the
• 19:59
  Speaker 9: two big prediction markets. And then the Trump family's social
• 20:04
  Speaker 9: media platform, truth Social has announced plans to create its
• 20:10
  Speaker 9: own prediction market. But it's kind of a pattern where
• 20:13
  Speaker 9: the Trump family has these business interests in this kind
• 20:17
  Speaker 9: of gray area market, and then the Trump administration is
• 20:20
  Speaker 9: creating rules that are legalizing these markets and helping make
• 20:24
  Speaker 9: them grow.
• 20:26
  Speaker 5: As President Trump or his family or his administration comment
• 20:29
  Speaker 5: on your story or about the mean coin part of it.
• 20:32
  Speaker 9: So the Press secretary got back to us not really
• 20:37
  Speaker 9: getting into the specifics, but just saying, hey, the Trump
• 20:40
  Speaker 9: family would never engage in conflicts of interest, but not
• 20:44
  Speaker 9: really addressing how they manage having interests in both the
• 20:49
  Speaker 9: business side and being in charge of drafting the rules.
• 20:54
  Speaker 6: And I guess no one cares anymore.
• 20:57
  Speaker 9: I'd like to think that people still care. But you know,
• 21:01
  Speaker 9: when it came normally, you have like, let's say this
• 21:05
  Speaker 9: was the stock market and somebody created like a penny
• 21:07
  Speaker 9: stock that went up, you know, a thousand acts in trash. Yeah,
• 21:10
  Speaker 9: somebody would be diving in. They'd be digging through people's messages.
• 21:13
  Speaker 9: They've been trying to figure out what happened meme coins.
• 21:16
  Speaker 9: A few weeks after Trump was elected, the SEC put
• 21:19
  Speaker 9: out a statement that basically said, not our business, okay,
• 21:23
  Speaker 9: and nobody has stepped up to look into these yet.
• 21:26
  Speaker 6: All right, very good.
• 21:27
  Speaker 3: There's the answer to your question, Paul.
• 21:28
  Speaker 6: Yeah, there's answered to my question.
• 21:30
  Speaker 5: I think maybe the definitive report is your article here
• 21:33
  Speaker 5: Zeke Fox, investigative reporter for Bloomberg News, adjournings here on
• 21:36
  Speaker 5: a Bloomberg interactive broker's studio. Again, it's a you can
• 21:40
  Speaker 5: read this big take story on the Bloomberg criminal and
• 21:42
  Speaker 5: at Bloomberg dot com slash Big Take, so you can
• 21:46
  Speaker 5: read Zeke's article as well as all the other Big
• 21:48
  Speaker 5: Take stuff. And again every day they come out with
• 21:50
  Speaker 5: is blockbuster stories. Will you're really well sourced as well.
• 21:55
  Speaker 6: Stay with us more from Bloomberg Intelligence coming up after this.
• 22:02
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• 22:06
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• 22:09
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• 22:12
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• 22:16
  Speaker 5: All right, Scartan fil and Paul Sweeney, we're live here
• 22:18
  Speaker 5: in our Bloomberg Arrector Broker studio in New York City.
• 22:20
  Speaker 6: We are streaming live on YouTube. So check us out there.
• 22:23
  Speaker 5: Looking at the ten year yield down a little bit here,
• 22:25
  Speaker 5: We're down at four point one seven percent.
• 22:27
  Speaker 6: Here, looks like the fete.
• 22:29
  Speaker 5: Is in a rate cutting mode that you bet infit
• 22:32
  Speaker 5: a number of industries, including the housing market as well.
• 22:36
  Speaker 5: So let's check in on that. Drew Redding, he's the
• 22:38
  Speaker 5: homebuilder analyst for Bloomberg Intelligence. Drew, what's your twenty twenty
• 22:42
  Speaker 5: six outlook for the home builder segment? There the folks
• 22:45
  Speaker 5: that are out there building the homes, will lower interest rates?
• 22:48
  Speaker 6: Will that help their business?
• 22:51
  Speaker 10: So we actually think that twenty twenty six is going
• 22:54
  Speaker 10: to be another challenging year from a fundamental perspective for
• 22:58
  Speaker 10: the builders. If you think about the weeks that we've
• 23:00
  Speaker 10: had in demand over the last several quarters, it leaves
• 23:04
  Speaker 10: much of the group coming into the year with backlogs
• 23:07
  Speaker 10: that are down anywhere from ten to forty percent, and
• 23:09
  Speaker 10: that's ultimately what translates into revenue over the next call it,
• 23:13
  Speaker 10: three to nine months. In addition, I think you're going
• 23:16
  Speaker 10: to see further pricing pressure as builders look to adjust
• 23:19
  Speaker 10: prices to meet market demand. So we're going to have
• 23:21
  Speaker 10: further base price reductions and I think builder are going
• 23:24
  Speaker 10: to have to continue to lean on incentives because it's
• 23:27
  Speaker 10: something that home shoppers have become accustomed to, and you know,
• 23:30
  Speaker 10: they're looking for deals when they're out there in the market. So,
• 23:33
  Speaker 10: you know, slow top line growth and I think that
• 23:35
  Speaker 10: incentive dynamic is also going to continue to pressure gross
• 23:38
  Speaker 10: margins as we get into next year.
• 23:41
  Speaker 8: You know, on the on.
• 23:42
  Speaker 10: The positive side, we do have lower rates, so I
• 23:45
  Speaker 10: do think that orders can grow next year. You know,
• 23:49
  Speaker 10: we're looking at a six and a quarter rate call
• 23:52
  Speaker 10: it right now last year where romost one hundred basis
• 23:54
  Speaker 10: points higher heading into the spring. So lower rates and
• 23:57
  Speaker 10: community count growth could support orders, but I think that
• 24:00
  Speaker 10: revenue and margins are going to be down this year.
• 24:03
  Speaker 5: What's the relationship historically drew between new housing and existing
• 24:07
  Speaker 5: home sales.
• 24:10
  Speaker 10: So the new home market is historically about fifteen percent
• 24:14
  Speaker 10: of overall housing transactions, so a much smaller piece of
• 24:17
  Speaker 10: the market. You know, they've they've performed vastly differently over
• 24:21
  Speaker 10: the last couple of years. If you look at the
• 24:23
  Speaker 10: existing home market, we've been bumping along a four million
• 24:26
  Speaker 10: annualized run rate of home sales for about three years now,
• 24:29
  Speaker 10: and that's about twenty percent below normalized levels. So there's
• 24:34
  Speaker 10: been a lot of pressure because the mortgage rate lock
• 24:36
  Speaker 10: in effect affordability. We have seen an improvement in demand
• 24:40
  Speaker 10: in the resale market as rates have come down. You know,
• 24:43
  Speaker 10: we're looking at purchase applications, which is the most high
• 24:46
  Speaker 10: frequency data point that we have. So we have seen
• 24:49
  Speaker 10: some improvement and we think, you know, looking into twenty
• 24:51
  Speaker 10: twenty six, you could see growth in the resale market
• 24:54
  Speaker 10: anywhere from five to ten percent, call it but keep
• 24:57
  Speaker 10: in mind that's off a historically low level.
• 25:01
  Speaker 5: What's the Has the tariffs impacted the new home building market?
• 25:05
  Speaker 5: I'm thinking lumber and all the other materials used in
• 25:08
  Speaker 5: building a home.
• 25:09
  Speaker 6: Has that got an impact on the profitability?
• 25:12
  Speaker 8: Yeah? Good question. To this point, it really hasn't.
• 25:15
  Speaker 10: We've heard from a number of builders who haven't seen
• 25:18
  Speaker 10: much of a increase in twenty twenty five. I think
• 25:21
  Speaker 10: you could see as you get into twenty twenty six
• 25:23
  Speaker 10: that become more of a problem. You know, we did
• 25:25
  Speaker 10: an analysis that looked at all the tariffs that have
• 25:28
  Speaker 10: come through, and you know, it shows that there could
• 25:30
  Speaker 10: be a ten thousand dollars cost increase per home as
• 25:34
  Speaker 10: it relates to tariffs. Now, when you think about who's
• 25:37
  Speaker 10: likely to feel that the most, it probably won't be
• 25:40
  Speaker 10: the large.
• 25:40
  Speaker 8: Single family production builders.
• 25:42
  Speaker 10: They've got a lot of scale, they've got a lot
• 25:44
  Speaker 10: of leverage, and they've had success in pushing back against
• 25:47
  Speaker 10: their suppliers. I think you're more likely to see the
• 25:50
  Speaker 10: pinch among smaller private home builders who just don't have
• 25:53
  Speaker 10: that scale and ability to push back. So to this point,
• 25:56
  Speaker 10: it hasn't had a bigger impact, but I think that's
• 25:58
  Speaker 10: something you need to watch as we look in next year.
• 26:06
  Speaker 5: Are they still building like crazy down there in Florida
• 26:09
  Speaker 5: and Texas and Tennessee and those kinds of states.
• 26:13
  Speaker 8: Yeah, that's a good question.
• 26:14
  Speaker 10: I mean, during the pandemic, that's where a lot of
• 26:16
  Speaker 10: people were flocking to. There was a lot of construction
• 26:19
  Speaker 10: down there. If you look at inventory levels now in
• 26:22
  Speaker 10: the South, they're actually at the highest level on record.
• 26:26
  Speaker 10: So that's where we're seeing a lot of the weakness
• 26:28
  Speaker 10: in the new home market. There's so much inventory. Builders
• 26:31
  Speaker 10: have had to get increasingly aggressive on prices you to
• 26:35
  Speaker 10: move inventory, a lot of incentives in the market, a
• 26:38
  Speaker 10: lot of base price reduction. So that's really where we've
• 26:41
  Speaker 10: seen the weakness, and if you can trast that to
• 26:43
  Speaker 10: some of the stronger markets, it's really a tale of
• 26:45
  Speaker 10: a couple of regions. You have the Midwest and the Northeast,
• 26:49
  Speaker 10: which tend not to be boom markets. We didn't see
• 26:51
  Speaker 10: the same type of inventory growth there, and you're seeing
• 26:54
  Speaker 10: a lot more price stability. On the other hand, you
• 26:57
  Speaker 10: mentioned the South, but you also have the West where
• 26:59
  Speaker 10: there was a lot of inventory growth and we're seeing
• 27:01
  Speaker 10: similar price and pressure.
• 27:03
  Speaker 5: So is there still a housing shortage in this country,
• 27:06
  Speaker 5: and if so, how does it right itself?
• 27:10
  Speaker 10: Yeah, another good question and the one that's frequently debated.
• 27:14
  Speaker 10: Just to take a step back, you'll hear estimates of
• 27:16
  Speaker 10: anywhere to you know, a million to five million unit
• 27:19
  Speaker 10: housing shortage. But I think, you know, I think it's
• 27:22
  Speaker 10: a more complex answer in that the shortage, so called shortage,
• 27:26
  Speaker 10: is probably more at lower price points. So there's a
• 27:29
  Speaker 10: mismatch between where there's theoretically demand, which would be at
• 27:33
  Speaker 10: lower price points, and what's available out there in the market.
• 27:36
  Speaker 10: So it's really afford affordability problem that's holding things back.
• 27:41
  Speaker 10: And now how do we get I mean, the government
• 27:42
  Speaker 10: has talked of about all sorts of things in order
• 27:45
  Speaker 10: to boost production and help builders to build more homes
• 27:48
  Speaker 10: at reasonable prices. Whether it's you know, dangling characters in
• 27:53
  Speaker 10: front of local municipalities to get them to reduce their regulations,
• 27:58
  Speaker 10: you know, whether it's trying to not down the price
• 28:00
  Speaker 10: of building materials.
• 28:01
  Speaker 8: There's a lot of different things.
• 28:03
  Speaker 10: But I don't really think that there's necessarily any one
• 28:06
  Speaker 10: single silver bullet that's going to solve this problem. I
• 28:08
  Speaker 10: think at the end of the day, you have home
• 28:10
  Speaker 10: prices that are up more than fifty percent since twenty nineteen,
• 28:13
  Speaker 10: and I think we need to let kind of the
• 28:16
  Speaker 10: basic laws of supply demands kind of take course in
• 28:18
  Speaker 10: order to write that.
• 28:21
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• 28:37
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