Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside my co host Matt Miller.
Every business day we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market moving news.
Find the Bloomberg Markets Podcast on Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. All right, we still have the auto workers on strike. It seems like the strike is expanding in scope. We're not doesn't seem any closer to a solution here, questions what does it mean for these companies in their balance sheets? So we got Joel Levington here. He runs all credit research for Bloomberg Intelligence, and his day job he follows
these auto guys and the industrial companies from the credit perspective. So, Joel, you know, when I think of the auto companies, I don't think of them with the strongest balance sheets and strongest credit profiles. And if this strike goes on, is it a risk here or what type of risk is it to their balance sheets and to their credit?
Yeah, Paul, it's a great question. And really the US companies are autos have weaker balance sheets to begin within the European names. It hasn't really been too much of a concern at this point, but as it extends already in week six, it becomes an issue. And really it becomes an issue because the payables on these companies balance sheets are huge, you know, in excess of thirty billion dollars,
and you don't really have receivables to offset that. So you have this liquidity issue of you already lost mat machtables. Like you know, you're paying your suppliers every sixty days and as as you have no sales, like you're thought to pay them. On the flip side, remember they're selling to their dealers, so they get the cash kind of upfront. So that cash, right yeah.
Because when you sell a car to a dealer, you don't get cash for it, right.
Right, Well, it's done through floor or usually done through floor plays, so well essentially you get it very quickly, and so there's a timing mismatch. You get the cash up front and then you have to pay your supplier. So when there's no more sales or when sales decline, you don't have the money come in because you're not selling to the dealer. But on the flip side, you still have to pay your vendors, and so that's where all the cash strain happens. If you were called during
the pandemic. Ford had an issue eight and a half billion dollars worth of debt, which is a very high coupon debt, which eventually they called in at a premium on top of that just to keep their liquidity whole. So, you know, hopefully that's not the situation we're in, but certainly it feels more.
And we get into next year and we look back, I'm sure this strike will be resolved in the next few weeks. Seems like they're done. They just need to strike a little bit longer, Is that right?
Is that kind of the feeling.
That's what I got from your interview with David Welch this morning, which is that Sean Fayn has to make a lot of noise. He had huge demands. They're going to get a big pay bump, but obviously not the pensions or the four day work week. Was acruiting for the four day work week, yeah, I thought it would be awesome. Four hour work week is what I'm for. But when you look back at the second half of twenty twenty three, how much of an impact is this going to make on the top line?
Probably not that much. I mean there, I think, particularly with Stillanta. So you know, like your hell Cat and Dodge and Chrysler, they built inventory in front of this, knowing that there might be a protracted.
And build a lot of jeep wranglers we heard in this.
I mean if you go to the so learn the way in our town, they certainly have a lot on their lots of Broncos and rams and jeep so wranglers you mean and wranglers, yes, and so.
Broncos are coed.
No, well they have have to. Oh okay, but yeah, like all the all the autos had lots of inventory other lots, you know, knowing that you might have a several week lack of supply coming out.
So wait, just a sidetrack on the Bronco thing. Uh, you got a dealership in your town that has a ton of Broncos on the lot. Do you go in there? And I mean are they charging five or ten thousand dollars over MSRP or can you actually just buy one?
I think you could just buy one?
Where do you live?
Would do that offline on the bench right the train station?
So what do you think the union is going to get at the end of all this. I mean, it looks to me like they're going to get twenty three percent increase and pay right, maybe bigger compounded, but no pensions. Right, They're not going.
To get that back.
No, I think you're totally right, and I think you're probably in the twenty five percent zone is where it kind of works out. I think one of the reasons that you hear people like Dave walchho does a great job in our Detroit office, talk about it being extended is because if you think about from the UAW side of things, they've had a complete decline in volume and customers for decades, right, and they have to kind of
turn it around. So if you can pop a you know, fifteen percent increase in salary on day one, that will get other industries and other autos to be nice that if the uaw's in town, certainly more people could join them, which is really their goal and game to become more signing.
Their battery factories now. They I'm sure they hope that some Tesla shops will look at the union and say, you know what, let's do, Let's try it again.
Yeah, And all the non union shops down south or in the West.
That would BMW.
BMW. Volkswagen is building a new two billion dollar scout facility, so I'm not sure if anybody that's gonna happen.
But is that really gonna happen? I saw it at the you know, the Import Mechanic in Bronxville, right around the corner from Rosies. They had an international Scout on their lot and I thought, man, that is cool, so cool, but you have no room in your parking garage. I don't know, but I I feel like, is it really gonna happen? Are they Is Volkswagen really gonna revive that brand and actually make a mass production product.
They are, although if you look at the products that they've shown online, it looks very very similar to the Ribbean products. Yeah, just without a branding that nobody remembers.
Is that Gonna live?
Is Gonna live reviewed?
I think Ken Live? You know, like they did a convertible bond a couple of months ago, which really gives them some liquidity in time for their next product to come out. But just like all of these ev companies, they're years away from making profits, so it really becomes what's your liquidity and access to the capital markets for more of it? Because you're gonna need it.
Let me ask one more stupid car question, then I'll yield around the flour. The cyber truck. Elon Musk on the conference call, when he was so bummed out and getting kind of philosophical and dark. Uh, he said, we never should have, you know, launched into this special product. And you know we we we should have known that this like you know, special edition would have been, would have caused us to go back into production. Hell, he was talking about it as if it were limited.
Right.
Don't they want to challenge f one fifty, you know, Chevy Silverado, you know Ram fifteen hundred, these massive volume products with huge margins. Isn't that a market that they want to take a piece of or is this just like if you got one in the two year production run, you're lucky and then it's done.
I don't think the cyber Truck is the answer to the F one fifty or the Silverado. I think really what they're trying to do there is really work on giga casting, which is really making these huge casts, and when you can do that, you can really cut down production time really quickly. But I think where Tesla is headed is really towards the Toyota side, towards making suv not necessarily making a lot of money off of a pickup truck, but really on the smaller cars, and I
think you'll see that with the model too. That's where I think they can get super high volume and get it out to the largest amount of consumers. Right Their business has always been about the retail person, not the consumer, and not the commercial application like you'd seen in F one fifty, So I think that's really where they're headed.
But having that ability to cast in great scale at a short period of time, that can give them a competitive advantage even against an amazing manufacturer like Toyota.
Ge geez back baby. After like a ten or twenty year hiatus in terms of being a stock and a company that seems to be headed in the right direction.
It costs me my hairline, but they are back at action and doing really well, and I think there's potential rating upgrades which should you know, like enhance views of their bonds. They will be separating their energy business in the second quarter of next year or probably at the end of the first quarter, and that really will keep it as a pure aerospace company, and by all metrics they should be back into the A category for the first time in five years, and their bonds do not
reflect that. And so that's been a huge winner this year, both in the stock market and in the bond market, and I think that can continue into next year.
I'm just looking at the FA function for ge nineteen. You're in twenty nineteen at ninety four billion of debt. Now they've got like twenty three twenty four billion dollars.
Yeah, it's me it's amazing if you think about what they did with the finance company. At one point, I think at their peak they had about half a trillion dollars worth of dead outstanding and that's been whittled down to the twenties, about twenty billion dollars today from almost half a trillion.
So G is back.
It's just a shadow of itself though in terms of size.
They have skinny down to the core business of aerospace, and they are really really a strong player in that business with a lot of aftermarket products and a twenty percent margin with very little capital intensity, so that can be a huge home run business. Investors, all right, and who's the CEO. We like this guy, Larry Colepe. He was great at Danahur and has done a tremendous job at g E.
See it can be done, so you know, Jack Welch, Jeff mmelt now.
Joel Levington. Yeah, we got to get this guy in the studio for like a half hour.
I know, you know, he's mind.
He can talk about a million questions. Let's go to break so I can ask him some more questions.
All right, very good. Joe Levinton, he's the director research at Bloomberg Intelligence.
You're listening to the Team Cancer Line 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 podcast.
Matt sam Bankmin freed to testify at his for All troup.
Can we see this on TV?
Is this stuff?
Tell?
I mean I first when I saw that headline crossed, I was so excited because sheerly because of the drama. Yeah, you know, the the decision I find questionable, but I guess I get it. I mean, it's a not a Reportedly, it's not always the smartest move to make. On the other hand, some people have said he needs to throw this hail Mary because he's losing the game. You know. Then then I got kind of bummed out because I remember it as Katie Greifeld was selling amount of surveillance
state there's no cameras allowed. Yeah, and so we've seen everybody else who comes who's not in prison, who comes to testify, but we haven't seen Sam Bankman freed. And the chord sketches are I mean horrendous. I know it's subjective, but they're no bueno like, they're just not realistic at all.
Yeah, we need to get some cameras in there. Let's see if I can make a phone call there.
He's got a haircut, and I need to see it. You need to see Tom Kane's pointing out, no one cares if he gets a haircut. That's because we can see it all the time, right, you know, all.
Right, we had some some tech earnings last night. We're gonna get some more of the Reindeer of this week. You got Amazon still to go after the close, Mogiano, Let's check out with Angelo Zenom. He's a senior industry analyst at CEE f R, A Research Angela. We had last night Alphabet better known as Google, and Microsoft reports some numbers and it seems like for both companies it's all about the cloud. Give us your takeaways from some of those big name tech names last night.
Yeah, no, absolutely, it is all about the clouds. You know, I have to saying those numbers.
I mean, Alphabet was it a disappointment on the cloud side of things. Sharp deceleration, I think, well below what anybody anticipated at a twenty two percent growth rate. We were looking closer to twenty six to twenty eight percent. And you know, they're clearly losing.
Share to Microsoft and Azure, which saw actually an acceleration of their cloud business.
Growing twenty nine percent from the twenty six percent growth right we saw just last quarter on their end of things. And listen, I mean, as far as Alphabet is concerned, they are a much smaller player on the cloud side of things, so they should be growing above the growth pace of Microsoft, and the fact that they're not is
a big problem. I think the other issue with Alphabet, as far as the numbers we're concerned is as you start falling behind the competition, there's always concern that you may need to spend a little bit more to kind of keep.
Up with the pack, and I think going into twenty twenty four, there could be some concern that, you know, maybe Alphabet will need to spend a little bit more than what insensus out there is anticipating.
So that's probably what's weighing on the stock significantly.
And an on.
Microsoft side of things, I'd say it's as good a quarter as you possibly you know, probably we could have gotten executing again on the cloud side, like I mentioned, but also when you kind of look at office commercial growing, you know, high teens growth percentage pace, and then you know Copilot launching next week, it gives them all the momentum in the world kind of going into the December quarter and into calendar twenty twenty four, as they seem like they are kind of the clear leader here on
the AI side of things.
Yeah, I mean a leader, a leader on cloud right and a leader in AI, both places that Google seems to be dragon. I mean, I see I note that soon. Dar Pachai over at Alphabet says, I'm pleased with our financial results in our product momentum this quarter with AI driven innovations across search, YouTube, and blah, blah blah blah blah. I don't see any AI driven innovations there, and it's possible, it's likely that they're there and I just don't notice.
But isn't that important the marketing side of it important? Are they doing anything with artificial intelligence? Yeah?
I mean listen, I mean, one, they are kind of ahead of the game in terms of the infrastructure that they're.
Building, at least as far as kind of their internally the design ship, right their TPUs, which were they were way ahead of the game on that side of things, So you know, in terms of kind of getting a lower plush structure. From that perspective, I think they are
ahead of the game. But and and listen, just like you know, Meta which is going to report up for the close that I they are going to be a leader in terms of kind of you know, leveraging their AI into you know, improving kind of you know the back end and getting you know, such general experience in terms of you know, their third business as well as
you know, implementing it into YouTube here over time. But yeah, I mean to your point, at the at the at the onset here kind of early days, it doesn't look like that alphabet at least kind of early on is executing and implementing some of the AI capabilities across their ECO system, maybe the way you know Microsoft is doing on their end.
Or what you know, potentially Meta is actually doing with some of their rankings and recommendations on their.
End as well. So definitely kind of you know, we investors want to see more out of alphabet clearly given the stock performance here that we just haven't seen yet on the AI side of them.
Well, how about on the metafront again re reporting after the close? What's the street really looking for there? I mean again at digital advertising play like Google stocks up one hundred and fifty six percent year to date. What's what's the meta story here? Is all cost cutting or is there still a cloud play there as well?
So listen, I think.
It's I would say there's a cloud play here. But you know, as far as kind of meta is concerned, I mean, the growth rates are accelerating here into Q three and Q four. We're looking at digital ad growth for them to accept twenty percent, and you look at Alphabets too, results, right, it wasn't all bad. They actually did see some nice search numbers, some good YouTube note numbers, so the digital ads, you know, the ad space is
performing fairly well. I think, you know, maybe there is some concern about what guidance is going to look like here in Q four, given some of the comments made from Snap last night in terms of you know, what's going on in the Middle East, although I wouldn't expect, you know, much negativity on that side of things right now, but maybe to your point, I think All Eyes is going to be on the court side of things, more along the lines of what twenty twenty four is going to look like.
They should give some indication here like they did last year in terms of.
On their call. We do expect, you know, a big hike on the cap X side of things. But if op by you know, for instance, is north of one hundred billion here in twenty twenty four, that's going to cause the stock to you know, to see a negative reaction. So I think All Eyes is really going to be on the ops number here tonight.
All right, Angelo, thanks so much for joining us. Angelos you know there from CFRA talking to us about the results that we've seen and those that are coming.
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All Right, interest rates and moving higher. I thought that's good for net interest to come for the banks. We've seen some big banks put up some big net interest income numbers. But it also impacts the value of the bonds on the balance. I forgot about that part of it. Herman Chan joins us. He's a senior ANILSE. He doesn't forget anything ever, forget us regional banks and fintech. He covers it all for Bloomberg Intelligence. So, Herman, how talk
to us about this rising industry environment? What does it mean for kind of the regional banks out there in the United States that most of us do our banking with.
Right, Sure, so higher rates typically are better for banks, but they need to be moving in a slow measured fashion with rates whipsawing they that they did earlier last year. This year that has proven to be a bit more volatile for banks. So you saw the benefit of that last year when interest rates rose and that interest income rows for the banking group. Now those benefits are being being pushed back to consumers and business customers as the posit costs are rising. So it's been a double edged
sword on the rate front. You mentioned earlier that higher rates means higher unrealized gains in their bond holdings, and that's happening, and that's weakening book value.
Billy Herman, do so when I think of these bonds that are underwater back in March, I imagined regional banks using April, May, June, July, and August to get rid of those holdings. Why on earth would you still want to have zero coupon treasuries.
Well, the issue is that if you sell the bonds, then you chrisp the loss on their balance sheet, right, so that the banks don't want to do that, especially ahead of tougher capital rules and tougher capital requirements.
I have, hey, not all of it, but didn't don't you try and minimize your underwater bond portfolio.
You can do that in a few ways. You can hedge, so some banks have done that, which is good to see. So any future rate movements will be less pronounced on the unrealized losses, but some haven't and maybe you could say they dropped the ball on that front.
So they're still holding these they haven't found some greater fool they have to take to take those portfolio They have not.
They're just waiting for these.
Underwater securities to mature quarter after quarter.
Wow, all right, So what's the market? What's the stock market doing to the regional bank names or they're just thrown all of them out the window or are they trying to find winners and losers?
At this point, it seems like there's a lot of negative sentiment out there, and we've seen a number of banks in my coverage universe fifty two week closed over the past week or so. So we talked about weaker margins. There's not a lot of loan growth as well, and then we haven't really seen the the the client in asset quality that's coming ahead for the regionals in terms
of exposure to office properties and the like. So there there. Unfortunately, there's a lot of headwinds and it's hard to foresee some of these side ones going away over the next you know, three to six months.
Is there a valuation call here where I mean these things has been trading forever. There's great history to see how these names have traded. Is a floor where people just say, boy, if it gets the point eight book, I'm just holding my nose and binessings it eight.
Yeah, I don't know. Is point four?
Maybe point four? Is there a point? And if so, where are we relative to that point?
Yeah?
We're probably around like one times tangible book value, which historically has been a very low valuation, UH.
In this country, because I remember I spent years in Germany.
Right, it's different.
Over where one is like, wow, if only I could have one time tangible book value.
Bank would love that.
I guess it's different across the pond. But here in the US, one time stangible seems to be closer to a trough valuation the stocks that bounce off of those lows you know, in May and June. But now we're sort of back towards that that trough level, So there is UH. I would also point out that historically some of these stronger banks do grow through m and A
and periods of weakness. So if you see some further turmoil for the space, some of the stronger players do transact in M and A to get bigger at very attractive pricing. So that's something that could happen over time.
You know, I'm just wondering about loan growth because Torch and Slock, the economist over Topollo was out with a note a couple of days ago, and you had it, you know, saying basically thirty three there are thirty three million small businesses in the United States, which I didn't that number. That's good having your back pocket. But their average barring costs has now reached ten percent. At ten percent, am I taking out a loan to expand my business
or to start a new business? What are your banks telling you?
Yeah, they've talked about that very point, that banks that bank clients and business customers are delaying investing because of the higher rate environments. They've talked about potentially waiting for spreads to tighten a bit more, which may be a bit wishful thinking at this point. So you have seen less demand across the regional banking space by business customers because of the higher interest rates.
Yep, very good, herman, Chant, Thank you as always giving us keeping us up to data on what's happening in the world of the regional banks across the US.
You're listening to the Team Canser Live program Bloomberg Markets weekdays at ten am eastering on Bloomberg dot com, the iHeartRadio app, and the Bloomberg Business App, or listen on demand wherever you get your podcasts.
Brian Whalen joins us. He is the co CIO and generalist portfolio manager at TCW in the fixed income group. Over there, they get a couple shekels under management, so we always appreciate getting Brian's thoughts. Brian, again, we got yields moving higher, and I guess what kind of got a lot of people's attention over the last week or so, is boy, you don't have to just you know, stay in a two year and get five percent. You can go all the way out to curve now the thirty
percent and get five percent. On the US Treasury, what do you make about the movement in rates we've seen recently.
Yeah, it's been brutal.
It kind of got kicked off this summer when the Treasury announced higher anticipated you know, debt issuance, and that just kind of unraveled, you know, volumes of kind of ebbed and flows. But it just kind of feels like a market that nobody wants to step in front of, regardless of the of the value, that at least we see, and I think a lot of others are starting to see, you know, as you said, all the way across the curve at this point.
So what has to happen before you can be comfortable getting back in here? I was thinking about when I was a kid, I used to be so bummed out that I missed buying like seventeen percent ten year treasuries, yes, right in the early eighties, and I always thought I wish my parents had bought more of those, you know, before I sort of understood how it all worked. Am I going to look back at this moment and think I wish I bought five percent ten years.
I think, so, I do. I remember the same feeling. But I've hearing about people buying, you know, seventeen percent strips way out you know, the curve and duration and this incredible total return to the bond market.
I don't think we could promise that.
The math just doesn't work that way, but I would tell you, you know, you know, think about five percent across the curve. Think about like what that's telling you in
terms of like you know the bond math. It either means that we're going to be here at a five percent funds rate for the next five years, you know, it's it's goldilocks, you know, for a decade, or it means that the Fed still got to raise rates significantly from here hundreds of basis points, only to then unwind that by a lot more on the way down, so that over the next ten years you average five percent.
Both scenarios seem pretty unlikely to us, So it seems like, you know, five percent on the treasury curve looks like great value and something we always try to remind ourselves, as you know, you can't time the turn.
You know, more likely than not, whether it's.
A you know, it's a you know it's a kind of multi kind of standard deviation event, you know, some sort of financial accident, so to speak, or it's just kind of the natural, kind of.
Organic letting the air out of the economy and seeing unemployment start to rise and consumer spending start to come down. Either way, when the turn comes, you're probably not gonna be able to kind of catch that. So it's best to start kind of adding now dollar cost averaging in getting long understanding that you may be a little some bumps and bruises along the way, but over the long term it's going to provide a really nice return for you.
Well, let me ask a similar question. It's kind of the same question a different way. I got a viewer or listener writing in asking if you have a rates for you here. Are we higher because of technical inflation and stronger growth or is it fundamental structural change in ownership of rates and issuance to remain very elevated.
I think the ladder, the whole issuance thing is a little bit kind of like finding a narrative to fit the price action. I mean, historically there is no correlation between issuance and the way rates move. You can see periods where there's issuance is high and rates go high, and you can see periods where issuance is increases but rates rally because of the more macro event.
You know.
I think we're here because, let's be honest, the US economy has been stronger than people expected, and so the FEDS had to go higher. We haven't seen anything break yet, you know, outside of a few regional banks you know, earlier this year, and so I think there's just a fear that it might take more to kind of slow this economy down and bring inflation back down toward two percent.
You know, But the house view here at TCW is that you know that that fear is more about kind of looking through the rear view mirror as opposed to kind of looking forward and understanding that all this monetary titan, not just here in the US but globally, it just acts with a lack, you know, and people get impatient. But you know, this lag, whether it's from the time the Fed started hiking or when the curve went inverted, you know, there's nothing unusual about it.
You know.
They say it's a lag for reason.
And this has been consistent, and I think it's just going to take a little bit of patience to pay off.
But if you look at so one of the other things I started doing after the regional banks broke down is looking at debt. Go on the Bloomberg to see who's holding all this US paper. And I just can't imagine that previously was always like the Japanese and the Chinese and all these foreign investors were buying our treasuries.
You watch the dysfunction in the US government and the fact that even in a strong economy, we want to have two trillion dollar deficits, Like, why would any foreigner I want to hold this paper?
Good?
No, two days one.
I'm first of all, you know, we pretty much always run deficits, that's nothing new. And we're always dysfunctional, you know, We're just the least dysfunctional out there, or one of the least, and so I don't, I don't. That doesn't
hold a lot of water for us. I think more relevant to the reason we haven't seen foreign investors buying a lot of US treasuries or agency mortgage backed securities has to do with the fact that the hedging costs have been so high, and that really relates to where short term interest rates are, and that's been set by the FED. So as the Fed's taken rates from zero to five percent, it's become very expensive for non US
investors to buy our debt. However, if we are at or kind of very close to the peak in that rate, more likely than not, the US dollar over time will start to come down, the hedging costs will come down, and the value of US treasuries at five percent or four and a half percent or four percent it's going to actually start to be more appealing to the non US investor.
I like the we've always run deficits. It makes me feel a little better because in my house it's the same. You know, I'm always spend more money than I make. See, I just tell the world we're good for it. But at a certain point, it's got to worry you. Right at Stephen Major wasn't worried until he was. And and uh, you know, at some point it's got to be too we're borrowing too much money.
No, yeah, it's got to work. And you know what, you know, it's it's a little bon bond vigilantes. It's where that's come from. And at some point, the bond market's gonna raise rates. It's gonna it's gonna make the interest costs such a high burden that we're gonna have to fix our deficit problem and we're gonna have to realign spending. We're gonna have to be you know, more frugal, you know, with with our pennies. And so it kind
of feels like we're getting there. You know, we're seeing you know, the percentage of interest costs as a percentage GDP jump here and if we continue to hang at these rates, it's gonna have to make some forcesome from very difficult decisions in d C.
So you know, more than likely than not that's coming one way or the other.
Ran, Let's get to any important stuff. Yale football yell is three and three. They welcome into New Haven this weekend the Columbia Tigers. Tell us about Yeale football this year? What do you got?
You know, what a great program. Tony Reno's got over there. He came in years ago and he took a program. He's made it one of the best in the league. We won the title last year, as I'm sure.
You know and all your viewers know that. This year it hasn't been as good as last year.
But they've got a very very solid offense, and I think we're going to turn this season around. And went on out which includes you know, winning the Big hYP and finishing with a victory over Harvard at right before Thanksgiving.
Good stuff, good stuff for so we like to watch IVY League football a lot of fun. Looks like there's a lot of party in the league this year. All right, great stuff, buddy, Thank you, Brian Well.
Going to an IVY League football it's great.
I will say, yeah, it's fun.
Yeah, you should go to it.
I mean where you live, you should go to Columbia game. That's actually pretty pretty close, and that's a great stadium too. So Brian Well and co Cio, Generalist Portfolio Mager TCW Fixed Income Group.
You're listening to the tape our live program, Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station Just Say Alexa playing Bloomberg eleven thirty.
As Matt just mentioned, the Wall Street Journal breaking the story just earlier this morning that Israel has decided to delay its invasion of Gaza, presumably to allow the US to move some additional missile systems into the region. We want to check in with somebody who kind of knows how this stuff is done, and that's Jack Divine. Jack is the president and founding partner of the Arcan Group.
Before that, he spent thirty two years at the Central Intelligence Agency all over the world, so he knows how this stuff gets done. Jack, what do you make of the of the news here today that it appears that Israel is going to delay we don't know for how long it's invasion of Gaza.
I think we have a balancing task here. I think on one side, the faster you go in, the more quicker you suppress the mass, the better it is in terms of controlling them before they get dug in deeper. At the same time, you have the world looking at the situation and you're losing your bound the field pressures
coming at you. And then the over really balancing problem is though hostages, and I think everyone is trying to do the best they can to maximize the number of hostages and hopefully all and I think that's the balancing the military part being getting it done quickly and so on, and getting the hostages. So I think there's a balancing act. I don't think it.
Can go on too much longer, though.
I think that this delay is probably one that the Israelis felt was within their limits. But I don't know how long they can hold off.
They do seem to be losing momentum. I thought they were going to go in to Gaza, you know, it was reportedly imminent two weeks ago. And I get that they want to soften targets inside there, that's the terminology they use. But it seems like world leader after world leader has flown over to Israel to try and get them to put this off, to try and get them to, you know, breathe in, breathe out, and think about what's
about to happen. Is it possible that that tactic works and we don't get a ground invasion in Gaza or do you think that's a foregone conclusion.
I don't think the Israeli political life can withstand that. In other words, you had such a massacre, impacting not just the immediate victims, but their relatives and the spirit of the country. I think if you walk away without Hamasp being destroyed, I think they'll be huge to satisfaction.
I don't think it's in whose carrier they're the settle for that, But I do think they're trying to be smart to make sure they've done everything they can to try and deal with the world opinion and pressure about the situation. But at the end of the day, I don't think it's inconceivable to me that you have a ceasefire. So to me, the hostages, I think the bolt has to be bitten, and I do believe there were some
natural delays. I mean they weren't in position. I mean, they were not really set up to do the invasion, so that takes a little time and then you have to soften it up. But I think this is from where I sit, it looks to me like they're well within reach of going in and doing what they have to do.
To me, the hostage has reason interesting work against them. Yeah, I wonder what you think about you know, Erdowan today said he doesn't think Hamas is a terrorist group, but it's difficult to look at what they did on October seventh and not call that terrorism. We do not, at least as a public policy, negotiate with terrorists. So what's happening here?
Well, you have here to go, but you have many other leaders, you have the head of the UN. I mean it's very disappointing. I mean, we can't distinguish between massacres and slaughtering and trying to defend your country.
I mean in our universities.
It's to me, it's shocking, and I think we have to, when this is done, reevaluate where we stand. I do think there's an opportunity. There is a silver lining of the Israelis succeed as I think, which will be to get rid of Hamasa. I mean, they'll spring up again, but there'll be a breathing period to look at some longer lasting peace arrangement. But right now it's stunning to see. I don't know how you get there, to be honest, it's and I just feel you must.
Have been out of touch.
I didn't watch any news or listening to Bloomberg. Yeah, that's took place. I mean it was savagery.
Jack. What role do you believe currently the United States military and intelligence is playing as we speak.
I mean Israeli. So is Israel has been a long time ally, certainly our principal ally in the Middle East. I suspect we're doing everything we can on the intelligence front to assist. I also think militarily, I don't see
boots on the ground. I do think there are risk having the fleet there, but I think it's the right move, and I think we're showing strength so that we're really trying to contain the Iranians rather than dealing with anything ready directly to Hamas and the guys of the Israelis will take care of that, all.
Right, Jack, Thank you so much for joining us. Really appreciate you jumping on here last minute. Jack Devine. He's a president and founding partner of the Arcan Group, a thirty two year veteran of the Central Intelligence Agency. We always like getting a few minutes of Jack's time when there are breaking geopolitical events, and there seem to be plenty of those these days.
You're listening to the tape Catcher 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.
All right, I look at We've been talking about rates a lot over the last several weeks. How about this rate? The bank rate thirty year fixed mortgage eight point zero four percent? Are you kidding me crazy? I feel like a rockstar now with my six percent mortgage I got earlier in the year. We also had new home sales. Today they don't care about the rates of twelve point three percent. After a decline last month of eight point two percent, So all over the place, let's figure out
what's happening in the residential real estate market. We do that the Kate Kaminski, she's the COO of Walton Global. Kate give us just kind of an overview here. It seems like with mortgage rates this high, who can afford to buy a house these days?
Well, thanks for having me on, gentlemen. Excited to be joining you here and talking about this today. You know, that really is the question who can afford to get into homes with rates at where they're at five basis points from from a week ago. And we don't necessarily see the light at the end of the tunnel yet. But I think the stats that you just reference, the twelve point three percent that we're seeing up in September, you know, we're really bullish on new home sales and
production right now. You're seeing new homebuilders that represent about thirty five to forty percent of today's new home sales, which is up from fifteen to eighteen percent before. And we're attributing that primarily to these new home builders very aggressively buying down mortgages for these buyers. You know, the typical consumer is they feel that five is about the
average mortgage rate that they should be paying. And these new home builders are putting in programs whereby they're getting those new buyers down from eight percent to five percent through different different mechanisms of rate it items.
So how does this work out, Kate? I mean, what do you do at Walton Global and what is your expectation for Q four and twenty twenty four.
Yeah, So we're a global real estate investment and asset management firm and we specialize in land. We're looking to buy land that's in the path of growth, that that is primarily intended for sale to new home builders, and so we're a pretty critical part of the supply chain. We believe in in the new home building space because we're selling to these builders who are really focused on
that first time home buyer. And so Walton creates pretty creative financing mechanisms, off balance sheet financing mechanisms for these homebuilders who are looking for ways to keep as much cash on hand, keep their margins high so that they can do things like these rate buy down programs and deploy their excess capital, which these homebuilders have a lot of that right now. They've been waiting for this opportunity to expand their market shares.
Well, you're like, but so sorry forgive me because I don't understand the ins and outs of this business so well. But these new homebuilders are subsidizing mortgages for buyers because rates are too high, and you are subsidizing the loans to these new homebuilders to get your land because the rates are so high. Like, at some point the bucks got to stop, right, Well.
You know, we we think that it's going to continue on. We think we have a few more years of.
This, and I I just mean, somebody at the end of the day has got to pay for it, right, So you know, you can't continue to find creative financing solutions, Like at some point it's got to get paid for.
So how does that all? It's like a house of cards.
Yep.
Well, you know, we're definitely seeing the increased price of resale homes, which is why again we're focused on that new home build market. I was just traveling in Florida last week and there are still places where we have new communities that are going up being built by the public builders, and there's homes in there selling for two hundred thousand and an under in some instances, and so
I think that drive to affordability is critical. We need to be focusing on that right across the country so that we're matching the home buyer with what they're earning and what they can afford. And so you know, we've got we've got a real lock up in the resale market right now because we've continued to see the value of those homes increase and that's just not sustainable.
I completely agree with you.
But so that's why we continue to think that the new home building space is going to be where these buyers are fleeing to. We have a fundamental undersupply of homes in this country. Depending on what economists you speak to, it's between two and six million homes that we need to build because of the underbuilding that was occurring after the Great Recession. And so you know, these new home builders are or where the the affordability lies.
So when you're out there these days, what's the cost of land that you guys are looking at, what's the deal? What's the deals you're looking at today versus maybe four or five years ago in terms of acquiring land.
Yeah, you know that really is specific to every market that we're in uh you know, we we are looking for land that has UH is in a development friendly municipality or county. That continues to be one of the biggest challenges that we're seeing across the country as well, these areas where growth is coming, not wanting to accept this growth and provide the necessary approvals. But that's that's
where the opportunity lies. And and so we we focus on areas where there's access to infrastructure, and we've really got pro growth governments in and around the area that are going to help get these off the ground. So you know, there's there's not a specific price per acre that we're focusing on because that varies by state and per region. But we really focus here at Walton in the sun Belt, you know, the southern smile of the US, because of those major market trends that that we follow,
job growth, population growth, you know, net domestic migration. It's it's a pretty simple equation, and you know that's that has been our model for the last forty five years that we've been doing this.
Who do you compete against because we've heard this same you know, strategy on the real estate side from basically everybody in the home building, food chain, So who do you It's got to be competitive. When a partial property comes up in you know, suburban Dallas or suburban Austin or suburban Tampa. I got to think ten of the smartest and most well capitalized people are in there trying to get that land. How competitive is your market?
So it's definitely a competitive marketplace. But where I would say Walton's niche is is that we're buying land that's
a little bit earlier in the cycle. Most of your builders today, they because of what happened and after the Great Recession and the long duration that it took for everything to normalize, they all have pressures from Wall Street to keep land off their balance sheets, and so you know they're looking for land at that they can be building and selling homes within twenty four months, and so
they're compressed on wet assets they can actually purchase. And even many of the land bankers and groups that they work with, they have a pretty short time horizon for when that land needs to be cash flowing, okay, homes
being built and sold to third parties. Where Walton comes into play is we have a little bit more patient capital, not too patient, but a little bit more where we'll buy land that is a little bit earlier in the cycle, and we'll hold it while that homebuilder is doing the entitlement work, getting it ready to literally stick a shovel in the ground, and that's the time when we'll transfer the land to them. So it's pretty unique in that space and where we find the opportunities.
All right, Kate, thanks so much for joining us. Really appreciate it talking about some of the commercial real estate development. Kate Kaminski, COO of Walton Global, Thanks.
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