Bloomberg Wall Street Week April 7th, 2023

the US economy really is. Through the eyes of the most influential voices Larry Summers, the former Treater Secretary, Katherine Keating, CEO of BNY, Mellen Sam's l Sherman N, founder of Equatic Group Investment in Bloomberg wool Street Week with David Weston from Bloomberg Radio. A whole lot of drama from a former US president indicted to a one hundred and sixty six year old Swiss bank, saying goodbye to professional wrestling officially becoming part of Lala Land. This is Bloomberg

Wall Street Week. I'm David Weston. This week's special contributor Larry Summers on picking up the pieces of banking regulation. Owen Thomas of BXP on whether commercial real estate could be the next shoe to drop. Challenges in real estate are going to be tied to the economy and kept the beer of Ari's management on what all of this means for the credit world. The immediate effect is it's actually taken the banks out of our businesses in a

lot of ways. There was a lot for Global Wall Street to watch this week, not all of it was in the markets. We saw a former president of the United States or reigned on criminal charges, so the first time ever, and as usual, the former president, mister Trump did not let it pass without comment. This fake case was brought only to interfere with the upcoming twenty twenty

four election. The same day that mister Trump was facing the music in court, the leadership of Credit Suite was facing its own music had what was likely the last shareholders meeting ever for Credit Suie. It's a bits of reality to see the she didn't have time to bear fruit.

And if all that weren't enough drama, Global Wall Street witnessed the combination of Hollywood powerhouse Endeavor with World Wrestling Entertainment will combine with Endeva's Ultimate Fighting Championship to form a new company that's going to be listed on the New York Stock Exchange. When we weren't distracted by the theater of it all, we had plenty to keep us busy in the real economy and in the market as OPEC plus caught everyone out by cutting oil production by

a million barrels a day. It's either going to be seen as a precautionary master stroke or it's going to be seen as an unintentional Bober tightness. JP Morgan CEO Jamie Diamond issue his annual letters shareholders and to the world warning that the crisis of the bank's quote is not yet over and even when it is behind this, there will be repercussions from it for years to come. And then we ended the week with those US jobs numbers, adding another two hundred and thirty six thousand in March.

That's down from three hundred thousand plus in February, but still enough to take the unemployment rate down to three point five percent. The equity markets didn't get a chance to react and given the good Friday holiday, but before that we had the SMP five hundred down just a tenth of a percent, while the NAZAC was off just

over one percent. The bond market was open half of the day on Friday, and the initial action was the anticipation of higher rates, with a yield on both the ten year and the two year spiking up take US through all this shortened trading week. Were welcome now Chris Alman, chief investment officer at Calcer's and Julian Tet Financial Times, Chair of the editorial board and editor at Large for the US, So welcome back to Walster to both of you.

Thank you for being here. Crystally, start with you. We had a series of economic data this week that seemed tommunicated, We're really getting softer, maybe we're winning the war against inflation, and then the jobs numbers came in and said, maybe not so fast. What did you make of it. It's a conundrum, you know, David, and has continued to be a conundrum the FEDS data dress, so we know they're

going to pay attention to these numbers. They're going to look at the CPI next week is a real key indicator. The bond market, the stock market have been telling us that the Fed is going to pull off a soft landing. I mean, it's amazing to say. It's hard to believe though, so we'll see. I think the next week and two weeks are going to be really challenging CPI and then earnings reports, and that really is going to weigh on

the market. Because I'm expecting negative comments from CEOs, so Jennie as I said, the initial reaction to the bond market was maybe higher rates, somewhat higher rates, rather than the lower rates. What does this tell the feed about that may meeting in these jobs numbers? Is this a

further indication maybe it's too soon to start pausing. Well, I think one way to summarize what's happened in the last twenty four hours is a bond markets to remembered the message don't fight the Fed, because after the March madness of collapsing banks, there was a tremendous amount of wishful thinking months investors that the Federal Reserve would then go for wooden stock cutting rates said itself in terms of official statements, has been really clear over and over

again that they are not looking for rate cuts. If anything, they are expecting to continue to hike. And it's worth stepping back for a second and saying that any other situation, if you had a three point five percent unemployment rate and a four point two percent annual wage growth rate,

there's no way you'd be talking about cutting rates. So I think what's going on right now as a market of playing catch up and actually listening to what the Federal Reserve is saying instead of just hoping or dreaming that it might be something different. And Chris, I'm curious you're along term investor. Obviously with calsters you have to worry about all those pensions you have to pay off. One from your point of view, are we better off getting this behind us more quickly than we are right now?

Because this is a slow process here of getting inflation ut of control. It has been a very painful process, but that's the nature of inflation. The Fed's only tool is to raise rates, and that's an ineffective tool to compete against wage and what was starting commodity inflation. So I would like it to get over fast, but I don't think it will, David, because as Julian said, the markets are expecting a soft landing. But it's just really hard to believe that Powell can pull that off. I

hope he can. But the numbers tell us that unemployment should start to increase pretty sizably. And if you talk to CEOs, they're worried about a heavy recession coming up in the future. Well, Chris, what about that? Because the more we keep anticipating possibly a breakage if I can put it that way in the labor market, and yet it doesn't happen. Does j Powell need to be a spike up an unemployment in order to get where he wants to go? I don't know that he needs it.

You know, the wages were only up four percent. That's still higher than he wants, but that's not bad. These numbers just are quite a conundrum, and I think that Powell's only tools to raise rates. He will continue at some point pause and as Julian pointed, the markets are expecting a pivot as early as the third Quarder. I just don't see that. But we're going to find out which is right, the FED or the markets. Jillian, Does the FED have a problem right now? They got the

inflation issue wrong? I think everyone, including the Fed even admits that they got it wrong, the so called transitory inflation, and then we had that banking problem that developed starting with Silicon Valley Bank. Will come back and talk about that more detail. But is the FED got a problem here of credibility? They've made a couple of big mistakes, have they not? Jillian? Well, I think they certainly have

made a couple of big mistakes. I mean, I've been one of those who've been really critical about the superlis monetary policy going on for far too long in the past. You know what they're trying to do right now, and I think the market has forgotten this is they are scrambling. They're racing to re establish their credibility because frankly, for

a central banker, there's nothing worse than thinking they've lost credibility. So, you know, they have made it really clear that they are not going to be bullied by the markets into cutting prematurely. They're also, though this is really important point, they're trying very hard to signal to the markets, but they are separating out monetary policy measures that are helped to the design to target the economy from financial stability measures.

They're trying to deal with the financial stability issue through all kinds of macropredential tools, and they're trying to indicate that they're not going to lose some policy just for the financial stability reasons. Now, I think in many ways that is the right decision. I think there's very clear to signal for their credibility that they are committed to

trying to tackle inflation. And it's also very very important for the FED to signal that they have the credibility given that we have this little thing called a potential death ceiling crisis coming down the tracks. You know, there's never a good time for the FED. To lose credibility. Right now would be dreadful. So I think there's a lot to play for. As chrisss in terms of the market catching up to where the FED is from your mouth to Guard's ears that that's a little problem with

death ceiling. I hope that that's true. I think all wallstry hopes that that's true. So Julian Ted and Chris Elmont, Julian Ted and Chris Elmer will be staying with us as we turned from what we saw this week to the aftermath of the banking disruption that's gonna have next on Walter Week on Bloomberg, Frank Cappiello, let's pursue that if we can, does the stock market really have to

be affected in the long run by Watergate? It could be over the next couple of years if all of the energies of the administration are spent in these investigations or warding off investigations, depending on your point of view, And if he loses the confidence of Congress and the confidence of a large part of the electorate. The loss

of confidence could freeze the administration from moving forward. And I think what you had this week was can be summed up in one, well two words, really Watergate and Oil. That was Lewis Register back in May nineteen seventy three went in another US president was having some difficulties with the law, and as they did this week, the new

Oil was very much in the news. The number one movie back then was The Poseidon Adventure and the number one song was Tie a Yellow Ribbon Around the Old Oak Tree by Tony Orlando and Dawn Jillian ted As the Financial Times and Chris Ailment of councilors are so with us. So in the last one we were talking about the aftermath or what we saw in the banking system,

both here in the United States and in Switzerland. Jelian want to turn to you because, as you wrote in the Financial Times this week, you covered two financial banking crisis in the past. How was this different from those? Well, it was very striking this current crisis because in some ways it was similar. Bank crisis are always about a collapse of credit, meaning trust in the banking system. Fractional banking doesn't work without trust, and that's what Sparks Bank runs.

And that's true of the saucy bubble, it's true of today everything in between. But what was really different this time around was the speed of response and the virality because so much of it was conducted on social media and through mobile banking channels. And what we discovered is that they've fed system for trying to cool a banking crisis just are not in the twenty first century when

it comes to trying to contain a panic. We also found out that the contagion risks associated with small to medium sized banks are significant in their world of social media and mobile banking. You go back to the savings and loans crisis, and no one really cared if small banks collapse because they didn't really create great such a chain reaction. In the current hyper connected world of digital finance and digital social media, it really matters if panic thrupt,

if trust is lost. The good news is, of course, that we actually had fairly small overall losses from this crisis. I mean, twenty two point five billion if you look at what the FDUIC says, and that's pretty small compared to the history of banking crisis. The bad news is though, that what SVP was was very much a symptom, not

a cause. It was a symptom the fact that the financial system has had way too much, too cheap money for too long many financial institutions, that investors have been taking really dumb bets with that cheap money, engaging in a version of a carriage trade, and eventually those chickens are going to come home to roost. So I think the best way to see what happened in much is a symptom, not a cause, of a financial system that

is seriously displicated. Chris. We've heard from Jamie Diamond, the head of JP Morgan, this week saying he thinks we're past the worst of it. There may be another failure too long the way, but it's not really fundamentally going to continue to be a banking crisis. From your point of view as an investor, where might the next shoe drop? Because one of the problems here, as I understand it was unrealized losses on balance sheets. I'm not sure that's only at the banks. No, I agree, David, and I

don't know. I don't disagree with Jamie Diamond. We may be over the worst. I don't expect a lot of failures, but there's going to be a lot of pain. First off, when the FED raises rates from zero to five hundred in nine months, commercial real estate, particularly office real estate, is going to be hurt by that. Cap rates have risen, and while they haven't reappraised, those properties are down probably twenty percent in value, and the people that loan the

money on those buildings are usually the regional banks. So we'll probably enter a period again this fall of extend and pertend where building owners have wiped out their equity and they throw the keys back at the bank, and the bank doesn't want to pull back that loan. They don't want the commercial real estate. So I think we're gonna have a long hangover period of pain, just simply

because the FED raised rates so quickly. Julie, I also wanted about in another area, and that's private equity, which is just exploded. As you know, I'm not sure how transparent some of the losses might be in private equity. The valuations certainly must have come down on some of those companies. Well, David, that sounds like a mostly British understatement, because the reality is that private equity is private, and

we just don't know. And what is really striking about the last few years the gigantic credit bubble, and I do call it a bubble because of the cheap money, was that more of it happened through private capital markets than we've ever seen before in history. And the problem with that, and the good news about that is when it starts to implode, it doesn't necessarily immediately hit the regulated banks, and of course the regulated banks are at

the core of credit transmission and the economy. But the bad news is that private equity can't be seen quite so easy. What's happening inside it is private, and the marks tend to take a very long time to come down. So you are going to see more of a hissing sound, if you like, as the bubble the flates, not the dramatic pop. And one of the downsides of that is that there's going to be a lot of quite unpredictable chain reactions because we just don't know the complications of

where these losses will end up being felt. One area I'm very curious about right now is a universe endowments, because endowments have to produce a certain amount of income each year to pay the bills to qualify the charitable status. In some areas of the world, they're not like sovereign wealth funds that can just swallow losses for a few years.

And a lot of university endowments have dashed into the private equity in VC markets in recent years, and they could start to see the outlook looking pretty nasty in the next few years. As I recall, Chris, in the past, you have expressed some skeptics as a private equity. I think you pulled back, didn't you, A counselers, What about pension plants and their investments in private is there vulnerability there? Well, David, We've actually been a steady state investor. I'm skeptical of evaluations,

just as Jillian said. But you know a lot of private equity. You can read it from the employment numbers. They're still kind of steady, so they're not writing it down. But they are also a fundraising so they're not motivated to write it down. And I think really that when you look at private equity, particularly as Julian said, at the endowment level, there's no distribution. We're not seeing any transactions merger Monday has disappeared, so it is putting a strain.

I think there's a very serious liquidity crunch going on around the world, not just in the USA. We can survive it, but it's very tough. People with cash are hoarding it and right now we're not getting any money back from private equity or real estate, and that's putting a pinch on everybody's balance sheet. So people with negative cash flows are going to find it harder and harder to keep looking at new opportunities. That just as a long,

slow grind. I don't think it's going to lead to an immediate liquidation where somebody sells a good asset on a fire sale, because there are other people, like she mentioned sovereign wealth funds willing to buy that up. So it's a tough, tough period. Many things to Chris Alement of Calister's and Jillian Tett of The Financial Times. Coming up, we're gonna turn from credit over the subject of commercial real estate with Owen Thomas of The XP and this

is Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio, looking for cracks when Silicon Valley Bank went down. It sent tremors through the banking sector. Yeah, it's amazing. I mean, we continue to get new news on banking. Now we've got the SVB takeover. We've also got news that First Republic

will continue to be supported by the government. With fear of contagion triggering an immediate and massive government intervention, Treasury worked with the fit nif BIC to protect depositors in the resolution of SVB. Our intervention was necessary to mitigate systemic risks and protect the broader US banking system. Now that we may be past the worst of the bank failures, investors are looking around for what comes next, with realist

day being a prime suspect. Some like Bruce Flatt of Brookfield say there's a big difference between top line properties and the others. There's a real talty. It's the best of the best and the worst of the worst. The best of the best today is really really good. High quality space is very sought after by companies because they want to bring them people back and have new, engaging space, while others like Joshua Friedman of Kenyon Partners say even

the top of the food chain could get hit. In real estate, we don't know whether the market clearing prices or cap rate, leaving people like former FDIC chairman Bill Isaac to think hard about where real estate investments are heading. You always have to fear a commercial real estate. It's one of the risky activities in which banks engage, and every now and again it gets over built and out

of control and people take losses. So that's always an area of a bank that you should have under type control. And to give us his thoughts on where real estate is headed, welcome now a true expert in the area. He is Owen Thomas, the chairman and CEO of BXP formerly known as Boston Properties. So welcome. Great to have you back in Wall Street week. Great David, great to

be here. Thank you. So the twenty four thousand and sixty four thousand and sixty four billion dollar question is at real estate the next shooter drop and the aftermath of what we saw with the banks. The challenges in real estate are going to be tied to the economy. So it all depends on do we have a recession, how deep will the recession be, how long will interest rates be high? And the answer to that question will determine you know, the challenges that the real estate industry

will face in the quarters ahead. We had a Bluebird report saying that vacancy rates for office properties in Manhattan where a record high right now. I think something like fifteen percent something like that. How much of that is because the economic downturn and how much of it's because people just aren't coming back to the office they're working from home. Yes, I think that's a big misperception in the market today. The office business faces two significant headwinds.

One is a slowdown in economic conditions and the other is work from home. When you have a slowdown in the economy, businesses are more challenged in terms of their P and L and they do things to cut costs. And you see layoffs going on almost every day right now. And as you have layoffs, companies take less space or they put subble space back on the market. And by the way, this is no different than any other downturn that we've ever experienced. Office in many forms of real

estate are economically sensitive. So I think in the premium end of the market, what's impacting our leasing activity today is much more the economic conditions than work from home. And the evidence of that that I would give you is in twenty twenty two, last year, our company leased nearly six million square feet of space, which is basically at ninety five percent of our long term averages if

you think about it. Last year interest rates that started to go up, but the economy was much more solid and there were a lot fewer people in the office. Now you've moved to twenty three, office leasing is slowing down the economies worse than there are actually more people working in the office. So what is your experience of BIS, particularly in the tech area, because we've heard about a lot of layoffs in tech, downsizing in tech. Are you seeing that in your office situation? Yes, well, that has

an impact. The technology firms, particularly the larger ones, were important net absorbers of office space since the global financial crisis, and as you know, over the last six months, many of those companies their growth has slowed and they're focused very much on their profitability and they many of them have done layoffs and many of them have put subly spaced on the market. And by the way, they've all announced some form of return to the office as a

result of this as well. One hundreds of valuations because we have I guess net cree F it's called which gives us appraisal valuations, and saying we've got a Bloomberg b Read index of office property index, which is which is down a lot more than the appraisals. So how can you get your arms around exactly what's happening with valuations in real estate? Yeah, so let's divide it between

the private market and the public market. On the private market, it's hard to determine value because there are very few transactions going on right now. Interest rates have come up, bids are lower, and sellers are so far unprepared to accept those bids. So where is real estate trading. It's trading in the public market the reats as you mentioned, And if you compare these two areas, you know, office rates today are off fifty plus or minus percent from

peaks in March of last year. But the NYCREEF index, which is appraisal based that dictates where private market values are, it's only down about five to six percent from peak. Higher interest rates obviously affect the economy. Slow the economy down, may affect vacancy levels. It also affects financing for these properties. How is that playing out right now? For example, if you're putting up a new building. I understand you have construction financing that's short term. You got to turn it

into longer term at sometime. Are you in the process right now of refinancing and how does how does that work? Yes? Well, financing is harder to get today because of concerns about real estate, and also buildings have to have strong cash flows to support the higher interest rates that are associated with financing. From our company standpoint, most of the financing we do is in the bond market, so we're an investment grade issuer of unsecured bonds and that market is

open to us, albeit at higher spreads. We do have some mortgage financing, and I do think mortgages are available to office real estate. But the building has to be well leased, it's got to be of high quality, and it has to be owned by a strong sponsor. What about the high quality you just mentioned, because I've heard inflicting things that there's a huge difference between a buildings and bees and ces or some people say basically it applies across the board. Yes, Now, this is very important

issue when you think about office real estate. Last year I mentioned all the leasing success that we had yet we saw all these reports showing many of our cities being fifteen, twenty, twenty five percent vacant. And then an important measure in office real estate is net absorption. This is how much the occupied space goes up and down

in those segments. And if you look at the premiere workplaces for the last two years ended the year in twenty twenty two, the premier workplaces had a positive seven million square feet of net absorption, where everything else was down twenty five million square feet. So there's a very all the years that I've been doing this, this is one of the strongest moves towards quality office and real

estate that I've seen. What about prime cities, if I can put it that way, Yeah, what's the geographic dispersion? We hear reports for example, San Francisco really ugling, New York maybe not doing so well, and there's a big move into Austin to Miami, places like that. Yeah, Well, there is some migration out of the coastal cities into lower tax states and cities like in Florida and in Texas, but there's also in migration from employees in New York

and San Francisco as well. So I do think I believe in the long term vibrancy of cities like New York and Boston and San Francisco, And what about the ecosystem more broadly at this point, are places like b XP and others pulling back on future development of properties,

which can affect things like construction construction workers employment. Yeah, well, with the slowdown in demand, clearly there's going to be a slowdown in development, and that's one thing that'll help owners like ourselves because they're going to be less supply in the future because constructions being pulled back. We do have sites and we would consider future development, but it has to be de risked and for us, that means released.

What's the biggest opportunity for b XP right now? And is it, in fact part because of the valuation question. Maybe some bargains out there at the moment. No, I think that will come. I maybe a couple of things I would mention. We have also been in addition to our premier workplace business, we've also been developing life science assets. We're building a large lab building for Astra's Anaca and Cambridge. We're converting a large building in Cambridge for the Broad Institute.

So that's an area of growth for us. Another area of growth for us is simply leasing our portfolio, increasing the occupancy, because we're at about eighty eight or eighty nine percent occupied today, and that will grow our income stream. And then I agree with you. I think as this downturn unfolds, I think additional investment opportunities will present themselves to strong players like ourselves. Oh and thank you so much for being his own Thomas. He is the chairman

and CEO of BXP. Coming up, we wrap up the week with our special computer, Larry Summers of Harvard. That's next on Wall Street week on Bloomberg. This is Wall Street. I'm David West and we are joined once again by our very special contributor, Larry Summers of Harvard. So, Larry, at the very end of the week, on Good Friday, we would say, was of that persuasion. We got the jobs numbers two hundred and thirty six thousand, pretty much

right on expectations. Although the bottomark was a little disappointed. They were hoping something softer. What do you make of them? I think this was not a very newsworthy bit of news. Things came in pretty much as people expected. The numbers reflected the strength that we certainly saw in the early

part of the first quarter. I don't think this bears on very much on interpreting the economy because the numbers are a few weeks old when we get them, and more importantly, because those numbers employment and unemployment are lagging indicators of what's happening in the real economy. So the real question is still how much of a credit crunch is coming in the wake of all the banking problems, in the wake of all the disturbances in the banking sector.

And that's a very hard thing to know. Well, that's interally credit crunch. I mean, some people refer to that as saying the credit is just not available as supposed, that it's more expensive. Is that what you mean by it? And again, when do you think we might have a sense of whether that comes to pass. I think it's a combination of you know, something's available at any price, but if the price is too high, it doesn't really

matter that it is available. I think we're getting a sense that there is some substantial amount of constriction in credit. If you looked at the forward looking numbers this week from the PMI survey, those numbers were really quite weak. If you look at the UI claims with the new seasonal adjustment, they're suggesting much less strength than they had been earlier. When you looked at vacancies, they seem to

be coming down. So I think you have to say that recession probabilities are going up at this point, and I think the Fed's got very very difficult decisions ahead of it with very much two sided risk. That's a consequence of where we sort of found ourselves with an overheated economy. And finally, Larry, you said the magic words to borrow from growtual marks there if I may, it's had GPT. You brought those words originally to Wall Street Week.

I know eve been following it closely. Now as you talk to people about chat GPT and its potential, where do you think we are headed. Here's the thing I'm seeing more and more. I think it's coming for the cognitive class. Chat EPT is going to replace what doctors do hearing symptoms and making diagnoses. Before it changes what nurses do helping patients get up and handle themselves in

the hospital. It's gonna change what traders do going in and out of financial markets before it changes what salespeople do, making relations making relationships with potential clients. It's gonna change what authors and editors do before it changes what people in bookstores do. And so I think this is going to be an enormous change over time in our society. It's fascinating coming through the cognitive class. Thank you so much, Larry,

really appreciate it. Once again, that's a special contributor on Wall Street Week. He's Larry Summers of Harvard. That doesn't for this episode of Wall Street Week. I'm David Weston. This is Bloomberg. See you next week.