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As we've talked about, though, bond traders who have come to terms with the prospect of higher for longer interest rates through this year are looking toward tomorrow's FED meeting for really clues on how to game it out twenty twenty five and beyond. That's kind of where we're looking
at this point. To be fair, though, we have to get through tomorrow's FOMC meeting and the dot plot and before that another inflation print at that eight thirty am Wall Street time, so we'll all be focusing on that before we get to the decision.
Honestly, it sounds like the best day effort for us here at you're just seeing It's like, what's great at the FED? You got CPI, What more in life is there to ask for Kelly.
It'll create a new narrative, no doubt about it, or potentially just reinforce the existing one. Let's get to it with Bloomberg News Economics Molly Smith. She's here in studio along with Bloomberg News Economics reporter Steve Matthews. He's out there in our Atlanta bureau. Molly, I want to start with you first, up eight three to am tomorrow CPI report.
What's expected?
How might that shape thinking by the Fed and traders and economists about the US inflation print.
Yeah, it's going to be a real super bowl of a day for everybody here, for on both sides of the buildings, So it's going to be really busy. So yeah, starting off with CPI at eight thirty in the morning, I mean, I think you're probably going to call this maybe moving sideways at best, is still probably the story
of inflation or graduated or gradually modestly slowing. So it's really, you know, this is still nowhere near the disinflation that we saw at the end of last year that really was starting the fuel the rate cut narrative, and now it's really just more like treading kind of laterally and not so much you know, those bigger, you know, step downs that we had seen toward the end of the year. But you know, gas prices came down in the month,
so that'll be helpful. It really just depends though, how much broader beyond that the story is, because that's something that FED officials have been looking for. That it's not just coming from energy and from goods categories. We need to see services moderate as well.
That's a good point.
We are a service led economy. Let's remind it.
Especially having said that, a higher print, a lower print, will it just be kind of you know, disregarded, because what we keep talking about is we need to see like at least three reports to show an existent, you know, kind of a really strong trend here when it comes to inflation.
Right, Yeah, and that's exactly the thing.
When you had the princes in January through March that all came in above forecast.
That's that really the trend.
Yeah, that really reset the clock. Then on our right, we're back to zero. We need to now see another three pence three prints to establish a trend, and we did get a little bit of that with the April print. That underlying inflation there, that's the core measure that excludes food and energy, that step down month over months for the first time in six months.
That was a huge deal. If that can be repeated also a huge deal.
But if if it can be repeated, that would be important, certainly important to keep in mind. He Steve Matthews, come on in here and sort of give us an idea of how tomorrow's CPI report or Friday's strong jobs report and the overall flow of economic data is going to be taken into account when we do get that policy decision. And perhaps I think more importantly for a lot of our viewers than listeners, the updated summary of economic projections.
You know, these meetings of the FAT have been kind of boring the last several days.
Yeah, I can't say that.
Sorry, j all right, sorry, Steve says, you can say whatever you want, you can.
But this is going to be a cliffhanger. This is going to be have some fireworks because you know, the economists that we survey are evenly split on whether the Fed's dot plot is going to show two right cuts for this year or one cut. I mean, obviously in March they had three cuts that were priced in. We had bad inflation numbers in the first three months. As Molly said, April showed an improvement, and what we get tomorrow in the CPI could well set the tone for
what happens with the dots. If we get a good number, you could perhaps stay at two cuts for the year. If you have two cuts for the year, that implies that the first cut could happen in September, arguably before that. So if you get one cut priced in in the dots, that would suggest you're not going to get anything until after the election. So it's all important. And Jay Powell was asked about this at a recent press conference about Okay, if you get data in the middle of the meeting,
do you really change the dots. His answer was, yes, we do change the dots. We encourage the f OMC members to change their dots in the middle of the meeting with based on the latest data up until mid morning of the second meeting, so they can change their dots tomorrow.
Well wait a minute, and Tim's just like saying to me, wait, even if it's CPI about me, we're not.
Talking about PCE here, We're not talking about the FEDS preferred. There are inflation.
Measures, there are inflation prints, and then there are inflation prints.
That's true, it's not the PC which is what they target, but it gives a good indication when you combine the CPI and the PPI together of what PC is gonna end up at.
It's really fun because I think the three of us were all thinking the same thing, like, okay, wait, does the FED pull out like a giant whiteboard say, okay, guys, we have to erase this because the CPI came in differently. You are saying, bottom line, Yeah, if it's something very dramatic, they're going to rethink.
If it is away from consensus, if it is better than expected or worse than expected, they can definitely change their dots and they can change the way the median turns out.
Okay, I guess that that's really interesting to hear because I actually thought Molly that you know, they wouldn't take into account data that came day of. But look, if if it is an upside surprise or a downside surprise, like Stieve said, that could be part of the equation tomorrow.
Yeah. It really speaks to that whole cliffhanger element that Sea was telling us about here. So we're going to be on the edge of our seats in the morning. I'm sure, you know, God only knows what's going to be happening in Washington at that time. Yeah, and of course they're going to be looking for that, you know, core services ex housing number, that's always a big one
that they like to look at. So this is like the underlying services inflation in the economy that you know, taking out housing inflation because that has been so sticky to just get a sense of what are the kinds of services you know, like travel, entertainment, other things that Americans are spending on. Where is that momentum heading. So that's going to be another one that they're going to be looking at very closely.
You know, Steve Matthew Boly has that Collaly has that exactly right. The FED is very focused on services and Jay Powell is very focused on what's happening with services, and that's affected by what's happening with the labor market. So you know, to the extent that you've seen some kind of moderation in the labor market with unemployment ticking up just a little bit, then if you see that in the services inflation, that would be really encouraging to the FED.
Well, here's the thing to you, because I know that we talk about this all the time in our group, but you know, I find it hard when we're covering the jobs report and we've got the payrolls survey, you know, with the survey of businesses, the establishment survey, sorry saying one thing with the payroll's number that was so strong last week, and then the household survey painting a very
different picture of the labor market. So in your expert opinion, because you are the expert here, like, what would you say is the Fed's better signal right now of the truer signal of the labor market.
Well, I think that is going to be a really key question for share Pale in the press conference, is how does he view the labor market, because it's like, if you look at the job openings figures and the quick rate, you know, the number of people quitting and the job openings per unemployed, all those seem to have
returned to pre COVID levels. So there are definitely some science and moderation, but it will be really key to see how he sees the labor market because if he sees the labor market is basically back to balance, then that says that they would be much more open to cutting rights.
All right, guys, sit tight, We we got another great voice we want to bring into this conversation. Back with us is Steve Skanky, chief economic advisor at the Wealth Management from Keel Point. Former US Treasury in White House National Security Council staff member Steve Skanky joining us from Washington, d C. Steve, good to have you here and join our conversation. You know, curious about what you've been hearing from Molly and from Steve Matthews and what your expectations
are about what we get from the Fed tomorrow. It's, as I agree with Steve Matthews, a little bit of a cliffhanger.
Maybe it's the dot plot.
You know, we're just kind of trying to figure out what the Fed is thinking, especially when you have a lot of folks saying, wait, it's not about a rate move this year, think about twenty twenty five and beyond.
Well, that's right, Carol, and thanks for having me on.
I agree it is a cliphanger, and there's a lot of ways that it could go. I think though, we start with the with the premise that j. Powell would actually like to send a Dubvish tone, and the only adhibition to that would be as if we have a bad surprise on the CPI, but absent that, even though they're not going to cut rates, they're going to have a new dot plot. I think there's a growing concern that the economic data are moving toward a an inconvenient to slow down in the economy.
The jobs number was.
A surprise, but as you or Steve pointed out, I think Carol, you pointed out, the household number was four hundred thousand jobs down, an increase in the unemployment rate to reconcile that with two hundred and seventy two after they revised down April to one sixty five, A.
Lot of.
Opportunity to be confused in that as you're looking at first quarter GDP revised down, the second quarter GDP estimates among economists are now being revised down below two percent, and that spells concerned.
So Steve J. Powell and the Fed.
So Steve, Steve Skanky, how are you thinking about this at kel point in terms of how many rate cuts you think the Fed will actually be able to do this year or should do this year?
And it gets a.
Little complicated with the whole election coming up in November.
It does we still believe there's an opportunity for two rate cuts. Now, obviously that could change very quickly if we have higher inflation prints, certainly from the CPI, which is not the Fed's preferred measure, but that then ultimately works itself into the pc crystal conception expenditures deflator. I think that they'd like to cut twice, Yeah, and and
so how do they do that? And if they can't cut cut twice, how does j. Powell's signal to the market that they're they're they're they're trying to go easier in their in their policy moves. You know, if it if CPI goes the wrong way, it we very easily could see a dot plot that shows rate increases right, which would which would certainly disrupt market.
That would be that would be definitely a cliff hangar turning into falling off a cliff perhaps.
But come on back in right, I want to I want to come back to Steve Matthews here. This is something that we talk about before every FED meeting. And you know, Steve, sometimes it's you who's in the chair in the in DC who's asking Jay.
The questions we talked about.
One that Powell will probably get is how are you viewing the labormarket. Right now, what's another one you'd really want to hear Powell answer.
I think, as Steve said, the big question is how does he see the current economy? I mean, if you look at, for example, the Bloomberg Economic Surprise Index, the economic surprises have turned negative. I mean we're now seeing data that is trailing the consensus estimates fairly consistently. And you know, does that raise some concern that maybe the economy is moving to a below trend state? And how
does he how much worried is about about that? I mean, obviously he's going to be asked about the dot plot and inflation, but it's like just the view of the total economy would be really important.
One point I wanted to bring up.
It was really interesting on surveillance this morning with a guest about how keeping rates more normal, remember what we are in right now is more normal, actually gives the Fed a lot more room to cut rates if and when that is necessary. And that's a good good thing. Steve Matthews, you understand how the Fed moves and how it all works, right, The Fed having breathing room around policy is a really good thing.
Yeah, if you hear Powell or other FED officials in the aftermath of this meeting talk about the Taylor rule and about monetary politicy benchmarks. That is dubvish because right now the Fed's rates are much higher than what monetary policy rules would suggest they should be, which is around four percent. So there is room to bring rates down just based on inflation right now if they become convinced that the economy can handle that.
So, Steve Skanky, then is the conversation of potentially a rate hike.
Is that just completely inappropriate?
Then?
Based on what Steve Matthews is telling.
Us, Yeah, I believe that it's inappropriate, and I think J. Powell probably has some concern about that if we should see a negative surprise on the CPI. You know, the
feed uses forward guidance to constrain economic activity. I think the concern is that they need to encourage economic activity for the reasons that we talked about, and so I would believe that there's a good chance, absent to a CPI surprise, that the forward guidance is going to be forward easing, even though they won't change interest rates for probably the next couple of meetings.
Hey, Steve Skanky, very briefly because we want to do a final round, but just in thirty seconds. What's at stake here? If you don't see the Fed cutting rates this year, if that doesn't happen, how would you change how you advise the folks at kill point?
Well, the economy is fundamentally okay, but the downward revision that we've had in GDP growth and some of the mixed signals in the labor market certainly generate concern. Now, earning's growth continues to be remarkably power positive and so on that front, we're certainly positive, but we're very cautious if the bet continues to hold tight and doesn't signal a willingness or desire to loose, and we think that'll that'll work poorly for the economy and ultimately financial markets.
All Right, our wrapid round.
As we get ready to wrap up, and I'm going to start with you, Steve Skanky, very quickly, what would be a surprise coming from the Fed tomorrow?
And you do need to be quick.
Well for for CPI to bump up and the dot plot to show a heavier orientation toward raising rates.
Wow, that would be crazy, Steve Matthews, real quick.
I'd say the dot plot showing just zero or one cut, and also for long term rights to in the dot plot to move up in the neutral so called neutral right.
That would be our new narrative. Molly Smith save in the last thirty for you.
Maybe if Powell were to say that the labor market is still tight, I think that would be a bit It would be questionable of how he would fully support that. I think there are a lot of other data points that would maybe suggest otherwise.
Which is interesting, right, considering the missed signals in the labor market. If you comes out and the title you guys the trifecta. Molly Smith, Economics editor at Bloomberg News, right here in studio, Steve Matthews out there in our Atlanta bureau. He is our economics reporter, follows the Fed for US, and Steve Skanke, a regular guest here on Bloomberg business Week, chief Economic advisor at kill Point, former US Treasury and White House National Security Council staff member.
You're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from two to five pm Eastern Listen on Apple car Play and then brought auto with a Bloomberg Business app or want us live on YouTube.
We do want to talk a little bit about Apple.
It's your number one gainer in the S and P five hundred and the Nasdaq one hundred.
What's interesting?
Apple investors not impressed yesterday, and we also saw shares of some key Apple suppliers sinking overnight as well, following their big event that got underway yesterday. But as we said, very different tone. Apple shares at a record after that great AI reveal. We want to get to it though.
Once again, I'm lucky for us to have back with us our own Bloomberg News Chief Technology correspondent markerm And, who continues to write about everything that we are getting from the event on Apple and just Apple in general. Mark out there in La. So Mark, what happened? Apple
shares treated lower yesterday? We talked to you realing big time today when we talked kind of following the keynote, you said your view was that we kind of saw nothing better than or different from the competition except marketing and a focus on privacy.
And I love something you said was that.
They showed up to a party without a gift. It was like something we thought just said so much. So what's happened in the last twenty four hours.
Well, like I said, they rolled out a bunch of new AI features with a privacy stance, with deep integration into their applications. They didn't bring anything new to the party, but they did it in an Apple way. But the most important part is they showed up to the party, I guess. And it took investors in Wall Street sometimes to realize that Apple is now here with or without something new. They've arrived. The concern on Wall Street was that Apple would never show up, or they wouldn't show
up for a couple more years from now. But they worked as fast as they can. It was a year and a half for cleaning effort to get Apple Intelligence to market. They had all these AI features under development, but no synthesized, no integrated package, so it took a while to put it all together. And they did that. And it's not going to sell new iPhones. I believe it may spur a small number of upgrades, but more importantly,
it's going to lock people into the ecosystem. They're going to keep their existing userpace and they're not going to lose people away to Android and other AI driven platforms because they did this, so it was critically important for them to do it, regardless of the fact that nothing they brought to the table here is especially new.
Mark, why don't you think this is sort of a huge prompt for a suit recycle upgrade here? Why don't you think it's as big as adding five G to the phone for example?
You know, quite frankly, I didn't think five G was a supercycle moment either, and it you know it, it turned out that way. I mean, iPhone sales growth has been stagnant even prior to the five G iPhone. But like with AI, with five G did is it kept people within the ecosystem and it didn't allow people to switch away to rival products that had five G while Apple didn't. And so AI is in the same nature.
It's going to keep people within the ecosystem. I don't think if someone has an iPhone fourteen pro today that they're going to upgrade to the iPhone sixteen just because of those AI features, right. I think that down the line, a year or two from now, when they're ready to upgrade, that's going to ensure that upgrade happens.
I'm going to say that my household were a bunch of tech simpletons, because I think the five G we do, the upgrades on the Apple Phone were still back.
There is that where you are.
I'm at a twelve and I'm getting ready to upgrade this.
Cup far upgrade from twelve.
It is time.
Tis time the formal announcement with open AI.
I mean, let me jump in, let me jump in here. Last if you know, if Carol was, you know, really focused on our official intelligence and wanting the latest and greatest technology, and she has a twelve, the sixteen comes out later this year with no AI features. Right, maybe she takes a look around and says, you know, AI is all the hype right now, that's the vibe right now, Maybe I should take a look at Samsung or Android,
which are completely aiified. Now the iPhone has AI just like the competition, right, not a ton different, but they're there. And now she says, you know what, of course I'm going to get this new iPhone. So I don't think it's going to spur upgrades and get people to run out to buy them, but it's going to ensure those people who are already thinking about getting that phone pick that iPhone instead of moving away to Google or.
Samsung, And I will say, Mark, and I think we've talked about this before, and like we're a household where it is all Apple, and you know, my daughter when she was younger and tried to deviate, We're like, no, that's.
Not happening, you know.
So it's like we kind of continue to embrace, embrace and embrace. I do want to ask you though about the partnership with open aii. Right the formal announcement we got that, How important is that And is it any different from open AI's other partnerships that are out there, And is it always different because it's just Apple doing it?
Oh, the open ai partnership with Apple is incredibly different. So let me give you some perspective here. So Microsoft, they rolled out a ton of AI features on their computers and their other operating systems for both their in house devices and third party devices. The underlying large language models and underlying technology that they're using for nearly all of their features is powered by open ai. Apple's future set ninety percent of it is powered by Apple large
language models, underlying Apple technology, Apple servers, et cetera. Only the chatbot portion primarily, and some of the writing assistance tools. Those are powered by open ai, large language models and chat GPT.
So the open Ai.
Portion of the overall app intelligence story is actually only a very small sliver.
Is it integrated at the OS level? And you can probably guess why I'm asking this mark because.
I can guess why you're about that.
Okay, good, because well I want to introduce it because I don't think everybody is totally caught up on this. But yesterday Elon Musk said he would ban Apple devices from his companies if open AI's AI software is integrated at the operating system level. He called the tie up a security risk. Okay, go ahead, please.
Something integrated at the OS level. That is a vague term that can be interpreted in many different ways, so it's not entirely clear what he means by that. If you ask me, open ai is indeed integrated at the OS level, and I'm sure Apple would agree, but I'm sure there's some other people who would say that it's not integrated at the OS level. It's built into Siri, it's built into the OS. It's a chatbot. It's not just an application, it's not just a layer on top.
It is fairly integrated into the operating system. So I would say, yes, it is integrated, but just because it's integrated at the OS level doesn't mean there aren't parameters. And what's known as sandboxing implemented into the coding infrastructure that can separate what goes into chet GPT from the deeper core of the iOS foundation. Right, And so it's up. The burden of proof is on Apple and open Ai to show how privacy centric the chat GPT elements are
of Apple intelligence. Apple did a fifteen out of ten job yesterday showing how private and secure their artificial intelligence technology is for the phone that's the Apple LLM, how secure their their compute cloud is for the LLLM that runs in I Cloud. They did an amazing job on that. What we didn't hear a lot about is the privacy protections that open ai are implementing. From some standpoints, you can say it's just you know what, trust us. Maybe
Apple could say a little bit more there. Either way, I think that Elon Musk is competing with Apple and open Ai here he has grock from Xai. He has a terrible interpretation of Apple and feeling towards Apple and their app store rules and the fees they take from subscriptions on their platform. He clearly does not like Sam Altman. Right, He's embroiled in all sorts of things regarding Sam Altman and open Ai.
He was a co founder of open ai.
He was a co founder a falling open They had a falling out. So his perspective isn't exactly kosher on this. On this situation, what do you he raises real privacy questions regardless. I just think he's way overboard on it.
Okay, that said, Mark, how realistic is it that you know he could ban these devices at his companies given that they're ubiquitous, And I can't imagine employees, you know, putting them in some sort of box or leaving them in their car as they walk into work at SpaceX or the boring company or Tesla.
It's a top ten most ridiculous elon Musk tweet, Right, that's not going to happen. I mean imagine like showing up to work and like all of a sudden, you know, you can't bring your Apple devices in. You can have to leave your iPhone in a far and akad outside the office or leave it in your car. That's just not going to happen. Right, he's already laid off thousands of people from his company, or tens of thousands of
people from his company. I'm not sure he could afford to have people quitting in large numbers at this point, but I think that's going to upset a lot of people.
All Right.
You know, we always talk about the importance of the Chinese market to Apple. Is there something here in terms of what we're hearing from this event and you know what they're doing in terms of AI that kind of moves the needle potentially in their sales over in China.
Yes, good question. This is a point that, quite frankly, I should have made it earlier. Nothing Apple Intelligence, at least the first iteration is only available in the US or finish yes in the US English. So there's going to be a long ramp up here until they're able to get it in other languages. Now, let me give you some Apple history. When Siri launched in twenty eleven, it only launched in English and a couple other languages. But one year after Siri initially launched, they released so
many additional languages. In Siri today it works in every Chinese dialect, It works in many many countries. There's no barrier to using Siri regardless of where you are in the world in most cases. And I would have to imagine that getting Apple Intelligence to work properly outside of the US, outside of just US English, is going to be a very high priority for next year, and so I would anticipate China next year. Now, one other piece
of evidence about how Apple seeds China. It's going to be one of the first markets to get the Vision pro this month, just a few months after it came to the US. So clearly they're thinking, you know US first, right, China second. And it's not like China's like down the list. It's a priority. So I would imagine AI story right fine, I was going to get buttoned up sooner than later.
Everything we need to know about Apple, Mark arm and you rock. Bloomberg News Chief technology correspondent Markerrooman out there in LA. That is our top stock story. This shares of Apple are rallying.
You're listening to the Bloomberg Business Week podcast. Listen live each weekday starting at two pm Eastern on Apple car Play and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa playing Bloomberg eleven thirty.
Okay, Apple a top stock in business story today tomorrow. As you know, it's all about the FED and its impact on markets and mood and transactions, which brings us to Jim Gold CEO over as Stored Partners. It's a financial services firm. They've got about thirty five billion dollars in assets under management. Gym's here in the Bloomberg Interactive Broker's studio waiting patiently. Well, we go through everything that happens at the close one of those days.
It has been one of those days.
When we think we have our course like something through.
Hey, you know, as I was preparing for this, I went back and saw a note from Berkley's last month that said M and A volume has risen seventeen percent so far this year. The Investment Banks model projects fifteen to twenty percent growth over the next twelve months to one point eight trillion dollars. They also reminded us that activity in twenty twenty three was the slowest in a decade.
Remind us of how you play in the M and A space Over at Stewart partners and where you see the market going this year.
I think you know the M and A space is accelerating, and I think you know the figures we see publicly or I think actually woefully underreported because you think about the smaller end of the scale where Advisor A sells to advisor B and there's not a banker involved, No one reports on that transaction, So I would say there's probably hundreds more transactions that are out there. I think another trend is we look at his breakaway M and A. So an advisor from a big four wirehouse firm leaving
to go somewhere. The assumption is they're getting recruited, but in actuality, more of them are actually selling the business today. So them and that's M and A because they're selling the business.
Yeah, well that's what I was thinking about. You guys are really involved.
Right in ownership, private equity or like own a company, ownership of deals, and that's where you kind of play in that space.
We offer optionalities. We have the ability for advisors to affiliate with us and they own their clients and they just want to work with the Steward organization. Yeah, and then we also offer people the opportunity to say, hey, I'm five or six years from retirement. I want to sell you guys to business. Help me figure out my.
Sucresity event right right, yeah, no, continue, yeah please.
There's a succession crisis going on in wealth management. I think it's driven by the boomers actually are working longer than expected because they're healthier and mortgage they make a good living, and now all of a sudden they're getting into their seventies and saying, wait a minute, I got to wrap this up at some point.
I know somebody like that he has a wealth management business with a big firm, and he's got all the clients that he's had, and he's in his seventies and he's like, what am I going to do?
Now?
Who's going to buy this thing? His kids don't want to get into the business.
G twos don't have the money.
It's kids, partners don't want to get into the business, right what So what's what are his options?
Well?
I think the option there if he has to look at and I think at the bigger firms, the challenge they have is that there's only one bidder, So how do you know what the real value is with the test to market right and then the terms around that.
Isn't it pretty simple though to know what it's worth you have assets for that kind of business, assets under management.
It's so different if you stay, if you stay in that channel because they control, they're the only bidder, so there's a very suppress valuation.
But I mean, isn't there a way to create evaluation model based on comps?
Because okay, well like.
How do you how do you?
How do you? What are the comps for that type of business? Isn't it just like or the multiples for that type of business?
So you're going to see I mean, if you look at multiples of ebadah and the smaller end of the scale, to say, sell a billion dollar asset firm, they're going to be you know, high single digits, approaching double digits depending on the other criteria things like growth and how old are the clients? Is a business? Growing is a business?
Ranth meaning a firm with a billion dollars in assets under management would sell for nine ten million dollars?
Yeah are more?
Okay?
Yeah?
Interesting Jim?
How much pressure is on private equity firms? What are you seeing to do those exits because they've been holding for a while because the environment hasn't been a good one. But they eventually are going to get pressure from their investors and they want to free a capitalize. I know private credit can come in and help them maneuver through that, but how much is on private equity and how much does that mean in terms of the m and a environment picking up a little bit.
Well, you have to have private equity right because they provide the capital, they provide the fuel, and I think listen, the better private equity firms are getting creative where they're now having funds that are ten years shelf life. They're not the typical five year where they need to turn them and flip them. Look, at the end of the day, private equity is happy to be illiquid as long as
they're getting in liquid rates in return. But I think the challenge they have is finding the right partner to actually execute on that. Right, they're not directly getting involved. They're funding a company like Steward. We're not owned by private equity. We have two family offices. They are the capital behind the capitol. So what they really have to find is the right leadership team and the right company that has a scale and the resources to actually go out and execute on an M and A strategy.
So in terms of the deal activity that you're seeing or expecting, what does it tell you kind of about the broader macro environment. I feel like folks like you can kind of see a lot when we are seeing cross currents when it comes to some of that kind of you know, fundamental traditional statistics.
I think the challenge for advisors who think about succession. I think the mistake that's made is this should be a three to five year plan. Don't decide today you're going to retire at the end of this year, right, You have to think about your clients, your team, you know, evaluation structure, who's your successor. I think the older folks, maybe the gentleman you mentioned who's in the seventies, they
can't wait for another market cycle. Maybe, so they're starting to go, hey, the markets are pretty good here, maybe this is the time, and maybe I can't wait eight more years to do this or seven more years to do this. So I think the demographics are forcing some people to make a decision now because they don't feel they have a run way to wait through another market cycle. If that's where we're having.
Though are of the deals that maybe you are looking at or seeing are people who are pressured that have to do something.
How much are more just still kind of waiting for the right environment.
I think most of folks we're talking to are in their sixties. A lot of these are bigger teams though that we'll have G one, two three. Yeah, so they're saying, hey, to the point you made earlier, my G two and three don't have the capital to buy me out right. I don't want to leave immediately, so this is really my five year plan. But this team's going to be here forever. So we love that because we love the continuity with the clients as right.
Right now, what do you think of the idea of the wealth management business. I don't want to say, I'm not going to say losing relevance, but I'm going to say, is that increasingly you're seeing study after study talk about passive investing, the rise of passive just investing in index funds, And I'm wondering if there's this new class of investors who are less interested in paying high fees for their money to be managed and more interested in just setting it and forget it.
Right.
Yeah, there's an old cliche they shave their fees. You know, the feeling matters and the absence of value. So I think the need for advice is always going to be there. If you look at the studies on wealth creation, there's more wealth being creative than ever. The more wealth you have, the more complex your situation is and your need advice. I think the other trend that's really interesting and it's good for me on the side of the space that
seward sits, which is the independent space. Overwhelmingly the sub forty advisors want to be in an independent firm. They don't want to be at their mom or dad's wealth management firm. So that's driving a lot of this flow to our side of the space as well. So the market may shrink, but the assets are growing and the headcount is shranking, so you actually might still have more assets or revenue per advisor with a smaller salesforce.
Do you see those younger advisors, the sub forty advisors, changing the way they're charging clients, maybe doing an hourly rate versus an assets under management rate.
We haven't seen it. We think the asset based pricing seems to be reasonable and they can use some of those tools that could use index ETFs and things like that where appropriate and listen, I think the ROAs are coming down us to space, but they've always.
Come down AI.
How do you think is going to you know, I just came back from Nashville Pershing BNY Melon doing their inside event at.
All Team there.
Yeah, and it's really fascinating.
Of one of the conversations doing a keynote is that what does the future financial advisor look like?
What does the future investor look like? And what they want?
And we tapped into a lot of longevity as well as a younger, you know investor.
So how are you thinking about that?
I think AI is going to be amazing. Actually, our CIO actually spoke with the Persian conference.
Yeah, it's a great feel of kind of what everybody's thinking.
Yeah, I think it's it's another you know, some folks are taking this as the latest threat to advice, right and it's like, oh, online trading and advice is going to be free. So I think what it's going to be amazing for both the client and the advisor. I think the COVID world changed how clients say, hey, I don't want to hear my advisors out of the office. I'll just FaceTime them or tax them our teams are or whatever I can do to get a hold of them. So I think AI is going to create amazing tools
for the clients and the advisors to interact. We're seeing some of them already, and our CIO knows what he's doing. I don't. I tend to lock myself out of the computer once a month. So but we're excited about AI. We think it's going to be great. I think about I was the advisor back in the nineties when the Internet was a new thing, and you think about it. I remember Sandy wild At once said this. He said, they asked.
Something a City Group, correct.
And they asked Sandy about the Internet.
He said, listen, sorry, there is the whole generation that's out there that doesn't I know.
I feel like such an is go.
To wild Cornell and see who's picture.
I know, but I feel like I could ask a fair amount of folks.
I'm a grandfather now, I know these things.
I remember, right, you.
Remember him creating you know what is now City Group.
But anyway, forget his call was so it was so prolific, was he said, listen. Eighty five percent of the Internet based companies today will be bankrupt in ten years and the fifteen percent left and you just talked about some of them are going to be worth more than all of them combined, right, And I think it's the same thing Amazon exactly. I mean, we're all around then.
I was.
I'm old enough to remember some of the IPOs really fascinate.
Interesting time to be kind of in the markets.
Amazing, so amazing because of opportunity.
Yeah, really was opportunity as well. But there isn't always well, I guess there is just appreciation.
It's got to look harder sometimes.
Jim, this was fun. Thank you so much for being patient.
We had a lot going on and I really appreciate it and you being really flexible with our team. Jim Gole, chief executive Officer, Stewart Partners, joining us right here in our Bloomberg at Director Brokers Studio.
You're listening to the Bloomberg Business Week Podcast. Catch us live weekday afternoons from two to five pm Eastern Listen on Apple car Play and the brout Auto with a Bloomberg Business act or want us live on YouTube.
Well, you may have missed this this past month, Carol. The luxury home prices and select Asian cities are soaring, bucking downward trend in more established markets, including here in New York and across the pond over in London. We're talking about prime property prices there, defined as the top five percent of the market. They fell more than two percent in New York in London in the first quarter
compared to the same period a year ago. That's according to the real estate consultancy Night Frank.
All right, so let's get a check on the luxury real estate market, residential real estate market. Louis Phillips Forbes is a real estate broker with Brown Harris Stevens here in New York City. She's been in the business for more than thirty years. She's seen different cycles. She has sold more than five and a half billion dollars worth of real estate, specializing in luxury residential sales and development projects.
She's back with us here in our Bloomberg Interactive Broker studio and a little bit of a busy Tuesday, and also on an interesting day, we were talking a lot about kind of the economic backdrop and the rate environment. First of all, welcome, welcome, thank you. How does the market feel right now this moment in time?
Not quite the same as it was a couple of months ago when I was here.
There is, uh, what's different, what's changed?
I think that there is. It's not a pause, but there is. I think individuals that a month ago they might have pulled the trigger that they are still contemplating because I think remember, at the end of the year, we were expecting five rate reductions, and we haven't seen really any of those. In fact, we've had conversations about it coming up. So for some of those people it means holding off. However, what's right for one person's not always right for another.
What's surprising for me to hear from you about this quarter is this is supposed to be the busy time of year, I mean spring ahead of summer, and you had a great first quarter.
I had a record, I mean almost one hundred million in sales.
But that's the most as quiet time, right.
No, not as the cycles are off because of COVID number one, number two. You have to realize that people have been holding off what decisions that they make since twenty nineteen.
For a minute, so is that why people finally pulled the trigger?
Yes, And I think I believe my psychologically, I think that people believed that the interest rates were going to follow.
How many of your buyers are buying with a more versus.
Very few right now?
Ironically of the thirty two transactions, so the average deal is not first quarter, the average deal is not thirty eight million. The average deal is you know, three, six, five, two, six hundred thousand.
Mortgages are mostly cash.
All cash, all but seven, all seven of your sixty three percent across my business was a little higher, but across the market was.
Sixty three in the first quarter, so percent.
Why did they pull the trigger?
Then?
Then?
Is it just that they were so for them, the rate environment wasn't so much, which is always king.
It is always king. And it also you've got to remember some of these sellers have been waiting for nine months, twelve months.
But that's what I'm saying.
So it's not like, Okay, they thought maybe it had nothing to do with the rain environment.
I think they were just.
It was a it's a negotiating tactic. My experience is that if I have three offers on a piece of property and one's a mortgage, and I'm able to push the cash person or even a choose to take less because they're cash it was seller driven, it's seller do them. Having a choice was very powerful and important and new. They hadn't experienced that in a while.
Can you talk about I think this is unique to New York because there are so many cash deals, but can you talk a little bit about why a cash deal is so much more appealing to you than to deal with financing that could come in at a higher price.
So it's not seeing the reality shows where they're like, it's a cash down, it's deal, it's even lower.
And you're closing next Tuesday and.
They're closing next Tuesday. Done, like it's fascinating.
Yes, yes, and you have like eleven inch heels while you're doing it.
I know, I know they look perfect. I know it's like a little unreal. But anyway, I.
Haven't seen any any of these shows.
I don't, dude, Okay, okay, so no, listen, the preference becomes about cleanliness, meaning you know, you go to contract and then you don't have an appraisal, Like how would you feel if you had five bids on a piece of property, which, by the way, this happened all through the New year firm myself right and that, and then you it doesn't a praise, you have no contingency. But how do you feel as a buyer? How does a seller feel? Does somebody walk? So it's just cleaner if
you have the luxury of that choice. Otherwise we are it's our job to be able to make things a praise.
How do you then in your world where you're dealing obviously where some people who are listening are being like, I'm going to throw up because it's like five six million dollars all cash. Like, it's not a slice of total American life. It is a slice, right, a small slice. Having said that, what does it tell you about the broader economic environment in a world where we Louise have so many conflicting data points.
Yes, and I don't think that's going to change for a while, Carol, Okay, I mean listen, think just remember that when interest rates are high, the rental market is high.
I that's true.
Have somebody relocating here who got into the New York Academy of Arts and they are relocating here, and we were looking for a nine thousand dollars rental two bedroom. The same apartment two years ago went for fifty eight hundred, and it came on for seventy nine hundred and it went for eighty three.
In two days. That's wild.
So that is a forty seven percent increase in two years because the cost of money is cheaper. I mean, it's sorry, the cost of money is more expensive and that by so when interest rates are up, buyers can't. They get on the sidelines and they rent and they are affected.
So you're saying that people who are not buying are driving up the rental market.
Yes, but you are also safely it's a tougher it's environment and says something more broadly macro.
Right, I'm talking about for the lower end of the market.
Right.
So I have somebody who's contemplating selling a townhouse for six and a half million dollars and they're like, the cost of my capital, I can rent something for fifteen thousand. When he goes to look at what you can pay for fifteen thousand dollars, he's like, I'm going to wait a year, so to.
Wait to sell, Yes, because interesting.
It's sometimes some of this is a luxury. It is a luxury. And again I ask the same question whether it's a twenty million dollar buyer or a six hundred thousand dollars buyer. Do you want to pay your own mortgage or do you want to pay somebody else's mortgage, Because that's what it is, whether you're in a rental building, and so it's the whole thing around waiting for the election, like okay, but whoever ends up being our president is going to be our president, and you are still going
to need a place to live. So I do think that you can try to time everything, but it's really about understanding what I mean. I have people that are borrowing money from their grandmother who is going to inherit, you know, ninety two years old, and he's like, I'd love to be able to use it while you're alive, and that is what they did. And so people are getting creative, and it is what my recommendation is. Is whether you're borrowing from your sister, you're co owning with
your parents, you know. I mean, I'm thinking about I have a twenty a son that's going to be twenty one years old who's looking at real estate every day, like I want to buy my own apartment. He wants to buy an apartment where he can have a roommate. He doesn't think he can afford to live by himself.
Yeah, I get one last question. Does what goes on in office does it matter? Does it impact you at all in terms of certain neighborhoods are not really.
Certainly excuse people's They're more cnics that are in that field. I mean a lot of my business or commercial brokers that I do business with, meaning helping them personally with their homes.
Yeah, and you know, they're they're feeling squeezed.
They're like, oh my god, how are you holding up? We is and I'm like, okay, I don't even want to tell.
So because they are feeling so squeen there.
Yeah.
I mean the New York Times that there's a building and Time Square that just had a short sale, like I don't know, was it sixty two percent?
Yeah, it's pretty yeah.
So but this, this is the way that that commercial market works, and the way lending works, and the way that they use the leverage. That is the science of that business, and that is always going to find cycles. It's going to have cycles, whether it's fifteen years or seven years or four years, right or I.
Just want to mention you're talking about Empire Capital Holdings and Nammed our real Tea Group agreed to purchase that property at three twenty one West forty fourth.
Street for less than fifty minus.
They bought it.
Yeah, it was a New York City office building owned by related company affiliates, set to be sold at a steep discount sixty seven percent.
We're going to say goodbye. Twenty seconds. What are ten seconds? The word to describe the environment right now?
For you?
The environment is when it's the most scaredest is usually when the best opportunities are.
It's not scary enough.
Lets it get scariest. Let's get me Gary.
It was more than one word.
I was gonna say, come on, doesn't feel scary.
I mean, the regional banks aren't collapsing, We're not in the rows of COVID.
But I'm always foolish for NYC.
I love it. I love it and you've seen a lot, no doubt about it. Louise, thank you so much. Thanks guys, fun to have you.
Louise Phillips Forbes real estate broker at Brown Harris.
Stated bromuk.
A journal.
How about you let me drive?
Oh no, no, no, no, who's gone and drive?
Honay please, I'll do the gravel. Let's wat I want to dry.
It's a good question.
This is the drive to the clothes think well by yold it on Bluebird Radio.
All right, guys, got about eighteen minutes to go until the closing bell on Wall Street. Having said that, one other stock we want to bring to your attention, Tim, we're watching share Parament. They're done about eight percent here in the trade.
Yeah, this after Sherry Redstone's National Amusements decides to stop talks with sky Dance. This according to a report in the wash Wall Street Journal. Those shares quickly dropping down seven and a half percent right now, the journal reporting that ANAI has decided to stop discussions with sky Dance and that is causing us all off in the stock.
Yeah, and here's why I write those previous reports. Listen, we have been following this story now for I feel like months. It's been a long time, or maybe so long, Carol, so long. I do wonder why the time we get to December, whether or not there'll be some kind of resolution. But National Amusement, you might remember, that is the company that controls Paramount. They had been in advanced negotiations to sell the majority stake in the company to sky Dance,
according to previous reports. But again the Wall Street Journal saying that National Amusements has decided to stop discussions with Skydance. So right now the stock down almost ten percent shares of paramount, So keeping an eye on that.
There were other suitors out there, I know, but it's parts of the business.
Yeah, several people, right.
Yeah, So anyway, stay tuned. As they like to say, we do want to get to though our doctor the closed guest delight to add back with us Larry Pitkowski. He's managing partner and portfolio manager good Haven Capital Management. Larry joining us from Milburn, New Jersey. How are you the trade? You know, less than twenty four hours away from the FED decision and an inflation print. I don't know what's top of mind for you in terms of the investment environment, Larry.
Well, Carol, nice to be here. Tim, nice to be here. I'm sorry to disappoint you that what the Fed's going to do tomorrow is actually not top of mind. You know. I think in whatever area you're investing in, if you want to try and generate outsize returns, you have to try and find things where you can have a non consensus opinion about what's going to happen, whether it's a company a sect or an industry, a commodity or whatever,
and then of course be right. Even we don't think we can develop a non consensus view about what the FED is going to do tomorrow, so we're really just not focused on it. We'll just assume whatever the consensus is.
Uh, you sound like, is this one of those things, Larry, Like, I can't do anything about it. The Fed's going to do what the Fed's going to do, right, and then we just got to.
Kind of follow along, like what my mom always says, like, worry about things you can control, don't worry about j Powell.
You had a husband at home like this.
And your mother is obviously you know, had the right idea. But we do try and find individual securities every so often where we think we can develop a non consensus view, and then we just got to be right. And it's worked out, you know, pretty well lately. But we don't think we can have an opinion on everything going on out there, and nor do we think most people can.
All right, So what what does drive your investment decisions right now? And what does that lead you to in terms of either particular areas or names right now?
Well, here's what we how we think about the overall environment out there. You know, it's kind of four environments are normally taking place one of four. Okay, the first three are rare. Things can be very euphoric, in which point you should be a little bit fearful. Things can be you know, a lot of negativity. You should be a bit more aggressive. There can be existential periods of true worry, like you know, COVID great financial crisis. But most of the time the economy is a little warmer,
it's a little colder. Interest rates are within some kind of a range, and you should just keep turning over rocks looking for a handful of things that you think you can understand a bit better than everybody else and where you can buy them with a margin of safety. So that's how we we think we are in environment number four. And by the way, we think we're in environment number four most of the time.
Okay, So let's get to some of the stock picks, some of these rocks that you believe you have uncovered where there are opportunities. We love it when you come on and and bring us stocks to talk about. Tick your VTS the tests energy to.
An EMP company, Right, Yeah, what's going on?
Well, it actually is not an EMP company, you know, Carol. Companies often have these sixty page power points where they explain what they do, and they're filled with words that you've got to keep reaching for a dictionary and saying,
what the heck does that mean. Vitests has a I think it's twenty four words that explains what they do and it goes like Vitessa is focused on returning capital to its shareholders by owning financial interests as a non operator and oil and gas wells drilled by the leading US operators. That's it. They are a capital provider to the bigger E and P companies who want a partner to share in some of the costs and of course the returns from oil and gas wells.
It's like a right for the NP industry.
Well rich, very smart uncle, and the history of the tests.
You know.
At good Haven we are always keeping an eye out for spinoffs because spinoffs from larger companies are often an area where there may be some mispricings or where they may get left behind or for whatever reasons often have to do with market dynamics. People receive shares in the spinoff, they don't know what to do with them. The test was part of Jefferies for a long time and we had the good fortune to watch the management team, Bob Garrity and Brian pre operate very successfully. It was spun
off in early twenty twenty three. It's a modest sized company, less than a billion dollar market cap, and it's got a very talented management team that has, as I like to say, dirt under their fingernails. They know every rock in the bocking, which is where they are focused on. So we have a stock price that we think is about you know, eleven times forward free cash flow, eight
and a half percent dividend yield. A small company, and with all of the mergers taking place in the I and P space, we think that bodes well for some crumbs left by the big guys, which will turn out to be potentially very valuable crumbs, and then some for the tests.
Really interesting like and I appreciate like you're walking through the story because I feel like fundamentally that's kind of the stuff we care about.
Twenty seconds left here.
You know, we've been talking a lot about Apple this week, anything in the tech area that you're finding interesting, and just real quickly.
We have a long term holding in Alphabet, which we remain very comfortable with. It appears to be reasonably priced, and we think that it's a long way from figuring out exactly who wins an AI, but you know, they have the resources, to people and whatnot, and we think
we were very comfortable there. We have an indirect holding in Apple through a long time, our large position in Berkshire Hathaway, and we will continue to look, we think, you know, trying to understand exactly how it all plays out its early days, but we're comfortable with the exposures we've got and we don't think we have to have an answer to every aspect of it.
That's very fair, all right, Larry gotta run, Thank you so much.
Larry Pitkowski.
He is maging partner portfolio manager of a good Haven Capital Management, joining us on this Tuesday.
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