Market Turmoil Continues, Inflation Debate Heats Up

You can also listen to our radio show at two pm Eastern Time on Bloomberg Radio, or watch us on YouTube search Bloomberg Global News. Let's set your business week agenda on, folks. Could be another interesting week. It's already a downward tone when it comes to the trade. So let's talk about it with Creedy Gupta, anchor and markets correspondent at Bloomberg. She is in our Interactive broker studio here at Bloomberg Headquarters. Juda Martin Adams, chief equity strategist

of Bloomberg Intelligence. I've been going through her research. She is on the phone in New Jersey. We're going to get to her in just a second. Quick though, Creedy, let's talk about the trade today because it did seem like tech tried to rally earlier on. It did attempt um big emphasis on the word attempt um, but but it's still you are seeing some outperformance here. Take a look at this, the NASTAC down four tenths of one percent. Compare that to what you're seeing the SMP broadly, which

was down about one percent at the session load. So you do see an attempt here. What's interesting to me, and I think we're pretty much just off session load, so we are, But I think what's crucial about the tech outperformance or relative outperformance I should say, is take a little at what's happening in the bond market. This kind of rate sensitivity, this currency sensitivity. We're so used to hitting the tech space. You're not seeing that today.

In fact, the two year yield um came and you had an auction this morning, nobody or this afternoon, sorry, nobody wanted to hop into this trade. In fact, it tailed and the tenure yield got a lot more volatility. So twenty basis point move on the ten yure yield and we have yield still higher, the dollar gets even stronger. That technically should create a feedback loop into stocks broadly, and I think that's what you're seeing here, and that

doesn't even take into account what's happening across the Atlantic. Yeah, I feel like the UK was just you tuned in this morning, you read the most read and so much of it had to do about the UK. Just quickly, what do we need to know about the UK in thirty seconds? Well, you need to know is that this is the poster or child story for monetary policy and fiscal policy. Butting heads is something that I think serves as a really big lesson for the United States as

the federal Reserve tries to hike. Do you want the likes of the Biden administration and other state authorities as well, trying to give more stimulus in the face of a recession in that contradiction that the UK is proving does not work. It's tough tim right for so many people where this is they're struggling with higher prices and so we gonna talk more though about the trade. Yeah, So the question is where does one look for return when

it comes to equities. Gina Martin Adams, chief equity strategist for Bloomberg Intelligence. Do you know last week we talked about small caps. This week we're talking about hy duration and megacap stocks. You and the team have a new noe doubt. But it's not essentially saying that they're standing out in a good way. It's in a bad way. What's going on? Yeah, So when we look at the distribution evaluations and five DRED, a lot of great value emerged over the course of the sell off in September.

We're now looking at about seventy stucks the index trading below their pre pandemic norm in terms of valuation ratios. The equal weighted index is also trading back to its pandemic lows in terms of a forward multiple. So very clearly opportunities are emerging in the S and P. The problem is that those mega cap stocks are still incredibly inflated. Their premium is to the rest of the index and

their hyduration long duration stocks. So that would suggest that if interest rates are going to keep rising, they're going to continue to have to reprice back to more normalized valuation levels consistent with those higher interest rates, and that could remain a source of tension in the index. So wait, let me just make sure I understand that. So Jinna, you said that various measures in terms of stocks multiples,

it's kind of different variations. Were below pre pandemic valuations, yep, So the index actually now trades below its pre pandemic average multiple. So we're looking at before the pandemic, before the valuation and massive valuation expansion five year average multiples pre pandemic, so that level and SMPS five hundred stocks are now trading at discount that average. But it's not

enough what you're saying. They still need to reprice lower. Yeah, So what's not enough is the fact so that other thirty percent has a lot of the biggest stocks in the SMP five hundreds, So the market capitulating the index is getting in trouble here where the biggest stocks are still premium priced. There's a lot of concentration in those biggest stocks. Most investors own them and are overweight them.

The result of that is they're hanging onto these stocks that it should be repricing with the rest of the index. So that creates a lot of turmoil for the index at large. You know, if you're still hanging onto stocks with a duration that is bigger or longer than the rest of the SMP five hundred In an environment where interest rates are going higher, you're probably mispositioned and the

index at large is still at risk of correction. Did you know, very briefly, what about when it comes to when we start to hear from these companies and then we see do we see in some sort of other reset, because, after all, for better for worse, this quarter is over this week. Yeah, I think that we do want to look forward into October's earning season. It's a bit early to do so yet, as we're still trading clearly on

macro um. You know, the interest rates are the biggest driver of equities still, with utilities and real estate stocks trading off today by the most among sectors in the SMP five hundred. Nonetheless, I do think we want to look forward to the earning season and start to sort of handicap the prospects for earnings to come in probably a little bit better than anticipated, given the insulationary backdrop

and the relatively steady economic indications that we're getting. As much as the market is in turmoil with this interest rate reset, the economy has been relatively resilient, suspiciously resilient, and inflation is still pricing power is still somewhat intact for many of these companies, so earning season could be pretty meaningful. Got to be quick twenty seconds. I gotta

ask you. We're talking about there's a story in the Blueberg about investors sitting on five billion dollars worth of cash, you know, ready to put to work. Does that factor in it all in terms of how you think about the outlook in really quickly, Gina, yeah, not tons. I mean, you know, there's always a decent amount of cash on the sidelines, and frankly, for the first time in a long time, you're gonna get paid to hold some cash. The competitive landscape is very different today than it was

in yours pass the c D back in fashion. Who would have thought, alright, guys, we get it wrong. Thank you so much. Critykopta, anchor and markets correspondent at Bloomberg, along with Gina Martin Adams of our Bloomberg intellent. That's certificate of deposit, not compact disc By the way, we'll walk around our global cities and you're likely to see

a common denominator among them. It's all in a story that is among our most read today on the Bloomberg terminal It's also happens to be the Bloomberg Big Take, and it's about New York City's empty offices and their reveal of a global property dilemma. The story written by Natalie Wong, John Getlsen and Noah Boo Hire. Natalie Wong joins us now she's US commercial real estate reporter for Bloomberg News. It is Today's a big Take. Check it out it Bloomberg dot Com and of course, and I

big take on the Bloomberg terminal as well. Natalie, good to have you with us this afternoon. Laid out for us. If you take a stroll down Third Avenue in New York City, what do you see? Thanks for having me. So we go down Third Avenue. First of all, we see a lot of empty retail storefronts, indicating that a lot of retailers are not moving in because there's not

enough workers on that corridor. And then you also see a lot of nineteen fifties to nineteen eighties office buildings that don't quite compare to the new one Vanderbilt by Grand Central or the Hudson Yard skyscraper that we see across the rest of the city. Souch is something that's nineteen fifties to nineteen eighties look like, is it just a fewer windows. It's not all glass that sort of thing. It's more of those glass buildings with punched out windows

that don't necessarily have a lot of outdoor spaces. You know, if you go towards Hudson Yard you see some building the spirals going up. They have cast skating terraces around the building, but these ones not a lot of outdoor spaces. Looks a little bit outdated when you walk into the lobby, not a lot of amenities. So how much of it is like in the realm of all those reality shows, it's done for a makeover for all these office buildings. How much, though, is just a pandemic world and not

everybody's going back to work. Um, It's it's both in the sense that right now in New York City we have less than fifty of workers that have returned back to work. Especially for Third Avenue buildings. A lot of tenants have rolled over releases and are not renewing them, so there's a lot of vacant spaces left. And then it's really costly for landlords to put in hundreds of millions of dollars to renovate an entire building. It's extremely

hard to do that. People don't necessarily have the funds, and then on top of that, lenders may not necessarily want to help finance that either. At this point you mentioned financing. It's a big part of this story with the loans coming due in the coming years. How does that look for the office buildings that you took a

look at for this pace? Just in general, a lot of lenders are really not keen on lending on any office buildings, some even for Class A let alone Class B offices that are not getting any traction at all from tenants. Where you know, landlords are struggling with maintaining costs because they have a dwindling rent rules. So it's not looking that promising for a lot of these landlords.

How much is to also build at Like in a city like New York City, I feel like we've seen a lot of building continue, especially when it comes to commercial space, and there's just man, if I'm looking for space, I've got options and maybe nicer options and options that make more sense for how people are wanting to work. It's extremely competitive, I guess for landlords because you're right.

There are a lot of new skyscrapers popping up. There's a lot of space that tenants have left behind, like really nice sublet space across even Hutson Yards, newly built out offices that these tenants aren't taking. And so people can, you know, have a look around Park Avenue fifth or Medicine for what they want. We're talking New York in a big way, but we do say this story's global, so broaden out for us in terms of what we're seeing around the globe. I mean, this is an issue

happening across every major global city around the world. In our story, you can see vacancy rates have swored from across Toronto, Frankfurt, Tokyo, and Hong Kong. It's not an issue that's just common to New York. Okay, Natalie and I asked the question that everyone has been asking for two years. We have a housing crisis here in the city. Converting these office build things into homes easier said than done. I mean, the windows don't open, communal bathrooms on every

floor like it's a tall task. Is it something that is even being considered. It's definitely being considered. People have been talking about it NonStop. But the problem right now is there's no legislation or tax incentives that makes it doable for these landlords. It's an extremely costly proposition. A lot of the buildings that could have been converted that you've seen downtown happen converted, and in Midtown you're full of these big block buildings that don't have a lot

of sunlighter air in the core. And it's just really hard to make that proposition without having any tacks or financial incentives. So enter private public partnerships. Is that's what's needed. And I think about you mentioned you guys mentioned in your story about what happened post none eleven in terms of downtown Manhattan, and we needed to see those private

public partnerships. Right. We saw thousands of apartments spring up um in place of those empty offices, and that's definitely something that people are talking because nobody wanted to work downtown, right, Nobody wanted to work downtown after nine eleven. Yeah, and it really wasn't a livable area as well. And now you go down there, it's seven neighborhood. One are the things I think about Tim during the pandemic, we all talked about, especially as as people obviously and had to

flee their offices and then weren't coming back. Are we going to see some kind of commercial market crisis as a result. I don't know that it's yet played out in the financial markets, right, we haven't really seen it, but I feel like these conversations, how could it not? People have been talking about it for more than two years now, you know, with like loans coming to how much longer can can lenders extend the timeline for people?

It's unclear one that's gonna unfold, But definitely there's more to come, you know, in terms of the mountain the market balancing out. Okay, thirty seconds. I'm wondering, Natalie, if if the economy does start to turn for the worst and we do see a labor market that it's a little softer, does it change with more people being asked

to come into work. I mean, I think we've definitely already seen an increase in people coming back to work, But I don't know necessarily that you know, people being worried about being fired is going to suddenly turn around the entire office market. There's just too much office space and there's not enough demand alright. Hashtag new normal. J Powell says that I'm just leaning into it in a big way, right, so many different things. Um, what a

great piece of reporting by you and our team. Natalie Wong, she's US commercial real estate reporter at Bloomberg News, joining us in our Interactive broker studio. Also check this one out online because it is very interactive and you can scroll through it geographically. It's very cool. All right, you

are listening watching Bloomberg Business Week. Follow us here, which means a new docut of Supreme Court cases to be considered, everything from the right to vote, firmative action, gay rights, and even one involving Andy Warhol and prints so of a variety of topics. Joel Webber is the editor of Bloomberg Business Week. He's with us right now in the Bloomberg Interactive Brokers Studio. Greg Store is Supreme Court reporter

for Bloomberg News. Check out Gregg story. It's available on the Bloomberg terminal and of course at Bloomberg dot com. Slash of business Week. It's all about the U S bracing for a new round of devices Supreme Court clashes. Joel Uh, we know the makeup of the court hasn't changed. Because Katagi Brown Jackson is replacing Stephen Bryer, So it's still firmly in a concern of it. Of camp any surprises ahead, Well, you're gonna see more of the same.

So maybe that's a surprise depending on how you've been, how long you've been watching UM And and that was sort of what we uh we we we started talking to Greg about actually kind of like weeks or months ago now, because we saw the last term end and we knew that there was gonna be this next term, and we were like, you know, what's it gonna look like and what we and keep in mind how divisive

last time was. Uh So what Greg came back with was basically like, boy, if you thought last time was divisive, like this time it's going to be more of the same. So so Greg tell us, um what you're somebody who who is all over Supreme Court coverage? We're gonna see sessions resume next Monday. What are you watching for? Well, as you said, more of the same, we're going to see the kind of divides At least we expect to see the kind of divides that we saw last term.

There may not be a single day case case quite as big as the Job's case that overruled the constitutional right to abortion. But we're gonna have a huge college affirmative action fight coming up on October thirty one. There are a couple of very big voting cases involving partisan gerrymandering and so called racial gerrymandering. We've got cases involving gay rights and whether people have a business owners have a free speech right to uh to say I don't

want to take part in the same sex wedding. All these things are the kind of cultural issues that you know, divide the country and divide the court increasingly in a conservative way to greg what's the what's the one that you think is going to be Probably, well, it's back up here, right like we've had this sort of court that was a little bit more balanced in decisions. What are the decisions, you know, the uses that you kind of just rattled up there where where where's the power? Imbalanced?

Start to look like, well, you know, you look at the affirmative action case for example, that is actually two cases before the Supreme Court, one involving Harvard, one involving the University of North Carolina. And this case takes direct These appeals take direct aim at two thousand three Supreme Court decision that that reaffirmed that universities can use race as an admissions factor for the sake of enhancing diversity on campus. And that's something that the large majority of

selective universities do. They say, if you overturn that, uh, it's going to have a devastating effect on their ability to make sure there's a significant number of black and Hispanic and Native American students on campus. Um. You know that that's a case where you can see this court's change of membership, the three Trump appointees who made the court more conservative. You can see that that that they're

very likely going to make a difference. It's a case, actually we're Chief Justice with John Robberts, who we we know in some cases has not been willing to go as far as some of these conservative colleagues on this issue. He's kind of been in the vanguard saying, um, I believe in a color blind constitution. The constitution doesn't permit racial discrimination, and he has suggested he sees these race

conscious admissions as racial discrimination. So, uh, you know, the Conservatives certainly go into that case with the upper hand. What's interesting there, though, is what we learned last time is that Roberts has maybe his own man on this court, and that you've got several justices to the to the right of him and several to the left. Uh. And and that also, you know, you have this line here that, um, the court faces at least the spectr of a legitimacy crisis,

if not a full blown one. Talk about what that means, you know, the court going its own way here and and sort of America the American publics, uh, you know, reaction to that. Well, let's start with the American public's reaction. We've seen declining confidence in the courts, declining the Court's approval ratings, not surprisingly but noteworthy. Uh. That's especially with with Democrats. Overwhelmingly Democrats now say they disapprove of the

Supreme Court. Um. And over the summer and a couple of different presentations, Justice Heelena kay In one of the liberal justices, without actually naming names and talking about particular cases, but she talked about what in her mind creates a legitimate legitimacy problem for a court. And she talked about, um, you know, if you have the same issue being decided a different way because the courts membership has changed, and one could certainly think about cases like the abortion cases

as fitting into that category. Um. And so when you have a justice on the court, uh, you know, at least raising that that specter um. You know, it's certainly something for for you know, all of us to to pay attention to Creig. I want to dive into the elections that a little bit and how elections could shift under the Supreme Court. What what could they do specifically to make it so state supreme courts have a different

hand in elections. Yeah, So there are two big election cases, and the one involving state supreme courts has to do with a North North Carolina redistricting fight. And so let me just back up for a second. Remember a few years ago, the Supreme Court said, we, the Supreme Court interpreting the U. S. Constitution, don't have authority to say that voting districts are so partisan or unconstitutional. They said that sort of partisan jurymandering claim doesn't fly in federal court.

But they left open the possibility that a state supreme court could say, hey, under our state constitution, uh, these districts you've drawn are unconstitutional. And that's what happened in this North Carolina case, and now the question at the Supreme Court, and it could be a really far reaching one, is whether the the US Constitution limits what what what

a state Supreme Court can do. The U. S. Constitution, when it talks about drawing districts and setting voting rules for congressional elections, says that the power to do that lies with the state legislature. Uh. And so the question is whether the North Carolina Supreme Court kind of overstepped its bounds in doing something that only the North Carolina state legislature can do. And and this issue could apply in a whole variety of context, potentially including presidential elections. Well,

it's it's pretty wild. And when you think about personality and politics and how that potentially is has definitely shaped our our new Supreme Court or our latest U. S. Supreme Court. Hey guys, we get around. Greg Store, thank you so much, Supreme Court reporter at Bloomberg News from d C. And of course our thanks as always to the editor of Bloomberg Business Week, Jill Webber, the journal. Now, but you let me drive, no, no, no, all right, please, I want to try. It's good question. This is the

drive to the close. On Bloomberg Radio. You are listening to Bloomberg Business Week and it is just about ten minutes away from that closing Vell Carol Master along with Tim Stanovic, we've got the perfect guest to talk about the market trade. I'm really curious about what he says about some of the macro trends that are out there. Let's get right to him. Alan Lance, director of research at Lance Global dot com, that's the president of Alan B. Lance and Associates, joins us right now on the phone

from Toledo, Ohio. Allan, good to have you back with us. How are you good? Well? Thanks? Tom Okay. So we have tested and gone below the lows of earlier in summer June, I should say, uh, And now you have some strategies out there, like Mike Wilson saying that we could go down to thirty four hundred or three thousand on the SMP five hundred. He's over at Morgan stan

What are you seeing ahead of your ahead for this year? Yeah, I think a lot of people, you know, because we've been negative thirting the year, and when we talked last month and into the rally, a nice rebound from June in August. Uh. You know, we said that we'd use that as a way to reduce exposure and risk for those that didn't sell last year at this time. UM and um, you know, even though the markets plunged, you know since then, UM, we're still not buying. I still

see there's a ceiling on evaluations. There's too much uncertainty out there. I think we're going to get these negative you know, as far as forecast now, UM, my thought would be what were they saying a year ago more than what they're saying today. I think that's what you know, as far as a smart investors should really look at. But you know, we would be on their side right now as far as being negative. But we're are less

negative than we were at the beginning of year. We get a big pullback, um, you know, sell off in into October, would actually be buying. What's a big this is? This isn't a big pullback because let me just about two numbers. SMP is down more than ten percent in September twelve, the past ten trading days, nasack one about in that time frame. And then if you go to another what I would deem maybe another key market point,

the high before September twelve, which was mid August. For stocks, SMP is roughly down nearly fifteen percent since August sixteen, one hundreds than seventeen percents in August fifteen. So what would be more significant to the downside. Well, we're pretty much where we were in June, you know, and and and so we had a we had a rebound. I

think it was artificial. People thought inflation was cured, you know, and and it was behind us, and and we talked you know that you know that that's definitely not the case. And and that's why you want to reduce risk. Now we're back to where we were in June. The things we were buying June, you know, getting into Goldman you know, around book value to seventies shaneer at one. They're still abolve that even though they're you know, with this splate

is sell off getting close again. So so that's what I mean. If if if we saw the continue to sell off and those quality companies uh fell back to arranges that they were in June, and then we would um, you know, buy for for new new clients or for uh you know, investors that didn't take advantage of the sell off. But it's a matter just like in the beginning of your Carol being in the right areas. You know, energy has been good, it's fallen back. So so that would be an area that we would get into, uh

in in into uh you know, a further sell off. Hey, Allen, I put out a Twitter Paul, pretty basic, not any kind of high econometrics going on our S d I S or whatever. But I said financial market capitulation is close, not close, no clue. At about thirty eight percent said it is it is close. Um do you agree or

what would what would denote market capitulation in your view? Allen? Yeah, that's the problem is if everybody's expecting it, you know, and there are more you know net you know, Barish investors down, then there has been you know, at any time in recent history. And um, you know, so some of the technicals are looking to a point where you know, you could see a bounce back and what have you. But I'm just saying, uh, the earnings is just so uncertain.

So if you have you know, one part of the price earnings ratio that that is so uncertain, it's it's really hard to value. And I think that's where you're not going to get any kind of you know, uh surge, you know, sustainable surge and and stock valuations. Um, you know, until some of these uncertainties clear, and and that's where you know, we we'd be buying into weakness, accumulating for

the long term. Nobody knows where the bottom will be, but it's just a matter of you know, we're getting close. So to answer your Twitter poll, yeah, I think we're getting close. Whether we get a big dramatic sell off, you know, and and that's the capitulation everybody's looking for, whether it's uh, you know, just sustained drop. I think you know, we would be buying into this. We're two weeks ago we were saying, you know, I guess a lot of the media we're surprised we weren't buying, and

we're saying, you know, we see a further plunge. We've we've seen a good plunge of last two weeks and and uh, I don't see anything to turn it real quick. But uh, you know, we're definitely getting close. And we might not get the compitulation, but by quality, and I think a year, you know, two years from now, you'll be happy you bought those areas and and uh, who knows,

you know where the bottom will be. We we've never been good pick in the bottom even two thousand, you know eight Uh you know, we bought around the end of November and the market went down another four four months before bottoming. So but it was the same kind of rationale as buying Goldman book value and and and that tends to uh, you know, pay off if if you have a long term perspective, you know, Shanna, the

same way we like natural gas, you know. So so the areas we're buying, I think we'll do well and it won't be as as bloody as as uh, you know, some some of these high salutin areas that still half risk to them even though they might be down. I guess the main thing for listeners is, you know, just because something down doesn't mean it's a bargain. And I because I mean, we're saying this on a day where we're seeing another fifty two weeks low, a fresh fifty

two weeks love for Facebook down levels. Hey, just thirty seconds left, Alan, how long do you think we're sort of going to be in the midst of all this uncertainty, at least with the markets. I mean, do you see this lasting another four months, another two years? I see it at least through the mid terms, and and uh, there's just too much uncertainty. And if that, you know, clears things up a little bit, then then you could

could see some stabilization. But if it doesn't, you know, then then you know, a lot of it will be predicated on Russia, Ukraine and and some of the geopolitical aspects that are still overhanging us. So so yeah, I could could be a while, but nothing I see, you know, before at least mid terms, if not beyond that. Yeah, the macro risk basket feels like it's pretty full at this point. Hey, Allan, thank you so much. As always, Alan Lance, He's director of research at Lance Global dot com.

He's president of Allen B. Lance and Associates, joining us once again on the phone from Toledo. All hearts thanks for listening to Bloomberg Business Week. Download the podcast on iTunes, SoundCloud, or Bloomberg dot com, and you can also listen to our radio show at two pm Eastern on Bloomberg Radio or watch us on YouTube search Bloomberg Global News