Wishes For Big Rate Cuts Foiled By Strong Consumer

We're joined by Bloomberg Opinion columnists Bob Burgess. He's an editor of Bloomberg Opinion, joining us here in our Bloomberg Interactive Broker studio. Bob, I think I speak for Lisa and most of our audience when I say, over the last two or three days, we've all had to brush up on the Repo market. What does it mean? Is it important? Do I care? So, Bob? Do I care about what's going on in the repo Market's been kind

of scorely the last few days? Yes, and no. I think that um when people here that there's just locations going on in the Repo market, they have nightmares and flashbacks back to the financial crests, right, because this is one area that really royal markets. But there's a sense that was going on in the repo market now UH is much different than what happened back then. Now it's more of a technical move that we're seeing where you have a confluence events coming together that is pushing up

these overnight borrowing costs. Back then, borrowing costs arising because banks didn't trust each other, which was a major problem. It's not really the reason why repo rates are rising right now. I guess that it gets to the heart of this real fear in markets right now. Will there be sort of a winning out of the global slowdown that will UH plunge a hole in the equity rally or will we see some sort of everything rally continue which we have been seeing. And I guess this is

something you addressed in a recent column. We're talking about what markets need for this everything rally for bondstocks, currencies, commodities, everything to rally together. So what is it that they need? Right you know? This is one of those are years.

You have the global stock market, the global bomb market, the global commodities market, and currency of returns all poised to deliver positive returns for the first time since two thousand ten Um Bank of America recently came out with their monthly survey of institutional clients, and they identify three things that would likely keep the as you put it, the everything rally going. One of those is German fiscal

stimulus UH. The second is a fifty basis point rate cut from the Federal Reserve, and the third is Chinese infrastructure spending. But when you look at it, it looks like only two of those three things are likely to happen. Um. The Germans UM, instead of talking about borrowing UH to blow out his budget for infra, for phisical spending, it's actually talking about sticking with a balanced budget. UM. So the Germans are steer, So we're not gonna get any

fiscal spending from the Germans. I'm not shocked at all. Nobody else I think should be shocked at all. As as as well UM. The second thing, the fifty basis point rate cut from the thread, is increasingly looking less likely by the hour. Um. You know, there's even a couple of strategies reports out over the past couple of days. I says, maybe the Fed shouldn't even cut rates, mainly because of the consumer is relatively strong in the US. You know, Brown Brothers Harriman is one firm that says,

maybe the FED shouldn't cut rates. So a fifty basis point rate cut is definitely off the table. Might get twenty five basis point rate cut today. We'll see what they say about the outlook. The third point Chinese different structure spending that's actually happening. Um, you know, the Chinese recently introduced a proposal to allow local municipalities to sell bonds to increase your infrastructure. So the bottom line is the outlook for global risk assets seem to be dimming

at the point. So, Bob, it is uh FED day today. It's not just REPO day, it's actually FED a rate decision day. If the FED were to come out with the you know, perhaps something less devilish, a little bit more Hawker saying, hey, the data is not is actually pretty solid. We're pretty good where we are. I'm not sure the markets are prepared for that. I would agree. I think the markets have been um have been anticipating a very devilish FED. But look at the housing starts

data that came out to this morning. I mean, you know, the biggest monthly increase in housing starts since since two thousand seven, uh, consumer spending has been surprisingly strong. Uh So there are these metrics that suggest that the economy is doing pretty good. That said, we know from history that the consumers can lose confidence pretty quickly. If you look at every recession going back to at the very beginning of the recession is when the unemployment rate reached

its bottom. Okay, so don't be fooled by a I want to employment rate saying the economy is strong. If companies feel that the outlook is getting dimmer, they'll start laying off workers, that unemployment rate will shoot up, and that's when you'll see consumers start pulling back. How much do you think that equity markets would sell off if the Fed indicate yes, they're going to cut twenty five bases points today, but going forward, who knows? You know,

it's it's it's it's hard to say. But if you look at the rally this year in the U S stock market, the sp up, that's despite UM economists forecasting recession coming next year. That's despite strategists actually cutting their earnings estimates for this year. So how do you explain that? Well, the the only way you can explain the rally and

the stock market this year is from ever lower interest rates. Right, simple discounted cash flow analysis suggests that you know future earnings are more valuable now when you assign a lower interest rate. If the Fed says maybe interest rates aren't going to be as low as and Wark is expecting, there's going to need to be a reprising Bob Bridgess, thank you so much for being with us. Bob Bridges as editor for Bloomberg Opinion, Joining us here in our

Bloomberg Interactive Broker Studios. US home construction surged in August to the fastest pace since mid two thousand seven, showing ongoing strength and accelerating strength on the heels of lower mortgage rates. What does this mean for the United States housing market? Joining us here to discuss Melissa Reagan, head of US research for now Vina real Estate, which oversees

a hundred and twenty five billion dollars of assets. Melissa joins us here in our Interactive Broker Studios to Melissa, can you just give us a sense of the increase in home construction? How do you see this sort of in the bigger picture and what's going on in how builders are responding to lower mortgage rates. Yeah, sure, absolutely, so I think the numbers are really strong. Housing starts up six point six percent year over year August twelve

percent during the month. I really focus in on the multi family market and that was extremely strong as well, with it like four hundred and forty five thousand starts, And wasn't that kind of driving it was the apartment building like that. So the majorities driven by single family. So if he's in context of that, one point three six four million, uh nine and like nineteen was single family,

and then the fot was was multi family. Um. So when you put in that context, I think a lot of it was driven by immigration in kind of the southern regions, and you think at the southeast southwest, that's where you saw a lot of really strong demand, and that's completely consistent with where you're seeing population in very

strong levels of immigration. Right You've probably read the headlines population is actually falling in places like San Francisco, New York, UM to some extent l A. And I think this is a reflection of that and very strong to me and from multi family. Uh. Just as people still continue to want to rent, So is this strong housing market that we've been seeing. Is it just simply a function of everybody's got a job and mortgage rates are low and appear to be coming lower And are those the

two main drivers? Partly? Right? So I look at it, that's definitely true. On the single family home starts angle of it. Uh morgates are low. But you also have to remember from that perspective, I think you need to put in context. You know, a single family starts peaked at like one point seven million right before the crisis, right, so this is so pretty low in a historical content

from a peak perspective. From a multi family perspective, starts are actually I'm wouldna say historically high, but they've been elevated for a while. And that is definitely due to strong in migration demand for rentals, the millennials, you know, not being able to afford a home at this point. So he's all kind of one and the same, the homeownership versus the rental single family starts being down from

their peak, It's it's all interrelated, so to speak. Well, uh So, Paul and I were in Nashville not so long ago, and I was struck by all of the construction cranes in downtown Nashville, which makes sense given the fact that a number of businesses are moving from places like New York to Nashville, and there certainly is outmigration from the bigger cities to places like Nashville. At what

point is it over building, right? I mean, especially if there is somewhat of a downturn and the jobs remain in the big cities and some of these other ones do lose out like we saw in two thousand and

eight and two thousand nine. Yeah, absolutely, I think. Listen, I think the big cities will They're not going anywhere, and so somebody who the headlines get a little overstated of population film and they try to make the same dramatic big cities are not going anywhere to the extent what I do think has happened in places like Nashville's. They have changed who they are from fifteen years ago.

So Nashville and you can think of Charlotte, Raleigh, Austin all being in that same kind of category fifteen or twenty years ago did not have the vibrancy the people, the businesses, and today they do, and I think they will have staying power in a downturn in the next cycle. Um but yes, to the extent that you want to have a certain job, right, think about finance, that's that's largely going to still be in New York. So, you know,

we're ten plus years into this economic cycle. So yet you know, the real estate, the consumer is still strong. How are you, Folcus at Novine on your real estate investments? How are you kind of positioning yourselves now? I mean, at some point this has all got to end. We you know, it's not that long ago that we still have the memories of the financial crisis and there in the real estate issues. So how are you guys positioning your portfolios? Yeah, I think at this point you realize

you're you're late in the cycle. And I think that's just consensus at this point. We all we all know that. And so what we do is we think about the sectors we want to be in that we think will actually provide us with a protection in a downturn. So some of us have been more of the alternative property

types which tend to still grow in a downturn. Alternative alternative Yeah, so when even so, you can think of self storage, or you can think of senior housing, or you can think of manufactured house at it things that that actually do pretty well in the downturn, just because of the demand drivers. At the same time, when you think about apartments or offices, industrial or retail, we just get more selective UM and we get really focused on

making sure we're focused on high quality location. Price. Obviously UM is a factor in that as well, So you just narrow down the opportunity set and be you'd be more selective in the investment process. One thing I'm trying to understand is the amount of money getting raised for real estate funds at this point in the credit cycle. Because you're saying it's consensus, we're late cycle. Why is Blackstone, for example, raising an unprecedented amount of money for commercial

real estate? Uh, and you see a whole other host of fund managers doing the same. Is this for now or is this for a downturn? I do think in some sense, if you're an investor who looks at it from a multi asset perspective, If you're an investor who has stocks, bonds, and then you think about real estate or real asset, what you think about is in a downturn, real estate or real assets can provide me with some pure diversification relative to my stocker bond portfolio. And I

think there's a lot of that going on. And I think investors saying, hey, I've probably been under allocated to real estate real assets, you know, for probably twenty years now, and it's time to start helping that allocation, you know, to call it ten or fifteen percent of my portfolio. It's almost just a pure diversification play of nothing else. Is there any sense that the commercial or real estate or residential real estate market is overheating at all at

the moment? Yeah, you know, there's been a lot of discussion about that for probably five years now. I would say, I mean really, um and and because people have seen the cranes in Nashville for more than five years now, and so you have a lot of those questions. The demand has kept up, So from an apartment perspective, you still have rents growing above inflation. Demand is there. You do see oversupply in certain pockets of the southern regions

like a Dallas or a Houston. And um, but by and large, I would say supply de man have kept in sync, so really strong demand for apartments even with the supply just quickly here, which market do you see as having the most potential upside here in the US at this point. That's a great question. UM. We're really favoring some of the more tech driven markets. UM. You could think of San Francisco, l A, San Diego, Portland. UM.

But we also like some of the southern regions too. UM. I still think there'd be good demand in migration in places like Nashville, UM, who have really changed their stripes of who they are as a city. Melissa Reagan, thank you so much for joining us. Melissa's the head of US research for Moving real Estate with about a hundred and twenty five billion dollars under management on the real estate side. She joins us here in our Bloomberg Interactor

Broker studio. We saw again more evidence today with a new housing starts and new uh. You know, the real estate market in the US remains very solid. Well, it is FED day, but it's not your typical FED day. Instead of obsessing over what we might hear from the Fed this afternoon, we're talking about a little known part of the capital markets, and that is the overnight federal

repo market. They get the latest. We welcome Hugh Nicola, Principal and head of fixed Income at gent Trust with about two billion dollars under management, and Alex Harris, Bond reporter for Bloomberg News, both joining us here in our Bloomberg Interactive Broker Studio. So Alex, let's start with you. Just give us the latest on what is going on with this three day story about the federal repo market. Um. Well, so it kind of had started building actually last Friday.

You were starting to hear about withdrawals from the money market funds to cover that corporate tax payment. And then Monday everything kind of came to a head because you had collateral coming in and so from these treasury coupon auction settlements. Um. But then you know, there's some X factors and things that we're still trying to sort through. There were rumors flying around about you know, Saudi Arabia pulling cash out of the funding markets to shore you know,

their liquidity after the attacks. You were you know, so I'm hearing a few different things, but ultimately that was sort of the crux of it is a supply demand and balance, and so you repo got really unstable, and with it, it just pulled all these other rates up, the security overnight financing rate, which regulators are looking at is sort of the air presumptive to Liebor shot up. And even today, you know, the setting for as of yesterday was five five point five percent. That was a

two basis point move. And then more concerning is that the FED funds rate, the FEDS policy target rate moved out of the range. Today it's at two thirty and the FEDS benchmark range is two to two and a quarter percent. And that's more concerning here. And even though repo's starting to sort of normalize, things are calming down. What's what's more worrisome in long run is that the FED has lost control. It's the perception that the FED has lost control of the benchmark and of policy and

the transmission mechanism. And so I think that's now what the meeting becomes today is you know what kind of steps is Jerome Powell on the FOMC gonna take here to kind of you know, help keep you know, the FED funds rate within its target range and keep things sort of under control and controlling the short term interest rates. Hugh, how are you viewing the rebot disruption of this week? So, um,

first of all, thank you for having me here. Um I don't think uh in you know, in ah in summery, I don't think it's a huge deal, right, I mean, we need to worry about this market, right, I mean there is an important market for the financial industry, right, I mean, for it's a lifeblood essentially financing of the of the financial industry. So we've got to keep an eye on if there are issues with liquidity or if there's some break in the system. We need to know

what's going on. But that being said, you know, this isn't a problem that the Fed isn't was unaware of. I mean they talked about essentially a repo facility and premier repo facility in UM in June, putting it in place. They knew that they were drawing down on access reserves over time. I mean that's been a long standing trend we've seen reserves coming down, So we knew reserves were leaving the system. Um So, I think the shock was

just how dramatic it was. Right So um, as Alex mentioned, you had essentially the auctions that settled on Monday, you also had talked corporate tax payments, took a lot of money on the system, and suddenly you see reaper rates up eight. Just to be clear, as we talked about this, for people who don't know what repro rates are, aren't familiar with what we're actually talking about. It's basically banks

offering treasuries other high quality securities. Uh, it's a sort of as collateral for cash from other firms, and basically because there wasn't enough cash on the balance sheets of these other firms, they were demanding a much bigger premium

for that cash. Right, just to sort of lay this out there, to give people sense of what we're talking about exactly, it's a collateralized loan, right, So Okay, I mean, I think it's important to think about this because basically that's why people are talking about a cash crunch, because there was not enough physical cash on the balance sheets of other firms to make this a sort of seamless process, right, I mean that's yes, well, I mean, but the other issue is is that you also have to think about

it from the collateral side that there is. You know, one of the takeaways from this is just there are just too many treasuries in the system, and this is a problem because treasuries pile of debt is only gonna grow. I don't see anything about deficit reductions. I don't see anything about debt reduction, Like that's only going to continue

to grow. And that's why people are really now getting nervous about the fourth quarter, because treasury bill supply is going to resume its March higher treasuries cash buffer is going to continue to grow, and that actually pulls reserves out of the system. So, like you talked about, with this, you know, reserve scarcity level with the Fed, it becomes a bit more problematic because you're really hitting those precarious levels and that's what the market is really worried about

going forward. So he does this affect your kind of overall investing view in any way, shape or form, or you kind of viewing everything the same way you did before? You know, I think the Fed, uh, we'll have a handle on this. I mean, we'll bound the scene announcement today on something um particularly with the meeting coming up later today. So no, I'm not worried. Uh right now, I'm not worried. It doesn't really affect us per se.

How does this affect investors in general? It's essentially if this kind of panic bleeds into other markets, right, and then from other financial markets into the real economy. That's the worried. Um. I think we've got to handle on it right now. So no, not concerned at the moment. Are you buying bonds or do you think yields go lower?

Well on this new I wouldn't. I'm not buying it's not in this but just in general, you know, Um, you know, I've been on the mind that you you buy dips because I think that it seems recently that you know that a lot of once first we had a lot of good news for bonds, trade war being good news for bonds, and then we had UH and then we had to sell off, we had some negative news.

So it's difficult to see that this that the trade ward tweeting, et cetera won't continue and won't ramp up at some stage, and that you know, I like bonds. Hugh Nicola, thank you so much for being with us. Principle and had a fixed income at gen Trust, overseeing about two billion dollars. Of course he likes bonds. He focuses on fixed income, although it doesn't necessarily translate always. Alex Harris, thank you so much for being with us.

Bloomberger News Bond reporter, explaining how the report market is kind of affecting everything right now. Well, diversity in the workplace continues to be a challenge for most industries, including the financial services industries. I think at the latest we welcome Tracy Davies. She's President of Money based in London, but joining us here in our Bloomberg Interactive Broker studio.

So Tracy, thanks so much for joining us. And I've spent most of my career in the financial services industry, and I've seen the challenge of promoting and creating diversity in the workplace, and I know the industry tries very hard, has been doing it, you know what, I think a pretty good job. But still at the highest levels there's probably isn't the proper representation of women, for example, What do you think is going on in the financial services industry? Yeah, well,

I think the financial services industry is not alone. There are there are many industries, and not a problem just for this industry. Um, it does seem to be a little off pace though compared to say some of the industries, like my industry in the media. If you look at the Lady stats, I think we've got in the US about the exact committees now women versus thirty now that we've gone through in the UK, so I think there is still I mean it's not fifty fifty, so there's

still work to them. But you're right, there are a lot of companies making a lot of progress and I think that's really important and really exciting. So I think we are seeing a shift new and there's actually gonna be an emphasis on this at the at the Money conference focused on fintech and of the financial services. It's upcoming in October. Can you talk a little bit about that. Yeah, So we have a whole program dedicated to this called rise Up, which is about empowering women um and enabling

them to the next step. There's a load of talented women out there. We run a program to accelerate. So we did this last year. It's our second year. Last year's cohort, thirty three percent have been promoted into more senior roles. So we see that as direct legacy of launching rise Up and inspiring and connecting them because what we do is we connect them to senior folk in the industry, senior mentors. This is a really important thing.

So when we are seeing progress, that's interesting you talk about that the mentorship, and that's something that's very important for for everyone in all walks of life, was certainly in business. Do women have a particular challenge kind of creating those relationships and getting that kind of support. Yeah. I think what we see is not just financial services, but generally women I think spend less time invest in networks, and that's one of the really important things that we drive.

We enable that network connection, but invest more time in building your network. I think there's a really interesting debate around sponsorship and networking and mentoring, and women seem to have less sponsors in organizations, and so I know that's a real focus from some organizations. Mentoring and sponsoring are different, um but we've seen great results, so we're super pleased. So let's talk a little bit about this conference in

October being hosted by Money twenty. It's going to focus on financial technologies, and I think immediately of how well Square and Stripe and some of these other companies have done so far this year, I'm wondering, what do you think will be sort of the buzzword of the conference this year. Well, there's always a lot to talk about. I think there's a couple of really big ones that

are standing out at the moment. So there's a we see there's a big focus on digital banking now in the in the US, so we've got CEOs of Chime and twenty six that's coming from Europe Grasshopper. So we're seeing a lot of the new banks, the neo banks, the digital banks. I think that's a big talking difference between a digital bank and a bank that has online presence. Well there are no branches and they're often very very digitally based and a based, so they don't have branches.

Okay um. So the other big talking point is obviously the developments around Facebook and Calibra. We've announced last week. David Marcus is speaking, so I think that's going to be a big talking point. There's a lot of people interested to know what that's all about. So I think they're two really big talking points this year. And we do have Strike speaking as well, so we'll gabri it, we'll speak. So we just see constant innovation here in the US, but we do this around the world. You

know this there is it is changing. We just see constant change coming through in a good way for the consumer. I think Lisa and I a couple of weeks ago spent some time at a fintech conference in Boston. We learned a lot. One of the things we we heard was that there is a lot of investment in technology in the financial services industry. We even you know, we're here from the government to access of on the JP Morgan's But how about some of the smaller midsize financial institutions.

Are they at risk of not of kind of getting lost because they don't maybe have the capabilities to wherewithal to make the big technological invention investments. Yeah, I mean, I think I when we see companies of all scale, and it's one of the things that you see coming out of money tween twenties, people making those connections. So whether they're obviously there's a lot talked about the large companies, but you know a lot of the mid sized companies

working with the right startups. So much about this industry is about partnerships and finding those partnerships. So it's exactly why money was created, so you can have the big, the small, the middle. That's what we do. You have over ten thousand people in Vegas in October and they're all they're working out who to work with. It's so I think there is as much opportunity. You think about who to work with, and you think about getting in a room and saying, you know, should we work together?

It might work. I also think of consolidation and somebody coming and saying I want to buy you. How much more of that kind of activity do you expect. Yeah, well, there's been a lot of consolidation. I think the two This one was confirmed this morning, so you know, we do see there's been some consolidation in payments, but that's about getting global scale. This is a global industry. There's a lot of global opportunity out there. So we've seen some very big ones, um you know, so it's been

quite a talking point this year. You know, M and A is a fact of life, so we may see some more, but we've seen some big ones in here. But it's about global scale because there's a really big global opportunity. Payments is a really hot sector. People want to be in it and they want global scale, and that's what the consolidation has been about. How important was it that Libra came into the marketplace in terms of maybe validating the whole blood chain or financially you know

digital payments sound important? Was it? I think it's an important development. I think there's a lot of debate about it. I mean that debate is you know, it's only been announced quite recently, this development. There's a lot of interests from regulators. You've had the hearings here, So I think it's a big talking point. I think people are still trying to work their way through what does this mean,

what's the impact going to be, etcetera, etcetera. So it's a big oaking point, although there is also a larger question, which is our crypto assets, cryptocurrency is going to be more into integral in the entire uh fintech world. Yeah, I mean that debate is going to run. It's going to be a big debate money. That's what we're there to do. You know, we we're in neutral platform. We make sure that this debate gets hosted, which is why having David Marcus speak money is very important to us.

Thank you so much for being with us, really very Tracy Davies is joining as president of Money twenty twenty, which is going to be held in Las Vegas at the Venetian October seven through October. More than ten thou people have already registered fintech. As we've heard and Tracy mentioned, it is a very hot area. Payments, digital payments, fintech in general, uh, really attracting a lot of investor interest. Thanks for listening to the Bloomberg P and L podcast.

You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa Abram Wohits. I'm on Twitter at Lisa Abram whits one. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio