Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside my co host Matt Miller.
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It's not every.
Day that a ninety nine year old company coast bankrupt, but that's what happened in the trucking business, Yellow corpor I'm going to use Yellow Freight. That's how I know this company used to cover the stock back in the eighties, back in the day when I was a pain weber Y E l L is your ticker. Our good friends at yellowfrate tough going at it. Lee Klaskal joins is here. Is he's a sector head in senior analyst. He cares all the freight transportation, all the logistics that supply chain.
We blamed it on him in the last couple of years. He's with Bloomberg Intelligence. He joins us here on our Bloomberg Interactive Broker studio. So Lee Yellow Frate's been out there for literally ninety nine years.
What happened?
Yeah, well, this bankruptcy is decades in the making, at least twenty five years when they acquired my time, when they acquired Roadway, I think it was back in two thousand and three, and since then, you know, they just really haven't been able to integrate all these networks that they've acquired. You know, usually when you do an acquisition, one plus one should at least equal three. This was one plus one equal maybe.
One and a half. And a lot of that had to do with, you know.
The fact that the company is a Teamster unionized employer, so.
They was that unusual in a trucking business.
Today it is, ok, it's even more unusual now that one of the largest ones is going under. You know, UPS was a Teamster LTL player and they sold their business to TFI. It was a very highly unprofitable business of very thin margins, and you know, they're they're competing against companies that don't have work rules, stringent work rules like some unions do, and so they're just able to be more flexile, more nimble, you know, it's not to
say that it couldn't become a better trucking company. And again there's blame to be spread across the board, whether it's management early in two thousand and three, or you know, maybe you know the fact that some of the things that the union did recently, like threatening to go on strike, kind of accelerated this bankruptcy again, like you know, twenty plus years in the making.
So is this the case of a union putting itself out of a job.
You know, I don't want to put the blame squarely on union. I think like I said, I think there's there's there's there's a blame to go around. But you know, they the company said that they were going to hold off on a fifty million dollar pension payment, and the union said, well, if you do that, you know we're going to strike. And then the problem is with an LTL, a lesson truckload carrier, it's.
Kind of like a run on the bank.
Shippers will move away from you, and then once that happens, you have a de leveraging effect of your network. That means your business becomes less and less profitable. And then as more people move away because they're scared that their freight might be stuck in your system.
It just it just becomes a snowballing effect.
And that's why usually when there's a bankruptcy in the LTL industry, it's always always a liquidation, never restructuring.
I was going to ask, so there's no ongoing concern. It's not like these truckers are going to still have jobs. Just have you know, an executor running the company.
Now there's obviously you know, there's I guess there's some good news. Some of these folks are obviously going to rebound. You know, XBO is hiring, FedEx Freight is hiring. There's a lot of other companies that are going to be hiring and looking for people.
But not giving them union jobs and benefits.
No.
But the interesting thing the the yellow employees actually make less than the non union companies just because of the market. Yeah, from a from a pay standpoint, maybe not from an olden benefit standpoint.
From a pay standpoint, so that make a little less, but maybe they have higher benefits and air conditioning in the cab.
Right.
That was one of the shocking things to me about the ups and I ever since never do it ever since then I've been looking at ups delivery guys all over the place and they are sweating bullets.
Yeah, it's a hot job. They work hard.
All right, Let's step back and take a look at the trucking business in the United States.
Kind of where are we these days? Again? We came through the pandemic.
There were definitely some supply chain issues that just went all the way back, you know it from the ships until it gets to the to the warehouse. You know how that works. Talk to us about how the trucking industry is these days.
Yeah, So there's there's two types of trucking that I look at. I look at the truckload industry, and those are companies like night Swift, Schneider. You probably see all those trucks on the road. Then you have the LTL carriers, the Yellow xbo, Saya, FedEx.
Freight our best LTL by the way, just started it interrupt because I don't know as much about this as you guys do. LTL just means they're gonna go and pick up your load and ship only truck only your load, even if it doesn't fill up their hauler.
Right.
It's usually, I mean, how most of the LTL carriers like it, which is less than truckloads, less than truckl sorry, yes, less than truckload.
Uh.
They like it on pallets, so you can get a forklift in, pull it out, and then go across the dock, put it in another truck, and then keep on doing that in the olden days. You know, I actually, a long, long, long time ago, I worked at an LTL carrier unloading and loading trucks in the summer graveyard shift. Hardest job I ever had in my life. These jobs a little easier, and that was very hot.
As well, and nothing was palatized.
You had to take everything off the truck, some of yellow stuff, a lot of the yellow freight. I mean not to keep on going back to yellow because like you know, a lot of the carriers that are going to be left, they're going to be going after.
Some of this business. But not all of this business is good freight.
Some of it is not palatized, so it's more expensive to move. A lot of it might have high cargo claim, so it could be glass, it could be TVs, things that tend to break when you move them around. So you know, they have about six point eight percent of the shipments in the us XPO FedEx freight the other ones. They're not going to want all six point eight percent of that, So it's going to be interesting to see where that kind of the not so great freight ends
up going. But it'll be a real great opportunity for the carriers that are left because they're going to probably have good freight at good rates, at good margin, and it should be really good incremental margins for the LTL carriers.
And trucker LINGO, could you explain to Matt what reefer means? I know what means.
No, for the trucking industry has a specific.
Different it's temperature controlled, so food pharmacutic.
I wanted to get that out trucks.
Yes, all right, So Lee, your company is not the same as the one in Cheech and chong up and smoke.
Or at the fish show that you fish that you tend to go to. So all right, Lee, your companies, the truckers, the railroads, the global ocean shippers. I can't think of an industry it's got a better look on the economy than those types of companies. What are those companies saying about their economic out look?
Yeah?
So I think you know, we actually just spoke to one of our companies this morning. We spoke with DHL and then they were telling us that, you know, they're not expecting much of a peak season this year really, and if they do see it, they'll probably see it in the air freight on their forwarding business versus their ocean business. A lot of the other carriers like night Swift, you know, they're all talking about your seeing the d stocking happen.
So d stocking that's just retailers just bringing down their.
Inventory exactly, and they're not seeing the restocking where they're filling up the inventories. So we're at a situation where a the consumer is obviously pretty resilient, but we're just not seeing the normal seasonal patterns.
Yet.
We're pretty optimistic, where I guess we're probably a little more bullish. You know, we think we're going to see not a peak peak season, but we are going to see an incremental increase in demand and that's going to have a really positive impact on the truckload industry. We've been calling a bottom for that industry for quite some time on the rate side, and so far has.
Been playing out.
We think that as we go into the fourth quarter, they're going to slowly increase. Now, a lot of the trucking companies that we cover, they don't play in the spot market, but it's kind of like this. It tells you where contract rates are going to be six to nine months out. And so what we're looking closely at the spot market. We look at it every week, try to figure out where it's going. You know, we think that's going to set up next year a pretty good
for the truckload industry for contracts. This year, contract rates are down anywhere between mid to high single digits. Some companies are even seeing them down low double digits. But you know they can't come down much more because they've had all the inflationary pressures that every other company has. You know, they're paying their people more, equipment costs more,
insurance costs more. So you know, eventually people are the larger companies we're just going to say, you know, we'd rather not take your freight because it just doesn't make sense for us.
How about if I own a truck and it's parked in my backyard, a big, you know, eighteen wheeler. Can I get business anytime I want? Can I work anytime I want? You can't you can't.
You can because there's an app for that. I mean, everyone and their mother has an app. Every large trucking company has an app. You have the Uber Freights of the world. You have load boards like truck Stop or dat so alls you need is a smartphone and a truck and a CDL and you can move freight. The problem is you might be moving freight at a loss. And that's what a lot of truckers are dealing with now.
So as time goes on, some of the truckers, we'll call them high high, high cost truckers that are that kind of came into the market at the peak and their equipment's more expensive and their insurance is more expensive, and they thought they were going to get these great rates that they were getting during the pandemic. Now that rates are down considerably, you know, twenty some percent from
last year. You know, they're not making money and eventually you can only operate for cash flow for so long until you're just like, I'm going to go do something else. And a lot of truckers, you know, the owner operators, come.
In and out of this business.
You know, they might work, they might they might drive their truck as a long haul trucker, or they might do construction, or they might work in warehousing.
So it's my neighbor in North Carolina had his eighteen Miller Park Beautiful truck parked next to his little house in Durham Nor, North Carolina. He's like, I feel like working for the next three or four weeks, and he just go out and do it.
So I don't know sal work. That's my dream, as you know exactly.
All right, Lee Clasical, thanks so much for joining us. Lee does all the transportation stuff.
You're listening to the teenth 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.
Matt Miller, Paul Sweeney here in the Bloomberg Interactive Brokers studio.
All right, we got the s and p up.
Let's call it eighteen percent. Year to date, the tech heavy Nasdaq is up over thirty percent. I mean, you know, the back half of August and September some of the best times of the Jersey Shore. I think I'm just packing it in. I'm done, and I'm just gonna go down to short because I've got a great first half. I don't need to do anymore. But let's see what the professionals are out there doing. David cast, president and
CIO at Matrix Asset Management or Advisors Matrix Asset Advisors. David, I mean, boy, that's a heck of a first seven months here in this market. Is there anything left in this market?
We do think there's still a batch more left book.
We think that it's going to come from different places.
If you look at the first five months of the year, the largest seven technology companies were up over sixty five percent. The rest of the market was flat. Since that time, the broader market's been doing better. There's been a lot of catch up. We think when you look for the balance of the year, you're going to continue to have catch up with things that have not done as well in the first seven months of the year. We think they will start to rally, and we think the things
that did great can still do okay. But we would agree with you there there's not going to be a repeat of that.
So are you not concerned that we're going to have her recession? We just talked to Bloomberg Economics Anna Wong. She says October is now her prediction for the beginning, and she says it's going to start slow and then get really steep.
But we don't think it's going to be steep. We think that it's even money.
Whether we have a short, shallow, modest recession, or a soft landing. We think the economy has been unbelievably resilient, but you have to upset that with the fact that the BET has been increasing rates.
For the last year and a half. We think that the FED is close to.
An end, but a lot of the things that they did have lagging impact. So we think you could have a modest recession, but we think a modest recession or a soft landing would be bullish for stocks. Deep recession, which we don't expect, would be bearish for stocks.
All Right, So I'm just looking at some of your picks because interesting because again we've talked about it before, a lot of the big cap tech names have really led the market.
Here.
If I wanted to broaden it out, Metronic is one of your names. You know, a healthcare device company. Talk to U about Metronic.
So healthcare did very well on a relative basis in twenty twenty two and has been miserable in twenty twenty three. Again, we think there's going to be a rotation in terms of Metronic. The procedures for cardiovascular are finally starting to get better.
You had United.
Healthcare say that more people are going to the hospitals for these procedures.
Metronic has had a number of disappointing quarters. They set the bar particularly low this year.
We think this quarter, for the first time in the last four to six they're going to have good numbers and there's a reasonable chance that they beat and can raise expectations. You're getting it at a pretty reasonable price and a very nice dividend deal. We think you have a twelve month time horizon. You easily have twenty to twenty five percent of the upside.
Why do you think these stocks haven't done better though?
Well?
Again, certain stocks did well last year and there was a rotation. The things that did well last year have slowed down this year, and vice versa. Financials also did particularly poorly this year. The drug companies had been doing poorly up to last week, and then you had companies like abd Amgen that had very good numbers and the stock really spiked on that, so we think it's going to spread out. So we don't I think that you want to question that they haven't done well in terms of, hey,
I'm not going to buy them. They haven't done well, and we think you want to look at them as what's going to be the next thing that rallies. And we think a lot of those drug companies and medtech companies are going to start to do better because their fundamentals are strong.
But the stock prices haven't moved yet.
Hey, David, I want to I can't remember the last time on this show we ever talked about it. An electric power company utility company. But you've got American Electric Power AEP based in Columbus, Ohio that's on your list.
What's the play on the electric business?
Socks down fourteen percent year to date.
YEP, So that's exactly it. So they're a very well run company.
We like management. They're going to grow the earnings from five to seven eight percent. They're going to grow the dividend from five to seven eight percent. It's a fifteen and a half times earnings, so it's at the lower end of its valuation range. The yield is four percent, So if you go back to your last guest that was looking for a recession. These are the type that's the type of business you want to own in an economic slowdown or recession. And we just think you want
to balance your portfolio. We think the economy is going to be okay, but if it's not, AEP is going to be.
A very good place to be. We think that they haven't done anything.
The stocks down it shouldn't be, so we're not looking for a home run here. But you could get a four percent yield and a fifteen to twenty percent.
Gain over the next twelve months.
So again conservative place, balance out your portfolio.
And in a great place. Yeah, you need to do channel checks.
I'm your man.
In terms of screening, I see air products and chemicals as well.
So they sell oxygen, which we need, nitrogen, argon, helium, stuff like that. How do you pick these companies, David?
How do you screen for those?
So we have eight valuation models that look at the companies earnings and dividends and return inequity, and we try to value what the business is worth and then buy it at a discount. We also focus on dividends, sustainability of dividends, and in terms of air products, they are really consistent earnings for over time. They've grown the dividend at North in ten to twelve percent. The expectation is that that's going to continue. The stock did well last year,
has not done a whole lot this year. But I think what's very interesting here is it's a green energy play, but you're not paying too much for you and you're getting a good yield while you're waiting.
David, how concerned are you about this Federal Reserve?
We're going to get a bunch of economic data this week, and if the market seems to be saying maybe one more rate increase or maybe even just hold steady, how concerned are you a bet our federal reserve?
Well, we think the Federal Reserve has overshot in terms of raising rates, so we're a little bit fearful that they continue to do that. You did have one Fed governor say that she thinks there could be additional multiple raises this year, So that's a worry. We don't think they have to. We think inflation is definitely breaking lower.
Your last guests just talked about inflation going lower. If you look at this quarter's earning season, we agree most companies are talking about not having issues with supply anymore, logistics shipping, all prices coming down. So we think the Federal Reserve doesn't have to increase more.
They could do one. It's either one or done or none and done.
And if that's the case and the economy holds in Okay, which we think it will, stock should be a pretty good place to be. If we're wrong and the Federal Reserve raises four more times, that's problematic.
We don't think that app that's.
A problem for a lot of people there. All right, David, thank you so much.
We appreciate it as always, David Katz, He's a president and chief investment officer Matrix Asset Advisors. Still bullish on this market, even after the run we've had in the S and P in particularly in the Nasdaq and Nasdaq one hundred.
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 Play Bloomberg eleven thirty.
I want to talk Goldvin Sachs.
Jeff.
Do we have shri? I mean he's a year round I mean got it.
I heard he was going to be in studio And the reason we like to talk to this guy because he is all over the Goldman Sachs beat. So two questions about Jeff Curry. He's only one person. He's a commodity strategist. Okay, he's not a key man risk in my opinion, but high profile guy. I like to know two things, neither which I think we know.
A why did he leave? And B where's he going?
So, yes, you're right, he's not key man risk. But Jeff Curry is the name that the Bloomberg listeners, the Bloomberg readers certainly know really well. He has been the face of commodities research at Goldman Sachs for nearly thirty years now, and he truly has craft a brand for himself as one of the most recognizable commodities analysts out there. He makes bold calls, he describes it in an entertaining in a very easy to understand manner, and he has
won his followers. He may not always have been right. Remember right now he's called for another super cycling that has not quite panned out. But agree with him or not, everyone in the market will tell you that he is someone you must at least pay attention to. That's Jeff Curry. Of course, there is the broader Goldman Sachs then that we always wonder about, another very recognizable name brand leaving Goldman Sachs the sixth partner in the last couple of weeks.
I would argue that it's a little different from the sort of tug of war you've seen in the other parts of Goldman, where there are bigger issues over strategy and some of the reorganizations that they've done that has led to a flow of talent. I can't really attribute that being the chief reason for Jeff Curry in any way that we understand. And look, it doesn't look like he's looking to take any other job immediately. He's going to spend some time with family. He has two young kids.
He's only fifty six years old.
I was about to say that, but he's still only fifty six years old, so it would be hard to bet against a second act.
Here's a quote I like, and is this Yeah, it's in your story, Stree, you got it. From Colleen Foster is like a senior salesperson in commodities.
And this is like the best anybody could say about an analyst.
There's never a time I couldn't get a meeting with a CEO, an oil minister, or a hedge fund founder if Jeff Curry was with me.
That's the sway this guy had it.
He gets you in the door. I actually had a prominent dream about Jeff Curry. Remember last year.
Now.
We were sitting at a diner and he was selling me on the commodity supercycle and he was like, listen, Europe hasn't gone into the recession that we thought it was going to. China's about to come roaring back, you know, and a US driving season is going to kick.
A lot of that stuff.
Europe doesn't look great anymore. China hasn't come roaring back, and the US we're just not using as much gas.
There's not as much demand as they.
Okay, let's not leave Matt hanging here. Yes, you knew Jeff Curry for his commodities research, and maybe that was something he did on the side, But what was he more famous for? Matt He helped co produce a documentary on the British drug band the Kings, trying to bring them back together.
That is pretty cool.
Hey, just stepping away from Goldman, I don't think there's any to me, any turnover that we're seeing in Goldman or anywhere else on the street is any different than any past.
Cycles to me. Do you sense that there's anything.
Unusual going on in turnover or it's just business as usual?
No, I mean there's certainly a different story at Goldman Sachs. Yes, maybe there's not much in terms of the quantity in terms of the number of people who are leaving, but the type of people who are leaving. Some of these people who were handpicked for a bigger and greater role at Goldman sacks for them to be leaving so soon after they've been on the up and you know, Goldman's
always had an upper out culture. But but the but the weird part is some of these people were on the up, you know, either they were kneecapped or they didn't sort of fit in the new plans. They have been getting frustrated and leaving. So it's the type of names that are leaving the building that have caught our attention more than the number of people leaving two hundred Wes Street, So.
We have no idea what Curry's going to do then later, is anyone speculating, like.
I said, I mean, if he seems to have told confidence that for the moment he wants to spend some time with family. But again, if you've been in the game for so long, the itch to get back there will overcome your desire to just relax on the beat. So I will be very surprised if a year later you don't see Jeff Curry pop up somewhere else again.
David Solomon just characterize kind of the feeling on the street about David Solomon these days. I mean, I would argue that Goldman's doing well, and I would also argue that the foray into commercial banking wasn't his call.
That's a blank fine call.
He inherited, he committed hard though blank Fine dated Consumer Bank, the consumer business, and Solomon married it.
Is that is that accurate? That is accurate? Okay? So he does in fact bear Look.
They had a banking charter after two thousand and eight, so it made sense for them to do something as basic as what they were doing off of some deposits make out some loans. But then there was this desire to push in and make something bigger. And they will always tell you such a big deal has been made about consumer It was just three percent of revenues. Yes,
it was three percent of revenues. But you racked up losses at a time when you really don't didn't want those losses, right when the cycle was turning, right, when your engines of investment, banking and trading were slowing down, you had this. Add that to all of the disagreements people have with his leadership style and how he goes about his business, you create a little bit of environment that feels like there is this air of dissatisfaction that is settled in on Goldman Saxe.
Is that is that accurate? Because I hear that, Do you think that's fair? I mean, you're right.
I would trust you more than anyone else. You're right.
And the thing I'm just wondering, you know, because it seems like Goldman Sacks and I can have competed against them for thirty plus years, they just win every single year.
And let's get this right. I think when you look at the broader dynamics and global banking, you know, the retreat of European banks, what is happening with credit SWAICE and all of that. What that ultimately does is leave
a few very strong players who continue to benefit. And the three biggies that we have JP Morgan, Morgan Stanley, Goldman Sacks, they have a big, large, growing, deep competitive mode that ensures that they continue to do better in stuff that they're really good at, banking and trading for Goldman Sachs, the investment bank sites for JP Morgan and Morgan Sandy as well, but also the consumer side, the wealth management side at Morgan Sandy, they are certainly benefiting there.
There is this palace Insriegan, there is this issue with the CU and there is this sort of growing noise that you hear out of Goldman Sax and one does feel that there's no way that's going to turn around in a minute, even if business recovers. So you don't have to find a solution.
I'm just looking at the stocks Goldman Sacks. You're to date stocks up three point six percent, Morgan Stanley up five percent trailing twelve months, Goldman Sacks up nine percent, Morgan Stanley up eight percent.
So here I always pull up my five year comp chart I know you do. And Goldman Sachs over the last five years, they're the second best bank of the Big six, right only Morgan Stanley has done better over the last five years because they compete big time, right now, you know.
That that hurts a lot. But also remember when we think about the Big six, we think about Wells Fargo as the sixth name in that list, right, but they're not a true, true comp Goldman Sack. So I always like to also throwing someone like a Jeffries into the mix. Okay and Jeffries, which is a pure play in Masson Bank yep, at least right now, it's done extraordinarily well in the same time period. So if you add them to the list, they are three in the number seven.
Not bad, not great.
If you're inside Goldman Sacks, you don't like listening to the fact that you're behind Morgan Stanley. But they're getting around to the idea of a praising their rival, praising their competitor, and be hoping to recover that lost crownd.
All Right, Tree, thanks so much, we appreciate it. As always.
Three in Niagen, you're listening to the teenth Can't 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.
Matt Noer, Paulsweeni here in the Bloomberg Interactive Broker Studio, I want to bring in our next guest, because he traveled all the way from Newport Pach, California. David and Cio of the Bonson Group. All right, So David, I got the S and p up. I don't know, seventeen eighteen percent. I got NASDAK up thirty two, thirty three percent, I got the Nasdaq one hundred up darn near forty percent.
Are we called a tech bubble here? Well, yes, AI bubble. Maybe, I don't know.
Most certainly we're in a tech bubble if you were looking at valuations relative to history, okay, and that premium to historical valuation calls for a mean reversion, and I think that that's inevitably going to happen right now. It's interesting you have Apple and Microsoft below their fifty day moving average, and there are more energy names as a percentage of the index above their two under.
Day than there are tech names.
Interesting, Well, we got w tach crude oilly eighty two dollars has had a nice runoff of that sixty seven low from four or five weeks ago.
So where should where you looking at?
Where are you talking to your clients about where they should be looking for some opportunities here?
Well, it's funny, is I was listening to guys talking about McDonald's. I was thinking not about the quarter pounder or the calories, but the sixty seven thousand percent return it has had since nineteen sixty seven. And it's a real number compounded reinvesting those dividends. MacDonald's is the best real estate company that happens to such.
I didn't know that, so I watched the movie. Now I got it.
We've owned it for many, many years, and it's interesting. We bought at the financial crisis at fifty it's now at three hundred. Wow, and the dividend is increased six times, just as the stock has gone up six times.
How important dividends do you?
Just?
In general, it's what we do, what you do, And it's not just dividends, it's the growth of dividends. So that's why I use MacDonald's example. But I can't think of a better environment than the one room right now, where the growth of the income is more important, while you also get better stabilized business models. People too dependent on AI, too dependent on momentum, two dependent on multiple expansion.
They're the most vulnerable right now. So it's interesting.
I was talking to somebody, an investor yesterday, large cap growth guy, and he said we were talking about Goldman Sachs and the other big public investment banks. He doesn't want to buy them because they still pay their people as if.
They were a partnership.
Right. Every time they have a bad year, they say, we got to pay these guys because they're the talent and it's the most important thing. When they have a good year, they're like, we have to pay these guys because they're the talent.
That's the most important thing.
And they never give money back to the shareholders, or not as much as they should for a public company.
Do you agree.
Well, see, I have a name for him that is the exact same business, but a totally different outcome. It's a little investment bank called Molus and Tickers MC, where all they do is an is Ken Mollis was old vice share at UBS started this investment bank. They give our deal j back in the day, one hundred percent of free cash flow goes back to shareholders as dividends. And that's all they are is a deal company. I'm like Goldman Sachs, which is a balance sheet company to
some degree. They have to maintain capital for especially at fixed income trading mols more pure advisories. So that's what we're really going to do. Look, we own Blackstone and Apollo.
All we are is get a piece of.
The management fees that they're charging, and clients don't seem to mind paying it. The results haven't done anything to keep people from paying it. And so when you own those companies, it's not balance sheet risk. Yes, they pay their people well, but it's very performance driven. I think Wall Street's one of the few meritocratic areas left, to be honest, I see that as a good thing.
Well, one of the things that Goldman Sacks that David Soloman is doing right now. He's selling, you know, their big balance sheet business the investments they've made in real estate over years because the returns have been volatile. But I was just talking to Shrie Nata Rojin about this. He said, one year they'll make six billion on those investments. Next year they'll lose a billion, the next year they'll
lose lose two, but then they'll make six again. So over four years, you know they've made net positive nine billion dollars. But since investors are so worried about quarterly or annual reports, they don't care about the longer term picture.
Well, I am a good investor then, because I couldn't care less about quarterly smoothness of those things. But with balance sheet businesses, it's not just that it's going to be voll at all. You're going to evaporate capital at times, you're going to take on big losses. Dodd Frank took away their ability to do much of that. But see, that's not just a good thing.
Is there's less risk. It's a bad thing. Is there's less upside.
Morgan Stanley remedied it by becoming more of a fee based wealth management business. But we believe that these Blackstones, Apollos, al Rock, they're able to take huge fees around being an asset manager in a space that has huge growth in front of it.
So, David, the importance of dividends to you when your firm and your investment outlook.
If I got you in a room with Tim Cook at Apple, what would you say to him?
I would be very respectful, because how could you not be with someone who's created that kind of wealth. And then I would simply point out that the day and age of them saying we can do better with your money is long gone, that there must be a greater return of capital shareholders. That they have proven that for years by holding on to hundreds of billions of dollars. If they had found better opportunities to deploy it, would
have deployed it. And so by keeping a yield somewhere around half of a percentage point, I think it is a very very good opportunity for them to increase return on equity by paying more back to shareholders. In the meantime, they have abundant resources to still go do R and D and consumer product expansion.
The great thing to do is fine stocks that are misunderstood by the market.
Right.
And Simon, Property Group is one you like. When I looked at that, my instant, you know, my brain's at oops. You know, commercial real estate. That must be a bad thing. You think a lot of people make that mistake.
I think a lot of people do. And Simon Property is a great example. It was at fifty dollars during COVID, people said, no one's ever going in the mall again. Now it's at one hundred and twenty five dollars, and people don't realize they have a higher occupancy rate now than they've ever had in the history of the company.
Basically, about ninety five.
Percent of their square footage across two hundred and eighty seven high end malls is occupied. They bought Jcpenny basically for free and are now selling the old jcpenny buildings.
You know, I forgot about that.
I mean, they paid something like five hundred thousand dollars a box when they were selling for twenty million a box, and they are selling them to Amazon to be fulfillment warehouses. They're repurposing them into hotels and more entertainment oriented malls. Cymon Property has a ton of unleashed value that will get developed over time. And while you wait, you're getting a six to seven percent dividend yield that's coming straight
from net operating income. And they just have a very well run balance sheet, about forty seven percent debt to value. It's really low. And to the extent they've had about five malls that have done poorly. Out of two hundred and eighty seven, those were non recourse. They gave them back and the CMBs people had to fight over the assets.
I wonder what I see one of your books, or your most recent book. I guess There's no Free Lunch two hundred and fifty Economic Truths. I love the title. I was hanging out with Gary Shilling as I was telling these guys yesterday, and he said, that's his one main takeaway, there's no free lunch. What do you think about these trillion dollar deficits that we're running? You know, what do you think about the magic money tree that everybody seems to have bought into in government?
Does that ever catch up to us?
Well, it does, and the question is how it catches up. And so Japan's been about two hundred and thirty percent debt to GDP, and what it's done there is basically thirty years of no economic growth. So we're now at fifteen years of one point six economic growth. We had had seventy years of over three percent economic growth before that. So the cost so far seems to be a downward trend on growth, a kind of stagnation in the economy. But do I think that there's a moment in which
the apocalypse comes. It's very difficult to predict that. My real quick comment though on the trillion dollar deficits is I don't like it when we spend five trillion during COVID. I don't like it when there's two trillion of spending in the aftermath of financial crisis.
But I do.
Understand there's a Keynesian school of thought that believes it's necessary. My problem is during peace time and during i'm an expansion time, when we're running one to two trillion dollar deficits, and that seems to be accepted by both sides of the aisle. And the only time anyone fights against it is when the other guy is the president.
That brings it home. That brings it home.
David, thanks so much for joining us. You can get back to Newport Beach. You know they can't be doing work out there Pinco people. I think it's all smoking mirror.
I don't know, because maybe it's just too warm outside and you have to spend time in your air conditioned office.
Perfect outside, seventy five degrees there all the time. All that's like that, and that sounds perfect to me all right, David.
Say Cio at the Boxing Group, we always appreciate getting a few minutes of his time. I was a saint to our producer, a unique view on investing.
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 play Bloomberg eleven thirty.
Natalie want Joints is real estate reporter with Bloomberg News. Natalie talk to us about kind of that commercial real estate market. I mean, if I'm a bank and I try to sell off some of these commercial real estate loans I have in my books, am I finding any buyers out there?
Thanks for having me. It's really hard for banks these days to find buyers out there, not because there aren't buyers that might want to snatch up heavily discounted loans, but because the pricing isn't there yet. Right, There's a lot of liquidity out there, a lot of dry powder out there for opportunistic buyers and funds that are raised to specifically target distressed opportunities. But the problem is banks aren't ready to meet them at the price that they
want to pay. Yet the prices haven't necessarily fallen down far enough, although it is starting to. And this is what the story kind of talks about, which is there's been so much pressure building on the commercial real estate market and on the debt market for so long, and finally we're starting to see that banks are under more pressure to try to sell their loans, to try to add a bit more discount to their deals and find buyers so they can reduce their exposure to some of the riskier properties.
We've heard a similar story with residential with existing homes, right Natalie, The people who own them aren't willing to sell them at the discounted price that buyers are looking to pay in that case, because buyers are having to take a higher mortgage in the in the in the retail market or in the residential market.
We call this the.
Great reset, That's what they'll call it when it actually happens. What is needed for the great reset to happen in commercial property, It's going.
To be a year's long process. I mean sources that we've spoken to, brokers investors all say this is kind of like what happened with the malls. And I'm specifically talking about offices because that is the one sector where it's getting hit by boring rates and also the fundamental values are falling. It's kind of similar to malls where we've seen that unfold for the past decade, right, and we're still seeing that some of the better retail properties
are under high demand. They're selling for good prices, but you have a lot of dead malls in places that still sit empty, and it'll be a process that could be you know, anywhere from five to ten years, but we're starting to see that it's happening now, and in talking to brokers, they think that maybe heading into the third, the fourth quarter and next year, we're going to start to see more banks put up loans for sale and you know, acquiess to better discounts for potential buyers out there.
So, Natalie, I guess you know, one of the challenges for both sides of a trade is I don't really know what the underlying value is of commercial real estate in New York. Have we seen any big transactions that we can use to kind of mark the market. Have we seen anything really come to market in New York for example.
That's the problem is we haven't necessarily seen a lot of asset sales yet, so it's really hard for people to figure out where the values of certain properties stand right now. We've seen some cases of distress sales, but these are one off cases. One example that people are really looking at right now is you know the Signature Bank loans. The FDIC is selling a big chunk of
commercial real estate loans. Many of them are in New York apartments, some offices, and a lot of stakeholders are looking at that to see what the market to market might be. But the problem is, especially again for offices, people don't necessarily know where office demand and remote work,
how that's going to shake out. Right We're starting to see some of the finance firms bring people back to the office four days a week, five days a week, but at the end of the day, there's still disagreements as to how that's going to shake out and what the overall demand will be a few years from now. And that is how people write down the income for those types of loans and those types of deals. So if you don't know how that's going to shake out.
It's really hard to value what those loans will be several years out from now.
What are you seeing, Natalie, in terms of defaults, you know, because a lot of these a lot of these lenders are going to be facing that situation, and some of them are some of the borrowers are defaulting just to try and renegotiate.
We've seen that defaults have really picked up over the past i'd say, you know, starting this year, and that's kind of been the next two to drop in this whole commercial real estate saga is that owners, you know, people that are our sponsors of this debt are just looking at their property and looking at, you know, whether or not it's even worth trying to throw money in to renovate it or to invest in a long term.
And we've seen even the biggest sponsors and owners like Brookfield, like Pimpo, like Blackstone just walk away from their properties, hand back the keys. And if the biggest investors are doing this, the smaller guys are looking at them and saying, Okay, it's appropriate for us to do this right now. We just don't have the money. And that's a big concern for the lenders and the banks, because they didn't write down these loans with the expectation that they're going to
take it over and become managers and landlord cards. Right, So for a lot of these guys, they probably want to get ahead of any potential default, any potential loan maturities, and maybe sell off the loans at a slight discount instead of having to foreclose and end up having to sell the asset for distress values down the line.
And that's what really surprised me.
Shocked me actually to see a company affirm of the quality and the size of Brookfield walk away from something. I mean, I didn't even think that was even possible. I mean, you know from a like how do I walk away from JP Morgan Chase? Why I've got a good jillions of dollars where the deals I'm doing with these guys every year.
But that's what happened.
Yeah, I mean, it's simple economics for a lot of these bigger folks. You know, they have distressed funds. Actually they've raised distress funds to target opportunities across real estate as well for this particular cycle. And you know, for them, it's a lot of these loans are non recourse, meaning they can walk away from it and the lender can't go after their other properties. So it's easy for them
to just look at the economics of the building. They think that the demand might not come back, or it might cost more than it's worth, and it's just simpler to hand the keys back and to refocus their money on something that's a bit more valuable.
Can they repurpose the buildings that they've got. I mean, offices seem to be the real problem here, right, but you're not having you're not seeing nearly as much of a problem in malls. Surprisingly, We're just talking to an investor who likes Simon properties and they've done pretty well.
Right.
Offices are the worst performing properties right now. Malls already bottomed up out a couple of years ago, so the values have already fallen. Hotels have stayed relatively flat, and we've seen some stress happening in apartments, but that's mostly due to a function of the interest rates, not so much that there's no demand there.
Right.
There's a shortage of housing demand across the country. But with offices, that's really where the glood is, that's really where values have fallen twenty seven percent across the US just in the last year and set to fall more. And you know, a lot of people are looking at
potential ways to convert properties. But the problem today in the US is that, you know, the regulation isn't there necessarily to allow for zoning in many cities, and it's extremely costly to repurpose a building into residential if you're able to do it, due to the structural you know, standards of the building and whether or not's even able to convert it.
I mean, I'd always thought about a residential conversion as well, Natalie, especially you know, the Third Avenue corridor here in New York has a lot of office buildings that nobody wants and are impossible to convert into residential unless people all of a sudden are demanding apartments with no windows. I just I had never thought about converting the self storage. That might be a great idea for some of these buildings. Yes, and they haven't faired as poorly either, self storage spaces.
Some people are exploring that, but that's definitely not happening, you know, on the masses at all, because again of zone right. New York City in particular has very specific zoning about what buildings can be designateds for certain uses. And again, self storage is the very particular type of properties that many of these midtown nineteen sixties to nineteen eighties buildings just might not work out for.
Hey, the nineteen sixties to the nineteen eighties was a pretty good ear for me, So I'm just going to leave it to that. Natalie, thanks so much for joining us. Natalie Wong, real estate reporter for Bloomberg News. Yeah, that's gonna be a tough conversion there.
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