Latest / Bloomberg Intelligence / Canada’s Railways Lock Out, Jackson Hole

Transcript

Canada’s Railways Lock Out, Jackson Hole · Bloomberg Intelligence

0:02
Speaker 1: Bloomberg Audio Studios, podcasts, radio news. You're listening to the
0:10
Speaker 1: Bloomberg Intelligence podcast. Catch us live weekdays at ten am
0:15
Speaker 1: Eastern on Affo car Playing and broyd Otto with the
0:17
Speaker 1: Bloomberg Business app. Listen on demand wherever you get your podcasts,
0:21
Speaker 1: or watch us live on YouTube.
0:25
Speaker 2: Let's go up to Canada. Here the railroaders they're striking.
0:29
Speaker 2: I think that's a big deal. But let me ask
0:30
Speaker 2: somebody who knows about this stuff, Lee Clascow. He's a
0:33
Speaker 2: senior transportation analyst for Bloomberg Intelligence. Lee, is this Canadian National,
0:38
Speaker 2: Canadian Pacific they're striking it?
0:40
Speaker 3: Do we have that right? And what does it mean?
0:43
Speaker 4: Well, they've locked out their employees because the union threatened
0:46
Speaker 4: to strike. So berrero, do you have to kind of
0:50
Speaker 4: shut down operations safely to make sure that you know,
0:53
Speaker 4: not only your employees can be get home, but also
0:56
Speaker 4: you know the equipment is safely stored. So that's kind
0:59
Speaker 4: of what we've seen happen. That's obviously going to impact
1:04
Speaker 4: volumes of the Canadian rails, both Canadian Pacific and Canadian National.
1:09
Speaker 4: They make up around twenty five percent of originated car
1:11
Speaker 4: loads in North America and you know, the impact will
1:14
Speaker 4: be felt across the supply chain because it's not just
1:17
Speaker 4: a Canadian thing. You know, it's also going to impact
1:20
Speaker 4: the rails that they interchange with. And also both Canadian
1:24
Speaker 4: Pacific and Canadian National also go into the United States.
1:27
Speaker 4: CP also goes directly into Mexico. About a third of
1:32
Speaker 4: Canadian Nationals volumes or revenues i should say, are tied
1:36
Speaker 4: to cross border traffic, so you know, it's not just
1:39
Speaker 4: going to be impacting Canada. How we see it playing
1:43
Speaker 4: out is that, you know, these kind of work stoppages
1:48
Speaker 4: don't last that long. Typically, usually they're usually forced into
1:53
Speaker 4: some sort of arbitration, you know, when it starts really
1:56
Speaker 4: impacting the economy. The Canadian government kind of a hands
2:00
Speaker 4: off approach going into Thursday when the deadline was there.
2:05
Speaker 4: You know, they might take more of a kind of
2:07
Speaker 4: a direct approach now that freight is starting stopping to flow,
2:13
Speaker 4: you know, and for the railroads, the two railroads impacted,
2:15
Speaker 4: it's going to impact their earnings. You know, a lot
2:18
Speaker 4: of the freight is going to be just delayed, it's
2:21
Speaker 4: not necessarily going to be lost, but some of their
2:24
Speaker 4: you know, more truck competitive freight like intermodal that's a
2:28
Speaker 4: little more time sensitive could get lost to other modes,
2:32
Speaker 4: namely trucks.
2:34
Speaker 5: You've also talked about how, due to the different labor disruption,
2:39
Speaker 5: shippers have been diverting free from those Canadian ports toward
2:42
Speaker 5: the US West Coast. So what I'm wondering is who
2:45
Speaker 5: kind of wins and who loses from this, because you've
2:47
Speaker 5: also talked about how this sort of situation has helped
2:50
Speaker 5: boost Union Pacific and other sort of internal modal traffic
2:53
Speaker 5: in recent weeks.
2:56
Speaker 4: Yeah, so you know how we see this playing out
2:58
Speaker 4: is you know who's going to benefit it. Well, if
3:01
Speaker 4: if it's freight that's headed into Canada that's going to
3:05
Speaker 4: end up in the United States, it's not going to
3:08
Speaker 4: go into Canada because the steamships are going to avoid
3:10
Speaker 4: those sports due to the workstop it. So they might
3:13
Speaker 4: try to bring that freight into southern California or the
3:17
Speaker 4: Gulf Coast and the East Coast. But that being said,
3:19
Speaker 4: the Gulf Coast and East Coast are also facing those
3:22
Speaker 4: ports are also facing their own labor issues. They have
3:25
Speaker 4: a contract that comes up in September thirtieth with their unions,
3:29
Speaker 4: and right now there doesn't seem like there's an agreement
3:33
Speaker 4: at least in the near term. So you know a
3:35
Speaker 4: lot of shippers have been redirecting their freight to southern California.
3:41
Speaker 4: So then who wins. Well, big winners would be Union
3:44
Speaker 4: Pacific in Burlington Northern and also in Burlington Northern that's
3:50
Speaker 4: a fully owned subsidiary by Berkshire Hathaway. And so also
3:54
Speaker 4: some of the intermodal players might benefit too because you'll
3:58
Speaker 4: have maybe longer lengths of haul, which should drive higher
4:02
Speaker 4: revenues for the players. And also, you know, we expect
4:06
Speaker 4: to see a little bump in truck spot load rates
4:09
Speaker 4: next week, as you know, maybe more and more capacity
4:12
Speaker 4: might be needed to move that time sensitive freight that's
4:16
Speaker 4: being impacted by the Canadian labor strife.
4:20
Speaker 3: Lee, I wonder if is this time of year particularly crucial.
4:23
Speaker 2: I'm thinking about the retailers maybe stocking at their shelves
4:26
Speaker 2: getting ready for you know, the holiday season.
4:29
Speaker 3: Was this time period chosen or is this just happenstance?
4:34
Speaker 4: This has happenstance, This is just like when their contract
4:38
Speaker 4: came up, you know, and not all labor issues have
4:42
Speaker 4: been terrible this year. CSX yesterday announced that they've reached
4:46
Speaker 4: an agreement four or five months ahead of their deadline
4:50
Speaker 4: with about twenty five percent of their unionized workforce, which
4:54
Speaker 4: included a three and a half percent pay increase on
4:58
Speaker 4: an annual basis over the next five years. So it's
5:02
Speaker 4: not it's not all bad news for labor, but but
5:04
Speaker 4: it and you know, it's not all bad news when
5:07
Speaker 4: it relates to labor, I should say, uh, but you know,
5:11
Speaker 4: we hope that things in Canada come to a close
5:16
Speaker 4: uh and and the rails get back to work, not
5:18
Speaker 4: only you know, for the economies involved, but you know
5:21
Speaker 4: the people involved as well.
5:23
Speaker 5: What does this mean for commodities traffic growth from here?
5:27
Speaker 5: Because it's largely dependent on the pace of of course
5:31
Speaker 5: China's economic recovery, and since it's also a major importer
5:34
Speaker 5: of North American materials as well.
5:38
Speaker 4: Yeah, so you know, as China goes, so does a
5:41
Speaker 4: commodity demand globally. You know, in addition to covering railroads,
5:44
Speaker 4: we cover marine shipping, the dry ball and tanker market
5:47
Speaker 4: as well. They're a major player and importer of goods.
5:52
Speaker 4: You know, their economy has not been as good as
5:55
Speaker 4: many were expecting. Uh, And that is definitely going to
5:59
Speaker 4: have an impact on demand, you know, with rails. You
6:02
Speaker 4: know what we should see on the commodity side is
6:05
Speaker 4: a lot of lumpiness in the weekly volume data that
6:09
Speaker 4: we get from the trade Association, the American Rail Association,
6:16
Speaker 4: and so you know, while a lot of that freight
6:19
Speaker 4: is not going to get lost like two other modes
6:22
Speaker 4: like maybe more truck competitive stuff, it's just going to
6:24
Speaker 4: get delayed. So it's going to create probably more lumpy
6:28
Speaker 4: earnings for Canadian National, Canadian Pacific in the third and
6:31
Speaker 4: fourth quarter. You know, probably it's going to weigh on
6:36
Speaker 4: the third quarter and maybe be somewhat of a tailwin
6:38
Speaker 4: in the fourth quarter.
6:39
Speaker 2: All right, Lee, thanks so much for joining us. I
6:42
Speaker 2: always appreciate getting your views there. Lead classical senior transport
6:45
Speaker 2: logistics and shipping analysts for Bloomberg Intelligence joining us via
6:48
Speaker 2: zoom from Princeton, New Jersey. On that Canadian railways they
6:51
Speaker 2: lock out their workers as talks fail, snarling trade there,
6:55
Speaker 2: so that brings up the risk of a possible strike here.
6:58
Speaker 2: So Lee is our global leader of all that trucking
7:02
Speaker 2: and railroads and logistics and all that kind of stuff.
7:05
Speaker 2: See is our go to guy there.
7:08
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
7:12
Speaker 1: weekdays at ten am Eastern on Apple car Play and
7:15
Speaker 1: Android Auto with the Bloomberg Business app. You can also
7:18
Speaker 1: listen live on Amazon Alexa from our flagship New York
7:21
Speaker 1: station Just Say Alexa playing Bloomberg eleven thirty.
7:26
Speaker 2: Let's go to out this Jackson hawayoming a little bit
7:28
Speaker 2: more west of Chicago.
7:30
Speaker 3: Michael McKee joins is there.
7:31
Speaker 2: He's Bloomberg International Economics and Policy correspondent, and he is
7:34
Speaker 2: the authentic Western dude, born and raised in Colorado, Colorado State,
7:39
Speaker 2: the whole thing.
7:40
Speaker 3: So he's at home out there. Tom Keen in the
7:43
Speaker 3: suit and the bow tie not so shure, but Michael
7:46
Speaker 3: McKee fits right in there, like the cowboy hat. I
7:48
Speaker 3: know he's sporting to camp. I was waiting for it
7:50
Speaker 3: the friends on YouTube. Michael, what's the.
7:54
Speaker 6: But everybody asked, so I need to and you.
7:57
Speaker 2: Delivered, And you delivered, no question. You're bringing the game.
8:00
Speaker 2: What's the feeling out there in Jackson Hole, Mike. What
8:02
Speaker 2: is the expectation for FED Chairman J Powell tomorrow?
8:08
Speaker 6: Expectations aren't really high that he's going to give us
8:10
Speaker 6: a whole lot new he'll say that the inflation numbers
8:14
Speaker 6: have been good, they have more confidence about reaching their
8:16
Speaker 6: two percent inflation target, and that it may soon be
8:20
Speaker 6: appropriate to change policy. He doesn't want to commit to
8:24
Speaker 6: a September eighteenth rate cut because we do have data
8:27
Speaker 6: coming in two inflation reports, that a jobs report that
8:30
Speaker 6: could change their mind. I suppose, But I think what
8:33
Speaker 6: he wants to do is leave the markets believing they're
8:36
Speaker 6: going to cut without guaranteeing it.
8:39
Speaker 5: And of course we've had a few different FED speakers
8:41
Speaker 5: this morning, as you know, so Kansas City FED President
8:44
Speaker 5: Jeffrey Smith obviously speaking on Bloomberg Television earlier. So he
8:48
Speaker 5: was talking about how, especially if you're thinking about the
8:51
Speaker 5: payroll visions don't really change how they were thinking about policy.
8:54
Speaker 5: But then something else that I thought was interesting was
8:57
Speaker 5: Patrick Harker was speaking about how he already thought markets
9:01
Speaker 5: have priced in a move for FED action, and he
9:03
Speaker 5: also said that the easing cycle may put the FED
9:06
Speaker 5: funds rate near three percent. I thought that was interesting
9:08
Speaker 5: because he was a little bit more specific than some
9:10
Speaker 5: of the other FED speakers that you've heard. What's your
9:13
Speaker 5: kind of takeaway from this as far as some gleaning
9:15
Speaker 5: some of this new information from them ahead of obviously
9:18
Speaker 5: pal tomorrow speaking.
9:22
Speaker 6: Well, it's pretty clear the markets are priced in at
9:23
Speaker 6: least one rate cut, a little bit more than one
9:25
Speaker 6: at this point. Is they keep their options open. You
9:29
Speaker 6: can see that in the futures and the overnight index swaps.
9:32
Speaker 6: But the idea of what neutral is going to be
9:34
Speaker 6: and where the Fed is going to end its rate
9:36
Speaker 6: cutting cycle is going to be a big matter of
9:38
Speaker 6: debate going forward. A lot of people from the Fed say,
9:41
Speaker 6: we don't know yet because we're not sure what's happened
9:44
Speaker 6: with the demand level, the potential growth of the economy.
9:48
Speaker 6: I don't want to get all wonky, but basically our star,
9:51
Speaker 6: as they say, and if it has, if it has
9:54
Speaker 6: gone up, then they cut less. If if it's gone
9:57
Speaker 6: back to pre pandemic levels, then we could get down
10:00
Speaker 6: around three or so. They don't want to go much
10:01
Speaker 6: further than that because they want some space to cut rates.
10:04
Speaker 6: And the one thing they will all tell you they
10:06
Speaker 6: don't have a number yet, but they say it will
10:08
Speaker 6: not be zero.
10:08
Speaker 2: Again, Michael, is the feeling out there in Jackson Hole
10:12
Speaker 2: that the FED, in terms of timing of cutting rates,
10:15
Speaker 2: that they're on the right glide path or is there
10:18
Speaker 2: concern that maybe they're a little bit late here As
10:20
Speaker 2: we look at some of this data over the last
10:22
Speaker 2: several days and weeks.
10:25
Speaker 6: FED folks don't think they're late. You get the argument
10:28
Speaker 6: from Wall Street that they might be. There are people
10:30
Speaker 6: on Wall Street who think the Fed's behind the curve.
10:33
Speaker 6: But their view is you look at the data, and
10:36
Speaker 6: the data aren't telling us the economy is falling off
10:38
Speaker 6: a cliff. Jobs claims this morning barely moving and on
10:42
Speaker 6: a non seasonally adjusted basis actually going down. There's no
10:45
Speaker 6: layoffs happening. And what they're hearing from their constituents, the
10:50
Speaker 6: CEOs and companies in their districts is that they're still
10:53
Speaker 6: demand out there. People are still spending money, not as much,
10:56
Speaker 6: not as fast, but they are still spending and so
10:59
Speaker 6: the outlook still pretty good, which means they don't feel
11:02
Speaker 6: an urgency to move that some people on Wall Street
11:07
Speaker 6: would like them to have.
11:08
Speaker 5: It's interesting looking at the moves in the bond market.
11:11
Speaker 5: So after we heard for Kansas City, a FED president
11:14
Speaker 5: at Jeffrey Smid, you're actually looking over at the tenure
11:17
Speaker 5: yield rising. It's close to about a three eighty four
11:20
Speaker 5: right now. So he was saying about how more data
11:23
Speaker 5: is needed for a rate cut. But when you're hearing
11:25
Speaker 5: that type of rhetoric, is that just basically them trying
11:28
Speaker 5: to signal, don't expect to say a fifty basis point
11:31
Speaker 5: rate cut out a September meeting something that aggressive. To
11:33
Speaker 5: be thinking more, maybe a more measured pace in line.
11:36
Speaker 5: When it comes to markets and their anticipation for.
11:38
Speaker 6: This, it depends on who is talking. Deef Schmid represents
11:43
Speaker 6: the Kansas City District, which has traditionally been one of
11:46
Speaker 6: the more hawkish on inflation, so it's understandable that he
11:50
Speaker 6: is reluctant to commit at this point. But I think
11:55
Speaker 6: they all want to leave the impression that we're about
11:57
Speaker 6: to start a cutting cycle. If it's not going to
12:00
Speaker 6: be in September, it's going to be shortly after that
12:03
Speaker 6: unless we see some sort of dramatic reversal in inflation.
12:06
Speaker 6: They just don't want to have to ratify the market's
12:10
Speaker 6: wishes and start cutting too far too fast.
12:14
Speaker 2: All right, Michael McKee, thank you so much for joining us.
12:16
Speaker 2: Thank you for the cowboy hat that I love.
12:18
Speaker 3: It makes the hit. Michael McKee, He's not just a cowboy.
12:20
Speaker 2: He covers all the economic stuff for Bloomberg News Intellivision,
12:23
Speaker 2: but he is a colunt on, a native, so he
12:25
Speaker 2: fits in.
12:25
Speaker 5: That is I'm so excited we got to see it.
12:27
Speaker 5: This is a suspense of us waiting to see if
12:29
Speaker 5: the hat was there, and he delivered.
12:30
Speaker 3: Basically for the FED chairman pal tomorrow. I mean, you
12:33
Speaker 3: know they don't. He doesn't have to do a whole
12:34
Speaker 3: lot tomorrow.
12:35
Speaker 5: So the options market, actually, the volatility that was had
12:38
Speaker 5: been priced in come down pretty dramatically. So right now
12:40
Speaker 5: the options market's pricing and eight tenths of a percent
12:43
Speaker 5: swing for the S and P five hundred in either direction,
12:45
Speaker 5: and for context, last week it actually had been over
12:48
Speaker 5: one percent, it had been around one point two percent.
12:50
Speaker 5: So really it's just based on the positioning and investors
12:53
Speaker 5: expecting volatility to fade, and a lot of it. Because
12:56
Speaker 5: we've talked about we've already had at least a half
12:58
Speaker 5: dozen FED speakers come out signal that rate cuts are
13:01
Speaker 5: expected next month. So really it's all about what traders
13:03
Speaker 5: are talking about, the tone, and if he keeps that
13:05
Speaker 5: tone going tomorrow exactly.
13:06
Speaker 2: And then I'll be interesting to see kind of the
13:08
Speaker 2: pace of rate cuts. How they cut rates going forward?
13:10
Speaker 2: Is it twenty five basis points.
13:12
Speaker 3: Each each meeting?
13:13
Speaker 2: Every other meeting that he does a front load with
13:15
Speaker 2: fifty be interesting to see how this all plays out.
13:18
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
13:22
Speaker 1: weekdays at ten am Eastern on Apple car Playing and
13:25
Speaker 1: broud Otto with the Bloomberg Business app. Listen on demand
13:28
Speaker 1: wherever you get your podcasts, or watch us live on YouTube.
13:34
Speaker 2: Just meant sitting in for Alex Steel here on Paul Sweeney.
13:36
Speaker 2: You live here in our Bloomberg Interactive Brokers studio. We're
13:38
Speaker 2: streaming live on YouTube as well, so check us out there.
13:42
Speaker 2: Brian Jacobson joins us here. He's the chief economist at
13:44
Speaker 2: Annex Wealth Management, joining us from Brookfield, Wisconsin via that
13:49
Speaker 2: zoom thing. Hey Brian, thanks so much for joining us here.
13:51
Speaker 2: We're about to hear from FED Chairman j pal Tomorrow
13:54
Speaker 2: out in Jackson Hole. What's your view of the economy
14:00
Speaker 2: right here?
14:02
Speaker 6: Yeah?
14:02
Speaker 7: I think well, it obviously had to change based upon
14:04
Speaker 7: some of those BLS revisions that we got as far
14:07
Speaker 7: as suddenly, poof, there goes eight hundred, eighteen thousand jobs.
14:10
Speaker 3: But for the most part.
14:12
Speaker 7: My view is that we went from great growth to
14:14
Speaker 7: good growth to now sustainable growth. And obviously the trick
14:18
Speaker 7: is whether or not that sustainable growth will tip over
14:21
Speaker 7: into a recession. We don't necessarily think that it will.
14:24
Speaker 7: A lot of that does depend upon the FED beginning
14:28
Speaker 7: to really take its foot off of the break of
14:31
Speaker 7: the economy. It's been trying to slow things down. We
14:33
Speaker 7: don't necessarily think that it needs to really completely take
14:37
Speaker 7: its foot off of the break. That's just not their style.
14:40
Speaker 7: They are likely to do a twenty five basis point cut.
14:42
Speaker 7: I think Collins from Boston said it pretty well about
14:45
Speaker 7: being very slow and methodical about the rate cuts, which
14:48
Speaker 7: is very different than what they did in the past,
14:50
Speaker 7: which is they'd be slow and methodical in hiking and
14:53
Speaker 7: then have to cut aggressively. And now it's the complete
14:55
Speaker 7: opposite of that aggressive hiking, more slow, methodical cutting and
14:59
Speaker 7: st on the way.
15:01
Speaker 5: And looking at the latest Atlanta FED GDP model for
15:04
Speaker 5: the current quarter, it has growth around two percent. As
15:07
Speaker 5: you know, that can be very volile at times. Another
15:09
Speaker 5: thing I like to look at the paul in the
15:11
Speaker 5: terminal as a function ECFC, so you can look at
15:13
Speaker 5: the economic forecast annually as where's quarterly, But you're still
15:16
Speaker 5: seeing strength there. So whenever people are pointing to say,
15:20
Speaker 5: for instance, Brian, that last July payrolls report that's all
15:23
Speaker 5: slow down and hiring, that was just one report. Of course,
15:25
Speaker 5: we haven't seen a trend of that just yet. Where
15:27
Speaker 5: exactly do you see when people are trying to argue
15:30
Speaker 5: for the weakness here, Because when you're looking at consumer
15:32
Speaker 5: spending that obviously makes up the bulk of GDP more
15:35
Speaker 5: than two thirds of that that drives the economy, it
15:37
Speaker 5: still seems like people are maybe they're shifting which type
15:40
Speaker 5: of retailers they're going to, right when we see results
15:43
Speaker 5: from Walmart and Target here, kind of diverging paths, but
15:46
Speaker 5: still seems like there's a strong consumer out there.
15:49
Speaker 7: Yeah, the consumer is strong, but not as strong as
15:51
Speaker 7: they used to be, And I think that's one of
15:52
Speaker 7: the key things when people are talking about some of
15:54
Speaker 7: the weakness, a lot of that is focused more on
15:56
Speaker 7: what's been going on with small and medium sized businesses
15:59
Speaker 7: in the UNI it States, high cost of financing. They've
16:02
Speaker 7: seen really orders being canceled over the last few years.
16:05
Speaker 7: Manufacturing in particular has really been struggling. I think it's
16:08
Speaker 7: been like twenty one months in a row, with maybe
16:12
Speaker 7: one or two of those months above fifty. But for
16:14
Speaker 7: the most part in recessionary territory, the service sector activity
16:17
Speaker 7: has stayed rather buoyant. But now the fears are more
16:20
Speaker 7: about what is happening next. It's not necessarily disagreement about
16:23
Speaker 7: where are we now, but where are we headed? And
16:26
Speaker 7: I think that's where you see some of these early indicators,
16:29
Speaker 7: you know, the Walmart and Target earnings. I think we're
16:31
Speaker 7: good examples. Why is it that they've been doing well
16:34
Speaker 7: because of discounting. Customers really view it easier to buy, say,
16:38
Speaker 7: throw pillows to spruce up a room as opposed to
16:41
Speaker 7: doing a complete remodel, right, and so that benefits Target
16:45
Speaker 7: at the expense of say home depot or other companies
16:47
Speaker 7: that are more in that higher ticket price things that
16:50
Speaker 7: maybe need to be financed. And so I think the
16:53
Speaker 7: consumer is strong, but not as strong as they used
16:56
Speaker 7: to be.
16:57
Speaker 2: What's the risk here that the FED is late and
16:59
Speaker 2: this is really at risk of a recession, maybe even
17:02
Speaker 2: tho some folks say we're already in one.
17:04
Speaker 7: Well, yeah, I think that they are late, but that
17:07
Speaker 7: doesn't necessarily risk a recession because of the resiliency of
17:11
Speaker 7: the consumer and the overall economy. In fact, with the
17:15
Speaker 7: rate cuts coming in September, you know, maybe they should
17:17
Speaker 7: have done that back in July. If not sooner, maybe
17:20
Speaker 7: they should do fifty basis points. It's not necessarily about
17:24
Speaker 7: saying what I would like them to do about but
17:26
Speaker 7: what I think they will do, which is that twenty
17:28
Speaker 7: five basis points, and so if they slowly take their
17:31
Speaker 7: foot off the break, I think that's going to be
17:33
Speaker 7: good enough for the economy to avoid a recession. I
17:37
Speaker 7: don't think we need any sort of outsized move higher.
17:39
Speaker 7: I would like to see a bigger move higher, you know,
17:42
Speaker 7: basically to allow that real federal funds, right, the inflation
17:45
Speaker 7: adjusted one, to come back down to something that I
17:49
Speaker 7: think is more on target with that two percent inflation
17:52
Speaker 7: that we're headed towards. But the Fed is likely to
17:55
Speaker 7: deliver kind of weak beer here in terms of a
17:57
Speaker 7: twenty five basis point cut. Maybe the big disappointment is
18:01
Speaker 7: that even any cut is not necessarily going to accelerate
18:05
Speaker 7: economic growth immediately. The initial effect is actually to serve
18:09
Speaker 7: as an economic drag as people pull back their activity.
18:13
Speaker 7: The borrowing, waiting for something more meaningful until maybe you
18:16
Speaker 7: get four cuts under your belt. Because does it matter
18:19
Speaker 7: if it's six and a half percent on a mortgage
18:21
Speaker 7: versus six point twenty five. Probably not, But six and
18:24
Speaker 7: a half versus five and a half, that's a bigger difference.
18:27
Speaker 5: Talk to us about some of your favorite corners of
18:30
Speaker 5: the economy, especially when you're thinking about those closely tied
18:33
Speaker 5: to growth when it comes to industrials, consumer staples, energy,
18:36
Speaker 5: as well as financials.
18:39
Speaker 7: Yeah, some of those have been a little bit painful.
18:41
Speaker 7: We've been overweight energy for a while, just thinking that
18:44
Speaker 7: these companies are cash cows and they're probably going to
18:47
Speaker 7: continue to do well. The big disappointment there has really
18:50
Speaker 7: been on the demand side of the equation in terms
18:52
Speaker 7: of China's growth being very slow, helping to push down
18:55
Speaker 7: oil prices. But still from that fundamental basis the cash
18:58
Speaker 7: flow generation. We do like that area, and they could
19:02
Speaker 7: get a boost if we do see an eventual reacceleration,
19:06
Speaker 7: but we're not banking on an economic reacceleration For some
19:09
Speaker 7: of those more cyclical areas, those are more based on
19:12
Speaker 7: let's say the valuations, and that a lot of these
19:16
Speaker 7: companies have already gone through an earnings recession. If you
19:20
Speaker 7: look on the Bloomberg terminal as far as you know,
19:22
Speaker 7: the FA function for the financial analysis for these different
19:24
Speaker 7: indices for the different areas, you can see how it
19:28
Speaker 7: is that small mid sized companies they have been in
19:31
Speaker 7: and out of recession for basically the last two years,
19:36
Speaker 7: and now the expectation is for that earnings recession to
19:39
Speaker 7: continue for the next couple of quarters. That seems pretty realistic.
19:43
Speaker 7: So if that's already priced in, maybe we could actually
19:46
Speaker 7: see the valuations provide a bit of a foundation for
19:50
Speaker 7: longer term gains in those areas.
19:52
Speaker 5: I'm glad you brought that up, because, of course Bloomberg Intelligence, Paul,
19:55
Speaker 5: if you crunch Geno Martin Adams team over on the
19:58
Speaker 5: equity side, they actually had been talking about coming into
20:01
Speaker 5: this quarter, how the rest of the S and P
20:04
Speaker 5: five hundred to four ninety three were actually going to
20:06
Speaker 5: have in turn of profit growth when you're excluding those
20:08
Speaker 5: MAGS seven type companies. And so even though we're seeing
20:11
Speaker 5: maybe some of the growth pull back a little bit
20:13
Speaker 5: for big tech companies, of course, the comps a year
20:15
Speaker 5: over year, it's hard to match that when you had
20:17
Speaker 5: that gangbuster revenue forecast a last May of in twenty
20:21
Speaker 5: twenty three, of course from Nvidia. But when you're looking
20:24
Speaker 5: ahead to sort of the remainder of those companies, maybe
20:27
Speaker 5: not even just the four ninety three and the S
20:28
Speaker 5: and P five hundred, but you were just talking about
20:30
Speaker 5: small caps and mid type cap companies. What else do
20:33
Speaker 5: you need to see there because people talk so much
20:34
Speaker 5: about small caps. Obviously you're economists, but when you're thinking
20:37
Speaker 5: about sort of the pain that we've seen reflective in
20:40
Speaker 5: the equity market, say with the Russell two thousand, we
20:42
Speaker 5: saw it really outperform the broader benchmarks in July, but
20:46
Speaker 5: then pull back at the start of this month. At
20:47
Speaker 5: what point do you see kind of a turn there,
20:50
Speaker 5: Because we do know that a lot of those smaller
20:51
Speaker 5: companies are very debt heavy oriented, and what that could
20:55
Speaker 5: mean if there could be some relief there, if we
20:56
Speaker 5: get some rate cuts on the way the rest of
20:58
Speaker 5: the year.
21:00
Speaker 7: Rate cuts would help, because when you saw that massive
21:02
Speaker 7: rotation from large cap the small cap, it was around
21:05
Speaker 7: the time that we got that decent CPI print where
21:08
Speaker 7: it says suggested that okay, rate cuts are on their way,
21:11
Speaker 7: and then you also then had Trump's popularity rising and
21:14
Speaker 7: so maybe some regulatory relief. Since then, we've seen Trump's
21:18
Speaker 7: popularity decline, and we've also seen some resiliency with some
21:22
Speaker 7: of those megacap tech stock they're earning. So even if
21:24
Speaker 7: the stock prices are pretty volatile, the fundamentals seem pretty
21:28
Speaker 7: well intact.
21:29
Speaker 3: Now.
21:30
Speaker 7: One of the big areas is I just think don't
21:32
Speaker 7: underestimate the power of low expectations for some of those companies,
21:36
Speaker 7: because if you are expecting a gradual turn in earnings,
21:40
Speaker 7: a lot of these companies have a lot of built
21:42
Speaker 7: in operating leverage. So as long as you get a
21:45
Speaker 7: little bit of growth, it doesn't have to be a lot.
21:47
Speaker 7: It can amplify to the bottom line, and that's where
21:51
Speaker 7: you could probably see some of that earnings acceleration. So
21:53
Speaker 7: that's really what we're looking at. They've already done the
21:56
Speaker 7: hard work in terms of bracing for recession that has
22:00
Speaker 7: happened or that was isolated to their particular industry or
22:03
Speaker 7: their particular community, and so if you see just some stability,
22:08
Speaker 7: maybe a slight bit of an acceleration and economic activity,
22:12
Speaker 7: that should really accrue to the bottom line and improve
22:14
Speaker 7: the valuation picture.
22:16
Speaker 2: Hey, Brian, thanks so much for joining us. Really appreciate
22:18
Speaker 2: getting some of your thoughts there. Brian Jacobson. He's a
22:20
Speaker 2: chief economist at Annex Wealth Management. Joining us from Brookfield, Wisconsin,
22:26
Speaker 2: just a little bit west of Milwaukee. Again, you heard
22:29
Speaker 2: me say before, I'll say it again pound for pound,
22:31
Speaker 2: some of the smartest money managers are in Milwaukee, Wisconsin.
22:34
Speaker 3: That's rightly.
22:35
Speaker 5: I have a lot of sources that.
22:36
Speaker 3: Are out exactly you know as University Wisconsin.
22:39
Speaker 1: I don't know you're listening to the Bloomberg Intelligence Podcast.
22:44
Speaker 1: Catch us live weekdays at ten am Eastern on applecar
22:47
Speaker 1: Play and Android Auto with the Bloomberg Business app. You
22:50
Speaker 1: can also listen live on Amazon Alexa from our flagship
22:53
Speaker 1: New York station, Just say Alexa play Bloomberg eleven thirty.
23:00
Speaker 2: I just meant sitting in for Alex Steo on Paul sweety.
23:02
Speaker 2: We're live here in our Bloomberg Interactive Brokers studio or
23:04
Speaker 2: streaming live on YouTube as well. And if you're listening
23:08
Speaker 2: to us in Boston, our new home starting September third
23:10
Speaker 2: will be ninety two nine FM. That's the day after
23:13
Speaker 2: Labor Day, Bloomberg Radio moving to ninety two to nine
23:17
Speaker 2: FM in Boston. Looking at Peloton stocks of twenty five percent,
23:22
Speaker 2: I mean the lost narrows. I guess sales came in
23:24
Speaker 2: a little bit better and expected and pretty decent profit outlooks.
23:27
Speaker 2: So I guess a turnaround plan here that people have
23:30
Speaker 2: been waiting to see some positive effects. Maybe that's actually
23:33
Speaker 2: happening here again, stock up twenty five percent. So let's
23:35
Speaker 2: check in with KEITHA. Ranganathin. She's a media analyst for
23:38
Speaker 2: Bloomberg Intelligence. She joins us from Princeton via that Zoom
23:42
Speaker 2: technology thing. Gihill, what did you make of the Peloton's
23:47
Speaker 2: results and.
23:48
Speaker 3: Is it twenty five percent move higher? Is I warranted?
23:51
Speaker 4: Yeah?
23:51
Speaker 8: I don't know about that, Paul. I think twenty five
23:53
Speaker 8: percent might be a little bit of an overreaction. But
23:55
Speaker 8: then again, remember it's down from you know, what was
23:57
Speaker 8: it trading at one sixty or something? Yeah, sixty seven.
24:03
Speaker 5: Yeah, that's when I was on the biking, So it's
24:05
Speaker 5: a drawdown of close to one hundred percent. Keep it.
24:08
Speaker 8: It definitely is, but you know, you're you're absolutely right, Paul.
24:12
Speaker 8: So there there definitely were some green shoots from the
24:15
Speaker 8: fiscal fourth quarter results. I mean up to this point,
24:18
Speaker 8: I think Peloton's management was really trying to do too
24:21
Speaker 8: many things at once, So they were trying to reintegrate
24:24
Speaker 8: subscriber growth and at the same time they were also
24:27
Speaker 8: tasked with, uh, you know, reducing costs, and of course
24:30
Speaker 8: those two are kind of a little bit incompatible because
24:32
Speaker 8: you need to kind of run promotions, you need to uh,
24:36
Speaker 8: undertake a lot of marketing spend to to you know,
24:39
Speaker 8: kind of re energize subscriber growth, and those two were
24:42
Speaker 8: just so incompatible with each other. So obviously now they're
24:44
Speaker 8: just focusing on the cost element of it. They're really
24:47
Speaker 8: right sizing their cost base. What we're seeing is, you know,
24:51
Speaker 8: strong discipline across the board, and with that we've seen
24:55
Speaker 8: not just an increase in their profitability for the quarter
25:00
Speaker 8: they reported, but also their guidance for fiscal twenty twenty
25:03
Speaker 8: five was super encouraging. So their adjusted EBADUF forecast came
25:07
Speaker 8: in almost twice or double what you know, consensus was expecting.
25:13
Speaker 8: But again, Paul, as we kind of think about the
25:15
Speaker 8: longer term strategy here, the question is, I mean, can
25:18
Speaker 8: there really ever be a turnaround in the true sense
25:21
Speaker 8: of the word, meaning, you know, can demand inflect and
25:25
Speaker 8: so far, you know what management said and all the
25:28
Speaker 8: signs that we're seeing is the visibility is extremely limited.
25:32
Speaker 8: So yes, we can have some short term gains in
25:34
Speaker 8: terms of you know, the profit metrics, but the long
25:36
Speaker 8: term metric, which is really revenue and subscriber growth, I
25:39
Speaker 8: think that's going to continue to be challenged.
25:42
Speaker 5: Looking at that all time closing high, so it was
25:44
Speaker 5: January thirteenth, twenty twenty one, one hundred and sixty seven dollars,
25:47
Speaker 5: forty two cents there. You look where it's trading now
25:50
Speaker 5: four dollars and about fifteen cents there. But when you're
25:53
Speaker 5: talking about this turnaround strategy, Paul and I earlier were
25:56
Speaker 5: talking about he has a couple different products from Peloton,
25:58
Speaker 5: but usually he's mentioning his girlfriend news is a more
26:01
Speaker 5: now than he does. But how do you get as
26:03
Speaker 5: from a shareholder type perspective, because when you have an
26:07
Speaker 5: inflection point like Covid, obviously this was a stock that
26:10
Speaker 5: was one of those types of darlings. Though what when
26:13
Speaker 5: it comes to demand, like you were talking about, how
26:16
Speaker 5: do they rectify that and how do shareholders really view it?
26:19
Speaker 5: Because how do you get that stock back to even
26:21
Speaker 5: Eclipse one sixty seven.
26:24
Speaker 8: It's going to be very hard just to kind of
26:26
Speaker 8: get it back. And remember this is a company that
26:28
Speaker 8: is in transition on many different fronts. So they actually
26:33
Speaker 8: do not have a CEO right now, so the CEO
26:36
Speaker 8: search is ongoing. So they're doing everything that they can
26:39
Speaker 8: right now at least to kind of right the ship.
26:42
Speaker 8: So headcount reduction, marketing expense reduction. You know, obviously they're
26:46
Speaker 8: closing a lot of the retail showroom space inventory, they're
26:49
Speaker 8: kind of right sizing that. So they're doing everything that
26:52
Speaker 8: they can. But if you kind of look out at
26:54
Speaker 8: the long term, like what is the business model, like,
26:57
Speaker 8: we do need some kind of clarity on that. Do
26:59
Speaker 8: they get into different you know modalities, I mean they've
27:02
Speaker 8: so far they've mainly they're principally really just a bike company,
27:06
Speaker 8: even that the treadmill really hasn't taken off in a
27:09
Speaker 8: big way, and even with their hardware, yes it you know,
27:12
Speaker 8: obviously they're one of the best connected fitness products out there,
27:16
Speaker 8: but they've had problems with recalls and that kind of
27:18
Speaker 8: causing churn. So you know, again, will like getting into
27:23
Speaker 8: different modalities like the roar or even strength training will
27:26
Speaker 8: it really kind of move the needle. I'm not necessarily sure,
27:30
Speaker 8: which means that the only other option for them is
27:33
Speaker 8: to really find a buyer. And there have been some
27:35
Speaker 8: rumors that, you know, private equity companies might be interested.
27:39
Speaker 8: But then if private equity gets involved, then it really
27:41
Speaker 8: comes down to, you know, trimming the costs even further
27:44
Speaker 8: and just it kind of becomes more about like just
27:47
Speaker 8: extracting whatever cash you can from the company.
27:49
Speaker 2: Hey, Githa, let's switch Gears to Paramount. It looks like
27:52
Speaker 2: we may have a bidding war there, Mister Edgar Bronfman
27:57
Speaker 2: up to his offer today. What's the feeling about Paramoun
28:00
Speaker 2: and how this might play out?
28:02
Speaker 8: So's it's getting very interesting, Paul, And I'm not really
28:05
Speaker 8: sure what Brafman's endgame is here. So obviously he wouldn't
28:09
Speaker 8: get involved in this, you know, kind of at this
28:11
Speaker 8: late stage if he didn't get some encouragement in my view,
28:15
Speaker 8: from Cherry Redstone. And again I'm not really sure what
28:18
Speaker 8: Cherry Redstone wants here. I mean, she obviously has she
28:21
Speaker 8: ultimately kind of calls the shots. I don't know whether
28:24
Speaker 8: she's doing this because she wants sky Dance to kind
28:27
Speaker 8: of sweeten their deal. Obviously, you know, the fifteen dollars
28:29
Speaker 8: per share for the public shareholders was not something that
28:33
Speaker 8: sat well with them. Brafman has kind of upped that
28:36
Speaker 8: a little bit. It's it's a sixteen dollars per share
28:39
Speaker 8: cash out. But we're not sure whether whether Sharry Redstone
28:42
Speaker 8: really is is kind of manipulating this in any way,
28:46
Speaker 8: or whether she's kind of the voice behind this, or
28:49
Speaker 8: whether she simply wants to see Brafman kind of have
28:51
Speaker 8: this bid just to just to make sure that there
28:54
Speaker 8: aren't that she's reducing her litigation risks. So again, it's
28:58
Speaker 8: a little bit unclear, but definitely I think think Brompmann
29:00
Speaker 8: coming in sweetening his bid does set the stage in
29:03
Speaker 8: a way for a bidding war. So it's going to
29:06
Speaker 8: be interesting to see whether sky Dance comes in and
29:09
Speaker 8: you know, Sweten's their proposal.
29:11
Speaker 5: You've also talked about how a lot of questions still
29:14
Speaker 5: remain when it comes to some of the risks, including
29:17
Speaker 5: its valuations. So Class B shares of paramount down about
29:21
Speaker 5: twenty four percent year to date. Unpack sort of the
29:24
Speaker 5: valuation type issues that it's facing when it comes to
29:27
Speaker 5: a potential bidding.
29:28
Speaker 3: War, like this.
29:29
Speaker 8: Yeah, So the valuation has always been a sticking point.
29:33
Speaker 8: And you know, the major shareholder outcry against the sky
29:37
Speaker 8: Dance proposal was that it was in fact only benefiting
29:40
Speaker 8: you know, maybe two people, right, one with Sherry Redstone
29:43
Speaker 8: and the other is of course the Ellisons and the
29:46
Speaker 8: sky Dance team itself. Now, what Brafman is arguing is
29:51
Speaker 8: that in his proposal, he's matching quite a bit of
29:53
Speaker 8: what sky Dance has offered. The one thing that he's
29:56
Speaker 8: not doing is diluting existing shareholders. And the way that's
30:00
Speaker 8: is diluting existing shareholders is by forcing Paramount to actually
30:04
Speaker 8: buy the sky Dance studio at a fairly high multiple.
30:08
Speaker 8: We think that the multiple is about fourteen to fifteen
30:10
Speaker 8: times ibada. Meanwhile, you have the rest of the media
30:13
Speaker 8: landscape trading at about six times, and Paramount itself close
30:17
Speaker 8: to only about seven or eight times. So obviously a
30:19
Speaker 8: very rich multiple bear for sky Dance, you know, again,
30:24
Speaker 8: diluting the shareholders, and Brafman is saying his deal does
30:27
Speaker 8: not do that when it comes to valuation. I mean,
30:30
Speaker 8: the reason that we're seeing, you know, all of the
30:32
Speaker 8: media stocks challenge the way that they are is because
30:34
Speaker 8: of their heavy exposure to linear TV, linear TV which
30:38
Speaker 8: is in secular decline. And you know, the writing is
30:40
Speaker 8: obviously on the wall because we saw both Paramount and
30:43
Speaker 8: Warner Brothers in their most recent quarter actually take huge
30:46
Speaker 8: programming write downs, and so you know, as that exposure
30:51
Speaker 8: to linear TV remains high, this valuation is going to
30:54
Speaker 8: be a constant question mark. One could argue though, that
30:57
Speaker 8: Paramount still has significant exposure to a very good film
31:01
Speaker 8: and TV production studio and should therefore trade definitely higher
31:05
Speaker 8: than at that fifteen dollars that sky Dance was offering.
31:07
Speaker 2: Keitha once again great stuff Keith wrong andoh and US
31:10
Speaker 2: media analys from Bloomberg Intelligence from Princeton. You knowes, I
31:13
Speaker 2: hired a lot of really really really good people at
31:16
Speaker 2: Bloomberg Intelligence.
31:17
Speaker 3: None better. Thank Keith wrong enoughing. She's become one of
31:21
Speaker 3: the top.
31:21
Speaker 2: Top media analysts on Wall Street and a relatively short
31:24
Speaker 2: period of time.
31:24
Speaker 3: So it's great, great stuff.
31:27
Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
31:31
Speaker 1: weekdays at ten am Eastern on applecar Play and Android
31:35
Speaker 1: Auto with the Bloomberg Business app. You can also listen
31:37
Speaker 1: live on Amazon Alexa from our flagship New York station.
31:41
Speaker 1: Just say Alexa playing Bloomberg eleven thirty.
31:46
Speaker 2: Just meant sitting in for Alex Steel on Paul Sweeney.
31:48
Speaker 2: We're broadcasting live from the Bloomberg Interactive Brokers studio, and
31:51
Speaker 2: we're also streaming live on YouTube as well well. Presumably
31:55
Speaker 2: we're gonna hear from Fatcherman j Pal tomorrow and he'll
31:57
Speaker 2: presumably confirm what the market believes, which that interest rates
32:01
Speaker 2: are soon to begin falling. That should be good for
32:04
Speaker 2: a number of asset classes, including real estate, both commercial
32:07
Speaker 2: and residential.
32:08
Speaker 3: So let's get an update there. Ben Miller's the CEO
32:10
Speaker 3: fund Rise.
32:11
Speaker 2: Fundrise is the largest direct to consumer alternative asset manager
32:15
Speaker 2: in the US. Hey, Ben, again, it looks like interest
32:18
Speaker 2: rates are going to begin falling. How does that inform
32:22
Speaker 2: your view of real estate?
32:26
Speaker 9: Yeah, for the first time in a while, real estate
32:29
Speaker 9: has a bowl market tailwind. Basically, real estate is highly
32:36
Speaker 9: interest rates sensitive, and with the rise from interest rates
32:41
Speaker 9: going from zero to five percent five and a half percent,
32:44
Speaker 9: that really hurt real estate prices, especially institutional real estate
32:49
Speaker 9: prices that price off yield. Now we're talking about rates
32:53
Speaker 9: falling by potentially fifty percent, you know, from five and
32:57
Speaker 9: a half to three percent, and that could have a
33:01
Speaker 9: huge impact on real estate prices.
33:05
Speaker 5: And when you're talking specifically about those real estate prices,
33:08
Speaker 5: obviously there's commercial and then residential real estate. But you've
33:11
Speaker 5: talked about how apartments are likely to see a rally
33:13
Speaker 5: but not necessarily is clear when it comes to single
33:16
Speaker 5: family housing kind of unpacked that for us.
33:22
Speaker 9: Yeah, well, so single family housing is priced by supply
33:27
Speaker 9: and demand, and so what's surprised I think a lot
33:30
Speaker 9: of bears in the last couple of years is that
33:33
Speaker 9: high interest rates didn't lower single family housing prices. Actually,
33:37
Speaker 9: housing prices stayed healthy, and that's because most people have
33:41
Speaker 9: long term fixed rate mortgages. The average mortgage is below
33:46
Speaker 9: five percent. I think seventy five percent of people have
33:49
Speaker 9: a mortgage below five percent. And so the reality is
33:53
Speaker 9: that high interest rates really didn't impact the housing market
33:56
Speaker 9: like people expected, and home sellers didn't want to bring
34:03
Speaker 9: their house to market when interest rates are so high.
34:07
Speaker 9: So what ended up happening is supply of new housing,
34:10
Speaker 9: Supply of housing from existing homeowners was absolutely depressed. It's
34:15
Speaker 9: the lowest almost in history. And that low supply of
34:18
Speaker 9: housing kept prices up because prices are are determined by
34:24
Speaker 9: where supply needs demand. So now as interest rates are
34:29
Speaker 9: to fall, on one hand, that's good, will make housing
34:33
Speaker 9: more affordable. On the other hand, it may bring more
34:35
Speaker 9: houses to market. That's kind of if more houses come
34:39
Speaker 9: to market, that could actually cause prices to actually stay
34:44
Speaker 9: dampened despite falling interest rates.
34:47
Speaker 3: Right, And that's kind of where I wanted to go.
34:48
Speaker 5: Bet.
34:49
Speaker 2: I'm looking at the Mortgage Bankers Association thirty or fixed.
34:51
Speaker 2: It peaked kind of back in late twenty three at
34:54
Speaker 2: about seven point eight seven point nine percent. We're now
34:57
Speaker 2: down to six point five. Where do you think mortgage rates.
35:00
Speaker 3: Need to go?
35:01
Speaker 2: Is there like a clearing level you think where with
35:04
Speaker 2: the marginal seller would come back into the market, we'd
35:07
Speaker 2: get some more activity in the real estate, residential real estate.
35:14
Speaker 9: My view is that mortgages will end up in the
35:16
Speaker 9: mid fives as most likely. But I unfortunately, if you
35:22
Speaker 9: look at like the last decade, the average mortgages were
35:26
Speaker 9: in the threes. And so for a house to got
35:29
Speaker 9: as affordable as it was in the twenty tens, you
35:32
Speaker 9: really need not just rates to fall, but you need
35:35
Speaker 9: wages to increase, and that's going to take a long time.
35:39
Speaker 4: And so.
35:42
Speaker 9: Affordability is going to remain a challenge, I think through
35:45
Speaker 9: the rest of this decade as we make progress on
35:48
Speaker 9: wages and bring rates down but not to where they
35:53
Speaker 9: were last decade.
35:55
Speaker 5: And when it comes to when it obviously higher rates
36:00
Speaker 5: and how that has slowed new construction, especially when it
36:03
Speaker 5: comes to apartments. What do you think that could mean
36:05
Speaker 5: for when you have the direction in the path for
36:07
Speaker 5: cuts potentially coming soon here but not necessarily what it
36:11
Speaker 5: seems like not at an aggressive pace, but even if
36:13
Speaker 5: it is more gradual, do you think that could ease
36:16
Speaker 5: some of the slowing that we did see with new
36:18
Speaker 5: construction for apartments.
36:21
Speaker 9: Right, So, just to recap what happened was the low
36:24
Speaker 9: rates in twenty twenty one twenty twenty caused spike and
36:28
Speaker 9: new construction, especially in apartments. It's all time high. And
36:32
Speaker 9: that new supply started in twenty twenty one and is
36:37
Speaker 9: delivering now and so right now we're at all time high.
36:41
Speaker 9: But if you look at starts or new construction, we
36:45
Speaker 9: finance and build a lot of housing. We probably have
36:49
Speaker 9: our financing new construction in the thousands of units, and
36:53
Speaker 9: you're seeing that it's very difficult to start a new
36:56
Speaker 9: apartment project a lend is very reluctant to lend. The
37:02
Speaker 9: lending low proceeds to maybe fifty five percent of the
37:07
Speaker 9: cost of the project, and at may be seven percent
37:10
Speaker 9: interest rate, maybe even higher. So it's very hard to
37:14
Speaker 9: make a pencil, and so new constructions falling off a cliff.
37:18
Speaker 9: And as a result, by late next year, there'll be
37:22
Speaker 9: some of the lowest new supply in probably modern history.
37:26
Speaker 9: So we're going to go from an oversupplied undersupplied market.
37:29
Speaker 9: As a result, I think that we'll see rents continue
37:34
Speaker 9: to grow, rent prices continue to grow because of the
37:39
Speaker 9: falling supply of new apartments.
37:41
Speaker 3: Hey, Ben, let's switch gears a little bit.
37:43
Speaker 2: On the commercial side, I think the most concern for
37:46
Speaker 2: you know, most investors is on the office market. Where
37:51
Speaker 2: are we in terms of the kind of flushing out
37:54
Speaker 2: and trying to find a bottom there. I don't see
37:56
Speaker 2: a lot of transactions that would help me to get
37:59
Speaker 2: a sent said, maybe this market's bottoming.
38:02
Speaker 9: No, No, I mean it's there's a real fundamental change.
38:06
Speaker 9: I mean it's the market has lost somewhere between thirty
38:10
Speaker 9: to fifty percent demand for office as a result of
38:13
Speaker 9: work from home. So from pre pandemic to now office
38:18
Speaker 9: occupancy is probably going to fall thirty to fifty percent.
38:21
Speaker 9: That will have a consequence to office rents and office prices,
38:25
Speaker 9: and that process is going to take at least a
38:29
Speaker 9: half a decade, another five years. I think of decline repricing,
38:35
Speaker 9: sort of compounding or vicious cycle dynamics, and so that
38:41
Speaker 9: is I think not only is it obviously bad for
38:44
Speaker 9: the three trillion dollars of office which probably will lose
38:47
Speaker 9: at least a trillion dollars of value, maybe trillion a
38:50
Speaker 9: half dollars of value, but also for downtowns across the
38:54
Speaker 9: across the country, Downtown DC, downtown San Francisco. I think
38:58
Speaker 9: they're the city budgets and the state of those of
39:03
Speaker 9: those streetscapes are going to see a lot of challenges
39:09
Speaker 9: that no one has like good solutions in the midterm.
39:13
Speaker 9: I mean, probably going to take again half a decade
39:16
Speaker 9: to really find the bottom and really figure out how
39:19
Speaker 9: to rebuild those downtowns.
39:21
Speaker 5: One question I have is when it comes to work
39:24
Speaker 5: from home. I know Paul's very passionate about this. We
39:27
Speaker 5: actually have a workshift column here at Bloomberg, and so
39:30
Speaker 5: there was an article earlier this summer where they talked
39:33
Speaker 5: about empty office is risk wiping out about two hundred
39:36
Speaker 5: and fifty billion dollars in commercial property values. So that
39:39
Speaker 5: US office vacancy rate is forecast a hit peak of
39:42
Speaker 5: twenty four percent by twenty twenty six. If you looked
39:45
Speaker 5: at where it was sitting basically in the first quarter
39:48
Speaker 5: of this year was around nineteen point eight percent. Paul, So,
39:51
Speaker 5: I kind of wanted to pick your brain when it
39:54
Speaker 5: comes to what you're looking at this bin and that
39:57
Speaker 5: kind of dynamic from the work from home sort of
39:59
Speaker 5: aspect in your sort of purview and.
40:01
Speaker 3: What you do.
40:03
Speaker 9: Yeah, So Fundrais is a technology company and also an
40:07
Speaker 9: investment company, and so we understand a lot about both
40:13
Speaker 9: how technology effects the markets, and also we have two
40:16
Speaker 9: million users, two million customers, and so we have a
40:19
Speaker 9: really good sense of how people behave across the United States.
40:23
Speaker 9: And so the reality is that we're from home is
40:26
Speaker 9: not only permanent, but I think we're still actually at
40:30
Speaker 9: the beginning of a cycle of technology affecting office. And
40:34
Speaker 9: we saw this happen with e commerce. You know, nineteen
40:37
Speaker 9: ninety nine, e commerce there was only one percent of
40:39
Speaker 9: all commerce. Now it's sixteen percent. Of all commerce and
40:43
Speaker 9: work from home today is you know, approximately twenty twenty
40:48
Speaker 9: five percent, and I think it will grow because we'll
40:50
Speaker 9: see more technological progress. AI will have huge impacts on
40:55
Speaker 9: the efficacy of working from home, Virtual reality rivals, cars,
41:01
Speaker 9: and so I think that the extrapolations into the future
41:04
Speaker 9: are underestimating the impact of technology.
41:06
Speaker 2: Yep, that's going to be a long term trend. And
41:09
Speaker 2: again for the commercial real estate, particularly the office profound
41:12
Speaker 2: one Ben Miller. He is a CEO of Fundraise. We
41:15
Speaker 2: appreciate getting a few minutes of his time.
41:18
Speaker 1: This is the Bloomberg Intelligence podcast, available on apples, Spotify,
41:22
Speaker 1: and anywhere else you'll get your podcasts. Listen live each
41:25
Speaker 1: weekday ten am to noon Eastern on Bloomberg dot com,
41:29
Speaker 1: the iHeartRadio app, tune In, and the Bloomberg Business app.
41:32
Speaker 1: You can also watch us live every weekday on YouTube
41:36
Speaker 1: and always on the Bloomberg terminal.