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Alex Deeal Paul Swiney live here on the Bloomberg Interactive Broker's Studio streaming live on YouTube, as well as to head over to the YouTube dot com and search Bloomberg dot com. My first trade on Wall Street, Johnny Cogvin leans over to me, my head trader block desk of pain Webber, buy three hundred thousand shares of PanAm at thirty one and a half and do not lose money. I'll give you all day to do it.
I did.
I made about four thousand dollars. It took me almost the entire day to get this trade done. Six months later, I did it in ten minutes. But amazing. AnyWho, that's my heritage on the block trading desk trading equities, but now streaming on Orogen. He covers all of Wall Street forces. It's got a story that I don't like because it's got Citadel Securities. Craft's a plan to shake up banks trading desk. I like the trading desk. Are they being intermediated to some degree?
A very good morning to you as well.
He likes you just be clear.
No, but that's actually that's a word we do not use in the story. But in some ways that's a good way to think about it. The difference between when you were at pain Webern now is the industry model has changed dramatically. A lot of trading products, especially ones where you've seen that embrace of electronification. It's just not easy to make a lot of money in that business. I go back to this famous Bearston trader who is
known as two sticks Eady. He got that name only because he would buy something at ninety seven, sell it at ninety nine, always had that two point spread. That's not what's available now. It's the technology, the process, the execution, it's the plumbing of the system has changed. It's not so much driven by relationships, and that has allowed these players, these market makers on the edges of that trading ecosystem
to come in and really take market share. That's where you've seen people like Citadel and Jane Street and Virtue actually starting to gain share. They're still not as big as the biggest players, but where they do have an advantage is because the trading landscape has changed, because so many of the products are becoming categories of one or two. Your one or two top players in that space, and
outside of that competitive mode, everyone else is struggling. Everyone has to identify their niche and that is where someone like sit sec can come in and say, our niche is great technology, great analytics, great ability to execute and process. Why don't we go to some of these struggling banks, people who need to offer these services but can't really refer to offer these services. There's Tier two, the tier three banks, the brokerages, and tell them we will do
it for you. We will be your engine. Just slap your name on it, tell the clients you're still doing it, but split your commission with us. Your costs go way down, and you will show a bitter return on equity, which, at the end of the day is the most important thing all of them are striving for.
Okay, here's my super dumb down question. So if that happens, what would Paul's trade of pan am back in the day look like? How would that now be different.
It's just that Paul wouldn't be doing it. He was sending it off into the pipes that someone else will be.
Doing it for it.
He just like puts in like an order and then it just like goes and happens, and he's nothing. He doesn't have to sit there all day and manage it because Citadel is working on the pipes.
It's not like client ABC comes upon and says, hey, here's the deal. He takes it from him and then flips it around to X, y Z and and makes the spread. It's just become harder, especially in equities, even in other products that you would not have previously thought about as low touch, they are becoming low touch. Think about corners of the credit market that you would not have thought would be easy to electronify. But that's happening,
and that's happening at PACE. But the bigger, I guess academic question here is if you're a client, And the simple way to think about it is, it's like if there were some banks, if there was some Tier two banks that were to embrace this model, and you're a client going to them, it's almost like a Starbucks selling Dunkin Donuts coffee. How long does a client keep going to Starbucks to buy that Dunkin coffee instead of going to Dunkin directly. And that's Citadel's opportunity because it is
also doing that. It has also got a platform of clients comes straight to them. But it's not all going to happen at once. That intermediate term can last a while. So if this plan, which is still, let's be clear, a bit pie in the sky, but if they're able to roll this out and if they're able to get people to embrace this, that intermediate term can last a while, and that could enable Citadel Securities to make a bigger
leap in the business quicker than otherwise. And that's important because this trading firm of Ken Griffin's has it's clear to us, it's clear to a lot of people in the market, and in the coming years it will ipo and it is going to have a pretty valuation because it is completely focus stone having high roe low capital intensive businesses because they're convinced that's what investors an analysts like, and their entire model is around taking that piece of it and scaling it.
The Citadel's trading operation third party trading operation. Did they put up capital to facilitate trades or they just do it with flow, because I mean, part of the reason is that people would pick up the phone and call me back in the day, is that I would put up some capital to facilitate a trade, put capital at risk to facilitate a trade. Now that first day, I wasn't not to put up any capital because that would probably would have lost it. But that's kind of how
it goes. Are they putting up capital?
They do?
I mean, and again we'll have to go through the numbers, but there are some disclosures. I believe the Citadel Citadel Securities capital is somewhere close to eight nine ten billion. Jane Street is perhaps double of that. The big banks are probably eight nine times that.
So yes, you can't.
You can't play this game without any capital. It's not as intensive as the bigger operations because they're not doing some of the harder stuff. They're not doing some of the prime brokerage stuff, which is the financing business where a lot of the capital intensity comes into play, and that is by design. They're saying, we don't want to
chase that capital intensive stuff. We don't want the regulators to be breathing down our Next we will do the stuff which requires efficient use of operating expenses, up to date, new age tech stack, which is very different from a lot of these other older players who are struggling with creaking technology, burgeoning operating expenses, and not cutting edge analytics. Citel believes it has all of that and that is
what gives it that agility and nimbleness. At least that's how they see it to go in there and offer a service like this and also outcompete some of their bigger rivals.
So who would this be bad for?
We know who it will be good for securities. Who will it be bad for the way they are making the pitch is they're going to all of these or or they will go to all of these tier two players in below and say it's not bad for you, it's mutually beneficial. If we weren't there, you would be having serious conversations with your board about what products do you need to exit because some products just don't make money and you can just carry along that dead weight forever.
But in theory, those tier two companies that will be losing some of their.
They will be losing some of theirs. They will be losing some of this way, they will be losing some of their commission. In exchange they get higher profitability, So they have to figure out if that trade off is worth it.
I think one of the concerners I would have if I were a Deutsche Bank I was mentioned in your story. Do I want to give up a the commissions and be my relationships because I think the market's going to know that I'm not really in the game and allocating capital and all that kind of stuff, And what does that mean for my clients. If I'm not in there, I'm forming out a lot of this capital risk and so on to an execution cost to Citadel.
Hence, why not just go right to dunkin Donuts and buy past Starbucks.
Yeah, so I'm sure they have to think about that, but for a lot of again a lot of the second tier terms, it might make a lot of sense, right.
And iven Deutsche Bank, which I would not necessarily consider inside the competitive motors, I mean they exited, I could spots of actory training who are not going to be a part of this process. They're not going to Goldman Sachs and JP Morgan, Monks, Stelli and say, we're going to supplant you, right, because those three are squarely inside that competitive mode. It's when you step outside of that area that it becomes extremely challenging.
Street.
Thanks good stuff, Srinan Rodgers, Senior Financial Report of Bloombergers. He's got a story I don't particularly care for, but I do understand it. It makes some sense. We'll see if we're good friends at sitadel, I can float that down the street.
Here, 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 Act. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa playing Bloomberg eleven thirty.
All right, let's get a broader take in the market here. Emily Rowland, one of my favorites, co chief investment strategists for John Hand Investment Management, joins us. Now, Emily, the reaction is clear, right, the S and P responding mortar earnings, and you know, the bond market and the currency market responding to that CPI data. What's your take over the last couple hours?
Oh so much relief right now, especially seeing that shelter component coming in at two point two percent month over month, it just felt like it was groundhog Day. Every time we've gotten CPI reports this year, it's just been that sticky shelter component, and I think there's a lot of relief that that's coming down. I think the challenge that the market's contending with right now is when does kind of good news on disinflation maybe put pressure on growth
and corporate earnings. So the way that we've been thinking about it is, yes, disinflation traction is great for consumers. It means the FED can start cutting, and I think we solidify to September cut after today's report. But it's not necessarily the best thing for corporate revenues. In fact, we're finding that a lot of companies are now having a harder time.
Asking those prices along to the end consumer.
If you look at the guts to the CPI report today, it's stuff people want, right like Alex clearly you want to go to Idaho. But there's things like airfares, It's things like cars, used cars, new cars. It's things like you know, other sort of discretionary items that are falling because companies have less pricing power.
That means revenue growth might slow.
At the same time, the cost of capital is still elevated for companies, so their margins are going to come under pressure here, and I think that's the reason you're not necessarily seeing that massive pivot party that we've seen with other CPI releases coming down because it's not the best thing for corporate earnings from here.
Well, I'm a former equity analyst, but I know all along that the fixed income guy folks are much smarter. The bond market's definitely reacting to what's happening out there. We got the two year, as John Tucker LASA called the most interest rates sensitive and fed sensitive instrument out there, the to year treasury. It's off almost twelve basis points four point five percent, and we were at five point zero two percent on April thirty. So big moves in
a bond market, is that? What's that telling this? Emily?
Yeah, So we've been suggesting that investors lean into high quality bonds over the course of this year, even though the path has been bumpy. I mean, it's amazing. We started at three eighty eight on the ten year treasury yield this year we're still not even there yet back down to that level. So it's like the market, the bond market hasn't really like sniffed out this disinflation trend yet.
So we were suggesting that investors take advantage of that big backup in yields that we've seen to lock in those higher interest rates when the Fed does start cutting, When rates start to move lower, it can happen really quickly. So many of the investors that I've been talking to this year like, well, we're just going to wait for the Fed to cut in order to leg into duration
a little bit more. The challenges with that is that you're going to miss out on a lot of the total return potential in bonds if you wait for the Fed to cut. We know that the ten year treasury yield are really the entire yield is going.
To sort of sest that out before the Fed actually starts cutting.
So that's why we think it's important to get paid income here while we can at these elevated levels close to twenty year highs on bond yields pretty awesome.
So then if we just go from the ten for second, so steep inner trade seems to being played today, but that's more because the front end and the stronger buying in the front end, how do you want to be playing that?
Yeah, I mean we are suggesting essentially looking at the intermediate part of the curve right now for the best opportunities, you know, looking at seven to ten years of maturity.
And again locking that in right now.
The trends that we're seeing is that it's cash cash cash CDs. They're six trillion dollars out like sitting in money market funds right now.
That is unbelievable.
And so what we're seeing is investors are loving getting paid this close to five percent risk free rate. But our contention is, hey, by the way, that's fine, it's great that there's something else to do with short term cash, but it's really a terrible long term investment. So just going out the curb, embracing the intermediate part of the curb, locking in that five even six percent income for many, many years.
We think we're going to look back and really.
Identify the fact this was a great opportunity to take advantage of these higher yields before inflation comes down even further and the Fed starts to.
Cut How much credit risk should I take here, Emily or should I just stick with my safe treasuries.
I mean, I know it's boring, Paul, I know it's foreign to just love high quality bonds.
But when we look at.
High yield right now, the yields are elevated, of course, but you're not really getting rewarded. I mean, spreads are still sitting at around three hundred basis points above treasuries on high yield bonds.
That is pretty unusual.
We actually did some analysis suggesting that when spreads have been this tight, the forward looking twelve month returns on high yield bonds are right around zero to one percent historically looking over the past forty years, with a range of plus ten mind ten. So to us, you just don't need to go down the credit spectrum anymore to generate impressive yields and bonds.
Where is the riskiest spot right now?
Yeah, so it's really in lower quality sort of growth at any price on the equity side.
So we talked about the risks in bonds.
But on the equity side, you know, seeing small cabs rallying today, I'm actually a little bit surprised by that because what we saw for most of the last year was that small cabs were the biggest participant in the pivot party. Right, the idea that the FED can resume cutting the cost of capital can come down. That's awesome for companies that have the highest levels of indebtedness, right.
But what we started seeing recently over the past month or so is small caps weren't getting as excited about rate cuts as they once had because again, it means it puts pressure on revenues, it hurts margins, and it
hurts the lowest quality players. So we would be taking an opportunity right now now to kind of sell out of growth at any price meme stocks, if you will risky your small cap equities and kind of lean into higher quality stocks that have great balance sheets, tons of cash and a limited need to tap the capital markets in order to grow. We think those still do well in this decelerating growth environment.
All Right, we've kind of i think in earnest beginning to kick off earnings today, and of course we'll really do it tomorrow with some of the big banks slip at JP Morgan Chase. Here, what do you need to see? What do you think the market needs to see from this earning season?
Yeah, I mean the trickiest part now is that we like, finally have a high bar again. You know, not that that's a great thing, but eight point eight percent earnings growth is what analysts are penciling in for this quarter. It's the first time in a while that we've had an elevated bar. That would be the highest earnings growth since Q one of twenty twenty two.
One thing we're looking for though, is.
That eight out of eleven sectors in the S and P five hundred are expected to see positive earnings grow at this quarter. So if that does come through, that would help broaden market breadth, which I think is really important for markets given the level of concentration we've seen across megacap technau. So I think if earnings can deliver, you know, eight nine percent feels a little bit overly optimistic to me, then we can get that market bread that everybody's looking for.
You know who says twelve percent, Gina Martin Adams A BI we're gonna talk to for next because that's even like, here's a bar and then we're going to rise above it. Emily, before we let you go though your thoughts on Ai, Goldman had a really interesting NOTEUBT that talked about maybe the hyperscalers won't be investing as much as maybe we thought. Does that change how does that wind up affecting AI trades? What do you think?
Yeah?
I think what we're going to be looking for this earning season across those big AI names is again back to the monetization of it. How is this being monetized, How is it producing productivity benefits? And to your point, like, where's the budget prioritization across these companies? So we'll be looking for kind of who the winners and losers are across that, especially as it comes to how does everybody monetize this incredibly powerful productivity driver?
From here, great stuff, Emily, Thanks so much. We appreciate you at we roll in Co, Chief Investment Strategies for John Hancock Investment Management.
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I'm Alex the alongside Paul Sweened. This is Bloomberg Intelligence Radio. We bring you all the top news and analysis with our great Bloomberg Intelligence Team. They cover two thousand companies and one hundred and thirty industries worldwide, and we also take you outside talk to the CEOs, economists, analysts, and
also get their take on what's happening. And for this we go to real estate because housing stocks are getting a nice boost today, whether you're looking at reads, whether you're looking at homes, all thanks to those lower yields. So we're checking in now with Steve Jacobs, president of tenx. He's joining us from Irvine, California, and ten x is apparently the largest online commercial real estate auction platform, so it's a great window to give us a viewpoint on
cre market. Thanks for joining u, Steve, and we really appreciate it. Can you just talk me through how the largest online commercial real estate auction platform works?
Coork thing nice to talk to you. So we're in the business thirteen years and the difference between being online and offline is using our technology, our customers do their due diligence when they're looking to buy a piece of commercial real estate before they actually purchased it, versus offline.
How due diligence is done after they sign a contract, and by doing that we shorten the time frame between marketing and and closing a deal to about one hundred days nine to one hundred days versus a six month process. We also eliminate the risk of retrades and all of how we have a ninety eight percent closing rate, and we've traded helped We've helped brokers trade over thirty two billion dollars of commercial real estate over the last several years.
All right, So, Kennel from I mean, Steve, from your perspective, can you give us a sense of what you're seeing out there into the health of the commercial real estate market because that obviously it impacts folks in that business and effects impacts the banks that finance that business. So investors are really interested in this space. What are you seeing?
So I diden't since the interest rates, you know, it's going on two years, it was July twenty two, they really popped up. I have a phrase and it's not that that exciting, but it's it's it's just math, right, And when interest rates were three percent, cap rates on investments were lower. All right. Now, what's happened is when interest rates going up till five to six, in some cases seven percent, it just changes the value of the real estate, It changes what you're in return is going
to be. So what's happened in sort of the state of commercial real estate is there's a lot of owners that own very nice pieces of real estate. There's nothing necessarily wrong with them, but the capital stack in the map has just been sort of, you know, sort of turned over turned upside down, if you will. And what if the building was worth ten million dollars when your cap rate was three four percent, Now your cap rate is you know, six to eight percent. Your building is
worth seven or eight million dollars. And that has caused a lot of what I like to call stress for owners because it has put values in some cases underwater based on what the debt is and based on what the value of the real estate is. It doesn't mean it's a bad piece of real estate. It could be a great piece of real estate, fully occupied, people paying one, getting your NI your net income on the asset. Just on a value approach, it's worth something less than a once.
So when you look at the buyers and the sellers and the gap between maybe what the pricing looks like, how has that changed, say in the last six months, And what do you think it's going to change in the next six months.
So that's a great question. So it's very interesting. So the gap has existed for a couple of years to your point, and what we saw at fourth quarter twenty three and going into the first quarter of twenty four, we saw more activity, more interest from the investors really stepping up on our platform bidding and buying assets because the messaging that came up from the FED is we're done raising rates. What we've now seen coming out of
Q two is still seeing similar activity. We are seeing buyers be more reserved because what we think of, what I think that the vestors are waiting for, is a message from the FED more than a message we're reducing rates. Even if it's twenty five business point, the act of reducing the rates will set the tone going forward and give more confidence to the underwriting for the investors that that there is value to there is there is value in their underwriting because rates will go back.
Steve I one of these fundamental problems with office real estates. I don't think anybody really knows where the market is. I think if you drive through any town, USA and any generic office park, every single one has that sign in the grass telling you about how much square feet is available with occupancy levels where they are, what is the value of commercial real estate? Are you seeing activity.
There so you're specifically often about yeah office. Yeah, So you're right, and I can tell you on our platform we've actually been very successful in the last you know, six months to a year of trading helping brokers trade office assets. But it all comes down to what the pricing expectations of the seller is. And based on what
I said earlier, you may have a a uh. And in this case with office you know, fifty percent occupied office building, it doesn't matter really how nice it is or how what the you know, how nice the common areas are in the in the various you know, uh, improvements that have been made. Uh. If you have a fifty percent office building of six percent occupied, you're kind of in trouble because what I think landlords and owners are searching for is how to get people back into
the office space and huddle are companies back in? And I just think beyond the real estate, I think businesses and companies are struggling still with how do we get our employees back in? So if you have a you know, a suburban office building that's half vacant and it's an older building, maybe a Class B or C, you can get to really get real with the value. And if you get real with the value, and you might have
to take a hit, somebody will buy it. When that person buys it at quote unquote a differ account, but a lot, what the new investor can do is then lower the lower basis, right, so they lower the reds. So all of a sudden, this particular suburban building that might have been charging twenty five dollars a square foot under one financial model because it was purchased, you know,
several years ago. Now then come in buy it at a lower price, and now they can, you know, have the space be twelve dollars a square foot when the rest of the market's twenty. And that's how they'll attract tenants. I do think there's a lot of there's been a lot of discussion about urban downtowns and how they're really in trouble. But also the flip side of that is that the Class A, so the best quality office buildings
are attracting tenants. I do think that they're giving a lot of incentives and there's a lot of negotiation going on as far as pricing the leases.
Steven, we just have about a minute left. But I was wondering what about mixed use stuff. So you have an office building that's only fifty percent occupied, how do you get other people in there to do other stuff? Like someone was talking to me about a hotel that just encompasses four floors of a previous office building.
So there's a there's a lot, a lot of discussion about that. With regards to repurposing these buildings, some of them can be, some of them can't be. But a lot of these buildings were built for office right, so they don't have the right templates, the floor plates right to actually convert to hotel. Like think about a hotel room. You know needs windows, right, Every room needs windows. Right.
Office space you need windows, but you can have people sitting out in the middle of the floor, not high window. It's the same with bringing them to multifamily. Not only is it expensive, super expensive, but it's not as easy as it sounds. And also you have to look at that market demand. You could have a two or three story office building in the middle of an office industrial park, and I don't think people want to stay in that as a hotel or a residence.
Yeah, we appreciate this. This is really interesting. Thank you so much. Stephen. Come back and let us know how it's evolving as the Fed moves towards those rate cuts and as yields move Flower as well. Stephen Jacobs, president of ten X, joining us on the state of commercial real estate. But that's so hard, Like, how do you price something that's going to evolve over the next five to ten years?
Right, Yeah, it's really really tough. And I just you know, and what we hear is reconfiguring this buildings is very difficult.
Yeah.
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All right, let's get to that CPI number and then the market reaction. Right, the SEB is down by about half percent. You're still seeing bidden too. The bond market here where yields lower dollar lower as a CPI number cools. Lindsay Piezga, as chief economist over at steepel, and she joins us. Now, all right, lindsay, what was your take. We already saw a JP Morgan move up it's cut estimate to September from November.
Well, I think that might be a little aggressive based on one month improved data or one month better than expected report. I think rather this supports the FEDS message.
Of caution as.
Inflation slowly resumes its previous disinflationary trend. But we want to be careful and the Committee wants to be hesitant not to repeat it's earlier over zealous assessment of improving inflationary conditions, which, as you remember, at the front of the year, was met by a number of head fakes.
So despite the fact that we're seeing improvement in the data for now a couple of months, despite the fact that we're starting to see more cooling labor market conditions, this is still fall shores of that bar that the FED has set at many months of good data. But that being said, each improving data point, the FED and market participants, as we see, are increasingly optimistic that a policy change is around the corner.
Lindy, I guess with a little bit of hindsight, Now, what do we make of that first quarter, there's three reports on inflation. It came in a little bit higher than expected. Were those seasonal? Was there something structural or is it just a blip and a generally deflationary longer term trend.
Well, I think this just underscores the bumpy and on even nature of inflation. I don't think you can kinpoint one component to say that's what drove inflation higher, but rather it's a broader message of inflation is not on a clear cut downward trajectory. We are going to continue
to see on evenness and volatility in the numbers. And so this is where the FED needs to really stay vigilant, and it's focused on reinstating price stability, not just hoping that or on a sustainable downward track, but really keeping their focus on that bar of many months of good data to gain that needed confidence that we are on a sustainable downward trajectory back to two percent. This is certainly a step in the right direction, absolutely, But is
it enough to justify a near term rate cut? Not quite yet?
What do we what more? Though? Do you think we need to see them? So if we just fast forward like to November, like what in these few months, will we learn like the extent to which inflation is dropping. What would you be looking for?
Well, we need to see consistent downward momentum. We saw a little bit of an improvement in April, but I'm not really going to count that as a month of improvement. We saw more improvement in May. Absolutely June we're starting to see more improvement, So we now have two good
months under our belt. We need to see this downward momentum, this lack of upward pressure and inflation continue not just in July and August, but to a meaningful degree to really give the Fed enough confidence that September would be the appropriate time to take its foot off the break
and allow a less firm policy response. But again I would caution that the FED is somewhat nervous about making a larger judgment call on such a short amount of data, given that volatility that we saw at the start of the year.
We had a two pretty big kind of consumer oriented companies report some weaker than expected results today, Pepsi and Delta Airlines. I still don't get the Delta thing. Every plane is packed that I go on, But it kind of goes to the question of How is the consumer out there? How do you view the consumer today?
Well, the consumer is still resilient. Now, there's no doubt that the American household is feeling the pain from higher prices, higher borrowing costs, the resumption of student debt payments. But we are seeing the consumer continuing to spend. It's more of a second derivative decline, a lower pace of still positive expenditures as opposed to an outright decline in that spending pattern. But we see the support stemming from a
combination now of organic and inorganic factors. On the organic side, with inflation coming down, real earnings have turned positive and that's providing welcomed financial stability to many households. We also still see a lingering supplement of pandemic savings, and with rates relatively elevated, we see positive earnings interests as well. Now on the inorganic side, we continue to see a reliance on intergenerational wealth transfers four one K hardship withdrawals
credit cards. But regardless of the combination, what we're seeing is there's a number of factors that are continuing to suggest a good amount of spending and borrowing. Part of power on the part of the American consumer, suggesting ongoing resilience and positive activity for the US for the broader US economy.
How would you categorize the job market right now?
Well, the job market is still tight, but it's less tight than what we've seen. We are starting to see signs of pooling headline job creation as we saw did face some sizeable downward visions to earlier months, but thus far for twenty twenty four, we're talking about an average hiring pace of around two hundred and twenty five thousand. That's on par with what we saw in two hundred excuse me, that's on par with what we saw in twenty twenty three, with an average of about two hundred
and fifty thousand. So we're still continuing to see labor demand outpaced labor supply, with weight pressures still up near four percent. So this is still a solid labor market, tight ish conditions, but slightly less tight than what we've seen, and that's a welcomed improvement, suggesting that finally, this elevated level of great is having the intended negative effect. I'm
beginning to slow the economy, slow the labor market. But again it's this very gradual decline in conditions as opposed to falling off a cliff.
Economic exceptionalism. That's a story, a narrative that I've heard, you know, over the last twelve months characterized in the US economy visa vis say, you know our friends in Europe or in Asia, particularly China. Is that something you abscribe to, and if so, what does mean to you?
Well, I think, first and foremost, we have to put the US economy in the context of what we're seeing on a global basis, because, as we talk about some of these nominal figures beginning to show signs of weakness, on a relative basis, the US economy is fary significantly better than what we see in many of our developed counterparts abroad, which have either fallen into or teetering on
recessionary conditions. So when we look at the US growth rate now follow below two percent, nominally not impressive, but compared to what we've seen overseas, the US certainly does appear to be the strongest component in that global picture post pandemic. In this post pandemic environment, it was.
At least dirty shirt in a pile laundry, Okay, something along those sort of lines. Lindsay when we look forward to the election, not necessarily that will impact growth in the short term, et cetera. But have you modeled out any kind of policies, whether it's tax increases, slash decreases, or tariffs, in terms of what the economy might look like over the next four years as it relates to inflation.
Well, I think when we talk about the outcome of the November election, we have to remember that in many ways, it's going to be a number of sizable barriers regardless of who comes into power, whether it's the second round Trump administration or a second round Biden administration. We're still going to face elevated crisis. We're still going to face an ongoing divide between labor demand and labor supply, an
ongoing gap between asset holders and non asset holders. We're going to continue to face demographic issues, geopolitical risks, and international crises, and so in many ways, the pressures that are going to continue to retard the US economy are going to be in place regardless of who's victorious in November.
The biggest differences, as you mentioned, are going to come into play when we talk about immigration, border security, tax policy, specifically, corporate tax policy, international trade, and any additional regulations that we see put in place. But the US economy is on relatively sound solid footing at this point, and I do think that we are going to continue to see this lack of momentum going into twenty twenty five, regardless of who comes into the power in this November.
All right, Lindsay, thank you so much. We appreciate that. As always, Lindsay Pias, she is a cheap economist at stifle, joining us from her hometown Chicago, Illinois via zoom.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar Play and androyd Otto with the Bloomberg Business. You can also listen live on Amazon Alexa from our flagship New York station Just Say Alexa playing Bloomberg eleven thirty.
Delta Airlines weaker than expected results here this morning, stock trading down about five percent here, dragging down the other airline stocks. What's going on at there? I can't remember the last time I got on the plane and it wasn't packed. George Ferguson, Senior Aerospace, Defense and Airlines AANALS. He joins US all of the news. He's a Bloomberg intelligence. So George, what do we learn from from Delta what's going on out there in the airline business.
We're learning that fares are softer than I guess we all hope or expected. Paul, I think you just fly at core times, at really busy times for the airlines because somehow they're not getting the same price point data the rest of their customers.
Look.
Look, I think what we do know is that you know that the weakest part of the business right now appears to be sort of basic economy or those economy classes, and that's weighing it down. So actually, I expect that Delta's earnings report will be better than most this quarter. So I think it'll get worse and worse as you get into the low costs and ultra low cost carriers, because again that's I think where the majority of the pain is in fairs.
Yeah, because you know, going through the quarter, like corporate travel rose thirteen percent for Delta in the second quarter. Revenue from international passengers also increased, and premium products just ten percent. So basically, business people are traveling, we're going overseas, and we're buying business class or first class. So like, is no one going to Idaho in economy?
Now?
Well people are going. They're just they're going for lower fares. Right, Their load factors were great on Delta, right, they were like a eighty seven percent, So they're filling airplanes as well as they filled the year prior. I think, you know, Delta will get a bit of a tailwind as business comes back. That you know, that tailwind applies that Delta, United American and the big business airlines, you know, I mean, management always paints a really nice picture of how everything
is going. But every market but Atlantic showed lower yields year of a year and yields the price of the customer pace per mile they fly. So to me, that's synonymous with fares. So what I saw was weaker fares that were really bad. Into Latin America down I think it was twelve percent or something like that. They're down a couple percent for the domestic market. Into Europe it
was up up one percent. But if you do it on a unit revenue basis, I don't want to get too complicated about how that works, but let's just say that factors in load factors there it was down and so what that's telling is that they're having a harder time filling airplanes going across to Europe at the price point they want to fill. So they notched back a
little bit how full those airplanes were. So I generally think, you know, from a revenue standpoint, not boating well at all for the rest of the airlines they're going to report, and it was I didn't see any sort of silver lining, you know for three Q. I just it looks like a weakening market to me.
So talk to us about capacity out there, George. I thought that there's some capacity constraints out there which might push fares higher because maybe Boeing wasn't delivering as many aircraft that they want, maybe even Airbus as well, so the airlines didn't have as many aircraft as they really needed. Is that a capacity? What is the capacity of the industry these days?
Yeah, So I think that's a narrative that's definitely been going around the street, and I think it's pushed you know, some investment in airlines. So we just really we haven't seen that, right. I think there's a there's a couple of things that are kind of working against that, and I think one I think you, US airlines in particular have been taking plenty of deliveries they're prioritized by by Boeing. Right, Boeing sort of lost business in China. China has been weakening.
So I don't even know if China needs as many airplanes as Boeing used to send to them, but they, you know, they went around and got a bunch of orders from Southwest United Alaska, and Boeing had been feeding them airplanes before we had the you know that some of the problems earlier this year with the Alaska you know flight so and you know, so that means most of the US airlines had the airplanes they expected. We saw Delta. They added I think five percent more seats
and available seat miles they added eight percent. When we look at this market, we see in both two Q and three Q additions kind of in that five five percent, six percent, seven percent range for seats and domestics, seats in Latin America, seats going into Europe. And that's well above GDP growth rates. And so what I think also is going on here is if you were an airline and you thought this bounce back travel post pandemic, Hey,
there's all this pent up demand. They're all going to fly this summer and it's going to be growth greater than GDP. I think you were wrong, right. We're basically saying we think growth in travel is recoupling with GDP like it was prior to the pandemic. And you can't add five percent seats to this market. The US market isn't growing that fast.
What part of any of this? And you kind of sort of answered it. It's just also tough comps because we were expecting the scenario that you just lined out.
Well.
I mean, another thing we've put together recently. It's on the Bloomberg terminal under o A BI space AI r l N dashboard and EROG dashboard. We looked at return on invested capital. We looked at margins at US and global airlines and you know they did you know, they did better last year, but if you look at last year, those margins weren't pre pandemic margins. I mean, Delta is a bit of a standout. Their returns in invested capitol
are doing better than a lot of their competitors. And at Bastian called that out a bunch of times today on the call of course, but most airlines in the US market are not getting returns in invested capitol or margins like they were in you know, prior to the pandemic. So it is a tougher compa guess, coming out of the pandemic. But this is not the airline industry we saw in the past decade. And that's because we got
record revenues. But those pilots took a big chunk right when they got their twenty percent increases, and the airlines aren't pricing to get that back.
All right, George, great stuff has always George Ferguson, senior Aerospace, defense and airlines analyts for Bloomberg Intelligence, joining us from Prince of New Jersey. Are you flying anytime?
No, No, A whole lot of nothing. Well we're going to Orlando in October.
Right right, go see Mickey Melson.
Yeah, but that's a work thing.
Yeah, travel when I get paid to travel, it's my new thing. Or if I'm going to Ireland, which I'm.
Doing in September, meaning that you go international, do a big trip, but like you're not gonna.
Go yeah, people can come to me.
It's fair enough. I mean, you know, he's at the Jersey Shore, he's got stuff yeah, I don't know. I'm not going anywhere, although my best friend is moving to Costa Rica. Oh so I feel like it'll be one of those things where I'll be like, Hey, I got an extra day. I'm gonna get to Costa Rica for three days for two hundred bucks on Jet Blue. Yes, which feels like it sounds good.
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