This is the Bloomberg Surveillance Podcast. I'm Tom Keene along with Paul Sweeney. Join us each day for insight from the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global
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NYCB cut to junk by Moodies as stock hits lois since nineteen ninety seven. The real question for investors, just like it was a year ago some of the West Coast banks, is is this specific to one or two individual banks? This indicative and maybe some risk in the US banking system. For that, we turn to Herman Chant. He covers the regional banks for Bloomberg Intelligence. He joins
his us here in our Bloomberg Interactive Broker Studio. So Hermann tell us, just summarize for us what happened at NYCB and what do you think is going to happen going forward?
Right for this bank.
So there's two things. One is our idios and credit factors, and one that's the overall risk and commercial real estate. The and credit factor is your community cleared one hundred billion dollar asset threashold with the acquisition of signature banks that was facilitated by the FDIC last year. That ushers in higher capital and liquidity requirements and they're trying to
digest that. The second is that they cut their dividend to be able to increase their capital and increase their reserves because of some issues on the credit quality side, some losses in multi family, commercial real estate and in office.
All right, So for.
Our listeners and viewers out there nationwide worldwide, does the US have a regional bank problem.
The United States does not have a regional bankrob It has a burgeoning potential problem in losses and commercial real estate, specifically office and if you want to throw in multifamily regulated multifamily, it's a niche business in New York City. That's not going to be a issue across the industry. We'll see losses percolate in twenty twenty four and throughout the next few years, but it's going to be a longer term issue.
How many more nycbs are. There's a general number, there's four thousand banks. I don't need a number, most of minus ten. But do you feel in very William Isaac SNL crisis Robert McTeer of the eighties or the complete disaster of the reats in the seventies, or is this really hyper selective.
It's going to be selective going forward and it has been right so the banks that FAED, we're very focused on certain businesses that really didn't pan out when rates went higher, and now we're facing the similar issues with rates where they are elevated. It's tougher for these commercial real estate lenders to in their bars to refinance, and
it's creating asset quality issues. And it's going to be banks that have an intense focus on commercial real estate and that's going to be a small subset of the overall banking system.
And you know, because Tom and I were talking about this, and we follow the news flow in this very carefully, which is when we see some of these big pieces of real estate change hands. Now it's fifty cents on the dollar, right, and it's all over the country. It's not just San Francisco or New York. It's everywhere. So but I guess what I'm asking you is what percentage of that type of real estate is part of the portfolio of the regional banks out there in the US. Is it a big piece, small piece?
It's a fairly small we're talking about when we say fifty cents on a dollar. It's like those B and C class properties in central business districts that aren't getting a lot of occupancy. And that's not like typically where the regional banks play there, like medical offices where the operators also.
Okay, so there's this headline story here when I hear bankers tell me things will be fine, or even someone as cynical as you. The heart of the matter is is we're looking at them like they own every office hour out there, right, and they don't. They don't.
And even if they do, you can go back to their underwriting right where their loan to value is about fifty five to sixty years.
So who takes a loss cut to the chase. There's a building out there, it's down fort it's going to be the headlining cranes two days from now. Who takes that laws.
Ermage in the loss is going to be on the owner of the building predominantly, and the banks will take, you know, maybe some sliver, but it's going to be the losses will be prevailing in areas like commercial banks, It's going to be in commercial real estates, the NBS, reads, insurance companies, the entire financial system will face some sort of way.
Tom. It just feels like one of the markets where this smart money is gonna come in soon, and I don't know who that is. Is it private equity, is it just some smart real estate money? Is it the rooting found start buying the stuff at fifty cents on the dollar, and we're gonna have the story five or ten years from now. Wow, at a time, I.
Get I do agree with that, But then here's the next question. Herman Chan what I see And I'm reading cranes voraciously just to get the gossip and all that. You know, I don't know anything about this. The foreign money is like a drug. I mean, they just show up in New York. Are they going to show up in Topeka?
I don't think they're going to show up and say the foreign money has to be in large metro city, So it's gonna be in New York Miami.
Are they buying LA with a train wreck in the central district LA.
That remains the BC? Maybe if if valuations have become really really attractive, but we haven't really seen them.
Told the Jepanese there was a there was a time when I first started playing Public thirty years ago that every time I went out and played, which is probably two or three times a year, it was my foursome was all Japanese players. Because the japan economy is so strong, the yen was so strong, it was close by they owned it. You know, you don't see that anymore. But again, the foreign buyers have been in the big metro markets. What are the banks saying about will they underwrite commercial
real estate today? Are they? Are they making loans? Are they trying to say? Are they refinancing? Are they how's it typically happening? Because if I have to go refinance a real estate loan in Topeka, I gotta pay a lot more interest rate.
Yeah, You're gonna have to pay a lot more interest rate. What they're what the banks are doing is trying to make sure that the existing bioer can repay and maybe in Jeck some equity into it. Because the value of that real estate is not what it was two, three, four, five years ago.
Thomas showed question over. Keith Brey added, woods, are we going to see m and A? What are we gonna do here? Come on, Herman, I mean, it's got to be mating season.
Right, it's got to be at this point. You see all these banks, and especially the banks that are wobbling, and then any other management team is going to be is going to be a bit shaken what happened. So I think bigger, bigger is better and need for scale is something that I think the industry needs a consolidate and create the value.
Add go to the Bloomberg terminal, look at Bloomberg Intelligence. Herman Chan c ch A and Herman Chan is just absolutely encyclopedic on the regional banks, not so much the hot air the emotion of it, but the actual matthewness of where we're.
Going to be in.
Pall Swunian time, keen, and we're going to do now for Global Wall Street. We're going to get wonky. We're going to edge on the edge of Imperial College in London, n Yu Currant in a small shop and the rivers of Boston the Charles River of Boston. That would be the Massachusetts Institute of Technology. That can only mean Katie Kimsky, Katie Kaminski joins us with Andre Loo's Elpha. Simplex, folks. This is going to be a little bit of jargon laced, but it's going to give you a window into how
the animals in the derivative space think. Katie, I have up in front of me the Magnificent Seven, and I've got a five trend quant log chart up. I have the Magnificent seven on trend with log convexity. I've got room to run. I'm up only at two standard deviations up among those seven stocks. And maybe there's an argument about is Tesla in it or though can you do trend analysis on this historic moment, this Magnificent seven?
Well, I mean, I think if you look at the Magnificent seven, they have been the ballast for US markets and they have driven a divergence trade for the US.
It's put the US in a much better position.
But as we know, the trend can keep going longer than you think it can. And that's what we continue to see is that there's still continued strength in that trend despite some critics.
Is that trend LinkedIn I'm going to go over to the fundamental world away from alpha simplex, which is this new belief in an annuitization. And frankly, folks, I'm talking the Bloomberg book here. This is what we do with the Bloomberg terminal. It's been a real gift to us
over thirty years plus. But the annuitization of free cash flow, the annuitization of that hunk of money at the EBITDA line, does that fold over into your technical analysis as a force and an inertial force to a higher priced Magnificent seven.
Well, I mean, I think as you said, I mean, we're much more of a technical trader, and at the end the fundamentals become clear.
But what you've really seen is resilience.
They're in prices for those technical and there doesn't seem to be any indication that that's abating. And the other thing that's interesting to me is that, you know, if you look at where we are, even with higher rates, those type of companies should be more duration sensitive, and they've been.
They've wavered the storm.
So perhaps it's perhaps it's you know, sort of the future is the value in the future is more technology than what we're used to thinking about for value companies.
Hey, Katie, I know you guys at Alpha Simplex or as you mentioned, technical uh focused, you're also global. Where's the global relative value? I actually, for the first time in twenty or twenty five years, I hear people talking about Japan here, So I'm wondering, where's the relative value out there?
So the interesting thing that we have seen, and this is something that we can talk about this in a minute because I'm a little I'm always nervous. You've seen very strong signals in the US and Japan, and you've seen very weak signals in China.
In fact, China's been down.
For two years and almost fifty percent if you look at the A fifty. So that to me is something very interesting that this huge divergence across performance. Albeit that you know, we just talked about the tech names really
being a leader for the US. But the question for that that all comes back to inflation too, is if China has been down so much, they're a huge driver of demand for raw commodities and the commodity sector, is that the missing sort of key component that has driven inflation down in the short term is that China is a big player and they've definitely been in the bunker.
They have been and I'm not sure if it's technical or just the fundamentals of is China even investible here? So I'm guessing your technical signals are flashing pretty green for China. But then how do you overlay I guess the fundamental just kind of country risk factor.
Oh well, I think that's definitely an issue.
I think what we're more concerned about is is there a stimulus package? Is there a way out of that trend which causes increased demand for commodities because we've kind of like forgotten about China.
If they get back in the game, things change.
I mean, if they increase their demand for commodities, you'll see that change.
But the heart of the matter here, Katie, is the stochastic view of catching the knife in the dark, and right now China is a knife coming down, down, down. What you're saying, and Andrew Lows saying, is you've got to find trend when China turns, and let's be optimistic and believe a society has to when China turns. How do you know when to get on board a nascent China bull market?
So we're not seeing I mean, we're starting to see some indications this week. I mean people have been looking for a bottom in that market for some time now, but we need to see confirmation in the data, and we haven't seen that yet.
I think people are nervous right now because.
It is the holiday season and you know how far that trend has really gone a long way.
You know, you got some parchment from MIT. I mean, you know she does like doublele and you know a bunch of other fancy degrees thought about it's off furymed Katie. But I want to go all eric Rinjelsnania. Can we do that? Is it okay? If I go rieln On you what is this AI stuff? I mean I get the idea Chat, gpt works, Microsoft co Pilot, Azure, blah blah blah, But you how about what portion, Katie Kaminsky of AI is hot air.
So AI is great for solving some simple problems and to deal with data and to analyze lots of information in an efficient way. We see it in our space more for things like execution, just dealing with very complex, complicated data sets and distilling that down into information.
I think the idea that you're going to let AI trade.
Your money is still very far away, at least for my personal view as well.
But it is a tool.
To help us to analyze more things in less time and automate a lot of things that you know, could make our focus onto something else.
So that's kind of how I see it.
It is the future, but it has to be taken with trust and with understandability.
Yeah, it seems like I'm one of the questions I asked the tech analyst Katie when we have them on is how much of you know, is AI capital spending or just development of AI? How much is that just taking is it new money? Is it new spending on AI or is it just just moving it from some other it budgets and things like that. So from your perspective, just from the you know, the academics, is AI really new or is it just taking the next step in making everything more techy.
A is definitely not new.
It's just about can we find new applications for it and are there ways see this In the financial sector, It's interesting all the large firms have really invested in AI because they know they need to be there, and they're still trying to sort out Okay, how do we use it and what are the applications? So I think it's it's the next phase and there's the adoption, but the application is still unclear.
He Katie one found a questionnaire. My quota of the year last year was a guy named Ta Leb. He's pretty good and derivatives and that seeing Taleb said, the gravity's returned, And that's really what's going on here. We finally have interest rates up, We've got a risk for you rate, We've got a legitimate, calculable sharp ratio. You know, all the mumbo jumbo as well. Can there be too much gravity? Can there be too much like a higher real rate that gums up our investment horizon?
So I think that's a great point.
I mean, I think for us, everybody's sitting around hoping for lower rates because who doesn't like that? But the truth is that's not the normal equilibrium. And I think what you're seeing as well as I mean, do you think policy is restrictive?
Now?
I don't think so.
Lisa Minteo, did you see how Kaminsky did that? Who's running this program? Do I think things are restrictive? There's a lot of people out there going to come on, Tom answer, Oh look Mike from rebuta to see be able to say. Don't answer, Katie Kaminski, go away. You're restrictive but also accommodative as well, Katrin Kaminsky. Folks with Alpha Simplex can't say enough about their work. We're gonna stop the show right now and take a broader view kind of Leon So c if RA a research usually
joins us in the big bank days. He does not cover the regional banks, and there's also of legal issues. You don't talk about what you don't cover. But his research director for CFRA, We're going to take a broader view of the nyc B tobacco and not speak to him about the individual's securities. Ken, What are the government doing right now? I mean, this is a dibaccle commercial real estate, a tobacco, this singular bank. Maybe there'll be
others like them. What are government institutions like the FED institutions in Washington in this case Albany, what are they doing right now?
Great to be with you, Tom, And what's going on in Washington is we had comments this week from the head of the OCC that m and A for the banks is going to be tougher, and also there's going to be significant capital built for most of the banks. And what this means, I think for investors is that we're not going to see systemic bank failure of the industry, but we're going to see kind of situations as we
did with New York community banks. So I think it just has to be put in the right placement that this is not going back to March twenty twenty three, but it's something that gets the attention of the market.
If the industry struggles with this gets the attention of the market and there's smaller institutions, does that lead to more consolidation of the industry.
There is, and there are still four thousand banks in the United States. Regularly, Tom we speak about the big six that dominate and are gaining market share and expanding across the US. So again, it's what's happening with really small banks that might have founders that want to sell because there's no succession. In some instances, you're going to see these elevated risks for real estate for those that have a high percentage of their loan book related to some troubled real estate.
And can I guess what a lot of investors trying to get a handle of And it was literally a year ago that we had some problems with some of the regional banks on the West Coast, and now we've got the New York Community Bank. So what are the good folks at CFOA. Are you concerned about the status of just kind of the regional banking system in general, or again, can we chalk this up to some more just specific idiosyncratic issues.
It's a good question. If you go back in time over decades, you know, a bank analyst would say by region, you might have more exposure to Texas banks if the
energy industry was failing in this situation. Today we go through really rigorous bank metrics and to see who is under reserve, who has not really not had a good balance in terms of diversifying their loans and in situations of in this case commercial real estate, it's going to be those banks with assets perhaps of fifty bill million to one hundred billion.
It could be at rest Kin Leon was his director research at CFIRA. Previously scheduled to be on Disney. Oh they report airnings after the club joining us. Now ken Leon bank expert on the don't bank on Disney. I guess is it or the other media stax Paul, why don't you talk to Kenn Lean about absolutely dibaccle known as Disney Ken.
So we've got Disney after the close, and there's a million issues to discuss. But I guess the latest one is just kind of what we heard the announcement today that you know, Disney's gonna hook up with you know, Warner Brothers, Discovery and Fox to create a standing sports streaming offering. I didn't see that coming, do you. What do you think is going on there?
Good for that?
So, you know, I think when you look at Disney, Warner Brothers, Discovery and also Fox, they basically were victims to the NFL and other major sports leagues of spending billions of dollars. It still continues. But putting them all together and putting them in a package for streaming, this gives them an opportunity to have a little bit more pricing power to defend. And also it puts at risk those that are not in this droika, which would be
comcast with Peacock. We saw what happened with viewers infumed when the Miami game was not on NBC but on Peacock. So you know, I think there's a lot of moving parts here, but essentially what we're seeing as an opportunity to really get more rational pricing. But Disney's got more to say later today after the closed because they're still looking for an equity investor into ESPN besides this partnership
with Fox and Warner Brothers Discovery. And that's a deep risking by Eiger about ESPN because you're falling off the cliffs in terms of table viewers.
Paul on your head, what's your percentage of investment in ESPN by dreaded outsider? Is it like a minority five to ten percent? Bigger?
I think it'd be bigger. I think particularly if it's a big entity like the NFL, I think they would not be a controlling stake, but it would be a large stake so that they would have multiple seats at the table. And Ken, I guess you know, what do you think is the big I don't know what do you think Bob Iger needs to do here this afternoon on this conference call because the stock you know, investors used to love this name that I just get the sense they have no idea what to do with this story.
Well, they're beginning to prone assets. They may have something to say in NDA, which was never it was an either of assets but not profitable, so selling that business. And as Tom knows, you got James Gorman now on the board of Disney. So looking for businesses that have durable revenues and really have the magic of Disney will be the thing in parts and renewing film. So I think that's a big change.
Ken, What do you do? You said, grizzled pro You know, I was going back looking. Get to read the back of the seventies. You know, all good things in trees don't grow to the sky. Rumor thank you Goldbin Sex for that quote. The Weinberg family, you know, Kelly, and help me here, what do you do with a magnificent seven?
So for CFRA, what we see again is valuations that still seem reasonable for most. It becomes challenging for investors when you look at the overall stock market because of the significant weighting that these stocks have. I don't believe it's like really in my career when we had the tech boom bust, because these are our businesses that are throwing off enormous cash flow and are also innovating to
drive organic revenue growth. It's a little bit different, but I never like to say this time is different than the others, whether it's the nifty to fifty back way in time. So I think investors have to be prudent. Diversification does make sense, but it's an outsized waiting of the entire s and P five hundred comes from the
Magnificent seven. But I'll give you one more tom. In the financial sector, which you know we talked about the banks being so challenging, there's about twelve stocks that are seventy percent of the financial sector. So if you're a fund manager and you say I want to be overweight the financial sector as CFI does, it really gets to names like Berkshire, Hathaway, American Express, MasterCard, Visa, JP, Morgan Chase,
and others. So it's a big difference. So I think that's the conversation, what is the big constituents of the market max seven or in any sector, And that's how CFA thinks about our waitings.
You can't get to leave it there. Thank you so much. Ken lean with us here today's front page headlines. You know, we had like eighteen ideas in the newspapers to what'd you top it with?
Going crazy this morning?
I know?
All right, So this first one stood out to me. This from the New York Times. There's been a rise in the use of psychedelic mushrooms. This is becoming popular. There was a study that says that law enforcement they're confiscating, confiscating more of it. It's illegal right under federal law, but it's getting popularity because people are using as therapy. They're saying that it may be useful in treating depressions. So a lot more people are taking it. But experts
are saying that hype. It's really moving faster than the science. There's some states that are moving to legalize it. You have Oregon, Colorado, it's legal there for therapy. Okay, yes, But the New York Times actually had a Wallsteret Journal had an article about it. How more high powered working moms are using magic mush wise just to take the edge.
Off a little. You know, that's why listen to berg surveillance. Yeah, are we back to Timothy Leary in the early sixties.
I mean it's coming back. Some gummies were for no apparently on that but because the gummies are legal, see, this isn't legal too much.
That would be my I mean, okay, full discasure. I'm not really ignored on this, but long agoing far away, I remember Fred Brothers that took too much? Can you take too much?
I bet the psychedelics, I'm not sure. I mean, I'm sure it'll definitely affect you most definitely.
Room. Yes, you know, we don't know who that was, but dark you guys are killing it. It's like a Swiss watch in the control to control room next.
All right, if you're looking to get in shape in the new year, the Wall Street Journal is saying, take a break from drinking. Yes, yeah, Jim said, you already got a pass.
Uh.
They're saying the dry January it helped out a lot of people. But it depends on how much and how often you drink. If you just keep it to let's say the weekends, it might be a little bit better. Full disclosure. I used to, you know, have a cocktail or two every night during the week, every day, you know, but dinner a glass of wine. And when I cut that back and I left it to just like maybe a Friday happy hour Saturday. You see, the difference are
so different. But there are they say their health benefits. You sleep a little bit better, You get better sleep, you're a little bit more rested. You know, people tend to lose a little bit of weight when they do that. But you know, it's it's up. It's up to everyone. Not everyone is you know, like the lecture peering mushrooms first and then.
Give it a beverage of rooms.
Is that what I'm doing there?
You can save us? What's next?
Okay, we've been talking a lot about this, you know, the whole quote unquote Hulu is sports, right, you heard Michael Barr talk about it, right, Walt Disney's ESPN, Fox, Warner Brothers, Discovery. They're all launching this streaming sports service in the fall, of course, right at the start of the NFL College football see and just happens to be. But I mean, you think about it. You got ESPN's Monday Night Football, Foxes Sunday and NFL game March Madness
college basketball that's carried on Warner Brothers. But there's some people missing out of this picture.
No foot Well, CBS, they've got a big NFL package, NBC has the Sunday Night package. So I want to see the backstory, which we'll get from somebody how this came together? How these you know, these respiration desperation I think is the call there?
Okay, so let's let's review this as Sweeney's like world class on this. In the old days, we had one hundred dollars cable bill yep. Without question, the biggest hunk of that was the ESPN yep. Right. So with that said, if we're pricing one hundred million dollars streaming things at nine ninety nine a month, where do you think this thing will price in?
Boy, it's not going to be ten or eleven bucks. I don't think, like we're all used to for our hulus.
And our so we're going out and spending twenty something or even forty.
Somethings, I think. So, I mean, ESPN alone is ten bucks.
So we're popping We're popping another three hundred dollars. You're asking three hundred dollars a year.
Well, I think what happens since all the stuff we pay for otherwise, like Max for example, I think if I pay for Max, I might get this new thing. Like we don't know the name of this new product, you know, we don't know the pricing, we don't know exactly all those things. I think, if I pay for Max or I pay for something else, I'll get Grandfather And I don't know. But all I know is I'm not paying anymore. So if they want me to pay for this standalone thing, I'm cutting out two or three other of.
My stream, right or do you cut the cable? I mean, that's the whole thing. That's the question. Comcast, you know, what is it? And what is Comcast, NBC paramount Globals, CBS, Like, what do they think about this? They're kind of a little bit app It's funny.
You know, Comcasts we used to we'll call it today just generically a cable company. They haven't thought of themselves as a cable company for five or six or seven years. They consider themselves a broadband company. We deliver high capacity internet connection to your home. Oh yes, and by the way, we also have five hundred shills Liberty.
So go there. Because I saw this in the zeitgeist here in the last twenty four hours, I'm going to pick on Charter just because I'm guessing that's where I saw it. Charter or the others, they really really want to deliver your internet service to your house? Is the stuff Lisa's talking about Hulu Sports and the rest is that not just noise.
It's become increasingly just noise for the cable companies because they make While they don't like to lose you as a video subscriber, they don't care that much because they make so much more money profit on you as a broadband customer than they do as a video customer. So they're willing to trade a little bit at the margin. I'll trade away some video customers as long as I can keep and keep adding broadband customers.
This is the Bloomberg Surveillance Podcast, bringing you the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global head quarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app.