Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside my co host Matt Miller.
Every business day we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market moving news.
Find the Bloomberg Markets Podcast on Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. Our next guest, I guess I got to call him like my favorite economists, but that's not saying a whole lot quite frankly, but he is good and we're glad we got a few minutes of his time. You know, Carl Ricadona, he's BNP Perry bott and now I trained him up here at Bloomberg Intelligence for many years. But he's pretty solid. Carl, What are you looking at today?
You know, we just heard from the good folks Dana Peterson at the Leading Economic Indicator of the Conference Board. They still have a recession call out there, how about you guys at ben P Perry Bow.
Well, Paul, I should back that up. You taught me everything I know. Of course, thanks for that.
I'll start with that.
But in terms of the recession view, you know, we still see some pretty ominous factors looming on the horizon. You've been talking about the resumption of student debt payments. Now, you know, there may be some legal room here that you know, you have a twelve month grace period, you know, to start and whatnot. But if we just look at the you know, the view from sixty thousand feet, the price tag on that is about one hundred billion dollars annualized.
So look back to Q one when everything went haywire with the cost of living adjustment and Social Security that was also about one hundred billion dollar price tag. So I'm sure they're not equal, but when you look from a you know, when you're squint from a distance, there are you know, similar sizes, and so all of the things that went up in Q one, discretionary spending and whatnot, we could see kind of a similar fallout in the Q four period.
But on top of that, you have, you know, a very divided.
Government that has to pass twelve appropriation bills by the end of this month, by the end of September. Rather you know, that seems very unlikely, so there's a risk of a government shut down. Then the excess saving story we've been focusing on this. San Francisco FED wrote on
this recently. Those savings are rapidly being eroded. You see that in the retail earnings you discussed in the earlier segment, where Target is noticing that, you know, price sensitivity of consumers in Walmart sees a lot of the higher end consumers walking into Walmart to go after those bargain prices and whatnot. So you kind of see that playing out,
you know. So there's a bit of a perfect storm I think coming about in Q four, which still makes me worried about elevated recession risk in Q four and into the kind of first part of next year.
How do you swear that away when a lot of this data still is pretty resilient if you're looking at retail sales even the Atlanta Feds GDP now for the current quarter up around five percent, and when you're seeing talking about Walmart coming in and better than expected outlook
on the consumer. As far as you talked about student loans, I mean, is what's the main catalyst here to really weigh on consumers when we're looking at the difference between spending when you're talking about obviously goods versus services.
Well, I think the GDP tracker in the you know, the early part of the quarter can often go for you know, a real loop, and I think that's what we're going what we're seeing at the moment. I highly doubt we're growing at five percent in the current quarter an inflation adjusted terms. So you know, I value the Atlanta Fed GDP now tracker.
It can be volatile follow it, but.
It does move.
It does move over the course of the quarter. That's not unusual, and so I do think we'll see some moderation in that in that indicator over the course of the quarter. That being said, there is a theme of resilience here, whether it's the labor market or consumer activity and whatnot. But you know, you always have to be looking forward, and you're hearing those anecdotes of price sensitivity
from consumers. So the real test will be, you know, if this can hold out over the course of the quarter, or if July just happened to be a good month for retail, whether you know, whether it was driving people into shopping malls or Amazon Prime Day or a lot
of these factors maybe just one off developments. When we kind of step back and look at the macro fundamentals, the broader GDP trends, So not the quarter on quarter change that we see in the GDP now forecast, but rather the year and year rate of change is slowing. What does disturb me is GDI. So gross domestic income, which in a perfect world should track in lockstep with the GDP. But you know, the guy who taught me everything I know, Paul Sweeney, you know, don't live in
a perfect world. And the gd I numbers look pretty bad. So gross domestic ink, well, first of all, profits are slowing and gross domestic income looks pretty lousy. We'll see the next print on that when we get the second print for Q two GDP. But GDI is a disturbing trends, So there's there's definitely fodder for both sides of the debate here, and I'm not convinced of the reacceleration narrative just yet.
We've certainly seen Carl over the last I don't know, a couple of weeks, some really disappointing economic news come out of China. How do you kind of think about that as as you think about the impact of the US economy.
Well, I you know that China's obviously a very important trading partner, and global commodity prices are very sensitive to the health of the Chinese economy, and those commodity prices impact the US inflation outlooks. So you know, we're definitely watching the situation very closely and trying to understand what's happening, you know, in the kind of immediate reopening after COVID and then you know, where things settle there, there seem
to be some key differences. So, you know, in Europe and the US, we saw a lot of pent up savings, in pent up demand that really led to the you know, kind of revenge spending and house price appreciation and and you know demand for you know, for a lot of
consumer spending categories. It looks very different in China, and we're you know, we're seeing that play out that the reopening of the second largest economy in the world looks very different than, you know, than what we've seen in the US and Europe, and we're seeing that pass through to supply chains, and this is feeding into an inflation
narrative of of deceleration. But our view has been at BNP for quite a while that the last mile is going to be where, you know, where the real toughness comes out and the real stickiness of the inflation data is apparent, and that's going to mean that this FED can't you know, we'll have a course correction on the the immaculate disinflation narrative, and the FED is going to have to remain vigilant in its inflation fight to get
us all the way back to two percent. It's easy to get from nine percent down to six, but from six to four is harder. And getting from four to two is where will really take some softening of labor conditions and some of the categories that have been sticky to to really move lower.
All right, you brought up the FED. We do have Jackson Hole next week. How do you view this and what this could potentially mean for their signaling ahead of that September twentieth decision.
I don't think they're going to signal much for the September decision. Of course, they'll be asked in the you know, the press conferences and media exchanges and whatnot what they're thinking, and I think they'll give us the you know, the generic FED answers of well, there's more data to be seen, so we don't want to cast a judgment so we.
Did get the employment Costs Index CPI PPI and then PCE since the last decision. So it feels like those FED minutes we got yesterday might be a bit backward looking, right.
That is spot on analysis because people are focusing on some of the hawkish language that was in the minutes where they said they're still upside risk to inflation and therefore we may need to do more. We have to remember they wrote those words, and then we got a cooler CPI report, cooler ECI report, a still hot but cooling trend in the labor data, right, so that dates
some of that language. And I think the more important takeaway from the minutes was that they're looking at this in a very two sided fashion now, is they assess risks for the outlook doing too much but also doing too little, Whereas before they were always kind of worried they were behind the curve and we're just focused on catching up. So this is a different, more thoughtful, more
data sensitive FED going forward. You know, I think this may mean that they're on hold, and in fact, they may have been at the peak rate of the cycle at the July meeting and they're done now, even though they don't want to say mission bump right, all.
Right, Carl, thanks so much for joining us. Always always appreciate getting your perspective. Your analysis called wreck Don one of the best. He's a chief US economists at b n P. Parrybottle.
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Here a Bloomberg. We love talking about central bank activity. We're all over that stuff. Today we're going to focus a little bit on the Bank of Japan, and we have a great guest to help us do that, Regina Schlagger, director of Central Bank Policy Research at SGH Macroadvisor. She joined us live here in our Bloomberg Interactive Broker Studio.
I have to admit, Regina, of all the central banks and probably least comfortable or knowledge about what they are doing, so just give us a sense of what the boj has been up to really over the last several years and kind of what you expect them to do going forward.
Sure, Thanks Paul, thanks for having me, and nice to see you both this morning. So the Bank of Japan has been somewhat of a laggered in terms of central bank policy tightening over a recent recent couple of years, and so markets are quite focused on the timing of their transition to Titan pol see, particularly with respect to transitioning out of what they have had in place now for many years yield yield curve targeting, which is them targeting the ten year yield, and so they have recently
shifted toward more flexible arrangement or regime with respect to yield curve targeting, which markets are obviously taking as a signal that they are on the move if you like, and soon to be thinking about higher interest rates at some point. Markets intensely focused on the timing of that and taking every signal they can from the economy to try to gauge when they're likely to move.
And very different like you're seeing. If you juxtapose that against the Federal Reserve and other global central banks that clearly have been on this aggressive tightening cycle for over a year now, how do you think that impacts the global economy? Because Japan is the third larger economy behind the United States and China.
Absolutely and as you rightly infer there's a huge yield differential now between the US and Japan, and so one of the things that we've become aware of is that officials officials in Japan are you know, waiting for the FED to be done, if you like, with respect to their tightening cycle, so that they can start to think about how they will move on their own rates and
narrow that differential. They have a currency right now which is at levels that they're not entirely comfortable with, right, so the end breaching one right, right, So this is a this is a policy driver for them in the sense that they have now i think admitted that it's a big factor in how they're thinking about how to transition smoothly out of this ultra easy policy that they've had now for a very long time. And I think that you know, really that rate differential is not going to narrow.
Until they actually moved to move on rates.
So the yen bridging it's now around one for six against the dollar. How much does that stoke expectations that it could prompt the Bank of Japan to have more intervention from here.
Right, So that right now there is a lot of speculation that they could come in in fact overnight. I was even reading about expectations that they could come well, well, Japan is asleep essentially and do some stealth intervention. There is a lot of focus on when and how they'll
intervene and at what level. I think from a broader perspective that whatever that intervention, whenever that intervention is and at what level, it's not necessarily as important as what they do on the monetary policy side.
And so the impact on the market.
I think of any intervention BOJ official sorry ministry finance officials execute is not It has a more transient effect I think on markets. Then does the speculation about what they'll do with interest rates.
And when we've had a change in leadership of the Bank of Japan, just talk to us about that, what that means and going forward.
Yeah, I think this is a really interesting element.
I mean, we're always at pains to try and discern these differences in personality when there's a change in leadership at a central bank. In particular, I think that the exit of the former Central Bank of Japan governor Couroda, you know, ushered in this succession.
Of a new governor that comes.
From a school of thought or an academic background where he relies more heavily on forward guidance. That's more the Bananki Dragi school of thought. And so I think that one of the elements that's really obvious to me through this transition of the leadership is the extent to which he has been starting to impart that forward garden. I think that he's going to rely quite heavily on signaling Rhetorically, the bank has held quite firm to.
This ultra easy.
Policy, but you can detect little nuances in the way he's shifting the language so that markets are understanding that the bank is on the move.
And also will have another update when it comes to consumer praises. And if you looked at the latest data from the prior month, it did advance at a faster clip. How do you view the direction of where those prices could be headed from here?
Right?
So this is a really another really interesting element because the headline rate is expected to show.
That prices fell in this report.
That would be consistent with the boj's own forecasts.
They expect in fiscal.
Year that inflation will have risen, but in the next fiscal year they anticipate that inflation will slow to under the two percent objectives.
So they the same. What is this two percent number? Everybody's got a two percent invation?
Yeah, the magic two percent.
I never heard it from New Zealand in the nineteen eighties.
Yeah.
And then Bernaki, I.
Think Japan's on the two inflation watch as well.
They're on the watch.
So I'm looking at the ego function on the Bloomberg terminal and putting it in there for Japan. I guess the forecast is for CPI. I guess the headline year veer three point three percent, right, so getting there but not there, getting there but not there first time, by the way I've ever pulled up.
Thing.
Okay, and also on an on the line basis, I think that that that's the important number. You know, with X energy, they're very focused on what the core writ is doing.
Okay.
I have to get your thoughts on when it comes to this discussion. GP Morgan actually had a recent note about China's Japanification risks, So seeing similar concerns that Japan did in the early nineteen nineties kind of set the scene for us about how that worked and what that could mean potentially for China.
Well, obviously there is so much concern about China at the moment. It's it's you know, it's it's seeping into market psychology.
I think with respect.
To how it potentially impacts US federal reserves, future outlook and other economies, it's it's impacting the extent to which weeks we think that central banks might be done in their own respective titaning campaigns. But in terms of the Japan, you know, in terms of China becoming Japan, I think where some way off assessing that that is the decidedly the outlook for China.
Having said that, you know, there are.
Real concerns there, and I think that China experts more more a depth than I have voiced them for many years.
You know, when I started in the business back in the mid eighties, Japan was the bomb. If you were a US investment banker, you had to get a tour of duty in Tokyo. But that's not the case any for like ever for a long time. Give us suchest overview. What's the how do you think or how do comds think that japan economy will be over the next five or ten years.
Yeah, it's an interesting point. I like you Paul, you know, was in Japan around that time, and it was a global superpower, no doubt.
And since it's been in.
The doldrums obviously, I think that as they emerged from from what has been you know, twenty five year slump, the economy is probably not likely to see those heady days again to the extent that they did in the in the eighties and early nineties. That said, I think, you know, the Japanese officials have very long memories and they'll be very very cautious and careful about moving too quickly to curb any kind of ambulance in the economy for fear that they might be reverting back to inflation.
That's under too.
I mean, again, as you investment banker, there was Asia, then there was non Japan Asian, so basically it was and everything else. Right now it's China and everything else. So it's just how times have changed. For Ginis Schlager, thanks so much for joining us, giving us a view of that part of the world.
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So we've got one of the leading reinsurance companies here in our Bloomberg Interactor Broker studio. Juan Adrade, CEO of Everes. The based worlds Bermuda scam. But that's how these guys do it. One, he's here in our Bloomberg Interactor Broker Studio. One. Thanks for coming in, appreciate it. Thanks, talk to us about the reinsurance business. What's driving your business these days? I'm looking at your stock. It's a fifteen billion dollar
market cap company. You've got one eg is a ticker up about seven percent year to eight thirty percent over the last twelve months. What are the key drivers of your business?
Yeah, no, it's a fascinating question. I mean, if you think about the confluence of events that we've all lived through over the last few years, whether it's the pandemic, the supply chain issues, inflation, climate change, all of that is driving demand. And again, as you said, we basically ensure insurance companies. So when you think about what's driving
our business right now. It's the fact that these insurance companies are looking for protection for earnings volatility essentially, and so that increases the demand for our.
Product, and there's been a price correction in the insurance industry.
Why there's been a significant price correction, You're absolutely right, and it's really down to a supply and demand imbalance. The bottom line is, with all the storms and all the activity that we've seen since twenty seventeen, reinsurance companies have deployed less capital into the market, so that's constrained supply.
The other thing that's happened on the supply side is a lot of third party allocators, pension funds, sovereign wealth funds that used to put money into our sector have also out and so that's created a supply crunch, if you will, in the industry. But at the same time, because of inflation, climate change, all of these other things,
there's more demand. So there's basically a gap of roughly one hundred billion dollars between supply and demand, and that's what's created the price correction that really started at the beginning of this year in a pretty significant way.
Hey, on, when you bump into a climate change denier. What do you say to that person? I always say, like somebody when I bump into them, I say, go talk to an insurance company. They'll tell you if it's real or not.
What do you say, Well, I think that's good advice, by the way, because that is what we do on a day and day out basis. Look just look at what happened in Maui, and I think that's a perfect example of that, right. You know, the island had significantly high temperatures because of what's been happening around the world, drought which basically dried all the grasses, and then you have a hurricane that's turning off the coast, putting out
sixty seventy mile an hour wings. So once you get the spark that started this, and you got those wins, you get the fortunately the strategy that unfolded in Maui. And look, all of this is scientifically proven, right Wildfires, floods, droughts, all of that is directly related to what we're seeing. You know, one of the interesting statistics that's out there right now the ocean, whether it's the Pacific or the Atlantic Ocean right now, is that the warmest temperature it's
been since recorded history. That tells you something. Now, the endgame of that is that you're going to get more severe storms because they fuel off of the higher temperatures in the ocean. So what I would just say is look at the facts.
So are the insurance companies that you ensure, how is that reflected in their business? They I've heard like a lot of insurance companies won't even do business in Florida anymore. So how do you see that in your business? And I mean, are are you charging more for that an increase risk? How does that affect your business?
It affects us in a number of different ways. So yes, one is we're charging more. That's part of that price correction that we talked about. The second thing is we try to embed the latest science into our models to be able to do better predictions on where storms are going to develop, where they're going to hit the coastlines,
et cetera, et cetera. But the other thing that you're seeing right now, and you've seen the headlines from companies moving out of Florida A and moving out of California, there's also public policy issues that we have to address. I think the governor of Florida, and the legislature did a nice job with tort reform in Florida because one of their significant issues was not only climate chains and the storms that come out of that, but it's also fraud and abuse in the system, and so the governor
took strong actions on that. California is a different story at this point in time. You know, you have a lot of companies leaving the state because the market is not functioning as well as it should be. And at the end of the day, we all have shareholders or stakeholders and we're for profit business.
The Hawaii wildfires insured losses are estimated to be around three billion dollars. But at the same time, why is one of the nation's lowest rates when it comes to homeowner coverage just because it really hasn't had a ton of natural disasters. How does that affect insurers?
Yeah, it's a great point because that also goes back to Paul's question on climate change. Hawaii itself is not known as sort of a natural catastrophe hot spot, similar to when you think about Florida or when you think about California. What will happen as a result of this is prices will go up again, Right, A lot of claims will be paid. I think, as you said, it's about three to three point two billion in industry lass
that is expected to come out of that fire. So insurance companies will basically adjust their pricing because the risk is there.
Essentially, you guys are a global company. Talk to us about how business is different US versus outside of the US.
Yeah.
No, Look, I've spent a vast majority of my career actually working outside of the United States. And we are global. So we're the fourth largest property casualty reinsurer in the world. We have customers in one hundred and fifteen countries. And you know, our business is really a relationship business, and you really have to adapt to how you do business
in different cultures. Right, whether it's it's an Asian culture, a Latin American culture, where you know, before you do a deal, they have to understand who you are, they need to try us to you, et cetera. Whether it's in Europe in the US, you might be more direct, get to the bottom line a little bit quicker, et cetera,
but the issues are fundamentally the same. At the end of the day, we're ensuring risk, so we have to understand what we're taking on our balance sheet, what we price for it, and you also need to understand the geography, the climate, the geopolitical issues, regulatory environments, all that.
Sort of thing.
We have about a minute left. What's your thought on what the reinsurance industry is telling us on where the economy is headed.
Yeah.
Look, I think if you look at our industry, we're sort of a bright light in what's happening in capital markets right now. And I'll give your own example. So we just posted in the second quarter a twenty five percent annualized total shareholder return and a twenty two percent plus ROE and so that tells you sort of what we're seeing in the opportunities that are out there because of the uncertainty in the world right now, heightened risk environment,
geopolitical issues, climate change issues, et cetera. So we're pretty bullish about where the industry is going, not only this year, but well into twenty twenty four as well.
All right, one, thanks so much for joining us. Really appreciate you taking the time to come into our Bloomberg Interactive Broker studio. Juan Andrade he's the CEO of Everest, the tickers EG Everest Group, a New York Stock Exchange traded company. You guys have an investor Day coming up in November at the NYSEC, so that'll be big for you. Guys. Me we'll get you back into studio since you're gonna be back in New York. That'll be good stuff.
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All right, let's talk about commercial real estate. This is near and dear to my heart because I walk through Midtown, Manhattan every day, back and forth to Penn Station, and I'm first hand. I can check out what's happening. Our next guest knows about what's happening to Hassam Naji. He's the CEO of Marcus and Millichap, which is a New York Stock Exchange traded company. MMI is the ticker. He joins his live here in our Bloomberg Interactive Broker Studio. Sam,
thank you very much, which for joining us. All right, I walk back and forth twice a day Midtown Manhatan. I look up and there's a lot of empty space here. This is a disaster in certain big cities. We'll get to some of the good parts of commercial real estate, but what happens to the New York's, the San Francisco's. In reality, they're not converting all this stuff to condos. What do you think of? How is this going to shake out?
Good morning, Thanks for having me on. Great to see you again. It is going to be painful in the next two to four years, there's no way around it. But the bifurcation of what's happening with newer, high amenity office space versus older, obsolete office space is the story in that overall demand is shrunk. The pandemic has changed societal patterns that are not going to come back anytime soon.
We're seeing improvement, by the way. We're up to about forty eight fifty percent daily attendance, not vacancy rates, but utilization rates of people in office spaces, which is amazing to even.
Share with you.
And that we're at forty eight or fifty percent up from ten or twenty percent right after the pandemic. It is a profound reduction of office space demand, which means quality buildings can be more popular, and older properties are going to see that the vacancies go up significantly.
And we all know how bullish Paul Sweeny is about in office. When it comes to our employees here at Bloomberg, what do you think is the key catalyst that could fix this situation?
Time when people realize that working in isolation one hundred percent of the time for those that have been virtual one hundred percent of the time, really affects your career, affects your collaboration, affects your skill sets. That takes time to play out, but we're seeing more and more people want to come back, just not five days a week
full time. So amenities, ease of getting to work, different ways to attract workers to want to be back together are the key strategies we're hearing from our office clients all over the country, and they're actively pursuing creative ways to do that.
What about also so much discussion obviously about a recession, but whether or not at a certain point the economy would slow down in the next few years when that could potentially happen, we don't know. But how much is that the catalyst, because then you have more power when it comes to the employer. And if you are the employee and you're looking for a job, does that switch the dynamic.
Absolutely, because we've had no leverage as employers to mandate anything. You have to adapt to what the workforce wants in a three point seven percent on employment environment. If that shifts,
of course the dynamics will shift as well. But the one thing I really want to highlight is that there's so much coverage of this stressed office space putting more stress on the banking system, and a lot of headlines around that, and I wanted to really share with you and your audience that twenty four percent of total bank outstanding loans are in commercial real estate and fifteen percent of that is in office and a very large portion of that office loan portfolio is performing just fine. So
do we have stress in the system. Absolutely. Is it going to get worse as Lisa's rollover for office, Absolutely, But is it a threat to the entire banking system? The answer is no.
How About you know, if I want to go build a building somewhere in one of the growth markets, my cost to capital is much higher. Can I even get a loan for commercial real estate? These days. If I want to go build an office building.
The answer is yes, but you're going to pay a very high price for that debt. It's going to be underwritten so carefully, and as a sponsor a developer you have to have an amazing track record and an equity partner. It's happening very rarely right now. Part of what happens in a cycle like this is you get a big pullback in new supply. And thankfully office hasn't had much new supply in the last ten years. Otherwise this problem would be much bigger. But the construction loans are very
difficult to get. Land is expensive and materials and laborer is also another reason, another deterrent to new supply. The other thing to is the other segments of commercial real estate outside of office apartments, even shopping centers, self storage units, hotels that are performing extremely well because they are aligned with a strong economy. We've had great job growth, very low unemployment. That is reflected in demand for all kinds of commercial real estate space outside of.
Office And how does that compare when you're talking about the portion of loan portfolios. If you are looking at say, retail apartments versus office can that offset what we see with the issues when it comes to the office space.
You know, I really believe that the heavily tilted loan portfolios toward multifamily apartments. You know, they have occupancy of around ninety five percent, and even though rent growth has really slowed after three years of very robust above average rent growth, apartments are doing great and those loans are performing just fine. We have a disconnect on the valuation
of apartments. Therefore, sales activity, trading activities way down because interest rates shot up and the lowest cap rate, lowest yield product type in the industry, so there's a big disconnect between buyers and sellers. The trading is way down, but the loan performance is just fine because the occupancies are high and apartments make up the bulk of outstanding loans.
So if I'm a building owner and I got to refinance my debt, wow, that's a tough nut. I mean, what's happening in that market.
If your property is in distress, chances are the lender will work with you, because the FAD and the Treasury have gone to the banks, have said work with your distressed borrowers. That's been the message to avoid a fire sale. Nonetheless, you're seeing some distress sales come out of loan portfolios. There's no question about it. If you're performing well, if your asset is performing well and occupancies are good, rent
collections are good, there is financing available. But it means you have to come up with more equity if you're upside down in the valuation and the loan to value ratios depending on when you finance the deal. I remember most commercial real estate loans are five to seven years in term, so five to seven years ago prices were a lot lower and occupantcies and rents were a lot lower. So there is should be plenty of margin even with the who.
Provides the equity? Who would I go to for equity? Is there is there private equity out there for just real estate? And I guess the question is are they willing? I know some of these people now now that I think about it, and they do quite well, will they make that equity investment today?
Absolutely, there's plenty of capital, and one thing we're not seeing a shortage of is capital ready to pounce. And when we see prices that have adjusted from the peak to the tune of ten to twenty five percent. There's multiple offers on properties even with the credit crunch.
Network questions like I'd want to see it like in New York and in San Francisco's I haven't seen anything trade. I think if you see a marqueability to rade in Manhattan, is it going to be down ten percent, thirty percent, fifty percent? I think those are the numbers we're going to be seeing and we haven't seen that. That's going to shock the market, won't it.
If it's an older office building, it's colosial of the fifty percent you're talking about. If it's a newer asset with good amenities and great occupancies, it's going to be closer to the ten percent you're talking about.
What's the top question you hear from your shareholders?
How long will it take for this market correction to reverse?
And what's the outlook for trading activity? Because our business as a leading broker of investment properties and financing of commercial real estate in the country North America, I should say, including Canada, is all dependent on trading activity, and trading activities down somewhere between fifty to sixty percent market wide because of the buyers seller price disconnect and very tough financing environment, and we think that once the FED is done, which may be a little bit down the road, we
were hoping that by now the FED would really declare mission accomplished. On inflation, I think we still have a little ways to go, but not far because inflation numbers still don't reflect the drop in housing the covalent of housing costs because they lag by about a year. So when the current leases roll over and the index for inflation shows the drop in housing costs, I think inflation is going to go down quicker. So I think we're
very close to that end. And the ending of the tightening cycle itself will bring a lot of stability for both lenders on setting price and buyers which are going to be borrowers essentially. And then put a little time on top of that with prices adjusting, sellers are usually behind the market by a year and being realistic about what price and asset will trade at because they're hoping
for last year's pricing. When the market is corrected, both of those are starting to come together, but we're not quite there yet.
All right, Naji, thanks so much for joining us. Really appreciate it. Hasam Naji, he is the president and CEO of Marcus and Millichap New York Stock Exchange traded COMPANYMI is the ticker at one point three billion of market cap out there. So looking at the national brokerage commercial real estate, interesting time for that market in some of the larger markets. Again, I want to see some marquee
properties trade in New York and see where that goes. Guys, just saw Billy Rudon on the Death Start earlier this morning talking about the will State market. That family is long NYCE real estate, so see how some of that plays out.
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Right now, we're talking about Walmart, and that is also another great read on the consumer. Their numbers I thought came in pretty well. Stock's kind of trading sideways.
He's its annual profit forecast.
I mean, I mean people are shopping at Walmart and you can't I mean talk about a staple. I mean, they're just you can't avoid Walmart at all. Jen Bartash is she covers Walmart. She's a senior industry an also Bloomberg Intelligence. Jen, what was a key takeaway from the results from our good friends from Bettonville.
Well, it really when we look at Walmart, obviously they're on a roll and they're continuing to draw consumers in. The messaging that we heard is that consumers continue to be a little bit conservative, but they're being selective about where they're shopping, and so they're saving on essentials, they're splurging a little bit in other areas. But Walmart has really positioned itself well to serve any any customer that's coming through its stores with how they're offering value to those people.
All Right, Jen, you taught me or you let me know a couple of years ago that the number one grocery chain in the US is Walmart. I was shocked to learn that. Didn't even think about it. So if I go in to do my weekly shopping, do I then move over to the aisle and go buy some clothes and stuff like that? Does that really happen?
It actually really does, because part of what they're doing is they bring you into the store with compelling prices.
People are going into shop for groceries and then on their way to the checkout, they see a T shirt that's maybe five dollars and they think, oh, well, there's some value, and that it gets added into their cart, Or as they're looking to prepare meals, they're adding small kitchen appliances to help with the preparation of those meals, and so that cross shopping into general merchandise is happening.
And one of the things that Walmart called out is that even though general merchandise sales are still lower than last year, they're sequentially improved meaningfully from first quarter, and so that increase in momentum is actually really important as we get into back to school when people will be looking for clothing and backpacks and shoes and things for like that for their kids. So all signs point to a pretty good back to school season for Walmart.
Walmart is in the staples sector in the S and P five hundred because that huge percentage of grocery sales, but so is Target. Target had been in a discretionary sector earlier in the spring, it did get moved into Staples because of its percentage with groceries. But Target has a bit of a different story. It's still cut its forecast, even though we saw improvements when it came to the inventories.
What is it about Walmart? What is it doing differently that some of its counterparts aren't doing well?
I think the first thing is to just acknowledge the fact that Walmart's grocery offering is comprehensive. You can buy everything you need for a grocery shop at Walmart. That's a little bit different than at Target. Target's food strategy has been a little bit more targeted and that they were looking specifically for products that may have some sort of unique appeal or attribute. So Target never wanted to positions itself as a place where you would go and
do all of your grocery shopping. It was more of a place of look at these interesting things for discovery that are in the food area, some essentials that you need. But that difference in strategy is really showing now with the current economic backdrop and the way Walmart is acquiring more and more of the food shopping that's out there.
Hey, Jen, what is Walmart Plus and how do Walmart Plus members how do they shop?
So Walmart Plus is Walmart's subscription service and it's similar to Amazon Prime for people who know that, and Walmart pruss Is Plus is ninety eight dollars a year. It offers you free shipping without any order minimum for things shipped to your house. But it also gives you free same day delivery to your home from Walmart stores. And because Walmart is so big in the grocery business, membership
has really been growing. It's been increasing, and in fact, we actually think that is a much underappreciated aspect of Walmart's business that's going to really drive sales and profit growth over the next five years.
We still have a lot of economists that are warning about the trajectory of the economy. When you look at Walmart's results, though it's saying very much of a different story. What's your view of where the economy is headed When you have the world's biggest retailers signaling still some strength there.
Well, you know, when we're looking at the economy in general, consumers are still under pressure. I think the advantage that Walmart has is that we are in a spot where we're seeing, for example, inflation on food come down it's still high compared to two years ago, but it is starting to come down, and as inflation comes down, Walmart is able to very quickly work with their suppliers lower
their prices and pass it on to customers. And so that is the backdrop is still quite conservative, and there are still a lot of consumers out there who have a lot of have to be careful with their budgets or being very selective on where they're spending. But Walmart's size and scale does position it well to take advantage of tempting them with even better deals as inflation starts to come down and people feel like they can spend a little bit more.
Jen does Walmart open new superstores in America anymore? Are they pretty much everywhere where they want to be.
It's pretty rare. They have slowed their new store growth where it's they're only a handful of year. A handful of year. Sometimes they're replacing old stores or relocating them, and then they are very targeted new openings that are happening. But the majority of their new store growth is happening in the international markets. For example, in Mexico, they're adding many new stores every year because they're still in a
growth phase. They're adding new stores in China and in other international markets, and so there is still kepex for new store development, but it tends to be outside the United States.
When it comes to back to school shopping, which is the key driver in the current quarter, How do you view that as far as what that could mean for Walmart and other retailers.
Well, in terms of back to school, Walmart actually said that so far they're off to a good start, which is a little bit different than the sound we heard from Target, which was much more cautious, saying there were only a couple of days into the season and that they didn't have a good read on it yet. For Walmart, one of their strategies they've done in the past year, as inflation has been really high, is they've targeted bundles of things and kept them at prices that were the
same as last year. They did that at Thanksgiving for Thanksgiving dinner. They're doing that for back to school. So they have a basket of thirteen or fourteen most common school items, whether it's crayons or colored pencils, and offering them at the same price as last year as a bundle.
And that can be very appealing to consumers. So they've very clearly been thoughtful in their approach on how they're going to handle back to school and make sure that they are attracting customers to what they have to offer.
I know we might be a little bit ahead of this, but any sort of early indications about the holidays.
Well, you know, historically the rule of thumb in retail is that if back to school is strong, holiday tends to be strong as well. You know, back to school is a very reliable precursor to how the holiday season is going. So by the time we get through this current quarter and we have an idea of the third quarter results, we will have a very good read into how we think the holiday season will play out.
Walmart stock at a all time high here today, and they went public back in nineteen seventy, stock at an all time high. Stevens and Company took them public and Steven's in company good, little invest some bank and little Rock really good. Uh, they're still in business, Jen, is there any what's the what's the risk to Walmart? What's the risk of owning Walmart? Worst case it's a GDP road story.
Well, I mean I think the risk is, you know, potentially. You know, the the current management team has done a great job in shifting the entire culture of the company, but there are you know, we've we saw earlier this week some some announcements of some management changes, especially at
the heads of the different businesses. You know, Doug McMillan appears to be ready to stay for a couple more years, but you know, when that changes, there's always the risk that the company culture that he's worked so hard to instill will change, So that you know that that there
is a risk. And then just because you're the biggest person in the room, there are always people coming, you know, who have you in their sights, and so complacency, you know, is the is the other real risk for Walmart and reality to make sure that they're continuing to execute on all these different yea, not buying.
I mean Amazon came in. Amazon came in, and here's Walmart still hitting all time highs. I mean, if they've shown they can compete against Amazon and that amazing business.
Model so true.
I mean you got to take your hat off. And that's why if you look at rich Go, there are Walton's all over the rich Go, which is the world's richest people, so they're doing something right, as is Jen Bartash's. Jen Bartasha's senior industry analyst Bloomberg Intelligence, one of our absolute best analysts. We appreciate getting a few minutes of her time.
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Again probably one of the bigger news coming out over the last several weeks. It's just been this seemingly kind of never ending or continuous flow of negative economic data coming out of China. Obviously not good for them, because remember we started the year and this was going to be a good year for China. Reopening was kind of the theme, and how how do you play that and what would it and we're just not seeing.
Anyth Yeah, and then there was the downgrade in terms of the expectations for GDP growth and then you know, oh wait, the property crisis is still escalating or it's still very much alive and then you know all this tension, geopolitical tensions.
Yep.
But we're going to sort this out right.
We're going to work this out right now with Jennifer Welt. She's a chief geoeconomist for Bloomberg Economics. She joined us from Washington, d C. First, Jennifer, thanks for joining us. Please tell me what a geo economist is. That's a new term for me.
Thanks so much for having me. Yeah, it's a term we're still defining. But essentially, we look at the intersection of geopolitics and economics, so, for example, geopolitical developments of economic impacts, and the use of economic tools to achieve geopolitical ends.
Dave de Wire thought of that. It seems a little above his pay grade, all right, Jennifers, So what do we think about China here the economic data, I don't know. It just doesn't seem very good, and I guess it seems disappointing, realtive to maybe expectations.
Yeah, no, I think that's a really great point, I would say from a geopolitical perspective, and this is a piece we put out recently. I think we shouldn't over exaggerate the impact that this will have on China's geopolitical importance, or exaggerate the effect that this will have on their foreign policy. There's a history here of rising powers lashing out when they feel they've hit their economic peak or when they're feeling sensitive about economic challenges, and we don't
necessarily see that happening with Beijing. I think at the same time, we should expect that they'll be more defensive when they do feel challenge. But again, we're not looking at a major foreign policy crisis on the horizon as the result of the latest economic data.
You know, we had an interview with the front runner in the presidential race in Taiwan, who is I guess seen as a little bit less favorable of a candidate with respect to China. I mean, can you weigh in on how China's economic woes are influencing that situation, particularly especially because it's so close, because the tensions with Taiwan, Taiwan just being so physically close to China.
Yeah, sure, things so, I think you're referencing the recent interview with Taiwan's vice president and leading presidential candidate, Lai Chinda, who is actually just wrapping up a transit back through the United States on his way back to Taiwan. Lii is definitely not Beijing's preferred candidate. They've made that quite clear, including in their pretty strongly worded responses to his recent transit.
This is despite the fact that it's pretty common for Taiwanese vice presidents and presidential candidates to come through the United States, and this case, lie was on his way to Paraguay for the presidential inauguration there. Lai is ahead
in the polls. It's early days still, but he does look to have a pretty strong lead for the elections in January, and I think there's a real question of how China would react to a live victory should he emerge at the top when when the election is held in January.
Jennifer, can you give us a sense of how this administration kind of views or would like to see the relationship with China go over the next several years. Is it one of engagement, is it one of limited engagement? Is it one of just shutting China and letting them kind of, you know, kind of deal with themselves. What's the approach?
Sure? So, I think that the term is strategic rivalry, and the common catchphrase is you know, intense competition requires intense engagement, so we're likely to see both of these things. And frankly, I think the paradigms of the past of it's either engagement or its hawkishness don't really apply anymore.
I think the administration is trying to balance both of these features with trying to engage Beijing, as we saw from Secretary Blincoln's visit, Secretary Yellen's visit, discussion of Secretary Armando heading out this month, with continuing to take actions from the administration's perspective that are aimed at, you know, defending US interests, as for example, rolling out the most recent outbound investment screening regime.
I mean, when you think of the struggles that China's economy is having right now, how does that change the dialogue in the Biden administration in the White House about how tough to be with respect to some of their geopolitical issues.
I think from a political perspective, this is a pretty good look for the administration. You know, for the first time in many, many years, the US GDP growth seems to be outpacing China's and that's a pretty exciting story, I think from a foreign policy perspective. I don't see this changing in a major way. The administration's approach. Again, I think that's based on fundamentals that are unchanged here. China is going to continue to be a major power
to be reckoned with. You know, for example, they still have plenty of resources to put towards their military modernization, their technological advancement, etc. So I think the broad arc of the strategy is going to say the same. But I would imagine there'll probably be some celebration about the recent economic data and how that shows how the administration is handling the US economy.
You know, it's interesting, Jennifer, I kind of feel a little bit of a dichotomy here. Trying to take a tough government stance against China. There are some executive order last week to that end on the technology side, Yet it just seems like a parade of US CEOs making the way over to Beijing, whether it's Elon Musk or Tim Welch or Jamie Diamond. I guess it's a kind of a fine line everybody's trying to walk here. We want to be tough against China, but we got to do business with these folks.
I think that's absolutely right, and I think that's contributing to a slightly more sophisticated discourse on what the future of the US China economic relationship looks like. You know, the conversation around decoupling is largely seen as a pretty infeasible task, and now there is increased conversation about how do you quote unquote de risk how do you kind of carve out the areas that you're most concerned about. And by the way, this applies on the China side
as well. They've certainly been concerned about overreliance on US technology for some time now, even before the latest US moves to restrict their access to it. So I think that's going to be part of the conversation going forward, is how do we maintain an economic relationship that benefits both sides while still preserving each side's perceptions of their national interests.
How do you view some of the I guess it's maybe unfair to call it unrest or anything like that, but the dissatisfaction among the population with well, boy, we put our money into these these apartments, or we're not getting we're not seeing the return, we're not seeing payments
on our investments. I think you know, there's some degree, at least a certain segment of the population feels a little perhaps betrayed by what's happened in the with with respect to some of the economic situation that's been going on. How do you view the population and their reaction.
I think that's a really important question. I think it's especially important for youth, right, many of whom are emerging from college and looking to land their first job, looking to find their first home to live in, start to kind of acquire assets. That's a really important part of you know, sort of the cycle of life there having property in your name as you start to build out
your own life for yourself. And I think people are starting to feel sort of a major difference between the situation of growing up in the nineties and the early twentys and twenty tens, as China was on the ascent and livelihoods were significantly improved from prior generations into perhaps what is going to be a new mode of as Beijing would put it, high quality growth, rather than necessarily focusing on the top up GDP numbers.
You know, it's for a while there. Again, as you mentioned, back in those those time periods, it seemed like China was opening up and that was a good thing for the world. Is it now simply the fact that g IS continues to be even more firmly enhanced, that doesn't necessarily need to do that anymore, and he can kind of go back to maybe what his natural inclination was, which would be a little bit more closed.
I think she is Dual circulation policy is a really interesting example of kind of the twin paradigms that they're trying to hit here, of one not necessarily being overly reliant on foreign technology for fear that access to that could be cut off, as they see recent US moves as kind of indicative of that perception being valid, while at the same time recognizing that in order to continue growing, in order to kind of beat the middle income trap,
China needs to continue advancing technologically, and right now a lot of that sort of superior IP and technology exist in other economies that they need to learn from. So I think that's the thrust of his approach, is trying to balance and make that bridge without becoming overly reliant on what he sees as being a risky sort of proposition.
All right, Jennifer, thanks so much for joining US geoeconomists. I like the term, and I like Jennifer Welch. You're gonna be coming back here. You get new friends with Bloomberg Radio. Jennifer Walsch, chief economists for Bloomberg Economics down in Washington, d C. Trying to kind of get a sense of what you know, geopolitics, economics. They certainly have, They certainly influence one another, and that's kind of what I think, Jennifer watching Bloomer.
So many interesting data points and headlines, recently the latest one China. Please visit Shadow Bank Investors at home to quash on the rest.
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A lot of kinds are still talking about the recession. I am not buying it. I took it off the table a month and a half ago. I'm just not buying it. But I like to talk to people who actually out there in the marketplace, talk at the companies large and small, give them a sense of kind of what they're seeing out there. And we've got a great opportunity.
Now.
Don McCree joins, as he said, of commercial banking and vice chairman at Citizens Financial, publicly traded bank. CFG is the ticker about thirteen point three billion dollars in market cap. Looks like it's been caught up in some of that regional bank's downdraft there off twenty eight percent year to data on this stock. Don, thanks, thanks so much for joining us here. What are you seeing out there? I mean,
I think we had Citizens. You guys talked at pretty much everybody, small business, it's midsize, larger companies, you compete against the big banks. What are you seeing out there from your clients?
You know, it feels pretty good. We're not seeing a lot of distress in the portfolio. I think companies are generally performing pretty well. I've said before that, you know, because of COVID a couple of years ago.
Companies really tightened their belts.
They got their their cost bases down, they built their liquidity, they refinance their debt, and so they're operating with strong balance sheets.
They've had some of.
The things that had been plaguing them, like supply chain issues and things like that, seem to be behind and a lot of the input costs that grew from inflation and the rapid changes of inflation have kind of subsided a little bit. So I think we're hearing pretty good things. There's there's absolutely a cautionary toll tone being flag being flown by a lot of the customers, just because there's still a lot of uncertainty out in the marketplace right.
And you wonder if companies have been preparing for recession so long, if we don't see quite the depth of the reception recession that we could have seen, maybe they are just better able to prepare for it. I wonder, though, you know, credit is tighter, do you see companies delaying transactions deals.
It's been The demand for loans is definitely tepid, and I think a little bit of that, particularly new money transactions. I think there's a little bit of a hesitancy to invest right now. There's a little bit of a there's definitely a little bit of a weakness and the leverage buyout markets, and some of the big transaction markets. M and A is a little quieter that it's been, and a lot of that's because valuations need to adjust and
buyer buyers and sellers are still quite far apart. We tend to play in our investment banking businesses in the middle market. That's been a little healthier because the transaction sizes are small and you don't have to raise massive amounts of capital to complete a transaction. And on the M and A side, it's a little friendlier from a
government standpoint in terms of getting approvals for transactions. But I think regular way lending is okay, but it's not great, and I think that's more demand than supply.
Frankly, any stress in your loan portfolio at this point.
The commercial side's pretty good. CE and I side. Obviously, real estate is the flashpoint, and office real estate is the place that we're all focused. We're working through the issues.
Fine.
We put a lot of disclosure out in the second quarter and kind of went through the portfolio, so you know, nothing that really is causing us to have sleepless nights, and we have an enormous amount of earnings power to basically absorb any losses that do come along.
Look at beyond yourself. There was a series of downgrades by Moody's on the regional banks. You guys saw your outlook cut, but that was actually a sort of positive thing. Looking at your peers, do you what's the extent of the commercial real estate stress that you see? That was a particular point that you.
Know, I think, like us, I think most of them are working through. It's going to be a two or three year kind of work, you know, working through any distress we have in the portfolio. We're having a fair amount of success restructuring loans that we were worried about. So we've taken a couple losses, nothing too significant. And I think as I looked at earnings from our peers across the board, everyone said about the same thing that
we said, which is, yeah, we're focused on it. Obviously is going to be stressed to stress in the in the office market, but there's a lot of equity in these deals.
That's the first to go.
And then any losses that the banks will take are going to be you know, small fractions of the oldverall.
Yeah, I mean, we've seen some of these large private equity firms or real estate firms in particular, like walking away from poor investments. I mean, as a to what extent are you guys happy to end up with the asset at the end?
Well, we generally won't. You know, we generally won't end up with the asset. We go to great links not to end up with the assets. So we would probably sell the note or or do some other kind of restructuring and bring in alternative alternative equity rather than take down the asset.
Let's talk just about the regulations on your industry more coming down. What are you telling your showholders about a the regulations, how they're going to impact you, and kind of what you're trying to do to get ready.
I think you know, there's there's clearly going to be higher capital requirements as to be stricter liquidity requirements, and we're preparing for those. We have been preparing for those long before the regulatory kind of talk talk about exactly what it's going to be started to leak out. So I think that our returns will be a little bit
under pressure. But you know the benefit that we have is we have a really diversified business model with a lot of earnings power, So if it goes down a little bit, we're going to continue to be able to return capital to shareholders. And and it's it's it's going to be an adjustment, but we've been through these kind of adjustments before.
We had some reporting on how US regulators are going to propose requiring banks with as little as one hundred billion dollars in assets to issue enough long term debt to cover capital losses, and then the head of the FDIC coming out and talking about how this bolster's financial stability?
Do you agree?
Disagree? I?
You know, at the margin, it bolsters, you know, stability, But we don't think we think that the banks are in really good shape. We think capital levels are quite high, better than a lot of other parts of the world, and well managed banks have really strong liquidity profiles and really strong capital absorption absorption capacity.
How's loan growth across your client base here, because boy, we've been shocked with these rise and interest rates. If you want to go out and get a mortgage, or or if you want to go out and finance some capital spending or finance and acquisition, what's loan growth like these days?
It's been it's been kind of flatish, yeah, for the last for the last couple of quarters, and we're expecting a little bit here and there, depending on the sector, but we expect, you know, reasonably low levels of long growth for the balance of the year, less on the less on the you know, that's on my side, the retail side. Should you know, we're having some pretty good expansionary growth in places that were growing on the retail side in the retail portfolio.
Have consumers just adjusted faster? Do businesses catch up with them to a higher rate environment?
Yeah?
I think.
I think we have to keep from perspective that where rates are aren't that high and from a historical standpoint, so I think the issue with with borrowers has been this beat of the change in rates as opposed to the absolute level of rates. So yes, I do think that consumers and businesses will adjust to a higher rate environment, and I think rates are going to stay high for quite a period of time.
University of Vermont, big fan. Two of my siblings went there, your big player. Give us twenty thirty seconds on UVM.
UVM is doing fantastic where the school is growing. We're very financially healthy, you know, great statistics we are. The major thrust we have right now is growth of our research programs, and we're basically getting enormous levels of research grants from a variety of businesses and governments. And it feels very strong up there, and Burlington is obviously a fantastic place.
Yeah, go to school man. My brother and sister went there, like why, and I had another brother go up there. Michael's have been vermonly. What are you guys thinking about? It's cold up there, so what do I do? I go south. Don McCree, head of Commercial Banking and a vice chairman Citizens Financial, joining us live here in our Bloomberg Interactive Broker studio. We appreciate getting some of his time. This is Bloomberg.
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