Here’s Why U.S. Housing Will Get Even Less Affordable: Shilling

they become less affordable. Joining us now is Gary Shilling. He is a Bloomberg Opinion Calmness. We're always happy to have him on his president of a Gary Shilling and Co. Gary, you wrote a column saying US housing will get even less affordable. Why, well, they're not. A reason for that one is that the construction costs have gone up, Labor costs have gone up. A lot of the carpenters, masons, uh, plumbers and so on that came from Mexico and elsewhere

in Central America. Uh, when the housing boom, they've gone home. And with immigration policy, it's harder for those people to come back. And also economic conditions are better in Mexico, so they're happier to stay there. You've also had increases in lumber cost is of paraffon imported Canadian lumber, and there have been forest fires and insect damage in the Pacific Northwest which you've added, which has added the costs.

Uh so, And and you also also in terms of the cost you simply have a lot of builders who are in effect concentrating on a higher cost houses because those are people who can't afford them, lower lower income people a lot of times they don't have a credit scores and so on. So villers are saying, I'll concentrate on the area where people are less price sensitive. So you really do have in effect a shift to higher, higher cost housing. And it's it's a number of factors.

Gary Shilling maybe explain why is it that a segment of the economy residential construction, which accounts for just four of g d P, Why is this such an important area it has a bigger effect. Well, it's bigger. It's bigger pen because it is so volatile and its last recession really proved it. Now this was this was really driven by the collapse in the subprime mortgage sector, and it took the economy with it, but you had their

UH decline. Housing at its peak was six point seven of g d P in late two thousand five, then it went to two and a half percent two point five percent of GDP in two thousand eleven. Well, that collapse of four point two percentage points of GDP in itself,

that is a major recession. It's a matter of fact, the whole economy declined attempt to less four point one percent of was housing collapse account for more than they declined in the economy and that recession that was the worst sense in myteen thirty So it's it's a volatility and a lot of it has to do with the fact that housing is driven by by interest rates. Is

highly leverage. You think about it, if you had a company that was leverage where you can get an f h A loan three and a half percent down, Well, if you had a company that that that had only that amount of capital and the rest was piled you say, boy, their way over leverage. But actually housing is so it's very sensitive interest rates. And then of course you also had that banans of people rushing into subprime mortgages are ridiculing afford them, so it was augmented the whole the

whole cycle on the downside. Well, Gary, I'm just trying to understand what the path forward is because a lot of people are lamenting the lack of affordable inventory here. You're you're predicting that there isn't gonna be much more of it because builders aren't really being incentivized to build it, and and just the materials and the labor is more expensive. So going forward, Uh, this this would seem to be supportive of prices right, um, but in the wrong places.

In other words, that it's going to be perhaps cheaper to buy homes on the high end, but it's going to get more and more difficult to buy more affordable homes. Yeah, and you see that in the in the inventories. Uh uh, there is a lot more inventory, you know, months surply, Uh that the the inventory relative to the sales in the latest month that is much higher in new houses than there's for existing houses. And existing houses tend to

be cheaper. So in effect, you just don't have the existing Housesn't that you haven't had a turnover four four babies are staying in their houses, they're working longer, allow of them need to. They don't have the income to retire. You had a huge shopping up of of used houses, existing houses brought out of foreclosure by institutional investors, and they and they tend to hang on to them. They turn don't turn over as fast as normal homeowners. And

that's the that's the key reason. Both these are key reasons that the that the length of time that people are staying in the house now is ten years. It used to be six years. So you just don't have a turnover. You don't have the available supply, particularly of existing houses. Garrett, we've been talking about supply. We've spoke about the effect of the housing industry on the overall economy. Give you about a minute or so, tell us about the demand side right now. Well, the demand side is

seeing is being hurt by a number of factors. One is affordability. Uh, particularly for younger people, they simply do not have the money the assets. I mean, you know, the average the average person under under thirty five has got savings of five thousand dollars or lett doesn't go very far in terms of buying a house. Uh. Student loans are big pressing a factor for many of these people. Credit scores. They've brightened up since the Great Recession and

housing collapse, and they can't meet the credit scores. Uh. So you have a number of factors here that really make it much more difficult for people to uh to afford houses. And you can say this is an imbalance and it shouldn't exist forever, but what it really means there is a lot more people are being forced to to rent now new homes. First time buyers are increasing,

no question about it. And the gap between mortgages and between the mortgages and rents is closing in favor of owning owning a house, but it's got a long way to go. Thank you very much, Gary Shilling. He is the president of a. Gary Shilling and Company. He is also a Bloomberg opinion columnists. He also is a wonderful honey producer. He has his own bees. Yes he does. Yes, yeah a p R. I think it's the term. Well done. Thanks very much, Gary Shilling. Hey, Gary Shilling and Company.

All right, time to talk about commodities with Mike mcloan, our commodity strategist for Bloomberg Intelligence. He joins us here in our eleven three oh studio and Alan burga agriculture reporter for Bloomberg News. He joins us from our Bloomberg nine one studios in Washington, d C. And of course you can follow Alan on Twitter at Alan Burga. That's b J E r g A. Uh, Mike. I want to begin with you because let's get the price action first of all, and a little bit of the pain.

Let's start with soybeans. What has been going on. If you're a soybean farmer, you're not happy. You're not happy with prices, You're happy with production. That's the one problem. The good, excellent conditions for this month are the best they've been in decades, in fact, basically right at the two thousand eleven peak. And I was there in the Midwest last weekend and I've just never seen the crop look this good, notably in corn, but soybeans are the

main expert. We have to China, so good conditions, um export trade tensions, and then of course the plunge in the Brazilian real has been basically a perfect storm for soybeans. So looking forward, the question is is this perfect storm sustainable? And from these levels it's unlikely. So Allen, come on in here. I mean, what could potentially alter this backdrop, which is a perfect storm to send corn and soybean prices plummeting and uh and leave and leave a lot

of crops out there, uh without a lot of profit margin. Well, there's two things you could do. I mean, one is sort of the perennial, which is weather. If you have we're getting to to a sensitive period in terms of the germination of the crops for corn and soybeans. If you have a hot dry spell in the US Midwest, that would change the crop out look. Um. Of course, you can always hope if you're a U. S. Farmer for lack of rain somewhere else. I mean, this is

a global market with global supply and demand. So those are a couple things. That's that's one thing. That The other thing, of course, is the policy environment. I mean, somebody could blink in the trade war, or the trade war could be called off, or something could be done in that regard. Another factor is the U. S. Department of Agriculture keep saying that that they're going to have

US farmers backs. That could be through some stepped up commodity purchases in the short term that could help support prices in the case of a trade war, but you in the long run it would just contribute to a supply overhang. So that's got to kind of present a bit of a mixed picture for the market. Alan a little bit more on these policy wars, perhaps on a product that isn't necessarily is widely traded anymore, and this has to do with cheese and dairy products, particularly on

the Canadian border. What have you been hearing? You know, A lot of the attention on terry and cheese has been with with Canada and the tariffs that they have on US products and their system of supply management, which is something that's become very controversial in the NAFTA talks. I would actually draw some of your mentioned to Mexico. I mean, for the very reason that Canada doesn't gavel out of US market share. It's not actually a big

supplier a big issue on the markets. Mexico, on the other hand, is our biggest export destination, and when you start to see some of these duties go into effect with Mexico, exports have really what have been supporting dairy markets um and if you see that cut off from the largest customer, now we see a return to dairy gluts that could be very difficult for producers. Mike, come on in here. I just want to broaden out and take take take a step back and look at commodities overall.

Bloomberg Commodities index actually has declined for yet a fourth week. That is its worst run in more than a year. And this comes right after months after behemets from Pimco to Goldman. Sachs said, commodities is the place to go. This is the bullish bet of the year. It has not been. Is it it has not been? Is it because of the stronger dollar? Is it because of the trade talk? Is it just a perfect storm in a

lot of different areas. When we're talking not just props, we're talking also zinc, We're talking aluminum, We're talking a whole bunch of things. I think you nail at first. With the dollar. The dollar had a pretty weak first first few months of the year. In the last few months, basically since the end of March, the Bloomberg dollar necks is up about five six percent, and guess what, the Bloomberg commodity necks is down almost exactly the same amount.

So the dollar is a key thing. Also, we've seen a peak in energy and crude oil prices. And what's really been more surprising is this this plunge in metals, and I think the metals at a very good support level. Obviously they're the most dollars sensitive, that's the key area. And then aggs now aggs are really the ones getting hit by trade tensions the most. So these kind of areas and these levels of question is is this somewhat perfect storm the last few months for commodities last month

really is it sustainable? I think it's unlikely, unlikely. What does that mean? So where people are people actually following that that that strategy? Well, yes, I think overall the commodity market looks like it's still in a pretty very solid recovering period. Now. It had got a little too enthusiastic earlier near and my main risk is that crewel would peak, and it did, and to me, the main potential upside is probably an agriculture and the eggs. But

now that's a little bit far away from now. But as our prey previous, as Allen mentioned, you know, the market has still has not even you know, we haven't started July in August and that's the key month for eggs. But overall. The key thing to remember commanity is this bool markets only three years old. Look at stock markets about ten years old. And the key issues a dollar. If we if this dollar rally, which looks like it's unsustainable, if it peaks out soon, the commodity market should come

right back, and it probably is going to. So Allen, come on in here, because I know you've you've got a lot of connections to the farming world and you've been tracking it for years, and I would love to get your sense of whether farmers kind of view this the same way as Mike was just portraying it, that this is just a perfect storm largely driven by the dollar rally that will reverse probably in short order. Or are they viewing this as something more substantial that they're

that they're more concerned about. Well, it kind of depends on what you mean by this. If you're talking about some of the short term issues in terms of trade flows with China and wars with exporters, I do think the sentiment is is that something that could be a short term pain, but you know there is a hope

for a long term gain there. You know, farm country tends to be very supportive of President Trump, and when they're told that he'll have farmers backs and in the long run this will lead to a better trade environment, a lot of them are willing to believe that message.

But in terms of the overall commodities outlook, I don't think we've seen enough um in terms of adjustment to supply and demand for farmers to truly be confident that this sort of dull drum period that we've been in for about the past half decade is really going to change. You know, American farmers, in terms of their productivity, can often be their the greatest enemy. And and other you know, world productive producers from Brazil and Argentina to the Black

Sea region have really up their gain too. And so from the macro standpoint of supply and demand and global agriculture, regardless of the headlines of the day, there has been a production and and and demand imbalance that even though this year we're seeing some progress on it for the first time in about five six years, it's still something that is very concerning an agriculture country. And I think you would need to have to three years of demand

outstripping supply before farmers would feel really confident again. Thank you so much for joining us both of you. I personally have been really interested in the idea that you've seen this sell off in commodities after so many firms that this was the place to go. Mike mclognan, Commodity Strategies for Bloomberg Intelligence, Alan berga Bloomberg agricultural reporter. Thank you to both of you. Now we're going to get smarter on General Electric with Karen Yubilhart, our industrials analyst

for Bloomberg Intelligence. Karen, if the ge healthcare business is such a great business, why are selling the business? I think that they needed to get smaller in a big way, and uh, they can't really do much with them Power aviation is their ground jewel. I think they the numbers worked. It is a different kind of business versus the other you know, industrial businesses they're in, and they can really pull a lot of cash out of it and solve

a lot of their other problems. What's left, Uh, Well, the aviation business, which is the engine business and the all the after related aftermarket and digital etcetera. And that's a very very good business with margins almost twenty uh so that's a keeper and Power, which is a problem so they've got a great business and a problem business, but there is upside uh if they can just shrink

power enough. So that's a multi year thing though, So what's the narrative that's driving the shares up seven today? That they took a big move that they gave us numbers are going to reduce step by twenty five billion dollars. A bunch of a lot of the pension is going with healthcare, which was another you know, um thing around

their neck. And so some of these real financial balanchee cash full problems can go away with the magnitude of the money they can draw from these other assets sales, which includes by the way Baker use what happens to the dividend, Well, the dividend will stay intact as long as the entity is intact, but when they split it

up in aggregate, the dividend will probably be lower. The industrial they will seek to get a yield in line with the industrial peers, which will be about to two point to two point three percent yield, and then the healthcare business will have a lower yield, so net uh, it will be down. However, solving these other problems I think matters significantly more to the stock. Let's go to the conspiracy theories, Karen. Right now, I just want to

bring up what Dave Wilson noted earlier today. He was saying, it's so interesting ge was just booted from the Dow Jones Index and now it announces the spinoff and it shares our surging. Do you think that the removal of the company from the Dow Jones Index actually had anything

to do with its decision to to do these sales? Now, I think the timing was I would think there was a little bit of planned timing on that front actually, because it happened the same day, right, Um, But I don't think a decision might would have the decision would have changed because new GI is going to still be a much smaller, smaller company. Right. But I think the

timing is interesting. Well, I mean that the point being here that there's less pressure on General Electric to be a behemoth, and there's less pressure to sort of maintain a certain veneer of anything. They can go try to do whatever makes sense for their business, um, without having to worry about getting booted out of the index because they already happen. Yeah, I don't think they'd make big

decisions based on that. I think all of this stuff was well under way, but I agree it lifts something that frankly didn't matter much to the you know, the prospects for the company, but it was a news that people worried about. Oh, they're gonna get taken out. They're gonna get taken out. Well, that's behind us now, Baker Hughes, what's the future there? Uh, you know, he got a lot of heat because that is um and I said, he could have monetized very easily, could have and um

he the Flannery CEO. Flannery said, look, I'm not going to do something quickly just because you want me to do something quickly. I want to get the benefits of an oil recovery, and I'm not going to sell it now. So he said, he'll sell it over two or three years. You'll probably sell it in pieces. Strategically they made that made sense, but he had such cash issues that you know, there was a question of whether he'd be able to do that. And now by monetizing healthcare, he gets some

flexibility to wait for a rebound. What's next for them to sell? You know, I think we're kind of done. I mean, there might be some little bits and pieces in power. Uh, you know that business. The core of it is the large gay since steam turbines. But there are some other businesses like a small grid business for example, you know, transmission and distribution business. Um, there's a few other smaller things in power he might want to prune, but the big stuff with these two moves is pretty

much done. Karen Eu wil Heart, thank you. That was really really illuminating and explains why the shares are up nearly seven p I'm curious about the whole conversation they must have had about all right, we're out of the down jones, so you don't think it's anything he's giving

me this look of incredible. I mean that, as Karen said, I think that timing is interesting and that may have had something to do with it, but I can't imagine that the decision to actually do it fair enough Karen, you wil Hurt, by the way, it's Industrials analyst for Bloomberg Intelligence. We always love getting Hurt insights. It is an official The Department of Labor's fiduciary rule is dead.

Let's find out what that means from Elliott Wise. Bluthy is the founder and the chief executive of High Tower Advisors. They're based in Chicago and help manage approximately fifty billion dollars of customer assets, and I'm sure by the time you get done with the interview, they will manage even more than fifty billion dollars for customer assets. Elliott, thanks very much for coming into the studio. Maybe just refresh

quickly the people. The fiduciary rule, which was proposed by the Department of Labor had to do with retirement accounts, but that rule is dead exactly. So this was I think that the latest attempt um well intended, and we applauded the effort for the agency to implement a true fiduciary rule. And for the folks that are listening that may not be familiar with that term, you know, think think about the way doctors follow the hippocratic oath, or a way a lawyer follows a duty to put the

client interest first. It's a very simple concept. There's no caveats to it, there's no exceptions to it. Either you put the client interest first or you put your own interest first. It's it's really that simple. So when when you see the regulators producing thousands of pages of reports trying to explain a very simple concept. You know that there's been influences that have come to bear to make

it complicated. And as I say to individuals that we talked to clients a lot, if you're confused about whether your advisor has a fiduciary duty, or if you're confused that they're putting your interest first or not, they're probably not. And there's a good reason why there's confusion. So last attempt. Again, we've been watching this for years. There was God Frank, there was the d O L, there's the sec UH. It's dead for now. VISAVI this effort, but it will

come back. The fiduciary duty discussion is not going away. One thing. It is also not going away conflicts of interest when it consolutely management tell us about that. Well, we started High Tower in two thousand and seven just on the eve of the credit crisis, which was a massive example of conflicts of interest, and unfortunately in the past ten years not a lot has changed in the

way certain parts of the industry operate. And to keep it very simple, if you can get paid a couple of different ways, and the person to whom you're looking for advice is getting paid one way, and and and the product or the service that you're being sold has

also generated profits elsewhere inside that business. You have a conflict of interest, and that conflict of interest is pernicious inside of inside of these firms, it results in lots of proven example, so people understand this could be things

like mutual funds. This could be so for example, if if a financial advisor and an institution says to you, I'm going to charge you one point one basis point hundred basis points or one percent point on your assets, and I get fifty of those basis points as my compensation, and then we pay fifty basis points to the platform of products. And look at all these products we have and different funds, equity funds and fixed income funds, all

sorts of funds. And you pay fifty cents or fifty basis points for that product and fifty basis points for the fee. The client might think, well, that sounds like a reasonable proposition. What the client doesn't know is that the actual money manager who's behind that platform may only get thirty five basis points of the fifty basis points

that the client is paying the firm. So the the institution gets a percentage of the fifty basis points paid to the financial advisor, and then hidden is a second layer of fees fifteen basis points, that is the cost between the product and what are charging the clients. So that second layer of fee is a very simple example of how the firm is getting paid twice. What's the

alternative or what is an alternative? The alternative is the client should have complete transparency into the cost, and at High Tower, for example UH, a client would know what the fees are of their products and they would have transparency into how much they were paying their financial advisor. So pure transparency in a very simple fashion is one

way to illuminate if a conflict exists or not. And if, as many people have complained over the years, you have a hard time understanding from your statement exactly how much you're paying the firm, then that confusion is probably covering up conflicts of interest. Tell us about banks as UH money managers and the wealth divisions of banks. So a number of years ago, there was a very famous argument that said it would be beneficial for the client if

you brought together different types of financial activities. You should bring an insurance company with a bank lending company with an asset management company, trading companies, and if you brought all this other under one roof, presumably you would get quote unquote synergies and that would be better for the client. Well, the synergy part was right, but what didn't happen is that the benefit didn't go to the client. The benefit

went to the firm. And so many of the people that thought that would benefit the client have now changed their story and recognized it's better to have those pieces separated. So if you go to a bank, you know the product you're getting from the bank, and you know the fees that you're paying. If you go to an asset manager whose job it is to pick stocks or pig bonds,

you know how much you're paying for that service. And if you go to a fiduciary financial advisor, in the same way if you went to see a doctor or a lawyer, you would know that that professional owed you a legal duty to put your interest first and that there was no behind the curtain, multiple layers of fees or conflict of interest that would impair the service provider providing services that were in your interest. Out the firms.

I want to turn your attention now to something that you've brought under the roof, and this is an acquisition that you made in Texas. Tell us about what High Towers doing there. Well. So the folks down in Houston, Texas, the name of the company as Salient, and the professionals

there are are truly outstanding. High Tower has a collection across the entire country of some of the finest financial advisors from many, many different firms, and we take a lot of pride in discharging the fiduciary duty and putting our clients interest first. And the folks that that joined us out of Texas have been building that level of

fiduciary energy and passion for for many, many years. They were already fiduciaries when we met them, and they were thrilled to find our infrastructure and technology and culture to partner up with us. What came along with that is that they were running a trust company as well. So High Tower not only picked up a whole slew of very fine professionals and a presence in a great state of Texas, we also picked up a new capability that we can now extend across the country to our other clients.

All Right, So in maybe thirty thirty five seconds. Given that you've put this together, do you have in your mind what is what you consider to be a fair fee structure for the typical retail investor. Sure? So, fair fee schedule is best defined by the relationship between the advisor and the client. So one of the areas that we take a lot of pride in at High Tower

is we respect the sophistication of our financial advisors. We respect them in their choices on products, we respect them in their choices and how to build portfolios, and we respect them on how they think they should generate a fee from their clients. So there's a tremendous amount of flexibility for our financial advisors to look at the human beings they service and come up with fair fees. Thanks

very much for being with Elliott Weissbluth. He is the founder and the chief pigs executive of High Tower Advisors. They're based in Chicago, helping to manage about fifty billion dollars of customer assets. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm Pim Fox, I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast.

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