This is Bloomberg Business Wait inside from the reporters and editors who bring you America's most trusted business magazine, plus global business, finance and tech news. The Bloomberg Business Week Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
All Right, she walks in the room, and I get excited because she is just one of.
Our rock stars around here.
And I know we kind of say sometimes rockstar a lot, but we really mean it with this one.
Zanolie Bosik is in the house. She's a Bloomberg News Wall Street reporter.
She's had quite a couple of weeks between bank earnings, interview with Morgan Stanley's James Gormant, and then tonight, no Tomorrow Night, she has the next big Risk. She also had a conversation with Blackstone John Gray. I feel like you're super there's.
One person for whom hustle culture isn't.
Now.
It's really remarkable.
And what's great is I feel like you get this wonderful big picture when you talk with these big names from different walks of the financial world about like kind of what's really going on.
It's my favorite project of the year, beyond everything else. By a landslide. And it's because it's the simplest question in the world. It's what the money managers are hired to do, what is the next big risk because their business is the business of managing risks. Every time we do get different answers, this time around Boas Weinstein. He's a very famous credit manager here who is known for making money in turbulent times. He's worried about the next
market sell off, partially because of quantitative tightening. You have Idolu, the head of the global private bank at City Group, right, she is frankly the first one in the three years of this project who has brought up geopolitical risks as an issue.
Shocker.
I mean, I feel like the last year or so easily two years, right, that it's been such a big part of our narrative.
More surprising to me that every time I ask the question, this is the first time it was brought up in three years, even in the middle of a war. So you know, she brought up China tensions with the United States. And David Rubinstein, who is the co under of Carlisle Group, also billionaire himself, had you know, worked in Washington for a long time he's worked back Bloomberg Colley, he does have the two shows for Bloomberg.
Right.
He also believes that inequality within the United States is a big issue as well as among nations that have a lot of money and nations that do not have a lot of money, and the tension that is going to create in the world.
Can we just run a little bit of the interview you do with bo As Weinstein and what he had to say about the next big market plunge.
Let's play it for everybody.
The next time there's a serious selloff, which is which is not just a three week affair. There are a number of aspects from the behavioral to also that the Fed is not your friend and in fact will not be able to come to the rescue of the market in the same way because of what's going on now.
All right, that of course is Boas Weinstein.
But I love his picture and I think that really plays to all of the money plump pumped into the economy and then as rates have gone up, just that major reset on assets.
Yeah, and we started with too, because you know, on one hand, people are worried about a recession. He's it's not about a recession. It's about the market structure that's been created after so much easy money. The point he's making is there are a lot of investors that have under the market that are buying products that didn't exist ten years ago. They're buying junk bond funds in scale, each he has in scale, and you know some of the things you're seeing them buy into, even private credit,
which is trying to open to retail investors. They existed in a zero rate world and in a world where rates are much higher, and some of these companies are being charged thirteen percent on their debt or more.
Very different environment, very.
Different environment, and it's one that most investors are not used to, which is part of the reason he thinks a saleoff, should there be a significant one, would be exacerbated.
We also have continued inflation concerns or really David Rubinstein told you like inflation is our only choice since the debt of this country has grown thirty two x since he was in the White House.
Yes, it's incredible because if you think about it, you know, with the Fed, we're talking about the monetary policy side of things. David not only talks about the monetary which is controlling inflation, through interest rates. What he's talking about here is the fiscal problem we've created for ourselves here. And you know, he actually brought up an issue that Muhammad Alarian had brought up in this project a while back, which is this idea that the American dream might be eroded.
They both gave different reasons, but David's reason, David Rubinstein's reason is in part because inequality would be exacerbated in an era where you have to only really inflate your way out of this thirty two trillion dollars debt problem. I guess what, who's watching it now that the debt ceiling has been raised. Investors, large investors who worry about the long term future of the United States.
Are the only people paying attention to Etentially.
Yeah, but do you remember a time where I feel like we spent years that every conversation was about the debt load of the United States and concerns about it, and then it just kind of went away.
Well, I mean the idea here that the debt servicing costs for the United States are going to surpass the defense budget of the United States. Interest rates were low then, interest rates are higher now, meaning the cost of debt is also higher. We're paying multiple more for our debt than we are for American health care, American education. Does that make sense? I think that every part of the isle that's massive, essentially in the things.
That we need to can we also go towards your interview with Jonathan Gray.
Yes, talk to se what a day by they what a day to interview him?
I mean on the day that a Blackstones assets under management, I guess you'd call it that in private equitcase, more than a trillion dollars and I think CBC raised more than twenty six billion dollars for one fund.
Apollows on their way to that level. But so much cash, it's.
An incredible thing to say, oh, you know, Blackstone, instead of raising twenty five billion dollars, they're going to raise, you know, in the heighth in the you know, the low twenty some billion dollars instead for the corporate corporate private equity fund. And that's spooky to I mean, yeah.
That's exactly what grip right, only in the low twenties.
Yeah, you know Steve short spend, Yeah, exactly. And that's the thing about it. I mean, yes, if you have two hundred billion dollars of dry powder, which is money to spend at Blackstone, you know that extra marginal twenty dollars twenty billion dollars. I don't know, but you know John Gray's point that he's making similar to all the banks, where he really feels like we're hitting a precipice here
where things can start to come back. Deal activity can come back, they can start putting money to work, they can start selling assets, and that's how they make money. Because the profitability did drop by almost forty percent, and part of that is because of that muted deal making.
Can we assume if they're raising more money or new funds, that they are the finding places to put at work and they are finding exit strategies because I always wonder about the pressure that they're getting from investors to kind of put that money to work.
Yeah, they're not finding exits or to.
Exit, right.
Yeah.
Well, it's interesting that FT had a really good point about Blackstone that over time they're the best barometer to use of their returns really is above fifteen percent, and so you know they've done well by being patient. You don't want to sell into a bad market either. But if you're not Blackstone and you don't you know, have your pick of the crop with whoever you're hiring. Apparently their acceptance rate is zero zero three percent now point
zero zero three percent. You know, wait so that you can point zero zero three percent to get into Blackstone. That's how hard it is. Point zero zero three percent of all analyst applicants get in. It used to be two years ago point four percent. That's how hard it is to get a job at Blackstone now. But if you are other private equity firms, it could be difficult because you have to find money to get those deals to work. You have to find debt financing.
If you do have money, you can do deals.
Scott Kleiman at Apollo, when he was talking about you know how much money they're raising, said that they're one of the few firms that can pay play offense in this area. And he said, our current pipeline of opportunities is about three times a year ago and growing.
I love it when Matt drops names. That is indeed the co president of Apollo, one of the most longest standing private equity executives in the world. But to the point, also on private equity, that's kind of why a lot of these firms have brought and beyond private equity. Even Apollo is much bigger in private credit.
Blackstone is They're massive in private credit, right massive.
It's more of their business and private equity. And the point they make is there's only so much skill you could have in private equity, because you don't want to raise so much money that you can't put into work. That is, but to the point that you're making, they do have places to put it.
To work, you know, on the private market. Matt's obsessed. I'm obsessed with it. I just find it fascinating. You know, we go out to milk and like it's all that anybody ever talks about. I feel like the last two years it's just been about private lending. Are there any concerns nervousness? As you say, It's like, you know, it's the interest rate picture and environment changes. It's more expensive for those companies that have.
Borrowed, right Yeah.
And it's you know, all of these companies, you know, Blackstone, Apollo, KKR, they have diversified well well well well beyond private equity at this point, they have huge businesses in all these other places. They're just big, massive private investment firms. You know, some of the biggest investments that that Blackstone is making outside of outside of real estate data centers. They're buying data centers because they believe that it will be fueled
by AI. Right, so I think they're not investing in the ways that they used to invest in the past. They have changed. You know, what's the next trillion look like? Laststone is a much bigger firm than a lot of its rivals.
By the way, I was talking with Moody's head of cohed of Banking, Global Banking this morning.
After Cotigue.
She told me she's not just covering banks anymore. She's covering private lenders because that area has.
Also you could feel him wanting to reach outside the banks because so much lending.
But I wonder for your next year series of the risks, right, is this going to be a problem if so much lending goes away from banks and into what she called the shaf banking.
System, even though they don't like being called that.
Isn't that a concern?
I mean boas once Scene brought it up today, the private credit funds. He said it certainly said, you know, lending it seven percent is way different than Leney at thirty percent. And another thing I'm working on right now is starting to calculate just how much of the bankruptcies we're seeing or private equity backed. Because we are seeing the point a lot of bankruptcies, many of these companies
are backed by private equity firms. There are going to be losses, and we don't even know to the extent to which we will see that across private aquitly.
I mean, I think about regional banking.
I feel like the crisis at least so far has been contained because so much lending middle market right is from these private credit firms.
And I do wonder at a high price.
Yeah, that's.
The industry that I'm learning is that when something is going wrong, you can throw more money at it.
Don't miss the Next Big Risk with Shinale Friday, eight thirty pm Wall Street Time on Bloomberg Television.
Shanelli Bosik truly a rock star. This is Bloomberg.
You're listening to the Bloomber Business Week Podcast. Catch us live weekday afternoons from three to six Eastern Listen on Bloomberg dot com, the iHeartRadio app, and the Bloomberg Business App, or watch us live on YouTube.
All right, everybody, we were all over Caravana yesterday.
Weird reason.
I mean it was off stratospheric if you will, right, in terms.
Of closed up forty percent yesterday normal day, one thousand percent year to date.
So and and it's massively profitable.
No, they don't make a net profit, but they talk a lot about their EBITDA growth, which is as David Welch points out, it's kind of silly to mention ebit DA when your interest expenses are the big problem.
Exactly. Good point. Well, so you had an interview today.
Yeah, I spoke with the CEO of Carvana Ernie Garcia after he clinched a really important deal that's gonna reduce interest expenses by four hundred and thirty million dollars a year in the next two years and reduce their total outstanding debt by one point two billion dollars.
Listen to what he had to say.
We've cut over a billion dollars of expenses out of the business in the last year. That's a that's a big number, right, and you know we continue to pull the expenses out. You know, we cut over one hundred million out in Q one. We cut another twenty million of expenses out in Q two. So we've got a lot of levers. We'll keep pulling that down. We've also been driving our URGPU up. So I think the business
performing really well. And again I think you know, twenty twenty two was a tough year for us, but the people inside Carbona came together and that's why we're having so much success today.
Our delivery are there still delivery delays, delivery issues. I know that for a long time, even in your business, the used car business, it was a problem getting buyers their cars in a timely manner, and that's been a problem obviously for the manufacturers.
As well for new cars. How does that look right now?
No way, I think you know. Inside of our business, there's kind of two major steps. One step is getting the car from the point where purchase it to our inspection centers, where we put about one thousand dollars aparts in labor in every car to prepare it for the buyer WHOI ultimately buy it. And then there's our delivery to that customer when they go to our website, they buy it online and then we deliver it to their door. And we've actually been speeding those timelines up recently. We've
been testing same data delivery, which is pretty remarkable. We had one customer in Phoenix the other day that actually got a car delivered an hour and fifty nine minutes after placing the order, which is pretty remarkable. So, you know, we're trying to give customers a huge selection with our online model and then build all of our operations and processes in a way that allow them to not only have that huge selection but also get the car very quickly.
And I think that's something we're very proud of.
How much do you expect buyers to embrace the online only model. I mean, you know a lot of people want to go into a dealership kicked the tires, look under the hood, or they have in the past. How much do you see that changing, for example, in terms of a percentage of all sales.
Where do you expect it to go?
Sure? So, I think different people like different things, and they'll continue like different things. I think what we're proud of is that we're giving customers a different kind of offering. They can go to our website, they can buy a car. You know, we've had people buy cars on our website and scheduled delvery and as little as ten or fifteen minutes and then, as I just told you, our fastest delivery was an hour and fifty nine minutes after that. So it can be very fast, it can be very easy.
They get a huge selection of cars, tens of thousands. They generally save money. We offer our cars at lower prices than most of our competitors because our business model enables us to do that. And so it's a different kind of offering for different preferences, and different people are different. But the great news is, you know today we're about
one percent of the market. So I think our view is that, you know, when you say you can get a broader selection and you can save money, you can save time, there's probably more than one percent of people that want to do that.
Right I'm looking for a Dodge Challenger RT scat pack wide body. They're not super easy to find a dealers near me, so I may look to a dealer in California. Is that what people are increasingly doing? And do you expect it to be maybe two percent of the market in say by twenty twenty five, three percent of the market by twenty twenty five.
Well, what I would.
Say is we've at various times we've had in some of our older markets. Market shares already above three point five percent and growing very quickly, and I think, you know, our product offering is only getting better. I think customers are only getting more comfortable online, and so I think our view would be much larger than that. Over time. We'll have to see exactly where it goes. But I
think again, the benefits are not being online. Online is something that enables customers to save money, to save time, to have a huge selection, so we're more likely to find that scat back for you. So I think that's what customers are really looking for, and we're trying to provide it.
You've had to pull back by your inventory I see from our reporting by more than fifty percent.
Are you going to be able.
To bring that back because obviously you want to offer a broad array of vehicles for customers to choose from.
Yeah, for sure, I think you know, twenty twenty two was about getting back in balance after car prices went up and instrates went up, and it made cars unaffordable for customers and slowed down their purchases. And I think we've done that and I think that's why our results, you know, have been so positive recently. But I think undoubtedly, as we turn back to growth, you know, which we will do in due time, we will certainly want to grow on inventory and give customers an even broader selection.
But even today, with the pullback and inventory size to get back in balance, we're offering customer selection of tens of thousands of cars, so it's still a pretty great place to go check out.
You know, I saw a figure that your total debt load was about two thousand dollars a car in the last quarter. I'm wondering what it looks like now after this.
Deal and where you want to see it.
Sure, at a high level, I think it probably decreased by fifteen to twenty percent. And again I would go back to the answer I provided before. I think the most important thing we could do as a company is just keep delivering great customer experiences, keep building the business as best we can. I think the capital choices will make over time, but I think that's very secondary to just building the core business and the best way we possibly can.
So, I mean, before this happened, obviously there was a lot of speculation in the market. People were worried that you were on the brink of filing. Now you've been thrown this lifeline. Can you say, now that we're past that sort of crisis point, are you, does this allow you to avoid any chance of bankruptcy.
In the future.
I'll say more than that. I think we were never there, you know. I think drama always finds a bigger audience than reality, which can sometimes be a bit more boring. But we always had a great business. We were always making a ton of progress. We continue to do so, so I think this, you know, this is a great transaction for us. I think the quarter was a great
quarter for us. I think we're in much better shape than many people may have believed before, and we're gonna work hard to be an even better shape in the future. So we'll just keep improving, all right.
That is of course. Carvana's Ernie Garcia.
Yeah, very interesting guy and.
CEO, chairman, majority the co founder too, co founder, and so he and his father owned more than eight percent of the common stock.
I don't know the exact number because it's changing now that he's buying some of the stock a lot of the stock that they're issuing, but they have eighty eight percent of the voting shares, so total control position to be in, right yes, absolutely, and it's just been I mean to be fair to him. The car the car business and his in particular, really grew throughout the pandemic. But they had low rates, I mean no rates. They had easy financing, right, and they had car prices that
were just absolutely soaring. So all the inventory they already had and they had over a billion dollars worth of inventory on in their life or in their vending machines before people started freaking out and looking for cars.
They were in the Cappard seat right, perfect right. And now you don't.
Have low rates, you have high rates, you don't have easy credit. It's quite difficult. And used car prices are going down and he says they're going to go down further.
So did you feel like if there was an area where you didn't quite get maybe a sufficient answer or clear enough like.
You know, because here's the.
Don't understand in.
This new paradigm.
Uh, The thought is they're going to have to cut costs significantly and bring debt down much further in order to make a profit at some point on a net basis.
And I kept asking him, how are you going to do that? You know, are you going to tighten your belts.
Are you gonna, you know, cut spending and he I don't think he didn't elaborate with a lot of real action.
You're person like you need to see it. I mean you obviously drive them and stuff like.
I think that's going to be less and less the case.
I think as we go, especially to EV's, I mean, what are you gonna look under the hood?
App there's nothing there, you know. I guess you could kick the tires. They're cheap enough.
You like to take it for a test.
I'd love to do all those things.
You're right, I want you the car person, but I want to get in it and feel it.
Yeah, me too, you know, but some people are happy buying them online, especially if you already know what you want.
That's true. You know, maybe you've done test drive elsewhere.
Right, And no, I want this Challenger, so I don't care if I get it from California.
So then they have to beat on price. Yes, and that's a tough business to be in.
All right.
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So we're gonna take a little bit of a break from earnings from FED, talk from yield curves, and because it's summer, we're gonna talk some barbecue.
Okay with that, Well, I mean not.
It's not just like a summer fun session, right, because this actually is very closely connected to markets, to inflation, to the FED, because the costs have been soaring.
I just said we were gonna take a break. Okay, gosh, okay, can you just follow my leader? Okay, okay, all right, let's get to it.
Loura Ray Dickie is with us.
She's CEO of the more than eighty year old family run barbecue franchise business, Dicky's Barbecue Restaurants. It's based in Dallas. Six hundred and fifty Dickies Barbecue pits locations in forty four US states eight other countries. I want to confirm some of these numbers with her. Laura joining us on zoom in Texas. Laura is so delighted to have you here with Matt and myself. And I hate to say it, I'm going to say he is right, because labor, beef,
this is certainly our world. First of all, the business of barbecue, how's it going?
Tell us about it?
You know, in general, the business of barbecue is good, but you are right, those macroeconomic factors that you see and you talk about every day all the time are definitely affecting us because you know, I hate to say this for Duncan, but America runs on trucks actually, and so every part of the supply chain has stress for us. Whether that's it's all the fuel costs, labor costs. Our beef packers, for example, going to a shorter work week is directly affecting the price of beef in the market.
You know, the beef average this year has been out about about four dollars and eighty three cents. That's about two cents higher than it was in an all time home last year. You know, our price actually is about three thirty four pounds because of our purchasing power. We're actually with the number of restaurants that we have. One of the largest well the largest purchaser of beef brisket in the country in the restaurant space, and so, you know,
we really really feel that food inflation. And so while business is good, we've certainly had to be very proactive. We've taken many reductions. You know, actually in our eighty two year history, this is a low urgest menu reduction you've ever taken. We've cut our menu by forty one percent to fight include inflation, to keep from passing on all of those costs to our guests.
So certainly, let me let's let's try and break this down a little bit. Because so, first of all, on your menu, when you see prices of beef, I think have risen a lot more than pork.
Pork has risen more than chicken.
If I'm if I'm not mistaken, I know that feed costs are much higher, the cattle herd is smaller. And so what does this mean for your menu? Do you raise the price then of your beef products? Are people choosing more chicken? Are you trying to offer more interesting chicken? Uh, you know, entrees so that people take those instead of pork?
How does it? How does it?
How do you work it out? Absolutely well.
So first, you're absolutely right, beef has been the most affective. It has the largest market cycle, if you will. It's actually ten year cycle, but the last three years or really make the most difference in that price per pound that you're seeing when you pay, you go to the grocery store, you certainly go to restaurants, and so that price per pound hid an all time high last year, and again we're two cents above that this year, and
we expect that to stay stable. But in order to not pass all of that onto guests, which there's certainly a tolerance that that market tolerance that guests just can't simply absorb, you price yourself out of the market, so we certainly do shift to pork. It's certainly that for us the summer of pulled pork, if you will. We have a wonderful pulled pork sandwich, our kicken comeback sandwich, which is great pulled pork with some wonderful kicking comebacks
claw on it. And we're doing that intentionally to guide guests towards pork. Chicken is in a good place. It's still high, but not as high as it has been. It's about three dollars and sixty two cents a pound right now. It's certainly taken a break from its high two years ago, and you can see the influx of the wing business as well as the Avian flu and
some other things like that. But chicken has just a much shorter of market cycles, so it can recover much quicker, so that you'll see the flux of chicken more so, and that's why you'll see specials roll on and off with chicken with more frequency. Although there's a lot of chicken in the market, it's one of the most popular proteins out there, so you have to be kind of careful with that because it can really fluctuate pricing again due to that short of market.
There's nothing like it.
I'm I'm gonna say there's nothing like a brisket.
S well, I agree with you, I love briscut.
Well.
So then how do you guys deal with some of the stress points? I'm assuming wages too, and labor is another issue, right.
It is, it's and that's where it's really challenging for folks in the business at large, in the restaurant industry is because again going back to that supply chain, there is stress at every point in the supply chain, whether it's the fuel costs for the trucks to get there. And with the restaurant business, you have labor not only in the supply chain, but obviously in the restaurants themselves. And then the food inflation that all guests, all consumers
are feeling. We certainly feel as well. So you have that and you have to be really, really really careful about where you can take price, but you also have to maintain value. And so for us, we shrunk our menu down to our core proteins. We cut anything from the menu that we didn't feel that we could pass on what we would have to in order to sell that.
For example, we cut smoke turkey, which has been a staple for us and it will only be here for the holidays, but we just didn't feel that we could pass that on to the guest, and so we made that menu reduction.
Go back to diesel.
Because I just looked at Matt, I'm like, how many energy costs come down? He's like, diesel, Right, you guys use diesel to cook it?
All?
Right?
Usually? Well, we do, so we use it. There's lots of different pieces, but yes we do. But it's certainly in the restaurant in the cooking process, but it's also in the freight everything. And sometimes what people forget is when you look at all of the markets that you see a lot of different opportunities in retail or folks
that have longer shelf life on their products. But for us, because we have two to three days of perishable product on hand, we're so susceptible to what the markets are doing, and so it's very, very very hard to be able to work around that labor cost, those stress points, that fuel costs, the labor shortages, and then what the commodity
markets do. And so we're thankfully in a position where we have enough restaurants and we have enough purchasing power in the market that we can again kind of speculate out by uh buy with speculation, buy and hole, do those sorts of things that a lot of smaller restaurant chains don't have the opportunity to do, or mom and pup may not have the opportunity.
Take us back loa ray and talk to us about the business and your involvement in it, because I think a lot of people are listening. You know, they think of Dickies as this family owned business and They're like, how come you know, I don't know Travis Dickie's granddaughter is like a PhD economist. But you actually have extensive experience in the markets. You've worked with agencies and covered
big restaurant chains like Chick fil A and others. So you have you come to this CEO position with real experience in the industry, and you have really grown the business. You have six hundred and fifty restaurants around the world. It's not just like a deep one barbecue pit in Texas. So tell us, tell us about the business.
My family in Texas would say just would not be the way to say Texas is a good place to be. Anyway, go ahead, Well, you.
Know, actually I'm married in I will say that, so I'm actually the granddaughter in law. I missed a meeting and got demoted to CEO, is how I like to put it. But I did have a lot of experience in the industry before I joined actually married and met Roland and then was drafted into service and thought it
would be temporary. And here I stand today. But it's been just that kind of journey of working always in hospitality, technology and strategic planning and a lot of restaurant clients in that genre, and so have worked with lots of different brands and there's a lot of similarity, and then there's a lot that's unique about Dicky's. But we certainly have grown it. We are now third generation. We are
still family owned and operated. I would love for guests to just think that their neighborhood Dickies is the only Dickies. I think, then we're doing something right, because that's how barbecue should feel. It's that passion food.
It's really an experience.
We smoke all of our meats on site. You go in and you should be able to smell that hickory smoke. You should be able to have that experience where you're hand chopped, sliced or if you are a pulled pork fan, that brat.
Stop, I'm starving, starving now, so wait, just quickly, we only have about thirty seconds.
Where's the growth come?
Because you led the company into international expansion, is that the growth and unfortunately just got about thirty seconds left.
Yes, there's international growth, but there is still domestic growth. Believe it or not. California is our second largest market, so it's not all vegan country out there, folks. Still do like their barbecue, and there's just opportunity in barbecue. There's a lot of burgers, there's a lot of chicken, but there's less and less a really really great barbecue. So there's still markets here.
It's funny you said California because I was going to say, what about plant based barbecue?
Is that something that you have to think about just real quickly?
Oh god, no.
No, no, you know what that's I like to say, we can serve something for everybody. That's where we would do a giant stuff baker without meat, but everything else will be a real traditional barbecue.
All right, Well, come back soon, Loriy Dicky, but you have to bring some barbecue next time. Loria Dickey, she's chief executive officer of Dicky's Barbecue Restaurants.
On Zoom from Dallas. I'm starve.
I can't wait to go to a Dickie's. I'm going to find any reason to get on a plane and go.
You're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from three to six Easter on Bloomberg Radio, the Bloomberg Business App, and YouTube. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa playing Bloomberg eleven thirty.
Are we still both searching on barbecue stuff?
No, I was looking. I was reading Hannah Elliott's Mercedes review.
Okay, we love Hannah Elliott. Hey, right now that we want to talk a little bit about that housing market and real estate, because there was a story that was on the Bloomberg this week about how the US home turnover rate in the first half of twenty twenty three has fallen to the lowest in at least a decade
as high mortgage rates compel owners to stay put. So Redfinn coming out and saying only one percent of US homes have changed hands this year, and that really fits in with some of the data we got today Matt about previously owned US homes falling to a five month low in June unlimited inventory, which then also helped push selling prices near record high. I mean there's just homes not coming on inventory.
Yeah, no, because nobody will to get out of three percent mortgage right exactly.
All right, So let's get a take on housing. We've got Brad Dilman with US Chief Economist over at Courtland. It's a real Estate Investment, Development and Management company. They've got to focus I believe that on apartments. And he's on Zoom from Atlanta. Brad, Welcome to Bloomberg Business Week on this Thursday. Tell us a little bit about what you are seeing when it comes to the real estate market.
Yeah, So we've actually just completed our FORECASTI family rent growth outlook forecasts as of Q two, So we got actual data four Q two. It came in a little bit lower than expected, and we've won all this for our models, and we're seeing that we're still expecting a five year compound annual rent growth rate of called about two point eight percent across the seven hundred and eighty
submarket SV track. We've been in a big slowdown in multi family and it kind of a disinflationary period and conventional institutional grade multi family, but it looks like we're kind of getting to the end of that. We're still expecting annual rent growth to trough this quarter Q three and then start to rally a little bit going forward.
So what's driving rents higher? I mean, here in New York, the rent is just too damn high.
I don't know if you're.
Aware of that, but yeah, I've I've heard that always too.
Yeah, but there was like a guy who ran for mayor and that was his entire platform. The rent is too damn high.
It works, but no, it is very expensive obviously in this city and in many others. But I guess with rates at you know, mortgage rates at seven percent, a lot of people cannot buy homes. Also, as Carol mentioned, exists, homes aren't coming on the market and they're forced to either remain renters or go back into the rental market.
Is that part of the problem.
Well, so, of course we have seen that big decline in the number of homes listen for sale, or even just the minor decline that we had recently in the existing home sales figures. I think some people are missing on that when the existing housing market freezes up, sometimes you can see this pop back into new home sales, which have actually increased a little bit. I think what people are missing there too, is that these new home sales are also clearing at a lower average price for
the new single family home. These are probably homes that are actually more in your kind of Tier three and even rural markets that some people take the opportunity to move to still more affordable areas than the aerswil affordable areas like the south or even parts of the Midwest.
So talk to us though about where you guys mostly operate and what you're seeing, because we talk a lot about people moving to Florida moving south. I have a bunch of family members who have got who were all along the East Coast, just in the New York metro and they have recently moved to the south, South Carolina, the Carolina is in particular. So what are you seeing from that perspective.
Yeah, we've certainly seen those migration trends continue. We do monitor cell phone based data to inform some of our migration models, and these have indicated that migration has slowed down a little bit. But it's been you know, robust for call it to a five to eight year period now with a real increase during the pandemic, and now
it's slowed down a little bit. But it's it's very clear, you know, anecdotally that you know, people are moving for affordability, they're moving for tax reasons, you could argue they're moving for political reasons in some cases, or even just to make that general you know, value that consumer value arbitrage. Florida markets do continue to look relatively strong in our
bank growth outlooks and in our market rankings. I think the real narrative is that we're starting to see smaller and smaller markets really start to pop. So instead of it really being a story about say, Tampa anymore, it's Tallahassee. Instead of it really being a story about Nashville, it's you know, Knoxville. These these kinds of markets popping a little bit higher than rankings. You can argue in some
cases that's really a basis effect, right. These are places that, certainly from the perspective of a New York city, have very low rents, right, And so as people migrate, they take with them savings accumulated in other areas. Sometimes they can even take that income with them now and deploy that area that was more affordable for Just.
Help me out. So you're in Charlotte, Dallas, Denver, Greenwich, Houston, Orlando. Am I missing anything?
Oh, we have an office in Greenwich. We don't own and operate properties there, Okay, but yeah, So Cortland has about eighty thousand units owned and managed, so that's a quite a large number, you know, we're generally in those smile states. We're very big in Texas, very big in Atlanta, Charlotte, Raleigh, Durham, you know, the Front Range region. We have a presence in Boise as well, Columbus, Ohio so and then of course very.
Long great state of Ohio. Yep, go buck Eyes, Matt's from.
So that's a you know, a pretty big exposure that we have. So we do consider our own portfolio to be generally, you know, representative of the national picture. But of course the work that I'm doing is really folks seen a lot more on just generalized market data to look at kind of everything, not just our own book.
As the chief economists at Cortland, and of course you have a lot of experience.
In that area.
I think you were at Polty before, head of economic research there, So you're looking at the entire country. What about housing starts, Brad, you know now that we can find some labor, now that construction costs are getting cheaper since there are no existing homes coming on the market, is it all about building new right now?
Yeah, So we would estimate that the US is still underbuilt by over seven hundred thousand units. So there's certainly a need to be building. Now we've been closing that gap for about five years. You know, the US had been more substantially underbuilt prior to the pandemic, and we've really seen that gap close a bit, even with an increase in immigration that's occurred over the last few years. So yeah, there's certainly you know that it would appear
that there's the need to be building more homes. And like I said, we can in fact see this on the new home sales side. So you're seeing that in the starts figures there, which is you know, recently rallied, even though they were they were sort of revised downward a little bit. And really multi family starts, right if you look at the government data, they're measuring this, and you know, with five structures with five units or more, this kind of product has seen starts really kind of
flirt with forty year highs. Still it's come down a little bit, but it's a lot closer to forty year highs and say the average over the last ten years. So housing is certainly being built, and yeah, they're definitely benefiting from a little bit of disinflation on the cost input side. And then I think demand that's been understated, right,
we see these continued job gains beats. You know, maybe with the last non farm parels you know, an exception, but prior to that, we've seen some very substantial beats.
That really are are alter teaming months in a row.
Yeah, by the over the last two years, we only have.
Twenty seconds left here as an economist from what you're seeing, any signs of recession real quickly, we.
Would say no, we've been in the no recession camp, you know for the last couple of years. You think it's going to be a soft landing at this.
Stage, soft landing. I'm just going to tell you if I had a buck for off landing every time I heard it.
This week, that's good. I hope you have a lot of bus I do you like a power ball? You would like to have a soft landing rather than session?
All right, Braddylaman, thank you so much. Jeef economist at Cortland joining us on zoom from Atlanta. Yes, soft landing would be good, yeah, or no land Jay Powell probably.
Like that, right, Yeah, we would congratulate.
President might like that too.
He would very much enjoy that.
All right, you're listening and watching Bloomberg Radio.
Brother Marc.
A journal how about you let me drive?
Oh no, no, no, no, honey, please, I'll do the gravel.
Let's I want to try it.
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All right, just about eighteen minutes left in today's trading session, getting ready to wrap up the Thursday trade. I got the date right again, Let's get to it. Carol Masser along with Matthew Miller here in her Bloomberg Interactive brokes.
You get the day right, Everything else just falls into place after that.
Looks that's so nice?
Yeah again?
Why I don't normally sit in this seat. There's a lot of light behind my head.
Don't we almost look angelic?
Not?
All right, let's get to it, and let's talk about the equity trade and the treasury trade, because we definitely have seen stocks.
Lower, treasuries move lower changes.
Although the yell curve kind of bounce it around a little bit as it usually does, it feels like John barenco Is, chief investment Officer of Fundamental Investments at all Spring Global Investments, on the phone from Meneminee Falls Wisconsin. John Welcome, nice to have you here. It does seem like fundamentally, if we can focus on that, and we're trying to do that as we are in the midst of earning season, that it's a good way to kind
of get an idea of where the markets go. When you look fundamentally at the markets, how do you see it?
Well, first, Carol Matt, thanks for inviting me. It's great to be here. I you know, I think the markets really have given us a lot us and from the past year that they're really more resilient to inflationary pressures and rising rates than we expected. And and that's largely a function of of you know, all the different stimulus programs that uh uh, you know led up to this year.
Relative to covid it it ultimately was a function of lower rates for so long that ultimately allowed consumers and corporations to lock in financing for a longer period of time. And I think the hybrid work environment and the resulting savings that people realized as a result of not traveling to work and you know, ultimately saving money from that side, while offset by you know, some of the impacts and
local economies I think has an effect as well. So you know, the markets are telling us I think that that we are probably heading towards a soft landing or even you know, no no recession, and you know, I think that that's a uh, you know, an interesting scenario to play out. However, I do think that there's clouds kind of forming on the horizon as we expect rates to stay higher for longer, and that's definitely something to pay attention to.
Yeah, it seems like some you know, the broader markets are saying we're good to go. But if you look at some individual pockets of the market, for example, bank stocks have incredibly low valuations that would indicate a recession, but the S and P five hundred is up eighteen percent year to date.
So how do you square that circle?
Yeah, I think that.
You know that.
You certainly have you know, kind of a bifurcation of companies that have really kind of been well positioned going into this cycle, Companies that are generating high free cash flow, companies that have you know, are not reliant on you know, the cost of capital to fund their businesses, companies that have great growth prospects, and so you know, as you look at the indices, many of the of the stock
indencies are driven by companies with that profile. You know, I think if you look more broader, there certainly is an undercurrent within the markets and in the debt markets relative to you know, what we think are are some challenges coming forward in twenty twenty four and twenty twenty five with respect to the impact of higher rates and
those ultimately being realized on the economy. You know, it's really interesting fifty percent of all US debt is maturing in the next three years, and that debt is financed at a one point seven eight percent yield right now. Thirty percent of all corporate debt, including leverage loans, are maturing in the next three years, so you know, you really have, you know, a fairly significant event coming up.
You know, as the next few years unfold, that really is going to really highlight how the cost of carry is going to get very expensive.
Because you do believe, as you as you walk us through the scenario, that rates will stay higher for longer, longer, mean in your view, especially when we've got I mean, at this point, we saw some moves in terms of the yield curve with expectations that it's not just a rate increase next week, which is pretty much on right at this point, but maybe even looking out at the September meeting or the November meeting, that we could get
another rate increase. But when you say rates higher for longer, do you say once the FED is done, that rates stay high all of next year?
Yeah?
How far? I think there's a good chance that that happens. We don't think the recession, if there is one, really starts to kick into gear until probably early next year. And I think the FED is going to be overly cautious with respect to lowering rates too early. And you know, there's it seems like the markets hung up on every single data point that comes out relative to you know, whether that means that we're you know, getting rate cuts
already increases. But I think if you step back and look at the bigger picture of what they're trying to to engineer here, I think to be very cautious in terms of getting into environment where we get into lower rates.
What do you like in this market?
I mean, if you have extra cash to put to work, where do you put it?
Yeah?
I think it's you know, in in in in the in the you know commentary that we've put out here midyear, we've really focused on, you know, a couple of different things. The first is in the fixed income markets. You know, obviously there's a great opportunity to invest in money markets and get a five plus percent yield in those instruments. But you know, we think that that you know, as you start to look forward and we do start to get to the point where rates are are you going
to pause for a while? That extending out your maturities along the duration curve makes a lot of sense right here. However, you want to stay up in quality. I think that you know, we're starting to see signs of distress with delinquencies pick up and and you know some of the you know challenges in in you know, the sub investment grade and leverage loan markets, and so we like staying up in quality and ultimately trying to lock in higher rates for longer as you work through the second half
of the year. On the equity side, we're very constructive on small cap stocks right now. And I know that sounds a little counterintuitive going into a period where you have, you know, potential recession on the horizon. However, you know, small cap stocks have underperformed large cap stocks five consecutive years, and I think it's nine of the last eleven years.
And so you know, when you look at at you know, ultimately, you know companies that are are generally poised to outperform, you know, coming out of a recession, and if we are going into a shallow recession or no recession, you know, we like the idea of kind of building up your small cap exposure. Coincidentally, they've outperformed in the last two months by four percentage points over large cap stocks, and
so yeah, we really like that segment. Although I think, you know, to my earlier point, you have to be very cautious. You know, a third of small cap debt is in non financials, is coming due over the next few years, and so ultimately it really requires active management. You don't want to own the broad indices. You want to own, you know, those companies that are self funded, that are generated as All right.
John, thank you so much.
By the way, the Russell is up about eleven percent your today SMP time hundred.
And twenty eighteen percent so far in twenty twenty three.
John Pranko, Chief Investment Officer of Fundamental Investments over all Spring Investments, this is the week.
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