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One of my favorite economists of all times, Lena Shilia Tava, senior US economists at the conference sport. Elena, thanks so much for joining us here. What did you make of the Fed's move this week? Was that appropriate?
Do you think?
I think so.
I think there's a lot of tension. Obviously, it was not an easy decision. You absolutely hear that in the press conference. A lot of tension going on between the inflation goal and the maximum employment target. But I think they did what they did was appropriate. We think that they will continue to cut rates this year. We have two more cuts in our FOCUST, and we also have to focus to cuts in the beginning of next year.
I think it's a risk management decision. It was all very clear throughout Chiair Powell's speech of the press conference that it was a risk management decision. A lot of people said that there was a lot of tension between
upgrading the economic projections and the rate cut. But actually, if you look at the materials to the summary of economic projections and you look deeper into the risk section, the risks to the labor market increased substantially, while the risks to the inflation mandate as a perception between the FORMC members actually declined, and that is what drove the rate cut. It's the balance of risks shifting, not necessarily their projections for the economy.
But Elena Powell said himself, this is not a bad economy right now with unemployment at four point three percent, the economy is still growing at about one and a half percent. So how many rate cuts do you think we should be not will get, but should get in twenty twenty six.
But we're still in a restrictive territory, he said, right at the same time, So it's not necessarily like cutting rates to boost economic growth. It's really removing that access restrictiveness.
From interest rates.
I think you know we're expecting four more cuts and for the FED to stop at three percent and see and assist what is happening in the beginning of next year. Why the beginning of next year, it's going to be a really pivotal moment for the economy. We think that we have not seen most of the impact from terriffs just yet. There's a lot of discussion on Bloomberg TV and Bloomberg Radio about how tariffs have not yet fully been felt throughout the economy.
I totally agree with that.
It's going to be the holiday season that will be a huge test for the US consumer in terms of their tolerance to higher prices. I think that's when we're going to see how consumers are doing. And in our own projections, we see a significant slowdown in the economy towards the end of the year just because of that
and going into twenty twenty six. So that's when we are going to see the significant impact on tariffs, which will probably not be fully upset by fiscal policy and that a lot of people talk.
About Yalan the FED seems to be I focused maybe a little bit more on the labor side of their mandate. What's your view of the labor market these days?
It's healthy, you know, it's weaker, but it's still healthy. And that's why I think the next payrolls report will be really key to what the FED does at the October meetings. So and it's not going to be about payrolls, and again Powell alluded to that. He was kind of like, Okay, yeah, payrolls, we agree that, you know, that may not be the perfect indicative labor market health. It's going to be about the unemployment rate. He did say a couple of times during his press conference.
That is a key measure.
For the FED to see what is happening in the labor marcket if the unemployment rate rises, and we will be very much looking at the details below, you know, the unemployment rate itself, what drove it up, and things like that. But if that rises, I think the FIT will continue to remove that restrictiveness from interest rates.
Elena, you were talking about the consumer and consumer spending a moment ago. You know, despite some consumer confidence reports that show confidence as lagging, we're still spending right And today there was even a report from the National Retail Federation saying they expect records spending on Halloween this year. So when are we going to start to see the consumer pulled back in some sort of a meaningful way, because let's admit, they've really been the pillar of this economy,
despite the tariffs, despite geopolitical uncertainty. They're hanging in there.
Well, you asking a question, and as a consumer, I can absolutely understand it. Like me myself shopping for school supplies earlier this year, it was like, you know, little note pads and things that went in price so much.
I was shocked.
Obviously I'm not happy about it, but I was still buying it. So this is like a question about that consumer tolerance level that I think we will be testing towards the end of the year when we get into that important holiday shopping season. I think, you know, to a degree, we're already cutting on services spending to buy
those essential goods. And that's why I will be looking at the Personal Income and Spending report towards the end of the months on September twenty six to see what the split is between the services side and.
The goods side.
I think that we have already, like the data shows that we have already diminished I was spending on, you know, particularly discretionary services.
Let's see that trend continues. All right, Elena, thank you so much. We appreciate that.
One of my all time favorite economists, Elaine issue li Teva, senior US economists at the conference board here.
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Let's see what's happening in this market here again, a little bit lifted market. We had a nice trading day yesterday, a little bit delayed response to the Fed cut.
Here.
Let's talk to somebody who actually is a professional in this stuff. That's Sarah Hunt.
She's a partner in chief market strategist at Alpine Saxon Woods. We just kind of pretend here, but Sarah's the pro here. Sarah, what did you hear from your Federal Reserve this week and did it alter the way you're thinking about allocated capital here?
Well, I think that they did the best job that they could in a circumstance that's challenging for a lot of reasons. Because you've got the labor market doing one thing, You've got potential inflation coming back on the other side. You've got a lot of different things going on at are we too restrictive.
Are we not?
Is a lack of restriction actually going to be helpful for businesses and whether or not that goes anywhere. I think that there's no actual next step. The expectation is they're going to continue cutting, but you've got some data in between now and then, So I think I think they did the best they could in a situation that's quite tough, and it's only going to be tougher as the meetings go from here.
You know, I think getting lost in the sauce guys is that there is a government shutdown looming. If that were to happen at the end of the month, how does that play into I mean, it's really on the back burner right now, but if it were to happen, how does that inform your decisions on the market.
I have to say that generally speaking, a lot of that political conflagration doesn't always come through in markets because they assume that it's going to get solved, and historically speaking it has been. We're also on the year thirty of continuing resolutions, right If you and I did that, our budgets would be completely a disaster. So the idea that all of a sudden, this one is the worst one that we've had. Is we'll see how that plays out.
It certainly could add to volatility at a time when people are expecting volatility, and so far in September we haven't really gotten very much of it. So it could certainly add to uncertainty, which would potentially be an issue for investors.
At record highs.
Red headline crossing the Bloomberg terminal. President she President Trump holding a phone call. That's according to the CCTV.
We'll have more reporting on that.
Sarah.
Talk to us about just kind of how do you think about.
US versus rest of the world in terms of opportunities, because we saw earlier in this year a lot of folks kind of leave the US maybe kind of back away from that American exceptionalism a little bit like I got to own everything, the dollar, I got own the US equities, US bonds, kind of back away from that.
How do you guys think about it that now we tend.
To be fairly US centric, and I think the tricky thing about backing away from it, there are periods of time at which different markets will do better than the US for any number of reasons. I mean, I think China with stimulants. The Chinese market's actually done quite well this year, But I think that the problem becomes if the US has a problem, the rest of the world tends to have a.
Problem as well.
Most of the large technology juggernauts are in the United States. Most of that cast generation is coming from there, so it's difficult to walk away from the US. It's more of an and than an ore as far as we're concerned. There are places where you can find pockets of timing where you can make more money, but the US markets really tend to be a place for investors to sort of stay and hold those stocks.
Are you surprised by the strength you're seeing in China right now, in the low inflation you're seeing in China, given all that's coming at them right especially from the US, I.
Think it's a surprise. I mean, this year has been such a challenge to try to parse out where things are going because you've had this moving, tear up situation.
You've had a lot of that that makes it.
Very difficult for people to figure out exactly where things are going to go. So I think you look into twenty twenty six and it's as confusing. What's going to happen next year. But China has certainly been trying to do work on their own economy and that's been a sort of a perennial. But this year does seem to have been a little better for them.
Sarah, what do you talk to your clients about is when they say, well, I'm concerned about this concentration risk in this market. I mean, it seems like all the performance is driven by a handful of names. But yeah, I know most of the earnings are coming from a handful of names, and but that, boy, we just haven't seen it like this for such a long time. Tom King would go back to the nifty to fifty back in the day.
It is.
That is also a very big challenge, and the problem is that it's almost the momentum has been driving a lot of that, but it's also the cash flow and the earnings that have been driving that. It is hard to see where you can look at ancillary areas, and we've talked about this before in the space of infrastructure build out for AI, but there's also that spending is enormous right now.
That spending doesn't look.
Like it's slowing down, when it does look like it's going to slow down. I think you're going to see a lot of wobbles. And every time we think that there might be a pullback in AI spending, that part of the market has wobbled. But it's difficult because that is where the performance is, and that is where the
concentration in the S and P is too. So if you're going up against the market quote unquote with as the S and P five hundred, that concentration in top names is enormous in that index, and that is historically.
Unusual headwinds in this market. I mean, besides maybe valuations being a little frothy in some areas. What's your biggest what's the biggest headwind to the market.
I think the biggest headwind to me is any kind of risk to earnings growth, because the valuations in and of themselves are usually not the problem. The problem is when something changes and if that delta in that change in earnings direction goes the other way, it's either negative or it starts to slow down. That's going to be a problem because of where valuations are. But the valuations in and of themselves are not as much of the issue.
What would be the impetus to make those earnings go down.
So this is the.
Problem of where do we end up with the tariffs and what happens with margins, because margins are a big problem. If you are worried that input prices is going up, are going up, then you have a problem with the labor market because that's usually how people solve margin part.
Right.
I mean, the second quarter earnings were I'm gonna really good, I mean, much better than people would expect it. But I keep waiting for the tariffs to really bite earnings or we just haven't seen it.
Really, It's that shoe that people are either waiting to drop or assuming is not going to drop because it hasn't dropped thus far. And I think that's where the problem is. And with the moving rules and timing, you know, you can just keep pushing things forward and then people keep bringing forward their activity because I'd rather buy it now than pay an extra twenty percent on it. At some point that script either flips or it doesn't work
quite as well. And we haven't gotten there, which is why earnings were so great and people were surprised, and those upside surprises were I think the expectation is that earnings are going to be higher in twenty twenty six. If that expectation changes, I think that's where you start to see the cracks in the firmament.
I think it all comes down to the consumer.
Right.
We were all buying up cars early in the year to get ahead of the towers. I mean, once the consumer starts to pull back, if the job market cracks in a larger way, right, that's when the dominoes will start to fall.
That's part of the problem, and that's part of what everybody's been waiting for. And there is a striation between upper end consumer and lowering consumer, and the lowering consumer has been hurting for quite some time. The upper and consumer continues to spend.
Sarah Hunt, thank you so much.
Appreciate it as always, Sarah Hunt, she was on television earlier. Nass already do it at all Multimedia. We'll get to get on a podcast or whatever the kids are doing these days. Sarah Hunt, partner and chief market strategists at out Pine Sex. What's giving us her thoughts on these markets?
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YouTube Asamnaji, President CEO of Marcus and Milkjob joins us here in our studio in New York City. As some talk those, we've got commercial real estate business here today.
How are things out there?
Good morning, Great to be with you again. We have come a long way since the shock of a five hundred basis point interest rate factor completely destroyed any notion of underwriting or how you value commercial real estate in twenty twenty three. Twenty four was a little bit of a regrounding all those values, and twenty five is now moving forward into a new cycle, and the Fed's move
yesterday continued that process. For this industry. Prices have adjusted, which is a really important reason why capital is coming back into commercial real estate on a replacement cost and alternative asset bases. Today's commercial real estate is far more compelling as an investment than it was even a year ago, especially with the head the FED now becoming much more dubbish.
We're also seeing a big pullback in new construction starts, especially for multi family housing, which had record production, and that draw up in new supply will give the market some time to recover.
Let's talk office vacancy rates, right, because there was all that doom talk, nobody's ever going to go back to the office. People are going back to the office, mainly because a lot of companies are saying if you don't, you know, you can hit the road. Where are office vacancy rates now, because I know across much of the country they were at record high as recently.
Great question about a property type that has really suffered from the post pandemic ripple effect that is now finally starting to recover. You're right. Overall vacancies that are around seventeen seventeen and a half percent nationwide, down from north of twenty percent just a couple of years ago. In New York City, those vacancies are accelerating on their way down. Now.
We're seeing a full percentage point drop in vacancies over last year, record absorption in Q four and Q three of last year, leading to a really strong twenty five for the market. What's interesting is that the daily attendance of office workers is now at eighty percent of pre pandemic levels. Lisa mattail from seventy percent last year and fifty seven percent the year before. I call that resilience, Yes it is, but there's been a lot of pain
in the process. A lot of properties have defaulted on their loans, and the bifurcation of older obsolete buildings versus class A newer, more modern buildings is huge. Vacancies in the class A newer product is you know, eleven twelve percent or so, and by comparison, you're looking at twenty five, thirty thirty five percent vacancies in older, more obsolete properties, especially in urban markets. So it's a tale of two cities.
And the reaction from the market to commercial real estate being the next shoe that falls because of office defaults was way over exaggerated. I've been on this program saying that for a couple of years now, and that's proof to be right. We're working our way through it.
How about the.
Financing side of the commercial real estate business? Are the banks playing? Are they where if I want to go develop something or redevelop something and I want to put some capital into commercial real estate, where am I going to go?
Am I going to go to my local bank? Where am I going.
Normally, the private investor sub ten fifty million dollars price point heavily relies on banks and credit unions, especially regional and local banks. In twenty twenty three, after the Silicon Valley banking crisis and first half of twenty four, banks were not lending. Underwriting was very tight. That has changed significantly this year, so the banks are much more active. The normal rotation of loans being paid off maturing is
finally starting to recover. That opens room on their balance sheets for new loans, and that's another reason we're bullish for twenty twenty six in terms of more transactions and refinancing.
You mentioned a moment ago about how these older buildings are having a hard time finding attention in the market. A number of cities are turning those buildings into those commercial buildings into residential buildings. We're seeing that in Cleveland, We're seeing that in Boston. Is that a trend that you think is sustainable.
It's a one off trend because the cost of those conversions and the practicality of most of the footprints that were designed for office use into a true residential use is very limited. But there are some successful examples. What we're seeing broadly, is the reuse of old retail. For example, shopping malls that are obsolete are a lot easier to either demolish or convert to something else than urban, especially urban office buildings.
Where are you guys seeing the best value out there today? Where are you guys seeing, well, maybe some of the smart money going, if you will, the.
Multi family rentals. You know, apartment buildings were so much priced to perfection before or the FED interest rate hikes that were affected pretty severely. So was industrial warehouses. Those were the two most let's say, price to perfection property types that were affected dramatically by the interest rate factor.
It's now two and a half years after that shock, prices have adjusted and because of the replacement cost comparison being so much higher than the existing valuation of existing assets, those two property types are still getting a lot of attention.
And believe it or not, retail is the comeback kit. Really, fifteen years of e commerce revolutionizing how consumers basically buy things made brick and mortar retail go through a massive repositioning and today's retail has less footprint, more of a customer focus and experiential retail focus, and it's doing very well. I would say it's the most desired property type of all the property types that our company.
Well, you know, it's interesting in my neighborhood, and I'm Midtown East. For years I walked past empty storefronts, and it just seems like all at once somebody got in a room and said, let's start buying because things are starting to pop up all around. Is that just you know, my enclave on the Midtown East.
It's not even urban retail right here in New York is starting to do much better. It took several years before that demand started to come back, but it's fascinating to see a property type that was left for dead because of e commerce now be the darling of the industry.
Here in Calabasas, California, right in La King's Fishouse, I'm a big fan. Talk just about the LA market. What's happening there at Russia Walle State in La.
Well, we're finally recovering from the devastation of the fires, and there's a lot of pressure on jobs because of tariffs and the port activity, but the market is holding up surprisingly well against those two headwinds. In that California as a state in southern California and particularly was sort of viewed as the diamond and the rough in the last six months in that there's been so much controversy, both political and non political, that a lot of investors
shied away from investing in properties there. We're seeing a reversal of that because the yields are now on a comparative basis to other markets, pretty attractive. And you know, let's face it, Southern California in particular is very dense, and you have the diverse economic base of trade, entertainment, education, and all the reasons. People are still attracted to Southern California. And the out migration of California is way over overstated. It's not nearly as bad as people feel about it.
We had the CEO of the Port of La here yesterday. I talk you know, some Bloomberg intelligence, and you know, they're dealing with all the day to day changes in tariffs and the import taxes and what have you. But it seems like business is humming along.
It is. That's what we're seeing on the ground as well. A new capital is looking at buying assets yep, throughout California.
I'm thank you so much appreciated coming in as always to Sam Naji. He's a presidency of Marcus and Millichap. It's a publicly traded company. MMI is the ticker giving us the lowdown.
On commercial real estate.
We appreciate that.
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It is that timeless day again, the highlight of the seven o'clock our newspapers with Lis Ptelisa, what do you have for us today?
Okay, this is from the New York Times. It's kind of a man versus woman's story when it comes to your health. So it talks about these different studies. Right, how forty percent of adults in the US have obesity. Men have similar races. Yes, I know that's figure there. Men have similar rates of obesity as women. Right, But here's the way the story is structured is that men are less likely to seek medical care. And this is the issue that's starting to happen. I mean, fewer them
get the bariatric surgery. Fewer them are on anti obesity drugs, and when they are on them, they get off faster than women do. They're saying, maybe it could be a reason because women are more concerned about how they look.
That might be it.
But they're talking about the consequences, and the article really gets into it. You know how it tends to be more deadly for men than women, obesity does, so it goes into all this and I'm just this is like the fight in my house letting my husband to go to the doctor.
Like you men, I don't know about you, but like I'll stop for directions. Well now we don't have to because we have Google maps in the same things. But no, I'll actually say to somebody, I need help. Where am I going?
Yes?
Where?
The guy not so much. So I think that that's sort of the same dynamic.
You know what.
I think.
I think that I think you're onto it.
So you want the men to do GLP one or you just want to go to the dost, go to the doctor, get checked out. I got to do that. He doesn't do the once a year thing. No, no, no, I have a talk. I have a talk.
Thank you?
All right? What else we got here.
Okay, so this one is from the Wall Street Journal, and this is for the cat moms and dads out there who have all the cats at home. A lot more homeowners are spending a lot of money on outdoor patios for their cats to let them roam around, keep them saved catos.
Yes, it's a thing.
People are spending one hundred and twenty five thousand dollars on these shatios for their cats. You have to go on the article and see some of the videos.
It's it's incredible.
I look at it how they span like outdoors, pretty intricate.
And they just go up and down and it's like hundreds of feet and all scream this article.
Hundreds of feet is a cat? You know, That's what's happening.
So, I mean it's crazy. Protect them from like animals, Yeah, coyotes.
Coyotes are a big thing because people are afraid to kind of let their cats wrong.
I see, So now the cats.
Can roam all around in these enclosed right.
Folks got to look at this Wall Street drop. I'm I'm reaching through the pictures in the video here. Unbelievable more people.
Actually have cats, you know, cat ownership rows by twenty three other day.
People are spending more on their cats than their dogs.
Why is that.
Yeah, they're having cat birthday parties.
They're doing it.
It's the whole thing, Okay, telling.
You maybe they're just easier to take care of. You don't have to go out and walk.
True.
True, I don't know. I'm allergic, So we move on. No, cat's definitely not okay. So a number of companies we'd heard, like retailers, talking about tariffs, higher cost of living and it's going to affect consumer spending. Well, apparently consumers are willing to spend on Halloween. Okay, they're not scared about it.
National Retail Federation says Halloween spending is expected to climb to a record thirteen point one billion dollars this year, and consumers know they have to spend more per person. Spending increased to about you're going to spend about a hundred and fourteen dollars and forty five cents, that's what they're saying. It's about eleven dollars more than last year. But where they're spending is changing. They're going more to the discount readtailers. I'm spending more of their money there.
The biggest category, yes, for spending for Halloween is candy, because you have to get the trigger treats right. Total expected to be about three point nine billion dollars. I don't get many tricker treaters anymore.
I don't know either, so people do will spend. My takeaway from you this morning, as people are spending on their cats and Halloween, don't get in the middle of them and their Halloween. Can't.
Oh my goodness, it's true.
But you know where the best place to go Halloween trick or treating? According to my daughter, Yes, Summit, New Jersey is they give out the big candy bars.
And think in Summit the parents are great.
They'll have a big bar stuffs outside their house.
I have cocktails.
So it's just I remember when my kids are a little used to do all that. So that's a good time. Yeah, people love the Halloween thing. My niece is a.
Crazy Halloween person. Otherwise a normal person. Full bar of chocolate, a lot of baby yes, and there's got to be a cut off. Twelve years old, thirteen years old.
I don't know the teenagers.
I know, yea, I know, or at least men say, oh that's it with our newspapers. Uh, some good stuff there.
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