Markets, Real Estate, And Drones

Greg Han. He's the chief ce IO of Winthrop Capital Management. Greg, we kind of got a FED yesterday that kind of threw some I guess some uncertainty into this market. Is talking about maybe being a little bit more hawkish. What did you take away from yesterday's trading and then today's seemingly kind of rebound here on a risk on Look, what are your thoughts? Good old days? We're going back to the good old days because the Fed, the FED

needs to get in front of inflation. So I think the posturing that we're hearing now is one that UM represents UM more of the committee, the committee's views, and there's a little bit more hawkish um in reminding investors that hey, we we don't have to move in twenty five basiness point increments UM. But there's been a reticence, especially with the labor challenges that we're going through last year, to actually message that two investors. We heard a very

clear message from the Fed yesterday. We're going to take the steps necessary that we have to to uh to to move retired, to control inflation. In in Paul, They're gonna they're going to implode the economy to do it. That's basically what the messages that were. If we have to push the economy into a recession, we'll do it. That was the message we took away. We were just talking with our chief rate strategy, our Jersey, who's um, I'm pretty sure we will have a recession, he said.

The question is just what kind of recession are we looking at? In three what's your out what's your outlook? Yeah, yeah, we've shifted. You know. It's funny because we plan. We we lay these big plans out at the beginning of the year, here's our investment themes. And sure enough we get to March and Wisconsin is not in the sweet sixteen and I got it, so I gotta change that. We've got to change our outlook on the economy. Uh, it's it's it's it's it's a whole brutal. But that's

what That's what investing is. You just have to shift, you do the next right thing. You can't just stick to your plan and say, Okay, I gotta I'm gonna just die on the hill on this. We've we've got to be flexible at move um and we saw that with Amicron last year. Um it we are. We We thought that we'd see this resurgence and growth, but the variant really put muted any economic growth that we were expecting.

We thought it would get pushed into this year, but the Russian invasion of Ukraine is going to provide serious dislocation for Europe. So we're going to see inflation, We're gonna see a slowdown in Europe. It's going to impact the United States. The real issue that we're trying to navigate now is what we've we've dealt with globalization for

over three decades. We're seeing we think we're moving back to the period where we have trading block block countries, where you've got trading arrangements between block countries and the w t O is almost neutered if we if major countries have establish UM privileged trading relationships, so that that may be one of the consequences of the last four years of trade issues with China and now with with what we're doing with russ all right, So with that backdrop, Greg,

what's an investor to do when this rising interest rate and inflation environment? Where do you go? Hold on? So this is this is this is because you have to just be patient and hold on. We've had We've got to remind it. Look, we've had three great years in the sp average returns an SP of over the last three years. We're giving some of it back cashes and an asset class. So we actually are allocated to cash just to just to be transitional. UM. These are near

term issues. Yes, cash is not keeping up with inflation. We get that, we know that, but it's right now, it's not meant to it's it's there to preserve capital. At the end of the day, this is a stock pickers market, so we want to sure that we're in good companies that have good revenue drivers. And UM fixed income is getting a lot more interesting with two and you know twenty on the tenure that that starts to make a lot of sense. Now, um, whether they actually

push whether the FET actually does push it higher. Yeah, I mean, what do you think about that? That? Uh? Right now we're looking at two thirty seven fifty two if you can believe it, just because it continues to soar, and that's true really across the curve. How high do we get on the tenure? So we I mean we we uh, we thought two would be a buffer just just to get us to this point. I we don't see it going over three percent. The short end is going to go higher. But I think that the posturing

the economy will break. And then if if I don't think the Fed's really going to risk that, um there to really to We think the mistakes that the FED is going to do is they'll stop it doing just the next right thing, which was the pattern in the nineteen seventies with the Federal Reserve really postponed really Curtailian inflation. It was only going far enough that it had to to get control for that moment and it just kept building up in the system. We think the same thing

is going to happen this time. Is the fed's not going to do enough because we will it will be politically unpopular. And who buys the tenure here? When you get more for buying threes, fives and sevens. You know who says I want to seven and at ten when you can get two four at seven. Doesn't make any sense? Well, the sad, the sad answer to that is that a lot of four oh one case and index funds are are our peg to the to the aggregate index, which

is required to buy the tenure. So I knew before I asked the question, but I am sorry, no, no, I get it. Yeah, it just seems um if you break it down to the most elementary terms, it doesn't make a lot of sense. But yeah, all right, Greg, we appreciate you coming on here, Greg han Cee, I O Winthrop cap All Management giving us his thoughts on the market. And again, seems like a consensus is kind

of building here for some type of recessionary environment. That's kind of new, I mean in Atlanta, Wilson, certainly since Jerome Powell went out with Constant Hunter yesterday and said, you know, the buck stops here. By the way, we should wish Gregg and Wisconsin best of luck for next year. We should yeah, okay, there's a basketball tournament every year. Okay, good, alright,

the duke invitation when I call it. You know, I got my uh my last car that I had to sell because I was moving back here and you can't um import German cars from into the US. I made twenty five percent. I drove it for two years, I put thirty thousand miles on it, and I made profit. Nice when I sold it. He's good for you. It's the only time I've ever made money on a vehicle. Car trader. All right, let's see you can put some money in the stock market today. You do pretty well.

The SMPS up one percent and as DAGs up. Robert Teeter, head of Investment Policy and Strategy Group of Silver Cress Asset Management, joins us. Robert, I'm not sure if I should go into the used car business or stick with my stock portfolio. What do you tell on your clients, Well, both have been pretty compelling over the over the past year or so. That's that on the on the grain

spreader and the US autos are pretty interesting. But I do think some of the youth thouto sales are slowing down a little bit, so I'd say stick with stocks. This has been a pretty challenging environment. But we do think there's a strong undercurrent of earnings growth that's likely to lead the way towards gains over the next year

or two. But is that I mean, with double digit inflation surely on the way um and a FED that is now ready to hike fifty basis points at multiple meetings, are you not concerned that this economic growth is going to slow to a halt. Well, I think that's that's been part of the challenge that markets have been working through here with this choppiness of late, which has been that there is a deceleration in growth. But I'm not

in the camp of of recession. I do think there's strong underlying growth to come, partly driven by COVID recovery and jobs recovery, and so I do think that will continue. And while you will get a bit of the the energy cost tax on consumers that might slow the top line rate of growth a little bit, there is still strong earnings growth and companies have been navigating this economy very well to deliver on those earnings in the in the face of a lot of challenges in the past years.

My concern is just this, Robert, that we have a federal reserve um. Now, I don't want to use the term hell bent, but I can't think of a less aggressive than would go for that one. Hell bent on slowing demand at the same time, we're about to see a bounce back in production and then inventories. Right, Yeah,

I do think that's right. I think that some of the comments by pal I think have been incorporated or or evaluated in a in a fairly optimistic way, and that's what we're seeing in terms of the the green on the screen today because he has become and communicated and appropriately serious message against inflation. And so I think that that burst of activity that we had from from post COVID has led to a lot of the inflation.

I think he's committed to fighting that now. But I do think that part of the outcome of him being a bit stronger is that you won't see inflation expectations in the outer years continue to rise, and that I think will be positive for investors and for valuations. So, Robert, you mentioned profitability earnings a couple of times. How concerned argue about inflation pressuring profit margins in corporate America. Yeah, I do think that's the that's the really important question,

and I think in some areas it will pressure a bit. Um. We've been of the mind that this market has been one where you need to be very highly selective. Uh. It lends itself very well, we think to stock selection because different companies are are having different degrees of success in managing through those supply chain problems and labor cost issues.

By and large, when we've looked at the Russell one thousand, overall margins have been very strong, improving somewhat, but it's not a uniform picture beneath the surface, and so we do think it's important to focus your opportunities on where companies are managing to the problems and delivering on earnings. Yeah. And like we've been seeing today, if they deal with the supply chain issues, well they are rewarded. Um. Who

do you think is best positioned? Yeah, Well, we think that the technology sector, which is seen consistently strong earnings and actually seen estimates go up a bit at the beginning of this year. UM, is one area. I do think there are some segments in consumer, even though consumer earning estimates have come down a bit, there's still pretty strong consumer demand in some areas, and then I think a few of the cyclical areas might still have a

few innings left of growth. So we think it's important to be diversified here and again really focus on which companies are getting the job done at the micro level. And I think that's really the theme here. Macro has been dominating, and we think it's going to shift back to micro micro. UM. When I think growth, I guess I've just been conditioned over the last ten or twenty years to think tech but cantect reform in a rising

interest rate environment? I think it can. I think the classic wisdom, like you say, is rates higher is not necessarily good for multiples, and I think that's true. Um. However, we have to consider the starting point as well, so rates are still pretty low. Pre COVID we were around two percent. Two thousand eighteen, we were around three percent. We're in the mid twos now. We think that could drift a little bit higher. UM. I think multiples can handle that as long as we have this runway for

growth in front of us. In terms of outlook for earnings, and again, earnings estimates have been going up in some some sectors and so we think that will help support multiple So also alright, so um, in terms of fixed income, what do you say just stay away? Well, we stay stay conservative. So not a lot of duration, so not a lot of interest rate risk. Be very careful on the credit selection side. It's not an environment to be scraping for a few extra basis points here and there.

Use fixed income for what it's meant to be safe and secure a part of your portfolio that if you hold it to maturity, it delivers at par and helps protect you against some of the chop inequities. All Right, Robert, thank you so much for joining us. I really appreciate your perspective there, Robert Teeter, he's head of Investment Policy

and Strategy Group at Silver Crest Asset Management. Kind of up and down Lexington Avenue here in midtown, a lot of empty stores, big stores, big box stores, smaller stores, and really gets you thinking about not just in New York City, but just kind of across the United States, how this commercial and industrial real estate markets gonna play out here. Fortunately, have an expert here you can walk us through with John Macy's, the CEO of I r

G Industrial. John love to get your just your thirty thousand foot overview of how the last two years have impacted the commercial industrial real estate space here in the US. Sure, the last two years on the industrial space has been pretty spectacular. Rates have risen virtually every market in the country.

Some of the major markets are up thirty even thirty most even through the smaller more minor markets, and industrial are up about So although we're seeing inflation affecting us, it's primarily in being able to rehab buildings that we bought or new construction where it's more expensive to build

as well, it's taking longer. Particularly one issue we face is we get tenants that are ready to move into our buildings, but we can't deliver the building because some of our delays due to supply constraints are six months even nine months and everyone standing on the sidelines waiting for the materials to come in so we can fix them up. Otherwise, rental rates are up significantly, and there there still is a large difference between office space and

industrial space. I mean, we could talk about office space for you know, extensively, but we're primarily in the industrial sector. So how do you differentiate those two. Yeah, office space are primarily for people who are service providers or other office people who actually go to an office and have office space primarily in either in the major cities or

suburban office where industrial space is big, large spaces. Trucking, manufacturing, distribution, e commerce rates are usually a lot cheaper for industrial space than they are for office. There's fewer jobs, um, and it's more for storage or for manufacturing. Big difference between the two. John, is there industrial I mean, is there a geographical impact on your business? Are you seeing greater growth and everybody seems like everybody's going down to

Texas and Florida? Is that what you're seeing demand for industrial space? Or is industrial space pretty much across the board? I'm going to say industrial spaces across the board. However, there are certain markets that are significantly stronger than others.

And I'd have to say the greater Seattle area, San Francisco, Bay area, Lost Angeles, and the Inland Empire and then probably central Jersey right outside of New York or the Rights industrial And I see all those trucks there are millions of them, prime trucks, and these warehouses right along the must have a huge amount of pull there. Yeah, so it's interesting, John, I mean is this Does you know Amazon come to you and say I need a warehouse in Central Jersey? Is that how it works? Amazon

does wanted to the things. They either buy the land and build their own or they go find a great location and they work a deal with a developer to build their their brand new, state of the art warehouse. And we've done both. We've sold some land to them that they've built on, and we've also um uh at least some of our land that we built for them. But most of what they want is the best, brand new, best location, the best, and they're willing to pay for it.

But there's a lot of other people out there besides Amazon. There's a lot of on shoring. We're manufacturing is coming back, so a lot of our properties, particularly in the Midwest in Ohio, Indiana, Illinois and Michigan area. I mean, a lot of manufacturing going on that's been really really stable for us. So I and I wonder if you see, you know, in commercial in office space. Um I was reading this morning on the Bloomberg that it used to be Manhattan had eleven percent of all of the national

office square footage, which is just massive. If you think about it. But that's not going to be the same going forward as the concern. You know, as people um gravitate more well away from the urban centers for for office work into the suburbs. Do you see that kind of shift with industrial space as well. No, not really. I mean what we are seeing though, is that there's a greater demand for the better locations. Before people were willing to drive an extra half hour hour outside of

the major urban area. Uh. Consider during the truck expenses of driving the trucks and gas was not a big deal. Now it is a bigger deal. Therefore, they're willing to pay more money and higher rents in order to be closer to the urban inner areas. It's through what's commonly referred to his last mile. So, John, interest rates are going up, maybe pretty dramatically. How does that impact your business? It certainly does. Interest rates going up. I mean, our

cost to capital is a critical element of what we do. Um, we know interest rates are going up. Matter of fact, the yield curve is flattened a bit, which is never great for the economy. But generally, if you have a good quality building, two percent three percent interest rates are traditionally very very low rates, we should be able to

make it through even as as rates increase. But what also happens is as interest rates increase, cap rates often increase, and when a capitalization rate increases, the value of the property declines. So it's it's cyclical. Have been through about four or five major cycles. Hopefully we're not having another one right now. Interest rates is definitely a factor in

our business. Now on the other side is inflation goes up, um cost the goods goes up, rents go up, so you just have to hope that the two balance out each other. Right, Hey, John, thanks so much for joining us. Really appreciate it. John May, CEO of I r G Industrial. I want to get to our next guest, Valerie Iakovenko Uh,

founder and CEO of Drone you A based in Ukraine. Valerie, thank you so much for taking the time UH to call in and share some time with us talk to us about your company Drone you A, what is it and how has your company been impacted by the last month with the invasion of Ukraine by Russia. Let's are to be with you today. Um and actually is a

drowning company. Is the technological company, the robotics company that was supposed to work only in industrial spheres, using drones and robots to help our manufacturing possibilities, to be smarter, more efficient, to grow more food on Ukrainian fields, to get better yields, to provide more safer work experience for any industrial employee. But when the work started, almost everything changed. Before it was we were like collaborating with officials with

Minister of Defense, with different police, UH departments, etcetera. It was a part of our business. But right now it's multiplied several I think, I think hundreds times since all our tension. And this is about not only us, this is about every Ukrainian person. So everybody may be clear. You make drones that were typically mostly recreational or industrial. You were working a little bit with m police, but none military, Harry, and now you've been drawn in to

the fight to try and beef up Ukrainian intelligence. This is correct, and this is about all all companies and all specialists on Ukrainian market. UH. Since we need intelligence, see needs, since we need to find enemy troops, everybody is joining forces to help with intel, to file with to help with surveillance, finding enemy troops, find an enemy tanks, finding there were sons of Suborteurs group all around Ukraine. This is not about only frontline in Ukraine or some

special regions. This is about everywhere. Drones are right now as working as a tool uh to provide intelligence to our Minister of Defense and to defend our country. So Valley give us a sense of the drone force in Ukraine right now. Does Ukraine have enough drones or does it need more? And where would you get them? First of all, you have to understand that there are two types of drones that are being used right now in Ukraine.

The first one is small hobby like looking like drones that you can purchase actually in almost every r sistore and they are useful. You're useful to provide information for the military and defensive military operations in Ukraine. But and there are a lot of them, like thousands of drones are working right now for the Ministry of Defense purposes

to provide intelligence. And the second part of drones is like military drones that was designed to provide strikes from the sky not only ice, but also some kind of power to make an action against Russian military troops that are invading Russia. Ukrainian peaceful cities. So basically the second part is mostly well well known by barracts. The Turkish drones that are being supplied to Ukraine, and there are a lot of them, but there are not enough to

cover all necessity of Ukrainian defense. We need more drones, all kinds of drones and surveillance and hope be like, yes, we need them. We are in lack of termal imagery cameras and termal imagery drones to help our defenders and during the night. But of course we need more intelligent weapons in Ukraine to provide defense and strikes to the troops that are stayed here or are taking us. Basically, how value, how is the war going right now? How

is the defense effort shaping up? How have the Russian aggressors? How far have they progressed? Firs fall uh all, you know that all ideas of Russian from Russian side was to make a blitz creek to conquer Ukraine in just days for several hours. But there is almost the month during start after the start of the war and Ukrainians are not going anywhere. But it will defend our own country. We will defend our land and no matter what is happening,

we will stay on our land and defend. Right now, Russia is in fronting in country in extremely high um like defense potentials from Ukrainian soldiers and even Ukrainian citizens since nobody wants Russian peace as they called it on Ukrainian land. So uh, there is a defense. But unfortunately there are no safe places in Ukraine no matter which

region you are staying. Uh. Rockets are coming all over Ukraine, in every city in every region, since we don't have like a close sky upon Ukraine, so there are no safe houses, no safe cities. You have. We here every day at least three times the sirens that are asking us to go underground because the strike is coming on. And this is happening everywhere on all teratory of Ukraine. If we are going down to to to to to defend against possible miss missile strikes from Russia to Ukraine.

About ground forces of Russia, well there is always bottles, but intensity of it has lowered. But we have really high risk areas such is varrieable that our archive and those cities are being suffered from the strikes from the Russian side, that it's actually destroying the city almost to the ground. Well, we are afraid. What what what? What's the feeling in Ukraine about how this may progress? This it's going to be a siege type of situation. Are

you guys preparing for the long term? What's the feeling within Ukraine? Uh? First of all all you have to understand that every Ukrainian things that this work is one right now, we we won this world. We didn't we we didn't didn't die it, we didn't gone anywhere. We understand that right now we are just burging the most uh, the better conditions from Russia side, unfortunately, because they just

have to leave and leave Ukrainian territories to Ukraine. But unfortunately the Russia doesn't have the possibility to do this. I think that this work will will come over since the Russia as empire will self destruct. We we have showed to the world that Russia is not power so powerful it was they was like pretending to be uh, and Russians from inside they started to see that actually uh, the aggressor they not Ukraine, that we are just defended defended.

Now the more Christian freedom and this is not a war between Darsia and Ukraine. This is a war between civilized war the Euros, Russia A thank you very much forgiving us your time. We really appreciate it. I wish we had some more time at Vallee Covenko. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews of Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt

Miller three. On Fall Sweeney, I'm on Twitter at pt Sweeney Before the podcast. You can always catch us worldwide at Bloomberg Radio