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