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Let's head over to talk about what's happening and our good friends at Walmart again, a really good quarters and revenues beat the earnings, talking pretty I think people again, people, I think really look at Walmart is kind of a read on the US consumer and that was kind of, I guess, a pretty good report there. Let's check out Jen Bartashes. She follows all the retailers for Bloomberg Intelligence.
She is in Prince, New Jersey. I'm guessing, Jen, what's your takeaway from our good friends in Bettonville.
Yeah, good morning, Paul. When I look at today's results, I think one of the striking things that is a takeaway that is beyond just the story of the higher income consumer which everyone is focused on, is that the multiple year strategy that Walmart's been employing to change their business mix is really starting to yield results, and that's allowing them to grow operating income ahead of revenue. That's, you know, driving profitability, and it's driving that long term
margin expansion that they think they can sustain. So to me, this is a great quarter, and yes they do have a great read on the consumer, but it is also starting to show that all of those investments are really paying off in the way that they're evolving the company.
So, Jen, I'm vowing to do a store walk this Saturday for the Walmart near here.
How do I do that?
Would?
How would you do it?
Like?
What do I do?
Will you drive there?
And I'm going to get there? There's a million aisles. These things are huge, they are you know.
I mean, what I would say, Paul is wander around a little. But what I do when I go into stores is I find one of the people who are picking the online grocery orders or they're online orders, and I follow them around and that way I get a sense of what it is, what is it that people are actually buying, what are they putting in their basket? And how are employees actually effectively navigating that big store. So that would be one tip I have for you.
That's very cool. Okay, you definitely should be doing. Get that guy Jen, when we look at the areas of mix that you were mentioned that they sort of were changing their business mix, that huge part is e commerce, right it is If their main competitor though, is Walmart for e commerce, how does that evolve?
Well, you know what Walmart's been doing is they've added a lot of sellers to their marketplace. It's unlocking ad revenue growth, it's unlocking the ability to charge for fulfillment services. Now, these are all things that sound very familiar because they are things that Amazon, for example, is very strong at. But that doesn't mean that it can't help Walmart evolve and it can't help make Walmart a much stronger company
in the long term. I think the advantage that Walmart has is because they have that strong store base, they can help keep some of the costs to fill digital orders down, which helps them with that overall profitability profile as well.
When you talk to investors about Walmart, again, it's stock hitting an all time high here today.
It ain't cheap.
How do you talk to them about valuation? I had like twenty six twenty seven times on a pe basis, how do you talk to them about valuation?
To get to your question, Paul it's really when I'm talking to investors, it's you know, about where is the company headed? Right. So I think one of the things that's admirable about the company, or that is is really something they just do so well, is they keep their cooperation tight. They're good at controlling costs, but they are not They don't hesitate to invest in opportunity, but they also will walk away from things that don't pan out. So I think, you know, you saw that with the
announcement earlier this month about closing health clinics. At one point they thought they might be able to you know, drive a big business out of that realistically couldn't make money, closed it down. So I think that that spirit of trial and or the willing to the willingness to actually try to flex, but then know when to say, Okay,
this isn't this isn't what we wanted. It's something that has become a strength of the company and helps, you know, helps put it up as a as a company that justifies, you know, potentially a higher valuation versus some other strict retail peers that are really just focused on growing a retail business.
I think she's gonna think and ask one more question. Yeah, I am gonna do it. What Amazon has, though, that Walmart doesn't is a w S. That's where they're going to get their bulk of their margin. That's where they get all the juicy, sexy revenue. Walmart doesn't have that.
So is that so?
So how does it sort of ramp up other revenue streams that can yield that kind of growth and margin.
That's a that's a that's the question of the day, right because you don't actually want Walmart to be another Amazon.
You want Walmart to be Walmart. And so I think that when you look at some of the areas that they're doing well, especially in some of the international markets where they're they're playing around with it in things like fintech, you know, those are areas where I think that there's some great opportunity for the company without them having to try to be a cookie cutter of Amazon and you know and have some you know, have something like an AWS that is not natural to their their current operations.
All right, Jen, thanks so much for joining us. I appreciate it. Jen Bartasha. She covers all the retail stuff for Bloomberg Intelligence, including Walmart again, which had a really good Quarterstock up six percent here, all time high. So good stuff for that, I think a good you know, a little just kind of a bullet point there. For if you're trying to get a sense a beat on how the consumer's doing, doing fairly well.
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I'm Alexei alongside Paul Sweeney. This is Bloomberg Intelligence Radio. We are live interactive broker studio right here in midtown Manhattan. So here was the front page of the Ft today when I logged in. Apparently, Starwood Real Estate Investment Trust CREATE is one of the largest unlisted property funds, and it has drawn more than one point three billion dollars of its one point five to five billion unsecured credit facility since the beginning of twenty twenty three. That sounds bad.
That sounds like they're in a cash crunch kind of scenario.
Poul.
And as we keep hearing, commercial real estate isn't a really tough spot. But yet I haven't seen a lot of shoes dropping.
I haven't either. I don't know how this is going to play out. Maybe our next guest I'll help us out with that. Rich Hill, head of real Estate Strategy and Research at Cohen and Steers, joining us here in our Bloomberg Interactive Broker studio. Why because we're here every day m hm, And that's how we roll. Rich, I walk from Penn Station to Hear every day, all through Midtown Manhattan. Now, I know this is not the world, it's only Midtown Manhattan. But there's a lot of vacant
real estate. People aren't coming back. I saw via Twitter yesterday via a report Bank Bank of America research report that kind of showed vacancies, and it seems like they're calling this new normal, which is about fifty percent of commercial real estate properties. They're calling that the new normal, just because that's kind of what the date is showing. A. Do you agree with that? And B what does it mean for the owners and the lenders and all that kind of stuff?
The new system?
First of all, thanks for having me in this morning. It's good to see you guys. Look, I'll begin by saying people like to talk about commercial real estate as a big, singular asset class, but in reality, it's actually eighteen different sub sectors under a big umbrella, and those eighteen sub subsectors can behave very differently in very different market environments. So you're leading with New York City, You're right, New York City office vacancies are high, retail vacancies are high.
Leading with maybe.
Retail, that doesn't actually tell the whole story, because if you actually look at what's happening with retail real estate across the United States, it's actually really strong footing. For two reasons. I think, you know, you rewind ten years ago. Everyone was talking about the retail apocalypse, so no one really was building new retail properties over the past ten to fifteen years, so you had no new supply coming.
And then COVID was a great Darwinistic event where it actually sort of right sized all the retail properties that were maybe on the edgines. You couple that with the fact that e commerce companies realized that physical retail real estate can provide micro fulfillment to their customers. The retail real estate market is actually on pretty strong footing, particularly open air shopping centers, whether it be community centers, neighborhood centers, or even power centers.
That's a really interesting point, and you're right, we kind of lump it all in in commercial real estate. We think office, So is that is that troublespot office commercial real estate? And again like when is that shoe dropping?
Yeah, Look, it doesn't do any good to say anything other than the facts about office. Office is struggling nationwide, by the way, we probably built too much of it prior to COVID. Work from home dynamics have have tipped that nationwide, office vacancies are twenty percent and they're increasing from here. And so there's a lot of ways you can unpack office. Though, just like I said, you know, maybe the truth is somewhere in the middle. It's not as bad as everyone fears, and it's not as good
as everyone fears. If you look at office, new, clean and green office even in New York City is doing exceptionally.
Well, like Hustin Yards is doing well, right, and that one Vanderbilt thing.
One vendor Bilt least up to almost one hundred percent during the middle of COVID. So class B and C properties, Class B and C properties are properties that were built in the nineteen seventies and nineteen eighties with no cop X put CAPEX put into it over decades and decades and decades.
I get it.
No one wants to work there. So we're sort of in this weird time period where office is struggling. I want to be clear. Office is only around twenty percent of the serie market. It's only around three percent of the US listed rate market. But look, everyone loves a great Greek tragedy.
I get it.
Like it sells clicks, it sells papers. It is a really challenging asset class. And so I don't want to belabor that.
What's the lending environment like now for real estate investors? What are the banks doing where they were the real estate investors sourcing their capital.
Yeah, so this is probably the single most important topic when we talk about commercial real estate. The reason being that commercial real estate isn't inherently a levered asset class. When people buy a commercial real estate property, they put debt on it. There's not very few properties that don't have debt on it. So it is a levered asset class. And so that's actually why valuations are being pressured so much. We think property valuations generically are down around twenty percent.
Office valuations are probably down thirty five percent. The reason they're down so much isn't necessarily because of fundamentals. Fundamentals ex office are on pretty strong footing. It's because the right side of the balance sheet is repricing. Both financing cost higher and the availability of debt much lower than it where it used to be. So look, lenders aren't
lending as much as they used to. If you look at the Mortgage Bankers Mortgage Bankers Association Senior Loan their Loan Origination Index, it's close to the lowest level since we've been in twenty fourteen.
I get it.
A lot of people have loans on their balance sheet and they're working through those. But you made a really good point. Distress hasn't really come about yet. And I think there's a really important point. And I'll pause here for a second. Lenders and borrowers are in a pretty challenging position. So they're actually solving the prisoner's.
Dilemma, meaning that a bank doesn't want to own an office space.
So a bank doesn't want to own it, they're not in the business of it. And guess what the regulatory capital charges for owning a property on your balance sheet are actually higher than if you were just to modify the loan at say a ninety nine percent LTV BLTV.
Ooh, okay, break it down for US loan to value. Okay, So what would that mean if you if you brought that down to nine nine percent LTV.
Yeah.
So let's assume ten years ago you did a loan at a fifty percent and LTV. So you had a property that was worth ten dollars and you put a loan on it was the worth five dollars, so fifty percent LTV. Fast forward ten years, the value of that property drops from ten to five, and you still have five dollars of loan. That's one hundred percent LTV. The regulators are actually incentivizing the banks to actually modify and extend loans. So some people might call it kicking the
can down the road. I don't necessarily think it's kicking the can down the road. I just think borrowers and blenders are incentivized to figure out way out of this of this environment. It's a pretty challenging environment for everyone right now, and so they are coming to a less bad situation modifying extending these loans.
One of the things I've seen in the last ten years and been amazed about. Alex n I talk about it a lot, is the growth of private credit. Is private credit coming into the real estate space to maybe just find some opportunity here.
Yeah, it has been for some time. Okay, twenty fifteen, private credit market share of total lending was probably ten percent plus or minus, and I'd probably say it's a little bit less than that. At the peak of the market it was around twenty percent or so. But look, there is something to be said for private for private credit finding a home within commercial real estate. There's forty two hundred banks across the United States. Bank share is
around forty percent of total lending. There will be some banks that pull back for various different reasons. There has to be a home for those additional loans, and I do think private credit, if you have the expertise not to just underwrite the loans, but work out the loans when some of them inevitably go bad, there's a home. There's a home for private credit. Do I think it's going to fifty percent market share? No, I sort of think the upper limits is around twenty percent. We're probably
a little bit less than that right now. But there's a home for private credit.
So when we talk about the shoe and commercial and office commercial real estate not dropping, it sounds like maybe it won't drop at all. It'll just be sort of John Tucker's doing the wave and I don't really know why that is, but get oh, we hit it.
That person just came back down number for a moment, doubt the tick up counts.
Yes it does.
That was amazing. This is not maybe going to drop. It's just going to be worked out and then no one's going to be sitting with really terrible loans forever.
So this is going to take longer than what was feared a year ago. A year ago when you had banks coming under stress, I think a lot of people were fearing a quick collapse in commercial real estate lending.
That has not occurred.
This will be a slow burn over a number of years. I want to be clear, though, we are not calling for no distress in the commercial real estate market. I mentioned to you that property evaluations are down around twenty percent right now. We are expecting them to be down peak to trough around twenty five to thirty percent, So around two thirds of the way through the next leg, lower is going to be rising distress. And by the way, that actually might be a contrarian bullish sign.
So what do I mean by set at the bottom?
Maybe exactly exactly. It basically means sellers are finally capitulating and knowing where buyers want to buy. That's a healthy contrarian signal.
See Richel Like, I think half of the real estate finance people in the business came out of Morgan Stanley. It's like a mafia there, those guys that are all over the place. Richard is off one of them. Richiel, head of real estate strategy and Research at Cohen and Steers, joining us here in at Bloomberg Interactive Brokers Studio, talking about the overall commercial real estate business, not just office
and octimity. But that's a one of them. I can't wait to see what some of these buildings on Third Avenue when they change hands, what the discount is going to be. I think it's gonna be huge, like the Lipstick Building, just to pick one, that iconic building, but it's not an a property.
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From Alex Steel alongside Paul Sweeney and John Tucker. This is Bloomberg Intelligence Radio. We bring you all the top news and economics and finance all around the world. But they're great Bloomberg Intelli Legends analysts. They cover two thousand companies and one hundred and thirty industries worldwide. What's not
at a record it's small caps. So they pushed higher yesterday they were near a two year high, but not yet at a record, and today they're a little bit softer, So you have to wonder if that whole rally broadening out thing is still on the docket. Let's get more here with David Kudla, founder's CEO and chief investment strategist at Mainstay Capital Management. He's on Zoom from Naples, Florida. So that's not too shabby. Yeah, nice job on that one, David.
Forty thousand for the Dow. It's a nice round number. We like nice round numbers.
You buying it, Yeah, I'm buying it. Good morning, Alex and Paul. You know, the market just has a lot of things going for right now. There are things that were tailwinds or were headwinds have become tailwinds. We've got strong earnings, we've got a fed that you know, I think Jay Pal's looking for a reason to cut, and I think the jan Ellen once Jay palett cuts so that you can afford the service the debt our national debt better. And we we look at we look forward
at at market fundamentals. We look forward to what's happening with generative AI and what that means in terms of what we're calling the next industrial revolution. Uh, this deal with Apple and open AI and the power that people are gonna have in the in the holding their hand at a handheld device. Yeah, there's there's some things that can trip us up. But you know, the market's really
really in good shape right now. On market sediment has changed so much investor sediment from just two weeks ago, it's incredible.
So, Uh, David talks about earnings. What are your takeaways here for this earnings which have generally been pretty solid across the board, what are your takeaways?
Well, you know, we went through their earnings trough and you know, we've emerged from that, and now when we look at first quarter earnings, we're coming in well ahead of expectations. Profit margins are the best in two years, and that's really the key, you know, when when there's a questions, so many questions about the FED. Look, we've been just since the beginning of the year, we've been all over the map on how many FED rate cuts we'll get this year, anywhere between zero and seven or
even a rate hike. But when we look over at fundamentals, just corporate earnings are coming in better than expected, and you know that's that's obviously positive for stocks and one of the most important long term factors. And we're looking for double digit growth and earnings down the road this year. So it's a it's a scenario that if we continue
with some multiple expansion, earnings continue to do well. The Fed, if anything that is looking to show that they're on a cutting cycle, they want to cut at least once to show they're on a cutting cycle. It's just they're having trouble. They got help with non farm payrolls, they got help with retail sales CPI. You know, we're going to see an opening here and that'll just be more, you know, another catalyst, more horsepower for the bulls out
there to take the market higher. So does that mean that is coming I'm sorry, I was going to say, with it coming on more in the spirit of a normalization of FED policy, not because the recessionary forces out there are becoming overwhelming and we're seeing a slow economy. We're not seeing that GDP has remained quite strong.
So when you talk about the AI and New Industrial Revolution, what's so interesting is that utilities over the last few weeks in may have been the second best performing sector in the S and P along with tech. Can utilities be a growth sector in this environment that you're outlining.
I think that's yet to be seen. You know, the belief there are the thesis there is that there is going to be so much demand for all these super chips and and all the the the the energy required for this revolutionist implementation of of general of AI. I think it's also investors looking for more areas they can diversify into. But I think it's you have to be seen how much that really translates. You know, that that demand for energy translates into actually pushing utility stocks higher.
It's not it's not a typical reaction function we've seen in the past, but we can see how it could be one going forward.
David, you know, aside from the AI play, you know, a lot of investors feel like maybe they've kind of, at least in the short term, missed some of the Big seven Magnificent seven plays. What are some other areas that you think there's maybe value out there in the marketplace?
Yeah, well we we you know, we've been saying this for a while, even when we've had these sell offs in the Magnificent seven or the Fabulous for or really just megacap tech, to stay with them because you know, they're really becoming all weather stocks with these fortress balance sheets and wide boats around them and uh, you know they're balance sheets that you know, companies like Apple, it
doesn't Microsoft, doesn't matter what rates are doing. So so it's it's such a good place to have a good Porsche or portfolio and large caps, specifically large cap tech with that focus on AI. But yeah, we can we look to other areas that have done well, and it will depends how the economy moves forward. There's still this risk we move into a stagflationary environment, which might lead US towards commodities. Uh, there's also you know, do we have a hard landing, soft landing or no landing. We've
been calling for the no landing scenario. I think we're somewhere between soft landing and no landing. But clearly I think golden locks economy. So a lot of different sectors are looking good and overseas, you know, there are even some areas there that.
Are attractive well well where over seeds. I know that the NK in Japan has been a huge hot spot, particularly with the weaker yen.
Yeah, that's that's really our main play is Japan. You know, we've a lot of it is is in fact the currency play, and you need if you invest in Japan do with a currency hedged vehicle.
But you know, the the the.
Rally in the in the EK two twenty five, I mean, we reached a high here here that we haven't seen since nineteen eighty nine when I was walking around the campus at Stanford learning how to invest in learning about business, right, I mean, it's been that long, and so there's you know, with corporate reforms, things that still are bringing true from abbynomics, Japan is in a position struggling with monetary policy obviously, but with that week currency, they're just they're a ne
ex supporting country. Their products are so competitive abroad, and so that's why they've done so well. You've just got to hedge that bet. Europe is starting to look a little bit better too, from where they were a year ago.
Uh.
The concern here is where rates go, you know, when you come to emerging markets and some of those some of the other more interest rate sensitive economies like you know, we we've seen China researchs in China earlier but or recently, but we would continue to avoid there for now because of the structural problems they have. But it's really right now for US. It's America first. The US economy is on is still rolling, you know, in a in a
pretty strong manner. The consumer is still strong. We're wondering, you know, how many times have we heard the consumers running out of money? The consumer is gonna they're going to run out of pandemic money, They're running out of money, they're borrowing. But the consumer's still strong. And that's that's the mainstay of our economy. So no pun intended. That's
the main stay of our economy. And you know we're we're America first with looking for some opportunities to tactically yeah, out to some other areas to manage portfolio risk.
All right, David, I always appreciate checking in with you. David Coodley, he's a founder and he's a chief executive officer and he's a chief investment strategist over at Mainstay Capital Management based in Michigan, but smartly right now in Naples, Florida, coming at us from zoom all right, the Naples days a kind of done. It's going to get like unbearably hot. Where you want to be from now on Jersey Shore, baby.
Yeah, you kind of do. Also, like today it's not that nice in New York. It's rainy and grows, but man is it humid? Yes, So henceforth the Jersey Shore, the Paulsweeni House. We're all waiting for our invite. I mean, John Tecker and I were like, I don't really need one down there too. I guess I haven't. Okay, I'm waiting for an invite to y'all house. I guess that's not gonna happen.
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Deer is one of those names that reported earnings, and again, when I think about Deer, I think about it in the context of being a really good snapshot of where the US farmer is in terms of their economic well being. Chris Chilo, he follows Deer, He follows all those industrial companies for Bloomberg Intelligence. He joins us here, Chris, what does it takeaway from Deer this quarter in the outlook? You're right, it's all about the outlook.
We expected them to cut their twenty twenty four outlook. You saw that from their peers at CNACH and Aco. They both lowered their expectations this quarter. But the haircut this quarter for Deer was more than we had anticipated. They actually took net income down. So we're looking at nettingcome around seven billion dollars this year, which would imply earnings a little north to twenty five dollars a share, or roughly eight percent below the street. And really there's
two things for the reduction and the outlook. One, farm fundamentals, farm economics continue to deteriorate, so we're seeing weaker, broadly weaker demand across the globe. And then two, they're going to have to underproduce retail demand here because inventories continue to pile up given the softer demand backdrop, So production will be down significantly in the back half of the year.
But I think now the question becomes, is this cut going to be enough to de stock the channel moving into twenty five?
Is it?
I don't think so, no, because I think we're going to see further degradation and the retail demand environment. You know, the backdrop isn't particularly encouraging for farmers. I mean, we're still looking at lower crop prices, you have higher production expenses, interest rates, they're still quite elevated, so net farm income is going to be double digits for a second straight year. On top of that, you have broadly weaker farmer sentiment.
They went out and bought a lot of equipment over the last three years, so there's really no impetus to go out and start spending again. And this is an election year, so add another layer of uncertainty on top of that, So I guess really struggle to see a catalyst at least in the near term that's going to really really accelerate demand.
Well does that mean is that good news for the John Tuckles of the world who want to go out and buy it John dear tractor. Are they can get a deal here? Are they going to get some competitive pricing?
You certainly can get a deal. We're starting to hear more and more about competitive pricing, particularly in South America. But there's too much inventory globally. We heard that from Deer on the call, at least for particularly for North America. That seemed to be a change intra quarter here where they're going to have to underproduce for the back half of the year. So both new and use too much inventory.
That being said, a lot of this equipment, even though it's sitting on lots, does come at an a significantly higher price point than even just five years ago given all the technological advancements.
So basically this is still a cyclical business and we haven't hit the bottom of the cycle. Let yet. Do you have visibility on when we may do that? It's a great question.
No, I'm one in the camp that thinks that we're in a little bit more of a prolonged downturn. You know, historically downturns in this business don't last one year. And if you look at you know, consensus expectations are for roughly flat sales and earnings for deer and that the ag equipment peers for next year. Historically, downturns last two to four years. We typically look at peak to truck the clients north to thirty percent. We'll be down roughly
fifteen percent in terms of volume this year. Historically speaking, that tends to accelerate in year two. So it really ultimately comes down to I think what are crop price is going to do? I think that would be probably the early sign that maybe we're approaching a bottom. But we're looking at another bumper crop this year bearings adverse weather, then I think you're going to see continued downward pressure there though.
Chris, what are the what are the crops that you look at and investors look at they see whether it's gonna be a good year or bad year for farmers? Is it soybeans?
Corn?
What do you look at?
So there's three that matter. It's corn, It's soybeans, and wheat. If you think about in the US, those three crops alone account for roughly fifty five percent of farmer cash receipts or farmer crop cash receipts, which are essentially farmer revenue. So those are the ones that really move the needle, particularly for the large, high horsepower equipment which really you know, drive the earnings power.
For deer, this may be a really weird question, but the used tractor business DoD Deer and Caterpillar, etc. Do they own the resale the secondhand business or is it a different type of dealer that does that and is there any sort of benefit to be made for them on that level.
So, generally speaking, dealers independent businesses. That being said, the OEMs do have pretty significant influence there, so they do
make their own business decisions. But you know, like I said, it's both a problem in the used market as well as that there's too much inventory out there, and until you could start maybe clearing some of that out on the second and third hand market, it's really tough to re accelerate demand for new equipment because most new equipment purchases typically will involve a trade in of older equipment and really the second and third buyers tend to be smaller,
mid sized type farmers. So unless there's some kind of improvement in farmer profitability, particular for those those farmers that are more pressured, it's really tough to you know, accelerate that demand.
So soybeans, wheat, corn, When does that stuff like get planted, harvested, all that kind of stuff.
Right now, we're right in the heart of planting season. I think about roughly fifty percent of the corn crop is in the ground. Yeah, particularly in North America, this is the planning season. South America a little different. You get multiple growing seasons down there due to the to the climate. But really we're squarely focused in on corn, corn, and soybeans right now. And really, you know, if you
look at soil moisture, it's actually quite favorable. So there's really expectations that this is going to be another bumper crop.
So you think you're can get a bumper crop because the soil is moist.
We have moist soil now, so you know, like I said, bearing some kind of drought, I think you probably see more downward pressure on crop prices, which kind of leads us to be probably a little bit more cautious heading into twenty twenty five, just because farmer incomes are still going to be under tremendous pressure, really what we think will be for at least a third straight year, and that's really just going to you know, temper buying the expectations.
All right, Chris, we really appreciate it.
Chris.
You'll you know, joining us bloom We're gonna tell legends, senior US machinery analysts. But it keep you two moist, like you can't have floods and you can't have drought.
You know, John, your assignment today, Go home and feel your soil. See how moist it Isn't I don't, but you run the danger of the seats rotting before they sprout if.
It's two moist.
So exactly too much moisture gonn to be a problem with farming businesses.
Top Oh my god, at least with my pegonias.
I mean, that's why you have crop insurns, like you really need it because you're just I mean, even though you might complain about all the handouts, et cetera, but like it's huge, it's big.
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If you remember, about a week ago, I attended the Boston Consulting Group Edge Expo in Boston, Massachusetts. Had the opportunity to chat with a lot of smart people top execs at BCG. One was with Global Chair Rich Lesser. He engages with CEOs, boards of directors, and senior leaders around the world on critical topics, including climate change and artificial intelligence. I began the conversation by asking Rich what he spends the most time talking to clients about. Let's take a listen.
So it's been a remarkable decade and it's not even half over yet.
And I think the two.
Characteristics that we are living with right now to a very high degree is uncertainty and change, and they're not the same thing. Uncertainty causes you to want to hunker down, you know, just get through it. Change forces you to be bold, to invest, to take some risk. And right now, more than I can remember, CEOs get pooled in both directions how to navigate, particularly if you're like a European CEO.
You've got two wars not so not so far away, and you've got all the pressures of energy costs and all the uncertainty of all these elections this year and so forth. You've got an enormous amount of uncertainty. But of course, just like CEOs everywhere in the world, you've got rapid technology evolution, and you've got to prepare for climate change, all sorts of things. So I think that's the tension point, is how to balance.
Those Let's talk about climate change a little bit here. It feels like maybe we're at a little bit of an ebb here in the US. I'm not sure if I don't think that's necessarily case in Europe, but I'm feeling a little bit here. How do you engage with your clients about climate change? What's the challenge these days? Is it convincing them that it's there, that it's an issue, convincing them that they need to maybe invest in getting
to a cleaner economy. What are some of the challenges you guys have seen.
I think it's really important to separate what people want to talk about publicly and what they do. Many many CEOs, particularly of leading US companies, have made pretty substantial commitments over the last two to three years.
But in making those commitments, they were.
Very, very visible and public about it a couple of years ago, and I think right now the sense is you don't walk away from your commitments. And I know very few CEOs, very few that I think are really trying to walk away from their amendments. I think most of them have tried to put them in their processes and sure they get delivered. But at the same time,
it's become such a politicized topic. We're all going to live on this planet, we're all going to bear the consequences of climate change, but unfortunately, in the public discourse and in a very you know, it's an election year.
It's just become very political.
And I don't think CEOs want to be so public on these very difficult, divided, divisive topics.
So they're much quieter.
They're not walking away from their previous commitments, but they're also being careful about new commitments, partly because of the public attention and partly because they don't know where the policy environment is going next year.
And you know, I guess an example that is ESG. It was the termed for so many years and now it's really fallen out of favor here in the US in particular. But again I guess the underlying commitment for many of those folks are still there.
Well. The problem is ESG.
Even people who were committed weren't always sure exactly what ESG was and what it meant. It was initials that were bundling three very different kinds of attributes together, and then it got politicizes a term without even people knowing why they shouldn't like it sometimes, so I think very few CEOs are using ESG language right now. You talk about your climate and sustainability commitments, you often talk about diversity and inclusion, good governance. I don't think anybody questions
makes for stronger companies. But when you put it together in ways people don't understand, you're just almost looking for trouble. And I think CEOs the last thing they want to do is look for trouble.
You know, when you look at the economic data, which is what we get Boomberg do all the time, and we talk about it all the time. For a lot of smart people, what are you hearing about the economy from some of your CEO clients out there, seems again there's some shifting wins out there for a lot of people. Those that won't assets, life's good. Those that don't maybe not so much. That inflation thing, for example.
Is a real problem. What are you hearing?
So, Look, we've been on the more optimistic side of the economic outlook for a while back, when everybody was saying recession or super high inflation. We were of a position, led by our chief economist Philip Carlson, that we could get to a soft landing and that that was not as low a probability scenario. Now we're living in a soft landing world. But one soft landings for companies have hard edges. You still have wages growing faster than your
power to raise prices. You still have low growth, not super high growth. It's hard to drive your own growth agenda without doing a lot of innovation, and so it's not so easy. And second, we're finding actually the glide path for the last thousand feet to the ground. We got a glidepath from thirty thousand feet of risk down to a couple thousand. But you know, getting from a world of high two s low threes down to a
well below two and a half. Approaching two is proving to be tricky, and the consequence of that, as you say, is that interest rates are high and there's much less sign of them coming down, and in that environment it makes a couple things hard. First, for many many consumers, you don't have much in the way of savings, buying a car, buying a house, renovating a house, all of those things go up much more than the underlying prices
do because of the interest costs. And second, for many of the capital investments we need to make, including climate and sustainability, things that look like they made a lot of economic sense a couple of years ago are much harder to justify now. So if you have a lot of assets, you're right, it's not bad right now you can get good value on But if you've got to make investments, take on debt, do things, that is trickier.
We spent a lot of time at your conference here talking about AI and the investment needed in AI and the commitment needed and the ethics around AI. How prevalent is that in your discussions with your declines at the CEO level, the board level.
I am blown away by how much energy CEOs are putting into thinking this topic through. But for me, the big difference between the last six months and say the first nine or ten months since the big announcements. The last six months people are less focused on thinking it through in the sense of understanding the technology and more
about how they can drive business impact at scale. And for us, it's been honestly one of the most exciting periods I can remember on something where we went from less than twenty clients a year ago to day working on this to three hundred and fifty. I mean, we've never had something like that. And I think that for us, there's a lot of opportunity that we're seeing now get materialized versus theorized, and CEOs are realizing it. They have to balance it, they have other priorities they have to do.
They have to do it in a responsible way. To your point, be careful, there aren't hidden biases. Be careful, they're not misusing the technology. But the underlying sense of opportunity right now has gone up quite a lot. And I think the more they see other companies delivering actually putting it into results, that they post deeper customer relationships.
The faster we'll see that come along.
Yeah, we met with well the goodness for BCGS. You have a lot of smart people on this topic here, we've met them here today. One aery was the ethics site, your chief ethics officers talking about that. Yeah, that's got to be front and center. I would think for total discussions before you start thinking about putting dollars to work, you have to have a commitment, it seems like, to try to do this as responsible.
As Yes, and it has to be owned by the CEO, not owned by the technology team.
Right, this is a CEO level issue.
What are the governance frameworks, What are the kind of biases to look out for? How do you have a process where you don't just put technology into the wild and hope you did a good job, but you're monitoring it in an ongoing basis, figuring out what the risks are, escalating the things to the right level, intervening in the right ways. That is a CEO and a top leadership agenda, and it's really important. But we are seeing companies navigate
that really well. And so yes, you have to be really careful, but that can't be the reason you don't choose to act.
Yeah, all right, You've been in this consulting game a while here, how has it changed? You know, certainly before the pandemic. I'm guessing the business models for a lot of companies have changed.
Here.
How how is your day to day house and consulting business evolved in over the least?
Right, So, I'd say there are two massive changes over the last five to ten years. Until five or ten years ago, it was very clear, get to the right answer for very difficult problems. Make sure the change really happens. I think the focus right now on driving real lasting impact goes up and up and up. We see it in so many clinident discussions. They don't just want partners to give them good ideas or give them a page of recommendations. They want impact partners that can team with
to drive stuff through. And two, they need an enablement focus. They need a focus on building because the world's going to keep changing, So making change once, however successful, is not sufficient. What you need to do is enable your organization, the people and the technology to keep learning, to keep growing,
to keep evolving. So the role of people like us are not just to make great change happen one successfully, but to build skills within the organization, so in the organist and keep growing and learning and evolving, and those two things have grown dramatically over the last five years.
All right.
That was Global Chair Rich Lesser of BCG Boston Consulting Group. I was up there attending their Boston Consulting Group Edge Expo in Boston, talking to a lot of their leaders senior partners there at bcgpas some of the issues they are working with their clients are on. A lot of it was about competition, global competition technology, particularly AI as well. So a lot going on there and they're getting more and more engaged with their clients.
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