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. All right, let's switch gears to real estate, and we can do that because I've got a lot of questions about real estate, particularly because half of midtown Manhattan nobody's in their office buildings, So we want to get to the bottom of that. Lisa Nie, she is managing partner
of real estate at Eisner Amper. I'm taking that as a promotion, dude, managing partner anywhere you go, managing partner is big. But she helps us kind of think about what's going on in the real estate sector. She's at Eisner Amper, So Lisa talk to us about kind of where we are with the real estate market today. We are on the other side of the pandemic that's in the rear view. The world's back to normal on so many metrics. Where are we in real estate? Yeah?
Thank you?
For having me.
But that's that's a great point and a great question. But let's put a little bit of landscape on that. So everyone's worried about where we are in office space, but when we look back, it's a supply and demand problem.
And you go back.
Even to the nineteen nineties. I don't know if you remember, but there was the sea through office problem, so the offices were empty. People weren't in those office buildings in nineteen ninety. We had too much supply at that point, and then as we've sort of grown over the last couple of years, the pandemic is one of many problems that office has had. First we started with it was three hundred square foot of person, and then it went down to one hundred square feed. Then we started doing hotel,
so now we needed less people in the space. Then when you start looking at office open space concept, exactly what we have at Bloomberg, exactly what we.
Might get that in nineteen eighty two, by the way, before like Zuckerberg was even born, before there was an Internet, I was doing.
Fully space, so that's also less space. And then we looked, you know, I'm in a service profession. We had libraries, we had file rooms, file cabinets. You don't have any of that. So that was four problems that were happening with office before we even got to the pandemic, which is now a behavioral issue of where are we at when where we need that hybrid office space? So what's the nail on the coffin and where's that equilibrium of what really people need for space to do their jobs.
And I think that's that realignment right now is what the pain we're having, and no one's able to figure out where we're going to solve that. And so that's why you hear about Crepsy's watch list and the delinquency rate for the mortgages is going up. People are giving back office buildings here in New York. And it's not because they don't believe or that they don't have the capital to invest. They just don't think that that is
a good investment right now of their capital. And so I think that's where we're sitting with office, well the core.
Of any kind of investment. Paul will agree to this as timing right, it's kind of forecasting exactly how long that trend is going to last. And it feels like when we talk about commercial real estate. This idea of hybrid work or hybrid lie or whatever it is something still kind of registers as temporary when you are valuing
commercial real estate or looking at it. Is this something that we're going to be still talking about in ten years time or is this something that's going to kind of maybe dissipate once this recession hits.
So real estate's cyclical, so we can talk about retail, we can talk about multi family, single family, and it's all pretty cyclical, and we don't really know the value of real estate because there's not a lot of transactions happening right now. So to your point, we don't know where things are going to end up with office or
with any of the sectors of real estate. And that's what people are waiting for, is when is the trading going to happen so I know the value And it's a behavioral issue of when are people going to come back? It's more of remember, really, when you think about an office building, you are leasing it for seven days of a week, but you were only ever using it for five and now you're at two or three. So it was a unique rental or a unique acquisition to begin with.
So where's that behavioral and where does the pencil mark out what am I going to pay for that office lease if I'm only using it two to three days a week. To your point, it's valuation exactly.
And do we have any evidence yet? I don't know when if there's a big waterfall of leases expiring and renewing in New York or San Francisco or Chicago, is there a year or a time when we're going to get a really good market sense of where the market is, Like you can tell me like five jillion square feet are going to come up for renewal next year in New York. And the question is is it down twenty percent?
Is down thirty percent? Do we have any sense of when we're going to get that or is it just kind of over time.
So that's a great question because the realignment is two things. It's the expiration of your mortgages and it's the expiration of leases. Mortgages we can tell because we know when when the debt cycle is going to come up, and we know when it is the lease is that's going to be a slow bleed because we don't know when people are going to start giving back or what their needs are, and so that's where the uncertainty is that credit worthy tenant that people were so excited to have
into their space. We don't know how much space they're going to take back and when those leases are going to start to expire within the building. And so that's your point is exact onto that's the uncertainty.
What about kind of all the talk we hear about that this banking turmoil that we've talked about in the community banks is ultimately going to have this big ripple effect in commercial real estate. One has that kicked off, are we seeing that? Are we going to see that? How are you viewing it as someone who's part of this industry?
So that that is going to have a huge impact, and it's part of what the regulators within the banking community are going to allow the banks to have on their balance sheets and where underwriting is. And so they're all very skittish, they're skittish to invest back in there.
And so as the mortgagees come back up, somebody's going to have to put capital back in and infuse capital back into those buildings, because if you had a hedge, or if they're for the interest rate environment, somebody has to come up with that capital, and the banks most likely are going to keep a very low loan to value ratio. They don't want to take the properties back, they don't want to put them on the balance sheet, and they absolutely don't want to write down their balance
sheets for those discounts. And so there is going to be a point where the banks, and this the banking industry is going to have a huge role as to when they go out there. Are they going to sell portfolios of loans that's very expensive. Are they going to
give back the buildings one at a time? The banks don't want to run those buildings, and so the regulators are going to keep really really strict lending restrictions going forward, and certainly they're going to be looking at what's on the balance sheets of those banks right now and be very concerned about.
Uh boy, is how they do that. I just feel like this is can get worse before it gets better. Lisa Nie, thanks so much for joining us. Lisa Nie is the managing partner of real estate at Eisner Amper, joining us live in our Bloomberg Interactive Broker studio. Talking about that the commercial real estate is some tough times and some tough times ahead.
You're listening to the Team Ken's live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot com, the iHeartRadio app and the Bloomberg Business app, or listen on demand wherever you get your podcasts.
Pretty you know, on the Mount rushmore of work from Home. The two of the founding members, Yeah, to be our next guest.
I used to sit between both of them.
Really, yeah.
My desk was nestled right in between.
I have such huge respect for these guys and how they're doing their business these days. Cameron Christ and Vince Cignirella. They cover their macro strategists. They write some really good smart stuff on these markets. They talk to a lot of smart people and we get a few minutes of their time every once in a while.
And went together every once in a while they're even right, and every once.
In a while they're even right. But to get them together at one spot is big, camer I want to start with you here. Matt Miller just walked in. You know, he starts his day a little bit. Lady gets in here around ten thirty. But he walked in here with his brand new leather jacket, and he says he doesn't believe he thinks the FED is not going to raise rates this June meeting. Do I should I listen to Matt Miller?
Well, I mean they've basically told you they're not. Philip Jefferson is the mooted new vice Erman basically came out last week and uh said that they should pause and have a look around, not necessarily saying they're gonna it's a definitive end, but that they they should they should pause. And you know, it's kind of they're like Ef Hutton when they talked, you're supposed to you're supposed to listen. Pretty pretty won't get that joke, but I know you will, Paula, I know Vince will as well.
See what I had to deal with every day.
If you guys give us a stick for where we work, you know, we can give you, uh you know, let it let our experience come to bear. Yeah. So, I mean they basically provided some some jawboning over the last week or so that June is probably off the table. So that's adjusted market pricing, and we're kind of going to be left parsing the signals for the second half of the year. Right now. Market still thinks there's a
decent chance that they'll have to go again. But obviously things can change, and and today's service services eyes ISM provides a less robust or less upbeat signal than we had from say, the labor market data last Friday.
Well, Vin's hop on in here because one of the key stark memories of the start of this monetary tightening regime, Chairman Powell said over and over and over again, we don't want to make the mistake of the seventies. We don't want to stop too prematurely, and therefore we're going to kind of put our full force behind tightening. And yet here we are with a super super hot payrolls report on Friday, one trading session later, not even we
have this ISM data. How does the Federal Reserve in that context avoid some sort of vulgar repeat by potentially skipping this month.
Well, you know, I think any comparison to the seventies, having sat on guess lines waiting for the ODDI even number license plate situation, this is nowhere near the seventies. And I think what Powell is speaking about and worrying about credibility, it's not credibility that they're going to make the mistake of the nineteen seventies, I think realistically, and he's not emitting it. They don't want to make the
mistake they made with calling inflation transient. They're trying to catch up for a major mistake they made through the pandemic, and not to be fair to them, wasn't so much of their mistake as much as it was the fiscal policy of overstimulating the economy at that time. Now, all well and good, it was necessary, but then when the economy started a turn, there was no movement interest rates and there was no appetite on a federal level to
take money out of the economy. So now he's faced with this dilemma of trying to maintain the Fed's credibility that they've actually lost the financial markets and not thinking they're very credible at the moment, and trying to walk this tightrope between not seeing inflation come down fast enough for them and overtightening and perhaps pushing the economy into
a recession. I will make a note there was a you know this headline that's going not at all really spoken about the idea of raising capital reserves on banks is going to be a very very big draw on growth and no one's talking about it and no one's seeing it. But when you raise capital reserves on banks, that's lending they can't make, and that's not even being discussed.
So depending upon how high they raise those additional capital requirements could be enough tightening that the FED doesn't have to do anything else.
Interesting all right, Cameron, I was on a holiday on Friday, so I missed this whole non farm payroll thing. But it seems like people want a job. They can get a job. You can't have a recession in that kind of scenario.
Can you?
No?
You and the thoughts so, but two provisos. One is that you often find that the labor data is misleading at turns, because it's not like the payroll numbers comprised of the BLS calling every business in America and saying how many people you I'm going to feel you out working for you?
Right?
So, there's a lot of statistical techniques that are used to estimate a broader conclusion from a relatively limited sample, and that works very well in normal circumstances, but at turning points you find that these modeling techniques don't work. So there is a that's one thing to consider and the other is that this economic cycle is likely to be very nonlinear. Things will look great and then you'll have a wily coyote moment and things will suddenly look
not very great at all. Now, we thought that there was a reasonable probability that that would be the outcome of the March banking sector turmoil. The evidence thus far is that that hasn't actually been the case. And I'll admit had in the air that I thought we would have a more immediate and more substantial impact than we've seen in the data thus far. That han't been said.
And this is adding on to sort of Vince's point about the transmission of credit, is that we're now at the point, now that the dead ceiling nonsense has been resolved, where the Treasury is going to be sucking a lot of money out of the financial system by issuing a veritable everest of Treasury bills, and that is going to
have an impact. Traditionally, when bank reserves at the FED decline substantially, you tend to see lending go down, and you tend to see financial markets, certainly the equity market go down. At this point, it's indeterminate whether the demand for treasury bills will come from bank deposits or from money funds, who would then try, you know, essentially take money out of the reverse repot facility at the FED
and use it to buy treasury bills. But it's a significant risk that we have to consider moving forwards.
You know, the irony of Fens and Cam talking to me about issue and treasury auctions and stuff like that. They actually taught me how to how to interpret them back in the day, all that funny jargon stops and tails and all that jazz.
Yeah too, I just wait to read the first two paragraphs.
Yeah, well, they're usually the ones writing it well. Cam following up on that point when it comes to kind of issuance and lending, haven't both lending and liquidity kind of been on I don't want to say like the drop, but like they've been declining significantly in the last couple of months because of the banking turmoil. I get your point about liquidity, but to marry it with the point
that Ben's just made about the capital requirements. If lending is already dropping, how big of a difference can that capital requirement increase really make If there is an appetite to lend anyway, Well.
Again, I think it's it's not the sort of thing you're gonna wake up one day and lending will have dropped by half a trillion dollars. It will be gradual
until it's not gradual. And from a financial markets perspective, I think it's reserves that are going to be the more timely issue to consider, because even though sort of bank deposits have dropped over obviously substantially so far this year, bank reserves and FED have actually increased as the Treasury has drawn down its general account, sort of spending every last penny that it had hidden under the FED sofa cushions.
As that treasury account is built back up through the issues of Treasury bills, now there's going to be a disproportioned impact on other FED liabilities, the two main components of which are these bank reserves and the money fund usage of the reverse repot facility, and how which one bears the brunt of treasury. Treasury is real rebuilding a general account, I think is going to have a significant impact on financial markets more broadly and liquidic conditions.
All right, So thirty seconds, Vince, I'm putting you on the spot in the context of what Cam just said, Vince is like, bring it on. Is there a sense then of even more risk taking to get that yield, to get that carry? What are you seeing in that thirty seconds?
Real quick? I will tell you this, Like you looked that was up seven hundred on Friday. Yeah, everybody knew on Friday this treasury issuance is coming. And this is the third lie that media and analysts are pushing. First Europe was going to freeze to death, and the death ceiling was going to crush us. And now treasury issuance is going to blow the lid off interest rates. If they go up high enough, there'll be a lot of buyers. It's just I think another story.
All right, guys, thanks very much for joining us. Both of you, Cameron Christ and Vince Cignarello, the macro strategists with Bloomberg News. They're the work from home kings. They've mastered it, and nobody does it better than we appreciate getting their time and getting their time together.
You're listening to the tape Cancer Live program bloom Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa play Bloomberg eleven thirty.
All right, here's one of the biggest trends I've noticed over the last five or ten years, which is just this whole thing of exchange traded funds. The kids call them ETFs. Man, what an exploding business. And our next guest was smart enough, you know, twenty some odd years ago to kind of get in on this game, Ben Slaven, Global head of ETFs at B and Y Mellon asset Servi. And that's a pretty good gig. Ben, Thanks so much
for joining us here in our studio. Here again, I've just been awed by the amount of capital going to the ETF space just over the last five to ten years. It seems like where are we today. Just give us an overview of kind of the ETF space in general.
Well, first of all, thanks for having me back. Look, this trend has not abated and actually continue to accelerate. So we've seen a huge divergence between investor's appetite to put capital into ETFs versus traditionally mutual funds and other structures and what we saw really in the last couple
of years was a significant pickup. So last year was the widest gap ever between inflows into ETFs and outflows from mutual funds, and that gap was around one point five trillion dollars, which is kind of hard to get your head wrapped around. But what we're also seeing is
a little bit you know different under the hood. So this equity trade or this equity difference in terms of investor preference has you know, been in place for a while, and last year we saw a much larger pickup in investor adoption of fixed income ETFs and it picked up about three percent of market share against mutual funds. And that's a huge leap and a shift now showing investors widening out their preference for the ETF structure.
When it comes to ETFs. I mean, the reason for a lot of the retail investor based to hop into them is liquidity. At the end of the day, access things like the bond market or the commodities market, which is harder to get to. Are you seeing that kind of sustained momentum from that class of investor.
It's a mix, So retail is absolutely part of it. And actually we saw a pretty large uptick, especially in the pandemic and kind of the rise of the retail trader really adopting thematic ETFs. We saw some of the leverage and short ETFs as well catch a lot of attention from investors. But also what's changed in the last couple of years is certainly the institutional investors are really
getting involved in ETFs in a big way. So for example, that stat I just quoted on fixed income ETFs, Yes, it's some retail, but a big piece of that is also the institutions jumping in to use ETFs exactly as you were just saying as a liquidity vehicle priced discuss and in a way to get access to some of these harder to reach asset types.
What type of institutional use is there for ETFs? Is it hedge funds? Who uses that? From an introdutional perspective?
So the short answer is yes to all of it. Okay, you know, just a couple quick examples. You know, we're seeing the traditional institutional investors like pension funds for example, who again are using ETFs for a variety of different ways to equitize cash to you know, use them as
again a source of liquidity. But we're also seeing the hedge funds get increasingly involved in different using more sophisticated strategies of course, But most interesting is mutual funds themselves have become a bigger buyer of ETFs, using ETFs to do either asset allocation. So think about a fund of ETFs or just using again ETFs in that same way to get exposure to a targeted asset class or a
liquidity sleeve inside their portfolio. So we're starting to see this convergence happen, and again that's another trend that's accelerating.
Well, let's talk about trends in the marketplace then in terms of kind of any favorites that are seeing excess flows or no flows at all or outflows.
What are you seeing?
Well, look, in May, we've started to see a pickup in flow into etf so we saw about thirty five billion come into the industry, which is muted considering we had the last two years of record inflows. Now granted that has everything to do with markets getting a lot of competition from money market mutual funds, so the data is skewed. So there's really an anomaly here with all the investor interest in chasing those high money market yields.
But we've started to see some money come back in What's interesting is under the hood again in May, we've started to see an increase in appetite for equity ETFs
fixed income much more so early in the year. But looking under the hood again, what is another little trend that we're picking up on is with that inflow, we've seen money come out of value ETF specifically products like dividend themed ETFs, which again had caught quite a bit of institutional and retail attention in the last you know, nine to twelve months for sure.
Talk to us about this. The structure of the ETF market in general, is it who are the big players? Is it diversified? Just give us a sense of like who really runs this business in terms of assets?
That's a great, great question. Look, one another interesting element here is the amount of firms, both everything from startups to large brand name acid managers seem to be jumping into the space. So in the last couple of years, we've seen record amount of product issuance. Actually a stat I like to quote it B and Y Mellon. We've been launching approximately one ETF a day on average somewhere in the world the last couple of years, just to give you a sense of how quickly these products are
coming to market. At the same time, it's driven by some of the existing players like Blackrock, Vanguard, Invesco and others, but also startups and brand name asset managers who have just said enough mutual funds can't just cut it anymore. I'm looking to launch an ETF as a way to again attract invest your interest and certainly recognize it for the benefits and potentially the better structure in many cases for investors.
And what does that then mean in terms of kind of your competitive ability now that I'm thinking about it. When you mentioned your Vanguards and your black Rocks about thirty seconds here, I mean, if you're putting out one ETF a day for years, are you able to see kind of demand catch up to that or is that just purely offerings?
It's great question. Different is obviously key. A lot of those bigger names and those assets are in passively managed ETFs, but a lot of the action and the majority of products coming to market are actively managed. So it's these are firms that are trying to differentiate and that is going to be absolutely critical. But I would say one of the reasons why I guess to bring it full circle I got into ETFs all those years ago was
the innovation. And I always make the joke that it's the most fun in the industry by far, because this is where the actions that is, and that is where the competitive game is being played.
All right, Ben, thanks so much for joining us. Ben Slavan, Global head of ETFs for b n Y Melon Asset Servicing, joining us here in our Bloomberg Interactive Broker Studio.
You're listening to the team Ken's are Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot Com, the iHeartRadio app and the Bloomberg Business app, or listen on demand wherever you get your podcasts.
Kind of the news today, you can make it the lo How does Maddie was in the commodity space and crude oil Saudi Arabia? I think a surprise to me, at least cutting production outside of the OPEC plus group, but just cutting production on its own by a million barrels a day. That seems material. I don't see that every day. So I figured, let's get this commodities guy in the studio. Maybe he can help us out there, Mike mcgloone. He covers all the commodities from port bellies
to corn, to oil to crypto. He's our guy, and he's actually in the Bloomberg Interactive Broker studio. And that's just because it's getting down towards summer. John in Miami it's too hot, so now he has to summer up there in Midtown Manhattan. I told him it was going to happen. Mike, thanks so much for joining us here. I don't recall seeing an OPEC member kind of on its own, much less Saudi Arabia kind of stepping out and changing production. What do you make it?
Today's it is rare for them to kind of front run the market like this. What's typical is for them to cut during bear markets. Okay, And that's my signal that this is a bear market. And I think they know you've seen it with price action today. We bounced about two bucks overnight, three two fifty for a while now, or maybe up a buck seventy two dollars a barrel.
And it's what's happening now is markets are kind of waiting for this the Saudi minister warned us, you know that they might be hurting, and so people who've been waiting to resell at higher levels have been waiting for this, and I think that's what's happening because.
It's a bear market.
Remember crewell peaked around one thirty last year, it's seventy two now, and it's the macro that's overwhelming. So I wrote about it again today. I still looking for the head towards fifty dollars a barrel.
Now, okay, fifty dollars per barrel is your call. And you've been there for a long time. Fifty before one fifty. I forget how you phrased it, but yeah, you're still sticking out with.
That, sticking with it and adding to it because to me, now it's getting worse. We're in a situation now. First of all, it's the macro's overwhelming. We talk about China demand. We're all seeing that is becoming less. You know, it's disappointing. Now that's what we expected because remember China kind of made enemies with its best customers US and Europe. Okay, so that's tilting that way, that's my And then it
is the massive paradigm shift of US production. So if you add Canada to our US production liquid fuels, it's about twenty six million barrels a day. The significance of that is as well above consumption, maybe four million bills above consumption. That's what's changed versus maybe the great financial crisis. That's overwhelming force and the ruling commodities. As you're always going towards the marginal cost of production. Now natural guests already did that. It spike to ten, back down to two,
and it's stuck at two. Crude else is following that path, and the US the largest producer, the average cost of production based on data and the terminals around fifty dollars a barrel.
Is it concerning at all? Or what's the thinking on Saudi being the main driver, the only opet.
Plus memory Exactly, they're just trying to catch up being the main driver.
Well, that's more.
What they're wise and what they're really doing that why. But the matters for me is what's it going to do for the market. It actually helps the US in a way. We're net energy exporter in terms of massively if he terms natural gas. This is what's change. And yes there's some oil that's still important to us, so Saudi, but it really hurts their customers more. I mean they're raising price, isn't cutting production? And what's the number one
customer China? So I look at it. It's just a part of the tree in the forest of that diminishing significance of this cartael.
That was a big part of our lives.
I mean, I grew up in the seventies and you remember those crisses those days. It's amazing how we've completely shifted the other way. And now it's also part of this significant paradigm shift. First of all, if you add in FED tightening that's very rare, commodits collapsing, and then towards evs. I mean almost ten percent of total Automo sales and are evs. That's stuff that we dreamed of ten years ago.
The United States is not part of OPEK, right Is there any reason they should be? Now that we're kind of a big player now, I mean, aren't we Like? How can we not be involved in.
Free market capitalism? Natural gas is a good exactly, mean, it's just good old free market capitalism on a global basis is what energy has become. It's because of OPEC's really boosting that price up above one hundred dollars a barrel, you know, up till twenty fourteen. That really accelerated the USL revolution. And that's part by piece of prices collapse. Now people keep talking about, oh, Shelle production is going
to decline. They've been hearing that for a decade. And I read this book called the Domino Effect, and it just points out, Okay, that might peak a little, but then there's the next technology, in the next technology. That's what's happening so fast. And I like to point out crude oil from a supplying demand standpoint, we're creating more of it with technology, replacing it with technology more than
any other commodity. So if you're gonna be bush of commodity, you start with gold and maybe triple trickle down the copper. But crude oil is the one that's just being replaced. I mean, I ride my electric bike too in Florida every day and I don't need a car anyone.
Yes, you do. Look at him now, is it a pedal assisted bike? Of course I did that, big old sissy, okay, but but it's battered assist as opposed to these guys who deliver the food here on sixth Avenue or Election to Avenue. They're just you don't have to pedal, you just fly down the show. I'm glad you mentioned that, Paul.
That was the paradigm shift for me.
About five years ago.
I remember seeing all these guys you I always here. Here are the motorbikes right now. They're all silent, they hardly ever pedal. But I looked at those bikes. They're not pretty, they're ugly, but they go fast. They don't have to pedal, Like, that's what I want. And so I came back a couple, you know, a couple of weeks ago, and you see.
All of you don't hear motorbikes anymore.
It's just that it's the technology is moving so fast. And the key question I asked, so TESTA is the same thing. It's just set power unit providing that electricity. Where's that power unit going from? It's only getting cheaper, faster and more powerful from batteries to made me feel sales, it's just what's all right?
All right, so you're zipping around South Beach on your bike. I get the visual, all right, Let's switch gears to crypto for just a second, not a good day for crypto space Finance Holdings, and as chief executive officer jo workus of breaking US rules according to a federal court following by the Securities Exchange Commission. What's it mean to you is somebody who looks at this crypto space parish.
I hate to say, because the crypto people do not like you when you say things they do now want to hear, which is particularly why I have to use my independent voice to say, I think you people are too overwhelming, the optim optimist, optimistic that the worst is not over. And I got that sense a lot in the bitcoin Miami. I see it a lot. Everybodybody says the worst is over. I hear it in the stock
market too. And that's what's happening late with crypto bloom Bloomberg, Galaxy, Crypto in NIXT the bitcoins down on the quarter about six percent, yet the stock market's up. That's not supposed to happen. So I think what's happened is you're seeing more and more. There's just massive speculation in that space and still needs to be purged. And the fact we had a big boom, a big bounce, means to me
the risk is it tilts back lower. So typically what happens if we're having this, you know, NASDAK lifting all boats rally, Crypto should be leading and they're not. So I'm sure I'm pointing out that maybe the Nasdaq is just in a short term bounce and everything's heading back towards that recession. That most of the spect and on along pointed out. Is this work from home unemployment. It's really ticking up. It's a good sign. Ono Wong's are chief economists. It's truly ticking up, showing signs.
Of RECESSI familiar with this whole work at home concept, but I hear that's the thing, all right. I appreciate it. Mike mcglohone, he covers all the strategy stuff, all the commodity stuff for Bloomberg Intelligence based down in the self proclaimed crypto capital of the United States, Miami, but we got him up here on our Bloomberg INTERACTI Brooker Studio in New York.
You're listening to the tape Cat's are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com.
And the Bloomberg Business app.
You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa playing Bloomberg eleven thirty Madison.
My fixed income strategy is simple. I'm walking up, I'm buying a two year treasury like four point five percent, and that's it. I'm done. I'm going down to the beach toes in the sand. That's it. But some people make it more difficult. I think our next guest is one of those guys, Steven O, Global head of fixed Income at pine Bridge Investments. He's based in Los Angeles, but of course he felt the need to come to the global financial capital of the world that is New
York City, and he's in our Bloomberg INTERACTI Brooker Studio. Dave, what do you think of my strategies buying to your treasures and just kind of rolling them over.
You know, it's not a bad strategy at this point in time, giving the yields that you're getting, although I would recommend if that's the approach you're going to take, you're probably better off rolling three month t bills because our view is that the FED is not going to be as aggressive or as quick to cut rates than what's being priced in.
You think a longer pause or.
I do you know? Right now, the market is expecting that the FED will start cutting at the end of this year, as well as the depth of cuts into next year. We think it's just unlikely to play out, and therefore market expectations are a bit too optimistic with respect to FED support.
All right, So if I wanted to take maybe a little bit more risk, a little bit more duration corporate credit, where should I start my analysis there?
Well, corporate credit right now is much maligned, in part because of all these talks about recessionary pressures, the faults and so forth. We think there's a lot of value across the spectrum of corporate credit. Of course, for more risk averse investors, investment great corporate credit is a very good space to be. But I think some parts of the leverage finance market right now, I think the you know,
ugly step child is leverage loans. But we think leverage loans are a little bit misguided in terms of what markets believe are going to be the default race and the problems and the absolute yields that you're getting there are more than adequately constant compensating you or another hybrid
way to play that market is CLO tranches. Right now, when you look at where CLO tranches are yielding, you know, double bclos are fourteen to fifteen percent, Triple a's are spreads of you know, one eighty to two hundred over. And then finally, last year for US was a theme about going within the US as a defensive strategy because we thought US was really where the fundamentals were superior.
This year it's about.
Also expanding outside of the US more toward emerging markets and other parts of the world.
Is that strategy partially because you're anticipating downside to the US dollar or what's the single I guess driving force find.
That the downside to the US dollar is a small component, but more so than expecting the dollar to depreciate meaningfully. We don't think that the dollar has much risk of appreciating, and so the headwinds will dissipate. But the bigger element of that is if you look out for the next two years at the growth expectations of US, which is decelerating versus emerging markets, the gap is going to increase, which favors the fundamental outlook for many parts of emerging markets.
All right, Steven, So if I'm an analyst in one of your funds and I bring an idea to my manager, to you as the head of fixingcome, am I running my recession model for the forecast? Or am I running kind of the world's okay kind of model?
Well, first of all, we have over one hundred investment professionals who are focused on the strategy, So you know, what is the analyst giving us in terms of that outlook and what is our top down view? And even though we get caught up into debate around recession or no recession, I think it's more important is what type
of recession environment will it be? You know, we believe that there will in all likelihood be a technical recession or recession definitionally, but we don't see unemployment levels going up much more than another percent or so. So it's the type of recession which would be very mild in nature. And I think that the FED is definitely headed toward engineering a soft landing.
Do you think the FED has had any missteps along the way or would you advise them to do anything differently than you're anticipating.
I think it's easy to criticize in hindsight, and that's what we do all the time. But I think the FED has done a fairly laudable job. I think the one area where I would somewhat disagree with is we are definitely in restrictive terrictory, and I would argue we have been. It's really how quickly do you want to achieve the deceleration goals with respect to inflation in particular. And you know, my view is that you're much better easing on the breaks to a glide path rather than slamming on the bs.
And I don't think.
The FED necessarily needed to be even where we are today, but they want to achieve their goals a lot more quickly, and that's the differential that I would have with them.
Early in my career was at the Chase Manhattan Bank lending money to media companies, technolo telecom companies. They had no assets. We lent against cash flow, We land against airwaves frequencies. My credit guys had no idea what we were doing, but we would lend to four or five six times cash flow on a senior basis. That's leverage lending. To me, what are you guys doing in leverage finance these days?
What are some of the sectors you guys like, you know, we are value investors and traditional credit investors.
We look at cash flows.
And for me, I just never understood when the telecom infrastructure build out was taking place into early two thousands on business plans. That may be a great equity story, but that's certainly not a fixed income.
Creditsortance we took on. We led money to fleet call, no company. It was just against spectrum. People don't know what fleek call is. It was basically a taxi thing. But we lend money those guys, but we got warrants.
Well, you know you're talking about the days of excess, right and during Polish periods, that's exactly what you have. And I think make Samir John, it's very important to have discipline when when you're chartered with making loans, when you have capital to invest, often it's not about making prudent investments. It's about what do you do that's the relatively the more attractive, And I think it's important to say we're not going to lend to those types of segments.
That's not what we do. That's beyond our knitting, that's beyond our comfort level, and be willing to in the short term in some ways underperformed by not getting the type of yields that the market may offer.
Wait, but I love this line of questioning, Paul, because you have the exact experience.
To why to what you do now we didn't know any better?
Give me another example.
I love this, Why just again? My favorite stuff? We just again? You lend against cash flow and Steven knows all about that because your cash net income doesn't pay you back. Cash flow pays you back. Free cash flow is what pays you back. Are there some sectors here right now? Let's talk about that emergent market thing, because we don't talk about emerging markets enough. In emergent markets, where would I start? I mean, I can't go to China? Can I?
You absolutely can go to China. We think there's a fair amount of value in you know, Asia. Credit is one. Even though China's you know rebound right now is bit irregular and there's fits and starts, it is absolutely rebounding. So one component of China where there'd be no greater comfort level. Everyone tends to focus is on real estate and property. But that's not all about China. There's other
things beyond that. I think travel and leisure rebound. For example, we have been proponents of the McCall casino reopening and rebound. So there are pockets of consumer leisure and entertainment and consumer travel that we think just as the US coming out of COVID still is on the rebound.
That's the sector.
But also we believe that with China reopening greater parts of Asia, whether with or without, China has also experienced some very good growth dynamics overall our opportunities, but we tend to approach it not from necessarily a less buy a basket of everything. You got to pick and choose, and we have teams on the ground over there who's responsible for doing that.
And you think that the China reopening story has just started, then like what inning are we in when it comes to the demand that's going to come from that.
The demand is going to be a little bit disappointing and has been versus expectations overall, but we do see if you look at things like airline travel data within and outside of China, that's one area where we're still in the very early innings of that demand rebound. Overall, I think the manufacturing side is going to still struggle a bit. So that's why we're turning more toward the consumer, more towards services, and more toward internal expenditures.
Steve, and I know you spend some time at Bank of America, which I refer to as Merrill Lynch on the Hyld trading and distress that trading desk. If you have a big position in pine Bridge and you need to move it, can you move it?
The good news is we don't have big positions because we're mid size of institutions. But no, you cannot move big positions anymore. The market is, you know, has always been semi liquid for distress or even you know, any type of credit, and now it's become much more illiquid overall, and so it becomes a much more challenging environment where you have to have greater conviction of what you're buying within credit because the liquidity is definitely going to be
more challenging. And I think at some level of size, you know, for example, in the most liquid part of credit investment, great corporates. You know, back pre financial crisis, we used to get fifty by fifty markets. Now you're lucky if you can get a five y five market yep, yep.
Chat times have change. Steven Oh, thank you so much for joining as Steven Oh. He's a global head of fixed income at pine Bridge Investments based in the City of angels but he joins us here in New York City on our Bloomberg Interactor Broker studio. We appreciate him coming in giving us his lay of the land in the fixed income space. I'm just looking down at the market. I'll give you some of the treasury quotes here. We
got the two year treasury four point four to nine percent. Again, I can sit there for a couple of years and get that that's not too bad. Ten year treasury off about three basis points here, three spot six eight percent on your ten year treasury.
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All right, now, let's pivot to Maddie. I think this debt ceiling discussion, which was front and center for you know, a month or so, it seems like it's been resolved. In My question is kind of what comes next. Doctor Nancy Kimmelman joins us. She's an economics professor from Northeastern University and Tuffs University. So doctor Kimmelman, thanks for joining us here. What does come next here with this debt ceiling deal? What should we be thinking about?
Well, I think what we're seeing on the political side right now is sort of an interpretation of what was the dynamic, what were the dynamics between the Biden administration and the Republicans in Congress. And there have been some interesting articles written about how really Biden seems to have gotten a good handle on the Republican Party, and maybe there's some opportunity ahead through the two parties and for Congress and the White House to work better together. I
think that would be hopeful. At the same time, we do know certainly that the Republican members of Congress are our claiming this of success and that it got the administration to take some cuts. The cuts aren't actually that significant, and in fact, you know, everyone pretty much knew that there was eventually going to be a deal, and there
was a deal. I think at this point, you know, other than maybe a little bit of post mortem, I think the markets and most people are sort of looking ahead and saying to ourselves, Okay, well we're now what We're past the dead ceiling. We're back into worrying about whether what the FET has done is enough? Yette. Is the economy weakening? Is it weakening considerably? Is it weakening
at all? So I think, unfortunately the Friday employment reports that we got through a lot of questions our way, and we're back into the sort of old story of we in terms of this, in terms of this tightening cycle, and where's the economy? Where's it going?
Does the back and forth over the debt ceiling lead to any repercussions for the US economy on the global stage moving forward? Or is the global world sloughing it off as much as markets did.
I think everyone's sloughing it off. First off, I don't think it has any repercussions in terms of economic performance from what I have read. I don't personally have my own macroeconomic model, but I read the results of those who do, and the folkse who run these models do not see any real impact on the performance of the economy and the remainder of this year or even next year.
Did the debt ceiling talk the most aggressive? The most aggressive result that I saw was that maybe it would turn into a one tenth of one percent increase in the unemployment rate at some point this year. So I think the economic impact is mooted, muted, and I think also the political point is moot at this point. The fact is, everyone sort of knew that they were eventually
going to get together. They took it a little bit too close to the wire for everyone concerned, but they did come through and it was sort of back to normal.
So I guess with the deal in place now, there are some folks in the in the money markets, I guess that are concerned that the Treasury will soon replenish its cash balance by selling more than one trillion dollars of bills through the end of the third quarter. That seems like a big number to me. How does that all work?
Is a big number.
It is a big number, but it's not a surprising number. I mean, the Treasury had to train its auction schedule as a result of the potential for the debt ceiling not to be lifted. Now that things have gotten back to normal. They're going to resume a much more normal after we get through the next couple of weeks, They're going to resume a much more normal auction schedule. You know, I looked this morning, and from what I could see, the three and the six month Treasury auction, the results
that I thought eleven thirty looked pretty damn good. So my suspicion is that people are worried about there being enough liquidity in the market in order to be able to stop up the new securities that the Treasury is ready to offer. And that really hasn't been an issue
for the US Treasury for many years now. And I suspect that there's plenty of money on the sidelines, whether it's in money market funds or maybe it's in some equity funds where they were just sort of hoping at some point to be able to push it back into
a saber asset like treasury builds. So my suspicion is that we're not going to see distortions in the yield curve, and we're not going to see distortions in the in the markets due to the Treasury and zooming fairly fairly aggressive schedule of auctions.
So money market funds specifically, that's that's all good from your perspective.
Well, I think I think the.
Money market funds. First of all, there's a lot of money there, but I think those money market funds will tilt towards putting more treasury securities in the portfolio. And frankly, if I were running a money market fun and I were an aggressive active manager, that is something that I would want to do. First off, because the economy is still uncertain. We don't know where the said is going. But the other part of it is that the banking
system is a little bit risky. We're seeing we've seen, you know, already a couple of name failures this year. People are concerned about the fact that there's going to be new bank capital regulations UH that are imposed upon the banks, and that could lead to some more trouble
amongst some of the big name banks. So I think it makes sense now that the Treasury is going to be back selling a lot of treasury securities, I think it does make sense for money market funds and a lot of actively amounaged funds to put more treasuries back in the portfolio because the risk profile is there.
So January twenty five, do we just come run and do this all again? Is this kind of the new normal or them?
You say, yeah, oh yeah, unless by some miracle we end up with either a fully Republican or a fully democratic Washington. Yeah, we're going to do it again. We've been doing it over and over again. It is a broken system. That's the easiest way for me to say it. We should have a government that is functioning. We should have a government where the Treasury, the representatives of the Late House the Treasury sit together with representatives of Congress, and we have to have a budget and then cows.
We've patched out the budget. There's an agreement that will raise the debt ceiling in order to be able to fund that budget. But for reasons which evades me, unfortunately, we do not come up with a budget and then at the same time agree this is what we need to raise the debt ceiling too.
In order to fund it.
Everything that this debt ceiling was going to put off the spending and make ways in the marketplace, it was all based on spending that has already been approved by Congress. Now facing at the third the Congress has already approved the spending, and yet now they're saying, we're not gonna let you raise the money. Uh, it's got to be done better than that. But we have not, we have not had a two party system that has allowed that to happen.
All right, interesting analysis there, because this is an issue that just keeps coming back and back. It seems like doctor Nancy Kimmelman, economics professor at Northeastern University and at Tufts University, so got the Boston area covered there from economics perspective. But again, talking about the debt ceiling, it's done, that's the good news. Looks like the Fed has to rebuild its balance sheet. It's the lowest level of cash
they've had on balance for a number of years. So they could be out there in the market selling up to one trillion dollars in securities to replenish the balance sheet. And so the folks in the bond market, the money markets are getting ready for that.
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Just do a little tech talk? Shall we round table at Madison. We can do that because we've got a couple of smart analysts joining us here, Man Deep Singing, anorog Rana, their senior tech analysts for Bloomberg Intelligence. We've got an rog Via Zoom and mandeep here in the studio on rag are with you. You're kind of one of your companies. I don't know. I think it's called Apple, Apple Computer or something. It's out in California. I think in some valley out there. They got an event today.
What are they eventing? What are they going to show us?
Yeah, thanks, Paul, so it Such events are very common for all the technology companies. And you know, historically on this event in or Apple, they've been launching new software updates, any kind of new products. So I would say the biggest product launch is going to be their mixed reality headset that's going to come out after the use of waiting. It's going to create a lot of buzz. It's already creating a lot of buzz. But I think it's going to be a spectacular event when it comes to showcasing
of what this thing can do. Frankly, on the functionality side of it.
What is multiple what's it called again?
Mixed reality?
Mix mix, mixed reality? What's mixed reality? From virtual reality? From augmented reality? What is mixed reality? I thought was.
Well, mixed reality is a combination of augmented and virtual reality. So in virtual reality you would have you know, your avatar drinking some you know, something nice, and then the augmented reality you would have half of it real and half of it not real.
So Google Glass didn't work. I'm never going to put a headset on my face. Menteep. Does Apple care about that?
Well?
So I think they're trying to create a new form factor. That is when they're to their you know, iPhone AirPod ecosystem, and really this is their way to drive more you know, sps out of the install base they have. And look, I think the reason why Apple works so well in terms of just keeping their ecosystem intact is because of
the bundle that they have created. And to me, you know, they can sell this high priced product to a subset of people that can afford it, and they may find a use case around it, whether it's on the corporate side or consumer side. But the problem that Meta had is they never were able to bring the developer community to build on their ecosystem. Apple doesn't have that problem. They can have developers build on this ecosystem because they already have a big ecosystem.
Built on the iOS.
Oh.
I see the apps that they already have, some of that can be extended into this augmented reality or the mixed reality form factor that Anarag mentioned, And there could be certain apps that are good in that sort of uh, you know, form factor because it can enhance productivity. And I think that's the part that Meta, even though they were early to it they have invested billions of dollars, they never had that ecosystem aspect where developers would come and build on their platform.
Hey, an Rog, do I have to pay attention to this AI thing or did you guys have your time in the sun last week with a big boom and in video stock? What's your view here on AI and how it may develop?
So, I mean, at the end of the day, it will develop at its own pace, frankly, but it is one of the bigger you know, you could say change is in the technology ecosystem and almost in each and every piece. We're trying to figure out how it impacts different players. You know, from our side, this is just another boost the technology industry gets. And you know, some of this thing is you can't run this stuff in older infrastructure, old and stuff. You have to have newer,
shiny toys like moving things to the cloud. So I think it really helps the entire technology ecosystem in all forms, whether it's hardware, software services. I mean, it's going to be a fun thing to see how it evolves over the next few years.
But this is my question. Isn't the metaverse a couple of years ago what AI is today? But AI is better? Like did Apple bet on this when the metaverse was cool and now the actual product is coming out a little too late. I'm looking at Mandy if you can't see that on early.
Yes, Look, I think for me, the key thing is if Apple was to leverage generative AI, they have to do it on their phone. The difference is the loud guys are all adding AI capabilities in their data center, whether it's awlu ass, Google Cloud. Apple has the install base in terms of the edge and we actually distinguish that and a report the training versus the inference side. So the training side is where you train a large anguid model. Inference is where you use a large anguige
model to answer questions. And that's where Apple has that install base. So if they develop a phone that can leverage generative AI, that would drive a whole new refresh cycle. And so imagine Apple phones are refreshed every three four years. This could just be things up in terms of everybody wanting that new iPhone version because it has that generative AI element.
All right, who's our chip guy?
We have a chip guy, right, Well, we have Kunjin who is based out of the West coast.
Kunjin, right, he's right, okay, so he's our chip guy. So he had his moment in the sun with Nvidia and stuff like that. But I know you guys, and I know how technology works, hardware software. It's almost like you want to play the arms player for you know, I think the beginning of the Internet we said by Akamai, you know, because they make this stuff that makes the Internet go, and we don't even know what the Internet's going to become. What are you guys thinking about now?
On Rock I'll start with you, what are you guys thinking about hardware software? How should investors approach this thing called AI?
See from again, one of the things I mentioned before, you have to upgrade your oldest infrastructure, which means, you know, from our side, the hyperscale cloud providers are the biggest
beneficiary of this particular shift on the software side. Almost all the all the big companies, you know, whether it's Microsoft, whether it's Adobe, whether it's you know, Salesforce, all of them will be investing heavily because remember, if they have the biggest installed based of users, millions of people using their products, they are the ones who can figure out things in a much faster way compared to a smaller company.
Man do anything to add on that.
Well, so to me, I think the interesting aspect here is these are all the companies that are on the verge of disruption, but we are betting on, you know, these companies actually being the kind of the torch bereers when it comes to the disruptive element that's going to play out. And so there will be I'm sure you know, a new startup that will really come out big in terms of finding that stellar use case that will scale revenues, and maybe chat GPT.
Is that use case.
But clearly there's a lot of disruption on the horizon. I think the interesting point to make here is that we're really betting on all the incumbents to drive that disruption forward.
Right so, I'm waiting for the next wave of the Google facebooks of AI, and.
So right now it is the Metas and the Googles that are the most likely gonna disrupt themselves. And you know, I don't see and look, there could be somebody else out there, and that's why I mentioned chat GPT. But Meta, given its scale and the first party data it has and the resources it has, looks to be the best position.
Who's the merry meeker of AI?
Is it?
You?
And Honora? We got to establish because all right, let's go down allay, this is where man Deep is. He can go high on the hog on some of the big tech but Twitter, what's elon? I mean, is anybody buying ads on this thing? We keep hearing the reporting is just brutal.
Yeah, I mean down fifty nine percent, But to me, the engagement isn't down fifty nine percent. So even though some advertisers have pulled back that's more of a reflection of them being concerned in the short term about the brand safety on Twitter's platform. Twitter's engagement is still holding up. I mean, I would bet you know it's down, but probably not down more than single digits.
These dollars go on to Facebook and Google and Snap and.
I mean, we are in that part of the digital ad cycle where everybody is pulling back. And we know digital ad is a cyclical market, so some of it is that. But yes, clearly meta and you know, all the kind of the direct response players, including Alphabet, they are the ones who are still kind of doing much better than the smaller players.
But Elon has said he doesn't care, right, hon rog At some point does Elon have to care about the lack of ad dollars?
There?
We have just about forty five seconds left.
See, from my point, this is a two different business models. You know, I can't mix enterprise versus consumer oriented stuff. I think in my personal view, if he just focuses on the car, that's going to be best for all of us.
Focus on the car there you go, right, all right, So all right, we're gonna let you guys go. We've had enough of technology talk for the day Mandy's saying on Rock Rana, their senior tech analysts part of this, I'm gonna say, a global team of close to twenty technology analysts around the world, and you know, we're gonna
send man Deep to London next week. We're gonna send him to Asia the week after that to kind of check in on all our tech analysts, make sure they are focusing on the right things, make sure they're you know, focusing on the right trends. And AI has got to be at the top of the Listcus boy, even for like you know, people like you and I, Matty, we hear about it every day.
We can't stop hearing about it. And it feels to Mendep's point, I guess the idea is that the BMTH names we already know are going to be the ones with the power to gobble up the next big AI names as well.
Yeah, but it just you know, I keep again, when you think about the beginning of the Internet, in some of these big companies like a Google, and then in
social media came along you had Facebook. You know, are there going to be similar moments like that when new companies come into the marketplace, And you got to think the answer is yes, But I guess people were just trying to identify where those companies, what type of companies are they, what applications do they have, What's what technologies do they bring to the marketplace, because we keep hearing about artificial intelligence being the next big, big, big thing
in technology, so have to see how that plays out.
Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple past or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three.
And I'm Paul Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.