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So here's the story of the day. First of all, John, I know you're the AI expert here at the Sloomberg Radio. But some nice news out of here. Some dude we got at Bloomberg News. He's out in California's somewhere, Mark Armern. He's pretty good on this Apple thing, which is a pretty good career move for him. And he just creates a story. You put Apple in a story with Google. This is an alphabet free zone. Apple and Google in a story that's gonna be big news. That's a lot
of market characture, that's a lot of market app. Then you throw in AI. Then you got something. Then you get something that's called a green bee, which I think is good for if you're one of those reporter geeks. Right, absolutely, okay, very good, Tom Jow Speaking of reporter geeks, he joins us here. He heads up all of our technology news coverage at Bloomberg News. Huge, huge job. He's got a great team of reporters working for him.
I time my visit well exactly, I time my visit around Mark German scoop Mark.
German scoops Tom. What do you make of this reporting coming out of mister German here about Apple, about Alphabet and about AI. What do you think is happening here?
This is Apple recognizing that it needs to weave artificial intelligence more deeply, more intelligently into its products, into the iPhone. It already has this really long standing, deep, very lucrative relationship with Google in terms of putting Google's search, making it very paramount on the iPhone. This is let's take it to the next step. Let's take this relationship further and let's weave your generative AI tools into what we have on the iPhone and make it better and make
it smarter. Let's leverage this relationship. Also, it's important to note that Apple is seen as a laggard when it comes to artificial intelligence. Everyone's got something big. Every big tech company has a big AI story. Apple is seen as a laggard in that.
And this is an admission in some way that AI Apple can't do it by themselves.
That's right, You don't get why.
Would the stock be higher.
You don't get to build this from scratch. I think there's a few things that work here. One is regulators are already looking at the relationship between Apple and Google. They don't like aspects of it. DJ is looking.
Hard at that.
The FDC is already looking at the relationship between Microsoft and open AI. The concern is there's innovation happening in artificial intelligence, and if you have combinations between the biggest players in tech, the most powerful players in tech, is that going to thwart innovation? And is it going to thwart competition?
So how do we think the regulators might look at something like this.
I think they need to figure out whether the talks are going to come to fruition first and foremost. We're definitely sending out feelers throughout the Bloomberg organization to figure out to figure out what the next step is and to assess what the argument would be for and against.
If you're a regulator, but if you're ready to think about it, if you're at the DJ, if you're at the FTC, do you want to see more concentration, more collaboration between the two most powerful companies in the world, or do you want to say to them, Apple, go and build your own.
How long does this relationship last? If Apple finds a better partner, could they drop Google like a hot rock.
We know, as we reported, Apple held talks with Open Ai. We also know that the talks that are existing now are the ones between Apple and Google. Could you kind of rekindle something? Could you start something up with somebody else? I think the sky's the limit here. Apple needs something big. They need something new. They need the app. The iPhone has been around, as we all know, since two thousand and seven. They need a big new thing. They need
that next big thing. Remember they were working on a car. As Bloomberg told you a couple of months ago. That project is actually it's just been a few weeks. That project is now being put being being being killed. They're going to redeploy some of those people into AI initiatives. But they need that next big thing, and weaving AI into your iPhone could be one of them.
So Apple also has a developer conference. I believe in June. Tom and a lot of folks think that maybe that's the time Tim Coast can get up on stage and say here's our AI play. Is that is this part of it? Is this It seems like, as John was suggesting, this is kind of admission, we don't have that big a wow moment for you. How are you thinking about that?
It takes a lot of time, It takes a lot of people. It takes a lot of resources to build these large language models upon which generative AI tools are based. Right, open ai was not created yesterday. You know, they've made a big splash in the last year, but that was years in the making. Microsoft's relationship with open ai works to their advantage. Google has been working on its own generative AI technology for many, many years. That was not
top priority for Apple for all this time. They've been working on the phone, They've been working on the watch, they've been working on the car, They've been working all these things that we use and are very lucrative for them and are making them one of the biggest and most valuable companies.
In the world.
But this was not the biggest area of concentration for them, at least not as much as other companies. It takes time. My sense is you can you can, even if you haven't nailed down all of your details on a relationship what like this, you can still use your developer conference to drop hints, to say, here's what's coming down the pike. Here's a taste of it, even if it's not completely They like to have stuff that's pretty baked before they
start talking about it publicly. So I don't think they're gonna jump the gun here, but it would be nice to have this in your back pocket to at least drop some hints.
Okay, so what does it do to my iPhone? And do I now have to go out and buy a new model iPhone? What does it do for sales? And you know, what's the practical impact for an iPhone user?
Look, we're already using our phones for virtually everything throughout the day. These are like, it's the one thing that you would take if you're running out of the house with the fire right you know, it would be things like creating images, writing essays, the things that we are already using tools like open AI for. Could you more easily incorporate those into your iPhone so that you don't have to fire up the laptop, so that you don't
have to delve into a different app. Could you weave this into the tools that you already have right on your phone It's.
Not like five G like everybody told me I had to upgrade my phone to go to five G. I don't even notice it. It's like, I don't know what this is different.
All right, Tom Giles, thanks so much for joining us. Tom's based in San Francisco. We got him in your four weeks. We pulled him into the studio here, Tom Giles, Bloomberg News, Senior executive editor for Global Technology. There we go. He's got a whole bunch of great technology reporters on his team, and they're doing some good stuff.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Apple card Play and Android Otto with the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa play Bloomberg eleven thirty.
Let's talk fixed income, shall we Let's go from skiing to the bond market. Ur J Gallow he could do that. Senior portfolio manager for fixed and fixing. It's Federated Hermes joining us via zoom here. Hey, you know RJ. Since the last time we spoke to you, yields are moving higher. Here I guess the market's kind of losing its enthusiasm for I guess aggressive rate cutting. What do you make of this market?
Well, it's good to see you again on YouTube. I would say that the market ended twenty twenty three, which seems quite a while ago, but it wasn't that long ago when the markets were priced for almost seven eases in the calendar twenty twenty four, and the markets had just gotten way ahead of themselves. There was excessive confidence at the time that the dubvish tone of the December FMC meeting opened the door for the following argument. Inflation
will continue to fall. Therefore, the Fed must ease nominal rate targets so that real rates, real policy rates don't inadvertently or undesirably rise. For that to work, you needed inflation to continue to fall, and that just hasn't happened. The inflation data has been sticky or buoyant at well above target levels. The economic data, both jobs and growth
data have been pretty good. Not as good maybe as some prior quarters that were stronger, but still nowhere near probably a sufficient slowdown to get the Fed to be concerned that we're heading towards harder landing.
Or something.
So since the data didn't cooperate with the argument that the FED had to ease to prevent real rates from rising, the Fed didn't have to ease, and that came out of the markets.
Now we've got a.
Little less than three eases priced in cumulatively up until the December twenty twenty four meeting, very consistent with the Fed's dots, just in time for the dots to maybe change.
Okay, what you got to explain to the dummies out there, including me, the real rate? Just how significant that is in terms of doing some or all of the heavy lift.
It's a good question, you know, real rate.
Simply take a nominal yield or a nominal rate target, use the upper end of the FED funds rage right now at five point fifty, and subtract off, you know, a four percent inflation rate, you've got a one point five percent real rate. If you subtract off a three percent,
you've got a two point five percent real rate. If inflation keeps going down to two and you don't move your five point fifty upper end of your FED funds target, you know, the Fed now has a three would end up having in that scenario a three and a half percent real FED funds rate, that's historically pretty hot. That's the kind of constrictive or restrictive policy that could precipitate a real economic downturn, a recession that the FED doesn't want.
But again, they don't need to move. If inflation itself is stuck.
In the threes, you know, generally, looking whether at the CPI or the or the PC deflator, then the Fed might not need to be in such a rush to reduce rates to prevent that real rate from rising. Secondly, I think it's important to note that, you know, the Fed doesn't really know where the equilibrium Fed funds rate is the long term dot, and of course we're going to get updates on the dots this week.
Is it two and a half percent?
The market if you look at so for futures out three to five years, the market seems to think that the that the long run equilibrium FED funds rate is more like three and a half or three seven maybe. So the Fed isn't going to ease based upon a model if the data is still strong, labor markets tight, and inflation not falling rapidly.
All right, So r J, given that kind of background, top, how are you positioning your portfolio, what are you telling your your teams to really look for sure?
Sure, so first of all, looking at sort of the different lever levers than an active manager, which is what we are can can do in a fixing income portfolio. On duration, you know, once the market started to get sort of disabused of the notion that we were going to get seven eases, you know, we waited and took a tactical long at times, we've gone back to neutral. We went back to neutral before the most recent selloff.
We took a little bit of profits on what we had as a very you know, temporary long position.
So that's worked.
We're at neutral now heading into the f MC meeting, we're apt to stay there. I think the Fed there is some risk that the Fed will move the dots up a little bit. Abgail was mentioning that could be a challenge for risk assets. We think that could be a challenge for rates to get a little lifts to the rates market. So that's on the duration front. On other levers that we can push and pull and fixed income. When it comes to credit sector allocation, we're overweight mortgages.
We think they still look cheap we'd like the extra carrier given us. We're much more cautious and underweight high yield corporates. We think that the spreads are very tight there, compensation for the risk isn't so great. The fault risk still rising incrementally. That's not to say that we're underweight high because we think a recessions coming. It's really a question of valuation and compensation for risk at the current levels.
We're a little more.
Constructive on ig Yes, we're a little underweight, but not as much so, and we've added to emerging markets. I think it's true that the market's base case of a soft landing has become more compelling. If the FED walks back tightening easing expectations aggressively, then I think that could be a challenge for risk assets and it would start to raise questions about whether or not the Fed can
ease into that soft lanning. What we think the Fed is going to continue to signal easing just less than they have been, and it's quite possible that they might be considered the long run dot right now with the way the markets are priced, that might be an opportunity for them to walk through that door and maybe move it from two to fifty median, maybe a little.
Higher two seventy five or something like that.
So we're watching that more of an academic exercise maybe, but that affects expectations in the market.
Why has the last mile been so difficult to get to the target?
I think the inflation problem which was so challenging, which caused the FED to completely abandon the transitory argument and get very aggressive, historically aggressive in the pace of tightening. That inflation was born of a surge in aggregate demand amid numerous supply problems, supply shocks, supply chain kinks, inadequate labor supply.
So when demand rose for many things coming.
Out of the pandemic, especially services, travel and things like that, and we had such constrained supply, including labor supply, the only answer in any normal economic model is price must rise to invite entry, to get people back to work, to get firms to work out the kinks. So that supply response is the first order aspect of the improvement that brought the inflation down that has been addressed.
Now.
I think we're in a world where inflation expectations are relatively well contained and benign, and that's because the Fed acted as aggressively as they did.
Had they not done so, inflation expectations might have release searched.
This last mile of getting inflation back to target is tougher. It's we have a better functioning economy, we have a tight labor market. Sort of more traditional non dislocation models of economics would suggest that maybe the economy does need to slow down in order to get inflation to continue
to fall. The argument that the first mile was successful on supply is very true, but the last mile might require more of a slowdown, and that suggests the FED might not ease as aggressively as once thought.
Ye all right, r J. Great stuff. Has always really appreciate getting some of your time, r J. Gallow He's a senior portfolio manager Federator Hermes. Joining us via.
Zoom You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on fo car Play and then with the Bloomberg Business app. Listen on demand wherever you get your podcasts, or watch us live on YouTube.
John, I know you're not on TikTok.
Can you just imagine, like the intersection of John Tucker and TikTok? What a disaster. That would be stop laughing, Lisa.
Are you aware that there is this thing called TikTok.
Yeah, Charlie Pellett in the office shows it to me all the time, so it's great, look you want videos of I'm like, this is the stupidest thing I've ever seen.
But the big issue here for a lot of folks is the ownership of TikTok owned my Byte Dance, which has Chinese ownership. So now there's a whole thing about do you want these TikTok company and Byte Dance having so much consumer information for Americans? And that's kind of the big issue here. So Matt Sheltenhelm he joins us. He's a mediate litigation analyst, so he kind of does all the legal side for all this stuff in the media telecommunication space. He's a Bloomberg intelligence. He spaced down
in Washington, DC. Where else? Hey, Matt, give us the latest on what's coming out of Washington, either from a regulatory standpoint or maybe some movements up from Congress about either forcing Bite Dance to cease operations here or you know, maybe force the Chinese to sell it. Where are we?
Yeah, Paul, So some surprising momentum here on this issue. This first came up about a year ago in March when you when you'll remember, Congress had had a big hearing with with TikTok. CEO showed Chew. It was really a tough hearing, and I think a lot of people thought it might lead to some drastic action sooner rather
than later. And then everything slowed down. But then sort of out of nowhere, about ten days ago, the House introduced a new bill, then quickly passed that bill out of committee, and then passed it through the on the
whole House floor by a huge bipartisan majority. And basically what this bill would do, if it were to clear Congress and President Biden were to sign it, and if it were to get through the courts, is to say that unless Byteedance divest TikTok to a less sensitive owner, that the application couldn't be be hosted by Internet hosts in the United States, it couldn't be on app stores in the United States, and there would be significant financial
penalties not for TikTok, but for those companies that would host it or that would include it in its app store if they were to ignore the legislation.
Well, we'll put on your Congress watching half for a moment. What's the hold up in the Senate? What's the objection there?
Yeah, So, I mean it's amazing to see the bipartisan support this has. You don't see legislation move three hundred and fifty two to sixty five like we saw last week in the House. You've seen on both sides say they want this. You've seen Chuck Schumer in the past, the Senate majority leader, say he likes the idea of requiring a change in ownership of TikTok. So that's exactly the question now. I think the hold up, though, is, Look, this is an election year, and even though you've seen
President Biden say, look, get it. You know, if it comes to my desk, I'll sign it, he also has one hundred and fifty million Americans using this app, many of them young people, at a time when you have an election coming in November, when every vote matters, in particular young people to President Biden. So I think this legislation has a chance. I only give it a thirty percent chance though this year, and that's exactly because of
the political risks of November. At a time when President Biden doesn't want to risk a potential backlash from those young voters. The Senate is controlled by Democrats. Senator Chuck Schumer is the majority leader. He decides how quickly this moves, and I think the looming election is a reason to move slowly. But after that, after this election is out of the way, I'd be a little more nervous if I were TikTok.
So do we have any clear sense of what TikTok and Byte dance, how they're approaching this at this point, like what would they presumably do?
Yeah, so that's a great question. I think we've seen indications from from China that it would not be willing to support a divestiture. Now that could be could be posturing on that end, but I think there's the possibility that if the US passes this legislation that requires a divestiture or else there's an effective ban, there's a real possibility that China wouldn't allow any sort of divestiture like that to happen. So you're inevitably in the result of
of a band. Of course, you're also in courts as soon as Congress passes this, and you saw Montana pass the TikTok ban last year it got tripped up in court. You saw President Trump before he was against this, he actually signed a band of TikTok that was tripped up in the courts. So once this passes, you still have a tough court challenge coming. And so TikTok's first line of defense is going to be to see over this all right.
So if this ultimately goes to the courts, You've got to explain to me, what's the legitimate national security threat of me going posting pictures of myself or a video of myself, you know, redoing my bathroom or Lisa putting on her mas scare.
That's exactly the question the courts are going to be asking. And one of the curious things about when the House voted on this in committee by that fifty to zero vote, is that they went into closed second law.
Some audio, Matt Shuttingham, we lost some audio, young man. This is when one of the first things I did with Matt, we were seeing clients six seven, eight years ago, we found out he had no cash in his pocket and say, why do you have no how do you walk in you live? You're up in DC, says nobody carries cash?
What?
Yeah, everything's on your phone. I'm like, so you don't have it was just crazy. That's when I first kind of came into this. The kids don't have cash anymore so so anyway, so that's kind of my ment shutting holm story. But again, this is a big thing for TikTok because.
Oh he didn't go away. Oh is either so your I think your earpiece cut out. Oh you're being hacked by the Chinese apparently. But Matt pickup, you were talking about the I was asking about what in God's name is the national security threat that's posed here that the courts are ultimately going to have to look out and determin We've got about a minute.
Left, absolutely so. So the House went into closed session in committee you when it talked about this, so so they kind of they were secret on the concerns that motivated this. But then after they had that closed session, all of a sudden it was fifty to zero voting
and support. So we don't exactly know. I think the concern is that if this data is you know, not just you looking at your you know, cat videos or whatever it is, but you know, one hundred and fifty million Americans everything that they are looking at all of this flow of data going to China's let's China take a look at it. There's also a concern on the propaganda side that if China can impact sort of the flow of videos, can they start to shape thinking, and
in particular in young people. So there's two sides of the concern here, looking at the data about how we're using it, and also influencing thought potentially by you know, framing messages, by using an algorithm to promote certain ideas.
I know I'd like to shape the thought of young people at this point, especially that time is pan the youngsters in my house.
So Matt, following off on my story, how much cash do you have in your pocket? Today?
Oh? Man, I see, I'm not walking around New York today. You taught me when I'm there, I'll be ready today. I'm still I still just got my credit He's.
Got the credit cards and the phone. So that's how I do good. All right, Matt, thanks so much on this. Matt is our go to guy and all this litigation stuff about anything on the media entertainment front, and there's a lot of litigation out there, and Matt's the attorney that follows that. For Bloomberg Intelligence. He's based down in Washington, DC, and investors really value his research on some of these big, big issues, and TikTok is a big, big issue.
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Another way to play. I'm still going to broadcome sucks up. You know, it's doubled in the last year. I mean, that's another way. Maybe next guests can shit some late on that. Michael Cogino joined US president and portfolio manager. The firm is a permanent portfolio family of funds, joining us from San Francisco via zoom This West Coast things. People. They know what's going on out there and with the technology. All right, Michael, give us your view here. You've been
doing this for a while. What do you think when you see a company like in Vidia and the growth is its experience and the stock price performance. What is an old pro like you think about that?
Yeah, good morning guys.
Well you know, it's funny you mentioned in Video and Broadcom because we own both, and look, I think there's a reason investors are coming to these companies, you know, the Magnificent seven four, whatever you want to call them. Profit growth is there, revenue growth is there. Outlooks are strong,
There's a lot of demand in these places. And so in an environment where there's some uncertainty with the broader equity market, it makes sense that investors are going to gravitate towards companies that are showing results Facebook, I mean, you know whatever, And so what that has resulted in is a little bit of upward concentration, obviously, and it really is named specific as to valuation. I mean, some would argue in Vidio certainly is not cheap, it's above
a market multiple. Same thing with Broadcom. But in the tech world, you know, given the growth rates, given the execution on the growth rates, they're not that unreasonable. Maybe a little expensive, but in tech, you know, you're looking to grow into a multiple overtimes. So it really depends on the investor and how much they're willing to pay.
All right, to stretch a metaphor in terms of your investment philosophy, you're driving a car in the winter, you put snow tires on. If you're in the rain, maybe rain tires. You're more of an all weather kind of guy, aren't you.
Yes, yep, that would describe us. We're very diverse. I mean we run for strategies and equ strategy and two fixed income strategies, but we're most well known for our all weather multi asset permanent portfolio, which is a big diversification play. It assumes the investor can't predict the future accurately.
It wants exposure in a number of areas so that the investor doesn't have to predict the future, and so we invest in not only US and non US equities in a variety of sectors, but also commodities, real estate, precious metals, and like I said, fixed income US and non US.
So, Michael, given that broad exposure to different asset classes, what's kind of your allocation these days in that fund in terms of the various asset classes, and maybe how has that changed over time?
Well, we have target weights in six broad categories twenty percent gold, five percent gold, and silver twenty percent five percent silver. Two equity sleeves, a hard asset sleeve with natural resources, commodities, energy, et cetera, fifteen percent, growth stocks fifteen percent, thirty five percent, and what we call dollar assets, which is investment grade debt, treasuries, agencies, other high quality debt, and ten percent in Swiss frank assets typically the currency or the bond.
As a non US play.
We are currently and we stay fairly close to those targets, but we're never right on them.
It's not an indexing methodology.
We're currently overweight gold by a couple of percentage points, We're overweight equities by several percentage points, probably a little bit underweight fixed income, and in a nutshell, that's and precious metals. I mentioned gold, Yeah, silver, we're probably right around target weighting.
How much of that is downside protection.
Depends on your perspective.
I mean, some would argue that the precious metals, probably the Swiss currency and Swiss government bonds, maybe some equity names would be considered defensive.
So from our perspective, we look at it.
More as a broader, comprehensive, comprehensive definition of wealth. So you know, the average investor their four O one K, maybe they got a brokerage account. Their residents maybe a second residence. But what we're trying to do is give exposure beyond that commercial real estate and a variety of sectors,
for example, commodities, industrial metals, energy, precious metals. In that way, the definition of wealth is broader, and we believe that the investor is kind of under exposed in a broad definition of wealth if they don't have exposure to some of these asset classes, because they all do impact the
financial and economic system and thereby asset prices. So, you know, we would argue that this sort of comprehensive diversification is a great addition to somebody's already existing typical you know, definitions of wealth.
So what's the biggest driver of your portfolio? What are you looking at the most? Is it defed and what they're going to do over the next uh cover several cycles or what else kind of impacts your portfolio?
Well, it varies from time to time, but right now, certainly it's the FED.
You know, I think the consensus is they're done, if not close to done. The big question seems to be when will they start cutting by how much? Or even you know, with the data recently in the last couple of months, here will they cut at all, and I think there's smart people on all sides of that debate.
We would sort of take the position that.
We're not going to try to predict the outcome, but we're going to have investments in a variety of areas so that regardless of what happens, we've got some winners and maybe mitigating losses. So my own opinion on this is that, you know, the the economy is growing, we're not in a recession. We may have a soft landing or no landing, or we may be inching to some
sort of slow down. We just can't tell. The growth numbers at the moment, and the low unemployment with consumer spending allow the FED to be cautious and they don't have to start cutting rates right away, and we could exist in a higher for longer environment and still grow.
Go back to the nineteen eighties, you know, when inflation was coming down from really high levels, we still had a period where the inflation rate was mid single digits coming down, and the economy still grew during a large part of that decade.
So it is possible now.
Circumstances are different nowadays, and the rates now from a perception standpoint, are a lot, how higher relative to what we lived with in the last twenty years, so you got to.
Take that into consideration.
But the current economic factors are allowing the FED to probably watchful weight. Obviously growth employment is a big factor we're looking at, because if that falls over, I think you do move very quickly towards a slow down. You've got the presidential progressional elections coming up, We've got geoptical uncertainties in several areas around the globe. So we are looking at a lot of issues and there are a lot of questions that need to be answered which argue for a diversified approach.
All right, Michael, thank you so much for joining us. We really appreciated. Michael Cogino, President, portfolio manager of the Permanent Folio family of funds.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Apocar playing and Broud Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts, or watch us live on YouTube.
NYCB New York Community Bank down another seven and a half percent today, down sixty five percent year to date. Is it an NYCB problem or do we have some more systemic problems for some of the regional banks. For that return to Herman Chen. He covers all the regional banks for Bloomberg Intelligence. Let's start first, Herman with any jointions here in our studio. NYCB, what's the news today pushing the stock down?
Yeah, so NYCB caught and analyst down grade earlier this morning excited ongoing credit issues with potential losses in regulated and apartment commercial real estate really hampering the earnings power.
For the bank.
So let's get back to the forty thousand foot view. The smaller banks like New York Community Bank in trouble because of real estate, whether it be commercial or other types of housing. Explain how that all works. They lend out money to a building a commercial real estate, and you know it looks like they don't have tenants anymore, so they the loan doesn't get paid back or what. Yeah, that's right, Talk to me like I'm your German Shepherds.
So there's two issues you can look at that.
Look at all these Class B and C type office buildings here in New York City has a good example where the work from home phenomenon has left a.
Lot of them has not.
Brought a lot of cash flow in for these owners of these properties, right because there some tenants are leaving. There's retail space that's leaving, so that's exacerbated some of the issues with cash flows for these borrowers as they refinance over the next few years. And you've seen that already where higher interest rates and the lower cash flows
is a bit of a double whammy for them. So it's harder to refinance and they don't have a lot of cash coming in, so it's difficult to repay these loans.
And it can in some circumstances they just walk away from the building.
There's some circumstances that we've seen, like larger property owners like Brookfield and Blackstone have walked away from buildings that just aren't tenable anymore. If they didn't walk away, there would be more losses going forward. So they make a calculation and say we're giving the keys back because it's better for us economically to do that rare than supporting this building that has wee cash flows.
So I'm looking at this spider s and p Regional Banking ETF. It's off one percent today, off nine percent year to date, but up thirteen percent from a trailing twelve month basis, they did kind of come off the very very bottom. I guess is NYCB. It sounds to
me it's specific to NYCB okay right now. But on the flip side, I also understand from smart people like you that if there to the extent there is commercial real estate exposure, it is primarily with small and mid sized lenders as opposed to JP Morgan's or the Bank of Americas of the world. That's right, Okay.
So there's two issues that we have pointed to in our research, the actual office and commercial real estate exposures for the largest banks like JP Morgan, and you can throw in the largest regional banks like a US Bank, PNC, Trust, Fifth Third.
Et cetera.
There their exposure to commercial real city is much smaller compared to smaller regionals and community banks, and growth in commercial real estate since the pandemic has been largely focused on the smaller banks, and for the largest US banks it's grown about two or three percent since the pandemic, whereas it's upwards of twenty percent for a lot of the smaller banks. So the concentration risk is more focused on the smaller banks and you've seen that the uptail nicely.
If you compare the performance of the BKX, which is the index for the largest banks, versus the KRE, which is the index for the regional banks as a whole, there's been a divergence over the past year today.
So as the situation gets worse, do the regulators who oversee the banks, do they increase the regulation, therefore making the situations spiral even further.
What you've seen some tougher regulations, at least proposals come out since the SVB first Republic signature failures last March, and that's still going through, you know, the sausage making process at the Federal Reserve, and there's been pushed back by the largest banks because they think the regulations.
Are too onerous.
So there and Palace talked about saying that as it's currently proposed and may not pass, muster for the Fed, so there's not one hundred percent buy in from the top of the Fed. So that means that there could potentially be some watering down of those regulations.
So if I'm an analyst, is it fairly easy for me to look at a bank and say how much commercial real estate or how much maybe office real estate exposure. It has visibly everybody else and I can mark that stock down or up accordingly though we are Are we already there?
Yeah?
We are.
I think we've seen that in the trading action since NYCB reported their fourth quarter results that really surprised the street that the industry has been pretty resilient, and I think everybody has started to realize that not every office and not every apartments lender is the same, and so there's been more discerning trading for a lot of these regional banks, which is good because last March it was all regional banks are going to fail, and now we're not in that sort of scenario any longer.
Unless we heard it was Steve Minution to the rescue with the billion dollars from other investors. Right, where's that stand? And is a billion dollars that not for?
Yeah, that's that's the ultimate question, right. So the billion dollars injection capital injection really and stilled a bit more confidence of the bank. It brings their capital ratios back to peer levels after the loss in the fourth quarter. It gives them some room to build up their bad debt reserves for future loan losses in their apartment lending business.
But is it enough.
It's still up in the air. The downgrades sort from an analyst today pointed to there's going to be credit losses, and there's there's a lot of uncertainty with their earnings because there's going to be higher expenses. Their margin is going to be compressed over the next several quarters, and they're not going to grow their loan portfolio, they're actually
shrinking it. So lots still lots of questions and really it will depend on where interest rates go and how their credit quality holds up, and not a lot of answers at this point.
So for the quality smaller regional sized banks are, is there smart buying in those things at the moment, longer term buying or just that trade off the bottom or.
Yeah, I think you've seen some stability for a lot of the banks, the smaller ones that still have room to perform and outperform with credit qualities is going to be the keynot the bank. Investors aren't really focused on growing the balance sheet at this point. It's more do you show stable credit performance not a lot of charge offs, and banks that have historically had strong credit on the that front, like a Western Alliance, M and T Regions,
et cetera. Those banks seem to be better positioned for the current bathroom.
How many people do we know who are looking for housing in New York and can't find it and you look across the street, Oh there's a vacant building. Well, there's a vacant building, whether.
There's something not good.
You know, it does not compute.
I know, can you convert retail space and office space into residential And what the experts tell me is for some of it you can, But.
I mean you just think about every apartment would need its own plumbing. In a commercial building, maybe there's like one or two bathrooms on each floor.
So I don't know, I don't know, but that's an infrastructure. It's a lot tougher, all right, Herman Chan, thank you so much. We appreciate it. Hermit Change. He covers all the regional banks force for Bloomberg Intelligence NYCB getting a downgrade from Raymond James today that stocks off seven percent, adding to the woes there NYCB.
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